DANCEST 805 Lecture Notes - Lecture 8: High Tech, Intensify, Network Theory
Chapter 23: Internationalisation and entrepreneurial businesses
Internationalisation and entrepreneurial SMEs
SMEs prevalence among the relatively recent category of firms referred to as born globals, global
start-ups, international new ventures or micro multinationals has given rise to as substantive
research field, international entrepreneurship.
International entrepreneurship (IE) has been defined as a combination of innovative, risk-seeking
behaviour that crosses national borders and is intended to create value for an organisation. Its
essential contribution has been to illuminate a phenomenon — `international new ventures' (INV) —
that has been largely ignored by the entrepreneurship and international business theories. The
former generally views new firm formation as a locally embedded process, while the latter does not
really posit a role for smaller and inexperienced firms it1 the inter- national markets.
At first researchers were focusing on MNEs but these firms experienced serious difficulties such as
depressed global demand, intense international competition and newly industrialising countries and
revolutionary new technologies. (Mostly due to the oil crisis of 1973/1974).
Faced, therefore, with burgeoning trade deficits and an inert large-firm sector, policymakers began
to focus on developing the little-tapped export potential of smaller firms. This favourable policy
climate transformed SME internationalisation into an important area of enquiry — a situation that
has continued to date.
Internationalisation and entrepreneurial SMEs: concepts, context and extent
The term `internationalisation' commonly refers to the process of increasing involvement in
international operations.
Sometimes used interchangeably with globalisation (its most evolved form), internationalisation is
attained through a variety of international market entry and development modes. These include
direct and indirect exporting, licensing, franchising, management contract, turn-key contract,
contract manufacturing/international subcontracting, industrial cooperation agreements, project
operations, contractual joint venture, equity joint venture, strategic alliances, mergers and
acquisitions and wholly owned subsidiaries.
In general terms, the progression from home-based internationalisation modes to overseas
production modes and from non-direct investment modes to direct ones, is marked by increased
resource commitments) transfer and risks. Given their obvious resource and attitudinal differences
small and large firms have tended to adopt divergent internationalisation modes. SMEs are more
likely to supply their international markets from domestic production bases.
In general, SME internationalisation is greater in small, open economies and less in large, more self-
contained economies. However it is not always the case.
That entrepreneurial SMEs are not restricting their internationalisation forays to exporting, however,
is evident in the rising trend towards small firms' adoption of more direct forms of international
marketing, including low-level foreign direct investments (FDI), strategic alliances, licensing, joint
ventures and similar cooperation-based modes.
These internationally active SMEs are growing faster than their domestic counterparts. Those in
niche markets and new (including high-tech) industries constitute the fastest- growing segment (20
per cent), while those in traditional industries (around 50 per cent) internationalise incrementally via
exporting. It would, indeed, appear that most SMEs now see internationalisation as not only
fashionable but also imperative. This is based on the realisation that pressures from inward
internationalisation are likely to be most unkind to firms that stand still and are not internationally
active.
Explaining SME internationalisation
Focusing on SME internationalisation, three theoretical approaches can be identified
1. Incremental internationalisation- or stage of development – models
According to the `stage' theorists, firms adopt an incremental, evolutionary approach to foreign
markets, gradually deepening their commitment and investment as they gain in international market
knowledge and experience.
Firms are also believed to target neighbouring, `psychically close' countries initially and,
subsequently, enter foreign markets with' successively larger psychic distance. `Psychic distance'
refers to the extent of proximity in geography, language, culture, political systems and business
factors — e.g., industry structure and competitive environment.
Some researchers found that the internationalisation process was the consequence of a series of
incremental decisions, rather than large, spectacular foreign investments. Four different stages were
identified in relation to a firm's international involvement:
A. no regular exports
B. exports via independent representation (agents)
C. sales subsidiaries
D. production manufacturing.
Other researcher extended the establishment chain backwards to include a pre-export-stage.
Starting to export was found to be influenced by the interplay between `attention-evoking factors'
and the individual decision maker, the environment and history of the firm, including experience in
extra-regional expansion (domestic internationalisation). Thus, the establishment chain model
attempts to explain the whole process of a firm's internationalisation, from the pre-export to post-
export stages, including FDI.
The actual number of `stages' undergone by internationalising firms also differs according to the
model however these differences are rather small. A major criticisms, however, are `the lack of
proper design to explain the development process', the absence of clear-cut boundaries between
stages and the lack of `tests of validity and reliability'.
The incremental internationalisation models have also been faulted on grounds of having limited
applicability. It was found that establishment model. was one of several paths to FDI, noting that
`firms often bypass the intermediate stages to FDI'. The incremental internationalisation models
merely identify the internationalisation patterns of certain firms, but not of others and they fail to
adequately explain the processes involved.
Researchers tried to clarify the situation by categorising internationalising firms into three kinds. s.
First, the traditional exporters with internationalisation patterns largely reflecting the traditional
stages model. Second, firms that leapfrog some stages — e.g., late starters that have only domestic
sales for many years, but then suddenly invest in a distant foreign market. Third, the born global
firms. Suffice it to say that `the stages theory has merit in its use as a framework for classification
purposes rather than for an understanding of the internationalization process.
Evidence was found for the psychic distance concept concluding that firms should focus on those
countries which are closest in "psychic distance" for early export endeavours'. However, it was
argued that there is limited relevance to the concept in the face of vastly improving global
communications and transportation infrastructures, as well as increasing market convergence.
Some even mentioned a psychic distance paradox' —that operations in psychically close countries
are not necessarily easy to manage because assumptions of similarity can prevent executives from
learning about critical differences.
