What types of networks do start-ups
from institutionally different
home-countries use to internationalize and
why?
A comparative study of start-ups based in a
developed and a transition economy
Master Thesis International Business and Management
University of Groningen, Faculty of Economics and Business2
Abstract
The aim of this thesis is to explore the types of networks that start-ups from institutionally different countries, use to internationalize. By doing this the study will enrich the theory on new venture internationalization via the network approach. To answer the research question a qualitative research method of multi-case analysis was chosen. A total of eight semi-structured interviews with start-ups from Bulgaria and the Netherlands were conducted, to investigate what networks they employ to expand internationally. The results from the cross-case analysis were discussed in respect to the existing theory on the topic, and new theoretical concepts were derived. The propositions suggest that due to the lack of strong business partners domestically, start-ups from institutionally underdeveloped countries try to internationalize via weak international business ties. On the other hand, the existence of strong MNEs in developed countries would stimulate the usage of national networks. Furthermore, high corruption perceptions in developing countries may discourage start-ups to use social networks, as this would be associated with corruption. On the contrary, in developed countries, social networks are developed as they symbolize high trust between the partners. The validity of these propositions is to be tested by future research.
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Table of Contents
1. Introduction ... 4 1.1 Background ... 4 1.2 Problem identification ... 5 1.3 Research objectives ... 61.4 Structure of the thesis ... 7
2. Theoretical background ... 8
2.1 Networks and start-up internationalization ... 8
2.1.1 The importance of internationalization and the role of networks ... 8
2.1.2 Types of networks ... 10
2.2 The moderating effect of institutions on the types of networks used for start-up internationalization ... 13
2.3 Summary ... 15
3. Background of the case research ... 17
3.1 Analysis of the institutional context in the case countries: Bulgaria and the Netherlands ... 17
3.2 The Entrepreneurial environment in Bulgaria and the Netherlands ... 23
3.3 Summary ... 26
4. Research Methodology ... 29
4.1 Research approach ... 29
4.2 Method of data collection ... 30
4.2.1 Setting selection ... 31
4.2.2 Cases selection ... 32
4.3 Data analysis... 33
4.4 Research quality and limitations ... 34
5. Data Analysis and Findings ... 36
5.1 Within-case analysis of the Bulgarian start-ups ... 36
5.2 Cross-case analysis of the Bulgarian start-ups ... 42
5.3 Within-case analysis of the Dutch start-ups ... 43
5.4 Cross-case analysis of the Dutch start-ups ... 48
5.5 Overall Cross-case analysis ... 49
6. Discussion ... 53
7. Conclusion ... 56
8. References ... 59
9. Appendix ... 64
INTRODUCTION
4
1. Introduction
This chapter will provide an introduction to the thesis by informing the reader about the research topic and the specifics of the thesis itself. Firstly, background information about the topic is given. Afterwards, the rational for choosing the specific research area is discussed by identifying the problem and defining the research question. The chapter concludes with clarification of the research objectives and the structure of the thesis.
1.1 Background
The contemporary business world is characterized by the fast pace with which new developments occur, an increasing competition from international players and growing importance of innovativeness and flexibility. It is often the case that the domestic market is too small or does not offer very promising growth perspectives, and this forces all firms – big and small – to internationalize. Furthermore, it is presumed that rapidly internationalizing companies could improve their learning capabilities due to their “newness”, which will allow them to develop flexible organizational routines and adapt faster to the changing conditions (Musteen, Francis, Datta; 2010)
Therefore most companies, big as well as small ones, need to expand internationally in order to survive and grow. What differentiates small, young companies from the big, experienced ones is the much more limited resource availability and lack of knowledge about the foreign location, as well as lack of economies of scale and risk aversion (Freeman, Edwards, Schroder; 2006). Due to those constraints, small firms are unable to perform the stage internationalization model (Johanson and Vahlne, 1977), which was discussed extensively in earlier research. Very often, small companies simply lack the financial resources to follow this traditional internationalization approach. They are also aware of the risks which foreign locations may pose, such as unknown demand and customer specifics, different regulations and ways of doing business.
5 advantage as they feed them with timely and valuable information (Sharma and Blomsterno, 2003). Start-ups could also compensate for the lack of resources (financial and knowledge) and credibility, by developing suitable ties (Coviello and Munro, 1995).
Nevertheless, networks could vary in types and therefore, possess different characteristics and be used for different purposes. Depending on: the location of the partners in the networks they could be national (domestic) or international (foreign); the nature of the relationships - formal (business or institutional) or informal (social); the strength of the ties between the partners - strong or weak. After some time, social networks could be transformed into business networks; or business networks into social ones. Social networks are mostly related to exploiting opportunities on new markets, while formal (business) networks support the exploitation of those opportunities (Vasilchenko and Morrish, 2011).
1.2 Problem identification
There are a number of studies investigating the role of a specific type of network for the internationalization of small firms. Most of those studies are performed in institutionally developed countries - Coviello and Munro (1997) on New Zealand; Servais and Rasmussen (2000) on Denmark, Mort and Weerawardena (2006) on Australia. Another stream of studies on this topic has been performed in developing countries - Manolova, Manev, Gyoshev (2010) on Bulgaria; Musteen, Francis, Datta (2010) on the Czech Republic; Steensma, Tihanyi, Lyles (2005) on Hungary.
INTRODUCTION
6 whether, and to what extent institutions influence the channels for internationalization of local start-ups and respectively, whether, and how the institutional context affects the businesses’ development and growth. Therefore this thesis will try to answer the question:
What types of networks do start-ups from institutionally different home-countries use to internationalize and why?
For the purposes of this investigation and in order to fill in the identified above research gap, a multiple-case study method will be used to compare the network internationalization approach of start-ups in Bulgaria and the Netherlands. The countries are presumed to have different level of institutional development and thus be suitable choice for the study. Further justification of this choice is given in the Research Methodology section. After identifying the types of networks accessed by Bulgarian and Dutch start-ups, possible explanations will be given for the observed phenomena, as an attempt to provide some useful insights and enrich the theory on this topic.
1.3 Research objectives
The major objective of the research would be to enrich the theory on the network approach for internationalization of small new firms, and explore what effect the differing levels of institutional development may have on it. To achieve that, eight start-ups from two European countries – a developed and a developing one – will be interviewed, and the information they give analyzed to assess the differences and similarities between them. Those will then be discussed from an institutional perspective. Consequently, the thesis aims to improve the understanding of the effect which institutions have on the internationalization process of start-ups.
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1.4 Structure of the thesis
THEORETICAL BACKGROUND
8
2. Theoretical background
This chapter will provide overview of the previous literature on the benefits and risks of internationalization for new firms and the role which networks have in mitigating the risks in this process. Further the different types of networks will be defined and discussed from the perspectives of different institutional settings.
2.1 Networks and start-up internationalization
2.1.1 The importance of internationalization and the role of networks
The importance of internationalization has been extensively discussed in the international business literature, in terms of both big multinational companies and small firms. The expansion to new markets is considered a sign and prerequisite for further business growth. Firm performance and success are dependent not only on the product development itself and the level of innovation, but also on the speed of commercializing these innovations (Vasilchenko and Morrish, 2011).
Nevertheless, foreign market entry presents risks in particular to small firms as it could decrease their survival chances (Musteen, et al., 2010) due to lack of experience, local market knowledge, resources (Freeman et al.; 2006). On the other hand, Musteen et al. (2010) argue that rapid internationalization may in fact present some benefits as new firms are more flexible in terms of organizational routines and would adapt faster to the unknown foreign market conditions. Consequently, such organizations would be able to better identify and exploit future opportunities on foreign markets.
9 Consequently, internationalizing is both risky and necessary for small firms. Therefore, they need to look for ways to expand globally while mitigating the risks of this action. A way to achieve this is the development of networks via which start-ups could overcome the disadvantages arising from their small size and access the resources they lack (capital, foreign market knowledge, etc.). Supporting this argument is the study on four New Zealand-based high-tech firms by Vasilchenko and Morrish (2011). It confirms that leveraging social and business contacts is crucial for exploring and exploiting growth prospects on the international markets. Networks are a source of information which is not made available to all firms on the market. Therefore, they would allow a member-firm to take advantage of opportunities or prevent threats before non-member competitors (Sharma and Blomstermo, 2003). Consequently, networks could be a source of competitive advantage. Moreover, network ties could secure and facilitate the access to local market knowledge and serve as a platform for obtaining initial credibility which would allow firms to enter established distribution channels, reduce entry costs, risk and time (Coviello and Munro, 1995). These benefits from network relationships to small firms make logical the perception that networks are a key element of entrepreneurship (Jacks, 2008).
One could conclude that, from the perspective of start-ups, networks are an effective mechanism for the global commercialization of innovation (Vasilchenko and Morrish, 2011) and serve as an alternative to the capital resources and knowledge base accumulated by big corporations for internationalization purposes.
Because of the resource shortage, the network model used by start-ups to internationalize diverges from the traditional internationalization stage model (Johanson and Vahlne, 1977), which is more costly due to the extensive market evaluation and exploration. When based on the network model, firm internationalization begins with foreign market intention and excludes the extensive foreign market trial, experimentation and evaluation (Coviello and Munro, 1997).
THEORETICAL BACKGROUND
10 discusses the anomalies in the process of start-up internationalization is the 2009 study of Johanson and Vahlne, which suggests that the “liability of outsidership” in relation to a relevant network, would increase the uncertainty and risks in business activities and thus favours the importance of network inclusion.
Nevertheless, Coviello and Munro’s study shows that while network ties support internationalization of the firms, they also constrain the pursuit of other opportunities. Other authors also pay attention to the potential threat of developing a too strong dependence on a network or a certain major partner which may transform the relationship into a captive one and restrain the process of knowledge transfer (Tokatli, 2008). This, however, is most likely to apply to less knowledge-intensive firms that lack absorptive capacity and would easily loose the learning race with the network partner.
Consequently, there are different network relationships, which play a different role in the partnership development and the internationalization process. To better understand those variations between networks, the following sub-section will discuss the type of networks used by young businesses.
2.1.2 Types of networks
There are different types of networks: formal and informal; domestic and foreign; comprised of weak or strong ties. To gain better insights about the networks’ role for start-up internationalization it is necessary to examine which particular types of network are used by start-ups and under what circumstances.
According to the general notion of networks, they are comprised of set of actors, which are linked by some form of relationship. In this respect, social or informal networks are developed from personal relationships, whereas formal networks (firm or firm-government) are created as a result of repeated economic exchange (Hoang and Antoncic, 2003). To secure clarity when talking about formal networks, they will be referred to as business networks in case of firm-firm or intra-industry relationships, and as institutional networks in case of relationship between a firm and a government-related organization.
11 way support the entrepreneur. Consequently, social-network actors are not friends per se – rather, the social networks depict interactions between individuals. On the other hand, formal networks are comprised of interactions between organizations. Due to their young age, start-ups are likely to have not yet built formal networks. Therefore, it could be assumed that mainly used by the start-ups are the social networks of the founders.
Both types of networks – informal and formal, are based on trust – either trust between people, or trust between organizations. In this respect, networks can be developed using the two trust-building perspectives, presented by Dyer and Chu (2000):
Informal networks could be built in accordance to the social embeddedness perspective. It claims that trust emerges through social interactions between exchange partners. Partners rely on social sanctions to protect their interests and control opportunism via: withdrawal of love, respect, prestige, banishment from the social community.
The process-based perspective, on the other hand, could be seen as the base of formal networks. It defines trust as a notion based on a set of impersonal, institutionalized processes and routines.
In real life these theoretical concepts are unlikely to be observed in their pure form. An example of how social and business networks complement each other is a study on New Zealand-based start-ups, which employ a network-based internationalization model (Vasilchenko and Morrish; 2011). The paper concludes that social networks are used for exploring foreign market opportunities, whereas business networks serve their exploitation. Thus social networks are mostly used in the early stages of internationalization and consequently, influence strongly the choice of new markets. On the other hand, business partners are used to operationalize the internationalization intentions. They are considered an important source of local market knowledge such as: regulations or industry-specific information regarding market size, competition, etc. Confirmation of these arguments could also be found in a study on the global market expansion of Syrian SMEs, whose results show that social ties are of greater importance at the initial stages of internationalization, while business networks become more dominant afterwards (Ibeh and Kasem; 2011).
trust-THEORETICAL BACKGROUND
12 building perspectives, one could also argue that social networks could evolve into business networks as with time the initial personal trust could be supplemented by trust based on the established routines.
From another perspective the networks used by start-ups could be viewed as comprised of strong or weak ties. Strong ties are characterized by high levels of trust and strong emotional involvement of the parties (Kiss and Danis, 2008). On the other hand, weak ties are distinguished by limited emotional involvement (Burt, 1992; Granovetter, 1973). Weak as well as strong ties can be attributed to both formal and informal networks, depending on the stage of the relationship – early-stage relationships would presumably be based on weak ties, whereas late-stage or mature relationships – on strong ties.
Networks could also be domestic and international. A study by Manolova et al. (2010) on the role of personal and inter-firm networks for internationalization of Bulgarian new ventures presents the positive effect of domestic networks on the internationalization of the SMEs. The authors’ argument for investigating solely domestic networks is that competitive advantages are to their biggest extend local and arise from concentrations of highly specialized skills and knowledge, institutions, rivals, and sophisticated customers in a particular nation or region. Consequently, the networks developed by the SMEs are also local and with their support the company could internationalize.
Another work, which distinguishes between domestic and international networks, is the study of Kiss and Danis (2010). The authors argue that during periods of institutional upheaval, entrepreneurs are more likely to have developed webs of internal (national) networks, and less likely to have well-developed webs of international networks. This supports the arguments of Manolova et al., (2010) whose research is based on a transition economy with underdeveloped institutional framework.
13 2.2 The moderating effect of institutions on the types of networks used for start-up internationalization
Findings of various studies demonstrate the important role of networks for the internationalization of small and medium-sized companies, based in different countries: New Zealand (Coviello and Munro, 1997; Vasilchenko and Morrish, 2011), Denmark (Servais and Rasmussen, 2000), Australia (Mort and Weerawardena, 2006), Spain (Sanchez and Perez, 1998), the Czech Republic (Musteen et al. 2010), Malaysia (Senik, Scott-Ladd, Entrekin, Adham, 2011), China (Ge and Wang; 2013), Bulgaria (Manolova et al. 2010), Syria (Ibeh and Kasem; 2011). Some of these works raise the question, whether there are differences in the networks used by entrepreneurs depending on the institutional context of the home country and stress the need to compare in this respect a highly institutionally developed country with a less developed one (Manolova et al., 2010; Musteen et al., 2010; Kiss and Danis, 2008). A number of scholars discuss the expected variations in the types of relationships formed by entrepreneurs in emerging or transition economies and those in developed ones (Kiss and Danis, 2008, 2010). Previously the institutional setting of a country has been linked to the domestic business activity and the international competitiveness (Kostova, 1997; Dunning, 1998), in accordance to the country-specific advantages of firms; as well as to the variations of entrepreneurship levels across countries (Busenitz et al., 2000). A comparative study between the network-building mechanisms, used by entrepreneurs in a developed country (Italy) and a developing one (Costa Rica), show variations in the relationship sources at the two locations, which could be a result of their market and institutional specifics (Ciravegna, Lopez, Kundu; 2014). This thesis aims to combine theoretical notions from those streams of business research and investigate the effect of country’s institutional context on start-up internationalization from a network perspective.
To understand the core of institutional differences across countries, it is first necessary to define the various dimensions of institutional contexts and the possible effect they may have on the business activity in a country. As defined by Scott (1995) the country institutional context consists of three dimensions: normative, regulatory and cognitive.
THEORETICAL BACKGROUND
14 institutional development, due to prior political and/or economic isolation, as in the case of Bulgaria, would be less experienced in conducting international business and will therefore lack strong normative values to support global expansion (Kiss and Danis, 2008).
The regulatory dimension depicts the governmental regulations, policies and laws that favor certain ways of behavior and restrict others (Buzenitz et al., 2000; Kiss and Danis, 2008). Countries with high levels of institutional development have legal and regulatory traditions as well as well-functioning enforcement mechanisms which lower the risks of investing in a business and therefore, facilitate the growth of new ventures (Kiss and Danis, 2008). Such institutional environments also have well-developed banking systems and equity markets (Bruton, Fried, Manigart, 2005), which offer entrepreneurs more options for funding for their start-ups, in particular in terms of international expansion.
The cognitive dimension depicts the institutionalization of knowledge and its transformation into social understanding (Zucker, 1991). For instance in institutionally developed countries networks might be of importance for entrepreneurs, but the actual development and production of products would be valued more. On the other hand, in less institutionally developed countries network inclusion may be crucial for the start-up survival and thus be of greater importance to entrepreneurs (Bruton et al., 2005; Peng, 2003; Kiss and Danis, 2008). Based on the definitions of strong and weak network ties, and informal and formal networks respectively, one could argue that in less developed institutional environments or in a situation of institutional transition, entrepreneurs would be more focused on building strong, informal networks (Khanna and Palepu, 2010). Those would compensate for the institutional voids and the risks posed by the turbulent environment and would give entrepreneurs a better access to valuable and timely information (Peng and Heath, 1996).
Such strong ties are, however, costly to develop and maintain. Therefore, entrepreneurs operating in developed institutional environments would prefer weak, formal ties as they are less costly and provide more diverse knowledge and resources (Granovetter, 1973).
15 institutional transition. The same logic is followed by Manolova et al. (2010) who assume that internal networks are more relevant and useful in the Bulgarian context and therefore, investigates the role of the national formal and informal networks. According to the paper’s findings in a transition economy domestic personal networks have positive effect on internationalization.
As already noted this thesis is aimed closing the gap between the outlined above streams of research, by actually comparing the networks used for start-up internationalization while investigating this phenomenon at technology start-ups based in two pre-selected countries – Bulgaria (exemplifying low level of institutional development) and the Netherlands (exemplifying high level of institutional development). The next chapter justifies the choice of these two countries by presenting their institutional and entrepreneurial profiles.
2.3 Summary
Based on the reviewed literature, one can conclude that internationalization is crucial for the development of new firms because in the highly competitive environment nowadays commercializing the innovations fast is a key to success. Rapid internationalization makes young firms more flexible and improves their survival chances. However, there are some significant risks related to the new-market entry of young firms – it is most of the time costly and the lack of local market knowledge may result in losing the race for gaining market share to more experienced competitors. To mitigate those risks and take advantage of the benefits of internationalization, new firms use their networks to provide valuable information and resources.
THEORETICAL BACKGROUND
17
3. Background of the case research
As mentioned earlier, the institutional profile of home countries seems to influence the networks available to entrepreneurs in the process of entering new markets. In order to argue, whether and in what terms those networks differ, one should first understand the specifics of the institutional settings in which the entrepreneurs operate. Moreover, formal institutions influence the types and scale of businesses themselves as they determine the ease of starting a business, the security of investments, in terms of property rights, and the access to financing and new markets. Therefore, before discussing the individual start-up cases, it is important to overview their home institutional environments. This overview also aims to justify the choice of Bulgaria and the Netherlands as countries, exemplifying respectively the developing and developed institutional settings that were discussed in the literature. Apart from the institutional variations, differences in the entrepreneurial environment may also influence the types of networks used by the entrepreneurs. Therefore, following the institutional analysis, an overview of the entrepreneurship in the two countries will be given.
3.1 Analysis of the institutional context in the case countries: Bulgaria and the Netherlands
For newly forming organizations, the institutional environment defines, creates, and limits entrepreneurial opportunities, and thus affects the speed and scope of entrepreneurial entry rates (Gnyawali and Fogel, 1994; Hawang and Powell, 2005). The institutional environment exerts a powerful influence not only on entrepreneurial entry rates, but also on ensuing trajectories of entrepreneurial initiatives.
BACKGROUND FOR THE CASE RESEARCH
18 different settings: Bulgaria and the Netherlands. Nevertheless, to ensure that there is a ground for such a comparison, first the institutional context of the two countries has to be analyzed. To do that, the two institutional dimensions: normative and regulatory, described earlier, will be discussed. The present analysis will not focus on the cognitive dimension as there is no secondary data on the institutionalization of societal knowledge.
While both, Bulgaria and the Netherlands, are market economies and members of the European Union, which presumes a comparable institutional context, the significant differences in the countries’ economic and political past, predetermine different levels of institutional development. As a former communist country, Bulgaria has been economically and politically isolated from most other economies (excl. the other communist countries). In addition, prior to 1990, the economy was based on large state owned enterprises and internationalization has basically been a non-existent phenomenon. Consequently, in terms of the normative institutional dimension, one could presume that Bulgarian entrepreneurs would not perceive internationalization as a logical and necessary part of their business development. This could also apply to the whole Bulgarian society, a part of which are also the policy makers. Therefore, one could argue that if the concept of supporting internationalization is missing from the normative institutional dimension, it would most likely be missing or underdeveloped in the regulatory dimension. On the other hand, the Netherlands has international trading traditions, which date back centuries ago, as well as one of the most well-developed port management systems in the world nowadays, and is a home country for a number of large multinational corporations. This would suppose that the Dutch society and in particular the entrepreneurs put great value into international expansion.
In terms of the regulatory dimension, well-developed formal institutions, are supposed to diminish the risks and transaction costs involved in business establishment and expansion. Therefore, based on a research by Steensma et al. (2005), which analyzes the institutional context in Hungary, several institutional indicators were identified in order to assess the differences in the level of institutional development between Bulgaria and the Netherlands (table 1). In this respect, weak institutions are presumed typical for economies in transition (Steensma et al., 2005), such as Bulgaria.
19 almost all indicators that identify mature market institutions Bulgaria scores much lower than the Netherlands.
A major indicator, which reflects the strength of the regulatory dimension in the institutional setting of a country, is the regulatory quality. It represents the perceptions of the government’s ability to formulate and implement sound policies and regulations that permit and promote private sector development (World Bank, 2012). While Bulgarian regulatory quality could be determined as rather “weak” (0.54 out of 2.50), the one of the Netherlands is “strong” (1.75 out of 2.50).
The government effectiveness index is used to show the perceptions of the quality of public services, its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government's commitment to such policies (World Bank, 2012). Here again Bulgaria has a significantly lower score than the Netherlands, which speaks for weaker government effectiveness.
Another very crucial indicator for the level of development of the regulatory institutions is the “rule of law”. It reflects the perceived extent to which agents are confident in and abide by the rules of society, such as the quality of contract enforcement, property rights, the police, and the courts; as well as the likelihood of crime and violence (World Bank, 2012). Concerning the property rights, a study by McMullen et al. (2008) shows a positive relationship between the level of property rights protection and opportunity-motivated entrepreneurship.
A reflection of the internationalization opportunities of firms in a country is the openness of the economy. Using indicators defined by the Heritage foundation, this paper assesses the level of openness of the Bulgarian and Dutch economies via their level of trade, investment and financial freedom. Trade freedom is the only indicator on which both countries score equally high (87.8). It, however, measures “the absence of tariff and non-tariff barriers that affect imports and exports of goods and services” (The Heritage Foundation, 2014). As a member state of the European Union and the WTO, it is not very surprising that Bulgaria scores high on this regulatory element.
BACKGROUND FOR THE CASE RESEARCH
20 against 80 for investment and financial freedom, respectively), which shows its lower level of economic openness.
Further on are presented the levels of corruption in the two countries using the Corruption Perceptions Index computed by Transparency International. It “ranks countries, based on how corrupt their public sector is perceived to be” (Transparency International, 2013). Bulgaria’s score is more than two times lower than the one of the Netherlands, which means that Bulgaria’s public sector is perceived to be twice as corrupt as the Dutch. The level of corruption is supposed to affect the entrepreneurs’ networks as according to Stiglitz (1995), corruption is a primary source of contractual uncertainty. Contracts, on the other hand, are major mean for trust-building according the process-based perspective (Dyer and Chu, 2000) and a tool used most often in cases of weak and formal networks. Consequently, corrupt environment would stimulate the development of strong informal (social) networks.
The last institutional indicator - political stability, “reflects perceptions of the likelihood that the government will be destabilized or overthrown by unconstitutional or violent means” (World Bank, 2012). The value of this indicator is much lower in Bulgaria (0.14) than in the Netherlands (1.80) and thus shows that the Bulgarian political environment is much more turbulent, which is typical for weak institutional settings.
Table 1. A comparison of institutional factors in Bulgaria and the Netherlands
Variable Source and Measure Bulgaria The
Netherlands Institutional indicators
Regulatory quality
Worldwide Governance Indicators of the World bank (2012);
Reflects perceptions of the ability of the
government to formulate and implement sound policies and regulations that permit and promote private sector development.
Estimate of governance (ranges from
approximately -2.5 (weak) to 2.5 (strong) governance performance)
0.54 1.75
Government effectiveness
Worldwide Governance Indicators of the World bank (2012);
Reflects perceptions of the quality of public
services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government's commitment to such policies.
Estimate of governance (ranges from
21
approximately -2.5 (weak) to 2.5 (strong) governance performance)
Rule of Law Worldwide Governance Indicators of the World bank (2012);
Reflects perceptions of the extent to which
agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the
likelihood of crime and violence.
Estimate of governance (ranges from
approximately -2.5 (weak) to 2.5 (strong) governance performance)
-0.12 1.84
Open markets The Heritage Foundation, 2014
Scale 0-100; higher number indicates higher level of openness.
Trade freedom
Trade freedom is a composite measure of the absence of tariff and non-tariff barriers that affect imports and exports of goods and services.
87.8 87.8
Investment freedom
An economically free country, there would be no constraints on the flow of investment capital. Individuals and firms would be allowed to move their resources into and out of specific activities, both internally and across the country’s
borders, without restriction.
55.0 90.0
Financial freedom
Financial freedom is a measure of banking efficiency as well as a measure of independence from government control and interference in the financial sector.
60.0 80.0
Corruption index Transparency International – Country Report 2013
The Corruption Perceptions Index ranks
countries and territories based on how corrupt their public sector is perceived to be. A country or territory’s score indicates the perceived level of public sector
corruption on a scale of 0 - 100, where 0 means that a country is perceived as highly corrupt and 100 means it is perceived as very clean.
41 83
Political stability Worldwide Governance Indicators of the World bank (2012);
Reflects perceptions of the likelihood that
the government will be destabilized or overthrown by unconstitutional or violent means, including politically-motivated violence and terrorism.
Estimate of governance (ranges from
approximately -2.5 (weak) to 2.5 (strong) governance performance) 0.33 1.17 Economic indicators Harmonized indices of Consumer price
Eurostat, 2013, HICP - inflation rate - Annual average rate of change (%)
BACKGROUND FOR THE CASE RESEARCH
22 GDP per capita in
PPS
Eurostat, 2013
The volume index of GDP per capita in
Purchasing Power Standards (PPS) is expressed in relation to the European Union (EU28) average set to equal 100. If the index of a country is higher than 100, this country's level of GDP per head is higher than the EU average and vice versa. Basic figures are expressed in PPS, i.e. a common currency that eliminates the differences in price levels between countries allowing meaningful volume comparisons of GDP between countries.
47 128
Real GDP growth Eurostat, 2013 (in percentage) 0.9 -0.8
The underdeveloped institutions in combination with weak economic indicators characterize the early stages of economic transition in a country (Steensma, 2005). Bulgaria has a slight GPD growth and considerably low inflation, which might speak for its advanced economic transition. Nevertheless, in terms of economic development, Bulgaria is considerably behind the Netherlands as its GPD per capita in PPS is almost 3 times lower (Table 1).
This institutional and economic analysis of the two countries shows, that the level of economic development and the state of institutions in a country affect the scope and the nature of business activities, including entrepreneurship.
Depending on the level of economic development, according to the World Economic Forum (GEM, 2012) countries can be classified as:
- Factor-driven: an economy based on the extraction of natural resources; typical for least developed countries;
- Efficiency-driven: economy driven mainly by industrialization and increasing scale-intensity – typical for developing countries;
- Innovation-driven: economy driven highly by the service sector, R&D, and knowledge intensive industries – typical for developed countries.
23 efficiency-driven characteristic as in the period of its transition from coordinated to a market economy; there has been a deindustrialization, rather than industrialization. Therefore, special attention should be paid to the transition character of the Bulgarian economy.
A further step for better understanding, not only of the institutional environment, but also of the entrepreneurial setting which it predetermines, as well as the interconnection between them in the two case countries, is an overview of the entrepreneurship.
3.2 The Entrepreneurial environment in Bulgaria and the Netherlands
The Netherlands
The annual analysis of the Small Business Act initiative of the European Commission (2013) shows that the country performs traditionally well, above EU average, on most entrepreneurship indicators. The Dutch are perceived as inherently entrepreneurial, which is proven by the fact that the number of opportunity-driven entrepreneurs is second highest in Europe, after those in Denmark (SBA Factsheet, 2013). The value which Dutch society puts to entrepreneurship could be included in the normative institutional dimension. Although, a high portion of the population (65%) have positive attitudes towards successful entrepreneurs, less than half consider school education as useful for developing entrepreneurship. Nevertheless, the Dutch government has initiated improvements in the entrepreneurial education but the results of that are expected to become more visible in the long term (SBA Factsheet, 2013).
A factor which highly encourages the entrepreneurship in the country, is as already mentioned, the high institutional development, and more precisely the significant ease of doing business (in terms of time needed to start a business; starting capital requirements, etc.) (SBA Factsheet, 2013).
BACKGROUND FOR THE CASE RESEARCH
24 Another aspect of particular interest for the present research is the internationalization of the Dutch start-ups. Data of the Global Entrepreneurship Monitor (2013) shows a downward trend in the international orientation of Dutch start-ups. In 2013, 14% of the firms indicated that at least a quarter of their clients are from abroad. As comparison, in 2007, these were 19% of the start-ups.
In terms of the profile of the Dutch entrepreneur, some insights could be gathered from the GEM National Report on the Netherlands (2012):
The results from this report show that the Dutch retain their positive perceptions towards entrepreneurship as a desirable career, and the entrepreneurship rates have doubled in the period 2008-2012. Nevertheless, Dutch early-stage entrepreneurs have more negative job growth expectations as compared to similar economies elsewhere.
As respect to education, it may come unexpected for an innovation-based economy, that only 12% of the entrepreneurs have a university degree, whereas the majority (54%) has only a secondary degree. This might be part of the reason why Dutch entrepreneurs are perceived as less innovative (just 21% are able to offer new product/service portfolio to all their customers). This, on the other hand, worsens the chances of Dutch start-ups to successfully compete on international markets.
It is worth noting that, unlike most innovation-based economies, in the Netherlands the prevalence of early-stage entrepreneurs among non-immigrants (10.7%) is higher than among immigrants (7.9%).
Very important in relation to the current research are the results of the GEM study (2012), showing that Dutch entrepreneurs do not involve in business networks too often, as compared to other innovation-driven economies. Nevertheless, when there is a business relation, men and younger entrepreneurs appear more involved than women and older entrepreneurs.
Bulgaria
necessity-25 oriented group. In spite of that, the majority of people consider that school education has improved the attitude towards entrepreneurship.
A major burden for Bulgarian SMEs, and in this respect also for start-ups is the significant amount of red tape, which is above the EU-average. Another difficulty is the lack of finance, which has additionally been worsened by the weak credit growth due to the large number of bad loans and the need for balance sheet adjustments (SBA Factsheet, 2013). A study on SMEs in Bulgaria performed by the Agency for Small and Medium Sized Enterprises (2013) also outlines this issue and reports that only 33.2% of the micro firms have used bank finance. The same report also makes a more detailed profile of the Bulgarian entrepreneur: In terms of education, the largest part of Bulgarian entrepreneurs, who are engaged in international activities (74%) are university graduates, even though Bulgaria does not have a coherent strategy for entrepreneurial education.
The attitudes of younger and older entrepreneurs towards the role of the government for encouraging internationalization differ – while 35% of the younger entrepreneurs think that the state aid is important for stimulating exports, less than 30% of the older entrepreneurs agree with the statement.
There is also a difference in the foreign markets preferred by younger and older entrepreneurs in Bulgaria. While younger entrepreneurs prefer neighboring countries and the EU, older ones are more focused on CIS and Asia.
Overall, Bulgarian start-ups have field for improvement in terms of international expansion: 32% of the firms perceive themselves as having a rather low degree of internationalization and just 21% - as having a rather high one. Of those, the manufacturing companies are the ones who internationalize the most. As main barriers for the internationalization of Bulgarian companies are identified the high cost of international expansion, lack of capital; insufficient access to information, support from the state and administrative difficulties related to transport arrangements. Nevertheless, the development of e-commerce has presented many new opportunities to Bulgarian companies to explore new markets. Difficulties when developing an e-business are the differences in legislation across borders and the not always sufficient quality of internet infrastructure.
BACKGROUND FOR THE CASE RESEARCH
26 financial state of the entrepreneurs, especially those who emerged in the mid-90s, as this period is characterized by high corruption levels, and people think that those entrepreneurs have gained their capital as a result of illegal activities. Nevertheless, there is a difference in how society sees the entrepreneur as personality – he has a positive image, being creative, hardworking. However, the entrepreneurial activity as a whole is not considered to have a positive impact on the social status of larger societal groups (Institute for Market Economics, 2013).
It is important to note that there are significant regional differences in entrepreneurship in Bulgaria. The South-Western region of the country is characterized by much higher incomes than the rest of the country (GDP per capita in the region is 60% higher than the average for the country) (National Statistics Institute, 2011) and has the highest number of SMEs – 135 934, or 37% of all SMEs in the country. Although, there are no specific data on the regional distribution of start-ups, one would assume that the region with highest income and number of SMEs is also most likely to attract most entrepreneurs. An indicator for this is also the relatively high concentration of business incubators and accelerator programs.
Table 2. Entrepreneurship indicators
Indicator Bulgaria The
Netherlands
EU average
Entrepreneurship rate (% of adults who have started a business or are taking steps to start one)
36 29 23
Opportunity-driven entrepreneurship (% of entrepreneurs)
42 67 49
Share of adults who think that successful entrepreneurs receive a high status in the society
- 65 69
Media attention for entrepreneurship - 58 50
Share of adults who agree that school education helped them develop an entrepreneurial attitude (%)
61 47 50
Number of registered firms (2012) 44,537 49,425 -
Source: SBA Fact Sheet 2013 Bulgaria, the Netherlands; World Development Indicators, World bank, 2012
3.3 Summary
27 quality, the government effectiveness, the rule of law, the corruption perception index, the financial freedom, the investment freedom and the political stability. This justifies the categorization of the level of the country’s institutional development as low. According to the entrepreneurship analysis, those underdeveloped institutions are a major burden to the small and medium-sized businesses. In view of these relatively unfavorable business conditions, the opportunity-based entrepreneurship is also higher in the Netherlands than in Bulgaria. Not surprisingly for a developing economy, the perception for corruption is also much higher than in the Netherlands. Based on these indicators and the earlier studies, reviewed in the previous chapter, Bulgarian start-ups are likely to have developed strong, informal ties, in order to counter the risks arising from the unreliable institutions. It could be assumed that because of the unfavorable institutional conditions, the small market size and low purchasing power (Table 2), Bulgarian start-ups would need and be willing to internationalize.
On the other hand, the Netherlands offers strong institutional support to the business and has a trustworthy legal system, low corruption rates and high governance quality. This could explain why the opportunity-based entrepreneurship in the Netherlands is higher than in Bulgaria. The majority of the Dutch entrepreneurs are positive about their future and a relatively big part of them is internationally oriented. However, an obstacle for their internationalization could be the low level of innovativeness, which would worsen their competitive capabilities.
As it could be clearly seen, Bulgaria and the Netherlands differ significantly in terms of institutional development and entrepreneurial characteristics. Consequently, the two countries are perfect examples to investigate the types of networks used for the internationalization of start-ups in different home settings.
BACKGROUND FOR THE CASE RESEARCH
28 Figure 1. Institutional settings, start-ups, and the networks they use to expand across borders.
Source: Author’s interpretation.
29
4. Research Methodology
The aim of this section is to present and justify the choice of research methodology employed for the present study. As pointed out by Thomas (2004), the methodology decisions made during the research process need to be clearly explained and justified in order to convince the reader in the scientific contribution of the respective work, the relevance of its results and conclusions. To begin with, the research approach will be presented, followed by the method of data collection, setting selection, cases selection, and some additional material. Attention will be paid also to the data analysis process and some final remarks will be made regarding the research quality, in order to present an objective overview of the whole research methodology.
4.1 Research approach
RESEARCH METHODOLOGY
30 similar characteristics to each other, and so will the Dutch ones. However, the intergroup comparison is expected to generate differences.
Case studies can be used for multiple reasons, but as the purpose of this research is exploration, the focus will be on the theory development use. The structure of this process is described by Eisenhardt (1989): an important first step is to define a broad research question, because otherwise one risks getting lost in the big volumes of data available. In this respect the research question defined earlier for this study is:
What networks do start-ups from institutionally different home-countries use to internationalize and why?
Nevertheless, the research question could shift during the research process. This type of research, aimed at theory development, should try to be as close as possible to an ideal scenario where no theory has been stacked because predetermined theoretical paths could “bias and limit the findings” (Eisenhardt, 1989, p.536). In this respect, the results of the current study should be analyzed with special consciousness, as there is a significant volume of literature and theories on entrepreneurial networks and their role for firms’ internationalization. Nevertheless, no actual comparison, that the author is aware of, has been made between the types of these networks in different institutional environments. This gives the researcher confidence that new theoretical concepts could be identified from the study.
4.2 Method of data collection
The method used to acquire information from the cases is interviews. The strong aspects of the interviews are that they are targeted, because their focus is on the topic of the case study, and are insightful as they provide for causal conclusions. Nevertheless, weaknesses of this approach could be the bias, resulting from a poorly constructed questionnaire; response bias; inaccuracies, due to poor recall or reflexivity – interviewee may say what interviewer wants to hear (Yin, 2003).
31 interviewer starts always with similar set of questions (Myers, 2013). The guideline-questions used for the interviews of this study could be found in the Appendix. Due to the bilingual character of the interviews, the questions have been first written in English, to get approval from the thesis assessor and then personally translated by the author in Bulgarian to be used for the conversations with the Bulgarian start-ups. The two versions are completely identical. Seven out of the eight interviews were performed via Skype due to the physical distance between the interviewer and the interviewees and the time and financial constraints which did not allow the interviewer to travel and meet the entrepreneurs in person. The last interview (Start-up 8) was conducted in person at the office of the company. The conversations lasted on average 30 minutes. Upon allowance from the interviewees, audio recordings have been made of all interviews in order to secure maximum accuracy during the data analysis and allow the interviewer to completely concentrate on the conversation and not be distracted by taking notes. Whenever possible, the interviews were conducted in the mother tongue of the respondent (this was the case with all Bulgarian start-ups). The Dutch entrepreneurs have been interviewed in English as the interviewer has insufficient knowledge of Dutch. Due to confidentiality issues, no real names have been mentioned in the thesis - the start-ups have been assigned names Start-up 1 until Start-up 8, and respectively the interviewees are being referred to as Entrepreneur 1 until Entrepreneur 8. For the same reason transcripts of the interviews are not included as part of this thesis but could be provided upon request.
4.2.1 Setting selection
RESEARCH METHODOLOGY
32 Netherlands but is originally Bulgarian. This allowed for using personal contacts in Bulgaria and approaching Dutch entrepreneurs in person to collect the data.
4.2.2 Cases selection
The case selection is crucial for the successful execution of the research. As discussed by Eisenhardt (1989), the set of entities from which the research sample is taken are determined by the population. The difference with quantitative research is that cases are chosen for theoretical, not statistical reasons (Glaser & Strauss, 1967), for instance, to serve as an example of two opposites.
Eight interviews were made with five Bulgarian and three Dutch start-ups. The pre-defined goal of the researcher was to obtain interviews from five Bulgarian and five Dutch start-ups. Unfortunately, this amount was not achieved due to lack of time and negative response rate from the approached firms. However, in the Bulgarian sub-set and partly in the Dutch one, a repetitiveness of phenomena was observed which convinced the researcher that pursuing a larger number of interviews would not add significant value to the study. Moreover, it is considered that for building a theory from case-study research, discussing between four and ten cases, is sufficient (Eisenhardt, 1989).
The cases for the present research were selected on the basis of few criteria: they had to be based either in the Netherlands or Bulgaria as these are the focus countries; reflect the definition of a start-up (be at an early stage of business development); to have initiated or have a serious intention to initiate international expansion. The industry under focus is electronics/IT. Most of the start-ups, which took part in the research, are software companies but few of them apart from developing the software also produce or outsource the production of hardware for their products. This industry was chosen due to its high value added, complex processes and product development which would presume the involvement of various parties and, thus, various networks to support the business development.
33 Dutch entrepreneurs, who she met at university events (extracurricular Entrepreneurship course and guest lectures). All three of them gave initial agreement to participate. Later on it became clear that one of them is not suitable for the research as he is active in a different industry than the one which is being studied. The second entrepreneur did not react on the several attempts to make a secondary contact and set an interview appointment, thus the interview has still not taken place. The meeting with the third entrepreneur took place at his office in Groningen and during a networking event of the Healthcare cluster in the city. The researcher was acquainted with another two Dutch start-ups based in Rotterdam, both of which were interviewed via Skype after agreeing to participate. In addition, during the networking event of the Healthcare cluster, the researcher approached a member of the cluster association, who provided the contacts of another six start-ups, however five of them did not respond to the researcher’s inquiry and one declined to participate. Therefore, in the end two Rotterdam-based and one Groningen-based start-ups formed the Dutch group, while the Bulgarian group consists of five Sofia-based start-ups.
In addition to approaching start-ups for interviews, the researcher also talked to a co-founder of a flexible workplace in Groningen, used mainly by software start-ups. The co-founder provided some valuable insights into the entrepreneurship in the Netherlands, regarding some regional specifics and the international orientation of software start-ups.
The attendance of the networking event of the Healthy Aging cluster in Groningen also gave the researcher with a better view on the networking and cooperation possibilities offered to start-ups in the cluster. The researcher observed few types of networks and was personally confronted with the options for support and assistance presented to those start-ups by third parties.
4.3 Data analysis
RESEARCH METHODOLOGY
34 author and the reader allowing for more in-depth cross-case comparisons afterwards. The within-case analysis will be followed by a cross-case analysis. According to Eisenhardt (1989) there are various tactics to perform a cross-case analysis. However, suited to the peculiarities of the present research most appropriate would be to define categories (the types of network relationships) and then to explore the within-group similarities and intergroup differences.
After the interviews, the researcher checked the completeness and sound quality of the audio recordings. Few days after the interview itself the researcher listened to the recording again, to check about information which could have been omitted at the first listening. Transcripts of the interviews were made using the InqScribe software. Afterwards the Bulgarian interviews were translated into English by the researcher and were thus ready for analyzing.
As Thomas (2004) points out, there is much more variety in techniques for interpreting qualitative data and for quantitative data. The difficulties of interpreting qualitative data often arise from the large volume of raw data collected during the interviews. Techniques for analyzing qualitative data have been presented by Miles and Huberman (1994). They suggest including visual representations of the data, such as tabular displays and graphs to present qualitative data without destroying its meaning through intensive coding. This technique was employed in the present study because very often valuable information was “hidden” between the lines – often the types of networks were not explicitly named by the interviewees but were explained using examples. This specific of the research did not allow coding the interviews as information and unique patterns could be missed. Rather, a schematic representation of the information given by each start-up was made, in an attempt to identify the employed networks and facilitate the cross-case analysis. In addition, the textual representation of the information was summarized, in a way which expresses the content in a “shorter, simpler way than the original but with minimum loss of information” (Thomas, 2004; p.217).
4.4 Research quality and limitations
35 Most concerns regarding the internal validity are based on the high possibility of investigator bias. As previously discussed, it is likely that due to biased questions the investigator leads the interview in a pre-defined direction, or that the interviewee answers what the researcher wants to hear. Another threat is that the mere interpretation of the information is subjective (Thomas, 2004). To prevent those issues as effectively as possible, the interview questionnaire is comprised of open questions, which aim to be as objective as possible and secure the focus of the interviews but not limit the stories. In order not to bias the interviewees, the researcher gave objective information about the aim of the research without mentioning his personal expectations and previous observations. Lastly, the information summaries are an accurate representation of the given information.
Regarding the issue with the external validity – various authors have argued its irrelevance because the core aim of a case-study research is not empirical generalization of results but a derivation of new theoretical concepts and hypotheses, which later to be investigated by other methods (Thomas, 2004). In line with this argumentation, this thesis is aimed at identifying theoretical aspects which are missing in the present theory on networks and start-up internationalization. No hypothesis will be tested, but rather propositions for future research will be made.
DATA ANALYSIS AND FINDINGS
36
5. Data Analysis and Findings
The following section will present and analyze the results of the research; based on the conducted semi-structured interviews with five Bulgarian and three Dutch start-ups. First a within-case analysis will be made for each start-up, which will then be followed by a cross-case analysis to show the differences and similarities between the cross-cases within the two groups – the Bulgarian and the Dutch, and an overall cross-case analysis of the two groups. Due to confidentiality reasons the names of the entrepreneurs and the start-ups will not be mentioned. Rather they will be referred to as Start-up 1 until 8, and Entrepreneur 1 until 8, respectively. The first five to be discussed are the Bulgarian start-ups, thus start-ups 6, 7 and 8 are the Dutch ones. Names of any other companies or other types of organizations will also be avoided and exchanged with descriptive explanations.
5.1 Within-case analysis of the Bulgarian start-ups
Start-up 1
Start-up 1 is based in Bulgaria and has been operating for a year and eight months. So far, it has activities on its local Bulgarian market and in the United Kingdom. In 2014 there are good prospects that the company will enter other European Union countries, in particular Germany. The firm is part of the electronics sector as it produces equipment for children playgrounds which uses the kinetic energy of the children playing with it to generate energy and some special effects (sounds, lightings, etc.).
37 intensive communication starts during which it usually becomes clear if the partnership has future or not.
As main drivers of internationalization for this company, are considered the international trade-fairs and the network of two business accelerators (one in Bulgaria and one in England). The first steps on the UK market were during a demo day in front of the English accelerator, which was the final round of completing the accelerator program in Bulgaria. Being part of the portfolio of the British accelerator gave Start-up 1 the opportunity to participate in various events in England. At one of those events, Start-up 1 met its major partner in the UK – a university research center. The research center is administrating a project for building a smart city with one British municipality and Start-up 1 is working together with them on building the children playgrounds. In addition, via the research center, Start-up 1 is negotiating partnerships with several schools and kindergartens in the UK.
From the description of Start-up 1’s networks it appears that they have mostly business character. The only social aspect mentioned during the interview was the close physical proximity of Start-up 1’s office to the office of the Bulgarian accelerator, and the daily communication (also informal) with people from the accelerator; and the personal acquaintance of the founder with people from the furniture sector in Bulgaria. However, Entrepreneur 1 notes:
“They [the two accelerators] are our investors; of course they have an interest that we perform well.”1
This statement shows that Entrepreneur 1 considers the accelerators more as part of its business- rather than as part of its social network.
As part of the portfolio of the British accelerator, Start-up 1 was invited to a competition in New York, where the company took one of the prizes and had its first grasp of the US environment. According to Entrepreneur 1, the US market has great potential and the company is taking steps to enter it. Nevertheless, due to administrative reasons (permits, patents, etc.) this process is slowed down. The main channel which Start-up one plans to use for the entry is participating in suitable events, trade-fairs, industry conferences where it hopes to initiate direct contact with distributors or other partners who will then serve as
1
DATA ANALYSIS AND FINDINGS
38 contact point with the local distributors. The company plans to apply the same tactic on the market of the Middle East which is also in its target group. In other words, Start-up 1 plans to rely on weak foreign business ties for entering the respective markets.
Based on the information given by Entrepreneur 1, Start-up 1 tries to foster its internationalization mainly via strong business networks (accelerators) which would provide access to weaker business networks of potential distributors or clients (event participation) and those would then be turned also into strong business ties.
Start-up 2
Start-up 2 is a Bulgarian software company, active since the autumn of 2013. It offers data-analysis software to companies, mainly big corporations. Start-up 2 was meant to be a “born global” from the very beginning. According to one of the founders, there are four channels which the firm can use for internationalization:
1. Direct contacts; 2. Events;
3. Agents;
4. Referrals from satisfied clients.
So far Start-up 2 has mainly used events and agents in its attempts to enter the international marketplace. These two channels have provided the first leads for the company in Europe. In England, the company visited 3 conferences and one event organized by a large local bank. At one of these conferences, start-up 2 met a big British-based MNE, which was interested in its product and organized a demo day in February 2014. This was the first demo that the company made outside Bulgaria. In addition, during this year Start-up 2 plans to visit events in Germany and France, where it hopes to meet prospective partners. Consequently, the company is highly relying on developing its business network. The decision, which events to visit, is made by one of the founders with a lot of experience in the industry.
