Pre-Liberalization Foundations and the FDI-Based Internationalization of SMEs from Emerging Markets.

VerfasserKumari, Sushma

1 Introduction

Recent studies are increasingly focusing on the distinctive factors that determine the internationalization of small- and medium-sized enterprises based in emerging markets (EM-SMEs) (Deng & Zhang, 2018; Fabian et al., 2009; Javalgi & Todd, 2011; Musteen et al., 2014; Narooz & Child, 2017; Radulovich et al., 2018; Wu & Zhao, 2015). However, most prior studies on EM-SMEs' internationalization have focused on their exporting behavior, rather than on their foreign direct investments (FDI) (Deng & Zhang, 2018; Jean & Kim, 2020; Kim & Hemmert, 2016; Manolova et al., 2010; Tiessen et al., 2001). Engaging in FDI requires greater resource commitment as well as risk-taking propensity, and in general, due to SMEs' resource and capability constraints, exporting has remained a key mode of their internationalization. However increasingly, SMEs--not limited to those from emerging economies--are also engaging in FDI in a more accelerated fashion (Huett et al., 2014; Jansson & Sandberg, 2008; Stoian et al., 2018). Yet, as a recent literature review highlights (Laufs & Schwens, 2014), research on SMEs' FDI is still in its infancy, and especially, little is known about the unique barriers faced by SMEs from emerging markets in engaging in FDI (Qiao et al., 2020).

Prior studies have acknowledged that EM-SMEs, as compared to their developed-country counterparts, lack sophisticated resources and capabilities to a greater extent (Javalgi & Todd, 2011; Narooz & Child, 2017). This causes EM-SMEs to suffer from relatively greater 'liabilities of smallness' (Ko & Liu, 2017; Lefebvre, 2020), which may further deter their internationalization prospects. At the same time, EM-SMEs also face 'liabilities of origin' (or liabilities of 'home') (Fiaschi et al., 2017; Marano et al., 2017) caused by the institutional voids in emerging markets that result in a negative perception of emerging-market firms and their products and services in international markets (Agnihotri & Bhattacharya, 2019). As such, due to these additional liabilities generated by EM-SME's home-institutions, the barriers for internationalization for EM-SMEs are higher. In this situation, undertaking FDI may be riskier for EM-SMEs. Nonetheless, FDI is regarded as an important internationalization strategy for EM-SMEs to catch-up with their developed-country counterparts on technological fronts, as well as to escape from the potentially rising domestic costs and other institutional challenges in emerging economies (Cuervo-Cazurra, 2016; Qiao et al., 2020; UNCTAD, 2019).

Due to the importance of home-institutional factors in the internationalization of emerging-market-firms (mentioned above), we first suggest that research on EM-SMEs' FDI can further benefit by taking into account the institutional conditions under which the SMEs were founded, especially whether they were founded before or after the market-liberalization era in emerging markets. Founding conditions, in general, form an important issue in entrepreneurship research (Bamford et al., 2000; Eisenhardt & Schoonhoven, 1990; Geroski et al., 2010). During the 1980s and 1990s, many emerging economies across the world liberalized their markets by reducing tariffs on imports, by promoting exports and foreign investment and by privatizing state-owned enterprises; and all of this has been of significant importance to the development of SMEs in such countries (Gupta et al., 2004; Yamak & Usdiken, 2006). Prior studies have also emphasized how institutional changes following liberalization have impacted firms' internationalization, however, these studies have focused on large, group-affiliated and state-owned firms (Chittoor et al., 2009; Dau, 2012, 2013), and lesser so on SMEs.

Institutions refer to the set of rules and regulations, the level of bureaucracy, the mechanism for accessing markets, the judiciary, government policies, contracting regimes, and the degree of stability that influence business activity (Cuervo-Cazurra, 2008; Denzau & North, 1994; Kimberly, 1979). Organizations develop distinct resources and capabilities in response to the external institutional characteristics surrounding them, and these capabilities form the basis of their competitive advantage (Oliver, 1997). External institutions surrounding firms at the time of their founding often leave a permanent imprint on them, making them difficult to change when new or different institutions are introduced in the future, since the founding period is such a sensitive time (Stinchcombe, 1965). In line with this, we expect that EM-SMEs founded in the pre-market-liberalization era would vary in their FDI behavior as compared to those founded in the later periods. This is because, before the market-liberalization era, institutions favoring protectionism in most emerging markets would have deeply impacted SMEs; and these would persist well-beyond the market-liberalization period (Maksimov et al., 2017). In contrast, during and after the liberalization period, governments in emerging markets encouraged competitive learning and risk-taking (Anand et al., 2006; Raithatha & Popli, 2022); and these institutional ideologies form the basis of SMEs' resources and capabilities founded in the post-liberalization period. In this respect, our first research question is: To what extent do emerging market SMEs founded prior to the market liberalization era differ in their FDI as compared to those founded in the post liberalization era?

Second, prior research has argued that a number of factors can condition this founding institutional effect, and these primarily revolve around the growth and governance characteristics of firms (Cheng & Yu, 2008; Lu, 2002; Maksimov et al., 2017). It is argued that the founding institutional effect is greater during the developmental stages of the firm, and can fade away as firms grow (Freeman et al., 1983) and based on how they are governed (Marquis, 2003). Based on this, a notable variable that we suggest is SMEs' size. This is because, when SMEs grow (in terms of increased sales and performance) their scope of learning and risk-taking improves, and they can buffer themselves from the imprinted institutional effects at the time of founding (Bhagat et al., 2015; Ng et al., 2013). Likewise, in terms of SMEs' governance, we suggest that ownership dispersion can have a moderating effect because a larger number of shareholders on the board can increase groupthink (Johnson et al., 1993), which can reduce the imprinted mental models of pre-liberalization founding (as compared to that in concentrated ownership) and potentially increase the risk taking propensity of firms (Eddleston et al., 2008). Based on these arguments, our second research question is: To what extent do SMEs' size and ownership dispersion moderate pre-liberalization founding effect on emerging market SMEs' FDI?

Our primary contribution lies in examining the FDI-based internationalization behavior of EM-SMEs. As previously emphasized, there is limited, yet growing research on SMEs' FDI in general, as most prior studies have focused on SMEs' exporting behavior (Laufs & Schwens, 2014). Recent studies on the FDI patterns of SMEs have been, so far, limited to SMEs from developed countries such as Japan (Lu & Beamish, 2001; Urata & Kawai, 2000), Germany (Huett et al., 2014), Sweden (Jansson & Sandberg, 2008) and Spain (Shin et al., 2017). These studies have focused on the economic characteristics of the 'host' markets and on the unique resources and learning capabilities of SMEs (Zahra, 2005). Urata and Kawai (2000), for instance, suggest that attractive markets in developed countries and the availability of lower labor-cost resources in developing countries were the key motivations for Japanese SMEs' FDI. Likewise, Huett et al. (2014) suggest that knowledge intensive SMEs are more likely to enter developed countries, whereas internationally experienced SMEs are more likely to enter developing countries via FDI. Studies on international new ventures and born globals (0yna et al., 2018) also provide valuable insights in this direction. E.g. Ripolles et al. (2012) find that that new ventures (based in Spain) with greater international market orientation, and those with greater marketing capabilities (Ripolles & Blesa, 2012) are more likely to engage in higher commitment foreign entry modes. We take this research forward by focusing on EM-SMEs, as they face unique 'home' institutional and resource-based challenges, and given that emerging markets have undergone significant institutional changes following the market-liberalization period. As such, theoretically, we take the discussion forward from the 'host' to the 'home' based factors that determine SMEs' FDI in general.

In doing so, we also contribute the emerging literature on the unique barriers faced by EM-SMEs in undertaking FDI. A limited number of studies have also examined how communist institutions have impacted the FDI of firms from specific home-countries such as China (Marquis & Qiao, 2018) and Poland (Ciszewska-Mlinaric et al., 2018); however, unlike ours, these studies focus on large firms and on firms from single countries, while there is limited research focusing on SMEs in this context (Qiao et al., 2020). Our study makes an empirical contribution to these studies by re-examining the institutional effect in the context of SMEs, as well as by: (1) examining important firm-level contextual factors that moderate the founding institutional effect; and (2) by focusing on a larger set of home-countries and contributing to the greater generalizability of findings.

Our paper is structured as follows. In the following sections, we first present our theoretical background and formulate our hypotheses. We then describe our data and present our findings. Finally, we discuss our results and conclude paper by highlighting our contributions and limitations and by suggesting worthwhile avenues for future...

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