The Internationalization of Small and Medium-Sized Firms - Assignment Example

The Internationalization of Small and Medium-Sized Firms The first stream of literature would first discuss the concept of globalization. The second stream of literature would discuss who is an entrepreneur and the third stream of literature review would be on how globalization has been an enabler of international entrepreneurship. The concept of Globalization The concept of globalization refers to the integration through international trade of markets in goods and services, financial integration through international trade in assets, foreign direct investment, international outsourcing of services and international movement of people. The two major drivers behind globalization are reduced costs in transport and communication in the private sector and reduced policy barriers to trade and investment on the part of the public sector (Frankel, 2006; Lee & Tai, 2006). The major drivers of globalization according to Singer (2004) include social-demographic (regional, cultural), technological, which includes telecommunications, internet and transportation, economic factors like foreign direct investment, profit motives and market share, ecological and environmental factors like pollution and green laws, and political-legal factors like falling trade barriers, political stability and intellectual property. Entrepreneurship and international entrepreneurs These factors have hence allowed not just the larger establishments such as the MNCs to look across borders but also the smaller entrepreneurs who capitalized on the resources and too advantage of the liberalization. Entrepreneurship has been defined in many ways by different authors and researchers. According to Stevenson, ‘entrepreneurship’ is “the process whereby individuals become aware of business ownership as an option or viable alternative, develop ideas for business, learn the process of becoming an entrepreneur and undertake the initiation and development of a business” (Chigunta, 2002). Opportunity Recognition (OR) is an important aspect of entrepreneurship (Silverthorne, 2005) and passionate vision distinguishes entrepreneurs from their competitive competitors (McIntyre, 1998). Entrepreneurs have a propensity to take risks and the need for achievement serves as the driving force (Koh, 1996). Hence an entrepreneur is one who is quick to identify an opportunity, take risks, one who is prepared for challenges and adversities and can achieve profits by utilizing the available resources. However, international entrepreneurship is “a combination of innovative, pro-active and risk-seeking behaviour that crosses national borders and is intended to create value in organizations” and such activity focuses on the relation between businesses and the international environments in which they operate (McDougall & Oviatt, 2000). According to Shane and Venkataraman, the study of entrepreneurship is the “examination of how, by whom, and with what effects opportunities to create future goods and services are discovered, evaluated, and exploited” (cited by McDougall & Oviatt, 2003). International entrepreneurs or Born Globals Entrepreneurs that have responded quickly to international opportunities have been referred to as Born Globals or instant entrepreneurs (Andersson & Wictor, 2003). Born Globals are associated with small size, entrepreneurship and few employees, limited resources and experience in international business, and small domestic markets and global niche products intended for global markets (Gabrielsson, 2005). Born Globals base their mission and vision on global markets right from inception and they plan to become global market leaders. They use different global marketing strategies and they grow exceptionally fast. Globalization and its most recognizable enabler – the ICT – have changed how the youth live and function (Rumiany, 2007). ICT is not merely a tool but a medium through which social, political and economic transformation occurs. Transformations have become global which implies that changes in one community impacts other communities as well. ICT has definitely been an enabler of change. A new media culture has permeated the society of which the youth are the main producers and consumers and the ICT the enabler. Therefore, the interaction between ICT and the youth brings about concomitant changes in the society impacted by this new media culture. Youth have become agents of change because they learn faster than the adults and they are more adaptive to change. Youth are the first-adopters of ICT and it has created a radical change in information flow. Andersson and Wictor contend that globalization trends may have provided greater opportunities for single firms but this is not enough to create a successful international venture. This requires resourceful individuals and firms that can recognize opportunity that globalization has provided. Born Globals and instant exporters are those that did not slowly build their way into international trade but from inception itself they could successfully compete against the large established players. This was facilitated due to globalization trend of lower trade barriers and cheaper and faster transportation and communication. Other reasons for international entrepreneurship, based on the resource-based view include advances in process technology, the increasing role of niche markets, being small firms the response time is quicker, they are more flexible and adaptable, application of technology tools by these firms and the use of global networks. Born Globals have highly innovative skills and they often have close collaboration in international relationships. An international new venture is “a business organization that, from inception, seeks to derive significant competitive advantage from the use of resources and the sales of outputs in multiple countries” (Andersson & Wictor, 2003). Network – the greatest enabler Network, is the result of advanced technology, which has facilitated globalization. New firms are dependent on relationship with their customers, suppliers and financiers. Social and business networking has helped entrepreneur to grow but the authors contend that not all entrepreneurs are necessarily involved in international networks (Andersson & Wictor, 2003). Born Globals rely on close relationships and network partners. They forma alliances with large distribution channels and they cooperate with MNCs which use Born Globals’ products in their system (Gabrielsson, 2005). Advanced technology and communication has helped the ethnic minorities to develop networks in countries which were once their domestic market. The Asian-owned SMEs in the UK clothing industry could rapidly exploit upon emigrating to the UK (Crick, Chaudhry & Batstone, 2001). Within a year of start-up they could internationalize and start trading operations with firms in the country of their origin to exploit cultural networks. However, those that did not have the existing contacts or the commercial know-how could not readily exploit the networks. This study takes into account other facilities that the firms did not utilize but since these do not concern the purpose of the current study, these have not been discussed here. Networks is an important outcome of globalization and it is clear that those could exploit the networks had a quick start against those that did not. The international new ventures (INV) are different from conception because they have a global focus and commit resources to international activities (Coviello, 2006). In the early stages the INVs are facilitated by networking and hence it is presumed that such activity takes place pre-internationalization. Network theory and analysis are fundamental to international entrepreneurship research. In the initial stages the network of entrepreneurial firms are cohesive and composed of socially embedded ties. As the firm moves into the growth stage economic ties are created to explore growth. The social ties however become less important over time. Networks provide the INVs with market access, financing, distribution channels, and contacts for both national and international development. Thus network relationships are intangible resources and they have been found to be present even before the conception. Early relationships are important for new ventures. The INVs are not likely to behave in a predictable manner. Organizational learning through technology Organizational learning and entrepreneurial orientation enhances international entrepreneurship (Clercq, Sapienza & Crijns, 2005). The study was conducted through survey of owners or top executives of small firms with fewer than 500 employees, which fetched 18% response rate. This study found that knowledge about foreign markets increases internationalization by affecting the perceptions of opportunities offered by further international expansion. Information about foreign markets reduces the uncertainties usually associated with international expansion. As a result it increases the willingness to expand overseas as in the case of a firm that was engaged in renting and selling movable cranes for construction projects. Because the top management could gather sufficient knowledge of individual workers and they knew about the safety regulations in different countries, they had the confidence to market their products overseas. The study also found that firms that have been proactive, innovative and risk-taking posture have been successful in their overseas ventures. The entrepreneurial firms experiment more freely and hence this study indicates that the process of globalization has stimulated the growth and development of international entrepreneurs. This study was on self-reported data and not on published data but for the purpose of understanding the effects of globalization, the results can be taken as valid. Libra, a brokerage company in Lithuania was suffering with economic problems as the country’s economic situation was bad. However the youth of the company took the initiative to contact potential clients. Soon they received orders from Switzerland and Italy for products such as steel and oak strips (Zidonis, 2007). Since the company could not find any oak strip producer in Lithuania, they set up facilities to manufacture the oak strips. As demand incased they had to invest in Western machinery. They faced numerous problems until they decided that knowledge acquisition was essential to meet the challenges. They found the momentum of growth only after knowledge accumulation from customers, co-owners and network partners. Libra was open to learning and they could develop new routines to operate in foreign markets. The company was driven by entrepreneurial enthusiasm and the authors contend that lack of experiential knowledge was not a constraint to their internationalization process. On the other hand Libra continued in its efforts to internationalize and acquire knowledge in the process as they progressed. The entrepreneurs had the quality of opportunity recognition which was the result of belief about the potential attractiveness of the Western markets. The action-oriented behaviour of the entrepreneurs at Libra resulted in the internationalization process. E-commerce – the outcome of globalization Gabrielsson conducted a study of 30 Finnish SMEs that were Born Globals. These firms sold hi-tech products such as electronic components and devices, medical instruments, and know-how products like software, games and other applications. They also had other products such as innovative interior design products, design garments, innovative utensils and gift items. The study found that majority of these born globals had a definite branding strategy for their products, which is unusual for companies that size and age. Due to resource constraints they could not develop multiple in-house brands but they did use the internet to expand. The branding strategy thus depended on the stage of global expansion. These SMEs engaged in B2B - business-to-business (targeting large industrial, service or governmental organizations) and B2C - business-to-customer (targeting private customers, in areas such as housing, leisure, or other desires). Apart from these, there were also firms that were B2B2C - targeting both business and consumer markets, with products like mobile telecom services or various software applications. The branding strategy was global right from the beginning. Instant global brand image could be achieved due to global nature of their selected media and the internet. Online publicity and editorial publicity were effectively used. Internet-related businesses are integrating their virtual and physical operations (Hitt et al). The four rivers of value creation for e-businesses are efficiency, complementarities, lock-in, and novelty. These help the entrepreneurial firms to enhance the purchase process for their customers and provide real time information to the customers. The service that they provide is unique thereby adding value to the overall business functions. External networks New technology and globalization has created a competitive landscape with substantial uncertainty but an entrepreneurial mindset can derive benefits from uncertainties (Hitt, Ireland, Camp & Sexton, 2001). External networks have become common that involve relationships with customers, suppliers and competitors and extend beyond the national borders. Networks provide firms with access to information, resources, markets and even at times, technology. External networks help the entrepreneurial firms to identify opportunities. It also provides them with resources and capabilities needed to effectively compete in the global market place. For instance, the smaller biotechnology firms provide new technology and innovative products while the pharmaceutical firms provide the distribution networks and marketing capabilities to market these new products. External networks hence provide the new entrepreneurial firms with the challenge to enhance their capabilities and compete. E-businesses use network extensively to outsource functions. In fact participation in the network provides access to resources. It also provides them access to venture capitalists through which they can generate financial support. These resources, capabilities and competencies facilitate the development of sustainable competitive advantage. Networks emphasize trust, reciprocity norms, personal relationships, and reputation. The network for an entrepreneur represents his social capital that is intangible and which keeps appreciating through repeated interactions, thereby building trust (McDougall & Oviatt, 2003). The network offers the financially constrained entrepreneurial firm with an opportunity to gain resources without incurring the capital investment of vertical integration. The network helps the born globals to identify business opportunities and they have more influence on the founders’ country choices than the psychic distance. Foreign market selection and entry initiatives are eased through such networks. FDI – and international entrepreneurs In addition to the external networks, the opening of international markets has allowed the entrepreneurs to venture overseas. Globalization requires that managers develop a global mindset to manage the complex transactions and interactions (Hitt et al). When international entrepreneurs enter new markets it has a positive effect on firm performance. They learn new capabilities from each of the new market they enter and also diffuse this knowledge through out the organization. A study of 164 Japanese SMEs revealed that they initially experienced reduction in returns but once they gained experience in foreign markets and had access to FDI, their profits increased. They experience greater profits when they have alliances with local partners. Thus investing directly in new markets is entrepreneurship and this has a positive effect while exporting has a negative moderating effect. Internationalization by the born globals is measured in terms of foreign direct investment or the amount of capital invested in buying up real assets. Bonnafous-Boucher and Laviolette (2009) find that ‘innovation centers’ have fueled the growth of international entrepreneurs. These innovation centers are based on the alliance of technology and human capital with a focus on sponsorship, business mindsets and commercialization. These organization provide service to the start-ups and help them market globally. A global or a transnational strategy gives access to the SME to a vision that no longer focuses on the home base. Innovation and creativity has been the core focus for entrepreneurship researchers. Innovation can vary from introduction of new products, new processes to opening of new markets developing organizational structures or even new sources of supply (Styles & Semour, 2006). A study was conducted of 164 Japanese SMEs engaged in 19 different industries. The data was collected from Nikkei NEEDS tapes, which is electronic data base providing information on the corporate performance of Japanese firms that are listed on the first and second sections of the Tokyo stock exchange (Lu & Beamish, 2001). The aim of the study was to examine the effects of an international aspect of an entrepreneurial strategy. The study found that FDI that has opened up markets as a result of globalization had a positive impact on the firm performance whereas exports had a negative impact. Initially, when the FDI is low, there is negative performance registered by the firms but as FDI increases, the Return on Assets (ROA) increases. FDI is a more competitive way than exporting for operating in international markets. Alliances with local partners help to overcome the local issues such as local knowledge, local language and location specific information. The study found that local knowledge base of alliance partners had a significant and positive impact on the alliance intensity and firm performance. This was also found by McDougall and Oviatt (2003) who found that the learning process helps in overcoming the liabilities of foreignness because it invariably relates to the firm’s lack of local market knowledge. Knowledge management and learning has been enabled through advanced technology. Learning is essential for the entrepreneur to compete internationally because knowledge is the most critical asset of the firm. A study of the Finnish firms revealed that newer firms are flexible and learning is acquired much easily compared to the older firms. The mode of international entry has also been found to be related to the technological learning and learning had a positive performance impact. Globalization has enabled capital inflow to entrepreneurs through venture capitalists. Born globals are usually young, forward-looking, fearless, relying on their own abilities and skills and they prefer their management team to be young and educated (Luostarinen & Gabrielsson, 2002). The born globals associate with venture capitalists but their objectives differ. There is one group of born globals that believe in “learning by doing” principle and did not prefer formal training. Another group of born globals understands the importance of having an experienced management team. Innovation and creativity Another dimension of globalization is privatization and Hitt et al contend that privatization unleashes firms’ entrepreneurial capabilities thereby leading to innovation. This leads to alliances with foreign partners which increases the resources and capabilities. The knowledge thus acquired creates greater value for the owners. The born globals acquire technological learning from varied international environments. They are then able to integrate the knowledge through out the firm through different means such as cross-functional teams and formal analysis of both successful and failed projects (McDougall & Oviatt, 2000). Venture performance improves through technology learning and knowledge dissemination. Technological alliances lead to innovation and this was confirmed by a study of 494 entrepreneurial firms in Australia, Indonesia, Mexico, Norway, and Sweden. Liberalization and international entrepreneurs Globalization is the only way for development of the enterprises, argues Suping (2006). After China entered the WTO, the domestic market was opened to the outside and the overseas enterprises entered China. This gave the domestic firms a challenge which forced them to look beyond their borders and enter the international markets. Taiwan’s information technology industry has received a boost due to liberalization and globalization thereby creating many international entrepreneurs (Kraemer, Dedrick, Hwang, Tu & Yap 1995). Taiwan’s computer industry was built around SMEs but today some of these SMEs have grown into large companies that dominate the market. Some of these larger companies such as Acer and Mitac have achieved global brand recognition. The Taiwan government helped create a decentralized industry structure through out the economy by changing its policies. Overcoming the protectionist attitude of the government helped China to become the fourth largest producer and exporter of computer hardware by 1994. The open architecture created by IBM in the PC industry lowered financial and technological barriers to entry. This enabled a market for standardized components and peripherals. Smaller companies were previously shut-out of the market due to IBM’s dominance. However, the PC revolution created new horizontally segmented industry structures which provided an opportunity for many companies to enter the industry through out the production chain. These helped the Taiwan’s computer industry to grow as entrepreneurs could build better and cheaper products based on openly available technical standards. Various basic assemblies and subassemblies came up as closer cooperation developed between the suppliers and manufactures, as networking enhanced between technical and engineering staff. The entrepreneurial culture in Taiwan helped the firms to gradually expand overseas supported by the dimensions of globalization. The government policies also supported the private sector. The electronics and the PC industry were export-oriented from the beginning and with government support they could progress much faster. The government helped by providing market intelligence and facilitating technology transfer from abroad by encouraging FDI inflow in China. Removal of trade barriers, advances in manufacturing transportation and information technology, and advances in process manufacturing have provided opportunity to entrepreneurs to leverage international and global markets (Styles & Semour, 2006). Traditionally three streams of entrepreneurial research have taken place which includes the Dunning’s eclectic paradigm, the Uppsala School and the network perspectives. According to the Uppsala internationalization model, lack of knowledge prevents the firms form entering cultural distant markets. The entrepreneurial internationalization can be the fourth stream. Internationalization has many characteristics associated with entrepreneurship such as risk taking, innovative behaviours, and new market entry arising from the awareness of unexploited opportunities. Internet technology and international entrepreneurs Web access is available to all firms irrespective of the size of the firm. The benefits include reduced importance of economies of scale, lower marketing communication costs, and greater price standardization, reduced information float time, and increased contact between buyers and sellers, and changes in intermediary relationships (Loane, 2006). The internet has enabled collaborative activity such as virtual communities that are knowledge exchange mechanisms. The knowledge pool created via informal internet enabled collaborations lead to new product developments and R&D activities. A study of small firms that have internationalized in four countries namely, Ireland, Canada, New Zealand and Australia were studied. The study revealed that relatively small firms have deployed the technology to a sophisticated level of internet usage. Firms use internet as a marketing medium – for marketing communications, customer relationship management and as a marketing channel. An Irish firm even provided design services for large-scale chemical plants. Two New Zealand firms utilized the internet as a transactional medium. They have set up an e-market place for lumber trading giving them a global reach. Their website offers seven language choices and accepts payments in several currencies. However, trading is private with security systems in place. The internet has enabled to develop virtual private networks (VPN) which links all the computers on both sides of the Atlantic. Canadian and Irish firms use the internet for recruitment and selection process. They also use it to drive changes in their administrative processes. The changing economic, political, and competitive environments in Turkey due to globalization have forced many entrepreneurs in Turkey to start and continue to operate small businesses. The impact of globalization in Turkey include privatization, tax reform, deregulations, abolishment of anticompetitive barriers, and reduction in monopolies, in addition to agricultural reforms, and the efforts made to meet the expectations of the European Union (Turan & Kara, 2007). Turkey now has a young entrepreneurial and culturally diverse population. SMEs in Turkey are now recognized as engines of economic growth. Conclusion Thus the literature review suggests that drivers of globalization include enhanced technology, foreign direct investment, reduced policy barriers and opening of foreign markets. Many countries to derive benefit from such open policies. In the process of internationalization, networking and ICT have been found to be the greatest enablers in increasing the entrepreneurial ventures. An international entrepreneur is one who has the capability to be innovative, has the propensity to take risks and is proactive. They have the willingness to cross national borders and start new ventures. Usually the youth has been associated with such ventures as they are able to use technology and derive benefits from it. They are early adapters and quick to learn than are the adults. International entrepreneurs are also known as instant entrepreneurs or Born Globals. This means right from the conception they have a global mindset. The literature further suggests that networking starts before the conception and early starters have an edge over others. Born Globals rely on close relationships and network partners. Technology has enabled organizational learning and dissemination of this knowledge through out the organization. This helps in the process of internationalization but at the same time the case of Libra Company of Lithuania suggests that learning and knowledge is not a pre-requisite to success. This company acquired learning as it progressed and achieved success. E-commerce platform, through the internet has definite benefited entrepreneurs in identifying opportunities, in making alliances with local partners, in securing new suppliers, in developing and maintaining customer relationships. Networks have also helped firms to locate venture capitalists and also the country of their choice. FDI – another dimension of globalization – has encouraged entrepreneurs to venture forth in different countries including the developing economies. Countries such as China opened up their economic as a result of globalization and this helped in the growth of the information technology industry in China. Even Japanese firms that had higher FDI inflow registered higher profits. The literature that has been reviewed suggests that globalization is an enabler of international entrepreneurship. References Andersson, S., & Wictor, I. (2003). Innovative Internationalisation in New firms: Born Globals-the Swedish Case. Journal of International Entrepreneurship. 1 (3), 249-276 Bonnafous-Boucher, M., & Laviolette, E. (2009). Special Issue: Catalysing international entrepreneurship. Retrieved online 18 October 2009 from http://www.advancia.fr/advancia.nsf/id/9FE7009AF290C975C125763C002E1D9A/$file/Introduction.pdf Chigunta, M., (2002). Youth Entrepreneurship: Meeting the Key Policy Challenges. 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