1. education

EU-Project
National Corporate Cultures and International Competitiveness Strategies – the Challenge of Globalisation for European SMEs
Contract Number HPSE-CT-1999-00027
Handbook for practising business people
How to Go International?! Risks and Chances for European SMEs
Co-ordinated by
Institut für Soziologie, Friedrich-Schiller-Universität Jena, Germany
Partners
Institut des Sciences de l’Homme – GLYSI, Lyon, France
Dipartimento di Scienze Sociali, Università Torino, Italy
Forschungsgesellschaft für Industriesoziologie, Universität Wien, Austria
Faculty of Management and Organisation, University of Groningen, the Netherlands
August 2002
Contents
1. Introduction........................................................................................................................3
2. Autonomous versus Co-operative Strategies: Empirical Findings ....................................5
2.1 Introduction ..............................................................................................................5
2.2 A Short Typology: Autonomous versus Co-operative Internationalisation
Strategies ............................................................................................................................6
2.3 Empirical Findings: Changes in Internationalisation Strategies ..............................7
2.3.1 International Market Selection and Geographic Distance .................................8
2.3.2 Current Entry Mode Choice(s): SMEs Predominantly Use an Autonomous
Strategy when Internationalising.....................................................................................9
2.3.3 Entry Mode Changes (Regression versus Progression): Why Do Firms Change
From One Entry Mode to Another? ..............................................................................11
3. Internationalisation as Opportunity Seeking: The Efficiency of Internationalisation via
Networks..............................................................................................................................17
3.1 What are Supportive Networks?.............................................................................18
3.2 Findings: The Use of Networks Compared ............................................................19
3.3 Risks and Limits of an Opportunity-Seeking Strategy via Networks ....................23
4. Learning From Best Practice ...........................................................................................25
4.1 Successful Autonomous Strategies.............................................................................25
4.2 Successful Mixed Strategies.......................................................................................30
4.3 Successful Co-operative Strategies ............................................................................34
5. Typical Causes for Failures .............................................................................................40
5.1 Undiscovered Ineffective Entry Modes......................................................................40
5.2 Ill Preparation of Going Alone–Strategies, Sales Offices in Particular .....................41
5.3 Short-Term Perspectives instead of Long-Term Development..................................43
5.4 Unsuitable Labour Division between Parent Company and Subsidiary ....................44
5.5 Instability of Joint Ventures with Partners in Distant Regions ..................................47
6. Policy Implications ..........................................................................................................50
7. Links and Further Information – European Supporting Agencies for SMEs ..................52
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1. Introduction
Due to increasing globalisation many companies in European countries are under considerable pressures to adapt to rapidly changing conditions. The number of competitors increases at home and abroad, international markets seem to approach. While public attention is mainly focussed on large, multinational companies (MNCs) small and mediumsized companies (SMEs) are affected as well. The chances of SMEs to conquer international markets, however, are limited. A lack of personnel and financial resources are a
huge hindrance for SMEs to become international active.
On the other hand, within Europe we find a whole range of SMEs that have managed to
expand their business to foreign markets, that have succeeded in becoming small global
players, that turned from - as we call it - “regional dwarfs into international giants”. Many
others have attempted the same – with less or no success. Why and under which conditions
some SMEs succeed in going international while others fail is the main question this handbook wants to answer.
The handbook rests on findings of the EU-research project “National corporate cultures
and international competitiveness strategies – the challenge of globalisation for European
SMEs” (HPSE-CT-1999-00027). It is based on 64 company case studies in the mechanical
engineering and the software sector in six regions in France (Rhone Alps), Italy (Piedmont), the Northern Netherlands, North East Austria, East and West Germany (Thuringia/Bavaria). 153 in-depth interviews were conducted altogether between November 2000
and June 2001 to find an answer to the question why, when and how small and mediumsized enterprises internationalise, and whether or not co-operation is their method of choice
to do so.1
* The handbook does not intend to present all findings of this research. However, some
results which are important for SMEs in the process of internationalisation will be portrayed.
* The handbook does not offer the one and only best way of SMEs to foreign markets. This
simply does not exist. Instead, it will show examples of best practice and give restricted
advice for certain situations. The reality of internationalisation is many and diverse. The
handbook will not offer easy and plain general answers.
* The handbook is directed to practising business people of European SMEs who intend to
internationalise or are already in the process to do so. It will not present all-embracing instructions. Instead, it will offer some general insights, selected advice, and many examples
how to succeed and how to fail.
1
The study was carried out from the following institutions: Institut für Soziologie, Friedrich-SchillerUniversität Jena, Germany (Rudi Schmidt, Katharina Bluhm, Bernd Teufel), Institut des Sciences de
l’Homme – GLYSI, Lyon, France (Dietrich Hoss, Bernard Ganne, Michèle Dupré), Dipartimento di Scienze
Sociali, Università Torino, Italy (Angelo Pichierri, Angelo Michelsons), Forschungsgesellschaft für Industriesoziologie, Universität Wien, Austria (Franz Traxler, Bettina Stadler, Georg Adam) and the Faculty of Management and Organisation, University of Groningen, the Netherlands (Arndt Sorge, Maryse Brandt, Gerda
Gemser, and Delano Maccow). The results of the study are to be found in the research report Internationalisation of European Small and Medium-Sized Enterprises (SMEs), submitted to the EU-Commission, April
2002, or on the webpage http://www.smeglobal.de.
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Structure of the handbook
The handbook is structured as follows: in chapter two findings will be presented from the
research project that show and explain different strategies and ways of internationalisation.
In chapter three the focus is on the important role of networks (on both regional, national
and international level) for the internationalisation of SMEs. In chapter four we will present a whole range of best practice examples. Here we portray companies that managed to
become international successful. In chapter five we take a different perspective and concentrate on different kinds of failures and causes for failures frequently made during internationalisation. Both chapters four and five will open a broad spectrum of how to master
internationalisation or how to fail. Without constructing a patent remedy for internationalisation these chapters contain a whole range of tips and advice. Chapter six will conclude
with some policy implications with respect to internationalisation, while chapter seven
contains links and further information, especially with respect to European supporting
agencies for SMEs.
The handbook is accompanied by the teaching video-film Going International – Paths
Taken by European SMEs comprising three parts: 1. Herding (Germany) – The many paths
to foreign markets; 2. Ever (France) – Thinking international from the start; 3. Fidia (Italy) – Innovation and internationalisation: a way of life of three SMEs studied in Lyon,
Turin and Bavaria provided by Bernard Ganne and Jean-Paul Pénard (Lyon). The enterprises presented in the film are also portrayed in chapter 4.
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2. Autonomous versus Co-operative Strategies: Empirical
Findings
2.1 Introduction
This chapter deals with the question if co-operation is the predominant strategy for SMEs
to speed up internationalisation and whether the internationalisation strategy of SMEs
changes over time.
While large multinational companies have the means and resources to follow autonomous
strategies to foreign markets this is less easy for SMEs. Thus, SMEs often get the advice to
compensate their scarce resources by co-operating with other companies. Nonetheless,
autonomous strategies prevail.
The concept of internationalisation includes both ‘entry mode choice’ and ‘international
market selection’. In this chapter, however, the emphasis is more on entry mode choice, i.e.
the institutional arrangements in SMEs organising and conducting their international transactions – as for example direct export, after-sales service via own staff or in close cooperation with independent partners, offshore production in wholly owned subsidiaries.
Based on this, two major internationalisation strategies are identified: the autonomous and
co-operative strategy of internationalisation. “Strategy” is described as an emergent strategy – i.e. an organised course of action, which was actually realised but not necessarily
intended at the beginning of the process. Strategies in this sense are the result of different
entry modes.
In this chapter, internationalisation strategy is looked at under the following headings:
1. A short typology: autonomous versus co-operative internationalisation strategies;
2. International market selection: Firms first search for markets in countries that are
culturally similar and geographically close and over time and through experience,
expand into culturally and geographically more distant markets.
3. Current entry mode choice(s): SMEs predominantly use autonomous strategies
when internationalising.
4. Entry mode changes (regression versus progression): Why do firms change from
one entry mode to another?
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2.2 A Short Typology: Autonomous versus Co-operative Internationalisation Strategies
We identify two basic internationalisation strategies that SMEs may follow: i.e. the cooperative and the autonomous strategy:
Autonomous Internationalisation Strategy
Firms that use an autonomous internationalisation strategy act, as the term already indicates, in an independent way. The autonomous strategy may be referred to as the 'classic'
strategy of cross-border activities which was typical for larger firms for a long time. Firms
engaged in direct exporting using their own export sales staff or independent intermediaries operate in an autonomous fashion. Firms that have
•
direct exporting and/or
•
own sales offices
• and/or their own production facilities, etc. in foreign markets also operate in an
autonomous fashion.
Co-operative Internationalisation Strategy
The co-operative strategy is one that is built on co-operative relationships among firms.
Firms that use the co-operative internationalisation strategy partly and deliberately give up
their autonomy for the purpose of co-operating in order to facilitate internationalisation. In
this chapter we are particularly interested in International Strategic Alliances (ISAs). An
ISA is defined here as a co-operative relationship with a partner operating backward, forward or in the same stage of a value chain and aims at the development, distribution,
and/or production of products in a foreign market. This relationship may be characterised
by equity sharing, such as in the case of joint ventures, and/or may be a contractual arrangement without equity sharing.
Strategic Alliances with Large Clients
The co-operative strategy may be subdivided into ‘one-side’ dominated relationships to
relationships, which are more symmetrical in terms of resources and capabilities. ISAs that
involve a small firm linking up with a large client or supplier are often characterised by
asymmetries in power and commitment. Usually these large clients or suppliers 'direct' the
internationalisation of the SME, exerting considerable influence on the product that is offered abroad, the location where the small firm directs its activities, and/or the activity that
the small firm shifts abroad (production or after-sales service, the type of applications,
etc.). On the other hand, this type of ISA can facilitate the internationalisation process of
the small firm, since a package of orders is often guaranteed, the firm can use existing distribution networks, and/or can tap into existing knowledge on foreign markets.
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Different Ways of Strategic Alliances
ISAs can come in various forms. We discern three basic types.
1. The first type is the non-equity strategic alliance, an alliance that is formed through
contractual agreements with a company to supply, produce, or distribute a firm’s
goods or services without equity sharing. Other types of co-operative contractual
arrangements concern marketing and information sharing. It thus also includes, for
example, licensing or franchising agreements.
2. The second basic type is the equity strategic alliance, which is an alliance in which
partners own different percentages of equity in a (new) venture. An example is a
firm with a majority or minority participation in a foreign partner.
3. The third basic type is the joint venture where two or more firms create an independent firm by combining parts of their assets. Commonly, partner firms own an
equal percentage of a joint venture’s equity. Equity strategic alliances and joint
ventures are closer to hierarchical control than are non-equity alliances.
Table 1: Entry Modes According to Autonomous and Co-operative Internationalisation Strategies
Major entry modes from low to high commitment
after-sales
R&D allian- joint producCo-operative OEM export sales with
(indirect ex- independent service in
ces
tion
Strategy
port);
partners
close colicensing
operation
with partners
sales offices/ after-sales
R&D facili- production
Autonomous plain direct
export
subsidiaries service staties
sites
Strategy
tions
2.3 Empirical Findings: Changes in Internationalisation Strategies
In this section, we will show that firms prefer to use the autonomous strategy instead of the
co-operative strategy. In addition, we will exemplify the possible changes in internationalisation strategies used.
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2.3.1
International Market Selection and Geographic Distance
The mechanical engineering firms in our study are, on average, currently active in more
world regions (three), than the software firms (on average active in two regions). This is
indicative that the software firms are still in the initial phases of internationalisation.
First steps into geographically and culturally close markets.
Almost 88% of the firms in our sample entered geographically and culturally close markets
(i.e. countries belonging to the EU and/or Switzerland) in the initial stages of internationalisation. There are no major differences between the two sectors: 89% of the mechanical
engineering and 87% of the software firms in the sample first entered relatively close markets (the terms 'region' and 'market' are, in this chapter, interchangeable terms). This market entry in close markets allows the firms to start internationalising without much risk. As
noted, for example, by a French software firm:
“The European market is not really like working on an international level”.
And a German software firm that started to internationalise by selling in the neighbouring
countries Austria and Switzerland considered this to be “virtually the same as selling to the
German market”.
Five of the seven firms that initiated their internationalisation process in more far away
countries erected production facilities (on their own or in co-operation with partners). The
dominant factor for selecting a 'far away' country was being able to profit from low labour
costs for four out of the five firms.
We did find, however, that cultural and geographical distance does not provide the only
explanation of firms' initial and subsequent market selection decisions. 'Client followership' (i.e. firms internationalise as a result of the international strategies of their clients),
also had a key influence on both the initial decision to internationalise and on the choice of
the foreign market. These foreign markets could be 'close' but often were not.
For example, an Italian mechanical engineering firm producing metal car components was
‘forced’ to become active in Argentina by its large client Fiat. The firm considered the
move to Argentina as ‘high risk’ since it did not have much international experience, but it
could not refuse the wish of the large client without loosing this client. To reduce the risk
and increase speed, it decided to erect a joint venture with a local firm in Argentina.
8
Another important factor influencing market selection was 'market growth': firms tended to
target markets that were perceived to offer the best growth opportunities for their particular
niches.
2.3.2 Current Entry Mode Choice(s): SMEs Predominantly Use an Autonomous
Strategy when Internationalising
Most international activities are in the realm of sales & marketing and production. Only a
few SMEs studied have R&D facilities abroad or have entered an alliance focussing on
R&D. Latter are mainly granted by EU research programmes.
86% of the firms in our sample make simultaneous use of different modes of entry: 52%
make use of two different modes of entry (direct exporting and ISAs, or direct exporting
and subsidiaries, or ISAs and subsidiaries), while 34% make use of all the three basic
modes of entry (direct exporting, ISAs, subsidiaries). However, in the majority of the
cases, a dominant strategy (co-operative or autonomous) could be discerned.
The current internationalisation strategy of 23% of the firms sampled can be described as
predominantly ‘co-operative’, 56% as predominantly ‘autonomous’, and in 18% of the
cases the strategy of firms was a balanced mixture of co-operative and autonomous modes
of entry. Of all the firms having a predominantly autonomous strategy, 53% is from the
software sector and 47% from the mechanical engineering sector.
There is no difference between the tendency of software and mechanical engineering firms
to choose the co-operative strategy (of all the firms opting for the co-operative strategy,
50% is from the software sector and 50% from the mechanical engineering sector). Overall, both software firms and mechanical engineering firms seem to have a slight preference
for a go-it-alone strategy (59% of the software firms and 53% of the mechanical engineering firms).
Co-operation is not the strategy that SMEs predominantly use when
internationalising because of the high risks involved and demanding governance.
However, SMEs have to be subdivided into different size classes: Larger ones (with
roughly more than 100 employees) are more in line for autonomous strategies, whilst
smaller ones may obtain more advantages from co-operation. Likewise, it appears to be
advisable to adjust entry mode to requirements in specific markets. Some markets put a
prime on autonomous presence and direct investment, and in others opposing forces may
contrive to annihilate an autonomous investment, whereas co-operation with parallel firms,
clients or suppliers leads to good results.
9
Important reasons to enter into ISAs are:
1. to pool resources and share risks
For example, a German mechanical engineer firm producing tailor-made cranes follows
predominantly a co-operative strategy because the risk of doing business abroad is considered ‘too high’ and the firm does not have employees that are willing to work abroad for
extended periods of time.
Another German mechanical engineering firm producing industrial filter systems considered the Asian market a high-risk market, but commercially also very attractive and therefore prefers to work with local partners, but it does not invest any equity.
2. to get access to technological or local market knowledge that can speed up foreign market penetration
An Italian firm developing software for water/gas facilities and traffic management decided to enter into a joint venture with an Indian partner where the firm would deliver the
technological know how and the Indian partner would provide for human resources and
‘contacts’ in the financial world. The firm also indicated that it opted for a joint venture
because it did not have the resources to erect a subsidiary by itself.
While the limited resources of the firms in our sample foster co-operative approaches, the
firms are, in general, very anxious to maintain 'control' and not letting their strategy being
dictated by alliance partners. Alliances of crucial importance (for example because these
alliances are established in major growth markets) are thus designed in such a way that the
partners can be 'controlled', for example by holding a majority of the shares. Resourcericher SMEs find it more convenient to operate autonomously, whilst resource-poorer
firms will make use of alliances and achieve control by building on a basis of legal guarantees and, above all, trust in partners.
10
Table 2: Typical benefits and risks of co-operation
Benefits
Pooling resources
Risk sharing
Access to technological knowledge (higher innovativeness)
Access to local knowledge (easier and faster
market entry)
Value adding
Risks
Empowerment of competitors
Loss of know how
Increasing dependency and loss of control
Unexpected interest divergences, which lead to
an early end of the co-operation (waste of resources)
High transaction costs by controlling, governing
and monitoring the relationship keeping the cooperation vivid and interests compatible
2.3.3 Entry Mode Changes (Regression versus Progression): Why Do Firms
Change From One Entry Mode to Another?
87.5% of the firms started their internationalisation process with low risk, low commitment
entry modes, i.e. direct exporting and/or the establishment of non-equity alliances with
foreign partners.
SMEs grow from low-risk, low-commitment entry modes toward
higher risk and more demanding international activities.
Just eight firms (12.5%) used higher risk, higher commitment entry modes right at the beginning. However, when looking at these cases more closely, the entry modes chosen seem
less risky than assumed at first glance.
One French mechanical engineering firm set up a production joint venture in Brazil together with three other French firms. The firm considered this joint venture a 'low risk'
mode of entry that allowed it to learn how to work abroad, and has subsequently shifted its
attention to direct exporting, among other things by erecting a specific export division.
A German mechanical engineering firm started its internationalisation process with a sales
subsidiary in China. However, this subsidiary was 'inherited' from the firm's predecessor (a
company that went bankrupt and on which the firm was subsequently built).
Both the software and mechanical engineering firms show increasing commitment, as is
manifest by their higher levels of investment in foreign markets over time. However, the
11
internationalisation path may not always be straight. There is no incremental step-wise
logic of internationalisation beginning with direct export, moving ahead to sales partners
and sales offices ending up in own production facilities.
There is no such thing as one dominant type of SME internationalisation path.
A central lesson is that all the internationalisation strategy elements may be radically different for different types of SMEs: small and larger ones, resource richer and resource
poorer ones, those with distinctive products or more dependent parts or service suppliers.
Depending on what an SME is or can realistically aim to become, its internationalisation
strategy will be quite different.
In comparison to MNCs which due to sufficient resources are able to realise and execute
the strategies they follow, an SME has to try and re-try. This trial and error process is influenced by different kinds of support and opportunities the firm is able to exploit. Thus,
the SME has to be able to react to changing conditions, to be open for changes and to
switch strategy whenever necessary. Patterns of success presented below are no patent
remedies for all kinds of SMEs. The only recipe is openness to meet opportunities and
learn from mistakes.
In order to work and to be sustainable, a company first has to know
or determine what type of enterprise it is. Furthermore, it has to
both, differentiate and adjust its policy pragmatically, but on the
basis of thorough reflection, to opportunities and limitations arising
from such a position.
Companies with respect to internationalisation may stagnate, regress, progress, or find
themselves caught in locked-in effects.
In spite of increasing pressure on SMEs to internationalise business activities, there are still
SMEs that are highly successful by stagnating at a level of relatively low commitment in
their international activities, i.e. plain export. Internationalisation by direct exporting of
course minimises risks and running costs, except if production or service provision in the
targeted markets is significantly less expensive. This is especially true in the mechanical
engineering sector in which global niche players quite successfully defend their technology/ high quality niche. The success of this strategy rests on three indispensable preconditions:
•
technology leadership;
•
existence of a relatively small global niche with few competitors and a limited
number of clients world-wide;
•
after-sales service/ applications etc. can be done from home country.
12
For example, an Austrian firm producing friction materials for clutches and brakes has a
very high export rate (99%), but has used no other modes of entry than direct exporting,
either in the past or in the present.
Other global niche players have developed a net of distribution partners they co-operate
closely with on a contract base but never intend to establish joint ventures or subsidiaries
abroad.
A German mechanical engineering firm producing agriculture equipment is an export
champion (export rate 90%). The firm has established a network of 150 distributors over
the years. The only change of strategy in the 1990s had been that the firm started to look
for suppliers in Central and Eastern Europe.
Pragmatic adjustment also implies that under certain circumstances SMEs may even
regress, may turn backwards. In the case of firms that regress from using a more high-risk,
high commitment mode of entry to using a more low-risk, low commitment mode of entry,
change is mainly due to resource constraints or cultural problems.
An Italian firm producing software and machines for the textile industry closed down its
sales subsidiary in the US and now has a strategic alliance with some of the former employees of the subsidiary, because it proved difficult to control an organisation in a different cultural and managerial context, and because of a general decline of US market demand.
Another Italian mechanical engineering firm erected a sales subsidiary in Brazil but because the market proved to be culturally too different, the firm is now considering to dissolve the subsidiary for setting up a joint venture with a Brazilian partner.
One Dutch mechanical engineering firm for purification systems had a sales subsidiary in
the US but because of lack of resources it was changed into a joint venture with a local
partner.
What are the reasons and motives of SMEs to progress in their international business activities moving from more low-risk, low commitment mode of entry to using more highrisk, high commitment entry modes for this kind of progress?
We find that these motives mainly relate to managerial learning, the ineffectiveness of particular modes of entry, and market potential or market size.
13
In some instances it was very clear that firms changed into more high-risk, high commitment entry due to managerial learning.
A French mechanical engineering firm, for example, had a production co-operation with a
Rumanian partner for two years and then transformed it into a joint venture after getting to
know the market and its partner.
The Italian software firm set up a joint venture with a local partner in China ‘to get to
know each other and build common ground’. In the near future this joint venture will be
changed into a ‘full blown’ production facility (it is currently only used for final testing
and assembly).
We found also many instances in which a firm was ‘forced’ to change its strategy because
of ‘ineffective’ modes of entry. In particular ISAs were often cancelled or changed in the
more high risk, high committed mode of entry of fully owned subsidiaries because of
‘problems’ in co-operation. Firms often regard these problems as rooted in different cultures.
For example, a French firm manufacturing centrifuges had created a production joint venture with an Indian partner to benefit from the low labour costs and highly qualified Indian
personnel. However, the joint venture was eliminated because the Indian partner was not
able to deliver the products in time.
A German manufacturer of industrial filter systems changed its production joint venture in
the Czech Republic with a local partner into a fully owned production subsidiary because
the ‘Czech mentality’ prevented efficient production.
In other cases, the firm decided to switch to, or directly use, more committed forms of entry modes because market potential or market size made the firm more prone to take risks.
The French medical software firm took over its German distributor because of the importance of the German market.
Sometimes a market has much potential but is difficult to penetrate, so that firms feel it
necessary to create a subsidiary. In particular the US market proved to be commercially
very attractive but also very difficult for firms to penetrate, both in the case of software
14
firms and mechanical engineering firms. Hopes for conquering the American markets simply by setting up a small sales offices usually failed.
As noted by the CEO of an Italian software firm: "for US clients to buy Italian software
would be like for an Italian firm buying software from Morocco.”
This explains why firms have decided to, or intend to, erect sales subsidiaries, or take over
existing US firms with an established reputation and existing client portfolio to overcome
the ‘not-invented-here syndrome’ of the US clients and to be able to better serve these apparently very demanding clients.
For example, a German producer of electronic industrial testing systems (65 employees at
home) was facing the chance to go to the American market three years after first experiences with internationalisation. At a trade fair in the US one of the founders met an engineer from the US who showed himself enthusiastic about the product and suggested the
firm to set up a 100% sales office in the US with him as the only sales staff. Enormous
sales rates within half a year were envisioned. Yet as the sales could not been realised, the
American engineer soon lost interest, the relationship broke. Many potential American
customers preferred their U.S. competitor in this field and did not seem prepared to buy
‘foreign’ although an US-citizen was establishing contacts. The firm kept the sales office
for another one and a half years with a German sales manager until they found an American distributor to co-operate with. Although the firm had to acknowledge new problems
with this new partner the company slowly consolidated its position on the US-market. At
the time of the interview, their major hope had been big European customers settling in the
U.S. and showing an interest in oversees supply that may become enough to set up an
‘American’ production firm to overcome the “not-invented-here syndrome” in the near
future.
Interestingly, we find some indications that, next to firms that either stagnate, regress or
progress in terms of level of internationalisation, there are also firms that under certain
circumstances remain ‘locked’ within their stage of internationalisation, i.e. firms conceived their actual steps as insufficient unable to change the approach right now as the investments in this entry mode were already quite high.
An Italian automobile supplier, for example, set up a subsidiary in Argentina making an
"enormous investment for a company of this size", i.e. a green-field production plant with
brand new metal presses to manufacture high-quality metal components. The choice of a
50% - 50% joint venture in order to maintain the independence of both companies is now
seen as a disadvantage because it tends to paralyse decision-making at a time when conflicts are inevitable (due to highly adverse market conditions). At an important moment of
its life when the company wishes to be more independent from its client, it would be easier
to have “a clear relationship of dominance" which allows one company to impose its decisions. The lack of financial resources and the Argentinean crisis made it impossible to
change the capital relations between the two partners.
15
Another Italian company producing virtual mechanical prototypes set up a 100% subsidiary in France with four employees in 1997. Yet the initial French ties in the automobile
industry did not develop in the way hoped. The result is the expression of regret without
expectation that a new strategy could replace the first: “If we had to set up a company in
France now, we would do things differently, and would willingly join a French company,
which we feel would facilitate our penetration of the French market.”
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3. Internationalisation as Opportunity Seeking: The Efficiency
of Internationalisation via Networks
Often the internationalisation of SMEs is less the result of strategic planning than by
chance. Especially when SMEs are rather young and still concentrated on the home market, trying to consolidate their own fragile economic position they do not have the means
and resources to develop detailed strategies for going international. This lack of strategy is
often considered as main hindrance for the internationalisation of SMEs.
On the other hand, many of those supposedly non-strategic companies manage to establish
themselves on foreign markets. Without active planning, they suddenly find themselves in
the position to co-operate with a foreign partner that they by chance met on a national trade
fair or via a big customer. Without having considered all risks and costs beforehand, they
take this unexpected opportunity to go international. Only after this first step to foreign
markets, they slowly start to develop explicit strategies.
While many scholars consider this as the “result of a fortuitous combination of events and
circumstances” (OECD 1998: 9) we argue that the chance of running into an opportunity is
dependent on the frequency of network linkages a company has gained.
The more linkages an SME has to one or more networks, the
greater is the probability to meet an opportunity for internationalisation.
Especially for internationalisation beginners the use of network resources is quite rational.
Systematic opportunity seeking, in this sense, can even be considered as an implicit strategy.
In our sample, we found a range of companies that made their way to foreign markets by
exploiting this kind of opportunities. Instead of relying on contractual co-operation – i.e.
international strategic alliance (ISA) – many SMEs prefer to use network connections and
the subsequent opportunities for own internationalisation attempts. We call this the supportive role of networks or supportive networks.
In this chapter we look at the supportive role of networks under the following headings:
1. We give a short definition what supportive networks are, why it is useful to distinguish networks supporting internationalisation and international strategic alliances/
co-operation, and what kind of supportive networks we can differentiate;
2. We present findings and examples for the use of different network types;
3. Finally, we ask for the risks and limits of an internationalisation strategy based on
the use of networks.
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3.1 What are Supportive Networks?
Supportive networks comprise relationships to other economic and non-economic actors
which SMEs have established, providing them with knowledge, information and contacts
concerning the question of entering foreign markets, where to go and whom to get involved, etc. Thus networks functioning in two directions:
1. Networks can be “bridgeheads” to foreign markets.
2. The use of networks partners reduces information, communication and control costs
(transaction costs).
Promoting and assisting SMEs’ internationalisation is often a by-product of existing network relationships. Yet, contacts may also be made just for the purpose of internationalisation.
It is, however, important to note, that the creation and maintenance
of network relationships is highly dependent from the individual
personality of the CEO. Especially in smaller firms the CEO is the
one to determine range and content of these contacts.
Why differentiate between strategic alliances and supportive networks?
There are four main reasons why we suggest distinguishing supportive networks from nonequity-based and equity-based strategic international alliances, i.e. co-operation:
Table 3: Differences between strategic alliances and supportive networks
Strategic alliances
Co-ordination of activities toward a common
goal right at the beginning and even beforehand
Combination of resources from independent
partners
Mostly contract/equity based
Risk sharing
Supportive networks
No joint goals in terms of internationalisation necessary: network may even exist for purposes other
than internationalisation
Using resources of others for own purposes instead
of resource pooling
No contractual/equity exchange to establish activities abroad
No risk sharing
As the use of network resources is less demanding in terms of risks and resource sharing,
fears typically linked to inter-firm co-operation as shown in chapter 2, table 2 are less developed. Even when firms have chosen to internationalise autonomously they often exploit
supportive network linkages to get access to reliable information or potential partners.
18
Four types of supportive network relationships
1. Personal relationships, which have been established over the years like family ties,
school and university friendships, former working relations, etc.
2. Relationships to other SMEs: these small SME networks are inter-organisational or
inter-company networks which can also be stated as relationships among equals.
3. Use of networks of large multinational companies (MNCs): in these networks, SMEs
are mostly vertically integrated or work together with large companies on a complementary base. In spite of the power asymmetry in this type of network, MNC networks
provide attractive opportunities for ‘exploitation’ of the great by the small.
4. Use of networks of intermediary institutions comprise all kinds of state and publicprivate agencies and associations supporting internationalisation of SMEs as these
agencies offer, too, network advantages by mediating contacts in foreign markets, providing information and consulting.
3.2 Findings: The Use of Networks Compared
Network relationships in the above sense are a crucial resource for
SMEs’ internationalisation in providing information on foreign
markets, contact mediating and facilitating of market entry.
In our sample, only three companies were not integrated in any kind of network. The great
majority of our sample (61 companies) has used at least one kind of network aiming at
internationalisation at least once. Most often (41 companies; 64.1% of all cases) intermediary networks have been consulted. Apart from this, MNC networks are the most decisive
means for SMEs to internationalise their activities, followed by personal ties. More than
half of all companies had access to, and made use of, MNC networks, almost twice as
many as had access to SME networks.
19
Figure 1: Making use of networks for internationalisation (more than one response possible)
Number of responses
Use of networks for internationalisation
45
40
35
30
25
20
15
10
5
0
38
41
26
20
3
No networks
Personal
networks
SME networks
MNC networks
Intermediary
networks
Considering the different types of networks, their effects on SMEs’ endeavours for internationalisation are quite different.
MNC networks are more effective than the other types of supportive networks.
Here it is important to note that these cannot be reduced to MNC-driven “follow the big
client” pattern often described in the literature, where MNCs use their market power to
induce their suppliers to move close to the MNCs’ foreign production sites.
SMEs actively exploit MNC networks in various ways:
1. They explore the corporate network of a big customer starting in one unit and
spreading their activities from there across the entire multinational company (without being forced to follow).
For example, a German software producer supplied software solutions to a big firm located
in the very same region. Due to the rotation system for international managers, one of the
managers the small firm had contact with, moved to the U.S., another one was replaced in
the UK. In both cases, the managers decided to stick to their small German software specialist pulling him abroad to other unites of the MNC.
20
2. SMEs also exploit contacts and reputation gained by the MNC to approach other
independent companies the MNC works with.
For example, an Austrian software firm could develop a customer relationship to an Austrian subsidiary of the German Telecom. Based on the references and contacts gained there
the small firm developed customer relationships to the parent firm. In the next step the
Austrian firm could also use Telecom to approach other partners and customers of Telecom.
3. Finally, MNC network support can also be provided by big “suppliers” as in the
software industry, where large multinationals deliver standard tools and programs
and establish international “user groups” providing their clients with special information, training and privileged access to updates and new products. In such cases,
foreign direct investment is less likely a result but new contacts can be made. Some
small software producers even copied the user group model to establish their own
network.
Personal ties have astonishing and important influence on guiding
the SMEs abroad.
Especially in the early stage of internationalisation, entrepreneurs seem to prefer to direct
their efforts to a person they fully trust rather than to an unknown and unstable environment in an economically more promising country. Because of this preference, internationalisation activities of this kind are often singular, accidental, disjointed and geographically
far-reaching foreign direct investments.
The CEO of an Austrian software company presented the decision for erecting a subsidiary
in Jordan as motivated by the highly developed software market and skills. Yet, it turned
out that a friend from Jordan convinced the company’s owner to move there. Meanwhile,
there is an offshore software production conducted by this person employing 30 programmers.
In contrast, SME networks in our sample rarely led to foreign investment in production or non-equity strategic alliances (NEA) as
personal networks did. The SME networks rather helped the companies in establishing distribution channels.
21
It is quite common to reduce risks and costs for searching reliable distribution partners in
foreign countries by benefiting from the information and mediation of other befriended
SMEs in similar but non-competitive product segments.
At a trade fair the founder of a German software and hardware producer met the sales
manager of a Japanese firm, which has been in a complementary business with a subsidiary
in Germany. Based on this contact, the partners undertook some business together in Germany. During this time, the relationship between the founder and the sales manager got
more personal and trustful. Via this informal, friendship-based relationship, the company
eventually obtained a contact to a French re-seller of the Japanese firm, and with this firm
the company established its first successful distribution channel abroad. The new French
partner also mediated contacts into the Spanish and Portuguese, and into the North European market, whereas the endeavours which the German firm made on its own to find a
proper distributor in the UK failed.
Most companies studied have used intermediary networks for support only once, quickly loosing interest.
Although only 11 companies explicitly expressed criticism with services they used, the
majority of companies had low expectations of services provided by Chambers of Commerce, public agencies and associations specialised in promoting international activities of
SMEs. Three major critics were raised:
1. Information is too general;
2. Information and support are only useful at the very beginning of internationalisation;
3. Contact mediation often shows little outcome.
Software companies were in general more critical than the mechanical engineering companies in our sample. We found less criticism in the economically and institutionally highly
developed regions of Bavaria and Rhone Alps in which also the co-operation between public bodies and firms in the region was relatively high.
Close co-operation between supporting institutions and the
firms improves the institutions’ performance as it gives them
more insight to focus their activities.
22
3.3 Risks and Limits of an Opportunity-Seeking Strategy via Networks
Network relationships also imply risks and limitations firms should be aware of. Four of
such risks can be named as follows:
1. If a small firm follows a big client abroad, the SME often does or has to make huge specific investments. Rising dependency is one of the major risks of this approach. Hence,
once abroad, many firms start with systematic search for new customers that they could not
reach from their home country in order to become more independent from their big client.
For example, a German equipment manufacturer for transportation vehicles set up a subsidiary in Turkey in the late 1980s close to its big German customers. 10 years later, the
Turkish subsidiary is supplying components also to producers and service stations in Middle East for which the delivering from Germany would be too expensive.
2. Developing informal contacts to other SMEs in order to get easier access to distribution
partners of the befriended firm keeps risks quite low. An important disadvantage, however,
is that it takes a relatively long time to establish trustful relationships. Trade fairs are the
most important places for such a way of networking.
3. Trust relationships to a person do not guarantee that there will be no conflicts but may
lead to the tendency to consider potential disagreements and problems carefully. In addition, market entries based on personal linkages are hard to duplicate elsewhere.
A Dutch mechanical firm producing waste treatment systems established a sales office in
China led by a Chinese who could be trusted because he studied in the Netherlands and
received an in-house-training by the parent firm. It was impossible to duplicate the same
strategy in the USA. Thus, the management looked for a joint venture partner instead of
going alone.
4. Relying on network relationships and seeking opportunities cannot be the sole strategy
for long. At a certain point successful internationalisation needs a more explicit strategy
based on experiences and market analysis. This implies organisational changes:
a) Accumulation of suitable skills in terms of language, culture and communication by
further qualification. Developing international contacts for a broader range of staff
members and rethinking of the hiring-strategy;
b) Professionalisation of the international activities by delegation to international sales
managers. Usually the founders and entrepreneurs are also the ones who start with
23
internationalisation of their business based on their industry knowledge, contacts
and trade fair visiting. Sticking to this successful phase can turn into an obstacle.
c) Establishing suitable organisational structures (e.g. by establishing an international
sales department or an separate international sales company, project groups etc.).
24
4. Learning From Best Practice
Giving advice on how to go international is a difficult task. Due to the different conditions
applying in different foreign markets it is almost impossible in being schematic about internationalisation. The same conduct being promising and successful for one company may
lead to failure of another company in a different sector, situation, or market.
What can be observed of course is that the majority of SMEs move incrementally from
low-risk, low commitment modes of entry toward higher-risk, higher commitment modes
of entry. This, however, does not lead to a clear scope of action for a certain company.
Instead, the variables are too heterogeneous to allow for general advice.
A more promising way of learning appears to be to learn from experiences of other firms.
In this sense, we present in the following chapter success stories of European SMEs in the
mechanical engineering and software sector that will enlighten risks and chances of internationalisation of SMEs. In line with our differentiation between autonomous and cooperative strategies we chose eight companies, of those three follow a predominantly
autonomous, three a predominantly co-operative and two a mixed strategy. Although the
basic internationalisation strategies are different, and the actual internationalisation steps
are even more different, all companies reached the status of being successful internationally.
4.1 Successful Autonomous Strategies
FIDIA spa – from (the) necessity to internationalisation∗
The Italian company FIDIA spa was founded in 1974 to design, produce and sell numerical
control systems for machine tools for the manufacture of complex die & moulds, models
and electrodes. The CNCs replaced hydraulic/manual systems for making these moulds.
Since the 1990s the company has also been involved in what is now its second line of
business, the production and sale of “high speed” milling machines for die & mould manufacturing. The company’s third line of business is a computer assisted manufacture system
which links up the first two products, making it possible to programme complex shapes of
moulds. So the company sells to die & mould and model manufacturers and to Machine
Tool Builders as well. Production takes place in Italy, but Fidia has branches abroad for
sales and for after-sales service.
Fidia produces a few hundred systems/machines per year. The numerical control systems
in particular are highly customized, so “runs” do not exist. Milling machines are more
standardized, but production runs still quite short. Owing to the specialized nature of the
product, the niche is quite small, and the number of competitors correspondingly small.
Mainly Italian, German and Japanese firms. Fidia is smaller than its main competitors
(producing hundreds of machines per year rather than the thousands produced by main
competitors), but it claims that this makes it possible to offer a more customized product.
∗
Original name.
25
Fidia is a joint stock company, floated on stock exchange in November 2000, when 30% of
the company’s shares were placed on the market or sold to employees. With 210 employees in 4 plants in Italy (three in Piedmont plus one in Emilia Romagna) and 90 abroad, the
company had in 2000 a turnover of 42 million Euro.
The share of export with respect to the turnover is 60% (mainly to Germany, Spain,
France, Brazil, China and the United States). In all these countries Fidia has sales and
technical assistance branches, while it distributes its products through an external sales
network and through service centres in India, Australia, South Africa, Britain and Mexico.
The first offices for technical assistance and sales were set up in 1984 in the United States
and in Germany. In the years which followed offices were opened in France and Spain.
The Chinese offices date from 1993 and the Brazilian ones from 1994. The idea was partly
to increase sales but above all to offer an adequate after-sales service.
Fidia has recently set up a joint-venture (in which it holds a majority share), together with
the largest Chinese MTB state research centre, for the production of numerical control systems in China. This is not a full-blown factory, but a laboratory/workshop for the assembly
and final testing of numerical control systems.
Fidia’s internationalisation is closely linked to the internationalisation of the machine tools
companies to which it sells its first product, numerical control systems. In fact, internationalisation is described as the necessity to follow machine tools manufacturers abroad (since
these manufacturers sell largely abroad). It was necessary for the machine tools companies
which were actually selling the product to the final user to be able to reassure this final
customer that they would have effective after-sales assistance. So the core activity of the
foreign branches is after-sales service rather than sales. Another important function of
these branches maintaining close contact with customers is the gathering of feedback regarding technical problems and customers’ needs – feedback which can then be used to
improve the product.
Internationalisation seems therefore to have taken place in three steps: 1) to export and to
carry out new developments, using sales agents; 2) to establish a sales & service centre; 3)
to open a new subsidiary for after-sales service and sales in markets considered strategic.
The company theorizes this gradual approach as being an important component of its approach to international market coverage, thus allowing Fidia to obtain detailed knowledge
of the market itself.
The recent addition of assembly and testing facilities in the Chinese offices is obviously a
new stage of internationalisation.
The external conditions for Fidia’s internationalisation are the following:
•
a highly-specialised product with high added value
•
and a position within the value chain where the immediate customers are internationalising themselves.
⇒ Thus, this kind of internationalisation is considered as necessity of the intrinsic nature
of the market.
26
Internationalisation itself follows an incremental path with high export rates, contracts with
sales & service centres, and own branches of the company for sales and after-sales service
nearby important customers. In that way, the necessity to internationalise finds its answer
in a gradual, step-by-step approach within which the necessity is replaced by autonomy on
international markets.
Wintersteiger - Expanding within niches∗
The Austrian firm was set up in 1953 as a limited liability company by a technician who
primarily focused on innovative seed growing machine construction. He soon decided that
the niche production company, based in Ried in Upper Austria not far from the German
border, should be prepared to go across the limited national home market. Consequently,
the first steps to internationalisation were made first in Germany in the 1950s. Later on,
beginning in the 1960s, the product range has been deliberately widened and nowadays
comprises – besides ‘seed mechanics’ – production of wood manufacturing machines as
well as ski and snowboard service machines. This development has been accompanied by a
stepwise expansion of the outlets all over the world. In 2001 Wintersteiger had 280 employees at home (450 in total) and a turnover of 37.6 million Euro in Austria and 59,1 million Euro for the whole company. The advanced specialisation of the company within the
three branches of production has required an orientation towards international markets
right from the beginning due to the limited number of saleable units per country. Thus, the
export ratio runs to almost 87%.
The extension of the company’s engagement has been performed continuously since its
foundation in 1953. First experiences as a small-sized, nevertheless – due to the company’s
specialised know how and technological leadership – well performing niche player at the
home market (‘seed mechanics’) led to the management’s decision to widen the product
line and to conquer new niches. As a consequence, by investing in further technology,
highly precise wood cutting and ski service machines were developed. The fact that the
company’s specialised know how has affected a technological leadership first in one, at
last in three branches has to be considered a main precondition for this successful autonomous internationalisation strategy which was deliberately chosen by management. Moreover, as the high costs of innovative product development have to be compensated, an offensive strategy of market expansion has been inevitable. In the 1960s, the first steps into
the German market were followed by capturing other foreign markets, especially in western and eastern Europe, South-America, the U.S. and South-Africa. With the years, Wintersteiger expanded its technologies as well as its markets.
Characteristically, the combination of technological leadership on the one hand and market
expansion into foreign countries on the other hand has been performed actively by an excessively autonomous strategy of internationalisation, implying both a thorough qualification of the personnel at the headquarters and strategic acquisitions of the foreign competitors – like in France and Germany – in order to incorporate the sites’ know how while protecting their brand names.
The marketing concept of internationalisation in all of the three business branches follows
the same model. While due to the existing and carefully cultivated know how capacities at
the headquarters development and production is almost exclusively performed in Upper
Austria, the internationalisation strategy, in general, consists of establishing an international network of either sales departments or general agencies. For that reason, despite of
∗
Original name.
27
its relative small size in terms of turnover and employment, the company’s sales representatives are scattered all over the world.
The strategy first to identify and occupy a market niche aiming at a de facto monopoly
within this niche and subsequently to install an international distribution network has been
repeatedly successfully performed. However, variations of the marketing concept occur
due to the estimated capacity of the regional market aimed at. In this respect two different
approaches of the company’s internationalisation can be distinguished. In the main foreign
markets – like Germany, France and the USA – subsidiaries (meanwhile 13 in number) are
either founded or acquired in order to distribute the products. Some of them are not only
sales departments, but also assembling plants, or even – like in Germany and France –
have a production line on their own, since the product developing capacities are mainly
concentrated at the headquarters in Upper Austria. On the other hand, in countries and regions where the turnover is less outstanding, a sales department on its own does not pay. In
these areas general agencies like commercial representatives or companies selling under
their own name are in charge of the products’ distributions, in total numbers about 60 all
over the world.
Both approaches, however, follow the same concept of a completely autonomous internationalisation, which means: the headquarters’ absolute control over all subsidiaries and
sales units (even the foreign subsidiaries’ senior management is dispatched from Austria),
100% acquisitions instead of highly committing partnerships (Joint Ventures), establishment of an own distribution network, concentration of the technology at the headquarters
in Upper Austria, etc. This well calculated and consequent strategy of highly autonomous
internationalisation has to be considered the main feature of this company.
The recipe of the Wintersteiger GmbH company for successful internationalisation seems
to be quite simple:
•
Following an outstanding autonomous path of high specialisation in combination with
an uncompromising acquisitions policy and an extraordinary high export rate.
•
Securing the technological leadership in all three branches.
•
Keeping 100% control of the business including all subsidiaries and sales offices.
•
Considerable qualification of the personnel and concentration of the technological
know how at the headquarters.
⇒ Thus, Wintersteiger follows an autonomous strategy per excellence.
Ever – internationalisation as founding vision∗
Ever Team is a French software firm with a turnover in 1999-2000 of 9.9 million Euro and
about 250 employees. It was founded by four people in 1990, all of them knowing each
other from previous business activities in another company. Ever Team produces software
for managing document and web content in libraries, enterprises and administrations. With
setting up a new business, the founders hoped to introduce an innovation into the market –
object oriented document knowledge tools. At the outset, they elaborated a ten years business plan that included a long-lasting internationalisation strategy. In the first five years,
they wanted to become the market leader in France. Reaching this goal, they planned to
focus on foreign markets the following five years. By their previous activities the founders
∗
Original name.
28
have gained a broad network of relationships within the region and beyond. Especially in
the first years, this network and their “regional embeddedness” was a great help for consolidating and expanding the firm.
A major step in this context had been the funding for editing their first product by a French
agency specialised on sustaining the innovativeness of SMEs, ANVAR, that plays a crucial
role in the French software sector. Without this financial support, they would not have
reached the goal to discover and conquer a niche position in an already fully organised
market. In the first two years, the founders focussed their efforts on research and development but they were also observing the market. As it turned out the potential customers
showed not ready for the new software product. Thus, the four founders put a lot of endeavours in training the users to prepare them for the new tool. The close relationships they
had especially to the research centres and universities in France and Rhône-Alpes in particular allowed them to get their first clients quickly opening the doors to others.
From the outset, the tool was designed not only for French customers but also for users
speaking different languages, or showing a different behaviour with respect to computers.
Former experiences and international contacts did here play a major role. In addition, the
name of the firm should take the internationality of the market into consideration: It had to
sound internationally, and should be easy to remember in different countries.
The first step to international markets occurred, when Ever Team in 1997 bought another
French firm selling similar products for other target markets, in particular SMEs, and having a world-wide network of distributors. At the same time, Ever Team found its first customer abroad. This year had been the starting point for a more active strategy on international level. The growth of the commercial activity abroad can be shown by the following
figures: in 1997 1,5% of the turnover was realised outside France, 8% in 1998, and 15% in
1999.
As the internal after-sales service was not considered as efficient, Ever Team in October
2000 acquired a software service company that was capable to develop interface tools between the tool of Ever Team and other tools customers have in use.
Their proceeding on an autonomous way of internationalisation occurred partly by strategy, partly by opportunity. The American market was considered as an important, but also
as a difficult one. Hence, the founders decided to look out for acquisition and in 2000
bought a company for software editing in the very same field that is located in Toronto and
has a subsidiary in Minneapolis. Similarly, this occurred in Germany and Spain, but more
by chance. As a German and a Spain firm envisioned bankrupts, they looked out for partners who could rescue them. Knowing the French firm for a long time, they approached
Ever Team for take-over. This was of great interest for both sides. Ever Team got immediate access to clients in countries which were perceived as difficult to enter from France.
The firms in Germany and Spain could prevent their employees from unemployment.
For financing this expansion, Ever Team aimed to become quoted on the stock market in
2000. Yet, they drew back as the tech-stock bubble blew up and financial investors lost
interest in the software sector. Hence, the founders changed the strategy to raise “fresh
money” brought in by two financial institutions acquiring shares of Ever Team.
What can be learnt from this case?
•
The firm has an innovative product which allows to gain a niche market position.
•
Right from the start, a product was developed for international markets easily to be
used all over the world.
29
•
Even in the fast growing software sector, internationalisation is a long-term project that
should not be overdone. Ever Team pursued a two-step strategy conquering a good
position on the home market first before starting with internationalisation but creating
all preconditions necessary to become international right from the outset. Being established on the home market had been of importance also for raising fresh capital in spite
of the difficult situation the whole software sector faced at that time.
•
The autonomous strategy of Ever Team does not rest on any aversions against cooperation but was perceived as the most effective mode of entry to difficult markets
(that can be geographic distant but also very close countries) for the firm, and it occurred partly by opportunity.
•
The autonomous way of internationalisation was heavily supported by network relationships; regional networks helped to gain access to public funding and first clients in
Rhône-Alpes, and offered the opportunity to take over foreign firms.
4.2 Successful Mixed Strategies
Herding - The many paths to foreign markets∗
The German company Herding is an example for successful internationalisation by combining autonomous and co-operative entry modes. It not only invested in own foreign sales
offices and production subsidiaries, it also gave licences to competitors and co-operates on
a non-equity basis horizontally. Thus, Herding is a truly mixed case.
The company was founded in 1977 as a limited liability company by today’s managing
director, Mr. Walter Herding, and is situated in Amberg in Northern Bavaria. Although
being still first generation it considers itself a family-owned enterprise with the founder’s
son taking over in two years time. The company is engaged in the manufacturing of filter
elements, filter units and complete filter plants for separating dusts and aerosols from
gaseous media for industrial operations. Its customers are industrial companies of all kind,
mainly in the chemical industry. For the so-called sintered-plate filter, which is sold worldwide, Herding has an exclusive patent. The company has 150 employees at its headquarters
and 230 employees in total, distributed over five subsidiaries within Germany and another
seven in foreign countries. In the year 2000 the company had a turnover of about 20 million Euro and an export share of around 45%. It is present in the three world regions
Europe, North America and Asia.
The basis for Herding’s internationalisation success is a consolidated home market. Within
Germany the company has only one production site at its headquarters in Amberg and an
own sales system with five sales offices all over the country. As the technology for the
filters is not only patented but also a company secret Herding is keen to keep this technology in-house, for Germany as well as for the rest of the world. For the German market
Herding is able to produce and sell all the filter elements as well as the steel-works necessary for the housing of the filters autonomously and without co-operation partners.
With respect to the foreign market the strategy is more diverse. Here Herding started cooperatively with the selling of licenses, later mixed autonomous and co-operative entry
∗
Original name.
30
modes by establishing a net of own sales engineering subsidiaries in six countries, building
up an own foreign production site in the Czech Republic (only 200 km away from the
headquarters), and co-operating with twelve partners all over the world on a non-equity
basis. How all this came about and how it fits together will be seen in the following:
Herding started its internationalisation process beyond export in 1984 with the selling of a
product licence to a Japanese and a British company. This was motivated by the size, distance and impermeability of the Japanese market and the wish to make the own products
more known on international markets without the means to achieve this alone. While the
Japanese company got the exclusive right to sell Herding’s filters in Japan, the British enterprise is allowed to sell the filters world-wide (and to compete with Herding).
With the maturing of the filter technology and the general expansion of the company Herding in 1987 opened its first sales subsidiary in neighbouring Switzerland, later followed by
similar subsidiaries in the European countries Belgium and France, then in Mexico and the
US, the last one in China. This autonomous expansion into even far-away markets was
only made possible by the continuous growth and economic success of Herding. All these
subsidiaries are sales engineering offices, this means they get the exclusively in Amberg
produced filter elements and organise the engineering for the construction of the complete
filter systems according to customers’ wishes and preconditions. As all these subsidiaries
do neither produce the filter elements nor have own steel works they are reduced to organise even the steel construction which is given to local subcontractors. Notwithstanding,
Herding keeps control of the sales by solely cultivating contact to customers and precisely
instructing the subcontractors. In most of the cases the opening of an own subsidiary is the
result of long-lasting relations to big customers in these countries. To increase the own
presence and availability Herding followed its customers to foreign locations.
In 1991 Herding made an even larger foreign direct investment. After the failure of a joint
venture with a Czech manufacturer of ventilators Herding without more ado acquired the
Czech company. It kept the Czech production and now produces steel constructions for the
filter systems, other steel components and filter casings, for the Czech market as well as
for the re-export to Germany. Besides its ability to fulfil sales engineering as the other subsidiaries do, the Czech location also is good for labour-intensive workings that can be
made cheaper than in Amberg.
In addition to these different sorts of sales and production subsidiaries Herding has also
established co-operation with selected partners in twelve countries in Europe, North America and Asia. These partners are often producers of filter systems of their own. They normally have an own steel construction and buy the patented filters from Herding. In difference to the subsidiaries the partners organise construction and service, although in close
co-ordination to Herding that qualifies the partners’ employees and instructs the construction insofar as even the drawings for the filter housings are supplied.
Herding is a company that uses different entry modes for international markets. Whereas
neighbouring markets are mainly supplied from the headquarters in Germany or sales subsidiaries in neighbouring countries, contact to more foreign markets is mostly made with
the help of big customers (often MNCs). Whether this kind of initial co-operation evolves
into an own subsidiary or not depends on the relationship to the partner. If this is good and
trustful, the co-operation will be maintained, if not, Herding tries to become more autonomous. Only in markets that are especially far away in terms of distance and culture Herding prefers co-operation with local, established partners which are carefully selected and
closely tied to the company.
31
The precondition for Herding’s internationalisation success is its technological leadership
where the technology is carefully guarded and exclusively kept in-house.
Best practice
•
Internationalisation in carefully measured doses: only if prior markets are more or less
consolidated an expansion is promising
•
consistent and sustainable usage of opportunities to get to foreign markets (mainly
with the help of customers/ MNCs)
•
no fear of co-operation if goals cannot be achieved by own means
•
however, close steering and monitoring of all partnerships (close contact to customers,
qualification of partners, selected know how transfer, etc.)
•
continuation of co-operation if partners are reliable; otherwise attempt to become more
autonomous
FRIESOFT – subsidiaries and co-operative alliances∗
The Dutch company FRIESOFT was founded in 1990 by two persons and grew over ten
years by 30 employees. In the last couple of years their turnover from abroad grew to about
70 percent and, next to their home base in the Province of Friesland (The Netherlands),
they opened two affiliates, one in London and the other one in New York. The two founders owned another company that was sold in 1990. The owners took with them a large
network and a lot of experience about software and data distribution for the financial
world. Moreover a lot of financial resources became available to invest in R&D and product development. This was a dire necessity, because it took some years to develop their
solutions. In 1996 the CEO brought in the first client – a Dutch firm. After catching this
first fish and successfully implementing its products in this company approximately 10
other financial institutions made use of FRIESOFT’s product. In 1998 the firm got her first
clients abroad – in Germany and England. Nowadays FRIESOFT is developing and selling
product based solutions (software) to financial institutions (banks and clearing houses).
The product is an information management platform that enables financial institutions to
operate with better securities-related data. By streamlining and consolidating the data architecture, FRIESOFT serves data that is cleansed, verified, reconciled, integrated, combined and transformed into the most usable form, and is accessible instantaneously. Until
now FRIESOFT is the only company that offers proven solutions in this particular product
line. The only threat is from in-house projects in financial institutions. The expectation is
that other software firms will try to enter this emerging market in the near future.
FRIESOFT knew from the beginning that there was a necessity to internationalise. Their
potential customers were international financial institutions. The Dutch home market was
too small. This implied the necessity to be in the vicinity of the financial capitals such as
New York, London and Frankfurt. Direct exporting of services was not sufficient, in view
of the “Not Invented Here Syndrome” in the UK and the USA. FRIESOFT also has licence
∗
Identity changed.
32
contracts with large international financial institutions. This contains a once-only licence
fee for a software suite of products and an annual maintenance fee. In addition, there is
revenue from consultancy, training, quality control, implementation, support and customisation. Before a licence contract comes about, a time consuming acquisition trajectory will
have been completed. The firm thus had a two-pronged internationalisation strategy right
from the beginning: On the one hand direct investment into subsidiaries (UK and USA), on
the other hand alliances with several of the world’s leading service and technology providers. How did this internationalisation come about in practice? Quite simply, the CEO made
contacts in the financial world on the basis of reputation acquired in the first domestic contracts, which led to a large network. Regional and national intermediary organisation did
not play a role in bringing this about.
The main tasks of subsidiaries in London and New York are sales and partner support, and
the New York affiliate is to become a ‘Centre of Excellence’. Elsewhere, professional
reputation in international financial services networks has led to alliances with several
leading service and technology providers. The firm’s product has evolved through partnership in problem-solving with clients and suppliers, which was designated a formal Partner
Programme, involving an exclusive group of business consultants, system integrators and
providers of supporting hardware, software and middleware technologies. This is also the
platform for special training courses for professionals (business and IT partners) and endusers.
As a small start-up, FRIESOFT was confronted with specific problems. At first, they were
not taken seriously by potential customers and contract partners at home and abroad. It
took them several years to acquire their first Dutch customer. This established a professional reputation on the basis of a well-proven solution. This could be communicated in
financial data management circles, which tend to be international. It took time but since a
couple of years FRIESOFT has had less difficulties to contract partners and clients. Working through the partner programme has amplified and stabilised acquisition of contracts.
Success also crucially depended on the linking of development, consultancy, training and
implementation, in the firm’s service profile. This is what small software firms have come
to thrive on.
What can be learned from this example more generally, for a specific situation and path of
internationalisation beyond direct exporting?
1. The importance of having a distinctive and original product or service
It is important to have a distinctive product or service, linked to the specific knowledge and
human resources of the firm, which should be proven at home but potentially attractive
elsewhere. This puts you on a more autonomous track of internationalisation. You should
launch yourself onto this track to the extent that you have such a distinct and original product. When you do, it is preferable to tackle familiar markets first, and these may very well
be in neighbouring countries, but where competence and products are international, these
contracts lead further through professional reputational contacts.
33
2. Autonomy without networking does not work
Given the small size of the enterprise (not many more than 30 people in the country-oforigin), even an autonomous track of internationalisation and absence of help from local or
regional bodies such as chambers or federations tends to require extensive and forceful
networking through business partners, actual or potential suppliers, clients and indeed anyone who may know someone else useful. Networks and alliances are more co-operative
forms of internationalisation, which restrict risk through less capital investment required.
Particularly for the smaller SMEs, when legal guarantees (patents and licences) work and
are efficient, and when trust can be built, this co-operative solution may be ideal. There is
no need to be obsessed about having wholly-owned subsidiaries or joint ventures abroad.
Some firms may never want to do that, particularly if production cost advantages in foreign
settings are not a major internationalisation motive.
3. Some markets may require wholly-owned subsidiaries
Direct subsidiaries which are wholly owned may be a good thing for small SMEs, but their
role and vertical integration would be very limited, acting as important marketing, sales,
maintenance and product or service adaptation outposts close to customers, operating in
close touch with the parent firm. Some markets may require such a presence, through direct investment on a limited scale.
4. Trustful relations are essential for both direct investments and co-operative alliances
There is no point in being schematic about internationalisation. Different stages and forms
(direct investment on the one hand and co-operative alliance solutions on the other) may
have to be combined, depending on the conditions applying in different foreign markets.
But whatever you do, it should be undergirded by robust trust relations with partners
and/or foreign subsidiaries.
4.3 Successful Co-operative Strategies
Astrum – professionalisation by trial and error∗
The German software company Astrum, founded as Management-buy-Out in 1992 in Erlangen, grew fast in the last 10 years. The employment rose from 15 to 160 staff members.
Walter Greul, the founder of the firm, was an experienced managers in another small- and
medium sized firm. He set up his own business together with a partner having already a
new product idea. In 1993 Astrum presented its new software for personnel scheduling and
time management at the CeBit. Two third of the turnover (13 Mio. Euro in 2001) are
gained by this semi-standardised product for enterprises, hospitals, call centres, etc. The
rest of the turnover is made with project software development for large MNCs which are
settled in the region around Nuremberg-Erlangen. This business is exclusively regionalbased.
∗
Original name.
34
Software for personnel resource planning is an niche product within the realm of enterprise
solutions. Comparative advantages of this product are seen in the high degree of detailing
and in its industry-wide adaptability. Specialised solutions like that are often getting part of
Original Equipment Manufacturing (OEM) of larger companies. Astrum too uses this
channel for indirect export. However, from the outset the company was decisive to establish its own brand name and distribution net. The focus had been the national market first.
Internationalisation had not been of predominant concern at that time.
The situation changed more by chance than by strategy. A big Swiss company addressed
Astrum whether they can adopt their software to French and Italian language. This pushed
them to develop also an English version. In addition, in 1996, three years after the premier
presentation, two re-sellers from Northern Europe approached Astrum at CeBit showing
interest to sell the software in their home markets. In the following years other partners
could be won, first in the German speaking countries, finally in France. With the first steps
into internationalisation, also new OEM relationships could be established delivering the
personnel managing software to international airports. For legal reasons a separate sales
company in Germany was founded responsible for the international business. In 2001 Astrum has got 12 partnerships but still almost 100% of the export (35% of the turnover) has
gone to Northern Europe.
By 2000 the international business was exclusively in the hands of one of the two founders.
Both founders had not have much international experiences on their own nor did they own
an existing network of other companies or persons that could support their internationalisation endeavours. In the early stage of internationalisation also market analyses played
hardly a role for market selection. New partners only were found through established partners and at trade fairs.
The concept of „partner-based distribution“ is perceived as best practice for a company of
this size to enter foreign markets -- though Astrum has set up small sales and application
subsidiaries within Germany. The founders rationalise their co-operative strategy with financial constraints not allowing them to enter several foreign markets at the same time.
Venture capital or getting listed on the stock exchange never had been an option as external investors are increasingly inclined to exert influence and entrepreneurs loose corporate
control. Close relationships to a bank are considered as crucial instead.
As for many other European software companies, the entry into the Anglo-Saxon market
developed difficult – even during the boom time. In 1996 Astrum was approached by a big
American company and asked to sell the product of that firm (complementary to the Astrum product) throughout Germany. The hope, however, that this relationship could provide a chance to use the distribution channels of the Anglo-Saxon company for the Astrum
product failed. Endeavours to establish partnerships via the German Foreign Chambers in
the U.S. also proved not to be successful as contacts remained superficial. Only in 2001,
Astrum could convince a Canadian partner of the Anglo-Saxon company of the Astrum
product leading to the first partnership for the American market. Thus, it was a long-lasting
process to establish this relationship in which Astrum had to do a lot of commitment building providing test and pilot versions.
Establishing their partner net, Astrum had to make some “painful experiences”. First resellers had often been too small to do all the specific investment necessary for successful
marketing including application training which is quite demanding as the final software
configuration has to be done at the customer’s. Moreover, as it takes time to establish the
product at the market, re-sellers lost interest in the product, as they were just concerned
35
about quickly earned profit. Looking back one of the founders describes their way of finding partners as “heavy way” that takes a long time to get sufficient turnover abroad.
The following lessons the firm draws from this experience:
1. Building partnerships from the scratch is highly time-consuming. Thus, companies
who have to face this situation should take their time for a longer trial and errorprocedure. To have a standing at the home market is an important precondition to cope
with the difficulties of internationalisation, while time pressure and economic tight
situations are bad starting points.
2. Financial background and personnel resources of the partners involved must be sufficient to do specific investments in marketing and training.
3. Contracts with sales partners should have exit options at every time. Exclusivity should
be only granted in exceptional cases and only when the partners give guarantees in
turnover.
4. Sales partners need intensive contacting, consulting and monitoring. “Partnerdevelopmental schemes” are an useful instrument for enhancing relationships between
software producer and sales partners fixing joint targets, annual meetings of all partners for training and information exchange, and regular visiting.
ICAS spa – an oligopolistic niche champion∗
Founded in 1956 by the father of the present owner, in 1978 the Italian company Icas became a joint stock company owned 50% by the family, 50% by a German partner. The two
plants near Turin contained 84 employees in the year 2000, and had a turnover of almost
19 million Euro. Icas produces the little wire cages which go round bottles of champagne,
beer and cider: products may be standardized models, models with minor modifications for
a particular customer, or completely customized models. The firm claims to cover 80% of
world market. One of the characteristics of the company is said to be that it has always
invested in technology – this has given it an advantage over competitors and to expand its
market.
Internationalisation started in 1977 when the German partner – a company which makes a
similar product to Icas’ – joined. The two companies together managed to control the Italian and German markets. In 1980 Icas France was created to consolidate the firm’s hold on
the French market and improve after-sales service. In addition, Icas sought new markets in
Australia, New Zealand, China, Eastern Europe and elsewhere. The company therefore has
a consolidated international market in their niche. Export is 70% of turnover (40% to EU).
Icas has distribution agents in USA, Canada, Brazil, Argentina, Australia, Austria. The
German firm with which Icas is tied, plus the Austrian agent, act as agents for Russia,
Ukraine, the Baltic countries and Eastern Europe. The Spanish firm with which Icas is
linked handles sales for Spain and Portugal. Icas France is situated at Reims and is 98%
owned by Icas Italia. It does not produce but sells, distributes and provides after-sales ser∗
Original name.
36
vice to French customers. (France is in fact the largest market outside Italy, buying 25% of
the firm’s output, so the company saw it as important to have a presence of its own on the
spot.) Icas France also has a sales office at Tours and agencies for South West France and
North East France.
Icas has an agreement with a Spanish producer, via a joint-venture in which Icas and its
Spanish partner have 50% each. Once again, this company is solely for distribution and
after sales service. Through this joint-venture the two firms control the Spanish market.
Icas gives technology and technical assistance to its Spanish partner.
So, to dominate the market, Icas has used share exchanges with the few other firms in the
market (a German and Spanish firm). In the past it attempted to acquire a French firm,
when the latter had financial problems, but this attempt to increase monopoly position
failed. Nonetheless, the French company remains the only largish firm outside the dominant interlinked oligopoly.
In this sense, internationalisation has been to a large extent a question of establishing
agreements at ownership level with other firms in the niche market. Apart from this, internationalisation has been a question of working through agents, with the exception of
France, the company’s most important foreign market, where a sales office developed into
a foreign branch.
At present Icas is interested in expanding in Russia, Ukraine, the Baltic countries, Moldavia and Georgia - if these economies take off. Eastern Europe, Brazil and China are also
seen as potential markets. Icas has commissioned market surveys and has taken part in two
trade fairs in China. It is currently collecting material on legal arrangements, bureaucratic
requirements and the logistics. It already has a presence in Shanghai via the offices of another company.
Much of the firm’s internationalisation has not required contacts abroad except at the level
of ownership. Internationalisation has been a proactive strategy. Icas developed its technology and patented its product and process, using this to consolidate its dominance. Then
it established links with other firms (in Germany and Spain) which are controlled via both
formal agreements (joint-ventures) and the proprietary technology, while giving the partners wide autonomy on their markets (for example, managers are local, even in the French
branch which trades under the Icas brand name).
In conclusion Icas went through three main phases in its internationalisation process:
1. In the first twenty years of its existence it consolidated its domestic market and started
exporting its niche products – especially to other European countries.
2. In the two decades which followed, it consolidated its position in the main European
markets via a strategy of equity-based collaboration. At this stage Icas by exchanging
shares with competitors in Germany and Spain created an interlinked oligopoly with
only one largish firm outside. The establishment of these agreements at ownership
level is accompanied by agents and an own sales office. Thus, Icas was able to consolidate its world-wide exclusive niche position.
3. From this favourable economic position it is now using this network of allied firms as
a basis for widening its market and penetrating a number of potential markets throughout the world. Thereby Icas acts rather professional by commissioning market surveys,
visiting trade fairs, or gathering information and material on a broad basis.
37
Goodie, Cutsys and Heco – the ideal type of SME co-operation∗
Three entrepreneurs from the same region in Savoy linked by strong trust ties aimed at
“learning internationalisation by doing it”. The internationalisation was in fact seen by the
three men as a major challenge they would like to deal with instead of being a passive object to its consequences.
The three family firms founded in 1956, 1970 and 1968 do not compete with one another.
Even if they once have started with the same product, skiving pieces, each of them has
nowadays its own market. The befriended entrepreneurs have not really done any business
together before, until one day they faced the opportunity to invest in Brazil. A Brazilian
student tried to convince the three firms to co-operate with firms in his home country. Interested by that, they travelled to South America and discovered that a French MNC they
were already supplying in France wished to outsource a plastic injection hall in order to
concentrate his efforts on the core activity.
Seeing this as challenge for own internationalisation the three companies bought up this
hall and created a joint venture, with each of them having proportionally the same capital
share of the new firm as their turnover had been in France (7.6 million Euro, 12 million
Euro, and 20 million Euro). Although the new plant does not have much in common with
what the firms are doing in France they considered this as positive and a chance for a new
start. Besides, one of the firms had experiences with mergers and acquisitions.
Even if Brazil was considered as a low-cost country it turned out to be an “expensive” experience due to the fact that they had to increase the productivity in order to reduce the
productivity gap between Brazil and France. Thus, the organisation had to be changed:
they reduced the number of hierarchical levels, made substantial investments, and redefined the work organisation. For monitoring and control two of the three entrepreneurs
(in rotation) visit monthly the local management team which includes French speaking
managers.
This first (rather successful) internationalisation experience showed the three entrepreneurs
that an SME can operate on international level. All of them feel determined to do it more
intensively in the future, certainly each of them on his own way, but in collaboration with a
local SME. The search for low-cost countries seems to be a goal, at least for two of the
three companies, while the third one is rather interested in solutions making it able to reach
markets such as the US.
What can be learnt from this case?
•
Personal and trustful relations are the binding element on which the whole collaboration is built. These have been established over a long time.
•
The collaboration with other SMEs was considered as an unique learning occasion.
The confrontation with other work organisations in foreign countries was also seen as
an enrichment.
•
In order not to endanger the core business of the companies, a separate JV has been
created with well-defined ownership relations and transactions.
•
The new plant does not compete with the three enterprises. It is a truly new activity.
∗
Identity changed.
38
•
The local management has to speak French because the linguistic problem is seen as
important hindrance. Apart from this, the three companies put emphasis on frequent
monitoring and control.
•
Substantial investments were seen as decisive for success and realised.
39
5. Typical Causes for Failures
In this handbook we argue that “trial and error” is part of SMEs’ internationalisation moving incremental from low-risk, low commitment modes of entry toward higher-risk, higher
commitment modes of entry. However, there are of course failures which can be avoided
by learning from other firms’ experiences. Many of these failures can be traced back to ill
preparation and/or ineffective arrangements. The following chapter selects five typical
failures in this respect:
1. Undiscovered ineffective entry modes and half-hearted activities
2. Underestimation of the challenges of setting up sales offices in distant markets
3.
Short-term perspectives instead of long-term development
4. Unsuitable labour division between parent and subsidiary
5. Instability of joint ventures with partners in distant regions.
5.1 Undiscovered Ineffective Entry Modes
Trying and retrying of different entry modes is rather the rule than an exception especially
in early stages of internationalisation in which SMEs have little experiences. Some firms
eventually give up due to a lack of resources. Sometimes, however, the causes for failure
are less clear.
Austrian Softmath – Direct export instead of co-operation2
The software firm that was set up in 1989 in Upper Austria numbers only about 30 employees. It has been specialised on software programming for accountancy and on financial
mathematics for small and medium-sized enterprises and is performing an autonomous
sales/export strategy. The firm established a sales office successfully in Bavaria (Germany)
as a similar finance legislation and a fairly similar financial terminology in comparison to
Austria existed. The hope, however, to export the product to other European countries
failed. It has proved to be hard to export these highly specialised products into other foreign countries due to both the different finance legislation as well as language barriers.
Since neither the programmes’ translation nor their adjustment to the various countries’
specific legal basis (fiscal law) was prepared carefully, the programmes’ applications in
countries like France, the Netherlands, and the Czech Republic failed.
2
In this chapter all firm names were changed for confidential reasons.
40
The firm owners argue that due to resource constraints in terms of personnel and capital
funds, the company had to give up the strategy of entering geographically and culturally
more ‘distant’ markets in favour of establishing a net of sales representatives in Germany.
Yet, it is in fact hard to get all insights necessary for such a product from outside. An alternative approach had been to look out for partners in those countries to apply the product to
the national rules and conditions and to enter the market.
Note: The reference to resource constraints sometimes works like a
catch-all word hindering to draw the right lessons from failed entry
modes.
5.2 Ill Preparation of Going Alone–Strategies, Sales Offices in Particular
Autonomous strategies need good preparation with respect to the choice of market and
location, organising labour division between parent and subsidiary, control and monitoring,
management staffing. The more investments are necessary the more firms are inclined to
give subsidiaries the attention they need to become successful. In contrast to this sales offices with only one or two staff members at best are often ill prepared and show a high
failure rate.
Many software firms in our sample tried to establish one-men sales offices in the U.S. but
showed unprepared for the challenges of making a small sales subsidiary effective in a
foreign country. The firms did not only underestimate the hurdles to penetrate the U.S.
market. They also underestimated the financial and personnel endeavours necessary. Typical mistakes here are:
•
Short-term thinking with respect to resources necessary for autonomous market access (e.g. for advertising, for getting in touch with potential clients, etc.);
•
Lack of thorough market analysis;
B2Bsoft – Sales office in the US to be up-to-date
The Austrian software company has been specialized on internet platform services as well
as non-standardized B2B software application services for bigger company clients within
the convergence area between mobile phone and internet services. Only a few months after
its foundation in 1999, the company initiated an entry trial into the US market, establishing
two sales offices in New York City and California. The plans to sell tailor-made software
products in the US market failed, however, since the company’s strategy first to open a
web portal in the foreign market in order to get well-known and then to establish specialized B2B-products proved to be unfeasible due to resource constraints.
41
Moreover, the company omitted to thoroughly analyze the different nature of the US market not realizing that – despite a higher internet pervasion of the US – the US mobile phone
market was not as developed as the European one, which prevented the firm from successfully establishing its highly specialized software design business there. As a consequence,
the company changed its internationalization strategy focusing on a – mainly autonomous
– step by step roll out in geographically near regions and countries, such as Germany,
Switzerland, and the United Kingdom. Both the US offices, however, have been downgraded to mere market observing sites without any operating competencies.
•
Lack of insider skills and network relationships;
FaxFrance: From sales office to mergers and acquisition
In 1992 -- six years after foundation -- FaxFrance set up a sales office in Florida. One of
the two founders decided to run the office himself, though not having much experience in
foreign markets. FaxFrance never really entered the American market on this way. In 1998
the firm changed the entry mode: equipped with fresh capital from capital market it decided to buy the access to American customers by the acquisition of U.S. software firms.
Between 1998 and 2000 the French firm bought four U.S. firms to add complementary
products and to get access to American customers. The firm dealing today with web-tohost products, fax server and e-business grew to 250 employees in three world regions (80
at home). Having also U.S. managers in the supervisory board, FaxFrance is developing to
a truly transnational enterprise.
Countmech: Joint Ventures might be an alternative
The Italian mechanical engineering firm, Countmech, designs, manufacturers and sells
machines for reading cheques, scanners, and systems for credit and debit cards. Countmech
exports 98% of its turnover and has regular distributors in many European countries and
the United States. The firm tried to enter the Brazilian market but there the company had
no existing contacts, so they decided to set up a sales and technical assistance office of
their own – staffed by Italians. This was started four years ago. The initiative was a failure,
due to inappropriate skills of the staff sent over. These had high technical skills but they
lacked the relational and marketing skills which they needed to enter into “the culture of
the country”. Thus, they were not successful in forming relations with banks, financial institutions, ministries, etc. The firms’ board is therefore currently reviewing the whole project: in future they may change strategy and try to set up a joint venture with a local distributor or other partner, or perhaps simply take a shareholding in a local firm if they manage to find one they feel is trustworthy.
•
Dealing with the sales office as an isolated unit, lack of control and of a total concept.
42
Saalmech: Casual Orders from China
The German mechanical engineering firm (220 employees), Saalmech, producing tool
making machines ‘inherited’ a sales office in China from the firm’s predecessor. The office
-- staffed with a German and a Chinese – was kept because it cost not much and brings in
orders from time-to-time. There is no strategy how to develop the Chinese market nor is
there a regular exchange and control by visiting. Thus, the CEO claims not exactly to know
what they do there. The reasons for this ill-integration are twofold: 1. Saalmech has had to
fight to establish itself on the home market as most East German firms did and is working
to get access to the European supply business of the automobile industry. 2. The CEO
claims not having the qualified personnel in terms of language and international experience
to give the Chinese office sufficient support and control.
To change the situation, the CEO has offered language crash courses and organizes business trips. A significant change, however, he expects only from newly hired personnel in
sales and marketing and technical service with higher language skills.
Note: Sales offices abroad are successful when there are already
client relationships. Starting from the scratch they need time to develop market access and should be integrated into a larger range of
activities of the firm addressed to this market.
Systematic goal setting and output control are as much necessary as
regular exchange via visitings and training measures.
Isolated sales offices especially in difficult markets may easily turn
out to be useless investments.
5.3 Short-Term Perspectives instead of Long-Term Development
Failure of entry modes also occur when firms did not take or get sufficient time to stabilize
its foreign activities. There are two major causes for this time lack: 1. the firm tries to internationalise before it has established sufficiently on the home market; 2. due to crisis.
Ikarus: Internationalisation on shaky ground
The German firm, Ikarus, producing front-office software, decided right at the beginning
of its internationalisation process to go to the American market. Ikarus had personal contacts to an US-American with German roots and the illusion that this precondition, together
with an attractive product, would be sufficient to conquer the American market. Ikarus first
wanted to establish a loose co-operation with an US-software consulting house, mediated
by the US-citizen, and with the help of an agency find a re-seller to penetrate the USmarket, before taking over a small US-firm.
43
Both, co-operation and acquisition should allow for the entry to the American market.
The attempt failed. Although the personal relationship had brought Ikarus across the Atlantic, it did not bring the company any further. Arrived at the US-coast, Ikarus would have
had to invest. Yet, it had not even solved its economic and market problems at home. Thus,
accompanied by a lack of money, Ikarus had to retreat from the American market, soon
after its arrival. This led to a complete regression from internationalisation and giving all
attention to indirect export by development for large original equipment manufacturers
(OEM).
Brokersoft –Failed high-speed internationalisation
The German Brokersoft AG was founded by two fellow-students in 1998 focussing on
software for financial institutions. On the outset they got financial support of a venture
capital company. Fast growth and internationalisation headed the agenda of the start up
from the outset. Until 2001, the firm grew to 170 employees and 14 Mio. Euro turnover; at
that time 60 employees were located abroad.
Internationalisation started one year after foundation. Between 2000 and 2001, Brokersoft
set up subsidiaries in Canada, Spain, Italy and Rumania. The selection of places and people
for executive director positions were at least partly guided by personal relationships. Both
founders and the whole board of directors have lived abroad for a while during their studies. The subsidiaries were assigned to provide the parent with additional software developers hardly to find in Germany (outsourcing of development tasks), but they should also
find new customers in the local markets.
As the world-wide IT market crashed in 2001 most of the subsidiaries had still lived
mainly from the orders by the parent company. While the local partners found some new
customers, the market developed slower than expected for the parent company and even
declined more and faster, when the crisis hit the market. As also German orders declined,
the subsidiaries made losses that added to the home market problems in 2001 and challenged the schedule of the venture capital companies to launch Brokersoft on the stock
market. Finally, the external investors forced the parent company to cut of most of the foreign subsidiaries at the end of the very same year to save the annual turnover.
5.4 Unsuitable Labour Division between Parent Company and Subsidiary
Small firms as well as large companies set up different types of subsidiaries. These can be
differentiated along the questions of purpose, interdependence between parent and foreign
unit, and control. Adapting the typology of White and Poynter six types of subsidiaries can
be identified that include different levels of autonomy.
44
Table 4: Types of Subsidiaries adopted from White and Poynter3
Type of Subsidiary
Marketing Satellite (sales offices/after sales services)
Market Scope
Local
Miniature Replicate of the parent (with product adaptations
for the local market)
Local
Rationalised operator
(manufacturer/ programmer)
focussing on components
Often re-export to
home country or
directly to nonlocal clients
Market unlimited
Product specialist for the complete value chain
Independent subsidiary (mostly Market unlimited
by acquisition of a firm with
complementary products)
Methods of Control
Financial/output control, regular visitings
and training (indirect control): little autonomy
High management transfer at the beginning,
financial/output control, regular visiting:
autonomy changes according to the degree
of local adaptation
Management transfer, usually control via
expatriates, financial/output control, regular
visits, manager rotation: little autonomy
Financial/output control: high autonomy
also strategically in the defined market
segment, meetings in boards
Financial/output control: high autonomy
also strategically, meetings in boards
SMEs are inclined to set up 100% subsidiaries as marketing satellites (sales offices/aftersales service for local markets) and miniature replicates producing parts of the product
usually to overcome tax hurdles or the not-invented-here syndrome in some markets. Since
the late 1980s, many SMEs also started to cope with “rationalised operators”. As offshore
production it is the most intensive form of interdependence between parent and subsidiary.
Parent firms have not only to transfer components, know how, technology and qualitative
standards to rationalised operators but have also to organise a labour division between the
parent and its offshore production.
In the mechanical engineering sector firms usually reduce the necessity for interaction by
shifting the responsibility for complete production lines abroad starting from less sophisticated products and moving on toward more complex products. A similar concept can be
applied to software development. More standardised tools and components demanding
little day-to-day communication with software teams of the parent company or clients in
the home country are more suitable to shift abroad than tailor-made and highly customeroriented production for re-export. Yet, not all software firms studied were aware of the
problems raised by an unsuitable labour division between parent and rationalised operator.
Brokersoft: Unlucky labour division covered by cultural misperceptions I
Again Brokersoft as there was a second reason for failure of the subsidiaries, namely problems in collaboration. The “product” of Brokersoft consists of tools configurated by the
clients to their special needs. Especially the Spain subsidiary with its expatriate was heavily involved in the tailor-made programming, while the parent was holding the contact to
the German clients. All wishes and changes made by them during the process has to be
communicated by them to the Spain rationalised operator.
3
R.E. White/ T.A. Poynter: Strategies for Foreign-Owned Subsidiaries in Canada, in: Business Quarterly,
84(4), 59-69.
45
In spite of internet and e-mail, communication turned out not as easy as expected: misinterpretation, lack of information and delays in delivering raised the tensions between the
German team close to the customers and the Spain offshore developers and the expatriate
sent there from the headquarters which were culturally interpreted: “The Germans” vs.
“The Spain”.
Dutch Qsoft: Unlucky labour division covered by cultural misperceptions II
Dutch Qsoft, founded in 1995, is offering tailor-made software solutions for knowledge
and information management based on ‘semi-manufactured’ tools. Since one of the two
founders stems from India it was quite easy to develop ties to the Indian market and to
“combine low-cost but highly skilled Indian labour, with Dutch creativity and experience."
(web site) The Indian subsidiary, based in the high-tech capital of India, Bangalore, was
partly used as rationalised operator but also developed software for the local markets (75%
of the turnover).
In the software development two teams were involved representing the “global software
team”: Qsoft Netherlands acquired a new project, it made the analysis and design of the
product (based on extensive communication with the client to discover his
wishes/possibilities), and, based on these instructions, Q India built the product. All the
other communication was done by internet and e-mail.
To establish a co-operation among equals Qsoft chose against sending an expatriate. Instead, Qsoft decided to post Dutch project managers at the Indian subsidiary for 3 to 6
weeks; these managers had to give background information on the project. This enhanced
the quality of the projects completed by the Indian subsidiary. Another initiative to enhance the communication and limit the cultural distance was to write background reports
about Q's clients and their products; these background reports could obtain a length of
more than 55 pages! To improve the co-operation with its Indian subsidiary, Q developed a
'trajectory' that was used both in the Dutch main unit and at the Indian subsidiary. This
trajectory made that Q could supervise and could advise and correct if necessary by means
of the WWW.
In spite of this investment in communication between both sides, the global project team
did not work well. Qsoft tried to 'educate' the Indian management team, this management
was under high pressure, while the Dutch management got rather impatient, resulting in a
high level of replacement of Indian managers, making that there was no continuity in the
Indian learning process.
Another important point that made it difficult to manage the Dutch-Indian initiative was
the Dutch and European legislation. This legislation made it impossible to have Indian
managers posted at the Dutch unit for longer periods of time. In principle it was necessary
to have Indian managers come to the Dutch unit for longer periods of time because of the
cultural difficulties; these Indian managers needed to be instructed on the precise aim of a
specific project, on the type of client for which the project was intended etc.
In 2000, the Indian subsidiary became independent (a 'spin-off') since it was not profitable
to subcontract out small projects from the Netherlands. Moreover, while the Indian employees did possess the capabilities to build software applications, the results where often
different than Qsoft had intended.
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Note: To deal with cultural differences is the core issue international firms have to deal with. However, one should be careful with
tracing back problems to cultural differences without considering
other problems carefully like an unsuitable labour division.
5.5 Instability of Joint Ventures with Partners in Distant Regions
Joint Venture and equity alliances are often perceived as an alternative to 100%subsidiaries
– not just because it allows pooling of resources and risk sharing but also because it reduces control problem of the management abroad because the partner is also involved as
entrepreneur. Especially in geographic distant regions, the reduction of control problems
appears appalling.
Nevertheless, joined ventures are very often unstable and give causes for disappointment.
Typical problems are the divergent development of interest and conflicts on shares.
FranceCut SA: Conflicts on different strategies
FranceCut SA was founded in 1947 producing metallic compasses and cutting instruments
(with plastic injection parts since 1980). In the 1980s, the family owners decided to develop to a producer of for school, office and draft supply. Their first step into Asia had
been on the supply side. Based on this experience FranceCut decided to produce there on
their own for low-cost reasons and opted for China in this respect. Because of the long
spatial and cultural distance between France and China the entrepreneur were looking for a
partner familiar with the region. A former Taiwanese supplying firm agreed to set up joint
venture in which the French firm got the majority. The joint firm opened in 1992 in a town
not very far from Shanghai where a new production area was created. Yet, problems raised
very soon as in 1996/97 the French firm wished to expand the production, while the Taiwanese partner showed little interest to do so. Obviously, such prospects for the near future
had not been part of the arrangement in the first place. Fortunately, FranceCut was able to
buy the shares the Taiwanese firm hold and turned the JV into a 100% subsidiary that fast
grew. Today, FranceCut manages 250 employees at home and about 1000 employees in
China with an turnover of 45 Mio. Euro. The subsidiary is conducted by four expatriates
living there already for a couple of years.
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Front-rank: 50:50 blockage
Front-rank was founded in 1948 and is still a family-controlled firm. In the year 2000 the
firm employed 160 people in Italy and 40 in the joint-venture in Argentina. With a turnover of 15.4 Mio. Euro, the firm produces metal panels and metal parts for car assemblies
(gear sticks, parts of brakes, internal and external panels, etc.). These are relatively standardized products, produced in fairly long runs for particular models of cars. Since its
foundation Front-rank has been a Fiat supplier; over time it established itself as one of
Fiat’s front-rank suppliers and as such it became involved in the auto company’s globalisation strategy.
Internationalization started in the mid-1990s and was "imposed" by Fiat which asked its
suppliers to follow it to Argentina. Over-reliance on Fiat-related business made it difficult
to say no, and this enabled Fiat to force its suppliers to bear some of the riskier investments. Front-rank had no prior strategy for internationalization. However, once the necessity became clear, they set up a joint-venture with an Argentinean whose founder was an
Italian “brother-like friend of my father". The existence of this high-trust relationship made
it easy, and cheap, to set up the relation - reducing legal costs and other transaction costs but the lack of a clear legal framework has made some conflicts more difficult to handle
now that things are going through a hard period, with orders extremely low. The division
of labour between the partners was clear. It was Front-rank which had the technical experience (and greater financial resources), while the Argentinean firm had knowledge of the
local context, and was able to quickly set up effective relations for sales to car manufacturers operating in Argentina and Brazil. Yet, the fact of having chosen a 50% - 50% joint
venture, in order to maintain the independence of both firms, is now seen by the Italian
firm as a disadvantage because it tends to paralyse decision-making at a time when conflicts are inevitable. There is "no clear relationship of dominance" which allows one firm to
impose its decisions.
DutchMech: Missing control due to minor shares
With 90 employees in the Netherlands and 107 in the world, DutchMech, founded in 1961,
produces recycling machinery. It began to be active on international level by exporting its
products since the Seventies. Following a step by step strategy it started then to look for
agents and afterwards to stimulate employees to open regional offices. This was the case in
different European countries like Germany (in the eighties), Great Britain (in 1991), France
(1996) and Spain (1999). With the exception of England the same pattern can be recognised. Entrepreneurial employees get the opportunity to start a subsidiary abroad, and for
doing it, they obtain financial, product knowledge and sales support from the Dutch firm.
In England, they were engaged in a joint-venture with a partner, a service engineer who
came into interest conflict with the Dutch firm about turnover and accessories so that the
JV failed. It was one of the co-operations in which DutchMech had a minority capital share
and consequently missed the capacity to have a direct control over the product and market
strategy.
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Note:
Before starting a joint venture, partners should agree on:
a) common goals (in the short and medium term (future investments);
b) the contribution of the partners (also in the medium-range perspective) and managerial leadership in the JV;
c) methods and forms of control;
d) roles and arrangements for communication and well-behaviour;
e) decisions how to share the earnings of the turnover
f) rules for know-how transfer
g) make sure that co-operation rests on broader shoulders and not
only on the CEOs. Otherwise personnel fluctuation can easily destroy the co-operation.
Note: Although a majority of shares is often wished by firms, ownership control does not replace managerial control. Especially local
partners in cultural and geographic distant regions can compensate
their minor shares by drawing control and power from local market
know-how, network relationships and cultural and legal knowledge.
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6. Policy Implications
The research clearly shows that the firms studied benefited both from public resources and
services and from information and contacts coming from private bodies (major clients,
personal networks, etc.). As far as public policies are concerned, it should be stressed that
those which were not directly aimed at fostering internationalisation were often as, or
more, important than those that did have this explicit aim; for many policies that helped
firms in a local area to grow, also helped them to grow internationally.
In fact, for the firms studied in the present research, services explicitly oriented towards
internationalisation were of relatively slight importance, in spite of the wide range of support offered by public bodies, associations and agencies helping firms to internationalise
via financial support, information services or organisation of contacts. Although many
firms made some sort of contact with the services concerned (especially in their initial
search for information), only eleven of our firms declared that such aid formed a real part
of their internationalisation trajectory. The other firms financed their own move abroad,
acted on the basis of information they had discovered through mainly non-institutional
channels, and formed relationships with partners and contacts they themselves had found.
With the partial exception of research and development activity (not explicitly oriented
towards internationalisation), firms claimed that aid and services provided by public bodies
and associations had been either of small importance or of no importance.
Above and beyond the question of efficiency and inefficiency of local and national institutions, there appears to be a basic gap between what is requested by firms and what public
bodies and associations offer - or even could offer. Firms complain that the information
they receive (regarding laws, markets, contacts with potential partners, etc.) is too general.
What they really need, they say, is some highly specific information plus close accompaniment. However, there are objective problems in marshalling such precise services for one
small enterprise. Unless there are a number of companies wanting information of the same
type, it may be difficult for public institutions or associations to justify the considerable
outlay of time and money which obtaining "really useful information” (and, a fortiori,
"really useful contacts") may require. Only where there is a critical mass of small firms
working in one specific sector and/or interested in one particular country (or local area
within the country), can such services be easily provided (and in this case they may be very
effective). However, reaching a critical mass of this kind presupposes some sort of coordination. Such co-ordination may be provided in various ways - by the actions of large
firms, by the existence of regional specialisation, by the direct and indirect action of associations and public institutions.
Anyway, when considering policies which may encourage internationalisation among
SMEs it is probably wrong to think purely in terms of policies directly encouraging the
shift abroad. We will suggest that at least as important as such direct services may be a
series of effects deriving from policies intended for more general purposes.
It is interesting to note that the form of public aid which was most frequently mentioned by
the firms interviewed was research and development programmes. Although difficulties
were naturally encountered (in particular concerning the differing interests of researchers
and of companies - for example, researchers wanting to publish the results of their research
as soon as possible, the firms sometimes wanting to wait until a patent was ready), these
programmes were in general widely appreciated. This is important for the quality of a
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firm's product, obviously, but it also has implications for internationalisation. Firstly, because many internationalised SMEs work in a niche product and are heavily reliant on
keeping up or ahead technologically. But also because the kinds of international links
formed via international research programmes are themselves international experience
which may bear fruit later.
As already said, most firms had constructed their international paths alone. However, behind this level of individual action lay a background of informal networks and local context which was essential in explaining the capacity to marshal the considerable amount of
information and number of contacts needed for any successful internationalisation, even on
a modest scale. In part these networks are the result of previous personal contacts which
the CEO or entrepreneur made in a previous stage of life (university friends, former colleagues in a previous workplace, other small entrepreneurs, personal acquaintances made
via a variety of channels), which are mobilised for the firm’s internationalisation plans. In
part, they spring from the firm’s relations – as in the case of relations with a big customer,
which may push SMEs to internationalise, or provide them with the opportunity to do so.
In part, they are built out of contacts with people who are met at Industry Associations,
Chambers of Commerce, and various representational and development bodies. It would
seem possible to imagine measures which would encourage the density of such meetings
and exchanges.
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7. Links and Further Information – European Supporting
Agencies for SMEs
1. European Commission
DG Enterprise
Unit B.1 “Improving Business Support Measures”
200 Rue de la Loi – SC27 3/04
B-1049 Brussels
Fax: +32-2-296 62 78
e-mail: [email protected]
(Issue: Enhancing entrepreneurship and the business environment throughout the life cycle
of businesses; business support measures for SMEs)
DG Enterprise
Unit B.2 “Business Cooperation and Community Support Network Development”
200 Rue de la Loi – SC27 03/04
B-1049 Brussels
Fax: +32-2-295 55 40
e-mail: [email protected]
(Issue: Informing and assisting SMEs through a network operating at local level, Euro Info
Centre network)
DG Enterprise
Unit B.3 “Crafts, Small Businesses, Co-operatives and Mutuals”
200 Rue de la Loi
B-1049 Brussels
e-mail: [email protected]
(Issue: Enhancing entrepreneurship for small enterprises, specific target groups and specific types of enterprises)
DG Enterprise
Unit B.4 “Access to Finance”
200 Rue de la Loi – SC27 04/05
B-1049 Brussels
Fax: +32-2-295 21 54
e-mail: [email protected]
(Issue: Improving access to finance for SMEs; focusing financial instruments relevant to
SMEs)
DG Enterprise
Unit A6 “Co-ordination of enterprise policy”
200 Rue de la Loi
B-1049 Brussels
Fax: +32-2-296 62 84
e-mail: [email protected]
(Issue: General information on EU business programmes)
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Further information from the EU can be obtained on the following websites:
Promoting entrepreneurship and SMEs
http://europa.eu.int/comm/enterprise/entrepreneurship
SME envoy
http://europa.eu.int/comm/enterprise/entrepreneurship/sme_envoy/index.htm
Improving business support measures
http://europa.eu.int/comm/enterprise/entrepreneurship/support_measures/index.htm
SMIE Database on support measures
http://europa.eu.int/comm/enterprise/smie/index.htm
SMIE Database on good practice
http://europa.eu.int/comm/enterprise/smie/good_practice/index.htm
Business incubator database
http://europa.eu.int/comm/enterprise/bi/index.htm
Euro Info Centre Network
http://europa.eu.int/comm/enterprise/networks/index.html
Small enterprises, craft and target groups
http://europa.eu.int/comm/enterprise/entrepreneurship/craft/index.htm
Access to finance
http://europa.eu.int/comm/enterprise/entrepreneurship/financing/index.htm
Enterprises and the Euro
http://europa.eu.int/comm/enterprise/euro/index.htm
Activities and news from the Enterprise Directorate-General
http://europa.eu.int/comm/enterprise/index_en.htm
Dialogue with business
http://europa.eu.int/business
Community Research and Development Information Service, including innovation and
SMEs
http://www.cordis.lu/en/home/html
Information on facilities for private innovations financing
http://www.cordis.lu/finance
2. Other Agencies
European BIC Network
168, Avenue de Tervuren
Box 25, B-1150 Brussels
Fax: +32-2-772 95 74
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e-mail: [email protected]
(Issue: Professional support to innovative entrepreneurship and SMEs in an international
context)
Joint European Venture
JEV Information Unit
6 Rue Jean Monnet
L-2180 Luxembourg
Fax : 352-46 70 97
http://europa.eu.int/comm/enterprise/entrepreneurship/financing/jev.htm
(Issue: Support mechanism for the creation of transnational joint ventures for SMEs in the
Community)
Additional Website:
http://www.eif.eu.int/pg/ec_prod.htm
(Issue: Guarantee programmes for SMEs by the European Investment Fund)
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