Internationalization of Dutch SMEs in Utrecht Region 2011

International Activities of Dutch SMEs: A Synopsis from the Utrecht Region in 2011

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International Activities of Dutch SMEs

A Synopsis from the Utrecht Region in 2011

Hogeschool Utrecht

Research Group International Business and Innovation

Author: Martijn Boermans

Contact: [email protected]

Date: April 2011


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Full report is in English - except for the Dutch summary below - and has 8,000 words

NEDERLANDSE SAMENVATTING Internationaal actieve bedrijven doen het op competitief vlak veel beter dan bedrijven die niet internationaal opereren. Dit verslag geeft inzicht in de internationale activiteiten van kleine bedrijven (MKB) uit de regio Utrecht. De regio Utrecht staat binnen de Europese Unie bekend als meest competitieve regio en is daarom interessant voor nadere analyse op het gebied van internationalisering. Op basis van 20 diepe interviews met eigenaren en managers wordt er stilgestaan bij de omzet- en winstontwikkelingen, alsmede naar welke landen wordt geëxporteerd en welke problemen deze bedrijven daarbij ervaren. In dit rapport wordt ‘slechts’ een beschrijving gegevens van de ervaringen rondom de internationale activiteiten. Naast internationalisering wordt verslag gedaan van de rol van competitie, innovatie, het management en netwerken voor het MKB. Aan de hand van enkele interviews afgenomen in Maart 2011 ontstaat het volgende beeld van de internationale activiteiten van het MKB rondom Utrecht:

1. Bedrijven zijn over het algemeen optimistisch gestemd over 2011 en verwachten een stijging van de omzet, mede vanwege toenemende export.

2. Gemiddeld is 25 procent van de omzet afkomstig uit het buitenland. De meeste zaken worden gedaan met buurlanden België en Duitsland. 90 procent van de bedrijven noemt een land uit de Europese Unie als belangrijkste handelspartner.

3. Ook doet 35 procent bedrijven aan buitenlandse directe investeringen en heeft een kantoor of fabriek in het buitenland. Verder importeren 35 procent van de bedrijven direct goederen uit het buitenland. De helft van de ondernemingen geeft aan een gedeelte van het bedrijfsproces of diensten te outsourcen naar het buitenland.

4. Over het algemeen ervaren de bedrijven weinig problemen. De competitie is het enige echte obstakel voor de bedrijfsactiviteiten, wat niet verwonderlijk is gezien dat 80 procent van de ondernemingen meer dan drie directe concurrenten heeft.

5. In reactie op de zware competitie in the regio Utrecht verbeteren de bedrijven de prijs-kwaliteit verhouding van hun producten en diensten, zoeken toegang tot nieuwe buitenlandse markten en versterken hun marketing.

6. De ondernemingen zijn zeer bewust met innovatie bezig en zijn naar standaarden van kleine bedrijven (Nederlandse of Europees) doorgaans zeer innovatief op het gebied van investeringen in onderzoek, nieuwe producten en diensten of het vernieuwen van het bedrijfsproces. De belangrijkste reden om te innoveren is lokale concurrentie, gevolgd door zowel druk van buitenlandse competitie en de vraag van de klanten.

7. Het management team van de bedrijven is over het algemeen hoog opgeleid en vele managers hebben een MBA of vergelijkbare graad. Bijna alle managers zijn Nederlanders en getraind op lokale Hogescholen of universiteiten.

8. Netwerken spelen een opvallend kleine rol voor de internationale activiteiten. De bedrijven geven aan dat persoonlijke relaties en de banden van de Europese Unie wel redelijk belangrijke netwerken voor internationale handel bieden.


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MANAGEMENT SUMMARY

Firms that are internationally active are more competitive than firms that are only active in the domestic market. This research note provides insights into the international activities of small and medium sized enterprises (SMEs, in Dutch “MKB”), in particular from the Utrecht Region in the Centre of Holland. The Utrecht Region is ranked the most competitive region in the European Union and therefore it is interesting to further analyse the internationalization of firms in this location. Based on 20 interviews with owners, CEOs and managers we describe small business activities that are related to international activities. Not only do we focus on internationalization but also discuss firm performance, obstacles and problems to business operations, competition, innovation, management, and networks of small business around Utrecht. After several interviews conducted in March 2011 we gain the following synopsis from the contemporary international activities of Dutch SMEs from the Utrecht Region:

1. Firms are generally optimistic about 2011. They expect sales to increase, which can be ascribed to increasing export demand.

2. On average, 25 percent of the sales are earned abroad. Most firms trade with neighbouring countries Belgium and Germany. 90 percent of the firms regards a country from the European Union as their main trading partner.

3. On average, 35 percent of the firms is engaged in foreign direct investment and has one or more establishments, factories or offices abroad. 35 percent is involved with direct importing activities. 50 percent outsources part of the business process or production to a foreign partner.

4. In general, firms experience little obstacles. The main problem for the business operations is competition, which is not surprising given that 80 percent of the firms has more than three direct competitors.

5. In response to the fierce competition in the Utrecht Region, firms improve the price-quality ratio of their products and services, search for new foreign markets and increase marketing activities.

6. Firms are actively engaged in innovation. Most firms are very innovative in terms of research and development (R&D), launching new products and services, and renewal of business processes. The main reason to innovate is pressure from domestic competition, followed by pressure from foreign competition and customer demands.

7. The management teams of the firms commonly consist of highly skilled, trained professional managers as many managers have an MBA or equivalent education. Nearly all managers are of Dutch origin and received their education at local Universities.

8. Networks are surprisingly not very important to the firm’s international activities. Only personal relationships and European Union networks are fairly important to international trade.


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ACKNOWLEDGEMENTS

Inspiration for this study came from the EIM (2010) report “Internationalisation of European SMEs” which also serves as good reference for the interested reader. For participation I thank the owners, CEOs and general managers of the firms for their time and openness. I would like to thank the following students, class L2D, from the International Business and Management Studies program: Annelot Kuiper, Carole Bou, Claudia Acosta Andrade, Ekaterina Seryakova, Maruja Isbouts, Sabine de Graaf, Salomey Asare, Dirk Sjamaar, Matthias Wahl, Michiel Topper, Nick Hennen, Salim Wakil, Stefan Molenaar and Wannes Deville. Last but not least I thank my colleagues Yi Zhang, Yuyo Tsen and Necla Günay for support. All errors are mine. Martijn Boermans Utrecht, April, 2011

Picture of the Hogeschool Utrecht, Utrecht Science Park (De Uithof)


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TABLE OF CONTENTS

NEDERLANDSE SAMENVATTING ............................................................................. 3

MANAGEMENT SUMMARY ......................................................................................... 4

ACKNOWLEDGEMENTS ............................................................................................. 5

TABLE OF CONTENTS ................................................................................................ 6

TABLES AND FIGURES ............................................................................................... 7

CHAPTERS 1. INTRODUCTION ..................................................................................................... 7

2. BACKGROUND LITERATURE............................................................................. 10

3. SAMPLE OVERVIEW ........................................................................................... 13

4. INTERNATIONALIZATION ................................................................................... 15

5. PERFORMANCE INDICATORS .......................................................................... 16

6. OBSTACLES.......................................................................................................... 16

7. INNOVATION ......................................................................................................... 21

8. MANAGEMENT ..................................................................................................... 24

9. NETWORKS .......................................................................................................... 25

10. CASE STUDIES..................................................................................................... 26

11. CONCLUSION ....................................................................................................... 28

REFERENCE ............................................................................................................... 29

APPENDIX: .................................................................................................................. 30


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TABLES AND FIGURES

Figure 1.1: Regional Competitiveness Index, EU-27 (2010) Figure 2.1: Share of SMEs by sector engaged in international activities Figure 2.2: Causal links between international activities and innovation Figure 3.1: Firm location on a map of the Netherlands Figure 3.2: Firm size distribution by frequency Figure 5.1: Expected Sales and Profits in 2011 Figure 6.1: Business operation obstacles Figure 6.2: Change in competition Figure 6.3: Firm reaction to competition Figure 6.4: Obstacles to international activities Figure 9.1: The role of networks for international activities Table 4.1: Country list of sales generated outside Western countries Table 6.1: Business obstacles by sector Table A3.1: Rotated factor loadings for the obstacles


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I. INTRODUCTION

In this research note we focus on small Dutch businesses (SMEs; in Dutch “MKB”) from the Utrecht Region that are internationally active.

Utrecht: Europe’s most competitive region

The Utrecht region in the Netherlands is the most competitive region in the European Union according to the European Commission “Regional Competitiveness Index” (2010, p.221, p.230; see Figure 1.1).

1 In total there are

nearly 100,000 registered firms in the province of Utrecht (Monitor Ruimtelijke Economie, 2010). Almost all these businesses are small and medium sized enterprises (SMEs) with less than 500 employees. From 2009 to 2010 there were more than 2,000 business start-ups in the province of Utrecht (CBS, 2011). Since this region is so vibrant, it is important to get a better picture of the business operations of the firms within the Utrecht Region. We hope to do so in this report by analyzing 20 case studies.

The Netherlands: export nation

A large chunk of Dutch GDP is earned abroad. In 2010, the total estimated value of total exports is 370 billion euro, of which 75 percent is traded within in European Union (CBS, 2011). It is empirically well-established that firms that are internationally active perform better than their domestic peers. Larger firms are more likely to export or engage in other types of international activities. Most studies focus on large multinationals because they characterize a large part of total employment. As the Dutch economy is well-known as international trade hub it is surprising that relatively little is known about the international activities of small companies in the Utrecht region. Whereas the Dutch firms are among the world’s largest exporters, importers and foreign direct investors, Dutch SMEs, as compared to SMEs from other European countries, occupy a position in the middle with respect to the share of enterprises that export, import or invest abroad. Figure 1.1: Regional Competitiveness Index, EU-27 (2010)

1 Noord-Holland and Zuid-Holland are at the top 10 list among 268 EU regions. Based on the Country

Competitiveness Index (EU, 2010, p.224), the Netherlands is also the most competitive country among the EU-27, followed by Denmark and Finland, Luxembourg and Sweden.


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Small is beautiful: thriving international Dutch SMEs

Small and medium sized enterprises are at the core of the economy. SMEs are also thriving with respect to international activities. Based on EIM data, in 2006 SMEs in the Utrecht Province earned nearly 5 billion euro in foreign markets. Notice that this represents only 6 percent of the total economic activity by SMEs in that region, which was more than 75 billion euro in 2006. Although small, Dutch SMEs generate much income and employment, and especially those that are internationally active are an important engine of growth.

International activities SMEs are an exception

Very few SMEs are engaged in international trade. Nonetheless, SMEs account for half of the total Dutch exports. According to researchers at EIM, in 2007 Dutch SME exports were more than 224 billion euro. Direct importing activities are the most common “international activity” of Dutch SMEs. In 2004, 26 percent of Dutch SMEs were importing goods or services from abroad, 18 percent was engaged in exporting activities, 2 percent invested abroad and 9 percent cooperated with foreign partners (Hessels, 2005). In 2007 the European Commission completed 604 interviews with managers from Dutch small and medium enterprises (SMEs). At that time only 74 SMEs indicated to be exporting, about 12 percent of the sample. Based on EIM data, in 2010, 27 percent of Dutch SMEs were importing goods or services from abroad, 19 percent was engaged in exporting activities, 4 percent invested abroad and 13 percent cooperated with foreign partners. As such, Dutch SMEs that are internationally active are in general an exception, more competitive than their domestically oriented peers, and therefore interesting to study further in case studies.

Outline of the study

In this research note we focus on Dutch SMEs that are internationally active. In particular, firms are selected on the basis of export status. Based on our descriptive analysis from 20 Dutch SMEs, small international businesses perform better than domestic small businesses, and, at the same time these companies are more optimistic about the future in terms of employment and profits. This research note is describes the international activities and performance of the firms. It also highlights what obstacles firms face and zooms in on the competition channel. It further discusses the companies’ innovative capacities, management teams and network relationships. Next the study provides several case studies and concludes (see table of contents, p.4).


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II. BACKGROUND LITERATURE

In this part we outline some background literature. First we elaborate on the introduction and present some facts and figures about Dutch SMEs. Then we discuss recent insights from the international business and trade literature, focusing specifically on Dunning and Melitz.

A broad definition of internationalization among Dutch SMEs

Internationalization of firms is often defined in terms of importing, exporting, foreign direct investment (FDI) or cooperation with foreign partners. According to this broad definition, the EIM (2010) calculates that nearly 40 percent of the Dutch SMEs are involved with international activities. Their findings as presented in Figure 2.1 show large heterogeneity across sectors. As Hessels (2005) explains, the majority of Dutch SMEs that are engaged in exporting are also engaged in importing.

SMEs are an important engine for innovation

Small companies are not only essential for employment, but it has been repeatedly shown that SMEs are a core driver of innovation. Small businesses are often better able to realize technological innovations, provide new services and foster demands in niche markets. The creation of intricately connected global supply chains, developments in ICT, increased economic integration and knowledge based specialization have opened up new doors for SMEs to compete an equal grounds with large multinational (Audretsch & Thurik, 2000; Prahalad & Krishnan, 2008). Figure 2.1: Share of SMEs by sector engaged in international activities

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

totaal MKB

groothandel

industrie

transport & communicatie

detailhandel

autosector

zakelijke dienstverlening

landbouw bosbouw en visserij

bouw

verhuur en exploitatie van onroerend goed

overige dienstverlening

financiele dienstverlening

horeca

Source: EIM (2010), Monitor Determinanten Bedrijfsprestaties, Database


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Dunning’s Ownership, Location and Internalization (OLI) Advantages

The classical business literature suggests that firms carefully plan their internationalization strategies. The most celebrated theory stems from John Dunning, who is well-known for the OLI-paradigm. According to Dunning, firms choose to internationalize based on Ownership, Location and Internalization advantages.

O- advantages: market power, technology and managerial capabilities

Firms that have an ownership advantage (or firm-specific advantage) can transfer their unique products and services to larger markets. The ownership resources are often intangible or difficult to share with other companies, so that ownership advantages explain the emergence of larger firms. Strong ownership advantages imply a better price-quality ratio based on reputation, technology and economies of scale. In a way, firms have a monopoly over their core competence and utilize this abroad via exporting and foreign direct investment (FDI) or offshoring activities. These monopoly advantages can be based on specific technologies or patents. Finally, the management and organization of the firm can be stronger than others, which can be leveraged through internationalization.

L-advantage: inputs, skills and labour costs

Many high tech companies rely of unique skills of their employees. Also, many firms in manufacturing industries require specific inputs and materials. Firms that have access to highly skilled workers or scare resources may have this because of their locational advantages. A recent example comes from China. Many firms have moved their production towards China because of its unique locational aspects in terms of inputs, skills and labour cost. Moreover, that location also provides the facilities required for international production such as harbours, and other infrastructure.

I-advantage: make or buy (export or offshoring vs. import or outsourcing)

Internalization advantages refer to the make or buy decision of the firm. In exploiting ownership and locational advantages firms have to choose which activities fit with their core competences and which activities they can import cheaper from others. Dunning’s internalization refers to buying things in the market (arm’s length transactions) to hierarchy or within the firm production (wholly owned subsidiary). A firm chooses to internalize if the market does not exist or functions poorly so that transactions expenses of the external route are high (e.g. there may be a threat that the other firm copies your unique ownership advantage). Firm specific know-how and core ability are assets that can give rise to economic rents for the firm. These rents can be earned by licensing the firm resources to other firms, exporting products, or though opening subsidiaries abroad (FDI).

Sorting pattern: only the most competitive are internationally active

Since international activities have sunk costs, this has resulted in the theoretical prediction and empirical stylized facts that the most productive firms become engaged in investing abroad (FDI), the middle range of firms opts for exporting and the least productive firms stay on the domestic market (Melitz, 2003; Helpman, 2006). Any overview of this literature should include the seminal paper by Melitz (2003), who introduces firm heterogeneity in new international trade theory. In a dynamic industry model with heterogeneous firms he analyzes within-sector effects of international trade. The driving force behind the model is the so-called selection effect: entry and exit of firms will lead to aggregate changes in productivity due to


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reallocation of market shares towards the more productive firms. For instance, trade liberalizations induce firms to start exporting which simultaneously increases competition in the domestic market. Only the most productive firms become internationally active due to sunk costs. The least productive firms cannot compete and exit, such that average productivity and welfare increase: a process of “creative destruction” in the Schumpeterian sense. As Helpman (2006:593) explains, “so far the model has performed admirably well”. Empirical verification of the selection process is highly consistent: exporting firms are more productive, capital intensive, bigger and pay higher wages. Due to greater openness, FDI and outsourcing become more attractive business strategies, but there are large sector differences. These fields of study provide insights how firms can organize their internationalization strategies. In sum, with “new new trade theory” the heterogeneity of business becomes salient not only in differences in productivity, but also in the firm’s internationalization and fragmentation strategies with regard exporting, outsourcing and FDI decisions.

Causality from competitiveness to internationalization is debateable

This growing branch of literature following the successful “Melitz model” takes the productivity levels of the firm as given. Because productivity is exogenous, it leaves the question open what the impact of trade is on productivity, innovation and entrepreneurship. A new strand of work is emerging that investigates the role of internationalization on innovation. The argument of Melitz (2003) that productivity can be treated exogenous does not hold, because the “technology draw” of firms that determine productivity is endogenous. The heterogeneity is an outcome of exporting and innovation decisions. Greenaway and Kneller (2007:135) among others note that the direction of causation between productivity and internationalisation is debatable. It has become something of a stylised fact that ex-ante productivity determines the choice of whether or not to export. In other words, firms have to become more productive before they export and causality runs from productivity to exports. They argue that the causality in the opposite direction is less clear, but new studies, including their own show promising results. There can be “learning by exporting” effects (see Boermans, 2010). The presence of export markets might raise productivity after entry, due to learning effect and innovative activities. The exposure to best practise technology, competition effects and economies of scale brings firms closer to their production possibility frontier (and firms have less inefficiencies). Figure 2.2: Causal links between international activities and innovation


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III. SAMPLE OVERVIEW

20 interview from a random sample out of more than 100,000 firms

In total 20 owners, CEOs or general managers participated in structured telephone interviews. In this part we describe the characteristics of this sample. First, firms were obtained from a stratified random sample of registered firms at the Chamber of Commerce database and were selected using firm size, province and available website information as selection criteria. In order to get a representative sample and minimize the potential number of firms that were contacted we took 250 firms at random from a database with more than 100,000 companies (for details on sample selection, see appendix 2).

In the Utrecht Region 26 percent of the SMEs are internationally active

Using public information of each firm it was determined whether or not the firm is internationally active. In total, 26 percent of the SMEs are internationally active. As such, of the 250 firms, only 65 firms are were eligible for an interview. The response rate among these international small businesses was 31 percent, leaving 20 internationally active SMEs in our sample.

All 20 firms are from the broad Utrecht Region

Each firm is located in the Central Region of the Netherlands (Midden-Nederland), in short the broad Utrecht Region. We have 16 firms from the Utrecht Province (with 3 from the city Utrecht), 2 firms from Northern Holland Province and 2 firms from Gelderland Province. Figure 3.1 shows a map of the geographical location of each firm. Figure 3.1: Firm locations on a map of the Netherlands


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Firms fall into three broad sectors; each has unique products and services

We classify firms according three broad sectors: i) agriculture and commodities, ii) industry (manufacturing and high tech) and, iii) services and retail. In total, 55 percent of the firms are (high-tech) manufacturers, 35 percent is involved with services and retail and 10 percent are active in agriculture and commodities. Each firm produces different products or services, meaning that we did not interview direct competitors of any of the companies. In total, 50 percent of the SMEs has less than five different products or services. About a third of the firms indicates to have more than 40 specific products or services.

The average international SME has 75 employees; the median is 24

On average, the firms have 75 permanent, full-time employees (SD = 150). The median firm size is 24. None of the firms had more than 500 employees, qualifying each firm as SME based on the number of employees. Figure 3.2 classifies firms with less than 10 employees as very small (25 percent), firms with 10 to 24 employees as small (25 percent), firms with 25 to 99 employees as small medium (35 percent) and firms with 100 to 500 employees as medium (15 percent). Note that this distribution is not representative for the population of firms in the region. Most firms in the region falls in the first category, with nearly 50 percent of the firms having no employees at all. However, in terms of employment levels our sample does reflex a standard distribution of SMEs.

Some further ownership characteristics

Our sample consists of 20 internationally active SMEs. The median firm’s date of incorporation was in 1982. In total, 50 percent of the companies were established after 1980, and 20 percent after 2000. In terms of ownership, the companies have the following characteristics:

• 90 percent is a B.V. (private limited company)

• 40 percent is a family business

• 40 percent is run by the founder of the company • 20 percent is partly foreign owned

• 25 percent is part of a larger firm (or: is a subsidiary)

Figure 3.2: Firm size distribution by frequency

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IV. INTERNATIONALIZATION

25 percent of sales are generated in foreign markets

All firms in the sample are internationally active. On average, about 25 percent of the sales are earned abroad (SD = 20). In this respect, the firms are representative for Dutch SMEs.

Nearly all trade is EU related

The main export destinations are neighbouring countries like Belgium and Germany. Other key destinations - but of much lower importance than Belgium and Germany - are France, and the UK. In total, 90 percent of the firms say countries from the European Union are their main export destination.

Emerging markets are still relatively unexplored by Dutch SMEs

Apart from intra-EU trade, the focus of exporting and other international activities is mostly in Western countries including the United States, Japan and Australia. Several firms mentioned these destinations are important for their revenue. In line with the 2009 EIM data, 10 percent of the firms mention the United States as most important trade destination. One of development in recent years is that emerging markets have become more and more open for international trade and investment. Dutch SMEs in our sample are also undertaking activities in these emerging markets. However, in terms of sales the numbers involved with trade outside Western countries are small, but the list is long: countries that were mentioned as significant trading partners for sales are listed in Table 4.1, where China, Brazil and Thailand are trade destinations (of export and FDI) for 10 percent of the firms. Table 4.1: Country list of sales generated outside Western countries

Countries No. times mentioned Brazil 2 China 3 Egypt 1 India 1 Suriname 1 Thailand 2 Turkey 1 Vietnam 1

Outsourcing abroad is the trend

Half of the firms outsources a part of the production process. The outsourced processes and services are often done abroad as 40 percent of the firms indicates to outsource production to foreign partners. What is interesting is that most firms that outsource their production to a foreign partner are highly dependent on these partners. Most of these firms outsource more than 50 percent of their production to suppliers abroad. At the same time, 35 percent of the firms indicates to import goods (raw materials and intermediate inputs) from abroad.

Investing abroad is the other trend

In total, 35 percent of the companies has any number of establishments or offices abroad. This is an exceptionally large share of the firms. Most foreign subsidiaries are held within Europe, but 25 percent of all SMEs mention that China will be considered a partner country in the upcoming years.


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V. PERFORMANCE INDICATORS

Sales increased on average with 12 percent on annual basis

The total annual sales in 2010 are on average 15 million euro (SD = 20). None of the firms had revenues above 50 million euro, again qualifying each firm as SME (see target sample, appendix 2). Over the past three years, total annual sales increased on average with 12 percent on a yearly basis – or 40 percent over the last three years. For the year 2011, 70 percent of the firms expects that sales will increase, while the other 30 percent does not expect sales to change (see Figure 5.1).

Profits increased on average with 4 percent on annual basis

The average profit margin is 5 percent. Over the past three years, total annual profits increased on average with 4 percent on a yearly basis– or 12 percent over the last three years. For the year 2011, 45 percent of the firms expects that profits will increase, 50 percent does not expect profits to change, and 5 percent expects a decline in profits (see Figure 5.1). Figure 5.1: Expected Sales and Profits in 2011

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VI. OBSTACLES

Internationally active Dutch SMEs perceive little obstacles

Figure 6.1 shows that trade regulations, tax rate, business licensing and permits, tax administration, access to finance and an inadequately educated workforce are above “average obstacles”. However, all these obstacles are “minor” to “moderate”. Moreover, we find that customs, transport, labour regulations, courts, corruption and political instability are no obstacle at all to the internationally active Dutch SMEs in our sample. Overall, these companies face little obstacles to their business operations, expect for the toughness of competition.

The major obstacle is direct competition

Firms were asked to indicate to what extent 13 business operation obstacles were an obstacle on a 5 point scale. Interestingly, SMEs in the Utrecht region on average experiences only minor obstacles. As shown in Figure 6.1 the biggest (and only serious) problem faced by firms is competition.

There is fierce competition in the Utrecht region

In total, 40 percent of the internationally active SMEs indicate that the market environment is highly competitive. These firms face more than 10 direct competitors in their main product market. Another 40 percent indicates to have between three to nine direct competitors in their main product market, 10 percent has two to three main competitors, and, 10 percent faces no direct competition at all. Not surprisingly, the latter group that effectively has a monopoly does not experience competition as an obstacle. Excluding these SMEs with large market power, firms find competition a major to extremely severe obstacle (90 percent of the sample). Figure 6.1: Business operation obstacles

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Competition remains strong and may be increasing

The toughness of competition is persistent, as 95% of the firms indicates that there are no changes in competition or that is has increased over the past year (see Figure 6.2). In total, 45% says that the amount of competition in their main product market has increased in the past year.

How do firms react to competition?

Given the fierce competition the small international business face we asked the companies to elaborate on how they cope with competition. As presented in Figure 6.3, the most common ways to deal with competition are to reduce costs, enter foreign markets, increase quality and increased marketing.

In response to competition most firms improve their price-quality ratio

Reducing costs and increase quality are two generic responses to competition given that customers value products by the price-quality ratio. In total, 75 percent indicates to try to reduce the costs of their products and services in response to competition, while 58 percent tries to increase the respective quality. Note that 50 percent of the firms indicates to both reduce costs and increase quality.

In response to competition two third of the firms enters foreign markets

In total, 68 percent says that they enter foreign markets in response to competition. We find no difference in such response across sectors, implying that for internationally active small businesses in the Utrecht Region the intensity of competition is an important driver of internationalization of the firm. Figure 6.2: Change in competition

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There is large heterogeneity in the SMEs’ asset specificity

The fact that competition is the main obstacle and that firms indicate to have many direct competitors can also be seen by each firms self-reported “asset specificity”. We asked each SME to indicate how much time it would take her customers to find a new supplier if their firm would go out of business. 30 percent indicates that this would be in “a day or less”, implying very low asset specificity which can be related to the fierce competition in the Utrecht Region. At the same time, 40 percent of the firms says that it would take their customers “more than a month” to find a new supplier, implying that the firm hold unique assets that cannot easily be replaced. Nonetheless, we find no relationship between the perceived asset specificity and the number of competitors, nor between asset specificity and the extent to which competition is an obstacle to the firm’s business operations.

Diversity in law and regulation is important for international activities

We also ask to what extent language barriers, travel distances, cultural distances and law and regulatory differences were important for the international activities. Note that the scale is measured on a 4 point Likert scale (in contrast to the 5 point Likert scale for the prior obstacles). On average, the prior factors were slightly to moderately important to the international activities, with law and regulatory differences having the most important role in relation to international activities (see Figure 6.4).

Certain business obstacles cluster together

Using factor analysis we can categorize two obstacle dimensions: environmental and trade obstacles. The first consists of tax rate, tax administration, competition, business licensing and permits and labour regulations; the second includes customs, trade regulations, transport and access to finance (see Appendix 3). What this means is that in general, firms that face problems with taxes also are under larger pressure by competitor, and have difficulties with business licensing, and permits, and labour regulations. We name this factor environmental obstacles. The second cluster shows that firms that have difficulties with customs will in general also have more problems with trade regulations, and transport, and access to finance. We name this factor trade obstacles.

There are large sector differences in business obstacles

We find that the agricultural and commodity sector have much higher difficulties with the environment obstacles while the service and retail sector score below average on environment obstacles. Interestingly, the agricultural and commodity sector has below average problems with trade obstacles while the (high tech) manufacturing industry faces much larger than average trade obstacles (see table 6.1). Table 6.1: Business obstacles by sector

Sector Environmental obstacles Trade obstacles Agricultural / commodity HIGH LOW Manufacturing (high tech) AVERAGE HIGH Service / retail LOW AVERAGE


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Figure 6.3: Firm reaction to competition

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Figure 6.4: Obstacles to international activities

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VII. INNOVATION

About half of the Dutch SMEs are active innovators

EIM data from 2010 suggests that in the Netherlands, small businesses are innovative compared to other European countries. 23 percent of the firms was actively engaged in research and development (R&D) activities. 30 percent of the SMEs introduced new products of services in the past three years (marketisation). At the same time, 44 percent of the companies had made improvements to their internal business processes. 32 percent of the firms even had employees whose work was dedicated to innovation.

SMEs in Utrecht are very innovative compared to other EU regions

As discussed there are several indicators of innovation. The companies in the Utrecht Region were asked to explain about their R&D activities, marketisation of new products and services, upgrading of products and services, internal business changes, patents and general perception of their innovative capacity. Overall, as shown in Figure 7.1, SMEs in the Utrecht Region score very high on these measures.

Most SMEs in Utrecht invest actively in research and development

In the Utrecht Region, 60 percent of the SMEs was actively engaged in research and development (R&D) activities compared to 23 percent in the Netherlands. These companies in our sample invested at least 15,000 euro in R&D, and on average, yearly R&D expenditures were 175,000 euro. R&D expenditures are much higher than the average of business in the Netherlands (including large firms), which is about 2 to 3 percent of sales (CBS, 2011). The average SME in Utrecht spends almost 4 percent of sales on R&D. Figure 7.1: Innovations by SMEs (in shares)

0%

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Most SMEs in Utrecht successfully launch new products and services

80 percent of the SMEs indicates that they introduced new products of services in the past three years (marketisation) compared to 30 percent in the Netherlands. For the firms, these new innovative products and services already generate more than 10 percent of their current revenues. Only 10 percent of the firms that launch new products and services indicate that they earn no revenues from these innovations.

Firms innovate in many ways at the same time

Related to the initiation of new products and services is the upgrading of existing products and services. 60 percent of the firms has made such significant upgrades in the past three years. 40 percent of the firms in our sample has at least one registered patent, which is much higher than the average Dutch SME. Also, in the past three years 40 percent of the companies had made improvements to their internal business processes, which is comparable to the 44 percent in the Netherlands. However, 60 percent made significant organizational changes in the past three years, which is higher than the Dutch average. All these indicators - launching new and upgrading of products and services, patent, business and organizational changes – suggest that SMEs in the Utrecht Region like to renew and implement innovations.

Firms find themselves more innovative than direct competitors

The SMEs in the Utrecht Region not only score high on innovation indicators. Firms themselves find themselves more innovative than their direct competitors as presented in Figure 7.2. 70 percent would say their firms are more or much more innovative when compared to other competitors. Only 10 percent indicates that they are less innovative. Surely, self-reported perceptions are subjective, yet it is encouraging that the SMEs are highly optimistic about their own innovative capacities.

Where does the innovation pressure come from?

We asked each firm how important several factors are in affecting their decisions to develop new products or services and markets. Figure 7.3 presents on overview of innovation pull factors. The most important reason is pressure from domestic competitors. 60 percent indicates that domestic competitors are a fairly important to important reason for innovation. A second reason for innovation is pressure from foreign competitors. 55 percent indicates that foreign competition is a fairly important to important reason for innovation. Another reason for innovation is pressure from customers. 45 percent indicates that customers are a fairly important to important reason for innovation.


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Figure 7.2: Self-perception of innovative capacity

0%

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not innovative less than average average more than average very innovative

Figure 7.3: Importance of innovative pressures

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VIII. MANAGEMENT

Most internationally active SMEs have professionally trained managers

About 70 percent of the firms has a management team that consists of 3 to 5 managers. On average, in the Utrecht Region the internationally active SMEs employ highly trained managers. About 60 percent of the managers obtained a Bachelor or Master in Business education. In total, 40 percent of the firms indicates that all managers have received formal business training in the form of a Bachelor of Master in Business Administration or a related field such as Business Economics. At the same time, 30 percent of the firm has managers without a business education.

Most managers are Dutch and trained in the Netherlands

Nearly all managers were trained in the Netherlands. Only 15 percent of the SME indicate that they have a manager in the management team that obtained a MBA abroad. In total, 75 percent of the firms has a management team without any mangers that were born outside of the Netherlands. In other words, 25 percent indicates that their management team has at least one foreign manager.

It is common that some managers have prior experience at a multinational

In total, 65 percent of the firms has at least one manager with prior work experience at a large multinational corporation. On average, 35 percent of the full management team of each firm has prior work experience at a large multinational corporation.

In contrast to the managers, employees are relatively less educated

On average, internationally active SMEs employ a relatively low educated workforce. 30 percent has no employees with a university degree. 65 percent says that less than 10 percent of their workforce has a university degree. The rest of the firms, 35 percent, say that the majority of their employees has a university degree.


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IX. NETWORKS

Personal and EU relations are the core networks for international activities

Networks in terms of business networks, social ties and market connections are fairly important for international activities. Based on open answer questions about how important networks are for international activities 30 percent indicates that network relations are essential for their business, while 20 percent argues that they are of limited value in for their international markets. Overall, when further questioned, on average firms say that the personal networks and European Union facilities are fairly important to their international operations. The EU provides essential networks for (high tech) manufacturing industry SMEs, while personal networks are a primary network across all sectors. Firms argue that governmental agencies networks and family networks are not important for the international activities. As shown in Figure 9.1 personal relationships and EU networks are reported to be fairly important to very important by over 60 percent of the SMEs, while about half of the firms says family and government agencies networks are not to slightly important. Only firms in agriculture and commodities indicate that government agencies networks are fairly important. Overall, the role of networks in international relations is slightly to fairly important for most firms, especially personal and EU networks are important and family networks are not important Figure 9.1: The role of networks for international activities

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X. CASE STUDIES

In this part we present two company cases.

WAAIJENBERG MOBILITEIT

Sector: manufacturing (high tech) industry Size: 20-49 employees Location: Veenendaal, Utrecht Province Background WAAIJENBERG Mobiliteit is a small Dutch firm cooperative founded in 1992. There are about 40 employees working for the company. It has branches in Veenendaal, Den Haag and Amsterdam. WAAIJENBERG Mobiliteit produces cars for disabled people. They have three main products: The Canta, Scootmobiel and Broommobiel. WAAIJENBERG Mobiliteit also offers maintenance services at customer’s or company’s location. WAAIJENBERG Mobiliteit can be called for help outside office hours or weekends. They offer free warranty and towing services for damaged cars. There are no foreign owners. The company expects their sales and profits to remain unchanged. Mission WAAIJENBERG Mobiliteit’s mission is to design, develop, manufacture and integrate equipments with the highest safety standards. They aim to provide the differently abled community with the freedom and opportunity to drive with their specialized automotive mobility equipment and vehicles and aim to develop products which ensure users high quality and satisfaction, along with industry-leading technology. International activities Main markets: Austria, Portugal, Italy, Germany Export (as % of sales): 25% The firm first exported in 1992, the year the company was founded. The firm expects to increase its exports. The company has not faced any problems with exporting and they have no obstacles to their daily business activities. The firm has no establishments abroad and don’t expect to open any new ones, neither do they have partners or joint ventures abroad. WAAIJENBERG Mobiliteit does not face any direct competitors in its main market because of the uniqueness of their products. It could take their customers a month or more to find new suppliers if they closed. Competition has however increased over the last three years. The firm has patents registered and has introduced new products in the last three years. They also invest in R&D activities. The firm is very innovative as compared to other firms in the same industry. There is only one (top) manager employed. The manager has a university degree. About 5% of the firms labor force employed in 2010 had a university degree. Networking is not of a great importance for WAAIJENBERG Mobiliteit. Personal networks are also not important to this firm in establishing foreign markets and they are very risk averse.


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Techcomlight

Sector: manufacturing (high tech) industry Size: 10-19 employees Location: Ederveen, Gelderland Province Background Techcomlight B.V. is the only distributor of Solatube® products in the Benelux. The company was founded in 1992 in the Netherlands and is market leader for selling daylight systems in the Benelux. These daylight systems are its core product and they have nine customized variations of this product. Total sales has increased in the last three years from 2.1 to 2.8 million euro. Expectations for 2011 are positive regarding an increase in sales and because of this also an expected increase in employees. Mission Techcomlight wants to distribute products which solve daylight admittance problems, decrease your energy-bill, positively influence your life and health and contribute to a better environmental policy. Through offering the highest level of U-value (energy isolation), sound isolation and light admittance (patented), tested by Grontmij Technical Management and TNO, the Solatube® has distinctive assets to distinguish itself from its competitors. International Activities This firm only started exporting recently, 2008, but already 18 percent of its sales are earned abroad. The company focuses on the Benelux and high potential growth is expected as up to 25% of its total sales is expected to be earned abroad this year. As they are a distributor for Solatube® nearly all of its products are purchased from America and then customized locally. Solatube® has 40 official dealers all over the world. Other Even though Techcomlight distributes the official Solatube® the company also spends a great deal of money on R&D (nine percent of sales) to create extra benefits or customizations for the existing daylight system. During the crisis and facing a lot of competition - 14 direct competitors - the company has increased sales and furthermore has been able to increase prices without losing market share. This due to the new, tested, innovations which have increased the quality of the product. As it is a small company only a few employees are managers – the management team consists of four managers of which one has work experience at a large multinational. The differences in legislation, so laws and regulations abroad, seem to be the biggest obstacle to daily business and export.


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XI. CONCLUSION

Background Utrecht is considered Europe’s most competitive region. According to the literature only the strongest and most competitive firms are able to compete in foreign markets. There appears a sorting pattern: only the most competitive are internationally active. Given that the Netherlands is considered an export nation, not surprisingly, even among small business, many firms in the Utrecht Region internationalize. Still, international activities of SMEs are an exception, since these firms represent about 20 percent of all SMEs. Following Dunning, most of these international firms have specific Ownership, Location and Internalization (OLI) advantages. Ownership advantages such as technology, innovative capacities, managerial capabilities, market power and access to unique inputs are operative at the consulted companies. Locational aspects are rated favourable. Utrecht is a large agglomeration with specialized inputs and the SMEs benefit from the central location in the European Union. In terms of Internalization advantages many firms have often made a radical choice in their make or buy decision (export vs. offshoring vs. import or outsourcing). Most firms that generate sales abroad also import goods and outsource activities to foreign partners. At the same time 35 percent owns a subsidiary, establishment, factory or office abroad, which implies deep commitment to foreign markets. These international SMEs are an important engine for innovation. Nonetheless, the causality from competitiveness to internationalization – or, self-selection is debateable as firms may go abroad in order to learn and improve their business successfully; a statement upon which many owners, CEOs and managers agreed. International activities of SMEs in the Utrecht Region We held 20 interviews from a random sample out of more than 100,000 firms. In the Utrecht Region, 26 percent of the SMEs are internationally active. The average international SME has 75 employees; the median is 24. On average, 25 percent of sales are generated in foreign markets, and nearly all trade is EU related. Two trends in internationalization strategies appeared: international outsourcing and foreign direct investment (FDI), which are both indicative that the internationally active SMEs are highly competitive firms according (cq. sorting pattern literature). Indeed, on annual basis the sales of the companies increased on average with 12 percent and profits increased on average with 4 percent. Overall, firms are highly optimistic about the future. Obstacles, competition? Internationally active Dutch SMEs perceive little obstacles. Diversity in law and regulation is an important obstacle for international activities. The major obstacle is direct competition. In fact, there is fierce competition in the Utrecht region. The level of competition remains strong and may be increasing. But, how do firms react to competition? In response to competition most firms improve their price-quality ratio. Also, in response to competition two third of the firms enters foreign markets. Innovation About half of the internationally active Dutch SMEs are active innovators. SMEs in Utrecht are very innovative compared to other EU regions. Firms innovate in many ways at the same time. Most SMEs in Utrecht invest actively in research and development. Many firms successfully launch new products and services. In general, the companies find themselves more innovative than direct competitors. But, where does the innovation pressure come from? The most important factors are domestic and foreign competition, followed by pressure from customer demands. Overall, strong ownership advantages are important for internationalization, and the openness of firms in the Utrecht Region may very well explain why these firms are competitive and choose deep commitment to international markets.


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Boermans, M.A. (2010). Learning by Exporting and Destination Effects: Evidence

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Bedrijfsprestaties. Database. EIM, 2010. Internationalisation of European SMEs. European Commission for

Enterprise and Industry, Brussels. European Commission (2010). EU Regional Competitiveness Index. DG Joint

Research Centre and DG Regional Policy, European Union. Flyvbjerg, B. (2004). Five Misunderstandings about Case-Study Research. In

Qualitative Research Practice, Seale, C., Gobo, G., Gubrium, J.F. and Silverman, D. (Eds.). London and Thousand Oaks, CA: Sage, pp. 420-434.

Greenaway, D. and Kneller, R. (2007). Firm heterogeneity, exporting and foreign

direct investment. The Economic Journal 117, 134-161. Helpman, E. (2006). Trade, FDI and the Organization of Firms. Journal of

Economic Literature 44 (3), 589-630. Hessels, S.J.A. (2006). Internationalisation of Dutch SMEs. EIM, Zoetermeer. Melitz, M. J. (2003). The Impact of Trade on Intra-Industry Reallocations and

Aggregate Industry Productivity. Econometrica 71 (6), 1695-1725. Prahalad, C. K., & Krishnan, M. S. (2008). The New Age of Innovation: Driving

Cocreated Value Through Global Networks. New York: McGraw-Hill.


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APPENDIX 1: INTERVIEWS

Each interview was based on a structured questionnaire with open ended and closed questions. In February 2011, 65 internationally active small companies were approached to ask for the owner’s, CEO’s or a manager’s participation at any convenient moment. In total, 20 firms were interviewed in March 2011. 75 percent of the interviews were conducted in English. The interviews were conducted by telephone and took between 30 and 45 minutes to complete. Each firm later received a standardized case study report of their company after participation and was debriefed about the study before publication.

APPENDIX 2: SAMPLE SELECTION

A stratified random sample of firms that were registered at the Chamber of Commerce in 2010 was obtained. First, all SMEs were included, excluding all large firms that have more than 500 employees and/or more than 50 million euro annual sales. Next, all firms that are officially registered in the Centre of Holland (Midden-Nederland) were included based on ZIP CODE information, retaining five different provinces that include Utrecht and its neighbours (Gelderland, Noord-Brabant, Noord-Holland and Zuid-Holland). This set based on size and region includes over 100,000 firms. Finally, we excluded firms from the sample that we have no official operating income data or no officially registered website information. Our targeted sample consists of 3,318 firms. In order to get a ‘representative’ sample we took 250 firms at random from our dataset of 3,318 firms (7.5 percent). All these firms were contacted if and only if they were i) of Dutch origin, and ii) internationally active, in order to minimize the contacting of firms. (Notice that according to our definition and following the 2007 data of Dutch SMEs in the “Observatory of European SMEs” sample, only 30 firms are expected to be internationally active. However, note that the Utrecht region on which we focus is relatively internationally involved so we may expect that more than 12 percent of the targeted sample is internationally active.) Using public information of each of the 250 companies it was determined whether the firm is internationally active or not. In total, 65 firms indicate that they are internationally active, which represents 26 percent of our random sample of 3,318 firms. The response rate was 31 percent, leaving 20 internationally active SMEs in our final sample.

APPENDIX 3: FACTOR ANALYSIS OBSTACLES

We use all 13 obstacle items to perform a factor analysis (principle component analysis) in order to see how business operation obstacles of the SMEs cluster together. We apply a VARIMAX rotation method and derive two robust factors with eigen values above 2. Table A3.1 show the respective rotated factor loading of each obstacle item if its above 0.3 for the derived factors 1 and 2. We derive an “environmental obstacle” factor and a “trade obstacle” factor. These two dimensional structure of obstacles implies that for these underlying dimensions, firms that score high (low) on a item with a high (low) loading to a factor are likely to also score high (low) on any item that also clusters to that factor. Table A3.1: Rotated factor loadings for the obstacles

Factor

1 2

Obstacle: tax rates ,902

Obstacle: tax administration ,830

Obstacle: competition ,821

Obstacle: business licensing and permits ,730

Obstacle: labor regulations ,562

Obstacle: political instability ,412

Obstacle: inadequately educated workforce ,356

Obstacle: customs ,912

Obstacle: trade regulation and tariffs ,840

Obstacle: transport ,722

Obstacle: access finance ,638

Extraction Method: Principal Component Analysis. Rotation Method: Varimax with Kaiser Normalization.


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This publication was financed under the Innovation and Business (InnBus) Research Center of the Hogeschool Utrecht which is a public education and research institution in the Netherlands. The HU University of Applied Sciences Utrecht has over 40,000 students.

InnBus generates knowledge for and with SME in the Utrecht region. It also offers business support for innovation. The three pillars of the Research Centre are education, research and professional practice. The strength of the Research Centre lies in the synergy between these three pillars. This synergy is shaped by knowledge dissemination between professional practice, researchers and the HU University of Applied Sciences Utrecht. This enables the Research Centre to contribute to the innovation capacity in the region. Research Centre for Innovation and Business (InnBus) Postal address: P.O. Box 85029 3508 AA Utrecht Visiting address: Padualaan 101 3584 CH Utrecht Telephone: Alice van der Grein: +31 (0)30 258 64 65 Teja de Groot: +31 (0)30 258 64 03 E-mail: Alice van der Grein: [email protected] Teja de Groot: [email protected] HU Research Report “International Activities of Dutch SMEs: A Synopsis from the Utrecht Region in 2011” Author: M.A. Boermans Research Group International Business and Innovation

Published by Hogeschool Utrecht © 2011 --- Reproduction is authorized provided the source is acknowledged. Suggested citation: Boermans, M.A. (2011). “International Activities of Dutch SMEs: A Synopsis from the

Utrecht Region in 2011”. HU Research Report, Utrecht.


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Documents

Internationalization of Dutch SMEs in Utrecht Region 2011