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SME internationalizationresearch: past, present,

and futureMitja Ruzzier

Arc-Kranj, Kranj, Slovenia

Robert D. HisrichThunderbird, The Garvin School of International Management, Glendale,

Arizona, USA, and

Bostjan AntoncicFaculty of Management, University of Primorska, Koper, Slovenia

Abstract

Purpose The purpose of this paper is to understand the similarities and differences in theinternationalization of SMEs and MNEs and the specific factors affecting them.

Design/methodology/approach The relevant literature was reviewed particularly in the contextof the major theories of internationalization.

Findings The positive and negative aspects of each theoretical approach to internationalization arepresent to form the basis of a new model of international entrepreneurship.

Research limitations/implications The newly developed conceptual model has not beenempirically tested.

Originality/value A redeveloped theoretical integrative conceptual model of internationalentrepreneurship is proposed based on four internationalization properties (mode, market, product, andtime), internationalization performance, and key antecedents and consequences of the internationalizationprocess.

Keywords Small to medium-sized enterprises, Resources, Research

Paper type Conceptual paper

IntroductionInternationalization is a phenomenon researched intensively over the last few decadesfrom a variety of viewpoints, including: organization theory, marketing, strategicmanagement, international management, and small business management. Issues such asinternational decision-making and management, the development of internationalactivities, 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 todays marketplace, SMEsare increasingly facing similar international problems as those of larger firms. For manySMEs, especially those operating in high-technology and manufacturing sectors, it is nolonger possible to act in the marketplace without taking into account the risks andopportunities presented by foreign and/or global competition. As a result, discussion ofinternationalization in this study needs to cover to some extent, aspects of general

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Enterprise Development

Vol. 13 No. 4, 2006

pp. 476-497

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1462-6004

DOI 10.1108/14626000610705705


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internationalization of both large and small firms, while focusing on theinternationalization of SMEs.

Internationalization the evolution of the conceptIn previous international business literature, mature multinational corporations playeda dominate role, whereas SMEs (and especially their internationalization) have onlyrecently attracted broader interest (Miesenbock, 1988). This reflects the fact thatseveral countries, particularly those experiencing balance of payment deficits, haveattempted to increase the international activities of their SMEs in order to boosteconomic growth, cut unemployment and create potential mini-MNEs in the future.

Internationalization is a synonym for the geographical expansion of economicactivities over a national countrys border. The term started to be used when thephenomenon gradually replaced imperialism as the dominant organization principleframing cross-border interaction between market economies starting in the 1920s. Theeconomic internationalization process accelerated in the post-second-world-war era

and appeared unrivalled until the early 1970s, when a new phenomenon ofglobalization started to emerge (Gjellerup, 2000).Globalization usually refers to a stage in which the firms operations are managed on a

global scale, not in just a few selected countries. It is characterized by the worldwideintegration of ever more competitive markets and companies facing global competition.Traditional exports are increasingly coming under pressure while the conditions formarketing and production are changing rapidly. As a result, todays companies, includingSMEs, have to respond to markets at an increasingly faster pace (Pleitner, 2002).Globalization also includes the functional integration of geographically dispersedeconomic activities. It means something more in terms of the scope, content and intensityof mutual connections, capital and management involvement (Svetlicic, 1996) and istherefore a qualitative extension of internationalization (Gjellerup, 2000).

It is generally agreed that three forces are driving the globalization of business (Acset al., 2001; Gjellerup, 2000). The first is the explosive growth of low-cost technologyconnecting people and locations. Better information-processing and communicationtechnology is creating a greater awareness of international economic opportunities.The second force behind the globalization of business is the steady dismantling oftrade barriers and financial deregulation. Free-trade agreements have generated amore level playing field for innovative firms. The third force motivating theglobalization of business is the widespread economic restructuring and liberalizationthat followed the fall of socialism in Russia and Central/Eastern Europe, as well as thegeographical expansion of markets in Asia, particularly China. These previouslyclosed areas are now new markets and magnets for investment, opening furtheropportunities for growth and investment.

However, despite all these driving forces of globalization, internationalization hasnot been replaced, and many observations on internationalization remain valid today.The fact is that globalizations impact on the SME sector is likely to be more profoundthan on the already highly internationalized large corporate sector. While previouslySMEs were considered passive victims rather than active players, evidence indicatesthat this view is no longer valid. In the last few decades, many SMEs have successfullyset up activities beyond their home markets and their role is increasingly crucial incontributing to future growth (Gjellerup, 2000).

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Globalization and the attendant issues have only recently been introduced in smallfirm development and research (Madsen and Servais, 1997). Ruigrok (2000) proposedthat the term global should be reserved for those companies and phenomena thatreally deserve this label. Traditionally, SMEs restricted their activities to the region of

their location, or stayed within their national boundaries (Pleitner, 1997). Today manyare active in one or two world regions and are therefore international or regionalplayers. Following Ruigrok (2000), the term internationalization will be used to refer toSMEs outward movement of international operations, while globalization will refer tothe international connectivity of markets and the interdependence of nationaleconomies strongly affecting all SMEs activities.

Internationalization also means a changing state. The growth of the firm provides abackground 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 aresignificant degrees of difference between growth at home and growth internationally.

As is indicated in Table I , existing research has focused on SMEsinternationalization mainly from the point of view of the firms internationalactivities or operations by applying product, operation, and market analyses (e.g.Luostarinen, 1979) or network analyses (e.g. Johanson and Mattson, 1993). There is atendency in small firm research to view the process of internationalization asevolutionary (Luostarinen, 1979; Johanson and Wiedersheim-Paul, 1975) throughwhich companies become increasingly committed to, and involved in, internationalactivities, but at a certain point can also become inverted and result inde-internationalization (Calof and Beamish, 1995). In Nordic countries theinternationalization of SMEs has traditionally been defined as the process ofincreasing 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 continuallyestablished, maintained, developed, broken and dissolved in order to achieve theobjectives of the firm. This view, however, seems somewhat fragmented as it focusesexclusively on relationships. Assuming that SMEs operate within their naturalcontext, the view of Johanson and Vahlne (1990, p. 20) developed from Johanson andMattsson (1993) appears more promising. They define internationalization as theprocess of developing networks of business relationships in other countries throughextension, penetration, and integration.

In their definition, Lehtinen and Penttinen (1999) try to summarize the fundamentalcharacteristics of the internationalization process based on the Nordic research

findings. Their definition also covers two concepts occasionally applied in the contextof internationalization, namely international orientation and internationalcommitment. International orientation refers to a firms general attitude towardsinternationalization, thus representing an evaluative dimension. Reid (1981) defined itas a measure of the perceived difference between foreign markets and the home marketspace along economic, cultural, political, and market-strategic dimensions.International commitment is basically associated with the requirements of theoperation modes chosen and the size of international business. The latter seeks to

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position firms somewhere between the extremes of no involvement (domestic firm) andfull commitment (a firm with a realized foreign direct investment).

Generally, the overall research focus has shifted from the definition and analyses interms of international activities to the resources needed for internationalization. Withreference to the resource-based perspective, Ahokangas (1998) proposed a definition ofSME internationalization in terms of resources within the natural context (e.g. within afirms network). An internationalizing firm can be viewed as mobilizing unique andinterdependent resource stocks that enable and contribute to the firmsinternationalization activities within its natural context. This definition thus impliesthat internationalization is the process of mobilizing, accumulating, and developingresource stocks for international activities, regardless of the actual content of theinternational activities themselves.

A companys involvement in international business might arise when a company sellsits products to foreign markets, buys products from abroad or starts to cooperate in some

Author Definition Focus

Welch andLuostarinen (1993)

Internationalization is the outwardmovement of a firms international

operations

Process, firms operations

Calof and Beamish(1995)

Internationalization is the process ofincreasing involvement ininternational operations


Johanson andMattson (1993)

Internationalization is the process ofadapting firms operations (strategy,structure, resources etc.) tointernational environments


Johanson and Vahlne(1990)

Internationalization as a cumulativeprocess in which relationships arecontinually established, developed,maintained and dissolved in order toachieve the firms objectives

Relationships, process

Lehtinen andPenttinen (1999) Internationalization as developingnetworks of business relationships inother countries through extension,penetration and integration

Networks, relationships

Lehtinen andPenttinen (1999)

Internationalization concerns therelationships between the firm and itsinternational environment, derives itsorigin from the development andutilization process of the personnelscognitive and attitudinal readinessand is concretely manifested in thedevelopment and utilization processof different international activities,primarily inward, outward and

cooperative operations

Relationships, firms operations,process, int. environment

Ahokangas (1998) Internationalization is the process ofmobilizing, accumulating anddeveloping resource stocks forinternational activities

Resources, process

Table I.

Selected definitions of theinternationalization of

SMEs classified by theirfocus and research

approach

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area with a foreign firm. This implies that international operations can be divided intoinward, outward and cooperative operations, which shows the holistic nature ofinternationalization (Korhonen, 1999). Although internationalization is amultidimensional phenomenon, this study focuses on SMEs outward

internationalization, due to the following. First, more than inward operations, outwardoperations can in the long term increase the competitive advantage of a company,organization or a country. Second, at the firm level outward internationalization benefitsmay also be evident in the form of product and process innovation, better utilization ofcapacity, skill development and a generally improved business performance (Morgan andKatsikeas, 1997a). Third, at the country level outward internationalization induces severalfavorable outcomes for productivity performance, labor market employment levels,foreign exchange accumulation and related externalities such as industrial welfare andsocietal prosperity. Fourth, the intensifying competition, integration and liberalizationseen in international markets have forced firms to begin considering outwardinternational activities as a key factor in their future growth, profitability and evensurvival. Finally knowledge of the outward internationalization process and relatedoperations is more complex than that for inward internationalization.

Selected internationalization theories and modelsIn terms of the individual firm, the basis of internationalization research can be foundin the behavioral theory of the firm proposed by Cyert and March (1963) as well as indifferent decision-making theories. From a market perspective, trade theories can alsoprovide a lens on internationalization research.

Havnes (1994, cited in Ahokangas, 1998) argued that any of the models of small firminternationalization can be seen as presenting either a market, firm or entrepreneurshipperspective. The market perspective of internationalization has mainly been restrictedto 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 thestage models of internationalization, provides the bulk of available literature on SMEsinternationalization, whereas the number of studies based on the entrepreneurshipperspective is much less (e.g. Cavusgil and Naor, 1987).

In the current research, there is a difference in focus for large versus smallbusinesses. Although global strategies, strategic international alliances, and problemsof diversification and control are concepts frequently encountered, the discussionfocuses almost exclusively on large firms or the so-called multinational enterprises(MNEs). Small entrepreneurial business research is more concerned with variousstages (or export development models) of internationalization. In spite of the gapbetween the two lines of research, both build on the foundations of organization theory,

although significant differences have resulted. Attempts to apply theories developedfor or based on large firms may lead to relatively awkward results when applied tosmaller businesses as ideas developed for large firms do not necessarily work in asmall business setting (Chen and Hambrick 1995, cited in Ahokangas, 1998).

Internationalization theories focusing on MNEsThe beginning of internationalization research in the late 1950s and 1960s focused onlarge multinational companies and their international activities often called the

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economic approach, resulted in a vast body of theoretical and empirical data. Some ofthe main theories on the internationalization of MNEs resulting include: theinternalization theory, the transaction cost theory, the eclectic paradigm, and themonopolistic advantage theory. The abovementioned theories are the dominant

approaches in MNE research and will only be presented in brief as the core of thisstudy concerns SMEs.

Internalization theoryInternalization theory centers on the notion that firms aspire to develop their owninternal markets whenever transactions can be made at a lower cost within the firmand will continue until the benefits and costs of further internalization are equated tothe margin (Buckley and Casson, 1993). Internalization can involve a form of verticalintegration bringing new operations and activities, formerly carried out byintermediate markets, under the ownership and governance of the firm especiallywhen natural markets are imperfect or missing. Internalization of transactions beyondnational borders leads to the creation of the multinational enterprise. Antecedent tomarket internalization is a process of information gathering and assessment, throughwhich management determines the best foreign expansion approach.

The transaction cost approachReferring to the transaction cost approach, Teece (1986, cited in Gilroy, 1993, p. 82)remarked, At one level the internalization school and the transaction cost approachare one and the same. Both see the firm as a response to market failure. Profit-seekingfirms internalize operations when by so doing the costs of organizing and transactingbusiness will thereby be lowered. The difference of both theories is that in thetransaction cost approach the unit of analysis is the transaction itself (Williamson,1975; Gilroy, 1993).

The eclectic paradigmThe eclectic paradigm, also known as the OLI Paradigm, is based on internalizationtheory and tries to explain the different forms of international production as well as theselection of a country for FDI (foreign direct investments). According to Dunning(1988), the internationalization of economic activity is determined by the realization ofthree types of advantages. First, ownership advantages which are specific to thecompany and related to the accumulation of intangible assets, technological capacitiesor product innovations. Second, the internalization advantages stemming from thecapacity of the firm to manage and coordinate activities internally in the value-addedchain. These are related to the integration of transactions into multinational hierarchiesthrough FDI. Third, location advantages referring to the institutional and productive

factors present in a particular geographical area. These arise when it is better tocombine products manufactured in the home country with irremovable factors andintermediate products of another location.

Monopolistic advantage theoryMonopolistic advantage theory holds that MNEs exist because a firm has uniquesources of superiority over foreign firms in their own markets (Hymer, 1976, cited inMcDougall et al., 1994). The advantages belong to the MNE and cannot be acquired by

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other firms. One type of monopolistic advantage is superior ability. Hymer (1976, citedin McDougall et al., 1994) argued that MNEs have superior knowledge, as found in theform 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 advantageoverseas at virtually no additional cost over that of exploiting that advantage in thehome market (Caves, 1971, cited in McDougall et al., 1994). Because local entrepreneurshave to pay the full cost of developing this knowledge, they are unable to compete withthe foreign firm despite their advantage in local market knowledge.

Stage models of internationalizationThere 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 startedsometime in the early 1970s in the Nordic countries, with these researchers collectivelybeing referred to as the Uppsala School. Researchers operating in small and openeconomies were more interested in the dynamics of the whole internal process of smallfirms (Bloodgood et al., 1996; Korhonen, 1999). Because of these differences in theresearch objects and research contexts, Nordic researchers started their owntheory-building.

Researchers in Sweden and Finland at around the same time developed models ofinternationalization generally referred to as Nordic models (Korhonen, 1999) orlearning models (Ahokangas, 1998). Influenced by the behavioral theory of the firm(Cyert and March, 1963, cited in Ahokangas, 1998) and Penroses 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 companysinternational involvement as a result of different types of learning. According to themodel, the authors propose that the general and experiential market knowledge andresource commitment of firms (state aspects) affect commitment decisions and currentbusiness activities (change aspects). The change aspects, in turn, increase the marketknowledge and stimulate further resource commitment to foreign markets in thesubsequent cycle (Andersen, 1993). This model implies that firms increase theirinternational involvement in small incremental steps within those foreign markets inwhich they currently operate. Firms will then enter new markets lying at a greaterpsychic distance due to differences in languages, education, business practices etc.

This accumulated knowledge in conducting international operations drivesinternationalization by influencing the entry-mode and country-market selection.

In the Uppsala model, the concept of foreign market commitment is composed oftwo factors: the amount of resources committed and the degree of commitment (seeFigure 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 thedifficulty of identifying an alternative use for the resources and transferring them tothat alternative use (using the concept of sunk costs, Ahokangas, 1998).

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The Nordic internationalization models have had a considerable influence onstudies focusing on the internationalization of firms and significant efforts have beenmade to further test and refine the ideas (Vida and Fairhust, 1998; Morgan andKatsikeas, 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 hasprovided some empirical support for the Nordic models, some criticisms have emerged(for a detailed review of weaknesses of the stages model, see Chetty, 1999). TheUppsala internationalization model has been criticized as deterministic (Reid, 1981)and, if firms were to develop in accordance with the model, individuals would thenhave no strategic choices (Andersson, 2000). Another bigger challenge is that todaymany firms simply do not follow the traditional pattern of internationalizationproposed by stage theory. Some firms are international from their birth and have beencalled: international new ventures (McDougall, 1994; Oviatt and McDougall, 1994,1995), born global (Madsen and Servais, 1997), and global start-ups (Oviatt andMcDougall, 1995). Some authors have proposed separating the research intointernational start-ups from traditional small business internationalization(McDougall et al., 1994); these arguments for separation are mainly based onspecificity of the time of internationalization. In terms of internationalization correlatesthe argument is somewhat arbitrary at best (Antoncic and Hisrich, 2000).

Innovation-related models (I-models)The term innovation-related is derived from the work of Rogers (1962, cited inGankema et al., 2000), in which each subsequent stage of internationalization isconsidered as an innovation for the firm (Gankema et al., 2000). Their focus isexclusively on the export development process, in particular of small andmedium-sized firms. Leonidou and Katsikeas (1996) on the basis of a comprehensivereview 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 thenumber of stages varies considerably between models, ranging from as few as three toas many as six. They also identified three generic stages: the pre-export stage; theinitial export stage, and the advanced export stage. Andersen (1993) pointed out thatgenerally the models are relatively similar and the differences tend to be in the numberof stages and terminology used. Being behaviorally oriented to a significant extent,these models treat individual learning and top managers as important aspects inunderstanding a firms international behavior (Andersson, 2000).

Figure 1.The Uppsala model of

internationalization

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Some feel that the proposed stage models (innovation-related) are quite vague intheoretical terms. The demarcation criteria for distinguishing between stages areproblematic (Miesenbock, 1988; Andersen, 1993) and too little attention is paid to thetime 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 amatter of subjective opinion rather than discovering real differences between thestages. Ahokangas (1998) noted that, from a process point of view, these models fallshort in that they only describe the process of change but not its dimensions nor thedifferent approaches used by firms in developing their activities.

The first two types of models (the Uppsala and Innovation-related models) havebeen used to analyze small, but also large, firms with the focus on explaining thedevelopment of internationalization and international activities. The main thrust ofthese models is the incremental nature of internationalization processes, first, in termsof activities and, second, in terms of resources the basic building blocks of thebehavior 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 toevolutionary, with the different modes frequently being confounded.

Network approaches to internationalizationAnother way to analyze a firms internationalization within a process approach is touse the network as the starting point since this approach provides an appropriateframework for understanding firms as embedded actors in business networks(Johanson and Mattsson, 1993; McAuley, 1999). Based on the Uppsala model, Johansonand Vahlne (1990) continued an examination of the internationalization process byapplying a network perspective. The extension of the model involves investments in

networks that are new to the firm, whereas penetration means developing positionsand increasing resource commitments in networks in which the firm already haspositions. Integration can be understood as the co-ordination of different nationalnetworks. Thus, if the relationships between firms are seen as a network, it can beargued that firms internationalize because other firms in their (inter)national networkare so doing. Within the industrial system, firms engaged in the production,distribution and use of goods and services depend on each other due to theirspecialization. Certain industries or types of markets are more likely to beinternationalized given the configuration of the world economy (Buckley andGhauri, 1993; Andersen, 1993).

In the model of Johanson and Mattson (1993) the emphasis is on gradual learningand the development of market knowledge through interaction within networks. A

firms position in the network may be considered both from a micro (firm-to-firm) or amacro (firm-to-network) perspective. From the micro perspective, complementary aswell as competitive relationships are crucial elements of the internationalizationprocess. In other words, firms are interdependent both through co-operation andcompetition. Both direct (involving partners in the network) and indirect (involvingfirms that are not partners in the network) relations within networks need to be takeninto account when analyzing macro relationships. By combining micro and macroperspectives of networks, Johanson and Mattsson (1993) identified four stages of

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internationalization: the early starter, the late starter, the lonely international, and theinternational among others.

According to their model, internationalization of the firm means that the firmestablishes and develops positions in relation to other counterparts in a foreign

network. The internationalizing firm is initially engaged in a network which isprimarily domestic and then further develops business relationships in networks inother countries. This is achieved through the establishment of relationships in countrynetworks that are new to the firm (international extension), through the development ofrelationships in those networks (penetration) and through connecting networks indifferent countries (international integration). The strength of the network model ofinternationalization lies in explaining the process rather than the existence ofmultinational or international firms. From the network perspective, theinternationalization strategy of a firm can be characterized by the need to:

. minimize the need for knowledge development;

. 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 themanagement of international relationships. In these studies, the firm is viewed as a setof interlinked relationships connecting it with other firms in a more or less intimatefashion, depending on relationships within the network (e.g. Blankenburg et al., 1996,cited in Ahokongas, 1998). Theoretical issues raised with regard to networks includenot only the different types of relationships and their properties, but also issues such astrust, control, resources, and interdependency within and between firms. What seemsto be neglected in most process-oriented research and especially within networksapproach 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 personin the firm, who will have a substantial impact on internationalization through closesocial relationships with other individuals. Such social relationships are extremelyimportant for entrepreneurs and their business (Davidsson and Honig, 2003; Hoangand Antoncic, 2003). This social network is a sub-network within the businessnetwork, effecting and being effected by the gained resources and the chosenoperational mode (Holmlund and Kock, 1998).

Inter-firm and interpersonal relationships also appear to be influential in otherinternationalization 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 toexport (Westhead et al., 2001); strategic choices and performance (Peng and Luo, 2000);and degree of internationalization (Brush et al., 2002). Jaklic (1998) suggested thatnetworks can be especially useful for SMEs in catching-up economies since it ispossible to overcome some of the problems of knowledge and technology as well ascapital accumulation. Bonaccorsi (1992) illustrated that small firms trade and acquireinformation with one another through their social network, which leads them to imitateone another and speed up export entry.

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Despite some shortcomings, network theory can shed light on how the resources,activities, and actors (Hakansson and Snehota, 1995, cited in Ahokangas, 1998) withinnetworks 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, althoughfurther study is required on the resources and development strategies used by firms.

Resource-based approach to internationalizationBased on existing models, a resource-based perspective on internationalization iscurrently emerging. The objective is to develop a dynamic capabilities/resource-basedtheory of the firm whether this firm is domestic, international or global. The RBV(resource based view), developed within the field of strategic management, has tworoots: 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 EdithPenroses (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 andcapabilities side of firms (Foss and Eriksen, 1995).

The resource-based view of strategic management focuses on sustainable andunique costly-to-copy attributes of the firm as the sources of economic rents, i.e. as thefundamental drivers of the performance and sustainable competitive advantageneeded for internationalization. A firms ability to attain and keep profitable marketpositions depends on its ability to gain and defend advantageous positions with regardto relevant resources important to the firm (Conner, 1991). Resource-based modelsrecognize the importance of intangible knowledge-based resources in providing acompetitive advantage. They address not only the ownership of resources, but also thedynamic ability for organizational learning required to develop new resources. This

has led to an improved understanding of firms diversification strategies (Montgomeryand Wernerfelt, 1997), internationalization being one of them.

Given the heterogeneity of small firms and their operating environment, there arefundamental difficulties in seeking to identify and define the critical resources neededfor internationalization. By focusing on the attributes that resources should possess tosustain a long-term competitive advantage, authors have proposed differentcharacteristics (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 thatresources must capture durability, transparency, transferability, and replicability.These different perspectives indicate that these attributes are often relatively broadand hazy (Winter, 1995) and that there are not clear boundaries between them

(Andersen and Kheam, 1998). Resources in general can be considered stocks ofavailable tangible or intangible factors[1] that are owned or controlled by the firm andconverted into products or services, using a variety of other resources and bondingmechanisms.

Past research offers few examples of resource-based or capabilities-based studies ofsmall firms internationalization. They include models of Rautkyla (1991, cited inAhokangas, 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

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resource development and strategic internationalization behavior of small firmscombining the strategic and network perspectives of resources. Ahokangas (1998)assumes that SMEs are dependent on the development potential of key internal andexternal 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 (inwardorientation) or in a network-oriented manner (outward orientation)?

From the perspective of the firm, these two dimensions lead to four hypothetical modesof 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 overand interdependence between the critical resource stocks. This is predicated on theassumption that the accumulation of interdependent resource stocks at the firm level isbased on shared control.

The first kind of resource adjustment (internal firm-oriented) can be seen as thedevelopment strategy of a firm that tries alone to develop the critical resourcesneeded for internationalization by entering into international activities and learningfrom experience, without depending on externally available resources.

External resources in the development of the firms internal resources, such as

relationships with various expert organizations, research institutions or universities,represent the second mode of adjustment (external firm-oriented). The adjustment ofinternal resources in a network-oriented mode involves development activitiestraditionally associated with co-operation in any field from R&D to international

Figure 2.Modes of resource

adjustment

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after-sales services (usually in the form of alliances between firms), where bothpartners 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

firms 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 differentinternational activities over time. They can be either firm- or network-orientedresource development strategies or a combination utilizing internal and externalresources.

The development of resource-based theory and the network perspective seems tohave gone hand in hand. In both theories, internal and external resources available tothe firm are seen as constituting the total set of resources available to the firm. In orderto gain access to strategic resources, firms may co-operate vertically, with respect tothe product flow, or horizontally with competitors in other worlds by entering intonetwork relations. To some extent, the network and resource-based approaches alsoseem to be merging, with the model proposed by Ahokangas (1998).

Network perspective, which claims that the network (and the actors within thenetwork) provide the resources for internationalization, offers another point of viewwith regard to available resources. From the entrepreneurial perspective, networks ofindividuals and the tacit knowledge they integrate (social capital of entrepreneurs) canbe seen as resources themselves. Individual entrepreneurs (and their firms) areconnected through networks with other entrepreneurs (companies) in the sameindustry and a wider (international) environment. And it is through networks thatentrepreneurs get access to resources and information for entrepreneurial actions.

Resource-based models and traditional models of internationalization (the Uppsalaand innovation-related models) can be further distinguished by the way in which the

theoretical underpinnings are made explicit in research derived from theresource-based theory (Andersen and Kheam, 1998; Ahokangas, 1998). The centralconstruct of the models rests on (organizational) experimental learning that increases(market) knowledge and leads the firm to increased (market) commitment. Marketknowledge is based on Penroses (1959) definition of experimental knowledge, whichcan be learned only through personal experience. In experimental learning, theorganizational capabilities of firms within a dynamic nature of a model can berecognized. Since the theoretical foundations of the resource-based approach are still atan early stage of development, it is sometimes difficult to discern to what degreeresearchers are relying on internationalization research or resource-based theory. Theabsence of SMEs research is striking, however.

International entrepreneurshipThe economic view is useful in establishing single production facilities during the laterstages of a firms internationalization (Vahlne and Noedstrom, 1993), but it ignores theprocess aspects of internationalization. The process approach does handle this aspectbut, like the economic approach, overlooks the possibility of individuals makingstrategic choices (Reid, 1983; Turnbull, 1988; Andersson, 2000) and is less appropriatefor understanding radical strategic change, where entrepreneurs and top managersplay an important role (Reid, 1981; Andersson, 2000). Since our interest is in the

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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 actstrategically, 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 matchbetween what a firm can do (organizational strengths and weaknesses) within theuniverse 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 atthe interface of entrepreneurship and international business research calledinternational entrepreneurship (McDougall and Oviatt, 2000a; Antoncic and Hisrich,2000). This newly created research field is still searching for the right definition of theintersection of the two research paths, or more importantly the activities associatedwith entrepreneurial firms seeking to cross national borders. The most recent proposeddefinition specified international entrepreneurship (McDougall and Oviatt, 2000b) as acombination of innovative, risk-seeking behavior that crosses national borders and isintended to create value in organization. Similarly, even if attempts of a systematicreview 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 ofscholarly literature on business organizations. They have noted there has been asubstantial body of research in quadrants I, III and IV. Research in quadrant I has beenthe preserve of entrepreneurship scholars, and quadrant IV has been the focus ofinternational business scholars. Multiple functional areas have focused on quadrant III.Quadrant II, a more sparsely studied area which represents the domain of internationalentrepreneurship, 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 bestintegrates all the relevant approaches to internationalization with entrepreneurship, asa composite part of SMEs internationalization.

Alvarez and Busenitz (2001) and Rangone (1999) built a bridge between theresource-based view and entrepreneurship, implicitly proposing entrepreneurs as thesource of sustained competitive advantage and (slightly) moving the focus of analysisof the resource-based view from the firm level (Foss et al., 1995) to the individual level,

Figure 3.The domain of

internationalentrepreneurship with

regard to other academicliterature on organizations

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but still in the context of resources. These authors suggest that entrepreneurs haveindividual-specific resources that facilitate the recognition of new opportunities andassembling 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 sociallycomplex and add value to the firm because they are not easy to imitate and other firmscannot simply create them (Alvarez and Busenitz, 2001).

Some confusion still exists regarding the definition of entrepreneurship. Someobservers use the term to refer to all small businesses; others to all new businesses (Acset al., 2001). In practice, however, entrepreneurship (corporate entrepreneurship orintrapreneurship) 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 areindividuals carrying out entrepreneurial actions (Andersson, 2000). They are one of themost important agents of change with the capacity and willingness to take risks inrealizing their judgments, to be innovative and to exploit business opportunities in amarket environment (OECD, 2000). Often these opportunities can be perceived ininternational markets and, to exploit them, entrepreneurs establish ventures thatoperate across national borders. They are alert to the possibilities of combiningresources from different national markets because of the competencies (networks,knowledge and background) they have developed in their earlier activities (McDougallet al., 1994). Following the logic of the resource-based view of the firm, the possessionof such competencies are not the same for all entrepreneurs. Only the entrepreneurpossessing these competencies is able to combine a particular set of resources acrossnational 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 thediscovery of an opportunity and innovation being the exploitation of this opportunity(Alvarez and Busenitz, 2001). International entrepreneurial success requires not justthe discovery of a valuable innovation but also that the innovation be introducedsuccessfully to world markets (Acs et al., 2001). This can be identified asinternationalization, or as an example of what Schumpeter defined asentrepreneurial action (Andersson, 2000). He suggested five possible situationswhere new innovations can occur. The entrepreneur reforms or revolutionizes thepattern of production by exploiting an innovation or an untried technology forproducing a new commodity or producing an old one in a way, by opening up a newsource of supply of materials, or a new outlet for products, or by reorganizing theindustry (Schumpeter, 1934). Developing Schumpeters ideas further, the process of

internationalization can be seen as innovation adoption, which gives richer insight intohow international activities are initiated and developed (Reid, 1981) and recognizes theidea of innovation-related models.

The historical development of theoretical models of internationalization may beunderstood in terms of the four perspectives previously discussed, but increasedglobalization and hyper-competition has led to a new phenomenon of internationalstart-ups which represent a challenge to such approaches to internationalization.Especially in this new phenomenon and in SMEs in general, individual entrepreneurs

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and their personal factors and relationships have an evident position. Recently,researchers (Antoncic and Hisrich, 2000) have proposed a new integrative conceptualmodel that attempts to integrate the traditional models with the emerging area ofinternational 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 areinternationalization antecedents (environmental conditions and organizationalcharacteristics) and internationalization consequences (organizational performance).They have developed a set of propositions and implications about relationships in theconceptual model.

This newly developed conceptual model of international entrepreneurship seen inFigure 4, developed from the model originally proposed by Antoncic and Hisrich(2000), represents the conceptual integration of the theory of small and medium firmsinternationalization process merging into the area of international entrepreneurship.The main modifications from its original form are threefold. First, the entrepreneurs(founders/managers) characteristics, previously part of organizational characteristicsare now analyzed separately, and are divided into two parts: human and social capital.This reflects the importance and role we believe founders/managers and theircharacteristics have in the internationalization process. Second, internationalizationconsists of four main dimensions (mode, market, product, and time) instead of two plusinternationalization performance (previously analyzed separately). Third, somedifferent parameters were selected for firm characteristics.

Conclusions and implicationsWith the global integration of economic environments and different factors drivingglobalization and internationalization of companies with SMEs becoming the pillars ofeconomic growth and change, SME internationalization research will remain one of the

Figure 4.The internationalentrepreneurship

conceptual model

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most important areas. Theories underpinning their research will have to adapt andfollow this development. This study contributes to SMEs internationalizationdevelopment theory with the conceptual integration of various SMEinternationalization theories into a new emerging area of international

entrepreneurship. This study contributes to theory by proposing a redevelopedtheoretical integrative conceptual model of international entrepreneurship centering onfour internationalization properties (mode, market, product, time) plusinternationalization performance as well as key antecedents (environmental, firm,and entrepreneurs characteristics) and consequences of internationalization (firmperformance).

This study advances SME internationalization research by clarifying the newemerging area of international entrepreneurship and its theoretical basis withininternationalization research. International entrepreneurship places more importanceon entrepreneurship and entrepreneurs (and their characteristics), widely considered asthe main variable in SME internationalization research. Second, it gives more

importance to the time dimension, with the increasing number of SMEs operatinginternationally from their inception making time one of strategic dimensions ofinternationalization.

The proposed international entrepreneurship model shares limitations noted byAntoncic and Hisrich (2000) in their initially developed conceptual model; the model iscomprehensive but not exhaustive, and it does not specifically address interactionsamong constructs. Another limitation identified concerns the antecedents ofinternationalization, especially companies and entrepreneurs characteristics. Byidentifying such factors some limitations may arise. Did the antecedents ofinternationalization (companies and entrepreneurs characteristics) determine thedegree of internationalization or the opposite? A longitudinal research design mayclarify this issue.

An important implication of the model for practitioners is that they need toconstantly evaluate different elements related to internationalization. Especiallycrucial are the skills, competencies, and management know-how the entrepreneurneeds 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 firms relationships, for example those to

foreign customers, suppliers, authorities etc., constitute one of the firms 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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Corresponding authorRobert D. Hisrich can be contacted at: [email protected]

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