Internationalization Process Among Small and Medium-Sized Firms - Article Example

Article Analysis and Evaluation: “A study of the enablers of non-sequential internationalization process among small and medium-sized firms” The article entitled “A study of the enablers of non-sequential internationalization process among small and medium-sized firms” was written by Aihie Osarenkhoe of the University of Gavle (Sweden) Department of Business Studies, and was published in the International Journal of Business Science and Applied Management in February, 2008. The objective of the article is to detail the researcher’s findings in a study of internationalisation processes followed by small- and medium-enterprises. Osarenkhoe’s hypothesis is that firms which do not follow a sequential process towards internationalization are not solely enabled in their non-sequential approach by single factors, as is commonly asserted by the body of prior research, but rather by a number of interconnected factors. The article begins with a basic definition of internationalization – “the process of increasing involvement in international operations across borders (Welch & Luostarinen, 1988)” – and briefly introduces some of the large body of research done in North America and Europe. Both streams of research have, according to Osarenkhoe, developed essentially the same basic framework for models of internationalization: “Both research traditions conceptualize export development as taking place in gradual and sequential stages (learning sequences involving feedback loops), based on a series of incremental commitment decisions depending on perceptions, expectations, experience, managerial capacity, etc. The firm is assumed to build a stable domestic position before starting international activities.” (p. 2) In other words, internationalization is a step-by-step process undertaken once a firm establishes a sound position in its domestic market; moving into foreign markets is done incrementally, with each step providing learning to support the following step. The research question of the author then has two elements: First, not all firms follow a sequential, or step-by-step process; and second, their reason for not doing so cannot be attributed to a single factor. The theoretical framework of the research is based on three models that describe sequential internationalisation processes. The first is the Uppsala Internationalisation Model, proposed by Johanson and Wiedersheim-Paul in 1975, and expanded by Johanson and Vahlne in 1977. (p. 3) The second is the Transaction Cost Approach (TCA) first proposed by Coase, 1939 and applied to internationalisation by Williamson in 1975 (it should be noted, however, that the reference to this latter work is missing from the article). (p. 3) The third model and most recently-developed model is the Network Approach model, which has been studied by numerous researchers. Osarenkhoe summarises these three models in a table (p. 4), and they can be briefly described in the following terms: Uppsala Internationalisation Model: Firms move into international markets in incremental steps, relying on the experience gained from one step to move forward with the next. A typical example pattern would be: domestic production and sales, followed by export sales through an agent, followed by direct export, and reaching the final stage with production in the foreign market. The variable is in the size or complexity of the steps the firm takes, which is determined by the resources the firm has available to apply to the process. Transaction Cost Approach (TCA): The TCA holds that the cost of making a transaction determines the activities of the firm, and that the overall objective is to minimise transaction costs as much as possible. Firms following this model compare the costs of making the same transaction internally and externally; an example with respect to internationalisation would be selling a product in a domestic market or exporting it. When the external transaction cost is equal to or lower than the same transaction done internally, then the firm will expand its external activities. Network Model: This model uses theories of social interaction, on both the organisational and personal level, to explain how firms can gain experience and relationships that allow them to extend their activities internationally. While it is not as clearly a sequential process as the first two models, it is still incremental; internationalisation grows in proportion to the size and depth of connectivity within the firm’s ‘network’. After presenting the theoretical background, Osarenkhoe explains how firms “that tend not to develop in incremental stages with respect to their international activities” (p. 5) were identified and selected for the research survey: SMEs employing no more than 10 people. Firms operating internationally for less than 5 years. Representative of all business sectors. Importers as well as exporters, and Derive at least half their sales from international business. The final sample amounted to 60 firms, either Swedish SMEs with international sales, or foreign businesses operating in Sweden. The surveyed firms showed the characteristics of so-called “born globals” (Osarenkhoe, 2008: 6, and Mort & Weerawardena, 2006), which are firms that either begin as international companies or advance to international business within a short time (all of the surveyed firms entered international business within two years of their inception). None followed a sequential internationalisation process, either having a strong global mindset and internationally-oriented organisation at the outset, or employing outside consultants to fill gaps in experience and knowledge. All the surveyed firms demonstrated other “born global” characteristics such as strong focus on a market niche and a greater proportion of their sales outside their home country. (p. 6) Osarenkhoe summarises the factors which commonly affect all the companies in the survey in the form of a chart: Findings: Osarenkhoe summarises the survey responses in tabular form, and confirms that the firms surveyed did not follow a sequential process to internationalisation. He then goes on to explain some of the conclusions of the extensive literature that expresses the ‘traditional’ view that IT assets are the primary enabler of early, non-sequential internationalisation. (pp. 8-9) Based on his findings, Osarenkhoe concludes that several other factors enable non-sequential internationalisation, while not discounting the importance of communication technology. Personal and organisational relationships play a role, with connections offering virtually instant access to distant markets. These relationships also eliminate the need to develop all experience internally, since the expertise of others within a firm’s network can be co-opted. Product specialisation is also said to play a role, with niche products having demand in markets where they are otherwise unavailable, and because of strong competitive pressures among domestic firms. (p. 9) In his conclusion, Osarenkhoe reiterates that the sequential models of internationalisation are not valid in all instances, but he acknowledges that the basic outcomes of the sequential models – learning from experience and networking throughout international markets – still apply even in non-sequential internationalisation processes. (p. 12) Another aspect considered by the sequential models, the transaction costs – which are the determining factor in one model, as discussed earlier, and a significant component of the others – are unavoidable even in a non-sequential process. These, however, can be moderated by the strength of network relationships, according to the author. (p. 13) As a topic for further research, Osarenkhoe suggests the transaction costs or costs of entry into international markets be examined for firms similar to the ones in this study. Those factors, which the author feels have implications for the speed and extent of a firm’s internationalisation, were not addressed by this study. It is also suggested that future studies be expanded to encompass more firms of the type surveyed in this research. Analysis & Assessment The Research Problem: The first impression is that the research question is somewhat simplistic and not particularly innovative; it seems intuitive that the internationalisation of firms is due to a number of interacting factors that would necessarily be specific to individual firms. The author, however, has framed his research question as a hypothesis which disproves the conclusions of previous research; mainly, that in most cases, a firm’s ability to internationalise can be attributed to one strong enabling factor. In that respect, the research question becomes more important because it potentially sheds new light and a different perspective on the subject. In terms of predicting an outcome and explaining a logical path to it, the author is very clear, stating that the new model the research will develop will explain why the old models are inappropriate, and offer recommendations of how the implications of it can be approached. The author clearly explains the theoretical framework guiding the research, but does not go into detail about the empirical work or specific findings of previous studies. This seems to be a serious shortcoming, for two reasons. First, it would have possibly made the explanations of the theoretical models a bit easier to understand for readers who are not well-versed in the subject. Second and more importantly, since his hypothesis is that the application of the models to the internationalisation of a large number of firms is wrong, a discussion of how other researchers developed those models is needed. If the conclusions of other researchers are wrong, that implies some flaw in their research, and in order to point that out, the methodology must be discussed in some way. Literature Review: The author does not set forth a formal, separate literature review, but rather makes extensive reference to the literature throughout the article. From a style perspective, perhaps, this makes the article a bit easier to read, but there are gaps in parts of the discussion of the theoretical framework and in some of the definitions used in the research that show that foregoing a standard comprehensive literature review was not really a good idea. For example, in the discussion of the three models of internationalisation, the explanation of the third, the Network Model, is a bit vague. Osarenkhoe describes it specifically as “Draws on theories of social exchange and focuses on firm behaviour in the context of interorganizational and interpersonal relationships.” (chart, p. 4), and lists a number of references – 14 in all – to which the ideas can be attributed. But the author does not actually explain what those ‘theories of social exchange’ are, or in what ways firm behaviour can be described in ‘the context of interorganisational and interpersonal relationships.’ A proper literature review highlighting examples of these ideas would have added much-needed clarity and depth to the article. Another example can be found in the discussion of the study’s methodology. One of the metrics of the survey given to the 60 firms studied was “Entrepreneurial Prowess”, which Osarenkhoe explains in this manner (p. 6): “Entrepreneurial prowess, in this study, assessed the role of entrepreneur along the dimension of vision, innovativeness, and organizational capabilities in international growth. The frame of reference to operationalize the entrepreneurial prowess and managerial factors in this study originates from Zucchella’s (2004) recommendations.” Without some review of Zucchella’s work to define the frame of reference to which the author is referring, an entire component of the research upon which he will be basing his conclusions is unexplained. Methodology: There are numerous apparent flaws in the methodology. The first one is in the selection of the firms to by surveyed, which seems to have been done to produce the desired result. There is no control group, and the criteria used for selecting the firms to be surveyed are too narrow to otherwise make any comparisons between firms. Recalling the study’s hypothesis “Internationalisation of SMEs is not enabled by a single factor” suggests a number of questions that the methodology does not satisfactorily address: First, and most obviously, are there SMEs that do attribute their internationalisation to a single factor? Assessments of “Global mindset”, “entrepreneurial prowess”, and “relationship networking” were made, which suggests a certain amount of self-evaluation was gathered from the surveyed firms. That being the case, why didn’t the researcher include the simple question: “To what factor(s) do you [the surveyed firm] attribute your ability to internationalise your business?” For comparison, SMEs that did not have any intention to internationalise or that attempted to do so but failed should have been included. This would have allowed a broader analysis of the enabling factors, at least in the respect that it could be determined if they are unique to internationalised firms or not. Apart from the criterion that firms employing 10 or fewer people form the research sample, there is no correlation of the factors to the scale of the enterprise. Do all the surveyed firms do a similar level of business? This could be compared, for example, by including figures on gross sales. Or perhaps an even more objective measure would be gross sales divided by the number of employees, since the number of employees was specified as a selection criterion. The survey method is appropriate for the author’s research question, but it is not undertaken with sufficient rigour. There is no discussion of literature relevant to the methodology with which the author could justify his approach. And there is no control or basis of comparison included in the methodology. All these shortcomings prevent any sort of rigorous evaluation, which unfortunately will call the validity of the results and conclusions into question. Data Collection: There does not appear to have been any real ethical or practical problems connected to the data collection. The data collection process is described as a questionnaire followed by an interview. (p. 5) Osarenkhoe does point out that most of the interviewed firms requested anonymity, which does not seem to detract from the research; the identification of the firms beyond the basic descriptive data collected does not seem to be relevant. Findings: Osarenkhoe begins the discussion of his findings with the statement, “Findings presented in Table 2 aptly depict that firms did not follow the traditional stages pattern in their internationalization process.” (p. 8) Given that he earlier described the selection criteria for surveyed firms “to identify the firms that tend not to develop in incremental stages with respect to their international activities,” (p. 5) this does not seem like much of a revelation. The findings are otherwise presented in a concise manner and make appropriate references to the literature, but this actually does not help the author make his case. The author asserts, in line with his hypothesis, that there is no single enabling factor in non-sequential internationalisation, and briefly reviews the literature which describes IT as a single enabling factor. Yet despite this assertion, the author’s findings seem to be contradictory. He describes network relationships, access to markets, particularly markets for niche or specialised products, and consumer access to suppliers as all being interconnected factors in non-sequential internationalisation. But he describes communication technology as being an enabling factor in each of these. Network relationships are greatly facilitated by Internet and other forms of communication. Access to markets, which is dependent on being able to locate and research market conditions, is also made possible over great physical distances by communications technology. The same is true in the reverse direction for consumer demand for particular products. So while the author is asserting that a single factor – in particular, technology described by previous studies – is not responsible for enabling non-sequential internationalisation, every example he gives of the enabling factors are in some way made possible by technology. Far from proving the prior studies wrong, Osarenkhoe’s conclusions indicate that the one common factor in all the conditions which allow companies to enter international markets quickly is in fact IT and communications assets. The findings also confirm the validity of two basic premises of the sequential models, specifically experiential learning and network connections to distant markets. This does not contradict Osarenkhoe’s findings, but perhaps suggests a new model or theory to explain internationalisation, different from the existing sequential models or the “strong single enabler” of non-sequential internationalisation that Osarenkhoe seems to inadvertently proved. Conclusions & Recommendations: The author makes three basic recommendations for further research in his conclusion. First, that the study be repeated with a larger number of firms. Given the shortcomings of his methodology, this is a very good suggestion. Second, he notes that the transaction costs and costs of entry to foreign markets are an important factor in internationalisation, and suggests that future research take this into account. This of course begs the question of why it was not done in this study, but no reason is given for its omission. Finally, he suggests that social network theories might be applied to future studies to help explain the connection between rapid acquisition of knowledge in firms and the exponential growth of non-sequential firms. (p. 13) As discussed above, the third of the three ‘sequential models’, the Network Model, is not as fully-explained in this study’s discussion of the theoretical framework as the other two. In this light, this suggestion for further research seems to reveal that the author is aware of his own shortcomings in understanding or research of the Network Model. Overall Assessment: Unfortunately, it must be judged that this study has too many omissions to be viewed as a sound source of knowledge on the topic. The research topic is suitable and interesting, but the review of relevant literature and the discussion of the theoretical framework is not well-organised and seems incomplete. The methodology seems to have been designed to achieve a pre-conceived result rather than as a purely investigative effort, and ironically, seems to have resulted in findings that specifically contradict the researcher’s hypothesis. And finally, the recommendations for further research simply address limitations of this study, rather than presenting a new concept to be explored. In fact, a discussion of the study’s limitations, something that is considered a normal requirement for studies of this type, is not otherwise presented. If it were, the reader would have the opportunity to place the study in the proper context, which would give it more authority; as it is, the impression the reader is left with now is of a study that was not well-planned or researched, and is presented with less-than-acceptable attention to detail. References Coase, R.H. (1939) “The Nature of the Firm”. Economica, 386-405, cited in Osarenkhoe, 2008: 3. Johanson, J., and Vahlne, J-E. (1977) “The Internationalization Process of the Firm - A Model of Knowledge Development and Increasing Foreign Market Commitments”. Journal of International Business Studies, 8: 23-32, cited in Osarenkhoe, 2008: 3. Johanson, J. and Wiedersheim-Paul, F. (1975) “The internationalisation of the firm – Four Swedish cases”. Journal of Management Studies, 3 (October): 305-322, cited in Osarenkhoe, 2008: 3. Mort, G.S., and Weerawardena, J. (2006) “Networking Capability and International Entrepreneurship: How Networks Function in Australian Born Global Firms”. International Business Review, 23(5): 549-572, cited in Osarenkhoe, 2008: 6. Osarenkhoe, Aihie. (2008) “A study of the enablers of non-sequential internationalization process among small and medium-sized firms”. International Journal of Business Science and Applied Management, 3(2): 1-20. [Internet] Directory of Open Access Journals: . Welch, L., and R. Luostarinen. (1988) “Internationalization: Evolution of a Concept”. Journal of General Management, 14 (2): 34-64, cited in Osarenkhoe, 2008: 2. Read More