The Internationalization of Small Firms

A Strategic Entrepreneurship Perspective

Shameen Prashantham

• Publisher: Routledge
• Year: 2007
• eBook ISBN: 9781134083404
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Drawing on empirical case-study research carried out in the Bangalore software industry, this book explores the role of network relationships in the internationalization of small knowledge-intensive firms.Using a conceptual framework, it looks at a range of key themes. These include:networksknowledgetechnology.Highlighting the propensity of small k

Part I
Conceptual underpinnings

1 Resourceful internationalization

It is resourcefulness, not the mere amount or even types of resources, that matters.

(Zahra 2005: 21)

Internationalization: a strategic entrepreneurship perspective

Firms operating in international markets today seek competitive advantage. It has been suggested that if international business scholars agree on a ‘big question’ for the field, it ought to concern explanations of the differential performance of internationalizing firms – that is, ‘What determines the international success and failure of firms’ (Peng 2004: 99). Competitive advantage is at the very core of strategic management and an issue of interest to many researchers who focus on internationalization. Internationalization, after all, is ‘a major dimension of the ongoing strategy process of most business firms’ (Melin 1992: 101). Ultimately, successful internationalization is pointless if it does not help firms achieve greater strategic performance.

Today, it is widely recognized that international expansion can no longer be deemed the exclusive domain of the established multinational corporations (MNCs) (Wright and Ricks 1994; Zahra 2005). Despite a general preoccupation with large multinational enterprises, recent years have seen a surge in the study of internationalization of the smaller firm, especially in knowledge-intensive industries (Etemad and Wright 2003; Peng 2001). While Young (1987) was among the first to highlight the emerging importance of the internationalization of knowledge-intensive smaller firms, such interest caught on fairly rapidly within the international business field as evident from the following observation by Wright and Ricks (1994: 699) seven years later on significant trends in international business research:

Another, even newer thrust of research activity is international entrepreneurship and the internationalization of small business. In the emerging global environment, entrepreneurs and their businesses become less limited to domestic markets. Even small firms are entering the realm of international business. . . . International players in the world of tomorrow will no longer be limited to big business.

It was, coincidentally, in the same year that Oviatt and McDougall (1994) profoundly influenced internationalization researchers with their ideas on the accelerated internationalization of international new ventures, resulting in considerable research activity over the subsequent decade (Zahra 2005). Thus Wright and Ricks’ words have proved to be prophetic.

Scholars whose pioneering efforts seek to foster a research agenda at the strategy/entrepreneurship interface suggest that the internationalization of smaller firms is a topic that can be fruitfully examined from a strategic entrepreneurship perspective. Hitt et al. (2001) identify internationalization – along with external networks, resources/organizational learning and innovation – as a naturally occurring domain in strategic entrepreneurship. Smaller firms lack the resources of their large counterparts. Yet many are able to successfully leverage limited resources in an enterprising yet sensible manner. It is therefore appropriate that research on the internationalization of small and new firms be approached from both strategic and entrepreneurial perspectives.

Hitt et al. (2001: 480) note, ‘Entrepreneurship is about creation; strategic management is about how advantage is established and maintained from what is created. . . . Wealth creation is at the heart of both entrepreneurship and strategic management.’ Scholars have pointed out the need for an entrepreneurial mindset as they engage with risks and dangers presented by international expansion (Oviatt and McDougall 1994). Equally, attention has been drawn to the importance of a strategic orientation (Welch and Welch 1996) in relation to the key choices to be made in terms of market selection, entry mode choice and timing of entry. A strategic entrepreneurship perspective is consistent with internationalizing small firms’ need to ‘punch above their weight’, as it were, and resourcefully use their limited means to internationalize (Zahra 2005).

Other scholars echo the call for integrating strategic and entrepreneurial perspectives. Venkatraman and Sarasvathy (2001) colourfully argue that strategic management and entrepreneurship are incomplete without the other – much as Romeo would be incomplete without a balcony, and vice versa! Shane (2003) discusses the need for entrepreneurial strategies that synthesize opportunity recognition and strategic choice. McGrath and McMillan (2000) call for strategists to adopt an entrepreneurial mindset. As such, these two fields are seen as offering mutually beneficial perspectives (Zahra and Dess 2001).

The three other domains of strategic entrepreneurship identified by Hitt et al. (2001) can all be related to resourceful internationalization. There are certain resources that firms need to possess themselves. The influence of Penrose (1959), whose work inspired the resource-based view of the firm (e.g. Barney 1991), is evident in the small firm internationalization literature. In particular, knowledge is seen as a vital resource (Wiklund and Shepherd 2003). As Yli-Renko et al. (2002: 280) observe, ‘Given the importance of knowledge as a central value-adding resource of firms, it is not surprising that the current dominant theories on the internationalization process of new and small firms treat knowledge as a central enabling and driving resource.’ Reflecting the wider literature that emphasizes the role of market and technological knowledge with respect to smaller firms (Wiklund and Shepherd 2003), the internationalization literature documents the role of market knowledge as a regulator of resources (Johanson and Vahlne 1977) and of technological knowledge as an enabling resource (Oviatt and McDougall 1994). An important complementary perspective to the resource/knowledge-based view is that of organizational learning. As Hitt et al. (2001: 483) assert, ‘Knowledge is generated through organizational learning.’ Both traditional (e.g. Johanson and Vahlne 1977) and more recent (e.g. Sapienza et al. 2006) perspectives of internationalization highlight the importance of learning (Cyert and March 1963). Linking this notion with that of external networks above, a significant potential outcome for internationalizing firms is that ‘social capital facilitates learning’ (Hitt et al. 2001: 482); in other words, ‘external networks can be valuable because they provide the opportunity to learn new capabilities’ (Hitt et al. 2001: 481). The role of resources and organizational learning in small firm internationalization is considered in this volume (see Chapter 3).

A key manifestation of knowledge and learning, including via social capital, is in terms of innovation. The literature is replete with exhortations for firms to succeed at innovation. The significance of innovation is evident from Hitt et al.’s (2001: 481) suggestion that innovation ‘is considered by many scholars and managers to be critical for firms to compete effectively in domestic and global markets’. The role of innovation in internationalization is evident, at least implicitly, in the literature. McDougall and Oviatt’s (2000) definition of international entrepreneurship identifies cross-border innovation as a component. Also, innovation can be expected to precede international expansion given that ‘the capability to develop and introduce new products is a primary driver of a successful global strategy’ (Hitt et al. 2001: 484). Finally, parallels have been identified between the processes of innovation and internationalization – in other words, internationalization is an innovative process (Johanson and Vahlne 1992; Knight and Cavusgil 2004). While the importance of innovation is unmistakably acknowledged in this volume, its role in small firm internationalization is, in the main, implicit; indeed, a major call in the concluding chapter is for future research to take innovation into account more explicitly.

Of all the domains of strategic entrepreneurship, perhaps none is more relevant to small firms’ resourceful internationalization than external networks, the focus of this volume. External networks are an important means by which internationalizing firms are able to augment their limited resource base. As Hitt et al. (2001: 481) observe, ‘the greatest value of networks for entrepreneurial firms is the provision of resources and capabilities needed to compete effectively in the marketplace.’ This notion is expanded upon presently. Thus, in terms of the four domains of strategic entrepreneurship, this volume is primarily concerned with the relationship between external networks and internationalization. This introductory chapter explores some key themes on the role of networks in internationalization, to set the tone for the rest of the volume.

Networks and internationalization

A long-standing tradition, perhaps originating with Johanson and Mattsson’s (1988) network model of internationalization, has emphasized the role of interorganizational relationships in the internationalization process. Recently, internationalization scholars have drawn on social capital theory to conceptualize and study this phenomenon (e.g. Coviello 2006). Social capital emanating from network relationships provides internationalizing small and new firms with vital network resources (Gulati 1999). In this volume, social capital is taken to mean ‘the sum of the actual and potential resources embedded within, available through, and derived from the network of relationships possessed by an individual or social unit. Social capital thus comprises both the network and the assets that may be mobilized through that network’ (Nahapiet and Ghoshal 1998: 243). The rationale for the choice of this definition is threefold. First, this definition is conducive for research on firm-level social capital, including social capital derived from inter-firm relationships, which is the focus in the present volume. Second, this definition is integrative of previous work, which is useful given the diversity of views on social capital; for instance, it combines both the public and private good perspectives and is neutral on social capital typologies (Adler and Kwon 2002; Inkpen and Tsang 2005). Third, Nahapiet and Ghoshal’s (1998) definition – along with their ideas – establishes a relationship between social capital and knowledge wherein repeated and intensive social interaction facilitates the transfer of knowledge (Yli-Renko et al. 2001; Zahra et al. 2000). This approach therefore sits harmoniously with the knowledgebased view of the firm, which is dominant in the internationalization literature (see Chapter 3).

According to Portes (1998), it was Bourdieu (1986: 248) who provided the first systematic analysis of social capital, which he defined as ‘the aggregate of the actual or potential resources which are linked to possession of a durable network of more or less institutionalized relationships of mutual acquaintance or recognition’. That one kind of social tie (e.g. friendship) can achieve a different purpose (e.g. work-related advice) is a long-held belief in sociology (Portes 1998). Social relations – as distinct from market or hierarchical relations – underlie social capital. Of course, market or hierarchical relations may, over the course of time through repeated interaction, yield social relations – and therefore social capital (Adler and Kwon 2002). The social capital concept has formalized the notion that benefits can be derived from social ties and encapsulated it in a manner that has attracted considerable interest beyond the confines of sociology. For the purposes of the present discussion, the key facet of social capital is that it allows small firms to achieve levels of internationalization and performance that they would not have been able to achieve on their own. In other words, social capital enables resourceful internationalization.

A number of scholars have acknowledged the role of network relationships and social capital in small firm internationalization. With regard to the emergent body of work on accelerated internationalization, Johanson and Vahlne (2003: 83–84) observe that ‘a common feature of much of this research is that it places attention on networks and network relationships when trying to understand and explain the rapid internationalization of the firms’. They go on to suggest that ‘there is a need for new and network-based models of internationalization’ (Johanson and Vahlne 2003: 84). In similar vein, Oviatt and McDougall (2005a: 544) acknowledge that ‘network analysis has been a powerful framework for international entrepreneurship researchers’ and that ‘networks help entrepreneurs identify international opportunities, establish credibility, and often lead to strategic alliances and other cooperative strategies’. Also, as Zahra (2005: 24) notes, ‘Building relationships and gaining access to existing networks can help to shorten and expedite INVs’ learning.’

Three facets of network relationships or social capital, with respect to internationalizing small firms, seem especially relevant and are echoed in the following chapters of this volume. These facets, discussed briefly below, are

1. the development of social capital;
2. the leverage of social capital;
3. the management of portfolios of social capital.

Developing social capital

As Coviello (2006) has recently pointed out, new ventures have certain network relationships that can play a significant role in initial market entry. It would seem likely that such founding relationships can have path-dependent consequences in terms of the subsequent development of the firm. Initial network relationships are often directly attributable to the entrepreneur and/or top management team (McDougall et al. 1994). Over time, however, additional network relationships can – and indeed, must – be built. These relationships will likely influence subsequent international expansion. Oviatt and McDougall (2005a) argue that initially strong ties are important to ventures but over time a set of weak ties are more likely to provide information and opportunities that facilitate accelerated internationalization. As the portfolio of network relationships expands, and especially as the ventures’ confidence and capabilities grow (Coviello and Munro 1997), international growth accrues.

However, network relationships are not easy to come by and cannot be taken for granted. Research at the strategy/entrepreneurship interface suggests that ventures can develop the capability to replenish extant network relationships (i.e. its stock of social capital) with the addition of new ties (Hitt et al. 2001). However, while ventures’ network range, density and centrality are bound to increase over time (Coviello 2006), they must overcome key barriers and be able to achieve visibility, efficiency and intimacy with respect to their network of relationships.

Achieving visibility is an important challenge for the smaller firm. A large established MNC seeking strategic alliances is quite different from a small, often young, firm attempting to establish network relations. While there are specific smaller social networks within a given milieu wherein even smaller firms can gain visibility, this requires time and effort and often it is the entrepreneur who bears the burden of networking activity that must be undertaken if the smaller firm is to become, and remain, well known among key actors. Difficulty arises from these firms’ liability of foreignness (Zaheer 1995) – which has been viewed by some scholars as a symptom of deficient international social capital (Arenius and Autio 2005) – and liability of smallness (and of newness, for young firms). As Zahra (2005: 23) suggests, in relation to international new ventures (INVs),

INVs usually experience three types of liability. The first relates to their newness and inexperience, which limits their access to resources and existing networks. Newness raises questions in the minds of other stakeholders about INVs’ credibility and potential viability. The second liability stems from their size, as many INVs are small. This limits the slack resources of INVs and, as a result, their ability to withstand the challenges of internationalization. The third and final liability arises from the foreignness of INVs, which means that they have to work hard to overcome barriers to entry, build links to their customers and suppliers, and gain the acceptance of potential customers.

The next aspect of developing social capital can be referred to as the achievement of efficiency in relationships, once they are formed. The point being made here is that social capital is more likely to result when a firm is seen to be efficient and competent in its interactions. Efficiency in carrying out its part in a transaction or engagement ensures that a firm instills confidence and trust in the other actor(s) involved. As Gulati (1995: 92) notes, trust is built over time through repeated interactions. Implicit in this assertion is the importance of small firms ensuring that they ‘deliver’: that is, do a good job of whatever it is that has been undertaken. Initial interactions and impressions can be particularly important in establishing the reliability of the firm as an efficient player.

Finally, not in all but in some cases, it becomes possible and appropriate for small firms to build intimacy with the other actor(s). Intimacy implies knowledge about the other actor(s), which in turn increases the odds that any assistance provided is timely and relevant. Frequent interactions over time lead to stronger ties (Granovetter 1973) which can yield useful benefits (Krackhardt 1992). Even moderate levels of intimacy in relatively weaker ties can lead to the exchange of useful information and trade leads (Coviello 2006; Oviatt and McDougall 2005a). An important case of network relationship where intimacy can be particularly valuable is that of the involved customer, defined as ‘a customer who regularly makes purchases . . . and with whom the relationship also involves considerable interaction and information exchange and the discussing of past, present and future needs’ (Yli-Renko et al. 2002: 293). Such relationships can be a valuable source of technological knowledge (Yli-Renko et al. 2001), thereby resulting in useful innovation and internationalization outcomes.

Leveraging social capital

As noted, the initial network relationships of a small internationalizing venture can often be attributed to the entrepreneur and/or top management team. The extent to which a firm is initially endowed with social capital can vary greatly. The work of Bourdieu (1986), for instance, would suggest that ventures where the top management team is drawn from the elites of society – marked by attendance at prestigious educational institutions, for example – possess greater stocks of social capital. Certainly in the context of management education, the popular press emphasizes the importance of connections that are fostered at business schools through an MBA degree, implying that alumni networks from top educational institutions constitute a valuable source of social capital.

Similarly, another determinant of the stock of social capital that a firm is endowed with is the prior professional affiliations of the founding team. Former employees and colleagues can be an important source of information and advice (Nebus 2006). Also, as with educational institutions, former employers can signal pedigree which in turn helps to overcome barriers to social capital, such as a lack of visi...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Illustrations
• Foreword
• Preface
• Acknowledgements
• Abbreviations
• Part I Conceptual Underpinnings
• Part II Exploratory Insights
• Part III Future Research Directions
• Notes
• References