An integrated model of internationalization for singapore based small medium enterprises

.. .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... 21 An Integrated Model of SMEs Internationalization 25 An Integrated Model of SMEs Internationalization 41 V LIST OF TABLES Table Page A Comparison of Distinguishing Features between SMEs and... 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

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 85 Confirmatory Factor Analysis 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 Internationalization of 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 of the Four Core Theories 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 HerfindahlHirschman 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 1. Size 2. Access 3. Reach 4. Resource capabilities 5. Risk capacity and exposure 6. Strategic vision 7. Focus and responsibilities 8. Political influence 9. Expansion mechanisms 10. Network characteristics MNCs Advantages/Weaknesses of SMEs Small to medium Local or regional Limited Large, global markets, more vulnerable to environmental volatility and operational risk Limited, outsourced Internal resource High risk-takers, share with associates Vision of the entrepreneur or small group of executives Local markets React to prevailing policies Cooperative, symbiotic arrangements Loose, cooperative, international linkages among independent agents 11.Innovativeness and specialization Larger and more flexible inventive capacity 12. Human resources Human resource deficiencies 13. Control characteristics lateral coordination between mutually dependent players. Low since diversification SMEs: high probability of insolvency or failure Strategic aims of global boards; reactive and responsive Profitable markets all over the world Influence the policy environment of their host governments Rely on internal economies of scale and scope Tighter and complete linkages, with owned or tightly controlled agents Less inventive, but achieve higher success rates in commercializing innovations Recruit and promote based on professional qualifications rigid, hierarchical, internal control SMEs: mostly new, innovative, and productive SMEs: niche market SMEs: flexible “linkage” practices, such as strategic alliances and other collaborative arrangements SMEs: local expertise 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 nondeterministic 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 Eclectic paradigm Stages theory Network Influential feature Cost of transaction Experiential knowledge Interaction Inward/outward internationalization Pre-export import experience This study tries to construct Locus Firm Firm Firm customer competitor supplier within market environment Firm 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 To directly impact on Help to accelerate Incremental stage model Help to influence on --Market selection --Market entry --Product development --Market diversification 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, multidisciplinary 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 two23 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 Eclectic Paradigm (Foreign Direct Investment) Inward Internationalization (Import) Integrated Model of Internationalization Internationalization issues, theories and models Incremental Stage Model Network Perspective Internationalization issues, theories and models Internationalization issues, theories and models In much of previous research, theories like Inward (import) Internationalization, Eclectic Paradigm (FDI), Incremental Stage Model and lately Network perspective were individually employed to explain internationalization. Each perspective brought its own respective paradigm, premises, and disciplinary setting to address internationalization. This tradition yields undesired consequence. Each of these 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, coordination 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, resourceconstrained 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 outwardinternationalization 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 InwardInternationalization 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 3.Location Advantage: Investment Risk 4.Stage Theory: Psychic/Cultural 5 Stage Theory: Establishment Chain 6. Business Network Connection H1 H2 H3 H4 1. HHI H5 H6 sales 3. Number of foreign 7. Pre-export Import Experience: Physical Products 9. Pre-export Import Experience: KnowHow Operations 2. Overseas sales in percentage to total H7 8. Pre-export Import Experience: Service Operations Degree of Internationalization countries operated in H8 H9 41 Chapter 4 Table 3 Summary of Proposed Hypotheses for Testing the SME Internationalization Model H1 H1a H1b H1c H2 H2a H2b H2c H3 H3a H3b H3c H4 H4a H4b H4c H5 H5a H5b H5c H6 H6a H6b H6c H7 H7a H7b H7c H8 H8a H8b H8c H9 H9a H9b H9c Ownership specific advantage Æ DOI (+) Ownership specific advantage Æ HHI (-) Ownership specific advantage Æ Overseas sales (+) Ownership specific advantage Æ Number of countries (+) Market potential Æ DOI (+) Market potential Æ HHI (-) Market potential Æ Overseas sales (+) Market potential Æ Number of countries (+) Investment risk Æ DOI (-) Investment risk Æ HHI (+) Investment risk Æ Overseas sales (-) Investment risk Æ Number of countries (-) Psychic/Cultural distance Æ DOI (-) Psychic/Cultural distance Æ HHI (+) Psychic/Cultural distance Æ Overseas sales (-) Psychic/Cultural distance Æ Number of countries (-) Establishment chain Æ DOI (+) Establishment Chain Æ HHI (-) Establishment Chain Æ Overseas sales (+) Establishment Chain Æ Number of countries (+) Business network connection Æ DOI (+) Business Network Connection Æ HHI (-) Business Network Connection Æ Overseas sales (+) Business Network Connection Æ Number of countries (+) Pre-export Import Experience, Physical Products Æ DOI (+) Pre-export Import Experience Æ HHI (-) Pre-export Import Experience Æ Overseas sales (+) Pre-export Import Experience Æ Number of countries (+) Pre-export Import Experience, Service Operations Æ DOI (+) Pre-export Import Experience Æ HHI (-) Pre-export Import Experience Æ Overseas sales (+) Pre-export Import Experience Æ Number of countries (+) Pre-export Import Experience, Know-How Operations Æ DOI (+) Pre-export Import Experience Æ HHI (-) Pre-export Import Experience Æ Overseas sales (+) Pre-export Import Experience Æ 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 HHI = ∑ S i , 2 i =1 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 HHI = ∑ S i , n =3, 2 i =1 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): “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 47 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. 48 Chapter 5 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 49 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 1. Import 2. Export 3. Licensing 4. Joint Venture 5. Oversea Business Unit 6. Oversea Manufacturing Plant 7. Oversea Representative Office 8. Oversea Sales Personnel Percentage of Firms Engaged in (%) 78.3 84.8 2.2 7.6 9.8 5.4 9.8 5.4 Number of Countries Firms Engaged in (Mean) 4.99 5.28 4.50 3.00 2.44 3.00 2.78 5.50 50 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. 51 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. 52 Chapter 5 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. 53 Chapter 5 Location Advantage Table 6: Descriptive Statistics for Location Advantage ASEAN Item Asia Rest Mean SD Mean SD Mean SD 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 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 Market Potential: Investment Risk: 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. 54 Chapter 5 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. 55 Chapter 5 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 56 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. 57 Chapter 5 Table 8: Descriptive Statistics for Pre-export Import Experience Item Mean SD 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 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 7. Intensity of Foreign Licenses Granted 2.21 1.69 8. Intensity of Other Foreign Representation Right Granted 2.26 1.64 Physical Product Operation: Service Operation: know-How Operation: 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 58 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 reexport 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. 59 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). 60 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 1. Firm size (gloss volume of sales) 2. Product/service development program for new differentiated products/services 3. Firm’s creativity on new products/services 4. Firm’s capability: technology, management and finance Loading .654 .881 .852 .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 1. Market potential 2. Growth potential 3. Foreign government attitude on related business sector 4. Foreign government attitude on foreign firms 5. Political, economic and social stability 6. Risk of income convertibility and repatriation 7. Risk of foreign firms being taken over Loading Market Investment Potential Risk .761 .863 .718 -.121 .702 .512 .341 .725 .836 61 Chapter 5 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 Physical Product Operation: 1. Intensity of Importing Machines and Spare Parts 2. Intensity of Importing Raw Materials and Components 3. Intensity of Importing Products for Resale Intangible Operation (Service & Know-How): 4. Intensity of Engaging Foreign Services on Planning and Supervision 5. Intensity of Engaging Foreign Services on Installation of Machines, Equipment and Systems 6. Intensity of Engaging Foreign Services on Training and Development 7. Intensity of Foreign Licenses Granted 8. Intensity of Other Foreign Representation Right Granted Loading Tangible Intangible .255 .309 .117 .839 .799 .863 .830 .223 .699 .412 .885 .727 .805 .404 .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. 62 Chapter 5 Table 13 Exploratory Factor Analysis for Business Network Connection Item 1. New international customer introduced by own existing customers 2. New international customers introduced by own existing suppliers 3. New international customer introduced by his existing customers 4. New international customers introduced by his existing suppliers Loading .737 .844 .838 .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 Ownership specific advantage Market potential Investment risk Physical products operation Intangible operation Business network connection 5.3 Number of Items Alpha 4 4 2 3 5 4 .82 .89 .79 .84 .89 .78 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. 63 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. 64 Chapter 5 Table 15 Means, Standard Deviations, and Correlations (N=92) Mean SD 1 1. Ownership advantage 3.31 1.23 2. Market potential 3.94 .90 .387** 3. Investment risk 4.20 1.00 .201 4. Cultural distance 4.81 1.36 -.350** 5. Year of int. exp. 7.87 5.01 .297** 6. Physical products 3.18 1.71 .606** 7 Service and know-how 2.33 1.36 .541** 8. Network connection 2.97 1.10 .210* 9. Number of countries 2.90 1.65 .674** 10.HHI .83 .23 -.445** 11.Oversea sales percentage .29 .23 .355** ** Correlation is significant at the 0.01 level (2-tailed). * Correlation is significant at the 0.05 level (2-tailed). 2 3 4 -.045 -.177 -.308** .087 .047 .211* .199 .119 -.366** .346** .013 -.273** .410** -.223* .036 .508** .051 -.147 -.356** .032 .311** .237* -.143 -.074 5 .146 -.006 -.039 .248* .065 .220* 6 7 8 9 10 11 .603** .037 .425** .396** .469** .372** -.249* -.290** -.068 -.471** .159 .162 .036 .569** -.308** 65 Chapter 5 5.5 REGRESSION ANALYSIS Table 16 Regression Analysis in Testing the Determinant of DOI Independent variables: Ownership advantage Market potential Investment risk Psychic distance Years of int. exp. Physical product Intangible operation Network connection R2 Adjusted R2 ** p < .01 * p < .05 † p < .10 Model 1: Overseas sales in percentage β VIF .33* 2.36 .12 1.36 -.27* 1.21 -.06 1.52 .14 1.31 -.11 2.06 .10 2.35 -.19 1.66 .21 .14 Model 2: Number of countries β VIF .51** 2.36 .23** 1.36 .01 1.21 .08 1.52 .06 1.31 .02 2.06 .08 2.35 .13 1.66 .55 .51 Model 3: HHI β -.47** -.22** .17† .16 .16 .15 -.04 .17 VIF 2.55 1.38 1.18 1.52 1.34 2.13 2.32 1.56 .32 .25 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, 66 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. 67 Chapter 5 Table 17: Summarized Outcomes of Three Regression Models DOI Ownership advantage Market potential Investment risk Psychic distance Years of int. exp. Network connection Import exp. of physical products Import exp. of intangible operations Model 1 Model 2 Model 3 DV: Oversea sales H1b Supported H2b Not supported H3b Supported DV: Number of countries H1c Supported H2c Supported H3c Not supported DV: HHI H4b Not Supported H5b Not Supported H6b Not Supported H7b Not Supported H8b,9b Not Supported Remark H4c Not supported H5c Not supported H6c Not supported H7c Not supported H1a Supported H2a Supported H3a Marginally supported H4a Not supported H5a Not supported H6a Not supported H7a Not supported Supported by Three Models Supported by Two Models Supported by Two Models Not Supported at all Not Supported at all Not Supported at all Not Supported at all 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. 68 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. 69 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. 70 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. 71 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 Eclectic Paradigm Variable Ownership Advantage Critical Factors of Consideration • • • • • • • • Location 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. 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 Psychic (Cultural) Distance Stage • Difficulty in doing business due to location cultural differences. Establishment Chain • Number of years of export experience. Business Network Connection • • • Relationship with existing customers, Relationship with existing suppliers, Existing customers’ introduction on their customers, Existing suppliers’ introduction on their customers. Network • 74 Chapter 6 Table 18: Critical Factors of Consideration for Internationalization (Continued) Theoretical Construct Variable Pre-export Import Inward in Internationalization Experience Physical Product Operations Critical Factors of Consideration • • • Pre-export Import Experience in Service Operations • • • Pre-export Import Experience in Know-How Operations • • Experiences in importing machinery, spare parts and others Experiences in importing raw materials and component parts Experiences in importing products for resale 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 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 eer1 eer2 eer3 eer4 eer5 eer6 eer7 eer8 1 Owner1 1 1 Ownership advantage Owner2 1 Owner3 1 Owner4 1 Market1 1 1 Market potential Market2 1 Market3 1 Market4 Chi-square= 62.664, df=19, p=.000, Normed Chi-square= 3.298, CFI=.885, NFI=.830, RMSEA=.159 eer1 eer2 eer3 eer4 eer5 eer6 eer7 eer8 1 Owner1 1 1 Owner2 1 Owner3 1 Owner4 1 Market1 Ownership advantage & Market potential 1 Market2 1 Market3 1 Market4 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. 86 Appendix Ownership advantage & Investment risk eer1 eer2 eer3 eer4 eer5 eer6 1 Owner1 1 1 Ownership advantage Owner2 1 Owner3 1 Owner4 1 Risk1 1 Investment risk 1 Risk2 Chi-square=24.245, df=8, p=.002, Normed Chi-square=3.031, CFI=.918, NFI=.886, RMSEA=.149 eer1 eer2 eer3 eer4 eer5 eer6 1 Owner1 1 1 Owner2 1 Owner3 1 Owner4 Ownership advantage & Investment risk 1 Risk1 1 Risk2 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. 87 Appendix Ownership advantage & Physical product eer1 eer2 eer3 eer4 eer5 eer6 eer7 1 Owner1 1 1 Ownership advantage Owner2 1 Owner3 1 Owner4 1 Physical1 1 1 Physical product Physical2 1 Physical3 Chi-square=46.297, df=13, p=.000, Normed Chi-square=3.561, CFI=.897, NFI=.865, RMSEA=.168 eer1 eer2 eer3 eer4 eer5 eer6 eer7 1 Owner1 1 Owner2 1 1 Owner3 1 Owner4 1 Physical1 Ownership advantage & Physical product 1 Physical2 1 Physical3 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 eer1 eer2 eer3 eer4 eer5 eer6 eer7 eer8 1 Owner1 1 1 Ownership advantage Owner2 1 Owner3 1 Owner4 1 Intangible1 1 1 Intangible product Intangible2 1 Intangible3 1 Intangible4 eer9 Intangible5 Chi-square=73.627, df=26, p=.000, Normed Chi-square=2.832, CFI=.899, NFI=.855, RMSEA=.142 eer1 eer2 eer3 eer4 eer5 eer6 eer7 eer8 eer9 1 Owner1 1 1 Owner2 1 Owner3 1 Owner4 1 1 1 1 Intangible1 Ownership advantage & Intangible product Intangible2 Intangible3 Intangible4 1 Intangible5 Chi-square= 160.101, df=27, p=.000, Normed Chi-square= 5.930, CFI=.719, NFI=.686, RMSEA=.233 Note: a. Software used: AMOS 4.0. err1 to err9 are error terms, Owner1 to Owner4 are corresponding items of the Ownership Advantage factor, Intangible1 to Intangible5 are corresponding items of the Intangible Product factor. b. The two-factor model is superior to one-factor model. 89 Appendix Ownership advantage & Network connection eer1 eer2 eer3 eer4 eer5 eer6 eer7 eer8 1 Owner1 1 1 Ownership advantage Owner2 1 Owner3 1 Owner4 1 Network1 1 1 Network connection Network 2 1 Network 3 1 Network 4 Chi-square=58.815, df=19, p=.000, Normed Chi-square=3.096, CFI=.862, NFI=.814, RMSEA=.152 eer1 eer2 eer3 eer4 eer5 eer6 eer7 eer8 1 Owner1 1 1 Owner2 1 Owner3 1 Owner4 1 Network1 Ownership advantage & Network connection 1 1 Network 2 Network 3 1 Network 4 Chi-square= 154.382, df=20, p=.000, Normed Chi-square= 7.719, CFI=.534, NFI=.512, RMSEA=.272 Note: a. Software used: AMOS 4.0. err1 to err8 are error terms, Owner1 to Owner4 are corresponding items of the Ownership Advantage factor, Network1 to Network4 are corresponding items of the Network Connection factor. b. The two-factor model is superior to one-factor model. 90 Appendix Market potential & Investment risk eer1 eer2 eer3 eer4 eer5 eer6 1 Market1 1 1 Market potential Market2 1 Market3 1 Market5 1 Risk1 1 1 Investment risk Risk2 Chi-square=26.900, df=8, p=.001, Normed Chi-square=3.363, CFI=.907, NFI=.877, RMSEA=.161 eer1 eer2 eer3 eer4 eer5 eer6 1 Market1 1 1 Market2 1 Market3 1 Market4 Market potential & Investment risk 1 Risk1 1 Risk2 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. 91 Appendix Market Potential & Physical product eer1 eer2 eer3 eer4 eer5 eer6 eer7 1 Market1 1 1 Market potential Market2 1 Market3 1 Market4 1 Physical1 1 1 Physical product Physical2 1 Physical3 Chi-square=28.337, df=13, p=.008, Normed Chi-square=2.180, CFI=.949, NFI=.912, RMSEA=.114 eer1 eer2 eer3 eer4 eer5 eer6 eer7 1 Market1 1 1 Market2 1 Market3 1 Market4 1 Physical1 Market potential & Physical product 1 Physical2 1 Physical3 Chi-square= 133.219, df=14, p=.000, Normed Chi-square= 9.516, CFI=.602, NFI=.584, RMSEA=.306 Note: a. Software used: AMOS 4.0. err1 to err8 are error terms, Market1 to Market4 are corresponding items of the Market Potential factor, Physical1 to Physical3 are corresponding items of the Physical Product factor. b. The two-factor model is superior to one-factor model. 92 Appendix Market potential & Intangible product eer1 eer2 eer3 eer4 eer5 eer6 eer7 eer8 eer9 1 Market1 1 1 Market potential Market2 1 Market3 1 Market4 1 Intangible1 1 1 Intangible product Intangible2 1 Intangible3 1 Intangible4 1 Intangible5 Chi-square=77.139, df=26, p=.000, Normed Chi-square=2.967, CFI=.894, NFI=.852, RMSEA=.147 eer1 eer2 eer3 eer4 eer5 eer6 eer7 eer8 eer9 1 Market1 1 Market2 1 1 Market3 1 Market4 1 Intangible5 Market potential & Intangible product 1 Intangible5 1 Intangible5 1 Intangible5 1 Intangible5 Chi-square= 227.198, df=27, p=.000, Normed Chi-square= 8.415, CFI=.586, NFI=.563, RMSEA=.285 Note: a. Software used: AMOS 4.0. err1 to err9 are error terms, Market1 to Market4 are corresponding items of the Market Potential factor, Intangible1 to Intangible5 are corresponding items of the Intangible Product factor. b. The two-factor model is superior to one-factor model. 93 Appendix Market potential & Network connection eer1 eer2 eer3 eer4 eer5 eer6 eer7 eer8 1 Market1 1 1 Market potential Market2 1 Market3 1 Market4 1 Network1 1 1 Network connection Network2 1 Network3 1 Network4 Chi-square=51.192, df=19, p=.000, Normed Chi-square=2.694, CFI=.898, NFI=.852, RMSEA=.136 eer1 eer2 eer3 eer4 eer5 eer6 eer7 eer8 1 Market1 1 1 Market2 1 Market3 1 Market4 1 Network1 Market potential & Network connection 1 Network2 1 Network3 1 Network4 Chi-square= 133.036, df=20, p=.000, Normed Chi-square= 6.652, CFI=.643, NFI=.614, RMSEA=.249 Note: a. Software used: AMOS 4.0. err1 to err8 are error terms, Market1 to Market4 are corresponding items of the Market Potential factor, Network1 to Network4 are corresponding items of the Network Connection factor. b. The two-factor model is superior to one-factor model. 94 Appendix Investment risk & Physical product eer1 eer2 eer3 eer4 eer5 1 1 Risk1 1 Investment risk Risk2 1 Physical1 1 1 Physical product Physical2 1 Physical3 Chi-square=7.016, df=4, p=.135, Normed Chi-square=1.754, CFI=.981, NFI=.959, RMSEA=.091 eer1 eer2 eer3 eer4 eer5 1 Risk1 1 1 Risk2 1 Physical1 1 Investment risk & Physical product Physical2 1 Physical3 Chi-square= 8.844, df=5, p=.115, Normed Chi-square= 1.769, CFI=.976, NFI=.948, RMSEA=.092 Note: a. Software used: AMOS 4.0. err1 to err5 are error terms, Risk1 to Risk2 are corresponding items of the Investment Risk factor, Physical1 to Physical3 are corresponding items of the Physical Product factor. b. The two-factor model is superior to one-factor model. 95 Appendix Investment risk & Intangible product eer1 eer2 1 Risk1 1 Investment risk 1 Risk2 1 eer3 eer4 eer5 eer6 eer7 Intangible1 1 1 Intangible2 1 Intangible product Intangible3 1 Intangible4 1 Intangible5 Chi-square=39.337, df=14, p=.000, Normed Chi-square=2.810, CFI=.912, NFI=.873, RMSEA=.141 eer1 eer2 eer3 eer4 eer5 eer6 eer7 1 Risk1 1 1 Risk2 1 Intangible1 1 Intangible2 1 Intangible3 Investment risk & Intangible product 1 Intangible4 1 Intangible5 Chi-square= 50.285, df=14, p=.000, Normed Chi-square= 3.592, CFI=.874, NFI=.837, RMSEA=.169 Note: a. Software used: AMOS 4.0. err1 to err7 are error terms, Risk1 to Risk2 are corresponding items of the Investment Risk factor, Intangible1 to Intangible5 are corresponding items of the Intangible Product factor. b. The two-factor model is superior to one-factor model. 96 Appendix Investment risk & Network connection eer1 1 Risk1 1 1 eer2 eer3 eer4 eer5 eer6 Investment risk Risk2 1 Network1 1 1 Network connection Network2 1 Network3 1 Network4 Chi-square=9.626, df=8, p=.292, Normed Chi-square=1.203, CFI=.986, NFI=.928, RMSEA=.047 eer1 eer2 eer3 eer4 eer5 eer6 1 Risk1 1 1 Risk2 1 Network1 1 Network2 Investment risk & Network connection 1 Network3 1 Network4 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. 97 Appendix Physical product & Intangible product eer1 eer2 eer3 eer4 1 Physical1 1 1 Physical product Physical2 1 Physical3 1 Intangible1 1 eer5 eer6 eer7 eer8 1 Intangible2 1 Intangible product Intangible3 1 Intangible4 1 Intangible5 Chi-square=73.650, df=19, p=.000, Normed Chi-square=3.876, CFI=.878, NFI=.845, RMSEA=.178 eer1 eer2 eer3 eer4 eer5 eer6 eer7 eer8 1 Physical1 1 1 Physical2 1 Physical3 1 Intangible1 1 Intangible2 Physical product & Intangible product 1 Intangible3 1 Intangible4 1 Intangible5 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. 98 Appendix Physical product & Network connection eer1 eer2 eer3 eer4 eer5 eer6 eer7 1 Physical1 1 1 Physical product Physical2 1 Physical3 1 Network1 1 1 Network connection Network2 1 Network3 1 Network4 Chi-square=17.949, df=13, p=.159, Normed Chi-square=1.381, CFI=.977, NFI=.923, RMSEA=.065 eer1 eer2 eer3 eer4 eer5 eer6 eer7 1 Physical1 1 1 Physical2 1 Physical3 1 Network1 1 Network2 Physical product & Network connection 1 Network3 1 Network4 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. 99 Appendix Intangible product & Network connection eer1 eer2 eer3 eer4 eer5 eer6 eer7 eer8 eer9 Intangible1 1 1 Intangible2 1 Intangible product Intangible3 1 Intangible4 1 Intangible5 1 Network1 1 1 Network connection Network2 1 Network3 1 Network4 Chi-square=72.951, df=26, p=.000, Normed Chi-square=2.806, CFI=.886, NFI=.838, RMSEA=.141 eer1 eer2 eer3 eer4 eer5 eer6 eer7 eer8 eer9 1 1 1 1 1 1 1 1 Intangible1 1 Intangible2 Intangible3 Intangible4 Intangible5 Intangible product & Network connection Network1 Network2 Network3 1 Network4 Chi-square= 139.345, df=27, p=.000, Normed Chi-square= 5.161, CFI=.728, NFI=.690, RMSEA=.214 Note: a. b. 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. 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Harvard University Press, Cambridge, Mass. 113 Appendix QUESTIONNAIRE 114 ----- Questionnaire ----¾ 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. ¾ The questionnaire consists of two separate sections. ¾ Questions in Section I concern the company and its general profile. ¾ Questions in section II seek specific information regarding international business experience and activities of your company. 1 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 ( ( ( ( ) ) ) ) Manufacturing Construction Utilities Agriculture, Fishing &Quarrying ( ) Others Services Producing Industries ( ( ( ( ( ( ) ) ) ) ) ) Wholesale & Retail Trade Hotels & Restaurants Transport & Communications Financial Services Business Services 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) ()25 ( ) 10 to15 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) ()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 Section 2: International Business Experience Kindly circle only one of the seven numbers in each box that is most appropriate: 2.1 How do you rate your product/service development program in terms of preparing your firm to market new differentiated products/services? Weak 1 2 3 4 5 6 7 Strong 2.2 How do you rate your firm’s potential to create new and creatively designed products/services? Weak 1 2 3 4 5 6 7 Strong 2.3 Approximately, what percentage of your total earnings would you attribute to your foreign source income? Low 1 2 3 4 5 6 7 High 2.4 How multinational do you think your firm is, in term of number of countries operated in? Low 1 2 3 4 5 6 7 High 2.5 How capable is your firm in terms of technological, managerial, and financial capabilities to handle international expansion? Weak 1 2 3 4 5 6 7 Strong 2.6 What do you think is the market potential of your business in the following regions? • Asean Low 1 2 3 4 5 6 7 High • Asia • Rest of the world Low 1 2 3 4 5 6 7 High Low 1 2 3 4 5 6 7 High 2.7 What do you think is the growth potential of your business in the following regions? • Asean Low 1 2 3 4 5 6 7 High • Asia Low 1 2 3 4 5 6 7 High • Rest of the world Low 1 2 3 4 5 6 7 High 2.8 What do you think about the attitude of the foreign government in the following regions toward your business sector? • Asean Negative 1 2 3 4 5 6 7 Positive • Asia • Rest of the world Negative 1 2 3 4 5 6 7 Positive Negative 1 2 3 4 5 6 7 Positive 2.9 What do you think about the attitude of the foreign government in the following regions toward foreign firms? • Asean Negative 1 2 3 4 5 6 7 Positive • Asia Negative 1 2 3 4 5 6 7 Positive • Rest of the world Negative 1 2 3 4 5 6 7 Positive 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 Unstable 1 2 3 4 5 6 7 Stable • Asia • Rest of the world Unstable 1 2 3 4 5 6 7 Stable Unstable 1 2 3 4 5 6 7 Stable 3 2.11 What do you think is the risk of converting and repatriating your income 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? from the following regions back to Singapore? • Asean • Asean Low 1 2 3 4 5 6 7 High Low 1 2 3 4 5 6 7 High • Asia Low 1 2 3 4 5 6 7 High • Asia Low 1 2 3 4 5 6 7 High • Rest of the world Low 1 2 3 4 5 6 7 High • Rest of the world Low 1 2 3 4 5 6 7 High 2.12 What do you think is the risk of foreign firms being taken over by local 2.16 How difficult is it to do business in the following regions because of the difference in the location’s culture from that of Singapore? government from the following regions? • Asean • Asean Low 1 2 3 4 5 6 7 High Easy 1 2 3 4 5 6 7 Difficult • Asia Low 1 2 3 4 5 6 7 High • Asia Easy 1 2 3 4 5 6 7 Difficult • Rest of the world Low 1 2 3 4 5 6 7 High • Rest of the world Easy 1 2 3 4 5 6 7 Difficult 2.13 Compared to Singapore, how would you rate the costs of making and 2.17 Rate your intensity/frequency of importing of machinery, spare parts etc prior to your first export experience. enforcing contracts in the following regions? • Asean Low 1 2 3 4 5 6 7 High Low • Asia Low 1 2 3 4 5 6 7 High • Rest of the world Low 1 2 3 4 5 6 7 High 1 2 3 4 5 6 7 High 2.18 Rate your intensity/frequency of importing of raw materials and components prior to your first export experience. Low 1 2 3 4 5 6 7 High 2.14 How sure are you that your standards of quality of services/products will 2.19. Rate your intensity/frequency of importing of products to be resold prior to your first export experience. be maintained if you operated jointly with a local firm in the following regions? Low 1 2 3 4 5 6 7 High Not sure 1 2 3 4 5 6 7 Sure • Asean 2.20 Rate your intensity/frequency of engaging foreign parties/firms to provide Not sure 1 2 3 4 5 6 7 Sure services related to planning and supervising prior to your first export • Asia experience. • Rest of the world Not sure 1 2 3 4 5 6 7 Sure Low 1 2 3 4 5 6 7 High 4 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. Low 1 2 3 4 5 6 7 High 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. Low 1 2 3 4 5 6 7 High 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. Low 1 2 3 4 5 6 7 High 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. Low 1 2 3 4 5 6 7 High 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: _________________________ 2.25 To what extent is your business with a new international customer affected by any relationship with your own other existing customers? Low 1 2 3 4 5 6 7 High 2. 26 To what extent is your business with a new international customer affected by any relationship with your own suppliers? Low 1 2 3 4 5 6 7 High 2.27 To what extent is your business with a new international customer affected by any of his customer relationships? Low 1 2 3 4 5 6 7 High 2.28 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? Low 1 2 3 4 5 6 7 High Postal Address: ______________________________________________ ______________________________________________ e-mail: __________________________ Tel: __________________________ Fax: __________________________ If you like to receive a copy of the study’s findings, please tick on the following box. Thank you very much 5 [...]... 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... 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... 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 Eclectic Paradigm (Foreign Direct Investment) Inward Internationalization (Import) Integrated Model of Internationalization. .. 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 two23 Chapter 2 dimensional plain while the derived integrated model on a three-dimensional... 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... 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... 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. .. 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,... 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... 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