An integrated model of internationalization for singapore based small medium enterprises

.. .AN INTEGRATED MODEL OF INTERNATIONALIZATION FOR SINGAPORE- BASED SMALL- MEDIUM ENTERPRISES LEE AH HAI, STEPHEN A THESIS SUBMITTED FOR THE DEGREE OF MASTER OF SCIENCE (MGT) DEPARTMENT OF BUSINESS... 21 An Integrated Model of SMEs Internationalization 25 An Integrated Model of SMEs Internationalization 41 V LIST OF TABLES Table Page A Comparison of Distinguishing Features between SMEs and... while Johanson and Vahlne (1990) also cite studies of German, US, Japanese, Turkish and Australian firms which show strong support for the model, particularly in the early stages of internationalization

INTERNATIONALIZATION FOR SINGAPORE-BASED

SMALL-MEDIUM ENTERPRISES

LEE AH HAI, STEPHEN

NATIONAL UNIVERSITY OF SINGAPORE

2002

AN INTEGRATED MODEL OF INTERNATIONALIZATION FOR SINGAPORE-BASED

SMALL-MEDIUM ENTERPRISES

LEE AH HAI, STEPHEN

A THESIS SUBMITTED FOR THE DEGREE OF

MASTER OF SCIENCE (MGT) DEPARTMENT OF BUSINESS POLICY

SCHOOL OF BUSINESS NATIONAL UNIVERSITY OF SINGAPORE

2002

First of all, I gratefully acknowledge the supervisory guidance of Assoc Professor Nitin Pangarkar His scholarly view, professional insight and intellectual interpretation in globalization issues and theories had been a source of motivation for me to persist on with passion in this research endeavour

I like to hereby thank Mr JP Lim and Mr Desmond Chua of SOLIN Consulting Group

As experienced business practitioners and consultants, they had provided me much business insight and foresight on understanding SMEs’ operation mode in Singapore

I also take this opportunity to acknowledge the contribution of my four colleagues at SOLIN Consulting Group - Gary Tan, Don Teo, Aaron Ang and Tan Siew Peng - in supporting me to conduct questionnaire survey and interviews with SMEs senior managers I appreciate their hard work and patience in performing these tedious jobs

My gratitude goes likewise to Mr He Zilin and Ms Deng Min on their support on statistical analysis

Lastly I appreciate my coursework instructors, seminar speakers and classmates who had enabled me to gain greater understanding of the research issue during discussions and debates

Over the last three decades, international businesses and foreign direct investments (FDI)

by multinational firms have grown several-fold Though the literature on internationalization of firms is voluminous, there are two salient issues with the literature First, this literature has a strong bias towards activities undertaken by firms from developed countries Secondly, much of the literature also focuses on large multinational firms We aim to address these issues in our current study by focusing on internationalization undertaken by small- and medium-sized enterprises in Singapore

We focus on two major research questions: what is the extent to which the firms in our sample are internationalized and secondly, what are the determinants of their degree of internationalization

Our model is based on few streams of research Firstly, based on Dunning’s eclectic (OLI) framework, we predict that firms having strong ownership and location advantages will be internationalized to a greater extent Secondly, we argue that firms that have undertaken intensive inward internationalization activities will be more (outward) internationalized Thirdly, we predict that firms increase gradually in involvement of internationalization as suggested by Stage Theory Finally, drawing from the literature on inter-firm networks, we argue that firms having stronger networks will be more internationalized

firms in Singapore Consistent with the arguments of the previous research that the degree of internationalization is a complex and multi-dimensional construct, we included measures such as the Herfindahl Index (HHI), overseas sales as percentage of total sales and number of countries We believe that these multiple measures will be better able to capture the true degree of internationalization of the sample firms We employed perceptual measures to gauge the extent of ownership and location advantages, the extent

of incremental internationalization, the degree of inward internationalization and the strength of networks Multiple items (questions) were used to measure each of these constructs

We received 92 completed survey forms, giving us a response rate of just under 20 percent We find that small- and medium-sized enterprises in Singapore are predominantly focused on the home market with 71 percent of the sales coming from this source Other ASEAN nations form popular destinations (average 20 percent of their total sales from this region) for the FDI by the sample firms The sample firms, however, seldom invest in countries beyond the Asian continent

In terms of hypothesis testing, we found that the degree of internationalization was significantly influenced by the strength of ownership and location advantages But there

is no sign of support of incremental stage theory, network theory and inward internationalization in explaining Singapore SMEs’ internationalization

Chapter Content Page

5 Statistical Analysis and Discussion 49

6 Conclusions and Implications 71

Appendix A: Measures Used In Paper 80

Appendix B: Testing Discriminant Validity With Confirmatory Factor Analysis

85

Figure Page

1 Coviello and Munro (1997) Suggested Integrated Model of

Internationalization

21

2 An Integrated Model of SMEs Internationalization 25

3 An Integrated Model of SMEs Internationalization 41

4 International Business Activities of Singapore SMEs 50

5 Descriptive Statistics for Ownership Specific Advantage 51

6 Descriptive Statistics for Location Advantage 54

7 Descriptive Statistics for Psychic Distance and Years of

Exporting

56

8 Descriptive Statistics for Pre-export Import Experience 58

9 Descriptive Statistics for Business Network Connection 60

10 Exploratory Factor Analysis for Ownership Advantage 61

11 Exploratory Factor Analysis for Location Advantages 61

12 Exploratory Factor Analysis for Inward Experience 62

13 Exploratory Factor Analysis for Business Network Connection 63

15 Means, Standard Deviations, And Correlations (N=92) 65

16 Regression Analysis in Testing the Determinant of DOI 66

17 Summarized Outcomes of Three Regression Models 68

1.1 INTERNATIONALIZATION

The term internationalization generally refers to the outward movement in an individual firm’s or larger grouping’s international operations (Johanson and Wiedersheim-Paul, 1975; Piercy, 1981; Turnbull, 1987) This definition has ever served well as a starting point for researchers to explore the issue

As early as 1970s, researchers like Wilkins (1970, 1974) and others began to delineate some of the dynamic factors in the process of internationalization of firms (more on MNCs then) They had begun to develop longitudinal approach as a research methodology in order to study stages of internationalization Their studies not only highlighted the expansionary and growth activities towards internationalization, but also made some preliminary attempt to identify key dynamic factors in the process (Johanson and Wiedersheim-Paul, 1975; Johanson and Vahlne, 1977; Luostarinen, 1979)

Since dynamic concept begins to gain ground in internationalization literature and internationalization is no longer just static, the definition proposed by Beamish (1990) is perhaps most appropriate:

“ … the process by which firms both increase their awareness of the direct and

indirect influence of international transactions on their future, and establish and

conduct transactions with other countries.”

Beamish’s view incorporates and synthesizes various critical elements as proposed and considered by his contemporaries and predecessors First, there is an internal dynamic force that enhances learning to encounter changes and to foster growth and market expansion via acquisition and accumulation of knowledge (Johanson and Vahlne, 1992; Melin, 1992) Second, inward internationalization (import) is recognized here both as an important international transaction and as a facilitator for external internationalization (export, FDI and others) later (Welch and Luostarinen, 1988a, 1993; Korhonen et al., 1995) Third, external internationalization

in various forms is certainly the core issue here This may assume patterns ranging from indirect exporting, direct export to full commitment like establishing manufacturing plant and wholly controlled subsidiaries (FDI) in foreign lands Fourth, the view is process-based that may one way or another give accommodation

to incremental approach of internationalization whereby a firm progresses through a series of stages to intensify degree of involvement in internationalization (Stage Model) Finally, there is also suggestion regarding the importance of establishing

This gives due consideration on Network Model to interpret the internationalization process

With all these various elements, Welch and Luostarinen’s (1988b) work can

be considered a pioneering and comprehensive analysis of the internationalization concept Subsequently other researchers have reviewed, analyzed, assessed and synthesized from the general internationalization process literature in order to derive the implicit concepts and definitions attached (examples: Johanson and Vahlne, 1990, 1992; Melin, 1992; Andersen, 1993) Their analyses and reviews indicate two common phenomena in internationalization literature Firstly, efforts to encapsulate the internationalization concepts in a definitive manner have been inadequate Secondly, there is generally a lack of consensus in the definition of internationalization

With this background knowledge, in this study I will proceed to the relevant theories of internationalization For a more exhaustive analysis and comparative study of a firm’s internationalization effort, this study stretches beyond the mere question of whether a firm is ‘internationalized’ or not in term of obvious activities Rather, the depth of involvement, degree of internationalization (DOI), is the focus here

The measurement of DOI itself is also intensively discussed One common and simple measure is overseas sales in percentage to total sales However, it is often criticized on its drawbacks (Cavusgil and Godiwalla, 1982; Welch and Luostarinen, 1988b) For example, it gives not much clue regarding the diversity in operations, the

variety and heterogeneity of markets, and the extent of organizational commitment Therefore, in this study, DOI will be measured on three dimensions: breath, intensity, and dispersion The scale of “overseas sales in percentage to total sales” measures the intensity of DOI While the breath of DOI is measured by “the number of foreign countries operated in”, and the dispersion of DOI is measured by Herfindahl-Hirschman Index (HHI)

1.2 INTERNATIONALIZATION OF SME

Internationalization of multinational companies has been widely and intensively studied However, this study will shed light on SMEs on their internationalization

Although it has been well recognized that SMEs have contributed significantly

to economic development and growth and thereby creating employment, larger tax base, more well being to consumers and other social benefits (Dana et al 1999), business practitioner scholars and academics are yet to establish a universally accepted definition of SMEs: “definitions of ‘small firm’ vary to author and context” Buckley (1989)

Berra et al (1995) define SMEs by reference to the Italian “SMEs Incentive Law” that measures the size of SMEs by number of employees and/or volume of

Wilson committee and the UK Companies Act define small firms in term of their annual turnover, balance sheet total and average weekly number of employee

In Singapore context, based on Singapore EDB/SPRING and company acts, “a Singapore-based SME is broadly defined here as a firm holding net tangible assets (on group basis) not exceeding 15 million Singapore dollars and/or workforce not more than 200 persons, with Singaporeans holding at least 30% of equity share” A Singapore-based SME is a firm with above qualifications and registered in and having its head office in Singapore

There are differences between larger firms such as MNCs and SMEs To draw

a clearer boundary, it is listed in Table 1 some of the main features that in the past have distinguished SMEs from large firms and MNCs (Dana et al., 1999):

Table 1: A Comparison of Distinguishing Features between SMEs and MNCs

of SMEs

1 Size Small to medium

2 Access Local or regional

3 Reach Limited

Large, global markets, more vulnerable to environmental volatility and operational risk

Low since diversification

SMEs: high probability of insolvency or failure

6 Strategic vision Vision of the

entrepreneur or small group of executives

Strategic aims of global boards;

reactive and responsive

SMEs: mostly new, innovative, and productive

Influence the policy environment of their host governments

9 Expansion

mechanisms

Cooperative, symbiotic arrangements

Rely on internal economies of scale and scope

10 Network

characteristics

Loose, cooperative, international linkages among independent agents

Tighter and complete linkages, with owned or tightly controlled agents

SMEs: flexible “linkage”

practices, such as strategic alliances and other collaborative arrangements 11.Innovativeness

and

specialization

Larger and more flexible inventive capacity

Less inventive, but achieve higher success rates in commercializing innovations

12 Human

resources Human resource deficiencies Recruit and promote based on

professional qualifications

SMEs: local expertise

13 Control

characteristics

lateral coordination between mutually dependent players

rigid, hierarchical, internal control

SMEs: interdependence , allows networks of SMEs

to grow

It is these differences in dimensions, forms as well as degree of involvement

on those features listed above that finally define SMEs as unique business venture from large firms and MNCs

However, the advantages of SMEs are recently emerging as described by Table 1 Some key drivers in globalization bring about the changes in the relative advantages of SMEs and MNCs and make some of their practices more similar These drivers take the forms like technological advances in production, transportation and telecommunication; dismantlement of government-imposed barriers and structural impediments; and gradual disappearance of market segments

Similarities between SMEs and large MNCs in operating characteristics and strategies may be found in these areas (Dana et al., 1999):

1 First, economic environment: MNCs need to learn from and emulate

SMEs in order to compete effectively with them (or, perhaps, to collaborate with them) in their niche markets

2 Inter-firm relationships: MNCs find it increasingly necessary to

operate at levels closer to SMEs, adopting some of their flexible,

“linkage” practices, such as strategic alliances and other collaborative arrangements

3 Value chain: MNCs are more often using SMEs for specialized tasks

involving inventiveness, creativity, and local expertise

4 Control mechanisms: SMEs pool their capabilities and share control

without any one firm dominating This interdependence allows

networks of SMEs to grow Ever-increasing worldwide competition is forcing MNCs to adopt more localized postures in order to preserve their competitiveness locally and globally The essence of control of MNCs evolves from rigid, hierarchical, internal control toward lateral coordination between mutually dependent players

It can be found here that the similarity between SMEs and MNCs are mainly a process for MNCs to learn from SMEs on their advantage

The similarity between SMEs and MNCs make it reasonable to borrow the fruitful results regarding studies of MNCs internationalization in the previous decades and use them on the research of SMEs While their distinguishing features make it necessary to build a model appropriate for SMEs

From the features of SMEs, it is apparent that one of the main objectives for SMEs to internationalize is to gain access and possibly direct and indirect control of resources The resources can be both tangible and intangible (Holmlund and Kock, 1995) They can be personnel resources, software resources, hardware resources and organizational resources (Holmlund, M and Kock, S., 1998) Bell (1995) also pointed out other possible reasons such as small size of domestic market, and firms not being well accepted locally The following chapters will proceed to examine the determinants of SMEs degree of internationalization

One minor point, in this thesis, the term entrepreneurship and SMEs are used

practice or venture of undertaking enterprise, while assuming control and underlying risks Owing to constraints in resources and an entrepreneur’s predominant desire to manage and control a business venture, the size of the business venture is relatively small And such business venture is henceforth referred as small- or medium-sized enterprise or SME (Dana et al., 1999)

CHAPTER 2: THEORETICAL FOUNDATION

In Chapter 1, I discussed mainly on the definitional matters and related issues regarding internationalization My understanding here implies a diverse array of meanings associated with internationalization This arises mainly from the fact that there are various schools of thought and conceptual models explaining the behavior of internationalization Each conceptual model derives its interpretation from its particular perspective and specific discipline Hence I may safely affirm here that an individual school of though with its particularistic approach is inadequate to explain the complexities of internationalization In this chapter I will proceed to review these conceptual models

The current research to a certain extent is inspired by Beamish’s (1990) definition

of internationalization The concepts and theories discusses here are implicit in the five items summarized from Beamish’s (1990) view as discussed in Chapter 1

2.1 ECLECTIC PARADIGM

The eclectic paradigm sets out to explain ``the extent, form and pattern of international production’’ and is founded on ``the juxtaposition of the ownership specific advantages of firms contemplating foreign production, the propensity to internalise the cross-border markets for these, and the attractions of a foreign market for the production’’ (Dunning, 1988)

Dunning originates this theoretical concept and expanded the theory of internalization in the context of internationalization to include location factors These location factors influence decisions and flow of FDI (Dunning, 1973, 1988; Dunning and McQueen, 1981)

Based on the idea of location advantages, Dunning derived a three-factor (ownership specific advantage, location specific advantage and internalization) framework to explain the interdependence and significance of these location factors for FDI Two of the factors, ownership specific advantage and location specific advantage, contribute to the current study of internationalization:

Ownership specific advantages include exclusive technology and methods, patents, trademarks, professional and operation skills and management know-how These advantages will further augment location specific advantages These are mostly monopolistic advantages

Location-specific advantages are attached with the particular location firms intend

to invest in These are the resources endowment and assets at foreign location An investing firm may find them lacking and costly in its own country Or they can be valuable and contribute synergistic effect when combined with investing firm’s unique assets and competence Specifically, the incentives to internationalize depend on the context-the degree to which local conditions such as government regulations, telecom infrastructure, technology adoption patterns, taxation, repatriation of profits and exchange rates support the firm's business model (Kuemmerle, 1999)

Eclectic Paradigm has been a well-accepted and well-tested theory in explaining internationalization I therefore consider this paradigm as a supporting theory to build the integrated model I shall discuss more on Eclectic Paradigm and its other theoretical and practical implications at a later section

2.2 INWARD- AND OUTWARD INTERNATIONALIZATIONS

Koury (1984) and Huszagh & Huszagh (1986) included the inward side of activities, viz import, to arrive at a broader concept of internationalization This links the inward and outward activities and therefore emphasizes the related dynamic and interactive aspects of international trade in internationalization process

Inward- and outward-internationalizations consider import as part of internationalization process Import acts as initiator and facilitator for later exporting and other international exchange activities This concept recognizes import’s contributions toward greater degree of internationalization

This is one of the key models explaining internationalization of a firm I acknowledge import as an important activity of most business ventures Beamish himself gives significant weight to this factor I therefore consider inward-internationalization as one of the constituent theories to derive the overall integrated model of internationalization and shall discuss on this subject matter further in a later section

2.3 INCREMENTAL INTERNATIONALIZATION (STAGE MODEL)

This model views internationalization as a series of involvements through incremental modes of activity and stages Subsequent stage indicates more progressive and greater commitment in internationalization Two key dimensions explain this intensity of involvement These are psychic or cultural distance and accumulation of knowledge regarding foreign environment (establishment chain)

The concept of psychic (cultural) distance explains that firms develop their activities abroad over time and in an incremental fashion, based on their knowledge development Firms perceive some level of cultural distance between their home market and the foreign market (Evans and Mavondo, 2002).Differences between the home and foreign market regarding the legal and political environment, economic environment, market structure, business practices and language are essential elements of psychic (cultural) distance (Evans and Mavondo, 2002).Firms expand first into markets which are psychically close, and into more ``distant’’ markets as their knowledge developed (Johanson and Vahlne, 1977) Experiential knowledge knowledge which can only be gained through personal experience – is considered to be the critical kind of knowledge (rather than objective knowledge which can be taught) in international marketing

On the other hand, the concept of establishment chain reveals the chain of “export through independent intermediary – export through sales subsidiary – manufacture within the market’’

There are quite a number of attempts to describe various stages of internationalization process The classical and conventional version is proposed by Johanson and Wiedersheim-Paul (1975) This earliest and representative description is commonly known as Uppsala Model

Since Uppsala Model is both a classical and core theory, I shall provide some description and definition of this theory, which has been considered both as a behavior and growth model:

o State and change aspects, and causal cycles: each stage has its own state of being, conditions and uniqueness in its own aspect Normally certain state and conditions

of a particular precedent stage turn out as causal elements to usher the firm into next stage

o Objective and experiential knowledge: involvement at any stage brings about and cumulates experience and knowledge This experiential knowledge subsequently narrows or closes the gap of psychic distance and ultimately facilitates greater international involvement

o Experiential knowledge leading to reduction of market uncertainty: in addition to marginalizing the gap of psychic distance, experiential knowledge helps to reduce market uncertainty and thus reduces the risk of investment

o Generalization of market knowledge: it is possible to generalize to some extent, some localized market knowledge with some principles, so that such knowledge can be useful for other market entries as well However as each market is unique

in term of customers’ needs, cultural distinctiveness and other internal and

external factors, it is therefore difficult to generalize comprehensively and applicability of any generalization may not be high

o Small steps of market commitment: generally market commitment is incremental and gradual with relatively one small step at a time, although there may be some exceptions

o Continuous process: this process of internationalization is progressive and linear with an irreversible path Some extreme view of this model believes that the process is continuous and for all firms it shall cover all stages to terminate at final stage No allowance of cessation at all is made at some stage in between

o Two core considerations: Psychic distance and Establishment chain The former stresses on cultural and geographical proximities while the later on market knowledge and familiarity

o Operationalization of the theory usually emphasizes factors related to psychic (cultural) distance and establishment chain as indicators for internationalization

o Other indicators: usually not being considered as crucial They can be possibly reclassified as some properties of psychic distance or establishment chain

There have been some empirical studies testing the validity of the theory The results and findings are mixed Some claims are well supported while others obtain mixed results We discuss below some of the outcomes of these findings

o Gradual, incremental and outward process: most studies confirm these basic characteristics of Stage theory

o Leapfrogging: however it is also observed that some firms may skip some stages

to quicken the process These findings seem to contradict the assumptions of linearity and progressive continuality of the theory

o Stop halfway: there are cases where the firms just quit halfway and there are no indications of regaining the momentum for further commitment This fails to explain the non-cessationist doctrine of the theory

o Multiple strategies in each process: firms adopt different strategies to capture market share and return of investment Thus there are some elements of non-deterministic factors Conventionally, the theory tends to emphasize mechanistic and deterministic view The process is interpreted as evolutionary that human and firm level intervention is unlikely to be of any significance These findings however contradict to some extent the non-interventionist view

o Inward investment before outward activities: quite a number of findings supported that internationalization especially export usually begins with inward investment

in the forms of local market expansion and import These inward activities later act as springboards for outward internationalization like export Such findings confirm that internationalization can be viewed even at an earlier stage so called inward internationalization, viz import These warrant necessity of the Stage theory here to extend backward

o Low explanatory power for certain type of firms and industries: the theory explains well for manufacturing concerns But as for small high technology and service firms, mode of entry and market selection for these firms may not follow the straight path as suggested by Stage Sequential pattern usually does not exist and leapfrogging is common

o Rapid, non-incremental process: process of deepening internationalization is so rapid for certain firms that distinction of stages becomes less obvious and more arbitrary

o Only the early stages are important and applicable: in relating to market knowledge and resources, early stage of internationalization may stress very much

on knowledge acquisition At later stage, commitment can be just spontaneous without much consideration of the knowledge accumulated then

o Lack of market knowledge not necessary a factor limiting growth or pattern of stage: this is true for some cases not only at later stage of internationalization; it implies also on early stage or even at startup point Confidence gained to enter into a market may no longer just be explained by psychic distance and establishment chain alone

o Integrated relationship between environment, organization and strategy-making variables: giving rise to possible differences of stages in patterns and forms

The stage theory is process-based that accommodates the incremental approach of internationalization whereby a firm progresses through a series of stages to intensify degree of involvement in internationalization It relates well to Beamish’s vision of internationalization The concept of a stages theory of international involvement has been supported in relation to the development of exporting (Bilkey and Tesar, 1977; Cavusgil, 1980), while Johanson and Vahlne (1990) also cite studies of German, US, Japanese, Turkish and Australian firms which show strong support for the model, particularly in the early stages of internationalization I therefore include Stage Model in the building of integrated model of internationalization and shall come back to discuss more on this model and its other theoretical and practical implications at a later stage

2.4 NETWORK PERSPECTIVE

Definition of network has been derived from various sources especially from disciplines like sociology and organization behavior In its simple form, network is defined as “sets of two or more connected exchange relationship” (Axelsson and Easton, 1992) There are other more elaborate views as well

In network theory, markets are depicted as a system of relationships among a number of players Strategic action is rarely limited to a single firm; and the nature of relationships established with others in the market often influences and dictates future strategic options (Axelsson and Easton, 1992) Thus this nature of relationship influences strategic decisions of the members and also the extent of commercial exchange (Sharma, 1993)

The Network perspective originates from the social and behavioral schools of thought Recent development in some commercial and business modes induces awareness

in the midst of international business researchers the relevance of such thought in explaining certain patterns of internationalization (Bonaccorsi, 1992; Welch, 1992; Coviello and Munro, 1995)

Even among business strategy thinkers, associated concepts such as strategic alliances and collaborative partnerships are being considered important in creating competitive advantages Gulati (1999) observed that as firms' experience with alliances

Recently, networks have been recognized as increasingly important to explain internationalization of small firms (Holmlund and Kock, 1998) In view of this recent development and its possibility to complement other theories of internationalization (Granovetter, 1985; Coviello and McAuley, 1999), I therefore take network theory as one

of the constituent theories for this research paper to derive an integrated model of internationalization It corresponds well to Beamish’s view on internationalization I shall discuss further on this school of thought at later section

2.5 INTEGRATED MODEL OF INTERNATIONALIZATION:

CONSTITUENT THEORIES

The theories discussed above seem to indicate a diversity of opinion on the internationalisation of the firm The stage theory originally concentrated on the impact of one explanatory variable on this issue – the firm’s experiential knowledge More recently, Johanson and Vahlne (1990) have acknowledged the importance of another variable, said

to be implicit from the outset that of relationships to other bodies (customers, suppliers, competitors) in the foreign market As such, the network approach has been embraced by Johanson and Vahlne The eclectic paradigm, however, rather than adopting such a behavioral approach to internationalization, focuses on economic theories of transaction costs and assumes that a rational, optimal choice will be made As to inward/outward internationalization, the pre-export import experience is the only concern Table 2 lists the main features and locus of each approach

Table 2: Features and Locus of the Four Core Theories of Internationalization

Theory Influential feature Locus

Eclectic paradigm Cost of transaction Firm

Stages theory Experiential knowledge Firm

Network Interaction Firm customer competitor supplier

within market environment Inward/outward

internationalization

Pre-export import experience

Firm

This study tries to construct Eclectic Paradigm, Inward/Outward Internationalization, Incremental Stage Model and Network Perspective into an integrated model These are also the theories implicitly considered by Beamish when he defines internationalization For the current research endeavor, I shall paint the general connections of these four theories:

The need to integrate Incremental Stage and Network theories to explain better on internationalization of SMEs is emphasized by Coviello and Munro (1997) In their studies on small software firms, they conclude the relationship between these two fundamental models of internationalization This relationship is charted in Figure 1

Figure 1 Coviello and Munro (1997) Suggested Integrated Model of Internationalization

Network relationship

Incremental stage model

Market selection Market entry Product development Market diversification

To directly impact on

Help to influence on Help to accelerate

The complementary effect between Eclectic Paradigm and Network perspective is spelled out by Coviello and McAuley (1999) in their survey of literature in internationalization of SMEs The Network perspective offers a complementary view to Eclectic Paradigm given that the later does not account for the role and influence of social relationships in business transactions (Granovetter, 1985) Another complementary aspect can be viewed from the fact that internationalization decisions and activities in the Network perspective emerge as patterns of behaviour influenced by various network members, while Eclectic Paradigm assumes rational strategic decision-making This complementary feature warrants effort to integrate these two models of internationalization

A recent study by Brouthers & Brouthers (2001) on linking cultural distance with investment risk and market entry suggests some relationship between Eclectic Paradigm and Stage Model This study indicates that the degree of national cultural distance affects the perception of investment risk level and therefore the decision on market entry mode

Similarly, there is also some established link between Network and Stage Model Manev & Stevenson (2001) reveal that managers of different firms (both from customers’

or suppliers’) tend to network among themselves of close cultural distance Such

networking to some extent brings about businesses for the firms they involve in

While for consideration of incorporating Eclectic Paradigm, Stage Model and Network Perspective, I would like to quote O’Farrell et al (1998) to validate my conviction on requirement a more integrative model:

“Our evidence shows that involvement with foreign markets is not necessarily associated with investment in contractual arrangement or FDI … we need a greater understanding of the dynamics of the internationalization process… from intention, to entry and market development in different sectors under the interacting influence of demand in home region and national markets, the influence of home market conditions upon the timing of the decisions to internationalize, the international behavior and requirements of private and public sector clients, the dynamics of personal networks and interactions which lead to project contracts, the availability and quality of potential joint venture and other partners, the emergence of implicit or

practice, and the ways in which key sources of expertise are mobilized in order to service overseas contracts.” (O’Farrell et al, 1998: Remarks made at Conclusions and Discussions section)

O’Farrell et al are obviously subscribing to a doctrine of dimensional, disciplinary and dynamic approach to study the subject of internationalization Anyone of those conventional theories alone is incapable of explaining the complexity of this international behavior

multi-Buckley, P.J (2002) puts forth well on his view that internationalization is a pathway to globalization and on the necessity to address internationalization from an integrative perspective He quotes: “The rise of the global economy has been an important element in the international business agenda since the 1980s The sporadic, unplanned, externally driven approaches to international strategic planning needed to be superseded

by more formal models of global strategy and the myriad ways of doing international business, particularly strategic alliances and international joint ventures, had to be captured by a holistic theoretical approach.”

Beamish’s view and definition, which we accept as core definition of internationalization for this research paper, also advocates the need of an integrated approach in modeling internationalization

In view of the current trend of research and scholarly thinking in this area of internationalization, I therefore seek to spell out an integrated model of internationalization Figure 2 shows this integrated model of internationalization of SMEs In this diagram, those component/constituent theories are drawn on two-

dimensional plain while the derived integrated model on a three-dimensional perspective

I do so deliberately to highlight on the possibility of discovering new explanations and knowledge that is otherwise not being unveiled by those components These new explanations are represented by the third dimension of the box

Internationalization issues, theories and models

Network Perspective

Incremental Stage Model

Inward Internationalization (Import)

In much of previous research, theories like Inward (import) Internationalization, Eclectic Paradigm (FDI), Incremental Stage Model and lately Network perspective were individually employed to explain internationalization Each perspective brought its own respective paradigm, premises, and disciplinary setting to address internationalization This tradition yields undesired consequence Each of these understandings is partial

Global and integrative view is simply ignored A partial view is not only inadequate or insufficient, but possibly inaccurate also The whole at most times is more than simply all its parts And paradoxically it can be unique, as well as different from its parts In response to this concern, our research purpose is therefore to build and derive synergistically a model of internationalization with multi-disciplinary and integrative perspectives from current and well-established theories as constituent elements (components) By doing so we hope to attain a better understanding of internationalization in general, and, Singapore-based SMEs in particular

By employing and combining some features from each constituent theory, such integrated model, when successfully derived and built, should be able to better explain SMEs internationalization The power of explanation and prediction of this derived integrated model is expected to be greater and more accurate than that of its each individual constituent theory

This model draws very much on Beamish’s (1990) understanding of internationalization It is broad in perspective It captures the development and dynamics over time, the driving forces of the process, and the content of the process

CHAPTER 3 LITERATURE REVIEW & HYPOTHESES DEVELOPMENT

3.1 ECLECTIC PARADIGM

For MNCs, firm specific advantages usually refer to production technology, scale economies, managerial expertise, technological or knowledge advantage, monopoly, product differentiation, financial strength, knowledge in marketing, R&D, and human resource (Buckley and Casson, 1976; Rugman, 1980)

Compared with MNCs’ advantage in size, technology and global marketing, SMEs’ competitive assets are quite different SMEs usually do not have the advantage of scale economies They have no brand names or consumer loyalties to capitalize on Nor

do they manufacture new or exclusive products The capital resources of these firms are also limited

However, they still have their advantages, and their sources of competitive strength follow from a different set of conditions and factors

First, these firms may be able to acquire or develop labor-intensive, multipurpose operating technologies that can use locally available inputs and that can operate at lower scale of production (Wells, 1978, 1980; Wells and Warren 1979) Foreign investment by SMEs covers quite a wide spectrum of industries Operation and production is usually highly specialized with less than three production lines It is geared mostly to serve the contractual markets (White, 1983) Such technologies are often more efficient in local or regional countries

Second, the cost of the production of SMEs is usually low because of their use of appropriate technologies, and they are able to provide goods and services at prices below those of other multinationals or locally owned firms (Kumar and Kim 1981; Wells 1978; Lecraw 1981)

Third, the product technology of SMEs may be also appropriate Such firms sometimes manufacture simple, low quality consumer goods that can be used by a large segment of the populace, and that are usually not manufactured by the firm from industrialized countries (Nambudiri, Lyanda, and Akinnusi 1981; Lecraw 1981)

Fourth, since their scale is small, SMEs have high adaptability to local conditions and are flexible users of capital equipment (Wells, 1983)

Finally, because of their small size and lack of political clout, they are not perceived as threatening to the political sovereignty of the host countries

For the dimension of each specific advantage, I adopt the measurement of this proposed in Agarwal and Ramaswami’s (1992) study Specifically for location advantage, the study includes two dimensions: market potential and investment risk I will further discuss these dimensions in next chapter

Based on the above statement about SMEs’ specific advantages, the following hypotheses are developed:

Hypothesis 1: High degree of ownership specific advantage will result in high degree

of SMEs’ internationalization

Hypothesis 1a: High degree of ownership specific advantage will result in low HHI Hypothesis 1b: High degree of ownership specific advantage will result in high overseas sales

Hypothesis 1c: High degree of ownership specific advantage will result in high number of foreign countries with operations

Hypothesis 2: High degree of market potential (location advantage) will result in high degree of SMEs’ internationalization

Hypothesis 2a: High degree of market potential will result in low HHI

Hypothesis 2b: High degree of market potential will result in high overseas sales Hypothesis 2c: High degree of market potential will result in high number of foreign countries with operations

Hypothesis 3: High degree of investment risk (location advantage) will result in low degree of SMEs’ internationalization

Hypothesis 3a: High degree of investment risk will result in high HHI

Hypothesis 3b: High degree of investment risk will result in low overseas sales

Hypothesis 3c: High degree of investment risk will result in low number of foreign countries with operations

3.2 INCREMENTAL STAGE THEORY

Incremental Stage explains internationalization behavior as a gradual and incremental process Internationalization commitment deepens as a firm gains better understanding and knowledge of foreign markets A firm may contemplate to venture into

a foreign market if this market possesses some form of proximity in culture and geographical distance Proximity of this form is termed as psychic distance In short, there are two key drivers, viz physical distance and market knowledge, to determine whether a firm is comfortable with a market The closer or more familiar a firm is, in term of these two dimensions, to a market, the greater the likelihood that a firm will be more involved

in that market These drivers are the main consideration for a firm to advance to a later stage and increase its degree of involvement (i.e degree of internationalization) Hence each subsequent stage portraits greater proximity gained and thus greater commitment in internationalization And as such each different stage inevitably leads to differences in forms and norms for international business activities

There have been different schools of thought to describe various stages of internationalization process The classical and conventional version is proposed by Johanson and Wiedersheim-Paul (1975) This earliest and representative description is commonly known as Uppsala Model Other descriptions are in one-way or another some derived versions of Johanson and Wiedersheim-Paul (1975) proposition These derived forms accommodate with some amendment and adaptation for contingencies owing to different industries, countries, markets and time periods

Johanson and Wiedersheim-Paul (1975), with their Uppsala Model, are pioneers

in this field They segmented the whole process into four stages This version is later elaborated by Johanson and Vahlne (1977) There are others who prefer six stages and use this theory to interpret not only FDI and international production but also other international business activities at large (Bilkey and Tesar, 1977; Newbould, Buckley and Thurwell, 1978) Some, such as Cavusgil (1980, 1984b) opt for the midway: five stage instead Other scholars adhere to this approach include Bartlett and Ghoshal (1989), Cavusgil and Navin (1981), Johanson and Vahlne (1992), and Leonidou and Katsikeas (1996)

Whichever version of Stage Theory it may be - be it 4-stage, 5-stage or 6-stage,

we can safely conclude that each view is process-based that accommodates the incremental approach of internationalization whereby a firm progresses through a series

of stages to intensify degree of involvement in internationalization It relates well to Beamish’s vision of internationalization We therefore include the Stage Model in our building of integrated model of internationalization

For my research purpose here, I shall consider the core one of the Stage Theory as originally proposed by Johanson and Wiedersheim-Paul (1975) - their Uppsala Model

The four stages which are evolutionary are:

Stage 1: No regular export activities

Stage 2: Export via oversea agent

Stage 3: Export via oversea sales subsidiaries

Stage 4: Oversea production manufacturing

For a firm to progress to a higher (deeper) stage, the determinants are psychic (cultural) distance and establishment chain (international business/market experience) Cultural distance is a widely used construct in international business Here it has been applied to foreign investment expansion, entry mode choice and the performance of foreign invested affiliates, among others (Shenkar, 2001) The greater the psychic (cultural) distance is, the lesser the possibility for a firm to move to higher or deeper stage Conversely, the more international business experience a firm is, the greater the

likelihood to move to a higher or deeper stage

From above argument, it can be proposed that psychic/cultural distance and establishment chain are possible predictors of degree of internationalization

Hypothesis 4: High degree of psychic/cultural distance (Stage Theory) will result in low degree of SMEs’ internationalization

Hypothesis 4a: High degree of psychic/cultural distance will result in high HHI

Hypothesis 4b: High degree of psychic/cultural distance will result in low overseas sales

Hypothesis 4c: High degree of psychic/cultural distance will result in low number of foreign countries with operations

Hypothesis 5: High degree of establishment chain (Stage Theory) will result in high degree of SMEs’ internationalization

Hypothesis 5a: High degree of establishment chain will result in low HHI