Internationalisation of small and medium-sized firms : the role of the host country s institutional context

Abstract

The overall aim of this thesis is to contribute to a deeper understanding of the way that institutions impact the internationalisation of small and medium sized enterprises (SMEs). To address this aim I examine different aspects of SME internationalisation decisions. Based on empirical methods, I analyse two different datasets regarding an SME s entry mode choice, its establishment mode choice, its location choice and its entry timing. The thesis comprises six chapters. Chapter 1 introduces relevant background issues including the applied definition of SMEs as well as an overview of the main theoretical and methodological issues in research on SME internationalisation. After highlighting the research interest I present the two datasets applied in the empirical analyses. Finally, the last section of chapter 1 highlights the course of investigation. In chapters 2 to 5 I empirically examine different aspects of SME internationalisation. In detail, chapter 2 investigates the moderating effects of informal institutional distance and formal institutional risk on entry mode choice among German SMEs. Informal institutional distance represents the cultural and ideological differences between a firm s home country and the host country. Firms are challenged to bridge these differences when entering foreign markets. The formal institutional risk refers to the constraints resulting from insufficiently developed market support institutions in the host country. Firms have to handle additional hazards, restrictions, and costs in case of high formal institutional risk. The empirical findings add to prior research on SME internationalisation showing that the influence of established variables on entry mode selection is contingent upon the informal institutional distance and formal institutional risk in the host country.Chapter 3 elaborates on the moderating role of the perceived institutional uncertainty on foreign establishment mode choice (i.e. the decision between Greenfield and acquisition) of German SME. Arguing that the level of institutional uncertainty is contingent upon the manager s perception of hazards and risks the study shows that this is of particular importance in SMEs being often family businesses with centralised decision making by single persons. Empirical results confirm that the perceived institutional uncertainty moderates the relationships between international experience, knowhow intensity, investment volume as well as market growth and the SME s decision between Greenfield and acquisition.Chapter 4 examines the role of firm-specific knowledge intensity and international experience on SME location choice. Using the database of the Institute of Management Development, I built a new index in order to measure the institutional development of the target countries. This new index allows for a comprehensive and differentiated consideration of the individual country-specific degree of institutional development. In this context, I test an empirical model which analyzes determinants of the location decision of small and medium-sized enterprises. Results confirm that in addition to firm-specific motivations also an SME s knowhow intensity and international experience influence location choice. Thus, the study permits a more profound understanding of the effect that moderators have on SMEs and location choices considering the institutional development of the target country.Chapter 5 elaborates on the moderating role of institutional uncertainty on entry timing of early internationalising firms. The study draws on new institutionalism to examine in detail if entry timing is contingent on the institutional context in the host country. Hypotheses suggest that the institutional uncertainty in the host country moderates the relationships between international experience, network ties, learning capabilities and early internationalisation. The study s empirical results confirm that entry timing is contingent on the institutional context permitting a more profound understanding of the moderating effect institutional uncertainty has on entry timing. Chapter 6, finally, recapitulates and summarises the theoretical and empirical contributions of this dissertation. It further provides implications for the SME management. The thesis concludes showing limitations and directions for future research. Overall, the results of the empirical studies in this thesis show that SMEs are particularly sensitive to influences from the institutional set-up in the host country.