Entrepreneurial firms in the international arena.
This paper presents some of the findings of an ongoing, longitudinal study of high growth entrepreneurial firms that had successful implemented their global strategies. While most SMEs produce a service or product that could be competitive in international markets, many are unsure of the appropriate strategy for entry. In 1993-1994, in order to provide insights into how domestic SMEs could successfully enter the international arena, a study was conducted of 100 high-growth firms that had recently "gone international." The sample was drawn from Inc. magazine's list of the top 500 smaller U.S. companies. It was noted at that time, however, that the performance and relative success of these firms need to be ascertained over a period of time. Thus, the present study discusses an in-depth investigation of these same firms-ten years later- in order to assess their performance over a time span. Follow up data was obtained from each firm by mail survey and telephone and personal interview. Accordingly, we explore the changes that occurred as internationalism proceeds. The results provide more insights into patterns and experiences of foreign market entry among SMEs and suggest several recommendations for overcoming obstacles and continued growth in the international arena.
In the past, international business was frequently viewed as the domain of large enterprise. To some extent that was, and still is, true. In every country a majority of smaller enterprises continue to operate domestically because the nature of their business is oriented to personal service for local clientele. At the same time, changes that have swept through Europe and Asia as the world slipped into the 1990s, have reshaped business opportunities in the global arena.
International business is no longer the province of the large multinational firm. Many smaller firms recognize that the opportunities offered by global markets are increasingly important to the success of their operations. Most SMEs produce a service or product that could be competitive in international markets, but are unsure of the appropriate strategy for entry. This often resulted in failing to follow up on global opportunities, or in entering the international arena with insufficient knowledge of managerial and economic considerations (Barnara 1991). Academic literature and popular writings on international business are filled with cases and studies of firms that have attempted to internationalize their operations or enter the global market only to face numerous obstacles that led to failure (Johnson 2003).
Aside from the decision to launch or to end the venture, the decision to "go international" is perhaps the most important strategic decision for a firm to make. This decision must be made only after careful discussion and analysis because it must be viewed as a major, long-term commitment. In many respects, being involved in the international arena is different, and often more difficult, for the small, growing entrepreneurial firm than it is for a major corporation. For example, the large business often has more strategic alternatives; in-house staffs to direct international operations; and, in many instances, direct investments in another country.
Research on international business has proliferated during the past two and a half decades with a steady stream of studies dealing with larger multinational corporations (for example, see comprehensive literature reviews by Aaby and Slater (1989). At the same time, knowledge about the internationalization of SMEs was relatively limited until the past few years. As recently as 1988, Miesenbock pointed out in his literature review, that the literature based on empirical studies is full of inconsistencies and a conclusive theory of small business internationalization is far from being available(1988:42).More recently international entrepreneurship has received considerable interest from researchers, practitioners, and governments (Welch and Welch, 2004).
A review of the numerous more recent studies dealing with the internationalization of SMEs further reveals that most of the research relates to some aspect of exporting, typically covering topics such as: reasons for non-exporting; problems with export operations; key variables affecting exporting; demographic characteristics of exporting firms; managerial characteristics of exporting firms; and incentives to stimulate exporting. (For examples, see Pope 2002). While these studies have extended the theoretical understanding of the export performance paradigm and provided important insights for public policy makers regarding exporting, at the same time, as markets have become more complex and more international, firms have followed different modes to internationalize such as franchising, licensing agreements, joint ventures, and foreign acquisitions. While "it is evident that an exporting firm will face different problems, show a different organization structure, pursue a different marketing strategy, etc. than a firm that runs several subsidiaries abroad,"(Miesenbock: 43-44) the preponderance of research on SME internationalization continues to focus on exporting.
Back in 1991, the authors of a Finnish study (Aaltonen, Lindgren, Pennanen, et. al, 1991) similarly noted that:
The character of international trade is changing. In many cases, conventional export no longer corresponds to the companies' needs for international business operations. Conventional export has been replaced by new modes of international business operations, one of the most important being strategic alliances.
Furthermore, as Peridis in his study of 16 small Canadian technology-based companies noted, "For smaller technology-based firms strategic alliances may be the only avenue to international expansion, especially when swift changes and competitive pressure hasten the evolution of products and relationship" (1992:42). Small and medium-sized enterprises (SMEs) are not small versions of large companies, but because of their size they do tend to differ from large multinational firms with regard to managerial style, ownership, and independence (Coviello & McCauley, 1999). In addition, their limited resources may lead to different international strategic choices compared to the large firms (Zacharakis, 1997).
In view of this past research gap, in 1993-1994 an exploratory study of relatively new high-growth businesses that had recently internationalized their activities was conducted. The purpose of that study (Klatt, 1994) was to develop a profile of these successful firms and provide some insights into how and why they had successfully entered the international arena. Answers were sought in this preliminary study to several important questions including:
What was the primary reason(s) for the firm to develop an international strategy? What is the nature of the firm's global activities (e.g. exporting, importing, wholly -owned foreign operation, licensing, joint venture, and so on)? What major obstacles were faced in implementing the international strategy? What specific recommendations can be made to other SMEs considering the decision to "go international?"
A preliminary report on the research project was presented at the 1993 Conference on the Development and the Strategies of SMEs in 1990s, held in Mikkeli, Finland. It was noted at that time, however, that the results and implications drawn from the study should be viewed in light of the research method employed. For example, dynamic processes such as entry mode choice may require more than a temporal focus making longitudinal designs more appropriate. Similarly, the performance and relative success of the firms need to be ascertained over a period of time. (Klatt: 14). Thus, approximately ten years later, in 2003-2004, a follow-up investigation of these same firms was conducted in order to assess their performance and successes and to obtain more insights into patterns of foreign market entry among new ventures and the strategic decisions necessary for continued growth.
The analysis in this longitudinal study is based on the information obtained from 100 high-growth SMEs originally selected from Inc. magazine's list of the top 500 smaller U.S. companies in 1993. To be eligible for listing in the Inc. 500, a company must be independent and privately held on the day applications are due. Holding companies and regulated utilities are not eligible. The rankings were based on the percentage increase in sales for the previous five years. Companies had to show at least $100,000 (U.S. dollars) in sales five years ago (but no more than $25 million) and an increase in sales between the previous two years. Information in each business was verified by tax forms, confirmation letters from C.P.A.s, and telephone confirmations with company officials.
From the list of high growth SMEs, a sample of 100 firms, known to be profitable and operating to some degree in foreign markets, was compiled in 1993. Since all the firms were relatively new at the time the sample was drawn, the implication was that they had gone through the process of internationalization in recent years.
Because the list measures growth rather than absolute dollars, it has a strong bias toward newer, emerging companies. As a result, while a company had to exist for at least five years, the majority of the businesses in our sample were founded within the past several years. The list also provided the number of employees, sales figures, and profitability figures for each company. Z Additional data was obtained from each firm in the sample by mail survey and telephone interview, using a questionnaire that included several open-ended questions designed to elicit a wide range of information regarding the international strategies and activities of the firm, as well as top managements' perceptions about the internationalization process. In most cases, the respondent was the company C.E.O. Since the firms were relatively new and smaller, the C.E.O. frequently was the founder (or one of the founders) of the company. In a few instances the respondent was a top manager who headed up the international activities for the firm.
These same 100 SMEs were revisited in 2003-2004 and are the subject of the second stage of the research project. While all but one of the firms were still in operation, seven had different identities--four had been acquired by larger companies and three had merged with other firms, creating new legal organizations. This left a total of 92 of the original 100 for the second stage study. Similarly, while efforts were made in the second stage study to contact the original respondent in each SME, this was not possible in 11 cases where the respondent was no longer involved in the operation of the business.
The current study is based primarily on the second stage, which took place in 2003-2004, although the characteristics and contextual data from stage one were critical in interpreting information obtained in stage two. In essence, stage one provided the foundation for an emerging understanding of certain aspects of the internationalization process among SMEs while stage two allows for a more detailed investigation and an assessment of the relative successes over a time span.
Performance and success was evaluated through two perceptual measures: the satisfaction of the firm and the business performance. Satisfaction was selected in that it is one of the most frequently used performance variables in the literature, having been found to be a predictor of a firm's future actions in strategic alliances (Beamish 1984; Anderson and Narus 1990). The second variable, business performance was measured along several dimensions, ranging from profitability to overall performance.
In stage one, the firms included in the study (Table 1) were relatively small, with almost 75 percent of the firms employing less than 250 employees worldwide. The firms also were relatively new with 46 percent of the firms having been in business for only 5 years or less. The average age of the firms in the sample was slightly more than 6 years. However, nine years later, in the second stage study, these same firms had grown significantly in terms of number of employees and annual sales.
During a period of time (i.e. 1994-2003) when many larger businesses in the U.S. were undergoing considerable downsizing, the businesses in the study had increased the number of their employees, with 76 percent reported employing more than 100 workers worldwide in 2003 versus 66 percent in 1994. Similarly, while only 14 percent of the SMEs reported annual sales exceeding $50 million (U.S.) in the stage one study, the number had increased significantly in stage two, with the average reported annual sales more than doubling by 2003. Even when adjusted for inflation, the increase in total sales was significant. Much of this increase in total sales was attributed by the respondents to the increase in non-domestic sales. For example, non-domestic sales averaged about 22 percent of total annual sales in 1993 versus approximately 40 percent in 2003. Almost one out of four SMEs in the study attributed approximately 45 percent of their total sales to non-domestic sales. It was also found in the study that the percentage of total sales allocated to non-domestic sales is an understatement of actual international activity in that it does not reflect non-sales activity taking place with foreign companies, such as joint ventures to develop new technology.
Finally, the majority of firms in stage two were still engaged primarily in products or services for the industrial and/or institutional (e.g. governments and hospitals) markets. Follow-up interviews with a number of respondents from this category suggested that as many as one-half could be characterized as a technology-intensive company. However, a number of SMEs now find themselves developing foreign markets in both the industrial/institutional and consumer categories
Motivation for developing an international strategy
An important component of the stage one study was to gain insights into the primary reasons for developing international strategies. Why, for example, did these high-growth SMEs venture into foreign markets while the vast majority of SMEs restrict their business to the domestic scene? For instance, one study found that while SMEs in the U.S. were increasing their export rate faster than large firms, only approximately one in five SMEs in 1995 were exporting their goods or services (Barrett, 1995). A recent NFIB survey found that only 13 percent of small business owners reported that they had foreign sales in the past three years (Chamberlain, 2004). Thus, each respondent was queried as to the motivation for developing an international strategy in their respective SME.
As shown in Table 2, the vast majority of firms described their rationale for becoming international as part of a broader, overall strategy for growth which included entering foreign markets. A number of respondents went on to explain how internationalizing was not a sudden, unplanned occurrence for their firm, but rather was the logical extension of some strategic plan which was implemented after considerable cost, research, and discussion.
A large number of explanations offered for internationalizing might be combined into a market-driven categorization to include such perceptions as the local market being too small; or stagnant; or declining; or dominated by large, multinational firms. Several of the firms produced innovative, technology-intense products that had relatively short life cycles and faced potentially intense competition from multinational firms. Thus, they explained the need to gain immediate access to the large European, Canadian, Asian markets. Similarly, some SMEs look to foreign markets as long-term protection from downsizings in the domestic economy.
It is interesting to note that a large number of firms became global in an attempt to acquire certain types of knowledge. For example, obtaining knowledge of the markets in targeted countries apparently was an important motive for a number of firms to initiate agreements with foreign companies in the form of joint ventures or licensing agreements. Since a number of the SMEs in the study were involved in the development of new technology, they viewed these alliances as low cost, efficient opportunities to obtain access to new technological developments in their industry. Similarly, several firms indicated a need to have a presence where their competition is located in order to monitor events--or as one respondent said, "We have to be there to keep an eye on things."
A large number of reasons for internationalizing dealt with the perceived need to gain legitimacy and/or prestige. Eighteen firms saw internationalizing as a means to convey to customers and investors that they are truly a legitimate, established firm. As one medical supplier commented, "Since we are relatively small and somewhat new to the industry, being able to say that we are an international company with markets in several countries, has helped us in obtaining venture capital for expansion purposes."
Nature of the global activities
As seen in Table 3, almost two-thirds of the SMEs in the study were, and still are, involved in exporting to some degree. In stage one, 44 of the SMEs that exported did it directly to the end user of the product or service, while 20 SMEs exported through trade intermediaries. These middlemen typically bought the goods at as much as 15 percent below the producing firm's discount price and resold them overseas. Some of the firms used export management companies that did not take possession of the exported goods but worked primarily at obtaining orders for the SMEs goods or services. Most of these export management companies served essentially as a manufacturer's representative, working on a commission basis and forwarding orders to the company for direct shipment. Several companies also reported that they got started in exporting by teaming up with SMEs that were already exporting complementary products. Apparently the existing exporter had the foreign contacts and distribution system in place.
In stage two, the same number of firms were still exporting their product or service. However, with increased experience, as a group there is now less reliance on trade intermediaries and more direct exporting.
The next most frequently mentioned entry mode to foreign markets was some form of licensing agreement with a foreign firm. Typically, the arrangement included contracts to manufacture and market products and to provide services. However, a number of different types of licensing agreements were utilized by the SMEs in the study, the end result often being to permit a foreign company to utilize a proprietary technology. For example, several high technology firms licensed their technology to established foreign firms in return for royalties from expected future sales. No direct investment was required by the licenses and the licensees are responsible for developing the markets. In stage one, 50 SMEs had made international licensing agreements all of which were still in existence in 2003. Four additional SMEs were found to have licensing agreements in the stage two study.
Forty two firms in the study were involved in some type of joint venture in international markets. Unlike the licensing agreements whereby the SMEs surveyed made no direct investments, the joint ventures required specific investments by all parties. These strategic alliances varied from firm to firm. For example, two technology-intensive firms in the study were part of a consortium consisting of several private companies and a state-owned organization. In most cases the SME jointly owned a foreign entity with a local, foreign business. Usually the SME contributed some critical component or technical expertise while the foreign firm carried out the production and/or marketing of the product or service. By 2003 the number of SMEs involved in joint ventures had increased significantly to become the second most common mode of international activity. While 42 firms initially chose some form of a joint venture to enter foreign markets, all of these firms plus an additional 18 were found to be engaged in a foreign joint venture in the second stage study.
The least frequently mentioned entry made to foreign markets in stage one was via the creation of a wholly-owned subsidiary (WOS) in a foreign country. Of the 32 firms having subsidiaries in a foreign country, most operated as a manufacturing or sales branch of the parent company. Seven of the 32 SMEs acquired small firms in another country and operated them distinct from the parent company. In the stage two study it was learned that most of the SMEs were dissatisfied for various reasons with their WOS and, in fact, 12 respondents indicated that they had sold or closed their WOS.
Franchising has become a major export industry for the United States. Although large franchisers were already well established in Canada, Japan, Mexico, and most European nations, smaller companies were beginning to seek entry into these markets through franchising (Baron, 1993). Several respondents mentioned in 1994 that they were considering franchising as an entry mode into Canadian and European markets. In stage two, 6 SMEs were involved in international franchising.
Level of success of foreign entry modes
Foreign entry modes have been measured and evaluated along a number of performance dimensions which can be broadly classified as objective or perceptual (Herbert 1994), both of which have limitations (Beamish and Delios 1996). However studies have found strong correlations between perceptual and objective measures of performance (Geringer and Herbert 1991). Thus, the level of success of the foreign entry modes in the present study was evaluated through two perceptual assessments of success: overall satisfaction and business performance. The latter, business performance, was the respondent's perception of the extent to which the entry mode has achieved the expectations the SME had of it when it was initiated. It was measured along five performance dimensions, ranging from sales to overall performance.
The respondents' assessments of their firms' mode of entry into foreign markets are summarized in Table 4. In general, high marks are given for both overall satisfaction and business performance for exporting, licensing, and international joint ventures. On the other hand, based on mean scores, the respondents were much less satisfied with the wholly-owned subsidiaries (WOS). As mentioned earlier, in the first stage study, 16 SMEs had one or more WOSs in a foreign country. In the second stage study six of the 16 respondents indicated that they had sold or closed their WOSs, citing reasons such as "too expensive to operate"; "too difficult to control"; "didn't meet our expectations"; and "found better ways to have a presence in that foreign market." The respondent, elaborating on the latter comment, explained how they had established an overseas manufacturing and marketing subsidiary with very poor results. They then closed the subsidiary and set up a joint venture with a distributor in that country, which so far is working out quite well.
It should also be noted that, excluding WOSs, the mean scores for overall satisfaction are generally higher than the mean scores for the business performance indicators. For example, the majority of respondents appear to be at least moderately satisfied with their exporting, licensing, and joint ventures. At the same time, they assess the profitability and market share of these entry modes to be about equal, or slightly below equal to their initial expectations. One explanation might be that several of the respondents, while they are satisfied overall with the entry mode, view it as a long-term commitment which has not yet been fully realized, or which is taking longer than they initially expected.
It is also noteworthy that the performance assessment for the international joint ventures among these SMEs is higher than reported in the joint venture literature (Bemish and Delios 1997), which found that joint ventures often perform unsatisfactorily. International franchising is not listed in the above Table since 5 of the 6 involved in this activity indicated it was still too early to assess its effectiveness.
Major obstacles in implementing international strategy
In order to determine the difficulties faced by SMEs in implementing their strategic decision to enter foreign markets, the respondents in stage one were asked to discuss the major obstacles faced in carrying out their international strategy. Their numerous comments were categorized as presented in Table 5.
The smaller entrepreneurial firm typically lacks the middle managers or functional specialists who in a large firm play a major role not only in developing an international strategy but also in successfully seeing that it is implemented. Not surprisingly then, lack of management depth was the most frequently cited obstacle to carrying out a firm's strategy to internationalize.
A closely related, and almost as common, obstacle to going global was the lack of international management skills. Along with the functional specialists and middle managers in large multinational firms comes the legal expertise, administrative experience, negotiation skills, as well as, cultural understanding, all of which play a role in successfully becoming an international firm. Seventy out of the 100 firms surveyed in stage one indicated that the lack of these skills proved to be a major problem in reaching their strategic plans. Several firms found the solution to the problem by hiring a manager with the necessary skills from larger multinational firms. Intermediaries were also commonly utilized to assist in implementing strategic plans, especially with regard to exporting activities and establishing joint ventures. Two-thirds of the respondents discovered that entering the international arena ended up being more expensive than anticipated. Even with considerable strategic planning the start-up phase of the global activity proved to exceed financial estimates. A number of firms reported that their negative cash flows, resulting from the international activity, continued beyond expectation, putting a drain on their limited financial resources. Also included in this category are the responses related to the difficulty in financing business deals in foreign markets, a significant obstacle found to exist in other studies (Chamberlain, 2004; Mangelsdorf, 1991).
Dealing with government bureaucracies was listed as another common hurdle to internationalizing. Follow-up calls to the respondents requesting that they elaborate on this point revealed that the dissatisfaction was aimed at governments in the U.S. as well as foreign governments. A number of the SMEs received financial and other types of assistance from local and federal government agencies. The respondents described the paperwork, delays, and confusion involved in obtaining this assistance. Similarly, the rules and regulations of the foreign nations created costly delays and frustration in attempting to carry out strategic plans, as did trade barriers in the form of tariffs and quotas.
A growth-oriented SME needs to find growth markets and opportunities. Forty of the firms in stage one suggested that this was a gigantic challenge to carry out. Even after a systematic study was conducted to identify target markets and opportunities, locating suitable foreign contacts and/or partners was difficult for 32 firms in stage 2. Several respondents representing firms that are successfully engaged in licensing arrangements and joint ventures felt that an unexpected amount of time and money was spent in pursuing partners that later proved incompatible with their needs, interests, or values.
Twenty one of the SMEs initially had to overcome direct opposition, or a generally negative attitude, from key members of their own firm toward venturing beyond the domestic border. Finally, included in the "other" category are such reported obstacles as not getting paid, fear of the unknown, and language and culture barriers.
Nine years later in the second stage study, the responses received to the "major obstacle(s)" question were significantly changed. To begin with, the absolute number of major obstacles had diminished. Equally important, as a group the relative rankings of the responses changed. For example, while "lack of management depth" continued to be the number one identified problem, "lack of international management skills", which was a very close second in the first stage study, now is one of the lesser mentioned problems (frequency of mention dropping from 70 to 26). Apparently as the SMEs have gained more experience in the inter-national arena, their deficiencies in international skills have been remedied to a great degree. Similarly, the added experience, or perhaps changes in the political/economic environment, has had an important impact on the problem of dealing with government bureaucracies or trade barriers, as suggested by the substantial drop of responses in both categories.
As for the 21 SMEs that faced internal direct opposition or a negative attitude, only one felt that this was still an obstacle in stage two. Further questioning revealed that the "problem" people had left or been replaced, or that success in entering the foreign markets had converted skeptics into believers.
Lastly, one new obstacle was mentioned in the stage two and is included in the "other" category. CEOs at two smaller manufacturing firms said that they are unable to do business in Europe because they are still waiting to be ISO certified.
Recommendations for success in entering foreign markets
One of the purposes of this research project was to present recommendations for SMEs that are considering entering foreign markets. The recommendations that follow are based on responses received from the participants in both stages of the research as well as the experience gained in the course of conducting this longitudinal study.
Since all the respondents had numerous specific recommendations to offer, an attempt was made to categorize their answers and present in this study the most frequently mentioned. Some of the recommendations that are generally accepted, such as "be sensitive to cultural difference," or that pertain primarily to the uniqueness of a specific country, are not included.
1) Accessible travel, split-second electronic communications, and increased regulation are transcending barriers and compressing time. Broad distances no longer hinder opportunities or prevent people, products, information, and capital from going virtually anywhere at any time. Thus, owners and managers of SMEs must change their attitude with regard to entering foreign markets and recognize that good business and world trade are synonymous. Many respondents indicated that they wished they had internationalized sooner. The SME considering global opportunities should do some current reading such as McFarlin & Sweeney (2006) which provides an excellent survey of global trends and challenges.
2.) While there are several foreign entry modes, one might try exporting to get a toehold in a foreign market, which is what a number of SMEs in this study did. But before even taking this step, go back to the basics and do the market research to determine who will buy your product or service, where are they located, and so on. Doing these "basics" helped reduce the intimidation experienced by many respondents. Direct exporting is the simplest and most cost effective way to export. Still, the SME lacking international business experience or familiarity with the targeted foreign market may initially find the use of trade intermediaries to be quicker and more desirable. A company may benefit by using both strategies if it has different products with different customer profiles
3.) Become familiar with the various trade groups and agencies that provide information and assistance of all types to SMEs desiring to internationalize. For example, the Trade Promotion Coordinating Committee (TPCC) agencies in the U.S. developed numerous programs to help SMEs compete in the global marketplace, including financing, training, seminars, insurance, and information services. Properly selected Trade Shows and Trade Missions sponsored by chambers of commerce and state agencies can provide valuable networking opportunities. A number of respondents in the second stage study indicated that initially they were not aware of the many existing programs and data bases but are not finding them to be extremely beneficial.
4.) Compared to the domestic market, the global market is different, difficult, and more fast-paced. Therefore, an SME must approach internationalizing with a different mind-set and a different managerial approach. For example, unlike the smaller domestic firm where the founding entrepreneur often makes all the important decisions, the international C.E.O. must become an effective delegator. If business units exist in more than one country, the units need to be encouraged to network without coordinating all decisions through the home office. At the same time electronic communication systems need to be set up in order to allow for effective communications and frequent conference phone calls.
5.) Develop a detailed strategic plan; do not enter the international arena haphazardly. Several respondents emphasized the importance of setting goals, defining objectives, and involving all personnel who will be responsible for implementing the plan. One C.E.O. emphasized that in getting the international venture started at his firm, he encountered numerous unforeseen problems that would not have been solved without the total support of all personnel in his organization.
6.) Approach internationalizing as a long-term commitment. A number of respondents suggested that for many SMEs, internationalizing simply meant exporting their product or services when sales were down in the domestic market. When sales increased at home, the firms retreated from the foreign market. Not only was this costly, but the firms never developed the potential market that they entered.
7.) Evaluate different ways of entering foreign markets. A point repeated many times was that a good strategic plan should answer the question, what does the firm intend to achieve from internationalizing. It was felt by the respondents that most SMEs embark on global ventures for the purpose of short-term increases in sales and, as mentioned above, view exporting as the only means to achieve that goal. While most of the SMEs in the study initially were engaged to some extent in exporting, the majority as they acquired experience, made successful strategic alliances, in the form of licensing agreements and joint ventures. Several respondents from high-technology firms explained how they entered into cooperative agreements with foreign firms in order to develop their technology when they lacked certain resources. One firm acquired a small foreign firm for the purpose of obtaining a patent and a skilled researcher. At the same time, caution is advised in selecting a wholly owned subsidiary as the entrance mode to a foreign market. Not only did WOSs receive less that favorable assessments by the respective respondents, but in addition, several mentioned WOSs as their "failures" in implementing their global strategic plans.
8.) Acquire the skills necessary to internationalize. It was felt that the typical SME does not have the specialized skills to effectively implement an international strategy. A number of respondents suggested that this deficiency should be overcome by utilizing trade intermediaries (especially for developing new markets), acquiring personnel with the necessary skills from multinational firms, or employing consultants on a part-time or project basis.
9.) Develop realistic cost estimates, not only for the start-up of the venture, but also for the maintenance of the venture, as well as the added personnel costs for the domestic operation. It became apparent from the responses that international ventures always take longer than anticipated to reach their objective or a positive cash flow. During this early phase, as well as the initial start-up phase, substantial resources will be needed. Several respondents emphasized that personnel costs are frequently underestimated. For example, training costs will be incurred for domestic employees for everything from using the metric system to learning customs and regulations of foreign transport systems. Similarly, in spite of the internet and electronic communication systems, in a smaller firm the C.E.O. is likely to be devoting considerable time to the venture as well as incurring significant entertainment and travel costs.
This paper has presented some of the findings of a longitudinal study of high-growth SMEs that had successfully implemented their global strategies. The first-stage of the research project, completed in 1994 developed a profile of these successful SMEs and provides some insights into how and why they had entered the international arena, as well as identifying the major obstacles they faced. It was felt at that time that dynamic processes such as entry mode choice required more than a temporal focus. Thus, a follow-up investigation was conducted in 2003-2004 in order to assess how these firms have fared and to obtain more insights into foreign market entry among SMEs and the strategic decisions necessary for continued growth.
Not only was it found that, approximately ten years later, all but two of the 100 SMEs were still in existence, but that they had substantially increased in size as measured by number of employees, dollar sales volume, and percentage of non-domestic sales volume. Also in stage two changes were noted in foreign entry modes and major obstacles faced in implementing international strategies. In general, high marks were given for both overall satisfaction and business performance for exporting, licensing, and international joint ventures, while wholly owned subsidiaries received lower assessments.
Since the SMEs in the study were originally ranked among the highest growth, smaller firms in the U.S., and all were profitable, and all have internationalized in recent years, it is hoped that this in itself will encourage other smaller firms to consider entering the international arena. Similarly, since it was found that, while most of the firms were involved in exporting to some degree, other modes of entering the global market were also common, including various licensing arrangements, joint ventures, and, to a lesser degree, wholly owned subsidiaries. Thus, one might conclude that researchers should redirect some efforts from the vast number of exporting studies to the lesser explored, and fertile area of strategic alliances among SMEs. Also, a number of recommendations were offered to assist firms that are considering entering foreign markets.
Finally, it should be noted that this study has a number of limitations that in turn suggest further research. First, the research is limited in scope in that the findings are based on foreign entries by SMEs in the U.S.A.. Comparable studies of SMEs from other countries would provide further insights regarding the external validity of the findings of this study and add a much needed comparative element to the study. Second, future studies may provide additional understanding of underlying causal factors of the success or failures of foreign entry modes rather than the mere identification of these modes along with the assessment of their performance over a period of time.
Another limitation is that much of the results reported are self-report responses to a survey questionnaire which may then result in self-report bias. In addition, as in many longitudinal studies, it was not possible to have all the same respondents in the second stage study as in the first stage. Also, for reasons already mentioned, it was not possible to include 8 of the 100 SMEs from the first stage in the follow-up second stage. Hopefully, other studies using a more rigorous quantitative analysis will find this exploratory longitudinal study useful for continuing research in this important area of successful entry to foreign markets for SMEs.
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An earlier version of this study was presented at the 2004 Association for Small Business and Entrepreneurship Fall Conference.
Lawrence A. Klatt, Florida Atlantic University
Table 1: Sample Profile Stage 1 Stage 2 % % N = 100 N = 92 Employees Worldwide 100 or less 34 24 101 to 250 40 44 over 250 26 32 Total 100 100 Company Age (years) 6 or less 46 -- 7 to 9 40 82 over 9 12 18 Total 100 100 International Experience 3 or less 52 -- 4 to 7 48 -- over 7 -- 100 Total 100 100 Annual Sales (U.S. $) less than $5m 34 10 * $5m to $10m 34 30 $10m to $50m 18 34 over $50m 14 26 Total 100 100 Non-Domestic Sales 1 to 15% 32 10 16 to 30% 28 34 31 to 45% 26 30 over 45% 14 24 Total 100 100 Nature of Product/Service Consumer 30 24 Industrial/Institutional 70 66 Both -- 10 Total 100 100 * Part of the increase in Stage 2 sales is due to inflation. Table 2: Most Frequent Explanation for Going International Explanation Frequency Part of an overall strategy for growth 72 Local market too small 54 Domestic market stagnant or declining 42 Domestic market dominated by large, multinational firms 38 Acquire technological knowledge 38 Acquire knowledge concerning competition and international 36 markets Protection from downsizings in the U.S. economy 18 Other: e.g. to gain legitimacy and/or prestige 12 Table 3: Global Activities * Stage I Stage 2 Activity (N = 100) (N = 92) Exporting 64 64 Direct 44 56 Trade intermediaries 20 8 Licensing agreements 50 54 International joint ventures 42 60 Wholly-owned subsidiaries 32 20 International Franchising -- 6 * A number of SMEs indicated multi activities. Table 4: Assessment of Foreign Entry Modes (Stage2) Exporting Licensing IJV WOS N = 64 N = 54 N = 60 N = 20 Overall satisfaction * 3.81 3.62 3.52 2.12 Business performance ** Sales 3.16 3.10 3.20 2.12 Profitability 2.94 2.97 3.00 2.00 Market share 3.02 3.00 2.92 2.00 Product or technology n/a 3.00 3.58 2.42 development Overall performance 3.12 3.02 3.20 2.20 * 1 = very dissatisfied. 3 = neither dissatisfied nor satisfied. 5 = very satisfied ** 1 = much below initial expectations. 3 = equal to expectations. 5 = much above initial expectations. Table 5: Major Obstacles in Implementing International Strategy * Stage 1 Stage 2 Obstacle Frequency ** Frequency Lack of management depth 74 60 Lack of international management skills 70 26 Inadequate financing 66 30 Dealing with government bureaucracies 60 21 Trade barriers 40 18 Locating suitable foreign partners and/or 40 32 opportunities Negative attitudes 21 1 Other 19 10 * Most frequently mentioned are listed ** Many respondents mentioned more than one obstacle