FACULTY OF EDUCATION AND BUSINESS STUDIES
Department of Business and Economics Studies
Can they do it all?
A multiple case study of how clusters can support the process of internationalizations for small- and medium sized
organizations in Gävleborg.
Bernard Kofi Sekyere and Sandra Sjöberg 2021
Master Program in Business Administration (MBA): Business Management Master Thesis in Business Administration 15 Credits
Supervisor: Daniella Fjellström Examiner: Ehsanul Huda Chowdhury
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Acknowledgement
This thesis would not have been conducted without the tremendous help from all participants in it. First, we would like to send a great thank you to all our respondents from the clusters who participated in this study, FPX, Findit, Enterprise Europe Network, Almi and Propell/RISE, without your thoughts and insights this work would never have happened.
Except for the respondents we would also like to send a specific thanks for the people from the University of Gävle who have assisted us during this project and coached us into the right direction. That is to Aihie Osarenkhoe who provided us with initial contacts to some of the clusters but most and foremost to our supervisor Daniella Fjellström and our examiner Ehsanul Huda Chowdhury who have given us great feedback during the way, without you this thesis would not have been completed.
Bernard Kofi Sekyere
andSandra Sjöberg
June 2021, Gävle, Sweden
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Abstract
Title: Can they do it all? A multiple case study of how clusters can support the process of internationalizations for small- and medium sized organizations in Gävleborg.
Level: Final assignment for master’s degree in business administration
Authors: Bernard Kofi Sekyere and Sandra Sjöberg
Supervisor: Daniella Fjellström
Examiner: Ehsanul Huda Chowdhury
Date: 2021 June
Aim: The purpose of the study was to find out how clusters can assist small- and medium sized organizations to expand to the international market.
Method: A qualitative approach was used in this study where the primary data was collected with the help of semi structured interviews. The data was collected from a total of ten participants ranging from five different organizations in the region of Gävleborg in Sweden. The analysis was done with the help of concepts identified in the literature as well as new themes that was found in the empirical investigation.
Result & Conclusions: The findings in this research have shown that the clusters combined can help the SMEs to overcome obstacles related to capital, learning, innovation, networking, sales, and strategy. The clusters can also help the SMEs in terms of sustainability. The weakest link is to help the SMEs to gain social capital where the clusters abilities are low. The clusters have their niche competence and collaborate between clusters to help the SMEs in their international journey. We could also find that there are other themes emerging in the empirical findings which is related to the mindset of the SMEs and the limitations the SMEs face may be dependent of this mindset, mainly due to the manager in the organizations.
III Suggestions for future research: Future studies can focus on longitudinal research in this area to be able to follow the journey of the SMEs between the clusters but also to be able to capture and compare if the SMEs and cluster are experiencing the same pros and cons of the support system. We also suggest replicate this study in another region of Sweden to see if the results can be generalized or if it is a very local context regarding the help the SMEs can gain as well as to see if the theme of mindset occur.
Contribution of the thesis: The theoretical contribution is that we have extended the knowledge around the support system known as clustering by showing that the weaker areas in the clusters was the ability to help in the barrier of social capital and that cluster can help in a good matter when it comes to capital, creating environments for innovation and organizational strategy. The theoretical contribution also showed that one cluster are not able to help in all the given areas but together the clusters are able to help the SMEs to overcome most of the barriers towards internationalization. Another theoretical contribution is the addition of the new barrier to internationalization that we named as mindset. The managerial contribution is that we have shown what areas clusters can assist the SMEs with and thereby shown that managers need to realize the opportunities that comes when they are a part of a cluster as well as they need to be able to trust in the clusters who have a great knowledge in those areas.
Key words: Cluster, Support system, Small- and medium sized organizations, SME, Internationalization.
Table of content
1. Introduction ... 1
1.1 Background ... 1
1.2 Problematization ... 3
1.2.1 Research gap ... 4
1.3 The aim of the study ... 5
1.3.1 Research Question ... 5
1.4 Delimitations ... 5
1.5 Key concepts... 5
1.6 Disposition ... 6
2. Literature review ... 7
2.1 About cluster configurations ... 7
2.2 About small- and medium sized organizations... 7
2.2.1 The importance of resources and the lack of it in SMEs ... 9
2.2.2 How to gain competitive advantage and challenges of achieving it ... 10
2.2.3 Why is an organizational strategy important ... 11
2.2.4 External challenges that SMEs face ... 13
2.3 How the SMEs can overcome multiple barriers in one way ... 14
2.4 Expanding to international markets ... 16
2.4.1 Challenges that can occur in the international market ... 16
2.4.2 Clusters’ role in the process of internationalization ... 18
2.5 Summary of literature ... 18
2.6 Theoretical framework ... 20
3. Methodology ... 24
3.1 Research philosophies ... 24
3.1.1 Paradigm, ontology, and epistemology ... 24
3.2. Research approach ... 25
3.3. Research design ... 26
3.3.1 Qualitative approach ... 26
3.3.2. The collection of secondary data ... 27
3.3.3 Collection of primary data ... 28
3.3.3.1 Operationalization of interviews ... 28
3.3.3.2 Population and sample ... 31
3.3.3.3 Semi-structured interviews ... 33
3.3.3.4 Location of interviews ... 34
3.3.3.5 Interview process ... 35
3.4 Data processing... 36
3.4.1 Transcribing process ... 36
3.4.2 Process of analysis ... 37
3.5 Criterions for quality ... 40
3.5.1 Credibility, transferability, and trustworthiness ... 40
3.6 Ethical considerations ... 41
3.7 Limitations of methodology ... 42
3.8 Summary of methodology ... 43
4. Empirical findings ... 44
4.1 Internationalization of the SME ... 44
4.1.1 The main barriers to internationalization ... 45
4.1.2 Influences of the mindset towards internationalization ... 47
4.2 Attracting and attaining the right social capital ... 47
4.3 Improving the capital in the organization ... 48
4.4 How to gain knowledge by learning ... 49
4.4.1 Increasing technological use and awareness ... 50
4.4.2 How to become more sustainable ... 50
4.5. Improve the innovation for competitive advantage ... 50
4.6 Developing networks ... 51
4.7 Increasing sales ... 52
4.7.1 Help in distribution ... 52
4.7.2 How to market the products and services ... 53
4.7.3 Finding new markets ... 53
4.7.4 Improving the digitalization to increase sales ... 54
4.8 Organizational strategy ... 55
4.9 Summary of empirical findings ... 55
5. Analysis ... 58
5.1 Internationalization of the SME ... 58
5.1.1 The main barriers to internationalization ... 59
5.1.2 Influences of the mindset towards internationalization ... 60
5.2 Attracting and attaining the right social capital ... 60
5.3 Improving the capital in the organization ... 62
5.4 How to gain knowledge by learning ... 64
5.4.1 Increasing technological use and awareness ... 65
5.4.2 How to become more sustainable ... 66
5.5 Improve the innovation for competitive advantage ... 66
5.6 Developing networks ... 67
5.7 Increasing sales ... 70
5.7.1 Help in distribution ... 70
5.7.2 How to market the products and services ... 71
5.7.3 Finding new markets ... 71
5.7.4 Improving the digitalization to increase sales ... 72
5.8 Organizational strategy ... 72
5.9 Geographical location ... 73
5.10 Thoughts of analysis and new framework ... 74
6. Conclusions ... 78
6.1 Results ... 78
6.2 Implications of the study ... 81
6.2.1 Theoretical implications ... 82
6.2.2 Managerial implications ... 83
6.2.3 Societal implications ... 83
6.3 Reflection on this study ... 84
6.4 Suggestions for further research ... 84
References... 86
Appendices ... 99
List of Tables
Table 1 – Definition and division of SMEs ... 8
Table 2 - Summary of challenges that SMEs face ... 19
Table 3 – Operationalization of interviews. ... 30
Table 4 - Information about the participants in this study. ... 32
Table 5 - Information about the interviews. ... 36
Table 6 – The analysis process ... 39
Table 7 – Summary of our empirical findings ... 56
List of Figures
Figure 1 – Disposition of this work ... 6Figure 2 – Framework of factors that clusters can assist SMEs ... 23
Figure 3 – The overall methodological process of the thesis ... 43
Figure 4 – Word cloud illustrating the most common words in the empirical findings . 57 Figure 5 – Framework from analysis. ... 77
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1. Introduction
In this chapter we will present a background to the study, what clusters are and present small- and medium sized enterprises. We will also show the importance around organizations going international and finally present the research gap found.
1.1 Background
Globalization
Globalization, a big word with a various meaning for different individuals, one might think of the opportunities that comes with expanding their business, others might think of the effects it has on our environment, while another might think of the possibility to own an iPhone.
Globalization can therefore be summoned as the spread of jobs, information, technology, and products across all national borders (Investopedia, 2020). Wolf (2014), mentioned that, the interdependency in the name of globalization has pave way and made it feasible to remove barriers of cross broader trade and hence countries can trade more easily. Babones (2008) explain that the wide spread of international movement of goods, capital, services, technology, and information, has increase economic integration and interdepend of nations, regionals, and local’s economies across the world. In view of the importance of globalization, Bridge (2002) explained that despite the outrageous benefits, there are also problems associated which comes along with global warming and water and air pollutions, among others which sometime limit the importance of the phenomena of globalization.
Small- and medium sized enterprises
A Small- and medium sized enterprises (SME) is defined to be an organization that has less than 250 employees while at the same time a turnover that does not exceed 50 million euros (European commission, 2009). SMEs activities usually link to the development of regions and the country, by employing more of the working population at a particular place (Fischer &
Reuber, 2000). This increasing of the home country's gross domestic product (Rijkers et al., 2014) and hence being the engine for economic growth (Beck et al., 2005; Karaev et al., 2007).
SMEs are also important in the bigger picture, according to European Commission (2021) since they represent about 99 % of all businesses within the European Union (EU) and employ over 100 million people while at the same time, stand for about half of the EU’s Gross domestic product (GDP). This makes the SMEs the spine of Europe (European commission, 2021).
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So why would a SME want to expand their business international to compete with the stronger multinational organizations one might ask. The answer to that is that one of the opportunities with going international for the organizations is to find bigger markets or new markets when those at home get saturated (Wild & Wild, 2016). According to Investopedia (2020) organizations are benefiting from globalizations since this opens the opportunities of reducing costs by cheaper labor, getting access to raw material for production but also the important opportunity of getting access to at least millions of new customers. Evans et al., (2008) explained that the reasons for businesses to move to the international market can be related to the push and the pull factor. The push factors are about the availability of resource in the found market, management expertise which is related to specially in the use of specific knowledge in area of production and service, company culture and environmental factors. The pull factors have got to do with the size of the discovered market which can boost the sale and the profit margin, economic and social condition of the discovered market with can held in the maximization of the profit margin.
Research by Omri and Ayadi-Frikha (2014) have previously shown that resources of different kinds, both financial and nonfinancial, like human or social resources have effects on an organization’s growth. But the way towards internationalization can be quite of a challenge, especially for SMEs according to Paul and Rosado-Serrano (2019) since they usually lack those types of resources that fertilizes growth for internalization. Nevertheless, due to their size SMEs usually have limited access to adequate resources like finance, which helps in the expanding process of the business locally, but they also have limited access to technical support which could help in the use of new ways for production, and they even have limited abilities to invest in research and development to equip them for growth (Berger & Udell, 2006). In the business journey to expand and grow international, the SMEs are also facing challenges beyond their control, sometimes due to the inadequate knowledge of what the international market hold in terms of laws and governmental policies (Dobrauz-Saldapenna & Klebeck, 2019). This lack of technical, economical and development also hinder the possibilities of internationalization according to Kuah (2002).
3 The way towards internationalization through clusters
To be able to overcome these barriers, SMEs can be brought together in a network system in the area of infrastructure, science and technology, finance and the international mind (Karaev et al., 2007). This ideal way of bringing these organizations together is through a business unit which is a geographic consolidation of inter-connected businesses, suppliers, and correlated institutions and this phenomenon can be termed as clustering (Porter, 2000). A cluster is because of this inter-connected constellation missing the formal characteristics that is the core of an alliance or a partnership and therefore the SMEs included in the clusters are still able to benefit from the advantages that comes from being an SME while at the same time getting hold of advantages that usually takes a long time to obtain (Porter, 1998). When different organizations come together in a cluster constellation, they are said to be able to share the knowledge, resources, and technology to mention a few benefits, to get competitive advantage that would not have been able to achieve individually at such rapid pace (Porter, 1998). Porter (1998) argues that a cluster can therefore be seen as an alternative way in how to organize the value chain. The cluster innovation is also an economic activity of bringing firms to a hot spot area where new technologies spout at an astonishing rate and where pools of capital, expertise, and talent foster the development of new industries and new ways of doing business (Engel, 2015). This in turn will increase the productivity of companies and an overall competitiveness which gives opportunities for growth and innovation according to Karaev et al., (2007) both at the regional and international level. Clusters are also a vital aspect of strategic management to achieve competitive advantage for business (Delgado et al., 2016). Usually, Small enterprises underestimate the potential benefits that can come with cooperating with other organizations in a cluster consolation according to Eikebrokk et al. (2021).
1.2 Problematization
We have located a research gap in the literature that is related to how clusters can help SMEs in their internationalization. Researchers Morais and Ferreira (2020) states that there is a lack of evidence on internationalization for the SMEs and therefore future research needs to have a look at institutional setups support in the internationalization process of SMEs. This supporting institution can be the cluster. That is also supported by Ayakwah et al., (2018) who mentioned that research needs to continue exploring the role of private corporations in supporting business abilities of expanding internationally. Karaev et al., (2007) have called for future researchers to continue to look into the competitiveness of SMEs participating in clusters since this has not
4 been fully examined. Even though SMEs have been subject to research for a long time, clusters and their potential effects in helping SMEs in the international context have not got that much attention. Amdam et al., (2020) examined how clusters influence the decision of an organization's intention towards going international. Gancarczyk and Gancarczyk (2018) chose to investigate what competitive strategies the SMEs involved in a cluster can use when going international. While Osarenkhoe and Fjellström (2017) looked at how clusters contribute to value creation that helps the organization strengthen the competitiveness both domestic and international.
It is of importance to investigate this matter because of the fact that SMEs represent the majority of businesses, as stated by the European commission (2021), in the national area of EU where Sweden is located. If the SMEs can internationalize the possibility of survival could increase since markets are always in a change and saturated markets can be hard to compete on, especially if other giants enter it and thereby starts to compete with the SMEs.
1.2.1 Research gap
Research has looked on what constraints SMEs face on the domestic level but also what barriers they meet when wanting to expand international (Kuah, 2002; Paul and Rosado-Serrano 2019).
Research have also investigated clustering and what benefits the clusters can bring to the SMEs (Porter, 1998; Delgado et al., 2016; Karaev et al., 2007). When research has been conducted on clustering and SMEs, they have only applied one aspect. For instance, the challenges SMEs face (Kuah, 2002; Paul and Rosado-Serrano 2019) or investigated one aspect of how SMEs can benefit from clusters, as example regarding the business performance (Karaev et al., 2007) or how the cluster can assist with creating strategies (Gancarczyk & Gancarczyk, 2018). There are also limited research done of clustering in Sweden.
No research has looked at the many aspects simultaneously of what the cluster can contribute with when the SMEs want to expand internationally, based on the most occurring constraints SMEs face, in the Swedish context. And that is why we are picking up the request made by Morais and Ferreira (2020) to investigate the institutional setup and the request made by Ayakwah et al., (2018) in what the promoting businesses can help the SMEs on their journey to expand international. We are bridging the gap in the existing literature.
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1.3 The aim of the study
The aim of this study is to find out how clusters can assist small- and medium sized organizations to expand to the international market.
1.3.1 Research Question
The aim will be answered through the following research question:
RQ 1 – What resources and other aspects can the cluster contribute with for SMEs who want to expand internationally?
1.4 Delimitations
We will only look at the possibilities and opportunities that clusters have in the international context for the SMEs and will not see if they can benefit from each other in a domestic market.
The study will be implemented in the context of clusters within Gävleborg in Sweden. The clusters and promotors that have been a part of this work is Almi, Future position X, Findit, Propell/RISE and Enterprise Europe Network so this work might not cover all competence in the regional area.
1.5 Key concepts
SMEs: Small- and medium enterprises are businesses whose employee numbers fall below a certain limit and normally fall between 50 to 250 personnel (Rijkers et al., 2014). They should also have a turnover below 50 million euro a year or a balance sheet below 43 million euro (European commission, 2021). In this work we also include the micro organizations when talking about SMEs, so the work includes organizations from one employee up to 249 employees.
Clusters: This is a geological consolidation of interconnected business, suppliers, and collaborative institutions in a particular field to increase productivity for the business and for growth (Delgado et al., 2016).
Internationalization: This is an economic term, which denotes the process of increasing the involvement of enterprises in the international market (Susman, 2007).
Gävleborg: This is the region, which is under study in this research, located in Sweden.
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1.6 Disposition
This research is continued as follows in structure, we will first present to you a literature review of the chosen topic to create a deeper understanding. After that the methodology chosen will be presented followed by our own empirical investigation. The empirical investigation will later be analyzed with the help of the theoretical framework collected in the literature review. The work will be ended with a conclusion containing contributions and answering the research question and suggestions for further research.
Figure 1 – Disposition of this work
Source: Own
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2. Literature review
In this chapter we will present information about our two main variables in this research, the cluster, and the SMEs. We will also provide you with information about how organizations gain competitive advantage and expand internationally. At the end, we will present a theoretical model that will be used further in the work. Because of our research question “What resources and other aspects can the cluster contribute with for SMEs who want to expand internationally?”, searching for aspects and resources that the SMEs might need in their international process was a major focus when we collected literature for this chapter. To be able to show for in what matter the clusters could help the SMEs in the internationalization process we first need to determine what challenges the SMEs face.
2.1 About cluster configurations
To be able to collect the opportunities that comes with global marketing, SMEs need to increase their individual competitiveness and enter cooperative relationships to be able to take advantage of the synergy effects (Karaev et al., 2007). The cooperative relationship that Karaev et al., (2007) is talking about can also be named as a cluster. Clusters can according to Karaev et al., (2007) include privately owned organizations from many different areas, both suppliers, producers, and customers. But the cluster can also include the government, academics, training institutes and others (ibid.). Porter (2000) defined cluster as an area of saturated and interconnected business, with suppliers and associated institutions in a specific area of production. OECD (2019) defines a cluster as an agglomeration in a certain geographical location where one can find many interconnected firms as well as other supportive institutions for example universities, municipalities, and research institutes. Porter (2000) also supports the notion that clusters include different organizations ranging from big to small, government and universities to mention a few.
2.2 About small- and medium sized organizations
An SME is defined as a business entity which is characterized by the number of labor that they employ, the definition can be more explained by the qualitative and quantitative definition since this is how many researchers divide them. Buculescu (2013) defines the qualitative approach of SMEs as based on traits, which can be a relation that exists between the owner of the company and the business, which can be said to be a personal principle, the bond between the leadership and capital. The personal principle denotes the manager as the person who takes the
8 central duties when it comes to the decision making in the business. The manager through these duties has the fundamental overview of the business, administration, and the technical process of the business (Trigueros-Preciado et al., 2013). The bond between leadership and capital in this definition also reflects the notion of the manager and the owner being the same person, by this the manager then becomes an independent and a self sufficient person in the business as compared to that of a large company. Loecher (2000) defines the quantitative SMEs as the business which is based on set up standards that include the profit making, total balance sheet, total capital, investment, capital, earning, equity, product, and sales volume, as well as the number of employees. Below we show table 1, representing what is said to be an SME according to the European commission. They divided the organizations into micro, small and medium enterprises, by the number of employees and the annual turnover for an accounting period. The sale of a business which falls under this category should not be above 49,999,999 Euros and at the same time they should not employ more than 240 people. This is the definition of SME that we emanate from in this study, therefore including even micro enterprises.
Table 1 – Definition and division of SMEs
Definition Labor force units Turnover value (Euros)
Micro enterprise 1-9 0-1,999,999
Small enterprise 10-49 2,000,000-9,999,999
Medium enterprise 50-249 10,000,000 - 49,999,999
Source: European commission (2009).
In the daily operation of these businesses, SMEs are faced with many obstacles which are not that common in large companies, these issues can be seen at international or local level, and their challenges can be grouped into internal and external challenges (Khattak et al., 2011).
Research has shown that SMEs have a limited understanding of the services available on the market that can be provided to them as a help in developing their businesses and even if they realize there is help available the managers often think that external advisors have low abilities to add any value to the organization (OECD, 2021). These challenges that SMEs are facing limit the organizations’ ability to grow (Hessels & Parker, 2013), and to become an international player the organizations must grow.
9 2.2.1 The importance of resources and the lack of it in SMEs
Håkansson and Snehota (1995) define resources as “… tangible entities that are not free in supply.” (p. 132) and they combine this definition with the view that resources can also be intangible, material, or symbolical elements if the organization can make use of the element.
Lenney and Easton (2009) suggest that resources can be of tangible or intangible art that can hold stable as well as unstable configurations that can either be worthless or valuable, it all depends on how the resource is configurated. The view of Lenney and Easton (2009) is highly related to how Andersson et al., (2006) defines resources since they consider that to be an object that is valuable by someone else. Resources are wide and can be everything ranging from technical, material, intangible and knowledge (Håkansson & Snehota, 1995). Resources are also considered to be information, technology, and marketing besides the most obvious that can also be the financials (Wright et al., 2007). Resources can be intangible when it comes to human knowledge that creates new products or new designs, but it can also be tangible as in a production series (Lenney & Easton, 2009). Resources are therefore a resource if someone can make use of it and elements that lacks known use is not considered a resource. Hence, what value the resource holds is contextual since the potential of use creates the value. Andersson et al., (2006) mentions that the resource gets a value because someone can use it to trade with other organizations, get consumer experience or to be used in the production of another resource. Intangible assets that organizations might need is skills, know-how, image, and customer- as well as supplier bases (Håkansson & Snehota, 1995). Tangible assets can be manpower, financial resources, materials, or even technical capabilities (ibid.).
SMEs are facing obstacles related to gaining the labor force that they need, they have a hard time to identify covet skills on the labor market (OECD, 2017). According to Hessels and Parker (2013) skilled labor is of huge importance because that is what enables the organization to make full use of the resources that the organization can acquire, skilled labor is what transforms or combine the resources so that the organization is able to achieve growth. This is also supported by OECD (2019) who claims that good labor is a key asset for the organizations to be able to attain competitive advantages. The reason for not acquiring this labor force can be many, the labor might not be available in the market that the organization is operating, the SMEs might not afford the labor that is available because of the limited financials or the SMEs might be hampered to attain such labor because of the “non exited” environment that they offer in comparation to the bigger organizations that is already working across boarders (Hessels &
10 Parker, 2013) or simply because the SMEs are not able to identify the labor needed (OECD, 2019).
Other challenges that the SMEs are facing are more or less unified among researchers and the internal constraints are usually: lack of capital, lack of information, difficulties related to marketing, distribution or production of raw material and high costs (Tambunan, 2009;
Henttonen & Lehtimäki., 2017; Jansson et al., 2017; Paul, 2020). The internal challenges are related to effectiveness of leadership, sales and marketing effectiveness, lack of executive or visionary ideas, time management in line of duty and inaccurate pricing of services and products (Müller et al., 2018). Others which also can be seen as constraints are the lack of capacity to win the market and gain shares in the global market competition (Pati et al., 2018).
Digital transformation gives the SMEs opportunities to expand their operations but according to OECD (2019) many SMEs are struggling to seize these possibilities because of lack of resources as well as because of lack in visions and this can be because of the immaturity of digitalization in the SMEs. SMEs are also experiencing a hard time to connect with the other organizations or other players on the field and by that they experience that they have a hard time forming networks, this is no difference if we are talking about the local or at a global level (OECD, 2017).
One important thing that research has shown is that SMEs are because of all these obstacles not a smaller version of a multinational organization due to the lack of resources and assets in different areas and can therefore not apply strategies or other useful conditions that apply to multinational organizations (Kim & Shim, 2018).
2.2.2 How to gain competitive advantage and challenges of achieving it
Competitive advantage is when the organization can give a value of a service or a product that performs better in comparison to the competitors (Falahat et al., 2020). According to Porter (1990) all organizations use their own strategy to become tough competitors on any market and strategies depend on where the organizations are based and where they are to expand. But all successful organizations seem to have one thing in common and that is that they all achieve their competitive advantage through innovation. Innovation can practically be anything including new stuff or new ways of thinking, for example the design, process, new approaches
11 for markets or even how they do their operational training (Porter, 1990). For an organization to become successful they need competitive advantage, and they also need to be aware that innovation is a central role of this process (Porter, 1990). This is also shared by researchers Falahat et al., (2020) who concluded that product innovation is related to competitive advantage along with intelligence capability and pricing capability and these factors give SMEs advantages in their international performance. Innovation is about skills, knowledge, reputation, and physical assets and to be able to innovate, the organizations need to have access to human capital with the right skills according to Porter (1990). Innovation is also creating opportunities for the organizations since innovation perceives markets that have been ignored by others but also because innovation perceive entirely new markets (Porter, 1990). According to Osarenkhoe and Fjellström (2017), SMEs are usually not capable of managing the innovation process due to the lack of resources and capabilities related to manufacturing, distribution, promoting and funding and therefore clusters can contribute to these areas. This is also supported by Kim and Shim (2018) who concluded that the social capital that comes with being part of a cluster increases the overall knowledge that helps the SMEs to overcome disadvantages related to managerial skills and resources that is necessary for the innovation to appear.
Porter (1990) argues that information is the key to innovation since information that the competitors do not seek or information that is not available for the competitors can eventually come to an opportunity to transform into innovation. Hence, innovation therefore arises when the organization is under pressure and tough competitors can because of this be one of the sources to innovation (Porter, 1990). This is also supported by OECD (2017) who could conclude that SMEs have a higher change of innovate when they are collaborating with customers, suppliers, research centers, universities or even in collaborating with their competitors. Therefore, clusters can be a vital source of innovation. Bagheri et al., (2019) also argues that there is a relationship between technological innovation and how the SME perform in the international arena.
2.2.3 Why is an organizational strategy important
For every company to survive in the business environment surrounded by competition along with internal and external challenges they face in the daily activities, there is a need to have a strategic planning in place which act as a supporting device for solving issues and help to expand the business activities to other markets (Grünig & Kühn, 2015). According to Sharma
12 (2011) appropriate organizational strategies is important for the SMEs to be able to survive but unfortunately most SMEs are working without strategical patterns and more on a day-to-day operation because of their challenges of surviving due to lack in financials, resources, and social capital. Noble et al., (2002) explains the strategic orientation of a business to be the guiding principle that affects the organization's strategy making as well as their marketing activities and this view is common among other researchers as well (Rumelt, 2011; St-Pierre & Delisle, 2006). Other substitutes for strategic orientation can also be named as market orientation, production orientation or selling orientation (Noble et al., 2002). Strategies includes the current practice to be able to determine the need for a new line of action and is a guiding policy to what the business seeks to achieve and a tool on how to make it a reality (Rumelt, 2011).
Porter (2000) says that the formation of strategies in business includes knowing of the business strengths and weaknesses, personal values of key implementers that is the management and the board, industrial break through and threat, along with societal expectation of the business. The first two is concerned about the internal task of the business and the last two also about the external task of the business. In dealing with the activity plan of the strategy, businesses need to ask questions like: what customers consider to be valuable, what constitutes quality of a product according to the customers, what products and services to be include in the portfolio of the business, what makes their product and service very unique from the their rivals in the market, and what skills and knowledge needs to be develop in the business (Mintzberg et al., 2003). Answering these questions will help the business formulate proper strategies and help to achieve success. Kaplan et al., (2004) argued that for business to be able to make this strategy a reality, the business can use a strategy design with strategy themes, which is a visualization that is used to document and explain strategy goals to be pursue by the firm and its management team, to bring change according to the firm’s ideology. This outline includes financial aspect, which throw light on how to increase the shareholders’ value and increase the business growth.
It also includes the internal business process, how to increase the daily operational effectiveness of the business and creating high quality products that will meet the standards of the market.
The last part included in this strategy design is the learning and growth which speaks about how the employees are being trained along with how staff are being recruited for their quality and qualification for the task they are being assigned to do and the use of advanced technology of production and services. The globalization point of view by Larimo (2007) states that businesses must be both objective and subjective in their strategy formulation toward
13 international performance by looking at expanding its market shares, looking at their product performance in the major market and satisfaction with profit goals.
Organizations international orientation can be divided into two parts named inward and outward orientation according to Bagheri et al., (2019). The inward orientation is related to how the organization is preparing for the expansion to new markets that include what they need to achieve and how to achieve it in terms of resources and capabilities needed (Bagheri et al., 2019). The outward orientation is about how to realize internationalization in terms of finding a market, what market entry to use and how to target the chosen market (Bagheri et al., 2019).
Bagheri et al., (2019) argues that the success of the internationalization of the SME is depending on their international orientation since the orientation will help the SME to gain knowledge related to risk, costs, and opportunities.
2.2.4 External challenges that SMEs face
As if these challenges where not enough, there is also the external challenges. The external challenges are countless and can include unstable economics environment, high cost of insurance, high taxes, health and safety issues, lack of back lending, transport issues and challenges in getting qualified employees (Lindsay et al., 2017). The business has less control of these challenges since they are external and a couple of external challenges are related to the government's initiatives which influence the business and the economy as a whole in the long run (Almanei et al., 2017).
Another challenge that is both internal when it comes to dealing with it but external when it comes to pressure from the surrounding is the corporate sustainability. Magee et al., (2012) define sustainability as improvement that meet the needs of the present without comprising on the ability of the future generation to meet their desires. Moving towards sustainability involves social objections that entails international and national laws, civic planning, transportation, local and international lifestyle, and ethical utilization (William & Millington, 2004). SMEs have a leading role to play in the sustainability by promoting inclusive and sustainable economic growth, and employment as well as decent jobs for those it employs in this establishment since SMEs are seen as an engine of growth (Gherghina et al., 2020). Due to the size and the business operation activities of these SMEs, some lack the know how to incorporate principles of sustainability into each of its business decisions but the clusters can support the
14 SMEs with absorption and adaptive technique which lead to innovative ideas which helps in the sustainability of the business (Rodriguez et al., 2020). But according to Bartolacci et al., (2020), research has shown that there is a positive linkage between sustainability, competitiveness, and the overall financial performance with the SMEs. It is stated by Pizzi et al., (2021) that research has shown that there is a connection between sustainability through circular economy and the digitalization in the organizations.
2.3 How the SMEs can overcome multiple barriers in one way
The pure fact of collaboration in a cluster holds no value by itself, the value comes from what the involved parties can contribute with (Osarenkhoe & Fjellström, 2017). In the formation of a business cluster, the idea is to have a network of coalited or consolidated businesses with the aim of helping each other to achieve efficiency in a synergistic way (Dali, 2006). Benefits that occur in a cluster flows in a forward, backward and horizontal direction (Porter, 1990).
Horizontal networks in a cluster are between businesses that compete for the same market shares (Porter, 2000). The horizontal networking can therefore be of importance to reduce costs by for example buying bulks together or share market knowledge that leads to competitive advantage. The Vertical network in a cluster is when organizations cooperate between businesses which belong to a different level of the same supply chain (Greenstone et al., 2010).
Organizations in vertical networks can therefore gain advantage by incorporating each other to develop what the customer wants so all can increase their production and thereby even their sales. OECD (2017) consider networking to be a very powerful tool for the organizations to help them identify different business opportunities but also to help the organizations in mobilizing resources.
Navickas and Malakauskaite (2009) wrote that the stimulation of development and growth of the SMEs industry by the clusters can benefit the SMEs in a way of getting advantage like increased opportunities to enter new markets, cost reductions in manufacturing activities, improved and specialized infrastructure, skilled workforce, and an increased opportunity of meeting consumers. In competitive advantage, SMEs located in geographical locations where the cluster finds itself can have specific advantages because of the location (Porter ,1990) this location also helps the cluster to make productive decisions and lowering costs related to manufacturing of products (Altenburg & Meyer-Stamer, 2000). According to Gancarczyk and Gancarczyk (2018) SMEs that work in clusters can overcome disadvantages related to size and
15 range and this is also supported by Karaev et al., (2007). Researchers argue that the cluster can help the organizations to use their resources more effectively than they did before, it can help lowering the costs of the organizations, enhance the competitiveness and even influence the innovation of the organization (Lai et al., 2014). In geographical clusters, the organizations can also benefit from what is known as a tacit knowledge and the tacit knowledge is important since it is hard for the competitors to replicate (Karaev et al., 2007). In the research conducted by Oparaocha (2015) it was found that SMEs connected with different institutions usually could access a lot of resources, but the SMEs only utilized a small part of what was available, this because that the SMEs were not aware of what services and resources was available to them mainly because they did not seek what benefits that surrounded them. According to Håkansson and Snehota (1995), resources ties is about how the organizations combine or connect their resources available within the organizations with other organizations, this is usually the reason for the cooperation to occur. Resource ties is also what the organizations can gain from each other in a collaboration and usually this resource is something that the organizations lack itself.
According to Ford et al., (2010) the aspects of resource ties affect more than just the specific relationship that they occur in, they also have an impact on other relationships since resources exchanged between two parties can be transferred to third parties. How the organization is using the products that have been exchanged is also becoming available for the provider of the resource and that is something that they did not have access to before (Håkansson & Snehota, 1995). For example, if the provider hands raw material for use to their partner, then what the partner produces will be available for the provider. Håkansson and Snehota (1995) gives examples that organizations can connect a product with a machine or a specific knowledge that one person holds with a product in the resource ties.
Håkansson and Snehota (1995) argues that there is no organization that holds all the resources they need and thereby they must obtain resources by others, this is a reason for why business relationships are so important. The performance of any organization, for example market share, growth, and profit, is dependent on the relationships that the organization forms with others since both revenues as well as costs usually comes from business relationships (Håkansson &
Snehota, 1995). Business relationships are also important since it opens a possibility of collecting resources and resources affects what an organization can achieve according to Håkansson and Snehota (1995). Besides the importance that relationships give you access to different resources, relationships with others are also important to be able to secure the
16 resources that the organization needs (Håkansson & Snehota, 1995). According to Wright et al., (2007) SMEs can have a hard time to develop business and social networks that they need to be able to expand their operation, in this matter the cluster might be able to help by introducing organizations to each other as well as create opportunities for them to meet.
Researchers suggest that by joining different networks SMEs will be able to expand their social capital, especially when the networking is with bigger organizations (Wright et al., 2007).
2.4 Expanding to international markets
Organizations who want to expand their business of tangible products abroad can choose between wholly owned subsidiaries, alliances with foreign partners, joint ventures or exporting (Wild & Wild, 2016). Porter (1990) argues against the fact of doing alliances long term due to the downsides with coordinating different operations, creating the competitor and reduced profits since it needs to be shared and these cons goes against the gain of sharing finances with another part, so the only good part is the share of risk in alliances. One can look at the international market as if each country is surrounded by a metaphorical fence and the fence contains economical, cultural and institutional barriers of how business is practiced in that specific country (Johanson & Vahlne, 2003). In this work we will not take the way of internationalizing into concern, so we will not see how the clusters can contribute to different marketing entry options and if we find this, it will just be considered a bonus.
2.4.1 Challenges that can occur in the international market
There are several barriers that are known when organizations intend to expand their business international. According to Johanson and Vahlne (2003) there are both psychic and cultural barriers for the organizations to overcome. Psychical obstacles are related to differences in laws, business regulations, language while the cultural barriers are related to the cultural differences between the countries where the organization will carry out their business. The process of internationalization is a combination of two components which are learning about the foreign market and the commitment to international business since these two components are the main obstacles for the internationalization process for the organizations (Johanson & Vahlne, 2003).
Colovic (2021) concluded that the international market is so complex that it takes specific knowledge and skills to be able to manage the operation successfully. When it comes to the SMEs opportunities of expanding their business internationally constraints accruing include
17 lack of knowledge that has been mentioned by Paul (2020) as well as that the SMEs are less experienced within the field of strategic decisions according to Kim and Shim (2018). Chandra et al., (2020) summarize that SMEs who succeed internationally need expertise related to the foreign market, they need innovation, knowledge in marketing, institutional support, identify the challenges, formulate appropriate strategies and maybe most important, they need to be able to identify an opportunity. According to OECD (2009) the most frequently occurring barrier for the SMEs internationalization is found in the limitations of finances and resources. Besides finances and resources, the SMEs also mention a lot more constraints when wanting to expand into international markets, limited managerial knowledge of international markets including misperceptions of the markets, lack of connections in foreign countries as well as limitations when it comes to locating potential markets of making market analysis of where to expand the business (OECD, 2009). Limitations regarding the managerial skills, limited financials, and lack of knowledge of the potential market has also been raised as barriers in internationalization in the research conducted by Korsakienė and Tvaronavičienė (2012). In Korsakienė and Tvaronavičienė (2012) investigation, the SMEs thought that the start-up costs where to big in the international context and that is why the limited resources arise as a barrier. One important limitation with the lack of managerial skills is that research has found that organizations who have lack in managerial skills have harder or a total lack of acquiring abilities that is related to learning and knowledge that can transform to growth on the international arena (Korsakienė &
Tvaronavičienė, 2012). The importance of managerial skills has been raised by more researchers, for instance Roy et al., (2016) argues that organizations that do have a potential of expanding international requires that the manager has a global mindset if the organization is to achieve growth and increased performance on the international market.
Organizations that lack international experience can have a hard time to acquire human capital that is needed for the internationalization process (Wright et al., 2007). The importance of having the right human capital to have a chance of becoming successful in the international market has been raised by many researchers (Raymond et al., 2014; Roy et al., 2016; Ruzzier et al., 2007; Hessels & Parker, 2013). The most frequently occurring external barrier for internationalization are the actual establishment in a foreign country and issues related to currency, since currency is fluctuating and management had a hard time understanding the currency movement which led to exchange losses (Roy et al., 2016). The literature about usual constraints that SMEs face is highly similar to the constraints that organizations face when they
18 want to expand to the international arena. We therefore consider the SMEs constraints presented in section 2.2.1 also to be potential barriers to the international market.
2.4.2 Clusters’ role in the process of internationalization
According to Montoro-Sanchez et al., (2018) the domestic cluster networks play a vital role for SMEs that intend to expand internationally since SMEs that have a domestic network are exposed to new opportunities related to knowledge that can benefit their international process.
The domestic networks are important since they can provide the SMEs with knowledge in technological capabilities that can be beneficial for an organization’s competitiveness in international as well as in the domestic market (ibid.). Montoro-Sanchez et al., (2018) also concluded in their research that SMEs need to create a domestic network at first and when these relationships are in place they can continue and follow international business theory to learn how they should go international. To optimize the domestic network, organizations need to create diversity in their relationships since this is crucial for internationalization (ibid.). The authors mentioned could also prove that increasing the number of partners in the SMEs network has a positive relationship towards establishing networks international and this is important because this increases the knowledge in the SME. Other researchers also agree on this point, for example Zahoor and Al-Tabbaa (2021) who concluded that domestic networks for the SMEs are important since the network usually can help in the internationalization process since they can provide reliable information to the SMEs about the foreign market, and this is a good substitute to international networks if those are missing. Foreign market knowledge is necessary to be able to expand internationally but the network is only contributing if the relationships between the networking partners are environmentally friendly and not hostile (ibid.). Other researchers argues that SMEs need to collaborate with other organizations in networking activities so that they will be able to ensure the resources that they will need in their internationalization process, including in these resources are also the knowledge and learning (Wright et al., 2007).
2.5 Summary of literature
In table 2 below we are presenting a summary of the findings in our literature review covering the area of constraints and limitations that SMEs face when operating at a domestic as well as on an international level. In the column next to those constraints, we also present what the literature is saying about how clusters should be able to help in the given areas. In this table we
19 present constraints as well as possible ways for the clusters to help overcome these limitations regardless of the domestic or the international context. We divided the findings of the literature into a total of 7 categories named social capital, capital, learning, innovation, networking, sales, and strategy. Social capital and human capital are managed as the same term in this research since we adapt to the approach of Grootaert et al., (2004, p. 3) who summoned it well saying that social capital is: “the resources (such as information, ideas, support) that individuals are able to procure by virtue of their relationships with other people. These resources (“capital”) are “social” in that they are only accessible in and through these relationships.” Grootaert et al., (2004) further mentions human capital to be the specific skills or a specific education that a human hold. And we therefore apply the approach that social capital is the resources with or without a combination of specific skills and/or educations.
Table 2 - Summary of challenges that SMEs are facing and how clusters can contribute to the matter according to the literature.
Concepts Meaning for SME Cluster contribution
Social capital SMEs faces challenges in finding qualified employees, challenges with functioning leadership as well as visionary ideas.
They can help increase innovation and can connect the SMEs with qualified employees.
Capital SMEs faces challenges related to low material access, high costs and lack of monetary capital.
Cluster can help in using the resources more effectively due to cooperation and bulk purchase to lower costs.
Learning SMEs faces challenges because they lack information, knowledge and experience. They are also limited in technical capabilities.
Cluster participants together have knowledge, information and experience that is necessary. They can also contribute with tacit knowledge and technical capabilities.
Innovation SMEs can have a hard time to manage the process related to innovation because of lack of resources, capabilities, funding’s, distribution etc.
SMEs have higher chance to innovate in collaborations with customers, suppliers, universities, and competitors.
Cluster can contribute to creating the environment.
Networking SMEs experience hard times to connect with organizations and other vital players on the field that is necessary to be able to expand their business.
Clusters can help in this matter by introducing organizations and other stakeholders to each other.
Sales SMEs experience issues related to the marketing and distribution of products and services. They also meet constraints in gaining market shares and thereby increase their sales this can be related to problems of properly pricing their products and services.
Clusters help SMEs to increase opportunities for meeting new consumers and entering new markets. By cooperating vertically, they can help in increasing sales. They can also share knowledge related to markets.
Strategy SMEs are inexperienced in making lasting, changing, or new strategies for the organization. Due to this the SMEs face challenges in the orientation of the organization.
Knowledge of making strategies related to domestic as well as international ventures.
Source: own configuration.
20
2.6 Theoretical framework
Based on the presented theories in the literature, we created our own theoretical framework that will be the foundation of our empirical investigation. The gap which our investigation is built upon wanted researchers to investigate what institutional and supporting businesses could assist the SMEs with in their internationalization process. The phrasing of what they can assist the SMEs with is a question for interpretation and our interpretation is that “what” in this specific context can be resources as one example. Our aim with this study is to find out how clusters can assist small- and medium sized organizations to expand to the international market. To be able to fulfill the aim of our study we need to decide on how to investigate the “how” in our aim. Therefore, we created a research question to be answered that follows: What resources and other aspects can the cluster contribute with for SMEs who want to expand internationally?
The how of our aim is thereby investigated through the definition of resources and other aspects.
When searching for literature our focus thereby turned to see what obstacles the SMEs face and how the cluster can contribute to overcoming these obstacles. The obstacles we found in the internationalization process of the SMEs and the point of departure for our study are the seven concepts just presented in table 2 since those where the most commonly occurring barriers in the literature.
Clusters in this modern age do not have any official memberships which means that practically anyone can join and take advantage of the offerings in terms of seminars and other gatherings that the cluster hold. Since there are no formal memberships in the clusters, we define the act of an organization to sign up for receiving information and invitations from the clusters to be a part of the clusters network since it gets exposed to opportunities to interact with other nonmembers. Clusters also invite organizations to gatherings through their social media channels and websites so organization that is not receiving formal information can still join on some occasions. We also consider those organizations to be in the cluster network since they will be able to interact with other non formal members. The organizations who is a part of the cluster can therefore be both active and passive members. When we mention that someone is a
“part” of the clusters, we consider the active stakeholder or organizations that engage in activities to be a part of the cluster and no passive members since those are not offering anything to other organizations in the cluster.
21 At the top of our framework, we are illustrating the different organizations that usually are a part of the cluster. These are multinational corporations (MNC), SMEs, universities, research institutes and municipalities but there can also be others included that has not been mentioned in our framework according to OECD (2019) and Karaev et al., (2007).
According to the literature, SMEs who is a part of a cluster or that is getting help from a promotor will be able to utilize the different pros that comes of being in the cluster. And according to what we found in the literature the seven concepts that is important in the internationalization process of the SMEs can be divided into a total of four categories.
The first category is that SMEs should be able to obtain help regarding on how to increase their competitive advantage. Competitive advantage can be summarized as a service or product that performs better than the competitors and thereby satisfies the customers better according to Falahat et al., (2020). Innovation is an important role since this is usually what creates competitive advantage (Porter, 1990). Osarenkhoe and Fjellström (2017) mentions that SMEs are struggling with the innovation process and clusters can help them in this matter.
The second is that SMEs who is a part of a cluster should be able to access different resources.
Social capital, capital, learning and sales are all considered to be a resource according to the literature for instance. Wright et al., (2007) mentions that resources can be capital, therefore capital has been included in the resource aspect. Håkansson and Snehota (1995) mentions that resources can be knowledge and knowledge is gained by learning and Wright et al., (2007) says that information can also be resources, we consider information to be a way of creating knowledge, hence the heading learning as a collective name for knowledge, information, and learning. Marketing capabilities can be a resource (Wright et al., 2007) tangible assets for example a machine for production, as well as intangible assets in terms of supplier bases or customers (Håkansson & Snehota, 1995). We therefore include aspects that contribute to the sales either by production, distribution, or others as these just mentioned, to the terms of sales.
Both Håkansson and Snehota (1995) as well as Lenney and Easton (2009) consider manpower and human knowledge to be a resource, and human knowledge lies in the social capital with that human being, hence the social capital to be included as the last resource. Therefore, we use the collective name of resources to illustrate social capital, capital, learning and sales.
22 The third is that SMEs who is in a cluster will be able to get help in the formation of networks by getting in contact with different stakeholders as for instance the municipality, other SMEs, and bigger organizations to mention some. The formation of network is important from many aspects but one of them is because no organization holds all resources that they need, and business relationships is one way of obtaining resources by others (Håkansson & Snehota, 1995). Wright et al., (2007) mentions that SMEs have a hart time to develop these relationships and clusters can help to overcome that obstacle by creating opportunities for organizations to meet.
The fourth is that the SMEs should be able to get help with their organizational strategy from the clusters. Strategy is the orientation of the organization and this helps the organization to know what to do next (Noble et al., 2002). SMEs who will succeed on the international market is therefore in need of an appropriate strategy according to Chandra et al., (2020) and SMEs usually lack those appropriate strategies (Sharma, 2011).
All these different concepts can then be utilized, separated, or aggregated, by the SMEs to help in their internationalization process. Depending on the individual need of the SMEs, the SMEs might utilize only part of what the cluster can contribute with or all the aspects. Summarized, the SMEs need to be part of a cluster so they can collect advantages and help regarding resources, network creation, organizational strategy, and competitive advantage to be able to overcome the barriers to internationalization. The framework that we have created is based on our research question “What resources and other aspects can the cluster contribute with for SMEs who want to expand internationally?”. And deriving from the literature review we could distinguish four different aspects including resources. This process is visualized in our framework presented below in figure 2.
23 Figure 2 – Framework of factors that clusters can assist SMEs with and how this influence
SMEs internationalization.
Source: Own configuration.
24
3. Methodology
In this chapter we will provide the readers with information of how we are conducting the research. The readers will be enlightened on what research approaches we are applying, how we collected data and based on what, how we will analyze the empirical findings and much more.
3.1 Research philosophies
In systematic research, there is the involvement of paradigms such as axiology, ontology, epistemology, and methodology which must be taken into consideration to provide a clear, practical, and ethical behavior view of the research (Killam, 2013). Scotland (2012) summoned it up in a good way saying that researchers' paradigm contains the element of ontology, epistemology as well as methodology. The study is therefore driven by the researcher’s ontological and epistemological beliefs which are linked to the methodology and collection of data and related to a specific degree of objectivity. We will therefore present to you what views we are applying in the following.
3.1.1 Paradigm, ontology, and epistemology
The ontology refers to the researchers’ beliefs about the nature of reality where some researchers consider the reality to be constructed by social interactions while other researchers believe the reality to be out there able to be discovered according to Allison and Pomeroy (2000). Bryman and Bell (2007) explain that constructivism is an ontological view where the world is seen as a construction of the involved parts beliefs and perceptions of what is happening. They continue explaining that constructivism is highly dependent on the context of the situation and the people in it, and this influences our way of interpreting the world. We believe that we therefore are adapting a constructivist view of ontology since in the view of cluster influence for internalization, our purpose is to get to know the reality of the participants in the cluster and explain the fundamentals of their beliefs of how they can influence others, and how their activities thereby can impact the globalization of the SMEs. The questions we are asking are highly depending on the context just as explained by Bryman and Bell (2007).
Our belief is that the reality is constructed out of different social interactions and the people’s perception of the reality that they are experiencing. Allison and Pomeroy (2000) say that the epistemology is about the nature of knowledge, what and how we can know something in this world. Within the epistemology on business research there is one aspect named as interpretive
