Handbook of Research on European Business and Entrepreneurship: Towards a Theory of Internationalization (Elgar Original Reference)

HANDBOOK OF RESEARCH ON EUROPEAN BUSINESS AND ENTREPRENEURSHIP

Handbook of Research on European Business and Entrepreneurship Towards a Theory of Internationalization

Edited by

Léo-Paul Dana Adjunct Professor, GSCM-Montpellier Business School, on study leave from the University of Canterbury, New Zealand, Senior Advisor, World Association for Small and Medium Enterprises and Founding Editor, Journal of International Entrepreneurship and Journal of Enterprising Communities

Isabell M. Welpe Assistant Professor, Munich School of Management, Ludwig-MaximiliansUniversität, Germany

Mary Han Assistant Professor of Entrepreneurship and Strategy, Ryerson University, Canada

Vanessa Ratten Assistant Professor, School of Business Administration, Duquesne University, USA

Edward Elgar Cheltenham, UK • Northampton, MA, USA

© Léo-Paul Dana, Isabell M. Welpe, Mary Han and Vanessa Ratten, 2008 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited Glensanda House Montpellier Parade Cheltenham Glos GL50 1UA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA

A catalogue record for this book is available from the British Library Library of Congress Control Number: 2007941687

ISBN 978 1 84542 501 2 (cased) Printed and bound in Great Britain by MPG Books Ltd, Bodmin, Cornwall

Contents List of contributors Foreword: a theory of internationalization for European entrepreneurship by David Storey PART I

Introduction Léo-Paul Dana, Isabell M. Welpe, Mary Han and Vanessa Ratten

2

How international are European venture capital firms? Sophie Manigart, Wouter De Maeseneire, Mike Wright, Sarika Pruthi, Andy Lockett, Hans Bruining, Ulrich Hommel and Hans Landström

3

4

xiii

INTRODUCTORY CHAPTERS

1

PART II

ix

3 17

COUNTRY STUDIES

Internationalization of small and medium-sized firms (SMEs) in a Western European service economy: the case of Andorra Sanford L. Moskowitz

31

Trust-based cooperation as driver for the internationalization of SMEs: empirical evidence from Austria Matthias Fink and Slawomir Teodorowicz

42

5

Internationalization of SMEs in Belarus Friederike Welter, David Smallbone, Anton Slonimski and Marina Slonimska

57

6

Internationalization of SMEs in Belgium Jan Degadt

77

7

Internationalization of SMEs in Bosnia and Herzegovina William R. Pendergast, Mugdim Pasic and Aziz Sunje

94

8

Internationalization of Bulgarian SMEs Kiril Todorov and Kostadin Kolarov

114

9

Internationalization of SMEs in Croatia Tihomir Vranesevic´, Branko Bogunovic´ and Miroslav Mandic´

135

10

Internationalization of SMEs in Cyprus Demetris Vrontis and Alkis Thrassou

150

11

Internationalization of Danish SMEs Per Servais, Erik S. Rasmussen, Bo B. Nielsen and Tage Koed Madsen

171

v

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12

Internationalization of enterprises in Estonia Tiit Elenurm

185

13

Internationalization of SMEs: the case of Finland Asko Miettinen

198

14

Internationalization of SMEs: the case of The Former Yugoslav Republic of Macedonia Marija Risteska and Zhidas Daskalovski

214

15

Internationalization of French SMEs Hervé Mesure and Rita Klapper

16

Patterns of internationalization of German SMEs: surveying manufacturing offshoring Steffen Kinkel, Gunter Lay and Spomenka Maloca

246

Growth of Archetypon S.A.: exploitation of opportunities in Greek and European marketplaces Irini Voudouris and Pavlos Dimitratos

263

17

223

18

The internationalization of Hungarian SMEs László Kállay and Imre Lengyel

277

19

Irish perspectives of international entrepreneurship Cecilia B. Hegarty

296

20

Israeli, born global, knowledge-intensive firms: an empirical inquiry Tamar Almor and Gilad Sperling

316

21

Italian SME international strategies: state of the art and some empirical evidences Alberto Mattiacci, Christian Simoni and Lorenzo Zanni

337

Analysis of the environment for small and medium-size enterprises in Latvia for further internationalization development Tatjana Volkova and Andra Brige

366

22

23

Internationalization of SMEs in Liechtenstein Hans-Rüdiger Kaufmann

386

24

The path to the internationalization of Lithuanian manufacturing SMEs Audra I. Mockaitis

410

25

The internationalization of SMEs in Malta: a critical assessment in the context of five European island regions Godfrey Baldacchino

431

Issues on the internationalization of SMEs in Eastern Europe: the case of Moldova Sanford L. Moskowitz

451

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27

Monaco’s forgotten glitter: industrial SMEs and their worldwide appeal Martine Spence

478

28

Internationalization of Dutch SMEs Jolanda A. Hessels

494

29

The impact of the Single Market Programme on the internationalization of Polish SMEs Anna Rogut and Bogdan Piasecki

513

Export performance and productivity in Portuguese manufacturing SMEs Margarida Proença, Isabel Correia and Orlando Petiz

533

30

31

Small and medium size enterprises in Russia Anatoly Zhuplev and Vladimir Shein

544

32

The internationalization of small and medium companies in San Marino Donata Vianelli

564

33

Internationalization of Slovenian SMEs as a learning and unlearning process Miroslav Rebernik and Ksenja Pusnik

580

34

The internationalization of small and medium firms in Spain Alicia Coduras, Cristina Cruz, Ignacio de la Vega and Rachida Justo

598

35

Network coordination as a key to external resources: a study of an internationalizing biotech SME Angelika Löfgren, Daniel Tolstoy, D. Deo Sharma and Jan Johanson

618

Managing the challenges of globalization: evidence from Swiss small and medium-sized enterprises Thierry Volery

636

36

37

Outward internationalization of Turkish SMEs Serdar Karabati

647

38

Internationalization of SMEs in Ukraine Nahum Goldmann, Svitlana Slava, Yuriy Makogon, Tetyana Orekhova and Alena Dubouskaya

660

PART III

CONSTITUENTS OF THE UNITED KINGDOM

39

Business support for internationalization in England Leigh Sear and Robert T. Hamilton

685

40

Supporting SMEs in Scotland: strategies for internationalizing Mike Danson, Ewa Helinska-Hughes, Michael Hughes and Geoff Whittam

700

viii 41

Contents Internationalization of Welsh SMEs: the role of Wales Trade International David Pickernell, David Brooksbank, Helena Snee, Farid Ullah and Dylan Jones-Evans

PART IV 42

CONCLUSION

Toward a theory of internationalization for European entrepreneurship Léo-Paul Dana, Mary Han, Vanessa Ratten and Isabell M. Welpe

Index

718

743

759

Contributors Tamar Almor, College of Management – Academic Studies, Israel Godfrey Baldacchino, University of Prince Edward Island, Canada and University of Malta, Malta Branko Bogunovic´, University of Zagreb, Croatia Andra Brige, United Nations Development Programme, Latvia David Brooksbank, University of Wales, United Kingdom Hans Bruining, Erasmus University Rotterdam, Netherlands Alicia Coduras, Instituto de Empresa, Spain Isabel Correia, Universidade do Minho, Braga, Portugal Cristina Cruz, Instituto de Empresa, Spain Léo-Paul Dana, GSCM-Montpellier Business School, on study leave from the University of Canterbury, New Zealand Mike Danson, University of Paisley, Scotland, United Kingdom Zhidas Daskalovski, University of Cyril and Methodius and Center for Research and Policy Making (CRPM), Macedonia Jan Degadt, Research Centre for Entrepreneurship, EHSAL-K.U. Brussel, Belgium Ignacio de la Vega, Instituto de Empresa, Spain Wouter De Maeseneire, Ghent University, Belgium Pavlos Dimitratos, Athens University of Economics and Business, Greece Alena Dubouskaya, Kyiv-Mohila Academy, Ukraine Tiit Elenurm, Estonian Business School, Estonia Matthias Fink, Vienna University of Economics and Business Administration, Austria Nahum Goldmann, University of Ottawa, Canada Robert T. Hamilton, University of Canterbury, New Zealand Mary Han, Ryerson University, Canada Cecilia B. Hegarty, University of Ulster, Northern Ireland, United Kingdom Ewa Helinska-Hughes, University of Paisley, Scotland, United Kingdom Jolanda A. Hessels, EIM Business & Policy Research, The Netherlands

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Contributors

Ulrich Hommel, European Business School, Germany Michael Hughes, University of Stirling, Scotland, United Kingdom Jan Johanson, University of Uppsala, Sweden Dylan Jones-Evans, Cardiff University, Wales, United Kingdom Rachida Justo, Instituto de Empresa, Spain László Kállay, Ministry of Economy and Transport, Hungary Serdar Karabati, Istanbul Bilgi Üniversitesi, Turkey Hans-Rüdiger Kaufmann, University of Liechtenstein, Liechtenstein Steffen Kinkel, Fraunhofer Institute for Systems and Innovation Research, Germany Rita Klapper, Groupe ESC Rouen, France Kostadin Kolarov, University of National and World Economy, Bulgaria Hans Landström, Lund University, Sweden Gunter Lay, Fraunhofer Institute for Systems and Innovation Research, Germany Imre Lengyel, University of Szeged, Hungary Andy Lockett, Nottingham University Business School, England, United Kingdom Angelika Löfgren, Stockholm School of Economics, Sweden Tage Koed Madsen, University of Southern Denmark, Denmark Yuriy Makogon, Donetsk State University, Ukraine Spomenka Maloca, Fraunhofer Institute for Systems and Innovation Research, Germany Miroslav Mandic´, University of Zagreb, Croatia Sophie Manigart, Vlerick Leuven Ghent Management School, Belgium Alberto Mattiacci, University of Siena, Italy Hervé Mesure, Groupe ESC Rouen, France Asko Miettinen, Tampere University of Technology, Finland Audra I. Mockaitis, Victoria University of Wellington, New Zealand Sanford L. Moskowitz, St. John’s University, United States Bo B. Nielsen, Copenhagen Business School, Denmark Tetyana Orekhova, Donetsk National University, Ukraine Mugdim Pasic, University of Sarajevo, Bosnia William R. Pendergast, California Polytechnic, United States Orlando Petiz, Universidade do Minho, Braga, Portugal

Contributors

xi

Bogdan Piasecki, Uniwersytet Lódzki, Poland David Pickernell, University of Glamorgan, Wales, United Kingdom Margarida Proença, Universidade do Minho, Braga, Portugal Sarika Pruthi, Nottingham University Business School, England, United Kingdom Ksenja Pussnik, University of Maribor, Slovenia Erik S. Rasmussen, University of Southern Denmark, Denmark Vanessa Ratten, Duquesne University, United States Miroslav Rebernik, University of Maribor, Slovenia Marija Risteska, Center for Research and Policy Making (CRPM), Macedonia Anna Rogut, Uniwersytet Lódzki, Poland Leigh Sear, Wood Holmes Group, Newcastle upon Tyne, England, United Kingdom Per Servais, University of Southern Denmark, Denmark D. Deo Sharma, Stockholm School of Economics, Sweden Vladimir Shein, Academy of National Economy, Russia Christian Simoni, University of Florence, Italy Svitlana Slava, Uzhgorod State University, Ukraine Marina Slonimska, University of Economics of Belarus, Belarus Anton Slonimski, Ministry of Economic Affairs Minsk, Belarus David Smallbone, Middlesex University Business School, England, United Kingdom Helena Snee, University of Glamorgan, Wales, United Kingdom Martine Spence, University of Ottawa, Canada Gilad Sperling, Helsinki School of Economics, Finland Aziz Sunje, Sarajevo Graduate School of Business, Bosnia Slawomir Teodorowicz, Vienna University of Economics and Business Administration, Austria Alkis Thrassou, University of Nicosia, Cyprus Kiril Todorov, Institute for Entrepreneurship Development at the University of National and World Economy, Bulgaria Daniel Tolstoy, Stockholm School of Economics, Sweden Farid Ullah, University of Glamorgan, Wales, United Kingdom Donata Vianelli, University of Trieste, Italy

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Contributors

Thierry Volery, University of St Gallen, Switzerland Tatjana Volkova, Riga Business School, Latvia Irini Voudouris, Athens University of Economics and Business, Greece Tihomir Vranessevic´, University of Zagreb, Croatia Demetris Vrontis, University of Nicosia, Cyprus Isabell M. Welpe, Ludwig-Maximilians-Universität, Germany Friederike Welter, University of Siegen, Germany Geoff Whittam, University of Paisley, Scotland, United Kingdom Mike Wright, Nottingham University Business School, England, United Kingdom Lorenzo Zanni, University of Siena, Italy Anatoly Zhuplev, Loyola Mary Mount University, United States

Foreword: a theory of internationalization for European entrepreneurship

I am both surprised and delighted to be invited to provide this foreword. I am surprised because, while I am interested in small firms that grow rapidly – some of which do so by selling overseas – I have never undertaken any original work specifically on those SMEs with an international focus: instead my research on entrepreneurship is much more about individuals undertaking activities such as widow cleaning, car repairing and hairdressing – hardly sectors likely to spawn ‘born global’ enterprises. My delight comes from being required to read a set of papers and familiarize myself with a literature and data with which I was previously unfamiliar. The evidence proved interesting – at least to me! Starting with the data, I found that the EU SME Observatory reports that the proportion of SMEs that exported varied considerably from one country to another. While the EU-15 average was 8 per cent, it was much higher, at 19 per cent and 17 per cent respectively, for Finland and Denmark, but much lower for the larger countries – particularly France. However, a somewhat different picture emerges when export performance by size class or firm data, taken from Eurostat (2003), are used. Here, for example, large enterprises in Finland supply 80 per cent of exports by tonne value, whereas micro firms provide only 2 per cent. Of course it is possible that the SME Observatory and Eurostat findings are compatible with one another – Finland could have large numbers of SMEs exporting but still only making, in aggregate, a very modest contribution, but superficially the findings are curious. My curiosity was further stimulated when the Eurostat data compared Finland with another small country – Belgium. In that country micro enterprises provided virtually 40 per cent of all export sales, compared with the Finland figure of 2 per cent. The data therefore appears to tell different stories depending on its source, but my interpretation is that the likelihood of exporting increases with firm size and falls with country size, but that the variance is considerable. A second interesting question is whether ‘internationalization’ has increased in recent years. Reliable data on this is very scarce and so confirmation is difficult. Despite this, the general assumption is that small firms are more likely to ‘internationalize’ than was the case in the past, and that they do so at an earlier stage in their development. This is justified on four grounds: first, globalization is all pervasive and inevitably affects smaller firms. Second, the development of electronic communications means that international contact is easier. Third, smaller firms have played an increasingly important role in economic development and, finally, it is based on cases of individual firms that were ‘international from conception’ (Oviatt and McDougall, 1994, p. 46). While justifications one and two seem widely accepted, I have more reservations about justifications three and four. For example, the evidence of a general increase in entrepreneurship is patchy: business ownership rates were in fact higher in 1972 than in 2002 in Austria, Denmark, France, Luxembourg and Norway (Van Stel, 2005). As for justification four, Oviatt and McDougall say ‘Actually, international ventures have existed for xiii

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Foreword

centuries’, and go on to point to the example of the East India Company which was chartered in London in 1600. Clearly the ‘born global’ business is not simply a late twentiethcentury phenomenon. Of course, change is always of greater interest to researchers than continuity, but my own research on new ventures in Northern England shows that the percentage of sales overseas remains below 1 per cent for new firms in the 1970s, 1980s and 1990s. My view therefore, since I also have no access to wholly reliable data, is that small firms or SMEs that internationalize are an interesting small sub-sample of the small firm population. In many respects the arguments about why such firms are ‘special’ are similar to those put forward about fast-growth SMEs or ‘gazelles’. These are that, although they are unusual or atypical of small firms generally, they make a disproportionate direct contribution to wealth creation. To most researchers they are also significantly more glamorous and ‘interesting’ than the vastly more numerous window cleaners and car repairers. It therefore seems justifiable to investigate these special firms and the set of papers included in this volume provide a comprehensive review covering a remarkable range of EU countries. The theoretical context for such an investigation seems to come from two of the usual suspects favoured by management scholars: stage theories and the resourcebased view. In this context, stage theories are based upon the assumption that firms begin their internationalization with some overseas sales, and some – but not all – proceed to a greater scale of involvement through the appointment of local agents, ending perhaps with outlets overseas. While I find stage theories are a comfortable way of describing or categorizing case studies, they avoid the difficult but interesting questions: why do some firms ‘progress’ whereas others do not, and why? Why do some firms move in and out of ‘internationalization’? What explains these developments? The resource-based view (RBV) theories at least start the process of addressing these questions. RBV seeks to incorporate a wide range of measures of human and financial capital that can be accessed by the business owner and links this to firm creation and firm performance. For example, Westhead et al. (2001) find a range of human capital variables are associated with whether an SME exporting in 1990/91 continued to export six years later. An interesting paper by Lautenan (2000) captures neatly this concept of relevant human capital by showing that small firms in Finland were more likely to export if their owner spoke one foreign language. Indeed the propensity to export rose with each foreign language spoken. However, from my perspective, the most interesting result generated by Westhead et al. (2001) is that the dominant influence on whether a firm was exporting in 1997 was whether they exported in 1990. It suggests the presence of powerful lags that need to be better understood. My view is that such an understanding is unlikely to emerge from an RBV perspective alone on the grounds that those favouring such a perspective seem to exhibit an aversion to the concept of ‘price’. So, if we are to obtain a better understanding of why small firms export, and why they may or may not continue to export, then Europe provides an ideal testing bed. Here we have some countries that are in the Eurozone and some that are not, so that the role of both fixed costs and currency changes can be examined. The obvious research is to examine changes over time in SME exports in EU countries inside and outside the Eurozone. My expectation is that currency fluctuations would be the key lagged influence on Eurozone SMEs’ sales to EU countries outside the Eurozone. Second,

Foreword

xv

I would expect that SMEs from outside the Eurozone would be strongly influenced in their sales to Eurozone firms by currency fluctuations. Such research could valuably build upon the material in these papers, which I commend to you. Professor David Storey Director of the Centre for SMEs Warwick Business School, University of Warwick United Kingdom References Lautenan, T. (2000), ‘Modelling small firms’ decision to export: evidence from manufacturing firms in Finland’, Small Business Economics, 14(2), March, 107–24. Oviatt, B.M. and P.P. McDougall (1994), ‘Towards a theory of international new ventures’, Journal of International Business Studies, 25(1), March, 45–64. Van Stel, A. (2005), Entrepreneurship and Economic Growth: Some Empirical Studies, Erasmus University, Rotterdam: Tinbergen Institute. Westhead, P., M. Wright and D. Ucbasaran (2001), ‘The internationalization of new and small firms: a resourcebased view’, Journal of Business Venturing, 16, 333–58.

PART I INTRODUCTORY CHAPTERS

1

Introduction Léo-Paul Dana, Isabell M. Welpe, Mary Han and Vanessa Ratten

The chapters that appear in this Edward Elgar collection concern the application of international business and entrepreneurship theories to the internationalization of small and medium-sized enterprises (SMEs). In this volume, researchers discuss the performances of SMEs along the way to internationalization, and this pushes our field forward significantly, not simply by merging the theories of international business and entrepreneurship but by applying these theories to inform rich, theoretically-grounded depictions of how the process of internationalization of SMEs operates in these European countries. Each chapter emphasizes how the process of internationalization of SMEs operates, the challenges and opportunities that arise as a result of each country’s specific political and economical situation, and their subsequent internationalization performance. These processes, challenges and performances can be understood through theories in international business and entrepreneurship. Even at times when these theories cannot fully explain certain phenomena, they help derive extensions of new thoughts. Together, they constitute a foundation for a new way of thinking about and understanding of the importance and effect of internationalization of SMEs to country-level competitiveness in Europe. The purpose of the book is to identify patterns and build a theory on international entrepreneurship in Europe. In this introductory chapter, each of the chapters will be briefly discussed, followed by a discussion on a number of factors that each of the chapters have in common. These factors include resource, capabilities, networks and clusters, policy, economy, market competitive conditions and industry sector. The concluding chapter further elucidates these factors by building a theory based on the international entrepreneurship occurring within Europe. Sophie Manigart, Wouter De Maeseneire, Mike Wright, Sarika Pruthi, Andy Lockett, Hans Bruining, Ulrich Hommel and Hans Landström (Chapter 2) investigate how venture capital (VC) firms can influence the internationalization of firms by looking at the European VC industry in Belgium, Germany, the Netherlands, Sweden and the United Kingdom. VC firms are important resource providers for entrepreneurial firms and often hold large stakes in the companies they finance. VC is thus an important determinant of entrepreneurial international activities. Their study shows that the degree of internationalization of a VC firm makes a difference with regard to the resources, capabilities and networks that a VC firm provides. They also show that the degree of internationalization of a VC depends on the size and power of the home economy of the VC firm. For example, Swedish VC firms show the highest degree of internationalization and German VC firms show the lowest degree of international investment activities. Their results affirm that European VC firms follow a gradual internationalization strategy and target high growth markets predominantly in Europe. Access to local market knowledge and business networks 3

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Handbook of research on European business and entrepreneurship

are key determinants of success in any internationalization strategy (Hurry, Miller and Bowman, 1992). VC firms have to understand the local conditions, and the legal and institutional environment that may hamper or enhance their ability to extract economic returns from innovative ideas (Bruton, Fried and Manigart, 2005). There are compelling reasons for VC firms to invest in geographical areas close to their home base, merely owing to the fact that it is more difficult to reduce information asymmetries between entrepreneurs and investors as geographical distance increases. Their results also point to the preconditions that need to be in place for VC firms to internationalize: it is the comparatively older, more experienced and financially powerful VC firms that internationalize. Ownership structure also matters, as can be seen by the fact that captive and semi-captive VCs internationalize more often. Interestingly, European VC firms so far show almost no interest in investing in Australasia, South America or Africa. This shows that, apart from taking geographical and institutional considerations into account, European VC firms primarily target regions with high growth prospects. The results suggest that entrepreneurial companies interested in internationalizing should contact VC firms from their home geographic region. Sanford L. Moskowitz (Chapter 3) looks at the internationalization of SMEs from the perspective of Andorra, which is one of the smallest economies and can be characterized as a Western European, service economy. Andorra is special in a number of respects. First, it is not a full member of the European Union. Second, the internationalization of Andorra’s SMEs until recently was of a ‘passive’ nature. Third, it has a large shadow economy. Fourth, Andorra is a micro-state, whose economy is heavily influenced by the economies of its neighbours. The results of the study allow a number of interesting conclusions and raise future research questions. Andorra’s association with the EU was important in the internationalization process of the country. The EU has opened up the economies of Andorra’s European neighbours, and in particular Spain and France. Thus internationalization came to Andorra largely because of favourable taxation policies. The EU was also exerting pressure on Andorra to become more international. Thus the association with the EU has made the passive internationalization of Andorra (such as tourism resulting in currency exchange) more active. Internationalization for small countries that are service-based is quite different than for countries that depend on physical exports. The study provides evidence that, unlike other small non-accession countries (such as Moldova), Andorra may gain benefits from the rise of the European Union, such as acceleration in, and extension of, the internationalization of its businesses, especially its SMEs. In addition, the study provides evidence that this ‘passive’ form of internationalization is a stage leading to the next evolutionary step, outward, ‘active’ internationalization, as indicated in the short case study examples from tourism, banking and the tobacco trade. Matthias Fink and Slawomir Teodorowicz (Chapter 4) study trust-based cooperation as a driver for the internationalization of SMEs in Austria. Austria is one of the strongest economies in Europe and one that is prominently characterized by the contribution of its SMEs. Also, Austria is geographically close to the new EU members, which greatly influences the economic activities of its SMEs in this region. In addition to the geographical proximity, the study suggests that Austria’s historical and cultural proximity to the central European countries is of great assistance in the internationalization of Austrian SMEs into these countries. The most prominent form of internationalization for Austrian SMEs in Eastern Europe is cooperation with local partners.

Introduction

5

Friederike Welter, David Smallbone, Anton Slonimski and Marina Slonimska (Chapter 5) look at the involvement of SMEs in direct and indirect internationalization activities in the transition economy of Belarus. In Belarus progress towards a market economy has occurred slowly over the past 15 years. The government is not committed to supporting, private entrepreneurship, and SMEs experience an increasingly hostile institutional environment. Interestingly, SMEs in Belarus have been forced into operating abroad in many cases since regulations for private enterprises have increased since the mid1990s, rendering the majority of private firms illegal unless they were able to meet the minimum capital requirements for re-registration. Geographic proximity and EU membership also play an important role in the internationalization activities of Belarus. Belarus also has a location close to the new EU member countries of Poland, Lithuania and Latvia, all of which joined the EU in May 2004. Overall, the study suggests that the internationalization of SMEs in a transition country such as Belarus shows distinctive characteristics, which underscores the importance of looking at the historic and geopolitical context for research in international entrepreneurship. For firms in transition economies, low domestic purchasing power can limit the scale and scope of domestic markets, encouraging those with ambitions to grow, to look abroad in order to identify and develop new market opportunities and thus increasing collaboration. As the pace of transformation to a market system has been very slow, a considerably higher proportion of SMEs are engaged in some form of cross-border collaboration than in a mature market context. Furthermore, results illustrate a West–East divide in Belarus in terms of the markets and countries. Lastly, the process of EU enlargement presents entrepreneurs and businesses in Belarus with new sources of threat and opportunity. It may be argued that enlargement of the European Union will produce negative effects on adjoining countries like Belarus. Jan Degadt (Chapter 6) studies the internationalization of Belgian SMEs and concludes that, for most Belgian SMEs, internationalization still means Europeanization. As a full member of the EU, Belgium has always been very active on the European export markets, so the development and enlargement of the European Union have been sources of support for the internationalization of Belgian SMEs and for the performance of the Belgian economy in general. However, for most Belgian businesses, ‘internationalization’ still means Europeanization. Thus European integration and European enlargement have given the right impulses to start to implement this internationalization process. The Belgian economy has been a very open economy for a long time and, despite its small size, it is an important player in international trade. The institutional environment of business has changed dramatically over the last 20 years in Belgium as it has adopted the Euro as currency and become a member of the WTO. Belgian SMEs have mainly been active in export and import and are now aiming to expand into deeper internationalization activities, crossing the EU borders. William R. Pendergast, Mugdim Pasic and Aziz Sunje (Chapter 7) report the results of a case study of an international Balkan SME and highlight the importance of a domestic business environment providing support for international business. They suggest that future research should give more attention to the domestic platforms of SMEs’ internationalization efforts. In many ways Bosnia–Herzegovina is a special country for studying the internationalization activities of SMEs, as it faces the double challenge of post-conflict reconstruction (and reconciliation) and transition to a market economy. It also has to deal with a rather inefficient political and legal system. Moreover,

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Handbook of research on European business and entrepreneurship

Bosnia–Herzegovina presents a ‘Balkan stew’ of companies with extremely diverse histories and profiles. Their ownership may be state-owned, privatized or de novo. They may operate in the formal or informal economies, or both. The overall picture of the Bosnia–Herzegovina economic structure is domination by a few large firms; a small private sector; a large informal economy; low foreign investment; and low internationalization of business activity. The case of Bosnia–Herzegovina highlights the role of the domestic business environment in providing a supportive infrastructure for international business. This aspect of internationalization has not been widely emphasized. Furthermore, the study highlights the problems of corruption and emphasizes network effects in opportunity identification and in fostering a deeper level of commitment to international engagement through foreign investment. Kiril Todorov and Kostadin Kolarov (Chapter 8) studied the internationalization of Bulgarian SMEs and concluded that their import share exceeds their export share and that SMEs are exporting mainly in the finance, insurance, trade, construction, agriculture and business services. Bulgaria offers a strategic geographic position with relatively well-developed transport and telecommunications infrastructure combined with a qualified and comparatively cheap labour force. The Bulgarian economy could be described as relatively small, open and dependent on external factors. The SME sector begins to play an increasingly important role in business internationalization. The liberalization of trade with the EU offers significant opportunities for Bulgarian SMEs and their internationalization process. However, Bulgarian SMEs are now confronted with the necessity to manage the increased weight of the non-tariff barriers and the strong competition of the local (EU) SMEs who are the subject of purposeful support by the EU. In this dynamic and multicultural business environment, SMEs should in time find ‘their room’, otherwise their inherent flexibility would hardly compensate their resource limitation. This problem is particularly important for countries like Bulgaria with an open economy. The SMEs’ competitiveness can be increased simultaneously in two directions: provision of free access of the import to the Bulgarian market which creates a competitive environment for local production and improvement of access of production of such enterprises to foreign markets by purposeful export policy and concrete measures for the encouragement of exports. The limitations of the domestic market and the limited resource basis precondition Bulgarian SMEs to internationalize as a compensating economic mechanism. Tihomir Vranesˇ evic´, Branko Bogunovic´ and Miroslav Mandic´ (Chapter 9) examine the macroeconomic conditions for SMEs in Croatia and conclude that the current environment is ill-suited to generally support the internationalization efforts of SMEs. Croatia is one of the European transitional economies where SMEs, as in many other former socialist countries, are relatively recent phenomena. In fact, a relatively small number of SMEs in Croatia have been embraced by internationalization. SMEs are usually to some degree linked to large enterprises as regards resources and market availability. The overall bad state of the Croatian economy is hampering the development of SMEs. In order to improve conditions for internationalization of SMEs, the overall structure of the Croatian economy should be enhanced. Demetris Vrontis and Alkis Thrassou (Chapter 10) examine the limitations and potentialities of internationalization of SMEs in Cyprus. They conclude that professional service firms are best positioned for future internationalization efforts. The findings show

Introduction

7

an intensely competitive and saturated local/national market environment in Cyprus, with inflated buyers’ bargaining power, and a distorted client perception of value. Internationalization appears critical to growth and/or survival for many SMEs with various home-country and individual Cyprus-specific factors setting the context in which the internationalization process of SMEs will occur. The findings further indicate the need for a comprehensive strategic marketing management approach to internationalization and the utilization of Cyprus-specific strengths and advantages in a manner and system which are more mechanistic and methodical than the reflex-style approach usually adopted in the local market. Per Servais, Erik S. Rasmussen, Bo B. Nielsen and Tage Koed Madsen (Chapter 11) look at Denmark, a small, open economy highly dependent on trade with other countries. As foreign trade accounts for most of the gross domestic product (GDP), Denmark has a strong interest in the free exchange of goods and services between countries. Consequently, Denmark has joined economic organizations such as the EU, OECD and WTO and, within the framework of these, has striven to remove obstacles to free trade. SMEs are a very important part of the Danish economy, comprising the majority of business enterprises and accounting for a substantial proportion of economic activity in the country. Thanks to the decline in trade barriers and the advances in technology and logistics, Danish SMEs are internationalizing at an accelerating rate. However, for many Danish SMEs during recent decades, the internationalization process does not follow traditional patterns of building upon a stable domestic position before gradually, and sequentially, engaging in international activities. Three basic types of SMEs can be identified in Denmark, the Born Local Seller with no export, the Born European Seller, which is selling internationally but primarily within Europe, and finally the Born Global Seller, which has a truly global perspective in terms of sales. Overall, Danish SMEs no longer seem to follow traditional incremental internationalization patterns but, rather, increasingly consider the world at large as a potential source for access to competitively priced input as well as sales. While some SMEs in some industries continue to focus heavily on the home market and remain born locals, others internationalize rapidly, often to geographically and culturally distant areas without an apparent need for an incremental increase in market knowledge. Part of this trend can be explained as offshoring of labourintensive, blue-collar activities to low-cost countries like China, India and the Ukraine. Considering the vast pool of well-educated people living in these low-wage countries, however, Danish firms may also have begun offshoring of white-collar, that is knowledgeintensive, activities. Tiit Elenurm (Chapter 12) studied the internationalization of Estonian SMEs and concludes that learning from Finland has been one important success factor. He highlights the role of learning about markets and the market economy for SMEs in transitioning economies. A high degree of openness to the international business environment has resulted in rapid growth of exports but, on the other hand, even more rapid increases of import flows in Estonia. In a small open economy, more SMEs are involved in foreign trade operations than in a large economy. Rapid privatization and a simple taxation system have contributed to internationalization of entrepreneurship in Estonia. A main limitation of Estonian SME growth, however, has been the lack of external risk capital in recent years. Thus owners of growing SMEs are often forced to consider selling the company to foreign investors and to give up their role as entrepreneurs.

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Handbook of research on European business and entrepreneurship

Asko Miettinen (Chapter 13) researched the internationalization process of SMEs in the small and open economy of Finland, where SMEs account for 99.7 per cent of companies and more than half of company turnover. The main targets for exports are the EU countries, which accounted for 58 per cent of Finnish exports and 59 per cent of imports, respectively, in 2004. One of the most important recent initiatives in Finland has been the Entrepreneurship Policy Programme introduced by the government. It is part of the economic and industrial policy aiming to safeguard a stable and predictable operational environment for enterprises and to ensure that the resources available for promoting entrepreneurship in various administrative branches will be exploited to the full. Finnish enterprises started to internationalize their operations relatively late compared to most other small economies. As late as the 1970s, the international activities of Finnish companies still consisted mainly of exporting carried out by a handful of pioneering larger firms. Thus there is a need for Finnish SMEs to expand internationally and to identify the acquisition of competencies for expanding abroad as the basis for successful future internationalization. Marija Risteska and Zhidas Daskalovski (Chapter 14) discuss potential reasons and remedies for the low level of SME internationalization activities in the EU accession candidate of the Former Yugoslav Republic of Macedonia. Macedonia has signed the Stabilization and Accession Agreement with the European Union and became a member of the World Trade Organization in April 2003. Both events have started a harmonization process, in which many laws are to be harmonized with international standards. In 2004, 98.7 per cent of all the economically active firms had fewer than 250 employees, accounting for about 61 per cent of the total employment in the country. Judging by these numbers one can easily note that the driving force of the Macedonian economy is currently made up of SMEs. Given these data it is not surprising that, in Macedonia, the support of small businesses is one of the priorities for the central authorities. The government’s development programme for 2002–06 targets the following areas: (i) access to finance and business development services (BDS), including the awareness of their availability and benefits; (ii) promoting cooperation between businesses through clusters and supply chains; (iii) promoting local and regional economic development; (iv) export promotion for SMEs; (v) promoting the dialogue between SMEs and the state; (vi) improving the framework conditions and creating an enabling environment for SMEs. Hervé Mesure and Rita Klapper (Chapter 15) reviewed the adaptation to internationalization of French SMEs within three distinct industries. Their chapter in this volume shows that French SMEs have a key position in the French economy, yet are of much less importance in the internationalization of the French economy. So far French SMEs ‘resist’ the internationalization of the three sectors reviewed. The adaptation to the internationalization of industries is not only a matter of internationalization per se. Other strategies are possible for independent SMEs. The main point for those SMEs is to remain competitive and profitable. They find that French SMEs are of small overall importance in the internationalization of the French economy. In France, internationalization appears as a multiform phenomenon that cannot be reduced to the internationalization per se of the SME and traditional theoretical explanations about the internationalization of SMEs can be contested. French industrial SMEs are capable of adapting themselves to the internationalization of their industries. The internationalization of subsidiaries in France responds to a different logic than that of independent

Introduction

9

SMEs. The internationalization of independent SMEs is just one of the possible ways of adapting. Steffen Kinkel, Gunter Lay and Spomenka Maloca (Chapter 16) join the debate on the transfer of manufacturing activities to foreign locations by looking at patterns of offshoring activities of German SMEs. They find that geographically close countries are preferred over Asian countries and that factor costs are the dominant motive for offshoring. Also their results suggest a positive relationship for the size of the produced series, and a negative relationship for the involvement in regional cooperations at the German production site. The manufacturing of both very complex and very simple products is more likely to stay in Germany. The chapter by Irini Voudouris and Pavlos Dimitratos on Greece (Chapter 17) highlights the importance of the European marketplace for internationally orientated Greek small and medium-sized enterprises. The authors use a longitudinal case-study approach to discuss how Greek entrepreneurs can identify and exploit opportunities in the global environment. The authors also stress the importance of the international environment for Greek small and medium-sized enterprises. László Kállay and Imre Lengyel’s Hungary chapter (Chapter 18) establishes a clear view of opportunities and challenges of SMEs’ internationalization in advanced transition economies as they face intense competition both locally and internationally, since over half of companies’ ownership is in foreign hands. Cecilia Hegarty (Chapter 19) described the Celtic Tiger’s international entrepreneurship strategies as one that is based on clustering and networking. She further suggests that pragmatic government policies, a social partnership approach to economic development, openness to international trade and technological innovation are critical for future advances for Ireland’s SMEs’ internationalization. Tamar Almor and Gilad Sperling’s chapter (Chapter 20) views internationalization of Israeli SMEs in the knowledge-intensive industry. They demonstrate how Israel, though a small country, because of supportive infrastructure from the government, has created a competitive advantage for high-tech and knowledge-intensive industries over the last 20 years. Alberto Mattiacci, Christian Simoni and Lorenzo Zanni (Chapter 21) use a cross-level approach (industry, clusters and firm level) in examining the role of Italian SMEs in achieving their competitive advantages in globalization. Tatjana Volkova and Andra Brige (Chapter 22) analyse the environmental issues of SMEs’ internationalization process in Latvia. The authors demonstrate how the advanced transition economy (but one with poor natural resources) embarks on becoming a service industry to achieve economic growth. Nonetheless, Tatjana Volkova and Andra Brige conclude with major inhibitors that constrained rapid growth of SME internationalization in Latvia and these inhibitors may be a warning for others. Rudi Kaufmann (Chapter 23) describes how and why Liechtenstein might be regarded as a centre for high-tech SMEs. The critical details of how an intensive cooperation among all relevant decision makers in all parts of the Rhine Valley, for the benefit of common advantages in the regions, are discussed. Audra Mockaitis (Chapter 24) provides a comprehensive overview of internationalization through an examination of internationalization activities of Lithuanian manufacturing SMEs. This chapter contributes to the increasing volume but still limited literature

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Handbook of research on European business and entrepreneurship

on manufacturing SMEs in Central and Eastern Europe. Mockaitis finds that networking capabilities played a substantial role in Lithuanian SMEs’ incremental internationalization processes. Godfrey Baldacchino (Chapter 25) examines Malta’s SMEs’ internationalization, based on ‘comparative island studies’ using a number of different European island regions to derive a pattern of economic benefits of ‘smallness and insularity’ in Malta and other similar island countries. Sanford L. Moskowitz (Chapter 26) provides maybe the first systemic attempt to study the internationalization of SMEs in Moldova. This chapter established a framework of enhancers and inhibitors of the EU to European SMEs’ internationalization process. Martine Spence (Chapter 27) writes on the second-smallest country in the world after the Vatican: Monaco. She discusses the country’s unique approach to attracting industrial firms and Monegasque SMEs’ contribution to international trade. Jolanda Hessels (Chapter 28) drew from a resource-based view and stage theory of internationalization to examine the inward and outward modes of internationalization in Europe – in particular, Dutch SMEs’ internationalization. She concludes that stage theory and born global perspectives do not contradict but are complementary. Anna Rogut and Bogdan Piasecki (Chapter 29) used the results of two extensive projects, pre- and post-EU accession, to examine Polish SMEs’ internationalization processes. The results of these surveys show the changed behaviour of Polish SMEs during preparations for EU integration, during the following integration and subsequently within an internal EU market. Margarida Proença, Isabel Correia and Orlando Petiz (Chapter 30) investigate the determinants of the export propensity of Portuguese manufacturing SMEs. They found that Portugese manufacturing SMEs are heterogeneous and that exporting firms have a higher productivity and are more technologically advanced than other firms in the same industry. Anatoly Zhuplev and Vladimir Shein’s chapter on Russia (Chapter 31) discusses how entrepreneurship in Russia is a relatively new phenomenon. The authors discuss how Russia’s political situation and history has evolved and the impact this change has on small and medium-sized enterprises. They highlight the importance of private entrepreneurs in increasing entrepreneurship in Russia’s small and medium-sized enterprises. Donata Vianelli (Chapter 32) provides a comprehensive analysis of the internationalization of the companies operating in the Republic of San Marino, the third-smallest state in Europe after the Vatican City and Monaco. She analyses how SMEs can be competitive in international markets when dealing not only with the limits of its business structure and organization but also with the complexity of operating in a small independent country. Miroslav Rebernik and Ksenja Pusnik (Chapter 33) seek to enhance the understanding of the internationalization of SMEs in Slovenia and in this perspective the importance of learning and unlearning processes for encouraging further internationalization of SMEs. They show that internationalization remains a cumulative learning and ‘unlearning’ process at both the individual and the organizational level. Alicia Coduras, Cristina Cruz, Ignacio de la Vega and Rachida Justo (Chapter 34) discuss both international activity and international intensity of Spanish SMEs and focus on comparing the characteristics of exporters and non exporters to see what differentiates the two.

Introduction

11

Angelika Löfgren, Daniel Tolstoy, Deo Sharma and Jan Johanson (Chapter 35) study Swedish internationalizing SMEs’ use of network coordination within and across business relationships to access and to optimize their deployment of external resources. Thierry Volery (Chapter 36) talks about ways to manage the challenges of globalization, discussing evidence from Swiss SMEs. He focuses on the differences in personal factors, or the human capital of the owner–manager in Swiss SMEs and finds that different dimensions of personal factors are significant and that public policy directives, as well as education and training programmes, need to recognize that there are significant differences in SME internationalization rates that are based upon industry. Serdar Karabati (Chapter 37) looks at the large economy of Turkey. Despite the fact that SMEs account for 99.8 per cent and play a vital role in the development of large firms in the Turkish business, they suffer from slow growth. Karabati investigates the initial outward internationalization of Turkish SMEs in relation to characteristics of the local business setting and changes in macroeconomic conditions. Nahum Goldmann, Svitlana Slava, Yuriy Makogon, Tetyana Orekhova and Alena Dubouskaya (Chapter 38) analyse the internationalization of Ukraine SMEs. They review the economic history and discuss its implications for today’s SMEs. Leigh Sear and Robert T. Hamilton (Chapter 39) outline the structures in place in England to provide support to the internationalizing entrepreneur and then assess the appropriateness of these in meeting the specific needs of these entrepreneurs. Mike Danson, Ewa Helinska-Hughes, Michael Hughes and Geoff Whittam (Chapter 40) analyse the agency side of the support for internationalization strategies of Scottish SMEs. David Pickernell, David Brooksbank, Helena Snee, Farid Ullah and Dylan JonesEvans (Chapter 41) talk about the role of Wales Trade International in promoting Welsh SME exporting and internationalization. They find that Wales is the worst of the regions and nations for e-commerce adoption. The next section will discuss the factors considered important in helping to compare and contrast international entrepreneurship in Europe. Resources The uniqueness of Europe is the vast diversity of its countries. These range from island territories such as the Maltese Islands which are famous for their olive oil, to larger economies such as Italy, which is famous for its fashion worldwide. These European countries both small and large each possess different types of country-specific resources and different amounts of those resources. SMEs in small island countries tend to draw resources from their natural resources and turn them into products that are unique, valuable, inimitable, rare and organized to exploit (Barney, 1991). Maltese mainly sell their special products, using local raw materials, to tourists. Moldova, being one of the smallest and poorest of the Eastern Europe transition economies, focuses on imports of energy and manufactured goods and export of agricultural products to EU countries. While Lithuanian SMEs are still constrained by limited technologies, poor quality and lack of resources that inhibit their ability to compete in the western marketplace, Monaco has no arable land and natural resources, so they use their innovative managerial skills. At the same time, human resources, managerial skills and international experience are often the most influential limitation for some of the smaller European countries (such as

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Handbook of research on European business and entrepreneurship

Latvia) owing to lack of experienced and knowledgeable human resources. In her chapter, Hessels concludes that human capital, along with a firm’s current international involvement, has a positive influence on future international commitment. The Ukraine chapter states that financial resources are important for firm development such as foreign trade credits and innovative forms of business financing. The Turkey chapter highlights that firms can utilize as resources the personal contacts they have and, for many Turkish firms, this can be in the form of Turkish immigrants living overseas. The Swedish chapter stresses that the use of external resources can be strengthened by the combination of supplier relationships. Although most medium-sized firms have greater access to financial resources than small firms, in Spain there are more small firms exporting than medium-sized firms. Capabilities Smaller countries often possess lower levels of competencies and capabilities. This is especially true for small firms in small countries. Lithuanian manufacturing SMEs typically are suffering from a lack of knowledge and networks capabilities. They tend to use intermediaries to alleviate the need to invest in knowledge acquisition, as described in the chapter on Lithuania. Fortunately, some experienced incoming settlers and emigrants change the competitive scene of smaller firms’ competitiveness in some island territories, such as Malta. However, Proença, Correia and Petiz (in their chapter about Portugal) argue that, compared with non-exporting firms in the same industry, exporting activities actually help exporting SMEs increase their technological capability and productivity. This capability in turn drives SMEs to grow faster and more efficiently. Like many smaller and transitional economies, SMEs in Hungary accumulate their knowledge and capabilities in internationalization from external sources such as foreignowned SMEs and MNEs. The chapter on Switzerland highlights that human capital is important in increasing firm growth in overseas markets. Sweden has the highest per capita number of biotechnology companies in the world and, because of the small size of the Swedish market, it is necessary for them to compete internationally. The Swedish chapter holds that access to world opinion leaders has influenced the market development of biotech SMEs. As opposed to other European companies, Slovenian companies are more likely to focus on developing their competencies. Network cluster Hegarty’s chapter about Ireland suggests that networking ability and activities seem to be an important and often critical skill for SMEs. This is not only a skill set for the internationalization process such as ‘contract manufacturing’ (as noted by Mockaitis, in the chapter about Lithuania), but also a critical mechanism for local producers in fending off insourcing off-shore markets (such as Malta). However, many SMEs in European countries, such as Poland, lack formal or informal interaction and relationships with external sources. Networking and clustering benefited many smaller countries, as with Latvia’s relationship with Estonia, Lithuania, Finland, Norway, Sweden, Denmark, Poland and Russia. However, the tight network among EU members has marginalized the non-EU member countries such as Moldova. In fact, the situation has inhibited Moldova’s economic growth and internationalization process and development. The tight value chain formed

Introduction

13

by EU members in their ‘integrated network of production’ created the interdependence among EU members and thus directly and indirectly weakened the inward–outward internationalization process for non-EU members, as discussed by Moskowitz, in his chapter about Moldova. But the networking effect did not affect Monaco negatively. Monegasque SMEs have shown a great deal of flexibility and innovation in adapting their managerial processes to local and international constraints by cultivating and broadening their range of network relationships. The Ukraine chapter states that the formation of clusters through local communities facilitates competitiveness and social stability. Swiss firms that utilize social networks have a higher level of internationalization rates. The Turkey chapter points out that collaboration between firms after they have started to export is rare and should be improved. The chapter highlights the fact that informal networks are important in gaining access to opportunities in the international marketplace. In Swedish biotech SMEs, the business relationships and network coordination that exist strongly support the level of international performance. In Slovenia, more than 350 enterprises are involved in a form of clustering that enhances knowledge sharing between enterprises. Clusters in Slovenia allow for regional development and the combination of local and global internationalization efforts. In Scotland, a Business Gateway International network has been established to strengthen the relationships between exporting businesses. Networks are used by firms in Wales to overcome resource constraints and to drive economic growth. Policy Some chapters suggest that there is strong government support in transitional economies to advance and take advantage of internationalization. For example, Kallay and Lengyel wrote that many national agency networks for enterprise promotion were created after 1989, the critical year of termination of the planned economy in Hungary. The chapter on Portugal suggests that the Portugese government should design export assistance programmes to support export activities in ‘deep niche’ markets, especially for small firms. Poland, on the other hand, initiated cooperation between scientists and politicians. The formulation of regional innovation strategies for the purpose of rapid and effective identification and practical implementation of cooperation in Poland will, it is hoped, prove helpful for future SMEs’ internationalization into EU regions. In the case of Ireland, pragmatic government policies, a social partnership approach to economic development, openness to international trade and technological innovation and education might have a significant impact to SMEs internationalization. Almor and Sperling echo this and provide a positive note on government initiatives for providing supportive infrastructure to entrepreneurs. They show that policies such as encouraging the population towards higher education, creating a favourable environment for start-ups and developing supporting industries such as the venture capital industry, have resulted in viable high-tech industry in Israel and enabled many successful born globals to compete internationally. On the other hand, when environmental infrastructure is not supportive, it will constrain the development of internationalization of SMEs (as discussed by Volkova and Brige). Volkova and Brige write that the lack of competitiveness of the state tax policy, efficiency of capital market, infrastructure, educational system and state aid, alignment and stability of business legislation has hindered SME internationalization in Latvia.

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Handbook of research on European business and entrepreneurship

The Ukraine chapter points out that government policy initiatives such as creating state innovation agencies and technology parks can result in better internationalization rates. The Spanish study highlights that there is scarce international activity occurring amongst Spanish SMEs and this should be addressed by Spanish government policy initiatives. In Slovenia, the European Union efforts at cross-border collaboration has been combined with the Slovenian government emphasizing innovation systems. Scottish government policy initiatives are now aimed at growing SMEs, as the traditional industries such as shipbuilding in Scotland are disappearing. There are currently more than 1500 programmes aimed at increasing the internationalization rates of Scottish SMEs. The San Marino government is aware of the benefits that are derived from exporting, such as an increase in employment rates. In Wales, policy makers have initiated policies that reduce reliance on inward investment and have increased funding to indigenous business creation. In Wales, the government is trying to shift the trade imbalance away from being heavily reliant on exports from a small number of countries. Economy While some European economies are in an advanced transition stage, some, such as Moldova, are still struggling to survive the impact of the EU. Many others, however, such as Poland, are forced to internationalize: because of continuing competition from other developed economies such as China and India, Polish SMEs are moving towards delocalization. This is especially true for low-tech industries seeking the benefits of lower labour costs. However, the recent EU enlargement may be able to turn this trend around as some of these new members may provide low-wage benefits to other EU members, thus keeping the economic benefits within EU members. The comparative advantage has already led numerous producers in the EU15 to transfer some of their production to new EU members where low-wages benefits are offered. The Ukraine chapter highlights how, by increasing the SME internationalization rate, the economy can benefit. Swiss SMEs depend on international market conditions for firm profit. Turkish SMEs have a low international growth rate because of a lack of market orientation. The Spanish study highlights that internationalization of economic activity is highly related to innovation rates. Many Slovenian SMEs face higher barriers to entry than larger companies in international markets owing to a managerial orientation focused on the home market. Scotland has traditionally had a lower international growth rate than its counterparts in the United Kingdom. In particular, the success of the Celtic Tiger has influenced many of the growth initiatives in the Scottish economy with the introduction of a ‘Smart Scotland’ policy aimed at increasing the number of knowledge-intensive businesses. In order to strengthen internationalization efforts, policy makers in Scotland are trying to diversify the Scottish economy away from its dependence on manufacturing. Countries in Europe such as the Republic of San Marino and Monaco, that have a small population, necessitate a focus on the international market. The economy in San Marino has been significantly affected by globalization of the world economy. The San Marino economy is shifting to being more service and manufacturing oriented. Indeed, most firms in San Marino are considered micro firms as approximately one-quarter of all firms have fewer than five employees. Focusing on international growth efforts is particularly important for Wales as two-thirds of the country has a GDP per capita less than the EU average.

Introduction

15

In Wales, the contribution made by the small business sector to the secondary economy has meant that more policies are being focused on this sector. Market competitive condition Although SMEs in Hungary only have 5 to 10 per cent exporting levels, the country as a whole is competitive in attracting foreign investment both large and small. In fact, foreign-owned SMEs in Hungary have about 25 to 40 per cent exporting levels. These activities show the high competitiveness of Hungary compared to surrounding countries in the region as well as the potential knowledge spillover to local Hungarian-owned SMEs in terms of the internationalization process. However, the high number of foreign-owned SMEs and MNEs in Hungary means that domestic SMEs are competing on both fronts. This phenomenon is one of the characteristics of advanced transition economies. Some countries achieve competitiveness through a common language and a shared institutional environment to achieve fast expansion to neighbouring countries, such as Lithuanian SMEs to Latvia and Estonia. Others, such as Polish SMEs, prefer only a focus on price competition to achieve market competitiveness and avoid, if possible, innovation as it requires capital and time intensity (as noted by Rogut and Piasecki). Polish SMEs believe that, at the early stage, implementing new ideas for competitiveness is possible without large investments. Hessels concludes in her research that the small scale of a domestic market often is the important reason for SMEs to look for foreign market expansion, while Denmark SMEs are slightly above average when compared with the other 18 European countries in export, import and joint venture with foreign SMEs. Many Turkish SMEs are focusing their international development strategy on geographically close (but not necessarily similar) markets. The domestic market is the main market for the majority of Spanish SMEs. Slovenian SMEs operate in a small number of international markets, with most selling only to a handful of countries. Industry sector EU member countries have set the industry standard by having common pressing standards, currency of exchange and product quality requirements; therefore, they have formed a tight industrial network. This network is beneficial to EU members especially in industries that require international just-in-time logistics, Internet-based global production, and where individual member countries are part of the value chain, as in the apparel industry. Nonetheless, this situation has moved non-EU members such as Moldova, to an extreme disadvantaged competitive position. Mattiacci, Simoni and Zanni, in their chapter about Italy, noted that there are differences in level of internationalization, depending on the industry, and these authors assert that the differences lie in the costs and nature of the business. For example, in the gold industry, Italian firms have recently started to invest directly in foreign manufacturing activities. This is due to high transportation costs and stringent regulations. In the fashion industry, SMEs are characterized by a high international division of labour and adopting the more evolutionary approach to internationalization. This rationale also helps explain why some European countries participate in limited FDI activities (as suggested by Mattiacci, Simoni and Zanni).

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Handbook of research on European business and entrepreneurship

In the Ukraine, the main type of businesses involved in export activities is the industrial sector. In Switzerland, there are significant differences in internationalization rates based on industry type that can be used to help firms internationalize. Swiss manufacturing firms have a higher level of internationalization rates than service firms. The Swedish chapter highlights that the rate of technology development happening in an industry is strongly related to the internationalization rate of a firm. The Spanish chapter found that the decision of a firm to export is related to the industry in which they operate. While Maltese SMEs export by identifying distributors, dealers or agents, activities such as exporting workers is also popular as a major source of income and foreign exchange via remittances. Similarly, the poor economy and low wages in Moldova have driven a huge exodus from the country of about one-quarter of its workforce to search for jobs abroad. In conclusion, this chapter has introduced each of the countries that will be discussed in the book. A number of factors considered helpful in analysing international entrepreneurship in Europe were also identified. References Barney, J. (1991), ‘Firm resources and sustained competitive advantage’, in the Journal of Management, 17(1), 99–120. Bruton, G.D., V.H. Fried and S. Manigart (2005), ‘Institutional influences on the worldwide expansion of venture capital’, in Entrepreneurship Theory and Practice, 29(6), 737–60. Hurry, D., A.T. Miller and E.H. Bowman (1992), ‘Calls on high-technology: Japanese exploration of venture capital investments in the United States’, in Strategic Management Journal, 13(2), 85–101.

2

How international are European venture capital firms? Sophie Manigart, Wouter De Maeseneire, Mike Wright, Sarika Pruthi, Andy Lockett, Hans Bruining, Ulrich Hommel and Hans Landström

Introduction This chapter examines the internationalization of European venture capital firms (VCs). VCs are specialized financial intermediaries, providing equity or quasi-equity to unquoted, high-growth-oriented companies. Their specialization mainly consists in reducing agency problems before and after the investment (Amit et al., 1998), thereby enabling them to invest in ventures that would not receive financing from other (less informed) financial intermediaries. Before the investment, VCs have to select worthwhile investment candidates following a thorough due diligence process and write contracts that fit the local legal environment. After the investment, the portfolio companies have to be monitored actively and optimal exit routes have to be sought. VCs get most of their return from capital gains when they sell their shares (so-called ‘exit’), and not from interim cash payments. They may sell their shares on the stock market in an Initial Public Offering (IPO), or sell them to an industrial company, to another financial institution, to the entrepreneur or to the management team in a management buyout. As capital is a generic resource, this is not sufficient to be successful in the venture capital industry. A successful VC has to have skills in the area of valuation, contract writing, technological evolutions, strategy and network building (Wright and Robbie, 1998). VCs become active shareholders in the portfolio company after their investment. They often have a seat on the board of directors, enabling them to monitor the progress of the portfolio company and to add value, for example by giving strategic and other advice (Wright and Robbie, 1998). Having international shareholders, such as VCs, is important for an unquoted company pursuing an internationalization strategy, as its international shareholders may help in defining and executing that strategy (Jääskeläinen and Maula, 2005). If one of its shareholders has strong ties in another country, for example with lawyers and accountants, and if it has a thorough knowledge of the functioning of the market and the legal environment, then this shareholder may help the venture build a strong economic network and adopt a sound market approach. If one of the shareholders is highly respected in the target foreign region, then this enhances the legitimacy of the portfolio company, facilitating its access to customers, suppliers and even high-level employees. Having international shareholders may thus facilitate the internationalization process of small companies. Jääskeläinen and Maula (2005) have further shown, however, that non-local VCs often push their portfolio company to first internationalize in their region of origin, irrespective of what would be optimal for the portfolio company. The internationalization of the portfolio company entails either export, setting up a subsidiary in a foreign country or even delocalization. It is thus important to understand how international European VCs are and 17

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Handbook of research on European business and entrepreneurship

their target regions of investment. Indeed, choosing a VC whose internationalization strategy matches that of the portfolio company may facilitate the execution of the internationalization strategy of the portfolio company. Adopting an internationalization strategy is a non-trivial decision for a VC, however. International VCs often have to compete with regionally dominant and well-established national VCs. Access to local market knowledge and business networks are key determinants of success in any internationalization strategy (Hurry, Miller and Bowman, 1992). VCs have to understand the local conditions, and the legal and institutional environment that may hamper or enhance their ability to extract economic returns from innovative ideas (Bruton et al., 2005). There are compelling reasons for VCs to invest in geographical areas close to their home base, merely owing to the fact that it is more difficult to reduce information asymmetries between entrepreneurs and investors as geographical distance increases (Sorenson and Stuart, 2002). Recently, however, competitive pressures and the trend towards larger funds have pushed an increasing number of VC firms to become international players, while other VC firms have a deliberate strategy of remaining local. VCs can internationalize by raising funds in another country, by direct investment in a foreign country, by establishing a physical presence in a foreign country and investing from there, or by taking an equity stake in a foreign VC fund (Dixit and Jayaraman, 2001). In this chapter, we focus solely on international investments by European VCs, either through a physical presence or through direct investments in portfolio companies. We thus do not consider fund raising in an international context here. The international investment activity of European VCs is quite important, as the European Venture Capital Association (EVCA) estimates that 28.8 per cent of all funds invested by European VCs in 2003 was invested cross-border (see Table 2.1). Despite the importance of cross-border investments, this issue has been largely ignored in the academic literature. Therefore, this chapter adopts an explorative and descriptive approach. The chapter is structured as follows. First, we discuss the research method and data collection process used to study the internationalization of European VCs. We report the findings of a mail survey with VCs in five European countries, namely the United Kingdom, Germany, Sweden, the Netherlands and Belgium. The following section deals with the degree to which VCs in the different countries of the study are international. Thereafter, we compare the characteristics of domestic VCs with those of international Table 2.1

Domestic versus international VC investments in 2003

Europe Belgium Germany Sweden The Netherlands UK Source: EVCA (2004).

Total investment by VC industry (1)

Invested in domestic country (2)

% invested in domestic country

% invested internationally

29 095 918 304 457 2 481 200 1 015 295 1 092 254 13 538 599

20 706 779 247 823 2 054 760 818 642 744 335 7 277 200

71.2 90.3 82.8 80.6 68.1 53.8

28.8 9.7 17.2 19.4 31.9 46.2

How international are European venture capital firms?

19

VCs. Finally, we study the target regions of the European VCs. We conclude the chapter by stressing the importance of the findings. Research setting and method The degree of internationalization of the European VC industry is studied in five European countries: Belgium, Germany, the Netherlands, Sweden and the UK. These countries are chosen because they are important European VC markets and their VC industry is mature. Moreover, these countries geographically cover a large and diverse part of Europe. EVCA statistics (see Table 2.1) show that the UK is the most international market of the five countries in our study, as 46 per cent of all investments by UK-based VC companies occur outside of the UK. VCs in the Netherlands also have a more international focus (32 per cent is invested internationally, compared to a European average of 29 per cent), while VCs in Sweden, Germany and Belgium are more local, with respectively 19 per cent, 17 per cent and 10 per cent of the value of their investments made outside their home countries. Data were collected through postal or e-mail surveys or a combination of both, based on a questionnaire developed and first administered in the UK. The questionnaire was developed on the basis of instruments used to analyse internationalization in other sectors, adapted on the basis of existing literature and pilot interviews with VCs that had internationalized. The population of VC firms in each country was identified through the guides of the national and European venture capital associations, trade directories and VC firm websites. Responses were obtained from senior managers or managing partners as key respondents, so as to be sure to capture the policy of the VC firm. Questionnaires were sent out either by post or electronically, between 2002 and 2004, to 151 UK VCs, 74 Belgian VCs, 169 German VCs, 63 Dutch VCs and 94 Swedish VCs, identified through their membership of the EVCA or the national venture capital associations. In order to be as complete as possible, non-member firms that act as VC firms were added. These were identified through trade directories and VC firm websites. A follow-up was undertaken by sending reminders or by calling the VC firms after three to six weeks. This process resulted in a sample of 195 usable responses over the five European countries (16 Dutch VCs, 29 Swedish VCs, 31 Belgian VCs, 51 German VCs and 68 British VCs) or a 35.4 per cent overall response rate. Response rates in each of the five countries separately were good, ranging from a minimum of 25.4 per cent in the Netherlands to a maximum of 45 per cent in the UK. Overall, the sample was broadly representative of the VC populations across the countries, with some explicable differences. For example, with respect to the UK sample, respondents managed a significantly larger size of investment funds, and had significantly larger maximum investment preferences, but the number of investment executives and the minimum investment preference were not significantly different. The differences are not surprising since venture capital firms that are larger in terms of financial resources are more likely to internationalize and thus may be more willing to participate in the survey. However, there were no significant differences on these variables between respondents who replied to the first versus the reminder mailing. With regard to the Belgian venture capital market, our sample holds a relatively larger percentage of captive VCs than the sample of the BVA (Belgian Venturing Association), more specifically 19.4 per cent versus 6.2 per cent. Furthermore, our sample contains a smaller percentage of independent VCs

20

Handbook of research on European business and entrepreneurship

(54.8 per cent v. 67.2 per cent). However, based on total fund size, our sample is representative of the Belgian VC population. With respect to the German venture capital market, our sample also contains a larger percentage of captive investors than the BVK (German Private Equity and Venture Capital Association) population (34.1 per cent
16.3 per cent) and a smaller percentage of independent investors (54.5 per cent77.1 per cent). However, the VCs’ focus on early stage investments (40.9 per cent v. 40.2 per cent) and later stage investments (59.1 per cent v. 59.8 per cent) is comparable to the industry average. Furthermore, our sample firms are somewhat smaller when considering the average number of investments under management (16.79 27.76) and slightly larger in the average number of employees (12.32
8.93). We combine the data of the Belgian and Dutch VCs in the remainder of the analyses, so as to present a more concise view of the internationalization of European VCs. Analyses show that there are no significant differences between the behaviour of Belgian and Dutch VCs with respect to internationalization. The international orientation of European VCs Respondents were asked whether they invest in foreign countries. Slightly less than half of all VCs in our sample, namely 89 respondents (49 per cent), do so and therefore are classified as international VCs; the remainder are called domestic or local VCs (see Table 2.2). The proportion of international VCs is broadly the same in the different countries of our study, with slightly more Swedish and UK VCs and slightly fewer German VCs having an international focus. This is broadly consistent with the international investment statistics reported by EVCA, again stressing the representativeness of our sample. The VCs with an international investment activity invest on average 39 per cent of their funds outside their home country. Belgian and Dutch VCs are most international, as they invest 50 per cent of their total funds internationally, while German VCs are least international, as they invest only 28 per cent of their funds abroad. This may have to do with the limited size of the home market in Belgium and the Netherlands, compared to the large German home market. VCs report that they mainly internationalize for strategic reasons and to take advantage of one-off unexpected opportunities. Strategic reasons may include the wish to broaden the scope of investment opportunities (Hall and Tu, 2003) in markets where expected returns are high, to learn from foreign partners or competitors or to leverage existing Table 2.2

Level of internationalization in the venture capital industry

United Kingdom Germany Sweden Belgium  the Netherlands Total

N

Domestic

% domestic

International

% international

% funds invested internationally*

65 51 29 45

31 31 12 20

47.7 60.8 42.9 51.3

34 20 16 19

52.3 39.2 57.1 48.7

39.8 28.5 39.0 49.9

190

94

51.4

89

48.6

39.3

Note: * Percentage of funds invested internationally by international VC funds only.

How international are European venture capital firms?

21

resources in order to create value (Etemad, 2004). Increased domestic competition or the desire to initiate competition in a foreign market were not cited as reasons to internationalize. Domestic VCs mentioned the large size of the investments needed and their strategic domestic focus as reasons not to engage in international investment activities. VCs can pursue different strategies to invest in foreign countries. They may invest directly in portfolio companies, located in another country, but they may also adopt an indirect approach. For example, they may set up a branch office in a foreign target region and invest from that branch office. An even more indirect approach is to invest in or to take over another VC, active in the target region of the world. Other entry modes are franchising or licensing or setting up a joint venture with an international partner. The direct investment approach and setting up a branch office in another country are by far the most common internationalization strategies of European VCs. Half of the international VCs have a direct investment presence; that is, they directly invest from their home country in a company located outside their home country. Only one-third of the international VCs establish a branch office in the target country. This is somewhat higher than the figure reported by Botazzi et al. (2004), who found that 27 per cent of the European VC firms in their survey had an office in another country. Only a minority of the international VCs (16 per cent) take an equity stake in an existing VC fund in the target country, acquire an existing VC fund abroad, or form a joint venture with a partner in the target country. None of the international VCs adopt a licensing or franchising strategy. This shows that the number of options that VCs have to internationalize is rather limited. International versus domestic VCs In this section, we compare the characteristics of domestic and international VCs (see Table 2.3). International VCs are somewhat older than domestic VCs. At the time of the survey, the international VCs were on average 14 years old, while the domestic VCs were only 12 years old. This hints that internationalization is a gradual process for VCs, and that VCs are more inclined to become international as they mature. Consistent with Hall and Tu (2003), international VC firms are significantly larger than domestic VCs irrespective of the measure of size used, that is, total size of funds (in million Euros), number of people employed or recent investments. These three variables are highly correlated. Whereas the average total size of funds amounts to €660.90 million for an international VC, this only amounts to €139.25 million for a domestic VC (median: €233.50 million versus €33.36 million). However, the standard deviation of this variable is also substantially larger for the international VC firms than for the domestic VC firms. Furthermore, an international VC firm has significantly more human resources than a domestic VC (Manigart et al., 2005). An international VC employs on average 24.9 people (median  16.0), while a domestic VC firm only employs on average 9.1 people (median  6.0). International VCs have on average 13.8 investment executives, of which 54.3 per cent have international experience, while domestic VCs have on average 5.6 investment executives, of which only 37.4 per cent have international experience. International VCs thus have significantly more employees, more high-level executives and more executives with international experience compared to domestic VCs. International VC firms made on average 16.10 new investments in the last three years, which is significantly more than the average of 13.79 new investments for the domestic VC firms (median: 10.00 versus 7.00 new investments). Moreover, the international VC firms

22

Independent fund Captive or semicaptive fund Public fund Other

Fund ownership

Size Total fund size in million euros Total number of employees Number of investment executives % of investment executives with international experience New investments in the last 3 years Number of exits in the last 3 years New investments/executive Exits/executive 1.29 0.67 % int’l

54.33

16.10 12.18 1.71 1.27 # funds

84

68

68

68 68

50.5% 56.6% 28.6% 11.1%

54 30 4 1

7.00

10.00

50.00

16.00 8.00

24.92 13.76

89 89

233.50

10.00

Median

660.90

14.16

Mean

63

89

N

International VC firms

1.55 1.89

19.29

15.96

33.30

25.51 13.82

953.76

9.22

S.D.

International versus domestic venture capital firm characteristics

Age of VC fund

Table 2.3

58 59

60

61

83

91 92

63

93

N

10 8

53 23

# funds

3.05 1.11

5.25

13.79

37.38

9.11 5.65

139.25

12.03

Mean

71.4% 88.9%

49.5% 43.4%

% dom.

1.78 0.67

2.00

7.00

30.00

6.00 4.00

33.36

8.00

Median

Domestic VC firms

3.47 2.09

9.87

20.62

34.00

11.64 5.13

239.19

8.40

S.D.

**** ****

*

Significance

***

****

**

***

**** ****

****

*

Significance

23

0.16 0.38 0.74 0.61 0.06

69 69 69 69 69

0.00 0.00 1.00 1.00 0.00

0.00

Median

0.37 0.49 0.44 0.49 0.24

S.D.

63 63 63 63 63

60

N

0.40 0.54 0.65 0.52 0.08

0.35

Mean

0.00 1.00 1.00 1.00 0.00

0.00

Median

0.49 0.50 0.48 0.50 0.27

S.D.

*** *

Significance

Notes: Significance level: *  0.10, **  0.05, ***  0.01, ****  0.001; significance levels indicated for the differences between international and domestic VC firms (chi-square tests or Mann–Whitney tests).

0.30

67

Fund type (1high-tech, 0non-high-tech/generalist) Stage preference (0don’t invest; 1do invest) Seed / start-up Early stage Expansion / development MBO/MBI Other stage

Mean

N

Investment strategy

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Handbook of research on European business and entrepreneurship

have also exited significantly more investments over the last three years than the domestic VC firms, on average 12.18 investments versus 5.25 investments (median: 7.00 versus 2.00 exits). This is, of course, strongly related to the larger size of international VC firms. This might further be an indication that VC firms entering international markets have to be able to show that they are successful; that is, that they are mastering the full investment cycle from deal generation, over investing to selling their investment. Despite the fact that international VCs invest more, their investment executives have significantly fewer new investments to manage than domestic VC firms executives (1.71 versus 3.05 new investments/executive). International VCs differ from domestic VCs with respect to their ownership structure. Captive VCs are fully owned by either a financial institution or an industrial company, while semi-captive VCs are set up and partially financed by a parent company, and partially raise their funds on the market. These (semi-)captive VCs are more active as international investors than individual VCs (who are not sponsored by a parent company and raise all their funds in the market) or public VCs (who are fully or partially funded by the public sector). It seems that having a strong and – often – big parent company facilitates the internationalization of VCs. (Semi-)captive VCs more often have an international investment strategy than independent or public VCs. Public VCs are significantly less active internationally and follow more often a purely domestic, or even regional, strategy. This is important for entrepreneurs, raising VC. If they wish to pursue an internationalization strategy, they would better not approach public VCs but rather VCs affiliated with a large company or financial institution. Finally, international and domestic VCs differ with respect to their investment strategy. While there is no difference in the technology focus of international and domestic VCs, somewhat more international VCs consider themselves to be sector specialists, compared to domestic VCs. Domestic VC firms have a significantly stronger preference for investments in seed or start-up stages compared to international VC firms, however. The latter finding is in contrast with the findings of Hall and Tu (2003). International VCs have a somewhat stronger preference for later stage investments than domestic VCs, but the difference is not significant. Location choice of multinational firms has received a lot of interest in the literature on foreign direct investment and internationalization. It has received little to no attention in the VC literature, however. We therefore investigate which regions of the world are the targets of European VCs, depending on the entry mode. In order to do this, we collapse the entry modes into either ‘physical presence’ or ‘investment presence’. A VC has a physical presence in a foreign country when it has established a branch office abroad, has fully or partially acquired an existing VC or has set up a joint venture with a local player. A VC has an investment presence if it directly invests in a foreign portfolio company, from the office in the home country. Remark that a combination of both strategies is possible. For example, a VC may choose to invest directly in a portfolio company in a neighbouring country, to set up a branch office in another region of the world and to invest in an existing VC in another region of the world. Table 2.4 shows the regions of the world where European VCs are present, either through an investment presence or through a physical presence. First, an international VC has an investment presence in 5.48 countries on average and a physical presence in 2.33 countries. Given that setting up a branch office or investing in a foreign VC has longer-term

How international are European venture capital firms? Table 2.4

25

Target regions by entry mode (international VCs only) Physical presence

Countries in which active Number of VCs with presence in . . . Europe (ex. country of origin) North America Asia South America Australasia Africa

%

2.33 40 17 11 3 3 0

Investment presence

%

5.48 48.8 20.7 13.4 3.7 3.7 0.0

69 34 11 4 3 3

82.1 41.0 13.1 4.8 3.7 3.7

implications than investing in a single portfolio company abroad, it comes as no surprise that VCs restrict their physical presence to fewer countries compared to their direct investment presence. This also is consistent with the earlier finding that VCs sometimes act on one-off opportunities by investing in a foreign portfolio company. Setting up a branch office abroad is clearly more strategic and long-term than a one-off investment opportunity, as it requires commitment of more financial resources and management attention over a longer period of time. When analysing the investment presence of the European international VCs, our survey shows that the vast majority invests in another European country (82 per cent). The percentage of VCs investing in North America declines to 41 per cent, while as few as 13 per cent invest in Asia, 5 per cent invest in South America and 4 per cent invest in Australasia and in Africa. Fewer VCs establish a physical presence in another country. Almost half of the European VCs that are internationally active set up a physical presence in another European country. Only one in five establishes a physical presence in North America, while only one in eight has a physical presence in Asia. Almost no European VCs have a physical presence in South America (4 per cent) or Australasia (4 per cent), while no VC in our survey has a physical presence in Africa. With respect to both investment presence and physical presence, Europe is the most popular destination region, followed by North America and Asia. Almost no European VCs are present in South America, Australasia or Africa. This is unfortunate, as Sylvester and Egeli (2000) expect that foreign VC investors will play a major role in addressing the capital needs of rapidly developing African economies. At a country level, the survey shows that France, Germany and the US are the most popular countries to invest in for European VCs. It should be noted that the UK VCs are most active. They have a higher than average physical presence in more countries. German VCs, on the other hand, have a lower than average physical presence, especially in the US. German VCs are the least internationally oriented in our sample, while UK VCs are the most internationally oriented ones. The choice of regions in the world can be explained by the Uppsala theory of gradual internationalization (Johanson and Vahlne, 1977) and by the attractiveness of the markets for the VC industry. Consistent with the Uppsala theory on internationalization (Johanson and Vahlne, 1977), European VCs follow a gradual approach when targeting

26

Handbook of research on European business and entrepreneurship

their regions of interest. Following an internationalization strategy creates additional hurdles and pitfalls for a company, that are not trivial to overcome. These hurdles are more important as the ‘psychic distance’ between the home country and the target region increases (Johanson and Vahlne, 1977). Therefore, North America is more accessible to European VCs than Asia. Bruton et al. (2005) stress the importance of differences in the institutional environment for the development of the VC industry in a particular country or region. Examples of hurdles that have to be overcome when investing internationally and that are extremely important for VCs are the differences in the underlying legal philosophy, (minority) shareholder protection rights and the legal enforcement. Clearly, the distance between two European countries in this respect is lower than that between a European and a North American country; the distance is even greater between Europe and Asia. This also explains why UK VCs are more keen to invest in the US than Continental European VCs, as the US legal environment resembles more closely the UK one than the Continental European ones. Next to the legal environment, the social and cultural environment is important. For example, networks are important in doing business. Relevant networks for the VC industry are ties with lawyers (in order to set up contracts), accountants (as a source of deal flow), headhunters (in order to be able to strengthen the entrepeneurial teams), investment banks (as a source of deal flow and exit), and so on. Networks are especially difficult to enter in Asia, and therefore may deter European VCs from entering Asian markets (Bruton et al., 2005). Networking in North America is easier than networking in Asia, while it is even more easy to set up relevant links within Europe. Institutional and social differences thus make it easier to invest close to home – in another European country – than to invest in North America; investing in Asia is even more difficult (Kenney et al., 2002). South America, Australasia and Africa are almost irrelevant for the European VC industry. It is also clear that VCs target regions with potentially high rewards. North America and Asia are regions with high economic growth rates and with high investment levels in research and development. This makes those regions especially attractive to the VC industry. Further, the US and Canada have well developed stock markets and an equityoriented economy. This makes North America especially attractive for the VC industry, providing excellent exit routes (Jeng and Wells, 2000). Australasia, while being well developed, has the disadvantage of being geographically far away from Europe. Conclusions We have described the degree to which European VCs are international, how international VCs differ from purely domestic players, and which countries are targeted, depending on the VC internationalization strategy. We have shown that the Swedish VC industry has the largest proportion of international players (almost 60 per cent of VCs), followed by the UK (more than half of VCs). The German VC industry has the lowest proportion of international VC firms: only about 40 per cent of German players have any international activity. A VC that is international invests on average 39 per cent of its funds cross-border. Belgian and Dutch VCs invest somewhat more cross-border (almost half of their funds), while German VCs invest only 28 per cent of their funds cross-border. The German VC industry is the least internationally oriented, with a lower proportion of VCs pursuing an international strategy and with the international VCs investing a lower proportion abroad.

How international are European venture capital firms?

27

Our figures clearly show that most European VCs still have a home bias in their investment strategy. Compared to its domestic competitors, a typical international VC is somewhat older, and significantly larger in terms of funds managed, investment executives, number of employees and investments per investment executive. Captive and semi-captive VCs, that is, VCs (partly) owned by an industrial or financial parent company, are more international than the average VC, while public VCs have a more domestic focus. The proportion of independent VCs with an international focus is average. Finally, VCs with an investment strategy arrived at early-stage investments (seed, start-ups and other early stage) have a lower probability of acting internationally. A typical VC starts its internationalization strategy by investing in neighbouring countries from its office, and eventually expands into other regions of the world. In a later stage, VCs may consider setting up an office in a foreign country. An international VCs has, on average, invested at arm’s length in more than five different countries, while it has a physical presence in more than two countries. Europe is the most popular target region of the VCs in our sample. This indicates that European VCs follow a gradual internationalization strategy, first targeting the countries close by and – potentially – investing further away later on. North America is the second most popular investment region, followed by Asia. The most popular investment countries are France, Germany and the US. European VCs have almost no interest in Australasia, South America or Africa. This shows that, apart from taking geographical and institutional considerations into account, European VCs primarily target regions with high growth prospects. Our findings have implications for entrepreneurs seeking venture capital. As shareholders may have a considerable impact on the strategy of their portfolio companies, entrepreneurial companies wishing to internationalize should carefully select the right VC. For example, if Asia is the entrepreneurial company’s preferred region, then it should preferably approach investors with an Asian investment strategy. These are likely to be the larger and older VCs, especially active in later stage investments, and with a high probability of being a (semi-captive) VC. References Amit, R., J. Brander and C. Zott (1998), ‘Why do venture capital firms exist? Theory and Canadian evidence’, Journal of Business Venturing, 13, 441–66. Botazzi, L., M. da Rin and T. Hellmann (2004), ‘The changing face of the European venture capital industry: facts and analysis’, Journal of Private Equity, 7, 26–53. Bruton, G.D., V.H. Fried and S. Manigart (2005), ‘Institutional influences on the worldwide expansion of venture capital’, Entrepreneurship Theory and Practice, 29(6), 737–60. Dixit, A. and N. Jayaraman (2001), ‘Internationalization strategies of private equity firms’, Journal of Private Equity, Winter, 40–54. Etemad, H. (2004), ‘Internationalisation of small and medium-sized enterprises: a grounded theoretical framework and overview’, Canadian Journal of Administrative Sciences, 21(1), 1–21. EVCA (2004), EVCA Yearbook 2004: Annual Survey of Pan-European Private Equity & Venture Capital Activity, Zaventem: EVCA. Hall, G. and C. Tu (2003), ‘Venture capitalists and the decision to invest overseas’, Venture Capital, 5(2), 181–90. Hurry, D., A.T. Miller and E.H. Bowman (1992), ‘Calls on high technology: Japanese exploration of venture capital investment in the United States’, Strategic Management Journal, 13, 85–101. Jääskeläinen, M. and M. Maula (2005), ‘The effects of direct and indirect foreign venture capital ties on exit market selection and exit modes’, paper proposal submitted to the 25th Annual International Conference of the Strategic Management Society, Orlando, USA. Jeng, L.A. and P.C. Wells (2000), ‘The determinants of venture capital funding: evidence across countries’, Journal of Corporate Finance, 6, 241–89.

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Johanson, J. and J. Vahlne (1977), ‘The internationalization process of the firm: a model of knowledge development and increasing foreign market commitments’, Journal of International Business Studies, 8(1), 23–32. Kenney, M., K. Han and S. Tanaka (2002), ‘Adapting to strange environments: venture capital in Japan, Korea and Taiwan’, paper presented at the 2002 Annual Meeting of the Academy of International Business, San Juan, Puerto Rico. Manigart, S., V. Collewaert, M. Wright, S. Pruthi, A. Lockett, H. Bruining, U. Hommel and H. Landstrom (2005), ‘Human capital and the internationalisation of venture capital firms’, International Entrepreneurship and Management Journal. Sorenson, O. and T.E. Stuart (2002), ‘Syndication networks and the spatial distribution of venture capital investment’, American Journal of Sociology, 106, 1546–86. Sylvester, D. and F. Egeli (2000), ‘Selling Africa to the world: the emergence of private equity in Sub-Saharan Africa’, Journal of Private Equity, Summer, 27–52. Wright, M. and K. Robbie (1998), ‘Venture capital and private equity: a review and synthesis’, Journal of Business Finance and Accounting, 25, 521–71.

PART II COUNTRY STUDIES

3

Internationalization of small and medium-sized firms (SMEs) in a Western European service economy: the case of Andorra Sanford L. Moskowitz

Small and medium-sized firms (SMEs) are gaining increasing attention from both the academic and the business community. The general expansion in globalization has meant a growing role of small and medium-sized firms (SMEs) in international markets (Oviatt and McDougall, 1994, 1999). An increasing number of investigations examine the rise within, and internationalization of SMEs from, a growing range of countries. As the EU has expanded and become more integrated, European SMEs find themselves with greater access to international markets. The rise of entrepreneurial SMEs globally and their ability to operate in the global arena is seen as crucial to the eventual success of both European and, increasingly, non-European countries. This study examines the internationalization of SMEs with respect to the Southeastern European country of Andorra. In so doing, this study explores the issue of the internationalization of SMEs from the perspective of one of the smallest of the Western European economies. Andorra’s internationalization efforts appear to closely shadow the expansion and integration of the European Union, especially as it has opened up the economies of Andorra’s European neighbours, and in particular Spain and France. Until recently, the internationalization of Andorra’s SMEs was of a ‘passive’ nature; that is, it depended on the influx of currency, investments and tourists from the Western EU members. In this sense, internationalization came to Andorra, in large measure, because of favourable taxation policies, and the country took advantage of these imports. An important part of this type of internationalization was Andorra’s participation as a third or intermediate party in shadow economic activity. More recently, there is evidence that the West is putting pressure on Andorra and its SMEs to become more active players in the internationalization process by establishing outward international business through such traditional mechanisms as exports, foreign direct investments and joint partnerships. For their part, Andorra’s SMEs are learning to do so through the networks established from contacts established with companies and people who have come into the country from the EU to do business. The next few years will determine whether Andorra is prepared to compete actively in the global economy. This study adds to the literature on the internationalization of SMEs in a number of ways. First, there is no systematic study on the internationalization of SMEs in Andorra. Exploring this process in this country allows us to examine a less well-known phenomenon: the internationalization of SMEs in a service-based economy. In so doing, it shows how a service-based economy internationalizes in a passive manner and thus forces us to consider a wider range of mechanisms for internationalization than generally accepted. That is to say, Porter’s contention that ‘Firms can participate in international activities 31

32

Handbook of research on European business and entrepreneurship

through three basic mechanisms: licensing, export, and foreign direct investment’ requires amending (Porter, 1980: 277). In fact, Andorra’s SMEs internationalize through more passive means, such as tourism (resulting in currency exchange). This study also shows how shadow economic activity, typically ignored in studies of SME internationalization, can play an important role in this process. Also important is the examination of the linkages between inward and outward international activity, which adds to the work of Korhonen and others (Korhonen, 1999). Finally, this study shows how the rise, expansion and integration of the European Union affects the smaller, non-EU member states in Western Europe. In particular, it shows how the EU appears to be compelling Andorra’s SMEs to take a more active and outward international stance. This study, then, will expand our understanding of how the European Union influences the rate and direction of SME internationalization in smaller non-EU countries. In doing so, this investigation should be of great interest to multinational enterprises, public policy officials and students of globalization. Methodology Attempting to investigate the internationalization of SMEs in Andorra poses significant obstacles for the researcher. There is virtually no secondary scholarly literature on the country, nor are there significant numbers of articles on this less well-known country. Furthermore, Andorra itself does not compile a record of its national accounts. Therefore, it is as yet not possible to obtain detailed data on the structure of the country’s SME population or on trade or other sorts of statistics indicating international activity. Nevertheless, the research for this chapter draws selectively on empirical data from a range of sources, including material and data from publications issued by international and government agencies as well as various journals and assorted documents. This study is qualitative rather than statistical in nature. It draws its arguments from a textual analysis of the documents. The study and its results are suggestive rather than conclusive. They indicate certain trends and directions rather than provide definitive results. More exhaustive research is required to expand on the tentative results provided here. This study then offers suggestions for further research. Overview of Andorra and its economy Andorra is a small, landlocked country located in the heart of the European Union (EU) in the Eastern Pyrenees between France to the north and Spain to the south. Andorra has become a politically stable country. In March 1993, Andorrans voted to establish the country as an independent, democratic, parliamentary co-principality, giving full sovereignty to the Andorran people, with the French and Spanish co-princes continuing to function as joint heads of state with greatly reduced power. Andorra joined the Council of Europe in 1994. The population of Andorra has grown substantially since World War II. Between 1940 and 1980, Andorra’s population increased seven-fold, from only 5000 to 35 000 inhabitants. By 2005, the population had doubled to over 70 000 people. To a large extent, this growth has been due to immigration from neighbouring countries. Only 32 per cent of the population is today Andorran, while the rest are from other countries, mostly Spain and Portugal. Low taxation in Andorra has been a major inducement for immigrants to settle in Andorra and thus boost its gross domestic product to 5 per cent annually.

Internationalization of SMEs: Andorra

33

Thus, despite its low taxes and a trade deficit, Andorra has a budget surplus and low national debt. In 2004, the S&P ratings service raised its long-term sovereign credit ratings on the Principality of Andorra to ‘AA’ from ‘AA-’ This upgrade reflects Andorra’s improved fiscal position, supported by recent fiscal reforms aimed at preserving the general government’s surplus and its net creditor position. It also reflects Andorra’s medium-term growth prospects and the support of a wealthy economy with a competitive services sector and a stable political and institutional framework. Also, a favourable tax regime, with very limited direct taxation and low indirect taxes, has supported robust economic growth in Andorra.1 The general government is projected to maintain fiscal surpluses of between 1.0 per cent and 1.5 per cent of GDP and a debt-to-GDP ratio of less than 20 per cent. In addition, the 2003 law on local finances, aimed to curb the indebtedness of local governments, has resulted in local government debt decline of 8.4 per cent of GDP in 2003, down from 10.0 per cent in 2002. Continued surpluses and asset accumulation at the social security level have brought the general government net creditor position close to 9 per cent of GDP in 2003, compared with 5 per cent in 2002. The constraints on Andorra, however, are the relatively narrow and highly open nature of its economy. Adverse economic shocks could have an impact on Andorra’s banking sector, which is large relative to the size of the economy. Andorra has a good banking reputation thanks to conservative management practices and the consequent high level of the solvency ratio (18 per cent to 37 per cent) of its institutions, which is well above the 10 per cent required by current Andorran legislation or the 8 per cent required by European standards. However, a slowdown in the banking sectors could result at any time, owing to fast credit expansion in recent years. Another potential problem for the sector, and therefore for the Andorran economy as a whole, is the underground activity of the country’s financial operations. While it is true that Andorra criminalized money laundering in 1990 and broadened the scope of money laundering crimes in 1995, it is not clear how well these laws are carried out and implemented. Further, problems remain, in that neither the government nor industry as yet detect or monitor the cross-border transport of cash, record the international flows of cash, have centralized data on currency transactions or prevent the use of shell corporations in illegal transactions. Andorra’s economy is heavily influenced by its neighbours. Tourism, which accounts for 80 per cent of Andorra’s GDP, comes mostly from shoppers from France and Spain who see Andorra as a free port. These countries account for nearly three-quarters of the nine million visitors annually. The main tourist magnet is the absence of duties or value added taxes (VAT). Tourists buy imported merchandise and export it without customs clearance. In 2002, approximately 11 million people visited Andorra, 6.3 million from Spain and 4.3 million from France, with the rest from other countries. Most of these (eight million) were one-day shoppers. The other three million were more traditional tourists. In turn, tourism has led to much construction, especially in resorts. In addition to banking and tourism, Andorra has active commercial, industrial and agricultural sectors. Andorra’s industrial sectors, which include agriculture, mining, handicrafts and wood products, have declined to a GDP contribution of 20 per cent. It mainly supplies the international tourism industry but also manufactures cigarettes, cigars and furniture for the export sector. Andorra’s agricultural sector accounts for the smallest percentage of economic activity, as only 2 per cent of the land is arable. This sector employs less than 1 per cent of Andorra’s labour force. Tobacco is the country’s

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Table 3.1

Andorra’s SME sector, 2004

SECTOR Banks Hotels Restaurants Retail shops Farms Agricultural processors Mining operations E-commerce operations Trading operations

Number of establishments (estimates) 8 270 400 4 800 3 000 N/A 15
10 000 300

most important crop and sheep raising one of the country’s most vital agricultural activities. Andorra also grows grains, corn and grapes and operates distilleries in the making of brandy and anisette. Food is mostly imported into Andorra. The SME sector in Andorra Since Andorra is a small country with a relatively small economy, it cannot sustain big business units. Consequently, the vast majority of businesses in Andorra are in the micro to medium-sized range, as measured by the number of employees. These include enterprises in the service as well as industrial and agricultural sectors. Table 3.1 provides estimates of the number and distribution of SME businesses in Andorra in 2004. While lack of national accounts on the part of Andorra prevents detailed trend analysis of SME growth, it is clear that the SME sector continues to grow in Andorra, by approximately 5 per cent annually in terms of the total number of SMEs operating in the country. The service sector accounts for at least 80 per cent of all SMEs. Internationalization of Andorra’s SMEs Unlike many other countries, such as in Eastern Europe, the internationalization of SMEs in Andorra is not a function of exporting activity. While it is true that Andorra exports a number of products, including tobacco and furniture, to France, Spain and other countries, exports are a relatively minor activity compared to the level of imports. Since the later 1990s, annual imports of products into Andorra exceeded exports about twenty-fold. In 1998, total imports into Andorra were slightly over $1 billion Euros while exports were a mere $58 million Euros. The gap between imports and exports grew over the next two years as imports were 918 million Euros and exports 41 million Euros (that is, imports were 22 times greater than exports). This means that, in Andorra, infrastructural considerations are less important in the internationalization of SMEs than for other countries. Indeed, because of its isolation, Andorra has no real national transport network. This and its geography severely restrict the flow of products out of the country. In some smaller countries, such as Moldova, the lack of such networks limits internationalization. This is so because SMEs in these countries rely extensively on the movement of products and goods between countries. This is

Internationalization of SMEs: Andorra

35

not the case of Andorra, where internationalization does not depend on exports and, moreover, involves the service sectors and shadow economic activity. We find instead that the internationalization process often takes place through the formation of joint ventureships between a foreign company and an Andorran service sector enterprise, with the former establishing some sort of institutional partnership with the latter. The laws that deal with the formation of companies in Andorra allow such arrangements relatively easily, while it is true that Andorra protects its domestic business sector with ownership restrictions. The government, for example, insists on Andorran majority (two-thirds) ownership of all business and trading activity, but loopholes in the law suffice to ensure the active participation of foreign companies in the economy. There are three major types of companies allowed in Andorra that facilitate internationalization through joint business arrangements. The Societat Limitadad (SL) is the form commonly used for local trading companies. The SL requires a minimum paid-up share capital of 6000 Euros, with a minimum of two shareholders. A foreigner can be an owner of an Andorran SME if given rights by the Andorran major shareholder (the socalled ‘titular’). Alternatively, many SMEs are partnerships, which are created by two or more people by private contract. This form is often used by foreigners wanting to set up a business locally, such as a restaurant. As is the case with many businesses in Andorra, 67 per cent local ownership applies and the Andorran majority owner needs to sign contracts giving the foreigner day-to-day management rights, and control over finances. Finally, a citizen or an individual who has exceeded ten years’ residency in Andorra can establish business as a sole trader. This form is the basis for a large number of foreign– Andorran business relationships. In this case, the Andorran owns 100 per cent of the business, but signs away operating and cash flow rights to the foreigner. Overall, it is estimated that approximately 60 per cent of companies operating in Andorra – SLs, partnerships or sole trading companies – have significant foreign participation in one form or another. These represent a wide variety of SME companies, especially with the service sectors. These foreign-influenced enterprises are often such service providers as shops, restaurants, trading companies and, increasingly, E-commerce firms. There are, in fact, a number of Internet service providers in Andorra. The idea of locating websites in offshore jurisdictions such as Andorra to carry out functions previously based in high-tax jurisdictions (such as sales and marketing, treasury management, supply of financial services and, most of all, the supply of digital goods, such as music, video, training software and so on) takes advantage of low rates of taxation for increasingly substantial parts of their operations. Recent discussions examining the possibility of allowing foreigners to own 100 per cent of E-commerce (as well as other high technology) industries may induce even more foreign participation in Andorra’s high technology sector. These various companies depend on Andorra’s banking industry for financial support in the form of mortgages and business loans. Foreign investment in the financial services sector is highly circumscribed and foreign investment in domestic business (as opposed to offshore activity) is limited to minority stakes in most sectors. Andorra’s banking community regulates itself, in that it forbids its banks from seeking out and investing in foreign markets or partnering in outside banking establishments. The foreign activities of Andorran financial institutions are thus very limited, with only a single foreign subsidiary and no Andorran bank having foreign branches.

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Nevertheless, Andorra’s banking firms, which are themselves SMEs, are highly internationalized, from the inward participation of outside banking firms. Historically, there has been foreign participation (French and Spanish) in Andorra’s banking system, with foreign capital still a significant force. Out of the eight Andorran banks, just three are fully owned by Andorrans with the rest having a significant foreign (especially Spanish) share interest. The internationalization of Andorran banks depends on more than the participation of foreign companies in Andorran banking enterprises through joint partnerships. Even more important are the foreign bank accounts established in Andorran banks. While Andorran banks cannot go to other countries to seek prospective clients, foreigners can open bank accounts in Andorra at will and Andorran banks attract a large number of foreign depositors looking to take advantage of the minimal tax burden. Another enticement is Andorran banks’ policy of secrecy. For example, numbered accounts that are made available to top-quality clients, are known only to the customer and the banker. General accounts, also secret under the law, are tightly protected as well. Many of Andorra’s foreign-influenced SME service companies, financed by Andorra’s SME domestic banks investing the money of foreign clients, support themselves in Andorra by catering to the tourist trade. This is critical for Andorra since the country’s high trade deficit is offset by the income generated by the tourism sector. Indeed, approximately 42 per cent of Andorra’s service industries cater to the tourist trade. The tourist trade induces internationalization in Andorra through two interlinked mechanisms: imports and foreign exchange. The spur to tourism in Andorra depends on its central location in the EU and, as critically, on its well-earned reputation as a duty-free zone for shopping, a role that grew out of the business of smuggling French goods to Spain during the Spanish Civil War and Spanish goods to France during World War II. Over the years, Andorra has become an international shopping centre that imports products from all over the world. Spain accounts for 40 per cent of these imports and France and the US account for 30 per cent and 5 per cent, respectively. Internationalization results as well, in the sense that retail customers enter Andorra for brief periods of time and spend their money there. Indeed, tourism is Andorra’s largest source of foreign currency inflow, far more than from exporting. Andorra, SMEs and inward–outward linkages Through the 1990s, the internationalization of Andorra’s SME business sector was for the most part a one-way process. Rather than exporting or entering into more advanced stages of internationalization (such as joint ventures, or M&As) in other countries, Andorra’s business sector relied on the inward movement of foreign firms, bank accounts, tourists and shoppers. There is evidence that Andorra’s government and business community are looking to build on their experiences in such inward ‘passive’ internationalization in order to begin expanding outward in a more ‘active’ mode of internationalization. For example, Andorran lawmakers are promoting international trade in specialized areas where there is, as yet, no foreign competition. This means that the Andorran SMEs are preparing to advance to the next stages of internationalization by leveraging and expanding upon their prior experience with foreign firms operating in Andorra. The following brief studies, which encompass the major industries of Andorra, indicate that ‘inward–outward linkages’ may take on greater importance as

Internationalization of SMEs: Andorra

37

Andorra’s government and SME community attempt to internationalize outward to other countries. Case study one: tourism Local small business firms see their success within Andorra as a stepping-stone to moving outward internationally. The international networks they establish with foreign clients are particularly critical to their expansionist strategies. A case in point is the firm ‘Andimesa’. The company was founded in the early 1970s by two Andorrans. The company grew internally through real estate investment and, most critically, developing products that catered to the foreign tourist trade. Through the network of foreign contacts the company obtained in these activities in 1995, the company began to invest in foreign market opportunities. In particular, it established foreign subsidiaries for its perfume chain of products within Spain. The trigger to this move into Spain was the expansion of the EU and a belief that the company needed to have a presence in the more open EU markets before competition became too fierce, and the establishment of critical connections made with businessmen in the EU that helped to ease their entry into Spain. Case study two: banks Through the 1990s, the Andorran banking community internationalized in a passive manner. That is, they relied on foreign deposits and on foreign banks forming partnerships and other business relationships with Andorran banks. Table 3.2 shows the percentage interest held by foreign banks in Andorran banking institutions in 2004. Since 2000, the banking industry in Andorra has been attempting to expand the level of participation of foreign banks in Andorra. The government is preparing to admit four foreign 51 per cent controlled banks under some stringent conditions, including acceptance of Andorran chief executives. Andorra then attempts to leverage the contacts of its partners, owners and deposit customers to become active players within other foreign countries, such as Spain and France. Andorran bankers believe the global partners with whom they are now doing business within their country are useful for gaining access to other international markets, especially within the EU. The expansion, integration and Table 3.2

Percentage interest by foreign banks in Andorran banking institutions, 2004 Banc International

Banco Bilbao Vizcaya (BBV) (Spain) La Caixa (Spain) J. Henry Schroder Bank (Geneva) Caixa de Catalunya (Spain)

Credit Andorra

CaixaBank

32.6

100

Banca Privada d’Andorra

Banca Privada d’Andorra

30.3

18.3

5.0

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Handbook of research on European business and entrepreneurship

greater openness of EU service markets, and the greater transparency of prices and services because of the adoption of the Euro on the continent, now offer Andorran bankers an opportunity to enter new markets that they could not enter previously. By 2005, at least four of Andorra’s eight banks had been hoping to gain market shares in the markets of EU countries. Case study three: tobacco In this case, the inward–outward linkages involve shadow or black market activities. British tobacco firms did business in Andorra for years – the tobacco industry was one important source of contact between British firms and the Andorran government and business sector. Through these contacts, Andorran traders became part of a tobacco network of tobacco producers, processors and traders, that extended throughout the EU. This network eventually provided an avenue for Andorran traders to ‘export’ cigarettes illegally to EU countries. This activity involved major tobacco companies in the EU. Leading British tobacco firms sold millions of cigarettes to customers overseas, knowing that they would be smuggled illegally back into the UK. Gallaher, which produces best selling brands such as Silk Cut and Benson & Hedges, shipped cigarettes into Andorra, from where cigarettes were smuggled back into the UK tax-free. The number of British-made cigarettes imported into Andorra increased more than a hundred-fold from 1993 to 1997. According to UK customs officials, through Andorra’s network of contacts, it was the largest source of smuggling in Europe, importing nine million cigarettes a day, with four to five million being British brands, but officially exporting none. Spanish police believe that, of the smuggled cigarettes, about half were British brands. A confidential report from a European Union task group has demonstrated the close relationship between British tobacco manufacturers and their importers in Andorra. These smuggling operations – a basically illegal exporting scheme – have brought large incomes to Andorran traders and other Andorran businesses. It is believed that other Andorran trading businesses are also increasing their smuggling activities, an outward operation linked closely to establishing connections with foreign companies that earlier on did legitimate business in Andorra. Globalization, the EU and Andorra’s SMEs The relationship between the European Union and Andorra is complex. While Andorra is not officially a full member of the EU, the country has come to a series of agreements with the EU, including agreement on duty-free quotas and permission of the EU for Andorra to maintain price differentials from other EU countries. In 2004, Andorra signed a series of accords with the EU in the fields of economic, social and cultural cooperation. Thus Andorra is a member of the EU Customs Union and is treated as an EU member for trade in manufactured goods (no tariffs) and as a non-EU member for agricultural products. The expansion and closer integration of the EU, and the closer relationship Andorra enjoys with the EU than in the past, is not an unalloyed benefit. For example, since 2002, the country has been experiencing declining retail sales from tourism. This downturn is in large measure due to the greater competition of the larger, more integrated EU markets. Overall, the ‘flattening’ effects of globalization, as reflected in the rise of the EU, have been eating into Andorra’s competitive advantages, especially with its two primary

Internationalization of SMEs: Andorra

39

trading partners, France and Spain. Andorra’s comparative advantage – its duty-free status and summer and winter resorts – has been eroding as the economies of France and Spain have been opened up, providing broader availability of goods and lower tariffs. The country’s agricultural sector continues to decline as Andorra must compete with the EU’s heavily subsidized products and the future of its status as a tax haven is in doubt, in large measure because of the demands of the EU for Andorra to end tax exemptions because these are detrimental to other EU countries. The EU is also combating Andorra’s illegal trafficking in tobacco, and other products, an activity, as we saw, that is part and parcel of Andorra’s outward (albeit shadowy) internationalization movement. For these reasons, Andorra is not yet prepared to enter the EU because it believes the EU needs to modify its approach to micro-states (like Andorra). Also Andorra does not have the resources to contribute significantly to help maintain EU bureaucracy. Along with Liechtenstein, Iceland and Norway, Andorra sees itself as part of a cooperative fellowship of countries that are all different from the common EU model. Andorra believes it is necessary for it to get individual treatment from the EU, as have these other smalland medium-sized states. On the other hand, there is evidence that, unlike other small non-accession countries (such as Moldova), Andorra may gain benefits from the rise of the European Union, such as acceleration in, and extension of, the internationalization of its businesses, especially its SMEs. By insisting that Andorra become disentangled from its shadow world of smuggling, it imparts an air of legitimacy to the country which, in turn, makes it more welcome as a partner in the EU’s international economy. This, in turn, helps to establish network linkages more quickly. These linkages then serve to offer Andorran SMEs the next step in the internationalization process, that is, active exporting of products, services and technologies to the larger EU market. We have seen as well that the rise of the single EU market and currency provides opportunities for Andorra to compete in the EU on an equal footing with other European countries. And, of course, fear of being shut out of the EU market induces Andorran businesses to enter the EU quickly to obtain the benefits of first-mover advantage. Discussion and conclusions This study examined the particular case of the internationalization of SMEs within Andorra, so we must be cautious about generalizing our results to other European economies. Eastern European countries, for example, operate under quite different economic conditions, as do many of the other EU member countries. Consequently, a closer study that compares and contrasts Andorra with other small non-accession economies – such as Moldova – might prove very useful in providing further insights in the internationalization process, especially with regard to SMEs. Differences, as well as similarities, between such countries may prove quite instructive, but, even within the context of Andorra itself, many critical data remain to be uncovered and analysed. This study, then, must be considered a preliminary investigation into this very interesting and still elusive country. It is most useful in suggesting possible directions for future research. Despite the limitations of the study, this analysis is a useful addition to the body of international business and entrepreneurship literature. Firstly, this analysis suggests the importance of the service sectors in the internationalization of SMEs. It is, we have found, in banking, finance and tourism, and related industries, that so much internationalization

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within Andorran small and medium-sized firms takes place. This study shows as well that the internationalization process can proceed quite far in a ‘passive’ mode. That is to say, so much of the internationalization of Andorra’s SMEs has resulted from the outside world coming into the country in the form of tourists, imported products for shops and establishments catering to tourists, and foreign investors and money deposits in Andorra’s banks. This then suggests that the internationalization of SMEs does not depend on such traditional forms as the exporting of products, mergers and acquisitions, and so forth. Tourism, for instance, and its ancillary industries, draw foreigners to the country, which help to internationalize Andorra’s SMEs in various ways. At the same time, there is evidence that this ‘passive’ form of internationalization is a stage leading to the next evolutionary step, outward, ‘active’ internationalization, as indicated in the short case study examples from tourism, banking and the tobacco trade. This finding, in turn, points to a strong ‘inward–outward’ linkage mechanism at work in the internationalization process, but other types of linkages are also seen at work in this study, and this has not been fully examined in the literature. We note, for instance, the potentially important linkage between industries within a country as they internationalize in sequence. Within Andorra, the internationalization of the banking sector, especially the investment of Spain in Andorra’s banks and the growing pool of foreign deposits, has helped that industry to expand. As it has done so, it has been able to fund other industries in Andorra to the point where they could also grow internationally, such as the multitude of shops, restaurants and other retail establishments that cater to foreign visitors. Over time, as Andorra’s financial sector begins to exploit foreign markets through inward–outward connections, it will continue to link into and nourish the country’s other industries and so help support their attempts at actively entering and doing business within other countries. This study also provides certain insights into the role of shadow economies in the internationalization process. One example highlighted here was the tobacco industry, where once again inward–outward linkages are evident, albeit through an underground network. Internationalization first occurred through the import of European cigarettes into the country. Through the European contacts made during this stage, it appears that Andorran traders and exporters could succeed in organizing and operating an invisible export network. Although ‘under the radar’ and of an illegal nature, such activity is certainly another form of SME internationalization resulting in profits for participants and, at least indirectly, results in the flow of funds into the Andorran economy as a whole. Most importantly, this study highlights the interesting relationship between an expanding European Union and a small country that is not totally a part of it. There are some countries in Eastern Europe – the so-called ‘non-accession’ countries – that are having difficulty evolving to more advanced stages of internationalization. Moldova offers one example of this as the expansion of the EU places more rigid entry barriers to products that countries like Moldova have difficulty overcoming. The case of Andorra provides a different model of the role of the EU in an ‘outside’ country’s attempts at internationalization. While we have noted certain constraints imposed by the EU on Andorra, we have also seen how important the expansion of the Union can be to the future international development of the country. Most critically, the growth of the EU, the increased demands by the European Community for abrogation of shadow economic activity, and the growing opportunities from the single European market all point toward a country whose

Internationalization of SMEs: Andorra

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SME community will increasingly participate, more actively than in the past, in the international opportunities afforded by its European neighbours. Note 1. In Andorra, there are no capital gains taxes and little income tax. The only taxes are low small customs duties, local property taxes and corporate registration fees.

References Korhonen, H. (1999), ‘Inward–outward internationalization of small and medium enterprises’, Helsinki: Helsinki School of Economics and Business Administration. Oviatt, B.M. and P.P. McDougall (1994), ‘Toward a theory of international new ventures’, Journal of International Business Studies, 25(1), 45–61. Oviatt, B.M. and P.P. McDougall (1999), ‘Accelerated internationalization: why are new and small ventures internationalizing in greater numbers and with increasing speed?’, in Richard Wright (ed.), Research in Global Strategic Management, Stamford, CT: JAI Press. Porter, M.E. (1980), Competitive Strategy: Techniques for Analyzing Industries and Competitors, New York: The Free Press.

4

Trust-based cooperation as driver for the internationalization of SMEs: empirical evidence from Austria Matthias Fink and Slawomir Teodorowicz

Austria is one of the economically most successful nations of Western Europe, and its small business sector has been of academic interest (Dana, 1992). Even though its economic growth of 2.2 per cent of the GDP in 2005 seems quite moderate and lies only slightly above the EU25 average (2 per cent) (Austrian Economic Chambers, 2005), Austria still remains within the top nations if other current economic indicators are considered. Especially in comparison with other European countries, Austria does rather well and is situated above the average. Austria’s unemployment rate of 4.5 per cent is the lowest in the EU25 region and lies clearly below the EU25 average of 9 per cent (Austrian Economic Chambers, 2005). Additionally, with 27 100 Euros, Austria has one of the highest GDP per capita worldwide. Thus, within the EU25, Austria ranks fourth behind Luxembourg, Ireland and Denmark (Austrian Economic Chambers, 2005). The economic structure of Austria is decisively characterized by SMEs, with 99.5 per cent of Austrian enterprises being SMEs. They provide about 65 per cent of all jobs and generate approximately 58 per cent of total turnover. Compared to the EU average, the emphasis lies on small and medium enterprises and not on smallest, or on large-scale enterprises (Pichler and Bornett 2005; Mugler 1999). Austria as an international player Austria’s performance abroad Like many national economies with a rather small domestic market (Rundh, 2001), Austria heavily relies on foreign trade. Consequently, Austria’s export rate of 51.1 per cent lies significantly above the EU25 average of 35.9 per cent. In this context, Germany represents by far the most important trading partner (see Figure 4.1). Furthermore, Austrian foreign trade has been active and has shown outstanding engagement regarding the opening of the markets of Central and Eastern European Countries (CEEC) since the fall of the Iron Curtain. In spite of its small size and the high number of SMEs, Austria is one of the most important trading partners and investors in the CEEC. Concerning Austrian exports, Hungary and the Czech Republic are the most important countries in the CEEC (see Figure 4.1), Austria accounts for 7.5 per cent of the trade (exports and imports) of the EU15 with the CEEC and as a result ranks fourth. With regard to the export intensity, Austria ranks first in the EU25 (International Monetary Fund, 2005). The same picture arises when we look at the OECD countries. In 2004, Austria carried out 6.7 per cent of the OECD exports to the CEEC, but only accounted for 1.9 per cent of the total exports of the OECD countries (BMWA, 2004). In Slovenia, Croatia, Slovakia, Hungary, the Czech Republic and Bulgaria, Austria is one of 42

Internationalization of SMEs: empirical evidence from Austria Austrian exports in the EU15 (2004, in million EUR)

43

Austrian exports in the EU 10 (2004, in million EUR)

Other; 347

Other; 3672 B; 1280 Nl; 1650 E; 2181

SK; 1354 H; 3347

F; 3740

PL; 1605 D; 28582

GB; 3746

I; 7629

SLO; 1951

CZ; 2729

Source: Austrian Economic Chambers (2005).

Figure 4.1

Austrian exports in the EU

the top five investors. In Slovenia and Croatia, Austria has even taken the top position (BMWA, 2003). Austrian market shares concerning foreign direct investments (FDI) in Slovenia, Slovakia and Croatia are as much as four times higher than those of Germany (BMWA, 2004), although Austria, with its eight million inhabitants, only constitutes about a tenth part of the German population. In addition, Austrian foreign trade with the CEEC is characterized by a striking dynamic: the figures below show the more than triple increase of imports from and exports to the CEEC within the last decade The increase in exports has been slightly higher than the increase in imports. The doubling of the foreign trade volume with EU member countries appears relatively moderate, compared to the developments in the CEEC. This positive development reached its peak in 2002 when Austria held a positive balance of trade, for the first time since the beginning of measurement and monitoring ( 296 million EUR) (Austrian Economic Chambers, 2005). Austrian SMEs as international players Until now, it remains unclear whether the size of an enterprise correlates with the probability of internationalization (Calof, 1993; Westhead et al., 2001; Wolff and Pett, 2000). However, the method of internationalization seems to be dependent on the company size (Hollerstein, 2005). Hence the opening of new markets brings about specific difficulties for small companies (Roessl and Breit, 1992; Donckels, 2002; Fernández and Nieto, 2005; George et al., 2005; Hutchinson et al., 2005). The most significant problem concerning the internationalization of SMEs is often seen in the lack of resources (Gemser et al., 2004; Lu and Beamish, 2001; Rutashobya and Jaensson, 2004). The internationalization of SMEs typically suffers from the lack of those resources that provide economies of scale and scope by reducing transaction costs. Consequently, for SMEs, the entry of foreign markets is a risky venture. At the same time, the disproportionately high minimum investment reduces the possibilities of access to foreign markets for SMEs. Basically, it is possible to distinguish between an autonomous and a cooperative strategy of internationalization (Gemser et al., 2004). Cooperative strategies bear the risk of defectionist behaviour on the part of a partner. However, cooperation with a partner located in the foreign market facilitates a rapid opening up of new markets (Fink and Roessl, 2005).

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Handbook of research on European business and entrepreneurship Austrian foreign trade 1993 to 2003, by regions 16000 14000

IM EFTA EX EFTA IM NAFTA EX NAFTA IM CEEC EX CEEC IM OPEC EX OPEC IM ASEAN EX ASEAN

12000 10000 8000 6000 4000 2000 0 93 94 95 96 97 98 99 00 01 02 03

Austrian foreign trade 1993 to 2003 (total and EU) 90000 80000 70 000 60000 IM total EX total IM EU EX EU

50 000 40000 30000 20000 10000 0 93 94 95 96 97 98 99 00 01 02 03

Source: Statistik Austria (2005).

Figure 4.2

Austrian foreign trade 1993 to 2003, by regions

Empirical evidence of the internationalization of Austrian SMEs towards the CEEC (Aiginger and Czerny, 1998; Huber and Kletzan, 2000; Huber, 2003a; 2003b) has shown that companies often try to gain access to the Central and Eastern European markets by means of cooperation with local partners. Thus Austrian CEEC cooperation accounts for high numbers compared to other regions (Aiginger and Czerny, 1998). The cooperation density of SMEs is also highly distinctive, but varies according to company size (Huber and Kletzan, 2000). Considering all these facts, the question arises why, in particular, Austrian SMEs have so intensively and rapidly involved themselves in Central and Eastern European Markets. A glance at the map provides a first hint. However, not only the minor geographical distance, but also Austria’s historical and cultural proximity to the CEEC (Fink, 2004) indicate a favourable precondition for cross-border cooperation. It seems plausible to assume

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that this proximity is a fertile ground for the formation of norm-based trust relationships. Such relationships absorb uncertainties and seem to be suited to initiating and accelerating the process of internationalization. Whether this assumption finds support by the means of theoretical arguments and empirical evidence will be discussed in this chapter, against the background of the noticeable development regarding the engagement of Austrian SMEs in the CEEC. Additionally, the problem of behavioural uncertainty concerning cross-border transaction relationships of SMEs within the field of dependence and autonomy is described as a coordination problem in an uncertain and highly complex environment. Based on the knowledge of (1) the deficits concerning market and hierarchy and (2) the coordination capacity of trust, the establishment of a norm-based trust cooperation relationship is pointed out as a promising strategy in order to absorb the actors’ behavioural uncertainty. The empirical results presented support our line of argumentation and raise additional questions. The chapter closes with a discussion of the results, in which additional questions are thoroughly elaborated and provide interesting starting points for follow-up research. The role of cooperation in the process of internationalization Norm-based trust as driver for the internationalization of SMEs As SMEs are disproportionately burdened by the minimum investments necessary for going international, they need to expand their activities to foreign markets via cooperation in order to obtain access to the resources of other companies. Thus, especially for SMEs, inter-firm cooperation represents an attractive possibility for going international (Kaufmann, 1992; Lu and Beamish, 2001; Kirby and Kaiser, 2003; Gemser et al., 2004). The advantage of such cross-border collaboration arises from a functioning coordination of the cooperation partners’ behaviour within the areas of the cooperation. Only when each participant in a cooperation arrangement foregoes opportunism and shortterm advantages in favour of common long-term objectives can the cooperation be successful and create competitive advantages – both on the home market and on the export market – for each participating enterprise (Pleitner and Roessl, 1995). Those who cooperate make themselves and their success therefore dependent on the behaviour of the cooperation partner (Wurche, 1994). These aspects particularly gain importance within the context of cross-border cooperation relationships, owing to the reduced applicability of control and monitoring mechanisms. In order to ensure its own benefit, the cooperating enterprise has to make sure that its partner will act in accordance with the cooperation agreement (that is, in a cooperative manner) (Spremann, 1990). This combination of dependence and uncertainty as to the partner’s behaviour (the principal/agent problem) makes it possible for the cooperation partners to act on their own behalf and to pursue short-term interests (instead of common long-term interests) without being subject to sanctions. The option of behaving unfairly towards the foreign business partner without being detected, and not exhibiting the expected behaviour, is referred to as ‘latitude of opportunistic behaviour’ (Muris, 1981; John, 1984; Provan and Skinner, 1989; Hauser, 1991; Poppo, 1991; Dahlstrom and Boyle, 1994; Noorderhaven, 1995; Gassenheimer et al., 1996; Wathne and Heide, 2000). Two factors affect the latitude of opportunistic behaviour. On the one hand, it depends on the number of the actor’s chances (monitoring gaps) for opportunistic behaviour, which positively correlates with the geographical and psychic

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distance. On the other hand, the uncertainty as to the partner’s behaviour stems from his inclination to behave opportunistically. How is it then possible for an SME to ensure that the foreign business partner behaves according to the rules stipulated ex ante? We have identified three ideal-type coordination mechanisms for the reduction of the latitude of opportunistic behaviour which govern the actors’ behaviour in each real inter-firm transaction relationship in a certain combination: 1.

2.

3.

The coordination capacity of the market mechanism originates from the selforganization of suppliers and demanders who strive to realize their own interests as quickly as possible. Therefore, the market mechanism, which is based on the pursuit of short-term advantages, cannot be the dominant coordination mechanism in a long-term transaction relationship (e.g. Ouchi, 1979). The behavioural determination by hierarchical governance (Muris, 1981; John, 1984; Provan and Skinner, 1989; Hauser, 1991; Dahlstrom and Boyle, 1994; Noorderhaven, 1995; Gassenheimer et al., 1996; Wathne and Heide, 2000) is equally limited, depending on the context. Credible sanction threats (Buckley and Casson, 1988) of an actor require that he dispose of sufficient sanctioning power over his cooperation partners (pledge) (Emerson, 1962; Cook and Emerson, 1978; Engel, 1999; Heide and John, 1988; Schrader, 1993; Backhaus, 1992) and furthermore that the desired behaviour of the cooperation partner, and its consequences (Eberl, 2004), are known ex ante and that this behaviour is identifiable ex post (Spremann, 1988; Dwyer et al., 1987; Backhaus, 1992; Gierl, 2001) (contingency claim contracts; Heide and John, 1988, 1992). However, these requirements can often not be met or seem undesirable (Kaas, 1992a, 1992b). Furthermore, it has to be possible to monitor the cooperation partner’s behaviour consistently (‘the vitreous interaction partner’). It has been shown that, as a dominant coordination mechanism, hierarchical governance is limited (organizational failure) especially in those areas of inter-firm cooperation where the objectives cannot be programmed at all or only at prohibitively high transaction costs (Ring and Van de Ven, 1992; Ripperger, 1998). This situation can often be found in the course of accessing new markets. Cooperation research has proposed an alternative coordination mechanism, which is particularly well-suited as a coordination mechanism in situations of both market and organizational failure. This coordination mechanism is referred to as ‘self-extradition’ (e.g. Frey and Osterloh, 2002) or ‘self-commitment on the basis of mutual trust’ (e.g. Fink and Roessl, 2004; similarly Eberl, 2004).

Trust is the response of an actor (an individual, not an organisation) to subjective uncertainty regarding the interaction partner’s behaviour. Instrumental trust refers to the exogenous conformity of the cooperation partner’s behaviour with the cooperation norms. Norm-based trust is intrinsically motivated. Within our model the point of departure for norm-based trust is the perceived foreign cooperation partner’s trustworthiness. Highly trustworthy interaction partners may induce the actor to realize acts of trust in order to communicate his own trustworthiness credibly. Such risky advance performances signal to interaction partners that one has rendered oneself unprotected as a result of the trust placed in them (Roessl, 1994; Wiegand, 1994; Fink, 2005). Acts of trust are based on trust expectations, that is the expectation that the interaction partner is reliable and will

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voluntarily refrain from behaving opportunistically (Ripperger, 1998). The act of trust is interpreted as an expression of the interaction partner’s motivational structure and provides a basis for the actor’s own trust expectations, thus enabling acts of trust on his part. Based on these mutual trust expectations, both sides perform acts of trust, which in turn enforce trust expectations and justify further acts of trust. The evolution of norm-based trust can therefore be described as a reciprocal self-enforcing process (Fink, 2005). We argue that this process leads to a situation in which the cooperation partners mutually submit to each other. By doing so, they reduce their counterpart’s inclination to behave opportunistically. A cross-border, norm-based trust relationship evolves which neither of the participants intends to jeopardize with defectionist behaviour. Although the latitude of opportunistic behaviour still exists during the establishment of such a transaction relationship, restricting the participants’ inclination to behave opportunistically reduces behavioural uncertainty. Therefore, the complexity of the transaction relationship and the risk of internationalisation for SMEs can partly be absorbed. By determining a common objective, the necessary contributions of the cooperation partners can be coordinated in order to achieve long-term objectives. This provides a key to double contingency (Luhmann, 1984) and prevents the development of social dilemmas such as the prisoner’s dilemma from the outset (Bierhoff, 1991). Furthermore, the strategy of evolving a norm-based trust relationship based on the actors’ self-commitment enables the development and maintenance of cross-border long-term transaction relationships for SMEs. Owing to both market and organizational failure, such relationships would otherwise not take place. Consequently, the following hypothesis can be formulated: H1: Norm-based trust cooperation relationships facilitate the establishment and maintenance of transaction relationships in highly uncertain and complex contexts (e.g. the internationalization of SMEs) that cannot evolve based on market or hierarchical coordination. Minor distances as drivers for international cooperation relationships of SMEs The stage theory of internationalization, strictly speaking the Uppsala model (Johanson and Vahlne, 1977, 1990), assumes that the process of internationalization proceeds gradually. This theory characterizes the entrepreneurs as risk-averse. They enter only faintheartedly the unfamiliar grounds of international markets. In this respect, they tend to choose less risky strategies of market entry such as export. Then they continuously move deeper into the markets, at the same time gradually exposing themselves to higher risk. According to the stage theory, the main reason for the great uncertainty is the ‘psychic distance’ that may be defined as the manifold differences between home country and the foreign country. These differences may have a negative influence on the flow of information that ranges from language barriers and cultural misunderstandings to different levels of industrial development and so on (Johanson and Vahlne, 1977). The psychic distance is regarded, besides the geographic distance – which is seen as a great barrier for internationalization (e.g. Bröcker and Rohweder, 1990) – as a decisive disruptive factor in terms of internationalization efforts. After all, closeness and similarities foster the evolution of trust, which in turn is a prerequisite for the development of cooperation. Thus, innately shorter geographical and psychic distances ease the creation of international cooperation. Given Austria’s proximity to the CEEC, this assumption is supported by the fact that Austrian enterprises have been cooperating remarkably frequently with CEEC.

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The stage theory implies a rather traditional possibility of international market entry along a predetermined path. Recently this conservatism, which goes along with strong determinism, has frequently been criticized (e.g. Bell, 1995). The theory has been confronted with phenomena such as ‘born globals’ (Andersson and Wictor, 2003; Madsen and Servais, 1997; Rialp et al., 2005) or lately the ‘born-again globals’ (Bell et al., 2003). ‘Born globals’ are enterprises that tend to go international immediately after their start-up, whereas the definition of ‘born-again globals’ comprises already established, well-set enterprises that suddenly start a rapid internationalization process. Empirical evidence has proved that this often goes hand-in-hand with the ‘leapfrogging technique’ which is the omission of certain stages of the internationalization process (Millington and Bayliss, 1990). Thus it seems as if some enterprises manage to break out of the determined process of internationalization and pursue an alternative path. Provided that they manage to develop a strategy helping them to absorb behavioural uncertainty, they are able to enter new markets more quickly than others and consequently to realize first mover advantages (Luo and Peng, 1998). In any case, this deviation is supported by smaller psychic distance that facilitates the evolution of trust (Fink, 2005). As already shown above, trust is a crucial ingredient for the evolution and the maintenance of cooperation relationships. Based on this line of argumentation we were able to formulate our second and third hypotheses: H2: Minor psychic and geographical distance facilitate and accelerate the establishment of trust-based cooperation relationships for SMEs. H3: The establishment of trust-based cooperation relationships with foreign partners positively affects the success of the participating companies. Empirical evidence Hypothesis 1 A questionnaire survey (Fink, 2005) with a random sample of 632 entrepreneurs of Austrian SMEs (return rate: 21.8 per cent) carried out in autumn 2003, finds strong empirical support for Hypothesis 1. The questionnaire consisted of 51 statements with each of which the respondents were able to mark their level of agreement on a fourfold scale. The set of questionnaire items (eight items) relating to ‘norm-based trust in cooperation relationships aiming at long-term objectives in complex and uncertain contexts’ has shown satisfactory reliability values (Spearmann-Brown: 0.5075), just as the set of items (eight items) of the latent variable ‘self-commitment’ (Spearmann-Brown: 0.4871). Furthermore, the selectivity coefficients have also continuously shown results above the value of 0.4 for each single item. The empirical results of this study underline that norm-based trust cooperation relationships play an important role in real business life. Some 39.7 per cent of the respondents confirmed being part of a cooperation relationship based on mutual trust. The existence of such a relationship strongly correlates with the intrinsically motivated selfcommitment of the entrepreneurs. A highly significant Pearson correlation of 0.519 exists between the variables ‘normbased trust cooperation relationship’ and ‘self-commitment’, which serves as strong empirical evidence for the relation formulated in Hypothesis 1. Consequently, the strategy

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of establishing a norm-based trust cooperation relationship has been identified as a viable possibility for SMEs, as it enables the entrepreneurs to overcome the complexity and uncertainty of the internationalization process. Nevertheless, it remains unclear whether this strategy for internationalization is able to contribute to the explanation of the velocity and obvious success of the Austrian SMEs’ engagement in the CEEC. In order to find an answer to this question, we first thoroughly examined Hypothesis 2. For this purpose, the analysis of the empirical data will reveal to what extent Austrian SMEs have relied on norm-based trust and cooperative strategies during the opening of Central and Eastern European markets. Furthermore, we analysed how successful those enterprises were that pursued such a strategy (Hypothesis 3). Subsequently, we formulated an empirical model concerning the catalytic effect of the comparatively small psychic distance between Austrian and CEEC SMEs, on the Austrian SMEs’ process of internationalization towards the CEEC. Hypothesis 2 As already mentioned above, previous research has pointed out (Aiginger and Czerny, 1998; Huber and Kletzan, 2000) that Austrian SMEs increasingly internationalize by means of cooperation with the CEEC (see Table 4.1). Research data also show that the frequency of cooperation within the group of SMEs is not consistent. SMEs with 51 to 100 employees cooperate more frequently than smaller enterprises. Within this group 70.5 per cent of the enterprises maintain a cooperation relationship with companies from the CEEC. The frequency of cooperation only increases again significantly within the group of enterprises with more than 500 employees. These aspects comply with the current state of research, according to which large enterprises cooperate on average more often than SMEs. However, the comparatively strong cooperative interconnectedness of large companies has to be relativized insofar as an increasing company size automatically leads to an increasing number of external contacts. At the same time, a higher number of external contacts increases the probability of at least one cooperatively coordinated transaction relationship to evolve. Regarding the Austrian SMEs’ frequency of cooperation according to regions, the great significance of cooperative strategies while entering CEEC markets becomes apparent Table 4.1 Austrian cooperation in the CEEC sorted by number of employees

Employees

Without cooperation with the CEEC

With cooperation with the CEEC

Share of cooperation in %

SME

0 to 5 6 to 20 21 to 50 51 to 100 101 to 150 151 to 250

43 87 77 23 23 15

16 25 17 55 20 26

27.1 22.3 18.1 70.5 46.5 63.4

Large

251 to 500 Over 500

21 7

20 30

48.8 81.7

Source: Huber and Kletzan (2000).

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Table 4.2 Austrian cooperation in different regions (multiple selections possible) No. of employees EU 15 CEEC AUT Others No coop Enterprises

0 to 20

21 to 50

51 to 100

101 to 150

151 to 250

Over 250

23 24 27 8 52 171

20 18 18 6 62 94

77 71 60 5 14 78

33 47 19 12 37 43

54 63 49 15 24 41

73 64 54 5 17 78

Source: Aiginger and Czerny (1998).

(Table 4.2). Cooperation relationships in the CEEC are continuously on a similarly high level, compared to the levels in the EU15 and the cooperation relationships within the home country. Within the groups of companies with 101 to 150 and 151 to 250 employees, CEEC cooperation relationships are distinctly at the forefront. Additionally, it has to be pointed out that the high level of cooperative activities in the CEEC has been developed in a comparatively much shorter period of time (only since 1989). All of the abovementioned aspects serve as explicit indices for the intensity and dynamic of the Austrian SMEs’ cooperative interconnectedness with companies from the CEEC. In view of the given data we were not only able to point out (a) the existence of an elevated number of cooperation relationships with the CEEC in the area of SMEs, but also (b) that a comparison with the number of existing cooperation relationships in other regions, such as the predominant and larger EU15 region, need not be avoided. Even though the given data have to be interpreted with caution, they provide more than just a hint of a rapid internationalization of Austrian SMEs towards the CEEC by means of cooperative strategies. According to Fink (2004) Austria is close to the CEEC not only geographically but also psychologically. Therefore, the data support the hypothesis referring to the catalytic effect of minor distances on the internationalization process of SMEs towards the CEEC. Hypothesis 3 In a further step, we examine the effect of the fast velocity of the cooperative internationalization on the success of Austrian SMEs participating in cross-border cooperation relationships. The evaluation of Austrian SMEs’ success with regard to cross-border cooperation was examined in a recent survey. In autumn 2005, 1200 entrepreneurs of cooperating Austrian SMEs were surveyed. The questionnaire survey generated 250 analysable questionnaires. We measured the success on the basis of the five variables: stability of the cooperation, conflicts within the cooperation, the importance of the cooperation for the enterprise, the intensity of the relationship within the cooperation and the perceived success of the cooperation relationship. The analysis of the data confirms in two ways the assumption that cross-border cooperation relationships of Austrian SMEs are successful. First, histograms of the empirical results concerning the five variables mentioned above draw an explicit picture of successful cooperative internationalization strategies carried out by Austrian SMEs (see Figure 4.3).

51

0

2

4

10

20

18

30

40

Figure 4.3

0

1

3

10

20

30

30

32

42

40

50

Results of the survey (absolute numbers)

agree

rather agree

rather disagree

disagree

There is only a low level of CONFLICTS within the cooperation.

increases

is constant

decreases

fluctuates

The INTENSITY of the cooperation...

2

10

7

20

very successful

successful

unsuccessful

0

0 4

10

20

13

Is the cooperation SUCCESSFUL?

0

very unsuccessful

agree

rather agree

rather disagree

disagree

30

22

40

30

For my company the cooperation is of long-term IMPORTANCE

50

48

60

40

35

0

10

20

30

40

50

60

70

yes

59

no

5

Is the cooperation STABLE?

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Handbook of research on European business and entrepreneurship r = 0.646**

double contingency

r = 0.466** perceived success

norm-based trust relationship

stable cooperation r = 0.267** no conflicts

r= 0.335**

relationship intensity increases

importance

r = 0.434** ** p = 0.01

Figure 4.4

Empirical model: the ‘spiral of success’

In 63.6 per cent of Austrian SMEs cooperating across the border the cooperation intensity is on the rise. Furthermore, 86.4 per cent of the entrepreneurs consider the cooperation relationship as significant or as rather significant for the long-term development of their enterprise. Only 6.1 per cent of the respondents perceive the level of conflict within their cooperation relationship as rather or extremely high. Basically, the cooperation relationships are considered as stable (89.4 per cent) and successful (72.7 per cent) or very successful (19.7 per cent). Looking at the results from the relational perspective, highly significant Pearson correlations between the single factors can be observed. The relationships are represented in Figure 4.4. The empirical model demonstrates the formation and the functional mechanism of the ‘spiral of success’ in the context of norm-based trust relationships. The results of the study can be interpreted as follows. Minor psychic distance facilitates the evolution of a norm-based trust relationship, which provides the cooperators with a key to overcome the double contingency. Moreover, mutual trust and the pursuit of common long-term objectives (instead of pursuing short-term defectionist interests), enable the participants to establish and to sustain stable cross-border cooperation relationships with a low conflict rate. These cooperation relationships are perceived as successful by the participants, whereby the cooperation significantly gains importance for the long-term development of the participating enterprises. Not only the success but also the resultant importance of the cooperation leads to an intensification of the cooperation relationships. Furthermore, the effect of the ‘spiral of success’ unfolds: a self-enforcing circular flow of effects between the perceived cooperation success, the ascribed relevance of the cooperation and the intensity of the cooperation relationship. In this context, the psychic distance is gradually absorbed thanks to the establishment of mutual trust among the cooperation participants. The enterprises involved successively grow together and the coordination of single activities becomes smoother, thus increasingly preserving resources. Because of the comparatively small psychic distance between Austrian SMEs and enterprises in the CEEC, Austrian companies were able to establish a basis of trust earlier than their competitors, thus enhancing the self-enforcing process of the ‘spiral of success’. As a result, Austrian SMEs were rapidly able to establish and to maintain stable, successful cooperation relationships with a low level of conflict in enterprises in the CEEC.

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Profiting from the first mover’s advantage, Austrian SMEs were able to take over a prominent position in Central and Eastern European markets. Conclusion and further implications As a matter of fact, Austrian SMEs have rapidly and successfully entered the new Central and Eastern European markets. Furthermore, Austria is characterized by its geographical, historical and cultural proximity to the CEEC. A main purpose of this chapter was to link these facts by means of cooperation theory: the establishment and maintenance of normbased trust cooperation relationships was presented as the connecting link. Such forms of inter-firm collaboration require small psychic distance on the one hand, and represent on the other hand an effective and efficient means of cross-border cooperation. Owing to its geographical position as well as its psychic closeness to the CEEC, Austria disposed of considerable advantages concerning international cooperation with the CEEC. In this chapter, we have formulated a feasible approach in order to explain the catalytic effect of minor distances on the internationalization of Austrian SMEs in an eastward direction. This is not only true for the small geographical distance but particularly also for Austria’s minor psychic distance from the CEEC. The approach presented is supported by the results of empirical studies. Decision makers and designers of the general business framework should tap the full potential of available measures in order to prevent psychic distance evolving. Therefore active measures such as getting to know each other and openly approaching one another should be encouraged. On the organizational level, the necessity of reducing the psychic distance to potential foreign business partners by means of the realization and/or creation of informal meetings becomes apparent. However, this implies that the parties involved acquire specific knowledge (for example, languages, social codes), as well as replacing prejudices and scepticism with profound knowledge of and openness towards the other. For the establishment of a norm-based trust cooperation relationship with foreign business partners, an actor’s own trustworthiness has to be proved and actively (and credibly) communicated. We have used already established concepts (psychic distance) as well as rather new terms (born-globals, born-again globals) in order to discuss them against the background of cooperation theory. Thus alternative points of view and promising perspectives for further investigation are provided. The ideas presented will contribute to shift the focus of researchers more intensively on cooperative strategies based on trust while analysing processes of internationalization. Limitations Firstly, in order to avoid misunderstandings, we would have to thoroughly define the terms which are central for the theoretical reasoning. Furthermore, we would have to present consistently the arguments’ theoretical background. Unfortunately, this is not possible in the scope of the text at hand. We can therefore only refer to theoretical outlines on this topic that are more comprehensive (Fink, 2005; Fink and Roessl, 2004). Secondly, while investigating SMEs, the heterogeneity of this particular group must be kept clearly in mind. Besides the traditional industry differences, the SME sector’s diversity is further increased by personal characteristics such as different motives of the entrepreneur. Thirdly, we cannot be sure that the statements formulated, based on data from Austria and the CEEC, apply to other geographical contexts. Fourthly, the empirical evidence

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presented for the formulated hypotheses is taken from different data sets. In order to draw conclusions that are more significant, the whole line of argumentation would have to undergo a comprehensive empirical investigation. However, we are convinced that, by presenting innovative trains of thoughts and current empirical results, we may have been able to improve understanding concerning the internationalization of SMEs in general, and to contribute another piece of the jigsaw as to the functionality of cooperative strategies of internationalization. References Aiginger, Karl and Margarete Czerny (1998), ‘Kooperationen in einem erweiterten Europa. Industrielle Mittelbetriebe im Transformationsprozess der MOEL’, WIFO survey. Andersson, Svante and Ingemar Wictor (2003), ‘Innovative internationalisation in new firms: born globals – the Swedish case’, Journal of International Entrepreneurship, 1 249–276. Austrian Economic Chambers (2005), ‘Statistical Yearbook 2005’. Backhaus, Klaus (1992), ‘Investitionsgueter-Marketing – Theorieloses Konzept mit Allgemeinheitsanspruch?’, Zeitschrift fuer betriebswirtschaftliche Forschung, 44, 771–91. Bell, Jim (1995), ‘The internationalization of small computer software firms: a further challenge to ‘stage’ theories’, European Journal of Marketing, 29(8), 60–75. Bell, Jim, Rod McNaughton and Stephen Young (2003), ‘Born-again global’ firms: an extension to the ‘born global’ phenomenon’, Journal of International Management, 7, 173–89. Bierhoff, Hans Werner (1991), ‘Vertrauen in Fuehrungs- und Kooperationsbeziehungen’, in A. Kieser (ed.), Handwoerterbuch der Fuehrung, 2. Aufl., Stuttgart: Schaeffer-Poeschel, 2148–58. BMWA (Austrian Federal Ministry for Economic Affairs and Labour) (2003), ‘Austrian Economic Report 2003’. BMWA (Austrian Federal Ministry for Economic Affairs and Labour) (2004), ‘Austrian Foreign Trade Yearbook 2003/2004’. Bröcker, Johannes and Herold C. Rohweder (1990), ‘Barriers to international trade methods of measurement and empirical evidence’, The Annals of Regional Science, 24, 289–305. Buckley, Peter J. and Mark Casson (1988), ‘A theory of cooperation in international business’, in F.J. Contractor and P. Lorange (eds), Cooperative Strategies in International Business, Toronto: Lexington, 31–53. Calof, Jonathan L. (1993), ‘The impact of size on internationalization’, Journal of Small Business Management, 31(4), 60–69. Cook, Caren S. and Richard M. Emerson (1978), ‘Power, equity and commitment in exchange networks’, American Sociological Review, 43, 721–39. Dahlstrom, Robert and Brett A. Boyle (1994), ‘Behavioural antecedents to intrinsic motivation in capital equipment exchange relationships’, Journal of Applied Business Research, 10(2), 50–62. Dana, Léo-Paul (1992), ‘A look at small business in austria’, Journal of Small Business Management, 30(4), October, 126–30. Donckels, Rik (2002), ‘Die Internationalisierung von Familien-KMU’, in IGA. Zeitschrift fuer Klein- und Mittelbetriebe. Sonderheft 5. Internationalisierung europaeischer Klein- und Mittelunternehmen (INTERSTRATOS), Berlin/St. Gallen: Duncker&Humblot, 107–23. Dwyer, F. Robert, Paul H. Schurr and Sejo Oh (1987), ‘Developing buyer–seller relationships’, Journal of Marketing, 51(2), 11–27. Eberl, Peter (2004), ‘The development of trust and implications for organizational design: a game- and attribution-theoretical framework’, Schmalenbachs Business Review, 56, 258–73. Emerson, Richard M. (1962), ‘Power–dependence relations’, American Sociological Review, 27, 31–41. Engel, Christoph (1999), ‘Vertrauen: ein Versuch’, Preprints aus der Max-Planck-Projektgruppe Recht und Gemeinschaftsgueter, Bonn. Fernández, Zulima and María J. Nieto (2005), ‘Internationalization strategy of small and medium-sized family businesses: some influential factors’, Family Business Review, 18(1), 77–90. Fink, Elisabeth (2004), ‘Erweiterung der Europaeischen Union – Untersuchung der Positionen wirtschaftlicher Interessenvertretungen in EU-Mitgliedsländern’, doctoral thesis, Vienna. Fink, Matthias J. (2005), ‘Selbstverpflichtung als Erfolgsfaktor bei langfristigen, komplexen Transaktionsbeziehungen. Mit einem empirischen Befund’, Frankfurt/Wien: Peter Lang. Fink, Matthias J. and Dietmar Roessl (2004), ‘Instrumentelles und maximenbasiertes Vertrauen als Erfolgsfaktor von Kooperationen – Zur besonderen Relevanz maximenbasierten Vertrauens in Kooperationen unter KMUs’, in J. A. Mayer (ed.), Jahrbuch der KMU-Forschung 2004, Lohmar: Eul.

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Fink, Matthias J. and Dietmar Roessl (2005), ‘The strategy of trust-based self-commitment – a successful way to coordinate cooperation relationships: an empirically tested model’, 3rd Workshop on International Strategy and Cross Cultural Management, EIASM, Vienna. Frey, Bruno S. and Margit Osterloh (2002), Successful Management by Motivation: Balancing Intrinsic and Extrinsic Incentives, Berlin/Heidelberg/New York: Springer, 31–52. Gassenheimer, Jule B., David B. Baucus and Melissa S. Baucus (1996), ‘Cooperative arrangements among enterpreneurs: an analysis of opportunism and communication in franchise structures’, Journal of Business Research, 36, 67–79. Gemser, Gerda, Maryse J. Brand and Arndt Sorge (2004), ‘Exploring the internationalisation process of small businesses: a study of dutch old and new economy firms’, Management International Review, 44(2), 127–50. George, Gerard, Johan, Wiklund and Shaker A. Zahra (2005), ‘Ownership and the internationalization of small firms’, Journal of Management, 31(2), 210–33. Gierl, Heribert (2001), ‘Opportunismus in Geschaeftsbeziehungen – Ursachen und Gegenmassnahmen’, Der Markt, 41, 55–65. Hauser, Heinz (1991), ‘Institutionen zur Unterstuetzung wirtschaftlicher Kooperation’, in R. Wunderer (ed.), Kooperation – Gestaltungsprinzipien und Steuerung der Zusammenarbeit zwischen Organisationseinheiten, Stuttgart: Poeschel, 107–25. Heide, Jan B. and George John (1988), ‘The role of dependence balancing in safeguarding transaction-specific assets in conventional channels’, Journal of Marketing, 52, 32–44. Heide, Jan B. and George John (1992), ‘Do norms matter in marketing relationships?’, Journal of Marketing, 56, 20–35. Hollerstein, Heinz (2005), ‘Determinants of international activities: are SMEs different?’, Small Business Economics, 24, 431–50. Huber, Peter (2003a), ‘Small Firms in Cross-Border Business Networks with the CEEC. Evidence from Austria’, WIFO Working Paper. Huber, Peter (2003b), ‘On the determinants of cross-border cooperation of Austrian firms with Central and Eastern European partners’, Regional Studies, 37(9), 947–55. Huber, Peter and Daniela Kletzan (2000), ‘Bestimmungsfaktoren der Integration von Unternehmen in internationale Netzwerke’, WIFO survey. Hutchinson, Karise, Barry Quinn and Nicholas Alexander (2005), ‘The internationalization of small to medium-sized retail companies: towards a conceptual framework’, Journal of Marketing Management, 21, 149–79. International Monetary Fund (2005), ‘Austria: Selected Issues’, Country Report No. 05/249. Johanson, Jan and Jan-Erik Vahlne (1977), ‘The internationalization process of the firm – a model of knowledge development and increasing foreign market commitments’, Journal of International Business Studies, 8(1), 23–32. Johanson, Jan and Jan-Erik Vahlne (1990), ‘The mechanisms of internationalisation’, International Marketing Review, 7(4), 11–24. John, George (1984), ‘An empirical investigation on some antecedents of opportunism in a marketing channel’, Journal of Marketing Research, 21, 278–89. Kaas, Klaus P. (1992a), ‘Kontraktguetermarketing als Kooperation zwischen Prinzipalen und Agenten’, Zeitschrift fuer Betriebswirtschaftliche Forschung, 44, 884–901. Kaas, Klaus P. (1992b), ‘Marketing und Neue Institutionenlehre’, Working paper No. 1 aus dem Forschungsprojekt Marketing und oekonomische Theorie, Fachbereich Wirtschaftswissenschaften, Lehrstuhl fuer Betriebswirtschaftslehre, insbesondere Marketing, Frankfurt/Main, Johann Wolfgang Goethe-Universitaet. Kaufmann, Friedrich (1992), ‘Internationalisierung durch Kooperation, Strategien fuer mittelstaendische Unternehmen’, Wiesbaden, Dt. Univ.-Verl. Kirby, David A. and Stefan Kaiser (2003), ‘Joint ventures as an internationalisation strategy for SMEs’, Small Business Economics, 21(3), 229–42. Lu, Jane W. and Paul W. Beamish (2001), ‘The internationalization and performance of SMEs’, Strategic Management Journal, 22(6/7), 565–86. Luhmann, Niklas (1984), Soziale Systeme. Grundriss einer allgemeinen Theorie, Frankfurt/Main: Suhrkamp. Luo, Yadong and Mike W. Peng (1998), ‘First mover advantages in investing in transitional economies’, Thunderbird International Business Review, 40(2), 141–63. Madsen, Tage Koed and Per Servais (1997), ‘The internationalization of born globals: an evolutionary process?’, International Business Review, 6(6), 561–83. Millington, Andrew L. and Brian T. Bayliss (1990), ‘The process of internationalisation: UK companies in the EC’, Management International Review, 30(2), 151–61. Mugler, Josef (1998), Betriebswirtschaftslehre der Klein- und Mittelbetriebe Vol. 1, Vienna: Springer. Mugler, Josef (1999), Betriebswirtschaftslehre der Klein- und Mittelbetriebe Vol. 2, Vienna: Springer.

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Muris, Timothy J. (1981), ‘Opportunistic behaviour and the law of contracts’, Minnesota Law Review, 65(4), 521–90. Noorderhaven, Niels G. (1995), ‘Trust and transaction – towards transaction cost analysis with differential behavioural assumption’, Tijdschrift voor Economie en Management, 15(1), 5–18. Osterloh, Margit and Antoinette Weibel (2000), ‘Ressourcensteuerung in Netzwerken: Eine Tragoedie der Allmende?’, in J. Sydow and A. Windeler (eds), Steuerung von Netzwerken – Konzepte und Praktiken, Wiesbaden: Opladen, 88–106. Ouchi, Wiliam (1979), ‘A conceptual framework for the design of organizational control mechanisms’, Management Science, 25, 833–48. Pichler, J. Hanns and Walter Bornett (2005), ‘Wirtschaftliche Bedeutung der kleinen und mittleren Unternehmen. (KMU) in Oesterreich’, in R. Schauer, N. Kailer and B. Feldbauer-Durstmueller (eds), Mittelstaendische Unternehmen Probleme der Unternehmensnachfolge, Linz: Trauner Verlag, 117–50. Pleitner, Hans Jobst and Dietmar Roessl (1995), ‘Wirtschaftsfoerderung unterhalb der Wirtschaftspolitik – der Beitrag zwischenbetrieblicher Kooperation’, in A. Brandenburg (ed.), Standpunkte zwischen Theorie und Praxis: Handlungsorientierte Problemloesung in Wirtschaft und Gesellschaft, Bern/Wien: Haupt, 671–89. Poppo, Laura H. (1991), ‘Reputation and supplier opportunism in markets and firms’, PhD thesis, University of Pennsylvania. Provan, Keith G. and Steven J. Skinner (1989), ‘Interorganizational dependence and control as predictors of opportunism in dealer–supplier relations’, Academy of Management Journal, 32, 202–12. Rialp, Alex, Josep Rialp, David Urbano and Yancy Vaillant (2005), ‘The born-global phenomenon: a comparative study research’, Journal of International Entrepreneurship, 3, 133–71. Ring, Peter and Andrew Van de Ven (1992), ‘Development process of cooperative interorganizational relationships’, Academy of Management Review, 32, 483–98. Ripperger, Tanja (1998), Oekonomik des Vertrauens: Analyse eines Organisationsprinzips, Tuebingen: Mohr Siebeck. Roessl, Dietmar (1994), Gestaltung komplexer Austauschbeziehungen – Analyse zwischenbetrieblicher Kooperationen, Wiesbaden: Gabler. Roessl, Dietmar and Johann Breit (1992), ‘Internationalisierung der Klein- und Mittelbetriebe, Entwicklungsmuster, Internationalisierungsbarrieren und Methodenprobleme ihrer Ermittlung’, in W. Clement (ed.), Internationalisierung Bd. 6. Neue Entwicklungen – neue Formen – neue Herausforderungen, Wien: Schriftenreihe des Industriewissenschaftlichen Instituts, 191–222. Rundh, Bo (2001), ‘International market development: new patterns in SMEs’ international market behaviour’, Marketing Intelligence & Planning, 19(5), 319–29. Rutashobya, Lettice and Jan-Erik Jaensson (2004), ‘Small firms’ internationalization for development in Tanzania’, International Journal of Social Economics, 31(1/2), 159–72. Schrader, Stephan (1993), ‘Kooperation’, in O. Gruen and J. Hauschildt (eds), Ergebnisse empirischer betriebswirtschaftlicher Forschung – Zu einer Realtheorie der Unternehmung. Festschrift fuer Eberhard Witte, Stuttgart, 221–54. Spremann, Klaus (1988), ‘Asymmetrische Information’, Zeitschrift fuer Betriebswirtschaft, 60(5/6), 561–86. Statistik Austria (2005), Statistisches Jahrbuch Oesterreichs 2005, Wien: Verlag Oesterreich. Wathne, Kenneth H. and Jan B. Heide (2000), ‘Opportunism in interfirm relationships: forms, outcomes and solutions’, Journal of Marketing, 64, 36–51. Westhead, Paul, Mike Wright and Deniz Ucbasaran (2001), ‘The internationalization of new and small firms: a resource-based view’, Journal of Business Venturing, 16, 333–58. Wiegand, Wolfgang (1994), ‘Rechtsschein und Vertrauen’, in H. Hof, H. Kummer and P. Weingart (eds), Recht und Verhalten Verhaltensgrundlagen des Rechts – zum Beispiel Vertrauen, Baden-Baden, 183–98. Wolff, James A. and Timothy L. Pett (2000), ‘Internationalization of small firms: an examination of export competitive patterns, firm size, and export performance’, Journal of Small Business Management, 38(2), 34–47. Wurche, Sven (1994), ‘Vertrauen und oekonomische Rationalitaet in kooperativen Interorganisationsbeziehungen’, in J. Sydow and A. Windeler (eds), Management interorganisationaler Beziehungen, Wiesbaden: Opladen, 142–59.

5

Internationalization of SMEs in Belarus Friederike Welter, David Smallbone, Anton Slonimski and Marina Slonimska

Introduction Small enterprises are considered to play an important role in contributing to economic development. Their potential role includes generating employment, contributing to the development of a diversified economic structure, contributing to the trade balance through export earnings or import substitution and, in some cases, as a source of innovative activity (Acs and Audretsch, 1993). Whilst these are roles which SMEs can perform in any economy, there are aspects during the transition period which suggest that SMEs may have additional contributions to make (Smallbone and Welter, 2001b). For example, the development of SMEs can contribute to economic adjustment from highly concentrated structures that were overly focused on manufacturing industry based on mass production methods and relatively inflexible production processes. SME development in transition economies can also contribute to the process of privatization and/or the restitution of property. In the more advanced of the former command economies (e.g. Poland, Estonia), SMEs have contributed significantly to the internationalization of the economies during the transition period. In this context, Belarus is one of those transition economies, where slow progress towards a market economy has been made over the past 15 years, where government is not committed to supporting private entrepreneurship, and where small and medium enterprises (SME) experience an increasingly hostile institutional environment. For example, regulations for private enterprises have increased since the mid-1990s, rendering the majority of private firms illegal unless they were able to meet the minimum capital requirements for re-registration. This resulted in SMEs being forced either into liquidation or into operating abroad in nearby countries such as Lithuania and Latvia, Poland or the Ukraine, with cross-border activities often being at least partly illegal. In addition, Belarus is situated next to Poland, Lithuania and Latvia, all of which joined the European Union in May 2004. This deeply influenced traditional relationships between countries, as the recent discussion about the Polish minority in Western Belarus illustrates, and it also can be expected to influence economic interactions between the enlarged EU and its new border regions. International activities of SMEs in Belarus thus take place in a distinctive context. In this chapter, internationalization is understood as comprising both outward activities of SMEs into foreign markets and inward activities of foreign firms into a local market, involving local SMEs (Coviello and McAuley, 1999). A recent ENSR survey showed that 30 per cent of the European SMEs act internationally through foreign supply relationships and 18 per cent through exports (KPMG, EIM and ENSR, 2003), thus confirming the need to look at the internationalization of SMEs from both perspectives. This gains importance in a transition context, where the legal and institutional framework, 57

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which would allow private firms to operate in foreign markets, has to be created during the transition period. Little is known about how many SMEs export from Belarus, how many of them have international cooperation and which are the characteristics of internationally oriented SMEs. This is because of the limited and partial nature of the official statistics, although the point to stress is the small overall size of the private sector, because of the political and institutional conditions that pertain. In this context, the chapter will present statistical data and selected results from two previous research projects, in which one or more of the authors collaborated, in an attempt to explore the extent and patterns of internationalization of small firms in Belarus. We include foreign direct investment in Belarus in our analysis, as a form of indirect internationalization important for small firms in a transition context where enterprises initially might lack both resources and knowledge required for direct international activities. In this context, foreign partners will bring in modern management techniques, technology and knowledge about their home markets, all of which could trigger direct international activities of SMEs in the long run (OECD, 2004). The chapter is structured as follows. The first section will briefly introduce the context of SME development in Belarus. In the next section, the statistical data are used to give an overview of direct and indirect internationalization and the involvement of SMEs. This is followed by a section where the empirical surveys are employed to explore the nature of internationalization of Belarussian SMEs in more detail, as well as a description of data sources and sampling methods. In both sections, the data description is primarily descriptive and explorative. In the final section, we will briefly summarize our results and show potential implications for conceptualizing internationalization of SMEs in a transition context. The historical and regional context for SME development in Belarus Because of the Soviet–Polish border of the years 1921–39, Belarus is clearly divided into two regions, with the population possessing differing historical experience and in some cases a specific regional subculture. The territory of Western Belarus accounts for about 40 per cent of the country’s territory, and three out of ten million inhabitants live there. Compared to Eastern Belarus, Western Belarus is still a largely agricultural region, where a viable traditional rural culture has been preserved. In Western Belarus, only four cities have more than 100 thousand inhabitants, namely, Grodno (315 thousand), Brest (298 thousand), Baranovichi (169 thousand) and Pinsk (131 thousand). In this part, industrialization started to redevelop only shortly before the collapse of the Soviet Union (Shevtsov, 1997). All this is reflected in the high share of rural population, which amounts to 40 per cent, compared to 24 per cent in the Eastern part of Belarus (Minstat, 2004a). It is the Eastern part of the country where the largest cities of Belarus are situated: Minsk with 1741 thousand inhabitants, Gomel (492 thousand), Mogilev (365 thousand) and Vitebsk (350 thousand) (Minstat, 2004a, p. 100). Eastern Belarus is a predominately industrial region, where the large cities influence the prevailing regional culture. At the end of the nineteenth and the beginning of the twentieth century, the level of industrial development did not differ significantly between the Eastern and Western territories of Belarus; neither did the level of entrepreneurial activity of landlords and noblemen. For example, the greatest number of plants and factories belonging to nobles had

Internationalization of SMEs in Belarus

59

been established in Mogilev, which belongs to Eastern Belarus, and in Grodno provinces, which belongs to the Western part (Zhytko, 2003, p. 12). This changed radically during the 1920s and 1930s. From 1921 until 1939, Western Belarus was a relatively backward rural suburb of Poland. It was used overwhelmingly as a source of raw materials and a low-priced labour force, and as a sales market for Poland’s industry. Only in the area of Bialystok did an industrial district develop, of which only two regions, namely Grodno and Volkowyssk, belong to Belarus today. This being said, in 1928, about 2000 enterprises were active in Western Belarus, 80 per cent of them employing between five and 20 persons; craftsmen amounted to about 50 000 (Havratovich, 1996, p. 421). In Eastern Belarus, small entrepreneurship developed most intensively during the course of the New Economic Policy in 1921 and 1922, and in 1923, SMEs had overtaken large firms in terms of employment and output. The gross product of SMEs amounted to 60 per cent of the entire industrial production in Belarus at that time. However, since 1923, the government of USSR set itself the task of destroying the petty bourgeoisie, which impeded further SME development (Jaroshuk, 1999, p. 113). Nowadays, small enterprises are unevenly distributed in the territory. Their main share (56 per cent) is concentrated in the capital city, Minsk, and a relatively high share also can be found in district centres and industrially developed cities. This is partly explained by the better infrastructure available in such cities. In some respects, this is connected to a lack of adequate employment possibilities, especially for highly educated people, which results in small business owners in transition economies having higher education levels compared to mature market economies. For example, a survey conducted in 1998 found that 80 per cent of the interviewed small business owners in Belarus, the Ukraine and Moldova were educated to higher education level (Smallbone et al., 1999b). This is a distinctive feature of entrepreneurship in a transition context (Smallbone and Welter, 2001a; Smallbone and Welter, 2006) with possible implications for the orientation of SME owners towards internationalization and its importance. Looking at the spatial distribution of small firms today, we notice a higher entrepreneurial activity of the population in the districts of Brest and Grodno as well as in some western parts of the districts of Minsk and Vitebsk, compared to the Eastern regions of the country. The cities of Grodno and Brest show a similar level of entrepreneurial activity to that in Minsk, while entrepreneurial activities are lowest in Gomel and Mogilev. A possible negative factor which influences the entrepreneurial activity of the population in the SouthEast of Belarus is the radioactive contamination of the territory. The districts of Gomel, Mogilev and Brest suffered most from the accident at Tchernobyl Nuclear Power Plant (NPP), and they also have a much lower level of entrepreneurship development. Compared to the early twentieth century and the Soviet period, the Western region today is more developed with regard to small business activities and entrepreneurship. One possible explanation could be the shorter influence of a socialist economy and society, which might have allowed for a quicker ‘revival’ of entrepreneurial traditions after transition started, although this needs to take into account the predominance of agriculture and the still prevailing rural traditions in the Western part of Belarus. The ethnic composition of the population in Western Belarus partly appears to explain this trend, as exposure to more advanced post-transition countries and new member states has been greater in these areas through Polish minorities. For example, Polish people constitute nearly one-fourth of the population in the Grodno district (Minstat, 2004a,

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p. 355). More commonalities, which facilitate the cross-border exchange, arise through the fact that the majority of the population in the Western districts of Belarus is catholic, similar to Poland and Lithuania. Moreover, about 80 per cent of all purchases in Poland are made by Belarussians within a 20-kilometre zone of the common border, with the wealthier Western regions in Belarus profiting most from the small trade (Shevtsov, 1997). A statistical overview on foreign trade and foreign direct investment in Belarus In 2003, foreign trade turnover grew by 24 per cent, compared to 2002 (Figure 5.1). Export earnings amounted to US$9.9 billion, whereas import expenditures reached US$11.6 billion, which is an increase of 27 per cent compared to the previous year. The balance of payments account at the end of 2003 registered a deficit of US$1.6 billion, while in 2002 the negative balance was US$1.0 billion. In some sectors, Belarus exports more than 80 per cent of its output. This applies to machine tool production (83 per cent), the output in refrigerator and freezer manufacturing (88 per cent), car and tractor production (90 per cent and above) and the production of televisions and potash fertilizer, where around 90 per cent of the output is exported. Exports by small enterprises1 are dominated by the following group of goods: petroleum oils, which account for 31.2 per cent of all exports, or US$568.6 million, followed by engines, pumps, boilers, ventilators, heaters, flasks and other equipment with 10.7 per cent (US$194.7 million), transport with 5.9 per cent (US$108.2 million) and wood and wood products with 5.4 per cent (US$99 million). Overall, Belarus exports around 100 different goods and products. In 2003, the value of exports by small enterprises amounted to US$1.8 billion, which implied an increase of 33 per cent compared to 2002. The contribution of SMEs to all exports increased from 17 per cent in 2002 to 18.2 per cent in 2003, which is low compared to the export share of SMEs in mature market economies, but on a par with the European Union average. The OECD (1997) estimates that between 20 and 80 per cent of all SMEs in OECD countries are active in exporting, and their 25 000 20 000 Mln. USD

15619 15 000 10 000 5 000

12583 8549 7070

17113

15972

6674 5909

15737 8646

8286

7326

7451

21504 11558

9092 8021

9946

0 1998

1999

2000

2001

Total turnover

Exports

2002 Imports

Source: Minstat (2004b).

Figure 5.1

Foreign trade of the Republic of Belarus, in million US$

2003

Internationalization of SMEs in Belarus

61

export activities account for between 15 and 50 per cent of all exports, while a recent ENSR survey shows that 18 per cent of European SMEs export. Compared to the overall export development, exports of Belarussian SMEs grew faster than the total country exports, which contributed to strengthening the role of SME enterprises in the overall Belarus export performance. However, at the same time, in 2003, the contribution of SMEs to Gross Domestic Product and industrial production amounted to a mere 8.2 per cent and 8.6 per cent respectively (the figures for 2002 were even lower, with 6.8 per cent and 7.4 per cent respectively). This indicates, on the one hand, a greater orientation of SMEs towards internationalizing their business. Reasons could be lower market opportunities within Belarus, but also path-dependent tendencies related to the traditional export orientation of the Belarussian economy. Moreover, this trend could also reflect the hostile environment for SMEs within the country, encouraging them to look for external markets. On the other hand, it also indicates sectoral tendencies, since 42.4 per cent of all SMEs are still to be found in trade and public catering, that is, in sectors with low barriers of entry and low capital requirements. The main markets for small firms are nearby Eastern markets in countries of the Commonwealth of Independent States (CIS). Not surprisingly, most SMEs export their goods to Russia, which accounted for 52.4 per cent of all SME exports in 2003 (Table 5.1). This confirms that SMEs tend to internationalize by going to spatial and culturally proximate countries first (Welch and Luostarinen, 1988). In the case of Belarus, this is explained by longstanding mutual relationships between both countries, which are reflected in the customs union as well as in President Lukachenko’s idea of reuniting Belarus and Russia. As Belarus is a member of the unified customs territory with Russia, potential investors might be able to access Russian markets through an investment in Belarus. 42.1 per cent of SME exports went into the enlarged European Union, and surprisingly, perhaps, it is not nearby markets that SMEs export to in this instance. The UK takes first place, followed by the Netherlands and Latvia as one of the new member states, having joined the EU in May 2004. A comparatively lower share of SME goods was exported to neighbouring Poland, although Belarus and especially its western parts with the large Polish minority traditionally has strong relationships with this country. Table 5.1

Geographic structure of SME exports in 2003

CIS countries of which Russia European Union (25) of which: Great Britain Netherlands Latvia Germany Poland Source: Badej (2004).

US$ million

%

1023.0 955.3 767.8

56.1 52.4 42.1

168.3 159.4 133.5 76.9 64.5

9.2 8.7 7.3 4.2 3.5

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Table 5.2

Economic performance of joint and foreign enterprises 1992

Number of enterprises as of end of year Joint enterprise Foreign enterprise Total authorized capital as of end of year, US$ million Joint enterprise Foreign enterprise Foreign investments in the authorized capital as of end of year, US$ million Joint enterprise Foreign enterprise Annual average payroll number of joint and foreign enterprises employees, in thousand persons Joint enterprise Foreign enterprise Exports of goods, US$ million Joint enterprise Foreign enterprise Imports of goods, US$ million Joint enterprise Foreign enterprise

1994

1996

1416

2000 1860

2001 2082

2002

676

201 8 No data

519 157 590.3

973 398 726.4

936 480 486.5

566.2 24.1 286.8

666.7 59.7 362.9

442.0 44.5 276.8

434.9 127.4 334.7

520 163 410

558.7 210.1 488.0

660.7 257.9 589.5

7.7 10.0

262.7 24.1 22.9

303.2 59.7 38.5

232.3 44.5 57.6

207.3 127.4 81.4

247 163 97.5

277.9 210.1 112.3

331.6 257.9 133.3

9.9 0.1 24.7

21.1 1.8 52.4

32.3 6.2 292.5

47.2 10.4 477.6

63.0 72.1 18.4 25.4 690.6 1019

79.2 94.5 33.1 38.8 1248 1679

24.7 0.0 48.8

50.9 1.5 88.0

265.9 26.6 299.5

331.2 146.4 778.0

444.7 577 245.9 442 695.7 1199

783 465 1753

1106 573 2284

45.3 3.5

60.3 27.7

214.6 84.9

526.6 251.4

506.1 189.6

996 757

1354 930

1179 1140 681 942 562.3 683

604 595

2667

2003

209

7.7 No data

1371

1998

2957

1396 1575 1271 1382 768.8 918.6

Source: Gulida and Tamashevich (2005), pp. 153–4.

Foreign enterprises investing in Belarus have also added significantly to the level of foreign trade, as their share in exports increased from 1.8 per cent in 1993 to 17 per cent in 2003, while their share in total imports increased from 2.8 per cent to 20 per cent. Overall, the number of joint and foreign enterprises in Belarus and the level of employment in foreign-investing firms are steadily increasing (Table 5.2). As yet, Belarus is going through an early stage of FDI growth and, as the experience of other transition economies has shown, the effect on the trade balance at this stage is negative, with imports exceeding exports (Ugorich, 1999). In order to develop a production facility, foreign enterprises in an early-stage transition country need to import most capital goods, although this could in future lead to increasing exports as well. An initial negative effect on the balance of trade may thus be seen as an investment for the future (Ugorich, 1999).

Internationalization of SMEs in Belarus

63

In the long run, in cases where foreign-investing firms produce and sell on domestic markets goods which were previously imported, this also contributes to an improved balance of trade. Moreover, the increase in foreign trade may also result in a variety and quality of goods, which could advance the transition process in Belarus by promoting competition and leading to improved quality from local producers as well. Possible restructuring effects of foreign direct investments also include increased productivity, the transfer of new management practices and a larger product range. These ‘spillover’ effects on other firms represent important micro-economic effects of FDI (Ugorich, 1999), which must be considered along with the macro-economic contribution in terms of capital invested, employment and wage payments, as shown in Table 5.2. The majority of the capital employed in FDI in Belarus has come from major private investors, with very little FDI derived from the privatization programme. In general, privatization policies have been influential in attracting foreign investors to transition economies over the past decade, and there is considerable future potential for this in Belarus as well, as many firms that could be privatized have remained in state hands. However, a privatization programme which is not accompanied by thorough market and institutional reforms will most likely not attract significant foreign investment, as the risk for investors and political uncertainty remain high. Table 5.3 demonstrates that the majority of joint ventures and foreign companies are concentrated in Minsk, with 48.2 per cent of all joint ventures and nearly 60 per cent of all foreign enterprises being situated there. This has not changed much since the early years of transition: in mid-1993 the figures were 64.5 per cent for the share of foreign enterprises and 60.5 per cent for the total foreign investments (UNECE, 1993). The wider region around the capital and Brest, which is situated on the border with Poland and Lithuania, is in second place, although Brest appears to have lost importance for foreign investments over time. By the beginning of 2004, 522 enterprises with foreign investment were situated in the two western regions of the country, namely Brest and Grodno, where 2.6 million people live, while 487 enterprises worked in the three eastern regions, namely Vitebsk, Gomel and Mogilev, with a population of almost 4 million. With regard to the country of origin of the foreign investor, a large number of enterprises had partners from (former) transition countries: 692 organizations had investment partners from neighbouring smaller countries (Latvia, Lithuania and Poland) and a further 579 worked with investment partners from Russia. Relating these figures to the population of the countries, it is interesting to note that, contrary to its role as a major export partner, Russia, with its 145 million people, plays a minor part in foreign investments compared to the three countries mentioned above, where 44 million people reside (Minstat, 2004a). This can be explained by the role that knowledge of the country and its culture plays, in the case of a strategy that requires considerable resources and personal commitment, such as investing abroad. In this case, spatial proximity and a mutual cultural background between Belarus and the three neighbouring new EU member states play an important role. As Table 5.4 shows, the countries of origin for all joint ventures and foreign enterprises registered in Belarus have changed since the mid-1990s. Whereas, in 1998, Poland and Germany accounted for the highest number of joint ventures and foreign enterprises, this has decreased considerably, especially in the case of joint ventures. Interestingly, a larger number of investors from the UK and from Russia have entered the country, and

64

8.3 5.6 6.1 67.2 7.4 3.2 2.2

1996 9.9 5.9 10.0 54.6 11.9 2.8 4.9

1998

Gulida and Tamashevich (2005), p. 153.

14.4 8.7 6.2 54.5 7.7 4.6 3.9

Brest Gomel Grodno Minsk town Minsk region Mogilev Vitebsk

Source:

1994 9.7 7.3 8.1 53.2 11.7 2.5 7.5

2000 10.7 6.4 6.6 51.6 13.8 3.2 7.7

2002

Share of the number of joint enterprises

11.2 6.4 8.0 48.2 13.5 4.1 8.6

2003 31.9 1.9 1.9 61.1 1.3 1.9 –

1994

Regional distribution of joint ventures and foreign enterprises (in %)

Region

Table 5.3

16.3 1.8 3.8 71.4 3.8 1.5 1.5

1996

19.8 2.9 6.0 60.4 7.5 1.5 1.9

1998

14.5 5.1 4.4 60.4 9.4 2.5 3.7

2000

12.2 4.7 3.1 63.3 10.6 2.3 3.8

2002

Share of the number of foreign enterprises

11.3 5.2 4.6 59.3 11.4 3.0 5.3

2003

65

Internationalization of SMEs in Belarus Table 5.4 Region/ country

Countries of origin of joint ventures and foreign enterprises Number of joint enterprises 1996

1998

Western and South-east Europe Austria 46 33 Cyprus 24 38 Great 63 49 Britain Germany 341 262 France 30 22 Ireland 24 31 Italy 111 68 Netherlands 26 30 Switzerland 23 31 Turkey 11 8

Number of foreign enterprises

2000

2002

2003

1996

1998

2000

2002

2003

36 60 61

28 59 65

33 63 78

15 12 30

11 26 19

16 40 50

18 56 59

24 61 69

289 23 29 75 31 31 9

178 18 9 45 25 21 6

200 15 8 45 25 23 5

116 11 10 29 16 16 22

128 12 20 35 22 15 22

174 16 25 45 28 24 27

142 19 15 34 28 23 16

141 16 10 32 30 26 16

10 34

9 38

10 40

19 66 94 179 116 6

20 54 82 126 211 19

26 75 96 126 229 22

29

13 10 14 200

6 11 17 235

Former Socialist Countries in Central, Eastern and South-east Europe Bulgaria 46 23 22 15 14 18 8 Czech 44 46 61 50 52 16 17 Republic Estonia 17 13 18 19 17 12 10 Latvia 65 61 71 40 63 36 38 Lithuania 84 109 138 92 109 43 59 Poland 544 294 306 196 194 216 156 Russia 14 15 186 264 350 1 7 Ukraine 3 1 30 30 32 1 – Overseas China Canada Israel USA

20 28 40 196

14 18 25 159

16 21 33 192

5 13 20 161

5 15 23 184

21 3 10 64

20 7 14 68

15 152

Source: Gulida and Tamashevich (2005), p. 154.

investment from neighbouring Baltic states has also increased over this period. Official statistics do not show data on those joint ventures and foreign firms which were closed down as a result of the re-registration campaign of the Belarussian government in 1997, nor do they allow us to determine the share of operating foreign firms in all registered ones. Experts estimate that 48 per cent of those foreign firms registered in 1996 and 59 per cent in 2000 became operational. The majority of companies with foreign investors are concentrated in the tertiary and secondary sectors (Ugorich, 1999), reflecting those business fields which were interesting and accessible, from the point of view of foreign investors. For example, the tertiary sector accounted for 63.7 per cent of the total number of foreign investing firms in 1998. Foreign investment was particularly concentrated in companies in the wholesale and retail trades, transport, storage, telecommunications, real estate, rental activities and business services

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Handbook of research on European business and entrepreneurship

(55.4 per cent of the total number of foreign-investing firms). The secondary sector accounted for slightly more than one-third (34.6 per cent) of the total number of foreign investing firms in 1998. Again, foreign investors clustered in a relatively small number of fields, with 22.8 per cent to be found in wood, paper, publishing and printing, food, beverages, tobacco, textiles, leather and clothing. The number of foreign investing firms in the primary sector (including agriculture and mining) is negligible, comprising only 1.6 per cent of all foreign firms in 1998 (Ugorich, 1999). There is evidence to suggest that the early foreign investments, which were mostly joint ventures, included a large number of small investments, which is not surprising in a fragile environment, where investors might look for ways to lower their initial sunk costs. For example, Ugorich (1999) reports that, in 1998, out of 1416 operating joint ventures and foreign firms, only five recorded a statutory capital of over US$10 million: JV Coca Cola – Amatil Belarussia (US$59.9m), JV Dynamo-programme (US$14.7m), JV Frebor (US$14.4m), JV Rautaruukki Belcolor (US$13.7m) and JV Civil Project (US$10.5m). Approximately 60 companies stated a statutory capital of the foreign partner from US$1 million to US$10 million. The remainder, that is, 1451 firms, recorded a statutory capital of less than US$1 million (Ugorich, 1999). Not surprisingly, this differs across sectors, with industry accounting for the largest share of Statutory Funds, reflecting large capital needs, and trade accounting for the highest number of firms. This is consistent with patterns across the CIS in that those firms that are involved in manufacturing tend to be the largest and require the greatest capital input. However, these do not represent the majority of firms, which tend to be small-scale enterprises typically involved in labour-intensive activities in the tertiary (service) sector. Exploring the nature of SME internationalization in Belarus Data, methodology and sample characteristics This section draws on studies conducted by one or more of the authors over recent years. Both studies are used to describe and explore patterns in the internationalization of SMEs in Belarus. However, since the studies were designed for different purposes, caution must be used in making comparisons over time. The first study was titled ‘The Contribution of Small Firms to Regional Economic Development in the Ukraine, Moldova and Belarus’, funded under the INTAS2 programme (contract no. UA 95-266; for some of the results, see Smallbone et al., 2001). In each country, surveyed firms were drawn from the capital city and a peripheral region, recognizing that regional differences often exist both in the level of SME activity and in the development paths of firms once they are established. In Belarus, 200 small enterprises were surveyed, divided between Minsk (155) as the core region and Mogilev (45) as the periphery region in Eastern Belarus. In addition, case studies with 26 entrepreneurs (15 Minsk companies and 11 Mogilev companies) were conducted. The survey was conducted in October and November 1998, using a combination of a ‘drop-and-collect’ method and short face-to-face interviews, in order to boost response rates and improve the quality and reliability of the data collected. Firms were identified via a number of sources, such as lists of clients of business service providers in both cities, participants in trade shows and exhibitions, and local authority data, supplemented by businesses visible in the streets. The more detailed face-to-face interviews for the case studies, conducted in 1999,

Internationalization of SMEs in Belarus

67

were based on a topic guide, using a semi-structured interview method. They were all conducted by senior researchers in the Belarussian project teams, following training in the use and analysis of case study data by the authors. In this study we only included firms that were independent and predominantly privately owned indigenous firms. In size terms, we chose an upper size limit of 200 employees, which was consistent with the definition used in Belarus at the time. The survey covered four main sectors, namely manufacturing, service, trade and construction firms. However, since one of the aims of the study was to examine the various roles that small firms play in economic development, the survey samples were stratified in order to avoid the study becoming dominated by firms in retail, wholesale and basic services. As a consequence, the sectoral mix of the national sample is not entirely representative of the small business sector in Belarus. Since it can be argued that manufacturing firms have a disproportionate potential contribution to make to economic development, these firms are overrepresented in the survey. While all the firms surveyed employed between one and 200 workers, average employment size in 1998 was typically less than 20. Although typically small firms, the average employment size is higher than it would be in a completely random sample that included new and more very young firms. A majority of surveyed firms were privately owned. With regard to characteristics of the entrepreneurs, survey results show that 89 per cent were educated to higher education level. Case evidence shows entrepreneurs often originated from scientific institutes. They left to set up their own firms in order to realize a higher income and to exploit commercially scientific research. Not surprisingly, only a minority of surveyed entrepreneurs (29 per cent) had previous private sector business experience, and in only 11 per cent did this involve previous ownership of a private firm. The second project, which was funded under the Committee of Research Activities of Poland (grant no. 5H02C022021) and headed by professor Wojciech Kosiedowski (Torun, Poland), was entitled ‘The Competitiveness of Region in the Period of Transition to the Market Economy. International Comparative Analysis: Belarus, Lithuania, Latvia and Poland’. Within this project, 124 firms in a Western and Eastern region of Belarus were interviewed in 2002: 64 in Grodno on the western frontier, and 60 in Vitebsk region in the East. Respondents were selected using a statistical database, stratified by regional criteria, size and type of activity. Some were interviewed face-to-face, some by mail questionnaire and notification by phone. Unlike the 1998 study, both small and larger enterprises were included: 39 per cent (48) of the surveyed firms employed from one to nine persons; 24 per cent (30) from 10 to 49 employees; 18 per cent (22) from 50 to 249 employees; and 19 per cent (24) 250 or more. In this study, 40 per cent of the surveyed enterprises operated in manufacturing and trade, respectively, with another 20 per cent in services. Despite the prevalence of trade enterprises in the Belarussian economy, manufacturing firms were oversampled, in order to determine the competitiveness of the surveyed regions. Most enterprises had existed for more than five years (73 per cent). Younger enterprises predominately were found in the Grodno region. Patterns of internationalization in 1998 According to survey evidence in 1998, small Belarussian firms from core and periphery regions operated mainly on regional and/or national markets. In Minsk, exports to CIS and CEE countries and to Western countries generated only 15 per cent and less than 3 per

68

Handbook of research on European business and entrepreneurship

cent of the average sales turnover of responding firms, respectively. The figures for Mogilev in Eastern Belarus are even lower, with 10 per cent and 2 per cent, respectively. In general, firms in the core region were more enterprising in terms of markets, reflecting better access to resources, as well as more information about foreign market opportunities. While only 21 per cent of the Minsk firms sold exclusively on regional markets within the country, this is the case of 36 per cent of the firms in the peripheral region. The age of the companies interviewed, combined with their sectoral diversity, appeared to determine market diversity and the share of markets abroad. In both regions, the younger the firm, the higher the share of their sales was in the region, compared to national or international markets. Older companies generated more of their sales turnover outside of the region. Sector-wise, in both regions manufacturing companies sold most of their output outside their home region, either in the national market or through exporting, mainly to Central and Eastern Europe (CEE) and CIS countries, indicating their need for a larger market. In fact, a small minority of manufacturing companies in Minsk (9 per cent) and Mogilev (12 per cent), which borders on Russia, had no local market at all. The outward and international orientation of manufacturing firms is partly based on long-standing relationships with former Soviet countries. For example, one particular firm, which created new technologies for mills and crushers, generated 50 per cent of its sales in Russia, where the enterprise also holds 70 patents. Another company, manufacturing spare parts for cars, sold 70 per cent of its output in Ukraine and in Russia through barter trade. In exchange, the firm imports metal-rolling, spare parts and metallic powders. Despite the then unfavourable macroeconomic environment, surveyed enterprises were able to increase their sales between 1997 and 1998. Again, this is more pronounced for firms in Minsk (the core region) than in Mogilev. In Minsk, 58 per cent of the surveyed companies were able to achieve some growth during the year preceding the survey, but, in Mogilev, the figure was only 42 per cent. Not surprisingly, the highest level of growth was achieved for sales within the region, followed by growth within the country. However, a large increase also could be observed for sales in CIS and CEE countries (23 per cent and 13 per cent of all surveyed firms in Minsk and Mogilev, respectively), hinting at a link between export orientation and the firm’s ability to grow and develop. On the other hand, case evidence illustrates that those entrepreneurs searching for international markets were mainly attempting to secure the survival of their ventures. Only in a few cases was their internationalizing behaviour motivated by a proactive search for possibilities to expand the business, illustrating the role of ‘push’ factors with respect to internationalization, where domestic market operations are limited and the political and institutional environment relatively hostile. Table 5.5 shows the results on sales growth across enterprise size and sectors. Construction and service firms especially in both regions had been able to realize sales growth in all markets. With regard to foreign markets, manufacturing and construction companies in Minsk showed the highest level of growth, while there is no clear pattern regarding enterprise size. Internationalization can involve more than just simple import/export activity. Indeed, studies of how SMEs internationalize, often have shown a stepwise approach, where exports are followed by more resource-intensive internationalization forms (see, for example, Gankema, Snuif and Zwart, 2000). In this regard, cooperation is seen as one possibility to foster cross-border activities of small firms. In this context, survey

69

Source:

Note:

32 28 27 3 90

26 17 13 0 23

46 23 23 15 13

Mi

0 100 100 0 1

Mo

Mi

12 19 19 0 16

Mo

43 29 29 0 7

Mi

57 43 0 0 7

Mo

Own survey, 1998.

36 29 24 9 45

Mi

27 9 18 0 11

Mo

Services

Sectors Construction

Respondents could give up to two answers; percentages and totals based on respondents.

33 14 9 0 21

Mo

Manufacturing

30 35 30 8 66

33 23 17 8 52

Mi

51 plus

Region Country CIS/CEE Western countries Number of firms

Mo

11–50

per cent

Mi

1–10

Enterprise size, no. of employees

Sales growth of surveyed enterprises, 1997–98

Market Location

Table 5.5

35 5 8 0 37

Mi

36 9 9 0 11

Mo

Trade

52 40 36 9 155

No

33 26 23 6 100

%

Minsk

13 8 6 0 45

No

29 18 13 0 100

%

Mogilev

All firms

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Handbook of research on European business and entrepreneurship

respondents were asked to indicate ‘other’ forms of cooperation which go beyond sales and supplier relationships, but we left it to their interpretation as to what kind of cooperation they included. Nearly half of all surveyed firms in Minsk (48 per cent) and 29 per cent in Mogilev had some form of cooperation, which confirms the higher levels of internationalization found in SMEs located in the core region, compared with their counterparts in the periphery. With regard to the location of the partners they cooperated with, a surprisingly high share came from CIS and CEE countries (Table 5.6), given the low level of exports in this sample. A comparatively higher share of partners located in Minsk also came from Western countries: 10 per cent compared to only 2 per cent of exports going into these markets. Case evidence confirms these results, illustrating that, especially in Minsk, small enterprises often facilitated entry to foreign markets by working with partners from their target countries. In the case of Mogilev, which borders on Russia, one would expect a high level of cross-border cooperations with CIS partners. The low level of cooperations with partners in CIS countries was somewhat surprising, although further research is needed to investigate the reasons for this. In terms of the types of companies involved in some form of international collaborative arrangements, it was mainly service firms, young ones (that is, between three and six years of age) and smaller-sized enterprises that collaborated in Minsk, although, in Mogilev, manufacturing enterprises were more prominent in this regard, since nearly onethird of the manufacturing companies surveyed had some form of cooperation with CIS countries (Table 5.6). Often foreign cooperation partners helped small Belarussian firms to enter foreign markets. With regard to CIS markets, SME owners typically drew on assistance from parents, friends or former colleagues, using informal contacts and networks to gain international market access. Successful enterprises also tried establishing their own selling agencies in foreign markets; and some entrepreneurs planned creating joint-ventures with their foreign partners. In this context, research from established market economies has demonstrated a link between strong ties and entry into new markets (Havnes and Senneseth, 2001: 299), indicating that SMEs could internationalize fast in such cases, particularly where they used established and large networks (Coviello and Munro, 1995). Patterns of internationalization in 2002 In 2002, 20 per cent of the survey sample were exporting in both regions, with a much higher share in Grodno (Western Belarus) than in Vitebsk (Eastern Belarus). This result confirms the picture emerging from the 1998 survey, in demonstrating the higher level of foreign market orientation among enterprises located in the core region. This is part of a wider tendency for transformation processes to occur more rapidly in core than in periphery regions (Smallbone et al., 2001). Interestingly, Table 5.7 also illustrates that more enterprises in both regions sourced their inputs and material internationally than exported. In general, and confirming the spatial proximity and mutual ties of the people across the Western border in Belarus, enterprises in Grodno were more oriented towards international activities, both with regard to selling abroad and with regard to supplier relationships (Table 5.7). Obviously, they also actively used the benefits coming with Grodno’s position on the Western border, although the enlargement of the EU in 2004 might contribute to changing this.3

71

Source:

Note:

14 24 9 0 21

Mo

17 26 47 12 90

Mi

0 22 30 4 23

Mo

11–50

31 8 23 0 13

Mi

0 0 0 0 1

Mo

51 plus

21 29 44 8 66

per cent

Mi

0 25 31 0 16

Mo

Manufacturing

14 14 29 0 7

Mi

0 0 0 0 7

Mo

Own survey, 1998.

42 33 62 20 45

Mi

18 36 18 0 11

Mo

Services

Sectors Construction

Respondents could give up to two answers; percentages and totals based on respondents.

35 31 40 10 52

Mi

1–10

Enterprise size, no. of employees

Location of co-operation partners of surveyed firms, 1998

Region Country CIS/CEE Western countries Number of firms

Location of cooperation partner

Table 5.6

8 13 19 5 37

Mi

9 18 18 9 11

Mo

Trade

37 40 66 16 155

No

24 26 43 10 100

%

Minsk

3 10 9 1 45

No

7 22 20 2 100

%

Mogilev

All firms

72

Handbook of research on European business and entrepreneurship

Table 5.7

Location of sales and supply relationships of surveyed firms, 2002 Of which in All firms

Markets Local Regional National Foreign Number of respondents

Vitebsk

Procurement

Sales

35.9 17.2 23.8 23.1 124

59.7 17.5 13.0 9.8 124

Grodno

Vitebsk

Procurement 30.3 23.4 26.3 20.0 60

41.3 11.3 21.5 26.0 64

Grodno

Sales 61.7 16.4 14.5 7.4 60

57.8 18.6 11.4 12.2 64

Note: Average share in total amount of procurement and sales on various types of markets. Source: Slonimski and Slonimska (2005).

Not only did export activities increase in comparison with the 1998 study, but they also changed considerably in the period 1999–2001, albeit with huge differences across the surveyed regions (Slonimski and Shehova, 2004). In Grodno, in 2001, a higher share of exporting firms stated an increase in exports (46 per cent) and also a decrease (33 per cent), compared to 1999 (26 per cent and 13 per cent, respectively), suggesting a high level of volatility in terms of foreign market involvement. In Vitebsk, this development only holds valid for those exporting firms who reported decreasing exports, which applied to 8 per cent in 1999 and 31 per cent in 2001. Surprisingly, in comparison to Grodno, a higher share of exporters, although decreasing over the years (69 per cent in 1999 and 54 per cent in 2001), had reported increasing exports, which might reflect close and long-standing relationships across borders with former Soviet countries. As in the 1998 study, the 2002 survey again showed a large proportion of the surveyed firms involved in some form of cooperation, although the data from the two surveys are not directly comparable, as this study only asked for cooperations with foreign partners, excluding any form of collaboration with national business partners. On the whole, the majority of the sample (54 per cent) was involved in cooperation with other enterprises. Leaving out the survey region, the most important partner was Russia, followed by Poland, which illustrates the importance of geographic and cultural proximity and traditions for internationalization (Table 5.8). Regional differences can be identified in the nature and extent of enterprise collaboration, emphasizing once again the West–East divide in international relationships in Belarus, which is a consistent theme emerging in this chapter. In Grodno, surveyed entrepreneurs appear much more active in collaborating with enterprises in EU countries, especially with firms in Poland, which can partly be explained by the large Polish minority living in this part of Belarus. In Vitebsk, enterprises are focused to a much greater degree on countries from the CIS, using their border position with Russia as competitive advantage in reaching out to this important market. One of the underlying questions raised by the evidence is why SMEs cooperate with foreign partners. In this regard, most enterprises named the delivery or purchase of inputs for manufacturing as their main reason, followed by product development and gaining

73

Internationalization of SMEs in Belarus Table 5.8

Location of cooperation partners, 2002 Regions

Location of partners

All enterprises

Vitebsk

Grodno

27 4 15 9 3 3 48 30 15 9 88 76 7 67

22 4 11 7 7 4 41 19 15 19 93 78 7 27

30 5 18 10 0 3 53 38 15 3 85 75 8 40

EU countries Great Britain Germany Italy Spain France New EU members Poland Lithuania Latvia CIS countries Russia Other countries Number of responding firms Source: Slonimski and Shehova (2004), pp. 272–3.

access to new technologies. The latter two reasons were more commonly mentioned by enterprises located in Grodno, while firms in Vitebsk were more interested in joint sales and purchases. Conclusions The picture emerging from the statistical overview and survey data shows changes over time, with the export orientation of small firms growing. Results illustrate a West–East divide in Belarus in terms of the markets and countries at which Belarussian SMEs direct their international activities. This reflects the historically divergent development of Belarussian regions, as well as cultural ties with the people across the borders. In comparison to direct exporting, cooperative relationships with foreign partners appear to play an important role for Belarussian SMEs, certainly in comparison with SMEs in EU countries, where just 3 per cent of firms had collaborative relationships with foreign partners (KPMG, EIM and ENSR, 2003), suggesting that in Belarus, where the pace of transformation to market system has been very slow, a considerably higher proportion of SMEs are engaged in some form of cross-border collaboration than in a mature market context. Other studies indicate that cooperative approaches, alliances and networks involving SMEs generally will intensify in the future (for example, OECD, 2002) and results from a recent ENSR Enterprise Survey show that internationalized SMEs are frequently engaged in formal and informal cooperations (KPMG, EIM and ENSR, 2003). Research on entrepreneurship in transition countries shows a generally high inclination for entrepreneurs to collaborate (cf. Smallbone and Welter, 2006, for more details). In this context, we suggest that the process of internationalization of SMEs in a transition country such as Belarus may show distinctive characteristics, which indicates the importance of looking at internationalization within its specific history and country context.

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Handbook of research on European business and entrepreneurship

For firms in transition economies, low domestic purchasing power can limit the scale and scope of domestic markets, encouraging those with ambitions to grow to look abroad to identify and develop new market opportunities (Smallbone et al., 1999a). In such circumstances, subcontracting and other forms of collaborative arrangement with foreign firms can offer certain advantages, compared with more independent strategies for penetrating foreign markets, since they can reduce market entry costs and barriers, with lower associated business risks. In this context, EU enlargement can be expected to affect the internationalization of SMEs in Belarus as well as those located inside EU countries. The process of EU enlargement is redrawing the political map of Europe with particular implications for regions which are adjacent to new borders of the EU. This presents entrepreneurs and businesses with new sources of threat and opportunity. It may be argued that enlargement of the European Union will produce negative effects on adjoining countries like Belarus, especially in border regions, unless special measures are taken. The orientation of the new EU members towards the West and new regulations for cross-border trade and visits may significantly hamper traditional cross-border relationships of individuals and enterprises. The nature and extent of cross-border cooperation of businesses ranges from informal forms (such as petty trading of households, repeat business based on personal contacts, shuttle trade) to formal arrangements (such as joint sales and purchase activities, joint ventures of firms). Traditional literature on the internationalization of small firms tends to neglect most of the informal small-scale international activities. Future research on entrepreneurship in transition environments needs to pay attention to various forms of cross-border collaboration between entrepreneurs and enterprises with neighbouring countries,4 as part of an analysis of the wider process of internationalization of small firms. Notes 1. Belarussian statistics define small enterprises as follows: (i) up to 100 employees for industry and transport; (ii) up to 60 employees for agriculture and science; (iii) up to 50 employees for construction and wholesale; (iv) up to 30 employees for retail trade and personal services; (v) up to 25 employees for other nonmanufacturing sectors. 2. INTAS, the International Association for the promotion of cooperation with scientists from the NIS, is a European institution supporting collaborative research between INTAS members and the NIS. 3. At present, it is difficult to assess the consequences of EU enlargement on the development of small firms in the new border regions. However, we can note some separate effects connected to the expansion of the EU. For example, statistical data on the sectoral distribution of small firms across regions in Belarus show that, in 2004, in border regions next to the EU, SMEs in the transport sectors have benefited. In the region of Brest, transport SMEs account for 12.4 per cent of all SMEs, in Grodno for 10.8 per cent, while in the Eastern border regions this amounts to 6.3 per cent in Vitebsk, 6.1 per cent in Mogilev, 4.2 per cent in Gomel and to 5.9 per cent and 5.1 per cent in Minsk region and Minsk, respectively. 4. From 2005 to 2007, cross-border partnerships of households, enterprises and institutions in Belarus, Moldova and the Ukraine were analysed within an international collaborative project (INTAS 04-79-6991), in which all authors participated.

References Acs, Z. and D. Audretsch (1993), ‘Innovation in large and small firms: an empirical analysis’, American Economic Review, 78, 678–90. Badej, G.P. (2004), ‘About the development of export production of the small and average enterprises’, The Ministry for Foreign Affairs of Belarus, Interdepartmental Council on Development of Export, material for council session, http://www.bspn.nsys.by/ (in Russian).

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75

Coviello, N.E. and A. McAuley (1999), ‘Internationalisation and the smaller firm: a review of contemporary empirical research’, Management International Review, 39(3), 223–56. Coviello, N. and H.J. Munro (1995), ‘Growing the entrepreneurial firm’, European Journal of Marketing, 29(7), 49–61. Gankema, H.G.J., H.R. Snuif and P.S. Zwart (2000), ‘The internationalization process of small and mediumsized enterprises: an exploration of stage theory’, Journal of Small Business Management, 38(4), 15–27. Gulida, O. and V. Tamashevich (2005), ‘Statistical material’, Belarussian Economic Journal, 1(30), 150–55 (in Russian). Havnes, P.-A. and K. Senneseth (2001), ‘A panel study of firm growth among SMEs in networks’, Small Business Economics, 16, 293–302. Havratovich, I. (1996), Encyclopedia of History of Belarus, vol. 3, Minsk (in Belarussian), 421–5. Jaroshuk, S.V. (1999), ‘Small-sized industry in conditions of new economic policy (1921–1922)’, Belarussian Economic Journal, 3(9), 107–13 (in Russian). KPMG, EIM and ENSR (2003), ‘Internationalisation of SMEs’, Observatory of European SMEs, Report No. 4, Brussels. Minstat (2004a), Statistical collection ‘Regions of the Republic of Belarus’, Minsk: UE of Minstat, ‘The main computer center’ (in Russian). Minstat (2004b), Statistical Yearbook of the Republic of Belarus, Minsk: UE of Minstat, ‘The main computer center’ (in Russian). OECD (1997), Globalisation and Small and Medium Enterprises (SMEs), Vol. 1: Synthesis Report, Paris: OECD. OECD (2002), Small and Medium Enterprises Outlook, Paris: OECD. OECD (2004), Promoting Entrepreneurship and Innovative SMEs in a Global Economy: Towards a More Responsible and Inclusive Globalisation, executive summary of the background reports for the Second OECD Conference of Ministers responsible for Small and Medium-Sized Enterprises (SMEs), Istanbul, 3–5 June, Paris: OECD. Shevtsov, Y. (1997), ‘From West–East to Brest–Vitebsk: Threats to the security of Belarus which derive from its regional structure’, http://www.iph.bdg.by/socium.html (in Russian). Slonimski, A. and M. Shehova (2004), ‘The conditions of regions’ competitiveness improvement in the process of system transition in Belarus’, in W. Kosedowski (ed.), Konkurencyjnos´c´ regionów w okresie przechodzenia do gospodarki rynkowej. Mie˛dzynarodowa analiza porównawcza: Bial⁄orus´, Litwa, L⁄ otwa i Polska [Competitiveness of region in the period of transition to the market economy. International comparative analysis: Belarus, Lithuania, Latvia and Poland], Torun: Wydawnictwo Uniwersytetu Mikolaja Kopernika, 255–309 (in Polish). Slonimski, A. and M. Shehova (2005), ‘Factors of entrepreneurship in the Western and Eastern regions of Belarus’, in J. Karwowskiego (ed.), Polski konsument i przedsie˛biorstwo na jednolitym europejskim rynku, Szczecin: Wydawnictwo Uniwersytetu Szczecin´skiego, 307–12. Slonimski, A. and M. Slonimska (2005), ‘Specificity of enterprise activity of inhabitants of western and east regions of Belarus’, Regional and Local Researches, 1(19), 35–43 (in Polish). Smallbone, D. and F. Welter (2001a), ‘The distinctiveness of entrepreneurship in transition economies’, Small Business Economics, 16(4), 249–62. Smallbone, D. and F. Welter (2001b), ‘The role of government in SME development in transition economies’, International Small Business Journal, 19(4), 63–77. Smallbone, D. and F. Welter (2006), ‘Conceptualising entrepreneurship in a transition context’, International Journal of Entrepreneurship and Small Business, 3(2), 190–206. Smallbone, D., R. Leigh and D. North (1995), ‘The characteristics and strategies of high growth SMEs’, International Journal of Entrepreneurial Behaviour & Research, 1(3), 44–62. Smallbone, D., B. Piasecki, U. Venesaar, L. Rumpis and D. Budreikaite (1996), The Survival, Growth and Support Needs of Manufacturing SMEs in Poland and The Baltic States, Final report for Phare (ACE) project (contract no. 94 0743R), Centre for Enterprise and Economic Development Research, Middlesex University, London. Smallbone, D., B. Piasecki, U. Venesaar, K. Todorov and L. Labrianidis (1999a), ‘Internationalisation and SME development in transition economies: an international comparison’, Journal for Small Business and Enterprise Development, 5(4), 363–75. Smallbone, D., F. Welter, N. Isakova, Yu. Klochko, E. Aculai and A. Slonimski (1999b), Identifying the support needs of small enterprises in Ukraine, Belarus and Moldova to develop an agenda for policy at national and regional levels, final report for Tacis ACE project (contract no T 95-4139R), Centre for Enterprise and Economic Development Research, Middlesex University, London. Smallbone, D., F. Welter, N. Isakova and A. Slonimski (2001), ‘SMEs and economic development in Ukraine and Belarus: some policy perspectives’, MOCT–MOST: Economic Policy in Transition Economies, 11, 252–74.

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Ugorich, I. (1999), ‘Investment and trade policy of the Republic of Belarus’, http://www.nato.int/docu/colloq/ 1999/pdf/321-331.pdf. UNECE (1993), ‘Foreign investment in Belarus’, East–West Investment News, (4), 20–25. Welch, L.S. and R. Luostarinen (1988), ‘Internationalization: evaluation of a Concept’, Journal of General Management, 14(2), 34–55. Zhytko, A. (2003), ‘Landlords’ industrial entrepreneurship in Belarus (1861–1914)’, Belarussian Historical Journal, 2(46), 10–15 (in Belarussian).

6

Internationalization of SMEs in Belgium Jan Degadt

1

General background

Situation of Belgium Following its own constitution, Belgium is a federal constitutional monarchy. It is located close to the North Sea in Western Europe. Its neighbouring countries are France (South), the Netherlands (North), Germany and Luxembourg (East). The United Kingdom is across the North Sea. Belgium has an area of 30 528 sq km and a population of 10 396 421 (2004 estimate). There are three language-based Communities (Dutch, French and German) and three Regions: Dutch-speaking Flanders in the North, French-speaking Wallonia in the South, and bilingual Dutch-French Brussels at the centre. The currency is the euro. Belgium is a Member of a large number of international organizations, such as the UN, ILO, WTO, IMF/World Bank, OECD, EU and NATO. Brussels is the capital of Belgium. It also is the seat of a number of international institutions such as the EU Commission, the EU Council and the political headquarters of NATO. The Belgian economy has been a very open economy for a long time. Within 300 km of Brussels are the Paris and London agglomerations, Randstad Holland (the big metropolitan area including Amsterdam and Rotterdam in the Netherlands) and the German Ruhr area. Despite its small size, Belgium is an important player in international trade. In 2004, Belgium had a ‘market share’ of 3.4 per cent of world exports. It is the tenth most important exporter, lagging just behind Canada but preceding larger economies such as South Korea, Russia or Spain. Belgium has always been a proponent of a free trade policy and has tried to pursue such policies with its neighbours. Shortly after the World War I, in 1921, it established an economic union with the Grand Duchy of Luxembourg (BLEU or Belgian Luxembourg Economic Union), providing the abolishment of customs and a de facto monetary integration with a parity of one Belgian franc  one Luxembourg franc. After World War II, Belgium was co-founder of the Benelux Economic Union with the Netherlands and Luxembourg. Following the Belgian national accounts for 2004, the Belgian GDP amounted to 283 47 billion euros. Total exports amounted to 246 41 billion euros (86.9 per cent). The export quota of the Belgian GDP has increased significantly in the recent past: in 1993, export amounted to 58.3 per cent of GDP; in 2003, it was 83.8 per cent. The nominal value of exports increased by 128.6 per cent between 1993 and 2004, while the nominal value of imports increased by 134.1 per cent and the level of GDP by 53.2 per cent. The real growth in export values (taking account of inflation) over the same period was 106.7 per cent (meaning that it more than doubled). The VAT statistics give a slightly different figure but they confirm the importance of foreign trade for the Belgian economy. According to these statistics, exports amounted to 396.8 billion euros in 2003, or 51.0 per cent of the turnover of the enterprises. For the 77

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Flemish region (57.9 per cent of the population, 66.6 per cent of the Belgian exports) the export quota is even higher because the main ports (Antwerp, Ghent and Zeebrugge) are located in this region. The exports amount to 53.3 per cent of the turnover of Flemish enterprises. Although the Belgian economy is very open and although the export quota is high, it must be taken into account that the main customers for Belgian products are located in the neighbouring countries. Following research by the Belgian Federal Planning Bureau (Michel, 2005) on exports in 2001, 74.22 per cent of BLEU exports went to the then 15 Member States of the European Union. The share of North America is only 6.67 per cent, the share of Japan 1.07 per cent, the rest of Asia 5.53 per cent. These results are confirmed by government statistics with regard to the destination of the Belgian (not BLEU) export for 2003. A vast majority of 74.3 per cent is intra-EU export and 25.7 per cent extra-EU (2.9 per cent for the ten European countries who joined the EU in 2004, 7.0 per cent for the rest of Europe, 9.4 per cent for Asia, 6.2 per cent for America (Western Hemisphere) and 1.8 per cent for Africa). In a list ranking individual countries following their share in Belgian exports, we find only two non-European countries (United States and India) in a (tentative) Top Ten for 2004. According to a report of the Flemish government, 74.3 per cent of Flemish exports in 2003 went to the 15 ‘old’ Member States of the European Union, in particular the main neighbouring countries (Germany (17.54 per cent), France (15.88 per cent) and the Netherlands (14.01 per cent)). The share of the ten ‘new’ Member States was 2.75 per cent, the share of Asia 10.77 per cent. The main export products of Flanders are chemical and pharmaceutical products (15.99 per cent), transport material (15.02 per cent) and machines (13.41 per cent). Belgium has no diamond mines but it is the home base for an important diamond-processing industry. Precious stones (in particular diamonds from Antwerp) are a well-known product, representing 8.04 per cent of Flemish exports. The institutional environment of business has changed dramatically over the last 20 years in Belgium. On the one hand, we have important international developments with a full integration of the Belgian economy in the European Union, a new currency and the effects of globalization and membership of the WTO. On the other hand, Belgium has gone through a process of ‘regionalization’ or devolution of competences from the central or federal Belgian government to the three regional governments (Brussels, Flanders, Wallonia). For this chapter it is relevant that the competence and responsibility for international trade and export promotion was transferred from the federal government to the regional governments in 2002. Tradition of internationalization Because of its geographical location and the limitations of its domestic market, the Belgian economy and Belgian enterprises have for a long time been dependent on the outside world for their markets as well as for their supplies. The internationalization of the Belgian economy has its historical roots in the Middle Ages. The Flemish textile industry imported wool and exported cloth, making Bruges one of the major ports on the European continent. Flanders was very dependent on foreign suppliers and foreign markets. For instance, Niccolo Machiavelli (1469–1527), who visited France on a diplomatic mission in 1510, made an observation on this. On his return to Florence he reported

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to his government that Flanders would never initiate a war because it was too dependent on its neighbours. It needed France, for the import of food and as a market for its textiles (quoted in Gevaert (2004)). From the fifteenth and sixteenth century on, Antwerp became the major port and trading centre. The city of Ghent has for a long time been a production centre for textiles. In the nineteenth century, Wallonia, the southern part of Belgium, became the first industrial area on the European continent with an advanced steel industry. For a long time Belgian entrepreneurs have been exposed to international competition, in foreign markets and at home. Foreign trade has not been the only method of internationalization for Belgium. Today internationalization also implies foreign investment. Foreign investment has come to Belgium in three waves. Before the World War II, international businesses such as GM, Bell Telephone, Philips, Siemens and Renault built production units in Belgium to ensure access to the Belgian market and to avoid the then existing barriers to international trade. After the war, during the ‘golden sixties’ a new wave of multinational businesses built facilities, mainly in the port area of Antwerp (for instance Monsanto, Bayer and BASF). The third wave came in the 1980s. In this wave there was no more expansion of the production capacity. It was more a question of financial operations (Société Générale) or acquisitions of Belgian businesses by foreign investors (Glaverbel, Tiense Suiker, Côte d’Or, Generale Bank). Today in Belgium, especially big business has become a matter of multinational enterprises from abroad. According to estimates of the Belgian government, about two-thirds of the hundred largest firms in Belgium are dependent on decisions which are made elsewhere. SMEs in Belgium The representation of SMEs in the Belgian economy is very strong. According to statistics of the Observatory of European SMEs (European Commission) there were 438 thousand enterprises in Belgium in 2003. There were 408 thousand micro enterprises (under ten employees), 25 thousand small enterprises (ten to 49 employees) and four thousand medium-sized enterprises (50 to 249 employees). There were about a thousand large-scale enterprises (LSEs) with more than 250 employees. The average number of employees at SMEs (less than 250) was five, which is about the same as the average for the 15 Member States of the EU in 2003. The average employment at LSEs was 1115, with a European average of 1059. The value added per employee in Belgian SMEs was 93 per cent of the average for all enterprises; for the then 15 Member States of the EU, this proportion was 74 per cent. Research Research on SMEs and their internationalization has been carried out in Belgium for a long time. At the end of the 1980s and the beginning of the 1990s Donckels and Aerts (1992) surveyed Belgian SMEs in preparation of the full integration of the European market. This integration was to be completed by 1992. As this chapter is about internationalization of SMEs in Belgium in a European context, we focus on what is specific to the Belgian SMEs in relation to other European countries. Two international research projects make this possible. In the first place there is the Interstratos project. In this project (for a full description, see Haahti, Hall and Donckels, 1998) research institutes of eight European countries

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(Austria, Belgium, the Netherlands, Switzerland, Great Britain, Sweden, Finland and Norway) combined efforts to collect empirical data on the internationalization process in small firms in Europe. For this purpose a jointly designed questionnaire was independently collected in these countries for the period 1991–95. Analysis of the Interstratos data set enabled the making of cross-comparisons over time, over countries and over sectors. The Interstratos database has given rise to an extensive literature over a long period, including several PhD theses. For an evaluation of more recent developments see Voerman (2003). In the second place there is the Observatory of European SMEs. The Observatory is a project of the European Commission, started in 1993. It provides an instrument for monitoring the completion of the internal market and its effects on SMEs in Europe. The project has been carried out by the ‘European Network for SME Research’ (ENSR), a consortium of European research institutes. Until 1995, the database of the Observatory was mainly composed of macro statistics. From 1996 onwards, ENSR has surveyed enterprises, stratified by size-class and sector in the 19 participating European countries (the 15 Member States of 2003 plus Iceland, Norway, Liechtenstein and Switzerland), to assess thoroughly the effects of the internal market on SMEs. For instance, in 1999, the ENSR survey assessed the impact of the introduction of the euro. For the seventh edition of the Observatory, in 2003, a survey had been held on internationalization with SME owners or managers (with less than 250 employees) in 19 European countries. All information on the project and the participants can be found on the website of the European Union. The Interstratos and the Observatory project make it possible to analyse the internationalization of the Belgian SMEs within the framework of European integration and the internationalization process in the neighbouring countries. 2

Theoretical background

From stage theory to ‘born globals’ and a holistic approach The traditional stage theory describes internationalization as a gradual process beginning with low commitment or risk such as sporadic exporting and ending with high commitment or risk such as foreign subsidiaries or production facilities abroad. Following this reasoning, an SME which comes into business will consider its local market as its home market. The 2003 ENSR report points out that the stage theory is supported by national studies but also by the Interstratos studies (Gankema et al., 1997). According to this theory, internationalization is not an issue for starting businesses. Internationalization will only be integrated into the business strategy if it is made necessary by growth. Normally the business will try to develop its home market first. It will consider internationalization when it grows and when the home market becomes saturated. So, for the growing SME, internationalization is not a goal or target by itself. Internationalization is an instrument to achieve growth. The individual business internationalization can be ‘pushed abroad’ or ‘pulled abroad’, as described also by Kympers (1999). The first is ‘supply pushed’ and can be explained by the product cycle. When the home market has been saturated, the entrepreneur will look for new markets, possibly abroad. The second is ‘demand pulled’. Foreign customers want to buy the product (new product, low cost, favourable business cycle) so the entrepreneur will look for further opportunities. The demand pull drive was identified as the most

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important for Belgian small businesses in the Belgian survey in 1992 (Donckels and Aerts). A vast majority of respondents (93 per cent) indicated a request from abroad as a driver for internationalization. At first the business will do ‘more of the same’ and sell more of the product which has been successful on the home market. At a certain point discontinuities will arise and then some strategic decisions will be needed. Following stage theory, export usually is a first step in the internationalization process but it will be followed by other steps such as making use of foreign agents, setting up a network of sales offices abroad, setting up physical distribution facilities or stock capacity abroad, setting up production capacity abroad and joining strategic alliances. For the business, internationalization will imply a ‘strategic mutation’ with intensified international networking, big investments and a change in the business culture. The stage theory has been challenged recently. The Interstratos study has already pointed out that not all the SMEs went through all the stages but that some seemed to stagnate and to limit themselves to a committed involvement stage while others leapfrogged from one of the first stages to one of the last, thus skipping some stages in the middle. The 2003 ENSR report defines so-called ‘born globals’ as ‘companies that set up their activity targeting a market that is either global by nature or within a niche field that has a very limited potential on the domestic market. They often begin exports within the first five years of existence’. However, the ENSR report also states that the distinction between the stage theory and the born global model may not be considered too rigid. In practice internationalization may be gradual at some stage and go very fast at other moments, for instance after a redefinition of the business strategy. Such a business then behaves as a ‘reborn global’. Moreover internationalization implies a whole palette of mutually interdependent activities which are needed in combination rather than in successive stages. Finally, the different forms of internationalization may be decided in response to different strategic goals rather than as stages in a gradual process. The ENSR report supports a holistic vision of the internationalization process. A holistic approach ‘could see the different forms of international activities as a comprehensive set of internationalization options open to the SMEs, demanding careful and individual strategic consideration as to which option, or combination of options, will be the optimal choice at a given point in time’. Belgium: running a small business in a small country For an SME, the first market is the ‘home market’ or domestic market. At the very start this can be the local market and then be expanded to the regional or national market. However, the meaning of ‘national market’ is not the same in a large country as in a small country. In Belgium there is always an international border less than 100 km away, so the national market is relatively small. When the domestic market is small, a growing business will be confronted by the need to internationalize earlier than a business with a larger domestic market. In a large country, the national market is not uniform or homogeneous. Even in small countries with a high population density, such as Belgium or the Netherlands, there are regional differences. Differences in culture, tradition, climate and traffic conditions can cause the development of so-called ‘regional clusters’ inside a country. When international borders within Europe evaporate, we may see the development of new ‘regional

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clusters’ (or the revival of old ones) including regions of more than one country. Usually such clusters come into existence as a result of cooperation of a region with regions in neighbouring countries. In Belgium there are some examples, such as the cluster of the Western provinces of Flanders and the North of France, the cluster of the South of Belgium with Luxembourg and the ‘Euregio’ in the East with the Belgian provinces of Limburg and Liège, the Dutch province of Limburg and the German Aachen area. Different types of cooperation by SMEs in Europe were the subject of a separate Observatory report in 2003. 3 Results of the Interstratos project As we stated earlier, the Interstratos data set enables us to make comparisons between countries. Hakan Boter and Carin Holmquist (1997) examined the question whether nation or region matters to the internationalization process of a business. They focused on ‘the relations between internationalisation and structural factors as size, industry, and nation’. Methodology In their paper, Boter and Holmquist used data from seven countries of the Interstratos Group (Great Britain excluded) for the year 1993. In the original database there were 4304 observations, 315 (7 per cent) for Belgium. In a sampling procedure the database was rearranged to avoid uneven distributions following the size and industry. The result was a sample of 1758 observations and 219 (12 per cent) for Belgium. Results In the empirical part of the paper it was shown that the Belgian businesses were very internationalized if we define ‘internationalization’ as ‘foreign trade’. They had the highest export quota per cent of turnover: 43 per cent, compared to 36 per cent for the seven countries. Belgium also had the highest percentage of companies with some export activity: 87 per cent, compared to an average of 77 per cent for the seven countries. However, this internationalization is not reflected in the figures for investments in foreign units for distribution or manufacturing. Only 16 per cent of the Belgian respondents made such investments for distribution (average 19 per cent for the seven countries) and 6 per cent for manufacturing (average 10 per cent). The authors also found a high correlation between size and export quota: ‘the Belgian companies in the highest size classes are by far the most exporting’ and a relation to the industry: ‘Austrian and Belgian companies have the highest export quotas, with extraordinarily high levels in textiles and electronics’. 4 Results of the Observatory project As we stated earlier, Belgium also was involved in the ENSR survey on internationalization of SMEs, held in 2003 for the European Observatory and covering 19 countries. Methodology Data was collected from entrepreneurs and managers of SMEs (private independent businesses with less than 250 employees) in 19 countries (the 15 Member States of 2003, plus Norway, Liechtenstein, Switzerland and Iceland).

Internationalization of SMEs in Belgium Table 6.1

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Stages of internationalization

Exports in 2002? (%) Yes No Total Foreign supplier? (%) Yes No Total Subsidiaries/branches/joint ventures abroad? (%) Yes No Total

Belgium

All countries

24 76 100

18 81 100

45 55 100

30 70 100

4 96 100

3 97 100

In total, 7837 checked and approved interviews were available. There were 372 Belgian respondents. They have been weighed by industry, size class and country. The questionnaire for 2003 covered six topics, one of which was internationalization. In the following discussion, we limit our reporting to the topic of internationalization and to the position of Belgium in relation to the average of all countries. Results International trade is very important for Belgian SMEs. The fraction of businesses who are exporting or who are importing through foreign suppliers is much larger than the average elsewhere in Europe. This confirms the results of Interstratos ten years earlier. The ENSR report stresses that exports are more frequent in combination with a foreign supplier. More than 10 per cent of the SMEs have exports and a foreign supplier, whereas only 6 per cent just have export. ENSR also points out that importing often triggers exporting in SMEs. The results from the ENSR Enterprise Survey in 2003 indicate that importing and exporting are still the most common forms of internationalization, but ENSR points out that other methods involving cooperative approaches, alliances and networks involving SMEs will intensify in the future. Internationalized SMEs also engage in cooperation more frequently than SMEs in general. Table 6.1 shows that the proportion of businesses who have subsidiaries, branches or joint ventures abroad is slightly higher in Belgium than the European average. Among the businesses that have subsidiaries, branches or joint ventures abroad, enthusiasm is present but rather moderate. Most respondents consider that the experience has a ‘positive’ effect but almost nobody in Belgium considers the effect as ‘strongly positive’. The sum of ‘positive’ and ‘strong positive’ is the same as the European average. Nobody is speaking of a ‘negative’ or ‘strongly negative’ effect. Most Belgian respondents consider the neighbouring countries as important for their business abroad: France (55 per cent), the Netherlands (48 per cent), Germany (45 per cent) and United Kingdom (22 per cent). Other countries that are quoted as ‘important’ are Italy (17 per cent), Spain (13 per cent) and Luxembourg (8 per cent). Outside the

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Table 6.2

Effects of internationalization

Effect of foreign subsidiaries/branches/joint ventures on turnover (% of SMEs having subsidiaries/branches/joint ventures abroad)

Strongly positive effect Positive effect No effect Negative effect Strongly negative effect Don’t know/no answer Total

Belgium

All countries

1 52 33 0 14

13 39 33 7 1 7

100

100

Table 6.3 Has internationalization improved the competitive strength of the enterprise? (% of the SMEs having internationalization such as exports, foreign suppliers, subsidiaries/branches/joint ventures)

Yes No Don’t know/no answer Total

Belgium

All countries

44 51 5

59 34 7

100

100

European Union, the United States is considered important by 8 per cent. Belgium is considered as important by more than 10 per cent of the entrepreneurs in Luxembourg (65 per cent), the Netherlands (56 per cent), France (23 per cent) and the UK (13 per cent). Businesses that have gone through an internationalization process are more critical in Belgium than elsewhere in Europe about assessing the impact of the internationalization on their competitive strength. Only 44 per cent consider the internationalization as an improvement for the competitive strength of the enterprise. Only the Netherlands (43 per cent), Sweden (37 per cent) and Iceland (20 per cent) give a lower score. Belgium also is the only country where more than 50 per cent of the respondents declare that internationalization has not improved their competitive strength. Motives for internationalization The most important motives for internationalization are the search for new and larger markets, access to production factors such as labour and capital, the search for additional production capacity, access to know-how and technology and problems at home such as high production costs or strict laws and regulations. Access to new and larger markets is the most important motive for internationalization in Belgium. This is not unexpected because we noticed earlier that the home market is relatively small. But this motive is not only strong in Belgium but also elsewhere in Europe. The fraction who consider this ‘very important’ is significantly higher abroad. Belgian businesses have had an export tradition for a very long time, so it is possible that this motive simply has become very evident.

Internationalization of SMEs in Belgium Table 6.4

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Access to new and larger markets

(% of the SMEs having internationalization such as exports, foreign suppliers, subsidiaries/branches/joint ventures)

Very important Important Not important Don’t know/no answer Total

Table 6.5

Belgium

All countries

16 40 39 5

27 36 34 3

100

100

Access to labour

(% of the SMEs having internationalization such as exports, foreign suppliers, subsidiaries/branches/joint ventures)

Very important Important Not important Don’t know/no answer Total

Table 6.6

Belgium

All countries

5 15 77 3

7 16 75 2

100

100

Additional production capacity

(% of the SMEs having internationalization such as exports, foreign suppliers, subsidiaries/branches/joint ventures)

Very important Important Not important Don’t know/no answer Total

Belgium

All countries

3 31 62 4

12 25 59 3

100

100

The second most important is the search for know-how and technology and the third motive is the high production costs on the domestic market. This is not ‘typical Belgian’: we find these motives also elsewhere in Europe. For the other motives such as strict laws and regulations on the domestic market and access to input markets (access to labour, access to capital, additional production capacity), the sum of the fractions who consider it ‘important’ or ‘very important’ is almost the same for Belgium as for the European average, but the fraction of those who consider it ‘very important’ is always smaller in Belgium. On a European level the most frequently cited internal barrier is the ‘high costs of internationalization’ but for Belgium the ‘quality or specification of the products’ gets

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Table 6.7

Access to capital

(% of the SMEs having internationalization such as exports, foreign suppliers, subsidiaries/branches/joint ventures) Belgium

All countries

4 21 72 3

8 20 69 3

100

100

Very important Important Not important Don’t know/no answer Total

Table 6.8

Access to know-how and technology

(% of the SMEs having internationalization such as exports, foreign suppliers, subsidiaries/branches/joint ventures)

Very important Important Not important Don’t know/no answer Total

Table 6.9

Belgium

All countries

9 39 47 4

16 33 49 2

100

100

High production costs on the domestic market

(% of the SMEs having internationalization such as exports, foreign suppliers, subsidiaries/branches/joint ventures)

Very important Important Not important Don’t know/no answer Total

Belgium

All countries

11 34 52 3

16 30 50 4

100

100

the highest score, followed by the ‘high cost’ and the ‘price of the product’. The proportion of respondents who have problems with the product is in Belgium the highest of all responding countries. Only Luxembourg also has a score of 17 per cent. The proportion of respondents who have no internal barriers is lower than the European average. The Belgian respondents are close to the European average in their assessment of the external barriers for internationalization. The ‘existing laws and regulations’ and ‘lack of capital or finance’ get the highest scores.

Internationalization of SMEs in Belgium Table 6.10

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Strict laws and regulations on the domestic market

(% of the SMEs having internationalization such as exports, foreign suppliers, subsidiaries/branches/joint ventures)

Very important Important Not important Don’t know/no answer Total

Table 6.11

7 30 59 4

15 26 54 4

100

100

Belgium

All countries

7 17 15 11 5 41 16 1

5 8 12 8 8 42 22 2

External barriers for internationalization (%)

Lack of information Lack of support/advice Existing laws and regulations Cultural of language differences Lack of capital or finance Others Never considered internationalization No external barriers Don’t know/no answer

5

All countries

Internal barriers for internationalization (%)

Insufficient skills Quality or specification of products High cost Price of product Other Never considered internationalization No internal barriers Don’t know/no answer

Table 6.12

Belgium

Belgium

All countries

8 5 13 7 12 3 45 19 2

8 8 11 7 11 6 43 22 1

Discussion and overview

The role of the European Union The European integration has created high expectations in the business community with regard to economic integration in general and internationalization in particular. As Belgium is a founding member of the European Union, its enterprises have felt the full impact of this process from the very beginning in the 1950s. Belgian enterprises had

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already experienced the effect of integration even earlier because some measures, such as the simplification or abolishment of customs, have even been initiated before the Treaty of Rome: the BLEU and the Benelux treaties provided this. Today Benelux or BLEU has become obsolete and it is no longer possible in Belgium to have a discussion on internationalization without discussing the impact of the European Union on the competitive environment of the businesses. Since the 1980s we have gone through several interrelated ‘grand projects’ of the EU: 1.

2.

3.

The completion of the single market, leading to the removal of physical (in particular customs controls), technical (caused by different national standards and regulations) and tax (caused by national differences in taxation and excise duties) barriers to free intra-EU flows of goods and services, capital and persons. In 1987, it was decided to complete the internal market by the end of 1992. The accomplishment of the Economic and Monetary Union. In 1991, it was decided in the so-called ‘Maastricht Treaty’ to establish a common currency, the euro. Member states who wanted to join had to meet certain macro-economic criteria and had to coordinate their economic policy. In the 1970s and 1980s, Belgium had macroeconomic problems such as a huge government deficit and an oversized public debt. In the 1990s the Belgian government was forced to re-establish macroeconomic equilibrium to meet the so-called ‘Maastricht criteria’, in particular with regard to the government deficit and the public debt. In 2002, the euro became the currency for 12 Member States, among them Belgium. The enlargement process: after the fall of the Berlin Wall and the disintegration of the former Soviet Union, new democracies emerged in Central and Eastern Europe. Their economies have gone through a transition from central planning by the state to market economies with a greater role for the private sector. Ten countries joined the EU in 2004. Some other countries may join in the near future.

The expectation was that such ‘grand projects’ would have positive effects for the European enterprises. Increased competition induces more internationalization and Europeanization, to be reflected in larger export shares in the turnover and also more cooperation with firms of other member states. This was confirmed by an ENSR survey in 1993 among SME experts in the EU Member States. Lambrecht (2002) confronted the SME perceptions as they appeared in the survey for the Observatory in 1993 with the reality with regard to European integration as it was perceived through the surveys in the successive Observatory reports later on. Several subjects were discussed, among them also internationalization. 1993 The dominant perception is that the impact on intra-EU trade would be limited. This is confirmed by a survey by Eurochambres where the entrepreneurs referred to major technical barriers that would limit the impact of the single market on intra-EU trade. In their view, the new VAT system and the fact that several Member States had only partially adopted EC law would pose serious problems to intra-EU trade. 1996 It was estimated that roughly a quarter of all enterprises had experienced higher export shares thanks to the specific measures implemented by the EU. The abolition of phys-

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ical barriers and the reduction of fiscal barriers had stimulated the export performance of all direct exporters, irrespective of their size or sector of activity. The removal of technical barriers had promoted international trade specifically amongst those enterprises that did not export directly, but which participate in international trade through foreign subsidiaries or in close collaboration with foreign enterprises. Direct exporters had benefited less. 1997 No impact on export performance; for a majority the number of international business contacts had not increased during the previous five years. 1999 For a majority there was no increase in international business contacts over the last five years, but the Single Market had a positive effect on the growth rate of export turnover. It seems that the effect of the creation of the Single Market in 1993 had flattened out by the end of the 1990s. Fewer and fewer enterprises declare that they have experienced an increase in the development of international business contacts over the last five years: 50 per cent still mentioned an increase in 1996 (36 per cent no increase), compared with 39 per cent (43 per cent no increase) in 1997 and 31 per cent in 1999 (enterprises without employees were excluded in 1999). The larger enterprises refer more to an increase in international business contacts. Expectations of Belgian business leaders Further measures create further expectations but it seems that it can take some time before the expectations materialize. We have seen that the dominant perception in 1993 was that the impact of the completion of the Single Market on international trade would be limited. Today we have the discussion on enlargement. It seems that (at least in Belgium) expectations about enlargement are limited as well. PricewaterhouseCoopers (PwC) surveyed 102 CEOs of Belgian businesses (average turnover of 77 million euros) in March 2004, shortly before the official entry of the new Member States in the European Union. Although 83 per cent of the respondents did have business contacts with the new Member States, 30 per cent of them did not expect any impact on their business, while 66 per cent did expect an impact; 55 per cent quote some area of the expected impact. Mostly quoted are indirect taxes (32 per cent), followed by legal issues such as commercial law (14 per cent), labour and social laws (8 per cent). Methods of internationalization The ENSR report points out that Europeanization and globalization are bringing intensified competition for the SMEs. ‘Many SMEs, in almost all industrial sectors, now face increasing competition due to internationalization. SMEs have to respond strategically to these challenges whether they find themselves in “protected” national market niches or are heading for a committed international strategy.’ In this context the concept of a value chain becomes important. This concept has been introduced by M. Porter (1990): ‘A firm’s value chain is an interdependent system or network of activities, connected by linkages. The primary activities of the value chain may be summarised in five categories: inbound logistics, operations (or manufacturing), outbound logistics, marketing & sales and after-sale service. Then there are the support activities of the value

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chain: firm infrastructure, human resource management, technology development and procurement. Gaining competitive advantage requires that a firm’s value chain is managed like a system rather than a collection of separate parts’. According to the ENSR report, there is a danger that SMEs will not be strong enough to take leading positions in the value chain and will only have sufficient competitive power to take secondary positions. This will bring SMEs’ profit to a minimum level. In order to face these challenges SMEs will have to pay attention to a lot of items, including global differences in production conditions, innovative capability, ability to develop and absorb new technology, knowledge of the market, access to capital and so on. Internationalization implies more than just import and export, for SMEs as well as for large enterprises. For this reason the development of external relationships (for example, sales offices abroad and participation in all kinds of networks) is equally important. This is why the ENSR report stresses that the internationalization process should be approached in a holistic way. The size of the country and the size of the enterprise do matter The ENSR report shows that smaller countries, with small domestic markets, are more internationalized. The size of the domestic market is a very decisive factor for internationalization. Hence SMEs with a specialized production or some large production in a small country will very soon find that the demand on the domestic market is insufficient for sound business. Tendencies for increasing specialization globally are likely to stimulate more SMEs into seeking international business. Medium-sized enterprises are more internationalized than small and micro enterprises. Only 17 per cent of micro enterprises export, whereas 51 per cent of medium enterprises are exporters. However, while the likelihood of finding an exporting SME increases with the company’s size, the export share of the turnover does not correlate with size. Internationalization may not be regarded as merely international trade. It also involves all types of international collaboration and in this way it can enhance the competitiveness of businesses. Subsidiaries/branches of Belgian businesses abroad Belgian businesses know this very well. We take just one example of opening branches abroad. In 2003, the Belgian Federal Planning Bureau made a survey of the subsidiaries or branches of Belgian businesses abroad (Joos and Spinnewyn, 2003). They found that there is a strong correlation between the dimensions of a business and the willingness to open a foreign branch. Only 1 per cent of SMEs with fewer than ten employees have a branch abroad, compared to 40.2 per cent of businesses with 1000 or more employees. However, the number of SMEs is much larger than the number of LSEs, so the quantity of subsidiaries or branches of Belgian SMEs is important. Most Belgian enterprises start their internationalization in Western European countries in general and the neighbouring countries in particular. The data of the Belgian Federal Planning Bureau show that relationships in language and culture do matter in the selection of the country. In French-speaking Wallonia, France is the most popular location for subsidiaries or branches (42 per cent of the businesses with subsidiaries or branches abroad), followed by also French-speaking Luxembourg (21 per cent). Only 14 per cent go to Germany and 12 per cent to the Netherlands. In bilingual but

Internationalization of SMEs in Belgium Table 6.13

91

Characteristics of Belgian Businesses

Employees (full time equivalent)

Enterprises with subsidiaries or branches abroad (1)

Population of the enterprises (2)

(1) as % of (2)

1–9.9 10–49.9 50–249.9 250–999.9 1000 or more

1 145 896 581 206 66

11 0956 20 460 3 749 719 164

1.0 4.4 15.5 28.7 40.2

Total No information or no employees

2 894 1 992

136 048

predominantly French-speaking Brussels, France obtains as much as 50 per cent, followed by Luxembourg (21 per cent), the Netherlands (17 per cent), the United Kingdom (11 per cent) and Germany (10 per cent). In Dutch-speaking Flanders, the Netherlands are the most popular destination (43 per cent) but France also enjoys in Flanders high popularity (30 per cent), followed by Germany (14 per cent) and the United Kingdom (10 per cent). Conclusion and recommendations For Belgian SMEs internationalization has for a long time been the same as exporting or importing. The Belgian economy has always been a very open one and the Belgian firms have a long tradition of outstanding export performance. However, in our globalizing economy of today, this is no longer enough. As is stressed by the ENSR report, activities such as cross-border cooperation, alliances and networks are increasingly important. This is a fundamental and structural feature and therefore it is expected to remain strong in the near future. Recent surveys have shown that Belgian entrepreneurs are well aware of this. For instance, they are establishing subsidiaries or branches abroad. Internationalization, in Belgium as elsewhere, is part of a business strategy and so it will be very firm-specific. Some businesses will behave as predicted by the traditional stage theory. They start their internationalization strategy gradually, beginning with sporadic international trade and ending with subsidiaries. However, other businesses will behave as ‘born globals’ (oriented toward internationalization from an early stage) or ‘reborn globals’ (oriented toward internationalization after an assessment or reassessment of their strategy). Finally, we want to make a last point with regard to Belgium. Belgian businesses have for a long time been very active on the European export markets, so development and the enlargement of the European Union have been sources of support for the internationalization of Belgian SMEs and for the performance of the Belgian economy in general. But we have to keep in mind that internationalization for most Belgian businesses still means Europeanization. The export statistics which we quoted at the beginning of this chapter as well as the results of the ENSR survey of Belgian SMEs and the survey by the Belgian Federal

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Planning Bureau on foreign branches or subsidiaries all confirm that internationalization very often is confined to European countries, even to the neighbouring countries. This implies that Belgian exports are very dependent on these countries. The ‘export portfolio’ should be more diversified. Michel (2005) points out that the BLEU has been confronted with a serious decline in its world export market share in 1991–97 owing to this ‘unfavourable market specialization’. The same effect caused an increase in the world export market share of the BLEU in 1997 to 2001. The Belgian business community must be aware that an overemphasis on Europe could come at the expense of openness towards the rest of the world. Internationalization has to be directed towards other markets outside Europe, especially emerging markets in Asia and the Pacific. At the same time, internationalization has to be extended to all types of international cooperation and not be confined to export and import. For a small business in a small country such as Belgium, the need for internationalization may be very evident. European integration and European enlargement have given the right impulses to start and to implement this internationalization process, but European integration must not be an excuse to confine internationalization to Europeanization. Europeanization is good but it is not enough. Even if we no longer speak about a ‘small business in a small country such as Belgium’ but about ‘a small business in a larger economic entity such as the European Union’, the need for internationalization still remains there. Belgium has always been a very open economy. Belgian entrepreneurs have always worked in a competitive environment. European integration will only support the internationalization process if European integration does not come at the expense of openness toward the rest of the world. This must be the subject of continuous monitoring and research. Also Europe is only a part of a large, globalizing world. A reshuffling of political borders toward larger entities does not change this. ‘On a political map, the borders between countries are as clear as ever. But on a competitive map, a map showing the real flows of financial and industrial activity, those boundaries have largely disappeared’ (Kenichi Ohmae, quoted in Zimmerer and Scarborough, 1998). References Boter, Hakan and Carin Holmquist (1997), ‘The impact of size, industry, and nation on internationalization in small and medium-sized enterprises’, in, Rik Donckels and A. Miettinen (eds), Entrepreneurship and SME Research: On its Way to the Next Millennium, Aldershot: Ashgate, pp. 163–83. Donckels, Rik and Ria Aerts (1992), KMO’s en internationalizering, Koning Boudewijnstichting in cooperation with the Small Business Research Institute and Cera, Brussels. Donckels, Rik, Jan Degadt and Betty Dupont (1988), KMO’s in België. Sociaaleconomische betekenis, Louvain Acco. Gankema, H.G.J., H.R. Snuif and K.A. van Dijken (1997), ‘The internationalization process of small and medium sized enterprises: an evaluation of the stage theory’, in Rik Donckels and A. Miettinen (eds), Entrepreneurship and SME Research: On its Way to the Next Millennium, Aldershot: Ashgate, pp. 185–99. Gevaert, Marc (2004), De Vlaamse poort naar Utopia. Vlaanderen en Vlamingen in de Europese literatuur, Roeselare, Belgium: Roularta Books. Haahti, Antti, G. Hall and Rik Donckels (eds) (1998), The Internationalization of SMEs. The Interstratos Project, Routledge Advances in Management and Business Studies, London and New York. Joos, A. and H. Spinnewyn (2003), Filialen van Belgische ondernemingen in het buitenland, (Belgian) Federal Planning Bureau, Working Paper 22-03. Kympers, L. (1999), Strategische bedrijfsvoering, Antwerpen: Standaard Uitgeverij. Lambrecht, Johan (2002), ‘European integration: have the expectations fitted the SME perceptions and reality?’, paper presented at the 29th International Small Business Congress, Amsterdam.

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Michel, B. (2005), ‘Trends in export market shares between 1991 and 2001. An international comparison with a focus on the Belgian–Luxembourg Economic Union’ (Belgian), Federal Planning Bureau, Working Paper 7-05. Porter, Michael E. (1990), The Competitive Advantage of Nations, London. Voerman, Liane (2003), The Export Performance of European SMEs, Alblasserdam, The Netherlands: Labyrinth Publications. Zimmerer, Thomas W. and Norman M. Scarborough (1998), Essentials of Entrepreneurship and Small Business Management, Englewood Cliffs, New Jersey: Prentice-Hall.

7

Internationalization of SMEs in Bosnia and Herzegovina William R. Pendergast, Mugdim Pasic and Aziz Sunje

Introduction This chapter presents a case study of a successfully internationalized small and mediumsized enterprise (SME1) in Bosnia and Herzegovina (BH). The chapter begins with a brief description of recent BH history, its industrial structure and the role of SMEs, and an overview of BH integration into the global economy. This material provides the backdrop for a detailed case study of Vegafruit, a medium-sized company in the food processing industry. The chapter concludes with a discussion that relates the foregoing material to prevailing hypotheses about the internationalization process. A Balkan story BH presents a context for the study of SME internationalization that suggests the culturebound nature of some academic literature that has focused on internationalization as a gradual, sequential process by firms that choose an explicit, strategic path of growth through international activity (Johanson and Vahlne, 1977, 1990, 2003). More recent attention has focused on ‘born international’ companies that short-circuit the gradualist sequence and have international markets or sources from inception (Oviatt and McDougall, 1994, 1997). Unlike the sequential and gradualist paradigm of internationalization, both large firms and SMEs in Former Yugoslavia (FY) experienced a ‘Big Bang’ internationalization with the collapse of the country. In April 1992, BH declared its independence. BH companies that had operated domestically within FY suddenly found themselves ‘international’ as a result of exogenous political events that severed them from their domestic markets and operating units. In the context of Balkan politics, however, this did not mean they would remain unified entities or retain their established positions within other FY republics. BH industry formed within the context of FY, where the development of industry was politically directed. Choices made in Belgrade allocated many value-added activities to Slovenia and Croatia, while BH was assigned basic industry like steel, wood processing, and defence industry. During the 1992–95 war, much of BH industry was completely destroyed. By the mid1990s, BH economic activity had sunk to less than 20 per cent of pre-war levels, a much greater decline than in any other FY republic (World Bank, 2005, pp. 2, 4). Some firms persisted and survived the war, while others were formed in the aftermath of conflict. During the war, legislation converted previously ‘socially owned’ companies to stateowned enterprises, in which top management was politically appointed. Subsequently, many of these companies were privatized. BH faced a double challenge of post-conflict reconstruction (and reconciliation) and transition to a market economy. These challenges were complicated by an inefficient 94

Internationalization of SMEs in Bosnia and Herzegovina 95 political and legal environment. The Dayton Accords ended the war in 1995 but failed to create a single economic space within the country. Instead, two ‘entities’ (Federation of Bosnia and Herzegovina or FBH and Republika Serpska or RS) retained most of the power. There is a toothless state-level government and an international district (Brcko). FBH is further divided into 10 cantons with significant authority. As a result, business contends with multiple overlapping and contradictory regulations (US Embassy, 2004, pp. 2, 6). While reconstruction has been largely successful, thanks to extensive international aid, structural reforms like privatization, market liberalization and enterprise restructuring have lagged. This has resulted in weak economic growth, high unemployment, a large informal economy, widespread corruption, a persistent brain drain and large imbalances in external trade. BH presents a ‘balkan stew’ of companies with extremely diverse histories and profiles. Their ownership may be state-owned, privatized, or de novo. Their origins may be prewar or post-war. They may be large, medium or micro. They may operate in the formal or informal economies (or both). The overall picture of the BH economic structure is domination by a few large firms; a small private sector; large informal economy; low foreign investment; and low internationalization of business activity. Structure of BH enterprise Dana (1999) gives an overview of entrepreneurship in BH. In 2002, there were 64 026 registered firms in BH (World Bank, 2005, p. 57). Their value-added by sector (percentage of GDP) was services: 61.6 per cent; industry: 27.8 per cent; agriculture: 10.7 per cent. BH industry has been dominated historically by a few large, diversified, state-owned enterprises. Throughout FY, a small number of large companies coexisted with many small, private businesses. In FBH, for example, less than 9 per cent of nearly 26 000 enterprises were publicly owned, of which more than half were large-scale businesses. In 2002, the private sector share of BH output was still only 45 per cent, the lowest in the region (Table 7.1). Large companies in BH tend to be state-owned enterprises (SOEs). Privatization began in 1999, but progress was particularly slow for large-scale companies. By the end of 2002, only 24 per cent of large SOEs in FBH and 42 per cent in RS had been privatized (World Bank, Table 7.1

Private sector share of GDP (2002)

Country Albania Bosnia & Herzegovina Bulgaria Croatia Macedonia, FYR Moldova Romania Serbia & Montenegro Source: Boardman et al. (2004), p. 92.

Private sector % of GDP 75 45 75 60 60 50 65 45

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Table 7.2

Number of SMEs per 1000 inhabitants (2001)

Albania Serbia & Montenegro BH Czech Republic Bulgaria Hungary Croatia Poland Romania Slovak Republic

18.1 7.8 7.0 85.1 27.6 58.9 13.7 87.0 27.4 67.7

Source: World Bank, Country Economic Memorandum (2005), p. 59.

2005, p. 57). Most BH companies are SMEs (30 000 in 2001), but BH nevertheless has the lowest number of SMEs per capita in East, Central and Southeast Europe (Table 7.2). Most BH SMEs are private. Only 7.2 per cent of the SMEs in the IBRD/World Bank BEEPS2 survey were entirely government-owned. Private companies are either privatized firms (formerly state-owned) or new (de novo) companies. Compared with the private sector in other Southeast European (SEE) countries, BH has the highest proportion (25 per cent) of privatized firms (Broadman et al., 2004, pp. 92–3). Privatization was more prevalent in BH and occurred later (1998–2001) than in most other SEE countries. Unfortunately, BH followed privatization methods that limited progress towards corporate restructuring, the influx of new capital and know-how, and profit-orientation. The primary methods of privatization are direct sales, vouchers and management–employee buyouts (MEBO). Mass privatization encompassed 68 per cent of all privatized firms in FBH and 45 per cent in RS. This resulted in fragmented ownership by Private Investment Funds (PIFs), inside managers and workers, and the state. BH internationalization BH has an open economy, with a ratio of exports and imports of goods and services to GDP that amounted to 85 per cent in 2002. This results mainly from high imports that are three times the amount of exports. It produces a negative trade balance of 36.8 per cent of GDP and a current account deficit of 18.5 per cent of GDP (European Commission, 2004, p. 2). BH exports are low in relation to GDP, more than three times lower than before the war (including trade with other FY republics). Exports as a percentage of GDP were 79.6 per cent in 1990; by 2002, they were only 28.4 per cent (World Bank, 2005, p. 34). The European Union (EU) is the major destination for BH exports. As a result of the Stabilization and Association Process (SAp) described below, the EU share of BH exports increased from 44 per cent in 1997 to 66 per cent in 2002 (World Bank, 2005, p. 34). BH exports to other republics of FY fell, from 57.3 per cent of GDP in 1990 to only 11 per cent of GDP in 2002 (World Bank, 2005, p. 34). In some cases, this reflects discriminatory application of non-tariff barriers and political relations. In general, however, it reflects the elimination of intra-company trade within FY enterprises and the destruction of the BH defence industry that supplied the FY military.

Internationalization of SMEs in Bosnia and Herzegovina 97 BH exports to EU markets (Table 7.3) are heavily skewed towards natural resources (45 per cent) such as lumber and hides, and unskilled, labour-intensive products (42 per cent). In 2002, agricultural and industrial raw materials sold to EU markets were 35 per cent of total exports. Textiles, clothing and footwear were another 30 per cent. The low level of food exports (2.3 per cent) reflected the inability of BH producers to obtain EU veterinary, sanitary and phytosanitary certifications (World Bank, 2005, pp. 34–7). There has been little evidence of a shift to more skilled labour-intensive or capital-intensive products. In view of the heavy orientation of BH exports towards the EU, this factor composition of exports may not be sustainable. BH has no labour cost advantage over Asian countries in unskilled labour-intensive exports like textiles and footwear. Nor is European demand growing for these products. Because of their low-wage structure, these industries provide little boost to living standards or growth in output. To secure a sustainable competitive advantage in doing business with the EU, BH SMEs require a more value-added approach which, in turn, depends on internal changes in the domestic business environment. BH companies in general are not highly integrated into international business networks. In 2002, export receipts as a percentage of total sales by BH firms were only 10.6, the lowest level of export intensity in the region except for Serbia and Montenegro (S&CG or Serbia and Crna Gora) (Broadman et al., 2004, p. 110). Firm size has a clear effect on international involvement. Overall, 31 per cent of BH SMEs reported selling products or services outside the country, compared with 62 per cent of large firms. More than 85 per cent of SMEs in BH are micro-enterprises with ten or fewer employees and only 21 per cent of them engage in exporting (World Bank, 2005, p. 59). BH data from the BEEPS2 survey (Table 7.4) confirm the prevailing hypothesis that micro-enterprises are less likely to engage in international business. There is a similar separation of large firms from SMEs in the foreign percentage of total sales. As much as 79 per cent of SMEs reported that 91–100 per cent of their sales were domestic, compared to only 43 per cent of large firms (BEEPS2). Company size also affects the sophistication and complexity of international activities (Table 7.5). Besides their low export orientation, BH SMEs are less likely than large companies to have ‘holdings or operations in other countries’. The 14.4 per cent of BH SMEs that reported holdings or operations in other countries is the same percentage as the average for the six-country region (World Bank, BEEPS2, 2002). This suggests that, throughout the region, SME exports are twice as common as SME foreign direct investment, supporting the sequential paradigm of internationalization. The period 1998 to 2002 covered by the BEEPS survey was not one of great international expansion for BH SMEs. Only 16.6 per cent of all surveyed BH firms exported to new foreign markets between 1998 and 2002, compared with an overall average of 20.2 per cent in eight Southeast European countries including BH (Broadman et al., 2004, p. 112). Only 11.6 per cent of BH SMEs exported to new markets, compared with 41.4 per cent of large companies (BEEPS2). During the same period, 39.3 per cent of large firms reported an increase in their volume of exports, but only 10 per cent of SMEs. Finally, 12.8 per cent of SMEs initiated a new joint venture with a foreign partner, while 31 per cent of large companies did so. BH firms are, however, dependent on foreign inputs. BH firms reported that approximately 45 per cent of all input purchases were imported from foreign sources, higher than

98 100.0

All goods

100.0

0.9 9.3 11.0 5.9 0.5 72.3 1.6 29.9 14.9

1997

World Bank, Country Economic Memorandum (2005), p. 36.

2.3 5.0 12.0 10.2 1.2 69.2 0.9 23.3 16.4

Food Agricultural raw materials Industrial raw materials Machinery & equipment, excl. auto Auto & parts Consumer goods, of which: Textiles Clothing Footwear

Source:

1996

End-use product

100.0

2.1 15.0 9.7 4.3 0.4 68.4 1.2 34.2 9.0

1998

100.0

2.1 19.1 17.0 4.3 1.4 56.0 1.2 25.9 8.4

1999

Table 7.3 BH Exports of end-use products to EU markets, 1996–2002 (export share in %)

100.0

2.4 15.9 27.6 4.0 0.2 49.8 1.8 18.0 8.6

2000

100.0

2.2 12.6 23.9 3.6 0.4 55.5 2.5 19.7 8.9

2001

100.0

2.3 13.7 21.2 5.1 0.5 57.1 1.8 18.4 10.9

2002

Internationalization of SMEs in Bosnia and Herzegovina 99 Table 7.4

‘Does your firm sell products or services to customers outside the country?’

Number of employees 2–10 (N 82) 2–249 (N 152) 250 (N  29)

Yes

No

20.7% 30.9% 62.1%

79.3% 69.1% 37.9%

Source: BEEPS2.

Table 7.5

‘Does your firm have holdings or operations in other countries?’

Number of employees 2–249 (N 153) 25 (N  29)

Yes

No

14.4% 37.9%

85.0% 62.1%

Source: BEEPS2.

the region’s 38 per cent average (Broadman et al., 2004, p. 122). SMEs in BH were less dependent on imported inputs than large companies: 30 per cent of SMEs reported importing more than half of their total inputs, compared with 42 per cent of large companies (BEEPS2). It appears counterintuitive that more SMEs (62.5 per cent) reported importing their inputs through direct import channels than did large companies (46.7 per cent). The main barriers to SME internationalization are not external. BH has pursued a liberal trade regime and international integration at the EU, regional and WTO levels. The 1999 Stabilization and Association process (SAp) provided BH and other Western Balkan countries with non-reciprocal duty and quota-free access to EU markets which now include 10 new EU members. BH concluded a feasibility study for a Stabilisation and Association Agreement (SAA) with the EU in November 2003 that requires it to comply with a number of measures prior to negotiation of an SAA. In addition, BH concluded bilateral Free Trade Agreements (FTAs) with neighbouring countries, providing market access for BH exports (but resulting in limited export expansion except with Croatia). BH and Serbia and Montenegro (S&CG) are the only countries in the region that are not WTO members. Eventual WTO membership will require significant strengthening of BH laws, institutions and practices. Internal (domestic) barriers to internationalization for BH SMEs suggest that an effective domestic business environment may be necessary for successful international engagement.2 For example, the informal (shadow) economy in BH is estimated at 34 per cent of GDP (higher estimates are common) and informal firms tend to be SMEs. The shadow economy is driven by high taxes, social security contributions and government regulations. Its effects include loss of government revenue, unfair competition for the formal sector and corruption. SMEs that participate in the informal economy to avoid onerous business registration procedures and taxes are unable to develop legitimate international business activities. Access to credit is necessary to finance international activities and to develop valueadded products demanded in world markets. SMEs in BH have great difficulty accessing

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short-term bank loans (World Bank, 2005, p. 82). BH has not achieved a single, internal, economic space that can serve as a solid domestic platform for internationalization. BH lacks institutions and legislation to certify exports to meet EU standards. In 2005, only four BH companies had CE certification (World Bank, 2005, p. 49). The infrastructure, processes and institutions for trade facilitation are inadequate. These include communication and transport infrastructure; port and border facilities for reliable and speedy passage of goods; efficient processing of documents to reduce customs clearance times; and the absence of corruption in customs transactions. Finally, a favourable business environment is essential to attract FDI with its dynamic spillover effects on financial resources, transfer of know-how, and international marketaccess for local producers. Foreign investment stimulates the international integration of companies through networks and know-how. FDI inflow to BH was only US$230 million in 2002. The cumulative FDI inflow to BH between 1989 and 2002 was the lowest among eight Southeast European countries in both volume and per capita (Broadman et al., 2004, p. 18). The FDI–GDP ratio in BH is 2.8 per cent (European Commission, 2004, p. 15). Vegafruit: a case in point Introduction In the best of times, it is a challenge to create and manage a company in Bosnia and Herzegovina. This explains the small number of recorded SMEs in BH as well as the large share of the informal economy. The World Bank’s annual snapshot (Table 7.6) of national requirements for starting a business in 2004 sheds harsh light on BH in both its regional and OECD contexts. Compared to 2004, the year 1994 in BH was not the best of times and starting a business was infinitely more complicated and difficult than ten years later. The war was in its third year. By the end of 1995, out of a population of 4.4 million, 250 000 people died or went missing, more than 60 per cent of the population was internally displaced, and more than one million people left the country (World Bank, 2005, p. 2). The policy of ‘ethnic cleansing’ forced many people to leave their homes. Short history of Vegafruit: quick growth and development Vegafruit Ltd was founded in June 1994 during the Bosnia war by a group of refugees from the Doboj region in northern BH who were forced from their homes. They established a factory in a small place called Brijesnica Mala, 10 kilometres east of Doboj and eight kilometres west of Gracˇanica, in an area under the control of the BH Army. During the Table 7.6

Starting a business (2004)

Indicator

BH

Regional Avg

OECD Avg

Number of procedures Time (days) Cost (% of income per capita) Min. capital (% of income per capita)

12 54 46.2 65.0

9 42 15.5 51.8

6 25 8.0 44.1

Source: World Bank, Doing Business (2004).

Internationalization of SMEs in Bosnia and Herzegovina 101 next 11 years, Vegafruit became the largest BH producer and exporter of a wide range of products based on fruit and vegetable processing, including juice production. Vegafruit is the subject of this case study because its success in the face of adversity exemplifies the entrepreneurial spirit. It has successfully internationalized in export intensity, the scope of its presence in foreign markets and the level of its international activity. It operates in a technically challenging industry for international business but met the highest international quality standards and achieved the value-added products that BH industry requires for sustained economic development. The main founders of Vegafruit were Muharem Salihbasˇ ic´ (61) and his brother Fadil Salihbasˇ ic´ (55). Muharem Salihbasˇ ic´ had been CEO of Bosanka Doboj, a large processor of fruits and vegetables in the former Yugoslavia (the fourth-largest factory of its kind in FY). After fleeing Doboj, Salihbasˇ ic´ and his family stayed in Mala Brijesnica with close relatives where he drew on his previous experience to start the same kind of business he had managed at Bosanka Doboj. With few financial means, he joined with his brother, a few relatives and close friends to initiate the manual production of two products: prune jam and tomato concentrate. Muharem Salihbasˇ ic´’s experience, knowledge of technology, clear business vision and personal charisma led Vegafruit to excellent growth in its first year of operation. Today it produces 180 different products based on fruit and vegetable processing, including juices (Table 7.7). The company grew from 1994 to 2004 with an average annual increase in sales (15.5 per cent), products (17 per cent), assets (32 per cent), equity (45 per cent) and employment (15 per cent). During the 11 years after the company was founded, several key events punctuated its development. Although the company achieved significant growth in 1995 even during wartime, 1996 and 1997 were crucial for company development. In this period, USAID spotted Vegafruit’s potential and provided significant support. USAID’s Business Consulting Department provided business consulting (in particular in marketing) and educated company employees. In 1997, USAID’s Business Finance Department extended Vegafruit a loan of 2 million euros at 9.5 per cent interest rate, requiring no collateral. Four Table 7.7

Vegafruit growth and development indicators

Year

Production (tons)

Sales (€)

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

230 2 124 4 600 4 880 7 708 7 447 10 272 10 500 14 600 15 680 15 991

260 759 2 423 524 3 931 835 5 660 001 7 297 158 7 158 598 8 208 791 8 947 608 10 481 484 12 576 246 13 411 186

Profit Profit after tax margin 5 113 79 250 256 157 68 002 278 654 230 081 95 572 179 289 353 315 327 227 409 545

Source: Vegafruit income statement.

1.96 3.27 6.51 1.20 3.82 3.21 1.16 2.00 3.37 2.60 3.05

Assets

Equity

No. of products

No. of employees

202 983 1 037 411 1 490 416 4 110 787 5 849 179 5 879 857 5 879 857 7 581 436 9 324 430 13 054 730 13 417 376

12 271 72 092 283 256 340 520 1 410 143 1 512 401 1 819 177 2 475 708 2 752 795 3 272 675 3 662 906

6 12 33 48 56 61 66 70 125 155 180

17 28 109 115 171 180 180 224 229 232 235

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months after receiving the loan, Vegafruit constructed its first production hall and purchased basic equipment for processing fruits and vegetables. The production hall permitted Vegafruit to consolidate production that had been scattered over three rented facilities. In April 1997, all equipment was moved to the new production hall. In August 1997, an additional investment of €1.3 million was used to complete the production hall and purchase additional processing equipment. With these investments, by 1997 Vegafruit had established the foundation for accelerated and continuous growth and to explore foreign markets. The next critical year for company development was 2001. Vegafruit purchased and activated an automated line for non-carbonated juice bottling. This investment made Vegafruit a significant producer of diverse beverages. The bottling line had an annual capacity of 18 million bottles of juice. Although Vegafruit juices in glass bottles quickly became recognizable on the market, management decided to purchase machinery for packaging juice in tetra pack boxes. With the tetra pack juices, Vegafruit achieved a product that is recyclable, hygienically packed, sealed, easy to open, pour and recap, and has a longer shelf-life than glass packaging. It is also easier and cheaper to transport. In 2002, Vegafruit purchased a tetra pack filling line and tetra pack boxes, as well as equipment for environmental improvements to the factory. In the following years, Vegafruit used diverse loan arrangements to introduce the technology base for mass production of different products and infrastructure improvements for the entire factory, and to purchase land for future expansion. At present, Vegafruit in Mala Brijesnica covers 57 000 m2, which includes 10 000 m2 of production facilities including the management building and shop. The conditions exist for the further expansion of production capacities in Mala Brijesnica. After 2000, Vegafruit went beyond organic expansion and grew through investments in other companies. In 2002, Vegafruit increased its production capacity when, through the BH process of privatization of state-owned companies, it purchased shares in Bosnaprodukt, a fruit and vegetable processing company in Gradacac. Vegafruit as a company and its owners purchased more than 70 per cent of Bosnaprodukt shares. Since 2002, the total investment by Vegafruit has been about 1.4 million euros. Vegafruit subsequently organized a line for jam production inside Bosnaprodukt and built a cooling tunnel for fresh fruit and vegetable preservation. In 2002, Vegafruit invested about 150 000 euros to renovate the production hall and equipment for jam production at Bosnaprodukt. In order to improve production quality and management, several Vegafruit staff were temporarily transferred to manage Bosnaprodukt’s operations, especially jam production. Apart from processing fruits for Vegafruit, Bosnaprodukt processes fruits and vegetables for its own needs. The production capacity of the factory is 4120 tons per year. It runs two work shifts and is operating at 70 per cent capacity. In 2004, it processed about 7000 tons of fruits and vegetables. In 2003, Bosnaprodukt recorded its first profit in 15 years. Table 7.8 shows Vegafruit’s financial development since 2000. Business model Drawing on Muharem Salihbasˇ ic´’s vision, Vegafruit established a business model based on its competitive advantage in a few core competencies. These include advanced production and operations technology, cooperative relations with raw material providers and a strong organizational culture.

Internationalization of SMEs in Bosnia and Herzegovina 103 Table 7.8

Vegafruit balance sheet (2000–2004) December

Assets Current assets Inventory Accounts receivable Short-term investment Cash Long-term assets Intangible assets Property plant & equipment Investments Total assets Liabilities Current liabilities Long-term debts Retained earnings Owners equity Common stock Reserved encumbrances Total liabilities and owner’s equity

2000

2001

2002

2003

2004

3 060 135 2 273 329 639 645 54 100 93 061 2 916 185 61 174 2 771 846 83 166 5 976 321

4 491 962 2 758 024 1 433 171 218 838 81 929 3 088 823 60 238 2 908 058 120 526 7 580 785

6 119 196 3 684 498 2 246 954 121 135 66 762 3 716 576 163 217 3 437 097 116 262 9 835 772

8 347 499 4 246 601 3 525 631 469 391 105 876 4 707 231 99 697 4 043 523 564 012 13 054 730

7 862 975 3 540 340 3 638 286 589 774 94 575 5 554 400 112 129 4 811 444 630 827 13 417 376

3 416 719 873 322 1 412 719 1 686 279 0 273 560

4 064 953 1 040 124 1 592 007 2 475 708 610 140 273 560

5 638 320 1 439 485 1 899 307 2 757 967 585 100 273 560

6 052 921 9 782 056 2 226 594 3 272 675 519 314 526 767

5 887 730 5 152 843 409 553 3 662 906 2 745 907 507 445

5 976 321

7 580 785

9 835 772

13 054 730

13 417 376

Source: Vegafruit.

Ownership Vegafruit is a private company of 12 owners, eight of whom work at the factory. Factory management and administration own 84 per cent of the equity. Muharem Salihbasˇ ic´ has the majority with 23 per cent. There are no plans for Vegafruit to go public. Products Vegafruit makes about 180 different products, divided into four product groups (Table 7.9). The intention is to build differentiated brands within the generic Vegafruit brand. The Vegafruit brand is protected under the Madrid Convention in 48 countries and has widespread recognition in Bosnia and Herzegovina and elsewhere. Besides their high quality, all Vegafruit products have attractive, modern and recognizable packaging, good marketing slogans and top designs. Vegafruit Organic is a brand introduced in 2004 and represents Vegafruit’s inclination towards production of organic foods. As will be seen later, organic products have special potential for international market development. Quality Product quality is a key element of Muharem Salihbasic´’s business philosophy and underpins Vegafruit’s entire business system. Aware of the importance of quality for the success of the company and especially its presence on foreign markets, Vegafruit organized its production process in accordance with the highest quality standards. As a result,

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Table 7.9

Product groups

Brands 1 2 3 4

Vegy – vegetable based products Fruby – fruit based products Svity – fresh fruit juices (different packages and sizes) Vegafruit Organic – organic products (fruit and vegetable-based products)

% of sales 45 27 25 3

Vegafruit obtained the following certifications that provide access to foreign markets: (1) ISO 9001:2000, (2) FDA (Food and Drug Administration) certification for entry to the US market (Vegafruit is about to adjust this standard to the new US standard on Bio Terrorism), (3) HACCP (Hazard Analysis and Control Critical Points), issued by TIF Institute Bayern, Germany, and (4) KRAV, a Swedish certificate on organic food production. Vegafruit expects shortly to satisfy all conditions necessary to meet the following additional standards necessary for widespread presence on world markets: (1) ISO 14001, which pertains to ecology, clean production, protection and preservation of the environment, and (2) IFS (International Food Standards). Production Modern, competitive technology underlies Vegafruit’s production strategy. Vegafruit’s production capacity is 15 500 tons per year and its facilities run at 100 per cent utilization. Over the past 11 years, Vegafruit equipped the following four production lines with advanced technology: (1) fruit processing, (2) vegetable processing, (3) juice, syrup production and packaging, and (4) PET packing production. In addition, Vegafruit acquired extensive infrastructure: cooling tunnels, storage and energy facilities. Procurement of raw materials (fresh fruits and vegetables): Vegafruit’s crucial core competence Vegafruit procures about 90 per cent of its raw material inputs from local producers, via a broad network of cooperatives and individual producers. Vegafruit operates with nearly 7000 cooperants, farmers throughout Bosnia and Herzegovina, and fosters excellent relations with them. Vegafruit provides the seeds for its cooperants as well as professional assistance in cultivating fruits and vegetables. Vegafruit treats them as partners and promptly pays their claims (notable in the BH business environment), thereby building long-term relations. The trust that Vegafruit enjoys with its cooperants is a keystone of its business. Vegafruit expresses this relationship in a slogan that expresses its strategic differentiation: ‘production from soil to customer’. The potential of such cooperation arises from the natural advantages that Bosnia and Herzegovina has in the cultivation of fruits and vegetables as well as its hundred-year tradition of cultivation in small village farms. Raw fruits and vegetables Fruit production in BH consists mainly of plums, pears, apples, cherries, sour cherries, melons, strawberries, raspberries, blackberries and some peaches (mainly in the Mostar area). About 280 000 tons of fresh fruit are produced and marketed each year throughout BH, with a total market value of about 210 million euros, which almost covers local

Internationalization of SMEs in Bosnia and Herzegovina 105 demand for fresh fruits, especially during summer. Fruit shortages are noted not only in off-season periods but also during the entire year, owing to the demand of fruit processing industries for almost all types of fruit juices except plum, apple, orange and grape. The current total BH market potential for fruits is estimated to be 350 million euros per year. BH vegetable production amounts to 570 000 tons each year. In the Federation (FBH), most agricultural production consists of vegetable crops (62 per cent of all crops). Vegetable production includes potatoes, cabbages, peppers/chilli peppers, mushrooms, onions, tomatoes, carrots and beans. The level of vegetable production in BH is nowhere near its potential because many fields and irrigation systems have not recovered from war devastation, including mines. Another constraint is that vegetable processors are not yet recognized as a primary consumer of fresh vegetables and many producers instead sell their produce on green markets with uncertain spot market sales. This marketing orientation leads to product waste from unsold goods and often unfavourable prices. More than 97 per cent of BH fruit and vegetable production occurs on private farms and orchards. About 55 000 hectares of land in FBH and 45 000 hectares of land in RS are allocated to such agricultural production. The quality of land in the RS is more suitable for agriculture than in the FBH. About 50 per cent of the population in RS are farmers owning an average of 2.5 hectares. Average yields, in tons per hectare, are low by western standards owing to a lack of proper irrigation and adverse climatic conditions. The main strengths of BH production of raw fruit and vegetables are (1) traditionally good qualities of local plant varieties; (2) high quality seeds, scientific expertise and support available through local Institutes of Agriculture. BH potential for production of fruits and vegetables as a raw-material base is fundamental to Vegafruit’s competitive advantage, particularly in international markets. According to some evaluations, agricultural soil in Bosnia and Herzegovina is six times less contaminated than similar soils in western Europe thanks to the low level of pesticides. This represents the foundation for a future orientation of Vegafruit towards production of organic food. People: human resources Vegafruit employs nearly 250 people, and seasonally it hires an additional 450 to 500. In addition, it maintains close relationships with 7000 collaborative producers. One of Vegafruit’s major strengths is its skilled, knowledgeable, dedicated and hardworking staff. Many Vegafruit employees, seasonal workers and collaborators have acquired an emotional bond with Vegafruit. To work in Vegafruit is seen as a privilege. This can be attributed to the influence of Muharem Salihbasˇ ic´, who is regarded as honest and trustworthy. His charisma and personality convey the essential values of the company. Charismatic governance and a value system that focuses on care for people and offers a wide spectrum of support to employees, seasonal workers and collaborators represents one of Vegafruit’s core competencies. Internationalization of Vegafruit Foreign trade business of Bosnia and Herzegovina and position of Vegafruit In its foreign trade accounts, Bosnia and Herzegovina shows a large imbalance between imports and exports, as indicated earlier and shown in Table 7.10.

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Source:

Chamber of Foreign Trade and Statistics Bureau.

1 007 082 3 637 409 2 630 326 27.69

2000

BH foreign trade accounts (€)

Export (000 €) Import (000 €) Trade balance (000 €) Exports as percentage of imports

Year

Table 7.10

923 763 3 355 914 2 432 151 27.53

2001 965 483 3 518 358 2 552 875 27.44

2002 1 182 726 4 231 016 3 260 528 27.95

2003

1 530 919 4 791 448 3 260 528 31.95

2004

1 175 971 3 374 526 2 198 555 34.85

2005 (January–August)

Internationalization of SMEs in Bosnia and Herzegovina 107 Table 7.11

BH and Vegafruit trade in food, fruits and vegetables (2003)

Structure

Export (€)

Import (€)

Coverage (%)

Total food – BH Fruit and vegetable products

73 300 956 8 871 371

923 038 476 19 913 862

7.92 44.55

In the first eight months of 2005, in the trade category ‘food and livestock’, BH covered only 11.3 per cent of imports through exports. Of these exports, 19.2 per cent were ‘fruits and vegetables’, 15.2 per cent ‘dairy products and eggs’, 5.9 per cent ‘drinks and tobacco’ and 9.3 per cent ‘meat and meat products’. During the same period, the largest export share in the ‘food and livestock category’ was ‘fruits and vegetables’ amounting to 13.8 million euros, while a significant share was ‘cereal and cereal products’, amounting to 9.76 million euros. In the first eight months of 2005, the greatest import share in ‘food and livestock’ was ‘cereal and cereal products’ (87 million euros) followed by ‘fruit and vegetables’ (71 million euros). Significant imports were also in ‘meat and meat products’ (49 million euros). Table 7.11 provides an overview of the 2003 BH trade exchange in food, fruit and vegetable products. In the food sector, only 8 per cent of imports were covered by exports, (compared with 114 per cent in ‘timber and leather’). Overall, more than one-quarter of total BH imports are in the ‘food’ sector, while ‘food’s’ share in total exports is only 5 per cent. During the same year, Vegafruit’s exports were worth 5 001 457 euros, or 56 per cent of total BH food exports. Their imports were 3 701 753 euros (of which 500 thousand euros were raw fruit and vegetables). Table 7.12 compares Vegafruit’s fruit and vegetable product exports in 2003 with the total for the entire Federation of Bosnia and Herzegovina. In some product categories, Vegafruit represents a large majority and overall it is responsible for half of FBH fruit and vegetable exports. Winning foreign markets The initial phase of Vegafruit’s internationalization replicates the model of passive exports in response to unsolicited orders. Later, company management adopted a proactive posture through participation in trade fairs. This strategy proved effective as they found business partners at almost every fair they attended. Also, some buyers initiated contacts via the Internet. Currently, fairs and a website are the main drivers of Vegafruit’s internationalization. Vegafruit exports its products through distributors who handle sales and distribution in specific countries. Such indirect export is characteristic of early-phase internationalization and substitutes contractual relationships for the higher commitment of physical presence through sales subsidiaries. Vegafruit has strategic alliances with several business partners, including Centroproizvod in Serbia and Montenegro (S&CG), Decka in Germany and Dobrava in the US. Certain products of Vegafruit appear in foreign markets under the brand of its business partners. Some 70 per cent of Vegafruit production appears under the Vega brand, with 30 per cent appearing under the brands of these strategic allies.

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Vegafruit.

4 103 435

Total

Source:

2 582 646 1 622 171 1 473 157 284 526 429 104 50 885 243 592

Vegetables, fruits and other warm processing products Jams, marmalades, mashed fruits, pastas Cucumbers, raw and pickled Additives for sauces, spices Other fruit and vegetable based products Tomatoes, concentrated and tinned Carbonated water, mineral water and juices

2001 2007 0707 2103 2106 2002 2202

Kg

€

4 924 464

2 088 197 1 487 900 575 081 266 517 287 566 48 475 170 727

‘Vegafruit’

Title

FBH and Vegafruit fruit and vegetable exports (2003)

Tariff/Fee

Table 7.12

18 056 434

2 919 966 2 248 139 1 534 517 362 562 3 200 232 63 047 7 727 971

Kg

9 889 434

2 278 377 2 071 964 602 103 362 431 2 130 031 55 202 2 389 322

€

Federation of B&H

49.80

91.65 71.81 95.51 73.54 13.50 87.80 7.14

%

Participation (share)

Internationalization of SMEs in Bosnia and Herzegovina 109 Vegafruit began penetration of foreign markets in 1997. Its international market presence increased significantly after 1997 as new markets opened in the US, England, the Netherlands, Austria, Germany, France, Sweden and Canada. By 2003, Vegafruit earned 4 924 464 euros on foreign export sales, representing 40 per cent of total income. Although exports fell in 2004 compared to 2003, owing to harsh weather and poor crop yields, Figure 7.1 still shows a trend of growing exports in 1998–2004. In 1997, Vegafruit exported exclusively to markets of FY, namely Slovenia (22 394 euros), Croatia (378 732 euros) and Macedonia (167 515 euros). By 2004, Vegafruit’s exports to Slovenia had grown ten times, to 259 343 euros, and exports to Croatia increased five times, to 2 044 618 euros. Interestingly, before 2000, Vegafruit made no exports to BH’s eastern neighbour, Serbia and Montenegro (S&CG), a reflection of political relationships. In 2000, Vegafruit made a symbolic export to Serbia and Montenegro (S&CG) of 11 693 euros. By 2004, this had increased to 910 615 euros. Currently, Vegafruit’s exports to countries of FY are about 3 214 576 euros. In 2004, total Vegafruit exports amounted to 4 092 803 euros, and 78.54 per cent went to countries of FY. Vegafruit’s preponderance of exports to countries of FY fits the

Export in € & trend line

Export & trend line 6 000 000 5 000 000 4 000 000 3 000 000 2 000 000 1 000 000 0 1998

Figure 7.1

1999

2000

2001 Year

2002

2003

Export and trend line Vegafruit Export in 2004

11.82%

Former Yugoslav Republics

1.4%

European Countries

8.24%

USA and Canada

78.54%

Figure 7.2

Vegafruit foreign market shares (2004)

Other markets (Middle East, Far East and Australia)

2004

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Table 7.13 Country

Vegafruit exports by destination (in euro) 1997

Slovenia 22 394 Croatia 378 732 Macedonia 167 515 Sweden Germany Denmark Canada Switzerland Austria S&CG France USA Holland England Dubai Hungary Libya S. Arabia Australia Total export 568 640 % of sales 10.05

1998 28 672 858 835 149 292 35 689 76 536 6 604

1999 104 941 796 157 129 569 110 180 244 781 0 50 425 87 137 18 532

2000

2001

2002

2003

2004

97 273 106 312 33 014 462 587 259 343 400 054 1 199 630 2 197 286 2 523 931 2 044 618 45 445 53 800 77 312 3 910 0 80 892 180 261 238 042 156 348 127 782 268 453 195 172 51 940 75 474 79 216 0 0 0 0 0 45 817 117 028 146 366 233 890 231 429 0 0 0 54 678 29 840 40 101 33 794 378 308 12 664 0 11 693 15 635 23 966 887 809 910 615 7 878 3 964 10 073 0 0 86 182 163 474 262 166 467 378 252 315 15 629 32 776 19 727 27 217 53 482 39 902 9 200 6 655 33 256 13 656 24 240 10 175

1 155 628 1 541 721 1 083 788 2 084 700 3 451 249 4 958 533 4 092 803 15.84 21.54 13.20 23.30 32.93 39.43 30.52

‘psychic distance’ paradigm of export development and internationalization. These countries are nearby or contiguous, present no language barrier, share common cultural backgrounds and historical experience, and have a legacy of established business relationships that existed before the dissolution of FY. In 2004, Vegafruit’s exports to EU countries were 8.24 per cent of its total. Since 66 per cent of all BH exports in 2002 went to EU markets, this suggests significant potential for improvement in Vegafruit’s exports to the EU. The US and Canada represented 11.82 per cent of the total. The remaining 1.4 per cent of exports goes to the United Arab Emirates, Saudi Arabia, Malaysia, Libya and Australia. Table 7.13 provides a time line of the development of Vegafruit’s export structure by foreign market destination. Vegafruit’s pace of market expansion grew from initial foreign market entry to three countries in 1997, three countries in 1998, three countries in 1999, three countries in 2000, one in 2001, none in 2002, two in 2003, and four in 2004. By the end of 2004, Vegafruit had established a market presence in 19 countries. Two things are notable about this pattern of internationalization. First, although Vegafruit was not a ‘born global’ company, it immediately entered proximate foreign markets following the external funding that permitted improvement of its production facilities. Second, although its initial foreign market entry in 1997 was in ‘psychically’ close countries like Slovenia, Croatia and Macedonia, in the very next year (1998) it made the leap to Sweden, Germany and Denmark and the following year to Canada. By 2004, it was exporting to the Middle East.

Internationalization of SMEs in Bosnia and Herzegovina 111 During 2004, Vegafruit began negotiation for investment in a factory in Libya, its first venture in foreign direct investment in production facilities. Fadil Salihbasic´, a Vegafruit director and owner, had previously worked in Libya on projects for the Sarajevo-based company Energoinvest. Drawing on contacts established during this time, Vegafruit acquired a business partner in Libya to represent its products. Later, during a trade fair in Tripoli in April 2004, this partner shared information about the prospective sale of a factory for fruit and vegetable processing. A feasibility study suggested the desirability of a Vegafruit investment in the factory. This factory currently produces several products: canned fruit juices; fruit concentrates from lemons, oranges and mandarins; canned tomato concentrate; and a spicy traditional dish made from paprika. Vegafruit planned to produce its four brands in the factory (Vegy, Fruby, Swity and Vegafruit Organic) for sale in markets of Tunisia, Algeria and Egypt, and later to all of Africa. During the visit of a BH trade delegation to Libya following the trade fair, negotiations commenced about the purchase of the factory. Vegafruit planned to acquire 67 per cent ownership. By August 2005, Vegafruit had purchased equipment for installation in the factory as part of its plan to invest two million euros in a tetra pack filling line as well as in modernization of existing production equipment. This development would have marked the culmination of the logical path of internationalization through sequential stages of increasing commitment from export to foreign direct investment through acquisition. It also suggested the moderating effect of personal contacts and network ties in providing information about opportunities and a relationship of trust that permits deepening the internationalization process (Oviatt and McDougall, 2005). Unfortunately, the deal fell through. Vegafruit planned to finance its investment in the factory with a bank loan. In mid-September 2005, the loan arrangement did not materialize. Vegafruit sold the equipment it had purchased to another Sarajevo company, MIMS, which replaced Vegafruit in the Libya project. Future opportunities Vegafruit has identified organic food production as a market niche that can accelerate its penetration of international markets. As shown in Table 7.9, Vegafruit Organic is one of four Vegafruit brands, but has only a 3 per cent share in overall production. Vegafruit intends to bring this brand into an equal position with other brands through an increase of organic production, which could be explicitly oriented towards foreign markets. Organic products are increasingly demanded internationally and they are a high valueadded form of production that represents the only convincing strategy for sustainable BH economic development. Vegafruit has decided to start production of organic forest fruits and first-class cultivated vegetables. It will segment organic products into four groups: (1) organic marmalade made of first-class forest fruits like sipak (dog-rose berry), drenjak (cornel berry) and apple; (2) organic jams made of first-class forest fruits (strawberry, blackberry, raspberry); (3) organic kompoti (stewed fruits) made of first-class forest fruits (blueberry, blackberry and raspberry); (4) organic pasteurized cucumbers and organic pasteurized cvekla (beet root).

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Conclusions and discussion The BH profile and Vegafruit case study presented in this chapter lead to several observations. First, the available data clearly affirm that BH company size is related to international business activity. Small firms export less and have fewer ‘holdings or operations’ and joint ventures abroad. This conclusion is not universally accepted in the literature, although it is supported in many cases (Calof, 1994). It is certainly affirmed in the present case and has both intuitive and empirical appeal. Small companies often lack the financial resources, information and experience for effective international operation. Second, Vegafruit exemplifies many prevailing precepts about the internationalization process, although with a peculiar Balkan flavour. By many standards, Vegafruit was an early internationalizer, launching its first foreign market entry just three years after founding and immediately after formative investments in productive capacity. This ‘early mover’ status was largely a consequence of the idiosyncratic situation following the dissolution of FY. Many companies had existing facilities and networks throughout FY that suddenly became ‘international’. Vegafruit was a new venture but its first foreign markets were in countries with little psychic distance that had recently been part of the same country. Its initial exports were responses to unsolicited inquiries. Subsequently, Vegafruit rapidly expanded its foreign market presence and quickly entered markets at a considerable geographic and psychic distance. Its rate of international market expansion after 1997 dramatically outpaced that of SMEs in the BEEPS2 survey. Vegafruit exports its products through indirect channels, which is typical of small and medium-sized firms with few operational capabilities abroad. Only recently has Vegafruit taken steps to acquire foreign production facilities. This latest initiative was a clear instance of network effects in opportunity identification and in fostering a deeper level of commitment to international engagement through foreign investment. Third, the BH situation highlights the importance of the domestic business environment in providing a supportive infrastructure for international business. This aspect of internationalization has not been widely emphasized. Most studies focus on external or firm-specific barriers or stimuli to international business. Some attention has been given to domestic environments and FDI attraction (see European Commission, 2004, p. 21), but there has been little focus on domestic environments as a platform related to internationalization. In BH, and probably in other transitional economies, various aspects of the domestic environment have inhibited SME export capacity as well as other forms of business. These include the prevalence of corruption, the informal economy (and the conditions that lead to it), access to finance, the fragmented domestic economic space, institutional effectiveness and standards, and physical infrastructure. Notes 1. This chapter adopts the EU definition of SMEs. The EU defines medium-sized enterprises as having fewer than 250 employees, less than 40 million euro annual turnover, and an annual balance sheet total of less than 27 million euros. Small enterprises have 10–49 employees, annual turnover less than 7 million euros, or annual balance sheet total less than 5 million euros. Micro-enterprises have fewer than 10 employees (http://www.europa.eu.int/scadplus/leg/en/lvb/n26001). 2. The World Bank online database Doing Business succinctly compares the difficulties of doing business around the world. It identifies indicators of the ease or difficulty of starting a business, hiring or firing workers, registering property, getting credit, protecting investors, enforcing contracts and closing a business (http://www.doingbusiness.org/Default.aspx).

Internationalization of SMEs in Bosnia and Herzegovina 113 References Andersen, O. (1993), ‘On the internationalization process of firms: a critical anlaysis’, Journal of International Business Studies, 24(2), 209–31. BEEPS2, EBRD/World Bank Business Environment and Enterprise Performance Survey, available at http://info.worldbank.org/governance/beeps 2002/. This is a survey of managers and owners of firms across 26 countries of Eastern Europe, the former Soviet Union, and Turkey. The survey was carried out twice, in 1999 and 2002, to generate comparative and temporal measurements of the quality of governance, the investment climate and the competitive environment, which can then be related to different characteristics of the firm and to firm performance. Over 180 BH firms participated. The sample of firms differed in the two surveys and overrepresented smaller firms in all 26 countries. Broadman, Harry G., James Anderson, Constantijn A. Claessens, Randi Ryterman, Slavova Stefka, Maria Vagliasindi and Gallina A. Vincelette (2004), Building Market Institutions in South Eastern Europe: Comparative Prospects for Investment and Private Sector Development, The World Bank, Washington, DC. Calof, J. (1994), ‘The relationship between firm size and export behavior revisited’, Journal of International Business Studies, 25(2), 367–87. Dana, L.P. (1999), ‘Business and entrepreneurship in Bosnia–Herzegovina’, Journal of Business & Entrepreneurship, 11(2), October, 105–18. European Commission, Directorate-General for Economic and Financial Affairs (2004), The Western Balkans in Transition, Occasional Papers, No. 5, January, ISSN 1725-3209. Johanson, J. and J.-E. Vahlne (1977), ‘The internationalization process of the firm: a model of knowledge development and increasing foreign commitment’, Journal of International Business Studies, 8, 23–32. Johanson, J. and J.-E. Vahlne (1990), ‘The mechanism of internationalization’, International Marketing Review, 7(4), 11–24. Johanson, J. and J.-E. Vahlne (2003), ‘Business relationship learning and commitment in the internationalization process’, Journal of International Entrepreneurship, 1(1), 83–101. Oviatt, B.M. and P.P. McDougall (1994), ‘Toward a theory of international new ventures’, Journal of International Business Studies, 25(1), 45–64. Oviatt, B.M. and P.P. McDougall (1997), ‘Challenges for internationalization process theory: the case of international new ventures’, Management International Review, 37(2), 85–99. Oviatt, B.M. and P.P. McDougall (2005), ‘Defining international entrepreneurship and modeling the speed of internationalization’, Entrepreneurship Theory and Practice, 29(5), 537–54. US Embassy Sarajevo, Bosnia and Herzegovina Country Commercial Guide (2004), (http://sarajevo.usembassy. gov/hlights/files/ccg 2005.doc). World Bank (2005), Bosnia and Herzegovina Country Economic Memorandum, Report No. 29500-BA, May (http://siteresources.worldbank.org/INTBOSNIAHERZ/Resources/BHCEM.pdf).

8

Internationalization of Bulgarian SMEs Kiril Todorov and Kostadin Kolarov

Introduction Bulgaria Bulgaria is one of the first ever European states, established in 681 AD. Bulgaria has a rich history that goes back to ancient times (Dana, 1999). Its khans, Asparoukh, Krum (803–814 AD) and Omurtag (814–831 AD) turned it into a mighty power in south-eastern Europe. In 855 AD, the brothers St Cyril and St Methodius created the Slavonic (Cyrillic) alphabet. In 865 AD, Knyaz Boris I Mikhail (852–907 AD) did away with paganism and introduced Eastern Orthodox Christianity as the official religion in Bulgaria. The Byzantine Empire recognized Mikhail as Tsar of the Bulgarians. In 1396, Bulgaria fell under the Ottoman yoke that lasted five centuries. On 3 March 1878, following the Russian–Turkish War, a peace treaty was signed, putting an end to Ottoman rule. There followed the period of the Third Bulgarian Kingdom. After World War II, Bulgaria fell under the influence of the USSR. In 1990, in the course of the changes in the Eastern Bloc countries, the first free elections were held and the new democratic Constitution of Bulgaria was passed in 1991. Bulgaria joined NATO in 2004 and plans to join the European Union (EU) in 2007. Situated in south-eastern Europe, Bulgaria occupies the north-eastern part of the Balkan Peninsula. To the North, via the Danube River, it borders on Romania, to the West, on Serbia and Macedonia. To the South its neighbours are Greece and Turkey. To the East, Bulgaria touches the Black Sea, which links it also to Russia, Ukraine and Georgia. The Black Sea borderline is 378 km (240 miles) long. The country’s total territory is 111 000 sq. km (43 000 sq. miles). The population of Bulgaria is about eight million. The capital city of Bulgaria is Sofia, with a population of over 1.2 million. The other main cities are Plovdiv (pop.377 637), Varna (pop. 297 090), Bourgas (pop. 188 367) and Rousse (pop. 185 425). Bulgaria has a strategic geographic position with relatively well-developed transport and telecommunications infrastructure combined with a qualified and comparatively cheap labour force. The average life expectancy in 2003 was 72.1 years (68.7 for men and 75.6 for women). The main ethnic groups living in Bulgaria are Bulgarians – 86 per cent, Turks – 9 per cent, and Roma – 5 per cent. The official language is Bulgarian, from the Slavonic group of languages, written in the Cyrillic alphabet. One of the strengths of Bulgarian society is its traditional studious culture. This culture is the key factor not only for the availability of an intelligent and qualified workforce but also for the many individual successes that result from it, including those abroad. Now this culture creates the knowledge base needed for successful internationalization of Bulgarian businesses. Some facts that confirm the quality of education are the following: second in the world, based on the Scholastic Aptitude Test scores for 114

Internationalization of Bulgarian SMEs

115

secondary students, fourth in literacy of elementary students, fifth in the world in sciences (secondary education). Bulgarian secondary education has a strong tradition in mathematics and physics and Bulgarian students have won many first places in different international competitions. Bulgaria now has 39 universities, 25 colleges and 460 secondary, vocational and technical schools. More than 45 per cent of Bulgarians can carry on a conversation in one of the major European languages (23 per cent Russian, 12 per cent English, 9 per cent Turkish, 7 per cent German, 6 per cent French, 2 per cent Greek, 1 per cent Spanish, 1 per cent Italian, 3 per cent others).1 More than 18 per cent of Bulgarians have higher (university) degrees, ranking third in Europe. Many young people study abroad: nearly 3000 Bulgarians are currently enrolled in technical universities in Germany alone. On an annual basis, Bulgaria’s universities and colleges produce more than 2000 graduates with computer science degrees, 700 graduates with communications technology degrees and 5000 graduates with engineering degrees. Bulgaria employs more than 20 000 professionals in the IT sector and ranks third in the world for certified IT professionals per capita, eighth in the world in terms of absolute numbers. Following the removal of the communist regime in 1989, Bulgaria has become a parliamentary republic ruled by a democratically elected government. The constitution provides for the separation of powers amongst the executive, judicial and legislative branches and a system of checks and balances. The president is the head of state. The presidency is empowered to conclude international treaties and to schedule parliamentary (or National Assembly) elections. The National Assembly is a unicameral legislative body that consists of 240 members who are elected for a term of four years. Civil law and Criminal law are based on Roman law, accepting compulsory ICJ jurisdiction. Bulgaria has one of the most liberal foreign policy investment laws in the region. In regard to foreign trade Bulgaria has been a member of the WTO since 1996. Bulgaria has signed the European Union Association Agreement, EFTA Agreement, CEFTA membership, established a free trade area with Turkey and effective free trade agreements with Macedonia, Lithuania, Israel and Estonia. Parliament has adopted the Patent Act which entered into force on 1 June 1993 and which is consistent with the European Patent Convention. A copyright law came into effect on 1 August 1993, providing for a high level of protection in major areas for authors, performers and producers. Bulgaria has modern transport infrastructure that offers good communications to the EU countries, to Russia, and the Middle East, and also the Adriatic, the Aegean and the Black Sea. The total length of the railway network is 7353 km, and of the road network 31 404 km. The sea and river (along the Danube river) fleet take an active part in the trade of the country. The major seaports are Varna and Bourgas, and the main Danube ports are Rousse, Lom, Svishtov and Vidin. The main airports are near the cities of Sofia, Bourgas, Varna and Plovdiv. The Bulgarian economy could be described as relatively small, open and dependent on external factors. After a long period of economic difficulties connected with the disintegration of the Soviet Union and COMECOM reaching their peak in the crises of 1996–97, the Bulgarian economy was stabilized and the restoration process was initiated. In recent years the development of the national economy has speeded up considerably as the figures in Table 8.1 show.

116

Sources:

1996 17.43 5.6 547.7 2.9 100.4 1 046 10.1 321 4 809 4 488 505

1997

1999

2000

22.42 23.79 26.75 4.0 2.3 5.4 1.6 7.0 11.3 1.3 0.2 0.6 85.5 89.2 86.9 61 652 702 0.5 5.0 5.6 381 1 081 1 175 4 193 4 006 4 825 4 574 5 087 6 000 537 819 1 002

1998

National Statistic Institute (NSI) and Bulgarian National Bank (BNB).

14.43 9.4 311.6 10.3 97.0 164 1.7 122 4 689 4 568 109

Main economic indices

GDP (BGN bn) Real GDP growth (%) Annual inflation (year-end, %) Budget deficit (% GDP) Foreign debt (% GDP) Current account (USD m) Current account (% GDP) Trade balance (USD m) Exports (USD m) Imports (USD m) FDI (USD m)

Table 8.1 2002

29.71 32.34 4.1 4.9 4.8 3.8 0.6 0.6 78.6 65.1 888 827 6.5 5.3 1 568 1 594 5 107 5 692 6 674 7 286 679 905

2001

34.40 4.5 5.6 0.0 60.5 1 666 8.4 2 474 7 439 9 912 1 419

2003

38.0 5.6 4.0 0.0 63.0 1 806 7.5 3 353 9 859 13 211 2 031

2004

Internationalization of Bulgarian SMEs

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Bulgaria’s economic expansion accelerated in 2004, with estimated real GDP growth surging to 5.3 per cent. This pace of growth makes Bulgaria one of the fastest growing economies in Europe. Official statistics underreport economic activity, with an unofficial market possibly representing an additional 20 to 30 per cent of the official GDP.2 As a result of the deep changes the Bulgarian economy is now dominated by SMEs: about 99 per cent of all the registered enterprises. SMEs development The SME sector begins to play an increasingly important role in the business internationalization – no matter if it is independent or under different forms of cooperation (joint ventures, representation offices, participation in subcontracting chains, cross-border cooperation, trans-border strategic alliances). The share of Bulgarian SMEs’ subcontractors to bigger international companies, however, is still insignificant. In reality such subcontracting would serve as a bridge to EU business without having shocks or suddenly raised barriers, as the case will be of many Bulgarian SMEs. At the same time abolition (limitation) of the different national and international barriers brought both new opportunities and challenges to Bulgarian SMEs. The liberalization of trade with the EU offers significant opportunities for Bulgarian SMEs and their internationalization, but at the same time confronts them with the necessity to manage the increased weight of the non-tariff barriers and the strong competition of the local (EU) SMEs who are subject to purposeful support by the EU. In this dynamic and multicultural business environment SMEs should in time find ‘their room’, otherwise their inherent flexibility would hardly compensate their resource limitation. The role of SMEs in extension of the foreign trade of the country is underestimated by the government institutions and particularly by the commercial policy makers. In this direction there is dormant potential by SME sector. The globalization as a feature of the external transition leads to a significant increase in the requirements of business competitiveness including that of SMEs. This is made on the basis of increased specialization, utilizing Bulgarian competitive advantages. This problem is particularly acute for countries with an open economy such as Bulgaria. The SMEs’ competitiveness can be increased simultaneously in two directions: provision of free access of the import to the Bulgarian market which creates a competitive environment for local production and improvement of access of production of such enterprises to foreign markets by purposeful export policy and concrete measures for encouragement of exports. The present study of the internationalization of Bulgarian SMEs focuses on achievements of the following aims: 1.

2.

Identification of the effects of the increased internationalization of the Bulgarian SMEs’ markets in regard to the new sources of both opportunities and threats, together with the strategies and activities launched by entrepreneurs and managers toward these sources. Assessment of the alternative for the Bulgarian SMEs serving foreign markets and the managerial problems that should be solved for the successful utilization of those alternatives. Besides, special attention should be paid to the scope of the different types of internationalization activities (subcontracting, joint ventures, strategic alliances).

118 3.

Handbook of research on European business and entrepreneurship Development of practical recommendations put to the economic policy makers in Bulgaria so as to support SMEs to use the opportunities but to avoid the threats resulting from the increasing globalization.

Necessity and opportunities for SMEs’ internationalization Until now business internationalization was considered as the ‘reserved perimeter’ of the big companies. In recent years, however, the evidence on the internationalization of smaller companies is increasing. There is also growth of the studies and researchers analysing the motives, forms and problems of SMEs’ internationalization. Furthermore, there are not a few studies which consider business internationalization as some kind of basic, fundamental innovation. Forsgren (1989), for example, sees internationalization as a unique innovation because, in an international environment, the firm has to do for the first time things that it never did before.3 Harrison and Hart consider the internationalization as gradual, evolutionary and innovating, comprising mostly marketing and partly technological elements.4 Other authors include (reasonably) in this innovation also new communication elements, new managerial style and creation (development) of international cultural forms. Some authors ground the uniqueness of SME internationalization with the role of an entrepreneur, personifying the firm’s activity in contrast to a big company where the internationalization process is far more anonymous and formalized. The opportunities for SMEs’ internationalization naturally should be considered in the context of the new economy which, as was mentioned earlier, offers more alternatives for doing business in the international environment, particularly for SMEs. Following Ian Donald,5 the opportunities for SMEs as a result of the activity of the new economy can be summarized as in Table 8.2. But, as always, the medal has two sides. In the case besides the increase of business opportunities in the international environment, the New Economy sets up a number of challenges that SMEs should meet and answer. Again adapting Ian Donald,6 we can present these challenges as in Table 8.3. The increasing internationalization of business and increasing opportunities of SMEs in this context can be seen not only in the developed industrialized countries (there is the example of recent actions in the EU and, in first place, the elimination of the internal Table 8.2 The New Economy and the opportunities for SMEs for business in an international environment Characteristics of the new economy

Opportunities for SMEs

Services Technologies

Low entrance barriers Their use (at first place of ICT) leads to increased effectiveness of SMEs’ activity Flexibility, low costs Achieving economy of scale without additional costs (creation of entrepreneurial networks and strategic alliances – K.T.) Finding new markets

Size Partnership

Globalization

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Table 8.3 The New Economy and the challenges to SMEs in an international environment Characteristics of the new economy

Challenges to SMEs

Services Technologies

Increasing competition (due to the low entrance barriers) There is a trend towards implementation of complex and sophisticated production technologies (expensive for SMEs) SMEs do not enjoy priority attention of the crediting institution because of their limited size, resources and heterogeneity Requires more time and management capacity (owing to multicultural business environment issues) The local markets become weakly protected (which affects mostly SMEs)

Size

Partnership Globalization

borders between the countries which facilitates the internationalization of SMEs). The access of the Eastern European SMEs to the demanding Western markets (mainly Western European) became possible due to the political and economic opening after 1989. But in order to develop a reciprocal cooperation much still has to be done, especially by the Eastern European SMEs.7 The necessity to internationalize SMEs’ activity has been proved by researchers as well as by practice. This necessity is of particular importance for the Bulgarian SMEs, at least for the following reasons: – – –

The change of industrial and size structures after 1989; The need to establish a significant middle class and entrepreneurial culture as guarantee for a sustainable democracy; The need for the integration of Bulgarian SMEs into EU economies and their rapid adaptation to a new international environment.8

At the end, the necessity of SME internationalization can be presented by the motives for this internationalization – subject to further investigation in this chapter. Internationalization of Bulgarian SMEs: the status quo It is understandable that the international orientation of Bulgarian SMEs is still too modest, for well-known reasons (youth of the SME sector, insufficient support by the state and its institutions, inadequate terms of financing, insufficient preparation of entrepreneurs and SMEs’ managers, barriers on the part of the richer markets). If we see the structure of SMEs’ distribution by industrial sectors (presented further on in the chapter), in first place commerce, transport and services, the conclusions are more than obvious: the majority of SMEs having operations abroad practise strategies of export and import. Together with this, however, there are already symptoms of changes (even slow) in this situation. In the last couple of years the proportion of growing industrial SMEs which are internationalizing their activity is increasing. It is possible now to identify among export-oriented SMEs the so-called ‘dynamic entrepreneurs’, having

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vision (using the methods of strategic management), oriented to intensive growth, using high technologies and achieving significant turnovers. Between the SMEs from EU and Bulgaria we can find common as well as different approaches to entering the international market. For example, SMEs from the EU endeavour to find additional markets, generating relatively high added value. For this purpose they count on certain advantages, such as reliable quality, possession of a unique product or operating in a specific market segment. For Bulgarian SMEs the main aim is to receive foreign know-how and financing, although in their international operation they do not generate especially high added value. Their main competitive advantages are the lower prices and comparatively good quality. It could be said by way of conclusion that, in the West as well as in the East, the number of internationalizing SMEs is growing (of course, the starting point is different) as most attention is paid to the trade with neighbouring countries. The main differences could be found in the motives for internationalization. While for the Western SMEs the aim is for growth and new markets, for Bulgarian SMEs, it is to increase the resource potential, first of all for investments, and to obtain know-how in all possible forms.

High

Strategies for internationalization of SMEs The most widespread strategies for entering and operating in an international business environment will be reviewed here, as they will be interpreted for the case of SMEs. In Figure 8.1, those well-known strategies are

Ownership over foreign operations

Subsidiary

Joint venture

Franchising

Low

Licensing

Export

High

Low Control over foreign operations

Source: Todorov. K. (1992), Entrepreneurship. International Management, 6th reader in the distance learning course in Firm Management, Sofia, Bulgaria: Informa-Intellect.

Figure 8.1

Strategies for entering an international business environment

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121

presented as a function of the ownership and, respectively, of the control over operations abroad. Export/import is the first and relatively easier strategy for implementation in an international business environment. It supposes lowest engagement for the partners and shorterterm orientation. The import/export strategy is considered as ground for (eventual) further and stronger cooperation. This is the strategy preferred by the Bulgarian SMEs. The strategy of licensing is one of the more commonly implemented strategies for internationalization of SMEs by selling or buying a licence, but it is supposed to be rarely implemented by Bulgarian SMEs because of the lack of finance and the low proportion of production-based SMEs. Franchising is a more competitive activity and is one of the main growth strategies of SMEs. The strategy has great potential, especially in the context of the EU accession, but it is also a very demanding form of international cooperation. The establishment of joint ventures of an East–West type is one of the most popular strategies of SMEs as a suitable way of attracting foreign investments. The benefit to the Western partner is the direct access to the local market and use of cheap local resources, while the Bulgarian firm acquires valuable know-how and financial stability. As recent studies show, the biggest problem of joint ventures lies not so much in the different economic level of the partners but in the different social–cultural environment and psychological attitude.9 The establishment of one’s own offshoot is not yet a very popular strategy to follow even on the part of Western European partners. On the one hand, this could be explained by the limited resources of SMEs and, on the other, by the requirements of many political and economic conditions – stability, warranties for foreign investments, developed infrastructure, availability of local managers and specialists who meet the Western qualification and behaviour standards. Hypotheses about internationalization of Bulgarian SMEs The review of the existing studies in Bulgaria on the problems of SMEs and their internationalization provides ground to formulate the following hypotheses: 1. 2.

The limitations of the domestic market and the limited resource basis preconditioned SMEs’ internationalization as a compensating economic mechanism. The degree of internationalization is positively related to the size of the enterprise.

In addition to the above hypotheses it is interesting to point out that the following working hypotheses were settled in the preparation and realization of an international research project about the internationalization of SMEs from food and clothing industries in Bulgaria with participation of the authors:10 1. 2.

The behaviour of Bulgarian SMEs in entering an external market is distinguished by a gradually increasing engagement (entrance). The engagement of the Bulgarian SMEs on entering a foreign market features consecutively increasing intensity which is approaching the typical line of development advanced by the Swedish school (the types of internationalization are based on the classification of Meissner and Gerber (1989), namely indirect export, direct export

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3.

Handbook of research on European business and entrepreneurship without one’s own representation office, direct export with one’s own representation office, licensing, contracted production, joint ventures, daughter company).11 The intensive form of development of the market which is preceding by less risky and engaging activities is estimated as more successful than the direct investments at the initial entrance of an international market.

Methodology of the study The present study of the internationalization of Bulgarian SMEs by its nature is an upgrade and revision of studies already done in this area – some with the participation of the authors, some done by other authors’ teams. Because of this the methodology covers a spectrum of methods, starting with review of publications, revision of the results from earlier studies, comparative analyses, review of the newest statistics data and concluding synthesis. The verification of certain hypotheses was done by interviewing entrepreneurs and managers with the support of structured questionnaires, carried out in the context of authors’ research on the SMEs’ problems. Data from the reports about the SME sector by the Agency for SMEs, Ministry of Economy, National Statistic Institute, Bulgarian National Bank, and other research centres and institutions, were used too. Sample selection and characteristics Because of the specifics of the methods implemented, the analyses examined below are done on the basis of results achieved in different types of research each of which covers a different sample of SMEs. In this sense the characteristics of the respective sample will be quoted where the results of its study are analysed. Aggregated statistic data are used in some places to provide a representative picture of international activity of Bulgarian SMEs. The main study referred to covers a sample of SMEs from food and clothing industries. It is a not-by-chance purposive typological sample including 63 respondents. Data collection process and instruments The two types of data used – primary and secondary – define two types of approaches in their collection. The secondary data were collected by review of publications about SMEs’ internationalization. The primary data used in the analysis were collected by interviews with structured questionnaires distributed among SMEs by preliminary set criteria. Analytic techniques The analytic instruments used for processing and analysis of the primary data cover onedimensional descriptive distributions and cross-tabling, dispersion analysis (ANOVA) and cluster analysis (K-means Clustering, hierarchical clustering with aggregation algorithm WARD). Results Profile of Bulgarian SMEs At the end of 1989, Bulgarian SMEs numbered around 13 000 and in 1992 they stood at approximately 200 000. After the peak of the registered companies (between 1995 and 1999 there were over 400 000) the total number stabilized at a relatively constant level and

123

Internationalization of Bulgarian SMEs Table 8.4 Structure of the enterprises by group, according to the number of employed persons during the period 1999–2002 (per cent) Groups of enterprises

1999

2000

2001

2002

Total

100.0

100.0

100.0

100.0

92.4 5.5 1.0 0.4 0.7

92.3 5.7 1.0 0.4 0.6

91.9 6.1 1.0 0.7 0.3

91.1 6.8 1.1 0.7 0.3

Up to 10 employed persons 11–50 employed persons 51–100 employed persons 101–250 employed persons Over 250 employed persons

Source: NSI (2002), Demography of Small and Medium-sized Enterprises in Bulgaria in the period 1995–2001, Sofia, Bulgaria: NSI.

in 2004 was around 220 000 as 99 per cent of them are SMEs (under 250 employed). In the great majority they are sole proprietorship – over 70 per cent,12 which is logical having in mind the fact that over 90 per cent of the registered companies are micro enterprises, with fewer than 10 employees. The changes in the structure of enterprises according to the number of personnel are insignificant during the period 1999–2002 and there is a slight tendency of an increase in the relative share of enterprises with 11 to 50 employees: from 5.5 to 6.8 per cent and for enterprises with over 100 up to 250 employed persons, from 0.4 to 0.7 per cent. The relative share of the biggest firms (with over 250 employed persons) decreases from 0.7 to 0.3 per cent.13 In respect of the branch structure the picture is as follows: most SMEs are operating in the areas of commerce and services. In 2002, 55.14 per cent of all SMEs were classified under ‘trade, repair of automobiles and households’; 12.31 per cent in the processing industry; 10.36 per cent in operations with real estate and business services; 10.21 per cent in hotels and restaurants, 7.68 per cent in transport, storage and communications.14 As to the markets where SMEs realize their product and services, they are mainly domestic. Less than 10 per cent of SMEs have export activity but their share in the export/import is increasing fast as can be seen below. The reasons for the small share of export-oriented SMEs are many and the most significant among them are the inadequate terms of financing, lack of information and contacts, lack of government support to export, existing nontariff barriers, etc.15 Participation of SMEs in foreign trade During the last decade SMEs, although with a modest share, have been active actors in the country’s foreign trade relations. As a result of decentralization of the economy and abolition of almost all limitations on conducting foreign trade activity, more and more SMEs establish contacts with foreign partners. According to the latest data, 9.4 per cent (18 976) of the total number of the registered companies are pursuing foreign trade activity, as 93 per cent of them are SMEs.16 Despite the low values of these figures, comparison to the data from previous years shows a sustainable trend of increase in the number of SMEs with foreign trade activity. Analysing the contribution of SMEs in foreign trade, two facts make an impression (see Table 8.5). First, their share in foreign trade is smaller than their share in the national

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Table 8.5 Contribution of the enterprises in Bulgarian foreign trade according to their size (per cent) Share in export by years

SMEs with under 100 employees Enterprises with 101 to 250 employees Large-scale enterprises

1996

1997

1998

1999

2001

2002

21.47 7.44

18.66 8.52

22.12 11.03

21.15 11.16

27.4 14.0

28.3 25.2

71.09

72.82

66.85

67.69

58.6

46.5

Share in import by years

SMEs with under 100 employees Enterprises with 101 to 250 employees Large-scale enterprises

1996

1997

1998

1999

2001

2002

37.93 6.76

28.67 10.86

38.52 11.36

37.19 11.34

43.4 13.5

45.7 27.0

55.29

60.47

50.12

51.47

43.1

27.3

Note: The data for 2000 were not published. Source: NSI and own calculations.

economy; and second, their share in imports is greater than in exports. For the last five years the share of all SMEs in exports has been growing as the particular share of the upper medium-sized enterprises has increased significantly. In respect of the SMEs’ export contribution by industrial profile, the differences are quite significant. The industries could be differentiated into two big groups. The first group includes finance and insurance, trade, construction, agriculture and business services. The second includes extraction and processing industries, energy, transport and communications. While SMEs are dominant export contributors in the first group, the second group is dominated by the large-scale enterprises. The differences in the size structure are only part of the explanation. In the second group of industries considerable influence arises from the fact that the enterprises from these industries are still either state-owned or have a monopolistic position in the economy. In principle, the bigger enterprises have bigger possibilities to participate in the foreign trade activity. Only the large-scale enterprises have a greater share of their incomes from export (25.47 per cent in 1999) compared to the average for the country (14.45 per cent in 1999) and the indicator for the enterprises with 101 to 250 employees is close to the average. For all of the remaining SMEs, the income from exports has a smaller share of their total incomes in comparison to the average. The trend is clear: incomes from export range from 5.22 per cent for the micro enterprises to 14.93 per cent for those with 101 to 250 employees. In conclusion it is expected that the export structure will not correspond to the size structure, as in exports the bigger groups will be dominant. In addition we should mention the findings from the last report of the Agency for SMEs in respect to SMEs’ foreign trade activity:17

Internationalization of Bulgarian SMEs 1.

2.

125

Most of the enterprises conduct both export and import operations. Pure exporters (that only handle exports) were hardly 38 per cent of all SMEs exporting products to foreign markets, while pure importers were rather more than 70 per cent of importing SMEs. The medium-sized enterprises class (50–99 employees) shows weaker growth and better positions in exports, while micro-enterprises deal better with imports.

Geographic orientation of foreign trade operations It is necessary to analyse the geographic orientation of the foreign trade operations to corroborate part of the hypotheses related to the changing international environment, the adaptability and flexibility of SMEs in their internationalization and the compensation of the limitations of the national economy. Table 8.6 presents the statistics of Bulgarian exports and imports by foreign market. One can see from the figures the shift in foreign trade to the EU markets, both in imports and in exports. For 2004, over 58 per cent of total Bulgarian exports was to the EU with a growth of 16 per cent compared to 2003. The SMEs’ contribution to these exports grew more than proportionally, by 27 per cent (2004 to 2003) as can be seen in their share, from 25.8 (2003) to 29 per cent (2004). SMEs’ EU markets share in total SMEs’ exports increased from 54.5 per cent in 2001 to over 60 per cent as the three leading EU countries in Bulgarian exports, Greece, Italy and Germany, contribute to this fact. The similar growth in exports could be observed in respect to the neighbouring Balkan countries, where total exports grew by 13.6 per cent. It is notable that the SME sector has a dominant position in export activity in the closest countries while in other destinations (outside EU and the Balkans) the enterprises with over 100 employees perform better. SMEs’ share in the total exports to the last destinations is as follows: Arab countries, 37 per cent, CIS, 32.2 per cent, CEFTA, 23.5 per cent (in 2002). From the last SMEs’ report (2004) one finding is impressive: within only a year the exports of enterprises with 101 to 250 employees grew by over 70 per cent. A possible explanation is that those are the enterprises capable of manufacturing and offering to the foreign markets a sufficient volume of products in compliance with the high-quality requirements, established good production practices, as well as sustainability of supplies.18 The import figure presents a slightly different situation – the SMEs’ import share is bigger than their export share in EU, CEFTA and the Balkan countries – totally forming over 75 per cent of the SMEs’ import. The main import destinations for Bulgarian SMEs are Germany, Greece and Italy. One of the reasons is the greater number of joint ventures with these countries which are mainly import-intensive production facilities with subsequent exporting of the finished products. Shares in the import of different subcategories of SMEs (micro, small and mediumsized) have changed significantly since 2001. The most dramatic was the change in the imports, from CIS, earlier dominated by large-scale enterprises (over 80 per cent), now by medium-sized (accounting for 70 per cent). This fact could be explained by the changes in the industrial structure of the import-intensive sector, such as energy production and distribution. Sectoral differences The dominant position in the export share is occupied by commercial SMEs: only 3 per cent of commercial enterprises are large-scale. More interesting is

126

Source:

Note:

5113 915 129 212 114 282 120 62 3609 413 285 2799 488 449 766 65 589

4825 1009 87 375 110 277 119 60 3275 493 190 2474 437 377 688 55 541

** EU as of 1 May 2004; includes 25 countries.

NSI and own calculations.

2001

2002

530 271 3166 543 521 875 103 634

92 53 4131

239

159 173 124

5692 928

In mln USD

2000

2003

1193 583 7844 1405 1352 1829 105 1485 107

26

182 103 2327

464

398 431 267

1105 558 6604 1132 1091 1828 215 1217

191 110 2286

498

330 359 259

13042 1654

2004

58

1561 698 9103 1596 1553 2040 122 1834

197 118 2961

527

620 542 326

15617 2166

In mln BGN 11858 1434

2002

Export-FOB

Export and import by groups of countries and main trade partners

TOTAL Central and Eastern European countries of which Romania Serbia and Montenegro The former Yugoslav Rep. of Macedonia CEFTA CIS of which Russian Fed. Ukraine OECD of which Turkey USA EU ** Germany Greece Italy EFTA Countries not included in the upper groups of which China

Table 8.6

2001

2002

214 191 2865 903 318 550 89 628

1582 182 3451

231 23 26 568 1804

6507 2429

273 191 3583 1109 412 696 91 688

1453 235 4251

172 21 20 551 1725

7261 2322

390 172 3967 1128 476 894 108 1028

1147 246 4783

163 24 18 576 1453

7903 2092

In mln USD

2000

285

811 357 8271 2346 993 1865 225 2006

2412 511 2554

3048

337 50 37

16451 1330

2002

2003

2004

486

1151 481 10403 2682 1250 1922 234 1896

2363 741 3336

3479

452 59 41

18797 1676

738

1369 497 12290 3312 1306 2233 294 2521

2875 922 3982

4207

670 83 80

22726 2227

In mln BGN

Import-CIF

Internationalization of Bulgarian SMEs

127

the situation in the manufacturing industry sector where the major export share is that of the enterprises with between 101 and 250 employees – in fact they doubled their exports in 2002 in comparison with 2001 and now they hold the greatest share of the export of manufacturing production. The SMEs with fewer than 100 employees account for only 16 per cent of exported manufacturing production. Very similar is the situation with the imports. The difference is that SMEs with under 100 employees have a significantly bigger share in the imports than enterprises with over 100 employees: for example, the commercial SMEs accounted for 85 per cent of the total import. It is important to note that enterprises with 100 to 250 employees record the biggest growth in their share of total imports – around 100 per cent in 2002 to 2001. Most of these enterprises are from manufacturing industry. The changes in the foreign trade contribution over recent years could be explained also by the declining number of large-scale enterprises. After their privatization many of them were downsized and are now classified as SMEs although they inherited relatively good export potential from the time they were internationalized as large-scale enterprises. Foreign direct investments as SMEs’ internationalization measure The statistics show that the Bulgarian SMEs are still insignificant investors abroad. The figures as regards their investment are symbolic and cannot provide grounds for any analysis. Much more attention could be paid to the foreign direct investments made in Bulgarian SMEs. The reason is that they are not only a measure of the internationalization level achieved but they are also important sources of SMEs’ modernization, technical and management development. The foreign direct investments help Bulgarian SMEs to improve their production capacity and to introduce a high-quality product and thus to raise their competitiveness on the international market. According to the SMEs’ Report 2004, SMEs account for over 90 per cent (93.9 per cent in 2001 and 92.3 per cent in 2002) of all enterprises in which capital has been invested in 2001 and 2002. The same report states that a major recipient of foreign capital in the SME group are micro-enterprises, but there exists a clearly expressed trend of reduction of their share in the total number of SMEs that attracted investments at the expense of small and medium-sized enterprises.19 There are no detailed statistics about distribution of foreign direct investment according to the sectors SMEs operate in, but, by expert estimation, most of the investment in SMEs is in the sectors of industry and commerce, and rarely in services. The geographic structure of the foreign direct investments in Bulgarian SMEs follows the geographic structure of the foreign trade partner – the investors are coming from the same countries where Bulgaria has established strong commercial relations – Germany, Greece, Italy and other EU countries. However, by comparing the absolute volume of investments by enterprise size, we can conclude that the big enterprises are still preferred by foreign investors: they attract around two-thirds of all investments. The political and economic changes in the last decade helped the internationalization of Bulgarian SMEs. Their total contribution in foreign trade operations speaks of their potential and size advantages: flexibility, market niche orientation, fast decision making. The statistics prove that export potential grows with the size of an enterprise; the mediumsized enterprises (both under and over 100 employees) showed the biggest growth in their foreign trade activities in recent years.

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Drivers for SMEs’ internationalization It was supposed that internationalization is a compensative mechanism for the limited domestic market and the need to import resources that are lacking in the country. As the analysis of the statistics data proved, imports are balanced to a significant degree by exports (with the important contribution of SMEs); there is another set of drivers at micro or individual level that have to be understood in order to develop effective policy recommendations to strengthen and make sustainable the internationalization process. The necessity of SMEs’ internationalization can be presented by the motives for this internationalization too. In a study of 50 Bulgarian SMEs, conducted in Bulgaria in 2002,20 12 possible answers were given to the question: What is the main motive to begin export operations? See Table 8.7. In the countries from Eastern Europe and Bulgaria, as many other studies show, the leading motives for internationalization of SMEs are (a) the ambition to increase the resource potential of the enterprise (first of all the financial, including attraction of capital for investments); (b) the ambition to obtain know-how; (c) the ambition to receive stable incomes (in hard currency) from an attractive but quite exacting market.21 If we summarize other studies of the motives of SMEs from the developed industrial countries for entering international markets we will see as leading among them the following: (a) access to new and larger markets (not entirely satisfied) for products/services; (b) access to a local inexpensive (but at the same time qualified) workforce; (c) access to inexpensive local raw materials. Specialization, followed by the quality of product/service, low production costs and the flexibility of the internationalization approach, are among the first success factors in the international market. Strategies for SMEs’ internationalization What are in practice the internationalization strategies implemented by the Bulgarian SMEs? To answer this question we will use the results achieved in the framework of the international research project ‘Internationalization, Inter-firm linkages and Development Table 8.7

Main motives for starting up export operation

Motives 1. Hard currency 2. Attraction of foreign markets 3. Falling domestic market 4. Company traditions 5. Obtaining foreign credit 6. Common language 7. Geographical proximity 8. Cultural similarity 9. Approach from foreign partner 10. Unexpected opportunity 11. Network opportunity 12. Other Note: * The sum is bigger than 100 per cent because more than one answer was given.

Frequency* 65 60 51 26 14 6 16 7 14 4 26 2

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of SMEs from the Clothing and Food Industries’.22 The analysis of the data shows that SMEs from EU countries enter foreign markets generally generating high added value and counting on the quality and uniqueness of the product and position in a specific market niche. It can be seen from the statistics that the Bulgarian SMEs cannot generate very high added value. At the same time, in the internationalization process, they compete above all on low prices and comparatively good quality. The study showed that, most often, strategies followed by the Bulgarian SMEs from the food and clothing industries include joining international subcontracting chains. They are also strongly interested in establishment of joint ventures with Western partners. The fact that the Bulgarian SMEs oriented towards long-term internationalization tend to develop strategically (a transition to more mature and open strategies) compared to the majority of SMEs that are operating only in the domestic market, should be underlined. The comparison between the companies of the two industries shows distinctive differences in favour of the clothing industry. Making use of the weaker regulation, their greater international experience and smaller dependence on climate condition, SMEs from this industry are one step ahead of food industry SMEs. On the other hand, the food industry SMEs have greater potential for a significant increase in the value of their products, mostly by occupying narrow market niches by criteria such as taste, ecology and so on. Here we will present the results that provide grounds to look for elements of a strategic approach in internationalization activity by the enterprises. As a starting point, the views of entrepreneurs and managers about the external environment, together with the opportunities and threats, are analysed. The activities undertaken by SMEs as a response to these opportunities and threats include the different approaches that could be conventionally called ‘strategic’. The analysis proves that internationalization as a rule provides greater scope for opportunities than the SMEs investigated. The ambition to start up a joint venture is especially popular among the exporting SMEs as they see it as bridge for transfer of know-how and to gain access to foreign market opportunities (30 per cent of respondents). The results show also that a big proportion of SMEs recognize that the cost advantages are appropriate only in the initial stage of entering foreign markets and to some extent even in the domestic market. Parallel with the maturing of SMEs and their establishment on the market, they face the need to develop new, higher forms of competitive advantages such as product development and diversification or product innovation. It is a fact that only food industry SMEs see costs reduction as the main priority for keeping the old and realization of new competitive advantages. These strategic approaches are seen mostly in the active search for information and less in investing in new equipment. As a whole, the internationalized SMEs are more active, particularly those from the food industry. Another important point from the study is the SMEs’ managers’ assessment of the threats coming from the external environment. As the most serious danger, the SMEs for both industries see the weak domestic demand (between 60 and 70 per cent). The exporters have already succeeded in developing their marketing strategy and feel affected to a smaller degree by the eventual shrinking of domestic demand, but they are more sensitive to the macroeconomic factors: suppliers, finance, payments and so on. Here the problems are stronger in less internationalized SMEs than those from the food industry. The problems of the domestic market are found to be a serious push factor for the SMEs from both sectors as they make them look for new, mostly external, markets and

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thus to insure themselves against the fluctuations in domestic demand. An important part of the exporting SMEs engaged in subcontracting relationships plan to reduce their production costs so as to increase the gross margin and profitability. The general conclusion is that the two strategies most often implemented which respond to environmental impacts – both existing and potential, are modernization of the product spectrum and entrance of new markets. The orientation to one of the two strategies depends on the degree of internationalization: those who have already had success on a certain foreign market look for new ones, and those who are mostly domesticoriented invest in their products’ development. As barriers to export activity, SMEs point out the taxation, strict regulations, duties and customs bureaucracy. The next big barrier is the insufficient financial resources of SMEs. Part of the internationalization strategies are the priorities for internal development given by the SMEs’ managers. The study has outlined two such groups. The first is related to the products, namely the improvement of quality and technological modernization, as a necessity to meet the higher criteria of the foreign markets. The second group of priorities includes improvement of distribution channels and strengthening of active marketing elements such as advertisement and promotion. The latter was mostly recognized by the more internationalized SMEs. Support to SMEs’ internationalization Besides the issues of the internationalization strategies of Bulgarian SMEs, the issues of the supporting internationalization policy are very important. To present them we will use the findings of another piece of international research covering Bulgarian SMEs.23 These issues are formulated as the main problem faced by Bulgarian SMEs at their starting (and already started) international activities underlying the need of business support services (BSS). The main findings are (a) the starting up of an international operation leads to significant changes in SMEs that are the main reasons for the need of BSS; (b) Bulgarian SMEs face a serious problem in the international markets and need cooperation with support organizations; (c) the need of BSS is determined by the real need for obtaining market information and increasing the competences of the people engaged with an international operation. These needs were summarized by the answers about the top ten main barriers faced (ranked by mean intensities) as follows:24 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Legal difficulties in foreign markets. Poor language skills. Unacceptable cost increases. Problems in accessing local market infrastructure. Adequate external financing. Adequate internal financing. Market knowledge – customer-based. Market knowledge – sector-based. Differences in business culture, management style and practice. Technology and technical standards difficulties.

Typically, the Bulgarian SMEs ask for BSS at their servicing banks, the Bulgarian Chamber of Commerce and Industry, the Agency for Supporting SMEs, regional business

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organizations, universities, Bulgarian Industrial Association, the Agency for Export Insurance and others. Besides the availability of specialized organization for BSS, the entrepreneurs used services of independent consultants: lawyers, accountants, financial and marketing specialists, foreign trade experts. The main conclusions from this study could be summarized as follows: a. b.

The use of BSS among the Bulgarian SMEs is insufficient (as yet). In the cases when SMEs need cooperation they prefer to use independent consultants rather than specialized organizations. c. The assessment of BSS by SMEs is high, which contradicts the existing limitation on using such services. d. The government and organization providing BSS should make significant efforts to popularize the services offered to export-oriented SMEs. Hypothesis test results On the basis of the analyses from the studies conducted (statistical and empirical) the following conclusions were reached about the initially formulated hypotheses. The limitations of the domestic market and the limited resource basis preconditioned SMEs’ internationalization as a compensating economic mechanism. The changes in the export structure in both geographic extent and size of exporter aspects in the last five years undoubtedly prove the SMEs’ importance as a factor compensating the country’s limitations: small domestic market and lack of resources, although the foreign trade deficit still exists. These limitations play as both push and pull factors for SMEs. On one hand, SMEs need the market to achieve important business aims: growth, utilization of capacity, economy of scale; and they need resources: finance, technologies, know-how, energy, specific materials, so they cannot be developed on the basis of the domestic market. On the other hand, the foreign markets are attractive places for realization of SMEs’ products and services and also as a source of product and technological know-how. Under such conditions the more ambitious Bulgarian SMEs orient their activity in an international context and, through achievement of their own business aims, contribute to the national economic development. The degree of internationalization is positively related to the size of the enterprise. This hypothesis was verified both by statistics analysis about the size-related structure of exporting enterprises and by study of the internationalization of SMEs from the food and clothing industries. The latter investigates the duration of the period from the establishment of enterprises and the duration of the period when the same enterprise enjoyed international activity. The engagement of the Bulgarian SMEs on entering a foreign market features consecutively increasing intensity, which is approaching the typical line of development used by the Swedish school.

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To identify the behaviour on entering foreign markets, the interviewed SMEs were asked to indicate the time when they have chosen and/or passed from one form of internationalization to another. The data were summarized using a cross tabulation method that shows the frequency of use of certain forms of internationalization as a starting point for change to a higher form. The cross tabulation helped to ascertain that the internationalization process of Bulgarian SMEs is distinguished (in accordance with the hypothesis) by increasing intensity of their market engagement. It shows also that the consequence of the implemented forms of internationalization follows the typical scheme. The indirect export with its own representation office was the prevailing form of export in the majority of cases of initial entrance to a foreign market. This first stage was followed in most of the cases by establishment of their own representation office and in a few cases by establishment of joint ventures. The intensive forms of development of the market, which are preceded by those less risky and engaging, are estimated as more successful than the direct investments in more engaging forms on first entering an international market. The substantiation of the idea in this hypothesis finds ground in the Uppsala theory. According to this theory explaining success at firm level, when there is a strategy of international expansion, it is supposed that market success should be greater in a more cautious and gradual development of the international market, passing through the typical scheme from less to more engaging and risky forms of internationalization, in comparison to an initial entrance by direct investments. To verify this hypothesis the cases with established daughter companies were scrutinized. The entrepreneurs’ answers clearly showed a trend of higher assessment of the gradual entrance than a direct investment. The trend was revealed by average assessment scores for several variants of consequent steps with increasing engagement with the foreign market. Concluding comment The internationalization (globalization) of the business presents exceptionally big challenges (understood as opportunities and problems) to SMEs. To meet these challenges, SMEs should mobilize, on the one hand, all their own available resources, and on the other, be supported in an appropriate way by the respective institutions (government and private). The SMEs’ internationalization depends to the highest degree on the extent of the development of the respective country and industry, as well as of the product structure and the size of the respective enterprise. The parameters of macroeconomic frame, taxation and opportunities for financing have definite importance. In the internationalization process, SMEs use different strategies (mostly unwritten) in the context of their intentions for growth by entering foreign markets. For the Bulgarian SMEs, most often, the internationalization strategies are associated with participation in international subcontracting chains, introduction of new products and a search for partners to establish a joint venture. The SMEs oriented mainly and constantly to foreign markets tend to develop a strategic plan in spite of SMEs oriented mainly to the domestic market accidentally operating abroad. The strongly open character of the Bulgarian economy and the optimistic development of the SMEs’ sector lead to the formulation of the ‘mega introduction’ – the future

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development of the Bulgarian economy will be based to the highest degree on the successful internationalization of the Bulgarian SMEs. In this the definitive role will be played by systematic government support, together with the developing capacity of the very SMEs: first place for their entrepreneurs and managers. Notes 1. 2. 3. 4. 5. 6. 7. 8. 9.

10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22.

23. 24.

Data from Alpha Research, Key Facts and Figures about Bulgaria, Sofia (2005). Assessment of independent economic observers. Forsgren, Mats (1989), Managing the International Process. The Swedish Case, London: Routledge. Harrison, R. and M. Hart (1987), ‘Innovation and market development: the experience of small firms in a peripheral economy’, Omega – International Journal of Management, 15(6), 445–54. Donald, I. (1993), ‘SMEs and the challenge of the New Economy: an appropriate role for governments’, in Hans J. Pleitner (ed.), Small and Medium-sized Enterprises on Their Way into the Next Century, proceedings of the 20th International Small Business Congress, Switzerland, Interlaken. Ibid. This is important even for the ten newly admitted EU members. Todorov, K. (1997), Strategic Management in Small and Medium-sized Firms, Sofia, Bulgaria: Next. For more details see: Marie-Joëlle Browaeys (1996), The Impact of National Business Cultures on Joint Ventures between Central and Eastern European and Western European Companies, A joint PHARE/ACE Research Project, Final Report, Nijenrode University: The Netherlands Business School, City University Bratislava, Entrepreneurship Development Centre, University of National and World Economy (Sofia), Université Paris Dauphine. Todorov, K. and A. Damyanov (1998), Internationalisation, Inter-firm Linkages and SMEs’ Development, Sofia, Bulgaria: Next. Meissner, H.G. and S. Gerber (1989), ‘Die Auslandsinvestition als Entscheidungproblem’, Betriebswirtschaftiche Forschung und Praxis, 32(3), 227–8. NSI (2002), Demography of Small and Medium-sized Enterprises in Bulgaria in the Period 1995–2001, Sofia, Bulgaria: NSI. NSI (2005), Small and Medium-sized Enterprises in the Republic of Bulgaria during the Period 1999–2002, Sofia, Bulgaria: NSI. Ibid. The data are about SMEs with personnel up to 100 in accordance with the earlier law for SMEs. UNWE Research Project (2004), ‘Competitiveness of the Bulgarian Industry: Entrepreneurship and Management’, Sofia, Bulgaria: EDC. Agency for Small and Medium-sized Enterprises (2004), Small and Medium-sized Enterprises in Bulgaria 2002–2003, Sofia, Bulgaria: ASME. Agency for Small and Medium-sized Enterprises (2004), Small and Medium-sized Enterprises in Bulgaria 2002–2003, Sofia, Bulgaria: ASME. Agency for Small and Medium-sized Enterprises (2004), Small and Medium-sized Enterprises in Bulgaria 2002–2003, Sofia, Bulgaria: ASME. Ibid. RSS Project: Accession Internationalization and SMEs in Central and Eastern Europe. Todorov, K. (2000), op. cit. The project ‘Internationalisation, Inter-firm Linkages and Development of SMEs from Food and Clothing Industries’ has been conducted in the period 1995–97 with participation of researchers from the United Kingdom, Greece, Poland, Estonia and Bulgaria. Professor Kiril Todorov was the national coordinator for Bulgaria. This issue is investigated by the research of 50 SMEs in the framework of the RSS Project: Accession Internationalization and SMEs in Central and Eastern Europe. Lloyd-Reason, L., Damyanov, A., Nicolescu, O. and Wall, S. (2004), ‘Internationalisation Process, SMEs and Transitional Economies: A Four-Country Perspective’, CIB Paper 3, an Internet publication.

Bibliography European Commission Enterprise Publications (2004), ‘Internationalisation of SMEs’, Observatory of European SMEs 2003, no. 4, Luxembourg: Office for Official Publications of the European Communities, available at http: ec.europa.eu/enterprise/ enterprise_policy/analysis/doc/smes_observatory_2003_report4_en.pdf. Agency for Small and Medium-sized Enterprises (2004), Small and Medium-sized Enterprises in Bulgaria 2002–2003, Sofia, Bulgaria: ASME.

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Alpha Research (2005), Key Facts and Figures about Bulgaria, Sofia. Browaeys, Marie-Joëlle (1996), The Impact of National Business Cultures on Joint Ventures between Central and Eastern European and Western European Companies, a joint PHARE/ACE Research Project, Final Report, Nijenrode University: The Netherlands Business School, City University Bratislava, Entrepreneurship Development Centre, University of National and World Economy (Sofia), Université Paris Dauphine. Damyanov, A. (1999), Firm Internationalisation, Svishtov, Bulgaria: University Press. Damyanov, A. (2005), ‘Internationalisation of business and SMEs’, chapter in K. Todorov, Foundations of Small Business, Sofia, Bulgaria: Next, pp. 177–96. Dana, L. (1999), ‘Bulgaria at the crossroads of entrepreneurship’, Journal of Euromarketing, 8(4), December, pp. 27–50. Donald, I. (1993), ‘SMEs and the challenge of the new economy: an appropriate role for governments’, in Hans J. Pleitner (ed.), Small and Medium-sized Enterprises on Their Way into the Next Century, proceedings of the 20th International Small Business Congress, Switzerland, Interlaken. Forsgren, Mats (1989), Managing the International Process. The Swedish Case, London: Routledge. Harrison, R. and M. Hart (1987), ‘Innovation and market development: the experience of small firms in a peripheral economy’,Omega–International Journal of Management, 15(6), 445–54. Lloyd-Reason, L., A. Damyanov, O. Nicolescu and S. Wall (2004) ‘Internationalisation process, SMEs and transitional economies: a four-country perspective’, CIB Paper 3, an Internet publication. Meissner, H.G. and S. Gerber (1989), Die Auslandsinvestition als Entscheidungproblem, Betriebswirtschaftliche Forschung und Praxis, 32(3), 227–8. NSI (2002), Demography of Small and Medium-sized Enterprises in Bulgaria in the Period 1995–2001, Sofia, Bulgaria: NSI. NSI (2005), Small and Medium-sized Enterprises in the Republic of Bulgaria during the Period 1999–2002, Sofia, Bulgaria: NSI. Smallbone, D. (1998), ‘Internationalization, inter-firm linkages and SME development in Central and Eastern Europe’, Final Report to ACE Committee, CEEDR, Middlesex University, London, UK. Smallbone, D., B. Piasecki, U. Venesaar, K. Todorov and L. Labrianidis (1999), ‘Internationalization and SME development in transition economies: an international comparison’, Journal of Small Business and Enterprise Development, Winter, 5(4), 363–75. Todorov, K. (1992), Entrepreneurship. International Management, 6th reader in the distance learning course in Firm Management, Sofia, Bulgaria: Informa-Intellect. Todorov, K. (1997), Strategic Management in Small and Medium-sized Firms, Sofia, Bulgaria: Next. Todorov, K. (ed.) (2000), Foundations of Small Business, Sofia, Bulgaria: Trakia-M. Todorov, K. and A. Damyanov (1998), Internationalisation, Inter-firm Linkages and SMEs’ Development, Sofia, Bulgaria: Next. Todorov, K., K. Kolarov, I. Kereziev and S. Ruychev (2004), Dynamic Entrepreneurs in Bulgaria: State of the Art, Trends, Needs, Training, Sofia, Bulgaria: Stopanstvo University Publishers. UNWE Research Project (2004), ‘Competitiveness of the Bulgarian industry: entrepreneurship and management’, Sofia, Bulgaria: EDC.

9

Internationalization of SMEs in Croatia Tihomir Vranesˇ evic´, Branko Bogunovic´ and Miroslav Mandic´

1 Introduction Croatia is one of the European transitional economies where SMEs, as in many other former socialist countries, are relatively recent phenomena and most SMEs have been established during the 1990s (Dana, 2005). The process of internationalization of enterprises that started in many former transition countries has taken place in basically larger companies. In fact, a relatively small number of medium and small enterprises have been embraced by internationalization. The case of Croatia is not much different from most East European countries. This chapter attempts to study the process. 2 Defining the concept and data sources For an investigation of the internationalization process of an enterprise, one needs to define the meaning of the term ‘internationalization’ and agree on its measure. The process of internationalization of companies can be defined in various manners. To our mind the best way to judge the degree of internationalization of companies is to measure the degree of foreign ownership, import–export exposure to foreign markets and inflow/outflow of investments. One of the important dimensions of this problem lies in the overall division, structured as small, medium and large-size companies. A number of sources define internationalization. Westhead et al. (2002) and Calof and Beamish (1995) approach internationalization from a quantitative point of view, proposing FDI and level of exports as its measures. Chetty and Campbell-Hunt (2003), look at some ‘soft’ indicators such as market knowledge, strategy and success. The latter approach, which to us seems better suited to our investigation, requires primary data collection. Unfortunately, data on indicators of firms’ success in Croatia is not easily available, since there is no systematic auditing done by an authorized institution. For applying a macrostatistical approach, a set of secondary data can be used. Such data are available from published sources such as The Croatian National Bank and the Croatian Bureau of Statistics. Data on the number of companies, their size and FDI are also available. A possible source of such data can be a questionnaire survey. It must, however, be stated that different data sources provide very different information for the same indicator for the same period. Sometimes, the data from various sources vary by as much as 30 per cent. Accordingly, the data sources need to be quoted. Another problem that one is confronted with in the case of Croatia is that consistent statistics on these indicators exist only for the late 1990s. Any attempt to compare the early period with the later needs every caution for the data are either non-existent or deficient. Further, no institution in the country uses specific FDI statistics according to the size of the firms. Also, there is no systematic approach to statistical coverage of internationalization of enterprises. For these very reasons, investigation needs to be based on the FDI statistics and structure of enterprises. 135

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Since, parallel to the growth and development of SMEs, Croatia was going through a war and a transition of ownership process, internationalization of enterprises had a specific path. Transformation of the economy and effects that followed must be carefully interpreted to understand and explain the changes in structure of enterprises and FDI. Explaining macroeconomic and political conditions at a certain point in time is therefore one of the cornerstones of data interpretation in this chapter. Our secondary analyses in particular include the following: 1. 2. 3.

Analyses on structure of enterprises according to size, number of employees and economic activity. Analysis of SMEs according to number of companies, number of employees and industry. Analysis of FDI in Croatia.

We expect that comparing data on all types of enterprises and SMEs should lead us to conclusions on the state of SMEs, and their current and past trends. Industry-wide analysis also offers some answers to questions such as the following: 1.

2.

Do the changes in structure of enterprises benefit further internationalization of SMEs in Croatia (for example, do more trade or tourism-oriented SMEs mean better chances for internationalization than an increase in agricultural or health care companies)? Are Croatian SMEs becoming larger or smaller (according to number of employees)? It is assumed that larger companies have better chances of acquiring FDI.

3 SMEs and available data The EC (2004) defines micro, small and medium enterprise as below in Table 9.1. Croatia follows very similar classification criteria of companies. The Croatian Accounting Legislation Act No. 16 (Croatian Accounting and Finance Union web site, 2005), provides appropriate definitions. Small enterprises are companies that are subject to at least two of the following three criteria: 1. 2. 3.

Balance sheet value after the loss on the active side discounted is not higher than 7 million HRK (1 Eur
7.5 HRK). Revenue in 12 months before the balance sheet is prepared is not higher than 15 million HRK. Average annual number of employees is not higher than 50.

Table 9.1

Definition of micro, small and medium enterprises according to the EC

Category

Number of employees

Annual revenue (EUR)

Balance sheet value (EUR)

Micro Small Medium

 10  50  250

 2 million  10 million  50 million

 2 million  10 million  43 million

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Medium enterprises are companies that are subject to at least two of the following three criteria: 1. 2. 3.

Balance sheet value after the loss on the active side discounted is not higher than 31 million HRK. Revenue in 12 months before the balance sheet is conducted is not higher than 62 million HRK. Average annual number of employees is not higher than 250.

Large enterprises are not subject to at least two criteria stated for medium enterprises. The Croatian Central Bureau of Statistics (2005) shows the structure of Croatian small and medium-sized enterprises during 1996–2003. It should be pointed out that numbers in Table 9.2 do not include micro-enterprises. The trend, structure and increase in employment in Croatian companies can be seen from Table 9.3. Industry-wide distribution of the number of employed persons in Croatian companies is shown in Table 9.4. The official statistics on inflow of funds are shown in Table 9.5. Another important source of measurement of internationalization is the foreign direct equity investment in the country seen from the following data (Table 9.6). 4 Organizational structure of Croatian companies In market economies enterprises differ according to their size, ownership structure and organization. Enterprises can be classified by activities and sectors, according to the goods and services they provide and applied technology. The aim of the ownership and organizational structure analyses is to determine the variables that can be influenced in order to increase the efficiency of the economy, while the current values of these variables can be an assumption, but not a guarantee, of economic growth. The global economy widens the scope of various market contents, but also changes supply and demand, and even the degree of competition and markets. Any stage of economic development of a country is a result of long-term development processes and changes in organization structure (which is not dependent on the size of the enterprise). Obviously, as organizational structure is a tool of economic growth, the assumption is (and the data confirm it) that private ownership is more efficient than public and other similar models of ownership. Private ownership is exclusively oriented towards the market and functions under conditions of competition which cause a permanent drive for initiatives, innovations, investments and work. Publicly owned enterprises are not necessarily subjected to competitive behaviour because of their specific characteristics, in many cases protected or privileged conditions of work, that cause slow adaptation to a changing market environment. Under conditions of imprecise, undefined rules of the game of privatization in most transition economies, including Croatia, it is difficult to arrive at reliable data on ownership structure, making economic analyses complicated. From the available data on macroeconomic variables it can be seen that, in recent years (1990–2005), there was a significant drop in GDP and a decrease in the employment rate. Croatia, in 2005 was close to the pre-transitional level

138

Central Bureau of Statistics of Croatia (2005).

1548

Total

Source:

551 355 144 132 96 76 71 47 18 8 7 5 3 1 34

1996

Processing industry Trade Construction Hotels and restaurants Agriculture Transport Real estate Electric energy, gas and water Mining Health care Fishing Finance Education Public sector, social insurance Other

Industry

1784

39

39 1730

601 474 187 127 89 84 88 54 17 11 6 5 2

1998

570 459 173 133 92 84 83 53 17 11 8 5 3

1997

2075

613 657 196 125 100 99 131 51 21 13 8 7 3 1 50

1999

2044

609 639 195 118 100 102 122 57 18 13 5 9 3 1 47

2000

Table 9.2 Small and medium-sized enterprises in Croatia according to industry, 1996–2003

2203

628 772 206 114 98 97 129 58 18 14 7 10 2 1 49

2001

2279

629 815 218 107 100 98 138 57 22 11 7 17 3 2 55

2002

2597

679 967 265 107 82 129 187 60 23 15 7 13 4 3 56

2003

139

Source:

Central Bureau of Statistics of Croatia (2005).

61 841

62 533

1057

1008

Total

30 297 9646 8434 5055 3477 1905 1185 451 457 167 217 89 64

30 867 9184 8275 4798 3417 1883 1141 423 375 180 158 79 53

Trade Real estate Processing industry Construction Transport Hotels and restaurants Agriculture Education Finance Fishing Health care Mining Electric energy, gas and water Public sector, social insurance Other

1997

1996

59 802

1091

27 962 9554 8126 5041 3354 1904 1109 484 501 174 261 95 62

1998

57 323

1076

26 171 9244 7848 5029 3233 1859 1063 497 649 170 311 98 75

1999

Number of employees in SMEs according to industry (1996–2003)

Industry

Table 9.3

56 173

25 051 9178 7716 4834 3127 1878 1032 498 633 164 359 103 72 1 1097

2000

54 213

23 660 9232 7564 4696 3053 1896 1022 509 606 173 397 107 78 6 1143

2001

60 562

25 954 10 488 8367 5278 3383 2392 1152 614 644 191 498 126 86 10 1379

2002

64 598

26 683 11 808 8872 5741 3592 2635 1262 665 685 198 601 142 91 11 1612

2003

140

Source:

36

66 116 15 29 41 14 13 150 91 21 20 27

1997

Central Bureau of Statistics of Croatia (2005).

40

87 129 15 33 45 14 12 141 75 26 20 30

Trade Real estate Processing industry Construction Transport Hotels and restaurants Agriculture Education Finance Fishing Health care Other

Total

1996

34

59 109 14 27 40 15 12 242 100 29 24 28

1998

28

40 71 13 26 33 15 11 166 93 21 24 22

1999

Average number of employees in SMEs according to industry (1996–2003)

Industry

Table 9.4

27

39 75 13 25 31 16 10 166 70 33 28 23

2000

25

31 72 12 23 31 17 10 255 61 25 28 23

2001

27

32 76 13 24 35 22 12 205 38 27 45 25

2002

25

28 63 13 22 28 25 15 166 53 28 40 29

2003

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Internationalization of SMEs in Croatia Table 9.5

FDI inflows in Croatia (1993–2004)

Year

FDI (mln EUR)

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

1203 1170 1142 5108 5380 833 14 720 10 865 17 468 11 261 20 416 871

Table 9.6 Foreign direct equity investments in Croatia 1993–2004 (65625 million USD) (%) Other monetary intermediation Telecom. Manufact. of pharma preparations Manufact. of refined petroleum products Extraction of crude petroleum and natural gas Hotels and motels, with restaurant Manufacture of cement Other retail sale in non-specialized stores Manufacture of beer Business and management consultancy activities Others

21.42 15.88 10.52 7.79 3.78 3.29 3.27 3.12 2.08 1.02 27.83

of GDP, so that the population has decreased by nearly 10 per cent. The employment rate and the employment structure have deteriorated. Besides their economic activity, enterprises can be classified by their size. For this purpose different criteria can be applied. However, there are no universal criteria for such classification, for at least three reasons. 1.

2.

The goal of the analysis undertaken often means different definitions of the size of the company. If the labour force survey is made, it is obvious that number of employees will be the criteria for distinguishing between small, medium and large companies. Again, if the overall impact on the economy is considered, the level of annual revenue will be a more valid criterion, and these two criteria do not generally converge. Similarly, other goals of analysis will dictate the choice of the criteria. Different economies have different borderlines even if the same criterion is applied. For example, a company in Japan is considered as an SME if it has fewer than 500

142

3.

Handbook of research on European business and entrepreneurship employees (Lu and Beamish, 2001), while the financial and economic bodies in Croatia recommend that all companies with more than 100 employees should be considered to be large enterprises. This is a logical consequence of a huge difference in size between the Japanese and Croatian economies. Companies change in time, especially when it comes to economic parameters like revenue and profit. Even if the criteria that describe small, medium and large companies are established, it is hard to determine the exact number of companies that match the criteria at a particular moment. Nevertheless, if the situation is observed on a macroeconomic level, it can be assumed that the number of companies that enter or exit the criteria over a certain period is even. This is usually the case if there is no market, macroeconomic or other global drivers that have significant influence on changes in company size.

These limitations influence classification and make the criteria, definition, economic and trend analyses more difficult. Therefore, the logical conclusion is that the classification should include core criteria, and various possible combinations should include the following: a. b. c.

physical criteria – size of the company in comparison to fixed assets, number of employees, level of annual output and so on; significance for the domestic economy; qualitative dimension: number of initiatives, participation in innovative processes creation and participation in technological development.

It should be stated that the last two groups of criteria are mostly used to distinguish large enterprises rather to find the borderline between medium and small enterprises. Griffiths and Wall (1991) propose the classification of enterprises according to size, based on the following parameters: a. b. c.

share that enterprises have on the market; formality of the management structure: it is assumed that their owners usually run small enterprises; level of independence in making decisions on production with (or without) direct influence either of the state, large companies or financial and similar institutions.

It must, however, be noted that all the above stated methods and criteria must be employed flexibly, allowing adaptability and having consideration for the type of economic activity. Further, it is necessary to establish primary criteria so that other country-specific criteria can be added. As stated earlier, the number of companies in any economy is dependent on the level of development, market organization and their functions. Economic data confirm that the processes of transition and restructuring in Croatia have increased the number of enterprises by more than ten times, and these are growing all the time. However, at the same time, the quantity of produced goods and services, and employment, has decreased. The number of registered enterprises in the mid-1990s was three times higher than the number of enterprises with any economic activity (transactions

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in company bank accounts). The total number of active enterprises in 1996 was 62 109, of which 60 081 were small and micro enterprises, 1 500 medium enterprises and 528 large enterprises (Bogunovic´, 2001, p. 308). As with most transition economies, in Croatia, improved conditions for entrepreneurial growth and creativity did not result in new initiatives, innovations and technologies, along with an increase in output and employment. Changes that occurred in economic structure can be observed in the shifting of production, activities and sectors on the market. Of the total number of enterprises, 2.6 per cent was in the primary sector, 19.8 per cent in secondary and 77.6 per cent in tertiary. If we take activities into account, 46 per cent of all enterprises were in trading. In all Croatian enterprises, 736.5 thousand people were employed in 1996, of which 48 per cent were employed in large enterprises, 23 per cent in medium enterprises and 29 per cent in small enterprises. Average employment per enterprise was 670 in large enterprises, 114 in medium and only 3.5 employees in small enterprises. When data are reviewed, it can be concluded that the large majority of small enterprises were micro enterprises (with fewer than ten employees). If we look at the business results, small enterprises were more successful. Taking into account the sums for each type of enterprise, small enterprises are the only category that made a profit in 1996. The situation was identical in 2000. This confirms our thesis about the evident efficiency of small economic entities in developed economies. This efficiency can be explained by the flexibility and market adaptability of small enterprises. In relative terms, the situation is similar in all the 15 developed member countries of the EU (EU-15). In the mid-1990s in EU-15 there were some 18 million enterprises with the dominant share of small and medium companies. Small and medium enterprises were employing more than two-thirds of all employees, while the share of small enterprises with fewer than 100 employees was around one-third, meaning that the share of small and medium enterprises is the same. In small enterprises, the dominant sector is in the so-called ‘micro’ enterprises with up to ten employees, most of them having only one employee (more than 50 per cent). In total employment of EU-15, enterprises with up to ten workers employ around 33 per cent of all employees (Bogunovic´, 2001). Practically, the small and medium-size enterprises are characterized with the fusion of employee, manager and ownership functions. Besides, small enterprises are mostly, as in Croatia, represented in construction industry, small family trade businesses, tourism, real estate and similar businesses (OECD Economic Survey, 1999). In such enterprises EU-15 makes up more than 50 per cent of total GDP. Therefore, it can be concluded that large enterprises create overall development and make the backbone of the economic system, while the small and medium enterprises contribute to employment and diversification of production with their competitive force. 4.1 Employment structure of Croatian SMEs The data in Table 9.3 reflect that the increase in number of enterprises in SMEs was not followed by an increase in total number of employees. During 1997–2001, the number of employees in SMEs decreased by 13.3 per cent (62 533 in 1997 to 54 213 in 2001). This was a consequence of an overall decrease in employment in Croatia during 1998–2001 (see Appendix). The decrease in number of employees was highest in the trade industry, while some of the less represented industries (education, mining, energy and so on) had steady

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growth in numbers of employees. However, the number of employees was increasing again in 2003: 64 598, which was an increase of 2065 employees (or 3.3 per cent) in comparison with 1997. In Table 9.4, the number of companies is matched with the number of employees to get the average number of employees in SMEs. In eight years of constant decrease, the average number of employees declined by 37.5 per cent (from 40 in 1996 to 25 in 2003). Thus it can be concluded that the share of small enterprises in total number of SMEs is increasing at the expense of the medium enterprises. The number of small and medium enterprises shows constant growth in the observed period. In the eight years reviewed, the number of small and medium enterprises grew by almost 70 per cent. The largest growth can be seen in the trade industry, where the number of enterprises has increased by almost 200 per cent. In some industries, such as hotels and agriculture, the number of enterprises has decreased. In terms of internationalization these data can be interpreted positively, for the following reasons: 1.

2.

The total number of enterprises is increasing. This means that some new enterprises are established and that some micro enterprises are switching into a higher category. It is also likely that small and medium enterprises will show more international activity (level of exports, FDI inflow/outflow) than micro enterprises that may lack resources to internationalize (employees, financial power and so on). The number of SMEs has increased from 1996 to 2003 by 1049 enterprises, of which 612 were in trading. In 2003, there were 967 trade-oriented SMEs, or 37 per cent of all SMEs. As an industry, trade is mostly oriented on export/import, and therefore it can be concluded that this change, as a consequence, in the structure itself has an increased internationalization.

Another fact supporting the increase in internationalization of Croatian SMEs is that state-owned SMEs or SMEs involved in industries are closely related to the public sector (agriculture, education, energy and so on) and, in most cases, do not show international activity; that is, they have not increased in number over the observed period. If the average number of employees is observed on an industry basis, we can see a huge diversity according to the industrial activity. For example, the average number of employees in education has varied from 141 to 255 and in agriculture from 10 to 15. We can conclude that most of the SMEs in education are medium-sized companies and that almost all SMEs in agricultural industry are small enterprises. Regarding internationalization, the most indicative are the data on average number of employees in industries with highest probability of international activity such as trade, the hotel industry (tourism) and real estate. Except in the hotel industry, the average number has decreased significantly (by more than three times in trade) during the 1996–2003 period. Naturally, this is not a healthy indicator for internationalization because, as has already been mentioned, medium-sized enterprises have a higher potential to export and especially to attract FDI, than small enterprises. 4.2 The transition process and its impact on enterprises The transition process and change in ownership structure has determined the fate of the Croatian economy and society over the last 15 years. These changes have been going on

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without a proper institutional framework that could prevent wrongful application and abuses of power. A new legal, economic and political system was emerging slowly and most of the instruments of economic policy of the old system were being discarded rather too quickly, replaced by often inadequate and inappropriate ones. Obviously, this created an ideal climate for abuses of power that emerged during the transition processes. Considering these conditions, positive expectations of changes in the short term were unrealistic. If the synthesis of all changes is taken into account, it makes sense only if these strengthen the real economy (that is, increases in output, employment and human welfare). Unfortunately, there was a different trend in Croatia. Large (and what were from the market point of view frequently called ‘inadaptable and slow’) enterprises have frequently disappeared, not turning into medium or small enterprises. This effect has led to a drastic decrease in production and employment. In the beginning of the transition process large enterprises faced a severe battle for their survival, with little success. The disappearance of these enterprises made the core of the future economic structure of small and medium enterprises. The development process of small and medium enterprises was now lacking the services of large enterprises and their technological, market and financial strength. This was especially important in the processing industry, which lost products, market shares and employees and thus entered a depression. The lack of concern for large companies in Croatia has been often justified with the argument that a specific set of circumstances existed. In the first phase of transition, privatization and restructuring, it was wartime. Later, there was a fusion of restructuring and the post-war reconstruction process of dwellings and infrastructure with significant limitations of capital and with pressure of time. Nevertheless, ample space for the number of large-sized enterprises was still available for their restructuring and operation. This can be concluded from the changes in their market shares and the positions which they subsequently attained in domestic and foreign markets. 5

Internationalization of Croatian enterprises

5.1 Indicators of internationalization No matter which of the definitions mentioned above we adopt, there remains a question as to how to measure the level of internalization for the purposes of this and similar studies. A broadly accepted indicator of internationalization is the size of foreign direct investment (FDI) (Lu and Beamish, 2001; Wei and Christodoulou, 1997). Alternatively, foreign direct investment can also be observed as the capital or equity invested in foreign companies and businesses, or that same capital or equity invested in domestic companies from abroad. It is important to have in mind that a portfolio, for example a stock investment, is not considered as an FDI (Wei and Christodoulou, 1997). FDI can be linked with above-stated definitions of internationalization in developed and powerful economies. Transitional economies like Croatia do not and still cannot compete in international markets, especially small and medium size enterprises, so FDI is probably not the best measure of internationalization. Westhead et al. (2002) suggest the level of exports as a measure for internationalization of SMEs. We have already shown that Croatian accounting legislation defines small and

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medium companies as smaller by employees and equity than is common in developed economies. Every single FDI is subjected to rules of economy of scale. This means that there is some threshold of capital and economic activity that a company has to reach in order to be capable of attracting FDI. Croatian SMEs are smaller than is common in other countries, so it will be more difficult for them to be strong enough to employ FDI. Exports are not so challenging for the company in terms of investment and they also show the international orientation of the company. 5.2 The process of internationalization of SMEs in Croatia The global economy can be judged by various indicators, such as size of supply and demand, or indicators of the changing social environment in which economic processes are taking place, and so on. Thus internationalization embraces, not only the economy, but also the conditions relevant to the life and work of the people. These relations are built both collectively and individually. The process of internationalization in an economy is, in a relative sense, stronger in the financial than in the real sector. This is because the conditions of internationalization of the financial sector are defined by global institutions like the IMF, World Bank and World Trade Organization and are not dependent on the state for information systems, while the real economy and competitive market in the real sector need a developed information system. A process of change in ownership in the Croatian financial sector came after a phase of reconstruction of the damaged monetary and banking system over the short and long term. Changes took place in personal expenditure and the state budget. Increased private consumption expenditure resulted in increased fiscal revenues, investments and foreign debt. Internationalization in Croatia took place in the financial sector only while the real sector remained untouched except for a few large enterprises. The process of internationalization in the Croatian economic structure is mostly directed by change of ownership, but not based on evolution and expansion of companies. This can be confirmed by the decrease in the volume of business turnover, employment and, finally, GDP. Change of ownership in the real sector in favour of international owners is visible, for example, in telecommunications, energy (oil and gas), the metal industry, the hotel industry and, especially, in trade (large shopping centres). FDI statistics are strongly connected to the privatization process. According to Table 9.5, the highest FDI in Croatia was in 2001 when both the Croatian Telecom and Croatian Oil Company, among others, were privatized, causing high monetary inflows in the Croatian economy. Considering the fact that, still, each year brings another government-managed privatization, it is difficult to observe FDI as a measure of internationalization or free market activity. FDI outflows are a more significant parameter and, according to data in Table 9A.1, Croatian companies show significant progress in internationalization (88 million EUR in 1998, rising to 273 million EUR in 2004). There is a constant rising trend if overall FDI inflow in Croatia is observed (Table 9.5, Croatian National Bank, 2005). Somewhat higher FDI in the years 1999, 2001 and 2003 is the consequence of privatization of Croatian banks and Telecom in those years when they were all sold to foreign companies, and that inflow is being considered as FDI. What concerns us is the

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decrease in 2004 in relation to 2000. There was no major privatization in those years so the data are comparable and show that Croatia is becoming less attractive to foreign investors. The structure of FDIs in Croatia in the last dozen years confirms the privatization of state-owned companies as the main source of FDI (Table 9.6). Highest shares are in monetary intermediation (banks), telecommunications (Croatian Telecom), the oil and petrol industry (30 per cent of the domestic petroleum company sold to Hungarian MOL). Even the beer industry (Heineken and Interbrew bought the two biggest Croatian breweries) can be spotted near the bottom of the list. In that sense, it is hard to take FDI as a measure of internationalization because it is parameter that better describes a selling out process rather than internationalization, at least in an inflow direction. However, if the structure of FDI inflow according to industry is linked to the analysis of SMEs, a relatively high share of FDI in the hotel industry can be observed. We have already noted that the hotel industry and trade are Croatian industries that have a high potential of internationalization. The hotel industry is ranked sixth in FDI inflow structure, but we have to bear in mind that the first five industries according to FDI inflow volume are the industries where the privatization of the largest Croatian enterprises took place (telecommunications, banks, oil and gas industry and so on). FDI in the hotel industry also comes from privatization, but, as against large companies, new hotel owners are in most cases influencing company strategy and management structures and thus contributing to internationalization of such companies. The reasons for such a difference can be explained as follows: a.

b.

c.

Difference in size of the company: hotels in most cases are SMEs. SMEs compared to large companies are joint-stock companies of lesser degree. Therefore any foreign direct investment in SMEs means higher influence of the investor on the processes, behaviour and culture of the company where the equity was invested. Export orientation of the hotel and tourism industry in general. The Croatian economy is highly dependent on tourism or, to be more precise, on the revenues gained from foreign tourists visiting the Adriatic coast, which can be referred to as an export. Most of the hotels in Croatia are situated on the coast and those hotels were proportionally more privatized. New owners of large companies behave like common shareholders, not influencing strategy and management practices.

Unfortunately, there are only summarized data on FDI outflows available, with no further division which could provide us with a basis for deeper FDI outflow analyses of SMEs in Croatia. Like most transitional countries, Croatia has experienced a large increase in FDI inflows in the last 10 years. In order to determine the extent of the influence of FDI in Croatia on internationalization of all enterprises, and especially SMEs, changes in enterprise structure, trends in the SME enterprise segment and FDI analysis on the basis of secondary data were made. The results show a large increase in the overall number of enterprises in Croatia (but with only one-third of them with any economic activity) in the last 10 years. Similarly, the number of SMEs is also growing, but with a decreasing average number of employees.

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This means that an average SME is becoming smaller. Considering that an FDI is more likely to be placed by a larger company, this has a negative effect on the ability of Croatian SMEs to place an FDI abroad. Structure and trends of FDI inflow show a marked dependence on FDI inflow with privatization of large companies in Croatia. If the years when the largest companies were privatized are not considered in trend analyses, FDI inflow in Croatia has been stagnating since 2000. An encouraging fact is the high percentage of FDI in the hotel industry, so that hotels are mostly SMEs directed to internationalization because of the export nature of the hotel industry. 6 Conclusion The process of transition in Croatia has determined the starting conditions of the internationalization process of SMEs in the counrty. SMEs are usually to some degree linked to large enterprises, as regards resources and market availability. The privatization process had damaging consequences for many of the large companies in Croatia. Those large enterprises could not provide support for SMEs. On the other hand, most of those enterprises were not changed into medium or small companies, but were simply shut down. Therefore the state of the Croatian economy suggests that, in order to improve conditions for internationalization of SMEs, the overall structure of enterprises and the Croatian economy should be enhanced. References Bogunovic´, A. (2001), ‘Economic integrations and regional policy’, Faculty of Economics Zagreb, Faculty of Economics and Tourism, Zagreb. Calof, J. and P. Beamish (1995), ‘Adapting to foreign markets: explaining internationalisation’, International Business Review, 4(2), 115–31. Chetty, S. and C. Campbell-Hunt (2003), ‘Paths to internationalisation among small to medium-sized firms’, European Journal of Marketing, 37(5/6), 796–820. Croatian Accounting and Finance Union web site (2005), http://rif.hr. Dana, L. (2005), When Economies Change Hands: A Survey of Entrepreneurship in the Emerging Markets of Europe from the Balkans to the Baltic States, Binghamton: Haworth Press. Griffiths, A. and S. Wall (1991), Applied Economics, London: Longman, p. 68. Lu, Jane W. and Paul W. Beamish (2001), ‘The internationalisation and performance of SMEs’, Strategic Management Journal, 122, 565–86. OECD Economic Survey (1999), Enterprise policy – SME, 1999 and Eurostat, Product 3-1003, EN – BP, Luxembourg, 2000. Wei, H.C. and C. Christodoulou (1997), ‘An examination of strategic foreign direct investment decision processes: the case of Taiwanese manufacturing SMEs’, Management Decision, 35(8), 619–30. Welch, L.S. and R. Luostarinen (1988), ‘Internationalisation: evolution of a concept’, Journal of General Management, 14(2), 34–55. Westhead, P., M. Binks, D. Ucbarasan and M. Wright (2002) ‘Internationalisation of SMEs: a research note’, Journal of Small Business and Enterprise Development, 9(1), 38–48.

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Appendix Table 9A.1

Croatia: basic macroeconomic indicators Croatia – basic macroeconomic indicators

Population (’000s) GDP nom. EUR, mln. GDP annual change (%), real GDP/capita at exchange rate (EUR) GDP/capita at PPP (EUR) Unemployment rate (%) Discount rate (%) end of period FDI annual inflow, EUR mln FDI annual outflow, EUR mln Source: Croatian Central Bureau of Statistics (2005).

1998

2001

2004

4501 19 272 2.5 4284 7470 18.1 5.9 833 88

4437 22 174 4.4 4998 8640 23.1 5.9 1746 173

4442 27 610 3.8 6225 10 270 18.7 4.5 871 254

10 Internationalization of SMEs in Cyprus Demetris Vrontis and Alkis Thrassou

Introduction: Aims and value of the research This research investigates the existing international competitive situation of SMEs in Cyprus (CySMEs) and their internationalization limitations and potentialities. Through the presentation and interrelation of the various home-country and individual-firm international competitive factors, this chapter pinpoints the critical parameters that affect international activities. These stem also from CySMEs’ current home-country marketing environment situation which reveals, among other things, the relative competitive advantages and disadvantages of such small firms in the global arena. Finally, and consequently, it focuses on small professional services firms which surface as the most promising type of organizations to compete internationally. The research is based on an extensive literature search and review and is largely a conceptual analysis and development of past generic and current specific theories on the subject. The first part of the chapter (introduction) presents the research aims, approach and value and provides some general information on Cyprus. The second part (literature review) exhibits the existing theories on the subject which are discussed, analysed and interrelated in the third part (analysis and development), to distil some specific findings whose expansion, interrelation and extrapolation allows specific conclusions regarding CySMEs’ internationalization to be reached. The research in the fourth part (overview and conclusions) finally prescribes explicit and comprehensive guidelines on global/international strategy and marketing, making recommendations on the required means and approaches to maximize the probability of success. The findings show an intensely competitive and saturated local/national market environment, with inflated buyers’ bargaining power, and a distorted client perception of value. Internationalization appears critical to growth and/or survival for many SMEs (Reuber and Fischer, 2002) with various home-country and individual–CySME factors setting the context in which their internationalization process should occur. The findings further indicate the need for a comprehensive strategic marketing management approach to internationalization and the utilization of CySME-specific strengths and advantages in a manner and system which more mechanistic and methodical than the reflex-style approach usually adopted in the local market. Background information on Cyprus General Cyprus is an island with a variety of scenery, including mountains, forests, valleys, wild, uncultivated areas, agricultural areas and coasts. Great historical and archaeological sites exhibit its culture. The island’s economy heavily depends on foreign exchange earnings from tourism, though its professional services sector has also been growing in strength over the past few years. The island has a Mediterranean climate with almost 300 days of 150

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Source: http://geography.about.com/library/cia/nccprus.htm (2 August 2005).

Figure 10.1

Map of Cyprus

Source: http://kcm.co.kr/mission/map/flags/Cyprus.jpg (2 August 2005).

Figure 10.2

Flag of Cyprus

sunshine per year. The two official languages of the republic are Greek and Turkish, although English is widely used and understood. The Greek Cypriot community adheres to the autocephalous Greek Orthodox Christian church of Cyprus, while the Turkish Cypriot community complies with Islam (www.centralbank.gov.cy, www.cyprus.gov.cy). The map of Cyprus is illustrated in Figure 10.1. In this, you can see in the south the area controlled by the government of the Republic of Cyprus and in the north the Turkish occupied area, which resulted from the Turkish invasion in 1974. The flag of Cyprus, presented in Figure 10.2, is white with a copper-coloured silhouette of the island (the name Cyprus is derived from the Greek word for copper) above two green crossed olive branches in the centre of the flag; the branches symbolize the hope for peace and reconciliation between the Greek and Turkish communities.

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Geography Cyprus is the third-largest island of the Mediterranean Sea, after Sicily and Sardinia. The total area of Cyprus is 9251 sq. kilometres, of which 1733 are forested. It is strategically situated, being very close to the busy trade routes linking the continents of Western Europe, the Arabic World, the Far East and North Africa. It has a maximum length of 240 kilometres from east to west and a maximum width of 100 kilometres from north to south. It is situated at the north-eastern end of the East Mediterranean basin and is surrounded by Egypt, Israel, Lebanon, Syria, Turkey and Greece. The latitude of Cyprus is 34 33’ – 35 34’ north and its longitude 32 16’ – 34 37’ east. The capital of Cyprus is Nicosia, which is situated roughly in the centre of the island, where it is the seat of the government and main business centre. However, the Turkish invasion and occupation of 36 per cent of the island’s territory since 1974 has literally cut the capital in two. Nicosia remains today as the only militarily divided capital in Europe. The total population, excluding the Turkish occupied north, is 689 565 (Census of Population, 1992). Of these 90 per cent are Greek Cypriots, 1 per cent Armenians, Maronites, Latins, Turkish Cypriots and others and 9 per cent non-Cypriots. The density of the population is 86 persons per sq. kilometre. History Cyprus is an island of oceanic origin, and has never been connected to the mainland. Despite its small size, Cyprus has always played an important role in the history of the Mediterranean region. According to archaeological evidence its civilization goes back 9000 years to the seventh millennium BC, to the Neolithic or Stone Age. The island acquired its Greek character after it was colonized by the Mycenaean and Achaean Greeks between 2000 and 1000 BC. It subsequently came, in turn, under Assyrian, Egyptian and Persian domination between the eighth and fourth centuries BC. It also became part of the Roman Empire between 50 BC and 330 AD. However, the Greek language and culture were retained throughout the centuries despite the many foreign invaders, including the Franks, Venetians, Ottomans and British. Cyprus was a British colony until 1960, when it gained its independence from British rule and a republic was created. Since then British bases have been retained on the island under the agreement that gave Cyprus its independence. These British military bases today cover 2.74 per cent of the island’s territory (see Figure 10.1 for the sovereign bases of the UK). The 1960 Constitution created a presidential system, with a Greek Cypriot President and Turkish Cypriot Vice President elected by their respective communities. As part of a number of safeguards designed to protect the rights of the Turkish Cypriot minority, the Vice President was given veto rights over defence, foreign affairs and security matters. The Turkish Cypriots were also assured of a representation of 30 per cent in the civil service, and in the unicameral legislature, which was to consist of 35 Greek Cypriot and 15 Turkish Cypriot members. The same ratio was obtained in the ten-member Council of Ministers, three of whose members were Turkish Cypriots, and one of whom had to hold the Defence, interior or foreign affairs portfolio. The constitutional system broke down with the outbreak of intercommunal fighting in late 1963. UN peacekeeping forces have been present on the island since 1964, after the outbreak of clashes in December 1963 between the Greek Cypriots and the Turks (see Figure 10.1 for the UN buffet zone). As a result of the Turkish invasion in 1974, 36 per cent of the territory of the Republic of Cyprus is still under the illegal occupation of the Turkish

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occupying forces. As a result there were 162 000 Greek Cypriots refugees who were forced to abandon their homes and move to the south. In 1983, the Turkish Cypriots declared the Turkish invaded and occupied area as the ‘Turkish Republic of Northern Cyprus’, an illegal entity that is recognized only by Turkey. Government and legislation The president of the republic is the head of state and is elected by universal suffrage, for a five-year term. The President appoints the Council of Ministers, which is the executive organ of the republic. The House of Representatives, where all legislative power lies, is made up of members of different parties. It is a multi-party democratic system. Most Cypriot laws are translated into English, since the English language is vital to the island’s commercial, legislative and administrative activities. The Supreme Court, the Assize and District Courts administer justice. Local government is the responsibility of the Municipal Councils in large cities and the Community Councils in villages. These councils are independent bodies whose members are elected by universal suffrage. Economy Throughout the post-independence period, Cyprus has had a record of successful economic performance, reflected in rapid growth, full employment conditions and external and internal stability. Cyprus’s economy has been transformed from a poor, underdeveloped agricultural economy into a service-based one. By the late 1990s, Cyprus was already ranked as one of the top 12 performers worldwide in terms of its average annual growth rate of Gross Domestic Product (GDP) per capita. Cyprus has an open free market economy, with a limited government role over regulation and the provision of public utilities. Cyprus’s economy is market-oriented, with the private sector playing the dominant role. The government’s role focuses on the creation of favourable entrepreneurial conditions through the maintenance of macroeconomic stability, the development of an economic, social and legal infrastructure and the achievement of social and environmental objectives. Since 2004, and as a full member of the European Union, Cyprus is ready to meet successfully the challenge of being part of the enlarged European family. The island’s economy is characterized by robustness and macroeconomic stability, which is evidenced by the favourable evaluations and comments of the European Commission, the International Monetary Fund and other international organizations. In addition, in 2003, Cyprus was ranked twenty-fifth in the United Nations Index of Human Development. During the period 1999–2003, the Cyprus economy recorded real GDP growth of the order of 3.5 per cent, which compares favourably with the EU average. It is noteworthy that this growth was accomplished in an environment of full employment conditions, low inflation and a stable and strong currency. Cyprus’s per capita GDP has reached about 80 per cent of the corresponding euro area average. In addition, it should be pointed out that important structural reforms are in progress in order further to modernize and liberalize its market-oriented economy, with a view to enhancing its international competitiveness and EU compatibility. These structural reforms, together with macroeconomic stability, provide a strong foundation for the successful participation of the island in the euro area in the near future (Central Bank of Cyprus, 2005). To get a more complete picture of the economic situation of the island, selected economic indicators are presented in Table 10.1 that follows.

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Table 10.1

Selected economic indicators

Official international reserves Tourist arrivals Tourist receipts Current account balance (5) Inflation rate Registered unemployed GDP (at current prices) GDP (real growth) GDP per capita (CYP) GDP per cap.(PPS) (8) GDP per inhabitant (PPS) (8) Gen. government surplus ( )/deficit () Gen. government surplus ( )/deficit () Gen. government Domestic public debt (2) Domestic public debt (2) Foreign public debt (2) Foreign public debt (2) Net total public debt (2) Net total public debt (2) Ttal public debt Total public debt Total foreign debt (7) Total foreign debt (7)

2000

2001

2002

2003

2004

% change (4) Cyp EU-25100 PPS Cyp mil.

1153 10.3 16.5 5.3 4.14 3.4 5679 5.0 8188 85.8 17000 133.9

1558 0.4 6.5 3.3 1.97 2.9 6103 4.1 8703 88.8 18200 138.7

1734 10.3 11.0 4.5 2.80 3.1 6370 2.1 8977 83.2 17600 283.9

1607 4.8 10.4 3.0 4.14 3.5 6805 1.9 9444 81.8 17500 427.7

1750 2.0 3.2 5.8 (3) 2.3 3.6 7216 3.7 (1) 9841 (1) 81.1 (f) 18100 (f) 306.3 (1)

% of GDP

2.4

2.3

4.5

6.3

4.2 (1)

Cyp mil. % of GDP Cyp mil. % of GDP Cyp mil. % of GDP Cyp mil. % of GDP Cyp mil. % of GDP

2581 45.5 820.8 14.5 3402 59.9 5407 95.2 1755 30.9

3016 49.4 760.6 12.5 3776 61.9 5998 98.3 2213 36.3

3308 51.9 844.7 13.3 4153 65.2 6559 103.0 3036 47.7

3686 54.2 1059 15.6 4745 69.7 7359 108.1 3541 (3) 52.0 (3)

3785 (6) 52.5 (6) 1417 (6) 19.6 (6) 5203 (6) 72.1 (6) 7982 (6) 110.6 (6) 4200 (3) 58.2 (3)

Cyp mil. % change (4) % change (4) % of GDP % change (4) % of EAP

Notes: (1) Estimated, (2) excluding intragovernmental and short-term liabilities of the Central Bank to the IMF, (3) provisional data, (4) percentage change compared with the corresponding period of the previous year, (5) as of 2000, balance of payments statistics are being compiled on the basis of the BPM5 definition of residency, (6) prefinal, (7) as of 2002 there is a break of series due to the adoption of the BPM5 definition of residency, (8) source, Eurostat (f) forecast. Source: Central Bank of Cyprus (7 June 2005), www.centralbank.gov.cy.

Generic/background and specific existing theory on the subject Literature on the subject of SMEs and their internationalization, while extensive, with regard to its generic application is extremely limited in relation to Cyprus. This chapter approaches the subject conceptually by first investigating the ‘orthodox’ SME theories as developed by the classical researchers of SME management, strategy and marketing. Subsequently, the Cyprus-specific differentiating factors that necessitate fundamental adaptation of the generic theories are presented. Generic SME theories’ literature review With the knowledge that, consequent to its size and other macroenvironmental factors, Cyprus exhibits a number of traits that probably make direct adoption of generic SME

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internationalization theories impossible, a lengthier but more reliable methodological approach was chosen. Specifically, the subject of SMEs was reviewed firstly in its fundamental forms (competitive, economic, management, strategic and marketing) as presented in classical SME theory. This method has allowed for the elements that make up the SME internationalization theories to surface individually, easing their subsequent adaptation to Cyprus and ensuring they are both specific and scientifically solid (Jones and Coviello, 2005). Contemporary theories on SME internationalization are later injected and overlapped to increase the accuracy of the findings. Reviewing ‘classical’ SME literature, a number of general observations are in order. Firstly, most authors and researchers hold the ‘you’ll know one when you see one’ attitude towards small firms, presenting many definitions but often not supporting one. This is a natural result of the fact that the word ‘small’ is defined differently according to industry, market, country, time and the rest. Secondly, the subject is analysed, mostly with minimal differences and/or contradictions, but often through different perspectives, the most common being business, financial, economic and social. Some differences and contradictions are nevertheless met, such as differences in the definition of small firms in terms of size, the entrepreneurial element as a small firm characteristic and whether small firms attract a higher or lower level of employees. Thirdly, the economic and social benefits of small business existence and activities are sometimes presented along with individual small business analysis, potentially misleading the reader to believe that the small businesses sector advantages are individual small businesses advantages as well. Finally, the majority of literature reviewed assumes a market environment consisting of small to large firms, a much different situation to the case of Cyprus. A number of findings, though, do carry special weight relative to this research: 1.

2.

3.

4.

5.

6.

Despite the widely acceptable notion of small firms’ inability to affect their environment, exceptions do exist such as ‘niche’ and geographically isolated ones (Storey, 1997). Both cases, especially the latter, are applicable to Cyprus. The ‘grounded’ definition of small firms (Storey, 1997), that is, categorization after industry research, poses as a better option for this research than simply accepting one of the many existing definitions. There is a general, though vague relation between small firms and entrepreneurship (Storey, 1997; Ballantine et al., 1993), which creates the need for this research to include the latter as a separate but incorporated element (see further in this section). Small firms, apart from their general definition and characteristics, can also be divided according to ‘conditions’, that is, those that are small because their market dictates it is the best option, those that are small as an evolutionary stage to getting bigger and so on. This view affects the strategic perspective of this research by relating small firm theory to the market environment and firm strategy (Stanworth and Gray, 1997). Management and individual-form culture deficiencies are largely presented as the direct or indirect reason for small firm competitive disadvantages (De Chiara and Minguzzi, 2002), with the owner/manager institution furnished with a largely negative image (Keasey and Watson, 1995; Griffin, 1987; Barrow, 1993). Especially valuable for CySMEs is the observation that small firm theory is naturally related to the market profile in terms of company sizes. Markets with high

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Handbook of research on European business and entrepreneurship proportionate population of small firms diminish the importance of specific-tosmall-firms characteristics and along with these their advantages and disadvantages (Storey, 1997; McMahon et al., 1993; Hall, 1996). Overall characteristics and conditions of the economy appear as a comparatively even more major parameter affecting small-firm characteristics (Kangasharju, 2000) and demands further investigation.

Regarding SMEs not individually, but as a sector of the economy, some valuable additional information has been collected in prescriptive form regarding the direction that should be given to small firms both collectively and individually. This information, further to its generic value, also carries special weight relative to this research’s focus: 1.

2.

3.

4.

There is a strong relation between small firm theory and environment. This is a point already met but here it is further substantiated through the economic perspective contributing additional parameters specific to SMEs. This further justifies this research’s approach to work on first principles rather than simply adopting generic theory (Storey, 1997; Julien, 1993; Curran and Blackburn, 1998). ‘Locality’ surfaces as a major parameter in small firm theory though there is some contradiction with respect to its nature amongst researchers (Curran and Blackburn, 1998; Shutt, 1998; Bentley and Shutt, 1995; The European Observatory for SMEs, 1996). The potential for cooperation and support between SMEs is another factor that appears crucial to success and involving many areas of the firms’ business (Storey, 1997; Shutt, 1998; Bentley and Shutt, 1995; Shutt, Robertson and Sear, 1995). Government policy and involvement also appears as a parameter carrying special weight since, further to its usual relation with the economy and business, it may have specific policies to support small firms. Also further to central and local governments, the EU poses as a force of increasing influence (Bell et al., 2004; Storey, 1997; Curran and Blackburn, 1998; Shutt, 1998; Bentley and Shutt, 1995; Shutt, Robertson and Sear, 1995; The European Observatory for SMEs, 1996).

Investigating the fundamentals of entrepreneurship within the context of SMEs, again a number of points can be identified as bearing special weight regarding this research: 1.

2.

It is evident that, irrespective of terminological descriptions in the study of small firm entrepreneurship theory, the most vital element is the person at the centre: the owner/manager and entrepreneur. The person therefore must be studied in conjunction with the firm and not as part of the firm (Wickham, 1998; Hellriegel and Slocum, 1992; Keasey and Watson, 1995; Kao, 1991; Megginson et al., 1991). Entrepreneurship appears to be a result of internal (mostly personal) factors rather than environmental ones. Despite this fact, though, it also appears that the environment has the ability to ‘promote’ or ‘resist’ entrepreneurship either directly or through its influence on the entrepreneur (Wickham, 1998; Keasey and Watson, 1995; The European Observatory for SMEs, 1996).

Internationalization of SMEs in Cyprus 3.

4.

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The value of correct terminology is comparatively small as regards this research, as its interest lies more in specifying characteristics than defining their totality. As a result, Mintzberg-style analysis (Mintzberg and Quinn, 1991) appears to be the most valid form of basis towards development. A distinction should be made between creativity and innovation, the latter being the practical application of the former. This gives rise to implementation as an important issue.

SME strategy and marketing theory are expectedly more focused than general theory and closer to this research’s focus, but not to the degree that it (or parts of it) might provide a solid platform for Cyprus SME theory to rest on. On a more positive note, SME strategy and marketing generic theory are free of various complexities such as multi-level management, global expansion and so on, while most aspects and elements are simpler. It would be easy but wrong, though, to disregard the negative side. Firstly, the small-firm definition varies extremely from research to research and averages much higher than CySMEs’ average size. This in turn means that existing strategy and marketing research is based on a different category of businesses from CySMEs. Secondly, the given environment is different from the Cyprus one mostly in terms of geographic isolation, smallfirm concentration and absence of large firms. Somewhat unexpectedly, therefore, SME strategy and marketing literature review overall have provided little assistance, though some points have been deemed noteworthy and are presented here: Stevenson’s perception of entrepreneurship as dimensions of management provides a welcome alternative to the more conventional definitions (Stevenson, 1991). Guides and lists provided towards conducting audits, internal analyses, plans and so on are useful in defining the simpler structure of small firms. Some valid points, furthermore, are made with respect to specific SME strategy and marketing tasks and processes. These do point out also the frame of mind that should rule the thinking on the subject (Dewhurst and Burns, 1993; Wickham, 1998). It is also apparent that in small-firm strategy and marketing research, macroenvironmental studies have no diminished value. The personal/psychological parameters of the management, on the other hand, appear to be granted an increasingly vital role in the formation and application of SME strategy and marketing and its related processes (Hay and Kumshad, 1994; Dewhurst and Burns, 1993; Wickham, 1998). Cyprus-specific literature review As mentioned earlier, existing literature on CySMEs is extremely limited and what there is does not substantially relate to the question of internationalization. This research, though, provides some vital information. This research is a result of a multidimensional, comprehensive and largely qualitative methodological approach, which proves valuable for this research in two ways. On the one hand, it provides primary data specific to SMEs in Cyprus and on the other it concentrates on construction consulting services firms. This focus, although more specific than this research’s, does relate to it, as Cyprus SME internationalization will expectedly be undertaken primarily by professional services firms (see later in this chapter). The first set of data directly applicable to this research relate to a number of factors that differentiate the CySMEs’ environment from the one assumed in generic research. These differentiating factors are especially important since

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they consequently alter the degree and nature of the forces underlying the need for internationalization, as well as the degree and nature of the actual implementation of the internationalization process. 1.

2.

3. 4. 5. 6. 7.

8.

9. 10. 11.

12. 13. 14. 15. 16. 17.

The professional services firms in Cyprus have been largely developed only in the last two to three decades, consequently often lacking in maturity, control and organization at a collective level. Decades-long severe political turbulence that ended in the late 1970s but was continued by uncontrolled economic growth resulted in a general macroenvironmental lack of organization. The present stability and fair organization are newly achieved and many professional services have not yet mastered the survival skills necessary for this new and highly competitive environment. The general competitive environment is extremely susceptible to economic conditions and especially the tourist sector, with abrupt changes in demand. The market is extremely small, with the geography of the area limiting extremely the ability of firms to expand their operations and grow. The market is predominantly made up of very small (micro) firms. Social norms and attitudes often dictate organizational approaches that defy business logic. A major Cyprus SME internal environment characteristic is the disproportionately strong element of power being concentrated in a single person, this almost always being the (founder-) owner–manager. The concentration of power results in its turn in a number of internal environment peculiarities: it creates the potential for better control, better intra-firm relationships and increased efficiency and flexibility, but renders the overall structure more vulnerable and fragile by depending on the knowledge, experience, instinct, personal conditions, personality, periodic psychological states, values, beliefs and ability of a single person. The family firm is a frequent case among CySMEs, though the elements of such firms are similar to the ones met in generic literature. CySMEs also carry a disproportionately large number of characteristics generally accepted in related literature as also belonging to entrepreneurial firms. In Cyprus, university-level education is usually obtained abroad, resulting in a very high understanding and knowledge of foreign cultures, languages, environments, methods, techniques and attitudes. Professional education ranges from minimal to non-existent and what there is, is largely organized by a semi-governmental authority. The market size does not provide niches and allows little specialization, while it rewards the development of multiple skills and a wide spectrum of activities. Research and development always was and still is very limited, both with respect to technology and business management/organization. The competitive environment is frequently fierce, with a very high buyer (client) bargaining power. A most important effect is competition frequently becoming price-dependent. Low fees result in cost cutting, often through diminished quality, and consequently creating a situation where firms offer lower quality than what they are capable of and

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18.

19. 20.

21. 22. 23. 24. 25.

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than what they would have preferred to offer, against their clients’ interests largely because of the clients’ wrongful perception of what is in their interest. There is a distinct lack of Cyprus SME collective experience in competition, which often leads to a form of competitive environment with no widely accepted notions of ethical competition. There is a confused sense of product value among the clients, with very few large/experienced returning clients. There is a confused sense of services’ value as well, with most clients not understanding the range and nature of firm responsibilities, but often placing on these a much greater value than they do on the actual product (core service) itself. ‘Social networking’ or ‘connections’ appear to play a hugely disproportionate role in the CySMEs’ competitive environment. Mostly for practical/business reasons, acquisitions are very limited. Mostly for personal/social reasons, mergers are also rare. For political and geographic reasons, international expansion involves a sudden ‘leap’ from local competition, without the natural intermediary step of national competition. The home country international competitive position and the individual SCACEC international competitive position are naturally unique to Cyprus, encompassing a mixture of economic, political, cultural, technological and other characteristics.

These points, especially the last two, combined with the general information that exists on the business environment of Cyprus and the knowledge obtained from the generic SME literature review, allows some further analysis and development to reach some conclusions in relation to the internationalization of CySMEs. Analysis and development Current Cyprus SMEs’ international competitive situation In view of the current domestic competitive situation, search for and penetration of new markets appear to provide a potential solution to the problems of many CySMEs and the only ground for growth for others. In order, however, to decide on the wisdom or otherwise of this option, it is not enough to simply confirm the increasing difficulties of the domestic competitive environment. It also crucial to see the potentialities of expansion, its threats and the relative advantages and disadvantages of CySMEs in the international competitive environment. International expansion Up to now, very few CySMEs have attempted to undertake projects abroad. The past has seen some international activity, but past experience, although helpful, does not appear to have set any foundations for further activities abroad. Any attempt at expansion abroad must be considered as a new start, under different conditions, largely as a result of the new European status carried by CySMEs. The most attractive markets currently appear to be Greece, the Middle East, North Africa, Eastern Europe and Russia. CySMEs that meet their objectives through their current volume and nature of work in Cyprus do not need to look further. Those that find themselves either dissatisfied by their degree of success in Cyprus or simply wanting more have three choices: (a) wait for an

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expansion of their markets in Cyprus, which for most will probably be slow and minor, even assuming that it will happen; (b) obtain a larger market share, a relatively difficult aim under the present harsh competitive conditions; and (c) expand abroad. It is evident, nevertheless, that CySMEs are not willing to take the risk of expanding abroad unless they have a good chance of success. They appear to be especially afraid of their lack of knowledge of the markets despite their belief that the combination of price and quality they offer can compete with most potential competitors for most clients/projects. The general notion, though, of expanding abroad as a means to solving the problem of increased competition at home is evidently challenging. It is in fact accepted that expansion abroad may be so vital that for some it is seen as making the difference between a firms’ survival and death. It is also recognized that, even where it is not a matter of survival, the possibilities and opportunities are such that it may very well be wise for an attempt to be made in this direction. Investigating the matter in a more practical dimension and attempting to answer the question of what is actually being done by the individual firms towards this end, a contradiction has surfaced between theory and practice. Firstly, firms are unwilling to take the risks associated with an organized attempt to expand abroad. Secondly, while the option is not rejected, attitude is by and large passive, with the firms not actively seeking the opportunity to internationalize themselves but basically waiting for the ‘right opportunity’, which in itself is largely undefined. Thirdly, the possibility of attempting a cooperation/association with a foreign firm, although not rejected, is seen as a remote one. Lastly, while there is a firm belief that CySMEs can offer a cost/quality combination that is very competitive in the international arena, an implicit fear of competing with larger and more experienced foreign firms is obvious. The idea of attempting to expand abroad appears to be much more attractive if it is made in combination with other firms, in a collective fashion that would reduce risk, and with the possible support of the government (Bell et al., 2004). Home country international competitive position Human and physical resources In the case of CySMEs, the domestic competitive disadvantage of human resource saturation turns into an advantage in the international arena. The current situation of excess professionals with high-level, internationally recognized qualifications and salaries lower than most developed countries provides a competitive strong point in what is one of the most important parameters in international competitive environments. It is also evident that CySMEs offer an attractive combination of high ability, low salaries and low fees compared to firms from the most advanced nations. This, apart from making them more competitive, ensures that the comparatively high fees of foreign markets will compensate for the cost inefficiencies caused by undertaking projects there. Capital resources The good economic situation of the island is naturally accompanied by the strengthening of the financial sector. Assuming that the will exists, and that conditions are favourable enough in the eyes of the financial institutions to invest in CySMEs’ attempt at expansion, there are considerable financial resources within Cyprus to fully support the venture. In the opposite case, capital resources will become available to CySMEs according to the securities they can offer.

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Technology and infrastructure The findings with respect to international competition is that the island offers all the technology, infrastructure, communications and transport needed for international activities, to a standard that not only allows competition on an equal basis, but in some cases would even provide a competitive advantage. Economic and political stability As previously discussed, Cyprus is in the peculiar position of being very stable both economically and politically but with both conditions fragile owing to uncontrollable external factors mainly related to the Cyprus Problem. This results in their being considered sometimes as an advantage, sometimes as a disadvantage, and sometimes not even as a parameter in the island’s competitive position. In the case of CySMEs, their international activity would not require any major investment by a foreign client or financial institution, in Cyprus itself. As a result, even if the situation is considered to be unstable, any potentially negative developments would still have very moderate effects on the investment. The estimation of risk is of course also very much dependent on the perception and image individual potential clients have of Cyprus. The recently acquired EU membership in combination with the expected entry to the EMU, nevertheless, has by and large extinguished the fears of most sceptics. Image and status of Cyprus abroad The image of Cyprus abroad appears to vary considerably from country to country. In the Middle East, Cyprus appears to have a fairly good image as a provider of services since global/international companies use Cyprus and Cypriot personnel as their Middle East ‘stepping stone’. The high-rate economic growth of the last two decades and the continuously strengthening relations between Greek and Cypriot professionals have also resulted in considerable respect and status being given to the latter by the former. A good image of Cypriot professionals appears, furthermore, to be held by Eastern Europeans and, especially, Russians. As a result of good general Cyprus-related promotional tactics, the island becoming a major offshore business centre for Russian companies, the considerable investment of Cypriots in Russia, as well as the fact that Cyprus is a favourable business and tourist destination, the Cypriot professionals have come to be considered to be of high calibre (though this is truer of business and related services than of engineering and technology). Lastly, in Western Europe and the UK, Cyprus is being respected as offering services often of a level comparable to most developed countries, but this is not generalized. Each case is judged on its own merits and judgment is largely objective and realistic. Though the above are not supported by any indepth research it is also apparent that the newly achieved EU member status has further strengthened the image of Cyprus abroad, especially in non-EU countries. Geographical position A valuable international competitive advantage is Cyprus’s geographical position. At the crossroads of three continents, with frequent direct flights to West European, East European, Middle East and North African countries, it is well positioned for its businesses to compete for clients and undertake projects in any of these areas or markets. International relations The geographical position, though, becomes even more important considering another national competitive advantage: that of the well-preserved international relations. Cyprus, despite (perhaps because of) its very weak political and

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military status, has managed to retain, not just a neutral, but a very actively positive, relationship with all the countries of its wider geographical area (Turkey excepted). With the very delicate international relationships governing the countries of the Middle East and North Africa, being able to conduct business outside the shadow of political conditions is an advantage for CySMEs. On a ‘personal’ political level, Cypriots are considered ‘neutral’ and ‘harmless’, the best status perhaps that can be given to a western-like foreigner in these potentially profitable markets for CySMEs. Excellent political relations also exist between Cyprus and most East European countries (especially Russia): despite their being some distance away they appear to be the most popular CySMEs markets. Bilateral agreements bind many of these countries to Cyprus in many business areas. These agreements include double-taxation abolishment, motivation for investment, area developments, trade and industry cooperation and so on. These political relations are not simply business-supported, but often go back in time and are based on close historic ties and the Christian Orthodox Church, which is still quite influential. Western European political ties are equally strong and with the entrance to the EU they are getting not only stronger but also formalized at all levels and dimensions. The liberal nature and attitude of western economies, however, does not place much importance on political relations, at least not in relation to private clients or projects of the scale CySMEs would currently aim at. The good political relationship with Western Europe therefore appears to have comparatively moderate benefits to provide. Finally, Greece is considered an open and promising market for CySMEs since Cyprus–Greece relationships, after many alienating years, have now reached a stage where little differentiation is made between a Greek and a Cypriot firm. This of course is on a more theoretical or psychological than practical level, since practical market differences, laws, norms and bureaucracy do not allow the excellent sociopolitical relations to be fully reflected in the area of business. Cultural relations The historically European culture of Cypriots strengthened by EU membership, as well as the very strong influence of Western countries (mainly the UK) on the business-world culture of Cyprus, make cooperation and business relations with the West most comfortable. The Russians and many East Europeans place greater importance on social/cultural parameters than West Europeans do. The close historic and religious ties and similarities in the mentality of the Cypriots to Russians and Eastern Europeans have proved in many cases much more valuable than any other more tangible advantage. Past experience showed that there is often more trust in the cultural/behavioural similarities with Cypriots than there is in the usually more methodical, rational and professional attitude of Westerners. A similar advantage is also held relative to the Middle East, where again many cultural similarities prove beneficial to the relations with both the Arab world and Israel, again with substantial business gains. The findings of this research stress the importance of cultural communication and understanding as a major national competitive advantage, especially in Cyprus’s geographical region (Dana, 2000). Governmental international influence and support This is perceived as a major competitive disadvantage, as the small economy of Cyprus cannot support or even substantially promote Cyprus businesses abroad. The reality of the situation is that the government

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cannot, financially, substantially provide support for a systematic, full-scale venture abroad. Some measures of partial funding do exist but they are mostly inadequate for a serious attempt to expand abroad. At the same time, Cyprus has little international diplomatic, political or military weight. As a result it cannot secure big contracts for its companies through indirect ways as practised by stronger nations’ governments. Furthermore, there are very few business ventures by government-controlled organizations in other countries and, although this may change in the medium-term future, it is unlikely to become a parameter for successful internationalization of CySMEs. With a handful of exceptions (primarily banks), there are also no really large Cypriot companies operating abroad to provide substantial assistance. Government support, therefore, is limited to minor financial funding, the organization of seminars, exhibitions and so on to promote Cypriot firms, the building of good international political relations, hopefully accompanied by formal agreements, and finally the provision of information to Cypriot firms on the international business situation and some general guidance. One platform for support is the EU through its various programmes for SMEs and so on but it is still a novelty for CySMEs and the results are still to be observed. It is very likely, though, that this may be one of the most solid foundations on which CySMEs will come to rely when taking major evolutionary steps in the future, including the one of internationalization. Current individual CySMEs’ international competitive position The specific-to-individual-firms (that is, not national) advantages are crucial to the nature and extent of the internationalization process (Sternberg and Arndt, 2001) and very much depend on the profile and characteristics of each CySME and its owner-manager. One potentially very strong advantage is the language, since the huge majority of professionals in Cyprus are at least bilingual. Furthermore, the range of countries in which the CySMEs’ professionals have studied is wide and therefore equally large is the knowledge of habits, norms, systems and languages of foreign markets by CySMEs’ professionals. The great majority of these can speak well to fluent English, while a substantial number can additionally speak Russian, French, Italian, German and/or other languages. Another individual advantage is international networking, which some CySMEs have been quick to build and does provide important sources for business opportunities, support and assistance (Oviatt and McDougall, 2005; Konstadakopoulos, 2000). Networking in this situation has a double meaning: on the one hand, it refers to foreign companies that may seek CySMEs’ services abroad, and on the other it refers to the connections with other CySMEs already established abroad, which can be used as ‘vehicles’ for internationalization. A further advantage is the fact that CySMEs, like many SMEs internationally (Nakos and Brouthers, 2002), are considered to be very flexible and easily adaptable to varying situations. Used to doing so throughout the changes that occurred within Cyprus, but also through their sometimes frequent collaboration with foreign firms, CySMEs have an organizational structure which, although very vague and undefined, is very flexible (this refers to flexibility and adaptability to new conditions and circumstances, and not to management systems where rigidity has been observed). The frequent domination of a single individual (usually the owner–manager) can play a decisive competitive role as either an advantage or a disadvantage, since adapting to specific conditions mostly depends on this individual.

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An additional competitive advantage may arise in the case of CySMEs attempting a group attempt to compete for clients or projects abroad. This will largely depend on the nature and degree of both the organization of and the government support for such a venture. Its realization will allow the collective potential of a group of CySMEs to be directed towards larger clients or projects that individually no CySMEs would target. Furthermore, this spreads risk, reducing it to levels that the CySMEs’ conservative nature (Hadjimanolis and Dickson, 2000) will accept. To allow the presentation of the above findings in a single model, Figure 10.3 was designed. This outlines the major forces that are seen to be the moderators of success in the internationalization of CySMEs. International environmental analysis by Cyprus SMEs As indicated above, a large number of parameters affect the internationalization process of CySMEs. This, in combination with orthodox strategic and marketing practices as dictated by the generic literature, necessitates that a comprehensive and systematic environmental analysis (strategic/marketing audit) should be the pillar of any proper CySMEs’ internationalization process. The findings, nevertheless, show that the current application of international environmental analysis is without question one of the least developed of CySMEs’ management processes and a long way from reaching a very necessary systematic and rational approach. The need for international expansion, therefore, naturally also gives rise to the need for proper international environmental analysis. Most CySMEs’ professionals, though, used to the informal, personal and largely empirical analysis of the local CySMEs market, find it difficult, not just to implement the process properly, but sometimes even to conceive the notion of the process. The current approach mostly relies on personal experience and word-of-mouth information obtained by friends and/or colleagues who have had some (even minimal) experience of the target foreign market(s). This information is often highly subjective, inaccurate and in any case unreliable. It is strengthened by some support from governmental bodies, and potential markets’ governments themselves who organize Domestic Demand Conditions

Home Country International Competitive Position

Home demand conditions, size of demand and demand growth patterns, demand internationalization Pioneering Ability CHANCE

Individual CySMEs’ International Competitive Position

Figure 10.3

Opportunity to use Internationalized Local Firms

International competitive environment component

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seminars and meetings to facilitate expansion abroad. This information, although much more reliable, is hardly enough for a CySME seriously considering to expand abroad. The variety of other sources available is rarely used, with the exception of random newspaper and non-academic journal articles, themselves also usually of limited reliability. The most valid analysis is made, where possible, based on personal experience, though even this largely depends on the breadth of international experience of a CySME. In the majority of cases, the sample of experiences is not adequate to provide even moderately acceptable knowledge. The whole situation is unjustified because Cyprus provides access to most of the available information on all of the most popular target markets. Again, academic and other research work is almost never consulted. The problem is not expected to continue indefinitely, as slowly but surely more appropriate management techniques are applied in analyses. One phenomenon, though, that appears to have a powerful but more indirect effect, is the fact that the lack of proper knowledge results in fear of foreign markets and, consequently, restrains CySMEs from attempting international expansion. There is no doubt that international environmental analysis is a function that needs considerable improvement and the required attention of a process that may support the greatest evolutionary change for a CySME, the expansion abroad. The importance of the function, therefore, is such that even the paid services of management consultants or marketing researchers should be considered. This relates to the very few larger CySMEs, but mostly to the potential for group efforts to expand abroad. As the international environmental analysis does not involve only the understanding of the international market but also the evaluation and choice of alternatives, its correct application would provide not only a practical tool within the target markets but also a competitive edge over other CySMEs competing for Cypriot investors/clients and their projects abroad. Figure 10.4 presents a comprehensive strategic marketing management system for the internationalization process of a CySME. The system includes the elements that make up the components of the internal, competitive and international environment. It also indicates the position and role of the environmental analysis process in developing the general strategy and specific marketing components. Equally importantly, the figure interrelates these components into a functional system. Overview, conclusions and proposals towards the internationalization of Cyprus’s SMEs The above sections have presented the home country and individual CySME international competitive position. The obvious question springing from these is as follows: what practical and specific strategic and marketing steps should be taken to maximize CySMEs’ potential for success abroad? First of all, a general domestic environmental analysis (both internally and externally) and a subsequent SWOT analysis will allow the CySME to decide whether the international option should be considered. Assuming that it should, then a brief environmental analysis of the possible markets and a comparison to the SWOT of the CySMEs will indicate the most attractive market. Having chosen the target market, an in-depth analysis is necessary for the CySME to form its general and marketing strategies. Figure 10.4 portrays these processes in more detail. The CySME can wait for a specific opportunity to enter the market, such as undertaking a project in the foreign market for local or Cypriot investors. Alternatively, it can penetrate the market and open an office, branch and so on without having anything

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BUSINESS/ MARKET STRATEGIC PLAN

Figure 10.4

Structure & Relationships, Processes, Leadership, Attitude, Behaviour & Mentality, Balance of Theory & Practice, Client & Quality Focus

IMPLEMENTATION

BUSINESS/ MARKET STRATEGY FORMULATION

MACROENVIRONMENT

SWOT ANALYSIS

INTERNATIONAL ENV. ANALYSIS

EXTERNAL ENV. ANALYSIS

INTERNAL ENV. ANALYSIS

COMPETITOR ANALYSIS

CUSTOMER ANALYSIS

ENVIRONMENTAL ANALYSIS PROCESSES

Matching Company/Country Needs, Adopting Marketing Mix to Target market (5 Ps), Development of Marketing Plan

THE MARKETING MIX (Client & Quality Focus)

Strategic Marketing Plan (Client & Quality Focus)

Identification of Alternative Plans And Mixes

Estimation of Expected Results

Delivered Value

THE MARKETING PROCESS

Product, Price, Promotion, Place, People, Plasticity Balance & Interrelation

Product Positioning

Marketing Programmes (Client & Quality Focus)

Implement, Assign Responsibility, Control, Measure Performance, Evaluate, Correct

Short to Medium-term Assumptions

INTERNATIONAL STRATEGIC MARKETING

Resistance-toMarketing Factors

Business/Market Strategy & Objectives

Marketing Audits

A comprehensive internationalization strategic marketing management system for CySMEs

THE STRATEGY PROCESS

Diagnose Results Measure Results Corrective Action

FEEDBACK & CONTROL

Resource Allocation, Business Definition, Systematic Evaluation of Alternatives, Tailored Objectives, Programme Plans, Annual Plans

SELECTED & ADAPTED GENERIC STRATEGIES

GENERAL ORGANIZATIONAL DIRECTION Scope, Mission, Intent, Objectives, Personal Value & Aspiration, Culture, Economic Social Role, Non-economic Social Role, Bottom-up & Top-down, Client & Quality Focus

Goal Formulation

Strategy Formulation

CLIENT & QUALITY FOCUS

INTERNATIONAL COMPETITIVE ENVIRONMENT

THE ENVIRONMENT

CAPITAL & MONEY MARKETS, CREDITORS, MATERIAL & SERVICES INTERNAL ENVIRONMENT LEGAL, DEMOGRAPHIC, CULTURAL, TECHNOLOGICAL, MARKETS, LABOUR, TRADE UNIONS, COMMUNITIES, SPECIAL ECONOMIC, POLITICAL, NATURAL INTEREST / PRESSURE GROUPS, CENTRAL/LOCAL GOVERNMENTS, Characteristics INTER-FIRM RELATIONS, PROFESSIONAL ASSOCIATIONS, MERGERS/ Decision Centralization, Flexibility & Adaptability, Riskier, ACQUISITIONS/ JOINT VENTURES, SMALL FIRM POPULATION SIZE, DOMESTIC COMPETITIVE ENVIRONMENT Delegation of Responsibility, Enthusiasm, Quality, LOCALITY & SYNERGY, ROLE/IMPORTANCE OF PROFESSIONS, Importance of Independence, Personal Financial Objectives, DEMAND FLUCTUATIONS, INDUSTRY UNIQUENESS, EXTERNALLY Primary Real Perceived Minimal Training, Minimal Planning Procedures, Multiple INTRODUCED INNOVATION, IMPORTANCE OF MARKET PULL OVER Activities Value Client Client Skills / Lack of Specialization TECHNOLOGY PUSH Margin Chain Value Value Secondary Activities Total Client SCACEC OWNER / Substitutes Home Country International Competitive Position Price MANAGER Client ENTREPRENEUR Threat of Substitutes Bargaining Power Opportunity to use Industry Competitors Structure Factors Individual Internationalized Direct Supervision, Structure, Supplier Client SCACEC CHANCE Local Firms Little Staff, Loose System, International Rivalry Amongst Division of Labour, Style, Competitive Bargaining Existing Firms Little Formalization, Staff, Domestic Demand Position Power of Little Org. Complexity, Skills, Conditions Suppliers Threat of New Entrants Small Managerial Strategy, Home Demand Conditions, Pioneering Hierarchy, O/M Power Superordinate Goals Potential Size of Demand and Demand Ability Concentration Entrants growth Patterns, Demand Internationalization

INDUSTRY ENVIRONMENT ELEMENTS

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specific at hand. Intermediate solutions are also available through joint ventures and/or alliances. These are probably the best ways to enter a market even in the case where the projects are already undertaken. Joint ventures or alliances with local firms or foreign ones with experience in the specific market will allow the CySME the time and experience necessary to gain the knowledge required to operate independently. Alliances with foreign companies can also be achieved through joint ventures in Cyprus on specialist projects. The foreign firm may also use the CySME as a base for operating in the geographical area around Cyprus. An alliance with foreign firms is, furthermore, likely to provide the CySME with professional experience through its contact and cooperation with a larger, more formalized and probably more professional firm (at least functionally). This in its turn will maximize the probability of a successful internationalization process (Nakos and Brouthers, 2002). Possibly the best way to start expanding abroad is to participate in business ventures which are partially or totally funded and/or controlled by Cypriot firms. There are multiple benefits to this method: (a) there is safety in dealing primarily with people belonging to a familiar professional and cultural environment, (b) the same stands for the client, which strengthens the relation between the two, (c) procedural matters such as payments and contract details can be much more easily arranged, and (d) the matter of distance becomes less important as a large number of service delivery and contact points would occur at the base-country (Cyprus). This research additionally emphasizes that CySME managers should consider the international expansion option very seriously. It is time for CySMEs to give up the notion that expanding abroad is only a theoretical option. This is indeed a big step to take, but the number of false perceptions that inhibit or frighten the CySMEs from taking it must be corrected: 1.

2.

3.

Expanding abroad does involve a number of (especially financial) risks but these are within the acceptable limits of a typical small firm in a western-style liberal economy. The nurtured expectation of CySMEs of big returns on low investment/low risk ventures does not fit the highly competitive economic/market conditions, as they are being formed and solidified over the past few years. Undertaking projects abroad does require some considerable knowledge of possibly very different systems, conditions, procedures, laws, regulations and norms. The small and ‘insulated’ market of Cyprus has inevitably created correspondingly small and closed-minded CySMEs who find it difficult to accept the idea of operating abroad and do not accept the concept of actually investigating and studying a different market, even from a distance. The means and tools (Internet, research, books, embassies, seminars and so on), though, are easily accessible at low cost and they should be fully utilized. Fear of the new and different is natural, but rational business thinking must overcome it and allow logic to prevail. The attitude of ‘let others try first and if they succeed we shall follow, learning from their successes and mistakes’ is wrong. The international markets are indeed huge by Cyprus standards and they can easily accommodate the penetration and coexistence of all willing CySMEs. Timing though – or, to be accurate, speed – is important. The reason is that, as mentioned before, expanding through other Cypriot large firms who wish to expand or invest abroad (banks, land developers and so on) is the way to bear

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4.

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Handbook of research on European business and entrepreneurship the lowest risk and maximum probability of success. The first CySMEs to follow this path (some have already begun the effort) are the ones to form strong formal or informal associations with these large firms, which are themselves limited in number. These CySMEs will build such competitive advantages in relation to international clients/projects that it will be extremely difficult for followers to displace them. They will have the knowledge of the markets, the experience of the markets, a successful business and professional past with the large firms and even common, mutually dependent, interests with them. It is highly unlikely that these large firms will switch from these CySMEs and put their trust in inexperienced ones even if the latter try to compete on price. One might argue that existing strong networks/connections can bypass business logic and that CySMEs, which have this type of power, will enter the international markets in a safer, guaranteed way ‘through the back door’. It is probable that such a thing will play a part in the competitive race towards securing the support of the large ‘vehicle’ companies, but to a much smaller degree than it does in Cyprus. Firstly, the stakes are higher. In Cyprus the large firm does not especially mind which CySMEs it cooperates with, since regularly many can satisfy its requirements and therefore choice is sometimes made based on a rationale that is not centred on pure business interest. Abroad, choosing an internationally inexperienced CySME is a comparatively much greater risk. This is further supported by the finding that large Cypriot firms are getting more and more professional, that decision making takes place within a continuously stronger business/rational context, and that the firms themselves are getting more and more impersonal and detached from social, personal or political beliefs and affiliations. A simple extrapolation of these facts into the short-to-medium term future strengthens the idea of time being a crucial factor in establishing a CySME’s successful international presence. Although not widespread, there is an obvious ‘inferiority complex’ among many CySME professionals. There is a belief that CySME professionals are not able to produce the quality of work that their EU and USA counterparts do. This research has found no evidence to support such a belief. All indirectly-related gathered data, however, point in the same direction: a good CySME (at least in professional services) can compete with most foreign counterparts for clients or projects suitable to its size and experience, and based on the CySME’s home country and individual competitive advantages.

One more fundamental question arising from the findings is ‘which CySMEs stand the greatest probability of a successful implementation of the internationalization process?’ The answer, as expected is difficult to answer and impossible to resolve specifically. Nevertheless the findings themselves strongly indicate that professional services are probably the ones. These would include professions such as business and construction consultants, IT services companies, financial organizations, academic and professional education institutions, land developers and many more. The reasons for being considered more suitable are multiple: (1) the advantage of high education levels with low professional job salaries in Cyprus means that ‘white-collar’ workforce firms alone have this advantage (in fact blue-collar jobs in Cyprus are relatively highly paid); (2) the agricultural and manufacturing sector in Cyprus is diminishing in importance, largely owing to the inability of Cypriot CySMEs in these sectors to compete with the larger foreign companies;

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(3) services are frequently more easily exported, at a lower cost and with a lower risk than tangible goods; (4) the home-country international business image is positive primarily in relation to professional services; (5) the culture-based international advantages of Cypriots are especially important in high-contact personal-touch business collaborations and this of course is a natural attribute of professional services; (6) it is likely that individual professionals with international experience and potential will be part of a professional services firm; lastly (6) professional services are often peripherally accompanying other services, making it much easier to support each other (De Chiara and Minguzzi, 2002) and therefore increasing the probability of ‘vehicle-based’ internationalization (see above) and also the probability of success for all. It is not possible (or at least it is difficult) to take the step of international expansion without having the proper strategic marketing management basis to guide and support such a venture. It is the general organizational direction that will set the scope and mission that leads to internationalization; it is the business and functional strategy that will show the way; it is the strategy implementation that will turn theory to practice; it is the marketing processes within the strategic context that will set and organize the specifics and the ‘fine-tuning’ of the venture; and it is the feedback and control that will make sure that the venture is kept on the right track. A proper strategic marketing management system is the very medium in which all international steps of a CySME, from conception to everyday running, from people to places, from processes to relationships and from products and services to attitudes and norms, should exist. It is therefore the primary need for a CySME with a potential for international expansion to set aside the empirical, circumstantial approach and to adopt a strategic marketing management system unique to the specific CySME, for the specific CySME and according to the people, conditions, abilities and potentialities of the specific CySME. References Ballantine, J.W., F.W. Cleveland and C.T. Koeller (1993), ‘Probability, uncertainty and firm size’, Small Business Economics, 5, 87–100. Barrow, C. (1993), The Essence of Small Business, Englewood Cliffs, NJ: Prentice-Hall International Ltd. Bell, J., D. Crick and S. Young (2004), ‘Small firm internationalization and business strategy’, International Small Business Journal, 22(1), 23–34. Bentley, G. and J. Shutt (1995), ‘Negotiating and implementing objective 2 SPDs in the English regions’, paper presented at the ninth Congress of AESOP (Association of European Schools of Planning), 16–19 August. Central Bank of Cyprus Official Homepage (2005), July, www.centralbank.gov.cy. Curran, J. and R. Blackburn (1998), Small Firms and Local Economic Networks: The Death of the Local Economy, London: Paul Chapman Publishing Ltd. Dana, L.P. (2000), Economies of the Eastern Mediterranean Region – Economic Miracles in the Making, Singapore and London: World Scientific Publishing Co. Pte. Ltd. De Chiara, A. and A. Minguzzi (2002), ‘Success factors in SMEs’ internationalisation process: an Italian investigation’, Journal of Small Business Management, 40(2), April, 144–54. Dewhurst, J. and P. Burns (1993), Small Business Management, 3rd edn, New York: The Macmillan Press Ltd. Griffin, R.W. (1987), Management, 2nd edn, Boston, Mass.: Houghton Mifflin Company. Hadjimanolis, A. and K. Dickson (2000), ‘Innovation strategies of SMEs in Cyprus, a small developing country’, International Small Business Journal, 18(4 ), July–September, 62–78. Hall, G. (1996), Surviving and Prospering in the Small Firm Sector, London: Routledge. Hay, M. and K. Kumshad (1994), ‘Small firm growth: intentions, implementation and impediments’, Business Strategy Review, 5(3), Autumn, 49–68. Hellriegel, D. and J.R. Slocum (1992), Management, 6th edn, Reading, Mass.: Addison-Wesley Publishing Company. Jones, M.V. and N.E. Coviello (2005), ‘Internationalisation: conceptualising an entrepreneurial process of behaviour in time’, Journal of International Business Studies, 36(3), May, 284–304.

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Julien, P.A. (1993), ‘Small business as a research subject: some reflections on knowledge of small business and its effects on economic theory’, Small Business Economics, 5, 157–66. Kangasharju, A. (2000), ‘Growth of the smallest: determinants of small firm growth during strong macroeconomic fluctuations’, International Small Business Journal, 19(1), October–December, 5–18. Kao, J.J. (1991), The Entrepreneur, Englewood Cliffs, NJ: Prentice-Hall. Keasey, K. and R. Watson (1995), Small Firm Management: Ownership, Finance and Performance, Oxford: Blackwell Business. Konstadakopoulos, D. (2000), ‘Learning behaviour and co-operation of small high technology firms in the ASEAN region’, ASEAN Economic Bulletin, 17(1), April, 48. McMahon, R.G.P., S. Holmes, P.J. Hutchinson and D.M. Forsaith (1993), Small Enterprise Financial Management: Theory and Practice, Sydney: Harcourt Brace and Company. Megginson, L.C., C.R. Scott and W.L. Megginson (1991), Successful Small Business Management, 6th edn, Homewood, IL: Richard D. Irwin Inc. Mintzberg, H. and J.B. Quinn (1991), The Strategy Process, 2nd edn, Englewood Cliffs, NJ: Prentice-Hall International Editions. Nakos, G. and K.D. Brouthers (2002), ‘Entry mode choice of SMEs in Central and Eastern Europe’, Entrepreneurship: Theory and Practice, 27(1), Fall, 47–64. Oviatt, B.M. and P. McDougall (2005), ‘The internationalisation of entrepreneurship’, Journal of International Business Studies, 36(1), January, 2–9. Republic of Cyprus Government Official Homepage (2005), July, www.cyprus.gov.cy. Reuber, R.A. and E. Fischer (2002), ‘Foreign sales and small firm growth: the moderating role of the management team’, Entrepreneurship: Theory and Practice, 27(1), Fall 29–46. Shutt, J. (1998), ‘Industrial clusters and led business support: contrasting strategy evidence from the North of England’, paper presented to the Conference on Networking and Small and Medium Sized Enterprises, Universita di Bologna, 19–20 June. Shutt, J., M. Robertson and L. Sear (1995), Strengthening ERDF Business Development Support in Yorkshire and Humberside, A Final Report to GOYH Following the Objective 2 Business Support Workshop, April. Stanworth, J. and C. Gray (1997), Bolton 20 Years On: The Small Firm in the 1990s, published on behalf of the Small Business Research Trust commissioned by National Westminster Bank, London: Paul Chapman Publishing Ltd. Sternberg, R. and O. Arndt (2001), ‘The firm or the region: what drives the innovation behaviour of European firms?’, Economic Geography, 77(4), October, 364–76. Stevenson, H.H. (1991), A Perspective on Entrepreneurship, Englewood Cliffs, NJ: Prentice-Hall. Storey, D.J. (1997), Understanding the Small Business Sector, London: International Thomson Business Press. The European Observatory for SMEs (1996), Fourth Annual Report, European Network for SME Research. Wickham, P.A. (1998), Strategic Entrepreneurship, UK: Pitman Publishing.

Websites http://geography.about.com/library/cia/nccprus.htm (02 August 2005) http://kcm.co.kr/mission/map/flags/Cyprus.jpg www.centralbank.gov.cy www.cyprus.gov.cy.

11 Internationalization of Danish SMEs Per Servais, Erik S. Rasmussen, Bo B. Nielsen and Tage Koed Madsen

Introduction Denmark is a small, open economy highly dependent on trade with other countries. As foreign trade accounts for most of the gross domestic product (GDP), Denmark has a strong interest in the free exchange of goods and services between countries. Consequently, Denmark has joined economic organizations such as the EU, the UN (Denmark was a cofounder in 1945) OECD and WTO and, within the framework of these, has striven to remove obstacles to free trade. Owing to the lack of natural resources and the limited size of the country (approximately 5 million inhabitants) small firms and only a very limited number of multinational corporations (MNCs) characterize the Danish manufacturing industry. While Danish companies increasingly operate abroad, just as many foreign companies establish themselves in Denmark. In 2001, net investments by Danish companies abroad thus amounted to DKK 57 billion, while foreign companies invested DKK 40 billion in Denmark. Most of both incoming and outgoing direct investments are in financing and business services. Most of the Danish investments abroad are in Europe, while most of the foreign investments in Denmark come from EU countries outside the euro zone. Foreign trade accounts for two-thirds of GDP and around two-thirds of the total foreign trade is with other EU countries. The principal export goods are industrial machinery and instruments, followed by chemical products and industrially processed agricultural products. Consumer goods constitute around 30 per cent of imports, while raw materials and semi-manufactured products, including energy, machinery, other capital equipment and means of transport, account for the rest. Small and medium sized enterprises (SMEs1) are a very important part of the Danish economy, comprising the majority of business enterprises and accounting for a substantial proportion of economic activity in the country. Thanks to the decline in trade barriers and the advances in technology and logistics, Danish SMEs are internationalizing at an accelerating rate. However, for many Danish SMEs during recent decades, the internationalization process does not follow traditional patterns of building upon a stable domestic position before gradually, and sequentially, engaging in international activities. Rather, evidence suggests that a new pattern of international entrepreneurship, based on rapid, if not instant, internationalization, is emerging. The existence of ‘Born Globals’ and ‘International New Ventures’ has been identified and described in the literature, but few studies have explicitly linked international business behaviour and entrepreneurship in an effort to explain the internationalization patterns of SMEs (see Academy of Management Journal, 2000, 5, special issue on international entrepreneurship). The present study is focused on the phenomenon of International New Ventures and examines the internationalization behaviour of Danish industrial firms during the first three years of operation, including both selling and sourcing activities. Our rich data set 171

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allows us to provide both a historical account and a detailed analysis of the internationalization process of Danish SMEs, thus contributing to research on international entrepreneurship (McDougall and Oviatt, 2000). The analysis in this chapter answers questions concerning the pattern of internationalization of Danish SMEs. Our primary contribution is a classification of the internationalization pattern of Danish SMEs based on their international behaviour during the first three years of operation. The analysis also explores the differences in internationalization across sectors and regions, as well as investigating the evolutionary changes in the internationalization process by Danish SMEs prior to 1982 and up to 2001 in an attempt to develop new knowledge of international entrepreneurship based on the characteristics of Danish SMEs. The chapter proceeds as follows. After a short presentation of the theories of International New Ventures, the next section provides a short overview of relevant literature on internationalization of Danish SMEs. After a description of the sample and the data collection process of the present study, we proceed to an overview of the patterns of internationalization of Danish SMEs based on a classification of different internationalization strategies inspired by the literature on International New Ventures (see McDougall, Shane and Oviatt, 1994; McDougall and Oviatt, 2000; Oviatt and McDougall, 1994; Oviatt and McDougall, 1995; Oviatt and McDougall, 1997; Oviatt and McDougall, 2005). We conclude with a discussion of our findings and provide evidence of a new category of international entrepreneurship, which leads to suggestions for future research. International New Ventures In contrast to the slow and gradual internationalization process described in the classical ‘Uppsala’ model (Johanson and Wiedersheim Paul, 1975; Petersen and Pedersen, 1997), Oviatt and McDougall (1994, p. 49) focus on newly started firms and define an International New Venture (INV) as a business organization that, from inception, seeks to derive significant competitive advantage from the use of resources from, and the sale of outputs in, multiple countries. In contrast to traditional organizations that develop gradually from domestic firms to multinational enterprises, the INV starts out with a proactive international strategy despite starting with only one or a few employees or entrepreneurs. Concerning the governance structure of activities, McDougall, Shane and Oviatt (1994) claim that there are key differences between established firms and start-up firms, due to the amount and sources of resources. The latter type of firms will only have a few resources left for expensive investments in, for example, distribution channels; therefore, in comparison with established firms, the entrepreneur must rely more on hybrid structures for controlling the sales and marketing activities (close personal relationships, joint ventures and so on). McDougall, Shane and Oviatt (1994) further argue that the founders of INVs are mostly concerned with the possibilities of combining resources from different national markets, because of the competence they have developed from their earlier activities. International entrepreneurs are able to avoid domestic path dependence by establishing ventures, which already from the beginning have routines for managing a multicultural workforce, for coordinating resources located in different nations and for targeting customers in several geographic places simultaneously. Oviatt and McDougall (1994) propose a matrix, based on two dimensions, viz. the number of countries and the international

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coordination of value chain activities. The matrix recognizes the relevance of the different activities in the international value chain, that is, foreign selling as well as international sourcing. This matrix has formed the background for the typology developed later in this chapter. Recent research on Danish export behaviour A large study of Danish firms’ international establishment pattern concludes that Danish industry consists of two dominant groups of firms. The first group consists of larger and older firms, which have conducted an array of activities abroad in a way very similar to the patterns described in the Uppsala model (Johanson and Vahlne, 1977). The second group consists of smaller and younger firms, which have only partly followed the Uppsala model and typically leapfrogged different stages in the model. The existence of the latter group is confirmed by a comparative research study carried out in the Nordic countries by Lindmark et al. (1994) focusing on the internationalization pattern of Nordic SMEs. Using a study of 328 exporters from Finland, Norway, Sweden and Denmark, they concluded that the firms’ domestic markets no longer seem to be as important a ‘learning place’ as earlier studies demonstrated. A high proportion of the exporters started their international activities just after the birth of the firm. About 20 per cent of them did so within one year of their inception; two years later the percentage had risen to roughly 50. The Danish data reveal that firms born within the last 10 to 15 years start exporting faster than do older firms. Results from another empirical study in Denmark by Industri- og Handelsstyrelsen (1992) show similar patterns, and in a longitudinal study (from 1985 to 1993) of 948 newly established firms in Denmark, Christensen and Jacobsen (1996) report that a rising number of these firms started exporting within the first years of existence. They conclude that different firms have different routes to internationalization ‘based on differences in established contacts and knowledge acquired prior to the initiated new business’ (p. 7). Market knowledge, personal networking of the entrepreneur, or international contacts and experience transmitted from former occupation, relations and education are examples of such international skills obtained prior to the birth of the firm. In a more recent study of Born Global firms in Denmark, Madsen et al. (2000) collected data from 272 small and medium-sized Danish firms (between 10 and 499 employees). Born Globals were defined along the criteria suggested by Knight and Cavusgil (Knight and Cavusgil, 2004; Knight and Cavusgil, 1996; Knight, 2000; Knight, 2001) meaning that a firm was a Born Global if it had been established after 1976, had a share of foreign sales of 25 per cent or higher and started exporting within three years of its inception. According to these criteria, 47 out of the 272 firms were categorized as Born Globals. The remaining firms were divided into three categories: 48 firms with 10 per cent foreign sales or fewer were labelled ‘Experimental Exporters’; 65 firms with 70 per cent foreign sales or more were labelled ‘International Firms’; and the remaining 112 firms were named ‘Traditional Exporters’. The categorization was inspired by the internationalization literature and follows the same operationalization of categories used in previous research on Danish exporters. The high number of Born Globals in the sample has led to some considerations regarding the definition of Born Globals since many of the exports from the region are heading towards neighbouring countries like Sweden and Germany. Moreover, only firms engaging in international sales (exporting) of some kind were included, neglecting companies that purchase (sourcing) from international suppliers.

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The present study utilizes a richer data set in the pursuit of a more accurate classification of the internationalization process of Danish SMEs. In a survey of Danish and Norwegian SME internationalization, Moen and Servais (2002) did not find a gradual development in international activity regarding export intensity, distribution, distance to markets served and number of countries or international orientation. No association was found between the firm’s year of foundation and export intensity, international orientation, distribution, psychic/geographical market distance or the number of markets served. One result in accordance with the stage models did occur: firms that had exported for a long period did export to a larger number of countries than newly established exporting firms did. Overall, the results of this study do not support the existence of a gradual international development process as predicted by the Uppsala model. In summary, existing empirical evidence suggests that the classical Uppsala model with its gradual development from the home market to new, geographically close markets does not explain the internationalization behaviour of the majority of the Danish industrial firms. Instead, evidence suggests that firms develop along networks to countries and customers with which they are familiar, regardless of geographic proximity. The underlying reasoning of the Uppsala model is still valid (see Madsen and Servais, 1997), however, since the internationalization behaviour of firms does follow a gradual learning approach, and typically the learning process goes back many years before the actual foundation of the new firm. Thus, in order to understand a firm’s true internationalization behaviour, we have to examine its history more closely (Rasmussen, Madsen and Evangelista, 2001). The remaining part of the chapter investigates the international activities of Danish manufacturing firms through an empirical analysis of a large survey from 2004/2005. As such, this study supports existing empirical findings and can be seen as a further elaboration on the existing literature of International New Ventures. Methodology The project ‘Market Strategy of Firms in Global Environments’2 has primarily focused on new (international) business ventures. Business firms of interest to the project are manufacturing firms. Firms established in 2002 or later were disregarded since no economic performance data were available and only firms with a minimum of 10 employees as of 1 February 2004 were included. Firms established before 1982 were only included if on 1 February 2004 they had more than 50 employees. The population of business firms studied was identified by means of a public database, which lists all private Danish business firms, and 3048 firms met the criteria. Some incorrect registrations were identified along the process of data collection, and some of the firms were impossible to approach. Initially, a letter was sent to the CEO of all the firms. Attached to the letter were seven questions of central importance to the total project. These seven questions provide the basis for classifying firms as different types of ventures. The letter was addressed directly to the CEO of the company. As a next step, as preconditioned in the initial letter, all CEOs were approached by telephone in order to ask them to participate in the survey and to answer the seven questions. During April and May 2004, a marketing research bureau carried out this part of the data collection, supported by the team of researchers. In this process, 49 incorrect registrations were identified (firm was closed, further doublets, firms with wrong NACE code and so on) which reduced the population to 2908 firms.

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Because of budget and time constraints, it was decided to contact each firm only five times. If it was not possible to reach the CEO after five phone calls, the firm was defined as unreachable, and thus as not belonging to the population. This was the case for a total of 381 firms, which led to an effective population size of 2527 firms. About 57 per cent of the firms in the effective population of 2527 firms (1456 firms) refused to participate in the survey. A non-response bias test showed no significant differences between the two groups in terms of size, year of establishment and turnover. The test led to the conclusion that no significant differences were present and that the sample was representative. The number of firms responding to the seven questions regarding internationalization, enclosed with the introductory letter, was 1031. The 1031 firms that answered the seven questions are significantly younger (average year of establishment: 1982) than the 1496 firms who did not answer the questions (average years of establishment: 1978–79). Except for this, we found no significant differences between respondents and non-respondents. Classification of Danish SMEs As mentioned above, we asked the CEOs seven questions related to the internationalization of their firms. In accordance with the definition by Oviatt and McDougall (1994) of an International New Venture, one of the questions investigated the firms’ international sales (exporting within the first three years), whereas another question pertained to their international purchases (sourcing within the first three years). For the purpose of the present study, we only make use of the questions regarding the firms’ international sales. The limit of three years is often used in the literature (see Rialp, Rialp and Knight, 2005, for a discussion). The limit for moving from being international to being global has been set at 25 per cent of sales outside Europe, again according to the tradition in the Born Global research (see Knight and Cavusgil, 2004; 1996; Madsen, Rasmussen and Servais, 2000). Traditionally there has been no differentiation between different types of geographical markets, but Denmark is such a small market that we find it relevant to distinguish between firms oriented towards the European markets and firms exporting on a global scale. This led us to three types of firms: the Born Local Seller, with no export at all within three years after the foundation; the Born European Seller, with export to the European market, but with no or a limited export outside Europe (less than 25 per cent of the firm’s export) within three years after the foundation; the Born Global Seller, with a truly global sales perspective of 25 per cent or more outside Europe within three years after the foundation. Table 11.1 shows the classification in a historical perspective related to the year of foundation, divided into three periods: the ten years from 1992 to 2001, the previous decade from 1982–1991, and the years up to 1982. As indicated in Table 11.1, large differences exist between the three periods. Examining the local firms with no international sales within three years after the foundation, we find that the number of locals has been decreasing from more than 70 per cent of the population in the first period to just below 50 per cent in the second period and then eventually to less than 30 per cent in the last period. This shows that less than one out of three new firms in Denmark founded in the last 10 years have no international sales within the first three years after their foundation. If we include international sourcing as an international activity, less than one out of eight new firms in the last decade had no international

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Table 11.1

Classification and the foundation year

Type of firm

Established before 1982 Established 1982–1991 Established 1992–2001 Total

Born local seller Born European seller Born global seller

317 71.4% 112 25.2% 15 3.4%

127 47.6% 124 46.4% 16 6.0%

64 28.8% 119 53.6% 39 17.6%

508 54.4% 355 38.0% 70 7.5%

Total

444 100%

267 100%

222 100%

933 100%

activities in the first three years after the foundation. In the same vein, it is clear that the proportion of Born Global Sellers has been rising: from 3 per cent in the first period, to 6 per cent in the second period and eventually to 18 per cent in the last decade. Hence the data indicate that most new industrial firms in Denmark have a strong international focus from the foundation and thus do not seem to follow the traditional incremental internationalization pattern suggested by the Uppsala model. Industry and market As often mentioned in the literature (for example, Rialp, Rialp and Knight, 2005; Knight and Cavusgil, 2004; Dimitratos et al., 2003; Moen and Servais, 2002; Madsen, Rasmussen and Servais, 2000; Madsen and Servais, 1997), the existence of firms that are born global can be explained by differences between industries. Thus high-tech industries, such as biotechnology, medical equipment and so on should contain a disproportionally large number of Born Global Sellers, whereas traditional industries, such as furniture, metal production, machinery and so on, should contain a relatively smaller number of Born Global Sellers, all other things being equal. In Figures 11.1, 11.2 and 11.3, we have placed the three types of firms according to the main NACE groups. In the figures below, we have collapsed the NACE groups into seven main groups according to the information we had from the questionnaire and from secondary data. The first six groups are the typical industrial groups and the seventh is the ‘new’ types of industries, such as software development and research. As illustrated in Figures 11.1, 11.2 and 11.3, and as expected, Born Local Sellers are overrepresented in the classical industry of producing metals; however, we observe Born Local Sellers in all industries. The Born European Sellers are not overrepresented or underrepresented to any significant degree in any industries, but are more prevalent in the production of machinery and equipment and in the production of food and textiles. The Born Global Seller type of firm has sales on a worldwide scale and, as shown in Figure 11.3, these firms are overrepresented in the industries of electrical and optical equipment and in the new industries of software and research. In a similar vein, we find a very small number of Born Global Sellers in the classical industry of production of metals. Although many Born Global Sellers seem to be located in knowledge-intensive industries, and even if some types of firms are underrepresented in some industries, we do observe examples of all types of firms in all industries.

Internationalization of Danish SMEs

Born Local Sellers 2% 8% 11%

Food, textiles etc 21%

Chemicals, plastic, etc

13%

Metal products, etc Machines and equipment Electrical and optical

16%

Furniture and transport Software and research

29%

Figure 11.1

Born Local Sellers and industry Born European Sellers 10%

2%

14% Food, textiles etc Chemicals, plastic, etc

15%

Metal products, etc 20%

Machines and equipment Electrical and optical Furniture and transport

20%

Software and research

19%

Figure 11.2

Born European Sellers and industry Born Global Sellers 16%

7% Food, textiles etc 11%

7% 7%

Chemicals, plastic, etc Metal products, etc Machines and equipment Electrical and optical

17% 35%

Figure 11.3

Born Global Sellers and industry

Furniture and transport Software and research

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First export country and year of foundation In the present study, the respondents were asked about information regarding the firm’s first countries of export. The question was designed to allow the respondent to write more than one country or a part of the world as the answer. This information was recoded into three parts of the world: the Nordic countries, rest of Europe and rest of the world. If the answer, for instance, was Sweden and China as the first export countries, the recoding will have been ‘rest of the World’. The total number of firms that answered this question was 792. As is evident from Figure 11.4, the Nordic countries are very important as the first step towards exporting, but the importance has been steadily decreasing. The importance of the European market has been growing slightly and the importance of exporting to the rest of the world has been growing fast with regard to importance as the first international export market for Danish manufacturing firms. During the last decade, almost 20 per cent of the firms with exports had exports to countries outside Europe as the first market, further supporting the notion of increasingly rapid internationalization of Danish SMEs. However, even if the Danish SMEs have developed a more global outlook in their sales activities, our data show that they have rather limited global sales. In the latest available year (typically 2003) the Danish SMEs as a group had 60 per cent of their sales in Denmark, 32 per cent on the European market (outside Denmark) and only 9 per cent on a global scale (outside Europe). Naturally, the Born Global Sellers had the highest amount of global sales, with 32 per cent. Hence, although our study shows a trend toward an increase in global focus among Danish SMEs, the vast majority of firms still seem to look for export opportunities within Europe and rely on these geographically close markets for the majority of their sales. Up to now we have been focusing on export as the only variable in the internationalization of the SMEs. Export is, however, only one of several international activities undertaken by SMEs. Hence additional international activities need to be included as part of 100% 90% 80% 70% 60%

Rest of World

50%

Rest of Europe

40%

Nordic countries

30% 20% 10% 0% Established before 1982

Figure 11.4

First export region

1982–1991

1992–2001

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the analysis in order to capture the true nature of internationalization of SMEs. Consequently, in the next part of the chapter, we look at different types of international activities, such as sourcing, production and so on. Activities abroad The respondents to the questionnaire were asked to identify the type of international activities their firm had during the first three years after foundation. The answers were divided into five groups: (a) we did not have any kind of activity abroad; (b) we had production abroad; (c) we had sales and marketing abroad; (d) we had service abroad; (e) we had supply from abroad. More than 500 firms answered that they had one or more activities abroad during the first three years. If we use the three groups previously described and divide them into groups according to one, two, three or four activities abroad (see Figure 11.5 below), the finding seems clear. The most internationally active firms are without any doubt the Born Global Sellers. Of the total number of firms with activities abroad during the first three years, 105 are Born Local Sellers, 355 are Born European Sellers and 70 are Born Global Sellers. As one would expect, the most common combination of activities abroad is sales and sourcing; however, a large number of firms with service as one of their activities abroad can also be found. Few of the firms had production abroad within the first three years of establishment and these firms were typically among the largest. For the Born Local Sellers (with no sales outside Denmark in the first three years) the typical foreign activity was sourcing. From this analysis, it seems obvious that, even if a firm is labelled ‘Born Local’, owing to a lack of export activities within the first three years after foundation, it can be highly active internationally in areas such as sourcing, service or production. A classification of firms according to all types of international activities in general could thus lead to the % 100 90 80 70 60

Four activities

50

Three activites

40

Two activities

30

One activity abroad

20 10 0 Born Local

Figure 11.5

Born European

Born Global

Type of firm and number of activities abroad in the first three years

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false conclusion that almost all Danish firms belong to the group of international firms. This is not, however, the case, as a large group of firms (43 per cent) exist (all of them Born Local Sellers) that did not have any kind of activity abroad during the first three years. Concluding remarks Denmark is a small, open economy highly dependent on trade with other countries. International trade is not only important to the production of GDP; interaction with foreign suppliers and customers supplies the Danish SMEs with vital information and knowledge regarding product development, production expertise and so on. In this chapter, we divided Danish SMEs into three categories: the Born Local Seller with no export, the Born European Seller, which is selling internationally but primarily within Europe, and finally the Born Global Seller, which has a truly global perspective in terms of sales. The majority of SMEs in the sample (approximately 54 per cent) can be characterized as Born Local Sellers with domestic focus, whereas the second-largest group is Born European Sellers (approximately 38 per cent), predominantly focusing on the European market. Born Global Sellers only constitute 8 per cent of the population, suggesting that Danish SMEs, largely, focus on geographically (and culturally) close markets. The survey also showed that locally oriented firms have diminished their dependence on the Danish market; however, it still appears that the Danish industrial firms to a large extent are dependent on the home market, which accounts for approximately 60 per cent of their total sales. Naturally, the Born Global Sellers are the most global with 32 per cent global sales. Born Local Sellers were found to be overrepresented in the classical industry producing metals yet we find Born Local Sellers in all industries. The Born European Seller sells primarily to Europe. These firms are slightly overrepresented in the industries of production of machines and other types of equipment for the industrial markets as well as in the production of food and textiles. The Born Global Sellers were overrepresented in the industries of electrical and optical equipment and in the new industries of software and research; however, these are present in all industries. Hence our data seem to supports the notion that industry differences are important as a critical variable in predicting internationalization behaviour, albeit perhaps of slightly diminishing importance as industries and customers increasingly globalize. Nordic countries were found to be very important as the first step towards exporting, but the importance has been steadily decreasing. The importance of the European market has been growing slightly and the importance of exporting to the rest of the world has been growing fast. During the last decade, almost 20 per cent of the firms with exports had exported to the world outside Europe as the first market, further supporting the notion of increasingly rapid internationalization of Danish SMEs. Moreover, our evidence points to a more complex picture of internationalization when other activities in the global value chain, such as sourcing, production and service, are included. Danish SMEs seem to fall into two distinct categories, either highly internationalized with several activities across the value-chain performed outside Denmark during the first three years of operation, or, conversely, highly localized with few or no activities abroad during the first three years of operation.

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A picture emerges that seems to suggest that Danish SMEs no longer follow traditional incremental internationalization patterns but rather increasingly consider the world at large as a potential source for access to competitively priced input as well as sales. While some SMEs in some industries continue to focus heavily on the home market and remain born locals, others internationalize rapidly and often to geographically and culturally distant areas without an apparent need for incremental increase in market knowledge. Part of this trend can be explained as offshoring3 of labour-intensive, blue-collar activities to low-cost countries like China, India and Ukraine. Considering the vast pool of well-educated people living in these low-wage countries, however, Danish firms may also have begun offshoring of white-collar, that is, knowledge-intensive,4 activities. This may have important implications for policy, including creation or loss of knowledge-intensive jobs, as knowledge societies like the Danish become further embedded in the global economy. Reflections on future research Our results show that a classification that builds upon export as the only variable could be too narrow. We suggest a broader classification, including all types of international activities, may be more relevant. Furthermore, our data indicate that the classical internationalization model from the ‘Uppsala school’ is no longer valid for explaining the complex decisions managers of SMEs make regarding internationalization. As market complexity grows as a result of globalization and cross-border networks, our data suggest that firms respond by internationalizing specific parts of their value-chain, based on comparative advantages across global markets. In the ‘classical’ survey research of SME internationalization, the firm is seen as the unit of analysis, but in the research in the years to come we must focus more on the entire value-chain or even value-system, including firms in upstream and downstream activities. During the explorative stage of our research, we came across a number of entrepreneurial firms which seemed to ‘live’ from outsourcing from other entrepreneurial firms. As an illustration, Firm A is a two-year-old company, established by a Dane and a Lithuanian. Many small clothing designers are facing problems in managing the production process abroad. Firm A is taking care of the production drawings of the collection, assigning suppliers for the production, shipping textiles to production facilities, movement of the collection to different production sites, and shipping of the final goods to various customers. In a sense Firm A is taking over the supply-chain management on behalf of the customers, leaving these to concentrate on collection development (design) and marketing of the products. The customers internationalize in terms of sales, but all other activities are internationalized through Firm A via the outsourcing process. Another example of this kind of ‘outsourced internationalization’ is Firm B, which is three years old and was established by four Danish engineers, who all had previous experience in different industries to do with outsourcing. Firm B handles the international outsourcing activities of other small and medium-sized manufacturing firms: from making usable production drawings (carried out in Russia by a Russian draughtsman), finding the optimal places of production (Poland, Slovakia, India, China and so on) via an established net of contacts and finding suppliers for those places, to managing the delivery logistics to the Danish customers. Hence the Danish customers can concentrate on assembling the final products and sales and marketing of these. Like Firm

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A above, Firm B is highly internationalized, but mostly based on the outsourcing of its customers’ activities. For the same reason, the customers, who are typically small firms with scarce resources and little or no international experience, are also highly internationalized in their value-chain activities, albeit via the intermediary (Firm A or B). Neither Firm A (or B) nor the customers typically show up in the studies of internationalization, as these firms seem to fall somewhat between categories. The intermediary firms (A and B) can be categorized as international sourcing service companies with a high degree of international activities, albeit not via export or sales themselves as their customers are Danish companies. Similarly, the Danish customers may not export a significant part of their products. However, they too exhibit a high degree of internationalization as they source from international vendors, albeit via the Danish intermediaries (Firm A or B). In order to capture this kind of internationalization it is necessary to broaden the concept of firm internationalization and Born Globals to focus not only on the sales and supply side, or the products offered by these firms, but also on the processes these firms carry out. Hence, future research on internationalization of SMEs should include considerations about both international sourcing activities and the role of intermediary companies in assisting SMEs in their international entrepreneurial efforts. Moreover, as evidenced by the cases cited above and throughout the exploratory stages of our research, the role of the entrepreneurs themselves in the internationalization process of SMEs may be underestimated. Often leaders of entrepreneurial start-ups and the ‘born global’ type of firm have extensive prior international experience and established formal (and informal) networks, perhaps gained from prior jobs within the industry, which may account for the increasing proportion of born global firms. For instance, in many of the so-called ‘new’ types of industries we often observe entrepreneurial spin-offs internationalizing rapidly by capitalizing on prior international networks. A different trend among SMEs is their tendency to form networks for internationalization themselves, thereby pooling their resources and internationalizing as groups (clusters) of companies rather than individual companies. In addition, many of these companies already belong to cross-national regional clusters (for example, the Medicon Valley or the Baltic Sea Region) as entire regions internationalize and the traditional national borders are blurred. These types of internationalization are not well captured in existing empirical studies of internationalization and thus we strongly advocate more indepth, longitudinal studies of SMEs both nationally and regionally. In conclusion, we offer a few central questions to guide future research on the internationalization of SMEs: 1.

2.

What is the applicability of the Uppsala model, and other traditional stage models, in explaining the complex internationalization behaviour of SMEs? Do the underlying assumptions and features of the model (such as the learning processes) still apply and, if so, under what conditions (context, industry, firm size and so on)? What is the applicability of sales (export) as the dependent variable for studying internationalization of SMEs? Do we need to include all types of international activities, such as sourcing, production, service and the rest to gain the full picture of SME internationalization?

Internationalization of Danish SMEs 3.

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What is the applicability of the single firm as the unit of analysis? With the rise of new organizational forms, such as the ‘the virtual firm’, and the increasing importance of networks, we may have to ground our analyses in value chains, value systems, clusters and so on.

Notes 1. In general, statistical definitions of a small to medium-sized enterprise (SME) use one or other of three defining measurements: number of employees, turnover or the size of the balance sheet. In this research, we use number of employees to define SMEs and we adopt the European Commission’s definition where enterprises with 250 employees constitute an SME. In the US, the definition is 500. 2. The project was sponsored by The Danish Social Sciences Research Council. 3. By offshoring is meant firms’ relocation of in-house activities from the home country to a foreign country destination. 4. By knowledge-intensive activities we refer to corporate activities that require a high human capital input relative to other production inputs, such as labour, land and physical capital.

References Christensen, Poul R. and L. Jacobsen (1996), ‘The role of export in new business formation’, RENT X Conference on Entrepreneurship and SMES in Brussels. Dimitratos, Pavlos, Jeffrey Johnson, Jonathan Slow and Stephen Young (2003), ‘Micromultinationals: new types of firms for the global competitive landscape’, European Management Journal, 21(2), 164–74. Industri- og Handelsstyrelsen (1992), Nye virksomheder og iværksættere i tal – 1985/89, Copenhagen: Industriog Handelsstyrelsen. Johanson, Jan and Finn Wiedersheim-Paul (1975), ‘The internationalization of the firm – four Swedish cases’, Journal of Management Studies, 12, 305–22. Johanson, Jan and Jan-Erik Vahlne (1977), ‘The internationalization process of the firm: a model of knowledge development and increasing foreign market commitments’, Journal of International Business Studies, 8(1), 23–32. Knight, Gary A. (2000), ‘Entrepreneurship and marketing strategy: the SME under globalization’, Journal of International Marketing, 8(2), 12–32. Knight, Gary A. (2001), ‘Entrepreneurship and strategy in the international SME’, Journal of International Management, 7, 155–71. Knight, Gary A. and S.T. Cavusgil (1996), ‘The Born Global firm: a challenge to traditional internationalization theory’, Advances in International Marketing, 8, 11–26. Knight, Gary and S.T. Cavusgil (2004), ‘Innovation, organizational capabilities, and the born-global firm’, Journal of International Business Studies, 35(2), 124–41. Lindmark, Leif, Poul R. Christensen, Heikki Eskelinen, Bo Forsström, Olav J. Sørensen and Eirik Vatne (1994), Småföretagens internationalisering – en jämföranda studie, Stockholm: NordREFO. Madsen, Tage K. and Per Servais (1997), ‘The Internationalization of Born Globals: an evolutionary process?’, International Business Review, 6(6), 561–83. Madsen, Tage K., Erik S. Rasmussen and Per Servais (2000), ‘Differences and similarities between Born Globals and other types of exporters’, Advances in International Marketing, 10, 247–65. McDougall, Patricia P. and Benjamin M. Oviatt (2000), ‘International entrepreneurship: the intersection of two research paths’, Academy of Management Journal, 43(5), 902–6. McDougall, Patricia P., Scott Shane and Benjamin M. Oviatt (1994), ‘Explaining the formation of international new ventures: the limits of theories from international business research’, Journal of Business Venturing, 9, 469–87. Moen, Oystein and Per Servais (2002), ‘Born Global or gradual global? Examining the export behavior of small and medium-sized enterprises’, Journal of International Marketing, 10(3), 49–72. Oviatt, Benjamin M. and Patricia P., McDougall (1994), ‘Toward a theory of international new ventures’, Journal of International Business Studies, 25(1), 45–64. Oviatt, Benjamin M. and Patricia P., McDougall (1995), ‘Global start-ups: entrepreneurs on a worldwide stage’, The Academy of Management Executive, 9(2), 30–43. Oviatt, Benjamin M. and Patricia P., McDougall (1997), ‘Challenges for internationalization process theory: the case of international new ventures’, Management International Review, 37(2), 85–99. Oviatt, Benjamin M. and Patricia P., McDougall (2005), ‘The internationalization of entrepreneurship’, Journal of International Business Studies, 36(1), 2–8. Petersen, Bent and Torben Pedersen (1997), ‘Twenty years after – support and critique of the Uppsala Internationalization Model’, in Ingmar Bjorkman and Mats Forsgren (eds), The Nature of the International

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Firm: Nordic Contributions to International Business Research, Copenhagen: Copenhagen Business School, 117–34. Rasmussen, Erik S., Tage K. Madsen and Felicitas Evangelista (2001), ‘The founding of the Born Global company in Denmark and Australia: sensemaking and Networking’, Asia Pacific Journal of Marketing and Logistics, 13(3), 75–107. Rialp, Alex, Josep Rialp and Gary A. Knight (2005), ‘The phenomenon of early internationalizing firms: what do we know after a decade (1993–2003) of scientific inquiry?’, International Business Review, 14(2), 147–66.

12 Internationalization of enterprises in Estonia1 Tiit Elenurm

Entrepreneurs in the Estonian economy have, for the last 15 years, been continuously exposed to international competition. After the collapse of the command economy and regaining independence in August 1991, Estonian governments have neither built customs barriers nor applied any differentiated support measures discriminating against foreign or domestic entrepreneurs. Architects of the economic transition policy in Estonia did not have good alternatives to the policy of open doors as a small population of 1.4 million was considered too limited a market to create a ‘greenhouse’ environment for protecting entrepreneurs in infant industries. Only in May 2004, when Estonia became a member of the European Union and joined the common tariff policy of the EU, did tariffs applied to imports outside the EU become an important factor influencing entrepreneurial choices in the field of internationalization. Already in 2001 the share of EU countries was 69.5 per cent in Estonian exports and 56.5 per cent in its imports (Statistical Office of Estonia, 2004). In 2004, the share of the enlarged EU-25 in Estonian exports was 80.0 per cent and in imports 77.7 per cent .The role of EU countries as export destinations has not been so high for Latvian (77 per cent) and especially Lithuanian (66.4 per cent) enterprises in 2004 (Statistical Office of Estonia, 2005). Estonian entrepreneurs in agricultural and food businesses had to compete with subsidized imports form the European Union already in the 1990s. At that time the Estonian economy started to receive a strong injection of foreign direct investments as foreign investors were actively involved in the privatization process of large and medium-sized state-owned enterprises. Accumulated foreign investments in Estonia were 2050 euros per capita by the end of the year 2000, making it one of the highest accumulated FDI levels per capita in Central and Eastern Europe (OECD, 2001). At the end of the first quarter of 2005, direct foreign investment stock in Estonia was 9022 million euros (Bank of Estonia, 2005), that is, 6678 euros per capita. The investment stock has been dominated by Swedish (54.5 per cent) and Finnish (19.9 per cent) investors. Among more distant countries active investors have come from the USA (4.2 per cent), the Netherlands (2.8 per cent), Norway (2.4 per cent) and Denmark (1.7 per cent). The share of German (1.7 per cent), British (1.7 per cent) and Russian (1.6 per cent) investments is quite small compared to some smaller Nordic and West European countries. In the year 2000, Estonia was the only Central and Eastern European country where outward direct investment stock exceeded 5 per cent of GDP. Estonia was followed by the Russian Federation, Hungary and Slovenia, each of which displayed values over 4 per cent, at least if the official statistics are to be believed (Kalotay, 2004). At the end of the first quarter of 2005 the total direct investment stock from Estonia to other countries was 1 112 million euros. Most important foreign investment destinations were Lithuania (36.8 per cent), Latvia (32.5 per cent), Cyprus (9.9 per cent), Russia (5.5 per cent), Finland (4.5 per cent), Italy (3.8 per cent) and Ukraine (3.0 per cent). Cyprus should be treated as a specific investment destination that is linked to shipping and other off-shore activities. 185

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Outward investments to Italy to a large extent reflect repatriation of profits generated by some Italian businessmen in Estonian banking and retailing businesses. In general, the majority of inward and outward investment flows are between Estonia and a limited number of its close neighbours. The high stock of Swedish direct investments in Estonia includes investments in the largest banks, Hansabank and SEB Ühispank. It is not so long ago that Hansabank was set up by young entrepreneurial Estonians as a subsidiary of Tartu Commercial Bank in 1991 and could be labelled as a small enterprise when becoming independent in 1992. In 1996, Hansabank established its presence in the largest market in the Baltic states, Lithuania. During recent years the Hansabank Group has become the largest financial institution active in all Baltic countries. On 10 March 2005, Hansabank completed the acquisition of the Moscow-based OAO Kvest bank in Russia. Hansabank is a remarkable example of internationalization, but is it internationalization of an Estonian enterprise? Hansabank has for nearly 11 years been the largest corporation listed on the Tallinn Stock Exchange. With Swedbank having acquired in 2005 the shares of the minority shareholders and gained control of all Hansabank Group shares, Hansabank has become a subsidiary of Swedbank. As from 1 July 2005, Hansabank is no longer listed on the Tallinn Stock Exchange. The Hansabank example demonstrates that internationalization of enterprises in a small transition economy and new EU member state is a tricky concept. The research on international entrepreneurship has been, in recent decades, strongly influenced by the stage approach of the Uppsala school (Johanson and Vahlne, 1977, 1990) and approaches that relate stages of entrepreneurial internationalization to product, operation mode and market dimensions (Luostarinen and Welch, 1997). The internationalization process has been described as a multi-stage increase in foreign market commitment, according to the changes in a company’s experiential knowledge (Johanson and Vahlne, 1977). That process starts with indirect exporting to geographically and culturally close markets, continues with direct exporting and ends with more resource-intensive entry modes as a wholly-owned subsidiary. Stage approaches have, over the past few years been challenged by the concept of born globals as companies which start exporting and follow internationalization strategies already at the early stage of their business activities (Knight and Cavusgil, 1996; Andersson and Wictor, 2001). Has the Estonian open doors policy supported the internationalization path described in the Uppsala school stage approach or has it created new internationalization patterns? Are direct investments from Estonia to Latvia and Lithuania reflecting internationalization efforts of Estonian entrepreneurs, or is it the process of Nordic investors internationalizing their business through Estonia as a gateway? Should we call a small enterprise whose first business transactions were export operations and which is continuously exporting 90 per cent or even 100 per cent of products a born global even if its business success is heavily dependent on strategic outsourcing decisions of one large foreign client? What have Estonian entrepreneurs learnt in developing export operations and what should they learn to be capable of internationalizing their business and being competitive in the enlarged EU markets and also globally? How can EU-sponsored development projects support technology-based SMEs and increase the role of innovative products and services in the internationalization process? We use the Estonian example to discuss these issues that are important for entrepreneurship and competitiveness development also in other changing economies.

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The Estonian business environment Rapid privatization and a simple taxation system have contributed to internationalization of entrepreneurship in Estonia. The European Bank for Reconstruction and Development has pointed out that, in 2001, 75 per cent of Estonian GDP was contributed by the private sector. Progress with small-scale privatization and the development of a foreign exchange system was already in 2001 assessed by EBRD as meeting the standards and performance norms of advanced industrial countries (EBRD, 2001). Estonia has used a proportional income taxation system, where a universal 26 per cent rate has been applied to all types of taxable income during recent decades. This rate was reduced to 24 per cent in 2005 and has to be reduced further, to 20 per cent in 2009. Starting from the year 2000, reinvested profits of enterprises are not taxed, only dividends are. This investment-friendly principle has to be adjusted to EU regulations, when the Estonian transition period in the field of taxation is over in 2009, but as SME growth is a challenge for the EU in general, there is a chance that Estonian practice that facilitates self-financing of company growth will in the future be accepted also by other EU countries. Estonia has gained fourth place in the 2005 global index of economic freedom calculated on the basis of ten criteria by the Heritage Foundation and by the Wall Street Journal (http://www.heritage.org/research, 2005). This is higher than the position of all other present and potential EU member states, except Luxembourg, which is in third place. In 2004, Estonia was sixth. Lack of external risk capital, however, has been in recent years a constraint on SME development in Estonia. Limited availability of investment loans, low availability of collateral that is acceptable to financial institutions and shortage of loans for working capital have remained problems both for start-up and growing SMEs, although a state agency, Kredex, has offered loan guarantees to SMEs in recent years. The venture capital market remains weak. Owners of growing SMEs are often forced to consider selling the company to foreign investors and to give up their role as entrepreneurs. This is an especially topical issue for SMEs in these sectors, where the business development logic assumes the likelihood of going international. A high degree of openness in the international business environment has resulted in rapid growth of exports but, on the other hand, an even more rapid increase of import flows. In 2004, exports were 4747 million euros, compared to 6727 million imports (Statistical Office of Estonia, 2005). In a small open economy more SMEs are involved in foreign trade operations than in a large economy, where the domestic market is the first growth base for the majority of new ventures. In Estonia, export development is a key activity contributing to business growth in sectors where the economy of scale is an important efficiency factor. Estonian liberal foreign trade rules before joining the EU and the stable exchange rate of the Estonian currency to the Euro have simultaneously encouraged SMEs as importers. Stable currency and restricted public spending during the 1990s have made Estonia a predictable environment for foreign investors. Estonian currency (kroon) was, from its first issue in June 1991, pegged to the German mark under an exchange rate of 8 to 1 and later to the Euro (1 EUR  15.6466 EEK). Estonian entrepreneurs involved in export and import operations with partners in the Euro area have not suffered from the currency exchange rate risk. Enterprises that have made long-term contracts for exporting their goods to the USA have suffered during the long period where the EUR/USD exchange rate increased. Even more essential has been the impact of the

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currency board arrangement on the importers and exporters in general. Growing purchasing power of the Estonian population and the need for investment goods have boosted imports. Exporting enterprises that, at the beginning of the 1990s, could rely on cheap production factors, have been forced to cope with increasing production costs and diminishing profit margins or to search for more value-added export options without the hope of being bailed out by devaluation. Preparation for membership of the European Union was the period of intensive harmonization of the Estonian legislation, quality, safety and environment regulations with the EU requirements. Compliance with the new regulatory framework assumed substantial investments, especially in food and retail trade sectors. That has led many small enterprises into financial difficulties and diminished the number of enterprises in these fields of business activity. Entrepreneurship and export development challenges The Commercial Code which was introduced in 1995 increased founding capital requirements for setting up a public limited company (joint stock company) to 400 000 Estonian crowns (25 565 Euros), resulting in transformation of public limited companies into private limited companies, where the required founding capital is ten times lower. Under the regulations of the Commercial Code the number of sole proprietors also increased in recent years. The classification of small and medium-sized enterprises in Estonia has followed recommendations of the EU Commission (European Commission, 2005). In 2003, there were 63 322 enterprises in the Commercial Register, including 6743 joint stock companies and 54 387 private limited companies, but the number of operating enterprises that had real sales turnover was 37 454. The 155 large enterprises were only 0.41 per cent of the total number of operating enterprises. Some 37 197 enterprises were SMEs although, from the point of view of internationalization, this common label hides different trends and challenges. In 2003, there were 5630 exporters in Estonia, 15 per cent of all enterprises. Although the absolute number of exporters had increased by 8.3 per cent compared to 1999, the share of exporters in the total enterprise stock has not increased in recent years as most new micro enterprises are not capable of producing for export markets (Ministry of Economy and Communications, 2005). It is self-evident that the Estonian market is too limited for many large enterprises. The share of exporting companies, however, has decreased both among large and among micro enterprises during the period 1999–2003, but increased marginally among small enterprises and by 5 per cent among medium-sized enterprises. The total volume of export in 2003 was 71 per cent higher than in 1999 but in medium-sized enterprises the growth was 73 per cent compared to 59 per cent export growth in small enterprises (Ministry of Economy and Communications, 2005, p. 16). The Estonian Export Agency, starting from 1998, has commissioned surveys on export prospects and barriers that inhibit export development in Estonian companies. These surveys have been based on expert assessments by top managers and export managers in exporting enterprises. When comparing some results in the year 2004 to the year 2001, it can be concluded that neighbouring countries, Finland, Sweden and Latvia, are continuously seen by entrepreneurs as the main destinations for export growth. In 2004, the year when Estonia joined the EU, 62 per cent of exporters assessed the influence of EU on exports as positive and 7 per cent as negative. The main positive changes are seen in

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simplified border crossing (78 per cent of respondents), time saving (49 per cent), diminishing bureaucracy (45 per cent) and abolishing of customs and quotas (43 per cent). More pessimists can be found among agricultural producers and in the food processing industry. The negative impact of the EU is found in the increase in imported raw material prices (21 per cent of respondents) and increasing bureaucracy in business relations with countries outside the EU (Enterprise Estonia and Ariko Marketing, 2004). Economies of scale in EU markets have been seen as an opportunity by 30 per cent of enterprises, more often by small enterprises than by large enterprises. Respondents generally see the good quality of their products, cheap production input and flexibility of the production process as their main sources of competitive advantage in export markets. There are no substantial changes in these perceptions when comparing 2004 results with earlier surveys. Among the main general export barriers, increasing competition in the international marketplace (61 per cent of respondents in 2004, versus 63 per cent of respondents in 2001) was identified. Main barriers of the Estonian business environment were in 2004 related to the weakness of the general and vocational education system (43 per cent of respondents in 2004 versus 37 per cent in 2001), limited state support for export development (35 per cent in 2004 versus 37 per cent in 2001) and for new product implementation (34 per cent in 2004 versus 23 per cent in 2001). The customs procedures were considered an important barrier by 56 per cent of respondents in 2001 but in 2004 only 15 per cent identified it as an important barrier (Ariko Marketing, 2001; Enterprise Estonia and Ariko Marketing, 2004). Export barriers inside enterprises were linked to shortage of qualified labour (45 per cent of respondents in 2004 versus 38 per cent in 2001) and the shortage of finances and working capital (41 per cent of respondents in 2004 versus 50 per cent in 2001). High production costs were mentioned as an important export barrier by 37 per cent of respondents in 2004, whereas in 2001 it was perceived as important by 31 per cent of respondents. This indicates deepening tension between the competitive advantage that is based on cheap production inputs and limited ability to use economies of scale for managing the growing cost pressure or increasing profits by introducing new high-quality premium products to export markets. Lack of export training was mentioned in 2004 as an essential barrier by 21 per cent (in 2001, 20 per cent) of respondents and lack of developed products by 28 per cent (in 2001, 21 per cent) of respondents. Lack of contacts with potential foreign partners was perceived as an important export barrier in 2004 by 20 per cent and in 2004 by 31 per cent of enterprises. The number of foreign partners has not diminished but it is possible that risks and limitations of subcontracting to a restricted number of foreign partners has become more evident for exporters that are representing Estonian capital. Of enterprises in this survey that are fully controlled by foreign owners, 38 per cent have a different situation. Elenurm (2001) has analysed export training needs of Estonian SMEs at the end of the 1990s and come to the conclusion that the logic of export development and going international in the SME sector of Estonia as a transition country is different from the stage logic which has served as the basis of export development programmes in stable market economies. Many SMEs that stated exporting in the 1990s were in fact not following a stage-wise approach but were simply found by entrepreneurial foreign business people who engaged them as subcontractors. The next steps in their export development can be interpreted as entrepreneurial emancipation through searching for alternative and more reliable foreign partners and possibly a more extensive and profitable role in

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the value chain. A paradox of an open emerging market economy is that even a company which does not have an advanced internationalization strategy may be able to move rapidly to the direct export stage by exploiting the cost advantage of cheap labour and other production resources if by chance it has been identified by a suitable foreign partner. One could label such a company ‘a born global’ if only the formal benchmark of reaching at least a 25 per cent share of foreign sales in total sales turnover within three years after their birth is used. However, if the other element of the born global definition ‘. . . seeks to derive significant competitive advantage from the use of resources and the sales of outputs in multiple countries’ (Andersson and Wictor, 2001, p. 43) refers to active strategic efforts, the number of born globals in Estonia, as in other transition economies, has been quite small. New or privatized and restructured enterprises first started exporting as opportunistic subcontractors and only later focus on a more strategic approach by comparing different target markets and entry modes and by investing in their own product development and market research. A survey of Baltic clothing exporters (Smallbone and Venesaar, 1998) pointed out that, compared with the Polish and Bulgarian firms, Baltic clothing exporters, including Estonian enterprises, were more likely to be involved in foreign subcontracting. Although more than half of surveyed clothing firms had subcontracting relations with foreign customers, only 10 per cent were acting as subcontractors for domestic customers. Unlike a mature market economy, domestic subcontract chains are a less common feature of the Estonian transition economy. Under the competitive threat of cheap imports from China and other Asian countries, the strategic challenge of moving from subcontracting to value added export of one’s own products has been in recent years more clearly perceived by managers of some larger clothing firms after subcontracting-based growth and resource accumulation during the 1990s. Links between inward and outward internationalization Internationalization is a two-way process of company involvement in international business activities, where inward internationalization and outward internationalization are mutually linked (Luostarinen and Welch, 1997). This definition incorporates not only the outward side of internationalization, but also inward internationalization and cooperative internationalization. In Estonia, links between inward and outward internationalization can be traced in the financial sector but also in wholesale, retail and service businesses. Nordic companies that have founded subsidiaries or taken over independent enterprises in Estonia have in some cases restricted their role in international entrepreneurship but in other cases used them as internationalization agents, especially for entering Latvian and Lithuanian markets. A survey conducted by the Estonian Institute of Future Studies among Estonian entrepreneurs in the northern part of Estonia, Tallinn and Harjumaa county, indicated that 60 per cent of entrepreneurs see Finnish-owned enterprises both as competitors and as cooperation partners, while 28 per cent assess cooperation as the dominating relationship with Finnish companies (Kurik et al., 2002). Foreign direct investments from Nordic countries to the Estonian financial sector have been instrumental in supporting the reorganization of the Estonian economy but also in marginalizing the role of local capital in the banking sector. Especially important was that role in the aftermath of Russian currency crises in 1997. In 1997, the leading Estonian banks were also directly involved in the

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Russian market via their investments in acquisition of Russian banks or financing greenfield investments of their clients in other business sectors. Radical changes in the Russian economic environment had an adverse impact on the credit ratings and expansion intentions of Estonian banks. Until 1998, the domestic owners had the majority of the stock capital of the largest Estonian banks, but after the Russian crises the leading Estonian banks were the target of two Swedish banking groups (Varblane and Roolaht, 2004). In fact, underestimation of the Eastbound international entrepreneurship risks by inexperienced Estonian capital owners increased the control of the Nordic capital over the Estonian economy and led to the situation where the role of foreign affiliates in Estonian outward foreign investments increased. Russian crises led to a temporary deinternationalization trend, decreasing business operations in Russia and exports in this direction for some years. At the same time, Estonian entrepreneurs and foreign parent companies of Estonian subsidiaries have increased their commitments in other Baltic states. A survey of 70 Estonian outward investing enterprises (Varblane et al., 2001) pointed out the high volatility of FDI outflows from Estonia from 1993 to 2001 and the correlation between GDP and outward foreign investments. Starting from 1999, many Estonian firms that could not afford long-term strategic investments were acquired by foreign firms. Foreign parent companies were able to provide funds for strategic outward investments that did not depend on current business success of their new subsidiaries in Estonia. Indirect outward FDIs by such companies had gained relatively more in foreign market shares and employment, while Estonian entrepreneurs, as direct outward investors, had a more positive impact on the exports from the parent company. Reiljan (2005) demonstrates that full deinternationalization cases of Estonian exporters from Finland and Sweden, as nearby markets, have been rare. A high proportion of deinternationalization of Estonian companies from Germany in 2003 has been the result of the German government’s policy not to use the Estonian labour force for assembling blocks of Estonian producers in Germany. EU membership makes it possible to overcome such internationalization barriers although a majority of old EU member states still apply a transition period restricting free movement of the labour force from new member states. Kálmán Kalotay stresses four common factors that have supported the growth of outward FDIs in Estonia but also in Hungary and Slovenia: 1.

2.

3.

4.

These countries, especially Estonia and Hungary, had a very early head start in privatizing their major enterprises. By the mid-1990s, those firms could consolidate their activities and strengthen their financial position for internationalization. The small size of the domestic economies left for many enterprises’ international expansion as the only avenue for becoming competitive in response to an open trading environment. Estonian, Hungarian and Slovenian enterprises may be in a particularly advantageous position when investing in other transitional economies, especially the geographically close ones, because of their knowledge of these markets. Often, particularly in the case of smaller investors, cultural and personal links play an important role in investment decisions. In Hungary and Slovenia (much less in Estonia) manufacturing firms are the engines of outward FDI (Kalotay, 2004, p. 17).

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Kálmán Kalotay also points out that the role of foreign affiliates in Slovenian outward FDI has been more limited than in Estonian and Hungarian ones. In Estonia, outward investments have been politically enabled by capital account liberalization and through bilateral investment treaties and double taxation treaties. There are, however, no active promotion and counselling systems to support Estonian entrepreneurs in acquisitions and greenfield investments abroad. In developed market economies manufacturing companies have usually been the first wave of active outside investors (Stare, 2002). In Estonia, the service sector and especially banking have been more active in investing in neighbouring countries. In the situation, where all large banks in Estonia are now foreign-owned, autonomy of local subsidiaries has become an important aspect of inward–outward connections in the internationalization process of financial services. In some cases foreign owners are likely to restrict subsidiaries’ freedom and pre-determine the nature of indirect FDI, while in other situations the complementarities are realized by retaining the strategic autonomy of the acquired company. Inward–outward connections, for instance, in the case of Eesti Ühispank meant that they lost all their activities in other Baltic countries and were to a great extent pushed back into domestic activities. Swedbank, the majority owner of Hansabank Group, for several years used a more decentralized ‘hands off’ approach, by which managers in Estonia were developing and executing their plans of foreign market expansion (Varblane and Roolaht, 2004). Decisions of Swedish owners to diminish the autonomy of Eesti Ühispank and more recently to acquire 100 per cent of Hansabank shares have led to the resignation of several local management team members used to a higher degree of strategic freedom, including the decision to offer banking services outside Estonia. Strategic autonomy has become a topical issue also in retailing business, where, in the same way, more entrepreneurial personalities have been forced to step down as foreign owners, after Estonian EU accession, have tried to apply a more standardized approach in their Baltic subsidiaries. It will be interesting to see which career path will be chosen by managers who, despite their young age, have acquired rich experience of managing growth in turbulent business environment. They may choose to work for some other international corporation but may also try to test themselves as independent entrepreneurs in order to implement their visions in less bureaucratic and more innovative ways than was accepted by their former international employers. Varblane, Männik and Hannula (2005) compare autonomy and performance of foreign subsidiaries in Slovenia, Poland, Hungary, Slovakia and Estonia and come to the conclusion that the higher the autonomy level in marketing activities of a subsidiary, the lower the effects either on technology upgrading or on the share of exports in their sales turnover. They also point out that, in Estonia, the smallest of the five markets, subsidiaries of foreign companies have achieved more significant effects on export orientation compared to Poland and Hungary. Reiljan (2003) discusses survey results that suggest a limited contribution of inward foreign direct investments to the internationalization of Estonian enterprises in the sense that their activities have been mostly concentrated on the Baltic markets or focused on exporting products back to the foreign parent company. The foreign activities of locally owned Estonian enterprises have been more diversified on different foreign markets, creating more extensive knowledge that can serve as a competitive advantage in future.

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Internationalization of innovative entrepreneurs In recent years, knowledge-based society and ideas of innovative entrepreneurship, especially in the fields of information technology and biotechnology, have become topical issues when discussing future competitiveness prospects of Estonian enterprises in the global marketplace. A challenge for innovative SMEs is to connect international market orientation and the enterprise’s ability to be innovative. In the 2004 European Innovation Scoreboard, Estonia was assessed as being higher than the EU 25 average in SME innovative cooperation and information and communication technology expenditure, but lower in patenting, business R&D expenditures and in several other performance criteria that are important for innovative entrepreneurship (Commission of the European Communities, 2004). In spite of the fact that implementation of the Lisbon Strategy, that was to make the EU the most dynamic and competitive knowledge-based economy in the world by 2010, has recently come under strong criticism (High Level Group chaired by Wim Kok, 2004; European Commission, 2005), it has initiated in Estonia discussions around prospects of innovative enterprises in a small country, where financial and human resources are too small for large-scale R&D projects that are needed for developing and commercializing new drugs, not to speak of new space technologies. At the same time, advantages of a small country as a test site have been demonstrated by rapid development of e-banking and application of mobile payments for car parking services. After introducing a mobile parking service in Estonia, Estonian leading mobile phone operator EMT transferred this technology in 2002 to Oslo through a joint venture of EMT and Norwegian mobile communication applications developer Scangit. EMT was rewarded for this development project with the finalist award of the 2002 Stockholm Challenge Award in the category ‘e-business’. An interesting example of an internationalization attempt is Regio, an SME that has four fields of activity: mapping, geospatial data, geographical information systems and mobile positioning. Regio was founded in 1990 as a university spin-off. After a period of stable growth (1994–98) owner–managers decided to speed up international sales growth and software development by involving the Baltic Small Equity Fund. At the next development stage, Regio owners tried to use the image of Finland as an innovative country to enter the global technology market. In the year 2000, Regio was sold to Finnish Done Corporation, which had been listed on the stock exchange. It was a period of intensive investments in technological development work, but also increasing costs. Crises hit both information and mobile technology sectors on a global scale. Regio owners received Done Corporation shares for selling their part of Regio but soon the Finnish parent company faced bankruptcy. The Regio management offered to the trustees of the bankrupt estate a management buy-out solution and, in 2002, Regio again became an independent company owned by Estonian capital. We have studied innovative SMEs in technology-intensive business as part of the EU fifth framework project ‘Development of the innovative entrepreneurship potential of SMEs as knowledge-sharing trans-national technology transfer partners (EW ISME)’. The project focused on developing management competences and international business knowledge of innovative enterprises for East–West technology transfer. A pre-survey of knowledge development needs that was carried out at the beginning of the project in 2003 revealed that know-how about the existing and future needs of international clients was considered to be important in Estonian SMEs, but the legal protection of intellectual property received a higher ranking by Western managers. Pre-survey results also indicated

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that West European SMEs were more focused on competencies supporting development of new technology and new products, whereas Estonian firms concentrated on improvements in process quality and productivity and cooperation with partners in the supply chain (Elenurm et al., 2004). An important insight of the EW ISME project is that the organizational learning needs of SMEs in technology-intensive businesses can be specified according to six main international business drivers and corresponding development paths (EW ISME, 2005): 1. 2. 3. 4. 5. 6.

commercializers of unique technological expertise; the movement from subcontracting/outsourcing to technology and product development activities; growth through foreign markets; the cost of making everything yourself being too high; the complexity of making everything on your own being too great; network organizations as a tool for developing technologies or creating a new value chain.

Many West European SMEs followed paths (3) and (4), whereas the majority of Estonian SMEs in the project followed paths (2) and (5). The role of SMEs following paths (1) or (2) was quite marginal in the project. That influenced a sceptical attitude to intellectual property protection issues and also limited the networking agenda. Estonian SMEs that were eager to follow development path (2) and West European SMEs following path (3) are potential cooperation partners if they are able to build a long-term strategic alliance, where Estonian SMEs help West European companies to enter new East European markets and West European companies accept the vision of their East European partner to gradually move from subcontracting to more advanced models of value creation. Network organizations can be seen as a future trend in internationalization. Learning for internationalization Authors discussing the logic of internationalization stages also point out the importance of learning by experience and feedback from international marketing activities as factors enabling companies to move through the logical path of internationalization (Johanson and Vahlne 1990; Yip et al., 2000). Relevant competence development needs and knowledge gaps should be identified in order to succeed in the international business environment. Entrepreneurs in East European small transition economies face the challenge of intensified learning in the field of international business even if they do not follow explicit and focused internationalization targets in the same way as born globals from advanced market economies. Eriksson et al. (1997) and Blomstermo and Eriksson (2001) specify the types of experiential knowledge that are relevant for a successful internationalization process: marketspecific experiential knowledge and internationalization knowledge. The market-specific knowledge consists of foreign business knowledge that includes experiential knowledge of clients, the market, and competitors and foreign institutional knowledge that refers to experiential knowledge of government, institutional frameworks, rules, norms and values. The internationalization knowledge supports the organisation’s capability and resources to engage in international operations.

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The knowledge base for internationalization in an open transition economy has broad and narrow meanings. Learning needs in the broad sense are not limited to export development and setting up a business abroad. Understanding the international business context is also important for a domestically oriented entrepreneur for forecasting future roles of international players on his domestic marketplace. The entrepreneur has to develop international business negotiation skills in order to make a good deal for setting up a joint venture with a foreign partner or to sell out his enterprise to a foreign investor. Training programmes have to match learning-by-doing experience but also social and political environment factors that have shaped attitudes of entrepreneurs towards international business challenges. Entrepreneurial firms in transition economies still miss the advanced export supporting institutional environment that would allow efficient outsourcing of export-related legal, market research or information services. They are forced to develop some features of knowledge-creating companies (Nonaka and Takeuchi, 1995) and ‘re-invent the wheel’ themselves in order to match their international business development practices with new opportunities in their rapidly changing environment. A special knowledge factor that for potential Estonian entrepreneurs created some understanding of the market economy logic and trends in the international business environment was for many Estonians the Finnish mass media of the 1970s and 1980s. It has been quite easy and popular for Estonians in the northern part of the country to follow Finnish TV and radio broadcasts as part of their everyday activities. Decades of such practice have increased Finnish language skills in Estonia. A Finnish employer recruiting an Estonian workforce may find that, in the northern part of the country, it is quite easy to recruit employees who have some command of the Finnish language. It is not so easy in Tartu or other regions of Southern Estonia. Finnish TV broadcasts did not cover these more distant regions. During the Soviet stagnation years, and indeed also in Central Russia, one could find some active listeners to the Voice of America or BBC who were able to develop competence in understanding the logic of the market economy. Following and openly discussing ‘enemy propaganda’ in work communities, however, could not be so widespread a practice there as following and discussing Finnish TV and radio programmes in Estonia. Some elements of American and Nordic management concepts that created the departure point for internationalization knowledge were introduced in the Estonian higher education many years before perestroika and the glasnost period started in the former Soviet Union. Historical context of past experiences and access to information are especially relevant in order to understand the SME internationalization process from the point of view of international orientation of the management team that depends on past experience, current life space and future ambitions of the entrepreneur and his/her team (Kjelmann et al., 2004). Contact seminars with Finnish and Swedish companies gained popularity among new Estonian entrepreneurs in the 1990s. The partner-identification approach during the early 1990s had quite a short time-horizon and was not based on long-term export development plans. A survey of export-related training needs in 94 Estonian companies dealing in wood and furniture, food processing, electronics, information technology, clothing, mechanical engineering and export logistics sectors which was conducted in the summer and autumn of 1998 deepened understanding of training needs at the stage of economic transition, when international competitiveness and European Union accession started to become

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topical issues. The greatest gap between importance ranking given to the competence area and assessment of the existing level of knowledge was at that time identified in the following areas (Elenurm, 2001): the European Union as the target market; entering the market; conducting market research into the target market; identifying business partners and studying their background; legal aspects of foreign trade and the Vienna Convention. General strategic analysis of export potential and competitiveness, market research and different ways to enter EU target markets were considered important training topics mainly by larger companies that had already accumulated export development experience. Entrepreneurs–managers of smaller companies were often locked into a subcontracting mode of business and did not see real opportunities for the high-profile strategy of going international even if they could acquire relevant know-how. Comparing these results with knowledge gaps of entrepreneurs that were involved in the EW ISME programme in 2003–05, we can conclude that, at least among innovative entrepreneurs, in addition to the missing information about target markets, intermediaries also lack knowledge of internationalization risks, international technological cooperation projects, protection of industrial property, international joint ventures and strategic alliances which are identified as knowledge gaps. Cooperation in international learning networks with SMEs from other EU countries is, however, considered to be most important and rewarding in the following knowledge fields: developing contacts with business partners and studying their background and motives; managing international technological cooperation projects; national and EU support for innovative entrepreneurs and technology transfer activities; presenting your company know-how and business opportunities (Elenurm, 2004b). At the present stage of internationalization many Estonian SMEs could benefit from international learning by doing projects, where they have the opportunity to combine field visits to potential more distant target markets, brokering events and virtual networking tools that develop their international contact base with reflections on development path options they are facing today and tomorrow. Note 1. See also Elenurm (2004a).

References Andersson, S. and I. Wictor (2001), ‘Innovative international strategies in new firms – Born Globals: the Swedish Case’, Fourth McGill Conference on International Entrepreneurship, vol. 1, Glasgow: University of Strathclyde, pp. 39–63. Ariko Marketing (2001), Eksportööride uuring 2001. Bank of Estonia (2005), http://www.eestipank.info, 07.08.05. Blomstermo, A. and K. Eriksson (2001), ‘Domestic operations and the internationalization process of firms’, Fourth McGill Conference on International Entrepreneurship, vol. 1, Glasgow: University of Strathclyde, pp. 131–58. Commission of the European Communities (2004), European Innovation Scoreboard 2004, Annex 2. SEC (2004) 1475. EBRD (2001), Transition Report 2001: Energy in Transition, London: European Bank for Reconstruction and Development. Elenurm, T. (2001), ‘Development needs of estonian entrepreneurs and managers for international business’, Fourth McGill Conference on International Entrepreneurship, Glasgow: University of Strathclyde, vol. 1, pp. 384–407. Elenurm, T. (2004a), ‘Estonian perspectives of international entrepreneurship’, in Léo-Paul Dana (ed.), The Handbook of Research on International Entrepreneurship, Cheltenham, UK and Northampton, MA, USA: Edward Elgar.

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Elenurm, T. (2004b), ‘Knowledge sharing and learning challenges in East–West co-operation between innovative small and medium-sized enterprises’, Proceedings Fifth European Conference on Knowledge Management, vol. 1, Paris, pp. 285–94. Elenurm, T., E. Terk, A. Reid and S. Kurik (2004), ‘Developing the international technology transfer potential of innovative SMEs’, EBS Review, Summer, 18, 7–16. Enterprise Estonia and Ariko Marketing (2004), Esportööride uuring 2004. http://www.eas.ee/. Eriksson, K., J. Johanson, A. Majkgard and D. Sharma (1997), ‘Experimental knowledge and cost in the internationalization process’, Journal of International Business Studies, 28(2), 1–25. European Commission (2005), Working Together for Growth and Jobs. A New Start for the Lisbon Strategy, COM (2005) 24. EW ISME (2005), Enterprises in Technology-intensive Business, Tallinn: Estonian Institute for Future Studies. Heritage Foundation (2005), http://www.heritage.org/research. High Level Group chaired by Wim Kok (2004), ‘Facing the challenge: the Lisbon strategy for growth and employment’, November. Johanson, J. and J.-E. Vahlne (1977), ‘The internationalization process of the firm – a model of knowledge development and increasing foreign market commitments’, Journal of International Business Studies, 8(1), 23–32. Johanson, J. and J.-E. Vahlne (1990), ‘The mechanism of internationalization’, International Marketing Review, 7(4), 11–24. Kalotay, K. (2004), ‘Later riser TNC: outward FDI from Central and Eastern Europe’, New Europe 2020, Visions and Strategies for Wider Europe, 27–28 August, Turku, Finland, Conference Proceedings CD. Kjelmann, A., A-C. Sundnäs, J. Ramström and M. Elo (2004), Internationalization of Small Firms, Vaasa: Academy of Finland, TEKES. Knight, G. and S.T. Cavusgil (1996), ‘The born global firm: a challenge to traditional internationalization theory’, Advances in International Marketing, Greenwich, Conn.: JAI Press, pp. 11–26. Kurik, S., E. Terk, M. Kovin and A. Paling (2002), Tallinna ja Harjumaa ettevõtjad EestiSoome integratsioonist, Tallinn: Eesti Tuleviku-uuringute Instituut. Liuhto, K. (ed.) (2000), ‘East goes West, the internationalization of Eastern enterprises, studies in industrial engineering and management’, No. 14, Laapenranta University of Technology. Luostarinen, R. and L. Welch (1997), International Business Operations, Helsinki: Ministry of Economy. Ministry of Economy (2002), Ettevõtlik Eesti, Tallinn: Majandusministeerium. Ministry of Economy and Communications (2005), Ettevõtluse areng Eestis aastal 2004, Tallinn: Majandus- ja Kommunikatsiooniministeerium. Nonaka, I. and H. Takeuchi (1995), The Knowledge Creating Company, Oxford: Oxford University Press. OECD (2001), OECD Review of Foreign Investments Estonia, Paris: OECD. Reiljan, E. (2003), ‘Internationalization of Estonian enterprises: the market dimension’, University of Tartu, Faculty of Economics and Business Administration, Working Paper Series, No. 14. Reiljan, E. (2005), ‘Target market pattern of de-internationalization in Estonian manufacturing firms’, 13th Scientific Conference on Economic Policy, University of Tartu, Mattimar OÜ. Smallbone, D. and U. Venesaar (1998), ‘Internationalization processes and SME development in the Baltic States: some recent evidence and key policy issues’, Fifth Nordic–Baltic Conference in Regional Science, Estonian Institute of Future Studies, University of Tartu. Stare, M. (2002), ‘The pattern of internationalisation of services in Central European countries’, The Service Industries Journal, 22(1), 77–91. Statistical Office of Estonia (2004), Estonia, Latvia, Lithuania in Figures 2004, Tallinn: Statistical Office of Estonia. Statistical Office of Estonia (2005), Estonia, Latvia, Lithuania in Figures 2005, Tallinn: Statistical Office of Estonia. Varblane, U. and T. Roolaht (2004), ‘Inward–outward connections in internationalization of Estonian banks’, New Europe 2020. Visions and Strategies for Wider Europe, 27–28 August, Turku, Finland, Conference Proceedings CD. Varblane, U., K. Männik and H. Hannula (2005), Autonomy and performance of foreign subsidiaries in transition countries, Tartu: University of Tartu, Faculty of Economics and Business Administration Working Paper Series, No. 38. Varblane, U., T. Roolaht, E. Reiljan and R. Jüriado (2001), Estonian Outward Foreign Direct Investments, Tartu: Tartu University Press. Welch, Lawrence S. and Reijo Luostarinen (1993), ‘Inward–outward connections in internationalisation’, Journal of International Marketing, 1(1), 44–56. Yip, G., J. Biscarri and J. Monti (2000), ‘The role of the internationalization process in the performance of newly internationalizing firms’, Journal of International Marketing, 8(3), 10–35.

13 Internationalization of SMEs: the case of Finland Asko Miettinen

Introduction Firm expansion into a new market can be considered one of the fundamental forms of strategic variation among business organizations. As Martin et al. (1998) have shown, corporate expansion can be viewed as a form of constrained adaptation to growth opportunities. Enterprises that undertake major, discreet expansion moves, such as going international, exercise strategic choice in the sense that their management has substantial influence in determining and selecting among emerging options in terms of occurrence, timing and direction of growth. The object of such expansion is typically to improve performance by increasing profitability, business growth and the chances to survive. Internationalization is not always a separate strategy for an enterprise, be it small or large. Often it is the outcome of a selected growth orientation or growth strategy. This is particularly true in the case of small open economies such as Finland, where domestic markets are limited (the total population of Finland is only 5.2 million). Internationalization is very seldom a slow, step-by-step development, but rather a sudden and major leap in the activities of a smaller enterprise. In exploring internationalization of SMEs, researchers have become increasingly aware of the need to account for influences at multiple levels. It has proved to be difficult to find an overall model which can specify accurately enough all the variables related to internationalization of the firm (Bifulco, 1997). In contrast to what is presented in many textbooks, it is very rare for an enterprise to develop a clear-cut ‘internationalizing strategy’ and to straightforwardly ‘implement’ it. ‘Enterprises’ do not make decisions; these are made by people within firms (Manolova et al., 2002). Neither is it the case that ‘internationalization strategies’ are simply developed and followed. Rather, they are discovered and invented and they are made official only retrospectively. As Mannio and al. (2003) have shown, even large companies only seldom have separate and distinctive written and documented ‘internationalization strategies’ shared by all concerned. It seems rather surprising that events and incidents shape corporate life and that emerging opportunities and threats determine or even dictate a firm’s future shape and development. Davidsson and Wiklund (2000) have pointed out that knowledge about what facilitates and hinders growth is scattered and limited today. The same seems to be true for insights into the process of firm growth. Furthermore, the large volume of current empirical research has not had a high yield of generalizable knowledge. Each internationalization case tends to be different, if not unique. Thus, it can be analysed and explained using various kinds of theoretical lenses. It is important to explore the strategizing processes, focusing on particular modes of internationalization, to observe the learning processes involved, to view the conditions under which decisions are made, to analyse carefully the wider institutional and social contexts and to look at the demands that financial markets impose on firms, and so on. This approach to exploring internationalization of SMEs 198

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allows and values pluralism in terms of possible theoretical and methodological alternatives. It highlights the significance of micro-level decisions, but does not ignore specific historical, cultural and social contexts that are of relevance. A brief look at statistics The internationalization of Finnish firms is a relatively recent phenomenon, although wood-based products were exported as far back as five hundred years ago. However, only the past few decades have been of particular importance in turning the Finnish economy and Finnish companies away from primarily domestic market-based operations towards more international operations. The Finnish case is not unique; one can see similar trends in a good number of other developed countries. Still, this process has taken place in Finland much faster than in most other countries. As in most countries, the Finnish corporate landscape is dominated by SMEs. The number of enterprises in the various size classes may be seen in Table 13.1. Thus, in Finland, SMEs account for 99.7 per cent of companies and for slightly more than half of company turnover. Foreign trade is of high significance for a small open economy such as Finland’s. The proportion of exports of GNP has varied greatly in past decades. It was about 30 per cent in 1980, only 22 per cent during the deep economic depression of 1991, 43 per cent after the ensuing period of rapid recovery and 38 per cent in 2004. The latest figure is close to the EU15 average. Export by industry has changed dramatically in past decades. The biggest exporter in 2003 was electronics and the electrotechnics industry, led by Nokia Corporation, which reached the level of 25 per cent of the total. This industry hardly existed in 1980, when it accounted for only 4 per cent of exports. The second-biggest export industry is the traditional pulp and paper and paper products sector, accounting for 20 per cent. Its share was 42 per cent of the total in 1960 and was still only 30 per cent in 1980, illustrating the rapid change. The third-biggest sector is machinery, equipment and vehicles, accounting for 18 per cent of total exports, followed by metals and metal products (10 per cent), chemicals and chemical products (9 per cent), wood and wood products (9 per cent) and other industries (11 per cent). The main targets for exports are the EU countries, which accounted for 58 per cent of Finnish exports and 59 per cent of imports, respectively, in 2004. Until 2005, Germany and Sweden were the most important single countries for exports, followed by Russia, Great Britain and the USA. However, in late 2005, Russia became Finland’s biggest trading partner. This happened not only as a result of high oil prices, but also of growing exports by construction, metal and industries. In 2004, the total amount of exports was Table 13.1

Firm population in Finland according to size and turnover

Size of firm Micro firms (1–9 employees) Small firms (10–49 employees) Medium-sized firms (50–249) Large firms (250 employees) Source: Statistics Finland (2003).

Number of firms and their proportion among all firms

Turnover of firms and their proportion of total turnover

212 428 (93.0%) 13 154 9(5.8%) 2 265 9(1.0%) 575 9(0.3%)

49 billion EUR (17.2%) 46 billion EUR (16.1%) 53 billion EUR (18.8%) 136 billion EUR (47.9%)

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Table 13.2

Exports of firms according to their size in 2003

Firm size Micro firms Small firms Medium-sized Large firms Total

Proportion of Exports out of Proportion of Proportion of firms exporting (%) total turnover (%) direct exports (%) indirect exports (%) 18 28 54 54 21

32 33 39 39 33

51 55 62 62 52

49 45 38 38 48

Source: Hyrsky and Lipponen (2004), p. 34.

48 790 million EUR and the total amount of imports 40 270 EUR, yielding a clearly positive foreign trade balance (source: National Board of Customs). Large companies accounted for 85 per cent of total exports in 2003 and SMEs for 14 per cent. Thus the small number of Finnish SMEs engaged in international business is a source of concern for the further development of the economy. SMEs accounted for 32 per cent of imports in the same year. The lower degree of internationalization of SMEs becomes even clearer if one looks at the operations of firms listed on the Helsinki Stock Exchange: some 80 per cent of their turnover comes from abroad. A recent survey (Hyrsky and Lipponen, 2004) gives more detailed information on the export operations of Finnish firms (see Table 13.2). The relationships are clear: the bigger the firm the more probably it exports. This is indicated by several other studies as well (Hurmerinta-Peltomäki, 1994; Boter and Holmqvist, 1997; Gankema et al., 1997; Ahokangas, 1998; Haahti et al., 1998, 2000; Moen, 2000). The average proportion of exports out of the annual turnover was one-third. The most active sectors in exporting were transportation firms (48 per cent) and industrial firms (36 per cent). The survey further revealed that the export operations of SMEs focused more on nearby regions, such as Russia, Sweden and the Baltic countries. In spite of the fact that one-fifth of SMEs are exporting, only 4 per cent considered foreign countries the most central market area. Furthermore, 82 per cent of SMEs in this survey did not announce the need for internationalization. Strong efforts were made in only 4 per cent of the SMEs in this study, while at least some efforts were made in 13 per cent of cases. The transportation and industrial firms were most active also among SMEs. The survey further recognized relatively large regional differences in terms of internationalization activities (Hyrsky and Lipponen, 2004). Furthermore, it has been estimated that only 7 per cent of firms in Finland are growthoriented enterprises. These firms create, however, most of the genuinely new jobs. International studies (that is, recent GEM reports) also show that the promotion of growth companies is decisive in improving economic growth and employment. Some comparative studies have indicated that 3 to 5 per cent of new firms may create even up to 75 per cent of the total number of new jobs. In the study conducted by Hyrsky and Lipponen (2004), out of all growth companies in the sample, which included more than 4000 enterprises, about 60 per cent operated in the service industries in 2001–03. Another general impression given by statistics is that the level of foreign trade in services is far higher than in goods exporting. Foreign trade in services is not yet developed

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and the balance has been negative for a long time. The annual volume of service exports was about 7.3 billion EUR and that of service imports 9.5 billion EUR at the end of 2004. Trade in services has great potential if backed up by development initiatives. SMEs in Finland face a particular challenge because the service industry is dominated by smaller companies and because the proportion of private service trades of both production and employment is low on the international scale. Business services still employ a relatively low number of people compared to other developed countries. More high-quality business services are also badly needed to support the further growth and internationalization of enterprises. The general expectations regarding the economy in the near future are rather promising: GNP is estimated to grow by 3.9 per cent in 2006 and Finnish consumers’ expectations 12 months ahead are positive. The biggest problem is the high unemployment rate (8.6 per cent according to the OECD standard in June 2005), which is estimated to go down only slowly to 7.5 per cent in 2006. Research evidence regarding the internationalization of SMEs in Finland Internationalization has been taught and investigated as a separate subject in the Nordic Countries since the pioneering studies of Johanson and Vahlne (1977) and Luostarinen (1979). The literature on internationalization of Finnish SMEs since the late 1970s is very diverse rather than homogeneous or rich. More is known about the international activities of large companies since they have received more attention than SMEs. As was noted earlier, international operations are less common in small and medium-sized companies as the vast majority of them have conducted business, survived and grown on the local domestic market. Their basic limitations seem to be linked to scarce resources, such as financial, managerial, human and informational resources, that have restricted active moves towards international markets. Most empirical work on the internationalization of Finnish SMEs has focused so far on the question of the operation (market entry) mode used abroad. Other popular themes have been the profiling of the attributes of the exporting SMEs, support activities such as training and consulting conducted in aid of international activities, the export behaviour of SMEs, internationalization strategies and more recently the role of new technologybased firms and other knowledge-intensive entrants as well as so-called ‘born global’ enterprises. Comparative studies in going international have also been a common topic. The export behaviour of firms is a good example of a topic having a vast array of empirical research. Variables seeking to explain export behaviour can be classified in terms of (1) decision-making characteristics such as managerial commitment and perceptions regarding the benefits of exporting, risks and constraints (for example, Hyvärinen, 1994); (2) firm-specific characteristics that are mostly internal variables and looking for a more accurate identification of firms’ distinctive characteristics such as their business networks (Holmlund and Kock, 1998); and (3) firms’ environment characteristics (Niittykangas, 1996; Littunen et al., 1998). A good number of earlier studies in the 1980s and early 1990s concerning internationalization from the Finnish perspective were based mainly on so-called ‘stage models’ (Johanson and Vahlne, 1977; Luostarinen, 1979; Welch and Luostarinen, 1988; Luostarinen and Welch, 1990). Briefly summarized, these models are focused on gradual internationalization:

202 1. 2.

3.

4. 5.

Handbook of research on European business and entrepreneurship Internationalization usually begins with neighbouring countries or countries otherwise felt to be close in some respect to the native country. The most common sequence in international operations examined in the literature is the following. The first stage is exports, which is usually followed by the establishment of sales units and, later, that of manufacturing units abroad. The more a foreign operation requires investments and other commitments, the later that operation takes place in the internationalization process. A great many studies on internationalization have actually focused on one phase of internationalization, such as on export or production units abroad. Still, import tends to be the very first contact of a firm with foreign enterprises, suppliers and markets (for example, Hyvärinen, 1994). Stages involving foreign investments, such as establishing one’s own unit abroad, are generally undertaken in countries where the enterprise has previously had less demanding foreign operations. Offerings to the international market tend to start with the simplest, that is, goods. This is followed by services and later by know-how and systems. Evolution of the internationalization pattern varies among firms. Not all enterprises apply all possibilities in internationalizing.

The stage models have been criticized in different respects, for example for being far too deterministic (Holmlund and Kock, 1998; Chetty and Campbell-Hunt, 2003), for lacking leapfrogging, for not including mergers and acquisitions and for giving too much importance to psychic distance (Melin, 1992). Moreover, these models do not explicitly take into account either the importance of the network context in which companies may be embedded or the social network and other community-related issues (Majocchi and Zucchella, 2003). Luostarinen and Welch (1990) improved their conceptualization of internationalization by adding new components and alternatives to their earlier work. These include indirect, direct and own exports, selling a licence, know-how, franchising rights and projects, acting as a subcontractor or contractor and being a foreign partner in joint ventures in outward international operations. In inward operations they include indirect, direct and own imports, buying a licence, know-how, franchising rights, importing projects, acting as a subcontractor or contractee and being a local partner in joint ventures. In cooperative international operations the partners work together in their own or in a third country to achieve commonly agreed shared goals. They can also exchange goods, services, know-how or systems with each other without any monetary transactions. Franchising is a good example of a rapidly growing opportunity to exploit new markets (Stanworth et al., 2004). It has been said that it is one of the most dynamic business models in the modern business world. It has been estimated that in Europe alone there are about 5500 different franchising concepts. Compared to the situation in 1998 – a mere seven years ago at time of writing – there has been a 50 per cent increase in franchising concepts. It has been estimated that there are about 250 000 franchising units in Europe. Franchising has expanded to new business sectors like energy and real estate, which traditionally have not been franchised. Many consumers do not know that they use franchised services in fast food restaurants, retailing, cafés, hotels, recruitment and travel agencies, insurance companies and so on.

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The growth rates in Finland in franchising are high. There were some franchising activities before 1988, but the real breakthrough occurred in the 1990s. Currently, there are 177 franchising chains, 5000 franchising entrepreneurs and 6600 units in the country. Most units are owned by small enterprises, but the franchisee can in some cases also be quite a large company. Generating a turnover of more than EUR 5 billion, franchising business is no longer a small-scale business in Finland. Growth has been especially fast in the retail and service sectors in general, and these form the majority of the franchising sector today. It is expected that more and more chains will be seen in the business-to-business sector in the future. Franchising businesses typically operate in the centres of bigger cities. So far there are more ‘incoming’ (foreign) than ‘outgoing’ (Finnish-based) chains. Typical examples are such chains as Gold’s Gym (an American fitness chain), a Swedish Wayne’s Coffee and Robert’s Coffee. The largest Finnish franchising chain is R Kiosk, having more than 700 operating points in Finland, 500 in Lithuania, 400 in Latvia and 200 in Estonia. It also has operations in Germany, Romania and Russia. Another example is Hesburger, Finland’s largest chain of hamburger outlets. There are now roughly 200 Hesburger restaurants in Finland and the Baltic states. The chain has also launched its first outlets in Arab countries where McDonald restaurants are more or less boycotted. Franchising has proved to be a dynamic industrial sector also in the sense of being able to reproduce its concepts. There are new trends to come, such as co-branding. For example, petrol service stations and cafés can be situated alongside each other and use synergy in their marketing efforts. Another trend is multi-unit franchising. This means that one franchisee company owns more than one unit in a franchising operation. It is also evident that companies which are not franchisee-based in their home market will use franchising when expanding abroad. Thus it is highly evident that internationalization of franchising will increase. Internationalization policy for SMEs? The need for an SME policy reflects the need to capture the economic potential of people and enterprises. An organized SME sector has benefits on many levels: economic, social and political. This last point is often underestimated or neglected: a well-functioning SME sector can guarantee economic democracy better than a few large companies dominating the marketplace. This has been clearly demonstrated in economic history. An SME policy also provides a framework within which the private sector and the government can work cooperatively so that resources can be used optimally. However, this area is extremely diverse, comprising a broad range of business entities and reflecting highly different needs. Policy making involves decisions which have a wide rather than a narrow effect on people and operations and which are intended to have more than a short-term impact. Policies usually involve (see Neck, 1998) (a) the strategic function of support and guidance, shaping and clarifying substantive goals and major objectives; (b) providing direction for developing and implementing programmes; and (c) influencing the allocation of resources among competing demands. Policy statements should possess multiple characteristics. Firstly, they ought to state a clear intent to provide general direction applicable to a well-defined population. Secondly, they should address an area over which the policy-making body has acknowledged authority or particular influence. Further, policy statements, by design and

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definition, should be intended to have relatively long-term effects. They may require the support of procedural statements such as guidelines, rules and regulations to assist in implementation policy. Policy is in the first place a course or a principle of action, proposed or adopted by persons in authority and selected from among alternatives to determine and support present and future action. A review of existing policies, rules and regulations concerning SMEs in order to finetune and recommend amendments should be carried out where needed if it is considered that they hinder the orderly growth and development of SMEs. The guiding principle is to create an enabling environment for the growth of SMEs through the stages of awareness building, survey of resources and strategies for achieving national policies. This may call for restructuring the institutional framework for small business support. One of the prevailing assumptions is that economic systems could be planned and implemented to a large extent through a rational policy framework. Furthermore, the myth is kept going in some policy circles that there should be centralized allocation of funds according to a central plan. However, it is rather multiple sources of policy making that tend to produce the necessary experimentation and more adaptive systems. A polycentric policy-making process allows inputs to be placed on different approaches, and this manner of protecting can be a useful asset in the uncertain and dynamic business environment. The need for internationalizing Finnish SMEs is strongly stated in the objectives of Internationalization policy by the Ministry of Trade and Industry (Annual Report, 2004) as follows: 1. 2.

3. 4.

5. 6.

To increase the number of export partnership programmes for small enterprises drawing on the experience gained. To examine the scope and coverage of the service network abroad and to develop it to better match the needs of enterprises and the demand for services abroad. At the same time, services in Finland are to be developed. To revise the training services in export trade and business management offered to SMEs. To develop the content and services of internationalization policy in accordance with the recommendations of the Export Forum (a forum managed by Ministry of Trade and Industry). To increase the number of networking projects and Export Partner Groups. To support SMEs with growth potential and to develop their capacity to meet international competition. In addition, to work towards the strengthening of the industrial base and the diversification of exports.

The primary task of internationalization policy is to support growth-oriented companies and to promote the commercialization of products and exports of SMEs. The current focus is on supporting technology-intensive SMEs at the risk-sensitive early stages of internationalization. This policy statement indirectly indicates the gap between the ideal and actual situation of the internationalization development of SMEs. There is a need for increasing and updating cooperation between organizations and agents supporting the internationalization of SMEs. ‘Glory of the past’ is no longer enough, and new openings such as promotion of internationalization of Finnish music that happened for the first

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time in 2003 are welcomed. A good piece of news is that some 70 per cent of sector-specific aid has been granted to SMEs in recent years. One of the most important recent initiatives in Finland has been the Entrepreneurship Policy Programme introduced by the government. It is part of the economic and industrial policy aiming to safeguard a stable and predictable operational environment for enterprises and to ensure that the resources available for promoting entrepreneurship in various administrative branches will be exploited to the full. This programme underlines the importance of enterprises and entrepreneurs in the production of economic growth and employment by attempting to mobilize the potential ‘entrepreneurship capital’ (Eriksson, 2002). The main focus of this Entrepreneurship Policy Programme that started in 2003 is on concrete projects that support entrepreneurship and firm growth. The programme consists of five sub-sectors which indicate a holistic need to improve the operating environment and increase the support particularly for SMEs: a. b. c. d. e.

entrepreneurial training and consultancy, establishment, growth and internationalization of enterprises, entrepreneurial taxes and payments, regional entrepreneurship, provisions governing entrepreneurship and the functioning of markets.

The policy programme is carried out in close collaboration with the private sector. The state and entrepreneurs’ organizations hold annual talks to follow the development of entrepreneurial prospects and gauge the need for legislative and other reforms. However, criticism has been voiced concerning whether these kinds of government-driven programmes are ‘more hopeful than helpful’ from the practitioner’s point of view. Growth and internationalization are mentioned, but more in the form of general statements and outlining. SMEs going international need a guidance and support system as well as financing and guarantees equal to those of competitors in other countries. There are risks involved, but the losses due to the situation that followed the collapse of the former Soviet Union in 1991 have been rather small and manageable in the SME sector. The entrepreneurs expect a stable and predictable business environment policy and proper operating conditions. Priorities for SMEs in these areas include business skills in running the operations, well-functioning financing and markets as well as utilization of technology. Thus the main responsibility of public policies is to maintain the infrastructure in good shape rather than to try to affect the internationalization strategies of enterprises. Policy interventions play an important role regionally in stimulating and promoting new knowledge-intensive agglomerations which are highly appreciated in Finland as part of efforts towards a knowledge-based society. There is actually a paradox in the fact that sources of global competitiveness are increasingly dependent on local economic, political and social institutions and processes (O’Gorman and Kautonen, 2004). There are several reasons for this. Formal and informal contacts between network members are made possible through casual and/or planned information exchange and meetings as well as the localized customer–supplier relationships. Synergies can emerge from shared cultural, psychological or political perspectives of actors engaged in the same economic region. The localized pool of specialized expertise and knowledge in a region contains a considerable

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amount of tacit knowledge embedded in the system and its network, and may therefore be difficult to transfer to another locality. Policy makers who seek to emulate successful agglomeration face two problems. First, existing models generally focus on established agglomerations and, as such, may fail to capture the dynamics of agglomeration formations. Seeking to replicate the established agglomeration tends to ignore the path-dependent processes that are critical to the development of agglomerations. Attempts to transpose a development model from a successful industrial district might not work because many successful developments have not been the result of direct policy interventions (O’Gorman and Kautonen, 2004). Research evidence has shown that localization is also the result of accidents and a cumulative development process. Furthermore, there is a strong link between innovation and diversity. Policies tend to be more effective in supporting the exploitation of existing or even past opportunities rather than in trying to open up new lines of development. Looking at the current situation of some major actors providing guidance and support for internationalization efforts in Finland gives an idea of how SMEs use those services. Fintra (www.fintra.fi) is Finland’s leading trainer in international business management. It was founded in 1962 by industry, universities and the Finnish government and specializes in training services, creating tailor-made concepts to meet the development needs of companies and individuals in the global business environment. Out of Fintra’s 3000 annual customers, about 40 per cent are in the SME sector, which is clearly below the proportion they form of the total number of firms. This proportion has been stable over the past years. Finpro (www.finnpro.fi) provides services, support and information to help Finnish companies enter the international market as swiftly, safely and efficiently as possible and create reliable business solutions worldwide. Finpro’s expertise and competence is at the service of their customers in 50 export centres in 40 countries around the world. According to their customer portfolio, 65 to 68 per cent represent small and medium-sized enterprises. The majority of these SMEs operate within the European Union and in neardistance countries. The proportion of two-thirds of customers from the SME sector has also been very stable over the years. Regional Employment and Economic Development Centres (TE-Centres) are evenly spread around the country in 15 centres. Their business idea is to promote entrepreneurship, to improve company competitiveness and growth and to promote employment and regional development. TE-Centres combine advising, consultation, training and public financing, serving SMEs at different stages in their life cycle. The present network of TECentres was created only in 1998 in a reorganization intended to improve customer service, create savings in administration and decrease bureaucracy, especially with respect to European Union financing. There are regional variations in the use of TE-Centre services, but almost all customers are from the SME sector and the majority of them aim to develop their ‘conventional’ domestic activities rather than international ones. TECentres had 20 000 customer contacts in 2003, mostly concerning domestic issues. Finnvera plc (www.finnvera.fi) is a specialized financing company offering financial services to help both domestic and international operations of Finnish businesses and to further exports and the internationalization of enterprises. Finnvera has 27 000 customers, out of which some 20 000 are micro enterprises employing fewer than 10 people. Roughly one-third of its export credit guarantees are given to SMEs. Finnvera’s guarantees have

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increased more briskly than credits over the past few years. Another change in 2004–05 was the increasing proportion of export guarantees and offers given for operations in Russia. Russia now ranks second after the USA in the book of the amount of the liability of Finnvera and particularly small guarantees needed for SMEs for activities in Russia have grown fastest of all. To sum up, the infrastructure and the support and innovation systems in Finland are rather well developed, but the number of start-ups and established SMEs willing to answer the call for growth and internationalization is not at a satisfactory level. Risks are too often considered to be greater than the potential benefits in the minds of key decision makers involved. The lack of knowledge is still no doubt another obstacle which prevents too many enterprises from growing and going international. According to research evidence, uncertainty about foreign markets often leads only to a cautious and incremental process of internationalization instead of to swift and full exploitation of existing business opportunities (Nummela, 2000; Miettinen, 2005). SMEs willing to grow fast play a key role. Internationalization follows growth rather than vice versa. Thus the primary task of government and policy makers is to create an enabling environment for growth by further improving the institutional framework for SME support. Internationalization strategies should be designed in each firm, but a proper back-up is naturally needed and welcome. Internationalization today is a coat of many colours encompassing exports, inter-firm non-equity and equity agreements, foreign direct investments, alliances, network strategies and other collaborative arrangements for market expansion. These provide strategic options that SMEs may pursue in order to overcome resource constraints and to accelerate their internationalization process with a view to achieving success beyond what they could achieve alone. An example: the case of the software industry The software industry is a relatively new industrial sector which has become one of the major growth industries over the past 40 years in advanced economies. This sector is characterized by a few big multinationals and a large number of small firms typically providing high-performance inputs into complex systems of production, of information processing and of product development. The software industry has also rapidly moved towards internationalization of the sector, coupled with niche and small-scale market opportunities due to technological change and vertical disintegration. A great many firms in the sector appear to be relatively young, which is an indication that the expansion of the sector has provided opportunities for new entrants. Many of them are also ‘born global’, having much growth potential. The global volume of the software industry is estimated to be about 250 billion EUR. With its annual growth rate of 10 to 15 per cent, further expansion appears imminent. This growth rate is clearly above that of expected growth in industry in general. Following a recent decline (2001–03), the prospects for growth once more look good. An estimate for the period leading up to 2010 indicates a global market volume of 450 billion EUR. Although quite a few big mergers took place in 2004–05, indicating an accelerating concentration tendency in the software industry, the market for small and mid-market businesses in this industry is expected to be tens of billions a year in the future. Small companies can actually have the same expertise as big companies in the software business, which explains their potential competitive position in this sector. The other side of the

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coin is that the software industry is very sensitive to fluctuations in the economy. This, together with the fact that competition in the industry has become keen, means that companies have to develop an effective adaptive capacity and establish the sort of business culture and staff development methods that can identify skill deficits and predict future skill needs. Given the software sector’s role as an ‘enabling industry’ and the changes within the information sector of the economy, characterized by the change in value added from hardware to software and services, there has been a significant rise in research interest in the software industry. Much of this research has focused on the ‘internal’ aspects of software production as an engineering discipline or has been extended to examine the intraorganizational dynamics of software production and intraorganizational variations in performance and in learning and adaptability (Harrison et al., 2004). Another group of research studies has placed greater emphasis on the ‘external’ dimensions of the sector, in terms of the formation, growth and economic impact of software firms (Autere, 2005; O’Gorman and Kautonen, 2004). This research derives from two main research traditions: regional development literature and entrepreneurial finance literature. In their study of 100 software companies around the world, Hoch et al. (1999) found that the critical success factors did not vary much across different regions, economic environments and cultures. However, the factors differed quite a lot across three industry segments: professional services, enterprise solutions and mass-market products. Software provision is a very capital-efficient business. Therefore, venture capitalists like to invest in software companies. For this reason economic resources do not limit growth and strategic choices to the extent that they do in many other industries. Even start-up enterprises with limited tangible assets find that it is possible to raise a sufficient amount of capital to succeed (Autere, 2005). The software sector in Finland started to develop fast in the early 1990s. There was a widely shared view in the late 1990s as to what would be the best strategy for achieving fast growth in this business. Concentrating upon software products was considered the key which would lead to very fast growth. It was also observed that international needs grow faster in this industry than in the domestic market. The turnover of this sector was 270 million EUR in 1997, followed by rapid growth in 1999–01 and reaching the volume of 1300 million EUR during 2001, out of which the proportion of exports was 408 million (31.4 per cent). In terms of people working for this sector, there was also rapid growth, from some 750 people in 1999 to 14 000 in 2001. During the period 1997–01 the total turnover of the software industry in Finland quadrupled and exports quintupled. The majority of about 1000 enterprises were recent start-ups or firms in their early growth stage. For 2005, the number of software firms was estimated to be closer to 2000 than 1000. However, the total number of these firms is not particularly high: for example, Harrison et al. (2004) estimated that there are approximately 22 000 software SMEs across the UK. The software business in Finland showed the other side of the coin after the rapid growth period. Business cycles had deteriorated by 2002. A comparison of the dominating themes in 2001 and 2003 produced Table 13.3. Interviews with venture capitalists revealed that the business environment in 2002–03 and early 2004 was perhaps more demanding than ever before in the software industry:

Internationalization of SMEs: Finland Table 13.3

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Change in Finnish software industry – a comparison of 2001 and 2003

Themes in 2001

Themes in 2003

Managing growth: – premises – organization Recruiting problems: – competition of top professionals – commitment Selection of financiers: – value adding Board and managing director: – good governance practice – strategy formation – investor relations Managing director and management team: – planning and executing operations – implementing customer processes Management team and personnel: – implementing plans

Managing costs: – downsizing – product/service concept Retaining professionals: – appreciation of options – appreciation of shares Availability of financiers Increasing use of outside experts

Source: Miettinen (2005).

demand was down, financing opportunities were restricted and operations by competitors were oftentimes precarious (Miettinen, 2005). There was also a strong call for versatile know-how and experience in software firms: the technocrat longed for a skilful financier, the accountant for a lawyer, and so on. ‘Been there, done that’ was highly appreciated, and yet, a relatively large capital mass was continuously looking for credible investment targets. The role of referents as growth dynamos was recognized during those uneasy years (Autere, 2005). Less dramatic but accurate recent information is available on the Finnish software product industry (including enterprise solutions and packed mass-market software but not professional services). This sector accounts for about a third of the total volume of software industry in Finland. It grew by 21 per cent in 2004, but its international business increased by only 7 per cent. About a half (46 per cent) of the enterprises operating in this sector had revenues from abroad, but the degree of Internationalization of most companies was still moderate. Thus the challenge for the future is to further develop international operations. The proportion of international activities was 31 per cent of the total turnover on average. Somewhat surprisingly, almost a third (31 per cent) of the firms in software product business employed fewer than five people. The personnel in software product companies grew by 3.3 per cent in 2004, and in 2005 new recruitments by all small software firms continued. The same report surveyed the most urgent development needs of firms in software product business. It was revealed that, in the case of small enterprises, the focus was on networking and R&D, while the priority of larger companies lay in international sales, marketing and development and training of their personnel. Thus the larger companies seem to be a step ahead in growth orientation and internationalization compared to their smaller counterparts.

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‘The expectation barometer’ conducted every month by the Federation of the Finnish Information Industries was approaching the level for the year 2000 after four difficult years. Software markets have been becoming customer-driven rather than technologydriven. Competitive technology is no longer enough and the source of new competitive advantage will be the combination of technology with users’ needs. The upcoming challenges for SMEs operating in software industry are investments in R&D, commercialization, international sales and marketing, cooperation and networking and the need for professional management. The software industry is still expected to develop into one of the most important pillars of Finnish industry, with some very promising core technology areas such as applications for the Internet service infrastructure, applications for mobile communications and new enterprise management software for companies operating in the digital industry. The software sector is also expected to be dominated by innovative SMEs in the future (Tonttila et al., 2005). Concluding remarks Certain trends and forces appear to be behind the resurgence of SMEs worldwide. Many studies have noted a change in consumer preferences towards specialized and customized products and services, which is strengthening the position of niche markets. It is assumed that these preferences can be more readily met by small-scale and flexible production modes. Recent process innovations and improvements in communication technologies have also worked in favour of smaller enterprises. The adaptability and cost-effectiveness of small firms, mostly unimpeded by managerial complexity, have revitalized the SME sector and allowed it to compete more effectively and to move into the export market. Finnish enterprises started to internationalize their operations relatively late compared to most other small economies. As late as the 1970s, the international activities of Finnish companies still consisted mainly of exporting carried out by a handful of pioneering larger firms. However, the situation has changed dramatically during the past two decades and today a good number of Finnish SMEs are engaging in many-sided international operations covering not only traditional exports but also foreign direct investments and internationalization of ownership as part of the global integration of markets for capital, goods and technology. The recent developments in internationalization have been based strongly on building and exploiting specific competencies for expanding abroad, and focused acquisitions as a way to create international business have increased considerably. New initiatives have emerged, such as inter-firm network creation, supporting the use of knowledge-intensive business services and cooperation schemes between higher education institutes and SMEs. Although making the step from a domestic market of five million people to a world market a hundred times bigger may be a radical one for a small enterprise, there is no other way forward. It calls for a new type of international business know-how and the ability to cross various thresholds. Small firms going international face not only foreign countries and languages, but also new business habits and cultures and often fierce competition. As markets grow, also the risks tend to grow. It can be said that small firms in Finland are forced to internationalize ‘too early’, during the first stages of their development. Too many things are learned by trial and error, compared, for example, to German firms having a 16 times bigger domestic market.

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In the light of comparative international statistics, Finnish service industries do not appear to be as innovative and growth-oriented as the manufacturing sector. The share of private service trades of both production and employment is low on the international scale. For example, the expenditure of services industries on R&D lags clearly behind that of manufacturing. However, service firms could be as R&D-intensive, growth-oriented and international as high-technology manufacturing enterprises. Thus, development of service firms is a crucial challenge for Finland. The most promising opportunity window for SMEs is right there. More high-quality business services are also needed to support the growth and internationalization of SMEs. Services represent an important link in the commercialization process, in that they bring together available technologies and customers’ needs that can be solved with the help of appropriate technologies. Particularly knowledge-intensive business services (KIBS), such as computer and related services, R&D, legal and financial services, marketing services, various technical services and consultancy, play an important role as carriers, shapers and creators of new innovations (Kuusisto and Meyer, 2003). Services are also important inputs into the modern production process, where they are being used at an increasing rate. Another shortcoming that must be addressed in the future relates to Finnish total entrepreneurial activity, which is relatively low in international comparison. Furthermore, established firms have on average relatively modest growth ambitions. The causal link is clear: if there is no growth orientation in firms, there will be no internationalization either. Over the past few years entrepreneurship in services has grown fastest so that services now are the biggest employers. This entrepreneurship has not utilized the full potential of existing opportunities and could grow far faster and much more aggressively. Fortunately, there are some recent indications that entrepreneurial activity is higher among the younger age groups in the Finnish working-age population (Lundström, 2005). It is widely accepted in Finland that there is evidence of a new and growing recognition of the role of SMEs (Dana, 2006). For example, there has been a profound reorientation in development policy over the last decades. However, this new awareness of the importance of SMEs both in sustaining economic stability and as indispensable catalysts in fostering economic dynamics, welfare and economic democracy has shown itself more in terms of positive attitudes than of real actions taken. Globalisation has created a situation in which internationally oriented SMEs need to increase their speed to market (Christie, 2002). The direction taken by the Finnish SME population is right, but the speed could be faster and the number of internationally oriented growth companies could be much bigger than it is today. References Ahokangas, P. (1998), Internationalization and Resources. An Analysis of Processes in Nordic SMEs. Acta Wasaensia, No. 64, Universitas Wasaensis, Vaasa. Autere, J. (2005), ‘The Impact of Referents on Entrepreneurship. Growth of Small and Medium-Sized Software Companies in Three Finnish Regions’, Helsinki University of Technology, Department of Industrial Management, doctoral dissertation. Bifulco, F. (1997), ‘Entrepreneurial behaviour in the international development of small firms’, in R. Donckels and A. Miettinen (eds), Entrepreneurship and SME Research: On its Way to the Next Millennium, Aldershot: Ashgate, pp. 149–61. Boter, H. and C. Holmquist (1997), ‘The impact of size, industry, and nation on internationalisation in small and medium-sized enterprises’, in R. Donckels and A. Miettinen (eds), Entrepreneurship and SME Research: On its Way to the Next Millennium, Aldershot: Ashgate, pp. 163–83.

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Chetty, S. and C. Campbell-Hunt (2003), ‘Explosive international growth and problems of success amongst small to medium-sized firms’, International Small Business Journal, 21(1), 5–27. Dana, Léo-Paul (2006), Entrepreneurship & SMEs in the Eurozone: Toward a Theory of Symbiotic Enterprises, London: Imperial. Davidsson, P. and J. Wiklund (2000), ‘Conceptual and empirical challenges in the study of firm growth’, in D.L. Sexton and H. Landström (eds), The Blackwell Handbook of Entrepreneurship, Oxford: Blackwell Publishers, Ltd. Education Intelligence. Success Clusters Today and in 2015: Facts and Visions to Support Anticipating Competencies, Interim Report 1, Confederation of Finnish Industries, Helsinki. Eriksson, T. (2002), ‘Entrepreneurial capital: the emerging ventures’ important asset and competitive advantage’, Journal of Business Venturing, 17, 275–90. Gankema, H.G.J., H.R. Snuif and K.A. van Dijken (1997), ‘The internationalization process of small and medium-sized enterprises: an evaluation of the stage theory’, in R. Donckels and A. Miettinen (eds), Entrepreneurship and SME Research: On its Way to the Next Millennium, Aldershot: Ashgate, pp. 185–97. Haahti, A. (2000), ‘INTERSTRATOS: a longitudinal study of European enterprises in five industries’, In H.-J. Pleitner and W. Weber (eds), Die KMU im 21. Jahrhundert – Impulse, Aussichten, Konzepte, KMU Verlag HSG: St. Gallen. Haahti, A., G. Gall and R. Donckels (1998), The Internationalization of SMEs. The INTERSTRATOS Project, London: Routledge. Harrison, R.T., C.M. Mason and P. Girling (2004), ‘Financial bootstrapping and venture development in the software industry’, Entrepreneurship & Regional Development, 16, 307–333. Hoch, D.J., C.R. Reoding, G. Purkert, S.K. Lindner and R. Müller (1999), Secrets of Software Success: Management Insights from 100 Software Firms around the World, Cambridge, MA: Harvard Business School Press. Holmlund, M. and S. Kock (1998), ‘Relationship and the internationalization of Finnish small- and mediumsized companies’, Journal of Small Business Management, 16(4), 46–63. Hurmerinta-Peltomäki, L. (1994), ‘Success factors and their sensitivity to internationalization: some empirical findings among Finnish SMEs’, in J.M. Veciana (ed.), SMEs: Internationalization, Networks and Strategy, Aldershot: Ashgate, pp. 24–37. Hyrsky, K. and H. Lipponen (2004), Yrittäjyyskatsaus 2004 (in Finnish), Ministry of Trade and Industry, Publications 18/2004, Helsinki: Edita Publishing Oy. Hyvärinen, L. (1994), ‘Internationalization of Finnish SMEs: commitment, internationalization paths and innovation’, in J.M. Veciana (ed.), SMEs: Internationalization, Networks and Strategy, Aldershot: Ashgate, pp. 76–100. Johanson, J. and J.-E. Vahlne (1977), ‘The internationalization process of the firm – a model of knowledge development and increasing foreign market commitments’, Journal of International Business Studies, Spring–Summer, 23–32. Kuusisto, J. and M. Meyer (2003), ‘Insights into services and innovation in the knowledge intensive economy’, Technology Review 134/2003, Tekes, Helsinki. Littunen, H., E. Storhammar and T. Nenonen (1998), ‘The survival of firms over the critical first three years and the local environment’, Entrepreneurship & Regional Development, 10, 189–202. Lundström, A. (2005), Creating Opportunities for Young Entrepreneurship. Nordic Examples and Experiences, Swedish Foundation for Small Business Research, Örebro. Luostarinen, R. (1979), The Internationalization of the Firm, Helsinki: Acta Academiae Oeconomica Helsingiensis. Luostarinen, R. and L. Welch (1990), International Business Operations, Helsinki: Kyriiri Oy. Majocchi, A. and A. Zucchella (2003), ‘Internationalization and performance. findings from a set of Italian SMEs’, International Small Business Management, 21(3), 249–68. Mannio, P., E. Vaara and P. Ylä-Anttila (2003), Our Path Abroad. Exploring Post-war Internationalization of Finnish Corporations, Helsinki: Taloustieto Oy. Manolova, T., C.G. Brush, L.F. Edelman and P.G. Greene (2002), ‘Internationalization of small firms: personal factors revisited’, International Small Business Journal, 20(1), 9–31. Martin, X., A. Swaminathan and W. Mitchell (1998), ‘Organizational evolution in the interorganizational environment: incentives and constraints on international expansion strategy’, Administrative Science Quarterly, 43, 566–601. Melin, L. (1992), ‘Internationalisation as a strategy process’, Strategic Management Journal, 13, 99–118. Miettinen, A. (2005), ‘How small software firms innovate?’, a paper presented at IECER Conference, 2–4 April, Amsterdam. Ministry of Trade and Industry, Annual Report 2004, Helsinki. Moen, Ö. (2000), ‘The relationship between firm size, competitive advantages and export performance revisited’, International Small Business Journal, 18(1), 53–72.

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Neck, P.A. (1998), ‘Building SME policies utilising international and national networks’, in H.-J. Pleitner (ed.), Renaissance der KMU in einer globalisierten Wirtschaft, KMU Verlag HSG: St. Gallen, pp. 569–77. Niittykangas, H. (1996), ‘Enterprise development in different rural areas of Finland’, Entrepreneurship & Regional Development, 8, 245–61. Nummela, N. (2000), SME Commitment to Export Co-operation, publications of Turku School of Economics and Business Administration, Series A-6:2000, Turku School of Economics and Business Administration, Turku. O’Gorman, C. and M. Kautonen (2004), ‘Politics to promote new knowledge-intensive industrial agglomerations’, Entrepreneurship & Regional Development, 16, 459–79. Stanworth, J., C. Stanworth, A. Watson, D. Purdy and S. Healeas (2004), ‘Franchising as a small business growth strategy. A resource-based view of organizational development, International Small Business Journal, 22(6), 539–59. Tonttila, J., P. Virtanen, I. Lamberg and J. Kontio (2005), Osaamisen kehittäminen työllisyyden edistäjänä. Tutkimus tietotekniikan palvelu- ja ohjelmistotuotannon toimialalta, Työministeriö, Helsinki (in Finnish). Welch, L.S. and R. Luostarinen (1988), ‘Internationalization: evolution of a concept’, Journal of General Management, 14(2), 36–64.

14 Internationalization of SMEs: the case of The Former Yugoslav Republic of Macedonia Marija Risteska and Zhidas Daskalovski

Introduction The aim of this chapter is to focus on the SME sector in Macedonia, a candidate for EU membership, and a former Yugoslav republic with difficult transition in the postcommunist period. Like a few other countries in Eastern Europe the reforms in the last 15 years in Macedonia have been simultaneously focused on two issues: state building and setting up the legal base for a functioning market economy.1 Many of the problems of democratic consolidation were affected by the inter-ethnic relations. Today the political situation in Macedonia is fairly stabilized. However, according to various data, the Macedonian economy can be judged as weak, underperforming and, in many sectors, not competitive on international markets. What is more, the insufficient level of investments (particularly in research and development) and the failure to attract foreign investors are both a reason and a result of the current economic state. In early 2001, Macedonia signed the Stabilization and Accession Agreement with the European Union and became a member of the World Trade Organization in April 2003. Both events started a harmonization process, in which many laws are to be harmonized with the international standards. The post-communist process of liberalization of the economy and the loss of several traditional export markets created both positive and negative effects. Faced with the increasing competition during the privatization process, many socially-owned enterprises have scaled down production, dismissing many employees. On the other hand, in the transformation period many private small businesses were created. In 2003, the Macedonian GDP per capita was 1675 USD. By sectors the economic make-up of the country was as follows: 11 per cent agriculture, 58 per cent services and 31 per cent industry. The share of the private sector in the GDP is about 60 per cent. The main export goods are textiles/garments, industrial manufactured goods made of steel, and various food products, including tobacco. The major export partners in 2003 were Germany (30 per cent), Greece (25 per cent), Serbia/Montenegro (25 per cent), and Italy (11 per cent). SMEs in Macedonia In 2004, 98.7 per cent of all the economically active firms had fewer than 250 employees, accounting for about 61 per cent of the total employment in the country. Judging by these numbers we can easily note that the driving force of the Macedonian economy currently comprises the small and medium enterprises. More data on the kind of enterprises in the country are given in Table 14.1. The sectoral distribution of the enterprises is the following: 52 per cent are active in trade, 13 per cent in industry, 6 per cent in crafts and 4 per cent in tourism. (see Figure 14.1).

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215

Kinds of enterprises in Macedonia in 2004 Small

State-owned Cooperatives Mixed ownership Unknown ownership Socially-owned Privately-owned % of Total

28 150 571 25 219 40 087 98.7

Total number of enterprises

41 582

Medium

Large

12 4 147 2 27 237 1

5 0 32 0 5 31 0.2

% of total 0.01 0.4 1.8 0.06 0.2 97

Source: Central registry office, status as of December 2004.

Macedonian SMEs by sector

Trade Industry Craft Tourism

Source: Ministry of Economy, Department for Entrepreneurship Support (2004)

Figure 14.1

Macedonian SMEs, by sector

Support to SMEs Given these data, it is not surprising that, in Macedonia, the support of small businesses is one of the priorities for the central authorities. The government’s development programme for 2002–06 targets the following areas: (i) access to finance and business development services (BDS), including awareness of their availability and benefits; (ii) promoting cooperation between businesses through clusters and supply chains; (iii) promoting local and regional economic development; (iv) export promotion for SMEs; (v) promoting the dialogue between SMEs and the state; (vi) improving the framework conditions and creating an enabling environment for SMEs. At present, the support to small firms in Macedonia is governed by the following documents: ●

The National Development Strategy for Small and Medium Enterprises SMEs (SME Strategy).

216 ●

●

Handbook of research on European business and entrepreneurship The Programme on Measures and Activities for the Promotion of Entrepreneurship and Creation of Competitiveness of the Small and Medium-sized Enterprises in the Republic of Macedonia (SME Programme). The European Charter for Small Enterprises – National Report, Republic of Macedonia (SME EU Charter).

The SME Strategy defines the general direction of SME development in Macedonia, the SME Programme rules the implementation of the SME Strategy, while the SME EU Charter sets the priorities in SME development necessary to achieve EU accession. Figure 14.2 displays the institutions foreseen to implement the SME Programme. This is a rather decentralized approach where the decisions are made at a central level (within the Government and the Ministry of Economy in cooperation with the National Competitiveness Council, which plays the role of an advisory body to the policy-making elite); the implementation is governed independently by a separate body, the Agency for Entrepreneurship promotion (APE),2 together with a network of regional centres, local entrepreneurship support agencies and business development services (consulting agencies) that provide business development support directly to SMEs. In addition to the decentralized business support scheme, several donor-funded projects target the SMEs in Macedonia (in particular: the EU,3 the GTZ,4 the USAID,5 the WB,6 and the SDC7). Their approaches in support of business development differ extensively. The EU supports government institutions in creating a more favourable business environment and facilitating the EU accession of Macedonia. The GTZ, the SDC and the WB support the businesses and their associations with complementary measures. USAID has a mixed approach, combining SME programmes for improving the policies and giving direct Government National Competitiveness Council

Ministry of Economy

Agency for Entrepreneurship Promotion

Regional centres

Consultants

New local centres

SME Source: © Sasha Sindeloski SME Department, MoE, 04/2003, adapted by Policy Support Project, 07/2004.

Figure 14.2

Institutions implementing the Macedonian SME programme

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support to businesses. However, the issue of coordination of this donor support and its responsiveness to the real needs and functions of the small businesses remains unresolved. Internationalization of Macedonian enterprises The internationalization of the Macedonian SMEs is measured by the number of foreign direct investments (FDIs) in Macedonian companies and the number of FDIs made by Macedonian companies abroad. However, it should be noted that the official institutions overlooking the dynamics of Macedonian economy currently do not register the outflow of Macedonian capital. Therefore we will focus here primarily on foreign capital inflows. A major assumption in the literature on transitional economies is that privatization increases the internationalization of national economies. The privatization of Macedonian companies was initiated in 1991, when privatization of 1700 companies was planned. The privatization was conducted in two phases: (i) all socially-owned enterprises, except agricultural, ‘strategic’ and state-owned enterprises were privatized on a case-by-case basis via two state-controlled agencies: the Privatization Agency and the Bank Rehabilitation Agency;8 (ii) restructuring and privatization of 25 large loss-making enterprises.9 The FDIs in Macedonia, as is the case with other transition countries, are mainly absorbed through the privatization process. In this respect the biggest FDI in the country was made in 2001 with the privatization of the state’s stake in the Macedonian telecommunications operator. This investment was quite large as it accounts for the total FDI in the preceding ten years (Table 14.2). The privatization of the Macedonian oil refining company (OKTA), the marbleproducing company, the nickel-producing company, the steel-producing company and several Macedonian mines allowed for further internationalization through privatization. But it must be noted that all of these are big companies, employing in socialist times thousands of people. However, in the last two years FDI inflows are also noticeable in the consumer’s sector, as investments in shopping malls and supermarkets were announced from various sources. While the investments of the Turkish billionaire Rahmi Koc in the shopping centre Ramstore and the Greek businessman Nikos Veropolous in the chain of super markets Vero are the two biggest market entries, other Greek investors, Slovene, and investors from the neighbouring Serbia and Montenegro, have also shown an interest in investing in the Macedonian retail sector. Whereas FDI inflows to developed countries are usually horizontal investments driven by market-seeking strategies and try to take advantages of a new large market, Table 14.2

FDI in Macedonia (mln. $)

1994

1995

1996

1997

1998

24

33.49

44.7

60.42

178.12

2000

2001

2002

2003

2004

178.5

445.1

77.3

97.5

157

Source: Vienna Institute for International Studies.

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Table 14.3

FDI in South East Europe (million $)

Country / year Albania Bosnia Bulgaria Croatia Macedonia Moldova Romania Serbia & Montenegro

2000 142.6 158.2 1001.5 1088.7 178.5 148.7 1.037 50

2001 204 139.9 812.9 1561.3 445.1 155.5 1.157 165

2002 149 308.3 904.7 1124.0 77.3 146.1 1.144 475

2003 178 200.4 1419.4 1998.3 97.5 91.7 1.574 1.36

2004

1198.6 547.8 157

Source: Vienna Institute for International Studies.

innovation new managerial techniques and development of additional skills, foreign investors in Macedonia are motivated by various economic factors, such as the inexpensive labour force, availability of natural resources, specific skills and infrastructure. In this respect experts have highlighted that Macedonia is not a much desired destination for foreign investors as the market is small, the business climate is not favourable and, owing to the poor functioning of the judicial system, investment security is low. If we compare the foreign direct investments in Macedonia with those of the neighbouring countries in the region, we will see that the country is at the bottom of the list with states such as Albania, Bosnia and Herzegovina and the federation of Serbia and Montenegro that lag behind in the European side of the Atlantic Ocean process better performing (see Table 14.3). Foreign direct investments in Macedonia differ significantly by sector. Most notable investments have been made in transport and communication, followed by financial intermediation (banking, leasing, insurance). Modest investment can be seen in the manufacturing sector. Turning finally to the sources of FDI flows in Macedonia, one might notice that (i) the sources of FDI are typically made up of the following countries: Hungary, Greece and Cyprus; (ii) the FDI flows originate from countries which are targets of FDIs from Western European companies (Figure 14.3). This provides strong support to the hypothesis that gravity variables, in particular, proximity, play a major role in determining FDI flows.10 For both political and economic reasons, Macedonia as well as the rest of the Southeastern European countries has adopted a regional approach to shaping the investment environment. This development has to a great extent been supported by the EU and powerful international financial institutions such as the World Bank, through the Investment Compact, a component of the Stability Pact for Southeastern Europe. The Entry mode of international capital As emphasized above, the entry mode of international capital in Macedonian enterprises currently is mainly through acquisition: purchase of a controlling interest in an existing enterprise in the course of the privatization process of the state-owned companies. Because these state-controlled companies were huge and employed far more workers than needed, the government has decided that the companies would be sold unit by unit if

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FDI flows in Macedonia (2003 stock in US dollar million) 350 300 250 200 150 100 50 0 HUN

GR

CYP

CHE

GBR

Source: IMF.

Figure 14.3

FDI flows in Macedonia

needed. This approach by the government directly supported establishment of various internationalized SMEs. In many of these cases the foreign partner owns the controlling package of stocks, but the ownership is truly mixed (in some cases the state is still one of the owners, in others the workers or the managers of the companies). It is interesting to note that, even in the financial sector, primarily banking, where the assumption will be that the foreign investor would prefer full control over the entity, in Macedonia we have joint ventures (for example, Komercijalna Banka and Stopanska Banka, the two biggest banks, which account for about 70 per cent of the banking business in Macedonia, are managed by at least three owners. The three majority shareholders in Stopanska Banka are the National Bank of Greece, International Financial Corporation and the European Bank for Reconstruction and Development, while the biggest shareholders of Komercijalna Banka are Prva Pokojinska Druzhba from Slovenia, the European Bank for Reconstruction and Development, and Promedika).11 The so-called ‘greenfield direct investments’ are made mostly by domestic companies. Only a limited number of foreign firms, from Slovenia12 and Turkey,13 have invested in new capacities. This actually shows that the Macedonian domestic investors have a distinct preference for new start-ups over acquisition. But it also reflects the mentality of the Macedonian managers seeking to be sole owners of a company despite their desperate need for additional equity capital in order to upgrade production or overall performance. However, foreign-owned greenfield investments are especially becoming a trend now, with the European integration of the country when many foreign investors are interested in putting their money into shopping centres and supermarkets. This development is further strengthened by the decentralization process and the growing interest of municipalities in promoting greenfield investment zones in order to accumulate more communal taxes, one of the main sources of finance of the Macedonian municipalities. This factor will in the future influence more greenfield investments in Macedonia. Joint ventures in greenfield investment are a rare case. This reflects the existing Macedonian companies not having acquired the trust of, nor having attracted with their professional operations, many of the foreign partners they work with, to invest together.

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There are some isolated cases, such as the recent one in clothing manufacturing when a Polish firm in a joint venture with a Macedonian counterpart invested in a greenfield investment in the town of Delchevo. Since Macedonia is a less developed country with a small market, but with also low labour costs, vertical foreign investments especially should be expected in the manufacturing sector. The vertical FDI takes place when a firm relocates part of its production process and not the whole production. In many cases, it is the relocation of the labour-intensive activities in low-wage countries.14 The Macedonian wage average in 2004, in small enterprises in the private sector, was 8062 Macedonian denars.15 The sector with the highest average salary is the financial intermediation sector with a salary of 20 813 MKD16 per employee. The real estate, renting and business activities, with 9974 MKD,17 and the health and social work sector with 827318 MKD were next highest. The sector with the lowest average salary per employee was manufacturing, with 5355 MKD.19 The biggest manufacturing sectors in the country are steel and textile/apparel production. Finally, capital participation is the least used entry mode of foreign capital in Macedonian SMEs. In 2005 entry of Swiss capital was made into ORKA holding, a clothing producing company from Skopje. This capital was used to upgrade the production of clothes in the Macedonian company, which was critical for the growth of this company to become a leader in this sector in Macedonia. The internationalization of Macedonian companies is a very new development and thus the age of foreign subsidiaries in Macedonia is the lowest, particularly because most of these investments were made by the end of the 1990s. Things are probably the same in the rest of the countries in the region, as all come out of the socialist system of the state-planned and largely state-owned economy. Room for foreign owners was made just recently and thus their presence in the country is modest. As the government aims to improve the business climate and therefore attract more foreign investments in Macedonia, further internationalization of Macedonian SMEs should be expected. Processes and measures for support of further internationalization The decentralization drive Decentralization is a process that involves transfer of authorities from central to local government. The Ministry of Finance has a key role in this process as it organizes the flow of resources between the central and local government and develops the capacity of local government to raise revenues, to prepare and implement the budgets and to account for the use of financial resources. The Law on Local Self-Government, Article 22, sets out the areas for which competencies are devolved to the municipal level. These include (i) urban and rural planning; (ii) environmental protection; (iii) local economic development; (iv) communal activities (including, inter alia, water supply, waste water treatment; solid waste collection and treatment, heating supply and road construction); (v) culture; (vi) sport and recreation; (vii) social welfare and child protection; (viii) education; (ix) health care; (x) civil protection; (xii) fire fighting; (xii) supervision of municipal responsibilities. As local economic development is one of the important areas for the decentralization process, promotion of greenfield investments at the municipal level is part of the strategic plans for development of most Macedonian municipalities.

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European integration Since 2001, Macedonia has been closely linked with the EU, as it has signed a Stabilization and Association Agreement (SAA). On 9 November 2005, the European Commission issued a positive opinion on the application for European Union membership that the Macedonian Government submitted on 22 March 2004, recommending the European Council to approve Macedonia as a candidate for membership. The European perspective of the country is expected to influence the number of foreign investments to be attracted in the country in the future. As an illustration, once the Croatian future in the EU was certain, the country obtaining a date for starting negotiations for EU membership, foreign investors started flowing into the country and, in three months, 477 investment projects in small and medium enterprises were registered.20 Company matching through the EIC network The European Information Centers (EIC) network was created in 1987 to facilitate access to pertinent EU information for businesses. The EIC network has since broadened its geographical scope and extended its range of activities. Since 2006 in Macedonia also, there is such a centre. An all-inclusive and often preferred service that an EIC can do for a client is Business Co-operation & Partner Search. If companies are considering doing business inside or outside the EU, EIC can conduct a partner search and provide information on (a) funding and tenders, (b) procedures for EU external aid, (c) market analysis, (d) legal provisions, and (e) co-operation initiatives. This service is a challenge to the ‘I can do it alone’ mentality, to ‘my business is mine’, that is characteristic in Macedonia. As more companies will find partners and work in the EU, the old-fashioned mentality of the managers will be affected. Conclusion: the future of the internalization of SMEs in Macedonia is wireless Having a low level of internalization of SMEs, Macedonia may have found a quick and effective way to improve this factor and bring in foreign direct investors. Recently, relying on skilled foreign aid,21 the government and the private sector have transformed Macedonia, once the least developed of the Yugoslav republics, into the world’s first ‘wireless country’ of its size or larger. On 10 November 2005, the BBC reported that wi-fi technology had been put in place all around Macedonia.22 Now a vast majority (95 per cent of the country’s population) has access to wireless, broadband and Internet service. The backbone for the national wireless system in Macedonia is the connectivity of rural communities scattered throughout the rugged mountainous countryside. As noted by Jani Makraduli, President of the Committee for Information Technology of the Government of the Republic of Macedonia, ‘This infrastructure will bring in investment and create jobs.’ ‘Investment in the ICT infrastructure and skills helps to diversify economies’ say Addison and Heshmati.23 As a result, Macedonia can end dependence on its natural resources and offset some of the location disadvantages of being a landlocked country with a small market. Notes 1. 2.

Cf. Jon Elster, Claus Offe and Ulrich K. Preuss, Institutional Design in Post-Communist Societies: ReBuilding the Ship at Sea (Cambridge: Cambridge University Press, 1998). This agency was established in 2004 with the Law on the Agency for Entrepreneurship as successor of NEPA, which was abolished in May 2004.

222 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23.

Handbook of research on European business and entrepreneurship European Union. Deutsche Gesellschaft für Technische Zusammenarbeit. United States Agency for International Development. World Bank. Swiss Development Corporation. This phase commenced in 1993. This phase commenced in 1995. IMF Working Paper, ‘Foreign Direct Investment in Southeastern Europe: how (and how much) can policies help?’ 2005, p. 11. See ‘Koj Upravuva so Makedonskite Banki’ (Who runs the Macedonian banks)’, Kapital, 19.05.2005. LEK Ljubljana, FRUCTAL and MERKATOR. KOC, TAC and ULKER. Mariotti, S., M. Mutinelli and L.Pisticello (2003), ‘Home country employment and foreign direct investment: evidence from the Italian case’, Cambridge Journal of Economics, 27(3), p. 419–31. Approximately 135 Euros (source: Ministry of Labor and Social Policy). Approximately 340 Euros (source: Ministry of Labor and Social Policy). Approximately 165 Euros (source: Ministry of Labor and Social Policy). Approximately 136 Euros (source: Ministry of Labor and Social Policy). Approximately 88 Euros (source: Ministry of Labor and Social Policy). Interview with Croatian Premier Sanader, 06.09.2005, published in Utrinski Vesnik (Morning Gazette), Skopje. Through a grant from USAID, the AED project, Macedonia Connects. http://www.bbcworld.com/content/template_clickonline.asp?pageid666&co_pageid2. Addison, T. and A. Hashmati (2003), ‘The new global determinants of FDI flows to developing countries – the importance of ICT and democratization’, UNU/WIDER (World Institute for Development Economics Research), Helsinki, Discussion paper No. 2003/45.

15 Internationalization of French SMEs Hervé Mesure and Rita Klapper

This chapter is the first step in a research programme whose objective is to propose a strategic model of independent SME adaptation to internationalization, a model that is expected to be tested empirically. This chapter is based on a number of French-language empirical studies, conducted over a period of ten years, during which we have been able to collect information about the development of the three chosen sectors. To explain some of the empirical findings we have complemented this information with French-language theoretical work about the internationalization of SMEs. We studied the three sectors by using a conceptual framework based on French-language texts in order to develop a first-step modelling relevant to independent French SMEs. This chapter contains two key ideas. First, the adaptation to internationalization appears as a multiform phenomenon that cannot be reduced to the internationalization per se of the SME. Second, the traditional theoretical explanations about the internationalization of SMEs are contested and a list of generic strategies for SME competitiveness in an international context is proposed. After a short introduction we will present the industrial characteristics of the three industries studied; we will consider the internationalization of French independent SMEs within the three industries under review and we will explore how independent French SMEs resist the internationalization of their industry. This is followed by an elaboration based on our argument that the adaptation of SMEs to the internationalization of their industries must first be thought of in terms of competitive advantage rather than in terms of traditional approaches such as exportation or internationalization. Having discussed the factors that form the basis for the competitiveness of independent SMEs in an international industrial context, we finally propose our own modelling of SME adaptation strategies to the internationalization of the industries under review. Some final remarks concerning further research and limitations of our work round off this chapter. Introduction Whereas the world economy has seen a significant increase in growth throughout the period of 2004/05 we find that European economies, in particular France and Germany, have lost out and in particular in France industrial production has stagnated (Honoré, 2006). In 2005 French GDP increased by only 1.4 per cent which compares to 2.1 per cent in 2004 (INSEE,1 2006). While the inflation rate remained stable at 1.5 per cent in 2005, unemployment is relatively high in France with 9.5 per cent of the active population being out of work. Factors such as a weak dollar, a very strong outside competition and an increase in Chinese exports have contributed to this situation. In fact, the Growth Competitiveness Index of the World Economic Forum placed France in thirtieth position compared to other ‘good students’ such as Finland (first) and Sweden (third) (Betbèze et al., 2006). 223

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France has a population of 60.6 million inhabitants who inhabit an area of 552 000 square metres. Arguably, the French economy is exceptionally diversified (Dana, 2006) as agriculture and the agro-food industries account for a larger share of economic activity than in many other West European countries. In fact, in 2002 the agriculture and agro-food sector employed 5 per cent of France’s workforce and contributed 3.4 per cent of GDP. In comparison, the industrial sector’s share of GDP fell to below 20 per cent in 2000. Arguably, France’s greatest strengths are in sectors such as motor vehicles, pharmaceuticals, transport equipment and aerospace (civil and military). In fact, manufacturing accounts for around three-quarters of total exports of goods and services and exports represent 27 per cent of French GDP. Even by EU standards the French services sector is large as it accounted for about 72 per cent of the GDP in 2002 (Economist.com/countries/France/profile.cfm 17.5.2004, accessed 23/03/06). In 2005, French GDP amounted to 1898bn US$, which was slightly higher than in 2003 (1754.6bn US$) (www.Economist.com/countries/France/profile.cfm accessed 23/03/06). Whereas, in 2003, French GDP was roughly the same as that of the UK (1773.2bn US$) it was significantly lower than that of Germany (2377.7bn US$). At the same time inflation averaged around 2.1 per cent, which was higher than in the UK (1.4 per cent) and Germany (1.1 per cent). In terms of the exports of goods fob, France showed a surplus of 358.48bn US$ which compares with a deficit of 353.98bn US$ in terms of imports of goods. In comparison, Germany’s exports amounted to 696.9bn US$ which compares with a deficit of 585.0bn US$ in terms of its imports. This negative trend continued in France in 2004 with the value of good exports totalling US$421.1bn which compares with an import bill of US$429.1bn, which resulted in a trade deficit of US$7.9bn. However, in total, France is the fourth-largest exporter of goods and the thirdlargest exporter of services in the world (www.Economist.com/countries/France/profile. cfm accessed 23/03/06). What is of great interest to this study is that the French balance of trade showed a deficit of 26 million Euros in 2005 (INSEE, 2006) and the balance of payments is just about positive (INSEE, 2006). There are three explanations for this result: the bad specialization of France in terms of its products and her strong orientation towards, in particular, African countries), her high energy bill and the insufficient export activities of French SMEs (CPCI, 2005; INSEE, 2006). Yet, on the positive side, France remains attractive for foreign investment thanks to the quality of her infrastructures and highly qualified labour (INSEE, 2004). In more detail, in 2004 about 150 000 French companies were engaged in foreign trade, which represented only 6 per cent of the total of French enterprises. 80 per cent of all imports were realized by less than 4 per cent of all importing companies, whereas 85 per cent of the exports were effected by 3 per cent of all exporting companies. The main partners for both imports and exports were countries of the Single European Market (SEM); indeed 70 per cent of the exchanges were realized with these countries, the first partner being Germany (INSEE 2006, www.Economist.com/countries/France/profile. cfm accessed 23/03/06). There were officially 2 568 650 enterprises in France in January 2004, of which, according to INSEE, 177 920 were SMEs. These SMEs represent 52 per cent of national value added. Looking at the economic tissue of the country we find that that, in 2004, one in two French companies did not have any employees and 92.5 per cent employed fewer than ten people. About 7.3 per cent of companies employed between 10 and 249 people, yet

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only 0.2 per cent more than 250 people. However, French groups have a key importance in the French economy as one in 20 companies depended on a group in 2002. These big groups produced five times more value added and realized four times more investments in 2002, but their economic weight varied with the industry concerned. Whereas they are well represented in car manufacturing and in the energy sector (they constitute more than nine employees in ten) they are slightly less important in intermediary goods and capital good industries (seven in ten employees). In comparison, very small companies represented 29 per cent of all employment and 28 per cent of total added value among all French companies. As highlighted by INSEE (2006), almost 63 per cent of French SMEs do not participate in international trade. In fact, only 18 per cent of SMEs export and these are predominantly small and medium-sized industrial enterprises (so-called PMI). Even more important, only 6 per cent of French SMEs have a site abroad. Almost 15 years after the creation of the Common Market, and despite the increasing globalization and regionalization of the economy, French SMEs appear largely unconcerned by internationalization. Arguably, this situation seems at odds with the standard thinking about the growing globalization and internationalization of our economies. In fact, this somehow paradoxical situation has triggered our interest in pursuing this particular research study as the internationalization of the French economy seems to be happening largely without French SMEs. Furthermore, as already highlighted by Klapper (2004, 2005a), it is not necessarily the case that the predominance of large groups encourages the development of an entrepreneurial spirit in the country. For a discussion of barriers to entrepreneurship, see for instance Klapper (2005b). However, it seems that this situation is not particular to France, as was recently highlighted by the Observatory of European SMEs (2003), an organism attached to the European Union. Hence there is a need to understand how French (and other foreign) SMEs cope with the internationalization of the economy in order to find out whether they have a hidden, as yet unexploited, potential, for the development of international trade. Considering that a macro approach is inadequate to understanding SMEs’ adaptation to internationalization, our text will focus on a meso level of analysis by conducting a review of the adaptation of French SMEs within three industries (in Porter’s sense): textile–clothing, food processing and wood–furniture. Our aim is to understand how French SMEs belonging to those industries adapt themselves to the growing internationalization that affects these three industries. After some methodological clarifications we will introduce the three chosen industries and we focus on the place SMEs have within them. Second, we will detail the way SMEs within these three industries have adapted themselves to the growing internationalization of their industry. Third, having elaborated this further we will aim to explain the situation which, fourthly, will allow us to suggest a hypothesis based on the logic of SME competitiveness. Also we will propose a typology of SME adaptation strategies to the internationalization of their industries. Lastly, we will round off this chapter by highlighting the limitations of this work, as well as our interests, and further research. Methodological considerations Our study is part of a wider research programme which focuses on the adaptation of independent SMEs to the internationalization of their industries. There are three features and one major objective to this research. First, we are investigating ‘real’ SMEs, that is,

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independent enterprises of small to medium size. Second, our approach aims to integrate meso and micro analysis levels, the so-called ‘strategic’ levels following Strategic Management literature. Third, our study is based on the idea to use both Anglo-Saxon and French literature to develop our conceptual framework (however, this first chapter is based solely on French literature), and finally our objective is to propose a strategic model of independent SME adaptation to the internationalization of their industries. The study that follows is the first step in this wider research project. It seems that a macroeconomic approach is inappropriate for the analysis of the study of SME adaptation to the internationalization of their industries as it plays down SME variety owing to aggregation. Furthermore we believe that SMEs do not adapt themselves to the internationalization of the economies but first to the internationalization of the industries to which they belong. We follow Porter’s (1982/85) definition of an industry or a sector as a set of firms that produce or sell a similar product or service. As it would be impossible to study all existing industries we have chosen to focus on three of them: textile–clothing, food processing and wood–furniture, the reasons for which are threefold. First, these industries have existed in France (and in the European Union) for a long time and they have not been created such as was, for instance, the petroleum industry through the internationalization of the economies. Second, these are industries which are relatively well documented; and third, above all these are industries which have undergone internationalization. In order to study these industries we have followed the strategic approach to industries as proposed by Porter (1982/85) and integrated into the standard body of Strategic Management literature. Our operational definition of an SME is based on two key characteristics: (a) it is a financially independent firm, of (b) small or medium size that must be studied in the context of a given industry. This conception of the SME corresponds to the European Union definition of the SME of April 1996. Moreover, we have already underlined the methodological importance of distinguishing independent SMEs from dependent SMEs in Klapper (2001). Our study is based on French documentary data, that is, a number of empirical studies, conducted over a period of ten years, during which we have been able to collect information about the development of the three chosen sectors. The statistical information has been provided by INSEE (the official French organism for economic and social statistics), the SESSI (the official statistical organism of the French Ministry of Industry) and other official sources. Most of the other empirical studies reviewed are backed up by INSEE or SESSI data, except when the authors made their own collection (for example Bourcieu, 2000). To explain some of the empirical findings we have complemented this information with French-language theoretical work about SME internationalization. Nevertheless we would like to point out that French authors tend to be very well aware of the research and theories available from the Anglo-Saxon literature. However, for the present chapter we have restricted our modelling to conceptual frameworks based on French-language publications. However, while conducting our research we encountered a number of problems. First, it is very difficult to exploit French statistical sources since the official definition of an SME differs from that given by the European Union (EU). The main difference is that the independence criterion is not taken into account since a small or medium-sized firm is

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only defined by the size criterion. Second, whereas the Anglo-Saxon literature that deals with the internationalization strategies of SMEs exists in abundance,2 in contrast, there are only a limited number of studies that have explored the internationalization of French SMEs; some notable examples are Boyer (1994), Bricout (1994), Gibiat (1994) and Roux (1991). However, one of the characteristics of French literature, in particular of Canadian research such as by Julien et al. (1995), is that it deals primarily with the question of SMEs having to face internationalization from a wider angle of SME adaptation to the internationalization rather than in terms of the internationalization of these companies. Having clarified these methodological aspects relevant to our study we will now proceed to present industrial, or rather strategic, characteristics of the selected industries. The industrial characteristics of the three industries studied To study the adaptation of French SMEs to the European Single Market (ESM) in the industries selected, we have based our work on Porter’s framework (1982/85) which arguably offers two advantages in the context of this study. First, Porter proposed a set of analytical categories to describe an industry as a ‘field’ in which firms have to compete, and, second, he has invited the researcher to search for factors other than the internationalization of an industry in order to pick out the structural conditions of competitiveness and profitability in the industries selected. According to Porter (1982/85) the stage of the internationalization of an industry is not enough to determine the competitive rules that affect the viability of SMEs in a given industry. Other factors such as the maturity, number and nature of competitors must be taken into account. Thus, on the basis of the literature reviewed, we identified the three industries under review as ‘mature’, ‘administered’ and ‘multidomestic’. In the following section we will develop our argument further. Three multidomestic industries It is worth pointing out that the three sectors in question have been engaged in a process of internationalization for about 30 years (Jacomet, 1992; Parat, 2000) and did not simply begin to internationalize with the launching of the ESM (as a set of treaties). Therefore it is more a question of the ‘nature’ of the internationalization process, following Porter’s criteria, that is of interest to us. We have to consider whether the ESM, as a set of treaties, can be said to have ‘homogenized’ the industries studied. However, according to the majority of the literature reviewed (Abecassis and Benghozi, 1999; Daly-Hassen, 1999) those industries are not homogeneous; in fact they differ from one country to another, in terms of distribution channels, customer needs and product legislation. Therefore they are ‘multidomestic’. The ESM has for the most part erased the political obstacles but it is not tailored to dealing with the structural disparities of the industries. Nevertheless this national market diversity of the ESM has become the ‘natural’ playground for French SMEs, at least for the medium-sized firms. In the industries studied, about 80 per cent of the SMEs that export do so within the ESM where they realize most their exports and international sales volume (Bourcieu, 2000). In addition, since 1992, the French SMEs of the industries selected have been making more and more direct investments in ESM countries mainly by creating subsidiaries rather than by taking control of existing firms. On the other hand, foreign exportations to France and foreign settlements in France – in the three sets of industries – are increasing (Insee, 2000).

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Fontagne and Frendengerg (1999) observe that ‘France’ imports and exports whatever the industries studied. Thus, at a macro level, it seems that France (through its economic agents) does not differentiate itself through specific products or industries but through the level of quality (low, middle, high). Therefore, at the micro and meso levels, it means that French SMEs, whatever their generic product, have to compete against foreign competitors and, as a result, the intensity of competition has increased in the three sectors selected since 1992. In conclusion, the studies reviewed suggest two things. First, French SMEs in multidomestic industries can only survive by being very precise in their strategic positioning. Second, except for the ‘wood–furniture’ industry, it seems that it is very difficult for a French SME to compete on a low quality or a cost basis. Those strategic positions seem now to be occupied by foreign firms, especially those of Southern Europe. Three ‘mature’ industries Several aspects have led us to suggest that these three industries are ‘mature’ in France, following Porter’s criteria. Arguably, this maturity could be detrimental to SMEs as it is generally assumed that a ‘mature’ industry is more favourable to big firms as the latter have more resources (financial, technological or human) at their disposal to survive in a mature market. In the three industries under review we note that the global growth rates are weak and sometimes even negative, for instance in the textile industry. In addition, these industries are rather characterized by a continuous process of product renewal than by a strong general demand (Audroing, 1995; Bounine and Dert, 1993; Bouquery and Renault, 1996; Mbokoko, 1996; Nicolas and Valceschini, 1995). Three administered industries Following Porter’s criteria we can identify the three industries in question as ‘administrated’. Whereas in the textile industry international exchanges are highly regulated by ‘General Agreements’ which are supposed to fix both volume and tax conditions for the inter-zone exchanges, the food industries are in fact heavily influenced by the Common Agricultural Policy (CAP). Here the controlling factors are both volume and price. Both textile and food industries are also influenced by a growing number of official rules about product security and the environmental conditions of production. What we see, as a result, was adequately summarized by Rainelli (1993), who suggested that the more administered an industry becomes the less favourable it is to SMEs. Are the three sectors selected ‘SME’ industries? The discussion so far does not make it possible for us to answer the question unambiguously whether the three sectors considered here are particularly SME-friendly. However, as shown in Table 15A.1, statistical information could possibly suggest that these industries are ‘SME’ industries as the majority of the firms qualify for SME status. However, we need to point out the level of subsidiarization of these industries as between 15 and 25 per cent of all SMEs are subsidiaries of another firm or group that may be French or foreign in nature; the tendency is decreasing (except for the wood industry). However, one of the main developments that SMEs must cope with within the three sets of industries studied is the movement towards integration led by ‘distribution’ groups at the top end of the value chain. In strategic terms, this evolution means that there is now a real variety of competitors which SMEs have to compete against. As Torrès (1997) argued, there is no way for SMEs to shelter from group competition.

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There are two major conclusions we can derive from this short overview of the three sets of industries selected. First, all three sectors are now internationalized, even if they are not at the same stage of internationalization. The French ‘real’ SMEs are therefore ‘contested’ in their home market, mainly by Europeans firms. Second, despite some aspects that could be potentially unfavourable to the survival of SMEs, the sectors studied still show a strong majority of independent small and medium firms, which implies that these companies have found solutions to adapt. Before trying to explain why they have been able to adapt, we are going to examine some empirical data about the internationalization of ‘real’ SMEs in the sectors studied. The internationalization of the French independent SMEs within the three industries: textile, food processing and wood–furniture There are two parts to this section. Whereas in the first part we focus on the ‘attitude’ of independent French SMEs towards the internationalization of their industries, the second part is dedicated to the geographical establishment of these companies, in particular in the ESM. But let us first begin with some quantitative data about the internationalization of the SMEs in the three industries studied. All the studies reviewed to date have highlighted that the number of firms that export or import has been increasing steadily. As a result, in each of these three sets of industries, whatever the size category (from very small firms to large groups), we can find firms that export. According to Bourcieu (2000), there are 90 000 independent SMEs that can be considered as ‘exporting firms’ (that is, at least 5 per cent of their sales volume is made abroad). They represent, in volume and in value, about 25 per cent of French exports. Another sign of the vitality of the internationalization of independent French SMEs in the industries studied is the creation or the acquisition of subsidiaries abroad. Thus we can conclude that French SMEs are not only exporting firms, but they are also more and more ‘internationalized’ firms. The three industries studied show clearly that independent SMEs do not react in the same way to the internationalization of the industrial environment as dependent companies. Julien and Morin (1996) have developed a typology where they identify ‘five positions’ (or attitudes) possible for an independent SME. The researchers suggested that there is a group of SMEs that are outside the internationalization process and for different reasons – mainly cultural ones – these companies do not compete in the ESM. It seems that these companies represent less than 10 per cent of textile SMEs and less than 10 per cent of the ‘food and wood–furniture’ companies. These independent SMEs are always small or very small; that is, they employ fewer than 49 people. The second set of companies is composed of SMEs that are locally competitive; these are companies that fit very specific local needs and they build their competitive advantage within a local area and sell their products locally. An example of this is, for instance, independent SMEs that sell traditional clothes from Provence to tourists. Whereas this type of SME can be found in all three industries, it seems that the ‘food and wood–furniture’ industries have more of this particular type of company than the ‘textile–clothing’ sector. By comparing data and different studies, we estimate that these firms represent about 15 per cent of the independent SMEs in the industries studied. The third group is composed of the importing independent SMEs which are companies that, in order to be competitive locally or nationally, buy the materials or the semi-products

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they need abroad but they neither export themselves nor are located abroad. Importation is one of the typical ways through which an SME can internationalize (Saporta, 1997; Julien and Morin, 1996), a hypothesis which is supported by the fact that two-thirds of the textile SMEs import. The proportion is, however, smaller in the ‘food processing and wood– furniture’ industries owing to the specific characteristics of their generic products. The fourth group include the exporting independent SMEs; that is to say, those that generate at least 5 per cent of their sales volume abroad. According to SESSI (1999) about 55 per cent of ‘textiles’ SMEs are exporting companies, which contrasts with two-thirds of ‘wood–furniture and food processing’ SMEs that export. We note, however, that the number of exporting SMEs has generally increased over the last 30 years. The fifth group is composed of the international independent SMEs which export and import and produce abroad. Thouverez and Brochot (1994) consider that the ‘internationalization’ of French industrial SMEs (evaluated through the creation or the acquisition of subsidiaries abroad) is more and more common among those companies. Data and studies (Bounine and Dert, 1993; Bouquery and Renault, 1995; Mbokoko, 1996; Nicolas and Valceschini, 1995) referring to the three industries under review support this proposition. It is in particular among this group of SMEs that we can find the ‘hidden champions’ of the three industries studied. Some literature, in particular Simon (1995), has highlighted the existence of this specific type of SMEs: the so-called ‘world class SMEs’ or the ‘hidden champions’ that exist in virtually all industries. We can identify at least three characteristics among these SMEs: their export rate is equal or superior to 75 per cent; they are leaders in terms of market share in their niche(s); they export to more than five different countries. Among French SMEs those ‘hidden champions’ are more numerous in the ‘food and textile’ industries than in the ‘wood–furniture’ industries. We can conclude that French SMEs belonging to the industries studied are well on the way to becoming internationalized since most of them are already able to compete successfully against foreign competitors or are working abroad. We are now going to focus on the geographical focus of the internationalizing SMEs in the sectors studied. Thouverez and Brochot (1994), Bourcieu (1999) and SESSI (1999) underline the fact that the ESM has become the ‘domestic market’ for most of the industrial independent SMEs that have international activities. For these companies the real question is rather whether they should or could export outside the ESM. Most of the studies dedicated to our three industries reached the same conclusion: French SMEs (when they export) export successfully (about 80 per cent of them) within the ESM, whatever the industry they may belong to. Exporting outside the ESM is ‘reserved’ to a few independent SMEs and those who do so favour the United States. Asian countries are rarely ‘targeted’ by French SMEs. More generally, some French studies have shown a correlation between the size of the firms and their geographical area of activity. It seems that, the bigger the firm, the more it works outside the ESM especially with the US. According to Bourcieu’s empirical study (1999), French industrial SMEs exporting mainly within the ESM do not do so to the same extent. Thus, 50 per cent of the SMEs export to less than five European countries while 20 per cent of them export to only one European country. It seems that we can find similar proportions for the textile, food and wood–furniture industries studied. Furthermore, on the basis of his empirical studies, Bourcieu (1999) has suggested that the spread of independent French SMEs in the ESM follows an incremental and sequential

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process which seems to confirm the work done by the Uppsala school (see, for instance, Welch and Luostarinen, 1988). French SMEs seem to export first towards ‘close’ markets (either on their borders or French speaking); then, towards Central Europe (that is to say, Germany and Austria) and, lastly, when they are ‘toughened’ they turn towards surrounding countries of the ESM (Scandinavia, Portugal, Greece). For Welch and Luostarinen (1988), Germany, Austria and even the North of Italy are the real ‘learning markets’ for exportation or internationalization. The studies and the data collected about the food, wood and textile industries seem to confirm this idea, yet with one exception. Most of the identified ‘hidden champions’ have not followed this linear geographical process of internationalization. In fact, most of them have exported (and even manufactured) immediately to several countries at the same time. The resistance of independent SMEs to the internationalization of their industry: an explanatory attempt We are now trying to explain why independent French SMEs (belonging to the industries selected) seem ‘to resist so well’ the internationalization in their sector. The analyses of the reviewed literature and our own research have suggested some industry-specific explanations which will be complemented by a set of more general explanations. We first present five explanations based on the industry-specific characteristics of the three industries selected. The first one relates to the segmentation of markets and industries. The markets are less and less ‘homogeneous’, but rather divided or structured into different sets of clients in terms of needs and channels of distribution. The ‘textile and food-processing’ industries are good industrial examples of the ‘economy of variety’ that offers a lot of ‘niches’ for SMEs, as suggested by Taddéi and Coriat (1993). This has at least one main consequence. The competition in the food, textile and even in wood–furniture industries is becoming more and more a ‘marketing competition’ especially concerning distribution channels, which partly explains the development of trade marketing in the three industries (Audroing, 1995; Grau, 1996). However, it seems that this ‘marketing competition’ is less favourable to independent SMEs than a purely ‘industrial’ one. Second, the industries under investigation are mature in the way that they are complex and moving, which arguably can be interpreted as signs of ‘maturity’. They are ‘moving’ industries because they have been in a continual process of restructuration for the past 20 years. They are also complex because of the variety of the raw materials, products, channels of distribution, technologies they use and the types of firms they house. In addition, they are also different in terms of seasonality and rhythm of production and development. Finally, the clients of those industries may be both consumers, firms or public organisms. According to Angelier (1991) the more complex an industry is the more favourable it is to SMEs. The third explanation derives from the multiple consequences of new technologies. In the three industries studied we can observe a constant evolution and process of interaction between the four types of technologies: material, communication, production and logistics. Technologies in those three industries bring four main advantages to independent SMEs: they offer them the opportunity to differentiate their product, to produce at a lower cost even with ‘small series’, to be flexible (in terms of production or development) and, lastly, to guarantee good standards of quality. A lot of studies focusing on one industry only, for example, Nicolin (1996), or more general work, for instance Audretsch

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(1994), underline that SMEs can be as ‘high-tech’ as big firms and can innovate technology as well as big firms although in a different way. The fourth explanation is more paradoxical as it is argued that the ‘resistance’ of SMEs is partly due to the development of groups. In the three industries studied, independent SMEs must compete against other SMEs, but also groups of companies. These can be a potential danger for our SMEs because they can either be replaced or be pushed out by these groups. However, data and facts, predominantly from ‘food processing and textile’ industries show that groups can also be an opportunity for an SME as these groups are increasingly seeking to cooperate with independent SMEs. Furthermore, groups can also help SMEs to export (that is, go ‘piggyback’). As a result, some authors, such as Marchesnay (1997) and Galliano and Alcouffe (1992), ascertain that groups do not only threaten SMEs but also offer opportunities of international development. The fifth argument is related to the evolution of the legal and societal environment. We must recall that the three sets of industries studied are still what Porter would call ‘administered’ industries. Helfer (1998), for instance, argues that the European Union did not intend the disappearance of laws and other regulation but rather their ‘shift’ to other fields. In fact, reglementation about product security (food security), employment and the environment are increasingly important. According to Grau (1996) and Bedin (2000), the effects of the ESM (as a legal factor) on SMEs’ competitiveness are ambiguous as they possibly reinforce big firms that can afford those additional costs more easily and work against SMEs which are traditionally resource-weak. The example of the food industry has shown that this process of permanent (re-‘administration’) has contributed to developing lobbying practices at the EU level. Whilst SMEs are in general not well equipped, at least at present, for lobbying, as opposed to big firms or groups, legislation can indeed contribute to the re-segmentation of those industries and therefore create ‘niche’ opportunities for these companies. In addition to the five arguments presented there are other aspects related to the impact of size and efficiency that need to be considered in order to better understand the successful adaptation of SMEs to the internationalization of the three sectors under review. However, we will first contest the ‘standard’ or ‘classical’ explanation of the internationalization of the firm. Traditional authors from an economics background have for a long time argued that the internationalization of industries is condemning SMEs because the more an industry is internationalized the more vital it is to reach the ‘critical size’.3 Arguably, this opinion is related to the economic debate about the relationship between size and efficiency. Three main ‘effects’ are proposed to explain why ‘big is efficient’: the ‘scale effect’, the ‘learning’ effect and the ‘scope (or variety)’ effect with the latter pushing towards the increase of size via the diversification of activities (Rainelli, 1993). In French literature we find authors such as, Marchesnay (1993; Marchesnay and Messeghem, 2001) who was one of the first to challenge traditional and dominant thinking that ‘big is beautiful’, both theoretically and empirically. In fact, Marchesnay rejected the idea of economies of scale from which only large enterprises would benefit and highlighted instead the scale of ‘déséconomies’ (déséconomies d’échelle) as great disadvantages of these companies due to bureaucratization, differentiation and increased need for customer service (Marchesnay and Messeghem, 2001). Furthermore, a lot of empirical studies have not yet succeeded, on the one hand, in calculating (or defining) – for a single

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industry – this ‘critical size’ and, on the other hand, in validating this ‘efficiency–size’ relationship. It even seems that the ‘asymmetry’ of the various sizes is the rule in most industries (Audretsch, 1994). The empirical data and the historical approach of the industries urge us to think that it is possible for a firm to be small or medium and ‘efficient’ at the same time. As Julien and Morin (1996) observed, most of the industries began their internationalization in the 1970s and the SMEs which still exist in the three industries studied are not an exception to that ‘empirical’ evidence. In addition, Marchesnay warned that ‘learning’ effects attributed to large size are relative because they are ‘in process’ and apply only under special conditions (‘fixed’ product and technologies and, above all, they do not apply to the economic logic of most of the service industries (that are dominant in the ESM). In addition, the ‘scope’ effect (or variety) can be dysfunctional as it may increase the cost of coordination (Marchesnay, 1993). Moreover, it is possible to observe, in particular in high-tech industries, that today’s technologies offer the opportunity to produce ‘small series’ at low cost at least for some industries or products, which holds true for the textile industry, especially for very fashionable clothes (Parat, 2000; Guilloux, 1994). The competitiveness of independent SMEs in an international industrial context Having reviewed the relevant literature we are now in a position to identify the generic competitive advantages of SMEs and the main factors behind them. Please note that the classical ‘strategic management school’ provided the theoretical framework that underlies the following part. Arguably, there are two main generic competitive advantages for an SME in an internationalizing industry: differentiation and cost advantages. Differentiation is put into practice by selling a product or service that ‘fits’ the (present and even latent) needs of the markets target.4 The mastering of cost factors can be another competitive advantage for those SMEs that choose to be suppliers to one or several distribution groups that have developed their own brand. However, this is only possible for non-standardized products (for example, regional culinary dishes distributed by hypermarkets). The French literature suggests seven factors that are supposed to contribute to the realization of those two generic competitive advantages. First, information factors are systematically covered in the literature (Bouquery and Renault, 1996). Most of the authors insist on the necessity for SMEs to invest in the collection and analysis of ‘relevant’ information. Thus information is collected by close contacts with customers and by scanning ‘relevant’ competitors. Most of this information is ‘grey’ and non-formalized and it can only be collected through the personal commitment of the manager and her/his close collaborators. It seems that new technologies or institutional support can help but are not crucial compared to an ‘information-oriented attitude’. In addition to information factors, authors such as Julien and Morin (1996) point out the importance of organizational factors of which three are crucial. First, the structure of an SME, its management systems and decision processes can be a source of differentiation advantage (whatever its nature). The second organizational factor related to competitiveness is the learning capacity. The more an SME (as an organization) is able to ‘learn’ and to evolve through a learning process the more competitive it will be in the context of the constant evolution of the industry (Algoe, 1993; Bourcieu, 2000). Finally, authors such as Paradas and Torrès (1996) underline the importance of both skills and commitment of the

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employees, which are arguably a result of human resource management, for the competitiveness of the organization. In financial terms, the consequence of these organizational aspects of competitiveness is the growing importance of ‘intangible’ investments. Third, authors such as Algoe (1993), estimate that increasingly the question of finance has an impact on the competitiveness of an SME. Indeed access to relevant sources of financing is becoming, in particular for SMEs, a decisive factor in the attempt to adapt to the internationalization and evolution of their industrial environments. Fourth, it is also suggested that most of today’s industries have become ‘marketing industries’ (Eurostaf, 1994; Bouquery and Renault, 1996). Thus the mastering of marketing skills is considered as one of the critical success factors for an SME in differentiating itself and ensuring its competitiveness. Fifth, increasingly networking has become recognized as a factor of competitiveness in an internationalizing industry and authors such as Fourcade (1993), and Taddéi and Coriat (1993) underline that today’s SMEs cannot be competitive ‘alone’, but only together with others, especially if they want to export or internationalize. Therefore the main question for an SME is to define with whom they should ‘work’. Following a number of French authors such as Fourcade (1993) or Courault and Trouvé (2000) SMEs can create three kinds of networks. They can cooperate with local partners (public organisms or local firms); they can also cooperate with other SMEs of the same industry (usually when they have a different specialization) especially for exporting or internationalizing and, lastly, they can cooperate with big firms or groups. Please note that other combinations may also be possible. These networks can be formalized legally and/or technically or ‘administratively’ structured. In any case, the SME manager is at the front line in order to animate and to review those networks. Arguably, the competitive position reached can by itself be a source of competitiveness (Porter, 1982) by bringing financial resources, reputation and, maybe above all, experience to the company. Audroing (1995), Savoye (1994) and Guilloux (1994) agreed on the fact that the more experienced an SME is in terms of internationalization (that is to say, they have reached viable competitive positions abroad) the easier it is to export or internationalize. This factor is often referred to as ‘the virtuous extent of success’. Authors like Julien and Morin (1996) estimate that, at last, the most important factor is the manager/owner and they state two main reasons. Firstly, he/she is the one that defines the strategy and, secondly, in the context of the ‘true’ SME, he/she is the one who is going to implement the strategy. From this point of view it is important to pay attention to the aims, the skills, the agenda and the health of the manager/owner as sources of competitive advantage. Hence the internationalization of an SME is firstly the internationalization of its owner. It is the owner–manager that combines the six previously mentioned factors to obtain a viable ‘mix’ that will guarantee the performance of his/her SME. Independent SME adaptation strategies in the internationalization of the industries Using empirical research, some authors, such as Algoe (1993), Boucieu (2000) and Julien and Morin (1996) have proposed typologies of adaptive strategies that can be implemented by independent SMEs in order to survive or face the internationalization of their industries. In line with these authors and our own research in these industries we suggest four main strategies of adaptation that can be adopted by independent SMEs to face the internationalization of their industry: to be local, to be national, to be international and

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to be ‘global’. We exclude the special case of independent SMEs that do not need to adapt because they are ‘outside’ (or ‘on the fringes’) of the industry, as discussed earlier in the chapter. ‘Be local’ Being local is the development strategy of SMEs, in particular of small ones, that are usually characterized by single-activity business (in portfolio terms) and that are competitive by selling a very specific product that is produced mainly on a local (or ‘territorial’) basis within a locality or region. This kind of strategy is not incompatible with the use of modern tools (such as ‘high-tech’, up-to-date accounting systems and so on). Usually a small firm that adopts this kind of strategy has the commercial and organizational structure of a network of individual local producers. We can find this kind of strategy in the food-processing and wood–furniture industry almost everywhere in France. ‘Be national’ Being national in the sense of Ruffieux and Valceschini (1996) and Bouquery and Renault (1996) is the strategy of development of the SME that is ‘national’. In general this is a company established a long time ago in the industry and that just wants to grow ‘a bit’, that is to say to stay in the same ‘strategic group’ (Porter, 1985). The process of adaptation of such independent SMEs is threefold. First, these companies try to maintain their differentiation by gradually modifying their products and production systems to keep in touch with the market. Second, these companies and their managers innovate by reinforcing their (economic and social) networks. Third, they modernize their management systems, yet without restructuring (especially the decision process). We would like to put forward the hypothesis that this kind of development strategy is spontaneously pursued by managers who are about to retire (without family succession) in less than ten years’ time (Eurostaf, 1994; Bouquery and Renault, 1996; Prudhommeaux, 1996). Those medium-sized firms are, in fact, the most vulnerable to the internationalization of their industry and more generally to the intensification of competition. They are often the ideal ‘prey’ for groups, especially foreign groups. As an illustration of this strategy of development we would like to suggest the group Besnier (which specializes in dairy products), Spangheroo (cooked dishes) and SGT (men’s clothes). Adaptation by internationalization Arguably, there are also a great number of independent SMEs that cannot survive or develop by staying ‘national’ and that must work and sell abroad. On the basis of the authors reviewed and the industries studied, it seems possible to distinguish four international development strategies: the first three are import strategy, internationalization specialization and the global strategy, which are grouped together as ‘independent SME strategies’. The fourth is internationalization through group partnership which is a ‘dependent SME strategy’. The studies reviewed here were compared to observations from the three industries under review which allowed us to add some quantitative information about the distribution of SMEs within those categories. We would like to suggest that there are about 50 per cent of independent SMEs in the selected industries that follow a strategy of ‘international specialization’ which contrasts with about one-third of all SMEs that pursue either the ‘group partnership strategy’ or the ‘importation strategy’. The global strategy is most likely to be the most unusual strategy among the SMEs of the industries studied. We will pay further attention to these strategies in the ensuing discussion.

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Internationalization of the SME by importation Authors such as Julien and Morin (1996) have suggested that the adaptation to the internationalization of the industrial context can be facilitated by way of a well developed purchasing strategy, an idea that was tested and confirmed in Bourcieu’s work (2000). Indeed this is the strategy of independent French SMEs that compete only on the French market, yet have built their competitive advantage (totally or partly) by organizing and controlling a set of foreign suppliers which are more and more frequently East European rather than North African suppliers. In such a strategic context the independent SME needs to develop its resources and capacities by designing, coordinating and controlling a network of foreign suppliers. Very often this kind of strategy is associated with ‘vertical integration’ which aims to control foreign suppliers economically through either commercial contracts (such as subcontracting, licensing), cooperation (that is, joint-ventures), acquisitions or financial shareholdings. Technologies such as EDI, Internet and other telecommunication technologies have indeed had a facilitating influence on this strategy. Finally, we should not neglect the effect of ‘bureaucratic’ techniques such as ISO 9000 which can complement the tools that an importing SME can use to gain a national competitive advantage. According to Bourcieu (2000), this kind of strategy is indeed developing with Eastern European ‘emerging’ countries (where they are often associated with clearing operations) as French SMEs have started to replace their traditional North African suppliers with Eastern European suppliers. However, we need to emphasize that this strategy is not very frequent either in the French ‘wood–furniture’ industry or in the French food industries, simply due to the fact that here the ‘national’ factors of production are the source of the industry’s competitive advantage (that is, it would not make much sense to import Hungarian grapes to make Bordeaux wines). In comparison, this strategy is more frequent among independent French SMEs in the clothes/textiles industries. It is even the main strategy of adaptation for the traditional SMEs that want to survive in the textile industry. Moreover, it is suggested that this development strategy is used as an apprenticeship to internationalization. International specialization These are the independent SMEs that have one or two strategic business units (SBUs), on an international scale, within which they try to be competitive and profitable in the French and foreign markets they have selected. According to their industrial contexts and their strategic position, those SBUs can be ‘niches’ for the generic products of the industry. The generic competitive advantage and the competitive basis which are usually associated with international specialization are ‘qualitative differentiation’. We must, however, note that the operationalization of this competitive logic is conditioned by the industrial context. In the ‘food and textile’ industries the possibility of finding a viable differentiation or a ‘niche’ are extremely important given that these industries are characterized by both a generic product that can be easily differentiated and by markets that are not homogeneous. For independent SMEs this is the main way to avoid being in direct competition with big groups (Bouquerey and Renault, 1996; Grau, 1996; Parat, 2000). As a competitive strategy differentiation is based on non-cost competition. However, nowadays, in contrast to the 1980s, independent SMEs cannot work on a purely non-cost competition basis (Porter, 1982, 1985) as the importance of the price (as a key factor) has increased, whatever the industry, but especially in the ‘food and textile’ industries. Customers are ready to pay just a little bit more for a specific product. Hence SMEs must work simultaneously on differentiation

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and cost control even if the main focus is qualitative differentiation (Eurostaf, 1994; Bouquery and Renault, 1996). The success of this strategy is dependent on a number of different success factors: whilst differentiation can be designed and operationalized through marketing and technical factors, it also requires SMEs, as organizations, to adapt themselves to that differentiation. Furthermore it requires those companies to create a network of suppliers and, eventually, the success of this strategy also depends on regular investments in order to sustain the necessary differentiation. Internationalization by ‘globalization’ This form of international development strategy, in the context of an independent SME, applies to SMEs that are (highly) specialized and compete either in a truly ‘global’ industry (following Porter’s criterion of global industry, 1985) or do business in at least three main world areas (such as ARENA and ESM). This leads us to distinguish between ‘internationalization by globalization’ and ‘internationalization via specialization’, the latter being the case of SMEs that work mainly within an integrated regional economy such as the European Single Market. The SMEs that are strategically ‘globalized’ have a long experience of working abroad (over at least several decades). (This point confirms that the internationalization of SMEs is a matter of a long learning process.) There are some exceptions, such as the ‘global start-up’; that is, SMEs that were originally created in a context of a recent global industry. Independent SMEs that are ‘globalized’ can be more or less associated with ‘hidden world champions’, as pointed out by Simon (1996). However, we have not found any traces of such a strategy in the French ‘wood and furniture’ industries. In contrast, it is possible to find SMEs, in particular in the textile industry, whose general development strategy can be qualified as ‘global’. Despite being small or medium in size, relative to their industry, these SMEs are often market leaders within their niche. These firms are highly specialized; that is to say, they carefully choose a market niche. In fact, they combine resources and capacities to gain a competitive advantage. These firms avoid expanding to new markets or developing new products except as a response to their customers’ needs and only if they are closely related to existing ones. It may be that their main comparative advantage could be their capacity to establish close contacts with customers and develop a long-term relationship based on mutual trust which allows them to reduce transaction costs as well as to develop new products. Their global strategy is often associated with (technical or commercial) innovations that are achieved more by incremental internal processes than by dramatic or external processes. Finally, those firms pay attention to organizational factors such as internal communication or employee management. They are, for instance, more likely to recruit foreign managers and to internationalize their management team. To complete this presentation of independent strategies that are available to SMEs, we would like to point out that the French literature reviewed has not been tailored enough to answer the question of a possible critical path that could link (diachronically) those strategies except by some allusions to the Upsalla theories. Adaptation by dependence: the subcontractor strategy The internationalization strategies reviewed in the previous section refer to independent SMEs, which implies that these companies try to adapt to the internationalization of their environment by preserving their

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technical and commercial independence. Conversely we find evidence that some SMEs in the three industries selected adapt themselves to internationalization through a ‘dependency’ strategy. These are legally and financially independent companies which choose to become a (capacity or functional) subcontractor of a group that could be of French or foreign origin. This is in particular the case among ‘food or clothes’ SMEs that work for French distribution groups that have developed their own ‘distributor brand’. Whereas these SMEs are to a certain extent dependent on their partners, which makes them vulnerable, this kind of strategy enables these companies to focus their efforts and investments only on the manufacture of products that fit the needs of their partner. In this strategic context an SME can develop a ‘cost-competitive’ logic that is possible in the framework of a group partnership. Under certain conditions, this strategy can be a way of learning the international business process. Discussion We will kick off our discussion by highlighting the four main ideas of this study. First, this study has shown that French industrial SMEs are capable of adapting themselves to the internationalization of their industries. As suggested by our research, this adaptation is a multiform phenomenon. Our argument is that the adaptation of SMEs to the internationalization of their industries must first be thought of in terms of competitive advantage rather than in terms of traditional approaches such as exportation or internationalization. Having discussed the factors that form the basis for the competitiveness of independent SMEs in an international industrial context, we proposed our own model of SME adaptation strategies to the internationalization of the industries under review. Furthermore our study focuses on independent SMEs and French official statistics and too many other studies (which have been based on the former) tend to make the methodological mistake not to distinguish between independent SMEs and the small to mediumsized subsidiaries of large companies. (For one of the few studies that has considered the importance of independent versus dependent companies, refer, for instance, to Klapper, 2001). In terms of internationalization, this mistake distorts the analysis, in particular as the small to medium-sized subsidiaries only internationalize within the framework of a ‘virtual’ international market created by a large international group. As a result, the internationalization of these subsidiaries responds to a different logic than that of independent SMEs. Our third idea is that we should not think in terms of the internationalization of independent SMEs but rather in terms of the adaptation to the internationalization of their respective industries. The internationalization of independent SMEs, as defined earlier in this chapter, is just one of the possible ways of adapting. Hence it seems that at least in the three industries studied here a huge unexploited potential exists for the internationalization of independent SMEs. The fourth idea follows from the preceding two. We would like to suggest that, by paying attention to the specificities of independent SMEs, it becomes possible to facilitate their internationalization process, as far as tailored industrial policies or the management of an independent SME are concerned. Hence the question has been raised recently whether the idea of the internationalization of independent French SMEs, as defined earlier, does not go against the ‘real’ nature of these companies. In fact, in the

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French literature, the discussion revolves around the issue of ‘denaturing’ the SME. The French researcher who specializes in SMEs has always started his or her research by postulating that independent SMEs are different from large companies and as a result they respond to a specific logic of performance and development. Hence, since the mid1990s (Torrès, 1998), some of these researchers have asked whether internationalization, or the certification through ISO 9000, does not turn independent SMEs into small medium enterprises who are in danger of losing their ‘natural’ competitive advantages. Having said this, if we consider the hypothesis of a specificity of independent SMEs in terms of their adaptation to the internationalization of their industries, we need to ask which elements of an industrial policy would be most appropriate to help them preserve their specificities. The present discussion in France revolves around five topics. The first is the question of financing the internationalization process. Should an independent SME increase its funds by going public (at least partially)? The second question is about SMEspecific obstacles encountered when accessing new foreign markets. Within this framework the focus is on the harmonization of public markets, in particular the invitation to tender, norms, and access to information specific to commercial or industrial opportunities. The third aspect is the appropriate types of alliances or partnerships which these independent SMEs could forge to internationalize. The fourth question revolves around how independent SMEs could better access the existing support and advice network relevant to internationalization. The fifth topic is related to the Internet equipment of independent SMEs. Let us also point out that all these aspects have two sides to them, apart from the last one, as all of them have already been discussed extensively in the 1980s both in terms of the ‘modernization’ of SMEs and in terms of ‘quality’ issues in the 1990s. In fact, we believe that this ‘chewing over’ of the same old ideas, which is arguably supposed to help independent SMEs, is a result of the majority of the studies being too ‘macro’. At present the French authorities do not seem to have considered the consequences of the research that has been carried out at either meso or micro level, with respect to the internationalization of independent SMEs. We would like to emphasize three limitations to our study. First, in this chapter we have exclusively focused on existing French data, studies and our own research in these industries and we have deliberately not sought to apply any Anglo-Saxon theories, though the authors are very aware of these, as pointed out at the beginning of the text. The advantage of this approach is that we were really working in a French SME internationalization theory paradigm, which meant exclusive focus on work done in France. However, we recognize the need to compare French theory development on SME internationalization with Anglo-Saxon theories in a later research project. The final stage of the project envisages integrating both theoretical bodies into a general theory of the adaptation of independent SMEs to the internationalization of their industries. The focus on the French literature has highlighted a need for a more detailed picture on the internationalization of SMEs in the different sectors of the economy. In fact this is one of the key limiting factors of our work as it only applies to the manufacturing sector. We only explored three manufacturing industries and more research is necessary to compare and contrast our findings with other manufacturing industries to test the generalizability of our work. In addition, more research is necessary to explore the reaction of French services SMEs to the internationalization of their industries, as arguably these sectors are crucial to the national economy and yet very different from manufacturing.

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This type of research is necessary on the basis of possibly quantitative studies that focus on three or four comparable sectors. The ideal would be to conduct a total of four or five studies to cover the majority of existing industries. These complementary studies would be based on the collection and analysis of secondary data as it seems extremely costly to create sectorial data ad hoc, given the difficulties involved and the limits of the utilization of secondary data. Finally, although we have identified several adaptation strategies we do not really have any information explaining why the management of an independent SME would choose one strategy over another or how it implements this or other strategies. Hence, in the context of an independent SME, it seems that the ‘why’ is often inextricably linked to the ‘how’. As a result, the owners/managers of SMEs do not throw themselves into the internationalization of their enterprise, as this would also oblige them to change significantly the time spent managing, given that they would need to spend at least ten weeks per year travelling, which would have an impact upon both their professional and private life. Hence our study needs to be complemented by qualitative studies conducted among SMEs and this is why we have started to write cases about independent SMEs in the textile sector (see, for instance, Mesure, 2002b). Conclusion This chapter has shown that French SMEs have a key position in the French economy, yet are of much less importance in the internationalization of the French economy. We have shown how SMEs ‘resist’ the internationalization of the three sectors reviewed. The adaptation to the internationalization of industries is not only a matter of internationalization per se: other strategies are possible for independent SMEs. The main point for those SMEs is to remain competitive and profitable. We have hypothesized different factors that contribute to the competitiveness of these companies and we have proposed a first-step modelling of an independent French SME adaptation to the internationalization of the three industries. We must underline that the modelling proposed here may be subject to change in line with the results from future research projects on the adaptation of SMEs to the internationalization of their industries, whatever the nature of these industries. Our final aim is to build a general model of the international adaptation of the independent SME, a model that we expect to test, at least partially, empirically. Methodologically we defended two ideas in this chapter: first, the necessity to distinguish between independent SMEs and those companies that are subsidiaries of groups; and second, that both the industrial and the organizational level are the most appropriate for analysing the adaptation of independent SMEs to the internationalization of the economies. In this context, this study must be complemented with information from both industrial and organizational studies in order to be able to develop some pertinent recommendations in favour of those independent SMEs that have the strategic potential to be fully internationalized. Notes 1. INSEE is the official body charged with with the economic and social data provision in France and depends on the Ministry of Economics. According to INSEE an SME is a legal enterprise that employs between two and 250 people. They do not consider any independence criteria. 2. See for instance Coviello and Martin (1999), Fillis (2001), Gankema et al. (2000), Johanson and Vahlne (1977), Leonidou and Katsikeas (1996), Leonidou (2004), Manolova et al. (2002), McDougall and Oviatt (1999), Stewart (1997), to name just a few.

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3. Note that the French efforts to define ‘critical size’, theoretically or operationally, in such an industry have generally failed. We also underline that SMEs, in those studies, are defined by only one criterion: size. 4. Commercial or technical innovations are only one way to differentiate.

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Galliano, D. (1991), ‘Groupes de sociétés et méso-analyse: le cas des IAA’, Revue d’Economie Industrielle, 58, 4ème trimestre, 64–85. Galliano, D. and A. Alcouffe (1992), ‘Modes d’organisation et d’efficacité: le cas des groupes agroalimentaires en France’, Cahiers d’Economie Mondiale, 2, 101–11. Gankema, H.G.J., H.R. Snuif and P.S. Zwart (2000), ‘The internationalisation process of small and medium sized enterprises – an evaluation of stage theory’, Journal of Small Business Management, 38(4), 15–28. Gibiat, M. (1994), ‘Les modèles intégrés de la décision d’exporter en PME/PMI: synthèses de recherches depuis 20 ans’, Revue Internationale PME, 7(2), 10–25. Grau, M.F. (1996), ‘Les industries de l’habillement’, Paris: Puf. G.R.E.P.M.E (1997), Les PME: bilan et perspectives, Paris: Economica. Guilloux, V. (1994), ‘Nouveautés – implications pour les acteurs de la filière textile/habillement’, Gestion 2000, 2, 101–17. Helfer, J.P. (1998), ‘Les orientations stratégiques de la PME à l’heure de la mondialisation’, in J. Helfer, M. Kalika and J. Orsoni, 2nd edn, Le management, Paris: Vuibert. Herblay, M. (1997), ‘Les PME françaises sont-elles moins bien préparées à l’exportation que leurs concurrentes européennes?’, Problèmes Economiques, 2531, 27 août, 12–15. Honoré, G. (2006), ‘La faiblesse du dollar et la percée chinoise ont freiné la reprise, le, 4 pages des statistiques industrielles’, SESSI, No. 213, janvier. INSEE (2000), L’Economie Française: Edition 2000–2001, Paris: Librairie Générale Française. INSEE (2000), Tableaux de l’Economie Française 1999/00, Paris: Editions de l’ INSEE. INSEE (2005), Tableaux de l’economie francaise 2004/05,: Paris: Editions de l’INSEE. INSEE (2006), ‘La France en faits et en chiffres’, http://www.insee.fr/fr/ffc/. Jacomet, D. (1992), Les Textiles, Paris: Economica. Joffre, P. (1986), ‘Le rôle de la taille ne doit pas être surestimé’, Revue Française de Gestion, 55, janvier–février, pp. 68–76. Johanson, J. and J.E. Vahlne (1977), ‘The internationalization process of the firm: a model of knowledge development and increasing market commitment, Journal of International Business Studies, 8(1), 23–32. Julien, P.A. and M. Morin (1996), Mondialisation de l’Economie et PME Québécoises, Sainte Foy: Presses Universitaires du Québec. Julien, P.A., P.Y. Léo and J. Philippe (1995), PME et Grands Marchés, Paris: L’Harmattan. Kaufman, F. (1995), ‘Internationalization via cooperation. Strategies of SMEs’, International Small Business Journal, 13(2), 27–33. Klapper, R. (2004), ‘Government goals and entrepreneurship education – an investigation at a Grande Ecole in France’, Education  Training, 3, May. Klapper, R. (2005a), ‘The Projet Entreprendre – an evaluation of an entrepreneurial project at a Grande Ecole in France’, in P. Kyro and C. Carrier (2005), The dynamics of entrepreneurship learning in cross-cultural university context, University of Tampere, RCVE. Klapper, R. (2005b), ‘Training entrepreneurship at a French Grande Ecole: the Projet Entreprendre at the ESC Rouen’, Journal of European Industrial Training, 29(9), 678–93. Lauret, F. (1993), ‘Méso-analyse et économie agroalimentaire’, Economie et Société, Série AG 21, 99–118. Le Corroler, C. and F. Le Vigoureux (1998), ‘Les moyennes entreprises de l’industrie ont-elles des comportements spécifiques?’, Economie et Statistique, 319–320(9/10), 195–204. Léo, P.Y., M-L. Mommoyer-Longe and J. Philippe (1990), ‘PME: stratégies Internationales’, Paris: Economica. Leonidou, L.C. (2004), ‘An analysis of the barriers hindering small business export development’, Journal of Small Business Management, 42(3), 279–302. Leonidou, L.C. and C.S. Katsikeas (1996), ‘The export development process: an integrative review of empirical models’, Journal of International Business Studies, 28(3), 517–51. Levet, J.L. and R. Paturel (1997), ‘Comparaison et explication des stratégies des PMI françaises et allemandes’, Revue Internationale P.M.E., 10(2), 81–108. Liouville, J. (1998), ‘Stratégie de spécialisation et compétitivité des PME en environnement global. Le cas des entreprises allemandes et italiennes de taille intermédiaire’, Gestion 2000, mars–avril, 31–50. Liouville, J. and M. Bayad (1995), ‘Stratégies de gestion des ressources humaines et performance des PME’, Gestion 2000, 1, 159–80. Liouville, J. and C. Napolousos (1993), ‘Les déterminants des performances des implantations à l’étranger’, Economies et Sociétés, série S.G., 19, 35–53. Manolova, T.S., C.G. Brush, L.F. Edelman and P.G. Greene (2002), ‘Internationalization of Small Firms International’, Small Business Journal, 20, 9–31. Marchesnay, M. (1993), ‘Les bases de la compétitivité de la petite entreprise face à la globalisation des marchés’, Cahiers de l’ERFI, 55, 106–17. Marchesnay, M. (1997), ‘La moyenne entreprise existe t-elle?’, Revue française de Gestion, 116, 85–94.

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Marchesnay, M. and K. Messeghem (2001), ‘Introduction, présentation de la spécificité de la PME’ in M. Marchesnay and K. Messeghem (eds), Cas de Stratégie de PME, Colombelles: Editions Management & Societé, pp. 5–26. Marseille, J. (ed.) (1997), Les industries agroalimentaires en France. Histoire et performances, Paris: Le Monde Editions. Mbokoko, B. (1996), ‘Le rôle de l’innovation dans la dynamique de la restructuration de l’industrie laitière française’, Economie et Gestion Agro-Alimentaire, 38, 22–9. Mbokoko, B. (1998), ‘Le point sur les stratégies des entreprises de l’industrie laitière française des années 80/90’, Gestion 2000, mars–avril 1998, 87–104. McDougall, P.P. and B.M. Oviatt (1999), ‘International entrepreneurship literature in the 1990s and directions for future research’, in D.L. Sexton and R.W. Smilor (eds), Entrepreneurship 2000, Chicago: IL: Upstart Publishing, pp. 291–320. Minvielle, G. and H. Fourneau (1998), Le guide du textile et de l’habillement, Centre Textile de Conjoncture et d’Observation Economique (CTCOE), Paris. Nicolas, F. and E. Valceschini (1995), Agroalimentaire: une économie de la qualité, Paris: Economica. Nicolin, Y. (1996), ‘Les perspectives d’avenir de l’industrie du textile – habillement: rapport au Premier Ministre’, Paris: La Documentation Française. O.E.C.D. (1997), Globalisation and Small and Medium Enterprises (S.M.E.S.), Paris: OECD Press. Paradas, A. and O. Torrès (1996), ‘Les politiques de formation de PME françaises de classe mondiale’, Revue Internationale PME, 9(2), 7–35. Parat, E. (1995), ‘De l’intégration verticale amont-aval à l’intégration aval-amont: la filière textile – habillement – distribution’, in Jean-Marie Chevalier (ed.), L’Economie industrielle des stratégies d’entreprise, Paris: Montchrétien. Parat, E. (1998), ‘La filière textile – habillement – distribution’, Dossier 15, Centre d’Etudes et de l’Emploi (CEE), Paris. Parat, E. (2000), ‘Intégration et quasi intégration verticales: les PME de la filière textile–habillement–distribution’, in B. Courault and P. Trouvé (eds), Les Dynamiques de PME: Approches internationales, Paris: Puf, pp. 201–28. Porter, M.E. (1982), Choix stratégiques et concurrence, Paris: Economica. Porter, M.E. (1985), Competitive Advantage, New York: The Free Press. Prudhommeaux, M.J. (1996), Les industries du Bois, Paris: SESSI. Prudhommeaux, M.J. (2000), Industrie des panneaux à base de bois, Paris: SESSI. Rainelli, M. (1993), Economie Industrielle, Paris: Dalloz. Romano, J. (1997), La modernisation des Pme, Paris: Puf. Ruffieux, B. and E. Valceschini (1996), ‘Biens d’origine et compétence des consommateurs: les enjeux de la normalisation dans l’agroalimentaire’, Revue d’Economie Industrielle, 75, 1er trimestre, 133–46. Saporta, B. (1997), ‘Stratégies des Petites et Moyennes Entreprises’, Encyclopédie de Gestion, Paris: Economica, pp. 3105–28. Savoye, B. (1994), ‘Handicaps et atouts des petites entreprises industrielles exportatrices’, Economie et Statistique, 271–272, 105–12. Services de Statistiques Industrielles (SESSI) (1998), L’Habillement, Paris: SESSI, (analyse chiffres clés). SESSI (1999), L’Etat des PMI, Paris: Editions du SESSI. Simon, H. (1995), ‘Les Champions cachés: fers de lance du succès des exportations allemandes’, in B. Pras and A. Boutin, Les Euro-PMI, Paris: Economica, pp. 41–63. Simon, H. (1996), Hidden Champions: Lessons from 500 of the World’s Best Unknown Companies, Boston, M.A.: Harvard Business School Press. Stewart, D.B. (1997), ‘Domestic competitive strategy and export marketing strategy: the impact of fit on the degree of internationalisation of SMEs’, Journal of Marketing Management, 13, 105–17. Taddéi, D. and B. Coriat (1993), Made in France: L’industrie française dans la compétition mondiale (2 vols), Paris: Le Livre de Poche Biblio Essais. Thouverez, J. and M. Brochot (1994), ‘Internationalisation et compétitivité des moyennes entreprises industrielles françaises’, Entreprise et Histoire, 5, pp. 9–19. Torrès, O. (ed.) (1998), PME: de nouvelles approches, Paris: Economica. Torrès, O. (2001), ‘Le PME face à l’internationalisation’, in M. Marchesnay and K. Messeghem (eds), Cas de Stratégie de PME, Colombelles: Editions Management & Societé, pp.151–68. Wagner, J. (1995), ‘Export, firm size, and firm dynamics’, Small Business Economics, 7, 29–39. Welch, L. and R. Luostarinen (1988), ‘Internationalization: evolution of a concept’, Journal of General Management, 14(2), 34–64.

Thesis and working papers Dominiack, P. (2000), ‘The adjustment process of SMEs in Poland and the Czech Republic to the ESM’, Phare ACE P 97-81786-R Intermediary report.

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Klapper, R. (2001), ‘Small and medium sized enterprises and sustainable development: the case of two European regions’, Tyne and Wear and Emscher Lippe’, unpublished MPhil dissertation, University of Northumbria, Newcastle upon Tyne, UK. Mesure, H. (2000), ‘French SMEs and the European Single Market: an intermediary review of the “litterature” in French’, Cahiers de Recherche du Groupe ESC Rouen, 6, Rouen. Mesure, H. (2002a), ‘The adaptation of French SME(s) to the internationalization of their industries’, Cahiers de Recherche ESC Rouen no 28. Mesure, H. (2002b), ‘The internationalisation of the SMEs: the case of two French Independent SMEs’, Cahiers de Recherche ESC Rouen no 32. Nunes, P. (1991), ‘Les opérations de PMIsation: pratique ou stratégie?’, Thèse de doctorat en sciences de gestion, Université de Grenoble II. Parat, E. (1997), ‘Les stratégies de flexibilité adoptées par les protagonistes d’un secteur en crise: le cas de la filière textile – habillement – distribution française, Thèse de doctorat, Université de Paris-Nord, Paris. Roux, E. (1991), ‘Les facteurs explicatifs de la décision d’exporter en PMI: rôle de l’attitude du dirigenat envers le risqué’, Thèse de doctorat d’Etat en sciences de gestion, Université d’AIX-Marseille III. Torrès, O. (1997), ‘Les stratégies de globalisation des petites enterprises’, Thèse de doctorat de sciences de gestion, Université de Montpellier I.

Website Economist.com/countries/France/profile.cfm (accessed 23 March 2006).

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Source:

79

99

These figures are adapted from SESSI (2000).

85 73 73 67

Independent SMEs (%)

66 95 96 95

Number of SMEs in the sector 2

General figures

Clothes sector (C11) Leather clothes (C12) Furniture sector (C41) Textile (F 42) products  clothes Wood products (F31)

1996–97

Table 15A.1

Appendix

21

15 27 27 33

Subsidiary SMEs (%)

85

34 72 63 83

% of sector Sales volume

0.88

0.44 0.58 0.47 0.89

SME chance of export

18

19 23 12 28

Average export rate (%)

94

69 82 65 85

% of employment in sector

16 Patterns of internationalization of German SMEs: surveying manufacturing offshoring Steffen Kinkel, Gunter Lay and Spomenka Maloca

Today, acting globally is no longer a strategic option exclusively for giant multinational enterprises (Vernon, 1974; Caves, 1982). More and more small and medium-sized enterprises (SMEs) are getting involved in this arena (Anderson et al., 1998; Fillis, 2001; Bell et al., 2003; Kohn, 1997; Reynolds, 1997; Rugman and Hodgetts, 2000; Urata and Kawai, 2000). They frequently operate within a narrowly defined market niche and cannot afford only to target a home market. International business literature recognizes the growing relevance of SMEs’ internationalization, yet it remains largely focused on the export transaction as the predominant entry mode (Chetty, 1999; Gankema et al., 2000). The ‘traditional SME path’ can be described as an incremental approach to internationalization, establishing themselves in their domestic markets before initiating export activities (Johanson and Wiedersheim-Paul, 1975; Johanson and Vahlne, 1977; Bell et al., 2003). Because of a lack of knowledge about foreign countries and a propensity to avoid uncertainty, these firms start exporting to neighbouring countries or countries that are comparatively similar as regards business practices. According to the Uppsala model, the establishing of a manufacturing facility abroad is the fourth and last stage of a firm’s internationalization process (Johanson and Wiedersheim-Paul, 1975; Johanson and Vahlne, 1977). On the other hand, there is also increasing evidence that not only large multinational enterprises, but also SMEs pursue other modes of entry such as direct foreign investments or offshoring activities (Buckley and Casson, 1976; Hill et al., 1990; Eenemaam and Brouthers, 1996; Meyer, 1996). In the case of Germany, one-third of manufacturing companies have at least one production location abroad (Kinkel and Lay, 2004). The quota of companies producing abroad ranges from 16 per cent in the case of small, to about 50 per cent in the case of medium, to 85 per cent in the case of large enterprises (ibid.). These numbers show that a remarkable number of SMEs of the German manufacturing sector have experience of internationalization of their production activities. With globalization of markets, new opportunities of ICT (Information and Communication Technologies) as well as with better traffic infrastructure, manufacturing offshoring is becoming an increasingly interesting option for firms of all sizes (Mucchielli and Saucier, 1997; Pennings and Sleuwaegen, 1997). Offshoring decisions can play a crucial role in the competitiveness of an enterprise, but also for the labour market of the regional and national economy (Porter, 1990, 1998). Especially relocations of production activities to low-cost countries seem to have negative effects for the employment situation of the ‘exporting’ nation (Brainard and Riker, 1997; Mucchielle and Saucier, 1997; OECD, 1995). Some recent studies have also shown that cost-driven offshoring decisions are quite often not sufficiently based on solid reflections (Kinkel, 2004). In some cases, production facilities had to be repatriated back home, at times becoming a burden for the 246

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companies as well for their employees (Schulte, 2002). Thus manufacturing offshoring may not be regarded solely as a one-way street. Despite the increasing importance of manufacturing offshoring for (small) business and regional research, empirical data on this issue are rather sparse. In the following, attempts will be made to give a short definition and an empirical overview of the concept of manufacturing offshoring in German SMEs. The share of companies using manufacturing offshoring (as well as backsourcing), the underlying motives and the relevant characteristics of offshoring SMEs are analysed and described, using a database of 1450 German manufacturing firms. Definition of manufacturing offshoring and a short empirical overview In the debate on the transfer of manufacturing activities to foreign locations, relocation, outsourcing and offshoring are terms frequently used. However, often these terms are used interchangeably although they differ radically with respect to the spatial dimension and the question of ownership (Andersen, 2005). The spatial dimension distinguishes between relocation of manufacturing within national borders (national) or to foreign countries (international). Ownership is divided into transferring production capacities into other existing or newly built manufacturing locations of the own corporation (make) and shipping production capacities to external suppliers (buy). The four fields of the resulting matrix (cf. Table 16.1) cover relocation of parts of production to other, newly built or existing manufacturing sites of the own company within the home country (‘national relocation’) and in foreign countries (‘international relocation’ or ‘internal offshoring’) as well as outsourcing of production activities to domestic suppliers (‘national outsourcing’) and to foreign suppliers (‘international outsourcing’ or ‘external offshoring’). In the following, manufacturing offshoring is defined as ‘the move of a manufacturing process from one place to another (location or supplier abroad)’ (Mucchielle and Saucier, 1997). This includes the two bottom fields of the matrix (cf. Table 16.1). Few studies have looked at the share and the motives of German companies offshoring manufacturing capacities. The already sparse empirical base is further reduced if an adequate coverage of SMEs in the database is required. An analysis of recent studies on the extent of and motives for production offshoring activities of German manufacturing companies shows that quite often the random sample is predominantly focused on large companies (IKB and KfW, 2004; Fh-IPT and Droege, 2004; WZL and Roland Berger, 2004). These studies run the risk of overestimating significantly the real share of relocating Table 16.1

Four different types of manufacturing transfer Ownership dimension of manufacturing transfer

Spatial dimension of manufacturing transfer

national international

Note: Cf. Andersen (2005).

make

buy

national relocation international relocation  internal offshoring

national outsourcing international outsourcing  external offshoring

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companies as compared to the population. Consequentially studies which also adequately cover SMEs (DIHK, 2003; Bassen et al., 2001; Dichtl and Hardock, 1997) present a markedly lower but realistic quota of offshoring activities (ranging from 18 per cent to 36 per cent, depending on the timeframe) than studies focusing predominantly on large enterprises (ranging from 32 per cent to 83 per cent, depending on the timeframe). Empirical studies also often fail to take into account that manufacturing offshoring does not necessarily have to be an irrevocable process. Backsourcing of former offshored manufacturing capacities from foreign locations to the domestic location may well occur. Some evidence indicates that the internationalization and especially the offshoring of production are often linked to frustrations and failures (Pleitner, 1998; Schulte, 2002). Reasons for these failures stem from lack of knowledge about the foreign destination and from lack of systematic location planning, especially in SMEs with their limited managerial and financial capacities (Anderson et al., 1998; Truijens, 1992). Thus backsourcing of manufacturing capacities might be a measurable phenomenon, but reliable quantitative data are not yet widely present in the academic discussion. Additionally, empirical studies do not always cover adequately the most important motives for manufacturing offshoring. International production is not always based on proactive decisions (Anderson et al., 1998). Motives will therefore comprehend proactive and reactive factors, push and pull factors as well as production (cost) and market factors. A review of the literature (Badri, 1996, 1999; Dunning, 1980, 1988; Ferdows, 1997; Hoffmann and Schniederjans, 1994; MacCarthy and Atthirawong, 2003; Porter, 1990; Schmenner, 1982) enables the identification of at least eight major motives for establishing a production presence abroad, representing a good mixture of both production (cost) motives and market motives: (1) access to low-cost production factors, (2) access to markets and support of trade and distribution, (3) proximity to customers and support of services, (4) access to technologies, (5) access to resources and materials, (6) counterattacking competitors and seeking other strategic assets, (7) tax incentives and benefits, and (8) access to excellent infrastructure. Concerning both major categories of motives for manufacturing offshoring, production (cost) motives and market motives, the empirical studies we analysed can be divided into three types: surveys where production (cost) motives are dominating (WZL and Roland Berger, 2004; Wildemann, 2005; DIHK, 2003; Ernst & Young, 2004; van Eenemaam and Brouthers, 1996), surveys where market motives are dominating (IKB and KfW, 2004; Bassen et al., 2001; Meyer, 1996) and surveys where production (cost) motives and market motives have an equally high impact (Fh-IPT and Droege, 2004; Dichtl and Hardock, 1997). Motivations for international production do not only depend on the target country, but also on the size and type of firm (for example, MacCarthy and Atthirawong, 2003). However, the analysed studies do not give a clear picture of whether production motives or market motives are more or less important for SMEs than they are for larger enterprises. Most studies simply lack the necessary sample size to differentiate in parallel by firm size and motives triggering manufacturing offshoring. As shown above, empirical data and reliable findings on the share and the motives of manufacturing offshoring activities of German SMEs are limited. Therefore in our analysis the following key questions will be examined in more detail: 1.

How many German SMEs have been active in offshoring manufacturing activities and which target regions have been chosen predominantly?

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3. 4.

249

How significant is the share of companies backsourcing manufacturing activities back home compared to the share of offshoring companies, and which developments can be discerned over an eight-year time frame? From which regions are manufacturing activities backsourced to Germany? What are the main reasons for offshoring and backsourcing manufacturing activities and which motives have gained or lost importance? Which characteristics differentiate German manufacturing companies using production offshoring form non-users of production offshoring?

Methodology and database The database for testing our five hypotheses is the written survey, Innovations in Production, carried out by the Fraunhofer Institute for Systems and Innovation Research ISI, Karlsruhe, every two years in the metal and electronics industry as well as in the chemical and rubber and plastics industry.1 With 26 172 companies, this population covers more than half of the 47 463 companies of the manufacturing sector.2 For the 2003 survey, a sample of 13 295 companies was selected. Of these, 1450 companies returned a usable questionnaire, leading to a response rate of 11 per cent. The sample represents very well the population as regards company size and branches (Lay and Maloca, 2004). Smaller companies are slightly underrepresented in the sample whereas larger companies tend to be slightly overrepresented. Therefore, the discrepancies between the sample and the population have been compensated with weighting factors. The weighting factors have been calculated using criteria ‘company size’, ‘branch’ and ‘Western or Eastern regions of Germany’ as only these factors are available to the population. On the whole, the database can be regarded as a representative cross-section of the above-mentioned core sectors of the German manufacturing industries. When comparing the data of 2003 with the results of the 1997, 1999 and 2001 surveys, reliable statements on relevant longitudinal developments can also be drawn. Status quo, development and target regions of manufacturing offshoring According to the database in the period from 2001 to 2003, one-quarter of the surveyed companies had realized manufacturing offshoring. It comes as no surprise that the extent of the offshoring activities is largely dependent on the company size (cf. Table 16.2). With increasing company size the share of companies offshoring production is markedly increasing, too, as larger companies more easily have the necessary critical mass for international production. Additionally, they have more financial and personnel resources than SMEs have for preparing and carrying out such decisions (Truijens, 1992). They have often already gathered competencies and experiences with cross-border value adding (Johanson and Vahlne, 1977). Whereas only 16 per cent of the small enterprises have realized manufacturing offshoring between 2001 and 2003, 39 per cent of the medium-sized enterprises have done so in this period; with large companies the figure is 59 per cent. Against this background, findings of studies on the share of companies using offshoring activities with samples being biased by large companies outnumbering SMEs have to be critically assessed. It may be dangerous if small and medium-sized enterprises start to consider offshoring options just because some large company-biased studies raise feelings that almost all companies have already made offshoring decisions and that it is time to ‘follow the herd’.

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Table 16.2 Share of German manufacturing companies having realized production offshoring between 2001 and 2003 Share of companies with manufacturing offshoring (percentage) ***

Company size (employees) 20 to 99 employees (n798) 100 to 499 employees (n464) 500 and more employees (n159)

16.3 39.3 59.1

Core sectors of the manufacturing sector total (n1421)

24.5

Note: Chi-Quadrat-Test, Significance level ***  0.01, **  0.05 and *  0.10. 40% Offshoring realized in the two years before . . . 35% 30% 27% 25%

26%

25%

20% 15%

19% 17%

10% 5% 0% 1995 (n = 1305)

1997 (n = 1329)

1999 (n = 1442)

2001 (n = 1258)

2003 (n=1134)

Figure 16.1 Development of the share of companies having realised manufacturing offshoring over time (German metal and electronics industry) When comparing the data for the surveyed years 1995, 1997, 1999, 2001 and 2003 for the German metal and electronics industry, a time series can be constructed indicating the short-term dynamics of manufacturing offshoring (cf. Figure 16.1). This clearly shows that the current figure for the period 2001 to 2003 compared to the period 1999 to 2001 enjoys a clear increase in the quota of offshoring companies. The figures of the preceding years indicate that, after an increase in offshoring to 27 per cent in 1999, in 2001 a decrease was discernible for the first time. This decrease in effected relocations, however, has not been a stable trend reversal. The indicated decrease of 2001 has not only been stopped, quite the contrary, it has developed into a new upswing. The figures for 2003 have almost reached the high offshoring level of 1999.

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Table 16.3 Target regions of manufacturing offshoring (n394; multiple entries possible) Target region of manufacturing offshoring New EU member states Asia** Western Europe** Eastern Europe North and Central America*** Southern America**

Share of target region with offshoring companies (percentage)

20 to 99 employees

100 to 499 employees

500 and more employees

44.8 29.4 27.7 19.6 12.7 4.1

48.6 22.6 19.8 24.3 7.0 4.3

39.7 32.5 33.2 15.5 13.8 1.5

47.1 44.1 38.0 15.8 29.3 11.9

Note: Chi-Quadrat-Test, Significance level ***  0.01, **  0.05 and *  0.10.

The Eastern enlargement of the European Union has been obviously regarded as an opportunity by German industry. It seems to have strongly stimulated offshoring activities between 2001 and 2003. The special attractiveness of the new member states is based on the companies’ assumption that these new members’ geographical and cultural distance (see, for example, Bell et al., 2003) might be easily bridged and that they open new potentials for reducing costs and opening markets simultaneously (for example, IKB and KfW, 2004). This ‘felt attractiveness’ of the new EU members is confirmed by the figures stating into which region offshoring companies relocated parts of their production between 2001 and 2003. The data clearly show that these countries have been preferred target regions; about 45 per cent of all the outsourcing companies have relocated parts of their production to these countries (cf. Table 16.3). This finding is also confirmed by other studies stating that Hungary, Poland, Czech Republic and the other new member states have been important targets of relocations and direct investments in the last few years (Deutsche Bundesbank, 2004; IKB and KfW, 2004; Fh-IPT and Droege, 2004). Asia as a target region for production relocations notably ranks second. Almost 30 per cent of the companies offshoring production have chosen Asia. Western Europe ranks third behind Asia. Eastern European countries not belonging to the new member states take fourth place. Just under one-fifth of the offshoring companies have transferred production capacities to this region. Locations in North and Central America, particularly locations in South America, follow at a clear distance, with 13 and 4 per cent, respectively. More detailed analyses show that the selection of target regions for manufacturing offshoring is strongly dominated by the size of the offshoring company. With growing company size Western European, American and, especially, Asian locations are more important. Contrary to this finding, outsourcing activities to the new European member states and to Eastern Europe do not differ significantly in their frequency with regard to company sizes. As regards small enterprises with fewer than 100 employees, the new EU member states represent the most important target region with almost half of the relocation being effected into this target region. For this class of companies the new EU member states see twice as many relocations as the second ranking Eastern European countries do. For large companies the new EU member states also play an important role, but Asian and Western European locations almost catch up.

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Our findings illustrate that the new EU member states have been very attractive target regions for manufacturing offshoring in the years 2001 to 2003, a fact which has been the focus of public debate, too. The rising attractiveness of these new member states already before officially joining the EU has also given a marked stimulus to the share of offshoring companies on the whole. SMEs especially favour these countries over more distant Asian countries, whereas large enterprises realize offshoring to both regions with a similar frequency. This is slight evidence that SMEs start, not only export activities, but also offshoring of manufacturing capacities, in neighbouring or physically and mentally close countries (Johanson and Wiedersheim-Paul, 1975; Johanson and Vahlne, 1977; Bell et al., 2003). Status quo, development and regions of origin of backsourcing activities Simultaneously with offshoring activities backsourcing of production facilities back to German locations has taken place. In the core branches of the manufacturing sector, 4.4 per cent of all companies backsourced parts of their production between 2001 and 2003 (cf. Figure 16.2). Compared to the 6 per cent backsourcing quota the four years before, the current share of backsourcing companies is slightly on the decrease, again reaching the base mark of 1997. It becomes obvious that backsourcing of production is mirroring the trend in offshoring with a time lag of two years. The ratio of backsourcing companies to offshoring companies from the previous two-year timeframe is astonishingly stable and slightly increasing over time, ranging from 4.3 to 1 (1997/1995), to 4.5 to 1 (1999/1997), to 4.6 to 1 (2001/1999), to 4.9 to 1 (2003/2001). This confirms the findings of qualitative studies according to which foreign production activities are for the first time severely put 40%

Offshoring realized in the two years before . . . Backsourcing realized in the two years before . . .(not surveyed 1995)

35% 30%

27% 25%

26%

25%

20% 15%

19% 4.5: 1

17%

10% 5% 0% 1995 (n = 1305)

4.6: 1

4.9: 1

4.3: 1 4%

1997 (n = 1329)

6%

1999 (n = 1442)

6%

2001 (n = 1258)

4%

2003 (n = 1134)

Figure 16.2 Development of manufacturing offshoring and backsourcing quotas over time (German metal and electronics industry)

Patterns of internationalization of German SMEs

253

to the test after two years (Kinkel, 2004). The slightly decreasing failure rate also supports the argument that competence deficiencies in the process of internationalization and particularly in location decisions can be cured by learning or imitation (Henisz and Delios, 2001; Zollo and Winter, 2002). Small knowledge-intensive firms especially build or leverage resources for these special experiences on their path to a successful interationalization, which is a key to their competitive advantage (Wernerfelt, 1984; Barney, 1991). It is not surprising that, like the share of offshoring companies, the share of backsourcing companies also differs strongly according to company size. Because of their greater international experience and previously executed relocations abroad, it is above all medium-sized and large enterprises backsourcing production facilities to Germany. Table 16.4 indicates that backsourcing hardly ever occurs in the case of small enterprises. In medium-sized and in larger companies, however, backsourcing of parts of production is relevant. In companies with fewer than 100 employees, the offshoring–backsourcing quota is 10 to 1, in medium sized companies it is 4.3 to 1 and in large companies it is 3.5 to 1. These figures show that, with increasing company size, manufacturing offshoring is more frequently regarded as reversible development. Contrary to this, in the case of small enterprises, production processes, once having been relocated, seem to be lost for the German location. When analysing the regions from which backsourcing activities have occurred, it is found that in 60 per cent of the cases companies have backsourced production facilities from Western European locations (cf. Table 16.5). The new EU member states and the North and Central American states rank second and third, with 19 and 18 per cent. Asia, Eastern Europe and Southern America take a subordinate place as regions from which backsourcing activities derive their origin. In a comprehensive look at the regions of offshoring and backsourcing activities, Western Europe seems to have lost its attractiveness as an alternative location for domestic production. In this case, 2.9 offshoring companies are equalled by one backsourcer. The new EU member states exert a certain appeal, but the number of backsourcers from these regions also indicates that, in some cases, the presumed advantages of offshoring into these countries are severely overrated. The same partially holds true for offshoring to locations in Asia. Table 16.4 Share of manufacturing companies having backsourced production activities to Germany between 2001 and 2003

Company size (employees)

Share of companies with backsourcing activities (percentage) ***

20 to 99 employees (n748) 100 to 499 employees (n434) 500 and more employees (n149)

1.6 9.2 16.7

Core sectors of the manufacturing industries, total (n1331)

4.4

Note: Chi-Quadrat-Test, Significance level ***  0.01, **  0.05 and *  0.10.

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Table 16.5 Regions from which manufacturing companies have backsourced production activities to Germany between 2001 and 2003 (n72, multiple entries of regions possible)

Origin of the backsourcing

Share of origin region with backsourcing companies (percentage)

Western Europe New EU member states North and Central America Asia Eastern Europe Southern America

59.7 18.8 17.7 12.2 7.0 2.8

Motives for manufacturing offshoring and backsourcing Our analysis shows that the reduction of costs for production factors has been the dominating motive for manufacturing offshoring decisions between 2001 and 2003 (cf. Figure 16.3). In 85 per cent of the cases factor costs, that is, costs for personnel, materials and capital, have been at least also responsible (multiple entries possible) for the offshoring decision. The attempt to open up new markets with the help of offshoring of manufacturing capacities ranks second with 40 per cent. By production in the distribution area it is hoped to reach customers who, with export activities of goods solely made in Germany cannot be reached effectively. This motive has gained importance during the last few years. Today, 13 per cent more companies than in 1997 regard this motive as crucial for a decision on offshoring. The increased importance of flexibility and supply ability is closely related to this market motive. At the moment, flexibility and the ability to deliver are, in about one-third of the cases, (partly) responsible for production abroad. Despite advanced logistics concepts the supply time demanded by customers in different international regions could not be achieved by production facilities in Germany alone. In more than one-quarter of the surveyed relocations the production capacities available in Germany are evidently not sufficient to meet the growing demand. Enlargement of the capacities, however, has obviously taken place, not at the German location, but abroad. In one-quarter of the cases, taxes, levies and subsidies have contributed to the decision to practise production offshoring. This motive therefore does not play the important role that it is often ascribed. Studies assigning this motive a higher importance as regards production offshoring often restrict themselves to locational disadvantages and do not pay sufficient attention to market-oriented motives (for example, DIHK, 2003; DIHT, 1999). Key customers’ demand to produce in their vicinity (follow the customer) ranks among these market oriented motives. About 25 per cent of the offshoring companies have stated this motive. Further motives, such as the availability of qualified staff, presence of competitors or the opening up of technological competence with the help of production close to foreign competences centres are not crucial factors. Only in the minority of offshoring decisions do they play a role and almost exclusively they act as additional factors when it comes to decision. As regards company size, the motives for manufacturing offshoring do differ slightly (cf. Table 16.6). Company size does not have a significant influence on the importance of factor costs and taxes and levies as motives for offshoring decisions. However, this does

Patterns of internationalization of German SMEs 100% Costs of production factors

80%

60%

40%

20%

20%

40%

52% 6% 8% 4%

24% 22%

Quality

Coordination costs

1997 35%

42% 46%

22% 25% 28%

16%

Vicinity to key customers

* * 0%

* *

*

*

5% 5% 40% 49% 43% 31% 38% 37% Backsourcing motives (1997: n = 48; 1999: n = 74; 2003: n = 41)

100%

41%

56% 55%

Taxes, levies, subsidies

80%

28% 30%

38% Capacity bottlenecks

60%

81% 76% 87%

* *

Market opening Flexibility, ability to supply

0%

255

1999 2003

27%

17% 23% 4% 5% 4% 12% 10% 3% Outsourcing motives (1997: n = 329; 1999: n = 376; 2003: n = 284)

Note: * Not comparable or not surveyed. Source: Survey ‘Innovations in Production’, 1997, 1999, 2003 (metal electronics industry), Fraunhofer ISI.

Figure 16.3 Motives for manufacturing offshoring and backsourcing over time (German metal and electronics industry, multiple entries of motives possible) not apply to the market-oriented motives. The bigger the company is, the more important the opening of new markets and the vicinity to key customers are. These findings are in line with rare studies showing that, for international manufacturing and offshoring activities, especially proactive motives like market orientation gain importance with increasing firm size (Anderson et al., 1998; Dichtl and Hardock, 1997; Kinkel et al., 2007). The importance of these motives for manufacturing offshoring varies over time. The time series for the metal and electronics industry illustrates (cf. Figure 16.3) that all main motives having been surveyed in the course of time have gained importance. Today, more markedly than in the 1990s, offshoring decisions are caused by a mix of different motives. The motive to open up new markets ranks first in gaining importance above the average. Today 13 per cent more companies than in 1997 assign this motive as important for offshoring decisions. The increased importance of flexibility and ability to deliver in time is closely linked to the increased importance of the market motive. Whereas these motives have continuously increased in importance, the significance of factor costs has not varied significantly in importance over the years.

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Table 16.6 Motives for manufacturing offshoring according to company size (multiple entries possible) Share of companies with manufacturing offshoring naming these motives (percentage) Motives for manufacturing offshoring Costs of production factors Market opening ** Flexibility, ability to supply Capacity bottlenecks Taxes, levies, subsidies Proximity to key customers **

20 to 99 employees (n123)

100 to 499 employees (n 173)

500 and more employees (n94)

85.7 35.1 37.6 28.2 29.3 17.2

84.0 44.9 34.8 29.8 25.1 28.9

85.3 59.4 38.8 26.7 34.3 37.2

Note: Chi-Quadrat-Test, Significance level ***  0.01, **  0.05 and *  0.10

The motives for backsourcing activities have also undergone changes in significance. Currently factor costs are quite surprisingly the most important driver. More than half of the companies having backsourced production capacities from foreign locations seem to have not adequately calculated or underestimated the dynamics of development of different factor costs at the foreign location. This finding clearly indicates that location decisions have to be evaluated in a dynamic perspective, taking into account future scenarios of possible developments of the most important location factors (Kinkel, 2004). The second most important motive, ‘quality’, has increased markedly in 1999 and with 50 per cent reached its peak. Since then it has dropped to the current 43 per cent for 2003. Flexibility and supply ability which in 2003 ranked third have lost importance. The costs for coordination and communication increasingly seem to become more important. This finding is also supported by companies’ experiences according to which the support costs from the home base for the location abroad (‘overheads’) are in many cases not sufficiently calculated (Kinkel, 2004). Enterprises’ characteristics differentiating offshoring users from non-users Besides firm size there might be other attributes that determine whether offshoring activities of German manufacturing companies are more or less probable. Therefore, in the following, we will analyse the correlation between the share of enterprises using manufacturing offshoring and enterprises’ characteristics like the industrial sector, series size of production, product complexity, R&D quota (share of R&D expenses in turnover), the relation of capital costs to labour costs and the intensity of regional cooperation with other firms. When having a closer look at manufacturing offshoring and backsourcing quotas regarding the industrial sectors of the German manufacturing companies surveyed, it is clearly noticeable that sector-specific patterns do exist (see Figure 16.4). On the one hand, there are sectors in which offshoring of production activities plays an important role and backsourcing activities do not take place to an important extent. Manufacturers of devices for the production and distribution of electricity represent this type of ‘offshoring companies not inclined to come back’. Companies of the automotive sector represent a

Patterns of internationalization of German SMEs

Share of offshoring companies [in %]

40

257

Offshoring companies not inclined Flexible out- and backsourcers to come back Producers of office machines, data-processing equipment radio, TV, etc.,

35

Producers of devices for generation and distribution of electricity, etc.

30

Producers of automobiles and automotive parts, other vehicle contstructors

Mechanical engineering

25 Medicine, measuring, and control engineering, optics

20

Producers of rubbers and plastics Chemical industry

Producers of metal products

15

10

Cautious offshorers with tendency to come back

Companies affiliated to the home base 0

5

10

15

20

25

30

35

40

Relation backsourcers to offshoring companies [in %] Source:

Survey ‘Innovation in Production’, 2003, Fraunhofer ISI.

Figure 16.4

Sector-specific patterns of manufacturing offshoring and backsourcing

second specific type of manufacturing offshoring. This type is characterized by an aboveaverage extent of offshoring activities and also a marked share of backsourcing activities, but still not equal in number. However, firms of this type can best be described as ‘flexible out- and backsourcers’. According to potential changes in frame conditions, offshoring activities might well be reversed. Companies of the chemical industry represent a third type, best described as ‘cautious offshorers with a tendency to come back’. In this sector relatively few offshoring activities take place; the relation between offshorers and backsourcers is 2.8 to 1 at the lowest. The German manufacturing location seems to be able to stand its ground comparatively well for this type of companies. A fourth type of manufacturing offshoring is constituted by sectors which show (still) relatively low offshoring quotas and hardly any backsourcing activities (‘affiliated to the home base’). Manufacturers of metal products tend to belong to this type. The sector-specific offshoring behaviour can partly be attributed to the differing series sizes of production. Our correlation analysis shows that companies offshoring manufacturing activities are not only markedly larger but also manufacture significantly more often medium and large series sizes than companies keeping their production in Germany do (cf. Table 16.7). Additionally, in companies not offshoring manufacturing activities the relation between capital and labour costs at 1 to 5.1 is significantly higher than in the case of offshoring companies (1 to 6.2). Thus especially larger series of mature standard products, for which a more capital-intensive automated production seems not to be profitable, tend to be offshored more than the average. However, the correlation of product complexity and offshoring activities also indicates that labour-intensive production

258

1069 984 618 917 917 917 917 605 1069

N

446 63.5% 1 to 6.2 20.1% 43.6% 24.1% 14.0% 5.4% 29.3%

Average

348 319 196 313 313 313 313 215 348

N

Companies with manufacturing offshoring between 2001 and 2003

Note: T-Test, significance level ***  0.01, **  0.05 and *  0.10;  As regards product complexity multiple entries have been possible so that the average figures do not exactly add up to 100 per cent.

139 51.5% 1 to 5.1 26.8% 34.3% 22.9% 18.0% 6.3% 36.7%

Average

Companies without manufacturing offshoring between 2001 and 2003

Bivariate characterization differentiating offshoring users from non-users

Employees 2002*** Series size medium/large*** Relation capital costs to labour costs** Product complexity : one-piece products*** Product complexity : single, mulit-part products*** Product complexity : complex multi-part products Product complexity : complex facilities*** Share of R&D expenses in turnover*** Share of companies having regional cooperation with other industrial firms**

Table 16.7

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259

processes can be competitive in Germany if based on the employees’ high qualification. The offshoring quotas of companies manufacturing products of a middle complexity are markedly higher (at 30 per cent and 26 per cent) than the corresponding quotas of manufacturers of very simple (20 per cent) or very complex products (22 per cent). This finding clearly indicates that production in Germany can be competitive either when it is adequately automated and capital intensive or when it sufficiently exploits the innovation and flexibility potentials of the available qualified staff. Another interesting finding is that offshoring companies show markedly lower average R&D quotas than companies not using manufacturing offshoring. This finding is in line with other studies (such as Grupp et al., 2003) stating that R&D-intensive value adding processes can be executed more competitively in Germany than less R&D-intensive processes. Furthermore offshoring companies cooperate significantly less often in production, procurement, sales and R&D with other industrial companies within their regional area (up to a distance of 50 km). These findings indicate that, in some cases, not all innovation potentials have been sufficiently exploited at the German location before deciding on manufacturing offshoring. In particular, the consequential utilization of regional networks quite often bears promising potentials for manufacturing companies that are too seldom exploited and adequately considered when it comes to deciding on manufacturing offshoring (Kinkel, 2004). Conclusions The analysis of 1450 companies of the core sectors of the German manufacturing industry allows the identification of special SME patterns of manufacturing offshoring and backsourcing. As expected, the enlargement of the EU has provided a dynamic stimulus to the overall share of offshoring companies, already before the ten new member states officially joined the EU. SMEs particularly favour these ‘physically and mentally close’ countries over more distant Asian countries, following a similar path as regards their export activities (Johanson and Wiedersheim-Paul, 1975; Johanson and Vahlne, 1977). Today, offshoring decisions are increasingly triggered by a bundle of motives. Reduction of factor costs is still the most common motive for manufacturing offshoring decisions of German firms. Market and customer motives have gained in importance over time, not only in larger companies but also in SMEs. But the latter refer to these proactive motives more rarely. Therefore, manufacturing offshoring sometimes might tend to become an evasive strategy not sustainable in the medium term for European SMEs. Qualitative findings show that sometimes promising innovation strategies, internal process modernizations or cooperation within regional networks are put aside in favour of offshoring strategies which supposedly might be a quicker remedy (Kinkel, 2004). In this context it may be dangerous if SMEs start to consider offshoring options just because some large company-biased studies raise feelings that almost all companies have already made such decisions. There is a measurable risk of failure, leading to backsourcing of production capacities to the home base. Backsourcing activities are mirroring the trend in manufacturing offshoring with a time lag of two years. The ratio of backsourcing to offshoring activities of the previous two years is significant and slightly decreasing over time, from 23 per cent to 20 per cent. The decrease indicates effects of organizational learning in decision making for international production (Henisz and Delios, 2001; Zollo and Winter, 2002). Therefore, manufacturing offshoring can no longer be regarded as a

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one-way road. Studies on offshoring activities should always also cover the backsourcing phenomenon. The following aspects have been identified as characteristic differences between users and non-users of manufacturing offshoring. The bigger the company, the larger the produced series and the lower the involvement in regional cooperation at the German production site, the higher the probability of manufacturing offshoring is. Conversely, the more extreme product complexity (very simple or highly complex) is, the higher the capital–labour ratio and the higher the R&D intensity are, the greater the chances of manufacturing remaining in Germany are. The below-average R&D quotas of the offshoring companies and the comparably low degree of linking up with industrial cooperation partners in the regional environment of the German manufacturing site imply that the innovation potentials of the home base are not always being adequately exploited before deciding on offshoring of manufacturing activities. Particularly the thorough utilization of regional networks often bears as yet unexploited potentials which are not sufficiently taken into consideration. For further research it might be worthwhile examining which patterns of international manufacturing are most promising in terms of superior performance for which types of SMEs. Another question of paramount interest for European SMEs with their current need for innovation concerns the existence of weak or strong ties between offshored manufacturing capacities and their R&D resources at the home base. Which firms (sizes, branches and so on) have strong ties? And under which conditions will strong ties favour home-based production or pave the way for R&D to follow manufacturing offshoring? Detailed studies examining these questions might certainly add profundity to the scientific debate on SMEs’ manufacturing offshoring patterns. Furthermore it might help companies improve their decision and planning processes for offshoring activities and thus improve their overall competitiveness. Notes 1. NACE groups 24, 25 and 28 to 35 of the official statistics. 2. Companies with 20 and more employees; cf. Statistisches Bundesamt: Statistisches Jahrbuch 2002 für die Bundesrepublik Deutschland, Wiesbaden.

References Andersen, P. (2005), ‘In the shadow of the Dragon and the Tiger: towards a new understanding of production relocation, innovation and industrial decline’, The Aarhus School of Business. Anderson, V., S. Graham and P. Lawrence (1998), ‘Learning to internationalize’, Journal of Management Development, 17(7), 492–502. Ayal, I. and J. Zif (1979), ‘Market expansion strategies in multinational marketing’, Journal of Marketing, 43, 84–94. Badri, M. (1996), ‘Multicriteria approach to global facility location–allocation problem’, Information and Management Science, 7(3), 1–9. Badri, M. (1999), ‘Combining the analytical hierarchy and goal programming for global facility location–allocation problem’, International Journal of Production Economics, 62(3), 237–48. Barney, J. (1991), ‘Firm resources and sustained competitive advantage’, Journal of Management, 17, 99–120. Bartlett, C.A. and S. Ghoshal (1989), Management across borders. The Transnational Solution, Boston: Harvard Business School Press. Bassen, A., M. Behnam and D.U. Gilbert (2001), ‘Internationalisierung des Mittelstands. Ergebnisse einer empirischen Studie zum Internationalisierungsverhalten deutscher mittelständischer Unternehmen’, Zeitschrift für Betriebswirtschaft, 71. Jg., H.4, S.413–32. Bell, J., R. McNaughton, S. Young and D. Crick (2003), ‘Towards an integrative model of small firm internationalisation’, Journal of International Entrepreneurship, 1, 339–62.

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Brainard, S.L. and D.A. Riker (1997), ‘Are U.S. multinationals exporting U.S. jobs?’, Working Paper 5958, National Bureau of Economic Research, Cambridge. Buckley, P.J. and M. Casson (1976), The Future of the Multinational Enterprise, London: Macmillan. Caves, R.E. (1982), ‘Multinational enterprise and economics’, Cambridge: Cambridge University Press. Chetty, S.K. (1999), ‘Dimensions of internationalisation of manufacturing firms in the apparel industry’, European Journal of Marketing, 33(1/2), 121–42. Deutsche Bundesbank (2004), ‘Auswirkungen der EU-Osterweiterung auf die deutsche Wirtschaft’, Monatsbericht Mai, S.5–23. Dichtl, E. and P. Hardock (1997), ‘Auslandsfertigung und Produktionsverlagerung von Unternehmen des Fahrzeugbaus: Ergebnisse einer empirischen Studie’, University of Mannheim, ‘Allgemeine Betriebswirtschaftslehre und Marketing’, Working Paper 122, Mannheim. DIHK (2003), ‘Produktionsverlagerung als Element der Globalisierungsstrategie von Unternehmen. Ergebnisse einer Unternehmensbefragung’, Deutscher Industrie- und Handelskammertag, Berlin. DIHT (1999), ‘Produktionsverlagerungen ins Ausland – eine Antwort auf Standortprobleme in Deutschland. Ergebnisse einer Unternehmensbefragung’, Deutscher Industrie- und Handelstag, Berlin. Dunning, J.H. (1980), ‘Towards an eclectic theory of international production: sine empirical tests’, Journal of International Business Studies, 11(1), 9–31. Dunning, J.H. (1988), Explaining International Production, London: Harper Collins. Ernst & Young (2004), ‘Kennzeichen D: Standort-Analyse 2004 – Attraktivität Deutschlands als Investitionsstandort’, Ernst & Young Niederlassung Ruhrgebiet, Dortmund. Ferdows, K. (1997), ‘Making the most of foreign factories’, Harvard Business Review, 75(2), 73–88. Fh-IPT and Droege (2004), ‘Ist der Produktionsstandort noch zu retten? Produktionsverlage-rungen: Erfolgsfaktoren, Trends, Auswirkungen’, Fraunhofer Institut Produktionstechnologie, Droege & Comp. GmbH. Fillis, I. (2001), ‘Small firm internationalization: an investigative survey and future research directions’, Management Decision, 39(9), 767–83. Gankema, H.G.J., H.R. Snuif and P.S. Zwart (2000), ‘The internationalization process of small and mediumsized enterprises: an evaluation of stage theory’, Journal of Small Business Management, October, 15–27. Grupp, H., H. Legler, B. Gehrke and B. Breitschopf (2003), ‘Zur technologischen Leistungsfähigkeit Deutschlands 2002’, Bericht im Auftrag des Bundesministeriums Bundesministerium für Bildung und Forschung, Bonn. Henisz, W.J. and A. Delios (2001), ‘Uncertainty, imitation, and plant location: Japanese multinational corporations, 1990–1996’, Administrative Science Quarterly, 46(3), 443–75. Hill, C.W.L., P. Hwang and W.C. Kim (1990), ‘An eclectic theory of the choice of international entry mode’, Strategic Management Journal, 11(2) 117–28. Hoffman, J.J. and M.J. Schniederjans (1994), ‘A two-stage model for structuring global facility site selection decisions: the case of the brewing industry’, International Journal of Operations and Production Management, 14(4), 79–96. IKB and KfW (2004), ‘Gemeinsame Unternehmensbefragung von KfW und IKB: Studie zu den Auslandsaktivitäten deutscher Unternehmen: – Beschäftigungseffekte und Folgen für den Standort Deutschland, Frankfurt am Main. Johanson, J. and J-E. Vahlne (1977), ‘The internationalization process of a firm: a model of knowledge development and increasing foreign market commitments’, Journal of International Business Studies, 8, Spring/Summer, 23–32. Johanson, J. and F. Wiedersheim-Paul (1975), ‘The internationalisation of the firm – four Swedish cases’, Journal of Management Studies, October 305–22. Kinkel, S. (ed.) (2004), Erfolgsfaktor Standortplanung. In- und ausländische Standorte richtig bewerten, Berlin, Heidelberg, New York: Springer-Verlag. Kinkel, S. and G. 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17 Growth of Archetypon S.A.: exploitation of opportunities in Greek and European marketplaces Irini Voudouris and Pavlos Dimitratos

Introduction Although international entrepreneurship has been a field of emerging interest for more than a decade, it recently shifted its emphasis to the study of opportunity identification. Previous attempts to demarcate the boundaries of this field have centred on the speed of internationalization of the firm as the key criterion distinguishing an international entrepreneurial firm (e.g. McDougall, 1989; Oviatt and McDougall, 1994), yet recent writings increasingly emphasize the notion of exploitation of opportunity by the international entrepreneurial firm (Dimitratos and Plakoyiannaki, 2003; McDougall and Oviatt, 2005). Dimitratos and Jones (2005) assert that the theme of ‘international opportunity perception’ may form one of the most important and well-researched fields in international entrepreneurship study in the future. In spite of this, existing empirical evidence on this issue seems to be missing. In particular, we appear to lack evidence on how entrepreneurial firms evaluate and act upon opportunities that may appear in the marketplace. It may be that opportunities arise at home or abroad, and so an examination regarding the pursuit of profitable prospects by the entrepreneur should take place everywhere the firm seeks opportunities, regardless of the locus of the market. Apart from this, it would be interesting to investigate how firms pursue opportunities mobilizing scarce resources in dynamic environmental contexts that offer significant opportunities for growth. Towards these objectives we aim at providing some empirical evidence in this chapter. The issue of exploitation of opportunities is ignored in the international entrepreneurship research, and thus our knowledge on it is limited. Consequently, we choose to carry out a case study on an entrepreneurial small firm in the Information and Communication Technology (ICT) sector. Such an analysis can provide longitudinal data into this unexplored issue. Besides, as researchers (for example, Katsikeas et al., 1997; Leonidou et al., 2002) have often stressed that a larger number of studies should be conducted in countries other than the major industrialized ones, this current research offers insights from a small country with a dynamic economy located on the EU periphery, namely Greece. Specifically, this case explores the process growth of a Greek small company. It describes the creation and analyses the growth of Archetypon S.A., an ICT service provider. In 1996, the owner of this firm created Archetypon after a successful management buy-out of a small, stagnant subsidiary of Computer Logic, a well established group of companies. The management buy-out was accompanied by the division of the company into two main departments, the first focusing on ICT services and the second 263

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offering software-websites testing and globalization services. In the following years the company, managing its relationship with its biggest customers, Microsoft and IBM, which at the time accounted for about 70 per cent of its sales, succeeded in attaining a mean annual growth rate of 45 per cent. This growth led Archetypon to be selected among the 20 faster growing companies in Greece in 1999, and among the 500 faster growing companies in Europe in 2001. In the meantime, the entrepreneurial management team of the company acknowledging the risk related to its dependency on a few big customers and trying to take advantage of the knowledge gained in Information Technology (IT) issues, especially in eGovernment, proceeded to make important investments in this area. In 2002, Archetypon International Ltd was established in Belgium to facilitate Archetypon’s entrance to the private and public sectors of the EU. However, the company was not able to harvest the benefits of this investment inasmuch as both Microsoft and IBM, attempting to resist the recession of the IT sector, turned to low labour-cost countries, reducing significantly their orders from Archetypon. The persistent recession of the IT sector not only resulted in decreased orders for Archetypon but also in stagnation of the IT services offered. Cash-flow problems appeared but a new opportunity was located. To summarize, an enormous language-related market was emerging in the European Union and Archetypon, already possessing the appropriate skills, could take advantage of it. In order to preserve the company’s threefold investments (e-government services, Archetypon international and language-related services) and support its growth, the management team, equipped with a well-written business plan, launched the quest for financing. After the evaluation of several options, including financing from venture capital, they opted for a long-term bank loan. From the second half of 2004, a new period for Archetypon started. Released from cash difficulties and beginning to reap the benefits of the European market, Archetypon anticipates a dynamic expansion for the years to come. Overall, the case study evidence is particularly illuminating on the process in which the firm seeks to exploit profitable prospects in the marketplace, wherever they arise. Because the study covers a six-year period, it appropriately highlights key factors affecting the pursuit of opportunities in the marketplace of a dynamic environment. This evidence additionally shows how ventures in growth environments can be managed successfully by offering useful guidelines to management practitioners. This chapter is structured as follows. The next section provides the research background to the theme of exploitation of opportunities in international markets. The third section outlines methodological details on the case study. The fourth section presents and discusses the findings of the research, while the concluding section highlights the key points of the study and sets out implications for theory and practice. Literature review An emerging theme in the entrepreneurship literature deals with the degree to which firms search for and discover opportunities, evaluate opportunities among alternatives and finally exploit those selected. Shook et al. (2003) assert that there are three stages in the opportunity perception process, namely intention, search and discovery of opportunities. Compared with other internationalized firms, international entrepreneurial firms are likely to be more successful concerning how quickly, efficiently and holistically they sense and act upon opportunities abroad (cf. Crick and Spence, 2005). As far as

Exploitation of opportunities in Greek and European marketplaces 265 international entrepreneurial intention is concerned, Shapero’s (1982) model may be applied in international entrepreneurship studies. According to this model, entrepreneurial intentions are determined by perceptions of feasibility and desirability, and a propensity to act on an opportunity. In relation to international entrepreneurial search, awareness of opportunities abroad can be instrumental to initiation of entrepreneurial ventures. With regard to international entrepreneurial discovery, alertness to opportunities is of key importance because it can lead to detection of attractive prospects in the international marketplace (Minniti and Bygrave, 2001). Organizations with alert decision makers are more likely to become successful entrepreneurs (Minniti, 2004). Alertness leading to discovery of opportunities is an iterative process that depends on learning from organizational successes and failures (Gaglio, 1997). For instance, organizations that value learning in their internationalization process can be more alert to and in a better position to discover opportunities abroad from those that do not assign importance to learning. There is a dearth of studies associated with learning in the international entrepreneurship field. It has been argued that founders of firms that go abroad from inception, namely international new ventures, are alert to new international market opportunities because of their previous knowledge and learning acquired from earlier activities. Thus, the stock of knowledge that founders of international new ventures possess is influential to the fast internationalization speed of these firms. In a similar vein, Zahra et al. (2000) argue that positive associations exist for international new ventures between international diversity and technological learning, and between technological learning and performance. Apart from this, Autio et al.’s (2000) study provides interesting insights suggesting that young internationalized firms can learn faster than older ones. Thus, these authors posit that older firms may have developed learning impediments that block their ability to learn quickly in the international marketplace. This can be related to the finding that international new ventures employ fewer established routines than older internationalized firms for augmenting and exploiting the organizational stock of knowledge (Kuemmerle, 2002). In addition, Dimitratos and Plakoyiannaki (2003) posit that an ‘international learning dimension’ should form one of the dimensions of an ‘international entrepreneurial culture’. According to them, this dimension can distinguish activities between internationalized firms and refers to the propensity of the organization to actively obtain and benefit from knowledge abroad. Growth of the firm, which is related to effective identification and exploitation of opportunities, has been approached in the strategic management literature in a rather narrow context whereby the firm has to choose between different market segments and products mainly in the domestic market. The international business literature has also approached growth of the firm as a predominantly foreign business activity, seemingly disregarding other ‘domestic’ or ‘product-market’ strategic choices that organizations may implement in order to discover opportunities and grow (for example, Johanson and Vahlne, 1977). It is surprising that the two literature streams have apparently not been examined in conjunction so as to provide a more holistic view of the overall strategic choice portfolio of the firm, particularly that of the small firm. However, a few recent contributions in the small-firm field acknowledge that small enterprise internationalization is a holistic organizational phenomenon reflecting an internal growth and development process, in which inward and outward internationalization affect

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one another (Jones, 1999, 2001). In a similar vein, new venture strategies in developing countries may involve different combinations of product markets, technological capabilities and geographic target markets (Park and Bae, 2004). Identification and exploitation of opportunities can take place in different product and geographic markets as the firm acquires experiential knowledge through learning. Methodology A case study methodology was employed, based on a successful small Greek firm covering data over a six-year period (1999–end of 2004). Such a longitudinal research can provide a dynamic view of the incident under investigation, providing in-depth insights into the theme of small-firm growth over a lengthy time frame and that of exploitation of opportunities (Yin, 1989; Patton, 2002). The data collection methods used involved comprehensive interviews with 52 managers and employees of the firms, examination of company documents and archival data, and observation. In essence, triangulation of methods was implemented, which is a procedure contributing to acquisition of a comprehensive view and generation of a valid interpretation of organizational phenomena. Collected data were content analysed. All interviews were transcripted. Initial respondents were asked to identify other managers and key employees of the firm involved in the process of growth of the firm. Each of the interview lasted between one-and-a-half and two hours. In a subsequent stage, investigation of company documents and archival data was undertaken. The interviews were based on a semi-structured questionnaire addressing key issues on the theme of firm growth and opportunities identified and pursued in the markets of the company. The themes of the questionnaire evolved around key milestones of the firm, as well as major facilitators and obstacles identified during the development of the firm. Respondents were asked to elaborate on how they reacted to potential opportunities identified as well as how they dealt with major difficulties faced by the company in domestic and international markets. As managers and employees in all departments of the firm were interviewed, our insights were drawn from a broad range of value-added activities of the company, allowing for a comprehensive examination into the investigated issue. Findings and discussion The early years of the firm The company milestones are presented in Box 17.1. The company was founded in 1987 by the shareholders of Computer Logic, which was a group of Greek companies, and the entrepreneur G.K. under the name Computer Logic R&D. From its early years the company targeted the international market offering consulting, software development, software and testing. For the next nine years the company grew slowly, although the ICT market was developing rapidly. The two shareholders, namely Computer Logic and G.K., possessed equal shares of the company, yet they were not always on the same side when strategic issues were discussed. Computer Logic was more interested in software development of accounting software and tools, whereas G.K. was aware of the opportunities that could arise from the globalization of markets, leading to a high demand for software services. To add to this, Microsoft, which since 1992 had signed a contract with the company, was a very important customer, which the firm could count on in order to ensure future growth.

Exploitation of opportunities in Greek and European marketplaces 267

BOX 17.1 1987: 1988: 1990: 1990: 1992:

1993:

1996: 1997: 1998: 2000: 2000: 2001: 2002: 2003:

ARCHETYPON’S MILESTONES

Creation of Computer Logic R&D S.A. as an independent company within the Computer Logic Group Development of the first Greek Enabling Solution for MS-Windows 2.xx First Conformance Testing Contract with the European Commission Marketing the first Greek SW application for MS-Windows First contract with Microsoft – Redmond Greek localization for Windows 3.1 Engineering and consulting for Greek, Hebrew & Arabic Windows 3.1 Short-listed by the European Commission for contracts in the fields of ‘Telecommunications studies’ and ‘Development & maintenance of information systems’. Management buy-out. The company is renamed as ARCHETYPON S.A. First contract with IBM/Lotus Co: localisation, testing and engineering Establishment of the Multilanguage Testing Lab Development of the first Greek WAP portal Telecommunications consulting: development of National Numbering Plan Europe 500 award Creation of Archetypon International in Brussels Europe 500 award for second year in a row ISO 9001:2000 certification

Apart from potential growth possibilities connected with Microsoft, the entrepreneur G.K. was also aware of opportunities linked to the European Commission’s projects that could both enhance the company’s technical expertise and ensure necessary funds to finance the building of a strong internal infrastructure. Hence, it only seemed logical for G.K. to bring a management buy-out proposition to Computer Logic. Following a couple of months of fierce negotiations among the old partners, the proposition was finally accepted from Computer Logic and in 1996 G.K. was the sole owner of the company. Before starting to implement the first big change in the company, G.K. decided to reward and motivate its good colleague and friend G.S. by offering to him, under preferential terms, 15 per cent of the company shares. The deal was reached and the two partners, after changing the name of the company to Archetypon S.A., immediately started to implement an aggressive business plan. The fact that the two partners were in essence the two main owners and strategists in this Greek firm is not unusual of the typical Greek small firm, whose management style tends to be rather ‘ownercontrolled’ and centralized. Family ownership, which is a feature in the vast majority of Greek small firms, may lead to a non-participative style of management in which the owners or top executives take all key strategic decisions (Makridakis et al., 1997; Voudouris et al., 2000).

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Reorganization and growth With 20 people employed in the firm’s early days, the top management team organized Archetypon into two departments: the Department of I.T. & Telecommunication Services and the Department of Localization, Globalization and Quality Control. The newly structured company looked for a market with significant potential. The global ICT market showed dramatic growth during the second half of the 1990s, with a mean annual growth rate of 6.3 per cent for the years 1995–2001 (OECD, 2002). The software market was the most dynamic sub-segment of the ICT market, presenting a mean annual growth rate of 12.3 per cent for the years 1992–2001. The IT Department mainly focused on ICT Outsourcing and Solutions, which was a sector estimated to grow significantly in the years to come. The ICT outsourcing business line of Archetypon included a broad range of services, aiming at facilitating public and private, Greek and international organizations to optimize and control costs by allowing them to focus on their key competencies, rather than delivering services through their own IT departments. Archetypon offered end-to-end services covering the whole range of consulting, planning, deployment and management. In order to support this business unit, the firm participated in and coordinated a considerable number of EC-funded projects that were all successful in terms both of scientific innovation and, importantly, of business applicability of the results. The participation in such demanding and innovative projects had increased Archetypon’s technical expertise and capabilities of testing, localization and globalization. This expertise was canalized to its second department. Furthermore, through these projects, the firm succeeded in gaining specialization in e-government services, which would constitute the basis of the company’s strategy in a later period. The firm developed its resources to such an extent that it could take advantage of later opportunities. The Department of Quality Control, Localization and Globalization specialized in quality control and localization/globalization testing, translation and cultural adaptation of software and web sites. Among the main offerings of the department were the software testing and engineering services for international software producers. Starting with an early version of the original–source US software product, Archetypon undertook all production and management tasks necessary to finally deliver a well engineered and tested software product that was meeting the high standards of its worldwide customers. Initially, the company offered its services for Greek translations. The overall market value of software testing and engineering services was difficult to measure, given the fact that it was a niche market, but an indicative example was what Microsoft spent on its own, which ranged between $10 and 12 millions per year, depending on its product release life cycle. Apart from Microsoft, new key customers such as IBM, which signed its first contract with Archetypon in 1997, were attracted to the company, as they needed its specialized services in order to offer a tested and localized version of their products in the Greek market. Seeking new opportunities, Archetypon in 1999 offered localization services in other languages apart from Greek, including those of South-eastern Europe and the Middle East. Existing customers supported this expansion because they acknowledged and were satisfied with the efficient operations performed by the company and were eager to further capitalize on it. Archetypon’s expertise in localization was further strengthened by being developed both in-house and in cooperation with other European partners. The firm sought opportunities at home or abroad,

Exploitation of opportunities in Greek and European marketplaces 269 highlighting that growth of the small firm can be a holistic organizational phenomenon (Jones, 1999). G.K.’s persistent search for opportunities in the localization industry was now being shared by many others in the company and the management team focused on localization, which was a business activity that, together with translation, was still unknown to many professionals for its importance. G.K. was effective in transferring its vision for growth to many managers and employees within the firm, a characteristic frequently encountered in international new ventures (Madsen and Servais, 1997; Oviatt and McDougall, 1995). The localization/globalization market was showing signs of great potential. The total market was estimated to reach €1380 million in the year 2001. Archetypon’s focus on the ICT service market sectors proved very successful. Synergies between the two departments helped the company to create unique capabilities, in testing localization and globalization. These technical capabilities, along with Archetypon’s emphasis on customers’ service and satisfaction, were reflected in the company’s annual growth rates. From 1997 to 2001, turnover was growing at a mean annual rate of approximately 45 per cent. At the same time, the entrepreneur G.K. was always on the hunt for new opportunities. The Athens Stock Exchange was booming at that time and new prospects were arising for partnerships, new buyout schemes and so on. As almost all companies did in that period, Archetypon evaluated a these new prospects. Although G.K. as an entrepreneur was keen on taking risks, something held them back from taking risks with the stock exchange and agreeing on various proposals that seemed exciting at the time but would later prove to be catastrophic. Hence, the subsequent crash of the stock market did not harm Archetypon, whereas many other companies were negatively affected or even went out of business. It was perhaps ‘good luck’, but this event also helped the company maintain its robust financial position. Investment in eGoverment services: the creation of Archetypon International Ltd The increase in Archetypon’s turnover clearly indicated a hyper-growth for the firm. This hyper-growth resulted in Archetypon being selected among the 20 faster growing companies in Greece in 1999, and among the 500 faster growing companies in Europe in 2001. However, the two owners of the firm were aware of the potential problem that lay ahead: almost 70 per cent of the company’s sales were coming from the two big customers, Microsoft and IBM. Thus, once again, G.K. decided on a new internal transformation in 2001. Taking advantage of the technical and consulting expertise in the e-government area that the company had acquired through its involvement in EC R&D-relevant projects during recent years, the Department of I.T. & Telecommunication Services focused strategically on e-government, an area were many opportunities were to be found, as under the European Commission’s e-Europe initiative the year 2005 was set a target for all member states to offer the majority of their public sector services through on-line channels. This meant that 188 European country ministries and 35 000 local authorities were potential buyers of Archetypon’s services and expertise, an expertise which has been well developed since 1998. To the contrary, the majority of Archetypon’s international competitors in that particular area were starting their expertise build-up after 2000. The investment of Archetypon in e-government services was followed by the formation of Archetypon International Ltd in 2002. This move aimed to facilitate Archetypon’s

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penetration of the private and public sector of the European Union in order to expand its customer base and avoid the dependency on its big customers. Such a practice proved to be very wise some years later, when significant contracts were signed with the European Commission. A subsidiary in Brussels supported the company’s interest in the European institutions and performed duties such as sales, pre-sales and sales promotion with other European public administration customers. Archetypon essentially became an international new venture and a micromultinational (cf. Dimitratos et al., 2003) and its foreign direct investment facilitated exploitation of opportunities abroad. Investment in language-related services: the search for financing Unfortunately, since summer 2002, the fears of the management team of the company started to come true. While the recession was hitting the Greek economy, and especially the ICT sector, whose growth had decreased at an annual rate of 3.4 per cent for the year before that, Microsoft (to which more than half of the company’s turnover was owed at that time), decided to reduce significantly outsourcing orders for localization. For the first time since the management buy-out, G.K. and G.S. were feeling that the future growth of the company was threatened. Sales projections for the following year showed a decrease of 10 per cent, generating uncertainty. Although this was a big shock for the company, Archetypon was trying to confront it. The management team of the company, always alert, was trying to evaluate new measures, helping Archetypon to sustain its position and further growth. The opportunity appeared in the translation market. Specifically, the enlargement of the EU with the addition of ten new member countries was about to create a ‘tower of Babel’ within the boundaries of Europe, making translation services profitable. Archetypon had long created capabilities in language-related services through offering integrated globalization services for software and web sites. Apart from its own skills, the company had formed an important network of language partners all over Europe. Thus there was a great challenge, but also a tough decision was to be made. Could Archetypon, a high-tech IT company, accept its role also as a traditional translation service provider? Over and above this, although Archetypon had the technical capabilities to exploit the new opportunity, did it have the financial resources to support a new investment? Whether taking a risk or just perspicacious, G.K and G.S. decided to go ahead. The persistent recession of the IT sector resulted not only in decreased orders by Archetypon’s big international customers, which would now turn to lower-cost suppliers worldwide to cover a great part of their localization needs, but also in stagnation concerning IT services offered by the company. The investment made to e-government services had not yet yielded significant results in 2003 and, to make things even worse, projects driven by the Third Community and Support Framework concerning Information Society tenders in Greece were showing significant delays in their implementation by the Greek government. The end of 2003 was the toughest period in the company’s history, in which serious cash-flow problems were anticipated for early 2004. The company’s need for external financing was imperative in order to preserve its investments and support its growth. G.K. and G.S., equipped with a well-written business plan, launched the quest for financing at the beginning of 2004. This stresses the fact that growth of the small firm can often be a non-linear process with many ‘ups’ and ‘downs’ in its development. The owners started

Exploitation of opportunities in Greek and European marketplaces 271 by investigating the venture capital market in order to secure not only financing but also risk sharing for the years to come. Investors would evaluate Archetypon for its current situation and its future prospects. The difficult situation of the ICT sector, together with Archetypon’s cash-flow problems, would not create a favourable position for the company. However, the past performance of the company, its dynamic investments as well as its intangible assets mainly measured by the skills of its owners and employees, were attractive to potential investors. Discussions with three venture capitalists lasted approximately three months and G.K. and G.S. evaluated several propositions. The differences between the valuation approach of the venture capitalists and the terms of agreements proposed obstructed G.K. in coming to a final agreement, but the need for external financing was still there. The owner of Archetypon, accepting the risks in his decision and providing personal guarantees, opted for and succeeded in obtaining a long-term bank loan of approximately €1.5 million. This evidence suggests that the personality and traits of the top management team of the entrepreneurial firm are embedded in the company, something witnessed in the entrepreneurship literature. The most recent situation Archetypon had a permanent workforce of 90 highly specialized people committed to the mission and the quality engagement of the company for its customers. Relations with the employees are more at the personal level than a distant, detached employer–employee relationship, and thus, high employee retention rates have been preserved. Well-balanced education and low age profiles are maintained. While 85 per cent of the employees are involved in the production and technical department, the remaining 15 per cent are involved in administration and sales. A dynamic team, devoted to the company from its early years, manage the firm. According to G.K., ‘The company owes its success to its people.’ The headquarters of the company are based in Athens at a 2200 m2 office space from where the local market sales, and also the markets of Eastern Europe, the Balkans and the ten new members of the enlarged EU, are coordinated. Archetypon International Ltd abroad supports the company’s interest in other European countries. Furthermore, Archetypon is committed to maintaining its infrastructure at the top of the most demanding industrial requirements and has established synergies and alliances with some of the biggest corporations both internationally and in Greece, with major European research institutions and universities to further support its ‘big account mentality’ customer service and satisfaction (an indicative list of Archetypon’s customers can be seen in Box 17.2). Network formations have typically been shown to assist the small firm in overcoming resource deficiencies (Aldrich and Martinez, 2001; Aldrich and Zimmer, 1986) and to internationalize effectively (Crick and Jones, 2000; Westhead et al., 2001) and have constituted the source of knowledge and resource creation of the firm. Services, activities and competition The current services portfolio offered by Archetypon can be grouped into two main categories: Language Related Services and ICT Solutions & Services. The language-related services business category involves creation, transformation, publishing and maintenance of content using highly specialized, often internally developed, ICT tools and techniques. More specifically, the sub-services involved include the following:

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BOX 17.2

CUSTOMERS AND SERVICES OFFERED

Microsoft

IBM

European Commission

Siebel DeAgostini Greek Telecoms Authority Greek Ministry of Interior OteNet ISP & ASP Sun Microsystems ELOT Symantec ●

●

Largest provider of outsourced testing and engineering Multi-language Prime provider of outsourced testing and engineering Multi-language IT services Integrated content services Multi-language translation RTD projects Testing and engineering Multi-language localization (SW, multimedia, e-content) Managed services ICT Consulting ICT Solutions e-Government ASP application development and service provisioning, e-translation Localization Translation Testing and engineering

Integrated content solutions and localization. This involves design, development, management, operation and maintenance of content intensive portals in all EU languages as well as traditional services of the company for software and globalization. Translation services. This product line refers to management and coordination of traditional translation services.

The ICT Solutions and Services business category includes two main subcategories of services: ● ●

● ● ● ●

e-Government Services and Solutions: this is defined as vertical solution development for citizen-centric portals for public administration and public authorities. ICT Outsourcing and Solutions: the ICT outsourcing business line of Archetypon includes end-to-end services throughout the entire ICT infrastructure life cycle and development of integrated solutions for private enterprises or public administration. Archetypon develops a wide range of technical production outsourcing services: Testing & Engineering for the Software Industry, Technical Production Outsourcing, ICT Integrated Solutions, ICT Life Cycle Management.

Exploitation of opportunities in Greek and European marketplaces 273 The road ahead Archetypon has always managed to benefit from a profitable balance sheet over the years. Even when costly investments created cash-flow problems for the company, it managed to maintain growth, albeit occasionally slow. The same was true for profitability. Turnover for the fiscal year 2003 reached €5.7 million and net profits of €0.5 million were achieved. Having secured income from long-term contracts, future growth prospects seem very promising, even potentially reaching the rates of the hyper-growth phase. The company had always counted on its strong technical expertise and its focus on customer satisfaction. The highly specialized staff, international partner network, European presence, competitive pricing, ‘big account’ mentality and culture, continuous investments in R&D and training are some of the numerous qualities that distinguish Archetypon, and which have been the strong base of the company’s success. In line with the resource-based view (Barney, 1986; Penrose, 1959; Wernerfelt, 1984), the firm has successfully nurtured these competencies likely to produce rents in the Greek and international marketplaces. For the future, Archetypon is already well positioned in the market to offer Integrated Content Services, as the company had foreseen the potential demand mainly driven within the European Union, long before any other international companies. The management team of Archetypon is convinced that Integrated Content Services in the EU is a major business opportunity to grasp. Thus Archetypon’s vision seems clear regarding the road ahead: ‘to serve the tremendously important market need for Integrated Content Services, which will be the trend for the years to come’. It appears that this is the arena where profitable opportunities will lie. Nevertheless, the owners of Archetypon, being guided by the company’s history, are not unapprehensive. They know that the entrepreneurial process is dynamic and not always predictable. The road ahead is promising but not without the need for continuous efforts and investments. The growth of the firm shows that its progress is based on its prior successes, mistakes and failures, stressing a path-dependence growth in accord with the resource-based view. There has been a learning process for Archetypon, which has aided its route to growth, as the entrepreneurship literature suggests (Gaglio, 1997; Minniti and Bygrave, 2001). G.K. and G.S. have already discussed the next steps. The company is considering the following possibilities: developing top-class alliances to focus on multi-language content services and selected countries such as the ones in the Baltic area, Hungary and Malta; developing lower-cost solutions so as to maintain revenues from its US customers, favouring outsourcing of labour-intensive jobs to lower-cost territories; growing market footprint and increasing customer base; enhancing the service portfolio to offer end-to-end integrated solutions; and developing support infrastructure and capabilities. Whatever the next route(s) to growth of the firm, small firm owners know that persistence and commitment to the long-run objective of the firm is the key to success, irrespective of the hardships that may come up. Concluding remarks Archetypon has always counted on its strong technical expertise and focus on customer satisfaction. Its highly specialized staff, international partner network, tight cooperation and success with ‘big accounts’, pan-European presence, competitive pricing schemes, continuous investments in R&D and employee training constitute the foundation of the

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firm’s growth. These elements form the core competencies of the firm in its pursuit of profitable market opportunities. The evidence from this research suggests that these core competencies are developed and nurtured in numerous departments and functions of the firm, such as marketing, R&D and human resources, stressing that key resources and capabilities require a company-wide holistic effort in order to be cultivated and subsequently assist in exploitation of opportunities by small firms. In addition, the case study evidence suggests that success of the firm is largely based on a ‘path-dependent’ stock of knowledge, whereby learning has been gained in the quest for profitable market opportunities. The company effectively seemed to switch from one product market to another and from the international to the domestic market, and vice versa, forming a portfolio of intertwined strategic choices in which growth was sought and achieved. Thus, the results of this research show that growth of the small firm is a comprehensive phenomenon likely not to be constrained within the limits of any geographic or product market. On the contrary, it appears that activities of successful entrepreneurs seem to transcend geographic markets and industry sectors, wherever opportunities may emerge. Future research may explore to a greater extent the role of dynamic learning of the small firm across different markets. It appears that firms and entrepreneurs learn from their mistakes and failures, and it would be useful to explore the constituents and mechanisms of such useful knowledge creation in the learning process. Related to this issue is the topic of whether some of the knowledge gained is of a rather ineffectual type for the entrepreneur. If this holds, how can entrepreneurs avoid this ineffectual knowledge, if at all? Also the evidence of this research accentuates the fact that growth of the firm takes place wherever opportunities emerge in domestic or international marketplaces and in various product markets. Hence, it seems that the sole examination of either international or domestic activities offers a one-sided view to the complex nature of strategic growth and exploitation of opportunities of the firm. Researchers in strategic management and international business would better examine the theme of small firm growth together in order to gain a comprehensive picture of this theme. In a similar vein, international entrepreneurship study would benefit if it incorporated notions from the (mainstream) entrepreneurship literature in relation to exploitation of opportunities and growth of the small firm. Viewed in this light, a blend of the strategic choice and firm growth theories from the strategic management, international business and entrepreneurship literature streams can illuminate aspects of the dynamic small-firm growth phenomenon. With regard to the implications of the study for management practitioners, it seems that growth of the small firm takes place over a long-term period in which both favourable and adverse events can affect performance of the firm. Effective entrepreneurs appear always to ‘keep an eye’ on potentially profitable prospects as well as learning from their mistakes, and insist on the objective of growth of their firm. ‘Keep walking’ is likely to be the best lesson for small firm managers from this current study since successful entrepreneurs tend to pursue an objective of growth steadfastly, gain experiences and knowledge, avoid failures and attempt to alleviate consequences of unfortunate events. Acknowledgement An earlier version of this chapter was written as a case study with the financial support of the European Case Study Writing programme of the Gate2Growth Academic Network in Entrepreneurship, Innovation and Finance.

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Jones (2000), ‘Small high-technology firms and international high-technology markets’, Journal of International Marketing, 8(2), 63–85. Crick, D. and, M. Spence (2005), ‘The internationalization of ‘‘high performing’’ UK high-tech SMEs: a study of planned and unplanned strategies’, International Business Review, 14(2), 167–85. Dimitratos, P. and M.V. Jones (2005), ‘Future directions for international entrepreneurship research’, International Business Review, 14(2), 119–28. Dimitratos, P. and E. Plakoyiannaki (2003), ‘Theoretical foundations of an international entrepreneurial culture’, Journal of International Entrepreneurship, 1, 187–215. Dimitratos, P., J.E. Johnson, J. Slow and S. Young (2003), ‘Micromultinationals: new types of firms for the global competitive landscape’, European’, Management Journal, 21(2), 164–74. Gaglio, C.M. (1997), ‘Opportunity identification: review, critique and suggested research directions’, in J.A. Katz (ed.), Advances in Entrepreneurship, Firm Emergence and Growth, vol. 3, Greenwich, CT: JAI Press pp. 139–202. Johanson, J. and J.-E. Vahlne (1977), ‘The internationalization process of the firm: a model of knowledge development and increasing foreign market commitments’, Journal of International Business Studies, 8(1), 23–32. Jones, M.V. (1999), ‘The internationalization of small high-technology firms’, Journal of International Marketing, 7(4), 15–41. Jones, M.V. (2001), ‘First steps in internationalization – concepts and evidence from a sample of small hightechnology firms’, Journal of International Management, 7, 191–210. Katsikeas, C.S., S.L. Deng and L.H. Wortzel (1997), ‘Perceived export success factors of small and mediumsized Canadian firms’, Journal of International Marketing, 5(4), 53–72. Kuemmerle, W. (2002), ‘Home base and knowledge management in international ventures’, Journal of Business Venturing, 17(2), 99–122. Leonidou, L.C., C.S. Katsikeas and S. Samiee (2002), ‘Marketing strategy determinants of export performance: a meta-analysis’, Journal of Business Research, 55, 51–67. Madsen, T.K. and P. Servais (1997), ‘The internationalization of born globals: an evolutionary process?’, International Business Review, 6, 561–83. Makridakis, S., Y. Caloghirou, L. Papagiannakis and P. Trivellas (1997), ‘The dualism of Greek firms and management: present state and future implications’, European Management Journal, 15, 381–402. McDougall, P.P. (1989), ‘International versus domestic entrepreneurship: new venture strategic behavior and industry structure’, Journal of Business Venturing, 4, 387–400. McDougall, P.P. and B.M. Oviatt (2005), ‘Fundamentals of international entrepreneurship’, Entrepreneurship Theory and Practice, 29 (in press). Minniti, M. (2004), ‘Entrepreneurial alertness and asymmetric information in a spin-glass model’, Journal of Business Venturing, 19, 637–58. Minniti, M. and W. Bygrave (2001), ‘A dynamic model of entrepreneurial learning’, Entrepreneurship Theory and Practice, 25(3), 5–16. OECD (2002), OECD Information Technology Outlook: ICTs and the Information Economy. Oviatt, B.M. and P.P. McDougall (1994), ‘Toward a theory of international new ventures’, Journal of International Business Studies, 25, 45–64. Oviatt, B.M. and P.P. McDougall (1995), ‘Global start-ups: entrepreneurs on a worldwide stage’, Academy of Management Executive, 9(2), 30–43. Park, S. and Z.-T. Bae (2004), ‘New venture strategies in a developing country: identifying a typology and examining growth patterns through case studies’, Journal of Business Venturing, 19, 81–105. Patton, M.Q. (2002), Qualitative Evaluation and Research Methods, 3rd edn, Newbury Park, CA: Sage. Penrose, E. (1959), The Theory of the Growth of the Firm, London: Blackwell. Shapero, A. (1982), ‘Social dimensions of entrepreneurship’, in C.A. Kent, D.L. Sexton and K.H. Vesper (eds), The Encyclopedia of Entrepreneurship, Englewood Cliffs, NJ: Prentice-Hall, pp. 72–90. Shook, C.L., R.L. Priem and J.E. McGee (2003), ‘Venture creation and the enterprise individual: a review and synthesis’, Journal of Management, 29, 379–400.

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Voudouris, I., S. Lioukas, S. Makridakis and Y. Spanos (2000), ‘Greek hidden champions: lessons from small, little-known firms in Greece’, European Management Journal, 18, 663–74. Wernerfelt, B. (1984), ‘A resource-based view of the firm’, Strategic Management Journal, 5, 171–80. Westhead, P., M. Wright and D. Ucbasaran (2001), ‘The internationalization of new and small firms: a resourcebased view’, Journal of Business Venturing, 16, 333–58. Yin, R.K. (1989), Case Study Research – Design and Methods, Newbury Park, CA: Sage. Zahra, S.A., R.D. Ireland and M.A. Hitt (2000), ‘International expansion by new venture firms: international diversity, mode of market entry, technological learning, and performance’, Academy of Management Journal, 43, 925–50.

18 The internationalization of Hungarian SMEs László Kállay and Imre Lengyel

Hungary has a small open economy that, after the political change in 1989 and 1990, joined the EU in 2004, following a transition period. With its transition economy having transformed from a planned into a market economy, the country’s special situation is characterized by the termination of the planned economy, the swift emergence of a market economy and the high rate of newly established small enterprises. Two phases may be distinguished in Hungary’s transition economy and the development of small and medium-sized enterprises after 1989–90: the early and advanced phase in the development of the market economy. The early phase began in 1989, when it became obvious both from an economic and political aspect that the Hungarian economy had ultimately stopped being a planned economy and the development of the institutions of a market economy occurred. The radically fast and spectacular structural transformation of the economy took place in the early phase. The advanced phase of the transition economy started in 1997 and ended in 2004 with the country’s accession to the EU. The importance of SMEs was recognized in the early 1990s in Hungary, too, various assistance programmes were launched and different enterprise development organizations were formed. In order to deal with the special problems of Hungarian SMEs typical in transition economies, various government decrees were born; the law on SMEs and the support of their development came into force in 2000. After Hungary’s accession to the EU in 2004, this law was modified in order to be in harmony with EU legislation. The hypothesis of our research is that size (measured primarily by number of employees) is a most important explanatory variable of companies’ market orientation and market sphere, and also explains to a great extent the level of internationalization of a firm. Using our databases we try to find out if there is a connection between firm size and internationalization in the Hungarian SME sector, and, if so, how close this connection is. Traditionally, exporting and foreign direct investments (FDI) have been considered the main approach to becoming an international enterprise (Lu and Beamish, 2001). During recent decades, many of the papers on SME internationalization focus on the outward (such as sales/export) and inward (such as import/access to knowledge) activities of these firms (EC, 2003; Karlsen et al., 2003, Mockaitis et al., 2005). Several theories from the international business literature have been presented to explain why firms engage in international operations (Gankema et al., 2000, Westhead et al., 2001): a resource-based view, monopolistic advantage theory, product cycle theory, stage theory, oligopolistic reaction theory, transaction cost theory, and so on. The internationalization of Hungarian SMEs is special in as much as it happened in a very short time and these enterprises suddenly entered the competition on a highly developed, unified EU market. ‘The internationalization of SME is co-evolving with the internationalization of their national business environment’ (Meyer and Skak, 2002, p. 180). Our chapter first of all reviews major processes after 1989 that define the present 277

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situation of Hungarian SMEs. Then it analyses the internationalization of SMEs based on statistical data and questionnaire surveys. Early transition economy in Hungary between 1989 and 1996 As part of the political transformation from 1989, a series of radical changes occurred in Hungary’s legal regulation concerning the operation of enterprises. ‘Hungary was among the first countries in Eastern Europe to take bold initiatives toward a market-led economy, with emphasis on small and medium enterprises; the Hungarian economy soon became the soundest of the former Soviet bloc’ (Dana, 2005). On one hand, legislation broadly regulating economic organizations was introduced; on the other hand, a deregulation process also took place that abolished the majority of the rigid, bureaucratic rules of the planned economy. Concerning small enterprises, the legislation in the early phase of the transition period can be classified into two groups. The first group includes laws directly regulating such activities of small enterprises as foundation, operation and termination. The second group consists of statutes exercising an indirect effect on the activities of such enterprises. Direct regulation of the foundation and operation of small enterprises in Hungary Enacted on 1 January 1989 in Hungary, the Companies Act (Act VI of 1988 On Economic Associations) brought about fundamental changes compared to the planned economy. First of all, it introduced the complete structure of economic associations with and without legal entity (limited partnerships, limited liability companies, joint-stock companies); furthermore, it integrated into the new system some of the privately owned enterprise forms tentatively introduced in 1982. Following the introduction of the Companies Act the foundation of any economic association became possible and no more bureaucratic limitations and missing legislation hindered the process. Although in the beginning the Companies Act limited the number of employees and areas of activities of privately owned economic associations, these limitations were soon lifted. Act V of 1990 (enacted on 1 April 1990) brought radical changes in the rules of sole proprietors. It tied such activities only to the possession of an entrepreneurial card or certificate and obtaining relevant qualification, but did not prescribe any financial limits. This way it created very simple and rather liberal regulations for the most common form of enterprise. The enactment of the act reduced former highly bureaucratic burdens of founding enterprises to a very low level and, therefore, enabled practically anyone to become an entrepreneur. This act strengthened entrepreneurial skills, which was particularly important since the planned economy had allowed few people to gain entrepreneurial and business experience. Taking effect on 1 July 1989, the Transformation Act (Act XIII of 1989 on the Transformation of Economic Organisations and Economic Associations) was designed to control how certain organizational forms of the planned economy can (and must) be transformed into one of the new forms introduced by the Companies Act. It basically defined how state property could be privatized, and under what conditions it could be transferred into privately owned economic organizations. From the standpoint of small enterprises the significance of this act lay in regulating the transformation of formerly founded sole proprietors into new organizational forms.

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Between 1989 and 1992, further important measures included the legal regulation of bankruptcy and liquidation proceedings (Act IL of 1991 on Bankruptcy Proceedings, Liquidation Proceedings and Voluntary Dissolution), the amendment of the act on cooperatives (Act I of 1992 on Cooperatives) and the regulation of the activities of registry courts. Indirect regulation of the foundation and operation of small enterprises in Hungary The most important feature of legislation indirectly controlling the foundation and operation of small enterprises lay in deregulation. Some of the decrees limiting the activities of enterprises were abolished, while others were redefined. The limiting nature of laws which were common in the planned economy, regarding sole proprietorship as an exceptional type of activity to be limited and scrupulously controlled while favouring state property, gradually disappeared. The government’s decree on deregulation measures in public administration entered into force on 1 December 1989. It ordered part of the ministries and local governments to revise and annul or essentially simplify their decrees. This way, besides the formerly launched innovative legislation, a well-designed campaign also ensured the abolition of bureaucratic local decrees. It is important to underline the liberalization of foreign trade, foreign exchange management and travelling, greatly contributing to the fact that small enterprises were not forced to face bureaucratic obstacles when trying to develop international economic relations. Breaking down legal limitations together with the liberal control of enterprise foundation led to the partial realization of the economic emancipation of private persons and sole proprietorship. Since the early 1990s, sole proprietors have been able to participate in Hungary’s economic sphere practically as partners with equal rights, with no artificial limits expressed in laws hindering their activities and growth. The first and least disputable achievement in the early phase of the transition economy lies in the fact that, in two or three years, the shortage of products and services, a typical phenomenon in the planned economy, finally disappeared. Instead of the lack of inputs, both small and large enterprises had to face the low level of effective demand, which called for a new type of entrepreneurial behaviour. The major general characteristics of the early transition economy between 1989 and 1996 are the following (Futó and Kállay, 1994; Hisrich and Szirmai, 1993; Lengyel 1993, 2003): ● ●

● ● ●

The institutions of the planned economy and party-state political system are wound up. The institutional frameworks of the market economy develop (tax law, the legal frameworks of the foundation, operation and termination of enterprises, law on bankruptcy and so on). The economy of shortage transforms into a market economy in a short period of time. The privatization of state property reaches a critical point, beyond which the role of private property becomes dominant in the economy. The regulatory environment undergoing fast liberalization becomes unstable at the same time, even new laws are constantly modified. Fundamental economic (mainly

280

●

● ● ● ●

Handbook of research on European business and entrepreneurship taxation) laws are amended yearly or sometimes even more often, which makes adaptation rather problematic for small enterprises. A radical transformation often accompanied by phenomena of crisis occurs in the structure of the economy, various of the former leading branches decline (mining, food industry and so on) and many people are forced to found small enterprises. The transition deficit often caused equilibrium disturbances in the macroeconomy that had to be remedied with the help of stabilization programmes. The openness of the economy grows constantly, while the proportion of foreign trade compared to the GDP quickly increases. The number of enterprises grows dynamically, the vast majority of which are micro enterprises. As a result of its many new entrants and the inexperienced entrepreneurs, the sector of small enterprises ‘thins down’ and its qualitative indicators degrade. The rate of enterprises unable to survive, grow or consolidate is high.

In Hungary the process described by the characteristics listed above had been completed by 1996–97, therefore it can be stated that the advanced, riper phase of the transition economy started after that period. In 1993, more than 500 000 small enterprises with fewer than 50 employees already provided work for approximately one and half million people (about 30 per cent of the work force) in Hungary. Ten years before, this rate had been under 5 per cent. An important development of the period is the macroeconomic stabilization of 1995 (so-called ‘Bokros-package’). The financially overextending budget preceding the elections of 1994 and the strong governmental overspending deriving from partially fulfilling the promises of the winning political forces had created a situation the solution of which called for shock therapy in 1995. It was after this period that a relatively stable macroeconomy emerged, the rise of which coincided with the slowdown of spectacular structural transformations. The advanced transition economy in Hungary between 1997 and 2004 Stabilization of the national economy From the aspect of small enterprises (and the entire economy as well) the phase of the advanced transition economy is characterized by the increase of market competition. In Hungary three important components of this can be observed since 1997 (Kállay and Imreh, 2004): ● ● ●

The regulation of imports is more and more liberal; therefore, import competition increases. Part of the foreign-owned enterprises moving to Hungary make sales on the domestic market replacing Hungarian enterprises. The productivity of Hungarian enterprises improves, which results in the increase of competition on the domestic market.

In the phase of the advanced transition economy enterprises had a growing need for the stabilization of the regulatory environment. Consequently, the initial weaknesses of the newly introduced laws were cured in a few years, but at the same time, the enterprises and

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other players in the market also learnt to adapt to the rules to a growing extent. Furthermore, equilibrium disturbances forcing tax increases occurred less often in the Hungarian economy. The developed Central Eastern European transition economies, together with Hungary, joined the European Union and, starting from May 2004, became part of the Single Market. In the accession process, opening the markets took place at a much earlier stage, which meant that the country’s economic openness constantly increased in this period. As a result of the stabilization of the macroeconomy and the improving performance of the economy, from 1997 the situation of the central budget started to improve and a decrease in the centralization of the incomes produced in the economy and their redistribution with the mediation of the state became possible. While in 1991 the incomes of the state finance amounted to 53.5 per cent of GDP, in 2002 the amount was only 40.2 per cent. In harmony with this, in 1991, the expenditures of the state finance were 56.4 per cent, while in 2002 they were only 50.1 per cent. In the meantime, between 1997 and 2003, a significant economic development of about 4 per cent per year occurred in the country (Lengyel, 2004). The GDP per capita (purchasing power parity, PPS) increased from 47 to 55 per cent of the average of the EU-15, from 9958 to 15 166 USD. Incomes remaining in the private sector or the population strengthened the position of small enterprises both directly and indirectly. In Hungary, parallel with privatization, the number of enterprises grew rapidly from 1990. Although in 1994 and 2002 the registry of enterprise forms changed slightly, in 1990 about 440 000 enterprises existed, while the figure was 1 002 000 in 1994 and 1 177 000 in 2003. Out of the 1 177 000 registered enterprises, 883 thousand were active; that is, they conducted business activities and prepared declarations of income for tax returns in 2003. The number of larger private companies also increased significantly; for example, in 1990, only 646 joint-stock companies existed, but with a steady increase their number reached 2896 in 1994 and 4372 in 2000, although from this point hardly any change occurred, because 4345 joint-stock companies operated in 2003. The characteristic enterprise form of SMEs in Hungary In Hungary the most characteristic enterprise forms of SMEs include sole proprietors, limited partnership and limited liability companies (Figure18.1). In 1990, the number of limited liability companies was only 18 000, while the number of limited partnerships reached 6000. The number of the enterprises in both organization types experienced a rapid growth until 1998, although since then the process has slowed down. In 2003, 215 000 limited partnerships and 193 000 limited liability companies were registered. The number of sole proprietors in 1990 was 393 000, while in 1995 it reached 791 000. Many people closed their enterprises owing to the effect of the modification in the legal background of enterprise foundation in 1994, and partly because of the macroeconomic stabilization in 1995. The regress also derived from the fact that, at a certain stage of development, many sole proprietors transformed into limited liability companies or limited partnerships. After 1998, the number of sole proprietors increased slowly, reaching 717 000 by 2003. In Hungary, three-quaters of the registered corporations and enterprises operate and conduct business activities (Table 18.1). While almost 90 per cent of companies and partnerships (joint-stock companies, limited liability companies, limited partnerships

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1200000

1000000

800000 SP 600000

LP LLC

400000

200000

20 02 20 03

19 99 20 00 20 01

19 95 19 96 19 97 19 98

19 92 19 93 19 94

19 90 19 91

0

Note: SP: sole proprietor; LP: limited partnership, LLC: limited liability company.

Figure 18.1

Number of basic categories of registered enterprises in Hungary

Table 18.1 Registered and active number of corporations and unincorporated enterprises in Hungary, 2003

Joint-stock companies Limited liability companies Cooperatives Limited partnerships Sole proprietors Other Total Source:

Registered

Active

Active/registered (%)

4 345 193 247 6 790 214 787 716 729 41 036

3 855 171 858 5 546 190 035 473 238 37 971

88.7 88.9 81.7 88.5 66.0 92.5

1 176 934

882 503

75.0

Statistical Yearbook of Hungary (2003).

and cooperatives) are active, in the case of sole proprietors the same number only reaches two-thirds. While 56 per cent of operating sole proprietors work full time, 27 per cent work part-time and 17 per cent are retired. The increase in the number of enterprises slowed down from 2000 and what is more, certain activities also underwent decrease. Although the number of established and terminated enterprises over the given period remained high, which maintained a strong fluctuation in the sector of enterprises, the increase in the number of enterprises is much lower than in the early phase.

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Together with the quantitative stabilization of the SME sector, from the late 1990s the indicators characterizing the quality of the economy also started to improve. The rate of enterprises becoming capable of finding external sources of financing began to grow, more and more of them used business services and a significant proportion could stabilize their markets. The growing presence of multinational enterprises was a process of essential importance in the Hungarian economy after 1990 (Szerb and Ulbert, 2002). Owing partly to privatization and green field investments, most Hungarian entrepreneurial money moved into foreign hands, while foreign-owned companies won a significant role both in the area of exports and on the domestic markets. For small and medium-sized enterprises the presence of foreign capital and management represented both opportunities and challenges. Although there was strong competition with the foreign players, the markets of small and medium-sized enterprises also underwent growth. In Hungary, the change in the political system took place between 1989 and 2004 and the socialist planned economy was transformed into a competitive market economy in two distinct time periods (Lengyel, 2004). Owing to the features of the transition economy, obviously the SME sector also experienced an upswing, when the number of SMEs rose fast. This was followed by the phase of stabilization, with the number of SMEs changing less, but, owing to the effect of the strong market competition, only the ones that are able to improve productivity can survive. After 1990, especially under the influence of the EU accession process, the Hungarian SMEs also faced international competition to a growing extent, international companies appeared on the domestic markets and an increasing number of Hungarian SMEs entered the world market or became contractors of multinational firms. This process accelerated when, from 2001, it became clear that Hungary would join the EU. The most important characteristics of SMEs in Hungary Institutions, acts and definitions of SMEs in Hungary In Hungary, the recognition of the special problems of SMEs and the importance of supporting them resulted in various measures from the early 1990s (Kállay, 2003; Kállay and Imreh, 2004). These included the establishment of the Hungarian Foundation for Enterprise Promotion that has a national network system of agencies. Furthermore, organizations promoting the internationalization of Hungarian SMEs were created. The state-owned Hungarian Export–Import Bank Ltd (EXIMBANK) was also founded, helping to increase the exports of Hungarian enterprises by using the budgetary sources and warranties offered by the state. In 1994, the state-owned Hungarian Export Credit Insurance Ltd (MEHIB) was established, with the task of encouraging the export of Hungarian enterprises by sharing risks. In 1997, Corvinus Ltd, a state venture capital association, was born to offer financial sources for enterprises intending to operate abroad. Special financing (mainly micro-loan), training, consulting and other programmes were also launched for SMEs partly using the pre-accession sources of the EU. The Act on SMEs (Act XCV of 1999 on Small and Medium Sized Enterprises and the Promotion of Their Development) dealing with subsidies to promote SMEs, the representation of their interests, their registration and other related issues entered into force in 2000. The act established the SME Promotion Fund (KKC) to ensure the support of SMEs from budgetary sources through grants. The government announced the Széchenyi

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Enterprise Development Programme in 2002 with the aim of facilitating the expansion of SMEs on international markets. Parallel to the government’s programmes the regions also developed SME promotion schemes (Lengyel, 2003; Rechnitzer, 2000). The Act on SMEs was amended in 2004 (Act XXXIV of 2004) to introduce the EU’s definitions concerning SMEs in Hungary too. Using the categories of autonomous enterprises, partner enterprises and linked enterprises valid in the EU, the following SME types were introduced in Hungary: ●

● ●

Medium-sized enterprises employ fewer less than 250 persons. Their turnover must be lower than 40 million or their annual balance-sheet total must be lower than 27 million Euros. Small enterprises employ between 10 and 49 persons. They must have an annual turnover of less than 7 million or a balance-sheet total of less than 5 million Euros. Within the SME category, microenterprises are enterprises employing fewer than 10 persons.

Proportion of the different types of SMEs In Hungary, statistical data records register enterprises based on staff categories since 1999, so data concerning SMEs have been available since then. Within microenterprises there is also a category for enterprises operating without employees, partly with regard to sole proprietors. Within active enterprises the proportion of the different types of SMEs has hardly changed since 1999 (Table 18.2). The proportion of enterprises employing fewer than nine persons stayed between 96.2 and 96.5 per cent. Two-thirds of active enterprises had no employees. The proportion of medium-sized and large enterprises remained at 0.7 per cent. The number of operating enterprises slightly increased in this period; in 1999, it was 802 000, while in 2003 it reached 883 000. The number of enterprises with no employees hardly changed, while that of the other SMEs slightly increased. In Hungary, the fundamental structural features of small and medium-sized enterprises have undergone hardly any change since the late 1990s (Table 18.3). In harmony with the international trends, our economy is characterized by high work force intensity and low intensity of capital. They share a much greater portion of the employment than of sales Table 18.2

Distribution of active enterprises by company size categories in Hungary (%)

Micro-enterprises without Small enterprises Medium-sized Large enterprises employee or 1–9 (10–49 enterprises (250 and more Year self-employing employees employees) (50–249 employees) employees) Total 1999 2000 2001 2002

66.7 66.0 64.3 63.3

29.8 30.5 32.0 32.9

2.8 2.8 3.0 3.1

0.6 0.6 0.6 0.6

Source: Monthly bulletins of the Hungarian Central Statistical Office.

0.1 0.1 0.1 0.1

100.0 100.0 100.0 100.0

285

Source:

Kállay et al. (2003).

Number of enterprises Number of employees Sales revenue Export Added value Owners’ equity

62.7 21.6 6.5 2.1 5.5 7.6

without employee or self-employing 33.5 19.9 14.4 5.2 11.2 10.2

1–9 employees

Micro-enterprises

3.1 17.0 21.2 14.6 16.0 14.4

Small enterprises (10–49 employees) 0.6 15.5 18.7 13.7 18.7 15.9

Medium-sized enterprises (50–249 employees)

99.9 74.0 60.8 35.6 51.4 48.0

SME total

0.1 26.0 39.2 64.4 48.6 52.0

Large enterprises (250 and more employees)

100.0 100.0 100.0 100.0 100.0 100.0

Total

Table 18.3 Distribution of the most important figures characterizing the position of active enterprises by size category in Hungary, 2003 (%)

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revenue or income production. In 2003, they employed 74.0 per cent of employees; however, they own only 60.8 per cent of the sales revenue and 35.6 per cent of the exports. Their share of added value is only 51.4 per cent, while their equity capital reaches 48.0 per cent. In international comparison the differences between small and large enterprises seem rather great and the gap tends to increase in the light of certain important indicators (exports, investments and productivity). Two-thirds of the Hungarian SMEs are without employees or self-employing, offering employment to one-fifth of the employees. The rate of medium-sized enterprises is as little as 0.6 per cent, while that of small enterprises employing 10–49 employees reaches only 3.2 per cent. The proportion of micro and small enterprises is great also in international comparison, while that of medium-sized enterprises is small, with only 15.5 per cent of the work force employed there. All this influences the foreign relations of Hungarian SMEs, too, since the rate of small and medium-sized enterprises capable of forming international relations is low. In Hungary, the average size of micro- and small enterprises is similar to that of the European countries. However, the size of medium-sized and large enterprises is significantly different, being half and one-fourth, respectively (see Table 18.4). The share of exports in turnover only lags behind in the case of small enterprises compared to the European average, while the production of large enterprises mainly focuses on exports. It is important to note that in Hungary various multinational companies established sites in a duty-free area in the 1990s, where they obviously make products only for export. In the creation of new work places, small enterprises play the most important role: since the change of the political system this has been the only part of Hungary’s economy to create net work places, while employment in large enterprises has constantly decreased (Table 18.5). This tendency characterized 2001, too; what is more, by then only micro enterprises and enterprises without employees increased net employment. In 2003, the tendency of the former years changed and employment decreased in all staff categories. In Hungary, the economic activity rate was 48.8 per cent, while the average of the EU-15 is 56.7 per cent. This suggests that the proportion of black and grey economy is high (in agriculture, construction industry, tourism, services for the population); many SMEs do not register their employees. The change also noticeable in employment indicates that the opportunities for the extensive growth of small and medium-sized enterprises seem gradually to become exhausted. It is partly because the domestic market has become saturated and the further development of SMEs is mainly possible on foreign markets by increasing exports. All this draws our attention to the growing importance of the internationalization of Hungarian SMEs. The most important features of the internationalization of Hungarian SMEs The internationalization of Hungarian SMEs may be detected in their market orientation and ownership structure. The statistical data collection of the Hungarian Central Statistical Office covers in detail only enterprises with four or more employees. When examining the internationalization of Hungarian SMEs, data contained in the declarations of income for tax returns submitted by enterprises are used as an information source. These concern three minor universes: enterprises with single- or double-entry book-keeping and sole proprietors. Regarding the internationalization of SMEs, little official information is available, therefore we have also used data deriving from questionnaire surveys.

287

Source:

Note:

2 2 7 5 40 3

Micro(0–9 employees) 20 20 14 8 75 8

Small (10–49 employees)

EC (2002), APEH (Tax and Financial Control Administration in Hungary).

EU-19–15 countries of the EU plus Iceland, Liechtenstein, Norway and Switzerland.

EU-19 HU EU-19 HU EU-19 HU

EU-2000/ Hungary-2001

Comparative indicators of enterprises in Europe-19 and in Hungary

Average size (employing persons) Share of exports in turnover (%) Value added per employee (1000 euro/person)

Table 18.4

95 56 17 14 105 15

Medium-sized (50–249 employees) 4 3 13 9.9 65 5.8

SME total

1 020 1 266 1 21 1 32 1 115 1 26

Large (250 and more employees)

6 4 17 23 80 14

Total

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Table 18.5 Changes in employment compared to the previous year in 2001–03 (thousand persons) Enterprises

2001

2002

2003

Micro- (0–1 employee) Micro- (2–9 employees) Small (10–49 employees) Micro- and small total Medium-sized (50–249 employees) SME total Large (250 and more employees)

153 65 9 227 6 221 16

153 98 16 71 6 65 40

75 31 19 125 24 149 39

208

23

188

Total

Source: Calculated, based on declarations of income for tax returns.

The sample and methodology of the survey The empirical data of the research are based on a questionnaire survey1 done by the Institute for Small Business Development that was conducted regularly between 1997 and 2003, with the same methodology each year. The majority of the questionnaire consists of constant questions; however, some currently relevant questions also occur each year. The questionnaire serves to survey the characteristics of Hungarian small and mediumsized enterprises. Its aim is to trace the changes over time as well as to regularly map the differences among enterprises of various size categories. The survey is conducted with the help of the more effective and reliable method of personal interview with interviewers contacting each selected entrepreneur. On each occasion a sample consisting of 2000 enterprises was taken as the basis of the analysis. Data collection involved Budapest and four counties in every year. Hungary has 19 counties, constituting seven NUTS 2 regions. The counties involved in the survey changed yearly, although they were selected each year to represent correctly country regions with different development levels. The distribution of enterprises involved in the sample in counties is in proportion to the territorial distribution of all active enterprises. The sample is stratified according to the size categories of enterprises; the portion of small enterprise categories is greater amongst those interviewed (Table 18.6). For the estimation of rate and average concerning the entire population, the correlation based on the composition of the sampling population was used. Market orientation and sphere of operation The market orientation of enterprises is closely related to their size in Hungary, too (Table 18.7). Similarly to the natural features of the market structure observed in most countries, smaller enterprises sell products and services mainly to the local inhabitants and, to a smaller extent, to domestic enterprises, while they are hardly present on international markets. Less than 10 per cent of Hungarian enterprises engage in exports; their share in exports is only 2.6 per cent. Sales to national enterprises and export play a significantly greater role in the markets of larger enterprises. According to the results of the survey, the interrelation between market orientation and the size of enterprises occurs not only in exports but in more general terms as well.

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Table 18.6 Distribution of sample by size categories of enterprises in Hungary, 2003 (%) Enterprises

Proportion in the sampling population

Proportion in the sample

62.7

19.3

33.5 3.1 0.7

65.7 12.2 2.8

100.0

100.0

Micro- (without employee or self-employing) Micro- (1–9 employees) Small (10–49 employees) Medium-sized and large (50 and more employees) Total

Table 18.7

Distribution of the main sales markets of enterprises in Hungary, 2003 (%) Micro-enterprises

Markets Inhabitants National enterprises Public organizations Export Total

without employee

1–9 employees

Small enterprises (10–49 employees)

Medium-sized enterprises (50–249 employees)

SME total

64.2 29.4 5.5 1.0

51.5 41.9 5.1 1.5

27.7 55.3 10.2 6.8

20.0 45.5 14.5 20.0

50.2 41.1 6.1 2.6

100.0

100.0

100.0

100.0

100.0

Source: Survey data.

The population constitutes the main market of enterprises without employee and microenterprises, while small and medium-sized companies focus on national enterprises. Only 1.0–1.5 per cent of the smallest enterprises regard exports as their main sphere of sales, while 20 per cent of the sales revenue of medium-sized enterprises derives from exports. The size of enterprises is also closely linked to the size of their market sphere of operation, which can be measured by the spatial situation of their partners on the market (Table 18.8). The markets of smaller enterprises are located closer to them in physical and geographical terms than in those of larger enterprises. In Hungary, the market sphere of operation of 72 per cent of enterprises without employees does not outreach their own location, while only 37 per cent of medium-sized enterprises responded that they mostly do sales only where they are located. The markets of 10 per cent of the smallest enterprises cover the whole country, while this proportion exceeds 25 per cent in the case of larger enterprises. The survey contains the date of all the interviewed enterprises including sole proprietors. However, it is clear from the declarations for tax returns of companies and partnerships that exports are significant in all the staff categories (Table 18.9). It is 10 per cent even in the case of enterprises employing 0–1 person. The larger the enterprises are, the more they strive for exports. This also means that the internationalization of sole

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Table 18.8

Sphere of market operation of enterprises by size categories (2003) Micro-enterprises

Own settlement Own county Hungary Foreign buyers Total

without employee

1–9 employees

Small enterprises (10–49 employees)

Medium-sized enterprises (50–249 employees)

total

71.5 16.5 9.2 1.1

66.0 21.8 9.2 1.4

44.4 20.8 25.6 8.2

37.3 15.7 27.5 17.6

63.8 20.5 11.6 2.6

100.0

100.0

100.0

100.0

100.0

Source: Survey data.

Table 18.9

Share of export sales of companies and partnerships in net sales revenue (%)

Enterprises

2000

2001

2002

2003

Micro- (0–1 employee) Micro- (2–9 employees) Small (10–49 employees) Micro- and small total Medium-sized (50–249 employees) SME total Large (250 and more employees)

12.0 9.8 10.4 10.4 18.0 13.0 37.5

12.4 9.6 10.9 10.7 16.1 12.5 38.8

13.7 8.7 10.8 10.5 16.0 12.3 35.9

10.8 9.1 15.5 12.8 16.2 13.9 36.2

Total

23.3

23.8

21.4

23.1

Source: Calculated, based on declarations of income for tax returns.

proprietors is rather weak: if sole proprietors start developing foreign relations, they are likely to found a company or partnership. In the staff types of partnerships the proportion of exports in the sales revenue has hardly changed since 2000. The domestic market expands slowly, which means that Hungarian enterprises could not win markets abroad during this period. Owners of SMEs Foreign direct investments exercise a great effect on the internationalization of SMEs. Companies partly or entirely owned by foreigners probably have more open relations than the ones operating with national capital exclusively, which is also apparent from their market orientation (Kállay and Imreh, 2004; Szerb, 2003; Szerb and Ulbert, 2002). In the Hungarian economy over half of the registered capital of companies and partnerships is in the hands of foreign owners (Table 18.10). An international stake is significant in all SME types, reaching at least 17–18 per cent. Similarly to large companies, half of the capital of medium-sized enterprises is in foreign hands. Foreign ownership is obviously less significant in the case of sole proprietors, although data are not available on that. It is important to note that, in Hungary, an enterprise with at least

291 13.3

Total

12.9

33.6 26.3 15.1 25.4 0.9

National private

Calculated, based on declarations of income for tax returns.

2.6 9.2 3.4 4.5 21.7

Micro- (0–9 employees) Small (10–49 employees) Medium-sized (50–249 employees) SME total Large (250 and more employees)

Source:

State

Enterprises

22.0

32.4 27.9 24.1 28.4 15.9

National corporate

44.2

27.4 28.0 49.1 35.1 52.9

Foreign stake

7.7

4.0 8.5 8.3 6.6 8.7

Other

100.0

100.0 100.0 100.0 100.0 100.0

Total

Table 18.10 Distribution of the registered capital of enterprises with single or double entry book-keeping by staff category and main owner, 2003 (%)

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10 per cent of foreign business share falls into the definition of ‘enterprise including foreign stake’. The role of foreign ownership is relatively smaller in smaller enterprises, although this form of internationalization is present in Hungary as well. In medium-sized and large companies the dominant form is foreign private ownership, while it is national private ownership in the case of smaller categories. Based on the ownership share of registered capital, it is clear that the internationalization of Hungarian companies is at an advanced stage. However, compared with earlier data, this internationalization can be spotted, not so much in exports, but rather in ownership structure, which means that many companies including foreign stakes operate only on the Hungarian domestic market. In Hungary, the export orientation (export sales/total sales revenue) of companies and partnerships is in relation both to their size and to the composition of owners (Table 18.11). The proportion of exported products in the case of large companies is over three times bigger than that of micro companies and over twice the proportion of the exported products of small or medium-sized enterprises. This correlation is present in each national ownership category. Foreign-owned companies gain 30–50 per cent of their sales revenue from abroad. Using Tables 18.9 and 18.11, it is likely that the export orientation by size category and owner has been unchanged since 2000. The correlation of ownership types and export orientation seems very strong. The export orientation of foreign-owned companies is significantly higher than in the case of companies with Hungarian owners. In this latter category, companies with partnership property export relatively more than companies owned by private persons. The stronger export orientation of foreign-owned companies is definitely the case in each size category. In Hungary foreign-owned companies realize 77 per cent of exports (Table 18.12). In another aspect, large companies provide 64 per cent of exports. The export of foreignowned small companies is higher than that of large companies with Hungarian owners. Empirical data show that the size and ownership categories of enterprises strongly influence their export orientation. Hungarian small enterprises, similarly to the companies of other countries, are less present on international markets than larger companies. The geographical sphere of operation of small companies is smaller than that of the Table 18.11 Export orientation of companies and partnerships by size category and ownership type (2003) Enterprises Micro- (0–9 employees) Small (10–49 employees) Medium-sized (50–249 employees) Large (250 and more employees) Total

National private person National partnership Foreign stake

Total

5.0 6.2 9.6

4.7 9.0 12.6

29.6 38.8 24.8

9.5 15.5 16.2

15.3

21.6

47.5

36.2

6.8

15.4

40.9

23.1

Source: Calculated, based on declarations of income for tax returns.

293

The internationalization of Hungarian SMEs Table 18.12 Share of enterprises in total export by size category and ownership type, 2003 (%) Enterprises Micro- (0–9 employees) Small (10–49 employees) Medium-sized (50–249 employees) Large (250 and more employees) Total

National private National partnership Foreign stake Other Total 2.7 3.2 2.5

0.3 1.1 2.3

4.2 9.4 8.7

0.1 0.9 0.3

7.3 14.6 13.7

1.0

7.0

54.7

1.6

64.4

9.4

10.7

76.9

2.9

100.0

Source: Calculated, based on declarations of income for tax returns.

big ones; the market of their majority does not outreach their location. Part of the explanation can be found in the fact that, for smaller enterprises, it is not economical to maintain a diversified sales structure, let alone foreign presence. An increase in the number of employees may improve the chance of geographical expansion. The appearance of foreign capital and management in the Hungarian economy also served the development of foreign relations. Foreign owners brought to Hungary the information and relations necessary for presence on the international market. Data prove that the larger average size of foreign-owned companies in itself does not justify a stronger export orientation, since foreign-owned companies are more export-oriented in each size category than the ones with Hungarian owners. We may suppose that a connection between firm size and importing activity also exists; however, we do not have empirical data about direct imports of firms to test this hypothesis. Collecting such data as well as finding out what further factors influence the internationalization of Hungarian SMEs might be the subject of further research programmes. Discussions and conclusions The internationalization of Hungarian SMEs shows special characteristics and differs from the European average. Hungary’s economy has already become an advanced transition economy. Hungary joined the EU in 2004; however, this exercises hardly any effect on the development of SMEs. Up to the present, the government’s economic policy has made an attempt to create the business environment of a modern market economy together with the necessary legal frameworks. Until 2001, the most important objectives included privatization and involving foreign direct investment with special emphasis on attracting divisions of multinational companies to settle in Hungary. The Act on SMEs entered into force only in 2000; however, because of the short elapsed time, the ideas defined in this law cannot be recognized in the development of SMEs yet. After 2004, the Economic Competitiveness Operative Programme of the National Development Plan already included grants aiming to support the development of SMEs with the help of EU funds. It seems highly important that, although in Hungary there is a growing number of enterprise foundations, there is a shortage of international relations essential to survival

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in the successful world market competition. This also manifests itself in the fact that, in terms of internationalization, two types of SMEs can be distinguished: companies with Hungarian owners and enterprises with a foreign stake. The majority of Hungarian-owned SMEs are present in the local market and only 5–10 per cent of their sales revenue derives from exports. Furthermore, the scarce national demand makes it possible for only a few Hungarian-owned SMEs to grow. Medium-sized and large enterprises with Hungarian owners are not competitive enough, having a small number of employees and low export rates. Even foreign-owned SMEs export more than large Hungarian companies. If Hungarian medium-sized and large enterprises become stronger and increase their exports, micro- and small enterprises are also likely to grow as their contractors. Exports constitute 25–40 per cent of the sales revenue of foreign-owned SMEs; their majority probably performs the outsourcing activity of large multinational companies. Also their foreign owners take many SMEs to international markets. It is extremely important that the management and marketing knowledge and skills of competitive, foreignowned SMEs is transferred to SMEs with Hungarian owners (Makó, 2005). In the Hungarian economy, over half of the registered capital of companies and partnerships is in foreign hands. Foreign-owned companies perform 77 per cent of the exports in Hungary, while large companies produce two-thirds of the Hungarian exports. It is clear from the data above that Hungarian SMEs are only at an early stage of internationalization. The training and consulting programmes available for years, the effects of the accession to the EU and the subsidies will hopefully strengthen part of the SME sector that can enter the international markets. In the extended European Union, 25 countries enjoy the benefits of international trade of goods, labour and capital. Stronger competition on a large market may contribute to building an internationally more competitive Europe. However, if smaller firms have significantly more limited access to foreign markets, competition is not as strong as it could be. Removing further barriers to international trade, making administrative procedures more simple and efficient and educating small firms’ managers to do international business should be an important part of the European cooperation to help small firms making more use of the unified European market. Note 1. The survey was conducted under László Kállay’s supervision.

References Dana, Léo-P. (2005), When Economies Change Hands: A Survey of Entrepreneurship in the Emerging Markets of Europe from the Balkans to the Baltic States, Binghamton: Haworth Press. EC (2002), ‘SMEs in Europe, including a first glance at EU candidate countries’, Observatory of European SMEs, no. 2. EC (2003), ‘Internationalization of SMEs’, Observatory of European SMEs, no.4. Futó, Péter and László Kállay (1994), Emancipation and Crisis: The Size and Development of the SME Sector in Hungary (in Hungarian), Budapest: Foundation of Market Economy. Gankema, Harold G. J., and Henoch R. Snuif and Peter S. Zwart (2000), ‘The internationalization process of small and medium-sized enterprises: an evaluation of stage theory’, Journal of Small Business Management, 38(10), 15–27. Hisrich, Robert D. and Peter Szirmai (1993), ‘Developing a market-oriented economy: a Hungarian perspective’, Entrepreneurship and Regional Development, 5, 61–71.

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Kállay, László (2003), ‘Microfinance in Hungary: opportunities and impediments’, in Imre Lengyel (ed.), Knowledge Transfer, Small and Medium-Sized Enterprises, and Regional Development in Hungary, Szeged, Hungary: JATEPress, pp. 81–95 (http://www.eco.u-szeged.hu/region_gazdfejl_szcs/konyv3.html). Kállay, László and Szabolcs Imreh (2004), A kis- és középvállalkozás-fejlesztés gazdaságtana (Economics of SMEs Development), Budapest: AULA. Kállay, László et al. (2003), State of Small and Medium-sized Businesses in Hungary. Annual Report, Budapest: Institute for Small Business Development. Karlsen, Tore, Pal R. Silseth, Gabriel R.G. Benito and Lawrence S. Welch (2003), ‘Knowledge, internationalization of the firm, and inward–outward connections’, Industrial Marketing Management, 32, 385–96. Lengyel, Imre (1993), ‘Development of local government finance in Hungary’, in Robert J. Bennett (ed.), Local Government in the New Europe, London: Belhaven Press, pp. 225–45. Lengyel, Imre (2003), ‘Programming for economic and enterprise development in the Southern Great Plain region’, in Imre Lengyel (ed.), Knowledge Transfer, Small and Medium-Sized Enterprises, and Regional Development in Hungary, Szeged, Hungary: JATEPress, pp. 161–79. (http://www.eco.u-szeged.hu/region_ gazdfejl_szcs/konyv3.html). Lengyel, Imre (2004), ‘The pyramid model: enhancing regional competitiveness in Hungary’, Acta Oeconomica, 54(3), 323–42. Lu, Jane W. and Paul W. Beamish (2001), ‘The internationalization and performance of SMEs’, Strategic Management Journal, 22, 565–86. Makó, Csaba (2005), ‘Training and competence development in the SME sector: the Hungarian case’, Journal for East European Management Studies, 10(2), 156–85. Meyer, Klaus and Ane Skak (2002), ‘Networks, serendipity and SME entry into Eastern Europe’, European Management Journal, 20(2), 179–88. Mockaitis, Audra I., Erika Vaiginiené and Vincent Giedraitis (2005), ‘The internationalization efforts of Lithuanian manufacturing firms – strategy or luck?’, Research in International Business and Finance, (forthcoming) Rechnitzer, János (2000), The Features of the Transition of Hungary’s Regional System, Pécs, Hungary: Discussion Papers 32, Centre for Regional Studies oh HAS. Szerb, L. (2003), ‘The changing role of entrepreneur and entrepreneurship in network organisations’, in Imre Lengyel (ed.), Knowledge Transfer, Small and Medium-Sized Enterprises, and Regional Development in Hungary, Szeged, Hungary: JATEPress, pp. 81–95 (http://www.eco.u-szeged.hu/region_gazdfejl_szcs/konyv3.html). Szerb, László and József Ulbert (2002), ‘Entrepreneurial growth and the role of venture capital in Hungary’, in Attila Varga and László Szerb (eds), Innovation, Entrepreneurship, Regions and Economic Development: International Experiences and Hungarian Challenges, Pécs, Hungary: University of Pécs Press, pp. 122–44. Westhead, Paul, Mike Wright and Deniz Ucbasaran (2001), ‘The internationalization of new and small firms: a resource-based view’, Journal of Business Venturing, 16, 333–58.

19 Irish perspectives of international entrepreneurship Cecilia B. Hegarty

Introduction In the late 1980s and throughout the 1990s, Ireland was awakened from the doldrums and placed on the international stage as a key player (Dana, 2006). Ireland was in an enviable position compared to the rest of Europe, experiencing an unprecedented era of sustained economic progress commonly known as The Celtic Tiger (Williams, 1994). Whilst most other European countries continue to suffer from poor economic growth, Ireland continues its success into the twenty-first century with a multi-billion Euro tourism industry. Economic advancement was initially attributed to a more outward-looking approach to development within all social strata, yet Irish firms have not been without their challenges. In the political environment, the Northern Ireland struggle for independence brought a period of troubles during the 1960s that not only prevented domestic tourism in the border regions but also assisted the media in promoting devastating images to the international market. Economically, two oil crises coupled with price inflation reduced Ireland’s market share of international tourism as alternative destinations were successfully packaged. Good macroeconomic management and investment through government action plans as well as the desire for Irish products (tourism boom years) kept most entrepreneurs in business. Traditional firms in Irish tourism relied upon the comparative advantages of the natural resource base: landscape, scenery and culture. However, embracing the new and emergent technologies and strategically managing new information and intelligence was vital to sustaining entrepreneurial activity in this industry. The principal technological advances include the following: 1. 2.

3.

The national airline cartel was broken as the aviation industry opened up to competition that eventually gave way to low-cost airlines. Man-made attractions were created as a result of customer expectations through the film and entertainment industry: Riverdance and Lord of the Dance are Ireland’s greatest example of export success. Entrepreneurs could better communicate and interact with their markets to customize products and services – package holidays specific to regions, destinations and holiday types.

Business owners have been able to capitalize on the increased mobility not only in the expanding European market but also globally as evidenced in the increased influx of overseas tourists (Fáilte Ireland, 2005, p. 7). The case was very different pre-1980s and before the wars when the Irish economy was heavily dependent upon agriculture and virtually all agricultural exports went to the UK. The Programme for National Recovery (1988–1993) was launched as a response to the ‘grave state of our economic and social life’ (Department of Taoiseach, 1987, p. 5). In the National Recovery Programme, tourism was identified as a major instrument of national and regional economic and social development (Department of Taoiseach, 1987). 296

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During the six-year period 1942–48, the net income from tourism increased from €2.54 million to €41.90 million. Whilst a decline in income was experienced during the next fiveyear period, it generally increased until 1968 (Kennedy and Dowling, 1975, p. 128). This economic success resulted in Ireland losing its European Union (EU) Objective 1 status because income per capita was no longer below 75 per cent of EU average (European Parliament Office in Ireland, 2003a; 2003b). The service sector accounted for over 70 per cent of all jobs in the EU and in Ireland it accounted for 60 per cent of jobs (Department of Taoiseach, 1993). Irish employment in tourism grew by more than 70 per cent between 1990 and 2002, a growth rate above the 50 per cent employment growth experienced generally in the economy over the same period. Revenue earnings equated to more than 50 per cent of the total exports from Ireland (Department of Arts, Sports and Tourism, 2004). This research broadly examines how small firms have developed from an introspective agricultural base to become international market leaders. The data set is based on a nationwide consensus of Irish entrepreneurs in tourism enterprise during the summer of 2001. Survey administration was timed to coincide with the national census. The focus of the article is the value of networking and cooperating with business-minded individuals to grow from a small-scale venture focusing on domestic markets into a firm that achieves international success. Firstly, an overview will be presented of what is meant by networking and clustering followed by background information into Irish entrepreneurship. The methodology for surveying Irish firms will be explained. In this study, aspects of the characteristics and performance of Irish firms and a profile of entrepreneurs will be covered. A number of factors that contribute to the internationalization of Irish firms will be explored, including evidence of the level of public and private monies invested in Irish firms within the tourism industry and the indicators for international success. The relative importance of Irish firms clustering together to succeed internationally will be documented. In a final discussion the challenges for creating international Irish firms are summarized and conclusions drawn about the appropriateness of European policy in developing Europe’s entrepreneurial gazelles. Study background This section will first determine how entrepreneurs cooperate with each other to satisfy international markets. Since customers are becoming more internationally mobile, they seek out new and refreshing experiences that require firms to be adaptive. When entrepreneurs make product or market adaptations this gives rise to several specialist segments where firms can become involved in clustering strategies (Bord Fáilte, 2000). These clusters can also be referred to as alliances that arise from networking practices. There must be at least three parties (actors) engaging in some sort of commercial relationship based on agreements or negotiations (Vatne and Taylor, 2000, p. 10). The participating entrepreneurs or actors effectively seek to develop communication networks that enable them to scan business conditions (Marceau, 1989, p. 7). Clusters can thus be defined as a structure that analyses: a specific form of governance, the influence of the external environment and the dependency or autonomy of organizations (Vatne and Taylor, 2000, p. 8). Clustering can put firms at a competitive advantage because they protect against factors that impinge upon firm growth. A recent example is the expense of conducting business in Ireland, which was clarified after dissolution of the European foreign currencies.

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Ireland was noted as the second most expensive country in Europe after Finland (Eurostat, 2002; European Communities, 2002). Most clusters are evaluated by economies of scale. For instance, Marshall (1979) describes small firm networks as external to the single units of production but internal to the industrial districts in which they are located (Goffee and Scase, 1987, p. 14). This means that the place where material, human and social resources are accumulated is most important (Petric, 2002, p. 3). Competitiveness does not exist within individual companies; instead it is aligned to the ‘competitiveness of territories’ (Giaccaria, 2000, p. 97) (See also pioneers of industrial districts: Marshall, 1979; Porter, 1985). However, Humphries (1996) suggests that, as firms grow and entrepreneurs seek to establish successful international companies, the mutually dependent relationships formed within the local or regional cluster can be left behind. He recalls: ‘Most new businesses, regardless of size, are firmly embedded in their local communities and look to that community for the bulk of their workforce, finance, sites and facilities, external services, information and advice and external goods and services’ (Humphries, 1996, pp. 239–40). Granovetter (1985) and Petric (2002, p. 3) both warn against detachment from a local system since the actors or stakeholders are hugely varied. They include individuals and organizations, economic and non-economic, private and public parties. Van de Ven (1993) also places little confidence in the individual entrepreneur to succeed on his own merits by stating that ‘businesses need complementary businesses to succeed in a competitive marketplace’. But there are notable disadvantages to clustering, including slow adaptations (Petric, 2002, p. 4) since entrepreneurs depending on whether the linkages are vertical or horizontal must conform to standards of technology, quality, delivery and after sales service (Christensen, 2000, pp. 71, 89). The second argument in this section focuses on the importance of the entrepreneur. Historically, Irish entrepreneurs in private enterprise were involved in farming and cultural attitudes towards early forms of non-agricultural enterprise were poor to say the least. The ‘new-age entrepreneur’ was treated with much scepticism (Simms, 1981). It was the attractiveness of a home-working environment especially for female entrepreneurs and two-income families (Irish CSO, 2003) and expansion within the service sector in general that created more entrepreneurial opportunities and promoted acceptance of an entrepreneurial culture. There were increased opportunities for tourism firms because of the growing interest in tourism and the environment across Ireland that had been expanding since the early 1990s (Pollard, 1994) in conjunction with the drive for regional development and improved Irish products (Keane and Quinn, 1990; Ó Cinnéide and Walsh, 1990). Stronger integration of the Irish economy into the EU (Deenihan, 1994) and a concrete European agenda for Entrepreneurship (European Commission, 2004) should create more opportunities for would-be entrepreneurs. However, there needs to be a cautionary note about the possibility of firm failure. ‘Although much is written about small business failure [in Ireland], reliable information about who fails, why and at what rate is hampered by differences in definitions, data sources and methodologies’ (Cochran, 1981, pp. 50–59; Fitzpatrick Associates Economic Consultants, 2001). Low self-esteem, fear of failure and lack of achievement were notable factors in the Irish culture (O’Farrell, 1986) but failure rate was notably higher in the service sector in the UK because of low entry thresholds into the sector (Smallbone, 1990). O’Farrell (1986) viewed demand deficiency as the central problem for surviving firms in manufacturing, the prime industry before tourism. And the most important single reason for failure was the lack of

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financial capital generated. Yet government paternalism towards entrepreneurs in the twenty-first century has resulted in available loans and investment funds (Lerner and Haber, 2000). It has been reported that 90 per cent of Irish entrepreneurs cited grant-aid as one of the three largest sources of initial start-up capital (O’Farrell, 1986). Until the 1990s, most tourism expenditure in Ireland was focused on infrastructure. During 1960–70s, two-thirds of public expenditure was absorbed by accommodation and resort development. Providing facilities and amenities and catering for both the international and domestic market consumed much additional investment post-1970s. Developing innovative products and services that are internationally competitive is crucial to continuing the buoyancy of the industry. When government and private sector investment is combined, a total of €1.9 billion had been invested in the tourism industry by 1999 (Bord Fáilte, 1999). In the twenty-first century, with a focus towards strengthening of marketing strategies, expenditure from the national exchequer amounted to €50 million alone in 2002 (Tourism Policy Review Group, 2003, p. 25). Whilst it is true that tourism is heavily endorsed by public expenditure, it is arguable that Irish entrepreneurs in tourism firms can multiply this investment better than firms in other sectors and than firms in other European countries. The Organisation for Economic Co-operation and Development (OECD) and the Global Entrepreneurship Monitor (GEM) research provides a marker of Ireland’s progress by documenting the direct correlation between entrepreneurial activity and economic growth. The Republic of Ireland first participated in the GEM data collection in 2001 and gained ninth place out of 29 countries and similarly, in 2002, ranked twelfth out of 37 participant countries (GEM Ireland, 2002, 2003). Northern Ireland participated in the GEM in 2002 and in 2003 the total entrepreneurial activity (TEA) increased from 3.3 to 5.2. Whilst it was ahead of Germany, it lagged behind the Republic of Ireland by 3 per cent (O’Reilly and Hart, 2003). It is important to note, firstly, that there is no breakdown of GEM statistics by industry. Secondly, whilst the Republic of Ireland knows firm success of international market magnitude, Northern Ireland has been the slow adaptor, remaining ninth out of the 12 UK regions in 2004 (O’Reilly and Hart, 2005). Entrepreneurship here is hindered by parochial attitudes towards risk and firm ownership and the lack of potential interest in entrepreneurship from females and high earners in the population. As Jones-Evans (1997, p. 153) rightly surmises, for a long time researchers had sidelined the topic of Irish entrepreneurship. There had been a lack of academic discussion of entrepreneurship in Northern Ireland and in the Republic of Ireland. Naturally there is paucity in industry cohesive data and all-island data. This research makes one small but valuable contribution to examining the firm, entrepreneurial behaviours, and support structures across the island of Ireland. Methodology Sample Collaborating with LEADER II Companies funded under the EU Programme affords the research a nationwide sample that is further divisible into 48 regions across the island of Ireland including Northern Ireland and Republic of Ireland. Of the 48 regions, 15 are located in Northern Ireland (Figure 19.1). This collaboration had considerable advantages, since the Irish small-medium enterprises (ISME) had no official statistics. Furthermore,

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Key:

Note full addresses of LEADER II LAGs in Appendix B, Table 3.2.

1 4 7 10 13 16 19 22 25 28 31

Agrina Catchment Area Blackwater Comhdhail Oilaein na hEireann Galway Kildare Louth Mid-south Roscommon Clare Tipperary & N-east Limerick West Cork Mayo and Sligo

2 5 8 11 14 17 20 23 26 29 32

Republic of Ireland Ballyhoura Cavan-Monaghan Donegal (all except Inishowen) Inishowen Laois Meath Offaly Sligo and south Kerry South Kerry West Limerick Wexford

3 6 9 12 15 18 21 24 27 30 33

Barrow-Nore-Suir Comhar Iorrais East Cork Area IRD Duhallow Longford Kerry and Achill Island Rural Dublin South west Mayo Waterford Westmeath Wicklow

1 4 7 10 13

Armagh Cookstown Lower Bann RAPID (Derry) South Down & South Armagh

2 5 8 11 14

Northern Ireland Canal corridor Craigavon Magherafelt Roe Valley South Tyrone

3 6 9 12 15

Coleraine Fermanagh North Antrim Rural Down West Tyrone

Figure 19.1

Mapping the nationwide study of Irish firms

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the County Enterprise Boards did not have a central database, nor did they hold long-term records and they exist only in the Republic of Ireland. The regional structure of LEADER II Companies permits a number of regional liaison officers to work with entrepreneurs from the seed through to the exporting stages. Their aim is to implement European and National policy objectives at local level through practical advice or financial assistance within the LEADER II Programme. Thus the researcher can work with direct points of contact at regional level. The diverse nature of enterprise and the scale of the study could be regarded as research limitations but not when the research design involved survey techniques. Entrepreneurs were firstly accessed through mail surveys. The EU LEADER II programme was operational during 1994–99. Conducting a census on the database of these applicants selects for tourism firms having passed the first critical three-year period (North and Smallbone, 2000). Owing to variation in local administration, start-up enterprises were found and included to test this theory. All LEADER II Companies in Ireland recognized the potential of this study and were responsive in all 48 regions. As a result, 2697 mail surveys were administered. Instrument The mail survey tool was designed in English with Gaelic additions for Gaeltacht areas (Irish-language speaking areas). The survey (Hegarty and Ruddy, 2003) was six pages long and consisted of five parts sectioned under business set-up, operation, support, entrepreneurial background and characteristics. There were 25 questions (41 questions including component parts) limited to three types: open, closed (including dichotomous) and rank (for example, Likert scale). Because of the size of the sample, considerations about how long it would take to complete the survey, survey structure and how to increase response levels were factored into the mail survey design. Both the covering letter and the survey were piloted to entrepreneurs and researchers who responded on aspects of length, sections, content and aesthetics. The administration of the survey was timed to coincide with the national census 2001. The census was cancelled in the Republic of Ireland because of Foot and Mouth Disease (FMD) and was already administered in Northern Ireland. Measures The research focused on a number of measures that indicated the start-up position of the firm and how the entrepreneur conducted business. Entrepreneurs exacted how key sources of financial and advisory assistance were used to expand and grow the firm. In the final sections, measures were related to the individual entrepreneur. These measures included previous qualifications and work experience as well as current additional experience, for example additional entrepreneurial ventures. The entrepreneurial personality was measured through 29 traits. A trait is defined as the combination of personal characteristics and attributes. Table 19.1 illustrates how certain measures were coded for statistical analysis. Analysis Of 2697 entrepreneurs in the sample of Irish firms in tourism, 405 entrepreneurs initially responded. Considering the survey was administered during the summer period, a time when these firms experience their peak, this response was most satisfactory. The response rate upon the first mailing calculates out at 15 per cent. Since the surveys were coded for

302

Q1. Have you received advisory support to set up or operate your business? 1 No 2 Yes 1 source 3 Yes 2 sources 4 Yes 3 sources 5 Yes 4 sources 6 Yes 5 sources 7 Yes
5 sources Q2. Have you received financial support to set-up or operate your business 1 No 2 Yes 1 source 3 Yes 2 sources 4 Yes 3 sources 5 Yes 4 sources 6 Yes 5 sources 7 Yes
5 sources

Q3. Which method of promotion do you most frequently use to market your business? 1 Internet 2 Media 3 Telephone 4 Print & directories 5 Tourism sites 6 Combination of 2 7 Combination of 3 8 Combination of 4 methods Q5. How would you describe your business? 1 Much worse 2 Worse 3 About same 4 Better 5 Much better

Part five: your personal characteristics Close 1,2a-b Q1. How would you describe yourself ? 1 Strongly disagree 2 Disagree 3 Not sure 4 Agree 5 Strongly agree

Part three: your business support Open 1,2

Part two: your business operation Close 1c,2a-e,3,5,8a-c

Number

Type

Example of coding

Coding measures for statistical analysis of Irish firms

Table 19.1

Irish perspectives of international entrepreneurship Table 19.2

303

Survey response of Irish firms

Political division

No. of surveys mailed

No. of survey returns

Percentage returns (%)

Republic of Ireland Northern Ireland

2299 398

433 73

18.8 18.3

Total

2697

506

18.7

each firm to follow responses and trace data back to particular regions it was possible to resend surveys to the non-respondents with slight changes to the covering letter and survey code. These survey codes contained numbers and letters identifying whether the firm was located in Northern Ireland or the Republic of Ireland, the LEADER II region, and a number for the firm/entrepreneur. The letter ‘R’ was added as a prefix to resent surveys. All survey codes were computerized in SPSS (11.0) for the purposes of extensive data mining. A second mail-wave and telephone follow-ups resulted in a total of 506 responses generating a total 18.7 per cent response rate. In comparison to similar studies, for example Westhead (1995), the survey gained a higher (+3 per cent) response. Certain entrepreneurs justified their response rates by their entrepreneurial commitments. Some emphasized a ‘busy period’ despite the knock-on affects of Foot and Mouth Disease (FMD) whilst others contradicted this view by taking extended holidays due to the farming outbreak affecting businesses in tourism. Table 19.2 shows how entrepreneurs responded by political division, that is Northern Ireland or Republic of Ireland. Considering the volume of data from the six-page questionnaire that contained both open and closed questions, statistical software was necessary and a coding system needed to be devised for efficient entry of the data into the computer software package. Since the survey codes were already entered into SPSS (11.0) this database was continued with an elaborate coding scheme devised for the answers to each question as shown in Table 19.1 The data file consisted of 506 cases against 107 variables, thereby producing 54 142 statistical data entries. Before the results are discussed below, the usage of terminology will be explained. Throughout the chapter the terms ‘firm’, ‘venture’, ‘business’ and ‘enterprise’ are used interchangeably but it is understood each can have different connotations. The term ‘firm’ has had negative connotations associated with it, including large firm downsizing and technology advances. Ventures have been most closely linked to start-up companies arising from new or increased market demand. Business has referred to organizations with changing work attitudes and fostering intrapreneurial activity. The word ‘enterprise’ has been consistently used in the context of providing more jobs, in making a stronger economic contribution and in innovation (Enterprise Board, 1997; Bridge et al., 1998; Enterprise Board, 1999). Note that ‘enterprise’ can be used in a narrow sense to depict business issues but it has wider connotations that exemplify behavioural applications. Results Characteristics and performance of Irish enterprise The survey showed that entrepreneurs nationwide are involved in providing a range of tourism products or services comprising accommodation, activities and attraction.

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Enterprises tended to be most heavily involved in the accommodation sector (36.6 per cent) and then activities: indoor (22.7 per cent) or outdoor (22.3 per cent). Enterprises with more than one business component and the most diversified firms tended to be among the international market leaders. Most were relatively young enterprises with 42 per cent being established during the 1990s with a reduction in business purchasing or inheritance in recent years. Ownership and partnerships between spouses or additional family members were popular (52 per cent) with the result that business objectives could be focused on individual personal goals unless business expansion was envisaged in the short term. These tourism enterprises were significant employment providers especially during the peak season and full-time positions were privy to entrepreneurs, co-preneurs or family. The tourism sector showed growth with 74 per cent and 69 per cent of entrepreneurs quoting increases in turnover and profits, respectively. Approximately 50 per cent of entrepreneurs had turnover in the region of €100 000–1 000 000 with slightly lower profit levels.1 Whilst these statistics are encouraging, there were a number of microenterprises that were cash-poor and likely to experience low returns on investments. Whilst entrepreneurs sought to further develop and grow the firm, they relied upon conventional promotional methods. In addition, an insufficient range of methods was used per business and entrepreneurs failed to capitalize on the branding options, for instance, using the family image to promote quality-assured products. Entrepreneurs that stated their business was ‘more competitive than others in the region’ consistently made efforts to seek out new markets and guarantee quality to existing customers. They also tended to be more involved in networking and established linkages outside the family in order to grow the firm. Entrepreneurs who risked expansion readily accessed support when necessary from public bodies and even from private organizations where a fee was incurred. Most of these Irish firms were state-supported during their development, especially financially. In establishing links to professional networks, the government bodies responsible for supporting enterprise were perceived to be professional in their approach. Grants or loans were considered generous and practical advice was useful. Entrepreneurs perceived advisory support to be most useful from agencies with a role for regulating a particular segment of firms; for example, the cruising sector were best supported by the Water Authorities and the Network for Women in Business greatly supported female Irish entrepreneurs. Investing in Irish enterprise The most cited source of support for both advisory and financial assistance for the firms surveyed was under the EU Programme, LEADER II. Approval for LEADER II assistance did not exempt entrepreneurs from receiving support from different strands of the same EU programme (LEADER I & LEADER+) or from a multitude of additional state-support strategies. Table 19.3 lists the range of support agencies accessed by entrepreneurs at the initial start-up venturing stage and throughout the business life cycle. The same sources could be used for both financial and advisory purposes but advisory sources tended to be specific to the nature of the enterprise. Table 19.3 highlights that the supporting agencies for entrepreneurs in Irish tourism firms are numerous and it gives some indication of the need

Irish perspectives of international entrepreneurship Table 19.3

Agencies supporting entrepreneurs in Irish firms

Support

Agency

305

Common to both Northern & Southern Regions of Ireland Financial County Council, District Council Heritage Council, National Lottery – Heritage Lottery, Sports Lottery, Business Loan Institutions and Business/Family/Friends Contacts, Politicians & European programmes (mostly in border or north regions – INTERREG I & II, Peace and Reconciliation Funds, Fund for Ireland), local businesses and local people involved in Committees. For example, Millennium Committee and general local fundraising Republic of Ireland Financial County Enterprise Boards, Udaras Na Gaeltachta (body in south of Ireland funding businesses who set up business in a Gaeltachta/Irish-speaking area), County or Local Tourism Organisations, banks – AIB Rural Tourism Awards; Access Fund; FAS Community Programme; Co-operatives (similar to Rural Community Networks in the north) Northern Ireland Financial British Council, Arts Council, Crafts Council; Rural Community Network; Healthcare Trust; Youth Fund; Sports Council; Department of Environment Republic of Ireland Advisory LEADER I & II, County Enterprise Boards, County Council, District Council, Udaras Na Gaeltachta, Co-operatives Northern Ireland Advisory LEADER I & II, County Council, District Council, Arts Council, British Council, Crafts Council; Rural Community Network Support pertaining to particular entrepreneurial ventures (Northern & Southern regions) Advisory Examples: Waterways Ireland for entrepreneurs in watersports/events across Ireland or Irish Peatland Conservation Council for bogland projects ‘The rural tourism practitioner’, that is, others working in a similar business environment that had a similar business, such as another artist featured under this category and evidence of the importance of family advice became more prominent Agricultural bodies such as Irish Agriculture & Food Development Authority (TEAGASC) in the south or Department of Agriculture & Rural Development (DARD) in the north Besides the aforementioned, some groups applauded their members for example, family or local solicitor, for their specialized expertise and advice

for State investment in the industry. However, it does not give an indication of the level of investment. In this investigation entrepreneurs were asked to indicate, if they sought finance, what was the purpose and what was the amount received as a percentage of the total required. The findings revealed that public investment facilitated (a) product diversification and market expansion that in turn increased firm employment levels and (b) training resources that led to improved management practices. Since 57.9 per cent of entrepreneurs received one source of financial support and the most commonly listed source was LEADER programmes which operate on a matchfunding basis (entrepreneur receives 33.3 per cent of the total amount required) entrepreneurs invested many personal (including family) resources in the enterprise. The

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findings in Table 19.4 denote how dependent entrepreneurs are on business support in the Irish firms surveyed. Table 19.4 indicates whether entrepreneurs received either advisory or financial support and if they sought support from different sources. Only 12.1 per cent of entrepreneurs claimed to have received no financial support, 29.2 per cent were in receipt of financial support from two sources or more and 30 per cent benefited from advisory support from two sources or more. It appears entrepreneurs nationwide were successful in a number of grant applications. To illustrate, 44 entrepreneurs had four or more sources of either advisory or financial support; four entrepreneurs received advisory and financial support from more than four sources. The entrepreneurial perspective The Irish entrepreneurs surveyed were relatively young, between 30 and 50 years old. Entrepreneurial gender was related to the type of enterprise; for instance, the cruising sector was 80 per cent male-dominated. Entrepreneurs were highly indigenous (64 per cent), but there was market space for non-local entrants. Entrepreneurs in tourism firms were involved in quasi-entrepreneurship because they had involvement in additional businesses. The entrepreneurs surveyed were highly educated (39 per cent to third level) and perceived business knowledge and training in specific skill areas to be important. Motivations for establishing their firm involved a desire to generate income, to contribute to the local area, or to realize a business dream – all of which are dependent on a gap in the market. Different levels of success were desired. The determining factors to success were as follows: 1. 2. 3. 4. 5.

quality, entrepreneurial attributes, available local resources, relationships with suppliers or customers, and promotional success.

Failure was apparent for 20 per cent of entrepreneurs and was caused by lack of finance, quality or market demand. Table 19.4

Dependency on agency support in Irish firms

Level of support*

Advisory

Financial

Totals

No support Support from 1 source Support from 2 sources Support from 3 sources Support from 4 sources Support from 5 sources Support from more than 5 sources

214 144 71 51 16 6 4

61 293 85 30 17 6 14

275 437 156 81 33 12 18

Totals

506

506

1012

Note: * Discounts personal expertise and investment.

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Increasing the success of Irish enterprise All entrepreneurs in the Irish survey were questioned about their opinion of owning and operating a successful firm. Success was generally defined as operating ‘smoothly’ with a ‘healthy or happy balance sheet’ meaning break-even or making a profit and with ‘satisfied and content customers’ in ‘both domestic and international markets’. For certain entrepreneurs the business had to ‘do more than just make money’, it had to build a worthy reputable status and attract repeat customers. From the findings, it can be identified that ‘setting realistic targets’ and ‘achieving business goals’ was critical to success and based on the needs of the entrepreneur as well as market demand. Interestingly, whilst the majority (80 per cent) perceived their firm to be successful, this had something to do with the type of entrepreneurship, as demonstrated in Table 19.5. The percentage success rate increased when companies were operated under copreneurship (entrepreneur and spouse matched in entrepreneurial zest), family and community. The failure ratio increased for firms operating under individual ownership (every one in six firms fail) or as public companies (every one in five firms fail) compared to family enterprises where only one in ten fail. This evidence suggests that entrepreneurs involved in social entrepreneurial activity (SEA) in Irish firms are more likely to succeed. Internationalizing Irish enterprise Entrepreneurs had a number of objectives for growing their own firm. When these objectives are summarized, they illustrate the interest entrepreneurs have in internationalizing the Irish firm. Figure 19.2 shows the routes to internationalization chosen by Irish entrepreneurs. The first growth objective for Irish entrepreneurs was to expand the tourism product and shift market focus from the domestic to the international market capacity. The main international markets identified in Europe were German, French, Italian and Dutch, with prominent markets resulting from American and Australian customers. The second objective for Irish enterprises is to expand the market or ‘customer base’ not solely through internationalization but also through domestic markets. As they became more successful at the international level, entrepreneurs desired to encourage and reward customer loyalty, especially within local markets. They thought that becoming more involved with corporate markets was a good way to grow their business. The third objective focuses on the need to improve marketing practices to compete effectively within the expanding tourism industry. Entrepreneurs realize that, to be able to compete successfully in niche markets they need to be more proactive in promoting their business and the region as a whole. The fourth objective included the desire to deliver innovative products and services to niche markets, indicating a need for Irish firms to segment their markets in order to internalize the Irish firm. Entrepreneurs noted that improved infrastructure might be essential to increase access to products and services. The fifth objective is more concerned with protecting the status quo of the business. Whilst entrepreneurs are willing to reinvest profit in the business to facilitate future growth, becoming internationally competitive should have its financial rewards. Entrepreneurs at this point need to re-evaluate their balance sheet, quality of product and quality of life. Finally, a minority of entrepreneurs did envisage a sixth objective, which is not demonstrated in Figure 19.2: selling the company was a slim possibility for Irish firms.

308



446

111 161 72 75 27

Successful

—

86 88 91 90 84

Percentage success rate (%)

Success-failure

Responded ‘no’ to success question; that is, they perceived themselves as less successful; composed of public owned enterprises.

60

Total

Notes:

18 22 7 8 5

Individual Co-preneurship Family Community Other group

Not successful



Increasing the success rate of Irish firms by social entrepreneurship

Type of entrepreneurship

Table 19.5

—

1:6 1:7 1:10 1:9 1:5

Failure ratio

Irish perspectives of international entrepreneurship

Expand product

Figure 19.2

Expand market

Improve marketing

Segment market

309

Protect status quo

Routes to internationalization of Irish firms

Entrepreneurs in Irish firms indicate that becoming an international player in tourism is the fastest way to grow the business. Their enterprise has to be of international demand and standards: they generally recognized that exit behaviour is affected by import competition. Whilst consumer choice can be more difficult to gauge and less consistent in the tourism industry, entrepreneurs strongly believed that their involvement as independent firms in clusters can strengthen their market position and prevent the occurrence of a crowding-out effect of indigenous Irish firms. The next section provides evidence of increasing the competitiveness of Irish firms in an expanding global marketplace by networking together. Networking the interests of entrepreneurs, agencies and the destinations plays a major part in the productivity of Irish firms and how they sustain a multi-billion euro industry. Competitive clusters for Irish enterprise Entrepreneur network Networking between individual businesses forms a measure of the level of the active engagement of entrepreneurs in the region and the likelihood of interacting in a regional cluster. Irish entrepreneurs were involved in business links that tended to be purpose-driven and served to support daily business operations. Businessto-business interaction led to entrepreneurs becoming known to each other at regional level. Due to the supporting agencies organizing promotional and training events for the industry, entrepreneurs became involved in a regional cluster. This agency-controlled cluster often evolved into a competitive cluster with established common goals for supporting the long-term development of firms within the region. Active members in the cluster truly believed they could improve the quality of regional products and sales. The linkages were characterized by an informal nature and by frequent interactions with spatial concentration, mostly at regional level. Linkages moved beyond the immediate economic activity space in order to satisfy the resource needs of the business. The cluster gained an international dimension when entrepreneurs became involved in new stages of product innovation that required advice and support from industry experts abroad.

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Insurance and promotion were additional purposes for changing network stability and adding an international dimension. It was noted that the behaviour of entrepreneurs in the regional cluster became more evaluative when international players were introduced into the regional cluster. To remain active in the cluster, entrepreneurs had to be guaranteed of the economic and social benefits. Agency network Since we observed the diverse range of supporting agencies for Irish firms in this industry, it is important to look at the ways in which agencies are networked to assist Irish firms in becoming internationally competitive. On the whole, entrepreneurs frequently accessed professional networks for purposes of advice, training, promotion and financial support. However, sometimes establishing contact with the relevant agency and individuals in particular roles was problematic. Not only did entrepreneurs reveal that certain individuals/agencies did not fully appreciate the importance of these firms to the economic wealth of the region or the entrepreneur’s role in satisfying international customers, but also agencies were poorly networked. Agencies continued to operate as a centralized organization even though they held regional offices because they attempted unsuccessfully to adapt a national mission to the region. High staff turnover, lack of internal communication and the number of newly introduced organizations could be the reason for such behaviour. Entrepreneurs suggested that there are so many agencies, their mission statements and roles overlap and create ineffectiveness at policy level. Besides the ‘waste of resources’ that this must entail there are ‘cost implications’ and ‘time complications’. Owing to this bureaucracy, Irish entrepreneurs feel that there is an absence of twoway flow of information and resources; entrepreneurs frequently cited cases of agencies failing to follow up on their requests. And those entrepreneurs, who had been involved in meetings and negotiations contributing to the production of formal county and regional plans, were highly disappointed by the outcomes. The agreed inputs were very different from the outcomes documented in the Plan, so that entrepreneurs queried the intentions of agencies to develop the industry in the region and to control the development of Irish firms. Destination network To become internationally competitive in the tourism industry depends upon the ability of entrepreneurs to package their destination and make it attractive to international customers. The findings proved that entrepreneurs in early development companies are highly conscious of their dependency on local communities and aware of the socioeconomic and cultural impacts that their business activities have on the regional economy. While entrepreneurs may network together in similar enterprises to increase international market share, becoming involved in the destinations network ensures entrepreneurs involved in different types of enterprises cooperate with each other to market the destination. When Irish entrepreneurs thought about how networked the destination is they were able to pinpoint local multiplier effects. Local multiplier effects were experienced with businesses directly and indirectly involved with the industry. The collective promotional effort of firms in the area was not only thought to attract more international customers but also to positively impact upon residents’ perceptions: enhanced confidence and cultural appreciation. The most valuable resources within the destination for the success of these Irish firms were the natural and built resources, including road and rail infrastructure and industrial heritage.

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Discussion and conclusions Challenges for the internationalization of Irish firms While tourism has been used as the vehicle to transform Ireland into one of the most successful industrialized economies in the European Union, the industry is not without its challenges. The literature has shown Ireland is one of the most expensive places to conduct business in Europe. Consumer prices in Ireland were 21.7 per cent higher in 2002 than they had been in 1996, compared to an average increase across the EU of 11 per cent. In fact, inflation in Ireland has surged since 1999, with price increases of 16.1 per cent to mid-2002. With the Euro giving transparency to other EU countries, combined with the fact that the Euro is gaining in strength against the pound sterling and dollar, this needs to change for Irish products to be internationally competitive. In manufacturing, Ireland’s second most successful export industry (especially in foreign direct investment) the massproduction model worked, but it simply does not work in tourism. This research has shown that investing monies from the European Union has assisted in developing the industry and therefore created opportunities for potential entrepreneurs. However, investing in start-up companies is not a sustainable plan, nor is bailing out fledgling or failing companies. Firm failure may provide an important learning experience in entrepreneurial development and can provide a useful form of organization under changing social and economic conditions (Scott and Lewis, 1984, p. 53) but should not be at the expense of the State or the European Union. Appropriate investment can be achieved by costeffective, client-focused delivery of investment strategies and by continuously promoting the value of indigenous industry. The functions of Enterprise Ireland illustrate this: it was established to develop marketing, technology, enterprise development (feasibility studies), business training, science and innovation. There is also a need to improve human resources especially at agency and policy level. Ireland’s statement of strategy of 2005–07 promises to review where any overlap in the work of agencies could occur (Department of Arts, Sports and Tourism, 2004, p. 24). Creating vertical and horizontal linkages between the key industry stakeholders is vital to growing Irish firms. To become internationally competitive, Irish firms need new innovative products and new consumers. There are different ways to achieve this including (a) new production conditions and use of technology, (b) new management styles and organizational structures, (c) new alliances and clusters, and (d) a sustainable entrepreneurial culture in the industry. How appropriate is current EU policy and strategy? There is an onus on policy to assist market imperfections but not necessarily to prevent all firm failures because there will be instances whereby good analysis and prescriptions will not be followed, perhaps because of entrepreneur inertia. While policy has influential powers in increasing the probability of entrepreneurial survival (Smallbone and North, 1995), it must avoid simply adding to the numbers of firms in overcrowded sectors that could be damaging to entrepreneurial culture, as exemplified by the manufacturing industry in Ireland. EU strategies for entrepreneurship appear to overcome this by combining individual and collective approaches that reflect upon cultural, social and environmental aspects. Policy proposes to make entrepreneurship more accessible to new entrants by explaining the concept and its attractiveness and

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providing the necessary skills – linked to a life-long learning policy, 2000-05 (European Commission, 2003, p. 4). Europe needs to foster entrepreneurial drive more effectively. It needs more new and thriving firms willing to reap the benefits of market openings and to embark on creative or innovative ventures for commercial exploitation on a large scale. (European Commission, 2003a, p. 4).

This is the opening statement of the ‘Green Paper for Entrepreneurship’ in Europe. The paper insists on increasing competitiveness, both economically (reform and jobs) and socially (more cohesion). It addresses two fundamental issues: how to produce more entrepreneurs and how to get firms to grow, that is, to increase the ‘gazelles’ (European Commission, 2004, p. 12). Of special interest to this study of Irish firms is policy instruments relating to improving access to finance throughout the entire entrepreneurial life cycle and improving performance (European Commission, 2000a; European Commission, 2000b, p. 7). Specific actions involve education and training for entrepreneurship, cheaper and faster start-up (seed stage) and strengthening technology capacity (e-business). One area for criticism is the Europe-wide investment and support of the current Global Entrepreneurship Monitor (GEM) research. On the positive side, the GEM does make a truly national contribution (Northern Ireland and Republic of Ireland) towards policy formulation by documenting areas of weakness in growing a fully mature entrepreneurial nation. The reports document awareness, attitudes, values and beliefs of entrepreneurs towards risk-taking behaviour, financing especially for start-ups and encouraging business angel investors especially for high-risk investment. In fact, the value of the GEM is provided in its measure of total entrepreneurial activity and it therefore paints a picture of those planning to become entrepreneurs and those in the seed stages. On the negative side, one of the biggest drawbacks of such research is that there is no breakdown of statistics by industry sector and the relative lack of knowledge of the GEM findings by the backbone agencies that are the vehicle for implementing policy and making realistic investments. In the Irish context, Ireland needs a strong, vibrant and indigenously controlled firm sector with the commitment to grow profitably in an increasingly challenging and fastmoving global business environment (Rauch et al., 2000; Department of Enterprise, Trade and Employment, 2000). During accession to the EU in 1973, Ireland was the poorest EU Member State but, thanks to the increase in national GDP, which in 2002 reached €129.5 billion, it was second-highest in Europe after Luxembourg. This phenomenal period of growth in the Irish economy has resulted in the use of economic measures promoting Ireland’s success. Qualitative measures, as shown by the use of clustering in this study, could provide another comprehensive outlook. Further examples include pragmatic government policies, a social partnership approach to economic development, openness to international trade and emphasis on technological innovation and education. As European structures become operational at regional level this could be ‘at least a partial solution’ to policy implementation in a global economy (Asheim and Isaksen, 2000) and would serve to strengthen entrepreneurial efforts within regional clusters, thereby inducing international success for indigenous Irish firms.

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Acknowledgements The author would like to thank the entrepreneurs and mentors involved in this research through the LEADER II Groups and the EU Framework project, SPRITE. A very special thank you to Dr P. McDonagh.

Note 1. Adopted from regional data.

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Westhead, P. (1995), ‘A matched pairs comparison of new owner-managed Businesses in “Rural” and “Urban” areas in Great Britain’, Warwick Business School and Centre for Small and Medium Sized Enterprises, Coventry. Williams, P. (1994), A Nuffield Trust Award. Farm-Based Tourism and Leisure, A Step Further, London: Nuffield Trust.

20 Israeli, born global, knowledge-intensive firms: an empirical inquiry Tamar Almor and Gilad Sperling

As stated by Dana, Etemad and Wright: ‘A research sub-discipline is emerging, fusing elements of what formerly has been considered international business with what used to be small business/entrepreneurship’ (1999, p. 4). This sub-discipline is the result of changes in the international behaviour of small and medium-sized firms as well as of entrepreneurial firms. Small and medium-sized enterprises (SMEs) have been playing a progressively important role in international business since the beginning of the 1990s (Bell, 1995; Keeble et al., 1997; McNaughton, 2000; Oviatt and McDougall, 1994; Wright, 1999). The emergence of smaller firms that are able to operate internationally is reported with increasing frequency all over the world (Almor, 2000; Gabrielsson and Kirpalani, 2004; Knight and Cavusgil, 2004; Luostarinen and Gabrielsson, 2004; Oviatt and McDougall, 1994; Rennie, 1993). By the late 1990s, about a quarter of SMEs around the world derived a major portion of their revenues from foreign countries. While these businesses first emerged from countries with small domestic markets, their existence is now also reported in other countries (Knight and Cavusgil, 2004; Moen and Servais, 2002; Rennie, 1993). Born global firms aim at the global market right from birth (Rasmussan, Madsen and Evengelista, 2001) and start their globalization at once, without any preceding domestic operations, simultaneously with domestic business or, exceptionally, soon after domestic operations (Luostarinen and Gabrielsson, 2001). The international growth and performance of these relatively small firms remain paradoxical, as it is seemingly difficult to explain how firms with limited resources, such as financial resources and managerial experience (Almor and Hashai, 2004; Buckley, 1989; Hashai and Almor, 2004; Kaufmann, 1995; Lu and Beamish, 2001) are able to compete globally against larger and more experienced firms. This paradox may be explained, at least partly, through firms that are often referred to in literature as ‘born global’ firms or as ‘international new ventures’ ( McKinsey and Co., 1993; Oviatt and McDougall, 1994; Rennie, 1993). Although born global firms are smaller than traditional MNCs, they incorporate similar characteristics in so far as they target international markets and organize their value-adding activities internationally (Oviatt and McDougall, 1994). Born global firms appear to have a number of unique features: they are relatively small, young and entrepreneurial in terms of ownership and organizational structure while they aim to cater to international markets from inception (Almor and Hashai, 2004; Gabrielsson and Kirpalani, 2004; Luostarinen and Gabrielsson, 2004; McKinsey and Co., 1993). Empirical data presented in different studies show that the home market is frequently negligible for ‘born global’ firms, and that many of them sell their first product in foreign markets (Almor, 2000; Bloodgood et al., 1996; Coviello and Munro, 1995; Hashai and Almor, 2004; McNaughton, 2000; Oviatt and McDougall, 1994; Oviatt and McDougall, 1997; Rasmussan and Madsen, 2002; Rennie, 1993). 316

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Moreover, they are commonly characterized as knowledge-intensive organizations that sell mainly innovative, self-developed, technology-based products (Almor, 2000; Bell, 1995; Bloodgood et al., 1996; Coviello and Munro, 1997; Dana et al., 1999; Knight and Cavusgil, 2004; Oviatt and McDougall, 1994; Oviatt and McDougall, 1997; Rennie, 1993; Zahra, Ireland and Hitt, 2000). Thus born global companies can be defined as ‘business organizations that, from or near their founding, seek superior international business performance from the application of (knowledge-based) resources to the sale of outputs in multiple countries’ (Gabrielsson and Kirpalani, 2004; Knight and Cavusgil, 2004; Oviatt and McDougall, 1994). The current study contributes to the question of how relatively small firms succeed in the international business arena by focusing on Israeli knowledge-intensive born global firms that compete internationally. We will first address the conditions that exist in Israel and allow the existence of a disproportionately large number of knowledge-intensive born global companies; subsequently, we will explore their growth and development over time and present our conclusions. Israel: a small country with an open economy Israel, a country that can be characterized as a democracy that has a small, open economy and is located on the East coast of the Mediterranean basin, had a population of around 6.9 million and a GDP per capita of about 18 000 US dollars in 2005. Israel is regarded as an international leader in terms of contribution of hi tech to overall exports as well as in terms of the high number of Israeli companies traded on the American NASDAQ stock exchange. According to Israel’s Central Bureau of Statistics, 72 per cent of Israel’s industrial exports in 2004 were accounted for by high and medium-high technology industries (when excluding diamonds). Moreover, according to Table 20.1, the contribution of these industries to exports has been very significant since the beginning of the 1990s. Despite the fact that Israel is located at the periphery of the EU and can be counted among the small countries situated around the Mediterranean basin, it has a disproportionate number of firms listed on the NASDAQ stock exchange. Until 2005, more than 145 Israeli companies had taken their initial public offering (IPO) to foreign stock exchanges such as NASDAQ and the London Stock Exchange (Sperling, 2005), in addition to nearly 600 companies that are traded successfully on the local Tel Aviv Stock Exchange. As early as 1995, the number of Israeli firms listed on the NASDAQ nearly equalled the number of all other foreign firms combined, excluding Canadian companies. There are more Israeli firms listed in New York than firms from any other foreign country, excluding Canada. Israeli firms that choose to take their IPO to NASDAQ are young, innovative, high-tech and export-oriented (Blass and Yafeh, 1998). The motivation behind these IPOs seems to be that (1) the US capital markets are better able to evaluate firms with few tangible assets and (2) Israeli firms signal, through the IPO in New York, that they are of a high quality (Blass and Yafeh, 1998). In addition to having a high proportion of high-tech industries and companies, Israel is one of the largest centres in the world for start-up enterprises, with more than 2500 startups in 2003 according to the Ministry of Industry and Trade. ‘In technology-intensive industries where global start-ups thrive, unskilled and semi-skilled labor is a very small portion of the cost. Unique skills, as well as strong educational and communication infrastructures, are key factors in making a particular location attractive to a global entrepreneur. Certain

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Table 20.1

Manufacturing exports by technological intensity (excluding diamonds)

Industry High tech Medium-high tech Medium-low tech Low tech Exports million US dollars

1990 (%)

1995 (%)

2000 (%)

2002 (%)

2004 (%)

30 31 20 19 7 697

37 28 21 15 12 302

53 23 15 9 21 005

48 25 17 9 18 309

46 26 19 9 23 731

Source: Central Bureau of Statistics of Israel (2005).

locations in the world are known for unique workforce skills’ (Oviatt and McDougall, 1995). Israel has a highly educated workforce with first-class educational institutions. Literacy is close to one hundred per cent and, in 2002/3, 57 per cent of the population of tertiary age was in tertiary education (Ministry of Industry and Trade, 2003; UNESCO, 2005). The national expenditure on education in 2002/3 was 7.50 per cent of GDP, compared with 5.62 for OECD countries (OECD, 2005). Conditions in Israel enabling the development of born global, knowledge-intensive companies Porter (1990) proposes that we can explain the existence and success of national advantage in particular fields by examining four attributes: (1) factor conditions, (2) demand conditions, (3) rivalry, strategy and business practice, and (4) related and supporting industries in that country. The factor conditions creating a national advantage in knowledge-intensive industries in Israel can be found in the high level of education and the abundance of academic institutions, many of them internationally renowned in their fields, such as the Technion and the Weitzman Institute. In addition, the massive influx of motivated and highly educated immigrants from the former Soviet Union at the beginning of the 1990s, and the large proportion of engineers in Israel (135 per 10 000 employees in 2002, compared to 19 in Singapore and 70 in the US: Sperling, 2005) have also contributed much to the development of unique factor conditions. Moreover, the government of Israel has developed a system of support for start-ups and knowledge-intensive firms that includes financial support from the Office of the Chief Scientist. The government further established about 30 state-supported incubators for entrepreneurs developing knowledge-intensive technologies; it established the BIRD foundation, which finances R&D cooperation between Israeli and US high-tech companies, and the Yozma VC fund as well as various additional types of support. Demand conditions in Israel that express the need for knowledge intensity include the need of the Israel Defense Forces (IDF) for new technologies and their applications, as well as the demand from international R&D centres and MNCs, such as IBM and Intel, which have research centres in Israel. Rivalry, strategy and business practices are created through the thousands of start-ups that are established, the activities of many international high-tech companies in Israel, such as HP, Motorola and Microsoft and the growth of successful local high-tech companies such as Teva, Amdocs and Checkpoint. Related and supporting industries play a crucial role in the existence and success of Israeli high-tech industries and include, besides factors already mentioned, the very

Israeli, born global, knowledge-intensive firms Table 20.2

319

Capital raised by technology VC funds in Israel, 1991–2000 ($ millions)

Technology VC funds Private funds Public & other funds Other private equity funds All funds Investment companies All capital sources

1991 1992 1993 1994 1995 1996 1997 1998 1999 49 0 0 49 9 58

27 54 45 126 34 160

162 42 128 332 40 372

112 0 242 354 20 374

145 0 6 151 5 156

264 0 110 374 23 397

609 27 66 702 25 727

468 8 74 550 125 675

2000

1 575 3 155 44 35 40 26 1 659 3 216 93 72 1 752 3 288

Source: Israel Venture Capital Research Center (IVC Research Center, 2001).

successful Venture Capital (VC) industry and knowledge gained by numerous law and accounting firms on the foreign IPO process. The VC industry in Israel Financial resources are critical for the success of new born global firms (Oviatt and McDougall, 1995). Venture capital is an equity investment made for the launch, early development or expansion of a business. Israel is commonly referred to in the global press as the second most active venture capital market in the world, behind Silicon Valley. Owing to the nature of investment in young companies, as opposed to investment in older, more established companies, venture capitalists have to be ready to take higher risks. The Israeli venture capital industry, starting with only a couple of venture capital firms in 1991, with less than $50 million in assets under management, had expanded to $3216 million in 2000, which allowed 513 private Israeli high-tech firms to raise $3.1 billion in that same year (Table 20.2). The Israeli VC industry was established at the beginning of the 1990s, when the government of Israel realized that, although many start-ups succeed in developing a prototype or basic technology, they lacked marketing skill and finance. After an initial failure, the government established in 1993 a $100 million VC fund, named Yozma, with the purpose of investing $80 million in private VC funds and $20 million in start-ups (Avnimelech and Teubal, 2004). The basic thrust was to promote the establishment of private VC funds that invested in young, Israeli, high-tech start-ups with the support of the government and the involvement of well-known, foreign financial investors. A total of ten private Yozma funds were created by the Yozma programme, which together raised $250 million and invested in over 200 start-up companies (ibid.). As a result, the number and scale of the funds increased enormously. By the early twenty-first century, the VC industry in Israel had become one of the largest in the world, both on a per capita basis and in absolute terms (Zuckerman, 2001). While American funds like the Sequoia Capital Fund opened offices in Israel, many of the largest Israeli VCs that were not already part of global funds opened offices in the US. Thus we see that, despite the fact that Israel is located at the periphery of the EU, is relatively isolated from other markets and has a small local market, it has created distinct comparative advantages in knowledge-intensive industries and has formed a hospitable environment for technological start-ups and knowledge-intensive firms.

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Israeli born global, knowledge-intensive companies Knowledge-intensive born global companies have gained attention in recent years (for example, Almor and Hashai, 2004; Hashai and Almor, 2004; Jones, 1999, 2001; Keeble et al., 1997; Knight and Cavusgil, 2004; Narula, 2002; Stray et al., 2001). These firms cannot be classified as MNCs because of their comparatively small size and limited scope of operations, nor can they be viewed as exporting SMEs (Aaby and Slater, 1989; Bilkey and Tesar, 1977; Bonaccorsi, 1992; Cavusgil, 1984; Gemunden, 1991; Reid, 1984) because they use a variety of strategies to compete internationally in addition to exports, such as the establishment of greenfield subsidiaries and the use of international strategic alliances as well as mergers and acquisitions. Thus these firms have unique characteristics that set them apart from MNCs on the one hand and from exporting SMEs on the other. Previous studies regarding Israeli knowledge-intensive born global companies have shown that these firms use specific configurations and strategies. Studies that focused on the major value added activities of these companies, and their configurations, found much similarity among the companies studied (Almor, 2000; Almor and Hashai, 2004; Hashai and Almor, 2004). Many born global companies create sustainable competitive advantages based on unique technologies and innovation, which they leverage worldwide (Bell, 1995; Hashai and Almor, 2004; Jones, 1999, 2001; Keeble et al., 1997; Knight and Cavusgil, 2004; Oviatt and McDougall, 1994; Stray et al., 2001). Their small size usually encourages born global firms toward innovation in specific areas that are likely to be less attractive to large corporations. The latter may often wish to develop applications that are of interest to the mainstream market and neglect applications that have a limited market potential. Thus born globals create competitive advantages that are based on innovative technologies and processes. They do so by investing relatively highly in R&D activities. Indeed, Almor (2000) reported that, among Israeli born global firms in the second half of the 1990s, the median expense on R&D activities was between 13 and 18 per cent, depending on the industry. Moreover, they protected this proprietary knowledge by retaining these activities in Israel, while having full control over them; the firms that were sampled did not outsource major R&D activities (Almor and Hashai, 2004). These superior technological capabilities, however, will usually have a limited home market; therefore, the born global companies are driven to international markets in order to exploit first mover advantages and monopolistic gains at an early stage of their organizational lives (Acs et al., 1997; Amin and Thrift, 1994; Keeble et al., 1997; McNaughton, 2000). Yet this strategy creates a problem that is not easily solved. Technology-driven firms need to stay in close contact with their customers, not only to protect their proprietary knowledge, but also to receive feedback regarding their technology through the processes of distribution and after-sales services. Such interaction may lead to further technological innovations; moreover, it creates customer loyalty and a strong client base (Almor and Hirsch, 1995; Hirsch, 1989). However, their small size impedes their ability to serve a wide variety of international markets and large numbers of customers without using external sources. Almor and Hashai (2004) found that Israeli born global companies deal with that paradox by focusing on global niches in which the born global firms typically serve a small number of customers that create a high added value for the born global company. Despite this cost-reducing strategy of Israeli born global firms in the late 1990s, the median marketing and sales (M&S) expenses reached between 18 and 31 per

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cent of revenues, depending upon the industry (Almor, 2000) representing about a third more than the R&D expenses. Almor and Hashai (2004) also found that, although most of the M&S activities were located outside Israel, most companies attempted to keep as much control as possible over these activities, an indication of their importance and contribution to the competitive advantages of these firms. While these results provide us with understanding regarding the strategic configuration of Israeli knowledge-intensive born global companies, they do not provide us with insight in the establishment, growth and development of these companies. Jones and Coviello (2005) argue that entrepreneurial internationalization can be understood better when we analyse the time-based process. In order to explore the development over time of these companies this study focuses on five case studies, and examines the firms from inception. Rather than posing specific hypotheses, the study poses a general research question and examines whether it would be possible to identify a mainstream pattern of globalization among these firms. Methodology The case study method as a research tool is controversial. While causal research is the preferred method, when exploring new topics, a case can be made for a method that is based on the ‘grounded theory’ approach (Glaser and Strauss, 1967; Strauss, 1987). This approach is related to the generation of new concepts and development of theoretical models, rather than the confirmation of existing theory. In this chapter, we present a descriptive methodology, which is concerned with understanding, comprehension and illumination, rather than causal relationships. For this study five Israeli, knowledge-intensive born global companies from the Telecom industry were chosen. Building on the theoretical concept, an operational definition for this study was developed as follows. Born global firms must (1) generate over 75 per cent of their revenues from foreign markets; (2) generate over 50 per cent of their revenues outside the domestic continent; (3) start international revenue generating within two years of inception; (4) have operations in at least two continents outside their domestic continent; (5) be established as an independent new venture. Finally, all the previous criteria should be achieved within ten years from inception. All case companies are born global according to the definition of this chapter and all were examined along the same parameters, which included the globalization process of each company, its founder characteristics and the product, customer, operations and market (PCOM) strategies of these firms over time. A list of the companies included in this study and the research period for each company are presented below. The companies were all studied from inception until the year 2002 by means of in-depth interviews with the founders and with senior managers, as well as by analysing secondary data that were available publicly, such as press articles, annual reports, marketing materials, company internet sites and databases. Case companies and research periods BATM Advanced Communications Ltd Emblaze Systems Ltd Orckit Communications Ltd VCON Telecommunications Ltd VocalTec Communcations Ltd

1992–2002 1994–2002 1990–2002 1994–2002 1989–2002

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Semi-structured, personal interviews were recorded and later transcribed. In addition, notes were taken during the interviews. Founders and top management were asked about the reasons for establishing the new venture, the background of the founders, the firm’s decision to enter foreign markets, the reasons behind these decisions, and the process of foreign market entry. To reduce the risk of informant bias, multiple interviews were held with various members of the management team in each firm. The industry and country characteristics are identical for all the firms in this study. Data gathering and analysis were based on the case study methodology (Eisenhardt, 1989; Yin, 1994) and included the following steps: 1. 2.

3.

4. 5.

Initial posing of research questions and identifying of important constructs. Selecting the cases: the cases were chosen for theoretical reasons, based on the replication logic. According to Eisenhardt (1989) the goal of theoretical sampling should be to choose cases that are likely to replicate or extend the emergent theory. Cases should be chosen that have common elements but represent polar types. The selected cases were all born global firms according to definition of this chapter, publicly traded, telecommunication firms which were registered on foreign stock exchanges, invested at least 5 per cent in R&D, and were established after 1989. Within the telecom industry extreme different types of companies were selected. Data collection and analysis were carried out simultaneously over a period of approximately one year. The freedom to make adjustments during the data collection process is a key feature of theory building case research (Eisenhardt, 1989). A detailed case study was written for each firm, which was subsequently sent to the firm for comments. Cross-case analysis: categories and dimensions were selected and examined across cases, forcing the researcher to go beyond initial impressions and build the basis for a theoretical framework.

Findings The founders The founders had a key role in shaping the companies since inception. In Emblaze, the founders realized that, during their army service, they had developed skills in multimedia development that gave them a competitive edge in the global market. They decided to use this competitive edge and build an international business. They started by targeting large firms in the US and through these companies achieved global sales. In BATM, the founder realized that he had developed competitive capabilities in telecommunication through his academic work and decided to use these capabilities to build an international business. In Orckit, the founder created a competitive edge by combining the experience gained through his work in ComStream with his engineering capabilities. He started with R&D subcontracting projects for the US-based ComStream and other foreign companies. VCON’s R&D work started in Optibase, which is another Israeli technology-intensive born global. In the R&D stage, the people at Optibase involved in the project aimed at the global market. When the R&D for the first prototype was completed and Optibase decided to spin-off VCON, these people left Optibase and joined VCON. One of the main founders behind VCON was also one of the founders of

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Optibase and clearly had no interest in the Israeli market. In VocalTec, the firm gained its global vision when two investors, who, owing to their prior international business experience had no interest in the small Israeli domestic market, joined the company and gave it its new direction. This finding compares well with other research. The global vision of the founders was recognized as probably the most important characteristic associated with the initial success of Born Globals (Oviatt and McDougall, 1995). The make-up of the founders and early management was found to be an important factor determining attitudes toward global market opportunity (Madsen and Servais, 1997; Roberts and Senturia, 1996). The decision maker’s global orientation is an important factor explaining why some firms are born globals, while others are born locals (Moen, 2002). Firms with managers who have more world-oriented mindsets (geocentric) were found to be more likely to enter international markets quickly (Harveston, Kedia and Davis, 2000). Many researchers view the international experience of the founders and prior international personal networks as a key to the establishment and success of born globals (Harveston, Kedia and Davis, 2000; Madsen and Servais, 1997; Oviatt and McDougall, 1995). However, the findings of this study do not support this. While at Orckit, VocalTec and VCON the founders did have some international experience, in BATM and Emblaze the founders had no international experience and, at Emblaze, BATM and VocalTec, no prior international personal networks existed. In VCON, certain personal international networks did exist prior to the establishment of VCON, but their significance is not clear. In Orckit, prior international connections did play a role, especially in the R&D subcontracting phase. Thus it seems that the international experience of the founders and prior connections to international networks might be less important than the personal traits and global visions of the founders. Personal traits of the founders seem to be important. Many of them have founded more than one born global firm. Moti Gura of VCON was also a founder of Optibase, Fibronics and Adacom. Doron Herzlich of VCON also founded Optibase and Mediagate. Dr Ganor of VocalTec has been behind the establishment of Viroval and ITXC. Izhak Tamir of Orckit established Corrigent systems, Spediant, Siliquent Technologies and Tetis. This seems to suggest that certain characteristics of these international entrepreneurs give them the capabilities necessary for the establishment of born global firms. These international entrepreneurs spot opportunities, are innovative, proactive and risktaking across national borders, in order to create value in their organization. However, the decision to go global from inception is not only related to the founder’s global vision and characteristics. The high degree of internationalization is not always a strategic objective for the founders, but can be a necessity. The phenomenon of born global firms must be studied within the context of the specific industry and its degree of internationalisation (Rasmussan, Madsen and Evengelista, 2001). In certain industries, the prospects for establishing a domestic-oriented firm simply do not exist because of the high degree of industry globalization. The telecommunication industry examined in this study is global by nature. There are accepted international telecommunications standards that allow companies to develop global standard products. Similar to other technology-intensive industries, the telecommunication industry tends to have high R&D costs. Telecommunication products are global by nature and tend to have a short life cycle. One domestic market, especially

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a small one like the Israeli market, cannot justify the high R&D investment of these companies. Even a developed continent, such as Europe or North America, is not sufficient by itself in this industry, hence the need to go global rapidly and at an early stage. The short life cycles of telecommunication products simply does not permit a slow incremental process of internationalization. The peripheral location of Israel, with no neighbouring countries with significant sales potential, forces Israeli technology-intensive born globals to start global activities on other continents from inception. PCOM strategies and patterns After the decision to go global from inception, the next step is actually starting the rapid globalization process. This study developed a PCOM (products, customers, operations and markets) framework to examine the globalization strategies of Israeli technology-intensive born global firms (Sperling, 2005). Luostarinen’s POM framework (Luostarinen, 1970, 1979) and partly his extended POM $ICA (products, operations, markets, price, intermediate, customer and advertisement) framework (Luostarinen and Gabrielsson, 2004) has been used as the basis for this analytical tool. Product strategy The term system is used to denote a package that includes both goods and services. The term services includes pre-sale support, after-sale support and installation. The products of the firms in this study are typically a combination of physical goods, knowledge and service. What seems to change over time is the mixture of these three elements. Among all the companies studied, we detected a pattern over time in which firms moved from goods (software or software and hardware) to systems, which also included services. The amount of services included in the systems increased as products became more sophisticated and subsequently became complete end-to-end solutions, thus creating a package of goods and services in which the services demanded by the customers were relatively higher and which is denoted here as ‘high-systems’. Thus the firms developed a product strategy over time that was initially based mainly on goods, at a second stage on systems, and finally on high-systems (see Figure 20.1). During this product strategy development, the physical element of the product mix tended to decrease while the expertise and service elements increased. Customer strategy The potential telecommunication customers segments found in this study can be divided into (1) consumer and SOHO (Small Offices and Home Offices), (2) enterprise, and (3) high-end. Enterprise segments consist of organizations that purchase specific kinds of products for the purpose of using them to produce other products, to resell or to facilitate the organization’s operations. High-end companies demand products of high technological quality, high reliability and excellent service (pre-sale and after-sale technical Goods

Systems

Low service Figure 20.1

High systems High service

Typical product patterns

Israeli, born global, knowledge-intensive firms Preliminary stage

Consumer/ SOHO

Enterprise

325

High-end

BATM Emblaze Orckit VCON VocalTec

Figure 20.2

Case companies customer pattern

Preliminary Phase Figure 20.3

Consumer/ SOHO

Enterprise

High-end

Typical customer pattern for technology-intensive born globals

support, and installation). While the consumer and SOHO customer segments are characterized by large volumes and low prices, the high-end segment is characterized by low volumes and high prices. High-end customers in the telecommunication industry include incumbent carriers, ITSPs (Internet Telephony Service Providers), CLECs (Competitive Local Exchange Carriers), mobile operators, mobile phone manufacturers, exchange carriers and clearing houses. When using the target customer segments as a tool to analyse the product development over time, it becomes clear that all of the case companies moved in the same direction. Most of the companies started with the enterprise segment and all of them aimed at the high-end segment (see Figures 20.2, 20.3). However, Emblaze and VocalTec started with the consumer/SOHO customer segment. Targeting the consumer/SOHO segment means targeting millions of potential customers around the globe. Young companies with limited resources cannot build their own global distribution network and global brand name alone and usually have to rely on local distributors and/or OEM deals. In order to be able to sell to the consumer/SOHO segments, the products must be affordable to consumers and small offices; this means low profit margins. Low profit margins mean that sales of large volumes are required to achieve profitability. This is especially true in industries with high R&D costs, such as the telecommunication industry. The marketing expenses for the consumer/SOHO segments, when selling under its own brand name, are considerably higher than the marketing expenses for the enterprise or high-end segments. The combination of high R&D costs, high marketing costs, low profit margins and the relatively long time it takes to build a global brand name and reach a sufficiently high volume of sales makes it very difficult for young born globals to succeed in this customer segment. Israeli technology-intensive born

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globals rarely attempt to target the consumer segment and those few which have attempted it failed. The enterprise segment usually represents thousands of potential buyers around the world. Marketing costs are considerably lower than in the consumer/SOHO segment and the prices of the products are higher. Higher profit margins with lower marketing costs make this market more attractive to born globals than the consumer/SOHO segment. However, thousands of potential customers around the globe still mean that these young companies cannot handle the sales and marketing activities alone. Use of distributors and VARs is common among born globals targeting this segment. The high-end segment usually means that the companies have hundreds of potential customers around the globe. Thus the companies can handle marketing and sales operations alone if they so choose. The marketing expenses in the high-end segment are lower than in the enterprise segment and the profit margins are much higher. This makes the high-end segment the most attractive segment for technology-intensive born globals. Niche-driven, direct marketing of high-end customers is less expensive and more profitable for these companies. In spite of this, out of the five case companies only Orckit started in the high-end segment. There seem to be three reasons for not starting at the high-end segment: 1.

2. 3.

Young born global firms simply do not have a complete end-to-end solution, with mature, high-quality and reliable technology, which is necessary when targeting the high-end segment. Young born global firms lack the track record in the enterprise segment which seems to be necessary in order to enter the high-end segment. A belief among the founders that they would be able to succeed in the consumer/SOHO or enterprise segment. Success in these segments can indeed turn a young born global into a large established global player. However, the difficulties of succeeding in these segments, and especially in the consumer/SOHO segment, seem to be underestimated.

As companies ‘climb the food chain’ (using their expression), they move towards heavier, more complicated end-to-end solutions. When moving from the consumer/SOHO segment to the enterprise segment and from the enterprise to the high-end segment, the products change accordingly. The products become more complete, end-to-end solutions, their price rises and more service is needed. With change in the customer segments and product characteristics the distribution channels change as well, as was previously described. Operations strategy All the case firms in this study started with non-investment operations. The first operations mode used in all cases was export. In two cases (Orckit and Emblaze), export of R&D services represented a preliminary stage, during which the firms performed R&D work for foreign companies. Both companies abandoned the export of R&D services as soon as they developed their own technological innovation. Starting with non-investment operations is in accord with the Helsinki model (Luostarinen, 1970; Luostarinen, 1979, 60) and with research on small high-technology UK firms that found that 90.2 per cent of the firms had a marketing/distribution foreign link at their first stage of internationalization (Jones, 2001).

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The most common operation modes found in this study were export, import (typically of standard components), subsidiary operations, cooperative operations, and acquisitions. When establishing foreign subsidiaries all case firms started by establishing a greenfield subsidiary. Other subsidiary establishment modes such as acquisitions and equity joint ventures were used only after establishing at least one greenfield subsidiary. When we examined the timelines and the data, three things became evident: (a) International operations started on inception or as soon as the first products were developed. (b) Case companies tended to start with export followed by the establishment of subsidiaries, which were greenfields. (c) Equity joint ventures were rare and not significant to the companies’ success. For Emblaze, the joint venture proved to be of little importance and, for VCON, the joint venture subsidiary arrangement did not work. These findings are in accord with Hashai and Almor (2004), who found that born global firms started by using exports, then established greenfield marketing subsidiaries, and finally engaged in more advanced operation methods such as mergers and acquisitions. Figure 20.4 shows the general trend of operation modes utilization shown by analysis of the case firms in this research. Market strategy All the case companies realized the key role of the North American market in the telecommunications industry. The difference between the firms was that, while some decided to focus their main efforts on the North American market from inception, others concluded that entry into the North American market required too many resources at that stage. These companies focused their main efforts on Europe during the first phase. The geographic market pattern as presented in Figure 20.5 shows the main geographical markets on which the companies focused their marketing and sales efforts. Companies focusing their main marketing and sales efforts on the North American or European market, or both, can also have sales in Asia and other markets. Indeed, in most cases, business took place on all these three continents relatively soon after inception. Looking at the data we see that three out of the five case companies established their first greenfield subsidiary in the US. Orckit, because of its agreement with General DataCom, and BATM, owing to its conclusion regarding lack of sufficient resources, started by investing more resources in the European market. All of the case companies recognized that 60 to 70 per cent of their revenues, according to data on other older Export of R&D services

Figure 20.4

Export of products

Pattern of operation modes

Subsidiary (greenfield)

International strategic alliances Acquisitions Equity joint ventures

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Handbook of research on European business and entrepreneurship Market pattern of Israeli technology-intensive born globals US Asia

Other

Europe Larger business potential Figure 20.5

Smaller business potential

Market pattern

companies in the telecommunication industry, should come from the North American market. VocalTec and Emblaze acted accordingly from inception by investing most of their efforts in the North American market. This was also true, though to a lesser degree, for VCON. Analysis of the market strategy of the case companies reveals that the concept of business distance (Luostarinen, 1970; Luostarinen, 1979) and psychic distance (Johanson and Vahlne, 1977; Johanson and Wiedersheim-Paul, 1975) has become much less relevant. The decisions regarding target markets were mainly based on market potential and the resources needed to enter the target market. This view of markets will be termed business potential (Sperling, 2005) When analysing the market strategy of technology-intensive born globals we should note also the speed with which these companies enter new markets. For instance, BATM was established in 1992 and, by 1997, it had generated revenues in Europe, America, Africa and Asia. In fact, all the case companies had generated revenues in Europe, North America and Asia within seven years from inception. Sales promotion strategy The cases of Emblaze and VocalTec are clear indications of the importance of launch events and media coverage. For Emblaze, the impact of the demonstration in MILIA in 1996 was tremendous and generated around 400 news articles around the world. For VocalTec the breakthrough happened when its technology was demonstrated to a Wall Street Journal reporter in a North American 1995 road show. This resulted in a lengthy article on VocalTec and the Internet phone, which had a tremendous effect. Companies and reporters from around the globe approached VocalTec to learn about the Internet Phone and the future of VoIP (Voice over IP). In the following months thousands of articles around the world followed. The topic of launch events, road shows and key media coverage is not researched extensively in connection with the born global phenomenon. However, as these two cases clearly illustrate, media coverage, especially by key media such as the Wall Street Journal, generated by launch events or road shows, can be essential for the rapid globalization process of these companies.

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Discussion and conclusions The research question in this chapter was posed as follows: ‘Can a mainstream pattern of globalization be identified among the firms studied?’ Based on the findings presented so far, the globalization process of the technological-intensive born globals can be illustrated as in Figures 20.6 to 20.10 showing the directions in which these companies developed during their globalisation process. The illustrations place the developmental stages of the firms on a four-vector, PCOM model, each vector representing one growth direction: P representing growth along the product line, C, type of customer group, O operations and M, growth in different markets. The patterned areas in the graphic illustrations represent the mix of products, customers, operations and markets which are targeted by the companies at a certain phase. Technology-intensive born globals do not always follow the exact illustrated order. The division into different phases is for illustration purposes only. The illustrations are used to show the directions which these companies choose during their globalization process. All case companies moved forward on each vector, never backward. In the preliminary phase (Figure 20.6), companies performed R&D subcontracting activities for foreign customers. The companies had no marketing and sales activities during this phase. It should be noted that three out of the five companies in this study skipped this phase entirely. The first phase (Figure 20.7) shows how the technology-intensive born globals in this study tend to start with export operations to North America and Europe (representing

Preliminary phase

P High-systems Systems Goods

M

Other

Asia

Smaller business potential

US Europe Larger business potential

R&D services Export of R&D services Export Import Subsidiary (greenfield) ISA, aquisitions, Equity JV

O Figure 20.6

Born globals, preliminary phase

Consumer SOHO

High-end Enterprise

C

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P High-systems Systems Goods

M

Other

Asia

Smaller business potential

US

R&D

Europe

services

Larger business potential

High-end

Consumer SOHO

Enterprise

C

Export of R&D services

Export Import Subsidiary (greenfield) ISA, aquisitions, Equity JV

O Figure 20.7

Born global, first phase

the highest business potential at the time) while targeting the consumers and SOHO customer segments. All the case companies started with an export operation that mainly targeted the North American and European geographical markets. Many companies, however, seemed to skip this phase and avoided the consumer and SOHO customer segments. When entering this or subsequent phases, the companies that started their activities in the preliminary stage began closing down their R&D subcontracting work. During this phase, companies did not target the enterprise or high-end segments and typically did not acquire any companies or develop significant strategic alliances. At the beginning of this phase no foreign subsidiaries had been established in most cases. The products sold during this phase were classified in this study as goods, including products (hardware and software) with a very limited service level, if any at all. The second phase, as shown in Figure 20.8, shows companies targeting the enterprise customer segment and moving out of the consumer and SOHO segments while targeting mainly the North American and European geographical markets. At this stage, greenfield subsidiaries were established. High-end customers were not yet targeted and acquisitions

331

Israeli, born global, knowledge-intensive firms

P High-systems Systems Goods

M

Other Asia

R&D services

US Europe

Smaller business Larger business Export of potential potential R&D services

High-end Consumer SOHO Enterprise

C

Export Import Subsidiary (greenfield) ISA, aquisitions, Equity JV

O Figure 20.8

Born global, second phase

or significant strategic alliances typically had not been carried out. During this phase the products in this study were classified as systems. During the third phase (Figure 20.9), companies had already exited the consumer and SOHO customer segments and started targeting high-end customers in addition to the enterprise segment. The products are systems and high-systems. During this phase, the firms tended to discontinue sales of goods with low or no service. They started developing their business in the Asian markets in addition to their existing efforts in North America and Europe. The geographical market patterns show an expansion of the marketing and sales effort. While some business could have taken place in Asia and other countries in the previous phases, very little marketing and sales efforts or resources had previously been dedicated to this region. During this phase, greenfield subsidiaries were established and strategic alliances and acquisitions became part of the company’s toolkit. During the fourth phase (Figure 20.10), the companies focused on high-end customers and moved out of the enterprise segment, while employing all relevant operation modes including export, import, greenfield subsidiaries, acquisitions and strategic alliances. During this phase, the companies targeted all significant potential markets. The products were classified as high-systems while sales of goods and systems were discontinued. Jones and Coviello (2005) argue that born global behaviour is understood better when we create a dynamic profile of streams of events that reflects change and developments of

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P High-systems Systems Goods

Other

Asia

US Europe

R&D services

Smaller business potential

Larger business potential

High-end

Consumer

M

SOHO

Enterprise

C

Export of R&D services

Export Import Subsidiary (greenfield) ISA, aquisitions, Equity JV

O Figure 20.9

Born global, third phase

the firm’s internationalization. Bearing in mind that this study focused on the time-based development of Israeli, knowledge-intensive born global firms, and that our sample consisted only of five telecom firms, findings should be viewed in this light. The findings show a much more rapid pace of internationalization than usually reported in the classic stages theory literature (for example, Johanson and Wiedersheim-Paul, 1975) and reveal that, contrary to Johanson and Vahlne’s (1990) claim, small, rather than large, firms make large internationalization steps in a short time frame. The findings further show that these firms are not able to succeed if they continue to focus on the private consumer and SOHO segments. Their success seems to depend upon their ability to create systems, based on a combination of goods and services that they sell to the high-end enterprise sector. This is similar to the finding reported by Almor and Hashai (2004) that these firms prefer to focus on relatively few customers for whom the firm can create a high added value, while employing a host of internationalization strategies. In addition, the study showed the central role the entrepreneur(s) of the born global firm play. The entrepreneur’s personality, previous experiences, skills and values have a

Israeli, born global, knowledge-intensive firms

333

P High-systems

Systems

Goods

Other

Asia

US

R&D

Europe

services

M Smaller business potential

Larger business potential

High-end

Consumer SOHO

Enterprise

C

Export of R&D services

Export Import Subsidiary (greenfield) ISA, aquisitions, Equity JV

O Figure 20.10

Born global, fourth phase

tremendous impact upon the key decisions and strategies that the born global firm chooses. Despite the fact that the various entrepreneurs had different backgrounds, skills and networks, the findings showed that the Israeli, knowledge-intensive born global companies in this study developed according to a typical pattern, where they started with simpler products and over time added services and more complexity. Thus, while entrepreneurs played an important role, it seems that success of these born globals was dependent, among others, upon their ability to focus on high-end customers around the globe to whom they sold high system products while employing a host of international strategies. Although the findings throw light upon the research question posed in the beginning, it remains to be seen if these firms will be able to continue their growth by employing a global niche strategy, or if they will change their strategies at a future point and return to the enterprise or the consumer and SOHO segments.

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Overview of the internationalization process of firms in Israel This chapter examined the internationalization of Israeli, born global, knowledgeintensive firms. Israel, a small country that is located at the periphery of the EU, was able, notwithstanding its geographical position, to create a viable high-tech industry. We showed how Israel created a comparative advantage for high-tech and knowledgeintensive industries over a period of about 20 years, by encouraging the population towards higher education, by creating a favourable environment for start-ups and by developing supporting industries such as the VC industry. The study presented in this chapter shows that entrepreneurial firms which are provided with the right contextual variables, such as supporting industries and the right infrastructure, are able to succeed internationally over a relatively short period of time. While we showed that the entrepreneur plays an important role in the establishment and development of the born global firm, we also found that born global companies do not have many strategic choices and we showed that all the firms studied needed to focus on global niches comprising large customers in order to be successful. At the policy level these findings show that governments need to support infrastructures and national context in order to create a conducive environment for born global companies to grow and to succeed. At the firm level the findings raise questions about success over time of born global companies as well as the growth options that are open to such companies. References Aaby, N.E. and S.F. Slater (1989), ‘Management influence on export performance: a review of the empirical literature 1978–1988’, International Marketing Review, 6(4), 7–22. Acs, Z.J., R. Morck, J.M. Shaver and B. Yeung (1997), ‘The internationalization of small and medium sized enterprises: a policy perspective’, Small Business Economics, 9(1), 7–20. Almor, T. (2000), ‘Born global: the case of small and medium sized, knowledge-intensive, Israeli firms’, in T. Almor and N. Hashai (eds), FDI, International Trade and the Economics of Peacemaking, College of Management, Rishon LeZion, Israel. Almor, T.and N. Hashai (2004), ‘The competitive advantage and strategic configuration of knowledge-intensive “born global” firms: a modified resource based view’, Journal of International Management, 10, 479–500. Almor, T. and S. Hirsch (1995), ‘Outsiders’ response to Europe 1992: theoretical considerations and empirical evidence’, Journal of International Business Studies, 26(2), 223–38. Amin, A. and N. Thrift (1994), ‘Living in the global’, in A. Amin and N. Thrift (eds), Globalization, Institutions and Regional Development in Europe, Oxford: Oxford University Press. Avnimelech, G. and M. Teubal (2004), ‘Venture capital policy in Israel: a comparative analysis & lessons for other countries’, in M. Sunil and A. Bartzokas (eds), Financial System, Corporate Investment in Innovation and Venture Capital, Cheltenham, UK and Northampton, MA, USA: Edward Elgar. Bell, J. (1995), ‘The internationalization of small computer software firms: a further challenge to “stage” theories’, European Journal of Marketing, 29(8), 60–75. Bilkey, W.J. and G. Tesar (1977), ‘The export behavior of small-sized Wisconsin manufacturing firms’, Journal of International Business Studies, 8(Spring/Summer), 93–8. Blass, A. and Y. Yafeh (1998), ‘Vagabond shoes longing to stray – why Israeli firms list in New York – causes and implications’, 29, Jerusalem: Research Department, Bank of Israel. Bloodgood, J.M., H.J. Sapienza and J.G. Almeida (1996), ‘The internationalization of new high potential US new ventures’, Entrepreneurship Theory and Practice, 20(4), 61–76. Bonaccorsi, A. (1992), ‘On the relationship between firm size and export intensity’, Journal of International Business Studies, 23(4), 605–35. Buckley, P. (1989), ‘Foreign direct investment by small-and medium-sized enterprises: the theorethical background’, Small Business Economics, 1, 89–100. Cavusgil, T. (1984), ‘Organizational characteristics associated with export activity’, Journal of Management Studies, 21(1), 3–22. Coviello, N.E. and H.J. Munro (1995), ‘Growing the entrepreneurial firm: networking for international market development’, European Journal of Marketing, 29(7), 49–61.

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Coviello, N. and H.J. Munro (1997), ‘Network relationships and the internationalisation process of small software firms’, International Business Review, 6(4), 361–86. Dana, L.P., H. Etemad and R.W. Wright (1999), ‘Theoretical foundations of international entrepreneurship’, in R.W. Wright (ed.), Research in Global Strategic Management. International Entrepreneurship: Globalization of Emerging Businesses, Stamford, Conn.: JAI Press. Eisenhardt, K.M. (1989), ‘Building theories from case study research’, Academy of Management Review, 14(4), 532–50. Gabrielsson, M. and V.H.M. Kirpalani (2004), ‘Born globals: how to reach new business space rapidly’, International Business Review, 13, 555–71. Gemunden, H.G. (1991), ‘Success factors of export marketing: a meta-analysis critique of the empirical studies’, in S.J. Paliwoda (ed.), New Perspectives on International Marketing, London: Routledge. Glaser, B. and A. Strauss (1967), The Discovery of Grounded Theory: Strategies for Qualitative Research, New York: Aldine de Gruyter. Harveston, P.D., B.L. Kedia and P.S. Davis (2000), ‘Internationalization of born global and gradual globalizing firms: the impact of the manager’, Advances in Competitiveness Research, 8(1), 92–9. Hashai, N. and T. Almor (2004), ‘Gradually internationalizing “born global” firms: an oxymoron?’, International Business Review, 13(4), 465–83. Hirsch, S. (1989), ‘Services and service intensity in international trade’, Weltwirtschaffliches Archiv – Review of World Economics, 125(1), 45–60. IVC Research Center (2001), IVA 2001 Yearbook, A Survey of Venture Capital and Private Equity in Israel, IVC Research Center. Johanson, J. and J.E. Vahlne (1977), ‘The internationalization process of the firm – a model of knowledge development and increasing foreign market commitment’, in P. Buckley and P. Ghauri (eds), Internationalization of the Firm – A Reader, London: The Dryden Press. Johanson, J. and F. Wiedersheim-Paul (1975), ‘The internationalization of the firm – four Swedish cases’, Journal of Management Studies, (October), 305–22. Jones, M.V. (1999), ‘The internationalization of small high-technology firms’, Journal of International Marketing, 7(4), 15–41. Jones, M.V. (2001), ‘First steps in internationalisation: concepts and evidence from a sample of small hightechnology firms’, Journal of International Management, 7(3), 191–210. Jones, M.V. and N.E. Coviello (2005), ‘Internationalisation: conceptualizing an entrepreneurial process of behaviour in time’, Journal of International Business Studies, 36(3), 284–303. Kaufmann, F. (1995), ‘Internationalization via cooperation strategies of SMEs’, International Small Business Journal, 27–32. Keeble, D., C. Lawson, S.H. Lawton, B. Moore and F. Wilkinson (1997), ‘Internationalisation processes, networking and local embeddedness in technology-intensive small firms’, Small Business Economics, 11, 327–42. Knight, G.A. and S.T. Cavusgil (2004), ‘Innovation, organizational capabilities, and the born-global firm’, Journal of International Business Studies, 35(4), 334. Lu, J.W. and P.W. Beamish (2001), ‘The internationalization and performance of SMEs’, Strategic Management Journal, 22, 565–86. Luostarinen, R. (1970), ‘Foreign operations of the firm’, Helsinki School of Economics and Business Administration. Luostarinen, R. (1979), ‘Internationalization of the firm’, Helsinki School of Economics and Business Administration. Luostarinen, R. and M. Gabrielsson (2001), ‘Born globals of SMOPECS – what, where, when, why, and how’, paper presented at the Annual Conference of European International Business Academy, Paris. Luostarinen, R. and M. Gabrielsson (2004), ‘Finnish perspectives of international entrepreneurship’, in L.-P. Dana (ed.), Handbook of Research on International Entrepreneurship, Cheltenham, UK and Northampton, MA, USA: Edward Elgar, pp. 383–403. Madsen, T.K. and P. Servais (1997), ‘The internationalization of born globals: an evolutionary process?’, International Business Review, 6(6), 561–83. McKinsey and Co. (1993), Emerging Exporters: Australian High Value-Added Manufacturing Exporters, Melbourne: Australian Manufacturing Council. McNaughton, R.B. (2000), ‘Determinants of time-span to foreign market entry’, Journal of Euromarketing, 9(2), 99–112. Ministry of Industry, Jerusalem, Israel (2003), Israel Economy 2002: Overview and Opportunities. Moen, O. (2002), ‘The born globals: a new generation of small European exporters’, International Marketing Review, 19(2), 156–75. Moen, O. and P. Servais (2002), ‘Born global or gradual global? Examining the export behavior of small and medium-sized enterprises’, Journal of International Marketing, 10(3), 49–72.

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Narula, R. (2002), ‘Collaboration by SMEs: some analytical issues and evidence’, in F. Contractor and P. Lorange (eds), Cooperative Strategies and Alliances, New York: Pergamon Press. OECD (2005), OECD in Figures, 2005 edn, education – expenditures. Oviatt, B.M. and P.P. McDougall (1994), ‘Toward a theory of international new ventures’, Journal of International Business Studies, 25(1), 45–64. Oviatt, B.M. and P.P. McDougall (1995), ‘Global start-ups: entrepreneurs on a world-wide stage’, Academy of Management Executive, 9(2), 30–43. Oviatt, B.M. and P.P. McDougall (1997), ‘Challenges for internationalization process theory: the case of international new ventures’, Management International Review, special issue 1997/2, 85–99. Porter, M.E. (1990), The Competitive Advantage of Nations, London and Macmillan and New York: The Free Press. Rasmussan, E.S. and T.K. Madsen (2002), ‘The born global concept’, paper presented at the EIBA Conference, Athens. Rasmussan, E.S., T.K. Madsen, and F. Evengelista (2001), ‘The founding of the born global company in Denmark and Australia: sensemaking and networking’, Asia Pacific Journal of Marketing and Logistics, 13(3), 75–107. Reid, S.D. (1984), ‘Information acquisition and export entry decisions in small firms’, Journal of Business Research, 12, 141–57. Rennie, W.R. (1993), ‘Global competitiveness: born global’, The McKinsey Quarterly, (4), 45–52. Roberts, E.B. and T.A. Senturia (1996), ‘Globalizing the emerging high-technology company’, Industrial Marketing Management, 25(6), 491–506. Sperling, G. (2005), ‘Product, Operation and Market Strategies of Technology-intensive Born Globals: The case of Israeli Telecommunication Born Globals’, Helsinki School of Economics, Helsinki. Strauss, A. (1987), Qualitative Analysis for Social Scientists, Cambridge: Cambridge University Press. Stray, S., S. Bridgewater and G. Murray (2001), ‘The internationalisation process of small, technology-based firms: market selection, mode choice and degree of internationalisation’, Journal of International Global Marketing, 15(1), 7–29. UNESCO Institute of Statistics (2005), Country profiles – Israel, http://www.uis.unesco.org/profiles/EN/EDU/ countryProfile_en.aspx?code=8400. Wright, R.W. (ed.), (1999), Research in Global Strategic Management, International Entrepreneurship: Globalization of Emerging Businesses. Stamford, Conn: JAI Press. Yin, R.K. (1994), Case Study Research, Newbury Park, CA: Sage, 2nd edn. Zahra, S.A., R.D. Ireland and M.A. Hitt (2000), ‘International expansion by new venture firms: international diversity, mode of market entry, technological learning and performance’, Academy of Management Journal, 43(5), 925–50. Zuckerman, E.W. (2001), ‘Venture capital in Israel: emergence and globalization’, Stanford Graduate School of Business, vol. case # SM-88.

21 Italian SME international strategies: state of the art and some empirical evidences1 Alberto Mattiacci, Christian Simoni and Lorenzo Zanni

Introduction The aim of this chapter is to analyse the role of small to medium enterprises (SMEs) in Italy and their recent competitive strategies facing globalization. In particular, we focus on firms in the fashion business considered in a broad sense (textile, apparel, shoes, leather goods, gold and jewellery). ‘Made in Italy’ – and particularly ‘in Tuscany’ – has strong market power and a worldwide known reputation in the fashion industry (firms such as Gucci, Prada and Ferragamo are located in Tuscany). Nevertheless, after years of constant growth, the Italian fashion industry has steadily slowed down, partly as a consequence of a negative international conjuncture and of the emergence of new competitors (such as China). In this changed competitive scenario, we focus on a few specific research objectives, summarized in the following research questions: 1. 2.

3.

4.

Among the numerous relevant variables, what are the peculiarities of Italian SMEs? Among the competitive dynamics of the fashion business, how important is the territory and belonging to a local cluster, in differentiating firm performances; to what extent does it influence the entrepreneurial development? Within the above-mentioned clusters, do firms have homogeneous or different structural characteristics and behaviours? In the case of differences, is it possible to identify business typologies? At first glance, a few ‘leading firms’ seem to play a primary role in the local development process and to be characterized by a different endowment of resources and competencies when compared to other firms. In terms of international approach, are there any differences in SME strategies and performances?

We adopt an interdisciplinary approach to the analysis. We discuss the competitive advantage of ‘Made in Italy’ and the recent challenges in the international markets with an ‘eclectic explanation’ organized along three different levels: 1. 2.

industry-specific – different strategies and performances can be explained in terms of sector analysis; cluster-specific – the entrepreneurial development is spatially concentrated in local production ‘clusters’, or industrial districts, dominated by SMEs; in particular, we focus our attention on the Arezzo industrial districts, based on the assumption that they are representative of the Italian model of production (Arezzo clusters are among the two hundred or so Italian industrial districts); 337

338 3.

Handbook of research on European business and entrepreneurship firm-specific – within the same cluster there are different types of firms that adopt different strategies (Porter, 1990); in particular, SMEs seem to be influenced by some leading companies located in the territory; international strategies can be different in terms of market approach (‘do-it-alone’, or subcontracting strategies) and in terms of performances.

Italian SMEs: a ‘micro-giant’ towards international markets The landscape Italian SMEs’ international attitude is to be considered in the light of local economic culture, which is strongly connected (Bertoli, 2004; Unioncamere, 2005; Banca d’Italia, 2005) (a) to our manufacturing heritage, coming directly from the Middle Ages; (b) to the strongest relevance of the territory; (c) to the weakness of the so-called ‘Country System’; and (d) to the ‘micro-firms’ relevance. The first is the humus of our worldwide positioning as ‘style setter’ as, for instance, in the ‘fashion system’. Italians tend to be very proud of this; they consider their manufacturing capability a real heritage, a sort of historical trademark to defend and update; consequently, it is very difficult even to accept the idea of delocalization, especially when affecting what we consider our traditional productions: clothes, furniture, shoes, domestic apparel, food and so on. The second is the visible basis of our identity. We recognize we are part of a system, though on a local basis, sometimes extremely small. Our dialects tend to exclude, our monuments and cities are considered as something unique and distinctive to be proud of, our first competitor is our neighbour and so on. Nobody can really see what a district is, without understanding what the word ‘territory’ means for us. The third is a pure consequence of the previous one. We, as Italians, are completely unable to consider ourselves as a system; we have difficulties in recognizing any superior interest, for which it can be useful to give up something personal. In a global competition, the brand new enormous opportunities in Asia will not be caught by our businesses without a turnaround in this attitude of mind. Last but not least, SMEs appear to be, in Italy, inefficient when evaluating business behaviours, including internationalization. In fact, any external observer should first consider that Italy shows the highest presence of ‘micro-firms’ (fewer than 10 employees, with a family-centred governance model) in Europe. In the EU these firms represent 90 per cent of the total number of firms, while in Italy this rate is about 95 per cent. Italy shows the lowest ratio of employees to firms of Europe: 3.7 versus, for instance, 13.1 in Germany, 12.1 in the UK and 6.5 in France. This category absorbs more than seven million employees (47.3 per cent of total manufacturing-services employees) and generate about onethird of the total added value, as against a European average of about one-fifth. The four-axes model In order to address issues about the way Italian SMEs are internationalizing, it is useful to concentrate on some key factors. As managing non-domestic markets is traditionally considered part of business strategy, the state of the art of Italian SMEs internationalization can be drawn from this point of view using a comprehensive model based upon four axes (Figure 21.1).

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PRODUCTION Pavitt’s Traditional and Specialized suppliers The ‘small multinational’ model

COUNTRIES Proximity in delocalization Tradition in marketing

MARKETING Niche approach

VALUES 96% of exporters 57.6% of total export

Figure 21.1

Four axes model

Production: this axis expresses how internationalization directs manufacturing decisions (specialization, delocalization, make or buy and so on). The 2004 World Investment Report demonstrates how Italy is one of the weakest European countries as foreign investors. Small firms (SE), however, are playing a growing role in internationalizing Italian production: ICE estimates that in 2004 more than 50 per cent of Italian multinational companies were SEs. This process accelerated after introduction of the Euro (ICE, 2005). On the other hand, medium-size enterprises (MEs) can be considered as ‘the engine’ of the Italian manufacturing system’s internationalization: the percentage of employees abroad more than doubled during the past ten years, up from 4.2 in 1994 to 9.2 in 2004 (ICE, 2005). With regard to products, Italian SMEs’ comparative advantage is basically focused on two Pavitt classes of industries: traditional and specialized suppliers (which includes medium to high technology products, made by the so-called ‘not-invented-here’ techs). According to many authors (including Monti, 2005), this model affects the Italian export with a sort of ‘dynamic inefficiency’, as it is concentrated on the slowest-growing industries. In particular, SEs in the traditional one show the strongest attitude to delocating wood production (furniture excluded) abroad, while MEs emerge for leather products and footwear (Table 21.1). Countries: this axis describes the geographical spectrum hidden by the word ‘abroad’, in terms of either production or trading. As mentioned above, Italian SMEs are currently increasing their multinational efforts. They tend to delocate their manufacturing activities abroad in order to regain the competitiveness they lost in favour of low labour-cost countries. This flow of FDIs is currently favouring the closest areas: SEs tend to prefer

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Table 21.1

Percentage of subsidiaries’ employees by industry in 2003

Textiles Clothing Footwear and leather products Wood (furniture not included) Plastic materials

SEs

MEs

BEs

Tot

11.7 14.7 19.0 40.4 7.8

16.4 34.1 50.8 28.8 12.7

71.9 51.2 30.2 30.8 79.5

100 100 100 100 100

Source: ICE (2005).

Table 21.2

Percentage of subsidiaries’ employees by region in 2003

Europe (15) Eastern and Central Europe Other European Middle East and North Africa Other Africans North America Latin America Central Asia Far East Oceania World

SEs

MEs

BEs

Tot

3.1 12.9 3.2 9.0 15.3 1.6 1.2 4.4 5.7 1.0

4.5 19.7 5.1 12.8 3.2 4.9 4.0 21.6 10.5 3.8

92.4 67.4 91.7 78.2 81.5 93.5 94.8 74.0 83.8 95.2

100 100 100 100 100 100 100 100 100 100

5.2

8.4

86.5

100

Source: ICE (2005).

Eastern Europe (firstly Romania), North Africa and Middle-Eastern countries. ICE estimates that Eastern Europe is the area with the largest number of Italian companies’ employees (about 13 per cent) (ICE, 2005). MEs are trying to recover productivity by internationally outsourcing manufacturing phases in Asia as much as in Eastern Europe (Table 21.2). The same attitude is shown in marketing activities: distance and its related costs are core variables in selecting the countries to penetrate. Both SEs and MEs prefer Europe (about 74 per cent of total export) as a market (Table 21.3); North America imports about 9.6 per cent from MEs and 8.4 per cent from SEs. Only about 6.7 per cent of total exports is done in the Far East, which is a serious weakness, as it moves SMEs away from the core of emerging economies, the real growth engine of the very near future. Marketing: this axis describes the international marketing approach of SMEs. There is a general attitude to consider niches as a ‘natural market’ for our enterprises, particularly of SMEs. This idea is based upon the evidence of a high penetration of the icon and superpremium market segments by our productions and consumer brands, such as Ferrari, Brunello di Montalcino, Bulgari and so on. Moreover, according to Pavitt, specialized suppliers’ competitive advantage is based on niche-typical assets, such as flexibility, highest differentiation and customer service. SEs mostly sell traditional productions to

Italian SME international strategies Table 21.3

341

Export by area in 2003

Europe North Africa Other Africans North America Central and South America Middle East Central Asia Far East Oceania

SEs

MEs

BEs

Tot

30.0 31.8 42.1 27.6 26.4 32.0 28.6 29.5 34.0

27.7 24.9 22.2 29.0 27.3 27.1 29.0 27.3 26.0

42.3 43.3 35.7 43.4 46.3 40.9 42.4 43.2 40.0

100 100 100 100 100 100 100 100 100

Source: ICE (2005).

Table 21.4

Export by product categories in 2003

Textiles Footwear and leather products Wood (furniture not included) Plastic materials Furniture Trade

SEs

MEs

BEs

Tot

34.8 43.1 46.3 20.8 34.2 79.6

33.8 38.1 40.5 44.8 37.5 12.6

31.4 18.8 13.2 34.3 28.3 7.8

100 100 100 100 100 100

Source: ICE (2005).

wholesalers (79.6 per cent of total exports); MEs do the same in process industries such as plastic commodities (Table 21.4). In both cases, SMEs dominate the Italian export. Values: this axis expresses the main figures of SMEs’ internationalization resulting from official statistics. About 60 per cent of Italian exports come from 178 000 firms out of a total 185 000 exporters. They all are SMEs (fewer than 250 employees), about 62 per cent of which are micro-firms. The SE category represents more than 90 per cent of Italian exporters: their number has been substantially increasing since 1996, while their share value (of total exports) decreased to a current 30 per cent (ICE, 2005). Some 6 per cent of Italian exporters are MEs, with a share value of about 27 per cent. The three main protagonists of ‘Made in Italy’: industries, clusters and (small and medium) firms The international success of ‘Made in Italy’ industries: factors of continuity and change a The competitive advantage of ‘Made in Italy’ The role of a nation in allowing its firms to create and sustain competitive advantage in a particular industry is well documented. Porter (1990, p. 19) has evidenced the paradox that, although in a growing globalization

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of industries and internationalization of firms, ‘competitive advantage is created and sustained through a highly localized process. The role of the home nation seems to be as strong as or stronger than ever’. The core of the Italian competitive advantage remained the same during the 1990s as in earlier times. Despite an increasingly strong international competition, Italy still maintains its leadership in many industries. If one considers, for instance, the exports data of 25 possible product categories in the fashion industry during 2001, Italy has been the leading export country in 12 categories, second in class in five categories; in third position in six categories and fourth in one subsector (Fortis, 2005). The success of leading Italian fashion firms seems to depend on a unique combination of craft ability, innovations, and managerial skills (Rabino, Simoni and Zanni, 2002). Manufacturing craftsmanship has been combined with an effective management of critical activities throughout the value chain with the ability to manage effectively artistic and stylistic aspects of production while simultaneously containing the manufacturing costs of high-quality products. However, during the last decade, some important changes have taken place, both in the industrial district structure and in the company strategies (Corò and Grandinetti, 1999; Lazerson and Lorenzoni, 1999; Sabel, 1995). b An emerging new scenario: risks and opportunities for Made in Italy In the last few years the changes of the international competitive arena deeply influenced the competitive factors of Italy. After 1996, Italy began to lose market shares in the international markets (Fortis, 2005) and many Made in Italy businesses are still slowing down. Some changes, on a global and at a national level, mined the foundations of the Italian international success. According to Porter’s (1990, 1998) ‘diamond’ of national competitive advantage, we can summarize them as follows: 1.

2.

3.

4.

Conditions of factors: first, Italian manufacturers have suffered an unfavourable currency exchange rate (re-evaluation of Euro versus US dollar) that penalized exports and increased the national labour cost in comparison with non-EU competitors. Second, there has been a massive increase in some infrastructural costs (such as energy, transport, credit and so on). Conditions of demand: a shrinking demand is the result of an overlapping of multiple effects, including the reduction of internal per capita consumption, the rise of substitute products (such as telecommunication and electronic products versus fashion goods), the overestimation of some market segments (high-quality segments) and a current reduction of exports that corresponds to an increase in imports of some goods. Related and supporting industries: Italian products may have partially suffered from the drop in inbound tourist flows that caused the reduction of sales related to hospitality activities. Delays in the distribution industry, in addition to the accumulated deficits in innovation at a national level (lack of applied research), may also have negatively affected our companies. Strategy, structure and rivalry of enterprises: Italian firms are looking for new structural equilibria both on the quantitative (reinforcement of resources and competencies) and on the qualitative side (refocalization of their entrepreneurial decisions). In particular, the fashion industry suffers from an excessive fragmentation (‘entrepreneurial

Italian SME international strategies

343

dwarfism’), a low level of capitalization, low technological innovativeness (R&D at a system level) and limited capability to manage available marketing levers (difficult relationships with retailers, lack of balance in the product portfolios, price policies inconsistent with product quality and so on). The role of government: institutions have been unable to adopt a comprehensive strategy to promote and defend Italian brands on foreign markets; this chronic inability to cooperate at a national level may encourage the fragmentation and the accomplishment on a merely local scale of promotional activities, thus reducing their effectiveness.

5.

The internationalization of industrial districts Italy still has a large national manufacturing basis, characterized by the presence of industrial districts and SMEs (Becattini, 1987; Pike, Becattini and Sengerberger, 1990; Porter, 1998). In Italy, there are around 200 industrial districts2 specialized in different industries, mainly characterized by a strong presence of SMEs with few large companies (Fortis, 2004). The process of internationalization of Italian industrial districts has some peculiarities: ●

●

●

A strong importance of indirect export strategies; more than 60 per cent of all the production in the fashion industry was exported (Menghinello, 2003); in other words, a ‘commercial approach’ to international trade (producing in the home country and selling abroad). A lower incidence of ‘passive internationalization’ in industrial districts when compared to national data (Mariotti and Mutinelli, 2003). The low presence of large international firms located in industrial districts seems to reduce their competitiveness because it reinforces local routines and the scope of the learning processes. This is an incremental learning process, a path-dependent system with a lock-in effect (non-local trajectories are inhibited and the local system is less reactive to accept new ideas developed abroad). The presence of leading firms or large international companies in industrial districts seems to reinforce their competitiveness (Lazerson and Lorenzoni, 1999): they can be ‘pull actors’ in terms of innovation, human spillover, building international manufacturing networks, adopting international market-seeking strategies if they are embedded in the local system in terms of resources and competencies (Bacci, 2004). They should reinforce the local system rather than acting as monopolists or creating a highly hierarchical organization, which in the long run reduces the SME competencies. A strong difference in terms of ‘active internationalization’, or FDIs (the industrial districts of the North of Italy show a higher incidence of active internationalization). This can partly be explained as depending on (i) the existence of leading companies that do not adopt a strong vertical or horizontal integration of competencies (reducing the domestic rivalry, transforming the small and medium specialized autonomous firms into exclusive subcontractors); (ii) the role of foreign large multinational firms that open the local knowledge to a larger global network; (iii) the existence of domestic rivalry where a correlation between innovation and internationalization and between nature of investment and level of exports (see Zanni, 2004a, and the following analysis) is evident.

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International strategies of leading firms and SMEs in Italian industrial districts a SME international strategies Globalization has induced a growing role of SMEs in internationalization. According to Audretsch (2003), globalization has had two major consequences for SMEs. First, their international activities have been eased; second, some of their size disadvantage has often turned into an advantage in a knowledge-based economy. On the contrary, other authors (such as Varaldo and Ferrucci, 1997; Onida, 2004) recently evidenced the Italian SME weaknesses in terms of advanced knowledge and market power in facing the current international competition. Evidence shows that Italian SMEs manage to conquer external markets via two major strategies: ‘do-it-alone’ or allying with one or more leaders in the market. The strategy choice essentially depends on the firm’s capabilities. Gomes-Casseres (1997) claims that SMEs endowed with high capabilities that allow them to lead a (niche) market generally choose to internationalize their business alone. In contrast, SMEs with fewer capabilities prefer allying themselves with a large firm. Piscitello and Sgobbi (2004, p. 333) argue that SMEs are more likely to hold more capabilities (‘scarce, unique and sustainable resources and capabilities’) as part of a network of SMEs. Although Italian districts have shown extremely good performances over recent decades, they also incurred difficulties in coping with globalization (Mariotti and Mutinelli, 2003; Piscitello and Sgobbi, 2004), including the following: the competition from developing countries, such as China and India, which can benefit from low-cost labour; and finding the resources to finance world-wide marketing activities. Two answers to these problems have emerged: first, the emergence of a small to medium leader in the district that takes up the role of coordinator and interface with the world markets, which is the SME network version of a ‘do-it-alone’ strategy; second, the relationship with a large firm, with either a domestic or a foreign base, through which local firms get access to the distribution channels of the leader while it gains access to the local know-how base (Zanni and Labory, 2002; Bacci, 2004). This is the ‘alliance’ strategy. b The emergence of leaders The recent evolution of SME local systems in Italy only partially depends on collective or homogeneous behaviour of local entrepreneurs; only a few firms act as leaders that ‘pull’ the growth of the local system. From a dimensional point of view, leaders are not necessarily large multinational corporations. Fortis (2004) underlined the low level of presence of large corporations (more than 500 employees) in Italian industrial districts. There is, instead, a significant number of medium (50–499 employees) firms (Coltorti, 2004). Mediobanca-Unioncamere (2005) recently showed that the economic and financial performances of medium Italian firms are much better than those of large firms.3 Many firms in the clusters adopt a network organization: the diffused presence of constellations of SMEs and small groups (Lorenzoni, 1990) might lead to underestimating the importance of medium firms. Focusing our attention on the international strategies of some leading firms acting in the Arezzo cluster, we can better understand some recent trends in the gold and fashion local clusters. In particular, Table 21.5 shows the following: ●

The predominance of small to medium firms (some of these firms are approximately medium size but do not want to go beyond the threshold of 50 employees).

Italian SME international strategies Table 21.5

345

International strategies of some medium-to-large firm in the Arezzo district

Employees Firm Industry (at 31-12-2003)

% export of tot. revenues

Plants of production abroad

Entry strategy in foreign markets

(1)

fashion

2500 employees (group); in Arezzo, 1300 employees

25 Italy 26 Europe 22 USA 29 Pacific

Yes (recently shut off plants in Germany to bring manufacturing back to Italy; beginning on delocalization in Romania)

Various controlled partially owned companies Direct export (with commercial branches) 160 proprietary stores

(2)

fashion

350 employees (employed in Arezzo)

35

Yes (in China, Hungary, Bulgaria, France, Spain, Russia)

Direct export (foreign branches) Joint venture for store openings in China

(3)

fashion

750 employees

50

No

Indirect export Joint venture for the opening of boutiques (China)

(4)

fashion

245 employees

30

Yes (Bulgaria)

Indirect export Direct export (through agents)

(5)

fashion

154 employees

15

No (it has a subsupplier network in China and Tunisia)

Indirect export Direct export (through agents)

(6)

fashion

100 employees

25

No (it has a subcontractors’ network in East Europe)

Indirect export Direct export (through agents)

(7)

fashion

96 employees in Italy

3.3

Yes (Turkey, Romania)

Indirect export Direct export (through agents)

(8)

fashion

45 employees

42

No

Indirect export Licence agreement for store openings in China, Syria and Taiwan Possibile future openings in the US

(9)

gold

501 employees

70

Yes (Jordan)

Indirect export Direct export (distribution branches)

(10)

gold

72 employees

60

No

Indirect export Direct export (distribution branches) 2 proprietary stores in India

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Table 21.5

(continued)

Employees Firm Industry (at 31-12-2003)

% export of tot. revenues

Plants of production abroad

Entry strategy in foreign markets

(11)

gold

105 employees

75

No

Indirect export

(12)

gold

3 employees in Arezzo 150 in Turkey

70

Yes (Turkey)

Indirect export Manufacturing and distribution Jointventure in Turkey

(13) (14)

gold gold

42 employees 41 employees

90 75

No No

Direct export (agents) Indirect export

●

●

●

Only in two cases are there large corporations with multi-plant production systems organized at an international level; the growth of some of these firms can be explained by the fusion of previous local network organizations into one firm. In the past, the role of a few large firms was very important to explain the development of industrial district (one leading firm, Uno A Erre, used to be the entrepreneurs’ incubator from which many SMEs were spun off; Zanni, 1995), while now there are ‘multi-polar’ systems with more leaders. The beginning of FDIs in the manufacturing area (mainly in the textile, apparel and accessories industries), which can contribute to explaining the loss of employees in Arezzo in the last few years (Italian leading firms do not lose resources but usually create new organizations on a global scale). In terms of goals, the predominance of a ‘resource-seeking approach’ in the fashion industry (in general, when part of the production is moved abroad, the export does not grow, which means that the firms are looking for a reduction in the cost of labour and re-import what was produced abroad). In many cases (above all in the luxury and the gold industries), firms prefer to continue producing in Italy and entering foreign markets with export strategies: in the gold industry, we noticed more simple approaches to foreign markets (indirect export) when compared to the fashion industry (where some firms prefer to control foreign markets more directly using commercial direct investments, joint ventures or licence agreements with foreign partners).

These trends seem to confirm that the future competitive advantage of Made in Italy will depend less on the total number of small and micro firms located in domestic industrial districts, and more on the strategies of a few leading firms that are more structured in terms of resources and competencies and with a network organization that combines local embedding with a global market approach. In terms of resources and competencies, the cases analysed show that, in the Arezzo clusters, leaders still have a strong manufacturing core; a gradual change with more employees working in more immaterial functions (marketing, finance, design and so on) will probably continue.

Italian SME international strategies

347

International strategies in Italian industrial districts: some recent evidence from the Arezzo fashion clusters Recent empirical research (see Zanni and Labory, 2004; Zanni, 2004a) highlighted some of the changes that are taking place in industrial districts in Tuscany. In the fashion clusters of Arezzo, we noticed three entrepreneurial processes: (i) a rapid disappearance of many micro-firms (fewer than ten employees) positioned in low market segments (where the Chinese competition is stronger); (ii) the emergence of few medium firms (50 or more employees) that can potentially play a leading role in the clusters and operate on an international scale; (iii) the significant impact of some large global firms that have created strong networks of subcontractors at a local level in the luxury industry; until now this type of firm is protected against the risk of delocalization by their own brands value and by the ‘Made in Italy’ value (firms with worldwide-known brands such as Gucci, Prada, Ferragamo, Celine Production-LVMH Group and the Dolce e Gabbana leather business unit are located in the area between Florence and Arezzo). Here we focus on the fashion local economic systems of Arezzo, an area having three main characteristics: ●

●

●

High industrial specialization in two main industries (apparel and gold) divided into three sub-local systems; in the decade 1991–2001, the employees in the fashion industry decreased (by 25 per cent, though in the leather industry they registered a strong growth of 146 per cent), while in the gold industry there was growth of 25.6 per cent. High incidence of SMEs (in Arezzo, in 2003, about 85 per cent of the 1850 firms in the gold industry had fewer than five employees; around 70 per cent of the 1500 firms in the fashion industry had fewer than five employees); A negative export trend in recent years (a 25 per cent decline in exports in 2002 and 2003 in the gold industry), but with some positive data in the last year, differentiated by industry (with a growth in the first semester of 2005 in Arezzo in both the fashion and gold industries).

Data and results of the first structural survey A structural research was conducted at the end of 2003, beginning of 2004 (Zanni, 2004a). After that, the same updated panel was interviewed for conjunctural surveys at the end of every semester. The research was based on a survey with a semi-structured questionnaire and interviews face-to-face conducted by specialized trained interviewers with a casual sample of firms selected through a sampling methodology that makes it representative of reality. It was decided to interview all of the Arezzo companies with at least 50 employees in the selected industries as an exception to the sampling procedure. The original panel included a total of 205 firms, 115 in the gold industry and 90 in the textile, apparel, leather and shoe industries. The companies were contacted by phone and then one of the owners, or the CEO, or a top manager, was interviewed. On average the interviews lasted about one hour. The structural survey showed differences between the two industries and among three different kinds of firms within the industries: ‘independent firms with brand’, at least 50 per cent of whose revenues come from selling products with their own brands (35.5 per cent in the sample of fashion firms, 69.5 per cent in the gold sample); ‘sub-contractors’, with less than 10 per cent of the total revenues coming from products sold with their own

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Table 21.6

Fashion firms’ export data (2003 survey)

Export propensity

N.

Non-exporter Potential exporter Consolidated exporter

70 12 8

Total

90

Table 21.7

Sub-contractors

Mixed

97.7

100

77.8 13.3 8.9 100

2.3 100

100

With brand(s) 40.6 37.5 21.9 100

Gold firms’ export data (2003 survey)

Export propensity

N.

Non-exporter Potential exporter Consolidated exporter

39 13 63

Total

Freq. (%)

115

Freq. (%) 33.9 11.3 54.8 100

Sub-contractors 100

Mixed 99.9 9.1

100

100

With brand(s) 6.3 16.3 77.5 100

brands (15.6 per cent of the interviewed fashion firms, 9.6 per cent of the gold sample); ‘suppliers with a mixed strategy’, which sell between 10 and 50 per cent of their products with their own brand (48.9 per cent of the fashion firms in the sample, 20.9 per cent of the interviewed gold firms). The survey showed, as mentioned, significant inter-industry differences. In particular, a number of firms in the apparel, textile, leather and shoe businesses have directly invested in manufacturing plants and direct wholesale and retail branches abroad as a way to develop and maintain a close control over an internationally articulated value chain. In the gold industry, indirect export prevails, with foreign independent wholesalers that stretch the supply chain and raise the price points at retail, thus making Italian products less competitive abroad. Even so, the fashion firms seem to have a lower export orientation (Tables 21.6 and 21.7). In the gold industry there are greater differences in terms of revenues share realized abroad when comparing ‘independent firms with brands’ (77.5 per cent of which are consolidated exporters) and subcontractors. In terms of FDIs, in the fashion industry 18 per cent of the firms have shares in others, only 8.3 per cent of which are foreign companies (75 per cent are localized in the economic local system, which is another sign of a high spatial concentration). The data of the gold industry are similar: 26 per cent of the firms have shares in other companies, 91 per cent localized in Arezzo and only 9 per cent abroad. These percentages are lower than those of other Italian industrial districts, particularly in the Northeast, that are more advanced in the internationalization process. In both of the industries, participating to export consortia represents an attempt at compensating difficulties in implementing internationalization strategies through the development of collaborative organizational networks to share resources, investments and competencies. In terms of geographic markets, Europe is the main market for fashion firms, followed by North America, and then Far East countries (particularly Japan) (Table 21.8).

Italian SME international strategies Table 21.8

Market of fashion companies (2003 data) (per cent)

Markets North America Europe Far East Rest of the world Notes:

349

I

II

III

IV

V

Total %

Weighted mean*

13.4 11.9 3.0 0.0

4.5 14.9 4.5 1.5

1.5 16.4 3.0 0.0

3.0 10.4 0.0 0.0

1.5 7.5 3.0 0.0

23.9 61.2 13.4 1.5

0.97 1.97 0.45 0.06

* ‘I’5, ‘II’4. . ., ‘V’1 weightsfreq. (%).

In the gold industry, North America is more important as a market than Europe and Middle-Eastern countries more relevant than Asia (Table 21.9). Finally, in terms of distribution channels, companies of both industries prefer to market their products in foreign markets through wholesalers instead of through shorter channels. This seems to be motivated by the decision to avoid an excessively fragmented distribution, a very dispersed client portfolio and the lack of resources for a more direct control of the market. In both the fashion and the gold industries, export performances were positively correlated to the firms’ age, dimension, positioning (more in the gold sector), span of the client portfolio in terms of types of clients (wholesalers, distributors, independent retailers, department stores and so on), affiliation to consortiums, investments in technology, in-house style department, and product innovativeness. For subcontractors, having collaborative partnerships with leaders positively affected export. Data, methodology and results of the first semester 2005, conjunctural survey In this paragraph we discuss similarities in structural characteristics, strategies and their correlation with performances of SMEs in the fashion and gold industries rather than underlying inter-sector differences. We keep the differentiation between companies that chose a firm-centred brand strategy and subcontractors. This decision is based upon two main factors: first, the results of previous analyses on the same sample: we found evidences that there are indeed significant differences in their internationalization approach; second, an opportunistic methodological decision: four questionnaires were used for the survey, with some differences between the fashion and the gold industry and between subcontractors and firms with their own brand; considering the two subsets of firms together would have meant losing a good deal of information, particularly when considering subcontractors. We use the data collected in the conjunctural survey of the first semester 2005 with a questionnaire consisting of 28 questions. The 193 interviewed firms are part of the 2003 panel, with few changes. 51.5 per cent of the sample consists of firms that adopted an independent brand strategy; the rest are subcontractors. There is a slight prevalence of the gold firms (54.6 per cent) over the fashion firms (45.4 per cent); among the latter, 57.9 per cent are apparel companies. In terms of methodology, we first analysed some descriptive statistics, then we ran a cluster analysis with the neural network technique considering the following proxy variables:

350

Notes:

Total

* ‘I’5, ‘II’4. . ., ‘V’1 weightsfreq. (%).

100.0

5.7 2.9

2.6 1.3

100.0

4.3

55.7 12.9

31.6 10.5

1.3

18.6

52.6

North America Europe Middle East South America Far East Rest of the world

II

I

100.0

10.3 0.0

5.2

58.6 10.3

15.5

III

Market of gold companies (2003 data) (per cent)

Markets

Table 21.9

100.0

13.3 0.0

13.3

51.1 13.3

8.9

IV

100.0

15.4 11.5

7.7

50.0 15.4

0.0

V

100.0

8.0 2.2

5.5

48.4 12.0

24.0

Total %

15.00

1.09 0.30

0.74

7.09 1.77

4.02

Weighted mean*

Italian SME international strategies ●

●

351

for companies with a firm-centred brand strategy – dimensional characteristics (number of employees, total revenues) and strategic decisions (percentage of revenues from export, percentage of revenues as subcontractors, number of brands, investments change in the last semester, investments and employees number changes planned for the next semester); for subcontractors – dimensional characteristics (number of employees, total revenues) and strategic decisions (percentage of revenues from export, percentage of revenues with own brand(s), investments change in the last semester, investments and employees number change planned for the next semester, number of purchasers, percentage of sales from the first and second largest purchasers, number of subcontractors as purchasers, number of purchasers with brands, number of wholesalers).

We chose to use neural clusters as, when compared with clusters resulting from more traditional analysis, they include companies that are more similar among themselves and more different than those of other clusters. Then we ran a principal components analysis, with a Varimax rotation and a normalization with the Kramer method, using the following performance variables: ●

●

for companies with a firm-centred brand strategy – sales per employee, percentage variation of production and sales, planned percentage variation of production and of sales; for subcontractors – sales per employee, percentage variation of production and sales.

Finally, we measured the correlation between clusters and performance components and analysed contingency tables considering clusters and export data. The firms with brands are generally larger, in terms of number of employees (Tables 21.10–12) and of sales (Table 21.10 and Tables 13–14), than subcontractors, about 70 per cent of which have up to 15 employees and sales up to 600 000 euros. The data confirm the trend of firms that chose a firm-centred brand strategy, gradually abandoning lower segments of the market and concentrating on the top segments in terms of price points and image. Only about one-fifth of the sample is positioned in the medium to low or low segment of the market (Table 21.15). The trend is even stronger for subcontractors. Almost 80 per cent of the sample is positioned in the medium to high or high Table 21.10

Sub-contractor – general data

Employees N Valid Missing Mean Median Deviation Sum

93 0 18.57 8.00 39.45 1727.45

2004 Revenues (€1000) 93 0 2000.159 280.000 6803.513 186 014.8

Export % 93 0 11.73 0.00 27.38 1091.38

Revenues with own brand(s) %

Market positioning (1low, . . ., 5high)

93 0 1.60 0.00 5.45 149

93 0 2.38 2.00 1.04 221

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Handbook of research on European business and entrepreneurship

Table 21.11

Independent firms with brand(s) – number of employees

Employees

Frequency

Freq. (%)

Cum. (%)

0–5 6–15 16–50
50

16 33 37 14

16.0 33.0 37.0 14.0

16.0 49.0 86.0 100.0

Total

100

100.0

Table 21.12

Sub-contractors – number of employees

Employees

Frequency

Freq. (%)

Cum. (%)

0–5 6–15 16–50
50

31 35 20 7

33.3 37.6 21.5 7.5

33.3 71.0 92.5 100.0

Total

93

100.0

Table 21.13

Independent firms with brand(s) – sales

Total revenues

Frequency

Freq. (%)

Cum. (%)

20 19 21 21 19

20.0 19.0 21.0 21.0 19.0

20.0 39.0 60.0 81.0 100.0

100

100.0

 350 000 350 000–1 100 000 1 100 000–3 000 000 3 000 000–11 000 000
11 000 000 Total

Table 21.14

Sub-contractors – sales

Sales (€  1000)

Frequency

Freq. (%)

Cum. (%)

100 100–250 250–600 600–3000
3000

24 20 21 15 13

25.8 21.5 22.6 16.1 14.0

25.8 47.3 69.9 86.0 100.0

Total

93

100.0

Italian SME international strategies Table 21.15

Independent firms with brand(s) – market positioning

Market segment

Frequency

Freq. (%)

Cum. (%)

5 41 35 13 6

5.0 41.0 35.0 13.0 6.0

5.0 46.0 81.0 94.0 100.0

100

100.0

High Medium–high Medium Medium–low Low Total

Table 21.16

Sub-contractors – market positioning Frequency

Freq. (%)

Cum. (%) 21.5 58.1 86.0 96.8 100.0

High Medium–high Medium Medium–low Low

20 34 26 10 3

21.5 36.6 28.0 10.8 3.2

Total

93

100.0

Table 21.17 Export (%)

353

Independent firms with brand(s) – export data Frequency

Freq. (%)

Cum. (%)

5 6–29 30–49 50–75
75

25 13 19 22 21

25.0 13.0 19.0 22.0 21.0

25.0 38.0 57.0 79.0 100.0

Total

100

100.0

segment of the market (Table 21.16). There is a high concentration of suppliers of companies with luxury brands and, in general, with a high market positioning. In our opinion, this can be considered the result of two main intervening factors: the presence in the area of fashion leaders such as Gucci, Prada and so on; and a stronger competition of suppliers from highly competitive firms located in developing countries (including China, Turkey, Bangladesh, India, and so on) in the lower segments. Subcontractors have a much lower export orientation than independent firms with brands (11.73 per cent of total sales against only 41.26 per cent average). The latter show a high export orientation: 41 per cent of them export at least half of their production and 21 per cent of these interviewed companies export over 75 per cent, while only one-fourth of them have export revenues that weigh less than 5 per cent (Table 21.17). On the contrary, 77.4 per cent of the interviewed subcontractors do not export at all (Table 21.18).

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Table 21.18

Sub-contractors – export data

Export (% of total sales)

Frequency

Freq. (%)

Cum. (%)

0 1–10 11–60 61–90
90

72 5 6 6 4

77.4 5.4 6.5 6.5 4.3

77.4 82.8 89.2 95.7 100.0

Total

93

100.0

Table 21.19

Sub-contractors – sales composition

Number Sales to of the largest clients client (%) N Valid Missing Mean Median Deviation Sum

Table 21.20

93 0 18.75 4.00 84.09 1.744

93 0 41.83 40.00 32.83 3.890

Sales to the N. of second largest purchasers: N. purchasers: N. purchasers: client (%) subcontractors with brand wholesalers 93 0 14.46 15.00 14.16 1.345

93 0 1.55 0.00 6.67 144

93 0 6.51 2.00 16.34 605

93 0 0.87 0.00 3.63 81

Sub-contractors – dependency on purchasers

% sales largest purchaser

Frequency

Freq. (%)

4 5–39 40–75
75

20 23 33 17

21.5 24.7 35.5 18.3

Total

93

100.0

Cum. (%) 21.5 46.2 81.7 100.0

The selected sample of subcontractors is characterized, in general, by a high degree of dependency on a limited number of purchasers (clients that impose product specifications; Tables 21.19 and 20). Of these have 63.4 per cent only up to five clients and over half of them sell more than 40 per cent of their production to one client. They mostly supply independent firms with brands located in Arezzo or in Tuscany (Table 21.20). They have only a few foreign clients (Table 21.21). Almost 90 per cent of the subset of the sample do not have any client abroad. At the same time, they also have a limited number of clients located in other Italian economic local systems. This, of course, is confirmation of the low level of internationalization but also suggests a general low permeability of Italian industrial districts to suppliers located in other areas, including Italy.

Italian SME international strategies Table 21.21

355

Sub-contractors – purchasers in foreign countries

N. purchasers: abroad

Frequency

Freq. (%)

Cum. (%)

0 1–5
6

82 5 6

88.2 5.4 6.5

88.2 93.5 100.0

Total

93

100.0

We identified four neural clusters for the subset of independent firms with brands and four neural clusters for subcontractors. With regard to the companies that chose a firm-centred brand strategy, relatively surprisingly, the best performers in terms of export are mono-brand SMEs (with an average of 27 employees and around seven million euros of sales) not necessarily positioned in the highest segments of the market, with a considerable 75 per cent average of total revenues coming from sales in foreign countries (cluster ‘3’ in Tables 21.22 and 21.23). The second most commercially internationalized companies are larger multibrand companies (with an average of four brands) mainly positioned in the high or medium to high segments that sell a 50 per cent average of their production abroad. When comparing the clusters with smaller companies, we notice that the firms with a lower market positioning export more than the others. Finally, in general, there seems to be a dimensional threshold under which firms do not have the necessary resources and competencies for internationalization. From Tables 21.24 and 21.25 we notice that the largest luxury multi-brand companies (cluster ‘1’), are the best performers even though they are not the most internationalized ones (see also Table 21.26). With regard to subcontractors, we identified four clusters (Tables 21.27, 21.28). The companies that belong to cluster ‘4’ are the ones that export the most (see also Table 21.29). They are, on average, the largest. They mostly sell to independent companies with brands positioned in the highest segments of the market (see also Table 21.30). Even though highly dependent (in terms of dimension) on the first two clients, they have more numerous portfolios and are able to take advantage of working for high-end leaders to increase their competitiveness in international markets. This seems to confirm the reasoning that there is a positive interorganizational learning process that enables firms related to leaders to increase their knowledge base and their competencies (see also Zanni, 2004a). All of them use, in their turn, subcontractors. Firms in clusters ‘2’ and ‘3’ are smaller and show a lower level of internationalization. Companies in cluster ‘2’ adopt a more risk-reducing strategy, with larger client portfolio and a lower sales concentration. The incidence of branded clients in their market is also higher. Finally, they are more de-integrated as almost all of them use subcontractors (Table 21.31). Finally, cluster ‘1’ includes micro-firms working only for a few clients positioned in the lowest market segments. They are totally enclosed in the local system of production. They are the worst performers (Tables 21.32, 21.33) as opposed to the best performer leading subcontractors included in cluster ‘4’.

356

250 14

659 27

440 14

2 Sum Mean

3 Sum Mean

4 Sum Mean

3 704 37

2355 87

1 Sum Mean

Final Total Sum Mean

Employees

724 775.0 7 247.7

65 690.0 2 119.0

166 102.0 6 920.9

17 711.9 984.0

475 271.0 17 602.6

Revenues (€1000)

4 126 41

762 25

1792 75

234 13

1 338 50

Export (%)

878 9

590 19

153 6

22 1

113 4

Revenues

Independent firms with brand(s) – neural clusters

Cluster

Table 21.22

200 2

34 1

32 1

27 2

107 4

N. Brands

195 2

71 2

46 2

34 2

44 2

Investments (1decrease, . . ., 3increase)

203 2

71 2

53 2

35 2

44 2

Planned employees change (1decrease, . . ., 3increase)

202 2

76 2

48 2

38 2

40 1

Planned investment change (1decrease, . . ., 3increase)

Italian SME international strategies Table 21.23 Market segment High Medium–high Medium Medium–low

Independent firms with brand(s) – clusters’ positioning Clusters 1

2

3

3 60.0% 15 36.6% 8 22.9% 1 7.7%

8 19.5% 8 22.9% 2 15.4%

2 40.0% 10 24.4% 8 22.9% 4 30.8%

27 27.0%

18 18.0%

24 24.0%

Low Total

357

4

Total

8 19.5% 11 31.4% 6 46.2% 6 100.0%

5 100 0% 41 100 0% 35 100 0% 13 100 0% 6 100 0%

31 31.0%

100 100 0%

Conclusions In terms of peculiarities of the SMEs’ internationalization process, Italy is still strong in some traditional industries with companies spatially concentrated in local systems of production that are characterized by a high division of labour among generally small and medium-sized firms. At the same time, we noticed significant changes that are symptoms of the recent transition of local clusters towards more multipolar models with emerging informal networks led by either medium local companies with a more internationalization-forward approach or large multinational leaders usually based in Italy. Within this framework, we found inter-industry differences. In particular, fashion firms, even though apparently less internationalized when considering the percentage of total revenues coming from exports, adopt more evolved international strategies that show a more mature approach to global competition. Firms in the fashion industry tend to use more strategically the potential advantages of an international division of labour on the manufacturing side and of more aggressive and direct entry modes on the marketing side. Of course, these firms do not adopt a homogeneous way to internationalize their businesses. The actual individual approach depends on the company’s resources and competencies and more general corporate and marketing strategies. So, for instance, one can find luxury brand firms that exploit a ‘Made in Italy’ production to enter foreign markets positively associating the manufacturing base to the brand as a fundamental differentiating value, whereas other firms organize subcontractor networks abroad, reimport the goods to Italy, do some finishing value-added manufacturing phases and packaging in Italy and then sell the final products, and so on. Nevertheless, in general terms, we noticed a higher propensity to commit themselves to foreign direct investments and joint venturing. There are even a few cases where the number of employees abroad surpassed that of Italy. Companies in the gold industry only recently started to invest directly in foreign manufacturing activities. This may be partially due to two intrinsic characteristics of this business: high transportation costs and the relative regulations; and a relatively high mechanization, which makes it unprofitable to divide the manufacturing process

358

41 349 33 891 17 559 4 295 2 907

% variation 41 349 75 240 92 799 97 093 100 000

% cum.

Extraction method: principal components analysis.

2 067 1 695 0 878 0 215 0 145

1 2 3 4 5

Note:

Total

Initial eigenvalues

2 067 1 695 0 878

Total 41 349 33 891 17 559

% variation 41 349 75 240 92 799

% cum.

Non-rotated factors weights

Independent firms with brand(s) – principal components on performances

Components

Table 21.24

1 840 1 798 1 002

Total

36 803 35 954 20 041

% variation

36 803 72 757 92 799

% cum.

Rotated factors weights

Italian SME international strategies Table 21.25

359

Independent firms with brand(s) – first of three rotated components

Clusters

N

Mean

Std. deviation

Std. error

1 2 3 4

27 18 24 31

0.357 0.296 0.086 0.205

0.375 0.654 0.569 0.420

0.072 0.154 0.116 0.075

100

0.000

0.552

0.055

Total

Table 21.26

Independent firms with brand(s) – export/clusters contingency table Clusters

Export 5% 6%–29% 30%–49% 50%–75%
75% Total

1

2

3

4

Total

N. % N. % N. % N. % N. %

3 11.1% 3 11.1% 7 25.9% 7 25.9% 7 25.9%

10 55.6% 3 16.7% 5 27.8% 0 0.0% 0 0.0%

0 0.0% 0 0.0% 2 8.3% 9 37.5% 13 54.2%

12 38.7% 7 22.6% 5 16.1% 6 19.4% 1 3.2%

25 25.0% 13 13.0% 19 19.0% 22 22.0% 21 21.0%

N. %

27 100.0%

18 100.0%

24 100.0%

31 100.0%

100 100.0%

internationally into phases according to labour cost asymmetries or similar variables. On the market side, firms in this industry still tend to use wholesalers. This implies two risks: first, a limited control and understanding of the overall value chain and of the final market in particular; second, a dependency on the trade client decisions in terms of suppliers’ selection, price policies, and so on. We also found major differences between two main kinds of firms, those that adopted a firm-centred brand strategy and the subcontractors, that we deeply investigated and illustrated. Although we are provided with evidence supporting the existence of differences, we now want to recompose everything into a more general interpretation. First, the dimensional scale matters, although not simply in terms of a direct correlation between dimension and the level of internationalization. There seems to be a minimum dimensional threshold below which firms are unable, because of a lack of adequate resources (even financial ones) and competencies, to exit from a more secure, comfortable, less uncertain local system. SMEs might overcome their dimension-related limits through the exploitation of locally embedded leaders or through networking informally. Export consortiums is another more formal way to cope collectively with globalization that is consistent with Italian industrial district characteristics and tradition. Second, market

360

Employees

165 5

233 10

173 12

1 157 58

1 727 19

1 Sum Mean

2 Sum Mean

3 Sum Mean

4 Sum Mean

Total Sum Mean

186 014.8 2 000.2

160 906.0 8045.3

3 660.0 261.4

16 076.0 699.0

5 372.8 149.2

Revenues (€1000)

1091 12

500 25

200 14

320 14

71 2

% export on total revenues

Subcontractors – neural clusters (I)

Clusters

Table 21.27

149 2

72 4

10 1

22 1

45 1

% sales with own brand(s)

194 2

32 2

28 2

47 2

87 2

Investments (1decrease, . . ., 3increase)

190 2

38 2

29 2

47 2

76 2

Planned employees (1decrease, . . ., 3increase)

192 2

35 2

28 2

46 2

83 2

Planned investments (1decrease, . . ., 3increase)

361

Italian SME international strategies Table 21.28

Subcontractors – neural clusters (II)

No. Purchasers

% sales to the largest purchaser

% sales to the second largest purchaser

N. purchasers: subcontractors

1 Sum Mean

169.0 4.7

1166 32

520 14

26 1

97 3

1 0

2 Sum Mean

395.0 17.2

725 32

348 15

73 3

202 9

16 1

3 Sum Mean

63.0 4.5

854 61

226 16

4 0

42 3

12 1

4 Sum Mean

1 117.0 55.9

1 145 57

251 13

41 2

264 13

52 3

Total Sum Mean

1 744.0 18.8

3 890 42

1 345 14

144 2

605 7

81 1

Clusters

Table 21.29

N. purchasers: N. purchasers: with brand(s) wholesalers

Subcontractors – export/clusters contingency table Cluster

Export 0 1%–10% 11%–60% 61%–90%
90% Total

1

2

3

4

Total

N. % N. % N. % N. % N. %

33 91.7% 2 5.6% 0 0.0% 1 2.8% 0 0.0%

17 73.9% 2 8.7% 1 4.3% 1 4.3% 2 8.7%

10 71.4% 1 7.1% 1 7.1% 1 7.1% 1 7.1%

12 60.0% 0 0.0% 4 20.0% 3 15.0% 1 5.0%

72 77.4% 5 5.4% 6 6.5% 6 6.5% 4 4.3%

N. %

36 100.0%

23 100.0%

14 100.0%

20 100.0%

93 100.0%

positioning matters, though not in the sense of a direct and spontaneous, automatic correlation between high positioning and internationalization performances. We found that SMEs positioned in the lowest segments of the market are the worst performing and the least internationalized. Those targeting the high-end of the market are the best

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Table 21.30 Market segment High Medium–high Medium Medium–low Low Total

Table 21.31 Use of subcontractors Yes No Total

Subcontractors – clusters’ positioning Clusters 1

2

3

4

Total

2 10.0% 10 29.4% 17 65.4% 5 50.0% 2 66.7%

4 20.0% 7 20.6% 9 34.6% 2 20.0% 1 33.3%

4 20.0% 8 23.5%

10 50.0% 9 26.5%

2 20.0%

1 10.0%

20 100.0% 34 100.0% 26 100.0% 10 100.0% 3 100.0%

36 38.7%

23 24.7%

14 15.1%

20 21.5%

93 100.0%

Subcontractors – use of subcontractors Clusters 1

2

3

4

Total

2 4.3% 34 72.3%

22 47.8% 1 2.1%

2 4.3% 12 25.5%

20 43.5%

46 100.0% 47 100.0%

36 38.7%

23 24.7%

14 15.1%

20 21.5%

93 100.0%

performers, though not necessarily the most internationalized. Not only are there firms positioned in the medium to high and medium segments of the market that export more than luxury firms, but the latter usually tend to maintain a local manufacturing base as they can not find those fundamental craftsmanship abilities abroad. Third, location matters: it is a value if firms are able to effectively combine locally available competencies and relationships into an internationally spread value chain; at the same time, it is a limit when it leads to closure and locks firms into a locally self-referenced learning process. Finally, the typical de-integration strategy and high division of labour that has historically characterized Italian industrial districts, together with a normally informal way of relating and partnering with other firms and with a limited availability of large financial capital (also related to the small dimension of the local companies), can contribute to the explanation of limited FDIs.

363

62.556 33.214 4.230

% var. 62.556 95.770 100.000

% cum.

Extraction method: principal components analysis.

1.877 0.996 0.127

1 2 3

Note:

Total

Initial eigenvalues

1.877 0.996

Total

Subcontractors – principal components on performances

Components

Table 21.32

62.556 33.214

% var.

Weights

62.556 95.770

% cum.

1.872 1.001

Total

62.399 33.371

% var.

62.399 95.770

% cum.

Rotated factors weights

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Table 21.33

Subcontractors – first of two rotated components

Clusters

N

Mean

Std. deviation

Std. error

1 2 3 4

36 23 14 20

0 3308 0 0690 0 1100 0 4391

0 63232 0 50600 0 52205 0 88323

0 10539 0 10551 0 13952 0 19750

Total

93

0 0000

0 70762

0 07338

Notes 1. The sections ‘Introduction’ and ‘Conclusions’ were written together by the three authors; Alberto Mattiacci is author of ‘Italian SMEs: a “micro-giant” towards international markets’; Christian Simoni is author of ‘International strategies in Italian industrial districts: some recent evidences from the Arezzo fashion clusters’; Lorenzo Zanni is author of ‘The three main protagonists of “Made in Italy”: industries, clusters, and (small and medium) firms’. 2. Industrial districts are geographical clusters characterized by vertical specialization and horizontal cooperation, each firm specializing in one or more phases of the production process, competing with other firms with similar specialization but cooperating with firms with complementary specialization. The districts benefit from dense economic and social relations, embedded in a homogenous culture, that lead to a collective efficiency, the reduction in transaction and communication costs, and collective learning (Becattini, 1987; Zanni, 1995; Bellandi, 2001). 3. Mediobanca-Unioncamere (2005, p. xxi) find that, in the period 1996–2002, the total revenues of mediumsize firms in Italy had growth of 40.1 per cent and exports, of 49 per cent (much more than the large firms respectively, of 32.2 per cent and 21.2 per cent).

References Audretsch, D.B. (2003), ‘Introduction’, in David B. Audretsch (ed.), SMEs in the Age of Globalisation, Cheltenham, UK and Northampton, MA, USA: Edward Elgar. Bacci, L. (ed.) (2004), Distretti e imprese leader del sistema moda della Toscana, Milano: Franco Angeli. Banca d’Italia (2005), Le prospettive dell’economia globale e l’Italia, Febbraio. Becattini, G. (ed.) (1987), Mercato e forze locali, Bologna: Il Mulino. Bellandi, M. (2001), ‘Local development and embedded large firms’, Enterpreneurship and Regional Development, 13, 189–210. Bertoli, G. (2004), ‘Globalizzazione dei mercati e competitività delle imprese italiane’, in G. Bertoli (ed.), La competitività del sistema Italia: dal locale al globale, Milano: F. Angeli. Coltorti, F. (2004), ‘Le medie imprese industriali italiane: nuovi aspetti economici e finanziari’, Economia e politica industriale, n. 121. Corò, G. and R. Grandinetti (1999), ‘Evolutionary patterns of Italian industrial districts’, Human Systems Management, XVIII (2) 117–30. Fortis, M. (2004), ‘Pilastri, colonne, distretti: una tassonomia delle principali imprese italiane’, Economia e politica industriale, n. 121. Fortis, M. (2005), Il Made in Italy nel ‘nuovo mondo’: Protagonisti, Sfide, Azioni, Roma: Ministero delle Attività Produttive. Gomes-Casseres, B. (1997), ‘Alliance strategies of small firms’, Small Business Economics, 9(1), 33–44. ICE (2005), Rapporto. Lazerson, M. and G. Lorenzoni (1999), ‘Resisting organizational inertia: the evolution of industrial districts’, Journal of Management and Governance, 3, 339–60. Lorenzoni, G. (1990), Architettura di sviluppo delle imprese minori, Bologna: Il Mulino. Mariotti, S. and M. Mutinelli (2003a), ‘L’internazionalizzazione delle piccole e medie imprese: lo scenario delle esperienze italiane’, in Sinergie, Quaderno di ricerca, n. 13. Mariotti, S. and M. Mutinelli (2003b), ‘L’Internazionalizzazione Passiva dei Distretti Italiani’, Economia e Politica Industriale, 119, 139–54. Mariotti, S. and M. Mutinelli (2004a), L’Italia multinazionale 2003, ICE. Mariotti, S. and M. Mutinelli (2004b), ‘L’Internazionalizzazione Attiva dei Distretti Italiani’, Economia e Politica Industriale, 123, 153–63.

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Mediobanca-Unioncamere (2005), Le medie imprese industriali italiane (1996–2002), Novembre, Milano: Ufficio Studi Mediobanca e Ufficio Studi Unioncamere. Menghinello, S. (2003), ‘Dimensione locale e competitività sui mercati internazionali: il contributo dei sistemi locali di PMI alle esportazioni nazionali’, National Conference ‘Internazionalizzazione dei distretti’, ICE, 20–21 March. Monti, P. (2005), ‘Caratteristiche e mutamenti della specializzazione delle esportazioni italiane’, Banca d’Italia, Temi di discussione, n. 559. Onida, F. (2004), Se il piccolo non cresce. Piccole e medie imprese italiane in affanno, Bologna: Il Mulino. Pike, F., G. Becattini and W. Sengerberger (eds) (1990), Industrial Districts and Inter-Firm Cooperation in Italy, Geneva: International Labour Office. Piscitello, L. and F. Sgobbi (2004), ‘Globalisation, E-business and SMEs: evidence from the Italian district of Prato’, Small Business Economics, 22, 333–47. Porter, M.E. (1990), The Competitive Advantage of Nations, London: Macmillan Press. Porter, M.E. (1998), On Competition, Boston: The Harvard Business Review Book Series. Rabino, S., C. Simoni and L. Zanni (2002), ‘Ehhancing competitive advantage overtime – the case of the Italian fashion industry’, in J. Wilson (ed.), From Art to Technology: Opportunities in Marketing Research and Education, Atlantic Marketing Association Proceedings, 18th Annual Conference, Savannah, Georgia, October, pp. 159–67. Sabel, C. (1995), ‘Turning the page in industrial districts’, in A. Bagnasco and C. Sabel (eds), Small and MediumSize Enterprises, New York: St. Martin Press, pp. 134–61. Unioncamere (2005), Le piccole e medie imprese nell’economia italiana – Rapporto 2004, Milano: F. Angeli. Varaldo, R. (2004a), ‘Competitività, economie locali e mercati globali: alla radice del declino industriale e delle vie per contrastarlo’, Economia e politica industriale, 121. Varaldo, R. (2004b), ‘La competitività del sistema Italia: dal locale al globale’, in G. Bertoli (ed.), La competitività del sistema Italia: dal locale al globale, Milano: F. Angeli. Varaldo, R. and L. Ferrucci (eds) (1997), Il distretto industriale tra logiche di impresa e logiche di sistema, Milano: Franco Angeli. Zanni, L. (1995), Imprenditorialità e territorio, Padova: Cedam. Zanni, L. (ed.) (2004a), Osservatorio Orafo-Argentiero e della Moda aretina. Rapporto 2003, Arezzo: Istituzione dei Distretti Industriali della Provincia di Arezzo. Zanni, L. and S. Labory (eds) (2002), Il sistema moda in Toscana, Firenze: Irpet.

22 Analysis of the environment for small and medium-size enterprises in Latvia for further internationalization development Tatjana Volkova and Andra Brige

Latvia is situated in the North of Europe and it has borders with Russia, Lithuania, Estonia and Byelorussia. Latvia is historically divided into three regions and at present the territory of Latvia covers 64 589 square kilometres, which makes it larger than a few other small European countries such as Denmark and Belgium. Latvia has a 500km long coast line on the Baltic Sea. Like both other Baltic countries (Estonia and Lithuania), Latvia is poor in natural resources. These consist mainly of forest, limestone, clay, sand and dolomite. The geographical location as well as the lack of natural resources has determined the development of particular business sectors, such as transit and transportation services, financial services, IT and food processing. Latvia claimed de facto independence on 21 August 1991 in the wake of the failed Soviet coup attempt. After gaining independence in 1991, Latvia embarked on a challenging economic transition programme in order to establish a social market economy. Major goals of this ambitious programme included the stabilization of deteriorated economic conditions, privatization, deregulation, currency reform, private sector development and the creation of market institutions. Latvia is one of the advanced transition countries. With its prime location as a transit hub for east–west trade, the country has a well-developed service sector, and the economy has a strong industrial backbone inherited from the industrialization process which started in the 1950s to supply the Soviet market. Since its independence in 1991, the country has made rapid advances in its transition towards a market economy and has attracted considerable foreign investment. Privatization is the economic process of transferring property, from public ownership to private ownership. The privatization process in Latvia is almost completed. Virtually all of the previously state-owned small and medium companies have been successfully privatized, leaving only the politically sensitive large state enterprises. Political relations with Estonia and Lithuania have traditionally been close, and economic cooperation between the Baltic republics has become a vital feature of their recent transition. The three countries are increasingly trading and investing in each other’s economies. In addition, the role of the Nordic countries is of vital interest for the economic development of the Baltic republics. Finland, Norway, Sweden and Denmark are among the major investors in Latvian enterprises. Latvia is also participating in regional cooperation in various fields, in which the Baltic Sea countries, including Poland and Russia, are involved. The Saeima, a unicameral legislative body, is now the highest organ of state authority. It initiates and approves legislation sponsored by the Prime Minister. The Saeima, and also the people, have the right to legislate, in accordance with the procedures, and to the extent, provided for by the Constitution. As an object of reform, public administration in 366

Analysis of the environment for SMEs in Latvia

367

Latvia has already undergone significant change since the country gained its independence several years ago. These changes were primarily designed to adapt and enhance the institutional infrastructure to new political and economic realities. Furthermore, public administration is clearly a key agent of economic reform and must ensure that Latvia’s public agencies are managed so as to produce results, especially results supportive of economic growth and development. Latvia has a liberal market economy and favourable investment climate and continues to attract reasonable foreign investment, especially in transit trade and finance. Since the 1998 crisis, enterprise restructuring has been successful and foreign trade has been reoriented towards EU markets. The economic reforms carried out in Latvia during the last 15 years provided the necessary conditions for market development. The stable monetary and banking systems were established and the market was opened for competition in recent years. The banking sector is essential to transition. The Latvian financial sector is very much dominated by the banking sector and its size is close to the average level of the accession countries. Theoretical background Current established theories in the internationalization process mainly deal with multinational corporations, quite often of a manufacturing nature, less often of a service nature. However, the small and medium size enterprises are vital to the development of European competitiveness on the global market scale since they are employing the majority of the European workforce. Moreover, getting SMEs to expand their export level would reduce trade deficits and more jobs should be created at the national level. It is good to note that SMEs differ greatly from large corporations on many dimensions, such as management style, resource access, ownership and operations Also exporting reduces the chance of running into financial trouble (compared to non-exporters) and diversifies the risk as well as extending the life cycle of a product (Hise, 1997). The issue of when and how to enter a new national market raises the question of how to determine the best mode or vehicle for such entry. There are five main choices of entry mode: exporting, licensing, franchising, entering into a joint venture with a host country company and setting up a wholly owned subsidiary in the host country. Each entry mode has its advantages and disadvantages and managers must weigh these carefully when deciding which mode to use. International licensing is an arrangement whereby a foreign licensee buys the rights to produce a company’s product in the licensee’s country for a negotiated fee. The licensee than puts up most of the capital necessary to get overseas operations going. Franchising is similar to licensing, although franchising tends to involve longer-term commitments than licensing. Franchising is basically a specialized form of licensing in which the franchiser not only sells intangible property to the franchisee (normally a trademark), but also insists that the franchisee agree to abide by strict rules as to how it does business. The franchiser will also often help the franchisee to run the business on an ongoing basis. As with licensing, the franchiser typically receives a royalty payment, which amounts to some percentage of the franchisee revenues. Establishing a joint venture with a foreign company has long been a favoured mode for entering a new market. A wholly owned subsidiary is one in which the parent company owns 100 per cent of subsidiary stock. To establish a wholly owned subsidiary in a foreign market, a company

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can either set up a completely new operation in that country or acquire an established host country company and use it to promote its products in the host market. Exporting is the most popular way to become international (World Bank, 1993) owing to the fact that it requires little use of resources, is flexible but can offer back to the company many rewards – financial, marketing, technological and others. Several authors have explained that there are three main ways to distributing the company output: indirect export, direct export and alternatives to export. Traditional internationalization process models see internationalization as an incremental process. The commitment of resources grows over time, with experience and knowledge of foreign markets. According to this school of thought, the degree of internationalization is a function of the age of the firm, its experience of international activities and the size of the firm. The latter is seen as a proxy for available resources. A company which is small and young is initially not expected to compete abroad because of the higher costs of cross-border activities relative to exclusively domestic sales. It can be argued that technological developments in information and communications technology since 1990s offer even more dramatic effects. SMEs now also have the possibility of combining product and process specialization and low-cost operation with access to electronic networks, which can reduce the barrier effects of distance, as well as access to information databases that potentially offer a levelling of access to knowledge and technology (Potet, 2004, p. 28–30). Developing abroad typically brings problems in comparison with local competitors. Thus the company entering a new market must have some advantages. Also companies going international are less dependent on the home market and less sensitive to changes (Hise, 1997). Sales abroad might then bring more stability over capacity and employment level. The traditional view of internationalization is that it is based on economies of scale and large enterprises. Internationalization in small companies is more often combined with threats than with opportunities. Traditionally, small companies are, however, often considered to be home-market oriented. Internationalization of SMEs is a relatively unexamined area. Research methodology This research attempts to describe briefly the situation of Latvian SMEs’ internationalization process, the obstacles diminishing the speed of process and positive factors improving the business environment locally and support exporting initiatives amongst SMEs. The information for research is mainly collected from the Central Statistical Bureau of Latvia, the National Enterprise Register and the Ministry of Economics of the Republic of Latvia. Two independent publications are resources for this particular work: ‘Small and medium–sized enterprises: results of a long–term survey’, 2002, by the Central Statistical Bureau of Latvia, and Uldis Cimdins’ Latvian exporters survey, ‘Main priorities and problems of the Latvian exporters in external economic activities’ in the framework of the UNDP project on upgrading the National Programme of Foreign Trade (January 2004). A series of personal interviews were conducted with employees of small and mediumsize enterprises, both at higher level and at middle managerial level, as well as with representatives of the Ministry of Economics of the Republic of Latvia.

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The Law On Control of Aid for Commercial Activity lays down the definition of small and medium-sized enterprises (according to the European Commission Regulation No. 70/2001 and amendments to the European Commission Regulation No. 364/2004): Medium-sized enterprises: ● ● ●

number of employees from 50 to 249; annual turnover does not exceed 50 million EUR; total balance sheet value is under 43 million EUR.

Small enterprises: ● ● ●

number of employees from 10 to 49; annual turnover does not exceed 10 million EUR; total balance sheet value is under 10 million EUR.

Micro enterprises: ● ● ●

number of employees from 1 to 9; annual turnover does not exceed 2 million EUR; total balance sheet value is under 2 million EUR.

More than 15 000 enterprises participated in both the above-mentioned surveys. All data in the surveys were obtained from the answers of enterprise owners or managers. The response rate was high, ranging in each survey from 69 to 89 per cent. Statistical data about the non-responding enterprises were replaced and incomplete responses were supplemented through data imputation. Imputation was done by means of the method of suitable analogues. Four factors, enterprise size, kind of economic activity, location of activity and legal form, were considered in order to find an analogue. If it was not possible to find an analogue by these criteria, data imputation was not used. The situation in Latvia Reforms accomplished in Latvia and integration in the European Union have left a positive impact on economic development of the country. Latvia has shown one of the highest economic growth rates in the EU. In the period from 2001 to 2003, the average gross domestic product growth in Latvia was 7.3 per cent a year. In 2004, GDP increased even faster, to by 8.5 per cent. High growth rates are due to stable domestic demand dynamics and increase in exports. The economic activity increases in all major branches of the national economy. In recent years almost three-fourths of the increase was ensured by the growth of service sectors where the biggest contribution was made by growth of trade, transport and communication sectors. Manufacturing contributes essentially to the growth. In the period from 2001 to 2003, output in manufacturing grew by 9.4 per cent on average every year, considerably exceeding average growth rates of the national economy. In these years the biggest contribution to industrial growth in Latvia was made by the wood industry, machine building and metalwork production.

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In 2004, manufacturing output grew at a slightly slower pace, 7.9 per cent, and the fastest growth was in the chemical industry and production of construction materials. Other sectors showed a more moderate growth than in the previous years, partly related to adjustment to new circumstances after accession to the EU. Modernization and reconstruction of production as well as utilization of the EU funds will increase productivity and competitiveness of the sector, therefore it is expected that industry will continue developing dynamically. Growth in agriculture was 3.5 per cent in 2004. Low productivity and external competition are the main obstacles to development of this sector. Development of agriculture will depend on adjustment of agricultural production facilities and products to the EU standards and quality criteria and the external demand. Latvia’s accession to the EU will ensure more equal competition opportunities for farmers in the EU internal market, while support from the EU funds will facilitate modernization of agriculture and diversification of agricultural activities. Rapid rise in investment has a favourable influence on development of construction, and it grew by 13 per cent in 2004. Construction of industrial and residential buildings, hotels, streets and roads, and other objects is growing fast. The construction sector is expected to maintain high development rates also in the future in relation to development of mortgage lending, increased economic activity and investment as well as implementation of projects financed from the EU funds. Increased domestic demand promotes development of services, especially those concerning wholesale and retail trade (in 2004, this sector grew by 10.1 per cent). It must be noted that growth of the trade sector is mostly determined by the domestic demand, but slightly more than one-tenth is also linked to trade intermediary services which are provided to non-residents. This share increases annually. The dynamics of domestic demand is stable and ensured by the growth of income, stability of the financial system, expansion of credit opportunities, accession to NATO and EU, and formation of positive future expectations. It is expected that increased household income and the spread of consumer loans will foster further growth of domestic trade (especially non-food consumer goods) and other market services, but the growth rates will be lower than up to now because of market saturation. Big opportunities for growth lie ahead for the tourism sector which has developed very rapidly in recent years. Transit services are of great importance for the national economy of Latvia. They constitute approximately 15 per cent of revenues from Latvian exports of goods and services, or about 5 per cent of GDP. Even though transit services are growing in volume, their share in the national economy in general and in the transport and communications sector is diminishing. This can be explained by the fact that, in recent years, the domestic use of transport sector services has been growing faster than their external use. Two-thirds of the growth in the transport and communications sector depend on the domestic demand (development of communications, warehousing, parking services, tourism and so on) and only one-third depends on the external demand (transit). All in all, the transport and communications sector grew by 12.9 per cent in 2004. In the second half of 2004, after accession to the EU, cargo transportation increased especially fast and passenger transport services grew, including air transport services. Statistical data indicate that the economic growth of Latvia in the first quarter of 2005 (an increase of 7.4 per cent on the first quarter of 2004) was mostly ensured by robust domestic consumption and a high level of investment. Trade turnover and construction

Analysis of the environment for SMEs in Latvia Table 22.1

371

Latvia: key indicators of economic development 2001

Gross domestic product Private consumption Public consumption Total fixed capital formation Exports Imports Consumer prices Central government budget fiscal balance Central government debt Current account balance Foreign direct investments (flows) Share of job seekers (% of economically active population, 15–74 years old)

8.0 7.3 2.8 11.4 7.5 14.5 2.5 2.0 13.8 7.6 1.6 13.1

2002

2003

2004

(growth against the preceding year, %) 6.4 7.5 8.5 7.4 8.6 8.9 2.2 1.9 2.3 13.0 10.9 17.3 5.2 5.0 9.3 4.6 13.0 15.6 1.9 2.9 6.2

2005f 7.5 7.0 2.5 15.0 5.7 4.1 5.5

(in % of GDP, unless stated otherwise) 2.3 1.6 1.1 1.7 13.3 13.4 13.2 13.3 6.7 8.2 12.3 9.8 2.8 2.7 4.8 5.0 12.0 10.6 10.4 10.0

Note: fforecast.

continued growing rapidly and transport operation indicators improved. Mostly due to the negative impact of the January 2005 storm on the biggest export sector (production of wood and wood products) the development of industry decelerated in the first quarter of 2005. An increase in industry growth rates was expected in the second half of 2005. The Ministry of Economics forecast that GDP in Latvia would grow by 7.5 per cent in 2005 (Table 22.1). Economic growth in Latvia is achieved in conditions of a stable macroeconomic environment. The Bank of Latvia implements a de facto policy of a fixed national currency exchange rate. This reduces uncertainty, eliminates exposure to currency risk and gives entrepreneurs a stable base for planning and price determination. As of 1 January 2005, the national currency, lat (LVL) was re-pegged from the SDR currency basket to the euro (EUR) at the rate of 1 EUR = Ls 0.702804. When the EU Council decides that Latvia is ready to take part in the EMU, the Latvian national currency will be replaced by the euro and the Bank of Latvia will discontinue implementing an independent monetary policy. According to forecasts of the Bank of Latvia, this could happen at the beginning of 2008. Until then, the LVL will remain the national currency of Latvia. In 2000–2003, the average annual consumer price inflation in Latvia had been within the 2–3 per cent band, but in 2004 it reached 6.2 per cent. Higher inflation growth in 2004 was due to a combination of several one-time factors, mainly the rise of administratively regulated prices, harmonization of indirect tax rates, inflation expectations related to Latvia’s accession to the EU, and high world oil prices. In view of growing domestic demand and to hold down the credit growth rate, in March and November of 2004 the Bank of Latvia raised the refinancing rate by 0.5 percentage points to 4 per cent and increased the reserve requirement from 3 per cent to 4 per cent in July. However, the impact of these measures in Latvia was limited by the fixed exchange

372

Handbook of research on European business and entrepreneurship 3 000 Exports

2 500

Imports

Balance

2 000 1 500 1 000 500 0 –500

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

–1 000 –1 500 1993

1994

1995

1996

1997

Exports Imports Balance

675.6 639.2 36.4

553.4 694.6 141.2

688.4 959.6 271.2

795.2 1278.2 483

971.7 1582.4 610.7

Exports Imports Balance

1068.9 1881.3 812.4

1993

1994

1995

1996

1997

1008.3 1723.9 715.6

1131.3 1933.9 802.6

1256.4 2201.6 945.2

1408.8 2497.4 1088.6

Figure 22.1 Latvian commodity imports (in CIF prices) and exports (in FOB prices) and the foreign trade balance, 1993–2002, in mill. LVL rate regime and several specific factors, such as the low share of loans granted to residents in GDP, relatively easy access by banks to foreign resources, and a relatively large share of credits granted in foreign currencies in the credit structure. Since 1997, Latvia has had a relatively high current account deficit in the balance of payments, which leaves a negative impact on sustainable development of the national economy. In 2000, the deficit became smaller, yet in 2001 it started to grow again, with the balance of trade deteriorating. In 2002, foreign direct investment in Latvia was twice as high as in the preceding year: 4.7 per cent of GDP. Net direct investment flows covered the negative balance of the current account by 60 per cent. In the long term, reduction of these investment flows is anticipated, therefore it is necessary to carry out a wide range of well-considered export promotion measures to gradually reach an equilibrium in the foreign trade balance for commodities, shown in Figure 22.1. In 2004, the commodity exports were favourably influenced by the fast rise of the export unit value which grew by 13 per cent in comparison with 2003, and this was the highest growth rate after 1995. The main reason for the rise was the favourable changes of currency exchange rates. In 2001–2003, investment in Latvian national economy sectors went up by 37.7 per cent in total or by 11.3 per cent annually (Table 22.2). Investment dynamics is faster in production sectors, which can be explained by the general increase of economic activities,

Analysis of the environment for SMEs in Latvia Table 22.2

373

Investment by sectors (excluding investment in individual construction) (%) Growth

Structure

average 2001–2003

2003

2004

average 2001–2003

2004

Primary sectors Manufacturing Electricity, gas and water supply Construction Trade Transport and communications Other commercial services Public services

36.2 14.7 15.2 14.6 7.9 1.4 20.6 6.5

5.1 7.1 25.4 33.7 12.2 18.0 43.6 11.6

36.4 17.5 113.0 42.0 19.6 4.0 23.6 22.5

3.0 16.2 8.1 2.9 17.6 21.5 17.3 13.4

3.8 17.0 13.1 3.7 15.2 17.8 16.5 12.8

Total

11.3

13.3

26.0

100.0

100.0

improvement of credit terms, and an economic policy favourable to investment. In this period, investment in production sectors grew by 60.5 per cent (annually by 17.1 per cent on average), while in the services sectors investment increased by 28.9 per cent (annually by 8.8 per cent on average). Similar trends remained also in 2004, when investment in production sectors was 60.5 per cent higher than in the previous year, while investment in services sectors grew by 28.9 per cent. Positive investment dynamics was observed in all sectors of the national economy. The share of production sectors in the investment structure increased year by year, from 29.8 per cent in 2001 to 37.6 per cent in 2004. In 2004, the investment in manufacturing went up by 17.5 per cent and constituted 17 per cent of the total investment in the national economy. These investments were mostly made in the food industry and wood processing. Investment structure in manufacturing industry is changing gradually. In the period from 2001 to 2003 the share of these two sectors in investment in manufacturing amounted to 57.4 per cent, but decreased to 45 per cent in 2004. This was mostly influenced by decreased investment in wood processing. In 2004, investment in wood processing was 30 per cent lower than in 2003 (Table 22.3), and the share of this sector in the total investment in manufacturing decreased by 12 per cent in comparison with 2003 and constituted 18.2 per cent. In 2004, as in the preceding periods, most investment was in labour-intensive and lowtechnology sectors, although in recent years considerable growth of investment has occurred also in high-technology sectors. During the last three years, investment in hightechnology sectors went up on average by 28.4 per cent per annum; in 2004, it grew by 46.2 per cent, including growth of investment by 124 per cent in the chemical industry, by 8 per cent in machinery, and by 22 per cent in production of electric machines and appliances. Thanks to faster growth of investment, the share of these sectors in the total investment amount in 2004 increased by 2.3 percentage points in comparison with 2003 and reached almost 20 per cent. The share of medium-technology sectors in the total investment made in manufacturing is also growing. Investment in these sectors in 2004 increased by 37.8 per cent in comparison with 2003, and the share of medium-technology sectors in the total investment in manufacturing reached 20 per cent. These trends should be evaluated positively although the share of low-technology sectors is still convincingly big.

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Table 22.3

Investment in manufacturing (per cent) Growth rates

Food industry Light industry Wood processing Paper industry and publishing Chemical industry and related industries Production of other nonmetallic mineral products Production of metals and metal articles Production of machines and equipment Other industries

Structure

average in 2001–2003

2003

2004

average in 2001–2003

2003

2004

13.9 13.4 10.0 3.3 19.2

5.4 21.4 2.8 12.0 19.4

5.6 23.0 30.0 148.2 98.4

29.3 8.2 29.2 6.2 5.6

30.5 7.2 30.6 5.3 5.1

27.4 7.5 18.2 11.2 8.6

11.1

38.6

17.0

3.6

3.5

3.4

32.4

9.2

55.0

7.2

6.5

8.6

27.0

11.6

18.6

6.8

7.1

7.2

26.0

21.0

114.2

3.9

4.3

7.8

According to the assessment by the Bank of Latvia, in 2002 the level of the current account deficit against the GDP was 1.8 per cent points lower then in the preceding year. However, the trade balance deficit is still very high, because imports are growing faster than exports. The volume of commodity exports in 2002 increased in all commodity groups. The most rapidly growing was the export of wood and wood products and products of metal industry and engineering. The export of light industry products is increasing, hence the structure of exports is changing: the share of light industry goods is growing while the share of agricultural and food products is decreasing (see Table 22.4). It is forecast that faster growth of exports promoted mostly by structural reforms will gradually bring down the current account deficit in the medium term. However, the demand for imports will remain relatively high owing to further modernization of the national economy and its growing openness. It should be noted that, after accession to the euro zone, the risks related to a negative current account deficit (risk of a currency crisis) will almost completely disappear as stability of the currency and the keeping of foreign currency reserves will become the competence of the European Central Bank. Latvia has been experiencing fast investment growth for several years. In 2004, the volume of investment in fixed assets was 1.8 times greater than in 2000; that is, the investment in this period increased by 13.1 per cent annually on average. Investment is favourably affected by a stable macroeconomic and financial environment, positive evaluation of the Latvian investment environment by independent international organizations, and an investment-supportive governmental policy. As indicated by Eurostat data, investment growth in the new EU member countries has slowed down somewhat in the last four years in comparison with the previous five years, but still several times exceeds the EU-15 average growth rate, which equalled only 0.4 per cent from 2001 to 2004. The EU is the main trading partner of Latvia. Trade with the EU member states has been constantly expanding since restoration of Latvia’s independence, and currently more

Analysis of the environment for SMEs in Latvia Table 22.4

375

Latvian exports by main groups of commodities in 2002 (in FOB prices)

Total including: wood and wood products transport vehicles, products of metal industry and engineering light industry products agricultural and food products products of chemical industry and allied industries, plastics other commodities

Commodity exports, mill. LVL

Structure (%)

Increase against the preceding year (in real prices, %)

1408.8

100

12.1

472.8 303.0

33.6 21.6

10.7 14.7

191.8 144.0 103.6

13.6 10.1 7.4

1.2 29.7 7.7

193.6

13.7

15.2

18 2001–04 15

2004

12 9 6 3 0 –3

Lithuania

Latvia

Estonia

Hungary

Slovenia

Slovakia Czech Rep. Cyprus

Malta

Poland

EU-15 average

–6

Figure 22.2

Average annual growth of investment in the new EU member states (%)

than 70 per cent of Latvian exports and imports are linked to the EU, including also the new EU member states. In 2004, most of Latvia’s foreign trade turnover was made up of trade with Germany (14 per cent of the total), Lithuania (11 per cent), Sweden (8 per cent), Russia (8 per cent) and Estonia (8 per cent). During 2000–02, the exports of Latvian goods in current prices grew by 11–12 per cent annually; in 2003, export growth was 17 per cent, while in 2004 exports increased by 29.1 per cent. In 2004, the export of goods was favourably affected by the rapid increase in export unit value, which reached 17.5 per cent in the last quarter of the year, in comparison with the fourth quarter of 2003. Price growth was caused by favourable changes in the currency exchange rate as well as increased world prices in several categories of goods, especially for metals and metalwork. Exports significantly increased to all sales markets for Latvian goods: to EU member states, CIS countries and other countries of the world. In exports to EU countries, the biggest contribution to export value growth was made by metal and metalwork exports (23 per cent of the total export growth to EU-25 countries) and wood exports (18 per cent). Growth of food product exports also should be noted. In 2004, the volume

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of food product exports to EU countries exceeded the volume of the preceding year by one-third. Small and medium-sized enterprises comprise a major part of the national economy and play a significant role in employment and GDP growth in Latvia, as elsewhere in Europe. In the first quarter of 2005, according to provisional data, there were 48 252 economically active enterprises in Latvia, of which 47 907, or more than 99 per cent, fell into the SME category (taking into account only the number of employees). The distribution of economically active SMEs in Latvia according to their size is similar to the one in the EU member countries: micro enterprises, 76 per cent, small enterprises, 20 per cent, medium-sized enterprises, 4 per cent. As many as 69.9 per cent of private sector employees are employed in SMEs and create 63.2 per cent of GDP. Assistance to SMEs in Latvia is regulated by the Law On Control of Aid for Commercial Activity, which has been in force since 1 January 2003. Statistical data for recent years indicate positive trends in growth of the number of newly founded enterprises. Lursoft data show that 7690 newly founded enterprises were registered in 2003 and 10 228 newly founded enterprises were registered in 2004, which is 33 per cent more than in 2003, and this growth was the greatest over the last eight years. On 27 January 2004 the Cabinet of Ministers approved the Basic Guidelines of the SME Development Policy in Latvia. This document lays down the basic principles of activity of the government, long-term objectives and tasks as well as the main directions of the SME development policy. The goal of the Basic Guidelines is to ensure promotion of a favourable environment for business activity, to promote the initiative of entrepreneurs and lessen the total risk, to prevent obstacles to business activity and to promote stability and effectiveness of the financial system and capital market in order to improve competitiveness of the enterprises in the market. The Basic Guidelines foresee implementation of policy, which is based on the best practice of companies of the developed countries, in accordance with the activities outlined in the European Charter for Small Enterprises, simultaneously taking into account also the specifics of the SME development problems in Latvia. For implementation of the Basic Guidelines, on 25 May 2004 the Cabinet of Ministers approved the Programme on Development of Small and Medium-Sized Enterprises of Latvia in 2004–06 in order to promote objectives of the SME development policy. To implement the Programme, the following actions are envisaged: ● ● ● ● ●

creation of a favourable environment for entrepreneurial activity, especially in relation to SMEs; promotion of availability of funding for development of small and medium-sized business; development of human resources and new business initiative; promotion of competitiveness of SMEs; analysis of the business environment and development of additional measures for territories with a relatively low index of socioeconomic development. Implementation of these measures is planned in close connection with the plans for utilization of financial resources from the EU Structural Funds.

For the majority of the entrepreneurial activity assistance measures envisaged in the Programme, attraction of co-financing of the EU Structural Funds is planned. In 2005,

Analysis of the environment for SMEs in Latvia

377

it was planned to continue training businessmen and business beginners and informing them about pressing issues by organizing informative seminars and publishing informative educational materials. Studies will be carried out on the administrative procedure which hinders SME development and identification as well as identification of the tax burden, by indicating factors which impede development in this field, and comparative analysis of tax application in EU countries will be performed. In cooperation with the World Bank, it is planned to conduct a business environment study, identifying potential activities for improvement of the business environment; it is also planned to start operation of venture capital funds, whereby businessmen will get access to additional financial assistance instruments in cases where receiving other loans for improvement of their activity is difficult. It is possible for Latvian businessmen to attract cofinancing from the EU Structural Funds for development and improvement of their activity, by submitting their projects to the following state support programmes for 2004–06 administered by the Latvian Investment and Development Agency: 1. 2. 3. 4.

support to consultations and participation of commercial companies in international exhibitions, fairs and trade missions; support to development of new products and technologies; support to modernization of commercial activity infrastructure; support to raising qualification of employees, their retraining and continued education.

The Mortgage and Land Bank of Latvia (hereinafter MLBL) plays an important role in the SME support system. Since 2000, MLBL has helped to implement the Programme of Crediting Latvian SME Development. The implementation of the programme so far has essentially promoted accessibility of capital for SMEs and has encouraged more active involvement of commercial banks in offering loans to SMEs. On 26 November 2002, the Cabinet of Ministers approved the Programme of Crediting Latvian SME Development (second phase) for the next three years, foreseeing state guarantees in the amount of 20 million LVL to MLBL in order to enable the bank to borrow the necessary resources for crediting of SMEs in the financial market. On 21 January 2004, MLBL started crediting in the framework of the Programme of Crediting Latvian SME Development (second phase). Funding projects of specific SMEs (business beginners, rapidly growing SMEs, SMEs in regions requiring special assistance, and female SMEs) supported within the framework of the EU programmes are continued in the framework of the Programme of Crediting Latvian SME Development (second phase). Until 31 March 2005, more than 1699 new jobs were created and 97 new enterprises were established within the framework of the Programme (second phase). The total amount of loans granted within the framework of the second phase of the SME development crediting project is 24.3 million LVL. Approximately 40 per cent of these loans are granted from state-guaranteed credit lines (14.8 million EUR from the European Investment Bank (EIB) credit line and 3.9 million LVL from the Kreditanstalt fuer Wiederaufbau (KfW) credit line). Special assistance loans in the framework of special programmes were granted to 273 SMEs for a total amount of about 10 million LVL. The great part of special assistance loans were granted to SMEs in regions requiring special assistance (approximately 4.1

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million LVL), followed by special assistance loans to business beginners (about 2 million LVL), female enterprises (approximately 1.8 million LVL) and rapidly growing SMEs (about 2.1 million LVL). Since June 2003, the Latvian Guarantee Agency (LGA) has started its work. LGA is a state-supported institution with a goal of supporting development of business activities of small and medium-sized enterprises (commercial companies) registered in Latvia by promoting availability of credit resources and issuing medium-term and long-term loan guarantees in its name to financial institutions registered in Latvia or abroad which are financing these enterprises. In 2004, the LGA issued 20 guarantees for the total amount of 0.66 million LVL. Since 1 January 2004, the LGA has raised the amount of support for one project up to 50 thousand LVL. The LGA Loan Guarantee Support Programme will be used as one of the instruments for utilization of the EU Structural Funds. The EU funds attracted in the framework of the programme in the period up to 2006 will allow the issuing of guarantees to entrepreneurs for the amount of approximately 25 million LVL. The Programme is thus directly focused on the solution of the principal SME development problems: inaccessibility of start-up capital to launch small and medium-sized business, lack of financial resources to expand activity of already established enterprises, lack of information for the existing and potential entrepreneurs about the EU legislation in the field of business policy, insufficient knowledge of how to express opinions and efficiently influence EU legislative initiatives in this sphere, and existence of barriers hindering business activities. Latvia joined the European Charter for Small Enterprises by signing the Maribor Declaration on 23 April 2002. In September 2002, Latvia also joined the Multiannual Programme for Enterprise and Entrepreneurship, and in particular for Small and Medium-Sized Enterprises (2001–05). In the framework of the Multiannual Programme, a range of integrated activities were performed in Latvia within the afore-mentioned three lines of action, thereby effectively overcoming obstacles to development of small and medium-sized business in Latvia. Promotion of SME policy development of the Charter’s member states through various so-called BEST (Business Environment Simplification Task) and horizontal projects is to be emphasized especially. The goal of these projects is to gain, as a result of active cooperation between the European Commission and national governing institutions, a better insight into various issues concerning business in order to identify best practices and evaluate choice of policies. Table 22.5

Structure of enterprises by their size in the major sectors of Latvia (%)

Sector Food and drink Wood and wood-pulp Textiles Chemicals, products of chemical industry and allied industries, plastics Furniture Medical, optical instruments

Micro

Small

Medium

Large

43 48 59 60

37 40 28 25

16 10 10 11

4 1 3 3

65 77

27 21

5 1

3 1

Analysis of the environment for SMEs in Latvia

379

The increase in and growth of SMEs’ export capacity are affected by market opportunities, private initiative, changes in business environment promoting establishment of new companies, access to capital and reforms in the government sector relating to completion of privatization, restructuring of the privatized enterprises and the labour market. In capital and intellectually intensive sectors, SME export development is affected also by existing technology and level of subsector development, availability of appropriate infrastructure and manufacturing premises, as well as quality of the educational system. The manufacturing industry has demonstrated stable growth in the three years 2002–04, and average annual growth rate has reached 8.6 per cent which is well above the average growth in the economy. A few detailed studies have been carried out to recognize major problems not allowing the development of SME exporting power to full capacity. As follows from the exporter’s survey ‘Main priorities and problems of the Latvian exporters in external economic activities’ were 290 companies from all regions of Latvia which were selected for interviews. All these companies were exporters of goods and services in 2003. In all, 201 valid responses were obtained. Results of this survey were compared with the results of a similar survey carried out in 1999. Respondents, by industries, were as follows: wood and wooden products, forestry – 23.4 per cent, textiles – 12.4 per cent, food – 11.9 per cent, services – 11.9 per cent, machinery – 6.5 per cent, other industries – 33.8 per cent. The split by industries is rather similar to their proportion in total Latvian exports. It is a very positive trend that most of the respondents planned to increase exports (80 per cent in 2004, 73.5 per cent in 1999). The same 10 countries are mentioned as main current and prospective export partners with a tendency to pay more attention to bigger markets (Russia, USA) in the near future. Importance of Estonia and Lithuania as trade partners is diminishing. A number of important changes were observed in the 5-year period from 1999 to 2004, when analysing the competitive advantages of exporters of Latvia. Companies of Latvia Table 22.6

Key indicators of manufacturing by sectors in 2004 (%)* Structure (by added value)

Manufacturing: total Food industry Light industry Wood processing Paper production and publishing Production of chemical, rubber and plastic products Production of other non-metallic mineral products Production of metals and metalwork Production of machinery and equipment Other industries Note: * According to operational data.

Growth

Share of exports in sector’s sales

100 24.7 8.5 20.1 8.3 6.4

6.2 6.5 0.4 5.9 2.2 19.8

52.2 21.8 79.1 68.2 20.0 51.9

3.5

12.5

35.0

11.3 11.3 5.8

6.9 5.9 10.4

76.4 69.3 68.1

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Table 22.7

Distribution of major export markets for next five years by countries

Country Germany Russia Great Britain Sweden United States Lithuania Estonia Denmark Finland The Netherlands

Mentioned by . . . of respondents in 2004 (%)

Mentioned by . . . of respondents in 1999 (%)

34.8 31.3 20.9 17.9 15.4 15.4 14.9 14.4 8.5 8.0

40 20 20 14 9 30 27 19 7.5 5.5

Table 22.8 Main competitive advantages (3 main advantages) mentioned by each respondent

Good knowledge of markets/clients High-quality workforce Low costs of workforce Up-to-date equipment Innovative technology Quality standards implemented (ISO 9000 etc) Low equipment utilization costs Access to raw materials at low costs

In 2004 (%)

In 1999 (%)

54.7 48.8 43.3 28.9 26.4 20.9 17.9 15.9

46 58 50 18.5 17.5 6.5 27 37.5

are more customer-oriented and understand that long-term success in export markets can be achieved by applying innovative technology and using up-to-date equipment. The importance of quality standards is growing. Exporters of Latvia are moving from lowcost to high-value added product producers. As follows from the survey, the biggest exporters of Latvia are still committed manufacturers and rather weak sellers, characterized by three of the main selling methods: passive waiting for orders by fax/mail, waiting for buyers from abroad, and selling using sales agents abroad. However, some positive movements from planned-economy thinking to marketeconomy thinking are observed: many more customers (61.2 per cent in 2004, in comparison to 36 per cent in 1999) have export managers, who travel abroad and sell goods ‘Made in Latvia’. More Latvian companies are using the advantages of Internet-based sales portals, participating in trade fairs and in international tenders. The product specification is mostly decided by the buyer: 40.3 per cent (in 1999, 27 per cent). 10 per cent of respondents companies design their own products (in 1999, 13 per cent). However, in most cases (46.8 per cent) product specification is decided together by customer and producer (in 1999, 60 per cent).

Analysis of the environment for SMEs in Latvia

381

Over the past five years, Latvian companies have made investments in training their marketing staff in modern marketing concepts and methods. In 2004, 32.3 per cent of respondents confirmed that their sales staff is familiar with novel concepts in marketing; 45.8 per cent evaluated these skills as partially acquired (in 1999, respectively, 15.5 per cent and 58 per cent of respondents). Some 51.2 per cent of respondents are planning to train their marketing staff in modern marketing concepts and methods. Especially high commitment towards marketing education is observed in the food sector: 83.3 per cent of respondents would like to train their staff in modern marketing methods. Half of respondents are not sure about availability of appropriate marketing training programmes in Latvia: 32.3 per cent of respondents think that such programmes are available in Latvia. Again, the food industry had the best knowledge on available marketing products: 54.2 per cent of respondents have found suitable programmes. Respondents get the needed information about foreign markets and buyers from a number of sources (Table 22.9). From the above table it is obvious that Latvian entrepreneurs so far have mostly relied on themselves and their contacts. The low rating of the Latvian Development Agency and the Latvian Chamber of Commerce shows they are underperforming. Most of the respondents are not aware of available market research services in Latvia (46.3 per cent) or think that such research services in Latvia are not available (24.4 per cent). Close to one-third of all respondents have found market research service providers in Latvia. Here is an interesting finding: 62.5 per cent of food industry representatives are convinced that the necessary market research services in Latvia are available. The explanation of this difference could be found in the more successful work of the Marketing Council (responsible only for the food sector) in comparison with the Latvian Development Agency.

Table 22.9

Information sources

Source of information Foreign clients Personal contacts International exhibitions Partners in multinational corporations Publications Databases accessible using a PC, incl. Internet Other enterprises in your industry or their representatives Foreign consultants Various associations of entrepreneurs Latvian Development Agency Latvian Chamber of Trade and Industry Latvian embassies, commercial attaches Relatives Ministry of Economy Ministry of Foreign Affairs

Regularly (%)

Sometimes (%)

67.7 54.2 44.3 43.3 34.8 31.3 23.9 16.9 15.4 10.9 9.0 4.5 4.0 3.0 0.5

18.9 28.9 26.9 23.4 28.4 35.8 33.8 18.4 29.9 28.4 24.9 17.4 14.4 12.4 9.5

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Table 22.10

Most popular methods of payment used for export operations (percentage)

Delayed payment (30 days) Pre-payment before production Payment on receiving shipment documents Delayed payment (60 days) Letter of credit Delayed payment (90 days) Barter deals

67.7 54.7 48.3 37.8 20.9 15.4 10.0

About 10 per cent of Latvian exporters have used commercial export credit; 8.5 per cent of respondents have used export guarantees; 22.4 per cent of respondents are convinced that export credits and guarantees would facilitate their exports; two-thirds of respondents are not sure about the positive impact of export credits and guarantees, because they have never used these instruments. Close to all (86.1 per cent) respondents are convinced that their products comply with the technical standards of other countries. Only one representative, from the wood industry, and two from services, think that their products do not comply with these requirements. Most respondents (73.1 per cent) had no problems in gaining access to information on standards required by export markets and how to get certification, but 18.9 per cent have never looked for them. Over the past five years, significant progress has been achieved in the quality assurance field. More than one-third of respondents (35.3 per cent) have introduced quality assurance system ISO 9000 (14000) in their enterprise, but 14.4 per cent are in the process of introducing it. In 1999, only 5.5 per cent of respondents were ISO-certified, and 24.5 per cent were in the process of introducing it. R&D activities are still the weakest part of the value chain of Latvian exporters. 45.8 per cent of respondents discover that they do not have R&D personnel. On the other hand, the situation is slightly improving, because, in 1999, 88.4 per cent of respondents had no R&D personnel. In 2004, 24.9 per cent had at least one R&D manager, but 9.5 per cent had more than 10 R&D specialists. With such a low proportion of R&D specialists in Latvian exporter companies, they are also not very keen on cooperating with research institutions or innovation centres: only 32.3 per cent had established such cooperation. Nevertheless 69.2 per cent of respondents are sure that the design of their products is suitable for western markets, and 65.2 per cent for eastern markets. Slightly more than half of respondents (53.7 per cent) export goods under their own brand name(s) and/or trademark(s). More advanced in that respect are food industry companies: 91.7 per cent of them export goods under their own brand and trademark. To the contrary, only 29.2 per cent of services are exported under the trademark of service providers. Availability of necessary packaging materials is not a problem for Latvian exporters: 57.7 per cent are buying all necessary packaging materials in Latvia, 21.9 per cent buy packaging materials in Latvia and abroad. Only 14.4 per cent of respondents have used state support programmes aimed at facilitation of exports. The rest of the companies have not heard about such programmes (22.9 per cent) or have not used them (62.7 per cent). There is a slightly better situation in the food sector, where 29.2 per cent of respondents have used state support programmes.

Analysis of the environment for SMEs in Latvia Table 22.11

Field in which consultants are required

Marketing Production technology and operations management Finance Quality assurance Strategic planning Human resource management Product design

Table 22.12

Answers in 2004 (%)

Answers in 1999 (%)

46.8 31.3

66 32

26.9 24.4 22.9 17.4 13.9

35 27 33 13 20

The preferred mode of transportation for shipping the products

Mode of transportation Road Sea Rail Air Multi-modal

383

In 2004 (%)

In 1999 (%)

83.1 63.7 29.9 23.9 5.5

95.5 43 41.5 16.5 3

Respondents were also asked to name the field in which they would like to have consultants, if the government would subsidize part of the costs for the use of their services (see Table 22.11). The customs duties paid by Latvian exporters on imported raw materials and semimade goods are low. The most common answers on average import duty rates were 0 per cent (20.4 per cent), 0.1–5 per cent (26.8 per cent), 5.1–10 per cent (9.6 per cent), 11–20 per cent (8.9 per cent). Some 70 per cent of respondents have requested reimbursement of VAT. The most common VAT refund periods mentioned were ‘within 2–4 weeks’ (44.7 per cent) and ‘1–3 months’ (35.5 per cent). Only 14.9 per cent of respondents see customs clearance as a problem. Most of respondents (55.7 per cent) have sometimes had a problem with customs clearance, but for 25.9 per cent it has never been a problem. The most common anticipated average order size in foreign markets is 6–20 thousand LVL (33.8 per cent) and 21–50 thousand LVL (19.9 per cent). Knowledge of foreign languages is not a serious obstacle to engineering and technical personnel of Latvian exporters: 77.1 per cent of respondents have personnel with the necessary knowledge of foreign languages; 19.4 per cent of respondents have personnel with a basic knowledge of a foreign language. Some 76.1 per cent of respondents provide just-in-time deliveries; only 7 per cent are not able to provide such deliveries. Most of respondents (61.7 per cent) have never visited the European Information Center at the Latvian Development Agency to collect information. Only 3.3 per cent of respondents do so on a regular basis. This is a clear indicator of the weakness of the current Latvian export promotion infrastructure.

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Table 22.13

Main constraints in increasing exports

Factors Lack of market information Lack of working capital Lack of production capacity Bureaucracy with import–export procedures Lack of skilled workers High production costs Lack of export guarantee facilities High costs of marketing Lack of demand for products Problems with distribution channels, wholesalers Management of the company Lack of product quality

In 2004 (%)

In 1999 (%)

31.8 29.4 24.9 24.4 18.9 15.4 12.9 12.4 10.9 7.0 7.0 1.0

47.5 54.5 19 11 10 16.5 17 14 19 13 5 1

Table 22.14 Respondents state that they would be interested in getting the following types of information

Business proposals Market studies Tenders Companies’ databases Trade regulations Statistics on world trade

In 2004 (%)

In 1999 (%)

60.7 54.2 42.8 33.8 25.9 18.4

86 67.5 23.5 29 16 17

Table 22.15 shows that electronic means of communication play an increasingly important role in business-to-business exchange of information. Only a few companies are willing to receive business proposals by mail or read about them in a newspaper. Most companies nowadays prefer e-mail messages and information portals. Discussion and conclusions The main problems hindering SME development in Latvia are the following. 1.

2.

Business environment Competitiveness of the SME sector cannot develop without an environment favourable to business activity, and this is largely determined by competitiveness of the state tax policy, efficiency of the capital market, infrastructure, educational system and state aid, alignment and stability of business legislation. Results of business surveys and conclusion reports of meetings and conferences of nongovernmental organizations representing SME interests allow coming to a conclusion that many of these factors in Latvia are unfavourable to business development. Availability of finances Although opportunities to receive external financing have recently increased to a considerable extent, access to current and capital financing is a significant obstacle to an increase in business activity and competitiveness of SMEs

Analysis of the environment for SMEs in Latvia Table 22.15

Preferred forms to receive information

E-mail Fax On web site or portal Post Printed magazine

3.

4.

5.

6.

385

In 2004 (%)

In 1999 (%)

75.1 26.9 25.9 16.4 11.4

21.0 56.5 9.5 66.5 25.5

and among business beginners. Guarantee and investment funds are not sufficiently developed as yet. Problems in the field of external financing availability are more pronounced outside Riga: the problem of availability of finances has an explicit territorial dimension. Personnel resources SMEs often face problems in choice of personnel: insufficient business management skills, knowledge of management and business and technical knowledge, to be able to develop business plans of high quality and value; insufficient level of knowledge about financial and money flow management; and poor culture of business organization, while working in the global economy. Competitiveness of SMEs Latvian enterprises, while working with EU directives on quality, lack information about product standards and new production methods, and this also is a pressing problem. Product quality assessment instruments are not available in Latvia. Regional differences In the last ten years, negative trends have been observed in Latvian socioeconomic development, namely rapid development of Latvian economic centres and stagnation or even regress in development of the other territory at the same time. This created increased differences between cities and rural areas as well as between the central part and periphery of the country. Integrated development of rural territories, including development of non-agricultural business activity, is a necessary precondition for balanced development of the country. Administrative capacity of public and non-governmental organizations for development and implementation of SME policy and for utilization of the EU Structural Funds is insufficient at present. The main causes are insufficient opportunities for financing from state budget, lack and high changeability of human resources, insufficient competence and qualification of policy developers and implementers, as well as lack of training of the existing and potential specialists.

References Cimdins, U. (2004), ‘Summary of the results of Latvian exporters’ survey in the framework of the UNDP project on upgrading the national programme of foreign trade’, unpublished material, UNDP Latvia Office, Riga, Latvia. Hise, R.T. (1997), ‘Globe trotting’, Marketing Management, 6 (3), 50–59. Potet, Laurent (2004), ‘Internationalisation process of Baltic IT SMEs’, Vitautas Magnus University, Vilnius, Lithuania. World Bank (1993), Historically Planned Economies: A Guide to the Data, edition featuring economies of the former Soviet Union, Washington, DC: The World Bank. Survey of exporters of Latvia, ‘Main Priorities and Problems of the Latvian Exporters in External Economic Activities’, Ministry of Economics, UNDP, Latvia, January 2004.

23 Internationalization of SMEs in Liechtenstein Hans-Rüdiger Kaufmann

From an economics perspective, internationalization has been a global success story since the Second World War. In the wave of growing interdependence of international economies the discipline of business administration had to integrate internationalization issues as corporate activities increasingly transcended national boundaries. The increase in world export performance ( 6.3 per cent) considerably exceeded the overall economic performance (3.6 per cent) (Backhaus, Büschken and Vöth, 2003). Also the Rhine valley would like to benefit not only from the fertile effects of its natural stream, the river Rhine, but also from an international stream of goods, services, investment, capital and people. The following map provides a geographic overview of the region. Geographic environment The Rhine valley embraces alpine regions along the alpine Rhine in Liechtenstein, the Swiss cantons of Graubünden (Bündner Rhine Valley) and St. Gallen (St. Gallen Rhine valley) and in the west of the Austrian county, Vorarlberg. The plain of the valley is about 500m above sea level at the Swiss city of Sargans and up to 400m above sea level at the Austrian city of Bregenz. The valley is up to 10 km wide, surrounded by mountains with an altitude of more than 2000m (Rheintal Artikel, http://rheintal.know-library.net/). Competing to attract global resources When investigating internationalization strategies and motives, attention has to be drawn not only to international markets and SMEs themselves but also to regional infrastructural conditions (Goette, 1994). Not only companies but also whole regions compete in attracting international resources to entice, on the one hand, foreign companies into the region and to enhance the competitive position of local companies (Porter, 1990; Liechtensteinische Landesverwaltung, 2005). Liechtenstein is keen to promote the image of an attractive business location with a very high standard of living. With a highly attractive economic, political and legal environment (tax system) the country would like to increase the attraction for investors, companies (that is, holding companies) and highly qualified human capital and to create an innovative and dynamic setting for large companies and SMEs summarized in positioning the Rhine valley as the ‘entrepreneurial valley’. Ricardo’s theory on comparative advantage based on productivity and Smith’s definition of wealth in terms of an increased level of consumption proved that internationalization results in an increase of living standards of the countries triggered by a concentration of the respective countries on certain core competences (Czincota, Rivoli and Ronkainen, 1992; Cezanne, 2005). However, economists and politicians currently discuss the blessings as well as curses of globalization for the national economy. When defining globalization, Petrella and Muldur (1994) differentiate between ‘business as usual’, ‘revolution’ or ‘new 386

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St. Galler Rheintal

Vorarlberg

Lorzenebene/Ennetsee

Werderberg March/Höfe

Liechtenstein Sarganserland

Prättigau Nidwalden/Engelberg

Bündner Rheintal

Source: Regional study of the Credit Suisse ‘Principality Liechtenstein – Structure and Perspectives’ (www.llv.li/amtsstellen/llv-avw-statistik/llv-avw-statistik-publikationen.htm).

Figure 23.1

Geographic area of Liechtenstein

structural phenomenon’. Reflecting on the intensive concerted activities on regional and local levels, the author regards the term ‘globalization’ as a subordinate aspect of the ‘structural phenomenon’ view as currently very relevant. ‘Globalization’ refers to an extensive reorganization of economic activities at a local/regional level as a basis for economic globalization, supported by intensive expansion of information/communication and products/services flows amongst cities and regions. Paradoxically, however, at a time of global networking, to succeed in the race for higher global market shares, profitability and technological leadership position, controversial poles are crystallizing, resulting in a tendency towards segregation. On the one hand, the EU integration of Central and Eastern European countries increases the chances for strongly export-oriented regions, such as the Rhine valley, to expand international business and for a common European identity; on the other hand, although without a convincing empirical basis (Weder di Mauro, 2005), possible negative implications of outsourcing or transferring employees to foreign subsidiaries to meet the employment situation of the local economy are discussed as well as a possible marginalization of regions fostering the emphasis on regional identities. The increasing foci on globalization and identity point to Kaufmann’s (1997; 2004) findings that the microsociological concept of identity might be conducive for international management learning. The latter refers also to the social/cultural environment as the unstoppable internationalization is

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anticipated to intensify political discussions within the Rhine valley counties, cantons and countries concerned with issues regarding migration and multicultural societies. As far as the level of attraction of the location for foreign investment is concerned, a study was conducted by the Contor GmbH at the end of 2003 with 1207 EU regions to investigate criteria for future place decisions of international industrial, high-technology and service oriented branches. In particular, cost factor comparisons between ‘old European’ and newly affiliated European countries and the implicit competitive consequences were examined. In a second study, specifically the differences between German and Austrian locations for high-technology companies were investigated. After publishing the results of this study, the Contor GmbH was charged by the AGV Rheintal with conducting a location analysis for the area of high technology with the objective of comparing the St. Gallen Rhine Valley with all EU regions and to provide a ranking. Research questions referred to criteria such as total work-related costs and productivity, closeness to research and development institutes, infrastructure (especially access to motorways and international airports), tax conditions, human capital potential and regional attraction factors such as crime rate, corruption and growth chances. The survey resulted in the conclusion that western European regions are very competitive in comparison to eastern European regions. The researchers, however, stress that company-idiosyncratic factors could not be considered and that the differences between the regions could be marginal. Compared to the best ranked German region, with Bremen town ranked 314th, the St. Gallen Rhine Valley belongs to the very top segment. After eight Irish regions the St. Gallen Rhine valley is ranked ninth followed by the Pohja – Eesti region in Estonia, the Linz–Wels region in Austria and the Rhine Valley – Lake Constance region in Austria. As a result, the St. Gallen Rhine Valley compensates for rather high total work costs and an only average productivity with good infrastructural and very good tax conditions, a high human resource potential and excellent values as to crime rate, corruption and growth chances (Lüttich, 2005). As the study implies a similar industry structure of the St. Gallen and Austrian parts of the Rhine valley which are both ranked very high on factors attracting international companies, it is suggested that these two parts be researched as one region in the future. Referring to the concept of globalization, this is supported by current local discussions in that this economic newcomer region in Europe reinvents its identity and moulds its economic forces across borders into a critical mass (including eventually also the German Lake Constance area) to be recalled by the international environment (Vorarlberger Nachrichten, 2006). Moreover, to profile the image of the principality of Liechtenstein a communication concept has been developed by the foundation Liechtenstein (Stiftung Liechtenstein). This communication concept also includes a location branding strategy of the country. Based on research, the key brand features emphasizing diversity refer to ‘dialogue’, ‘finance’, ‘industry’, ‘home’, ‘nature’ and ‘principality’. The brand positioning embraces preparedness to dialogue by a small, sovereign state which is internationally connected. Furthermore, Liechtenstein will be recalled as a competent, secure, personal financial centre, as a highly developed, successful and diversified industrial location with a colourful cultural life providing varied and welcoming vacation and recreation opportunities. In addition, key values are derived from the aristocratic background, being rich in tradition, entrepreneurial and close to the people (www.liechtenstein.li/en/fl-imagestiftungdownloads/ fl-imagestiftung-downloads-marke-geschichte.htm). Further information as

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to sociodemographic and detailed macroenvironmental data, location quality indicators compared to other regions, the development and chance–risk profiles of the industry branches as well as future perspectives are provided by two research studies conducted by the Crédit Suisse and Eisenhut (http://www.llv.li/amtsstellen/llv-avw-statistik/llv-avwstatistik-publikationen.htm). Summary of environmental factors With regard to the macroeconomic aspect of taxes, the European convergence, the global discussion on money laundry and the future role of tax heavens entails heated discussions as to tax harmonization or tax competition. Liechtenstein, as a traditional financial centre, took this theme up on the occasion of the first governmentally initiated Liechtenstein Dialogue, ‘International Forum of tax competition in the global market place: Rules for a sustainable framework in autumn 2004 (www.dialogue.li)’ and on three seminars of the author on the development of Liechtenstein’s tax system (Kaufmann, 2006) Other opportunities for Liechtenstein in the macroenvironment can be derived from a stable social, political, legal and economic order and continuity with a customs and monetary union with Switzerland, a solid finance policy of the public household, a flexible administration, a strong banking system focusing on banker’s discretion and a high living standard, the membership in the European economic area, its central location in Europe, a liberal economic policy with liberal taxation and low tax rates, well educated and motivated human resources and a cooperative social partnership. Possible detrimental aspects refer to the small area, high building costs and prices, a lack of own resources, being on the outskirts of the Swiss economic area, a ‘light weight’ in terms of international influence, a strong foreign dependency and a lack of promotion of the economy (http://www.llv.li/amtsstellen/llv-avw-statistik/llv-avw-statistik-liechtenstein_in_ zahlen.htm). The role and contribution of SMEs SMEs form the backbone of the European economy (Bannock and Albach, 1991; Sailer, 1993; Porter, 1990; Rennie, 1993; Fuller, 1994; Purkiss, 1993; File and Prince, 1992). According to publications of the European Commission, SMEs in Iceland, Liechtenstein, Norway and Switzerland amount to 19.8 m. (99.8 per cent of all enterprises) in the industrial and service sector. In these sectors SMEs employ 77.1 m. people corresponding to two-thirds of a total of 117 m. employees. Of the total turnover, 55 per cent is generated by SMEs (Europartner NRW, 2005). As Table 23.1 shows, of the total number of companies in Liechtenstein, the highest structural share (78.6 per cent) and the highest growth rate (6.5 per cent) are represented by sector 3, whereas sector 1 (3.7 per cent share) and sector 2 (17.7 per cent share) are stagnating and even slightly decreasing in amount. With 99.5 per cent SMEs takes the lion’s share of all the companies. As to the size structure, SMEs with up to nine employees (85.6 per cent) dominate and have the strongest growth rate (5.2 per cent). Second-highest in amount are SMEs, with 10 to 49 employees (structural share of 11.9 per cent) displaying a growth rate of 1 per cent. Slightly but continuously growing ( 4.9 per cent) is the SME block with up to 249 employees (structural share of 2.0 per cent). There are only 15 large enterprises with more than 250 employees and their number is stagnating.

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Table 23.1

Number of companies in Liechtenstein 2002

2003

2004

2005

Sectors Sector 1 (agriculture & forestry) Sector 2 (Industry) Sector 3 (Services)

128 599 2288

124 594 2326

126 591 2436

1.6% 1.3% 6.5%

Size range 1–9 employees 10–49 employees 50–249 employees 250 employees

2553 386 61 15

2573 394 62 15

2684 390 64 15

5.2% 1.0% 4.9% 0.0%

Total

3015

3044

3153

4.6%

Source: http://www.llv.li/amtsstellen/llv-avw-statistik/llv-avw-statistik-liechtenstein_in_zahlen.htm.

Table 23.2

Liechtenstein Switzerland Austria Germany

Employees according to branches of trade (2003) Sector 1 Agriculture & Forestry

Sector 2 Industry

Sector 3 Services

1.3% 4.1% 5.6% 2.3%

45% 23.9% 29.6% 27.0%

53.7% 72.0% 64.8% 70.7%

Source: http://www.llv.li/amtsstellen/llv-avw-statistik/llv-avw-statistik-liechtenstein_in_zahlen.htm).

The strong influence of the few but large enterprises in the industrial sector on employment is depicted by Table 23.2. The industry sector is compared to a relatively low structural share with an employee figure of 44.2 per cent a significant employer. A comparison of the employee structure on a nationwide basis points to Liechtenstein’s predominant industry employment and to a relatively lower share of service and agriculture/forestry employment. The most important industry branches produce high-quality high-tech products rather than mass products such as mechanical engineering and equipment making and construction, manufacturing precision instruments also in the dental and food industry. Switzerland and Germany lead in the service sector, whereas Austria, comparatively, has the highest share in agriculture/forestry. Referring specifically to Liechtenstein, Table 23.4 illustrates that exports of the industry sector have boomed between 1980 and 1990 (249 per cent) and between 1990 and 2000 (209 per cent) up to CHF 5.144 bn. Whereas 2001 (4.33 per cent) and 2002 (2.89 per cent) reflect decreasing growth rates exports have risen again in 2003 (4.65 per cent) and considerably in 2004 (10.72 per cent). Table 23.5 also points to the USA and Western Europe (Germany, Switzerland, France and Italy) as the most important trading partners, followed by Hong Kong and Taiwan and, finally, by the direct neighbour, Austria.

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1.30% 44.20% 54.02%

Services

Industry

Agriculture & silviculture

Source: http://www.llv.li/amtsstellen/llv-avw-statistik/llv-avw-statistik-liechtenstein_in_zahlen.htm.

Figure 23.2

Table 23.3

Employees according to branches of trade in Liechtenstein (2004)

Exports of industries since 19501

Year

M. CHF

1950 1960 1970 1980 1990 2000 2001 2002 2003 2004

15 83 333 887 2 213 4 622 4 422 4 294 4 646 5 144

Note: Source:

1

Only for Industry-member Companies of Liechtenstein Chamber of Commerce. http://www.llv.li/amtsstellen/llv-avw-statistik/llv-avw-statistik-liechtenstein_in_zahlen.htm.

Table 23.4 1. 2. 3. 4. 5. 6. 7. 8.

The most important buyers (2004)

USA Germany Switzerland France Italy Hong Kong Taiwan Austria

Source: http://www.llv.li/amtsstellen/llv-avw-statistik/llv-avw-statistik-liechtenstein_in_zahlen.htm.

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Table 23.5

Competitive opportunities and threats for SMEs

Competitive opportunities for SMEs

Competitive threats for SMEs

More consequent implementation of marketing strategies due to entrepreneurial spirit

Insufficient use of market research and marketing tools owing to budgetary constraints

Lower complexity costs of well-managed SMEs

Possible emergence of financial gaps through a lack of product/service portfolio planning

Quick unbureaucratic reaction to environmental challenges due to short internal communication paths

Cost structure prevents price-based market entry strategies

High innovative power by flexible structures, direct communication and closeness to customer needs

Lack of efficient decision support systems because of unsystematic controlling. This is related to a lack of appreciation of decisionrelevant information

Tailored and differentiated products and services due to specific core competences and closeness to customers

Market entry strategies entail dramatic increase of fixed costs in the case of pay agreements

High customer loyalty due to personal relationships

Lack of leadership competence prevents strategic planning

Overcoming cultural or ideological barriers by direct communication

Centralization of technological complexity know-how at the leaders’ level prevents continuous improvement of individual company units

Experience in market niches (often high-tech) and market leadership

Preference of a traditional value system emphasizing security and independence is detrimental to risk and growth orientation

Uniting competences, capacities and resources by networks and strategic alliances between SMEs Focus on quality

Often lack of international management experience

Competitive opportunities and threats for SMEs Before expanding on more concrete SME challenges when internationalising, Table 23.6 provides a general overview of potential competitive opportunities and threats for small and medium sized enterprises. The Table is based on Hoppe and Rickes (2000), Meissner (1987), Nienaber (2003), Behr and Semlinger (2004) and Benz and Fiedler (2005). Summarizing, market entry strategies of SMEs in relation to the overall business might entail both higher chances and higher risks as SMEs base their activities on lower turnovers and smaller market segments (Hoppe and Rickes, 2000). Whereas Hoppe and Rickes (2000) perceive a disadvantage for SMEs, Nienaber (2003) and Benz and Fiedler (2005) hold that SMEs might be able to compensate the potential disadvantages by their competitive opportunities compared to large corporations. The latter could be reflected by compensating a lack of economies of scale by flexible, that is, computer-integrated production (Beutel, 1998). Referring to the strategy gap, Meissner (1987) appeals for the application of international marketing concepts in SMEs rather than preferring ad hoc

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operational marketing tactics. The participation in the international business has been regarded by SMEs as contributing to competences in the area of international competitiveness (Meissner, 1987; EU, 2005): the level of international competitive skills is the higher the more sophisticated the forms of market entry. Previous barriers for internationalization of SMEs EU research (EU, 2005) differentiates between internal and external barriers. According to the EU, 59 per cent of the SMEs never considered internationalization. It is assumed that this high percentage has less to do with internal barriers than with a lack of motivation and experience of the management (EU, 2005). Amongst the internationalized SMEs more than 30 per cent do not feel themselves confronted by internal barriers. The high costs of the internationalization process, followed by the price of the products and services, the quality or other product features as well as insufficient qualification or competences of the employees, were mentioned as the most relevant internal barriers. As far as external barriers are concerned, about 30 per cent of the SMEs do not feel affected at all. The legal environment, followed by a lack of capital or financial sources, a lack of support and consulting, culture and language differences as well as lack of information, were seen as sources of external barriers. Methodology of the Rhine Valley survey The conclusions and recommendations on international SME issues in the Rhine Valley in general and on educational issues in particular are partially drawn from secondary research and from qualitative empirical research findings of the author referring to indepth interviews and especially to participant observation of the author. Moreover, an on-line based quantitative survey investigated international strategic approaches of SMEs. This referred to internationalization motives for and motives for not internationalizing, planning for internationalization, including preferred international markets, influential environmental factors, success perceptions of the individual internationalization strategies and potential gaps in the strategic internationalization process, as well as the attraction of local infrastructural conditions. The survey was conducted between 15 June 2005 and 5 August 2005. The population consisted of SMEs with less than 250 employees and branches in Vorarlberg/Austria, the Eastern Part of Switzerland and, especially, in Liechtenstein. The questionnaires were sent to 794 SMEs of the data bank of the Institute for Entrepreneurship of the Liechtenstein University of Applied Sciences (Hochschule Liechtenstein) and the return rate was 5.6 per cent (42 companies). Only 15 SMEs (eight from Liechtenstein, three from eastern Switzerland and four from Vorarlberg) are internationally active beyond the German speaking area; 14 SMEs in Liechtenstein are internationally active, however, exclusively in the German speaking area, whereas 11 Liechtenstein SMEs and two Vorarlberg SMEs were not internationalizing at all. The 15 companies internationalizing beyond the German speaking area can be characterized as experienced, as 10 participants had more than 10 years and five participants between three and five years of international experience. Although the results of the survey cannot be seen as representative (e=14.5 per cent) and the preconditions for a random sample are not given owing to the lack of an integrative data bank for all SMEs in the Rhine Valley, the survey might provide cues and an informative basis for further

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quantitative or qualitative research. Reasons for the low response rate might be numerous: first, as part of a bachelor thesis the survey was conducted during the holiday season; second, the SME centre at the University of Applied Sciences had recently conducted a series of surveys, implying a lack of preparedness of the SMEs to participate; third, a data bank for Eastern Switzerland SMEs turned out not to be usable; fourth, the Chamber of Commerce Vorarlberg could not provide assistance in getting access to further data. The questions were either addressed to all 42 SMEs in order to be able to differentiate between different SME groupings or, specifically, to SMEs internationalizing beyond the German speaking area to get more detailed information on their internationalization experience and perceptions. As already mentioned, the quantitative research results cannot be regarded as representative or generalizable; hence, there is no multivariate analysis, but cross-tabulation could be applied. The results, however, together with qualitative findings, do form a good basis for the creation of hypotheses to be tested in further research. In the following, the research findings are reflected against previous SME research. Indicative findings Internationalization competences of Liechtenstein SMEs According to the EU (2005) there are still 63 per cent of SMEs not internationalized, with only 18 per cent of SMEs whose internationalization approach is limited to exclusive foreign suppliers and 6 per cent of SMEs exclusively exporting. Only 13 per cent of SMEs are using more sophisticated forms of internationalization as having a production plant abroad and engaging in more than only one form of internationalization. The EU survey also implies that the intensity of internationalization and the degree of sophistication of forms of internationalization increase with the growing number of employees. 18 per cent of the SMES provide for 50 per cent of the total SME exports. This implies, in addition to a general internationalization gap of European SMEs, an internationalization demand to catch up, especially for smaller SMEs with up to 49 employees. Here, the data on Liechtenstein, with 34 per cent of SMEs achieving an export share of 50 per cent imply that, compared to other European areas, a higher percentage of small and smallest SMEs are internationalizing. Regarding the internationalization forms of ‘foreign supplier’ and ‘exporting’, the smaller countries within Europe seem to be more strongly internationalized. Hence, Liechtenstein SMEs lead the European table in ‘exporting’ whereas they are, after Luxemburg, second as to ‘foreign supplier’ as internationalization forms (EU). The previous finding of the European Network for SME Research (EU, 2005) survey stating that 63 per cent of the SMEs are not internationalized and that larger European SMEs as a tendency, are more strongly internationalized than smaller ones, could not be confirmed. To the contrary, in the Rhine Valley, the smallest SMEs are seemingly more strongly internationalized than the European average and also compared to larger SMEs in the Rhine Valley. In total, 67 per cent of these SMEs were internationalized, with half of them concentrating on the German speaking markets only. A transparency gap of support programmes The importance of SMEs for the national economies is underlined by support programmes to improve their often low capital budget and to improve the quantity and

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Internationalization of SMEs in Liechtenstein 50–249

17%

10–49

17%

1–9 no answer

33% 2%

not internationalized 0%

Figure 23.3

31% 5%

10%

15%

20%

25%

30%

35%

Status of internationalization

quality of human resources so urgently required for internationalization endeavours. These support programmes refer, for example, to the provision of guarantees and risk capital instruments by the European Investment Funds, of consulting services regarding importing and exporting, cooperation and foreign investment by the Euro Info Centres, of informative support with market entry and fair participation in Japan by the so-called ‘gateway’ to Japan or of supplier fairs to enhance direct contacts with OEMs by the IBEX initiative (Kaufmann, Davies and Schmidt, 1994; Backhaus, Büschken and Vöth, 2003). Although national and supranational institutions try to promote internationalization endeavours of SMEs, the Rhine Valley online survey implies that SMEs are often not aware of and seemingly also not interested in support programmes. Referring to the answers of 42 SMEs, the assumption that many SMEs are possibly not sufficiently informed about these programmes could be confirmed. Quite equally distributed across the three SME groups under investigation, 70 per cent of the respondents did not show any interest in support programmes. Referring to using financial support programmes, it was surprising that a high proportion SMEs (10) did not receive financial support and also did not show an interest in receiving them (nine). Only five companies received financial support from the respective government or the EU. First participation observation and interviews point to possible explanations, in that the majority of SMEs do not engage in research and that the various funding opportunities are actually not known. Moreover, on an EU-wide basis, there seems to be more demand for support services for more sophisticated forms of internationalization going beyond export promotion and for more specific and problem-oriented support, that is, search and selection of appropriate business partners for SMEs (EU, 2005). In order to provide support in this context an SME centre was established with a governmental mission for the two responsible bodies (the Chamber of Commerce Liechtenstein and the Liechtenstein University of Applied Sciences) of establishing new and developing existing companies to create futureoriented workplaces. The SME centre focuses on SME-relevant knowledge and technology transfer. It organized a government-supported business plan competition, engaged in continuous education as SME marketing, in a planned implementation of networks between strategic partners from science, policy associations and SMEs (that is, regular business forums) and individual coaching, (for start-ups). The SME centre is embedded in an overall

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life cycle philosophy for entrepreneurs, ranging from youth entrepreneurship (that is, adventure camps and innovative idea generation) to academic and continuous education (BA Business Administration mastering in International Management; PGD/MBA International Management; MBA Entrepreneurship; SME marketing), networking and training (SME centre) and research (Institute of Entrepreneurship). Perceptions on local infrastructural conditions Regarding the attraction of the local infrastructural conditions, the following information could be elicited: ● ● ● ● ●

the biggest share of SMEs (10) perceived education and continuous education as very attractive; the availability of qualified personnel, the closeness to the customer and the telecommunications infrastructure was evaluated as second-best (eight); six SMEs evaluated consulting and service offers, innovation climate, regional sales markets, cooperation with governmental authorities and taxation as positive; only four SMEs evaluated economic policy and traffic infrastructure as positive; costs for personnel (two SMEs), and the organization of fairs, the quality of the work of associations, and the availability of financial resources and risk capital was rated by only one respondent as positive.

An implementation gap of identified strategic foci In line with the ENSR survey (EU, 2005) the Rhine Valley survey also could identify a gap between the perception of the importance of strategic preparatory work for internationalization and the actual investment in its implementation. Only as regards continuous control of international activities was the importance identified and actually put into practice. However, referring to the analysis of foreign market potential and the legal and competitive environment, necessary product adaptations, corporate objectives, marketing and market entry strategies, only about 50 per cent of the SMEs put the identified necessary strategic activities into action. This strategy implementation gap seems to be especially high as regards social/cultural factors. In the literature (Backhaus, Büschken and Voeth, 2003; Goette, 1994; Quack, 1995; Trompenaars, 1993; Trompenaars and Wooliams, 2004; Hofstede, 1980; 1991; 1997; Hellriegel, Jackson and Slocum, 2002; Kluckhohn and Strodtbeck, 1961; Hall, 1976; Gatley and Lessem, 1995; Avery, Donnenberg, Gick and Hilb, 1999; Klimecki and Probst, 1992) knowledge about cultural differences is seen as a key success factor on foreign markets relating both to behaviour of clients and suppliers, corporate culture and to international marketing strategies. It is hypothesized for further research that this behavioural deficiency can be explained by a lack of ‘international awareness’ when referring to an internal barrier. This term implies that decision makers in SMEs, on the one hand, are, initially, very clear about the relevance of international business activities. The aforementioned deficits refer to the observation that, notwithstanding the identified importance, no or only insufficient practical implementation steps are undertaken. These deficits might primarily be put down to irrational aspects such as insecurity, fear or rejection. These immaterial barriers could be called as non-rational motives negatively influencing decision behaviour of SME leaders often preferring a centralized leadership style.

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10

Analysis of foreign market potential

4 10

Analysis of competitive environment 6 Necessary product adaptation

8 4

Determining clear objectives (objectives as to market share, costs or profitability)

11 4

Continuous control of international activities

8 8

International marketing strategy (i.e. winning market share or reducing costs)

8 5 10

Planning a market entry strategy (i.e. exporting, licensing, joint venture, own subsidiary)

5 10

Legal framework

4 6

Social/cultural factors

1 0

High and very high importance of planning

Figure 23.4

2

4

6

8

10

12

Implementation in practice

The strategy implementation gap

Internationalization motives In line with the ENSR survey (EU, 2005) the strongest motive highlights a proactive and marketing-oriented motive: access to new markets (12–15 SMEs). It is astonishing that the reactive motive of ‘reaction to inquiries by foreign clients or representatives’ was ranked second (10 SMEs) and represents a difference vis-à-vis the ENSR survey. Reflecting the high-tech focuses of the Rhine Valley SMEs, the motive of ‘getting access to know-how and technology’ was mentioned third most important (second in the ENSR survey). Internal barriers Regarding the internal company-related barriers to internationalization, the majority of the SMEs (eight out of 15) perceive a lack of time resources of management, the quality or features (that is, high explanatory need of high-tech products) or the high price of their products as most important. Less or not important were factors perceived as relating to insufficient qualification of employees, or a lack of information, support and consulting. This might be due to the obvious lack of strategic approaches. The suggested consequence would be awareness building for the need of systematic and well-informed strategic planning and decision making; also a high emphasis on control or a fear of losing control and independence (EU, 2005) might trigger a resistant attitude towards external support and consulting and also internal delegation and decentralization. The latter also explains the perceived lack of time resources of management. This

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would point to urgently needed new global leadership styles regarding networking and more participative leadership styles. External barriers With respect to external macroenvironmental factors, the respondents perceived existing legal barriers, economic country risks and access to distribution channels as the most important factors. Interestingly, only one participant sees a lack of capital or financing opportunities as detrimental to internationalization although six SMEs highlighted the high costs of the internationalization process and this criterion is repeatedly stressed in the literature. Perceived strengths of SMEs of the Rhine Valley Pointing to technical/engineering skills, perceived key strengths referred to quality (7), know-how (5) and closeness to customers/flexibility (4, respectively) were mentioned. It is remarkable that quality is perceived as both a key strength and also, in connection with price aspects, an important internal barrier. This implies a future emphasis on branding, in particular on better communicating the high quality and high price positioning of hightech niche products. Secondary and primary data for market selection The process of sequentially eliminating and selecting markets is described by numerous writers. The selection is divided into several stages, moving from more generic product oriented general macroenvironment data to more specific company product-related data. The process implies a continuously increasing demand for information provided initially by desk research or secondary information (due to cost and time factors) followed by primary data (Cadosch and Lehmann, 2003; Langer and Sand, 1983; Kamenz, 1997; Bauer, 1997; Meffert and Bolz, 1994; Simmet-Blomberg, 1998; Berndt, 1999; Backes and Stahr, 1992). Bauer (1997) suggests the following criteria on which data collection should be based: ● ● ● ● ●

relevance as to decision making, comprehensiveness as well as economic criteria, actuality, preciseness in the sense of reliability and validity, comparability.

The data should according to Meffert and Bolz (1994) provide for the following: ● ● ● ● ●

an early warning function regarding international market risks, an innovation function to surface chances and developments on international markets, an intelligence-enhancing function to support the will formation process of the marketing department, an uncertainty reduction function for objective decision making, a structuring function for a better understanding of company-related objectives and learning processes,

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a selection function to elicit decision-relevant information from an avalanche of data.

The assumption that SMEs prefer, owing to cost and time reasons, secondary research sources is confirmed by the online survey. Primary research only mentioned six SMEs as being very relevant, whereas for most of the SMEs internal information sources were of considerable importance. Referring to external data, especially international exhibitions, electronic data banks and continuous education were regarded as very relevant. Interestingly, consultants, representatives of international organizations and advertising agencies seem for most of the SMEs to be rather unimportant. Taking the far-reaching strategic importance of research data into account, more empirical research and referring also to branding, a closer cooperation with external experts is recommended. Behaviour or decision-oriented market selection approaches Approaches for selecting foreign markets can be differentiated between behaviouroriented and decision-oriented, analytic–rational approaches. A behaviour-oriented approach explains the decision process being determined by motives and objectives. One factor in selecting and consecutively entering markets for less internationalized companies is a high degree of uncertainty and low geographical and cultural distance (Breit, 1991; Goette, 1994). Here, Hofstede’s (1980; 1991; 1997) model comes into play, showing that the motive of uncertainty avoidance influences the market selection process. Besides this pragmatic and more intuitive approach, the decision-oriented approaches are based on heuristically or analytically derived determinants (Meffert and Bolz, 1994) of the macroenvironment such as, for example, general purchase conditions, analysis of political risks, country-specific success factors, or segment-specific success factors, risk indices, such as the Beri index (Beri, 2005). Breit (1991, p. 85) provides a survey of selection approaches in the German and English speaking countries, referring, for example, to checklists, cost–benefit analyses, mathematical programming, portfolio analysis or risk simulation. The Rhine Valley survey showed that 14 SMEs (32 per cent) are exclusively engaged in the German speaking markets, whereby eight of these SMEs intend to expand their international activities. Moreover, one-third of all SMEs prefer to enter those markets which are similar to the home market, supporting the behaviour-oriented approach. This is also confirmed by 12 SMEs selecting foreign markets based on ‘coincidentally happening chances’ representing the most preferred selection method. Only seven SMEs base their market selection on a systematic analysis of foreign markets (checklists or portfolio methods) pointing to a gap in decision-oriented market selection methods. This more behaviour-oriented approach of Rhine Valley SMEs might imply that better market opportunities in more culturally distant markets are forgone. With education and training on intercultural management, diversity, complexity management and decisionoriented market selection approaches, this situation might be reversed. Importance of macro environmental data Thanks to their crucial initial impact on the sequential market selection process, the degree of perceived importance of the macroenvironmental criteria provided by heuristic methods have been analysed. The strongest influence perceived by 16 SMEs refers to legal

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factors (customs, import restrictions or currency exchange, investment limitations and tax issues). The second most important macro factor is considered to be the economic environment (10 SMEs) referring especially to market volume, economic growth and stability of currency. The technological environment (especially product and process technology), the political system (economic system, stability of the political system and the region) are mentioned to a lesser extent. Only every fourth SME regards sociocultural factors such as value systems, client needs and education as most important. Religion, in particular, is regarded by none of the SMEs as a very important factor. This assumption might be debatable, taking the current debates and riots with respect to Islamic issues into account. These answers reflect a lack of awareness of the importance of cultural issues to international business. Ecological factors relating to catastrophes and infrastructural aspects have been regarded as being least important for the market selection. Current and future international markets for Rhine Valley SMEs The international activities of SMEs in the Rhine Valley are currently concentrating on Western (14) and Northern Europe (10) as well as North America (9), Africa (9), Southern Europe (9) and Eastern Europe (8). Asia (7) (except China, which is seen currently and in the future as equally important by five SMEs) is seen as the international market with the highest perceived future importance. Asked to mention the three currently most important international markets, the majority of the SMEs (11) mentioned Germany, followed by the USA (9), France (4) and England (3). The top position of Germany seems to be threatened, as only five SMEs perceive it also in future to be the most important foreign market. Also the USA and France seem slightly to lose importance. The increasing future importance of China and other Asian markets has been confirmed. This points to information and training needs in respect of high-context cultures of Asia as well as more low-context cultures in Europe and the USA. Market entry strategies After selecting country groups and finally specific countries, a very important decision in the internationalization process refers to an SME-relevant market entry strategy. The crucial implications can be reasoned by the long-term consequences the market entry strategy entails because of the necessary allocation of often limited resources (Cosi, Hürlimann and Karges, 2002). A market entry strategy is defined by Weiss (1996, p. 6) as an ‘institutional form of the international business activity enabling the company to apply a corporate strategy in a foreign market’. When fine-tuning the organization and the legal form of the SME for its international venture, the design of the strategy aims optimally to exploit respective competitive advantages and to identify the interdependence of the market selection, market entry and international marketing strategy decision (Perlitz and Seger, 2000). Whereas 50 years ago only two organization forms, exporting and direct investments, were differentiated, there are nowadays numerous alternatives of market entry forms at the disposal of SMEs. For the development of a systematization framework of market entry strategies providing the ‘helicopter view’, Perlitz and Seger (2000) regret the lack of existence of a concept being generally accepted in the literature. According to Backhaus, Büschgen and Vöth (2003) criteria refer to control and planning opportunities, the focus of the value creation depending on

Internationalization of SMEs in Liechtenstein Western Europe 9 9 9

North America Africa

10

9

5

9

Southern Europe

7

Eastern Europe

8

7

Central America

6

3

6

South America

5 5 5

China Asia

4

Japan

4 4

7

3 3

Australia 1 1

India 0

2

4

6 Currently

Figure 23.5

14

11

Northern Europe

401

8

10

12

14

16

In future

Current and future markets for Rhine Valley SMEs

whether it is the home market or the foreign country and the amount of transaction costs for developing the foreign market. Bamberger and Evers (1997) add the aspect relating to the degree of transfer of capital and knowledge. Kotler and Bliemel (1999) differentiate market entry strategies by their increasing degree of engagement, risk, control and profit potential. The stages according to Kotler and Bliemel are indirect export, direct export, licensing, joint ventures and direct investment. In order to provide a comprehensive summary of market entry forms, Table 23.6 suggests including and specifying indirect and direct export, international activities with and without capital participation (Bamberger and Evers, 1997) and considering modern market entry forms (Perlitz and Seger, 2000). Relating to a new form of market entry strategies in international entrepreneurship, International New Ventures (INVs) and/or ‘born globals’ are characterized by Oviatt and McDougall, Madsen and Servais (in Criado et al., 2002, p. 7) as ‘international at inception’. Similarly, Knight and Cavusgil (in Criado et al., 2002, p. 7) refer to ‘small, technology-oriented companies that operate in international markets from the earliest days of their establishment’. Cavusgil (in Rasmussen and Madsen, 2002, p. 7) highlight that ‘there is emerging in Australia a new breed of exporting companies, which contribute substantially to the nation’s export capital. The emergence of these exports, thought unique to the Australian economy, reflects two fundamental phenomena of the 1990s: 1. Small is beautiful. 2. Gradual internationalization is dead.’

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Table 23.6

International market entry strategies

Exporting Indirect exporting: Exporting intermediary Exporting associations Direct exporting: End-user General agent Own sales organization

International activity without capital participation (contractual form of market entry)

International activity with capital participation (Direct investment)

Licensing

Joint venture

Virtual company

International franchising

Fully owned subsidiary: • new launch • acquisition

Strategic alliances

Other market entry forms

Source: Based on Perlitz and Seger (2000, p. 93) translated into English by the author.

Reflecting a high level of awareness of the opportunities international markets provide and a cosmopolitan and courageous mindset, Rasmussen and Madsen (2002, p. 8) characterize born globals as follows: ‘they did not see export and the foreign markets as a necessary evil. Instead they looked upon the world as one, large market.’ This is confirmed by McKinsey & Co (in Rasmussen and Madsen, 2002, p. 8) who confirms that ‘these firms view the world as their marketplace from the outset and see the domestic market as a support for their international business’. McKinsey also stresses the importance of management’s commitment to internationalization. To narrow the complexity of the decision-making process Stahr (1993) suggest to systematically compare the possible and relevant market entry strategies based on a bunch of factors. Both, Stahr (1993) and Meffert and Bolz (1994) differentiate in this context by internal factors (strategy, cost situation and product-related factors) and external factors (legal, economic, competitive, trade-related and consumption-related factors). As those factors are in a continuous flux process their evaluation has to be repeated at regular intervals. To analyse these factors, checklists, evaluation procedures and the net value calculation of exporting, licensing contract or direct investments are required (Berndt, 1999). Referring to the limitation and exclusion of market entry forms consecutively condensing analytical work, Berndt (1999) puts emphasis on market-related factors. According to his view, a small market volume and growth potential would imply a cooperative strategy due to the low level of required investment. In case of a high market growth potential, he suggests a property strategy. A growing international involvement implies an increased allocation of resources to international marketing strategies. Owing to the limited capital resources, SMEs often decide on cost-effective and low-risk market entry strategies in the first instance (Cosi, Hürlimann and Karges, 2002). This approach also bears advantages for the confirmation of the market entry decision. Starting, for example, with indirect exporting, the international markets are exposed to a certain probe phase, and a timely market exit

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strategy to prevent negative long-term consequences by a wrong allocation of resources is feasible (Cadosch and Lehmann, 2003). Rather than structuring the internationalization process in consecutive developmental stages, Bamberger and Evers (1997) suggest different starting points, paths and a different number of development stages. Most of the SMEs in the Rhine Valley survey prefer market entry forms with the lowest degree of complexity: direct and indirect export (17). The view of testing the international waters seeing exporting as a probe phase was confirmed by nine SMEs. The other extreme of the continuum of market entry strategies, the fully controlled foreign subsidiary or acquisition, was preferred by 11 SMEs. The newer market entry options of strategic alliances, virtual market entry and also cooperative market entry forms (Joint Ventures, Licensing and Franchising) do not seem to be very interesting for Rhine Valley SMEs. However, the SMEs indicated that they intend either to expand their international business activities (10) or to change into a more sophisticated market entry strategy. Regarding the factors influencing the market entry strategy decision the competitive situation with 67 per cent (that is, extent of competition and existence of substitute products) and product-related factors (that is, extent of product differentiation, product type, innovativeness of product and stage in the product life cycle) with 63 per cent are regarded as most influential. Of medium importance were cost factors (productivity, and costs for sales, location and technology), economic factors (market volume, market structure, exchange rates and inflation) and strategy-related factors (market segments and competitive strategy). Legal factors (except import and export regulations) and the trade situation (amount and influence of intermediaries as well as structure of price conditions) were 35 per cent less important factors. Interestingly, the situation of the consumers (price elasticity, income and demand conditions) was regarded as the least important factor determining the market entry strategy (18 per cent). This seems very debatable, taking the crucial importance of the consumer conditions on market potential and attraction of the market into account. SMEs are recommended to assume stronger international consumer behaviour and also international place aspects the better to take access to distribution channels into account. Only six SMEs mentioned applying mathematically based investment methods, such as net value calculation, implying the relevance of international accounting and finance. The relatively high degree of wholly owned subsidiaries with farranging future financial implications suggests a stronger emphasis on primary research. Moreover, rather than following consecutive market entry strategies starting with less sophisticated low involvement strategies, more sophisticated forms of market entry such as ‘born global strategies’ should be considered. Timing of market entry To plan and realize the correct timing of the market entry, basically two timing strategies, the sprinkler and the waterfall strategy, can be applied. With the sprinkler strategy a variety of markets is developed simultaneously. In markets which do not prove to be successful a market exit strategy is applied, compensating possible losses by a comprehensive market presence. On the other hand, the waterfall strategy develops a new market carefully and only after detailed market research international activities are gradually extended to other markets. The potential disadvantage of this strategy can be seen in that the neglecting of other attractive markets might give rise to market entry barriers, in the meantime

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compounding a later market entry (Meffert and Bolz, 1994). Established competitors might try to create certain market entry barriers for new entrants in order to protect their market positioning. According to Oelsnitz (2000) the degree and structure of those market entry barriers can be positively influenced by the right market timing strategy. He and other authors (Robinson and Fornell, 1985; Backhaus, 1997) refer in this context to advantages and disadvantages of the leadership or pioneering strategy (first to market), the early follower strategy (second to market), the late follower (me-too strategy and niche strategy). In the past, the leadership position was expected to reap the best benefits. However, after many companies have proved that a well considered follower strategy might displace competitors, a statement on the preference among the strategies is difficult to make. The decision has to be based on the idiosyncratic internal and external conditions for a company (Meffert and Bolz, 1994). As far as the timing aspects of the marketing entry strategies are concerned, the majority of SMEs (five) apply the early follower strategy to participate in the market development strategy of the pioneer and to reduce the market entry risk. Reflecting the high-tech and speciality character of the SMEs products, the pioneer strategy was preferred by four SMEs to use the strategic advantages of higher awareness and more intensive contacts with the customers. The late follower niche strategy allows four SMEs the realization of cost advantages and the development of niche core competences compared to the pioneer and early follower. The late follower strategy was applied by only two SMEs. With a strong emphasis on research and development (eventually with strategic alliance partners) Rhine Valley SMEs could exploit the pioneer strategy and price skimming to a larger extent. International business/international marketing strategy According to Meffert and Bolz (1994) an international marketing strategy might be seen as a long-term behavioural plan to realize one or more competitive advantages on international markets. Being aware of wide-ranging international marketing strategies referring, for example, to the Ansoff strategy, growth strategies, resource-based or competitive strategies, this chapter concentrates on a strategy which rests on two important pillars: the focus of the competition due to the existence of comparative advantages and the location or the width of competition. These two dimensions result in four generic strategic options (Lechner and Müller-Stewens, 2005) which are depicted in Figure 23.6. The strategy of cost leadership intends to achieve economies of scale and an increase of efficiency potential by the standardization of marketing leading to a competitive advantage due to lower costs. Differentiation, on the other hand, targets the adaptation of the marketing mix by considering the legal and social/cultural environmental factors. Higher customer preference due to better performance, quality and uniqueness of performance legitimizes higher costs. A differentiation focus is recommended if a specific need exists on the market and the company is able to satisfy it. Customer segments interested in specific benefits often behave in a price-inelastic manner. The cost focus strategy is pursued by creating a cost advantage compared to the competitors focusing on a specific need in the respective customer segment. Lechner and Müller-Stewens (2005) refer to Porter, who strongly appeals to deciding unequivocally on one of the core strategies (differentiation or cost leadership) as a mixed strategy results in getting ‘stuck in the middle’, gaining neither positioning nor competitive advantages, with detrimental effects

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Focus of competition due to advantages by . . . Differentiation industry-wide

Competitive scope

Differentiation Performance/Quality uniqueness

Differentiation focus specific needs price inelastic

. . . low costs Cost leadership Price/Costs mass product

Cost focus limited need price-elastic

segment-specific Source: Based on Lechner and Müller-Stewens (2005), p. 269, translated into English by the author.

Figure 23.6

Generic strategic types according to Porter

on the success and profitability of the company. Referring to SMEs, it is assumed that they prefer, in contrast to large enterprises and OEMs, a segment-specific strategic option (Lechner and Müller-Stewens, 2005). Contrarily to the recommendations in the literature, relatively more Rhine Valley SMEs compete industry-wide rather than segment-specific (10:8). Regarding the branch-wide approach, standardization is preferred to differentiation (7:3). Regarding the segmentspecific approach, adaptation in a niche market is preferred to standardization in the niche market (5:3). Taking the more high-tech and speciality products of Rhine Valley SMEs into consideration, the dominance of both the branch-wide and standardization/cost leadership is surprising and might point to a necessary review of current strategies. It might also reflect the aforementioned lack of efficient branding strategies. It is very surprising that five SMEs mentioned applying a middle of the road strategy, combining standardization and adaptation strategies, which is not recommended the in literature. Again, the latter might necessitate a better understanding and formulation of internationalization strategies. Indications to differentiate between SME groupings Barriers to internationalization or reasons for not internationalizing so far The major barriers for already internationalized SMEs refer to ‘short time resources of management’, ‘quality or other features of products/services’ and ‘price too high’ (respectively, 57 per cent) followed by access to distribution channels (50 per cent). Compared to the other SME groups, this group also seems to need more information on the external environment (law, and economics).

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The major barriers for SMEs internationalized only in the German speaking area refer to higher organizational effort (personnel, logistics, finance, customs: 75 per cent), cultural and social differences and access to distribution channels (respectively, 58 per cent), high cost of the internationalization process (50 per cent). Compared to other SME groups, this one perceives more difficulties in finding appropriate personnel and a greater lack of information (respectively, 42 per cent). A greater lack of support and consulting, insufficient qualifications and competences of employees and a lack of capital and financing opportunities (respectively, 33 per cent). As reasons not to internationalize, the majority of the SMEs refer to ‘high organizational effort’, access to distribution channels, high cost of the internationalization process (respectively, 45 per cent) and the perception that the ‘market potential at home is sufficient’ (42 per cent). A capital gap seems to exist mainly through those SMEs internationalizing only in the German speaking area and which are not yet internationalizing. Already internationalized SMEs perceive this gap to a far lesser extent (38 per cent). To conclude, SMEs should be differentiated when approaching or training them on the availability of funds. Furthermore, a stronger emphasis on cultural training seems to be recommendable especially for those SMEs internationalizing in the German speaking area. Evaluation of the attraction of local location conditions As to the evaluation of the attraction of the local/regional location conditions, the means of all 42 SMEs independently of their level of internationalization, reflect a rather high level of contentedness with the factors closest to the customer (80 per cent), education and continuous education (79 per cent), regional sales markets (68 per cent), the telecommunication infrastructure (53 per cent), the infrastructure for consulting and services (53 per cent), and the availability of qualified personnel (50 per cent). 46 per cent perceived the investment climate, 44 per cent the traffic infrastructure and 43 per cent the taxation as very attractive. Cooperation with governmental offices and costs for personnel are regarded as very attractive by 39 per cent and 36 per cent respectively. Below average are the values regarding economic policy (27 per cent) and opportunities to receive financing sources (20 per cent. The lowest evaluations included the quality of the work of associations (15 per cent), exhibitions (14 per cent) and the promotion of start-ups (11 per cent). However, the different SME groups have to be differentiated as regards traffic infrastructure, costs for personnel, offers for financing sources (risk capital) and taxation, and, to a lesser extent, infrastructure for consulting and services. Regarding all these factors, SMEs already internationalized beyond the German speaking area seem to be far less content (offers for financing sources: 7 per cent; costs for personnel: 13 per cent; traffic infrastructure: 20 per cent; taxation: 33 per cent and infrastructure for consulting and services: 40 per cent). With respect to the ‘work of associations’ non-internationalized SMEs are by far more content (54 per cent) compared to the two internationalised groups (beyond the German speaking area: 33 per cent and within the German speaking area: 29 per cent). This might imply a stronger involvement of associations in internationalisation or extending internationalization services of associations. Evaluation of future development Most of the Rhine Valley SMEs seem to be determined to expand their international activities. Only 26 per cent of the SMEs did not see a reason

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to propel or begin international activities. The most preferred future market entry form is the wholly owned foreign subsidiary, which will be either acquired or newly created (17 SMEs). Also more complex and modern market entry strategies such as strategic alliances and virtual market entry are seen to be relevant for 16 SMEs. An increase in exporting is planned by nine SMEs. The classic cooperative forms without capital participation, international licensing and franchising, were mentioned by only one SME. Seemingly, there has to be differentiation as to the different future market entry strategies of SMEs already internationalized beyond the German speaking area (exporting and wholly owned subsidiaries) and the SMEs internationalized in the German speaking area only (strategic alliances and virtual market entry). Conclusions Based on a differentiation of SMEs as to ‘internationalizing beyond the German speaking market’, ‘internationalizing within the German speaking area’ and ‘non-internationalized SMEs’, the following teaching and/or training foci for internationalizing SMEs are hypothesized and suggested for testing by further research: ● ●

● ● ● ● ● ●

●

Intercultural aspects (low and increasingly high context cultures). Interdisciplinary subjects: personality growth (that is, international awareness at all levels of vocational, continuous and academic education, identity and international entrepreneurship). More sophisticated market entry forms (wholly owned subsidiaries, strategic alliances, virtual market entry, born global). Information on internationalization support programmes for SMEs. The contribution of research & development (especially primary research) to market selection strategies, product development and corporate strategies. Focus on information provision on the respective international macro environment (especially regarding the legal, economic and cultural environment). Leadership issues (that is, motivation techniques, time management, delegation, networking, participative leadership styles, diversity and complexity management). International marketing (that is, international consumer behaviour, global branding, international place strategies, decision-oriented market selection concepts, systematically evaluating market entry forms, international marketing strategies). International accounting (that is, net value calculation).

On a Europe-wide basis, the question might be resolved as to how far the competition between European regions and the development towards regional identities might support or threaten a common European identity. The apparent change process in the Rhine Valley of strengthening regional competitiveness is suggested to be channelled in a constructive and interdisciplinary dialogue with politicians, entrepreneurs, associations and educational representatives to proactively utilize the chances of globalization for economic, corporate and individual advancement. A more intensive cooperation of all relevant decision makers in all parts of the Rhine Valley being considered as a whole rather, than individual competing sum of its parts, is recommended. This could also be reflected in any kind of (eventually) virtual institutionalization not only to integrate economic policy, organizing common fairs, providing for a

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common information system and comparative research database, but also to provide for an integrated knowledge transfer. Within the Rhine Valley, Liechtenstein might be regarded as a centre for SMEs focusing on high-tech industrial niches. This concerted approach could be underpinned by further quantitative and qualitative research providing discriminating figures on the different parts of the Rhine Valley and on different SME groupings. There also seems to be specific know-how about internationalization of SMEs in general and about the internationalization of small and smallest and ‘born global’ SMEs in particular. References Avery, G., O. Donnenberg, W. Gick and M. Hilb (1999), ‘Challenges for management development in the German-speaking nations for the twenty-first century’, Journal of Management Development, 18(1), 18–31. Backes, S. and G. Stahr (1992), ‘Marktforschung und Informationsmanagement im internationalen Marketing’, in A. Hermanns and U. Wissmeier, ‘Internationales Marketing – Management: Grundlagen, Strategien, Instrumente, Kontrolle und Organisation’, Stuttgart. Backhaus, K. (1997), ‘Industriegütermarketing’, München. Backhaus, K., J. Büschken and M. Vöth (2003), ‘Internationales Marketing’, Stuttgart. Bamberger, I. and M. Evers (1997), ‘Internationalisierung’, in H-C. Pfohl (1997), ‘Betriebswirtschaftslehre der Mittel- und Kleinbetriebe- Grössenspezifische Probleme und Möglichkeiten zu ihrer Lösung’, Berlin, S.377–417. Bannock, G. and H. Albach (1991), Small Business Policy in Europe, London: Anglo-German Foundation. Bauer, E. (1997), ‘Internationale Marktforschung’, Wien. Behr, M. and K. Semlinger (2004), ‘Internationalisierung kleiner und mittlerer Unternehmen’, Frankfurt. Benz, T. and F. Fiedler (2005), ‘Internationalisierungsstrategien für KMUs’, http://www.fh-heilbronn.de/ forschung/i3g/download-/kapitel8.pdf (23.07.05). Beri (2005), ‘About B.E.R.I’, http:www.beri.com/aboutus.asp (28.07.2005). Berndt, R. (1999), ‘Internationales Marketing Management’, Berlin. Beutel, R. (1998), ‘Internationalisierungsstrategien international tätiger mittelständischer Unternehmen’, Frankfurt am Main. Breit, J. (1991), ‘Die Marktselektionsentscheidung im Rahmen der unternehmerischen Internationalisierung’, Wien. S. 85. Cadosch, P. and R. Lehmann (2003), ‘Internationalisierung- Die Auswahl von ausländischen Absatzmärkten’, in KMU-Magazin, 11/2004. Cezanne, W. (2005), ‘Allgemeine Volkswirtschaftslehre’, München. Cosi, R.R., Hürlimann and G. Karges (2002), ‘Wie Schweizer KMU im Ausland Fuss fassen’, in KMUMagazin, 11/2002. Criado, A.R., J.R. Criado and G.A. Knight (2002), ‘The phenomenon of international new ventures, global start-ups, a born-globals: what do we know after a decade (1993–2002) of exhaustive scientific inquiry?’, Universitá Autónoma de Barcelona Spain and Florida State University. Czincota, M., P. Rivoli and J. Ronkainen (1992), ‘International Business’, 2nd edn, Orlando: The Dryden Press. EU (2005), ‘Europa- das Portal der Europäischen Union (12.07.2005): Beobachtungsnetz der Europäischen KMU (2003): Internationalisierung von KMU’, http://europa.eu.int/comm/enterprise/enterprise policy/ analysis/doc/ smes observatory 2003 report 4 de.pdf (24.07.2005), pp. 1–73. Europartner NRW (23.07.2005), KMU, http://www.europartner-nrw.com/news/fakten/Kleine und mittlere Unternehmen. htm (23.07.58). File, K. and R. Prince (1992), ‘Emerging critical success factors in marketing to the smaller business’, International Journal of Bank Marketing, 10(5), 19–25. Fuller, P. (1994), ‘Assessing marketing in small and medium sized enterprises’, European Journal of Marketing, 28(12), 34–49. Gatley, S. and R. Lessem (1995), ‘Enhancing the competitive advantage of trans-cultural businesses’, Journal of Industrial Training, 19(9). Goette, T. (1994), ‘Standortpolitik internationaler Unternehmen’, Wiesbaden. Hall, E.T. (1976), Beyond Culture, New York: Anchor Press. Hellriegel, D., S. Jackson and J. Slocum (2002), Management – A Competency-based Approach, South-Western, Thomson Learning. Hofstede, G. (1980), ‘Culture’s Consequences – International Differences in Work-related Values’, London: Sage Publications. Hofstede, G. (1991), Cultures and Organisations, London: McGraw-Hill.

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Hofstede, G. (1997), Lokales Denken, globales Handeln, Muenchen: Verlag C.H. Beck. Hoppe, K-H. and M. Rickes (2000), ‘Markteintrittsbarrieren bei kleinen und mittleren Unternehmen’, in D. von der Oelsnitz, Markteintritts- Management- Probleme, Strategien, Erfahrungen, Stuttgart, pp. 182–201. Kamenz, U. (1997), ‘Marktforschung- Einführung mit Fallbeispielen, Aufgaben und Lösungen’, Stuttgart. Kaufmann, H.R. (2004), ‘Approaching the very core of the client: CRM and identity in private banking’, in Ph. Schädler and M. Menichetti (eds), Private Banking im Qualitätswettbewerb um den Kunden, 2. Liechtensteinisches Finanzdienstleistungssymposium, Vaduz: Physica Verlag. pp. 17–29. Kaufmann, H.R. and B. Davies (1997), ‘Identity and marketing: a new relation in transition’, Third Alps Euro Conference, University Charleroi. Kaufmann, H.R. (2006), ‘Special edition on Liechtenstein’, International Journal of Management Cases, 8(3). Kaufmann, R., B. Davies and R. Schmidt (1994), ‘Motivation, management and marketing – an Eastern German case study’, European Business Review, 94(5), 38–48. Klimecki, R.G. and G. Probst (1992), ‘Interkulturelles Lernen’, in M. Haller, H-Pleitner, K. Bleicher and R.Wunderer, Globalisierung der Wechselwirkungen auf die Betriebswirtschaftslehre, 54. Wissenschaftliche Jahrestagung des Verbandes der Hochschullehrer für Betriebswirtschaftslehre, Sommer 1993, St. Gallen: Haupt Verlag. Kluckhohn, F. and F.L. Strodtbeck (1961), Variations in Value Orientations, Westport: Greewood Press. Kotler, Ph. and F. Bliemel (1999),‘Marketing Management’, Stuttgart. Langer, H. and H. Sand (1983), Erfolgreiche Marktforschung im Investitionsgütervertrieb, München. Lechner, C. and G. Müller-Stewens (2005), Strategisches Management- Wie strategische Initiativen zum Wandel führen, Stuttgart. Liechtenstein Dialog. (2004), ‘International forum on tax competition in the global marketplace: rules for a sustainable framework’, www.dialogue.li. Liechtensteinische Landesverwaltung (2004), Portal, ‘Liechtenstein lädt ein-Wirtschaftsstandort mit Perspektiven’ http://-www.llv.li/pdf-llv-sw-leitbild 4.0.pdf, pp. 1–29. Lüttich, H. (2005), ‘Medienorientierung’, Zürich. Meffert, H. and J. Althans (1982), ‘Internationales Marketing Management’, Stuttgart. Meffert, H. and J. Bolz (1994), ‘Internationales Marketing-Management’, Stuttgart. Meissner, H.G. (1987), ‘Strategisches Internationales Marketing’, Stuttgart. Nienaber, K. (2003), ‘Internationalisierung mittelständischer Unternehmen’, Hamburg. Oelsnitz, D. von der (2000), ‘Markteintritts-Management- Probleme, Strategien, Erfahrungen’, Stuttgart. Perlitz, M. and F. Seger (2000), ‘Konzepte internationaler Markteintrittsstrategien’, in D. von der Oelsnitz (2000), ‘Markteintritts-Management- Probleme, Strategien, Erfahrungen’, Stuttgart. Petrella, R. and U. Muldur (1994), ‘The European Community and the globalization of technology and the economy’, Commission of the European Communities, Luxembourg. Porter, M.E. (1990), The Competitive Advantage of Nations, New York: Free Press. Purkiss, A. (1993), ‘Britain’s backbone’, Director (UK), 46(8), 36–40. Quack, H. (1995), Internationales Marketing, München. Rasmussen, E.S. and T.K. Madsen (2002), ‘The born global concept’, Paper for the EIBA conference, University of Southern Denmark. p. 7. Rennie, M. (1993), ‘The McKinsey Quarterley (USA)’, 4, 45–53. Rheintal Artikel, http://rheintal.know-library.net/. Robinson, W. and C. Fornell (1985), ‘Sources of market pioneer advantages: the case of industrial goods industries’, Journal of Marketing Research, 8. Sailer, C. (1993), ‘US exporter’s passport to Baden-Württemberg, a value customer of American products and technology’, Business America, 114(15), 16. Simmet-Blomberg, H. (1998), ‘Interkulturelle Marktforschung im Europäischen Transformationsprozess’, Stuttgart. Stahr, G. (1993), ‘Internationales Marketing’, Ludwigshafen. Trompenaars, F. (1993), Riding the Waves of Culture, London: Economist Books. Trompenaars, F. and P. Wooliams (2004), Marketing Across Cultures, London: Capstone Publishing Ltd. Vorarlberger Nachrichten (9 January 2006), Diese Region muss Realität werden. Weder di Mauro, B. (2005), ‘Rede auf dem 5’, Wirtschaftsforum für Liechtenstein, Werdenberg & Sarganser Land. Vaduzer Medienhaus AG. Vaduz. Weiss, Ch. (1996), ‘Die Wahl internationaler Markteintrittsstrategien: eine Transaktionskosten orientierte Analyse’, Wiesbaden, p. 6. www.llv.li/amtsstellen/llv-avw-statistik/llv-avw-statistik-publikationen.htm (14.02.06). www.rinova.ch/riweb/mod.php?mod=userpage&menu=11&page id=4. www.liechtenstein.li/en/fl-imagestiftung-downloads/fl-imagestiftung-downloads-marke-geschichte.htm (14.02.06).

24 The path to the internationalization of Lithuanian manufacturing SMEs Audra I. Mockaitis

Introduction Much has been written about the internationalization activities of multinational firms, and much attention in the literature has been given to the internationalization decisions of firms entering the Central and Eastern European (CEE) region. However, we still know relatively little about the internationalization activities of small and medium-sized enterprises (SMEs), especially manufacturing SMEs in the CEE region. With the enlargement of the European Union, at first glance it appears that many small and medium-sized firms now have greater opportunity for internationalizing their activities. Although it is generally held that SMEs have the flexibility and ability to adapt to their environment more quickly than large enterprises, SMEs must be able to use these advantages in internationalizing. This study looks at the internationalization activities of Lithuanian manufacturing SMEs. It seeks to provide a comprehensive overview of internationalization, through an examination of the degree and direction of internationalization and on what this depends. The results lend some support to incremental internationalization models. Although many SMEs in this study are not actively engaged in internationalization, most companies heavily rely on networks, which they may use as stepping-stones to foreign markets in the future. It is well known that SMEs are the most important drivers of the European Union (EU) economy, with their share comprising over 99 per cent of all European firms. And, while we remember the traditional enterprise in the former Soviet Union (FSU) and socialist countries as a giant operating on the principle of inefficiency, the transition period in Central and Eastern Europe (CEE) brought forth not only the dissolution of these former state-owned giants, but also the emergence of both new and restructured SMEs (Hutchinson and Xavier, 2004). Gradually, and consequently, SMEs in the CEE region have become the backbone of national transition economies and a simultaneous source of much concern, as the SME sector in these countries still remains largely underdeveloped (ibid.). With increasing competition from local and foreign companies over the last decade, more and more Lithuanian manufacturing companies are being forced to look outside of Lithuania in order to survive. Because of the long dependence on the market of the former Soviet Union and the poor quality of manufactured goods up to 1998, most Lithuanian exports were directed at the Russian market. However, after the 1998 Russian crisis, many Lithuanian manufacturing companies were faced with a challenge – the Russian market was no longer an option, while the poor quality, lack of resources, knowledge and networks did not allow them to reorient themselves to Western markets. Since 1998, the major percentage of Lithuanian exports has been directed toward the EU countries; however, more than half of these exports are goods produced via manufacturing contracts. Now, with increasing economic growth, rising standards of living and increasing 410

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factor costs, many traditional Lithuanian manufacturing companies face the risk of failure. While many larger companies are capable of producing high-quality goods requiring appropriate technologies and have even begun to transfer a portion of their manufacturing to other geographically close, lower-cost countries (Russia, Belarus, the Ukraine), many SMEs are still in a state of uncertainty. Because SMEs comprise 95.7 per cent (2002 data) of all Lithuanian companies, this chapter will concentrate on these firms and attempt to analyse the current internationalization strategies of manufacturing SMEs. It is expected that many SMEs still limit their internationalization activities to securing manufacturing contracts from European outsourcing endeavours. We will analyse the extent to which this is true of the Lithuanian manufacturing sector, by gauging the overall internationalization activities of firms, the dependence on contract manufacturing and the nature of these contracts. Among the questions we will try to answer are the following: 1. 2. 3. 4.

How active are Lithuanian firms in the international market? On what does the degree of internationalization depend? How reliant are SMEs on manufacturing contracts as a first step in internationalizing? How do Lithuanian SMEs internationalize? Do they begin their internationalization process with geographically and/or culturally close countries?

The chapter is structured as follows. We first review the literature on internationalization theory with particular attention to the internationalization of SMEs. This is followed by a brief overview of studies conducted in the CEE region. We next present the constructs applied in this study, the methods and results of our empirical study of Lithuanian manufacturing SMEs. It is the goal of this chapter to provide a comprehensive picture of the internationalization activities of as yet a little studied former Soviet country and to add new data to the literature on the internationalization of SMEs. An investigation into the above issues will not only provide a general picture of Lithuanian SME internationalization, but will also allow us to distinguish those characteristics that are most important for successful SME internationalization. Background Models of internationalization Internationalization theories have generally focused on entry mode selection criteria and the environment, resources and experience of the firm. According to the internationalization model proposed by Johanson and Vahlne (1977), firms gradually increase their foreign market commitments as sudden leaps to distant markets and sophisticated entry modes are hindered by uncertainty, fuelled by lack of market information and differences in culture. Johanson and Vahlne (1990) argue that their internationalization model is more suitable for firms in the early stages of internationalization, while the eclectic paradigm of Dunning is more relevant for larger, more experienced multinationals. Thus, it would seem that the internationalization model would be more appropriate for small firms with limited international experience. Andersen (1993), however, has criticized the model and pointed to studies that have shown that SMEs do not select foreign markets as methodically as presumed by the model. Andersson et al. (2004) argue that the stages

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model does not explain why some small firms internationalize while others do not. Oviatt and McDougall (1994) and Knight and Cavusgil (1996) as well criticize the stages model as lacking explanations for the internationalization of small ‘born global’ firms, which lack both resources and experience. Neither of the two models explicitly discusses contract manufacturing; however, it seems logical that the eclectic paradigm is better suited to explain the outsourcing decisions of manufacturing firms, while the former could be used to describe the incremental internationalization processes of small local suppliers, their shift from unsolicited orders to more active involvement and the formation and nature of networks with foreign buyers. Buyer–seller interactions have been discussed in the literature through network models, which are related to the internationalization model of Johanson and Vahlne (1977) in that they rely on commitment, knowledge and uncertainty as well in describing the composition of networks and the entry of firms to foreign markets. Relationships between industrial firms are formed and maintained through interactions, in which mutual trust and knowledge lead to increased commitment (Bodur and Madsen, 1993). Simply put, the success of internationalization depends largely on the ability of the firm to form and maintain relationships in foreign markets (Johanson and Vahlne, 1990). Chetty (1999), for instance, views networks as a means to overcoming the obstacles to internationalization. According to Madsen and Servais (1997), subcontractors that cooperate with foreign suppliers may even internationalize in a non-sequential manner. Cavusgil and Godiwalla (1982) as well, have described the internationalization process as a process of decisions, which may be categorized along a continuum from clearly strategic decisions, in which firms actively search for opportunities and alternatives, to reactive decisions, in which no clear goals are set and the firm’s phases of activity are not determined in advance. In the early stages of internationalization, the behaviour of firms is reactive and incremental, whereas in later stages, this evolves into a proactive decision-making process (Cavusgil and Godiwalla, 1982). Because large firms often have the resources to enter foreign networks easily, in our view, the establishment of network relationships will be even more important for SMEs, especially those which do not yet have clearly defined internationalization goals. Internationalization of SMEs Much of the literature on the internationalization of the firm has focused on multinational enterprises (MNEs) (Andersson et al., 2004). More recently, scholars have begun examining the internationalization processes of SMEs. Not surprisingly, however, the results of these studies have produced mixed results. There is also divergence in the theoretical considerations of the advantages and limitations of SMEs in the literature. From a theoretical point of view, SMEs have certain advantages over large enterprises, in that they are able more easily to overcome governance problems (McIntyre, 2002). Some researchers (such as Liesch and Knight, 1999) argue that SMEs have the advantage of flexibility and are able to internalize market information to the same degree or better than large firms. However, SMEs also face certain disadvantages vis-à-vis large enterprises, which may inhibit their success in the local market as well as discourage them from pursuing international opportunities. Obviously, a major impediment to SME expansion, in comparison to large firms, is lack of resources. Size, as well, has been viewed as an obstacle to the internationalization of small firms, as well as the size of the host country (Berkema and Vermeulen, 1998; Calof, 1993, 1994).

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Much of the literature on SME internationalization focuses on the export activities of these firms and the differences between successful and unsuccessful exporters (Leonidou and Katsikeas, 1996). Bilkey and Tesar (1977) describe the export activities of small firms as incidental, whereby firms passively fulfil international orders instead of proactively seeking opportunities. As such, because of lack of resources, SMEs do not approach internationalization in a systematic fashion and do not possess formal strategies (Bell et al., 2004). SMEs in the CEE region SMEs in transition economies also have the advantage that they are less likely to uphold the ‘traditions’ of the former planned economy system, such as low productivity and poor quality, and they are better able to adapt to the often changing circumstances of transition (McIntyre, 2002). However, Aidis (2002) identifies numerous barriers impeding the success of SMEs in Lithuania, which might also be relevant for SMEs in other CEE countries. These barriers include macro environmental variables, remnants of the Soviet system, lack of information and knowledge. The limited market potential and purchasing power of consumers in Lithuania might also pose another barrier to SMEs, however at the same time pushing them to internationalize their activities. But here, Lithuanian companies face competition from SMEs in other transition countries, with differing levels of experience and opportunity. Although the advantages and hurdles to SME internationalization in the CEE countries are similar in nature, companies from certain CEE countries have advantages over Lithuanian firms. Poland, Hungary and the Czech Republic immediately come to mind as countries in which the transition to a market economy was much quicker than in the Baltic States, where private enterprises were established sooner, and companies have longer ‘traditions’ of networking. Estonia as well is in a relatively more advantageous position than Lithuania, as FDI, the existence of foreignowned companies and liberal government policies all contribute to the opportunities of SMEs to internationalize their activities (Dana, 2005). These factors illustrate the importance of identifying the advantages and disadvantages of SMEs in Lithuania and the nature and depth of their relationships with foreign networks from the viewpoint of the companies themselves. Networking has always been an important facet of enterprise survival in the former Soviet Union countries. Even today, SMEs in the CEE countries depend on informal networks between producers and customers, competitors, intermediaries and other firms. According to Lundvall (1988), such networks are important for the innovative activity and success of the firm. However, to date few studies have empirically tested theories of internationalization on small firms (Andersson et al., 2004). Several studies have addressed the issues of foreign direct investment, investment and sourcing strategies, attractiveness of location, wages and the institutional environment of Central and Eastern Europe (Bevan et al., 2004; Djarova, 1999; Meyer, 2001; Donges and Wieners, 1994); however, these studies have been conducted from the point of view of the investing or internationalizing company, from west to east. More recently, Danis and Parkhe (2002) analysed East–West international alliances and differences in management practices between partners in 17 Hungarian–Western cooperative ventures, and Pavlinek and Smith (1998) discussed the causes and consequences of inward investment and differences between the Czech Republic and Slovakia. Liuhto and Jumpponen (2001) were the first

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to conduct a study of the motivations for internationalization, market selection and entry mode choice of the largest Baltic companies. However, there is still a dearth of studies investigating these issues from the viewpoint of suppliers in the CEE countries. We were unable to find any such studies in our literature search, and attribute this to the observation that it is far more difficult to obtain company information and the participation of CEE companies in surveys. For one, few CEE companies are listed in international directories. Second, there is still a higher overall prevailing uncertainty in these countries as compared to Western European countries. These factors together with the inexperience of and hesitancy of many CEE companies (especially SMEs) to participate in survey research may explain the lack of research on this area thus far. Factors influencing the degree of internationalization The concepts in this chapter are developed from the literature on internationalization discussed above. Although it is difficult to analyse the networks of firms without observing them from within (Johanson and Vahlne, 1990), we will attempt to identify and examine the general tendencies of Lithuanian firms, and to summarize the internationalization efforts of Lithuanian manufacturing SMEs, the extent of their internationalization, and on what this depends. We expect that the degree of and obstacles to internationalization will depend on a number of factors, discussed below. Likewise, the nature of networks between Lithuanian suppliers and foreign buyers will be contingent upon the views of Lithuanian companies regarding internationalization. Firm size and experience As the stages model of internationalization maintains, companies will gradually increase their foreign market commitments, as they acquire knowledge of and experience in foreign markets (Johanson and Vahlne, 1977). Small firms face many more constraints than large firms, and thus, the smaller the firm, the more it will depend on intermediaries and manufacturing contracts, as a possible first step to internationalization. The larger the firm, the more resources it will have to seek out foreign partners, and will engage in export or greater foreign market commitments. The experience of the company is determined not only by the age of the firm, but also by its efforts to acquire new knowledge. Knowledge acquisition reduces uncertainty as perceived by the firm and leads to increased market commitments (ibid.). In our view, this will involve the extent to which companies view such aspects as employee training, knowledge of foreign markets and flexibility as important in entering foreign networks. Also, the more partners a firm has in different countries, the easier it will be for it to enter new markets through different entry forms. Regarding company age, however, we must take into account the possibility that some companies in Lithuania might have been established prior to the transition period, and that in such cases the age of the company will not be as reliable an indicator in determining the degree of internationalization. We will thus calculate age of the firm as starting from the first years of transition in Lithuania (1991 onwards). Uncertainty In our view, Lithuanian SMEs face a high degree of uncertainty in both the local and international markets. This has been confirmed in the study by Aidis (2002) of Lithuanian SMEs active in the local market. Although networks are an important part of Lithuanian

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business, a remnant of the socialist era, uncertainty is a function of the local environment (and culture) nonetheless. While local companies might establish informal networks with other local companies and base local business relationships on informal ties and extending favours, it is our expectation that they will attempt to decrease uncertainty to as great an extent as possible when dealing with foreign buyers or contractors. This might take the form of securing detailed contracts, guarantees or other promises from foreign buyers. Such attempts may negatively influence the degree of internationalization of the firm. Attitudes of company management In line with the views and previous findings of researchers (Knight and Cavusgil, 1997; Cavusgil and Naor, 1987; Manolova et al., 2002), we expect that the views of the individuals responsible for the international decisions of the company will largely influence the success and nature of internationalization of the firm. Although firm size, experience and proximity of countries are important determinants of a firm’s level of internationalization, a proactive view toward establishing relationships, acquiring knowledge and an understanding of the company’s advantages are factors which will distinguish successful companies, or those which are more internationalized, from those less so. Andersson et al. (2004) have pointed to a lack of studies which address the internationalization of SMEs from the point of view of company CEOs, and related the degree of internationalization to the age and experience of company heads. While we acknowledge that this is important, we feel that a more important distinguishing factor among internationalizing SMEs is the extent to which attitudes among SMEs toward internationalization differ. In our view, we should not limit the measurement of a firm’s degree of internationalization to company size and aspects of the institutional environment, but must also analyse the factors that are more within the control of the firm. Companies which actively seek resources and try to develop and maintain network relationships have a more proactive view toward internationalization, which will be reflected in the nature and degree of their networks and entry mode choice. This will also be enhanced by the understanding of the need for acquiring and building knowledge, both tacit and experiential. Methods Research instrument and sample We conducted a survey of Lithuanian manufacturing SMEs, defined as companies having fewer than 250 employees and an annual turnover not exceeding 50 million EUR, and/or an annual balance sheet total not exceeding EUR 43 million, in line with accepted definitions of European SMEs (EU Commission recommendations, 2003). The survey consisted of three parts. The first part included general questions about the company, such as company age (date of establishment) type (legal status), size (measured by number of employees) and ownership (international or local company, parent or subsidiary of a local or international company), one question which asked whether the company was established as an international company from the start, and one question asking the number of years from the establishment of the company to the beginning of international activities (to quantify experience). The second part of the questionnaire consisted of several groups of questions, about the reasons for internationalizing, the process of internationalization, the countries in which SMEs conduct international activities and the

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degree of involvement in each country (export, licensing/contractual manufacturing, joint venture or wholly owned subsidiary in the foreign market). The second group of questions was specifically related to contractual manufacturing activities, and respondents were once again asked to indicate up to five countries from which they receive international orders, even if they are the same countries as indicated in the first group. Because the first question was related to international activity in general, this allowed for the inclusion of additional countries in case the company is not only actively engaged in foreign markets, but is also a supplier to foreign companies in its home market. Respondents were also asked to rank the countries from highest to lowest involvement and indicate the approximate number of buyers in each of the listed countries. The final group of questions in this section asked respondents to indicate the extent of agreement on a five-point Likert-type scale to 52 statements about their contract manufacturing activities. The last part of the questionnaire included 10 questions about respondent demographics (age, education, gender, position), whether the respondent is the one responsible for the international decisions of the company, foreign language knowledge and previous international experience. The questionnaire was originally developed in English and translated into Lithuanian. Because the author is a native speaker of both languages, back-translation was not conducted; however, the questionnaire was thoroughly checked for any inconsistencies in meaning, and small corrections were made before distributing the final version. The survey was administered both electronically (by e-mail) and by post from May 2004 to June 2005, to 494 Lithuanian companies, in several stages. Companies were also sent reminders after initial receipt of the survey. In all, 38 surveys were returned as undeliverable, leaving 456 surveys, and 60 companies responded, for a response rate of 12 per cent, and 44 usable questionnaires. Seven companies also responded but indicated that they did not wish to participate in the survey, for the following reasons: they are not manufacturing companies (n=5), they do not conduct any international activities (n=1) and they are currently undergoing restructuring and cannot fully answer the questionnaire (n=1). With studies in the post-socialist countries, there is always a risk of high non-response because companies are hesitant to reveal any information about their activities (Michailova and Liuhto, 2000). Even to date, much of what in the west is considered public information is still considered to be confidential by companies in the CEE countries. The companies in the sample were all manufacturing companies listed in the Kompass directory from the following sectors: metal processing and industrial machinery, rubber and plastics, electronics, pulp and paper and textiles. The majority were companies in the textiles sector. The companies were not concentrated in any particular geographic region, but were located throughout all of Lithuania. Although the age of companies differed, most of the companies were relatively young, founded after the re-establishment of Lithuanian independence (n=38). The average age of companies was 15.2 years. The average number of years from establishment to the start of international activities of companies was eight years. However, if we look only at those companies which were established during the transition period the average number of years is 1.9. Twelve companies (27 per cent) were established as international companies from the start. All companies indicated that they are of local origin (they are not a subsidiary of a foreign company). A detailed summary of company characteristics is provided in Table 24.1.

417

*

44

Total

Note:

29.83 176.75 180.33 81.50

6 4 14 4 50

— 40 49.33 —

— 56

Pre-1991

The only sector listed as ‘other’ was the wood processing sector.

97.31

20.0 52.58

4 12

Electronics Metal processing & machinery Rubber & plastics Pulp & paper Textiles Other*

Size

N

Company characteristics

Sector

Table 24.1

9.74

10.17 11.67 10.45 11

9 7.80

1991 or later

Ave. age

50

— 30 62.5 —

— 45

Pre-1991

1.90

2.75 2.33 1.00 1.00

3.50 3.40

1991 or later

Ave. years to international

12

1 1 7 2

0 1

N Born globals

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Respondent characteristic A look at the composition of respondents is important as well, as it is individuals, not companies, who make decisions, and often the strategic decisions of SMEs are made by top management alone. The experience of individuals is an important thrust for international activity. It is also important to assess whether the respondents completing the questionnaire are in fact the individuals responsible for the company’s international decisions. Respondent characteristics are depicted in Table 24.2. All respondents were highly educated, and 86 per cent had a university degree. Although only a few respondents indicated having previous international experience, foreign language knowledge among respondents was quite high. Some 55 per cent of respondents indicated a higher than average knowledge of English (mean = 5.75 on a scale from 1 to 10, where 10 indicates a near-native level). Also, all respondents had foreign language knowledge, with the most frequently listed language other than English being Russian (97.7 per cent), followed by Polish (38.6 per cent) and German (22.7 per cent). French was the only additional language listed (4.5 per cent). Over half (52.3 per cent) of respondents indicated knowledge of three languages, and 14 per cent of four languages. Thus it appears that language knowledge should pose no barriers to internationalization. Constructs and measures The 52 items in the second part of the questionnaire were used in developing the constructs in this study. The aim was to examine the extent to which SMEs attempt to acquire and accumulate knowledge and view it as necessary in internationalizing, the extent to which companies actively pursue international activities and the extent, if any, to which companies tend to reduce uncertainty in their activities. The items used in developing constructs were based on a review of the literature on internationalization theories and Table 24.2

Respondent demographics F

%

Ave age of respondents Gender (male)

40.1 32

72.7

Education Graduate degree University degree Unfinished university Vocational training

12 26 4 2

27.3 59.1 9.1 4.5

Position Top management Manager of managers Manager of employees Academically-trained professional Technically-trained employee Administrative

27 5 4 2 1 5

61.4 11.4 9.1 4.5 2.3 11.4

N responsible for international decisions N with previous international experience

37 6

84.1 13.6

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previous studies testing similar aspects. Because of the small sample size, it was decided that factor analysis would not produce reliable dimensions. Thus, correlation and covariance matrices of the items were first analysed to detect any patterns in the data. Next, the items were grouped mechanically into dimensions based on theoretical reasoning and the inter-item correlations and reliabilities were assessed. The constructs were labelled ‘uncertainty’, ‘learning’ and ‘proactive internationalization’. Brief descriptions of the items comprising each of the constructs and construct reliabilities are depicted in Table 24.3. Each of the constructs is explained next. Uncertainty Eight items comprised the uncertainty construct, which intends to measure the extent to which companies take measures to reduce uncertainty in their interactions with foreign buyers. Three items measured the degree to which companies prefer welldefined and long-term contracts (items 2, 3 and 6). Two items measured the extent to which companies try to minimize risk through securing guarantees in advance and their general view that received order fulfilment should be associated with as minimal risk as possible (items 7 and 8). One question (item 1) measured the extent to which companies give preference to long-term contracts over short-term or one-time order fulfilment. Two questions (items 4 and 5) were also included which measured the extent to which firms seek orders from geographically close countries and the extent to which companies agree that they are better able to deal with customers from certain countries over others. Learning Nine items measured the extent to which companies hold a favourable view of or take measures to increase their knowledge base. The questions concerned the following aspects: the extent to which companies have invested into timely order fulfilment, learning and employee training (items 1, 4, 8 and 9), the extent to which companies seek or attract employees with country-specific knowledge or other special knowledge (item 3), the extent that companies view language knowledge as important for international activities (item 5), and the extent to which companies view and use their experience with foreign customers as contributing to knowledge enhancement (items 2, 6 and 7). Proactive internationalization Whether companies have a proactive or reactive view toward internationalization was reflected in ten items. The higher the score on this dimension, the higher the proactive orientation of the firm. Six items measured the extent to which companies pursue international orders on their own: aggressive pursuit of opportunities (item 1), regular buyer searches (item 2), openness toward new customers (item 4), customer searches worldwide (item 9) and the extent to which companies conduct regular analyses of their client base (item 5). Item 8 measured the extent to which companies have increased production capacity with the intent of increasing international activities and attracting orders. ‘Maintenance of relationships’ (item 7) measured the extent to which firms try to retain customers through the formation of relationships, while ‘buyers potential partners’ (item 10) measured the extent to which companies actively seek potential investment partners. One question (item 6) measured the extent to which companies gave importance to continually staying ahead of their competition, and one item (3) measured the extent to which companies view international experience as important. Additional measures were also used in answering our research questions: the degree of internationalization, measured by assessing the number and types of entry modes in all

420

Uncertainty ( 0.71)

1. Long-term relationships 2. Long-term contracts 3. Well-defined contracts 4. Seek orders from close countries 5. Prefer certain countries to others 6. Contracts very complete 7. Secure guarantees 8. Orders must have low risk

Items

Main constructs and items

Construct (reliability)

Table 24.3

1. Invested in learning 2. Experience-based know-how 3. Employees with international 4. experience 4. Conduct employee training 5. Language skills important 6. Apply experience 7. Build on experience 8. Employee know-how 9. Other investments

Learning ( 0.73)

11. Aggressively pursue opportunities 12. Regular buyer searches 13. International experience important 14. Always seek new customers 15. Detailed buyer comparisons 16. Try to keep ahead of competition 17. Maintenance of relationships 18. Increased capacity 19. Worldwide opportunities search 10. Buyers’ potential partners

Proactive view ( 0.71)

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countries indicated by companies (where a higher value is associated with a higher degree of involvement: for example, wholly-owned subsidiary), and number of networks was measured as the aggregate of customers in all countries as indicated by firms. Results Degree of internationalization Our first research question was concerned with the overall international activities of Lithuanian manufacturing SMEs. Figure 24.1 depicts the percentages of firms, by sector, which are engaged in no activity, receive only contracts in the home market, have entered foreign markets but are not engaged in contract manufacturing at home, and those which have both entered foreign markets and secure manufacturing contracts at home. It is evident that the firms in our sample are quite active companies, as only four companies (9 per cent) are not engaged in any type of international activity, while 19 companies (43 per cent) simultaneously pursue foreign market entry and fulfil manufacturing contracts in their home market. Figure 24.2 depicts the breakdown of companies by sector according to modal choice in entering foreign markets. Companies were asked to indicate up to five countries and entry modes for each country, and answered an additional question, indicating the total number of countries entered according to each entry mode, where five countries did not sufficiently depict their activities. The percentages reflect the aggregate number of entry modes used by all companies, as some companies may have indicated several different entry modes to a single country. It is not surprising that exporting is the main entry mode for Lithuanian SMEs. However, regarding the remaining entry modes, we do see differences among sectors. The rubber and plastics SMEs rely solely on exporting, while the electronics sector also shows a lower level of internationalization. The machinery and metals sector relies more on licensing than any other sector, while the only sector with any wholly-owned subsidiaries is textiles. These differences likely reflect specifics of each individual sector, such as Electronics Machinery & Metals

No activity Contract manufacturing only

Rubber & Plastics

Direct market entry only

Pulp & Paper

Both contract manufacturing and foreign market entry

Textiles Other Total 0%

Figure 24.1

20%

40%

60%

80%

100%

Percentage of respondents in each sector engaged in international activities

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Handbook of research on European business and entrepreneurship Electronics Machinery & Metals

Export Licensing Sales subsidiary Joint venture WOS

Rubber & Plastics Pulp & Paper Textiles Other Total 0%

Figure 24.2

20%

40%

60%

80%

100%

Percentage breakdown of international activities, by entry mode

differences in levels of technology, R&D and know-how, labour qualifications and the like. However, because of the small sample size, it is still too early to make generalizations about each sector, though overall the reliance on exporting is clear. However, the degree of internationalization may also depend on other factors, such as company age and experience, size risk aversion and the attitudes of SME management. Our second research question was thus, ‘On what does the degree of internationalization depend?’ To answer this question, we tested the relationship between the above variables and the degree of internationalization, using the Spearman’s rho correlation coefficient, to test for one-tailed statistical significance.1 We first tested the relationship between degree of internationalization of the firm and the age of the firm. The variables indicated a mild positive correlation (0.318), and are statistically significant at the 0.05 level. Firm size is also seen as a determinant of the level of internationalization. Here, we found a smaller yet significant correlation (0.276, p0.05) between firm size and degree of internationalization. We also found a significant positive correlation (0.382, p0.01) between the age of the firm and firm size. Older companies have both more resources and experience, which are a precondition for higher international commitments. To explore this further, we have suggested that the degree of internationalization might also depend on the attitudes toward companies as regards internationalization, specifically as regards uncertainty avoidance, proactive pursuit of knowledge and learning, and a proactive view of internationalization in general. Table 24.4 depicts mean scores and standard deviations on each of these constructs, by sector. It can be seen that mean differences on each of the dimensions are significant, with the greatest differences in views toward uncertainty, followed by proactive views toward internationalization. The least differences, while still significant, were on views toward learning. The results for the uncertainty construct are interesting, in that we would expect that the degree to which firms take measures to reduce uncertainty would be inversely related to the degree of internationalization of the firm. However, a first look at the mean scores on this dimension by sector reveals something different. By far the highest agreement to the items comprising this construct was expressed by textiles SMEs, and the lowest by

The internationalization of Lithuanian manufacturing SMEs Table 24.4

Comparison of construct mean scores by sector Uncertainty

Sector Electronics Machinery & metals Rubber & plastics Pulp & paper Textiles Other F-ratio

423

Learning

Proactive view

M

S.D.

M

S.D.

M

S.D.

2.75 3.86 4.04 3.92 4.13 NA

0.71 0.21 0.14 0.19 0.48

3.39 3.35 3.22 3.89 3.96 NA

0.39 0.53 0.33 0.00 0.46

3.05 3.51 2.97 3.63 3.99 NA

0.78 0.34 0.21 0.21 0.45

5.679**

2.827*

4.719**

Note: * and ** represent significance levels of 0.10 and 0.01, respectively.

firms in the electronics sector. Yet textiles companies were by far the most active of all companies in our sample, as well as those with the highest levels of commitments in foreign markets. On the other hand, the electronics firms were second only to companies in the rubber and plastics sector according to the lowest levels of commitment. We did find a negative correlation as expected, however it was not significant (0.219, p0.164). A possible explanation might be the small sample size; however, many of the items included in the ‘uncertainty’ construct were concerned with the importance laid on longterm relationships, securing guarantees and the detailed nature of contracts. Although the intent of these questions was to gauge the degree to which companies formalize their activities, higher foreign market commitments are naturally associated with higher risk, which might simply have been restated by respondents themselves. Although there are differences according to sector on the variable ‘learning’, we did not find a significant relationship between the degree of internationalization and commitment to learning and knowledge acquisition. One would expect a positive correlation to exist between these two variables, however the correlation was only weakly positive at 0.112, and not statistically significant, at p=0.310. It may be reasoned that, since companies fulfil foreign orders in their home market, investments into learning about foreign markets are not viewed as necessary. However, no significant differences were found either in mean scores between those companies which are only engaged in contract manufacturing in the home market, or those that directly pursue internationalization. It is logical to expect that companies with a proactive view of internationalization would be involved in greater commitments abroad and/or greater numbers of foreign networks. These variables displayed a positive yet insignificant correlation of 0.234 (p=0.148). Because the mean scores by sector are more or less similar to the levels of commitment in foreign markets in Figure 24.2, we expected to obtain a stronger relationship between the views and efforts of companies toward internationalization and the actual degree of internationalization, though no such relationship was found. This might indicate that Lithuanian companies are still faced with uncertainty and rely more heavily on network relationships, regardless of whether they have proactive or passive views of internationalization. Other factors as well, for example barriers, such as lack of financial and other resources, may be more important factors than management attitudes (and, in some

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cases, efforts) toward internationalization. In fact, a significant positive correlation exists between a proactive view by management and company size (0.485, p0.01), indicating that the larger the company, the easier it may be to internationalize. However, the direction of causality is unclear: do larger companies have a favourable attitude because of experience and resources, or do resource constraints lead to a less favourable view of internationalization? Reliance on contract manufacturing Our third research question was concerned with the reliance of SMEs on manufacturing contracts as a first step in internationalizing. Those companies which are engaged in contract manufacturing answered a block of questions specifically related to different aspects of this activity and indicated their agreement or disagreement on a five-point scale (where five = completely agree). Two questions were specifically related to the dependency on contract manufacturing as a necessary step in the internationalization process. In response to the statement: ‘We hope that working with foreign customers will help us to further internationalize our activities in the future’, virtually all respondents answered ‘agree’ (57 per cent) or ‘completely agree’ (39 per cent). The second statement said, ‘We view contract manufacturing as a necessary step in further internationalizing our activities.’ Here, as well, 61 per cent of respondents indicated agreement, and 26 per cent complete agreement with this statement. Thus it is clear Lithuanian SMEs are quite dependent on contract manufacturing. It is important, then, to assess where Lithuanian companies expand their activities and the nature of their manufacturing contracts, as well as the role that networks play in the internationalization process. Process and direction of internationalization Our final research question regards the process of internationalization and whether Lithuanian SMEs begin by internationalizing to geographically close countries. Here we tested the extent to which the companies in our sample followed an incremental stages model, as asserted by Johanson and Vahlne (1977, 1990). To depict this process, we asked each company to rank different steps in the internationalization process, indicating a ‘1’ next to the first step, a ‘2’ next to the second step and so on, for seven modes: securing foreign customers in the home market through intermediaries, exporting with the help of intermediaries, direct export without intermediaries, contract manufacturing or licensing abroad, establishment of a sales subsidiary abroad, establishment of a joint venture, and a wholly-owned subsidiary abroad. These are indicated in Table 24.5 in order from lowest commitment and resources to highest. Next, because not all companies employ all of the above modes, we calculated the percentages of companies using a particular entry mode in each step only from the aggregate of companies, which use a particular mode (for example, not as a percentage of all companies in the sample). Table 24.5 depicts the percentages of companies utilizing a given mode at each stage of the internationalization process. The highest percentages in each category are highlighted. The data lend some support to the incremental internationalization of firms. Although it is apparent that the vast majority of companies rely rather heavily on the first four modes (from securing contracts in the home market to contract manufacturing abroad), where the subsequent entry modes were indicated, they are almost fully employed in a sequential manner, beginning with the establishment of sales subsidiaries or joint ventures, and only

425

26 55 33 44 0 33 0

Stage 1 47 18 33 26 0 0 0

Stage 2 26 5 15 30 0 0 0

Stage 3 0 23 15 0 20 0 0

Stage 4

0 0 4 0 60 17 0

Stage 5

Percentages of companies utilizing different entry modes at each stage of internationalization

Foreign customers through intermediaries Exporting through intermediaries Exporting without intermediaries Contract manufacturing/licensing Sales subsidiary Joint venture Wholly-owned subsidiary

Entry modes

Table 24.5

0 0 0 0 0 50 33

Stage 6

0 0 0 0 20 0 67

Stage 7

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establishing a wholly-owned manufacturing facility in the last step of the process. Thus, even though companies seem to follow a haphazard pattern in the initial stages of internationalization, the overall pattern is one of step-wise involvement. The lack of a clear pattern in the initial stages of internationalization might also be due to the inclusion of similar modes. For example, the first two modes are both related to indirect exporting and working through intermediaries. If taken together, they not only depict a heavy reliance on intermediaries, but also are clearly the first stage in the internationalization process. Finally, a breakdown by all countries listed by respondents in answer to the question: ‘Please list the top 5 countries in which your company actively conducts international activities’ is depicted in Figure 24.3. Respondents were asked to indicate the countries according to the level of involvement in each. At first glance, there does not seem to be an evident pattern, with Germany, Latvia and the Scandinavian countries as the main countries to which Lithuanian SMEs expand their activities. This is closely followed by Russia (9 per cent). Geographically close countries do appear to be given preference, however, all of the countries listed as the top destinations are also among the main Lithuanian trading partners. However, a clearer pattern emerges if we look only at the countries listed as those in which SMEs are most actively involved (see Figure 24.4). Here Latvia (19 per cent) and Russia (13 per cent) are the top two countries, followed by Norway (12 per cent) and equally by Germany, Denmark, Sweden and the UK (10 per cent). Thus, Lithuania’s closest geographic neighbours are where Lithuanian SMEs are most active, and it is these

Sweden 10%

UK 9%

USA 4%

Other 15% Belarus 6%

Russia 9% Norway Latvia 4% 10%

Figure 24.3

Denmark 10% France 4%

Germany 12%

Percentage breakdown of international activity, by country

Sweden 10%

UK 10%

USA 8%

Other 8% Denmark 10%

Russia 13%

Norway 12%

Figure 24.4

Estonia 7%

Latvia 19%

Germany 10%

Percentage breakdown of international activity, by main countries

The internationalization of Lithuanian manufacturing SMEs

Estonia 8%

USA 5%

Other 32%

Norway 5%

Germany 8% UK 9%

Figure 24.5

427

Latvia 10%

Denmark 10%

Sweden 13%

Buyer breakdown, by countries

countries with which SMEs likely have the most experience and face virtually no language barriers. We also put a similar question to companies engaged in contract manufacturing activities in their home market: ‘Please list up to five countries from which you receive orders’, together with questions measuring the degree of involvement with buyers from the listed countries. The countries listed most often are depicted in Figure 24.5. It comes as no surprise that Denmark and Sweden are among the countries with the most outsourcing activities to Lithuania. However it is interesting that Latvia and Estonia as well are among the top five countries. These were mainly in the metals processing (Latvia, 50 per cent; Estonia, 50 per cent), rubber & plastics (Latvia, 38 per cent; Estonia 33 per cent) and pulp & paper (Latvia, 12 per cent; Estonia, 17 per cent) sectors. Conclusions This study presented preliminary data on the internationalization of Lithuanian manufacturing SMEs, as part of a large-scale project on CEE SMEs, which is still going on. It was the intent to provide a general picture of the degree and direction of internationalization of Lithuanian manufacturing SMEs, and the factors influencing the internationalization process. Although it is difficult to make generalizations about Lithuanian SMEs on the whole, from the results of this sample we can note that, while many companies in our sample are active internationally, most of them are still in the experimental or initial stages of internationalization. Almost half of the companies in our study engage in contract manufacturing. It is clear that the companies in our study have a proactive view toward internationalization, and view the establishment and maintenance of networks as an important and necessary first step in internationalizing. Our findings also lend some support to the Johanson and Vahlne (1977) model of internationalization, whereby firms incrementally increase their market commitments. Knudsen and Madsen (2001) point to the abundance of empirical studies, which confirm that a firm’s initial foreign market entry efforts are haphazard, chaotic or explorative. While at first glance our results lend some confirmation to this in the initial stages, it is clear that firms first rely on the assistance of intermediaries before increasing their foreign market commitments. In general, however, we agree with Knudsen and Madsen (2001) that the initial expansion of companies into foreign markets may be viewed not as a carefully planned or strategic activity, but as accidental. Although they refer to the incidental exporting activities of firms, here this included securing manufacturing contracts in the

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home market through intermediaries as well as exporting. In assessing the direction of internationalization, it became clear that SMEs begin active market entry to neighbouring markets (such as Latvia and Russia). This is not surprising, considering that language barriers in these countries are virtually non-existent, and an institutional environment shared for so long does not require incremental accumulation of experience and knowledge. Latvian and Estonian buyers likely seek Lithuanian suppliers for similar reasons. Regarding the factors which influence the internationalization process and degree of internationalization, we found a positive relationship between both the degree of internationalization and firm size and age. Regarding the dependence of level of internationalization on the attitudes of company management, the results were somewhat mixed. Although we expected a higher degree of uncertainty to be inversely related to the degree of internationalization, no such relationship was found. This might have reflected the formalization of activities as companies increase their foreign market commitments, which takes place regardless of whether or not companies are risk-averse. Nor did we find a significant relationship between the ‘learning’ dimension and the degree of internationalization, which might also be a reflection of lack of resources by companies and also of the large reliance on intermediaries, which, at least in the beginning, alleviates the need to invest in knowledge acquisition. The same explanation may apply to the lack of a significant relationship between degree of internationalization and a proactive view toward internationalization by company management. Lack of resources, reflected in the size of the firm, lends support here, as larger SMEs scored higher on this dimension. Although other factors might have played a larger role in determining the degree of internationalization, such as institutional barriers, these were not addressed in this chapter owing to space limitations. A longitudinal study might also enable the assessment of such environmental factor influences on internationalization, and might be a consideration for future research. This study is not without limitations. First of all, the small sample size in our study is typical of the difficulties in conducting quantitative research in the CEE countries, especially on SMEs, and may have influenced the results. Many companies are still quite hesitant to participate in research and offer any type of information to external researchers. Another difficulty in conducting research is lack of information about companies in the CEE region, as companies listed in official registers are not necessarily active companies. This is especially true of SMEs. This fact as well contributed to the low response rate. Of the companies that did respond, most were involved in or considering internationalizing their activities. Although in other cases this might result in bias, the nature of this study was such that internationalizing SMEs were of primary interest. As the research instrument clearly focused on internationalization activities, companies which either do not or are not considering internationalizing might not have responded to the survey, contributing to the lower response rate as well. Although Lithuanian SMEs seem quite proactive, it is unclear how active they are in comparison to similar SMEs in the other new EU member countries, another possible area for future research. Despite these limitations, however, this study is a first step in testing internationalization theory and identifying general patterns in the international activities of companies in a little studied region. Acknowledgement This study was partially funded by a grant from the Lithuanian State Science and Studies Foundation.

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Note 1. The size of our sample had an impact on our statistical findings. Before conducting bivariate correlations, our data were screened for outliers, which were removed. We also checked for a linear relationship between the variables of interest, though the variables and constructs did not always appear to be linear as we had expected. The Kolmogorov–Smirnov test for normality was also conducted on all variables, and we found that all data did not meet assumptions of normality. For these reasons, Spearman’s rho, not the Pearson product–moment correlation coefficient, was used to test for one-tailed statistical significance.

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Leonidou, L.C. and C.S. Katsikeas (1996), ‘The export development process: an integrative review of empirical models’, Journal of International Business Studies, 27(3), 517–51. Liesch, P.W. and G.A. Knight (1999), ‘Information internalization and hurdle rates in small and medium enterprise internationalization’, Journal of International Business Studies, 30(2), 383–94. Liuhto, K. and J. Jumpponen (2001), ‘The internationalization of the largest Baltic corporations’, Research Report No. 125, Lappeenranta University of Technology, Finland. Lundvall, B.Å. (1988), ‘Innovation as an interactive process: from user–producer interaction to the national system of innovation’, in G. Dosi et al. (eds), Technical Change and Economic Theory, London: Pinter, pp. 349–69. Madsen, T.K. and P. Servais (1997), ‘The internationalization of born globals: an evolutionary process?’, International Business Review, 6(6), 561–83. Manolova, T.S., C.G. Brush, L.F. Edelman and P.G. Greene (2002), ‘Internationalization of small firms: personal factors revisited’, International Small Business Journal, 20(1), 9–31. McIntyre, R.J. (2002), ‘SME “success” in transition: policy research and ownership alternatives’, International Association for the Economics of Participation, 7 May, Brussels. Meyer, K.E. (2001), ‘Institutions, transaction costs, and entry mode choice in Eastern Europe’, Journal of International Business Studies, 32(2), 357–67. Michailova, S. and K. Liuhto (2000), ‘Organisation and management research in transition economies: towards improved research methodologies’, Journal of East–West Business, 6(3), 7–46. Oviatt, B.M. and P.P. McDougall (1994), ‘Toward a theory of international new ventures’, Journal of International Business Studies, 25(1), 45–64. Pavlinek, P. and A. Smith (1998), ‘Internationalization and embeddedness in East–Central European transition: the contrasting geographies of inward investment in the Czech and Slovak Republics’, Regional Studies, 32(7), 619–38.

25 The Internationalization of SMEs in Malta: a critical assessment in the context of five European island regions Godfrey Baldacchino

1 Introduction Malta is the official name of a resource-poor, semi-desert limestone archipelago consisting of two main inhabited islands (Malta and Gozo), with a total surface area of just 316 square km (126 square miles), located some 60 miles off the southern tip of Sicily. A population of 400 000 makes the Maltese Islands the second most densely populated state in the world, after Singapore. Given its geostrategic location at the crossroads of the Mediterranean, plus its excellent sheltered harbours, the islands have been targets of covetous rulers throughout history, to the extent that the islanders learnt to manage and even appreciate the benefits of a ‘fortress economy’ which boomed in wartime and slumped in peace (Zammit, 1994: 12; Busuttil, 1973: 1). The few indigenous manufacturing industries – such as salt harvesting (during Roman Times) and cotton growing and weaving (during early British rule) – which sought to thrive independently from the military operations, were typically short-lived affairs. The radical revision of Britain’s global military role after the Suez Crisis of 1956 meant that ‘Malta as fortress’ was suddenly expendable, and that a serious economic restructuring would be necessary to develop alternative employment opportunities for the distraught islanders. It was in 1959 that the first of six development plans was ushered in (Baldacchino, 1998a); and Malta looked at exportoriented manufacturing fuelled by foreign investment and technology (Sklair, 1993: 1) as a viable economic strategy (Baldacchino, 1998b). Until then, it would be fair to say that Malta’s only significant indigenous manufacturing facility was its brewery: a condition shared by many small island jurisdictions. Employment opportunities have been largely in services, private (trade and tourism) and public (public service and public administration). To support infant industries, successive governments created or maintained tariff barriers. A sober assessment of Malta’s manufacturing capacity was well borne out by the avis (opinion) produced in June 1993 by the European Commission with respect to Malta’s bid for EU membership: Malta is a small economy, in which the great majority (more than 75 per cent) of its industrial companies employs fewer than five people. Of the 2,300 companies registered, only 61, less than 3 per cent, employ more than 100 staff and only 12 more than 300. (European Commission, 1993; Coopers & Lybrand Europe, 1991, Appendix A-1)

Of the latter, only four were locally owned; and two of the four were heavily subsidized public companies. Moreover: The vast majority of the smaller companies is engaged in sectors such as construction, machinery repairs, food and furniture and primarily targets the domestic market. These companies

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account for more than 70 per cent of industrial employment on the islands: their productivity is very low and their wages generally poor. In most sectors, they are sheltered from foreign competition by protective trade legislation and by extremely stringent tariff and non-tariff barriers. (European Commission, 1993; Coopers & Lybrand Europe, 1991: 21)

Most protectionist arrangements have now been dismantled in the wake of EU accession, secured on 1 May 2004. The above presents a historical appetizer to the challenges facing viable enterprise in Malta, a small sovereign nation which only secured political independence in 1964, after centuries of military colonialism during which time hardly any indigenous manufacturing capacity – except ship building and ship repair related to the war effort – was entertained. 2 The argument This chapter will document the specific challenges that affect the internationalization of small-scale enterprises based on a small island jurisdiction. Dealing with small, discrete numbers; experiencing economic booms and busts; spawning companies which wield significant leverage by virtue of being modestly large; not to mention the structuring difficulties of operating viable manufacturing activities . . . all these are issues which are not unique to Malta but are faced by other small island jurisdictions, since they are economic consequences of smallness and insularity. Thus, in this chapter, the analysis of the Malta situation will proceed from the perspective and vantage point of ‘comparative island studies’ (for example, Biagini and Hoyle, 1999; Baldacchino, 2004); drawing on recent fieldwork on the challenges facing small businesses from a number of different European island regions. The chapter argues that the successful internationalization of locally owned firms benefits handsomely from a thorough, qualitative analysis of successfully internationalized firms, scrutinized from a comparative perspective. It concludes with some learning nuggets, listing features that are deemed pertinent to successful SME internationalization in the small island scenario. 3 Theoretical background: small firms in small islands Small-scale enterprises are recognized the world over as crucial to sustainable economic development (for example, Liedholm and Mead, 1999; Jones and Tilley, 2003); and more so in small economies than large ones where they easily command an even larger proportion of firms in business (for example, Granovetter, 1984; McDonald, 1999; Wignaraja and O’Neil, 1999). Small businesses gather resources to produce goods and services, create jobs, motivate those associated with them to higher levels, decrease dependency on government, facilitate the integration of ethnic minorities, and support an economic development path that is considerably less expensive and often more sustainable than the massive influx of capital, advanced technology and highly specialized personnel needed for developing large businesses (McClelland, 1987: 232; Boissevain et al., 1990). Their critical importance to the Maltese economy has been highlighted in a few seminal articles (such as Briguglio, 1998; Boissevain, 1991; Mizzi, 1996). That policy makers seek to introduce a fiscal, human resource and general policy regime that is supportive of and conducive to successful SME establishment and growth should therefore come as no surprise.

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Much of this effort to support small firms is based on and confined to national or regional markets. After all, the regulatory environment, educational and human resource development policies, taxation regimes and other features deemed to have an impact on the number and quality of entrepreneurs, innovators and small firms are typically within the control and decision-making power of national governments, with features of shared rule in the case of members of regional fora (as in the case of environmental, labour relations and occupational health and safety regulations within the European Union). The comparative, cross-national examination of small firm ‘success’, however defined, is a more demanding undertaking, requiring a careful methodology to control for various national, fiscal, product area and enterprise-specific variables.1 A largely neglected aspect of this comparative approach puts island populations into the same analytic category. Conceptual research on small firms in small islands has raised awareness of insightful common patterns at both the micro level (such as entrepreneurial behaviour and recruitment tactics) and macro level (such as branding strategies) (for example, Baldacchino, 1999a, 1999b, 2002; Fairbairn, 1988b). 4 A methodology for defining success The NISSOS Project2 has been seeking to understand the conditions behind the success of exceptional small firms in Europe by using an inductive, comparative methodology. The project has determined a tough and stringent set of criteria for defining success; sought out firms which match those criteria; and then delved into detail to understand the particular ensemble of characteristics of these firms, teasing out what appears to be idiosyncratic, and then re-examining these features in the context of general lessons for successful SME manufacturing development. The project’s special interest and focus lies firstly in island territories: tracts of land surrounded by water (at both high and low tide), conceived as locations where successful economic activity is arguably hampered by such features as isolation, peripherality and diseconomies of scale. The focus has, secondly, also been explicitly on manufacturing firms: discrete economic units whose main product is not a service, but is tangible, requires some kind of material input and whose site of consumption can be distinct from that of its production. Manufacturing remains important because it is recognized as typically a stronger provider of permanent and well-paying employment, with large multiplier effects (including service jobs and skill development) to the local economy (for example Seers, 1982: 74; Baldacchino, 1998c: 269). The definition of success adopted by the NISSOS partners has been deliberately set at a most challenging level. To qualify, island-based manufacturing firms had to be locally (that is, island)-owned; primarily export (that is, off-island)-oriented, and had to have been so for (at least) the previous three years; having fewer than 50 employees; and utilizing adapted or locally developed (and not just imported and/or adopted) technology. The choice of these criteria was a direct response to the tenets of conventional wisdom as they apply to (especially small) island territories. According to such ‘common sense’, small islands are deficit locations: they are prone to suffer from the absence of returns to scale in both public goods and private service provision, both being generally constrained by indivisibilities (Alesina and Spolaore, 1997; Barro and Sala-i-Martin, 1995). Small island economies are also claimed to be less likely to be able to diversify, making them vulnerable to economic shocks (Briguglio, 1995; Commonwealth Secretariat, 1997). Public servants operate under regular conflicts of interest, and are under considerable pressure

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to honour obligations and curry favour (Farrugia, 1993), while a limited pool of human resources may lead to the recruitment and promotion of the mediocre (Streeten, 1993). Small islands are thought to be structurally cheated of markets, economies of scale and institutional ‘thickness’ (Amin and Thrift, 1994: 14–15). Kaminarides et al. (1989) list no fewer than 19 different deficits that are meant to apply to small island economies. These and similar ideas are now well enshrined in Article 299.2 (ex-Article 227) of the Treaty of Maastricht (1997) as applying to the European Union’s outermost (or so called ultraperipheral) regions. This Article claims that: ‘remoteness, insularity, small size, difficult topography and climate [as well as] economic dependence on a few products’ are structural features whose permanence and combination severely restrain (especially small) island development. The NISSOS definition was conceived with a view to challenging such received wisdom, in support of growing empirical evidence to the contrary (Easterly and Kraay, 2000; Armstrong and Read, 2002, 2003; Baldacchino, 2006). Furthermore, in raising the bar as high as possible, and in excluding many thriving small firms (especially service firms) from its remit in the process, only the truly exceptional (as against the humdrum representative) were being scouted by NISSOS. Moreover, the size of the database was rendered manageable and avoided any resort to sampling. In this way, and in spite of some initial scepticism, a total population of 144 firms which matched the stringent criteria was identified in the five partner island territories. 5 Results The lessons from NISSOS are still being evaluated, and other academic papers are exploring other implications arising from the research results (for example, Baldacchino, 2005a, 2005b). Meanwhile, five training manuals (one for each island region involved in the project, including Baldacchino and Vella Bonnici, 2006) as well as a multilingual CDROM are being produced as part of the project’s deliverables. This chapter, pitched at a primarily international audience, invites readers to consider critically the quantity and quality of Malta-based successful firms, in the context of the NISSOS data and research template, and of the lessons learnt about SMEs generally from this research project. Number of firms One stark implication of the database is that Malta scores somewhat poorly in terms of its number of successful firms. The ratio of successful firms in Malta (as defined) in relation to local population is by far the lowest within the five-island sample (see Table 25.1); and this in spite of Malta having by far the largest population base of the five-island partnership. Unless this statistic is the outcome of underrepresentation of actual firms, Malta appears to suffer from a relative dearth of successful, small, export-oriented, manufacturing businesses. The reasons for this shortfall could be varied and complex. However, a few explanations suggest themselves readily. First of all, a relatively large population size permits some manufacturing firms to be set up with an exclusively local market orientation. Thus, a larger population base, especially on a fairly unified land mass (as in the case of Malta, followed by Iceland) increasingly means a potential domestic market for manufactured products, avoiding the obligation to export, and its associated hassles, costs and problems. In contrast, the smallest jurisdictions

435

Source:

Total

2900 10 110

36 100

NISSOS Project (2004).

1430 103 000 316

Land area (Sq. km.)

26 290 400

Population (000s)

7 87

21 4 3

No. of islands (populated)

County spread over 6 local authorities

Autonomy Sovereign State Sovereign State

Jurisdiction

Island territories, geographic, demographic and economic details

Åland (AL) Iceland (IS) Maltese Islands (MT) Saaremaa (SA) Scottish Isles (SC)

Island Territory

Table 25.1

144

19 25

25 42 33

Successful No. of Successful Firms

5.3 2.5

9.6 1.5 0.8

Firms per 10 000 population

23.3 10.5

15.9 26 22.5

Their mean workforce

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Ratio of successful firms per 1000 island population

12 10

AL

8 Population size versus ratio of successful firms

6 SA 4 SC

2

IS MT

0 0

50 000 100 000 150 000 200 000 250 000 300 000 350 000 400 000 450 000 Population count

Source: NISSOS Project, (2004).

Figure 25.1

Population size versus ratio of successful firms

in the database, the island regions of Åland and Saaremaa, have such a small domestic population base that most manufacturing operations must consider export activity for sheer survival. The smallest economies are therefore more strongly in the throes of an ‘export or perish’ orientation (for example, Brookfield, 1987), imposing stronger obligations on such economies to spawn regionally or internationally competitive forms. The relationship between small population base and SME manufacturing export density on the basis of NISSOS data is statistically significant and clearly visible from Figure 25.1. Secondly, the ability to export off-island to a territory which is part of the same political jurisdiction, speaks the same language and/or which is sympathetic to the island region facilitates the export transaction. In this sense, it is the sovereign islands of Malta and Iceland which lose out; while the Scottish Isles, Saaremaa and Åland can all benefit from a positive association with mainland Scotland/UK, mainland Estonia and Sweden/Finland, respectively. Sovereignty can thus be seen as a handicap to off-island trade; it is only by virtue of bilateral or multilateral regional trade agreements that this handicap can be minimized, but probably never totally eliminated. Thirdly, sovereignty also exercises an opposing, positive influence on legislative capacity, however. Having the jurisdictional power to pass laws and regulations, along with the capacity to run and operate one’s own shipping and air transport networks, facilitates manufacturing exports. The number of successful firms in Malta and Iceland would have arguably been even lower had not these island regions also been sovereign states in a position to deploy their own legislative powers as well as national airlines (Air Malta, Icelandair) and shipping companies (Samskip and Eimskip in Iceland) to support indigenous manufacturing export efforts. In contrast, the Scottish Islands, with their jurisdiction shared by no fewer than six local authorities, half of whom share responsibility over both island and mainland regions, find themselves politically starved of a coherent governance structure that might help them export more and better; though a ferry service under public ownership, Caledonian MacBrayne, is a subsidized monopoly, and this somewhat facilitates trade between the islands and the mainland (Royle, 2001: 111–13). Åland, being a unique, autonomous but non-sovereign jurisdiction, has some limited ability to oblige its own political machinery to render economic service (with a strong bias

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in favour of its own impressive shipping fleet register); while Saaremaa is a county/local authority and thus enjoys only administrative capability. Type of firms A different assessment can be carried out when one takes a more detailed look at the types of products that these 144 successful manufacturing firms are producing. The products come in two main varieties. On one hand, one finds a clutch of low-tech, labour-intensive, mainly craft or agrobased products deliberately seeking to plug into the tourism market and seeking to associate themselves with their particular island brand or lure. It is the tourist who would incur any transport costs here. On the other hand, one finds high-tech, high-value added, knowledge-intensive products which are either light in weight/small in volume or else are ‘virtual’ products which can be ‘exported’ with considerable ease, such as downloaded from an internet site. In both cases, costs of transportation are minimal or non-existent. The products are collated by island territory and economic sub-sector below (see Table 25.2). Even the empty cells in the table are suggestive. Saaremaa, operating in an economic environment still undergoing fledgling liberalization after many years under state totalitarianism, has very few small, locally-owned, high-tech, export-oriented firms. In spite of North Sea Oil and Gas, the Scottish Isles have not seen this industry develop any notable upstream or downstream local manufacturing activity amongst its SMEs. Iceland, with its exhorbitant labour costs, finds itself uncompetitive in labour-intensive products. Its tourist industry, although up-market, boasts ‘only’ some 300 000 visitors per year. Instead, Iceland has done well in spawning a clutch of diverse, successful, small firms from its major export industry (fishing), as well from a burgeoning information technology sector. The association with wellness and fitness supports the sale of some of its health products, based on fishery derivatives. A similar and deliberate association between wood and Saaremaa, the renowned Mediterranean diet (wine, olive oil, tomatoes) and Malta as well as (of course!) whiskey and Scotland, facilitates the export of such specific products as long as they maintain the highest levels of quality: this strategy fends off similar competing products from cheaper locations. Malta’s decorative glassblowing industry is an interesting example of an ‘invented tradition’: a labour-intensive operation that has been marketed as ‘traditional’ when the local industry owes its birth to two English partners as recently as 1968.3 In such cases, as with the modern invention of the Scottish kilt and tartan (Trevor-Roper, 1983), even the tradition has been (ingeniously) manufactured. In the Malta case, it has also been successfully indigenized. There is also evidence of some of the firm clustering that is today being hailed as a key driver of competitive industry: by creating conditions suitable for the development of collective efficiency, clustering enhances the competitive advantage of firms and makes it easier for them to respond to both opportunities and crises (for example, Porter, 1990). Clustering in small island locations, however, appears to warrant some specific observations. Geographically, small firms on small islands are indeed located on relatively compact zones; once organized, they can also develop a sense of cooperative competition or ‘co-opetition’ (for example, Golden, 1994), especially in developing a strong island brand overseas, as has been done effectively by the Shetland Lady trademark in the Shetland Islands;4 thirdly, they set up and cultivate crucial off-island links in order to secure markets, source new ideas, approach new clients and exploit opportunities

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Table 25.2 Products of successful firms, by island and economic sub-sector (number of firms in brackets) Island territory

Number of firms

Åland Islands

25

Iceland

42

Maltese Islands

33

decorative glass/lace gold/silver filigree furniture (6)

olive oil wine/sausages sun-dried tomatoes liqueurs (6)

Saaremaa

19

lime/agar/limestone wooden houses wooden boats (8)

fish processing berry processing meat processing fur products (7)

Scottish Isles

25

stone woollen knits/fabrics jewelry/furniture pottery/drums (12)

preserves smoked salmon whisky beer (7)

Natural craft

Natural agro

wood panels Furniture sheet-metal (9)

meat processing fish processing sour apples (7) cod/shark liver oil cattle food candy poultry processing fish processing (20)

Source: NISSOS (2004).

for professional development; fourthly, especially in knowledge-driven and technologyintensive industries, key links are established with such local institutions as universities and technical colleges, business incubators and technology centres. Such institutions would be relatively few and far between in small islands, but they are even rarer in small islands which are not jurisdictions. Thus, Iceland boasts at least three universities5 and a Technological Institute.6 In Malta’s case, these would be the University of Malta, the Malta College of Arts, Science and Technology and the Business Incubation Centre run by Malta Enterprise.7 Meanwhile, at the other end of the scale spectrum, Saaremaa and Åland can each boast of one small technical college/polytechnic campus,8 while various Scottish Isles are served by some 33 satellite learning centres of the UHI Millennium Institute.9 Thus, those institutions which do exist in such locations have an enormous responsibility towards supporting local research and development efforts as well as facilitating the technical and professional formation of recruitable human resources. Furthermore, unlike the postulates of economic geography associated with clustering, successful small manufacturing firms on small islands do not initially become competitive on the basis of domestic competition, but must prove themselves from inception in international markets. A further novelty associated with successful manufacturing firms in small islands is the juxtaposition of the actual production of the commodity with a service experience.

The internationalization of SMEs in Malta

Chemical / plastic

IT / Hi-tech/engineering

sausage skins air cleaning systems plastic printing (5)

purifier units welding/electrical systems IT/software (4)

sulphur-resistant pipes plastic tubs/fishing nets fibreglass boats fish scales (9)

artificial intelligence games anti-virus software electrical equipment fish industry equipment digital EEGs (13)

plastic pipes/cables paints/detergents labels/packaging injection moulding (15)

IT packages software support solar panels (6)

rubber products (2)

aluminum boats (2)

toiletries/soaps (2)

electrical instruments flexible circuits observation devices transformers (4)

439

Cashing in on their attraction as targets of a ‘tourist gaze’ (after Urry, 1990), the act of manufacturing a specific product associated with a particular island is transformed into an item of interest and a novel experience to visitors. A factory is thus metamorphosed, without much effort, into a living museum, not just a location for the production of souvenirs but also one of consumption where being there and seeing the product being made is itself memorable. This feature is being used to good effect by glassblowers and vintners in Malta, by whiskey distilleries in Scotland, and finds parallels in other island locations (for example, Baldacchino, 2002). Island location of firms Although not always articulated explicitly, references to an enviable ‘quality of life’ on a small island can be traced to all the successful island entrepreneurs in the NISSOS database. This feature might well include a well-bonded, flexibly-specialist and loyal workteam (Bennell and Oxenham, 1983), safe places to raise children, having strong family structures and boasting other social networks based on mutual knowledge and familiarity (Boissevain, 1974; Srebrnik, 2000), and other significant and long standing ‘social capital’ supports which promote unitarism (Baldacchino, 2005a). The island effect is not only significant in extending and packaging the ‘island lure’ to potential clients (e.g. Baum et al., 2000: Fairbairn, 1988a); it also attracts potential entrepreneurs, some of whom were

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born and bred off-island or else were born on the island but had drifted away in search of adventure, education and/or employment before being enticed back. 6 Manufacturing enterprise in Malta: a harsh assessment In Malta, as with other European island regions, small firms are by far the most numerous economic units (for example, Granovetter, 1984). Yet, in Malta, as with other European island regions, the number of successfully internationalized small manufacturing firms is a very small fraction: just 0.8 per cent.10 The research advantage that a small island region provides is that comprehensive firm data are usually more readily available; more so in the case of a jurisdiction with an obligation to compile and maintain accurate statistics. The overall map of commercial firms in Malta in December 2004 reveals 23 868 units, of which 88.6 per cent (21 148) employ up to four persons. Of these, some 13 000 involve self-employed, sole proprietors (see Table 25.3). Malta ranks with Mauritius, Fiji and Singapore as one of the world’s few island economies with a relatively strong manufacturing base (Baldacchino, 1998c: 271). About 16 per cent of Malta’s employees still worked in private sector manufacturing in 2004, with another 4 per cent engaged in enterprises (like Malta Shipyards) where the state still retains total or majority control. This is a fortuitous outcome of a combination of factors, notable amongst which has been the long existence (for at least 450 years, and still counting) of a naval shipyard (which nurtured industrial skills and culture); a geographical location only 60 miles (100 km) from the European mainland; and a stable democratic polity which attracted a steady flow of foreign direct investment from the late 1950s (Vella, 1994). Still, there are downsides to such export oriented industrialization by invitation. Much FDI chose Malta also because of heavy subsidies, positively discriminatory legislation (such as concessionary access) and cheap wages: all three attractions have now been largely lost because of the obligations towards the European single market and the opening up of other, much cheaper, production locations. Moreover, a hoped-for ‘trickle effect’ of technological transfer remains largely illusory. The indigenous Maltese private economy is dominated by (a) a merchant class engaging in wholesale and retail trade, which makes its profits simply by transposing goods; (b) a construction industry which thrives thanks to the (so far) ready availability of globigerina limestone, its raw material; (c) a largely fragmented professional and personal service class often offering one-person services, ranging from legal advice to bus driving to hairdressing. Local manufacturers are wary and highly suspicious of overtures for cooperation with would-be local competitors; as a result, they continue to forgo specialization and to spend too much of their capital in excess capacity. Only 76 manufacturing firms employ more than 50 employees; and only eight employ more than 500; today, these are all largely internationalized and, barring a handful, would be non-Maltese-owned. By far the largest manufacturing concern in Malta is the branch of the semiconductor multinational S-T Microelectronics, with close to 2000 employees. Its future remains uncertain; it has threatened to relocate on a number of occasions (Zammit and Mintoff Bland, 1992: 17). 7 A more sobering assessment The scenario, however, is not only one of doom and gloom: there exist a few but notable examples of successful, locally owned and internationalized, small-scale manufacturing operations from small islands, including Malta. These SMEs may not operate as parts of

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441

large knowledge clusters, but they have deployed their ‘entrepreneurial innovation’ skills11 by identifying what they can do best: promote quality (often branded) products for selective overseas up-markets, and luring innovators or clients from overseas in the process. Theirs is a message and a narrative of hope, demonstrating how, in spite of the heavy baggage of allegedly insurmountable constraints, the alleged tyranny of geography can be overcome. Their stories deserve being showcased as ‘best practices’ that can be studied by other firms on the same or similar island territories. Such best practices may also, in turn, inform the training, education and professional development of business students, apprentices and/or actual or potential entrepreneurs from the same and other small island jurisdictions. 8 Ten lessons from research findings What have been the main lessons learnt from the showcased successful firms? What transferable knowledge can be gleaned from case studies of enterprises which are clearly exceptional rather than representative? A set of ten, distinct yet interrelated, lessons suggest themselves from the research material. The nature and origins of entrepreneurship On small islands, returning emigrants or incoming settlers with skills and experience abroad are crucial in boosting the stock of entrepreneurs in the home country and in being able to tap overseas contacts and markets. Entrepreneurship also appears to be a somewhat gradual, incremental and summative set of experiences and learning, partly from formal schooling but also from conventional employment and incidental learning. Unemployment can be a trigger; but so can be a casual encounter with a potential buyer, or a chance discovery. The entrepreneur then weans himself away from employment into self-employment: there is no dramatic bursting on the scene. Growth is slow, measured, tentative . . . investments are often as low as possible, guaranteeing that control remains firmly in the hands of the founder/ideator. The nature of the material product An easy way to start a successful small business on a small island is to develop naturally available raw materials (wood, glass, wool, stone and so on) into products that are geared towards a tourist market, but issues of quality, packaging, display and consistency soon emerge, enabling some sifting and thinning of the myriad producers. A consistent island brand, a mechanism for certifying the genuineness of local products, some concerted effort by local producers to cooperate in sourcing off-island markets (co-petition), rather then engage in all too common internecine conflict and rivalry, are important markers on the road to firm and industry success. The use of the factory as a ‘looked-at’ site is also helpful, combining production and consumption, and thus, hopefully, boosting sales. The nature of the virtual product Software and virtual products (like products sold over the web and software) offer obvious advantages to all producers, avoiding transport and insurance costs; but island-based producers reap the largest potential advantage, since they suffer most from transport handicaps. Developing a product (and a market) from scratch helps immensely. The ‘exotic’ link with an island can help in relationship marketing, but not too close a branding with the island is preferred.

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Table 25.3

Employment levels by economic sub-sectors in Malta, end December 2004

Industry sector

1–4

5–9

10–19

20–29

30–49

01 04 13 14

1389 368 92 55

10 1 1 6

12 2 1 5

1 0 0 1

3 1 0 1

1 552

0 48

0 21

0 7

0 11

24 5 56 133

2 0 1 9

4 2 2 5

0 0 1 2

4 0 3 2

10

1

0

0

0

672

57

20

9

2

18 104 11

2 20 3

1 13 2

2 3 0

1 5 0

11 42 3

0 15 0

1 16 0

0 8 0

0 1 0

210

21

12

4

5

306

40

16

6

3

38 287

11 42

5 20

2 5

2 7

689

36

15

5

2

167

24

17

8

8

2 356 0 5 671 15

83 0 312 11

54 0 176 0

17 0 47 3

14 0 36 2

69 226 1 508

11 13 111

11 5 39

4 0 24

4 1 18

19 20 21 22 23 24 25 26 27 28 29 30 31 32 33

35 36 37 38

39 40 51 61 62 63 64 71

Agriculture Fishing Oil Drilling Stone Quarrying and Clay pits Non metallic quarrying Food Manufacturing Industries Beverage Industries Tobacco Manufacturing Manufacturing of Textiles Mfg of Footwear, Clothing etc. Manufacturing of Wood & Cork Mfg of Furniture and Fixtures Mfg of Paper Products Printing & Allied Industries Mfg of Leather & Leather Goods Mfg of Rubber Products Mfg of Chemical Products Mfg of petroleum & coal products Mfg of Non-Metallic Products (except petroleum and coal) Manufacturing of Metal Products Manufacturing of Machinery Mfg of Electrical Machinery, Appliances and Supplies Mfg of Transport Equipment (excluding Malta Shipyards) Miscellaneous Mfg Industries Construction Electricity & Gas Wholesale and Retail Trades Banks & Financial Institutions Insurance Real Estate Transport

The internationalization of SMEs in Malta

443

50–74

75–99

100–199

200–399

400–499

500–999

1000

Total

0 0 0 0

0 0 1 0

0 0 0 0

0 0 0 0

0 0 0 0

0 0 0 0

0 0 0 0

1 415 372 95 68

0 4

0 1

0 4

0 1

0 0

0 0

0 0

1 649

3 0 0 2

1 0 0 0

1 1 0 0

0 0 2 2

1 0 0 0

0 0 1 1

0 0 0 0

40 8 66 156

0

0

0

0

0

0

0

11

1

2

0

0

0

0

0

763

1 3 0

1 0 0

0 2 1

0 0 0

0 1 0

0 0 0

0 0 0

26 151 17

1 1 0

0 0 0

1 0 0

0 1 0

0 0 0

1 0 0

0 0 0

15 84 3

1

1

0

0

0

0

0

254

1

0

1

0

0

0

0

373

1 2

0 2

0 5

1 1

0 0

0 1

0 1

60 373

4

2

1

0

0

0

1

755

2

1

2

1

0

2

0

232

4 0 11 1

0 0 5 2

5 0 7 2

2 0 1 2

0 0 0 0

0 0 0 0

0 1 0 2

2 535 1 6 266 40

2 0 5

2 0 3

0 0 2

0 0 3

0 0 0

0 0 0

0 0 1

103 245 1 714

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Table 25.3

(continued)

Industry sector 72 73 81 82

Storage and Warehousing Communications Government Services Community and Business 83 Recreation Services 84 Hotel & Catering Establishments (Other personal services) Total No. of Employers

1–4

5–9

10–19

20–29

30–49

3 39 0 2 904

1 7 0 263

3 6 0 132

2 1 0 43

2 5 0 42

261 1 114

11 106

7 53

1 25

0 23

1 737

34

11

4

2

21 146

1 313

689

235

210

Note: Sectors 20 to 39 cover the manufacturing elements. Source: Employment & Training Corporation (ETC), Malta.

‘Export or perish’ Successful island entrepreneurs quickly develop an appreciation of how crucial ‘off island’ sales are to preserve and grow their business. Tourism is one easy route; but exportation is another step. The identification of distributors, dealers or agents is a common strategy, with close communication with the entrepreneur. Once again, the approach is wary, in small steps. State support can facilitate participating in a trade fair, from where good contacts can start. The ‘export’ of workers (emigrants) can also be a major source of income and foreign exchange via remittances. Human resource strategies People are crucial resources, especially to small businesses. Family labour is one route, especially where technological inputs are not as challenging. In the case of hi-tech firms, however, the best choice is not usually a relative. The unitary, team-based, labour relations in a small firm are enhanced by operating in a unitary island framework. This solidifies bonding, reducing labour turnover; but it may also make it difficult to discharge longserving employees, or for discharged employees to avoid being black-listed. Any specific labour market segment will be tight, so workers will be hard to recruit, tempting to poach, would need to be trained in-house, would have limited options for alternative employment – unless they decide to become self-employed and compete with their former boss! It is vital to offer possibilities of professional development, including stints off-island. The gender dimension: profiling successful men and women There is a remarkable level of entrepreneurship by both men and women in the showcased island firms, even if men are often, and perhaps even expected to be, more in the public eye. Control is transferred to, or shared with, members of the immediate family in many cases. The presence of women at the helm is inspiring. Many businesses survive because of the complementarity of the founding partners, often a male–female combination.

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50–74

75–99

100–199

200–399

400–499

500–999

1000

Total

0 0 0 26

0 1 0 17

0 1 0 14

0 2 0 7

0 0 0 1

0 0 0 3

0 1 1 0

11 63 1 3 452

2 15

0 8

2 15

0 5

0 0

0 0

0 0

284 1 364

3

1

0

0

0

0

0

1 792

96

51

67

31

3

9

8

23 858

Outside supports Small businesses from small islands tell different stories about external supports. Some are very enthusiastic, others disappointed; many are indifferent and frustrated by what they claim is ‘red tape’ and paperwork. Is a one-stop shop that difficult to set up? Why are island bureaucracies not exemplars of ‘small is beautiful’? Or are island entrepreneurs simply suspicious of ‘outsiders’, whoever they might be? Government bureaucracy/regulations can strangle private enterprise: a judicious process of deregulation and liberalization can do wonders for promoting entrepreneurship and business. Appropriate forms of official assistance can be vital in such key areas as credit, training and marketing. Developing local expertise New technology can be adopted, adapted or invented outright. Successful small businesses excel at adaptation. The modification of an existing technology at a certain point becomes a new technique. Moreover, the disposition to become technologically innovative comes also from exposure to ideas and models developed off-island. Young islanders should be afforded the opportunity to travel off-island and spend time in metropolitan locations where ideas are generated. The link between the formal and informal sectors (including networks, politics and social capital) Social capital is very strong amongst small communities. Many small island entrepreneurs operate between the formal and informal sectors, as do many employees. Governments are often misled into believing that the informal sector acts to disguise productivity and therefore is a site of tax evasion which must be formalized and destroyed. The informal sector needs to be recognized as a strength and major support for entrepreneurial behaviour. Post-secondary and vocational training institutions require active and harmonious relations with nuggets of informal (but powerful) social capital, such as neighbourhood groups, cooperatives, voluntary associations and parish committees.

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The effective teaching of entrepreneurship We end with a humbling note: only one of the entrepreneurial men and women showcased in the NISSOS case studies entered the world of business after following an entrepreneurial programme at school. This confirms that entrepreneurship is more likely to be developed out of school than in school. The question, therefore, naturally arises: is it a contradiction in terms to seek to foster entrepreneurship via the formal educational system? How innovative and formative can schools be in developing individuals keen to start their own businesses? Is a training manual on entrepreneurship a contradiction in terms? 9 Policy implications These critical observations on the state of manufacturing in Malta can suggest lessons that can in turn inform local public policy. The following are some of the main implications of the above research outcomes to current Maltese economic development strategy. First, is fostering networks of ‘cooperative competition’ in specific export industries, with local producers joining forces to defend the quality and reputation of their brand internationally, while continuing to compete amongst themselves locally. Some initiatives have been taken here, as in the case of jewelry manufacturers (for example, IPSE, 2001); these are now being championed by the Malta Crafts Council. Second is the incorporation of institutes of technology and higher learning into drives towards the identification and promotion of entrepreneurship, for example through such initiatives as Scoops: Coops for Schools, Young Enterprise and The President’s Award, now all recognized in the National Minimum Curriculum. So far, it appears that entrepreneurship is negatively associated with graduate education in Malta (for example, Baldacchino et al., 1997). Third is tapping into Malta’s extensive overseas diaspora, with a view to attracting entrepreneurs to return to Malta and relocate their firms, or deploy their knowledge capital and extensive overseas networks in order to support local economic growth. Rather than a blanket sourcing drive, a more focused approach aimed at specific individuals may prove more successful. While Malta’s ‘geographical location, modern infrastructure, adequate and flexible labour supply and political stability are some of its key advantages’ (Malta Enterprise web-site: www.maltaenterprise.com), when it comes to industrial investment, Maltese living abroad can be encouraged to return with the reassurance of a quality of life and strong social networks not easily experienced elsewhere. Fourth is tourism, which is a crucial economic industry for Malta, but also crucial in the sense of facilitating the export of gourmet foods and wines and other choice hand-made craft products. Tourist purchases on the island relieve the producer of the responsibility for the transportation of goods overseas, with the accompanying surcharges for customs, insurance and freight, effectively off-loading these to a consenting customer. 10 Conclusion Clearly, Malta’s relatively low density of internationalized SMEs requires further investigation. The regulatory environment may be too stifling and bureaucratic. The Maltese may prefer low-risk investments, such as real estate, liquid bank deposits, government

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bonds and gold: a shrewd response bred during the feast and famine years of the fortress economy. The local corporate tax regime and the sprawling public sector may together disincentivize entrepreneurship and innovation, instead promoting and rewarding behavioural strategies that focus on how to ‘work the system’, or intrapreneurship: this includes ‘safe’ full-time public sector jobs and under-declared part-time incomes (see Delia, 1994). The informal economy persists as a haven for local business acumen (and in spite of the introduction of value added tax), perhaps because of what is widely perceived as a heavy corporate tax rate of 32.5 per cent. A pervasive belief that ‘big is beautiful’ may have led to the benign neglect of the potential of small, local firms to create employment, leading successive (especially Labour) governments to concentrate instead on attracting large, foreign companies to Malta (for example, Vella, 1994) or to set up large public corporations, resulting in a ‘socialist black hole’ of absent, stagnant enterprise (Vahcic and Petrin, 1990). Or is this an attitude problem, part of the legacy of industrial protectionism meant to defend nascent industries? Finally, is it simply that entrepreneurship in Malta enjoys very low social esteem, with small business owners being, by and large, still popularly regarded as primarily tax evaders? After all, piracy is arguably Malta’s oldest profession: and that speaks volumes. Acknowledgements This is a much expanded version of a paper published as: G. Baldacchino (2005) ‘Successful small-scale manufacturing from Malta: a comparative assessment across five European island regions’, Bank of Valletta Review (Malta), No. 31, pp. 17–32. The encouragement of Léo Dana and the constructive comments of anonymous reviewers have been especially welcome. The support of the European Commission, through its Leonardo da Vinci Community Vocational Training Action Programme, in the pilot project – MT/2002/B/F/139000 – is gratefully acknowledged. My gratitude goes to the 11 institutional partners, their delegates and associated support staff involved in the NISSOS Project, for their support and commitment to the NISSOS Project’s objectives. These are Estonia Chamber of Commerce and Industry – Saaremaa Branch (delegate: Tullio Liblik); Kuressaare College at Tallinn Technical University (Maret Pank and Merlin Muur); Åland Trade Association (Mika Lindfors and Johnny Mattson); Åland Polytechnic (Anna-Lena Sjöberg, Christer Kullman and Thor-Bjorn Wik); Technological Institute of Iceland (Bjorn Gislason); Institute of Business Studies at the University of Iceland (Gylfi Dalmann Adalsteinsson); Foundation for Human Resources Development, Malta (Sandra Agius, Helga Ellul, Mario Grixti, Godwin Micallef and John Muscat Drago); Malta Enterprise (Karl Herrera); the University of Malta (Roger Ellul Micallef and Saviour Rizzo); the Malta College for Arts, Science & Technology (Frank Edwards); the Highland Council of Scotland (Catriona MacLean and Lisa Stephen) and the UHI Millennium Institute, Scotland (Maggie Marr, Anne Marie McDairmid and Stephanie Tristam). Thanks also to the expert independent input of Joe Vella Bonnici (Malta), Ingi Runar Edvardsson (Iceland) and Tage Petersen (Denmark). The institutional support of the University of Prince Edward Island, Canada, and the Employment & Training Corporation (ETC), Malta, is also acknowledged. Responsibility for the contents of this chapter and any errors remain only my own, and are not attributable to either the European Commission or any of the NISSOS Project Partners. (All Internet sites quoted in this chapter were accessed during July 2005.)

Notes 1. 2.

3. 4.

A case in point is the comparative study into SME performance undertaken by the Centre for Advanced Studies, Cardiff University, comparing firms in Denmark, Ireland and Wales (www.cf.ac.uk/cass/projects/ comparative_performance.html). NISSOS (the Greek word for island) also stands for Network of Islands for Small Scale Organisational Success. The NISSOS Project was a three-year (2003–06) pilot project under the European Commission’s Leonardo da Vinci’s Vocational Training Programme. It was coordinated by Malta Enterprise, and had 11 partners from five island regions of Europe: Åland, Iceland, Malta, Saaremaa (Estonia) and the Scottish Isles. Its web-site can be found at www.nissos.net. Visit www.glass-time.com/Encyclopedia/Mdinaglass.html. Visit www.shetland-knitwear.com/history.html.

448 5. 6. 7. 8. 9. 10. 11.

Handbook of research on European business and entrepreneurship The University of Iceland (www.hi.is), Reykjavik University (www.ru.is) and the University of Akureyri (www.unak.is). www.icetec.is/. www.um.edu.mt; www.mcast.edu.mt, and www.maltaenterprise.com/page.asp?p=4078&l=1 respectively. http://eng.ttu.ee/structure/kuressaarecollege and www.ha.aland.fi/ respectively. www.uhi.ac.uk/learningcentres/learning_centre.shtm#mainland. Just 33 out of 3952 manufacturing firms employing up to 50 persons in Malta in December 2004: data compiled and kindly made available by the Employment & Training Corporation, Malta. ‘Liikanen proposes new perception of innovation’, Cordis Newsletter, No. 195, Brussels, European Commission, April 2002, p. 1.

References Alesina, Alberto and Enrico Spolaore (1997), ‘On the number and size of nations’, Quarterly Journal of Economics, 112(4), 1027–56. Amin, Ash and Nigel Thrift (eds) (1994), Globalisation, Institutions and Regional Development in Europe, Oxford: Oxford University Press. Armstrong, Harvey W. and Robert Read (2002), ‘The phantom of liberty? Economic growth and the vulnerability of small states’, Journal of International Development, 14(3), 435–58. Armstrong, Harvey W. and Robert Read (2003), ‘Small states, islands and small states that are also islands’, Studies in Regional Science, 33(1), 237–60. Baldacchino, Godfrey (1998a), ‘Far better to serve in Heaven than to reign in Hell: Malta’s logic of relating to the European Union’, in Godfrey Baldacchino and Robert Greenwood (eds), Competing Strategies of Socioeconomic Development for Small Islands, Charlottetown, Canada: Institute of Island Studies, University of Prince Edward Island, pp. 213–37. Baldacchino, Godfrey (1998b), ‘The industrialisation of Malta: a historical analysis of the formation, control and response of labour’, in Ernest Azzopardi and Paul Heywood (eds), Issues: Aspects of an Island Economy, Malta: New Economics Society, pp. 60–87. Baldacchino, Godfrey (1998c), ‘The other way round: manufacturing as an extension of services in small island states’, Asia Pacific Viewpoint, 39(3), 267–79. Baldacchino, Godfrey (1999a), ‘An exceptional success: the case study of an export oriented, locally owned, small scale manufacturing firm in a small island country’, Journal of Pacific Studies, 23(1), 27–47. Baldacchino, Godfrey (1999b), ‘A double dose of unitarism: employment relations in a small firm in an island state’, International Journal of Employment Studies, 7(2), 103–21. Baldacchino, Godfrey (2002), ‘A taste of small island success: a case from Prince Edward Island’, Journal of Small Business Management, 40(3), 254–9. Baldacchino, Godfrey (2004), ‘The coming of age of island studies’, Tijdschrift voor Economische en Sociale Geografie, 95(3), 272–84. Baldacchino, Godfrey (2005a), ‘Island entrepreneurs: insights from exceptionally successful knowledge-driven SMEs from five European Island Territories’, Journal of Enterprising Culture, 13(2), 145–70. Baldacchino, Godfrey (2005b), ‘Successful small scale manufacturing from small islands: comparing firms benefiting from local raw material input’, Journal of Small Business and Entrepreneurship, 18(1), 21–38. Baldacchino, Godfrey (2006), ‘Managing the hinterland beyond: two ideal-type strategies of economic development for small island territories’, Asia-Pacific Viewpoint, 47(1), 45–60. Baldacchino, Godfrey et al. (1997), The Graduating Workforce, Malta: Workers’ Participation Development Centre for the Employment and Training Corporation. Baldacchino, Godfrey and Joseph Vella Bonnici (2006), Real Stories of Small Business Success: Insights from Five European Island Regions: A Self-Help Guide, Malta: Malta Enterprise. Barro, Robert J. and Xavier Sala-i-Martin (1995), Economic Growth, New York: McGraw-Hill. Baum, Thomas G. with Laura Hagen-Grant, Lee Jolliffe, Sheldon Lambert and Bjorn Sigurjonsson (2000), ‘Tourism’, in Godfrey Baldacchino and David Milne (eds), Lessons in the Political Economy of Small Islands: The Resourcefulness of Jurisdiction, Basingstoke: Macmillan, pp. 214–30. Bennell, Paul and John Oxenham (1983), ‘Skills and qualifications for small island states’, Labour and Society, 8(1), 3–38. Biagini, Emilio and Brian Hoyle (eds) (1999), Insularity and Development: International Perspectives on Islands, London: Pinter. Boissevain, Jeremy (1974), Friends of Friends: Networks, Manipulators and Coalitions, Oxford: Blackwell. Boissevain,Jeremy(1991),‘Smallentrepreneursandtheirculturalcontext’,Bankof VallettaReview(Malta)(2),1–16. Boissevain, Jeremy et al. (1990), ‘Ethnic entrepreneurs and ethnic strategies’, in R. Waldinger, H. Aldrich, R. Ward et al. (eds), Ethnic Entrepreneurs: Immigrant Business in Industrial Societies, Newbury Park, CA: Sage, pp. 131–56.

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Briguglio, Lino (1995), ‘Small island developing states and their vulnerabilities’, World Development, 23(9), 1615–32. Briguglio, Lino (1998), ‘Surviving the competition: small business in Malta’, in Godfrey Baldacchino and Robert Greenwood (eds), Competing Strategies of Socio-Economic Development for Small Islands, Charlottetown, Canada: Institute of Island Studies, University of Prince Edward Island, pp. 119–33. Brookfield, Harold C. (1987), ‘Export or perish: commercial Agriculture in Fiji’, in M.J. Taylor (ed.), Fiji: Future Imperfect?, Sydney: Allen and Unwin, pp. 46–57. Busuttil, Salvino (1973), ‘Malta’s Economy in the Nineteenth Century’, Department of Economics, University of Malta. Commonwealth Secretariat (1997), A Future for Small States: Overcoming Vulnerability, London: Commonwealth Secretariat. Coopers and Lybrand Europe (1991), The Effects of EC Membership on Industry in Malta, Malta: Malta Federation of Industry. Delia, Emanuel P. (1994), ‘A labour market in transition’, in Ronald G. Sultana and Godfrey Baldacchino (eds), Maltese Society: A Sociological Inquiry. Malta: Mireva, pp. 461–81. Easterly, William and Aart C. Kraay (2000), ‘Small states, small problems: income, growth and volatility in small states’, World Development, 28(11), 2013–27. European Commission (1993), ‘The challenge of enlargement: commission’s opinion on Malta’s application for membership’, Bulletin of the European Communities, Supplement No. 4, Brussels, June. Fairbairn, Teo I.J. (1988a), ‘Indigenous entrepreneurship and business development in the Cook Islands’, in Teo I.J. Fairbairn (ed.), Island Entrepreneurs: Problems and Performance in the South Pacific, Honolulu HI: East West Center, pp. 55–76. Fairbairn, Teo I.J. (ed.) (1988b), Island Entrepreneurs: Problems and Performance in the South Pacific, Honolulu HI: East West Center. Farrugia, Charles J. (1993), ‘The special working environment of senior administrators in small states’, World Development, 21(2), 221–6. Golden, James R. (1994), Economics and National Strategy in the Information Age: Global Networks, Technology Policy and Cooperative Competition, Westport, CT: Praeger. Granovetter, Marc (1984), ‘Small is bountiful: labour markets and establishment size’, American Sociological Review, 49(3), 323–34. Institute for the Promotion of Small Enterprise (IPSE) (2001), Sectoral Analysis Report on the Jewelry Industry, Malta: Business Process Consulting for IPSE (available at www.maltaenterprise.com/filebank/documents/ Jewellery.pdf). Jones, Oswald and Fiona Tilley (eds) (2003), Competitive Advantage in SMEs: Organizing for Innovation and Change, Chichester: John Wiley and Sons. Kaminarides, John, Lino Briguglio and Henk Hoogendonk (eds) (1989), The Economic Development of Small Countries: Problems, Policies and Strategies, Delft: Eburon. Liedholm, Carl and Donald C. Mead (1999), Small Enterprises and Economic Development, London: Routledge. McClelland, David C. (1987), ‘Characteristics of successful entrepreneurs’, Journal of Creative Behaviour, 21(3), 219–33. McDonald, Colin (1999), Small Enterprise Development in Mini Island Economies: The Case of Tobago, New York: Peter Lang. Mizzi, Leonard (1996), ‘Small and medium-scale enterprises in Malta and Cyprus’, in Klitos Symeonides and Godfrey Baldacchino (eds), Cyprus and Malta on the Threshold of Accession to the European Union: Challenges to Workers and Trade Unions, Cyprus: Government Printer, pp. 12–18. Porter, Michael (1990), The Competitive Advantage of Nations, New York: Free Press. Royle, Stephen A. (2001), A Geography of Islands: Small Island Insularity, London: Routledge. Seers, Dudley (1982), ‘The new role of development planning’, in Bimal Jalan (ed.), Problems and Policies in Small Economies, London: Croom Helm, pp. 69–84. Sklair, Leslie (1993), Assembling for Development: The Maquila Industry in Mexico and the United States, University of California, San Diego: Center for U.S.–Mexican Studies. Srebrnik, Henry F. (2000), ‘Identity, culture and confidence in the global economy’, in Godfrey Baldacchino and David Milne (eds), Lessons from the Political Economy of Small Islands: The Resourcefulness of Jurisdiction, Basingstoke: Macmillan, pp. 56–71. Streeten, Paul P. (1993), ‘The special problems of small countries’, World Development, 21(2), 197–202. Trevor-Roper, Hugh (1983), ‘The invention of tradition: the highland tradition of Scotland’, in Eric Hobsbawm and Terence Ranger (eds), The Invention of Tradition, Cambridge: Cambridge University Press, pp. 15–41. Urry, John (1990), The Tourist Gaze: Leisure and Travel in Contemporary Societies, London: Sage. Vahcic, Ales and Tea Petrin (1990), ‘Restructuring the Yugoslav economy through the development of entrepreneurship and the role of the financial system’, Slovene Studies, 12 (1), 67–73.

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Vella, Mario (1994), ‘That favourite dream of the colonies: industrialisation, dependence and development discourse in Malta’, in Ronald G. Sultana and Godfrey Baldacchino (eds), Maltese Society: A Sociological Inquiry, Malta: Mireva, pp. 55–77. Wignaraja, Ganeshan and Sue O’Neil (1999), SME Exports and Public Policies in Mauritius: 1999, Trade and Enterprise Papers, London: Commonwealth Secretariat. Zammit, Edward L. (1994), A Colonial Inheritance: Maltese Perceptions of Work, Power and Class Structure with Reference to the Labour Movement, Malta: Malta University Press. Zammit, Edward L. and Yana Mintoff-Bland (1992), ‘Workers’ Participation in Technology and Production’, Malta: Workers’ Participation Development Centre, mimeograph.

26 Issues on the internationalization of SMEs in Eastern Europe: the case of Moldova Sanford L. Moskowitz

Small and medium-sized firm (SMEs) are gaining increasing attention from both the academic and the business community. The fall in trade barriers over the last few decades, the increasing importance for the world’s economies of innovation and new technology, and the general expansion in globalization has meant a growing role of small and medium-sized firms (SMEs) in international markets (Oviatt and McDougall, 1994, 1999). As part of these studies, investigations examine the rise within, and internationalization of, SMEs from a growing range of countries. In particular, they investigate how the internationalization of SMEs leads to ‘value creation’ and, in turn, economic growth in these countries. As the EU has expanded and become more integrated, Central and Eastern European SMEs find themselves with greater access to international markets (Roolaht, 2002). Thus attention increasingly has been shifting to ways in which these socalled ‘transition economies’ (Hungary, Poland, The Czech Republic, the Baltic States, etc) can effectively compete internationally with Western Europe and the US. The rise of entrepreneurial SMEs in Eastern Europe and their ability to operate in the global arena is seen as crucial to the eventual success of these countries (Dana, 2005). Certain recent theories of internationalization look at the reasons why SMEs increase the breadth and depth of their exporting activities, and in turn lead to economic growth within certain transition economies (Knight and Cavusgil, 1997). When barriers arise to internationalization, these investigations tend to focus on internal problems in a country, such as political instability, decaying infrastructure, and so forth. But, beyond this more empirical focus, are broader theories that advance either incremental (staged) or ‘rapid leap’ models of entry, and in turn value creation within countries. In the former case, rapid SME internationalization is assumed unlikely because of financial constraints, the lack of international market experience or information, cultural friction, and other factors. Thus the incrementalists hold that SMEs will internationalize in gradual steps, first undertaking the least complex forms of entry (such as exporting) and then evolving into more complicated types of market entry strategies–from the rather passive forms of contracting work (such as becoming part of an outsourcing network) to the more active entry modes of licensing, joint venturing, and merging and acquiring. As SMEs do this, they create and capture economies along the value chain of production. This study examines the internationalization of SMEs with respect to Moldova. It explores the issue of the internationalization of SMEs from the perspective of one of the smallest and poorest of the Eastern European transition economies. As with most of the transition economies, Moldova began to privatize its economy in the early 1990s (Dana, 1997). Over the next few years, this process generated thousands of small and mediumsized enterprises, mostly within the agricultural, wine producing, clothing and apparel, 451

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and trade-related industries. Entering and thriving in international markets is a critical requirement for these enterprises, and for Moldova as a country that is so dependent on their success for its future economic growth. This study examines in some detail the dynamics of the internationalization process for the SMEs of a non-accession country such as Moldova. In doing so, this chapter accepts that the ‘gradual staged’ paradigm of internationalization pertains to Moldova. The evidence collected thus far appears to conform to this model. As the evidence shows, different industries in Moldova, for various reasons, are at different stages of evolution in the internationalization process. In this study, we explore why these industries and their SME population are in the stages they are and what factors are influencing the rapidity and extent of their internationalization, and, in turn, their ability to create and capture critical production value added. This study adds to the literature on the internationalization of SMEs in a number of ways. First, while there are some studies on the internationalization of SMEs in Eastern Europe, there is no systematic study on the internationalization of SMEs in Moldova (Reason and Nicolescu, 2002; Roolaht, 2002; Szabo, 2002). More generally, to the best of our knowledge, there has been few if any investigative studies on the internationalization of SMEs from non-accession countries; that is, countries that are not now part of the EU, or are expected to become members of the EU in the foreseeable future. This investigation, then, will help to increase understanding of the spurs and hindrances that exist in such countries when it comes to the internationalization of SMEs. An important aspect of this study is that it adds to the recent area of scholarship that examines the ‘inward’ and ‘outward’ relationships that exist in the internationalization process (Welch and Luostarinen, 1993). In particular, this study suggests that, in certain contexts, such linkages can hinder as well as propel outward international expansion. In doing this, this study will broaden our understanding of how the complex relationship between nonaccession countries (such as Moldova) and the European Union significantly influences the rate and direction of SME internationalization and the ability of SME firms to create and capture essential value along the production chain. This investigation, then, should be of great interest to international business and financial managers and European (and US) public policy officials, as well as the academic community. Overview of Moldova’s economy Moldova is part of a group of countries that are considered making slow progress in their development of an entrepreneur-based economy (IMF, 2005). Moldova shares this characteristic with Albania, Bosnia, Macedonia and the majority of CIS countries. These countries are not yet part of the European Union (EU), nor are they expected to gain accession to the Union in the near future. In contrast to these ‘slow progress’ countries are those countries that appear to be making more rapid progress economically, most of which are part of the EU or are expected to become part of the Union within the next couple of years. These ‘Rapid and Intermediate Progress’ countries include Hungary, Poland, Slovakia, Czech Republic, the Baltic States, Bulgaria and Romania. In 1991, Moldova, in fact, entered onto what many believed was going to be a rapid economic track. Early successes during the first half of the 1990s pointed the way for entrepreneurial-based growth in post-Soviet Moldova (Development Alternatives Inc., 2004). These included the liberalization of both domestic and foreign trade, easing of

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price controls, responsible monetary policies and a robust privatization policy. However, this promising beginning did not live up to expectations. Indeed, Moldova’s economic collapse was worse even than that of other former Soviet Republics after break-up of the Soviet union. The secession of the breakaway region of Transnistria, from which Moldova relies upon one-third of its total industrial output, has certainly injured the economy. Nearly all cotton textiles, power transformers and electrical machines are produced in Transnistria, which also controls 90 per cent of Moldova’s electricity generation. There were also severe trade shocks in the late 1980s and then again in the late 1990s. Then there is the issue of the Soviet Union. Before 1989, the Soviet Union was Moldova’s largest market for its agricultural products and Moldova remained the major supplier of food and beverage to the other republics (IMF, 2005). It provided almost one-fifth of USSR grapes and wine, one-third of its tobacco, and 10–15 per cent of its fruits and vegetables A barter system obtained where Moldova received subsidized energy imports in return for its agricultural products. After 1989, Moldova found itself cut off from its major export market and, in addition, forced to pay significantly higher import costs as Russian energy prices were adjusted to world prices. Indeed, the direct and indirect subsidies lost amounted to 24 per cent of its GDP. Overall, between 1991 and 2000, the country experienced deterioration of trade of 45 per cent. As a result, Moldova’s trade deficit ballooned to three times its pre-1989 amounts. The collapse of the Russian market for exports during the ruble crisis in 1998 exacerbated the situation. Between 1998 and 2000, Moldova exports dropped by half (owing to a 60 per cent decline in exports to Russia). In the aftermath of the crisis, Moldova’s currency – the leu – depreciated against western currency but appreciated against the Russian ruble. This meant that Moldova’s exports to Russia fell precipitously – a decline aided by the consequent introduction by Russia of quotas on key Moldova exports, including sugar, tobacco and liquor – while real household incomes fell to less than 60 per cent of pre-crisis levels. By late 1990s, Moldova’s economy, as measured by GDP, had shrunk to two-fifths its pre-1989 size. In contrast, the other former communist countries, which had also suffered trade shocks, returned to 1990 levels. Only Georgia and Tajikistan approached the scale of decline experienced in Moldova. At this point, Moldova had become the poorest nation in Europe. Wages covered less than two-thirds of the minimum consumer budget and so Moldavians had to rely on a shadow economy to survive or else leave the country. It is estimated that there was an exodus from the country of about one-quarter of the country’s workforce to search for jobs abroad (IMF, 2005). Remittances from expatriates back to Moldavian families amounted to between 15 per cent and 17 per cent of the country’s total GDP. Moldova’s institutional infrastructure remained generally plagued by low salaries and corruption. Since 2000, the country, at best, appears to be experiencing stagnation. Real GDP growth jumped in 2001 and grew a little more in 2002, only to collapse in 2003 (Table 26.2). Inflation in the country remains a growing problem. Gross investment is very low, around the 1.4 to 1.9 range. If consumption also grew from 2001 to 2003, this is merely the result of the growing flow of remittances from expatriate persons working in other countries. The flow of workers’ remittances from abroad fuels a surge in demand that also stimulates inflation.

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Moldova’s trade situation is also problematic. While export activity expanded from 2001 to 2003 as Moldova strived to rebuild its trade and distribution networks, the level of exports reached in 2003 fell short of what it was in 2000, which itself was significantly less than in 1990. Fundamentally, Moldova’s export activity has become far too concentrated, in that it remains a narrow agricultural economy. The country exports far fewer products than its Eastern European neighbours. In 2003, the country’s export concentration ratio of 0.30 was far more than other Eastern European countries, except Bulgaria. Between 1995 and 2003, the number of products exported declined by 22 per cent and the share in exports of the three largest exported products grew from nearly 40 per cent to 53.3 per cent. In contrast, in 2003, the share of the three largest products for Bulgaria was 33.4 per cent, Lithuania 32.7 per cent, Romania 34.5 per cent and Slovakia, 27 per cent (Table 26.3). Moldavian exports are dominated by wine, food products, and apparel and clothing products. Wine accounted for 28 per cent of total exports in 2003, food products 27 per cent, and apparel and clothing 15 per cent of exports. Apparel and clothing are, for the most part, exported to the European Union. Wine and food products are mainly exported to Russia. These goods were particularly hard hit by the Russian ruble crisis of 1998. Between 1998 and 2001, the value of food and wine exports to Russia contracted by 56 per cent. In 2003, total exports of food and wine were only 72 per cent of their pre-crisis level. Only a small amount of these lost exports to Russia are sent to the EU. With such a narrow, low unit value, and generally declining export stream, imports, growing by 29 per cent annually, greatly exceed the 18 per cent annual rate of growth of exports in the 1999–2003 period, resulting in debilitating trade deficits. Between 1995 and 2003, Moldova’s trade deficit averaged 21 per cent of GDP. This is resulting in a corresponding negative contribution to the GDP, and a growing balance of payments problem. In contrast to its exports, Moldova’s imports are far more diversified. Once dominated by energy imports, Moldova’s import picture has changed dramatically over the last few years. In 1995, energy represented 46 per cent of total imports into Moldova. By 2003, the figure was only 21 per cent. On the other hand, imports of manufactured goods have been on the rise and, in fact, now exceed energy as the leading import group, reaching 30 per cent of 2003 imports (Development Alternatives, 2004). Imports of food products and chemicals and fertilizers have also been increasing and, in 2003, accounted for, respectively, 14 per cent and 12 per cent of total imports. Moldavian trade is highly segmented geographically. Less than 10 per cent of the products being exported to the CIS are also exported to the EU. This means Moldova exports a very different mix of products to the EU than it does to the CIS (Lubarova et al., 2000). As subcontractors to EU companies, Moldova exports significant amounts of clothing and apparel to the EU. It exports the bulk of its agricultural and wine products to Russia and other Eastern European countries. Moldova’s SME sector Private enterprise plays a critical role in the transition economies and this is certainly true of Moldova (EU, 2003). The total number of private enterprises in Moldova has expanded over 37% between 2000 and 2004. In 2004, private companies accounted for 96% of all firms in the country.

Issues on the internationalization of SMEs: Moldova Table 26.1

2000 2001

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SME statistics: Moldova, 2000 and 2001

Agricultural farmers

Self-employed (individual entrepreneur/sole proprietor)

Incorporated enterprises with 1–249 employees

Total number of incorporated SMEs

178 208 203 319

91 900 104 048

19 996 20 518

21 423 22 955

0–99 20–75 employees employees (micro) (small) 17 837 16 479

2 159 4 039

Within the private sector, SMEs dominate, as they do in most Eastern European countries. About 98% of all private firms in Moldova are in the micro to medium range. Not much has changed in this regard between 2000 and 2004 (Table 26.5), Although, between 2000 and 2004, the percentage of Moldova’s firms that are in the micro range grew by 3.2 per cent. This is most likely because the privatization movement was most intense in the 1990s. In terms of net sales, only small changes occurred in these years in the percentage distribution over enterprise type (Table 26.6). Throughout the 2000–2004 period, micro enterprises accounted for between 21 per cent and 22 per cent of net sales within the private sector, the small firms between 27 per cent and 28 per cent, and the medium firms between 27 per cent and 33 per cent. Overall, Moldova’s SMEs captured between 77 per cent and 81 per cent of the country’s economy. The vast majority Moldova’s SMEs are in the agricultural and food processing sector, as Table 26.1 shows. Out of the nearly 292 000 identified SMEs in the country, about 61 per cent are farming enterprises. This sector comprises over 1000 debt-free agricultural enterprises and hundreds of thousands of individual landowners. These new owners produce over 80 per cent of agricultural output. About a third of Moldova’s SMEs, or 32 per cent, are non-farming individual or sole proprietorships. The table also indicates that the vast majority of SMEs in Moldova (about 94 per cent) has more than 75 employees and are therefore in the small to medium-sized range. As far as exports are concerned, most CIS countries have undergone a major reorientation of trade towards the European Union during the 1990s. In 2003, these countries, with the exception of Moldova and Lithuania, sent over half of all their exports into the EU. While it has nearly doubled its trade with the EU in the 1995 to 2003 period, Moldova is far behind Bulgaria, Romania, Slovakia and even Lithuania in EU exporting (see Table 26.2). In this respect, Moldova’s exporting patterns are similar to those of Belarus, Turkmenistan and Uzbekistan (EU, 2003). In 2003, over half of Moldova’s exports went to CIS countries, particularly Russia. For the most part, these included agricultural products and wines. In contrast, it is in importing that Moldova is most active with the West. In 2003, over half of the country’s imports came from non-CIS countries, especially the EU. A large part of these imports was due to the subcontracting relationship Moldova’s garment factories have with larger EU clothing firms who furnish their subcontractors with materials such as yarn and thread with which to ‘cut and make’ final products to be shipped back into the EU. This essentially tolling operation produces little value added within Moldova. Since SMEs dominate Moldova’s economy, it is to them we must turn to account for this poor showing. In general, SMEs are estimated to be more numerous in importing

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Table 26.2

Exports to the EU, 1995 and 2003 (percentage of total exports)

Bulgaria Lithuania Moldova Romania Slovakia

Table 26.3

2000 2001 2002 2003 2004 % change: 2000–2004

Table 26.4

2000 2001 2002 2003 2004 % change 2000–2004

1995

2003

39 36 12 54 37

57 42 23 68 61

Exports by enterprise type, 2000–2004 ($ millions) Micro

Small

Medium

Large

69 64 83 109 161 133%

100 92 95 98 121 21%

115 165 183 187 235 104%

151 205 272 357 449 197%

Imports by enterprise type, 2000–2004 ($ millions) Micro

Small

102 136 183 259 343 236%

181 227 219 355 452 150%

Medium 167 238 284 358 446 167%

Large 214 211 268 363 469 119%

than exporting because of the higher costs of exporting (transport, insurance, nonpayment risk) and lower profits realized in export transactions. In general, the average foreign trading company in Moldova is smaller than a manufacturing firm and employs fewer staff. With fewer fixed assets to offer as collateral, such an operation often faces problems maintaining financial liquidity. Table 26.3 and Table 26.4 present data that compare export and import trends by size category of firm. Firms ranging from the micro to medium category import significantly more than they export at any one point in time (BIZPRO Moldova, 2004). In contrast, import–export ratios are much closer to unity for the large firms. Moreover, in measuring the percentage change in exporting between 2000 and 2004, we note that, while SMEs (especially the micro and medium-sized firms) increased their export activity significantly between 2000 and 2004, the large firms registered a clearly greater increase in the period. Not surprisingly, we find that the percentage

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weight in total volume of exports for SMEs generally declined in the period. On the other hand, SME importing expanded far more compared to the larger firms during this same period. These trends explain the growing trade deficit in the country, which more than doubled between 2002 and 2004, resulting in a contraction in the country’s economy. Methodology With this context, the following sections examine in more detail the internationalization process of Moldova’s SME sectors. This analysis is qualitative rather than econometric in nature. The data at hand lend themselves more to such an approach. Case study analysis proves effective in comparing and contrasting regions and industries in order to arrive at our results. Econometric analysis cannot always capture the level of detailed description required and that is afforded by our source material. For example, a comparison and contrast analysis of the clothing and apparel industry vs. the agricultural and wine producing industries is highly fruitful in isolating and underscoring critical factors in the internationalization process involving Moldova’s SMEs. Then again, the case example of the walnut industry, as described in qualitative terms, offers important insights into the role of the EU and the outward reach of Moldova’s agricultural sector. Through such a qualitative analysis, we can also readily distinguish critical differences between the EU and Eastern Europe in their relationship, and ability to interfere, with the internationalization of Moldova’s SMEs. Ultimately, understanding how SME internationalization can lead to (or hinder) value creation along the production chain of industries lends itself to qualitative analysis, such as in our discussion of the rise of global supermarkets and international quality standards and their impact on limiting international markets for Moldavian industry, or, similarly, in the exploration of EU companies placing barriers in the way of Moldavian SME clothing and apparel firms. The research for these discussions draws on empirical data from a range of sources. These sources include detailed economic analysis of Moldova’s major regions: Chisinau, Balti, Cahul, Causeni, Ceadir-Lunga and Ungeni. These studies, released in 2004, offer rather detailed data and description of the general economy and industrial trends for these regions. These studies are quite useful in that they allow close comparison and contrast of the different industries in these various areas, especially with respect to trading patterns, industrial and agricultural activity, foreign direct investment and the stages of internationalization of SMEs. These data and information are particularly useful in uncovering new insights into ‘staged’ internationalization and ‘inward–outward’ linkages in the internationalization process. A second major category of sources is turned out by international agencies. Certainly EU studies on Moldova are highly valuable in determining the role of the Union in helping or hindering the internationalization – and value-creation – process. Memoranda, policy directives, press releases, regulatory initiatives, country studies and economic analyses published by the EU Commission are important documents for a qualitative analysis of the shifting EU–Moldova relationship. In addition to the EU, international organizations, including the World Bank, IMF and UN, have recently become interested in analysing the current and future prospects of Moldova and its industries, for a number of reasons. It is a small, non-accession country and therefore it might possibly be affected by the recent (2004) addition to the EU of ten Eastern European countries. These government studies are designed to better understand

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just where this country stands with respect to the integration of Europe. Moldova also sits in a fairly pivotal position between West and East and therefore serves as a unique model of internationalization in general, and SME internationalization in particular. The European Union itself – through the council – has examined Moldova and its economy in some detail. These government sources include country profiles, macroeconomic analyses, domestic and international policy, trade trends in aggregate and by industry, internal policies and infrastructural issues. These sources use and analyse both secondary data and information as well as surveying (primary) data undertaken by that particular agency under specific grants. These studies prove particularly useful in providing industry description and activities, and output data as well as detailed data on agricultural and trade activity in Moldova. A third category of sources used are documents turned out by Moldova’s government itself, and individuals who work for the government or for organizations that deal with the Moldavian government, although these are not yet extensive. These sources, nevertheless, are useful in providing data and information on international trade trends and some level of industry analysis. Interviews with ‘connected’ officials also proved useful in this report. Contacts of the author within the country will continue to aid in uncovering new sources. Moreover, international organizations and Moldova’s own government continue to release new information on the country and its SMEs, which should prove invaluable in future studies, both of a qualitative and an econometric nature. The question of inward–outward linkages and SME internationalization Exporting is an essential measure of internationalization since it is generally the first step in entering another country’s markets. Relying upon exports to still-developing countries in Eastern Europe limits the markets for Moldova’s agricultural and wine products and exposes them, and Moldova’s economy as a whole, to repeated economic shocks and uncertainty, an eroding balance of payments situation, and, in turn, contracting GDP. It is the EU that is the market to enter and compete in if Moldova’s agricultural and wine industries hope to expand their markets, reduce their deficits, and activate their agricultural and industrial sectors. For these industries, the next important phase in their internationalization would be to expand their presence in the growing market of the EU by a redirection of their exporting westward. This is not necessarily the case with Moldova’s apparel and garment industry. In contrast to the agricultural and wine sectors, this industry has redirected its international stance westward and today has an active relationship with the EU based on past models of internationalization. Under the Soviet system, Moldova’s garment factories had annual production quotas to fulfil. Materials such as yarn and fabric were assigned to them automatically according to plan. The factories would take the materials, produce garments and then ship the final product back to Russia. After 1989, seeing a beneficial opportunity, European clothing firms increasingly turned to Moldova as a subcontractor. Consequently, The situation is similar today in that Moldova’s garment companies passively fulfil what are now outsourcing contracts with their foreign that is, European, customers, who provide production orders and materials and then receive finished products at reduced tariffs back into the Union (World Bank, 2004). It is largely this industry that accounts for the rise in exports noted above, for the country in general, and the SMEs in particular.

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But this ‘cut and make’ activity on the part of Moldavian firms is essentially a tolling function that creates little value added in Moldova itself. Such tolling activity generates little income for the firms themselves and helps to exacerbate Moldova’s trade deficit situation. For Moldova’s apparel industry, the next important step in its internationalization is to move up the value chain in the production process – beyond the simple and passive ‘cut and make’ operation – so that the industry creates and captures a greater proportion of the total value added in the making and selling of clothing products. Recent theories of internationalization demonstrate a close linkage between ‘inward’ international activity and outward internationalization. These studies saw connections, for example, between earlier inward forward developments, such as being customers of foreign companies, and later outward international movements (Welch and Luostarinen, 1993). For instance, the widening of international relationships and contacts through inward activity can lead later on to outward international opportunities. This model of internationalization might have significant influence, especially for Moldova’s clothing and garment industry, and in fact there is evidence that inward–outward linkages have been important in the expanding external internationalization of a number of transition economies. But, in the case of Moldova, such linkages, if they exist at all, are weak and have not proved effective in upgrading the internationalization of the coutry’s SMEs. What, then, is holding Moldova’s SMEs from moving into these next phases of internationalization? What factors are hindering outward internationalization from evolving from clear inward-focused activity? Certainly, SMEs are the engines of growth for many of the transition economies, in large part because of their innovation, flexibility and ability to internationalize. It is this last benefit that is of critical concern for the transition economies. Certainly, other Eastern European countries have undergone privatization and the subsequent decomposition of large, state-run enterprises into many small and medium-sized firms. Moreover, these SMEs have shown themselves capable of moving up the value chain of internationalization from simple exporting to more complex and active strategies. They have done this through their ability to compete head on with other companies in expanding markets, and in particular the European Union. The following sections then examine what factors (internal and external) may be actual barriers for Moldova’s SMEs to undertake the critical expansion of their international operations. Internal barriers to the internationalization of Moldova’s SMEs: infrastructure, logistics and fragmentation As is true of a number of transition economies, conditions exist in Moldova that place barriers in front of SMEs hoping to move on to the next stage of internationalization. These barriers hinder the growth of individual companies and sectors as well as the country as a whole. These hurdles are both political and infrastructural in nature. For example, Moldova suffers from political corruption and frequent changes in government, which means political risk for potential investors in the country. There are also structural issues. There are, for instance, difficulties and costs in obtaining capital owing to lack of availability and high costs. The political and structural converge here in that government restrictions and regulations limit the performance of banking industry. The underdevelopment of the Moldavian banking system prevents it from playing a central role in modernizing and making more competitive its industry. Transportation also is a serious barrier. In 2002, 91 000 trucks used Moldova’s roads in international traffic, either

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entering or exiting Moldova. Of this traffic, 94 per cent involved nine countries: Russia, Ukraine, Romania, Belarus, Italy, Greece, Bulgaria, Turkey and Germany. The single most important trade involving road transport is truck movements from Russia to Moldova and from Moldova to Romania. However, the use of truck transport to the EU is greatly limited. Moldova’s existing transport infrastructure is relatively extensive but poorly maintained. Little infrastructure is added to address the needs associated with changing trade patterns. In rapidly developing countries, the transport and telecommunications investment accounts for 80 per cent of GDP. In Moldova, it is less than 3 per cent, with the bulk of it going to telecommunications. In addition to direct transport costs, Moldova has yet to develop a sophisticated logistics network comprising freight forwarding, warehousing and related services Compared to international standards, the range of logistics-related services offered in Moldova is narrow, and the quality of these services – reliability, on-time deliveries, and timely information – is low. This deficiency presents a problem for SMEs to expand into foreign markets, especially in the West. This is so because trade with the EU depends as much on timely delivery as on costs. Over four-fifths of Moldova’s exports comprise time-sensitive goods. Time-sensitive trade with non-CIS countries, mainly trade with EU and EU accession countries, has risen dramatically during the 1990s. Moreover, the types of products that are intensely time-sensitive and therefore dependent on the country’s logistics infrastructure are those most vital to the internationalization of Moldova’s SMEs: agricultural and food products, alcoholic beverages (which are both cost- and time-dependent) and garments and apparel. In contrast, the cost sensitive products tend to be the province of the larger firms that depend on economies of scale to compete. The timely delivery of agricultural products to the west is vital (Meenan et al., 2005). It is also a concern if Moldova’s apparel SMEs are to attempt to enter more complex just-in-time relationships with its European clients by moving up the value chain of production. An even more fundamental problem for Moldova has been the land reform schemes of the 1990s. Prior to this, Moldavian agriculture consisted of typical Soviet state and cooperative farm structures from which agroindustrial enterprises received their inputs supplied from large-scale and government-controlled farms. In this system, there was a good match between the supplies of raw materials produced from the farm and the capacities of the processing enterprises (Business Consulting Institute, 2004). There was also good quality control from state-supported teams of agronomists supported by technical staff. With privatization and subsequent land reform, these larger farms broke up and fragmented into much smaller parcels of household and small business farms. These parcels were not economically viable, except in the most favourable areas (BIZPRO Moldova, 2004). This was so because they were simply too small to capture the technical, financial or mechanical means to thrive. Restrictions on finance that plagued the micro and small farm also meant degradation of cooling and storage facilities that severely limited market life of most agricultural products. In addition, no viable wholesale marketing industry developed (BIZPRO Moldova, 2004). This, in turn, meant that Moldova’s farmers could not benefit from a focused, centralized distribution system and the economies of scale and regularity and flexibility in handling products for export that attended it. Consequently, farmers had to carry the financing and scheduling of exporting their own products, a difficult requirement for

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smaller farmers and wine processors. In Moldova’s wine industry, for example, 40 per cent of total vineyard area has been lost since 1985 owing to privatization and fragmentation, and the small vineyards cannot sustain themselves. These micro and SME farms operate small, aging vineyards and equipment. As a result, they produce large quantities of cheap wine (generally semi-dry and semi-sweet wines) with little attention paid to quality (World Bank, 2004). Since the European countries demand higher-quality wine, no more than 1 per cent of Moldova’s wine exports go to the EU (in contrast, over 90 per cent of Moldova’s wines are exported to the Ukraine, Belarus and Kazakhstan). External barriers to the internationalization of Moldova’s SMEs: the EU Can we then say that internal problems and barriers prevent Moldavian SMEs from entering the next phase of internationalization, that is, redirecting export trade from East to West (for the agricultural and wine producing firms) and moving up the value chain in its dealings with the EU (for the apparel firms)? While clearly putting difficult hurdles in the way of SMEs, the question must be asked whether internal issues are the definitive cause of Moldova’s economic stagnation. We should note that all of the internal problems discussed above apply whether Moldova deals with the EU in the West or other transition economies and Russia to the East. Yet, as we discussed, Moldova’s agricultural and wine sectors retain a robust export trade with these countries, despite political risks, costly transportation and a still-developing logistical system. Then, too, SMEs of other transition economies, such as the Baltic States, have been internationalizing westward, not only in terms of breadth but depth as well. That is to say, they are not only increasing exports to, and undertaking subcontracting assignments with, EU companies, but also participating in higher forms of international activity within the EU, such as joint partnerships, mergers and acquisitions, and licensing and franchising. The SMEs in these countries therefore are playing a more active role in the EU economy and raising their nation’s economies as a result, despite facing a set of internal problems similar to those of Moldova. Moreover, Moldova possesses a number of important comparative advantages – favourable geographic location between the EU and Russia; inexpensive labour and land; skilled workforce – equal to or greater than other, more successful, transition economies (World Bank, 2004). It appears, then, that the difficulties facing Moldova extend beyond these domestic problems and involve to an important degree external developments that need to be considered. More precisely, they depend on the ways in which external movements intersect and act dysfunctionally with Moldova’s decaying infrastructure. This then leads us to ask to what extent the continuing growth and integration in the European Union (EU) are a benefit for, or a detriment to, Moldova and the internationalization of its SMEs. Does it offer possibilities that can help Moldova overcome its internal barriers to internationalization, or does it exacerbate the already difficult situation in Moldova? And why, if the EU actively engages Moldova’s industries (such as apparel and clothing) through such inward activity as subcontracting, has not this led to a more outward international push on the part of Moldova? Indeed, it might be expected that the presence of a growing, more coherent EU market, lower tariffs, lessened restrictions on foreign direct investment and the fact that Moldova’s Eastern European neighbours can serve as entry points into the EU as a whole, should spur Moldova’s SMEs and their internationalization activities.

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To address these issues, we once again turn to the two major sectors: agriculture (including wine production) and apparel and clothing on the other. These sectors provide insights into ‘inward-outward’ linkages and the extent and limits of their impact on the internationalization of SMEs. The agricultural sector: redirection of exports The expansion of the EU eastward offers certain advantages to Moldova. For example, Moldova’s market access to the accession Eastern European countries may improve since tariffs in some of Eastern Europe’s largest markets – Poland and Hungary – are likely to decline as these countries implement the common external tariff and adopt the EU’s Generalized System of Preferences (GSP) system. However, Moldova and other non-accession countries are the odd men out when it comes to redirecting trade toward the West. If Moldova attempts to sell its products in the EU, it must increasingly compete with Eastern countries that, as part of the EU, can trade there with no tariff burdens. While certain of Moldova’s exports may be granted GSP preference in the EU, in practice, only 66 per cent of Moldova’s agricultural exports as a whole that are eligible for GSP preferences actually request entrance to the EU on a preferential (GSP) basis. This means that the remaining 34 per cent must pay the full MFN tariff. This underutilization of the GSP benefits is a result of the time and costs involved in completing documentation required by EU bureaucratic red tape (World Bank, 2004). Moldova’s small agricultural enterprises cannot afford to undertake this process on top of the other trade costs (transportation, logistics, administrative) imposed by their own country. The inability of Moldova’s agricultural and wine industries to take full advantage of trade preferences takes its toll on their ability to compete in EU markets. Tariffs imposed by the EU, which amount to 10 per cent of the total FOB price, constitute the greatest single expense for Moldova’s wineries attempting to export into Europe. And the situation for Moldova has been getting worse. As the EU expands eastward, an important part of Moldova’s agricultural exports must compete in European markets with Eastern European countries who now can sell their output throughout Europe with no tariff burden imposed (and become eligible for EU subsidies). For instance, duties levied on Moldavian exports of apple juice place producers at a competitive disadvantage relative to Polish producers who, as new members of the EU, can enter Europe’s markets duty-free. Increasingly, Moldova’s producers must also compete with agricultural products shipped into Europe by the least developed countries (in the Balkans, Africa, the Caribbean, the Pacific, Latin America) who have signed a free trade agreement or customs union agreement with the EU. Thus, the costs imposed by Moldova’s policies and infrastructural problems mean that the country’s wine producers must severely restrict their trade with the West. It is estimated that a reduction of the tariff costs by half would increase exports of wine and agricultural products into Europe by between 30 per cent and 50 per cent (World Bank, 2004). Tariffs and subsidies are not the only barrier for Moldova’s agricultural and wine industries. There is also the growing difficulty of Moldavian products to penetrate Europe’s global retail enterprises. Large integrated supermarket retailers flourish within fastgrowing regions with large populations and per capita incomes edging toward those with consumer societies. The creation of the single European market, especially over the last

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decade, has seen a concentration of retailers driven by these global supermarkets (Mekay, 2004). The fastest-growing supermarket chains include Carrefour (France), Ahold (Netherlands) and Tesco (UK). The growing dominance of these large-scale retailers poses a barrier to exports from countries like Moldova which traditionally imports fruits and vegetables by channelling them through local retailers and wholesale markets. The largest retailers control over 60 per cent of the fresh imports in some EU markets. These supermarkets do not compete with smaller retailers, but with other supermarkets, on attributes such as quality, yearround availability, presentation, product range and packaging. These sorts of requirements on suppliers result, in large part, from such incidents as the ‘Mad Cow’ scare and such cases as the finding of diesel fuel in Palm oil, Listeria in Cheese, Salmonella and antibiotics in poultry, and e-coli in meats. The continuing EU–US trade dispute over genetically modified foods (GMO) also has had a significant impact on European agricultural and food standards. Increasingly, supermarkets are under control of the EU as they increase their influence over national and international supply chains, thus heightening competition in price and quality. The larger countries of Western Europe (UK, France and Germany) are setting the pace in their application of new quality and food safety standards. The bulk of the European fruit and vegetable market (80 per cent) increasingly is in the hands of a small number of large supermarket chains, which are progressively reducing the number of their favoured suppliers (Mekay, 2004). These global supermarkets make it more difficult for Moldavia’s SMEs to break into Europe’s food and wine markets. These producers usually deliver their goods directly to open markets or to local wholesalers using their own vehicles and without having to meet strict guidelines. These ‘super’ retailers are now making stringent demands on security of delivery and Moldova’s producers are finding it increasingly difficult to meet these new standards. SMEs in the agricultural and wine-producing industries thus are at a decided disadvantage as they risk a large part of their produce being rejected by the EU retailer because of substandard quality. Moldova’s SMEs run an especially high risk since they export fruits and vegetables in bulk, often not calibrated, and of variable quality (World Bank, 2004). And here we have another nexus between external (EU) and internal (Moldova) trade barriers. Small farmers cannot afford the investments in equipment they need to be able to sell to the supermarkets (Mekay, 2004). The supermarkets, for example, in accordance with good farming practice, require suppliers to purchase and use mechanical milking equipment, cooling tanks and ultrahigh temperature treatment. These requirements effectively close Moldova’s small farmer out of the EU’s supply chain. The costs incurred by the SMEs in transporting goods, in covering expenses related to logistics and administrative requirements, and in meeting customs duties are far too great – and the operations of the SMEs far too small – to have the margins to purchase such capital equipment or to spend the sums needed to otherwise institute new and improved agricultural practices. It is likely that this situation will get worse as the EU expands and integrates further. Indeed, current Eastern European countries are likely to become more selective about produce accepted from other countries. For example, as Romania gets closer to accession, it is coming under the sway of the large European retailers. It is therefore requiring higher

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standards of imports into its country. In late 2002, for instance, Romania introduced higher quality standards for the importation of onions, including stricter requirements for packaging and labelling. A recent survey indicates that Moldavian producers believe that Romania is protecting this market with such non-tariff barriers. The wine industry provides a similar story. Within the EU market, the role of the supermarket chains has increased since the late 1980s, led by the UK, but gradually spreading throughout the member states of the EU. These retail outlets work on margins of 15–25 per cent rather than the conventional 35–50 per cent, which has a serious impact on imported wines, especially the cheaper wines and lower-quality wines of Moldova. The lower-quality segment faces a squeeze on price whilst there is continual upward pressure for costly improvements to quality and packaging. Moldova’s nearest competitors in the EU wine market – Bulgaria and Romania – enjoy the advantage of duty-free entry into the EU. Expanding subsidies, and foreign direct investment, permits them to purchase newer technologies and know-how to upgrade the quality and lower the cost of their product, while closer ties to the EU them gains experience in trading and access to major European buyers. As a result, Moldova’s wine producers have not been able to break into the EU market successfully. At best, Moldavian wines may find very limited markets with wholesalers and traditional wine distributors (World Bank, 2004). Certain products, notably shelled walnuts, buck this trend, but in so doing are the exceptions that prove the rule (World Bank, 2004). Moldova has successfully established a strong market position in the EU. It is the largest supplier of shelled walnuts to the Union. The comparative advantages of climate and low-cost labour make Moldova’s walnuts very competitive in the EU, especially in France and Greece. In contrast to other agricultural products in Moldova, the vast majority (over 84 per cent) of walnut producers, most of whom are SMEs, successfully engage the EU’s GSP option, which greatly reduces, and in some cases eliminates, tariffs. Moreover, the uniformly high quality of Moldova’s walnuts allows producers access to the large retail supermarkets, as well as the traditional distribution channels. The issue of instituting costly production-improving technologies and methods in farming is not as critical as for other of Moldova’s agricultural products, since producers easily meet EU standards. EU expansion has proved a positive development in this one exceptional case. This example of Moldova’s agricultural sector does not point to inward–outward linkages as a particularly critical factor in the internationalization of the country’s SME sector. Certainly, networks established during the Soviet period may have helped Moldova’s agricultural trade with post-1989 Russia. However, if true, these linkages appear to be holding the sector hostage and making it difficult to break free to explore the more important option of forming ties with the EU. In part, this is due to the extensive network of free trade agreements that Moldova’s agricultural sector has with Russia and other CIS countries. The fact that the EU is making it difficult for the sector to enter and take part in its trading area and that Moldova’s agricultural industries are at least assured a ‘friendly’ market in the East, means there is little incentive to break old trading ties. However, the case of Moldova’s walnut industry is instructive. That industry, without such an extensive network in Russia and therefore without a steady and assured market in the East, was willing to push its way through into the EU. This outward international activity has less to do with the inward influence of the EU and more with the comparative advantage they could exploit. Then, too, the industry did not have an already

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established trading network in the East to fall back on. The walnut producers, on their own, took pains to get the advantage of GSP preferences and upgraded quality and production to be competitive in the EU market. Only then could they begin to establish a network in the EU and then enter their markets. We can conclude, then, that either ‘inward–outward’ linkages hindered Moldova from entering the important EU market (because the agricultural industry, with an already established Eastern network, had little incentive to shift westward), or that (in the case of walnuts) it did not apply at all (it cleaned up its own house before being accepted in the EU). But these considerations do not answer the question of what would happen if foreign direct investment from the EU were to enter the country in significant numbers and in such a form as to modernize Moldova’s productive capacity and marketing channels. Would not this ‘inward’ flow lead to an upgraded Moldovan industry which, in turn, would allow it to compete better in the international marketplace? Could we not then say that ‘inward–outward’ linkages applied? When we turn to Moldova’s clothing and apparel industry, in which the EU has invested significantly, we see that this may, in fact, not be so, for these pre-existing inward influences may, in fact, become direct barriers to – rather than agents of – further internationalization. The clothing and apparel sector: advancing on Porter’s value chain As with its agricultural sector, most clothing and apparel companies in Moldova are SMEs. These companies are far more active than the agricultural and wine-processing enterprises in internationalizing within the EU. The industry offers the West a clear comparative advantage in terms of labour costs over other European and Asian countries. For example, whereas in the Baltic countries the average price in the making of clothes is $0.114 per minute, in Moldova, it is only $0.035 per standard minute. The concept of the value chain and its role in competitive strategies is a central concern in attempting to understand the structure and dynamics of Moldova’s clothing and apparel industry (Porter, 1980; 1985). It is clear that West to East outsourcing or OPT (‘Outward Processing Traffic’) is the main driving force for Moldova’s apparel exports. OPT is a special EU regulation allowing preferential customs treatment to EU companies that outsource apparel production through the providing of materials of EU origin. In this case, import duty by EU companies is paid only on the value added at re-entry to the EU. In this system, EU customers supply materials (yarn and fabrics) to Moldova-based companies for processing. In 2001, more than 80 per cent of textile materials were imported from EU customers for processing by Moldova, with 75 per cent of apparel exports heading back to the EU. Because of compelling comparative advantages, including cheap labour, the period 1998 to 2003 saw 25 per cent annual growth in the export of apparel to the EU. The difficulty for these firms is that they remain embedded in low value-added tolling (‘cut-and make’) activities which severely limits income and net profits. Moldova can overcome this by moving up the next stages of development in value-added stairway. Currently, Moldova’s garment industry inhabits Stage 1, which is a purely outsourcing activity. Exports of apparel and clothing to the EU leave the initiative with the buyer who typically provides design specifications, furnishes all the materials, handles compliance with norms and standards, and markets and distributes the finished goods to the end

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consumer. For example, Steilmann, one of the largest apparel groups in Germany, has a joint venture factory in Moldova producing ladies’ coats, jackets and blazers. Production, marketing and distribution are planned and controlled by Steilmann’s corporate offices in Germany. Table 26.5 indicates that the only skills and technology needed within this early stage are manufacturing and production machinery. The most important comparative advantage a country in this stage can have is cheap labour. For each stage, the table also estimates the degree of control a country can have in a process, in terms of percentage of total value of a product it adds to the final product. An industry ‘stuck’ in the first stage can, on average, claim no more than 15–25 per cent value input per garment. As an industry (or company) ascends to higher levels along the ‘value-added stairway’, it takes greater control of the production and distribution functions. To do so, cheap labour becomes less a comparative advantage. Rather, it must expand the breadth and depth of its skill base and technological capability. It must also incorporate greater strategic management, logistical (such as just-in-time), design and marketing/distribution capabilities. European producers play a less dominant role in the joint venture relationships. They no longer supply (and own) the materials and control the overall process. They now become more equal partners in the arrangements, possibly taking on the role of supplier of capital and distributor of final products into selected European markets. Despite attempts by Moldova’s apparel producers to break out of Stage 1, they still remain firmly embedded there. On average, they sold 93 per cent of their capacity on a ‘Cut-and-Make’ (CM) basis, 2 per cent on full price subcontracting, and 5 per cent under their own label. None of Moldova’s apparel companies sell private label services. With such low value added permeating the industry, very little income is generated within Moldavian apparel firms. Consequently, SME firms cannot generate sufficient cash to modernize plants and equipment, such as with advanced machinery and computerized pattern design. Certainly, internal problems in Moldova do not help to facilitate the movement of the industry to higher stages in the value chain. As a firm takes on more shares of the production, marketing and distribution function, it relies less on its European partner to handle these matters and becomes more dependent on its own resources and those offered within his country. Clearly, the costs of transportation, logistics and related matters increase as the firm takes on more of the responsibilities of the production cycle (World Bank, 2004). Table 26.6 compares Moldova and Eastern Europe as a whole with respect to the percentage of total production costs represented by these country-specific costs. As is seen, these costs are higher by two to three percentage points at each stage in Moldova than for Eastern Europe as a whole. But the growth and integration of the European Union appear to pose an even greater barrier to Moldova’s garment and clothing industry. With the evolution of the European single market, customers throughout the EU expect to be provided with full service by clothing and apparel companies, including garment and pattern design, material sourcing and manufacturing. This provides an added incentive for European companies to retain as much control over the entire process as possible. If they form joint ventures with cheap labour countries such as Moldova, companies such as Steilmann’s want to be sure to retain the dominant role. They are, therefore, less than anxious to help Moldova out of its Stage 1 position by providing investment funds and technology needed for high-valued

467

PL

OL

IV.

FOB

II.

III.

Manufacturer sells cutting and manufacturing services only Temporary imports of all materials, which are owned by the customer For CMT, same as for CM, except manufacturer buys some of the accessories, such as buttons, threads, etc

CM, CMT

I.

Own label

Manufacturer designs collections independently or jointly with the customer. The full value products are delivered under customer’s trademark

Private label

Manufacturer buys all materials according to the customers’ specs and at delivery invoices full value of the product

Full price, full package

Meaning

Manufacturing, materials sourcing, pattern design, garment design, marketing

Manufacturing, materials sourcing, pattern design, garment design

Manufacturing, materials sourcing, pattern design

Manufacturing

Skills needed

Value-added stairway of the international garment trade

Stage

Table 26.5

25%–50%

15%–25%

Control over process (% of value added)

Production machinery, 75%–100% pattern design CAD, Internet, garment design CAD, marketing

Production machinery, 50%–75% pattern design CAD, Internet, Garment design CAD

Production machinery, pattern design CAD, Internet

Production machinery

Technology needed

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Table 26.6 Estimated percentage of the total costs in the making, transportation and distribution of garments and clothing, by stage in the value chain Stage in the value chain I II III IV

‘Country’ costs (% of total production costs) Eastern Europe*

‘Country’ costs (% of total production costs) Moldova

5% 7% 10% 13%

7% 9% 12% 15%

Note: * Average ‘country costs’ for the major Eastern European countries.

activity. Moreover, any foreign investment money that might filter from West to East is more likely to be diverted to Eastern European countries that are already part of the EU, or are expected to become a member shortly. For example, Romania is far more attractive for Western FDI than Moldova since it is an accession country, while Moldova is not. A second factor involves customs requirements. The more a company attempts to move up the value chain, the more expensive and time-consuming become customs clearance, import duty procedures and related EU requirements. Especially onerous are the costs and time required to satisfy EU customs authorities on the ‘rules of origin’ requirements in order to obtain preferential treatment. In order to gain access to the EU on a preferential basis, Moldova producers would have to prove that they exported their fabric from the EU rather than from low-cost areas, such as India and China. Currently, the costs and responsibilities for doing this rest with the dominant, European ‘joint’ partners. But, if companies in Moldova were to attempt to move up the value chain, they would need to take over these responsibilities for themselves. In doing so, they would be placed in a potentially untenable economic position: to employ cheap labour countries and for-go critical trade preferences in entering EU markets, or to enter the Union under preferential treatment but at considerable expense and time proving ‘rule of origin’ requirements and prohibited from taking advantage of important economies by sourcing from non-EU cheap labour countries. Finally, there is the issue of international standards. Just as the rise of the global supermarket within the EU constructed barriers to entry into Europe by Moldova’s agricultural and wine producing sectors, so the recent influence of international standards in clothing and apparel is a serious hindrance for Moldova’s firms to enter higher stages of the value chain. In particular, the industry standards developed by the International Organization for Standardization (ISO 9000) are a product of, and closely embraced by, the EU community. In part this is because, in contrast to the US legal system, the EU legal regime is based largely on a code system that is less reliant on private (civil) litigation than in the US. European consumers who purchase products that fail cannot readily seek redress in the courts. As a consequence, Europe relies more heavily on certification requirements in general and ISO quality management standards (ISO 9000) in particular across the EU. As the EU has grown, meeting ISO quality standards has become increasingly critical for any company to do business in the region.

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Table 26.7 Number of companies within selected transition countries with ISO 9000 Certification

Bulgaria Czech Republic Romania Moldova

1995

1996

1997

1998

1999

2000

2001

2002

3 180

14 366

42 746

96 1 443

199 1 500

259 3 855

469 5 627

883 N/A

42

61

214

269 3

466 4

1 032 6

1 670 10

N/A 11

But meeting ISO standards in European markets is difficult and costly, involving the performing of multiple tests and the obtaining of different certificates of conformity. The small firm in Moldova does not generally have the resources to obtain the needed ISO 9000 certification. Compared to its neighbours (Bulgaria, the Czech Republic and Romania), Moldova has very few companies with ISO 9000 certification (Table 26.7) Europe’s international standards requirements affect the apparel and clothing industry particularly deeply. The ISO has developed over 80 standards for the clothing and apparel industry that touch on such components as fibres, yarns, textile products and related materials. The EU countries regularly enforce these standards and the Union expects the same for the accession countries. For those apparel and clothing companies operating in Stage 1 of the value chain, this restriction is not so onerous simply because assuring adherence to ISO standards is the responsibility of the dominant (that is, EU) partner. But, as an SME in Moldova’s apparel and clothing industry attempts to move into higher stages, he becomes progressively more responsible for quality control. Without the financial means – or his own government’s help – in adopting ISO quality standards, the company cannot attract FDI from Europe, nor could it compete effectively against other ISO-compliant firms in the European market. The case of Moldova’s clothing and apparel industry, then, shows that inward international activity does not necessarily lead to advancing outward expansion by a country. Certainly, Moldova’s clothing and apparel industry benefited up to a point from contracts and investment on the part of the EU. But this very inward activity continues to prevent Moldova from moving up the value chain. The EU, with its attention (and investments) focused on the new Eastern European members, has scarce resources for upgrading Moldova’s industries. And, in any case, Moldova provides the EU with what the Union wants and needs. It is not necessarily to the EU’s advantage to have Moldova expand internationally beyond its current status. This ‘don’t rock the boat’ mentality on the part of the EU means that the observed inward–outward linkages act as a brake to further international exposure for Moldova. In contrast to Moldova, we offer the Baltic States as an example of countries whose clothing and apparel industries have been gradually moving from being Stage I contractors up the value chain. As countries with somewhat larger economies than Moldova, their SMEs are, on average, somewhat larger and therefore possess more resources than their Moldavian counterparts. As countries close to the EU and, as of 2004, an integral part of it, their apparel and clothing industries have free access to EU’s preference system

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and therefore competitive advantage in European markets over non-EU members. They also receive subsidies from the EU that help their industries, including clothing and apparel, modernize and meet ISO standards. Their own countries, to be in line with the other Western European countries in the Union, now offer liberal trade policies and incentives for the formation of integrated, full-service companies. As a result of all this, we see that, in these countries, several firms begin to employ designers and start their own collections, as well as offering FOB and private label services to foreign customers. These countries are host to a swelling number of clothing and apparel joint ventures and fully foreign-owned firms. These, in turn, bring in further know-how and trigger new and well-organized spin-off companies, leading to an expanding capability in design, marketing, finance and merchandizing. Discussion This study examined the internationalization of SMEs within a single country – Moldova – that has remained outside of the European Union and thus, along with certain other CIS countries, has been marginalized and isolated within Eastern Europe. Through an examination of Moldova in particular, this study offers an interesting case of the extent and limits of value creation within the SME population in one of the ‘slow growth’ transition economies. In doing this, it furthers our understanding of the reasons why countries such as Moldova have not been able to achieve the same economic benefits of globalization as have been captured by other Eastern European economies. SMEs and value creation Our investigation of Moldova helps us understand the extent and limits of small and medium-sized firms in the internationalization and value creation process. In the first place, the internationalization of SMEs appears to be quite important for value creation and economic growth in a European transition economy. This is because, in the wake of the privatization movement, a multitude of SMEs were carved out of the large, uneconomic formerly state-run companies. As a consequence, by the turn of the twenty-first century, the health of these countries’ economies (their ability to create jobs and growth) depended on the viability and creativity of the SMEs. For industries such as textiles and clothing, the vast majority – between 60 per cent and 95 per cent – can be categorized as SMEs. SMEs are generally considered to be flexible and innovative. For example, within the US and EU, the bulk of companies considered as leaders in twenty-first century technology (such as nanotechnology) are micro to small and medium-sized firms. This trend has been contrasted with the norm for innovative technology in the post World War II period when the large integrated firms were the innovative engines of creative destruction. Nevertheless, our study forces us to reconsider some of these assumptions about the role of the small and medium-sized enterprise in twenty-first century value creation and economic growth. For instance, the case of Moldova suggests that the size of a firm can hinder internationalization and value creation if it becomes too small. In this case, it falls below some minimum size so that various economies are lost. Within both Moldova’s agricultural and textile and clothing industries, firms could not proceed beyond a certain evolutionary point because they simply never grew large enough to have the capability, capital pool and economic (and political) influence to be able to control the negotiation of terms with EU companies forming joint venture agreements with them. Indeed, their

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lack of size and, in turn, reach left them unaware of the pricing policies of EU companies and thus put them at a severe disadvantage when negotiating terms. In these cases, small firms shift down the value as they ‘are on the weak side of the contract relationship’. Such firms are in a precarious position in the value chain. The case of Lithuania is quite different. As our studies indicate, textile and apparel firms were able to grow out of their SME status. As they did so, they became more integrated – in both the forward and backward directions – and eventually achieved an equal (or close to equal) status with their EU partners. These firms are able to build on subcontracting to invest to capture higher value production, such as adding new sewing processes, including buttonholing, embroidery or finishing, such as labelling packing, and bar coding, as well as distribution, marketing and advertising. In this case, size and reach, and geographical proximity, meant the firms captured more leverage with EU companies in their negotiations. These cases appear to suggest that SMEs can be at a distinct disadvantage in international value creation processes. They can indeed wield economic leverage if, for example, they have a clear core competency with which to leverage, such as new technology and patent protection, or otherwise provide important benefits to an existing industrial network, such as exists throughout the EU. Such is not the case of Moldova, with the result that its SMEs have difficulty evolving past the lowreturn stages of internationalization. Our examination of this stagnation process forces us to reconsider some of the basic concepts of the ‘Stage theory of internationalization’. Stage theory and value creation Our study shows that Moldova’s main industries appear to follow the stage theory of internationalization, that is, one of step-wise increasing commitment to foreign markets (Johanson and Vahlne, 1977). At the same time, even within a country, not all industries are in the same stage of international development. Within Moldova, the agriculture, wine producing and the clothing and apparel industries are at different stages of internationalization. It is is certainly true as well for the same industry within two countries. Thus, for Lithuania and Moldova, the textile and clothing industry is not following the same step-wise trajectory: for Lithuania, it is moving fairly steadily and rapidly up the stagewise value-creation ladder, while in Moldova it remains stagnating within the very lowest (and least value-creating) levels (EKT Group, 2004). Our investigation also uncovered a complicating factor of the stage-wise theory of internationalization and value creation. In the first place, it is incorrect to make too great a distinction between different stages of internationalization. In particular, our study shows that, rather than exporting and joint venturing being separate stages in the value chain, with exporting being situated lower down the chain, we have seen a converging or even merging of these stages. For the textile and clothing industry in Moldova, we have seen that the two ‘stages’ actually operate in tandem in a reinforcing manner: firms in these countries form joint venture arrangements with EU (and sometimes Eastern) firms with the former exporting finished (or semi-finished) products back to the EU partners. If too great a distinction should not be made between exporting and joint venturing – in that they can operate simultaneously, in tandem and synergistically – a greater distinction needs to be made of the various sub-stages making up exporting and joint venturing activities. That is to say, our study shows that what are traditionally taken to be discrete stages of international activity in reality can be further divided into distinct sub-stages

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with different capability and potential for value creation. For instance, we find that there are gradations of internationalization and value creation within the category of exporting activity itself. If exporting is considered one of the early stages in SME internationalization, there are higher and lower ‘sub-stages’, within the exporting category. Within Moldova, for example, economic growth in Eastern Europe depends on redirecting international allegiances, at least economically, from Russia and other CIS countries, to the expanding European Union. These older, traditional Eastern markets remain highly risky for a country too dependent on them and can offer but limited value creation potential in the long run. Rather, tapping into the ever-expanding and increasingly influential, wealthier and more sophisticated EU market is the sine qua non of future market growth for the Eastern European countries. As we have seen, Moldova’s industries have only been partly successful in shifting its exporting activity to the West. Its agricultural and wine-making industries remain oriented towards the East and its clothing and apparel industry has not yet reached a significant level of integration into the EU. Thus even this early stage of internationalization has not been fully stabilized and made coherent enough for Moldova’s textile and apparel industry to serve as a solid foundation upon which to base further upward movement along the value creation ladder. In a similar vein, even if we accept that the joint venture is a more advanced stage of international development and value creation relative to exporting, it is also true that there are different gradations and degrees of joint venture arrangements. Increasingly, Lithuania’s textile and clothing industry has entered into what we can call ‘equal partner’ JV arrangements with EU countries (EKT Group, 2004). This in turn has led to increased investment in Lithuania, modernization of machinery and plants, and growing participation by Lithuanian firms in such high value-added activities as vertical integration of production and international retailing and branding. In stark contrast, we saw how Moldova’s textile and clothing industry stagnated within passive joint venture arrangements. As the minor partner in these arrangements, the industry captured only a small percentage of the total value added, thus retarding its economic growth. The next developmental stage for this industry, then, would be to evolve along the same lines as Lithuania, from passive contract partner to a more dominant player in joint ventures that accommodated the industry’s increasing control over the production, distribution and marketing process and, in turn, over the creation and capturing of the potential total value added. At the bottom of Moldova’s inability to energize its SMEs so that they can lead their agricultural and clothing industries to higher levels of internationalization and, in turn, value creation, is an apparent breakdown in the ‘inward–outward linkage’ mechanism that is supposed to create critical information, expertise and networks to propel a country into the higher realms of international activity. This has not yet occurred in Moldova, and the comparison of the textile and apparel industries of Moldova and the more advanced international capabilities of Lithuania is instructive. The EU and inward-outward linkages How does one account for differences that we have observed in the rate and direction of value creation within the textile and clothing industry between Lithuania and Moldova? On one level, we can turn to internal policies and regulations. In the case of Lithuania, internal conditions have proved beneficial to value creation. In contrast, Moldova

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illustrates how such internal problems as political instability, transportation and logistical costs, lack of cheap capital and unfavourable taxation, fail to offer critical support to – and indeed put serious barriers in the way of – the country’s SME firms in their efforts to create value by competing in international markets. This study, then, at a minimum, suggests the need for certain transition economies to look inward to revise economic, fiscal and political policy in order to better support their SMEs as they attempt the critical process of internationalizing. But this study also indicates that such efforts, while important, are not by themselves sufficient explanation. As observed, other industries within other Eastern European countries that also have had internal problems show international vitality and an active trade stance that creates value. Moreover, attention from the West in the form of foreign direct investment would alleviate a number of constraints to internationalization within Moldova, as was seen to be true in Lithuania. This then leaves the question of why FDI is forthcoming in certain countries for certain industries and not others. The progressive expansion and further integration of the EU is generally believed an essential agent for growth for the developing and transition economies of East Europe. This study suggests that this may be true enough for those countries that have either just entered the EU family or are on track to do so over the next few years. After all, these countries, such as Lithuania, secure essential benefits that they did not previously have (and despite the problems that often arise for EU countries owing to non-optimal economic area issues). These benefits include free access to an ever-growing market, economic support in the form of subsidies, greater monetary stability, regulatory protection, and so forth. But what of those countries that are not so favoured? These non-accession countries find themselves increasingly distanced from this market and therefore marginalized. Whereas in the past these countries’ SMEs could at least trade with individual Eastern European neighbours, even this option becomes closed off to them as the EU has expanded from West to East and absorbed these neighbours into the EU system. Thus, the non-accession countries find themselves facing a growing monolithic entity that provides competitive advantages for its own members and thus relatively fewer opportunities for outlier countries to compete in the vital Western market. In the case of Moldova, the EU acts – both directly and indirectly – as a barrier to value creation. Its industries, made up of small and undercapitalized SMEs, stay imprisoned and stagnating within the lower (and unprofitable) reaches of the value chain. This issue centres on the question of inward–outward linkages in the internationalization process. Certainly, we find such strong links in the case of Lithuania where earlier inward trade and investment on the part of the EU did indeed lead through a sort of multiplier effect to even greater value-creating external activity by the Lithuanian firms as they grew and extended their reach, geographically and functionally, across Europe (EKT Group, 2004; Textile Industry in Lithuania, 2003). But the case with Moldova is very different. The EU’s internal activity there (at best, in the form of contracting SMEs to undertake tolling work) has not evolved in any regular way. Indeed, because such tolling activity suits the EU countries quite well, especially considering Moldova’s very low labour costs, and because, as a non-member, Moldova cannot readily integrate with the Union’s regulatory and quality control requirements, the EU is not particularly interested in helping to push Moldova’s industries up the value chain. In this sense, we have a case which seems to contradict the current theory of inward–outward linkages. Rather than causing an expansion in outward international

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activity, the very inward activity conducted by the EU, because it is so comfortable to maintain, actually acts as a deterrent in inducing Moldova to move up the internationalization value chain. Because the expansion and integration of the European Union appears, both directly and indirectly, to be a principal cause hindering value creation, and thus economic growth, in such countries, our study further adds insight into the growing importance of pan-European industrial networks in large regional economic groupings. Conclusion: internationalization, value creation and the ‘seamless’ industrial network This study suggests that that regionalization, such as is typified by the expanding European Union, can directly and indirectly hinder significantly the extent and intensity of internationalization activities of other countries that are outlier nations (such as Moldova) in the sense that they are outside of the regional grouping’s orbit. It makes sense that Western European countries would favour EU members. For example, it is easier and cheaper to trade with other EU members. Since 2004, this applies to the ten Eastern European accession countries. In this study, the question arose why Western Europe goes further than this and actively attempts, often with success, to invest and upgrade the industries of accession countries so that they can more readily move up the value chain, while holding back such outlier nations as Moldova. We found that, certainly, Moldova’s SMEs were on the whole below the minimum economic size, that its internal infrastructure remains troubling, and that the country’s low wages provide little inducement for Western European companies to help to upgrade machinery and plant. However, as was pointed out, other accession countries, including Lithuania itself, were in a similar situation in the 1990s. What can be suggested here is that an important advantage that the accession countries can claim is that, because of common processing standards, currencies of exchange and product quality requirements, they more easily fit into the fabric of the pan-European industrial network. This is important because, with the rise of Internet-based global production and the demand for international just-in-time logistics, these stages in the value chain, such as in the apparel industry, are becoming increasingly interdependent. The supply chain from sourcing of raw materials via design and production to distribution and marketing is being organized as an integrated production network where the production is strategically located and where it can contribute the most value of the end product, including providing the value added capability of just-in-time delivery. The critical point is to make goods, information and payments flow smoothly at each link in the production chain of an industry. To do this, a number of logistics and business services are needed. Integration of information and flows of goods and payments are only possible if all the links in the chain use compatible standards. For example, subcontractors in the textile and apparel industry are increasingly required to add bar codes that comply with EU industry standards to garments before they are shipped. Therefore, as countries join the EU, they also become part of the ever-expanding and increasingly integrated production network (such as the European-wide textile and apparel industry network) that defines their industry. The growth of an industry’ network, such as the textile and apparel network, occurs as it becomes part of the overall production structure. The accession countries that join the network certainly achieve significant economies of scale over a number of dimensions that they did not have access to before.

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But the EU and the major companies working within it also increasingly have a stake in ensuring that these new additions to the network grow and prosper as they integrate more or less seamlessly into the pan-Europe industrial structure. This is so because successful additions to the network benefit all members through ever-growing economies. Moreover, as the network expands and becomes increasingly interconnected, bottlenecks that occur anywhere in an industry’s network cause problems throughout the system that decrease the value in the activities of all members. In the apparel industry, for example, such problems can lead to delays in delivery, thus reducing the final value of fashion-centred clothing. The EU and the major companies in its various industries understand that it is therefore critical that the new companies be supported as they attempt to move up the value chain of their industry. By so doing, all members within that system themselves achieve greater value added. It is for this reason that inward–outward linkages can appear so strong in Lithuania’s textile and apparel industry. In contrast, a non-accession country like Moldova simply does not figure in this equation. While the fact that Moldova’s textile and apparel industry is more rooted to the EU than is its agricultural sector indicates that it is more integrable with Western Europe’s industrial network, this integration only goes so far. As we have seen, Moldova’s industry has not had an easy time more fully incorporating itself into Europe’s production system. Quality, standards, currency and even cultural issues have prevented this. As a result, Moldova’s textile and apparel firms have not been able to become a seamless part of the Pan-Europe clothing industry. Thus, investing in this country does not add much to the value to existing EU members, nor would problems that arise in this industry greatly affect the existing European textile and apparel industrial network. This is not to say that Western European companies do not value Moldova’s comparative advantage in cheap labour. but this is as far as it goes. Indeed, the very fact of this advantage, and that the EU has little incentive to help the country’s clothing industry move beyond it, helps to maintain Moldova’s textile and apparel industry in its low position in the value chain. This is why, for example, we found a weaker inward–outward internationalization link here than we did in Lithuania. Implications These conclusions point to a number of implications. In the first place, as indicated previously, they force a reconsideration of certain current theories and beliefs regarding the internationalization process in general. For example, we see that the role of SMEs in economic growth is far from certain. The creation of SMEs through privatization (especially in Eastern Europe) can result in firms too small to exert critical influence and to achieve required economies. Further, the results underscore factors that may retard the internationalization process of SMEs (and other firms) through the various stages of internationalization. Thus, while not contradicting the stage theory, the results show that movement up through the various stages is far from automatic, but may be thwarted for various internal and external reasons. Then, too, the study reconsiders the concept of ‘inward–outward’ linkages in the internationalization process. SMEs in particular are assumed to benefit from initial inward activity by larger companies. In fact, we find that this is not necessarily the case. Indeed, in the case of an outlier country like Moldova, inward activity from EU companies serves as barriers to Moldavian SMEs in their attempt to enter into more sophisticated (and value-creating) international arrangements.

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Beyond these theoretical considerations are potential geoeconomic consequences that stem from the rigidities inherent in the European Union’s growing and increasingly interdependent industrial network. These considerations question the relationship that the EU will continue to have with those Eastern European countries that are not part of the Union. The case of Moldova begs the question of whether wealth – in the form of value added – continues to be transferred from East to West, and what this implies with respect to the economic, social and political stability of Eastern Europe. Indeed, given the fact that a number of factors continue to prevent even the Eastern European accession countries from seamlessly integrating into EU’s industrial network – currency issues, the subsidy questions, labour inelasticities, standard differentials, and so forth – this may remain a problem even for current Eastern European members. Will, then, Eastern Europe’s inability to meld into Western Europe’s economic network exacerbate tensions between West and East with the heightening of problems and conflict between these regions? As one recent study indicates, it is important to ‘examine some of the ways in which the integration of East European [industrial] production into wider production networks is occurring . . . and consider the implications of these trajectories for our understanding of industrial upgrading’ (Pickles and Smith, 2005). There is also the question of the EU’s ability to absorb innovation into its structure. If new technology threatens the EU’s integrated and fine-tuned network, for example by requiring different production standards, setting new levels of quality, and so forth, it may be rejected by the EU as a disruption to the system as a whole. There is indeed evidence that this is happening and that, just as it has been growing and integrating, the EU has been falling behind the US and Asia in new technology and productivity (Moskowitz, 2004). All of this may have profound implications for the continued stability and competitiveness of the world’s largest regional grouping and therefore is of enormous importance for the future course of the globalization movement in Europe. Finally, this research suggests potential future research activity in the field of internationalization and value creation within firms, countries and regions. Our work here examined the important industries in but one outlier country. Additional studies of other industries, countries and even regions are strongly suggested to further our understanding of wide-ranging industrial networking, the internationalization process and value creation in an increasingly global and interconnected economy. References BIZPRO Moldova (2004), ‘EGA assessment survey’, Uniagroprotect Report, Chisinau, Moldova. Business Consulting Institute (2004), ‘Orhei economic growth area: final report’, Chisinau, Moldova. Dana, Léo-Paul (1997), ‘Stalemate in Moldova’, Entrepreneurship, Innovation and Change, 6(3), September, 269–77. Dana, Léo-Paul (2005), When Economies Change Hands: A Survey of Entrepreneurship in the Emerging Markets of Europe from the Balkans to the Baltic States, Binghamton: Haworth Press. Development Alternatives Inc. (2004), ‘Assessing competitiveness in Moldova’s economy’, USAID Study, Bethesda, Maryland. EKT Group (2004), ‘The textile and apparel industry in Lithuania: a study of the industry’s prospects’, Lithuanian Development Agency, Vilnius, Lithuania. EU (2003), ‘Economic development of Moldova: challenges and prospects’, Council of Europe, Parliamentary Assembly Document 979. IMF (2005), ‘Republic of Moldova: selected issues’, IMF Country Report, Washington, DC. Johanson, J. and J. Vahlne (1977), ‘The internationalization process of the firm – a model of knowledge development and increasing market commitments’, Journal of International Business Studies, 8(1), 23–32.

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Knight, G.A. and S.T. Cavusgil (1997), ‘Emerging organizational paradigm for international marketing: the born global firm’, Academy of International Business Annual Meeting Proceedings. Lubarova, L., O. Petrushin and A. Radziwill (2000), ‘Is Moldova ready to grow? Assessment of post-crisis policies (1999–2000)’, Center for Social and Economic Research Report No. 220, Warsaw. Meenan, N., L. Bugaian and S. Tkachenko (2005), ‘Strategic assessment of SME support in Moldova’, USAID Draft Discussion Paper. Mekay, E. (2004), ‘Global supermarkets elbow aside small farmers’, Inter Press Service News Agency. Moskowitz, S. (2004), ‘Globalization, technology, and international competitiveness: the case of the EU vs. the EU’, Proceedings: 2006 Academy of International Business, US Southwest Chapter, Oklahoma City, OK. Oviatt, B.M. and P.P. McDougall (1994), ‘Toward a theory of international new ventures’, Journal of International Business Studies, 25(1), 45–61. Oviatt, B.M. and P.P. McDougall (1999), ‘Accelerated internationalization: why are new and small ventures internationalizing in greater numbers and with increasing speed?’, in Richard Wright (ed.), Research in Global Strategic Management, Stamford, CT: JAI Press. Pickles, J. and A. Smith (2005), ‘Liberalization, integration, and convergence: pan European production networks, post-socialist apparel, and the embedded geographies of competition’, VII ICCEES World Congress, Berlin. Porter, M.E. (1980), Competitive Strategy: Techniques for Analyzing Industries and Competitors, New York: The Free Press. Porter, M.E. (1985), Competitive Advantage, Creating and Sustaining Superior Performance, New York: The Free Press. Pro Era Grup (2004a), ‘Balti economic growth area: final report’, Chisinau, Moldova. Pro Era Grup (2004b), ‘Cahul economic growth area: final report’, Chisinau, Moldova. Pro Era Grup (2004c), ‘Causeni economic growth area: final report’, Chisinau, Moldova. Pro Era Grup (2004d), ‘Ceadir–Lunga economic growth area: final report’, Chisinau, Moldova. Pro Era Grup (2004e), ‘Ungeni economic growth area: final report’, Chisinau, Moldova. Reason, L. and O. Nicolescu (2002), ‘Entrepreneurship in difficult circumstances: internationalization and small and medium-sized enterprises in Eastern Europe’, International Council for Small Business, 47th World Conference. Roolaht, T. (2002), ‘The internationalization of Estonian companies: an exploratory study of relationship aspects’, Dissertationes Rerum Oeconomicarum, Universitatis Tartuensis, Tartu, Estonia. Szabo, A. (2002), ‘The development of the SME sector in the EU accession countries in Central and Eastern Europe’, UNECE International Conference: The Role and Importance of SMEs in the Process of EU Enlargement, Ljubljana, Slovenia. ‘Textile Industry: Business Opportunities in Lithuania’, (2003) Swedish Trade Council, Vilnius, Lithuania. Welch, L.S. and R.K. Luostarinen (1993), ‘Inward and outward connections in internationalization’, Journal of International Marketing, 1(1), 46–58. The World Bank (2004), ‘The Republic of Moldova: trade diagnostics study’, World Bank Report No. 30998MD.

27 Monaco’s forgotten glitter: industrial SMEs and their worldwide appeal Martine Spence

Introduction Nestled between the Mediterranean and the Alps, the Principality of Monaco is best known for its Formula One car racing, its casinos and its luxurious holiday resorts. Overshadowed by the tourism and financial sectors, the country is also home to a welldiversified and thriving industrial base that has overcome the liability of smallness related to its location. The second-smallest country in the world after the Vatican, Monaco occupies an area of two square kilometres, borders France along 4.4km and possesses 4.1km of shoreline. With no arable land or natural resources and all available space used efficiently by buildings, roads or tunnels, some of it even regained from the sea, making the country a model of architectural and productive capacity ingenuity and enabling its high-density population of 16 440 inhabitants per square kilometre (Gouvernement de Monaco, 2003). Although much has been written about what made Monaco famous, the objectives of this chapter are to focus on the country’s industrial sector, the strategies used to overcome the challenges presented by its location and, more specifically, on its international trade activities. The first section will present a brief overview of Monaco’s place in the world, followed by a summary of the industrial sector’s main features. The country’s solutions to attract industrial firms is discussed next. Finally, the contribution of Monegasque SMEs to international trade is analysed. Monaco economy and industrial sector The country’s geographical location and historical development counterbalance, to a certain extent, its liabilities due to its small size. Governed by the longest reigning dynasty in Europe, the Grimaldis, the Principality had revenues of €636M in 2004, featuring a 46 per cent growth since 1995. It is a prosperous city-state with total GDP of €9.8B (Gouvernement de Monaco, 2005) and average GDP per capita of $27 000 (2000 est.) (World Fact Book, 2005). The country benefits from full customs integration with France, which collects and rebates Monegasque trade duties. It also participates in the EU market system through customs union with France which is as well the provider of energy supplies such as electricity and natural gas and ensures its defence. Monaco is a member of a number of supranational organizations and participates actively in several international summits. Given the size of its territory, Monaco is particularly prosperous compared to other small European states, the most significant figure being the revenue per square kilometre (Table 27.1). The subsistence industries of the turn of the century, including a brewery, a flour-mill and a chocolate factory, have been replaced by modern facilities producing world-class 478

Monaco’s forgotten glitter Table 27.1

479

Economic performance of selected small European countries

Countries

Area

Population*

Monaco

2 sq km

32 409

Andorra

468 sq km

70 549

Liechtenstein

160 sq km

33 717

Luxembourg

2 586 sq km

468 571

Malta

316 sq km

398 534

San Marino

61.2 sq km

28 880

GDP/ capita $27 000 (2000 est.) $26 800 (2003 est.) $25 000 (1999 est.) $58 900 (2004 est.) $18 200 (2004 est.) $32 600 (2001 est.)

Revenue $636M (2004) $385M (1997 est.) $424M (1998 est.) $14B (2004 est.) $2B (2004 est.) $400M (2000 est.)

Revenue/ sq km $318M $0.8M $2.64M $5.4M $6.32M $6.5M

Note: * July 2005 estimate. Source: World Fact Book (2005), Gouvernement de Monaco (2005).

outputs. Industrialization was developed after World War II, especially under the direction of HSH Prince Rainier III, nicknamed ‘Le Prince bâtisseur’, ‘The Building Prince’, who reigned between 1949 and 2005 (Edwards, 1992). Most small countries would concentrate their manufacturing activities in areas in which they have a comparative advantage. Monaco, with no natural resources or agriculture as other city-states such as Singapore and Hong Kong, has specialized in high value-added activities in a wide range of sectors (Streeten, 1993). Aside from this criterion, companies establishing themselves in the Principality need to be non-polluting to preserve the quality of life and the environment, given the population high density. The industries are located mainly in Fontvieille, a 250 000 square metres area reclaimed almost entirely from the sea. Monaco’s industrial sector consisted of 106 firms in 2004 (Gouvernement de Monaco, 2005). Revenues from these firms have increased steadily in the past four years, from €734M in 2000 to €862M in 2004, and have weathered the downturn from the beginning of the twenty-first century. They represent about 8 per cent of the revenues from the Monegasque private sector (Gouvernement de Monaco, 2005). Monaco’s industries are grouped into seven main activity clusters which are, in order of importance by revenues, chemical/pharmaceutical/cosmetics; plastic transformation; electrical/electronics; printing and packaging products; steel transformation; textile and clothing; and food processing (Figure 27.1). These industries employed 3792 persons in 2004. Monaco has the unusual situation of negative unemployment, with 32 000 inhabitants and 41 000 jobs and has drawn into the principality a large number of workers from the neighbouring cities of France and Italy. In all sectors, except plastic transformation, the total number of employees decreased by 5 per cent in five years, from 4001 in 1999. According to the Monaco Economic Chamber of Development, this trend may be attributed to gains in productivity and outsourcing of production.

480

0

62

103

14 278 400

412

88 732

100000

150000

250000

600 Employees

800

250 904

200000

Distribution of revenues and employees in sub-industrial sectors, 2002–03

200

23 340

40 292 263

36 746 179 33 996 218

50 000

Gouvernement de Monaco (2005).

Figure 27.1

Source:

Food Processing

Chem/Pharm./Cosmetics

Miscellaneous

Electrical/Electronics

Printing/Packaging

Mechanical

Textiles/Clothing

Plastic Transformation

0

Sales (000s)

Sales / Number of Employees by Sector – 2004

1000

350000

1200

373 592

1130

1094

300000

400 000

Sales

Employees

Monaco’s forgotten glitter

481

Monegasque SMEs, by number of employees, 2003–04 1

Over 300

2 3

101 to 200

Employees

4

5

2003 : 103 firms

5 5

2004 : 108 firms 6

11 10 10

31 to 50 6 16 to 20

4

6

8 9

6 to 10

11 12 11

29 33

13 13

None 0

10

20

30

40

Firms Source: www.gouv.mc (2004a).

Number of firms by size, 2002–03

Figure 27.2 Table 27.2

Origin of main exports and imports, 2004 Exports (in million €)

%

Imports (in million €)

Europe (EU excluding France) Africa America Asia Oceania

387 354

73 67

365 332

71 30 31 9

14 6 6 2

53 24 71 2

Total

528

100

515

% 71 65 11.00 5 14 0 100

Trade balance (in million €) 22 22 18 6 40 7 13

Source: Gouvernement de Monaco (2005).

Monaco’s industrial base is essentially constituted of SMEs (that is, firms with fewer than 250 employees, according to the EU definition (Europa, 2005) (Figure 27.2). In the three leading sectors of chemical/pharmaceutical/cosmetics, plastic transformation and electric/electronics, production is concentrated in the hands of five companies which have become world leaders in their niches and account for 51 per cent of the manufacturing output and 36 per cent of the industrial workforce. These companies have been acquired by multinational groups that provide them with market access. The other 49 per cent of manufacturing output is spread across a number of smaller entities which are also well positioned in the international arena.

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Monegasque industrial firms occupy an area of 656 642 square metres of industrial and administrative space, with 26 per cent or 173 951 square metres located in the Principality itself (Gouvernement de Monaco, 2004a). Monaco’s SMEs and international trade Given its size, the domestic market cannot support large production plants and provide companies with economies of scale. Monegasque firms looking to expand and prosper search for export opportunities in growing niches. The country’s proximity to one of France’s largest cities, Nice, served by the second-busiest French international airport and well connected by train and highway to the rest of Europe, provides local firms with ample opportunities to reach beyond their narrow territory. In 2004, exports from the Principality represented €528M or six per cent of the private sector revenues, not including sales to France a country of 56 million inhabitants considered as domestic sales due to the agreement signed between the two countries. The principality also differentiates between export to the EU, called ‘deliveries’ and to the rest of the world, called ‘exports’. In this paper the term ‘exports’ will be used for all goods sold outside Monaco and France. The EU accounts for the majority of its foreign trade, 67 per cent of exports and 65 per cent of imports in 2004, but shipments to and from other regions, other than Oceania, are not negligible as seen in Table 27.2 (Gouvernement de Monaco, 2005). Overall, the Principality enjoys a positive trade balance. The surplus is particularly significant with other EU countries. Total exports from the principality have grown steadily in the past 10 years, with an increase of 20.17 per cent between 2002 and 2003 alone. Total exports and deliveries from the industrial sector totalled €266M in 2003, or 32 per cent of manufacturing outputs. In each sub-sector exports have progressed, as shown in Table 27.3 with the exception of the food processing and printing industries, which are more traditional and less global. Exports are concentrated in the three leading sectors of the Monegasque industries, with five companies representing 73 per cent of total export revenues (Gouvernement de Monaco, 2004a). These figures, however, need to be considered with caution, given the small number of industrial companies overall and the large differential of size within the same sector. Table 27.3

Evolution of export revenues by industrial sectors, 1997–2003 (million €)

Sector

1997

1998

1999

Pharma Electro Plastic Metal Textile Food Printing Others

81 37 37 5 3 0.18 4 0.8

83 40 35 5 3 0.14 3 0.6

106 45 76 5 4 0.07 3 1

167.98 169.74

240.07

Total

Source: www.gouv.mc (2004a).

2002

2003

% increase

Export propensity (%)

111 107 51 56 46 49 6 7 5 6 0.08 0.21 3 2 1 3

110 60 70 6 7 0.08 2 5

122 58 68 6 7 0.06 2 3

34 36 46 17 43 2 50 73

45 22 26 2 3 0 1 1

234.21 232.08

260.08

266.06

36

2000

2001

Monaco’s forgotten glitter

483

Government incentives to the industrial sector Although it is incorrect to call Monaco a ‘tax haven’, contrary to popular belief, Prince Rainier III nevertheless used tax incentives to attract foreign investments and develop the industrial and commercial sectors of the Principality. This model is not unique to Monaco and has been used more recently to develop the Baltic states of Estonia, Latvia and Lithuania. It has had more success than the model used by Slovakia, for example, which features relatively high taxes and preferential treatment to some investors (Dana, 2005). Monegasques and citizens from countries other than France are exempt from personal income taxes. ‘Sweet taxation’, as it is labelled by the Economic Development Chamber’s treasurer, is only one of the incentives offered to investors, however. Security, stability and social peace, in spite of the 120 nationalities which live side-by-side on this small territory, a good primary and secondary education system with the possibility of starting learning English at an early age, a wide range of top-of-the-range as well as affordable quality sports and artistic activities in Monaco itself and nearby are also attractive features to investors and would-be residents. Aware of the challenges faced by industrial firms owing to lack of space and, consequently, the cost of real estate, the government has implemented a series of schemes to deal with the problem. It increased its territory by 20 per cent by gaining 250 000 square metres from the sea in the quarter of Fontvieille where 100 000 square metres have been dedicated to industrial space and the rest to private lodging, sports and commercial facilities and a heliport. The state has acquired multi-storey industrial buildings, known as Le domaine (The Estate), that it rents at subsidized rates to local companies. The railway and railway station which, by the end of the decade should be served by the TGV, France’s high speed train, have been moved underground, releasing the space they occupied for commercial, industrial and private use (Anonymous, Nice-Matin, 18/07/2005). To make the most of the available space, a network of underground parking lots, lifts, tunnels and roads has been created to manage the flow of traffic in and out of the country efficiently. The Government of Monaco favours high value-added activities on its narrow industrial area. Inventories, which because of today’s advances in logistics are considered more of a hindrance than an enabling factor of industrial processes, have been moved to 20 000 square metres of warehouses in Nice acquired by the Principality. This also reduces traffic as only full trucks are allowed to unload their cargo at the freight centre located under the commercial area, yet another example of how the Monaco infrastructure is being optimized. From there, a fleet of electric vans carries supplies to the various industries and shops all over the territory (interview with Mr Fonteneau from the EDC, July 2005). The Monegasque government provides its local firms with a limited range of export development programmes similar to those offered by COFACE in France. These programmes encourage companies to develop their foreign activities through a risk-sharing scheme: if sales generated by the event two to three years later are not substantial enough to cover the expenses, no refund, or only a partial refund, is required. Two programmes are offered: (a) trade show insurance covers 65 per cent of the expenses incurred (75 per cent in Japan) for the event up to a maximum defined in the contract; (b) prospection insurance covers export initiatives such as the set-up of specialized services, business trips or market studies. The number of times a firms can benefit from the schemes on an annual and per country basis is limited.

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Monegasque firms also have access to European funds through the ‘Eureka’ network if these companies collaborate with EU partners to develop technological innovations leading to the creation of commercializable products or services (Gouvernement de Monaco, 2004d). Finally, awareness that part of SMEs’ success is related to their ability to network (Filion et al., 2003), a forum enabling encounters between local firms and their foreign counterpart, the Economic Development Chamber, was created in 1999. The EDC organizes a number of events with the aim of promoting Monegasque products and services abroad and welcoming foreign buyers and investors. These events include trade missions, trade shows and foreign delegation visits. Whenever possible it tries to implement an integrated approach, that is to say a number of different events over time with the same country to allow acquaintances to develop, and trust to buildup, as, according to Webster, long-term relationships can be viewed as a social and economic process (Webster, 1992; www.cde.mc). Large delegations of 30 to 40 firms participate in missions abroad, enhancing the image of the Principality, especially when high-ranking officials, or even the Prince himself, head the delegation. The EDC also rents spaces at international trade shows and invites local companies to participate under the Monaco pavilion, events which have increased the visibility of local industrial firms abroad (interview with Mr Fonteneau from the EDC, July 2005). Methodology Owing to the addition of new EU members and the globalization of the economy, exports will play a more important part in the future in the Principality overall fiscal revenues. To better track activity in this area, the Government created the Foreign Trade Observatory, which monitors imports and exports transactions with partner countries. The Manufacturing Sector Observatory provides a detailed account of the industrial sector’s local and foreign activities. A detailed analysis of the latest government statistics published, in 2004 and 2005, from these two sources and others has been conducted, with the most significant results reported in the sections above. Primary data relating to present government policies and SMEs’ strategies have been collected through face-to-face interviews with the Economic Chamber of Development and six SMEs from various industrial sectors. Telephone and e-mail interviews have also been carried out with the Department of Economic Expansion of the Government of Monaco to clarify aspects of the published data. The criteria for selecting companies were size – fewer than 250 employees overall to be qualified as SMEs according to EU criteria (Europa, 2005), and a range of different activities to understand sector-specific challenges as well as more global ones. Four of the companies were selected by the Economic Chamber of Development (EDC) because they were representative of their industrial sectors and two were through personal contacts. The interviews were conducted between 4 and 22 July 2005, were taped to make sure no details were lost and lasted between one and two hours. Content validity was enhanced by triangulation as suggested by Yin (2004) and Eisenhardt (1989). Internationalization of Monegasque SMEs: six case studies In this section the internationalization of six SMEs located in Monaco will be analysed. Internationalization is considered to be ‘the process of adapting a firm’s operations

Monaco’s forgotten glitter Table 27.4

485

Demographic profile of participating companies Date first exports

Company

Sector

Employees

Sales

Date created

Export intensity (%)

al.ber.ti

Foundations public works

60 in Monaco 20 in France

N/A

1984

Recently started int’al prospection

Cosmetics laboratories

Cosmetics and perfumes

20 in Monaco 3 in Russia

N/A

1960

1988

25

Interplast

Trading Construction

32 in Monaco 30 in France

€30M

1980

N/A

3

Laboratories Asepta

Cosmetics, feet and hair care products

120 in Monaco 30 in France 10–12 in each of Germany, Switzerland, Belgium, Tunisia, Canada and the US

€20M

1946

1950

20

Manufacture de Monaco

Porcelain gifts and tableware

N/A

N/A

1975

1989

50

MC Company

Textile, swimwear

60 in Monaco

€30M

1986

1988

40

0

(strategy, structure, resources etc.) to the international environment’ as suggested by Calof and Beamish (1995). A demographic profile of the participants is presented in Table 27.4, followed by issues which were raised during the interviews related to these firms’ international strategies. In existence for 33 years on average, the firms interviewed are well established. Cosmetics Laboratories, Laboratoires Asepta and Manufacture de Monaco are family businesses of which the present owners are the second generation in the business. The other three firms have been founded or bought by individuals with many years of experience in the industry. As a consequence, the entrepreneurs have an intimate knowledge of the sectors in which they operate and have established reliable relationships in them. Another characteristic of all the SMEs interviewed is a cautious approach to growth based on selffinancing, which has a direct impact on their approach to international market expansion. As in any economy, some firms have a local orientation, as is the case of the two companies dealing principally with industrial markets, al.ber.ti and Interplast. These two firms could be classified as sporadic exporters while the others are more open to internationalization, either by necessity or vocation and have become regular exporters. Laboratoires Asepta and MC Company internationalized early because of the nature of their products, a growing market and their owners’ visions while Cosmetic Laboratories

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Handbook of research on European business and entrepreneurship

and Manufacture de Monaco first focused on the local market for several years for regulatory and personality reasons, respectively. Such a variety of export behaviours among only six cases drawn from a small economy suggests, as Crick and Jones (2000) have demonstrated, that the export decision is a holistic process to which each firm adapts its strategy according to its set of circumstances. Beyond these differences, the six firms are, however, confronted by the constraints imposed by their location. Location challenges The firms interviewed are niche players and are among the leaders in their respective sectors. Having developed a level of expertise in their area, they have been able to expand their trade to higher levels thanks to innovation, attention to detail and rigour. One associates Monaco with quality and the industrial firms are not exempt from this expectation. According to Mr Mas from Laboratoires Asepta, companies operating in Monaco must maintain an upward spiralling image that started in the past 10 years. The creation of the EDC in 1999, greater openness between companies and exposure to local and global media sustain this trend. It is now unlikely that a company without this upscale image is able to establish itself successfully in Monaco. With production facilities being scarce and expensive and Monegasque firms not being immune to international competition, firms need to adapt their business model and locate the various activities of their value chain in strategically selected places to enhance their competitiveness. For the time being, suppliers and logistics subsidiaries are mainly located in France, other Western European countries and Northern Africa for reasons related to practicality, as well as quality standards which Asian suppliers cannot yet provide on a consistent basis. The four consumer goods firms especially expressed concerns about the current mounting threats from products made in Asia and, to a lesser extent, the know-how which will eventually be coming from Eastern European countries. The focus of all the firms, therefore, is on differentiation in upscale niche markets or the ones requiring non-readily available expertise, with a great deal of effort being put into innovation, quality and customer satisfaction. To illustrate these points, some examples drawn from the interviews follow. Two of the businesses (Cosmetic Laboratories and Manufacture de Monaco) have started outsourcing the majority of their production in the past few months to two years. They have chosen to produce in European regions where the expertise in their areas was readily available at a lower cost in order to be able to face the mounting competition from Asia. For MC Company, better know for its Banana Moon brand of swimwear, subcontracting production is a common practice in the industry. Only 10 per cent of the production is carried out in Monaco, along with all the designing and cutting, for confidentiality reasons. Cut pieces are boxed or bagged at the end of each working day and shipped to workshops in Tunisia for sewing. Interplast business is focused on the watering, swimming pool, construction and public works industries and based on outsourcing quality plastic pipes and joints from European ISO 9002 certified suppliers. The 30 employees located in Monaco work in telemarketing and administration, calling upon hardware stores, public works departments and construction firms in France to sell their products. The other 30 are based in Lyon, a

Monaco’s forgotten glitter

487

strategic hub from which all corners of France can easily be reached, and run the warehouse, shipping the products to Interplast’s clients all over the country. al.ber.ti is a service company specialized in demolition and foundations. al.ber.ti relies on heavy equipment and specific expertise to fulfil the requirements of contracts in Monaco. A subsidiary located in France near Monaco provides services complementary to the core ones and is used to store the equipment, something which would be impossible to do in the Principality. Laboratoires Asepta is the odd one out. Having been granted three floors of production space in the same building by the Government last year (prior to that, production was scattered in various premises in the Principality), the firm concentrates 99 per cent of its production in the country. For regulatory reasons, some production is done in Tunisia as the country does not allow the import of finished products and some filling is carried out in Canada for economic purposes. All companies can draw skilled and semi-skilled labour from the vast pool available from surrounding areas of France and Italy. The challenge, however, is to find qualified executives with relevant management skills as the region has developed, based on a subsistence economy and tourism, and does not have a history of specific trades (Edwards, 1992) as in some areas of France, such as leather tanning and porcelain making, or textiles in Italy. Attracting this type of employee to the Principality and the surrounding areas is not always easy in spite of the climate, the scenery and personal fiscal benefits for non-French citizens because of the sharp increase in the price of real estate in the region in the past 10 years. Monaco is partially dependent on the policies of local French municipalities and financial establishments which are trying to find solutions by building subsidized housing and developing more affordable financial products leading to property ownership (Anonymous, Azur Entreprise, 2005). Fiscal benefits are not a major reason why the four consumer goods companies are located in Monaco. Three of them (Cosmetics Laboratories, Laboratoires Asepta and Manufacture de Monaco) are second-generation owners and continuing the family tradition. MC Company has been created by a native Monegasque and, given the strong attachment of local people to the region, no other location was considered. The fiscal regime weighed more heavily in the choice of business location for Mr Cassan of al.ber.ti and Mr Braux from Interplast. Not short of creativity, these firms demonstrate the flexibility of small firms and their propensity to adapt to constraints. In all cases, the higher value-added activities of design, R&D, market development, marketing and administration are still located in Monaco, fulfilling the vision of Prince Albert II expressed in his inaugural speech on 12 July 2005 (Prince Albert II, 2005). International orientation and strategy development Among SMEs, the owner’s personality and personal objectives are often closely related to the firm’s strategic orientation (Filion et al., 2003). France is the main focus for both Interplast and al.ber.ti and we will first look at the reasons behind these strategic choices. As mentioned previously, Interplast is a trading company specialized in plastic pipes and joints, aimed at the markets of watering systems, swimming pools, construction and public works. The objective of the company is to become the one-stop shop for all the needs in plastic pipes and joints for individuals through home renovation box stores,

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construction contractors and public works departments. The firm has evolved from being an agent for these types of products to being a distributor and, finally, to developing its own brand, Interplast, and deepening its product range. Unique product lines are conceived in conjunction with and outsourced from its European suppliers (none are in France). The firm also offers a range of services to differentiate itself. For instance, a shelving system aimed at box stores (‘Liberplast’) enhances product display and sales efficiency together with inventory management software (‘Libesoft’). The owner, Mr Braux, prefers to concentrate on a market he knows well and cultivates the loyalty of his clients with a team of specialized telemarketers. Besides, selling to other European countries would mean being in direct competition with his own suppliers, which he wants to avoid. Two to three per cent of sales reach foreign markets indirectly through the foreign contracts of French firms and through unsolicited orders. al.ber.ti specializes in demolition and foundations and has developed an expertise working in the confined spaces of Monaco and juggling with the French and Monegasque environmental and labour regulations. Mr Cassan claims that the expertise working in the Principality is such that the company is 10 to 15 years ahead of its closest competitors, which are French. Previously owned by self-made entrepreneurs, the firm was bought two years ago by two trained engineers with international experience and became professionally managed, which is another differentiating element. The new owners’ objective being to maximize profitability, the company bids on contracts which fit this view and in which its expertise can be put to full use. At present, revenues are split equally between work performed in France and in Monaco. The change in management brought with it an opening to international activities, with prospecting having started in Algeria where a lot of construction work is under way. al.berti’s internationalization is, however, opportunistic, relying solely on the relationships established by the owners’ 35 years of industry experience. The four other firms produce middle to high range consumer goods and the Monegasque and French markets are not large enough to sustain their growth and achieve economies of scale. For them, developing international markets has been a necessity. Laboratoires Asepta and MC. Company developed these activities almost from inception because of product appeal, market readiness and the entrepreneurs’ international orientation. Asepta is specialized in foot care products, a virgin market in Southern Europe in the 1950s, but already developed in Northern Europe with strong local brands. In spite of that, the first export market was Germany, with the appointment of a distributor interested in carrying the brand. MC Company’s Banana Moon line of swimwear caught the eye of a young Belgian who, in spite of his training as a physiotherapist, wanted to become a distributor for the brand. After much persistence on his part and reluctance from the firm owing to his lack of experience in the industry, he was appointed in 1987 and he has been the best performing distributor since, despite the small size of his territory (Belgium) with its 12 million inhabitants. Demonstrating a passion for the brand has since been a criterion for selecting MC Company’s distributors. For Cosmetic Laboratories and Manufacture de Monaco, it was legal considerations on the one hand, and a captive audience and an artistic approach to commercializing porcelain works on the other, that kept these firms focused on their local market for 21 and 14 years, respectively. Cosmetic Laboratories was created in 1957 as the French and Monegasque distribution subsidiary for the brand Misslyn owned by Laboratoires Lechner from Milan. French

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rights to the Misslyn name were bought from the Italian company in 1967 by Pier Ivo Ricciardi, who had been managing the subsidiary since 1960, and the Monegasque firm was separated from the Italian entity. Worldwide distribution rights for Misslyn were acquired in 1988, at which time exports could begin. To further its international presence, in 1996 the company bought worldwide rights to distribute miniature perfume samples from well-known brands presented in a gift box under the name Les Meilleurs Parfums de Paris, an activity which was previously concentrated in Monaco. Manufacture de Monaco was founded by Erich Rozewicz in 1975. Trained as an architect and a ceramic engineer in Rome and after studying Fine Arts in Warsaw, Rozewicz mastered the arts of porcelain making, so much so that he established the firm in the Principality at the special request of Their Serene Highnesses the Prince and Princess of Monaco, who were impressed by the works he exhibited in Paris. Once in Monaco, Rozewicz drew his inspiration from the artworks in the Palace and from the local art history to design and produce high-quality corporate gift items and tableware. As an artist and the official supplier of the Palace, he preferred to sell his pieces to a small number of appreciative customers and promoted them through one or two private exhibitions a year at the Hôtel de Paris, one of the exclusive hotels of Monaco, to which a select audience was invited. Monaco being cosmopolitan, his art travelled the world with its owners and, in 1985, sporadic exports started to the US and Japan. Given the history of porcelain in Japan and the country’s know-how in this art, Rozewicz was particularly flattered to receive interest and praise from the Land of the Rising Sun. To increase the brand’s visibility, a boutique was opened in an upscale shopping centre in Monaco in 1988. More regular exports activities started in 1989, when a contract was signed with an importer in Japan to supply the GM and Mercedes dealers with corporate gifts. Crick and Spence (2005) claim that serendipitous encounters play a non-negligible part in the start of the international expansion of SMEs, occurrences that cannot be discounted in the cases of Asepta, MC Company and Manufacture de Monaco. Cosmetic Laboratories followed a more structured path which was partly dictated by the regulatory environment in which it was operating. Subsequent international expansion Given the present owners’ long experience in their respective industries, a wealth of tacit and objective knowledge has been acquired. This knowledge is constantly updated by reading trade magazines, participating in trade shows and interacting with a number of entities in the industry. As a consequence, various players in the market are known, competitors as well as distributors and retailers, and the companies can position themselves accordingly. Aside from the location challenges mentioned previously, the firms have to take into account three major constraints when designing their international strategies: 1.

2. 3.

Their relatively limited resources because of the financial model used, one based on self-financing. As independence from outside control is cherished, and the owners do not want to dilute the firms’ capital, growth must be managed accordingly. The concern to preserve both their image and the image of the mark ‘Made in Monaco’ in each country in which they do business. Eroding margins due mainly to Asian competition.

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These constraints have directed a strategy of middle to high range positioning and selective distribution along with the outsourcing of non-core activities. The point of entry and expansion to foreign markets for these firms is through international trade fairs which offer a focal point for a variety of foreign and domestic industry players. Often considered as an efficient personal selling tool when the firm’s commitment to export is strong, they are also invaluable venues for the exchange of qualitative information regarding competition, channel and client assessment and relationship building (Hollensen, 2004; Sharland and Balogh, 1996). The companies studied tried to make the most of their trade fair participation by inviting potential intermediaries and other industry players to meet them during the event and testing their suitability for possible collaboration. It is through trade fairs that relationships with present distributors have developed. One of the keys to trade fair success is ‘targeting’. Many events and venues are offered each year, with varying degrees of credibility and focus. The four firms know which trade shows have the most international impact in their industry and make a point of participating on a yearly basis. Regional trade shows are generally attended by their distributors. New venues can be added as the firm grows and develops in other countries. For example, Banana Moon, which is now focusing on expanding on the West coast of the US, will be attending relevant trade fairs in the area. Hence, foreign market selection is slightly haphazard and is based on the mutual trust the company and a distributor may have developed during trade fair encounters and follow-up contacts. The firms try to assess, among other criteria, whether the potential distributor will take ownership of the brand and develop it through a proper network of retailers without engaging in marketing activities which will damage the image. The companies being SMEs, selective distribution is the preferred route to gain the attention of customers. These channels, however, take different forms, depending on the country. Laboratoires Asepta, for instance, has a virtual monopoly on foot care products with its brand Akiléine in French pharmacies. This channel has been used in several other European countries where the concept exists. In the UK and the US, pharmacies have been replaced by drugstores, larger establishments with several outlets featuring global brands at a low price and with high entry fees. In these countries, selective distribution includes instead beauty salons and spas, as well as foot doctors in the UK, which are not as common in the US. The other brands, Misslyn, Les Meilleurs Parfums de Paris and Manufacture de Monaco also target professionals and upscale boutiques as opposed to mass merchandisers. For Mr Flachaire from MC Company, the choice of appropriate retail outlets is a form of advertising. The first boutique to carry their brand was in St Tropez, one of the fashion hubs of Europe, especially for swimwear. Retailers from all over the region go there to keep up to date on new trends and manufacturers and to seek to offer the line themselves. Distributors have the autonomy to promote the brand in their countries the way they see fit as long as it is consistent with the overall brand positioning. Hence they can attend regional trade fairs, buy space in trade magazines or develop advertising campaigns with the company’s agreement. Some interesting initiatives include the development of several skin care products, which Cosmetic Laboratories does not carry, by their Jordanian distributor under the brand Misslyn Monte Carlo. The company receives royalties on the sales. The Belgian distributor of Banana Moon attributes his success to the relationships

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he has established with the media and the Portuguese distributor, for Asepta is currently broadcasting an advertising campaign which has a strong impact and which may be adopted by other countries. These winning initiatives can be attributed to the strong bonds the firms have developed with their representatives. As demonstrated by Calof and Beamish (1995), modes of entry evolve over time owing to internal and external factors. For all four companies, the first channel used abroad was a distributor, providing wide market access, security and ease of management. Competitive pressures had a negative impact on margins and in many Western countries distributors were subsequently made redundant in favour of direct sales or agents. Consequently, in 2000, Manufacture de Monaco closed the showroom made especially for distributors. In Europe, Banana Moon switched from distributors to agents, except in Belgium and Switzerland, where old contracts could not be changed. The products are therefore more expensive in these two countries. Although this has not created parallel markets, the company remains vigilant. Globalization and mergers and acquisition have also changed the power structure between distributors and manufacturers. As an example, the distributor Marioni, who represented 25 per cent of the perfume shop market in France, was bought by a distributor in Hong Kong, Watson, who was able to negotiate larger discounts and inventory returns. Clients are becoming larger and more demanding, further affecting the firm’s profitability (interview with Mr Ricciardi from Cosmetics Laboratories, July 2005). Other factors that triggered changes in modes of entry were market expansion and the perceived potential of higher profitability. As a result, Laboratoires Asepta switched to sales subsidiaries employing 10 to 12 persons each in six countries to better control distribution and to increase market share and client satisfaction. These situations, however, developed slowly, the outcome of 10 to 20 years of market development carried out by a good distributor. To reward the positive contributions of these persons, the company tried to integrate them as associates, as was done in Canada; in other cases, such as Tunisia, they bought back the distributor’s clients and created the subsidiary on their own. In countries where profitability and market shares are lower, distributors are still used. This strategy has been designed to meet the company’s objectives of being present in all the financially sound country markets and, once there, to become the leader in the niches it serves. In contrast with Asepta’s cautious approach to moving to a subsidiary, in September 2004, Cosmetic Laboratories opened a Russian subsidiary staffed by three employees to test the perceived potential of Eastern Europe. The country choice and entry strategy were motivated by the overall market size (150 million inhabitants) and potential (the development of a middle-class eager to consume Western products), therefore the presence of a growing segment for cosmetics with still little competition. Other considerations were the fact that selling to perfume shop chains in Russia cannot be done directly and doing it through a wholly owned subsidiary is more efficient than through a distributor adding his own margins and pricing the products out of the market. Banana Moon’s motivations to establish subsidiaries were client-driven. The variety of reasons triggering higher involvement in international markets demonstrates the dynamism of the process and the proactivity of the companies in adapting to their internal and external situations.

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Conclusion In spite of its small size, the Principality of Monaco features a striving non-polluting industrial base of about 100 firms operating in seven sectors with increasing export activities. Monegasque firms’ ability to grow is challenged by the few opportunities to expand productive capacity on the territory and by increased competition due to globalization. As demonstrated above, however, six of these firms have shown a great deal of flexibility and innovation in adapting their managerial processes to local and international constraints by cultivating and broadening their range of network relationships. Outsourcing of production, strategically located logistics activities and careful worldwide positioning while concentrating higher value-added activities in Monaco are elements in the firms’ strategies for maintaining their competitiveness. Moreover, the firms interviewed have the majority of their employees located in Monaco, adding to the dynamism of the local economy and creating opportunities for the local population. Implications for policy makers In today’s world of virtual corporations and collaborative relationships (Dana, Dana, Spence and Wright, 2004), Monaco still has a role to play in attracting industrial firms as long as the higher value-added activities, such as R&D, design, strategic planning and marketing, are located in the Principality and the non-core competencies, which are higher consumers of industrial space and non-qualified labour, are based in locations carefully selected to enhance competitiveness. This would contribute to diversifying the pool of researchers, academics, investors and entrepreneurs drawn to the Principality and enhance its know-how and visibility. Implications for research Further research should focus on studying in greater depth each key industrial sector to uncover the major hurdles faced by Monegasque SMEs looking at expanding abroad, either upstream or downstream, and discovering winning strategies. Given the small number of industrial firms in the Principality, a qualitative approach is suggested. References Anonymous (2005), ‘Mobilisation pour le logement des actifs’, Azur Entreprise (May–June), 17–19. Anonymous (2005), ‘Principauté de Monaco: elle a tout d’une grande’, Nice-Matin, July 18, 4–5. Calof, J. and P. Beamish (1995), ‘Adapting to foreign markets: explaining internationalisation’, International Business Review, 4(2), 115–31. Crick, D. and M. Jones (2000), ‘Small high-technology firms and international high-technology markets’, Journal of International Marketing, 8(2), 63–85. Crick, D. and M. Spence (2005), ‘The internationalization of “high performing” UK high-tech SMEs: a study of planned and unplanned ventures’, International Business Review, 14(2), 167–85. Dana, L.-P. (2005), When Economies Change Hands, New York: International Business Press. Dana, L.-P., T. Dana, M. Spence and R. Wright (2004), ‘Les PME dans l’arène mondiale: Une nouvelle donne’, Gestion 2000, 73–87. Edwards, A. (1992), The Grimaldis of Monaco, New York: William Morrow and Company. Eisenhardt, K. (1989), ‘Building theory from case study research’, Academy of Management Review, 14(4), 532–50. Europa (2005), SME Definition (http://europa.eu.int/comm/enterprise/enterprise_policy/sme_definition/index_ en.htm, accessed 14 June 2005). Filion, L.-J. et al. (eds) (2003), Réaliser son projet d’entreprise, 3rd edn, Montreal: Les Editions Transcontinental. Gouvernement de Monaco (2003), Recensement général de la population 2000, Direction de l’expansion économique – division des statistiques et des études économiques (www.gouv.mc, accessed 21 May 2005).

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Gouvernement de Monaco (2005), Monaco en chiffres–Edition 2005, Monaco: Direction de l’expansion économique – division des statistiques et des études économiques. Gouvernement de Monaco (2004a), Observatoire de l’industrie de transformation, données 2003, Direction de l’expansion économique – division des statistiques et des études économiques (www.gouv.mc, accessed 21 May 2005). Gouvernement de Monaco (2004d), Aides gouvernementales accordées à des entreprises de la place, Direction de l’expansion économique – division des statistiques et des études économiques (www.gouv.mc, accessed 21 May 2005). Hollensen, S. (2004), Global Marketing – A Decision-oriented Approach, 3rd edn, London: Prentice-Hall. Prince Albert II (2005), Discours de S.A.S. le Prince Albert II de Monaco Avènement – Place du Palais, 12 July, Monaco: Palais Princier. Sharland, A. and D. Balogh (1996), ‘The value of non-selling activities in international trade shows’, Industrial Marketing Management, 25, 59–66. Streeten, P. (1993), ‘The special problems of small countries’, World Development, 21(2), 197–202. Webster, F. (1992), ‘The changing role of marketing in the corporation’, Journal of Marketing, 53(October), 1–17. World Fact Book, Monaco 2005 (http://www.cia.gov/cia/publications/factbook/print/mn.html, accessed 18 May 2005). Yin, R. (2004), Case Study Research, 3rd edn, London: Sage.

28 Internationalization of Dutch SMEs Jolanda A. Hessels

1 Introduction In modern economies economic activity by small firms is increasingly important for achieving economic growth (Audretsch and Thurik, 2001). The revival of small businesses in Western economies from the 1970s onwards, commonly referred to as the emergence of the ‘entrepreneurial economy’ (Audretsch and Thurik, 2001; 2004), is related to increased globalization and economic integration, developments in ICT and the increased importance of knowledge in the economic process (Thurik et al., 2002). Furthermore, because of developments such as globalization and technological changes, small and mediumsized enterprises (SMEs) are increasingly involved in international markets (European Commission, 2004a). This study focuses on the internationalization of SMEs that are located in the Netherlands. The Netherlands is a particularly interesting country to investigate, because the Netherlands is a small, open economy (Dana, 2006). The Dutch business sector as a whole is among the largest exporters, importers and foreign direct investors in the world. In this study a number of issues will be addressed that relate to the internationalization of Dutch SMEs. First, an overview will be provided of the involvement of Dutch SMEs in various international activities: imports, exports, foreign direct investments and international cooperation. Second, the present study tries to link competitive strategy to the international involvement of Dutch SMEs. Increased globalization and economic integration results in an increase in (foreign) competition on the domestic markets. Both enterprises that are active on foreign markets and those that focus only on the domestic market will have to deal, more and more, with foreign competition (Netherlands Scientific Council for Government Policy, 2003). One of the challenges that Dutch SMEs increasingly have to cope with is the changing competitive environment. Third, this study will specifically focus on international activities of Dutch SMEs with and within the new EU Member States. Next challenges, such as more foreign competition, increased globalization and economic integration are also expected to provide all kinds of international opportunities for European SMEs such as trade, investment and cooperation possibilities. With respect to internationalization of enterprises, geographical distance is of importance, as firms tend to internationalize within their region. Nowadays most trade of EU Member States takes place within the borders of the European Union. SMEs are usually even more oriented towards nearby countries, for example because they usually experience more internal constraints to international growth, such as limited capital, management, time and experience, than larger enterprises (Buckley, 1989). Thus, processes of regional economic integration may be of particular relevance for SMEs. The present study investigates determinants of future international commitment of Dutch SMEs in the new EU Member States. 494

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This chapter provides several new and important insights into the internationalization behaviour of SMEs in the Netherlands. These insights may be relevant for other European economies as well. The organisation of the chapter is as follows. Section 2 provides an overview of internationalization behaviour of Dutch SMEs. This section deals with topics such as the degree to which SMEs are involved in various modes of internationalization, and how this international involvement differs by sector and size-class. Section 3 of this chapter focuses on the link between competitive strategy and the internationalization of the firm. Section 3.1 discusses the literature in the field of competitive strategy and internationalization. The following sections provide details on the empirical analysis (3.2) and on the results and implications (3.3). Section 4 chapter deals with business activities of SMEs with and in the new EU Member States. In section 4.1 the theoretical background and the hypotheses that are formulated are presented. Section 4.2 gives a description of the empirical analysis. Section 4.3 presents the results and implications. In the final section of this chapter, Section 5, the implications of this research for the internationalization of European SMEs and for future research are discussed. 2 Overview: internationalization of Dutch SMEs In this section some features of the internationalization behaviour of Dutch SMEs will be described, based on a study that EIM recently conducted (Hessels et al., 2005). Table 28.1 gives an overview of the extent to which Dutch SMEs are involved in various modes of internationalization. SMEs are defined as enterprises with up to 100 employees. The most cited international business activity of Dutch SMEs is import (about a quarter). A small part of Dutch SMEs (2 per cent) invested abroad in the past three years. It is important to note that most SMEs combine two or more modes of internationalization. Figure 28.1 presents an overview of the share of internationalized SMEs by size class of the firm. It appears that the degree of internationalization increases with size class for all modes of internationalization. Figure 28.2 shows the percentage of internationalized SMEs for each of the industries. The internationalization of Dutch SMEs takes place mainly in manufacturing, trade and transport. Table 28.1

Internationalization of Dutch SMEs, in percentages (2004)

Mode of internationalization Export Import Foreign direct investment* International cooperation: Cooperation with foreign enterprises only Cooperation with both foreign and Dutch enterprises Note: Source:

* Percentage that invested abroad in the past three years. EIM, SME Policy panel, July 2004.

% of Dutch SMEs 18 26 2 9 2 7

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10–100 employed people

40 35 30 25 20 15 10 5 0 Exporting

Co-operation with enterprises abroad

Invested abroad (last 3 years)

Importing

Source: EIM, SME Policy Panel, July 2004

Figure 28.1

Percentage of internationalized Dutch SMEs, by size class (2004)

Average Dutch SMEs

manufacturing construction trade lodging transport business services other services 0

5

10

15

20

Share of SMEs that cooperates internationally Share of SMEs that import

25

30

35

40

Source: EIM, SME Policy Panel, July 2004

Figure 28.2

45

50

Share of SMEs that invested abroad (last 3 years) Share of SMEs that export

Percentage of internationalized Dutch SMEs, by industry (2004)

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3 Competitive strategy and international involvement of Dutch SMEs In a world of increased competition, for example as a result of increased globalization and economic integration, firms may increasingly need to use competitive strategies in order to try to keep up with competitors. Depending on their competitive strategy, firms may undertake various internationalization activities. The following sections try to investigate the link between competitive strategy of Dutch SMEs and the various modes of internationalization that these firms exploit. 3.1 Competitive strategy Enterprises may have various strategies for improving their competitiveness. There are various types of classifications and approaches to competitive strategy. This study distinguishes between four competitive strategies for SMEs: (a) cost-leadership strategy, (b) differentiation strategy, (c) focus strategy, and (d) innovation strategy. The first three strategies are taken from the well-known and often used categorization of competitive strategies by Porter (1980; 1985). The fourth strategy, innovation strategy (for example, Weerawardena, 2003) is added because of the increased importance of innovation for small firms in the entrepreneurial economy (Audretsch and Thurik, 2001; 2004). When a firm uses a cost-leadership strategy this implies that it tries to compete mainly on costs or prices of products or services. This can be realized by reducing business costs or keeping prices of products and services as low as possible. This strategy can be labelled as a rather conservative strategy. Differentiation strategy, focus strategy and innovation strategy can be labelled as more bold or proactive strategies. In these strategies the focus is not on prices or costs but rather on trying to offer unique or innovative products and so on. In the case of a differentiation strategy, for example, firms try to be competitive on the basis of product features or extra service. When firms exploit a focus strategy they may aim to offer specialized products to specific customer groups. In this case the enterprise focuses on serving customers in one or a limited number of market segments. In the case of an innovation-based competitive strategy, a firm tries to offer products and/or services that are more innovative than those of competitors. The existing literature that tries to link competitive strategy with internationalization is strongly focused on on the link between competitive strategy and exports (for example, Julien and Ramangalahy, 2003; Bodur 1994; Cavusgil and Zou, 1994; Namiki, 1989). For example, previous research has found a focus strategy to be positively related to exports (Namiki, 1989). Also innovation strategy or an orientation towards innovation is likely to increase export opportunities for a firm. For example, the potential market for products of innovative firms may be much wider than is the case for less innovative firms (Autio et al., 2000). Also improved, modified or new products may give enterprises a (temporary) competitive advantage in foreign markets (van Dijken and Prince, 1997). However, competitive strategies may also be of importance for other modes of internationalization. Strategies that are likely to enhance sales possibilities in foreign markets may also stimulate enterprises to invest abroad (foreign direct investments in sales organizations) or to cooperate internationally. In order to be able to realize cost reductions or uniqueness of products, firms may also be stimulated to import cheap products or services from abroad or products or services that are not available in the domestic market.

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In general, a positive relation between competitive strategy and internationalization may be expected. However, it is also expected that some differences exist as regards the impact of various strategies. Especially the bold or aggressive strategies that focus on uniqueness or innovativeness of products or services are expected to result in international opportunities for firms. This is probably less the case for focus strategy, depending on whether the specific target groups are domestic or outside the country. Costs or prices may be important for a firm’s international competitiveness. For example, a cost strategy may stimulate enterprises to invest abroad and produce in lowcost locations, such as Asia, or may result in increased foreign sales possibilities. However, the comparative advantage of Western economies is to an increased extent shifted towards knowledge-based activities, which are costly to transfer around the world (Thurik and Wennekers, 2004). Given the complexity of contemporary international markets and the international environment in which firms operate, it is expected that, in order to attain or gain competitive advantage, bold competitive strategies are required. In this respect, the concept of ‘entrepreneurial orientation’ (for example, Slater and Narver, 2000) is also of relevance in studying competitive strategies of small firms. ‘Entrepreneurial orientation’ is build up around aspects such as innovativeness, risk taking and competitive aggressiveness of the firm. ‘Entrepreneurial orientation’ is of relevance, for example, as a key factor for business survival and growth (Covin and Slevin, 1988; Miles and Arnold, 1991; Jaworski and Kohli, 1993; Naman and Slevin, 1993; Chaston, 1997). It is expected that, rather than being conservative, entrepreneurial orientations may be critical for stimulating firms to be able to operate and succeed in foreign markets. 3.2 Empirical analysis The aim of the empirical analysis is to investigate what the empirical link is between competitive strategy and various modes of internationalization for Dutch SMEs. Sample The analysis is based on a sample of 1846 Dutch SMEs (enterprises with up to 100 employees) taken from EIM’s SME Policy Panel. The sample is based on interviews with business owners, conducted during July 2004. Internationalization 1. 2. 3. 4.

The following internationalization variables were constructed:

Exports: this variable takes the value 1 for enterprises that are exporting goods or services and 0 for enterprises that are not involved in exports. Imports: this variable gets the value 1 for enterprises that import goods or services from abroad, and the value 0 for all other enterprises. Foreign direct investments: this variable is coded 1 for enterprises that have invested abroad in the past three years and otherwise coded 0. International cooperation: this variable takes the value 1 for enterprises that cooperate with foreign firms, and 0 for all other enterprises.

Competitive strategy Based upon the respondents’ own assessment, the following measures for competitive strategy were used:

Internationalization of Dutch SMEs ●

●

●

●

Differentiation strategy. This variable is a proxy for a strategy that focuses on offering as many products or services as possible with a highly unique character with the aim of coping with competitors. The variable is coded 2 when this is strongly true, coded 1 when this is somewhat true and otherwise coded 0. Cost leadership strategy. This variable is a proxy for a strategy of keeping prices as low as possible in order to beat competitors. The variable is coded 2 when this is strongly true, coded 1 when this is somewhat true and coded 0 otherwise. Focus strategy. This variable is a proxy for a strategy that focuses on a specific target group in order to beat competitors. The variable is coded 2 when this is strongly the case, coded 1 when this is somewhat true and otherwise coded 0. Innovation strategy. This variable is a proxy for indicating that a firm’s products or services are a lot more innovative than those of competitors. The variable is coded 2 when this is strongly true, coded 1 when this is somewhat true and coded 0 otherwise.

Control variables ●

● ● ●

499

The following control variables were used:

Sector of industry: the firms were assigned to one of the following five industries: (1) manufacturing, (2) trade, (3) transport, (4) business services, and (5) other industries. ‘Other industries’ was used as a base case in the regression analysis (and was therefore not included in the regression equation). So four industry dummies were used to represent the industry. Firm size: two size classes for the SMEs in the sample were distinguished: 0–9 occupied persons (coded as 0), 10–99 occupied persons (coded as 1). Gender: this variable takes the value 0 for females and the value 1 for males. Starting year: four groups were distinguished: 1970 or before (codes as 0), 1971–90 (coded as 1), 1991–98 (coded as 2) and 1999–2003 (coded as 3).

Data analysis The various modes of internationalization are used as the dependent variables. Considering the nature of these dependent variables, binary logistic regression analysis was carried out. 3.3 Results and implications The bivariate correlation coefficients between the variables for internationalization and competitive strategies are presented in Table 28.2. Looking at the measures for competitive strategy it can be seen that the measures ‘differentiation strategy’, ‘focus strategy’ and ‘innovation strategy’ each show a significant positive correlation with all modes of internationalization (p 0.01). However, no significant relation is found between ‘cost leadership strategy’ and the various modes of internationalization. This confirms the initial expectation that a focus on low prices does not so much result in an international orientation or international competitiveness for firms. To confirm the identified relations of the correlation analysis other factors that may influence the propensity of enterprises to undertake international business activities have to be taken into account. To this end a regression analysis is carried out. The different modes of internationalization are taken as the dependent variables. Table 28.3 shows the results of the logistic regression analysis.

500

Note:

7 8

6

5

4

1 2 3

Correlation matrix

0.146** 0.180** 0.21 0.41

0.014

0.093**

0.332**

0.481** 0.226**

1

**p0.01; * p0.05;  p  0.10.

Exports Imports Foreign direct investments International cooperation Differentiation strategy Cost leadership strategy Focus strategy Innovation strategy Mean Standard deviation

Table 28.2

0.118** 0.129** 0.26 0.44

0.010

0.116**

0.258**

0.159**

2

0.096** 0.102** 0.03 0.17

0.017

0.069**

0.269**

3

0.097** 0.168** 0.10 0.30

0.029

0.074**

4

0.225** 0.357** 1.30 0.81

0.007

5

0.091** 0.034** 0.74 0.78

6

0.211** 1.02 0.88

7

0.94 0.81

8

Internationalization of Dutch SMEs Table 28.3

501

Binary logistic regression results Dependent variable Exports

Differentiation strategy Cost leadership strategy Focus strategy Innovation strategy Exports Imports FDI International cooperation Industry: manufacturing1 Industry: trade Industry: transport Industry: business services Firm size Gender Starting year Constant Nagelkerke R2 - -2 Log likelihood Observations

0.19 0.08 0.26* 0.28*

Imports 0.28* 0.03 0.06 0.07 2.28**

Foreign direct investments

International cooperation

0.85*

0.19

0.06

0.38*

0.60* 0.17 1.01* 0.20

0.00 0.42** 1.12** 1.20** 1.82**

2.28** 1.00* 1.11**

0.02 1.15**

1.84**

1.14**

0.69**

0.83

0.36 1.37** 1.27*

1.67** 0.81* 0.66**

0.28 0.05 0.13 4.34** 0.378 805** 1846

0.37* 0.46 0.04 3.80** 0.403 886** 1846

0.18 1.10 1.23 0.38 1.00 0.27 9.84** 0.305 193** 1846

0.28 0.12 0.79* 0.11 0.16 0.54 0.19 0.254 589** 1846

Notes: Standardized regression coefficients: ** p [two-tailed]  0.01; * p [two-tailed] 0.05;  p [two-tailed] 0.10. 1 Industry category ‘other industries’ used as base case.

A rather diverse picture emerges from the regression analysis. First, ‘differentiation strategy’ is found to have a significant positive impact on imports and foreign direct investments. Second, and remarkably, it is found that ‘cost leadership strategy’ has a significant negative impact on international cooperation. Furthermore, it can also be seen that ‘focus strategy’ has a significant positive effect on exports as well as foreign direct investments. Finally, it can also be seen that ‘innovation strategy’ has a significant positive impact on exports and international cooperation. The results of the analysis reveal that differences in competitive strategy may result in differences in internationalization behaviour or strategies of SMEs. The results indicate that, when a firm has a competitive strategy that focuses on offering as many goods or services as possible with a highly distinguished character, this may increase the probability for a firm to be involved in imports and foreign direct investments. Imports may be needed in order to be able to realize the desired uniqueness of products or services. That the use of this strategy has a positive impact on foreign direct investments and not on exports may

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indicate that this strategy does not so much result in foreign sales, but that an enterprise may be stimulated to produce abroad in order to realize the required uniqueness or to invest in research and development abroad. Differentiation strategy does not seem to stimulate enterprises to export or to cooperate with foreign firms. The results also suggest that firms that use a competitive strategy that consists of focusing on a specific target group (focus strategy) are likely to be involved in exports as well as foreign direct investments. When firms focus on a specific target group this is per se sales-oriented. Considering the positive impact on exports this strategy is probably related to foreign investments in sales organizations in order to serve the target group in their home market. Another result that was found is that, when the innovativeness of a firm’s products or services is a lot higher than that of competitors, this may enhance the likeliness of a firm to export or to cooperate internationally. The result that was found for the link between innovation strategy and exports confirms results from previous research (for example, Wakelin, 1998; Karagozoglu and Lindell, 1998, Ropers and Love, 2001). Also, access to know-how and technology is among the commonly cited motives for international cooperation for SMEs (Hessels et al., 2005). The results indicate that, when SMEs have a strategy of keeping prices as low as possible, this does not so much result in international involvement. It was even found that the strategy of cost leadership has a significant negative effect on international cooperation. The results confirm the expectations that it is not so much cost advantages, but rather aspects such as uniqueness, serving niches and innovativeness, that are important to creating international business opportunities. The findings have some important implications. They indicate that different strategies lead to different kinds of involvement in internationalization. Managers should be aware of the consequences in terms of internationalization when choosing a business strategy. Also, in light of the increasing importance of internationalization, education and MBA programmes should pay attention to competitive strategies in relation to internationalization. The analysis has a number of limitations. First, the categories or strategies presented in this study are not mutually exclusive. Also, more research is needed in order to better understand the complex relationships that exist between various modes of internationalization. Furthermore, using an analysis over a longer period of time would provide better insight into the actual relation between competitive strategy and internationalization behaviour of firms. 4 International business activities of Dutch SMEs and new EU Member States The following sections focus on international business activities of SMEs from the Netherlands with the countries in Central and Eastern Europe that have entered the European Union on 1 May 2004. More specifically, the focus will be on explaining future international commitment among Dutch SMEs in the new EU Member States. 4.1

Theory and hypotheses

Stage theory and effects of economic integration For individual countries economic integration is a means of securing access to a wider market and reinforcing growth in order to attain a higher level of national welfare (Jovanovic, 1998). The European Union is an

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example of one of the biggest achievements in economic integration. Since its existence integration within this region has both deepened and widened. Integration is an evolving and continuing process. In 2004, ten new Member States joined the EU. Formal international economic integration is an important factor for explaining an increase in international economic and investment activity, for example because it results in the reduction or removal of trade barriers. Many studies have addressed the impact of EU enlargement on enterprises in the EU-15 (for example, European Commission, 2001; European Commission, 2004b; EEAG Report, 2004; de Mooij, 2000). The main types of possible integration effects on the enterprise sector in the EU-15 that are identified in these studies are an increase in exports of goods and services; an increase in imports of goods and services; an increase in foreign direct investment into the new EU Member States and an increase in labour migration from the new Member States. These possible effects imply that increased international commitment of EU-15 enterprises in the new EU Member States is expected. At the level of the individual firm, these possible effects can be classified into the following categories: exporting of goods or services, importing of goods or services, investing or producing abroad and attracting foreign labour. In short, the enlargement of the European Union is likely to affect the process of internationalization of firms in the EU-15. The stage theory is the dominant paradigm for explaining the process of internationalization of enterprises (e.g. Johanson and Vahlne, 1977; 1990; Eriksson et al., 1997). This theory suggests that the internationalization process of an enterprise evolves in a sequential and developmental way, leading from low to high commitment in foreign markets. This means that firms are likely to start their internationalization with activities that involve less risk, such as export, before they will be involved in a more substantial commitment in foreign markets, such as producing abroad. Thus, as enterprises have more experience with internationalization and foreign markets, they are more likely to increase their commitment in foreign markets. The stage theory assumes that firms first target markets they understand best, that is, markets with a short psychic distance (Johanson and Vahlne, 1977, 1990). Psychic distance is thought to be a relevant factor for international operations (Wiedersheim-Paul, 1972). The concept of psychic distance may prove useful with respect to the extension of international activities to new or emerging markets. This concept is defined as factors that prevent or disturb the flows of information between enterprises and markets. Examples of such factors are differences in language, business culture and political systems. Psychic distance, however, is not constant but may change as a result of developments in communication and information systems, trade and other means of social exchange. An event such as the enlargement of the European Union is likely to reduce the psychic distance between the ‘old’ and new EU Member States. Furthermore, as firms gain business experience in this region, psychic distance will be further reduced. According to the stage theory, a firm gains ‘experiential knowledge’ when it undertakes international activities. When the experiential knowledge of a firm increases, it is more likely that this firm will make additional market commitment (Johanson and Vahlne, 1977; 1990). The stage theory considers this market experience to be to a large extent country-specific. In this research it was decided to link market experience to markets with rather similar conditions. The new EU Member States in Central and Eastern Europe are being considered as one specific area. Even though the individual

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countries vary greatly, there are several good reasons for taking them together. First, these new EU Member States have all gone through a rapid transformation from central planned economies to market economies. Furthermore, the countries have much in common with respect to their level of economic development, such as a low level of GDP and low average wages compared to the EU-15. Besides, similar effects (such as an increase in trade and inward foreign investment) are likely to take place in all these countries. Finally, enterprises that undertake international activities in this region experience similar problems in these countries, such as administrative barriers and corruption (Brummelkamp and Hessels, 2005). The term ‘international’ may be used to refer either to the actual undertaking of business activities abroad or to an attitude of an enterprise towards international activities (Kindleberger, 1969). Attitudes and actual behaviour are closely related to each other. On the one hand, attitudes form the basis for deciding actually to undertake international business activities. On the other hand, experience with international activities is likely to affect the attitudes of business owners towards internationalization (Johanson and Wiedersheim-Paul, 1975). In other words, current international experience in foreign markets is likely to affect the perceived future international opportunities of firms positively. The stage theory presupposes a positive link between the intensity of international involvement and the amount of relevant knowledge about the foreign markets that is present within the enterprise (Johanson and Vahlne 1977; 1990). Experience with doing business in the region supplies enterprises with increased knowledge of foreign markets, which will result in further international commitment. So the stage theory predicts that SMEs that are already internationally active in the new EU countries are likely to increase their foreign commitment in these markets. In the research design, therefore, the following hypothesis is formulated: Hypothesis 1: SMEs that are already internationally involved in the new EU Member States are more likely to increase their international commitment in this region than other SMEs ( stage theory effect). Traditionally the stage theory does not include imports in its analysis. This theory was especially developed with outward internationalization in mind. It is increasingly recognized that inward and outward modes of internationalization are interrelated processes and that foreign purchasing, for example, may stimulate enterprises to start exporting (for example, Korhonen, 1999). For this reason, it was decided to include inward as well as outward modes of internationalization in the analysis. Resource-based resources Although the stage theory recognizes that crucial marketspecific knowledge is embedded in individuals and acquired through personal experience, it does not reckon specifically with the aspirations and resources of entrepreneurs or business owners. However, especially for SMEs, the role of the entrepreneur is thought to be important for the process of internationalization (Miesenböck, 1988; van Elk and Overweel, 1991; de Jong and Overweel, 1998). Some previous studies have empirically explored the relationship between the characteristics and experience of the business owner and the propensity for the business to undertake international activities and underlined the importance of taking into account these personal features of entrepreneurs (for

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example, Westhead et al., 2001). This study will also take into account a resource-based view (McDougall et al., 1994; Bloodgood et al., 1996) to identify some factors that encourage SMEs to internationalize their activities. The resource-based theory draws on the view that the resources of the entrepreneur have an important impact on the ability to internationalize business activities (Chandler and Hanks, 1994). It assumes that resources accumulated by entrepreneurs throughout their life, or the entrepreneurs’ overall human capital, may have a positive influence on the propensity to develop international activities. For example, a higher level of education of the entrepreneur may result in stronger international commitment (Westhead, 1995). Age may also be a decisive factor as older entrepreneurs are likely to have wider social and business contacts and more experience to enable their businesses to sell goods and services abroad (Westhead, 1995). This leads to the following additional hypotheses: Hypothesis 2: A firm’s future international commitment in the new EU Member States is positively related to the entrepreneurs’ human capital. Hypothesis 3: The stage theory effect with regard to a firm’s future international commitment in the new EU Member States will be weakened when the effect of human capital is accounted for. 4.2

Empirical analysis

Sample The analysis is based on a representative sample of 1750 Dutch SMEs (EIM SME Policy Panel). Business owners were interviewed during March 2004. In the analysis only enterprises are included for which the enlargement of the European Union is potentially relevant. Therefore, the final sample consists of 855 Dutch SMEs. Predictor variables Current international involvement was assessed by asking the entrepreneurs whether they are currently undertaking international business activities in the new EU Member States. Enterprises were categorized into the following categories: (1) currently undertaking international activities in the new EU Member States, (2) no current international activities in the new EU Member States. When enterprises indicated that they were undertaking international business activities in the new EU Member States it means that they were involved in one of the following modes of internationalization or a combination of one or more of these modes: 1. 2. 3. 4. 5.

importing goods or services, importing labour, exporting goods or services, producing or investing abroad, other.

Human capital: education and age of the entrepreneurs were identified as components of the entrepreneurs’ human capital. The respondents were assigned into two categories of human capital: (1) aged over 40 and higher education, (2) aged below 40 and/or no higher education.

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Dependent variable Future international commitment was assessed by asking the entrepreneurs whether they perceive (new) future opportunities for undertaking international activities within the new EU Member States. Answers were separated into the following categories: (a) no perceived new future opportunities in the new EU Member States and (b) perceived new future opportunities in the new EU Member States. In the logistic regression equations the dependent variable takes the value 0 for no perceived new future opportunities and the value 1 for perceived new future opportunities. Control variables A number of control variables were included which are hypothesized to affect internationalization as well: ●

●

● ●

Sector of industry: the firms were assigned to one of the following five industries: (1) manufacturing, (2) trade, (3) transport, (4) business services, and (5) other industries. ‘Other industries’ was used as a base case in the regression analysis (and was therefore not included in the regression equation). So four industry dummies were used to represent the industry. Firm size: we distinguished three size classes for the SMEs in our sample: 0–9 occupied persons (coded as 0), 10–99 occupied persons (coded as 1) and 100–250 occupied persons (coded as 2). Starting year: four groups were distinguished: 1970 or before (coded as 0), 1971–90 (coded as 1), 1991–98 (coded as 2) and 1999–2003 (coded as 3). Gender: this variable takes the value 0 for females and the value 1 for males.

Data analysis Considering the nature of the dependent variable, binary logistic regression analysis was used to estimate the effect of the predictor and control variables on the level of future international commitment in the new EU Member States. Three models were constructed. In the first model only the control variables were entered. The first model is the benchmark against which to test the hypothesized relationships. The second model includes the control variables as well as the predictor variable ‘current international involvement’. The third model includes both the predictor variables ‘current international involvement’ and ‘human capital’ as well as control variables. 4.3 Results and implications The bivariate correlation coefficients between the variables are presented in Table 28.4. It is found that current international commitment is positively related to a firm’s future international commitment (r 0.329; p0.01). Human capital also shows a significant positive bivariate correlation with future international commitment (r0.151; p  0.01). Furthermore, current international involvement and human capital are also positively related (r 0.071; p0.05). Table 28.5 shows the results of the regression analyses. The first column pertains to the analysis where only the control variables were included in the model. An interesting observation is that the starting year is positively related to new future international commitment (p0.01), meaning that younger enterprises are more inclined to be involved in the Central European region than their older counterparts. This may confirm the born global perspective (Knight and Cavusgil, 1996, Madsen and Servais, 1997), which argues that younger firms increasingly engage in international activities. This may also signify that

507

Note:

2

** p 0.01; *p 0.05.

0.000 1.000

0.000 1.000

Future international commitment Current 0.329** international involvement Human capital: 0.151** 0.071* aged over 40 and higher education Industry: 0.035 0.071* manufacturing Industry: trade 0.039 0.128** Industry: 0.154** 0.124** transport Industry: 0.018 0.078* business Services Industry: other 0.091** 0.176** industries Firm size 0.104** 0.122** Starting year 0.087* 0.006 Gender 0.156** 0.101** 0.260 0.160 0.310 0.441 0.370 0.463

1

Correlation matrix

9 10 11 Mean Standard deviation Minimum 0.000 Maximum 1.000

8

7

5 6

4

3

2

1

Table 28.4 4

5

6

0.000 1.000

7

0.000 1.000

0.000 1.000

8

9

10

0.000 1.000

0.000 1.000

1.000 3.000

1.000 4.000

0.000 1.000

0.141** 0.058 0.068* 0.020 0.135** 0.054 0.255** 0.001 0.046 0.069 0.102** 0.031 0.260 0.270 1.241 2.580 0.844 0.437 0.444 0.561 0.951 0.364

0.227** 0.380** 0.166** 0.357**

0.161** 0.014 0.101** 0.027** 0.107** 0.012 0.020 0.011 0.015 0.120 0.280 0.070 0.328 0.450 0.254

0.062

0.226** 0.220** 0.368** 0.160**

0.167** 0.234** 0.036 0.102** 0.171**

0.040

3

11

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Table 28.5

Binary logistic regression results

Dependent variable Current international involvement Human capital: aged over 40 and higher education Industry: manufacturing1 Industry: trade Industry: transport Industry: business services Firm size Starting year Gender Nagelkerke R2 - -2 Log likelihood N

Future international commitment

0.72* 0.29 1.43** 0.43 0.35* 0.28** 1.25** 0.104 857** 855

1.68**

1.64** 0.63**

0.37 0.15 1.09** 0.32 0.21 0.29** 1.15** 0.204 795** 855

0.31 0.13 1.13** 0.15 0.15 0.30** 1.20** 0.221 785** 855

Notes: Standardized regression coefficients; ** p [two-tailed] 0.01; * p [two-tailed] 0.05;  p [two-tailed] 0.10. 1 Industry category ‘other industries’ used as base case.

younger firms are more flexible and better equiped for the knowledge economy (Audretsch and Thurik, 2001). The results of the model that includes the predictor variable ‘current international involvement’ and the control variables are presented in the second column of Table 28.5. A positive effect is found for the firms’ current international involvement on future international commitment (b1.68; p 0.01). Nagelkerke’s R-square increased from 0.104 in the first model to 0.204 in the second model, suggesting that a higher part of the variance is explained when ‘current international involvement’ is added. The model indicates that, even when controlled for industry, size class, starting year and gender, firms that are currently internationally committed in the new EU Member States are more likely to show future international commitment as compared to firms that are currently not undertaking international business activities in this region. Therefore, support is found for hypothesis 1, stating that current experience has a positive influence on future international commitment in the new EU Member States. The third model in Table 28.5 also includes human capital in the analysis. It is found that business owners aged over 40 with higher education are more likely to show future commitment to international activities compared to their less educated and/or younger counterparts (b 0.63; p0.01). Thus, support is found for hypothesis 2. The third model in Table 28.5 also shows that including human capital in the equation only slightly weakens the effect of current international commitment. When human capital is added, the estimate of the variable ‘current international commitment’ decreases from 1.68 (in the second model) to 1.64 (in the fourth model). Therefore, only weak support is found for hypothesis 3. To summarize: it is found that (1) current international involvement has a positive influence on future international commitment ( stage theory effect), (2) human capital has a positive influence on future international commitment and (3) human capital only slightly weakens the effect of current international involvement or the stage theory effect.

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These results in particular confirm the expectations of the stage theory that additional or new foreign market commitment is affected by the firm’s current international business activities (Johanson and Vahlne 1977; 1990). The positive relationship between resource-based factors and future international commitment indicates that the human capital of the business owner affects the future international possibilities he sees for his firm. In this analysis a rather crude measure was applied, including only two variables for assessing human capital of the business owner. This may explain the result that human capital only slightly weakens the stage theory effect. In future research, therefore, the definition of human capital should be extended to include other indicators such as the amount of international experience and international know-how of the entrepreneur or his staff or the management know-how available within the firm. The results indicate that young enterprises are more likely to undertake business activities in the new EU Member States than older ones. This finding could suggest that recent developments, such as technological changes, may have altered the business environment in which enterprises operate, in that it has become easier for young firms to make an international commitment. It may also indicate that younger firms are less firmly rooted in traditional patterns and more flexible in adjusting to new circumstances such as the EU enlargement. This finding is also in accordance with the view that the stage theory and born globals perspective do not necessarily contradict but may rather complement one another (e.g. Autio, 2005; European Commission, 2004a). The analysis has some limitations. First, it was not assessed how long the enterprises that are currently undertaking business activities in the new EU Member States have been active in the region. Therefore, it was not possible to take into account the element of time in the internationalization process of SMEs. Another limitation of the research is that the enterprises were questioned at only one point in time. Using an analysis over a longer period of time would provide better insight into the actual internationalization behaviour of firms in the new EU Member States. 5 Implications and challenges for (research into) internationalization of SMEs in Europe This concluding section will concentrate on the implications of the present study for the internationalization of European SMEs. Because of globalization and ongoing economic integration, international activities are increasingly important. The results of this study indicate that it is especially bold or entrepreneurial strategies that contribute to the internationalization of SMEs and that different strategies leave different implications for international activities. A differentiation strategy may result in foreign direct investments and/or import; a focus strategy may stimulate enterprises to invest abroad and/or to export; and an innovation strategy may stimulate firms to cooperate with foreign enterprises and/or to export. The results that were found for the impact of various competitive strategies on internationalization activities should be tested for other European countries. Also, effects of various strategies, in relation to various modes of internationalization, on business performance should be taken into account in future research. Developments within the EU, such as the diminishing of trade barriers, have resulted in the emergence of a wider competitive market. There are a lot of complaints about competition from new EU Member States and countries in Asia caused by cheap labour and so on. However, the result of this study suggests that it is not so much cost advantages

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that stimulate SMEs to operate in foreign markets. Rather the importance of more bold strategies for international opportunities is illustrated. This may indicate that it is important to foster an entrepreneurial orientation in Western economies, for example as part of the education system. The internationalization of SMEs not only concerns foreign purchases and sales, but will increasingly involve a multitude of activities such as production, distribution and R&D. Research into internationalization of European SMEs should focus on more modes of internationalization than only exports. A number of recent studies emphasize the possible link between inward and outward internationalization (see, for example, Welch and Luostarinen, 1993; Korhonen, 1999; Liang and Parkhe, 1997). In research into internationalization of European SMEs, more insight is needed into interrelations between various modes of internationalization. In the coming years an increase in the international involvement of Dutch SMEs is expected. This may also involve an increase in internationalization for industries that used to be focused on the domestic markets, such as business services. In the coming years there will, for example, be many opportunities for fiscal experts and auditors in new EU Member States. Technological developments and globalization have made the export of services easier. Internationalization of services is especially important for SMEs as service firms are usually very small-scale enterprises. Future research into the internationalization of European SMEs should provide more insight into the internationalization of services. In recent years, attention has increased for the role and competencies of people, including those of the entrepreneur who makes an early start with the internationalization of a venture. Increased attention for the entrepreneur is related to the emergence of born globals, which may involve people that already have international experience, such as from a job with a multinational and have decided to start their own business. The role of the entrepreneur in the internationalization process of European SMEs should be further explored. The results of this study have revealed that human capital has a positive effect on international commitment. Therefore, it may be important to invest in higher education with specific attention to international entrepreneurship. References Audretsch, D.B. and A.R. Thurik (2001), ‘What is new about the new economy: sources of growth in the managed and entrepreneurial economies’, Industrial and Corporate Change, 10, 267–315. Audretsch, D.B. and A.R. Thurik (2004), ‘A model of the entrepreneurial economy’, International Journal of Entrepreneurship Education, 2(2), 143–66. Autio, E. (2005), ‘Creative tension: the significance of Ben Oviatt’s and Patricia McDougall’s article “toward a theory of international new ventures” ’, Journal of International Business Studies, 36(1), 9–19. Autio, E., H.J. Sapienza and J.G. Almeida (2000), ‘Effects of age at entry, knowledge intensity, and imitability on international growth,’ Academy of Management Journal, 43, 909–24. Bloodgood, J.M., H.J. Sapienza and J.G. Almeida (1996), ‘The internationalization of new high-potential U.S. ventures: antecedents and outcomes’, Entrepreneurship Theory and Practice, 20(4), 61–76. Bodur, M. (1994), ‘Foreign market indicators, structural resources & marketing strategies as determinants of export performance’, Advances in International Marketing, 6, 183–205. Brummelkamp, G. and J. Hessels (2005), Het Nederlandse MKB en de uitbreiding van de EU (Dutch SMEs and EU Enlargement, Zoetermeer: EIM. Buckley, P.J. (1989), ‘Foreign direct investment by small- and medium-sized enterprises: the theoretical background’, Small Business Economics, 1, 89–100. Cavusgil, S.T. and S. Zou (1994), ‘Marketing strategy–performance relationship: an investigation of the empirical link in export market ventures’, Journal of Marketing, 58, 1–21. Chandler, G. and S.H. Hanks (1994), ‘Founder competence, the environment and venture performance’, Entrepreneurship, Theory and Practice, 18(3), 77–89.

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Chaston, I. (1997), ‘Small firm performance: assessing the interaction between entrepreneurial style and organizational structure’, European Journal of Marketing, 31(11/12), 814–31. Covin, J.G. and D.P. Slevin, (1988), ‘The influence of organization structure on the utility of an entrepreneurial top management style’, Journal of Management Studies, 25(3), 217–34. Dana, Léo-Paul (2006), Entrepreneurship & SMEs in the Eurozone: Toward a Theory of Symbiotic Enterprises, London: Imperial. de Jong, J.P.J. and M.J. Overweel (1998), Op zoek naar potentiële exporteurs (‘Searching for potential exporters’), Zoetermeer: EIM. de Mooij, R.A. (2000), Economic consequences of EU enlargement, CPB Report 2000/4, The Hague: CPB. EEAG European Economic Advisory Group (2004), Report on the European Economy 2004, München: Ifo Institute for Economic Research. Eriksson, K., Johanson J., A. Majkgård and D.D. Sharma (1997), ‘Experiential knowledge and cost in the internationalization process’, Journal of International Business Studies, 28, 337–60. European Commission (2001), The Economic Impact of Enlargement, Enlargement Paper no. 4. European Commission (2004a), Internationalization of SMEs, Observatory of European SMEs, Report 2003 No. 4, Report submitted to the Enterprise Directorate General by KPMG Special Services, Brussels: EIM Business & Policy Research, and ENSR. European Commission (2004b), The Impact of EU Enlargement on European SMEs, Observatory of European SMEs, Report 2003 No. 6, Report submitted to the Enterprise Directorate General by KPMG Special Services, Brussels: EIM Business & Policy Research, and ENSR. Hessels, S.J.A., M.J. Overweel and Y.M. Prince (2005), Internationalisering van het Nederlandse MKB. Bestaande en gewenste inzichten (Internationalization of Dutch SMEs. Existing and required insights), Zoetermeer: EIM. Jaworski, B.J. and A.K. Kohli (1993), ‘Market orientation: antecedents and consequences’, Journal of Marketing, 57, 53–70. Johanson, J. and J.E. Vahlne (1977), ‘The internationalization process of the firm: a model of knowledge development and increasing foreign market commitments’, Journal of International Business Studies, 8, 23–32. Johanson, J. and J.E. Vahlne (1990), ‘The mechanism of internationalization’, International Marketing Review, 7, 11–24. Johanson, J. and F. Wiedersheim-Paul (1975), ‘The internationalization of the firm – four Swedish cases’, Journal of Management Studies, October, 305–22. Jovanovic, M.N. (1998), International Economic Integration: Limits and Prospects. Julien, P.A. and C. Ramangalahy (2003), ‘Competitiveness and performance of small and medium sized exporting firms: an empirical investigation of the impact of their information behavior’ Entrepreneurship Theory and Practice, 33(3), 227–45. Karagozoglu, N. and M. Lindell (1998), ‘Internationalization of small and medium-sized technology based firms’, Journal of Small Business Management, 36, 44–60. Kindleberger, C.P. (1969), American Business Abroad, Boston: Yale University Press. Knight, G.G. and S.T. Cavusgil (1996), ‘The born global firm: a challenge to traditional internationalization theory’, Advances in International Marketing, 8, 11–26. Korhonen, H. (1999), ‘Inward–outward internationalization of small and medium enterprises’, Helsinki School of Economics and Business Administration. Liang, N. and A. Parkhe (1997), ‘Importer behavior: the neglected counterpart of international exchange’, Journal of International Business Studies, 28(3), 495–530. Madsen, T.K. and P. Servais (1997), ‘The internationalization of born globals: an evolutionary process’, International Business Review, 6, 561–583. McDougall, P.P., S. Shane and B.M. Oviatt (1994), ‘Explaining the formation of international new ventures: the limits of international business research’, Journal of Business Venturing, 9, 469–87. Miesenböck, K.J. (1988), ‘Small businesses and exporting: a literature review’, International Small Business Journal, 6(2), 42–61. Miles, M.P. and D.R. Arnold (1991), ‘The relationship between marketing orientation and entrepreneurial orientation’, Entrepreneurship Theory and Practice, 15(4), 49–65. Naman, J.L. and D.P. Slevin (1993), ‘Entrepreneurship and the concept of fit: a model and empirical tests’, Strategic Management Journal, 14, 137–53. Namiki, N. (1989), ‘The impact of competitive strategy on export sales performance: an exploratory study’, Mid-Atlantic Journal of Business, 25(6), 21–38. Netherlands Scientific Council for Government Policy (Wetenschappelijke Raad voor het Regeringsbeleid) (2003), Nederland Handelsland. Het perspectief van de transactiekosten, The Hague: WRR. Porter, M.E. (1980), Competitive Strategy: Techniques for Analyzing Industries and Competitors, New York: The Free Press. Porter, M.E. (1985), Competitive Advantage, Creating and Sustaining Superior Performance, New York: The Free Press.

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Ropers, S. and J.H. Love (2001), Innovation and Export Performance: Evidence from the UK and German Manufacturing Plants, Belfast: NIERC. Slater, S.F. and J.C. Narver (2000), ‘The positive effect of a market orientation on business profitability: a balanced replication’, Journal of Business Research, 48, 69–73. Thurik, A.R. and A.R.M. Wennekers (2004), ‘Entrepreneurship, small business and economic growth’, Journal of Small Business and Enterprise Development, 11, 140–49. Thurik, A.R., A.R.M. Wennekers and L.M. Uhlaner (2002), ‘Entrepreneurship and economic performance: a macro perspective’, International Journal of Entrepreneurship Education, 1, 157–79. van Dijken, J.A. and Y.M. Prince (1997), Zicht op de relaties tussen marktwerking, innovativiteit en export. Theorie en praktijk (Insight into the relation between the functioning of the market, innovativeness and export. Theory and practice), The Hague: Ministry of Economic Affairs. van Elk, J.W. and M.J. Overweel (1991), Met Kracht Naar Het Buitenland (Full Speed abroad), Amsterdam: ABN-AMRO Bank. Wakelin, K. (1998) ‘Innovation and export behaviour at the firm level’, Research Policy, 26, 829–41. Weerawardena, Jay (2003), ‘The role of marketing capability in innovation-based competitive strategy’, Journal of Strategic Marketing, 11(1), 15–35. Welch, L.S. and R.K. Luostarinen (1993), ‘Inward and outward connections in internationalization’, Journal of International Marketing, 1(1), 46–58. Westhead, P. (1995), ‘Exporting and non-exporting small firms in Great Britain’, International Journal of Entrepreneurial Behaviour & Research, 1(2), 6–36. Westhead, P., M. Wright and D. Ucbasaran (2001), ‘The internationalization of new and small firms: a resourcebased view’, Journal of Business Venturing, 16(4), 333–58. Wiedersheim-Paul, F. (1972), Uncertainty and Economic Distance – Studies in International Business, Uppsala: Almqvist and Wicksell.

29 The impact of the Single Market Programme on the internationalization of Polish SMEs Anna Rogut and Bogdan Piasecki

Introduction and theoretical background to research Country introduction With a population of over 38.6 million and an area of almost 313 000 km2, Poland is the largest new member of the European Union.1 In the enlarged Union, it has the sixthhighest population after Germany, Great Britain, France, Italy and Spain. Private small and medium-sized enterprises (SMEs) have a long tradition in Poland (Dana, 2005). They survived the entire post-war period and began to develop dynamically after 1989, when the new Economic Activity Act came into force. Consequently, the number of registered SMEs rose from 572 500 in 1989 to 3 576 800 at the end of 2004. The largest group of enterprises are microenterprises (employing up to nine people), which account for 95 per cent of all firms. Small firms (10–49 employees) account for four per cent, medium-sized firms (50–249 employees) account for 0.8 per cent and large firms (over 250 employees) account for about 0.1 per cent of all firms (Piasecki, 2002; Przedsie˛biorczos´c´ w Polsce w 2005, 2005). From 1992, the Polish economy grew faster, achieving its best results in the period 1995–98. The year 1999 saw a slow-down in growth, culminating in economic stagnation in 2001–02, but, since 2003, economic revival has been observed in Poland. The average rate of economic growth in Poland is expected to exceed 5 per cent during the period 2005–20. This means an increase in the annual real convergence rate from the current 2.2 per cent to 2.7 per cent. One of the sources of the accelerated growth will be an influx of Union funds, stimulating a growth in the GDP, consumption and investments (Draft National Development Plan 2007–13, 2005). Throughout the period of transformation, Poland witnessed a dynamic increase in foreign trade. For instance, in 2004, the volume of foreign trade rose by over 18 per cent as against 2003, and imports rose by over 16 per cent. Poland’s accession to the European Union also served to boost exports. SMEs have played, and continue to play, a major role in foreign trade. It is reckoned that, during the period 1993–98, the contribution to exports by SMEs rose to 48.1 per cent, but then fell to 47.6 per cent in 1999 and 43.9 per cent in 2001. The downward tendency was arrested in 2002 when their contribution to exports rose to 44.5 per cent, although much of the credit for the improvement lies with medium-sized enterprises, which have had a dominant position in SME exports since 1995 (Rogut, 2002b; Raport o stanie sektora, 2004). Imports by SMEs displayed an even higher growth. Both exports and imports by SMEs were (and still are) concentrated on such sectors as machinery, equipment and electrical appliances; non-precious metals and metal products; means of transport; materials and textile products. These commodities account for almost 513

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60 per cent of the entire exports of SMEs. Since May 2004 (accession to the European Union) exports of agricultural produce have also been a domain of SMEs. A more detailed analysis permits the identification of 22 export niches by SMEs regarding industrial and agricultural goods. Export niches are taken to be those product groups in which (i) the value of exports has risen by at least 100 per cent as against the preceding year; (ii) the value of exports (imports) has not significantly exceeded the levels of exports (imports) in 2001; (iii) the value of exports (imports) amounted to at least USD 1mn in 2002 (Przedsie˛biorczos´c´ w Polsce 2005, 2005). The chief market for exports and imports is the European Union, which accounts for 67 per cent of exports and over 65 per cent of imports by SMEs (Raport o stanie sektora, 2004). An additional factor influencing the high growth of exports is the influx of foreign direct investments (FDI). It is reckoned that, in 2002–04, FDI accounted for 13 per cent of the rise in the volume of exports (Ocena sytuacji, 2005). According to figures at the end of 2004, accumulated FDI in Poland amounted to USD 84.48 bn, including USD 80.65bn worth of large investments; that is, those that exceeded USD 1mn. Investments of less than USD 1mn are reckoned to have amounted to USD 3.83bn. The most FDI came from the EU15 countries and in 2004 accounted for 74 per cent of the total value of FDI. Among the EU countries, the greatest amount of capital was invested by France (over USD 16bn, or about 20 per cent of total FDI in Poland), Holland (over USD 11bn) and Germany (over USD 10bn). Foreign direct investments are usually concentrated in industrial processing (41.4 per cent of total FDI), especially the food industry, means of transport, chemicals, metals and metal products, and electrical and optical equipment. The second-highest FDI is financial brokerage. Increasingly attractive targets of FDI are also trade; electricity, gas and water supply; construction and real estate services. Poland has also become the fifth most attractive offshore location (Bezpos´ rednie inwestycje zagraniczne, 2005). FDI is invested mainly in large firms, but they also provide certain opportunities (coproduction) for SMEs, though caution may be dictated by the experience of some EU countries, indicating that in some sectors (such as the manufacture of means of transport), some ‘local resources’ are beginning to be subjected to European standards. When purchasing, foreign investors pay attention mostly to price, quality, certificates and other characteristics of products and services, and less attention to the proximity of potential suppliers; proximity is taken into account only when it is important to deliver goods quickly, and the type of goods delivered complies with the strict requirements of the consumers (Rogut, 2002a). Aim of the study Membership of the European Union also means entry to the Single Market Programme (SMP). One of the effects of the SMP is disappearing national trading borders. It implies that regional and national markets are more difficult, if not impossible, to separate. This compels large firms to compete against each other on a more international or worldwide basis. In this context, the perception hitherto of the internationalization of SMEs as purposeful, premeditated action assuming the form of outward,2 inward3 or linked activities4 needs to be revised (for an extensive review of the extant studies, see Leonidou and Katsikeas, 1996; Bell et al., 2003 and Wright and Dana, 2003; Young, Dimitratos and Dana, 2003; Fletcher, 2001). Such a perception erases from the field of vision all those

The impact of the Single Market Programme on Polish SMEs 515 firms that are not (or do not want to be) aware of the changes wrought by operations within an internal market, and which, concentrating on the local (domestic) market, ignore the fact that, as a result of political and economic changes brought by the SMP, they have been ‘condemned’ to operate on a wide international basis. This is because the SMP calls for a long and difficult process of adaptation, which fundamentally alters the conditions for business activity. These changes go much further than a mere formal elimination of the barriers to a free flow of goods, services, people and capital. They involve a relocation of resources not just within and between firms, but also within and between industries, regions and domestic market participants (SEC (96) 2378; Przygotowanie krajów stowarzyszonych . . . , 1995). In this context, it appears more sensible to accept the view that the SMP transforms a domestic market into an international market, depriving it of its separation and unique identity. Consequently, firms operating in a single market (including SMEs) automatically become internationalized firms, although among these we can identify firms that are conscious and unconscious internationals. But, in both cases, their operations consist of a palette of activities of considerable importance not only for international trade, but also for the ability to be competitive in an international business environment, especially because the abovementioned relocation involves adaptation costs to a greater or lesser degree. In the short term, this may mean a change (often a deterioration) to the situation of some domestic producers, sectors or regions. SMEs, in a less favourable position than large firms, may particularly find themselves in a worse situation, mainly because they are much less able to influence the external environment of firms; less capable of perceiving and exploiting opportunities or counteracting dangers; and their resources (especially financial and managerial resources) are restricted, which makes the process of strategic adaptation difficult. These features appear in various sectors to varying degrees and intensities, depending on their sensitivity to the SMP (The Economics of 1992, 1988; Buigues, Ilzkovitz and Lebrun, 1990). The purpose of this chapter is to reveal the opportunities for and dangers to Polish SMEs created by the internal EU market, and describe their competitive advantages and strong and weak points and – ultimately – the strategic reactions to ‘forced’ internationalization as a consequence of the SMP. Further, in this article we present the basic conclusions of research into literature on the subject of the impact of the SMP, with particular regard to the place and role of SMEs. This is followed by a discussion of the main threats and opportunities for Polish SMEs arising out of EU membership, including the implications for SMEs at the micro level. The final two sections summarize the main findings and limitations of the study, paths of future research and implications for building a theory of SME internationalization in Europe. Forced internationalization as a result of the Single Market Programme: background of the study The core of the SMP comprises legal regulations intended to eliminate the non-tariff barriers (NTBs) that hamper the free flow of goods, services, people and capital within the European Union (COM(85) 310 final). Eliminating NTBs results in a series of economic consequences, from short and medium-term adaptation to changes in price relations (trade creation and trade diversion through allocative, productive and dynamic efficiency gains), to the migration of industries within the internal market (El-Agraa, 1990;

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McDonald and Dearden [1992], 1994; Cecchini et al., 1988). This migration encourages the emergence of certain specialized profiles (at least in some industries), as a result of the interaction between the industry and the country that hosts this industry. This in turn leads to deepening specialization within the EU and a geographic concentration of business (Midelfart-Knarvik et al., 2000; Aiginger, 2000). These processes do not by-pass new member states (including ones like Poland, which joined the Euro in May 2004), that currently tend to be more specialized in labour-intensive sectors (COM(2004) 274 final). The growing specialization is accompanied by a change to the spatial location and concentration of many industries; for example, many industries with a low or negative level of growth and a large share of unqualified workers are concentrated in the peripheral countries where labour costs are low, whilst many capital-intensive high-tech industries with high-scale advantages, and industries with heavy outlay on R&D, tend to be located in the core countries of the EU (Second report on economic and social cohesion, 2001). An additional effect of SMP is a convergence of the legal, institutional, political and social conditions for business activity, which is akin to external impediments and external incentives, so important from the point of view of the nature and pace of internationalization (Fletcher, 2001). The impact of the SMP is heightened by the progressive liberalization of trade and the recent evolution in ICT. Liberalization is exposing all firms (including those whose business is restricted to the regional/domestic market) to increasing competition from other economies and from new competitors (SEC(2004)1397; Herdzina et al., 2004). ICT (and e-commerce) include firms (SMEs as well) in the global networks orchestrated by transnational corporations which use ICT in order to coordinate global activities (Clusters and SME Globalisation, 2000). The processes described above are leading to the disappearance of national trading borders, which implies that regional and national markets are more difficult, if not impossible, to separate. This compels all firms to compete against each other on a more international or worldwide basis (Sleuwaegen et al., 2001; Veugelers et al., 2002). In the end, firms, including SMEs, are no longer operating in different national markets, but increasingly take a European or even world market perspective. As a result, enterprise behaviour ‘is no longer based only on national considerations, but rather it reflects the increased multinational character of the firm’. (Dierx et al., 2002, p. 18). The behaviour of firms must also take into account to an increasing degree the drastic growth of competition, stimulating firms to develop product and process innovations, except that there is a certain optimum level of competition which, when exceeded, may reduce innovation activities. ‘On the one hand . . . increased product market competition leads to reduced innovative activity, as more competition reduces the monopoly rents that reward successful innovators. On the other hand, endogenous growth models extending the basic Schumpeterian model by allowing firms to innovate predict that more product market competition may end up fostering innovation, as competition may encourage R&D investments to “escape the competition” ’ (Bernard and Leroy, 2003, p. 5). An excellent illustration of these processes is provided by many Italian districts, especially those where traditional industries (footwear, clothes and textiles) predominate and where the opening of the internal market, coupled with a relaxation in trade with third countries, has eliminated some of the smallest producers from the market, especially those producers who manufactured standard, low-quality and very low-priced goods. Their

The impact of the Single Market Programme on Polish SMEs 517 place has been taken by even cheaper producers in Asia. Some firms have attempted to escape into the informal economy (in this way attempting to cut costs), while some have undertaken a struggle to regain their former position by increasing considerably the quality of their products. In the face of the growing price competition, other firms have decided to transfer their business to countries with lower labour costs, nevertheless often leaving the final phase of production in the hands of the parent company. For the smallest firms, this strategy frequently involves difficult organizational problems (inability to coordinate the geographically dispersed co-production network). Large firms have applied this strategy successfully, but some small firms who did so suffered a loss of customers. That was the case with Benetton, whose production was previously performed by almost 500 contractors located close to his ordinary place of business, but who transferred almost one-quarter of his production outside Italy in the 1990s. Those SMEs that had lost their former markets to several leading, usually foreign, firms who frequently acquired 50–60 per cent of regional production also found themselves in a tough situation. But, in this case, the reason was not just the opening of the internal market (raising the minimal threshold of the organizational potential required to compete effectively), but also the development of new IT technologies, which considerably reduced the costs of coordination and encouraged many firms to re-internationalize some of the production phases that had been shut down earlier (Belussi, 1999; Steng, 2001). Danish and Swedish firms had similar experiences (Internationalisation of SMEs, 2004). Things were worse in the case of Portuguese firms, especially those that had previously been sheltered by the strong umbrella of the domestic market (Syrett, 1996). They included food companies, the overwhelming majority of them SMEs, with a relatively low international competitiveness and geared mainly to the small domestic or regional market; with the exception of wine producers and a certain number of exporters of unprocessed fish, fruit and vegetables. Most of these firms had concentrated on standard products. The opening of the market brought them a huge rise in competition from bigger foreign firms, possessing clear cost advantages (larger-scale operations and, in many cases, cheaper sources of supplies). In a short while, the competitive position of Portuguese SMEs was weakened by increased operating costs caused by the expense of adapting to the standards of the internal market. The situation of some food companies was also worsened by their inability to react strategically to internal market conditions (concentration on cost reduction, poor exploitation of new products, company brands, and so on), as well as their poor experience of exports, making it difficult for them to exploit the emerging opportunities. Another threat to some local producers of raw materials was the loss of their previous domestic customers, who took advantage of cheaper, foreign sources of supply. It was different in the case of firms who had previously been intensely engaged in internationalization processes. These included clothing firms which had already been exposed to very strong foreign competition earlier (relaxation of international trade within the framework of GATT). For most Portuguese clothing firms, the source of their competitive edge was the cheapness of local labour (low labour costs) and not the quality of their products (ranging from medium to poor quality). Accession to the European Union and the associated rise in the standard of living (and therefore, also a rise in labour costs) gradually reduced the cost advantage of Portuguese firms, who now became exposed to even cheaper competition from Central–Eastern Europe, Northern Africa, Turkey or China. Neither was the situation of Portuguese firms helped by the fact

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that many of them had merely been subcontractors to other EU firms, as a result of which they had no experience in developing their own designs and applying energetic marketing strategies. Some Polish SMEs may undergo an experience similar to that of Portuguese firms. This is suggested by their current profile of specialization and their chosen model of trade (COM(2004) 274 final; Landesmann, 2003). In the light of the above processes, Polish SMEs have a choice of two alternative paths of strategic adaptation to forced internationalization (Rogut, 2002a). The first of these (traditional scenario) involves the use of their current (cost) competitive advantages, while the second involves a search for new sources of competitive advantages and the start of innovation (innovative scenario). Methodology The chapter uses the results of two extensive projects. The first of them was realized prior to EU accession, during the period 1999–2002,5 and was intended to determine the future impact of Poland’s EU integration on SMEs; identify the basic opportunities and dangers and scenarios of adaptation, and develop a methodology of applying multisectoral econometric models of a national economy to sectoral analyses, especially of the SME sector. The analysis focused mainly on sectors characterized by a large proportion of SMEs (measured in terms of their share in the sector’s turnover) and possessing contrasting conditions from the point of view of current internationalization processes and the nature of their competitive advantages. It took into account the influence of the most important economic processes connected with integration, including (i) the influx of FDI, including SMEs in EU countries; (ii) the gradual elimination of the barriers to free trade; (iii) the expansion of co-production links between Polish and EU firms and the development of strategic alliances facilitating entry into third markets; (iv) an expansion of various forms of consulting offered by western consulting firms; (v) the arrival of financial institutions (for example, foreign banks) offering a broader range of services for SMEs and a bigger volume of credits. This research used two main professional methods: econometric multisectoral models and exhaustive studies of the literature. The second of these projects started at the end of 2003 and is still in progress, so that it includes the post-accession period. Its purpose is as follows: 1.

2.

3.

to determine the information loophole among Polish SMEs and the extent to which they are aware of the opportunities and dangers of the challenges posed to these firms by the internal EU market; to diagnose the current and future strategic adaptation of Polish SMEs to the new business conditions in an internal market, and on this basis determine their ability to fully absorb the advantages of integration; to determine the paths of effective support for SMEs during the initial period of EU membership, including an ability to exploit all the tools of assistance provided to these firms in domestic and EU programmes.

This project mainly uses expert analyses, supplemented by sectoral focus groups and on-line questionnaires, enhanced by case studies. The expert analyses and focus groups concentrated on seeking answers to questions regarding the functioning and building of SME competitiveness in the EU market (competitive branches, products and services;

The impact of the Single Market Programme on Polish SMEs 519 competitive producers; the former experience of Polish SMEs in the EU market; cooperation with the R&D sphere as a way to boost competitiveness; support requirements). The questionnaire and case studies focus on innovation management (strategy of the firm, organizational factors, origin of technological resources, human resources management). The reaction of Polish SMEs to forced internationalization: results Opportunities and threats In considering the specific sources of threats and opportunities for Polish SMEs, the focus is mainly on direct effects (trade creation and trade diversion), which are contributing to new export opportunities on the one hand, but also to increasing competition in domestic markets on the other. While a reduction in the problems associated with physical barriers to trade is of potential benefit to all firms, SMEs are less likely to be able to capitalize on the opportunities afforded by market integration than larger firms. Factors such as a shortage of management time and a more limited capacity to employ specialist management expertise reduces the ability of SMEs to scan, analyse and respond to major environmental change, which accession to the EU represents. In addition, since increases in competition are likely to occur in market segments that were previously sheltered from competition (for example, by distance), SMEs are likely to be vulnerable to the threat from large firms that enjoy economies of scale in production, marketing and distribution. Apart from the trade effects stemming from market integration, SMEs will also face effects that stem from the harmonization of technical standards. This is because, once they have to conform fully with EC directives, SMEs will be subject to harmonized regulations, whether or not they are exporting. This differs from the pre-existing situation in new member states where firms which were only serving domestic markets were only subject to domestic regulations. Clearly, this is likely to pose the greatest threats where the gap between pre-existing national regulations and EU standards is wide. This typically varies considerably between sectors, because of differences in the nature and extent of national regulations and controls (Smallbone and Rogut, 2005, p. 221). The changing impact of sectoral characteristics on opportunities and dangers becomes more evident when we compare two groups of sectors dominated by SMEs, mainly leather and leather products production, and the production of timber products (Table 29.1). In the first case (leather and leather products) we are dealing with a traditional, workintensive industry with a large proportion of SMEs that are capable of facing competition from the internal market, and where EU integration should not affect the sector strongly. However, integration will accelerate the penetration of EU markets, restructuring and a rise in labour costs (and a fall in competitiveness), and will increase the risk of a relocation of industries to countries with lower labour costs (for example, South-East Asia or China). Some SMEs (especially tanneries) may feel the costs of adapting to EU environmental standards particularly strongly, especially in such spheres as spatial planning, assessment of environmental impact; control of waste disposal, pollution, disposal of solid waste; work health and safety; the rules governing the storage, transport, labelling and packaging of chemicals; and restrictions on the use of some chemical substances, such as dyes. On the other hand, the costs of essential adaptation will serve to modernize

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Table 29.1 Opportunities for and threats to the production of leather and leather products and timber-based production Opportunities Leather and leather products 1. Access to EU markets (easier penetration, 1. equal opportunities, incentives for 1. entrepreneurs) 2. Stream of investments (especially clean 1. technologies for tanneries, FDI, joint 1. ventures, EU Structural Funds) 3. General opportunities (spread of brands, 1. increase in productivity and efficiency)

4. Growth in earnings, increasing society’s 4. spending power Footwear 1. Access to EU markets (new technologies, 1. equal opportunities, possibility of a return 1. to German and British markets) 2. Stream of investments (FDI, joint ventures, 2. strategic partnerships; credit and insurance 2. guarantees; EU Structural Funds) 2. 3. General opportunities (spread of brands, 3. increase in productivity and efficiency, new 3. product lines, increase in value added of a 3. product) 4. Good penetration of Eastern markets, 4. especially Russia (Italian footwear does 4. not satisfy the demands of Russian 4. consumers), similar climate (footwear) 4. and prices, geographical proximity 5. Growth in earnings, increasing society’s 5. spending power Timber and timber products 1. Availability of wood 2. 2. 2. 3. 4. 2.

Dangers 1. Increased competition (especially from cheap, 1. low-quality products) 2. Changed production costs (especially rising 1. labour costs) 3. 3. 3. 1. 1. 4. 4.

Subcontracting (relocation to countries with cheaper labour) and – in the event of a lack of restructuring – specialization mainly in the production and export of raw materials and semi-products) Costs of adapting to the acquis (mainly regarding environmental protection)

1. 1. 1. 2. 2. 2. 2. 3. 3.

Increased competition (especially from cheap, low-quality products from China and South-East Asia) No possibility of applying domestic market protection instruments (for example, against Chinese imports) because of common trade policy Changed production costs (especially growing wages and indirect employment costs)

4. Subcontracting (relocation to countries with 4. cheaper labour)

1. 1. Increased domestic demand due to faster 2. economic growth (increased spending power, 2. rise in construction) Large potential Eastern market 3. 2. Better access to the funds needed to 4. modernize some sectors 2.

Costs of adapting to environmental protection requirements Competition from foreign firms operating on the Polish market Restructuring and concentration processes, also stimulated by FDI Changes to production costs (especially higher costs of labour and raw materials)

The impact of the Single Market Programme on Polish SMEs 521 Table 29.1

(continued)

Opportunities

Dangers

5. Access to Structural Funds, earmarked 2. especially for the development of SMEs 2. and for training and further training

5. Danger of specializing in low-quality 2. production

Furniture 1. Increased domestic demand

2. Reduced capital costs

1. 1. 1. 2. 1.

Increasing prices of raw materials (including those imported from Eastern markets) and energy Growing competition from imports (including from EU candidate-members)

3. Easier access to EU markets 4. Support from EU programmes 5. Influx of FDI Source: Piasecki and Rogut (2004, p. 59).

and improve the quality of production, creating greater opportunities for these firms on the internal market either as independent producers or as co-producers. As far as the manufacture of timber products is concerned, this includes various types of business such as timber and timber products, fibrous mass, paper and paper products, publishing, printing and reproduction, and furniture production. In this case, the requirements of acquis communautaire apply chiefly to work health and safety and environmental protection. But the extent of the essential changes may reduce the competitiveness of some Polish SMEs, especially because some of them already cannot cope with international markets. This applies especially to those engaged in the manufacture of timber and timber products which is considered insufficiently attractive to foreign investors, with not enough funds to modernize themselves and replace machinery and equipment, and concentration on low-quality production. In their case, integration may lead to numerous bankruptcies (with the possible exception of sawmills) or, at the very best, a switchover from the role of independent producers to that of subcontractors providing services for large (Polish and foreign) firms. SMEs also have a strong presence in the manufacture of furniture, but here they are able to compete with EU manufacturers, for Polish furniture complies fully with EU standards, and its design and functionality conform to world trends. A comparison between the food and clothing industries provides an excellent illustration of the specific nature of each section connected with the harmonization of technical standards. The food industry is an example of a sector with a relatively low level of internationalization as far as SMEs are concerned. Nevertheless this level is rising steadily, mainly thanks to the spread of Western chains of supermarkets and hypermarkets, which are shaping the food market to an increasing extent. SMEs engaged in the food sector include ones that have not sufficiently implemented EU standards regarding products and processes, including packaging and distribution. Therefore the initial period of operation in a single market may be costly.

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An example of a sector less susceptible to costly adaptation to technical standards is the clothing industry, where the requirements regarding essential harmonization are general (for example, with respect to health and safety) rather than sector-specific. Another advantage of this sector is that it attained a high level of internationalization, also evident in the highly competitive domestic market, where imports from countries with lower production costs are already a threat to domestic producers. Apart from that, SMEs in the clothing industry are relatively strongly engaged in subcontracting and improvement work, and for this reason they were compelled earlier on to modernize their production technologies, design processes, and so on. Therefore, given the current level of competitiveness, these firms should not feel any negative effects of integration. An interesting example is transport, dominated by SMEs, but the burden of adaptation will be felt only by those carriers who concentrate on domestic transportation. Adapting to EU standards will also mean the adoption of EU technical, environmental, insurance, tax and safety norms. For these carriers, it will involve additional costs, such as road utilization tax (currently EUR 6 per day for trucks heavier than 12 tonnes), conversion of vehicles to the norms governing pollution and technical safety, and adaptation to European social standards (maximum driving time, obligatory rest periods), and it will also be necessary to deposit at least EUR 9000 per vehicle as a guarantee of compliance with these norms (three times as much as the current deposit in Poland). The situation with international carriers will be different, for they are already under an obligation to comply with EU standards. They may prove to be exceptionally competitive vis-à-vis their foreign counterparts, mainly on account of lower operating costs (especially lower wages of drivers). It is generally held that the firm beneficiaries of the opening of the domestic market will include SMEs engaged in the manufacture of electrical machinery and equipment, radio, television and telecom equipment; machines and equipment that use mechanical power; heaters and boilers; means of transport (except railway rolling stock and trams); clothing; and furniture. As far as services are concerned, the main beneficiaries will be SMEs that provide construction and transport services. Strengths and weaknesses The use of the above opportunities will require a strategic reaction from Polish SMEs, particularly important in the context of the drastic increase in competition (under internal market conditions). It is true that Polish SMEs experienced an increase in competition throughout the 1990s. What is more, it increased even more as contacts with the EU became relaxed (as a result of the provisions of the European Treaty and the schedule for the creation of a free trade zone). Already during the pre-accession period, SMEs (especially the smallest ones) considered the level of competition on the domestic market to be intensive, and only seldom regarded it as moderate. Nevertheless integration with the European Union is exacerbating this competition, adding a few powerful domestic firms to the body of lesser competitors. Concentration, already occurring in some sectors occupied by SMEs, poses an additional threat. The most spectacular example is the abovementioned food industry, where concentration has been observed for some time already. It manifests itself in, among other things, an increasing market share by the economically strongest food firms and by firms with foreign capital participation. On the other hand, the share of weaker firms in sales is constantly

The impact of the Single Market Programme on Polish SMEs 523 diminishing, with the result that there are more and more cases of liquidation among these firms. Generally, one can say that those firms that were proactively managed earlier and have entered foreign markets are now in a far better position, whilst those whose business has been limited to local or regional market niches and whose managers are satisfied with the occupation of these niches and are therefore not preparing any strategy that conforms with the altered requirements of the domestic market, can experience negative effects of integration in future. Firms which are geared solely to the domestic market and occupy small market niches in which larger firms are not interested, at least for the time being, may also be strongly threatened. Integration with the EU will enlarge these niches, thus making them more attractive to medium (and even large) enterprises. From this angle, an analysis of the strong and weak sides of SMEs is interesting. Of course, each sector has its pluses and minuses, which strengthen or weaken its position under domestic market conditions. Table 29.2 provides an excellent illustration of this diversity, showing the strong and weak points of SMEs that operate in the leather and leather products and timber sectors referred to earlier. A more general view of the strong and weak points of Polish SMEs is shown in Table 29.3: poor investments activity, a relatively low level of innovation, underdeveloped forms of cooperation, low exports (compared to EU countries), more sporadic than regular; poor management (an excessive attachment to price competition; low awareness of the importance of technology in creating a permanent competitive lead; poor awareness of the significance of cooperation). Scenarios of adaptation in the light of the first year of membership Poland currently tends to be more specialized in the labour-intensive sectors. Although the model of trade with the EU is assuming to an increasing extent the characteristics of intra-branch trade, a more detailed analysis shows that, as regards industrial goods, our exports are competitive in a relatively narrow range of products which display large or increasing competitive features (wood and timber products and coke; clothing, except for knitwear and crochet work; copper and copper products; electrical accessories; furniture, medical and surgical equipment; lamps and lighting; construction materials). Apart from that, our exports are increasingly dominated by low-quality and low-price goods (unlike the EU, whose exports comprise products of a high quality and price), and concentrate on labour-intensive segments which create a competitive lead largely due to cheap labour. However, taking into account the rate at which wage differentials are being levelled out, one can assume that this model will continue to dominate in successive years (COM(2004) 274 final; Landesmann, 2003), but we must remember that this advantage is temporary, due to the process of convergence with the rest of the EU. In addition, the cost advantage is reduced by lower labour productivity than in the EU15. Despite considerable progress, the Polish economy is still marked by continuing specialization in labour-intensive industries (for example, clothing and footwear) and a large gap in R&D and skills-intensive sectors (transport machinery, electronic and electrical products). But the diminishing importance of capital-intensive industries is a positive signal (Weber et al., 1999). In the light of the above processes, Polish SMEs have a choice of two paths of strategic adaptation to the conditions of such ‘forced’ internationalization (Rogut, 2002a).

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Table 29.2 Strong and weak points of firms engaged in the manufacture of leather and leather products and in timber-based production Strong points Leather and leather products 1. Long traditions 2. Low labour costs 3. Qualified labour force 4. Good quality of products 5. Good production base (modern machines 1. and equipment)

Footwear 1. Long traditions 2. 3. 4. 1. 5. 1.

Low labour costs Qualified labour force Good quality of products at a competitive price Good production base (modern machines and equipment)

Timber and timber products 1. Advanced privatization 2. High rate of exports and trade surplus 3. Good raw materials base 4. Low penetration by imports 5. Large production potential (including 1. reserves) 6. Successive reduction of gap (vis-à-vis 1. Western producers) in terms of modern 1. machines and equipment, technology and 1. product quality 7. Relatively high level of harmonization 1. of Polish and EU standards

Weak points 1. 1. 2. 3. 1. 4. 1. 5. 1. 1. 1.

Poor supply base (also in view of high level of exports) Low productivity Funds (lack of working and investment capital, high capital costs) Low and diminishing share in domestic market Other factors (no recognized own brands; undeveloped distribution channels; poor marketing skills; relatively poor quality of management)

1. 1. 2. 3. 4. 1. 5.

Poor supply base (also in view of high level of exports) Low productivity Weak position of SMEs Funds (lack of working and investment capital, high capital costs) High share of subcontracting

6. 1. 1. 7. 1. 1. 1. 1.

High share of imports in supplying the domestic market, coupled with society’s low spending power Other factors (no recognized own brands; undeveloped distribution channels; poor marketing skills; relatively poor quality of management; a failure to keep up with fashion trends)

1. 2. 3. 4. 5. 1.

Low level of innovation Reduced own resources for development Low efficiency Largely worn-out machinery and equipment Production technology less advanced than in EU countries

The impact of the Single Market Programme on Polish SMEs 525 Table 29.2

(continued)

Strong points

Weak points

Furniture 1. Good and relatively cheap raw materials 1. base 2. Modern machines and equipment and 1. advanced technologies (mainly in 1. medium-sized and large firms) 3. Compliance with EU quality standards 1. regarding design and safety 4. Qualified labour force 5. Advanced privatization

1. Low productivity 2. Lack of modern technologies, machines and 1. equipment in small and very small firms 3. Restricted possibilities of self-financing 1. development in small and very small firms 4. Not many recognized brands

Source: Piasecki and Rogut (2004, pp. 68–9).

Table 29.3

Strong and weak points of Polish SMEs

Strong points

Weak points

1. 2. 2. 2. 2.

1. Poor financial liquidity 2. Low investments activity

High development priorities Relatively well developed forms of cooperation based on vertical integration (cooperation chain linking the producer, subcontractors, suppliers and retailers)

3. 4. 5. 2. 2. 2. 2. 6. 2. 2. 2. 2. 2. 7. 2. 8. 2. 2. 2. 2. 9. Source: Piasecki and Rogut (2004, p. 66).

Low level of innovation Outdated machine park and old technologies Cooperation (poorly developed forms of cooperation based on vertical integration, that is cooperation with firms from the same branch, R&D centres, educational establishments, business institutions) Low exports activity compared to EU countries, sporadic rather than regular; low level of co-production with foreign enterprises (except for industries that involve considerable improvement work, for example, clothing) Relatively high dependence on the narrow local market Poor management (an excessive attachment to price competition; low awareness of the importance of technology in creating a permanent competitive lead; poor awareness of the significance of cooperation) Weak pressure on building human resources

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The first of these (the traditional scenario) exploits the current competitive advantages, and comprises inter-branch and intra-branch specialization with concentrated lowquality product segments. However, the consequence of this variant may be pressure for specialization in traditional sectors with a relatively low presence of advanced technology, lower-qualified labour forces and cheaper labour costs. This may encourage some labourintensive EU industries to relocate to Poland, though the barriers to such a relocation may be low productivity, high deductions from wages and the absence of a suitable infrastructure. Therefore one can assume that this process will be restricted to a serious degree, and will only apply to those sectors where the labour cost differences between Polish and the EU are indeed very great. In any case, surveys carried out in the 1980s show that EU entrepreneurs are not too eager to relocate to the peripheral countries in the south, even though these countries had very low labour costs in this period. Therefore there is no reason to expect that they will be any more eager to relocate to Poland. The second path involves a change to a country’s profile of specialization, referring to the Ricardian specialization model (innovative scenario). Using new growth theory, we can differentiate between two kinds of specialization: Smithian specialization and Ricardian specialization. Smithian specialization leads to ‘learning-by-doing’ effects and increasing returns to scale, independent of the technological areas in which countries are specialized. Ricardian specialization, on the other hand, concerns the qualitative character of a country’s technological specialization, because countries specialized in technological areas with opportunities for higher rates of productivity growth might be in a better position to achieve fast overall growth. Furthermore, technologically backward countries can catch up by imitating technologies from other countries. (Jungmittag, 2004)

FDI may provide help in this regard. However, many studies show that foreign investors usually have only a limited interest in the overall economic development of their host countries. Most plants set up or modernized with the help of foreign capital remain isolated from the wider local and regional economic context in which they are situated (Brandsma, Thumm and Tübke, 2001). This can lead to the emergence of a ‘dual economy’ (the situation seen in some old member states), divided into a very effective hightechnology sector with a rapidly growing production, but dominated by international companies and, on the other hand, less competitive local industry. Therefore, the innovative potential of Polish SMEs is (and will remain) the basic factor determining the choice of scenario of adaptation. One can assume that, during the initial phase of integration, Polish SMEs will remain in the traditional scenario, though they will raise their level of innovation successively. However, these changes will not be sufficiently radical to shift the SMEs onto a new path of development (innovative scenario), delineated by the logic of European, and also global, competition. A barrier in this regard will be a lack of overall experience in functioning under international market conditions, as well as a relatively weak infrastructure to support innovation. Assistance in making faster use of the scenario will be provided by the development of regional innovation strategies (RIS), geared to a consolidation of endogenic growth factors. The balance of the first year of membership seems to confirm this assumption. On the one hand, it shows that the opening of the internal market has improved the profitability of such manufacturing sectors as timber and timber products, straw and wicker products; clothing; furs; and furniture. At the same time, expectations that the

The impact of the Single Market Programme on Polish SMEs 527 manufacturers of textiles, processed leather and leather goods, metal products and products from remaining non-metal materials would be in a difficult situation have not been confirmed. Following their entry to the internal market, these manufacturers have at least been able to maintain their profitability at its previous level, and have frequently even noted an increase thereof. The food-processing sector and drinks manufacturers have also noted an improvement in profitability. Their success is the direct result of the full access of Polish goods to the EU market. As far as other manufacturing sectors are concerned, the good domestic and overall world economic situation in 2004 had a greater impact on their profitability than mere entrance to the internal market (Dos´wiadczenia pierwszego roku, 2005). Therefore, this confirms that most of the firms that were expected to profit from integration have indeed profited from it, though not to the extent that was envisaged. On the other hand, the experts and entrepreneurs who took part in the focus groups point out that the above picture does not completely conform to the reality, firstly because it only concerns the first six months of EU membership, and secondly because changes to the level of profitability were calculated in terms of current prices, not fixed prices, and current prices in the period under review rose between 10 and 19 per cent in some sectors, and as much as several dozen per cent in others. Therefore, if we are talking of an increase in productivity, we must answer the question: to what extent was this increase actually attributable to an exploitation of the opportunities of integration (that is, increased export potential, increased spending power of the local market, increased sales, and so on) and to what extent was it the result of increasing prices (during the initial period of membership). Apart from that, some enterprises have still not undertaken full expenditure to adapt to EU technical (certificates), environmental and work health and safety standards. Therefore one can say that the first six months is too short a period to provide conclusions as to the predominant models of strategic reaction by SMEs to internal market conditions. Nevertheless, certain dangerous trends already evolved during this period. The most important of these was the poor use of innovation as a source of competitive advantage. It transpired that Polish SMEs continued to prefer price competition to the quality of their products and services. The attainment of a competitive lead through innovation continued to be unpopular among Polish SMEs, although we have no clear picture in this regard. Basing ourselves on the last Innobarometer survey (Flash Eurobarometer, 2004) we can say that Polish SMEs are among the top innovative European firms. For example, Polish SMEs are at the top of the list regarding the number of enterprises that have successfully introduced new or significantly improved products or services in the last two years (82 per cent of Polish SMEs have confirmed that they successfully introduced new or significantly improved products or services in the last two years, compared with 57 to 58 per cent in Estonia and Belgium). Similar levels of innovation were demonstrated by SMEs in Germany (81 per cent), Malta (81 per cent), Austria (81 per cent), Portugal (81 per cent) and Lithuania (85 per cent). Polish SMEs also show an above average percentage of firms that conducted market research into new products or services in the last two years: 38 per cent of such Polish SMEs compared with 54 per cent in Slovakia, on the one hand, and Germany, Luxembourg and the Czech Republic (with less than one in four enterprises confirming that they have recently conducted such studies) on the other. A little worse is

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the situation with in-house R&D; only 44 per cent of Polish SMEs claimed to have carried out in-house research in the past two years compared to 53 per cent as an average for the EU25. However, this average result masks a schism between the EU15 group and the new Member States where respective results of 54 per cent and 44 per cent are observed. An opposite trend is observed in the field of outsourced R&D, where Polish SMEs are placed above the EU25 average. A similar optimistic picture emerges from self-assessments of innovation performance by enterprises, taking into account the following areas: ● ● ● ● ●

frequency of introduction of new product models, packaging, or new forms of services; frequency of modifications made to products or services; frequency of changes to the production or services provision systems, new quality control systems; changes to the product distribution system or customer acquisition system; changes to the company’s organizational structure.

The responses to the above items are very similar. Entrepreneurs most believe often that their products, services, production systems, distribution and other systems are as innovative as those of their EU competitors (Report on the Condition of the Small and Medium-Sized Enterprise Sector in Poland, 2004). It is clear that these assessments are solely an expression of subjective speculations. A comparison of the self-assessment with more objective indicators, such as the number of patents or user trademarks held or purchased, the intensity of cooperation with R&D establishments, and the intensity of involvement in research programmes, shows a less rosy picture. For example, only 10 per cent of firms cooperate with a scientific centre, and fewer than 20 per cent indicate collaboration with a research institute or university. Collaboration between companies and the scientific community typically focuses on very tangible issues. It mostly pertains to technology and products and has led to either the introduction of improvements or implementations of new solutions. Cooperation with respect to the organization or logistics is incomparably less frequent (Rogut, 2005). Discussion This chapter is an attempt to present a concise summary of the results of earlier surveys into the changed behaviour of Polish SMEs during preparations for EU integration, then following integration, and finally within an internal EU market. The central topic of discussion is the opportunities and dangers emanating from this: the primary competitive advantages, the strong and weak points of Polish SMEs and, finally, their strategic reactions to forced internationalization. This topic is exceedingly important in view of the fact that the condition of SMEs will determine the overall balance of advantages. In this context, one of the immediate policy priorities is to put emphasis on improving the level of detailed knowledge of the changes to the business environment that SMEs in specific sectors may face as a result of EU accession. The first months of membership is too short a period to provide conclusions as to the predominant models of strategic reaction by SMEs to internal market conditions.

The impact of the Single Market Programme on Polish SMEs 529 Nevertheless, they already indicate certain dangerous trends, especially too low a level of innovation; Polish SMEs continued to prefer price competition to the quality of their products and services. The attainment of a competitive lead through innovation continues to be unpopular among Polish SMEs, although we have no clear picture in this regard. Depending on the methodology adopted, we observe widely different results. There are the results of surveys based on self-assessments of innovation performance (frequency of introduction of new product models, packaging, or new forms of services; frequency of modifications made to products or services; frequency of changes to the production or services provision systems, new quality control systems; changes to the product distribution system or customer acquisition system; changes to the company’s organizational structure). Entrepreneurs most often believe that their products, services, production systems, distribution and other systems are as innovative as those of their EU competitors. Another extreme is illustrated by the results of surveys based on more tangible indicators, such as technological know-how (the number of patents and user trademarks held or purchased, the level of R&D expenditures, the number of scientific personnel and so on.) However, in practice, these are input measures rather than indicators of the results of innovative efforts and may underestimate the amount of innovation taking place in SMEs. Unlike large enterprises and state institutions, SMEs often develop new products and technologies ad hoc, which means that the contribution of the SME sector to developing innovations is often underestimated. Implementing new ideas does not always require high R&D spending, although larger sums may be necessary during later stages of new product development, to construct a prototype, for example and test an idea directly on the market. Furthermore, R&D expenditure is typically highest in branches of industry where the role played by the SMEs is the smallest, especially in the production of chemicals, coke, tobacco products and means of transport, as well as in oil refining. (Smallbone and Rogut, 2005, p. 225)

Nevertheless there is no doubt that Polish SMEs have a low level of interaction with external actors of various sorts (customers, suppliers, specialist research centres and so on) and a low intensity of formal relationships with the external R&D base (high schools, R&D institutions, Polish Academy of Sciences), as well as lacking formal agreements with international R&D institutions. This illustrates the need to develop close cooperation between the world of science and the world of politics policy in preparing and implementing a complex SME support policy. Such cooperation has already been initiated, an example of which is the formulation of regional innovation strategies. Its successful implementation calls for a rapid and effective identification and practical implementation of effective mechanisms of dialogue and cooperation between scientists and politicians. The creation of such a mechanism must be supported by future research into such spheres as the following: 1.

Deepening knowledge of the demand for innovation by identifying and mapping existing clusters/networks in order to diagnose the innovation capacity of key sectors; examine the interrelations between firms and support agencies within clusters/networks; and detecting practices that would trigger a transition from networks into clusters.

530 2.

3.

4.

Handbook of research on European business and entrepreneurship Evaluation of the technological capacity (the state of technologies applied and wider pertinent technological advances), procedures and needs of Polish firms and identifying its strong and weak points in order to identify the areas where firms require the greatest support in the context of their R&D and innovation capacities and capabilities and to stimulate a thinking process among SMEs. Measurement of the quality and performance of the local/regional/national business support system in order to identify weaknesses and their sources; compare the business environment with those of other EU regions and learn from them; identify and exchange best practices in the field of delivery of business support mechanisms, adapt them to local/regional/national needs and establish better business support services. Providing SMEs with a practical vision for longer-term, strategic visions and developmental scenarios technology and regional foresight).

Overview of the internationalization process of SMEs in Poland These surveys lie within the framework of the revived debate that has been in progress for some time on the subject of the dangers which relocation and deindustrialization pose for European manufacturing (COM(2003) 704 final). The EU industry faces continuing competition from other developed economies, particularly in the high-technology sector and from new competitors. The latter case can be illustrated by China. Originally China focused on the toy and textiles and clothing sectors. In the 1990s, Chinese exports spread to products with a strong technological content (electronics). More recently, China has moved into other sectors with a major technological content, such as chemicals, and even into leading-edge sectors (ICT, biotechnologies) and research and design activities (electronic components). Also other countries (for example India) have adapted, in addition to its traditional sectors such as textiles, a niche strategy in fields with high added value, such as biotechnologies and ICT, based on the creation of clusters of local companies and American and European multinationals (SEC(2004)1397). These trends strengthen the possibility that certain industries, especially low-tech industries, would move outside Europe, bringing in their wake other user or supplier sectors. Some companies have already delocalized, or intend to do so, in order to benefit from lower labour costs. The phenomenon of relocation is beginning also to extend to research activities and high-tech sectors, although it is not possible to quantify it accurately or to distinguish it from the worldwide expansion in industrial activity. The trend could be stopped thanks to the enlargement. Following it, the EU has absorbed a group of countries with relatively low-wage economies, yet with considerable technological experience. This advantage is, however, temporary, owing to the process of convergence with the rest of the EU, although the rates of convergence will vary. In addition, the cost advantage is reduced by the fact that their labour productivity is much lower than in the current member states. Nevertheless, the comparative advantage of the new member states has already led numerous producers in the EU15 to locate some of their production there, and this is likely to continue. Notes 1. In May 2004, 10 new countries were added to the European Union. Apart from Poland, the new memberstates are Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, the Slovak Republic and Slovenia. 2. All activities addressed to foreign markets, starting from export and ending on FDI.

The impact of the Single Market Programme on Polish SMEs 531 3. Importing, buying agent, buying office overseas, licensee or franchisee in host country. 4. Strategic alliances, countertrade and cooperative manufacture, also including inward and outward international activities. 5. Financial surveys by the Scientific Research Committee, project no. 1 HO2B 01 817.

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Przedsie˛biorczos´c´ w Polsce w 2005 (2005), Ministry of the Economy and Labour, June, http://www.mgips.gov.pl (10.07.2005). Przygotowanie krajo´w stowarzyszonych Europy S´ rodkowej i Wschodniej do integracji z Rynkiem Wewne˛trznym Unii Europejskiej. Biala Ksie˛ga. Aneks (1995), European Commission, Delegation of the European Commission in Poland, Warsaw. Report on the Condition of the Small and Medium-Sized Enterprise Sector in Poland in 2002–2003 (2004), Polish Agency for Enterprise Development, Warsaw. Rogut, Anna (2002a), Male i s´rednie przedsie˛biorstwa w integracji ekonomicznej. Dos´wiadczenia Unii Europejskiej. Lekcje dla Polski, University of Lo´dz´ Publishing House. Rogut, Anna (2002b), ‘From transformation to integration – role of small and medium-sized enterprises’, in Piasecki, Bogdan (ed.), Entrepreneurship and Small Business Development in the 21st Century, University of L o´dz´ Publishing House, pp. 405–428. Rogut, Anna (2005), Potencjal polskich MSP w zakresie absorbowania korzys´ci integracyjnych, Report, June , typescript. Sleuwaegen, L., I. De Voldere and E. Pennings (2001), ‘The implications of globalization for the definition of the relevant geographic market in competition and competitiveness analysis’, Final report, http://europa.eu.int (1.12.2001). Smallbone, D. and A. Rogut (2005), ‘The challenge facing SMEs in the EU’s new member states’, International Entrepreneurship and Management Journal, 1, 219–40. Steng, Werner (2001), A textile and clothing industry in the EU. A survey, Enterprise Papers No 2-2001, http:/europa.eu.int/comm (25.05.2002). Syrett, Stephen (1996), ‘Internationalization, European integration and the Portuguese economy: the case of the food manufacturing sector’, The Cyprus Journal of Economics, 1 (9), 66–88. The Economics of 1992. An assessment of the potential economic effects of completing the internal market of the European Community (1988), European Economy Nr 35, Commission of the European Communities. Veugelers, Reinhilde, Leo Sleuwaegen, Isabelle De Voldere, Joke Reynaerts, Katrien Rommens, Laura Rondi, Davide Vannoni, Luigi Benfratello, Steve Davies, Peter Egger and Michael Pfaffermayr (2002), ‘Determinants of industrial concentration, market integration and efficiency in the European Union’, in European Economy, Special report No 2/2002, European Commission, pp. 104–211. Weber, Mathias, Werner Meske and Ken Ducatel (1999), ‘The Wider Picture. Enlargement and Cohesion in Europe’, European Commission, Institute for Prospective Technological Studies. Wright, R.W. and L.-P. Dana (2003), ‘Changing paradigms of international entrepreneurship strategy’, Journal of International Entrepreneurship, 1, 135–52. Young, S., P. Dimitratos and L.-P. Dana (2003), ‘International entrepreneurship research: what scope for international business theories?’, Journal of International Entrepreneurship, 1, 31–42.

30 Export performance and productivity in Portuguese manufacturing SMEs Margarida Proença, Isabel Correia and Orlando Petiz

1 Introduction This chapter examines the determinants of export propensity of Portuguese manufacturing SMEs. The most recent literature on firm’s internationalization tries to establish a relationship between performance, productivity and trade, assuming a model with heterogeneous firms. Applying quantile regression, this study supports the notion that firms are heterogeneous, and that exporting firms have higher productivity levels and are more technologically sophisticated than other firms in the same industry. International trade among industrial countries has, since World War II, risen at a faster rate than their national incomes. Almost every discussion of globalization and internationalization of production underlines the growing share of trade in output, the removal of barriers to trade and technical advances. In recent decades, considerable attention has been given to firm-level adjustment to international markets. From the product cycle model to the monopolistic advantage model of Hymer, the Uppsala School to the eclectic paradigm of Dunning and the transaction cost analysis, the literature is huge, but quite broad and poorly integrated and, in general, it does not take into account firm size. In fact, in most of this research, firms assumed to go international are large and mature, being the result of incremental decisions in the domestic markets (Johanson and Mattsson, 1988), a process, an evolution of the involvement in international operations (Welch and Luostarinen, 1988; Wind et al., 1973). In this debate, SMEs have been relegated to a minor role, which is in contrast to the European industry structure. It was almost assumed that small firms’ characteristics such as limited financial resources and managerial capabilities and objectives indicate different strategies, more adequate to domestic markets. However, technological changes in communications and transport, an increased homogeneity of consumers’ preferences and business cycles synchronization, the liberalization of regulatory systems, and spatial movements of people, goods, services and finance, contributed to the integration of national economies in the world markets. These changes are expanding markets, reducing costs and the risks associated with market transactions. SMEs benefit from globalization and consumers’ love of variety, being now more integrated in the world’s market through exporting. According to an assessment of SMEs and internationalization completed by the OECD (1995), about 26 per cent of exports within country members were provide by SMEs. They are ‘international players’ (Kohn, 1997) and authors such as Kandasaami (1998) and Know and Hu (2001) even identified the characteristics of ‘born-global’ SMEs. But, despite an increasing number of studies recent years, many aspects of export performance determinants remain unclear. In Portugal, the importance of SMEs is overwhelming. In 2001, 99.5 per cent of all enterprises were small or medium in size. They generated 75 per cent of total employment 533

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and 59 per cent of domestic shipments. From 2000 to 2001, in larger firms, total nominal shipments decreased by 8.6 per cent, and employment increased by only 1.8 per cent; in SMEs, both shipments and employment increased, respectively, by 5.3 per cent and 12.3 per cent. We investigate below the link between export performance and relative productivity and efficiency in Portuguese small and medium firms. However, to our knowledge, the inter-firm variation in the export propensity of Portuguese SMEs has not been studied. This study builds on a very recent empirical literature that shows that differences among firms are very important to explain world trade. Authors such as Schmitt and Yub (2001), Montagna (2001), Melitz (2003), Bernard, Eaton, Jensen and Kortum (2003), Helpman, Melitz and Yeaple (2004), Falvey, Greenaway and Yu (2004), Fryges (2000), Melitz and Ottaviano (2003), Yeaple (2005) and Baldwin (2005) incorporate firm-level heterogeneity as a requirement to explain trade volumes and prices, and productivity. Exporting firms have higher productivity levels and are more technologically sophisticated than other firms in the same industry. More efficient and more productive firms have more success in penetrating external markets, but exporting does not confer benefits in the form of faster productivity growth at the plant level (Bernard and Jensen, 1999). The rest of the chapter is organized as follows. In Section 2 we take a closer look at SMEs’ internationalization process. Section 3 contains a more thorough investigation of the central question of the chapter: do more efficient and more productive firms have more success in penetrating external markets? Besides the factors encompassed in total factor productivity, are there firm-specific factors that affect their ability to penetrate international markets? Section 4 describes the data and reviews the different methodologies. Estimation of our model was made using both OLS and quantile regression (Koenker and Basset, 1978), a method for estimating functional relations between variables for all portions of a probability distribution. Using OLS, one is implicitly assuming that differences in the impact of exogenous variables along the conditional distribution are not relevant. This estimation method, however, brings problems when the exogenous variables influence variables along the conditional distribution of the dependent variable other than the mean. In that case, the QR (quantile regression) estimator appears superior, allowing researchers to fit parsimonious models to an entire conditional distribution. Section 5 presents the empirical results and analyses are reported. Finally, we conclude and present some policy recommendations. 2 Small and medium firms’ adjustment to globalization Internationalization is an inevitable process. The literature on firm-level adjustment to international markets is impressive and well known. Firms’ internationalization relates to the consequences of incremental decisions in the domestic markets (Johanson and Mattsson, 1988), or it can be seen as a process, an evolution of the involvement in international operations (Welch and Luostarinen, 1988). Wind et al. (1973) define internationalization as a specific process which associates attitudes and orientations with successive degrees in the evolution of international operations, the result of foreign orientation of managers, being reinforced through a learning formal and informal process (Kandasaami, 1998; Know and Hu, 2001). To Johanson and Mattsson (1998) internationalization looks like a process of creation of networks, continuously being constructed and developed along each firm-competitive advantage. The process of internationalization of small and medium firms cannot be explained by a linear process, based on steps along time.

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The literature on the determinants of export or any other mode of entry in international markets and specific, different observable characteristics in different firms within the same industry, was stimulated by authors such as Fryges (2000), Johanson and Mattsson (1988) and Bernard and Jensen (2004). On the basis of empirical studies, they argue that a learning process through exports relates to internationalization and productivity. Firms learn to adapt to new habits and standards, to higher and more aggressive competition. They have incentives to differentiate products and to be more technologically driven. This learning process increases firm competitive capacity, and moreover has an impact on the growth rate of overall productivity, which can be very important for small and medium firms. Entrepreneurs and firms’ owners are very important; education, qualifications, business experience, attitude towards risk and ‘export entrepreneurial orientation’ have a very important role in explaining export propensity. The interactive learning process in a globalized world allows SMEs to access new knowledge and internalize the strategic importance of the new intellectuality of markets (Acs and Preston, 1997). Learning-by-doing forces firms to maintain routines, internal norms and standard common procedures (Eden, Levitas and Martinez, 1997). This creates conditions for strategic alliances in international markets (Kohn, 1997; Lundan, 2002). Cooperation can induce and facilitate entrepreneurial growth, being a priority to small and medium firms going international (Lundan, 2002). Through cooperation, small firms can overcome smaller size and experience, financial obstacles and less productive capacity. Cooperating through strategic alliances, SMEs can increase the probability of innovation and thus intensify internationalization (Lundan, 2002). Market imperfections, externalities, expansion of FDI and governmental impositions are valid reasons for firms’ internationalization, as they are looking for new markets, new resources, new strategies. Firms are economic institutions oriented towards profit maximization, even in imperfectly competitive world markets (Berhman, 1972; Kindleberger, 1969; Itaki, 1991; Acs and Preston, 1997; Acs et al., 1997). To some authors SMEs, being more flexible, are more innovative than larger ones (Almeida and Kogut, 1997), which can be an asset in specific ‘deep niches’ in global markets. Small-sized firms that can rely on specific technological and commercial capabilities (Lefebvre et al., 1998) or have a specific highly competitive product (Philp, 1998) outperform their competitors on international markets (Lefebvre et al., 1998). To Eden, Levitas and Martinez (1997), FDI is a key to increasing firms’ performance and competitive advantages, but internationalization of SMEs is a process which differs from large multinational firms. Some of them are able to invest abroad, but the main mode of entry is through export. Some small and medium firms behave in an active way, looking for new international market opportunities (Wright and Dana, 2003), but the more common behaviour is reactive, answering to external solicitations (Etemad and Wright, 2003). 3 Heterogeneous firms, trade and productivity Traditional comparative advantage theory assumes a perfectly competitive, constant returns world. Even when modelling trade in presence of increasing returns, it is assumed that those economies of scale are external to the firms, assumed as homogeneous. In consequence, conventional trade theories are inadequate to explain, in empirical terms, such questions as the volume of trade, the composition of trade, the role of intra-industry trade and direct foreign investment.

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Over recent decades, international trade microeconomics have been extended. Modelling approaches incorporating imperfect competition and increasing returns made it possible to explain intra-industry trade, as well as allowing us to look at the determinants of the number of firms in an economy and its propensity to export. However, perhaps because of the ‘excessive specialization’ between theorists, applied econometricians and governmental statistical offices, to date no unified theoretical model has been established on which factors explain export performance. There are, of course, quite a number of attempts to include theoretically justifiable variables. Fast-growing countries tend to have rapidly growing exports. More firms tend to produce a greater variety of goods, expanding their share of world markets. Some authors point to the influence of non-price factors such as technology and innovation affecting international competitiveness. New trade theory and the new economic geography have a major responsibility in explaining how the role of multinational corporations and location decisions profit maximization. But, in general, the empirical unit of analysis is country, region, industry or factors of production. A few very recent theoretical and empirical studies (Melitz, 2003) emphasize the difference between non-exporters and exporters. Exporting firms have higher productivity levels and are more technologically sophisticated than other firms in the same industry. Van Biesebroeck (2003) found evidence that exporter firms have a higher capital–labour ratio, higher value-added as a percentage of sales and a higher propensity to export; the rate of investment is higher and provides their employees with higher levels of formal training. Greenaway (2004) found evidence that productivity difference predates any entry into exporting. Exporters grow faster both in domestic and in international markets, and are associated with a more efficient allocation of inputs. That is, more efficient and more productive firms have more success in penetrating external markets, but exporting does not confer benefits in the form of faster productivity growth at the plant level (Bernard and Jensen, 1999). According to this new approach, the impact of openness at firm level is different from firm-to-firm within sectors. Firms’ marginal costs and fixed market-entry costs added to the cost of developing new varieties are heterogeneous (Baldwin, 2005). Within each sector there are small and medium firms and large firms; there are also exporters, nonexporters and firms that do not produce. Following Melitz (2003), Helpman, Melitz and Yeaple (2004) and Baldwin, (2005), only firms with low marginal costs will present operating profits that justify the fixed costs of producing a new variety. Thus, it will be expected that exporting firms should have a maximum marginal costs threshold below the corresponding value for firms that sell only in the domestic market. Efficiency, innovation and exports are closely related. Although only a fraction of firms in each sector export their outputs, their performance depends on innovation and varieties differentiation, efficiency and productivity. Freer international markets will select firms, independently of size, and reallocate production shares from less efficient to the most efficient firms (Melitz, 2003). The impact of globalization and a more free trade, assuming different marginal costs and fixed market-entry costs, is important, since it will allow each exporting firm to increase exports. Moreover, the size of new exporters should be smaller than the existing ones (Baldwin, 2005). This prediction explains the increasing role in world markets of SMEs.

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4 Data and methods In this work we used a sample of 81 small and medium-sized firms of Portuguese manufacturing. This database contains firm-level data for the years 2002 and 2003 and was constructed using IFQUATRO and Dun and Bradstreet information, as well as data directly collected from firms. In order to explore the impact of the different operational characteristics of firms on their ability to sell in foreign markets, the growth accounting approach was the methodology chosen. Following Basu and Fernald (1995) we start from a Cobb–Douglas production function to test the hypothesis that differences among firms’ export propensity are mainly explained by differences in the level of efficient utilization of inputs in production. The Cobb–Douglas production function has the form: Yit
AitKitLitMit,

(30.1)

where: Yit is gross output of firm i in period t; Kit, Lit and Mit represent production factors – capital stock, labour and materials; Ait is total factor productivity (TFP) or Solow residual for firm i at time t.

● ● ●

Let us suppose that firms’ production function is homogenous of degree r in K, L and M, so that r
    
1. Decomposing gross output Yit into exports (EXPit) and domestic sales (DOMit), we can rewrite equation (30.1) as EXPit
AitKitLitMit  DOMit.

(30.2)

Dividing both sides of equation (30.2) by Yit we obtain: EXPit Yit
AitKitLitMit Yit  DOMit Yit.

(30.3)

Under the assumption of perfectly competitive markets, the marginal product of each input is equal to its market price; hence, we can rewrite equation (30.3) as expit
ait  kit  lit  mit  domit, where: ● ● ● ● ● ●

expit
ln(EXPit Yit ) ; ait
ln(Ait Yit ) ; kit
ln(Kit Yit ) ; lit
ln(Lit Yit ) ; mit
ln(Mit Yit ) ; domit
ln (DOMit Yit ) .

(30.4)

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From the estimation of equation (30.4), we can assess the way differences in export propensity among firms can be explained by structural differences that determine their different level of efficient use of inputs in production. In fact, total factor productivity (TFP) is reflected by the constant of equation (30.4), it being expected that, the better the utilization of factors of production, the greater the firm’s propensity to export. So, the next step is to identify those structural differences among firms that determine their distinct performance in what concerns the efficient use of resources. In order to prosecute this aim, there was introduced into equation (30.4) a set of variables that may account for structural differences among firms: expit
ait  kit  lit  mit  domit  Sit  it,

(30.5)

where Sit is a set of variables that include capital intensity, skills, labour intensity, type of ownership and an industrys technological intensity. As mentioned above, we want to estimate the export determinants of Portuguese manufacturing SMEs. Our hypothesis is that exports are mainly determined by their relative productivity and efficiency in utilization of inputs in production. More efficient firms are those that exhibit a greater export propensity. The dependent variable of our model is the export propensity, measured by the exports to sales ratio: expit
ln(EXPit Salesit ) . Besides the factors encompassed in total factor productivity, there are a sort of firm-specific factors that affect either positively or negatively their ability to penetrate international markets. The explanatory variables include type of ownership, firm age, localization and innovation capabilities, and employee’s skills. As discussed above, multinationals are commonly associated with firms with a superior performance, measured in terms of profitability as well as productivity and efficiency; so foreign firms should be viewed as more competitive, as well as more advantaged, in foreign markets than domestic firms’ ones; a firm’s age should influence positively export propensity, as age brings experience, maturity and a greater capacity to face risks associated with international activities; local productive systems with dense relationships of business activity and industrial atmosphere externalities can afford competitive advantages of firms. Innovative firms are more productive and more competitive; their ability to internationalize should be superior. Low-cost unskilled labour can be a competitive advantage if firm competition is cost-based; otherwise, if foreign penetration depends on design, quality and reliability, we expect to find a positive correlation between labour skills and export propensity. There is still a set of factors that are somewhat conditioned by technology or that are related to industry. The literature suggests that these firms are more export–oriented, so we can expect to find a negative correlation between the scope of value added and export propensity. Capital intensity is mainly associated with scale economies; because of the reduced dimension of the Portuguese market, the realization of scale economies should be dependent on firms’ penetration of foreign markets, so it is expected to find a positive correlation between capital intensity and export propensity. Labour intensity is, in general, associated with the competitive advantages based on the low labour cost. The scope of value added tells us if firms are vertically integrated, performing various functions in the vertical chain or if the firm is a subsidiary in the production chain; it is relatively common

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to find subsidiaries acting as a place of processing and assemblage of imported components that are then exported. Finally, there are industry-specific factors, that potentially condition firms’ export propensity. We used a dummy variable to measure the sectorial technological intensity effect on export propensity. Firms are classified from zero (0) to four (4), this value corresponding to the highest sectorial technological intensity. The independent variables were selected having in mind theoretic and empirical findings of the literature, and are listed below. FOR stands for the type of ownership; it is represented by a dummy that assumes value 1 if there is some foreign participation in social capital of the firm, and value 0 otherwise; it is expected to assume a positive sign. Capital intensity (K_Int), is measured by the ln of the fixed asset per employee; the literature points to a positive correlation between this variable and export propensity. Skill intensity (Skill), is proxied by the ln of labour costs per employee; it is expected to be positively correlated with export propensity. L_Int stands for labour intensity, and it is measured by the ln of labour costs to total costs ratio and should be negatively correlated to export propensity. The scope of value added (SVA), is measured by the ln of the share of GVA (gross value added) on sales; it is expected to have a negative sign. Aglom represents the economies of agglomeration. It is represented by a dummy that assumes value 1 if the firm’s location is near Lisbon or Oporto, and value 0 otherwise; it is expected that it has a positive influence on export propensity. AGE stands for age of the firm, representing experience and a greater ability to face risks. It is expected to obtain a positive sign. The innovative abilities Inov were proxied by the ln of the value of the intangible fixed asset; their influence on a firm’s propensity to export is expected to be positive. Industry’s technological intensity (Tecnol) is represented by a ranking based on the classification of industries by the observatory of employment and graduate training; rank goes from 0 (low technology) to three (high technology). The model was estimated in two steps, using first OLS and then quantile regression. Using the OLS, one is implicitly assuming that differences in the impact of exogenous variables along the conditional distribution are not relevant (it is based on the mean of the conditional distribution of the regression’s dependent variable). This estimation method, however, brings problems when the exogenous variables influence variables along the conditional distribution of the dependent variable other than the mean. In that case, a quantile regression estimator appears superior, allowing researchers to fit parsimonious models to an entire conditional distribution. (Koenker and Basset, 1978) is a method for estimating functional relations between variables for all portions of a probability distribution. In quantile regression, the estimated regression coefficients can be interpreted as the marginal change in the dependent variable at the kth conditional quantile due to a marginal change in each independent variable. Table 30.1 presents the parameters estimated for the model using OLS for several specifications. The results are, in general, consistent with the priors. The constant value is always positive, as expected. More efficient firms export more. The main variable

540

Adj. R sq N

Aglom

Age

VAS

Inov

Tecnol

Skill

L Int

K Int

FOR

ln dom

ln m

ln l

ln k

constant

0,3901 162

7.5296* (3.18) 0.7000* (2.40) 2.1189* (4.49) 1.9349* (3.37) 0.6743* (5.31)

Model 1

0,3864 162

7.5893* (3.18) 0.6992** (2.39) 2.1341* (4.47) 1.9446* (3.37) 0.6752* (5.30) 0,2545 (0.24)

Model 2

0,3963 162

5.4158** (2.08) 11,4499 (0.23) 9.8308 (0.20) 3.0341* (3.85) 0.7016* (5.51) 0.6324 (0.56) 10.9701 (0.22) 1.3851** (2.12)

Model 3

Empirical findings: OLS estimation

Empirical findings

Table 30.1

5

0,4255 162

4.5655*** (1.78) 23,0354 (0.45) 9.9028 (0.16) 8.9676 (0.16) 0.7714* (6.10) 1.1028 (0.98) 22.4745 (0.43) 10.3834 (0.18) 11,1999 (0.20) 1.1732* (3.14)

Model 4

0,4232 162

4.7606*** (1.84) 23,8229 (0.46) 9.7272 (0.16) 10.1240 (0.18) 0.7595* (5.93) 1.2582 (1.09) 23.3198 (0.45) 11.1783 (0.20) 12,3151 (0.22) 1.1658* (3.11) 0.5829 (0.62)

Model 5

0,4212 162

4.4521*** (1.69) 24,7774 (0.48) 12.8832 (0.21) 7.8768 (0.14) 0.7534* (5.85) 1.3844 (1.19) 24.2036 (0.47) 8.8352 (0.16) 10,0313 (0.18) 1.2037* (3.17) 0.5316 (0.56) 0.2958 (0.69)

Model 6

0,4253 162

3,0552 (1.09) 27,2705 (0.53) 3.4866 (0.66) 19.6818 (0.34) 0.7697* (5.98) 1.7917 (1.50) 26.6779 (0.52) 20.8791 (0.36) 22.0170 (0.38) 1.2258* (3.24) 0.2167 (0.222) 0.3010 (0.70) 0,0277 (1.44)

Model 7

3,4185 (1.25) 18,4352 (0.36) 22.8221 (0.37) 8,6165 (0.15) 0.7402* (5.88) 0.4629 (0.37) 17.8626 (0.35) 7,1659 (0.13) 6.1416 (0.11) 1.2891* (3.49) 0,2997 (0.31) 0.2289 (0.55) 0,0255 (1.36) 1.7830** (3.00) 0,4546 162

Model 8

Portuguese manufacturing SMEs

541

capturing the technological factor, Tecnol, is statistically significative, with a positive sign. It is interesting to note that, although variable INOV, measured by intangible fixed assets, obtains a negative sign, it changes from negative to positive when we take into account the impact of economies of agglomeration (Aglom). This result confirms the impact of innovative environment, including spillovers effect, in influencing the firm’s export propensity. The estimated sign of Skill is positive as expected. The higher the labour qualification, the higher will be the impact on productivity and competitiveness. However, it is not statistically significative. The variable FOR represents foreign ownership in Portuguese SMEs. It presents a negative sign, being not statistically significant. According to the results we obtained it is not possible to confirm the hypothesis that foreign ownership determines exports. As for the firm’s characteristics, the measure of capital intensity K Int is not significant, and the sign is not the hypothesized one. Higher capital intensity may not give SMEs a competitive advantage in Portugal. Labour intensity (L Int) shifts the sign from negative to positive when we account for the agglomeration effect (Aglom). Although statistically significative, we cannot be sure that export propensity is not higher in the more labourintensive firm. The estimated sign of Skill is positive as expected. As indicated above, the higher the labour qualification, the higher will be the impact on productivity and competitiveness. The variable VAS is the ratio of value-added to sales. An increase in VAS would translate into more vertical integration. On the contrary, a negative sign would indicate specialization in the different phases of the productive process. The obtained sign is the hypothesized one (negative). The coefficient of AGE is positive, as expected. This result indicates that export firms are the more experienced ones. It is not statistically significant, as happens with some of the other variables. A possible reason for this is the small size of the sample we used. Application of OLS implies that firms are homogeneous, that is, the estimates of the relationships between export propensity and firm characteristics are the same, but this is a strong assumption. Firms are heterogeneous and their behaviour with regard to international markets is not necessarily the same, or explained by the same variables. Table 30.2 presents the results of quantile regression in order to be able to evaluate the relative importance of the variables viewed as determining export propensity at different points of the conditional distribution of the share of export in total sales. At the conventional 0.25 quantile foreign ownership, technological intensity and agglomeration effects are statistically significative. The impact of capital intensity, skills and foreign ownership differ between quantiles. At the upper tail of the conditional distribution of the export propensity, technological factors, dimension and innovation and valued added scope are statistically significant. There is clear evidence of firm heterogeneity. Our conclusions indicate that more efficient and productive small and medium firms, more technologically driven, have higher export propensity. Governments should design export assistance programmes to support export activities in ‘deep niches’ markets. For small firms, the differentiation of products and innovation is more often the result of a local network of entrepreneurs and universities than the product of a firm’s effort. Given the impact of these variables on export propensity of small and medium firms in Portugal, R&D policy design should take this into account.

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Table 30.2

Quantile regression QR

constant ln k ln l ln m ln dom FOR K Int L Int Skill Tecnol Inov VAS Age Aglom Adj. R sq N Pseudo R2

OLS

Q10

Q25

Q50

Q75

Q90

3,4185 (1,25) 18,4352 (0.36) 22.8221 (0.37) 8,6165 (0.15) 0.7402* (5.88) 0.4629 (0.37) 17.8626 (0.35) 7,1659 (0.13) 6.1416 (0.11) 1.2891* (3.49) 0.2997 (0.31) 0.2289 (0.55) 0.0255 (1.36) 1.7830** (3.00)

8,0466 (0.63) 142.2061 (0.64) 50,2488 (0.18) 98,6514 (0.40) 0.7137 (0.89) 1,9487 (0.51) 141,973 (0.63) 95,5004 (0.39) 94.6652 (0.38) 1,2092 (0.57) 2,0526 (0.58) 0.0219 (0.02) 0.0193 (0.29) 3.1855 (1.00)

6,2295 (1,54) 44,3434 (0.60) 13.6538 (0.15) 25.9565 (0.32) 0.6449* (3.04) 2.5361*** (1.80) 43.5994 (0.59) 27.1063 (0.33) 28,3291 (0.35) 0.9555*** (1.66) 0.0010 (0.02) 0,0956 (0.15) 0,0058 (0.24) 3.4040* (4.05)

0,6151 (0.36) 52.4542*** (1,67) 26.0264 (0.68) 23.0897 (0.66) 0.5633* (7.60) 0.2304 (0.32) 51.3732*** (1.64) 23.4342 (0.67) 25,1557 (0.72) 0.9633* (4.30) 0,0348 (1,34) 0.3665 (1.44) 0,01578 (1,36) 0.7939** (0.36)

0.7827 (0.63) 14.4140 (0.65) 17.0894 (0.68) 4,0575 (0.17) 0.5742* (14.91) 1.1895*** (1.84) 14.1484 (0.64) 4,1613 (0.18) 3.1676 (0.14) 0.2921** (2.17) 0.7161** (2.02) 0.4774* (3.78) 0.0055 (0.53) 0.3485 (1.27)

0.0446 (0.09) 0,4918 (0.11) 18.5872** (2,52) 18.4497** (2.24) 0.5599* (45.04) 0.6485*** (1.89) 0.4798 (0.11) 18.7060** (2.27) 18.9728** (2,32) 0.0396 (0.92) 0.0052 (0.95) 0.0737 (1.47) 0.0025 (0.97) 0.0430 (0.35)

162 0,3218

162 0,4122

162 0,2941

162 0,1892

162 0,1496

0,4827 162

References Acs, Z.J. and L. Preston (1997), ‘Small and medium-size enterprises, technology, and globalization: introduction to a special issue on small and medium-sized enterprises in the global economy’, Small Business Economics, 9, 1–16. Acs, Z.J., R. Morck, J.M. Shaver and B. Yeung (1997), ‘The internationalization of small and medium-sized enterprises: a policy perspective’, Small Business Economics, 9, 7–20. Almeida, P. and B. Kogut (1997), ‘The exploration of technological diversity and the geographic localization of innovation’, Small Business Economics, 9, 21–31. Audretsch, D. and E. Lehmann (2005), ‘Do locational spillovers pay? Empirical evidence from German IPO data’, Discussion Paper Series No. 4949, March, Centre for Economic Policy Research, 1–22. Baldwin, Richard E. (2005), ‘Heterogenous firms and trade: testable and untestable properties of the Melitz model’ (http://beiwww.unige.ch/
baldwin). Basu, S. and J. Fernald (1995), ‘Aggregate productivity and productivity aggregates’, NBER Working Paper, no. 5382.

Portuguese manufacturing SMEs

543

Berhman, J.N. (1972), ‘The role of international companies in Latin America: autos and petrochemical, location and internalisation factors’, Journal of International Business Studies, 23(1), 1–27. Bernard, A.B. and J.B. Jensen (1999), ‘Exceptional exporter performance: cause, effect, or both?’, Journal of International Economics, 47, 1–25. Bernard, A.B., J. Eaton, J.B. Jensen and S. Kortum (2003), ‘Plants and productivity in international trade’, American Economic Review, 93(4), 1268–90. Eden, L., E. Levitas and R.J. Martinez (1997), ‘The production, transfer and spillover of technology: comparing large and small multinationals as technology producers’, Small Business Economics, 9, 56–67. Etemad, H. and R.W. Wright (2003), ‘Internationalization of SMEs: toward a new paradigm’, Small Business Economics, 20, 01–04. Falvey, Rod, David Greenaway and Zhihong Yu (2004), ‘Intra-industry trade between asymmetric countries with heterogenous firms’, GEP Research Paper 04/05. Fryges, H. (2000), ‘Productivity, growth and internationalisation: the case of German and British high techs’, Discussion Paper No. 04-79, ZEW – Zentrum für Europäische Wirtschaftsforschung GmbH, Centre for European Economic Research. Greenaway, David (2004), ‘The assessment: firm-level adjustment to globalization’, Oxford Review of Economic Policy, 20(3), 335–40. Helpman, Elhanan, Marc Melitz and Stephen Yeaple (2004), ‘Export versus FDI with heterogenous firms’, American Economic Review, 94(1), 300–317. Itaki, M. (1991), ‘A critical assessment of the ecletic theory of the multinational enterprise’, Journal of International Business Studies (22). Johanson, J. and L.G. Mattsson (1988), ‘Internationalization in industrial systems: a network approach’, in N. Hood and J.E. Vahlne (eds), Strategies in Global Competition, New York: Croom Helm. Kandasaami, S. (1998), ‘Internationalization of small- and medium-sized born-global firms: a conceptual model’, in htto//www.sbaer.uca.edu/research/1998/ICSB/j006.html, consultado em 05/05/2004. Kindleberger, C.P. (1969), American Business Abroad: Six Lectures on Direct Investment, New Haven: Yale University Press. Know, Y.-C. and M.Y. Hu (2001), ‘Internationalization and international marketing commitment: the case of small/medium Korean companies’, Journal of Global Marketing, 15(1), 57–66. Koenker, R. and G. Basset (1978), ‘Regression quantiles’, Econometrica, 46, 33–50. Kohn, T.O. (1997), ‘small firms as international players’, Small Business Economics, 9, 45–51. Lefebvre, E., L.A Lefebvre and M. Bourgault (1998), ‘R&D related capabilities as determinants of export performance’, Small Business Economics, 10, 365–77. Lundan, S.M. (2002), ‘Technology, clustering and foreign investment’, 28th EIBA Conference, 8–10 December, Athens. Melitz, Marc (2003), ‘The impact of trade on intraindustry reallocations and aggregate industry productivity’, Econometrica, 71, 1695–725. Melitz, Marc and Gianmarco Ottaviano (2003), ‘Market size, trade and productivity’, mimeo. Montagna, Catia (2001), ‘Efficiency gaps, love for variety and international trade’, Economica, 68, 27–44. Organization for Economic Co-operation and Development (OECD) (1995), ‘Globalization of Economic Activities and the Development of SMEs: Synthesis Report’, DSTI/IND/PME (95)3, 16 October, Paris. Philp, N.E. (1998), ‘The export propensity of very small enterprises’, International Small Business Journal, 16(4), 79–93. Schmitt, Nicholas and Yub Zhihao (2001), ‘Economies of scale and the volume of intra-industry trade’, Economic Letters, 4(1), 127–32. Van Biesebroeck, Johannes (2003), ‘Exporting raises productivity in Sub-Saharan African manufacturing plants’, NBER Working Paper, no. 10020. Welch, L.S. and R. Luostarinen (1988), ‘Internationalization: evolution of a concept’, Journal of Management, 14(2), 34–64. Wind, Y., S.P. Douglas and H.V. Perlmutter (1973), ‘Guidelines for developing international marketing strategies’, Journal of Global Marketing, 37, 14–23. Wright, Richard W. and Léo-Paul Dana (2003), ‘Changing paradigms of international entrepreneurship strategy’, Journal of International Entrepreneurship, 1(1), March, 135–52. (Reprinted in Benjamin M. Oviatt and Patricia Phillips McDougall (eds), International Entrepreneurship, Cheltenham, UK, and Northampton, MA, USA: Edward Elgar, 2007.) Yeaple, Stephen (2004), ‘Exports versus FDI with heterogenous firms’, American Economic Review, 94(1), 300–317.

31 Small and medium size enterprises in Russia Anatoly Zhuplev and Vladimir Shein

Entrepreneurship in Russia: the background Entrepreneurship is a phenomenon relatively new for Russia. Since Russia’s inception as a sovereign nation in the ninth century, its business environment and cultural tradition have not been as supportive of entrepreneurship as that of the world’s most developed economies (Dana, 2005). Throughout its long history, Russia has been largely governed under strong centralized control and government role in economic development (Curtis, 1998). Russia missed the innovative ferment of Renaissance and Reformation, two trends that shaped culture and economic dynamics in the West. While the renaissance in the Middle Ages and the following industrial revolution have accelerated the development of domestic economies and international commerce in the neighbouring European countries, Russia, committed to Eastern Orthodoxy closely aligned with the ruling monarchy in governing the nation, has gone in a different direction. It is widely acknowledged that the development of czarist Russia has never followed that of most European countries. Trade routes and ties inside Russia and later in many other countries of the former Soviet Union have never been closely integrated with other industrial European countries. Without wide access to oceans and unfreezing ports, Russia’s international trade with other continents has been constrained. When the Bolshevik Revolution occurred, Russia was predominantly agrarian, so small business has never developed the way it has in the USA, Great Britain, Germany and other developed countries (Russian SME Observatory Report, 2002). Russia’s immense territory and remote geographic location relative to the world major markets and centres of culture, its rich mineral resources allowing for national economic self-sufficiency,1 harsh climate and great distances, lack of roads and other missing infrastructural elements critical for commerce and industry, communal tradition of life and work along with strong governing czarist bureaucracy, affiliation with the Byzantine politics and culture, strong impact of the Russian Orthodox Church and other factors have facilitated inward-oriented political–economic patterns and soul-searching culture that often looks to the past in search of solutions for future problems. Using the Cyrillic alphabet has added linguistically to separation from the West.2 Russia’s economic development and commerce have also been restrained by numerous devastating wars. Reflecting on one of them, the Mongol invasion of Russia in the thirteenth century and the following two centuries of the Tatar-Mongol yoke (Curtis, 1998), Russia’s famous poet Alexander Pushkin said, ‘They brought neither Aristotle nor algebra.’ Later, during the nineteenth century, the Russian government was coping with the changing environment and sought to suppress repeated attempts at reform from within. Its economy failed to compete with the West. Cities were growing without an industrial base, adequate transportation and means of communication to facilitate employment, although abolition of serfdom3 in 1861 foreshadowed urbanization and rapid industrialization late in the century (Background Note: Russia, 2005). Following a stream of domestic political–economic 544

SMEs in Russia 545 upheavals, the Russian Revolution (1905) and the defeat in World War I (1914–18), the 1917 Bolshevik Revolution brought communism to power (1917–91). Private enterprise under communism was strictly prohibited by law and portrayed as a social and ideological evil. Russia’s current economic organization, from the pre-revolutionary epoch through Soviet history up to the present day, is a heritage from both the czarist and Soviet past. Ten centuries of the centralized governance, totalitarian leadership and monarchy followed by 72 years of communism in Russia, gave way to Gorbachev’s political–economic reforms in the mid-1980s and eventually led to the demise of the USSR. After legalization and partial liberalization of foreign trade, investment, joint ventures and full subsidiaries, private ownership and business ventures were finally allowed for the Soviet citizens in the late 1980s (Zhuplev et al., 2004). Such a path in the development of Russian history, political economy and administrative structure has predetermined generally restrained cultural attitudes towards entrepreneurship.4 During the late 1990s – early 2000s, several international studies of SMEs, including Russia, have taken place. In 1999, the Global Entrepreneurship (GEM) programme initiated an annual international assessment of entrepreneurial activity. The 2003 GEM survey covered 37 countries, including Russia (it was not a part of the latest 2004 survey) (Reynolds et al., 2004). The study placed Russia among the world’s least entrepreneurial countries and found that, by the late 1990s, Russia’s small business was responsible for 10 to 11 per cent of the GDP and 13 per cent of employment nationwide (Zhuplev et al., 2004). In 2000, there were 900 000 small enterprises in Russia and the shares of the total volume of the Russian market comprised by major groups of business companies were 35.3 per cent for small enterprises, 2.2 per cent for individual entrepreneurship, and 62.5 per cent for large and medium enterprises. Russia’s Firm Entrepreneurship Index was calculated at 1.2, compared to the 2.0 average for all countries surveyed. The share of Russian entrepreneurial firms was 2.85 per cent versus 11.49 per cent on average with the respective shares of employment 8.37 per cent and 12.31 per cent. While 12 per cent of adults 18 to 64 years of age in the 37 GEM 2003 countries overall have been either actively engaged in the start-up process or managing/owning a business less than 42 months old, for Russia this share was only 2 per cent (Reynolds et al., 2004).5 One of the most comprehensive recent studies of small business in post-communist Russia has been undertaken under the European Union’s Tacis Programme (Russian SME Observatory Report, 2002).6 Completed by foreign and local experts in Russia, the report contains a broad range of data on entrepreneurship, registered SMEs and individual entrepreneurs, employment in the SME sector, taxation, access to finance for SMEs, issues such as the legal environment, innovations, enterprise policies and business support services related to SMEs and others. A two-country SME study was conducted in Ukraine and Russia in 2002, under the US Agency for International Development sponsorship. According to the study, private entrepreneurs, natural persons, represent the major constituent of the small business sector in Russia that translates into 38 small businesses per 1000 of the nation’s population – close to the level of developed European countries (Lyapin et al., 2002). In 2004, the Russian SME Resource Centre in Moscow under the USAID sponsorship completed another study. Its core findings corroborate the Russian SME Observatory Report 2001 in disputing the alleged gap between Russia and developed economies in the

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level of SME development (Analysis of the Role and Place of Small and Medium-Sized Enterprises in Russia, 2004). Evolution, definition, role and place of the SME sector in the Russian economy The SME sector has been revived in the Russian post-communist economy in two ways: through privatization of formerly state-owned enterprises and through private venture initiation. In 1991, a large-scale privatization of government assets was unleashed. In the mid-1990s, 75 per cent of medium and large-scale enterprises in Russia and about 80 per cent of small shops and restaurants (establishments with under 200 employees) had been privatized. By early 1997, the private sector accounted for 75 per cent of manufacturing enterprises, 85 per cent of services, and more than 80 per cent of the workforce (Zhuplev et al., 2004).7 Following waves and stages of privatization, close to 90 per cent of Russian output in the late 1990s has been produced by private enterprises, including partly privatized companies. Indeed, in terms of the number of enterprises, mixed ownership forms (combining state, regional or local and private ownership) were predominant at the end the 1990s (White Paper, 2002). Throughout the 1990s–2000s, the universal definition of SMEs has undergone several legislative and regulatory changes. In terms of economic dimensions, the latest law and government statistics divide all enterprises in the economy into two categories: small enterprises and large and medium enterprises.8 Small enterprises are classified by the Federal Law ‘On the State Support of Small Business in Russian Federation’, 88-FZ of 14 June 1995 into three groups: individual entrepreneurs without legal status, farm enterprises and small enterprises – legal entities (please refer to Table 31.1 for statistical details). The Law determines small enterprises, legal entities as having no more than 25 per cent of the state, municipal, public and religious organizations or charitable funds’ ownership in their charter capital and not exceeding the following limits in annual number of employees: 100 persons in industry, construction and transportation, 60 in agriculture and R&D areas, 30 in retail trade and consumer services to the public and 50 persons in other types of activity.9 (Russia SME Observatory Report, 2002). The share of enterprises with up to 250 employees to the overall indicators for all enterprises in Russia in 2003 was as follows: total number of enterprises, 94 per cent; total employment, 49 per cent, and total sales revenue, 47 per cent. As for the number of enterprises with up to 250 employees per 1000 of economically active population, in 2003 this indicator in Russia reached 118 enterprises and individual entrepreneurs. The figures are slightly higher for a category of SMEs with up to 500 employees: their share in total number of enterprises Table 31.1

Russian small enterprises, by category

Small enterprise categories (thousands)

1998

2001

2001/1998 (%)

Individual entrepreneurs Small enterprises Farms

3 599 868 270

4 997 843 262

138.8 97.1 97.0

Total

4 737

5 602

18.3

Note: Calculated on the basis of the Russian SME Observatory Report (2001).

SMEs in Russia 547 was 98 per cent, share of total employment, 61 per cent, and share of total sales revenue, 54 per cent. For this category the density amounts to 122 small and medium-sized enterprises per 1000 of the economically active population (Analysis of the Role and Place of Small and Medium-Sized Enterprises in Russia, 2004).10 The Russian Ministry for Economic Development and Commerce estimates that, by 2008, SME’s contribution to Russia’s GDP is expected to reach 20 per cent (
оуо, 2005). Although there are three categories of Russia’s small business under the law, the discussion usually focuses on small enterprises: legal entities that are subject to regulatory reporting and statistical record keeping. As a result, until recently there has been little systematic analysis of the role played by large numbers of individual entrepreneurs. Meanwhile, one of Russia’s persistent problems with the analysis of individual entrepreneurship is that, often, SME owners and managers force onto de facto employees the status of individual entrepreneurs, for tax purposes. That tends potentially to inflate statistical estimates of SMEs’ performance. On the other hand, a large part of individual entrepreneurial activity happens in the informal economy, thus leading to underestimating the contribution of the SME sector. Meanwhile, limited available research data and strong anecdotal evidence also suggest considerable and often unregistered part-time self-employed activity among a full-time labour force permanently employed and having secondary jobs on the side. The share of enterprises with up to 250 employees and their economic impact are presented in Table 31.2 (Russian SME Observatory Report, 2002). As of January 2001, there were 4 245 200 individual entrepreneurs (including managers of farm enterprises) and 3 346 500 organizations (of which almost 30 per cent are small enterprises) registered in Russia. Small business employed approximately 21 to 25 per cent of the working population. In contrast, the share of taxes paid by its SMEs accounts for only about 10 per cent of total tax proceeds into the consolidated budget of Russia (Russian SME Observatory Report, 2002). Regionally, individual entrepreneurs in 2000 accounted for over 90 per cent of the small business entities in 10 out of the 89 Russian regions, and over 80 per cent in the other 62 regions. In only five regions the proportion of small enterprises was more than 20 per cent. Different administrative units of the Russian Federation, currently totalling 89, including 49 oblasts, 21 republics, 10 autonomous okrugs, six krays, two federal cities, and one autonomous oblast (The World Factbook, 2005), have markedly different patterns in the composition of business entities.11 Comparison of the regional distribution of small and individual enterprises (Figures 31.1 and 31.2) shows that regions with lower small-scale enterprise density tend to have a more pronounced sector of individual entrepreneurship (Russian SME Observatory Report, 2002). Meanwhile, SME dynamics in Russia are very uneven geographically and by industry affiliation: 40 per cent of all small business activities are concentrated in greater Moscow and greater St Petersburg; 70 per cent of them Table 31.2

Russian Federation–SME economic contribution

Share in the total value of enterprises Share in total employment Market share (share of total sales revenue)

Not less than 90% Not less than 45% Not less than 40%

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Handbook of research on European business and entrepreneurship Real estate 0.5% Information services 0.2%

Science 0.1%

Agriculture 0.6%

Industrial production 5.8% Other industries 14.2%

Housing and utilities 0.3% Transport Education 8.9% 0.4%

Supplies and sales 0.2%

Construction 1.2%

Trade and catering 67.5%

Figure 31.1

Distribution of individual entrepreneurs, by industries

5.8

100

1.2

8.9

15.7

90 80

2.5

16.8

Industrial production Transport Construction Trade and catering Science Other industries

70 60 67.5 50

44.5

40 30 20

4.5 0.1

10

16.4

17.0

0 IEs

Figure 31.2

SEs

Distribution of individual and small enterprises, by industry

in these areas are involved in services and retail operation, while only 30 per cent operate in manufacturing. Ninety per cent of small businesses are estimated to be in need of startup capital that translates into 1 trillion roubles (
$357 billion US) of the overall demand for start-up small business financing. The long-awaited and only recently proposed government budget allocations supporting SMEs can cover only 0.15 per cent of the small business sector needs for a start-up capital (
оуо, 2005). According to the Goskomstat, the Russian statistical agency, distribution of small enterprises by industry over the past several years remained almost constant. Services remain their most attractive sector. Since the beginning of transition in the 1990s, distribution of small-scale enterprises by industry has been partially influenced by the effects

SMEs in Russia 549 of economic transition inherited from the former Soviet economy: previously it was focused on heavy industries and manufacturing, which consequently created a large market niche in services for SMEs during the transition. Current general economic conditions (the depressed manufacturing sectors that have been unattractive even for large and medium-sized enterprises) also affect distribution of small enterprises by industry. At the end of 2000, small enterprises in trade and catering accounted for 46.3 per cent, industrial production and construction for 15.3 per cent and 14.4 per cent of the total number of small enterprises. Trade and catering is also the largest sector, employing about 35.2 per cent of all workers in the small enterprise sector. Industrial production and construction accounted for 21.7 and 20.5 per cent of jobs, respectively. In terms of employment, Russian SMEs are categorized into three major groups with two subcategories each: micro-enterprises (1–5 people and 6–9 people), small-scale enterprises (10–49 people and 50–99 people), and medium-scale enterprises (100–249 people and 250–500 people). With Russia’s current total population of 143.4 million and a 71.8 million labour force (The World Factbook, 2005) the small business sector in 2001 employed, as reported by official statistics, 17 million people (Russian SME Observatory Report). As mentioned earlier, weak law enforcement and a widespread corruption in Russia12 suggest that these official numbers in reality may be higher owing to the SME tendency to operate in the informal economy13 to avoid taxation, labour liabilities and government regulations. The phenomenon of secondary employment in post-communist Russia has been pervasive but recently started showing signs of decline. In 1999, some 23.6 per cent of total employment in small enterprises had ‘second’ jobs in small business in addition to their principal place of employment. By 2001, this had fallen to only 18.2 per cent. These figures indicate that the role of small business as a source of additional income – crucial during the 1990s – is now becoming relatively less important. At the same time, small business is increasingly becoming the primary place of work, and the main source of income for the people engaged (Russian SME Observatory Report, 2002). The majority of new small business entrants into the Russian economy are individual entrepreneurs among whom the ‘birth rate’ is approximately three times and the disappearance rate approximately 5–10 times higher compared to small enterprises. The turbulence measure showing the dynamics of small businesses moving in and out of business as a proportion of the initial stock of businesses indicates the relative stability of the small enterprise sector compared to individual entrepreneurship (Table 31.3). In 2000, individual entrepreneurs comprised 78.8 per cent of all small enterprise entities, as against 76 per cent in 1998. In contrast to small enterprises, the proportion of individual entrepreneurs in total employment is growing year by year. Their share in total employment reached 6.9 per cent in 2001, versus 5.6 per cent in 1998, suggesting that individual entrepreneurship appears to play a slightly greater role in Russia in terms of employment. Individual entrepreneurs generate about 8 to 10 per cent of the monetary income of the population. Although the share of individual entrepreneurs’ income in total incomes decreased by 8.4 per cent in the year 2000, the monetary income of individual entrepreneurs expressed in absolute terms increased by 22.2 per cent (Russian SME Observatory Report, 2002). Geographically, Russian SMEs are largely focused on local markets. Only 20 per cent of enterprises have customers in other regions of Russia, only 7 per cent beyond the

550

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te es

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4

38

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8

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36

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33

ga ol V

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Number of small enterprises per 1000 people

4

Number of small enterprise entities per 1000 people

Small enterprise entities and small enterprises, by region, per 1000 people

sia

us

R

37

Figure 31.3

0

5

10

15

20

25

30

35

40

45

SMEs in Russia 551 SE share in the total number of enterprises SE share in the total number of private enterprises SE share in total employment SE share in total employment at private enterprises SE share in total capital investments SE share in the GDP

60 49.7

50

43.1 38.5

40 30

35.0

33.5 30.0

28.7

26.8 20 10 0

13.8

Table 31.3

26.6

12.1

8

11.8

5.4

11.8

6.2 2.7

6.5 4.7

1997

Figure 31.4

28.6 26.2

31.8

1998

5.9 2.5

1999

2000

Contribution of Russian small enterprises to the main economic indicators Birth, disappearance and turbulence rates in the SME sector Birth rate 1999

2000

Disappearance rate 2001

1999

2000

2001

Turbulence 1999

2000

2001

41.9 12.1

36.0 12.5

30.8 11.4

as % of initial stock Ind. entrepreneurs Small enterprises

24.8 9.8

22.7 9.8

18.4 8.9

Ind. entrepreneurs Small enterprises

6.1 1.9

6.1 2.1

5.4 2.2

17.1 13.3 12.3 2.3 2.7 2.5 per 1000 population 4.2 3.6 3.6 0.4 0.6 0.6

NA

borders of Russia, and only 3.5 per cent beyond the borders of the Commonwealth of Independent States – former USSR (Figure 31.5). SME research suggests a strong reverse correlation between enterprise size and its involvement with markets. The bigger the enterprise size is, the smaller is the share of enterprises with customers in the given town (decrease from 52 to 30 per cent), while the share of enterprises with regional customers increases (though not sharply) from 28 to 36 per cent. The share of enterprises with customers in different regions of Russia also rises, from 13 to 23 per cent. Jamison Firestone, in his analysis of the Russian SME sector, reports that, in the early 1990s, when US and EU definitions for Small Business were applied to gauge SME developments in Russia, about 94 per cent of all Russian enterprises fell into the SME category to account for about 48.8 per cent of employment nationwide. Out of this total number 11.3 per cent of the population was employed by small enterprises and another 13.3 per cent were either independent entrepreneurs or people employed by them. Only about 15.4 per cent of the population was employed by mid-sized enterprises. The Putin

552

Handbook of research on European business and entrepreneurship 75 In the town (community) 52

In the region In different regions of Russia

20 7

In different countries of CIS In different countries (besides CIS)

4 0

Figure 31.5

10

20

30

40

50

60

70

80

Geography of SME customers, % of respondents

administration realized in the early 2000s that fostering small businesses should become a government priority and new laws are to be adopted to transform the sector. It was an exciting time, but ultimately small business reform has ended or at least paused without doing what was necessary to create a healthy small business sector (Firestone, 2005). In 2004, small enterprises accounted for about 12.7 per cent of GDP. The tax contribution of small businesses was even smaller. A report produced by United Financial Group in March 2005 declared that about 28 billion roubles (about $1billion) in taxes were paid in 2004 by businesses and individual entrepreneurs using the simplified system of taxation. That accounts for 1.4 per cent of all tax collected. About 60 per cent of all small and individual enterprises use the system, which is only available when sales volumes are less than 15 million roubles per year (about $526 000 at the going exchange rate – authors). Estimating that the remaining 40 per cent of small and individual enterprises paid roughly the same amount of tax, at the end of 2004, the entire small business sector (excluding medium enterprises) has generated only about 3 per cent of the tax revenue (Firestone, 2005). Firestone reckons that small and individual enterprises in Russia have not become the engines of a healthy economy. Instead of fostering growing companies, Russia has fostered the creation of a vast number of very small businesses comprising the ‘kiosk economy’. It follows from Firestone’s figures that the Russian ‘kiosk economy’ of micro businesses employs a quarter of the population but comprises a disproportionately small share of GDP and the tax base. Other than providing employment, these businesses add little to overall wealth creation and the majority of them are unlikely to make the transition to mid-size businesses because it will require massive advances in business education, regulatory environment, court system, financing and other components of the business infrastructure. The current Russian legislation and regulations limit the growth of small businesses. In drafting the small business legislation, the government decided to offer tax breaks and a friendlier business environment only to those companies that it considered as economically less significant for the budget. Thanks to government reforms, small enterprises are now easy to start and accounting requirements as well as taxes are minimal. While

SMEs in Russia 553 % 60

50

40

30

20

10

0 1–5

6–9

10–49 50–99 100–249 Number of employees at the enterprise

Paying customers are located in different countries (besides NIS)

Paying customers are located in this region

Paying customers are located in different countries of NIS

Paying customers are located in this town community

250–500

Paying customers are located in different regions of Russia

Figure 31.6

Geography of SME customers relative to the size of the enterprise

this is a great step forward, it has not led to a critical growth of medium enterprises. The explanation for this lies in the low cut-off limit for use of the simplified system of taxation and the abrupt and hugely punitive cost of moving to the regular tax system. Small businesses that do well under the protection of the simplified system of taxation are often not large or strong enough to survive the full weight of Russian taxation and accounting requirements. The difference between the two systems is stark: 6 per cent versus 24 per cent profits tax, exemption from charging 18 per cent VAT, paying tax on a cash basis instead paying profits tax and soon VAT on an accruals basis (often in advance of receiving payment for the goods and services sold), no social or medical insurance payments due on salaries, vastly reduced filing requirements. Many businesses that grow too large to use the simplified system find that they do not have sufficient resources to thrive without it and find their growth stunted. Additionally, the burdens of compliance and making advance tax payments are often more destructive to growth than the actual increased taxes themselves (Firestone, 2005).

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Current SME practices Despite more than a decade of the post-communist revival of small business since the late 1980s, limited research data are available on Russia’s entrepreneurs, entrepreneurial behaviour, cultural propensity for entrepreneurship and small business development (Gratchev et al., 2001, Djankov et al., 2005, Stewart et al., 2003, Zhuplev et al., 2004).14 These data largely come from Russian government statistics, limited in scope and sometimes unreliable owing to effects of the informal economy. Western-sponsored research projects taking place in Russia since its post-communist opening definitely make some difference (Russia is huge and complicated). They are often rich on good scholarly intentions, funding and statistical methodology, but poor on inside knowledge and understanding of Russia.15 Russia’s home-based scholars and academics are poorly paid, concentrated mostly in a few major cities and survive by doing things other than research. Domestic SME research in Russia is often of limited validity and journalistic rather than scholarly by nature. Adding to the problem, and indeed part of the problem, is the Russian government: it provides inadequate attention, financial and organizational support for SME research and development because of budget constraints and because small business is not on the government priority list, despite populist political pronouncements to the contrary. Although widely recognized as having progressed in SME development in absolute terms, compared with the Soviet past, Russia continues to hold relatively restrained cultural attitudes towards entrepreneurship. As noted earlier, in the long-term context, that can be attributed to Russia’s history, culture and other background factors, especially severe constraints for over seven decades under communism.16 These cultural restraints in Russia’s business behaviour patterns are unlikely to disappear in the near future. Under communism, Russia made remarkable progress in education. Educated persons were highly regarded in society and ideology, but generally kept underpaid in a pursuit of socialist equality. By the end of the 1980s, the proportion of managers of associations, enterprises and organizations with basic technical education throughout the Soviet economy was between 80 and 85 per cent. The majority of them never studied marketing, leadership, business communications, personnel management or other subjects fundamental for managerial training in most developed countries (Puffer, 1992). In the early 2000s, the level of education in Russian SMEs is considered an important criterion in hiring managers and top managers. Graduates of basic compulsory, primary vocational, and special technical education each account for about one-third of SME employees, while graduates of higher educational establishments account for a small percentage of the total. Approximately 20 per cent of SME managers of middle level and 10 per cent of top managers have just a basic education. Approximately a quarter of managers have predominantly technical and economic higher education, and fewer than 10 per cent of managers have legal education (Russian SME Observatory Report, 2002).17 Under the Russian labour law most SMEs commonly use written labour contracts. However, the share of temporary contracts, signed without a specific date of termination, is high. Apart from immense nepotism and influence peddling, there are numerous cases of labour law violation, including the widespread practice of using verbal contracts and hiring by order from a superior with a written entry in corporate books. One in five SMEs uses verbal hiring agreements, while a quarter hire employees without any contract, with just a written order from the managing director. Two-thirds of employees are hired under

SMEs in Russia 555 a verbal agreement with either an individual or a family enterprise and in many cases are owners’ friends, partners or relatives. In half of all SMEs the length of the working week is usually no more than 40 hours. One in ten enterprises have slightly lower hours than the legally regulated norm, while the remainder exceeds this norm on average by 4.5 hours a week. Generally, it is much easier to dismiss employees of SMEs (where trade unions are very rare) than public sector workers.18 On average, employee turnover at SMEs constitutes 20 per cent a year (Russian SME Observatory Report, 2002). Building on achievements in education and sciences under communism, Russia has developed several highly advanced sectors, mostly in fundamental sciences, defence and defence-related industries, such as space exploration or aircraft. However, hightechnology and consumer goods production are currently minor constituents, and light industry contributes only 2 per cent of the nation’s total output (Country Profile, Russia, 2005). Under central planning, the state was in monopolistic control of patents and licences, as well as other intellectual property-based products and technologies, providing those involved in R&D and industrial development with comprehensive organizational, financial and logistical support. A lion’s share of advanced sectors was concentrated in Moscow, St Petersburg and a few other scientific–industrial centres, along with institutions of higher education, major research centres, and a core cadre of academics, scholars and engineers.19 With the demise of communism and the USSR, central planning and R&D support ceased to exist and the majority of domestic enterprises outside high-tech industries collapsed without state funding, resources and support. As a result, currently SME involvement in product development and innovations is an exception rather than a rule, severely crippling SME entrepreneurial potential and competitiveness both domestically and internationally. Technology innovation-driven small business venture development was active in Russia in the early years of the market transformation. During 1993–95 the number of active working small innovation enterprises stabilized, and ceased to grow by the late 1990s. By now it seems to be in decline. The majority of innovation companies formed at that time were set up to attempt to realize the potential of the Soviet science base, especially in the defence sector. Companies and the innovation support institutions were created to commercialize research and development, primarily in machine building, tool making and high-tech industries. The 1998 crisis and its long-term impact have an extremely negative effect on innovative SMEs. Despite a massive scientific base inherited largely from the USSR, Russia has a low share of technology-based markets worldwide. Although almost 12 per cent of the world’s scientists and scientific experts live in Russia, its share in this market, by optimistic estimates, is just 0.5 per cent (Russian SME Observatory Report). Availability of financing is another critical factor for SMEs. Small enterprises in Russia work from a high cost base: available data suggest that the cost share in the total revenue for small enterprises constitutes 92 per cent, compared to the 82 per cent corresponding share for Russian enterprises overall. Financial performance of small enterprises on the whole, in domestic terms, is assessed as relatively positive: in relative terms, small enterprises show better financial results than other-sized enterprises. In 2000, twothirds of small enterprises finished the year with positive financial results (profits). The share of unprofitable companies in the total volume of small enterprises is lower than among large and medium enterprises,20 although the level of small enterprise

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profitability varies by sector. ‘According to 2000 results, the share of small enterprises in the total volume of profit comprises more than 10 per cent, however in industries, such as construction and trade they generate more than 80 per cent of profits. Labour productivity is relatively high in small enterprises: each employee has had twice as much contribution to positive financial results compared with the average for employees of all enterprises. Small enterprises also perform relatively well in terms of return on invested capital: during the last five years small enterprises were as a rule more effective than large and medium enterprises, in terms of the return on equity’ (Russian SME Observatory Report, 2002). External funding has greater significance for small enterprises than for medium and large enterprises that can rely on their own sources. The share of long-term liabilities in debt capital of small enterprises as a whole for the sector of small enterprises comprised 11.9 per cent by the end of 2000, compared to 6 per cent in 1997. Long-term resources for small enterprises are typically loans granted by non-bank institutions. The share of accrued liabilities in the total volume of borrowed assets was on average 66.3 per cent, according to the results of 2000. The largest share of accounts payable falls to liabilities to suppliers and contractors. In the last three years this share has grown dramatically. Such types of liability typically occur in case of pre-payment, as a form of settlement with clients. Small enterprises are reliable in repaying borrowed assets and tend to be solvent partners in business. Small enterprises also appear to be more reliable than large and medium-sized companies in terms of repayment of short-term loans.21 The structure of financing for small and medium enterprises is different: for example, the number of medium-sized enterprises that were granted loans (as a proportion of the number of applicants) is 1.7 times higher, compared to small enterprises. On the other hand, small enterprises are 1.5 times more likely to receive funds from individuals. Russian SMEs use different sources of financing than their counterparts in OECD countries. Comparing the sources of SMEs financing in Russia with similar enterprises in OECD countries, it is found that, while the latter use equity financing and services of local banks more often than Russian counterparts, Russian SMEs more often seek financing from their friends and relatives and rely on commercial credit of suppliers. Many SMEs do not require loan funding, but for those seeking bank financing it may be problematic: about a quarter of enterprises indicate they have no need for loans. For the remainder, getting a loan from a bank in Russia is primarily complicated by very high interest rates, unrealistic collateral requirements, guarantees, limitations on the duration of the loan and lengthy application procedures.22 While venture capital and informal venture capital (business angels) play a major role as a source of finance in developed countries, especially in the US,23 the availability and usage of external equity markets by Russian SMEs is very limited and they are hardly used at all by Russian scientific/R&D companies. Readiness to expand existing business through bringing in new partners is a notable trend, although the percentage is still very low (Russian SME Observatory Report, 2002). International aspects As mentioned earlier, international trade and foreign investment have historically played a secondary role in Russia and the nation tends to remain inward-oriented. Although geographically it is the largest country on earth and richly endowed with natural resources

SMEs in Russia 557 and human talent, Russia’s impact on the global economy and role in international political affairs are well below its potential. While Russia’s share of the world territory is 11.5 per cent and population is 2.32 per cent of the global total, its unified purchasing power is 1.79 per cent and its share of the world’s GDP is only 1.1 per cent. Russia contributes only around 2 per cent to the world exports and 1.8 per cent to the word’s foreign direct investment inflows. Russia’s per capita foreign trade and investment dynamics are also lagging behind other emerging economies and neighbouring countries: in 2005, Russia exported $1.13 US per capita, comparable to China and Poland but two to three times lower than the Czech Republic, Hungary or Germany. In 2000, Russia attracted $18.7 US in foreign direct investment inflows per capita; that is, about twice as low as China, ten times lower than Hungary, twenty times lower than the Czech Republic and a hundred times lower than Germany. Russia’s major export commodities include petroleum and petroleum products, natural gas, wood and wood products, metals, chemicals, and a wide variety of civilian and military manufactures. Its major export partners are Netherlands, 9.1 per cent, Germany, 8, Ukraine, 6.4, Italy, 6.2, China, 6, US, 5, Switzerland, 4.7 and Turkey, 4.3 per cent. Russia’s export commodity structure is consistently dominated by fuel and other primary products: oil, natural gas, metals and timber account for more than 80 per cent of exports, while the share of machinery and equipment is only 10 per cent. Russia’s manufacturing base is dilapidated and must be replaced or modernized if the country is to achieve broadbased economic growth. Russia’s import commodities include machinery and equipment, consumer goods, medicines, meat, sugar and semi-finished metal products and come from Germany, 15.3 per cent, Ukraine, 8.8, China, 6.9, Japan, 5.7, Kazakhstan, 5, US, 4.6, Italy, 4.6 and France, 4.4 per cent (The World Factbook, 2005) With inefficient markets, weak business infrastructure, financial impediments, regulatory, logistical and other obstacles on the domestic front as well as overwhelming dominance of large enterprises in international trade, Russian SMEs are precluded from large-scale involvement in international entrepreneurship. To the contrary, they largely operate in local markets: as mentioned earlier, in the early 2000s, only 20 per cent of them report having customers in other regions of Russia, only 7 per cent beyond the borders of Russia, and only 3.5 per cent beyond the borders of the former USSR (Russian SME Observatory Report, 2002). Until recently, one unique form of SME participation in international entrepreneurship was ‘shuttle trade’. 24 In the 1990s, Russian customs regulations allowed travellers to import up to $5000 US of goods without the assessment of any duty. Rough estimates put the volume of shuttle trade in 1993 at US$1.5–2 billion (Shuttle Trade, 1998). The latest assessment by the Institute of International Economic and Political Studies of the Russian Academy of Sciences suggests that more than 5 million people in Russia are in the suitcase trade business, although their number halved in the last five to six years. Suitcase traders annually add up to 15 per cent to Russia’s official foreign trade and import up to 30 per cent of audio and video products and 70 per cent of cheap clothes into Russia. Suitcase trade accounts for as much as 80 per cent of the shadow footwear import, causing the state to lose between 400 million and 500 million euros a year. Unofficial shuttle trade between Russia and Poland is estimated at $1 billion (Butuzova, 2006) and at $1.5–2 for Russian–Turkish shuttle trade (Vaknin, 2005). A 2005 draft decree pending in the Russian government aims to tax suitcase traders at one-third of the cost of

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imported goods under 100 kilograms and even more for any goods above 100 kilograms. New regulations (if they come into effect) are expected to reduce the Russian volume of shuttle trade (Butuzova, 2006). Conclusions 1.

2.

3.

4.

Historically, small business and entrepreneurship have not been a mainstream in Russia, its political–economic system and patterns of culture. Seven decades of communism have reinforced this path. Profound market transformation, globalization, openness and dynamic external changes affect Russia in many ways, propelling SME development as a higher development priority both domestically and internationally. That presents challenges for government and the SME community. In the post-Soviet revival of entrepreneurship, SMEs have an increasingly important role in wealth and job creation, as well as other vital socioeconomic programmes. Findings from several authoritative international and domestic studies in the 1990s–2000s point out that Russian SMEs are responsible for 10–11 per cent of GDP and 13–49 per cent of employment nationwide. SME contribution to GDP in Russia is forecast to reach 20 per cent by 2008. The shares of the total volume of the Russian market comprised by a major group of business enterprises were 35.3 per cent for small enterprises, 2.2 per cent for individual entrepreneurship and 62.5 per cent for large and medium enterprises. Overall, 94 per cent of all Russian enterprises in the early 2000s fell into the SME category. In the mid-1990s, only 2 per cent of adults from 18 to 64 years of age in Russia have been either actively engaged in the start-up process or managing/owning a business that is less than 42 months old, compared to an average of 12 per cent for 37 surveyed countries worldwide. Taking into account a category of individual entrepreneurs that are often overlooked in official statistics and research, Russia’s indicator of 38 small businesses per 1000 of population, or 118 enterprises and individual entrepreneurs per 100 economically active population, is comparable to that of the EU and the US, contrary to a widespread belief that Russia is lagging behind. SMEs contribute approximately 10 per cent of total tax proceeds into the consolidated budget of Russia. Small business in Russia currently includes three major categories: individual entrepreneurs without legal status, farm enterprises, and small enterprises-legal entities. In 2003, the contribution of enterprises with up to 250 employees to the overall economic indicators for all enterprises in Russia was as follows: share in the total number of enterprises, 94 per cent; share in total employment, 49 per cent; and share in total sales revenue, 47 per cent. By the early 2000s, about 18 per cent of total employed in small enterprises had second jobs in the SME sector in addition to their principal place of employment. The role of small business as a source of additional income – crucial during the 1990s – is becoming relatively less important. Because of weak law enforcement, sheer informal economy, flaws in reporting, and widespread corruption, statistical estimates should be viewed with a critical eye. Russia’s administrative–economic regions have different patterns in SME activity: regions with lower small enterprise density tend to have a more pronounced sector of individual entrepreneurship. Some 40 per cent of SME activities are concentrated in Moscow and St Petersburg, Russia’s two major cities, whose combined population by

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5.

6.

7.

official counts constitutes around 11 per cent of the total. About 70 per cent of SMEs in these two major cities are involved in services and retail operations and only 30 per cent operate in manufacturing. About 70 per cent of individual entrepreneurs are involved in trade and catering, whereas among small enterprises this share constitutes 45 per cent. Over the past several years, SME distribution by industry remained almost unchanged. Along with sound progress in the post-Soviet revival of entrepreneurship, most SMEs remain small and are unlikely to grow into thriving dynamic mid-size businesses. Some experts categorize the Russian SME sector as a ‘kiosk economy’. According to some estimates, the entire small business sector, including individual entrepreneurs, provides employment but generates only about 3 per cent of the overall tax revenues in Russia. After more than a decade of the market revival, Russia’s attitudes towards SMEs remain relatively restrained, given the nation’s long history of centralized governance, business environment and culture, as well as severe constraints under seven decades of communism. While education is considered as an important priority in SME hiring decisions, graduates with higher education diplomas account for only several per cent, approximately 20 per cent of SME managers of middle level and 20 per cent of top managers have just a basic education; approximately a quarter of managers have predominantly technical and economic higher education; and less than 10 per cent of managers have legal education. Under Russian law, SMEs commonly use written labour contracts. However, there are numerous violations of the law in SME’s labour practices. Examples include the widespread practice of using verbal contracts and hiring on a nepotism rather than a merit basis and other problems with an average employee turnover of about 20 per cent a year. SMEs, disproportionately concentrated in Moscow and St Petersburg, largely operate in trade and catering and, with some exceptions (mostly state-supported defence programmes, Russian–foreign joint ventures and so on), do not engage in R&D and product development. The lack of effort in R&D and product development has a crippling long-term effect on the Russian SME sector as well as its domestic and international competitiveness. Russian small firms are less cost-effective compared to large enterprises; they demonstrate a relatively positive performance in profitability, return on investment and have higher labour productivity compared to other groups of enterprises. Small firms experience greater need for external funding compared to medium and large firms. Long-term financial resources for small enterprises are typically loans received and/or guaranteed by non-bank institutions and individuals. Small enterprises are found to be more reliable than medium and large enterprises in terms of repaying short-term loans. Obstacles hampering SME bank loans include high interest rates, collateral requirements and guarantees, limitations on the duration and lengthy application procedures. Other sources of funding, such as venture capitalists or business angels, are rare among Russian SMEs. International trade and foreign investment have historically played a secondary role in Russia; their impact on the global economy and role in international political affairs are below their potential. With rich, although remotely located, mineral resources, Russia’s share of the world’s GDP is only 1.1 per cent and it contributes only around 2 per cent to world exports and 1.8 per cent to the world’s foreign direct

560

8.

Handbook of research on European business and entrepreneurship investment inflows. On a per capita basis, Russia’s foreign trade and investment dynamics are lagging behind other emerging economies and neighbouring countries. With inefficient markets, weak business infrastructure, financial impediments, regulatory, logistical and other obstacles on the domestic front, as well as an overwhelming dominance of large enterprises in international trade, Russian SMEs are precluded from meaningful involvement in international entrepreneurship. Quite the opposite, Russian SMEs mostly operate in local markets. In the early 2000s, only 20 per cent of them reported having customers in other regions of Russia, only 7 per cent beyond the boundaries of Russia, and only 3.5 per cent beyond the boundaries of the former USSR. Until recently Russian SMEs were active in ‘shuttle (suitcase) trade’. It is estimated that more than 5 million Russian entrepreneurs are involved in the suitcase trade business, but their number halved in the last five to six years. Suitcase traders annually add up to 15 per cent to Russia’s official foreign trade and import up to 30 per cent of audio and video products and 70 per cent of cheap clothes into Russia. Suitcase trade accounts for as much as 80 per cent of the shadow footwear import, causing the state to lose 400 to 500 million euros a year.

Notes 1.

2. 3. 4.

5.

6.

7. 8. 9.

The CIA estimates that Russia has a complete range of mining and extractive industries producing coal, oil, gas, chemicals and metals; all forms of machine building from rolling mills to high-performance aircraft and space vehicles; defence industries including radar, missile production and advanced electronic components, shipbuilding; road and rail transportation equipment; communications equipment; agricultural machinery, tractors, and construction equipment; electric power generating and transmitting equipment; medical and scientific instruments; consumer durables, textiles, foodstuffs, handicrafts (The World Factbook, 2005). Curiously, even the Russian railways are designed with wider clearance than the European ones for the purpose of separation. The late abolition of serfdom in Russia at the time when the world’s leading industrial powers were progressing in industrial revolution has also contributed to Russia lagging behind in domestic commerce, industry and international trade. Some empirical support can be found in a recent large-scale global cross-cultural study that placed Russia among the lowest-ranked countries on future orientation, uncertainty avoidance, and performance orientation, and among the highest-ranked on power distance (Gratchev et al., 2001) (power distance in a universal characteristic of culture according to a widely accepted framework by Geert Hosftede.) Although the GEM study claims a relatively low statistical margin of error, 2 per cent of SME activity involvement for Russia, including a miniscule percentage of women-entrepreneurs as reported by the GEM study, appears to be unrealistically low for a country where a majority of the population has been exposed to economic self-survival under the market transition. The Observatory of European SMEs was established by the European Commission in 1992 with the purpose of improving the monitoring of SME performance in Europe. The Observatory today consists of a series of SME reports published on a non-regular basis. The general objectives are to analyse the current and future performance and behaviour of SMEs in their business environment, to assess recent and future impact on the completion of the internal market on the performance and behaviour of SMEs, and to identify the objectives and measures of enterprise policies likely to affect the SME sector. In the mid-1990s, government privatization plans were undermined by corruption, which concentrated significant economic resources in the hands of a well-connected elite rather than effecting true redistribution. Russian law and official government statistics do not define or use a specific category of medium-sized enterprises. In comparison, the U.S. Small Business Administration (http://www.sba.gov/size/sizetable2002.html) defines small business by the North American Industrial Classification System (NAICS) codes differently for different industries, based on either the economic size of production (ranging for different industries from $0.75 million in production volume to $165 million in assets) or from up to 500 employees for most industries to 150, 750, 1000, or 1500 for selected industries. The 2003 European Commission Recommendation 2003/361/EC (http://europa.eu.int/comm/enterprise/enterprise_policy/sme_definition/ index_en.htm) defines SMEs as follows: micro enterprises as having either  10 employees in headcount, or € 2 million in turnover, or € 2 million in balance sheet total; small enterprises as having either 50

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10. 11. 12.

13.

14. 15. 16.

17. 18. 19. 20. 21.

22. 23.

employees in headcount, or €10 million in turnover, or €10 million in balance sheet total; and medium sized enterprises as having either  250 employees in headcount, or €50 million in turnover, or €43 million in balance sheet total. Another source reports that, in the beginning of the 2000s, the number of enterprises with up to 250 employees per thousand people of population was 37 enterprises for Russia and 45 enterprises for the EU (Russian SME Observatory Report, 2002). In large countries, particularly in federations such as Russia, national indicators need to be constructed along with regional ones because of their vast diversity (Doing Business in 2005). The 2005 Corruption Perceptions Index places Russia in the low 126th place, along with Albania, Niger and Sierra Leone (http://www.infoplease.com/ipa/A0781359.html). In 2002, an estimated 25 to 40 per cent of the gross domestic product (GDP) derived from ‘informal’ economic activity where organized crime plays a significant role in many types of enterprise. In 2004, businesses paid an estimated US$316 billion in bribes that are untaxed revenue for government officials and criminal organizations (Country Profile: Russia, 2005). The 2005 Index of Economic Freedom places Russia in 124th place with the score of 4 points on a 5-point scale (1 being the best and 5 being the worst) citing a sizeable informal market and large underground economy (http://www.heritage.org/research/features/index/country.cfm?id=Russia). Friedrich Schneider and NationMaster international statistics portal report that 46.1 per cent of the Russian economy takes place in the informal sector and it ranks 17th in the world among countries with the highest share of informal economy. The monetary value of the Russian informal economy is assessed at $779.1 US per capita (Schneider, 2002; NationMaster, http://www.nationmaster.com/graph-t/eco_inf_eco). On average, in a World Bank’s sample of 10 developing countries, informal enterprises are found to be less efficient, to produce 40 per cent less than enterprises in the same sectors of the formal economy. Additionally, formally registered enterprises pay taxes, increasing the tax base for government revenues and reducing the statutory tax rate on companies. The effect is even bigger if business registration reforms are accompanied by streamlining tax, labour and related regulations, which encourages formally registered firms to report sales fullyand officially register workers. If more companies move to the formal economy, governments can lower the tax burden on all firms. This gives every business a greater incentive to produce. International evidence suggests that a 1 per cent reduction in taxes is associated with a 3.7 per cent increase in firms, a 0.9 per cent increase in sales and a 1.1 per cent increase in employment (Doing Business in 2005, 2005). However insufficient it may seem from a scholarly or practical standpoint, an unbiased observer should accept that the Russian market economy is only a decade and a half old, compared to several centuries of capitalism in many developed countries. As Winston Churchill infamously observed, ‘Russia is a riddle wrapped in a mystery inside an enigma.’ A mid-1990s study of 250 Russian respondents on Hofstede’s five cultural dimensions by Naumov and Puffer showed that, on average, Russian culture appeared to be moderate in individualism, masculinity, and power distance, and fairly high in paternalism and uncertainty avoidance – characteristics hardly compatible with dynamic entrepreneurship. The younger generation that came of age during the perestroika of the late 1980s and early 1990s had the highest scores in masculinity and the lowest scores in paternalism. Individuals employed in business had higher uncertainty avoidance than people in the university sector (Naumov and Puffer, 2000). According to the 2005 investment climate survey by the World Bank, only 8.9 per cent of respondents identify labour skill in Russia as a major constraint (World Development Report, 2005, p. 247). Even many large firms in Russia have circumvented strict labour regulations by pushing workers to leave a firm voluntarily, through wage arrears, prolonged administrative leaves, reduced hours and other forms of deteriorating working conditions (World Development Report, 2005). Many of them have been created, at the expense of socioeconomic priorities under the Stalin industrialization campaign in the 1930s and later in the post World War II and cold war environment. This can be partially explained by inefficiencies in the Soviet heritage when large government owned enterprises were set up and managed with disregard for cost-efficiency priorities. In part this can be explained by prevalence of private loans and guarantees in small enterprise funding reinforced by personal relationships and commitment. Additionally, in the absence of an efficient institutional contract enforcement and court system in Russia, delinquencies in private funding are often privately enforced via mafia-style remedies, including blackmail, intimidation and contract killings. As a reflection of the problem with SME funding, the 2005 survey of investment climate by the World Bank indicates that only 8.8 per cent of small firms have loans; only 17 per cent of respondents cite financing as a major constraint (World Development Report, 2005, p. 247). In rich countries, certain categories of new business start-ups and the state raise money on financial markets. In developing countries, the established large companies and the state do. For example, stock exchanges in the United States have the largest market capitalization in the world, with 5295 registered companies and $14 266 266 US million in market capitalization. Comparatively the Russian stock exchanges market is the

562

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Handbook of research on European business and entrepreneurship world’s twentieth, has 214 companies and $230 786 US million in market capitalization. Additionally, corporate transparency plays a significant role in market capitalization. Today, if Russia were to adopt the more stringent disclosure regulations of Thailand, analysis suggests that its stock market capitalization would increase by up to 60 per cent, and the volume of trades by 40 per cent (Doing Business in 2005). Shuttle trade is a form of unrecorded (or underrecorded) international transactions in goods that is currently existent at the edges of formal trade. A common feature of this trade is that it is typically associated with persons who are travellers (Shuttle Trade, 1998). They cross the border as ‘tourists’ and come back with as much merchandise as they can carry in their enormous luggage without paying fees for their luggage or circumventing these fees by bribing customs officers. Sometime they take these trips as often as ten times a year. Some of them resort to freight forwarding their ‘personal belongings’ as they go to China, Turkey and other countries to buy and bring back garments, consumer goods and other commodities for resale in Russia (Vaknin, 2005).

References ‘Analysis of the role and place of small and medium-sized enterprises in Russia. Statistical reference’ (2004), United States Agency for International Development, Russian SME Resource Centre, Moscow (http://www. rcsme.ru/eng/common/libArt.asp?id=4558), accessed 15 November 2005. ‘Background Note: Russia’ (2005), US Department of State, Bureau of European and Asian Affairs (http:// www.state.gov/r/pa/ei/bgn/3183.htm), accessed 15 December 2005. Butuzova, Lyudmila (2006), ‘Hitting the Shuttle Trade Road’, The Moscow News, 1 January (50) (http://english. mn.ru/english/issue.php?2002-45-9), accessed 1 January 2006. ‘Country profile: Russia’ (2005), Library of Congress – Federal Research Division (http://lcweb2.loc.gov/frd/ cs/profiles/Russia.pdf), accessed 10 December 2005. Curtis, Glenn (ed.) (1998), ‘Russia: a country study’, The Library of Congress (http://lcweb2.loc.gov/frd/cs/ rutoc.html), accessed 18 November 2005. Dana, Léo-Paul (2005), When Economies Change Hands: A Survey of Entrepreneurship in the Emerging Markets of Europe from the Balkans to the Baltic States, Binghamton: Haworth Press. Djankov, Simeon, Edward Miguel, Yingyi Qian, Gérard Roland and Ekaterina Zhuravskaya (2005), ‘Who are Russia’s entrepreneurs?’ Journal of the European Economic Association, 3(2–3), 1–11. ‘Doing Business in 2005. Removing Obstacles to Growth’ (2005), The World Bank, the International Finance Corporation and Oxford University Press (http://www.doingbusiness.org/documents/DoingBusiness 2005.PDF), accessed 12 December 2005. Firestone, Jamison (2005), ‘Why institutional investors should care about SMEs’, Russian Investment Review (http://www.russiainvestors.com/contents/index.html), accessed 10 December 2005. Gratchev, M., N. Rogovsky and B. Rakitski (2001), Leadership and Culture in Russia: the Case of Transitional Economy (http://www.haskayne.ucalgary.ca/GLOBE/Public/publications_2001.html). Hisrich, Robert and Mikhail Grachev (1995), ‘The Russian entrepreneur: characteristics and prescriptions for success’, Journal of Managerial Psychology, 10(2), 3–9. Lazear, E. (2002), ‘Entrepreneurship’, NBER Working Paper No. w9109. Lyapin, Dmytro, Lyapina Kseniya, Oleksy Stupytsky and Feliks Shklyaruk (2002), Ukraine and Russia: SME Development Policy – Analytical Survey, Kiev: USAID. Naumov, Alexander and Sheila Puffer (2000), ‘Measuring Russian culture using Hofstede’s Dimensions’, Applied Psychology, 49(4), 709 (http://www.blackwell-synergy.com/doi/abs/10.1111/1464-0597.00041), accessed 19 November 2005. Polishchuk, Leonid (2001), ‘Small Businesses in Russia: Institutional Environment’, Centre for Institutional Reform and the Informal Sector (IRIS) at the University of Maryland at College Park. Puffer, Sheila (ed.) (1992), The Russian Management Revolution. Preparing Managers for the Market Economy, Armonk, New York: M.E. Sharpe. Reynolds, Paul, W.D. Bygrave, E. Autio et al. (2004), Global Entrepreneurship Monitor: 2003 Executive Report, London Business School, Ewing Marion Kaufman Foundation (http://www.gemconsortium.org/download/1134675527796/ReplacementFINALExecutiveReport.pdf), accessed 18 November 2005. ‘Russian SME Observatory Report 2001’ (2002), Moscow, The Russian SME Resource Centre under Tacis project SMERUS 9803 (http://www.rcsme.ru/eng/common/libArt.asp?id=4283). Schneider, Friedrich (2002), Size and Measurement of the Informal Economy in 110 Countries Around the World (http://rru.worldbank.org/Documents/PapersLinks/informal_economy.pdf), accessed 9 December 2005. ‘Shuttle trade’ (1998), Eleventh Meeting of the IMF Committee on Balance of Payments Statistics, Washington, D.C., 21–23 October (http://www.imf.org/external/bopage/pdf/98-1-3.pdf), accessed 5 December 2005. Stewart, Jr., Wayne H., Joann C. Carland, J.W. Carland and W.E. Watson (2003), Entrepreneurial Goal Orientations: A Comparative Exploration of U.S. and Russian Entrepreneurs (http://business.clemson.edu/ spiro/images/pdf/WP00-101.pdf), accessed 16 November 2005.

SMEs in Russia 563 Vaknin, Sam (2005), ‘Trading from a suitcase – the case of shuttle trade’, United Press International (http://www.upi.com/inc/view.php?StoryID=03042002-121843-3501r.), accessed 5 January 2006. White Paper On Corporate Governance in Russia (2002) (http://www.oecd.org/dataoecd/10/3/2789982.pdf), accessed 3 January 2006. World Development Report 2005 (2005), The World Bank and Oxford University Press (http://194.84.38.65/files/ esw/files/wdr_2005_eng.pdf), accessed 4 December 2005. The World Factbook (2005), Central Intelligence Agency (http://www.cia.gov/cia/publications/factbook/geos/ rs.html), accessed 5 December 2005. Zhuplev, A., F. Kiesner and I. Zavadsky (2004), ‘Impediments to small business development in Russia’, Proceedings of the 18th Annual Conference of the US Small Business and Entrepreneurship, Dallas, Texas, USA. Zhuplev, A., A. Kon’kov and F. Kiesner (1998), ‘Russian and American small business: motivations and obstacles’, European Management Journal, 16(4).
оуо, Дмитрий (2005),
umльсmо босuло тальıй бuззнес на произвол судьбьı (The Government left small business to meet its own fate), осб л (http://www.rosbalt.ru/2005/04/27/ 206517.html), accessed 4 December 2005.

32 The internationalization of small and medium companies in San Marino Donata Vianelli

Introduction International expansion provides new and potentially more profitable opportunities for small and medium enterprises which are involved in a process of continuous development necessary to compete and grow in the global arena. Internationalization is not a simple phenomenon and, especially for SMEs, it is not limited to the field of economic exchanges and transactions but it encompasses politics, society and culture (Nanut and Tracogna, 2003). All these aspects can significantly influence the degree of internationalization as well as the mode of entry and the choice of appropriate strategies necessary to be competitive in foreign markets. But what happens if a SME not only faces the limits (and the advantages) of its business structure and organization but also affords the complexity of operating in a small independent country? The purpose of this study is to provide a comprehensive analysis of the internationalization of the companies operating in the Republic of San Marino, the third-smallest state in Europe after the Vatican City and Monaco. This analysis seems to be particularly significant for two main reasons. First of all, in recent years, San Marino has strongly developed its international relations in order to promote exports and also to attract new economic investments in the country. The Republic is strongly aware not only of the social, political and economical benefits determined by exporting, such as the creation of jobs, the stimuli to economic growth and the improving of the balance of payments, but also of the advantages for the exporting companies. The increasing of exports can be related to a higher profitability mainly determined by an increased sales volume and economies of scale, a reduction of risks thanks to the market diversification, an extension of the product life cycles and an enhanced understanding of the global market and competition. A second reason of relevance to the present study is the fact that the Republic lacks a systematic investigation of the characteristics of its economy and, in particular, of the internationalization process of its companies. As a consequence, information on the strengths and weaknesses of the country in relation to foreign markets can be particularly helpful both for exporting decisions as well as for potential investors in San Marino. Even if the research will try to carry out, from an internationalization perspective, a systematic picture of the San Marino economy and of its companies, however, the analysis developed in this study is mainly qualitative and it aims to integrate the limited quantitative information provided by official institutional sources. As pointed out by the International Monetary Fund (2004), San Marino’s statistical database has improved but several shortcomings still remain. The investment of more resources in the compilation of general government accounts in line with Eurostat’s ESA95 methodology, and of timely national account statistics, as well as the collection of indicators enabling the 564

The internationalization of small and medium companies in San Marino

565

production of GDP growth estimates, is strongly recommended. In fact, the International Monetary Fund (2004) underlines how the availability of reliable statistics on current economic conditions and up-to-date transparent government accounts is not only important to external observers but it represents the key to designing appropriate economic policies and preparing realistic budgets. Country overview Located in Central Italy, in the Apennines near the Adriatic Sea, San Marino is the world’s smallest republic with a size of approximately 61 sq. km. It is completely surrounded by one other country, Italy, and its physical features have a certain charm, with a capital of the same name characterized by a medieval architecture with restored castellated walls, and an extraordinary view afforded from its 750m. Titano Mountain. ‘From any one of its three medieval watchtowers, you can see not only the whole of San Marino but, on a good day, across the Adriatic to the Dalmatian coast in one direction, and the Apennines in the other’ (Elphicke, 2005, p. 19). Founded by a Christian stonecutter from Dalmatia named Marino, in 301 AD, it claims to be Europe’s oldest existing state. According to tradition, Marino took refuge on the Titano mountain, the chief geographical feature of the present Republic, and by the middle of the fifth century a community was formed. Because of its relatively inaccessible location and its poverty, it has succeeded, with a few brief interruptions, in maintaining its independence, which was recognized by the papacy in 1631. Italy and San Marino signed a treaty of friendship and economic cooperation in 1862, which has been renewed and expanded several times. After the world wars (at which time volunteers from San Marino served the Italians and allied aircraft bombed the Republic, in 1944) the country was ruled by Communists (1947–57), followed by a coalition of Christian Democrats and Social Democrats. In 1973, the Social Democrats left the coalition and were replaced by the Socialists and by the Movement for Statutory Liberties. In 1960, women were given the right to vote, and in 1973, they were granted the right to hold public office. A left-wing coalition led by the Communists ruled from 1978 to 1986 and joined the Christian Democrats to form a new government. The coalition was re-elected in 1988. In 1992, the Christian Democrats formed a new coalition with the Socialists, remaining in power following the 1993, 1998 and 2001 elections. San Marino became a member of the European Union in 1992 and, similarly to other small states and principalities, the Republic adopted the euro on 1 January 1999. The customs union and a concord of cooperation established with the EU, do not imply the full participation of the country in the EU, but rather, the application of customs regulations and duties. Legislative power in San Marino is vested in the popularly elected grand council, which is made up of 60 members elected for five years. Every six months the council appoints two regents who, in conjunction with the ten-member council of state, form the executive. Today San Marino has a population of 29 905 (UPE, 2005), whose nationality is both Sanmarinese and Italian. The official language is Italian and the predominant religion is Roman Catholic. Methodology Owing to the small dimension of the Republic of San Marino and to the lack of information on the economic system already pointed out by the International Monetary Fund

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(2004), the research method has been based on a qualitative study, which seems to be particularly indicated when there is the necessity to provide insights into an area in which theory is limited. The qualitative approach was based on in-depth interviews conducted with relevant members of some economic institutions in the country, as well as on the analysis of the data set provided by the Chamber of Commerce of the Republic. Even if the database is not statistically representative of the companies operating in the country, with 467 companies out of 5292 operating in San Marino, nevertheless, to the present author’s knowledge, it is the most complete companies’ data set that can be consulted. In order to improve the reliability of the study, primary data have been integrated with document analysis, used as a complementary data collection method. These data have been compared and analysed in conjunction with interviews and observations. The economy During the 1990s, the Republic of San Marino experienced an average GDP real growth of approximately 10 per cent, finishing with an 8 per cent growth during the 1999–2001 period. However, between 2001 and 2002, the economy was characterized by a slowdown mainly due to a loss of competitive advantage resulting from the characteristics of the labour markets, narrowing tax advantages and increasing price competition (International Monetary Fund, 2004). In fact, lower corporate tax rates in Italy and other EU countries, together with higher taxes on Italian commuters, have trimmed previous tax advantages. Secondly, reforms enhancing the flexibility of the Italian labour market have reduced the appeal of investing in San Marino. Moreover, the appreciation of the euro has curbed the competitiveness of manufacturing firms, tax amnesties in Italy have led to the repatriation of considerable funds previously deposited in Sanmarinese banks, and languishing Italian consumption has depressed commerce and tourism. Today, despite the economic stagnation which actually characterizes the European economy, the macroeconomic indicators for the Republic of San Marino point to a positive trend. In fact, as emerges in tables 32.1 and 32.2, the real GDP growth rate is, on average, higher when compared with other euro and non-euro countries, in some cases similar to some Asiatic countries. Nevertheless, San Marino growth rates were lower than in other small European countries, such as Ireland, Luxembourg, Andorra, Cyprus and Monaco, which expanded rapidly even during the global slowdown (International Monetary Fund, 2004). Based on the estimates of the UPE (2006), San Marino’s GDP (at constant prices) should have improved by 4–5 per cent in 2004; in fact imports increased by 9.52 per cent and exports by 8.08 per cent. The dynamism of the Republic can be explained by two main phenomena: the first is related to the business diversification that characterizes the structure of the local economy; the second is related to the characteristics of the financial system and to the advantages companies localized in San Marino can benefit from (Parker, 2002). The country presents a relatively well-diversified economy with tourism, banking, financial services, manufacturing and a large public sector (Table 32.3). Farming, animal husbandry and limited quarrying activities represent some of the traditional San Marino economic activities. Agricultural products include wheat and other grains, fruit, cheese and olives. Cattle and hogs are raised. Significant also is the sale of historic stamps and coins, while industrial output includes building stone, packing, telecommunications,

567

Source:

20 860

21 090

Adapted from UPE (2006).

749.01

2000

732.87

1999

20 930

790.50

2001

20 820

793.00

2002

21 820

823.93

2003

6.2%

9.0%

1999– 1998

5.5% 0.3%

1.1%

2001– 2000

2.2%

2000– 1999

0.5%

0.3%

2002– 2001

San Marino macroeconomic data: GDP and per capita GNP (purchasing power parity method, 1995 prices)

GDP (in millions of euros) GNP per capita

Table 32.1

4.8%

3.9%

2003– 2002

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Table 32.2 GDP growth rate (purchasing power parity method, 1995 prices): an international comparison 2000–2001 (%) San Marino European Union Euro Area Germany Greece Spain France Ireland Italy Luxembourg Netherlands Austria Portugal Finland Great Britain United States Japan

2001–2002 (%)

5.5 1.7 1.7 1.2 4.3 3.5 2.1 6.2 1.8 2.2 1.4 0.8 1.7 1.1 2.2 0.8 0.2

0.3 1.1 0.9 0.1 3.8 2.7 1.3 6.1 0.4 2.3 0.1 1.0 0.4 2.2 0.0 1.6 0.3

2002–2003 (%) 3.9 0.8 0.7 0.2 4.7 2.9 0.9 4.4 0.3 2.4 0.1 1.4 1.1 2.4 2.5 2.7 1.4

2003–2004 (%)

2004–2005* (%)

n.a. 2.2 2.0 1.6 4.2 3.1 2.0 4.5 1.2 4.4 1.7 2.4 1.0 3.6 3.2 4.3 2.7

n.a. n.a. 1.2 0.8 3.2 3.2 1.5 5.0 0.1 3.1 0.7 1.9 0.5 1.8 1.9 3.5 2.0

Note: * Estimates. Source: UPE (2006).

Table 32.3

GDP composition by sector (current prices) 2001(€)

2002(€)

2003(€)

2003 (%)

Agriculture Manufacturing Construction Commerce and tourism Transport and communication Financial sector Services Public sector

919 992.73 368 172 558.42 62 240 942.20 105 503 934.57

1 030 548.54 392 592 703.34 63 620 572.12 90 966 348.59

1 094 834.85 413 928 322.06 67 680 699.92 96 544 527.83

— 41 7 10

17 569 581.16

14 123 647.55

14 929 566.16

2

140 713 415.14 81 925 184.98 133 614 390.79

151 005 272.24 85 670 093.12 135 930 814.49

163 239 314.52 93 568 005.72 144 319 139.54

16 9 15

Total

910 660 000.00

934 940 000.00

995 304 410.60

100

Source: Adapted from UPE (2006).

The internationalization of small and medium companies in San Marino Table 32.4

569

Number of companies by sector (September 2005) No. of companies

% of companies

Agriculture Manufacturing Construction Commerce Hotels and restaurants Transport and communication Financial sector Services Education Health services and social assistance Other services

93 635 454 1422 37 172 101 1751 15 95 516

2 12 9 27 1 3 2 32 — 2 10

Total

5291

100

Source: Adapted from UPE (2006).

electronics, synthetic gum, metals, paints, textiles, fashion, leather goods, ceramics, chemicals, furniture, confectionery and alcoholic beverages. Nowadays the number of companies operating in the country is 5292 (UPE, 2005). In only one year, 257 new companies started to operate in the market, revealing a constant empowerment of the economy, especially in the service sector (with a prevalence of business to business services, informatics and real estate) (Table 32.4). As emerges in Table 32.6, the most diffused juridical form is the society, but what significantly characterizes the companies in the Republic of San Marino is their size. Based on the estimates of the local Industrial Association, only ten companies out of 5291 have more than 100 employees. This aspect clearly emerges from the analysis of Table 32.5 where, as an example, the manufacturing sector indicates the existence of 6040 employees for 635 companies, with a company average of fewer than ten employees. Also, from the analysis of the database provided by the San Marino Chamber of Commerce, there emerges the small size of the companies operating in the country. Tables 32.7 and 32.8 clearly identify two relevant issues. First of all, there is the lack of transparency already suggested by the International Monetary Fund (2004): most of the companies in the data set have not declared the number of employees (51.8 per cent) as well as their turnover (60.6 per cent). Secondly, there is the fact that only five companies of the database have more than 100 employees, while 23.3 per cent indicate fewer than five employees. Considering the turnover, only 14.3 per cent of the respondents declare more than 2 500 000 euros, revealing a panorama of micro-companies on which the local economy is based. Even if the Republic of San Marino, as previously underlined, is still outperforming Italy and other foreign countries, nevertheless a recent analysis of the International Monetary Fund (2004) points out some important weaknesses. More specifically, there are the limits which have been identified and could determine an erosion of competitiveness. First of all, San Marino needs to improve its financial position, which has been deteriorated on the heels of a string of budget deficits and devaluations of past tax credits.

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Table 32.5

Number of employees by sector No. of employees

Agriculture Manufacturing Construction Commerce Hotels and restaurants Transport and communication Financial sector Services Education Health services and social assistance Other service Not indicated

% of employees

34 6040 1454 2399 166 416 790 1988 38 97 828 12

— 33 8 13 1 2 4 11 — 1 5 —

Total private sector Public sector

14 262 4071

78 22

Total employees

18 333

100

Source: Adapted from UPE (2006).

Table 32.6

Number of companies by juridical form No. of companies

% of companies

Societies Handicraft enterprises Commercial enterprises Industrial enterprises Independent enterprises Cooperatives Consortia Others

2786 639 603 171 672 74 6 341

54 12 11 3 13 1 — 6

Total

5292

100

Source: Adapted from UPE (2005).

Secondly, labour and product markets need to be reformed: bureaucratic hindrances, that stunt business activity and reduce state interventions that distort the allocation of resources, have to be eliminated. Finally, authorities should create the conditions for a further development of the financial sector. As reported by Prati, Anayiotos and Sgherri (2004), with the offer of offshore financial services, the financial sector of San Marino engages in a broader set of activities than that of Italian regions surrounding the Republic, but it is not as well developed as other small international financial centres (Table 32.9) and it faces an erosion of profits due to an increased international competition, tax amnesties in Italy, prospective changes in saving taxation, and the significant growth in the number of bank and non-bank

The internationalization of small and medium companies in San Marino Table 32.7

571

Company size: number of employees

No. of employees

No. of companies

% of companies

1–5 5–10 11–20 21–40 41–60 61–80 81–100 101–150 151–200 201–250 n.a.

109 47 35 18 4 4 3 2 2 1 242

23.3 10.1 7.5 3.9 0.9 0.9 0.6 0.4 0.4 0.2 51.8

Total

467

Table 32.8

100

Company size: turnover(€)

Turnover(€)

No. of companies

% of companies

 250 000 250 000–500 000 500 000–1 000 000 1 000 000–2 000 000 2 000 000–2 500 000

2 500 000 n.a.

22 19 23 38 15 67 283

4.7 4.1 4.9 8.1 3.2 14.3 60.6

Total

467

100

financial intermediaries. The development of the financial sector in the Republic has always been based on the strategy that a small economy must primarily avoid mistakes and the risk of reputation losses (San Marino is not a tax haven). Nevertheless there is considerable room to increase the flexibility and innovation needed to remain internationally competitive, while maintaining the strengths and soundness of the financial and fiscal system. Today in San Marino, societies and assimilated companies benefit from a unique proportional tax rate of 19 per cent, and the relation with the tax administration is based on personal contacts: there is even the possibility, respecting the laws in force, to agree on ad hoc fiscal treatments on specific operations (BMS, 2006). The internationalization of SMEs of the Republic of San Marino The San Marino economy is highly dependent on trade, with the sum of exports and imports being more than three times the GDP (Table 32.10). Italy is the most important trading partner, absorbing 85 per cent of San Marino exports, followed by Western and Eastern Europe, South America, China and Taiwan

572 Yes

Yes

Banking Fund management IB services Trusts

Cyprus

Yes

Banking International Business (IB) Co. providing trust and company services

British Virgin Islands

Banking Security business (brokerage) Fund management Money brokerage Hedge funds Mortgage intermediation

Yes

Banking Fund management Wealth management

Andorra

Hong Kong SAR

Insurance activities

No

Yes

Yes

No

Mutual funds

No

Yes

No

No

International bond insurance

Characteristics of the main international financial centres

Type of services

Table 32.9

Yes for offshore banking units

Moderate

Insurance law provides confidentiality

Yes

Banking secrecy

Cyprus Pound

HK$

US$

Euro

Currency

Banks: 12 domestic, 31 offshore banking units Cooperative Credit Societies: 360 Insurance Co.: 52 domestic, 28 foreign IBC: 47 465

Deposit taking institutions: 229 Insurance: small number Brokers: 490 Fund Mgmt Co.: 172 Money Brokers: small number HK Mortgage Corporation

Banks: 8 Insurance Co.: 30 Mutual funds: 2606 Mutual funds Administrators: 490 IB Co.: 350 000

Banks: 8 Small number of fund management firms and wealth management co.

Size of financial sector

573 Yes

No

Yes

Yes

Yes

Adapted from Prati, Anayiotos and Sgherri (2004, p. 13).

Yes

Trade financing Loan syndication Foreign exchange Trading Derivative products Securities trading and underwriting Fund management

Singapore

Source:

No

Yes

Banking Asset management Portfolio management

Monaco

Banking Fund management Fiduciary services

Yes

Banking Administrative and marketing services Managed funds

Luxembourg

San Marino

Yes

Banking Trust Other fiduciary services Investment management Insurance

Liechtenstein

Yes

No

Yes

Yes

Yes

Moderate; numbered accounts allowed

Yes

Yes

Yes

Yes

Singapore $

Euro

Euro

Euro

Euro

Banks: 166 Finance companies: 4 Insurance companies: 140 Insurance brokers: 59 Holders of capital market services licences: 166 Holders of financial advisers’ licences: 48

Banks (2003): 10 Non-bank financial institutions: about 40

Credit institutions: 51 Portfolio Management Co.: 24 Investment funds: 60 Insurance: 49 Co. & Trust Service Providers: 40

Banks: 189 Investment funds: 1908 Insurance: 357 Other financial sector Professionals: 145

Banks: 17 Investment funds: 81 Insurance: 12 Trustees: 355

574

Source:

1675.01 1451.42 1627.05

1602.18

1448.76

1583.50

Adapted from UPE (2005, 2006).

1494.21

839.65

801.03

1465.85

749.01

2000

732.87

1999

1682.77

1460.74

1744.28

1514.14

910.66

790.50

2001

1660.23

1408.16

1756.44

1489.77

934.94

793.00

2002

1763.08

1459.50

1846.55

1528.60

995.30

823.93

2003

8.0%

6.9%

8.7%

7.0%

10.7%

9.0%

1998– 1999

International trade and GDP in the Republic of San Marino (millions of €)

GDP (values at 1995 prices) GDP (values at current prices) Imports (values at 1995 prices) Imports (values at current prices) Exports (values at 1995 prices) Exports (values at current prices)

Table 32.10

2.8%

0.2%

4.5%

1.9%

4.8%

2.2%

1999– 2000

3.4%

0.6%

4.1%

1.3%

8.5%

5.5%

2000– 2001

5.13% 3.6% 6.19%

3.6% 1.3%

2.6%

1.6% 0.7%

6.45%

3.9%

2002– 2003

2.7%

0.3%

2001– 2002

The internationalization of small and medium companies in San Marino Table 32.11

Main countries of export for San Marino companies

Main countries of export Italy Europe France Germany World USA EU Spain Russia Switzerland Far East

575

No. of companies

% of companies

307 66 37 34 31 27 23 21 15 13 10

68 14 8 7 7 6 5 4 3 3 2

(U.S. Department of State, 2005). These data are confirmed by the analysis of the Chamber of Commerce database. All the companies registered in the database export their products. The main question that originates from the analysis of these data is whether San Marino companies can be competitive in the international markets. At a first glance, variables such as the limited size, the fact that San Marino is not a member of the EU, and the lack of information regarding the economy of the country could be considered important factors that can hamper the internationalization of these companies. Then, which are the variables that can influence the significant increasing of exports which characterizes the Republic, especially in recent years? In what way had the companies in San Marino been able to expand in international markets despite the disadvantages in sales facilities, production scale, and international experience typically faced by SMEs? An indepth analysis of the strengths of the companies operating in San Marino with reference to their export activities could be helpful to interpret the internationalization process of this country. Industrial districts versus country district The internationalization of the SMEs in San Marino can be considered for some aspects similar to the internationalization of Italian enterprises which have become, over the years, less and less dependent on company size (Compagno, 2003). This relation has become weak also in other countries, as confirmed by a recent study carried out on Swedish firms, where they found no support for the relationship between the size and the export growth in internationalized small firms (Andersson, Gabrielsson and Wictor, 2004). In Italy it is possible to identify a general transition from an élitist globalization stage of the economy, that was left to large multinational organizations, to a new stage characterized by a condition of widespread globalization (Nanut and Tracogna, 2003) where the industrial district (chairs, shoes, jewels, glass and ceramics districts are only some examples) represents one of the main actors. In fact, according to Becattini (1991), in an industrial district most of the advantages of a large-scale production can be achieved also by a population of small-sized firms concentrated in some areas, which are

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specialized in different phases of production and find labour supply in a single local market. What significantly characterizes the industrial district is the idea of a sort of congruence between the requirements of a specific kind of organization of the production process, and the social and cultural characteristics of some groups of people. As previously pointed out, San Marino manufacturing companies offer products which are in part typical of the Italian industrial districts (textiles, ceramics and furniture represent an example), but they cannot benefit from the advantages of this economic system, facing the risk of a decreasing competitiveness if compared to other Italian and foreign companies. Nevertheless, the qualitative research has pointed out that what positively characterizes San Marino, owing to its size, independence and role of its institutions, is the existence of a sort of ‘country district’, where the social and cultural features are so important if they are to be appropriate for a bottom-up industrialization process. In other terms, there emerges the existence of a successful mix of a individualism and a feeling of belonging to a local community, with a significant positive impact on the competitive resources of the small companies operating in San Marino. State foreign relations versus international companies’ relations In order to reduce the level of uncertainty, when entering foreign markets, companies require information on markets, buyers, suppliers, prices and trade practices. Informational barriers are amongst the most critical variables which have to be considered in the internationalization process of SMEs (Leonidou, 2004). Nowadays what characterizes the Republic of San Marino is the number of institutional and economical relations developed by the country, especially in recent years. As reported by Wilkinson (2006), the government can develop some actions in order to compensate the gap between firm capabilities and foreign market opportunities. San Marino is going in this direction, trying to create an entrepreneurial climate; that is, an economical, political, social and technological environment whose features can facilitate and enhance the efficacy and efficiency of its SMEs in international markets. Currently, the Republic has signed bilateral agreements with almost a hundred countries, but what seems to be strongly recommended is the transformation of these relations from a government level to a company level, and the fact that San Marino is a small community can positively support this approach. Furthermore, services created to reinforce and facilitate the internationalization process represent a great help to the companies operating in the Republic. Particularly active is the Chamber of Commerce, which engages in a significant number of export promotion strategies: 1. 2. 3. 4.

5.

activities developed to link companies directly to potential customers, to identify agents and distributors, or to get in touch with foreign professionals; market research carried out to provide market and industry reports; organization of trade fairs, not only with a direct participation of the Chamber of Commerce but especially through assistance in the arrangement; organization of trade missions/business meetings, useful to get primary information on the foreign market as well as to get in contact with foreign prospects or potential business partners; arrangements of seminars on how to do business in foreign countries, the latest with China, India, Lebanon, Libya and Serbia;

The internationalization of small and medium companies in San Marino 6. 7.

577

development of printed, television, on-line and direct advertising for companies of different industries; business services such as translation of documents and interpretation during business meetings.

All these services have been strengthened in recent years through an intensification of technology investments, whose main purpose is to increase the efficacy and efficiency of the internationalization processes. Another institution recently created to support the internationalization of San Marino companies is the Business Management Services International Agency, run by the World Trade Center. On one side they can act as a real partner for San Marino companies willing to enter foreign markets: planning, strategic, financial, technical and logistical services can be offered through the network of World Trade Centers around the world. On the other hand, their purpose is also to attract investments in the Republic, promoting the strengths of the economic system and the advantages of the localization. Born ‘export-oriented’ companies The small market potential of the country is one of the main determinants of internationalization. Growth strategies planned by local companies could not be pursued without foreign sales. Economies of scale, required to be competitive in the market, could not be obtained by operating only in a local context. As a consequence, from the beginning, San Marino companies were born with a strong export orientation, which is favoured by the fact that the Italian market, the natural country of export, is very similar from a marketing point of view, hence adaptation strategies are not required (Hollensen, 2004). Another variable influencing the export orientation of San Marino companies is the fact that many Italian and international companies, such as Bosch, Wonderfood, Renault, Colombini, Aprilia and Valleverde, have already discovered the advantages of localizing their company in the Republic (BMS, 2006). As a consequence, they are actors of the local industry, but they behave as international competitors, selling their products in Italy or in the other foreign countries already penetrated by the company in previous years. In this respect, it is possible to recognize a general trend in the modes of entry of the manufacturing companies. With regard to companies founded by Sanmarinese entrepreneurs, they mainly internationalize directly, exporting finished products to their target clients: cases of strategic alliances or other modes of entry are unusual. On the other side, considering foreign companies located in San Marino, they act in a more complex way. Three main groups have been identified: the first group consists of companies exporting packaged finished products directly to foreign markets; the second group of companies produce finished products exported to foreign countries (mainly Italy) and commercialized by the parent company; the last group exports semi-finished products to the parent company in the foreign country. These constant relations with foreign markets, made up of local and foreign companies operating in the country, contribute to the creation of an export-oriented entrepreneurial climate that strongly characterize the Republic of San Marino.

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Conclusions and limitations of the study This was the first research on the internationalization of the SMEs operating in the Republic of San Marino and, as a consequence, its first limitation is the lack of previous analysis as well as the scarcity of specific data provided by institutions. The second limitation is related to the fact that the research was exploratory, since the sample of companies analysed became a convenient one, including only those companies that were registered in the database of the Chamber of Commerce. However, as emerges in the present chapter, some significant trends have been identified and supported by other reports and documents provided by other international sources. Because of the unique characteristics of San Marino, such as the small size, the extraEU position and the specificity of the financial and fiscal system, it is not easy to generalize to other countries the characteristics of the SMEs operating in the Republic. They face the typical weaknesses of the small and medium companies, but they have certain ‘site-specific’ advantages that cannot be extended to other countries (Stampacchia, 2003). The main question this study wanted to answer was how a SME can be competitive in international markets when dealing, not only with the limits of its business structure and organization, but also with the complexity of operating in a small independent country. At first glance, the answer of an outside observer could be focused mainly on some simplistic considerations related to the fiscal and financial advantages. As underlined in the research, there are some advantages, but they are not enough to justify the continuous and constant economic development of San Marino. In the present author’s opinion, the real answer has to be found first of all in the force of the local community and in the intense business, personal and social relations that perhaps only in a small but vigorous state like the Republic of San Marino can be developed and strengthened year after year. The positive network created between the institutions and the local entrepreneurs, the former willing to support the international activities of the local companies, the latter participating in the business environment not only as individual enterprises but also as members of a country system, probably represents the main value source of the Republic of San Marino, allowing its companies to reach competitiveness also in an international context. Export and international commitment, significantly diffused from the Institutions to local companies and vice versa, should perhaps be considered in the development of a theory of SME internationalization in Europe. On this subject, future research should be focused on a comparison of the internationalization processes that characterize similar small independent States, in order to investigate whether this sense of community is a constant strength of these countries, especially when they are committed to expanding abroad. References Andersson, S., J. Gabrielsson and I. Wictor (2004), ‘International activities in small firms: examining factors influencing the internationalization and export growth of small firms’, Canadian Journal of Administrative Sciences, 21(1), 22–34. Becattini, G. (1991), ‘Italian industrial districts: problems and perspectives’, International Studies of Management & Organization, 21(1), 83–90. BMS (2006), Aspetti fondamentali dell’attuale sistema fiscale della Repubblica di San Marino, San Marino: Business Management Services International Agency – World Trade Center. Compagno, C. (2003), ‘Assetti di governance e processi di internazionalizzazione nelle PMI’, Sinergie, 60, 51–88. Elphicke, C. (2005), ‘Almost Italy: destination Britain and Europe’, The Australian, 25 November, 19. Hollensen, S. (2004), Global Marketing: A Decision-oriented Approach, London: Pearson Education Limited.

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International Monetary Fund (2004), San Marino – 2004 Article IV Consultation – Preliminary Conclusions, retrieved from http://www.imf.org/external/np/ms/ 2004/051104a.html. Leonidou, L.C. (2004), ‘An analysis of the barriers hindering small business export development’, Journal of Small Business Management, 42(3), 279–302. Nanut, V. and A. Tracogna (2003), ‘Processi di internazionalizzazione delle imprese: vecchi e nuovi paradigmi’, Sinergie, 60, 11–34. Parker, P.M. (2002), ‘The economic competitiveness of San Marino: financial returns, labor productivity and international gaps’, Icon Group International Ltd. Prati, A., G. Anayiotos and S. Sgherri (2004), San Marino: Selected Issues and Statistical Appendix, Washington, DC: International Monetary Fund (retrieved from http://www.imf.org/external/pubs/ft/scr/2004/cr 04256.pdf). Republic of San Marino Web Site (2006) (http://www.sanmarinonline.com/story/html). Stampacchia, P. (2003), ‘Configurazioni d’impresa per il vantaggio globale’, Sinergie, 60, 89–101. ‘The non-European euro’ (1999), Economist, 350(8101), 48. UPE (2005), Bollettino di statistica III trimestre 2005, San Marino: Ufficio Programmazione Economica e Centro Elaborazione Dati e Statistica. UPE (2006), Relazione economico-statistica al bilancio di previsione dello Stato 2006, San Marino: Ufficio Programmazione Economica e Centro Elaborazione Dati e Statistica. U.S. Department of State (2005), Background Note: San Marino (retrieved from http://www.state.gov/r/pa/ei/ bgn/5387.html). Wilkinson, T.J. (2006), ‘Entrepreneurial climate and U.S. state foreign trade offices as predictors of export success’, Journal of Small Business Management, 44(1), 99–113.

33 Internationalization of Slovenian SMEs as a learning and unlearning process Miroslav Rebernik and Ksenja Pusnik

Introduction The ability to engage in exporting activities is a necessary ingredient to ensure the survival and growth of SMEs, especially in a small market economy, like Slovenia. Globalization processes, transition to a market economy, membership of the European Union, progress in telecommunications and transport, and utilization of the Internet have opened up completely new business possibilities for Slovenian SMEs and at the same time exposed them to fiercer international competition. Our contribution seeks to enhance understanding of the internationalization of SMEs in Slovenia and in this perspective the importance of learning and unlearning processes for encouraging further internationalization of SMEs. Despite the importance of internationalization processes and the volume of research in the field, there is still insufficient knowledge about factors associated with the ability of SMEs to be engaged in international activities. Looking at internationalization as the product of a series of incremental decisions (Johanson and Vahlne, 1990), the decisions on improving the level of knowledge and skills are very important, especially when we consider internationalization to be pathdependent, based on experience, sequential, local and relied upon feedback (Blomstermo et al., 2004). Internationalization of firms implies accumulating new knowledge (ibid.), but at the same time also discarding the knowledge that became obsolete (Hedberg, 1984; Eriksson et al., 1997, Windeknecht and Delahaye, 2004; Blomstermo et al., 2004). In this perspective, not only the process of learning but also the process of unlearning is of special importance when discussing the internationalization of the Slovenian economy, and SMEs in particular. In this chapter we, first, outline internationalization as a learning process. Second, we sketch a simple verbal model to show the complexity of learning and unlearning. Third, we introduce internationalization processes in Slovenia and their tardiness and, finally, discuss some learning and unlearning challenges that Slovenian SMEs are facing. In conclusion, we summarize our findings on the importance of learning and unlearning for internationalization, and develop some implications for (economic) policy concerning the internationalization of Slovenian SMEs and need for further research. Internationalization as a learning process The Uppsala model of internationalization shows the importance of experiential knowledge generated by managers and staff exposed to doing business in international markets. Understanding organizations as information-processing systems where experiential knowledge is stored in organizational memory (Christensen et al., 2004) prompts an important caveat for transitional countries like Slovenia. During their ‘previous life’ under 580

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socialism/communism these countries have accumulated much experiential knowledge that has grown obsolete and should be disposed of, because it has become useless and impedes the accumulation of new knowledge needed for the market economy and internationalization. Transitional economies like Slovenia, to a greater extent than mature market economies, lack each type of experiential knowledge: business, institutional and knowledge on how to internationalize. None of them can be obtained without costs and they are hard to plan in advance (Eriksson et al., 1997). Business knowledge, that is, knowledge about customers, competitors and foreign markets, is similar to the knowledge that the firm doing business in domestic markets is already exploiting. Institutional knowledge is much harder to obtain. It consists of knowledge of government and institutional frameworks, rules, norms and values in the target markets. The third type of knowledge is knowledge about the process of internationalizing, and is very firm-specific, embedded in the routines, norms and structure of the firm (Blomstermo, Eriksson and Sharma, 2004). If, according to Johanson and Vahlne (1990), the knowledge is stored in the decisionmaking system, when decision makers leave the company, the knowledge is lost. Many new companies in Slovenia in the period 1990–95 were formed by ‘drop-out’ managers of large and medium-sized companies. As many managers of previously (big) socialist companies have formed their own companies, usually as sole proprietorships, the experiential knowledge embedded in organizational routines has been lost. Large and medium-sized companies have lost the expertise gained at international markets, while newly formed (very often one-man-band) companies did not have the resources to internationalize. They may have had the desire, but not the capital and people. Oviatt and McDougall’s seminal work on internationalization (Oviatt and McDougall, 2005; Autio, 2005) called our attention to companies that are international from inception. They do not follow the stage model and they start their businesses in international environments without previous accumulation of experience on domestic markets. Born globals do not develop routines that could interfere with internationalization and long domestic operations are not a prerequisite in the internationalizing process (Blomstermo, Eriksson and Sharma, 2004). Research by Christensen et al. (2004) shows that organizational routines play a role in guiding initial international activities of companies but do not give an answer on how to accelerate the process of creating routines that would support internationalization. A hierarchy of routines (Nelson and Winter, 1982) would lead us to the conclusion that the changing of dominant beliefs of top managers could be the answer. But, here again, we enter the twilight zone of transitional economies where institutional arrangements are not built-up yet, rules of the game and the structures of payoffs (Baumol, 1990) are not determined, many agency problems exist, false cooperation (Rebernik, 1999) is taking place and the requisite holism is missing (Rebernik and Mulej, 2000). Many definitions of organizational learning and knowledge sharing exist (Hedberg, 1984; Cummings, 2003; Argyris, 2004; Esterby-Smith and Lyles, 2005). According to the definition that ‘an organization learns in only two ways: (a) by the learning of its members, or (b) by ingesting new members who have knowledge the organization didn’t previously have’ (Simon, 1991, p. 125) our attention should be paid also to individual level, as at both levels the learning and unlearning is taking place.

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Complexity of learning and unlearning Even though we are still not able to answer the question of what are the relevant organizational and individual-level competencies for internationalization (Autio, 2005), we know that any understanding involves both learning new knowledge and discarding obsolete and misleading knowledge and that sometimes the unlearning may be as important as is adding new knowledge (Hedberg, 1984; Sinkula, 2002). Nevertheless, until recently, not much research has been devoted to the area of unlearning even though the presence of certain knowledge may constrain learning or even encourage ineffective learning (Cummings, 2003). It is interesting that young firms may have cognitive learning advantages on entering a new market because of fewer ‘systemic rigidities’, as before learning they do not need to unlearn established routines (Autio et al., 2000). This would mean that, the later a firm internationalizes, the more likely that it develops competencies that constrain the opportunities it sees (Sapienza, Autio and Zahra, 2003). For unlearning to take place intentional forgetting of some parts of existing individual and organizational knowledge is needed. A firm must ‘disorganize’ some part of its knowledge store (Holan, Phillips and Lawrence, 2004). Similar disorganization must take place also at the individual level. The complexity of never-ending learning and unlearning processes is depicted in Figure 33.1. There are two constituents of knowledge relevant for internationalization: one is owned by individuals, and the other is stored in organizations. They both relate to business knowledge, institutional knowledge and internationalization knowledge (Ericksson et al., 1997; Blomstermo et al., 2004). Each type of knowledge has three dimensions (Windeknecht and Delahaye, 2004; Becker, 2005). The first dimension is explicit, easy to articulate, identified, transferred and documented. The second dimension is tacit, intangible, hard to define and expressed. The third dimension is the one that is usually cited as weltanschauung, terms of SOCIAL, CULTURAL, ECONOMIC, POLITICAL CONTEXT AREAS OF KNOWLEDGE:

INDIVIDUAL LEVEL

ORGANIZATIONAL LEVEL

EXPLICIT KNOWLEDGE

INERT KNOWLEDGE

TACIT KNOWLEDGE

ORGANIZATIONAL MEMORY

MENTAL MODELS

ORGANIZATIONAL CULTURE

LEARNING UNLEARNING Source: Windeknecht and Delahaye (2004); Eriksson et al. (1997); Blomstermo et al. (2004).

Figure 33.1

Complexity of learning and unlearning

UNLEARNING

INTERNATIONALIZING KNOWLEDGE

LEARNING

UNLEARNING

LEARNING

BUSINESS KNOWLEDGE INSTITUTIONAL KNOWLEDGE

Internationalization of Slovenian SMEs

583

reference, mental models, and so on. It is the dimension that is the most difficult to articulate, and therefore to change or unlearn. Explicit knowledge, tacit knowledge and mental models at the individual level are to a certain degree synonymous with inert knowledge, organizational memory and organizational culture at the organizational level. Learning and unlearning is permanently taking place in all knowledge areas and with all types of knowledge, which makes the phenomena very complex and hard to comprehend, especially because processes are mutually dependent on the social, cultural, economic and political context which is different from country to country. This not only makes internationalizing processes very hard to compare between countries but also calls for our prudence when transferring experiential knowledge from one context to another. In the next section we will reveal some of the basic characteristics of the Slovenian economy and SMEs and their functioning in the international environment. Tardiness of internationalization processes in Slovenia Main characteristics of the Slovenian economy and SMEs Slovenia became an independent state after the collapse of the Socialist Federal Republic of Yugoslavia in 1990. The country, with two million people, entered the European Union (EU) in May 2004, and is among the most advanced of all transition economies in Central and Eastern Europe, not far behind the less developed countries of the ‘old’ EU. A GDP per capita at purchasing power parity (PPP) exchange rates of EUR 17 400 in 2004 (Bank of Slovenia data) represents 78 per cent of the EU-25 average GDP per capita and places Slovenia above the average level of medium-income countries. Since 1990, Slovenia has undergone a threefold transition: (i) transition from a socialist to a market economy, (ii) transition from a regional to a national economy, and (iii) transition from being a part of Yugoslavia to becoming an independent state and a member of the EU (Mrak et al., 2004). Yet Slovenia accomplished only the first stage of transition, which was carried out in the context of creating the new independent state and reforms, aimed at macroeconomic stabilization and internal and external liberalization, and significant challenges still remain. These are in part the result of delays in some crucial (structural and institutional) reforms associated with the unique path of transition (that is, a gradualist approach to economic reform) including, among others, the building of some institutions (the problem of the so-called ‘implementation gap’), the privatization of state-owned assets, health reform, the second stage of pension reform, the reform of the enterprise sector the financial sector and the reform of public administration. Slovenia has a relatively short entrepreneurship tradition since its private sector started to grow only after the start of its reorientation towards a market economy in 1989. After a sharp increase in the number of small and medium-sized enterprises at the beginning of the 1990s, the process of rapid development of the small business sector slowed down considerably after 1994. On average, the largest part of SMEs could be found in the trade and repair industry (24 per cent), followed by real estate and business activities and manufacturing (each 19 per cent), construction (13 per cent) and transport and communication (10 per cent). The comparison of Slovenian and EU firms (Table 33.1) shows that the structure of the economy in terms of number of firms, number of employees and the average number of employees per firm is very similar to the European average, less so in turnover per enterprise and value added per employee.

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Table 33.1 Some indicators of Slovenian SMEs in comparison with EU-19 in 2002 and 2003 Micro, small and medium enterprises (SMEs) Micro Number of enterprises (in 1000s)

Slovenia

Share of enterprises in %

Slovenia

Employment (in 1000s)

Europe-19

Europe-19 Slovenia Europe-19

Employment share in %

Slovenia Europe-19

Average enterprise size: Employment Slovenia per enterprise Europe-19 Turnover per enterprise (in million euro) Value added per employee (in thousand euro) Share of labour costs in value added in %

Slovenia Europe-19 Slovenia Europe-19 Slovenia Europe-19

Small

2002 2003 2000 2003

85.36 85.41 19.040 17.820

4.42 4.54 1.200 1.260

2002 2003 2000 2003

93.47 93.50 93.10 92.28

4.95 4.97 5.90 6.53

Medium

SMEs total

Large enterprises

Total

1.11 1.10 170 180

89.14 91.06 20.415 19.270

0.30 0.30 40 40

89.45 91.35 20.455 19.310

99.66 99.67 99.80 99.74

0.34 0.33 0.20 0.21

100.00 100.00 100.00 99.95

203.14 203.14 40.960 42.300

544.94 545.52 121.750 139.720

1.25 1.21 0.80 0.93

2002 134.25 2003 134.83 2000 41.750 2003 55.040

91.56 91.56 23.080 24.280

116.00 341.81 116.00 342.39 15.960 80.790 18.100 97.420

2002 2003 2000 2003

24.55 24.72 34.30 39.39

15.95 16.78 19.00 17.38

21.54 21.26 13.10 12.95

62.04 62.76 66.40 69.73

37.96 37.24 33.60 30.27

100.00 100.00 100.00 100.00

2002 2003 2000 2003 2002 2003 2000 2003 2002 2003 2000 2003 2002 2003 2000 2003

1.62 1.58 2 3 0.14 0.13 0.20 0.44 17.72 17.71 40 40 46.14 51.44 66 57

19.84 20.17 20 19 2.03 2.11 3.00 3.61 23.07 24.25 75 60 61.56 63.00 66 57

106.42 105.36 95 98 9.46 10.35 24.00 25.68 22.23 23.73 105 90 67.07 66.24 58 55

3.82 3.76 4 5 0.37 0.35 0.60 0.89 20.67 21.50 65 55 58.39 60.46 63 56

689.62 683.96 1.020 1.052 66.42 69.43 255.00 319.02 26.90 28.70 115 120 61.75 60.67 49 47

6.15 5.97 6 7 0.56 0.57 1.10 1.55 23.02 24.18 80 75 59.88 60.55 56 52

Note: According to the methodology of the European Observatory of SMEs, companies in A-agriculture, hunting and forestry, B-fishing, L-public administration, defence, social insurance, and M-education are not included. Source: For Slovenia, IPMMP according to data provided by AJPES (in 2002 and 2003), for Europe-19 European Observatory for SMEs – 6th Report (in 2000) and 7th Report (in 2003).

Internationalization of Slovenian SMEs

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Internationalization of the Slovenian economy and SMEs The internationalization of enterprises in Slovenia, as in other transition economies, has been gaining importance only in recent years. Academic research on internationalization in Slovenia has been addressed seldom if compared to other countries, and has been fairly limited. Researchers have been focused mostly on trends and characteristics of inward FDI and, in recent years, also on outward FDI of large firms (Pusnik and Rebernik, 2008). There is still insufficient knowledge about the internationalization of SMEs. The main reasons for limited research on internationalization of Slovenian enterprises and on internationalization of SMEs in particular are availability of data and statistical problems. General unavailability and modesty of systematic and comprehensive data, limited time series and scope of data, changing methodology and reluctance of firms to report set limits on a substantive empirical and qualitative analysis. Slovenia has traditionally been an open economy and the most outward-oriented Yugoslavian republic, with exports being the most widely used foreign market entry mode. International knowledge was gained relatively early compared to other socialist economies also in other internationalization modes, since Slovenian firms began investing abroad as early as the 1960s, firstly in order to facilitate imports, than to facilitate exports and, lastly, for general systemic reasons (Jaklic and Svetlicic, 2001a, 2001b; 2003a, 2003b; Jaklic, 2003, p. 205). Already, in 1980, developed countries accounted for 58 per cent of all Slovenian exports and in 1990 Slovenia accounted for 29 per cent of Yugoslavian exports and 20 per cent of its GDP despite having just 8 per cent of its population (Pleskovic and Sachs, 1992, p. 2; cited by Jaklic, 2003, p. 14). Over the past decade and a half, internationalization through outward foreign direct investments (FDIs) has come under the pressure of the processes of globalization, liberalization, deregulation, privatization and democratization, the most dynamic instrument of integration in the world economy since they have grown relatively quickly, even faster than inward investment (UNCTAD, 2004). Indicators of trade integration and internationalization of Slovenian economy show that Slovenia has becoming more integrated within the international economy (Tables 33.2 and 33.3). However, the trend in outward FDI indicates that the Slovenian economy is still in the early phase of internationalization. Slovenian enterprises’ FDI abroad totalled €2200.3 million at the end of 2004 (Bank of Slovenia data) and records a relatively high growth rate for the fifth consecutive year. The value of inward FDI in Slovenia totalled €5633.1 million at the end of 2004, and has increased on 2003 and 2002. The ratio of foreign revenues to total revenues of Slovenian enterprises (Figure 33.2) also indicates the early phase of internationalization of Slovenian enterprises. Almost two-thirds of Slovenian enterprises gain their revenue only on domestic markets, and only one-third of enterprises (23.4 per cent in 2003) also on foreign markets (AJPES data). These exporters employ almost three-quarters of employees (71.4 per cent) and have the largest share in total annual turnover (78.6) and added-value (77.3 per cent). The most export-oriented are large enterprises, which create the largest share of revenues on foreign markets (32.9 per cent). Medium-sized enterprises create 23.0 per cent of revenues on foreign markets and small enterprises 12.8 per cent. Large enterprises create also the largest share of total revenue both on domestic (53.5 per cent) and foreign markets (74.2 per cent). In the period 2000–03, the ratio of foreign revenue/total revenue

586

Slovenia

1.2

0.8

2.3

8.8

62.8

4

Czech Republic

5.3

20.2

61.8

6.2

5.8

28.6

20.7

3.7

2.8

10.9

40.8

8.5

2.1

9

46.9

6.7

2.4

10.1

56.6

4

Estonia Cyprus Latvia Lithuania Hungary

Source:

UNCTAD (2004).

1.4

5.3

34.8

5.3

Poland

Notes: * Index of trade integration of goods and services: average value of imports and exports of goods (services) divided by GDP, multiplied by 100. ** Average value of inward and outward foreign direct investment flows divided by gross domestic product (GDP).

n.a

n.a

9.4 3.3

2

2.4

EU 25 EU-zone

Trade integration of goods and services of the Slovenian economy in international perspective (2004)

Real GDP growth 4.6 rate at constant prices, % change on previous year Trade integration of 50.8 goods* Trade integration of 9.5 services* Foreign direct 1.6 investment intensity**

Table 33.2

1.6

8.7

69.4

5.5

Slovakia

587

— 11.3 1.1 4.4 0.1 8.9 2.5

1995

Bank of Slovenia; AJPES; UNCTAD, 2001, 2003, 2004, Annex Tables B5 in B6.

* Sole proprietorships excluded.

Sources:

Note:

— 17.6 0.6 4.7 0.04 3.8 1.5

1993

Indicators of internationalization of the Slovenian economy

Foreign sale/total sale (in %)* Import of goods and services (real growth in %) Export of goods and services (real growth in %) Inward FDI flows as a % of gross fixed capital formation Outward FDI flows as a % of gross fixed capital formation Inward FDI stock as a % of GDP Outward FDI stock as a % of GDP

Table 33.3

— 10.4 6.7 4.5 0.1 12.1 2.3

1998 — 8 1.6 1.9 0.9 14.5 3

1999 26.73 7.6 13 2.8 1.4 15.3 4

2000

27.5 3 6.3 7.9 3.1 16.4 4.9

2001

28.1 4.9 67 32.3 1.9 18.7 6.8

2002

28.8 6.8 3.2 2.9 4.8 15.6 6.5

2003

26.6 12.4 12.6 — — — —

2004

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Handbook of research on European business and entrepreneurship

Foreign revenue/total revenue (%)

40 35 30 25 20 15 10 5 0 2000

2001

2002* Large

Medium

2003

2004*

Small

Note: * In 2001 and 2004, the criteria for classification of enterprises into large, medium and small enterprises were changed by the Enterprises Act (Uradni list RS, 45/01, 59/01, 139/04). Source: IMAD (2005) according to AJPES data.

Figure 33.2

Foreign revenue/total revenue of Slovenian enterprises 2000–2004

of all three class sizes has increased, indicating the increasing internationalization in terms of export orientation. The international operations of Slovenian SMEs are rather simple. A survey among 161 internationalized and 86 non-internationalized Slovenian SMEs in 2003 (Ruzzier, 2004) shows that almost three-quarters of SMEs use one or two operating modes. The most frequently used mode of entry to the international markets is direct exporting (used by 66 per cent of enterprises), followed by importing (27 per cent), export through an intermediary (15 per cent) and contract entry mode (12 per cent). Franchising, joint venture direct investment and other non-specific modes are very rarely to be found among Slovenian SMEs. In another survey (Burger and Svetlicic, 2004) of 180 companies from the Czech Republic, Estonia, Hungary, Poland and Slovenia, market motives have proved to be by far the most important, with almost no differences among motives for investing abroad between SMEs and large firms. A second motive for Slovenian SMEs to start international activities is to fill the gap/niche in the product/service market followed by the opportunity to meet the existing demand for products and services. Exploiting the opportunity to position themselves at a lower price and the opportunity to cut costs seems to be the least important motive for internationalization. One of the reasons is that SMEs are generally more focused on niche markets where products and services are more differentiated and accustomed to specific needs of known customers and are often less price-elastic (Burger and Svetlicic, 2004). SMEs also much more rarely follow long-term strategic motives (technology, brand names, networks) in their outward internationalization than large firms. Slovenian SMEs need on average between one and two years to start their international activities, but many enterprises never achieve higher rates of foreign annual turnover. They may never exceed 5 or 10 per cent of their annual turnover or they are just occasional exporters. On the other hand, many enterprises increase their foreign turnover

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very fast (10 per cent of foreign trade on average in two to three years and 20 per cent in, on average, three to four years) and they represent the major part of their total turnover (Ruzzier, 2004). Slovenian SMEs operate in a relatively small number of markets. The majority of internationalized Slovenian SMEs (39.8 per cent) sell their products or services in from one to three countries, while 4.3 per cent sell them in 21 or more countries. The most common countries in which Slovenian SMEs operate are Italy, Austria and Germany, followed by countries in former Yugoslavia and Russia, other EU countries and associate countries. Slovenian SMEs operate least in the USA and Canada, which shows that these countries are still ‘distant’ markets for Slovenian enterprises (Ruzzier, 2004). Research on entrepreneurship activity in Slovenia, based on a survey of 3016 adults in 2005 (Rebernik, Tominc and Pusnik, 2006) shows that less than 10 per cent of Slovenian enterprises have on average more than three-quarters of their customers in foreign markets. New enterprises are less export-oriented than established enterprises, a result consistent with those theories of internationalization which consider export activities as an evolutionary process. In the next section we will discuss some selected issues and expose some ideas on what is to be learned and unlearned on the individual, organizational and societal level in order to encourage Slovenian companies to become more international. Learning and unlearning challenges for Slovenian SMEs Development of competencies The Slovenian Entrepreneurship Observatory reports that Slovenian firms are more likely to be aware of the importance of the development of competencies than European companies. This is probably because of the awareness of Slovenian enterprises that their lagging behind their European counterparts is mainly due to a lack of knowledge and skills. More than 45 per cent of European and only 28 per cent of Slovenian SMEs have a (special) person or a group of people employed in charge of developing knowledge, experience and skills of employees. An important obstacle to the development of competences is that the owners of SMEs are often unable to identify missing knowledge or skills. Only a small number of SMEs acknowledge the problems related to the identification of professional needs and the finding of useful resources for the development of competences. Looking at organizational learning in Simon’s (1991) way and understanding internationalization as a learning process, one can expect a company to internationalize if (a) individuals are willing and capable of learning, or (b) where a company is open and capable of employing diverse people. Because of the short entrepreneurship history Slovenian companies, there are not many established routines that would push for learning of its members, and, as the employment is local, the process of learning is suppressed. Visiting exhibitions and fairs, reading professional literature and meetings organized for the exchange of information are among the most important methods used by enterprises in order to increase the level of knowledge, experience and skills. Slovenian enterprises (between 70 per cent and 80 per cent of surveyed enterprises) use these methods more often than European companies (between 30 and 60 per cent of surveyed enterprises). Both Slovenian and European large enterprises use these methods more

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frequently. After this comes cooperation with advisers, which is used by 59 per cent of Slovenian and 33 per cent European SMEs (Rus and Kroslin, 2004). A major assumption of the stage process theory is the gradual accumulation of knowledge, which can be accelerated if SMEs cooperate within industrial clusters (Matlay and Mitra, 2004; Prashantham, 2005). Clusters also support the regional development and provide a fertile environment for internationalization at the cross-section of global and local. Clustering initiatives fits well with arguments that industrial innovation is of crucial importance to economic growth. The idea of cluster development in Slovenia goes back to the beginning of the 1990s, when the concept of clustering was introduced to the wood-processing industry (Petrin, 1991). In 2004, more then 350 enterprises and institutions and almost 55 000 employees were involved in clustering (Rebernik, Dermastia and Kroslin, 2004). Cooperation of companies in clusters enhances knowledge sharing and accelerates learning; the results of clustering have been encouraging and awareness of clustering has significantly increased. Highly specialized supply chains are developing within the clusters, and the process of outsourcing parts of the value chains that feature lower added value to other regions with lower labour costs has been started. Connections to Italian, Austrian and German clusters have already been established, in part through joint participation in the 6th European Framework Programme. Not many studies focus on strengthening internationalization via cross-border clustering. The Observatory of European SMEs (2002) indicates that the barriers to increasing cross-border cooperation are mostly linked to differences in legislation (the labour market, construction and housing, social services, environment and planning, tax policies, education and research, infrastructure and logistics, culture and shared identities, and industrial politics). However, the effects of the Single Market should lead to these barriers being lowered. Very often linguistic barriers and differences in mental and institutional distance matter. Company managers are often familiar with regional and national R&D institutes as a result of earlier experience, but are unfamiliar with the institutional setting abroad. Thus, in spite of the European efforts at integration and several cross-border initiatives, national innovation systems with their regulations and institutional settings are still important for a company’s innovation interactions, and companies from different regions remain strongly embedded in their respective regional and national innovation systems (Observatory of European SMEs, 2002, p. 26). Obviously the physical borders between countries are not the main difficulty to face in attempting to form a cross-border regional cluster and a network of international firms. Beside lack of institutional knowledge, the main obstacle is the difference in mental models and in organizational cultures. Technology development According to a GEM Slovenia survey among 3016 adult populations in 2005 (Rebernik, Tominc and Pusnik, 2006) only 4.9 per cent of Slovenian new enterprises and 5.6 per cent of established enterprises are convinced that their products and services are new to all potential buyers. A larger share of enterprises believe that their products and services are new to some potential buyers (29.2 per cent of new and 16.2 per cent of old enterprises). Slovenian enterprises use mostly technology which is available for five and more years (78.5 per cent of new enterprises and 62.5 per cent of old enterprises). Only a few enterprises

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(7.4 per cent of new and 14.1 per cent of old enterprises) have technology, being available for less than one year. In order to encourage internationalization, innovation orientation of Slovenian companies and technology they exploited have to be improved. We consider successful technology transfer mechanisms to be an important determinant for internationalization of SMEs in Slovenia. A degree of initiative can be seen in this field but its effectiveness is rather poor and universities have only recently established university incubators and technology transfer offices. Technology and research transfer are, according to GEM Slovenia surveys, the second most unsettled entrepreneurial framework conditions in Slovenia (Rebernik, Tominc and Pusnik, 2005, 2006). To achieve technology and research transfer successfully, networking between university (professors, researchers) and the local economy, between financial institutions and various entrepreneurship promotion institutions (Small Business Development Agencies, the Chamber of Commerce and Industry, developmental agencies and so on) is extremely important. In Slovenia, these supporting institutions are numerous, but their cooperation is poor. They mainly operate at the individual level and are largely ineffective. In general, Slovenian universities do not take responsibility for helping small and medium-sized enterprises in their technological development or in the process of internationalization. One of the key problems in connecting university and SMEs in Slovenia is the lack of technological development of small enterprises. In addition, they have a short research horizon and often lack the knowledge needed for cooperation, while academic staff are not particularly interested in cooperating with smaller enterprises, as they generate little or almost no income. Institutional, cultural and infrastructural barriers can all be identified as explanations for the lack of success in knowledge transfer (Rebernik, 2003). Among institutional barriers, the present mode of functioning of Slovenian university system is the most influential. It does not direct researchers and staff into the commercialization of research. Universities are still predominately pedagogical rather than research institutions. In order to meet their obligations, academics mainly need to teach and research. To gain promotion and tenure, teaching staff need to publish papers and gain citations, rather than prove the practical applicability of their research. Considering the cultural barrier, the prevailing mode of thinking at universities is still mainly administrative. The transfer of innovation into entrepreneurial practice is a complex process that needs to be dealt with as a whole. The complexity of this process is even greater in the university environment, where public and private interests are combined. Most innovations that can be commercialized come from technical faculties where there is little business knowledge available and where the creators of innovation rarely have any entrepreneurial knowledge or experience. Successful transfer of knowledge can only be made possible if a university is capable of promoting creative teamwork between technical and business knowledge, and establishes cooperation with successful companies, investors and various support institutions. The prevailing system of values at institutions of higher education in Slovenia is not inclined towards entrepreneurship. The peculiarities of Slovenian academic culture, which often sees involvement in commercial tasks as a violation of consecrated research work, makes the transfer and commercialization of technology even more difficult. Among infrastructural barriers for technology transfer the relatively underdeveloped economic and business environment that surrounds universities together with lack of

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efficient promotional mechanisms and schemes is to be mentioned. There are no supporting mechanisms at universities with which we could facilitate the weak cooperation between university and business. The practice of a company set-up stemming from the cooperation between university and its partners is not valued in Slovenia. Neither of the Slovenian universities has yet developed business incubators up to the point that would focus on the transfer of research directly into entrepreneurial practice. The entrepreneurial scope of Slovenian universities and research institutes is still limited to single cooperation agreements and rare joint projects with established (larger) firms. Slovenia faces a challenge to remove the above institutional, cultural and infrastructural barriers to success in knowledge transfer. The main obstacles in learning and knowledge sharing are in organization culture and organizational memory, as well as mental models. Growth ambitions GEM surveys on growth aspirations of Slovenian entrepreneurs, measured by intended employment of people, by expansion of market and export, show that their ambitions are very high when they establish a company but they drop significantly when companies become older and more experienced (Rebernik, Tominc and Pusnik, 2005). Experiential knowledge in this case leads to more cautious operation. On average, 13 per cent of Slovenian nascent and new entrepreneurs planned in the next five years the employment of more than 20 people and exporting of more than 50 per cent of their products. When we surveyed established companies, which were older than three and a half years, fewer than 4 per cent still had such intentions. Analysing Global Entrepreneurship Monitor data for the years 2002, 2003 and 2004, we find that the growth aspirations of Slovenian entrepreneurs are also significantly higher when compared to Croatian and Hungarian entrepreneurs (Tominc and Rebernik, 2005). However, when drawing conclusions about growth ambitions we should consider that the majority of SMEs are mainly oriented towards home markets, not just because their owners may not have the ambitions to grow and internationalize, but also because barriers to entry are probably higher for them than for larger companies (Acs et al., 1997). International entrepreneurship and internationalization have a common heritage (Welch, 2004, p. 145), and the decision to internationalize is one of the most important decisions the entrepreneur will ever make (Ibrahim, 2004, p. 133). As learning in SMEs occurs only when entrepreneurs and owners/managers recognize the need for acquiring new knowledge, their growth ambitions are important. Internationalization makes sense only when companies want to increase their long-term profitability. Decisions on longterm profitability are of a strategic nature. In smaller companies, where ownership is not separated from management, strategic decisions are made by the lead entrepreneur. In larger companies they are made by agents (top management) based on governing instructions set by principals (owners). Internationalization decisions therefore depend either on the growth ambitions of the lead entrepreneur or on the extent of agency problems. We do not have studies on the way agency problems in Slovenian SMEs would oppress internationalization, but, taking into account the unfinished transitional processes and infant institutional environment in Slovenia, we may hypothesize that such problems exist and cause lower efficiency of SMEs in a majority of cases where ownership is separated from management. On the other hand, the dramatic decrease in growth ambitions with

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the aging of the company is a clear warning sign that the business and cultural environment of Slovenian SMEs at the moment is not supportive of ambitious growth-oriented companies. Conclusions The strengthening of internationalization in recent years indicates that Slovenian enterprises are gradually realizing that, without internationalization, they can no longer maintain their market shares as internationalization is almost a necessity, given the limited domestic market size (De Clercq et al., 2003, p. 3). However, even though Slovenia is a very small market, it seems that it has not yet developed its economy up to the point that limited market size would press more aggressively for internationalization. The Slovenian internationalization pattern demonstrates that internationalization remains a cumulative learning and unlearning process at both the individual and the organizational level, despite the rapid changes in the international environment. In this perspective, business, institutional and internationalization knowledge, combined with the elimination of institutional, cultural and other barriers and more promotion, is an important tool that can convert the prevailing externally driven internationalization (globalization and European Union integration) into a more endogenous one. Some determinants are of special importance for internationalization of Slovenian SMEs. First, Slovenia as a transitional economy lacks every type of experiential knowledge: business, institutional and internationalizing. Second, although some experiential knowledge is stored in SMEs, there are not many established routines that would push for learning of its members and, because the employment is local, the process of learning is extremely important. Third, SMEs very often lack the capabilities and/or resources to expand their operations abroad. Fourth, Slovenian SMEs are aware of the importance of development of knowledge and competence, but only a small number of them acknowledges the problems of identification of professional needs and the finding of useful resources for the development of competences. Moreover, internationalization of SMEs is impeded by existing agency problems, as well as by a business and cultural environment that is not supportive of growth ambitions of the lead entrepreneurs. Furthermore, technology transfer is not yet successful in Slovenia. Finally, SMEs dominate in services industries, which are bounded locally and cannot cross borders so easily. In Slovenia, the improvements in internationalization of SMEs could not be expected without a supportive entrepreneurial environment, which would create not only necessary conditions for growth of enterprises through internationalization, but also conditions for emergence and growth of new enterprises. The latter are of special importance since the Global Entrepreneurship Monitor (GEM) placed Slovenia at the bottom of the researched countries, being 41st out of 44 countries in the 2002–04 period, and in 17th place among 20 European countries, with 4.4 per cent of the adult population engaged in early-stage entrepreneurial activities in 2005 (Rebernik, Tominc and Pusnik, 2005, 2006). In order to encourage entrepreneurship and the process of learning new knowledge and discarding obsolete and misleading knowledge at the individual and organizational level, there is a need to improve entrepreneurial framework conditions, which directly or indirectly affect the level of entrepreneurship in Slovenia. Particular attention should be paid to government regulation and programmes, transfer of R&D, cultural and social norms and the education system, which, according to GEM Slovenia surveys, prove to be the

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most unsettled framework conditions in Slovenia (Rebernik, Tominc and Pusnik, 2005, 2006). The greatest emphasis needs to be placed on improving the quality of education for entrepreneurship in order to build entrepreneurial thinking and values; supporting the development of knowledge and competence in enterprises; changing public attitudes toward entrepreneurship; encouraging growth ambitions of entrepreneurs, resolving agency problems in Slovenian SMEs, and supporting internationalization of clusters and transfer of research and development. A policy-mix that would create an environment for the development of key services and institutions would support the internationalization of Slovenian SMEs. It seems that the Slovenian government has recognized the importance of internationalization for development since a competitive economy and faster economic growth through supporting internationalization, increasing inflows of development-promoting domestic and foreign investment and fostering entrepreneurship has become one of the five key development priorities of Slovenia’s new Development Strategy, 2006–13 (2005). However, in order for Slovenia to achieve this goal it needs to prepare and deliver sweeping structural reforms and provide an effective policy-mix that would, on the one hand, close the implementation gap in institution’s building, and, on the other hand, provide supportive institutions, which would facilitate the development of entrepreneurship and internationalization. A key role in fostering entrepreneurship in globalization is regional economic policy, which must be characterized by networking and anticipation (Tajnikar and Pusnik, 2005). Public understanding and awareness of the importance of internationalization is essential, not only for a survival and growth of enterprises, but also for economic and social development and welfare of individuals in Slovenia. Changes in cultural and social values are needed, where the main stress should be put on improving public perceptions of the importance of internationalization as well as on general acceptance of foreign know-how and capital. The Slovenian population needs to overcome a slight dislike of foreign capital and create the awareness that foreign capital may be instrumental in creating jobs, enabling the growth of enterprises and fostering economic and social development, as well as a means of (un)learning. An important tool of awareness building in this perspective is the promotion of internationalization, which is to be ingrained in the education system. Education is accountable for the development of more dynamic, flexible and open-minded individuals, capable of responding swiftly to the challenges of globalization. Education needs to develop entrepreneurial qualities and skills of individuals, who should be aware of entrepreneurship as a career option and of the importance of internationalization for the survival and growth of their enterprises and qualified to recognize the need for acquiring new knowledge either by the learning of its members or by ingesting new members with knowledge the organization did not have previously. The process of unlearning, in which obsolete knowledge and values would be deliberately replaced, is also of utmost importance for transitional countries such as Slovenia. Living and doing business under socialism/communism for three generations created a lot of values and experiential knowledge that put obstacles in the way, not only of international business, but also of everyday running of an efficient business. Unfortunately, unlearning processes are neglected in the internationalization literature (Christensen et al., 2004, p. 27), even though generation of new knowledge is faster in conditions under which there are few existing organizational routines to unlearn (Autio et al., 2000, p. 911). In order to

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facilitate the internationalization process, it is necessary to think about ways of eliminating old mental models, methodologies and contents which no longer go along with the real world and internationalization needs (Rebernik, 1997; Rebernik and Mulej, 2000). Along with exploitation and exploration, deliberate unlearning should be fully taken into account when encouraging the internationalization of SMEs. Comprehensive and integrated research would provide sufficient knowledge about internationalization of SMEs and the importance of learning and unlearning for continuing success of organizations on foreign, as well as on domestic, markets. Methodology and measures of internationalization of SMEs should be further refined and developed in such a way as to capture (un)learning as a determinant of internationalization of (Slovenian) SMEs. While literature to date has provided a sound basis for development of the model of learning both at the individual and the organizational level, empirical research is required to inform the debate about unlearning at both levels (Becker, 2005). Internationalization as a learning and unlearning process needs to attract integrative research attention from various sciences (international business and entrepreneurship, social sciences, psychology, philosophy and so on) with the purpose of advancing descriptive and normative SMEs international theory. For further research, Slovenia must improve standardized statistical data and overcome statistical problems (the limited scope of data, changing methodology, and reluctance of firms to report) that limit research on internationalization of both large and small SMEs. Even though internationalization has become a necessity, not only for companies to survive and grow and for economies to develop, we are still not able to answer the question of what are relevant determinants of internationalization, especially for internationalization of SMEs. We know that the decision to internationalize implies accumulating new knowledge and at the same time also discarding obsolete knowledge, and we also know that learning and unlearning are important. However, we will still have to find answers to the questions concerning relevant organizational and individual-level competence for internationalization and the way in which processes of learning and unlearning could be encouraged in order to support individuals and organizations to make decisions on internationalization. References Acs, Z., R. Morck, M. Shaver and B. Yeung (1997), ‘The internationalization of small and medium–sized enterprises: a policy perspective’, Small Business Economics, 9(1), 7–20. Argyris, C. (2004), On Organizational Learning, 2nd edn, reprinted, Malden, US: Blackwell. Autio, E. (2005), ‘Creative tension: the significance of Ben Oviatt’s and Patricia McDougall’s article “toward a theory of international new ventures” ’, Journal of International Business Studies, 36, 9–19. Autio, E., H. Sapienza and J. Alemida (2000), ‘Effects of age at entry, knowledge intensity, and imitability on international growth’, Academy of Management Journal, 43(5), 909–24. Baumol, W. (1990), ‘Entrepreneurship: productive, unproductive and destructive’, Journal of Political Economy, 98, 893–921. Bank of Slovenia (1993–2005), Monthly Bulletin, various issues, Ljubljana, Slovenia: Bank of Slovenia. Bank of Slovenia (2004), Direct Investment 1994–2003, 8(1), Ljubljana, Slovenia: Bank of Slovenia. Becker, K. (2005), ‘Individual and organisational unlearning: directions for future research’, International Journal of Organizational Behaviour, 9(7), 659–70. Blomstermo, A., K. Eriksson and D. Sharma (2004), ‘Domestic activity and knowledge development in the internationalization process of firms’, Journal of International Entrepreneurship, 2(3), 239–58. Burger, Anze and Marjan Svetlicic (2004), ‘Internationalization of small and medium-sized enterprises from selected Central European economies’, in Enlarged European Union: Challenges to International Business and Management: Conference Proceedings, Brussels, Belgium: EIBA.

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Christensen, P.R., P.H. Andersen, T. Damgaard and K.B. Munksgaard (2004), ‘Internationalization of sourcing and knowledge development: an organizational routine perspective’, paper presented at LOK Research Conference, 1–2 December 2003, Middelfart (available on http://www.lok.cbs.dk/site/publikationer.asp? aar=2003). Cummings, J. (2003), Knowledge Sharing: A Review of the Literature, Washington: The World Bank. De Clercq, D., H.J. Sapienza and H. Crijns (2003), ‘The internationalization of small and medium-sized firms: the role of organizational learning effort and entrepreneurial orientation’, Vlerick Leuven Gent Working Papers Series (available on http://www.vlerick.be/research/workingpapers/vlgms-wp-2003-19.pdf). Easterby-Smith, M. and M.A. Lyles (eds) (2005), The Blackwell Handbook of Organizational Learning and Knowledge Management, 1st paperback, Malden, US: Blackwell. Eriksson, K., J. Johanson, A. Majkgard and D. Deo Sharma (1997), ‘Experiential knowledge and cost in the internationalization process’, Journal of International Business Studies, Second Quarter, 28(2). European Commission (2002), Observatory of European SMEs: Regional Clusters in Europe, No. 3, Brussels, European Commission (available on http://europa.eu.int/comm/enterprise/enterprise_policy/analysis/ observatory_en.htm). European Commission (2003a), European Observatory for SMEs: Competence Development in SMEs, No. 3, Belgium: European Commission (available on http://europa.eu.int/comm/enterprise/enterprise_policy/analysis/ observatory_en.htm). European Commission (2003b), European Observatory for SMEs: SMEs in Europe, No. 7, Brussels, European Commission (available on http://europa.eu.int/comm/enterprise/enterprise_policy/analysis/observatory_ en.htm). Eurostat, Statistics in Focus: Economy and Finance (available on http://epp.eurostat.cec.eu.int/portal/page?_ pageid=0,1136173,0_45570704&_dad=portal&_schema=PORTAL). Hedberg, B. (1984), ‘How organizations learn and unlearn’, in P. Nystrom and W. Starbuck (eds), Handbook of Organizational Design, London: Cambridge University Press. Holan de, P., N. Phillips and T. Lawrence (2004), ‘Managing organizational forgetting’, MIT Sloan Management Review, 45, 45–51. Ibrahim, A.B. (2004), ‘Internationalization: motive and processes’, in L.-P. Dana (ed.), Handbook of Research on International Entrepreneurship, Cheltenham, UK and Northampton, MA: Edward Elgar. Institute for Macroeconomic Analyses and Development of Republic of Slovenia (IMAD) (2005), Economic Mirror, Ljubljana, Slovenia: IMAD. Jaklic, Andreja (2003), ‘Slovenian outward foreign direct investment’, in Marjan Svetlicic and Matija Rojec (eds), Facilitating Transition by Internationalization: Outward Direct Investment from Central European Economies in Transition, Burlington, US: Ashgate Publishing Limited, pp. 205–26. Jaklic, A. and M. Svetlicic (2001a), ‘Does transition matter? FDI from the Czech Republic, Hungary and Slovenia’, Transnational Corporations, 10(2), 67–105. Jaklic, A. and M. Svetlicic (2001b), ‘Slovenia’s outward direct investment in the states of former Yugoslavia: a strategic or a defensive response?’, Economic Business Review, 3(3/4), 299–321. Jaklic, Andreja and Marjan Svetlicic (2003a), Enhanced Transition through Outward Internationalization: Outward FDI by Slovenian Firms, Burlington, US: Ashgate Publishing Limited. Jaklic, A. and M. Svetlicic (2003b), ‘The outward direct investment from CEECs: can their firms compete in the global market?’, Journal of East European Management Studies, 8(1), 67–83. Johanson, J. and J.-E. Vahlne (1990), ‘The mechanism of internationalisation’, International Marketing Review, 7, 11–24. Matlay, H. and J. Mitra (2004), ‘Learning, innovation and globalization: the competitive advantage of collaborative entrepreneurship’, in L.-P. Dana (ed.), Handbook of Research on International Entrepreneurship, Cheltenham, UK and Northampton, MA, USA: Edward Elgar. Mrak, Mojmir, Matija Rojec and Carlos Silva-Jáuregui (eds) (2004), Slovenia: From Yugoslavia to the European Union, Washington: The World Bank. Oviatt, B.M. and P.P. McDougall (2005), ‘The internationalization of entrepreneurship’, Journal of International Business Studies, 36, 2–8. Nelson, R. and G. Winter (1982), An Evolutionary Theory of Economic Change, Cambridge, UK: Harvard University Press. Petrin, Tea (1991), Medpodjetniska mreza povezav in prestrukturiranje podjetij pohistvene industrije notranjske regije in ljubljanskega obmoca, Ljubljana, Slovenia: RCEF. Prashantham, S. (2005), ‘Toward a knowledge-based conceptualization of internationalization’, Journal of International Entrepreneurship, 3, 37–52. Pusnik, K. and M. Rebernik (2008), ‘Obstacles to internationalization of Slovenian SMEs’, Our Economy: Review of Current Issues in Economics (forthcoming). Rebernik, M. (1997), ‘Beyond markets, hierarchies and ownership-mania in transitional countries’, Systems Research and Behavioral Science, 14(3), 183–194.

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Rebernik, M. (1999), ‘Resources, opportunities and cooperation’, in George E. Lasker (ed.), Advances in support systems research. Vol. 5, Decision support methodology for human systems management and its applications in economic and commerce, Windsor, Canada: The International Institute for Advanced Studies in Systems Research and Cybernetics. Rebernik, M. (2003), ‘From innovation to entrepreneurship’, in Erich J. Schwarz (eds), Technologieorientiertes Innovationsmanagement, Wiesbaden, Germany: Gabler, pp. 139–60. Rebernik, M. and M. Mulej (2000), ‘Requisite holism, isolating mechanisms and Entrepreneurship’, Kybernetes, 29(9/10), 1126–1140. Rebernik, M., M. Dermastia and T. Kroslin (2004), ‘Cluster initiatives, firm foundation and entrepreneurship in Slovenia’, in B. Böhm, H. Frisch and M. Steiner (eds), Slovenia and Austria: Bilateral Economic Effects of EU Accession, Graz, Austria: Leykam. Rebernik, Miroslav, Polona Tominc and Ksenja Pusnik (2005), Global Entrepreneurship Monitor Slovenia 2004: Entrepreneurship on the Crossing, Maribor, Slovenia: Faculty Economics and Business, University of Maribor. Rebernik, Miroslav, Polona Tominc and Ksenja Pusnik (2006), Global Entrepreneurship Monitor Slovenia 2005: Entrepreneurship between Wishes and Reality on the Crossing, Maribor, Slovenia: Faculty Economics and Business, University of Maribor (forthcoming). Republic of Slovenia, Uradni list Republike Slovenije, several issues. Rus, M. and T. Kroslin (2004), ‘How do Slovenian and European SMEs learn?’, in M. Rebernik et al., Slovenian Entrepreneurship Observatory 2003, Maribor, Slovenia: Institute for Entrepreneurship and Small Business Management, University of Maribor. Ruzzier, Matija (2004), ‘The Internationalization of Small and Medium Enterprises: the Influence of the Enterpreneur’s Human and Social Capital on The Degree of Internationalization’, doctoral dissertation, Faculty of Economics, University of Ljubljana, Ljubljana, Slovenia. Sapienza, H.J., E. Autio and S. Zahra (2003), ‘Effects of internationalization on young firms’ prospects for survival and growth’, Academy of Management Best Paper Proceedings. Simon, H. (1991), ‘Bounded rationality and organizational learning’, Organization Science, 2(1), 125–34. Sinkula, J.M. (2002), ‘Market-based success, organizational routines, and unlearning’, Journal of Business and Industrial Marketing, 17(4), 235–69. Tajnikar, M. and K. Pusnik (2005), ‘Globalization and entrepreneurship – a Slovenian perspective’, Our Economy: Review of Current Issues in Economics, 51(5–6), 34–44. Tominc, P. and M. Rebernik (2005), ‘Growth aspirations and cultural support indices: a comparison of CEE post-socialist countries’, paper presented at 2nd GEM Research Conference, Budapest, Hungary. United Nations Conference on Trade and Development (UNCTAD) (2001), World Investment Report 2001, Geneva: United Nations Conference on Trade and Development, Division on Transnational Corporations and Investment. United Nations Conference on Trade and Development (UNCTAD) (2003), World Investment Report 2003, Geneva: United Nations Conference on Trade and Development, Division on Transnational Corporations and Investment. United Nations Conference on Trade and Development (UNCTAD) (2004), World Investment Report 2004, Geneva: United Nations Conference on Trade and Development, Division on Transnational Corporations and Investment. Welch, L. (2004), ‘International entrepreneurship and internationalization: common threads’, in L.-P. Dana (ed.), Handbook of Research on International Entrepreneurship, Cheltenham, UK and Northampton, MA, USA: Edward Elgar. Windeknecht, M.K. and B. Delahaye (2004), ‘A model of individual and organisational unlearning’, Proceedings 18th annual Conference of the Australian and New Zeland Academy of Management, Dunedin, NZ.

34 The internationalization of small and medium firms in Spain Alicia Coduras, Cristina Cruz, Ignacio de la Vega and Rachida Justo

1 Introduction The classical literature on internationalization has considered the large firm as its reference point and unit of analysis. However, during the past 15 years or so, academics as well as policy makers have turned their attention to the internationalization of small and medium firms. Falling barriers to international trade, combined with rapid advances in communication and information-processing technologies, have led to an era of global economic integration (Tilly and Welfens, 2000). In this globalized context, even businesses that focus on the domestic market have to be competitive internationally in order to survive (Karagozoglu and Lindell, 1998). Moreover, researchers have started to realize that small and medium firms make an important contribution to the trade balances of their respective countries. However, firm’s internationalization varies widely among countries. In this chapter, using GEM1 2004 data, we describe the internationalization phenomenon for small and medium firms (SMEs) in Spain, a country in which small and medium firms clearly dominate.2 GEM’s data are based of a survey of the population aged 18–64 in all the participating countries. The survey is designed to cover many different dimensions of the entrepreneurial activity. Among these dimensions, the survey determines the exports activities of these initiatives. Although we are aware of the fact that the internationalization phenomena can take many forms other than exports, it seems reasonable to assume that small and medium firms cannot enjoy all the options of internationalization described in the literature (Baird, Lyles and Orris, 1994). For most of these firms, the financial resources available can act as a considerable constraint in developing an international orientation. Therefore it is unlikely that these firms will follow an international path based on direct foreign investment or that they take initiatives that require a vast amount of capital. Exporting may offer effective means for firms to achieve an international position without overextending their capabilities or resources (Porter, 1980). This is why the internationalization phenomenon is analysed using exports, since they are expected to be the widespread form of internationalization among small and medium firms. Moreover, most research considers internationalization as a double process: first the company chooses to take or not take part in international markets and, once it has decided to participate, it establishes the volume of its production that is going to be exported. Taking this into account, the importance of internationalization is going to be assessed in two dimensions: first of all as the ‘international activity’, understanding by this the percentage of firms that gave an affirmative answer to whether or not some percentage of the firm’s sales were designated for foreign markets; second, as the ‘international intensity’ or 598

The internationalization of small and medium firms in Spain

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the percentage of exports over total sales. Both international activity and international intensity of Spanish small and medium firms are assessed in section 1 of the chapter. Additionally, research in international business has focused most often on established companies. As a result of this, research that seeks to understand how small and medium firms are able to develop their export capabilities at an early life-stage is less developed (McDougall and Oviatt, 2000; Wolff and Pett, 2000). GEM’s data offer the possibility of making important contributions in advancing the understanding of this phenomenon: the GEM Project measures the annual entrepreneurial activity as the percentage of the adult population that is involved in the creation of a start-up (a firm that has up to three months of activity) or a baby business (a firm that has between three and 42 months of activity). Moreover, it also offers information relative to established firms (more than 42 months of activity). Thus, using GEM’s data, section 2 of the chapter not only provides a detailed picture of the internationalization of Spanish small and medium firms, but also deeply examines their differences by development stage. In section 3 of the chapter, following the stream of research (Baird, Lyles and Orris, 1994; Calof, 1993) the focus is on comparing the characteristics of exporters and nonexporters to see what differentiates the two. GEM’s data offer the possibility to establish these comparisons among a large number of dimensions, including geographical locations, sector differences, firm and owner’s characteristics, innovation and growth expectations. 2

The internationalization of small and medium firms in Spain

2.1 International activity Table 34.1 summarizes the information regarding international activity (measured as the percentage of firms that undertook any exporting activity), for all the firms included in the GEM 2004 in Spain. The information contained in the GEM’s survey offers the possibility to classify firms in different categories, depending on their months of activity. Moreover, it allows differentiating of firms that are engaged in new venture creations. Data show that only a minority, one-fourth (27.2 per cent) of Spanish firms surveyed in the GEM’s study are currently engaged in any type of export activity. Moreover, an examination by type of business shows that there exist significant differences in the Table 34.1

International activity by type of business International Export

Type of business All (start-up, baby business or established business) Established business (more than 42 months’ activity) Baby business (between 3 and 42 months’ activity) Start up (up to 3 months’ of activity) Established businesses that have baby business Established businesses that have start-ups Baby businesses that have start-ups Notes:

Pearson’s Chi Square
15.403; p
0.009.

Yes (%)

No (%)

Total (%)

27.2 26.5 30.1 23.3 16.7 51.6 33.3

72.8 73.5 69.9 76.7 83.3 48.4 66.7

100.0 100.0 100.0 100.0 100.0 100.0 100.0

600

Handbook of research on European business and entrepreneurship INTERNATIONAL EXPORT NO YES

Type of business

BB+SU EB+SU EB+BB Established business Baby business Start-up 0%

Figure 34.1

25%

50%

75%

100%

International activity, by type of business

international activity between firms. The stage theory of export development (see Leonidou and Katsikeas, 1996, for a review), suggests there is a positive relationship between the time elapsed since a firm’s foundation and the level of the firm’s internationalization, measured by export activity. Our exploratory analysis sheds new light on this argument: while it is true that young and established businesses have a greater proportion of international firms than start-ups; those that have a higher propensity to become international are established businesses that are engaged in new ventures (the category ‘established businesses that have start-ups’), followed by those young firms that are also engaged in this business creation process (the category ‘baby businesses that have start-ups). This finding suggests some relationship between the ‘entrepreneurial’ activity of firms and their decision to sell abroad (Figure 34.1 shows graphically the information contained in Table 34.1). International activity of Spanish SMEs also exhibits important differences among Spanish regions. Data show that exporters’ firms are mainly concentrated in Catalonia and C. Valenciana, two Mediterranean regions located in the east of Spain (Table 34.2). 2.2 Export intensity in small and medium Spanish firms Regarding the level of export intensity (international sales/total sales), data show that 57 per cent of the firms fall within the range between one and 24 per cent of export intensity, 34 per cent of the firms export from 25 to 75 per cent of their total sales and only 9 per cent have an export intensity higher than 75 per cent of total sales. Thus, the majority of Spanish small and medium exporting companies sell most of their production in the domestic market. This export intensity (Table 34.3) is independent of the age of the firms. A Chi Squared test shows that the proportion of exporters firms is equally distributed among start-ups, baby businesses and established businesses. GEM’s data also offer the possibility of making international comparisons regarding this export intensity, in order to establish the international competitiveness of Spanish firms. In particular, for all participants countries, it offers the number of entrepreneurial

601

The internationalization of small and medium firms in Spain Table 34.2

International activity, by Spanish regions

Region

% of SMEs with international exports

Catalonia C. Valenciana Andalucia Canary Islands Madrid Castilla y León Basque Country Extremadura Rest of Spain

16.1 15.4 14.0 12.5 12.4 12.0 9.4 4.3 3.9

Total

100.0

Percentage

50

57%

40 30

34%

20 10 9% 1–24% SALES

25–74% SALES

75–100%

International export dimension

Figure 34.2

International intensity of Spanish firms

Table 34.3

International intensity, by type of business International export, % sales

Type of business

1–24

25–74

75–100

Total

Established business (more than 42 months’ activity) Baby business (between 3 and 42 months’ activity) Start-up (up to 3 months’ of activity)

58.5 55.3 56.5

31.4 39.8 29.0

10.1 5.0 14.5

100 100 100

Note: Pearson’s Chi Square
8.501; p
0.075. EB SU, EBBB y BB SU were deleted from the analysis since they lacked representativeness.

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SU&BB (7/04)#/10000: inter exp>50% sales

200.00

150.00

100.00

50.00

Japan Brazil Portugal Sweden Germany Croatia Norway Hungary Spain Slovenia Denmark France Hong Kong Poland Finland Netherlands Belgium Greece Israel Argentina United Kingdom GEM Jordan Italy South Africa Ireland United States Singapore Australia Uganda Ecuador Canada Peru Iceland New Zealand

0.00

Country of origin

Figure 34.3 Number of entrepreneurial initiatives which export more than 50% of total sales

SU&BB (7/04)#/10000: inter exp>50% sales

100.00

75.00

50.00

25.00

Ireland

Italy

United Kingdom

Greece

Belgium

Netherlands

Finland

Poland

France

Denmark

Slovenia

Spain

Hungary

Germany

Sweden

Portugal

0.00

Country of origin (EU)

Figure 34.4 Entrepreneurial initiatives which export more than 50 % of total sales, EU countries initiatives (understanding by this both start-up and baby business as we have previously defined) for every 10 000 which export more than 50 per cent of their sales. Comparisons with some of GEM’s countries participants (Figure 34.3) and, more concretely, with EU countries (Figure 34.4) reveal the unfavourable Spanish position. Thus, for every 10 000 businesses in early stage phases in Spain, fewer than 31 have an export level higher than 50 per cent of their sales. This represents a very small

The internationalization of small and medium firms in Spain

603

SU&BB (7/04)#/10000: inter exp>50% sales

50.00 45.02

40.00

49.51

39.53 35.31

30.00 26.24

20.00

26.39

17.60 10.00

10.29 Basque Extremadura Andalucía Castilla Country La Mancha

Canary Islands

Madrid

Valencia

Catalonia

Spanish Regions

Figure 34.5 Entrepreneurial initiatives which export more than 50% of total sales, Spanish regions number of firms, compared for instance to countries such as Ireland, in which the number rises to more than 100 firms. It is also an indicator of a deeper problem of the business creation process in Spain: the scarce growth potential of the firms that are created every year. However, the whole picture hides important regional differences. GEM’s data on export intensity are also disaggregated by Spanish regions, as shown in Figure 34.5. 3 Differences between exporters and non-exporters’ firms In this section, we focus on comparing some of the characteristics of exporters’ and nonexporters’ firms offered by GEM’s survey, to see what differentiates the two. 3.1 International activity, by sectors The first column in Table 34.4 shows the distribution of exporters’ firms within the main sectors of activity. Most of the exporters’ firms in Spain belong to the transformation sector (40.1 per cent) followed by those oriented to customers (34.4 per cent), services to firms (19.6 per cent) and at a very high distance, the extractive sector (3.8 per cent). A Chi Squared test reveals that the decision to become international depends on the sector in which the firm operates. The test compares the proportion of exporters’ and nonexporters’ firms within each sector. According to these results, it seems that extractive firms have a lower probability of exporting and that this probability increases for consumer-oriented business services and transformation businesses. However, the international intensity (percentage of exports over total sales) seems to be independent of the sector in which the firm operates. As Table 34.5 indicates, in all sectors, the majority of the firms are in the interval from 1 to 24 per cent of exports to total sales, around 35 per cent exports from 25 to 74 per cent of the sales and only 10 per cent exports more than 75 per cent. 3.2 Firm size and international activity On the issue of size and internationalization, most studies have found that internationalization activity is positively correlated with firm size (Czinkota and Johnston, 1983, Calof,

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Table 34.4

International activity, by sectors Exporters’ firms % total exporters

Yes (%)

No (%)

Total (%)

40.1 34.4 19.6 3.8 2.0

25.4 29.9 29.3 18.4 33.3

74.6 70.1 70.8 81.6 66.7

100.0 100.0 100.0 100.0 100.0

100.0

27.2

72.8

100.0

Transforming Consumer-oriented Business services Extractive Not classified Total

International activity

Note: Chi Square
10.421; p
0.034.

Table 34.5

International intensity, by sectors International Intensity

Type

1–24% Sales

25–74% Sales

75–100% Sales

Total

Extractive Transforming Business services Consumer-oriented Not classified

60.9 58.8 59.8 53.4 50.0

13.0 32.9 30.8 37.9 41.7

26.1 8.3 9.4 8.7 8.3

100.0 100.0 100.0 100.0 100.0

Total

57.0

33.6

9.4

100.0

Note: Chi square
12.717; p
0.122.

1993). However, some studies have found either no relationship or a negative relationship, with small firms having a greater level of international intensity than large firms. For the case of the Spanish SMEs, GEM’s data show that exporters’ firms have a mean of nine employees, including the entrepreneur; 21.6 per cent of these firms give employment only to the owner, but 4 per cent have from two to five employees. Thus exporters are mainly small firms, with only 5 per cent of medium firms falling within this category. As shown in Table 34.5, exporters’ firms have, on average, nine employees. This number is higher than the corresponding average for non-exporters’ firms that have a mean of four employees. 3.3 Firm ownership and International activity Ownership is highly concentrated among exporters firms. Most of them (60 per cent) have only a single owner, the average 1.7 owners and the maximum is 10 owners. The test for the significant differences between exporters’ and non-exporters’ firms regarding the number of owners does not yield significant results, so it seems that the number of owners does not influence the internationalization process of small and medium Spanish firms.

The internationalization of small and medium firms in Spain Table 34.6

605

International activity and firm size (number of jobs) Actual number of jobs

International export

N

Mean

Std. dev

95% confidence interval

Yes No

598 1598

8.9197 4.1771

39.61562 5.48173

3.9–4.44 5.7–12.1

Total

2196

5.4686

21.28778

Note: F (ANOVA)
21.803; p
0.000.

Table 34.7

Numbers of owners in exporters firms

Number of owners

%

Cumulated %

1 00 2 00 3 00 4 00 5 00 6 00 7 00 8 00 10 00

62.0 17.1 13.2 5.2 1.2 0.8 0.2 0.2 0.2

62.0 79.1 92.3 97.5 98.7 99.5 99.7 99.8 100.0

Total

100.0

Table 34.8

International activity by number of owners Number of owners

International export

N

Mean

Std. dev.

95% confidence interval

Yes No

598 1598

1.71 1.68

1.15 1.19

1.63–1.74 1.62–1.80

Total

2196

1.69

1.18

1.64–1.74

Note: F (ANOVA)
0.223; p
0.637.

3.4 Entrepreneurs’ characteristics and International activity The data show that entrepreneurs that manage an exporter firm are mainly men (69.6 per cent compared to 30.3 per cent women). However it seems that gender is not a determinant for the decision to export within the Spanish firms: the proportion of men and women within the group is not statistically significant. The mean age for these entrepreneurs who own an exporter firm is 42.43 years, with a standard deviation of 10.6, so there is high dispersion among them. Considered globally, as was the case with entrepreneurs’ gender, age does not seem to influence the internationalization

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Table 34.9

International activity by entrepreneurs’ gender Gender

International export

Male (%)

Female (%)

Total (%)

73.4 26.6

71.2 28.8

72.8 27.2

100.0

100.0

100.0

No Yes

Total Note: Chi Square
1.038; p
0.308.

Table 34.10

International activity by entrepreneurs’ age Entrepreneurs’ age

International export

N

Mean

Std. Dev.

95% confidence interval

Yes No

598 1598

42.38 42.81

10.610 10.578

41.52–43.23 42.29–43.33

Total

2196

42.69

10.586

42.25–43.13

Note: F (ANOVA)
0.721; p
0.396.

Table 34.11

Entrepreneurs’ age, by gender categories in exporters’ firms Entrepreneurs’ age Mean

Std Dev.

Male Female

43.25 40.39

11.003 9.382

Total

42.38

10.610

Note: F (ANOVA)
9.295; p
0.002.

activity of Spanish firms: mean age is similar in statistical terms between entrepreneurs that own exporters and non-exporters’ firms. However, comparing age by gender categories, it seems that women entrepreneurs who own an exporter firm are younger than men in the same situation: Moreover, if we undertook the analysis taking into account only those cases in which the entrepreneur is a women, age becomes statistically significant, with young women entrepreneurs showing higher international activity than older ones. Entrepreneurs who own an exporter firm have at least some secondary studies, with none of them showing none or some primary studies. This seems to suggest that education level may have an impact on the international activity, which is confirmed in the following table: owners of exporters’ firms possess post graduate education to a higher extent than owners of non-exporters’ firms.

The internationalization of small and medium firms in Spain Table 34.12

607

Women entrepreneurs: age and international activity Women entrepreneurs’ age

International Export

N

Mean

Std. Dev.

95% confidence interval

Yes No

182 451

40.39 42.97

9.382 10.362

39.02–41.76 42.01–43.93

Total

633

42.23

10.150

41.44–43.02

Note: F (ANOVA)
8.470; p
0.004.

Table 34.13

Distribution of entrepreneurs’ education within exporters firms

Educational attainment

%

None Some secondary Secondary degree Post secondary Grad exp

0.0 53.3 16.2 30.4 0.0

Total

100.0

Table 34.14

Entrepreneur’s education and international activity Educational attainment

International export

No Yes

Total Note:

Some secondary (%)

Secondary degree

Post (%) secondary (%)

Total (%)

74.9 25.1

74.0 26.0

67.0 33.0

72.8 27.2

100.0

100.0

100.0

100.0

Chi Square
12.378; p
0.002.

On the issue of income levels, owners of exporters’ firms belong to the higher ranges. However, it is important to note that a notable percentage of respondents refused to answer this question, so the results must be interpreted with caution. As shown in Table 13.16, the difference between exporters’ and non-exporters’ firm owner’s income is not statistically significant. 3.5 Entrepreneur’s attitudes Fear of failure or, in other words, risk aversion does not seem to be a determinant of the international activity of Spanish firms: irrespectively of their exporter–non exporter condition, 80 per cent of the respondents declared that they were not afraid to start a new business with the possibility of failure.

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Handbook of research on European business and entrepreneurship

Table 34.15

Distribution of entrepreneurs’ income within exporters’ firms Entrepreneurs’ income of exporters’ firms (%) (income: recoded into thirds)

Low Middle Upper

15.2 24.4 37.8

Total Miss/cannot code

77.4 22.6

Total

Table 34.16

100.0

Entrepreneurs’ education and international activity Entrepreneurs’ income Lowest (%)

International export

No Yes

Total

Middle (%)

Upper (%)

Total (%)

77.0 23.0

73.2 26.8

70.3 29.7

72.8 27.2

100.0

100.0

100.0

100.0

Note: Chi square
5.883; p
0.053.

Table 34.17

Entrepreneurs’ attitude toward risk and international activity International export

Failure fear prevents start-up

No/None Yes

Total

No (%)

Yes (%)

Total (%)

80.1 19.9

83.6 16.4

81.0 19.0

100.0

100.0

100.0

Note: Chi Square
3.467; p
0.063.

However, those owners that show higher entrepreneurial activity achieve a higher level of internationalization: there is a higher proportion of owners who intend to create new start-ups in the following three years among exporters firms than among nonexporters. Owners of exporters’ firms are more likely to have a favourable view of the existence of good business opportunities in Spain, so it seems that the higher international activity of these firms gives their owners greater capacity to detect and exploit business opportunities. Lastly, the ability to create a new firm is perceived as equal within the two groups, exporters and non-exporters.

609

The internationalization of small and medium firms in Spain Table 34.18

Entrepreneurs’ new venture creation and international activity % expect to create a start-up in 3 years

International export

No Yes

Total

No (%)

Yes (%)

Total (%)

73.8 26.2

66.4 33.6

72.8 27.2

100.0

100.0

100.0

Note: Chi Square
7.001; p
0.008.

Table 34.19 Entrepreneurs’ perceptions of business opportunities and international activity Good start-up opportunities in next 6 months

International export

No Yes

Total

No/None (%)

Yes (%)

Total (%)

55.5 49.7

44.5 50.3

100.0 100.0

54.0

46.0

100.0

Note: Chi square
4.884; p
0.027.

Table 34.20

Entrepreneurs’ ability to create a new business and international activity % skill to do start-up

International export

No Yes

Total

No/None (%)

Yes (%)

Total (%)

9.8 8.3

90.2 91.7

100.0 100.0

9.4

90.6

100.0

Note: Chi square
1.214; p
0.027.

3.6 Innovation and internationalization activity One of the central issues related to the new international competitiveness has to do with the relationships between innovation and internationalization of economic activity. Following this trend, GEM’s data offer the possibility to study the relationship between firms’ international activity and their degree of product and technological innovation. The first result shows that exporters’ start-ups offer more new products to customers than those that do not export. As shown in Table 34.21, product innovation is to some

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Table 34.21

New products and international activity in start-ups firms Start-up: product/service new for customers

International export

New for all (%)

New for some (%)

Not new (%)

Total (%)

10.1 18.1

25.4 27.5

64.5 54.4

100.0 100.0

12.5

26.0

61.6

100.0

No Yes

Total Note: Chi square
9.546; p
0.008.

Table 34.22

New products and international activity in established business Level of innovation in product/service of established business

International export

New for all (%)

New for some (%)

Not new (%)

Total (%)

6.1 12.9

23.6 23.6

70.3 63.5

100.0 100.0

7.9

23.6

68.4

100.0

No Yes

Total Note: Chi Square
24.790; p
0.000.

Table 34.23

New technology and international activity in start-ups Use technology available 1 year ago

International export

No Yes

Total

No (%)

Yes (%)

Total (%)

3.4 9.8

96.6 90.2

100.0 100.0

5.3

94.7

100.0

Note: Chi Square
11.106; p
0.001.

extent related to the internationalization process of the youngest Spanish firms. The same result holds for established firms. There are also significant differences in the use of updated technologies between exporters and non-exporters’ firms: tests show that exporters’ firms use technologies that were not available one year before to a higher extent than non-exporters. Moreover, as with product innovation, these differences hold among firm types. Our results suggest that product and technological innovation are a discriminatory factor when we try to analyse firms’ behaviour towards exportation. These results are contrary to the study of Alonso and Donoso (1994), which concluded that exporting Spanish companies did not consider innovation as a strategic variable.

The internationalization of small and medium firms in Spain Table 34.24

611

New technology and international activity in established firms Use technology available 1 year ago

International export

No Yes

Total

No (%)

Yes (%)

Total (%)

10.0 15.1

90.0 84.9

100.0 100.0

11.4

88.6

100.0

Note: Chi Square
9.930; p
0.002.

Table 34.25

Expected competition and international activity in start-ups firms Start-up Expected level of competition

International export

Many competitors (%)

Some competitors (%)

No competitors (%)

Total (%)

70.3 59.1

24.5 30.6

5.2 10.4

100.0 100.0

67.0

26.3

6.7

100.0

No Yes

Total Note: Chi Square
9.997; p
0.007.

Table 34.26

Expected competition and international activity in established firms Own-manage: expected level of competition

International export

Many competitors (%)

Some competitors (%)

No competitors (%)

Total (%)

70.0 69.9

24.1 24.0

5.8 6.0

100.0 100.0

70.0

24.1

5.9

100.0

No Yes

Total Note: Chi square
0.033; p
0.984.

3.7 Expected competition and international activity Exporters’ start-ups firms expect to face less competition than those that do not export, as shown in Table 34.25. However, this result is not consistent among established firms: within this group, both exporters and non-exporters expect to face the same level of competition.

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3.8 Growth employment’s expectation and internationalization activity In this section we consider the expectations of owners regarding growth in sales and employment to be generated by their firms in the near future: are there any differences between exporters and non-exporters when it comes to growth expectations? According to GEM’s data, within the exporters group start-up firms are those that are going to experience higher employment growth: compared to baby businesses that expect to create just 1.72 jobs in the next five years, exporters’ start-ups expect to create around 5.66 new jobs over the same period. It seems logical to expect a lower rate of growth the longer the firm is in the market; however the difference between the two categories is too high and this is another indicator of the low growth potential of new ventures in Spain. Table 34.27

Growth expectations among exporters’ firms

Start-up: jobs in five years post-birth Baby business: jobs in the next five years

Table 34.28

Minimum

Maximum

Mean

Std. dev.

0 16.00

30 80.00

5.66 1.7180

6.123 4.47291

Growth expectations and international activity in start-ups Start-up: jobs in five years post-birth Confidence interval at 95%

Int. exp.

N

Mean

Std. dev.

Std. error

Lower

Upper

Minimum

Maximum

No Yes

445 157

4.38 5.67

4.230 6.126

0.201 0.489

3.98 4.70

4.77 6.64

0 0

40 30

Total

602

4.71

4.825

0.197

4.33

5.10

0

40

Note: F (ANOVA)
8.418; p
0.004.

Table 34.29

Growth expectations and international activity in baby business Baby business job creation in five years Confidence Interval at 95%

Int. exp.

N

Mean

Std. dev.

Std. error

Lower

Upper

Minimum

Maximum

No Yes

1245 553

1.0152 1.7180

2.73689 4.47291

0.07758 0.19023

0.8630 1.3444

1.1674 2.0917

14.00 16.00

20.00 80.00

Total

1797

1.2314

3.38183

0.07977

1.0750

1.3879

16.00

80.00

Note: F (ANOVA)
16.674; p
0.000.

The internationalization of small and medium firms in Spain

613

Table 34.30 Growth expectations and international activity in baby business (only firms with positive expected job creation) BB job creation in the next five years (only expected growing firms) Confidence Interval at 95% Int. exp.

N

Mean

Std. dev.

Std. error

Lower

Upper

Minimum

Maximum

No Yes

556 295

2.6556 3.4602

2.88132 5.32954

0.12223 0.31016

2.4155 2.8498

2.8957 4.0706

1.00 1.00

20.00 80.00

Total

851

2.9348

3.92416

0.13453

2.6708

3.1989

1.00

80.00

Note: F (ANOVA)
8.165; p
0.004.

On the other hand, exporters’ firms, both start-ups and older firms, have a higher rate of employment growth. Exporters’ firms create a mean of six jobs per year, while the figure for non-exporters is four. This difference remains significant for baby business firms: exporters expect to create a mean of two jobs in five years, while non-exporter’s expectations are about one. At this point, it is important to note that, among the baby business category, there are some firms that expect to destroy employment in the years ahead, something that is not observed among nascent firms. This is logical, as the latter have only three months of activity. This difference may be affecting the comparisons between the two types of firms. To avoid this, we remove from the analysis those baby businesses that expect to destroy employment in the next five years (3.2 per cent of the cases). Obviously, as a result, the average number of jobs that these firms expect to create in the near future increase (3.5 for exporters, 2.6 for non-exporters), but the difference between the two categories regarding the expected employment growth remains statistically significant. 3.9 Market expansion and internationalization activity Survey questions included in the GEM project allow classifying firms according to their expected expansion in the markets in which they compete, to end with four categories: (a) firms that do not expect to experience any market expansion in the mid-term, (b) firms that expect to experience a moderate market expansion in the mid-term, (c) firms that expect to experience a notable market expansion in the mid-term, (d) firms that expect to experience a great market expansion in the mid-term. Linking this market expansion with firms’ internationalization, results show that, in general, there exist some significant differences between exporter and non-exporter SMEs, although these differences only affect some of these four categories. Exporters’ firms show a higher propensity to have ‘little’ or ‘great’ market expansions in the short term than nonexporters. However, as shown in Table 34.31, differences are non significant for those firms that expect to have ‘some’ market expansion in the short term. 4 Conclusions This chapter has attempted to contribute to the understanding of the determinants of the internationalization activities of the small and medium Spanish firms. Our data, although

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Table 34.31

Expected market expansion and international activity International export

SMEs’ market expansion level

No (%)

Yes (%)

Significance Chi Square

No market expansion

Not present Present Total

68.3 31.7 100.0

75.7 24.3 100.0

X2
11.371 p
0.001*

Little market expansion

Not present Present Total

93.4 6.6 100.0

88.8 11.2 100.0

X2
12.955 p
0.000*

Some market expansion

Not present Present Total

98.0 2.0 100.0

97.1 2.9 100.0

X2
1.471 p
0.225

Maximum market expansion

Not present Present Total

99.6 0.4 100.0

97.9 2.1 100.0

X2
14.503 p
0.000*

Note: * Significant at 95% level.

limited in certain aspects, are unique in the sense that they provide a wide range of information on small and medium firms’ characteristics that are not found in previous contributions devoted to the study of the internationalization phenomenon in Spain (Molero, 1998, Campa and Guillén, 1999). Obviously, much remains to be done and the next GEM’s editions hope to contribute to this stream of research by introducing new aspects that help to shed light on this issue, such as the relationship between firms’ financing and internationalization. The exploratory analysis undertaken in this chapter has yielded relevant results. First of all, the chapter has shown the scarce international activity of Spanish small and medium firms, with only one-fourth of all companies selling their goods abroad. In a country that is considered among the most open of the large OECD economies, with trade openness of more than 62 per cent of GDP, higher than that of Italy or France, these data could be surprising at first glance. However, results are easily explained if one takes into account that around a quarter of total Spanish exports are accounted for by four multinationals (Ford, Opel, Seat and Citroën) and that more than 90 per cent of Spanish large firms (those with more than 500 employees) sell internationally (Alonso and Donoso, 1994). Once more, results highlight the lack of competitiveness experienced by small and medium companies in Spain, that in this particular case is manifested by their difficulties in gaining access to external markets. Data have shown that, to a considerable extent, some of the determinants of Spanish SMEs’ exporting activities come from several structural features of that group, such as size, sector of activity and geographical locations. Size has indeed shown itself to be a fundamental factor in determining the international activity of small and medium Spanish firms: results show a positive correlation between the number of employees of the company and its exports. These findings corroborate previous studies that have examined exporting behaviour of Spanish companies (Alonso and Donoso, 1994; 2000; Suarez et al., 2002).

615

Figure 34.6

10.00%

7.19%

16.67%

12.64%

10.04%

20.00%

8.55%

17.41%

17.47%

10.04%

30.00%

Expected market expansion and international activity

TEAO4:MARKET EXPANSION NONE (1)

TEAO4:MARKET EXPANSION LITTLE (2)

TEAO4:MARKET EXPANSION SOME (3)

TEAO4:MARKET EXPANSION MAXIMUM (4)

NOT PRESENT

40.00%

YES

NO

20.00%

30.00%

PRESENT

27.01%

8.62%

10.00%

14.37%

1.72%

0.57%

1.15%

0.57%

INTERNATIONAL EXPORT

40.00%

45.98%

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Consistent with the above discussion, size may have to do with the state of competitiveness of the markets and with the capacity of the firms to innovate, according to the requirements imposed by the new international scenarios. Indeed, innovation has proved to be a major determinant in the decision to become international. The results show how product and technological innovation clearly separates the decision of selling abroad or not, irrespective of the type of firm considered. Spanish firms are clearly less innovative than firms in other similar countries and this may partly explain Spain’s disadvantageous position regarding international competition. With regard to policy recommendations, the conclusions of this study clearly suggest the need to raise the level of resources (financial and human) devoted to innovative activities, as this provides basic knowledge and skills for successfully competition in international markets. In the same line, results also highlight the need to continue devoting efforts to increase the level of education among entrepreneurs, since the education level appears to be the only entrepreneur characteristics to distinguish between exporters’ and nonexporters’ firms. In this sense, policy initiatives in Spain such as Program PIPE (Plan Iniciación Promoción Exterior)3 promoted by the ICEX (Institute of Foreign Trade) must be encouraged and further developed, to lead Spanish small and medium firms to a competitive international position. This need to achieve international competitiveness is also necessary to encourage Spanish economic growth since, as the data suggest, exporters’ firms have greater job creation expectations than non-exporters and they expect to experience greater market expansion in the near future. At this point, it is important to note that the low expectation of employment growth and market expansion declared for most companies, irrespective of their relationship with internationalization, once more invites reflection on the growth potential of Spanish SMEs. On the other hand, the important differences found among the international activities of Spanish regions also merit some discussion. In recent years, several Spanish regional governments have established a network of offices abroad with the aim of providing support for companies wishing to trade and invest in foreign markets. In particular, six out of 17 Spanish regional governments (Andalusia, Aragon, Basque Country, Catalonia, Murcia and Valencia) have developed an extensive network of offices located around the world. Further research should address the influence of these regional policies on the different international activity found among Spanish regions. Finally, results also show that international expansion does not follow a single common pattern. To a considerable extent, Spanish SMEs exhibit dissimilar patterns, depending on the age of the firm: in some cases, the international activity of start-ups differs from that of more mature businesses. This reinforces the need to devote more research efforts to the relationship between firms’ stage of development and the internationalization process. Notes 1. GEM or Global Entrepreneurship Monitor has been assessing entrepreneurial activity worldwide since 1999. See, for more details, www.gemconsortium.org. 2. According to the National Institute of Statistics (INE) in Spain, in the year 2002 53.3 per cent of the total number of firms had no employees, 26.5 per cent had only one or two employees and only 5.8 per cent had more than ten employees (DIRCE (2003), Instituto Nacional de Estadística (INE), España). 3. See http://www.icex.es/pipe2000 for a detailed information about the PIPE programme.

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Bibliography Alonso, J.A. and V. Donoso (1994), ‘La Competitividad de la Empresa Exportadora Española’, Instituto Español de Comercio Exterior, Madrid. Alonso, J.A. and V. Donoso (2000), ‘Modelización del comportamiento de la empresa exportadora española’, ICEX, Noviembre No. 788; 35–56. Baird, I.S, A.M. Lyles and J.B. Orris (1994), ‘The choice of international strategies by small business’, Journal of Small Business Management, 29(2), 71–8. Calof, J.L. (1993), ‘The impact of size on internationalization’, Journal of Small Business Management, 31 (October), 60–69. Campa J.M. and M. Guillén (1999), ‘The internationalization of exports: firm and location-specific factors in a middle income country’, Management Science, 45(11), 1463–78. Chislett, W. (2002), ‘The internationalization of the Spanish economy’, Real Instituto el Cano de Estudios Internacionales y Estratégicos. Czinkota M.R. and W.J. Johnston (1983), ‘Exporting: does sales volume make a difference?’, Journal of International Business Studies, Spring/Summer, 147–53. Holden, A. (1986), ‘Small business can market in Europe: results from a survey of U.S. Exporters’, Journal of Small Business Management, January, 22–29. Karagozoglu, N. and M. Lindell (1998), ‘Internationalization and small and medium-sized technology-based firms: an exploratory study’, Journal of Small Business Management, 36(1), 44–59. Leonidou, Leonidas C. and Constantine S. Katsikeas (1996), ‘The export development process: an integrative review of empirical models’, Journal of International Business Studies, 27 (Third Quarter), 517–51. McDougall, P.P. and B.M. Oviatt (2000), ‘International entrepreneurship: the intersection of two research paths’, Academy of Management Journal, 43(3), 902–6. Molero, J. (1998), ‘Multinational and national firms in the process of technology internationalization: Spain as an intermediate case’, Working Paper, Universidad Complutense de Madrid. Porter, M. (1980), Competitive Strategy, New York: Free Press. Suarez, S., F. Alamo and J. García (2002), ‘Determinantes Organizativos y Directivos de la Actividad Exportadora’, Cuadernos de Economía y Dirección de Empresas, pp. 519–43. Tilly, R. and P.J.J. Welfens (eds) (2000), Economic Globalization, International Organizations, and Crisis Management, New York: Springer. Wolff, A. and T. Pett. (2000), ‘Internationalization of small firms: an examination of exports, competitive patterns, firms’ size and export performance’, Journal of Small Business Management, April, 34–46.

35 Network coordination as a key to external resources: a study of an internationalizing biotech SME Angelika Löfgren, Daniel Tolstoy, D. Deo Sharma and Jan Johanson1

Introduction Sweden has the highest number of biotechnology companies per capita in the world.2 Because many of these firms need a larger market than that provided by Sweden alone, such firms must mobilize enough resources at an early stage to compete internationally. In organizational research, the resource-based viewpoint links a firm’s internal organization with its ability to achieve a sustainable competitive advantage (Penrose, 1959; Barney, 1991). Such a view focuses on firms’ internal resources and capabilities; linked with the argument that management’s primary task is to maximize an organization’s value by optimizing deployment of its resources (Grant, 1996). Much resource-based literature features knowledge as a key resource for a firm (Penrose, 1959; Johanson and Vahlne, 1977; Cohen and Levinthal, 1991; Nonaka and Takeuchi, 1995). The knowledge-driven Uppsala model (Johanson and Vahlne, 1977), which has gained prominence in international business (IB) research, relies on the resource-based view. This model is frequently cited and built upon (Barkema, Bell and Pennings, 1996; Eriksson, Johanson, Majkgard and Sharma, 1997; Pedersen and Petersen, 2004). Later research has shown that firms rely not only on internal resources but also on external resources. Relational research has revealed that firms’ dyadic business relationships play a crucial role when firms acquire and leverage external resources. Business relationships therefore can be regarded as resources in their own respect (Dyer and Singh, 1998). In accordance with this relational view, IB research has acknowledged the essential role of business networks in establishing new ventures in foreign markets, especially for resource-constrained small- and medium-sized enterprises (SMEs) (Oviatt and McDougall, 1994; Bell, 1995; Coviello and Munro, 1997; Chetty and Blankenburg-Holm, 2000; Chen, 2003). All these studies emphasize networks and dyadic business relationships as explanatory factors for understanding the rapid internationalization of the firms they describe. Hence, SMEs’ patterns of internationalization do not consistently resemble incremental and knowledge-dependent processes, as described by the Uppsala model. However, the strategic aspects of the way activities and resources are managed in business networks are largely missing in contemporary research. The concept of coordination has been explained as the decomposition and the integration of activities through mutual adaptations, sharing of information and opportunities, division of labour, and common routines (Thompson, 1967; Mintzberg, 1979; Gulati and Singh, 1998). Integration as synonymous with efforts to coordinate an organization’s activities is depicted by Galbraith (1973), who reasoned that one major problem in designing an organization is ‘to provide for the integration of the differentiated subtasks so as to achieve successful completion of 618

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the whole task’. Correspondingly, Ritter, Wilkinson and Johnston (2003) claim that management and coordination of dyadic relationships should take into consideration an organization’s entire network because network relationships are interrelated. Hence, network coordination can be seen as the combination of activities and the development of routines for adaptations between activities, not only within but also across dyadic relationships, in order to integrate activities and resources of the network as a whole. In this study, the coordination of activities across dyadic business relationships is referred to as business network coordination. Although there has been abundant research on intra-firm coordination (Hedlund, 1986; Nohria and Ghoshal, 1994), as well as on inter-firm coordination (Cannon and Perreault, 1999; Jap, 1999), few studies have examined coordination across relationships in networks; such examination is intended to be this study’s contribution. Thus, anchored in a resource-based view, this study seeks to understand how internationalizing SMEs use network coordination to access and optimize their deployment of external resources within and across business relationships. After providing a theoretical background for the study, a presentation of the empirical findings from the case firm Alpha is given. These findings are followed by an analysis of the network coordination activities in Alpha and the following conclusion provides a brief review of the study’s findings. Theoretical background Internationalization through networks: the SME perspective Recent studies have shown that SMEs internationalize in ways different from large multinational enterprises (MNEs). This research indicates that SMEs do not follow the incremental internationalizing pattern suggested by stage models but that they are more likely to enter foreign markets close to their inception (Oviatt and McDougall, 1994; Bell, 1995; Madsen and Servais, 1997; Crick and Jones, 2000). This discrepancy with MNE behaviour is explained by the structural differences caused by SMEs’ smaller size. SMEs have inherent advantages because they carry less bureaucracy and are less rigid and have smaller information systems. These advantages bring with them increased innovative abilities, a more customer-oriented approach, and quickness in adopting new technologies and meeting specialized needs (Liesch and Knight, 1999). The network approach to internationalization moves in a different direction vis-à-vis the transaction-cost aspects of foreign market entry in that it turns attention toward business relations and network positions (Blankenburg and Johanson, 1992). A business network is defined as ‘a set of two or more connected business relationships, in which each exchange relation is between business firms that are conceptualized as collective actors’ (Anderson et al., 1994, p. 2). Network research rests upon the assumption that firms rely on certain resources, which can be accessed only through network connections (Johanson and Mattsson, 1988). Numerous studies indicate that networks play an essential role for internationalizing SMEs (Chetty and Blankenburg-Holm, 2000; Chen, 2003). Coviello and Munro (1997) found that their sample of SMEs internationalized at a pace far exceeding the traditional incremental view of internationalization. These authors further underlined the importance of networks as they found that involvement in international interorganizational relationships facilitates foreign market entry for internationalizing firms. This contention is supported by Oviatt and McDougall (1994) and Bell (1995);

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these authors stress the importance of relationships because small organizations typically are dependent on external skills and resources. Correspondingly, the network can be used by firms for mutual matching of resources. Resources in business relationships Dyadic business relationships can be seen as the primary elements of the business networks which they constitute. Network coordination and management can take place on different levels, from the individual-firm level to the interorganizational level to the network level (Ritter et al., 2003). This study focuses on business–network coordination (coordination of activities across dyadic business relationships) rather than on coordination of actions within individual dyadic business relationships or within individual organizations. In line with the relational view, studies have shown that a firm’s knowledge to a high degree is contingent on its business relationships (Burt, 1992, 1997; Kraatz, 1998; Gulati, 1999; Blomstermo et al., 2004). In a study of biotech-industry firms, Powell et al. (1996) found that the locus of innovation resides in relationships and claimed that both skill and experience are needed to access sources of expertise. Coordination in networks Thompson (1967) claimed that organizations can be viewed as open systems that need to cope with environmental uncertainties and, therefore, they demand coordination of transactions within as well as outside organization boundaries. In other words there is interdependence between actors within and outside organizations. Such interdependence can be categorized as pooled interdependence, sequential interdependence or reciprocal interdependence. When interdependence is pooled, the work of each part of the organization is not directly connected, but each part is supported by the whole organization, which in turn would be threatened if any of its parts should fail. According to sequential interdependence, each part’s tasks must be performed in sequence and, in reciprocal interdependence, each part of the organization does something for the others. Pooled interdependence requires the least amount of coordination, and reciprocal the most, with sequential falling between the two. The means of coordination differ according to the type of interdependence in relationships. Reciprocally interdependent organizations must coordinate through mutual adjustment; sequentially interdependent organizations may be coordinated by planning and scheduling; and organizations with pooled interdependence can be coordinated by standardization of rules (Thompson, 1967). Building on Thompson’s classification, Mintzberg (1979) claimed that, in situations of uncertainty, when a superstructure cannot handle all its interdependencies, an organization must decentralize and employ lateral linkages between individuals. Lateral linkages are tools for coordination and are used for mutual adjustments between two sub-tasks. In order to create linkages between individuals, certain liaison devices must be created. According to Galbraith (1973), these liaison devices can vary in costliness and complexity. Mintzberg (1979) argued that, in situations demanding coordination by mutual adjustment, a manager’s role is not to give orders by direct supervision but to act as a link and a negotiator, coordinating sub-tasks laterally among participating teams and functional units. Mintzberg further claimed training and indoctrination of individuals to be prerequisites for producing and maintaining lateral linkages that hold together a decentralized organization.

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Research on strategic networks rests upon the idea that firms are not autonomous entities, but rather, are actively involved in coordinating network activities (Gulati and Nohria, 2000). In order to achieve fit between network entities, activities and resources have to be adapted and coordinated. Coordination efforts may enable interacting firms to share information, opportunities and processes. These efforts may be manifested through joint projects, such as just-in-time systems (Frazier, Spekman and O’Neal, 1988) and joint product development (von Hippel, 1988; Gerwin, 2004). Network activities must be coordinated within relationships, as well as across relationships. Coordination across relationships implies that intentions and expectations of one relationship are linked with those of other relationships. Business networks can be regarded as sets of connected firms, where the term ‘connected’ implies that exchange in one relationship is dependent on exchange in others (Cook and Emerson, 1984). Firms embedded in business networks are connected through activities combining resources, which makes firms’ relationships interdependent (Anderson et al., 1994). Correspondingly, Ritter et al. (2003) argue that a firm’s dyadic relationships in a network can be both directly and indirectly connected, giving rise to interdependencies. Dyads therefore cannot be examined without consideration of other interrelated relationships. However, dyads are instrumental in achieving synergy in the network because cross-related issues have to be coordinated through them. Tomkins (2001) discussed cooperative coordination, with a focus on trust and information as enhancers of business relationships. He argued that these aspects concern not just a single relationship but also the network connected to that relationship. Network coordination by formal control methods may cause problems because coordination across organizations blurs a firm’s defined boundaries required by accounting methods. (Håkansson and Lind, 2004). However, clan-control, which relies on traditions and common values and beliefs, may be used in cooperative situations. Conceptual framework: relational resources and network coordination If the firm cannot on its own mobilize all necessary capabilities, it must search for them outside its boundaries. Pfeffer and Salancik (1978) claimed that an organization’s dependence on resources creates dependence between it and external units. Network coordination implies that the firm must coordinate its activities on different network levels to access and make proper use of desired external resources. Activities may have to be coordinated within and across customer relationships, as well as within and across supplier relationships. As both supplier relationships and customer relationships can be assumed to be interwoven in the same network, there also must be coordination across these two dimensions. This indicates that firms depend on network coordination when critical external resources must be accessed via the network. Figure 35.1 depicts how dependence on supplier-based external resources and customer-based external resources results in different levels of dependence on network coordination. In the first cell, the firms possess vital internal resources; hence, dependence on external resources is low. Because the firm needs fewer external resources, dependence on network coordination activities is assumed to be lower. In the second cell, the firm does not rely on customer resources, but depends on suppliers for knowledge and capabilities. According to Walter (2003), suppliers often possess the potential to generate new ideas and provide means to realize them. In this situation, a firm will probably depend on its ability to coordinate the network to leverage

622

Handbook of research on European business and entrepreneurship Dependence on supplier-based external resources

Low

1. Low dependence on network coordination

High

Dependence on customerbased external resources

Low

3. Moderate dependence on network coordination

High

2. Moderate dependence on network coordination

4. Comprehensive dependence on network coordination

Figure 35.1 Relationship between dependence on external resources and dependence on network coordination suppliers to provide customer-based external resources. These firms may thus be moderately dependent on network coordination. In the third cell, the firm does not rely on supplier-based resources for research and manufacturing associated with its product. It does, however, rely on knowledge about finding markets for the product and/or receiving feedback from its customers. In a market-driven organization, customers are seen as collaborative partners and sources of innovative ideas (Day, 1999). When firms enter foreign markets, they often rely upon the market knowledge and the marketing skills of intermediates (Katsikeas and Piercy, 1990). In this situation, a firm will probably depend on its ability to coordinate the network to leverage external customers and distributors to provide customer-based external resources. These firms may thus be moderately dependent on network coordination. The fourth cell presents a situation in which the firm relies on both supplier-based external resources and customer-based external resources. An exporter needs not only to manage customer relationships but also to manage a complete network to drive performance (Piercy, Kaleka and Katsikeas, 1998). In such situations, dependence on business network coordination is likely to be comprehensive, especially because technical achievements and market demands must be matched. Methodology The findings of this study are based on a case study of the Swedish biotech firm, Alpha. This firm was selected from a sample of 12 Swedish firms within the same industry, all located in the Stockholm area. All 12 firms in the sample fit the definition for small- and medium-sized enterprises (SME),3 as the number of employees of each ranged from six to 92. Selection of the firms was governed by the research purpose, and they were chosen on the basis of the following criteria: (a) Sales to foreign countries, (b) definition of an SME, (c) biotech-industry membership, (d) Swedish origin. Several of these firms are spin-offs from Swedish academic research centres and are in the early stages of internationalization. The biotech industry was chosen as a focus area because

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it has grown more rapidly during the last few years than any other industry in Sweden, with an annual growth rate of 10 per cent between 1995 and 2003. Thus the Swedish biotech industry constitutes a dynamic and interesting focus area. Although their average size is relatively small, many Swedish biotech firms internationalize early because of Sweden’s small domestic market. The majority of biotech firms are located in the Stockholm–Uppsala area. Correspondingly, Alpha is a small biotech firm that internationalized early. Alpha was selected to provide empirical illustrations of the role of business relationships and network coordination in the foreign endeavours of a Swedish biotech SME. The primary sources for the case study are six face-to-face interviews. Two of the interviews were conducted with Alpha’s salesmanager, and two were conducted with the director of research and development. One interview was conducted with the firm’s CEO, and one interview was conducted with a market manager. The interviews were all semistructured and lasted approximately one hour each. Questions revolved around the firm’s relationships with customers and suppliers and the management of these relationships. A questionnaire was used but not strictly followed as this study was intended to remain explorative. The explorative approach seemed suitable because not much research has been done in this area. Complementary sources of information, such as annual reports, databases, printed material and the firm’s website, were consulted to gather additional information. Empirical findings Introduction to Alpha Alpha was established in 1997 by scientists at a major research institute in Sweden after they had discovered a method to diagnose and to monitor a particular disorder. The founders remain as owners but are no longer part of the firm’s management. The basic business idea behind Alpha is the design of devices to measure effectively the physical condition of patients with a certain disorder and thus provide the means for monitoring them. Such devices may facilitate diagnosis and improve patient treatment, as well as reduce costs. Moreover, the devices can be employed in medical research purposes while conducting tests on patients with the disorder. The firm has two product lines based on the same business idea: the original product, a diagnostic device weighing about 40 kg and about the size of a PC, and a second, smaller product made possible by new sensor technology and new hardware. The smaller product weighs a mere 800g and is easy to handle, so it is more user-friendly. There is also a price difference, with the bigger instrument costing approximately six times more than the smaller one. The two products are built on the same principle and measure the same features; however, their applications differ. The bigger device supports more applications and targets larger hospitals and research institutes. The smaller product is more standardized and has limited applications; it is intended mainly for medical clinics and general hospitals. The introduction of the smaller device can be seen as a strategic step from providing an instrument aimed toward research institutes to offering one to be used in the healthcare system for everyday treatment of patients. The larger product has been sold to between 300 and 400 university hospitals in Europe and the US, whereas the smaller one, although it is a newer product, has already been sold in thousands of units. Alpha can be considered a steadily growing company because the number of personnel has risen from eight to 21 employees and turnover has multiplied by 50 in the past four

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years. However, Alpha is not yet able to offset high research and development (R&D) costs with sales revenues, so its debt/equity ratio has almost tripled in four years. The firm thus is dependent on risk capital, and it relies on money from investors to continue to exist. Alpha’s goal, however, is to start to show positive numbers on its result sheets within the next five years. Alpha deems operating abroad to be imperative because the firm believes that the Swedish market is too small for it to derive sufficient profits solely from domestic sales. Thus, in 2001, Alpha began to develop a worldwide network of distributors and founded Alpha Inc., a sales company in the United States. Today, Alpha is represented by local distributors in foreign markets on all continents and has two wholly owned subsidiaries, one in the US and one in Great Britain. Furthermore, Alpha has a complete portfolio of patents in each of the three major international medical technology markets, the US, the European Union and Japan. Alpha’s organization is divided according to four major functions: (1) sales, (2) service and support, (3) marketing, and (4) research and development. About half of Alpha’s human resources belong to the sales and the service and support functions, which partially overlap. The marketing department is staffed by four people: the marketing director, two coordinators, and one expert on regulatory issues. The R&D function comprises four people and includes experts in both clinical studies and technical development. Alpha’s international market strategy Alpha’s strategy for conducting business abroad is threefold: direct exports, local distributors, and subsidiaries. The majority of Alpha’s international markets have historically been reached through local distributors; this still holds today. Having representatives in local markets and interacting with intermediaries is believed to correlate with the company’s success in selling its product. One way Alpha maintains its local-market presence is by attending local fairs in relevant product areas. An employee from the marketing department plans and administrates visits to local fairs abroad. At these fairs, Alpha is represented by product specialists from the Stockholm office, as well as by staff from the local distributor. The organizational consensus of working closely with sales partners is claimed to have been reached by a trial-and-error process. Thus it is considered important to visit distributors in order to follow up on their work, as well as to get a feeling for needs and preferences among buyers in local markets. Alpha sees medical doctors as sources of valuable information: for example, which distributors are reliable. When the firm chooses collaborative partners such as distributors, the potential partner’s existing network of key persons and medical doctors is crucial because Alpha considers such people to be decision makers about purchases; alternatively, such people may have the power to influence hospital administrators to make purchases in accordance with their preferences. Medical doctors and other key persons also work as opinion leaders and take part in configurations that decide regulatory standards for markets’ Alpha targets. The present customer base consists of a limited number of scientists and medical personnel with a specific scientific interest in the product or of deeply clinically engaged medical doctors with a sincere interest in facilitating the diagnosis and treatment of patients. Because Alpha’s devices are not mature or volume-based, the firm is not inclined to approach centralized decision makers in the medical arena. Rather, Alpha must turn directly toward those most involved and most likely to have an interest

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in the novelty of a new method and a new product. Approximately 500 opinion leaders in the world have the ability to influence trends and standards within Alpha’s particular field, and the firm claims to have established contact with about 50 to 100 of these influential persons. Some of these opinion leaders are authorities on specific markets, such as markets in the US, Europe and Japan. Moreover, some of them have influence that reaches across borders and affects discourse internationally. Alpha believes that it needs to connect with opinion leaders from all over the world in order to secure longevity. This belief has led to an international strategy with wide geographical spread and lowcommitment foreign-market entry modes. The strategy is candidly described as ‘broad and shallow’. Knowledge about opinion leaders is attributed to the whole organization. The owners have their contacts; the CEO and the R&D director have contacts of their own, and so do the sales staff and the marketing staff. Alpha’s supplier network Alpha’s entire structure is based on outsourcing, with the in-house organization consisting of a small, focused group of people. Alpha’s relationships with its suppliers are said to be close, and the firm is described as rather dependent on its most important suppliers. Two large American producers of medical devices, with a solid understanding of and experience with production according to the ‘good manufacturing practices’ of the U.S. Food and Drug Administration (FDA) have been appointed to carry out all of Alpha’s manufacturing. Alpha does not consider it feasible to build adequate production facilities of its own because of high costs and numerous regulatory issues. Components of Alpha’s product are manufactured by independent component suppliers. Some of these component suppliers may be considered especially crucial to Alpha because they have exclusive patents and therefore cannot be replaced easily. Even though these manufacturing firms are American in origin, they have local Swedish subdivisions. Even though R&D functions are regarded as most vital to Alpha they are not kept inhouse but are outsourced to larger international corporations. However, all research is managed by a small group of in-house researchers who retain the essential core of product knowledge. When Alpha develops a product, the firm cooperates closely with suppliers, developing ideas and carrying out product tests and other activities in collaboration with them. For each project, a group is formed that meets approximately once a month. Alpha was recently awarded a prestigious international prize for its latest small, user-friendly diagnostic device. The award also recognized one of Alpha’s collaborating partners, a large Swedish firm involved in developing the process from the idea phase to market introduction. Alpha believes this project’s success was based on the relationship with this partner. In the project group assigned to develop new products, Alpha is represented by personnel from R&D, sales, marketing and service support, whereas supplier firms are represented by engineers. Parts of the group meet weekly in various configurations. For example, if a technical design firm wants to include a certain component in a product, it must find a supplier for this component and introduce it to the manufacturing firm; then, together, the two firms can decide if it is possible to achieve a fit. Alpha is, however, the organizing node and has contact daily by telephone and email with each participating partner. Alpha also has implemented an intranet to bring together all information and knowledge generated by its project partners, thus enabling all participating parties to get a complete project overview. Alpha does not have any formal system for actively

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monitoring the work of the firms that make up the project group, nor do suppliers have any part in product sale revenues. However, work on the projects is governed by standards such as the FDA’s ‘Good Manufacturing Practice’ and ‘Quality System Record,’ as well as by European requirements such as ISO 13485. These standards require project documentation and operational specifications and provide guidelines for project management. Alpha emphasizes that it could not meet these international standards and carry out production meeting international customer requirements without partnering with its large American manufacturers. Project work processes are usually characterized by an iteration process, including a specification phase during which the project aims and functions must be stated. Alpha’s managers believe it is important to create an atmosphere where everyone involved assumes a sense of responsibility toward work in the group, as well as toward the results of the work. It is considered equally important to work on personal relationships and proactively to avoid conflicts between group members, which otherwise may disrupt relationships. Alpha also arranges a large social gathering once a year, as well as smaller celebrations when milestones are reached, in order to promote a good working atmosphere within the project group. To generate feedback, product specifications stated by Alpha’s project groups are tested continually on customers and opinion leaders. These tests are carried out in order to meet regulatory requirements and to develop a product that meets customer requirements. Alpha’s most recent award-winning product passed four iterations of tests and modifications, each including customer interactions. Alpha maintains that it is not hard to get medical specialists to participate in these tests because participation gives specialists an opportunity to work with an advanced medical instrument and an emerging technology. Alpha has to turn down proposals from doctors, rather than actively convince them to participate. The product initially is tested on the conceptual level, then on the functional level, and finally on a prototype level. Before every new step in the product development process, Alpha discusses with the manufacturer what can and what cannot be done technically. When tests of prototypes are carried out with potential customers, Alpha marketing staff are usually accompanied by the involved industrial designer from one of the firm’s suppliers. Different construction proposals are tested continually by the manufacturing firm to determine whether such proposals are practically viable. The R&D manager describes product development as a complex process, during which it is impossible to predict the consequences on one product part of modification of another. He states that all problems cannot be solved simultaneously; therefore, the project group must gather regularly throughout the course of the project to decide which adjustments to make to allow the project to move forward. To meet regulatory requirements, the product must gain acceptance through clinical studies. Such clinical studies ideally are conducted by researchers with a high degree of legitimacy within their field. Alpha offers these researchers support for product testing and furnishes experts, depending on the test carried out. Experts sometimes are found inhouse, and sometimes are hired as consultants. Despite the complexity of Alpha’s production process, results must not deviate substantially from the product specifications initially presented because any deviations must be explained to regulatory authorities. Each project member’s individual work therefore is relatively constrained, and every step must be carefully monitored and documented. Even though each participating firm has

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the freedom to solve problems by its own means, its actions must stay within the project framework. Alpha regards interaction, transparency and a sense of responsibility as crucial to running a successful project. Alpha’s customer network: the Dutch case Alpha considers its export strategy based on using local distributors to be beneficial because it believes the distributors hold valuable knowledge about local markets, such as knowledge about administrative issues, and can identify networks of local opinion leaders. The firm regards it as crucial to find distributors with appropriate contacts among key persons in local markets. The local distributors’ central role in Alpha’s export strategy further is described through the example of its Dutch distributor. Alpha first contacted its Dutch distributor in 1998, the Dutch market thus becoming one of Alpha’s first foreign markets. Alpha’s founders identified Dutch researchers working in the same field as the firm; thus Alpha believed there to be a potential market for its device in Holland, a market it could appropriately approach with a product offering. Alpha’s distributor in Holland is considered to be especially suitable because this distributor firm promotes other products matching Alpha’s medical device and used in the same medical field by the same people. Thus the distributor is believed to have provided a good entrance for Alpha’s products because it possessed an established network of personal contacts among practitioners, as well as among hospital administrators. Alpha regards knowledge about physicians and hospital administrators as the most critical business knowledge in its industry. Distributors have the names of key people, contact information, and information about the behaviour of these people in different situations. This information is strictly guarded by the distributor because such knowledge grants power and competitive advantage. To avoid being overly dependent on its distributor, Alpha must discover alternative means of accessing this information. In practice, the firm gathers key opinion-leader information at conferences and exhibitions. Customer visits with the distributor are also regarded as important opportunities for accessing these opinion leaders. The distributor allows Alpha to gain entrance to its network in order to provide its clients with the latest technical expertise and clinical information. These joint meetings with customers include members from the R&D function and representatives from the marketing department. In addition to offering support for users, Alpha’s representatives use these customer meetings to gather ideas and to discover application areas for the product. Then they can share these ideas and new applications with the R&D department at Alpha, as well as with other distributors and customers. Alpha’s end-user network The distributors’ customers consist predominantly of the administrative divisions at hospitals and clinics. These administrative divisions do not include actual product users, but managing budgets and financial assets is their responsibility; thus they are in charge of hospital and clinic purchases. Such administrative divisions represent Alpha’s main sales constraints and are regarded as a brick wall the firm needs to break through. To overcome this obstacle, Alpha must establish contact with influential people at the hospital. Although Alpha has some direct contact with hospital administrators through advertising and at international medical conferences, end users are usually approached by the

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local distributor. These hospital staff end users, mostly physicians and researchers, can be allies in convincing clinic administrators to buy Alpha’s product because such medical personnel generally evaluate Alpha’s products favourably. Hospital purchasing decisions may very well be politically influenced, where medical personnel with the strongest position may carry through a product purchase regardless of the opinion of administrative personnel. Holland’s healthcare system operates on a reimbursement principle which means that, when a medical procedure is completed, a hospital receives a specified amount of money from local medical authorities. A major obstacle for Alpha to get its product to gain a broad acceptance is that its instruments are as yet not included in the Dutch reimbursement system. It is thus essential that Alpha work with physicians who specialize within the treatment area in which its instruments are used because these physicians may influence the politics governing medical reimbursements. So far, the firm has established contact with a few Dutch physicians open to new technology and with sufficient authority to be politically influential. To gain acceptance for the product it is vital to enter a large number of markets to get access to an international network of opinion leaders. Key opinion leaders may form international alliances through their membership of various professional organizations. These organizations include one association that develops treatment guidelines within this medical field in Europe. In this association one Dutch specialist, identified by Alpha as an opinion leader, serves on the same organizational committee as a specialist with whom Alpha works in Italy. Alpha’s network structure as a whole Alpha’s network structure can be divided into three distinct systems: (1) the supplier network; (2) the distributor/customer network; and (3) the medical-personnel/end user network. Figure 35.2 depicts Alpha’s network structure as composed of five dyadic business relationships, although in reality the network is much more complex, with each network partner, such as suppliers, consisting of several firms and the presence of other actors, such as regulatory authorities, not included here. Figure 35.2 is thus not meant to present a complete description of Alpha’s business network. It rather shows a simplified overview of the dyadic business relationships forming the business network discussed.

The end-users/ medical personnel

The Dutch distributor

Suppliers Alpha

Figure 35.2

Alpha’s network structure

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Analysis This section analyses coordination activities across Alpha’s dyadic relationships and suggests that network coordination can help a firm to optimize employment of external resources embedded in network relationships. In addition, the section discusses ways network coordination is carried out in situations in which network actors are involved in activities using complex technology. Alpha has a small internal organization and relies on capabilities and knowledge from both suppliers and customers. Thus, in Figure 35.3, Alpha can be said to be in a situation of comprehensive dependence on external resources. To access and optimize use of these external resources, Alpha appears to depend upon comprehensive network coordination within and across supplier and customer relationships. Supplier-based resources and network coordination Network research rests upon an assumption that firms rely on certain resources which can be accessed only through network connections, and organizations’ dependence on resources creates dependencies between them and external units. Such dependence is demonstrated by Alpha’s product development strategy, in which a small group of inhouse researchers retain the essential core of product knowledge but contract with larger international corporations for manufacturing and some R&D functions, in order to meet American and European quality standards. Thus Alpha can be seen to depend on external resources, which it accesses through its dyadic business relationships with its suppliers. However, a firm’s dyadic business-network relationships can be both directly and indirectly connected and therefore, dyads cannot be considered without taking into account other interrelated relationships. This suggests that Alpha should coordinate activities across its dyadic relationships. Such coordination may enable firms to share information and opportunities and to engage in joint product development. This idea can also be supported by Alpha’s product-development strategy involving coordination of activities

Dependence on Supplier Resources

Figure 35.3

Low

High

Alpha High

Dependence on customer resources

Low

Alpha’s position in the matrix

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within each dyadic relationship with collaborating partners, as well as across these relationships. Products are developed in project groups consisting of both in-house representatives and supplier representatives. The partners’ work on these projects is coordinated through regular project-group meetings and with the use of technical aids. Formal incentives are also used to integrate the activities of the supplier network. Thus it appears that Alpha should coordinate the activities of its suppliers in order to use supplier-based external resources effectively for product development. In other words, Alpha needs to coordinate across its dyadic relationships with various suppliers. Development of a new product also requires some coordination between the demands of end users and the cutting-edge know-how of producers. Alpha therefore must mediate between producers and users to ensure an optimal match between what can be made and what the market wants. In Alpha’s production process, information from end customers is taken into account in the product-development phase. When prototypes are tested, end customers and personnel from producing firms are brought together. Thus Alpha must take into account the different types of dyadic relationships within its business network, in addition to supplier relationships, in order to optimize use of supplier-based external resources. This idea implies that a firm dependent on supplier-based external resources needs to coordinate activities across relationships with both suppliers and customers. Thus dependence on supplier-based external resources may be said to produce a need for coordination throughout the network. Proposition 1 dependence on supplier-based external resources results in dependence on coordination, not only within and across firm–supplier dyads, but also across other dyadic relationships in the business network. Distributor- and customer-based resources and network coordination We earlier observed that SMEs may not follow the incremental internationalizing pattern suggested by stage models. Instead, SMEs internationalize much faster then the traditional incremental view of internationalization suggests. In this context, dyadic business relationships are considered imperative for SMEs because small organizations typically are more dependent on external skills and resources. Research shows that intermediates are often used for market knowledge and marketing skills (Katsikeas and Piercy, 1990). This finding is also the case for Alpha, which regards knowledge about local physicians and local hospital administrations as the most critical business knowledge for its industry. Alpha’s local distributors possess established networks of personal contacts among practitioners, as well as contacts on the administrative level of hospitals, and Alpha may be claimed to depend on distributor-based and customer-based external resources in order to internationalize successfully. The distributors’ network among end customers can be seen as a crucial customer-based external resource upon which Alpha’s international marketing strategy builds. However, Alpha also receives advice from key persons among end customers about which distributors are reliable and competent. Thus Alpha’s international market strategy can be seen as a form of interplay between approaching distributors and approaching end customers. Consequently, Alpha must correlate information and other external resources from different distributors and from local end customers in international markets to optimize its use of customer-based external resources. In other words, a need for coordination may

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be said to exist within and across Alpha’s dyadic business relationships with its various distributors and end customers. Referrals can be beneficial because of their contacts and important networks in several countries (Burt, 1992). Alpha may access an international industry network through local end customer networks that represent interrelations between physicians. Involvement in international interorganizational relationships facilitates foreign-market entry for internationalizing firms (Coviello and Munro, 1997). Alpha can be seen to take advantage of such facilitation, as key persons among its end-customers participate in groups that decide future product regulations. Such participation indicates that Alpha must work closely with these key persons in order to legitimize its new technology within the international biotech industry. However, information about key persons is guarded by local distributors. To access these local key persons, Alpha gathers information about key opinion leaders at congresses and exhibitions and carries out customer visits along with its distributor. Distributors allow Alpha to enter their networks to provide their clients with the latest technical expertise and clinical information. This expertise and information is sometimes found in-house and sometimes with external network partners. Moreover, Alpha can also access the international clique of end customers by testing prototypes with potential customers. The evidence suggests that it is not hard to get medical specialists to participate in such tests, because their participation gives them the opportunity to work with advanced medical instruments and an emerging technology. During prototype tests, marketing staff from Alpha are usually accompanied by an industrial designer from one of the firm’s suppliers. Thus it is apparent that Alpha needs to match the competence of the suppliers with the needs of the distributors and customers in order to optimize its use of information about local key persons in international markets. This line of reasoning leads to the idea that Alpha should take into account different types of dyadic relationships within its business network, in addition to customer relationships, in order to optimize its use of distributor- and customer-based external resources. This idea implies that a firm that is dependent on customer-based external resources should coordinate activities both within and across customer relationships and supplier relationships. Thus dependence on customer-based external resources may be said to produce a need for coordination throughout an entire network. Proposition 2 Dependence on customer-based external resources results in dependence on coordination, not only within and across the firm–distributor and firm–customer dyads, but also across other dyadic relationships in the business network. Cooperative coordination in the supplier network Following Thompson (1967), interdependencies can be viewed as sequential, pooled or reciprocal. Sequential interdependence could be described as a relay race, with activities carried out in a particular order. Pooled interdependence refers to situations in which several units carry out separate activities but indirectly depend on each other. Reciprocal interdependence arises when two units are dependent on continuous interaction in order to carry out their activities. Alpha can be recognized as the coordinating node for contracted suppliers because these suppliers depend on Alpha to combine their resources to meet a common objective. Because the R&D firms are working on new technology, they must work together to find common

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solutions and to adapt their specifications to what the manufacturer can construct. The manufacturer in turn depends on its component suppliers to meet R&D specifications. Product development is characterized by a creative work process, by communication between several units, and by mutual adjustments. The firms work together in a series of iterations as they inform each other about the activities they will perform next and about subsequent actions that correspondingly must be adjusted to these activities. The iteration process demands close interaction between and dedication from all parties involved because they all need to keep abreast of others’ actions. In addition to meetings, phone calls and e-mail messages, Alpha uses an intranet to communicate information. Moreover, Alpha attempts through regular interaction and arranging social gatherings to create a foundation of common values and a sense of sharing the same objectives within the work group. Because Alpha can be recognized as the coordinating node for contracted suppliers and an actor upon which these suppliers’ work relies, these relationships indicate pooled interdependence. However, Alpha is involved in development of complex products, a process whose outcome is hard to predict. Alpha’s supplier-side relationships therefore can be regarded as predominantly reciprocal because the firm, in order to achieve its objectives, must work closely with its partners so that all parties involved can make mutual adjustments during a project’s course. Lateral linkages are implemented by close and regular interaction through meetings, an intranet and social gatherings. Alpha also tries to create an atmosphere of shared beliefs through the relationships with its suppliers. In summary, relationships in Alpha’s supplier network can be regarded as predominantly reciprocal as a result of the complex work the companies carry out. Because of the nature of these relationships, the firms mainly use cooperative forms of coordination. Proposition 3 The more complex its product, the more an internationalizing SME will depend on cooperative coordination within and across the dyads of its supplier network. Cooperative coordination in the distributor–customer network As stated by Katsikeas and Piercy (1990), intermediaries are often used to provide market knowledge and marketing skills. Alpha considers distributors’ knowledge of local markets to be important. However, the customer’s customers, which include hospital administration personnel and physicians, are also sources of such knowledge and skills, and Alpha needs to work closely with these end customers in order to legitimize its new technology with opinion leaders within the international biotech industry. These end customers, who typically are specialists interested in new therapy methods, may also help Alpha develop new technology. Furthermore, Alpha needs these end customers to facilitate its products’ inclusion in the various guidelines that govern reimbursement agreements. The distributors’ network among end customers can also be seen as a crucial external resource for Alpha. The firm secures direct access to these end customers whenever a distributor needs Alpha’s expertise about the product to improve customer relations. However, Alpha also tries to secure information from end customers concerning the distributors from whom they purchase and the distributors they consider to be reliable and competent. As this description indicates, Alpha’s customer and end user network comprises a complex web of interdependencies. We find a mixture of Thompson’s (1967) classification of interdependencies (pooled, sequential and reciprocal relationships) in Alpha’s

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customer and end user networks. Distributors act independently of each other, except for sharing Alpha as their supplier. This relationship therefore can be categorized as a type of pooled interdependence, with sequential coupling in the distributor network, since the product is mediated by the distributor between Alpha and the end customer. However, as Alpha promotes a new and specialized product device, it must gain broad acceptance by end customers to secure local, as well as international, product acceptance. To make that happen, the firm must work closely with the end customers. The relationship between Alpha and the end customers can be seen as reciprocal because end customers are interested in new methods of therapy and can in turn help Alpha to develop and legitimize technology for this purpose. Relationships with distributors can also be regarded as reciprocal because Alpha needs information from the distributor to keep itself up-to-date about markets, and distributors need expertise about the product from Alpha to be able to interact with end customers. Proposition 4 The more complex its product, the more an internationalizing SME will depend on cooperative coordination within and across the dyads of its customer network. Conclusion This study sought to explore internationalizing SMEs’ use of network coordination within and across business relationships to access and to optimize their deployment of external resources. The case firm, Alpha, has a small internal organization, thus it relies upon external resources from both suppliers and customers. In order to access and optimize the use of these external resources, Alpha may be said to depend on network coordination within and across supplier and customer relationships. Moreover, this study reveals that dependence on external resources from one part of the network may produce dependence on comprehensive network coordination not only within and across business relationships in that specific part of the network, but throughout the network as a whole. The study further addresses ways network coordination may be carried out under different conditions. The coordination approach is given by the nature of the interdependencies between the actors in the network. These interdependencies may in turn depend on the nature of the product, among other aspects. In this study, Alpha’s product development, which involves new and complex technology with unpredictable project outcomes, may call for closer collaboration with suppliers than in other situations. Moreover, in order to secure acceptance of new technology, the firm must also work closely with distributors and end customers. Thus the study shows that Alpha can be seen as predominantly dependent on cooperative coordination in order to access and optimize use of external resources within and across supplier relationships, as well as within and across customer relationships. Acknowledgement Financial contribution from the Jan Wallanders and Tom Hedelius Foundation is gratefully acknowledged.

Notes 1. The authors have contributed equally. 2. www.swedenbio.com (2005-08-05). 3. The EU definition of an SME is a firm with fewer than 250 employees.

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36 Managing the challenges of globalization: evidence from Swiss small and medium-sized enterprises Thierry Volery

Introduction Globalization and the emergence of internationally active small and medium-sized enterprises (SMEs) are key worldwide trends. During the last decade a paradigm shift occurred: it is now widely recognized that SMEs are a critical driver of employment both in industrialized and developing countries. Policy makers realized that SMEs are uniquely positioned to answer the challenges of an ever-faster globalizing economy. At the same time, the development of a theoretical approach to the internationalization of firms has existed from the earliest days of international business research, but in the last 30 years that debate has intensified through the development of a range of theoretical models. Interestingly, many of the earlier research themes are still relevant, as for example Ahroni (1966), who perceived internationalization as a complex social process and advocated a holistic approach to understanding the process and its impact within the firm and in the marketplace, a view incorporated in some more recent work. What seems to have happened during this period of the evolution of internationalization as a concept is that researchers have employed a range of different approaches, which has had the effect of blurring the issues as much as revealing new knowledge. Methodologies have tended to evolve from a situational perspective to a longitudinal approach, seeking to explain internationalization as a dynamic process and, more recently, there has been more emphasis on collaboration between firms and other organizations in the internationalization process. Beamish (1990) offered a view which is both holistic in nature and has the advantage of catering for various internationalization processes. He suggests that internationalisation is ‘a 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, 1990:77). From a conceptual point of view, internationalisation is a multidimensional construct (Ramaswamy et al., 1996). The traditional distinction between export and foreign direct investment (FDI), as the two core expressions of an internationalization strategy, has been replaced by a wide range of entry-mode alternatives. Thus, internationalization may range from exports to inter-firm non-equity and equity agreements to FDI, and involves different levels of commitment and risk (Beamish and Lu, 2001). The majority of studies focusing upon the internationalization activities of SMEs have focused upon the exporting activities of manufacturing firms (Boter and Holmquist, 1996; Holmlund and Kock, 1998; Bagchi-Sen, 1999), particularly those manufacturing technology-based products (McDougall, 1989; McDougall and Oviatt, 1996). More recently, some researchers have focused upon the exporting activities of services firms (O’Farrell et al., 1996; O’Farrell and Wood, 1998). Many previous studies 636

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have also failed to acknowledge that the reasons for internationalising and modes of foreign market entry reported by respondents in small service firms may be markedly different from those reported by respondents in manufacturing firms. Supporting this viewpoint, empirical evidence from surveys of small business service firms casts doubt on the established paradigms (generally drawing upon evidence collected from large firms) which have been developed to explain why and how firms internationalise (O’Farrell et al., 1996). Because of the bias of previous research towards manufacturing firms, there is the possible risk that the technical assistance provided by policy makers and practitioners is solely geared to the needs of manufacturing firms. Most studies have focused upon new firms (that is, firms less than 10 years old) (McDougall, 1989; McDougall and Oviatt, 1996) or publicly listed companies (Bloodgood et al., 1996). Smallbone and North (1995) for example have asserted that the contribution of older firms to economic performance should not be overlooked. In addition, the majority of studies have focused upon the exporting activities of entrepreneurs and firms located in Scandinavia (Boter and Holmquist, 1996; Ahokangas, 1998; Haahti et al., 1998) and the USA (Bloodgood et al., 1996; McDougall and Oviatt, 1996). The values and norms of entrepreneurs owning and managing exporting and non-exporting firms located outside Scandinavia and the USA are relatively neglected (Kolvereid and Shane, 1993; Westhead, 1995; O’Farrell et al., 1996) and relevant policies, support systems and infrastructure may also differ between countries. This study provides information about the internal and external environmental stimuli and strategies reported by Swiss SMEs that have survived the initial hurdles to business development. Our study extends research in SME internationalization in two important ways. First, while research on international entrepreneurship is growing, it tends to focus primarily on the age and size of new ventures (Westhead et al., 2001a). SMEs, however, face unique challenges in the process of internationalization, not only because of their age and size, but also because of their resource constraints. Human capital in particular can become a significant source of internal differential advantage for the internationalization of the firm. Secondly, small firm internationalization research has focused on manufacturing firms, whereas research in international entrepreneurship is focused primarily on the high technology sector. In contrast, our study looks at the impact of organizational and personal factors across multiple sectors. Review of the literature Julien (1996) asserted that about 85 per cent of small firms are operating to some degree with a strategy that can respond to market globalization (that is, the purchase of goods or services from foreign countries, the sales of goods or services to foreign countries, investments in foreign countries, agreements between enterprises from different countries and so on). To provide a greater understanding of market globalization processes, he presented the following typology of small firm behaviour and their associated internationalization strategies. Julien’s typology identifies a number of important themes that explain why some small firms are more likely to become exporters. It also illustrates that small firms can choose a variety of routes to internationalize their activities. Using a much narrower definition of globalization than Julien, several studies have focused solely on the propensity of firms to export a proportion of their sales abroad.

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A two-category classification of small firms has been used to compare exporters and non-exporters. Evidence from studies focusing upon the exporting activities of new and small firms suggests that only a minority of firms sell their goods or services abroad (for a review, see Westhead, 1995). The majority of new and small firms can be classified as ‘local’ firms because they sell their goods or services only in domestic markets. Nevertheless, there has been a rapid growth in the research literature surrounding the characteristics and contributions of ‘exporting’ and ‘non-exporting’ firms (Westhead, 1995; McDougall and Oviatt, 1996; Havnes et al., 1998; Prince and van Dijken, 1998). Most notably, the relationship between firm size and the ability to be an exporter has attracted considerable research attention. Evidence regarding the relationship between export activity and size (measured in terms of sales revenues or employment) is rather mixed. Bonaccorsi (1992) detected a significant positive relationship between large firm size (a useful surrogate measure of a firm’s resources) and the ability to be an exporter. This relationship has been supported in numerous studies which have focused on sales revenues’ size (Calof, 1993; Westhead, 1995; Bagchi-Sen, 1999) or employment size (Westhead, 1995). Some studies however, have, found that smaller firms are more likely to be exporters (Bilkey and Tesar, 1977) or an insignificant relationship has been detected between firm size and the propensity for a firm to be an exporter, or the intensity of export activity (Cavusgil, 1984). Evidence suggests that owner-managers of small firms wishing to export face a number of internal and external obstacles (Julien et al., 1997; Bagchi-Sen, 1999). These obstacles include insufficient information on the possibilities and constraints of foreign markets; the narrow attitudes of owner-managers who prefer to concentrate on domestic markets; insufficient resources; and poorly developed strategies to gain a market share in new markets (Bagchi-Sen, 1999). In response, enterprise and development agencies have introduced initiatives to address obstacles to internationalization. For example, enterprise agencies are encouraging firms to consider direct exporting, joint ventures, strategic partnerships, technology alliances and/or direct outward investment leading to production in foreign countries (Scottish Enterprise Network, 1993). Numerous theories have been presented to explain why some small firms engage in international operations. It is difficult, however, to find any characteristics common to all approaches (Boter and Holmquist, 1996: 472). Havnes, Sletten and Saether (1998: 104) recently observed that research based knowledge about internationalization is fragmented. In addition, they concluded that there is no uniform theory of the exporting behaviour of SMEs. However, it is possible to classify research into three main schools of thought: economics-related Foreign Direct Investment Theory (FDI) theory, stage models with their behavioural emphasis, and the network perspective, which emphasizes relationships between organizations (Coviello and McAuley, 1999). Foreign direct investment theory to internationalization The FDI ‘school’ has the longest history in the development of internationalization theory and evolves from neoclassical and industrial trade theory, incorporating a transaction cost approach and the internalization of activities in expanding abroad. Dunning (1988), for example, considered internationalization to be a pattern of investment in foreign markets explained by rational economic analysis of internationalization, ownership and location advantages. In particular, this means that the firm decides on the level

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of internationalization by evaluating the cost of economic transactions. Thus companies planning to internationalize choose the organization form and location for which the overall transaction costs are minimized. Critics argue that such theories ignore important long-term aspects of international expansion; however, in forming the basis of strategy, the ‘school’ does not specifically exclude the growth of decision-making expertise over time (Morgan, 1997). Furthermore, Oviatt and McDougall (1994) argued that the FDI theory presents a static model, which is primarily applicable to the development of structure and process in established multinational companies. Stage models of internationalization Considerable research has examined the view that a firm’s decision to enter export markets follows a gradual sequential process associated with several stages of internationalization. Each stage is characterized by a ‘typical’ behaviour. As the firm enters a new stage, its international commitment and involvement in international marketing activities increases. Perhaps the most influential of these models is that of Johanson and Vahlne (1977). Colloquially known as the Uppsala model, it suggests that internationalization occurs in an incremental fashion, influenced by increased market knowledge and management commitment. According to this theory, the internationalization process begins with exports, progressing through more sophisticated forms such as licensing and joint ventures to wholly owned marketing and production-oriented subsidiaries. Exporting itself can be perceived by some commentators as having distinct stages, from partial interest through to a high degree of expertise and commitment to exporting, perhaps within a specialist exporting arm of the organization. It is assumed within the stage model theory that the process of internationalization is a unilinear evolutionary process with incremental stages (Welch and Luostarinen, 1988; Pleitner, 1997). It also assumed that the process has as a cyclical evolution pattern with a more differentiation character (Haahti et al., 1998). Pleitner (1997) presented a six-stage model of internationalization. Within this perspective, it is assumed that the firm is bound to choose a certain method or mode of operation through which it services customer needs in foreign markets (Ahokangas, 1998). Firms (and entrepreneurs) can choose one or more of the following methods: indirect exporting, direct exporting, licensing, joint ventures or direct investments. Associated with this ‘stages’ approach is an important area of theory, that of psychic distance which, although used in earlier research, came into prominence with the work of commentators such as Hallen and Wiedersheim-Paul (1979). It is suggested that firms will internationalize first into markets which are psychically close (that is, they possess similar cultural and other relevant dynamics to the home market) and that factors preventing the flow of information between actual or potential suppliers and customers are minimized. Although this concept has been criticized on a number of accounts (for example, see O’Grady and Lane, 1996), it has been used extensively in assessing the choice of market entry for internationalizing organizations. The network perspective A more recent approach has been to research the impact of relationships upon the growth strategies of firms. This school of thought draws upon theories of social exchange and

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the impact of interorganizational and interpersonal relationships. These range from suppliers and customers to associated firms in the same industry and also government and state bodies. It is the network which is important rather than firm-specific advantages, an externalization rather than an internalization emphasis, and it is an inherently systemic approach. To defend or maintain its position in a particular business network, a firm may be ‘pushed’ into becoming an exporter. Firms can also be ‘pulled’ into becoming exporters because other firms in the same business network have established relationships with other businesses in foreign markets. Many knowledge-based business service firms (such as accounting, advertising and insurance businesses), in particular, obtain their competitive advantage not solely because of their internal resources. They achieve some of their competitive advantage by developing mutually supportive interactions with other service firms. Further, they can create a ‘capital of trust’ (Holmlund and Kock, 1998) through effectively utilizing their institutional and social networks (O’Farrell et al., 1996). Owing to their inability to accumulate all necessary resources, some knowledge-based business services firms may be only able initially to enter export markets in cooperation with service organizations and other businesses (Boter and Holmquist, 1996). Within the network theory of business internationalization, SMEs can ‘go international’ in various ways. They may become part of an international value-added chain; they may outsource part of their production process to third countries; they may seize business opportunities by spreading across borders or form international networks to exchange information or strengthen their presence on foreign markets, to name just a few possibilities (Möhring, 2002). Hypotheses In this section, hypotheses are developed which focus on issues relating to the organizational and external environmental characteristics of SMEs, to explain why some SMEs are more likely to export their goods and services abroad. In addition, hypotheses are formulated surrounding the link between exporting firms and the human capital. Factors that encourage owner-managers of small firms to export, as well as those factors that determine export activity are reviewed. Organizational factors Internationalization involves a degree of risk (Calof, 1994; Masurel, 2001). Smaller firms with more limited internal resources may be unable to make calculated judgements surrounding opportunities in their external environments, specifically the viability of selling goods or services abroad. Several studies have detected a significant positive relationship between large firm size in terms of sales revenue size and the ability of a firm to export goods or services abroad (Calof, 1994; Westhead, 1995; Westhead et al. 2001b). Hence, we suggest the hypotheses. H1a Smaller firms are less likely to be exporters and will report a lower intensity of internationalization. The main industrial activity of a firm has been found to be associated with its ability to export its goods or services abroad (Miesenbock, 1988). Studies have generally noted that

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services firms are markedly less likely than manufacturing firms to be exporters (Westhead, 1995; Westhead et al., 2001b). Hence: H1b Manufacturing firms are more likely to be exporters and will report a higher intensity of internationalization. Stage models of internationalization (Johanson and Vahlne, 1977, 1990) suggested that older firms are likely to be more effective exporters. Several studies have detected that older firms are more likely to export their goods or services (Westhead, 1995; Westhead et al., 2002; Burgel et al., 2001). These results, however, have been questioned by other researchers. For example, Ursic and Czinkota (1984) and Autio et al. (2000) noted that the effect of firm age was at best inconclusive. Therefore: H1c Older firms are more likely to be exporters and will report a higher intensity of internationalization. There are many options a small business can choose from to ‘go international’. However, stage models of internationalization (Johanson and Vahlne, 1977, 1990) indicated that the firm would usually start with direct export from the home country, and then gradually increase its capital and management involvement in the host country through licensing agreements, strategic alliances and various forms of FDI such as the development of joint ventures or subsidiaries. Pleitner (1997) reported that SMEs can use a variety of internationalization modes, which in turn lead to increasing internationalization activities. Hence: H1d SMEs using multiple modes of internationalization will report a higher intensity of internationalization. Human capital factors The importance of human capital and its relationship to performance and internationalization is established (Westhead et al., 2001b; Manolova et al., 2002), yet the effects of particular aspects or dimensions are less clear. The literature on SME internationalization suggests that three dimensions of human capital distinguish between internationalized and non-internationalized firms: experience and skills, international orientation and demographics. Research shows that high experiential knowledge (that is, experience and skills) of the owner-manager and low perceived environmental uncertainty are important determinants of small firm internationalization (Cavusgil, 1984; Johanson and Vahlne, 1990). Furthermore, the degree of international experience of the top management team is a distinguishing feature between internationalized and non-internationalized firms. Holzmüller and Kasper (1991) found that international business skills have a positive and significant impact on export performance. Therefore: H2a There is a positive and significant relationship between owner–manager international business skills and SME internationalization. Foreign-market or ‘international orientation’ comprises dimensions such as psychic distance to foreign markets, linguistic capability, travel abroad and risk tolerance. For example, the crucial ability of decision makers in exporting firms to converse in foreign

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languages has been well documented in the literature (Waver and Pak, 1990). The reason underlying its importance is not so much founded upon the function of two parties communicating in one language, but on the basis that language can conceptualized as ‘bridge to culture’ (Morgan, 1997). Other subjective issues reflecting owner-managers’ perception of the attractiveness of exporting are part of the international orientation. The construct is related to Cavusgil’s (1984) notion of global orientation. It is argued that the more internationally oriented managers are, the more likely they will be, under comparable conditions, to participate in export activities. Therefore: H2b There is a positive and significant relationship between the owner-manager’s international orientation and SME internationalization. Finally, evidence linking demographic characteristics to internationalization is inconclusive, despite the prominent position these variables have in international marketing research. Studies examining demographics find that a high level of education, as well as youth, is associated with internationalization (Oviatt and Mc Dougall, 1994). In contrast, other work shows that the older age of the owner/founder is related to internationalization (Nakos et al., 1998), while still other researchers have found no relationship between age, education and internationalization (Davis and Harveston, 1999). Hence, we propose the following hypothesis: H2c The demographic characteristics of owner-managers will not differ between internationalized and non-internationalized SMEs. Method Data for the study were collected in Spring 2003. Since no sampling frame and comprehensive data base exist to identify small business owner-managers, we collected data in an executive education programme for small owner-managers. All 69 respondents were senior executives of SMEs operating in Switzerland. The survey instrument was developed on the basis of an existing questionnaire of INTERSTRATOS (internationalization of strategic orientation of small and medium-sized enterprises), an international European project about internationalization of SMEs conducted from 1991 until 1995 (Haahti et al., 1998) . Internationalization (INT) was primarily measured by the percentage of export in relation to sales. International business skills (INT_SKILLS) were measured using a five-item scale which comprised the respondents’ perception of their international work experience, personal networks and relationships abroad, marketing expertise, international business education, and expertise in technology and communication (Reuber and Fischer, 1997). Each item was measured on a five-point Likert scale. The scale showed a high reliability with a Cronbach alpha of 0.78. The ‘International Orientation of the Entrepreneur’ (INT_ORIENTATION) was measured by the extent of travel, time lived and employment abroad (Manolova et al., 2002). The orientation is an aggregation of four items, namely: ‘In the past year, I have regularly been travelling in foreign countries; I have at least once lived in a foreign country longer than six months; I have studied in a foreign country; I speak, read and understand a second language’. This scale was a sum of individual item scores, with dichotomous responses (0 = no; 1 = yes).

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The internationalization mode (INT_MODE) was measured by whether or not the firm was engaged in any of the following activity: export, licensing, partnership, equity joint venture, commercial subsidiary, production subsidiary. Each of these last measures was dichotomous. Other organizational characteristics were measured by the age of the firm (AGE_FIRM); the size of the firm (SIZE) expressed in terms of number of employees; the type of industry (INDUSTRY), which could be either manufacturing, consumer goods or services (Westhead, 1995; Westhead et al., 2001a). The owner–manager demographic characteristics were measured by self-reported age (AGE_MANAGER); highest educational level completed (EDUCATION); years in the firm (TENURE). (Bijmolt and Zwart, 1994; Cavusgil, 1984). Results Twenty-two firms (36 per cent) were not currently exporting any goods or services, and they were not interested in developing export activities. Six firms (10 per cent) did not export; however, they would like to develop export activities. Fifteen firms (25 per cent) exported occasionally, usually in neighbouring and similar markets. Eighteen firms (30 per cent) regularly exported their goods and services in different markets worldwide. Swiss SMEs which internationalized reported that a substantial part of their sales (27 per cent on average) and a substantial part of their production (19 per cent) were dependent on markets abroad. Most importantly, data revealed that firms rely heavily on subcontractors located abroad. More than 31 per cent of the exporting firms indicated that they had an outsourcing agreement with subcontractors abroad. SMEs used a variety of modes to ‘go international’: 41 firms (63 per cent) used a partnership; 35 firms (52 per cent) used direct export; 15 firms (22 per cent) set up a commercial subsidiary; 11 firms (16 per cent) set up a production subsidiary; six firms (9 per cent) developed a joint Table 36.1

Mean, standard deviation and F-statistics

INT (% of export in sales) SIZE (n of employees) INDUSTRYa AGE_FIRM (years) INT_MODEb INT_SKILLSb INT_ORIENTATIONc AGE_MANAGER (years) TENURE (years) EDUCATIONd

Mean

Std deviation

n

F-stat

27.32 72.33 2.06 14.69 1.41 2.67 1.72 37.74 7.86 3.02

14.33 123.14 0.93 10.36 1.43 1.15 0.99 8.91 6.25 1.01

63 69 63 67 69 69 69 65 69 62

— 0.655 6.003** 4.548 3.254** 2.573* 3.274* 1.334 4.312 0.567

Notes: a Measured on a nominal scale: 1
manufacturing, 2
consumer goods, 3
services. b Dichotomous variable: 1
yes, 0
no; all positive answers were added to form an index. c Measured on a 5-point Likert scale: 1
totally agree, 5
totally disagree. d The higher value indicates a higher level of education. * Significant at p0.05; ** Significant at p  0.01.

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venture; and another 6 firms (9 per cent) used a licensing agreement. Several firms combined several modes of internationalization at the same time. Hypotheses were tested by analysis of variance (ANOVA) and a chi-square test, using the SPSS procedure. Hypotheses H1b, H1d, H2a and H2b were supported. Data suggest that industry matters when it comes to internationalization: manufacturing firms have a higher export intensity than service providers. In the same vein, while 83 per cent of the experienced firms in exports belong to the manufacturing sector, 68 per cent of the firms that have no interest in export are service providers. However, one needs to be careful, as it is questionable how much the concept of ‘exporting’ as stated in the question is applicable to service providers. The internationalization mode also influences the export intensity. Firms which use multiple internationalization strategies display a significantly higher export intensity. This indicates that internationalization is a complex process rather than an event. Consistent with recent research (Westhead, 1995; 2002; McDougall and Oviatt, 1996; Havnes et al., 1998), two central dimensions – economic and owner–manager – each encompassing a series of specific variables, influence the internationalization of SMEs. Therefore, when it comes to globalization, the personality and skills of the owner–manager play a crucial role. Policy makers and small business advisors must remember that they have to consider the ‘human factor’ as well as other economic dimensions. We found that demographic factors neither affected the internationalization intensity, nor did they differentiate between internationalized and non-internationalized firms. This finding lends support to Cavusgil’s (1984) proposition that demographic factors are not as important differentiators of internationalization as behavioural factors. Given the total lack of support with respect to demographics in this study, we feel confident in stating that, at least in the context of Swiss SMEs, demographic characteristics are not significant discriminators between internationalized and non-internationalized firms. Conclusion Clearly, the phenomenon of SME globalization is becoming increasingly more important as more small firms seek growth in foreign markets. Our study focuses on the differences in personal factors, or the human capital of the owner–manager in Swiss SMEs. By unbundling dimensions of human capital, we found that different dimensions of personal factors are significant. Additionally, the findings show that public policy directives, as well as education and training programmes, need to recognize that there are significant differences in SME internationalization that are based upon industry. Knowledge of these differences can be used to guide the development of small firm internationalization initiatives that match industry characteristics. However, the study suffers from several limitations. The most important limitation is that we provided only a ‘snapshot’ on the globalization of Swiss SMEs, based on a small sample. Secondly, this study did not consider an important but neglected part of the internationalization process, that of inward internationalization, examples being countertrade and the import of goods and services. A potentially fruitful line of further enquiry would be the identification of these specific resources and capabilities required by firms and owner-managers to develop and sustain the internationalization process. Future research on human capital effects and their link to internalization is called for to develop a more complete understanding of this important

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aspect of SME decision making. In particular, the link between exporting firms and subsequently enhanced business performance needs to be explored in several industrial, locational and industrial settings. Longitudinal research designs might also provide more illuminating confirmatory evidence. References Ahokangas, P. (1998), ‘International orientation and external resource dependence of Nordic engineering companies’, in A. Haahti, G. Hall and R. Donckels (eds), The Internationalisation of SMEs: The Interstratos Project, London: Routledge, pp. 81–100. Ahroni, Y. (1966), The Foreign Investment Decision Process, Boston, MA: Harvard University Press. Autio, E., H. Sapienza and J. Almeida (2000), ‘Effects of age at entry, knowledge intensity and imitability on international growth’, Academy of Management Journal, 43, 904–24. Bagchi-Sen, S. (1999), ‘The small and medium exporters’ problems: an empirical analysis of canadian manufacturers’, Regional Studies, 33, 231–45. Beamish, P.W. (1990), ‘The internationalisation process for smaller ontario firms: a research agenda’, in A. Rugman (ed.), Research in Global Strategic Management – International Business Research for the 21st Century, Greenwich: JAI Press. Beamish, P.W. and J. Lu (2001), ‘The internationalisation and performance of SMEs, Strategic Management Journal, 22(6), 565–86. Bijmolt, T.H.A. and P.S. Zwart (1994), ‘The impact of internal factors on the export success of dutch small and medium-sized firms’, Journal of Small Business Management, 32, 69–83. Bilkey, W.J. and G. Tesar (1977), ‘The export behavior of smaller-sized Wisconsin manufacturing firms’, Journal of International Business Studies, 8(1), 93–8. Bloodgood, J.M., H.J. Sapienza and J.G. Almeida (1996), ‘The internationalisation of new high-potential U.S. ventures: antecedents and outcomes’, Entrepreneurship Theory and Practice, 20, 61–76. Bonaccorsi, A. (1992), ‘On the relationship between firm size and export intensity’, Journal of International Business Studies, 23, 605–35. Boter, H. and C. Holmquist (1996), ‘Industry characteristics and internationalisation processes in small firms’, Journal of Business Venturing, 11, 471–87. Burgel, O., A. Fier, G. Licht and G. Murray, (2001), The Rapid Internationalisation of High-Tech Young Firms in Germany and the United Kingdom, London: Anglo-German Foundation. Calof, J.L. (1993), ‘The impact of size on internationalisation’, Journal of Small Business Management, 31, 60–69. Calof, J. (1994), ‘The relationship between firm size and export behaviour revisited’, Journal of International Business Studies, 25(2), 367–87. Cavusgil, S.T. (1984), ‘Organizational characteristics associated with export activity’, Journal of Management Studies, 21(2), 3–22. Coviello, N. and A. McAuley (1999), ‘Internationalisation processes and the smaller firm: a review of contemporary empirical research’, Management International Review, 39(3), 223–56. Davis, P.S. and P.D. Harveston (1999), ‘Internationalisation and organizational growth: the impact of Internet usage and technology involvement among family businesses’, paper presented at the Academy of Management Conference, Chicago, 6–11 August. Dunning, John H. (1988), ‘The eclectic paradigm of international production: a restatement and some possible extensions’, Journal of International Business Studies, 19(1), 1–32. Haati, H., G. Hall and R. Donkels (eds) (1998), The Internationalisation of SMEs: The Interstratos Project, London: Routledge. Hallen, L. and F. Wiedersheim-Paul (1979), ‘Psychic distance and buyer–seller interaction’, reprinted in P. Buckley and P. Ghauri (eds) (2000), The Internationalisation of the Firm, London: International Thomson. Havnes, P.A., J. Sletten and A. Saether (1998), ‘Export orientation in open markets: the case of Nordic countries’, in A. Haahti, G. Hall and R. Donckels (eds), The Internationalisation of SMEs: The Interstratos Project, London: Routledge, pp. 101–25. Holmlund, M. and S. Kock (1998), ‘Relationships and the internationalisation of Finnish small and mediumsized companies’, International Small Business Journal, 16, 46–63. Holzmüller, H. and H. Kasper (1991), ‘On a theory of export performance: personal and organisational determinants of export trade activities observed in small and medium-sized firms’, Management International Review, 31, 45–70. Johanson, J. and J. Vahlne (1977), ‘The internationalisation process of the firm: a model of knowledge development and increasing foreign market commitments’, Journal of International Business Studies, 8(1), 23–32.

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Johanson, J. and J. Vahlne (1990), ‘The mechanism of internationationalization’, International Marketing Review, 7(4), 11–24. Julien, P.A. (1996), ‘Globalization: different types of small business behaviour’, Entrepreneurship and Regional Development, 8, 57–74. Julien, P.A., A. Joyal, L. Deshaies and C. Ramangalahy (1997), ‘A typology of strategic behaviour among small and medium-sized exporting businesses: a case study’, International Small Business Journal, 15, 33–49. Kolvereid, L. and S. Shane (1993), ‘Is it equally difficult for female entrepreneurs to start businesses in all countries?’, Journal of Small Business Management, 31(4), 42–52. Manolova, T., C. Brish, L. Edelman and P. Greene (2002), ‘Internationalisation of small firms: personal factors revisited’, International Small Business Journal, 20(1), 9–31. Masurel, E. (2001), ‘Export behaviour of service sector SMEs’, International Small Business Journal, 19(2), 80–84. McDougall, P. (1989), ‘International versus domestic entrepreneurship: new venture strategic behaviour and industry structure’, Journal of Business Venturing, 4, 387–400. McDougall, P.P. and B.M. Oviatt (1996), ‘New venture internationalisation, strategic change, and performance: a follow-up study’, Journal of Business Venturing, 11, 34–40. Miesenbock, K.L. (1988), ‘Small business and exporting: a literature review’, International Small Business Journal, 6(2), 42–61. Möhring, J. (2002), ‘SMEs and cluster internationalisation’, East West Cluster Conference, Paris: OECD. Morgan, R.E. (1997), ‘Decison making for export strategy’, Small Business and Enterprise Development, 4, 73–85. Nakos, G., K.D. Brouthers and L.E. Brouthers (1998), ‘The impact of firm and managerial characteristics on small and medium-sized Greek firms’ export performance’, Journal of Global Marketing, 11(4), 23–47. O’Farrell, P.N. and P.A. Wood (1998), ‘Internationalisation by business service firms: towards a new regionally based conceptual framework’, Environment and Planning, 30, 109–28. O’Farrell, P.N., P.A. Wood and J. Zheng (1996), ‘Internationalisation of business services: an interregional analysis’, Regional Studies, 30, 101–18. O’Grady, S. and H. Lane (1996), ‘The psychic distance paradox’, Journal of International Business Studies, 2, 309–33. Oviatt, B. and P. McDougall (1994), ‘Toward a theory of international new ventures’, Journal of International Business Studies, 25(1), 45–64. Pleitner, H.J. (1997), ‘Globalisaton and entrepreneurship: entrepreneurs facing the ultimate challenge’, Journal of Enterprising Culture, 5(1), 27–55. Prince, Y. and K.A. van Dijken (1998), ‘Export orientation: an econometric analysis’, in A. Haahti, G. Hall and R. Donckels (eds), The Internationalisation of SMEs: The Interstratos Project, London: Routledge, pp. 126–35. Ramaswamy, K., K.G. Kroeck and W. Ren forth (1996), ‘measuring the degree of internationalization of a firm: a comment’, Journal of international Business Studies, 27, 167–77. Reuber, A. and E. Fischer (1997), ‘The influence of the management team’s international experience on the internationalization behaviour of SMEs’, Journal of International Business Studies, 12(2), 807–25. Scottish Enterprise (1993), Improving the Business Birth Rate: A Strategy for Scotland, Glasgow: Scottish Enterprise. Smallbone, D. and D. North (1995), ‘The employment generation potential of mature SMEs in different geographical environments’, Urban Studies, 32(9), 1517–37. Ursic, M.L. and M.R. Czinkota (1984), ‘An experience curve explanation of export expansion’, Journal of Business Research, 12, 159–68. Waver, K.M. and J. Pak (1990), ‘Export behaviour and attitudes of small and medium sized Korean manufacturing firms’, International Small Business Journal, 8(4), 59–70. Welch, L. and R. Luostarinen (1988), ‘Internationalisation, evolution of a concept’, Journal of General Management, 14(2), 36–64. Westhead, P. (1995), ‘Exporting and non-exporting small firms in Great Britain’, International Journal of Entrepreneurial Behaviour & Research, 1, 6–36. Westhead, P., M. Wright, D. Ucbasaran and F. Martin (2001a), ‘International market selection by new and small firms’, Entrepreneurship and Regional Development, 13, 17–46. Westhead, P., M. Wright and D. Ucbasaran (2001b), ‘The internationalisation of new and small firms: a Resource-based view’, Journal of Business Venturing, 16, 333–58. Westhead, P., M. Binks, D. Ucbasaran and M. Wright (2002), ‘Internationalisation of SMEs: a research note’, Journal of Small Business and Enterprise Development, 9(1), 38–48.

37 Outward internationalization of Turkish SMEs Serdar Karabati

One of the 25 largest economies in the world, Turkey boasts a GNI of approximately 268 billion and a GDP of approximately 301 billion US dollars (World Bank, 2005). Turkey is regarded as a highly successful NIC among the non-oil economies of its immediate region, especially in terms of depth of industrialization achieved (Dana, 2000). Although the Turkish economy is considerable in size and scope, accommodating a population of approximately 72 million people, Turkey ranks as a lower middle-income country alongside Brazil, China, the Russian Federation, Colombia, Iran and Peru (World Bank, 2005). In the Turkish business environment, SMEs account for 99.8 per cent of all enterprises, 76.7 per cent of total employment, 38 per cent of capital investment and 26.5 per cent of value added (OECD, 2004). An important segment of these SMEs is located in industrial zones and small-scale industrial estates in less developed cities in Turkey. These emerging firms represent a new wave of industrialization driven by local entrepreneurship and sustain an important role in the elimination of regional differences (Akgemci, 2001). Although the SMEs also play a vital role in the development of large firms in Turkish business, they suffer from slow growth (Radikal, 2005, 24 August). Problems that Turkish SMEs face are argued to result basically from technological obsolescence, absence of professionalism and lack of market orientation (Coskun and Altunisik, 2002). In addition to these firm-level deficiencies, it is also suggested that SMEs show greater vulnerability towards adverse consequences of macroeconomic instability in comparison to large firms (Erzan and Filiztekin, 1997). One of the major issues that Turkish SMEs confront is internationalization as Turkey’s penetration into international markets is accelerating. In this study, initial outward internationalization of Turkish SMEs is investigated in relation to characteristics of the local business setting and changes in macroeconomic conditions which act as strong moderators in the internationalization process. Findings are expected to contribute to debates on models of internationalization and to the extant literature on international entrepreneurship. Internationalization While researchers have called to attention that there is no commonly accepted definition of what makes a firm ‘international’ (Sullivan, 1994), internationalization continues to receive new attention (Welch and Welch, 2004) alongside a growing interest in international entrepreneurship (Oviatt and McDougall, 1994; Welch, 2004). Early work on internationalization (Bilkey and Tesar, 1977; Johanson and Vahlne, 1977), frequently labelled the ‘Uppsala model’, focuses on the firm’s experiential knowledge of foreign markets and conceptualizes the internationalization process as a series of incremental decisions. According to the model, firms begin internationalization with a country psychically closest to them (that is, in terms of language, business practices, industrial development) owing to the perceived high uncertainty of foreign markets. It is only with improved business experience and greater understanding of foreign markets that firms are willing to 647

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make greater resource commitments and, thus, venture into countries that are increasingly dissimilar to their home. The stages model has been validated for firms in certain contexts (Calof and Viviers, 1995) but it is generally criticized for being too deterministic and inadequate to explain rapid internationalization or entry within regional trading blocks (Tavakoli and McKiernan, 1999). In a critical evaluation of the model, Andersen (1993) notes that relevant market knowledge can be gained in ways other than experience when market conditions are stable and homogeneous. A general view on information and communication technologies suggests that ease of information gathering is no longer a function of geographical proximity and that uncertainty about markets is diminishing as international integration unfolds. In an investigation of attitudes of managers about motives to internationalize, for example, Sullivan and Bauerschmidt (1990) show that these attitudes do not differ according to the number of foreign markets in which managers’ firms operate. Firms now have a greater opportunity for international business contacts (Berry and Brock, 2004), sometimes being pulled into the process in the form of unsolicited orders from foreign markets or via proactive network development (Welch and Welch, 2004). Further disagreement with the stages model of internationalization is found in research on international new ventures or born-globals (Knight and Cavusgil, 1996; Oviatt and McDougall, 1994; Oviatt and McDougall, 1997). By definition, international new ventures seek competitive advantage by the use of resources in multiple countries (Oviatt and McDougall, 1994). It has been suggested that international new ventures are likely to operate in industries with higher levels of global integration (McDougall, Oviatt, and Shrader, 2003). As evidence for the impact of cross-order alliances, Coviello and Munro (1995) reveal that early relationships with large firms are particularly influential in the entrepreneurial high-technology firms’ internationalization process. Other studies emphasize the role of innovation. Knight and Cavusgil (2004), for example, argue that bornglobals are businesses characterized by a particular pattern of innovativeness that gives rise to early internationalization. Oesterle (1997), on the other hand, emphasizes market conditions for innovation and argues that radical innovation may lead to immediate internationalization, when combined with a hostile home market climate towards innovations. In other evaluations of internationalization, it is pointed out that the stages model has no explanation of why and how the internationalization process starts (Andersen, 1993). Pull factors such as availability of new opportunities abroad may increase the likelihood of internationalization. On the other hand, firms may be pushed to become international by factors such as a highly competitive domestic environment, market saturation, or in order to achieve the strategic flexibility needed to adapt to market volatility. However, firms may choose to expand internationally even when the environment is munificent. For example, it is shown in the US context that exporting provides a positive market performance outcome for SMEs in fast-growing industries (Rasheed, 2005). Furthermore, a broad national industrial policy for foreign expansion is a powerful factor that pushes SME internationalization in a proactive manner, specifically in the so-called ‘developing economies’. SMEs in the Turkish economy The foundation of the modern Turkish economy was institutionalized during the early decades of the twentieth century, with the 1913 Act for the Encouragement of Industry

Outward internationalization of Turkish SMEs

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(Tesvik-i Sanayi Kanunu) and 1923 National Assembly for Economy held in Izmir (Izmir Iktisat Kongresi) signifying major steps towards betterment in policy and structure. Thinkers and policy makers of the time envisioned a mixed economy, partially owing to earlier liberalist movements which paved the way to constitutional reform (Kansu, 2002) back in 1908. This mixed motive was evident in the composition of manufacturing where the domination of local, small-scale enterprises were complemented by foreign investments in newly developing businesses such as electrical energy, paper and mining (Keyder, 1982/1993). By the 1930s, however, the Turkish economy had been restructured under the doctrine of étatism, a corporatist ideology that ‘society will function more naturally, efficiently if it is regulated by a strong state acting in concert with organizations representing major socio-economic interests’ (Moore and Hamalai, 1993). The shift to a stateled economy has grown partly as a response to burdens increased by the collapse in external markets for exports in the aftermath of the 1929 world economic crisis (Emrence, 2003) but mainly as part of a developmental outlook geared to fulfil the growing need in Turkey’s late-industrializing context for established financial markets and organizations (Bugra, 1994b). The restructuring of the national economy has expanded into the 1940s and 1950s and it is usually considered a case of success (Kazgan, 1999), justified on overall growth rates achieved (ranging between 8.5 and 17 per cent in manufacturing and reaching an average of 9 to 10 per cent in GNP per capita) between the world economic depression and the World War II years. A formal definition for small businesses was present even before the National Assembly for Economy in 1923 (KOSGEB, 2003). Successive governments have initiated various support mechanisms for the emerging small business activity, among which the establishment of a specialized bank, Türkiye Halk Bankasi, in 1933 and further institutionalization of small employers’ chambers in 1943 are noteworthy. A new upsurge on behalf of SMEs in Turkey was not possible until the 1960s, a period characterized by the constitutional amendment requiring a state planning organization (named DPT) and the official adoption of an import-substitution policy. In the planned economy years, microenterprises and small businesses have been recognized through the 1964 Act and later in 1970 by the establishment of KÜSGEM (The Small Industry Development Center), a local organization in the Gaziantep district, with support from UNIDO (United Nations Industrial Development Organization). KÜSGEM has eventually been transformed into KOSGEB (Small and Medium Sized Industry Development Administration), a semiofficial organization introduced to help SMEs increase competitiveness and develop policies at the national level. It should be noted, however, that efforts to restructure and boost SMEs in Turkey have remained rather sporadic and unproductive. The global trend towards large-scale activity throughout the first three quarters of the century (Audretsch, Thurik, Kwaak and Bosma, 2004) has found strong pathways in the Turkish context, leading to ‘deliberate neglect’ of small industry (Bugra, 1994a) and domination of larger enterprises located in and around a few coastal cities with a major history of commerce and industry. The current milieu for Turkish SMEs has largely been shaped by the new wave of liberalism of the 1980s. The period is characterized by reorientation in manufacturing industry and a rapid shift to export orientation and internationalization (Yeldan, 2001). This policy shift is a delayed response to import substitution which was prolonged into the late 1970s and curbed economic growth (Önis, 2000, February). In order to increase exports

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Handbook of research on European business and entrepreneurship 140

120

100

80

60

World Turkey

40

20 1980

1984

1988

1992

1996

2000

2004

Source: Data from IMF (International Monetary Fund), www.imf.org.

Figure 37.1

Change in Turkish industrial production, 1980–2004 (2000
100)

from its very low level of US$2.9 billion in 1980, the governments have strived to simplify export procedures and to implement export promotion measures such as direct export subsidies and tax rebates. These have been followed by financial liberalization aimed at maintaining a competitive real exchange rate. Liberalization has especially had a positive effect on industrial production, which has expanded almost six-fold within a 25 year period, at a higher rate than the world average (see Figure 37.1). While early increases in production have largely been maintained by the use of the idle capacity rather than by new investments (Onaran and Yentürk, 2001), small- and medium-sized enterprises have increasingly benefited from expansion in the economy. The profile of SMEs in Turkey is different from that of the European Union countries, in that their average workforce is much smaller, one of the lowest among EU member and candidate countries combined (Audretsch, Thurik, Kwaak and Bosma, 2004). According to statistics of the DPT (State Planning Organization), 94.9 per cent of all enterprises in the private manufacturing sector are in the size class of 1–9 employees, but they contribute only 8.52 per cent to the value added (see Table 37.1). Therefore, SMEs in Turkey generate low levels of value added and make only a small contribution to exports despite their domination of the economy in terms of employment. Evidence from manufacturing (Taymaz and Saatçi, 1997) reveals that there is a positive relationship between technical efficiency and plant size in Turkey and most recent development plans acknowledge the further need for an increase in productivity of SMEs. Turkish SMEs lag behind in terms of know-how, skill levels and access to modern technologies. Two new bodies were introduced in the 1990s to support technology development. The TTGV (Turkish Technology Development Foundation) was established in 1991 to raise the industries’ awareness of

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Table 37.1 Distribution of employment and value added in private manufacturing sector in 2000, by size class Distribution by size class 1–9 employees 10–49 50–99 100–150 151–250 250

Distribution of employment Share of value added

94.82 3.31 0.82 0.36 0.31 0.38

34.40 11.62 7.85 5.96 8.05 32.12

8.52 8.89 6.76 6.83 11.48 57.52

Source: DPT (State Planning Organization), www.dpt.gov.tr.

and participation in R&D activities. TTGV supports research projects and technoparks through funds provided by the Treasury from the resources of the World Bank. Similarly, TIDEB (Industrial R&D Funding Directorate), founded in 1995, operates under TÜBITAK (The Scientific and Technological Research Council of Turkey) to support R&D activities of Turkish firms. Internationalization of Turkish SMEs Turkish SMEs operate largely as domestic firms, but a significant fraction of Turkish SMEs in comparatively developed regions has experienced some form of inward internationalization through importing as commercial intermediaries or under agreements for subcontracting and franchising. Despite the increased level of international activities, however, Turkish SMEs possess a low 10 per cent share in exports (OECD, 2004) and they do not contribute to total direct investment flows from Turkey which currently range around a low 0.9 billion US dollars (OECD, 2005, June). According to Sharma and Erramilli (2004), there is a relationship between competitive advantage and entry mode, moderated by transferability of knowledge. Firms with competitive advantage tend to find it more strategic to assume greater ownership over their activities in the host country. In contrast, firms with no competitive advantage are likely to prefer indirect entry modes or to engage in direct exporting if marketing resources can be transferred to local partners in the host country. Turkey possesses competitive advantage only in a few, comparatively traditional sectors. In comparison to EU-15, for example, Turkey holds advantages only for relatively traditional product groups. These are clothing and clothing accessories, textile yarn and fabrics, vegetables and fruits, sugar and sugar preparations, tobacco and rubber manufactures (Utkulu and Seymen, 2004). In addition, high technology exports possess a 2–5 per cent share in manufactured exports (UNDP, 2003; World Bank, 2005), attesting to the fact that Turkey lags behind in sectors with high R&D intensity. Therefore, it may be assumed that outward internationalization of Turkish SMEs is essentially restricted to slow-growth exporting activities. In fact, the same should also be true for most of the larger firms, except for a cluster of companies affiliated to big business groups which hold greater financial capabilities for investments abroad. Currently, exports lie within a US$65–70 billion range fuelled by commercial relationships with over 200 countries and approximately 15 000 products. This total of exports of

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Table 37.2

Turkish exports by country groups (in billion US dollars) 2001

2002

2003

2004

EU (25) EU (15) EFTA CIS Russia North America USA Latin America Africa Middle East Others

16.9 16.1 0.3 1.9 0.9 3.3 3.1 0.3 1.5 2.9 4.2

19.5 18.5 0.4 2.3 1.2 3.6 3.4 0.2 1.7 3.1 5.2

25.9 24.5 0.5 3.0 1.3 4.0 3.7 0.2 2.1 5.0 6.5

34.4 32.5 0.6 4.0 1.8 5.2 4.8 0.4 3.0 7.2 8.3

Total

31.3

36.0

47.2

63.1

Source: DTM (Undersecretariat of Foreign Trade), www.dtm.gov.tr.

goods and services possesses a 27 per cent share of GDP. In exports, machinery and transport equipment is the top category, followed by textiles and clothing, with shares of 27.3 per cent and 21.6 per cent, respectively (DPT, 2005). A recent finding suggests that Turkish manufacturing firms in industrial machinery and textiles prioritize internationalization to a greater extent than services firms in sectors such as health and tourism (Karabati, 2005). Services firms stay localized because they are more profitable in domestic markets (Westhead, Wright, Uçbasaran and Martin, 2001) or simply because their experience is location-specific. European Union countries, especially the EU-15, are major destinations of Turkish exports. Approximately half of all exports are directed to these countries (see Table 37.2 for details). Turkey has a long tradition of bilateral trade with countries such as Germany, France and the United Kingdom. Among these trade partners, Germany has become additionally important following the 1961 agreement to recruit Turkish guest workers for Germany’s rebuilding. The share of Turkey’s exports to Germany remains almost constant at 14 per cent of its total exports. Alongside the principal presence of the USA, foreign direct investments in Turkey are also dominated by European countries, including the Netherlands, Germany, the UK, France, Switzerland and Italy. It should be assumed in the Turkish context that the pace of internationalization will be strongly related to firm age. Research (Blomstermo, Eriksson and Sharma, 2004; Cohen and Levinthal, 1990) reveals that firms with long domestic experience find it harder to alter their processes and that, as firms get older, they develop mental models that hamper their ability to grow in new environments. Differences should be expected also because firms in Turkey established after the 1980s have benefited from economic openness and changes in global communication directly from their start-up. Market-related motives (that is, market potential, market access or market protection) are the most important ‘pull’ motives for Turkish manufacturing firms (Kaya, 2004) and the importance of these motives remains similar regardless of differences between target export regions (Erem and Mengüç, 1997). Smaller firms are affected more by ‘push’ factors than by pull factors

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653

(Kaya, 2004) but it can be argued that push factors become significant for all firms during economic crises. The 1990s in Turkey stand out, with a series of financial crises that curbed the economy (Önis and Türem, 2001; Yeldan, 2001) leading towards a major economic disaster in 2000–2001 (Tunç, 2003). It should be expected that a push related to economic crises will be the major factor of internationalization over the recent period. Research method Sample and data collection According to the statistics produced by the Undersecretariat of Foreign Trade DTM (DTM, 2005), total number of export firms in Turkey equals 39 422 in 2004. A total of 25 326 of these firms (about 64.2 per cent) are located in the Marmara region to the northwest, accounting for 73.1 per cent of all Turkish exports. According to statistics published by the State Planning Organization DPT (DPT, 2003), per capita value of exports between the years 1995–2000 equals 5342 US dollars in the region compared to a national average of 2249 US dollars. Despite the fact that certain less developed cities specialize in sectors such as ship building, furniture, and wine, geographic concentration of economic activities in Turkey shows an asymmetry in favour of Marmara, more so for Istanbul and its immediate surroundings (Öz, 2004). Therefore, the study centres on small- and mediumsized businesses registered in Istanbul, top city of SME presence (KOSGEB, 2004, December) and socioeconomic development in Turkey. All types of private companies (joint stock, limited and so on) were included for selection with the exceptions of micro enterprises with fewer than 10 people and larger firms of 250 employees. Firms were sampled through the KOSGEB (Small and Medium Industry Development Organization) database. KOSGEB operates under the Ministry of Industry and Trade and functions as a major source of information for SMEs and researchers. The database currently hosts contact details of over 21 000 firms and lists employment category, status and turnover for each entry. Overall, a stratified random sample (based on employment category) of 1125 firms was the target. Questionnaires were either mailed or e-mailed to the contact persons of the selected firms during the second half of June 2005. After a follow-up in July, the collection of responses was terminated by mid-August. Table 37.3 summarizes the sampling procedure and overall return. Table 37.3

Sampling procedure and overall return

Total number of firms

Percentage (appr.)

Number of randomized contacts made

Total return*

Return rate (%)*

10–24 employees 25–49 employees 50–99 employees 100–149 employees 150–249 employees

1467 1198 695 329 171

38.0 31.0 18.0 8.5 4.5

427 350 203 95 50

24 24 12 10 5

5.6

6.8

5.9

10.5

10.0

Overall

3860

100.0

1125

75 23*

Note: * 23 questionnaires were returned anonymously.

8.7

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Measures At the firm level, outward internationalization is investigated in relation to timing, entry modes and psychic distance. The structured questionnaire includes items expressed in interval (Likert) scale and several short, open-ended questions on entry/exit decisions toward international markets. The 17 items on push and pull factors of internationalization are in part adapted from Kaya (2004). Push factors can be categorized as negative (for example, adverse economic conditions) versus positive (for example, state incentives). Pull factors mainly include market potential and economic stability in a target destination. Firms’ ability to differentiate products or services in the largest international market is measured through a seven-item set. Evidence on Greek SMEs (Dimitratos and Lioukas, 2004) suggests that there is a relationship between host country characteristics and business performance. While variation in business performance is not investigated, Turkish SMEs’ strategies are hypothesized to be different in established as opposed to emerging international markets. Findings of the study As summarized in Table 37.4 below, descriptive statistics reveal that SMEs in the study are on average 20.96 years old and they have an average turnover of 6.86 million US dollars. Firm age ranges between one and 86 and sales between 0.1 and 105 million US dollars. The average sales of exporter SMEs in the study (7.49 million US dollars) remains significantly low against the average of 56.19 million US dollars of SMEs listed in the top thousand Turkish exporters (TIM, 2005, August). It should be noted that the firms sampled operate largely on domestic capital with international sales averaging 25.14 per cent of total sales; mean international sales reach 30.37 per cent when firms with no international operations (equals 17.2 per cent, N
93) are excluded. As hypothesized, firm age is negatively related to speed of internationalization (Spearman’s rho
0.433, sig.
0.001, N
70). Internationalization speed and share of international sales are positively correlated (Spearman’s rho
0.261, sig.
0.034, N
66), also when controlled for sales volume. These findings support the argument that newer firms go international faster as they benefit from a wider spread of information and increased openness in the world economy from inception. Not surprisingly, Germany (West Germany before 1990), the largest market for Turkish exports, is the initial international destination for a considerable 16.3 per cent of firms in the sample (Valid N
70). No significant pattern emerges among the rest of the 35 countries reported, but Russia, Algeria, Iran, Iraq, Saudi Arabia and Israel appear to have been major target markets at different periods. Germany is the current largest market for Table 37.4

Characteristics of ventures represented in the study

Firm age Sales in 2004 (in m. US$) Share of international operations (%) Share of foreign capital (%) Number of employees

Mean

Std. dev.

Median

5% trimmed mean

N

20.96 6.86 25.14 3.16 69.18

14.7 15.8 26.6 15.8 65.7

19.00 2.10 15.00 0.00 42.00

19.68 4.17 22.80 0.60 61.32

97 87 93 90 97

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655

11.2 per cent of the firms (Valid N
69), followed by Russia (8.2 per cent) and then by a noteworthy presence in Greece, Iran, Israel, Azerbaijan and the USA. For the period 1995–2004, it can be argued that internationalization is not defined by economic similarity. The relationship between economic openness of Turkey versus mean openness of host countries at the time of internationalization is insignificant (Spearman’s rho
0.188, sig.
0.603). According to the Index of Economic Freedom (The Heritage Foundation, 2005), which measures countries against ten broad factors (such as trade policy, government intervention in the economy, foreign investment, banking/finance), Turkey currently ranks 113th in openness among 155 countries listed, next to countries such as Paraguay, China, Algeria and Argentina. It should be noted that economic openness of Turkey averaged 2.80 before the economic crisis of 2001 and 3.25 after the crisis (lower scores in the Index denote greater openness largely in terms of fewer trade restrictions). There is a tendency of Turkish SMEs going international in recent years to target comparatively open economies (see Figure 37.2). However, it is not statistically possible to test this trend against changes in industry patterns or macroeconomic conditions as the number of observations is limited. As expected, services firms are found to be more domestic than international. Among three types of business concentration (manufacturing, services and trade), services is the only predictor (stepwise regression sig.
0.046, adjusted R2
0.041, N
73) for share of provincial (Istanbul) sales as the two variables are positively correlated (partial correlation
0.285, sig.
0.016). Nevertheless, concentration in services, trade and manufacturing are not significant markers either for share of international sales for internationalization speed. Within internationals only, however, greater concentration in trade is a predictor 5.0

Economic openness

4.0

3.0

Mean of host countries Turkey

2.0

1.0 1995

1997

1996

Figure 37.2

1999

1998

2001

2000

2003

2002

2004

Economic openness of Turkey versus host countries, 1995–2004

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Handbook of research on European business and entrepreneurship

of a greater share of international sales (stepwise regression sig.
0.044, adjusted R2
0.050, N
63). Analyses reveal that intensity levels of capital, technology and labour do not predict the share of international sales or internationalization speed, either for total population or within exporters. Factor analysis of reasons for internationalization (KMO
0.526, Bartlett’s sig.
0.000, total variance explained
74.98 per cent) reveals seven major factors. Factors may be labelled as follows: (1) increased costs, (2) slow firm growth, (3) governmental policy instability, (4) domestic market volatility, (5) foreign exchange rate, (6) state incentives, and (7) market expansion strategy. The second factor implies that slow firm growth may be a result of increased competition, whereas the fifth factor denotes decrease in the value of local currency and a collapse in domestic demand. Regression analysis from these seven factors onto year of internationalization (regression sig.
0.000, adjusted R2
0.282, N
48) shows that state incentives (factor 6), a positive push factor, has lost its importance in time and that domestic market volatility (factor 4), a negative push factor, has become a major motive for internationalization. Regression analysis from internationalization motives onto firm size (regression sig.
0.010, adjusted R2
0.106, N
53) suggests that state incentives have been more important for internationalization of currently larger firms. However, the hypotheses that pull motives will be more important for manufacturing firms and that smaller firms will be more affected by push factors are not supported. The hypothesized interaction of capital intensity and size over entry mode cannot be tested as outward internationalization (Valid N
79) is dominated by direct exporting (68.4 per cent) followed by export via local intermediary (20.3 per cent). Entry modes such as franchising, joint ventures or acquisition which require greater resource investments appear to be exceptions to the general rule. Besides, the negative correlation between capital intensity and size (Spearman’s rho
0.314, sig.
0.002, N
95) suggests these two variables may not be separate at all. Forty-one per cent of the firms report that their current largest international market is the same as the first international destination, whereas 59 per cent reveal that their current largest international market is different from initial entry. Among the seven factors of internationalization, opportunity arising from the foreign exchange rate is the only factor that discriminates between these two groups of firms. That is to say, internationalization due to foreign exchange rate is more typical of firms which report that their current largest international market is different from initial entry (t
2.556, sig.
0.015, df
38). As the composition of the factor implies, this mode of internationalization is a form of rapid exit with no strategic concerns about economic stability of the target country. Conclusion Findings of the study show that outward internationalization of Turkish SMEs begins most typically through an incident of exporting, indirect or direct, and that robust mechanisms as in international partnerships or direct investments are rare even after internationalization. Turkish exports have increasingly developed into a reactive motive against slow growth in the domestic market (Radikal, 2005, 24 August) and internationalization of Turkish SMEs in the sample appears to be largely fuelled by the search for substitute markets. Entry into a geographically close (but not necessarily similar) emerging market is one of the main strategies of the Turkish SMEs, especially of a group of firms that reportedly possess cost competitiveness achieved through price/quality balance. While the composition of target

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countries is highly variable, Germany emerges as a special destination for Turkish SMEs. It is very likely that the Turkish immigrant population in Germany acts as brokers and intermediaries of commerce and communication for SMEs in Turkey. This partially verifies the role of international ethnic ties for SMEs in developing countries (Zafarullah, Ali and Young, 1998). Other firms try to penetrate international markets by building relationships with powerful buyers abroad or via opportunities created by global networks. For small firms in clothing, even informal networks created by exchanges under shuttle trade may become drivers of internationalization. These findings suggest that models of internationalization need to be elaborated to suit contexts such as Turkey where the informal economy and macroeconomic conditions shape the behaviour of most SMEs. SMEs in Turkey receive only a marginal 5 per cent of bank credits (OECD, 2004) and they appear to be excluded from financial markets. Despite official efforts to develop necessary tools for venture capital, SMEs in Turkey lack the financial dynamism for new investments and growth. Also, considering the low level of competitiveness of Turkish products, there seems to be no apparent reason to assume that entry modes requiring greater resource commitments will increase in the near future. Owing to limitations of the dataset at hand, possible industry differences cannot be tested. Further research needs to be introduced to reveal specific industry patterns of internationalization. Turkish SMEs appear to possess distinctive strategies for survival and show strong flexibility in adapting to changes in environmental conditions. In addition, internationalized Turkish SMEs report willingness to penetrate new markets, emerging or established, by intensifying their efforts towards exports. Longitudinal studies on growth patterns and market behaviour of these SMEs are worthy of consideration for internationalization theories. References Akgemci, T. (2001), ‘KOBI’lerin temel sorunlari ve saglanan destekler’, Ankara: KOSGEB. Andersen, O. (1993), ‘On the internationalization process of firms: a critical analysis’, Journal of International Business Studies, 24(2), 209–31. Audretsch, D.B., A.R. Thurik, T. Kwaak and N. Bosma (2004), ‘SMEs in Europe’, Observatory of European SMEs Report No. 7, retrieved 6 June 2005 http://europa.eu.int/comm/enterprise/enterprise_policy/analysis/ doc/smes_observatory_2003_report7_en.pdf). Berry, M.M.J. and J.K. Brock (2004), ‘Marketspace and internationalisation process of the small firm’, Journal of International Entrepreneurship, 2, 187–216. Bilkey, W.J. and G. Tesar (1977), ‘The export behavior of smaller-sized Wisconsin manufacturing firms’, Journal of International Business Studies, 8(1), 93–8. Blomstermo, A., K. Eriksson and D.D. Sharma (2004), ‘Domestic activity and knowledge development in the internationalization process of firms’, Journal of International Entrepreneurship, 2, 239–58. Bugra, A. (1994a), ‘Political and institutional context of business activity in Turkey’, in A. Öncü, C. Keyder and S. Ibrahim (eds), Developmentalism and Beyond; Society and Politics in Egypt and Turkey, Cairo: The American University in Cairo Press. Bugra, A. (1994b), State and Business in Modern Turkey: A Comparative Study, Albany, New York: State University of New York Press. Calof, J.L. and W. Viviers (1995), ‘Internationalization behavior of small- and medium-sized South African enterprises’, Journal of Small Business Management, 33(4), 71–9. Cohen, W.M. and D.A. Levinthal (1990), ‘Absorptive capacity: a new perspective on learning and innovation’, Administrative Science Quarterly, 35(1), 128–52. Coskun, R. and R. Altunisik (2002), ‘Management’s concerns about the issues faced by Turkish SMEs’, International Journal of Entrepreneurial Behaviour and Research, 8(6), 272–91. Coviello, N. and H. Munro (1995), ‘Growing the entrepreneurial firm: networking for international market development’, European Journal of Marketing, 29(7), 49–61. Dana, Léo-Paul (2000), Economies of the Eastern Mediterranean Region: Economic Miracles in the Making, Singapore, London and Hong Kong: World Scientific.

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Dimitratos, P. and S. Lioukas (2004), ‘Greek perspectives on international entrepreneurship’, in L.Dana (ed.), Handbook of Research on International Entrepreneurship, Cheltenham, UK: Edward Elgar Publishing. DPT-Devlet Planlama Teskilati Müstesarligi (2003), ‘Illerin sosyo-ekonomik gelismislik siralamasi’ (retrieved 11 July 2005, http://www.dpt.gov.tr/bgyu). DPT-Devlet Planlama Teskilati Müstesarligi (August 2003), ‘Industrial policy for Turkey’ (retrieved 5 July 2005, http://ekutup.dpt.gov.tr/sanayi/tr 2003ab.pdf). DPT-Devlet Planlama Teskilati Müstesarligi (2005), ‘Secilmis fasillara göre ihracat’ (retrieved 31 October 2005, http://ekutup.dpt.gov.tr/tg). DTM-Dis Ticaret Müstesarligi (2005), ‘Bölgeler itibariyla ihracat’ (retrieved 31 October 2005, http://www. dtm.gov.tr/ead/ekolar 1/eko16.xls). Emrence, C. (2003), ‘Turkey in economic crisis (1927–1930): a panoramic view’, Middle Eastern Studies, 39(4), 67–80. Erem, T. and B. Mengüç (1997), ‘Export market segmentation practices of Turkish firms’, Journal of EuroMarketing, 6(3), 103–35. Erzan, R. and A. Filiztekin (1997), ‘Competitiveness of Turkish SMSEs in the Customs Union’, European Economic Review, 41, 81–92. Johanson, J. and J. Vahlne (1977), ‘The internationalization process of the firm: a model of knowledge development and increasing foreign market commitments’, Journal of International Business Studies, 8(1), 23–32. Kansu, A. (2002), 1908 Devrimi, Istanbul: Iletisim Yayinlari. Karabati, S. (2005), ‘Correlates of entrepreneurship in Turkey’, unpublished manuscript, Istanbul Bilgi University. Kaya, H. (2004), ‘Internationalization of Turkish manufacturing firms: foreign direct investment outflow’, unpublished doctoral thesis, Istanbul, Bogaziçi University. Kazgan, G. (1999), Tanzimat’tan 21. Yüzyila Türkiye Ekonomisi, Cagaloglu, Istanbul: Altin Kitaplar. Keyder, C. (1982/1993), Dünya Ekonomisi Içinde Türkiye (1923–1929), Istanbul: Tarih Vakfi Yurt Yayinlari. Knight, G.A. and S.T. Cavusgil (1996), ‘The born global firm: a challenge to traditional internationalization theory’, Advances in International Marketing, 8, 11–26. Knight, G.A. and S.T. Cavusgil (2004), ‘Innovation, organizational capabilities, and the born-global firm’, Journal of International Business Studies, 35, 124–41. KOSGEB-Small and Medium Sized Industry Development Administration (December 2003), ‘KOBI Ekonomisi Tarihi Gelisimi’ (retrieved 6 June 2005, http://www.kosgeb.gov.tr/Ekler/Dosyalar/Yayin/106/ kobitarihi.pdf). KOSGEB-Small and Medium Sized Industry Development Administration (December 2004), ‘KOSGEB Saha Arastirma Calismasi Ön Degerlendirme Raporu’ (retrieved 6 June 2005, http://www.kosgeb.gov.tr/Ekler/ Dosyalar/Yayin/130/saha%20arastirma%20on%20degerlendirme.pdf). McDougall, P.P., B.M. Oviatt and R.C. Shrader (2003), ‘A comparison of international and domestic new ventures’, Journal of International Entrepreneurship, 1(1), 59–82. Moore, M. and L. Hamalai (1993), ‘Economic liberalization, political pluralism and business associations in developing countries’, World Development, 21(12), 1895–1912. OECD – Organization for Economic Co-operation and Development (2004), ‘Small and medium-sized enterprises in Turkey: issues and policies’ (retrieved 8 July 2005, http://www.oecd.org/dataoecd/5/11/31932173.pdf). OECD – Organization for Economic Co-operation and Development (June 2005), ‘Trends and recent developments in foreign direct investment’ (retrieved 1 August 2005, http://www.oecd.org/dataoecd/13/62/35032229.pdf). Oesterle, M.-J. (1997), ‘Time span until internationalization: foreign market entry as a built-in mechanism of innovation’, Management International Review, 37(2), 125–49. Onaran, O. and N. Yentürk (2001), ‘Do low wages stimulate investments? An analysis of the relationship between wages and investments in Turkish private manufacturing industry’, International Journal of Applied Economics, 15(4). Oviatt, B.M. and P.P. McDougall (1994), ‘Toward a theory of international new ventures’, Journal of International Business Studies, 25(1), 45–64. Oviatt, B.M. and P.P. McDougall (1997), ‘Challenges for internationalization process theory: the case of international new ventures’, Management International Review, 37(2), 85–99. Önis, Z. (February 2000), ‘The Turkish economy at the turn of a new century: critical and comparative perspectives’ (retrieved 6 June 2005, http://home.ku.edu.tr/
zonis/turkecon.pdf). Önis, Z. and U. Türem (2001), ’Business, globalization and democracy: a comparative analysis of Turkish business associations’, Turkish Studies, 2(2), 94–120. Öz, Ö. (2004), ‘Türkiye’de ekonomik faaliyetlerin mekansal dagilimi ve rekabetci yapisi’, ODTÜ Gelisme Dergisi, 31, 211–41. Radikal (24 August 2005), ‘KOBI’leri ihracat kurtardi’ (retrieved 24 August 2005, http://www.radikal.com.tr/ haber.php?haberno
162255).

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Rasheed, H.S. (2005), ‘Foreign entry mode and performance: the moderating effects of environment’, Journal of Small Business Management, 43(1), 41–54. Sharma, V.M. and M.K. Erramilli (2004), ‘Resource-based explanation of entry mode choice’, Journal of Marketing: Theory and Practice, Winter, 1–18. Sullivan, D. (1994), ‘Measuring the degree of internationalization of a firm’, Journal of International Business Studies, 25(2), 325–42. Sullivan, D. and A. Bauerschmidt (1990), ‘Incremental internationalization: a test of Johanson and Vahlne’s thesis’, Management International Review, 30(1), 19–30. Tavakoli, M. and P. McKiernan (1999), ‘SMEs’ strategic reaction to the 1992 single market announcement: evidence from Scottish manufacturing firms’, Journal of Small Business Management, 37(1), 79–89. Taymaz, E. and G. Saatçi (1997), ‘Technical change and efficiency in Turkish manufacturing industries’, Journal of Productivity Analysis, 8, 461–75. The Heritage Foundation (2005), ‘Index of economic freedom’ (retrieved 10 May 2005, http://www. heritage.org/research/features/index/chapters/Chapter_6.cfm). TIM-Turkish Exporters’ Assembly (August 2005), ‘Ilk 1000 Ihracatci’ (retrieved 7 August 2005, http://www. tim.org.tr). Tunç, H. (2003), ‘The lost gamble: the 2000–2001 Turkish financial crises in comparative perspective’, in Z. Önis and B. Rubin (eds), Turkish Economy in Crisis, London: Frank Cass Publishers. UNDP – United Nations Development Programme (2003), ‘Human development indicators’ (retrieved 25 October 2005, http://www.undp.org/hdr 2003/indicator/indic_135_1_1.html). Utkulu, U. and D. Seymen (2004), ‘Revealed comparative advantage and competitiveness: evidence for Turkey vis-à-vis the EU-15’, paper presented at European Trade Study Group 6th Annual Conference (ETSG 2004), Nottingham, UK. Welch, L.S. (2004), ‘International entrepreneurship and internationalization: common threads’, in L. Dana (ed.), Handbook of Research on International Entrepreneurship, Cheltenham, UK: Edward Elgar Publishing. Welch, C.L. and L.S. Welch (2004), ‘Broadening the concept of international entrepreneurship: internationalisation, networks and politics’, Journal of International Entrepreneurship, 2, 217–37. Westhead, P., M. Wright, D. Uçbasaran and F. Martin (2001), ‘International market selection strategies of manufacturing and services firms’, Entrepreneurship & Regional Development, 13, 17–46. World Bank (2005), ‘World development indicators’ (retrieved 13 June 2005, http://www.worldbank.org/ data/wdi2005/wditext/home.htm). Yeldan, E. (2001), Küresellesme Sürecinde Türkiye Ekonomisi, Cagaloglu, Istanbul: Iletisim Yayinlari. Zafarullah, M., M. Ali and S. Young (1998), ‘The internationalization of the small firm in developing countries: exploratory research from Pakistan’, Journal of Global Marketing, 11(3), 21–40.

38 Internationalization of SMEs in Ukraine Nahum Goldmann, Svitlana Slava,Yuriy Makogon, Tetyana Orekhova and Alena Dubouskaya

Ukraine: country introduction Ukraine is a post-Soviet republic independent from 1991, with the current constitution accepted in 1996. It includes 24 provinces (‘oblasts’) and the Crimean autonomy. The head of the state is the President, the highest legislative body is the Parliament (‘Verhovna Rada’), and The Cabinet of Ministers of Ukraine (Ukrainian Government) is the top executive body. By 1 January 2004, 96 political parties have been registered in the country. Ukraine is strategically positioned between Europe and Asia. Its most important natural resources are iron ore, coal, manganese, natural gas, oil, salt, sulphur, graphite, titanium, magnesium, kaolin, nickel, mercury and timber. The arable land covers nearly 60 per cent of the whole land area. The population of Ukraine, 49.5 million people, makes it the fifth largest in Europe (after Germany, Italy, Great Britain and France); 68 per cent of Ukrainians live in cities, the rest in rural areas. The population is traditionally highly educated: 98 per cent literate. In 2003, 23 per cent of Ukrainians were employed in agriculture (including 12.9 per cent on private family farms), 20.1 per cent in industry, 18 per cent in trade and hospitality, and 7.7 per cent in education. In the Soviet period, the heavy industry and agriculture had dominated the Ukrainian economy. Since the collapse of the USSR, as was typical for all the post-Soviet states, Ukraine has had considerable difficulties with the re-establishment of economic activities and commencement of new trading contacts. However, from 2000, the country’s GDP started to grow again, by 6–10 per cent in annual terms, and the new Ukrainian currency introduced in 1996 has reached relative stability. Figure 38.1 shows some key private property indicators for the newly privatized Ukrainian economy achieved by 2003 (from almost 100 per cent of state-owned and ‘collective’ property during the Soviet period). The country still has quite a high concentration of post-Soviet industrial conglomerates and, until recently, its government and business environment was not very favourable for forming modern competitive enterprises. Thus, Ukraine had been ranked by the Centre for Economic Reform and Transformation (CERT) as being between 15th and 18th (out of 25 developing economies of Eastern Europe and Central Asia) in ‘soft budget constraint’, which roughly corresponds to the likelihood that it could receive a subsidy or run up arrears on its debts if it wished. Corporate ‘soft budget’ is frequently used in socioeconomic studies as indicators of the presence of a soft budget in a given country (Carlin, Fries, Schaffer and Seabright, 2001). In fairness, since 2000, in parallel with the growth of GDP, the competitive situation has started to improve somewhat with the emergence in the country of numerous modern joint ventures. Thus, in Zakarpattia, the smallest province of Ukraine, but bordering on four countries, there are Yazaki, Leoni, IKEA, Fisher, Flextronix, Eurocar and Volkswagen, Henkel and many clothing factories. 660

Internationalization of SMEs in Ukraine International ownership 1% State ownership 5%

Other 7% Private property 30%

All Ukrainian Industry

Joint-stock collective 57% International ownership 0% State ownership 1%

Joint-stock collective 64%

Figure 38.1

661

Other 5% Private property 30%

Ukrainian SMEs

Key private property indicators for the Ukrainian economy in 2003

As well, before 2001, Ukraine was ranked between 18th and 21st (out of 25) in ‘business environment quality’ ratings. ‘Business environment’ rating comprises a range of factors associated with the functioning of the state that influence the profitability and predictability of economic activity: from tax systems, to regulatory hurdles, to official corruption, to organized criminality, as well as the uncertain enforcement of business contracts and property rights. Without a sound business environment, new investment and improved productivity are unlikely to emerge from abandoning central planning, liberalizing prices and trade, changing ownership and cutting state support (Carlin, Fries, Schaffer and Seabright, 2001). According to Maryanchyk’s more recent econometric study (Maryanchyk, 2003), the vague nature of the relationship between ‘profitability’ and ‘concentration’ might signify that competition is flawed in Ukraine. The author mainly attributes problems with the country’s competitiveness to heavy distortion of industrial structures, due to extensive practices of vertical and horizontal integration, as well as markets’ overregulation, widespread crony relationships between business and government, and lack of efficient bankruptcy legislation. Starting with privatization, an endless chain of mergers and acquisitions created a situation where one firm might dominate several markets, and whole industries are owned by a single business group. Maryanchyk concludes that market forces might fail to function under the burden of non-market regulations and institutions. Yet, as per a Ukrainian Government’s statistical publication, among the post-Soviet countries, Ukraine has one of the highest growth rates for foreign trade activities. From 2000 to 2003, imports have grown by 162.3 per cent, exports by 150.8 per cent, with the positive balance officially remaining for exports above imports. For the Commonwealth of Independent States (CIS) countries, owing to the movement of energy resources from

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Russia, Turkmenistan and, to a lesser extent, from Kazahstan and Uzbekistan, imports to Ukraine are higher than exports, whereas for the rest of the CIS and the world, the exports prevail (‘Статистичний щорічник Україн´и, 2003’). Note that, although a substantial share of small enterprises is cooperating with the foreign partners, especially in the border areas, usually their activities are not being tracked by the state statistics office, although some imprecise monitoring by the custom authorities might take place. Clearly, the foreign trade activities of the Ukrainian SMEs must be studied more rigorously. Ukrainian SMEs: a brief history Even today, many business terms commonly used by Western business practitioners and historians have somewhat different meanings when applied to the Ukrainian economy in transition. Just 10 to 15 years ago, before the country’s socioeconomic formation undertook a sweeping change, the majority of definitions and basic assumptions that are standard in the Western business research had little relevance to the USSR’s ‘socialist’ economy, society and law. Perhaps more important, the very mentality of the Soviet population differed radically from that in the West, especially as related to ‘individual initiative’, ‘selfreliance’, ‘small trade’, and many other critical concepts that define a vibrant market economy. Numerous SME research results emphasize the importance of formal and informal social networks for the success of small enterprises, including business connections, family, friends and ethnic connections, and professional alliances (Aldrich and Zimmer, 1986; Zimmer and Aldrich, 1987; Aldrich, 1989; Dubini and Aldrich, 1991). According to the ‘conceptual model’ of Antoncic and Hisrich (2000), the international experience of entrepreneurs and the extent of their personal network greatly affect the growth of international sales and success of new international trade enterprises. Unfortunately, the remnants of the old Soviet ideology and the absence of entrepreneurial social networking and culture, still common among some segments of the Ukrainian population, hinder the progress of the country’s market economy. In the not so distant past, the population mentality of many Eastern European and Asian socialist countries (notably Yugoslavia, Hungary, Poland, China and Vietnam) differed substantially from that of their Soviet counterparts. This was mainly due to their considerably shorter period of communist indoctrination and also because these countries managed to retain at least some private enterprises, especially in agriculture and local services. Hence, many definitions, methodologies and conclusions of research projects on internationalization of SMEs conducted for the Eastern European and Asian transition economies might not be directly applicable to the situation in the former Soviet Union. For more than 70 years of the Soviet government, SME activities were severely curtailed and often criminally punishable. Virtually all ‘underground entrepreneurs’ involved in external trade and hard currency-related activities, were routinely penalized by hardlabour prison terms and, above a relatively low money threshold, even by death sentences. In the 1960–70s, for every political prisoner in the USSR, there were dozens of economic prisoners. Arrested ‘underground’ entrepreneurs were often treated even more harshly by KGB than political prisoners, frequently with the tacit approval of the general population, brainwashed to blame small entrepreneurs for most of the economic shortcomings of the failing regime. As well, the Soviet legacy of large industrial enterprises dominating

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the Ukrainian economy has significantly complicated the advancement of SMEs in the Ukraine. The SME sector officially started in the USSR in 1987, with the introduction of the Soviet law ‘On Individual Labor Activities of the Soviet Citizens’. Before the ‘perestroika’ virtually all non-state-owned industrial and trading activities were strictly forbidden and more often than not ‘black marketeers’ engaged in any commerce were severely prosecuted. Hence, unlike the situation in some other ‘socialist’ countries, like the rest of Eastern Europe and even China and Vietnam, Ukraine and all other former Soviet republics have not had much SME history before the 1990s. In 1987–90, before the sizable emergence of SMEs, small entrepreneurs in Ukraine would typically start their business activity by forming co-ops. Unlike state industrial enterprises, co-op activities have not been well regulated by the Soviet legislation. Some of the prevailing categories (like housing, car parking and fruit – orchard co-ops) were relatively well defined, others have been emerging ‘spontaneously’ and typically functioning in the ‘quasi-legal’ state. Hence, it was somewhat easier to obtain official approvals for a new co-op from the all-powerful state bureaucracy. SMEs are the most agile and ‘smart’ players in the new economy. They are the fastest to react to new opportunities, such as the opening of foreign markets after the collapse of the foreign trade state monopoly in Ukraine. On the other hand, SMEs are most sensitive to the economic risks and are often under tough financial constraints when selling abroad. With the launch of the Ukrainian economic reform, the resulting growth of the private sector was quite rapid, and SMEs quickly multiplied. This process was somewhat facilitated by the creation in May 1991 of the Ukrainian State Committee for Small Enterprises and Entrepreneurship and, especially, by the introduction of several legislative acts in support of SMEs (Егоров и Михайлов, 1999). Thus, from 1991 to 1993, the number of small enterprises has grown from 4326 to 13 599, with the largest size segments of machine building and metal works (‘Народне господарство України’, 1994), at least some of which can be explained by ‘self-privatization’ of state factories assets (in fact stripping them down by the routinely unpaid factory workers). Still, the growth of SMEs has also proceeded in the following years. From 1997, when the Ukrainian Government adopted a State Programme of developing small entrepreneurship in the country, and SMEs started to gain ground in the Ukrainian economy, to 2004, the share of small enterprises has grown in Ukraine from 64.7 per cent to 83.6 per cent, reaching 292 thousand according to the Ministry of Economy of Ukraine (‘Інформація про виконання в Україні заходів регіональних програм розвитку малого підприємництва за 2003–2004 роки’ 2005-04-06) but of which only 73.4 per cent have been actually operating, according to the State Committee of Ukraine for Regulatory Policy and Entrepreneurship (‘Здійснено порівняльний аналіз економічних показників роботи СПД – великих та середніх підпрнємств з малими підпрнємствами за 2003 рік’ 2004-11-28). In parallel, from 1994 to 2002, the number of small enterprise employees increased from 1.1 million to more than 2.1 million, still comprising just 7.2 per cent of all the employed population of Ukraine. In addition, the number of one-person business operations that were paying taxes exceeded 1.6 million in 2004. Some regional studies have found that as much as two-thirds of all SMEs concentrate in larger cities, with the largest city in the region (such as Donetsk in the Donetsk region),

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attracting nearly half of the overall number of SMEs in the given geographic locality (‘Основні показники діяльності підпрнємств малого бізнесу Донецької області за 2003 рік’ 2004). This might reflect certain difficulties with registration and support of SMEs outside of very large cities, as well as significant business development disparity between the leading urban centres and the hinterlands. Note that a different branch of the Ukrainian Government, the State Committee of Ukraine for Regulatory Policy and Entrepreneurship (‘Здійснено порівняльний

аналіз економічних показників роботи СПД – великих та середніх підпрнємств з малими підпрнємствами за 2003 рік’ 2004-11-28) quotes a far more

‘optimistic’ share of the employed population in Ukraine (21 per cent). This might be at least partially due to methodology differences in evaluating organization and physical persons and, more likely, due to the difference in handling of the underground economy. Still, almost a triple disparity in the critical official employment indicators between various branches of the same government indicates the necessity to treat all government-produced numbers with the utmost caution and at least with a sound understanding of methodologies used. Taking into account the underground economy, however, the real number of employed in the Ukrainian small enterprises is more likely to have reached as many as 10 million (Степанова, 2000). According to the Ministry of Economy of Ukraine (‘Оцінка та аналіз рівнм тіньової еконояіки за підсумками 2004 року’ 2005) illegal smuggling of goods has become a ‘national security problem’, leading to excise tax losses of tens of billions of dollars. A large proportion of this money is apparently being shifted back into the underground economy. Smuggling of footwear, apparel, cosmetics and household chemicals exceeds internal manufacturing of these products in Ukraine and might negatively affect legitimate SMEs. For instance, whereas annual sales of hair-colouring products in Ukraine reach 144 million units, only 35 million of these are produced locally and eight million more is officially imported. The Ministry of Economy believes that the difference of 101 million units is likely to be smuggled in from abroad. A similar discrepancy has also been observed for Ukrainian exports. Government support of SMEs in various regions is somewhat sporadic and varies among the regions. An edict of the President of Ukraine ‘On State Support of Small Enterprises’ (as cited in Єфремова, Швець, 2003) has recommended that the local authorities assign to SME support no less than 0.5 per cent of their corresponding budgets. Some cities (notably Kyiv) and certain regions have met this target, but the majority have not, although, in 1999–2000, 15 out of 27 provinces have allocated at least some resources to SME support. On the positive side, a limited number of provincial and city administrations do consider support of SMEs among their top priorities. More current testimonials on the Ukrainian Government’s critical support of SME activities are somewhat contradictory. On the one hand, in May 2005, the then new Ukrainian Prime Minister Yulia Tymoshenko had announced that the Government intended to conduct a ‘deep discussion’ with SME representatives on the state of SMEs in the country’s economy, and President Viktor Yushchenko had officially sent a corresponding request to the Cabinet. The objectives were to identify the obstacles, including regulatory, reporting and taxation, to liberalize entrepreneurial activity and to provide state support to the enterprises. The 2006 State Budget should increase financing for the

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‘National Program in Support of Small Enterprises’. According to Tymoshenko, ‘SMEs that were the driving force of the Orange Revolution should feel that the new government is able to turn its face to its problems’ (‘Тимошенко берется за малый и средний бизнес’ 16 Мая 2005). Another government document issued at the same time recommended studying the experience of the foreign countries, especially the EU, in facilitation of SMEs (‘Інформація про розвиток інфраструктури підтримки розвитку малого підприємництва в Україні (2003–2004 роки)’, 24 травня 2005). On the other hand, according to Anders Aslund, Director of the Russian and Eurasian Program at the Carnegie Endowment for International Peace (Aslund, 2005), the new Ukrainian government has surprisingly opted for an economic policy that appears to be socialist and populist in nature, which in the first four months of 2005 led to a reduction in economic growth, from 12 to just 5 per cent, while inflation increased to 15 per cent. Plans for re-privatization placed in limbo the property rights of thousands of enterprises and the overall tax pressure has risen dramatically. The SMEs have especially been hit by the cancellation of simplified taxation that served them so well. ‘The result has been that tens of thousands of small entrepreneurs have been forced to close their businesses, while others have fled into the underground economy.’ Although, since the fall of the Tymoshenko government, the situation might have eased somewhat, and the new Ukrainian Government pledged support for SMEs, it remains to be see to what extent popular political slogans will be transferred to the practical administrative steps. Although the share of the population involved in small enterprises is quite significant, and their profitability and productivity is much higher than for the large Soviet-era enterprises, their share in the country’s GDP remains relatively low (just 7.7 per cent for small enterprises, versus 40–60 per cent for small and medium enterprises in the developed countries) (‘Здійснено порівняльний аналіз економічних показників роботи СПД – великих та середніх підприємств з малими підприємствами за 2003 рік’ 2004-11-28). The Ukraine’s UNECE-calculated ‘Index of SME Development’ (Szabó, 2003) is equal to, or even somewhat lower than that for all the other post-Soviet republics that also make ‘slow progress’, with the notable exception of the three Baltic states, whose corresponding indices are 7 to 31 times higher. It is twice as low as the average Index of SME Development for the ex-Yugoslavia states and substantially lower than that for every other Eastern European economy on which Ukraine borders. Recently, there were also some disturbing data on the reduced growth rate in the number of Ukrainian SMEs involved in both internal and foreign trade, as well as on the number of employees in the small sector (Войнорубова, 2000). According to some experts, as much as 50 per cent of active small enterprises moved to the underground economy, whereas the private investment capital is mainly flowing to the non-productive sector, intermediary commercial activity and the like (Войнорубова, 2000). This is mainly due to the substantial tax burden on the legitimate SMEs and relative ease of conducting ‘underground’ intermediary activities. The Government has certain programmes that provide critical credits to SMEs (that is, through the Ukrainian Fund of Industrial Support – UFPP), but the overall volume of credits is not that considerable (‘Аналітична довідка про стан виконання заходів Національної програми сприяння розвитку малого підприємництва в Україні’ 2004-06-25). More important, although loans to SMEs have grown rapidly (approximately

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Handbook of research on European business and entrepreneurship Health services 1% Hospitality and restaurant service 4%

Others 3%

Agriculture 4%

Real estate and renting operations 15%

Wholesale and retail trade 42%

Transportation 5%

Construction 9% Industry 17%

Figure 38.2

Top industrial segments of the Ukrainian small enterprises

five times from 2002 to 2004), their overall volume is negligible compared with the economic need. According to the State Committee of Ukraine for Regulatory Policy and Entrepreneurship, the chief reasons for the dearth of credit are that Ukrainian financial institutions are not sensitive to the needs of SMEs, the credit rates are very high, and that banks require considerable collateral (‘Інформація про розвиток інфраструктури підтримки розвитку малого підприємництва в Україні’, 2003–2004 роки). However, the most important reason for the banks’ lack of interest in lending money to SMEs is the deficiency of the Ukrainian banking legislation that would not protect the interests of the creditors. State credit guarantees for SMEs in Ukraine are virtually nonexistent. In fairness, the above noted absence of legislative protection of interests of creditors as the main barrier for the country’s economic development is also characteristic of many other Eastern European economies. Figure 38.2 shows involvement of the Ukrainian small enterprises in the top industrial segments. Note that, regretfully, disproportionately insignificant is the share of small Ukrainian firms in some vertical segments that are typically a domain of SMEs in the developed economies, that is, Agriculture, Hospitality and Restaurant Service and Health Services. At the same time, the situation in some regions could differ significantly from the average countrywide data. Although average SME share in the Ukraine’s total output in 2003 was 7.7 per cent, in some cities and regions it might have reached as much as 21 per cent (‘Статистичний щорічник України’, 2003). The experience of SME facilitation in foreign countries, especially the EU, is of great interest to various branches of the Ukrainian Government. Thus, a Ukrainian–Austrian Working Group on SME co-operation met in March 2004 in Vienna in parallel with the meeting of the bilateral Committee on Economic Co-operation. Similar bilateral and multilateral committees exist with other Western European countries. As well, some local governments supported participation of SMEs at various trade shows, exhibits and fairs in

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the country and abroad (‘Інформація про виконання в Україні заходів регіональних програм розвитку малого підприємництва за 2003–2004 роки’ 2005-04-06). SME trade internationalization and the Ukrainian economy Up to now, there has been little research conducted in the internationalization processes of SMEs in Ukraine. The Ukrainian transition economy has created some specific conditions for SME functioning, often adverse. Research of new approaches that SMEs from transition countries have to undertake in order to enter international markets could greatly benefit both the development of the Ukrainian economy and the process of SME internationalization in Europe. The new state’s infrastructure (legislation, customs, currency policy, banking, transportation and so on) is not specifically focused on supporting Ukrainian SMEs in their pursuit of the international trade. When it does exist, it is usually but a part of the broader efforts to stimulate export or promote investments. Lack of focus on SMEs is not sustainable in the new economy. Hence, a new course on SME enhancement has to be introduced, similar to that happening in the leading Western economies. Certain aspects of internationalization of SMEs in Ukraine are similar to those in Western Europe and elsewhere; others differ radically, mainly owing to the considerable legacy of the old centralized economy legislative frameworks, peculiarities of international relations, economic infrastructures, business practices and confused human attitudes. The principal difficulties in investigating the SME internationalization processes in Ukraine lie in the absence of pertinent state-produced data on the prevailing types of foreign trade activities and on their geographic distribution. Hence, the analysis of such processes can only be conducted on the basis of indirect expert estimates. Some other types of trade internationalization, including developing sales subsidiaries in the foreign countries, are all but non-existent. Results of an export/import survey of the Ukrainian SMEs recently conducted by the Department of International Economics, Donetsk National University are presented in Figure 38.3. Note a disproportionately small share of exports to North America, currently the largest and most strategically critical trading area in the world. Figure 38.4 presents principal commodities in Ukrainian general exports. The leading SME industrial export segment, agricultural commodities (10 per cent), is roughly equal to the total export share of the Ukrainian agricultural commodities and processed food. However, the exporting activities of the Ukrainian SMEs are mainly limited to either being intermediaries or trading spin-offs of large industrial companies (Стратегії

економічного розвитку в умовах глобалізації, 2001; Макогон и др., 2004; Макогон, Бакуменко, 2004; Макогон, 2004; Смолбоун, Орехова, 1999).

Top foreign countries investing in the Ukrainian economy are shown in Figure 38.5. For SME investors, the most attractive are opportunities in the food industry, wholesale and retail trade, transport and telecommunications and real estate operations. Trade internationalization: a radical shift For the last 10 to 15 years, the trading partners of Ukraine changed considerably. Understandably, before the collapse of the Soviet Union, Ukraine was trading mainly with other USSR Republics, as well as with the neighbouring socialist countries.

668

Handbook of research on European business and entrepreneurship SME Export Other 11% CIS 24%

Asian countries 28%

EU 20% Other European countries 17% SME Import

Asian countries 7%

Other 6%

CIS 53%

EU and other European countries 34%

Source: Survey by Department of International Economics, Dontez National University (2004).

Figure 38.3

Primary export/import regions for the Ukrainian SMEs

Others 18%

Agricultural commodities and processed food 11%

Chemical products 9% Machinery, equipment and mechanisms 9%

Non-precious metals and metal goods 40%

Mineral products 13%

Figure 38.4

Principal commodities in the Ukrainian general export

The situation changed substantially during the first decade of Ukrainian independence. For example, in 1996, foreign trade of Ukraine with CIS comprised approximately 59 per cent, whereas in 2003 it decreased to just 39 per cent. At the same time, commerce with Russia, the biggest trading partner of Ukraine, fell from 47.5 per cent to less than 30 per cent. (‘Послання Президента України до Верховної Ради України’ 2004). These and other trade data demonstrate that the reorientation of export from the Ukraine to the West is increasing faster than replacement of imports, mainly energy resources from Russia, although in ten years (1993–2003) the reduction in overall Russian imports has been substantive, reaching almost 25 per cent.

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US 13% Others 27%

Cyprus 12%

Austria 4% Switzerland 5% Russian Federation 6% Virgin Islands 7%

Figure 38.5 Table 38.1

UK 11%

Netherlands 7%

Germany 8%

Top foreign countries investing in the Ukrainian economy Five top foreign investing countries in the Ukrainian economy

2003

1994

US Cyprus UK Netherlands Germany

US Germany UK Cyprus Switzerland

During roughly the same period, the five top foreign investing countries have changed (see Table 38.1). Perhaps more important, Russia moved from sixth to seventh place in this rating. However, strategic investments of large multinationals are relatively rare; according to www.elvisti.com, mostly these investments represent the return of illegally exported capital laundered through the offshore jurisdictions. For example, there are some indications (Mintchev, 2001) that enterprises based in Bulgaria are used for expansion towards the Russian and Ukrainian markets. For the Ukrainian firms, changing the market from domestic to international, or even from socialist countries to Western economies, meant a necessity of radically new and quite challenging business strategies. Initially, large Soviet-era enterprises dominated international trade. Using the previously established links with neighbouring countries, they tried to find new ways to enter new markets. Sometimes they explored various marketing approaches, such as expanding existing business links, employing mediators and even investigating new market opportunities on their own. More often than not, however, they have just been passive, in line with the planning economy’s lifestyle, expecting that the domestic and foreign partners would undertake the initiative. In contrast to large enterprises, immediately after the collapse of the Soviet foreign trade monopoly, some Ukrainian SMEs have aggressively pursued international markets. Thus, in the Western Ukraine’s Zakarpattia region, first border-trade examples were initiated in 1972 among the Ukrainian and Czechoslovakian consumer co-ops). The origin of the initial cross-border trade after Ukrainian independence was typically in connections between relatives or close friends, personal knowledge of opportunistic mediators from neighbouring countries, or previous success in small, often barter, operations.

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At the same time, because of differences in the level of taxation and, perhaps, certain privileges for small businesses, the executives of many bloated Soviet-era organizations would typically split them into several small and agile enterprises. Previously employed managers either would become the owners of privatized SMEs or would be hired in the new managerial positions, thus retaining former clients and business networking. As well, some individuals involved in petty trading as a survival tactic for many families have grown to become successful international entrepreneurs. This is especially remarkable, taking into account the general lack of trading skills in the wide Ukrainian population owing to relentless persecution of all commercial activity, and especially international trade, for more than 70 years of the Soviet system. At present, this form of international trade is quite geographically diverse. Thus, for Western Ukraine, regular trade contacts have been conducted with Italy, Poland, the Czech Republic, Slovakia and Hungary, as well as with Turkey and China. According to the Derzhkomstat, the growth of foreign investments in the Ukrainian economy was 2.7 per cent in the first quarter of 2005, reaching US$8.8 billion in April 2005, or $186 per country’s citizen. Just 5.8 per cent of such investments came from Russia and less than 4 per cent from other post-Soviet countries, the absolute majority coming from the West. The official Derzhkomstat data on the volume of direct investments from Ukraine to other countries is unlikely to be entirely credible, because of the high prevalence of money-laundered capital flowing abroad. The overall volume of the direct Ukrainian investments abroad has been estimated at US$214.3 million, in approximately equal shares to Russia and other post-Soviet countries, and to all other countries. Principal Ukrainian investors are firms in real estate, transportation, the financial sector, wholesale and administration. Almost exclusively, the official investors abroad are located in the Eastern and South Ukrainian regions (according to www.elvisti.com and www.ukrdzi.com.ua of 25–26 May 2005). Defining a Ukrainian SME According to the current Ukrainian Business Law (Господарський кодекс України, Chapter 7, 2003), small enterprises are defined as legal entities of every organizational type and of any type of ownership, with the annual average number below 50 employees and gross revenues below €500 000. Large enterprises are defined as having more than 1000 employees and gross revenues above €5 million. The rest are recognized as mediumsize enterprises. As far as the number of employees is concerned, these definitions are smaller than the corresponding OECD countries’ definition for the number of employees at small enterprises, especially as relates to gross revenues. This is understandable in light of the Ukrainian transition economy and peculiarities of the country’s accounting conventions, but makes direct comparison with Western countries that more challenging. Thus, the UK sections 247 and 249 of the Companies Act 1985 with later amendments defines a small company as one with a turnover of less than £5.6 million, a balance sheet total of less than £2.8 million and with fewer than 50 employees. A medium-sized company has a turnover of less than £22.8 million, a balance sheet total of less than £11.4 million and fewer than 250 employees. The European Commission Recommendation 2003/361/EC, 6 May 2003, p. 36, defines a small enterprise as having a headcount of less than 50, and a turnover or balance sheet

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total of not more than €10 million. A medium-sized enterprise has a headcount of less than 250 and a turnover of less than €50 million or a balance sheet total of not more than €43 million. The EC also has a third category, called ‘micro enterprises’, with a headcount of less than 10 and a turnover or balance sheet total of less than €2 million. The US Small Business Administration (SBA) sets size standards for each individual NAICS-coded industry. This variation is intended to better reflect industry differences and provide state support to SMEs: the most common size standards are 100 employees for wholesale trade industries, $6 million of annual receipts for most retail and service industries, $28.5 million of annual receipts for most general and heavy construction industries and $0.75 million of receipts for most agricultural industries. It is interesting to note that an earlier definition of SMEs in Ukraine (Закон України від 27.03.91), as well as a roughly similar definition in Russia (Russian Federal Law of 14 June 1995), have also provided a differentiated number of employees, depending on the type of industry, not unlike the one used by the US. In Ukraine, a differential definition has been abandoned in favour of a cross-industrial SME definition similar to that used by the EU. Traditional definition of internationalization For the purposes of this chapter, we have initially defined internationalization of Ukrainian SMEs as ‘the continuous process of increasing involvement in international operations’ (following Welch and Luostarinen, 1988, p. 37). In practical terms, based on original definitions of Aharoni (Aharoni, 1966) and the Uppsala model (the U-model) developed by Johanson and associates (Johanson and Wiedersheim-Paul, 1975; Johanson and Vahlne, 1977, also covered by Hollensen 2001), the conventional process of internationalization progresses through four fundamental stages. 1. 2. 3. 4.

A firm directly exports to a foreign country (usually by conducting cross-border retail operations). The firm establishes a foreign sales channel using independent resellers in several strategically important countries (that is ‘indirect exporting’, usually wholesale operations). Developing sales subsidiaries in the strategically most important foreign countries. Establishment of a production/manufacturing facility abroad.

A basic assumption of the U-model is that one internationalization stage constitutes the input of the next. In the case of SMEs, this assumption might not be as valid as in the case of larger corporations. In the case of the Ukraine, as well as other post-Soviet republics, China, India and other Asian countries, owing to the break-up of prior supply connections, a somewhat modified type of internationalization has been apparent. According to the research of Uzhhorod National University and Zakarpattia Regional Center for Socio-Economic and Humanitarian Research (Слава, Сембер, Завадяк, Сержанов, 2003; Слава Калантарідіс, 2003; Kalantaridis, Slava, Sochka, 2003; Калантарідіс, Слава, Сочка, 2002) this modified type of internationalization has become prevalent among the country’s exporting SMEs and even among the large firms, especially in the light industry. A recipient of investment, typically a Ukraine-based joint corporation or a local subcontractor of a foreign company, would use imported raw materials to produce

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final goods for direct or indirect export. As well, numerous joint ventures have also been established to make use of local facilities, typically in food processing, machinery and equipment, timber and furniture. Certain strategic advantages of the Ukraine, such as the country’s location close to the European markets, as well as high qualification and adaptability of its workforce, often permit rapid development and manufacturing of relatively complex products. This is especially important for certain market segments like the fashion industry and for urgent or customized orders. Internationalization in the knowledge economy The Internet and the knowledge economy introduced two critical changes in the traditional U-model. Firstly, today, an SME can relatively inexpensively conduct mass B2B (business to business) exporting by using Internet channels, that is, through its own website, as well as through international marketplaces like eBay and with the support of common payment instruments (online credit card merchant accounts, PayPal or other specialized payment systems). Online marketplaces can in turn lead to the emergence of ‘internationalized networks’, whereas the firm establishes relationships with other participating vendors, such as financial institutions (payment, insurance, collection, factoring), logistics (couriers, transportation), travel discounts, legal, accounting and arbitration services, and so on. According to Johanson and Mattson (1988), a networked firm’s service proposition and international competitive advantage directly depend on its participation in such a network and hence they should be analysed in relation to other network vendors and online intermediaries. Maryanchyk has noted that, in the Ukraine, with its extensive vertical and horizontal industrial integration, international trade might itself be a source of competition and, because of the deficiency of internal competition, a ‘good disciplinary tool’ for the local producers. In particular, negative significant estimates of the import penetration ratios suggest that imports act as a ‘disciplinary mechanism’ (Maryanchyk, 2003). The second critical change in the traditional exporting model occurred in the 1990s. A sizable share of SMEs in the OECD countries were established as ‘International New Ventures’ (INV) or ‘Born Globals’, by aiming their trade chiefly at foreign markets (Oviatt and McDougall, 1994; Hollensen, 2001). To some extent that was also a result of ecommerce opportunities. Often, however, the need to export aggressively is a direct result of the globalization of goods manufacturing and service delivery. The multinationals are frequently taking over the traditional entrance opportunities for small business (especially local retailing of food, perishables and clothing). Consequently, new entrepreneurs, especially executives and professionals that are laid off as a direct result of high industrial concentration, are often forced to find new opportunities by competing abroad rather than locally, as was traditionally the case in the not so distant past. It is interesting to note that a certain proportion of the leading high-tech SMEs in the new economies of China, India, Latin America and Eastern Europe are also aggressively positioning themselves as ‘Born Globals’, to the extent that they even conduct internal operations in English, the lingua franca of the new knowledge economy. In the Proceedings of OECD Workshop (‘Enhancing the Competitiveness of SMEs in Transition Economies and Developing Countries in the Global Economy and Their Partnership with SMEs of OECD Countries’, 2000), key constraints on SMEs’

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competitiveness in foreign markets in transition economies like Ukraine are specified as limited access to technology, management know-how and finance, as well as a combination of outdated equipment and a lack of market-oriented management knowledge and experience. A partnership arrangement between domestic SMEs and OECD member countries is seen in such circumstances as a means of narrowing the marketing knowledge and technology gap. An example of a Ukrainian joint venture described earlier (Klochko and Isakova, 1996) demonstrates both a successful joint cross-border collaboration between SMEs, as well as financing limitations faced by SMEs in transition economies. A manufacturing enterprise was started by a group of Ukrainian engineers who initially focused on producing hightech cutting equipment. However, undercapitalisation contributed to early cash flow difficulties, leading to a cessation of in-house production. The firm refocused on selling a range of technologically sophisticated welding equipment from its Swiss partner and also, world-wide, more basic equipment, bought in from the Ukrainian sources. The Ukrainian entrepreneur referred to his previous lack of management and marketing skills as the main reason for the initial attractions of the joint venture. Among the Ukrainian export-oriented SMEs, the emergence of specialized software and high-tech development firms is especially noticeable in Kharkiv, Kyiv, Lviv and Dnipropetrovsk. According to the ‘Ukrainian IT-Export Industry Market Research, 2003’ report (Ukrainian IT-Export Industry Market Research, 2003), between 200 and 300 small companies and independent software developers’ groups have been involved in the Ukrainian IT-export industry, whose market share amounts to 50 per cent. Many smaller companies are not incorporated. In the 1990s, the majority were trading with Russia, especially servicing military– industrial corporations (Егоров и Михайлов, 1999), mainly due to substantial currency exchange premiums enjoyed by the Russian clients (Ukrainian IT-Export Industry Market Research, 2003). More recently, some high-tech development firms have become mainly oriented towards the USA and Western European markets, with the Russian clients moving into fourth place. For some of the Ukrainian entrepreneurs involved in such high-tech exporting companies, obtaining foreign contracts was in the 1990s a first step for immigration abroad, again mainly to Russia (Егоров и Михайлов, 1999), but also to USA, Canada and Western Europe, although there are indications that, by now, some of them are coming back to Ukraine and establishing their own businesses (Ukrainian IT-Export Industry Market Research, 2003). Organizational peculiarities in internationalization of Ukrainian SMEs Most Ukrainian firms, including SMEs, would often use familiar support infrastructures for trade expansion (Кузьмін, Комарницький, 2002). Analysis conducted by the State Committee of Ukraine for Regulatory Policy and Entrepreneurship (‘Інформація про

розвиток інфраструктури підтримки розвитку малого підприємництва в Україні

(2003–2004 роки)’, 24 травня 2005) indicates certain growth in the country’s SME support infrastructure. In particular, at the start of 2005, Ukraine had 321 business centres, 73 business incubators, 19 technology parks, 187 leasing centres, 1225 credit organizations (including 786 credit co-ops), 151 funds for organizational support, 1007 investment funds, 1445 information-consulting centres and 1683 industrial associations.

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However, access to the external market is frequently obstructed by the absence of the state agencies that are required to support such processes or to act as their working participants. Thus, chambers of commerce facilitate international trade everywhere in the world as a part of numerous state organizations and private industry associations, but the Ukrainian Chamber of Commerce (UCC) is among a very few ‘official’ country’s organizations that play any practical role in the external trade (‘Дотримуючись економічного курсу держави’, 2005). UCC actively supports bilateral relations with chambers of commerce and other partnership organizations from 88 countries. Its main strategic priority is support for Euro-integration. More recent growth is largely due to the participation of SMEs. Certain work in support of international trade has been conducted by some city and provincial administrations. For instance, the government of Zakarpattya region organized the Office of Foreign Economic Relations in 1990, which has also been requested since 1994 to support foreign investments. On the other hand, foreign trading activities of the Ukrainian SMEs also differ, compared with the more established Western European model. With the radical change and rapid economic growth of the Ukrainian newly established neighbours, old markets are rapidly rising and new markets emerging, sometimes creating lucrative ‘Wild West frontier’ territorial opportunities related to export/import of foreign and Ukrainian-made goods. Owing to virtually non-existent trading infrastructure characteristic of the old Soviet economy, a number of SMEs emerged as ‘Reversed Born Globals’ trading houses. They often started at the border regions, as opportunistic individual smuggling-cum-importing operations from Turkey, Poland, Hungary and the Slovak and Czech republics (Williams and Balazh, 2002), Dubai, as well as Russia, other ex-Soviet republics and even China and Western Europe. Nonetheless, some of them have grown into sophisticated importing physical and logistic marketplaces and export/import business areas, dominating whole regions, and typically supplying less expensive consumer goods and second-hand cars across Ukraine, as well as to neighbouring regions of Russia, Belorussia and Moldova (such as the prominent one located near to the port city of Odessa). Another peculiarity is the emergence of ‘barter intermediaries’, described by Polterovic (2000) for Russia, but also characteristic of the Ukrainian business model. After the collapse of the Soviet foreign trade monopoly at the beginning of the 1990s, the commercial banking system was primitive, and routine payment transfers between tightly integrated industrial partners that suddenly found themselves in separate countries could typically take up to several months. With the ensuing hyperinflation, lack of law enforcement and resulting high incidence of fraudulent banking operations, it was often more cost-effective to deliver payments physically, using proverbial cash-filled briefcases than ‘officially’ to transfer money to a ‘foreign partner’s’ account. Industrial enterprises rapidly figured out that transactional overheads for barter operations were far lower than those for the ‘official’ money transfer. As well, for established business partners conducting routine operations within the framework of the old Soviet planning system, the switch to barter operation was only natural, and the transfer cost low. According to Polterovic, the more industrial enterprises that were switching to barter, the easier it was for them to find new barter partners. The coordination effect of such a switch led to the emergence of sophisticated barter chains that, in turn, simplified

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transfer to barter operation of the new industrial enterprises and even led to the emergence of specialized barter brokers. However, access of Ukrainian SMEs to credit capital is poor (a situation which is aggravated by virtually non-existent critical insurance services); commercial leasing is missing, and a shifting political and legal environment, especially as relates to the alterations between privatization and renationalization, all result in steep business investment risks. Methodology Researchers of the new Eastern European economies have to be especially cautious with regard to the reliability and validity of statistical data at their disposal provided by the official government agencies. Central statistical agencies of stable Western democracies typically enjoy a degree of independence from their governments; their long-term scientific credibility is normally due to numerous checks and balances provided by a rich layer of private and academic econometric think-tanks that challenge government data all the time. In contrast, the validity of SMEs’ statistics available from the Ukrainian Government’s sources is by definition quite limited. The country’s business is undergoing a radical shift, and its underfunded official agencies are clearly incapable of transforming themselves on their own to develop the data gathering ways suitable to the new market economy. State-assembled statistical information is indeed available and, in our research, we were trying to use it as much as was reasonable. However, its applicability to the SMEs is often questionable and official sources related to internationalization of SMEs are quite limited. It is well known that the old statistics-gathering methods imposed by the command economy were politically motivated and mainly used by the government’s propaganda machine. They were especially biased against privately owned SMEs, often considered shady, which operated almost exclusively underground (‘tinyova ekonomika’) and were ruthlessly criminalized, especially if engaged in currency exchange operations. It does not help that, even now, both state agencies and the widespread public opinion in Ukraine often treat SMEs with high contempt. In contrast, the underground economy in the West is not necessarily considered a negative economic factor, especially if the state regulatory mechanisms are too rigid and not market-oriented. Consequently, in Ukraine, the existing underground economy, especially of small enterprises, is not statistically accounted for. Numerous sources indicate that the Ukrainian underground economy is quite substantial (Варналій, 2001; Варналій, 2003; Гончарук, 2003; Козоріз, 2003; Kalantaridis, Slava, Sochka, 2003). Although the evaluations are based mainly on indirect evidence, such as the presence of luxury houses and cars, turnover at high-priced stores, foreign travel, and so on, there are also more formal methodologies based on the analysis of cash flows used by the Ministry of Economy of Ukraine (‘Оцінка та аналіз рівня тіньової економіки за підсумками 2004 року’ 2005). More recent anecdotal evidence suggests that some of the old command economy barriers in Ukraine are still widespread. Certainly, the reluctance of small entrepreneurs to declare the true level of their business activity (mainly owing to corrupted bureaucracy and, sometimes, the dangers imposed by the local criminals) prevents credible statistical

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monitoring of SMEs’ exporting activities. For an independent observer of the Ukrainian SMEs, the principal issue is whether it is possible to address the underlying structural economic-business issues based on the limited credible information and without taking any political stand. Conclusions and recommendations Enhancing SMEs’ internationalization is especially important for improving the Ukrainian business climate and trade balance, particularly for the regions that have been concentrating on intensification of international economic cooperation. However, there are significant challenges to carry out research on internationalization of Ukrainian SMEs, such as the following: (a) there are no reliable detailed statistics on SMEs’ involvement in internationalization, so the process is difficult to track; (b) In addition, Ukrainian medium-size enterprises are often counted together with large enterprises, which makes SMEs analysis even more challenging. By serving as agents of change and innovation (Audretsch, 1995), SMEs have an important role for the social structure, regional development and economic growth in the transition economies (OECD, 2002). Even in the US, SMEs were the primary source of the largely unanticipated economic turnaround in the 1990s (Audretsch, 2002). In many Western developed countries, the SME trade internationalization issue, although important, is often treated as ‘tactical’ by the government and society as a whole. In contrast, in the current state of the Ukrainian economy, it is a fundamental socioeconomic issue. Perhaps SME trade internationalization is the only viable way to move the society towards the market economy and to rapidly advance the living standards of the majority of the country’s population. As well, according to Hisrich and Peters (2002), in this day and age it is essential for every growth-oriented entrepreneur to move into international markets. To radically increase international integration of Ukrainian SMEs and to reverse the disturbing reduction in the growth rate of the Ukrainian SMEs involved both in internal and in foreign trade, our recommendations are as follows: 1.

To improve substantially export competitiveness of the Ukrainian SME sector and to fill structural gaps between Ukrainian and foreign partners by the following. (a) Forming international trade information, consulting support and financial assistance infrastructure, especially at large regional centres with high concentration of SMEs. (b) Enhancing state support for attracting foreign and local investments as a part of the industry modernization programme, in particular by creating state innovation agencies and technology parks. (c) Negotiating bilateral and multilateral agreements with other countries, to facilitate cooperation between SMEs and attracting for them international financial, management and technology assistance. (d) Directly supporting SMEs in finding international partners, in organizing joint ventures in the border regions, trade shows, exhibits, information bulletins and conferences. (e) Providing prioritized state assistance to SMEs that are involved in advanced ecology solutions, act as trading intermediaries or specialize in international trade, tourism, management consulting, engineering and marketing.

Internationalization of SMEs in Ukraine (f)

2.

3.

677

Providing small entrepreneurs with free access to legal, commercial, marketing and scientific information, and training them in initiating exporting activities. (g) Using non-governmental organizations, such as chambers of commerce, business centres and incubators, and supporting formation of SME exporting and mutual credit associations, to provide informational, organizational, financial and training/educational support to the SMEs, which would enhance their competitiveness and ease their entering international markets. (h) Forming clusters, especially in traditional and mature industries, as recommended by the UNCTAD Report (‘Improving the Competitiveness of SMEs through Enhancing Productive Capacity’, 2003). The success of the SMEs cluster model is strongly rooted in the local communities and often combines competitiveness and social stability. Areas with consolidated systems of specialized small firms are generally more likely to create the conditions that increase marketability, efficiency and productivity on a long-term basis. (i) Creating a system of foreign trade credits for SMEs, facilitating contacts with the foreign venture funds and individual investors, and supporting innovative forms of SME financing (leasing, insurance, promissory notes, bonds, and so on). (j) Encouraging growth of exporting SMEs in the regions and providing effective state financial assistance to them, given that they are capable of utilizing local resources that might be unprofitable for large corporations, even the ones with similar products. It is imperative to implement a set of effective incentives and economic/fiscal/ regulatory measures, to (a) facilitate transfer of the underground economy into the regulated sector, (b) advance entrepreneur-friendly environment in the regions, (c) Substantiate economic effects for newly introduced regulatory acts that might affect internationalization of SMEs (Варналій, Павлюк, 2004). It is necessary to improve substantially the national statistic-gathering processes and analysis methods, to ensure better monitoring of primary data for the growth dynamics of SME internationalization activities across Ukraine. Taking into account Ukraine’s low level of global economic integration, it is important to employ more detailed indices of the internationalization process for the countries with transitional economies; that is: (a) When calculating internationalization indices for different economic sectors of countries with a transition economy, it is essential to take into account not just the higher-level internationalization indicators, such as creation of sales subsidiaries within the country or in foreign countries, but also more basic types of SME’s involvement in international business, such as export/import activities, licensing, outsourcing contracts and partnerships, creating joint ventures as well as the degree of transition to the market economy in the corresponding country. (b) When evaluating the level of SME internationalization, it is important to differentiate import trade (typical of the transition economies) from the exporting activities. In Ukraine, the main engine of exporting activities is the large industrial sector, whereas smaller enterprises are primarily involved in less productive importing; and there are not enough credible exporting statistics on the mid-size industrial sector to draw definitive conclusions.

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Handbook of research on European business and entrepreneurship (c) To improve reliability of statistical results, it might be necessary to analyse regional patterns of SMEs’ involvement in international activities. In addition, empirical studies would be useful for obtaining reliable results from interviews. (d) Regional differences should be taken into account; for example, in the case of Zakarpattia, and Western Ukraine in general, a significant share of businesses comprise medium-size enterprises. As well, by and large, people possess a more highly developed entrepreneurial spirit thanks to the location of the region as a crossroads of Eastern Europe, the region’s rich political and trading history, and the considerably shorter time as a part of the Soviet Union in comparison to other regions. In contrast, in 2003, 9.5 per cent of all Ukrainian SMEs were located in the Donetsk region in Eastern Ukraine (Статнстичний щорічник Укарїнн – 2003, 2004). The share of SME production in the region was quite low (4 per cent), but the absolute value relatively high, at UAH2.9 billion (Основні показники діяльності підлриємств малого бізнесу Донецької області за 2003 рік, 2004), which puts it in second place in the country, after the city of Kyiv. The inconsistency between absolute value and relative share indicators can be explained by the high concentration of large industrial enterprises in the Donetsk region.

Acknowledgements The authors are thankful to Prof. Léo-Paul Dana, Prof. Vanessa Ratten, Dr Igor Y. Egorov and anonymous reviewers for their encouragement, editorial comments and fruitful contributions to the discussion on the nature of the concepts described in the chapter.

References ‘Аналітична довідка про стан виконання заходів Національної програми сприяння розвитку малого підприємництва в Україні’ (‘A note on the implementation state of the National Program of Development Assistance for small Enterprises in Ukraine’) (2004-06-25), Портал (Portal of the State Committee of Ukraine for Regulatory Policy and Entrepreneurship) (http://www.dkrp.gov.ua/kompred/ control/uk). ‘Бізнес-осередовище в Україні’ (‘Business Environment in Ukraine’) (January 2004), Міжнародна фінасова корпорація (International Financial Corporation) (IFC). Варналій З.С. (Varnalij, Z.S.) (2001), Мале п дприємництво: основи теор ї практики (Small Enterprise: Basic Theory and Practice), Київ: Знання (Kyjv: Znanja), 275 с. Варналій З.С. (2003), ‘Розвиток підприємництва як головний чинник соціально-економічного

розвитку Украни га її регіонів’, Соц ально – економ чн досл дження в перех дний пер од, Випуск 5, ‘Регіональна політика: досвід Європейського Союзу та його адаптація до умов Україниі’, частина l, Львів: ІРД, 81–90. (Varnalij, Z.S. (2003), ‘Development of enterprise as the main

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тку? Приклад швейної промисловості Закарпаття’ Науковий в сник Ужгородського ун верситвту. Сер я ‘Економ ка’, №11, 96–109. (Kalantaridis, K., S. Slava and K. Sochka (2002), ‘Does

Globalization Create Viable Development Standards? On the Example of Zakarpattja Sewing Industry’, Scientific Herald of Uzhgovod University, Economics Series, (11), 96–109.) Козоріз М.А. (2003), ‘Вплив підприємництва на розв’язання соціально-економічних проблем

розвитку регіонів’, Соц ально – економ чн досл дження в перех дний пер од, Випуск 5 ‘Регіональна політика: досвід Європейського Союзу та його адаптація до умов України’, частина 1, Дьвів, ІРД, 188–194. (Kozoriz, M. A. (2003), ‘Influence of Enterprise on Solving Socio-

Economic Problems of Regional Development’, Socio-economic Research in the Transitional Period, (5), ‘Regional Policy: Experience of the European Union and its Adoptation to the Ukrainian Conditions’, part 1, LVIV: IRD, pp. 188–94.) Кузьмін О.Є., Комарницький І.М. (2002), ‘Інфраструктура та її специфіка у сфері малого бізнесу’, Науковий в сник Ужгородського ун верситвту. Сер я ‘Економ ка’, № 11, 55–59. (Kuz’min, O.E. and I.M. Komarnickij (2002), ‘Infrastructure and its specifics in the area of small business’, Scientific Herald of Uzhgorod University, Economics series, (11), 55–9.) Макогон Ю.В. и др. (2004), ‘Зовнішньо економічна діяльність’, Донецьк, Альфар-пресс, 400 с. (Makogon, Yu. V. and others (2004), Foreign Economic Activity, Donetsk: Alpha Press, p. 400.) Макогон Ю.В., В.В. Бакуменко (2004), ‘Развитие инноваций и малого предпринимательства в Украине’, Економ ка промисловост , №1 (23), ISSN 1562–109X, 89–106. (Makogon, Yu.V. and V.V. Bakumenko (2004), ‘Growth of innovation and small entrepreneurship in Ukraine’, Industrial Economy, 1(23). Макогон Ю.В. (2004), ‘Участие Украины в различных интеграционных объединениях:

современное состояние и перспективы’, Проблемы развития внешне конмических связей и

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привлечения иностранных инвестиций: региональный аспект. Сборник научных трудов, Донецк, ДонНУ, 14–28. (Makogon, Yu.V. (2004), ‘Ukraine’s participation at various integration joint ventures: today’s conditions and perspectives’, Development problems of external economic relations and attraction of foreign investments: the regional aspect, Campendium of scientific publications, Donetsk: Don NU, pp. 14–28.) ‘Народне господарство України’ Статистичний щорічник, 1993, (1994),. Київ, Техніка. (‘National Economy of Ukraine’, Annual statistics publication, 1993 (1994), Kyjv: Technika.) ‘Основні показники діяльності підпрнємств малого бізнесу Донецької області за 2003 рік’ (2004),

Економічна доповідь, м. Донецьк: Держкомстат України, Головне управління статистики у Донецькій області, Донецька Торгово-промислова палата. (‘Basic activity indicators of small busi-

ness enterprises of the Donetsk region for 2003’ (2004), Economic presentation, city of Donetsk, State Statistics Committee of Ukraine, Main Statistics Administration of the Donetsk Region, Donetsk Chamber of Commerce and Industry.) ‘Оцінка та аналіз рівня тіньової економіки за підсумками 2004 року’ (2005), Тенденц ї т ньової еконот ки в Україн № 2005-2 (15). (‘Estimates and analysis of the level of shadow economy by the results of 2004’ (2005), Trends of the shadow economy in Ukraine, No. 2005-2 (15), Portal of the Ministry of Economy of Ukraine (http://www.me.gov.ua/control/publish/article). ‘Прямі іноземні інвестиції в Україну на 01.01.2005’ (2005), Держкомстат України. (‘Direct Foreign Investments to Ukraine on 01.01.2005’ (2005), State Statistics Committee of Ukraine (http://www.ukrstat.gov.ua/operativ/operativ2005/zd/ivu/ivu_u/ivu0105.html).) ‘Послання Президента України до Верховної Ради України’ (2004), Київ: Інформаційно-видавничий центр Держкомстату. (‘Message of the President of Ukraine to Verkhouna Rada of Ukraine’ (2004), Kyjv: Information publishing center of the State Statistics Committee of Ukraine.) Слава С. і Калантарідіс К. (2003), ‘Стратегії та механізми міжнародної економічної інтеграції в

контексті сталого розвитку на прикладі швейиої промисловості Закарпаття (Україна) та пеонії (Греція)’, Рег ональна економ ка, -#4, 163–176. (Slava, S. and K. Kalantaridis (2003), ‘Strategies

and mechanisms of international economic integration in the context of steady development on the examples of sewing industry of Zakarpattya (Ukraine) and Peonïa (Greece), Regional economics, (4), 163–76.) Слава С., Сембер С., Завадяк Р. і Сержанов В. (2003), Доцільність і перспективи розвитку швейиої промисловості в Закарпатській обл. у 2004–2008 pp.’, in the Research Report by the Zakarpattia Regional Center for Socio-Economic and Humanitarian Research ‘Науковий зв т на замовлення ЗАТ Ужгородська швейна фабрика та Закарпатської ОДА’. (Slava, S., S. Sember, R. Zavadjak and V. Serzhanov (2003), ‘Goals and development prospects of the sewing industry in the Zakarpatskij Region in 2004–2008’, in the Research Report by the Zakarpattia Regional Center for Socioeconomic and Humanitarian Research, ‘Scientific report on the order of joint-stock company of the Uzhgorod sewing factory and Zakarpatskij ODA’.) Смолбоун Д., Орехова Т.В. (1999), ‘Малый и средний бизнес в контексте регионального

экономического развития’, Материалы конферен$ии Стратегия управления социально кономическим развитием региона на период до 2010 года, Донецк, И ПИ НАН Украины,

82–88. (Smolboun, D. and T.V. Orekhova (1999), ‘Small and medium business in the context of regional economic development’, Materials of the conference, Management strategy of socio-economic development of the region till 2010, Donetsk, IEPI NAN Ukraine, pp. 82–8.) ‘Статистичний щорічник України.2003’ (2004), Київ: Консультант. (‘Ukraine Annual Statistics Publication. 2003’ (2004), Kyjv: Konsultant.) Степанова Т.О. (2000), ‘Место и роль малого бизнеса в кономике Украины’, in Проблемы развимия ВЭС и привлечения иностранных инвестиций: региональный аспект, Сб. науч. тр., Донецк, ДонГУ, 127–129. (Stepanova, T.O. (2000), ‘Place and role of small business in the economy of Ukraine’, in Development problems of external economic relations and attraction of foreign investments: the regional aspect, Compendium of scientific publications, Donetsk, DonSU, pp. 127–9.) ‘Стратегії економічного розвитку в умовах глобалізації’ (2001), Монографія за. ред. д.е.н., проф. Д.Г. Лук’яненко, Київ, КНЕУ, 507–529. (‘Economic development strategies under the globalization conditions’ (2001), Monograph, editor d. e. n., D.G. Luk’janenko, Kyjv, KNEU, pp. 507–29.) ‘Тимошенко берется за малый и средний бизнес’ (16 Мая 2005), (‘Timoshenko is tackling small and medium business’ (16 May 2005), Institute for Competitive Society, (http://www.ics.org.ua/ua).) ‘Товарна структура зовнішньої торгівлі України за 2004 рік’ (2005), Держкомстат України. (‘Commercial structure of the Ukraine’s Foreign Trade in 2004’ (2005), State Statistics Committee of Ukraine (http://www.ukrstat.gov.ua/operativ/operativ2004/zd/tsztt_u/tsztt122004_u.htm).) ‘Украина в цифрах’ (2005), Госкомстат Украины. (‘Ukraine in numbers’ (2005), State Statistics Committee of Ukraine.)

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References Aharoni, Yair (1966), ‘The foreign investment decision process’, Boston, MA: Division of Research, Graduate School of Business Administration, Harvard University. Aldrich, Howard (1989), ‘Ethnicity and entrepreneurship’, Annual Review of Sociology, 16, 111–35. Aldrich, Howard and Catherine Zimmer (1986), ‘Entrepreneurship through social Networks’ in Donald L. Sexton and Raymond W. Smilor (eds), The Art and Science of Entrepreneurship, Cambridge, MA: Ballinger. Antoncic, B. and R.D. Hisrich (2000), ‘An integrative conceptual model’, Journal of Euromarketing, 9(2), 17–35. Aslund, Anders (2005), ‘Betraying a revolution’, Washington Post, 18 May, page A17. Audretsch, D.B. (1995), Innovation and industry evolution,. Cambridge, Massachusetts: MIT Press. Audretsch, D.B. (2002), ‘The dynamic role of small firms: evidence from the U.S.’, small business economics’, 18, 13–40. Carlin, Wendy, Steven Fries, Mark Schaffer and Paul Seabright (2001), ‘Competition and enterprise performance in transition economies from a cross-country survey’, CERT Discussion Paper DP01/01, 16 (http://www.som.hw.ac.uk/cert/wpa/2001/dp 0101.htm). Dubini, P. and H. Aldrich (1991), ‘Personal and extended networks are central to the entrepreneurial process’, Journal of Business Venturing, 6, 306–13. Hisrich, R.D. and M. Peters (2002), Entrepreneurship, New York: McGraw-Hill. Hollensen, S. (2001), Global Marketing: A Market-responsive Approach, 2nd edn, Place: Prentice-Hall Europe. Johanson, J. and L.G. Mattson (1988), ‘Internationalization in industrial systems’, in N. Hood and J.E. Vahlne (eds), Strategies in Global Competition, Beckenham: Croom Helm, pp. 287–314. Johanson, Jan and Jan-Erik Vahlne (1977), ‘The internationalization process of the firm: a model of knowledge development and increasing foreign market commitments’, Journal of International Business Studies, 8(1), 23–32. Johanson, Jan and Finn Wiedersheim-Paul (1975), ‘The internationalization of the firm: four Swedish cases’, Journal of Management Studies, (October), 305–22. Klochko, Y. and N. Isakova (1996), ‘Small business sector in Ukrainian transition economy: achievements to date’, Entrepreneurship and Regional Development, 8(2), 127–40. Maryanchyk, I.V. (2003), Market structure and profitability in a Transition Economy: Ukrainian Case. Economics Education and Research Consortium Working Paper, No. 03/06, Moscow. Mintchev, Vesselin (2001), ‘Barriers to foreign direct investments: managerial perceptions and performance’, Workshop on Foreign Direct Investments in Bulgaria: Alternatives to Reduce Existing Barriers (http://www.csd.bg/news/3FDI-CSD.pdf). OECD (2002), ‘Small business and entrepreneurship’, OECD Economic Surveys, No. 5. Paris: OECD. Oviatt, B.M. and P.P. McDougall (1994), ‘Towards a theory of international new ventures’, Journal of International Business Studies, First Quarter. Polterovic, V.M. (2000), Institutional Dynamics and the theory of reforms. Evolutionary Economics and ‘Mainstream’, Moscow: Nauka. Szabó, Antal (2003), ‘Topic 5. Government SME policy in the context of industrial restructuring: the development of the SME sector in the countries in transition and emerging market economies in the UNECE Region’, in Economic Commission for Europe Workshop on ‘Policy and Regulatory Options for Promoting Industrial Restructuring in ECE Region’, Palais des Nations, 23 April, Geneva. ‘Ukrainian IT-Export Industry Market Research 2003’ conducted by Techinvest jointly with Market Visio/Gartner Group, (http://www.techinvest.com.ua/main.php?lang=en&page=23). Welch, Lawrence and Reijo Luostarinen (1988), ‘Internationalization: evolution of a concept’, Journal of General Management, 14(2), 36–64. Williams, A. and V. Balazh (2002), ‘International petty trading: changing practices in Trans-Carpathian Ukraine’, International Journal of Urban and Regional Research, 26(2), June, 323–42. Zimmer, Catherine and Howard Aldrich (1987), ‘Resource mobilization through ethnic networks: kinship and friendship ties of shopkeepers in England’, Sociological Perspectives, 30(4), 422–45.

PART III CONSTITUENTS OF THE UNITED KINGDOM

39 Business support for internationalization in England Leigh Sear and Robert T. Hamilton

This chapter is about the way entrepreneurs in England are supported into and through the process of exporting. We are concerned primarily to document the ‘supply side’, that is, the nature and coverage of the available support, and then to assess the appropriateness of this against the needs of the internationalizing entrepreneur. It should be noted that the research findings drawn upon in this chapter relate specifically to England, the country that accounted for 87 per cent of all VAT-registered business in Great Britain at the beginning of 2002. In addition, there is a different configuration of provision to support international activity in Wales and Scotland, in terms both of organizations and of the way in which support is delivered. Similarly Ireland has a more distinctive set of initiatives that are covered elsewhere in this volume. There is a wealth of evidence within the academic literature and government statistics that demonstrate that exporting is the predominant mode by which SMEs engage with international markets and trading. Since the mid 1990s, there has been a great deal of debate around the exporting activities of small and medium-sized enterprises (SMEs), in both a regional and a national context. A brief review of the academic and practitioner literature highlights a number of perceived benefits to firms from exporting. These include exposure to differing ways of doing business (Barclays Bank, 1996), additional demand for the product or service of the business (Julien et al., 1997) and opportunities for modifications of existing products and new product development. The successful development of export markets by SMEs has also been recognized by government as critical to enhancing the competitiveness of these businesses and hence to the strengthening of regional and national economies. It is these public benefits – principally the generation of a larger number of more secure jobs – that provide the basis for the substantial expenditure of government funds in the support of private businesses. This is an issue that we return to later in the chapter. In the next section we report on the overall ‘supply-side’ provision of advice and information. We follow this with a discussion of the appropriateness of what is being supplied, given the apparent needs of the export-oriented entrepreneur. The chapter then concludes that an improved fit between what is supplied and what is needed is possible and, if achieved, this will raise the effectiveness of the advice and information provided to exporters. The supply side The government context There are conflicting estimates of how many UK SMEs are actively engaged in exporting, ranging from as low as 3 per cent or around 110 000 businesses (Bank of England, 1999) to over 40 per cent (Grant Thornton, 1999; Small Business Research Centre, 2000). 685

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The government’s estimate is 23 per cent (Small Business Service, 2001) which is perceived by policy makers as too low, especially in comparison to rates of exporting activity within other developed market economies such as France and Germany. In response the government has used public monies to provide a range of services and schemes, at a local, regional and national level, to increase the number of businesses engaging with international activities and enhancing the capabilities of existing businesses which are currently engaged with international trade. Indeed British Trade International continues to commit itself to some challenging performance targets as set out in its Corporate Plan 2002–05. These include the following achievements by 2004: a 30 per cent increase in take-up of information services, the development of 5000 new exporters in England, and at least 50 per cent of established exporters assisted improving their business performance by 2004. Publicly funded business advice and support in England is provided through a network of 45 Business Link offices, managed nationally by the government’s Small Business Service (part of the Department of Trade and Industry, or DTI). Each Business Link office is franchised by the Small Business Service to provide a range of support services to local SMEs. The system is designed to be responsive to the needs of local SMEs and facilitate access to other providers of support, particularly private sector organizations such as banks, accountants and specialist consultants. Until April 2001, publicly funded export provision was delivered through the Business Link network, via a network of Export Development Counsellors and DTI secondees. Since April 2001, however, this has been delivered by Trade Partners UK (or TPUK), which is the export development part of British Trade International, the government agency (sponsored by DTI and the Foreign and Commonwealth Office) responsible for promoting different aspects of international trade. In order to promote export provision as part of a holistic business support service, international trade advisers are located in the offices of the majority of Business Link offices. In addition, a wide array of services are available from private sector organizations such as those of accountants, solicitors, bank managers, freight forwarders and insurance brokers. To this list we could also add the less formal network made up of other exporters, customers and suppliers. There are, then, a wide range of organizations, public and private, providing advice, consultancy, information and training to SMEs wishing to export and those businesses already exporting. Local and regional contexts: coverage and depth of export provision In addition to practitioner guides, which provide descriptive insights into the type of organization and support available to SMEs wishing to internationalize, there is an academic literature exploring the availability and configuration of various types of export service and support. At a general level, this literature has focused on evaluating schemes or provision at a national level (for example, National Audit Office, 1996) or different types of support initiative or intervention such as export training (Carrier, 1997). There are relatively few studies which explore the nature of the variation in provision in the different regions of England or the degree of fit between the needs of exporting SMEs and provision (McAuley, 1993). Wilson’s Review of Export Promotion (1999) did stress, however, that the first step in developing business-driven forms of export provision should be an extensive mapping of provision that highlighted the similarities and differences between regions in the depth and coverage of support, and the extent of any gap between the expectations of the policy makers and the actual needs within the sector.

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The available academic literature and insights from a recently completed audit1 of export provision for Trade Partners UK (Sear et al., 2001) highlight that, at a local and regional level, the support infrastructure for exporting is complex, involving a large number of players in a series of multiple networks and relationships. Amongst this diversity, however, the following eight general types of organization operating as export support providers can be identified: 1.

2. 3.

4. 5. 6. 7. 8.

Government bodies and agencies incorporating regional and national government bodies and supporting the funding of trade services, such as TPUK. This structure is not fixed. For example, during 1996, responsibility for the delivery of export services was transferred from the Overseas Trade Services to Business Link (National Audit Office, 1996; Atherton and Sear, 1997a). Recently the rebranding of British Trade International as TPUK has created a number of ambiguities, especially in terms of the focus of government support. Regional agencies such as Regional Development Agencies (RDAs) that have trade development as one of their strategic activities. The Business Link network which bridges, to some extent, the regional–local divide in support configuration, in that it is a sub-regional provider but operates as an interface between local and regional support programmes. Local authority economic development units (EDUs) who focus on trade development and exporting as a means of job and wealth creation. Chambers of commerce which operate largely at a sub-regional or local level. Business federations, associations and institutes which are generally business-led but with some support and input from the public or quasi-public sector. Private sector providers supporting different types of export activity. A broad range of other providers of support, such as enterprise agencies and universities, which are involved at a local, regional and national level and offer varied services. Such agencies tend to have somewhat different, and unclear, relationships with the above groupings of providers within and between regions.

The extent to which these different types of organizations are involved in the provision of export services varies between each region, although the role and type of service provided by each grouping of providers is somewhat similar throughout England (Johnson et al., 2000). For example, chambers of commerce tend to provide a plethora of services including advice, information, training and documentation services, while local government economic development units focus on the provision of information and direct financial assistance. There is, however, a degree of flux and interaction between these different organizations, at all levels, that blurs organizational and network boundaries. For example, the development of the Small Business Service franchises has altered the configuration of export services, at a local level, within several of the regions. Such changes and turbulence within support structures create issues to be resolved and present challenges to business support organizations in developing coherence within the configuration of provision that makes sense to the business community (ibid.). For example, since the mid-1990s, there have been three major changes to the nature of central government support for exporting, which has hindered attempts to integrate national schemes, such as market research and language services, into the portfolio of local providers and clarify confusion within

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the business community as to the accessibility and availability of different schemes (Leonidou and Adams-Florou, 1999). More specifically four general observations can be made about the coverage and type of exporting support available to SMEs in England. First there are a plethora of advisory, information and ‘other’ related types of service in each English region. For example, over 40 per cent of organizations in each region provide some form of advisory or information service (see Table 39.1). The majority of such provision is provided by publicly funded agencies such as Business Link, government agencies and other types of providers such as enterprise agencies. In some northern regions, there can be up to 10 different publicly funded and quasi-public agencies, ranging from TPUK to universities and chambers of commerce, providing export advice. Other services tend to be provided by the private sector and include export management, freight forwarding, logistics management and market and product representation services. These services tend to be offered as chargeable services and are aimed at assisting SMEs with the transaction-focused part of international trading activity, whether this be exporting or importing. Secondly Table 39.1 also highlights that there is a relative lack of financial provision, training and networking services. In five English regions, less than one organization in five provides some form of direct or indirect financial provision. If financial assistance is available at a local, regional or national level, it tends to be provided by two types of provider: private finance providers and/or local government economic development units. The two most common forms of financial assistance are financial subsidies, often in the form of export vouchers, which businesses can use to offset the cost of advice or training from another provider; and grants which are provided to cover the costs of undertaking market research or translating a brochure into a foreign language. In terms of available training offerings, on closer inspection it emerges that the majority of such provision is designed to provide an awareness and develop an understanding of how to complete export documentation, income terms, letters of credit and export procedures. However there are relatively few offerings that help businesses to develop the capabilities and competencies required to manage the different activities and tasks involved in developing a new market and exporting (Atherton and Sear, 1997b). Thirdly there are a number of differences in the configuration of export provision between northern and southern regions of England.2 There is a greater propensity for organizations in the northern regions to provide advice, consultancy and information services, whilst providers in the southern regions had a greater propensity to offer other types of service. To an extent, this difference reflects the different configurations of support and interorganizational relationships between the regions. Different regions have different business bases and support infrastructures which tend to influence the point of delivery of assistance (Robson et al., 2000). In the majority of northern regions, for instance, publicly funded agencies can use European monies to underpin a range of export support services that may overlap existing provision. In southern regions, Bennett and Smith (2001) and Sear et al. (2001) have noted that there is a more active private sector providing different types of specific service, such as market research consultancy or trade representation service, to SMEs who are willing to pay for niche-focused services. Finally there is evidence of a qualitative difference in the role that publicly funded and private sector organizations perform in helping SMEs to export. Publicly funded agencies have a greater propensity to adopt process-focused roles, whilst private sector

689

51.8 18.5 11.1 44.4 14.8 25.9 59.2

London 47.5 30.0 17.5 50.0 55.0 47.5 62.5

South East 51.4 48.6 35.1 67.6 45.9 37.8 62.2

South West 58.1 48.4 29.0 74.2 51.6 45.2 54.8

East Midlands 83.9 58.1 48.3 71.0 51.6 45.1 61.3

West Midlands

Percentages add to more than 100 because most providers provide a range of services.

42.3 38.4 19.2 50.0 30.7 34.6 76.9

Advice Consultancy Finance Information Networking Training Other

Note:

East

Percentage of providers in each region offering each type of service

Service

Table 39.1

54.4 54.4 29.8 42.1 21.1 22.8 33.3

North East

75.6 73.1 14.6 63.4 46.3 43.9 63.4

North West

56.8 62.2 8.1 40.5 64.7 48.6 45.9

Yorkshire & Humber

74.2 35.5 51.6 74.2 29.0 12.9 61.3

England

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organizations tend to perform more niche focused roles. In part, this difference reflects the type of services provided by private and publicly funded agencies. Private sector providers tend to provide a portfolio of discrete services to exporting SMEs, around one or two areas of expertise, that are used by businesses on a commercial basis. In contrast, in certain northern regions, publicly funded agencies such as Business Link reported providing 12 or 13 services and adopting two or three different delivery roles. This multiplicity of roles is not problematical per se, but does raise an issue in terms of the ability of the organization to match the role required by the business to the role provided by the agency. These variations in institutional support services can, however, generate a sense of confusion or inconsistency among potential, or actual, business users, particularly if the businesses are located near to an administrative border or have facilities in different areas. This was particularly an issue in regions where agencies have different levels of access to national and European government funding to underpin the design and development of service provision. Supply and demand: the appropriateness of export support and provision While the supply side is elaborate and complex, it does remain ‘piecemeal’ (Stanworth and Gray, 1991, p. 23) and ‘fragmented’ (Bennett and Robson, 1999, p. 177) with a number of differences in the nature of provision both within and between the English regions. Other commentators such as Julien et al. (1997) have noted that the availability of significant levels of advice and guidance to support the development of exporting SMEs does not necessarily translate into commensurate levels of usage by small businesses. Atherton and Sear (1997a) and Carrier (1997) suggest that this difference between supply and expressed demand reflects weaknesses in the appropriateness of export offerings. There have been very few studies that have assessed the needs of SMEs in relation to the supply of support being provided (McAuley, 1993). It is important to highlight this lack of considered insight bearing in mind the current discourse within business support agencies on the need to develop demand-driven forms of support. For example, the Wilson Review (1999, p. 5) recommends that ‘the strategy and objectives of the new operation [TPUK] should be clearly based on business needs’. Gibb (1997) suggests that ‘appropriateness’ can be measured by the degree to which the support reflects the business development process, as experienced by the business itself. This implies that the role of support interventions is to assist the business in satisfying key ‘how to’ needs and another factor critical for success is to ensure that the provider understands the distinct culture of the client business and can operate with credibility in that environment. This ability to assimilate with the context of individual SMEs is likely to be most difficult for those coming from careers and training in large formal organizations (Dalley and Hamilton, 2000). A recent audit of export provision by Sear et al. (2001) highlights that the majority of provision within England focuses on the ‘front-end’ activities of the exporting process such as researching the market and establishing a local presence (see Table 39.2). This reflects a supply-side perception that the relatively low level of exporting activity within the SME community reflects a lack of business awareness of exporting opportunities and how to develop new markets (CBI, 1996). This perception has manifested itself in support organizations providing a range of advisory and information services designed to assist

691

50.0 57.6 53.0 42.3 69.2 65.3 23.0 3.8

DMC RM ELP Selling OF S&D Strategy Financing

51.8 51.8 44.4 25.9 44.4 48.1 11.1 11.1

London 45.0 52.5 52.5 55.0 52.5 55.0 22.5 10.0

South East 54.1 64.7 56.6 29.7 54.1 43.2 27.0 8.1

South West 64.5 83.9 67.7 29.0 38.7 48.4 25.8 3.2

East Midlands 61.3 77.4 71.0 64.5 45.2 51.6 35.5 9.7

West Midlands 24.6 59.6 78.9 52.6 50.9 35.1 15.8 8.8

North East 56.1 65.9 61.0 43.9 65.9 39.0 12.2 7.3

North West

54.1 70.3 73.0 32.4 59.5 32.4 24.3 10.8

Yorkshire & Humber

25.8 54.8 45.2 71.0 64.5 41.9 12.9 58.1

England

Note: DMC – developing motivation and confidence; RM – researching the market; ELP – establishing a local presence; OF – Order fulfillment; S&D – Shipping and delivery.

East

Percentage of providers in each region catering for each stage of the exporting process

Service

Table 39.2

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SMEs in finding new customers and understanding conditions in certain markets and sectors. Such provision is premised on a notion that there are available opportunities for businesses to engage with international trade, as opposed to a lack of skills within the business to address and take advantage of these opportunities (Carrier, 1997). There is, however, a major concern with this support focus on the early stages of the exporting process, which highlights the particular nature of exporting activity in small businesses. Atherton and Sear (1997b) and Chetty and Hamilton (1996) highlight the fact that, during the initial stages of exporting, businesses tend to focus on selling rather than on researching the market and establishing a local presence. This is because ‘the development of a new market tended to be transaction-led, i.e. in response to a selling opportunity, rather than planned’ (Atherton and Sear, 1997a, p. 1060). As the selling activity is consolidated, however, businesses tend to increase their formal, and purposive, researching of the market and start to develop more considered forms of local presence. Therefore the focus of the majority of publicly funded agencies on helping new and inexperienced exporters to research the market and establish a local presence does not reflect the initial entry point into exporting, via selling. In addition, Julien et al. (1997) suggest that the appropriateness of export offerings can be ascertained by exploring the degree to which services are aimed at different groupings or types of exporting SMEs. Both the Wilson Review (1999) and Sear et al. (2001) highlight the point that there is a tendency for support organizations throughout England to provide services that can be used by any type of exporting business. In all of the English regions, except one, over 75 per cent of the organizations surveyed by Sear et al. (2001) responded that they did not segment service offerings by the key characteristics or needs of the exporter or would-be exporter (see Table 39.3). The lack of segmentation reflects the following: ●

●

●

The aims and objectives of the organizations required services to be provided to as many SMEs as possible and hence achieve ‘visibility’ within the market place. This reflects in part the way in which the performance of business support organizations is ascertained and measured. There will be a number of output, as opposed to outcome-related targets for programmes of support and specific initiatives upon which funding is levered (Priest, 1998; Johnson et al., 2000). These will typically include the number of exporters assisted, number of services sold and number of jobs created. The role of the agency did not necessitate the segmentation of the market because the agency is largely approached by SMEs to provide a general advisory or information service that negates the need to act in a diagnostic manner. There was a lack of appropriate data on the level and nature of exporting activity within the locality which could be used to segment the market and assist in prioritizing which segments of the market to support. The Wilson Review (1999) found that a lack of market intelligence and data was one of the major barriers to being able to develop services that meet the needs of different types of exporting business.

If organizations within the English regions do segment the exporting SME market, they tend to do so by addressing SMEs in certain sectors or promoting exporting activity in

693

92.3 7.6 7.6 19.2 11.5 3.8

East

85.1 3.7 – 22.2 3.7 3.7

London 90.0 2.5 7.5 27.5 5.0 –

South East 78.4 16.2 10.8 24.3 5.4 2.7

South West 77.4 3.2 9.7 22.6 19.4 3.2

East Midlands

Percentage of providers using each segmentation strategy

None Size Match Sector Experience level Geographical area

Service

Table 39.3

77.4 9.7 16.1 32.3 9.7 –

West Midlands 94.7 17.5 5.3 19.3 5.3 7.0

North East

65.9 4.9 4.9 17.1 4.9 7.3

North West

59.5 – 21.6 37.8 21.6 –

Yorkshire & Humber

67.7 16.1 12.9 41.9 – –

England

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certain markets. The focus on supporting export activity in certain sectors reflects the emphasis placed on sectoral and market development by TPUK, the government offices and the Regional Development Agencies as a strategy for regional development (Robson et al., 2000). On closer inspection, however, there is a degree of tension and overlap between local, regional and national priorities in terms of which sectors are important to local and regional competitiveness. This raises the issue of how these different priorities can be managed into an effective and deliverable programme of support for sector development. The findings on the lack of segmentation strategies used by agencies in each of the regions is interesting in the context of the emphasis within regional international trade plans upon the need for TPUK to work with those businesses new to exporting or inexperienced in managing the exporting process. As noted above, there is a perception within the support network that too few SMEs are engaged with exporting. Interestingly Table 39.3 highlights that, on average, approximately one organization in 10 uses either size or level of experience and expertise in exporting as a criterion for segmenting needs. With the recent introduction of Passport to Export by TPUK, as a gateway into provision for new and inexperienced exporters, there may now be less difference between the rhetoric and practice of government engaging with new exporters. A clear case can be made for government intervention with new exporters, in that such businesses would either be unwilling or unable to pay for services that may assist them in developing overseas markets or international activity. This has been used as a case for justifying the use of public monies and adding value to the activities of private sector providers. There is,however, both empirical and anecdotal evidence to suggest that export advisers tend to work with more experienced exporters, who may be easier to identify and engage with, and more willing to pay for the provision of specific services. This tension is evident in international trade plans which attempt to balance encouraging greater numbers of businesses to export with greater levels of exporting activity from existing businesses. Developing effective exporting support in England The above review of academic and practitioner literature and empirical studies of the nature and configuration of export support highlights the fact that there are a number of key similarities in provision between each region in England, especially in terms of the coverage and depth of provision. Although individual organizations in each of the regions are operating under unique circumstances, because of variations in their internal structure and their external environment, a number of key challenges and opportunities emerge that have implications for local, regional and national support agencies, such as TPUK, in terms of developing effective exporting support and provision. The first challenge relates to resolving the key gaps and concentrations in provision. Across England, the extensive provision of advice and information and other services suggests that this is considered the most appropriate form of support. However this raises a question concerning whether this configuration of provision reflects a set of particular customer needs and local/regional priorities or represents a lack of differentiation and overlap. Similarly the observed gaps in financial and training provision can be seen as both positive, where services are not being delivered because there is no or minimal demand, and negative, where gaps in provision are problematical in that they indicate a lack of

Business support for internationalization in England

695

response to market needs or demands. Such concerns can only be resolved by comparing and contrasting audits of supply-side provision against ‘audits’ of the needs of exporting SMEs. Such a comparison would provide information that could be used by local, regional and national agencies to identify the requirements of exporting SMEs and the responses required to satisfy the ‘how to’ needs of exporting SMEs. While there are numerous studies of the barriers faced by SMEs in exporting and developing overseas markets (see, for example, Ibeh, 2000), there are few studies that have explicitly explored and assessed the developmental needs and requirements of exporting SMEs. Indeed, even in the 1980s, it was concluded that ‘little is known [about] how well demand (firms’ need) for support and supply (assistance offered) actually match’ (Seringhaus, 1987, p. 27) and, as noted above, the Wilson Review (1999) saw the continuing lack of such information and intelligence as a major barrier to being able to segment effectively the SME market and offering tailored provision. Another key challenge for support agencies, especially publicly funded agencies, is clarifying what is the most appropriate alignment of support, both geographically and between different types of support provider. In terms of the latter, Sear et al. (2001) highlighted that there is a perception amongst providers of export that the private sector is better able to tailor their offerings to different types of exporting SMEs, by addressing the immediate problems and opportunities encountered by the business. Therefore a problemfocused role or opportunity-driven service is provided to meet the ‘how to’ needs of the business. The lack of targeting and segmentation in the majority of publicly funded offerings, especially advice and information services, would imply that there is a lack of differentiation and hence overlap and competition between publicly funded and private sector provision. To ensure that publicly funded services do not continue to displace and duplicate private sector offerings, there is an issue concerning how publicly funded provision can add value to private sector provision. One key issue here is to deal with the higher level of trust that entrepreneurs have in the advice that they pay for from the private sector providers (Bennett and Robson, 1999). Previous research on business links and personal business advisers has highlighted that there is a role for publicly funded agencies in providing a process management role (Sear and Agar, 1996). Despite the current rhetoric within international trade plans and Small Business Service (SBS) documentation concerning the need for advisers to adopt a process facilitation or management role, as opposed to a more traditional counselling or consultancy role, there is evidence that advisers are encountering a number of difficulties in embedding such a role within the business community (Mole, 2002). In part, this reflects the nature of the targets used by funding agencies to determine the performance of business advisers (Priest, 1998). Unlike a counsellor or consultant, the key aim of a process management role is to develop the skills of the business owner–manager and export managers to manage the export process themselves. In so doing, publicly funded agencies would help the business to manage the risk, uncertainty and complexity associated with exporting and developing new markets (Chetty and Hamilton, 1996). There are certain key skills or attributes required by a process manager (for example communication and influencing skills and networking abilities) that could be translated into a set of competencies that would underpin the development of a continuing professional programme for export advisers and counsellors. This programme would ensure that export advisers would possess the skills required to perform a process management role,

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but also develop local and specialist knowledge required to keep up-to-date with businesses who are engaging with and managing the exporting process. Despite TPUK introducing centres to assess the abilities and knowledge possessed by international trade advisers within each region, there is still no national framework by which to accredit continuing professional development for international trade advisers within England. This would be part of a process of ensuring that advisers have the abilities and skills required to work with exporting SMEs to address their needs and requirements (Mole, 2002). The final challenge for support organizations relates to the mismatch between the focus of support and the exporting process as encountered by SMEs. Most of the providers had no segmentation strategy and those that did tended to favour segmentation by sector. The majority of publicly funded provision is concerned with early stage activities such as locating customers and identifying export opportunities for businesses via market research services. However, when a business starts to move into new export markets, the focus is predominately on more transactional (developmental) activities. Therefore there is a difference between the way the support network has conceptualized the process by which a small business starts to sell in an export market and the actual experience of this by the business. Ultimately this difference is one of an emphasis on trade promotion as opposed to trade development. The majority of publicly funded provision is concerned with trade promotion, in particular finding customers and identifying export opportunities for businesses via market research services. As a result the general focus for much of the new market development support is formal and impersonal when the preferred entry point into using support for the small business is informal and personalized (Atherton and Sear, 1997b). How can the interaction between these two approaches be balanced? One starting point is to recognize that small business owner–managers will have vastly different levels of experience in developing export markets and hence different needs in terms of support. For example, the entry point into developing new markets will be different for starter or inexperienced exporters, in comparison to global, or expert, exporters. These different types of business will have different characteristics, encounter different barriers and challenges and hence have different requirements and developmental needs over time. In Table 39.4 we outline a framework that relates a set of areas of ‘need to know’ for the owner–manager or business to the level of experience in managing the exporting process. Note too that the exporting process is sales-led, as this does seem to be the way in which SME managers actually activate the process. The implication for support organizations is that support is most effective when it is aimed at assisting businesses with different levels of experience and ‘know-how’ of the exporting process. The specificity of the support to the emerging challenges facing the owner–manager is crucial and cannot be achieved with a bland undifferentiated service. Segmenting on the basis of experience also serves to focus directly on the needs of the key people involved, the owner and senior managers of the SME. It is the motivation and performance of these individuals that will make or break any foray into a new export market. In addition, Table 39.4 can be used to identify which agencies can address different types of need. For example, while the private sector is best placed to assist more experienced businesses with fulfilling orders and shipping and delivery through the provision of focused services, public agencies could work with the less experienced businesses to develop basic systems to underpin the selling and transaction activity.

697

Derived from Atherton and Sear (1997a).

Raise awareness of other markets Identify selling opportunities

Researching the market

Source:

Not applicable (at this stage)

Establishing a local presence

Not applicable

Fulfilling orders

Not applicable

Not applicable

Shipping and delivery

Selling

No experience

Increase understanding of the market and of competitors, agents and partners

Develop structure directly related to selling

Maximize margins Be aware of negotiating and culture differences

Based on existing business systems Recognition of need to refine current selling approach/selling

Development of basic system

Inexperienced

Segmenting support needs by experience level

Export process

Table 39.4

Find diversification and new market opportunities

Expand local presence to wider market development activities

More emphasis on generating own sales Improvement of negotiating skills

Development of tailored order fulfilment system

Refining of system internally Search for best external support

Experienced

Find optimum marketing and distribution options Transfer ‘know-how’ between markets

Consider alternative longerterm options

Shift to marketing and profile development Sensitize to local environment

Use of order fulfilment/selling systems to gain market/ customer knowledge

Development of closer links with shipping/delivery organizations Consideration of alternate channels of distribution

Expert

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Conclusions We have argued that there is a need to improve the fit between the abundant supply of advice and information and the effectiveness of this in stimulating more exporters and more exports. There are numerous models of internationalization through market development and some consensus on how SME owner–managers experience this process. While there is no shortage of advice and support for potential and active exporters, there is a fairly low uptake of this, particularly from public sector providers, and the overall effectiveness is problematic. The key to effectiveness lies in understanding that people, the owners and key managers, are at the heart of any SME exporting initiative. It seems to follow that the supply of advice needs to reflect the differing needs of these individuals as these are determined and changed by their experiences in international markets. The specificity of the advice provided to the needs of the business is the crucial determinant of effectiveness. This need for specificity, however, stands in some contrast to the generic and impersonal provision from the public sector sources. The real dilemma that these public providers face is the need to be able to claim, in the interests of their accountability, that a large number of businesses have indeed been helped by their offerings. From this point of view, a more selective approach from their standpoint would be seen as much more difficult to justify, given the current scale of their activity. However we do not think that some segmentation along the lines we have indicated need lead to the neglect of a large number of client businesses. We do think that such an approach will lead to much more effective outcomes for the businesses that are involved. Notes 1. The authors would like to stress that the views expressed in the chapter are their own and do not necessarily reflect the views and attitudes of Trade Partners UK. 2. For the purposes of this paper, the northern regions consist of the East Midlands, North East, North West, West Midlands and Yorkshire and the Humber. The Eastern region, London, South East and South West are classified as southern regions.

References Atherton, A. and L. Sear (1997a), ‘Support for the exporting SME: current configurations of provision in the North-east of England’, paper presented to the 20th National ISBA Small Firms Policy and Research Conference, 19–21 November, Belfast. Atherton, A. and L. Sear (1997b), ‘Working within the global economy: insights into the internationalisation process in North-east England’, paper presented to the 27th efmd European Small Business Seminar, 17–19 September, Rhodes. Bank of England (1999), Smaller Exporters: A Special Report, London: Bank of England. Barclays Bank (1996), Realising Your Export Potential,Coventry: Barclays Bank. Bennett, R.J. and P.J.A. Robson (1999), ‘The use of external advice by SMEs in Britain’, Entrepreneurship & Regional Development, 11(2), 155–80. Bennett, R.J. and C. Smith (2001), ‘The influence of location and distance on the supply of business advice’, paper presented to the 24th ISBA National Small Firms Policy and Research Conference, November, Leicester. Carrier, C. (1997), ‘The training and development needs of owner-managers of small businesses with export potential’, paper presented to the 42nd World ICSB Conference, 20–22 June, San Francisco. CBI (1996), Trade Secrets: Maximising Export Potential in SMEs, London: Confederation of British Industry. Chetty, S.K. and R.T. Hamilton (1996), ‘The process of exporting in owner-controlled firms’, international small Business Journal, 14(2), 12–22. Dalley, J. and R.T. Hamilton (2000), ‘Knowledge, context and learning in the small business’, International Small Business Journal, 18(3), 51–9. Gibb, A.A. (1997), ‘Small firms training and competitiveness: building upon the small business as a learning organisation’, International Small Business Journal, 15(3), 13–29.

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Grant Thornton (1999), European Business Survey, London: Grant Thornton. Ibeh, K. (2000), ‘Internationalisation and the small firm’, in D. Jones-Evans and S. Carter (eds), Enterprise and Small Business: Principles, Practice and Policy, London: Addison Wesley-Longman. Johnson, S., L. Sear and A. Jenkins (2000), ‘Small business policy, support and governance’, in D. Jones-Evans and S. Carter (eds), Enterprise and Small Business: Principles, Practice and Policy, London: Addison WesleyLongman. Julien, P.A., A. Joyal, L. Deshaies and C. Ramangalahy (1997), ‘A typology of strategic behaviour among small and medium-sized exporting businesses: a case study’, International Small Business Journal, 15(2), 33–50. Leonidou, L.C. and A.S. Adams-Florou (1999), ‘Types and sources of export information: insights from small business’, International Small Business Journal, 17(3), 30–48. McAuley, A. (1993), ‘The perceived usefulness of export information sources’, European Journal of Marketing, 27(10), 52–64. Mole, K. (2002), ‘Business advisers’ impact on SMEs’, International Small Business Journal, 20(2), 139–62. National Audit Office (1996), Overseas Trade Services: Assistance to Exporters, London: HMSO. Priest, S. (1998), ‘Business link SME services: targeting, innovation and charging’, Environment and Planning C: Government and Policy, 6, 177–94. Robson, B., J. Peck and A. Holden (2000), Regional Agencies and Area-based Regeneration, Bristol: The Policy Press. Sear, L. and J. Agar (1996), A Survey of Business Link Personal Advisers: Are They Meeting Expectations?, Durham: Durham University Business School. Sear, L., M. Dodd and I. Doole (2001), ‘An audit of export services in england; developing business focused support’, Small Business and Enterprise Development Conference, University of Leicester, 22–23 March. Seringhaus, R. (1987), ‘The role of information assistance in small firms’ export involvement’, International Small Business Journal, 5(2), 26–36. Small Business Research Centre (2000), British Enterprise in Transition, Cambridge: Cambridge University Press. Small Business Service (2001), ‘SBS Omnibus Survey’, Autumn, London, Department of Trade and Industry (access from www.dti.gov.uk). Stanworth, J. and C. Gray (eds) (1991), Bolton 20 Years On, London: Paul Chapman. Wilson, R. (1999), The Review of Export Promotion, London: Department of Trade and Industry/Foreign Commonwealth Office.

40 Supporting SMEs in Scotland: strategies for internationalizing Mike Danson, Ewa Helinska-Hughes, Michael Hughes and Geoff Whittam

Introduction Scotland is a constituent part of the United Kingdom that also comprises England, Wales and Northern Ireland. Although Scotland is not a sovereign state in her own right, she is very much an independent nation with considerable political and economic autonomy. The Scotland Act of 1998 reinstated the Scottish Parliament after almost three centuries and returned power for Scots self-governance in areas of devolved competence over domestic affairs. However, the Scottish legal system is the consequence of almost 1000 years of Scottish history and was one element of the Scottish institutional structure that remained independent. The provisions of the Scotland Act set out the legal framework for Scottish devolution within the UK. Devolution for Scotland has all the dimensions of regional autonomy, namely, administrative, legislative and executive powers over domestic social, economic and political arenas (Balci, 2003). Scotland is classed as a small country with a population of 5.1 million. This is an important dimension to be considered when addressing regional economic development policy (Felsenstein and Portnov, 2005), assumptions about SME internationalization processes, and SME internationalization support measures, as discussed later. Despite its relatively small size and an economic performance that has been below the UK national average during the past few decades, the Scottish economy did register improvement throughout the 1990s. In 1997, Scottish GDP was estimated at £56.2 billion (at current prices) which accounted for 8.3 per cent of UK GDP as a whole (Storie and Horne, 1999) and rose to £69.1 billion in 2001 (Scottish Executive, 2004a). The relative strength of the Scottish economy in recent years contrasts with a prolonged period of previous decline in several important ways. Scotland can be divided into several sub-regions, each of which has been shaped by deep structural problems. The Central Belt area delineated by the Glasgow–Edinburgh axis, and containing a substantial part of Scottish population and economic activity, has suffered for decades from contraction in its traditional areas of economic activity such as manufacturing, iron and steel production, and coal mining. This decline has also affected the southern, rural areas of the Borders and the South West. By contrast, the northern part of Scotland, the Highlands and Islands, has been typified by underdevelopment and reliance on rural activities. With heavy industry in decline, the high-technology Silicon Glen area with an emphasis on electronics developed quickly in response to a major inward foreign direct investment attraction policy initiative established by the regional development agency (Scottish Development Agency, now restructured as Scottish Enterprise). The increasing dominance of electronics was seen as a solution for the decline in traditional industries in the Central Belt. However, the dependency on electronics manufacturing hit Silicon Glen hard from 2000 onwards, with 700

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significant disinvestments and relocations of major electronics firms, primarily to SE Asia, China and the EU candidate countries of Central and Eastern Europe. Five years on, there are promising signs that this process has abated; but also there is the recognition that the Scottish economy needs to diversify away from its dependence on non-indigenous electronics and manufacturing in general, and encourage its endogenous growth more vigorously. This forms a major plank in the current regional economic development policy to support the growth of existing SMEs, particularly in terms of their potential to internationalize via exporting. In spite of the prolonged economic difficulties in the region, some strong industrial activities have been maintained. The service sector dominates, now providing 79 per cent of all jobs in Scotland (excluding self-employment), while manufacturing has been declining steadily and only accounts for 11 per cent of jobs in Scotland (Scottish Executive, 2004a). The finance and food and drink sectors (especially whisky) have retained their strong positions both in export and in employment terms. Tourism has also helped to sustain a certain level of employment, particularly in the rural parts of Scotland. After the massive job losses of the early 1980s, employment rose through the rest of that decade in Scotland and on into the 1990s, mostly through increasing rates of part-time employment, and especially amongst women in the service sector. Consequently, the Scottish employment rate is the highest ever, while the ILO unemployment count is at the lowest level since June 1975. The latest labour market statistics for Scotland show unemployment continuing to fall and employment to rise (Scotland Office, 2005). Significant variations exist in economic performance across the Scottish regions with economic activity, employment, earnings and GDP per head tending to be highest in the North East, Edinburgh and those suburban localities which benefit from urban functions, such as East Renfrewshire. Owing to Scotland’s localized economic growth, significant regional disparities have become more apparent (Newlands et al., 2004). For example, the cities of Edinburgh, Glasgow and Aberdeen and Grampian region (with its high concentration of oil and gas activity) have per capita incomes above the UK average. By contrast, incomes are lower in the rural areas of the South West, and the Highlands and Islands. Given the substantial economic differences within Scotland, ranging from rural areas in the north to the high concentration of manufacturing in the Central Belt, significant variations in enterprise size and structure might be expected. The nature and concentration of Scotland’s industries in the Central Belt has meant that its enterprise structure was skewed towards large firms. Nonetheless, in both Scotland and the UK as a whole the majority of enterprises are small (over 98 per cent in Scotland and over 99 per cent in the UK in 1997; Campbell and MacDonald, 1999). Small businesses account for an overwhelming majority of all enterprises, with the largest proportion of small firms being sole proprietors, partnerships or small family businesses with no employees. This feature of Scotland’s business ownership structure has an important impact upon SME internationalization behaviour. Also, when compared with the UK as a whole, Scotland has experienced a relatively low enterprise birth rate (by population). This is mainly due to a lower number of start-ups rather than other factors such as the closure rate (Fraser of Allander, 2001). Therefore, the key issue for Scotland’s SMEs and perhaps those in other small states is to forge a link between economic development policy and the support for growth of endogenous SMEs in successful sectors in order to promote employment through internationalization.

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The rest of this chapter is as follows: next we introduce the current debates on the roles of SME internationalization in economic development by exploring the theory and literature. Section 3 introduces the methodology applied in this study and Section 4 provides further detail on the exporting behaviour and internationalisation issues facing Scottish SMEs in particular. The strategies, structures and practices to support internalisation in Scotland are examined and analysed in Section 5 while Section 6 discusses directions for future research and offers a concluding overview. Theory and background of study SMEs and economic development Recent Scottish economic development policy has attempted to support the growth and internationalization of small and medium enterprises (SMEs) as a key component of Scotland’s overall strategy to cope with major shifts in its business environment (Scottish Executive, 2001). The recent enlargement of the European Union is posing a major challenge to large firms and the SME sector as their competitiveness is under threat but becoming even more significant (Voerman et al., 1999). This is all the more pressing in the case of small economies such as Scotland because of significant changes in investment flows and trade patterns (Danson et al., 2002) and the subsequent pressure on regional economic development policy (Felsenstein and Portnov, 2005). This may well revive the interest in the complexities of small states and their economic and corporate structures, especially in the context of ever-expanding supranational entities such as the European Union. However, there are a confusing number of definitions for small and medium-sized firms, and there is often a lack of precision in the analysis of the relative importance of each sub-category within an economy. This is particularly important with respect to the treatment of family-owned businesses in the process of internationalization, and their relatively risk-adverse approach to international activity. Although this chapter cannot fully explore both size and the ownership structure of Scottish SMEs, taken together they are an increasingly important combination of factors that need to be considered when addressing the needs of this sector within an internationalization strategy (Dunn and Hughes, 1995; Graves and Thomas, 2004; Zahra, 2003; Zahra et al., 2004).1 Thus there are a number of broader issues that need to be considered and related to Scottish SMEs in the attempt to promote their internationalization activity. These stem primarily from Scotland’s location within the enlarged EU, and its changing status as a preferred MNC inward investment location. Indigenous SMEs’ networks of supplier relations with inward investors have been eroded by a further peripheralization of Scotland as the economic axis of the EU shifts eastwards and multinational corporation location strategies and relocation decisions become driven by low cost and high value added alternatives to Scotland (Danson et al., 2002). These factors need to be addressed at both policy and institutional levels, particularly with regard to the role of SMEs in future economic development in Scotland, as discussed later. Policies to address these matters have been in place for two or three years in various revised forms, but there is a clear need to examine the effectiveness and appropriateness of current networks and mechanisms for supporting SME exporting behaviour and other internationalization activities at regional and company levels. This chapter is based upon results from current research and provides a more comprehensive empirical picture of the

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existing services to SMEs that were established in order to develop internationalization behaviour. This approach, focused on organizations, also offers a better understanding of the way Scottish SMEs internationalize and which factors create successful ‘foreign’ market entry strategies and behaviour. Internationalization of SMEs Attempts to explain SME internationalization have been dominated by concepts that focus on the ‘stages’ of their growth and international activity (Bell and Young, 1998; Tayeb, 2000). These perspectives viewed SME growth as comprising a passage through several sequential stages. Its enthusiastic embrace by researchers and practitioners alike can be partially explained by the clear applicability of this model within an organizational development framework, and the ability to assist firms in their desire to grow. This model was further extended to other processes such as internationalization, as discussed below, since it avoids the problems associated with other concepts and approaches that are based on less tangible characteristics, or those less amenable to resolution at the level of the firm. These might include personality traits of owners, the role of ‘vision’, and macroeconomic factors. However, a stage-based model could also incorporate and address some of the key elements linked to SME success and failure, such as the acquisition of business skills, knowledge and market awareness, and the role of the owner–manager. Furthermore, the delineation of stages was an ideal template for the development of a ‘programmatic’ approach to solving SME growth and other problems confronted by agencies such as Scottish Enterprise that were attempting to intervene and support its SME sector. However, recent research has shifted attention to internationalization processes, success factors and barriers to improving SME exporting and foreign investment behaviour (Dimitratos et al., 2003). This is mainly in response to issues that have been highlighted in debates surrounding ‘globalization’ and ‘networking’ in the international business, entrepreneurship and economics literature (Birkinshaw, 2000; Burns, 2001; Kirby, 2003; Manolova et al., 2002; McMahon 1998; Préfontaine and Bourgault, 2002; Vatne and Taylor, 2000). The debate over market networks and linkages, as an important aspect of this process for all firms seeking to internationalise, reinforces the development of internationalisation and development models for SMEs (Etemad, 2004). Much of the earlier literature was focused upon domestic expansion and did not generate concepts that could be easily applied to the process of SME internationalization. Furthermore, perhaps the most notable changes in company operations and communication systems in recent times have been technology driven, such as the Internet or E-Commerce. This means that newly founded companies may pass through many phases of their development in a shorter space of time than they would have done a few years ago, or skip them entirely. Therefore, a major theoretical flaw in this genre of SME literature concerns its lack of general applicability and relevance to small firms that may have an international outlook from the start. Current debates on SME internationalization The concept of stages for SME growth was clearly attractive and applicable to interventionist policies that required solutions based upon company-level actions. This approach was extended to address the process of internationalization, and models such as the Uppsala (Johanson and Vahlne, 1977) and ‘establishment chain’ (Johanson and

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Wiedersheim-Paul, 1975) were the most influential. Broadly speaking, a firm progresses through a chain of steps or phases when interacting with a foreign market: initially engaging with countries close to the domestic economy, and then proceeding to markets with greater ‘psychic distance’ (cultural, political and economic differences) and more geographically apart. This paradigm suffers from the same weaknesses as those focusing on SME growth processes since there is no agreed number or type of steps, or an agreed sequence. The focus on particular forms of internationalization is also problematic since other modes of market entry are deployed by SMEs (Su and Poisson, 1998), especially by SMEs in the high-tech sector. Bell and Young (1998) argue that assumptions underpinning traditional ‘internationalization’ models are unidirectional and do not account for firms that start up with international strategies or operations. Finally, rapid developments in the area of international business, such as EU expansion, have significantly realigned the barriers and opportunities for foreign economic activity. This is particularly important for smaller economies such as Scotland and most of the new EU member states, and future effectiveness of their local and national agency support programmes. Recent empirical research on SMEs’ internationalization behaviour attempts to remedy the fundamental weaknesses of linear models (Su and Poisson, 1998) and stresses the complexity of internationalization processes (Coviello and McAuley, 1999; Graves and Thomas, 2004). These conceptual developments draw attention to a range of factors that create unevenness in the internationalization process, such as risk adversity and resource constraints, networking and partnerships, and the acquisition of market knowledge. Contemporary approaches to internationalization pay more attention to the role of networks, and introduce the use of constellation and investment modes by SMEs in the dynamic hi-tech SME sector (Dimitratos et al., 2003). The most influential concepts that capture these types of SMEs are the notions of ‘born global’ developed by Knight and Cavusgil (1996) and ‘international new ventures’ (Oviatt and McDougall, 1994). They suggest that the internationalization of some SMEs is evident from their beginning, being less reliant upon domestic markets and not proceeding through stages of growth or internationalization (Madsen and Servais, 1997). As Bell et al. (2001) argue, other firms may have the capacity to become ‘born-again’ global with an appropriate catalyst. These are interesting concepts, and relevant to current SME growth prospects in Scotland (Drakopoulou et al., 2002), and tend to be concentrated in the knowledge-intensive and high-tech sectors. This approach also extends the concept of ‘collaboration’ in the form of networks between SMEs as a means of ‘going international’ and overcoming resource constraints, amongst other things (Chetty and Holm, 2000). Finally, it has long been recognized that ignorance of market opportunities is a major barrier to taking opportunities to export as a means of internationalizing (Daniels et al., 1984). A major factor in successful exporting behaviour is the capacity of SMEs to acquire and use relevant information (Julien and Ramangalahy, 2003), forming the basis for optimal decision making (Whitelock, 2002), and the basis for a programme-based strategy for regional economic policy implementation. These factors also appear in the attempts to identify barriers to SME internationalization (Cullen and Parboteeah, 2004; McDonald and Burton, 2002; Shenkar and Luo, 2004) and overcome them. The main obstacles to SME internationalization are frequently cited as scale and transaction costs, access to capital – small scale and restricted geographical range, lack of knowledge, lack of market power and intellectual property.

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Therefore, this chapter analyses the main trends in SME development, and the extent and role of public sector agencies in Scotland. It argues that there are two primary information gaps, the first relating to exploring new markets, and the second advice about developing networks as a means of getting ready for international business activity (Crick, 1995; Mole, 2002). Though each level of network building is important, especially gaining access to international networks (Matlay and Mitra, 2004), Bell et al. (2004) argue that networks may be a means of addressing SME resource constraints rather than providing the impetus for internationalization. Questions posed Within the policy arena of economic and regional development in Scotland, there seems little doubt that the Scottish Executive still places considerable faith in the capacity of the SME sector to deliver its part in export-based economic growth and employment. There were lacklustre results emanating from previous SME policy initiatives, and the current shift in EU and global patterns of trade and FDI are dominated by decisions at state and corporate levels that clearly outweigh the capacity of small economies to influence the ‘big picture’. Therefore, there are some fundamental questions that formed the basis of our research: ● ● ●

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How effective and appropriate are the current provisions for supporting SME internationalization? At what levels of economic activity (national, regional, local, firm) are these provisions best delivered? Is a programmatic, information transfer model sufficient when Scotland may well be moving towards hi-tech, knowledge-based internationalization by fast-growing SMEs? To what extent does the provision of economic development services to SMEs in Scotland deploy effective networking and partnership strategies?

Further sections examine the nature of SME internationalization support from agency sources that address these issues and opportunities. Methodology Sample selection and rationale, sample characteristics This research was undertaken in 2004 to explore the support mechanisms and infrastructure in the light of the well-founded academic literature on the nature and requirements of SMEs who were seeking to internationalize their operations, reviewed above. As the impacts on SMEs of the new arrangements introduced in the light of the 2001 Inquiries (ELLC, 2000; Danson et al., 2000) would take a further period to become apparent in their performance, growth and development, it was considered that a survey of enterprises themselves would be premature but that a complementary study of them was essential and should follow at a later date. Data collection process and instrument and rationale Rather, the research methodology adopted by the authors focused on interviews with leading players in the Scottish economic development infrastructure. The focus of the

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research was the local Business Gateway International Trade (BGIT) partnerships (subsequently rebranded as Business Gateway International (BGI): see the following section 5), which would be likely to include the Enterprise development agency networks, local authorities, Small Business Gateway, Scottish Executive, private sector organizations and such corporate bodies as Scottish Council Development and Industry (SCDI), Tourist Boards, Learndirect Scotland and the Sector Skills Councils. To this end, several organizations were interviewed using a semi-structured questionnaire (available on request) including SCDI and representatives from Scottish Enterprise’s network of 12 local enterprise companies (LECs) that provide services to SMEs wishing to internationalize. Those sampled were located across Scotland, from the Grampians down to the Borders. In the Highlands and Islands of Scotland, similar services are provided by Highlands and Islands Enterprise (HIE) and expert commentators from there were included also in the survey. All these organizations constitute one of the main mechanisms for SMEs to gain access to the range of services provided by Scottish Enterprise, HIE and their partners. Interviews were taken to be the most appropriate form of data instrument, given the need to discuss, confidentially, sensitive information and attitudes with agents regarding their partnership organizations, staffing levels and budgets, company participation in programmes and so on. Measures (construction, rationale, reliability, validity) The nature of the questionnaire, recent restructuring, discussed below and our appreciation that there was an evolving unease in the main organization involved in delivering internationalization – SDI – with any form of scrutiny at this time, meant that the survey was conducted as a qualitative exercise. Although it had been planned to undertake a statistical analysis of the findings, the reluctance of many interviewed to disclose data and the richness of the non-quantitative material encouraged an in-depth scrutiny of the results using qualitative means. Analytic techniques Information was sought on standard areas, especially regarding budgets, staffing, participation and so forth, but, where this was forthcoming, there were still insufficient data to merit a meaningful statistical analysis. Many of the respondents confirmed that national programmes were being followed, that information was unavailable or otherwise incomplete on firm activity and their other replies in the main encouraged the view that applying qualitative techniques would be more appropriate in this instance. Internationalization and export behaviour of Scottish SMEs Over the last two decades we have noted the emphasis placed on the importance of SMEs for economic development within Scotland. This has continued in the Scottish Executive’s (2001) high-profile Smart, Successful Scotland (SSS) strategy that envisages the SME sector playing a major role in developing and extending Scotland’s ‘global connections’, primarily through export-led activity. The main destinations for Scottish exporting companies are the USA and the EU15 economies. The value of exports to the EU15 was estimated to be £10.1billion, 54 per cent of all exports in 2003, with the USA accounting for £2.7billion (Scottish Executive, 2004a). However, the countries of Central and East Europe have become attractive FDI destinations and trade flows within multinational

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enterprises (though currently small, with Scotland) are likely to increase (SCDI, 2002). This becomes even more pertinent for the Scottish economy given that 79 per cent of all export value was generated by overseas-owned companies (SCDI, 2002). There are two avenues along which Scotland has succeeded historically in forming and sustaining its ‘global connections’, though recently these have encountered severe problems. First, the nation has benefited from its unequalled record of technological innovation based upon its science base, and more recently through the capacity to produce a high-tech skill environment for FDI. This has formed an export platform particularly within manufacturing generally and in the electronics sector specifically. In 2003, total Scottish exports were provisionally estimated to be £18.8 billion, of which 69 per cent (£13 billion) were attributable to manufacturing (Scottish Executive, 2004b). The slowdown in demand within the EU15 has seen a reduction of £1 billion for Scotland’s exports to this destination in the recent past, whilst there was an increase of exports outside the EU15 of £500 million from 2002 to 2003. This reduction in exporting between 2002 and 2003 saw manufactured exports decline from £14.8 billion in 2002 to £13 billion in 2003, with the electronics sector declining from £6.6 billion to £4.6 billion (Scottish Executive, 2004b) mirroring the recent fall in production in the sector in Scotland. These falls appear to be continuing, with Scottish manufactured exports falling by 2.3 per cent in real terms in the first quarter of 2005 and by 2.1 per cent over the year (Scottish Executive, 2005a). Second, entrepreneurship and start-up companies have advantaged Scotland traditionally. As discussed earlier, the birth rate of small companies remains lower than the UK average at around 30 per cent (falling from 25 000 in 1997 to less than 18 000 in 2003) and entrepreneurial activity compares poorly with other countries (Scotsman, 2003). However, it is argued that there has been a positive change in terms of culture and attitude to entrepreneurship over the last decade, due in part to the impact of the Business Birth Rate Strategy (Fraser of Allander, 2001) There are sectoral growth poles such as biotechnology and services (computer-related). Thus, the current Smart, Successful Scotland strategy focuses on increasing the capacity to build on Scotland’s traditional strengths in innovative, high-growth new start-up SMEs, and on supporting entrepreneurship. A key driver for this policy is an outward facing orientation to business and the reduction of barriers to exporting via national and local agency assistance, primarily through Scottish Enterprise and Business Gateway International, as this chapter illustrates. While it has been argued that the Scottish economy can attain strong GDP growth performance (Storie and Horne, 1999), the current downturn in the key electronics sector is a main contributor to the ‘underperformance’ of GDP output in comparison to the rest of the UK. During 2004, GDP in the UK as a whole rose by 2.7 per cent compared with 2 per cent in Scotland (Scottish Executive, 2005b). These broad figures do indicate some justification for the concern of the Scottish Executive and Scottish Enterprise’s agency network regarding ‘footloose’ inward FDI projects and the detrimental effects that they may have upon exports when disinvesting or downsizing. Thus, there is a perceived need to balance and encourage SME sector firms that can respond quickly to these threats and market perturbations. These two rationales for intervention follow from the discussions on the advantages of MNEs (Dimitratos et al., 2003) and the flexibility of internationalizing SMEs (Jones and Tilley, 2003), respectively (see section 3 above).

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It is calculated that 72.1 per cent of domestically owned companies in Scotland have some form of exporting activity and, given that SMEs are the largest and most diverse company sector, this gives some credence to an economic development approach that supports SME exporting activity and complements the need for growth. This offers some degree of optimism for Scottish service providers where its proportion of UK exports has risen to 4.3 per cent and there is potential to grow, particularly in computer and software services firms (SCDI, 2002). Despite some positive indicators, Scotland still has a relatively low level of internationalization and exporting activity amongst its SMEs. With regard to the problems of creating ‘new international ventures’, ‘global companies’ or micromultinationals (Dimitratos et al., 2003) a number of barriers were highlighted by Scottish Enterprise: a lack of awareness of other cultures and markets; lack of experience of working or operating overseas; lack of entrepreneurship; problems with establishing networks abroad; problems in dealing with new international operations; and relatively lower-level language skills (Scottish Enterprise, 2002). The following section examines the nature of SME internationalization support from agency sources to address market failures and opportunities. Results: institutions and support mechanism for Scottish SMEs Concept of Business Gateway International Our research has involved interviews with several leading players in the Scottish economic development infrastructure, including Scottish Enterprise’s network of 12 local enterprise companies (LECs) that provide services to SMEs wishing to internationalize. In October 2001, the Scottish Executive launched its new strategy for Scotland’s international economic development and established Scottish Development International, which is jointly operated by the Scottish Executive and Scottish Enterprise. From 2001, various initiatives have been undertaken in order to improve the quality and consistency of business support and to tackle confusion over access and mechanisms of support. Business Gateway was launched in 2003 and then restructured and rebranded as Business Gateway International (BGI). Thus, BGI now delivers all of the activities within the internationalization process on a partnership basis across Scotland, with Scottish Enterprise and Scottish Development International (SDI) as its integral part. The network of local Business Gateway International operates within the Global Connections and International Development Strategies and is intended to improve the effectiveness and coherence of export support in Scotland. This framework includes a range of private and public sector partners (local authorities, chambers of commerce and local enterprise companies). A network-level approach guarantees the most effective method of ensuring that the principles of Business Gateway International as a one-stop approach are applied consistently and reliably throughout Scotland. In order to secure this uniformity of approach, products and services delivered to internationalizing SMEs are clearly defined. In order to capture all of the support process for international business development, it was imperative to approach this from the customers’ perspective, ranging from micro-firms to large multinational companies. Initially, Scottish Enterprise identified 64, grouped into eight broad categories reflecting various phases of engagement in international activity (Ministerial Taskforce for Local Economic Forums, 2002). Apart from a reduction in the

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number of products, a further modification included the product delivery system. The products are available to all businesses and they are delivered through a network of Business Gateway International services grouped around ‘core’ services (80 per cent of all services). However, there is a further distinction between service provision, comprising three separate categories: first, those that are universally available, without condition, to any business in the Scottish Enterprise Network area; second, target services, which are available on specific terms but accessible on the same basis throughout the Scottish Enterprise Network area; third, discretionary services that capture and meet business needs in specific geographically defined areas. The question of 80 per cent core services versus 20 per cent discretionary services triggered a debate within and among partnerships, who argued that the rigid application of the 80 per cent rule for core services might prove to be too restrictive. Internationalization programmes and services As suggested above, company size is an important consideration when exploring the issue of internationalization. It is recognized that internationalization is related to resources available to firms to overcome the transaction costs imposed (in the case of Scottish firms) by peripherality. Internationalization programmes designed by Scottish Enterprise try to address this issue by focusing on both large companies and SMEs. Furthermore, it also adopts a stage-based programme for SME support. Programmes under the heading Preparing for International Business, target companies at a very early stage of internationalization, having little or no experience of foreign markets while services provided within the Doing International Business programme are directed at companies that are already involved in overseas markets. Some of these programmes are discussed below in greater detail. Preparing for international business Scotland displays lower levels of internationalization than other countries, for example Germany (Raines, 1996). Although substantial regional differences could account for some of the reasons behind it, a study by Scottish Enterprise (1996) identified peripherality and distance to markets as significant barriers to internationalization. The resources of Scottish Development International, Business Gateway International and the Scottish Enterprise network are now combined to offer a range of support to help companies achieve their international aspirations. There are three programmes which are designed to help businesses to embark on the first stage of the internationalization process. Ready for international trade SCDI statistics above showed a relatively satisfactory performance by Scotland overall, but there remained a continuing need to raise awareness of the importance of exporting for small Scottish companies, with more emphasis on access to information, education and training support. When comparing exporting levels between firms in Scotland and North-Rhine Westphalia in Germany, Raines (1996) concluded that exporters formed a smaller share in all size categories of firm in Scotland than in this German region. Therefore, offering companies a range of programmes and support throughout the whole internationalization cycle is crucially important.

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Some companies may think that they are ready for international activity but need to check for possible gaps in knowledge, organization or planning. To establish their degree of preparedness for overseas markets, there are a number of programmes that they can engage in: first, business health checks which contain an international component that will help them assess their readiness for international business; second, a business development review that provides a more detailed analysis of a company’s activities; third, a growing business review that takes the company one step further by providing an in-depth analysis of business activities; fourth, advice to inexperienced companies about the processes involved in doing business overseas, and the various avenues of support that are available; and fifth, an international preparedness programme which supports SMEs in developing key skills in international business activities and assesses whether they are ready to move to the next stage of overseas market entry. This multi-staged process reflects a number of reiterations and fine tuning in Scottish Enterprise’s international service delivery over the years. It started with Export Partnerships (with the Trade Development Centre in Falkirk as a notable example) through Business Gateway International Trade to its latest reincarnation – Business Gateway International. International strategy development International markets offer major opportunities but at the same time they present numerous challenges to Scotland’s ambitious businesses. This set of programmes draws together a variety of forms of assistance into one package that enables companies to develop their international presence. At this stage, companies can take advantage of international mentoring, strategy advice or the global companies development programme. This last activity is particularly important to Scottish Enterprise’s primary internationalization objective as it enables companies eventually to achieve global presence. As successful internationalization requires a variety of skills that may not be available in-house, companies that have limited international exposure can also take advantage of other opportunities. They can use the services of the ‘International Manager for Hire’ programme, or an international graduate who has the appropriate qualifications and linguistic skills to help with marketing and technical issues in targeting international markets. Once a company (particularly an SME) has taken advantage of some or all of the programmes described above, it may be ready to move to the next stage in its pursuit of international markets. Doing international business Reflecting the lessons from the literature reviewed above (Dimitratos et al., 2003; Jones and Tilley, 2003), there are three services designed and developed in order to help businesses already involved in international activity to become more effective. Overseas market support To enable a company to enter a new market or develop new business relations a range of services can be accessed. They range from customized market research, and market entry and development support, to a specifically Scottish initiative: ‘Globalscot’. Market research provides intelligence on potential markets and advises about existing competition as well as possible strategic alliances. In the past, a Tailored Market

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Information Report (TMIR) was commissioned and provided by Trade Partners UK (now UK Trade and Investment). Recently, a new provision, the Overseas Market Information Service (OMIS) was identified as a ‘best practice’ solution and added to the internationalization products portfolio in Scotland. The ‘Globalscot’ network is based on a network of individuals all over the world with a special affinity to Scotland. It facilitates contacts with advisers, investors and lobbyists in foreign markets. This is a particularly useful initiative which helps Scottish companies overcome knowledge deficit and shortcomings in their networking capacity. International exhibitions, missions and learning journeys This category of the internationalization portfolio encourages companies to become more aware of overseas market opportunities by participating in missions and exhibitions. When looking for new market opportunities, companies can participate in international exhibitions, or join an outward mission or learning journey. It is an opportunity for companies to meet new business partners, buyers or agents. Trade missions and learning journeys often incorporate major global events and have a sectoral focus which reflects Scottish Enterprise’s priorities (energy, engineering, food and drink, life sciences and new technologies). At key global events, Scottish Development International organizes Scottish displays and pavilions in order to reinforce the Scottish identity, and to facilitate a direct contact with key players in the foreign market. The aim here is to treat Scottish Pavilions as a one-stop business shop that provides a professional service. International market presence Companies with more experience in overseas market activity and which have a well developed business plan and are account-managed may be eligible to participate in the International Market Development programme. This service is offered as a ‘toolkit’ and is delivered jointly by the Scottish Enterprise network and forms a complex array of 18 different elements. These range from strategic issues, such as the development of an international market entry strategy, to more practical aspects, for example a desktop research facility. Once a company feels that it has had sufficient exposure to international business activity, and is confident enough, it may want to establish an overseas base and reach new markets. There are various possibilities and options available, at subsidized rates. These include virtual offices, incubator offices and access to meeting and training rooms worldwide. The Global Companies Development Programme is of crucial importance as it mainly targets high-tech companies. Some of the services in this category were developed as a direct result of a study (Scottish Enterprise, 1999) which looked into the comparative number of global companies which operated in Scotland. The research showed that Scotland had only one global company per million of its population, whilst other comparable small countries such as Sweden, Finland and Denmark had between three and six such companies. The aim of this programme is to help Scottish companies gain global status quickly, and in a structured way. However, it is only open to larger companies that are able to formulate and implement a global strategy in order to increase employment, competitiveness and economic prosperity in Scotland. This last group of products was designed to support all three priorities of the Smart, Successful Scotland strategy. First, it corresponds with the Global Connections theme, as

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it increases involvement of Scottish companies in global markets. Second, it supports the Growing Business priority as it encourages greater dynamism and entrepreneurship among Scottish SMEs. Third, it also helps Learning and Skills development among participating companies. Discussion of future directions for research and policy implications Faced with a new stage in its economic development, Scotland is having to address the failing of its recent strategy based on FDI and new firm formation at the same time as the EU has been enlarging. Having seen its traditional industries all but disappear in the 1980s and 1990s, and with inward investment opportunities declining markedly, a move to grow local SMEs has been promoted. Sustainable development built on commercialization and human capital, on the one hand, and the internationalization of indigenous enterprises, on the other, has been put at the forefront of the promotion of a Smart, Successful Scotland. Indeed the incoming Chief Executive of Scottish Enterprise has stressed the need to prioritize the encouragement of medium-sized Scottish based companies (Perry, 2004), complementing the research of the Royal Bank of Scotland (RBS) (2004) and mirroring the industrial strategy of the Greater London Council in the early 1980s (GLC, 1985). The lessons for others can be found in the need for simplicity and clarity in the delivery of support services at the appropriate jurisdictional level (Armstrong, 1997). Achieving these objectives confirms that the fundamentals of sustainable economic development are rooted in indigenous and immovable factors: land, culture, norms and habits. Ultimately the success of these strategies and programmes may depend on how appropriate these basics are to the twenty-first century global economy. Key findings This research has examined only the agency side of the support for internationalization strategies, but the analysis can be considered more broadly. In particular, below we explore what this means for building a theory of SME internationalization in Europe and what (methodological) challenges there are for doing research on the internationalization of European SMEs. Before that discourse, several key findings follow from the analysis. ●

● ●

●

●

Theory, literature and experience suggest that indigenous enterprises may require support to internationalize, and especially to overcome limitations on expansion based on economies of scale and scope imposed by a small home market, with market failures exacerbating such restrictions on development. The importance of the process of internationalization of SMEs has been recognized as critical to the growth and development of the Scottish economy. Scotland has adopted a framework for economic development which includes a role for a powerful regional development agency network working in partnership with other organizations to deliver business support services. After reviewing and restructuring, the former local export partnerships have evolved into a Business Gateway International network with regional delivery of standard products and processes. To an extent, the Scottish system appears to display some of the features of the criticized simple stages theory of growth, with a tendency to embed support within a programmatic approach.

Supporting SMEs in Scotland ●

●

● ●

●

713

However, reflecting more innovative, non-traditional processes, other products and programmes seem to allow companies to be supported without progressing through prerequisite stages. While the literature encourages support, in particular, for indigenous enterprises which are both owned and managed within the host country, the BGI model is accessible by any company active in Scotland. Recent academic developments suggest that MNEs can make a crucial contribution to the economy, and Scottish strategic interventions need to pay attention to this. Scottish entrepreneurs have demonstrated notable difficulties with networking and partnership working which can frustrate attempts to support internationalization through the means of non-subsidiaries. It is not clear that the BGI approach recognizes these limitations; this failure to realize the constraints imposed by this culture has been noted in the context of the cluster strategy (Danson and Whittam, 1998). There are well-established market failures inherent in the capacity of indigenous Scottish SMEs to acquire and utilize information and intelligence on internationalization processes. There are still gaps in their knowledge base and in the support mechanisms, even after the introduction of BGI.

Further research This chapter has presented an exploration of the business support infrastructure for internationalization activities of SMEs in Scotland. As it is still evolving, not least through its ‘productization’ and rationalization processes, and becoming embedded within the Scottish Enterprise and Highlands and Islands Enterprise networks, this suggests a continuing or incomplete research agenda on the supply side. Some of the agencies and organizations who were long established in supporting such activities have expressed concerns that their roles and responsibilities have been reduced with these changes, with potentially experience, networks, expertise and contacts lost or otherwise made redundant. Whether such developments are disadvantageous should be considered systematically as an implicit cost of change. There is also a need to assess the viewpoint of the client SMEs, to determine their satisfaction with services and products offered, whether gaps and confusion are identified and so on. With time, an evaluation of real impacts on awareness, orders, market reach, turnover, size and other performance indicators should be undertaken. Policy recommendations For the Scottish Parliament’s Inquiry into the Delivery of Local Economic Development Services in Scotland (ELLC, 2000), we recommended that the local area Trade and Export Partnerships generally work well in combining the activities of LECs, Chambers of Commerce and local councils. The moves to establish BGI appear to have threatened the synergies and advantages of this partnership approach and it may be worth revisiting this dimension of the services offered to SMEs. Nevertheless, the developments over the last few years do follow from our suggestion that there was ‘scope for further improvement . . . through development of single access points such as integrated Trade Centres’. In many respects the introduction of the BGI model is consistent with this.

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Although the model established at Stirling for Central Scotland, the Trade Development Centre, [was] recommended as an example of good practice, there appeared to be some disquiet and tension over the degree of standardization as well as ‘overlap’ and ‘duplication’ in the products and services available for SMEs in Scotland (‘overlap’ includes the concept of complementarity while ‘duplication’ does not involve any complementarity). Prior to the establishment of BGIT, a review of existing services in each area was undertaken with a view to identifying the degree of ‘overlap’ and ‘duplication’. The analysis found some evidence of duplication but a considerable amount of overlap. This again is worth reconsidering with regard to further streamlining BGI’s portfolio of SME support services. Our previous work on networking and clustering between enterprises in Scotland revealed an underlying problem for implementing many services in business development. The reluctance of agencies to recognize these limitations on their operations led us to propose that ‘on-line facilities for dissemination of export information and for export clubs should be promoted further’. Innovative ways of promoting closer and more productive links between firms within Scotland remain necessary in our view, following the analysis for this project. There was some concern over the continuing variation in some aspects of the services and products offered to SMEs wishing to internationalize, to an extent contrary to the desire for more local discretion. Where this was in potential conflict with wider macroeconomic considerations, such as the markets and geographical areas targeted, there are questions raised over the capacity, intelligence and analysis available to decision makers. This suggests the need for a clearer and more transparent knowledge and strategic policy set regarding Scotland’s international relations and target markets. A wider debate may well be useful on this. There are two broad areas where we can draw conclusions from this research: first, the applicability of the Scottish experience to the development of institutional support for the internationalization of SMEs, particularly in Central and Eastern Europe (CEE); and second, the conceptual development to which this analysis has contributed, that can underpin economic policy for tackling regional development, unemployment and the role of the SME sector in these endeavours. Recent research undertaken by Burger and Svetlicic (2004) indicates that the main motive for SMEs’ internationalization in CEE (post-transition) economies is market seeking rather than cost reduction, which tends to motivate larger companies. Therefore, the Scottish experience in supporting SMEs pursuing foreign markets provides useful information and lessons. Scotland and some of the older industrialized parts of the EU, and again especially CEE member states (or regions), share similar experiences. A steep decline in traditional heavy industries (extractive, iron and steel, shipbuilding) as well as in some manufacturing centres has resulted in extremely high rates of unemployment and regional desolation (Danson, 2003). Clearly, there is an apparent short-term solution to these socioeconomic problems through embracing inward investment based on low labour costs, in the first instance. However, as illustrated by the Scottish case, longer-term sustainable economic redevelopment may require a longer-term strategic approach with an internationalization process which embraces a wider agenda incorporating a vibrant and successful SME sector. Exporting and deeper forms of internationalization activity amongst SMEs are almost impossible to resist for economies (such as Scotland and equivalent small nations and

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regions) that are seeking a resolution to unemployment and regional development problems, especially within the context of the opportunities promised by an enlarged customs union and single European market (Cecchini, 1988). However, our research shows that the initial portfolio of programmes aimed at the internationalization of Scottish SMEs was very large (over 1500 programmes) and confusing. It was too difficult for small and medium-sized companies to access, and reducing it to approximately 15 products and services appears to be a very sensible step forward. Furthermore, providing the internationalization service on a partnership basis and with a clear division of tasks among its members is another positive move. Note 1. Here SMEs will relate to the number of employees; however, it will compress the micro and small categories of 010 and 1050, respectively, into one term of small firm, with medium size firms having 50250 employees, as adopted by the European Union (Commission of the European Communities, 2003).

Bibliography Armstrong, H. (1997), ‘Regional-level jurisdictions and economic regeneration initiatives’, in M. Danson, G. Lloyd and S. Hill (eds), Regional Governance and Economic Development, London: Pion. Balci, B. (2003), ‘Devolution for Scotland in the UK constitutional framework’, (http://www.law.ed.ac.uk/eyl/ 03repbora.htmora). Bell, J. and S. Young (1998), ‘Towards an integrative framework of the internationalization of the firm’, in G. Hooley, R. Loveridge and D. Wilson (eds), Internationalization: Process, Context and Markets, Basingstoke: Macmillan. Bell, J., D. Crick and S. Young (2004), ‘Small firm internationalisation and business strategy. An exploratory study of ‘knowledge-intensive’ and ‘traditional’ manufacturing firms in the UK’, International Small Business Journal, 22(1), 23–53. Bell, J., R. McNaughton and S. Young (2001), ‘Born-again global firms. An extension to the born global phenomenon’, Journal of International Management, 7, 173–89. Birkinshaw, J. (2000), Entrepreneurship in the Global Firm, London: Sage. Burger, Anze and Marjan Svetlicic (2004), ‘Internationalisation of small and medium-sized enterprises from selected Central European economies’, 2nd International Conference, An Enterprise Odyssey: Building Competitive Advantage, University of Zagreb, 17–19 June. Burns, P. (2001), Entrepreneurship and Small Business, Basingstoke: Palgrave. Campbell, A. and D. MacDonald (1999), ‘Small and medium-sized enterprises in Scotland’, Scottish Economic Bulletin, 58, 11. Cecchini, P. (1988), The European Challenge 1992: The Benefits of a Single Market, Aldershot: Gower. Chetty, S. and D.B. Holm (2000), ‘Internationalisation of small to medium-sized manufacturing firms: a network approach’, International Business Review, 9, 77–93. Commission of the European Communities (2003), ‘Commission recommendation of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises’, Official Journal, L124, 36–41. Coviello, N.E. and A. McAuley (1999), ‘Internationalisation and the smaller firm: a review of contemporary empirical research,’ Management International Review, 39(3), 223–56. Crick, D. (1995), ‘An investigation into the targeting of UK export assistance’, European Journal of Marketing, 29(8), 76–94. Cullen, J.B. and K.P. Parboteeah (2004), Multinational Management: A Strategic Approach, London: Thomson. Daniels, J.D., R.A. Pitts and M.J. Tretter (1984), ‘Strategy and structure of US multinationals: an exploratory study’, Academy of Management Journal, 27(2), 247–70. Danson, M. (2003), ‘Regional problems, regional policy and regional well-being – what have we learned in recent years?’, in G. Blazyca (ed.), Restructuring Regional and Local Economies: Towards a Comparative Study of Scotland and Upper Silesia, Aldershot: Ashgate. Danson, M., E. Helinska-Hughes and M. Hughes (2002), ‘East European challenges for FDI: a view from the Celtic periphery’, Zagreb International Review of Economics & Business, December, 37–52. Danson, M., D. Deakins, G. Whittam and J. Fairley (2000), ‘Inquiry into local economic development: a map of economic development support across Scotland’, Enterprise and Lifelong Learning Committee, Appendix E in Delivery of Local Economic Development Services in Scotland, Scottish Parliament, Edinburgh.

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Danson, M. and G. Whittam (1998), ‘Networks, innovation and industrial districts: the case of Scotland’, European Research in Regional Science, 8, 192–210. Dimitratos, P., J. Johnson, J. Slow and S. Young (2003), ‘Micromultinationals: new types of firms for the global competitive landscape’, European Management Journal, 21(2), 164–74. Drakopoulou Dodd, S., S. Jack and A.R. Anderson (2002), ‘Scottish entrepreneurial networks in international context’, International Small Business Journal, 20(2), 213–19. Dunn, B. and M. Hughes (1995), ‘Themes and issues in the recognition of family businesses in the United Kingdom’, Family Business Review, 8(4), Winter, 267–91. Enterprise and Lifelong Learning Committee (ELLC) (2000), Delivery of Local Economic Development Services in Scotland, Scottish Parliament, Edinburgh. Etemad, H. (2004), ‘Internationalisation of small and medium-sized enterprises: a grounded theoretical framework and an overview’, Canadian Journal of Administrative Sciences, 21(1), 1–21. Felsenstein, D. and B. Portnov (2005), ‘Understanding regional inequalities in small states’, Regional Studies, 39(5), 647–58. Fraser of Allander (2001), ‘Promoting Business Start-ups: A New Strategic Formula. Stage 1: Progress Review Final Report’, University of Strathclyde. GLC (1985) The London Industrial Strategy, London: Greater London Council. Graves, J. and J. Thomas (2004), ‘Internationalisation of the family business: a longitudinal perspective’, International Journal of Globalisation and Small Business, 1(1), 7–27. Johanson, J. and J-E. Vahlne (1977), ‘The internationalisation process of the firm: a model of knowledge development and increasing foreign market commitment’, Journal of International Business Studies, 8(1), 23–32. Johanson, J. and F. Wiedersheim-Paul (1975), ‘The internationalisation process of the firm: four Swedish cases’, Journal of Management Studies, 12(3), 305–22. Jones, P. and F. Tilley (2003), Competitive Advantage in SMEs: Organising for Innovation and Change, Chichester, UK: Wiley. Julien, P. and C. Ramangalahy (2003), ‘Competitive strategy and performance of exporting SMEs’, Entrepreneurship Theory and Practice, 27(3), 2–19. Kirby, D.A. (2003), Entrepreneurship, London: McGraw-Hill. Knight, G. and S. Cavusgil (1996), ‘The born global firm: a challenge to traditional internationalization theory’, in S. Tamer Cavusgil (ed.), Advances in International Marketing, Greenwich, US: JAI Press. Madsen, K. and P. Servais (1997), ‘The internationalisation of Born Globals: an evolutionary process?’, International Business Review, 6(6), 561–83. Manolova, T.S., C.G. Brush, L.F. Edelman and P.G. Greene (2002), ‘Internationalization of small firms: personal factors revisited’, International Small Business Journal, 20(1), 9–31. Matlay, H. and J. Mitra (2004), ‘The internationalisation efforts of growth oriented entrepreneurs: lessons from Britain’, in H. Etemad (ed.), International Entrepreneurship: The Globalisation of SMEs: Orientation, Environment and Strategy, Cheltenham, UK: Edward Elgar. McDonald, F. and F. Burton (2002), International Business, London: Thomson. McMahon, R.G.P. (1998), ‘Stage models of SME growth reconsidered’, School of Commerce, Research Paper Series, 98–5, The Flinders University of South Australia, Adelaide. Ministerial Taskforce for Local Economic Forums (2002), Second Report, ‘Creating a Business Gateway for the Scottish Enterprise Network Area’, Scottish Executive, November. Mole, K. (2002), ‘Business advisers’ impact on SMEs’, International Small Business Journal, 20(2), 139–62. Newlands, D., M. Danson and J. McCarthy (eds) (2004), Divided Scotland? The Nature, Causes and Consequences of Economic Disparities within Scotland, Aldershot: Ashgate. Oviatt, B.M. and P.P. McDougall (1994), ‘Toward a theory of international new ventures’, Journal of International Business Studies, 25, 45–64. Perry, J. (2004), Interview, Sunday Herald, 6 June. Préfontaine, L. and M. Bourgault (2002), ‘Strategic analysis and export behaviour of SMEs: a comparison between the United States and Canada’, International Small Business Journal, 20(2), 123–38. Raines, P. (1996), ‘Determinants of international business cooperation among Scottish companies’, European Urban and Regional Studies Conference, A Changing Europe in Changing World, April, Exeter. RBS (2004), Wealth Creation in Scotland: A Study of Scotland’s Top 100 companies, www.rbs.co.uk/economics, 18 May. SCDI (2002), Survey of Scottish Manufactured Exports 2002/2003, Scottish Council for Development and Industry, Glasgow. Scotsman (2003), ‘Welcome dose of realism has been a long time coming’, 2 October. Scottish Enterprise (1996), The Business Birth Rate Strategy, Update, Glasgow. Scottish Enterprise (1999), Global Companies: A Strategy for Scotland, Glasgow. Scottish Executive (2001), Smart, Successful Scotland: Ambitions for the Enterprise Networks, Edinburgh: Stationery Office.

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Scottish Executive (2004a), Scottish Economic Statistics (http://www.scotland.gov.uk/stats/). Scottish Executive (2004b), Global Connections Survey 2003 (http://www.scotland.gov.uk/about/ASD/OCEA/ 00018878/SummaryReport.doc). Scottish Executive (2005a), Scottish Export Statistics (http://www.scotland.gov.uk/Topics/Statstics/exportstatistics/ime-introduction). Scottish Executive (2005b), GDP Figures First Quarter 2005 (http://www.scotland.gov.uk/News/Releases/2005/ 07/2709455). Scotland Office (2005), ‘January Labour Market Statistics for Scotland’, Press Release SS0862, 18 January. Shenkar, O. and Y. Luo (2004), International Business, New York: John Wiley & Sons. Storie, G. and J. Horne (1999), ‘Economic review’, Scottish Economic Bulletin, 58, 5–22. Su, Z. and R. Poisson (1998), ‘Processes of internationalisation: an empirical study of small and medium-sized high-tech Quebec enterprises (SMEs) (http://www.sbaer.uca.edu/research/1998/ICSB/r 003.htm). Tayeb, M. (2000), International Business: Theories, Policies and Practices, London: Prentice-Hall. Vatne, E. and M. Taylor (eds) (2000), The Networked Firm in a Global World, Aldershot: Ashgate. Voerman, L., M. Wedel and P.S. Zwart (1999), ‘The dynamics of exporting SMEs’ information behaviour’, 1999 International Council For Small Business. Whitelock, J. (2002), ‘Theories of internationalisation and their impact on market entry’, International Marketing Review, 19(4), 342–7. Zahra, S.A. (2003), ‘International expansion of U.S. manufacturing family businesses: the effect of ownership and involvement’, Journal of Business Venturing, 18(4), 495–512. Zahra, S.A., J.C. Hayton and C. Salvato (2004), ‘Entrepreneurship in family vs. non-family firms: a resourcebased analysis of the effect of organizational culture’, Entrepreneurship Theory and Practice, 28(4), 363–81.

41 Internationalization of Welsh SMEs: the role of Wales Trade International David Pickernell, David Brooksbank, Helena Snee, Farid Ullah and Dylan Jones-Evans

Introduction and theoretical background to research Structural change has been a consistent feature of the manufacturing economy in Wales over the last 25 years. Nor is it just coal and steel which have been reduced to a fraction of their previous size and importance. Industrial sectors ranging from chemicals to clothing have seen substantial reductions in their relative labour force and output and many of the newer industries brought in to replace the industries on which Wales used to rely (such as electronics and automotive components) have themselves moved on again, at least partially, no more than a generation later. Policy makers have responded with initiatives aimed at reducing reliance on previous sources of new employment, such as inward investment. In particular, they have sought to address historically low levels of indigenous business creation and have directed much of the new funding available through the European Union’s Structural Funds towards this end. Despite some scepticism about the evidence base, job creation policies in Wales post 2000 have been almost entirely focused on creating and developing indigenous enterprise within micro-businesses, small to medium-sized enterprises (SMEs) and the voluntary sector. The creation of a Welsh Assembly, with devolved responsibility for economic development, also heralded a fundamental rethink of strategies to promote economic development in Wales generally. Approximately two-thirds of Wales, entitled ‘West Wales and the Valleys’ qualify for EU Objective One status, having GDP per capita levels averaging under 75 per cent of the EU average. Objective One status up to the end of 2006 offers Wales the opportunity for £1.3bn of EU funds, together with matched funds from the UK government and private sector, to help revitalize the economy. The conventional model of national economic growth implies that SMEs essentially played a secondary role in the economy, supporting the activities of larger, more established firms (Reynolds et al., 1999). More contemporary models afford entrepreneurship a more active role in generating economic prosperity. In the early 1980s in a number of EU countries, particularly the United Kingdom (UK), the major policy and strategic emphasis was placed on stimulating new firm formation (Storey, 1999; Burns and Harrison, 1996). This emphasis was due in part to evidence that suggested that the smallest firms were disproportionately responsible for innovation and employment creation (European Commission, 1998). The extent to which market opportunities can be identified and exploited, however, is determined by the degree to which firms have the necessary entrepreneurial capacity to establish, survive and grow. The net effect of this business dynamic represents the contribution made by the entrepreneurial sector to a nation’s economy (Reynolds et al., 1999). In other words, it is argued that, in addition to the contribution made by the small business sector in the secondary economy, the existence of 718

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Major Establ. Firms (Primary Economy) General National Framework

SMEs (Secondary Economy) National Economic Growth (GDP, Jobs )

Social Cultural Political Context

Entrepreneurial Framework

Entrepreneurial Opportunities

Business Dynamics /Churning

Entrepreneurial Capacity Source: Derived from Jones-Evans and Brooksbank (2000).

Figure 41.1

Contribution of entrepreneurship to national economic growth

entrepreneurial firms ensures that the sector also makes a direct contribution to national economic growth (Figure 41.1). Wales, however, has generally had a poor record when it comes to entrepreneurial activity pre-2000, For example, Wales lags behind England in terms of stock, as shown in Table 41.1. The policy focus within Objective One areas has therefore been placed upon the indigenous growth of small Welsh businesses and entrepreneurship in general. The Global Entrepreneurship Monitor (GEM) (Jones-Evans and Brooksbank, 2000) survey indicated that only 1.4 per cent of the adult Welsh population were participating in start-ups, half the level of Scotland (2.7 per cent), well below the UK average (3.1 per cent) and a seventh of the US figure. This followed through into new firm participation with Wales at 1.4 per cent compared with 1.8 per cent in Scotland, 2.2 per cent in the UK and 4.7 per cent in the USA. While Wales had a relatively high survival rate of new firms, the firms themselves did not grow. Jones-Evans and Brooksbank (2000) therefore advocated a number of areas where support needed to be given. These included financial support, research and development, infrastructure, culture, and education and training. Five years later, the GEM Wales survey (Jones-Evans and Brooksbank 2004) indicated that Wales has generally been improving with regard to entrepreneurship. The Total Entrepreneurial activity (TEA) rate (of working age adults) of 5.5 per cent in 2004 placed Wales in the top 20 entrepreneurial nations in the World. While still below the UK average of 6.3 per cent, Wales had climbed to sixth of the 12 UK regions, a major improvement over the five years (in 2000, Wales’s TEA was only 2.6 per cent). Conversely, only 2.5 per cent of the adult population were involved with running firms under 42 months old, compared with 2.0 per cent in 2000. Wales thus continues to have one of the lowest new

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Table 41.1

Wales England

VAT-registered businesses Stock rate 2003a

Registration rate 2002b

Deregistration rate 2002b

326.5 379.1

7.9 10.3

8.8 10.3

Notes: a Number of VAT-registered businesses per 10 000 people aged 16. b As a percentage of the stock at the start of 2002. Source: DTI small business service.

firm (firms up to 42 months old) prevalence rates in the UK, and below the UK average. Jones-Evans and Brooksbank (2004) therefore suggested further areas where support was required. These included an increasing role for higher education in developing research and development, technology commercialization and scientific education and development of relevant skills education and training. The survey also found that around 80 per cent of start-ups and new firms in Wales have no exports, with particular weaknesses in start-ups compared with nearly every other region of the UK (except the North East of England). Jones-Evans and Brooksbank (2004) therefore argued for more support for certain types of start-ups, to boost knowledge of exporting know-how in training and advice, but also recognized that export potential is largely determined by the sector in question and the ambitions of the entrepreneur. The role of exports in economic growth thus also has to be considered here from a policy point of view. Generally, known as the export-led growth hypothesis, increased exports may lead to increased growth in economic output via greater capacity utilization, adoption of more efficient technologies via the need to meet increased competition (Balassa, 1978) and learning (Grossman and Helpman, 1991), increasing returns to scale (Helpman and Krugman, 1985), higher foreign exchange allowing the import of superior capital goods and raw materials (McKinnon, 1964) and then further promote economic development generated via additional spillover effects into other industries (Levin and Raut, 1997). This causal relationship is by no means without controversy, however (see Panas and Vamvoukas, 2002; Hatemi-J and Irandoust, 2000), with exports causing growth in some countries, domestic growth generating exports in others (including the UK) and both simultaneously in others. Riezman et al. (1996) found that the relationship between growth and exports could also change over time, moving from one direction to the other. This indicates that the relationship, at the very least, is not simple, and issues such as the size of the economy and the types of goods exported may also be of importance. For example, looking at the regional level, there is support for the export-led growth hypothesis (Jin, 2002, for South Korea), though the number of studies is very limited. In terms of export-good type, Balaguer and Cantavella-Jorda (2004) found, for Spain, that the change in export composition towards more industrialized (technologically sophisticated) sectors did generate significant increases in growth. Calderon et al. (2001) argued, further, that for exports of goods with relatively high technological content (which are likely to be promoted by economic development policy), such as manufactured goods, a

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critical export mass may be required before such increased growth rates occur, because of the time necessary to build the requisite labour force skills and management systems to optimize such technologies. They also argue that the export-growth link is likely to be highest at the beginning of the product life-cycle, falling away as the exported goods become more standardized. Although by no means exhaustive, this review seems to promote the idea that focused encouragement of exports from an economic development policy viewpoint, into industries and sectors with higher levels of innovation and differentiation, is most likely to promote regional economic development. Such a boost to Welsh economic development is badly needed. Welsh GVA contributions have ranked second-poorest in the UK for the past several years. (Regional GVA by UK region). While a study by Cambridge Econometrics forecasts Welsh GVA to grow by 3.25 per cent in 2006, ahead of the UK average of 3 per cent, it is highly unlikely that Wales will reach 90 per cent of the UK GVA average by 2010, a goal set by the Welsh Assembly Government (2004) (currently, Welsh GVA is 78 per cent of the UK average). Simultaneously, Wales’s record in terms of exporting has recently improved, at least as a proportion of GVA and relative to employment, as is illustrated by Tables 41.2 and 41.3. The issue that still exists, however, is that exports, compared to the labour force, are still low (because of Wales’s high inactivity rates in comparison with the UK more generally) and Wales is reliant on exports from a relatively small number of companies. This is illustrated in Table 41.4, which confirms the GEM data (Jones-Evans and Brooksbank, 2005) which highlighted a low level of exporting from new SMEs. Table 41.2

Value of exports of goods (£ per employee job)

Year

UK

England

Wales

Scotland

Northern Ireland

2001 2002 2003 2004

7370 7248 7246 7246

6113 6195 6407 6443

6628 6157 6675 7505

7550 6904 5914 5296

5916 5048 6093 6374

Note: UK figure includes exports that cannot be allocated to a nation. Source: Statistics and Analysis Unit, HM Revenue and Customs.

Table 41.3

Exports as a percentage of headline GVA

Year

UK

England

Wales

Scotland

Northern Ireland

2001 2002 2003 2004

21.5 20.0 19.2 19.4

18.1 16.9 16.4 17.5

21.3 19.6 17.9 22.1

23.7 21.3 19.4 15.2

19.2 17.1 15.4 19.7

Note: UK figure includes exports and GVA that cannot be allocated to a nation. Source: Statistics and Analysis Unit, HM Revenue and Customs.

722

Source:

Note:

2001 2002 2003 2004

Year

90 (84.4) 90 (84.3) 90 (84.0) 90

4.4 4.1 4.3 4.9

Exports 2.6 (4.45) 2.6 (4.47) 2.6 (4.66) 2.6

Exporting companies labour force

Wales

10.4 9.7 8.0 7.1

Exports 4.9 (8.64) 4.9 (8.65) 4.9 (8.64) 5.0

Exporting companies labour force

Scotland

2.1 (2.52) 2.3 (2.59) 2.3 (2.66) 2.4

Statistics and Analysis Unit, HM Revenue and Customs, except for Labour Force figures which are derived from Regional Trends, 38 (2005).

2.4 2.1 2.5 2.6

Exporting companies labour force

Northern Ireland Exports

Total for UK from which percentages are derived excludes exports and companies that cannot be allocated to a nation.

83 84 85 85

Exporting companies labour force

England

Value of exports, companies and labour force: percentage of total UK

Exports

Table 41.4

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This feature of the economy emphasizes the need to examine, in depth, the role of public policy support in affecting SME exporting and in Wales this revolves around analysis of the functions and place of the public body known as Wales Trade International (WTI). The remainder of this chapter is structured as follows. Next we explore the theory surrounding the Internationalization of SMEs and the consequent range of policy prescriptions that have been suggested. The role of Wales Trade International is then explored in depth, with case studies of relevant programmes. Finally we examine the evidence for any positive link between economic development and trade promotion in Wales, concluding with a future research agenda. Background to the study Ibeh (2000) highlights a number of ideas to explain SME Internationalization (in this scenario mainly focused on exporting). Bell and Young (1998) highlight three basic theoretical approaches from which to explain the Internationalization of SMEs. ●

●

●

Stages of development approaches, where firms incrementally become involved in foreign markets, from no regular exporting, through exporting via agents and then sales subsidiaries to similar countries and then wider, to foreign production and manufacturing. Network theory, where exporting occurs as a result of interactions with and development of networks (with customers, suppliers, competitors, public agencies and so on) through which information and trust are generated. Resource-based approaches, where Internationalization decisions take place within the context of development of internal and external resources, and environments, and as part of overall strategy.

In terms of policy, the stage-based approach offers a template of assistance, from which specific policies can be developed. The growth of the Internet is making the stage-based approach less relevant for SMEs in certain industries, however: for example, those able to utilize normal postal services for distribution. The incremental approach will also be less applicable for SMEs in some sectors (such as hi-tech sectors), where life cycles are short, the need to exploit large markets is of greater importance (Madsen and Servais, 1997) and the greater use of networks from an earlier stage to overcome resource constraints (Chetty and Holm, 2000). Network arrangements in an economy are also seen as a foundation for economic growth. This can be seen specifically at the level of the regional economy (see Cooke,1997; Brusco, 1982; Brusco and Righi, 1989) where government, business and labour networks can all promote the economic development policies of development organizations (Kinsella, 1989). Thus, network approaches can also be seen as a framework within which policy can be generated. Bell et al. (2004) argue, however, that networks can be seen as a means by which SMEs address resource constraints, rather than triggering the Internationalization itself. Resource-based approached also offer conceptualizations of the issues useful for policy makers. For example, there is an issue for SMEs in accessing and then utilizing export-focused information (Julien and Ramangalahy, 2003). These general frameworks, whilst useful, can be seen as explaining how internationalization occurs, rather than why. There is thus a need to utilize the factors contained in the frameworks, to examine why Internationalization actually occurs.

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Existing research indicates that a multitude of factors have an impact upon SME Internationalization, depending on the industry in question (external environmental factors) and internal firm-specific factors. According to Ibeh (2000), the actual decision depends on the characteristics of the decision maker, firm characteristics and competencies and the environment facing the firm. Summarizing, the following appear to be of importance in positively driving exporting. ●

●

●

Firm decision makers who have spent part of their lives abroad, and/or have established foreign market contact networks, favourably perceive export market potential relative to the home market, and have higher flexibility and self-confidence. Firms in industries characterized by high value added, short life cycles, and products not requiring modification for export, with a history of trading (importing or exporting) and consequent networks. Saturated home market environments that are enterprise- and network-oriented and external markets with good infrastructure and facilitatory government policy.

Conversely, there are also a number of barriers to exporting that need to be overcome and tend to mirror the triggers highlighted above. Summarized by Kaleka and Katsikeas (1995), the four categories are as follows. ●

●

●

●

Internal-firm domestic impediments such as lack of qualified (in terms of information and/or knowledge) marketing personnel, negative relatively high export risk perception, and emphasis on home market development. Internal-firm foreign impediments from the lack of marketing capability, particularly where product modification investment is required, as well as after-sales issues, pricing, communication and transportation costs. External domestic-market impediments created by the time and resources needed to deal with documentation, the absence of domestic government incentives and infrastructure support to overcome barriers, and the absence of capital needed to finance internationalization. External foreign-market impediments created by foreign government regulations and currency issues, the need to develop external networks of contacts, distributors and representative, language and cultural differences, foreign competition, price competitiveness and payment issues.

There is also likely to be a time-related element to this, with Bell (1997), for example, finding that, unsurprisingly, finance-related issues tended to increase as foreign market exposure grew, but that marketing (information and network development) tended to decline over time. There are, therefore, a number of factors that policy makers will need to take into account when considering programmes to encourage exporting. These are clearly linked, however, with the need to promote successful exporting behaviour, which improves the performance of the firm (and region). The fact that Westhead et al. (2004) did not find a strong statistically significant relationship between exporting and superior overall firm performance (compared with non-exporters) indicates the importance of also determining the factors that improve the probability of successful exporting activity. Hart and Tzokas (1999), for example, found that, for UK SMEs, there was a positive

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relationship between the gathering of market data and successful exporting in general, with specific importance attached to information on market background and infrastructure, as well as proactive formal market data gathering and specific use of the data in strategy generation. Holzmuller and Stottinger (1996) found that less centralized firms, with more flexibly organized, goal-driven and consensus-based decision making, had better export performance, thus indicating the need to promote such management frameworks. Di Chiara and Minguzzi (2002) argued, generally, for a need to promote an entrepreneurial culture, open to learning and change. Di Chiara and Minguzzi (2002) also argue that there are specialized skills scale diseconomies inherent in SMEs that present a barrier to internationalization, and therefore need to be overcome through the promotion of provision of such customized services. The growing importance of the Internet in lowering barriers to internationalization (Hamill and Gregory, 1997) also creates general policy issues, for information gathering, marketing and networking. Au and Ho (2002), for example, see the worldwide growth of electronic commerce as making it imperative for government export policy to be aligned with the need to train and support SME use of the new technologies. Hart and Tzokas (1999) argued that there was a general export policy requirement to facilitate and encourage the use and importance of IT use (for example, the internet) to gather market data. In addition to this ‘passive’ use, Styles and Goldsworthy (2002) also illustrate the potential export benefits of the ‘active’ use of the Internet, via creation of ‘virtual companies’ from groups of SMEs in their example of the Gippsland International (GI) Extranet. Eighteen small firms participated in the pilot extranet, along with the local government and further education institution. This is a case study of the development of a ‘virtual corporation’, using extranet technology to link SMEs in the Gippsland area of Victoria in Australia. Initially driven by state and local government funding, and assisted by local university expertise, the extranet links competing SMEs to promote the cooperative interests of many SMEs and organizations. Its purpose was to develop an internal network between the member companies to facilitate resource and information exchange, in order to bid for and win major consortia contracts in the engineering sector (specifically those in the electricity generation industry where the region had a high level of expertise). In particular, the technology is meant to allow these SMEs to compete cooperatively in the global market. The extranet facilitates this by providing common communications and support technology frameworks to create effectively a single bidding entity. According to Styles and Goldsworthy (2002), this does not prevent the SMEs competing with each other locally. Importantly, they conclude as follows: the project demonstrates that competing small and medium enterprises are capable of leveraging their size with judiciously applied telecommunications technologies by creating virtual businesses. With the support of government and other agencies and with access to well informed facilitators, co-operating SMEs can apply this relatively inexpensive technology for individual, joint and regional benefit. (Ibid. p. 89)

The specific use of the Intenet will, of course, depend on the nature of the firm and industry in question. Indeed, Crick et al. (2000) argue for the need to differentiate overall policy based on the needs of specific industries and individual firms. Those such as Moini (1998) and Ibeh (2000) also concluded that there was a need to differentiate policy support, depending on whether the firm was new to Internationalization or was already internationalized in

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some way (its external orientation). Policy also differed depending on the internal nature of the company (whether it is perceived as having an entrepreneurial orientation that positively sought or seeks Internationalization, or has found itself forced into undertaking on contemplating Internationalization by the environment), with consequent differences in their strategies. This can also be seen in the work of Fletcher (2004), who notes a difference, between SMEs that are ‘born global’, in industries and sectors where internationalization are almost automatic consequences of conditions in those globalized markets, and those which internationalize at a later date, following a period of home-market focus. In the former, internationalization utilizes the existing skills base required to begin the business, and the issues mainly involve the spatial expansion of existing skills, knowledge and networks, whereas later internationalization requires extension and expansion of existing skills, and development of resources via new network development. Merrilees and Tiessen (1999) also identified different marketing strategies employed where firms were forced into sales-driven exporting, compared with actively seeking out relationship-based exporting. This, therefore, requires differential policy, dependent on the initial status of the company. Further, Andersson et al. (2004) argue that the factors influencing initial exporting differ from those which influence their continuation and growth. In particular, the firm decision maker perception of the environment determines initial exporting, whilst longer-term organizational experience of exporting and more youthful decision makers encourage further growth. The different policy requirements seem to be well synthesized in the work of Ibeh (2000), outlined in Figure 41.2. According to Ibeh (2000), this leads to a differential policy focus, although with clear overlaps. Non-internationalized, less entrepreneurial SMEs require an initial focus on Internal focus Entrepreneurial / born global

Internationalized

Less entrepreneurial

[IV] Encourage best-practice R&D, IT, innovation Facilitate participation in network structures Mitigate operational problems: assist foreign customers, market access, etc

[III] Seek positive reinforcement Deploy liason officer / problem solver Encourage networking, export clubs Establish mentoring scheme

[II] Help reduce competency gap Provide consultancy support and training Ease access to available support Introduce mentoring scheme Encourage best practice R&D, IT innovation & networking

[I] Introduce change agents Provide training / information support Help with foreign market contacts Encourage networking Establish and utilize international market brokers

External Focus

Noninternationalized

Source: Derived from Ibeh (2000).

Figure 41.2

Recommendations to assist SME internationalization, by SME categories

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the possibilities of internationalization such as seminars, sponsorship for trade fairs and export information. In addition, external agent support is required, linked to support in acquiring management with the required skills. Rosa et al. (1994) also suggest the use of placements of students with the requisite management and language skills as a means of such resource transfer) and networking, whilst Hamill and Gregory (1997) argue of the need for promotion and provision of Internet-related skills. The noninternationalized, but entrepreneurial, SMEs are more likely already to have the required internal management characteristics, and thus resource requirements are more likely to revolve around product quality, technology and network development, as well as market consultancy and mentoring to assist in the initial internationalization process. A subset of these firms, the born globals, are likely to have largely achieved these resource requirements, though possibly requiring assistance in their geographical expansion into wider markets. For those already internationalized, but less entrepreneurial, the focus is on measures to encourage the firms to continue the policy, via assistance in providing training, information, ‘change agents’ and required management and networking. Finally, those companies internationalized and entrepreneurial or born global need to be assisted in maintaining and developing the competencies for continued success and growth, through product development and market network relationships. For this group of firms, research by authors such as Joynt and Welch (1985) recommends that assistance should be more in line with removing obstacles and facilitating sectoral/industry export SME network agreements to assist in meeting competition from other regions through the sharing of resources and the rest. This fits in with much current regional policy which is focused on cluster/network development. It is also important, however, to recognize that FDI from such firms is often discouraged by negative public sector interventions (Mariotti and Piscitello, 2001). Overall, this provides a framework in which to examine the policies and focus of Wales Trade International. Case study of Wales Trade International Wales Trade International (WTI) was created on 28 June 2000, by bringing together the overseas trade work previously carried out by the Welsh Assembly Government (WAG) and the Welsh Development Agency (WDA). WTI works under the direct control of the WAG and provides a range of export development services, including the following: ● ●

● ●

● ● ●

Free workplace visits: to discuss overseas trade needs and strategies. Helping SMEs to develop skills necessary for global trade. Help is available for individual entrepreneurs and groups of entrepreneurs who have the same interests or concerns. Specific programmes for SMEs in the Objective 1 regions,1 for example ‘Export Assist’:2 – see Figure 41.3 for the geographical area. Identifying opportunities, and assistance in taking SMEs forward, for trade in Western Europe, Eastern Europe, USA and Canada, Middle East, South Africa, Asia Pacific and South America through a team of dedicated in-market consultants. A comprehensive subsidized trade mission and trade fair attendance programme. A full seminar and clinic programme. International Trade Fund.

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East Wales West Wales and the Valleys

Note: West Wales and the Valleys: Blaenau Gwent, Bridgend, Caerphilly, Carmarthenshire, Ceredigion, Conwy, Denbigshire, Gwynedd, Merthyr Tydfil, Neath Port Talbot, Pembrokeshire, Rhondda Cynon Taff, Swansea, Torfaen and Isle of Anglesey.

Figure 41.3 ●

Wales Objective 1 areas

Advice on international trade issues, in conjunction with UK Trade and Investment, tailor-made to meet company-specific needs, including a. identification of potential agents, customers and distributors, b. investigation of joint venture projects, c. assessment of prospects and the best way to approach the market, d. status reports on overseas companies, e. publicity.

Generally, and perhaps unsurprisingly, the support offered by WTI predominantly, although not exclusively, focuses on the type of support highlighted in type I of Figure 41.2. WTI groups the available help into three categories, as well as the geographically focused Export Assist programme as follows. Company development For companies in the early stages of exploring overseas markets, WTI assists in building an international trade strategy for the company and preparing entrepreneurs for the next stage of growth. WTI argue that planning and commitment are key elements of success, requiring a strategic approach to the development of new markets, careful planning and extending exporting activities progressively to minimize risk, maximize success and provide best practice, This can be seen as a clear stages of development approach, which

Internationalization of Welsh SMEs Table 41.5

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Clusters supported by WTI

Cluster Aerospace Automotive Biotechnology Consumer products Creative industries Electronics Engineering Environmental goods and services Geo-science Golf and leisure Healthcare and medical Industrial products Information and communication technology (ICT) Professional services

% of % of Combined Combined members members No.of turnover Combined exports looking for experienced Began companies (£m) employment (£m) first export in exporting 2003 1999 2001 2002

46 41 48 103

190 170 50 150

2785 2500 600 1600

64 38 15 14

35 25 38 38

42 55 56 —

1999

67

87

450

9

—

46

2000 2000 2000

82 75 95

220 340 190

4000 5200 2700

54 63 18

29 27 46

56 46 32

2002 2005 1999

36 20 96

24 — 420

400 — 4000

14 — 100

14 7 33

86 13 55

2002

86

210

3200

41

26

49

2001

80

220

2400

33

40

60

2000

103

110

1800

10

56

44

seems more relevant for the ‘less entrepreneurially’ focused (type I) firms that much of the support is aimed at. WTI’s Internationalization Development Programme (IDP) therefore focuses on helping companies to acquire the necessary skills and knowledge required for global competition. The IDP provides companies with a package of workshops, on site consultancy, self-help workbooks, overseas sales, guidance on how to access funding for overseas market research, business development and market visits/exhibitions. WTI has also established several international clusters comprising specific sectors. Each cluster consists of Welsh companies from the same sector which are attempting to develop exports, the stated aim being for member companies from the same cluster group to benefit from the mutual knowledge and experience of each other (see Table 41.5). This can be seen as following a network approach, with elements of basic networking (type I) and mentoring (type III). Overall there are more than 1000 companies in the clusters. These clusters can be seen as generally in the hi-tech/high value-added industries where Wales exports are currently deficient (of which more later), and are required to maximize export-led growth benefits to the Welsh economy. In several of them, however,

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export:turnover ratios are currently low, particularly on the service side (for example, professional services, creative industries, environmental goods and services). Market research WTI also offers wide-ranging market research support, utilizing its close relationship with UK Trade and Investment, which is responsible for the UK government’s international trade promotion. This enables WTI to have access to a global network of information and advice. WTI also works in partnership with the Wales Export Association and assists in making contact with other organizations which can offer additional expertise in this matter. Overall, WTI offers the following support measures. 1.

2.

3.

4.

5. 6.

7.

8.

Wales European Information Centre Provides data about European markets, tenders, legislation, latest trends, standards and establishing links with companies in these markets. International trade counsellors These counsellors are based in the Welsh regions (WTI has regional offices located in Cardiff (South East Wales), Swansea (South West Wales), Welshpool (Mid-Wales) and Colwyn Bay (North Wales)) and provide initial help to local companies, based on the counsellor’s own international practical experience. The international trade counsellor with international knowledge and experience leads each regional office, employed from the private sector, supported by WAG export staff. The counsellors’ responsibility is to work closely with companies and help them to internationalize,3 including the following (type I). ● meetings at the business workplace, ● detailed assistance in the development of an international trade strategy, ● help with documentation, finance, market research and overseas promotion. Trade promoters Senior executives offer practical expertise in specific markets and sectors. Seconded from industry, they provide regular clinics in Welsh regions and even visit the business premises if required (type I). Commercial officers Overseas-based commercial officers from British Embassies and British Councils provide one-to-one or group discussions and can advise on opportunities and the latest trends in the markets (type I/II). Seminars Series of seminars, briefings and specialist advice (type I). UK Trade and Investment Most of the UK Trade and Investment services are accessible through the WTI. The information provided is up-to-date and sector-specific concerning tariffs, export regulations and cultural issues which entrepreneurs need to be aware of. An extensive list of links, as well as an on-line self assessment checklist to other export-related websites, is also provided (type II). Information centre A self-help library providing a wide range of information such as statistical information on trade, production, market size for specific products, business/visitor guides, country profiles and sector reports, trade and telephone directories, mail-order catalogues, access to CD-ROM data, the Internet and even research can be carried out on the company’s behalf (type I/II). Tailor-made market information This can be prepared on the entrepreneur’s behalf by commercial officers overseas, consisting of basic market information and assessment of the business product/service, advice on market approach, as well as customized local contact lists (type II).

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9.

Export marketing research scheme This is delivered by the British Chambers of Commerce on behalf of UK Trade and Investment to help entrepreneurs and their businesses to undertake a research project. This helps in selecting a territory, prioritizing individuals’ export matters, and developing an efficient marketing strategy. Moreover, medium-sized firms (fewer than 500 employees) may be eligible for a grant of up to 50 per cent of the agreed cost of approved marketing research projects (type II). 10. TradeUK National exporters’ database and sale lead service (type I/II/III/IV). 11. Simpler Trade Procedures Board Advice on trade facilities and e-commerce solutions relating to movement of goods (type III). 12. Technical help to UK exporters Service from the British standards Institution, providing advice on technical standards, regulations and approval procedures and how to meet them (type IV). Trade development This category can also be seen as taking a network approach, from basic (type I/II) networking activities, to more sophisticated (type II/IV) activities focused on trade alliances. WTI has a team of overseas consultants, experts on the Welsh economy as well as familiar with the economies of the countries they are working in, who actively search for the right partners for Welsh businesses. WTI then coordinates and facilitates these sectoral alliances between Welsh and foreign businesses. The International Trade (IT) initiative was created to act as a driving force in establishing alliances between Welsh companies and their counterparts worldwide. IT can identify potential partners, facilitate introductions and offer continuing project management support tailored to the needs of its clients. It does so under the auspices of the Welsh Assembly Government. Such trade alliances can involve shared research and development, technology transfer, new manufacturing capabilities and marketing skills. According to WTI, it can also provide distribution networks, enhance business reputation, reduce dependence on domestic markets and result in faster routes to market penetration as companies build on each other’s core strengths. This can be seen as following the resource-based approach. The brief case studies below illustrate all four types of firms seen in Figure 41.2. 1.

2.

Type I: Cape Town An engineering company from West Wales has agreed a (first) export contract with a company from South Africa. The South Africa-based WTI representative coordinated and facilitated this deal, supported by a subsidized trade visit. The two partners were introduced in a Welsh Trade Mission and then exchanged ideas, discussed future goals and set up talks on specific projects. The Welsh company has secured profitable export business while the South African company has accessed high-quality supplies. Type II: Barcelona A Welsh electronics company and the largest Spanish windscreen wiper manufacturer have signed a partnership. The Welsh company supplies electronic assemblies to the automotive industry and took a proactive approach to growing new business, targeting several Spanish businesses, but local competition was fierce. The Spanish-based WTI representative identified and introduced the two parties, providing ongoing support to this agreement. This agreement is predicted to give the Welsh company high future export growth, with the Spanish company accessing high-quality components.

732 3.

4.

Handbook of research on European business and entrepreneurship Type III/IV: Dubai A team of academics from the Middle East and Wales agreed a technology transfer deal in the leading centre for research and training in Dubai. The centre in Dubai is attracting high-calibre students from higher colleges of technology throughout the Gulf region and WTI helped the centre to establish a portfolio of academics and business training links with organizations in Wales. This meeting was arranged by one of the WTI Middle Eastern representatives, after WTI secured introductions with experts from Wales who planned strategies for the long-term flow of information between Wales and the UAE. The centre wishes to use Welsh SMEs’ experience to establish a ‘hot-house’ environment for future entrepreneurs. The centre is well reputed on an international level as a technology incubator for SMEs, operating two technology parks which foster development of the latest technology in the UAE and help create the knowledge infrastructure needed to exploit this technology. WTI’s role is now to act as a bridge between the centre and the organizations in Wales in order to assist in technology transfer to Welsh SMEs, as well as promoting future commercial opportunities between companies in the two countries. Type IV: New York An American hi-tech packaging company and a specialist CD/DVD company from South Wales agreed a joint venture. The US-based WTI representative coordinated this deal from concept to completion seeing the synergy between the American company wanting to penetrate the European packaging market, and the Welsh company’s need for innovative packaging for its products sold in European markets. The US company had approached the America-based WTI representative for assistance and were referred to the Cardiff-based head office, who pinpointed a Welsh company interested in a joint venture, as well as providing relevant information and professional assistance on a range of issues such as financial advice, UK government law and tax and marketing relevant to the European community.4

Export Assist This programme aims to assist SMEs in the Objective One region of Wales to export for the first time, or into new markets, through a 75 per cent subsidy on travel and accommodation costs for trade missions, export development counsellors for advice and assistance, ‘fit to export’ diagnostic management review via one-to-one consultancy for companies to analyse their own capabilities when exporting, and specialist management support to develop an export plan. According to WTI, this programme, since its inception in September 2002, has generated £130m in new export business, helping over 100 companies export for the first time, and 350 companies visit 42 international trade events. Again, this type of support seems most suitable for type 1 companies, though again there are case study companies that seem to fall into each of the four different categories. 1.

Type I Derma Shield produces an invisible breathable protective coat for skin, currently used in the chemical industry medicine, film industry and fishing industry. Export Assist has worked as a change agent, promoting a change in attitude and trade links which have generated exports to Australia and New Zealand and links with Malaysia and Singapore. In many ways the product appears to be one which would lend itself to a ‘born global’ scenario, though the firm’s own statements suggest it needed initial

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assistance in seeing the global potential of the products. This may indicate both the legitimacy of the approach adopted by WTI and also one of the problems facing the organization in encouraging Welsh exports. Type II Hydra-Ject produces advanced valve and pipeline systems suitable for water and gas pipelines. Export Assist helped in sending personnel to trade missions in Japan and Brazil, with Brazil being seen as a significant market. In addition, they have accessed information via the British consulates, as well as using the local export development counsellor to generate a long-term export plan. Type III Bowman Consulting produces risk assessment software for the international petrochemical industry, working with BP, Castrol, and BP/SECCO (Shanghai Petrochemical Co Ltd). Export Assist helped the development of a business model applicable to international trade, and tailoring of the product to specific countries (the product currently being converted to 27 different languages). Type IV Anglesey Dolls Houses produces high-quality doll’s houses, already sold to Russia, Malaysia and the USA. Export Assist has facilitated entry into new markets in the Republic of Ireland, Holland and Germany.

2.

3.

4.

Discussion This initial review of the activities of WTI suggests that the policies followed are in line with those suggested by theory and focus correctly on support for firms new to exporting. There are, however, some areas where additional policy may be suitable in the future: ● ●

●

Type I companies may benefit from student placements of those with international management and language skills, to assist in knowledge transfer. Type I and Type II companies could be assisted in their development of websites which could be used for internationalization purposes (for products capable of being marketed and sold over the internet). Type II companies could be helped in the development of virtual organizations, where network activities between companies could assist in exporting activities and relevant skills.

Generally, the statistics indicate an improving picture for Welsh exporting, both absolutely and relative to the UK as a whole. The value of exports for Wales for the year to June 2004 rose by 5.2 per cent compared to the same period a year earlier. This was in excess of the growth in the value of exports, for the total of all UK regions also rose over the same period (2.3 per cent). Growth since 2001 was also higher for Wales than the average across the UK regions. This increase for Wales was made up of an increase of 19.7 per cent in exports to non-EU countries, partly offset by a decrease of 0.8 per cent in exports to EU countries. Despite this fall, EU countries remained the destination of a large proportion (67 per cent in the year to June 2004) of Welsh exports, compared to an average of 55 per cent across the UK regions. While Figure 41.4 shows (Jones-Evans and Brooksbank, 2005), that 68 per cent of start-ups and 82 per cent of owner-managers in Wales had no export orientation, the corresponding figures for UK are slightly worse (start-ups 70 per cent and owner-managers 85 per cent). On a regional level, North Wales demonstrates a better picture, with 57 per cent start-ups having no exports whilst,

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% with no export orientation

120 100 80 60 40 20 0 South East Wales

South West Wales

North Wales

Mid-Wales

Start-ups

West Wales and the Valleys

East Wales

Wales

UK

Owner-managers

Source: Jones-Evans and Brooksbank (2005).

Figure 41.4

Companies with no export orientation (2005) by Welsh region

in Mid-Wales, 75 per cent of owner-managers had no exports. This means that start-ups in North Wales and owner-managers in Mid-Wales are more export-oriented than other regions of Wales. In addition, according to the Office for National Statistics (10 January 2006), the value of exports for Wales for the latest four quarters (quarter 4, 2004 to quarter 3, 2005) rose by £727 million (9.3 per cent) compared to the previous four quarters.5 The total value of UK exports over the same period also rose by 7.3 per cent. The £727 million is split into £639 million to non-EU countries (24.8 per cent) and £87 million to EU countries (1.7 per cent). The comparable UK figures are 11.4 per cent and 4.1 per cent, respectively. There are other data, however, which may suggest the basic nature of this exporting. For example, the main destinations for Welsh exports (shown in Figure 41.5) are relatively familiar and/or geographically close countries such as USA, Germany, Ireland, France and Belgium. Figure 41.5 shows the top destinations for Welsh exports. In comparison, countries outside the EU were not as well represented. For the UK as a whole, Figure 41.6 shows non-EU countries taking 45 per cent of exports (16 per cent for US and 29 per cent for other non-EU). The structure of exports also suggests that many of Wales’s exports are still dominated by older traditional industries, rather than those which theory would suggest are likely to maximize the benefits of export-led growth. In terms of high-value products, metal exports come first, followed by engineering, energy, chemicals and automotive. Figure 41.7 shows that, in 2004, 62 per cent of Welsh exports by value were from the top four product sectors such as chemicals (17 per cent), metals (16 per cent), engineering (15 per cent) and energy products (14 per cent). In contrast, Figure 41.8 shows that, in the UK in 2004, these traditional sectors accounted for only 44 per cent of exports, IT, Telecommunications, Automotive and biotechnology/pharmaceuticals accounting for 30 per cent, compared with 18 per cent (of those identified) in Wales.

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USA 16%

Other non-EU 18%

Other EU 10%

Germany 14%

Netherlands 5% Italy 5%

France 9% Spain 6%

Belgium 9%

Ireland 8%

Source: Statistics and Analysis of Trade Unit, HM Revenue and Customs, 29 November 2005.

Figure 41.5

Top destinations for Welsh exports, 2004 USA 16% Other non-EU 29%

Germany 11%

France 9% Other EU 9% Belgium 5%

Netherlands 5% Italy 4%

Spain 5%

Ireland 7%

Source: Statistics and Analysis of Trade Unit, HM Revenue and Customs, 29 November 2005.

Figure 41.6

Top destinations for UK Exports, 2004

Limitations of the study and concluding comment This study has undertaken an initial analysis of the role of WTI in promoting SME exporting and internationalization. There is still much work to be done to examine the validity of any claimed link between the public sector intervention and true economic growth through exporting propensity. In 2005, the Univerisity of Glamorgan and Cardiff University teamed up to create a new National Entrepreneurship Observatory for Wales (NEO). This £1.7m

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Handbook of research on European business and entrepreneurship Other 14%

Chemicals 17%

Telecommunications 2% IT and electronics 6% Household goods 6%

Metals 16%

Automotive 10% Engineering 15%

Energy 14%

Source: Statistics and Analysis of Trade Unit, HM Revenue and Customs, 29 November 2005.

Figure 41.7

Top products exported from Wales, 2004 IT & Electronics 7%

Chemicals 11% Metals 9%

Other 26%

Engineering 17%

Telecommunications 3% Biotechnology & Pharmaceuticals 7%

Automotive 13%

Energy 7%

Source: Statistics and Analysis of Trade Unit, HM Revenue and Customs, 29 November 2005.

Figure 41.8

Top products exported from the UK, 2004

project will, over the next three years, coordinate the largest regional version of GEM in the world. In doing so, the research team at NEO will specifically concentrate part of its activity on a detailed examination of exporting by new and existing firms in an attempt to evaluate the success of WTI. While the review in this chapter has identified some gaps in present policy, it has not examined the weightings given to different elements of policy. For example, we have not looked at new versus existing exporters, ‘natural exporters’ versus ‘reluctant exporters’, and so on, in order to examine whether the focus is correct. One area of particular interest and potential importance is that of ICT usage in promoting export activity. Indeed, according to a recent report from Opportunity Wales

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(2003), micro and small enterprises in particular need more encouragement in the takeup and use of ICTs and e-Commerce. Indeed, although medium enterprises are responding, small and micro-enterprises are still reluctant to adopt e-Commerce tools, especially the more advanced purchasing and sales functions. Their report shows that Welsh SMEs are feeling the benefits of e-Commerce as they reach new customers, both in the UK and overseas. The impact of e-Commerce adoption for respondents to their survey is thus described as follows: ● ● ● ● ●

28 per cent with Internet access had won new customers via the Internet. The tourism sector shows the best results, with 46 per cent having won new customers via the Web. Nearly half of SMEs (44 per cent) marketing their business overseas through a website and/or e-mail have won new customers. Almost one-third (31 per cent) intend to expand their use of e-Commerce in the next 12 months. The most frequently reported benefit experienced through the use of e-Commerce is improved customer communication, indicated by 12 per cent of respondents.

Compared to the rest of the UK, however, Wales is the worst of the regions and nations for E-Commerce adoption (Jones et al., 2003). This is one area, amongst many, where there remains a need for much further research. Whether or not it will be possible to determine a testable link between WTI programmes and sustained economic development in Wales is, of course, the million dollar question. It is hoped that the research resource now provided by the NEO project will, at least, take us a little farther down the road. Notes 1. About 2/3 of Wales qualify for European Objective 1 funding where GDP per capita is lower than the EU average levels of 75 per cent. Almost all of the West Wales and Valleys qualifies for Objective 1 status (see Figure 40.3). 2. ExportAssist is a WTI initiative funded by £8.6m of Objective 1 money and beginning in September 2002. The initiative aims to give companies the help they need to break into overseas markets for the first time, as well as support for existing exporters who want to open new markets. 3. www.walestrade.com. 4. All the information on WTI comes from www.walestrade.com. 5. The figures relate to goods that are exported to destinations outside the UK.

References

Andersson, S., J. Gabrielsson and I. Wictor (2004), ‘International activities in small firms: examining factors influencing the internationalization and export growth of small firms’, Canadian Journal of Administrative Sciences, 21(1), 22–34. Au, K.F. and D.C.K. Ho (2002), ‘Electronic commerce: a business model for Hong Kong Clothing SMEs’, International Journal of Services Technology and Management, 3(1), 5–21. Balaguer, J. and M. Cantavella-Jorda (2004), ‘Structural change in exports and economic growth: cointegration and causality analysis for Spain (1961–2000)’, Applied Economics, 36, 473–7. Balassa, B. (1978), ‘Exports and growth: further evidence’, Journal of Development Economics, 5(2), 181–9. Bell, J. (1997), ‘A comparative study of the export problems of small software exporters in Finland, Ireland and Norway’, International Business Review, 6(6), 585–604. Bell, J. and S. Young (1998), ‘Towards an integrative framework of the internationalisation of the firm’, in G. Hooley, R. Loveridge and D. Wilson, (eds), Internationalisation : Process, Context and Markets, London: Macmillan.

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Bell, J., D. Crick and S. Young (2004), ‘Small firm internationalisation and business strategy: an exploratory study of ‘‘knowledge-intensive’’ and ‘‘traditional’’ manufacturing firms in the UK’, International Small Business Journal, 22(1), 23–53. Brusco, S. (1982), ‘The Emilian model: productive decentralisation and social integration’, Cambridge Journal of Economics, 6, 167–84. Brusco, S. and E. Righi (1989), ‘Local government, industrial policy and social consensus : the case of Modena (Italy)’, Economy and Society, 18(4), 405–24. Burns, P. and J. Harrison (1996), ‘Growth’, in P.Burns and J. Dewhurst (eds), Small Business and Entrepreneurship 2nd edn, Basingstoke: Macmillan Press. Calderon, C., A. Chong and L. Zanforlin (2001), ‘On non-linearities between exports of manufactures and economic growth’, Journal of Applied Economics, 4(2), 279–311. Chetty, S. and D.B. Holm (2000), ‘Internationalisation of small to medium sized manufacturing firms : a network approach’, International Business Review, 9, 77–93. Cooke, P. (1997), ‘Regions in a global market : the experiences of Wales and Baden Wurttemburg’, Review of International Political Economy, 4(2), 349–81. Crick, D., S. Chaudhry and S. Batstone (2000), ‘Revisiting the concentration versus spreading debate as a successful export growth strategy: the case of UK SMEs exporting agricultural-related products’, Entrepreneurship and Regional Development, 12, 49–67. Di Chiara, A. and A. Minguzzi (2002), ‘Success factors in SMEs’ internationalisation processes: an italian investigation’, Journal of Small Business Management, 40(2), 144–53. European Commission (1998), ‘A common definition of European SMEs’, Euro-Info, March, European Commission, Brussels. Fletcher, D. (2004), ‘International entrepreneurship and the small business’, Entrepreneurship and Regional Development, 16, 289–305. Grossman, G.M. and E. Helpman (1991), Innovation and Growth in Global Economy, Cambridge, MA: MIT Press. Hamill, J. and K. Gregory (1997), ‘Internet marketing in the internationalisation of UK SMEs’, Journal of Marketing Management, 13, 9–28. Hart, S. and N. Tzokas (1999), ‘The impact of marketing research activity on SME export performance: evidence from the UK’, Journal of Small Business Management, April, 63–75. Hatemi-J., A. and M. Irandoust (2000), ‘Export performance and economic growth causality: an empirical analysis’, Atlantic Economic Journal, 28(4), 412–26. Helpman, E. and P. Krugman (1985), Market Structure and Foreign Trade, Cambridge, MA: MIT Press. Holzmuller, H.H. and B. Stottinger (1996), ‘structural modelling of success factors in exporting: crossvalidation and further development of an export performance model’, Journal of International Marketing, 4(2), 6. Ibeh, K. (2000), ‘Internationalisation and the small firm’, in Dylan Jones-Evans and Sara Carter (eds), Enterprise and Small Business: Principles, Practice and Policy, London: Prentice-Hall, pp. 434–52. Jin, J.C. (2002), ‘Exports and growth: is the export-led growth hypothesis valid for provincial economies’, Applied Economics, 34, 63–76. Jones, P., E.J. Muir and P. Beynon-Davis (2003), ‘An identification and classification of ebusiness barriers to growth within the SME sector’, WEI Working Paper Series 31, University of Glamorgan, Pontypridd. Jones-Evans, D. and D. Brooksbank (2000), Global Enterprise Monitor: 2000 Wales Executive Report, Welsh Development Agency, Cardiff. Jones-Evans, D. and D. Brooksbank (2004), Global Enterprise Monitor: 2000 Wales Executive Report, Welsh Development Agency, Cardiff. Jones-Evans, D. and D. Brooksbank (2005), Global Entrepreneurship Monitor: 2005, The University of Glamorgan and The University of Cardiff. Joynt, P. and L. Welch (1985), ‘A strategy for small business internationalisation’, International Marketing Review, Autumn, 64–73. Julien, P. and C. Ramangalahy (2003), ‘Competitive strategy and performance of exporting SMEs’, Entrepreneurship Theory and Practice, 27(3), 2–19. Kaleka, A. and C.S. Katsikeas (1995), ‘Exporting problems: the relevance of export development’, Journal of Marketing Management, 11, 499–515. Kinsella, T.K. (1989), ‘Regional economic development organisations and their inter-organisational networks: towards a broadened view of development’, Economic Development Review, Summer, 14–19. Levin, A. and L. Raut (1997), ‘Complementarities between exports and human capital in economic growth: evidence from the semi-industrialized countries’, Economic Development and Cultural Change, 46, 445–89. Madsen, K. and P. Servais (1997), ‘The internationalisation of born globals: an evolutionary process’, International Business Review, 6(6), 561–83. Mariotti, S. and L. Piscitello (2001), ‘Localized capabilities and the internationalisation of manufacturing activities by SMEs’, Entrepreneurship and Regional Development, 13, 65–80.

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McKinnon, R. (1964), ‘Foreign exchange constraint in economic development and efficient aid allocation’, Economic Journal, 74, 388–409. Merrilees, B. and J.H. Tiessen (1999), ‘Building generalizable SME international marketing models using case studies’, International Marketing Review, 16 (4/5), 326–44. Moini, A.H. (1998), ‘Small firms exporting: how effective are government export assistance programs?’, Journal of Small Business Management, January, 1–15. Opportunity Wales (2003), E Commerce in Welsh SMEs: The State of the Nation Report, Opportunity Wales, Cardiff. Panas, E. and G. Vamvoukas (2002), ‘Further evidence on the export-led growth hypothesis’, Applied Economic Letters, 9, 731-5. Reynolds, P.D., M. Hay, S.M. Camp and Kauffman Centre for Entrepreneurial Leadership (1999), Global Entrepreneurship Monitor, Ewing M. Kauffman Foundation, Babson College, Wellesley, MA. Riezman, R.G., C.H. Whiteman and P.M. Summers (1996), ‘The engine of growth or its handmaiden’, Empirical Economics, 21, 77–110. Rosa, P., M. Scott and R. Gilbert (1994), ‘The internal change agent approach to export training in small firms’, Journal of European Industrial Training, 18(3), 17–22. Storey, D.J. (1999), Understanding the Small Business Sector, London: Routledge. Styles, K. and M. Goldsworthy (2002), ‘GI extranet: a case study in applying technology for competitive advantage’, International Journal of Networking and Virtual Organisations, 1(1), 82–90. Welsh Assembly Government (2004), A Winning Wales – Annual Report 2003–2004, Cardiff : Welsh Assembly Government. Westhead, P., M. Wright and D. Ucbasaran (2004), ‘Internationalisation of private firms: environmental turbulence and organisational strategies and resources’, Entrepreneurship and Regional Development, 16, 501–22.

PART IV CONCLUSION

42 Towards a theory of internationalization for European Entrepreneurship Léo-Paul Dana, Mary Han, Vanessa Ratten and Isabell M. Welpe

Why is it important to understand SME internationalization in Europe? It has been said that, in today’s economy, there is no such thing as international business and management, since all business and management activity today involves international activities. Internationalization therefore has become an integral part of any commercial activity and it is difficult to find any country or company in the world that is not engaged in some form of international business. So far, there have been many studies on the globalization strategies of large firms and multinational enterprises but until recently SMEs have been overlooked in the literature to date (Dana, Etemad and Wright, 1999b). Prior research on SMEs tends to concentrate on their impact on domestic economic growth and the few extant studies of SME internationalization are focused on the United States and Japan or on individual European countries. Comparative, regional research on SMEs in Europe is still rare. We set our research in Europe for several reasons. First, Europe is a unique agglomeration of countries within the world. Its countries are diverse in size, political background and economic development. Europe has both island economies and transition economies and its developed economies range from the very small (for example, Vatican City) to the very powerful (for example, United Kingdom). Moreover, Europe is influenced by the two major world trade networks, the European Union (EU) and the World Trade Organization (WTO), so there are many opportunities for foreign direct investment (FDI) and export. Indeed, the EU is the world’s second-largest economy by GDP (see Table 42.1) and the third most populous region: it is an international trade powerhouse (World Bank, 2006). Studying the internationalization process of SMEs in such a diverse and important region has the potential to shed light on the internationalization phenomenon of SMEs in other parts of the world as well as to test the fit and applicability of existing theories of internationalization to the diverse European context. Second, extending the first reason, Japan, the United States and Europe form the world’s largest trading blocs; however, only Europe is itself a bloc of many countries. As such, it offers unique insights into international business and entrepreneurship that have not yet been fully explored. Third, Europe is politically and socially diverse. Relatively small, highly-educated, technologically-advanced countries neighbour nations which have struggled with years of recession, reverse economic growth and war. Based on the meta-analysis of 36 recent empirical studies on the internationalization of SMEs in Europe, we provide testable propositions of the internationalization of SMEs in (1) transitional economies, (2) developed economies, and (3) island economies. Overall, our study contributes to the international entrepreneurship research and practice in several aspects. First, by unravelling the uniqueness of European international entrepreneurship, 743

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Table 42.1

EU countries from richest to poorest*

Country

Population

Gross national income ($)

Luxembourg Finland Sweden Ireland Austria Denmark Belgium United Kingdom Netherlands France Germany Italy Spain Greece Cyprus Slovenia Portugal Malta Czech Republic Hungary Slovakia Estonia Poland Lithuania Latvia

474 413 5 231 372 9 016 596 4 062 235 8 192 880 5 450 661 10 379 067 60 609 153 16 491 461 60 876 136 82 422 299 58 133 509 40 397 842 10 688 058 784 301 2 010 347 10 605 870 400 214 10 235 455 9 981 334 5 439 448 1 324 333 38 536 869 3 585 906 2 274 735)

61 610 35 150 35 070 32 930 31 800 31 770 31 530 31 430 31 360 29 460 28 170 28 120 24 750 22 230 22 230 20 830 19 240 18 590 18 420 15 800 14 480 13 630 12 730 12 690 11 820

Note: * Based on 2004 PPP GNP per capita in international. Boasting the world’s second-largest economy by GDP, and third-highest population, the European Union (EU) is an international trade powerhouse. Based on World Bank Development Indicators published in July 2006, here are the 25 European Union countries and their corresponding GNP per capita based on global purchasing power parity (PPP) in international dollars. GNP per capita, also referred to as Gross National Income, represents the total amount of money that a country’s consumers spend on all goods and services in a year divided by that country’s population.

we build understanding that will transfer to other parts of the world. Second, our work fills a gap in the existing literature because it includes many European countries in their diversity, addresses the critical role of transitioning economies, and recognizes that Europe has been undergoing rapid change. Finally, our theoretical frameworks help to inform and depict these variables and the process of SME internationalization with supporting evidence from 36 European countries. Literature review Internationalization is part of the ongoing strategy process of most businesses that aim to grow. Calof and Beamish (1995) define internationalization as the process by which firms become more aware of the direct and indirect influence of international transactions on their future and establish transactions and conduct business with other countries.

Towards a theory of internationalization for European entrepreneurship 745 Gurau (2002) defines internationalization as any form of business activity that involves a foreign element, such as in-sourcing internationally, exchanging information across borders, producing, commercializing or investing globally, establishing contractual or informal agreements with foreign partners or conducting international research. The main difference between internationalization and alternative growth strategies is that the firm transfers or sources products, services or resources across national boundaries. Hence, the firm has to select in which country(ies) these transactions should be performed and the firm has to choose a strategy for international exchange transaction modality: in other words, an entry strategy. These two choices, country and entry, are the key strategic decisions of internationalization, but, most researchers have concentrated on the question of international entry mode, assuming country selection as simply a subor side-issue. There are several possible reasons for this: (1) entry mode is one of the core components of the internationalization concept; (2) choosing the right entry mode is one of the most critical decisions for the firm; and (3) theoretical contributions in this field are the most advanced. The international business literature presents several theories to explain why firms engage in international operations. Monopolistic advantage theory suggests that firms will internationalize when they can use their established advantages in foreign countries at little or no additional cost (Westhead, 2001). The product life cycle theory suggests that firms internationalize in an attempt to protect their existing markets of mature products (Westhead, 2001). Oligopolistic reaction theory suggests that firms will try to reduce their risks by imitating the entrance of competing firms into foreign operations (Westhead, 2001). Another theory is that firms internationalize to reduce costs by transferring goods and services across national borders to less expensive locations (Westhead, 2001; Buckley and Casson, 1988). Strategic choice theory suggests that firms facing strategic complexities respond opportunistically to changing market opportunities by carefully evaluating risks; thus managers actively determine many features of the internationalization process (Westhead, 2001). Network theory states that knowledge-based business service firms (in particular) achieve competitive advantage by developing mutually supportive interactions with other service firms (Coviello, 1999). Transaction cost theory suggests that firms choose the least-cost international location for each activity they perform; they grow by internationalizing markets to bring interdependent activities under common ownership and control, up to the point where the benefits of further internationalization are outweighed by the costs. Gurau (2002) uses resource complementarity arguments for the internationalization of small firms. He suggests that the lack of specialized resources in domestic markets has forced high-technology SMEs to internationalize in order to gain access to essential complementary resources. The classic economic view of internationalization is based on the theory of competitive advantage. Over the years, internationalization has been viewed in various contexts, yet, in Europe, it was seldom seen as a competitive necessity, only as a growth option. Furthermore, traditional internationalization theories have mainly focused on large multinational corporations; their arguments are less pertinent to smaller firms (Dana et al., 1999a; 1999b). Even today, many small firms concentrate on their domestic market, neglecting international opportunities. Until recently, firms wishing to avoid the inherent unknowns of competing in foreign markets could simply stay small and local. However, trade liberalization has levelled protective walls, especially within Europe. Even small

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local businesses are threatened by international competitors penetrating formerly protected domestic markets. The success of entrepreneurs will rest largely on their ability to become competitive across Europe. In the past, internationalization was usually depicted as a gradual, incremental process. The Uppsala Model (Johanson and Wiedersheim-Paul, 1975) identified four stages of progressive entry into international markets. Similar stage models of internationalization were developed by Bilkey and Tesar (1977), Cavusgil (1980; 1984), Johanson and Vahlne (1977) and Newbould et al. (1978). A major shortcoming of the stage model is that it assumes a considerable span of time during which a firm can gain experience, accumulate resources and develop the managerial capabilities required for international operations. Through successively more involved modes of operation, small firms internationalize gradually, in a controlled fashion. However, the rapid globalization of markets (Levitt, 1983) and competition (Ohmae, 1989; 1990) is dramatically reducing that time span and constraining the ability of small firms to control their own development paths. A variety of circumstances may force small firms to deviate from the stage model. For example, a firm in a vertically integrated industry may have to internationalize immediately in order to reach the scale necessary to survive. When the economics of high start-up costs, small domestic market size and shortened product life-cycle combine, firms may have no choice but to become ‘instant internationals’ in order to survive (Oviatt and McDougall, 1999; Knight and Cavusgil, 1996). In the present global business environment, time has become a critical strategic weapon (Stalk, 1988; Stalk and Hout, 1990). In such an environment, time-delayed models, such as stage theory, do not provide an appropriate scenario for either survival or growth. Smaller firms may have neither the prerequisite resources to internationalize, nor the luxury of unlimited time in which to acquire such resources. Entrepreneurial behaviour cannot follow the gradual and controlled process of conventional stage theories. Coviello and Martin (1999) concluded that small, high-tech firms rarely follow a stepwise approach to internationalization. Jones (1999) showed that the initial cross-border activity of small firms is often importing, rather than exporting. This finding is in contrast to the prescription of stage theories. All the aforementioned theories in this section have merit, but none addresses the heterogeneity of Europe. Previous research has not addressed the fact that SMEs have different access to resources, capabilities, networks and clusters, that they operate under diverse government policies across Europe and that they face different market conditions and competitive structures. Model development To develop our model, we categorize European countries into three major types: transition economies, market economies and island economies. Transition economies Transition economies exist in countries that have shifted from centralized political power to privatization (Kornai, 1999) and from central planning to market economics. They are sometimes called ‘emerging market economies’ (Gelb, 1999). Their economic growth is such that they already interact with advanced market economies (Svejnar, 2002). Eventually, these countries will compete with developed market economies, but they are not at this stage yet, they are in transition. Examples include Estonia, Poland, the Czech Republic, Hungry, Slovenia, Bulgaria and Slovakia.

Towards a theory of internationalization for European entrepreneurship 747 Market economies Market economies exist in countries that generate rapid and sustainable rates of economic growth. They compete with other advanced market economies without any trade protection. Examples include Germany, France, the United Kingdom, Italy, Netherlands, Austria, Belgium, Denmark, Turkey, Switzerland and Finland. Island economies Island economies exist in countries with self-sustained economies and can be separate geographically from other countries or be geographically next to another country. Examples include Malta, Andorra, Monaco and Liechtenstein. Internationalization of SMEs in transition economies There are three issues, unique to transition economies, that have not yet been fully explained in the extant literature: (1) why have so many SMEs emerged in these countries in such a short time; (2) why are they concurrently internationalizing at the same pace; and (3) how does the internationalization of SMEs operate? We adopt a variable-theorizing and process-theorizing approach to explain the factors behind these interdependent issues. Figure 42.1 illustrates the process of SME internationalization in transition economies. We also propose four variables that might be contributing to this phenomenon.

Foreign trade Blank / no clue / state of uncertainty

Knowledge transfer Lack of resources

Mediating effect

Developing local domestic SMEs

Openness in economies Learning Lack of capabilities

Unclear government policy

Rapid internationalization of SMEs

(Transitioning from planned to market economies) Increased absorptive capacity

Internationalization of SMEs

Building ethnic ties

Figure 42.1

Process of internationalization of SMEs in transition economies

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The transition from central planning economies to market economies has been difficult. We have seen the collapse of the Soviet political and economic system in the late 1980s, the fall of the Berlin wall in 1989 and current economic recession in Soviet Bloc countries. Yet transition economies have progressed (Svejnar, 2002), evidenced by the rapid internationalization of SMEs. We argue that the microeconomic and macroeconomic openness of these countries is a mediating factor in this development. Before abandoning central planning in the late 1980s, transition economies were characterized by poor economic growth, inefficient resource distribution, poor access to information about other market models and unclear government policy. Economic rigidity discouraged innovation, invention and efficient allocation of resources. The population lived in a state of fear and uncertainty and lacked the resources, capabilities and knowledge to make informed decisions. The rules of the central government planning systems were unclear and opaque. Corruption undermined regulation and made foreign trade and investment risky. These conditions directly affected domestic and international entrepreneurship. Macroeconomic and microeconomic reform In the late 1980s, various Soviet Bloc policy makers formulated strategies to open their economies via macroeconomic stabilization and microeconomic restructuring. These policies were adopted at different rates and to varying degrees by the transition economies, hence we see differences in the internationalization strategies of SMEs in these countries. The major macroeconomic reforms included dismantling the communist system, abolishing the Council for Mutual Economic Assistance (CMEA) and encouraging price liberalization. Transition economies took several steps to operationalize these objectives, including (a) implementing restrictive fiscal and monetary policies, (b) managing wages, (c) fixing exchange rate, (d) reducing subsidies to state-owned enterprises, (e) breaking up the ‘monobank’ system to create new and independent banks, (f) implementing smallscale privatization by encouraging new firms to form and (g) providing a social security safety net. These policies resulted in several benefits. First, they created a political, economic and legal environment more hospitable to foreign direct investment (FDI). Privatization projects became available and feasible (Svejnar, 2002), particularly given these countries’ proximity to the EU. Second, increased FDI brought in new learning from the outside world. Multinationals transferred knowledge and know-how to local firms, increasing absorptive capacity in the host countries. Exports increased dramatically as multinationals sought returns on their investments. Third, expatriates (ethic ties) returned home from other market economies, bringing resources, knowledge and skills and stimulating trade and interaction between developed and transition economies. Macroeconomic reform has improved economic performance in Central Europe and in Baltic countries, though it has been less successful in Russia, the other countries of the Commonwealth of Independent States and the Balkans. Proposition 1 SME internationalization is higher in transition economies that have implemented macroeconomic reform. Proposition 2 The more open the macro economy, the more rapid the internationalization activities.

Towards a theory of internationalization for European entrepreneurship 749 The major microeconomic reform was to liberalize prices in energy, housing and basic consumption goods. This was implemented by (a) privatizing enterprises, (b) building legal systems and related institutions, (c) developing viable banking systems and regulatory infrastructure and (d) regulating the labour market and unemployment and retirement systems (Svejnar, 2002). Proposition 3 Domestic entrepreneurship is higher in transition economies that have implemented microeconomic reform. Proposition 4 The more open the micro economy, the more rapid the domestic entrepreneurship activities. Hungary: a successful reformer There are major obstacles to macroeconomic and microeconomic reform in transition countries. Success often depends on the ability of the government to control corruption and collect sufficient tax revenues to finance public programmes. However, implementing these reforms is critical to shifting from a centrally planned economy to an economy in which domestic entrepreneurs and foreign investors can exploit and explore new opportunities. The example of Hungary illustrates how domestic entrepreneurship and SME internationalization occur concurrently and rapidly (Table 42.2). Hungary has a relatively strong track record of reform (see Box 42.1). It has built clear property rights, improved corporate governance, privatized most state-owned enterprises and substantially supported the creation of new and private firms (Svejnar, 2002). Macroeconomic stability and microeconomic institutional restructuring have helped the country increase its level of knowledge, information, resources, learning and absorptive Table 42.2

Economic openness, internationalization and performance

Transition Economic economy openness Macro reforms

Micro reforms

Poland

Medium

Foreign direct investment Rapidly privatize small enterprises Encourage creation of new firms

Hungary

High

Significant flow of foreign State-owned direct investment enterprises sold Substantially support outright to outside creation of new firms owners Break up and privatize state-owned large enterprises into small firms

Lithuania Low

Foreign direct investment Encourage creation of new firms

Results

Firms remain stateSlow owned, but run by internationalization independently appointed supervisory board Fast internationalization Improved managerial skills More external revenues

Subsidized, Fast management– internationalization employee buy-out of Poor economic state-owned firms performance

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BOX 42.1

EAST-CENTRAL EUROPE GROWTH OUTPACES CORE EU MARCH 13, 2006 (COPIED FROM WEBSITE OF EDC, WRITTEN BY JEAN-LOUIS RENAUD)

The release of final GDP growth numbers from the four largest EU accession countries – Czech, Hungary, Poland, and Slovakia – confirm these countries’ rapid growth compared to the core EU. Czech GDP growth soared to a stellar 6.9% y/y pace in Q4 2005 versus expectations for a 5.0% increase. This boosted 2005 Czech GDP growth to 6.0%, the biggest increase since the Czech Republic and Slovakia separated 13 years ago. Foreign trade remained the mainstay of growth, although domestic consumption and investment also contributed to the outturn. Hungary’s GDP growth eased to 4.3% y/y in the third quarter from 4.5% in the third quarter 2005. Strong manufacturing and construction sectors as well as robust exports remained the key drivers of Hungary’s economic growth. January trade data showed Hungary’s exports jumped 21.6% y/y, the fastest pace in 19 months, following a 14.6% increase in December. Imports, meanwhile, grew by 23.0% y/y, up 9.1% on the December growth which already represented a 19-month high. Poland’s GDP growth in 2005 was 3.5%: not bad, but still very good considering the poor start at the beginning of last year. Economic activity in the country grew steadily in 2005, from 2.1% y/y in Q1 to 2.8% y/y in Q2, 3.7% y/y in Q3 and 4.2% y/y in Q4. Hence, much of this growth is expected to continue. Source:

Jean-Louis Renaud, EDC website (13 March 2006)

capacity. These characteristics have helped it generate new firms, accelerate economic growth and stimulate SMEs to internationalize. Thus, we propose: Proposition 5 Transition economies are more likely to achieve superior performance in both domestic entrepreneurship and SME internationalization when they achieve macro and micro economic openness. Proposition 6 The more open the economy (macro and micro), the more likely that rapid domestic entrepreneurship and SME internationalization will occur. Internationalization of SMEs in market economies Extant literature suggests that resources are important criteria for internationalization (Zahra, Korri and Yu, 2005). We argue that the internationalization of SMEs in Europe is positively influenced by (1) government policy, (2) membership of a cluster or network, (3) internal firm resources and capabilities and (4) the size of the domestic market. SMEs that leverage resources and capabilities, operate under favourable government policy regimes and take advantage of networks and clusters, will derive greater performance benefits from internationalization. These factors will accelerate SME internationalization.

Towards a theory of internationalization for European entrepreneurship 751

Resources - Human - Technology - Financial

+

Government policy + - Fostering entrepreneurial development

Network and clustering

Internationalization of SMEs

+

- EU - WTO

Size of domestic market

Figure 42.2

+

Model for internationalization of SMEs in market economies

Proposition 7 The internationalization of SMEs in Europe is driven by factors such as government policy, national economy, firm resources, membership of networks and clusters, market competition and industry sector. Proposition 8 Firms in established economies in Europe that can leverage resources, join a cluster and operate under favourable government policies will internationalize fastest and achieve higher performance benefits. We draw on propositions 7 and 8 to develop a model for SME internationalization in market economies in Europe (Figure 42.2). This model helps to explain the importance of resources (R), networks (N), government policy (P) and size of the domestic market (S). The greater the intensity of R, N, P and S, the greater the benefits for the internationalizing SME and the faster its speed of internationalization.

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Handbook of research on European business and entrepreneurship

Core product and services

Figure 42.3

+

Geographical distance and product

Increase level of internationalization

Model for internationalization of SMEs in island economies

Internationalization of SMEs in island economies Based on observation, we argue that there are two major factors that enhance the internationalization of SMEs in island economies: (1) the availability of island-specific core products, services and business processes, and (2) the geographical location of the island (Figure 42.3). The former argument is consistent with the resource-based view that productivity (in this case, of the country) largely depends on available resources (Wernerfelt, 1984; Barney, 1991). The geographical location of the island also has an impact on domestic and international entrepreneurship. For example, the success of the tourism industry in Malta is largely due to the proximity of the island to other major market economies. Thus, we propose: Proposition 9 Core island specific products, services and business processes are critical to island economic growth. Proposition 10 Geographical location and proximity of the island to other major market economies significantly affects economic growth and internationalization. Proposition 11 The more and better the island’s core products, services and business process, coupled with the close proximity of the island to a major network of market economies, positively influences the domestic and internationalization activities. Research methods Table 42.3 provides an overview of the countries in our book, which represent the different economic, cultural and political spectrums existing in Europe. We have examined 36 studies conducted by over 70 researchers. They include six island economies, 12 former East European countries and 18 West European countries. The sample is also well balanced between small economies (such as Andorra, Cyprus, Liechtenstein) and large economies (such as Germany, Spain, France) and between EU members (for example, Belgium, Italy) and non-EU members (for example, Belarus, Switzerland). The studies in our book make use of a variety of methodological approaches. Study data include secondary as well as primary sources and quantitative as well as qualitative research designs. Each study indicates the state of international entrepreneurship in the respective countries in Europe with regard to SMEs. We conducted content analysis on these empirical studies in order to achieve a more comprehensive understanding of the current phenomenon in Europe and to derive patterns and categories theme by theme. In other words, we analysed

753

Yes Yes Yes Yes Yes No Yes Yes

Candidate Country Yes

6 0656 178 82 431 390 10 668 354 10 006 835 4 015 676 6 556 000 58 103 033 2 290 237

4 397 400 935 400

Croatia Cyprus

Yes Yes Yes Candidate country

7 917 600

Bulgaria

n.a. No Yes No Yes Potential candidate country Acceding country

EU membership

5 387 300 1 268 300 5 215 100 2 114 500

n.a. 71 800 8 037 400 10 044 800 10 339 300 4 207 300

European VCs Andorra Austria Belarus Belgium Bosnia

Denmark Estonia Finland Former Yugoslav Republic of Macedonia France Germany Greece Hungary Ireland Israel Italy Latvia

Population

Market economy Market economy Market economy Transition economy Market economy Market economy Market economy Transition economy

Market economy Transition economy Market economy Transition economy

Transition economy Island economy

Transition economy

n.a. Island economy Market economy Transition economy Market economy Transition economy

Type of country

Characteristics of countries in content analysis

Country

Table 42.3

Survey of high-tech firms 1450 manufacturing firms In-depth case study 2000 SMEs 405 Irish entrepreneurs in tourism enterprise Case studies Survey of medical firms Two samples: 1 Survey by Central Statistical Bureau of Latvia 2 Latvian Exports’ Survey

Email survey of VC firms Secondary data from a range of sources Questionnaire survey of Austrian SMEs Statistical data from two surveys Questionnaire data collected between 1991 and 1995 Case study of a medium-sized company in the food processing industry Secondary data from the reports about SME sector by the Agency for SMEs, Ministry of Economy, National Statistic Institute, Bulgarian National Bank Combination of primary and secondary data Extensive literature search and review and is largely a conceptual analysis Mail and telephone survey Conceptual Secondary data, conceptual Secondary data

Type of sample

754

Yes No Yes Yes Yes No Candidate country No

No Yes Yes No No Yes Yes

EU membership

Constituents of the United Kingdom England 50 690 000 Yes Scotland 5 116 900 Yes Wales 2 958 876 Yes

10 566 212 28 400 20 110 70 40 341 462 90 01 774 7 376 000 69 660 559 47 425 336

34 600 3 596 617 398 534 4 229 700 32 409 16 258 300 38 635 144

Liechtenstein Lithuania Malta Moldova Monaco Netherlands Poland

Portugal San Marino Slovenia Spain Sweden Switzerland Turkey Ukraine

Population

(continued)

Country

Table 42.3

Market economy Market economy Market economy

Market economy Island economy Transition economy Market economy Market economy Market economy Transition economy Transition economy

Island economy Transition economy Island economy Transition economy Island economy Market economy Market economy

Type of country

SMEs in international trade partnerships SMEs in international trade partnerships SMEs in international trade partnerships

Secondary data and survey 44 manufacturing SMEs Government data and case studies Secondary data analysis, qualitative data Government data and case studies Survey data Surveys conducted on SMEs by Poland Scientific Research Committee 81 manufacturing SMEs In depth-interviews Government data Global entrepreneurship monitor data In-depth case studies Survey 98 private companies in Istanbul Empirical data

Type of sample

Towards a theory of internationalization for European entrepreneurship 755 the completed reports to identify patterns, differences, inhibitors to internationalization, and best practices. Content analysis aims to determine the presence of certain concepts and/or results within texts, which researchers quantify and analyse and then draw inferences about the messages within the texts. The categories which we have used to analyse the text are the type of economy, economic openness, macro reforms, micro reforms and result with regard to internationalization of SMEs. Findings Each of the propositions stated will now be examined in terms of whether they were supported or not supported by the findings from the book. Proposition 1 argues that SME internationalization is higher in transition economies that have implemented macroeconomic reform and this is supported by the research. Many new EU members from the former Soviet Union in Eastern Europe, such as Latvia, Lithuania and Estonia, have undergone significant macroeconomic reforms in order to meet EU requirements. As part of the EU, these countries have higher SME internationalization rates than European countries that have not undergone macroeconomic reform. Turkey is an example of a non-EU member country that has low levels of macroeconomic reform being conducted that has resulted in a low SME internationalization rate. Proposition 2 argues that, the more open the macro economy, the more rapid the internationalization activities, and the result is somewhat mixed in the research. Both Ireland and Scotland have open macro economies but have significantly different levels of internationalization activities. While Ireland has been very successful in developing businesses in the IT field, Scotland has not developed its internationalization activities at the same rate. Proposition 3 states that domestic entrepreneurship is higher in transition economies that have implemented microeconomic reform and the result is supported in the research. The Ukraine government has successfully created state innovation agencies and technology parks that have been combined with microeconomic reforms such as the deregulation of state-owned enterprises that have encouraged domestic entrepreneurship. Proposition 4 argues that, the more open the micro economy, the more rapid the domestic entrepreneurship activities, and this was supported by the research. Israel is an example of such a country that has an open micro economy and a very dynamic domestic economy that is highly focused on knowledge-intensive industries such as biotechnology. Proposition 5 states that transition economies are more likely to achieve superior performance in both domestic entrepreneurship and SME internationalization when they achieve macro and micro economic openness and this was supported by the research. New EU members such as Poland have undergone a significant amount of micro economic reform prior to entering the EU and have become more macro economically open as a result of becoming an EU member. However, because of the EU protectionist stance on farming, transition economies in Europe need to focus on competing on a global basis with more macro and micro economic openness. Proposition 6 argues that, the more open the economy (macro and micro), the more likely that rapid domestic entrepreneurship and SME internationalization will occur; the result was mixed in this research. For example, Spain has a low SME internationalization rate with a high percentage of large multinationals that have decreased the SME internationalization rate. Proposition 7 states that internationalization of SMEs in Europe is driven by factors such as government policy, national economy, firms resources, membership of networks

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and clusters, market competition and industry sector, and this proposition is supported. These factors allow different countries in Europe, including small and large population countries, to focus on different aspects of their economy in which they are the most efficient. For example, the internationalization of SMEs in Germany is largely driven by the government policy focusing on international markets, whilst Malta’s government focuses on the development of networks and clusters that encourage collaboration in niche industries such as the craft industry. Proposition 8 argues that firms in established economies in Europe that can leverage resources, join a cluster and operate under favourable government policies will internationalize fastest and achieve higher performance benefits; the results were mixed in the research. Countries in Europe such as Ireland have higher internationalization rates than similar established economies such as Scotland, and Ireland’s growth has largely been attributed to the predominance of technology firms. However, similar government policies in Scotland have yet to see internationalization rates comparable to those of Ireland. Proposition 9 states that core island-specific products, services and business processes are critical to island economic growth and this proposition is supported in the research. Particularly in island economies that are focused on tourism, such as Cyprus, it is important that services be incorporated into measures of economic growth. Likewise, in Liechtenstein, the growth of the financial service sector has greatly increased its growth rate. Proposition 10 argues that geographic location and proximity of the island to other major market economies have a significant impact on economic growth and internationalization, and this was supported by the research. Liechtenstein has benefited from being close geographically to Germany, which has allowed many German businesses to operate in Liechtenstein thanks to the favourable taxation laws. Similarly, Andorra, while being close to Spain, is further away from the other mainland European countries that have affected its economic growth rate. Proposition 11 states that, the more and better an island’s core products, services and business process, coupled with the close proximity of the island to a major network of market economies, positively influences the domestic and internationalization activities, and this was supported by the research. Monaco is a good example of an island economy that has achieved a high internationalization rate through utilizing its position close to France and focusing on high-tech industries. Discussion Much of the existing research on international entrepreneurship takes the position that all transitional economies can be classified together. However, as the chapters in our book show, many transitional economies are at different stages of development that affect SME internationalization rates. For example, Eastern European transitional economies such as Estonia, Latvia and Lithuania, that are now part of the EU, have a macroeconomic environment that is conducive to entrepreneurship because of the stability of financial institutions. However, transitional economies such as Turkey and the Ukraine are at a different stage of development in their quest for EU membership. The conceptual models developed in this chapter also highlight the importance of island economies in Europe. Past research on international entrepreneurship in Europe has seemed to neglect the importance of island economies and the context of geography in developing different types of entrepreneurship. European countries located on the Mediterranean have typically had a

Towards a theory of internationalization for European entrepreneurship 757 craft-based entrepreneurship culture that fosters domestic entrepreneurship. However, despite the existence of island economies, there seems to be a lack of theories to explain international entrepreneurship in island economies. The theoretical models developed in this chapter are an attempt to initiate a framework that can help understanding the role of geography, culture and market conditions in SME internationalization rates in Europe. Thus, it is important for international entrepreneurship theory to take into account these differences when building theory and to take a wider stance on the use of terms such as ‘transitional economies’. Implications This chapter has provided a theoretical framework in which to understand the complexity of the SME internationalization process in Europe. For governmental organizations involved in developing future policy initiatives, this chapter has provided a useful analysis of the ways in which transitional, island and developed economies in Europe conduct their SME internationalization efforts. As the majority of businesses in Europe are SMEs, it is particularly helpful for governments to learn and understand the internationalization process through examining how different factors such as resources and clusters have an impact on a country’s development process. By pinpointing the most important factors that speed up the internationalization process of SMEs, governments can save money and develop more cost-efficient plans for helping SMEs achieve higher rates of market penetration. For practitioners, this chapter is useful in providing examples and a discussion of SME internationalization processes in Europe. Managers can learn through experience and example about the best ways in which to foster internationalization, whether it be through micro or macro policy initiatives. For future research, there needs to be further analysis of the different types of transitional economies and how they differ from island economies. Given the abundant diversity of economic systems in Europe, there is a plethora of research needed on SME internationalization efforts in Europe. References Barney, J.B. (1991), ‘Firm resources and sustained competitive advantage’, Journal of Management, 17(1), 99–120. Bilkey, W.J. and J. Tesar (1977), ‘The export behavior of smaller sized Wisconsin manufacturing firms’, Journal of International Business Studies, 8(1), 93–8. Buckley, P.J. and M. Casson (1988), ‘A theory of co-operation in international business’, Management International Review, Special Issue, 19–38. Calof, J. and P.W. Beamish (1995), ‘Adapting to foreign markets: explaining internationalization’, International Business Review, 4(2), 115–31. Cavusgil, S.T. (1980), ‘On the internationalization process of firms’, European Research, 8, 273–81. Cavusgil, S.T. (1984), ‘Differences among exporting firms based on their degree of internationalization’, Journal of Business Research, 12(2), 195–208. Coviello, N.E. (1999), ‘Internationalization and the smaller firm: a review of contemporary empirical research’, Management International Review, 39(3), 223–31. Coviello, N.E. and K.A.M. Martin (1999), ‘Internationalization of service SMEs: an integrated perspective from the engineering consulting sector’, Journal of International Marketing, 7(4), 42–66. Dana, L., H. Etemad and R.W. Wright (1999a), ‘The impact of globalization on SMEs’, Global Focus, 11(4), 93–105. Dana, L., H. Etemad and R.W. Wright (1999b), ‘The theoretical foundations of international entrepreneurship’, in Richard W. Wright (ed.), International Entrepreneurship: Globalization of Emerging Businesses, Stamford, CN: JAI Press, pp. 3–22. Gelb, A. (1999), ‘The end of transition?’, in a. Brown (ed.), When is the Transition Over?, Kalamazoo, MI.: W.E. Upjohn Institute for Employment Research, pp. 39–49.

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Gurau, C. (2002), ‘The internationalization process of UK biopharmaceutical SMEs’, The Global Business Conference, Istanbul. Johanson, Jan and J. Vahlne (1977), ‘The internationalization process of the firm – a model of knowledge development and increasing foreign market commitments’, Journal of International Business Studies, 8(1), 23–32. Johanson, Jan and F. Wiedersheim-Paul (1975), ‘The internationalization of the firm: four Swedish cases’, Journal of International Management Studies, 12(3), 36–64. Jones, M.V. (1999), ‘Patterns, processes, decisions: the internationalization of small U.K. high technology firms’, Journal of International Marketing, 7(4), 15–41. Knight, G. and S.T. Cavusgil (1996), ‘The born global firm’, in S.T. Cavusgil and T.D. Masden (eds), Advances in International Marketing (8), Greenwich, CT: JAI. Kornai, J. (1999), ‘Reforming the welfare state in postsocialist economies’, in A. Brown (ed.), When is the Transition Over?, Kalamazoo, MI.: W.E. Upjohn Institute for Employment Research, Chapter 6. Levitt, T. (1983), ‘The globalization of markets’, Harvard Business Review, May–June, 92–102. Newbould, G.D., P.J. Buckley and J.C. Thurwell (1978), Going International – The Experience of Smaller Companies Overseas, New York: John Wiley & Sons. Ohmae, K. (1989), ‘The global logic of strategic alliances’, Harvard Business Review, March–April, 143–54. Ohmae, K. (1990), The Borderless World, New York: Harper Collins Books. Oviatt, B.M. and P.P. McDougall (1999), ‘A framework for understanding accelerated International entrepreneurship’, in Richard W. Wright (ed.), International Entrepreneurship: Globalization of Emerging Businesses, Stamford, CN: JAI Press, pp. 23–40. Stalk, G. (1988), ‘Time – the next source of competitive advantage’, Harvard Business Review, July–August, 41–51. Stalk, G. and T.M. Hout (1990), Competing Against Time, New York: Free Press. Svejnar, J. (2002), ‘Transition economies: performance and challenges’, Journal of Economic Perspectives, 16(1), 3–28. Wernerfelt, B. (1984), ‘A resource-based view of the firm’, Strategic Management Journal, 5(2), 171–80. Westhead, P. (2001), ‘The internationalization of new and small firms: a resource-based view’, Journal of Business Venturing, 16(4), 333–58. World Bank (2006), World Bank Development Indicators, New York: World Bank. Zahra, S.A., J.S. Korri and J. Yu (2005), ‘Cognition and international entrepreneurship: implications for research on international opportunity recognition and exploitation’, International Business Review, 14, 129–46.

Index Aaby, N.E. 320 Abecassis, C. 227 Acs, Z.J. 320, 535 Adams-Florou, A.S. 688 Addison, T. 222 Aerts, Ria 79 Agar, J. 695 Aharoni, Yair 671 Ahokangas, P. 200, 637 Ahroni, Y. 636 Aidis, R. 413, 414 Aiginger, Karl 44, 49, 50, 516 Akgemci, T. 647 Aland 435–6, 438 Albach, H. 389 Albert II, Prince of Monaco 487 Alcouffe, A. 232 Aldrich, H.E. 271, 662 Alesina, Alberto 433 Ali, M. 657 Almeida, P. 535 Almor, T. 316, 317, 320, 321, 327, 332 Alonso, J.A. 610, 614 Altunisik, R. 647 Amin, A. 320, 434 Amit, R. 17 Anayiotos, G. 570 Andersen, O. 411, 648 Andersen, P. 247 Anderson, J.C. 619, 621 Anderson, V. 246, 248, 255 Andersson, S. 48, 186, 190, 411, 412, 413, 415, 575, 726 Andimesa 37 Andorra balance of trade 34 banking sector 35–6, 37–8 data availability 32 EU relationship 38–9 overview 32–4 SME internationalization 31–2, 39–41 SME inward–outward linkages 36–8 SME sector 34 tobacco 38 tourism 37 Angelier, J.P. 231 Antoncic, B. 662 Archetypon S.A., case study eGovernment investment 269–70

history 266–9 language-related services 270–71 literature review 264–6 methodology 266 overview 263–4, 273–4 recent situation 271–3 Arezzo fashion clusters study 2003/4 structural survey 347–9 2005 conjunctural survey 349–57 overview 347 Argyris, C. 581 Armstrong, Harvey W. 434, 712 Arndt, O. 163 Arnold, D.R. 498 Asheim, B. 312 Aslund, Anders 665 Atherton, A. 687, 688, 690, 692, 696 Atthirawong, W. 248 Au, K.F. 725 Audretsch, D.B. 57, 231, 233, 344, 494, 497, 508, 649, 650, 676 Audroing, J.F. 228, 231, 234 Austria overview 42 performance abroad 42–3 SME internationalization drivers distance 47–8 empirical evidence 48–53 norm-based trust 45–7 overview 53–4 SMEs, as international players 43–5 Autere, J. 208, 209 Autio, E. 265, 497, 509, 581, 582, 594 Avery, G. 396 Avnimelech, G. 319 Bacci, L. 343, 344 Backes, S. 398 Backhaus, K. 46, 386, 395, 396, 400, 404 backsourcing 248 Badej, G.P. 61 Badri, M. 248 Bae, Z.-T. 266 Bagchi-Sen, S. 636 Baird, I.S. 598, 599 Bakumenko, V.V. (Бакуменко, В.В.) 667 Balaguer, J. 720 Balassa, B. 720 Balazh, V. 674

759

760

Index

Balci, B. 700 Baldacchino, Godfrey 431, 432, 433, 434, 439, 440, 446, 447 Baldwin, Richard E. 534, 536 Ballantine, J.W. 155 Balogh, D. 490 Bamberger, I. 401, 403 Bannock, G. 389 Barkema, H. 618 Barney, J.B. 11, 253, 273, 618, 752 Barro, Robert J. 433 Barrow, C. 155 barter intermediaries 674 Basic Guidelines of the SME Development Policy in Latvia 376 Bassen, A. 248 Basset, G. 534, 539 Basu, S. 537 BATM Advanced Communications Ltd 321–3, 325, 327–8 Bauer, E. 398 Bauerschmidt, A. 648 Baum, Thomas G. 439 Baumol, W. 581 Bayliss, Brian T. 48 Beamish, P.W. 43, 45, 135, 142, 145, 277, 316, 485, 491, 636, 744 Becattini, G. 343, 364, 575 Becker, K. 582, 595 Bedin, V. 232 Behr, M. 392 Belarus context 58–60 FDI 62–6 foreign trade 60–61 SME internationalization 1998 patterns 67–70 2002 patterns 70–73 data, method and sample 66–7 overview 73–4 as transition economy 57–8 Belgium context 77–8 internationalization tradition 78–9 SMEs EU role 87–9 internationalization motivations 84–7 Interstratos project 82 overview 79, 87–92 research 79–80 theoretical background 80–82 venture capital firms, degree of internationalization 18–20, 26 Bell, J. 48, 156, 160, 246, 251, 252, 316, 317, 320, 413, 514, 618, 619, 703, 704, 705, 723, 724

Bellandi, M. 364 Belussi, Fiorenza 517 Benghozi, P. 227 Bennell, Paul 439 Bennett, R.J. 688, 690, 695 Bentley, G. 156 Benz, T. 392 Berhman, J.N. 535 Berkema, H. 412 Bernard, A.B. 534, 535, 536 Bernard, Jacques 516 Berndt, R. 398, 402 Berry, M.M.J. 648 Bertoli, G. 338 Betbèze, J.-P. 223 Beutel, R. 392 Bevan, A. 413 Biagini, Emilio 432 Bierhoff, Hans Werner 47 Bifulco, F. 198 Bilkey, W.J. 320, 413, 647, 746 Birkinshaw, J. 703 Blackburn, R. 156 Blankenburg-Holm, D. 618, 619, 704, 723 Blass, A. 317 BLEU (Belgian Luxembourg Economic Union) 77 Bliemel, F. 401 Blomstermo, A. 194, 580, 581, 582, 620, 652 Bloodgood, J.M. 316, 317, 505, 637 Bodur, M. 412, 497 Bogunovi´c, A. 143 Boissevain, Jeremy 432, 439 Bokros-package 280 Bolz, J. 398, 399, 402, 404 Bonaccorsi, A. 320 Bonnici, Joseph Vella 434 born global firms 316–17 Bornett, Walter 42 Bosma, N. 649, 650 Bosnia and Herzegovina (BH) industrial structure 95–6 internationalization 96–100 overview 112 recent history 94–5 see also Vegafruit, case study Botazzi, L. 21 Boter, H. 200, 636, 637 Boter, Hakan 82 Bounine, J. 228, 230 Bouquery, J.M. 228, 230, 233, 234, 235, 236, 237 Bourcieu, E. 230 Bourcieu, S. 226, 227, 229, 233, 234, 236 Bourgault, M. 703

Index Bowman, E.H. 4, 18 Boyer, M. 227 Boyle, Brett A. 45, 46 Brainard, S.L. 246 Brandsma, Andries 526 Breit, Johann 43, 399 Bricout, J.L. 227 Bridge, S. 303 Briguglio, Lino 432, 433 Broadman, Harry G. 95, 96, 97, 99, 100 Brochot, M. 230 Brock, J.K. 648 Bröcker, Johannes 47 Brookfield, Harold C. 436 Brooksbank, D. 719, 720, 721, 733, 734 Brouthers, K.D. 163, 167, 246, 248 Browaeys, Marie-Joëlle 133 Brummelkamp, G. 504 Brusco, S. 723 Bruton, G.D. 4, 18, 26 Buckley, P.J. 46, 246, 316, 494, 745 Bugra, A. 649 Buigues, Pierre 515 Bulgaria Austrian investment 42 overview 114–17, 132–3 SME development 117–18 SME FDI 126 SME foreign trade 123–5 SME internationalization drivers 128 hypotheses 121–2, 131–2 status 118–20 strategies 120–21, 128–30 study methodology 122 support to 130–31 SME profile 122–3 SME sectoral differences 125–7 Burger, Anze 588, 714 Burns, P. 157, 703, 718 Burt, R.S. 620, 631 Burton, F. 704 Büschken, J. 386, 395, 396, 400 Business Birth Rate Strategy 707 Business Gateway International (BGI) 708–9 business network coordination 619 Busuttil, Salvino 431 Butuzova, Lyudmila 557, 558 Bygrave, W. 265, 273 Cadosch, P. 398, 403 Calderon, C. 720 Calof, J.L. 43, 112, 135, 412, 485, 491, 599, 603, 648, 744 Campbell, A. 701

761

Campbell-Hunt, C. 135, 202 Cannon, J.P. 619 Cantavella-Jorda, M. 720 captive venture capital firms 24 Carlin, Wendy 660, 661 Carrier, C. 686, 690, 692 Casson, M. 46, 246, 745 Caves, R.E. 246 Cavusgil, S.T. 173, 175, 176, 186, 316, 317, 320, 412, 415, 451, 497, 506, 648, 704, 746 Cecchini, P. 516, 715 Central and Eastern European (CEE), SME internationalization 413–14 Cezanne, W. 386 Chandler, G. 505 Chaston, I. 498 Chen, T.-J. 618, 619 Chetty, S. 135, 202, 246, 412, 618, 619, 692, 695, 704, 723 Christensen, P.R. 173, 298, 580, 581, 594 Christodoulou, C. 145 Cochran, A. 298 Cohen, W.M. 618, 652 Coltorti, F. 344 Compagno, C. 575 Cook, Caren S. 46 Cook, K. 621 Cooke, P. 723 Coriat, B. 231, 234 Corò, G. 342 Cosi, R.R. 400, 402 Coskun, R. 647 Courault, B. 234 Coviello, N.E. 57, 70, 155, 240, 316, 317, 321, 331, 618, 619, 631, 648, 704, 745, 746 Covin, J.G. 498 Criado, A.R. 401 Crick, D. 265, 271, 486, 489, 619, 705, 725 Croatia Austrian investment 42–3 data sources 135–6 organizational structure of companies 137, 141–3 overview 135, 148 SMEs available data 136–7 employment structure 143–4 FDI as internationalization indicator 145–6 internationalization process 146–8 transition process impact 144–5 Cullen, J.B. 704 Cummings, J. 581, 582 Curran, J. 156 Curtis, Glenn 544

762

Index

Cyprus background 150–54 international competitive position 160–63 literature review 154–9 research, overview 150 SMEs international competitive situation 159–60, 163–4 international environment analysis 164–5 overview 165–9 Czech Republic, Austrian investment 42 Czerny, Margarete 44, 49, 50 Czincota, M. 386 Czinkota, M.R. 603 Dahlstrom, Robert 45, 46 Dalley, J. 690 Daly-Hassen, H. 227 Damyanov, A. 133 Dana, Léo-Paul 42, 95, 114, 135, 162, 211, 224, 278, 296, 316, 317, 413, 451, 483, 492, 494, 513, 514, 535, 544, 647, 743, 745 Dana, T. 492 Daniels, J.D. 704 Danis, W.M. 413 Danson, M. 702, 705, 713, 714 Davidsson, P. 198 Davies, B. 395 Davis, P.S. 323 Day, G. 622 De Chiara, A. 155, 169 De Clercq, D. 593 de Jong, J.P.J. 504 de Mooij, R.A. 503 Deenihan, J. 298 Delahaye, B. 582 Delia, Emanuel P. 447 Delios, A. 253, 259 Denmark market competitive condition 15 overview 171–2 SMEs activities abroad 179–80 classification 175–6 first export country 178–9 future research 181–3 industry and market 176–7 literature review 173–4 overview 180–81 research methodology 174–5 Dermastia, M. 590 Dert, F. 228, 230 Dewhurst, J. 157 Di Chiara, A. 725 Dichtl, E. 248, 255

Dickson, K. 164 Dierx, Aadriaan 516 Dimitratos, P. 176, 263, 265, 270, 514, 654, 703, 704, 707, 708, 710 Dixit, A. 18 Djarova, J.G. 413 Donald, I. 133 Donckels, Rik 43, 79 Donges, J.B. 413 Donnenberg, O. 396 Donoso, V. 610, 614 Dowling, B.R. 297 Drakopoulou-Dodd, S. 704 Dubini, P. 662 Dunn, B. 702 Dunning, J.H. 248 Dwyer, F. Robert 46 Dyer, J. 618 Easterby-Smith, M. 581 Easterly, William 434 Eaton, J. 534 Eberl, Peter 46 Eden, L. 535 Edwards, A. 479, 487 Eenemaam, F. van 246 Efremova, N. (Єфремова, Н.) 664 Egeli, F. 25 Egorov, I. (Егоров, И.) 663, 673 Eire, see Ireland Eisenhardt, K.M. 322, 484 El-Agraa, Ali M. 515 Elenurm, T. 189, 194, 196 Elphicke, C. 565 Elster, Jon 221 Emblaze Systems Ltd. 321–3, 325–8 emerging market economies, definitions 746 Emerson, Richard M. 46, 621 Emrence, C. 649 Engel, Christoph 46 England proportion of UK businesses 685 SMEs appropriateness of support 690–94 developing effective support 694–6 government support 685–6 local and regional support 686–90 support overview 698 entrepreneurship teaching, impact 446 Erem, T. 652 Eriksson, K. 194, 503, 580, 581, 582, 618, 652 Eriksson, T. 205 Erramilli, M.K. 651 Erzan, R. 647

Index Estonia business environment 187–8 export development challenges 188–90 internationalization of innovative entrepreneurs 193–4 inward and outward internationalization links 190–92 learning for internationalization 194–6 overview 185–6 Etemad, H. 21, 316, 535, 703, 743 Evengelista, F. 174, 316, 323 Evers, M. 401, 403 Fairbairn, Teo I.J. 433 Falvey, Rod 534 Farrugia, Charles J. 434 FBH (Federation of Bosnia and Herzegovina) 95; see also Bosnia and Herzegovina Felsenstein, D. 700, 702 Ferdows, K. 248 Fernald, J. 537 Fernández, Zulima 43 Ferrucci, L. 344 Fiedler, F. 392 File, K. 389 Filion, L.-J. 484, 487 Filiztekin, A. 647 Fillis, I. 240, 246 Fink, Elisabeth 44, 50 Fink, Matthias J. 43, 46, 47, 48, 53 Finland SME internationalization overview 198–9, 210–11 policy 203–7 research evidence 201–3 software industry example 207–10 statistics 199–201 Finnvera plc 206–7 Finpro 206 Fintra 206 Firestone, Jamison 552, 553 Fischer, E. 150 Fletcher, D. 726 Fletcher, R. 514, 516 Fontagne, L. 228 Fornell, C. 404 Forsgren, Mats 118, 133 Fortis, M. 342, 343, 344 Fourcade, C. 234 France overview 223–5 SME internationalization adaptation strategies 234–8 competitiveness 233–4 discussion 238–40

763

overview 229–31, 240 research method considerations 225–7 resistance 231–3 study industries’ characteristics 227–9 franchising 367 Frazier, G.L. 621 Freudenberg, H. 228 Frey, Bruno S. 46 Fried, V.H. 4 Fries, Steven 660, 661 Fuller, P. 389 Futó, Péter 279 FY (Former Yugoslavia) 94 Gabrielsson, J. 575 Gabrielsson, M. 316, 317, 324 Gaglio, C.M. 265, 273 Galbraith, J. 618, 620 Gallaher 38 Galliano, D. 232 Gankema, H.G.J. 68, 80, 200, 240, 246, 277 Gassenheimer, Jule B. 45, 46 Gatley, S. 396 Gelb, A. 746 Gemser, Gerda 43, 45 Gemunden, H.G. 320 gender dimension, Maltese SMEs 444 George, Gerard 43 Gerber, S. 121, 133 Germany SME manufacturing offshoring motives 254–6 overview 259–60 research methodology and database 249 status quo, development and backsourcing 252–4 status quo, development and target regions 249–52 venture capital firms 18–20, 25–6 Gerwin, D. 621 Gevaert, Marc 79 Ghoshal, S. 619 Giaccaria, P. 298 Gibb, A.A. 690 Gibiat, M. 227 Gick, W. 396 Gierl, Heribert 46 Glaser, B. 321 Global Companies Development Programme 711 globalization, definitions 387 Globalscot network 710–11 Godiwalla, Y.M. 412 Goette, T. 386, 396, 399 Goffee, R. 298

764

Index

Golden, James R. 437 Goldsworthy, M. 725 Gomes-Casseres, B. 344 Goncharuk, A.Ja. (Гончарук, A.Я.) 675 Gozo, see Malta Grandinetti, R. 342 Granovetter, M. 298, 432, 440 Grant, R. 618 Gratchev, M. 554, 560 Grau, M.F. 231, 232, 236 Graves, J. 702, 704 Gray, C. 155, 690 Greece, see Archetypon S.A., case study Greenaway, David 534, 536 Gregory, K. 725, 727 Griffin, R.W. 155 Griffiths, A. 142 Grossman, G.M. 720 Grupp, H. 259 Guilloux, V. 233, 234 Gulati, R. 618, 620, 621 Gulida, O. 62, 65 Gurau, C. 745 Haahti, A. 200 Haahti, Antti 79 Haber, S. 299 Hadjimanolis, A. 164 Håkansson, H. 621 Hall, E.T. 396 Hall, G. 20, 21, 24, 79, 156 Hamalai, L. 649 Hamill, J. 725, 727 Hamilton, R.T. 690, 692, 695 Hanks, S.H. 505 Hannula, H. 192 Hansabank 186 Hardock, P. 248, 255 Harrison, J. 718 Harrison, R.T. 133, 208 Hart, M. 133, 299 Hart, S. 724, 725 Harveston, P.D. 323 Hashai, N. 316, 320, 321, 327, 332 Hashmati, A. 222 Hatemi-J, A. 720 Hauser, Heinz 45, 46 Havnes, P.-A. 70, 638 Havratovich, I. 59 Hay, M. 157 Hedberg, B. 580, 581, 582 Hedlund, G. 619 Hegarty, C. 301 Heide, Jan B. 45, 46 Helfer, J.P. 232

Hellriegel, D. 156, 396 Helpman, E. 534, 536, 720 Henisz, W.J. 253, 259 Hessels, J. 504 Hessels, S.J.A. 495, 502 Hilb, M. 396 Hill, C.W.L. 246 Hirsch, S. 320 Hise, R.T. 367, 368 Hisrich, R.D. 279, 662, 676 Hitt, M.A. 317 Ho, D.C.K. 725 Hoch, D.J. 208 Hodgetts, R.M. 246 Hoffman, J.J. 248 Hofstede, G. 396, 399 Holan, P. de 582 Hollensen, S. 490, 577, 672 Hollerstein, Heinz 43 Holm, D.B., see Blankenburg-Holm, D. Holmlund, M. 201, 202, 636 Holmquist, Carin 82, 200, 636, 637 Holzmuller, H.H. 725 Honoré, G. 223 Hoppe, K.-H. 392 Horne, J. 700, 707 Hout, T.M. 746 Hoyle, Brian 432 Hu, M.Y. 533, 534 Huber, Peter 44, 49 Hughes, M. 702 Humphries, C. 298 Hungary advanced transition economy 280–81 Austrian investment 42 early transition economy 278 market competitive condition 15 overview 277–8 policy 13 SMEs characteristics 281–4 direct regulation 278–9 indirect regulation 279–80 internationalization 286–8 market orientation 288–90 overview 293–4 owners 290–93 research sample 288 types 284–6 track record of reform 749–50 Hürlimann, 400, 402 Hurmerinta-Peltomäki, L. 200 Hurry, D. 4, 18 Hutchinson, J. 410 Hutchinson, Karise 43

Index Hyrsky, K. 200 Hyvärinen, L. 201, 202 Ibeh, K. 695, 723, 724, 725, 726 Ibrahim, A.B. 592 Iceland domestic market size 434 and EU membership 39 export orientation 602 and Observatory of European SMEs 80, 82 SMEs, importance of 389 sovereignty impact 436 statistics 435 tertiary education 438 types of SMEs 437 viewing internationalization as improving competitive strength 84 Ilzkovitz, Fabienne 515 Imreh, Szabolcs 280, 283, 290 instrumental trust 46 international activity, definitions 598 international entrepreneurship, within Europe capabilities 12 economy 14–15 importance 3 industry sector 15–16 market competitive condition 15 network cluster 12–13 policy 13–14 resources 11–12 international intensity, definitions 598–9 international licensing 367 International New Ventures, theories 172–3 internationalization definitions 135 FDI theory 638–9 importance of understanding 743–4 as learning process 580–83 literature 411–13, 637–8, 703–5, 744–6 manufacturing focus of research 636–7 network perspective 618–20, 639–40 new model for definitions 746–7 discussion 756–7 implications 757 island economies 752 market economies 750–52 research findings 755–6 research methods 752–5 transition economies 747–9 stage models 639, 647–8, 671–2, 746 theory 367–8

765

Internet, and Ukrainian SMEs 672 Irandoust, M. 720 Ireland context 297–9 enterprise characteristics 303–4 enterprise internationalization 307–9 enterprise investment support 304–6 enterprise success 307 entrepreneurial perspective 306 network cluster 12, 309–10 overview 296–7, 311–12 study methodology 299–303 Ireland, R.D. 317 Isakova, N. 673 Isaksen, A. 312 island economies, definitions 747 island territories, definitions 433 ISO 9000, impact on Moldova 468–9 Israel born global knowledge-intensive companies conclusions 329–33 conditions enabling 318–21 customer strategies 324–6 founders 322–4 internationalization process 334 market strategies 327–8 operations strategies 326–7 product strategies 324 research methodology 321–2 overview 317–18 Venture Capital industry 319 Itaki, M. 535 Italy internationalization of industrial districts 343 ‘Made in Italy’ industries 341–3 overview 337–8, 357–64 SMEs four-axes model 338–41 internationalization strategies 344–6 see also Arezzo fashion clusters study Jääskeläinen, M. 17 Jackson, S. 396 Jacobsen, L. 173 Jacomet, D. 227 Jaensson, Jan-Erik 43 Jakli´c, A. 585 Jap, S. 619 Jaroshuk, S.V. 59 Jaworski, B.J. 498 Jayaraman, N. 18 Jeng, L.A. 26 Jensen, J.B. 534, 535, 536 Jin, J.C. 720

766

Index

Johanson, J. 25, 26, 47, 94, 172, 173, 186, 194, 201, 240, 246, 249, 252, 259, 265, 328, 332, 411, 412, 414, 424, 427, 471, 503, 504, 509, 533, 534, 535, 580, 581, 618, 619, 647, 671, 672, 703, 746 John, George 45, 46 Johnson, S. 687, 692 Johnston, W.J. 603, 619 joint ventures 367 Jones-Evans, D. 299, 719, 720, 721, 733, 734 Jones, M.V. 155, 263, 266, 269, 271, 320, 321, 326, 331, 486, 619, 746 Jones, Oswald 432 Jones, P. 707, 710, 737 Joos, A. 90 Jovanovic, M.N. 502 Joynt, P. 727 Julien, P.A. 156, 227, 229, 230, 233, 234, 236, 497, 637, 685, 690, 692, 704, 723 Jumpponen, J. 413 Jungmittag, Andre 526 Kaas, Klaus P. 46 Kaiser, Stefan 45 Kalantaridis, K. 671, 675 Kalantaridis, K. (Калантарідіс, K.) 671 Kaleka, A. 622, 724 Kállay, László 279, 280, 283, 290 Kalotay, K. 185, 191 Kamenz, U. 398 Kaminarides, John 434 Kandasaami, S. 533, 534 Kangasharju, A. 156 Kansu, A. 649 Kao, J.J. 156 Karabati, S. 652 Karagozoglu, N. 502, 598 Karges, G. 400, 402 Karlsen, Tore 277 Katsikeas, C.S. 240, 263, 413, 514, 600, 622, 630, 632, 724 Kaufmann, F. 45, 316 Kaufmann, H.R. 387, 389 Kaufmann, R. 395 Kautonen, M. 205, 206, 208 Kawai, H. 246 Kaya, H. 652, 653, 654 Kazgan, G. 649 Keane, M. 298 Keasey, K. 155, 156 Kedia, B.L. 323 Keeble, D. 316, 320 Kennedy, K.A. 297 Kenney, M. 26 Keyder, C. 649

Kindleberger, C.P. 504, 535 Kinkel, S. 246, 253, 255, 256, 259 Kinsella, T.K. 723 kiosk economy 552 Kirby, D.A. 45, 703 Kirpalani, V.H.M. 316, 317 Kjelmann, A. 195 Klapper, R. 225, 226, 238 Kletzan, Daniela 44, 49 Klimecki, R.G. 396 Klochko, Y. 673 Kluckhohn, F. 396 Knight, G.A. 173, 175, 176, 186, 316, 317, 320, 412, 415, 451, 506, 619, 648, 704, 746 Know, Y.-C. 533, 534 Knudsen, T. 427 Kock, S. 201, 202, 636 Koenker, R. 534, 539 Kogut, B. 535 Kohli, A.K. 498 Kohn, T.O. 246, 533, 535 Kolvereid, L. 637 Komarnickij, I.M. (Комарницький, I.M.) 673 Konstadakopoulos, D. 163 Korhonen, H. 32, 504, 510 Kornai, J. 746 Korri, J.S. 750 Kortum, S. 534 Kotler, P. 401 Kozoriz, M.A. (Козоріз, M.A.) 675 Kraatz, Matthew S. 620 Kraay, Aart C. 434 Kroslin, T. 590 Krugman, P. 720 Kuemmerle, W. 265 Kumshad, K. 157 Kurik, S. 190 Kuusisto, J. 211 Kuz’min, O.E. (Кузьмін, O.Є.) 673 Kwaak, T. 649, 650 Kympers, L. 80 Labory, S. 344, 347 Lambrecht, Johan 88 Langer, H. 398 Latvia network cluster 12 overview 366–7 research methodology 368 SME environment 369–84 SME hindrances 384–5 Law on Control of Aid for Commercial Activity (Latvia) 369, 376 Lawrence, T. 582 Lay, G. 246, 249

Index Lazerson, M. 342, 343 Lebrun, John 515 Lechner, C. 404, 405 Lefebvre, E. 535 Lehmann, R. 398, 403 Lengyel, Imre 279, 281, 283, 284 Leonidou, L.C. 240, 263, 413, 514, 576, 600, 688 Lerner, M. 299 Leroy, Sauner 516 Lessem, R. 396 Levin, A. 720 Levinthal, D.A. 618, 652 Levitas, E. 535 Levitt, T. 746 Lewis, J. 311 Liang, N. 510 Liechtenstein competing to attract global resources 386–9 environmental factors 389 geographic environment 386 SMEs competitive opportunities and threats 392–3 previous internationalization barriers 393 role and contribution 389–91 see also Rhine Valley SME survey Liedholm, Carl 432 Liesch, P.W. 412, 619 Lind, J. 621 Lindell, M. 502, 598 Lindmark, Leif 173 Lioukas, S. 654 Lipponen, H. 200 Lithuania capabilities 12 resources 11 SMEs context 413–15 degree of internationalization 421–4 direction of internationalization 424–7 factors affecting internationalization 414–15 reliance on contract manufacturing 424 research method 415–21 study overview 410–11, 427–8 Littunen, H. 201 Liuhto, K. 413, 416 Lloyd-Reason, L. 133 Lorenzoni, G. 342, 343, 344 Lu, J.W. 43, 45, 142, 145, 277, 316, 636 Lubarova, L. 454 Luhmann, Niklas 47 Lundan, S.M. 535 Lundström, A. 211

767

Lundvall, B.Å. 413 Luo, Y. 48, 704 Luostarinen, R. 61, 186, 190, 201, 202, 231, 316, 324, 326, 328, 452, 459, 510, 533, 534, 671 Lüttich, H. 388 Lyapin, Dmytro 545 Lyles, M.A. 581, 598, 599 MacCarthy, B.L. 248 MacDonald, D. 701 Macedonia, Former Yugoslav Republic of international capital, entry mode 218–20 internationalization 217–18 internationalization support measures 220–21 overview 214 SMEs statistics 214–15 support for 217 wi-fi infrastructure 221 Madsen, T.K. 48, 173, 174, 175, 176, 269, 316, 323, 401, 402, 412, 427, 506, 619, 704, 723 Majkgård, A. 618 Majocchi, A. 202 Makó, Csaba 294 Makogon, Yu.V. (Макогон, Ю.B.) 667 Makridakis, S. 267 Maloca, S. 249 Malta employment levels 442–3 history 431–2 importance of small island studies 432–3 manufacturing 440 number of firms 434–7 overview 446–7 policy implications 446 research findings 441–6 social capital 439–40, 445 sovereignty impact 436 types of firms 437–9 Maltese Islands, resources 11 Manigart, S. 4, 21 Männik, K. 192 Mannio, P. 198 Manolova, T.S. 198, 240, 415, 703 manufacturing firms, definitions 433 manufacturing offshoring definition 247–9 German SMEs motives 254–6 overview 259–60 research methodology and database 249 status quo, development and backsourcing 252–4

768

Index

status quo, development and target regions 249–52 overview 246–7 Marceau, J. 297 Marchesnay, M. 232, 233 Mariotti, S. 222, 343, 344, 727 market economies, definitions 747 Market Strategy of Firms in Global Environments project 174 Marshall, A. 298 Martin, F. 652 Martin, K.A.-M. 240, 746 Martin, X. 198 Martinez, M.A. 271 Martinez, R.J. 535 Maryanchyk, I.V. 661, 672 Matlay, H. 590, 705 Mattsson, L.G. 533, 534, 535, 619, 672 Maula, M. 17 Mbokoko, B. 228, 230 McAuley, A. 57, 686, 690, 704 McClelland, David C. 432 McDonald, Colin 432 McDonald, F. 704 McDougall, P.P. 31, 94, 111, 163, 172, 175, 240, 263, 269, 316, 317, 318, 319, 320, 323, 412, 451, 505, 581, 599, 618, 619, 636, 637, 638, 647, 648, 672, 704, 746 McIntyre, R.J. 412, 413 McKiernan, P. 648 McKinnon, R. 720 McMahon, R.G.P 156, 703 McNaughton, R.B. 316, 320 Mead, Donald C. 432 Meenan, N. 460 Meffert, H. 398, 399, 402, 404 Megginson, L.C. 156 Meissner, H.G. 121, 133, 392, 393 Mekay, E. 463 Melin, L. 202 Melitz, Marc 534, 536 Menghinello, S. 343 Mengüç, B. 652 Merrilees, B. 726 Messeghem, K. 232 Mesure, H. 240 Meyer, K.E. 246, 248, 277, 413 Meyer, M. 211 Michailova, S. 416 Michel, B. 78, 92 Midelfart-Knarvik, Karen H. 516 Miesenböck, K.J. 504 Miettinen, A. 207, 209 Mikhajlov, V. (Михайлов, B.) 663, 673 Miles, M.P. 498

Miller, A.T. 4, 18 Millington, Andrew L. 48 Minguzzi, A. 155, 169, 725 Minniti, M. 265, 273 Mintchev, Vesselin 669 Mintoff-Bland, Yana 440 Mintzberg, H. 157, 618, 620 Mitra, J. 590, 705 Mizzi, Leonard 432 MLBL (Mortgage and Land Bank of Latvia) 377 Moen, Ö. 174, 176, 200, 316, 323 Moini, A.H. 725 Moldova agricultural sector, export redirection 462–5 clothing and apparel sector 465–70 economy 14, 452–4 EU and 474–6 industry standards 15 network cluster 12–13 resources 11 shelled walnuts 464–5 SME internationalization external barriers 461–70 internal barriers 459–61 SME inward–outward linkages 458–9, 472–4 SME sector 454–7 SME study methodology 457–8 overview 451–2 SME value creation 470–71 SMEs and stage theory 471–2 wine industry 462–4 Mole, K. 695, 696, 705 Molero, J. 614 Monaco economy and industrial sector 14, 478–82 industrial sector incentives 483–4 network cluster 13 overview 478 resources 11 SME case study methodology 484 overview 484–6, 492 SMEs international expansion 489–91 international orientation and strategy 487–9 and international trade 482 location challenges 486–7 Montagna, Catia 534 Monti, P. 339 Moore, M. 649 Morin, M. 229, 230, 233, 234, 236 Moskowitz, S. 476

Index Mrak, Mojmir 583 Mucchielli, J.-L. 246, 247 Mugler, Josef 42 Muldur, U. 386 Mulej, M. 581, 595 Müller-Stewens, G. 404, 405 Munro, H.J. 70, 316, 317, 618, 619, 631, 648 Muris, Timothy J. 45, 46 Mutinelli, M. 222, 343, 344 Nakos, G. 163, 167 Naman, J.L. 498 Namiki, N. 497 Nanut, V. 564, 575 Naor, J. 415 Narula, R. 320 Narver, J.C. 498 Naumov, Alexander 561 Neck, P.A. 203 Nelson, R. 581 Netherlands SMEs competitive strategy 497–502 international business activities 502–9 internationalization status 495 overview 509–10 venture capital firms, degree of internationalization 18–20, 26 network clusters 12–13 networks conceptual framework 621–2 coordination in 620–21 internationalization through 618–20, 639–40 resources in business relationships 620 see also Sweden, biotech firm case study Newbould, G.D. 746 Newlands, D. 701 Nicolas, F. 228, 230 Nicolescu, O. 133, 452 Nicolin, Y. 231 Nienaber, K. 392 Nieto, María J. 43 Niittykangas, H. 201 NISSOS Project 433–4; see also Malta Nohria, N. 619, 621 Nonaka, I. 195, 618 Noorderhaven, Niels G. 45, 46 norm-based trust 46 North, D. 301, 311, 637 Northern Ireland, see Ireland Nummela, N. 207 Ó Cinnéide, M. 298 Oelsnitz, D. von der 404 Oesterle, M.-J. 648

769

O’Farrell, P.N. 298, 299, 636, 637 Offe, Claus 221 O’Gorman, C. 205, 206, 208 Ohmae, K. 746 Onaran, O. 650 O’Neal, C.R. 621 O’Neil, Sue 432 Onida, F. 344 Önis, Z. 649, 653 OPT (Outward Processing Traffic) 465 Orckit Communications Ltd 321–3, 325–7 O’Reilly, M. 299 Orekhova, T.V. (Орехова, T.B.) 667 Orris, J.B. 598, 599 Osterloh, Margit 46 Ottaviano, Gianmarco 534 Ouchi, Wiliam 46 Overweel, M.J. 504 Oviatt, B.M. 31, 94, 111, 163, 172, 175, 240, 263, 269, 316, 317, 318, 319, 320, 323, 412, 451, 581, 599, 618, 619, 636, 637, 638, 647, 648, 672, 704, 746 Oxenham, John 439 Öz, Ö. 653 Panas, E. 720 Paradas, A. 233 Parat, E. 227, 233, 236 Parboteeah, K.P. 704 Park, S. 266 Parker, P.M. 566 Parkhe, A. 413, 510 Patton, M.Q. 266 Pavlinek, P. 413 Pavlyuk, A.P. (Павлюк, A.П.) 677 Pedersen, T. 618 Pedersen, Torben 172, 173 Peng, Mike W. 48 Pennings, E. 246 Pennings, J. 618 Penrose, E. 273, 618 Perlitz, M. 400, 401, 402 Perreault, W.D. 619 Perry, J. 712 Peters, M. 676 Petersen, B. 172, 618 Petrella, R. 386 Petric, L. 298 Petrin, Tea 447, 590 Pett, T.L. 43, 599 Pfeffer, J. 621 Phillips, N. 582 Philp, N.E. 535 Piasecki, Bogdan 513, 521, 525 Pichler, J. Hanns 42

770

Index

Pickles, J. 476 Piercy, N.F. 622, 630, 632 Pike, F. 343 Piscitello, L. 222, 344, 727 Plakoyiannaki, E. 263, 265 Pleitner, H.J. 45, 248 Poisson, R. 704 Poland economy 14 market competitive condition 15 overview 513–14 policy 13 Single Market Programme impact study adaptation scenarios 523–8 aims 514–15 discussion 528–30 forced internationalization elsewhere 515–18 methodology 518–19 opportunities and threats 519–22 strengths and weaknesses 522–3 SME internationalization, overview 530 Pollard, J. 298 Polterovic, V.M. 674 Poppo, Laura H. 45 Porter, M.E. 32, 89, 226, 227, 234, 235, 236, 237, 246, 248, 298, 318, 338, 341, 342, 343, 386, 389, 437, 465, 497, 598 Portnov, B. 700, 702 Portugal overview 533–4 policy 13 Single Market Programme impact 517–18 SME, adjustment to globalization 534–5 SME study data and methods 537–9 results 539–41 theoretical background 535–6 Potet, Laurent 368 Powell, W. 620 Prashantham, S. 590 Prati, A. 570 Préfontaine, L. 703 Preston, L. 535 Preuss, Ulrich K. 221 Priest, S. 692, 695 Prince, R. 389 Prince, Y.M. 497, 638 Probst, G. 396 Provan, Keith G. 45, 46 Prudhommeaux, M.J. 235 psychic distance 26 Puffer, Sheila 554, 561 Purkiss, A. 389 Pusnik, K. 585, 589, 590, 591, 592, 593, 594

Quack, H. 396 Quinn, J. 298 Quinn, J.B. 157 Rabino, S. 342 Rainelli, M. 228, 232 Raines, P. 709 Ramangalahy, C. 497, 704, 723 Ramaswamy, K. 636 Rapid and Intermediate Progress countries 452 Rasheed, H.S. 648 Rasmussen, E.S. 174, 175, 176, 316, 323, 401, 402 Rauch, A. 312 Raut, L. 720 Read, Robert 434 Reason, L. 452 Rebernik, M. 581, 585, 589, 590, 591, 592, 593, 594, 595 Rechnitzer, János 284 Reid, S.D. 320 Reiljan, E. 191, 192 Renault, C. 228, 230, 233, 234, 235, 236, 237 Rennie, M. 389 Rennie, W.R. 316, 317 Reuber, R.A. 150 Reversed Born Globals 674 Reynolds, P.D. 246, 545, 718 Rhine Valley SME survey international marketing strategy 404–5 internationalization barriers 397–8 internationalization competences 394 internationalization motives 397 local infrastructure 396 market entry strategies 400–3 market entry timing 403–4 market selection 399–400 markets 400 methodology 393–4, 398–9 overview 407–8 SME groupings 405–7 strengths 398 support programmes 394–6 Rialp, Alex 48, 175, 176 Rialp, Josep 175, 176 Rickes, M. 392 Riezman, R.G. 720 Righi, E. 723 Riker, D.A. 246 Ring, Peter 46 Ripperger, Tanja 46, 47 Ritter, T. 619, 620, 621 Rivoli, P. 386 Robbie, K. 17

Index Roberts, E.B. 323 Robertson, M. 156 Robinson, W. 404 Robson, B. 688, 694 Robson, P.J.A. 690, 695 Roessl, Dietmar 43, 45, 46, 53 Rogut, A. 513, 514, 518, 519, 521, 523, 525, 528, 529 Rohweder, Herold C. 47 Ronkainen, J. 386 Roolaht, T. 191, 192, 451, 452 Rosa, P. 727 Roux, E. 227 Royle, Stephen A. 436 RS (Republika Serpska) 95; see also Bosnia and Herzegovina Ruddy, J. 301 Ruffieux, B. 235 Rugman, A.M. 246 Rundh, Bo 42 Rus, M. 590 Russia history of entrepreneurship 544–6 SME sector 546–53 SMEs characteristics 547–9 current practices 554–6 definitions 546–7 employment 549–51 government attitude 551–2 growth restrictions 552–3 international aspects 556–8 overview 558–60 Rutashobya, Lettice 43 Ruzzier, Matija 588, 589 Saaremaa 435–8 Saatçi, G. 650 Sabel, C. 342 Sailer, C. 389 Sala-i-Martin, Xavier 433 Salancik, G.R. 621 Salihbasi´c, Muharem 101, 103, 105 San Marino data availability 564–5 economy 14, 566–71 overview 565 policy 14 SME internationalization born ‘export-oriented’ 577 industrial vs country districts 575–6 overview 578 state foreign relations vs international companies’ relations 576–7 trading partners 571, 575

SME study limitations 578 methodology 565–6 Sand, H. 398 Sapienza, H.J. 582 Saporta, B. 230 Saucier, P. 246, 247 Savoye, B. 234 Scarborough, Norman M. 92 Scase, R. 298 Schaffer, Mark 660, 661 Schmenner, R.W. 248 Schmidt, R. 395 Schneider, Friedrich 561 Schniederjans, M.J. 248 Schrader, Stephan 46 Schulte, A. 247, 248 Scotland economy 14 network cluster 13 overview 700–2 policy 14 SME export behaviour 706–8 SME policy implications 712–15 SME study definitions 702–3 findings 712–13 literature 703–5 methodology 705–6 SME support mechanisms 708–12 Scott, M. 311 Scottish Isles 435–8 Seabright, Paul 660, 661 Sear, L. 156, 687, 688, 690, 692, 695, 696 Seers, Dudley 433 Seger, F. 400, 401, 402 Sember, S. (Сембер, C.) 671 Semlinger, K. 392 Sengerberger, W. 343 Senneseth, K. 70 Senturia, T.A. 323 Seringhaus, R. 695 Servais, P. 48, 174, 175, 176, 269, 316, 323, 412, 506, 619, 704, 723 service-based economies, SME internationalization, see Andorra, SME internationalization Serzhanov, V. (Сержанов, B.) 671 Seymen, D. 651 Sgherri, S. 570 Sgobbi, F. 344 Shane, S. 172, 637 Shapero, A. 265 Sharland, A. 490

771

772

Index

Sharma, D.D. 581, 618, 652 Sharma, V.M. 651 Shehova, M. 72, 73 Shenkar, O. 704 Shevtsov, Y. 58, 60 Shook, C.L. 264 Shrader, R.C. 648 Shutt, J. 156 Shvets, V. (Швець, B.) 664 Simmet-Blomberg, H. 398 Simms, D. 298 Simon, H. 230, 237, 581, 589 Simoni, C. 342 Singh, H. 618 Sinkula, J.M. 582 Skak, Ane 277 Skinner, Steven J. 45, 46 Sklair, Leslie 431 Slater, S.F. 320, 498 Slava, S. 671, 675 Slava, S. (Слава, C.) 671 Sleuwaegen, L. 246, 516 Slevin, D.P. 498 Slocum, J. 396 Slocum, J.R. 156 Slonimska, M. 72 Slonimski, A. 72, 73 Slovenia Austrian investment 42–3 capabilities 12 economy 583 internationalization challenges 589–93 as learning process 580–83 tardiness of 585–9 market competitive condition 15 network cluster 13 overview 593–5 policy 14 small island studies importance of 432–3 see also NISSOS Project Smallbone, D. 57, 59, 66, 70, 74, 190, 298, 301, 311, 519, 529, 637 Smart Scotland 14 Smart, Successful Scotland (SSS) strategy 706–7, 711–12 Smith, A. 413, 476 Smith, C. 688 Smolboun, D. (Смолбоун, Д.) 667 Snuif, H.R. 68 Sochka, K. 671, 675 Sochka, K. (Сочка, K.) 671 Sorenson, O. 18 sovereignty, as handicap to exports 436

Spain economy 14 market competitive condition 15 policy 14 SME export intensity 600–3 SME international activity and competition 611 and entrepreneurs 605–8 and firm ownership 604 by firm size 603–4 and growth expectations 612–13 and innovation 609–11 and market expansion 613 overview 599–600, 613–16 by sector 603 Spekman, R.E. 621 Spence, M. 265, 489, 492 Sperling, G. 317, 318, 324, 328 Spinnewyn, H. 90 spiral of success 52 Spolaore, Enrico 433 Spremann, Klaus 45, 46 Srebrnik, Henry F. 439 Stabilisation and Association Agreement (SAA) 99, 214 Stabilization and Association process (SAp) 96, 99 stage theory, Moldavian SMEs 471–2 Stahr, G. 398, 402 Stalk, G. 746 Stampacchia, P. 578 Stanworth, J. 155, 202, 690 Stare, M. 192 Steng, Werner 517 Stepanova, T.O. (Степанова, T.O.) 664 Sternberg, R. 163 Stevenson, H.H. 157 Stewart, D.B. 240 Storey, D.J. 155, 156, 718 Storie, G. 700, 707 Stottinger, B. 725 Strauss, A. 321 Stray, S. 320 Streeten, P. 479 Streeten, Paul P. 434 Strodtbeck, F.L. 396 Stuart, T.E. 18 Styles, K. 725 Su, Z. 704 Suarez, S. 614 subsidiaries 367–8 Sullivan, D. 647, 648 supermarket chains, impact in Moldova 462–4 Svejnar, J. 746, 748, 749 Svetli´ci´c, M. 585, 588, 714

Index Sweden biotech firm case study analysis 629–33 company overview 623–4 customer network 627 end-user network 627–8 market strategy 624–5 methodology 622–3 network structure 628 supplier network 625–7 capabilities 12 internationalization and business networks 618–20 network cluster 13 venture capital firms, degree of internationalization 18–20, 26 Swedish, resources 12 Switzerland industry sector 16 SME globalization human capital factors 641–2 organizational factors 640–41 research method 642–3 research results 643–5 Sylvester, D. 25 Syrett, Stephen 517 Szabó, A. 452, 665 Szerb, L. 290 Szerb, László 283, 290 Szirmai, Peter 279 Taddéi, D. 231, 234 Tajnikar, M. 594 Takeuchi, H. 195, 618 Tamashevich, V. 62, 65 Tavakoli, M. 648 Tayeb, M. 703 Taylor, M. 297, 703 Taymaz, E. 650 Tchernobyl Nuclear Power Plant 59 Tesar, G. 320, 413, 647, 746 Teubal, M. 319 Thomas, J. 702, 704 Thompson, J.D. 618, 620, 631, 632 Thouverez, J. 230 Thrift, N. 320, 434 Thumm, Nikolaus 526 Thurik, A.R. 494, 497, 498, 508, 649, 650 Tiessen, J.H. 726 Tilley, F. 432, 707, 710 Tilly, R. 598 titular shareholders (Andorra) 35 Todorov, K. 120, 133 Tominc, P. 589, 590, 591, 592, 593, 594 Tomkins, C. 621

773

Tonttila, J. 210 Torrès, O. 228, 233, 239 Tracogna, A. 564, 575 transition economies, definitions 746 Trevor-Roper, Hugh 437 Trompenaars, F. 396 Trouvé, P. 234 Truijens, T. 248, 249 trust, definitions 46 Tu, C. 20, 21, 24 Tübke, Alexander 526 Tunç, H. 653 Türem, U. 653 Turkey market competitive condition 15 network cluster 13 overview 647 resources 12 SMEs internationalization status 651–3 overview 656–7 research findings 654–6 research method 653–4 and Turkish economy 648–51 Tzokas, N. 724, 725 Uçbasaran, D. 652 Ugorich, I. 62, 63, 65, 66 UK venture capital firms 18–20, 25–6 see also England; Ireland; Scotland; Wales Ukraine economy 14 industry sector 16 network cluster 13 overview 660–62 policy 14 resources 12 SMEs definitions 670–71 history 662–7 internationalization of knowledge economy 672–3 organizational peculiarities 673–5 overview 676–8 research methodology 675–6 trade internationalization 667 trading partners 667–70 and Uppsala model 671–2 Ulbert, József 283, 290 underground entrepreneurs 662 Uppsala Model 746 and Ukrainian SMEs 671–2 see also internationalization, new model for; internationalization, stage models

774

Index

Urata, S. 246 Urry, John 439 Utkulu, U. 651 Vahcic, Ales 447 Vahlne, J.-E. 25, 26, 47, 94, 173, 186, 194, 201, 240, 246, 249, 252, 259, 265, 328, 332, 411, 412, 414, 424, 427, 471, 503, 504, 509, 580, 581, 618, 647, 671, 703, 746 Vaknin, Sam 557, 562 Valceschini, E. 228, 230, 235 Vamvoukas, G. 720 Van Biesebroeck, Johannes 536 Van de Ven, A. 46, 298 van Dijken, J.A. 497 van Dijken, K.A. 638 van Eenemaam, F. 248 van Elk, J.W. 504 Varaldo, R. 344 Varblane, U. 191, 192 Varnalij, Z.S. (Варналій, З.C.) 675, 677 Vatne, E. 297, 703 VCON Telecommunications Ltd 321–3, 325, 327–8 VCs (venture capital firms) definitions 17 international versus domestic 21–6 internationalization international orientation 20–21 overview 17–19, 26–7 research setting and method 19–20 Vegafruit, case study business model 102–5 history 100–2 internationalization 105–11 Vella, Mario 440, 447 Venesaar, U. 190 Vermeulen, F. 412 Vernon, R. 246 Veugelers, Reinhilde 516 virtual products, and island economies 441 Viviers, W. 648 VocalTec Communications Ltd 321, 323, 325, 328 Voerman, L. 80, 702 Vojnorubova, I.A. (Войнорубова, И.A.) 665 von Hippel, E. 621 Vöth, M. 386, 395, 396, 400 Voudouris, I. 267 Wakelin, K. 502 Wales economy 14–15

overview 718–23 policy 14 Wales Trade International study background 723–7 company development 728–30 Export Assist programme 732–3 limitations 735–7 market research 730–31 overview 727–8, 733–5 trade development 731–2 Wall, S. 133, 142 Walsh, J. 298 Walter, A. 621 Wathne, Kenneth H. 45, 46 Watson, R. 155, 156 Weber, Mathias 523 Webster, F. 484 Weder di Mauro, B. 387 Weerawardena, Jay 497 Wei, H.C. 145 Weiss, C.A. 400 Welch, C.L. 647, 648 Welch, L.S. 61, 186, 190, 201, 202, 231, 452, 459, 510, 533, 534, 592, 647, 648, 671, 727 Welfens, P.J.J. 598 Wells, P.C. 26 Welter, F. 57, 59 Wennekers, A.R.M. 498 Wernerfelt, B. 253, 273, 752 Westhead, P. 135, 145, 271, 303, 505, 637, 638, 652, 724, 745 Westhead, Paul 43 Whitelock, J. 704 Whittam, G. 713 Wickham, P.A. 156, 157 Wictor, I. 48, 186, 190, 575 Wiedersheim-Paul, F. 172, 246, 252, 259, 328, 332, 503, 504, 671, 746 Wiegand, Wolfgang 46 Wieners, J. 413 Wignaraja, Ganeshan 432 Wiklund, J. 198 Wildemann, H. 248 Wilkinson, I. 619 Wilkinson, T.J. 576 Williams, A. 674 Williams, P. 296 Wind, Y. 533, 534 Windeknecht, M.K. 582 Winter, G. 581 Winter, S.G. 253, 259 Wolff, James A. 43, 599 Wood, P.A. 636 Wooliams, P. 396

Index Wright, M. 17, 652 Wright, R.W. 316, 492, 514, 535, 743 Wurche, Sven 45 Xavier, A. 410 Yafeh, Y. 317 Yeaple, Stephen 534, 536 Yeldan, E. 649, 653 Yentürk, N. 650 Yin, R.K. 266, 322, 484 Yip, G. 194 Young, S. 514, 657, 703, 704, 723 Yu, J. 750 Yu, Zhihong 534

Zafarullah, M. 657 Zahra, S.A. 265, 317, 582, 702, 750 Zammit, Edward L. 431, 440 Zanni, L. 342, 343, 344, 346, 347, 355, 364 Zavadjak, R. (Завадяк, P.) 671 Zhuplev, A. 545, 546 Zhytko, A. 59 Zimmer, C. 271, 662 Zimmerer, Thomas W. 92 Zollo, M. 253, 259 Zou, S. 497 Zucchella, A. 202 Zuckerman, E.W. 319 Zwart, P.S. 68

775