Network and institutional effects on SMEs' entry strategies.

VerfasserLo, Fang-Yi
PostenRESEARCH ARTICLE - Small and medium-sized enterprises - Report

Abstract Building on the network and institutional environment perspectives, this study examines the foreign market entry strategies of 851 small and medium-sized enterprises (SMEs) based in Taiwan, a newly industrialized economy. From the network perspective, our findings show that SMEs prefer to enter new markets in two distinct ways: (1) through wholly-owned subsidiaries when they are following their customers into a host country, or when the operations in a host country have more internal network linkages; and (2) through joint ventures when they have stronger supplier relationships. From the institutional environment perspective, SMEs set up wholly-owned subsidiaries when they perceive differences in the macro-economic and industrial-policy environment in a host country; however, they will choose to enter into joint ventures if they perceive a significant degree of socio-cultural difference in a host country. As SMEs decide on entry strategies, they must carefully consider not only the different types of network resource, but also the influence of institutional factors in host countries.

Keywords Networks * Institutional environment * Entry strategies * SMEs

1 Introduction

Theories relating to foreign market entry by multinational corporations (MNCs), such as the monopolistic advantage (Kindleberger 1969) and internalization (Buckley and Casson 1976) theories, have postulated that foreign direct investment (FDI) acts as a means by which firms are able to extend their advantages abroad. That is, firms engaging in FDI are superior to their competitors in terms of technological capabilities or the uniqueness of their product offerings. This implies that firms with fewer competitive advantages will be less able to effectively operate in foreign markets. Nowadays, a new breed of MNCs, based in newly industrialized economies (NIEs) and also engaging in FDI, has begun to emerge as significant players in world markets (Alvi 2012; Chiao et al. 2010; Meyer 2001; Wells 1983). Most recently, small and medium-sized enterprises (SMEs) from NIEs have also become active in making foreign direct investments (George et al. 2005; Pinho 2007; Tesfom et al. 2004). Compared to MNCs based in developed countries, NIE-based MNCs, especially SMEs, tend to be smaller in size and possess limited resources and advantages.

How might these SMEs overcome the challenges of lack of resources or international experiences to compete successfully in foreign markets (Chen et al. 2006; Lu and Hwang 2010)? From the perspective of firm-specific advantages, on the one hand, such firms may in fact be advantaged when it comes to capabilities such as small-scale production and flexibility in switching product lines (Chen and Chen 1998). On the other hand, firms tend to regard FDI as a way to access desirable external capabilities and resources, such as logistics support, market information, and technical assistance (Johanson and Mattson 1988). For small firms, network relationships between customers and suppliers or between producers and distributors typically play important roles in their activities in host countries, either in sales or production (Bradley et al. 2006; Fujita 1995). SMEs are often more dependent on network linkages because of the risks and managerial complexity associated with FDI.

Among the theories shedding light on the various facets of FDI, the network approach has offered some insightful interpretations of firms' moves toward internationalization (Madsen and Servais 1997). However, empirical study of the subject has been sparse (Chen and Chen 1998). Because different network relationships result in different flows of information (Gulati 1998) and provide varying network resources or knowledge to firms (Lamin and Dunlap 2011), regardless of their size, it would seem that such relationships would influence firms' foreign-market entry strategies. Therefore, the first purpose of this study is to adopt the network perspective to examine SMEs' entry strategies.

In an effort to aid our understanding of firms' decisions with regard to FDI, we chose to distinguish network relationships in two distinct categories, internal networks and external networks. This study defines these two categories of relationships from the perspective of a parent company. Differing from a domestic firm, an MNC comprises a parent company and subsidiaries (Ghoshal and Bartlett 1990) by means of internal networks, and the relationships between the parent company and its subsidiaries gradually form an inter-organizational network in which behaviors of subsidiaries are influenced and restricted by the parent company (Granovetter 1985). While MNCs' internal network linkages help the organizations to develop advantages and enhance their competitiveness (Ghoshal and Bartlett 1990), multinationals can also build their own external network linkages (e.g., strategic alliances, joint ventures, and long-term relationships) with external stakeholders such as customers and suppliers. These relationships are conducive to learning new knowledge, gaining information, acquiring resources, penetrating new markets, or accessing technologies to reach their goals (Gulati et al. 2000) and to reduce business speculation behaviors of other parties (Williamson 1991), to name a few advantages. In this paper, we focus on the external networks of a parent company because these linkages do not exist before a subsidiary in a host country has been established. As to the internal networks, we captured the relationships among parent companies and their subsidiaries.

Recently, researchers have begun to make use of the institutional environment perspective to examine firms' entry strategies (Davis et al. 2000; Harzing 2002; Rosenzweig and Singh 1991), as host countries' institutional environments appear to have a significant impact on MNCs' operations (Alvi 2012; Delios and Beamish 1999; Henisz 2004; Pogrebnyakov and Maitland 2011). Institutional environmental factors in host countries, such as industrial policies, government-imposed limitations on incoming foreign investments, restrictions on corporate operations, and government interventions, are always carefully evaluated by MNCs considering entry into foreign markets. Scott (1995) suggested the necessity of categorizing differences in institutional environments in order to effectively analyze the impact of such differences on various strategic behaviors. We can thus infer that differences in various aspects of institutional environments have varying impacts on firms' choice of foreign-market entry strategies. Some differences in institutional environment might lead firms to enter new markets by means of wholly-owned subsidiaries (Davidson and McFetridge 1985), while others may lead to the use of joint ventures (Anderson and Gatignon 1986; Hennart 1988; Hill et al. 1999). Indeed, some such differences may have no effect on firms' choice of entry strategies (Xu and Shenkar 2002). Brouthers et al. (2004) further suggested that future studies may consider examining institutional environments according to various dimensions or constructs. Accordingly, we chose to compare SMEs' home institutional environments with those of their host countries, distinguishing along the lines of macro-economic differences, socio-cultural differences, and industrial-policy differences. It is our hope that such differentiation will help to facilitate our discussion of the effect of institutional environments on firms' choice of entry strategies. The second purpose of this study, then, is to examine firms' entry strategies through the lens of institutional environment.

Taking SMEs as our research subjects, we extend the scope of previous studies, which have primarily been concerned with large corporations (Ghobadian and O'Regan 2006). This paper uses the internal and external perspectives together to empirically test the impact of networks and institutional environments on the international strategies of these MNCs. Following the introduction, we first provide a review of the literature, and then derive our research hypotheses in Sect. 2. In Sect. 3 we describe the research methodology, and in Sect. 4 we discuss our empirical findings. The last section provides our concluding thoughts and remarks.

2 Literature Review and Hypotheses

2.1 Network Perspective

Firms might be attracted by their foreign customers to operate in foreign markets, or may choose to expand abroad in order to capitalize on their customers' positions in industrial networks. In the process of internationalization, firms may utilize their linkages with host country firms to facilitate their entry into foreign markets, rely on local networks in host countries to ease their entry, or form strategic alliances with local firms (e.g., joint ventures) as a means to enter host countries. Madsen and Servais (1997) proposed three network patterns typical of firms expanding into foreign markets: (1) internationalizing via an existing network in the home country; (2) internationalizing via the pathways established by its (internationalized) partners in the host country network; and (3) seeking an internationalized network, and then joining it. It is evident, then, that different networks lead to different strategies of internationalization (Johanson and Mattsson 1988). Thus, we may conclude that network linkages affect MNC choice of entry strategies.

The network relationships for an MNC can be divided into internal networks and external networks. Though internal networks are formed by the parent company and its subsidiaries, external networks can be viewed from the parent company as well as subsidiaries (i.e., a parent company has its own external networks and each subsidiary has its own external networks). Regarding the value of external networks, for example, the inter-firm networks with local suppliers, local customers, and local regulators in a host country help a subsidiary to access...

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