2009:048
M A S T E R ' S T H E S I S
Internationalization Process Model
A Case Study of Wire and Cable Exporer Firms
Mahshid Shirani
Luleå University of Technology Master Thesis, Continuation Courses
Marketing and e-commerce
Department of Business Administration and Social Sciences Division of Industrial marketing and e-commerce
2009:048 - ISSN: 1653-0187 - ISRN: LTU-PB-EX--09/048--SE
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Abstract
Purpose – The objectives of this study are to: examine the specific process that wire and cable exporter firms -which are mainly SMEs, follow in their internationalization;
identify the key influences on the entire process, particularly export barriers and exporter challenges.
Design/ methodology/ approach – Three research questions are proposed to achieve the stated objective. The exploratory multiple-case study research method was chosen.
Interviews with five manager directors or senior executives of firms that engaged in international business were used as the main source of data.Case narratives, frequency tables and cross-case analysis were used to analyze the data. Expert judgments were used to validate data.
Findings- The review of findings showed that in Iran context, the appealing entry mode in international markets is export. The internationalization process model provided by Mtigwe (2004) is applicable in Iranian context with some tiny changesto be better suited to Iran, for instance, Firm age is not a major factor in internationalization process of Iranian firms or motivators and export barriers.
Research limitations – However final results of study can be applied in all of Iranian wire and cable firms, implementing outcomes in firms that are not in Iran region should be performed attentively.
Practical implications – Firms with international ambitions must emphasize on international orientation in their recruitment and training of key managerial staff. This study builds mechanisms that sustain SME international business growth.
Originality/value – The study addresses a knowledge gap in respect of the firm Internationalization process in the context of Iran. This knowledge is of value to academics, and policy-makers alike. The study also provides an integrative conceptual framework and practical advice on how firms’ international growth can be encouraged, given its importance to economic growth prospects within the Iran. As the reduction in the barriers for global commerce continues and the country economy becomes more integrated, there is an increase in the attention being placed on the internationalization of small and medium-sized enterprises in Iran.
Keywords: International business, Internationalization process model, Exports, Iran
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Acknowledgement
This dissertation consummates my Master of Science degree in Marketing and e–
Commerce at Tarbiat Modares University joint program with Lulea University of Technology. This would not be possible without the advice, assistance, cooperation and encouragement from a number of people. I would like to acknowledge their help and support.
First, I would like to express my sincere appreciation to Dr. Manoochehr Najmi my supervisor, Department of Management and Economics, Sharif University of Technology, for your valuable advices and comments that gave me the feedback I required to improve my effort. Additionally, Dr. Peter Naudé, The University of Manchester, has been profoundly supportive and helpful in co-supervising and editing this dissertation. It is really very difficult to express how much I am grateful for all your support during last two years.
Thank you to all of you in Department of Industrial Engineering. And special thank you is directed to Dr. Amir Albadvi, Professor Esmail Salehi Sangari, and Dr.
Abbas Keramati for your valuable advices.
And special thanks directed to Mr. Aalidaai, Mr. Tehrani, and Mr. Arabian for your constructive comments.
I would also like to state the greatest love to my husband, Hajir. Without your love, support, patient and encouragement this would not have been possible.
And the last but not least, a very special thank to my parents, who gave me this chance in the best place for me at the time that I needed the most in my life. Thank you for making me believe that I can do anything I set my mind on. Thank to you for always being encouraging, supporting and reliable. I am greatly indebted to you for what you have done for me.
And a warm thank should also be dedicated to my sister, Mahtab, my brothers, Mahan and Mahyar, for your encouragements.
Tehran, April 2009
Mahshid Shirani
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Table of Content
ABSTRACT ... I ACKNOWLEDGEMENT ... II TABLE OF CONTENT ... III LIST OF TABLES ...VII LIST OF FIGURES ...VIII
1 ... 1
INTRODUCTION ... 1
1. INTRODUCTION ... 1
1.1 PREFACE ... 2
1.2 PROBLEM DEFINITION ... 4
1.3 IMPORTANCE OF THE PROBLEM ... 4
1.4 GENERAL DOMESTIC ENVIRONMENT OF MANUFACTURING SECTOR IN IRAN ... 6
1.5 INTERNATIONALIZATION ... 8
1.7 OPERATIONAL DEFINITIONS ... 11
1.8 RESEARCH DESIGN ... 12
1.9 RESEARCH PURPOSE ... 13
1.10 ANALYSIS OF FINDINGS AND CONCLUSION ... 14
1.11 PRACTICAL IMPLICATIONS/ MANAGERIAL IMPLICATIONS ... 18
1.12 THE LIMITATIONS OF RESEARCH ... 19
1.13 FUTURE RESEARCH POSSIBILITIES ... 20
1.14 ABBREVIATIONS ... 20
1.15 THE GENERAL OUTLINE OF THE STUDY ... 21
2 ... 23
LITERATURE REVIEW ... 23
2. INTERNATIONALIZATION ... 23
2.1 INTERNATIONAL BUSINESS ... 23
2.1.1 Definition of international business ... 24
2.1.2 International trade theory ... 24
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2.1.3 International product life cycle theory ... 25
2.1.4 Foreign Direct Investment theories ... 27
2.1.5 Internalization theory ... 30
2.1.6 Eclectic theory ... 31
2.1.7 International portfolio theory ... 32
2.1.8 Internationalization theory ... 32
2.1.8.1 The Uppsala Internationalization Model (U‐M) ... 34
2.1.8.2 Innovation‐related Internationalization Models (I‐M) ... 36
2.1.8.3 Discussion and criticisms of the U‐I models ... 39
2.1.9 Internationalization definitions ... 40
2.1.10 Internationalization under the network perspective ... 41
2.1.10.1 Social Network Theory and its Contribution to SMEs’ Studies ... 43
2.1.11 Entrepreneurship ... 44
2.1.12 The International New Venture (INV) Model ... 47
2.1.12.1 The international marketing strategies of INVs ... 48
2.2 EXPORTING ... 48
2.2.1 Reasons for Exporting ... 50
2.2.2 What factors influence Export ... 51
2.2.3 Challenges for exporting ... 55
2.2.4 Classifying export barrier elements ... 57
2.2.4.1 Internal‐domestic export barriers ... 58
2.2.4.2 Internal‐foreign export barriers ... 58
2.2.4.3 External‐domestic export barriers ... 58
2.2.4.4 External‐foreign export barriers ... 59
2.3 FRAME OF REFERENCE ... 59
2.3.1 Comparison with other models ... 61
2.4 SUMMARY ... 63
3 ... 65
RESEARCH METHODOLOGY ... 65
3. METHODOLOGY ... 65
3.1 INTRODUCTION ... 66
3.2 RESEARCH APPROACH ... 68
3.3 RESEARCH STRATEGY ... 69
3.3.1 Identification of the Cases: Multiple‐Case Study ... 71
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3.3.2 Selection of Cases ... 72
3.3.2.1 Exploratory Cases ... 74
3.4 RESEARCH DESIGN ... 75
3.5 DATA GATHERING ... 77
3.5.1 Interview ... 77
3.5.2 Data Recording and Managing ... 79
3.5.2.1 Methods to interview analysis ... 79
3.5.2.2 Testing and Confirming Qualitative Findings ... 81
3.6 QUALITY CRITERIA ... 83
3.7 SUMMARY ... 85
4 ... 87
ANALYSIS AND FINDINGS ... 87
4. DATA ANALYSIS ... 87
4.1 INTRODUCTION ... 88
4.2 STUDY OF THE INTERNATIONALIZATION PROCESS OF FIRMS IN IRAN ... 89
4.3 GENERAL INFORMATION ... 89
4.4 CASE STUDIES: WITHIN‐CASE ANALYSIS ... 93
4.5 CROSS‐CASE ANALYSIS ... 105
4.6 INTERNATIONALIZATION PROCESS MODEL ... 113
4.6.1 Explaining the model ... 114
4.6.2 Comparison with other models ... 120
4.7 SUMMARY ... 122
5 ... 124
CONCLUSIONS AND RECOMMENDATIONS ... 124
5. CONCLUSIONS ... 124
5.1 INTRODUCTION ... 125
5.2 PREVIOUS CHAPTERS’ REVIEW ... 126
5.3 CONCLUSIONS FROM THE RESEARCH ... 128
5.3.1 Conclusions concerning the first research question ... 128
5.3.2 Conclusions concerning the second research question ... 131
5.3.3 Conclusions concerning the third research question ... 133
5.4 VALUE... 134
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5.5 SUMMARY ... 134
REFERENCES ... 137
APPENDIX 1 ... 142
FINDINGS OF MEANING CONDENSATION AND MEANING CATEGORIZATION ... 142
APPENDIX 2 ... 145
INTERVIEW‐GUIDE ... 145
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List of Tables
TABLE 2‐ 1 ASSUMPTIONS AND INFLUENTIAL FACTORS OF ECONOMIC THEORIES ... 29
TABLE 2‐ 2 A REVIEW OF THE INNOVATION‐RELATED INTERNATIONALIZATION MODELS ... 37
TABLE 2‐ 3 A SUMMARY OF THE EVALUATION BASED ON THE EXPLANATION CRITERIA ... 38
TABLE 2‐ 4 DEFINITIONS OF ENTREPRENEUR AND ENTREPRENEURSHIP ... 45
TABLE 2‐ 5 COMPARISON OF INTERNATIONALIZATION PROCESS MODELS ... 62
TABLE 3‐ 1 DIFFERENT TYPES OF RESEARCH PURPOSE ... 67
TABLE 3‐ 2 RELEVANT SITUATIONS FOR DIFFERENT RESEARCH ... 70
TABLE 3‐ 3 SAMPLING STRATEGIES FOR QUALITATIVE EVALUATIONS ... 73
TABLE 3‐ 4 CASE STUDY TACTICS FOR FOUR DESIGN TESTS ... 84
TABLE 4‐ 1 GENERAL INFORMATION ABOUT THE 5 CASES ... 90
TABLE 4‐ 2 SHARE OF INTERNATIONAL ACTIVITIES AND TARGET MARKETS ... 93
TABLE 4‐ 3 MOTIVATIONS OF INTERNATIONAL ACTIVITIES ... 105
TABLE 4‐ 4 BARRIERS ON THE PATH OF INTERNATIONALIZATION ... 108
TABLE 4‐ 5 COMPARISON OF INTERNATIONALIZATION PROCESS MODELS ... 121
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List of Figures
FIGURE 2‐ 1 THE INTERNATIONALIZATION PROCESS OF THE FIRM ... 34
FIGURE 2‐ 2 EXPORTING IS PART OF A CONTINUUM ... 50
FIGURE 2‐ 3 CLASSIFICATION OF EXPORT STIMULI ... 54
FIGURE 2‐ 4 CLASSIFYING EXPORT BARRIERS ... 57
FIGURE 2‐ 5 THE INTERNATIONALIZATION PROCESS ... 60
FIGURE 3‐ 1 CASE STUDY DESIGN ... 76
FIGURE 4‐ 1 INTERNATIONALIZATION PROCESS MODEL... 115
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Introduction
1. Introduction
The world is changing dramatically. The evolution from a small domestic firm to an established and international company is a key step for any company. In recent years, it is required that manufacturing firms consider internationalizing their operations. In times of globalization,this issue is greatly significant for scholars and practitioners, and a great deal of research has been conducted in this field (Reiner et al., 2008). “For over 50 years international business has been the subject of extensive research enquiry, and
2 yet to date there is no universally accepted model of international business, let alone the same theory of international business (Bilkey, 1978; Toyne, 1989; Leonidou and Katsikeas, 1996 and Chandra and Newbury, 1997; cited by Mtigwe, 2004)”.
1.1 Preface
From Tokyo to New York, from London to Beirut, it is increasingly evident that what happens in one corner of the world, affects us all. Commerce no longer recognizes national borders, international customers, global supply chains and overseas joint ventures are reshaping the corporate environment.
As more and more firms enter the international business environment, there is increased competition. Increasing competition results in a reduction in the ability of companies to control their own developmental paths. In a very competitive environment, there is a need to identify and understand factors that impact international performance.
As Fillis (2001) points out small and medium-sized enterprises (SMEs) embody a large and important part in both advanced market economies and transition economies.
Increasingly smaller firms are becoming involved in international activities and are exhibiting behaviors not previously seen before (Bell, 1995; Knight and Cavusgil, 1996;
McAuley, 1999; Cummins et al., 2000). Small firms constitute between 75 to 99 percent of all businesses in nearly all economies, so they are key contributors to any country’s employment, GDP, and general economic and social well-being (Prefontaine and Bourgault, 2002; cited by Ghanatabadi, 2005).
However SMEs are experiencing augmented competition as foreign firms get access to local markets, SMEs have superior opportunity to internationalize, since potential markets have moved beyond national borders (Ghanatabadi, 2005). “In the present world economy no market is safe from competition and no firm can afford to stake its future on the assumption that it ‘owns’ its home market. It is particularly necessary for SMEs in developing countries to internationalize, due to the increasing competitive pressure and reduction of the direct subsidies and protection they used to receive from their governments (Etemad, 1999; cited by Ghanatabadi, 2005; p. 2).
3 The great income from the petroleum industry led to rapid growth of the entire Iranian economy in the 1960s and 1970s. The influx of foreign capital and the establishment of new industries slowed dramatically, however, due to turmoil preceding the Islamic revolution in the late 1970s. Already disturbed by the revolution, economic activity was further reduced by war with Iraq and a decline in oil prices in the mid-1980s.
Heavily dependent on oil exports for revenue, the government initiated austerity measures in the early 1990s. Nevertheless, improved relations with Western nations and opportunities for economic exchange with newly independent Central Asian republics have broadened Iran's economic prospects. Gross domestic product (GDP) was estimated at $90 billion in the mid-1990s, and was growing at a rate of about 5 percent a year (Soran, 1998).
In the third “economy development programs” in Iran (2000-2004) efforts to expand non-petroleum products introduced as the root foundation for export development. Since they prospered in the third “economy development programs” goals, government is being bound over targeting and giving direct and indirect award to exporters in the forth “economic development programs” (2005-2009) to increase Iran’s share in international marketing and reinforcement of exporting products’ competitive advantages in international markets.
Nowadays, Iran government adjusts his focal point headed for non-petroleum export and provides some promotion programs. This is a good promotion for firms to revise their strategy toward export. In Iran and conceivably in other developing countries, access to hard currency is an added inducement for international business for companies.
Additionally, governments benefit from the flow of hard currencies.
Based on the discussion so far, due to the value of SMEs in economic development and lack of empirical studies on internationalization of SMEs in developing countries, this area is selected for this research. Because of the nationality and professional experience of the author, and accessibility of the data, the study area is limited to Wire and Cable manufactures in Iran. This chapter proceeds as follows: first, a
4 brief review of internationalization literature and SMEs definitions; operation definitions of the three key concepts, export, internationalization and SMEs are presented. The rest of this chapter is devoted to presentation of the design and purpose of study; brief background information about the Iran’s economic and business environment; Practical implications, limitations, and future research possibilities; declaring abbreviations used in the document; and finally the general outline of study is provided.
1.2 Problem definition
Governmental appropriate politics have salient influence in its realization. A glance at non-petroleum exporting countries’ economy shows if a country considers susceptible non-petroleum export, its revenue would be more than petroleum exporting countries and it could be a predominant revenue source for such countries. Petroleum products are terminable; consequently politicians have the belief that non-petroleum export development and releasing from single product economy is inevitable necessity.
Most governments acknowledge the value of exports to economic growth. Some have industrial policies which include strategies for export expansion, but most do not emphasize a policy for small business. Therefore, it is indispensable to provide models for industries, segments within industries and individual firms that not only have the ability to export but also the predilection to do so.
Studies have reported few firms have entered foreign markets in Iran, especially in some potential industries like wire and cable. This study focuses on Internationalization and export, because business has become progressively more globalized, companies face increasing competition, and in point of fact that non- petroleum export in Iran is not sufficient in comparison with other countries in neighbor - for instance, Turkey.
1.3 Importance of the problem
International marketing is critically important because business has become ever more globalized. Companies facing increasing competition and ever-changing
5 technological challenges are discovering that international trade is not only a strategic option but may be a requirement for corporate survival (American Marketing Association, 2007).
There are numerous benefits that exporting can offer to both national governments and business organizations. From the macro-national perspective, it increases domestic employment levels, provides a source for foreign exchange, assists in the development of new technologies, creates backward and forward linkages in the economy, and leads to higher standards of living. At the micro-business level, it improves the firm’s financial position, helps to develop competitive advantages, enriches managerial skills, makes better utilization of production capacity, and facilitates company growth.
It is believed in general that exporting symbolizes one of the main forms of international involvement for firms. This is mainly because of the fact that it does not soak up the assets that overseas operations and joint ventures normally require and, therefore, tends to be associated with less risk (Morgan, 1997). Many developed, newly industrialized and developing country governments have identified exporting as a leading priority for their indigenous firms and several have formulated sophisticated export- oriented trade strategies and extensive assistance programs to encourage export sales to flourish (ibid.).
Non-petroleum product export is a predominant revenue source for Iran.
Petroleum products are terminable; consequently politicians should have the belief that non-petroleum export development and releasing from single product economy is inevitable necessity.
Export is the prominent source of revenue for production activities and it has been as the strategic goal in development programs precedence. Although exporting can offer many benefits to smaller manufacturers, a large number of Iranian firms refrain from export operations as a result of insufficient stimulation.
6 1.4 General Domestic Environment of Manufacturing Sector in Iran
Iran, the second largest OPEC (Oil Producer Exporter Countries) oil producer, holds 100 billion barrels of proven oil reserves, about 10% of the world’s total, after Saudi Arabia and Iraq (World Bank Report, 2003; cited by Ghanatabadi, 2005). On the other hand, in oil-exporting economies, a rise in oil and natural gas revenues to $200 billion supported 5.8 percent growth in 2008, down from 6.4 percent in 2007. A falloff in the oil sector to 2 percent pressured growth in the Islamic Republic of Iran from 7.8 percent in 2007 to 5.6 percent in 2008 that was a key factor in its development (World Bank Report, 2009).
The huge income from the petroleum led to rapid growth of the entire Iranian economy in the 1960s and 1970s (Soran, 1998). The influx of foreign capital and the establishment of new industries slowed dramatically, however, due to turmoil preceding the Islamic revolution in the late 1970s. Already disrupted by the revolution, economic activity was further dampened by war with Iraq and a decline in oil prices in the mid- 1980s. Heavily dependent on oil exports for revenue, the government initiated austerity measures in the early 1990s. Nevertheless, improved relations with Western nations and opportunities for economic exchange with newly independent Central Asian republics have broadened Iran's economic prospects. Gross domestic product (GDP) was estimated at $90 billion in the mid-1990s, and was growing at a rate of about 5 percent a year (Soran, 1998).
Despite the fact that in the last four decades the government has comprehensively supported the large industrial sector through channeling subsidized foreign exchange, credit, and other resources into the manufacturing sector, many problems emerged, such as: “the dominance of outdated technology and machinery; dependence on government- earned foreign exchange from oil revenue; high level of concentration (monopoly power) in different branches of industry; domination of government or public ownership; poor entrepreneurial capability; availability of unutilized capacity; poor management and
7 outdated administrative infrastructure; an over-sized labor force with the greatest portion comprised of unskilled workers and inadequate accounting and management processes”
(Tabibian,2003; p. 2-3; cited by Ghanatabadi, 2005). Therefore the manufacturing sector has not demonstrated a capability for growth or even been able to sustain operations over several decades (Ghanatabadi, 2005).
The over-dependence on oil and gas exports positioned the country’s economy in a weak level, exposing it to fluctuations in international energy prices that have fallen to below $10/barrel during 1998 (UNIDO, 1999; cited by Ghanatabadi, 2005). It has also created a heavy dependence on public and quasi-public large enterprises, in spite of the fact the great majority of businesses in Iran (98.4%) have less than 9 employees (Ghanatabadi, 2005).
Based on the Third Five-Year Plan, “the Government of Iran sees the diversification and increase of non-oil exports as a major issue in strengthening the economy by making it less dependent on oil and gas exports. Secondly, Iran needs to increase its non-oil exports in order to become an active partner in the WTO-led process of globalization. Finally, and equally important, the development of new and existing export markets is seen as a powerful tool to promote employment creation” (UNIDO, 1999, p. xviii; cited by Ghanatabadi, 2005). In the third “economy development programs” in Iran (2000-2004) efforts to expand non-petroleum products introduced as the root foundation for export development. Since they prospered in the third “economy development programs” goals, government is being bound over targeting and giving direct and indirect award to exporters in the forth “economic development programs”
(2005-2009) to increase Iran’s share in international marketing and reinforcement of exporting products’ competitive advantages in international markets.
To achieve these objectives, the government requires improving environment to develop competitiveness that is a prerequisite for job creation and the promotion of non- oil exports. Several firms have transferred their activities toward international markets to deal with new situations and it has forced the manufacturing sectors to endeavor for a
8 considerable improvement in their competitiveness through adoption of different policies and strategies. As a result, increasing the competitiveness of the SMEs has become a crucial concern in the national economy because of their impact on job creation and increasing scope for success in export markets (Ghanatabadi, 2005).
1.5 Internationalization
Internationalization has become widespread in the last decade, and firm’s internationalization process attracted the attention of the scholastic. Internationalization process originated by Johanson and Wiedersheim-Paul (1975) and Johanson and Vahlne (1977), has been a resurgent over the recent years (cf. Eriksson, Johanson, Majkgard, and Sharma, 2000). The consequent researches within this subject matter were accomplished by empirical research of Sullivan and Bauerschmidt (1990), Leonidou and Katsikeas (1996), Eriksson et al. (2000), and Vyas and Souchon (2003) (Cheng et al., 2005).
“Internationalization is a continuous process of choice between policies which differ maybe only marginally from the status quo. It is perhaps best conceptualizes in terms of the learning curve theory. Certain stimuli tempt a firm to shift to a higher export phase, the experience (or learning) that is gained then modifies the firm’s insights, prospects and indeed managerial capacity and competence (Fillis, 2001); and new stimuli then induce the firm to move to the next higher export stage, and so on” (Cunningham and Homse, 1982; cited by Ajdari, 2007; p. 3).
Prior to the seminal work of Oviatt and McDougall in 1994 where they pointed to the intriguing fact that internationalization can be viewed as an entrepreneurial act, the research streams focusing on entrepreneurship and internationalization were only rarely combined (Andersen, 1993). Several studies from the 1970s supported the notion that firms initially gain a strong foothold in their domestic market before they leap into international markets. Hence, international business research mainly focused on established firms whereas the entrepreneurship literature focused on domestic market dimensions. Over the past decade the literatures on entrepreneurship and internationalization have been more closely related in terms of the effort to describe and
9 understand the phenomenon of infant firms that operate internationally right from inception. The international business literature embodies different theoretical models that attempt to explain slow and incremental internationalization processes of firms. The most recognized approaches are stage models such as the Swedish “Uppsala Internationalization Model” and the American “Innovation-related Internationalization Model” (Andersen, 1993). In the late 1980s, researchers began to question the universality of these stage models. Johanson and Mattsson (1988) proposed that firms that initiate their internationalization process in an already internationalized market (cited by Andersen, 1993).
A few years later, the term “born globals” created for this type of firm (Rennie, 1993). Madsen and Servais (1997) adopted this term, which has been used by many international marketing and business researchers since then.
According to Reiner et al. (2008) in seeking the reasons for internationalization, Ferdows (1997) acknowledged “access to low-cost production”, “access to skills”, and
“proximity to the market” as the three main strategic causes for selecting a location. Due to him, Dunning (1998) differentiates between “resource seeking”, “market seeking”,
“efficiency seeking”, and “strategic asset seeking” as the main types of FDI. A more complete and full list is supplied by Vereecke and Van Dierdonk (2002), who empirically test Ferdows’ model and find strong empirical evidence for most of its elements. In particular, they present eight potential advantages of relocation:
(1) Proximity to suppliers;
(2) Availability of labor;
(3) Availability of skills and know-how;
(4) Proximity to market;
(5) Socio-political advantages;
(6) Competition;
(7) Energy; and (8) Others.
10 So far, Reiner et al. (2008) have acknowledged a number of factors which make influence on internationalization. These are: market knowledge (Johanson and Vahlne, 1990); level of product standardization, level of country development (Vernon, 1979);
entry mode or control (Anderson and Gatignon, 1986); strategic reasons (Ferdows, 1997;
Dunning, 1998; Vereecke and Van Dierdonck, 2002); importance of local resources and local market (Bartlett and Ghoshal, 1989); role in the operations network (Vereecke et al., 2006); driver of the supply chain (Gereffi, 1999). These factors are certainly not independent of one another.
1.6 SMEs
Several scholars identified quantitative criteria for defining small and medium sized enterprises. According to Ghanatabadi (2005) Loecher (2000) has identified two criteria: quantitative and qualitative.
In quantitative view, SMEs refer to firms in all sectors as long as a given size threshold is not exceeded. Economists recommend indicators such as profits, invested capital, balance-sheet total, earnings, total capital, equity, market position, production and sales volume, number of employees and turnover. Due to the simplicity, compatibility, and practical application, “number of employees” and “turnovers” are two indicators that suggested as the most appropriate quantitative criteria (ibid).
In general, qualitative criteria present information on the nature – the characteristic properties – of SMEs. Relationships between “owner” and “company” in the framework of “personal principle”, and “unity of leadership and capital” are offered as the qualitative criteria. The “personal principle” means that the company manager performs a central role in the business decision making, he has an overview of fundamentally all technical, administrative and organizational procedures in the company. “Unity of leaderships and capital” means that the company manager and proprietor is one and the same person, the owner-manager is much more self-sufficient and independent than the contracted management of large companies (ibid.).
11 In 1996, the European Union (EU) set the following ranked criteria for defining the SMEs (Ajdari, 2007; Ghanatabadi, 2005):
1) Less than 250 workers,
2) A maximum of 40 million Euros annual turnover, 3) A maximum 27 million Euros annual balance-sheet total,
4) Minimum of 75% of company assets owned by company management, and 5) Owner- managers or their families manage the company personally.
Obviously these limit figures change from country to country.
1.7 Operational Definitions
Export: Exporting is the most popular, quickest, and easiest way for many small companies to become international.Contrasting to other forms of foreign market entry, it involves less commitment of organizational resources, offers superior flexibility of managerial actions, and requires fewer business risks (Leonidou et al., 2007).
Internationalization: According to Ajdari (2007; p. 4) based on definitions mentioned in this chapter and chapter 2, and regarding the Iranian firms situation we define internationalization as an action that firm willing to export their products and services and also the process of expanding their business activities into foreign markets.
Small and Medium-Sized Enterprises in Iran: “In order to select proper criteria for definition of SMEs in Iran, it is necessary to mention that the “medium-sized firm”
does not exist according to the law in Iran; therefore, it is impossible to find any published official information or any agreed upon definition for medium-sized firms”
(Ghanatabadi, 2005; p.7).
“Since 1995, when the first “development plan” was launched in Iran, industries were divided in two groups: ‘Small firms’ and ‘Large industries’. While small firms were private and the large firms belong to the government and defined as enterprises with more than 500 employees (according to the development plan).
12 With respect to the lack of information about the SMEs and the problems of accessibility to the correct data and regarding to definitions of SME in this study we limited the factors to the “number of employees” meanwhile, regarding to lack of definition for medium sized firms we define maximum 250 employees as the upper limit for medium sized enterprises” (Ajdari, 2007; p.4).
1.8 Research design
According to Reiner et al. (2008; p.926) the case study research method is chosen for the following causes:
“First, the approach is particularly suitable for studying phenomena in a real-life context (Yin, 2003). Second, presented theories seem to have only limited applicability to the environmental context in question (Stuart et al., 2002; cited by Reiner et al., 2008).
Third, the subject matter is highly complex (ibid.). Finally, the research deals with “why”
and “how” questions (Yin, 2003). generally, the research is conducted using a clearly structured research design based on the available publications on case study research (Eisenhardt, 1989; Miles and Huberman, 1994; Stuart et al., 2002; Voss et al., 2002; Yin, 2003; Van Donk and Van der Vaart, 2005; Seuring, 2005;) in order to ensure the quality of our research in terms of reliability and validity and in order to generate theory (Wacker, 1998)”. Following the advice of Stuart et al. (2002; cited by Reiner et al., 2008), selected companies have the required experience and we could expect to obtain relevant data.
The research design will follow the cross-sectional design for practical purpose of the study; because of the time constraint and resource limitation longitudinal design is not achievable. Although cross-sectional has been under criticism in the study of internationalization, but a longitudinal study involves years to make out and considerable fiscal resources which are not generally obtainable by a single researcher (Leonidou and Katsikeas, 1996).
13 Interviews with manager directors or senior executives were used as the main source of data, conducting one interview at each company. The interviews lasted about one hour and half each and they were recorded on tape and transcribed.
1.9 Research Purpose
In recent years, it is required that manufacturing firms consider internationalizing in their operations. In times of globalization, this issue is greatly significant for scholars and practitioners, and a great deal ofresearch has been conducted in this field (Reiner et al., 2008). The increasing internationalization and globalization of business has forced many firms to reconsider what contributes to international success.
This study aims to focus on the determinants influencing the internationalization of companies in Iran. The objective is to investigate and evaluate the business environment and, then, examine a comprehensive model of internationalization provided by Mtigwe (2004) which has been provided for the African context.
Although exporting can offer many benefits to smaller manufacturers, a large number of Iranian firms refrain from export operations as a result of insufficient stimulation and information. This study seeks to examine a model of Internationalization Process (Mtigwe’s model of internationalization process) for wire and cable exporter firms, which are mainly SMEs, follow in their internationalization in order to simplify their path of internationalization. The fundamental question of this study is: Why is it crucial to know how the process of internationalization takes place?
According to Mtigwe (2004) knowledge of the process helps us to do:
• Establishing an all-purpose theoretical framework of international business;
• Calculating with a certain degree of accuracy which firms are better prospect for internationalizing;
• Marking export assistance programs more effectively and accurately.
14 It is therefore the main purpose of our multiple-case study examining a model of the internationalization process in selected firms in Iran. This is done by dealing with three research questions:
RQ1: How is the entire process of internationalization? Does Mtigwe’s model of internationalization process suit the Iran context?
RQ2: What are motivating factors influencing internationalization process?
RQ3: What are impeding factors influencing internationalization process?
This study is limited to Iran due to:
• the importance of SMEs in economic development and social stability;
• the lack of empirical studies in Iran;
• the nationality and professional experience of the author
We believe that it is necessary to investigate such projects carefully and systematically in order to remove common misunderstandings in practice.
1.10 Analysis of Findings and Conclusion
The review of findings showed that in Iran context, the appealing entry mode in international markets is export. As mentioned in the literature these firms believe that Exporting is the most popular, quickest, and easiest way for many small companies to become international.
Contribution of SMEs in economic development and long-term social stability is increasing (Hubenr, 2000; cited by Ghanatabadi, 2005), and they embody one of the greatest increasing divisions in the economies of countries (Neupert et al., 2006). We found out that contribution of wire and cable sector in economic development of Iran is small while they have the capability to export their products. In this respect, the key informants believe that if the challenges faced by SMEs along their path of internationalization diminish, they could enhance their export sales.
15 To gain the purpose of the study which seeks to examine a model of Internationalization Process (Mtigwe’s model of internationalization process) to find the accurate model of internationalization process in Iran context, and consistent with the case narratives, we deal with second and third research questions initially.
To accomplish the answer of RQ1 which is the fundamental research question of this study, following findings emerged.
All respondents (exporting firms) are high quality manufacturers. Their production is based on customer needs. “Firm age” is not a major factor. So it was removed from the Mtigwe’s model to suit Iran region. It was clarified that these firms are planning oriented. They study their development process, and would revise it if any error or fault is available. There is a great body of literature to support this finding.
Respondents considered personal network (Mtigwe, 2005) as the major source of information which is the most valuable to them. Personal foreign visit (Styles and Ambler, 1994; Mtigwe, 2005; Leonidou et al., 2007) is the next source of information.
The cross-case analysis showed that the preferred entry mode is export; additionally most of these firms have started exporting recently so they are in growth level. Many scholars identified export increasing industrial improvement and national prosperity, levels of employment, foreign exchange revenues (Leonidou and Katsikeas, 1996; Morgan and Katsikeas, 1997), and also improving the profitability, the performance of firms, market share and sales amount (Köksal, 2008). Respondents operate in neighbor countries’
markets, since they are located in a close proximity (physically and psychologically close) to Iran and purchasing Iranian products with reasonable price (So pricing policies is one of the major concerns in this regard. Actually the price factor led to withdrawal from the Europe market.). All firms have a common opinion about export readiness.
Describing a firm's preparedness and tendency to begin internationalization is internationalization readiness (Tan et al., 2007). Respondents believe that Integration of well cost management (Rundh, 2006), good quality management (Eldik and Viviers, 2005), well trained staff (HR) (Leonidou et al., 2007 Spyropoulou, 2007), knowledge management (Eldik and Viviers, 2005), and having customer satisfaction strategy
16 (Andersen and Buvik, 2002) helps firms to approach export readiness and these are necessary for the company to be successful in export markets.
Three out of five firms chose the Mtigwe (2005)’s model due to its comprehensiveness. Basically, those three firms pointed out that antecedents (Firm factors, Decision maker factors, and Environmental factors), Enablers (Information sources, and Enablers) and Market Outcomes are robustly significant for Iranian firms; in other words, these parts of model should remain without any changes for the Iran’s internationalization process model. Whereas Export Barriers and Motivators may need to be changed a bit in variables to suit the Iranian context. To sum up, the entire model is good enough to offer to firms for internationalization.
To achieve the answer of RQ2, The cross-case analysis presented that the focal driving force that influence the internationalization of wire and cable exporters in Iran is desire for corporate Growth (Karadeniz and Göҫer, 2007; Leonidou et al., 2007; Rundh, 2006; Ghanatabadi, 2005). A strong motivation to begin or expand export is supplied by the growth objective, because most of small firms aim to progress and play a strong role in the marketplace (Leonidou et al., 2007). Furthermore, Government incentives (Leonidou et al., 2007) and Risk reduction (Leonidou et al., 2007; Mtigwe, 2004) are the next motivations of international activities in Iranian firms. Simpson and Kujawa (1974;
cited by Leonidou et al., 2007) identified Government incentives as an external stimuli consequent from the environment in which the firm operates or intends to operate. With one exception (Jain and Kapoor, 1996), this motivation was the spotlight of many researches and it persuades firms to initiate or develop exports (Leonidou et al., 2007).
Consequently, this finding presents the effectiveness of the various export promotion programs proffered by governments in numerous countries. Export promotions can absolutely contribute Iran economy because it has many potential sectors for exports.
Moreover, the firm will “puts all its eggs in one basket” If it rely only on local market (ibid.). Penetrating to international markets might reduce such a risk. Interestingly, most of the studies (Pavord and Bogart, 1975; Barker and Kaynak, 1992; Katsikeas and Piercy, 1993; Trimeche, 2002; cited by Leonidou et al., 2007) identified the crucial role of this
17 factor. Saturation/shrinkage of domestic market (Leonidou et al., 2007; Rundh, 2006), Capacity utilization (Leonidou et al., 2007; Rundh, 2006; Mtigwe, 2004), and Brand development (Cheng et al., 2005) are the third group of motivations. Unfavorable domestic economy or declining conditions in the local market yields a strong motivation for manufacturers to embark on exporting, as expressed by the high ranking received in some studies (Pavord and Bogart, 1975; Karafakioglu, 1986; Kaynak et al., 1987;
Leonidou, 1988; cited by Leonidou et al., 2007) and a saturated market will redound to reduce the firm’s utilized capacity. Due to this study, a desire to entirely utilize production capacity is a reason for some manufacturers to look into international market to exploit their idle capacity (because their plant capacity has not been utilized by leaning on domestic orders) or to dispose unsold inventory. The export sale potential of merchandise may contingent upon building a brand image for a company, which unless it is large (and established already internationally) may be difficult to achieve (Harris and Li; 2005). This motivation has been figured to achieve benefit of prestige discerned by local customers and developing high quality product, simplicity in magnetizing foreign partners and potential staffs, as well as cultural benefits and international knowledge, all result in simplifying foreign market entries and cost efficiencies of marketing strategies (Aaker & Joachimsthaler, 1999; Beerworth, 1998; Craig and Douglas, 2000; Gillespie, Krishna, and Jarvis, 2002; Quelch, 1999; Yu, 2003).
RQ3 identifies “barriers” decelerate international activities or impeding them.
Foreign investment has been hindered by unfavorable or complex operating requirements in Iran and by international sanctions (Tropical Rainforest Conservation, 2006). Hence, Home political situation is troubling most of the businesses in Iran. There are some input materials that are not available in Iran and they should be imported. There is a crucial need for preparing high quality input material to produce high quality final product in order to export, but with reference to sanctions, recently high quality input materials have become scarce and firms cannot make them ready. In addition, another source of barriers in the Iran and so many other developing countries is Logistics and shipping difficulties (Morgan, 1997; Leonidou, 2004; Neupert et al., 2006). Logistics play a significant role
18 for entering international markets and for the value firms are given for the product (Nordås et al., 2006). Difficulties in logistics may cause export reduction because it leads to delay in delivery time. For developing countries this means that integration into international markets “requires a long leap forward as far as availability and quality of transport and other logistics services are concerned” (ibid.; p. 11). This calls for government assistance. Government should try to eliminate export barriers as much as it aims to stimulate exports (Cheong and Chong, 1988). Export promotion benchmarks like low-interest loans, tax rebate, free introduction to and advertising in overseas markets, low prices on land leasing, electricity and water are still commonly used in many developing countries (Akrasanee and Tambunlertchai, 1990; Hill, 1990; World Bank;
1991, Tables 2, 14, 16; Gan, 1992; Pangestu, 1992; cited by Yin and Yin, 2005) but it is not common in Iran context. This study’s interviewees complain that they are not given such assistances or if they are proffered they would be inadequate. Furthermore, most Iranian firms do not have access to the required financial resources to be proficient to improve an export program. Oviatt and McDougall (1994; cited by Rundh, 2006) in his study found that one of the significant export inhibitors is the lack of finance. In the same way, Fillis (2002; cited by Rundh, 2006) in his UK and Ireland study of internationalization barriers realized the lack of financial resources as one of the most influential forces hindering internationalization.
With reference to the findings of study which has been mentioned comprehensively in chapter 4 and the result of research questions, presented above, the Mtigwe’s model is accepted as the internationalization process model of Iran, however the author has made a bit changes in Barriers and Motivators due to findings of interviews (Figure 4-1, chapter 4). In addition, from the findings firm age is not a critical factor for firm internationalization, hence, we excluded firm age from the model.
1.11 Practical implications/ Managerial implications
From an entrepreneurial point of view, the findings of this study point to the need for firms to review their recruitment policies in terms of the emphasis that they place on a manager’s background, if the firms have any future international ambitions.
19 Second, the findings have insinuations in terms of the nature and quality of training that is made available to managers and facilitation of networking with foreign contacts or exposure to foreign business practices and opportunities (Mtigwe, 2005).
These steps will contribute toward nurturing an international mindset within the firm, which is a great resource for international business initiation (ibid.).
From a public policy view, there are some insinuations come up out of the results of study. Policy-makers ought to first shape managers instead of companies to be targeted for export assistance and provide a differentiated service perfect to the requirements of the identified managerial clusters (Mtigwe, 2005), since it has been confirmed both here and elsewhere that managerial attitudes and managerial characteristics are the key enablers of internationalization.
Concerning practical implications, our findings provide explanations that should increase the knowledge about the internationalization process in companies located in Iran, such as the combined focus on utilizing the findings to support decisions in internationalization activities by companies as well as consultants in this field of study.
We also believe that companies in other regions where developed and emerging countries are relatively close to one another can utilize our model and results.
1.12 The limitations of research
Regarding the limitations of the research, the fact that the findings are closely linked to a specific context is underlying. This research has been confined to a single industry sector, and to respondent companies from just one country (Evers and Knight, 2008).
Second, the preferred model consists of a particular selection of variables and relationships (Reiner et al., 2008). Obviously, they have been chosen carefully, but it must be said that other factors may also be significant in chosen context.
Another limitation of the study is that interviewees were members of senior management (managing directors, CEOs, etc.). Consequently, findings about different
20 views at other level of management (middle management, team leaders, etc.) are not afforded and how these differences may have an effect on the internationalization process (Reiner et al., 2008).
There is not much exporter in Iran especially in wire and cable industry;
consequently the sample will form basically for small number of businesses and therefore small sample sizes. Furthermore, the research design of study is cross-sectional design for practical purpose of the study; because of the time constraint and resource limitation longitudinal design is not achievable. But cross-sectional has been under criticism in the study of internationalization, but a longitudinal study involves years to make out and considerable fiscal resources which are not generally obtainable by a single researcher (Leonidou and Katsikeas, 1996).
Wide generalizations cannot be made because of the localized context of the study. Therefore, the usefulness of the study is limited to the developing countries, basically neighbor developing countries.
1.13 Future research possibilities
In addition to future research possibilities arising directly from the limitations, it should be recommended that future research may explore longitudinal research design for further contribution to international business in this context.
More specifically, the following questions could be addressed: How can government arrange export promotion programs? How can exporters attract more investment? How the internationalization process is viewed and evaluated in other industries in the region?
1.14 Abbreviations
FDI: Foreign Direct Investment
I-M: Innovation-Related Internationalization Model ICT: Information Communication Technology
21 INV: International New Venture
MNE: Multinational Enterprise
NGO: Non-Governmental Organization R&D: Research and Development SME: Small and Medium size Enterprise TPO: Trade Promotion Organization U-M: Uppsala Internationalization Model
UNIDO: United Nations Industrial Development Organization WTO: World Trade Organization
1.15 The General Outline of the Study
This chapter reflects on the introduction of present study. After explaining a preface, the problem defines. Since business has become progressively more globalized, companies face increasing competition and in point of fact that non-petroleum export in Iran is not sufficient in comparison with other countries in the same situation (for instance, Turkey). Nowadays, Iran government adjusts his focal point headed for non- petroleum export and provides some promotion programs.
The next chapter, Chapter 2, encompasses the review and analysis of theoretical and empirical studies. This chapter is organized in two main sections which is the main body of the literature review that is devoted to the internationalization literature and export.
In Chapter 3, based upon the literature review and with regard to the purpose of the study, the research problem and research questions are developed and stated. The next sections deal with research methodology. Chapter 3 shields the entire area from research approach, research strategy, and research design to sampling, data gathering, and data recording.
22 Chapter 4 contains the major empirical part of the study that covers data analysis.
It is assigned to the analysis, discussion and interpretation of the findings that result in answering the research problem and research questions.
Finally, Chapter 5 provides a summary of the fundamental empirical and theoretical findings. Evaluation, revision and interpretation of the theoretical frame of reference and theoretical findings are also discussed in this section (Ghanatabadi, 2005).
Implications for practitioners and policy makers are provided on the basis of these findings.
23
2
Literature Review
2. Internationalization
The increasing internationalization and globalization of business has forced many firms to reconsider what contributes to their competitive advantage and consequently their international success. Researchers found that firms who achieve success in their international business are those that perceive the changes in the international environment and are able to develop strategies that enable them to respond accordingly.
This chapter considers International business literature categorized in three broad sections that are International trade theories, Foreign Direct Investment theories and Internationalization theories.
2.1 International Business
Notwithstanding International Business has been focused of extensive researches during last 50 years (Mtigwe, 2004), there is not yet any universally accepted model of international business (Bilkey, 1978). A rationale for this is that little research has been
24 done for building theory and testing (Andersen, 1993). Additionally, researchers have applied theories from their primary backgrounds to international business (Mtigwe, 2004). This is an argument that new frames of reference are needed other than the neo- classical rational economic perspectives that presently dominate the entire study of international business (Johanson and Vahlne, 1977).
2.1.1 Definition of international business
According to Mtigwe (2004) there are several definitions of international business which are mentioned here:
Ball et al. (2002) define international business as: “Business whose activities are carried out across national borders”; likewise Punnet and Ricks (1997) define as: “any commercial, industrial or professional endeavor involving two or more countries”.
Therefore a company which imports input for trade domestically would be an international company. Czinkota et al. (1999) offer this definition: “transactions that are devised and carried out across national borders to satisfy the objectives of individuals and organizations”. Hill (2001) takes the wider opinion as:”any firm that engages in international trade and investment” (ibid.).The most comprehensive one is defined by Scott (2001). That is: “all business activities (motivated by internal and external influences) needed to create, ship and sell goods and services across national boundaries (for specific financial and non-financial rewards)”.
2.1.2 International trade theory
International trade theory is the oldest succession of international business studies and it is strongly rooted in theories like product life cycle, factor proportion and classical trade (Morgan and Katsikeas, 1997; cited by Mtigwe, 2004). The development of product life cycle theory is the result of testing the validity of factor proportion theory and classical trade theory by Leontif (1953) (Mtigwe, 2004).
In conformity with classical trade theory, a country exports products and services having economic advantages whereas it imports products and services in which they
