Internationalization of SME enterprises

Internationalization of Small & Medium-SizedEnterprises

‘A Global Perspective’

H. Halbe E. Koenraads

2

AUTHORS

H. Halbe MSc.

E. Koenraads MSc.

PRINTING

Thieme MediaCenter Rotterdam

EDITOR

W. van Mourik (for Dapper Editing)

DESIGN AND LAY-OUT

Newton da Costa

ISBN

978-90-79024-02-5

PUBLISHER

Study Association EUREOS

Burgemeester Oudlaan 50

H12-02

3062 PA Rotterdam

Email: [email protected]

Website: www.eureos.nl

COPYRIGHT© 2008, EUREOS, ROTTERDAM

All rights reserved. No part of this work may be reproduced, stored in a retrieval system, or

transmitted in any form or by any means, electronic, mechanical, photocopying, microfilming,

recording or otherwise, without the written permission from the publisher and the authors.

4 Contents

Table of contents

Table of contents 4

Preface 7

1. Introduction 11

1.1 Motivation 11

1.2 Case example and quotes 12

1.3 Research set-up 12

1.4 Dutch SMEs 14

1.5 Structure 15

2. Internationalization 17

2.1 Introduction 17

2.2 Definitions 18

2.3 SMEs vs. MNEs 19

2.4 Modes of internationalization (how) 21

2.5 Internationalization theories (why) 26

2.6 Conclusions and implications 40

3. Determinants of internationalization 41

3.1 Introduction 41

3.2 Research question 42

3.3 Theoretical background 43

3.4 Research model 44

3.5 Literature review 45

3.6 Hypotheses 51

3.7 Methodology and data 57

3.8 Research method 64

3.9 Analysis 66

3.10 Conclusions 69

3.11 Policy implications 70

Contents 5

4. Innovation and internationalization 71

4.1 Introduction 71

4.2 The concept of innovation 72

4.3 Research set-up and hypotheses 80


4.5 Analyses 94

4.6 Conclusions 106


5. Internationalization and performance 109

5.1 Introduction 109

5.2 Literature review 110

5.3 Hypotheses 112

5.4 Research set-up 116


5.6 Analyses 124

5.7 Conclusions 135


Reference list 137

Appendix 159

Organizing committee 160

Sponsors 160

Preface 7

Preface

This book is the outcome of the International Scientific Research Project (ISRP) 2007 organized

by EUREOS (previously le manageur), the study association for Entrepreneurship, Organization

and Strategy of the Erasmus University Rotterdam (EUR).

During the last 20 years students participating in the ISRP have done research on several

topics including that of ‘The world of family business’ (2004), ‘Knowledge management’ (2005)

and ‘Business planning and financial performance’ (2006). For these research projects students

performed in-depth interviews with relevant actors (e.g., entrepreneurs, managers, government

officials) in The Netherlands and a selected foreign country. For more information we refer to www.

eureos.nl.

For the ISRP 2007 a group of ten highly motivated students, under the skilful guidance of Prof. Dr.

A.R. Thurik (Roy) and Dr. I. Verheul (Ingrid), did research on the challenging and up-to-date topic:

‘Internationalization of (Dutch) Small and Medium-Sized Enterprises’

The current trend of increased international involvement of SMEs is a strong argument for

investigating this topic. Due to the twin forces of globalization and technological development

many new opportunities have arisen for SMEs to operate internationally. Together with ABN

AMRO, the employers’ organization MKB-Nederland has concluded that there is an underutilized

export potential of Dutch SMEs. A serious lack of knowledge is one of the reasons why firms may

not be operating internationally yet. Therefore, the aim of this year’s research project is to create a

better understanding of how and why SMEs (do not) engage in international activity.

The qualitative part of this research project consisted of in-depth interviews with international

operating SMEs in The Netherlands and Brazil. Brazil was chosen for several reasons. As the

largest country of South-America and bordering ten countries, Brazil belongs to the top-15 of

countries in the world with the largest economies. Together with Russia, India and China, Brazil

is one of the BRIC-countries; these upcoming markets have a high chance of becoming one of

the largest economies of the world within thirty years. Brazil is among the top-10 of exporting

nations in the world. The Netherlands is one of the most important foreign investors in, and export

partners of, Brazil. Due to the strong growth of the Brazilian economy many opportunities are

8 Preface 1

created there for firms from European countries. Finally, South-America nowadays is increasingly

popular for ‘off-shoring’.

The 10 months of thorough research have resulted in an extensive and unique literature review,

which will provide the reader of this book with a good overview of the research done on the

international engagement of SMEs. Furthermore a scientific contribution is provided on the following

sub-topics: determinants of internationalization and the relationship of internationalization with

innovation and performance.

This achievement would not have been possible without the help of the people and organizations

involved. We would like to thank the project committee and the academic staff for all their efforts

and dedication to this project.

This research project could not have been possible without financial support. We want to thank all

the sponsors of the ISRP 2007 for their contribution and support. We are grateful, in particular, for

the support of our main sponsor PricewaterhouseCoopers (PWC) and Steef Klop and Marlies de

Vries. We also want to thank Jolanda Hessels from the research institute EIM Business and Policy

Research for providing us with the data for our quantitative analyses as well as her professional

feedback.

In addition to the scientific contribution, the ISRP creates a wonderful opportunity for Master

students in Economics to develop research skills through participating in this professional research

project. We hope that the companies and institutes will keep on supporting this great initiative of

EUREOS in the future.

To conclude, we hope that this book will aid all students, researchers, companies and other

people who are interested in the topic, to have a better understanding of the phenomenon of

internationally operating (Dutch) Small and Medium-Sized Enterprises (SMEs).

On behalf of the International Scientific Research Project 2007,

Hendrik Halbe MSc. & Erwin Koenraads MSc.

Chairman ISRP Vice-Chairman ISRP

Chapter 1 11

1.1 Motivation

Internationalization is an important strategic choice and one of the key growth paths for a firm (Lu

and Beamish, 2001). Consequently it has become a large part of today’s business environment

and the prominence of this phenomenon has captured the interest of researchers in strategic

management, international business and entrepreneurship.

Internationalization has traditionally been something for large companies. It is therefore not

surprising that much research has been done on the internationalization of large firms (Hollenstein,

2005; McDougall and Oviatt, 1996; Johanson and Root in Knight, 2001). Yet the research field on

internationalization of Small & Medium-sized Enterprises (SMEs) has become more important

and receives increasing academic attention (Fillis, 2001; Wright and Etemad, 2001; McNaughton,

2001). This attention has grown since the eighties when SMEs were becoming increasingly

involved in global competition due to the more globalized economy and a ‘death of distances’

(UNCTAD, 1993; OECD, 1997). In the past years SMEs have also played an even more active role

in the development of the internationalization trend (Oviatt and McDougall, 1994, 1999; Coviello

and McAuley, 1999).

At the national level, and specifically from the point of view of national governments, international

involvement by SMEs is crucial because it contributes to economic development of nations (Lages

and Montgomery, 2004). For example, exports have a positive impact on the national amount

of foreign exchange reserves and on national prosperity, and contribute to the development of

national industries, to improved productivity and to the creation of employment. The open economy

of The Netherlands is a good example of this.

Developed countries need to compete with foreign countries (often with lower costs) and therefore

1Introduction

12 Chapter 1

governments are increasingly trying to stimulate entrepreneurs and small businesses to stay

ahead of unemployment and competition problems. Dutch SMEs in particular understand the

need for internationalization and being able to compete internationally because of the relatively

small but rich Dutch market.

The development of the field of research on internationalization of SMEs is essential since theories

from the past are failing to explain this phenomenon (Fillis, 2001). This gap has been noticed by

several authors and has led to an increase of articles and new theories; an example of a new

theory is the model of International Entrepreneurship (Antoncic and Hisrich, 2000), which takes

into account the increasing importance of the entrepreneur in the internationalization process.

Although there is an increase in literature dealing with the internationalization of SMEs it is still

difficult to draw general conclusions for several reasons. An example is that the majority of studies

are performed with small datasets that consist only of a small amount of firms (Coviello and

McAuley, 1999). Also, most analyses do not cover the existing industries or sectors in an economy

but are restricted to a specific sector (Hollenstein, 2005).

The purpose of this book is first of all to give the reader an extensive overview of the existing

literature (chapter 2). Secondly an attempt is made to make a scientific contribution by correcting

in our analyses (chapters 3, 4 and 5) for some of the shortcomings found in literature; by using both

a qualitative and a quantitative dataset, by using a large dataset covering the entire private sector

of The Netherlands and by performing the analyses on more than one mode of internationalization

(namely FDI and export).

1.2 Case example and quotes

In the International Scientific Research Project (ISRP) several entrepreneurs and managers have

been interviewed about their international Small and Medium-Sized enterprises (SMEs). Spread

throughout this book there are several case examples of these SMEs, as well as quotes from

entrepreneurs and managers, both obtained from the ISRP. These real live case examples and

opinions are both helpful tools to illustrate and reinforce the theoretical points being made.

1.3 Research set-up

This book is based upon the results of the ISRP 2007. For this research project first an extensive

study on the current literature available on this topic has been performed, which resulted in

a literature review providing a good and clear overview of the existing theories and research

available on this topic. With this knowledge qualitative data was collected by doing in-depth

Introduction

Chapter 1 13

interviews in The Netherlands and Brazil; interviewing Dutch SMEs who have internationalized.

From the results of these interviews a dataset was built, containing mostly qualitative results.

This dataset acts as preliminary research on the topics covered in each chapter of this book.

This helped us in getting a better understanding of the human aspects of internationalization like

the rationale behind decisions. The relevance of this kind of study lies in the insight such a study

provides to better interpret outcomes and to be able to mirror results to in-depth interviews with the

international Dutch SMEs (Marshall and Rossman, 1999). In order to expand the research and to

be able to go beyond mere assumptions, another larger dataset was used of which the data could

be compared to the preliminary results. A large quantitative sample gives the option to perform

proper statistical analyses, representative of the Dutch SME population.

1.3.1 Research samples

In total two datasets were used, each with different characteristics (see table 1.1). Important to

distinguish is the difference in the definition of an SME. The EIM policy panel dataset uses the

European definition defined by the European Commission, the International Scientific Research

Project (ISRP) dataset uses the US definition. Important in this difference is the maximum number

of employees allowed within the definition, 500 for the US definition, and 250 for the EU definition.

There is a difference between the number of cases in each dataset; this is also the result of the

way the data was collected. The ISRP dataset was collected by face-to-face in-depth interviews,

the EIM policy panel was collected by phone-based interviews. Finally there is a difference in the

year the data was collected, with the ISRP dataset being the most up-to-date.

Table 1.1: Datasets

ISRP dataset 2007

The criteria for including firms in this research sample are:

• The firms must fall within the US definition of SMEs (a maximum of five hundred employees

globally).

• The companies’ country of origin is The Netherlands.

• The firm performs a form of Foreign Direct Investment (FDI) and the company has been operating

abroad for at least one financial year.

Introduction

DatasetsMax. nr. of employees

Max. turnover

Nr. of firms in set

Firm countries

Year

ISRP dataset 2007 <= 500 <=40 mln. 24 Dutch 2007

EIM Policy panel 2004 <= 250 <=40 mln. 1,884 Dutch 2003/4

14 Chapter 1

The questionnaire consists of seventy-three questions in six main categories: firm characteristics,

success factors of internationalization, innovation and internationalization, company performance,

networks and internationalization and, finally, governance and internationalization. The questions

were either open or closed conform the Likert scale. A list of subjects per main category and

the full questionnaire can be found in the appendix. The data was collected by means of twenty-

four interviews. There were two rounds of interviews: first in Brazil with the management of

subsidiaries, secondly in The Netherlands with the management of parent firms. The interviewed

subsidiaries and parent firms did not reside in the same ownership structure. The gathered data is

of a qualitative nature. Due to the limited population of twenty-four firms, no significant quantitative

analysis could be done.

EIM Policy panel 2004

The quantitative analyses are based on data from the SME Policy Panel of the Dutch research

institute EIM Business and Policy Research (PANTEIA). The dataset was compiled of phone-

based interviews with 1,884 Dutch SMEs in 2004. The panel consists of Dutch SMEs with less

than 250 employees operating in eight different sectors. The eight sectors distinguished are

manufacturing, construction, business, lodging, transport, financial, business services, and other

services. To perform the analyses the second measurement in 2004 was used. Dutch SMEs have

been asked questions on a wide range of topics, including characteristics of the firm, performance

and internationalization activities. Many of the original variables were recoded in order to make

them more suitable for the analyses performed in this book.

1.4 Dutch SMEs

All the research preformed in this book is done with datasets containing only Dutch SMEs, so

before going in-depth on the subject, first some facts and figures on Dutch SMEs are presented.

Previous research has revealed that Dutch SMEs are less internationally active than large

Dutch companies. Nevertheless around 18% exports goods, 24% imports goods, and 2% have

made foreign investments in the last three years before 2004 (Hessels, 2004; Dijkgraaf et al.,

2005). According to research by MKB-Nederland (an employer’s organization for SMEs in the

Netherlands) in cooperation with ABN AMRO in the year 2005 there were 80.000 SMEs with the

potential1 to export (Dijkgraaf et al., 2005).

Introduction

1 These SMEs do not export yet, but posess the resources and capabilities to do so.

Chapter 1 15

Several facts on Dutch SMEs (Hessels, 2005):

• Size class differences; internationalization increases with firm size for all modes.

• Industry differences; manufacturing, trade and transport are most active.

• Geographical orientation; Dutch SMEs focus on nearby countries:

Total exports Dutch SMEs; about 80% directed at EU.

Export of services; much more oriented towards non-EU countries (57% EU).

• Common barriers: high costs, law and regulation, language and cultural differences.

• Intensity of internationalization; exports usually form a small share of total sales.

1.5 Structure

This book comprises of five chapters. In chapter 2, an overview on internationalization is given

and internationalization is defined and explained using existing theories and literature. In chapter

3, 4 and 5 we analyze and discuss respectively the determinants of internationalization, the role

of innovation in the internationalization process and the financial performance as an outcome of

internationalization.

Chapter 2 is descriptive; chapters 3, 4 and 5 are explanatory, including hypotheses, data

analysis and a discussion of the main results. Each chapter ends with conclusions and policy

implications.

Introduction

16 Chapter 1

Chapter 2 17

2.1 Introduction

In this chapter light is shed on what internationalization is, how it is performed and why firms go

international. Important in grasping the entire concept of internationalization is an overview of

the different theories explaining the phenomenon. In this overview a distinction is made between

traditional trade theories, static theories and dynamic (process) theories. The traditional trade

theories focus on the logic behind trade between countries, static theories focus on why firms

choose to internationalize, and dynamic theories focus on the process of internationalization. To

give an overview:

Traditional trade theories

• Theory of Absolute Advantages (Smith, 1776)

• Theory of Comparative Advantages (Ricardo, 1817)

• Heckscher-Ohlin Theorema (Heckscher, 1919; Ohlin, 1933)

Static theories

• Theory of the growth of the firm (Penrose, 1959)

• International Product-Life-Cycle (Vernon, 1966)

• OLI-Paradigm (Dunning, 1993)

• Resource-Based-View (Wernerfelt, 1984)

Dynamic theories

• Network Perspective (Johanson and Mattson, 1988; Sharma, 1992)

• Uppsala Model of Internationalization

U-Models (Johanson and Wiederpaul, 1975)

I-Models (Cavusgil, 1980)

• International New Venture Theory (Oviatt and McDougall, 1994)

• Model of International Entrepreneurship (Antoncic and Hisrich, 2000)

2Internationalization

18 Chapter 2

Internationalization

Before describing the above mentioned theories in-depth, we first elaborate on the definition of

internationalization, describe the differences between SMEs and multinational enterprises (MNEs)

and discuss the different modes of internationalization (how). The chapter ends with conclusions

and implications.

2.2 Definitions

What exactly is internationalization? There is not one definition that all authors agree upon, instead

there are many discussions. A useful process oriented explanation of the concept is provided by

Beamish (1990) and is most suitable for the research in the following chapters:

‘Internationalization is 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, 1990, p. 77).

Furthermore, table 2.1 by Ruzzier et al. (2006) provides a good overview of several other process

and/or relationship based definitions. Since the focus of this book is on the internationalization

process a selection was made in definitions describing the changing process of internationalization.

The factors of growth and development are the most important similarity between these definitions

but it is also noticeable that resources are mentioned quite often (Ahokangas, 1998). Also, the role

of relationships and networks, imbedded into human capital seems to play an important part in

these definitions.

Growth is an important factor; one of the paths to firm growth is geographic expansion. By

broadening customer bases through entering new markets, firms are able to achieve a larger

volume of production, and growth. By leveraging resources in different markets, firms are in a

position to capitalize on market imperfections and achieve higher returns on their resources

(Zahra et al., 2000).

Capitalization on these market imperfections is done by both SMEs and MNEs. Although MNEs

have shown to be superior in internationalization so far, there is an increasing amount of evidence

that SMEs are also aiming at rapid internationalization, despite their smallness, early stage of

development or limited resources (Knight and Cavusgil, 1996, 2004; Madsen and Servais, 1997;

Moen, 2002; Oviatt and McDougall, 1994; Rennie, 1993).

Chapter 2 19


2.3 SMEs vs. MNEs

International SMEs differ in many respects from larger international firms, referred to as Multinational

Enterprises (MNEs). SMEs (and especially their internationalization) have only recently attracted

broader interest (Miesenbock, 1988). This reflects the fact that several countries, particularly those

experiencing balance of payment deficits, have attempted to increase the international activities of

their SMEs in order to boost economic growth, cut down unemployment and create potential mini-

MNEs in the future (Ruzzier et al., 2006). Four important differences between SMEs and MNEs

with regard to internationalization are described:

More limited resources/competences

The most obvious difference between SMEs and MNEs is size related. SMEs simply have more

limited resources. Resources, as seen later in this chapter in the Resource-Based-View (RVB),

are important factors in internationalization (Wernerfelt, 1984). The competences a firm holds are

Author Definition Focus

Welch and Luostarinen (1993)

Internationalization is the outward movement of a firm’s international operations.

Process, firm’s operations

Calof and Beamish (1996)

Internationalization is the process of increasing involvement in international operations.


Johanson and Mattson (1993)

Internationalization is the process of adapting firms’ operations (strategy, structure, resources etc.) to international environments.


Johanson and Vahlne (1990)

Internationalization as a cumulative process in which relationships are continually established, developed, maintained and dissolved in order to achieve the firm’s objectives.

Relationships, process

Lehtinen and Penttinen (1999)

Internationalization as developing networks of business relationships in other countries through extension, penetration and integration.

Networks, relationships

Lehtinen and Penttinen (1999)

Internationalization concerns the relationships between the firm and its origin from the development and utilization process of the personnel’s cognitive and attitudinal readiness and is concretely manifested in the development and utilization process of different international activities, primarily inward, outward and cooperative operations.

Relationships, firm’s operations, process, environment

Ahokangas (1998) Internationalization is the process of mobilizing, accumulating and developing resource stocks for international activities.

Resources, process

Table 2.1: The concept of internationalization (Ruzzier et al., 2006)

20 Chapter 2


important in a similar way. These are the skills and knowledge existing in the firm; also know as

human capital. Larger firms obviously have access to a larger pool of human capital and have

more resources to keep human capital within the firm.

‘It isn’t a question of small or large, it’s all about how to approach’Robin de Rooij, Commercial Attaché Consulate General Rio de Janeiro (ISRP dataset)

Liability of foreignness

Lu and Beamish (2001) argue that the expansion into new geographic markets presents an

important opportunity for growth and value creation but the implementation of such a strategy

involves challenges different from the ones associated with the domestic growth of SMEs. One

set of challenges are the ones associated with the liability of foreignness. This liability postulates

significant differences between markets meaning that the knowledge and capabilities that a SME

has developed by operating in its original markets are often not suited to operations in the new

market; new knowledge and capabilities need to be acquired or developed to successfully enter

the new markets (Hymer, 1976). According to Lu and Beamish (2001) the consequence of this

liability is that the global entrepreneur may incur higher costs than the local competitors. MNEs

do not suffer from this liability in the same way SMEs do because they can invest many resources

into the transfer between countries. In many cases the MNE enters a new market starting as one

of the main competitors in this market. SMEs first have to earn more knowledge and experience

of the foreign market, in order to gradually overcome the liability of foreignness and thus receiving

positive impacts on firm performance as costs associated with foreignness gradually decrease

with time and experience.

Liability of newness

While an international market expansion strategy offers opportunities for growth and value creation,

the potential for failure is also strong for newly internationalizing companies, given a certain

degree of uncertainty (Majocchi and Zucchela, 2003). The liability of newness (Stinchcombe,

1965) implies that younger firms have a higher propensity to go bankrupt. The liability of newness

occurs because young organizations have to learn new roles as social actors, coordinate new

roles for employees and deal with problems of mutual socialization of participants and because

of both their inability to compete effectively with established organizations and their low levels

of legitimacy. Again MNEs deal with these changes more quickly and efficiently because of their

access to resources.

In the internationalization context, a new subsidiary faces many of the same challenges as a

start-up. According to Barringer and Greening (1998) the subsidiary needs to build business

Chapter 2 21


relationships with stakeholders, the subsidiary needs to establish its legitimacy and it must recruit

and train new employees to staff new operations. This is similar for both SMEs and MNEs but the

difference lies in the speed in which MNEs can adapt to a new environment.

Importance of the role of owner/manager

The importance of the role of the owner/manager in the internationalization process for SMEs

is larger than for MNEs. The owner/manager in an SME makes most of the decisions and is the

entrepreneur of the firm. Everything relies on this person, especially since the owner/manager

in SMEs is usually also the founder and the heart of the organization. In larger firms there are

complex governance structures where the ownership and control of the organization is not the

responsibility of one person, which makes it harder for quick decisions to be made but it also

means that if one manager lacks the skills to make the company an international success, there

are others to help or replace him/her. Failure or success in the internationalization process of an

SME relies heavily on the owner/manager.

2.4 Modes of internationalization (how)

There are different modes of internationalization; in this paragraph we shortly describe each mode.

Some internationalization modes are directed inwards, others outwards or a combination of these

two. First the outward modes are described:

Outward internationalization

Outward internationalization covers the activities of firms directed outward; a product, service or

the entire firm moves towards a foreign country. The outward modes are: direct export, indirect

export and foreign direct investment (FDI). FDI is divided into branch and/or subsidiary abroad,

joint venture, foreign acquisition, and cross-border merger.

Direct/Indirect export

Exporting products or services to international markets can take a variety of forms and involves

a number of different types of intermediaries. Exporting through domestic intermediaries or a

foreign agent is defined as indirect exporting. It is regarded as a relatively easy and fast way to

enter a foreign market, because there is low risk and low commitment involved (Blomstremo et al.,

2006). It does not require knowledge of the target country trade infrastructure, nor does it allow

much control over the positioning or merchandising of the products or services.

Direct export channels, on the other hand, do require the SME to establish a linkage, with or

without intermediaries, to the final foreign consumer. This direct export channel involves direct

22 Chapter 2


contacts in the host country. With the emergence of e-commerce applications, we may expect

direct shipments to consumers as an additional direct export option. Direct exporting does offer

advantages in that more control of marketing activities can be achieved, intellectual property can

be better protected, and feedback from the foreign market is likely to be timelier. These advantages

must be balanced against the higher startup costs and the necessity of learning about export

documentation, shipping procedures and international payments.

Foreign Direct Investment (FDI)

In its most basic form, FDI entails the following:

‘(FDI is defined as) cross-border expenditures to acquire or expand corporate control of

productive assets.’ (Froot, 1993, p.1).

A more exhaustive, but essentially similar, definition is found in OECD (1996):

‘Foreign direct investment reflects the objective of obtaining a lasting interest by a resident

entity in one economy (“direct investor”) in an entity resident in an economy other than that

of the investor (“direct investment enterprise”). The lasting interest implies the existence of

a long-term relationship between the direct investor and the enterprise and a significant

degree of influence on the management of the enterprise. Direct investment involves both the

initial transaction between the two entities and all subsequent capital transactions between

them and among affiliated enterprises, both incorporated and unincorporated.’ (OECD, 1996,

p.7-8).

And further:

‘OECD recommends that a “direct investment enterprise” be defined as an incorporated or

unincorporated enterprise in which a foreign investor owns 10 per cent or more of the ordinary

shares or voting power of an incorporated enterprise or the equivalent of an unincorporated

enterprise. The numerical guideline of ownership of 10 per cent of ordinary shares or voting

stock determines the existence of a direct investment relationship. An effective voice in the

management, as evidenced by an ownership of at least 10 per cent, implies that the direct

investor is able to influence or participate in the management of an enterprise; it does not

require absolute control by the foreign investor.’ (OECD, 1996, p.8).

On a more practical note; FDI plays a major and growing role in international business. The

change in trade and investment policies, moderation of restrictions on foreign investment and

Chapter 2 23


acquisition, and the deregulation and privatizations of many industries, have probably been the

most important factors for the increasing role of FDI. Furthermore, new information and technology

systems have made it possible to reduce the global communication costs which are necessary to

manage foreign investments when compared to the past.

FDI can offer firms new markets, cheaper manufacturing facilities, access to new expertise,

products, tax advantages and finance reasons. For the country or the foreign firm which receives

the investment, it can provide a source of new technologies, capital, products, organizational and

management skills which can all contribute to further economic development.

FDI consists of different submodes. These different submodes differ in ownership and control;

governance plays an important part in these differences. For the subsidiary there is a physical

entity present in the foreign country that operates under supervision of the parent company.

Subsidiaries can be wholly-owned or non-wholly-owned depending on the desired ownership

structure. When a firm does not want to bear all the risks of setting up a subsidiary it can choose a

different submode, the joint venture, where two or more firms work together in specific ownership

and control structures to seek the benefits of entering foreign markets. To gain the advantages of

local knowledge and customers of incumbent firms can choose for foreign acquisition or cross-

border merger. The only difference between these two is the division of ownership and control. In

table 2.2 a short summary of different ownership and control structures is depicted.

Table 2.2: Characteristics of firms entering foreign markets (Blomstermo et al., 2005)

For SMEs, FDI represents a chance to become more actively involved in internationalization.

According to the ENSR Enterprise Survey 2003, only some 3% of European SMEs have a

subsidiary, a branch or joint venture abroad. Although this is not much, the general view is that

the trend in SME internationalization through FDI is clearly upward (EU, 2003). The reason for this

development is not that different from the factors that drive the internationalization of larger firms.

FDI offers access to new markets as well as access to resources including know-how and new

Entry mode Form Control Relational friction

Commitment

Wholly-owned subsidiary

Subsidiary, acqui-sition High Low High

Non-wholly-owned subsidiary

Joint venture, cross border merger, af-filiates, etc

High/moderate Low/moderate Low

Contract, alliances Relationship Moderate High/moderate Low

24 Chapter 2


technology. Thus the importance of owning assets abroad continues to increase, reflecting the

significant role of internationally oriented enterprises in the worldwide economy.

Inward internationalization

Inward internationalization, the direct opposite of outward internationalization, has only one form:

Import

Importing is to buy products made in other countries for use or resale in one’s own country.

Today many firms’ first ventures into the international marketplace begin with importing (Griffin and

Pustay, 2001). Importing can be divided into two groups: trade in goods, tangible products, is called

merchandiswe import. Trade in services or an intangible product is called service import (Griffin

and Pustay, 2001). The reason for using international suppliers (importing) is that better value is

perceived to be available from that source than from a domestic supplier (Leenders and Fearon,

1997). Common reasons for importing are a better price, better quality and the unavailability of

items domestically. Importing and exporting is generally recognized as the least risky method of

internationalization.

Linked modes

Strategic alliances or licensing agreements are both good examples of combinations between

inward and outward internationalization:

Strategic alliances

A Strategic alliance is defined as a formal relationship that is formed between two or more

parties in order to pursue a set of agreed upon goals or to meet critical business needs while still

remaining independent organizations (Mowery et al., 1996). As partners, firms may provide the

strategic alliance with resources such as products, distribution channels, manufacturing capability,

project funding, capital equipment, knowledge, expertise, or intellectual property. The alliance

indicates cooperation or collaboration aiming for a synergy where both parties seek benefits

from the alliance which are greater than those from individual efforts. Often, the alliance involves

technology transfer (access to knowledge and expertise), economic specialization, shared

expenses and shared risks.

Strategic alliances can bring partners benefits like access to their partner’s distribution channels,

international market presence, products, technology, intellectual property and capital. It can

provide access to new markets for their products and services or new products for their customers,

increased brand awareness, reduced product development time, faster-to-market products,

reduced R&D costs, shared risks and so on.

Importance and

complexity

of operations

Chapter 2 25


Licensing agreements

A low commitment strategy involves licensing. This strategy allows firms to manufacture products

in the host country, primarily for the domestic market, in exchange for license fees. A license is

really nothing more than a contractual right that gives someone permission to engage in a defined

activity or to use certain property that is owned by someone else. In the case of internationalization

this means a firm either sells this right or buys this right.

2.4.1 Inward-outward internationalization model

The link between inward (import) and outward (export) activities and how this affects the

internationalization process of the firm has received some, but limited attention in the literature

in recent years (Korhonen et al., 1996; Welch and Luostarinen, 1993). Welch and Luostarinen

(1993), who work on the possible connections between inward and outward internationalization

processes, stressed that these links may be important even at the earliest stages of international

development. The limited evidence indicates that inward activities may provide a good opportunity

to learn about foreign trade techniques and foreign operations. By active use of this knowledge, the

firm should be in a better position to undertake outward activities (export) (Karlsen et al., 2003).

Thus, firms learn from different modes, with different degrees of intensity and/or commitment.

High

Importance and

complexity

of operations

Unilateral

connections:

e.g. import

Bilateral

connections: e.g.

Joint venture

Multilateral connections: e.g.

FDI in many countries

Inward

operations

Outward

operations

Time/Phases

Low

Figure 2.1: Development in inward-outward connections (Johanson and Vahle, 1990)

26 Chapter 2


This learning process can explain why a firm engages in advanced modes of internationalization.

When firms engage in import for a set period and learn about the market, trade techniques and

gain experience they can see new opportunities in the market. Firms have a better chance to

survive in the global environment when undergoing this process (Johanson and Vahlne, 1990).

In a large study of Finnish SMEs, Korhonen et al. (1996), found that a majority of the companies

started international activities with inward operations (import) as a springboard to outward

operations (export). Korhonen (1999) also found inward-outward connections at different stages

of the internationalization process. Import was very often a starting point in the internationalization

process to be followed by export and/or production abroad. This can also be seen in figure 2.1 it

starts with inward operations and later develops into outward operations. The internationalization

process occurs in incremental steps.

2.5 Internationalization theories (why)

In traditional research there was a strong focus on MNEs, nowadays there is an increased

attention for internationalization of SMEs and new ventures. Similarly, there was focus on

export, where research on FDI is becoming more popular nowadays. This development implies

a holistic approach; companies are taking into account other modes than only export. In many

cases different modes of internationalization are combined and involvement in one mode can

lead to involvement in other modes. In recent research, attention is also paid to the possibility of

de-internationalization, which is the process of leaving a foreign country to centralize the firm’s

activities (Hessels, 2005). We do not cover the topic of de-internationalization in this book, but it

is nevertheless an interesting development.

In the following paragraphs the most important internationalization theories are described.

Starting with the basic theories that explain why countries trade, the traditional trade theories.

These theories provide us with the basic knowledge needed to better understand international

trade and internationalization in general. Followed by static theories that explain why firms go

international. These theories describe the choice of internationalization. Finally the dynamic

theories are explained; these focus on the changing process of internationalization.

2.5.1 Traditional trade theories

The following theories developed throughout different centuries make an attempt to explain

international trade:

Chapter 2 27


Theory of absolute advantages (Smith, 1776)

A country has an absolute advantage over another in producing a good, if it can produce that

good using fewer resources than another country. For example if one unit of labor in Holland can

produce 80 units of wool or 20 units of wine; while in Brazil one unit of labor makes 50 units of wool

or 75 units of wine, then Holland has an absolute advantage in producing wool and Brazil has an

absolute advantage in producing wine. Holland can get more wine with its labor by specializing

in wool and trading the wool for Brazilian wine, while Brazilians can benefit by trading wine for

wool. (Adam Smith, Wealth of Nations, Book IV, Ch.2) The benefits to nations from trading are

the same as to individuals; trade permits specialization, which allows resources to be used more

productively.

Theory of comparative advantages (Ricardo, 1817)

The principle of comparative advantage, generally attributed to David Ricardo, extends the range

of possible mutually beneficial exchanges. It is not necessary to have an absolute advantage to

gain from trade, only a comparative advantage. With comparative advantages it is beneficial for

two countries to trade even if one country has an absolute disadvantage in every type of output.

Both countries benefit from specializing in and exporting those products in which they have a

relative advantage over the other country. This means that someone needs to be able to make

something at a lower cost, in terms of other goods sacrificed, to gain from trade.

Heckscher-Ohlin Theorem (Heckscher, 1919; Ohlin, 1933)

The Heckscher-Ohlin Theorem is one of the four critical theorems of the Heckscher-Ohlin model.

It states that a capital-abundant country will export the capital-intensive good, while the labor-

abundant country will export the labor-intensive good.

The critical assumption of the Heckscher-Ohlin model is that the two countries are identical, except

for the difference in resource endowments. This also implies that the aggregate preferences are

the same. The relative abundance in capital will cause the capital-abundant country to produce the

capital-intensive good cheaper than the labor-abundant country and vice versa.

28 Chapter 2


Initially, when the countries are not trading:

• The price of capital-intensive goods in a capital-abundant country will be bid down relative to

the price of the goods in the other country;

• The price of labor-intensive goods in a labor-abundant country will be bid down relative to the

price of the goods in the other country;

• Once trade is allowed, profit-seeking firms will move their products to the markets that have

(temporary) higher price;

As a result:

• The capital-abundant country will export the capital-intensive goods;

• The labor-abundant country will export the labor-intensive goods.

2.5.2 Static theories

Knowing what drives trade between countries makes it easier to understand why firms

internationalize; there are clear incentives. The following static theories describe the choice to

internationalize, each from a different perspective.

Theory of the growth of the firm (Penrose, 1959)

Posited by British economist Edith Penrose (1914-1996) and forming part of managerial theories

of the firm, theory of the growth of the firm relates to economic expansion due to processes taking

place within the firm. Managers are presumed to reach their optimal rates of power and prestige by

following a path towards product excellence and maximum growth. In pursuing this goal, managers

will expand across borders when opportunities are at hand. This theory uses the internal factors

to determine internationalization. The reason why this theory is static and not dynamic is because

internationalization is seen as a static choice in the dynamic process of growth of the firm.

International product-life-cycle (Vernon, 1966)

Vernon’s theory of the International Product Life Cycle (PLC) puts emphasis upon timing of

innovation, the effects of scale economies, and the roles of ignorance and uncertainty in

influencing trade patterns. The PLC states that products go through a continuum, or cycle, that

consists roughly of four stages: Introduction – Growth – Maturity – Decline. Though this seems

like a natural process, there are many factors that influence the strategic decisions of a firm as it

attempts to maximize efficiency through the most optimal international manufacturing operations.

It should be noted that there are basic geographical regions of the world that may be best suited

to locate the production facilities based upon the product stage within the PLC. In later writings,

Michael Porter (1998) notes that untangling the paradox of location in a global economy offers

insights into how companies continually create competitive advantages.

Chapter 2 29


As the number of ways that a product can be produced increases, the corporation must decide

on its optimal means of production. For example, should the company produce with a large labor

input in a low wage country or should it produce with capital intensity in a high wage country

(Fabrizio, 2003)?

OLI-Paradigm (Dunning, 1993)

The OLI-Paradigm developed by Dunning (1977; 2000) integrates three basic theoretical

approaches that explain the international investments of firms (Hollenstein, 2005):

• Classical theory of international trade

Investments of firms follow the comparative advantages of different locations with specific

factor endowments (see traditional trade theories of 2.5.1).

• New trade theory

Firms combine specific capabilities (technological, organizational, etc.) that can be exploited

in different countries. This is a Resource-Based-View (RBV); more information on the RBV

can be found below.

• Transaction cost theory

Firms invest abroad when the costs of internalizing the production in a transnational hierarchy

are lower than the costs of obtaining the product by market transaction.

The OLI-Paradigm distinguishes three groups which may explain the foreign investment activities

of firms: ownership-specific (O) advantages, location-specific (L) advantages, and internalizing (I)

advantages.

• O-advantages are firm-specific characteristics and capabilities (knowledge, physical and

human capital, property rights, marketing, etc.) which give the firm a competitive advantage

relative to its local competitors.

• L-advantages are related to the immobile endowments (natural or created) which a firm

needs to use in combination with its own competitive advantage. If the location-specific

endowments are such that they favour foreign production over domestic production, the firm

will invest in foreign production.

• I-advantages refer to the advantages that a firm can realize by the internalization of market

transactions that produce large search and transaction costs.

30 Chapter 2


The OLI-Paradigm assumes rational decision-making behavior. Although dynamic aspects (like

production in networks or strategic alliances) are not taken into account in the early framework,

recent adjustments have accounted for this; networks are now seen as efficient means for the

firm to preserve and augment its unique characteristics and capabilities; the O-advantages in the

framework (Dunning, 2000).

Resource-Based approach to internationalization (e.g. Wernerfelt, 1997)

Different from the process/stage models is the Resource-Based approach to internationalization.

Unlike the process/stage models, the Resource-Based approach does not focus on increased

commitment or gradual processes. The Resource-Based- View focuses on sustainable and unique

costly-to-copy attributes of the firm as the sources of economic rents, i.e. as the fundamental

drivers of the performance and sustainable competitive advantage needed for internationalization.

The body of research was first used by Wernerfelt (1984) in his article ‘A Resource-Based-View

of the firm’. This paradigm presented a shift from neoclassical focus to a broader rationale. A

firm’s ability to attain and keep profitable market positions depends on its ability to gain and

defend advantageous positions with regard to relevant resources important to the firm (Conner,

1991). In doing so successfully a firm could go through different phases very fast. Resource-

Based models recognize the importance of intangible knowledge-based resources in providing

a competitive advantage. They address not only the ownership of resources, but also the

dynamic ability for organizational learning required to develop new resources. This has led to an

improved understanding of firms’ diversification strategies (Montgomery and Wernerfelt, 1997),

internationalization being one of them.

Given the heterogeneity of small firms and their operating environment, there are fundamental

difficulties in seeking to identify and define the important resources needed for internationalization.

By focusing on the attributes that resources should possess to sustain a long-term competitive

advantage in international markets, authors have proposed different characteristics (Barney, 1991;

Peteraf, 1993; Wernerfelt, 1997; Mahoney and Pandian, 1997; Grant, 1991). Barney (1991), for

example, argued that resources must be valuable, rare, imperfectly imitable and not substitutable,

while Grant (1991) proposed that resources must capture durability, transparency, transferability,

and replicability. These different perspectives indicate that these attributes are ‘often relatively

broad and hazy’ (Winter, 1995) and that there are ‘no clear boundaries between them’ (Andersen

and Kheam, 1998). Resources in general can be considered stocks of available tangible or

intangible factors that are owned or controlled by the firm and converted into products or services,

using a variety of other resources and bonding mechanisms.

Chapter 2 31


The development of Resource-Based theory and the Network Perspective seem to have gone

hand in hand. In both theories, internal and external resources available to the firm are seen as

constituting the total set of resources available to the firm. In order to gain access to strategic

resources, firms may co-operate vertically, with respect to the product flow, or horizontally with

competitors by entering into network relations.

2.5.3 Dynamic theories

The difference between static models and dynamic models is the factor of progress; static models

only describe why firms internationalize but not how (progressing in a process). The dynamic models

focus on the process of firms’ internationalization. This process includes the ‘stages’ approach

which views internationalization as involving changes in the firm as it increases its commitment to

foreign markets. Firms start with the entry mode that requires the least commitment of resources

and gradually increase their commitment of resources (Cavusgil, 1980; Reid, 1981). Gankema

et al. (2000) postulate that there are two approaches to the internationalization processes; the

Uppsala Internationalization model (U-Model) and the Innovation related models (I-Models).

These are known as the ‘stage models’ of internationalization. In both models the central focus is

a firm’s involvement in foreign markets (Morgan et al., 2000). Commitment, as seen in paragraph

2.4.1 starts low and increases when firms start to increase international activities. The I- and

U-model do not differ significantly from each other but simply use a different point of view when

describing almost the same process.

Uppsala model (U-model) of internationalization

The Uppsala model is a dynamic model, internationalization is described here as a process. The

Uppsala model is divided into the engagement in the establishment chain in foreign countries in

small incremental steps and the choice of entering a market with smaller physical and geographical

distance.

First part

The first part of the Uppsala model indicates that the firm will engage in operations in a specific

foreign market according to the establishment chain. The establishment chain is the sequence of

stages, made in small incremental steps, that firms go through in order to establish themselves in

a foreign market. Johanson and Wiedersheim-Paul (1975) identify four stages. First firms will start

with regular exporting activities, second, firms will continue with export via agents. The third stage

in the internationalization process is a sales subsidiary and the fourth and final stage consists of

setting up an own production or manufacturing establishment, respectively.

32 Chapter 2


The establishment chain construct of the U-Model makes it easier to understand and explains the

choice of SMEs to export as an internationalization strategy. According to the establishment chain

construct SMEs start with the entry mode that requires the least commitment of resources and

gradually increase their commitment of resources (Bilkey and Tesar, 1977; Cavusgil, 1980; Reid,

1981). This makes it the least resource dependent strategy, ideal for SMEs.

Second part

The second part of the Uppsala model defines that a firm enters new markets where the physical

and geographical distance are smaller. The physic distance becomes larger when there are greater

differences in language, education, business practices, culture and industrial development. When

the physical distance is relatively small, the firm can better predict the opportunities in the new

market they will enter and the uncertainty will be lower. The best way to reduce the uncertainty is

by experiential knowledge which consists of personal experience in that market (Johanson and

Vahlne, 1977).

Johanson and Vahlne (1977) stated four assumptions belonging to the model. The first assumption

is that the firm strives to maximize long-term profit. The second assumption is that the firm wants

to reduce risk when they choose to internationalize. The third is that every level of the firm strives

to reach this and the last one is that it must be assumed that the state of internationalization

affects the opportunities and risks of the firm.

The Uppsala model assumes that it is the firm that is going international but according to Johanson

and Vahlne (1977) it is the knowledge of the entrepreneur that makes the internationalization of the

firm successful. The process of internationalization is thus influenced by the market knowledge that

the entrepreneur has. Based on the knowledge of the entrepreneur, decisions are made which are

also influenced by the current state and mode of internationalization. The state and mode determine

State aspects Change aspects

Market knowledge

Commitmentdecisions

Market knowledge

Currentactivities

Figure 2.2: The

internationalization process

of the firm (Johanson and

Vahlne, 1990)

Chapter 2 33


the market commitment. This is appointed in figure 2.2, showing the interaction between these

different aspects. There is a distinction made between state aspects and change aspects.

Innovation related models (I-Models)

The I-Model conceptualized by Cavusgil (1980), displayed in table 2.3, postulates that the

internationalization process is done along five stages: a domestic marketing stage, a pre-export

stage, an experimental involvement stage, an active involvement stage and a committed involvement

as presented in table 2.3. The I-Model considers each subsequent stage as an innovation for

the firm (Gankema et al., 2000). According to Rialp and Rialp (2001) this is an ‘incrementalist/

gradualist approach’ due to its conceptualization of the internationalization of the firm as a learning

process based on the gradual accumulation of experiential foreign market knowledge. Although

McDougall et al. (1994) and Oviatt and McDougal (1994) argued that the I-Model does not hold

for born globals, Reuber and Fisher (1997) found that the international knowledge and experience

of the SME management team is very important in the export development process of a small

firm. They concluded that SMEs with an experienced team can skip stages 1 and 2 with positive

Stage Description

Stage 1: Domestic marketing

The firm is only interested in the domestic market and does not export at all. The firm is not interested or willing to experiment with exporting – it is too busy doing other things, or is not capable of handling an export order. The export/sales ratio is 0 percent.

Stage 2:Pre-export

The firm searches for information and evaluates the feasibility of exporting activities. However, basic information about costs, exchange risks, distribution, etc. is still lacking. The export/sales ratio is at or near 0 percent.

Stage 3: Experimental involvement

The firm starts exporting on a small basis. Physical and cultural distances are limited. The involvement of an experimental exporter is usually marginal and intermittent. The export/sales ratio varies from 0-9 percent.

Stage 4: Active involvement

There is a systematic effort to increase sales through export to multiple countries. A suitable organization structure is in place to support these activities. The export/sales ratio varies from 10-39 percent.

Stage 5: Committed involvement

The firm depends heavily on foreign markets. Managers are continuously faced with choices for the allocation of limited resources to either domestic of foreign markets. Many firms are engaged in licensing arrangements or direct investments. The export/sales ratio is 40 percent or more.

Table 2.3: Stages of the Internationalization process (Cavusgil, 1980)

Stage 1 no regular export activities

Stage 6 Firms look to export to psychologically distant

34 Chapter 2


effects on subsequent export performance. Reuber and Fisher’s (1997) conclusion suggests that

the I-Model can be used for SMEs that are international from inception.

The applicability of I-Models for SMEs and its predictive validity was tested by several scholars.

Gankema et al. (2000) showed that Cavusgil’s (1980) stage theory was valid for a sample of SMEs

from six European countries. Bell (1995) also verified the applicability of the I-Model in a sample

of small software companies from Finland, Norway and Ireland.

The stages approach suggests that firms internationalize gradually, in an incremental manner,

after a period of domestic experience and growth. Figure 2.3 shows four different stage/process

approaches in comparison to each other over time. We can conclude from this figure that different

stages resemble each other in commitment but, for example, occur in different time periods. In

essence all these stage theories describe the same thing; the fact that there are stages. They only

slightly differ from each other in point of view.

Figure 2.3: Four stage models compared (Anderson, 1993)

Tim

e

Stage 1 Management not interested in exporting

Stage 1 domestic marketing only

Stage 2 Management is willing to fill unsolicited orders Stage 2 Pre-export stage

Stage 2 Export via overseas agents

Stage 3 Establishment of an overseas sales subsidiary

Stage 3 Management explores feasibility of active exporting

Stage 4 Experimental exporting to psychologically close countries

Stage 5 Firm is an experienced exporter

Stage 3 Experimental involvements in psychologically close countries

Stage 4 Active involvement

Stage 5 Committed involvements

Stage 1 Completely uninterested firm

Stage 2 partially interested firm

Stage 3 Exploring firm

Johanson & Wieder-Paul Bilkey & Tesar (1977) Cavusgil (1980) Czinkota (1982)

Stage 4 Overseas production

Stage 4 Experimental exporter

Stage 5 Experienced small exporter

Stage 6 Experienced large exporter

Chapter 2 35


Network Perspective/Approach

The Network Perspective (Johanson and Mattson, 1988; Sharma, 1992) concentrates on non-

hierarchical systems where the firm functions in an international network of interpersonal and

interorganizational relationships. The theoretical foundations are drawn from social exchange

theory and resource dependency theory. According to the framework, internationalization depends

on the set of network relationships a particular firm is involved in, rather than on firm-specific

advantages. The firm’s investment decisions are guided by the aim to strengthen the position of

the firm in the international network (Coviello and McAuley, 1999).

The Network Approach attributes internationalization to the development of networks over time as

international buyers and sellers build up knowledge about each other (Hakansson, 1982; Johansson

and Mattson, 1988; Easton, 1992). Burt (1982) states that network research emphasizes the crucial

role of inter-firm ties in accumulating knowledge. According to Lindqvist (1997), SMEs strongly rely

on networks at the outset of their internationalization, especially to select and expand into foreign

markets. Networks enable the acquisition of knowledge and experience of these markets. Coviello

and Munro (1995) claim that inward and outward activities are closely related in the small firm. The

relationship related to the inward activities may facilitate the internationalization process. Similarly,

Bell (1995) found that export activities were initiated due to contact with suppliers. Integrating the

stage models of internationalization with the network approach enhances the understanding of

the internationalization process of SMEs.

International New Venture Theory/Model of International Entrepreneurship

The stage approach to internationalization deals with a process whereby firms internationalize

slowly during their lifetime. Stage models are becoming more and more irrelevant because firms

do not go through all the stages anymore (Hessels and van Stel, 2007). The International New

Venture Theory and the Model of International Entrepreneurship shed light on these developments.

Both of these theories describe how firms create their own stages of internationalization instead of

the traditionally described process of internationalization.

International New Venture Theory

The International New Venture Theory started as a reaction to one of the shortcomings of the

Process Theory (Oviatt and McDougall, 1994). By pointing out that the Process Theory fails to

explain how particular firms manage to internationalize early in their existence (the so called ‘Born

Globals’), International New Venture Theory stresses the distinguishing characteristics of young

internationalizing firms.

Tim

e

36 Chapter 2


‘(An international new venture (INV) is defined as) a business organization that, from inception,

seeks to derive significant competitive advantages from the use of resources and the sale of

output in multiple countries.’ (Oviatt and McDougall, 1994, p. 49).

Attention devoted to exploring whether value is created in the internationalization of new ventures is

important, because ultimately we are concerned whether such entrepreneurial strategies can lead

to higher performance and if firms can become more competitive when expanding geographically

(Lu and Beamish, 2001).

Among the macro-trends encouraging widespread emergence of INVs, globalization and

advanced information and communications technologies are probably the most important. The

globalization of markets facilitates internationalization in recently created enterprises by affording

abundant opportunities abroad. Widespread diffusion of the internet, computers, and other such

technologies also are spurring international new ventures (Moen and Servais, 2002; Zahra et al.,

2000).

The performance of INVs has been a subject of research. It is believed that new ventures

benefit from internationalization in terms of improving a new ventures’ competitive and financial

performance (Zahra et al., 1997). The literature suggests (Moen and Servais, 2002; Zahra et

al., 2000; McDougall and Oviatt, 2000) that INVs manifest particular resources comprising

orientation and competencies that propel them to superior international performance. While

Case example:‘Born Global’

This small Dutch company develops, produces, and sells products for the healthcare industry. In 1995 it decided to expand to the US. In 1998 the company started its activities in Germany, and in 2001 it internationalized to Belgium. It is a typical ‘born global’ since the internationalization of the company took place within one year after its birth. The most important reasons for going international were risk diversification and access to different markets. The company owns multiple patents, which means that the products introduced to the market were new. New products are introduced continuously, at least every two years. The company has won several prizes and awards in the area of innovation. Due to its small size it does not have official R&D departments but there are 3 people in the company in charge of innovation exclusively. Moreover 6-10 % of the total revenue is spent on R&D. Thanks to innovation the company was able to explore foreign markets almost right from the start-up. The company claims that the key success factor that enabled its internationalization is the fact that they are able to offer high-quality and competitive products in the entered markets. Also the fact of being an international firm has helped to continue innovating due to new knowledge gained in these foreign markets.

Chapter 2 37


most lack the substantial tangible resources of large multinational enterprises, INVs appear to

leverage a collection of fundamental resources (similar to the Resource-Based approach) that

facilitate international success (Knight et al., 2004). However, only a few empirical studies have

investigated the effect of export on business performance among new ventures (Bloodgood et al.,

1996; McDougall and Oviatt, 1996; Zahra et al., 2000).

The age of the firm at internationalization is considered a crucial determinant for the successful

expansion and performance of the firm. INVs which go international early in their life cycle face

important competitive advantages compared to older firms, because they are not hampered by

the inertia that limits the ability of older firms to learn and develop. However, it has been argued

that the entrepreneurial behavior of the firm, rather than its age, is the most important factor in

explaining subsequent performance (Zahra, 2005). Because many parts of the framework have

not been researched yet, much of the unique characteristics of INVs still have to be discovered

(Zahra, 2005).

The framework is most elaborated in its predictions for INVs in high-technology industries

(McDougall and Oviatt, 1996; McDougall et al., 2003). As a result of the emergence of specialized

global market niches and the high costs of R&D, young firms may be compelled to internationalize

early in their life cycle. Because selling only to the domestic market would not cover the required

investments, these firms can only be successful by internationalizing early. Process Theory

states that the later stages of internationalization, which are associated with FDI, will only be

entered after a firm has passed through the earlier stages of lower order modes, like indirect and

direct exporting. In contrast, INV Theory suggests that firms can bypass these earlier stages

of the internationalization process and engage in FDI early in their life cycle. In this way, INV

Theory also rejects the validity of gradual, experiential learning as the central determinant of

the internationalization process as suggested in Process Theory (Zahra, 2005; Luostarinen and

Gabrielsson, 2006).

Empirical support for several hypothesized distinguishing characteristics of INVs is found among a

number of studies. These studies include, for example, Bell (1995), Zahra et al. (2000), McDougall

et al. (2003), and Luostarinen and Gabrielsson (2006). Regarding knowledge appropriation, the

study of Zahra et al. (2000) found evidence for significantly greater breadth, depth, and speed of

technological learning for INVs compared to other firms. The empirical results show that high-

control entry modes (FDI through start-ups and acquisitions) are positively related to the depth

and speed of technological learning. There is also a positive association between foreign entry

through acquisition and breadth of technological learning. Thus, INVs which are engaged in high-

control FDI enhance their technological knowledge compared to other firms (Zahra et al., 2000).

38 Chapter 2


With respect to knowledge appropriation, McDougall et al. (2003) conclude that management

teams of INVs exhibit much higher levels of previous international and industry experience. This

higher previous experience may very well form the core of the experiental knowledge which is

at the heart of Process Theory, and enable the INV to internationalize faster and skip some of

the earlier stages (see also Mutinelli and Piscitello, 1998). With respect to internationalization in

stages, Luostarinen and Gabrielsson (2006), apart from noting many differences between INVs

and other firms, conclude that INVs do not completely diverge from the staged approach, although

they note that INVs move significantly faster through the earlier stages of the internationalization

process.

Model of International Entrepreneurship

An economic view of the internationalization process is useful in establishing single production

facilities during the later stages of a firm’s internationalization (Vahlne and Noedstrom, 1993),

but it ignores the process aspects of internationalization. The process approach does handle this

aspect but, like the economic approach, overlooks the possibility of individuals that make strategic

decisions (Reid, 198l; Turnbull, 1988; Andersson, 2000) and is less appropriate for understanding

radical strategic change, where entrepreneurs and top managers play an important role (Reid,

1981; Andersson, 2000). Since the interest of this book is in the internationalization of SMEs, we

cannot neglect the importance of entrepreneurs, widely recognized as the main variables in SMEs’

internationalization (Miesenbock, 1988). However, in order to create the most value, entrepreneurial

firms also need to act strategically, and this calls for an integration of entrepreneurial and strategic

thinking (Hitt et al., 2001). Therefore, entrepreneurs can be seen as strategists who find a match

between what a firm can do (organizational strengths and weaknesses) within the universe of

what it might do (environmental opportunities and threats) (Foss et al., 1995).

This last approach to SMEs’ internationalization is a new emerging research area called

International Entrepreneurship (McDougall and Oviatt, 2000a; Antoncic and Hisrich, 2000). This

newly created research field is still searching for the right definition of the intersection of the two

research paths, or more importantly the activities associated with entrepreneurial firms seeking to

cross national borders. The most recent proposed definition of International Entrepreneurship as

specifeid by McDougall and Oviatt (2000b) is:

‘A combination of innovative, risk-seeking behaviour that crosses national borders and is

intended to create value in organization.’ (p.6).

Even if attempts of a systematic review of International Entrepreneurship exist (Oviatt and

McDougall, 1999, 2000), there is still a lack of an integrative theory (Antoncic and Hisrich, 2000).

Chapter 2 39


Resource-Based-View and entrepreneurship

Alvarez and Busenitz (2001) and Rangone (1999) built a bridge between the Resource-Based-View

and entrepreneurship, implicitly proposing entrepreneurs as the source of sustained competitive

advantage and slightly moving the focus of analysis of the Resource-Based-View from the firm

level (Foss et al., 1995) to the individual level, but still in the context of resources. These authors

suggest that entrepreneurs have individual-specific resources that facilitate the recognition of

new opportunities and assembling of resources for the venture (Schumpeter, 1950; Alvarez and

Busenitz, 2001; Penrose, 1959). Entrepreneurial knowledge, relationships, experience, training,

skills, judgement, and the ability to coordinate resources are viewed as resources themselves

(Barney et al., 2001; Barney, 1991; Langlois, 1995). These resources are socially complex and add

value to the firm because they are not easy to imitate and other firms cannot simply create them

(Alvarez and Busenitz, 2001).

Conceptual model of International Entrepreneurship

Antoncic and Hisrich (2000), have proposed a new integrative conceptual model that attempts

to integrate the traditional models with the emerging area of International Entrepreneurship. The

model, depicted in figure 2.4, is built around the concept of internationalization that consists of

internationalization properties (time and mode) and internationalization performance.

Figure 2.4: The International Entrepreneurship conceptual model (Antoncic and Hisrich, 2000)

Entrepreneur Human Capital

• International business skills• International orientation• Environmental


1a. Mode1b. Market1c. Time1d. Product1e. Int. Performance

Firm performance

• Sales growth

Firm characteristics

• Number of employees

Environmental characteristics

• Domestic environment

40 Chapter 2


The conceptual model of International Entrepreneurship seen in figure 2.4, was developed from

the model originally proposed by Antoncic and Hisrich (2000), representing the conceptual

integration of the theory of small and medium firms’ internationalization process merging into the

area of International Entrepreneurship. The entrepreneur (founder/manager) characteristics are

divided into two parts; human and social capital. This reflects the importance and role founder/

manager and their characteristics have in the internationalization process.

2.6 Conclusions and implications

Global integration of economic environments and different factors drive internationalization. SMEs

are becoming the pillars of economic growth and change, hence internationalization of SME

research will remain an important area.

The theories mentioned in this chapter give a good overview of why countries trade, why firms

internationalize and how this is done. Nevertheless there is not one theory that describes the

internationalization process best; differences among theories exist because each theory focuses

on different aspects of internationalization. The modern theory of International Entrepreneurship

for example focuses on the entrepreneur as the main driver behind internationalization, but

nevertheless describes all the resources that the Resource-Based-View also states to be

important. The goal of each of these theories is to describe the internationalization process found

in practice, thus theories that are up-to-date describe the process better than some of the older

theories which might be outdated due to the global developments of recent years. Theories will

have to adapt and follow this development.

In the following chapters of this book several theories, each focusing on different aspects of

internationalization, serve as the theoretical framework on which hypotheses are based.

Chapter 3 41

3.1 Introduction

In the motivation for this book in paragraph 1.1, it is made clear that SMEs are important contributors

to the world economy and are increasingly involved in global competition. Consequently more

insight in this topic is needed and the importance of this research field is rising.

The competitive pressure of international markets and the high cost of the internationalization

process make it risky and challenging for an SME to go international. When SMEs are able to

reduce the uncertainty that comes from expansion to foreign markets, the barrier to internationalize

will be reduced and thereby will enable firms to profit from the vital growth and useful learning

outcomes and financial performance that an international venture can induce. In order to reduce

this uncertainty a better understanding of the factors influencing the internationalization of SMEs

is needed. The purpose of this chapter is to get more insight in these factors that influence the

internationalization of SMEs. Some examples of determinants as found in modern literature are:

manager characteristics like; age, gender or educational level, international experience of the

manager and managerial perceptions like; growth and exporting expectations (Stoian, 2006).

Although this topic has been studied by various researchers, still no conclusive results have

been found. Among these researchers there is little consensus on what the influence of different

factors on internationalization is. For instance, on whether or not the size of the firm influences the

internationalization of SMEs is little consensus (Walters and Samiee, 1990).

Part of the scientific relevance of this chapter lies in the fact that the research is done on both

export and FDI and not just on either one. This choice was made because SMEs tend to move

into foreign markets not only as exporters (most frequent) but also as foreign investors (Reynolds,

3Determinants of internationalization

42 Chapter 3

Determinants of internationalization

1997; Coviello and Mc Auley, 1999). In addition, the empirical literature on FDI is still rather

limited (Hessels, 2007) but since SMEs are increasingly involved in FDI it is becoming a more

important and popular area of research. To indicate, small enterprises with subsidiaries abroad

tripled between 1990 and 1998, while it did not change significantly in case of large multinationals.

Added to our study is the comparison of the results on export and FDI, giving the opportunity to

investigate whether export and FDI are influenced by different factors.

3.2 Research question

This chapter investigates the determinants of internationalization and in particular export and

FDI as modes of internationalization. There is a variety of research done on the determinants of

internationalization. Yet, studies on the determinants of internationalization have not resulted in

consistent conclusions. In addition, research on the determinants of FDI is still limited.

The main research question is;

What are the determinants of internationalization, in particular export and FDI, of Dutch SMEs?

This research question is further explored through the following sub-questions:

• Do the characteristics of the founder/CEO influence the likelihood to engage in inter-

natio nalization and in particular in export and FDI?

• Do the characteristics of the firm influence the likelihood to engage in internationalization

and in particular in export and FDI?

• What are the differences between export determinants and FDI determinants?

Although the external factors (for more information on external factors see paragraph 3.5.2) on

internationalization will not be examined in this chapter (due to the limitations of the dataset) we

have chosen to still analyse them briefly through a literature review. In this way the importance of

these factors is taken into consideration and can help interpret the outcomes.

The outline of the remaining paragraphs in this chapter are structured in the following way; the next

paragraph gives the theoretical background. In this paragraph the categorization of factors that can

influence the internationalization of SMEs are given and theoretically supported. Then a theoretical

model is provided and a literature review of the factors that determine the internationalization of

SMEs is given. This is followed by a specification of the hypothesis. Next, the methodology, data

and research set-up are discussed. Analyses on the EIM policy panel dataset are performed and

analysed, closing the chapter with an overview of the results and the conclusions.

Chapter 3 43


3.3 Theoretical background

In several theories an attempt is made to predict which factors are determining the internationalization

of SMEs. With the knowledge from the in-depth literature review that was presented earlier the

choice is made to divide these factors into internal and external2 factors, which is theoretically

justified for example according to Zou and Stan (1998). In most analyses the internal factors

refer to organizational factors (see for example Leonidou et al., 1998; Suares-Ortega and Alamo-

Vera, 2005; Antoncic and Hisrich, 2000). Yet we have chosen to split up the internal factors into

entrepreneur (founder/manager) characteristics and organizational characteristics. Thereby

reflecting the importance and the role we believe founder/manager and their characteristics have

in the internationalization process. By external factors we mean those factors that the firm can not

control or to a very limited extent such as macro-economic, social, physical, cultural, and political

aspects, as well as industry characteristics that influence international behavior and performance.

In other words, they represent the opportunities of, and threats to the firm (Wattanasupachoke,

2002).

The clustering of the determinants into internal and external, as given above, is theoretically

justified because the two clusters correspond to different theoretical bases. Both categories are

closely related to the OLI Framework. The internal factors are closely related to O-advantages in

the OLI framework, while external factors are more related to the L- and I-advantages.

The internal and external factors fit, directly or indirectly, within the Resource-Based-View (RBV)

of the firm. The RVB assumes that the internal resources are the main determinants of firm

behavior, for example the entrepreneur is seen by most researchers as an important and unique

resource of the firm (Miesenbock, 1988). And it recognizes the importance of external influences

since the firm’s resources should be adapted to the changing environment. In addition it is in line

with previous studies that used the RVB as a background (Stoian 2006; Leonidou et al., 1998;

Fernandez & Castresana, 2005). Although these studies all have developed their own preference

for groups of factors, in general they give different names to the same thing.

External factors are also included for the reason that adapting to the environment is becoming more

important for firms nowadays. Due to the pace of technological change, declining government-

imposed barriers and the rapid globalization of markets many SMEs face different opportunities

2 Remark; as mentioned before there will be no analyses (except literature review) on external factors, due to the

limitations of the dataset.

44 Chapter 3


and threats than before (Hitt et al., 2001). Furthermore the domestic business conditions have

become increasingly influenced by international economic factors so that the ability for SMEs to

isolate themselves from foreign competition has decreased (Andersson, 2000). An example of

these changes is the integration of the European market, where deregulations have made it easier

for small firms to deliver products beyond the region where the firm is located.

The role of the entrepreneur (founder/manager) in the internationalization process is also

recognised by the model of International Entrepreneurship and the ‘Theory of the growth of the

firm’ (Penrose, 1959) (see chapter 2). In the former theory by Penrose (1959), managers are

presumed to reach their optimal rates of power and prestige by following a path towards product

excellence and maximum growth. In pursuing this goal, managers will expand across borders when

opportunities are at hand. This theory uses the internal factors to determine internationalization.

3.4 Research model

Based on the selected categorisation of factors that influence the internationalization, given in

the previous paragraph (see paragraph 3.3) and the limitation of the SME Policy Panel dataset

the following model is developed (see figure 3.1). What can be seen in figure 3.1 is that more

explanatory variables could have been added. However, due to the limited extent of explanatory

variables provided by the dataset, these were left out (for example; the external factors of

geographical scope).

In the model we have linked the explanatory variables (left side of the model) with the dependent

dummy variables internationalization, export and FDI. Measured by the questions ‘Has the firm

been involved in FDI during the last 3 years?’ and ‘Does the company export goods or services’

(The ‘internationalization’ dummy is created by combining the dummies of ‘export’ and ‘FDI’). The

arrow, connecting the left side with the right side, in the model indicates a causal relationship.

Chapter 3 45


3.5 Literature review

As pointed out earlier, firms have to take internationalization into account in defining their strategies.

It appears that the decision to engage in international activities is especially important for Small

and Medium-Sized Enterprises (SMEs), since international competition carries many profitable

opportunities, but also considerable threats, to SMEs. The more limited financial and managerial

resources of SMEs, complemented by a less extensive geographic scope, are examples of size-

related handicaps which make SMEs more vulnerable to the risks involved in internationalization.

Such risks may originate from a number of sources; for instance, trade barriers, currency

volatility and foreign culture. On the other hand, higher flexibility may enable SMEs to profit from

opportunities which are unattainable for large firms.

In the literature several determinants of internationalization have been analyzed. The results of

these studies are given below.

3.5.1 Internal factors

Entrepreneur (founder/manager) characteristics

Which entrepreneurs internationalize? What personal factors play a role in this decision?

Figure 3.1: Research model determinants

Internationalization of Dutch SMEs

Internal factors

Organizational characteristics

- Size- Age- Innovation- Network- Education level- Import

Entrepreneur characteristics

- Education- Age- Gender

- Internationalization- Export- FDI

Determinants

46 Chapter 3


Literature recognizes the importance of human capital factors and various dimensions of personal

factors in the decision to go abroad (Manolova et al., 2002). Given that internationalization

is a managerial decision-making process, the entrepreneur or manager of the firm plays a key

role in the internationalization of SMEs (Colvielleo and McAudley, 1999). The literature on small

firms internationalization suggests that four dimensions of human capital distinguish between

internationalized and non-internationalized firms: experience and skills (Reid, 1981), international

orientation (Knight and Cavusgil, 1996), perceptions of the environment (Cavusgil et al., 1979)

and demographics (age, gender, education) (Moini, 1995).

Experience & skills

Most studies assume that relevant work experience of the entrepreneur has a positive effect on

internationalization. Furthermore some studies claim that the experience of top management is

a distinguishing factor between internationalized and non-internationalized firms (Bloodgood et

al., 1996; Naidu and Prasad 1994). According to Carter et al. (1997 ) entrepreneurs that already

have some managerial experience as a founder are more capable in spotting favorable market

opportunities, not only on the domestic market but also overseas, due to the skills the individual

possesses. Also previous experience within the same industry seems to have a positive influence

on discovering business opportunities due to the knowledge of the industry he or she possesses.

Furthermore, the individual may take advantage of social networks and contacts realized during

the period of previous employment when searching for foreign market opportunities (Leonidou

et al., 1998). Chandler (1996) claims that professional experience provides an entrepreneur with

knowledge of customers on local, national and international markets. Additionally, the individual

possesses greater capability to identify and develop more suitable market niches. The manager

with previously obtained business experience will be able to create a better balance between

advantages and disadvantages of going international. Moreover, he may feel that the risk is reduced

as he or she can already have some expectations based on past performance (Hollenstein,

2005).The study of Manalova et al. (2002) indicates that international work experience, personal

networks or relations abroad are skills necessary to conduct international business.

International orientation

Entrepreneurs/managers with previously obtained experience in international business are

considered to be more internationally orientated. Consequently they are more likely to seek

international opportunities and as a result have a positive effect on internationalization (Mutinelli

and Piscitello, 1998). Reuber and Fisher (1997) perceive internationally orientated management

as a resource for the firm. They found that if SMEs hire an internationally experienced manager

this will speed up the process of going international.

Chapter 3 47


Perceptions of the environment

Research shows that a low perception of the manager on environmental uncertainty is an important

determinant of small firm internationalization (Cavusgil, 1980; Johanson and Vahlne, 1977, 1990;

Reid, 1981; Stoian, 2006; Fernandez and Castresana, 2005; Leonidou et al., 1998).

Demographics (age, gender, education)

Research on the relationship between age and internationalization of SMEs has led to contradicting

results. Several studies find that youth is associated with internationalization (Cavusgil and Naor,

1987). Cavusgil and Naor (1987) and Jaffe et al. (1988) argue that young entrepreneurs are more

involved in export activities than older ones, because, for example, younger people are more

internationally orientated. On the contrary, Cressy and Story (1995) argue that older entrepreneurs

are more likely to have enough financial resources that can decrease the barrier to internationalize.

Older entrepreneurs have wider social and business networks and more experience. These

networks can help or stimulate the entrepreneur to go international (Westhead, 1995). Other studies

found similar results showing that older age levels are related to internationalization (Welch and

Weidersheim-Paul, 1980; Nakos et al., 1998). In contrast, there are also researchers that found no

relationship at all between age and internationalization (Davis and Harveston, 1999).

According to literature on female entrepreneurs, females face more difficulties than their male

counterparts in developing relevant work experience. Women have fewer contacts (Aldrich, 1989;

Brush, 1992) and assembling relevant resources like bank loans tend to be harder to obtain for

female entrepreneurs (Carter and Rosa, 1998). There is also a difference in the goals of male and

female entrepreneurs. Economic goals are more important for men than women (Brush, 1992).

For example females are less growth orientated and are more risk-averse, because they want to

keep control over there own business (Verheul, 2005). Verheul and Thurik (2001) have argued

that females are less likely to be entrepreneurs at all, partly because of a lack of confidence.

Analogously this could perhaps be said about the decision to go international as well.

In literature on education several studies assume a positive relationship between education and

internationalization (Simpson and Kujawa, 1974; Cavusgil, 1982; Barrett and Wilkinson 1986;

Axinn, 1988). An explanation for the positive relation can be that education (which relates to

knowledge, skills, problem-solving ability, discipline, motivation and self-confidence) increases

the capabilities of the entrepreneur (Cooper et al., 1994). In addition graduated entrepreneurs are

more willing to evaluate the (dis) advantages of doing business abroad (Garnier, 1982). Besides the

increased capabilities higher educated entrepreneurs have larger social and business networks

and this increases the awareness of business opportunities in foreign markets (Westhead et al.,

2001). Related to education are the language skills of entrepreneurs. It is expected that a lack of

48 Chapter 3


language skills could also be an important barrier to operate on international markets, something

which highly educated entrepreneurs are less likely to experience (Hessels and Snel, 2006). In

contrast, other analyses have found no relationship between education and internationalization

(Davis and Harveston, 1999).


Firm size

A study by the European Commission on internationalization of SMEs in 2003 states that size is an

important aspect of internationalization. It is not surprising that the firm size variable is one of the

most studied among all the firm characteristics that can determine the internationalization of a firm

(Bonaccorsi, 1992; Kinoshita, 1998). According to Dhanraj and Beamish (2003), next to enterprise

and technological intensity, firm size is a good predictor of the degree of internationalization. Yet

there is little consensus among the different authors that studied this variable (Miesenbock, 1988;

Cooper and Kleinschmidt, 1985; Diamantopoulos and Inglis, 1988). As a result it is very hard to

come to a conclusion regarding the importance of the effect of firm size (Walters and Samiee,

1990).

Most analyses expect that the probability for large firms to ‘go global’ is higher, than for SMEs.

This is because they assume that SMEs face a higher degree of resource constrains in terms

of finance, information, management capacity, etc. (Buckley, 1989; Hollenstein, 2005; Aaby and

Slater, 1989; Fuensanta, 2004), and are more risk- averse since an international failure will hit

the small firm harder (Bonaccorsi, 1992). This is in line with one of the basic assumptions of the

Uppsala Internationalization model (U-Model, see paragraph 2.5.3) that the firm will first grow

within its domestic market before expanding to foreign countries (Johanson and Wiedersheim-

Paul, 1975).

Given that the resources commitment for FDI is higher than for export, the influence of firm size is

expected to be different. Consequently the choice is made to also discuss them separately.

Export and size

Studies on the relationship between firm size and export have not resulted in one consistent

conclusion; some studies conclude that there is a positive relationship between firm size and export

(Reid, 1982; Cavusgil and Naor, 1987; Bonaccorsi, 1992) while others state that firm size has little,

none or even a negative effect (Bilkey and Tesar, 1977; Wolf and Pett, 2000; Bonaccorsi, 1992;

Alonso and Donoso, 2000). Bilkey (1978) states that many analysts regard a firm’s size as critical

for its propensity to export, yet empirical findings on this issue have been mixed. Furthermore

Chapter 3 49


empirical evidence is indicating a nonlinear relationship between firm size and export and has

shown that exports went down when firms grew larger (Schlegelmilch and Crook, 1988; Stopford

and Turner, 1985).

Various authors argue that SMEs can formulate a successful export strategy and compensate

for having just one skill or resource, by focusing on one specific skill or resource (Wolf and Pett,

2000). This is in line with the assumption that many small firms think that offering a unique product

or service is more important than the overall volume (Culpan, 1987).

Wagner (2001) and Calof (1994) also drew the conclusion that smallness is not a problem for

exporting in every industry and it can be overcome. Wagner argues that from a managerial point of

view the size of the firm should not form a problem when considering exporting. In fact, economies

of scale can encourage smaller firms to export because it can increase their sales volume. Ursic

and Czinkota (1984) argue that smaller firms have more to gain, because larger firms already

have a large output in their home market.

It can also be that economies of scale exist but only to a certain point. When firms get larger than

this certain point they switch from export to FDI (Hunt et al., 1967).

FDI and size

Literature suggests no definite conclusion on the relationship between FDI and firm size. Mutinelli

and Piscitello (1998) found that smaller firms face size-related disadvantages compared to larger

firms in performing FDI. They argue that these size-related disadvantages can be overcome by

opting for lower control modes of FDI (like joint ventures). Such lower control modes enable SMEs

to gain access to valuable knowledge and resources, while at the same time they require lower

costs and involve lower risks. By acting in this way, smaller firms face less danger of FDI related

risks, while increasing the probability that their FDI will be successful (Mutinelli and Piscitello,

1998). In addition, several studies also found that there is a relation between smaller firm size

and lower control forms of foreign entry modes (Brouthers and Nakos, 2004; Gemser et al., 2004;

Mutinelli and Piscitello, 1998; Berra et al., 1995). On the contrary others argue that firm size

does not lead to different opinions on the desired form, since FDI equals high-control (startup,

acquisition, majority stake in joint venture) it is the preferred form for all size classes (Gemser et

al., 2004; Brouthers and Nakos, 2004; Zahra et al., 2000a). In addition, it is also found that size

is only positively related to internationalization up to a certain point (Hollenstein, 2005; Kuo and

Li, 2003).

50 Chapter 3


Human capital of the firm

The OLI-Paradigm and Resource-Based-View have pointed out that the human capital of a

firm (O-advantages, unique costly-to-copy resource) can influence whether or not a company

goes international. Next to the knowledge and education level of the entrepreneur, which has

been discussed earlier in this chapter, employees also contribute to the human capital of a firm.

In the literature little was found on the relationship between the education level of employees

and internationalization. Nevertheless, research done by Hollenstein (2005) indicates a positive

relation between the level of education of employees and FDI.

Innovativeness

Empirical results show a positive relation between innovativeness and FDI (Hollenstein, 2005;

Kuo and Li, 2003; Luostarinen and Gabrielsson, 2006). Some authors argue that smaller firms

are better at creating radical innovations (Cohen and Klepper 1996). This positive relation is in

line with theories as the Resource-Based-View and the OLI-Paradigm; innovations can be the

source that gives a company the competitive advantages and thereby attaining and keeping

its (profitable) market position and opens opportunities for internationalization (Bloodgood et

al.,1996). In addition Hessels and Snel (2006) found that Dutch exporting starters more frequently

use new technologies or inventions.

Network

Networks seem to play a vital role in the internationalization process. Research shows that the

social network of SMEs significantly influences the process of internationalization (Holmlund and

Kock, 1997). Burt (1982) states that network research emphasizes the crucial role of inter-firm ties

in accumulating knowledge. According to Lindqvist (1997), SMEs strongly rely on networks at the

outset of their internationalization, especially to select and expand into foreign markets. Networks

enable the acquisition of knowledge and experience of these markets. According to the Network

Perspective (see paragraph 2.5.3), the performance of internationally operating firms crucially

depends on the strength of its position in the international network. Although network activity

seems to have an effect on internationalization the empirical evidence is not quite clear. Network

linkages are positively related to FDI (Hollenstein, 2005; Kuo and Li, 2003), but cooperative

agreements are negatively related to high-control modes of FDI (Berra et al., 1995). Hessels and

Snel (2006) found that Dutch exporting starters more often co-operate with other businesses.

3.5.2 External factors

As stated earlier, only a short overview of external factors is given in this paragraph. External

factors are those factors that the firm cannot control, or to a very limited extent, such as macro-

economic, social, physical, cultural, and political aspects, as well as industry characteristics that

Chapter 3 51


influence international behavior and performance. Whitelock and Jobber (2004) found five factors

that have a high potential in explaining the decision to enter a new, non-domestic market for the

first time:

• The country environment;

• Physical (or geocultural) distance;

• Market-based factors;

• Competition;

• Information and market knowledge.

In the conducted literature review the following external factors and their supposed relations were

found:

• Environmental uncertainty is negatively related to FDI (Brouthers and Nakos, 2004; Mutinelli

and Piscitello, 1998).

• High relative foreign availability of productive resources is positively related to FDI (Urata and

Kawai, 2000; Kuo and Li, 2003).

• Foreign market potential is positively related to FDI (Urata and Kawai, 2000; Kuo and Li,

2003).

• Well-developed infrastructure and agglomeration in foreign countries are positively related

to FDI (Urata and Kawai, 2000).

• Cultural distance is negatively related to FDI (Gemser et al., 2004; Mutinello and Piscitello,

1998).

3.6 Hypotheses

Based on the research model (see 3.4) and the literature review on the determinants of

internationalization of SMEs (see 3.5) the available variables in the dataset are linked to the

literature findings and the formulated hypotheses. These hypotheses will be used to test whether

the expected relationships exist. More hypotheses could be formulated based on the literature,

but limitation to the dataset do not allow them. Within these limitations, however, answers to the

research questions can still be provided.

3.6.1 Entrepreneur (founder/manager) characteristics

Gender

The literature overview on gender in paragraph 3.5.1 suggests that because females encounter

more difficulties as entrepreneurs and have different goals (for example less growth orientated)

and they are less likely to engage in internationalization than male entrepreneurs.

52 Chapter 3


H1: Male entrepreneurs are more likely to go international than female entrepreneurs.

H1a: Male entrepreneurs are more likely to be exporters than female entrepreneurs.

H1b: Male entrepreneurs are more likely to engage in FDI than female entrepreneurs.

Age of the entrepreneur

The literature review has shown that the relationship between age and export behavior of SMEs

has led to contradicting results. Although there is an argument that young entrepreneurs are

more involved in export activities than older ones, for example because younger people are more

internationally orientated (Cavusgil and Naor, 1987). We argue that older entrepreneurs are more

likely to go international, because the importance of (general) experience is assumed to be high,

as well as the importance of social and business networks. These assumptions are partly based

on the Process Theory which states that firms are more likely to expand their foreign activities

once their current business activities have generated knowledge for the firm in such a way that

more business opportunities can be seen. Because generating useful knowledge takes time, we

think that internationalization is expected to be more frequent among older entrepreneurs.

H2: Older entrepreneurs are more likely to be involved in international activities than younger

entrepreneurs.

H2a: Older entrepreneurs are more likely to be involved in export activities than younger

entrepreneurs.

H2b: Older entrepreneurs are more likely to be involved in FDI activities than younger

entrepreneurs.

Education of the entrepreneur

Based on the empirical evidence (see 3.5), the assumed problem-solving skills (capabilities) of

educated entrepreneurs can result in less problems with certain barriers, like language differences,

or administration procedures. It is also thought that the highly educated entrepreneurs have

wider social and business networks, which make them more aware of opportunities outside their

domestic markets. As a result we argue that highly educated entrepreneurs are more likely to

engage in international activities.

H3: Highly educated entrepreneurs are more likely to go international than lower educated

entrepreneurs.

H3a: Highly educated entrepreneurs are more likely to be exporters than lower educated

entrepreneurs.

H3b: Highly educated entrepreneurs are more likely to engage in FDI than lower educated

entrepreneurs.

Chapter 3 53


3.6.2 Organizational characteristics

Firm age

This hypothesis is mainly based on the Process Theory (see paragraph 2.5.3) which states that

firms are more likely to expand their foreign activities once their current business activities have

generated such knowledge to them that it results in increased business opportunities. Since the

dataset gives no alternative possibilities for measuring the experience of the firm prior to the

choice for export or FDI, ‘age of the firm’ is one of the variables used as a proxy variable for

‘experience of the firm’. Because this process of knowledge accumulation and internationalization

in stages takes time, internationalization is expected to be more frequent among older firms. We

expect this relationship to be stronger for FDI than export as FDI means a higher commitment

level and the need of more resources.

H4: Older SMEs are more likely to be engaged in international activities.

H4a: Older SMEs are more likely to be engaged in export.

H4b: Older SMEs are more likely to be engaged in FDI.

Firm size

The hypotheses on firm size are mainly based on the OLI-Paradigm and the Resource-Based-

View (RBV). In several studies firm size is seen as one of the O-advantages (firm-specific

characteristics and capabilities of a firm which give the firm a competitive advantage relative to its

local competitors) of the OLI-Paradigm. For example, Kuo and Li (2003) and Hollenstein (2005)

both conclude that firm size (reflecting O-advantages) has a positive impact on FDI. In addition we

argue that the ability to gain and defend relevant resources to the firm is easier obtained when a

firm is larger, which is in line with the RBV.

H5: Larger SMEs are more likely to be engaged in international activities than smaller SMEs.

H5a: Larger SMEs are more likely to be engaged in export than smaller SMEs.

H5b: Larger SMEs are more likely to be engaged in FDI than smaller SMEs.

Human capital

SMEs are limited in terms of resources. One of the important factors in internationalization is the

competences that a firm holds. As a result, human capital is a crucial factor for smaller firms that

want to internationalize. Manalova et al. (2002) recognize the importance of human capital in the

firm. Hollenstein (2005) concludes that human capital, measured in several different ways, has a

positive effect on FDI. Knowledge and education levels of employees could also be considered as

another reflection of O-advantages (related to human capital) and a costly-to-copy resource. This

54 Chapter 3


is also the basis of the RVB and can influence whether (or not) a company goes international.

Therefore we assume in our hypotheses that firms with higher educated employees are more

likely to engage in internationalization, export or FDI than firms with lower educated employees.

H6: Firms with higher educated employees are more likely to engage in international activities

than firms lower educated employees.

H6a: Firms with higher educated employees are more likely to engage in export than firms lower

educated employees.

H6b: Firms with higher educated employees are more likely to engage in FDI than firms lower

educated employees.

Case example: The importance of educated employees

The company operates in the IT sector and develops custom-made business software. The company provides new solutions based on internet technology. Despite its young age the company is already internationalizing, it is present in Brazil in the form of foreign direct investment (subsidiary). The employees of the company are highly educated and experienced in their field of work. They contribute new ideas on a regular basis, which is an important source of innovation for this firm. A great amount of these new ideas are adopted and used. The manager of this company acknowledged that these innovations were the key success factors that made it possible to go abroad and be able to compete on distant and complex markets.

Case example: Innovation as the core business

This Dutch company was set-up eighty years ago and its core business is the development of new rose species. In 1989 this medium sized company was acquired by a bigger family business and at this point, the internationalization plan arose. The company saw opportunities and in 1994 they started their first subsidiary outside the Neteherlands, in South-Africa. After the startup of the subsidiary in South-Africa, more subsidiaries were opened: India, Colombia, Ecuador, Kenya. Apart from these subsidiaries, the company also worked with agencies in some other countries. The interviewee stated that ‘innovation is the lifeline of our company’. Innovation in this case is of incremental character, since no new products are created, just new and better versions of existing ones. ‘We mix species to make adjustments and improvements of color and shape. We improve transportability, disease-resistance and create non-perishable species’. In this case innovation is actually a core business of the firm; with the decentralized R&D department the company spends around 25% of its total revenue on innovation. When it comes to the relationship between internationalization and innovation, the interviewee admits that because of the diminishing domestic market the company was forced to go international to be able to exploit its competitive advantage through being innovative. At the same time the demand abroad differs from the domestic one and the company had to look for new solutions and new species mixes to satisfy the international clients, which implied more innovation.

Chapter 3 55


Innovation

Hypotheses on innovation are based on the assumption that innovative SME are more likely to

engage in internationalization because of the emergence of specialized global market niches and

the high costs of R&D. These innovative firms can only be successful by expanding to foreign markets

because selling exclusively on the domestic market would not cover the required investments.

There is empirical support for this prediction, although mainly from research conducted among

high technology firms (McDougall and Oviatt, 1996). In addition it is also argued that an innovation

can be a competitive advantage that opens opportunities for internationalization (Bloodgood et

al., 1996).

H7: Firms that innovated in the recent past are more likely to be engaged in international

activities than firms that did not innovate in this period.

H7a: Firms that innovated in the recent past are more likely to be engaged in export than firms

that did not innovate in this period.

H7b: Firms that innovated in the recent past are more likely to be engaged in FDI than firms that

did not innovate in this period.

‘Relationships are everything’Roger Ottenheym, Executive Director SoftBrasil (ISRP dataset)

Network

Based on the literature review (see paragraph 3.5) and from a Network Perspective point of

view (see chapter 2), it is hypothesized that export and FDI-levels will be higher for firms which

cooperate with other firms in some kind of network.

H8: SMEs engaged in cooperation with other firms are more likely to be engaged in international

activities.

H8a: SMEs engaged in cooperation with other firms are more likely to be engaged in export.

H8b: SMEs engaged in cooperation with other firms are more likely to be engaged in FDI.

Import

Based on the Process Theory (see chapter 2) we assume that companies that have generated

some experience in and knowledge of internationalization through import (earlier stages) are

more likely to engage in export or FDI.

H9: SMEs that import are more likely to be engaged in international activities.

H9a: SMEs that import are more likely to be engaged in export.

H9b: SMEs that import are more likely to be engaged in FDI.

56 Chapter 3


Export

Kuo and Li (2003) found that export has a positive effect on the likelihood that firms will eventually

engage in FDI. Based on this empirical evidence and the assumed experience a firm has gained

through exporting we are expecting a positive relation between export and the engagement in

FDI.

H10: Exporting SMEs are more likely to be engaged in FDI.

To conclude this paragraph on hypotheses the expected influence of each hypothesis is

summarized in table 3.1.

Table 3.1: Summary of expected influences

Independent variable Expected influence

Entrepreneur (founder/manager)characteristics Internationalization Export FDI

H1a/b Being a male entrepreneur (gender) + + +

H2a/b Age of entrepreneur + + +

H3a/b Education of entrepreneur + + +


H4a/b Firm age + + +

H5a/b Firm size + + +

H6a/b Education employees + + +

H7a/b Innovative SMEs + + +

H8a/b Foreign network + + +

H9a/b Importing SMEs + + +

H10 Exporting SMEs + + +

Chapter 3 57


3.7 Methodology and data

In order to answer the main research question three quantitative analyses were performed. For

the empirical analysis we have made use of the SME Policy Panel 2004 (2) dataset from the

Dutch research institute EIM Business and Policy Research (PANTEIA), Zoetermeer. We tested

the hypotheses formulated in paragraph 3.6.The dataset provided a limited number of variables,

which did not allow testing for the whole set of explanatory variables identified in paragraph 3.5 but

the data enabled us to test the relationship between a number of major explanatory variables.

3.7.1 Descriptive statistics

Dependent variables

The SME Policy Panel of 2004 (2) contains several questions regarding export and FDI. However

in order to examine the determinants of export and FDI, only one question for both (export and

FDI) is suitable to use as a dependent variable. For the dependent variable ‘internationalization’

we recoded ‘export’ and ‘FDI’ into one variable:

For export question vz24 of the questionnaire is used:

‘Does your company export goods (or/and) services to foreign countries?’ (dummy)

Internationalization Frequency Percent

1 = Yes 407 21.6 Minimum 0.00

0 = No 1,477 78.4 Maximum 1.00

Total 1,884 100 Mean 0.216

Std. Deviation 0.411

Export Frequency Percent

1=Yes 388 20.6 Minimum 0.00

0=No 1,474 78.2 Maximum 1.00

Total 1,862 98.8 Mean 0.20

Missing 22 1.2 Std. Deviation 0.40

Total 1,884 100

Table 3.2: Descriptive statistics dependent variable; ‘internationalization’

Table 3.3: Descriptive statistics dependent variable; ‘export’

58 Chapter 3


For FDI question vint01 of the questionnaire is used3 :

‘Has the firm been involved in FDI during the last 3 years?’ (dummy)

Independent variables

In table 3.5 the descriptive statistics of the independent and control variables used in this research

are given. The number of observations is shown, as well as the minimum and maximum value,

mean and standard deviations.

FDI Frequency Percent

1=Yes 64 3.4 Minimum 0.00

0=No 1,819 96.5 Maximum 1.00

Total 1,883 99.9 Mean 0.034


Total 1,884 100

Table 3.4: Descriptive statistics dependent variable; ‘FDI’

3 The variable ‘FDI’ included one ‘don’t know’ answer, which (by recoding) has been classified as missing, in order to

leave this out of the analyses.

Variable Description Question4 N Min. Max. Mean Std.D. Hypothese

Entrepreneur (founder/manager) characteristicsGender Are you male? vgesl 1,884 0 1 0.85 0.35 H1 a/b

Age of entrepreneur How old are you? vz56 1,879 18 92 46.98 9.48 H2 a/bEducation of entrepreneur Are you highly educated? vz57 1,879 0 1 0.56 0.50 H3 a/b

Organizational characteristicsFirm age How old is the company? vz61 1,883 0 324 24.24 28.07 H4 a/b

Firm size How many employees does the company have? wp 1,422 1 260 26.28 32.93 H5 a/b

Education employees

% of the employees are low educated? vz60_1 1,406 0 100 36.62 34.77 H6 a/b

% of the employees are highly educated? vz60_3 1,407 0 100 22.52 28.00 H6 a/b

Innovative SMEs

Product innovation

Has the firm introduced any new products/services? va01 1,882 0 1 0.39 0.49 H7 a/b

Process innovation

Has the firm introduced anyimprovements in its internalprocesses?

va05 1,881 0 1 0.69 0.46 H7 a/b

Network Has the firm had anycooperation with other firms? vint02a 1,884 0 1 0.25 0.50 H8 a/b

Import Does the firm import goods or services? vz27 1,860 0 1 0.26 0.44 H9 a/b

Export Does the firm export goods or services? vz24 1,862 0 1 0.21 0.41 H10

Sector Manufacturing and Construction sector 1,884 0 1 0.24 0.43

TradeTransport

sectorsector

1,8841,884

00

11

0.190.90

0.390.29

Lodging and Other Services sector 1,884 0 1 0.18 0.38Financial and Business Services sector 1,884 0 1 0.30 0.46

Chapter 3 59


Variable Description Question4 N Min. Max. Mean Std.D. Hypothese

Entrepreneur (founder/manager) characteristicsGender Are you male? vgesl 1,884 0 1 0.85 0.35 H1 a/b

Age of entrepreneur How old are you? vz56 1,879 18 92 46.98 9.48 H2 a/bEducation of entrepreneur Are you highly educated? vz57 1,879 0 1 0.56 0.50 H3 a/b

Organizational characteristicsFirm age How old is the company? vz61 1,883 0 324 24.24 28.07 H4 a/b

Firm size How many employees does the company have? wp 1,422 1 260 26.28 32.93 H5 a/b

Education employees

% of the employees are low educated? vz60_1 1,406 0 100 36.62 34.77 H6 a/b

% of the employees are highly educated? vz60_3 1,407 0 100 22.52 28.00 H6 a/b

Innovative SMEs

Product innovation

Has the firm introduced any new products/services? va01 1,882 0 1 0.39 0.49 H7 a/b

Process innovation

Has the firm introduced anyimprovements in its internalprocesses?

va05 1,881 0 1 0.69 0.46 H7 a/b

Network Has the firm had anycooperation with other firms? vint02a 1,884 0 1 0.25 0.50 H8 a/b

Import Does the firm import goods or services? vz27 1,860 0 1 0.26 0.44 H9 a/b

Export Does the firm export goods or services? vz24 1,862 0 1 0.21 0.41 H10

Sector Manufacturing and Construction sector 1,884 0 1 0.24 0.43

TradeTransport

sectorsector

1,8841,884

00

11

0.190.90

0.390.29

Lodging and Other Services sector 1,884 0 1 0.18 0.38Financial and Business Services sector 1,884 0 1 0.30 0.46

Table 3.5: Descriptive statistics independent variables

4 Question X of the questionnaire (for the questionnaire see the appendix).

60 Chapter 3


Entrepreneur (founder/manager) characteristics

Gender

Out of the 1,884 respondents 85.3% were male and 14.7 % female. This variable is used for

testing hypotheses H1, H1a and H1b.

Age of Entrepreneur

In the questionnaire the respondent is asked a date of birth. For easier interpretation we computed

this variable into ‘age of the entrepreneur’ (date of birth minus 2004).

Education of entrepreneur

In order to perform a better regression analysis the answer to the question ‘what is the level of

your highest graduated education’ is recoded into two dummy variables; ‘high education’ and ‘low

education’. This is due to the fact that using more categories can give disturbing outcomes.


Age of the firm

For easier interpretation, we recoded the question ‘In which year was the company founded?’ into

‘age of the firm’ by computing 2004 minus the startup year.

Firm size

There are different possibilities for the measurement of firm size, like ‘the number of employees’

and ‘firm turnover’. Based on other studies the choice is made to use the ‘the number of employees’

as a measure for firm size (see for example Hollenstein, 2005, or Lu and Beamish, 2006). The

question on the number of employees has been recoded into firm size. The ‘don’t know’ answer,

which was given one time, has been classified as missing in order to remove this from the analysis.

To get rid of any outliers we left out one observation of 550 employees.

Education of employees

In the questionnaire the respondent is asked the percentage of the employees that either have a:

low education level, middle education level or high education level. In order to test hypothesis

6 the questions for high and low education are included in the analyses. Both analyses were

recoded in order to leave the ‘don’t know’ answer out of the analysis.

Chapter 3 61


Innovation

Innovativeness of the firm is measured in the questionnaire through a question on product

innovation and a question on process innovation. The choice is made to not merge these variables

into one single variable but include both variables into the regression so that there will be no

unnecessary loss of information.

Network

As proposed in the literature, the variable ‘network’ should optimally have been measured as a

continuous variable (for example, number of partner firms, or number of cooperative agreements).

Unfortunately, the dataset enabled only the use of a dummy variable. Therefore, the hypotheses

have been adjusted to this fact.

Import and export

The questions on import and export are both included in the regression. In both variables the

answer ‘don’t know’ has been left out by recoding it into missing.

Sector

Eight different sectors were included in the original dataset. We have chosen to convert these

eight different sectors into five sectors, since too many dummies disturbed the regression. From

these five, one is excluded from the regression for proper interpretation of the others and for the

hazard of perfect collinearity.

Observations and multicollinearity

The dataset consists of 1,884 Dutch SMEs. The descriptions of the variables were given earlier in

table 3.5. A noteworthy aspect of this sample is the relative small size of firms involved in FDI. Only

64 out of 1,884 firms performed FDI against 388 firms out of 1,884 that export. As described earlier

some variables in the dataset included answers like ‘don’t know’ or ‘refused’. These answers have

been classified as missing, in order to leave them out of the analysis. To control for multicollinearity

we performed an analysis on correlation between the variables. The results are depicted on the

next page. From this table it can be deducted that there are no problems with multicollinearity,

assuming that the Pearson correlation indicator needs to be lower than 0.5. However, since the

regression is binary logistic, a correlation matrix could give disturbed indications. To overcome this

dilemma the tolerance and Variance Inflation Factor (VIF) have been performed. These results

are also not proposing problems with multicollinearity since the outcomes on tolerance are higher

than 0.2 and on VIF are below 5.

62 Chapter 3


1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

1 Gender 1

2 Age of entrepreneur -0.108 1

3 Education of entrepreneur -0.076 0.052 1

4 Firm age -0.098 0.166 0.067 1

5 Firm size -0.149 0.056 0.194 0.295 1

6 % of the employees are low educated? 0.012 0.025 -0.185 0.123 0.154 1

7 % of the employees are high educated? -0.082 0.020 0.336 -0.092 -0.019 -0.492 1

8 Product innovation -0.058 -0.031 0.184 0.037 0.194 -0.122 0.176 1

9 Process innovation -0.151 -0.043 0.158 0.134 0.286 -0.034 0.066 0.257 1

10 Network -0.092 -0.048 0.135 -0.014 0.097 -0.086 0.173 0.188 0.136 1

11 Import -0.100 0.015 0.046 0.010 0.079 0.038 -0.013 0.192 0.127 0.064 1

12 Export -0.103 0.047 0.126 0.000 0.097 0.003 0.085 0.272 0.128 0.143 0.476 1

13 Manufacturing and Construction -0.044 0.010 -0.063 0.110 0.036 0.199 -0.162 -0.025 0.009 0.008 0.120 0.117 1

14 Financial and Business Services -0.070 0.016 0.266 -0.052 0.023 -0.321 0.389 0.090 0.039 0.121 -0.174 -0.035 -0.369 1

15 Transport -0.015 -0.014 -0.033 -0.005 0.100 0.144 -0.094 -0.038 0.055 0.077 -0.047 0.063 -0.176 -0.206 1

16 Lodging and Other Services 0.133 -0.008 -0.102 -0.011 -0.054 0.054 -0.099 -0.062 -0.036 -0.128 -0.123 -0.169 -0.261 -0.305 -0.146 1

17 Trade 0.011 -0.012 -0.119 -0.045 -0.086 -0.006 -0.106 0.010 -0.059 -0.082 0.227 0.032 -0.274 -0.320 -0.153 -0.226 1

Table 3.6: Correlation matrix

Chapter 3 63


1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

1 Gender 1

2 Age of entrepreneur -0.108 1

3 Education of entrepreneur -0.076 0.052 1

4 Firm age -0.098 0.166 0.067 1

5 Firm size -0.149 0.056 0.194 0.295 1

6 % of the employees are low educated? 0.012 0.025 -0.185 0.123 0.154 1

7 % of the employees are high educated? -0.082 0.020 0.336 -0.092 -0.019 -0.492 1

8 Product innovation -0.058 -0.031 0.184 0.037 0.194 -0.122 0.176 1

9 Process innovation -0.151 -0.043 0.158 0.134 0.286 -0.034 0.066 0.257 1

10 Network -0.092 -0.048 0.135 -0.014 0.097 -0.086 0.173 0.188 0.136 1

11 Import -0.100 0.015 0.046 0.010 0.079 0.038 -0.013 0.192 0.127 0.064 1

12 Export -0.103 0.047 0.126 0.000 0.097 0.003 0.085 0.272 0.128 0.143 0.476 1

13 Manufacturing and Construction -0.044 0.010 -0.063 0.110 0.036 0.199 -0.162 -0.025 0.009 0.008 0.120 0.117 1

14 Financial and Business Services -0.070 0.016 0.266 -0.052 0.023 -0.321 0.389 0.090 0.039 0.121 -0.174 -0.035 -0.369 1

15 Transport -0.015 -0.014 -0.033 -0.005 0.100 0.144 -0.094 -0.038 0.055 0.077 -0.047 0.063 -0.176 -0.206 1

16 Lodging and Other Services 0.133 -0.008 -0.102 -0.011 -0.054 0.054 -0.099 -0.062 -0.036 -0.128 -0.123 -0.169 -0.261 -0.305 -0.146 1

17 Trade 0.011 -0.012 -0.119 -0.045 -0.086 -0.006 -0.106 0.010 -0.059 -0.082 0.227 0.032 -0.274 -0.320 -0.153 -0.226 1

64 Chapter 3


3.8 Research method

The first regression investigated the factors determining the likelihood that a SME exports and

the second regression the factors determining the likelihood that a SME engages in FDI. For

both analyses a ‘binary logit regression’ was used, which is based on the ‘Binary logit model’. The

difference with a regular linear regression is in the interpretation of the outcomes. In an ordinary

linear regression a continuous variable is explained while in a binary logit model the probability that

a binary variable equals 1 (with values 0 and 1) is explained with a set of explanatory variables.

Collinearity Statistics Export FDI

Tolerance VIF Tolerance VIF

Gender 0.948 1.055 0.946 1.057

Age of entrepreneur 0.955 1.047 0.953 1.049

Education of entrepreneur 0.807 1.239 0.807 1.239

Firm age 0.888 1.126 0.886 1.128

Firm size 0.790 1.266 0.790 1.266

Education employees

% of the employees are low educated? 0.693 1.443 0.693 1.444

% of the employees are high educated? 0.636 1.572 0.634 1.577

Innovative SMEs

Product innovation 0.848 1.179 0.819 1.221

Process innovation 0.865 1.156 0.865 1.156

Network 0.901 1.110 0.897 1.114

Import 0.857 1.167 0.673 1.487

Export 0.665 1.504

Sector

Manufactering and Construction 0.564 1.772 0.553 1.809

Financial and Business Services 0.472 2.119 0.471 2.124

Transport 0.689 1.452 0.677 1.477

Trade 0.602 1.661 0.600 1.487

Lodging and Other Services 0.619 1.614 0.620 1.612

Table 3.7: Collinearity statistics

Chapter 3 65


Table 3.8: Outcomes binary logit regressions

Note: *, **, and *** represent significance levels of 0.10, 0.05, and 0.01, respectively.

Variable Description Internat. Export FDI

coeff. std. err. coeff. std. err. coeff. std. err.

Entrepreneur (founder/manager) characteristicsGender Male or female? 0.522 0.303 0.494 0.312 1.561 1.033Age of entrepreneur How old are you? 0.150* 0.009 0.015* 0.009 0.004 0.016Education of entrepreneur Are you highly educated? 0.230 0.181 0.191 0.186 0.689* 0.373

Organizational characteristicsFirm age How old is the company? -0.006* 0.003 -0.005 0.003 -0.014** 0.007

Firm size How many employees does the company have? 0.001 0.002 0.000 0.003 0.010*** 0.004

Education employees% of the employees are low educated? 0.001 0.003 0.002 0.003 -0.006 0.006

% of the employees are highly educated? 0.006* 0.004 0.007** 0.004 0.000 0.006

Innovative SMEs

Product innovatie Has the firm introduced any new products/services? 0.981*** 0.167 1.080*** 0.172 0.318 0.327

Process innovatieHas the firm introduced any improvements in its internal processes?

0.237 0.220 0.256 0.227 0.053 0.449

NetworkHas the firm had any cooperation with other firms?

0.404** 0.165 0.374** 0.170 0.658** 0.328

Import Does the firm import goods or services? 2.490*** 0.174 2.580*** 0.178 0.654* 0.350

Export Does the firm export goods or services? 1.530*** 0.364

SectorManufactering and Construction 1.040*** 0.231 1.100*** 0.236 0.192 0.456

Transport 1.430*** 0.307 1.450*** 0.315 0.908* 0.534Lodging and Other Services -0.710** 0.332 -0.670** 0.341 -0.668 0.816Financial and Business Services 0.457* 0.253 0.442* 0.260 0.449 0.460

Internationalization Export FDI

Number of observations 1,370 1,370 1,369

Cox & Snell R Square 0.294 0.297 0.075

Nagelkerke R Square 0.438 0.451 0.251

LR statistic 476.059 (x², 15df.) 483.327 (x², 15df.) 106.636 (x², 16df.)

66 Chapter 3


3.9 Analysis

In the table 3.8 the outcomes of the binary logit regressions on internationalization, export and

FDI are presented.

3.9.1 Results

This paragraph will shortly discuss the results for the tested hypotheses.

H1a/b: Despite the barriers a female entrepreneur is supposed to encounter there is no evidence

found on the relationship between gender and internationalization (for both export and FDI).

H2a/b: The second hypothesis on the age of the entrepreneur is accepted for internationalization

and export. The regression shows a small significant effect on the likelihood that older entrepreneurs

go international and become an exporting firm. It could be that our given argumentation that older

entrepreneurs have more experience and have greater social and business networks, for this

hypothesis, was interpreted correctly. However, because the engagement in FDI is related to a

higher resource commitment, we argue that more experience and a greater social and business

network are needed, however the hypotheses on older entrepreneurs in relation to FDI were

not proven. An explanation can be that older entrepreneurs are more bounded to their home

market and have psychological barriers to enter foreign countries through FDI. They can see

internationalization as; ‘too risky’, ‘not our job’, ‘too much trouble’, and so on (Hamill and Gregory,

1997). It can be that younger entrepreneurs on the contrary are more ‘open minded’, opportunity

seeking and risk taking, since they have less to lose, are eager to grow and are born in the global

economy of today’s world. It is also possible to that the age of the entrepreneur does not influence

the likelihood to engage in FDI.

H3a/b: The hypothesis on the education level of the entrepreneur was accepted for FDI but not

for internationalization and export. The results on internationalization and export conflict with

our expectation that entrepreneurs with a higher level of education have a higher chance to be

involved with internationalization or exporting. The hypothesis on FDI (H3b) is accepted and

can be explained by the more complex issues that arise when engaging in FDI in comparison

to export. These complex issues can be better handled by educated entrepreneurs, since their

problem-solving skills are assumed to be higher.

H4a/b: Surprisingly the regression is pointing out a significant negative relation between older

firms and the likelihood of engaging in international activities and FDI, thereby rejecting the

proposed hypotheses. A possible explanation can be that because older firms have made profits

Chapter 3 67


for years in their home market they are more bounded to this market and have no incentives to

internationalize.

H5a/b: The relationship between FDI and size has been accepted with a strong positive

significance. This is supporting the assumption that for FDI size is more important than for export.

This outcome underlines that firm size can be one of the factors (O-advantages) that gives the

firm a competitive advantage relative to its local competitors.

H6a/b: The regression is indicating that firms with highly educated employees have a higher

chance of engaging in international activities and exporting. Therefore the hypotheses on

internationalization and export has been accepted. For FDI no relation has been found between

high or low educated employees and the likelihood to engage in FDI.

H7a/b: The hypotheses on internationalization and export are partly accepted depending on the

kind of innovation (product or process). The relation with product innovation has been accepted,

however, the one on process innovation has not been proven. This outcome appears to be logical

given that SMEs that have innovative products are better able to compete on the global market

than SMEs with regular existing products. Process innovation can lead to, for example, cost

reduction but does not add something substantial that can be exported as easily as a product. On

FDI the hypothesis has not been proven. An argument can be that firms that are investing abroad

are not doing this because they are innovative but because they seek cost reduction through

for example lower labor costs. Another argument can be that it is due to the different ways of

measuring innovation. For example, this study did not measure yearly R&D spending, which could

have lead to altered results.

H8a/b: The Network Perspective has received relatively strong support from a number of empirical

studies, which concluded that export and FDI are more likely to occur in firms which have strong

relationships with network partners (Hollenstein, 2005; Kuo and Li, 2003). This research provides

additional support since all hypotheses on cooperation with other firms are accepted.

H9a/b and H10: There seems to be evidence that supports the relation between previous

experience with internationalization and the engagement in export or FDI since hypotheses H9,

H9a, H9b and H10 have all been accepted.

Below an overview of the results is presented (table 3.9).

68 Chapter 3


Table 3.9: Empirical results

Note: The hypotheses are accepted if the significant level is 10% or less.

Hypothesis Description Internationa- lization Export FDI

H1Male entrepreneurs are more likely to engage in; international activities/export/FDI than female entrepreneurs.

Not proven Not proven Not proven

H2Older entrepreneurs are more likely to be involved in; international activities/export/FDI than younger entrepreneurs.

Accepted Accepted Not proven

H3

High educated entrepreneurs are more likely to engage in; international activities/export/FDI than lower educated entrepreneurs.

Not proven Not proven Accepted

H4 Older SMEs are more likely to be engaged in; international activities/export/FDI. Rejected Not proven Rejected

H5Larger SMEs are more likely to be engaged in; international activities/export/FDI than smaller SMEs.

Not proven Not proven Accepted

H6

Firms with higher educated employees are more likely to engage in; international activities/export/FDI than firms with lower educated employees.

Accepted Accepted Not proven

H7

Firms that innovated in the recent past are more likely to be engaged in; international activities/export/FDI than firms that did not innovate in this period.

Accepted5 Accepted6 Not proven

H8SMEs engaged in cooperation with other firms are more likely to be engaged in; international activities/export/FDI.

Accepted Accepted Accepted

H9SMEs that import are more likely to be engaged in; international activities/export/FDI.

Accepted Accepted Accepted

H10 Exporting SMEs are more likely to be engaged in FDI. - - Accepted

5,6 Partly accepted; only on product and not on process innovation.

Chapter 3 69


3.10 Conclusions

The aim of this chapter was to investigate what factors are influencing the internationalization of

Dutch SMEs. With the knowledge derived from chapter 2, the decision is made to categorize these

factors into internal and external. Due to the limitations of the dataset only the internal factors

are empirically investigated. The internal factors have been divided into the characteristics of the

entrepreneur and characteristics of the organization.

It was found that organizational characteristics appear to have a large influence on the likelihood

for Dutch SMEs to engage in internationalization, since fourteen out of the nineteen proposed

relations were found to be significant (twelve positive and two negative).

On the entrepreneurial characteristics it is hard to derive any conclusions because the amount

of variables available for testing this relationship was limited (gender, age, and education). For

example, the perception of the entrepreneur could not be tested. However we argue that the

results indicate that the entrepreneur at least has some influence on the likelihood of engaging in

international activities given that significant relationships were found.

With respect to the OLI-Paradigm, it is argued that of the internal factors, firm size is likely to

have the strongest explanatory power for predicting engagement in FDI. This was supported by

several empirical studies (Hollenstein, 2005; Kuo and Li, 2003). If these findings are compared

to the results from this present study, it can be concluded that firm size has indeed a positive

effect on FDI involvement. Thus, with respect to the effect of firm size on FDI, the results for Swiss

(Hollenstein, 2005) and Taiwanese (Kuo and Li, 2003) SMEs have been found similar to Dutch

SMEs.

When comparing the results of export and FDI one can see that network activity and previous

experience with internationalization appears to be influencing the likelihood to engage in both

export and FDI. The difference between export and FDI seems to lie in education, innovation

and firm size. Education seems to matter for both internationalization modes. However for export

it is the education level of the employees that influences the likelihood to engage in export and

for FDI it is the education level of the entrepreneur himself. The results also indicate that product

innovation only matters for exporting firms and firm size only for the engagement in FDI.

70 Chapter 3


3.10.1 Limitations

Although this study tries to provide evidence for several factors that influence the likelihood of

engagement in international activities, there are still some limitations which can be contributed to

several factors:

• Few companies in the dataset engage in FDI;

• The information in the dataset did not enable longitudinal analysis;

• The dataset enabled only a small number of continuous variables to be tested;

• In the dataset, no subdivision was made between different forms of FDI.

Despite these limitations, significantly positive effects have been found for the age and education

of the entrepreneur, age and size of the firm, the education of the employees, product innovation,

network activities (cooperation with other firms) and import and exporting on the likelihood that

Dutch SMEs will expand to foreign markets. This chapter should therefore best be viewed as

an initial impression of internationalization determinants for Dutch SMEs. Future research is

necessary to fill the numerous gaps on the current knowledge of the subject.

3.11 Policy implications

A policy implication that can be deducted from this research to stimulate internationalization is that

the Dutch government should stimulate firms to come up with new products or services (innovate)

and make it possible and motivate people to receive proper education. The reason behind this

is that creating new products or services and the education of employees and entrepreneurs all

seem to have a positive influence on international involvement.

Chapter 4 71

‘Bring something new abroad or stay at home’Joost Zondervan, Executive Director Huisman do Brasil (ISRP dataset)

4.1 Introduction

As seen in chapter 3, innovation can be a factor that influences the likelihood to engage in

internationalization. However, the influence of innovation goes beyond the initial steps of

internationalization. The innovation based models of chapter 2, ‘Internationalization’, describe

this influence of innovation. The transition between stages (i.e. from export to FDI) in the

internationalization process is seen as an innovation. In this chapter the relationship between

innovation and the process of internationalization is described and investigated for both FDI and

export using data from the EIM policy panel and ISRP dataset.

4.1.1 Structure

This chapter starts with a motivation and introduction to innovation. This is followed by the

difference between innovation in MNEs and SMEs. Next we elaborate on the difference between

innovation & FDI and innovation & export. Existing theories are described and molded into a

model. Several hypotheses are formulated and the research samples are described. There are

descriptive statistics shown as well as quantitative and qualitative analyses, including a discussion

of the results. The chapter ends with conclusions and policy implications.

4.1.2 Motivation

Societal

Innovation causes change, or as Schumpeter (1934) states ‘creative destruction’. The act of

innovation not only causes change but can also cause progression. Progression in the form

4Innovation and internationalization

72 Chapter 4

Innovation and internationalization

of growth, like economic growth or growth of the firm, causes positive effects. Increasing the

knowledge in the field of innovation is therefore needed to be able to understand better how firms

or economies are able to progress. In this book we combine innovation with internationalization

because it is assumed that a positive link exists, nevertheless this link should be investigated

further.

Scientific

On a scientific level research has been done on innovation and internationalization (Hessels,

2006; Filipescu, 2006; Lefebvre and Lefebvre, 2002) but research similar to this study on a circular

relationship between innovation and FDI with regard to SMEs was not found. There was research

done on the circular relationship between innovation and export; this was also taken into account

in this study to see whether the results from this study differ from existing literature.

4.1.3 Research questions

This chapter is meant to get a better understanding of the influence of innovation in the

internationalization process. To facilitate this thinking process we have formulated the following

research questions:

• What is the influence of innovation on FDI/export in the internationalization process?

• What is the influence of FDI/export on innovation in the internationalization process?

4.2 The concept of innovation

In studies by Acs (1996), Rothwell (1989), Audretsch and Thurik (2000), and Audretsch (2002),

the role of smaller firms in realizing technological innovations is significant. SMEs have a clear

influence in shaping a nation’s innovation and competitiveness.

4.2.1 Definition of innovation

One very clear and straightforward definition of innovation was given by Schumpeter (1934).

Innovation is:

• The introduction of a new good - that is one with which consumers are not yet familiar - or

of a new quality of a good;

• The introduction of a new method of production, which needs by no means be founded upon

a scientifically new discovery, and can also exist in a new way of handling a commodity

commercially;

• The opening of a new market, that is a market into which the particular branch of manufacture

Chapter 4 73


of the country in question has not previously entered, whether or not this market has existed

before;

• The conquest of a new source of supply of raw materials or half-manufactured goods, again

irrespective of whether this source already exists or whether it has first to be created;

• The carrying out of the new organization of any industry, like the creation of a monopoly

position (for example through trustification) or the breaking up of a monopoly position.

From a more macro perspective Acs et al. (2001) define innovation as the effort to create purposeful,

focused change in an enterprise’s economic or social potential. In the traditional sense firms were

considered technologically innovative if they were involved in R&D activities through laboratories

or had specific units dedicated to the investigation and development of new processes and

products. Molero et al. (1998) have a different perspective on technologically innovative firms.

They state that these are characterized by activities, on a regular basis, formal or informal, to

either create new product and process technologies or to improve existing ones, with the goal to

increase competitive advantages in existing markets or open new markets to support the growth

of the firm.

Definitions internationalization and innovation

More directed towards internationalization Molero et al. (1998) state that a definition on innovation

should include the concession of technical assistance to foreign firms, exportation, the concession

of licenses that allow the exploitation of assets, the participation in joint ventures and FDI in

commercial and productive subsidiaries.

Lall (1980) uses a similar definition where he argues that the level of internationalization depends

on the combination of monopoly advantages with the manner of implication (in foreign markets).

Many SMEs do not internationalize based on monopoly advantages but nonetheless this definition

is useable.

Since innovation is all about the development and improvement of firms’ products and services

and introducing new ways of doing business (Nelson and Winter, 1982), internationalization is

the new entry mode into foreign markets, which can be regarded as an innovative act of the firm

(Schumpeter, 1939; Simmonds and Smith, 1968; Casson, 2000).

To conclude, innovation can be used to enter foreign markets, but entering foreign markets itself

can also be seen as an innovative act. In this book the focus is mainly on using innovation as a

tool for entering foreign markets.

74 Chapter 4


4.2.2 Innovation forms

As mentioned in the definitions above, innovation can take different forms, namely: product

innovation, process innovation and market innovation. In these forms a distinction can be made

between radical and incremental innovations. A distinction is also made between technical and

administrative innovation. The different forms have different applications in internationalization,

these are discussed:

Product innovation

Product innovations can be used as a tool for firms to target new international markets. An

improved, modified or new product can lead to a competitive advantage in foreign markets. Firms

should however not forget that these advantages are temporary (Van Dijken and Prince, 1997).

Process innovation

With the goal to reduce costs or to increase the speed of the production process, firms can aim at

improving or renewing business processes to adapt or innovate products (Van Dijken and Prince,

1997). The acquisition of new process technology may motivate enterprises to review or revise

their strategic direction and market focus (Bell et al., 2004). As a result, firms can direct focus

towards undertaking international business activities or increase their involvement in international

activities.

Market innovation

When a firm decides to undertake international activities it is entering new country markets. It may

therefore be described as a process of innovation in the opinion of Andersen (1993) and Casson

(2000). When measuring innovativeness as a process, international new ventures have been

described as highly innovative because of their earlier market innovation strategy (Oviatt and

McDougall, 1994; Knight and Cavusgil, 2004).

Radical and incremental innovation

Radical innovations are discontinuous events as the result of an investment in research

and development (Freeman and Perez, 1988). Incremental innovations are adjustments or

enhancements to existing products, processes or markets as the result of experience. In many

cases incremental innovations are linked to a radical innovation. Freeman and Perez (1988)

state that even though incremental innovations are often underestimated, they are crucial for

firms’ productivity growth. Radical and incremental innovations can concern both products and

processes.

Chapter 4 75


Technical and administrative innovation

Some studies investigating the influence of innovation on company performance focus on

one type of innovation; technical or administrative. The main difference between technical and

administrative innovation is that:

‘Technical innovations pertain to products, services, and production process technology;

they are related to basic work activities and can concern either product or process. (…)

Administrative innovations involve organizational structure and administrative processes;

they are indirectly related to the basic work activities of an organization and are more directly

related to its management.’ (Damanpour, 1991, p.560).

Damanpour and Evans (1984) speculate that even though administrative types of innovation are

not as frequent as the technical innovations, the impact which they have on organizations can

be just as important. In the study of Han et al. (1996), the authors have found support for the

statement that technical and administrative innovations have a positive and direct impact on the

performance of the organization.

Innovation and the environment

Snow and Hrebiniak (1980) discovered that the environment in which companies operate has

an effect on the relationship between innovation and the performance of the company. Research

by Subramanian and Nilakanta (1996), propose that there is a relationship between ways of

measuring performance and different types of innovation. The twofold of innovation; administrative

and technical, suggest that both of these types of innovation will lead to improvements in different

types of performance measurements. Administrative innovation should have a positive influence

on the company efficiency. On the other hand the technical innovation should make the company

more competitive on the market leading to higher levels of company effectiveness.

4.2.3 SMEs vs. MNEs on innovation

Innovation is as important to small enterprises as it is to large firms (Van de Graaff and De

Jong, 2004). Innovation can take place in different ways for SMEs than for MNEs (Rothwell, 1991;

Rothwell and Dodgson, 1994; Hadjimanolis, 2000). When conducting R&D, SMEs traditionally have

more limited resources (Rothwell and Dodgson, 1994). However, formalization of innovation also

occurs less in smaller firms. Taking for example product innovation, many SMEs do not innovate

products through formal strategy or through a structured process (see e.g. Acs and Audretsch,

1990). An advantage SMEs have over larger firms is their (internal) flexibility. They can stay away

from bureaucracy and the likes. SMEs respond quicker to changing market requirements than

larger firms. As a result of their flexibility SMEs can adapt more easily to the specialized demand

76 Chapter 4


of niche markets and individual customers and can develop new product-market combinations in

successful ways. Acs and Preseton (1997) argue that smaller firms are better at creating radical

innovations (See Cohen and Klepper, 1996 for similar results). Advantages such as internal

flexibility and responsiveness are behavioral advantages of the SME and they can be the key

to success for SMEs that both innovate and internationalize. Learning about these differences

reminds us that innovation should also be measured differently for SMEs than for MNEs.

Measuring innovation in SMEs

As stated in the previous paragraph, SMEs are different from MNEs when it comes to innovation.

SMEs do not always have an R&D department (less formalization), nor do they always invest in

R&D in order to innovate (Filipescu, 2006). In a study by Hessels (2006) indicators were used like

the recent introduction of new products or services, the recent introduction of new or improved

internal business processes, and inter-firm cooperation.

Lefebvre and Lefebvre (1998) as well as Becchetti and Rossi (1998) concluded that R&D intensity

has no significant effect on export dynamism. However both found that other determinants such

as percentage of highly skilled employees and R&D collaboration agreements do have a positive

impact on the export activity. The above mentioned studies state that R&D intensity is not the most

suitable measurement of innovation; instead output measurements could be more valuable.

4.2.4 Innovation and different modes of internationalization

Numerous scientists, engaged in investigating the relationship between innovation and

internationalization, showed results supporting a positive relationship. Brouwer and Kleinknecht

(1993) for instance supported a positive relationship in their empirical research. They did however

emphasize that product innovation rather than process innovation is important for economic trade

performance. The findings from their research also proved that international cooperative R&D

agreements have a positive influence on firms’ export performance and on company profits.

The relationship between innovation and internationalization of SMEs has been investigated in a

number of studies (e.g. Lefebvre and Lefebvre, 2002). Many of these studies only focus on export,

where FDI has been often left out. In this study the focus is on both export and FDI; outward

directed internationalization. Export is also chosen to compare to FDI.

Innovation and export

The aspect of the relationship between innovation and export activity was addressed in various

studies. Over the years two main theories were proposed considering the relationship. One of

them proposed by Wakelin (1997) and Roper and Love (2002) is the neo-endowment theory

Chapter 4 77


which deals with specialization of endowments factors such as capital equipments, human capital,

materials and knowledge. The theoretical concept, the ‘neo-technology’ theory was proposed by

Greenhalgh (1990) in which she states that industries with a record of high levels of innovation will

be net exporters whilst non-innovators will be more likely to be net importers.

Back in 1985, when the global economy was slightly different from the current global economy,

Hirsch and Bijaoui (1985) found a link between R&D activities and the likelihood for firms that

undertake these activities to be exporters (compared to other firms in the industry). Kleinknecht and

Oostendorp (2002) similarly showed that R&D intensity significantly influences the probability that

a firm will be an exporter. These results indicate that there is an advantage for innovative firms to

engage in export, for example because innovation may improve the international competitiveness

of an enterprise (see e.g. Wakelin, 1997; Sterlacchini, 1999; Roper and Love, 2002; Karagozoglu

and Lindell, 1998). Another good argument is that the market potential for an innovative firm and

its products may be wider than in the case of less innovative firms (Autio et al., 2000). This can be

used as an argument to why innovations in firms may result in (more) international involvement.

Several empirical studies have been paying attention to the link between export and innovation;

these studies mostly focused on the US, the UK and Japan (e.g. Gruber et al., 1967; Baldwin,

1971; Lowinger, 1975; Stern and Maskus, 1981; Hughes, 1986; Vestal, 1989). Similar to the

investigations done by Hessels (2006) they found significant positive effects of R&D efforts on

trade. Even in firm-level studies it was found that technological orientation of firms is linked to

their export behaviors when taking into account innovative investments as well as innovative

realizations and practices.

Various other researchers have proved a positive relation between innovation and exports. For

instance, results from Basile’s (2001) empirical study on Italian companies revealed that firms

which introduce innovation in process and/or product form while engaging in R&D activity or by

investing in new capital equipment are more likely to export. Kumar and Siddhartan (1994) also

studied Italian firms and found that in low and medium technology industries R&D expenditure

is a very important factor. Moreover, export activity was increasing along with firm size until a

certain size (upper threshold) and was then declining. Companies which are initiators, creators

or are the first one to introduce new products or technologies, often accomplish greater financial

performance (Lengnick-Hall, 1992). As initiators they can aim at premium markets and charge

respectively high prices, have a control over access to the market through distribution channels,

and set-up their products as the standard ones (Zahra and Covin, 1995).

78 Chapter 4


Hessels (2006) investigated the impact of innovation on international involvement and revealed

that when firms invested in innovation in 2003 this had a significant positive impact on the firms’

international involvement in the year 2004. First, it was investigated whether innovation has a

positive impact on international involvement. The results of this study reveal that when firms

invested money in innovation in 2003, it had a significant positive impact on their international

involvement in 2004. The study also looked more specifically at innovation realizations or practices

and found that several measures for innovation had a significant positive effect on international

involvement. It was found that when SMEs had product innovations they would be more likely to be

involved in international trading activities than other SMEs. These international trading activities

are mostly directed towards export, more specifically export behavior and a firm’s export intensity

(e.g. Karagozoglu and Lindell, 1998; Lefebvre and Lefebvre, 2002).

Innovation and FDI

Many of the arguments and studies above are also applicable to FDI, mostly because they do

not focus on the specific characteristics of export but more on the advantages of innovation and

internationalization in general, using export as the most common mode of internationalization.

Studies directed specifically towards innovation and FDI for SMEs are very scarce. Hollenstein

(2005), Kuo and Li (2003), and Luostarinen and Gabrielsson (2006) did find R&D intensity

positively related to FDI while Bloodgood et al. (1996) argue that an innovation can be a competitive

advantage that opens opportunities for internationalization. Both of these studies are too broad to

say anything specific about SMEs, FDI and innovation.

4.2.5 Theoretical framework

Based on a process approach, some authors have built internationalization models from the

perspective of the internationalization process as an innovation (see Bilkey and Tesar, 1977;

Cavusgil, 1980; Czinkota, 1982; Reid, 1981). These models are based on stages in the adoption

process developed by Rogers (1962) and accentuate the firm’s learning sequence related to the

adoption of an innovation. This gradual adopting process results from the impact of internal and

external uncertainties concerning internationalization decision-making. Internal uncertainty arises

due to the lack of knowledge of and experience in international business operations. External

uncertainties are more related to the lack of specific information on foreign markets and business

cultures. Filipescu (2006) build a very different internationalization model, viewing innovation as

the start of a continuous model of internationalization and innovation (see paragraph 4.2.6).

Chapter 4 79


4.2.6 Cyclical phenomenon

When considering the relationship between innovation and internationalization, the idea of

a cyclic phenomenon comes to mind. Reinforcing the idea of a cyclic phenomenon, Edquist

and McKelvey (2000) and Lundvall (1992) describe a ‘circular and complex system embracing

interactive elements’. Hessels (2006) refers to this as a ‘positive two-sided link’ between innovation

and internationalization where:

• Innovation may lead to internationalization (e.g. innovative products increase foreign sales

opportunities);

• Internationalization may result in innovation (e.g. export and import provide access to

knowledge, product ideas, technologies etc.).

Figure 4.1: Cyclical phenomenon, based on Filipescu (2006)

A model on the relationship between innovation and internationalization was developed based on

the model developed by Filipescu (2006). The focus of the model is on the impact of innovation

on internationalization and vice versa. In the model, as shown in figure 4.1, the competitive

advantages gained through innovation facilitate the firm to compete in the international markets.

Hence, the degree of internationalization of the firm is enhanced. Because of this enhancement,

the firm gains more knowledge of the international markets and gains experiences in international

business. Based on such accumulated knowledge and experience, the firm is able to further adapt

to the international business environment. With better adaptation to the external environment and

accumulated experiential knowledge, the firm can further enhance its innovation ability, which

stimulates the further development of innovation within the firm. This will certainly lead companies

to gain more competitive advantages to survive and compete in the international markets

(Filipescu, 2006). In this book a start is made at investigating this model using qualitative and

quantitative analyses.

Innovative SMEs

Adapting to the international environments

Competitive advantage

Knowledge of the international

markets

Internationalization of SMEs

80 Chapter 4


4.3 Research set-up and hypotheses

Figure 4.2: Research set-up innovation

Case example: Dealing with foreign markets

This company was established in 1979 and is a manufacturer of diamond, polycrystalline and carbide wire and tube drawing dies. The company is very innovative. New technology, research and development and quality are key success factors of this company. The company has an R&D department which is very important for its growth and survival. 11-15 % of total revenue is spent on R&D. The company’s manager claims that without process and product innovation the company would not be able to compete on the international markets and therefore innovation is a prerequisite for them to go international.The interviewee mentioned that it was the head office in Spain which used to be the most innovative, but nowadays it is the subsidiary in Brazil which is a source of new ideas and new technology. They point out that it is because in Brazil the market situation is different; clients are more demanding and competition is stronger. To deal with these problems the company has to look for new solutions which very often involve process and product innovation. For instance, last year the Brazilian subsidiary improved some parts of the production process and therefore the head office visited to look and learn. Moreover, the subsidiary researches an option for replacing the diamond with synthetic materials which will make the product much cheaper.

This case example provides evidence that due to internationalization, this company had to deal with a more complex and demanding environment of international markets. This resulted in increased knowledge and a greater need to adapt to new situations that implied higher levels of innovation.


Network

Education

Innovation

• Product innovation• Process innovation

Modes of internationalization• Export• FDI

• Cooperation with other firms

• High or Low education of employees

Chapter 4 81


As seen in figure 4.2 there is a two-way relationship between innovation and internationalization

of Dutch SMEs. In the quantitative analyses this relationship is investigated for FDI and export.

Moreover, the interaction between network and innovation on FDI and export is tested as well as

the interaction between education and innovation.

According to Filipescu (2006) and Hessels (2006) a cyclic relationship between internationalization

and innovation exists. They imply a positive relationship between innovation and internationalization,

meaning that export & innovation and FDI & innovation could be positively related. Other results

show that R&D intensity is positively related to internationalization, and FDI in particular (Hollenstein,

2005; Kuo and Li, 2003; Luostarinen and Gabrielsson, 2006). The following hypotheses can be

formulated:

H1a: Innovative Dutch SMEs that undertake FDI will increase their innovative activities.

H1b: Innovative Dutch SMEs that export will increase their innovative activities.

Export intensity is positively related to FDI (Kuo and Li, 2003). This could imply a positive

relationship between export and increased international activities such as FDI.

H2: Innovative Dutch SMEs that export will direct international activities towards FDI.

Education may advance the capacity for innovation in various ways, according to Tidd et al. (1997).

This suggests there is a link between the education level of employees and innovation in SMEs.

Case example: Innovation and employees

A small Dutch consulting company in the area of change management and people leadership was set-up 16 years ago by two partners. The firm started exporting its services 13 years ago which makes it a ‘born global’. Nowadays the company is active in two foreign countries. It is operating in Spain in the form of foreign direct investments (subsidiary) and in Germany, in the form of export-based activities.The company is a knowledge based company, meaning that knowledge is the most strategically significant resource of this firm. All the services provided by the company are highly innovative and new ideas are contributed by employees on a regular basis. Every employee is expected to contribute new ideas but there are also two people exclusively in charge of innovation. Most of the services introduced by this firm were new on the market.The partners of the company indicate that the key success factor of this company is innovation. Innovation enabled obtaining competitive advantages and success on the domestic market, which was the most important driver for going international.

82 Chapter 4


According to Hollenstein (2005) the education level of employees is positively related to FDI. Other

studies also assume a positive relationship between education and internationalization (Simpson

and Kujawa, 1974; Cavusgil, 1982; Barrett and Wilkinson, 1986; Axinn, 1988). Assuming there is a

positive relationship between education of employees and internationalization or innovation, is there

then also a positive relationship between level of education and innovation for Dutch SMEs?

H3a: A high education level of the employees of Dutch SMEs leads to more innovation for Dutch

SMEs that undertake FDI.

H3b: A high education level of the employees of Dutch SMEs leads to more innovation for Dutch

SMEs that export.

Gosselink (1996) identifies co-operation with parties from the external environment as a

determinant of innovative ability. Local firms are aware of the fact that distinctly different firms that

enter relationships are most likely to discover a new recombination of information directing them to

more innovation (Cohen and Levinthal, 1990; March, 1991; McEvily and Zaheer, 1999; Ahuja, 2000;

Nooteboom, 2000). Additionally, the time it takes to act upon new ideas is effectively decreased

if cooperation is established (Stuart and Podolny, 1999). There is also a positive relationship to

be found between networks and internationalization; networks assist entrepreneurial firms in

identifying international business opportunities (McDougall et al., 1994). As a result it is tested

whether networks increase innovation for international firms.

H4a: Cooperation with other firms leads to more innovative activities for Dutch SMEs that

undertake FDI.

H4b: Cooperation with other firms leads to more innovative activities for Dutch SMEs that

export.


As described in paragraph 1.3.1, the EIM Policy Panel is used for quantitative analyses. For

the qualitative analyses the ISRP dataset is used. In contrast to chapter 3, this chapter uses a

combination of qualitative and quantitative analyses. This combination is important because the

qualitative analysis gives more insight in the topic and the expected results of the quantitative

analyses. When the results of both analyses coincide it provides a better base for argumentation.

4.4.1 Descriptive statistics ISRP dataset

The ISRP dataset consists of 24 Dutch SMEs who have engaged in FDI and have been asked an

extensive set of questions on internationalization. For more information on this dataset see the

Chapter 4 83


appendix. Table 4.1 gives an overview of the firms in this dataset. Variables in the ISRP dataset

are sometimes similar to the EIM Policy panel dataset and can be compared. No real significant

conclusions can be drawn from these results but nonetheless they give an insight.

Table 4.1: Overview ISRP dataset

7 The year in which the parent and the subsidiary were founded.8 The size of the parent and subsidiary in number of employees.9 The size of the parent and subsidiary in millions of turnover.10 Whether the firm is only engaged in FDI or also in other internationalization modes.

Firms Parent founded7

Sub-sidiary

founded

Size parent

(empl)8

Size sub-

sidiary (empl)

SectorTurnover

parent (mil)9

Turnover subsidiary

(mil)

Only engage in

FDI?10

1 1984 2002 5 2 Retail <0.5 <0.5 yes2 . 2003 7 5 Retail <0.5 <0.5 yes3 1979 1994 275 30 Metal Industry >50 0.5-0.9 yes4 2006 2006 23 20 Business Services 1-50 1-50 no5 1992 1996 100 20 Business Services 1-50 0.5-0.9 no6 1995 1995 50 10 Manufacturing 1-50 1-50 no7 1946 2003 31 1 Agriculture 1-50 <0.5 no8 1989 2001 80 7 Business Services 1-50 <0.5 yes9 1994 1995 36 8 Business Services 1-50 1-50 no

10 . 1991 450 48 Metal Industry 1-50 1-50 no11 1947 2002 92 3 Process Industry 1-50 <0.5 yes12 . 2005 180 3 Process Industry 1-50 <0.5 yes13 2003 2003 50 10 Business Services 1-50 <0.5 no14 1980 1989 400 50 Business Services 1-50 1-50 no15 . 2002 70 5 Manufacturing >50 <0.5 no16 1991 1991 1 1 Transport 0.5-0.9 0.5-0.9 yes17 . 2005 19 15 Business Services 0.5-0.9 0.5-0.9 yes18 . 2001 68 40 Process Industry 1-50 <0.5 no19 1927 1994 120 70 Agriculture 1-50 1-50 no20 . 1990 51 6 Business Services 1-50 <0.5 no21 1994 2006 30 20 Retail 1-50 1-50 yes22 1987 1995 140 40 Business Services 1-50 1-50 yes23 2000 2002 100 20 Business Services >50 >50 no24 2001 2002 3 1 Business Services 1-50 1-50 no

84 Chapter 4


How should innovation be measured for SMEs?

Table 4.2 shows how many innovative firms in this dataset have an R&D department. This is

used to determine whether innovation in SMEs can be measured by R&D. This is important

to know because one might otherwise get wrong results. Table 4.2 indicates that 11 out of 21

innovative firms do not have an R&D department. This means that using R&D as a measurement

for innovation in the remaining 10 out of 24 firms will give disturbing results. Concluded is that R&D

is not a good measure for innovation in the ISRP dataset, indicating that it might also be a wrong

measurement tool for other datasets.

H1a: Innovative SMEs that undertake FDI will increase their innovative activities.

In table 4.3 there are two variables taken into account; the extent to which internationalization

leads to more innovation and whether the firm is innovative ‘yes’ or ‘no’. The firms in this dataset

all undertake FDI so we cannot assume anything on export. What can be seen from the results is

that 21 out of 24 firms are innovative and from these 21 firms, 8 firms indicate to a great or very

great extent that internationalization leads to more innovation. These results support hypothesis

Is the subsidiary innovative yes or no?Total

yes no

Is there an R&D department yes or no?

yes 10 1 11

no 11 2 13

Total 21 3 24

Table 4.2: Descriptive statistics ISRP dataset

To what extent does internationalization lead to more innovation?

TotalNot at all

To a small extent

To a moderate

extent

To a great extent

To a very great

extent


yes 1 6 6 4 4 21

no 2 1 0 0 0 3

Total 3 7 6 4 4 24


Chapter 4 85


H1a because these innovative firms state that internationalization, for them, indeed led to more

innovation.

H2: Innovative SMEs that export will direct international activities towards FDI.

In table 4.4 there are two variables taken into account; the extent to which innovation leads to

more internationalization and whether the firm is innovative ‘yes’ or ‘no’. The firms in this dataset

all undertake FDI so we cannot assume anything on export. What can be seen from the results is

that 21 out of 24 firms are innovative and from these 21 firms, 10 firms indicate that to a great or

very great extent that innovation leads to more internationalization. More internationalization can

indicate an expansion to more foreign countries or undertaking other modes of internationalization

(also export). From these results can be concluded that hypothesis 2 is only partially supported.

The support is only partial because hypothesis 2 investigates the transition from export to FDI;

these firms already engage in FDI but might increase international activities to more foreign

countries or they might start exporting. Also, some of the firms in the IRSP dataset had only

recently started to engage in FDI after exporting for some time and even state that innovation was

the driving force behind this. This perfectly fits hypothesis 2 but these are only several firms.

To what extent does innovation lead to more internationalization?

TotalNot at all

To a small extent

To a moderate

extent

To a great extent

To a very great

extent


yes 5 3 3 5 5 21

no 2 1 0 0 0 3

Total 7 4 3 5 5 24


86 Chapter 4


H1a/H2

In table 4.5 there are two variables taken into account; the importance of innovation for

internationalization and the extent to which innovation leads to more internationalization. What

can be seen from the results is that for 17 out of 24 firms innovation was very to extremely

important for internationalization and from these 17 firms, 9 firms indicate that to a great or very

great extent innovation leads to more internationalization. This is important to check because

innovation might be important for the decision to internationalize but not for further progress in

the internationalization process. Table 4.5 shows that the results are dispersed and conclusions

are hard to draw.

To what extent does innovation lead to more internationalization?

TotalNot at all

To a small extent

To a moderate

extent

To a great extent

To a very great

extent

Is innovation important for inter-nationa-lization?

Not important at all 2 0 0 0 0 2

Not really important 1 2 0 0 1 4

Somewhat important 0 1 0 0 0 1

Very important 3 1 3 4 3 14

Extremely important 1 0 0 1 1 3

Total 7 4 3 5 5 24


Chapter 4 87


Is there more product or process innovation or a combination of both?

Table 4.6 shows what kind of innovation these 24 firms state to be involved in; this information is

used to determine what kind of innovation was used most. The number of firms that innovate with

products during the internationalization process (only FDI) account for 7 out of 24 firms where

only 3 out of 24 firms innovate in processes. Another 7 out of 24 firms innovate with both products

and processes. These results may indicate that for firms where innovation increased through

international activities, this was done with more product innovation than process innovation,

although this is a very rough indication.

Conclusion

From the results above we can conclude that indeed some support is found for hypotheses H1a

and 2. Unfortunately this support only gives an indication of what to expect from the quantitative

analysis in the next part of this chapter.

4.4.2 Descriptive statistics EIM policy panel dataset

Dependent and independent variables

In table 4.9 the variables from the EIM policy panel dataset that are used in the quantitative

analyses are described. Because there are different regression models used in this chapter,

variables are sometimes dependent and sometimes independent. The bold variables in table 4.9

Type of innovation Frequency Percent Valid Percent Cumulative Percent

Valid Process 3 12.5 13.0 13.0

Product 7 29.2 30.4 43.5

Market 1 4.2 4.3 47.8

Process and market 3 12.5 13.0 60.9

Product and market 2 8.3 8.7 69.6

Product and process 7 29.2 30.4 100.0

Total 23 95.8 100.0

Missing System 1 4.2

Total 24 100.0


88 Chapter 4


also act as dependent variables; the non-bold are only independent variables. The dependent

variable ‘FDI’ has already been discussed in chapter 3, ‘New product/process 12 months’ has not;

therefore the descriptive statistics in table 4.7 and 4.8 give an overview of this variable;

Frequency Percent

1 = yes 829 44.0 Minimum 0.00

0 = no 983 52.2 Maximum 1.00

Total 1,812 96.2 Mean 0.457


Total 1,884 100

Table 4.7: Descriptive statistics; ‘Investing in new products/services in the next 12 months?’

Frequency Percent

1 = yes 1,085 57.6 Minimum 0.00

0 = no 766 40.7 Maximum 1.00

Total 1,851 98.2 Mean 0.586


Total 1,884 100

Table 4.8: Descriptive statistics; ‘Investing in improvements of internal processes in the next 12 months?’

Chapter 4 89


Variable Description Question11 N Min. Max. Mean Std. D.

Innovative firms Is constantly innovating part of the firms strategy? services 1,881 0 1 1.36 0.48

New product 12 months

Investing in new products/services in the next 12 months? va20 1,812 0 1 0.46 0.50

New process 12 months

Investing in improvements of internal processes in the next 12 months? va21 1,851 0 1 0.59 0.49

FDI Has the firm been involved in FDI during the last 3 years? vint01 1,883 0 1 0.03 0.18

Export Does the firm export goods or services? vz24 1,862 0 1 1.79 0.41

Firm age How old is the company? vz61 1,883 0 324 24.24 28.07

Firm size How many employees does the company have? wp 1,422 1 260 26.28 32.93

Education employees

% of the employees are low educated? vz60_1 1,406 0 100 36.62 34.77

% of the employees are high educated? vz60_3 1,407 0 100 22.52 28.00

Innovative SMEs

Product innovation

Has the firm introduced any new products/services? va01 1,882 0 1 1.61 0.49

Process innovation

Has the firm introduced any improvements in its internal processes?

va05 1,881 0 1 1.31 0.46

Network Has the firm had any cooperation with other firms? vint02a 1,884 0 1 0.46 0.50


Sector

Transport sector 1,884 0 1 0.09 0.29

Other Services sector 1,884 0 1 0.08 0.27

Business Services sector 1,884 0 1 0.20 0.40

Lodging sector 1,884 0 1 0.10 0.30

Financial sector 1,884 0 1 0.10 0.30

Trade sector 1,884 0 1 0.19 0.39

Manufacturing sector 1,884 0 1 0.13 0.34

Construction sector 1,884 0 1 0.13 0.34

Table 4.9: Descriptive statistics dependent and independent variables


90 Chapter 4


Control variables

The control variables used are described in table 4.9:

1. ‘Number of employees’, indicating size.

2. ‘Age of the firm’, indicating firm age.

3. ‘Sector’, indicating sector. These are either used separately as described in table 4.9 or

divided into four combined dummy variables. One sector or a combination of two sectors is

always left out of the regression. The following combinations are made:

a. Trade and Transport;

b. Financial and Business Services;

c. Manufacturing and Construction;

d. Lodging and Other Services.

For regression models 2 and 3 (see paragraph 4.5) we have chosen to use the combined sector

dummy variables because when using them individually the outcomes were disturbed.

Measure of innovative firms

To indicate whether a firm is innovative the question is used; ‘is constantly innovating part of the

firm’s strategy?’ In the sample we can find that 1195 out of 1879 firms state ‘yes’. This is a very

large number; therefore it should be tested whether this is correct. This can be done by using

a crosstab of the questions ‘Did you bring new products or services to the market in the past 3

years?’ and ‘Did you improve or enhance internal processes of the firm in the past 3 years?’, both

indicating whether the strategy to innovate has actually led to innovations and thus indicating

whether the firms are truthfully stating that they are innovative. The results are shown in table

4.10, 4.11 and 4.12:

Introduced new products/services to the market in the past 3 years? Totalyes no

Constantly innovating?no 108 576 684

yes 625 570 1,195

Total 733 1,146 1,879

Table 4.10: Are firms really product/service innovative?

Chapter 4 91


625 out of 1,195 firms (52%) indicate that they have innovated products or services while constantly

innovating (as part of the firms strategy). 1,003 out of 1,194 firms (84%) indicate that they have

innovated processes while constantly innovating (as part of the firms strategy). 552 out of 1,193

firms (46%) indicate that they do both product and process innovation while claiming to constantly

innovate (as part of the firms strategy). This gives a good overview of how innovative these firms

really are and it shows that these firms are at least to a large extent innovating in products and

processes. Moreover it gives us confidence in using this variable to classify innovative firms.


The EIM policy panel dataset consists of 1,884 Dutch SMEs. The descriptions of the variables

were given earlier in table 4.9. The most distinctive feature of this sample is the relative small size

of firms involved in FDI compared to the firms that are involved in export. Only 64 out of 1,884

firms were conducting FDI against 388 firms out of 1,884 that export. It is hoped that this will only

have a limited disturbing influence on the (binary logistic) regression. As described earlier some

variables in the dataset included answers like ‘don’t know’ or ‘refused’. These answers have been

classified as missing, in order to leave them out of the analysis. To control for multicollinearity we

performed an analysis on correlation between the variables. The results are depicted in table 4.13.

Improved or enhanced internal firm processes in the past 3 years? Total

yes no


yes 1,003 191 1,194

Total 1,305 573 1,878

Table 4.11: Are firms really process innovative?

Both product and process innovations in the past 3 years? Total

yes no


yes 552 641 1,193

Total 617 1,259 1,876

Table 4.12: Are firms really process and product innovative?

92 Chapter 4


From this table it can be conducted that there are no problems with multicollinearity, assuming

that the Pearson correlation indicator needs to be lower than 0.5. There is no reason to perform

additional tests (chi-square tests) on multicollinearity.

1 2 3 4 5 6 7 8 9 10 11 12 13

1 FDI 1

2 Export 0.218 1

3 Product innovation 0.108 0.272 1

4 Process innovation 0.067 0.128 0.257 1

5 Network 0.110 0.143 0.188 0.136 1

6 Employee low education -0.049 0.003 -0.122 -0.034 -0.086 1

7 Employee high education 0.094 0.085 0.176 0.066 0.173 -0.492 1

8 Firm age -0.012 0.000 0.037 0.134 -0.014 0.123 -0.092 1

9 Firm size 0.117 0.097 0.194 0.286 0.097 0.154 -0.019 0.295 1

10 Trade and Transport 0.019 0.068 -0.016 -0.017 -0.022 0.087 -0.153 -0.043 -0.012 1

11 Manufactering and Construction 0.018 0.117 -0.025 0.009 0.008 0.199 -0.162 0.110 0.036 -0.352 1

12 Lodging and Other Services -0.072 -0.169 -0.062 -0.036 -0.128 0.054 -0.099 -0.011 -0.054 -0.290 -0.261 1

13 Financial and Business Services 0.024 -0.035 0.090 0.039 0.121 -0.321 0.389 -0.052 0.023 -0.411 -0.369 -0.305 1


Chapter 4 93


1 2 3 4 5 6 7 8 9 10 11 12 13

1 FDI 1

2 Export 0.218 1

3 Product innovation 0.108 0.272 1

4 Process innovation 0.067 0.128 0.257 1

5 Network 0.110 0.143 0.188 0.136 1

6 Employee low education -0.049 0.003 -0.122 -0.034 -0.086 1

7 Employee high education 0.094 0.085 0.176 0.066 0.173 -0.492 1

8 Firm age -0.012 0.000 0.037 0.134 -0.014 0.123 -0.092 1

9 Firm size 0.117 0.097 0.194 0.286 0.097 0.154 -0.019 0.295 1

10 Trade and Transport 0.019 0.068 -0.016 -0.017 -0.022 0.087 -0.153 -0.043 -0.012 1

11 Manufactering and Construction 0.018 0.117 -0.025 0.009 0.008 0.199 -0.162 0.110 0.036 -0.352 1

12 Lodging and Other Services -0.072 -0.169 -0.062 -0.036 -0.128 0.054 -0.099 -0.011 -0.054 -0.290 -0.261 1

13 Financial and Business Services 0.024 -0.035 0.090 0.039 0.121 -0.321 0.389 -0.052 0.023 -0.411 -0.369 -0.305 1

94 Chapter 4


4.4.3 Research method

In paragraph 4.5 different statistical analyses are done. For each analysis a ‘binary logic regression’

was used, which is based on the ‘binary logit model’.

4.5 Analyses

To test the hypotheses three binary logic regression models were created:

Regression model 1

Regression model 1 tests H1a; ‘Innovative SMEs that undertake FDI will increase their innovative

activities’ and H1b; ‘Innovative SMEs that export will increase their innovative activities’. For more

information on the following variables we refer to table 4.9.

Selected cases:

• For this analysis we only include SMEs with ‘yes’ to the question ‘Constantly innovating is

part of the firm’s strategy’, indicating innovative firms (N=1196).

Dependent variables:

1a. ‘Investing in new products/services in the next 12 months’, ‘yes’ indicating more product

innovation.

2a. ‘Investing in improvements of internal processes in the next 12 months’, ‘yes’ indicating

more process innovation.

Independent variables:

• ‘Invested abroad in the past 3 years’, ‘yes’ indicating FDI.

• ‘Does your firm export goods or services?’, indicating export.

• ‘Cooperation with one or more firms’, ‘yes’ indicating network activity.

• ‘% of employees with higher education’, indicating high education.

• ‘% of employees with lower education’, indicating lower education.

Control variables:

• For each model the same control variables were used. For a list of the control variables we

refer to paragraph 4.4.2 and table 4.9. In this model the sectors are not combined.

The results of these regression models can be found in table 4.14 and 4.15.

Chapter 4 95


Model innovation 1a Dependent: ‘New product next 12 months’

Variable Description coeff. std.err.

Export Does the firm export goods or services? 0.543*** 0.180

FDI Has the firm been involved in FDI during the last 3 years? 0.289 0.372

Network Has the firm had any cooperation with other firms? 0.277* 0.145

Education employees

% of the employees is low educated? -0.003 0.003

% of the employees is highly educated? 0.010*** 0.003

Firm age How old is the company? -0.001 0.002

Firm size How many employees does the company have? 0.006*** 0.002

Sector

Transport -0.335 0.304

Other Services 0.399 0.353

Lodging -0.181 0.291

Financial -0.392 0.274

Trade -0.281 0.251

Construction -0.145 0.288

Manufacturing 0.020 0.293

Number of observations 908

Cox & Snell R Square 0.065

Nagelkerke R Square 0.088

LR statistic (x², 14df.) 60.914


Table 4.14: Outcomes regression model 1a

96 Chapter 4


Model innovation 1b Dependent: ‘New process next 12 months’


Export Does the firm export goods or services? 0.208 0.201

FDI Has the firm been involved in FDI during the last 3 years? -0.006 0.421

Network Has the firm had any cooperation with other firms? 0.381** 0.165

Education employees


% of the employees is highly educated? -0.003 0.003


Firm size How many employees does the company have? 0.017*** 0.003

Sector

Transport 0.327 0.352

Other Services -0.047 0.353

Lodging 0.366 0.325

Financial 0.815** 0.327

Trade 1.186 0.266

Construction 0.079 0.309

Manufacturing 0.414 0.317






Table 4.15: Outcomes regression model 1b

Chapter 4 97


H1: The results in table 4.14 indicate that no evidence is found for hypothesis 1a; ‘Innovative SMEs

that undertake FDI will increase their innovative activities’. The results in table 4.15 do indicate that

hypothesis 1b; ‘Innovative SMEs that export will increase their innovative activities’, is accepted for

process innovation. There is a strong significant effect of export on product innovation (in the next

12 months) for innovative Dutch SMEs. The intuition behind this finding is that SMEs that export

gain knowledge and experience of international markets and use this to create new products.

The fact that these firms were already innovative, increases the chance that they will continue to

innovate.

Tables 4.14 and 4.15 both show a significant effect of network activity on whether a Dutch SME

will innovate more in the next 12 months. Network activity is defined as cooperating with one or

more firms, meaning that these results could indicate spillover effects. Spillover effects occur when

firms innovate and share their knowledge with other firms; these firms in turn can benefit from the

innovation knowledge and use it for their own innovative activities.

Table 4.14 shows that high educated employees has a significantly positive effect on whether

a Dutch SME will innovate more in products in the next 12 months. This being a logical effect,

because often highly educated employees are more involved with innovative activities in the firm.

Furthermore, table 4.14 and 4.15 show that the control variable ‘firm size’ has a very small positive

effect. This could indicate that the larger the SME, the more chance that this SME will innovate

more in the next 12 months. This also seems a logical results since larger firms often have more

resources to develop new products or invest in new processes.

98 Chapter 4


Regression model 2

Regression model 2 tests H2: ‘Innovative SMEs that export will direct international activities

towards FDI’. For more information on the following variables we refer to table 4.9.

Selected cases:

• For this analysis we only include SMEs with ‘yes’ to the question ‘Does your firm export

goods or services?’ indicating exporting firms (N=388).


2. ‘Invested abroad in the past 3 years’, ‘yes’ indicating FDI.


• ‘New products or services on the market in the past 3 years’, ‘yes’ indicating product

innovation.

• ‘Improved or enhanced internal processes in the past 3 years’, ‘yes’ indicating process

innovation.




Control variables:


refer to paragraph 4.4.2 and table 4.9. In this model the sectors are combined as described

in paragraph 4.4.2 in order to get better results.

The results of these regression models can be found in table 4.16.

H2: Table 4.16 indicates that hypothesis 2, ‘Innovative SMEs that export will direct international

activities towards FDI’, is not accepted nor rejected; the independent variables product and

process innovation have no significant effect on FDI for exporting Dutch SMEs. The logical next

step in the internationalization process, going from export to FDI does not seem to be influenced

much by innovation. However, the transfer from one stage (export) to another (FDI) is influenced

significantly by network activities of Dutch SMEs. Some forms of FDI are based on cooperation

with other firms, like a strategic alliance or joint venture, and will thus be influenced by this

networking behavior.

Table 4.16 also shows a significant positive effect of the control variable ‘firm size’ on the change

from export towards FDI in the internationalization process. Although the effect is minimal, the

outcome remains logical since larger firms have more resources to engage in FDI. FDI requires a

relatively large amount of investment where export can be done relatively cheap.

Chapter 4 99


Model innovation 2 Dependent: ‘FDI’


Innovative SMEs

Product innovation Has the firm introduced any new products/services? 0.549 0.435

Process innovation Has the firm introduced any improvements in its internal processes? 0.147 0.579

Network Has the firm had any cooperation with other firms? 0.823** 0.411

Education employees


% of the employees is highly educated? 0.004 0.008


Firm size How many employees does the company have? 0.009** 0.005

Sector

Trade and Transport 0.597 1.102

Financial and Business Services 0.763 1.101

Manufactering and Construction 0.539 1.101






Table 4.16: Outcomes regression model 2

100 Chapter 4


Regression model 3

Regression model 3 tests H3a: ‘A high education level of the employees of Dutch SMEs leads to

more innovation for SMEs that undertake FDI’, H3b: ‘A high education level of the employees of

Dutch SMEs leads to more innovation for SMEs that export’, H4a: ‘Cooperation with other firms

leads to more innovative activities for SMEs that undertake FDI’ and H4b: ‘Cooperation with

other firms leads to more innovative activities for SMEs that export’. For more information on the

following variables we refer to table 4.9.

Selected cases:

3a. For this analysis we only include SMEs with ‘yes’ to the question ‘Invested abroad in the

past 3 years’, indicating FDI (N=64).

3b. For this analysis we only include SMEs with ‘yes’ to the question ‘Does your firm export

goods or services?’, indicating exporting firms (N=388).


3a1. ‘Investing in improvements of internal processes in the next 12 months’, ‘yes’ indicating


3a2. ‘Investing in new products/services in the next 12 months’, ‘yes’ indicating more product

innovation.

3b1. ‘Investing in improvements of internal processes in the next 12 months’, ‘yes’ indicating


3b2. ‘Investing in new products/services in the next 12 months’, ‘yes’ indicating more product

innovation.



innovation.


innovation.




Control variables:


refer to paragraph 4.4.2 and table 4.9. In this model four sectors are combined as described in

paragraph 4.4.2 in order to get better results.

The results of these regression models can be found in tables 4.17 to 4.20.

Chapter 4 101


Model innovation 3a1 Dependent: ‘New process next 12 months’


Innovative SMEs

Product innovation Has the firm introduced any new products/services? 2.564*** 0.867

Process innovation Has the firm introduced any improvements in its internal processes? 0.433 1.475

Network Has the firm had any cooperation with other firms? 0.949 0.910

Education employees

% of the employees is low educated? 0.015 0.019


Firm age How old is the company? 0.021 0.022

Firm size How many employees does the company have? 0.001 0.012

Sector


Financial and Business Services -0.943 1.416








Table 4.17: Outcomes regression model 3a1

102 Chapter 4


H3a/4a: Table 4.17 indicates that hypothesis 3a ‘A high education level of the employees of Dutch

SMEs leads to more innovation for SMEs that undertake FDI’, is not accepted nor rejected; there

are no significant outcomes of the high education variable. Also hypothesis 4a ‘Cooperation with

other firms leads to more innovative activities for SMEs that undertake FDI’, is accepted nor

rejected; there are also no significant outcomes of the network variable. Both networking and the

level of education of employees in Dutch SMEs do not influence the innovative behavior of Dutch

Model innovation 3a2 Dependent: ‘New product next 12 months’


Innovative SMEs

Product innovation Has the firm introduced any new products/services? -1.807 1.628

Process innovation Has the firm introduced any improvements in its internal processes? 4.976*** 1.711

Network Has the firm had any cooperation with other firms? -0.680 1.388

Education employees





Sector



Manufactering and Construction -1.158 1.567







Table 4.18: Outcomes regression model 3a2

Chapter 4 103


SMEs that are engaged in FDI significantly. This could be because many of these firms are already

innovative, regardless of the level of education of employees or networking activities. It could also

be because FDI is measured as ‘invested abroad in the past 3 years’ which could indicate that

many of these SMEs used innovation to enter the foreign market and have since been trying to

settle and increase financial performance instead of investing in more innovation.

Both table 4.17 and 4.18 show a strong positive significant effect of innovation in the past 3

years on the planned or expected innovative activity in the next 12 months. The specific effects

are remarkable since on the one hand table 4.17 shows that product innovation in the past 3

years has a significant positive effect on process innovation in the next 12 months, but table 4.18

shows the exact opposite; process innovation in the past 3 years has a significant positive effect

on product innovation in the next 12 months. The intuition behind these outcomes may be that

product innovation and process innovation complement each other. This could mean that firms

which have launched a product innovation will start to invest time and money in process innovation

and when a firm successfully manages to innovate a process it will continue innovating products. A

conclusion that can be drawn from this interpretation is that Dutch SMEs engaged in FDI often do

not simultaneously work on process and product innovation, but variate between both.

H3b/4b: Table 4.19 indicates that hypothesis 3b ‘A high education level of the employees of Dutch

SMEs leads to more innovation for SMEs that export’, is accepted for process innovation. There

is a significant weak effect of the high level of education of employees on process innovation (in

the next 12 months) for Dutch SMEs. Other than for FDI, the level of education of employees is

significant for increased process innovative behavior in exporting Dutch SMEs. This could mean

that highly educated employees are involved with the internal processes of the firm and use their

high level of education to improve and innovative these processes.

The results from table 4.19 and 4.20 also indicate that hypothesis 4b; ‘Cooperation with other

firms, leads to more innovative activities for SMEs that export’, is accepted nor rejected; there are

no significant outcomes for networking activities. Networking activities are not directly linked to

more innovation for exporting Dutch SMEs. The strong link between FDI and network activities

cannot be found for exporting firms. Networking activity will help in the process of exporting but

the influence is much higher for FDI.

In addition, tables 4.19 and 4.20 show a similar effect to tables 4.17 and 4.18 where product and

process innovation in the past 3 years significantly influences the innovative activity in the next 12

months. The only difference is the internationalization mode used which is export instead of FDI.

104 Chapter 4


Model innovation 3b1 Dependent: ‘New process next 12 months’


Innovative SMEs

Product innovation Has the firm introduced any new products/services? 1.720*** 0.295

Process innovation Has the firm introduced any improvements in its internal processes? 0.784** 0.415

Network Has the firm had any cooperation with other firms? 0.209 0.296

Education employees


% of the employees is highly educated? 0.019*** 0.007



Sector

Trade and Transport 1.013** 0.479









Table 4.19: Outcomes regression model 3b1

Chapter 4 105


Model innovation 3b2 Dependent: ‘New product next 12 months’


Innovative SMEs

Product innovation Has the firm introduced any new products/services? 0.229 0.321

Process innovation Has the firm introduced any improvements in its internal processes? 2.077*** 0.379

Network Has the firm had any cooperation with other firms? -0.080 0.314

Education employees





Sector

Trade and Transport -0.006 0.551

Financial and Business Services -0.437 0.649

Manufactering and Construction -0.164 0.528







Table 4.20: Outcomes regression model 3b2

106 Chapter 4


Table 4.21 summarizes the results from the regression analyses. Only two out of the seven

hypotheses have been accepted. The other hypotheses were not proven since no significant

results were found.

4.6 Conclusions

Support is found for a relationship between product innovative Dutch SMEs and increased

innovative activity when exporting. This result clearly underlines the existence of the proposed

two-sided positive relationship (Hessels, 2006) between innovation and internationalization.

Drawing this conclusion indicates that innovative Dutch SMEs increase exports because they

innovate, innovate more because of the export experience or do both.

Support is also found for a relationship between high level of education of employees in Dutch

SMEs that export and increases in innovation activity. It can be concluded that investments done

by the Dutch government in the so called ‘knowledge economy’ of The Netherlands seems to be

a correct manner for increasing innovation activity for SMEs that export.

No support was found for the hypotheses directed towards FDI. This may be because the research

sample that was used only had 64 cases out of the 1,884 that were engaged in FDI. Another

reason could be that innovation is an outcome oriented variable, some even consider it to be a

measure of performance. This means that the SMEs in the sample would have to be successful

and/or established in the foreign market. Here the problem lies in the question that indicates FDI,

‘investing in foreign countries in the past 3 years’, meaning that SMEs who have only invested

abroad 1 year earlier might not be profitable yet.

Hypothesis Description Outcomes

H1a Innovative SMEs doing FDI increase innovation in the next 12 months. Not provenH1b Innovative SMEs exporting increase innovation in the next 12 months. AcceptedH2 Innovative SMEs exporting increase sinternationalization activity towards FDI. Not proven

H3a High education of employees of an SME increases innovation for SMEs engaged in FDI. Not proven

H3b High education of employees of an SME increases innovation for SMEs exporting. Accepted

H4a Cooperation with other firms increases innovation for SMEs engaged in FDI. Not provenH4b Cooperation with other firms increases innovation for SMEs that export. Not proven


Chapter 4 107


4.6.1 Limitations

An important recommendation for future research is to create a dataset with firms that are only

involved in FDI using variables only directed towards innovation. This way the qualitative analyses

in this chapter can be done quantitatively, yielding better results.

Also, to be able to get an insight in the required policy measures for the EU, a sample should be

used of European SMEs, especially because most existing studies, including this book, are limited

by the dataset used.


When translating the findings to policy recommendations one could say that stimulating

innovation in a country can increase the international competitive advantage of firms in a country.

Strengthening this advantage can lead to firms internationalizing. What the results are also

indicating; the internationalization of SMEs can lead to more innovation. This accumulation of

knowledge causes growth in markets. So in order to stimulate internationalization without wasting

money on subsidies and creating weak operating international SMEs, governments should

invest in regional innovation systems. This kind of system comprises of a flow of technology and

information among people, firms and institutions in a region. The interactions between these actors

are needed in order turn an idea into a product, process or service. Investing in such innovation

system can be a solution.

‘In a different country than your home country you have to improvise all the time’Pieter Tjabbes, Partner Art Unlimited (ISRP dataset)

108 Chapter 4


Chapter 5 109

5.1 IntroductionIn this book the outcome of internationalization is measured by financial performance. Measuring

financial performance can give an overview of the effects of internationalization expressed in

numbers. Hence, finding significant effects can have an impact on future strategic decisions by

management teams. Whether internationalization has a significant effect on performance in Dutch

SMEs will be investigated in this chapter.

5.1.1 Structure

This chapter is structured as follows. First a short motivation for this chapter is given, followed

by the research questions. The next paragraph presents a short literature review, with theories,

definitions and concepts related to internationalization and performance. The hypotheses following

from the integration of the literature review will be discussed in paragraph three together with

some empirical studies and the research set-up. Paragraph four presents the methodology and

data, followed by the analyses. The last paragraph ends with conclusions and policy implications.

5.1.2 Motivation

It is believed that SMEs benefit from internationalization in terms of improving competitive and

financial performance (Zahra et al., 1997). While SMEs for the most part lack the substantial

tangible resources of large multinational enterprises, they appear to leverage a collection of

fundamental resources that facilitate international success (Knight et al, 2004).

The purpose of this chapter is to get more insight in the performance effects of SMEs and their

internationalization. As a mode of foreign operation, the focus is on export activity and FDI. Export

activity is the most common international expansion strategy among SMEs (Zahra et al., 1997)

and is considered to be the first and most common step in a firm’s international expansion (Young

et al., 1988). As it is believed that SMEs benefit from internationalization, investigation whether or

not this holds is to be performed.

5Internationalization and performance

110 Chapter 5

Internationalization and performance

Attention devoted to exploring whether value is created in the internationalization of SMEs is

important for managers, because they are ultimately concerned with whether such entrepreneurial

strategies can lead to higher performance and if firms can become more competitive when

expanding geographically (Lu and Beamish, 2001).

5.1.3 Research questions

This chapter investigates the effect of internationalization on SME performance. There is a

significant amount of research done on the antecedents and process of internationalization of

SMEs. Yet, little is known about the effects of internationalization on the performance of SMEs

(Lu and Beamish, 2001). We would like to explore whether and how value is created in the

internationalization process of SMEs.

• How does internationalization affect the performance of Dutch SMEs?

• Is there a difference between export and FDI in affecting the performance of Dutch

SMEs?

• Which factors influence the relationship between internationalization and the performance

of Dutch SMEs?

5.2 Literature review

According to Majocchi and Zucchella (2003), the analysis of performance involves two fundamental

complexities. The first complexity deals with the concept of performance and the second refers

to the combination of drivers that influence performance. These drivers are firm specific and

are difficult to isolate from each other. The most common used performance measures are

profitability ratios such as; Return On Equity (ROE), Return On Assets (ROA) and Return On

Sales (ROS). Numerous studies have pointed out the positive relationship between the degree of

internationalization of the firm and its performance (Delios and Beamish, 1999; McDougall and

Oviatt, 1996; Ayal and Zif, 1979).

Most export models use export intensity as a performance measure (Gemunden, 1991). This is

useful at macro level when the interest is focused on a country’s exports, but at the firm level export

profitability is more important than export intensity. The export intensity is useful as a performance

measure to draw policy implication for promoting export; it is less useful for managers at the

firm level. According to Dhanraj and Beamish (2003), firm performance can be measured at the

firm level using a composite measure of profitability, growth and market share. In a comparative

study, on the export performance of U.S. and Canadian small and medium sized exporters,

they concluded that technological intensity and firm size are good predictors of the degree of

Chapter 5 111


internationalization. They also found that the degree of internationalization has a positive effect on

firm performance. When narrowing the literature review down to firm size and performance we find

that the results vary. Madsen (1987) mentioned eleven studies about the relationship between firm

size and performance. Five studies found no significant relationship, four found a weak positive

relationship and two found a weak negative relationship. Miesenbock (1988) found that eight out of

twelve studies reported a positive relationship between firm size and export sales, while Aaby and

Slater (1989) found one study with negative relationship and three with insignificant relationships.

According to Walker and Ruckert (1987), important aspects of economic performance are: effectiveness, efficiency and adaptability. Effectiveness means the extent to which desired goals

are achieved, efficiency stands for the ratio of performance outcomes achieved and adaptability

reflects in the export venture’s ability to respond to environmental changes. Another aspect is that

export ventures focus on two different stakeholders; distributors and end user costumers (Peng

and York, 2001). These firms often monitor their performance with respect to desired costumer

attitudes and behaviors (customer satisfaction) and those of channel intermediaries (Katsikeas

et al., 2000).

The link between performance and internationalization has been extensively researched from a

variety of perspectives. In table 5.1 a short summary of the results of previous research is given. In

this table a distinction is made between the kind of relationship; positive, negative or uncertain.

5.2.1 Structure Conduct Performance Theory (SCP)

The SCP theory posits that firm performance is determined mainly by two fundamental sets of

antecedents. The first antecedent is the structural characteristics of the firm’s market that determine

the competitive intensity the firm faces. The second one is the firm’s capacity to achieve and

keep up positional advantages through the efficient and effective execution of planned competitive

strategy (Scherer and Ross, 1990). A fundamental basis in the SCP is that the factors which

determine competitive intensity in the market have strong impact on the firm performance.

Positive relationship Negative relationship Uncertain

Han et al., 1998 Collins, 1990 Buhner, 1987Ramaswamy, 1992 Franko, 1989 Buckley et al., 1977Grant, 1987 Michael and Shaked, 1986Vernon, 1971 Kumar, 1984

Table 5.1: The relationship between performance and internationalization (adapted from Sullivan, 1994)

112 Chapter 5


5.3 Hypotheses

5.3.1 Export and firm performance

When exporting, an SME does not have to make large resource commitments to a foreign market

as it does in the case of subsidiaries or alliances (FDI). Exporting is also easier to implement

compared with these strategies, because establishing a subsidiary is complex and time consuming.

An SME can use its existing production facilities to serve its foreign markets, without building a

new one; therefore they have faster access to a foreign market. Export gives an easy access to a

foreign market, but also an easy exit because of the low commitment. An exporting SME does not

have to deal with a subsidiary or with alliances; therefore they can withdraw from a foreign market

in case of political instability or fluctuating market conditions. Furthermore, an SME can change its

geographical scope by adjusting the export volume in different target foreign markets. According to

Lu and Beamish (2001), an SME’s growth is positively related to its level of exporting. They used

a sample of 164 Japanese SMEs in their study.

The growth in this study was measured by the growth rate of net sales and total assets. A study

done by Lu and Beamish (2001) a year earlier using the same sample showed that exporting

was not positively related to firm performance. In this study the performance was measured by

the Return On Investments (ROI) and Return On Sales (ROS). Previous studies by Grant et

al. (1988) and Kogut (1985) show that the effect of export on profitability is positive. But on the

other hand a study on Italian exporters by Mediocredito Centrale (1998) showed a contradictory

result. Considering the results discussed so far it is reasonable to say that the empirical findings

cannot be considered conclusive. According to Aaby and Slater (1989) and Shoham (1998) this is

because of the lack of consistency in construct building and the operational measures adopted.

Taken everything together, we expect that in the case of SMEs, the firms that export perform better

than those which do not.

H1: SMEs which export perform better than SMEs that are not exporting, when controlling for

other factors.

5.3.2 Export intensity and firm performance

The literature on the effect of exports on the profitability of SMEs is large and bases its claim on

economic benefits of exports. Most of it concludes that because of the scale and scope economies

gained through large volumes of sales and the increased international experience (Cooper

and Kleinschmidt, 1985; and Grant et al., 1988), high export intensity leads firms to a better

performance. Other economic benefits explain the positive effect of exports on performance. The

presence in multiple, diverse international markets can lead to advantages related to increases in

Chapter 5 113


market power (Kim et al., 1993) and gains from diversification of revenues (Ramaswany, 1992a).

These economic benefits positively link exports to performance. Although it is possible to argue

that higher levels of international involvement would lead to better performance (Bracker and

Daniels, 1986; Rugman, 1979), the results of empirical studies do not reach definitive conclusions

(Ramaswany, 1992). Some empirical evidence suggests a positive relationship.

The evidence on the effects of export activity on profitability (Grant et al., 1988; Kogut, 1985) and

increases in market power tend to be positive. Other empirical evidence suggests a negative

relationship. According to a survey conducted by Lu and Beamish (2001) on Japanese SMEs,

the effect of export on performance was negative. The empirical findings cannot be considered

conclusive because of a lack of consistency in construct building and in operational measures

adopted. Some operationalize performance by profitability while others by sales growth. The

impact of exports on export intensity gives mixed, conflicting results. Despite the inconclusive

empirical results and the above mentioned inconsistency in constructs, the economic benefits

above mentioned lead to the second hypothesis.

H2: The more an SME exports, the better it performs, when controlling for other factors.

5.3.3 FDI and firm performance

With respect to firm performance, the OLI-Paradigm states that firms which rationally optimize

their FDI-levels and rationally choose to locate production where advantages can be enjoyed (it is

assumed that the firm has perfect information about the given O-, L-, and I-advantages), maximize

their profits and outperform firms which do not rationally optimize.

According to the Network Perspective, the performance of internationally operating firms crucially

depends on the strength of its position in the international network. Because FDI is regarded as

the strongest network investment a firm can make, it is expected that the ability to reap benefits

from the network is higher for firms which engage in FDI than for firms which are less actively

engaged in the network (Johanson and Vahlne, 1992).

Because the Process Theory does not take other explanatory factors into account, the power

in predicting firm performance is limited, and no empirical studies on this subject were found.

However, the explanatory value of the model may be relatively high in the early stages of the

internationalization process, because these firms have less experiental knowledge acquired on

which they can capitalize. This may apply to SMEs in particular, because they have less capacity

to gather and process information than large firms.

114 Chapter 5


Some authors have found evidence for an inverted U-curve describing the relationship between

FDI and performance (Beamish and Da Costa 1984; Hitt et al., 1997).

Lu and Beamish (2001), using a sample of 164 Japanese SMEs, find that the positive impact of

internationalization on performance is related to the extent of a firm’s FDI activities. The study

concludes that when firms first begin FDI activity, Return On Assets (ROA) declines, but higher

levels of FDI are associated with higher firm performance. This finding is consistent with Hymer’s

(1976) notion of a ‘liability of foreignness’ (see chapter 2) effect for firms which enter foreign

markets. Exporting moderates the relationship between FDI and performance, because a strategy

of high exporting in combination with high levels of FDI is less profitable than a strategy that

involves lower levels of exports when FDI-levels are high. Also, the authors find that alliances with

partners with local knowledge can be an effective strategy to overcome the deficiencies SMEs

face in resources and capabilities, when they expand into international markets (Lu and Beamish,

2001).

The research conducted by Lu and Beamish (2006) on Japanese SMEs concludes that different

strategies can be used to expand internationally. The study shows that FDI and exports have different

effects on both profitability and growth, but are not exclusive. When considered separately, exports

have a positive impact on growth, but a negative impact on profitability. FDI has a positive effect on

growth, but there exists a U-curve relationship with profitability, implying that profitability declines

with initial FDI but improves when FDI reaches a greater extent. This finding also lends credibility

to the ‘liability of foreignness’ effect (Hymer, 1976). Exporting has a positive moderating effect on

the relationship between an SME’s FDI activity and firm growth, and a negative moderating effect

on the relationship between an SME’s FDI activity and firm profitability.

Further, an SME’s age when it starts making FDI has initially a negative moderating impact

on the relationship between FDI and firm growth (Lu and Beamish, 2006). This supports the

‘liability of newness’ effect that firms experience when they internationalize early in their life cycle

(Stinchcombe, 1965). However, young internationalizing firms may eventually reach higher growth

rates than firms which have internationalized at a later stage (Lu and Beamish, 2006), which

provides support for the ‘learning advantages of newness’ effect, as proposed by Autio et al.

(2000).

In Majocchi and Zucchella (2003), a study on Italian SMEs, it is concluded that performance is

not determined by export intensity, but by the ability of firms to gain access to specific markets.

The findings indicate that performance (ROA) may decline when SMEs engage in FDI, a finding

that suggests the presence of a ‘liability of foreignness’ effect in the early stages of international

Chapter 5 115


expansion. However, this negative effect can be offset by the international competencies that

SMEs develop through intense export activities (Majocchi and Zucchella, 2003).

The results of Majocchi and Zucchella (2003) are largely in line with Lu and Beamish (2006),

which is more exhaustive in its disentanglement of the different effects of export and FDI on firm

growth and profitability.

H3: SMEs engaged in FDI perform better than SMEs that are not engaged in FDI, when

controlling for other factors.

H4: SMEs which combine FDI and network involvement perform better than SMEs which are

engaged in FDI but not in networking, when controlling for other factors.

5.3.4 Export and FDI on firm performance

Lu and Beamish (2006) found that exporting has a positive moderating effect on the relationship

between an SME’s FDI activity and firm growth. Confirmation of the hypothesis would support the

view that exporting provides valuable experience to the firm, which, if used in combination with

FDI, leads to higher firm performance as a result of FDI activity.

H5: SMEs which combine FDI and exporting have higher firm performance than SMEs which

are solely engaged in FDI or solely in export.

116 Chapter 5


5.4 Research set-up

Figure 5.1: Research set-up

As seen in figure 5.1: The relationship between internationalization and performance of Dutch

SMEs is tested. In the quantitative analyses this relationship is tested for FDI and export. Moreover,

the interaction between internationalization and network on FDI and export performance is tested

as well as the interaction between internationalization and education.


As described in paragraph 1.3.1, the EIM Policy Panel is used for quantitative analyses. For the

qualitative analyses the ISRP dataset is used. Similar to chapter 4, this chapter uses a combination

of qualitative and quantitative analyses. This combination is important because the qualitative

analysis already gives an insight in the expected results of the quantitative analyses. When the

results of both analyses coincide it provides a better base for argumentation.

5.5.1 Descriptive statistics ISRP dataset

Using the ISRP dataset provides insight into the results that can be expected in the quantitative

analysis. Variables in the ISRP dataset are sometimes similar to the EIM Policy panel dataset and

can be compared.


Modes of internationalization

• Export• FDI

Outcomes of internationalization

• Estimated net profits (pre-tax)

Education

• High or Low education of employees

Netwok

• Cooperation with other firms

Chapter 5 117


Do SMEs which combine FDI and network involvement perform better than SMEs that do

not?

To what extent does the parent participate in national networks?

TotalNot at all

To a small extent

To a moderate

extent

To a great extent

To a very great

extent

Average profitability in the past 5 years?

Extremely profitable 0 0 0 1 0 1

Very profitable 1 2 3 3 0 9

Slightly profitable 0 0 0 2 1 3

Break-even 0 1 1 1 1 4

Slightly unprofitable 1 0 1 3 0 5

Very unprofitable 1 0 0 0 1 2

Total 3 3 5 10 3 24

To what extent does the parent participate in international networks?

TotalNot at all

To a small extent

To a moderate

extent

To a great extent

To a very great

extent


Extremely profitable 0 0 0 0 1 1

Very profitable 2 0 4 3 0 9

Slightly profitable 0 0 1 1 1 3

Break-even 0 1 0 1 2 4

Slightly unprofitable 0 2 0 3 0 5

Very unprofitable 0 0 0 2 0 2

Total 2 3 5 10 4 24

Table 5.2: International networking and profitability

Table 5.3: National networking and profitability

118 Chapter 5


From table 5.2 it can be concluded that 19 out of 24 firms that participated in international

networks from a moderate to a very great extent, from these firms 8 out of 19 have had an average

profitability over the past 5 years between very profitable and extremely profitable. 5 out of 19 of

the same firms indicated to be slightly to very unprofitable. This indicates that there is no clear

performance advantage for SMEs that engage in international network activities. Note that these

firms all engage in FDI and thus have an advantage when it comes to international networks. Even

if firms state not to participate in international networks they still operate internationally.

Table 5.3 presents similar results to table 5.2 only this time for participating in national networks.

Both cross tables give an indication that combining networking activities with FDI can have a

positive effect. Even so, there is no sign of any clear results on this matter.

Do SMEs which combine FDI with other internationalization modes have a higher firm

performance than SMEs which are solely engaged in FDI?

From table 5.4 it can be concluded that from 14 out of 24 firms that did not engage solely in FDI

(and thus also engaged in other international activities) 8 out of 14 had an average profitability

over the past 5 years between very profitable and extremely profitable. 4 out of 14 of the same

firms indicated to be slightly to very unprofitable. This compared to 10 out of 24 firms that engage

solely in FDI with only 2 out of 10 firms indicating to be very profitable as an average over the

past 5 years. 3 out of 10 firms indicated to be slightly to very unprofitable over the past 5 years.

Engaged only in FDI?Total

yes no


Extremely profitable 0 1 1

Very profitable 2 7 9

Slightly profitable 1 2 3

Break-even 4 0 4

Slightly unprofitable 2 3 5

Very unprofitable 1 1 2

Total 10 14 24

Table 5.4: Multiple internationalization modes and profitability

Chapter 5 119


This provides a sign that firms which solely engage in FDI perform slightly worse than firms that

combine different modes of internationalization. Although no real analysis can be performed.

Conclusion

From the results above we can conclude that only minimal support is found for hypotheses H4 and

H5. This support gives an indication of what to expect from the analyses in paragraph 5.6.

5.5.2 Descriptive statistics EIM policy panel dataset

Dependent and independent variables

In table 5.5 the variables from the EIM policy panel dataset that are used in the quantitative

analyses are described. Whenever possible, continuous variables are selected instead of

categorized or dummy variables. This counters unnecessary loss of detailed information and

facilitates the interpretation of results. The dependent variable ‘performance’ has not yet been

described, therefore the descriptive statistics in table 5.5 give an overview of this variable:

N 1,595

Missing 289

Minimum -60.00

Maximum 370.00

Mean 2.855

Std. Deviation 14.296

Table 5.5: Descriptive statistics; ‘Estimated net profit 2003 (*100.000)’

120 Chapter 5


Variable Description Question12 N Min. Max. Mean Std. D.

FDI Has the firm been involved in FDI during the last 3 years? vint01 1,883 0 1 0.03 0.18


Export intensity % of sales earned from foreign customers? vz26 379 0 100 30.80 30.37

Interaction effect Export * FDI - 1,881 0 1 0.02 0.15

Firm age How old is the company? vz61 1,883 0 324 24.24 28.07

Firm size How many employees does the company have? wp 1,422 1 260 26.28 32.93

Education employees

% of the employees are low educated? vz60_1 1,406 0 100 36.62 34.77

% of the employees are high educated? vz60_3 1,407 0 100 22.52 28.00

Innovative SMEs

Product innovation

Has the firm introduced any new products/services? va01 1,882 0 1 1.61 0.49

Process innovation

Has the firm introduced any improvements in its internal processes?

va05 1,881 0 1 1.31 0.46

Network Has the firm had any cooperation with other firms? vint02a 1,884 0 1 0.46 0.50

Sector

Manufacturing and Construction sector 1,884 0 1 0.24 0.43

Trade and Transport sector 1,884 0 1 0.28 0.45

Lodging and Other Services sector 1,884 0 1 0.18 0.38

Financial and Business Services sector 1,884 0 1 0.30 0.46

Table 5.6: Descriptive statistics independent variables


Chapter 5 121


Control variables

The control variables used are described in table 5.6:

1. ‘Number of employees’, indicating size.

2. ‘Age of the firm’, indicating firm age.

3. ‘Sector’, indicating sector. These are either used separately or divided into four combined

dummy variables as described in table 5.6. One sector or a combination of two sectors is

always left out of the regression. The following combinations are made:

a. Manufacturing and Construction;

b. Trade and Transport;

c. Lodging and Other Services;

d. Financial and Business Services.

For all regression models (see paragraph 5.6) we have chosen to use the combined sector dummy

variables because when using them individually the outcomes became disturbing.


The dataset consists of 1,884 Dutch SMEs. The descriptions of the variables were given earlier in

table 5.6. The most distinctive feature of this sample is the relative small size of firms involved in

FDI compared to the firms that are involved in export. Only 64 out of 1,884 firms were conducting

FDI against 388 firms who export. It is hoped that this will only have a limited disturbing influence

on the (linear) regression. As described earlier some variables in the dataset included answers

like ‘don’t know’ or ‘refused’, these answers have been classified as missing, in order to leave them

out of the analysis. In order to control for multicollinearity we performed correlation analysis on the

variables. The results are found in table 5.7.

From table 5.7 can be concluded that there are no problems with multicollinearity, assuming

that the Pearson correlation indicator needs to be lower than 0.5. There is no reason to perform

additional tests (chi-square tests) on multicollinearity. Based on the VIFs in tables 5.8 to 5.12 we

see similar results; these results are also not posing a problem with multicollinearity since the

outcomes on tolerance are below 0.05 and on the VIF are below 5.

122 Chapter 5


1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

1 New Product 12 1

2 New Process 12 0.327 1

3 FDI 0.088 0.075 1

4 Export 0.175 0.128 0.218 1

5 Network 0.163 0.171 0.110 0.143 1

6 Firm size 0.171 0.289 0.117 0.097 0.097 1

7 Firm age 0.032 0.112 -0.012 0.000 -0.014 0.295 1

8 Employee low education -0.093 -0.038 -0.049 0.003 -0.086 0.154 0.123 1

9 Employee high education 0.148 0.058 0.094 0.085 0.173 -0.019 -0.092 -0.492 1

10 Product innovation 0.366 0.234 0.108 0.272 0.188 0.194 0.037 -0.122 0.176 1

11 Process innovation 0.224 0.425 0.067 0.128 0.136 0.286 0.134 -0.034 0.066 0.257 1

12 Innovative -0.394 -0.375 -0.063 -0.208 -0.187 -0.244 -0.089 0.066 -0.103 -0.360 -0.416 1

13 Transport -0.037 0.027 0.044 0.063 0.077 0.100 -0.005 0.144 -0.094 -0.038 0.055 0.006 1

14 Other Services 0.018 -0.056 -0.032 -0.085 -0.079 -0.089 -0.026 0.027 -0.079 -0.057 -0.049 0.036 -0.091 1

15 Business Services 0.067 -0.026 0.015 -0.007 0.095 -0.052 -0.198 -0.235 0.321 0.057 -0.023 -0.002 -0.158 -0.146 1

16 Lodging -0.058 -0.022 -0.062 -0.139 -0.092 0.011 0.009 0.044 -0.058 -0.027 -0.002 0.028 -0.105 -0.096 -0.168 1

17 Financial 0.025 0.103 0.016 -0.045 0.059 0.104 0.186 -0.176 0.172 0.061 0.089 -0.071 -0.104 -0.096 -0.167 -0.111 1

18 Trade -0.044 -0.029 -0.009 0.032 -0.082 -0.086 -0.045 -0.006 -0.106 0.010 -0.059 0.023 -0.153 -0.141 -0.245 -0.162 -0.162 1

19 Construction -0.061 -0.057 -0.028 -0.092 0.006 0.038 0.106 0.188 -0.154 -0.130 -0.044 0.068 -0.121 -0.112 -0.194 -0.128 -0.128 -0.187 1

20 Manufacturing 0.085 0.074 0.055 0.259 0.005 0.008 0.037 0.071 -0.056 0.105 0.058 -0.094 -0.111 -0.102 -0.178 -0.118 -0.117 -0.172 -0.136 1


Chapter 5 123


1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

1 New Product 12 1

2 New Process 12 0.327 1

3 FDI 0.088 0.075 1

4 Export 0.175 0.128 0.218 1

5 Network 0.163 0.171 0.110 0.143 1

6 Firm size 0.171 0.289 0.117 0.097 0.097 1

7 Firm age 0.032 0.112 -0.012 0.000 -0.014 0.295 1

8 Employee low education -0.093 -0.038 -0.049 0.003 -0.086 0.154 0.123 1

9 Employee high education 0.148 0.058 0.094 0.085 0.173 -0.019 -0.092 -0.492 1

10 Product innovation 0.366 0.234 0.108 0.272 0.188 0.194 0.037 -0.122 0.176 1

11 Process innovation 0.224 0.425 0.067 0.128 0.136 0.286 0.134 -0.034 0.066 0.257 1

12 Innovative -0.394 -0.375 -0.063 -0.208 -0.187 -0.244 -0.089 0.066 -0.103 -0.360 -0.416 1

13 Transport -0.037 0.027 0.044 0.063 0.077 0.100 -0.005 0.144 -0.094 -0.038 0.055 0.006 1

14 Other Services 0.018 -0.056 -0.032 -0.085 -0.079 -0.089 -0.026 0.027 -0.079 -0.057 -0.049 0.036 -0.091 1

15 Business Services 0.067 -0.026 0.015 -0.007 0.095 -0.052 -0.198 -0.235 0.321 0.057 -0.023 -0.002 -0.158 -0.146 1

16 Lodging -0.058 -0.022 -0.062 -0.139 -0.092 0.011 0.009 0.044 -0.058 -0.027 -0.002 0.028 -0.105 -0.096 -0.168 1

17 Financial 0.025 0.103 0.016 -0.045 0.059 0.104 0.186 -0.176 0.172 0.061 0.089 -0.071 -0.104 -0.096 -0.167 -0.111 1

18 Trade -0.044 -0.029 -0.009 0.032 -0.082 -0.086 -0.045 -0.006 -0.106 0.010 -0.059 0.023 -0.153 -0.141 -0.245 -0.162 -0.162 1

19 Construction -0.061 -0.057 -0.028 -0.092 0.006 0.038 0.106 0.188 -0.154 -0.130 -0.044 0.068 -0.121 -0.112 -0.194 -0.128 -0.128 -0.187 1

20 Manufacturing 0.085 0.074 0.055 0.259 0.005 0.008 0.037 0.071 -0.056 0.105 0.058 -0.094 -0.111 -0.102 -0.178 -0.118 -0.117 -0.172 -0.136 1

124 Chapter 5


5.5.3 Research method

In paragraph 5.6, different statistical analyses are done. For each analysis a ‘binary logic regression’

was used, which is based on the ‘binary logit model’. The difference with a regular linear regression

is in the interpretation of the outcomes. The regular linear regression would explain FDI or export

and the binary logit model explains the probability that FDI or export by SMEs occurs. The reason

for this alternative model is the fact that the dependent variables are measured by a dummy.

5.6 Analyses

In order to test the five hypotheses, five linear regression models were created:

Regression model 1

Regression model 1 tests H1; ‘SMEs which export perform better than SMEs that are not exporting,

when controlling for other factors’. For more information on the following variables we refer to table

5.6.

Selected cases:

• For this analysis we included the complete dataset (N=1,884).

Dependent variable:

1a. ‘Estimated net profit 2003 (pre-taxes)’, indicating performance.


• ‘Does your firm export goods or services?’, ‘yes’ indicating export.


• ‘% of employees with higher level of education’, indicating high education.

• ‘% of employees with lower level of education’, indicating lower education.


innovation.


innovation.

Control variables:


refer to paragraph 4.4.2 and table 5.6. In this model the sectors are combined.


Chapter 5 125


Model performance 1a

Dependent: ‘Estimated net profit 2003 (pre-tax)’

Variable Description coeff. std.err. tolerance VIF

Export Does the firm export goods or services? 1.441 1.130 0.850 1.176

Innovative SMEs

Product innovation Has the firm introduced any new products/services? 1.477 0.995 0.828 1.208

Process innovation Has the firm introduced any improvements in its internal processes? 0.836 1.148 0.888 1.126

Network Has the firm had any cooperation with other firms? -0.920 0.935 0.922 1.084

Education employees

% of the employees is low educated? -0.035** 0.016 0.666 1.501

% of the employees is highly educated? 0.023 0.020 0.652 1.533

Firm age How old is the company? 0.039** 0.017 0.893 1.120

Firm size How many employees does the company have? 0.131*** 0.015 0.822 1.217

Sector

Trade and Transport 1.013 1.262 0.601 1.664

Manufactering and Construction -1.986 1.343 0.601 1.664

Lodging and Other Services -1.390 1.441 0.690 1.449

Number of observations 1,406



LR statistic 11.902



126 Chapter 5


H1. The results in table 5.8 suggest that hypothesis 1: ‘SMEs which export perform better than

SMEs that are not exporting, when controlling for other factors’, is not accepted nor rejected;

no support is found. The effect of export on performance is indicating a positive effect but not

significantly. Controlling for sector, size and age is very important because of the differences in

performance for certain ages, sizes and sectors (old vs. young, small vs. larger, etc). The results

in table 5.8 show this for size and age; both have a significant positive effect on performance.

This means that older and larger SMEs perform better than young and small SMEs. Nonetheless,

export does not seem to be an important performance enhancement tool for Dutch SMEs.

Table 5.8 also shows a negative effect for a low education level of employees on performance in

Dutch exporting SMEs. This negative effect may be caused by unproductive behavior of certain

employees in the firm, although the labor costs remain the same.

Regression model 2

Regression model 2 tests H2; ‘The more an SME exports, the better it performs, when controlling

for other factors’. For more information on the following variables we refer to table 5.6.

Selected cases:


Dependent variable:



• ‘The % of sales from foreign clients’, indicating export intensity.





innovation.


innovation.

Control variables:




Chapter 5 127


H2. The results in table 5.9 indicate that hypothesis 2; ‘the more an SME exports, the better it

performs, when controlling for other factors’, is accepted. Export intensity has a weak but significant

positive effect on the estimated net profits (pre-tax). This shows that even though export in general

is not an important factor for enhancing performance, the intensity with which a firm exports is. A




Export intensity % of sales earned from foreign customers? 0.102* 0.058 0.933 1.071

Innovative SMEs


Process innovation Has the firm introduced any improvements in its internal processes? -2.478 5.288 0.928 1.078


Education employees

% of the employees is low educated? -0.058 0.069 0.544 1.838


Firm age How old is the company? -0.011 0.071 0.860 1.163


Sector







LR statistic 3.501



128 Chapter 5


higher intensity of exporting activities seems to slightly influence the performance of Dutch SMEs

significantly positive. The intuition behind this outcome is that intensive export activity is, in many

cases, only done when exporting has proven to be valuable to the firm. Increasing export intensity

when export proves successful obviously influences performance positively.

Similar to regression model 1, the size of the SME also has a significantly positive effect on

performance.

Regression model 3

Regression model 3 tests H3; ‘SMEs engaged in FDI perform better than SMEs that are not

engaged in FDI, when controlling for other factors’. For more information on the following variables

we refer to table 5.6.

Selected cases:


Dependent variable:








innovation.


innovation.

Control variables:




Chapter 5 129





FDI Has the firm been involved in FDI during the last 3 years? -1.153 2.122 0.960 1.041

Innovative SMEs

Product innovation Has the firm introduced any new products/services? 1.829* 0.954 0.879 1.138


Network Has the firm had any cooperation with other firms? 0.007 0.924 0.920 1.087

Education employees





Sector







LR statistic 11.977



130 Chapter 5


H3. The results in table 5.10 suggest that hypothesis 3; ‘SMEs engaged in FDI perform better than

SMEs that are not engaged in FDI, when controlling for other factors’, is not accepted nor rejected;

no support is found. Moreover there is a negative (not significant) signal from FDI on performance.

This negative signal can possibly be explained by the way FDI is measured. The question that

was asked was ‘have you invested abroad in the past 3 years?’, indicating that firms who answered

‘yes’ have made large investments in the past 3 years in order to enter these foreign markets.

The performance of such firms might increase in the next few years when there is a return on

investment.

Similar to regression model 1, a negative effect of low educated employees can also be seen for

Dutch SMEs that engage in FDI. Again, also size and age have a significantly positive effect on

performance.

Regression model 4

Regression model 4 tests H4; ‘SMEs which combine FDI and network involvement perform better

than SMEs which are engaged in FDI but not in networking, when controlling for other factors’. For

more information on the following variables we refer to table 5.6.

Selected cases:

• For this analysis we included SMEs that answered ‘yes’ to ‘Invested abroad in the past 3

years?’ indicating FDI (N=64).

Dependent variable:








innovation.


innovation.

Control variables:




Chapter 5 131






Innovative SMEs

Product innovation Has the firm introduced any new products/services? -0.418 3.812 0.581 1.721


Network Has the firm had any cooperation with other firms? 7.695** 3.524 0.734 1.636

Education employees

% of the employees is low educated? -0.160 0.069 0.443 2.399

% of the employees is highly educated? -0.040 0.076 0.417 2.399

Firm age How old is the company? 0.095 0.084 0.779 1.284

Firm size How many employees does the company have? 0.055* 0.033 0.831 1.203

Sector

Trade and Transport -1.617 3.574 0.640 1.562






LR statistic 1.269



132 Chapter 5


H4. Table 5.11 indicates that hypothesis 4; ‘SMEs which combine FDI and network involvement

perform better than SMEs which are engaged in FDI but not in networking, when controlling for

other factors’, is accepted. Dutch SMEs that engage in FDI combined with cooperating with other

firms perform better than those who solely engage in FDI. There is a significant strong positive

effect of network activity on estimated net profits (pre-tax) for firms that engage in FDI. As explained

earlier, FDI and cooperation with other firms are closely related (although not correlated, see table

5.7) and enhance the effect. Working together with other firms in combination with engagement

in FDI seems to be a worthwhile investment. The intuition behind this effect might be that the

firms with which the SMEs cooperate are local firms in the foreign market that provide the Dutch

SMEs with all sorts of valuable information and so forth. It can also mean that the Dutch SMEs are

cooperating with other Dutch firms that have already settled in the foreign market and can also

provide valuable information and help. Table 5.11 also shows a positive significant effect of the

control variable ‘size’.

Regression model 5

Regression model 5 tests H5; ‘SMEs which combine FDI and exporting have higher firm

performance than SMEs which are solely engaged in FDI or solely in export’. For more information

on the following variables we refer to table 5.6.

Selected cases:


Dependent variable:









innovation.


innovation.

Control variables:




Chapter 5 133





Interaction effect Export * FDI -1.225 4.722 0.274 3.650

FDI Has the firm been involved in FDI during the last 3 years? -0.954 3.943 0.287 3.490


Innovative SMEs


Process innovationHas the firm introduced any improvements in its internal processes? -0.842 1.149 0.888 1.126


Education employees





Sector







LR statistic 10.117



134 Chapter 5


H5. Table 5.12 shows that hypothesis 5; ‘SMEs which combine FDI and exporting have higher firm

performance than SMEs which are solely engaged in FDI or solely in export’, is not accepted nor

rejected; no support was found. Even when testing for an interaction effect we can see there is a

negative signal. Maybe due to the fact that FDI is such an advanced mode of internationalization that

the combination with export does not influence the performance any more than the engagement

in FDI already does; which was a negative effect. The logic behind the negative effect has already

been discussed in regression model 3. Table 5.12, like the other tables in this paragraph, also

shows a positive significant effect of size and age of the firm and a negative significant effect of

low educated employees on performance.

Table 5.13 summarizes the results from the regression analyses. Only two out of the five hypotheses

have been accepted. The other hypotheses were not proven since no significant results were

found.

Hypothesis Description Outcomes

H1 Exporting SMEs perform better than non exporting SMEs. Not provenH2 The more an SME exports, the better it performs. AcceptedH3 SMEs that engage in FDI perform better than those who do not. Not proven

H4 SMEs that combine network activities with FDI perform better than those who do FDI without network. Accepted

H5 SMEs that combine FDI and export perform better than those who solely do either one. Not proven


Chapter 5 135


5.7 Conclusions

Support was found for the relationship between export intensity and performance. This could

indicate that Dutch SMEs that have higher export intensities also have higher performance levels.

This positive effect is very weak, so in practice the effects may be small.

Support was also found for the relationship between an interaction of FDI, network and

performance. This could indicate that networking and FDI are a good combination in order to

increase the performance of Dutch SMEs in foreign countries

5.7.1 Limitations

This chapter is of a more descriptive nature, whereas the field of performance implications of

internationalization strategies is awaiting explanatory studies, which can establish causal

relationships. In order to gain more insight in the successful ingredients for internationalization

strategies it is important to research from a more causal point of view (Dhanaraj and Beamish,

2003).

Due to the restrictions imposed on us by the dataset we were not able to construct a performance

measure that is comparable to other studies. The dependent variable, the estimated net profits,

has the disadvantage that it not only measures performance, but also the foresight skills of the

entrepreneur.


When it comes to performance, governments should not be involved in subsidizing Dutch SMEs

that (want to) engage in FDI; results in this study indicate that the performance of these firms is

not significantly improved by FDI for at least the first three years. Governments should focus on

stimulating export activity as well as FDI by facilitating networks and investing in the education

level of Dutch employees. Both factors have proven to positively influence the performance of

Dutch SMEs that internationalize.

‘Some entrepreneurs fight today’s fires, but forget the ashes of yesterday’Jean-Pierre Bernard, Executive Director/Owner LFC Management (ISRP dataset)

136 Chapter 5


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Appendix

The ISRP questionnaire and EIM Policy Panel 2004-2 questionnaire are available on request.

160

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