SME internationalization research: past, present, and future Mitja Ruzzier Arc-Kranj, Kranj, Slovenia

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1 The current issue and full text archive of this journal is available at JSBED 13,4 476 SME internationalization research: past, present, and future Mitja Ruzzier Arc-Kranj, Kranj, Slovenia Robert D. Hisrich Thunderbird, The Garvin School of International Management, Glendale, Arizona, USA, and Bostjan Antoncic Faculty of Management, University of Primorska, Koper, Slovenia Abstract Purpose The purpose of this paper is to understand the similarities and differences in the internationalization of SMEs and MNEs and the specific factors affecting them. Design/methodology/approach The relevant literature was reviewed particularly in the context of the major theories of internationalization. Findings The positive and negative aspects of each theoretical approach to internationalization are present to form the basis of a new model of international entrepreneurship. Research limitations/implications The newly developed conceptual model has not been empirically tested. Originality/value A redeveloped theoretical integrative conceptual model of international entrepreneurship is proposed based on four internationalization properties (mode, market, product, and time), internationalization performance, and key antecedents and consequences of the internationalization process. Keywords Small to medium-sized enterprises, Resources, Research Paper type Conceptual paper Journal of Small Business and Enterprise Development Vol. 13 No. 4, 2006 pp q Emerald Group Publishing Limited DOI / Introduction Internationalization is a phenomenon researched intensively over the last few decades from a variety of viewpoints, including: organization theory, marketing, strategic management, international management, and small business management. Issues such as international decision-making and management, the development of international activities, and factors favoring or disfavoring internationalization have been studied for both large as well as small businesses. The focus of this study is on small and medium enterprises (SMEs) and their strategic internationalization and export behavior. Given the nature of today s marketplace, SMEs are increasingly facing similar international problems as those of larger firms. For many SMEs, especially those operating in high-technology and manufacturing sectors, it is no longer possible to act in the marketplace without taking into account the risks and opportunities presented by foreign and/or global competition. As a result, discussion of internationalization in this study needs to cover to some extent, aspects of general

2 internationalization of both large and small firms, while focusing on the internationalization of SMEs. Internationalization the evolution of the concept In previous international business literature, mature multinational corporations played a dominate role, whereas SMEs (and especially their internationalization) have only recently attracted broader interest (Miesenbock, 1988). This reflects the fact that several countries, particularly those experiencing balance of payment deficits, have attempted to increase the international activities of their SMEs in order to boost economic growth, cut unemployment and create potential mini-mnes in the future. Internationalization is a synonym for the geographical expansion of economic activities over a national country s border. The term started to be used when the phenomenon gradually replaced imperialism as the dominant organization principle framing cross-border interaction between market economies starting in the 1920s. The economic internationalization process accelerated in the post-second-world-war era and appeared unrivalled until the early 1970s, when a new phenomenon of globalization started to emerge (Gjellerup, 2000). Globalization usually refers to a stage in which the firm s operations are managed on a global scale, not in just a few selected countries. It is characterized by the worldwide integration of ever more competitive markets and companies facing global competition. Traditional exports are increasingly coming under pressure while the conditions for marketing and production are changing rapidly. As a result, today s companies, including SMEs, have to respond to markets at an increasingly faster pace (Pleitner, 2002). Globalization also includes the functional integration of geographically dispersed economic activities. It means something more in terms of the scope, content and intensity of mutual connections, capital and management involvement (Svetlicic, 1996) and is therefore a qualitative extension of internationalization (Gjellerup, 2000). It is generally agreed that three forces are driving the globalization of business (Acs et al., 2001; Gjellerup, 2000). The first is the explosive growth of low-cost technology connecting people and locations. Better information-processing and communication technology is creating a greater awareness of international economic opportunities. The second force behind the globalization of business is the steady dismantling of trade barriers and financial deregulation. Free-trade agreements have generated a more level playing field for innovative firms. The third force motivating the globalization of business is the widespread economic restructuring and liberalization that followed the fall of socialism in Russia and Central/Eastern Europe, as well as the geographical expansion of markets in Asia, particularly China. These previously closed areas are now new markets and magnets for investment, opening further opportunities for growth and investment. However, despite all these driving forces of globalization, internationalization has not been replaced, and many observations on internationalization remain valid today. The fact is that globalization s impact on the SME sector is likely to be more profound than on the already highly internationalized large corporate sector. While previously SMEs were considered passive victims rather than active players, evidence indicates that this view is no longer valid. In the last few decades, many SMEs have successfully set up activities beyond their home markets and their role is increasingly crucial in contributing to future growth (Gjellerup, 2000). SME research 477

3 JSBED 13,4 478 Globalization and the attendant issues have only recently been introduced in small firm development and research (Madsen and Servais, 1997). Ruigrok (2000) proposed that the term global should be reserved for those companies and phenomena that really deserve this label. Traditionally, SMEs restricted their activities to the region of their location, or stayed within their national boundaries (Pleitner, 1997). Today many are active in one or two world regions and are therefore international or regional players. Following Ruigrok (2000), the term internationalization will be used to refer to SMEs outward movement of international operations, while globalization will refer to the international connectivity of markets and the interdependence of national economies strongly affecting all SMEs activities. Internationalization also means a changing state. The growth of the firm provides a background to internationalization and to some degree the concepts of internationalization and growth are intertwined (Buckley and Ghauri, 1993). However, some features are unique to internationalization or, at least, there are significant degrees of difference between growth at home and growth internationally. As is indicated in Table I, existing research has focused on SMEs internationalization mainly from the point of view of the firm s international activities or operations by applying product, operation, and market analyses (e.g. Luostarinen, 1979) or network analyses (e.g. Johanson and Mattson, 1993). There is a tendency in small firm research to view the process of internationalization as evolutionary (Luostarinen, 1979; Johanson and Wiedersheim-Paul, 1975) through which companies become increasingly committed to, and involved in, international activities, but at a certain point can also become inverted and result in de-internationalization (Calof and Beamish, 1995). In Nordic countries the internationalization of SMEs has traditionally been defined as the process of increasing involvement in international operations (Welch and Luostarinen, 1993, p. 156) and this process has often been understood as gradual and sequential, consisting of several stages. In a network context, Johanson and Mattsson (1993, p. 306) described internationalization as a cumulative process, in which relationships are continually established, maintained, developed, broken and dissolved in order to achieve the objectives of the firm. This view, however, seems somewhat fragmented as it focuses exclusively on relationships. Assuming that SMEs operate within their natural context, the view of Johanson and Vahlne (1990, p. 20) developed from Johanson and Mattsson (1993) appears more promising. They define internationalization as the process of developing networks of business relationships in other countries through extension, penetration, and integration. In their definition, Lehtinen and Penttinen (1999) try to summarize the fundamental characteristics of the internationalization process based on the Nordic research findings. Their definition also covers two concepts occasionally applied in the context of internationalization, namely international orientation and international commitment. International orientation refers to a firm s general attitude towards internationalization, thus representing an evaluative dimension. Reid (1981) defined it as a measure of the perceived difference between foreign markets and the home market space along economic, cultural, political, and market-strategic dimensions. International commitment is basically associated with the requirements of the operation modes chosen and the size of international business. The latter seeks to

4 Author Definition Focus SME research Welch and Luostarinen (1993) Calof and Beamish (1995) Johanson and Mattson (1993) Johanson and Vahlne (1990) Lehtinen and Penttinen (1999) Lehtinen and Penttinen (1999) Ahokangas (1998) Internationalization is the outward movement of a firm s international operations Internationalization is the process of increasing involvement in international operations Internationalization is the process of adapting firms operations (strategy, structure, resources etc.) to international environments Internationalization as a cumulative process in which relationships are continually established, developed, maintained and dissolved in order to achieve the firm s objectives Internationalization as developing networks of business relationships in other countries through extension, penetration and integration Internationalization concerns the relationships between the firm and its international environment, derives its origin from the development and utilization process of the personnel s cognitive and attitudinal readiness and is concretely manifested in the development and utilization process of different international activities, primarily inward, outward and cooperative operations Internationalization is the process of mobilizing, accumulating and developing resource stocks for international activities Process, firm s operations Process, firm s operations Process, firm s operations Relationships, process Networks, relationships Relationships, firm s operations, process, int. environment Resources, process 479 Table I. Selected definitions of the internationalization of SMEs classified by their focus and research approach position firms somewhere between the extremes of no involvement (domestic firm) and full commitment (a firm with a realized foreign direct investment). Generally, the overall research focus has shifted from the definition and analyses in terms of international activities to the resources needed for internationalization. With reference to the resource-based perspective, Ahokangas (1998) proposed a definition of SME internationalization in terms of resources within the natural context (e.g. within a firm s network). An internationalizing firm can be viewed as mobilizing unique and interdependent resource stocks that enable and contribute to the firm s internationalization activities within its natural context. This definition thus implies that internationalization is the process of mobilizing, accumulating, and developing resource stocks for international activities, regardless of the actual content of the international activities themselves. A company s involvement in international business might arise when a company sells its products to foreign markets, buys products from abroad or starts to cooperate in some

5 JSBED 13,4 480 area with a foreign firm. This implies that international operations can be divided into inward, outward and cooperative operations, which shows the holistic nature of internationalization (Korhonen, 1999). Although internationalization is a multidimensional phenomenon, this study focuses on SMEs outward internationalization, due to the following. First, more than inward operations, outward operations can in the long term increase the competitive advantage of a company, organization or a country. Second, at the firm level outward internationalization benefits may also be evident in the form of product and process innovation, better utilization of capacity, skill development and a generally improved business performance (Morgan and Katsikeas, 1997a). Third, at the country level outward internationalization induces several favorable outcomes for productivity performance, labor market employment levels, foreign exchange accumulation and related externalities such as industrial welfare and societal prosperity. Fourth, the intensifying competition, integration and liberalization seen in international markets have forced firms to begin considering outward international activities as a key factor in their future growth, profitability and even survival. Finally knowledge of the outward internationalization process and related operations is more complex than that for inward internationalization. Selected internationalization theories and models In terms of the individual firm, the basis of internationalization research can be found in the behavioral theory of the firm proposed by Cyert and March (1963) as well as in different decision-making theories. From a market perspective, trade theories can also provide a lens on internationalization research. Havnes (1994, cited in Ahokangas, 1998) argued that any of the models of small firm internationalization can be seen as presenting either a market, firm or entrepreneurship perspective. The market perspective of internationalization has mainly been restricted to studies on internationalization or the diversification strategies of large firms conceived within the context of strategy research with roots in economics (e.g. Dunning, 1988; Mahoney and Pandian, 1997). The firm perspective, which includes the stage models of internationalization, provides the bulk of available literature on SMEs internationalization, whereas the number of studies based on the entrepreneurship perspective is much less (e.g. Cavusgil and Naor, 1987). In the current research, there is a difference in focus for large versus small businesses. Although global strategies, strategic international alliances, and problems of diversification and control are concepts frequently encountered, the discussion focuses almost exclusively on large firms or the so-called multinational enterprises (MNEs). Small entrepreneurial business research is more concerned with various stages (or export development models) of internationalization. In spite of the gap between the two lines of research, both build on the foundations of organization theory, although significant differences have resulted. Attempts to apply theories developed for or based on large firms may lead to relatively awkward results when applied to smaller businesses as ideas developed for large firms do not necessarily work in a small business setting (Chen and Hambrick 1995, cited in Ahokangas, 1998). Internationalization theories focusing on MNEs The beginning of internationalization research in the late 1950s and 1960s focused on large multinational companies and their international activities often called the

6 economic approach, resulted in a vast body of theoretical and empirical data. Some of the main theories on the internationalization of MNEs resulting include: the internalization theory, the transaction cost theory, the eclectic paradigm, and the monopolistic advantage theory. The abovementioned theories are the dominant approaches in MNE research and will only be presented in brief as the core of this study concerns SMEs. Internalization theory Internalization theory centers on the notion that firms aspire to develop their own internal markets whenever transactions can be made at a lower cost within the firm and will continue until the benefits and costs of further internalization are equated to the margin (Buckley and Casson, 1993). Internalization can involve a form of vertical integration bringing new operations and activities, formerly carried out by intermediate markets, under the ownership and governance of the firm especially when natural markets are imperfect or missing. Internalization of transactions beyond national borders leads to the creation of the multinational enterprise. Antecedent to market internalization is a process of information gathering and assessment, through which management determines the best foreign expansion approach. SME research 481 The transaction cost approach Referring to the transaction cost approach, Teece (1986, cited in Gilroy, 1993, p. 82) remarked, At one level the internalization school and the transaction cost approach are one and the same. Both see the firm as a response to market failure. Profit-seeking firms internalize operations when by so doing the costs of organizing and transacting business will thereby be lowered. The difference of both theories is that in the transaction cost approach the unit of analysis is the transaction itself (Williamson, 1975; Gilroy, 1993). The eclectic paradigm The eclectic paradigm, also known as the OLI Paradigm, is based on internalization theory and tries to explain the different forms of international production as well as the selection of a country for FDI (foreign direct investments). According to Dunning (1988), the internationalization of economic activity is determined by the realization of three types of advantages. First, ownership advantages which are specific to the company and related to the accumulation of intangible assets, technological capacities or product innovations. Second, the internalization advantages stemming from the capacity of the firm to manage and coordinate activities internally in the value-added chain. These are related to the integration of transactions into multinational hierarchies through FDI. Third, location advantages referring to the institutional and productive factors present in a particular geographical area. These arise when it is better to combine products manufactured in the home country with irremovable factors and intermediate products of another location. Monopolistic advantage theory Monopolistic advantage theory holds that MNEs exist because a firm has unique sources of superiority over foreign firms in their own markets (Hymer, 1976, cited in McDougall et al., 1994). The advantages belong to the MNE and cannot be acquired by

7 JSBED 13,4 482 other firms. One type of monopolistic advantage is superior ability. Hymer (1976, cited in McDougall et al., 1994) argued that MNEs have superior knowledge, as found in the form of superior manufacturing processes, brand names, differentiated products, organizational talents, or patented technology. Monopolistic advantage theory holds that once a firm has developed this superior knowledge, it can exploit this advantage overseas at virtually no additional cost over that of exploiting that advantage in the home market (Caves, 1971, cited in McDougall et al., 1994). Because local entrepreneurs have to pay the full cost of developing this knowledge, they are unable to compete with the foreign firm despite their advantage in local market knowledge. Stage models of internationalization There are two primary stage models the Uppsala Internationalization Model (U-model) and the Innovation-related Model (I-model). Uppsala internationalization model (U-model) The second stream of research on internationalization focusing on SMEs started sometime in the early 1970s in the Nordic countries, with these researchers collectively being referred to as the Uppsala School. Researchers operating in small and open economies were more interested in the dynamics of the whole internal process of small firms (Bloodgood et al., 1996; Korhonen, 1999). Because of these differences in the research objects and research contexts, Nordic researchers started their own theory-building. Researchers in Sweden and Finland at around the same time developed models of internationalization generally referred to as Nordic models (Korhonen, 1999) or learning models (Ahokangas, 1998). Influenced by the behavioral theory of the firm (Cyert and March, 1963, cited in Ahokangas, 1998) and Penrose s theory of knowledge and change in organizations (Penrose, 1959), Johanson and Vahlne (1977, 1990) developed the Uppsala Internationalization Model. In this dynamic model, internationalization of the firm is seen as a process of increasing a company s international involvement as a result of different types of learning. According to the model, the authors propose that the general and experiential market knowledge and resource commitment of firms (state aspects) affect commitment decisions and current business activities (change aspects). The change aspects, in turn, increase the market knowledge and stimulate further resource commitment to foreign markets in the subsequent cycle (Andersen, 1993). This model implies that firms increase their international involvement in small incremental steps within those foreign markets in which they currently operate. Firms will then enter new markets lying at a greater psychic distance due to differences in languages, education, business practices etc. This accumulated knowledge in conducting international operations drives internationalization by influencing the entry-mode and country-market selection. In the Uppsala model, the concept of foreign market commitment is composed of two factors: the amount of resources committed and the degree of commitment (see Figure 1). The former can be operationalized as the size of the investments needed, e.g. in terms of marketing, organization and human resources, while the latter refers to the difficulty of identifying an alternative use for the resources and transferring them to that alternative use (using the concept of sunk costs, Ahokangas, 1998).

8 The Nordic internationalization models have had a considerable influence on studies focusing on the internationalization of firms and significant efforts have been made to further test and refine the ideas (Vida and Fairhust, 1998; Morgan and Katsikeas, 1997b; Clark et al., 1997; McAuley, 1999; Peng, 2001; Eriksson et al., 2000; Knight and Liesch, 2002; Chetty, 1999; Glas et al., 1999). Although research has provided some empirical support for the Nordic models, some criticisms have emerged (for a detailed review of weaknesses of the stages model, see Chetty, 1999). The Uppsala internationalization model has been criticized as deterministic (Reid, 1981) and, if firms were to develop in accordance with the model, individuals would then have no strategic choices (Andersson, 2000). Another bigger challenge is that today many firms simply do not follow the traditional pattern of internationalization proposed by stage theory. Some firms are international from their birth and have been called: international new ventures (McDougall, 1994; Oviatt and McDougall, 1994, 1995), born global (Madsen and Servais, 1997), and global start-ups (Oviatt and McDougall, 1995). Some authors have proposed separating the research into international start-ups from traditional small business internationalization (McDougall et al., 1994); these arguments for separation are mainly based on specificity of the time of internationalization. In terms of internationalization correlates the argument is somewhat arbitrary at best (Antoncic and Hisrich, 2000). SME research 483 Innovation-related models (I-models) The term innovation-related is derived from the work of Rogers (1962, cited in Gankema et al., 2000), in which each subsequent stage of internationalization is considered as an innovation for the firm (Gankema et al., 2000). Their focus is exclusively on the export development process, in particular of small and medium-sized firms. Leonidou and Katsikeas (1996) on the basis of a comprehensive review of the most important models (Bilkey and Tesar, 1977; Cavusgil, 1980; Reid, 1981) noted that the models are a number of fixed, sequential stages, although the number of stages varies considerably between models, ranging from as few as three to as many as six. They also identified three generic stages: the pre-export stage; the initial export stage, and the advanced export stage. Andersen (1993) pointed out that generally the models are relatively similar and the differences tend to be in the number of stages and terminology used. Being behaviorally oriented to a significant extent, these models treat individual learning and top managers as important aspects in understanding a firm s international behavior (Andersson, 2000). Figure 1. The Uppsala model of internationalization

9 JSBED 13,4 484 Some feel that the proposed stage models (innovation-related) are quite vague in theoretical terms. The demarcation criteria for distinguishing between stages are problematic (Miesenbock, 1988; Andersen, 1993) and too little attention is paid to the time of the different stages as well as to the operationalization of the stages. Determining the stage differences with reference to activities appears to be more a matter of subjective opinion rather than discovering real differences between the stages. Ahokangas (1998) noted that, from a process point of view, these models fall short in that they only describe the process of change but not its dimensions nor the different approaches used by firms in developing their activities. The first two types of models (the Uppsala and Innovation-related models) have been used to analyze small, but also large, firms with the focus on explaining the development of internationalization and international activities. The main thrust of these models is the incremental nature of internationalization processes, first, in terms of activities and, second, in terms of resources the basic building blocks of the behavior of firms. Since these models have long been in the mainstream of internationalization research, a wide variety of such models are found in the literature. The mode of explanation employed in the models varies from cyclic to stage-based to evolutionary, with the different modes frequently being confounded. Network approaches to internationalization Another way to analyze a firm s internationalization within a process approach is to use the network as the starting point since this approach provides an appropriate framework for understanding firms as embedded actors in business networks (Johanson and Mattsson, 1993; McAuley, 1999). Based on the Uppsala model, Johanson and Vahlne (1990) continued an examination of the internationalization process by applying a network perspective. The extension of the model involves investments in networks that are new to the firm, whereas penetration means developing positions and increasing resource commitments in networks in which the firm already has positions. Integration can be understood as the co-ordination of different national networks. Thus, if the relationships between firms are seen as a network, it can be argued that firms internationalize because other firms in their (inter)national network are so doing. Within the industrial system, firms engaged in the production, distribution and use of goods and services depend on each other due to their specialization. Certain industries or types of markets are more likely to be internationalized given the configuration of the world economy (Buckley and Ghauri, 1993; Andersen, 1993). In the model of Johanson and Mattson (1993) the emphasis is on gradual learning and the development of market knowledge through interaction within networks. A firm s position in the network may be considered both from a micro (firm-to-firm) or a macro (firm-to-network) perspective. From the micro perspective, complementary as well as competitive relationships are crucial elements of the internationalization process. In other words, firms are interdependent both through co-operation and competition. Both direct (involving partners in the network) and indirect (involving firms that are not partners in the network) relations within networks need to be taken into account when analyzing macro relationships. By combining micro and macro perspectives of networks, Johanson and Mattsson (1993) identified four stages of

10 internationalization: the early starter, the late starter, the lonely international, and the international among others. According to their model, internationalization of the firm means that the firm establishes and develops positions in relation to other counterparts in a foreign network. The internationalizing firm is initially engaged in a network which is primarily domestic and then further develops business relationships in networks in other countries. This is achieved through the establishment of relationships in country networks that are new to the firm (international extension), through the development of relationships in those networks (penetration) and through connecting networks in different countries (international integration). The strength of the network model of internationalization lies in explaining the process rather than the existence of multinational or international firms. From the network perspective, the internationalization strategy of a firm can be characterized by the need to:. minimize the need for knowledge development; SME research 485. minimize the need for adjustment; and. exploit established network positions (Johanson and Mattsson, 1993). Much of the network-based research on international business focuses on the management of international relationships. In these studies, the firm is viewed as a set of interlinked relationships connecting it with other firms in a more or less intimate fashion, depending on relationships within the network (e.g. Blankenburg et al., 1996, cited in Ahokongas, 1998). Theoretical issues raised with regard to networks include not only the different types of relationships and their properties, but also issues such as trust, control, resources, and interdependency within and between firms. What seems to be neglected in most process-oriented research and especially within networks approach is the strategic position and influence of individuals, especially entrepreneurs, in the SMEs internationalization. Knowledge embedded in long-term relationships is often concentrated in one person in the firm, who will have a substantial impact on internationalization through close social relationships with other individuals. Such social relationships are extremely important for entrepreneurs and their business (Davidsson and Honig, 2003; Hoang and Antoncic, 2003). This social network is a sub-network within the business network, effecting and being effected by the gained resources and the chosen operational mode (Holmlund and Kock, 1998). Inter-firm and interpersonal relationships also appear to be influential in other internationalization issues: foreign market selection (Andersen and Buvik, 2002); market servicing (Welch and Welch, 1996); dynamics of entry (Meyer and Skak, 2002); international market development and marketing-related activities (Coviello and Munro, 1995); time of internationalization (Oviatt and McDougall, 1994); propensity to export (Westhead et al., 2001); strategic choices and performance (Peng and Luo, 2000); and degree of internationalization (Brush et al., 2002). Jaklic (1998) suggested that networks can be especially useful for SMEs in catching-up economies since it is possible to overcome some of the problems of knowledge and technology as well as capital accumulation. Bonaccorsi (1992) illustrated that small firms trade and acquire information with one another through their social network, which leads them to imitate one another and speed up export entry.

11 JSBED 13,4 486 Despite some shortcomings, network theory can shed light on how the resources, activities, and actors (Hakansson and Snehota, 1995, cited in Ahokangas, 1998) within networks affect the different dimensions of the internationalization processes of SMEs, whether at the level of individual firms or for groups of firms. In summary, the network of a firm is capable of providing the context for international activities, although further study is required on the resources and development strategies used by firms. Resource-based approach to internationalization Based on existing models, a resource-based perspective on internationalization is currently emerging. The objective is to develop a dynamic capabilities/resource-based theory of the firm whether this firm is domestic, international or global. The RBV (resource based view), developed within the field of strategic management, has two roots: seminal writings on business strategy by K. Andrews (1971, cited in Foss et al., 1995) and A. Chandler (1962, cited in Foss et al., 1995) among others, and Edith Penrose s (1959) work called The theory of the growth of the firm, characterizing firms as a collection of heterogeneous or firm-specific resources (Foss et al., 1995). Recently, numerous strategy scholars have revitalized the concern about the resources and capabilities side of firms (Foss and Eriksen, 1995). The resource-based view of strategic management focuses on sustainable and unique costly-to-copy attributes of the firm as the sources of economic rents, i.e. as the fundamental drivers of the performance and sustainable competitive advantage needed for internationalization. A firm s ability to attain and keep profitable market positions depends on its ability to gain and defend advantageous positions with regard to relevant resources important to the firm (Conner, 1991). Resource-based models recognize the importance of intangible knowledge-based resources in providing a competitive advantage. They address not only the ownership of resources, but also the dynamic ability for organizational learning required to develop new resources. This has led to an improved understanding of firms diversification strategies (Montgomery and Wernerfelt, 1997), internationalization being one of them. Given the heterogeneity of small firms and their operating environment, there are fundamental difficulties in seeking to identify and define the critical resources needed for internationalization. By focusing on the attributes that resources should possess to sustain a long-term competitive advantage, authors have proposed different characteristics (Barney, 1991; Peteraf, 1993; Wernerfelt, 1997; Mahoney and Pandian, 1997; Grant, 1991). Barney (1991), for example, argued that resources must be valuable, rare, imperfectly imitable and not substitutable, while Grant (1991) proposed that resources must capture durability, transparency, transferability, and replicability. These different perspectives indicate that these attributes are often relatively broad and hazy (Winter, 1995) and that there are not clear boundaries between them (Andersen and Kheam, 1998). Resources in general can be considered stocks of available tangible or intangible factors[1] that are owned or controlled by the firm and converted into products or services, using a variety of other resources and bonding mechanisms. Past research offers few examples of resource-based or capabilities-based studies of small firms internationalization. They include models of Rautkyla (1991, cited in Ahokangas, 1998), Hurry (1994, cited in Ahokangas, 1998), Roth (1995), Luo (2000) and, the most promising of them all, the model of Ahokangas (1998). This model concerns

12 resource development and strategic internationalization behavior of small firms combining the strategic and network perspectives of resources. Ahokangas (1998) assumes that SMEs are dependent on the development potential of key internal and external resources, which can be adjusted/developed within the firm and between firms and their environments. This adjustment behavior is analyzed along two dimensions: (1) where do the resources reside; i.e. what is their source are they internal or external to the firm; and (2) does the development of resources take place in a firm-oriented manner (inward orientation) or in a network-oriented manner (outward orientation)? SME research 487 From the perspective of the firm, these two dimensions lead to four hypothetical modes of resource adjustment: the adjustment of: (1) internal resources in a firm-oriented mode; (2) external resources in a firm-oriented mode; (3) internal resources in a network-oriented mode; and (4) external resources in a network-oriented mode (see Figure 2). The key issues concerning these modes of resource adjustment include control over and interdependence between the critical resource stocks. This is predicated on the assumption that the accumulation of interdependent resource stocks at the firm level is based on shared control. The first kind of resource adjustment (internal firm-oriented) can be seen as the development strategy of a firm that tries alone to develop the critical resources needed for internationalization by entering into international activities and learning from experience, without depending on externally available resources. External resources in the development of the firm s internal resources, such as relationships with various expert organizations, research institutions or universities, represent the second mode of adjustment (external firm-oriented). The adjustment of internal resources in a network-oriented mode involves development activities traditionally associated with co-operation in any field from R&D to international Figure 2. Modes of resource adjustment

13 JSBED 13,4 488 after-sales services (usually in the form of alliances between firms), where both partners share an interest in developing resources jointly. The last adjustment mode (external network-oriented) comprises networking behavior that is taken a step further, from sharing only resource stock interdependencies to also sharing control over the firm s resources. Some examples are mergers between two firms or joint ventures. The practical application of the model of resource adjustment is that firms may pursue different internationalization development strategies, with different international activities over time. They can be either firm- or network-oriented resource development strategies or a combination utilizing internal and external resources. The development of resource-based theory and the network perspective seems to have gone hand in hand. In both theories, internal and external resources available to the firm are seen as constituting the total set of resources available to the firm. In order to gain access to strategic resources, firms may co-operate vertically, with respect to the product flow, or horizontally with competitors in other worlds by entering into network relations. To some extent, the network and resource-based approaches also seem to be merging, with the model proposed by Ahokangas (1998). Network perspective, which claims that the network (and the actors within the network) provide the resources for internationalization, offers another point of view with regard to available resources. From the entrepreneurial perspective, networks of individuals and the tacit knowledge they integrate (social capital of entrepreneurs) can be seen as resources themselves. Individual entrepreneurs (and their firms) are connected through networks with other entrepreneurs (companies) in the same industry and a wider (international) environment. And it is through networks that entrepreneurs get access to resources and information for entrepreneurial actions. Resource-based models and traditional models of internationalization (the Uppsala and innovation-related models) can be further distinguished by the way in which the theoretical underpinnings are made explicit in research derived from the resource-based theory (Andersen and Kheam, 1998; Ahokangas, 1998). The central construct of the models rests on (organizational) experimental learning that increases (market) knowledge and leads the firm to increased (market) commitment. Market knowledge is based on Penrose s (1959) definition of experimental knowledge, which can be learned only through personal experience. In experimental learning, the organizational capabilities of firms within a dynamic nature of a model can be recognized. Since the theoretical foundations of the resource-based approach are still at an early stage of development, it is sometimes difficult to discern to what degree researchers are relying on internationalization research or resource-based theory. The absence of SMEs research is striking, however. International entrepreneurship The economic view is useful in establishing single production facilities during the later stages of a firm s internationalization (Vahlne and Noedstrom, 1993), but it ignores the process aspects of internationalization. The process approach does handle this aspect but, like the economic approach, overlooks the possibility of individuals making strategic choices (Reid, 1983; Turnbull, 1988; Andersson, 2000) and is less appropriate for understanding radical strategic change, where entrepreneurs and top managers play an important role (Reid, 1981; Andersson, 2000). Since our interest is in the

14 internationalization of SMEs, we cannot neglect the importance of entrepreneurs, widely recognized as the main variables in SMEs internationalization (Miesenbock, 1988). However, in order to create the most value, entrepreneurial firms also need to act strategically, and this calls for an integration of entrepreneurial and strategic thinking (Hitt et al., 2001). Therefore, entrepreneurs can be seen as strategists who find a match between what a firm can do (organizational strengths and weaknesses) within the universe of what it might do (environmental opportunities and threats) (Foss et al., 1995). The last approach to SMEs internationalization is a new emerging research area at the interface of entrepreneurship and international business research called international entrepreneurship (McDougall and Oviatt, 2000a; Antoncic and Hisrich, 2000). This newly created research field is still searching for the right definition of the intersection of the two research paths, or more importantly the activities associated with entrepreneurial firms seeking to cross national borders. The most recent proposed definition specified international entrepreneurship (McDougall and Oviatt, 2000b) as a combination of innovative, risk-seeking behavior that crosses national borders and is intended to create value in organization. Similarly, even if attempts of a systematic review of international entrepreneurship exist (McDougall and Oviatt, 1999, 2000), there is still a lack of an integrative theory (Antoncic and Hisrich, 2000). Figure 3 summarizes the findings of McDougall and Oviatt (2000a) on the domain of scholarly literature on business organizations. They have noted there has been a substantial body of research in quadrants I, III and IV. Research in quadrant I has been the preserve of entrepreneurship scholars, and quadrant IV has been the focus of international business scholars. Multiple functional areas have focused on quadrant III. Quadrant II, a more sparsely studied area which represents the domain of international entrepreneurship, is the subject of this study. Given the above, international entrepreneurship will be labeled a research approach to the internationalization of SMEs from the entrepreneurial perspective, which best integrates all the relevant approaches to internationalization with entrepreneurship, as a composite part of SMEs internationalization. Alvarez and Busenitz (2001) and Rangone (1999) built a bridge between the resource-based view and entrepreneurship, implicitly proposing entrepreneurs as the source of sustained competitive advantage and (slightly) moving the focus of analysis of the resource-based view from the firm level (Foss et al., 1995) to the individual level, SME research 489 Figure 3. The domain of international entrepreneurship with regard to other academic literature on organizations

15 JSBED 13,4 490 but still in the context of resources. These authors suggest that entrepreneurs have individual-specific resources that facilitate the recognition of new opportunities and assembling of resources for the venture (Schumpeter, 1950; Alvarez and Busenitz, 2001; Penrose, 1959). Entrepreneurial knowledge, relationships, experience, training, skills, judgment, and the ability to coordinate resources are viewed as resources themselves (Barney et al., 2001; Barney, 1991; Langlois, 1995). These resources are socially complex and add value to the firm because they are not easy to imitate and other firms cannot simply create them (Alvarez and Busenitz, 2001). Some confusion still exists regarding the definition of entrepreneurship. Some observers use the term to refer to all small businesses; others to all new businesses (Acs et al., 2001). In practice, however, entrepreneurship (corporate entrepreneurship or intrapreneurship) is also present in well-established large and small organizations, being an important element of their organizational and economic development. Who then are the founders of such entrepreneurial firms? Entrepreneurs are individuals carrying out entrepreneurial actions (Andersson, 2000). They are one of the most important agents of change with the capacity and willingness to take risks in realizing their judgments, to be innovative and to exploit business opportunities in a market environment (OECD, 2000). Often these opportunities can be perceived in international markets and, to exploit them, entrepreneurs establish ventures that operate across national borders. They are alert to the possibilities of combining resources from different national markets because of the competencies (networks, knowledge and background) they have developed in their earlier activities (McDougall et al., 1994). Following the logic of the resource-based view of the firm, the possession of such competencies are not the same for all entrepreneurs. Only the entrepreneur possessing these competencies is able to combine a particular set of resources across national borders as the basis of an internationalized firm. At the heart of entrepreneurial activity is innovation (Hitt et al., 2001). Schumpeter (1934) distinguished between invention and innovation, with invention being the discovery of an opportunity and innovation being the exploitation of this opportunity (Alvarez and Busenitz, 2001). International entrepreneurial success requires not just the discovery of a valuable innovation but also that the innovation be introduced successfully to world markets (Acs et al., 2001). This can be identified as internationalization, or as an example of what Schumpeter defined as entrepreneurial action (Andersson, 2000). He suggested five possible situations where new innovations can occur. The entrepreneur reforms or revolutionizes the pattern of production by exploiting an innovation or an untried technology for producing a new commodity or producing an old one in a way, by opening up a new source of supply of materials, or a new outlet for products, or by reorganizing the industry (Schumpeter, 1934). Developing Schumpeter s ideas further, the process of internationalization can be seen as innovation adoption, which gives richer insight into how international activities are initiated and developed (Reid, 1981) and recognizes the idea of innovation-related models. The historical development of theoretical models of internationalization may be understood in terms of the four perspectives previously discussed, but increased globalization and hyper-competition has led to a new phenomenon of international start-ups which represent a challenge to such approaches to internationalization. Especially in this new phenomenon and in SMEs in general, individual entrepreneurs

16 and their personal factors and relationships have an evident position. Recently, researchers (Antoncic and Hisrich, 2000) have proposed a new integrative conceptual model that attempts to integrate the traditional models with the emerging area of international start-ups. The model, indicated in Figure 4, is built around the concept of internationalization that consists of internationalization properties (time and mode) and internationalization performance. Other building blocks of the model are internationalization antecedents (environmental conditions and organizational characteristics) and internationalization consequences (organizational performance). They have developed a set of propositions and implications about relationships in the conceptual model. This newly developed conceptual model of international entrepreneurship seen in Figure 4, developed from the model originally proposed by Antoncic and Hisrich (2000), represents the conceptual integration of the theory of small and medium firms internationalization process merging into the area of international entrepreneurship. The main modifications from its original form are threefold. First, the entrepreneur s (founders/manager s) characteristics, previously part of organizational characteristics are now analyzed separately, and are divided into two parts: human and social capital. This reflects the importance and role we believe founders/manager s and their characteristics have in the internationalization process. Second, internationalization consists of four main dimensions (mode, market, product, and time) instead of two plus internationalization performance (previously analyzed separately). Third, some different parameters were selected for firm characteristics. SME research 491 Conclusions and implications With the global integration of economic environments and different factors driving globalization and internationalization of companies with SMEs becoming the pillars of economic growth and change, SME internationalization research will remain one of the Figure 4. The international entrepreneurship conceptual model

17 JSBED 13,4 492 most important areas. Theories underpinning their research will have to adapt and follow this development. This study contributes to SMEs internationalization development theory with the conceptual integration of various SME internationalization theories into a new emerging area of international entrepreneurship. This study contributes to theory by proposing a redeveloped theoretical integrative conceptual model of international entrepreneurship centering on four internationalization properties (mode, market, product, time) plus internationalization performance as well as key antecedents (environmental, firm, and entrepreneur s characteristics) and consequences of internationalization (firm performance). This study advances SME internationalization research by clarifying the new emerging area of international entrepreneurship and its theoretical basis within internationalization research. International entrepreneurship places more importance on entrepreneurship and entrepreneurs (and their characteristics), widely considered as the main variable in SME internationalization research. Second, it gives more importance to the time dimension, with the increasing number of SMEs operating internationally from their inception making time one of strategic dimensions of internationalization. The proposed international entrepreneurship model shares limitations noted by Antoncic and Hisrich (2000) in their initially developed conceptual model; the model is comprehensive but not exhaustive, and it does not specifically address interactions among constructs. Another limitation identified concerns the antecedents of internationalization, especially companies and entrepreneurs characteristics. By identifying such factors some limitations may arise. Did the antecedents of internationalization (companies and entrepreneurs characteristics) determine the degree of internationalization or the opposite? A longitudinal research design may clarify this issue. An important implication of the model for practitioners is that they need to constantly evaluate different elements related to internationalization. Especially crucial are the skills, competencies, and management know-how the entrepreneur needs to develop in order to be successful in the process of internationalization. Note 1. Different resource classifications have been proposed (e.g. Hall and Hofer, 1993; Grant, 1991). Amit and Schoemaker (1993) suggested seven main categories of resources: (1) financial (size and type of capital); (2) physical (location, plant, access to raw materials, transportation etc.); (3) human (personnel and management); (4) technological (product and process-related); (5) reputation (image, brands, loyalty, trust, goodwill); and (6) organizational resources (management systems). Proponents of the network perspective have added a seventh category, the relationships of the firm. Some of the firm s relationships, for example those to foreign customers, suppliers, authorities etc., constitute one of the firm s most valuable resources during the process of internationalization. Wernerfelt (1997) reduced resource classification to three groups: physical, financial and intangible resources. The latter have also been referred to as tacit knowledge (Peng, 2001) or organizational routines and skills (Nelson and Winter, 1982).

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