5Tffytt TEG Y
SMAI.L BUSINESS BRIEF

GO INTERNATIONAL GRADUALLY:
ADVICE TO SMALL BUSINESSES FROM

COMPANIES WITH OVERSEAS EXPERIENCE

Sheri Bridges
bridgesQa wfu.edu

J. Kline Harrison
harrisj koawfu. edu

Wake Forest University

ABSTRACT

Tlie limited resources of small businesses ofien present unique challenges when the
companies try to internationalize. This paper examines the decision to enter ihe global arena
from the viewpoint offirms who already are there. The results ofa survey of such companies
indicate that changes in tire external situation ofien overcome internal reservations firms
might have about internationali ing. Survey participants identify issues related to risk
management and the assignment of responsibility for international operations as key areas of
concern, and they suggest "coping strategies" for small businesses thinking abont doing
business overseas.

INTRODUCTION

Increased domestic competition, coupled with innovations and advancements in
transportation, telecommunications technology, converging consumer needs and wants, and
the adoption of multilateral trade agreements have prompted many U.S. companies to look
beyond their home borders for growth opportunities. Although the United States remains the
world's largest market for goods and services, 75% of total market potential now lies overseas
(Keegan 1999).

Like their larger corporate counterparts, small and medium-sized businesses are finding the
call of the international marketplace increasingly dilTicult to ignore. A survey of middle-
market companies conducted by Yankelovich Parmers for Deloitte and Touche revealed that
the quest for expansion was one of their top two concerns (along with staff recruitment and
retention), while globalization was the issue of greatest continuing concern (Simon 1998).
And a Federal Express survey of small business exporters found 52% of respondents
anticipate increasing their export volume this year, with 75% planning an increase over the
next five years (Zelade I 998).

However, the global arena —with its varied cultural, legal, political, and commercial
environments —adds new levels of complexity to business. This complexity can be
challenging for a firm of any size to handle, but the risks are especially high for smaller firms:
Because of their more modest financial and management resources, they cannot afford to
make a mistake.

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Journal ofSmall Business Strategy Vol. 10, iVo.2 Eall/IVinrer 1999

The purpose of this study is to examine the internationalization decision for small businesses
from the viewpoint of companies who already have made the cross-border leap. The results
of a survey, "Entering the Global Business Arena: Key Issues in Global Expansion for
American Small Businesses," suggest that firms should consider "three Rs" with respect to
internationalization: the rationale, risk management, and the responsibility locus. After the
conceptual background is set forth and the survey method is described, each of these is
discussed in turn. The article concludes with an overview of the findings.

CONCEPTUAL BACKGROUND

The global fever spurred by social, technological, competitive and legislative changes of the
recent past has in turn spurred a rise in the number of books, college courses, and articles
devoted to global strategy and tactics. Yet a review of the literature reveals a limited amount
of research on the subject as it relates to small businesses.

The Internationalization Process

In their review of recent empirical research on how small firms increase their involvement in
international operations, Coviello and McAuley (1999) examine 16 studies. They conclude
that the internationalization process among small and medium-sized companies is best
understood by integrating three major theoretical frameworks: (I) Foreign Direct Investment
theory (Anderson and Gatignon, 1986; Buckley and Casson, 1993), which says that firms
choose overseas structures and locations that minimize the cost of economic transactions; (2)
establishment chain or stage models (Iohanson and Vahlne, 1990; Melin, 1992), which
propose that internationalization occurs incrementally as firms increase their market
knowledge and commitment; and (3) the network perspective, which contends that
internationalization is a function of a firm's set of inter-organizational and interpersonal
relationships (Axelsson and Easton, 1992).

All 16 of the studies reviewed by Coviello and McAuley (1999) —10 of which focus on
manufacturing firms —were published in the period from 1992 to 1998, indicating the
inchoate state of the research. Interestingly, none were based in North America, a fact that the
authors attribute to the greater interest in internationalization among firms from small markets
with limited domestic opportunity. (Eleven were based in Europe, three were from New
Zealand, one from Hong Kong and another from Pakistan.)

Which Firms Go Overseas?

Baird, Lyles and Orris (1994) looked at the variance in international strategies of 180 small
businesses in Indiana. They found that firms who perceived a higher number of changes their
general or industry environments (including the regulatory, technological, competitive, and
technological climate) were more likely to have overseas operations. They also found a
higher level of internationalization among firms with more formal planning processes.

Calof (1993) examined archival data from more than 5,000 Canadian manufacturing
companies and found that, although large firms were more likely to export, 48 percent of the
smallest firms in the database (sales of $ 1,000 - $499,999) engaged in overseas business.

Analysis of surveys from 49 Canadian soiiware firms led Reuber and Fischer (1997) to
conclude that companies with internationally experienced management teams have a higher
probability of developing foreign strategic partners and pursue foreign sales sooner alter start-
up than those whose management teams lack international experience.

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Journal ofSmall Business Strategy Vol. /0, No.2 Fall/Winter /999

Why Go Overseas?

Karagozoglu and Lindell (1998) analyzed completed surveys from 34 small and medium-
sized technology firms in the United States. Although limited to a small number of
specialized firms, their results showed that the stimuli to go global included pursuit of greater
strategic opportunities, inquiries from foreign buyers, and a belief that domestic market sales
were insufficient to support competitive levels of R&D spending. They also found that a lack
of international management experience and limited information-gathering capabilities posed
significant barriers to venturing overseas.

Where Do Firms Go?

The internationalization process among small and medium-sized business services in the
United Kingdom was the focus of a study by O'Farrell, Wood and Zheng (1998). The results
of their survey revealed a significant relationship between type of industry (engineering
consulting, management consulting, market research, computer soAware, and product design)
and location of the firms'irst foreign market entry. The authors attribute the finding to the
internationalizing company's desire to deal with countries whose demand characteristics are
similar to the home market.

Non-Empirical Literature

Much of the remaining literature on small business internationalization is anecdotal in nature,
consisting of interviews in which the company executives or government officials offer their
advice to would-be international firms. For example, Ake (1993) says going global is "easier
done than said." He notes that the psychological barriers to making an international move are
oAen bigger than the legal or cultural barriers, and said firms who take the plunge will find
that success breeds success.

Searing (1998) contends that companies with successful products in the U.S. are likely to find
receptive markets elsewhere. She suggests that small businesses start off in the most stable
markets, moving into riskier areas only aAer they have gained overseas know-how.

The present research adds to the literature by examining a cross-section of U.S.-based firms
who have "been there, done that" and who have advice to give those who would follow in
their footsteps. It looks at three issues of importance to any firm considering a cross-border
leap: First, what stimulates the decision? Kotler (1997) notes that business would be easier
and safer if companies could stay in their home markets and not have to deal with the risks
and uncertainties associated with unfamiliar territory. However, firms oAen have no choice in
the matter —they are impelled to go global by factors that threaten their domestic success or
even their very survival.

For example, a company's home market might come under attack by an international firm
offering a superior product, lower prices, or both. Or the company might need additional
customers to achieve greater economies of scale or to support greater investment in RzkD.
More basically, the company might believe that profit opportunities overseas are greater than
those at home, or simply that it is too risky to be dependent on one market for sales and
revenue.

Second, how can the risk associated with such a move be reduced? Aharoni (1994, p. I I) uses
the words "massive" and "daunting" when describing the resources that "major" players must
commit to their global efforts. The resource and capability constraints of small businesses,
which do not permit a full-bore approach to competitive battle in the domestic market, can be

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Journal ofSmall Business Strategy Vol. /0, No.2 FallltVinrer /999

particularly problematic in the global marketplace, which requires efficient, effective

management of oAen-unfamiliar functions and activities.

Finally, who should be involved in the implementation? Close to 90 percent of American

firms employ fewer than 20 people, and almost half the U.S, work force is employed by

companies with fewer than 500 employees (Aharoni 1994). While these and similar statistics

are oRen used to demonstrate the contributions of small businesses to the gross domestic

product, they also illustrate another important fact: Small businesses do not have large staffs

to devote to international activities. Consequently, the question of how the
internationalization process will be implemented is key.

METHOD

The sample for this survey was randomly selected from the membership of the North Carolina

World Trade Association, a group whose mission is to facilitate world trade through education

and information exchange. The questionnaire was mailed to 141 association members, who

were told that the study's purpose was to identify key issues in global expansion for small

businesses. Seventy-six of those surveyed returned completed questionnaires, representing a

response rate of 51%. This unusually high response rate was likely due to the congruency
between the association's purpose and that of the research.

Of the 76 respondents, 64% classified their firms as service operations, while 20% classified

them as manufacturing. The remaining 16% indicated that their firms were both.

The average ratio of foreign sales to total sales among the survey participants was about 38%,
with 75% of respondents indicating that more than half their sales came from overseas.
Although more than 50% of the firms had no foreign subsidiary, more than one-third of them
had at least 10. The remainder had from 12 to 100.

More than 39% of the firms had export departments, with about 14% employing export
managers. Less than 5% engaged in overseas production, and none assembled abroad.

Survey participants were presented with a series of statements related to the decision by a

small business to expand globally, and were asked to indicate on a five-point Likert scale the

extent to which they agreed or disagreed with each of the statements (1
= strongly agree, 5 =

strongly disagree). The statements pertained to three general aspects of internationalization;
motives for going global, steps the firm could take to manage risk, and the locus of
responsibility for global elTorts.

RESULTS

Rationale For Entering International Arena

The results in Figure 1 show that respondents believe that while psychological barriers are the

biggest hurdles to overcome in entering the global arena, external factors can hasten
the

decision. Respondents strongly agreed ( x = 2.05) with the statement that "The largest barrier

an American small business will face in global expansion is an internal one (deciding whether

or not they really want to sell in foreign markets), not an external one." Moreover, they

agreed that the decision to internationalize can produce "substantial economies of scale in

production and marketing" ( x = 2.67), suggesting that the active pursuit of cost efficiencies

can be an international expansion driver.

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Journal of Small Business Srraregy Vol. 10, iVo.2 Fall/Winier l 999

Figure 1 - Respondents Level of Agreement on
Statements Related to "Going Global"

Largest harrier is

internal

Economies of scale 2.67

React to situational

thrust

Only market few

products

Staodardization in

similar markets

Should modify products .02

Willing to sacrifice price 3.57

Price is most important 4.05

Should raise prices 4.t2

Name international

gunl

"Gunl" vs. nlarkel
researcher

Should avoid

intermediaries

Should leave to experts 2.05

t 2 3 4 5

0 Mean (1uStrongly agree, 5=Strongly disagree)

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Journal ofSmall Business Strategy Va/. /0, Na.2 Fa///IVi uter /999

The results also show strong agreement ( x = 2.08) with the statement that, "Because of the
risks and difficulties of entering foreign markets, most small businesses o/ten do not act until
some situation or event thrusts them into the international arena, such as a domestic importer,
a foreign importer, or a foreign government asking the company to sell abroad."

Risk Management

When asked to identify the countries/regions of the world in which small businesses are most
likely to be successful marketing their products or services (see Figure 2 for a graphical
representation of mean rankings), almost 60% of respondents ranked Canada as number one,
while Mexico placed first among 21% percent of respondents and second among 47%.

Figure 2 —Level of Perceived Risk in Selected Regions

10

6

6

4

2

c
0

Gd

Behind the United States'eighbors to the north and south, Great Britain, Europe/EEC and
Central/South America ranked third, fourth, and filth, respectively. Interestingly, Australia,
an English-speaking country, ranked eighth behind the Orient, which was sixth, and Southern
Asia/South Pacific, which was seventh, possibly because it is not as active a trading partner
and hence represents a less-developed market for American products.

The Middle East, ninth, Africa, tenth, and the former Soviet Republics, eleventh, were at the
bonom of the list. Their poor showing presumably has much to do with the instability of their
political and/or economic environments.

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Journal ofSmall Business Strategy Vol.10, No.2 FalllIVinier l 999

The respondents believe that, once the decision has been made regarding the country or region
of the world in which the firm will do business, firms can and should take further steps to
minimize their risks. The survey participants indicated strong agreement ( x = 2.22) with the
statement that small businesses should begin by "marketing only a few of their products
initially" as opposed to taking their entire product assortment overseas. Moreover, they
strongly agreed ( x = 2.22) that standardization is practical only in economically similar
markets. In fact, they recommended ( x = 1.92) that small businesses consider modifying
products to meet better the needs of foreign consumers, and disagreed with the statement ( x
= 3.57) that "people around the world are willing to sacrifice preferences... for lower prices
at high quality."

On the subject of price, respondents disagreed ( x = 4.05) with a description of this decision
variable as "the most important factor in determining if the product will be a success." Nor
did they support the suggestion ( x = 4.12) that a small business should consider raising its
prices to cover exporting expenses or to send a quality signal.

Responsibility Locus

With respect to the assignment of responsibility for activities associated with the going global,
the survey results suggest that firms recognize the need for expert involvement, but also
understand the desire for small businesses to retain control. Respondents agreed ( x = 2.41)
that small businesses should appoint an "international guru" to make the global decision.
However, they are unclear ( x = 3.22) about the advantages of having this guru travel
overseas to meet potential agents and consumers, as opposed to hiring someone to research a
particular country's market potential.

Respondents disagreed ( x = 3.32) with the statement that small businesses should "avoid
using trade intermediaries whenever possible" and also with the opinion ( x = 3.88) that it is
acceptable for the firm to leave worries and duties related to letters of credit, shipping, and
documentation to the experts.

DISCUSSION AND CONCLUSION

Taken as a whole, the advice from experienced firms to those contemplating an international
move can be summed up as "Think big in small ways." The survey participants seem to
understand the need for small businesses to heed the siren call of the global marketplace, but
to do so in ways that makes size a strength, rather than a liability.

The results show that the decision to enter the global market ol)en is made reactively, rather
than proactively, when an external situation or event prompts the firm to respond. Proactive
moves would be consistent with the entrepreneurial orientation of many small businesses.
However, it may be that fear of the unknown and an awareness of the extraordinary resource
demands engendered by going overseas lead to inertia on the part of small businesses. On the
other hand, a reactive response to an externally generated threat or opportunity is consistent
with the speed, responsiveness and flexibility that many small businesses exhibit, especially
as compared to their larger counterparts.

With respect to decisions regarding where to go, survey participants strongly agreed that firms
should take their first steps close to home, identifying Canada and Mexico as the top two
international markets to pursue. The high rankings for these countries are not surprising,
given that they share borders with the U.S. and are NAFTA signatories. Moreover, the result
is consistent with advice from Griffin and Pustay (l996, p. 37), who identify the first rule of

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Journal ofSmall Business Strategy Vol. 10, No.2 Eall/Winter l999

internationalization as "know the territory" and contend that many businesses fail

internationally because they are ignorant of "basic geography, market characteristics, and
politics."

Survey respondents also strongly supported suggestions that small businesses limit the

number of products marketed overseas as another way of minimizing risk. Selection of a few
key offerings reduces marketing costs, and provides "experience curve" effects that can be

applied to products that require more eITort to achieve their market potential.

With respect to the products themselves, respondents apparently believe that moving away

from customization toward standardization might be easier in theory (see Levitt 1983) than in
practice. They indicated that standardization is practical and practicable only in economically

similar markets and agreed that product modifications should be considered if they are
necessary to satisfy foreign consumers.

The survey participants also believe that gaining expertise about the internationalization

process is important, and that such expertise can be provided by a "guru" inside the company
or by knowledgeable, experienced individuals and firms outside. However, they believe the
small business should remain concerned about and involved in the process, even when outside

experts have been engaged. In total, the responsibility-related results point to a perceived

need to balance the external competence —internal control issues that confront a small
business in the global arena.

As the world continues to get smaller, the role of small businesses in the global economy is
likely to get larger. The present research provides advice from a sample of North Carolina
firms regarding the global arena and the process for entering it. However, a larger-scale study

of small businesses from across the United States could provide even greater insight into the
unique challenges and opportunities faced by members of this vital economic sector.

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Sheri Bridges is an assistant professor of marketing in the IVayne Calloway School of
Business and Accountancy at IVake Foresi University. She received her Ph.D. from Stanford
University and teaches courses in Marketing, Consumer Behavior, and Marketing
Conimunications. Dr. Bridges'rimary research interests are in the areas of brand equity
and consumer response to marketing strategy. Her mosi recent publication was in the
Journal of Marketing. Beforejoining the IVake Forest faculty, Dr. Bridges was marketing
direcior for a San Diego company that manufactured residential security systems and city
editor of a daily newspaper in Florida.

J. Kline Harrison is an associate professor of management in the Wayne Calioway School of
Biisiness and Accountancy at Wake Forest University, where he also serves as Associate
Dean for Curriculum and Administration. He received his Ph.D. from the University of
Maryland and teaches courses in Organi ational Behavior, Human Resources Management,
and International Business. Dr. Harrison's research primarily focuses on international
human resource management. His publications include articles in the Journal of Applied
Psycliology, Administrative Science fjuarterly, International Journal of Intercultural
Relations, Journal of Social Psychology, and Journal of Management Education, as well as a
book entitled, Personnel/Human Resource Skills Modules. Prior to assuming his position at
IVake Forest in l990, Dr. Harrison was a management training consultant in Washington,
D.C. working with a variety of organi ations in both the public and private sectors. His
trainees ranged from corporate executives to first-time supervisors and included both
American expairiates and foreign nationals.

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