How Do SMEs Internationalise? A Review of the Stages Model, the Network Theory and the Born Global Phenomenon During the past five decades, the internationalisation of firms, with particular interest in small to medium sized enterprises (SMEs), has received a considerable amount of research interest (Bell, 1995) as a result of the evident increase in internationalisation of firms and industries (Johanson and Vahlne, 1990). Resulting from multiple research studies, three different literature streams were developed.
The first stream, often referred to as the ‘Uppsala Model’ (Johanson and Vahlne, 1977), depicts that firms will follow multiple incremental stages when going abroad, whereby the ‘psychic distance’ largely influences the choice of country for expansion. Approximately twenty years later Coviello and Munro (1995; 1997) introduced the ‘Network Theory’ concept, claiming that a key determinant of the internationalisation process of small firms are its formal and informal network relationships.
More recently, studies found evidence indicating that firms nowadays internationalise rapidly and almost directly after inception (McDougall and Oviatt, 2005; Bell et al, 2003), leading to a whole new approach to internationalisation, the ‘Born Globals’. Throughout this literature review, the three different internationalisation approaches will be critically discussed in chronological order of their establishment. Subsequently, the three approaches will be compared to one another in order to integrate them with each other and create a better understanding.
Finally, the observations of this article will be summarized and a conclusion will be provided. As indicated in the introduction, the first theory is the ‘Stages Model’ to which Johanson and Wiedersheim-Paul (1975) have contributed significantly with their concept of the ‘establishment chain’, which posits a series of evolutionary stages through which firms internationalise incrementally. Moreover, it depicts that firms initially target neighbouring countries, as their ‘psychic distance’ in terms of cultural, economic and political differences and geographic proximity is smaller.
An additional underlying assumption is that, before venturing abroad, firms are well established in the domestic market (Bell et al, 2001; Bell et al, 2004). Further building on these assumptions, Johanson and Vahlne (1977; 1990; 2009) conducted an empirical study on the behaviour of large manufacturing firms and indicated two change mechanisms, namely change by learning from experience and change by commitment. Exceptions to the rule are firms with large resources and much experience from similar other markets, and stable and homogeneous market conditions (Johanson and Valhne, 1977; 1990).
Although the stages model has received significant support, the model also received a large amount of criticism. The most often cited criticisms are that the model is much too deterministic, is not applicable to service firms, ignores the fact that firms often omit stages, wrongly assume step-wise progression, plus it pays insufficient attention to the context of industry, company or people and the development of alternative strategies and entry modes (Bell, 1995; Bell et al, 2001; 2003; 2004; Chetty and Campbell-Hunt, 2004; Forsgren, 2002; Johanson and Vahlne, 1990; 2009; Madsen and Servais, 1997; Petersen et al, 2003).
More specific, Anders (1993) has criticized the stages model for its weak theoretical underpinning, the absence of a longitudinal research basis and the lack of explanatory power and congruence between theory and practice. Also the influence of psychic distance is questioned, as several studies have found no relation between distance to market, sequence of market entered and rate of foreign expansion (Bell, 1995; Ellis, 2007).
Moreover, the changing environment and the advent of the ‘Born Globals’, which will be discussed later, has created even more serious challenges to the stages approach (Bell et al, 2001; 2003; 2004; Chetty and Campbell-Hunt, 2004; Madsen and Servais, 1997; Oviatt and McDougall, 2005; Sharma and Blomstermo, 2003).
A final criticism originates from the network theory, which suggests that a firm is more dependent on its relationships with both, domestic and international markets, than on the cultural characteristics of the chosen market when it comes to success in entering new international markets (Johanson and Mattsson, 1988 in Coviello and Munro, 1994). In response to this last criticism, Johanson and Vahlne (2009) have revisited their original model by explicitly considering the role of network relationships.
The increasing recognition of the fact that the growth of small to medium-sized enterprises (SMEs) is crucial to a nation’s economic and wellbeing, has led to a more detailed examination of this trend and the integration of the stages model and the network perspective (Coviello and Munro, 1994; 1997). By depicting markets “as a system of relationships among a number of players including customers, suppliers, competitors and private or public agencies” (Coviello and Munro, 1994, p. 0), the ‘Network Theory’ offers an invigorating view on the internationalisation process of smaller firms in particular, as they tend to depend on relationships with others. Through their formal and informal networks, firms are able to internationalise very quickly as SMEs generate competitive capability and information advantages, which enables them to overcome the liabilities of newness and foreignness (Coviello, 2006; Coviello and Munro, 1994; Hoang and Bostjan, 2003; Loane and Bell, 2006; McDougall et al, 1994 O’Donnel et al, 2001).
Critical elements to the networks are trust, since it enhances the quality of the resource flow, and existence of weak ties as they supply the small firm with more diverse knowledge (Hoang and Bostjan, 2003; Loane and Bell, 2006). A SME’s network partner is often appears to be influential in both market selection and mode of entry (Bell, 1995). Coviello and Munro (1994), however, also indicate that issues of relationship power and control may actually restrict the nature of the firm’s growth. Just like the stages approach, the network theory has received support and criticism.
To start with, too much attention has been paid to already existing relationships, neglecting the need for building new networks (Coviello, 2006; Ellis, 2007; Hoang and Bostjan, 2003; Loane and Bell, 2006, O’Donell et al, 2001). Similarly, a lack of attention has been paid to network dynamics compared to network effects (Bell et al, 2004; Hoang and Bostjan, 2003; Johanson and Vahlne, 2009) resulting in the failure to acknowledge the importance of decision-maker and firm characteristics in availing the international opportunities (Loane and Bell, 2006; O’Donnell, 2001).
To continue, a core theory and well-defined network concepts are absent (Hoang and Bostjan, 2003; O’Donnell, 2001) and only little theoretical distinction is made between personal and organisational networks (Hoang and Bostjan, 2003; O’Donnell, 2001). Additionally, the network theory fails to acknowledge the effects of interpersonal relations, and lacks predictive power and longitudinal research (Coviello, 2006; Hoang and Bostjan, 2003; O’Donnell, 2001).
Finally, because the network theory has integrated the stages model with the network perspective, the criticisms on the stages model also apply, to some extent, to the network theory (Bell et al, 2003). In contrast to the stages approach, the ‘Born Global’ literature describes the phenomena of rapid internationalising small, highly committed and knowledge intensive firms, with a global focus from the outset and a proactive international strategy (Bell et al, 2001; 2003; 2004; Gabrielson, 2008; Oviatt and McDougall, 1994).
The emergence of born globals can partly be explained as a response to the rapidly changing environment (Jantunen et al, 2008). Born globals are identified to enter domestic and international markets concurrently or even ignore the home market all together. Instead lead markets, niche markets or specific industry markets are targeted, regardless of psychic distance (Bell et al, 2001; 2003; Madsen and Servais, 1997; Oviatt and McDougall, 1994).
Important aspects of a born global are the entrepreneurial orientation, and knowledge processing and learning capabilities (Bell et al, 2003; Jantunen et al, 2008). Additionally, experience and previous networks of the founder are identified to be one the most important characteristics of a global start up as it facilities the identification of opportunities (Bell et al, 2003; Oviatt and McDougall, 1994; 2005).
Next to born globals, Bell et al, (2001) also identified the phenomena of ‘born-again’ globals, which are firms that first solely focused on the domestic market but due to a sudden change started a rapid international expansion comparable to the expansion of born globals. Due to its newness, the research that has been conducted on born globals so far is primarily empirical and purely descriptive and a well-developed theoretical framework is missing (Jantunen et al, 2008; Madsen and Servais, 1997; Knight and Cavusgil, 2004; Sharma and Blomstermo, 2003).
Moreover, the focus of research has been on the growth of firms and the process of internationalisation neglecting enquiries regarding what happens after the initial phase of establishment, understanding domestic and international behaviour of SMEs (Bell et al, 2003; Gabrielsson et al, 2008), and the influence of managerial decision-making (Jantunen et al, 2008). Another criticism concerns the lack of conceptualisation of term born globals.
So far, no consensus has been reached on the specific characteristics of a born global, impeding valid comparative research (Chetty and Campbell-Hunt, 2004; Crick, 2009; Gabrielsson et al, 2008; Jantunen et al, 2008). Additionally, Crick (2009) has indicated the necessity of a clear distinction between born globals and international new ventures, as the different types of firms are characterised by different types of behaviour.
In spite of the criticisms all three internationalisation streams have received, they have found support as well, indicating that the models do explain the internationalisation of firms to some extent (Bell et al, 2003; 2005; Coviello, 2006; Coviello and Munro, 1995; 1997; Johanson and Valhne, 2009). Their strength does not lie in the replicating the complex reality, but in explaining its central elements (Johanson and Valhne, 2009). The three approaches actually show commonalities.
When comparing the approaches, it becomes clear that they all emphasise the importance of; networks, experience, knowledge, learning and commitment (Chetty and Campbell-Hunt, 2004; Jantunen et al, 2008; Madsen and Servais, 1997; Oviatt and McDougall, 2005) and the role of management-decisions as initiator of the internationalisation process (Bell et al, 2004). Following the reasoning of Johanson and Vahlne (1990) many basic assumptions underlying the born global and network approaches are not necessarily different from those outlined in the stages model.
Nevertheless, changing market conditions and environment have changed the way in which firms behave, which logically has led to the development of different firm behaviour and different theories. In addition, although little support has been found for the stages model with regard to SMEs, recent research found that large manufacturing firms still internationalize in an incremental manner (Bell et al, 2003).
This implies that comparing the stages model with the network theory and the born global phenomenon might not be the best thing to do, as they focus on different types of firms. All together, like Bell and Young (1998) and Coviello and McAueley (1999) argue, instead of paying attention to the merits of competing theories, one should focus more on their potential complementarities (Bell et al, 2004). To boil it down, although all three approaches have received a substantial amount of criticism they have also received a considerable amount of support.
More interestingly, the underlying assumptions of the Stages Model, Network Theory and Born Global Phenomenon all include the importance of networks, experience, knowledge, learning, commitment and management-decisions, indicating similarities in their reasoning and suggesting that combining the three approaches might actually be a good suggestion. When doing so, caution should been taken concerning the applicability of the stages model to SMEs, as this theory is based on large manufacturing firm research. Nevertheless, the combination of the three sources might very well lead to better understanding and new insights.