national university of singapore 2002 · in singapore context, based on singapore edb/spring and...
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AN INTEGRATED MODEL OF
INTERNATIONALIZATION FOR SINGAPORE-BASED
SMALL-MEDIUM ENTERPRISES.
LEE AH HAI, STEPHEN
NATIONAL UNIVERSITY OF SINGAPORE
2002
AN INTEGRATED MODEL OF
INTERNATIONALIZATION FOR SINGAPORE-BASED
SMALL-MEDIUM ENTERPRISES.
LEE AH HAI, STEPHEN
A THESIS SUBMITTED FOR THE DEGREE OF
MASTER OF SCIENCE (MGT)
DEPARTMENT OF BUSINESS POLICY
SCHOOL OF BUSINESS
NATIONAL UNIVERSITY OF SINGAPORE
2002
ACKNOWLEDGEMENTS First of all, I gratefully acknowledge the supervisory guidance of Assoc. Professor Nitin
Pangarkar. His scholarly view, professional insight and intellectual interpretation in
globalization issues and theories had been a source of motivation for me to persist on
with passion in this research endeavour.
I like to hereby thank Mr. JP Lim and Mr. Desmond Chua of SOLIN Consulting Group.
As experienced business practitioners and consultants, they had provided me much
business insight and foresight on understanding SMEs’ operation mode in Singapore.
I also take this opportunity to acknowledge the contribution of my four colleagues at
SOLIN Consulting Group - Gary Tan, Don Teo, Aaron Ang and Tan Siew Peng - in
supporting me to conduct questionnaire survey and interviews with SMEs senior
managers. I appreciate their hard work and patience in performing these tedious jobs.
My gratitude goes likewise to Mr. He Zilin and Ms. Deng Min on their support on
statistical analysis.
Lastly I appreciate my coursework instructors, seminar speakers and classmates who had
enabled me to gain greater understanding of the research issue during discussions and
debates.
I
SUMMARY
Over the last three decades, international businesses and foreign direct investments (FDI)
by multinational firms have grown several-fold. Though the literature on
internationalization of firms is voluminous, there are two salient issues with the literature.
First, this literature has a strong bias towards activities undertaken by firms from
developed countries. Secondly, much of the literature also focuses on large multinational
firms. We aim to address these issues in our current study by focusing on
internationalization undertaken by small- and medium-sized enterprises in Singapore.
We focus on two major research questions: what is the extent to which the firms in our
sample are internationalized and secondly, what are the determinants of their degree of
internationalization.
Our model is based on few streams of research. Firstly, based on Dunning’s eclectic
(OLI) framework, we predict that firms having strong ownership and location advantages
will be internationalized to a greater extent. Secondly, we argue that firms that have
undertaken intensive inward internationalization activities will be more (outward)
internationalized. Thirdly, we predict that firms increase gradually in involvement of
internationalization as suggested by Stage Theory. Finally, drawing from the literature on
inter-firm networks, we argue that firms having stronger networks will be more
internationalized.
II
We used a survey instrument to gather data from a pool of 500 small- and medium-sized
firms in Singapore. Consistent with the arguments of the previous research that the
degree of internationalization is a complex and multi-dimensional construct, we included
measures such as the Herfindahl Index (HHI), overseas sales as percentage of total sales
and number of countries. We believe that these multiple measures will be better able to
capture the true degree of internationalization of the sample firms. We employed
perceptual measures to gauge the extent of ownership and location advantages, the extent
of incremental internationalization, the degree of inward internationalization and the
strength of networks. Multiple items (questions) were used to measure each of these
constructs.
We received 92 completed survey forms, giving us a response rate of just under 20
percent. We find that small- and medium-sized enterprises in Singapore are
predominantly focused on the home market with 71 percent of the sales coming from this
source. Other ASEAN nations form popular destinations (average 20 percent of their
total sales from this region) for the FDI by the sample firms. The sample firms, however,
seldom invest in countries beyond the Asian continent.
In terms of hypothesis testing, we found that the degree of internationalization was
significantly influenced by the strength of ownership and location advantages. But there
is no sign of support of incremental stage theory, network theory and inward
internationalization in explaining Singapore SMEs’ internationalization.
III
TABLE OF CONTENTS
Chapter
Content
Page
List of Figures
V
List of Tables
VI
1
Introduction
1
2
Theoretical Foundation
10
3
Literature Review & Hypotheses Development
27
4
Research Methodology
43
5
Statistical Analysis and Discussion
49
6
Conclusions and Implications
71
Appendix A: Measures Used In Paper
80
Appendix B: Testing Discriminant Validity With
Confirmatory Factor Analysis
85
References
101
Questionnaire
114
IV
LIST OF FIGURES Figure Page
1 Coviello and Munro (1997) Suggested Integrated Model of Internationalization.
21
2 An Integrated Model of SMEs Internationalization
25
3 An Integrated Model of SMEs Internationalization
41
V
LIST OF TABLES Table
Page
1 A Comparison of Distinguishing Features between SMEs and
MNCs
6
2 Features and Locus of the Four Core Theories of Internationalization
20
3 Summary of Proposed Hypotheses for Testing the SME Internationalization Model
42
4 International Business Activities of Singapore SMEs
50
5 Descriptive Statistics for Ownership Specific Advantage
51
6 Descriptive Statistics for Location Advantage
54
7 Descriptive Statistics for Psychic Distance and Years of Exporting
56
8 Descriptive Statistics for Pre-export Import Experience
58
9 Descriptive Statistics for Business Network Connection
60
10 Exploratory Factor Analysis for Ownership Advantage
61
11 Exploratory Factor Analysis for Location Advantages
61
12 Exploratory Factor Analysis for Inward Experience
62
13 Exploratory Factor Analysis for Business Network Connection
63
14 Reliability of Variables
63
15 Means, Standard Deviations, And Correlations (N=92)
65
16 Regression Analysis in Testing the Determinant of DOI 66
17 Summarized Outcomes of Three Regression Models
68
18 Critical Factors of Consideration for Internationalization
74
VI
Chapter 1
CHAPTER 1: INTRODUCTION
This study examines the degree of internalization for Singapore SMEs and
discusses four theories of internationalization: the eclectic paradigm; the stage theory
of internationalization; the network; and the inward/outward internationalization. It
suggests that a model incorporating the key elements of each approach could present a
more realistic and comprehensive picture of Singapore SMEs’ degree of
internationalization.
1.1 INTERNATIONALIZATION
The term internationalization generally refers to the outward movement in an
individual firm’s or larger grouping’s international operations (Johanson and
Wiedersheim-Paul, 1975; Piercy, 1981; Turnbull, 1987). This definition has ever
served well as a starting point for researchers to explore the issue.
As early as 1970s, researchers like Wilkins (1970, 1974) and others began to
delineate some of the dynamic factors in the process of internationalization of firms
(more on MNCs then). They had begun to develop longitudinal approach as a research
methodology in order to study stages of internationalization. Their studies not only
highlighted the expansionary and growth activities towards internationalization, but
also made some preliminary attempt to identify key dynamic factors in the process
(Johanson and Wiedersheim-Paul, 1975; Johanson and Vahlne, 1977; Luostarinen,
1979).
1
Chapter 1
Since dynamic concept begins to gain ground in internationalization literature
and internationalization is no longer just static, the definition proposed by Beamish
(1990) is perhaps most appropriate:
“ … the process by which firms both increase their awareness of the direct and
indirect influence of international transactions on their future, and establish and
conduct transactions with other countries.”
Beamish’s view incorporates and synthesizes various critical elements as
proposed and considered by his contemporaries and predecessors. First, there is an
internal dynamic force that enhances learning to encounter changes and to foster
growth and market expansion via acquisition and accumulation of knowledge
(Johanson and Vahlne, 1992; Melin, 1992). Second, inward internationalization
(import) is recognized here both as an important international transaction and as a
facilitator for external internationalization (export, FDI and others) later (Welch and
Luostarinen, 1988a, 1993; Korhonen et al., 1995). Third, external internationalization
in various forms is certainly the core issue here. This may assume patterns ranging
from indirect exporting, direct export to full commitment like establishing
manufacturing plant and wholly controlled subsidiaries (FDI) in foreign lands.
Fourth, the view is process-based that may one way or another give accommodation
to incremental approach of internationalization whereby a firm progresses through a
series of stages to intensify degree of involvement in internationalization (Stage
Model). Finally, there is also suggestion regarding the importance of establishing
connected relationships to facilitate business transactions both now and in the future.
2
Chapter 1
This gives due consideration on Network Model to interpret the internationalization
process.
With all these various elements, Welch and Luostarinen’s (1988b) work can
be considered a pioneering and comprehensive analysis of the internationalization
concept. Subsequently other researchers have reviewed, analyzed, assessed and
synthesized from the general internationalization process literature in order to derive
the implicit concepts and definitions attached (examples: Johanson and Vahlne, 1990,
1992; Melin, 1992; Andersen, 1993). Their analyses and reviews indicate two
common phenomena in internationalization literature. Firstly, efforts to encapsulate
the internationalization concepts in a definitive manner have been inadequate.
Secondly, there is generally a lack of consensus in the definition of
internationalization.
With this background knowledge, in this study I will proceed to the relevant
theories of internationalization. For a more exhaustive analysis and comparative
study of a firm’s internationalization effort, this study stretches beyond the mere
question of whether a firm is ‘internationalized’ or not in term of obvious activities.
Rather, the depth of involvement, degree of internationalization (DOI), is the focus
here.
The measurement of DOI itself is also intensively discussed. One common
and simple measure is overseas sales in percentage to total sales. However, it is often
criticized on its drawbacks (Cavusgil and Godiwalla, 1982; Welch and Luostarinen,
1988b). For example, it gives not much clue regarding the diversity in operations, the
3
Chapter 1
variety and heterogeneity of markets, and the extent of organizational commitment.
Therefore, in this study, DOI will be measured on three dimensions: breath, intensity,
and dispersion. The scale of “overseas sales in percentage to total sales” measures the
intensity of DOI. While the breath of DOI is measured by “the number of foreign
countries operated in”, and the dispersion of DOI is measured by Herfindahl-
Hirschman Index (HHI).
1.2 INTERNATIONALIZATION OF SME
Internationalization of multinational companies has been widely and
intensively studied. However, this study will shed light on SMEs on their
internationalization.
Although it has been well recognized that SMEs have contributed significantly
to economic development and growth and thereby creating employment, larger tax
base, more well being to consumers and other social benefits (Dana et al. 1999),
business practitioner scholars and academics are yet to establish a universally
accepted definition of SMEs: “definitions of ‘small firm’ vary to author and context”
Buckley (1989).
Berra et al. (1995) define SMEs by reference to the Italian “SMEs Incentive
Law” that measures the size of SMEs by number of employees and/or volume of
turnover. A SME is a firm that employs not more than 200 employees or has turnover
at most 50 billion Italian lire.
4
Chapter 1
Wilson committee and the UK Companies Act define small firms in term of
their annual turnover, balance sheet total and average weekly number of employee.
In Singapore context, based on Singapore EDB/SPRING and company acts, “a
Singapore-based SME is broadly defined here as a firm holding net tangible assets (on
group basis) not exceeding 15 million Singapore dollars and/or workforce not more
than 200 persons, with Singaporeans holding at least 30% of equity share”. A
Singapore-based SME is a firm with above qualifications and registered in and having
its head office in Singapore.
There are differences between larger firms such as MNCs and SMEs. To draw
a clearer boundary, it is listed in Table 1 some of the main features that in the past
have distinguished SMEs from large firms and MNCs (Dana et al., 1999):
5
Chapter 1
Table 1: A Comparison of Distinguishing Features between SMEs and MNCs
SMEs MNCs Advantages/Weaknesses of SMEs
1. Size Small to medium 2. Access Local or regional 3. Reach Limited
Large, global markets, more vulnerable to environmental volatility and operational risk
4. Resource capabilities
Limited, outsourced Internal resource
5. Risk capacity and exposure
High risk-takers, share with associates
Low since diversification
SMEs: high probability of insolvency or failure
6. Strategic vision Vision of the entrepreneur or small group of executives
Strategic aims of global boards; reactive and responsive
SMEs: mostly new, innovative, and productive
7. Focus and responsibilities
Local markets Profitable markets all over the world
SMEs: niche market
8. Political influence
React to prevailing policies
Influence the policy environment of their host governments
9. Expansion mechanisms
Cooperative, symbiotic arrangements
Rely on internal economies of scale and scope
10. Network characteristics
Loose, cooperative, international linkages among independent agents
Tighter and complete linkages, with owned or tightly controlled agents
SMEs: flexible “linkage” practices, such as strategic alliances and other collaborative arrangements
11.Innovativeness and specialization
Larger and more flexible inventive capacity
Less inventive, but achieve higher success rates in commercializing innovations
12. Human resources
Human resource deficiencies
Recruit and promote based on professional qualifications
SMEs: local expertise
13. Control characteristics
lateral coordination between mutually dependent players.
rigid, hierarchical, internal control
SMEs: interdependence , allows networks of SMEs to grow.
6
Chapter 1
It is these differences in dimensions, forms as well as degree of involvement
on those features listed above that finally define SMEs as unique business venture
from large firms and MNCs.
However, the advantages of SMEs are recently emerging as described by
Table 1. Some key drivers in globalization bring about the changes in the relative
advantages of SMEs and MNCs and make some of their practices more similar.
These drivers take the forms like technological advances in production, transportation
and telecommunication; dismantlement of government-imposed barriers and
structural impediments; and gradual disappearance of market segments.
Similarities between SMEs and large MNCs in operating characteristics and
strategies may be found in these areas (Dana et al., 1999):
1. First, economic environment: MNCs need to learn from and emulate
SMEs in order to compete effectively with them (or, perhaps, to
collaborate with them) in their niche markets.
2. Inter-firm relationships: MNCs find it increasingly necessary to
operate at levels closer to SMEs, adopting some of their flexible,
“linkage” practices, such as strategic alliances and other collaborative
arrangements
3. Value chain: MNCs are more often using SMEs for specialized tasks
involving inventiveness, creativity, and local expertise.
4. Control mechanisms: SMEs pool their capabilities and share control
without any one firm dominating. This interdependence allows
7
Chapter 1
networks of SMEs to grow. Ever-increasing worldwide competition is
forcing MNCs to adopt more localized postures in order to preserve
their competitiveness locally and globally. The essence of control of
MNCs evolves from rigid, hierarchical, internal control toward lateral
coordination between mutually dependent players.
It can be found here that the similarity between SMEs and MNCs are mainly a
process for MNCs to learn from SMEs on their advantage.
The similarity between SMEs and MNCs make it reasonable to borrow the
fruitful results regarding studies of MNCs internationalization in the previous decades
and use them on the research of SMEs. While their distinguishing features make it
necessary to build a model appropriate for SMEs.
From the features of SMEs, it is apparent that one of the main objectives for
SMEs to internationalize is to gain access and possibly direct and indirect control of
resources. The resources can be both tangible and intangible (Holmlund and Kock,
1995). They can be personnel resources, software resources, hardware resources and
organizational resources (Holmlund, M. and Kock, S., 1998). Bell (1995) also pointed
out other possible reasons such as small size of domestic market, and firms not being
well accepted locally. The following chapters will proceed to examine the
determinants of SMEs degree of internationalization.
One minor point, in this thesis, the term entrepreneurship and SMEs are used
interchangeably since they are similar ventures. Entrepreneurship usually refers to the
8
Chapter 1
practice or venture of undertaking enterprise, while assuming control and underlying
risks. Owing to constraints in resources and an entrepreneur’s predominant desire to
manage and control a business venture, the size of the business venture is relatively
small. And such business venture is henceforth referred as small- or medium-sized
enterprise or SME (Dana et al., 1999).
9
Chapter 2
CHAPTER 2: THEORETICAL FOUNDATION
In Chapter 1, I discussed mainly on the definitional matters and related issues
regarding internationalization. My understanding here implies a diverse array of
meanings associated with internationalization. This arises mainly from the fact that there
are various schools of thought and conceptual models explaining the behavior of
internationalization. Each conceptual model derives its interpretation from its particular
perspective and specific discipline. Hence I may safely affirm here that an individual
school of though with its particularistic approach is inadequate to explain the
complexities of internationalization. In this chapter I will proceed to review these
conceptual models.
The current research to a certain extent is inspired by Beamish’s (1990) definition
of internationalization. The concepts and theories discusses here are implicit in the five
items summarized from Beamish’s (1990) view as discussed in Chapter 1.
2.1 ECLECTIC PARADIGM
The eclectic paradigm sets out to explain ``the extent, form and pattern of
international production’’ and is founded on ``the juxtaposition of the ownership specific
advantages of firms contemplating foreign production, . . . the propensity to internalise
the cross-border markets for these, and the attractions of a foreign market for the
production’’ (Dunning, 1988).
10
Chapter 2
Dunning originates this theoretical concept and expanded the theory of
internalization in the context of internationalization to include location factors. These
location factors influence decisions and flow of FDI (Dunning, 1973, 1988; Dunning and
McQueen, 1981).
Based on the idea of location advantages, Dunning derived a three-factor
(ownership specific advantage, location specific advantage and internalization)
framework to explain the interdependence and significance of these location factors for
FDI. Two of the factors, ownership specific advantage and location specific advantage,
contribute to the current study of internationalization:
Ownership specific advantages include exclusive technology and methods,
patents, trademarks, professional and operation skills and management know-how. These
advantages will further augment location specific advantages. These are mostly
monopolistic advantages.
Location-specific advantages are attached with the particular location firms intend
to invest in. These are the resources endowment and assets at foreign location. An
investing firm may find them lacking and costly in its own country. Or they can be
valuable and contribute synergistic effect when combined with investing firm’s unique
assets and competence. Specifically, the incentives to internationalize depend on the
context-the degree to which local conditions such as government regulations, telecom
infrastructure, technology adoption patterns, taxation, repatriation of profits and exchange
rates support the firm's business model (Kuemmerle, 1999).
11
Chapter 2
Eclectic Paradigm has been a well-accepted and well-tested theory in explaining
internationalization. I therefore consider this paradigm as a supporting theory to build the
integrated model. I shall discuss more on Eclectic Paradigm and its other theoretical and
practical implications at a later section.
2.2 INWARD- AND OUTWARD INTERNATIONALIZATIONS
Koury (1984) and Huszagh & Huszagh (1986) included the inward side of
activities, viz. import, to arrive at a broader concept of internationalization. This links the
inward and outward activities and therefore emphasizes the related dynamic and
interactive aspects of international trade in internationalization process.
Inward- and outward-internationalizations consider import as part of
internationalization process. Import acts as initiator and facilitator for later exporting and
other international exchange activities. This concept recognizes import’s contributions
toward greater degree of internationalization.
This is one of the key models explaining internationalization of a firm. I
acknowledge import as an important activity of most business ventures. Beamish himself
gives significant weight to this factor. I therefore consider inward-internationalization as
one of the constituent theories to derive the overall integrated model of
internationalization and shall discuss on this subject matter further in a later section.
12
Chapter 2
2.3 INCREMENTAL INTERNATIONALIZATION (STAGE MODEL)
This model views internationalization as a series of involvements through
incremental modes of activity and stages. Subsequent stage indicates more progressive
and greater commitment in internationalization. Two key dimensions explain this
intensity of involvement. These are psychic or cultural distance and accumulation of
knowledge regarding foreign environment (establishment chain).
The concept of psychic (cultural) distance explains that firms develop their
activities abroad over time and in an incremental fashion, based on their knowledge
development. Firms perceive some level of cultural distance between their home market
and the foreign market (Evans and Mavondo, 2002). Differences between the home and
foreign market regarding the legal and political environment, economic environment,
market structure, business practices and language are essential elements of psychic
(cultural) distance (Evans and Mavondo, 2002). Firms expand first into markets which are
psychically close, and into more ``distant’’ markets as their knowledge developed
(Johanson and Vahlne, 1977). Experiential knowledge -- knowledge which can only be
gained through personal experience – is considered to be the critical kind of knowledge
(rather than objective knowledge which can be taught) in international marketing.
On the other hand, the concept of establishment chain reveals the chain of “export
through independent intermediary – export through sales subsidiary – manufacture within
the market’’.
13
Chapter 2
There are quite a number of attempts to describe various stages of
internationalization process. The classical and conventional version is proposed by
Johanson and Wiedersheim-Paul (1975). This earliest and representative description is
commonly known as Uppsala Model.
Since Uppsala Model is both a classical and core theory, I shall provide some
description and definition of this theory, which has been considered both as a behavior
and growth model:
o State and change aspects, and causal cycles: each stage has its own state of being,
conditions and uniqueness in its own aspect. Normally certain state and conditions
of a particular precedent stage turn out as causal elements to usher the firm into
next stage.
o Objective and experiential knowledge: involvement at any stage brings about and
cumulates experience and knowledge. This experiential knowledge subsequently
narrows or closes the gap of psychic distance and ultimately facilitates greater
international involvement.
o Experiential knowledge leading to reduction of market uncertainty: in addition to
marginalizing the gap of psychic distance, experiential knowledge helps to reduce
market uncertainty and thus reduces the risk of investment.
o Generalization of market knowledge: it is possible to generalize to some extent,
some localized market knowledge with some principles, so that such knowledge
can be useful for other market entries as well. However as each market is unique
in term of customers’ needs, cultural distinctiveness and other internal and
14
Chapter 2
external factors, it is therefore difficult to generalize comprehensively and
applicability of any generalization may not be high.
o Small steps of market commitment: generally market commitment is incremental
and gradual with relatively one small step at a time, although there may be some
exceptions.
o Continuous process: this process of internationalization is progressive and linear
with an irreversible path. Some extreme view of this model believes that the
process is continuous and for all firms it shall cover all stages to terminate at final
stage. No allowance of cessation at all is made at some stage in between.
o Two core considerations: Psychic distance and Establishment chain. The former
stresses on cultural and geographical proximities while the later on market
knowledge and familiarity.
o Operationalization of the theory usually emphasizes factors related to psychic
(cultural) distance and establishment chain as indicators for internationalization
o Other indicators: usually not being considered as crucial. They can be possibly
reclassified as some properties of psychic distance or establishment chain.
There have been some empirical studies testing the validity of the theory. The
results and findings are mixed. Some claims are well supported while others obtain mixed
results. We discuss below some of the outcomes of these findings.
o Gradual, incremental and outward process: most studies confirm these basic
characteristics of Stage theory.
15
Chapter 2
o Leapfrogging: however it is also observed that some firms may skip some stages
to quicken the process. These findings seem to contradict the assumptions of
linearity and progressive continuality of the theory.
o Stop halfway: there are cases where the firms just quit halfway and there are no
indications of regaining the momentum for further commitment. This fails to
explain the non-cessationist doctrine of the theory.
o Multiple strategies in each process: firms adopt different strategies to capture
market share and return of investment. Thus there are some elements of non-
deterministic factors. Conventionally, the theory tends to emphasize mechanistic
and deterministic view. The process is interpreted as evolutionary that human and
firm level intervention is unlikely to be of any significance. These findings
however contradict to some extent the non-interventionist view.
o Inward investment before outward activities: quite a number of findings supported
that internationalization especially export usually begins with inward investment
in the forms of local market expansion and import. These inward activities later
act as springboards for outward internationalization like export. Such findings
confirm that internationalization can be viewed even at an earlier stage so called
inward internationalization, viz. import. These warrant necessity of the Stage
theory here to extend backward.
o Low explanatory power for certain type of firms and industries: the theory
explains well for manufacturing concerns. But as for small high technology and
service firms, mode of entry and market selection for these firms may not follow
the straight path as suggested by Stage. Sequential pattern usually does not exist
and leapfrogging is common.
16
Chapter 2
o Rapid, non-incremental process: process of deepening internationalization is so
rapid for certain firms that distinction of stages becomes less obvious and more
arbitrary.
o Only the early stages are important and applicable: in relating to market
knowledge and resources, early stage of internationalization may stress very much
on knowledge acquisition. At later stage, commitment can be just spontaneous
without much consideration of the knowledge accumulated then.
o Lack of market knowledge not necessary a factor limiting growth or pattern of
stage: this is true for some cases not only at later stage of internationalization; it
implies also on early stage or even at startup point. Confidence gained to enter
into a market may no longer just be explained by psychic distance and
establishment chain alone.
o Integrated relationship between environment, organization and strategy-making
variables: giving rise to possible differences of stages in patterns and forms.
The stage theory is process-based that accommodates the incremental approach of
internationalization whereby a firm progresses through a series of stages to intensify
degree of involvement in internationalization. It relates well to Beamish’s vision of
internationalization. The concept of a stages theory of international involvement has been
supported in relation to the development of exporting (Bilkey and Tesar, 1977; Cavusgil,
1980), while Johanson and Vahlne (1990) also cite studies of German, US, Japanese,
Turkish and Australian firms which show strong support for the model, particularly in the
early stages of internationalization. I therefore include Stage Model in the building of
integrated model of internationalization and shall come back to discuss more on this
model and its other theoretical and practical implications at a later stage.
17
Chapter 2
2.4 NETWORK PERSPECTIVE
Definition of network has been derived from various sources especially from
disciplines like sociology and organization behavior. In its simple form, network is
defined as “sets of two or more connected exchange relationship” (Axelsson and Easton,
1992). There are other more elaborate views as well.
In network theory, markets are depicted as a system of relationships among a
number of players. Strategic action is rarely limited to a single firm; and the nature of
relationships established with others in the market often influences and dictates future
strategic options (Axelsson and Easton, 1992). Thus this nature of relationship influences
strategic decisions of the members and also the extent of commercial exchange (Sharma,
1993).
The Network perspective originates from the social and behavioral schools of
thought. Recent development in some commercial and business modes induces awareness
in the midst of international business researchers the relevance of such thought in
explaining certain patterns of internationalization. (Bonaccorsi, 1992; Welch, 1992;
Coviello and Munro, 1995)
Even among business strategy thinkers, associated concepts such as strategic
alliances and collaborative partnerships are being considered important in creating
competitive advantages. Gulati (1999) observed that as firms' experience with alliances
increase they develop collaborative capability.
18
Chapter 2
Recently, networks have been recognized as increasingly important to explain
internationalization of small firms. (Holmlund and Kock, 1998). In view of this recent
development and its possibility to complement other theories of internationalization
(Granovetter, 1985; Coviello and McAuley, 1999), I therefore take network theory as one
of the constituent theories for this research paper to derive an integrated model of
internationalization. It corresponds well to Beamish’s view on internationalization. I shall
discuss further on this school of thought at later section.
2.5 INTEGRATED MODEL OF INTERNATIONALIZATION: CONSTITUENT THEORIES
The theories discussed above seem to indicate a diversity of opinion on the
internationalisation of the firm. The stage theory originally concentrated on the impact of
one explanatory variable on this issue – the firm’s experiential knowledge. More recently,
Johanson and Vahlne (1990) have acknowledged the importance of another variable, said
to be implicit from the outset that of relationships to other bodies (customers, suppliers,
competitors) in the foreign market. As such, the network approach has been embraced by
Johanson and Vahlne. The eclectic paradigm, however, rather than adopting such a
behavioral approach to internationalization, focuses on economic theories of transaction
costs and assumes that a rational, optimal choice will be made. As to inward/outward
internationalization, the pre-export import experience is the only concern. Table 2 lists
the main features and locus of each approach.
19
Chapter 2
Table 2: Features and Locus of the Four Core Theories of Internationalization
Theory Influential feature Locus Eclectic paradigm Cost of transaction Firm Stages theory Experiential knowledge Firm Network Interaction Firm customer competitor supplier
within market environment Inward/outward internationalization
Pre-export import experience
Firm
This study tries to construct Eclectic Paradigm, Inward/Outward
Internationalization, Incremental Stage Model and Network Perspective into an integrated
model. These are also the theories implicitly considered by Beamish when he defines
internationalization. For the current research endeavor, I shall paint the general
connections of these four theories:
The need to integrate Incremental Stage and Network theories to explain better on
internationalization of SMEs is emphasized by Coviello and Munro (1997). In their
studies on small software firms, they conclude the relationship between these two
fundamental models of internationalization. This relationship is charted in Figure 1.
20
Chapter 2
Figure 1 Coviello and Munro (1997) Suggested Integrated Model of Internationalization
Network relationship
Incremental stage model
--Market selection --Market entry --Product development --Market diversification
To directly impact on
Help to influence on
Help to accelerate
The complementary effect between Eclectic Paradigm and Network perspective is
spelled out by Coviello and McAuley (1999) in their survey of literature in
internationalization of SMEs. The Network perspective offers a complementary view to
Eclectic Paradigm given that the later does not account for the role and influence of social
relationships in business transactions (Granovetter, 1985). Another complementary aspect
can be viewed from the fact that internationalization decisions and activities in the
Network perspective emerge as patterns of behaviour influenced by various network
members, while Eclectic Paradigm assumes rational strategic decision-making. This
complementary feature warrants effort to integrate these two models of
internationalization.
21
Chapter 2
A recent study by Brouthers & Brouthers (2001) on linking cultural distance with
investment risk and market entry suggests some relationship between Eclectic Paradigm
and Stage Model. This study indicates that the degree of national cultural distance affects
the perception of investment risk level and therefore the decision on market entry mode.
Similarly, there is also some established link between Network and Stage Model.
Manev & Stevenson (2001) reveal that managers of different firms (both from customers’
or suppliers’) tend to network among themselves of close cultural distance. Such
networking to some extent brings about businesses for the firms they involve in.
While for consideration of incorporating Eclectic Paradigm, Stage Model and
Network Perspective, I would like to quote O’Farrell et al (1998) to validate my
conviction on requirement a more integrative model:
“Our evidence shows that involvement with foreign markets is not necessarily
associated with investment in contractual arrangement or FDI … we need a greater
understanding of the dynamics of the internationalization process… from intention, to
entry and market development in different sectors under the interacting influence of
demand in home region and national markets, the influence of home market
conditions upon the timing of the decisions to internationalize, the international
behavior and requirements of private and public sector clients, the dynamics of
personal networks and interactions which lead to project contracts, the availability and
quality of potential joint venture and other partners, the emergence of implicit or
explicit internationalization strategies, differences in the scale, duration and nature of
projects; regulatory changes and the influence of differences in business culture and
22
Chapter 2
practice, and the ways in which key sources of expertise are mobilized in order to
service overseas contracts.” (O’Farrell et al, 1998: Remarks made at Conclusions and
Discussions section).
O’Farrell et al are obviously subscribing to a doctrine of multi-dimensional, multi-
disciplinary and dynamic approach to study the subject of internationalization. Anyone of
those conventional theories alone is incapable of explaining the complexity of this
international behavior.
Buckley, P.J. (2002) puts forth well on his view that internationalization is a
pathway to globalization and on the necessity to address internationalization from an
integrative perspective. He quotes: “The rise of the global economy has been an important
element in the international business agenda since the 1980s. The sporadic, unplanned,
externally driven approaches to international strategic planning needed to be superseded
by more formal models of global strategy and the myriad ways of doing international
business, particularly strategic alliances and international joint ventures, had to be
captured by a holistic theoretical approach.”
Beamish’s view and definition, which we accept as core definition of
internationalization for this research paper, also advocates the need of an integrated
approach in modeling internationalization.
In view of the current trend of research and scholarly thinking in this area of
internationalization, I therefore seek to spell out an integrated model of
internationalization. Figure 2 shows this integrated model of internationalization of
SMEs. In this diagram, those component/constituent theories are drawn on two-
23
Chapter 2
dimensional plain while the derived integrated model on a three-dimensional perspective.
I do so deliberately to highlight on the possibility of discovering new explanations and
knowledge that is otherwise not being unveiled by those components. These new
explanations are represented by the third dimension of the box.
24
Chapter 2
Figure 2
An Integrated Model of SMEs Internationalization
Internationalization issues, theories and
models
Integrated Model of
InternationalizationIncremental Stage Model
Inward Internationalization
(Import)
I
Eclectic
individu
respecti
This tra
Eclectic Paradigm
(Foreign DirectInvestment)
Network Perspective
n much of previous research, theories like Inward (i
Paradigm (FDI), Incremental Stage Model and lately
ally employed to explain internationalization. Each p
ve paradigm, premises, and disciplinary setting to a
dition yields undesired consequence. Each of these
Internationalizationissues, theories and
models
Internationalizationissues, theories and
models
Internationalizationissues, theories and
models
mport) Internationalization,
Network perspective were
erspective brought its own
ddress internationalization.
understandings is partial.
25
Chapter 2
Global and integrative view is simply ignored. A partial view is not only inadequate or
insufficient, but possibly inaccurate also. The whole at most times is more than simply
all its parts. And paradoxically it can be unique, as well as different from its parts. In
response to this concern, our research purpose is therefore to build and derive
synergistically a model of internationalization with multi-disciplinary and integrative
perspectives from current and well-established theories as constituent elements
(components). By doing so we hope to attain a better understanding of
internationalization in general, and, Singapore-based SMEs in particular.
By employing and combining some features from each constituent theory, such
integrated model, when successfully derived and built, should be able to better explain
SMEs internationalization The power of explanation and prediction of this derived
integrated model is expected to be greater and more accurate than that of its each
individual constituent theory.
This model draws very much on Beamish’s (1990) understanding of
internationalization. It is broad in perspective. It captures the development and dynamics
over time, the driving forces of the process, and the content of the process.
26
Chapter 4
CHAPTER 3
LITERATURE REVIEW & HYPOTHESES DEVELOPMENT
3.1 ECLECTIC PARADIGM
For MNCs, firm specific advantages usually refer to production technology, scale
economies, managerial expertise, technological or knowledge advantage, monopoly,
product differentiation, financial strength, knowledge in marketing, R&D, and human
resource (Buckley and Casson, 1976; Rugman, 1980).
Compared with MNCs’ advantage in size, technology and global marketing,
SMEs’ competitive assets are quite different. SMEs usually do not have the advantage of
scale economies. They have no brand names or consumer loyalties to capitalize on. Nor
do they manufacture new or exclusive products. The capital resources of these firms are
also limited.
However, they still have their advantages, and their sources of competitive
strength follow from a different set of conditions and factors.
First, these firms may be able to acquire or develop labor-intensive, multipurpose
operating technologies that can use locally available inputs and that can operate at lower
scale of production (Wells, 1978, 1980; Wells and Warren 1979). Foreign investment by
SMEs covers quite a wide spectrum of industries. Operation and production is usually
highly specialized with less than three production lines. It is geared mostly to serve the
contractual markets (White, 1983). Such technologies are often more efficient in local or
regional countries.
27
Chapter 4
Second, the cost of the production of SMEs is usually low because of their use of
appropriate technologies, and they are able to provide goods and services at prices below
those of other multinationals or locally owned firms (Kumar and Kim 1981; Wells 1978;
Lecraw 1981).
Third, the product technology of SMEs may be also appropriate. Such firms
sometimes manufacture simple, low quality consumer goods that can be used by a large
segment of the populace, and that are usually not manufactured by the firm from
industrialized countries (Nambudiri, Lyanda, and Akinnusi 1981; Lecraw 1981).
Fourth, since their scale is small, SMEs have high adaptability to local conditions
and are flexible users of capital equipment (Wells, 1983).
Finally, because of their small size and lack of political clout, they are not
perceived as threatening to the political sovereignty of the host countries.
For the dimension of each specific advantage, I adopt the measurement of this
proposed in Agarwal and Ramaswami’s (1992) study. Specifically for location advantage,
the study includes two dimensions: market potential and investment risk. I will further
discuss these dimensions in next chapter.
Based on the above statement about SMEs’ specific advantages, the following
hypotheses are developed:
28
Chapter 4
Hypothesis 1: High degree of ownership specific advantage will result in high degree
of SMEs’ internationalization.
Hypothesis 1a: High degree of ownership specific advantage will result in low HHI.
Hypothesis 1b: High degree of ownership specific advantage will result in high
overseas sales.
Hypothesis 1c: High degree of ownership specific advantage will result in high
number of foreign countries with operations.
Hypothesis 2: High degree of market potential (location advantage) will result in high
degree of SMEs’ internationalization.
Hypothesis 2a: High degree of market potential will result in low HHI.
Hypothesis 2b: High degree of market potential will result in high overseas sales.
Hypothesis 2c: High degree of market potential will result in high number of foreign
countries with operations.
Hypothesis 3: High degree of investment risk (location advantage) will result in low
degree of SMEs’ internationalization.
Hypothesis 3a: High degree of investment risk will result in high HHI.
Hypothesis 3b: High degree of investment risk will result in low overseas sales.
Hypothesis 3c: High degree of investment risk will result in low number of foreign
countries with operations.
29
Chapter 4
3.2 INCREMENTAL STAGE THEORY
Incremental Stage explains internationalization behavior as a gradual and
incremental process. Internationalization commitment deepens as a firm gains better
understanding and knowledge of foreign markets. A firm may contemplate to venture into
a foreign market if this market possesses some form of proximity in culture and
geographical distance. Proximity of this form is termed as psychic distance. In short, there
are two key drivers, viz. physical distance and market knowledge, to determine whether a
firm is comfortable with a market. The closer or more familiar a firm is, in term of these
two dimensions, to a market, the greater the likelihood that a firm will be more involved
in that market. These drivers are the main consideration for a firm to advance to a later
stage and increase its degree of involvement (i.e. degree of internationalization). Hence
each subsequent stage portraits greater proximity gained and thus greater commitment in
internationalization. And as such each different stage inevitably leads to differences in
forms and norms for international business activities.
There have been different schools of thought to describe various stages of
internationalization process. The classical and conventional version is proposed by
Johanson and Wiedersheim-Paul (1975). This earliest and representative description is
commonly known as Uppsala Model. Other descriptions are in one-way or another some
derived versions of Johanson and Wiedersheim-Paul (1975) proposition. These derived
forms accommodate with some amendment and adaptation for contingencies owing to
different industries, countries, markets and time periods.
30
Chapter 4
Johanson and Wiedersheim-Paul (1975), with their Uppsala Model, are pioneers
in this field. They segmented the whole process into four stages. This version is later
elaborated by Johanson and Vahlne (1977). There are others who prefer six stages and
use this theory to interpret not only FDI and international production but also other
international business activities at large (Bilkey and Tesar, 1977; Newbould, Buckley and
Thurwell, 1978). Some, such as Cavusgil (1980, 1984b) opt for the midway: five stage
instead. Other scholars adhere to this approach include Bartlett and Ghoshal (1989),
Cavusgil and Navin (1981), Johanson and Vahlne (1992), and Leonidou and Katsikeas
(1996).
Whichever version of Stage Theory it may be - be it 4-stage, 5-stage or 6-stage,
we can safely conclude that each view is process-based that accommodates the
incremental approach of internationalization whereby a firm progresses through a series
of stages to intensify degree of involvement in internationalization. It relates well to
Beamish’s vision of internationalization. We therefore include the Stage Model in our
building of integrated model of internationalization.
For my research purpose here, I shall consider the core one of the Stage Theory as
originally proposed by Johanson and Wiedersheim-Paul (1975) - their Uppsala Model.
The four stages which are evolutionary are:
Stage 1: No regular export activities
Stage 2: Export via oversea agent
Stage 3: Export via oversea sales subsidiaries
Stage 4: Oversea production manufacturing
31
Chapter 4
For a firm to progress to a higher (deeper) stage, the determinants are psychic
(cultural) distance and establishment chain (international business/market experience).
Cultural distance is a widely used construct in international business. Here it has been
applied to foreign investment expansion, entry mode choice and the performance of
foreign invested affiliates, among others (Shenkar, 2001). The greater the psychic
(cultural) distance is, the lesser the possibility for a firm to move to higher or deeper stage.
Conversely, the more international business experience a firm is, the greater the
likelihood to move to a higher or deeper stage.
From above argument, it can be proposed that psychic/cultural distance and
establishment chain are possible predictors of degree of internationalization.
Hypothesis 4: High degree of psychic/cultural distance (Stage Theory) will result in
low degree of SMEs’ internationalization.
Hypothesis 4a: High degree of psychic/cultural distance will result in high HHI.
Hypothesis 4b: High degree of psychic/cultural distance will result in low overseas
sales.
Hypothesis 4c: High degree of psychic/cultural distance will result in low number of
foreign countries with operations.
Hypothesis 5: High degree of establishment chain (Stage Theory) will result in high
degree of SMEs’ internationalization.
Hypothesis 5a: High degree of establishment chain will result in low HHI.
Hypothesis 5b: High degree of establishment chain will result in high overseas sales.
32
Chapter 4
Hypothesis 5c: High degree of establishment chain will result in high number of
foreign countries with operations.
3.3 NETWORK
Coviello and Munro (1995) researched network influence on SMEs’
internationalization process and concluded, “that the observed patterns of international
market growth for entrepreneurial high-technology firms differ from the processes of the
larger manufacturing firms outlined in the literature”.
There are other findings that also recognize the importance of networks to a small
firm (Hansen et al., 1994; Hara and Kanai, 1994; Kaufmann, 1995; Korhonen et al.,
1995). These findings suggested that network relationship could be a chief means to gain
access to foreign resources and thereafter to achieve internationalization (Bonaccorsi,
1992; Welch, 1992).
SMEs usually follow co-operative strategies. These strategies are pursued mainly
because of their resource constraints. Limited managerial and financial resources compel
SMEs to move onto internationalization as part of their growth strategy in order to
acquire complimentary assets (Richardson, 1972; Teece, 1986). Strategic network theory
suggests that firms are embedded in sets of relationships with suppliers, customers and
other entities (Gulati, Nohria, and Zaheer, 2000).
Networks can be either formal or informal and both influence a firm
internationalization. Such relationships can involve customers, suppliers, competitors,
33
Chapter 4
private and public support agencies, family and friends. Organizational boundaries
therefore incorporate both business (formal) and social (informal) relationships (Coviello
and McAuley, 1999). The formal ones usually take the form of business relationship and
may be termed as business network. Business network has influence on a firm’s
internationalization since it facilitates internationalization attainable via cost saving, co-
ordination and attracting new buyers. Informal networks take the form of social
relationship known as social network. This network is important especially for SMEs and
entrepreneur for startup stage of business and initial phase of internationalization
(Holmlund and Kock, 1998).
Network has impact on market selection, mode of entry, product development,
market diversification and growth (Coviello and Munro, 1997). Network relationship has
been a successful mechanism for most SMEs to gain access to other markets, to guide for
market selection and to facilitate as market entry mode (Coviello and Munro, 1997).
Apart from driving internationalization via commercial exchange and interactions,
networks influence international investment activities as well.
The main objective of establishing network especially for SMEs is to leverage the
skills and resources of other organizations. This is more so for small, resource-
constrained and technically-oriented firms to leverage the complementary capabilities of
other organizations (Hara and Kanai, 1994; McDougall et al, 1994; Oviatt and
McDougall, 1994). It is also resolved as a means to overcome limitations in other
resources and constraints such as to minimize financial and market risks and political
uncertainties as well.
34
Chapter 4
There are other reasons for SMEs to rely on co-operative strategies. The firm may
wish to capture the dynamics of industry; to gain rapid entry to a market; to capitalize on
market opportunity; to achieve great vitality, flexibility, and optimality in firm’s
economy; to gain market intelligence and information; and to promptly launch new
products, markets and technology (Berra et al., 1995).
Network helps to create interdependence among allied parties for market and
product development, establishment of support/service facilities and even transfer of
knowledge and technology within the network. It is a means to reach commercial scale
and scope through collaborative partnership (Berra et al., 1995). This therefore enhances
a firm competitive advantage.
Dana et al. (1999) state in their concluding notes, “If SMEs are to survive
increasing global competition, they must rely on the benefits of scale and scope
economies, only possible through cooperative arrangements such as alliances and
networks.”
With understanding and views gathered from preceding paragraphs on networks,
we hereby recognize network as an important determinant of internationalization.
Although network is dynamic and proactive, it is nevertheless not adequate by itself to
explain the process of internationalization. Internationalization is a complex issue that
cannot be adequately explained by any partial view. Thus we enlist here network as one
of the core constituent theories for building the integrated model of internationalization.
35
Chapter 4
It is therefore hypothesized:
Hypothesis 6: High degree of business network connection will result in high degree
of SMEs’ internationalization.
Hypothesis 6a: High degree of business network connection will result in low HHI.
Hypothesis 6b: High degree of business network connection will result in high
overseas sales.
Hypothesis 6c: High degree of business network connection will result in high number
of foreign countries with operations.
3.4 INWARD-INTERNATIONALIZATION: IMPORT
The impact of inward internationalization as facilitating platform for outward
internationalization is now being recognized. With the broad, macro and environment
changes that are taking place with accelerating pace and their effect on the nature of
business transactions, we expect increasing importance of inward international activities
in outward steps (Korhonen et al., 1996)
Market knowledge, information and learning are acquired while firm trades
internationally as an importer. Hence import and related experience acquired is thereby
considered as prelude for diminishing perceived obstacles, lowering uncertainty and
thereby assisting later decision making for export and other steps of internationalization
(Bonaccorsi, 1993; Luostarinen et al., 1994).
36
Chapter 4
Import therefore functions as a springboard and establishes business network
potential for later outward internationalization. In earlier studies on entry mode of firm
internationalization operation, import has been recognized as a primary starting point;
some prefer to call this as pre-export stage instead. Supplier-customer relationship can
later lead to business opportunities for export (Martin, 1991). Researchers on network
theory have been keen to accept inward international activities as critical part for network
creation and link to later lead to other outward steps of internationalization process
(Johanson and Mattsson, 1988; Johanson and Vahlne, 1990).
Even though internationalization and most other subjects of international business
have been well researched and theories well propounded, import as part of an
internationalization effort and contribution is yet to be generally acknowledged and
extensively studied. The subject of import is usually studied in the light of international
trade only. The early economic literature focused on impact of inward foreign direct
investment and its ability to stimulate export from the country in question - by foreign
and imitating firms.
But if we take internationalization as an evolutionary process, then import relates
directly and contributes significantly on a firm internationalization endeavor. Import
performance is important to outward effectiveness. In this manner, outward growth turns
out related with inward growth. As Korhonen et al. (1996) stated, “ … inward
international activities might have an important impact on the likelihood and outcome of
outward international steps.”
37
Chapter 4
In general import and export literature in relation to internationalization, we may
be able to summarize an overall simple process and linkage of inward- and outward-
internationalization as below (Buckley, 1989).
Import (inward internationalization) ⇒ Pre-export activities ⇒ Export ⇒
FDI and finally other outward internationalization activities
Based on this link, we recognize the possibility of high contribution of Inward-
Internationalization to explain the overall internationalization process. However we must
also admit that current business practices and complexities in international activities have
rendered this inward-internationalization theory alone inadequate to explain
internationalization of a firm. Thus enlisting Inward-Internationalization as one of the
constituent theories to build up the integrated model is appropriate.
The pre-export import experiences can be expressed from the perspectives such as
physical product operations, service operations and know-how operations as stated by
Korhonen et al. (1996). I thus base on their study to establish the hypotheses below.
Further discussion on these dimensions is done in next chapter.
Therefore, it is hypothesized:
Hypothesis 7: High degree of pre-export import experiences of physical products will
result in high degree of SMEs’ internationalization.
Hypothesis 7a: High degree of pre-export import experiences of physical products
will result in low HHI.
38
Chapter 4
Hypothesis 7b: High degree of pre-export import experiences of physical products
will result in high overseas sales.
Hypothesis 7c: High degree of pre-export import experiences of physical products
will result in high number of foreign countries with operations.
Hypothesis 8: High degree of pre-export import experiences of service operations will
result in high degree of SMEs’ internationalization.
Hypothesis 8a: High degree of pre-export import experiences of service operations
will result in low HHI.
Hypothesis 8b: High degree of pre-export import experiences of service operations
will result in high overseas sales.
Hypothesis 8c: High degree of pre-export import experiences of service operations
will result in high number of foreign countries with operations.
Hypothesis 9: High degree of pre-export import experiences of know-how operations
will result in high degree of SMEs’ internationalization.
Hypothesis 9a: High degree of pre-export import experiences of know-how operations
will result in low HHI.
Hypothesis 9b: High degree of pre-export import experiences of know-how operations
will result in high overseas sales.
Hypothesis 9c: High degree of pre-export import experiences of know-how operations
will result in high number of foreign countries with operations.
39
Chapter 4
3.5 SUMMARY OF HYPOTHESES
As highlighted in Chapter 2, no single theory is adequate to explain this complex
process of internationalization. One view of internationalization simply fails to fully
capture a firm’s behavior.
As for this research paper, I attempt to consolidate the key elements from four
core theories of internationalization to formulate an integrated model of
internationalization bearing interdisciplinary and multidisciplinary dimensions. This
derived model constitutes an all-embracing approach based on core theories such as
Eclectic Paradigm, Incremental Stage, Inward-Internationalization and Network. The key
elements studied in this thesis are ownership specific advantage, location specific
advantage, psychic/cultural distance, establishment chain, network, and pre-export import
experience. These elements are hypothesized to predict the degree of SMEs’
internationalization.
Figure 3 is the proposed model, with each line representing a hypothesized
relationship. Table 3 summarized all the hypothesized relationships.
40
Chapter 4
Figure 3 An Integrated Model of SMEs Internationalization
1.Ownership Specific Advantage
2.Location Advantage: Market Potential
Degree of Internationalization
1. HHI
1
2
33.Location Advantage: Investment Risk
4
4.Stage Theory: Psychic/Cultural
5 Stage Theory: Establishment Chain
7. Pre-export Import Experience: Physical Products
6. Business Network Connection
8. Pre-export Import Experience: Service Operations
9. Pre-export Import Experience: Know-How Operations
H
H
H
2. Overseas sales in 5
Hpercentage to total
sales 6
H3. Number of foreign
countries operated 7
HH
in
8
H9
H41
Chapter 4
Table 3 Summary of Proposed Hypotheses for Testing the SME Internationalization Model
H1 Ownership specific advantage DOI (+) H1a Ownership specific advantage HHI (-) H1b Ownership specific advantage Overseas sales (+) H1c Ownership specific advantage Number of countries (+) H2 Market potential DOI (+) H2a Market potential HHI (-) H2b Market potential Overseas sales (+) H2c Market potential Number of countries (+) H3 Investment risk DOI (-) H3a Investment risk HHI (+) H3b Investment risk Overseas sales (-) H3c Investment risk Number of countries (-) H4 Psychic/Cultural distance DOI (-) H4a Psychic/Cultural distance HHI (+) H4b Psychic/Cultural distance Overseas sales (-) H4c Psychic/Cultural distance Number of countries (-) H5 Establishment chain DOI (+) H5a Establishment Chain HHI (-) H5b Establishment Chain Overseas sales (+) H5c Establishment Chain Number of countries (+) H6 Business network connection DOI (+) H6a Business Network Connection HHI (-) H6b Business Network Connection Overseas sales (+) H6c Business Network Connection Number of countries (+) H7 Pre-export Import Experience, Physical Products DOI (+) H7a Pre-export Import Experience HHI (-) H7b Pre-export Import Experience Overseas sales (+) H7c Pre-export Import Experience Number of countries (+) H8 Pre-export Import Experience, Service Operations DOI (+) H8a Pre-export Import Experience HHI (-) H8b Pre-export Import Experience Overseas sales (+) H8c Pre-export Import Experience Number of countries (+) H9 Pre-export Import Experience, Know-How Operations DOI (+) H9a Pre-export Import Experience HHI (-) H9b Pre-export Import Experience Overseas sales (+) H9c Pre-export Import Experience Number of countries (+)
42
Chapter 4
CHAPTER 4
RESEARCH METHODOLOGY
This chapter describes the measures used for the variables. The instrument for the
survey is also introduced.
4.1 MEASURE
Overseas sales as percentage of total sales. This scale was measured by the
percentage of this year’s sales from regions beyond Singapore. The respondents were
asked to answer what percentage of this year’s (year 2000) sales were derived from each
of four different regions: Singapore, other Asean nations, other Asia nations, and rest of
the world and were told that these four regions sum to 100%. The percentage of sales in
the latter three regions was added up to measure the scale Overseas Sales as Percentage of
Total Sales.
Number of countries. This scale was measured by the question: “how
multinational do you think your firm is, in term of number of countries operated in?”.
This scale is a 7-point bipolar scale. The respondents can answer from choosing a
number from 1 to 7 with 1 representing “low” and 7 representing “high”.
HHI. The HHI index was developed and introduced by Orris C. Herfindahl (an
energy economist) in the 1950s. It is defined as
∑=
=n
iiSHHI
1
2 ,
where S can be any indicator of behavior such as market shares, sales and profits.
43
Chapter 4
In general, the index expresses the extent of concentration or dispersion of certain
economic behavior. The higher the measurement, the more concentrated (or less
dispersed) the behavior. It is mainly used by industrial economists to understand market
structure and to assess market power or degree of monopoly. It measures market
concentration of certain industry and therefore the monopolistic power of firms in the
industry. However the index has also been employed to measure other industrial
behaviors. Stigler (1964) related the HHI to the pricing behavior of oligopoly. Cowling
and Waterson (1976) demonstrated that HHI may be related to profitability in industries
with constant marginal cost.
With the implicit idea of concentration and dispersion, the index can also be
engaged as a measure of degree of internationalization. In this study, I intent to use the
HHI index to measure the degree of internationalization.
As to address the complexity of internationalization, a two-dimension
measurement is introduced here. It measures both the percentage of sales of firms and
geographical scope of sales of firms. Specifically,
∑=
=n
iiSHHI
1
2 , n =3,
where S1 +S2 +S3=1; S1 represents the percentage of sales in Year 2000 in ASEAN
nations except Singapore, S2 represents the percentage of sales in Year 2000 in Asia
nations except ASEAN, and S3 represents the percentage of sales in Year 2000 in the rest
of the world.
44
Chapter 4
The lower the ratio of HHI, the more geographically dispersed is the international
activities, and the greater the degree of internationalization is for a firm.
Ownership specific advantage. The measurement of ownership specific
advantage follows Agarwal and Ramaswami’s (1992) study. In their paper, they had
identified a four-item measure for ownership advantages. Two items relate to the
perceived quality of the firm’s development program in preparing employees to market
new differentiated products/services, and the perceived potential to create new and
creatively designed products/services. One item expresses firm’s multinational
experience, which refers to perceived readiness to handle international business. One
item measures firm size. Appendix A lists all the four items of this scale. For the three
items that describe the abilities to develop differentiated products and firm’s
multinational experience, the respondents are requested to answer by choosing a number
from 1 to 7 with 1 representing “weak” and 7 representing “strong”. For firm size, the
respondents are requested to answer by choosing one of the seven categories (Singapore
dollars on sales): “<1 million”, “1 to 5 million”, “5 to 10 million”, “10-15 million”, “15-
20 million”, “20-25 million”, and “>25 million”.
Location advantages. The measurement of this scale follows Agarwal and
Ramaswami’s (1992) study and it includes two dimensions: market potential and
investment risk. Market potential refers to the perceived managerial assessment of
market potential, growth potential, host government’s attitudes toward foreign firms in
general and the industry in particular. Investment risk refers to the risk of a breakdown in
the international trade and investment policies of the government, the risk that a host
government will interfere with the repatriation of profits and the control of foreign assets.
45
Chapter 4
Sample measures of market potential and investment risk are listed in Appendix A. For
all these items, the respondents are requested to answer by choosing a number from 1 to 7
with 1 representing “low/negative/unstable” and 7 representing “high/positive/stable”.
Psychic distance. Although the term ‘psychic distance’ includes aspect other than
culture, it is based on perceptions that are culturally influenced and determined (Fletcher
and Bohn, 1998). Therefore cultural distance has close proximity to psychic distance and
the measure proposed by Boyacigiller (1990) was employed in this study. His study
relates the difficulty of doing business in countries in different geographical blocks with
cultural differences among them. In the current study, the question is asked in the
following way: “How difficult is it to do business in the following regions because of the
difference in the location’s culture from that of Singapore?” For consistency with the
overall study, we split the world into three regions: ASEAN countries, Asia countries
excluding ASEAN members, and Rest of the World. This scale is a 7-point bipolar scale.
The respondents are requested to answer the question for all the three regions by choosing
a number from 1 to 7 with 1 representing “easy” and 7 representing “difficult”.
Years of international experience. This scale is used to measure the
establishment chain of Singapore SMEs. The participating companies were asked: “How
long have you engaged in term of number of years in international experiences/business
(since first import or export experience)? (Hoang, 1998). The scope of international
experiences/business are listed in the questionnaire, with the same eight items presented
in Table 4.
46
Chapter 4
Pre-export import experiences. This scale is based on Korhonen, Luostarinen,
and Welch’s (1996) measures. The experiences measured can be expressed from the
perspectives such as physical product operations, service operations and know-how
operations as stated by Korhonen et al. (1996). Physical product operations refer to the
intensity of importing of machinery and spare parts, raw materials and components,
products to be resold, prior to the firm’s first export experience. Service operations refer
to the intensity of engaging foreign parties to provide services related to planning and
supervising, installation and testing, training and development, prior to the firm’s first
export experience. Know-how operations refer to the intensity of being granted licenses,
technical know-how agreements, by foreign parties prior to the firm’s first export
experience. The respondents are requested to answer questions regarding these items by
choosing a number from 1 to 7 with 1 representing “low” and 7 representing “high”.
Business network connection. This scale follows Holm, Eriksson, and Johanson
(1996) and is measured by the extent to which the business with a new international
customer are affected by the relationship with existing customers, suppliers, the new
customer’s customer relationships, and the new customers’ relationship with
supplementary suppliers. This is a 7-point bipolar scale. The respondents can answer the
question for all the three regions from choosing a number from 1 to 7 with 1 representing
“easy” and 7 representing “difficult”.
4.2 DATA COLLECTION
500 firms were selected from Singapore Trade Directory of SMEs: Singapore 500
– SME “Into The Millennium”. This is an annual publication by DP Information Network
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Chapter 4
Pte Ltd, co-produced by Ernst & Young Consultant and supported by The Business Time
and SPRING. The year 2000 issue is used for this research paper. This publication is the
result of yearly effort to rank and describe top 500 SMEs in Singapore. On March 2001,
letter of invitation was sent to each of these 500 firms to invite CEO and senior managers
for an hour of interview and discussion at their office regarding internationalization issues
relating to SMEs.
Only 7 firms replied to our initial letters. Two weeks later, I called each firm by
telephone to reiterate the invitation. A total of 121 firms expressed interest in
participating this time. Schedule of interviews was arranged.
During meetings and interviews, I first discussed strategic issues, constraints,
business practices and opportunities relating to the internationalization of Singapore
SMEs. These were open discussions. Remarks and points raised during the sessions were
taken down to complement findings derived from quantitative analysis at later stage. A
session like this takes about 45 minutes to an hour. After this personal interaction, I asked
the managers to complete the Questionnaire Survey. The data from the survey responses
was the primary source of information for further data analysis. However, only 92 out of
these 121 firms interviewed agreed to reveal the data provided by them. As a result, 92
responses were sorted out to be valid data of this study.
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CHAPTER 5
STATISTICAL ANALYSIS AND DISCUSSION
5.1 DESCRIPTIVE STATISTICS
5.1.1 Statistics of the Responded Companies
The industries covered by this survey include both service and manufacturing
industries.
Regarding the size of the responded companies, among the valid sample, about
28.6% of Singapore SMEs have gross sales volume less than 1 million Singapore dollars
per year, 48.4 % with gross sales from 1 million to 5 million Singapore dollars, 11.0%
from 5 to 10 million, 4.4% from 10 million to 15 million. Not more than 5% of the firms
are operating with annual gross sales more than 20 million Singapore dollars.
Regarding the history of the responded companies, most SMEs (58%) in
Singapore had been established since 1990. The other 42% have more than ten years of
business experience.
On average, the responded companies have 30.67 full-time employees; 33.70% of
the full-time employees spend over 50% of their time on international activities.
Domestic sales at Singapore still take up high proportion for most firms at an
average of 71.04%. While for the remaining 28.96% foreign sales, a high proportion
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Chapter 5
measuring at 20.12% belongs to sales to ASEAN nations. It seems that Singapore SMEs
are mostly focus on regional and geographically close markets.
5.1.2 Statistics of International Activities
Eight international activities were listed as examples of main international
activities: import, export, licensing, joint venture, oversea business unit, oversea
manufacturing plant, oversea representative office and oversea sales personnel. A firm
that engages in one or more of these activities is considered internationalized. Table 4
reveals that there is high percentage of firms engaging in import and export activities.
Other activities are relatively less popular. Hence Singapore SMEs still operate in
traditional and primary mode of internationalization of which import and export are the
main focus.
The average number of countries that firms was engaged in ranges from 2.44 to
5.50. Hence, it can be concluded that most firms are both conservative and focused in
their approach on type of activities and on selection of countries.
Table 4: International Business Activities of Singapore SMEs
International Business Activities Percentage of Firms Engaged in
Number of Countries Firms
Engaged in (%) (Mean) 1. Import 78.3 4.99 2. Export 84.8 5.28 3. Licensing 2.2 4.50 4. Joint Venture 7.6 3.00 5. Oversea Business Unit 9.8 2.44 6. Oversea Manufacturing Plant 5.4 3.00 7. Oversea Representative Office 9.8 2.78 8. Oversea Sales Personnel 5.4 5.50
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Chapter 5
5.1.3 Statistics of Measured Variables
Ownership specific advantage
Table 5: Descriptive Statistics for Ownership Specific Advantage
Item Mean SD
1. Firm size (gloss volume of sales) 2.23 1.38
2. Product/service development program for new differentiated products/services 3.97 1.42
3. Firm’s creativity in new products/services 3.64 1.65
4. Firm’s capability: technology, management and finance 3.36 1.60
Table 5 illustrated the descriptive statistics for Singapore SMEs’ ownership
specific advantage. Item 1 views Ownership Specific Advantage from the perspective of
firm size; items 2 and 3 from differentiated products or services that enable the firm to
gain advantage; while item 4 from the perspective of multinational experience of the firm.
In term of firm size, Singapore SMEs have an average gross sale within 1-5
millions of S$.
In term of differentiation, Singapore firms have an average score at 3.97 on
product or service development program to market new differentiated products or
services. However, in the areas of creativity in design of new products or services, most
firms consider themselves below par at a mean score of 3.64.
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Chapter 5
It can be inferred here that in general Singapore firms have not attained a
significant degree of differentiation. Their products/services development program and
creativity in design are not rated high enough in comparison with most other international
players.
Innovation and creativity to bring about uniqueness and differentiation is very
much contingent to cultural context of the business community. Singapore is well known
of its highly disciplined and regulated environment. This on one hand discourages
fraudulent business practices, but on the other hand introduces rigidity that stifles
creativity and innovation. Further, Singapore firms are well protected under government
umbrella. This protective web immunes them from business risk. Thus when risk-taking
is concerned in introducing new differentiated products or services, Singapore firms
exhibit some degree of hesitation.
Many Singapore SMEs do not have a separate product development department
and R&D unit. This leads to unsystematic and less structured approach in new product
program as well as marketing effort. Programs are run without strategic and long-term
perspective. There is therefore lack of persistency and endurance. Especially operating
and being comfortable in the tradition of trading and re-export with not much value added
in products sold, most firms do not see high incentive in introducing new products or
services.
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In terms of multinational experience, Singapore firms admit their inadequacy to
compete at international level in term of technological, managerial and financial
capabilities. The score is at 3.36.
These statistics again depict that Singapore firms are still conservative and inward
looking. They are yet to undertake expansionary path to explore foreign markets
especially those at far off end like Africa, North and South Americas, and Europe. In
terms of capabilities, Singapore firms are still at an inferior position in relation to those
firms of advanced nations. Thus exposure, courage and willingness to learn might turn
out to be crucial for Singapore firms in the future.
In general, Singapore firms have low score in the aspect of Ownership Specific
Advantage. This makes them less competitive to enter and establish in some foreign
markets especially those of advanced nations. To sharpen this competitive advantage, the
firms therefore need to strengthen their managerial and technical skills.
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Location Advantage
Table 6: Descriptive Statistics for Location Advantage
ASEAN Asia Rest
Item Mean SD Mean SD Mean SD
Market Potential:
1. Market potential 4.30 1.39 4.14 1.52 3.51 1.53
2. Growth potential 4.07 1.37 3.95 1.46 3.50 1.41
3. Foreign government attitude on related business sector 4.02 1.18 3.92 1.12 3.92 1.32
4. Foreign government attitude on foreign firms
4.05 1.16 3.97 1.23 3.98 1.40
Investment Risk:
5. Political, economic and social stability 2.65 1.33 3.14 1.33 3.79 1.44
6. Risk of income convertibility and repatriation 3.79 1.39 4.10 1.41 3.97 1.39
7. Risk of foreign firms being taken over 3.61 1.31 3.77 1.45 3.56 1.63
Table 6 showed the descriptive statistics for Singapore SMEs’ location advantage
in three regions: ASEAN, Asia and Rest of the World.
Items 1 to 4 view Location Advantage from the perspective of market potential of
each regional block, viz. ASEAN, Asia and Rest of the World; items 5 to 7 gather the
respondent’s views on investment risks of each regional block.
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The higher the measure, the more differentiated or multinational the firm is. Score
4 is the central or an average point.
Most of the measures are moderate clustering at score point 4, which is the central
score of a seven-point scale.
In term of market potential which is further measured by business potential (item
1) and growth potential (item 2), Singapore firms tend to regard ASEAN and Asia having
greater potential than that of the rest of the world. Singapore firms are mainly regional
confining more activities in geographically close countries such as Malaysia, Indonesia
and perhaps at the farthest, China and India. Thus the firms’ exposure and acquired
knowledge are quite limited to these markets too. They may be more comfortable with
these traditional markets and thus ascribe higher score on their potential growth
opportunities.
The same phenomenon applies to items 3 and 4 which describe host governments’
attitude towards foreign firms and related business sectors. Familiarity with the markets
and close relations of Singapore government with the government of nearby countries
may be the main explanations. Another possible explanation is the rapid growth of China
market where Singapore firms tend to think they are familiar and capable to penetrate.
Hence in term of market potential, Singapore firms are still regional and restricted
in their opinions to see ASEAN and Asia as having high potential. They are yet to gain
business exposure at global level on the vast potential and opportunities that lie beyond
Asia.
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However in term of investment risk, Singapore firms tend to subscribe a low
opinion of ASEAN nations. ASEAN is generally viewed as less stable (item 5) with
higher risk of income conversion and repatriation. This low opinion is understandable in
view of Indonesia political instability, social unrest in Thailand and Philippines arising
from 1997 financial crisis, and growing tensions in the Singapore-Malaysia relations.
Thus we have a paradoxical situation, Singapore firms are more comfortable to
deal with neighboring countries in term of market potential but at the same time are
cautions in term of risk profile of these countries.
Psychic Distance (Cultural Differences) and Years of Exporting
Descriptive statistics for Psychic Distance (Cultural Difference) and
Establishment Chain (Years of Exporting) were tabulated in Table 7. Cultural Difference
is a single item in the questionnaire but expressed with three regions: ASEAN, Asia and
Rest of the World.
Table 7: Descriptive Statistics for Psychic Distance and Years of Exporting
Item Mean SD
Cultural Difficulty: ASEAN 4.37 1.66
Cultural Difficulty: Asia 4.78 1.48
Cultural Difficulty: Rest of the world 5.29 1.61
Years of Exporting 2.58 1.37
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Chapter 5
Psychic or cultural distance is investigated from level of difficulty on conducting
business in foreign countries. The higher the score the more difficult it is to conduct
business in a particular country block.
The measures link cultural similarity directly with geographical proximity.
Singapore firms consider it easier to do business with their neighboring countries in
ASEAN because of cultural similarity. The score for ASEAN is the lowest among the
three regional blocks. Singapore firms are more comfortable in dealing with ASEAN
nations.
Thus to Singapore firms psychic or cultural distance from other nations appears to
vary proportionately with geographical distance. In this respect it can be affirmed that
Singapore firms will tend to internationalize gradually by first extending their presence in
nearby neighboring nations and later stretching outward to more distant land. This
phenomenon confirms well to the understanding of Incremental Stage theory.
Pre-export Import Experiences
Descriptive statistics on items related to Pre-export Import Experience was
showed in Table 8.
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Chapter 5
Table 8: Descriptive Statistics for Pre-export Import Experience
Item Mean SD
Physical Product Operation:
1. Intensity of Importing Machines and Spare Parts 3.07 1.99
2. Intensity of Importing Raw Materials and Components 2.91 2.07
3. Intensity of Importing Products for Resale 3.58 1.82
Service Operation:
4. Intensity of Engaging Foreign Services on Planning and Supervision 2.42 1.59
5. Intensity of Engaging Foreign Services on Installation of Machines, Equipment and Systems 2.39 1.72
6. Intensity of Engaging Foreign Services on Training and Development 2.38 1.50
know-How Operation:
7. Intensity of Foreign Licenses Granted 2.21 1.69
8. Intensity of Other Foreign Representation Right Granted 2.26 1.64
Inward Internationalization studies three possibilities that a firm employs its early
import experience as a platform for later (other) international activities. These
possibilities are import of physical product operation (items 1 to 3), import of service
operation (items 4 to 6) and know-how operation (items 7 to 8).
The higher the score the higher the frequency of import activities is prior to export
or other international activities. Most of the score here rate below 4 points.
This is understandable in Singapore context. In early 60s and 70s and even
presently, Singapore firms have prospered mainly from regional trading activities. This
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Chapter 5
has been substantially supported by the country efficiency in physical infrastructure and
port management. Thus import and export are usually conducted almost simultaneously.
Singapore firms import raw materials or semi finished products from their ASEAN
counterparts and re-export to more advanced nations. The reverse also holds true.
Singapore firms import high value-added finished products from advanced nations and re-
export to ASEAN nations. Import and export experiences are thus gained concurrently.
There are rare cases when Singapore firms have gone through numerous and cumulative
import experience in order to venture into export activities. Hence the intensity of import
activities prior to export activities is not high in most cases.
Thus in general, import can be a means for Singapore firms to venture almost
immediately to export or other international activities. Import here, as the survey result
suggests, is not considered as a learning process that some time later enables Singapore
firms to expand into other international activities.
Business Network Connection
We tabulate below some descriptive statistics on those items related to Network
variable: Business Network Connection.
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Chapter 5
Table 9: Descriptive Statistics for Business Network Connection
Item Mean SD
1. New international customer introduced by own existing customers 3.11 1.49
2. New international customers introduced by own existing suppliers 2.92 1.37
3. New international customer introduced by his existing customers 2.97 1.33
4. New international customers introduced by his existing suppliers 2.87 1.43
Network is here expressed by the relationship of the firm with its customers or
suppliers that later leads to creation of new business opportunities. The higher the score
the greater is the intensity such relation brings about new businesses.
All measures are below the average score of 4 points. This indicates that
Singapore firms do not usually derive new businesses through their relationship with
existing customers or suppliers. In the context of Asian culture, relationship plays an
important role in business. It not only sustains and strengthens continuous business
transactions but also introduces new customers and markets. In the case of Singapore
firms, this role is more prominent for the sustenance and continuity of existing customers
and suppliers, rather than creation of new business ventures.
5.2 FACTOR ANALYSIS
For all the scales, exploratory factor analysis was employed to test their construct
validity, using principal component extraction method and varimax rotation method
(criterion for the number of factors to extract: eigenvalue > 1).
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Chapter 5
Table 10 reveals that, for ownership specific advantage, all the four measuring
items loaded on one single factor, and have item loadings greater than the .40 criterion
level (Ford, MacCallum, & Tait, 1986). 68.15% of the total variance was explained by
the only factor.
Table 10: Exploratory Factor Analysis for Ownership Advantage
Item Loading 1. Firm size (gloss volume of sales) .654 2. Product/service development program for new differentiated
products/services .881
3. Firm’s creativity on new products/services .852 4. Firm’s capability: technology, management and finance .823
Table 11 reveals that, for location advantage, the four items of market potential
and one item of investment risk were loaded on one factor, and two other investment risk
items were loaded on another factor. In this study, the item proposed to be measuring
investment risk but loaded on market potential was eliminated. As the results, two factors
were sorted out for measuring location advantage this scale. The two factors in total
explained 62.09% of the variance in location advantage.
Table 11: Exploratory Factor Analysis for Location Advantages
Item Loading
Market Potential
Investment Risk
1. Market potential .761 2. Growth potential .863 3. Foreign government attitude on related business sector .718 4. Foreign government attitude on foreign firms .702 -.121 5. Political, economic and social stability .512 .341 6. Risk of income convertibility and repatriation .725 7. Risk of foreign firms being taken over .836
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For inward experience, the three items proposed to be measuring physical
products loaded on one factor, and the items proposed to be measuring service operations
and know-how operations loaded on another factor. This may be due to the fact that
physical products are tangible while service operations and know-how operations are
intangible. The two factors in total explain 73.95% of the variance in inward experience.
Hence I merged service operations and know how operations into a single dimension
which I call as intangible operations. This suggests that the earlier proposed hypotheses 8
& 9 mention in chapter 3 can be tested concurrently (refer to figure 3 and table 3 in
chapter 3).
Table 12: Exploratory Factor Analysis for Inward Experience
Item Loading Tangible Intangible
Physical Product Operation: 1. Intensity of Importing Machines and Spare Parts .255 .839 2. Intensity of Importing Raw Materials and Components .309 .799 3. Intensity of Importing Products for Resale .117 .863 Intangible Operation (Service & Know-How): 4. Intensity of Engaging Foreign Services on Planning and
Supervision .830 .223
5. Intensity of Engaging Foreign Services on Installation of Machines, Equipment and Systems
.699 .412
6. Intensity of Engaging Foreign Services on Training and Development
.885
7. Intensity of Foreign Licenses Granted .727 .404 8. Intensity of Other Foreign Representation Right Granted .805 .369
Table 13 reveals that measures of business network connection loaded on one
single factor. 61.43% of the total variance was explained by the only factor.
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Chapter 5
Table 13 Exploratory Factor Analysis for Business Network Connection
Item Loading 1. New international customer introduced by own existing customers .737 2. New international customers introduced by own existing suppliers .844 3. New international customer introduced by his existing customers .838 4. New international customers introduced by his existing suppliers .706
After confirming the unidimensional nature of the constructs using factor analysis,
the Cronbach’s Alpha was reported in Table 14. The generally accepted lower limit of
Cronbach Alpha is .70 (Hair, Anderson, Tatham, & Black, 1998: 118). And a Cronbach
Alpha beyond .90 may indicate redundant items and inefficiency in developing
measurement scales (Van de Ven & Ferry, 1980: 80). In this study, the Cronbach Alpha
for each scale is within the desirable range.
Table 14: Reliability of Variables
Independent Variables Number of Items Alpha Ownership specific advantage 4 .82 Market potential 4 .89 Investment risk 2 .79 Physical products operation 3 .84 Intangible operation 5 .89 Business network connection 4 .78
5.3 DESCRIMINANT VALIDITY
The variables in Table 14 were further examined in their Discriminant validity.
Confirmatory Factor Analysis (CFA) was employed to test Discriminant validity, with the
software AMOS 4.0. Appendix B illustrated the CFA results between any two variables
and confirmed that the measures in this study are reliable in their Discriminant validity.
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Chapter 5
5.4 MEANS, STANDARD DEVIATIONS, AND CORRELATIONS
The means, standard deviations and correlations for the measured variables were
also examined. Table 15 reports the results of these analyses.
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Chapter 5
Table 15 Means, Standard Deviations, and Correlations (N=92)
Mean SD 1 2 3 4 5 6 7 8 9 10 11
1. Ownership advantage 3.31 1.232. Market potential 3.94 .90 .387** 3. Investment risk 4.20 1.00 .201 -.0454. Cultural distance 4.81 1.36 -.350** -.177 -.308**5. Year of int. exp. 7.87 5.01 .297** .087 .047 .211*6. Physical products 3.18 1.71 .606** .199 .119 -.366** .1467 Service and know-how 2.33 1.36 .541** .346** .013 -.273** -.006 .603** 8. Network connection 2.97 1.10 .210* .410** -.223* .036 -.039 .037 .425** 9. Number of countries 2.90 1.65 .674** .508** .051 -.147 .248* .396** .469** .372** 10.HHI .83 -.445**.23 -.356** .032 .311** -.249*.065 -.290** -.068 -.471**11.Oversea sales percentage .29 .23 .355** .237* -.143 -.074 .220* .159 .162 .036 .569** -.308**** Correlation is significant at the 0.01 level (2-tailed). * Correlation is significant at the 0.05 level (2-tailed).
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Chapter 5
5.5 REGRESSION ANALYSIS
Table 16 Regression Analysis in Testing the Determinant of DOI
Model 1: Overseas sales in percentage
Model 2: Number of countries
Model 3: HHI
Independent variables: β VIF β VIF β VIF Ownership advantage .33* 2.36 .51** 2.36 -.47** 2.55 Market potential .12 1.36 .23** 1.36 -.22** 1.38 Investment risk -.27* 1.21 .01 1.21 .17† 1.18 Psychic distance -.06 1.52 .08 1.52 .16 1.52 Years of int. exp. .14 1.31 .06 1.31 .16 1.34 Physical product -.11 2.06 .02 2.06 .15 2.13 Intangible operation .10 2.35 .08 2.35 -.04 2.32 Network connection -.19 1.66 .13 1.66 .17 1.56
R2 .21 .55 .32 Adjusted R2 .14 .51 .25
** p < .01 * p < .05 † p < .10
Table 16 illustrated the results of regression analysis for all the three models,
each model testing one of the three dimensions of DOI (Overseas sales in percentage
of total sales, number of countries operated in, and HHI).
Collinearity statistics were also examined for the concern of multicollinearity
existed among independent variables. Since VIF values for all the values are lower
than 10, multicollinearity is not a problem in the current study.
Regression results confirmed ownership specific advantage to be a strong
predictor of degree of internationalization. It is positively associated with overseas
sales in percentage of total sales (β = .33, p < .05, supporting Hypothesis 1b),
positively associated with numbers of countries operated in (β = .51, p < .01,
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Chapter 5
supporting Hypothesis 1c), and negatively associated with HHI (β = -.47, p > .10,
supporting Hypothesis 1a).
Market potential can predict two dimensions of degree of internationalization.
It is positively associated with numbers of countries operated in (β = .23, p < .01,
supporting Hypothesis 2c), and negatively associated with HHI (β = -.22, p < .01,
supporting Hypothesis 2a). However, it is not significantly associated with overseas
sales in percentage of total sales (β = .12, p > .10, failing to support Hypothesis 2b).
It seems market potential is related to degree of internalization in terms of breath and
diversity, but not in extent.
On the other hand, another factor in location advantage, investment risk, is
significantly associated with overseas sales in percentage of total sales (β = -.27, p <
.05, supporting Hypothesis 3b), while it fails to associated with number of countries
operated in (β = .01, p > .10, not in support of Hypothesis 3c), and only has marginal
association with HHI (β = .17, p < .10, supporting Hypothesis 3a). Investment risk is
thus related to degree of internationalization in terms of extent and diversity, but not
in breath.
To our surprise, the other variables all failed to predict any dimension of
degree of internationalization.
Table 17 summarizes the results of all the hypothesized relationships.
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Chapter 5
Table 17: Summarized Outcomes of Three Regression Models
Model 1
Model 2 Model 3 Remark
DOI DV: Oversea sales
DV: Number of countries
DV: HHI
Ownership advantage
H1b Supported
H1c Supported
H1a Supported
Supported by Three Models
Market potential
H2b Not supported
H2c Supported
H2a Supported
Supported by Two Models
Investment risk
H3b Supported
H3c Not supported
H3a Marginally supported
Supported by Two Models
Psychic distance
H4b Not Supported
H4c Not supported
H4a Not supported
Not Supported at all
Years of int. exp.
H5b Not Supported
H5c Not supported
H5a Not supported
Not Supported at all
Network connection
H6b Not Supported
H6c Not supported
H6a Not supported
Not Supported at all
Import exp. of physical products
H7b Not Supported
H7c Not supported
H7a Not supported
Not Supported at all
Import exp. of intangible operations
H8b,9b Not Supported
H8c,9c Not supported
H8a,9a Not supported
Not Supported at all
With the three models developed, there are altogether three out of the nine
hypothesized predictors received empirical support for explaining internationalization
of Singapore firms. These three variables are ownership advantage, market potential
(location advantage), and investment risk (location advantage).
Psychic/cultural distance, establishment chain, pre-export import experience,
and network do not get support from any of the three models and thus they do not
explain the degree of internationalization of Singapore firms.
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Chapter 5
From the above results, we can conclude that ownership advantage, location
advantage on market potential, and location advantage on investment risk, each has
independent impact on the degree of internationalization of Singapore SMEs. These
factors, taken together, explain a greater percentage of the variance suggesting that an
integrative perspective may still be useful for this purpose.
Ownership advantage and location advantage, which are core elements of
Eclectic Paradigm, receive strong support in explaining internationalization of
Singapore SMEs. Thus Singapore SMEs consider of the following factors: their size,
the ability to be different with the host countries’ firms and their experience in dealing
at multinational levels, as some prior conditions to venture into regional markets such
as Malaysia, Indonesia and Thailand and other international markets such as China,
India and Middle East countries. In terms of location advantage, Singapore SMEs
also evaluate the market potential in term of growth of those foreign markets or
countries to move in. They arc concerned about the risk levels--particularly the
attitude of the foreign government, general stability of the countries, ability to
repatriate income and the possibility of expropriation from foreign government.
Measures for Inward internationalization did not receive any support. As
explained previously, for most Singapore firms, owing to their unique trading
tradition, import and export activities occurred almost concurrently. These
simultaneous acts, to a great extent, explain why Inward Internationalization did not
receive support. Thus generally, Singapore SMEs may proceed to internationalization
activities such as exports, setting up foreign offices and others without really having
obtained prior import experience.
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Chapter 5
Psychic or cultural distance did not receive any support for explaining the
internationalization of Singapore firms. Cultural factors may not be an issue for most
Singapore firms since Singapore is known as an international city with immigrants of
different races, religious background and nationalities from neighboring countries and
even far off countries like the States and U.K (expatriates). Local firms therefore are
enriched with the experience to manage in a multi-cultural context. Thus when
Singapore firms aim to venture internationally, cultural factors may not be a major
consideration for them.
Another variable of Stage Model, namely establishment chain which is
expressed in term of years of international experience, also did not receive support.
With both Psychic distance and establishment chain failing to relate with DOI, the
Stage Model is therefore not relevant in explaining the internationalization endeavour
of Singapore SMEs. Thus Singapore firms appear to be proceed to internationalization
without going through the incremental, evolutional, progressive and linear steps as
purported by the Stage Model.
Last but not the least, Business Network Connection also fails to explain
internationalization of Singapore SMEs. Thus relationship with customer’s customers,
suppliers, and with supplier’s customers and suppliers may not enhance the degree of
internationalization of Singapore SMEs. These findings contradict to the general
understanding that Asian businesses usually operate and benefit a lot from “Guan Xi”
or Chinese word of relationship.
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Chapter 6
CHAPTER 6
CONCLUSIONS AND IMPLICATIONS
We began this study with an aim to establish an integrated model of
internationalization for Singapore SMEs.
We tested four principal theories of internationalization in order to see if each
theory applies to Singapore context. We have also moved one step further to see if by
synthesizing these theories, a better understanding of internationalization for
Singapore firms can be arrived. These theories are Eclectic Paradigm, Incremental
Stage, Inward Internationalization and Network.
In conducting quantitative analyses, we identified with the earlier contributors’
works in their respective areas to arrive at dimensions for each theory of
internationalization. Location advantage has two dimensions such as market potential
and investment risk. Stage or Incremental Theory has dimensions such as Psychic
(cultural) distance and establishment chain. Our factor analysis suggests that Inward
Internationalization (pre-export import experiences) can be expressed in two
dimensions, viz. physical products and intangible operations. For each of the other
theoretical constructs such as ownership advantage and business network, a single
dimension serves well.
In our effort to arrive a broader base for measuring Degree of
Internationalization (DOI) for Singapore SMEs, we employed three measures such as
HHI, oversea sales in percentage to total sales and number of countries operated in.
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Chapter 6
These measures enable us to assess the diversity, extent and breadth of
internationalization.
Our quantitative analyses suggests only one traditional theory out of the
selected four is capable to explain internationalization of Singapore firms. Eclectic
Paradigm in term of ownership advantage is quite strong explaining the phenomenon
while location advantage also plays a role in the internationalization of Singapore
SMEs.
Other theories such as Stage Theory, Inward Internationalization and Business
Network fail to get any support from our quantitative analyses.
In view of these results, we may have to conclude here that we are not able to
derive at this junction with concrete evident support an integrated model of
internationalization for Singapore SMEs.
We can at most say here that Singapore SMEs adopt internationalization
decision if they are comfortable with the market and business growth potential of host
countries, investment risk in terms of social-eco-political stability. They are also keen
to venture into other lands if they are more capable and superior in relation to host
countries’ firms in the area of technology, managerial skills, finance, and ability to be
different and innovative. Thus Singapore SMEs basically subscribe to the belief of
Eclectic Paradigm. They are therefore conventional and cautious in their approach in
internationalization.
72
Chapter 6
We have tabulated in the following table 18 the various determinants, internal
factors, external conditions and related competence that are helpful to business
practitioners for strategic decision making. These are strategic and operational
implications for each theoretical constructs such as Eclectic Paradigm, Stage Theory,
Inward Internationalization and Business Network.
In the light of the current study’s results, we would like to make some
suggestion to managers of Singapore SME that intend to venture into regional and
international markets. Apart from considering the critical factors of ownership and
location advantages for their internationalization decision, they might consider other
critical factors relating to Stage Theory, Inward Internationalization and Network that
can be important as well. Singapore SME managers can be more proactive to gain
some broader perspectives and a holistic view in internationalization of businesses.
This approach is highly endorsed by international business thinkers like Buckley
(1989, 2002), Johanson and Mattsson (1988), Johanson and Vahlne (1990), O’Farrell
et al (1998), and of course Beamish (1990) himself. These researchers assert that
holistic, multi-dimensional and integrative views on internationalization can help in
making better professional decisions regarding internationalization. Thus other
factors as highlighted in table 18 for Incremental Stage, Network and Inward
Internationalization can be considered and used to evaluate any decision on
internationalization. Such considerations should bring about greater opportunities for
any Singapore SME to go abroad and harvest accordingly.
73
Chapter 6
Table 18: Critical Factors of Consideration for Internationalization
Theoretical Construct
Variable
Critical Factors of Consideration
Eclectic Paradigm
Ownership Advantage
• New and differentiated products, • New and differentiated services, • Capability to create and design new
products and services, • Proportion of foreign earning, • Number of countries operating in, • Technological capability; • Managerial capability; • Financial capability.
Location Advantage • Regional market potential of related business sectors,
• Regional growth potential of the business,
• Foreign government attitude toward related business sector,
• Foreign government attitude toward foreign firms,
• Political stability of foreign countries, • Economic stability of foreign countries, • Social stability of foreign countries, • Risk of repatriation of income, • Risk of nationalization.
Incremental Stage
Psychic (Cultural) Distance
• Difficulty in doing business due to location cultural differences.
Establishment Chain • Number of years of export experience.
Network Business Network
Connection • Relationship with existing customers, • Relationship with existing suppliers, • Existing customers’ introduction on their
customers, • Existing suppliers’ introduction on their
customers.
74
Chapter 6
Table 18: Critical Factors of Consideration for Internationalization (Continued)
Theoretical Construct
Variable
Critical Factors of Consideration
Inward Internationalization
Pre-export Import Experience in Physical Product Operations
• Experiences in importing machinery, spare parts and others
• Experiences in importing raw materials and component parts
• Experiences in importing products for resale
Pre-export Import Experience in Service Operations
• Experiences in engaging foreign entities to provide services in planning and supervising
• Experiences in engaging foreign entities to provide services in installing or testing on machines, equipments and other physical systems
• Experiences in engaging foreign entities to provide services in training and development
Pre-export Import
Experience in Know-How Operations
• Experiences of being granted licenses by foreign entities to provide their products and services
• Experiences of being granted any other form of representation right by foreign entities to provide their products and services
75
Chapter 6
Our suggestion for Singapore SMEs managers are that:
a. they continue to focus on developing and sharpening their competitive
advantages in ownership advantage such as differentiations in
technologies, products, services, managerial capacity and capability,
and financial capacity.
b. if the strategies of the experienced firms are a good indicators of best
practice, then the managers should continue to look for the correct
locations to gain competitive advantages in those markets/countries
that indicate market potential and growth, social-eco-political stability,
leniency in repatriation of incomes, and low risk of nationalization on
business enterprises.
c. although there is no obvious support for other variables, as highlighted
in previous paragraph, they can still be important. Perhaps many
Singapore SMEs are still at the early stage of evolution in
internationalization. Their focus is still quite regional in the
neighboring markets/countries as our early descriptive statistic analysis
suggests. As they gradually venture into other markets, establishment
chain that measured by years of international experiences, factors
relating to business and social networks can turn out crucial
determinants for internationalization and global strategy. Hence for
76
Chapter 6
medium and long term strategic implication, SME managers should not
neglect these aspects of internationalization.
d. in order to benefit from global trend, Singapore SME managers have to
look beyond traditional markets, their conventional practices and
conservative mindset. In medium and long run, there is a need for them
to be more innovative and adventurous in their approaches and global
strategies.
There are some limitations to this study.
The model is confined to Singapore context at this juncture. It is hoped that
the same model can be tested for SMEs in other economies. It is my sincere desire
that other future research render better support and findings on developing an
integrative model of internationalization.
In the area of network theory, this model does not test and therefore include
the social aspect of network. Though social networking has been a subject of study in
the sociology and behavioral science disciplines, it can influence internationalization
decision and behaviour. Especially in Asian culture where the predominant races and
nationalities involving heavily in commercial sectors are Chinese, Indian and
Japanese whose social consciousness and coherence is high, social networks are likely
to play a crucial part in business transactions. Japanese are well known for running
big corporations and transact business within the keiretsu structure; Chinese and
Indian are well known in building up family business empire operated mainly by
77
Chapter 6
family members and close kin. As Singapore business community especially in the
SME sector is predominantly dominated by Chinese and Indian, we can not neglect
that social network and its associated factors may contribute to their move to
internationalize their businesses especially to Malaysia, China and India.
For measurement of some variables, more items can be included in the
questionnaires. Psychic distance and establishment chain can probably include more
items instead of just one item each at aggregate perspective. Hofstede (1980, 1989)
elaborates on individual cultural attributes such as power distance, individualism,
masculinity and uncertainty avoidance. Each of these may each influence
independently internationalization decision and entry mode choice either at corporate
or individual manager level. Thus they should be examined separately. By engaging
so we may be able to avoid sampling problems and over aggregation to therefore lead
to over simplified conclusion. This additional effort may lead to new light on the
incremental stage theory and its contribution on this integrated model.
As for degree of internationalization (DOI), a supplementary version as
suggested by Reuber and Fischer (1997) may be employed to include other
dimensions of measurement and derivation. Reuber and Fischer (1997) consider
measuring DOI from the perspective of a firm's extent of involvement in terms of
geographical scope of sales, volume of sales and time spent by employees in
international activities. In the present study, we did not include measurement of
involvement of employees in international activities. We suggest that researchers
intending to derive DOI may like to consider including measurement of involvement
of employees as well.
78
Chapter 6
Last but not the least, it is hereby hoped that the effort made here
will stimulate further research and help business practitioner to formulate more
effective internationalization strategies.
79
Appendix
APPENDIX A
MEASURES USED IN PAPER
80
Appendix
APPENDIX A: MEASURES USED IN PAPER
All items are on a 7-point scale unless otherwise indicated.
OWNERSHIP ADVANTAGES
Firm Size
What is your firm’s gross volume of business (sales) in year 2000? (in millions of S$)
(Please tick in one of the brackets only)
Ability in Developing Differentiated Products
How do you rate your product/service development program in terms of preparing your
firm to market new differentiated products/services?
How do you rate your firm’s potential to create new and creatively designed
products/services?
Multinational Experience
How capable is your firm in terms of technological, managerial, and financial capabilities
to handle international expansion?
LOCATION ADVANTAGES
Market Potential
What do you think is the market potential of your business in the following regions?
(Three regional blocks: ASEAN, Asia and the rest of the world)
81
Appendix
What do you think is the growth potential of your business in the following regions?
(Three regional blocks: Asia and the rest of the world)
Investment Risk
What do you think is attitude of government in the following regions toward your
business sector? (Three regional blocks: ASEAN, Asia and the rest of the world)
What do you think about the attitude of government in the following regions toward
foreign firms? (Three regional blocks: ASEAN, Asia and the rest of the world)
What do you think about the general stability of the political, social, and economic
conditions in the following regions of your investment? (Three regional blocks:
ASEAN, Asia and the rest of the world)
What do you think is the risk of converting and repatriating your income in the following
regions? (Three regional blocks: ASEAN, Asia and the rest of the world)
What do you think is the risk of expropriating of firms from the following regions?
(Three regional blocks: ASEAN, Asia and the rest of the world)
PSYCHIC/CULTURAL DISTANCE
How difficult is to do business in the following countries because of the difference in the
location’s culture from that of Singapore? (Three regional blocks: ASEAN, Asia and
the rest of the world)
82
Appendix
ESTABLISHMENT CHAIN
How long have you engaged in term of number of years in international
experiences/business (since first import or export experience)? (Hoang, 1998).
PHYSICAL PRODUCT OPERATIONS
Rate your intensity/frequency of importing of machinery, spare parts etc prior to your first
export experience.
Rate your intensity/frequency of importing of raw materials and components prior to your
first export experience.
Rate your intensity/frequency of importing of products to be resold prior to your first
export experience.
SERVICE OPERATIONS
Rate your intensity/frequency of engaging foreign parties/firms to provide services related
to planning and supervising prior to your first export experience.
Rate your intensity/frequency of engaging foreign parties/firms to provide services related
to installation or testing on machines, equipments and other physical systems prior to
your first export experience.
Rate your intensity/frequency of engaging foreign parties/firms to provide services related
to training and development prior to your first export experience.
83
Appendix
KNOW-HOW OPERATIONS
Rate your intensity/frequency of being granted licenses by foreign parties/firms to
provide their products/services in Singapore prior to your first export experience.
Rate your intensity/frequency of being granted any other form of representation right by
foreign parties/firms to provide their products/services in Singapore prior to your first
export experience.
BUSINESS NETWORK CONNECTION
To what extent is your business with a new international customer affected by any
relationship with your own other existing customers?
To what extent is your business with a new international customer affected by any
relationship with your own suppliers?
To what extent is your business with a new international customer affected by any of his
customer relationships?
To what extent is your business with a new international customer affected by any of his
relationships with suppliers of products/services supplementary to yours?
84
Appendix
APPENDIX B
TESTING DISCRIMINANT VALIDITY WITH
CONFIRMATORY FACTOR ANALYSIS
85
Appendix
Ownership advantage & Market Potential
Chi-square= 62.664, df=19, p=.000, Normed Chi-square= 3.298, CFI=.885, NFI=.830, RMSEA=.159
Chi-square= 167.469, df=20, p=.000, Normed Chi-square= 8.373,
CFI=.611, NFI=.589, RMSEA=.285 Note: a. Software used: AMOS 4.0. err1 to err8 are error terms, Owner1 to Owner4 are
corresponding items of the Ownership Advantage factor, Market1 to Market4 are corresponding items of the Market Potential factor.
b. The two-factor model is superior to one-factor model.
eer1 Owner1
Owner2
Owner3
Owner4
1
Ownership advantage
Market1
Market2
Market3
1
Market potential
Market4
1
1
1
1 eer2
eer3
eer4
1 eer5
1 eer6
1 eer7
1 eer8
eer1 Owner1
Owner2
Owner3
Owner4
1
1
1
1 eer2
eer3
eer4
eer5 Market1
Market2
Market3
Market4
1
1
1
1
eer6
eer7
eer8
Ownership advantage & Market potential
1
86
Appendix
Ownership advantage & Investment risk
Chi-square=24.245, df=8, p=.002, Normed Chi-square=3.031, CFI=.918, NFI=.886, RMSEA=.149
Chi-square= 57.856, df=9, p=.000, Normed Chi-square= 6.428, CFI=.752, NFI=.728, RMSEA=.244
Note: a. Software used: AMOS 4.0. err1 to err6 are error terms, Owner1 to Owner4 are
corresponding items of the Ownership Advantage factor, Risk1 to Risk2 are corresponding items of the Investment Risk factor.
b. The two-factor model is superior to one-factor model.
eer1 Owner1
Owner2
Owner3
Owner4
1
Ownership advantage
Risk1
Risk2
1 Investment risk
1
1
1
1 eer2
eer3
eer4
1 eer5
1 eer6
eer1 Owner1
Owner2
Owner3
Owner4
1
1
1
1
Risk1
Risk2
Ownership advantage & Investment risk
1
eer2
eer3
eer4
1 eer5
1 eer6
87
Appendix
Ownership advantage & Physical product
1 Owner1
1 Owner2
Owner3
Owner4
1
Ownership advantage
1 Physical1
1 Physical2
1
1
Physical product
Physical3
1
1
eer1
eer2
eer3
eer4
eer5
eer6
eer7
Chi-square=46.297, df=13, p=.000, Normed Chi-square=3.561, CFI=.897, NFI=.865, RMSEA=.168
Owner1
Owner2
Owner3
Owner4
1
1
1
1
1
1 Physical1
1 Physical2
1 Physical3
Ownership advantage & Physical product
eer1
eer2
eer3
eer4
eer5
eer6
eer7
Chi-square= 97.022, df=14, p=.000, Normed Chi-square= 6.930, CFI=.742, NFI=.717, RMSEA=.255
Note: a. Software used: AMOS 4.0. err1 to err7 are error terms, Owner1 to Owner4 are
corresponding items of the Ownership Advantage factor, Physical1 to Physical3 are corresponding items of the Physical Product factor.
b. The two-factor model is superior to one-factor model.
88
Appendix
Ownership advantage & Intangible product
Chi-square=73.6CF
Chi-square= 160.CF
Note: a. Software used: AMOS
corresponding items of corresponding items of
b. The two-factor model is
eer1 Owner1
Owner2
Owner3
Owner4
1
Ownership advantage
1
1
1
1 eer2
eer3
eer4
1 eer5
1 eer6
1 eer7
1 eer8
eer9
eer1 1
1 eer2
1 eer3
1 eer4
1 eer5
1 eer6
1 eer7
1 eer8
eer9 1
Intangible1
27, df=26, p=.000, Normed Chi-square=2.832, I=.899, NFI=.855, RMSEA=.142
1
4tt
Intangible2
Intangible3
Intangible4
1
Intangible5
Intangible product
Owner1
Owner2
Owner3
Owner4 Ownership advantage & Intangible product
1
Intangible1
01, df=27, p=.000, Normed Chi-square= 5.930, I=.719, NFI=.686, RMSEA=.233
.0. err1 to err9 are error terms, Owner1 to Owner4 are he Ownership Advantage factor, Intangible1 to Intangible5 are he Intangible Product factor. superior to one-factor model.
Intangible5
Intangible2
Intangible3
Intangible4
89
Appendix
Ownership advantage & Network connection
Chi-square=58.815, df=19, p=.000, Normed Chi-square=3.096, CFI=.862, NFI=.814, RMSEA=.152
Chi-square= 154.3CF
Note: a. Software used: AMOS 4
corresponding items of corresponding items of
b. The two-factor model is
eer1 Owner1
Owner2
Owner3
Owner4
1
Ownership advantage
Network1
Network 2
Network 3
1
Network connection
Network 4
1
1
1
1 eer2
eer3
eer4
1 eer5
1 eer6
1 eer7
1 eer8
eer1 Owner1
Owner2
Owner3
Owner4
1
1
1
1 eer2
eer3
eer4
eer5 Network1
1
1
1
1
eer6
eer7
eer8
Ownership advantage & Network connection
1
Network2
82, df=20, p=.000, Normed Chi-square= 7.719,
I=.534, NFI=.512, RMSEA=.272
.0. err1 to err8 are error terms, Owner1 to Owner4 are the Ownership Advantage factor, Network1 to Network4 are the Network Connection factor. superior to one-factor model.
Network 3
Network 4
90
Appendix
Market potential & Investment risk
Chi-square=26.900, df=8, p=.001, Normed Chi-square=3.363, CFI=.907, NFI=.877, RMSEA=.161
Chi-square= 39.784, df=9, p=.000, Normed Chi-square= 4.420,
CFI=.849, NFI=.818, RMSEA=.194 Note: a. Software used: AMOS 4.0. err1 to err6 are error terms, Market1 to Market4 are
corresponding items of the Market Potential factor, Risk1 to Risk2 are corresponding items of the Investment Risk factor.
b. The two-factor model is superior to one-factor model.
eer1 Market1
Market2
Market3
Market5
1
Market potential
Risk1
Risk2
Investment risk
1
1
1
1
1
1
1 eer2
eer3
eer4
eer5
eer6
eer1 Market1
Market2
Market3
Market4
1
1
1
1 eer2
eer3
eer4
eer5 Risk1
Risk2
1
1 eer6
Market potential & Investment risk
1
91
Appendix
Market Potential & Physical product
Chi-square=28.3CF
Chi-square= 133.2CF
Note: a. Software used: AMOS 4
corresponding items of corresponding items of
b. The two-factor model is
eer1 Market1
Market2
Market3
Market4
1
Market potential
Physical1 1
Physical
1
1
1
1 eer2
eer3
eer4
1 eer5
1 eer6
1 eer7
eer1
1
1
1
eer2
eer3
eer4
eer5 1
1
1
eer6
eer7
1
Physical2
product Physical337, df=13, p=.008, Normed Chi-square=2.180, I=.949, NFI=.912, RMSEA=.114
19, df=14, p=.000, Normed Chi-square= 9.516,
I=.602, NFI=.584, RMSEA=.306
.0. err1 to err8 are error terms, Market1 to Market4 are the Market Potential factor, Physical1 to Physical3 are the Physical Product factor. superior to one-factor model.
Market1
Market2
Market3
Market4
1
Physical1
Physical2
Physical3
Market potential & Physical product
92
Appendix
Market potential & Intangible product
Chi-square=77.139, df=26, p=.000, Normed Chi-square=2.967, CFI=.894, NFI=.852, RMSEA=.147
eer1 Market1
Market2
Market3
Market4
Market potential
eer5 Intangible1
Intangible2
Intangible3
eer9 1
eer8 Intangible4
1
Intangible product 1
1
1
1
1
1
I
I
I
I
Intangible5
eer4
eer3
eer2 1
1
1
1
1
1
1 eer6
eer7
eer1
eer2
eer3
eer4
1 eer5
1 eer6
1 eer7
1 eer8
eer9 1
Chi-square= 227.1CF
Note: a. Software used: AMOS 4
corresponding items of corresponding items of
b. The two-factor model is
Market1
1
Market2Market3
Market4
Market potential & Intangible product
ntangible5
ntangible5
ntangible5
ntangible5
Intangible5
98, df=27, p=.000, Normed Chi-square= 8.415, I=.586, NFI=.563, RMSEA=.285
.0. err1 to err9 are error terms, Market1 to Market4 are the Market Potential factor, Intangible1 to Intangible5 are the Intangible Product factor. superior to one-factor model.
93
Appendix
Market potential & Network connection
Chi-square=51.1CF
Chi-square= 133.0CF
Note: a. Software used: AMOS 4
corresponding items of corresponding items of
b. The two-factor model is
eer1
1
1
1
1 eer2
eer3
eer4
1 eer5
1 eer6
1 eer7
1 eer8
eer1
1
1
1
eer2
eer3
eer4
eer5 1
1
1
1
eer6
eer7
eer8
1
Market1
92, df=19, p=.000, Normed Chi-square=2.694, I=.898, NFI=.852, RMSEA=.136
1
Market potential
Network1
Network2
Network3
1
Network connection
Network4
Market1
Market2
1
Market2Market3
Market3Market4
Market4Market potential & Network connection
Network1
Network2
Network3 Network436, df=20, p=.000, Normed Chi-square= 6.652,
I=.643, NFI=.614, RMSEA=.249
.0. err1 to err8 are error terms, Market1 to Market4 are the Market Potential factor, Network1 to Network4 are the Network Connection factor. superior to one-factor model.
94
Appendix
Investment risk & Physical product
Chi-square=7.0CF
Chi-square= 8.8CF
Note: a. Software used: AMOS 4
corresponding items of corresponding items of
b. The two-factor model is
Risk1
Risk2
1 Investment risk
Physical1 1
Physical
1
1 eer1
eer2
1 eer3
1 eer4
1 eer5
1
1
1 eer1
eer2
eer3
1 eer4
1 eer5
Physical2
product Physical316, df=4, p=.135, Normed Chi-square=1.754, I=.981, NFI=.959, RMSEA=.091
44, df=5, p=.115, Normed Chi-square= 1.769, I=.976, NFI=.948, RMSEA=.092
.0. err1 to err5 are error terms, Risk1 to Risk2 are the Investment Risk factor, Physical1 to Physical3 are the Physical Product factor. superior to one-factor model.
Risk1
Risk2
Physical1
1
Physical2
Physical3
Investment risk & Physical product
95
Appendix
Investment risk & Intangible product
Risk1
Risk2
Intangible1
Investment risk
1 Intangible2
Intangible3
Intangible4
Intangible product
Intangible5
eer3
eer2
eer1 1
1
1
1
1 eer4
1 eer5
1 eer6
1 eer7
Chi-square=39.337, df=14, p=.000, Normed Chi-square=2.810, CFI=.912, NFI=.873, RMSEA=.141
eer1 Risk1
Risk2
Intangible1
1
1
1
1 eer2
eer3
eer4
eer5 1
1
1
eer6
eer7
1
Chi-square= 50.2CF
Note: a. Software used: AMOS
corresponding items of corresponding items of
b. The two-factor model is
Intangible2
Investment risk &Intangible product
Intangible3 Intangible4 Intangible585, df=14, p=.000, Normed Chi-square= 3.592, I=.874, NFI=.837, RMSEA=.169
4.0. err1 to err7 are error terms, Risk1 to Risk2 are the Investment Risk factor, Intangible1 to Intangible5 are the Intangible Product factor. superior to one-factor model.
96
Appendix
Investment risk & Network connection
Network1
Network2
Network3
1
Network connection
Network4
1 Risk1 1 Investment
risk Risk2
1 eer1
eer2
1 eer3
1 eer4
1 eer5
1 eer6
Chi-square=9.626, df=8, p=.292, Normed Chi-square=1.203, CFI=.986, NFI=.928, RMSEA=.047
Chi-square= 19.823, df=9, p=.019, Normed Chi-square= 2.203,
CFI=.909, NFI=.853, RMSEA=.115 Note: a. Software used: AMOS 4.0. err1 to err6 are error terms, Risk1 to Risk2 are
corresponding items of the Investment Risk factor, Network1 to Network4 are corresponding items of the Network Connection factor.
b. The two-factor model is superior to one-factor model.
Risk1
Risk2
Network1
1
1
Network2
Network3
Network4
1
Investment risk & Network connection
1 eer1
eer2
eer3
1 eer4
1 eer5
1 eer6
97
Appendix
Physical product & Intangible product
Chi-square=73.650, df=19, p=.000, Normed Chi-square=3.876, CFI=.878, NFI=.845, RMSEA=.178
Chi-square= 127.151, df=20, p=.000, Normed Chi-square= 6.358,
CFI=.760, NFI=.733, RMSEA=.243 Note: a. Software used: AMOS 4.0. err1 to err8 are error terms, Physical1 to Physical3 are
corresponding items of the Physical Product factor, Intangible1 to Intangible5 are corresponding items of the Intangible Product factor.
b. The two-factor model is superior to one-factor model.
eer1 Physical1
Physical2
Physical3
Intangible1
1
Physical product
1
Intangible2
Intangible3
Intangible4
Intangible product
Intangible5
1
1
1
1 eer2
eer3
eer4
1 eer5
1 eer6
1 eer7
1 eer8
eer1 Physical1
Physical2
Physical3
Intangible1
1
1
1
1 eer2
eer3
eer4
eer5 Intangible2
Intangible3
Intangible4
Intangible5
1
1
1
1
eer6
eer7
eer8
Physical product & Intangible product
1
98
Appendix
Physical product & Network connection
Chi-square=17.949, df=13, p=.159, Normed Chi-square=1.381, CFI=.977, NFI=.923, RMSEA=.065
Chi-square= 127.449, df=14, p=.000, Normed Chi-square= 9.104,
CFI=.467, NFI=.455, RMSEA=.298 Note: a. Software used: AMOS 4.0. err1 to err7 are error terms, Physical1 to Physical3 are
corresponding items of the Physical Product factor, Network1 to Network4 are corresponding items of the Network Connection factor.
b. The two-factor model is superior to one-factor model.
eer1 Physical1
Physical2
Physical3
1
Physical product
Network1
Network2
Network3
1
Network connection
Network4
1
1
1 eer2
eer3
1 eer4
1 eer5
1 eer6
1 eer7
eer1 Physical1
Physical2
Physical3
Network1
1
1
1
1 eer2
eer3
eer4
eer5 Network2
Network3
Network4
1
1
1
eer6
eer7
Physical product & Network connection
1
99
Appendix
Intangible product & Network connection
eer2 Intangible2
Intangible3
Intangible4
Intangible5
Intangible product
eer6
eer7 1
eer8 1
eer9 1
Network1
Network2
Network3
1
Network connection
Network4
eer5
eer4
eer3
1 Intangible1
1
1
1
1
eer1
1
Chi-square=72.951, df=26, p=.000, Normed Chi-square=2.806, CFI=.886, NFI=.838, RMSEA=.141
1
eer1
Intangible1
Intangible2
Intangible3
Intangible4
1
Intangible5
Network1
Network2
Network3
Network4
Intangible product & Network connection
1 eer2
1 eer3
1 eer4
1 eer5
1 eer6
1 eer7
1 eer8
eer9 1
Chi-square= 139.345, df=27, p=.000, Normed Chi-square= 5.161, CFI=.728, NFI=.690, RMSEA=.214
Note: a. Software used: AMOS 4.0. err1 to err9 are error terms, Intangible1 to Intangible5 are
corresponding items of the Intangible Product factor, Network1 to Network4 are corresponding items of the Network Connection factor.
b. The two-factor model is superior to one-factor model.
100
Appendix
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Appendix
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113
Appendix
QUESTIONNAIRE
114
1
--------------- QQQuuueeessstttiiiooonnnnnnaaaiiirrreee ---------------
The aim of this questionnaire is to gain understanding of the globalization/internationalization
strategies adopted by Singapore based Small Medium Enterprises (SMEs), i.e. the strategies
your company uses to conduct business in international markets.
The questionnaire consists of two separate sections.
Questions in Section I concern the company and its general profile.
Questions in section II seek specific information regarding international business experience
and activities of your company.
Section 1: Present Company Data
1.1 Name of the Company: _______________________ 1.2 The Company was established since _______ (Year)
1.3 Major Products or Services: _____________________
____________________________ _______
1.4 Industries: (Please tick)
Goods Producing Industries Services Producing Industries
( ) Manufacturing ( ) Wholesale & Retail Trade ( ) Construction ( ) Hotels & Restaurants ( ) Utilities ( ) Transport & Communications ( ) Agriculture, ( ) Financial Services Fishing &Quarrying ( ) Business Services ( ) Others ( ) Other Services
1.5 Number of full-time employees: ________ persons
1.6 Today, how many full-time employees spend over 50% of their time on
international activities? ______ %
1.7 What is your gross volume of business (sales) in year 2000? (in millions of S$) (Please tick in one of the brackets only)
( ) < 1 ( ) 1 to5 ( ) 5 to 10 ( ) 10 to15 ( ) 15 to 20 ( ) 20 to 25 ( ) >25
1.8 What percentage of this year’s sales (year 2000) is from each of four
different regions: Singapore, other Asean nations, other Asia nations and rest of the world? (These four regions sum to 100%)
Singapore _______ % Other Asean nations _______ % Other Asia nations _______ %
Rest of the world _______ %
1.9 How many years you have been exporting? (Please tick in one of the brackets only) ( ) < 2 ( ) 2 to 4 ( ) 4 to 7 ( ) 7 to 10 ( )>10
1.10 The Company has the following international business activities:
(Please tick all that are relevant and fill correspondingly the number of countries engaged in)
( √ ) Activities Number of Countries Import ___ Export ___ Licensing ___ Joint venture ___ Oversea Business Unit ___ Oversea Manufacturing Plant ___ Oversea Representative Office ___ Oversea Sales Personnel ___ Other (Please specify)
_________________ ___ 1.11 How many foreign countries in which your products/services have
ever been sold? _______
1.12 Number of years since you first engaged in any of the above (item 1.10) international business activities:
______ Years
2
3
Section 2: International Business Experience
Kindl of s is moappro
2 you ve terms rm to nti es?
2 your cre ly
s/ser 2 what ur uld y
forei
2.4 How multinational do you think your firm is, in term of number of
countries operated in?
2.5 How capable is your firm in terms of technological, managerial, and financial capabilities to handle international expansion?
2.6 What do you think is the market potential of your business in the
following regions? • Asean • Asia
• Rest of rld
do you think is the growth potential of your business in the wing regions?
the world
o you think about the attitude of the foreign government in the ng regions toward your business sector?
• Rest of the world
2.9 What do you think about the attitude of the foreign government in the following regions toward foreign firms?
• Asean • Asia • Rest of the world 2.10.What do you think about the general stability of the political, social,
and economic conditions in the following regions of your investment?
• Asean • Asia
st of the world
Unstable 1 2 3 4 5 6 7 Stable
Unstable 1 2 3 4 5 6 7 Stable
Unstable 1 2 3 4 5 6 7 Stable
Negative 1 2 3 4 5 6 7 Positive
Negative 1 2 3 4 5 6 7 Positive
Negative 1 2 3 4 5 6 7 Positive
Negative 1 2 3 4 5 6 7 Positive
Negative 1 2 3 4 5 6 7 Positive
Negative 1 2 3 4 5 6 7 Positive
Low 1 2 3 4 5 6 7 High
Low 1 2 3 4 5 6 7 High
Low 1 2 3 4 5 6 7 High
Low 1 2 3 4 5 6 7 High
Low 1 5 6 7 High
Low 1 2 3 4 5 6 7 High
Weak 1 2 3 4 5 6 7 Strong
Low 1 2 3 4 5 6 7 High
Low 1 2 3 4 5 6 7 High
6
2 6
the wo
2 3 4le onl:
w do yoparing y
w do yoigned p
proximaibute to
Wea
Wea
y one
u rateour fi
u rateroduct
tely, your
k 1
k 1
y circpriate
.1 Hopre
.2 Hodes
.3 Apattr
the se
r produ marke
firm’s vices?
percegn sourc
2 3
3
ven n
ct/servt new
potent
ntage e inco
4
4
umber
ice dediffere
ial to
of yome?
5
5
ch box
nt progrroducts
w and c
earnin
Str
Stro
that
am in/servic
reative
gs wo
ong
ng
in ea
lopmeated p
ate ne
total
7
7
2.7
• A
• A • R
2.8 W
f• A • A
Whatfollo
sean sia
est of
hat dollowisean
sia
st
of
ou
•
Re
2.11 What do you think is the g and repatriating your income
from the following regio ore? • As
• As
• Re
2.12 W is the firms b ken y log e fol
• As • As • Re 2.13 Compared to Singapore, how would you rate ts ing a
enforcing contracts in the following regions? • Asean • Asia • Rest of the world
2.14 How sure are you that your standards of quality of services/products will
be maintained if you operated jointly with a local firm in the following regions?
• Asean • Asia • Re
2.15 What do you think is the risk of dissipating or misuse of your proprietary
knowledge if you operated with a local firm in the following regions? • A
• A
• R e world
16 How ult is it to do business in the following regions because of the diff in the location’s culture from that of Singapore?
• A • A • R e world
17 Rate tensity/frequency of importing of machinery, spare parts etc prior to y t export experience.
2.18 Rate your intensity/frequency of importing of raw materials and components prior to your first export experience.
2.19. Rate your intensity/frequency of importing of products to be resold prior to
your first export experience. 2.20 Rate your intensity/frequency of engaging foreign parties/firms to provide
services related to planning and supervising prior to your first export experience.
Not sure 1 2 3 4 5 6 7 Sure
ot 2 3
Not sure 1 2 3 4 5 6 7 Sure
Low 1 2 3 4 5 Hig
Low 1 2 3 4 5 6 7 High
Low 1 2 3 4 5 6 7 High
3 4 5 Hig
3 4 5 Hig
3 4 5 igh
3 4 5 Hig
3 4 5 Hig
3 4 5 igh
Low 1 2 3 4 5 6 7 High
Low 1 2 3 4 5 6 7 High
Low 1 2 3 4 5 6 7 High
Easy 1 2 3 4 5 6 7 Difficult
Easy 1 2 3 4 5 6 7 Difficult
Easy 1 2 3 4 5 6 7 Difficult
ow 1 2 3 4 5 6 7 High
Low 1 2 3 4 5 6 7 High
Low 1 2 3 4 5 6 7 High
Low 1 2 3 4 5 6 7 High
4
he worl
the wor
do you nment f
the wor
d
st of tsure 1
N Sure 4 5 6 7ld
think rom th
ld
ean
ia
st of
hat overean
ia
st of
cal
nd
2.
2.
eing ta
the cos
6 7
6 7
6 7
6 7 H
6 7
6 7
6 7 H
over b
of mak
h
h
h
h
h
sean
sia
est of th
difficerence sean
sia
est of th
your inour firs
L
of conack to S
of forng regio
Low
Low
Low
Low
Low
Low
vertiningap
eign ns?
1 2
1 2
1 2
1 2
1 2
1 2
riskns b
risklowi
2.21 Rate your intensity/frequency of engaging foreign parties/firms to provide services related to installation or testing of machines, equipments and other physical systems prior to your first export experience.
2.22 Rate your intensity/frequency of engaging foreign parties/firms to provide services related to training and development prior to your first
export experience.
2.23 Rate your intensity/frequency of being granted licenses by foreign parties/firms to provide their products/services in Singapore prior to your first export experience.
2.24 Rate your intensity/frequency of being granted any other form of representation right by foreign parties/firms to provide their products/services in Singapore prior to your first export experience.
2.25 To what extent is your business with a new international customer affected
by any relationship with your own other existing customers?
2. 26 To what extent is your business with a new international customer affected by any relationship with your own suppliers?
2.27 To what extent is your business with a new international customer affected by any of his customer relationships?
2.28 To what exten r business with a new international customer affected by any of lationships with suppliers of products/services supplementary s?
2.29 Please list those factors you consider to be important in explaining Singapore SMEs to engage in global or international businesses.
_______________________________________ _______________________________________ _______________________________________ 2.30 Please write below any remarks you may have about globalization and
internationalization of Singapore SMEs. _______________________________________ _______________________________________
_________________________ _____________
2.31 Background information : Name: ___________________________ Title: ___________________________ Company: _________________________ Postal Address: ______________________________________________ ______________________________________________ e-mail: __________________________ Tel: __________________________
Fax: __________________________ If you like to receive a copy of the study’s findings, please tick on the f g box.
hhaann uu vveerryy mmuucchh
Low 1 2 3 4 5 6 7 High
Low 1 2 3 4 5 6 7 High
Low 1 2 3 4 5 6 7 High
Low 1 2 3 4 5 6 7 High
Low 1 2 3 4 5 6 7 High
Low 1 2 3 4 5 6 7 High
Low 1 2 3 4 5 6 7 High
Low 3 4 5 6 7 High
5
ollowin
TT
kk yyoo
t is youhis re
to your
1 2