International Entrepreneurship (RLE International Business)

The Effect of Firm Age on Motives for Internationalization

Candida Brush

• Publisher: Routledge
• Year: 2013
• eBook ISBN: 9781135129552
• Edition: 1
• Topic: Economics
• Subtopic: Business General
• Index: Economics

This volume provides important benchmarks for the integration of entrepreneurship and international business. It extends scholarship beyond the firm as single unit of analysis, instead including the role of the founder/entrepreneur. Exploration of this domain discusses possibilities for theory revision or development as well as providing information about an under-researched segment of companies.

I

Small Business and International Activities

“Record numbers of small businesses are turning overseas to bolster their profits … ‘Its an awakening’, says Howard Lewis, vice-president of the National Association of Manufacturers, ‘small companies are finding there is life beyond the domestic market’.” (Wall Street Journal, November 8, 1990, p. B-2)

Small companies are increasingly active in international markets. Believing that there are growth opportunities abroad for smaller firms, the U.S. government is encouraging international trade in this segment. To provide context for this research, this chapter describes the current state of small business international activity and presents information about the role of new companies in the U.S. economy. A discussion of differences between new and established small companies is presented to provide a better understanding of the potential variation in international behaviors based on age of small business. It is expected these distinctions will explain variations in motives for early or late internationalization and resultant strategies.

INTERNATIONAL TRADE ACTIVITY

Small businesses are actively participating in international business activity. While the U.S. government does not collect statistics on international trade by size or age of enterprise,¹ there are a range of estimates, all suggesting increases in small business internationalization. In 1980, the Department of Commerce estimated that approximately 15,000 businesses having less than 500 employees received revenues from exports; these businesses accounting for about twenty to twenty-five percent of all exports (Rabino, 1980).

In 1988, the SBA estimated that 90,000 small firms exported to foreign markets, and that those with less than 100 employees accounted for approximately twenty-five percent of the total or 22,500 enterprises (Small Business in the American Economy, 1988, p. 6). This estimate is close to a Wall Street Journal report (Nov. 8, 1990) that of 100,000 U.S. companies exporting, 80 percent are very small (less than 100 employees). Similarly, David Birch of Cognetics Inc., announced that more than eighty-seven percent of the 51,000 exporters tracked by his company employed fewer than 500 employees (Business Week, April 13, 1992, p. 70). For the year 1989, exports by small companies were up 11.1 percent from 1988, compared to imports which rose 6.1 percent, resulting in a decline in the foreign trade deficit (The State of Small Business, 1990, p. xi).

Sample surveys of small businesses also reflect growth in internationalization by small companies. A recent study by Dun and Bradstreet found that of small and medium-sized firms (less than 500 employees), forty-one percent of respondents reported export sales growth rate above domestic sales growth rate, and these firms accounted for 25.7 percent of all exports by firms with less than 100 employees (Holziger, Dec. 1990a). An investigation of the U.S. Department of Commerce PIERS data base found that firms of less than 500 employees accounted for approximately twelve percent of the value of direct export by manufacturing firms (Faucett, 1985). Exports accounted for approximately nineteen percent of growth in GNP in 1989, with small businesses contributing about twenty percent of the total U.S. exports. Results of a recent survey by the National Association of Manufacturers of 2,105 of its 8,200 small manufacturers found a twelve percent growth in businesses receiving revenues from exporting. Increases measured up from fifty-four percent in 1988 to sixty-six percent in 1992 (Braunlich, 1992). Furthermore, government officials predicted that the number of small companies exporting will increase in the future.

There are several factors contributing to this increase in international trade by small companies. These include political and economic changes; a successful conclusion to negotiations of the General Agreement on Tarrifs and Trade (GATT) and the North American Free Trade Agreement (NAFTA); a favorable U.S. policy position on international trade; and greater availability of resources to small companies.

Dramatic changes in the world economy with the opening of markets in countries such as the Czech Republics, Hungary, former Soviet Union and Vietnam, have created new opportunities for small companies. Dun and Bradstreet suggests that the political and economic changes in Eastern Europe will encourage even greater international trade among smaller businesses (Holziger, 1990b, Holziger, 1990c). In addition, growing economies in many developing countries present new market opportunities for small companies. Argentina and China are two examples of countries where GNP growth is projected, and economic reforms have created more spending power for their citizens (Maynard, 1994).

Successful negotiations on trade agreements are another factor contributing to increased opportunites for small businesses. As of January 1994 NAFTA was implemented, eliminating trade barriers among the U.S., Mexico and Canada, and designed to be particularly helpful to small companies. Coincidently, this year marks the successful conclusion of the Uruguay round of GATT. This agreement is expected to reduce and eliminate tariffs among the 117 signatories beginning in 1995. According to Lawrence Chimerine, Chief Economist and Vice President of the Economic Statistics Institute for Small Companies, “The opportunities [for small companies] to export are better now than the have been in a long time …” (Maynard, 1994, p. 23).

Besides these developments in international markets, the U.S. government is encouraging greater participation in international trade by small businesses: “One important mission of the U.S. Small Business Administration is to encourage small and medium-sized firms to export their products to other nations” (Small Business in the American Economy, 1988, p. iii). Three reasons are given for this position. First, to improve the balance of trade—U.S. small businesses import more than they export, especially in the retail and wholesale trade sectors (Small Business in the American Economy, 1988). Second, to survive—if small businesses are to participate more fully in the development of the American economy between now and the year 2000, a major area of engagement must be the international economy (Small Business in the American Economy, 1988, p. 23). Third, there are opportunities—from now to 1996 the world economy is expected to grow at an average rate of 3.3 percent per year, whereas the domestic economy is expected to grow only at an average rate of 2.4 percent (Small Business in the American Economy, 1988, p. 23). Furthermore, dollar exchange rates have declined, making it more cost-effective for small businesses to do business internationally (Small Business in the American Economy, 1988, p. 25).

The U.S. government also is assisting small companies threatened by foreign competition in domestic markets. In 1993, 249 small companies received trade adjustment assistance providing consulting, grants and other aid to help small companies recover from import “injury”. The total financial assistance was approximately $10 million for this year (Sullivan, 1994).

Even though the Small Business Administration is quite clear about its position encouraging small businesses to internationalize, and there are at least fifteen to eighteen separate federal agencies involved in promotion of exporting. These agencies seldom coordinate activities with each other (Wall Street Journal, March 5, 1992, p. B-2; Business Week, April 13, 1992, p. 70). For example, The SBA and the Commerce Department both offer counseling and market information through a network of offices and also sponsor overseas trade missions.

Another factor affecting increases in international trade are developments in communications and greater availability of resources and assistance. Improvements in telecommunications, such as FAX machines, 800 telephone numbers and overnight express mail, also have helped to make international markets more accessible to small firms (Business Week, April 13, 1992, p. 70). Likewise information is more widely available form export assistance centers (one stop shops) in major cities such as Baltimore, Miami, Chicago, and Long Beach, Calif. (Maynard, 1994). Further, agencies such as the Japan External Trade Organization (JETRO) have been created to promote trade between Japan and small companies. “No-one is too small to export”; says John Everett, Executive Vice President of Dage Company, an export management company located in Stamford, Conn. Like Dage company, there are many companies specializing in finding overseas markets for U.S. manufacturers.

In sum, many factors are contributing to a favorable climate for small companies to internationalize. Global market developments, a favorable U.S. public policy position, technological developments, and greater resource assistance have encouraged even very young companies to enter the international marketplace.

NEW BUSINESSES IN THE U.S ECONOMY

New businesses are important to the U.S. economy because they are a source of job creation (Small Business in the American Economy, 1988, p. 64-67) and innovations (Birch, 1987). A recent study by Kirchoff and Phillips (1988) found new businesses created a greater proportion of new jobs than established firms. New businesses also have been attributed with implementing more innovations than larger established firms (Birch, 1987). There is no single listing of new start-ups or new businesses, but several proxies are used: incorporations—compiled by Dun and Bradstreet;² self-employed, compiled by the Department of Labor,³ and Small Businesses for which information is maintained by the Small Business Administration. According to these proxy lists, best estimates are that approximately 600,000 new small businesses are created every year (Small Business in the American Economy, 1988, pp. 64-65; The State of Small Business, 1989, p. 23; The State of Small Business, 1990, p. xii). For the year 1991, the SBA estimated there were 734,304 start-ups, down 6.6 percent from the record 786,056 for 1990.

Despite the numbers of businesses created, many new small businesses are discontinued for one reason or another. While there is again no complete listing of business failures or discontinuances, the rate of business closings has been estimated by the SBA. In 1988, there were about 63,000 recorded small company bankruptcies and 57,000 failures. This represents about 10 percent of all small companies leaving the marketplace due to financial and non-financial reasons. In addition, between 1988-1990 there were 7.8 million jobs lost due to business dissolutions, and 9.2 million jobs created through business births during this period according to the Small Business Administration’s small business data base (Phillips, 1993). Among growing firms (those that add new jobs), approximately eight percent close within the first two years compared to approximately thirty percent of those small businesses that do not grow (The State of Small Business, 1989, p. 22). In the first six years, the overall discontinuance rate is estimated at approximately 62.7 percent for small businesses. However, for growing firms the rate is again significantly lower, 33.7 percent versus 72.5 percent for businesses that do not grow (The State of Small Business, 1989, p. 22). In other words, for new small businesses to survive, growth and expansion by adding jobs are of major importance. One means of growth is engaging in international business activity.

INTERNATIONAL ACTIVITY AND NEW COMPANIES

The U.S. government does not keep track of international business activity by age of business.⁴ Yet, there is some information to indicate that small businesses often export at an early age. For example, a recent article from the Wall Street Journal described the international activities of the Brooklyn Brewery, started in 1988, and its arrangements to export its beer to Japan. Foreign sales accounted for about ten percent of the Brewery’s two million dollars in annual sales (Wall Street Journal, Oct. 13, 1990). Other popular publications have highlighted international success stories of businesses that begin by selling products abroad at an early age. Examples include Garber Floor Testing, a six year old enterprise that sold its devices in England before entering U.S. markets (Nation’s Business, September, 1991, p.8). The case of Quantum Epitaxial Designs, Inc. is similar. Quantum, started in 1988, worked with a Pennsylvania state program called Ben Franklin Technology Partnership to obtain venture funding and sell its crystallized wafers to Japan (Nation’s Business, July, 1991, p. 9). Similarly, there is LIFE Corporation, a twelve employee firm founded in 1985, that started exporting in 1987. The company, which makes a portable oxygen pac, now receives more than forty percent of its revenues from foreign countries (Business America, June 3, 1991, p. 21). Barnyard Babies, a toy manufacturer also sold products to Japan, France, Brazil and Canada within its first three years of operations; and Cottage Country Baskets, a manufacturer of handcrafted baskets, also exported from inception.

In summary, there is data new small businesses are important to our economy. Furthermore, anecdotal evidence suggests new companies from various industrial sectors are selling abroad to many different countries. Despite this evidence of growth in internationalized new ventures, there is neither a count of the number of new small businesses that are internationalized, nor information about their reasons for, or experiences in inte...

Table of contents

• Front Cover
• Half Title
• Title Page
• Copyright
• Title Page
• Copyright
• Dedication
• Contents
• LIST OF TABLES AND EXHIBITS
• LIST OF APPENDICES
• PREFACE
• INTRODUCTION
• ACKNOWLEDGMENTS
• CHAPTER I- SMALL BUSINESS AND INTERNATIONAL ACTIVITIES
• CHAPTER II- THEORETICAL BACKGROUND
• CHAPTER III- EMPIRICAL LITERATURE REVIEW
• CHAPTER IV- METHODOLOGY AND RESEARCH DESIGN
• CHAPTER V- DATA ANALYSIS AND RESULTS
• CHAPTER VI- DISCUSSION OF RESEARCH FINDINGS
• CHAPTER VII- CONCLUSIONS AND IMPLICATIONS
• APPENDICES
• BIBLIOGRAPHY
• INDEX