SME Internationalization Strategies

Innovation to Conquer New Markets

Noémie Dominguez

• Publisher: Wiley-ISTE
• Year: 2018
• Print ISBN:
  9781786301536
• Edition: 1
• eBook ISBN:
  9781119516460
• Topic: Business
• Subtopic: Management
• Index: Business

Internationalization is a strategic issue for companies as it is today the central axis for the development of small and medium-sized enterprises (SMEs). Market expansion and the growing importance of emerging markets offer new development opportunities for SMEs to use innovative strategies - such as head-deck strategies - to effectively penetrate these markets. This book focuses on understanding these new strategies. Why do SMEs use head-of-bridge strategies in order to internationalize? How do they deploy such strategies abroad? Based on the example of five manufacturing SMEs, which are at different stages of internationalization, this book highlights the main motivations, stages of deployment but also difficulties encountered in this direction. This book is a tool for assessing potential locations and provide managers with a new alternative in terms of internationalization, enabling rapid identification of key stakeholders, adapting their international development plan and anticipating potential pitfalls.

PART 1
Internationalization of SMEs, Location Choice and Gateway Strategies: A Literature Review

Introduction to Part 1

The first part of the book begins with a review of the literature presenting key principles of SME internationalization and gateway strategies.

Chapter 1 presents the approaches that are more frequently used to explain the internationalization of SMEs, namely the processual approaches – the Uppsala and innovation models – and International Entrepreneurship. This chapter promotes various factors identified in international management literature in order to understand the dynamics and the pathways for expansion of SMEs.

Chapter 2 deals with the study of localization strategies. It harnesses the work conducted in geographical economics, entrepreneurship and international management to capture the main motivations in the choice of location. It emphasizes the key role of resources, networks and individual characteristics. Chapter 2 continues with a presentation of gateway strategies. By following the mainly economic – work – carried out in the field, this chapter highlights the main characteristics and motivations for the implementation of these strategies.

1
SME Internationalization Strategies

International development is one of the main growth strategies for companies. While it may have been the case that the latter was mainly the privilege of large firms up until the end of the 1970s, we must acknowledge that the growing number of small- to medium-sized enterprises (SMEs) geared toward foreign markets calls for a revision of existing theories. Coviello and McAuley [COV 99], followed by Chetty and Campbell-Hunt [CHE 03, p. 796], noted that, despite the growing implementation of expansion strategies by SMEs, the use of “large multinationals, as the unit of analysis, dominates the international business (IB) literature”. Based primarily on the study of large companies, the theories that have unfolded are in fact only partially applicable to SMEs, urging researchers to broaden the research in international management. Consequently, we are witnessing an escalation in research related to the internationalization of SMEs [LU 06], currently making them an interesting choice as subject of analysis.

Several research studies have tried, over the past few decades, to analyze the process by which companies initiate their internationalization process. The multitude of approaches used reflects the complexity and the multidimensionality of this concept. Welch and Luostarinen [WEL 88] define internationalization as “the process by which a company begins operating abroad”. Calof and Beamish [CAL 95, p. 116] go further in stating that it is a “process of adapting company operations (strategy, structure, resources, etc.) to international environments”, including, indeed, the possibility for the company to increase or reduce its operations abroad. If Welch and Luostarinen’s research [WEL 88] drifts toward the idea that internationalization is a process of growing (unidirectional) commitment, Calof and Beamish [CAL 95] state that for them it is a multidirectional phenomenon, where companies can adjust to or withdraw from a market. Chetty and Campbell-Hunt [CHE 03] explain the apparent lack of consensus on a single definition of internationalization by the ambiguity and great diversity of the phenomena studied. The census of the main definitions in Internationalization of SMEs undertaken by Ruzzier et al. [RUZ 06] affirms the evolution of the concept over the years. Adopting an approach, until the 1990s, essentially centered on the internal characteristics of organizations, scholars incorporate little by little the external elements affecting the geographical expansion of the business – dealings, networks, international environment, etc.

The first efforts of theorizing internationalization emerged at the beginning of the 1960s with the pioneering work of Hymer [HYM 60]. The main objective was to understand why and how firms were expanding into foreign markets while adopting an economic approach [RUZ 06]. In his theory of the monopolistic advantage, Hymer [HYM 60] introduces the holding of specific assets – intangible assets strongly related to the size of the company – as a condition which is essential to the internationalization of the company. These results will subsequently be expanded upon by Vernon [VER 66], who, by establishing a parallel with the concept of the life cycle, explains internationalization of innovative enterprises as the direct result of the normalization of products on the domestic market. The pursuit of new opportunities, of additional resources or of a reduction in production costs is indeed forcing companies to look to foreign markets. The obvious influence of size on the holding of specific assets and, hence, on the propensity of the organizations to go global justifies the exclusion of SMEs in any field of study. The emphasis is therefore on multinational firms that constitute the heart of analysis of the main theories of internationalization in force, such as the theory of internalization, transaction costs, the monopolistic advantage or even the eclectic paradigm [RUZ 06].

The development of the behaviorist models, at the end of the 1970s, marks a turning point in the literature on international management. The procedural approach that was initiated by the Nordic school of thought builds on the behavioral theory of Cyert and March [CYE 63] and the theory of growth of Penrose [PEN 59]. Internationalization is understood as a process of incremental nature, cumulative and linear, composed of a succession of stages through which any company wishing to develop into foreign markets must pass. In his article on “the internationalization process of firms: a critical analysis”, Andersen [AND 93] distinguishes two major avenues for the analysis of the internationalization process, namely (1) the Uppsala model developed by Johanson and Wiedersheim-Paul [JOH 75], and then Johanson and Vahlne [JOH 77], and (2) Bilkey and Tesar’s innovation model [BIL 77], where each step is perceived as an innovation for the company. According to Leonidou and Katsikeas [LEO 96], these models apply as much to the case of SMEs as of major groups. The authors specify, however, that export remains the preferred method of expansion for small businesses.

1.1. Incremental internationalization: introduction of the original models

The analysis of firms’ internationalization process is dominated by two major schools of thought:

• – the Scandinavian school, or “Uppsala Model”, introduced by Johanson and Wiedersheim-Paul [WIE 75] and Johanson and Vahlne [JOH 77];
• – the approaches following Bilkey and Tesar [BIL 77], namely the innovation models where each step is considered as an innovation for the company.

In this section, we intend to introduce the models and their contributions to the explanation of the dynamics of the internationalization process of SMEs.

1.1.1. The Uppsala model

The studies by the Scandinavian School of thought, primarily focused around the contributions of Johanson and Vahlne [JOH 77], are pioneers in the study of the internationalization process. These authors define internationalization as the product of a succession of incremental decisions, i.e. a process of “acquisition, integration and gradual use of market and international operations intelligence, and knowledge of continual involvement in foreign markets” [JOH 77, p. 23]. The concepts of psychological distance¹, establishment chain and experiential learning are the pillars of the analysis and give the model its incremental dimension [BIG 06]. With its focus initially on the importance of market research, the model, developed in the 1970s, has been the subject of many developments over the years. Therefore, we intend to present the Uppsala model in its original version to identify the main contributions.

The Uppsala model, developed by Johanson and Wiedersheim-Paul [WIE 75], and theorized by Johanson and Vahlne [JOH 77], finds its roots in behavioral theory [CYE 63, AHA 66] and in the theory of the growth of the firm [PEN 59]. It aims primarily to respond to two key issues for any company looking to overseas markets: where to go and how to go there [MEI 10]. The purpose of the model is to describe the process in order to gain a better understanding of the factors affecting the international development of companies. Integrating jointly the issues of market selection and expansion, taking risk minimization into consideration, the Uppsala model has the advantage of being, still today, “the only theory that describes and analyzes the internationalization process in its entirety” [MEI 10, p. 13].

Johanson and Wiedersheim-Paul [JOH 75] compare the expansion models of four large manufacturing companies in Sweden – Sandvik, Atlas Copco, Facit and Volvo – with production units in more than one foreign country and producing more than two-thirds of their turnover from export. The identification of the key differences and similarities that exist led the authors to develop a synthetic model composed of four major steps sequentially and constitutively linked to the “establishment chain” (Figure 1.1).

Figure 1.1. The constituent steps in the establishment chain

(source: adapted from [JOH 75, p. 307])

Each step is distinguished by an increase in the degree of overseas commitment: completion of irregular exports, regular exports via an agent, establishment of a sales subsidiary then manufacturing division. In the first phase, there is typically no commitment of resources, due to the lack of information to and from the target market. The beginning of involvement, in the second phase, then enables the company to access information flows on a more regular basis and to identify the main factors influencing sales. The establishment of a sales subsidiary, then a manufacturing one, abroad, while involving more commitment, finally allows the a firm to control the flow of information to and from the market. The establishment chain is thereby justified by companies’ lack of experience of the target market and the existence of information imbalances, which complicate gauging the local environment. The lack of knowledge and resources are, indeed, the two main barriers to internationalization identified by the researchers of the Scandinavian school of thought. Therefore, companies will tend to internationalize more progressively, starting their expansion in markets geographically or culturally close before increasing their commitments and targeting psychically distant countries as they gain experience.

Psychic distance is one of the three explanatory factors in companies increasing internationalization. An evolving concept by nature, it is composed of the “differences of language, education, manag...

Table of contents

• Cover
• Table of Contents
• Title
• Copyright
• Acknowledgments
• Introduction
• PART 1: Internationalization of SMEs, Location Choice and Gateway Strategies: A Literature Review
• PART 2: Research Methodology and Presentation of the Empirical Study
• PART 3: Deployment of Gateway Strategies: Motivations, Policies and Problems
• Conclusion
• Bibliography
• Index
• End User License Agreement