inter nationalization process of small and medium sized companies

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Internationalization process of small and medium-sized enterprises: toward a hybrid model

of experiential learning and planning.

Management International Review;

Lei Li, Assistant Professor of Management, Pamplin School of Business Administration, The

University of Portland, Portland, OR, USA.

Dan Li, Ph.D Candidate, Mays Business School, Texas A&M University, College Station, TX,

USA.

Tevfik Dalgic, Professor, School of Management, the University of Texas at Dallas, Richardson,

TX, USA.

Manuscript received September 2002, revised May 2003.

1/1/2004

Abstract

* This study develops a coherent internationalization process model, which is particularly needed

for examining the internationalization of small and medium sized enterprises (SMEs). Based on a

review of existing literature and an empirical illustration, this paper proposes a hybrid model that

integrates the experiential learning and systematic planning models, and incorporates the

contingency perspective. The managerial and scholarly implications of the model are discussed.

Key Results

* By replicating and extending the empirical analyses in a published article, this study illustratesthat US SMEs do not seem to follow a systematic planning process at the early stage of

internationalization.

* This study develops a hybrid model of internationalization process which is comprised of three

major phases: Antecedents, planning, and execution.

Introduction

The literature shows that there are three broad theoretical perspectives regarding the

internationalization process of firms: (1) Experiential learning (Johanson/ Vahlne 1977,

Lam/White 1999, Cavusgil 1980, Cavusgil/Zou 1994), (2) Systematic planning (Root 1987, 1994,

Miller 1993, Yip/Biscarri/Monti 2000), and (3) Contingency perspective (Welch/Welch 1995,

Boter/Holmquist 1996, Coviello/ Munro 1997, etc.). Despite their important contributions, these

perspectives have not led to a coherent framework that may help both scholars and practitioners

to gain a convergent understanding of the internationalization process of firms. (1) This paper

seeks to develop a hybrid model of internationalization process which reconciles different

theoretical perspectives, and bears normative implications for managers.


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In our opinion, the establishment of such a model would be particularly helpful for examining the

internationalization process of small and medium-sized enterprises (SMEs) which have played an

increasingly important role in the international arena (Fujita 1995, Liesch/Knight 1999, Manolova

2001). (2) There are three major reasons. First, SMEs usually have limited resources to allocate

for information and knowledge acquisition pertaining to foreign markets. They cannot afford to

undertake a thorough systematic planning process as big firms. Second, SMEs are internationally

inexperienced compared to large multinational enterprises (MNEs). They face the problem of"unknown unknowns" (Yip/Biscarri/Monti 2000). Third, today's SMEs initiate their international

expansion in a global environment which is substantially different than the one faced by

traditional MNEs two or three decades ago. They often have to respond to international market

opportunities in a very timely manner.

The rest of the paper is organized as follows. We first briefly review and classify the literature on

firms' internationalization processes. Next, we conduct an empirical replication and extension of

the article of Yip, Biscarri, and Monti (2000). Then, we conceptualize a hybrid model by

integrating the experiential learning and systematic planning models, and incorporating the

contingency perspective. Subsequently, we discuss the managerial and scholarly implications of

our model. Finally, we draw our conclusions.

Literature Review: Three Major Perspectives

The research on internationalization processes of firms can be traced back to Aharoni (1966),who provided one of the richest descriptions of US foreign investment decision processes as the

result of his field study. It is, in fact, one of the earliest studies that abandoned the classic

economic rationality, and instead applied the behavioral theory of the firm to foreign direct

investment (FDI) research. Perhaps the most influential study on internationalization processes

was conducted by Johanson and Vahlne (1977), who drew upon the works of Cyert and March

(1963) and Aharoni (1966), and developed a process model best known as "Uppsala model."

Since then, research on internationalization processes has attracted enormous scholarly attention.

Among the numerous studies, three main perspectives can be identified: (1) The experiential

learning perspective as exemplified by the Uppsala model and Innovation-related models, (2) Thesystematic planning perspective that is essentially based on the classic economic rationality, and

(3) The contingency perspective that emphasizes the impact of contextual factors.

Experiential Learning Models

The research of Johanson and Wiedersheim-Paul (1975) and Johanson and Vahlne (1977) led to

the genesis of the Incremental Internationalization model (i.e., the Uppsala model) that was

largely based on the behavior theory of the firm (Cyert/March 1963) and the theory of firm

growth (Penrose 1959). The Uppsala Model proposes that a firm's existing foreign market

knowledge determines what kind of commitment decisions it may make. The commitment

decisions reshape the current business activities, which, in turn, enhance the firm's market

commitment and market knowledge. The central thesis of this model is the gradual acquisition,

integration, and use of knowledge about foreign markets and operations through incremental

commitments. Johanson and Vahlne (1977) emphasized that market-specific knowledge could

only be gradually gained through experience in foreign markets.

The Uppsala model has triggered a large number of studies along the line of experiential learning

perspective. Among the subsequently proposed models, the Innovation-related models

(Bilkey/Tesar 1977, Czinkota 1982, Cavusgil 1980, 1984, Reid 1981, etc.) and the Adaptive


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Choice model (Lam/White 1999) should be noted. The Innovation-related models perceive a

firm's internationalization as an innovation. They describe an internationalization process as

similar to a sequence of new technology adoption. The Adaptive Choice Model (Lam/White

1999) avers that the internationalization process unfolds as a firm tries to adaptively solve various

dilemmas such as strategic dilemmas (e.g., standardization vs. adaptation), structural dilemmas

(e.g., strong vs. weak headquarters), etc.

Although some empirical studies have supported the experiential learning perspective (e.g.,

Gankema/Snuif/Zwart 2000, Eriksson/Majikgard/Sharma 2000, Kwon/Hu 2001, etc.), there has

been strong and legitimate criticism. Sullivan and Bauerschmidt (1990) pointed out that the

Uppsala model was exclusively induced from the studies on Scandinavian industrial firms and

therefore lacked external validity. Melin (1997) commented that the Uppsala model appeared to

be too deterministic by nature.

Andersen (1993) evaluated the Uppsala model and Innovation-Related models in light of theory

construction and criteria. She concluded that the former failed to explain how an

internationalization process begins and how experiential knowledge of foreign markets affects

resource commitment while the latter contained unobservable concepts and delivered only trivial

explanations of internationalization processes (Andersen 1993, Oviatt/McDougall 1992).

According to Oviatt and McDougall (1994), there are at least three situations wherein the

experiential learning models may not apply. First, the firms with abundant resources are expectedto take large steps in their international expansion. Second, when the foreign market conditions

are stable and homogeneous, experiential learning may become unnecessary. Third, when firms

plan to tap into new foreign markets that are similar to the existing ones, the previous experience

may be easily transferable to the new markets. The above situations have become increasingly

common with the regional integration of economic activities (Rugman 2000).

Systematic Planning Models

Some researchers (e.g., Root 1987, Miller 1993, Johansson/Yip 1994, Yip et al. 2000) claim that

systematic internationalization planning, based on thorough market research and scanning, would

enhance a firm's international performance. Miller (1993) proposed a ten-step internationalization

process that involves evaluation and selection of various foreign operation plans. Root (1987,

1994) specified an internationalization process composed of assessing market opportunities,

setting objects, selecting entry modes, formulating marketing plans, and executing, which has

appeared to be supported by some case studies and anecdotal evidence. Most recently, Yip et al.

(2000) proposed "Way Station Model" of SME internationalization. They suggested six steps in

the sequence of motivation and strategic planning, market research, market selection, entry mode

selection, problem planning, and post-entry commitment.

In general, the systematic planning models seem to be extremely rational. First, the centralassumption of these models is the viability of thorough and efficient market information

collection and analyses. However, considering the recent trend of quickened and early

internationalization of SMEs in the presence of evading market opportunities and turbulent

business environments (UNCTAD 1993, OECD 1997), the value of lengthy planning is

increasingly questionable.

Second, from the behavioral perspective of corporate decision-making, many decisions may be

made simultaneously rather than sequentially. Therefore, some of the proposed sequential stages


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may not be distinguishable in certain contexts. Third, a firm's internationalization process may be

significantly affected by its motivations and initial competencies.

Contingency Perspective

The contingency perspective suggests that a firm's internationalization process depends on

contextual factors (Roberts 1999, Jones 1999, Welch/Luostarinen 1993). This perspective can

perhaps be traced back to Turnbull's criticism of the Uppsala model. Turnbull (1987) asserted that

a company's internationalization is largely determined by the operating environment, industry

structure, and its own marketing strategy. Coviello and Munro (1997) tried to integrate the

incremental internationalization models with the network perspective. They found that the

internationalization processes of small software firms are affected by formal and informal inter-

firm relationships, and resemble an accelerated version of the incremental and sequential stage

models at best. Boter and Holmquist (1996) suggested that while small firms in traditional

economic sectors might still go through lengthy and organized internationalization processes,

those in the sectors characterized by high-tech demands (with first-generation products and/or a

pronounced intrapreneurship) tend to adopt rapid internationalization processes wherein the

development of various functions does not follow a predictable order. The acceleration of the

internationalization process is even more significant in those so-called "born global" firms(Knight/Cavusgil 1996).

The different models of internationalization process are summarized in Table 1.

From the above literature review on internationalization processes, we can identify an

evolutionary pattern of relevant research since the 1970's. The three perspectives of the

internationalization process may be temporally matched with the development of information

technology and the change of international business environments. In the 1970's and early 1980's,

the experiential learning perspective was developed to reflect the difficulties in obtaining relevant

information about foreign markets resulting from the fragmentation of international markets, the

rudimentary information technologies as well as the lack of foreign experience.

In the late 1980's and early 1990's, with the rapid advance of information technologies and the

gradual integration of international markets, foreign market knowledge became readily available

and transferable. Thus, the systematic planning perspective was widely endorsed by scholars and

managers. In the mid and late 1990's, the unprecedented market volatility and environmental

turbulence in the global arena, coupled with the increasingly shorter product life cycle and the

liberalization of national economies, have prodded scholars to adopt the contingency perspective

to explain the large variety of ad-hoe internationalization processes, especially of SMEs.

Implications for SMEs: A Brief Theoretical Reflection

The three perspectives of the internationalization process differ in their relevance to SMEs in thenew economic environment characterized by new information technology, deconstruction of

value chain, and regionalization of economic activities (Evans/Wurster 1997, Rugman 2000).

Experiential learning may be viable for the SMEs that intend to explore foreign market

opportunities but lack relevant international knowledge and competence and/or are operating in

highly volatile economic sectors. Systematic planning might be desirable for the SMEs that are

engaged in relatively mature industries and/or have achieved certain technological advantages.

The contingency perspective seems to be theoretically more promising because of its emphasis on


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the unpredictable nature of SME internationalization processes. However, it falls short of

providing a coherent framework that can help guide researchers and SME managers.

SME Internationalization Process: An Empirical Illustration

In this section, we illustrate that the SME internationalization process might well be capricious

even if it appears to be in good order at first sight. We have replicated and extended the empirical

analyses that were originally conducted by Yip, Biscarri, and Monti (2000). We chose this article

in part because it has made a commendable effort to examine the initial internationalization

process of SMEs and in part because the authors reported the surprising finding that these SMEs

appeared to follow a systematic planning process.

Data and Methods

Yip et al. (2000) hypothesized "Way Station Model" based on the works of Johanson and Vahlne

(1977), Root (1987), and Miller (1993) (see Figure 1.1). They designed a questionnaire that

consisted of 23 parts and totaled 120 questions on a seven-point Likert scale. They sent

questionnaires to two waves of 300 mid-sized US firms and received 68 responses (see Appendix

for demographic characteristics of the companies surveyed).

The measures of variables were derived from the questionnaire survey. For a manifest variable,

Yi et al. (2000) used a single composite indicator (i.e., the arithmetic average score for the

multiple closely related questions) to measure it. For a latent variable, they used more than one

composite indicator. (3) The descriptive summary and correlations of measured variables are

reproduced in Table 2.

They chose the structural equation modeling (SEM) technique because it can readily handle

multiple endogenous and/or latent variables and small sample size. To implement SEM

technique, they used EQS program to run Bentler-Weeks robust maximum likelihood estimation

(Bentler 1993).

The rationale for replicating and extending Yip et al.'s (2000) analyses lies in our understanding

of SEM technique that one particular structure cannot be confirmed as being the right model even

if the fit with the data is good (Mueller 1996, p.80). In fact, the alternative structures may be

equally acceptable as long as they are reasonable theoretically and practically and fit with the

data. Our analysis relies on the descriptive statistics and correlation matrix of the measured

variables reported in the original article. (4) We employed the LISREL 8.1 program. (5) The

methodological comparison between the original study and ours is summarized in Table 3.

Analyses and Results

We tried a number of structural models in our analyses. As a result, we are able to present at leastfour structural models (including the original) that make sense and have a reasonable goodness of

fit. The four structural models are displayed in Figure 1.

[FIGURE 1 OMITTED]

We briefly describe the four structural models as follows:


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1. The Original Structural Model (see Yip et al. 2000, p. 20) (6)

It presents a systematic and sequential internationalization planning process based on the classic

economic theory of perfect rationality (see March/Simon 1958, Simon 1979). The story-line is

that a firm is initially motivated to explore international markets. The firm conducts market

research to choose the most appropriate foreign market. Then, it decides on the proper entry mode

(e.g., wholly owned subsidiary or joint venture). Finally, the firm makes a resource commitmentwhen all the previous steps are properly undertaken. This model might be applied to a SME that

has already built a strong competitive position domestically, and has just begun to penetrate

international markets.

2. Alternative Structural Model I

Compared to the original model, we drop the path from Entry Mode Selection (EMode) to Post-

entry commitment (Commit) but add the path from Market Selection (Select) to Commit. We can

imagine that the above mentioned SME may face a two-market dilemma in which one market is

large but the host government requires joint venture arrangement whereas the other market issmall but the firm is allowed to set up its wholly owned operation. In such a situation, the firm

may need to make a critical decision on market selection. This decision would directly lead to

both entry mode decision and post-entry commitment.

3. Alternative Structural Model II

This model suggests that a SME's motivation may affect which market and entry mode to select

and how much of a commitment it may make. Thus we add the paths from Motivation and

Strategic Planning (KMotiv) to Select, EMode, and Commit respectively. We also think that the

initial advantage may affect the extent to which the firm can acquire new competitive advantages

due to the snowball effect. Thus, we add the path from Initial Competitive Advantage (KInitial)

to Acquired Competitive Advantage (Acquired). In addition, we reverse the path from Market

Research (ERes) to Select because, for example, a SME in intermediate businesses may follow its

major industrial customers to a foreign market. In such a case, the firm first selects the market,

and then conducts market research.

4. Alternative Structural Model III

This model is consistent with Agency theory (Jensen/Meckling 1976). If we imagine that a SME

has pre-determined its entry mode (e.g., a wholly owned subsidiary) due to its obsession with

control and/or protection of intellectual properties, then the firm needs to select market and

conduct market research. Therefore, we add paths from KMotiv to EMode, from EMode to ERes,

and from EMode to Select. In this case, we also modify some paths to Commit and Acquired to

achieve a better data fit.

The coefficient estimates and fit indices are displayed in Table 4 and 5 respectively.

There are five columns of results in both tables. The first column displays the results reported in

the original article. The second column shows the results from the replication of the original

structural model by using LISREL. The third, fourth, and fifth column exhibit the results from

estimating alternative structural model I, II, and III respectively.


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In Table 4, the results from replication in column (2) are very close to those in column (1). The

coefficient estimates reported in the article are replicated fairly well in terms of magnitude and

significance. (7) The [R.sup.2] for Performance (EPerf) and Acquired are almost the same

between the original study and our replication. In addition, Table 5 (column (1) and (2)) clearly

shows that the model data fit in the replication analysis is as good as in the original article.

The results of the three alternative structural models (I, II, and III) are presented in Column (3),(4), and (5) in Table 4 and Table 5. Four brief comments should be made here: (1) The three

alternative models are all specified according to relevant theories or practical rationale, (2) the

three alternative models are all significant and have equally good data fit compared to the original

model, which means that the validity of original model may be equivocal, (3) these three models

have at least as strong an explanatory power as the original one pertaining to Performance and

Acquired (i.e., [R.sup.2] for EPerf and Acquired are equal or larger), and (4) most critical paths

we specified or modified are significant, (8) which indicates that these models are consistent with

the scenarios that we have developed.

In summary, our empirical illustration appears to underscore the contingency perspective of the

internationalization process to a certain extent. We argue that it may be too premature to claim

that SMEs have followed a systematic planning process. In the next section, we propose a hybridmodel that is intended to inform both researchers and practitioners in a holistic manner.

A Hybrid Model of Internationalization Process

Our hybrid model is constructed to integrate the experiential learning and systematic planning

models in a semi-sequential approach and meanwhile incorporate the contingency perspective.

Figure 2 illustrates the overall conception of our model.

[FIGURE 2 OMITTED]

We propose that a firm's internationalization process is comprised of three major phases:Antecedents, planning, and execution. We use single and double solid lines to exhibit the

dynamic loop of the experiential learning model and the rational sequence of the systematic

planning model respectively. By adding a few critical elements (e.g., the feedbacks from

execution to motivation and planning as well as the alternative sequences within planning and

execution phases) with bold dash lines, we demonstrate that each of the two models is indeed an

integral part of a larger and more inclusive framework. We have also drawn upon the contingencyperspective by highlighting firm-specific motivations and competencies as essential contextual

factors affecting firms' internationalization processes.

Figure 2 shows that the experiential learning school essentially bypasses the planning phase and

ignores firm-specific motivations. Instead, it focuses on the interactions between the corporate

competencies (esp., international knowledge and experience) and the execution or operation inforeign markets. With limited market knowledge and experience at the initial internationalization

stage, firms are supposed to start with a low level, and thus a low risk involvement (e.g., export to

psychically close markets) and sequentially increase the commitment to engage themselves in

higher level, and thus higher risk activities (e.g., set up local production in a psychically distant

market) as market specific knowledge accumulates through experience. Although this model is

substantially tilted toward behavioral aspects of the firm by stressing the environmental

uncertainty and bounded rationality, it has a clear element of economic rationality reflected in its

predetermined sequence of international market activities. Indeed, as Melin (1997, p. 78)


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lamented, "the deterministic, sequential nature of [Uppsala] model excludes other options of

strategic choices, e.g., to initiate local production in a foreign country without having gone

through the steps of exporting or having local sales subsidiaries. Leapfrogging of intermediate

stages is in fact quite common."

We would like to remedy this deficiency by suggesting alternative sequences in the execution

phase as indicated by the bold dash lines. For instance, a customer-following firm may start witha direct foreign production (i.e., high level involvement and risk) or a joint venture (i.e.,

intermediate level involvement and risk), and then look for an exporter or sales agent (i.e., low

level involvement and risk) to handle complementary across-the-border transactions.

The neglect of the planning phase is all but certain for the experiential learning school because it

downplays the role of systematic acquisition of general knowledge in facilitating foreign market

entries. We argue that the value of general knowledge should not be underestimated in the

information age. The intended acquisition and use of general knowledge, in conjunction with

firm-specific competencies and motivations emerged from the interrelated business activities, can

in fact lead to any level of international commitment at the very beginning of a firm's

internationalization. For example, many Japanese industrial suppliers entered foreign markets

with local production because they had obtained significant market knowledge from theircustomers and the Sogo Shosha (i.e., general trading companies) that they had been affiliated

with (Delios/Beamish 1999). In addition, the experiential learning model appears to overlook the

fact that the execution itself may, in turn, enhance the capability and effectiveness of planning

(see the bold dash line in the top middle part of Figure 2).

Figure 2 also reflects the essence of the systematic planning school. This school suggests that

firms go through a systematic sequential process of acquiring general knowledge and planning,

which is presumably driven by the firms' motivation and initial competencies. As we have

illustrated, the planning sequence for SMEs may not be from market research to market selection,

and then to entry mode selection. Our empirical exploration shows that Yip et al.'s (2000) original

model may simply reflect one possible scenario of the internationalization planning process. We

argue that while it is necessary to investigate and plan before a market entry, the process maywell be unsystematic, multidirectional, and less sequential, especially in the context of SMEs that

are resource constrained and often have to respond to the imperative of internationalization

promptly. For example, a technology-acquiring firm may decide on the foreign location first, and

then conduct market research and consider market entry mode (see relevant bold dash lines within

the planning phase). Moreover, the planning process normally takes an iterative sequence rather

than a linear sequence (see the feedback from the planning phase to the antecedents phase)

because external events and internal conflicts may knock the process off track and force the

managers to repeat it later (Mintzberg/Raisinghani/Theoret 1976). In addition, systematic

planning alone would hardly lead to an effective acquisition of market-specific knowledge that is

absolutely needed for the firms to avoid significant operational blunders in the foreign markets

(Dalgic/Heijblom 1996).

The systematic planning school is too "rational" to incorporate the need for experiential learning.

However, it is clearly complementary to the latter. Our fundamental point is that experiential

learning and systematic planning are two separate but semi-sequentially interrelated components

in the internationalization process of firms. Neglect of either would be misleading theoretically

and harmful in practice.


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Discussions

This study shows that each of the received perspectives on firms' internationalization processes, if

it stands alone, has a far more limited utility to practitioners as well as researchers. We present a

hybrid model that not only integrates experiential learning and systematic planning, but also

incorporates the more recent contingency perspective. Such a model is intended to help both

researchers and practitioners in reviewing and analyzing internationalization process strategies offirms from a holistic perspective. It should be noted that although our model shares a central

contention with the contingency perspective, it differs in some important aspects. First, we

emphasize that an integration of experiential learning and systematic planning can provide a more

balanced view of the internationalization process. It is not that they are wrong; they each only tell

a partial truth. Combined together in a semi-sequential manner, they can have a much stronger

explanatory power. Second, although we agree that firms' internationalization processes are

essentially path dependent and highly unpredictable, we contend that a model or framework can

be generated to capture the variety of seemingly chaotic and non-rational patterns. Third, we

suggest that such a model bears not only descriptive but also strong normative implications.

Our model may be of particular relevance to SMEs. First, most large MNEs have already passed

the early stage of internationalization. Their focus has shifted to the tasks such as increasing hostcountry market shares, reconfiguring value-added processes, improving efficiency, and enhancing

global intra-firm learning rather than foreign market entries. Thus, our model may not be as

essential to large MNEs as to SMEs. Second, even when large MNEs need to enter new foreign

markets, they usually have the capacities, routines and international experience to go through a

systematic planning process. This process is often costly and time-consuming but could be

worthwhile considering the typically large size of their foreign investments. In contrast, SMEs

need to be focused and flexible given their relative paucity of resources (e.g., management time,

Planning staff, money, etc.) and international experience (Liesch/Knight 1999, Aharoni 1966). At

times, a SME would benefit from undertaking a systematic planning process if it has a clear edge

in technology and product quality, and has discretion to pick an appropriate foreign market to

start its international campaign. Other times, a SME may only need to focus on a critical step in

the planning process such as the negotiation and evaluation of entry mode if, for example, it mustfollow a key customer abroad to retain the business. On occasions, it would be wise for a SME to

"muddle through" with incremental steps without a visible planning phase if, for example, the

firm is involved in a volatile and uncertain industry, and has to take actions to gain valuable

industry and market-specific information, and explore its strategic options. In short, our model

tends to appeal to SMEs better because it caters to a wide range of internationalization processes.

Our model bears some specific normative implications for SME managers.

(1) Our hybrid model may serve as a roadmap for SMEs. Although systematic planning is often

not practical for SMEs, ad-hoc actions are not desirable for them either. SME managers may use

our model to prepare for their intended internationalization process strategies. They should first

examine their motivations and existing competence base carefully. Then, they need to identify

and focus on the critical steps in the internationalization process and deploy their limited

resources accordingly. For example, an industrial supplier following its major customer abroad

may want to specifically study the suppliers' market in the host country and the feasibility of

forming a joint venture with its customer as Japanese companies have practiced.

(2) SMEs' international expansion is often triggered by external ad-hoc signals such as the

activities of customers, suppliers, or partners. Moreover, SMEs are not much fettered by


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bureaucracy and hierarchical thinking. Top managers' personal initiatives can often drive

internationalization at an accelerated pace, especially for innovation-oriented SMEs. Compared to

experiential learning and systematic planning models, our hybrid model is relatively flexible in

the sense that the process is neither predetermined nor linearly sequential. Thus, it may assist

SME managers in weighing on emergent internationalization processes and/or making sense out

of competitors' internationalization strategies.

(3) Our model shows that a firm's internationalization process is iterative. Each phase (e.g.,

antecedents) receives periodic feedbacks from its subsequent phases (e.g., planning and

execution). SME managers face different options and constraints from one iterative process to

another. Our model has a potential to help SME managers to identify sensible paths in each

iterative process to avoid serious blunders or wasted efforts.

Our model also bears a few implications for future research. First, it may serve as a platform

based on which researchers can conceive and build more sophisticated internationalization

process models. For example, we have only specified two antecedents of internationalization:

Motivation and corporate competence. There is plenty of room for informed scholars to define

and develop the antecedent phase more systematically. Moreover, our model leaves out

environmental factors such as industrial characteristics and home/host country effects that can besalient for SMEs. It would be interesting to see how the business environment may be explicitly

incorporated into our hybrid model.

Second, scholars may identify many specific empirical research issues from our model. For

example, one may examine how the disparity of motivations and corporate competencies may

lead to divergent internationalization processes for SMEs. Although motivation and competence

have been addressed extensively in foreign direct investment (FDI) literature (e.g., Dunning 1993,

2000), they are much more often referred to in connection with FDI direction, location, and entry

mode than with internationalization processes. One may raise specifically such unanswered

questions: (1) Given a certain motivation (e.g., market seeking, customer following, or

technology/resources acquiring), how might a SME's competence level affect its choice between

experiential learning and systematic planning as well as its degree of commitment in theexecution phase? (2) Given a certain level of competence, how would SMEs with various

motivations select different internationalization processes?

Third, as noted earlier, today's SMEs face a global business environment vastly different from the

one in which traditional MNEs were initially involved. Yet, we know little specifics regardinghow the advance of information technology, the regional economic integration (e.g., European

Union, North American Free Trade Area), and the dominance of the worldwide largest MNEs

affect internationalization processes of SMEs. Perhaps it is time for international business

scholars to conduct the type of field research and case studies that Aharoni (1966), and Johanson

and Vahlne (1977) had done many years before. In this regard, our model is useful for scholars to

identify and classify the major patterns of SME internationalization processes.

Fourth, our model is partly a normative model. Although we used a sample of U.S. SMEs for our

empirical illustration, we believe that the model is applicable regardless of national contexts.

Nonetheless, the general validity of the model may only be substantiated with empirical studies

involving multiple countries. This is, in fact, a possible avenue for future research.

In addition, our study has an important methodological implication for relevant researchers. Our

empirical replication and extension suggest that the analysis in Yip et al. (2000) may reflect part


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of the internationalization behavior of the US SMEs in the sample. Considering the variety of

industries in which these SMEs were involved and the variance of motivations underlying their

internationalization, a single structural model might be misleading. Indeed, we have shown that at

least three alternative structural models capture the phenomena as well as the original model. This

finding provides some food for thoughts for similar empirical query.

Conclusion

This paper has proposed a hybrid model of internationalization process with specific relevance to

small and medium sized enterprises (SME). A central argument underscores our model. Despite

the enormous influences of the experiential learning and systematic planning perspectives, neither

provides an adequate account of internationalization processes. The contingency perspective is

necessary and helpful but delivers limited value without a coherent framework. However, once

we integrate the three perspectives within a model, they tend to be far more powerful and

realistic, especially in the context of SMEs.

Our model is not a replacement of the incumbent perspectives. Rather, we believe that it is anenhancement of the prior scholarly works. For managers, our model may serve as a road map to

examine and analyze a variety of internationalization processes and related strategies. For

researchers, our model may be useful for generating new ideas and/or uncovering relevant

research issues.

Appendix

Demographic Characteristics of the Companies Surveyed

Ownership 44% public/56% private

Management 40% family managed

Total annual revenues $ 211 million

Years in business 41

Number of employees 1222Percentage of international revenues 24%

Primary line of business Intermediate producer

Key export markets in rank order 1. Canada

2. United Kingdom

3. Mexico

4. Germany

5. France

6. Asian countries

Industries Industrial manufacturing 60.0%

Services 13.8%

Electronics 10.8%

Consumer products 7.7%

Distribution 4.0%

Other 3.1%

(Adapted from Yip, Biscarri, and Monti 2000, p. 19)

Table 1. Comparisons of Internationalization Process Models

Experiential Learning

Innovation-Related


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Uppsala Model Models

Internationalization --The cycle of four --A sequence of stages

Process self-reinforcing of adopting new

components: market technologies

knowledge, commitment --Internationalization

decisions, current decision considered as

activities and an innovation for a

market commitment. firm.

- Incremental learning

and market commitment

Time of Early and mid 70's Late 70's and early

Emergence 80's

Theoretical --Behavior theory of the firm: Bounded

Foundation rationality and uncertainty;

--Internationalization is embodied in a

process of organization learning and

adaptation.

Representative Johanson and Bilkey and Tesar

Studies Wiedersheim-Paul (1977), Czinkota

(1975), Johanson and (1982), Cavusgil

Vahlne (1977). (1980), Cavusgil

(1984), Cavusgil

Sampling: Observations and Sikora (1987),

of Swedish companies Cavusgil and Zou

in a few industries (1994), Reid (1981).

(steel, pulp and

paper, pharmacy, Sampling: Diversity

and engineering). of samples including

small and medium-sized

Lam and White (1999): firms in manufacturing

Adaptive choice model industries.

Sampling: A Taiwanese

firm--PEC, a

diversified firm.

Generalizability --Firms of any size --Firms of large and

--Initial stage of small sizes.

internationalization --Eriksson et al.

--Some research has (1997) pointed out

pointed out that that models in this

Uppsala model may not category may be more

be applicable to suitable for SMEs.

international

entrepreneurship.

Managerial --Experiential --Innovation adoption

Implications learning and is essential to the

adaptation are internationalization

particularly important of the export driven

in an international firms.

market of high --Exporters need

uncertainty. to make different

--SMEs may follow adaptations at


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the leaders and/or different stages

partners to reduce of international

the cost of "muddling expansion.

through".

Contingency

Systematic planning Perspective

Internationalization The --Accelerated

Process internationalization internationalization

process is a process with no

systematic step by predictable order;

step planning process -Internationalization

process depends on

various internal and

external factors.

Time of Late 80's and early Mid and late 90's.

Emergence 90's

Theoretical --Classic economic --Contingency theoryFoundation theory of perfect --Combination of

rationality; economic rationality

--Assume perfect and managerial

information behavior.

availability and a

firm can evaluate all

the opportunities to

pursue maximum utility

Representative Root (1987), Miller Boter and Holmquist

Studies (1993), Root (1994), (1996), Coviello and

Johansson and Yip Munro (1997), Welch

(1994), Yip et al. and Welch (1995),

(2000). Jones (1999).

Sampling: diversity Sampling: European

of samples including small and medium-sized

medium-sized firms in firms in various

various industries. industries.

Generalizability --Firms of any size, Small and medium-sized

but less viable for firms.

SMEs.

--Less applicable to

turbulent and volatile

environment

Managerial --Systematic strategic --Contextual factors

Implications planning may be viable (e.g., initial

for well established resources, networking

firms. condition with

--Limited stakeholders,

applicability to SMEs. marketing strategies,

industry

characteristics)

affect a firm's


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internationalization

process. Firms ignore

these factors at

their own peril.

--For SMEs,

contingency

perspective is

appropriate due to

their resource

constraints and a

large variety of

motivations.

Table 2. Summary Statistics and Correlations of Measured Variables

(Adapted from p.24-25, Yip et al. 2000)

Measured

variables

Constructs * ([dagger]) Mean S.D. Skewness

Motivation and Motivation 2.55 0.94 0.46strategic planning

(KMotiv)

Acquired Competitive Competencies 4.56 1.55 -0.64

Advantage (Acquired) Innovation 3.94 1.70 -0.37

Transfer 3.63 1.88 0.06

Market research Research 3.34 1.34 0.04

(ERes)

Market Selection Process 3.87 1.26 -0.37

(Select) Drivers 3.75 1.13 -0.62

Entry mode selection Mode 4.25 1.18 -0.39

(EMode)

Post-entry Structure 3.16 1.31 0.08

commitment (Commit) Strategy 3.55 1.42 -0.00

Human 3.75 1.77 -0.88

Resources

Internationalization Performance 5.10 1.13 -0.45

Performance (EPerf)

Initial competitive Initial 4.40 1.23 -0.86

advantage (KInitial)

Measured

variables

Constructs * ([dagger]) Kurtosis 1 2

Motivation and Motivation -0.50

strategic planning

(KMotiv)

Acquired Competitive Competencies -0.25 0.508


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Advantage (Acquired) Innovation -0.90 0.389 0.715

Transfer -1.07 0.315 0.614

Market research Research -0.60 0.577 0.401

(ERes)

Market Selection Process 0.11 0.434 0.285

(Select) Drivers 0.77 0.347 0.241

Entry mode selection Mode 0.11 0.279 0.204

(EMode)

Post-entry Structure -0.92 0.306 0.380

commitment (Commit) Strategy -0.69 0.177 0.266

Human -1.13 0.302 0.152

Resources

Internationalization Performance 0.10 0.125 0.425

Performance (EPerf)

Initial competitive Initial 0.39 0.271 0.373advantage (KInitial)

Measured

variables

Constructs * ([dagger]) 3 4 5

Motivation and Motivation

strategic planning

(KMotiv)

Acquired Competitive Competencies

Advantage (Acquired) Innovation

Transfer 0.757

Market research Research 0.277 0.146

(ERes)

Market Selection Process 0.261 0.246 0.519

(Select) Drivers 0.260 0.156 0.490

Entry mode selection Mode 0.199 0.180 0.488

(EMode)


commitment (Commit) Strategy 0.351 0.315 0.155

Human 0.185 0.044 0.225

Resources


Performance (EPerf)

Initial competitive Initial 0.323 0.463 0.328


Measured

variables


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Constructs * ([dagger]) 6 7 8


strategic planning

(KMotiv)



Transfer

Market research Research

(ERes)

Market Selection Process

(Select) Drivers 0.597

Entry mode selection Mode 0.626 0.654

(EMode)


commitment (Commit) Strategy 0.332 0.205 0.297Human 0.352 0.285 0.268

Resources


Performance (EPerf)

Initial competitive Initial 0.435 0.334 0.334


Measured

variables

Constructs * ([dagger]) 9 10


strategic planning

(KMotiv)



Transfer


(ERes)

Market Selection Process

(Select) Drivers

Entry mode selection Mode

(EMode)

Post-entry Structure

commitment (Commit) Strategy 0.573

Human 0.285 0.342

Resources

Internationalization Performance 0.400 0.241


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Performance (EPerf)

Initial competitive Initial 0.430 0.494


Measured

variables

Constructs * ([dagger]) 11 12


strategic planning

(KMotiv)



Transfer


(ERes)

Market Selection Process(Select) Drivers

Entry mode selection Mode

(EMode)

Post-entry Structure

commitment (Commit) Strategy

Human

Resources

Internationalization Performance 0.219

Performance (EPerf)

Initial competitive Initial 0.292 0.447


* The latent constructs are highlighted in bold; abbreviations used

for this study are in parentheses; In structural equation modeling,

an endogenous variable is referred to as Eta ([eta]) variable, and

an exogenous variable as Ksi ([xi]) variable. Thus, we use E or K

to prefix some abbreviations.

([dagger]) The measured variables for the latent constructs are

in bold.

Table 3. Methodological Comparisons between the Original and the

Current Study

Original Current

Statistical technique Structural equation Structural equation

modeling modeling

Data Raw Data Descriptive

statistics and

correlation matrix


18/25

Software package EQS program Lisrel 8.1 program

Estimator Bentler-Weeks robust Lisrel Default MLE

MLE

Structural models Single Multiple

tested

Table 4. Comparisons of Coefficient Estimates

(2) Replication of

Coefficient (1) Original-EQS original-Lisrel

[beta]13 (Select to Acquired) 0.03 (0.1)

[beta]14 (EMode to Acquired) -0.09 (-0.4)

[beta]15 (Commit to Acquired) 0.41 0.50 (2.95)

[beta]23 (Select to ERes)

[beta]24 (EMode to ERes)

[beta]32 (Eres to Select) 0.52 0.52 (4.4)

[beta]34 (EMode to Select)[beta]43 (Select to EMode) 0.85 0.85 (5.7)

[beta]53 (Select to Commit)

[beta]54 (EMode to Commit) 0.22 0.22 (1.76)

[beta]61 (Acquired to EPerf) 0.18 (1.1)

[beta]62 (Eres to EPerf) 0.12 (0.7)

[beta]63 (Select to EPerf) -0.18 (-1.0)

[beta]64 (EMode to EPerf)

[beta]65 (Commit to EPerf) 0.37 * 0.38 * (2.1)

[gamma]11 (KMotiv to Acquired) 0.34 0.33 (2.7)

[gamma]12 (KInitial to Acquired)

[gamma]21 (KMotiv to ERes) 0.53 0.53 (5.2)

[gamma]22 (KInitial to ERes) 0.19 0.19 (1.8)

[gamma]31 (KMotiv to Select)

[gamma]32 (KInitial to Select) 0.32 0.32 (2.7)

[gamma]41 (KMotiv to EMode)

[gamma]42 (KInitial to EMode) -0.09 (-0.8)

[gamma]51 (KMotiv to Commit)

[gamma]52 (KInitial to Commit) 0.54 0.56 (4.1)

[gamma]61 (KMotiv to EPerf) -0.1 (-0.7)

[gamma]62 (KInitial to EPerf) 0.30 0.294 (1.88)

[R.sup.2] for EPerf 0.28 0.29

[R.sup.2] for Acquired 0.42 0.41

(3) Alternative (4) Alternative

Coefficient I-Lisrel II-Lisrel

[beta]13 (Select to Acquired) -0.07 (-0.2) -0.2 (-0.5)

[beta]14 (EMode to Acquired) -0.03 (-0.12) 0.06 (0.22)

[beta]15 (Commit to Acquired) 0.53 (2.76) 0.49 (2.3)

[beta]23 (Select to ERes) 0.47 (3.4)

[beta]24 (EMode to ERes)

[beta]32 (Eres to Select) 0.52 (4.4)

[beta]34 (EMode to Select)

[beta]43 (Select to EMode) 0.85 (5.8) 0.96 (5.2)

[beta]53 (Select to Commit) 0.33 (2.1) 0.38 (0.9)


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[beta]54 (EMode to Commit) -0.07 (-0.2)

[beta]61 (Acquired to EPerf) 0.17 (1.0)


[beta]63 (Select to EPerf) -0.20 (-1.1) -0.2 (-1.0)

[beta]64 (EMode to EPerf)

[beta]65 (Commit to EPerf) 0.38 * (2.1) 0.39 (1.97)

[gamma]11 (KMotiv to Acquired) 0.33 (2.7) 0.33 (2.2)

[gamma]12 (KInitial to Acquired) 0.12 (0.9)

[gamma]21 (KMotiv to ERes) 0.53 (5.2) 0.34 (3.0)

[gamma]22 (KInitial to ERes) 0.19 (1.8) 0.0

[gamma]31 (KMotiv to Select) 0.4 (3.2)

[gamma]32 (KInitial to Select) 0.32 (2.7) 0.39 (3.1)

[gamma]41 (KMotiv to EMode) -0.18 (-1.5)

[gamma]42 (KInitial to EMode) -0.08 (-0.74) -0.1 (-0.8)

[gamma]51 (KMotiv to Commit) 0.08 (0.5)

[gamma]52 (KInitial to Commit) 0.47 (3.3) 0.42 (2.8)

[gamma]61 (KMotiv to EPerf) -0.1 (-O.7) -0.01 (-0.7)

[gamma]62 (KInitial to EPerf) 0.284 (1.85) 0.295 (1.94)

[R.sup.2] for EPerf 0.29 0.28

[R.sup.2] for Acquired 0.42 0.44

(5) Alternative

Coefficient III-Lisrel

[beta]13 (Select to Acquired)

[beta]14 (EMode to Acquired)

[beta]15 (Commit to Acquired) 0.44 (2.3)

[beta]23 (Select to ERes)

[beta]24 (EMode to ERes) 0.33 (3.4)

[beta]32 (Eres to Select) 0.19 (1.6)

[beta]34 (EMode to Select) 0.62 (5.6)

[beta]43 (Select to EMode)

[beta]53 (Select to Commit)

[beta]54 (EMode to Commit)

[beta]61 (Acquired to EPerf)


[beta]63 (Select to EPerf) -0.35 (-0.8)

[beta]64 (EMode to EPerf) 0.13 (0.4)

[beta]65 (Commit to EPerf) 0.38 (2.1)

[gamma]11 (KMotiv to Acquired) 0.28 (2.3)

[gamma]12 (KInitial to Acquired) 0.09 (0.6)

[gamma]21 (KMotiv to ERes) 0.46 (4.8)

[gamma]22 (KInitial to ERes) 0.09 (0.96)

[gamma]31 (KMotiv to Select) 0.18 (1.6)

[gamma]32 (KInitial to Select) 0.19 (1.9)

[gamma]41 (KMotiv to EMode) 0.2 (1.7)

[gamma]42 (KInitial to EMode) 0.28 (2.4)[gamma]51 (KMotiv to Commit) 0.21 (1.7)

[gamma]52 (KInitial to Commit) 0.55 (4.2)

[gamma]61 (KMotiv to EPerf) -0.04 (-0.2)

[gamma]62 (KInitial to EPerf) 0.31 (1.8)

[R.sup.2] for EPerf 0.31

[R.sup.2] for Acquired 0.43

([dagger]) The T-values are displayed in the parentheses.


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* This coefficient estimate is obtained when the path

from Acquired to EPerf is removed.

Table 5. Comparisons of Fit Indices

(2) Replication of

Fit Indices (1) Original-EQS original-Lisrel

Independence 424.787 424.592

Chi-square

Degrees of freedom 78 78

Model chi-square * 63.984 63.428


P-value 0.104 0.114

Satorra-Bentler 61.634 57.536

chi-square **

p-value 0.146 0.246

Bentler-Bonnet NFI 0.849 0.851

Bentler-Bonnet NNFI 0.943 0.945

CFI 0.963 0.964RCFI 0.964 N/A

RMSEA 0.062 0.0437

Number of iterations 11 23

Mardia's coefficient 3.23 N/A

(3) Alternative (4) Alternative

Fit Indices I-Lisrel II-Lisrel

Independence 424.592 424.592

Chi-square


Model chi-square * 61.955 59.037


P-value 0.140 0.132

Satorra-Bentler 55.700 53.037

chi-square **

p-value 0.302 0.286

Bentler-Bonnet NFI 0.854 0.861

Bentler-Bonnet NNFI 0.952 0.948

CFI 0.968 0.968

RCFI N/A N/A

RMSEA 0.0371 0.0396

Number of iterations 14 9

Mardia's coefficient N/A N/A

(5) Alternative

Fit Indices III-Lisrel

Independence 424.592

Chi-square

Degrees of freedom 78

Model chi-square * 61.583

Degrees of freedom 49

P-value 0.107

Satorra-Bentler 54.2

chi-square **


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p-value 0.283

Bentler-Bonnet NFI 0.855

Bentler-Bonnet NNFI 0.942

CFI 0.964

RCFI N/A

RMSEA 0.0398

Number of iterations 9

Mardia's coefficient N/A

* The equivalent in Lisrel is MFF Chi-square;

** The equivalent in Lisrel is NTWLS Chi-square

([dagger]) The equivalent in Lisrel is NFI

([dagger])([dagger]) The equivalent in Lisrel is NNFI

Endnotes

(1) We acknowledge that there are other theories that address a firm's internationalization such as

Dunning's eclectic or OLI paradigm and the resource-based view (RBV). However, it appears that

these theories are not intended to explain the internationalization process and thus are not highly

relevant to our study here. For example, Dunning's eclectic paradigm contributes to a convergent

understanding of the level and spatial pattern of foreign direct investment (Dunning, 1993, 2000).RBV has basically been used to explain a firm's resource-based rationale of internationalization

(e.g., Hitt/Hoskisson/Kim 1997).

(2) For the purpose of this paper, the strict definition of SME (e.g., the definition provided by the

American Small Business Administration) is not very important. We perceive SME as the firms

that are considerably smaller than an average firm on the market. (As a benchmark, the average

manufacturing firm in the CompuStat database has about 4,500 employees.)

(3) The validity of the measures is taken as given in our analyses because we drew upon the data

from a published article (Yip/Biscarri/Monti 2000). Yip et al. (2000) checked the possible

differences between the two responder groups and found that there were no significant

differences for more than 90% of the questions in the survey. In addition, they reported that thesample revealed a good spread in explanatory variables and dependent/endogenous variables and

thus the coefficients were unlikely to be greatly biased. Also, they tested the Cronbach's alpha for

the three latent constructs and showed that they were in general adequately measured by their

respective indicators.

(4) Although we may not accomplish the replication completely without using the raw data, there

are two reasons to justify our replication: (1) The results of our replication are generally very

close to those in the original study; (2) we can certainly compare different structures to examine

their relative merits based on the correlation matrix.

(5) Lisrel 8.1 can handle small samples compared to the old versions. The base SIMPLIS

program is available from the authors.

(6) There are three mistakes in the original diagram of Yip et al. (2000): (1) The arrow from

Research to Initial should be reversed; (2) The arrow from Research to Acquired should be

substituted by an arrow from Motivation to Acquired; (3) There should be an arrow from

Selection to Performance. (The mathematic description of the diagram is available from the

authors upon request.)


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(7) [beta.sub.15] (Commit to Acquired) appears to be somewhat higher than the original. While

[beta.sub.54] (EMode to Commit), 722 (KInitial to ERes), and [gamma.sub.62] (KInitial to

EPerf) were reported as significant at the 5% level by Yip et al. (2000), they appear to be

marginally significant at the 10% level in our replication. The coefficient estimates for certain

paths were not reported in the original article as they were not statistically significant at 5% or

above, which is confirmed by our replication.

(8) The paths such as KMotiv to EMode and KMotiv to Commit in Alternative III are significant

at 10%.

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