International Growth of Small and Medium Enterprises

Niina Nummela

• Publisher: Taylor & Francis
• Year: 2010
• Print ISBN: 9780415872706
• eBook ISBN: 9781136906428
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The majority of SMEs are operating in a networked business environment, and these networks extend beyond national and cultural boundaries. Within these networks, growth takes various routes and forms. Instead of linear, positive growth, international growth is often more cyclical, including periods of stagnation and withdrawal, even exits. International Growth of Small and Medium Enterprises focuses on international growth, such as how companies expand their operations across national borders through opportunity exploration and exploitation, and identification and development of innovations, i.e. on international entrepreneurship.

The book provides a comprehensive overview of international growth of small and medium-sized enterprises from diverse points of view. It verifies that SMEs in all parts of the globe share similar characteristics, but also differ significantly. New explanations emerge, such as ownership, steering of the company, or the negative consequences of international growth. It discusses how the changing external environment of SMEs pushes them to create innovative solutions in order to survive and succeed. This collection of new and international perspectives sheds much-needed light on how founders and management teams of SMEs can succeed in fostering the growth process, and what specific characteristics are instrumental in initiating and maintaining international growth.

1
International Growth of SMEs

Past, Present and the Future

Niina Nummela and Sami Saarenketo

International growth, or internationalization, is a rather well-studied area. The main body of literature on the subject can be found in the field of international business research, although various streams have their source either in economics or behavioral and social sciences (for more on the development of the international business (IB) research tradition, see, e.g., Weisfelder 2001). In the former field the focus of research has been on international trade and foreign direct investment, in the latter the concept of internationalization has been the central issue. Earlier research on internationalization can be divided chronologically into three eras based on the main focus of interest: (1) the internationalization process, (2) networks in internationalization and (3) new venture internationalization.

A LOOK BACK

In the 1960s Sune Carlson (1966) pointed out that internationalization was an incremental decision-making process and later other, both Nordic and North American, researchers (e.g., Johanson and Wiedersheim-Paul 1975, Johanson and Vahlne 1977, Luostarinen 1979, Bilkey and Tesar 1977, Czinkota 1982) developed this idea further. After Carlson’s (1966) work, for about a decade researchers concentrated on internationalization as a incremental (learning) process, in which separate phases could be distinguished. The different phases could be identified by following changes in aspects such as operation modes, attitudes toward internationalization, information acquisition and transition, the level of export involvement and successive decisions (for a review of process models, see, e.g., Leonidou and Katsikeas 1996). In spite of numerous attempts, researchers have not been able to agree on one common view of the process. In addition, the stage models have been heavily criticized.

By the 1980s, researchers, including some of the ones mentioned above, understood that internationalization was a much more complex issue than the pioneering models had presented it as. Instead of stages, the focus of research moved to the network of an internationalizing firm and, in particular, how it was able to establish and change its network positions during its internationalization (Johanson and Mattsson 1988). In other words, researchers claimed that changes in the internationalization process were mostly due to changes in a company’s network position. In addition to studies linking the internationalization process and networks, the importance and utilization of network connections in internationalization has become a central theme in several studies (for a review, see Coviello and McAuley 1999).

Furthermore, and parallel to and overlapping the interest in networks, researchers started to pay attention to new venture internationalization. The seminal article on this was written by Patricia McDougall (1989), in which she compared domestic and international new ventures and pointed out that there was an emerging phenomenon of new, resource-constrained firms entering international markets. Other researchers—among the pioneering ones Christensen (1991)—were also able to verify that the time lag in SME internationalization had begun to shorten in many countries. The introduction of the entrepreneurial viewpoint and the notion of the increasing speed of internationalization resulted in a whole new research field called international entrepreneurship—at the intersection of international business and entrepreneurship.

THE CURRENT DRIVERS OF CHANGE

From the viewpoint of the international growth of SMEs, the three main drivers of change are: (1) the transition to a service-based economy, (2) the change in the role of location, and (3) the development and convergence of technology. However, all these three themes are partly interrelated and overlapping, as can be seen from the following discussion.

First, the importance of the “non-manufacturing sector” has been growing steadily, and it can be argued that at the moment we are experiencing a service-driven business revolution (Möller et al. 2008). Also in international business the trend toward the increasing importance of services has been noticeable, as, for example, the composition of foreign direct investment has been shifting toward services worldwide (World Investment Report 2004). This development is in line with the current service dominant logic in business: i.e., customers play a crucial role in creating end value together with a service provider (cf. Vargo and Lusch 2004) and in order to be able to do that service providers need to be close to the customer. However, it needs to be highlighted that this emerging trend is not restricted to the service sector. On the contrary, the service logic can be transferred to goods, because in manufacturing customer value is often now created in interaction with the customer (Grönroos 2006). Additionally, the boundary between a physical product and services is nowadays blurred, as most tradable products also include a service or a knowledge-related element.

However, from the viewpoint of the international growth of SMEs, the escalation of services is important because it is clearly underdeveloped in international business research. In addition, services offer a very fertile research context because of their multi-faceted properties. Services are not a homogeneous group, but can be divided into hard or soft services (Erramilli 1990), or location-intensive and information-intensive services (Ball et al. 2008). Both classifications are significant as they have implications for how a firm will internationalize. It has been argued that hard service providers resemble manufacturers in their internationalization (Ball et al. 2008). However, there is a lack of empirical research that would compare the internationalization of different types of service providers. Furthermore, the internationalization of location-intensive service providers—such as tourism companies—highlights the often neglected aspect of internationalization, i.e., inward internationalization (cf. Korhonen et al. 1996), which takes place in a domestic market. Altogether it seems that both the service-based economy and the fact that value is created differently in the service sector indicates that the international growth of these companies would deserve more investigation.

Second, the concept of location has always been central in international business research, not least because of the eclectic paradigm applied in research on foreign direct investment and multinational enterprises (cf., e.g., Dunning 2000). However, recently the importance of location has been challenged, particularly due to the “global shift” (Dicken 1998) in the economy. Multinational enterprises are moving their mobile assets (including technology, skills, brands and production) around the globe in order to create a perfect fit with their immobile assets, which are situated in different locations (UNCTAD 2003), and as a result the value chain of the company (cf. Porter 1985) or value network is disintegrated and scattered worldwide. The outcome is a “global factory,” i.e., a structure that reflects the combination of the innovation, distribution and production of both goods and services (Buckley 2009, Buckley and Ghauri 2004).

This development is reflected on various levels, e.g., on the industry or the regional level one can argue that regional clusters may be de-clustered to other nations (Gupta and Subramanian 2008) but this also raises the question of balance between local and global operations (Buckley and Ghauri 2004), as both of them are required for value creation. For example, in the biotech industry business is based both on global markets and scientific advances, as well as on the accumulation and dissemination of local knowledge and capital (Brännback et al. 2007). Thus, it seems that the mainstream understanding of international growth provides only a poor fit for internationalizing SMEs. Despite the fact there have been arguments for the “death of distance” and the “end of geography” in international business, location still matters (Buckley and Ghauri 2004) but the question of in what way remains unanswered.

Third, one key argument behind the claims for “death of distance” and the decreasing role of location is the development of technology. In addition to the service-driven revolution, one might argue that a parallel technological revolution has been in progress for some time, due to the advances in information and communications technology (UNCTAD 2003). It is a commonly shared opinion that the development of technology will profoundly reconstitute the nature of international business, resulting in changes in all elements of a company’s value chain (for a more detailed discussion of the impact on international business research, see De la Torre and Moxon 2001).

In the literature we have already seen evidence of the impact of this development. The shortening of product life cycles, the drive for innovation, the need for technology transfer, the rapid development of information technology and global telecommunications are all factors that have particularly encouraged knowledge-intensive firms to enter international markets more rapidly than they previously had done (Jones 1999, Madsen and Servais 1997). Empirical studies also verify that companies do benefit from technological advances in the form of opportunity identification, the execution of strategy, and as knowledge and resource-building tools (Loane 2005, Aspelund and Moen 2004). On the other hand, the same technology also creates additional challenges in the form of an excess of information and markets. When combined with limited resources and an overload of information the result is that strategic decision-making becomes more complex and crucial to a company’s success (see also Jones 1999). Consequently, advances in technology have opened new avenues for international growth but also introduced novel challenges, both of which are factors that do not match well with our dominant understanding of the phenomenon.

WHERE WILL THE FUTURE LEAD US?

There are several potential future avenues for research on the international growth of SMEs. However, it is fairly clear that the landscape in business is about to change as the focus is shifting (again) from the west and northern hemisphere to the east and south. New global players are entering the international business arena, and we are witnessing an increase in the number of emerging economies, i.e., “regions of the world that are experiencing rapid informationalization under conditions of limited or partial industrialization,”¹ which will have implications for research as well.

With the developed markets becoming ever more saturated, the importance of the so-called BRIC countries (Brazil, Russia, India, and China) to the world economy is growing substantially. Most projections suggest that China will overtake the US as the world’s largest economy by around 2035. India’s GDP is also projected to pass that of the US by around 2045 (Wilson and Purushothaman 2003). According to the much cited report for Goldman Sachs (2003) it is expected that by 2050, the world’s three largest e...

Table of contents

• Routledge Studies in International Business and the World Economy
• Contents
• Tables
• Figures
• Preface
• 1 International Growth of SMEs
• Part I Drivers of International Growth of SMEs
• Part II International Growth Trajectories of SMEs
• Part III How Should We Study International Growth?
• Part IV The Role of Networks in the International Growth of SMEs
• Part V Illustrative Cases
• Index