Abstract. Key words: Small firm internationalisation, entrepreneurial marketing. Resource Poverty View Revisited

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1 Predicting the Course of Small Business Internationalisation: An Entrepreneurial Marketing Perspective Alastair Emerson, Asoka Gunaratne, Unitec New Zealand Abstract Small firm internationalisation has been a growing area of interest within the international marketing literature over the last decade. This interest is primarily attributed to policy planners desire to facilitate increased participation of small firms in international business. Small firms make a substantial contribution to national economies by making disproportionate contribution to employment generation as compared to large firms. However a substantial number of small firms fail within the first three years of operations and others experience difficulties in expanding their operations into international markets. These difficulties are attributed to resource poverty which includes managerial inadequacy which has been a cause for concern to both policy planners and researchers over the last few decades (Welsh and White, 1981). A parallel but a contrasting development is the emergence of the born global exemplar small firms that challenge conventional wisdom by securing direct entry into global markets with highly innovative products. These developments pinpoints to the need for further research into the small firm internationalisation process to understand the determinants of their actual expansion into foreign markets. Using the extant literature and adopting the emerging entrepreneurial marketing paradigm (Hills and La Forge, 1992) this paper proposes a theoretical model that captures the numerous parameters complementing the small business internationalisation process. Implications to theory and practice are discussed. Key words: Small firm internationalisation, entrepreneurial marketing Resource Poverty View Revisited The literature suggests that the resource-poverty which include lack of management expertise, under-capitalisation, disadvantages of lack of economies of scale, lack of resources to gather market intelligence, and inability to adapt new technologies (Lauder, Boocock and Presley 1994) constrain the number of strategic options that can be pursued by small firms. However recent literature challenges this view by providing several arguments against this view. Firstly, a growing number of researchers suggest that size is not a barrier to small firm internationalisation (Calof, 1994). Secondly, their smaller size and simple structures provide flexibility to be responsive to changing circumstances and the entrepreneurial dynamism that promote creativity, endow them with a combination of characteristics crucial to achieving competitive advantage. Thirdly, entrepreneurial small businesses have found ways of overcoming resource-related constraints through a network of relationships (Coviello and McAuley, 1999), and government and private sector support mechanisms. The born global firm phenomenon in particular suggests that small businesses can overcome these constraints with a higher degree of international entrepreneurship. We argue that small businesses can overcome the resource poverty-based constraints by adopting an entrepreneurial marketing posture. Creating an Entrepreneurial Business

2 (a) Creation stage (b) Consolidation stage (c) Internationalisation stage Figure 1: Internationalisation of Innovations through Entrepreneurial Activity Entrepreneurial process begins with the identification and assessing of opportunities and then marshalling the required resources to exploit such opportunities (Ibrahim and Ellis, 2002). Entrepreneurs face difficulties when they try to establish their inventions in the market place. Many inventions fail in the market place because of basic flows. Some others do not succeed because they are expensive, unreliable and impractical. Entrepreneurs who are keen to commercialise their inventions get assistance from their networks to improve the acceptability of the products and services in the market place. Their networks include experts in technology, marketing, manufacturing, engineering, buying and other specialist functions (Figure1a - Creation Stage). Many governments support the innovative activities of small firms by providing funding to encourage research and development for the creation of new products and processes, granting attractive tax incentives and legal protection to new innovations through patent rights (Figure 1a. Creation Stage). Entrepreneurial developments require financial support and at present their main sources are government, banks, and venture capitalists (Figure 1a Creation Stage). Venture capitalists despite becoming more cautious and restrictive are still prepared to invest in quality innovations. This leaves a huge responsibility with governments to encourage the development of institutions and flexible systems to provide financial support to practical, problem-solution based innovations. The establishment of these financial support structures is essential to maximise the creative potential of the entrepreneurial talent in a country. The absence of such support mechanisms will retard the commercialisation of the entrepreneurial innovations that has the potential to stimulate employment generation and economic growth. The success of new products or service innovations come from their ability to truly solve the customers problems by meeting their real needs or from their capability to offer significantly better satisfaction than existing alternatives (Baron and Shane 2003). The obvious role of marketing is to identify and satisfy the customers needs. However the entrepreneurs are not dedicated to following this main proposition of marketing concept in their creation and commercialisation of innovations. The initial focus of the entrepreneur is on the product or service innovation rather than on customer needs (Stokes, 2000). This non-alignment of innovations to customers needs delay the speedy diffusion of innovations through the market place. Entrepreneurs who exhibit the zeal for dreaming of innovative new product ideas and concepts then overcome this obstacle by making use of the expert assistance and the support mechanisms that are at their disposal (Figure 1 Creation Stage). The network of experts facilitates entrepreneurs to convert their inventions into income generating marketable products. The role of government in such circumstances should be to participate in the 2

3 expansion of available expert assistance and support facilities to entrepreneurs. This will further stimulate entrepreneurs to accelerate the commercialisation of their innovative ideas by converting them into market or customer driven innovative solutions. The cumulative effect of the support received from the experts, the government, the financers, the professional bodies, and trade associations is the creation of an entrepreneurial small firm (Figure 1. Creation Stage). Consolidation Stage Marketing in an entrepreneurial small firm is not developed to the advanced level that is observed in large organizations. Lack of resources and expert marketing knowledge restricts their decision-making abilities in the selection of appropriate products, suitable markets and development of optimal strategies (Chaston, 1997). The marketing activities of small firms are influenced by the entrepreneurial characteristics of the owner managers who play a vital role in adapting the tactical programmes as appropriate to meet the needs of the small firm (Figure 1b Consolidation Stage). Carson (1993) described the marketing decision making style of entrepreneurial owner managers as informal, responsive, reactive, opportunistic, simplistic, haphazard and short term oriented. They treat marketing as common sense and forge ahead until they confront the realities of their misjudgements in the form of grave business misdeeds. The weaknesses arising from the above characteristics are negated by their other characteristics such as creativity, innovation, motivation and leadership that they bring into decision-making environment. This practice of marketing adopted by entrepreneurial small business managers is refereed to as entrepreneurial marketing (Carson et al 1995). The term entrepreneurial marketing has been often used to describe the creative but unsophisticated tactical marketing activities of small firms that are resource constrained. At other times it is used to describe the unplanned opportunistic marketing approaches adopted by small business owner mangers. Entrepreneurial marketing therefore is a term that is often used loosely to represent the opportunistic behaviour of owner mangers who seek innovative ways to create value to their potential customers. Hill (2001) stated entrepreneurial marketing defines the fundamental role of the entrepreneur in organisational marketing activities. Kotler (2001) proposing a simple dichotomous approach to marketing based on the stages of development of a company found entrepreneurial marketing to be more useful in the early uncertain stages of development. Morris, Schindehutte and LaForge (2002) proposed a continuum of approaches to marketing that range from a more responsive, risk avoidant, control-oriented approach to one that is highly entrepreneurial and concluded that a company s position on the continuum will be context specific. A common element in both these concepts is the association of entrepreneurial marketing to conditions of risk and uncertainty, implying that this approach requires engaging in behaviours that entails risk and taking actions that are innovative. Entrepreneurial Marketing that has emerged through a synthesis of some of the core attributes of marketing and entrepreneurship provides a prescription for establishment of new small businesses in difficult and highly competitive environments. Kotler (2001) asserted that companies could prosper by using different types of marketing activities at different stages of the firm s development cycle and found that entrepreneurial marketing to be more useful at the early stages of development of a company. Morris, Schindehutte and LaForage (2002) following reviews of past research on entrepreneurial orientation (Miller and Freisen 1983; Covin and Selvin 1994; Morris and Sexton 1996; Zahra and Garvis 2000) and market orientation (Jaworski and Kohli 1993; Slater and Narver 1995; Han, Kim and Srivastave 1998) 3

4 identified seven dimensions of the construct entrepreneurial marketing. They are: (1) proactiveness (2) calculated risk taking (3) innovativeness (4) opportunity focus (5) resource leveraging (6) customer intensity and (7) value creation. Entrepreneurial marketing, which is still an emerging discipline, is thus different to the conventional marketing practiced by progressive firms in a number of important aspects. Small business managers who practice entrepreneurial marketing use organisational and personal net works for the generation of new product ideas and identification of opportunities to grow business. The target markets are selected through a process of elimination to the exclusion of the prescribed process of market segmentation. They prefer to communicate largely via interactive word-of-mouth than through formal integrated marketing communications. Information gathering is conducted more on a casual basis rather than using formal market research methodology. This is possible because of their closeness to the market. A key difference of entrepreneurial versus traditional marketing is the relatively little time spent by entrepreneurs on formal planning (Matthews and Scott, 1995). Even though the basic principles of marketing are equally applicable and valuable for both large and small businesses the marketing activities undertaken and implemented in small firms are affected by their differences from large firms (Carson and Cromie, 1989; Liu, 1995; Stokes, 1995). The above differences however have not impeded the entrepreneurs from growing their businesses, but, their reactive approach delay the spread of their innovations through the market place. Entrepreneurial marketing could thus be improved by building further on their existing practices and adopting a proactive approach to marketing. Tyebjee, Bruno and McIntyre (1983) proposed that in growing businesses marketing passes through four stages, the first stage of which is entrepreneurial marketing. The low sales volume at this initial stage does not permit the firms to have a formal marketing division. According to these authors the marketing success in these firms often comes from sale of customised products to friends and acquaintances. One outstanding characteristic of entrepreneurial marketing is heavy reliance on networks of personal relationships for marketing success. The individual needs of the small customer base that are not met by the larger firms are satisfied by the firms entrepreneurial managers by giving them personal attention in trying to get a foot in the door of the market. Even though inferior to the sophisticated traditional marketing activities, entrepreneurial marketing still generates sufficient sales to initially establish a small business in the domestic market (Figure 1b. Consolidation Stage). Internationalisation Stage Entrepreneurial firms that are initially limited to operating in domestic markets move to international arena to take advantage of the opportunities in other geographic areas. According to the global horizon approach proposed by Ahroni (1966) this movement is part of the firms growth and evolutionary process. The firms that have high-risk tolerance and aggressive drive take the internationalisation path very quickly (Welsh 2004). The motives for internationalisation of small entrepreneurial firms are provided by both internal and external factors (Ahroni 1966; Ibrahim and McGuire 2001). The tax incentives, subsidies and grants offered by foreign governments constitute the external factors (Ibrahim 2004). Factors such as employee skills and superior technology, which provide absolute advantage, constitute internal factors. 4

5 Only a small percentage of small firms that survive for more than five years eventually grow up to be gazelles that drive innovation and economic growth. This underscores the need for government intervention to create conditions that are conducive to creation and expansion of small firms to optimise their potential for economic growth. To foster the growth of small businesses governments need to improve their access to financing, information infrastructure and international markets (OECD 2000). What is required of a government is to develop regulatory and financial frameworks that remove any existing constraints and facilitate the speedy passage of small entrepreneurial firms on the road to growth and internationalisation (Figure 1c Internationalisation Stage). Governments should provide the lead to encourage the formation of small firm clusters that pool resources and share costs to overcome some of the constraints they confront due to insufficient access to financial resources. Cluster formation can lead to low cost training, marketing and research and in addition to other spill over effects such as the free availability of information on new technology and markets. These can provide the skill and information needed to develop competitive advantage that is necessary to compete in the global markets. Silicon Valley in United States, Valencia in Spain, Arezzo and Modena in Italy, Nuremberg in Germany and Guosjo in Sweden are some of the examples of successful local clusters of high entrepreneurial activity (OECD 2000). Governments that recognise the importance of assisting small firms to globalise their operations provide a range of support activities through state funded export credit and promotion agencies. These include export insurance, bank guarantees and advice, information on foreign markets, export opportunities, participation in foreign exhibitions and trade fairs, preparation of marketing tools in foreign language and their circulation in foreign markets (OECD 2000). Traditionally small firms that focused on the domestic markets are now becoming more and more involved in the global markets. New technology, partnering of large multinationals and formation of international strategic alliances and partnerships (either individually or in clusters) makes it easy for the small firms to reach across border markets (Figure 1c Internationalisation Stage). Internationalisation of entrepreneurial firms is constrained by the limited knowledge and information about foreign markets. Individuals and firms perceive a higher level of risk and uncertainty in foreign markets as compared to the local market. Trade missions that are sponsored by government promote contacts between entrepreneurs and individuals and firms in foreign countries facilitating exchange of information that help to mitigate risk perception (Figure 1c Internationalisation Stage). However, not all entrepreneurs internationalise their innovations. For those that don t, there is no desire in them to cross the chasm between innovation and internationalisation by creating new products or services out of their innovations to satisfy the global customers real needs. Those who do, internationalise their innovations at different paces and through different routes seeking to exploit foreign market opportunities in different ways (Crick 2004). This suggests the need in addition to generic assistance to develop schemes that provide for the specific support needs of the entrepreneurial marketers who select different paths to internationalise their firms. Methodology Methodology is how the researcher approaches discovering what can be known about reality (Guba & Lincoln, 1994). It refers to the overall approach to the research process, research design, methods of data collection and procedures used for analysis (Collis & Hussey, 2003). Review of research paradigms suggests two broad research methodological paradigms (Cohen & Manion, 1994; Lincoln & Guba, 1985; Patton, 1990). They are labelled positivist/quantitative and phenomenological/qualitative (Collis & Hussey, 2003). The authors 5

6 viewed these as two extremes of a continuum. At the positivist end are the objectivists and at the extreme phenomenological end of the continuum are the subjectivists. The phenomenological approach is concerned with understanding and explaining different behaviours and individual experiences. In this approach the validity of information is critical (Easterby-Smith et al., 1991). In this study qualitative method was used to gather information from 10 respondents, representing the owner-mangers of small businesses, government officials, and officers of ministries and business support providers. Findings The results of the interviews tended to support the three stage model developed, with most respondents identifying with stages and their components. In the perceptions of all of the respondents, the resource poverty view is still valid, to some degree. While the Sri Lankan Government has been taking steps to try to address the problem, both the report provided and the officials opinions revealed a level of dissatisfaction with the interventions tried to date. In particular, Sri Lankan Government officials felt that there were too many agencies acting without adequate coordination, and insufficient targeting of resources to be effective. Both officials and exporters complained that the interventions are supply driven, rather than rather than demand driven, resulting in inconsistent delivery. Respondents provided anecdotal evidence of Sri Lankan small businesses which had operated internationally from their early beginnings, most seemed to have been regional rather than global in their scope. All of the respondents considered that the diverse nature of the businesses requires an individualised approach, while the agencies tend to be constrained into using a blanket approach. The Government officials and documents favour the use of Information Technology as means to increase the availability of help, create networks and disseminate information. Discussion and further enquiry The findings largely support the literature and the model developed from it, confirming the presence of resource poverty situations as well as born global situations. Although this was a preliminary study, it can be assumed that the general direction of enquiry is valid.. The strongest theme to emerge was the need for individualised interventions to suit the needs and contexts of very diverse companies, and the difficulties this presents to agencies designed and funded for a more generalised approach. Future studies are needed with a larger cohort of respondents in other countries, both developing and developed to explore and define methods of assisting entrepreneurial marketing in SMEs, in particular in achieving internationalisation. Conclusion The number of small businesses going global is surging. These firms make a firm commitment to their global ventures and respond to the problems and challenges in these markets by nurturing their relationships with relevant stakeholders. The internationalisation process of these small businesses can now be explained by using either the incremental change models or the discontinuous patterns of the born global firms. The firms that take the path of incremental change alter the activities they follow in familiar domestic markets and reposition the products and services when entering the unfamiliar foreign markets to suit 6

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