Abstract
International marketing is changing dramatically. Government-imposed barriers and structural impediments, which previously segmented and protected domestic markets, are falling rapidly, and technological advances in production, transportation, and telecommunications—especially the Internet—allow even the smallest firms access to customers, suppliers, and collaborators around the world. Economic growth and innovation, both domestically and internationally, are fuelled increasingly by small companies and/or entrepreneurial enterprises. These trends will have a profound impact on marketing strategies, public policies, and the daily lives of everyone.
The focus of this and a subsequent special issue of the Journal of International Marketing is the phenomenon of globalization and, specifically, its relevance for and effects on small business and entrepreneurship.
On the surface, the activities of small or entrepreneurial businesses and those of multinational enterprises seem highly divergent. Until recently, they have operated in largely separate realms, each in its own competitive space and with markedly different characteristics. However, globalization has begun to dismantle the barriers that traditionally segmented local business opportunities and firms from their international counterparts. Local markets are becoming integral parts of broader, global markets. Consequently, internationally oriented entrepreneurs can view a much broader range of opportunities, unrestricted by national boundaries. In this integrating global environment, entrepreneurs and emerging businesses must learn about global business to thrive alongside larger firms already in the international marketplace. Conversely, multinational businesses are compelled to acquire greater insight into the strategies and processes of small and entrepreneurial enterprises, with which they increasingly share the same economic and competitive space. New strategic synergies are being created in the global arena through collaborative arrangements between small, entrepreneurial firms and large, international companies, with small firms’ enterprises frequently entering the global value-added chains of the larger multinationals.
To explore and expand the implications of these developments for the management of small, entrepreneurial firms, a pioneering, three-day conference was held at McGill University in Montreal, Canada, under the joint auspices of McGill's Centre for International Business Studies and the Dobson Centre for Entrepreneurial Studies. The conference brought together leading scholars from both international business and small business/entrepreneurship to begin integrating relevant research in what previously have been widely divergent fields. Selected papers from that conference were subjected to an extensive process of peer review and comments. Each paper was revised extensively to incorporate and reflect the perspectives of other disciplines, as well as to develop the significance of its findings for managers. The final product is the series of articles presented in this and in a subsequent special issue of JIM that brings the results of leading-edge research to bear on the management concerns of small and medium-sized enterprises (SMEs).
Models of Internationmalization
At least three prominent schools of scholarship have direct implications on the process of internationalization of SMEs. We refer to them here as the stage models, foreign direct investment (FDI) theories, and network theories.
The stage models (Cavusgil 1980; Johanson and Vahlne 1977, 1990; Johanson and Wiedersheim-Paul 1975) hold that firms internationalize through an orderly growth process in incremental stages. Initially, they may have only peripheral international involvement. However, as they learn through time and gain experience, they commit progressively more resources to international activities and accept the increasingly higher risks of entering and operating in new and distant markets. For example, they may move from indirect exporting to direct exporting to minority equity positions in joint ventures to full FDI. The incremental knowledge and experience about international operations acquired through this orderly expansion enable firms to gain insight into specific markets abroad and develop international expertise and skills, which thereby enable them to overcome the risks and disadvantage of “foreignness.” In essence, they take advantage of an extended time horizon to maximize risk-adjusted revenues, control resource requirements (including knowledge), and minimize costs and risks associated with internationalization. This view assumes neither the initial possession of a superior firm-specific advantage (FSA) nor a time urgency to exploit such advantages, when and if recognized.
Modern FDI theories are based largely on Hymer's (1976) observation that a superior FSA must be exploited in a timely fashion by the firm in a marketplace before that FSA is eroded. Hymer argues that it is the strength of the FSAs that enables international firms to compete successfully against local firms, despite their inherent handicap of foreignness. Although most advantages erode, FDI theories do not invoke time as a driving factor in either stimulating or deterring FDI. Rather, FDI is viewed as a mechanism that empowers a firm to combine its various FSAs with location-specific advantages and exploit them internally by creating its own system of subsidiaries abroad. In this view, the firm internationalizes independently, through FDI, without relying significantly on the knowledge or other resources of partners. A key concern is to maintain control. Some established international firms, facing requirements to assume minority positions (such as IMB and Coca-Cola in India and IBM in France), elect to withdraw from major markets rather than yield even partial control to their potential partners. They refuse to accept interdependence, as opposed to independence, as a basis for internationalization, mainly because of the fears of dissipating their FSAs.
The network theories relax the assumption that FSAs asymmetrically favor international firms and view international growth as based largely on sharing respective complementary, competitive advantages with other firms. This assumption contrasts with a core tenet of FDI theories, namely, that firms internationalize by internally leveraging their own FSAs to offset their disadvantages. The most potent partnerships have complimentary advantages, fully leveraged to the benefits of the partnership. Although some loss of independence and revenue sharing is inherent in growth through networking, interfirm collaboration may enable a firm to position itself in foreign markets much more quickly than it could through independent FDI. A firm that wishes to enter these markets quickly need not lose time gaining the necessary expertise or market knowledge itself. It can draw instead on the complementary strengths of other (often local) firms in those areas in which it lacks resources or suffers from foreignness without losing excessive time, absorbing undue risks, or excessively committing its scarce resources.
Resource-based approaches (Teece 1998; Teece, Pisano, and Shuen 1997) focus on the development and exploitation of unique bundles of capabilities and resources, including knowledge, in the international growth of firms. For our purposes, such internally developed resources may be viewed as specific FSAs and, hence, subsumed under the broad definition of FDI theories.
Internationalization of SMEs
The models previously discussed provide a comprehensive conceptual framework for understanding the internationalization of large, established companies. But do these mainstream models of internationalization help us also understand the emergence of small, entrepreneurial firms in the global competitive arena? Does any single conceptual approach adequately capture and explain this phenomenon? The collection of articles assembled in this and a subsequent issue of JIM offer penetrating new perspectives and empirical findings related to these important questions. They report on leading-edge research undertaken by scholars in several countries. Together, they provide new ideas and insights that will be useful to scholars and business managers alike.
We examine first the four articles appearing in this issue of JIM. Five other related articles will appear in a subsequent issue.
In retrospective but longitudinally oriented research, Marian V. Jones surveys, from their inception, the international business activities of 196 entrepreneurial, high-tech firms in the United Kingdom. Although she finds little direct or explicit support for stage models—the theory most suited for explaining the longitudinal behavior of firms over time—she discovers that the accumulation of experiential knowledge (a key explanatory factor of stage models) is likely to be significant in determining the rate and scope of the international expansion of small firms. However, the firms in her sample sometimes gained their experience and knowledge of international markets and operations in ways totally unforeseen by the theory, namely, by using entry modes, and sometimes complex combinations of entry modes, more traditionally associated with larger, more experienced firms. In contrast to the customary outbound direction of internationalization activities predicted by both the stage models and FDI theories, many of the firms Jones studies internationalize some aspects of their value chain through the inbound activities of other internationalizing firms (i.e., firms moving into the U.K. market from elsewhere). As a consequence, she defines cross-border activity as the cornerstone of the internationalization process. This cross-border activity moves both inbound and outbound, which she calls “inward” and “outward” internationalization. They include a wide range of involvement and complexity, from simple transactions to FDI in both directions, associated with key value chain activities such as research and development, production, and marketing. Each of the firms in her sample follows a seemingly unique pattern of internationalization, influenced by its own strategic objectives and the state of its resources and experience. Her overriding finding is that the scope of internationalization for small firms is much less limited by resource constraints and lack of experience than either the stage models or FDI theories might suggest. Differences in the intensity of cross-border links across a range of value chain activities suggest that some firms set out to gain experiential knowledge more quickly than others and that partners are selected strategically in relation to the firm's specific business activities.
Nicole E. Coviello and Kristina A.-M. Martin draw remarkably similar conclusions from their case studies of four New Zealand-based engineering consulting firms. They observe that the decisions and processes in internationalizing these innovative and service-based small consulting firms are as complex as those inherent in the stage models, FDI theories, and network theories. Constrained by time and resources and under the intense competitive pressures typical of such knowledge-intensive industries, these firms appear to combine strategically advantageous elements of all three dominant theories in their internationalization. For example, they followed a logical progression over time (stage models), while relying on a multitude of relationships (network theories) to gain access to local markets and develop specific competitive advantages (FDI theories).
Although we might attribute the complexities of Coviello and Martin's findings to difficulties inherent in the internationalization of service and consulting companies, Andrew McAuley's research shows similar processes at work in the sample of 15 small Scottish arts and crafts companies he studied. Although all the firms were less than a year old, they already had internationalized, becoming “instant internationals” (Oviatt and McDougall 1994). McAuley demonstrates that each of the firms relied mainly on strong network partners to enter international markets and sell its arts and crafts products globally. He further discovers that practically all of the companies participated actively in conferences and trade shows to establish or strengthen those links. In explaining this rapid internationalization, McAuley points to a strong self-perception of “can do and will do” as a common characteristic of the entrepreneurs at the helms of these small firms. Combined with international opportunities identified through networking contacts, this strong spirit of self-motivation seems to have propelled these small firms rapidly into new and distant markets. This pattern is in direct contrast to the received wisdom of the stage models, which calls for firms to export first to markets with close geographic and/or cultural proximity.
The research of Gopalkrishnan R. Iyer and Jon M. Shapiro focuses specifically on patterns of internationalization in ethnic entrepreneurial firms. The authors document the process by which ethnic (for example, Chinese or Indian) entrepreneurs in the United States first used their own local ethnic population and networks in the U.S. market to help globalize firms from their original home countries—a strikingly similar finding to Jones's “internally directed cross-border activities” for small, entrepreneurial firms in the United Kingdom. Armed with the knowledge and experience of managing cross-border business activity from the home country to the United States, these ethnic entrepreneurs subsequently served as catalysts in facilitating FDI from the United States back to their countries of origin. From the vantage point of standard theories, such FDI is reversing the direction of internationalization midstream. However, viewed from the network perspective, these entrepreneurs first used their ethnic networks to serve ethnic markets in the United States by importing supplies from their homeland. They subsequently strengthened the procurement function in their value chains by investing directly back into those countries from which the supplies were obtained. Membership in an ethnic market network became the currency of entrepreneurial value creation moving in both directions: first into the United States and later back into the country of ethnic origin. The cumulated cultural or ethnic experience of these entrepreneurs serves as the catalyst for their growing commitment to international trade in ethnically demanded goods and services (as in the stage models). Their use of the ethnic networks, first in the United States and then in other countries, helps them access and deepen their market penetration in a much shorter time than developing them on their own (as in the network theories). Subsequently, the accumulated experience and operating knowledge mitigates the risks associated with investing back in their homeland. The leveraging of the ethnic network advantage becomes a primary FSA for profitable FDI by these ethnic entrepreneurs.
The overriding message of the articles in this collection is simple yet powerful: Small, entrepreneurial firms enjoy enormous new opportunities in the expanding global competitive arena. However, they also face severe constraints. Managers must leverage their sources of advantage (including knowledge or expertise in local markets) to compensate for the disadvantages of constrained resources, limited access to international markets, and general inexperience in international operations to perform successfully in international markets. The processes and strategies they employ in so doing vary widely, depending on the characteristics of each firm and its management at any specific point in its evolution. No single, established model adequately explains the success of these small firms. Rather, their behavior must be regarded as an holistic process in which insights are drawn from a variety of theoretical models, including the stage models, FDI theories, and network theories.