The Internationalization of Small to Medium Enterprises

The Interstratos Project

Rik Donckels, Antti Haahti, Graham Hall

• Publisher: Routledge
• Year: 2002
• Topic: Business
• eBook ISBN:
  9781134785780
• Subtopic: Business General
• Index: Business

The Internationalization of Small to Medium Enterprizes uses information from annual surveys of companies in Europe during the period spanning the formation of a single European market.
It addresses issues affecting small businesses such as marketing, entrepreneurship, export strategies and the single market, on an international basis. The book also contains detailed case studies of individual countries including The Netherlands, Finland, Switzerland and the UK.

1 Introduction

Interstratos — a pioneering project on internationalization of SMEs in Europe

Antti Haahti

Purpose and Scope

Interstratos (Internationalization of strategic orientations of small and medium European enterprises) is a joint research project¹ in which researchers from eight European countries cooperate in studying the international behaviour of small and medium firms. On the initiative of Rik Donckels, Erwin Fröhlich, Antti Haahti and J. Hanns Pichler our aim in the research programme is to explore international operations in manufacturing industry. So far we have amassed an extraordinary amount of data (over 5,000 observations per annum over five years) with the possibility of gaining extensive comparative insight into more than 4,000 European firms and a panel of about 800 firms.

The purpose of the longitudinal research programme is to explore patterns of internationalization and describe strategies of adjustment to changes in their task environments by small and medium manufacturing firms in Europe during the years 1991-1995. The frame of reference model is based on a broad research question: How are changes in market circumstances and task environments reflected in the changing strategic and/or situational adaptive behaviours of SMEs?

The specific research objectives are to explore and describe the following questions:

• How do changes in competitive conditions, changes in market factors and constraints and inducements to undertaking international operations influence changes in product/market strategies and especially export orientation and the degree of cooperation of small and medium manufacturing firms?
• What patterns of behaviour relevant to the modes and methods of internationalization can be observed and how do adaptive changes in this behaviour affect changes in the export success of firms?
• What kinds of resource formation in terms of learning capability can be observed in the SMEs in their growth vector from local to overseas markets and how do these learning capabilities influence their choices and mode of operations in the local market and in their international operations?
• Are changes in managers' values and attitudes related to changes in their adjustment to the demands of their task environment, and what types of learning behaviour can we observe?

To be able to observe such phenomena, five industries in different phases of evolution — growth, expansion, stability, stagnation and contraction — have been chosen and we have focussed on the patterns of adjustment of SMEs operating in food, furniture, electronics, mechanical engineering and clothing and textiles. Data from Austria, Belgium, Finland, UK, the Netherlands, Norway, Sweden and Switzerland are being collected annually over a five-year period to serve as a source of information. The objective of this book, which is meant for academic, consulting and managerial audiences, is to highlight some of the changes European SMEs have to deal with.

Research Model and Methodology

Research model

Internationalization refers to the process of increasing involvement in international operations (Welch and Luostarinen 1988). Export related theories of internationalization have put forward two types of competing descriptive theories of export behaviour. The first theory concerns the stage-of-development models that are descriptions of causal patterns of development and growth. The process is viewed either as a unilinear evolutionary process with incremental steps, and characterized by sequential stages (Johanson and Wiedersheim-Paul 1975; Bilkey and Tesar 1977; Luostarinen 1979; Cavusgil et al. 1979; Czinkota 1983; Welch and Luostarinen 1988), or as a cyclical evolution pattern with a more differentiated character. Growth through strategic decisions is the second theory (Reid 1982, 1984; Aharoni 1966). The design of our approach allows us to test any of the competing models. We tend to lean on the strategic choice behaviour viewpoint in our research programme, but are also interested in the alternative evolutionary models.

From the outset we accept that the performance of SMEs is to a large extent dependent on external conditions, e.g. resource availability, but we also accept the view that through a planned, rational process of strategy formation a firm will increase the odds in its favour. Given less than perfect competitive conditions, it is the entrepreneur's ability to take advantage of market imperfections that determines the firm's competitive advantage. Awareness of market imperfections requires knowledge about market factors, information about market opportunities, insights into customer needs, production and products to satisfy those needs and understanding of the key success factors in the industry needed to create a sustainable position.

The basic line of thinking follows the external control theory and, therefore, we are mainly interested in the following types of relation: environment/strategic behaviour; performance/strategic behaviour. For a survey of the variables describing these relations, we refer to Table 1.1. In the next section a more detailed presentation of the variables is to be found.

Exogenous variables: the context of operations

There are quite a lot of variables that we have put forward to study. Why so many, and what is the justification for this?

The reason for such a set of variables is two-fold. First, we wish to have an opportunity to study bivariate relationships in the contingency theory fashion, and to relate, where possible, to some of these results within the contingency theory of organization literature. Second, given the limitations of bivariate contingency studies a configuration point of view will offer a more integrative approach to the study of patterns of behaviour. To succeed in such holistic studies a broad set of theoretical variables and their empirical indicators is needed.

Let us start with variables that are given to the manager such as nationality. Nationality of the responding manager is not only an indicator of domicile, but also a crude indicator of culture. If additional insights are wanted they may be gained by grouping respondents by nationality into groups such as those proposed by, for example, Hofstede (1980): (1) Germanic culture area — Austria, Switzerland and the Netherlands; (2) Scandinavian culture area — Finland, Norway and Sweden; (3) Advanced Latin culture area represented by France (France was included only once) and by Belgium (in part); and (4) Anglo cultures represented by British respondents.

Managerial characteristics that describe relevant aspects of their background such as sex, age, education, training and professional experience are listed first. The Stratos research results also suggest

Table 1.1 The variables in the model

that a manager's values have an important influence on all aspects of strategic behaviour and performance (Stratos 1990; Fröhlich and Pichler 1988; Haahti and Bagozzi 1994). To account, at least partially, for managers' values and attitudes a set of selected value items were included in the research design.

Knowledge about sources of knowledge may make the difference between successful and less successful performance. In the literature it is clear that there is a positive relationship between the extent of the use of information sources and successful export operations. The utilization of available information sources is assumed to favour export decisions. Ownership and related indicators will serve to differentiate between family firms and firms managed by hired managers. Recent contributions within the literature on family firms (Donckels and Fröhlich 1991) put forward the need for such a differentiation. Additionally, it is of importance to have some measure to differentiate firms managed by entrepreneurs from firms managed by hired professionals. This is of interest in attempting to specify, for example, thresholds of growth and related changes in export orientation.

The choice of industries selected for sampling was based mainly on pragmatic considerations. Most members of our team had experience of three industries (Stratos 1990), namely electronics, food, and clothing and textiles. To ascertain differences in industry growth trends, strategic behaviour and forms of international operations, mechanical engineering and furniture making were included. All these industries are sufficiently well represented in the respective countries to form a basis for international comparisons.

Size of firm is a much discussed contextual variable and indicator of structure discussed in all the relevant literature on exporting, strategic management, organizational behaviour and industrial economics. In line with the `increase in size is related to increased specialization' hypothesis (e.g. Child 1972a) we are interested in relationships between size of firm and increasing variety in strategic behaviours. Specifically the change in size in relation to changes in export orientation is of interest (e.g. Cavusgil 1982, 1984; Reid 1984; Miesenböck 1988).

Recent advances in logistics-related information technology have caused production to become one of the determining success factors. Type of production and form of order servicing are relevant structural variables related to strategic behaviour and performance, and already pinpointed as such in the 1960s (Woodward 1965). Fast advancement and radical changes in the real time technologies of production and forms of order servicing have increased the importance of these factors as determinants of success specifically for those firms that are subcontractors, suppliers or dependent on their output quality in the market (e.g. Buffa and Sarin 1987).

Changes in conditions within market are determinants of relations between the environment, strategy and firm performance. This external control theory viewpoint is reflected in our design and we are interested in how changes in the labour, raw material and capital markets affect small business operations and export orientation.

Research into inducements and constraints on international operations is a literature of its own as it has instant practical value for training and consulting purposes. By now there is convergence in results concerning these variables within the export literature (e.g. Dichtl et al. 1984; Miesenböck 1988). There seem to be patterns of personal characteristics that influence changes in export orientation positively, e.g. working knowledge of foreign languages, managerial experience, level of education, sensitivity to strategic information and firm and market related factors such as size, industry, market demand, etc. Inducements and constraints are the two areas where it is felt that training and consulting services should influence export decisions favourably.

Endogenous variables: the content of operations

Next we will discuss those variables that managers can influence with their own choices and decisions.The independent endogenous variables are the following: (changes in...) success factors, product/market strategy and international operations (we use export orientations as a synonym), and cooperation. The main dependent endogenous variables are (changes in...) total sales, domestic sales, export sales, and number of employees.

The basic question of strategy is concerned with the question of what is produced and for whom (Ansoff 1965). The product/market choices rest on the perception of unsatisfied market needs that create profitable marketing opportunities. The purpose of the firm is to satisfy those needs and to receive an economic rent for its competitive ability at a level that covers the opportunity cost of the entrepreneur's own labour and capital input, and the opportunity cost of capital. As all firms have some combination of products and markets whereby the scope of their operations is defined, identification of that combination reveals their basic strategic choices. Numbers of product and market groups reflect the degree of specialization or diversity of the small firm. The basic alternatives are then product (line) or customer (group) specialism, or concentric or horizontal diversification.

In our study we focus on the product/market scope and key success factors variables. Export orientation and forms of cooperation are the main business strategy variables that interest us. The two latter variables might be the strategic choices of the highest order in firms with international operations and alliances as the main avenues of strategic thrust. But since they are part of the growth vector component of strategy, we will regard them as business strategies.

Product/market choices and success factors are intimately intertwined. Identifying and weighing the importance of key success factors relative to competitors is at the core of corporate strategy analysis. Key success factors are those variables that managers can influence to gain an advantageous competitive position in their industry, and these variables are derived from the interaction of the economic and technological characteristics of the industry and the competitive weaponry used in that industry.

In the Interstratos study we are interested in the key success factors as a basis for export strategy. Managers of SMEs are not omnipotent. There is often a scarcity of management capability, information management capacity, knowledge of markets, logistics, distribution, etc., that requires some form of cooperation with other firms to combine forces. This building of strategic mosaics becomes more important in order to respond to the opportunities now opening with the growth of the European home market.

In our study of how entrepreneurs' decisions determine patterns of trade (Thomas and Araujo 1986) we focus on changes in forms of international operations. The alternative forms of operation have often been studied in connection with the phases of international operations, which generally distinguish at least four stages of involvement: no regular export activities; export via agents; overseas sales subsidiary; and foreign production and manufacturing (see for example Johanson and Wiedersheim-Paul 1975; Luostarinen 1979). Recording the alternative forms of operationalization enables the degree of international involvement to be identified.

Since it is assumed that businessmen are not always aware of international opportunities, it is of interest to investigate what sources of information patterns are associated with export orientation. Small size may represent a possible disadvantage and a major obstacle in pursuing foreign opportunities (e.g. Reid 1982). As the results are mixed and often contradictory due to problems in defining size and measuring the effects, this question remains unresolved. Likewise the interesting question about size and whether there are thresholds in the growth of a firm after which the likelihood of exporting increases significantly remains unanswered.

Methodology

In the follow...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of figures
• List of tables
• Contributors
• Preface
• 1 Introduction: Interstratos - a pioneering project on internationalization of SMEs in Europe
• 2 Industry characteristics and internationalization processes in small firms
• 3 Forms and extent of success factors: the case of Switzerland
• 4 Entrepreneurial profiles and strategies for the larger market
• 5 International orientation and external resource dependence of Nordic engineering firms
• 6 Export orientation in open markets: the case of the Nordic countries
• 7 Export orientation: an econometric analysis
• 8 Small firms' international strategies and performance: a comparison between Dutch and Finnish small firms
• 9 Internationalization and ownership: family versus non-family enterprises
• 10 Strategic management of British SMEs: changes in attitude 1991-4
• Index