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E IMPACT OF GLOBALIZATIONON SMEs
Leo Paul Dana, Hamid Etemad, and Richard W. Wright
International business literature once focused on international business processes and
on the behavior of large multinational companies. Entrepreneurship or small business
literature, on the other hand, dealt mainly with the evolution of new companies and the
management of small business in a domestic context. However, the contemporary, inter-
national environment is changing dramatically. Government-imposed barriers and struc-
tural impediments, which segmented and protected domestic markets, are falling rapidly.
Technological advances in production, transportation, and telecommunications-espe-
cially the Internet-allow small firms new access to customers, suppliers, and collabo-
rators around the world. The competitive space of international business is fusing with
that of small business. This article reviews the theoretical foundations of what had been
the disparate disciplines of small business/entrepreneurship and international business.
It then considers some consequences of their fusion, for business, and for society.
© 1999 John Wiley & Sons, Inc.
Introduction
The web of linkages and interconnections be-
tween states, societies, and organizations of
our contemporary world is referred to as "glo-
balization." This phenomenon is driven by a
variety of variables including investment,
technological innovations, trade, and finan-
cial flows. Acs and Preston explain that glo-
balization creates new structures and
relationships such that events in one part of
the world can affect society elsewhere. 1 Thus,
globalization is changing the nature of busi-
ness in the contemporary world and challeng-
ing conventional wisdom.
International business was traditionally the
realm of large companies, with smaller busi-
nesses remaining local or regional in scope. Not
surprisingly, small enterprises and international
business were often mutually exclusive, both
Global Focus, Vol, No, 93-105 (1999)
© 1999 John Wiley & Sons, Inc.
in practice and in academia. However, the
growth of global markets stimulates competi-
tion. It also prompts nations to adopt market-
oriented policies. These developments are
transforming business and society.
In the new global environment, entrepre-
neurs and emerging businesses are forced to
learn about global businesses in order to
thrive alongside larger firms already in the
international marketplace. Conversely, mul-
tinational businesses are forced increasingly
to share the same economic and competitive
space with entrepreneurs. In so doing they
are required to learn more about the basis
on which entrepreneurs successfully sustain
themselves. A consequence of the breakdown
of the lines of demarcation that formerly
segregated these disparate fields is the
emergence of a new field-international
entrepreneurship.
CCC 1525-0369/99/040093-
94 • GLOBAL Focus, Vol. 11, No. According to Schumpeter, the entrepreneur is an agent of change in an otherwise repetitive social economy. The Foundations of Entrepreneurship Entrepreneurship, as used here, refers to the practice of undertaking an enterprise, while assuming control and underlying risks. As such, few if any strategy specialists are em- ployed, and the owner/manager or entrepre- neur is often the sole or principal decision- maker. Capital limitations, time constraints, and the entrepreneur's desire to control are among the factors that limit the size of the business venture, which is often referred to as a small or medium enterprise (SME). It is widely accepted that entrepreneur- ship contributes to development, with a posi- tive effect on society-creating employment, economic expansion, a larger tax base, and more well-being for the consumer. This belief is supported increasingly by research, and gov- ernments around the world have acknowl- edged this relationship. Stearns and Hills noted that entrepreneur- ship, as an academic field, is in its decade of legitimization. 2 However, academia does not yet have a universally accepted definition of entrepreneurship. Over the years, different dis- ciplines have regarded the phenomenon from their perspectives, resulting in a wide range of contributions. How have economics and other disciplines viewed this emerging field? Economics Cantillon was the first scholar to use the term entrepreneur. 3 Subsequently, economists de- fined entrepreneur in the context of economic growth. Say, for example, linked the growth of England's economy to the skills of its entre- preneurs· 5 Ely and Hess explained that to simplify their analysis, economists should group factors of production into four catego- ries: labor, land, capital, and the enterprise or entrepreneur. 6 The last classification, a par- ticularly elusive term, is applied to the ulti- mate owners of business enterprises, those individuals who make the final decisions and assume the risks involved. Tuttle examined entrepreneurship from the context of early economic literature. 7 He focused on ownership considerations. While Keynes was concerned with equilibrium, 8 Schumpeter focused on the disequilibrium created by entrepreneurs. According to Schumpeter, the entrepreneur is an agent of change in an otherwise repetitive social economy. 9 In his view, entrepreneurs do things that are often already done, but in new and innovative combinations. Economic de- velopment, therefore, was simply carrying out new combinations, which resulted in nonreversible disturbances of equilibrium. Schumpeter's entrepreneurs were movers of society and had a joy of creating private dy- nasties. He emphasized dramatic innovation, which fostered long-term growth; entrepre- neurship was thus a means of transforming and improving society. Economic theory thus assumed that mar- kets move toward equilibrium and entrepre- neurs cause disequilibrium when they innovate and create profit opportunities. Ac- cording to this school of thought, profit op- portunities created by entrepreneurs generate disequilibria, which improve the incomes of
####### all affected. Knight confirmed, "It is unques-
tionable that the entrepreneur's activities af- fect an enormous saving to society, vastly increasing the efficiency of economic produc-
tion."10 Baumol describes the entrepreneur as A
"one of the most intriguing and one of the most., elusive characters in the cast that constitutes the subject of economic analysis."" In contrast to Schumpeter, who saw en- trepreneurs as creating disequilibrium, Kirzner believed that an entrepreneur could simply identify disequilibrium, without nec- essarily creating it. 12 Accordingly, entrepre- neurship has to do with the identification of where the next imperfection will be found. Entrepreneurship thus corrects socioeco- nomic waste or inefficiencies. Kirzner further explains that entrepreneurship is unlikely to come from the government or planned sec- tor, because even when there is innovation, entrepreneurship will ultimately depend on profit motive. He thus equates profits with arbitrage. Unlike the Schumpeterian entre- preneur who innovates and thus disturbs
####### equilibrium by introducing something new f
into the marketplace, Kirznerian entrepre- neurs profit from their alertness to existing disequilibrium. Rather than seeing innova- tion as central to entrepreneurship, in his view an imitator, as well as an innovator, can be an entrepreneur and profit from disequilibrium.
96 • GLOBAL Focus, Vol. 11, No. 4 ... companies investing overseas were in industries that typically engaged in heavy product research and marketing. context. This omission is not surprising, of course, as the traditional concept of entrepre- neurship is one of very small firms, operating in local market niches, with little or no direct in- volvement in global business activity. The litera- ture, therefore, reflects this localized perspective. While entrepreneurial studies continue to draw on the supporting disciplines of anthro- pology, economics, sociology, and psychology to better understand and predict entrepreneur- ship patterns and causal variables, international business has progressed beyond its constitu- ent fields. As an older discipline, international business has developed a cumulative method- ological and theoretical "tradition of its own." 32 The following is a summary of some of the main theoretical streams of international business. Product Life Cycle Theory Product Life Cycle Theory, as discussed by Vernon, 33 • 34 Stop ford and Wells, 35 Wells, 36 Knickerbocker, 37 and Davidson/ 8 attempts to explain world trade and foreign direct investment (FDI) in manufactured goods based on stages in a product's life. Briefly, the theory of interna- tional product life cycle states that certain kinds of products go through a continuum, or cycle, that consists roughly of four stages-introduc- tion, growth, maturity, and decline-and that the location of production will shift internation- ally, depending on the stage of the cycle. Vernon (see Note 33) observed that most new products are produced in an innovating country-usually the United States-and sold in the domestic market, with some exports to other major markets. Over time, however, de- mand for the new product starts to grow in other advanced countries, and competition begins to develop from other producers both at home and abroad. At some point the firm may choose to set up production facilities in countries where demand is growing, to service those markets more effectively. As price competition begins to loom larger, it will also shift production to low- cost developing countries, exporting the prod- uct back to the original home market and to other developed markets. Thus the cycle is complete. Monopolistic Advantage/Market Imperfec- tions Theories Modern monopolistic advantage theory arises from the work of Hymer in the 1960s. 39 He demonstrated that FDI occurred largely in oligopolistic industries rather than in indus- tries operating in near-perfect competition. He argued that firms investing abroad in such industries must possess advantages not avail- 1 able to local firms. Those advantages could include economies of scale, superior technol- ogy, or superior knowledge in marketing, man- agement, or finance. FDI takes place because these product- and factor-market imperfec- tions allow the multinational corporation to gain and maintain monopolistic advantages not accessible to local firms. Caves expanded on Hymer's work to show that superior knowledge permitted the invest- ing firm to produce differentiated products that consumers prefer to similar, locally made goods, thus producing an advantage over indigenous firms. In supporting these contentions, he noted that companies investing overseas were in industries that typically engaged in heavy · product research and marketing. 40• 41 The internalization theory expounded by Buckley and Casson, 42 Rugman, 43 Teece, 44 and others, is an extension of the market imperfec- tions theory. The multinational corporation is
assumed to hold a monopoly or semi- 6
monopoly control over technological, market-. ing, or management know-how. It follows that the larger the market in which these assets are applied, the greater the profits that can be earned. However, the firm could be reluctant to transfer its assets to a nonrelated firm through a contractual agreement, such as li- censing, for a variety of reasons. By investing in its own foreign subsidiaries, rather than li- censing, the company is able to exploit its knowledge across borders, while maintaining control and presumably realizing a longer, bet- ter, or safer return on its investment. Internal- ization theory was tested by Morek and Yeung, among others. 45 The Eclectic Paradigm Dunning's many contributions provide a frame- 1 work designed to extend the internalization theories to explain how location factors influ- ence the nature and direction of FDI. 46 •47 By location-specific advantages, Dunning includes: - Ownership-specific advantages, includ- ing patents, trademarks, and manage- ment know-how;
- Location-specific advantages that arise from using resource endowments or assets tied to a particular foreign loca- tion, which a firm finds valuable to com- bine with its own unique assets; and
- Internalization or the use by the multinational enterprise of its own in- ternal market-its network of head- quarters and sister subsidiaries-that allows it to further enhance its other advantages. Dunning advanced his model as a "three- legged stool." But with each leg dependent on the others, it would be a mistake to use any one part of his eclectic theory independently. His location-specific advantage refers to all the ad- vantages that accrue to MNEs because of trans- ferring investment and production to a specific location (in contrast with those of local firms). Implicit in the theory is that ownership advan- tages will further augment location-specific ad- vantages. Thus, MNEs, in spite of their high transaction costs, may be more competitive in foreign markets than local firms. 48 Oligopolistic Reaction Theory Knickerbocker postulated that in oligopolistic industries, enterprises react to the moves of their competitors and imitate them to reduce the risk of being different. 49 Two findings formed the basis of his theory. The first one referred to evidence indicating the tendency of firms in a number of American industries to cluster their direct investments in foreign countries. The second originated from data that suggest that American enterprises in the forefront of international expansion are typically in oligopolistic industries. Knickerbocker's exposition suggests that there exists a relationship between the clus- tering of foreign investments and the desire of oligopolists to react to the moves of rivals. His research pointed to a comfort zone char- acterized by firms replicating the actions of others to recreate a perceived level playing field. Once one company decides to enter or produce in a particular overseas market, com- petitors follow quickly, rather than let the first firm gain an advantage. Thus, the decision is based not so much on the benefits to be gained, but rather on the greater losses sus- tained by not entering the field. The ques-
The Impact of Globalization on SMEs • 97
tion for many multinational enterprises fac- ing investment decisions is, "Do I lose less by moving abroad or by staying at home?" Incremental Internationalization The Uppsala Model (Johanson and Wiedersheim-Paul) identified four stages of entry into international markets. 50 This model was further elaborated by Johanson and Vahlne. 51 Bilkey and Tesar opted for a six-stage modei 2 Newbould, Buckley, and Thurwell also examined such an approach to interna- tional business. 53 Cavusgil developed a five- stage modei 4• 55 Other scholars adhering to this approach include Bartlett and Ghoshal, 56 Cavusgil and Nevin, 57 Johanson and Vahlne, 58 • 59 and Leonidou and Katsikeas. 60 Essentially, these scholars view interna- tionalization as a series of involvements through incremental modes of activity. Each step is a more progressive stage in the prqcess of understanding the global environment and the competition. Typical stages include ( 1) in- direct exporting/importing/sourcing; (2) direct exporting/importing/sourcing; (3) licensing; (4) joint ventures; and, finally (5) wholly- owned subsidiaries. National Competitive Advantage Porter has made several significant contribu- tions to the theoretical understanding of inter- national business. 61 • 62 • 63 • 64 Based on an extensive study of 100 industries in ten nations, he and his associates attempted to explain why some nations succeed and others fail in inter- national competition. His thesis expounds that four broad attributes of a nation shape the en- vironment in which local firms compete, and they can promote or impede the creation of a competitive advantage. These attributes are: ]. Factor endawments: a nation's position in factors of production, such as skilled labor, or the infrastructure nec- essary to compete in a given industry; 2. Demand conditions: the nature of do- mestic demand for the industry's prod- uct or service; 3. Related and supporting industries: the presence or absence in a nation of sup- plier industries and related industries that are internationally competitive; and Once one company decides to enter or produce in a particular overseas market, competitors follow quickly, rather than let the first firm gain an advantage.
cal and business-line diversification. SMEs shared with or deflected larger-magnitude risks to their associates, while the sister subsidiary network of the MNE as a whole bore the higher risks of a given operation. fi 4) Strategic Direction. Entrepreneurial 'rms relied on all the resources they could borrow or leverage, often combining proactive and inno- vative strategies. They relied initially on the stra- tegic direction of the founder or owner. They usually lacked the capability to cross-subsidize markets or product lines because of their lim- ited size, reach, and access. MNEs, on the other hand, relied more on their own internal corpo- rate resources and subsidiary specialization, tak- ing advantage of the "lead markets" and "strongholds" of their well-established businesses to subsidize new ventures or weaker ones. 5) Market Focus and Responsiveness. En- trepreneurial businesses focused mainly on their primary or local markets. MNEs, on the other hand, related to profitable markets the world over, including internal markets created by their network of subsidiaries abroad. This large, internal market gave them the option of internalizing, while SMEs lacked that option and were forced to externalize for the most part. 6) Political Influence. By virtue of larger impact and mobility, MNEs could influence the policy environment of their host govern- ment by negotiating with local governments for better incentive packages. In contrast, SMEs lacked this power and were forced to react to prevailing policies. 7) Expansion Mechanisms. Entrepreneur- ial firms often pooled their resources with oth- ers to expand, mainly through cooperative, symbiotic arrangements. MNEs, on the other hand, relied more on internal economies of scale and scope, leveraging local incentives and coordinating among sister subsidiaries. 8) Network Characteristics. Entrepreneur- ial firms have tended to form relatively loose, cooperative, international linkages with arm's- length agents, with which they had few or no equity relationships. MNEs have tended to- ward tighter, more integrated linkages, mostly through licensing, acquisitions and mergers with owned or tightly controlled agents, par- ticularly their own subsidiaries. 9) Innovativeness and Specialization. The rewards of innovation in SMEs usually accrued directly to the individual entrepreneur or to a small group, making SMEs highly conducive to
The Impact of Globalization on SMEs • 99
innovation and creativity. This has given SMEs a larger and more flexible inventive capacity for their size than MNEs. In MNEs, on the other hand, the rewards of innovation were usually appropriated by the organization. Although com- paratively less inventive, they used their larger and stronger resources to achieve higher suc- cess rates in commercializing innovations. 10) Human Resources. The global com- petitive environment has prompted most MNEs to recruit and to promote on the basis of professional qualifications. In contrast, smaller firms, especially family businesses, often lacked the resources to hire the most capable professionals. While succession was problematic in SMEs, MNEs made it system- atic. Human resource deficiencies impacted smaller companies more profoundly. The Contemporary Environment: Converging Fields Entrepreneurial enterprises and international businesses have traditionally operated in largely separate realms. This dichotomy is characterized and summarized in Table I. However, globalization has beg to dis- mantle the barriers that segmented local markets and firms from their international counterparts and that enforced the two soli- tudes. Government-imposed barriers and structural impediments are falling rapidly, while technological advances in production, transportation, and telecommunications- including the Internet-allow even the small- est firms new access to customers, suppliers, and collaborators around the world. As market segmentation disappears, the modus operandi of both SMEs and larger firms is changing. SMEs now can take advantage of the expanded markets to compete or collabo- rate with MNEs both at home (in a subsidiary's market) and abroad. At the same time, MNEs are adopting new strategic postures to compete and/or cooperate with newly internationalizing SMEs. Their operating characteristics and strat- egies are converging in several key areas. Economic Environment In the contemporary world, SMEs and MNEs are learning to cope with each other. The dis- tinctions between them are becoming less Entrepreneurial firms have traditionally been high risk- takers.
100 • GLOBAL Focus, Vol. 11, No.
It·!:! Iii A Comparison of Past Distinguishing Features
Distinguishing Characteristics I. Size 2. Access 3. Reach 4. Resource Reliance 5. Risk and Exposure 6. Risk-Taking Capacity 7. Source of Strategic Vision/Direction 8. Focus of Responsiveness 9. Expansion Mechanisms 10. Network Characteristics II. Control Characteristics SMEs Small to medium Generally limited to local or regional markets Limited On small base, mostly outsourced and leveraged
- high risks emanate mainly from operations
- high-risk exposure relative to size of the enterprise
- risks mostly shared with associates
- high probability of insolvency or failure
- high propensity to take risk
- low capacity to absorb risk Vision of the entrepreneur or small group of executives; mostly new, innovative, and proactive Their primary segments, and local markets Pooling and leveraging own and others' capabilities/expertise Loose and synergistic interlinking of independent agents with mutual interests Self-control, mostly horizontal, synergistic, and mutual coordina- tion when a network of SAs and CAs are involved MNEs Large Regional and global markets Worldwide On large base, mostly sourced internally
- high risks mainly because of foreignness in the environment
- high risks for each subsidiary
- low risks for MNE as a whole because of diversification of worldwide resources
- low propensity to take risk
- high capacity for the MNE as a whole to absorb risk Strategic aims of globally oriented boards or CEOs; mostly reactive and responsive to governments and •. societies within which they operate ·. More profitable markets worldwide and international or subsidiary markets Leveraging local incentives and coordinating them among subsidiaries Tight and complete linkages between mostly-owned subsidiaries and the headquarters Hierarchical, mostly vertical control, for maximization of worldwide profits
Legend: CA = collaborative arrangement
SA = strategic alliance MNE = multinational enterprise/large firm S N E = small and medium enterprise obvious. The increasing need and ability of SMEs to grow into the competitive space of MNEs requires them to understand and adopt selective features of multinational market/in- dustry competitive practices and structures. At the same time, MNEs need to learn from and emulate SMEs in order to compete effec- tively with them (or, perhaps, to collaborate with them) in their niche markets. As MNEs introduce informal intrapreneurship, many SMEs are adopting more formalized structures for better coordination and efficiency. A con- sequence is the convergence of market/indus- try/competitive structures from either extreme to a middle ground. This is illustrated sche- matically in Table II, A.
102 • GLOBAL Focus, Vol. 11, No.
####### li•,:lli!i The Converging Trends
SMEs MNEs A: The Economic Environment
- compete in local market segments
- enter market niches
- avoid concentration
- symbiotic links to value chain of buyers and suppliers
- cater to specifically defined value schemes
- expand to increase economies of scale and scope
- compete in profitable markets worldwide
- global players
- plan for high concentrations
- weakly integrated with value chain of competitive suppliers cater to large (global) segments and markets
- focus to deliver specialized value
- capitalize on worldwide economies of scale and scope Fusion: Process of convergence of market/industry/competitive structures from either extreme toward a middle ground B: Interfirm Relationships
- loosely coupled members of supply or value chains to deliver highest value
- follow market discipline
- form collaborative arrangements to create viable coalitions to compete globally
- tightly linked into highly formalized HQ- subsidiary network
- formalized (contractual) suppliers and distributors (SMEs)
- follow international market/headquarters disciplines
- form alliances with SMEs to reduce costs Fusion: SME- and MNE-network membership and structure converge from either extreme toward an emerging optimal j
____________________________________ {
- SMEs deliver increasing value through fast, innovative, risky reconfigurations of their own in relation to others
- SMEs use efficient capabilities in their SAs' and CAs' pool of members
- SMEs deintegrate and then reintegrate value-chain activities for delivering more value by the combined value chain C: Value Chain
- use coordination and control internation- ally (of sister subsidiary network)
- use acquisition and divestment to reconfigure at the margins of existing value chain(s) use SAs and CAs with SMEs to deliver higher value when internal arrangements are not feasible Fusion: More independent SMEs join the MNEs global supply chain as MNEs outsource from more efficient SMEs than their own subsidiaries D: Control Mechanisms
- interdependent: due to own constrained resources and the need for pooling of others' capabilities and resources, leading toward mutual control without dominance
- each CA's starting point is from low/equal bargaining position before a strategic leader emerges. - independent: self-sufficient, self-financing allows headquarters to institute rigid controls - MNEs' reluctance to pool and cooperate because of a higher bargaining position in large and profitable markets leads to dominance at starting positions Fusion: As MNEs share wider economic space through more CAs and SAs, the nature of control changes from hierarchical to lateral coordination Legend: CA = collaborative arrangement SA = strategic alliance MNE = multinational enterprise/large firm S N E = small and medium enterprise
The Impact of Globalization on SMEs • 103 networks, and alliances between large and small firms. IBM, which for most of its his- tory epitomized the independent, self-con- tained enterprise, operates today within a network of some 20,000 alliances. It is both a provider and a recipient of competencies within a network of large and small firms that maximizes benefits of the entire group. Inter- firm linkages have long characterized communitarian economies, such as Japan 78 and Korea, 79 but they are becoming more ap- parent in North America and Europe as well. The growth of global markets is prompt- ing governments around the world to adopt more market-oriented policies. However, smaller firms still face severe constraints, such as inadequate financing and the high costs of technology. The burden of relaxing these constraints falls on the shoulders of governments. SMEs are becoming an increas- ingly important engine of growth and inter- nationalization for many countries. Therefore, a priority for public policies should be to facilitate the internationalization of emerging firms. In addition to ongoing liber- alization processes, such as reducing entry barriers, lowering transaction costs, and en- suring fair competition, this will involve cre- ating infrastructures, such as hard business networks, that facilitate partnerships and encourage the formation of networks. 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 al- liances and networks. LEo-PAUL DANA is Associate Professor and Deputy Program Director of the MBA (In- ternational Business) Program at Nanyang Technological University in Singapore. He has served also on the faculties of McGill University, Concordia University, University of Pittsburgh, Institut Commercial de Nancy, and other schools. He holds B. and M. degrees from McGill University, and a Ph. from the Ecole des Hautes Etudes Commerciales, University of Montreal. A leading expert on small business, Dr. Dana has published widely in the fields of international business and entrepreneurship. He is the author of twelve books, including Entrepreneurship in Pacific Asia: Past, Present and Future (World Scientific, 1999), and When Economies Change Hands (forthcoming); eighty journal articles; and nearly 100 cases. He serves as a Senior Advisor to the World Association for Small and Medium Enterprises, and as an editorial board member of several small-business journals. He is a founding partner of Omnidiffusion Inc., an international business consultancy. HAMID ETEMAD is Associate Professor of Marketing and International Business at the Faculty of Management, McGill University. He holds a Master of Engineering from the University of Tehran, an M., a MBA, a Ph. from the University of California, Berkeley. He is a director of Advanced Technologies, Inc., a software development and export/import company. His research interests and publications are in exporting, com- parative and international marketing, economic development, industrial strategy, glo- balization of SMEs, management of technology, and multinational enterprise-host country relations. He has held professional offices, such as Vice-President and Presi- dent of the Administrative Sciences Association of Canada, Director of the McGill- People's University Cooperative Linkage, Associate Dean and Director of the MBA Program, and executive of several professional associations (PACIBER & IFSAM). RICHARD W. WRIGHT is the founder and principal organizer of International Business Studies on the Faculty of Management at McGill University, Montreal, where he is cur- rently a full-time professor. He serves also as a frequent visiting professor/scholar at other leading management schools around the world. Dr. Wright holds a B. degree from Dartmouth College; an M. degree from the Amos Tuck School of Business Adminis- tration; and a D. in international management from Indiana University. He worked in the U. diplomatic service and in private business before entering academia. Dr. Wright is the author of nine books and research monographs in the field of international busi- The growth of global markets is prompting governments around the world to adopt more market-oriented policies.
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Global Fcopy - portions for bba
Course: statistics for managers (1103)
University: Siva Sivani Institute of Management
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