Transnational Entrepreneurship: Mathew J. Manimala Kishinchand Poornima Wasdani Abhishek Vijaygopal Editors
Transnational Entrepreneurship: Mathew J. Manimala Kishinchand Poornima Wasdani Abhishek Vijaygopal Editors
Transnational Entrepreneurship: Mathew J. Manimala Kishinchand Poornima Wasdani Abhishek Vijaygopal Editors
Longitudinal Narratives
Mathew J. Manimala
Kishinchand Poornima Wasdani
Abhishek Vijaygopal Editors
Transnational
Entrepreneurship
Issues of SME Internationalization in
the Indian Context
Entrepreneurship and Development in South
Asia: Longitudinal Narratives
Series Editor
Jay Mitra, Essex Business School, University of Essex, Colchester Campus, Essex,
UK
The series aims to provide a unique new insight into entrepreneurship and
development in South Asia, using a longitudinal narrative approach based on
qualitative empirical analysis of actual developments on the ground. The focus is on
new business and social enterprise creation and their impact on opportunity
creation, job creation, contribution to local GDP, resolution of regional economic
and social issues, the environment, and social attitudes towards entrepreneurship
and innovation in all their forms (i.e. business and social). It especially examines
the relationship between policy and practice and the mediating effects of context
and institutions on this relationship. The series will cover policy issues concerning
entrepreneurship, innovation and economic development as they affect people,
organisations and the environment in specific regions in South Asia.
Transnational
Entrepreneurship
Issues of SME Internationalization
in the Indian Context
123
Editors
Mathew J. Manimala Kishinchand Poornima Wasdani
Indian Institute of Management Bangalore MITACS Postdoctoral Fellow
Bengaluru School of Business
India Royal Roads University
Victoria, British Columbia
Abhishek Vijaygopal Canada
N. S. Raghavan Centre for Entrepreneurial
Learning (NSRCEL)
Indian Institute of Management Bangalore
Bengaluru, Karnataka
India
This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd.
The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721,
Singapore
Preface
v
vi Preface
India. In short, one could state that this volume deals mainly with the interna-
tionalization of Indian SMEs.
We do hope that this volume will be useful for academics, researchers, entre-
preneurs, and policy-makers in emerging economies. This book is inspired by the
enterprising spirit and works of the TEs and REs of the South Asian region, to
whom we dedicate it.
ix
x Acknowledgements
through the two panel discussions by SME entrepreneurs and corporate leaders,
which were organized by FICCI Karnataka State Council, Bengaluru, and TiE,
Bangalore Chapter. Our keynote speakers and panelists were the principal sources
of enrichment for the conference, whose contributions we gratefully acknowledge.
It was a great honor for us to have had Mr. St.John Gould (Director—Trade,
Economics and Prosperity, British High Commission in India, New Delhi) as Chief
Guest for the Inaugural Function and Prof. R. S. Deshpande [National Fellow,
Indian Council of Social Science Research (ICSSR) and former Director of Institute
for Social and Economic Change (ISEC)] as the Chief Guest for the Valedictory
Function of the conference. Both their addresses were sources of inspiration for the
delegates. While the inaugural address set the tone for the conference, the vale-
dictory address paved the way forward to implementing the deliberations of the
conference in both research and practice. We are immensely thankful to these two
dignitaries.
In organizing this conference, we have received the support and assistance from
several institutional partners, whom we gratefully acknowledge. Notable among
these supporters are as follows: (1) N. S. Raghavan Centre for Entrepreneurial
Learning (NSRCEL), IIM Bangalore, India; (2) International Consortium for
Innovation and Entrepreneurship Research (ICIER); (3) European Foundation for
Management Development (EFMD); (4) Council for Small Business and
Entrepreneurship (CSBE), India; (5) Federation of Indian Chambers of Commerce
and Industry (FICCI), Karnataka State Council, Bengaluru, India; and (6) The Indus
Entrepreneurs (TiE), Bangalore Chapter, India. We are especially thankful to FICCI
and TiE for bringing in the much-needed practitioners’ perspectives to this con-
ference by organizing two panel discussions.
We are happy that this conference attracted the attention of researchers from
different parts of the world. We received about 120 abstracts for initial review and
accepted about 70 full papers for presentation after a rigorous review process.
We thank all the paper presenters and appreciate their valuable contributions to the
conference.
Among the 70 papers that were presented at the conference, 21 short-listed
papers were sent for a double-blind review. Based on the review comments of the
experts, 18 papers were finally selected for publication in this volume. We express
our sincere thanks to each one of our expert reviewers for contributing their time
and commitment toward providing critical review comments on the short-listed
papers, which has helped in enhancing the research-rigour of this volume.
Academic and administrative support for the conference was provided by
Dr. Princy Thomas, Mr. P. K. Thomas, and Ms. Vishnupriya Hymavathi. Secretarial
and other related support was provided by Mrs. R. Gowri and Mr. N. Ravi, all from
IIMB. The general academic and administrative support received from various
departments of IIMB (including the infrastructure facilities) added great value to the
conference. Faculty colleagues helped us with the review of papers for their final
selection into the edited volume. We extend our heartfelt thanks to all of them. Last
Acknowledgements xi
but not least, we thank the publication team from Springer Nature’s India office,
particularly Ms. Sagarika Ghosh and Ms. Nupoor Singh, who worked with us in
bringing out a well-vetted and high-quality publication.
Mathew J. Manimala
Kishinchand Poornima Wasdani
Abhishek Vijaygopal
Contents
Part I Introduction
1 Transnational, Ethnic and Returnee Entrepreneurship:
Perspectives on SME Internationalization . . . . . . . . . . . . . . . . . . . . 3
Mathew J. Manimala, Kishinchand Poornima Wasdani
and Abhishek Vijaygopal
xiii
xiv Contents
xvii
xviii Editors and Contributors
Contributors
1.1 Introduction
Globalization is here to stay, in spite of the recent happenings in global politics (like
Brexit, Trump’s policies, Qatar issue, etc). One reason for the globalization
imperative is that the revolutionary changes that have taken place in the information
and communication technologies (ICT) are not easy to reverse. The channels of
information flow have multiplied in unimaginably large numbers so that they reach
every nook and corner of the world. The evolution and accessibility of the Internet
has proved to be a key enabler for e-commerce, which in turn has helped businesses
to become more proximate even to their distant customers. Undoubtedly, the
Internet has helped the otherwise local businesses to at least think global, thus
giving rise to a new term “glocal”, which denotes a process of thinking globally
while acting locally. Globalization of the thought process alone would be a major
reason to believe that globalization would continue to have an impact on all spheres
of human activity.
One of the inevitable consequences of the ICT revolution is the emergence of the
knowledge economy, which has now grown much larger in value than the
M. J. Manimala (&)
Indian Institute of Management Bangalore (IIMB), Bengaluru, India
e-mail: [email protected]
K. P. Wasdani
School of Business (SoB), Royal Roads University (RRU), #2005, Sooke Road,
Victoria, BC V9B 5Y2, Canada
e-mail: [email protected]
A. Vijaygopal
N. S. Raghavan Centre for Entrepreneurial Learning (NSRCEL), Indian Institute
of Management Bangalore (IIMB), Bannerghatta Road, Bengaluru 560076, India
e-mail: [email protected]
and other selected regions (PTI, 2017). It seems that the globe is vast enough to be
open and active at some places despite the trends to the contrary in other parts.
India too had been a closed economy till 1991. It was during the historic budget
presented in June 1991 that the Government of India announced its policy of
economic liberalization. In effect, the new policy was a triple-helix policy of
Liberalization, Privatization and Globalization (LPG), facilitated by the revolu-
tionary changes taking place in ICT. While the economic liberalization has facili-
tated the cross-border movement of people and goods, it is the technological
changes that made services move across borders. A customer can now choose to
buy an international edition of a book through the Internet, decide on the channels
he/she wishes to watch on cable television through Direct-to-Home
(DTH) technology and choose the most economical mobile network service pro-
vider. In other words, the new technologies have a tendency to militate against
economic isolationism and thereby give a greater push to transnational and returnee
entrepreneurship as well as SME internationalization.
The expansion in trade and commerce across borders has had its benefits and
provided impetus to a new class of risk-taking and entrepreneurial individuals, who
have chosen to establish enterprises that offer their products and services to a global
clientele. Any business expansion foray cannot be bereft of an understanding and
appreciation of the local tastes of individuals in the countries the business intends to
serve, and also needs to take into account local business regulations and principles
to secure greater advantage over its competitors. Similarly, global businesses that
serve local interests would need to be ahead of the locally established, and some-
times, traditionally robust, businesses that operate within the same geography and
offer better products and services to the same customer base, for which they may
utilize the knowledge resources from another country. The dual role of knowledge,
namely that of local knowledge about customer preferences and the regulatory
environment of the country of operation and the global knowledge about the
technology and resources available in other parts of the world, is therefore critical
for the internationalization of businesses. It is in this context of “glocalized”
business operations that transnational and returnee entrepreneurs have a special
advantage, as they have the knowledge of the culture and regulatory environment as
well as access to the resources and networks of at least two countries. Such
advantages are highlighted in several studies of transnational and returnee entre-
preneurs (Tan, 2008; Chen & Tan, 2009; Patel & Conklin, 2009; Fuller, 2010; Lan
& Zhu, 2014; Clark & Li, 2015; Rana & Elo, 2017).
without any specific reference to migration or host countries (McDougall & Oviatt,
2000; Yeung, 2000). In other words, TE is a specific case of IE involving only two
countries, preceded by a process of migration and, as mentioned above, supported
by a process of “reverse brain drain” or “brain circulation” as it was characterized
by Saxenian (2005). In fact, TE is often seen as a fitting antidote for brain drain
(Varma, 2011).
Although it is quite intuitive to assume that TE is a branch of, or has evolved
from international business (IB) or IE, Drori, Honig, and Wright (2009) point out a
critical difference. Studying IB/IE involves examining a firm as the unit of study,
while studying TE usually places an emphasis on the dual nature of the TE. They
have defined TEs as “social actors who enact networks, ideas, information, and
practices for the purpose of seeking business opportunities or maintaining busi-
nesses within dual social fields, which in turn force them to engage in varied
strategies of action to promote their entrepreneurial activities” (Drori et al., 2009,
p. 1001). There have also been arguments that entrepreneurship by immigrants
focuses only on their “causes, strategies and economic impact on the host society”,
while studying TE also focuses on these aspects in the home country (Baltar &
Icart, 2013). The key here is to note that TEs engage “simultaneously in two or
more socially embedded environments” (Drori et al., 2009, p. 1001) and can use
their resources from both contexts creatively. TE has also therefore been stated as
“a challenge to conventional ethnic entrepreneurship and ethnic economy studies
that have overwhelmingly focused on immigrants’ entrepreneurial activities within
the host country” (Chen & Tan, 2009, p. 1079).
The process of reverse brain drain indirectly suggests a difference in the nature
of the TEs’ migration. While “migration” often implies the movement of poor
unemployed people including refugees and asylum seekers from one country to
another in search of employment, income and security, the migration that precedes
TE is likely to be of a different kind; it is mostly about the movement of the
educated class (often from a developing country to a developed one—and hence
called “brain drain”) in pursuit of further education as well as high-profile jobs.
Such a process would obviously have implications for the quality of businesses they
would be starting later, which is why TEs (and returnee entrepreneurs, as discussed
in the next section) would often be the vehicles for bringing new technology-based
businesses to their home countries. It should, therefore, be clarified that TEs are part
of IE, on the one hand, and migration on the other, but with significant differences
(Leavitt, 2001), as is also explained with reference to the “traditional” versus
“transnational” views on immigration by Lima (2010). A major difference is that
migration is conceived as a uni-directional process, whereas transnationalism is a
bidirectional one. TEs, unlike the perceptions traditionally held on immigrants, do
have acceptable levels of social status and therefore are able to maintain/develop
their own networks in at least two different economic and social contexts. They use
these networks along with the associated channels of information for the purpose of
furthering their business interests (Glick-Schiller, Basch, & Blanc-Szanton, 1992;
Portes, 1996; Portes, Guarnizo, & Haller, 2002). Their dual geographical locations
help them develop a “dual habitus” mindset, which enables the TEs to identify
1 Transnational, Ethnic and Returnee Entrepreneurship … 7
unique opportunities and exploit them especially by using their network resources
to the advantage of their business initiatives (Drori et al., 2009). While it is a
logically tenable proposition that TEs would be more successful because of their
“dual habitus” status, it is rather surprising that some studies (e.g. Yavuz, Sapienza,
& Zaheer, 2012) have found TEs to be relatively less successful in comparison with
other IEs, which may be due to “over-confidence” on the part of the TEs, according
to Yavuz et al. (2012).
Notwithstanding such occasional findings to the contrary, the general consensus
is that immigrants are more likely to be successful entrepreneurs, especially of the
TE variety. The reasons identified for the greater entrepreneurial proclivity among
migrants are as follows: (i) poverty, unemployment and discrimination experienced
by them in the host countries (Aldrich, Cater, Jones, & McEvoy, 1983; Aldrich &
Waldinger, 1990), which incidentally represents the view of the pre-globalization,
pre-ICT period that regarded migrants as refugees who had to start necessity-based
ventures for their survival; (ii) the feeling of being uprooted, which creates an
intense desire to get reconnected and thereby leading to the development of “glo-
calized” networks (Handlin, 1973; Portes, 1996; Chen & Tan, 2009); (iii) induction
into a new culture while retaining the old one, whereby developing a “dual habitus”
mindset and the orientation/facilitation of dealing with new cultures (Portes, 1996;
Portes et al., 2002; Dana, Etemad, & Wright, 1999; Drori et al., 2009; Pavlov et al.,
2014); (iv) revolutionary changes in information and communication technologies
(ICT) and the emergence of the knowledge economy with increasing possibilities of
doing business online (Lima, 2010; Vertovec, 2004); (v) declining population in the
developed countries and the need felt for migrant workers (IOM, 2010;
Glick-Schiller, 1999); (vi) changing geopolitical situations including the shifting
policies on globalization (Crick, Chaudhry, & Batstone, 2001; Crick & Chaudhry,
2013; Newland & Tanaka, 2010).
The phenomenon of ethnic entrepreneurship (EE) offers a plausible link between the
immigrant diasporas and TEs. Diaspora networks in host countries have been known
to provide both business and personal support to members of their communities who
have migrated to that host country. Chaganti and Greene (2002) note that ethnic
entrepreneurs have often been identified in terms of “self-identification as belonging
to a particular ethnic group or assignment to a group according to an ethnically
identified surname” (p. 127). An ethnic economy is one that “consists of co-ethnic
self-employed and employers and their co-ethnic employees” (Light & Gold, 1990,
p. 4). From their sociological perspective, Light and Gold (1990) also highlighted
the concept of the “middleman minorities” (p. 6), defined by Becker (1956) and
Blalock (1967), and later explained by Bonacich (1973), and the “ethnic enclave
economies” (p. 11). The concept of an “immigrant enclave” proposed by Wilson and
Portes (1980) was a precursor to understanding the ethnic enclave economy.
8 M. J. Manimala et al.
cultural and organizational practices that operate in the home and the host countries
(Yeung, 2002). As TEs maintain business and cultural ties with contacts in two
different countries, it would be impossible to conceive of their establishing and
maintaining a base in two geopolitical spheres without the support offered by their
networks, both business and ethnic.
The phenomenon of transnationalism can be understood as a precursor to the
emergence of the phenomenon of transnational entrepreneurship (TE). This is
because only after understanding the shift in perceptions of migration in recent
times, one can also understand how specialized forms of entrepreneurship such as
ethnic entrepreneurship (EE) and TE have become part of current discussions. TE,
therefore, can be understood to have stemmed from the emergence of transna-
tionalism, or from engendering transnationalism. Glick-Schiller et al. (1992) studied
transnationalism as a different method of analysis to understand migration. They
argued against the contemporary view of that time that migration itself meant
uprooting oneself from a society and currently held beliefs and adjusting oneself to
another society with new beliefs. As TE is distinguished from international
entrepreneurship (IE) in the literature, a parallel may exist in understanding
transnationalism as a different form of migration. Being rooted in a “host” country
did not necessarily mean severing ties with one’s “home” country. Instead, one
could maintain multiple relationships—economic, familial, organizational, political,
religious, and social—across borders (Glick-Schiller et al., 1992). Vertovec (1999,
p. 447) attempted a definition for the phenomenon when he stated that transna-
tionalism “broadly refers to multiple ties and interactions linking people or insti-
tutions across the borders or nation states”. The narrative about transnationalism,
however, is incomplete without a discussion on how transnational identities within
individuals have evolved over time.
Mavrommatis (2015) studied ethnic entrepreneurs who have settled down in
Brick Lane, an inner-city area in East London, which is now famous for its migrant
businesses such as “curry houses”. Although the initial settlers were of Irish and
Jewish origins, the diaspora that has settled down in the area from the 1950s has
primarily been from South Asia. The area is today dominated by a strong presence
of Bangladeshi immigrants, although there are Indians and Pakistanis as well.
Different types of businesses—Internet cafes, money transfer, mobile phone stores,
halal butchers, leather businesses, etc.—dot the area, but the dominant business
from the mid-1990s has been that of the “curry houses”, which is the nickname in
the UK for Indian restaurants. The native East Enders left the neighbourhood for
other areas in the city, in the aftermath of the influx of South Asians. Initially, it was
rare for the immigrants to mix with the locals, but over time, they adapted them-
selves to the new country in terms of language and business culture to integrate
themselves with the local populace. Migration had produced a spatialized dimen-
sion in their thinking that was categorized into “where I was” and “where I am
now”. With the passage of time and progressive adaptation, there has been a shift in
paradigm from the earlier post-colonial and post-war period to the modern day,
which is characterized by the emergence of a “negotiated transnational identity”
(Mavrommatis, 2015, p. 98). This case could be viewed as one that provides a good
10 M. J. Manimala et al.
operated on the basis of two types of trust: (a) reciprocity-based and (b) enforceable
contract-based. The close-knit information networks also helped in transferring
technical and market knowledge from the well-established and better-developed
centres in Europe (primarily Antwerp in Belgium) and Gujarat (mainly in and
around Surat) in India. The networks also helped in sorting out problems among the
community and kept any community dissent at bay from the external world (Henn,
2013). Ironically, it was the ban on the import of polished diamonds in post-war/
post-Independence India that led to the development of “transnational production”
of polished diamonds. Since there were only a few remnants of the diamond-cutting
industry in the region coupled with some primitive knowledge about mining, it is
rather surprising that this region has emerged as a hub for diamond cutting and
polishing today, which can be attributed primarily to the strong family and com-
munity networks of these people in different countries (Henn, 2012, 2013).
As noted above, a special feature of the Palanpuris’ transnationalism was the
strategy of transnational production. They exploited the constraint of high labour
costs being faced by the foreign operators and sourced the rejected pieces of stone
from Antwerp to be cut and polished and thereby created economically viable
products that could be sold from India (Henn, 2013). Peers from their community
and family residing in Antwerp provided the local Palanpuris with external help
regarding technological expertise by connecting them to technical advisers from
Belgium who helped them learn the latest production techniques of the time (Henn,
2013). Such instances of transfer of competence allowed for the expansion of the
industry in India by the Palanpuris. This transfer of knowledge provides an inter-
esting example of the ability to create a “glocal” industry through the phenomenon
of transnational entrepreneurship, as it led to the establishment of a local industry in
the developing world, which, over time, developed global competencies and
techniques required to handle and mould a half-processed product sourced from the
developed world. Such examples would also do well to alter deep-rooted notions of
migration itself, which has been viewed as “uprooting” (Glick-Schiller et al., 1992)
and as developing countries’ offerings of cheap labour to the developed countries in
the context of a globalizing world (Varma, 2011). The idea of a “glocal” business
means that one needs to manufacture or reprocess locally, but would need to do so
to acceptable global standards for a globally competitive market.
Transnational migration offers an interesting foil to the erstwhile phenomenon of
“brain drain” and can help in offsetting this phenomenon (Varma, 2011). This can
also be mutually beneficial to the “host” country, as immigrants would interact in
“fluid social spaces” that are also inhabited with non-migrants and rework on a
constant basis to enable the flow of “people, money, and social remittances (ideas,
norms, practices and identities)” in a dense manner within fluid social spaces (Levitt
& Jaworsky, 2007, p. 132). With reference to the process of “brain drain”, Varma
and Varma (2009) identified the five key reasons (apparently acting in stages),
explaining the Indian entrepreneurialism in the USA in a progressive manner,
which are as follows: (i) permissible immigration policies which allowed Indian
migration; (ii) high standard of educational attainment that trained the Indian
migrants to work in the American system; (iii) possessing a combination of
12 M. J. Manimala et al.
business environments. The RE has the advantage of being able to tap into both the
diaspora and domestic networks that he/she is a part of and can contribute to the
economic development of his/her country by setting up international ventures.
Most of the studies in the context of REs have been in the domain of
high-technology industries. This has possibly been the case because immigrants
from developing countries now have greater access to the enhanced standards of
graduate education (including programs taught in English) in line with the world-
wide standards and to technical knowledge across learning platforms. Globalization
has also brought with it global standards of product manufacturing and service
delivery. The availability of cheaper and well-trained personnel in the developing
countries provides REs the opportunity to set up business ventures that export
services and products to clients in the developed ones. When viewed in the context
of the developing economies in Asia, which offer exciting opportunities to those
willing to return to their home countries, the erstwhile “brain drain” can be
understood to have given way to a new phenomenon of circular migration called the
“brain circulation” (Saxenian, 2000).
Even in cases where REs may not choose to maintain business links with their
erstwhile “host” countries, they would still be better off with the business exposure
and knowledge gained in their “host” countries during their stint there, as this
would provide an impetus for them to promote and maintain global standards, while
combining the inherent advantages offered by their previous knowledge of ethnic
and business network in their “home” countries. Such REs have been called “clean
break” returnees (Wright, Liu, Buck, & Filatotchev, 2008). In general, REs, par-
ticularly in the context of emerging markets in developing countries, have been
acknowledged for their different contributions in the technical and economic fields.
A TE venturing into a new sphere of activity (or habitus) would often face the
liability of foreignness, as would someone who has returned to their home country.
While those in foreign countries would naturally be perceived as outsiders, the
returnee entrepreneurs (REs) would be likely to face this issue when they return
home to establish or renew business ties after having spent some time in a host
country. In such cases, they may be perceived to be lesser attractive to
“resource-controlling” actors like investors, and this would imply that they face
more challenges in mobilizing resources in their home countries (Obukhova, Wang,
& Li, 2012). This “returnee liability” could take place due to their having been
away from their “home” countries for several years. This could be characterized by
feelings such as a lack of fit, a lesser degree of legitimacy, deficiency in local social
networks and difficulty in mobilizing resources. Such liabilities could be overcome
by using local networks (Obukhova et al., 2012).
Unlike the TEs who have been well-established in their host countries for a
period of time and have network connections in their home countries, the REs could
face issues in adjusting to the business culture, and may experience some lack of
institutional support when they try to begin their new ventures in their home
country, although this could be, to some extent, buffered by virtue of their ethnic
identity and their being identifiable with their local comrades. In the context of the
research on REs, it can be observed that most of the research, particularly in the
14 M. J. Manimala et al.
are the lack of support for protecting innovation, especially for patents registered
outside the country and issues with mobility due to suspension of the dual citi-
zenship (De Silva, 2015).
Finally, a comparative study on returnee entrepreneurs in high-tech industries
(ICT and ITES) in India, Taiwan and China highlights the critical difference that
government support can make for the RE and their ventures. The Taiwanese
government actively supported the development of the electronics and hardware
industries. In China too, there was support for the establishment of industries by the
government, but the main “returnees” in China were not those who returned to the
country for good but those who initially returned to the country to join the multi-
national companies (MNCs) that were operating there in view of the liberalization
policies followed by the government. In contrast, in the case of India, there was no
particular evidence to show that the growth of high-tech firms was due to the
“returnee” phenomenon supported by government policies (Kenney, Breznitz, &
Murphree, 2013). The relative performance of the electronics industries in the three
countries provides ample testimony to the critical role played by the government
policies in promoting RE/TE ventures.
As we have noted above and illustrated through the findings of several studies, TEs,
REs and ethnic entrepreneurs have a natural tendency to grow international on
account of their “dual habitus” mindset and connections with the diaspora and
ethnic roots, especially when supported by the conducive policies of the concerned
governments. In the ensuing sections, we will review the theories on internation-
alization of business as well as provide a brief outline of the factors that support
internationalization, as identified by various research studies on the issue.
In trying to generalize their observations and create a model for the process of
internationalization, Johanson and Wiedershiem-Paul (1975) and Johanson and
Vahlne (1990) argued that the process of internationalization involved a gradual
commitment of resources towards securing markets, once these markets had been
identified. Internationalization of the firm involved policies and strategies related to
two aspects—those of state and those of change. The state aspects are the market
commitment and market knowledge, while the change aspects are the current
business activities and the commitment decisions. The final outcome will depend on
the interplay between market knowledge and commitment decisions, which are the
two key drivers for the firm’s decision to internationalize (Johanson & Vahlne,
1977).
In contrast to the stepwise and the incremental process proposed by Johanson and
Vahlne (1977, 1990) is the concept of a “born-global” firm. This concept was first
proposed by McKinsey and Co. in a survey for the Australian Manufacturing Council
(McKinsey & Co., 1993; Rennie, 1993). The concept of international new ventures
(INVs) was defined by Oviatt and McDougall (1994, p. 49) as “a business organi-
zation that, from inception, seeks to derive significant competitive advantage from the
use of resources and the sale of outputs in multiple countries”. In the Australian
context, Cavusgil (1994, p. 18) made note of two new developments about exporting
firms that “small was beautiful” and that “gradual internationalization was dead”. The
born-global firm concept may seem akin to the concept of radical innovation, while
the Uppsala model is to incremental innovation. Knight and Cavusgil (2004, p. 124)
have defined born-globals to be “business organizations that, from or near their
founding, seek superior international business performance from the application of
knowledge-based resources to the sale of outputs in multiple countries”.
The internationalization pattern for these firms may not necessarily follow the
norms of physical closeness or psychic distance (Knight, Bell, & McNaughton,
2001). Such firms enter distant markets or multiple countries and form joint ven-
tures right away (Rasmussen & Madsen, 2002). A special feature of these
born-global firms is that they can be relatively small even while operating inter-
nationally. They may have annual sales values of less than $100 million and have
less than 500 employees. They are likely to begin exporting within two years of
establishment and export at least 25% of their total production (Knight & Cavusgil,
1996). However, Persinger, Civi, and Vostina (2011) have argued that this defi-
nition may not be suitable for born-global firms in emerging economies, in which
case the figures would need to be revised to annual sales of about $50 million, a
strength of less than 500 employees and a 25% export rate being achieved in about
three to four years after the establishment of the firm.
This sense of urgency for hastening the process of internationalization came
during the 1980s, which was characterized by the decline and fall of many com-
munist and socialist regimes around the world and the emergence of capitalism in
18 M. J. Manimala et al.
those and many other regulated economies, with its promises of free market com-
petition and meritocratic rewards for economic activities. Around this time, there was
also a revolution in communication technologies, with the result that the increased
reach of the Internet made communications easier, faster and less expensive. Though
there is better access to information now, that alone is not sufficient to explain the
emergence of born-global firms; the political climate has also to be conducive.
Oviatt and McDougall (1994) argued that INVs are start-ups having international
origins and resource commitments in more than one country, and hence the stage
theory of evolution that applied to multinational enterprises (MNEs) did not apply
to them. Though the large firms had their own advantages for internationalization,
their decision-making processes can be slow and therefore may move only in
stages. The small firms are more agile, and the changing dynamics in the business
environment has enabled them to internationalize. Factors like improved commu-
nication infrastructure, increased homogenization in foreign markets and mobility
of human capital could promote internationalization of firms at a faster rate, and not
necessarily in stages. These developments also allowed for markets to link up to
one another across geographical boundaries, which did not necessarily imply an
advantage for the large-sized firms (Oviatt & McDougall, 1994).
Instead of a market commitment and knowledge-based approach, Oviatt and
McDougalll (1994) proposed an alternative model which would be more relevant to
the changes experienced in the business world. This model relied on transactions
defined by four elements: (i) internalization of some transactions; (ii) alternative
governance structures; (iii) foreign location advantage; and (iv) unique resources
(Oviatt & McDougall, 1994).
In the more recent literature, there have been references to a tendency to localize
the expansion of the firm at the initial stages (which means that the firm would
expand up to certain areas or regions around its primary area of operation
depending upon protection of its assets, mitigation of transaction costs, valuation of
its innovations and costs of agency). Such firms may choose to carry out either a
direct or an intermediated mode of internationalization, but would give priority to
the local conditions, and hence these ventures deserve to be called “born-local” due
to the norms of choices they make (Acs & Terjesen, 2013).
Gereffi, Humphrey, and Kaplinsky (2001) identified and discussed a new phe-
nomenon in manufacturing that emerged during the late twentieth century (which
they called the “global value chains”), wherein different sourcing-contracting
mechanisms were used through systems of governance to put together goods and
services, which often took place across national borders. In these arrangements, the
provider and the consumer were not necessarily located at arm’s length. A global
value chain (GVC) does not necessarily restrict itself based on the size of the firm.
The value chain could comprise firms of different sizes that have attained capa-
bilities in delivering specialized goods and services which span national borders
1 Transnational, Ethnic and Returnee Entrepreneurship … 19
and come together through the GVC. Such GVCs were particularly prevalent in the
sectors of garments, electronics and agricultural commodities. Gereffi et al. (2001,
p. 1) also clarify that the lead firm (or the final firm that delivers the goods or
services under its umbrella) could be a multinational or a large firm, which “plays a
significant role in specifying what is to be produced, how and by whom”. The GVC
enables entrepreneurs to cater to specified markets through their niche competencies
while being a part of the big picture. Consistent with the above definition of
internationalization, they redefine globalization in the productive sphere and state
that it “implies functional integration between internationally dispersed activities,
and (that) the value chain perspective is an effective means of conceptualizing the
forms that this integration takes” (Gereffi et al., 2001, p. 2).
A few interesting observations about the GVCs include the following: (i) they
can take the form of inter-firm networks and quasi-hierarchical relationships;
(ii) lead firms derive their power from two attributes, market power and positioning;
(iii) the ability of one firm in the chain to govern the activities of the chain is
defined by supplier-monitoring and specification of standards; and (iv) the creation
of governance structures is mainly to ensure coordination through supplier speci-
fication and involvement as well as to address and manage any market risks that
may arise due to supplier failures (Gereffi et al., 2001).
Social Networks
Transnational entrepreneurs (TEs) who usually have a bifocal orientation have the
advantage of deriving benefits from their network associations in both their host and
home countries. Social networks play a vital role in propagating the intent and value
propositions of entrepreneurs. TEs utilize the comparative advantage that is gener-
ated by the value they derive from their networks in both the contexts they operate.
There are many benefits that networks offer to the TEs. For one, they could help
the TEs in identifying newer opportunities in foreign or hitherto alien markets (Ellis
& Pecotich, 2001). Social ties with varying degrees of antecedent familiarity have
been found to influence the exporting decisions by Small and Medium Enterprises
(SMEs) in a study on Australian SMEs. These ties have also been used as proxies
for market scanning and research and to minimize risks (Ellis & Pecotich, 2001).
The conventional image of a TE would most likely be of an individual who is
educated (possibly having earned a foreign academic degree) and has work expe-
rience in the host country, making him/her familiar with the institutional advantages
that exist in the host country. Many immigrants from South Asia have travelled to
western countries such as the UK, the USA or Canada to study and have stayed on
there while working on a job. They possess the required international experience
and qualifications, along with knowledge of the market and the kind of services and
products that are in demand. TEs’ exposure in the host country settings would, no
doubt, have helped them expand their professional and personal networks, and the
host country’s citizens interacting with them would probably perceive them to be
less foreign and feel more comfortable to deal with them. TEs’ networks would thus
offer them the benefit of access to resources, especially in the early stages of setting
up their enterprises (Chetty & Campbell-Hunt, 2004), and they would have a head
start when compared to entrepreneurs who are just beginning to internationalize
their business from their respective home countries.
In their endeavour to migrate to another country and set up business in a foreign
country, TEs would no doubt face challenges, but they may often feel that the
conditions are better in the host country than the home country, as the migration is
generally from a developing nation to a developed one. There may be several
institutional deficiencies in their home countries, because of which they may feel
1 Transnational, Ethnic and Returnee Entrepreneurship … 21
more comfortable to start and operate businesses from the host countries. In a
comprehensive review of the relevant literature, Manimala and Wasdani (2015)
identified the major deficiencies of the entrepreneurial ecosystem of emerging
economies, which are: (i) underdeveloped institutions; (ii) unclear and inconsistent
policies; (iii) inadequate governance; (iv) disjointed infrastructure; (v) limited
funding options; (vi) inhibiting culture; (vii) personal rather than professional
networks; (viii) ill-funded and ambivalent system of education; and reluctant and
restricted outlook for internationalization.
Stronger ties in a large network of the TE could provide a larger market base for
foreign operations. An increased frequency of interaction would enable effective
knowledge transfer. Networks also offer the benefits of providing access to
knowledge for the TEs, for whom the more relevant types of knowledge are about:
foreign competitors; foreign culture; foreign political and legal environment; for-
eign business opportunities and customers; and advancements in technology
(Musteen, Francis, & Datta, 2010).
In a study in the Chinese context, Wang, Wang, Huang, and Deng (2012) found
that behavioral commitment signified by the willingness to deliver value to each
other was more important than perceived trustworthiness of the member, for the
success of international business, especially in heterogeneous networks that con-
tained more structural holes and weak ties. In an earlier study, it was observed by
Burt (1997) that heterogeneous networks have more structural holes or weak ties.
As TEs can benefit from network affiliations in two different countries, they can
potentially benefit from both personal and professional networks in both their home
and host countries, which may have a positive impact on the degree of interna-
tionalization. According to Nahapiet and Ghoshal (1998), three types of embed-
dedness influence the speed of internationalization, which are as follows: relational
embeddedness (signified by personal ties), cognitive embeddedness (signified by
language commonality) and structural embeddedness (signified by a lower degree of
geographic diversity). In a later study, Rusinovic (2008) proposed the concept of
“transnational embeddedness”, which is based on the concept of “transnational
capital” that can be of help to TEs in transnationalizing their ventures. In other
words, in order for a migrant to be able to do business with his/her country of origin,
it is necessary for him/her to possess transnational capital, which is a combination of
three types of capital, namely economic capital (money to invest and travel), cultural
capital (language, knowledge and international experience) and social capital.
In a similar vein, Etemad (2004) defined the pull and the push factors that
supported or curtailed internationalization. The push factors identified were internal
to the firm, such as the founder, operations, competition and strategy, investments
in Research & Development (R&D), innovation and technological change, products
and markets and international operations. The pull factors (which are external to the
firm) included liberalization of international markets, advances in information
technology, communication and transportation and the presence of market gaps.
TEs have to deal with challenges on various fronts. As they have business ties in
both the home and the host countries, they need to adopt a bifocal approach rather
than a uni-focal one. By virtue of their position, TEs need to leverage upon the
22 M. J. Manimala et al.
comparative differences among the various types of capital available to them, pri-
marily because such capital is not valued identically in different countries. This
means that they must take advantage of the differences in valuation in different
types of capital—economic, social and cultural—across the different types of
contexts they operate in (Patel & Conklin, 2009).
According to Wahba and Zenou (2012), returnee entrepreneurs (REs) face
limitations in starting a business back home due to their weak social capital.
However, their financial and experiential capital gained during their stay in the host
country helps them in overcoming this limitation. First of all, their business could
be in a niche area with advanced technology, which could be new to the local
markets. Secondly, they may use their human capital to develop the relevant social
capital needed for their business. Prashantham and Dhanaraj (2010) noted the role
of networks possessed by REs in the growth of their ventures. As the REs had more
international networks by virtue of their international experience, the ebb and flow
of interactions, which followed a punctuated rhythm due to the social distances,
resulted both in the decay and replenishment of the social capital, where the overall
impact was positive on the growth of their businesses in international markets.
In this context, it should be noted that the development of the social capital is a
function of the human capital of the entrepreneur, as observed by Goxe (2010), who
states that human capital interplays with social capital in order to further strengthen
it and to derive benefits from the network members and vice versa. Social capital
feeds into the development of human capital traits such as international orientation,
international skills, management knowledge, sectoral connections and environ-
mental perception (Goxe, 2010). A higher degree of embeddedness in the social
network helps in deriving higher gains and in overcoming the challenges of new-
ness and foreignness.
Entrepreneurs who have low human capital benefit from strong ties among
members of the same identity when compared to foreigners. Due to low human
capital, their networks are built by virtue of their inheritance, religion and other
associations. In the Chinese context, tie-based practices are more successful than
market-based ones. SMEs that try to internationalize in the country would therefore
want to develop ethnic and cultural ties with the locals, which will help them in
dealing with information and resource scarcity. The absence of human capital could
be overcome by creating more ties and utilizing them for business needs. The
interaction between the two types of capitals could define the role played by social
capital in internationalization (Goxe, 2010).
The proliferation of technological innovations across the world has caused the
national boundaries to blur. This is especially true in case of the Information
Technology (IT) industry. Advances in digital communication and media today
allow for an airport in Germany to run its operations smoothly thanks to software
written by Chinese engineers. Managing a retail outlet in the UK is easier because
of the specialized software prepared in India. IT has certainly made the world
“flatter” and has perceptibly shortened the communication divide between the
developing and the developed countries.
Saxenian (2002, p. 184) has noted that “advances in communication and
transportation technologies and changes in the structure of technology markets and
competition” have acted as facilitators for transnational technical communities.
1 Transnational, Ethnic and Returnee Entrepreneurship … 25
Knight and Cavusgil (2004, p. 124), in their definition of born-global firms, have
highlighted the application of “knowledge-based resources”, thereby implying that
technology had a role to play in the internationalization process.
Data have today become a building block of enterprises in many ways. With the
increased availability of data, there has been an increased demand by customers to
place real-time data at their fingertips on demand. The very nature of this phe-
nomenon can be understood through bits and bytes, which could determine the
length of a queue of aircraft waiting for take-off at an airport, or confirm the receipt
of payment for the services of a food caterer through a wire transfer by his customer.
The proliferation of Internet technology and e-commerce has been a sort of equalizer
for both Multinational Enterprises (MNEs) and Small and Medium Enterprises
(SMEs) due to its accessibility and affordability (Jaw, Chang, & Chen, 2006).
When viewed from the lens of the lowest common denominator, this phe-
nomenon, coupled with the increase in demand for innovative and faster services
and products from across the world, has certainly paved the way for “flat enter-
prises”. These flat enterprises employ skill and labour from one part of the world
(usually in the developing world) to deliver services and products which serve the
requirements of people in another (usually in the developed world).
Among the South Asian economies, India is well-known for the recent IT boom.
Software engineers working out of offices in Bengaluru and Gurugram are today
creating smart card systems and award-winning animation movies for customers
from the developed world. It is in this context that an aspiring entrepreneur who has
a “dual habitus” could have an advantage over the others. The knowledge and
experience of having worked in or having run an enterprise in a country away from
one’s home could be a significant advantage. This human capital would enable
identification of the correct target market and the associated risks.
Saxenian (2002) asserted that the transnational entrepreneurs were going to be an
important community in the future, as they straddled many assets including “tech-
nical information, trust and contacts”, which, at that time, had not been accorded due
importance in the debate on globalization. Transnational communities had the
potential to become agents for the growth of technology entrepreneurship as they had
the potential for the evolution of global production networks by facilitating the
“international diffusion of knowledge and upgrading of local capabilities” (p. 183).
The erstwhile “brain drain” had given way to “brain circulation”, as there was quicker
diffusion of knowledge through networks of engineers and scientists between distant
regional economies. These technical communities could come into existence
following the advances in information and communication, and transportation
technologies, which had brought about changes in the technology markets and
competition structures. There were more independent enterprises which catered to
the needs of the technology value chain in a decentralized manner (Saxenian, 2002).
Global production networks could now be in place mainly because of the
emergence of transnational technical communities, whose reach spanned across
national borders. While technical communities previously existed within corpora-
tions, the emergence of transnational communities offered an alternative which
implied that the multinational corporation was no longer the only method of
26 M. J. Manimala et al.
SME would influence its strategy for internationalization. Looking at the human
capital of the founder alone would mean having a top-down approach, but this would
probably mean taking a one-sided view of things. Human capital available at the
employee level, when viewed in the aggregate, represents a tremendous knowledge
differential. Therefore, it is necessary to have a high degree of discernment when
human capital is allocated at the organizational level during the process of interna-
tionalization. This process must accommodate for handling both the external and the
internal issues related to internationalization, namely the exigencies that the firm may
perceive in an international environment and the specialized work knowledge
available within the firm (Onkelinx, Manolova, & Edelman, 2015).
SMEs are leaner organizations when compared to their larger counterparts. The
obvious assertion is that this combination of specialized product and process
knowledge, which forms important components of the human capital that the SME
possesses, would be vital in helping to determine the internationalization strategy
that it would like to follow. The predominant choices of internationalization
strategies are the gradual strategies (Johanson & Vahlne, 1977), and the born-global
model (Oviatt & McDougall, 1994).
Onkelinx et al. (2015), in the Belgian context, found that while following the
gradual method of internationalization, the SMEs tended to maintain their level of
human capital and focused more on experiential learning, which was more in line
with Johanson and Vahlne’s (1977) gradual model of internationalization.
However, SMEs focusing on a more rapid mode of internationalization are subject
to many pressures, and this may not allow them the time to develop organizational
capabilities. This leads them to a situation in which they choose to invest in
employees possessing the necessary human capital required to take the firm inter-
national. While these investments do pay off in the initial stages, any further
investment in human capital beyond a point (after which an optimum level has been
accumulated) in such firms tends to be counterproductive. This is because such
SMEs cannot invest the time required to develop their organizational capabilities,
including the creation of proper systems to manage employee talent effectively
(Onkelinx et al., 2015).
These and similar other findings open up the debate about the exact nature of
measuring human capital that could influence decision-making about the interna-
tionalization of SMEs in future.
1.6 Conclusion
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Author Biographies
2.1 Introduction
Small and medium enterprises (SMEs) occupy an important place in most of the
economies. This is mainly because they contribute significantly to output,
employment, and exports in various economies (Westhead, Wright, & Ucbasaran
2002). An important characteristic of SME growth in the post-globalization era is to
achieve the objective of growth through its intense expansion in the global market
(Lu & Beamish, 2001).
Internationalization can be viewed as a multidimensional event that includes
inward, outward, and cooperative operations (Ruzzier, Antoncic, & Konecnik,
2006). Internationalization of business facilitates SMEs to adopt better management
practices, knowledge, and technology and subsequently can enhance their com-
petitiveness in the global market (Pangarkar, 2008; Santhosh & Bala Subrahmanya,
2016). Wolf and Pett (2000) state internationalization as an engine for the devel-
opment of SMEs, their prosperity, and for the nation’s economic development.
Further, the literature on international entrepreneurship emphasizes that interna-
tionalization is an entrepreneurial act, strongly affected by the characteristics of the
individuals involved (Oviatt & McDougall, 1995). Subsequently, the literature has
also documented the importance of entrepreneurs and their characteristics as a
predictor of their performance (McDougall & Oviatt, 2000).
Although the importance of internationalization has been emphasized in the aca-
demic literature, most researchers on SMEs do not consider the firm strategy (in terms of
C. Santhosh (&)
Department of Economics, Christ University, Hosur Road, Bengaluru 560029, India
e-mail: [email protected]
M. H. Bala Subrahmanya
Department of Management Studies, Indian Institute of Science, Bengaluru 560012, India
e-mail: [email protected]
modes of entry). As such, the literature has not addressed how SMEs strategize their
market entry to improve their pace and performance.
Based on the identified gaps in the literature, an effort is made to investigate and
study:
1. What firm-level resources determine the speed at which SMEs entered the
international market?
2. Does the speed of entry into the international market along with the firm-level
resources facilitate SMEs to achieve a higher degree of internationalization?
Consequently, an effort has been made to probe the research questions based on
primary survey covering 70 SMEs of machinery industry located in and around the
Bengaluru City.
This paper contains six sections. The second section analyzes the relevant literature
that forms the conceptual framework for the further analysis and discusses the conceptual
model concerning the key variables used for the analysis. The third section illustrates the
sample, data, and statistical tool used for the analysis. The data analysis and results are
discussed in the fourth section. The fifth section contains conclusions and implications.
Finally, the important concepts and definitions are explained in the Appendix section.
Firm commitment
Marketing Division
Regularly visiting IM
Firm size
Nature of ownership
Entrepreneurial
characteristics
Education background
Speed of Degree of
International Experience
Internationalization Internationalization
Foreign language skills
Experience in a MNC
Firm strategy
MNC
International exhibition
E-Commerce
Fig. 2.1 Conceptual framework linking firm-level resources, speed, and degree of internation-
alization of SMEs
which SMEs entered the international market and whether the speed of entry into
the international market along with the firm resources facilitates SMEs to achieve a
higher degree of internationalization? The main ideas and the relationships between
them, which need to be analyzed, are exhibited in Fig. 2.1.
The important firm-level resources that may influence on internationalization
include: (i) firm size, (ii) entrepreneurs’ education background, (iii) entrepreneurs’
international experience, (iv) entrepreneurs’ foreign language proficiency, (v) en-
trepreneurs’ experience in a MNC or local enterprise, (vii) nature of ownership,
(viii) marketing division, (ix) regular or intermittent, and (x) mode of exports.
Among these internal factors, some might accelerate the internationalization pro-
cess of SMEs to enter rapidly into the international market whereas some others
might decelerate the process. Further, internationalization speed along with
firm-level factors might have an impact on the degree of internationalization
attained by the SMEs.
42 C. Santhosh and M. H. Bala Subrahmanya
1
Small portions of this study were also published by the authors in their works –
(a) “Internationalization of SMEs from Bengaluru: How do barriers affect the export
entrepreneurship?”, 2016 IEEE International Conference on Management of Innovation and
Technology (ICMIT), DOI: https://doi.org/10.1109/ICMIT.2016.7605039, published in 2016;
(b) “Degree of Internationalization and Economic Performance of SMEs in Bengaluru: Influential
Factors and Outcomes”, in Chinmay Pattnaik , Vikas Kumar (ed.) Emerging Market Firms in the
Global Economy (International Finance Review, Volume 15) Emerald Group Publishing Limited,
pp. 35–71.
2 Internationalization of SMEs in Emerging Economies … 43
(FZ) varied from two employees to 175 employees, the average being about 29
employees.
Table 2.2 examines the correlations between the variables. All those which are
statistically significant at 0.05 and 0.01 level are marked in bold. However, none of
the variables appear to be highly correlated with their corresponding variables to
establish the problem of multicollinearity (Hair, Black, Babin, Anderson, &
Tatham, 2006)
Table 2.3 exhibits the estimation results of binary logistic regression analysis to
ascertain the effect of firm-level resources on the speed of internationalization in
terms of early and late entry. The model has shown a better predictive accuracy as a
model was 85% correctly classified (Table 2.3) indicating that the explanatory
variables are better predictors of internationalization speed.
It is appropriate to describe the role of three explanatory variables in influencing
the internationalization speed. Among the different firm-level resources, marketing
division (MD) and regular visits (REG) to international markets have positively
influenced the internationalization speed, implying that firms that are highly com-
mitted in their initial entry are more successful to reach international markets sooner
than other firms. Further, multinational company as a mode of entry (EMNC) pos-
itively influenced the speed of internationalization, which implies that firms that
adopted multinational company as a mode of entry in their early years would rapidly
enter international market than the firms that adopted exports through a network.
With an understanding of firm-level resources and its influence on the interna-
tionalization speed, it is important to examine how internationalization speed along
with firm-level resources influenced the degree of internationalization. Therefore,
we performed a multiple linear regression analysis to ascertain the influence of
firm-level factors and internationalization speed on the degree of internationaliza-
tion. The results of the multiple linear regression analysis along with the collinearity
values of predictor variables are shown in Table 2.4. The overall model is signif-
icant as explained by the F value and as indicated in the R2 value (31%). Further,
none of the independent variables appear to be highly collinear as revealed by the
variance inflated factor (VIF) (Hair et al., 2006).
It is pertinent to explain the role of each of the five explanatory variables in
influencing the degree of internationalization. Firstly, CEOs’ education background
(CEE) had a significant positive effect on the degree of internationalization
implying that firms with more qualified CEOs’ could achieve a higher degree
compared to the lesser qualified ones. Further, the nature of ownership (NOW) is
positively related to the degree of internationalization implying that those firms with
more number of owners are able to achieve a higher degree of internationalization
compared to those firms with proprietorship. In addition, firms that depend on
e-commerce (EC) as a mode of entry in their first year of exports are likely to
achieve a higher degree than the firms that adopted exports through a network.
Although exports through international exhibitions (EIE) are significant has a
negative relationship on export performance, implying that those firms that adopted
international exhibitions as a mode of entry have achieved negative performance in
their first year of exports.
46
Table 2.3 Influence of firm-level resources on the internationalization speed: binary logistic
regression analysis
Variables B S.E. Wald Sig.
CEE 0.263 0.347 0.575 0.448
CIE 0.021 0.050 0.175 0.676
EFK 0.340 0.294 1.336 0.248
ML −0.132 0.405 0.106 0.745
NOW 0.446 0.512 0.759 0.384
MD 2.778 1.342 4.285 0.038*
MNC 3.893 1.326 8.622 0.003*
INE −0.626 0.830 0.570 0.450
EC −1.063 1.200 0.786 0.375
REG 1.793 0.929 3.726 0.054*
FZ −0.012 0.023 0.262 0.609
Constant −7.572 2.894 6.847 0.009
Chi-square = 26.532, −2 Log likelihood = 53.275, % correctly classified = 85%
*
Significant 0.05% level
Table 2.4 Influence of firm-level resources and internationalization speed on the degree of
internationalization: multiple regression analysis
Unstandardized Standardized T Sig. Collinearity
coefficients coefficients statistics
B Std. Beta Tolerance VIF
error
(Constant) −13.702 17.572 −0.780 0.439
CIE 0.097 0.362 0.032 0.267 0.790 0.862 1.160
EFK −1.927 2.035 −0.124 −0.947 0.348 0.727 1.375
MNC −1.156 2.601 −0.057 −0.445 0.658 0.749 1.335
NOW 6.339 3.439 0.270 1.843 0.071** 0.578 1.731
EIE −12.448 6.391 −0.249 −1.948 0.057* 0.761 1.313
EMNC 9.558 6.822 0.223 1.401 0.167 0.492 2.033
EC 20.167 8.444 0.299 2.388 0.020* 0.792 1.262
CEE 4.604 2.267 0.251 2.031 0.047* 0.816 1.226
MD −7.919 9.330 −0.134 −0.849 0.400 0.496 2.016
REG 4.459 6.000 0.098 0.743 0.461 0.720 1.389
SI 12.640 6.915 0.258 1.828 0.073** 0.626 1.597
FZ 0.044 0.158 0.034 0.276 0.784 0.824 1.213
F 1.812 (Sig 0.060), R2 0 315, *significant at 5%, **
significant at 10%
Entering a global market is viewed as a noteworthy for SMEs because of its lack of
resources. However, studies have highlighted that an appropriate strategy through
effective utilization of limited resources facilitates SMEs to enter international
market at a faster pace and can achieve higher export performance. Based on this
understanding we have analyzed the research objectives of this study.
Our results, for the first research question, revealed that among the different
firm-level factors, it is the firm commitment (in terms of marketing division and
regular visit to international market) which has positively influenced the interna-
tionalization speed. Firm commitment at the early stage is extremely an important
strategy for a firm to internationalize (Papadopoulos & Martin, 2010). Further,
Johanson and Valhne (1977) underline the importance of firm commitment in terms
of specialization of resources that are deployed to speed up the internationalization
process. As also indicated previously, firms with higher international commitments
allocate more resources and create a concrete platform for their global activities,
which results in increased intensity of internationalization (Papadopoulos & Martin,
2010). Furthermore, firm strategy (in terms of MNC mode of entry) used by SMEs
2 Internationalization of SMEs in Emerging Economies … 49
also determines their international efforts (Leonidou & Katsikeas, 1996). Typically,
barriers to internationalization are higher for SMEs than the larger firms. SMEs that
lack resource hardly dare to internationalize (Acs et al., 1997). Therefore, to
overcome the barriers at the initial year of exports, firms would have depended on
multinational companies as a mode of entry for international expansion (Acs et al.,
1997). Acs et al. (1997) advocate that MNCs act as facilitator for SMEs to expand
globally and an efficient means to access the foreign markets. Further, firms can
acquire relevant information that is required for early internationalization through
following the larger firms as subcontractors (Westhead et al., 2002). Therefore, one
could argue that firms that are “highly committed” and adopt “appropriate export
strategy” (in terms of mode of entry) are able to rapidly internationalize.
Ultimately, we probed whether the speed along with the firm-level resources had
any influence on the degree of internationalization. The results reveal that it is the
“human capital” and “appropriate firm strategy” which significantly determined the
degree of internationalization achieved by the SMEs. The “human capital” is
reflected in its CEOs’ educational qualification. Therefore, firms with CEOs who
are more qualified would have acquired the capability in the form of knowledge,
skills, and problem-solving ability through education (Cooper et al., 1994). Further,
the knowledge and skills facilitate entrepreneurs to assess the pros and cons of
internationalization from an unbiased perspective (Stoian et al., 2011). Therefore,
the higher the education level is associated with, higher the degree of
internationalization.
Finally, “appropriate firm strategy” is reflected in whether a firm is large in terms
of ownership, mode of entry, and time taken to enter the international market.
A firm which is a private limited, adopted e-commerce as a mode of entry, and
entered the international market at an early age has achieved a higher degree of
internationalization. Owners of the SMEs generally adopt strategies for their
business survival rather pursuing the risky strategies for their business growth.
Subsequently, firms with proprietorship may not have the desire, the expertise, or
the resource to grow their business through internationalization relatively (Reuber
& Fischer, 1997). A firm with more no of owners may have the business skills and
enables to be aware of export market opportunities. Moreover, the financial con-
straints faced by SMEs can be deliberately overcome through utilizing the external
funding through widening the ownership base to export (Westhead, 1997). In the
recent time, e-commerce has been widely adopted to enter international market as it
is easier for SMEs to compete and quite cost-effective in reaching the global cus-
tomers (Moini & Tesar, 2005) and enhances their competitive position in the world
market and performance (Moini & Tesar, 2005). Subsequently, early the entry into
international market facilitates firms to recognize the new knowledge and oppor-
tunities (Kuivalainen et al., 2007). Further, firms can exploit the opportunities to
gain higher advantages than their competitors by early internationalization (Autio
et al., 2000). Therefore, an entry into international market would call for “human
capital” and “appropriate strategy” on the part of SMEs to achieve a higher degree
of internationalization. Therefore, an appropriate strategy developed by a highly
50 C. Santhosh and M. H. Bala Subrahmanya
qualified entrepreneur would provide a platform for the SMEs to “seize the
opportunities” and to perform better in the international market.
Several implications can be offered based on the research findings. Firstly, this
study contributes to the existing literature by simultaneously studying the effects of
firm-level resource on the speed and the degree of internationalization, which is still
missing in the context of an emerging economy like India. The results point toward
firm commitment, capability, and an appropriate firm strategy to accelerate the
internationalization speed and degree of internationalization of SMEs. More
importantly entrepreneurs of SMEs, especially who have the aspirations of rapid
internationalization, will benefit from identifying the key factors that influence the
early internationalization. However, firms should consider becoming more com-
mitted by recognizing the importance of international sales. The mere fact of firm
commitment does not necessarily lead to early internationalization. Firm strategy
enables to commit appropriate resources to improve the pace of internationalization.
On the other hand, decision makers should be aware of the role played by their
educational qualification in influencing the export performance. Equally, firms
should also focus on low-cost entry mode and particularly on e-commerce, as it
facilitates to maximize their international exposure in their early years of exports.
Therefore, efforts should be directed toward acquiring capabilities and strategizing
their export operations in a planned manner at their initial stages of
internationalization.
SMEs
In this study, we adopt the definition of SMEs as described in the MSMED Act,
2006 and described as firms having original investment in plant and machinery not
more than Rs. 100 million. (Ministry of MSMEs 2014).
Internationalization
Given the various channels of internationalization, this study primarily focuses on
exports by SMEs to represent the mode of entry into the international market.
Therefore, in this study, we define internationalization as an expansion of firm’s
products or activities into foreign markets through exports.
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2 Internationalization of SMEs in Emerging Economies … 53
Author Biographies
3.1 Introduction
An earlier version of this chapter titled Returnee Entrepreneurs: Bridging Network Gaps in
China after Absence was published in a Special Issue of the South Asian Journal of Management
(SAJM), Volume 22, Issue No. 2, dated April–June 2015, on the theme of Entrepreneurship in a
Globalizing World.
M. Farquharson (&)
Nottingham University Business School (NUBS) China, University of Nottingham
Ningbo China (UNNC), 199 Taikang East Road, Ningbo, Zhejiang Province 315100,
People’s Republic of China
e-mail: [email protected]
S. Pruthi
School of Global Innovation and Leadership (SGIL), Lucas College and Graduate School
of Business, San José State University (SJSU), Business Tower 950, One Washington
Square, San José, CA 95192-0164, USA
e-mail: [email protected]
Following the previous studies, we define REs as those who have lived in a
developed OECD country, received education outside their home country, and/or
have working experience from the host country, and/or may have opened a business
in their host country prior to returning to their own home country (Guo, Porschitz, &
Alves, 2013; Liu, Lu, & Choi, 2014; Pruthi, 2014; Saxenian, 2006; Wright, Liu,
Buck, & Filatotchev, 2008). Our study specifically looks at Returnee High-tech
Entrepreneurs (Wright et al., 2008) who form new firms in a second-tier city in
China, Zhejiang Province, called Ningbo. We see the entrepreneurship process as one
embedded in context and where the behavior of individuals is embedded in networks
of relations. An individual entrepreneur’s network might, therefore, be varied in order
to access different types of resources for new firm formation and have to include
tangible and intangible resources, knowledge, advice, and guidance gained from
weak or strong ties (Granovetter, 1973; Li, Zhang, Li, Zhou, & Zhang, 2012).
On strength of ties it has been concluded that weak ties are much more important
at the firm formation phase (Batjargal, 2007) because the structural holes (i.e., the
disconnections between non-redundant contacts in a network) facilitate access to
information and opportunities from brokering opportunities between disperse ties
(Burt, 1992; Nahapiet & Ghoshal, 1998) (i.e., they have a bridging effect to
knowledge acquisition) (Guo & Miller, 2010). Weak ties, therefore, are portrayed
through infrequency and short duration of contact and no socioemotional attachment.
Contact with weak ties is generally established through existing strong tie links (i.e.,
friends, suppliers, customers) (Hoang & Antoncic, 2003). Strong ties (i.e., binding
connections or cohesive ties between contacts in long-term relationships), on the
other hand, associated with family, friends, former colleagues, industrial contacts, etc.
(i.e., direct, personal contact and frequent), might be deemed fundamentally impor-
tant on the entrepreneur’s return, after a period of absence (Drori, Honig, & Wright,
2009). Strong ties are associated with the evaluation of opportunities, the acquisition
of resources, and gaining legitimacy. They are also associated with frequency and
quality of contact. Notwithstanding, strong tie networks have also been negatively
associated with collusion, corruption, and the risk of ‘overembeddedness’ (Sun,
Mellahi, & Wright, 2012; Peng & Zhou, 2005).
Using network theory, we study and investigate the social ties in new firm
formation used by REs in an economy in transition (Batjargal, 2007), where the
barriers of an immature infrastructure supporting new firm formation (Peng &
Zhou, 2005; Peng & Heath, 1996) are exacerbated by a lack of personal knowledge
about access to resources due to extended overseas exposure. Social ties, after all,
are known to help overcome barriers to finding suppliers, clients, investors, regu-
lators, etc., through personal networks (Jack, 2005; Liu et al., 2012). REs, however,
must compensate for and/or create networks, because of their absence, in a country
where the concept of guanxi (relationships and connections) is fundamental to all
aspects of life and business (Guo & Miller, 2010; Tsui, Farh, & Xin, 2000).
Network theory is considered appropriate because it has been influential toward the
identification of antecedents of individual entrepreneur’s interpersonal ties for access to
resources and because China is a relationship-intense context (Gold, Guthrie, & Wank,
2002). Guided by past literature, we look at different types of networks associated with
family ties, business ties, community ties, and government ties but remain open to
3 Returnee Entrepreneurs (REs): A Comparison Between Direct … 57
discovering new relationships (Chen, Chen, & Huang, 2013). Ties are dynamic, and
weak ties may be established from existing strong ties that might reveal potential
partners, suppliers, or customers once trust has been established (Hoang & Antoncic,
2003; Luo, Huang, & Wang, 2012). We recognize also the usefulness and constraints
of not enough strong ties and a network dominated by strong redundant ties, both of
which are as equally detrimental for access to resources supporting development of new
firm formation (Arregle et al., 2013).
Since our unit of analysis is the individual RE, our attention will focus on
interpersonal level ties and resources embedded in network relationships.
Relationships, after all, are developed by individuals not firms. RE’s political ties to
governmental officials giving rise to dichotomous network connections are also
explored (Hoskisson, Eden, Lau, & Wright, 2000; Li, Meng, Wang, & Zhou, 2008;
Sun et al., 2012) because the call and support from the Chinese government to REs is
a specific factor in this context. The relationship between entrepreneurs and gov-
ernment is more prominent in Asian countries, such as China, because of historical
heritage and an evolving (yet weak) infrastructure supporting entrepreneurship (Peng
& Zhou, 2005). In China, the government is the key stakeholder because the country
is a party state which has the authority to approve projects, allocate resources, provide
funding, delegate logistical support, implement legislative change, own vital
resources such as land and banks, and control the media (Luo et al., 2012). Policy and
control exerted by central government are filtered down to provincial and municipal
level for dissemination to ambitious REs. This influence is political and ideological
and can sometimes lead to a volatile market structure (i.e., over subsidization). The
value of the entrepreneur’s political ties (EPT) is recognized in extant literature and
might involve individual ties but also interdependencies on different types of ties
(Batjargal & Liu, 2004; Li et al., 2008; Luo et al., 2012). In the context of China,
having good relations or guanxi with local government officials is considered ‘the
lifeblood of private business’ (Bian, 2005, p. 314; Gold et al., 2002) and in past
research has been shown to have a positive effect on high-tech entrepreneurs’
resource availability in an emerging market (Wang & Lestari, 2013).
This paper is structured as follows: First, an overview of Returnee Entrepreneurs
to China is presented. Second, justification for using a network-based approach for
analysis and extending understanding within the specific context in which the
research is conducted is outlined. Third, our methodological approach and reliance on
a comparative case study method is justified. Finally, we offer discussion of findings,
make recommendations for practitioners and academics for future study, and suggest
some policy considerations. We end with concluding remarks about the overall study.
Returnees who return as employees are not as new a phenomenon as the RE.
Kenney, Breznitz, and Murphree (2013) state that from an historical perspective
(especially within the ICT industry), multinational companies arriving in China in
the 1990s played a leading role in the transfer of knowledge and skills often through
58 M. Farquharson and S. Pruthi
the employment of returnees while the role of the RE became a later influence. It
was only during the 2000s that REs seriously considered returning when they
estimated that there was a sufficient indigenous skills and potential market base for
them to exploit their overseas experiences. Returnee Entrepreneur research in China
has generally centered on Beijing and Zhongcunguan Science Park which has good
relations with elite universities and governmental encouragement (Dai & Liu, 2009;
Filatotchev, Liu, Lu, & Wright, 2011; Saxenian, 2006).
Sending people overseas for further education from China has been recorded since
1849 when migrants generally returned to implement new ideas learned overseas
(Wang, Duan, & Hou, 2013). Prior to the Cultural Revolution, students were regularly
sent overseas for further education and, although closed during 1966–1976, reopened
when Deng Xiaoping restarted sending students out especially to the USA. However,
although the economy in China began to open, of those who were educated abroad, few
were enticed to return in the early days of ‘opening up.’ A recent analysis of returnees
to China indicates that those with working experience did not start to return until the
late 1990s, once openness and political stability had taken root. The rate has been
increasing in response to favorable domestic conditions, domestic market potential, and
attractive returnee packages for emigrants resulting in just over a third of the 1.9 million
Chinese studying abroad from 1978 returning to China (Kenney et al., 2013). REs,
from SE Asia as well as China, have, by a consequence of history, economic devel-
opment, capabilities building, and ‘home’ opportunities, been increasing in numbers
and have attracted attention from researchers both domestically and internationally (Liu
et al., 2014; Pruthi, 2014). A reversal of the ‘brain drain’ (i.e., where talent is enticed
from their home country to a more developed economy) or ‘brain gain’, for the host
country, is now becoming ‘brain circulation’ (i.e., emigrants are returning with their
experiences to their home of origin) (Dahles, 2012; Li et al., 2012; Liu, Lu, Filatotchev,
Buck, & Wright, 2010; Saxenian 2006; Zweig et al., 2006).
Authors have claimed that social capital, embedded in networks, can become a
means of compensation when barriers are met (Bourdieu, 1986; Peng & Zhou,
2005; Peng & Heath, 1996; Wellman, Chen, & Weizhen, 2002; Zhou & Li, 2007).
When entrepreneurs face barriers of an immature infrastructure supporting new firm
formation (i.e., the evolving infrastructure in China), they can use networks.
Networks allow access to information, resources, and opportunities (Granovetter,
1973). Network relationships, based on trust, assist entrepreneurs in accessing
resources, information, funding opportunities, skilled labor, etc., to overcome
infrastructure barriers (Batjargal, 2006; Pruthi, 2014; Uzzi, 1997). Those familiar
with their local context are likely to navigate the network system to their own
competitive advantage (Child & Rodriguez, 2005; Luo et al., 2012) because past
research indicates that those embedded in the context understand the social norms
and sanctions that facilitate trust and cooperative behavior (Granovetter, 1985;
3 Returnee Entrepreneurs (REs): A Comparison Between Direct … 59
Coleman, 1988). Those who have been absent (i.e., REs due to overseas exposure)
must compensate for their absence and gain entry into social network frameworks
through brokers (Anderson, Park, & Jack, 2007) to link the focal person to new
sources of information or new social capital (Coleman, 1988; Burt, 1992).
We speculate that REs will have both strong and weak ties in their networks.
Strong links may be based on embedded, personal links grounded in trust, which
are lasting and deep, supported by a high frequency of contact, while weak ties may
be based on loose relationships with unrelated individuals who have less contact
(Elfring & Hulsink, 2003). Differentiating between weak and strong ties allows us
to study the influence of the links on the function of the REs’ networks during new
firm formation. The diversity, homogeneity (associated with strong ties), and
heterogeneity (associated with weak ties) of these ties has an impact on the actions
of individuals and outcomes (Granovetter, 1973). Being associated with
like-mindedness (i.e., strong ties) during new firm formation may be a disadvantage
because, although safe, it might not open up new avenues for new information,
knowledge, or resources. Weak ties might therefore open up more connections or
social circles (Burt, 1992).
We further justify the use of network theory because of the influence of guanxi
within Chinese society. Guanxi has been viewed as a version of social network
theory because it is governed by strong ties (i.e., frequent interaction, emotional
involvement) and weak ties (i.e., access to diverse information) and is closely
related (if not fundamental) to relations in China (Tsui et al., 2000; Wellman et al.,
2002). Guanxi has also been defined as networks consisting of dichotomous ties
which is reinforced through frequent interactions, intimacy, emotional attachment,
and ongoing resource exchanges (Bian, 2005), where the contextual feature of
guanxi indicates a ‘rule of the game’ which is referred to as ‘face’ (mianzi) within
the China context (Bian, 2005, p. 313). Guanxi is thus a special social capital in
Chinese society shared by dyadic individuals in kinship, friendship, acquain-
tanceship, native origin, and surname (Guo & Miller, 2010).
The four main ties to be probed in this research are family, business, community,
and governmental which have been identified as important at the firm formation
stage (Guo & Miller, 2010) for the accumulation of financial resources, access to
funding promoted through governmental policy initiatives, and access to profes-
sional resources and knowledge within specific business communities (Davidsson
& Honig, 2003). According to Davidsson and Honig, family ties provide basic
information and support; business ties provide links with distributors, suppliers,
competitors, and customers; community ties offer ties with industrial specific
associations for the transfer of specific knowledge (Chen et al., 2013); and gov-
ernment ties provide the vehicle to access knowledge about existing and future
policies, and access to funding and benefits and has been viewed as both positive
and negative in China (i.e., perhaps more important at firm formation stage but
subsequently identified as stifling or interfering) (Sun et al., 2012). For example,
Fuller reports that firms with a strong Entrepreneurial Orientation (EO) (i.e.,
high-risk projects) are constrained by governmental guanxi because this entrepre-
neurial approach conflicts with the main governmental system (i.e., bureaucratic)
60 M. Farquharson and S. Pruthi
(Fuller, 2010). The effects of guanxi within professional networks (i.e., suppliers,
customers), however, may be dependent on the quality of people within that net-
work and the institutional system within which the industrial sector operates, as
opposed to being a traditional, reciprocal relationship based on kinship and trust.
Quality (and value) of guanxi is emphasized by Hsu and Saxenian (2000) studying
ethnic Chinese communities involved in the technology sector. Networks were
founded upon theoretical knowledge and technical expertise rather than just
knowing or having a reciprocal relationship with ethnically similar people and as
such have been instrumental in transferring knowledge from one destination to
another (i.e., the development of venture capital support in Taiwan linked to US
relations) (Hsu & Saxenian, 2000). Networks may therefore be contingent on the
content of the ties and the nature of exchanges between the people. For the purpose
of this paper, we rely on a definition of social tie offered by Batjargal ‘as inter-
personal relationships that facilitate or constrain social exchange’ (Batjargal, 2007,
p. 610).
3.4 Methodology
The concept of Returnee Entrepreneurs is fairly new to China, and there is relatively
little literature covering the individual RE, their process of firm formation, or
subsequent performance. A qualitative approach is, therefore, deemed reasonable to
explore the relationships between the individual entrepreneur and their network of
contacts during the process of firm formation because our understanding is limited.
We will look at ‘how and why’ things come about (Gartner & Birley, 2002). To
explore these questions, our interview guide evolved from network theory literature.
We thus hope to expand existing theory to conceptualize a potential new network
approach.
Unlike Beijing, Hangzhou, or Shanghai, Ningbo does not have an already estab-
lished high-technology sector. It is an historical, port city with a strong and suc-
cessful identity with international trading (Zhen & Yang, 2009). Change, however,
is inevitable, and as dictated by the central government, the Ningbo local gov-
ernment is working toward attracting a high-tech sector to its newly developing
science and technology and incubation infrastructure locations. RE research has
been conducted in first-tier cities like Beijing (Filatochev, Liu, Buck, & Wright,
2009; Filatotchev, Liu, Lu, & Wright, 2011; Sutherland, 2005), but none can be
found for second-tier cities like Ningbo.
3 Returnee Entrepreneurs (REs): A Comparison Between Direct … 61
Access to high-tech REs proved challenging and often contacts recommended that
we go to Shanghai, Hangzhou, or Suzhou which are sites with established histories
of high-tech development, but we recognize the future research benefits of starting
research in Ningbo in 2014 for potential longitudinal inquiry. Ethical protocol for
interviewing REs was approved through university channels, and our university
Research Office contacted for official letters of introduction to incubator managers.
Substantial time was taken to make the purpose of the research known to the
managers who subsequently e-mailed their tenants requesting them to consider
taking part in an interview. Research Assistants also built a database of contacts
through the participants’ LinkedIn accounts. Once interviews commenced, partic-
ipants recommended other REs to interview (who were not necessarily in incubator
units). A Returnee Association was also identified which had a strong connection to
our university and subsequently sparked a positive response from participants, but
not all were from the high-tech sector. Notwithstanding, all data were collected. Our
sample was thus based on a snowball process and 10 cases identified which is the
maximum Eisenhardt considered as manageable for a case study approach
(Eisenhardt, 1989; Yin, 1989). In total, we collected 20 interviews but used only 10
from high-tech REs. The sample size is small, but we do not concern ourselves with
the generalizability of our results since the research is exploratory of a new phe-
nomenon (Flyvbjerg, 2006). Eisenhardt (1989), we considered, offered opportunity
to build on theory through case study analysis. We strived to capture an under-
standing from the participants’ perspective which is in keeping with a qualitative
methodological approach (Gephart, 2004). Because of the size and unequal
development in China, it is impossible to offer a homogeneous conclusion to this
research. We assign any results and conclusion to the theoretical sample and the
context of Ningbo.
Returnee Age Highest Host Period of Purpose Length of Mode of Year Year of Industry or venture
Entrepreneur degree country stay of stay international return to of founder
abroad abroad work China (direct return start-up
(years) experience or indirect) to
China
(SHOU) 38 Master Finland 2005–2010 Study 6 Direct 2010 2010 New energy and printed
and (founder of electronics (has 2 companies)
work start-up)
(TING) 38 Ph.D. USA 1998–2012 Study 15 Direct 2012 2012 Medical devices and gene
and (founder of testing
work start-up)
(CHENG) 35 Ph.D. Sweden 2007–2009 Work 3 Direct 2009 2010 New material industry for
(founder of medical treatment (dentistry)
start-up)
(JUN) 28 Bachelor Italy 2008–2009 Study 1 Direct 2009 2010 Mobile phone APP for student
(founder of internships and temporary jobs
start-up)
(LI) 50 Ph.D. Scotland 1988–2006 Study 17 Indirect 2006 2009 Digital TV software for
and (employee of behavioral data collection
work another
company)
(REN) 30 Master UK 2002–2009 Study 6 Indirect 2009 2012 Information sharing platforms
and (employee of for SMEs (port authorities,
work another etc.). Big data and cloud
company) technology
(TONG) 35 Master Sweden 2008–2009 Study 1 Indirect 2009 2009 Data mining and analysis for
(employee of marketing and decision
another making systems (i.e., fast food
company) chains)
(continued)
M. Farquharson and S. Pruthi
Table 3.1 (continued)
Returnee Age Highest Host Period of Purpose Length of Mode of Year Year of Industry or venture
Entrepreneur degree country stay of stay international return to of founder
abroad abroad work China (direct return start-up
(years) experience or indirect) to
China
(YANG) 33 Master Sweden 2004–2006 Study 3 Indirect 2006 2011 Development and servicing of
and (employee of ultrasonic imaging software
work another
company)
(SHI) 32 Master Sweden 2006 Study 2 Indirect 2006 2010 Software applications for
(employee of online
another
company)
(KONG) 44 Ph.D. Canada 1996–2003 Study 7 Indirect 2003 2010 Information analytical data
and (employee of
work other
companies)
3 Returnee Entrepreneurs (REs): A Comparison Between Direct …
63
64 M. Farquharson and S. Pruthi
often the interview extended to over an hour. Most interviews were conducted face
to face, but one participant asked that the interview be conducted using Skype
because of a busy business agenda. All interviews were captured between March
and August 2014, and all participants signed consent forms, agreeing to be inter-
viewed and recorded.
Interview administration, capture, transcription, and translation were shared
among three Research Assistants (RAs), trained in qualitative interviewing tech-
niques. After piloting the guide, one RA was revered as a ‘good listener’ and as a
result became our primary interviewer. He conducted all interviews in Mandarin.
One RA, from Ningbo, made contact with the entrepreneurs and organized the time
and place for the capture. Our ‘good listener’ conducted and taped the interview.
The ‘organizing’ RA then transcribed the tapes and gave the third RA the written
transcripts and the tapes to translate into English. The transcripts and translation
were checked by the RA conducting the interviews and confirmation of meaning
and intent confirmed (Temple & Young, 2004; Nurjannah, Mills, Park, & Usher,
2014). This process was repeated when the lead author read through the scripts and
asked for confirmation from the RA conducting the interviews about original
meaning to try to arrive at a plausible interpretation of the data. Once joint theming
of data started, the consultative process continued involving all three RAs and the
researcher (Nurjannah et al., 2014). The analysis process continued dipping in and
out of the original scripts because the primary researcher’s language was English,
not Mandarin. Throughout the process, we put emphasis on meaning rather than
‘objective’ translation where the ‘good listener’ RA’s role became primary trans-
lation moderator and analyzer.
Data were read and re–read, and an initial round of categorization concluded for
within-case analysis, relying on the identification of ties and networks as associated
with and evolved from existing theory and literature, and those which were perhaps
unique to the context (Eisenhardt & Graebner, 2007). These categories, which were
broad and messy, were then refined into defined network ties. This was done on a
case-to-case basis, and each case looked at as a stand-alone response. A third round
of data exploration involved a cross-case themed analysis and comparison between
cases to enhance data analysis and the identification of ties and networks common
(or not) to all cases extracted (Yin, 1989). This process suggests that data were lost,
but drawing together important material is advised in data analysis by Eisenhardt
(1989). Direct quotations were captured in tables under identified network headings
and REs divided between those who had directly formed a new firm on return and
those who had not directly formed a new firm on return. The network headings
were reflective of our research purpose (i.e., to capture data exploring strength of
network ties in a society which is relationship centered and bound). Direct quotes,
however, are descriptive, and a fourth round of comparative analysis conducted to
3 Returnee Entrepreneurs (REs): A Comparison Between Direct … 65
3.9 Findings
We concluded our analysis with the construction of a typology (Table 3.2) which
captured different categories of RE (i.e., direct entrants with a clear/no clear idea
about forming their own new firms on return or indirect entrants with a clear/no
clear idea about forming new firms after a time of employment in their home
country). We identified 4 direct and 6 indirect REs. Following from this analysis,
we present our findings in accordance with the logic of the typology (Table 3.2).
The following subsections present detailed findings based on the empirical
evidence.
Table 3.2 Typology of social ties in new firm formation by REs in China
Direct entrant Indirect entrant
Clear Quadrant 1 Quadrant 2
idea While abroad: exploited strong ties (at While abroad: exploited strong ties for
home) which substituted for access to validation of idea from industry, school
weak ties to government (at home) for mates and education and gained
new firm formation managerial exposure (abroad)
While at home: validated idea through While at home: strong industry and
strong ties (abroad for confirmation of classmates ties (at home) substituted weak
high-tech idea and knowledge ties with government where family ties
acquisition) available but not always supportive
(Ting invited back by government) Shou, (Yang sought out by government to be
Ting and Jun given support) Yang
No Quadrant 4 Quadrant 3
clear While abroad: strong friends, While abroad: exploited strong industry,
idea educational and industry ties (abroad) lead educational and friends’ ties (abroad) for
to creation of a management team and validation of technology
substituted for lack of clear idea While at home: strong family ties
(identified only at home) (constrained social exchange) and weak
While at home: strong family ties not governmental ties (at home) substituted
exploited and weak government ties at through strong industrial ties (at home)
home brokered through strong friends ties (Kong had no intention to form a new
(at home) firm) Ren, Shi, Tong, Li and Kong
(One friend invited back by government)
Cheng
66 M. Farquharson and S. Pruthi
In total, three REs were identified as direct entrants (Quadrant 1, Table 3.2). Cases
Shou, Ting, and Jun demonstrated a clear idea to form a new firm prior to their
return to China and had cultivated strong university ties with their educational
institutes and strong industry ties with the companies they had chosen to work for in
their host countries to extend and confirm their technical and managerial knowl-
edge. Strong ties were exploited while abroad (i.e., through family and friend ties,
who were often also REs) (at home) which leveraged access to weak governmental
ties. Shou studied related topics for his business idea at undergraduate level and
later worked in a state-owned enterprise (SOE), where he learned paper printing.
During this experience, he absorbed essential knowledge about printing techniques,
machinery, and maintenance and knowledge which was invaluable for his business
which will potentially print paper batteries. Subsequently, at PG level in Finland, he
worked in a related company where he conducted R&D and filed 3 patents, and
then became friends with an immigrant from China who had been a prominent
academic in China. This immigrant created a company in Finland in a related field,
and during the building of their relationship, Shou was invited to consider using his
technological knowledge to form a new firm in China with the support of the
immigrant who became his partner (i.e., strong tie). One of his partner’s ‘uncles’
assisted setting up office space and contacting regulatory bodies when Shou
returned to Ningbo. Good relations were continually cultivated to include weak ties
to governmental-level officials, gained through strong ties to the uncle and his
partner, which led to the accumulation of government awards, honors, and media
coverage (Appendix 1). Being accepted to a national level incubator unit was set as
a target as outlined below:
We won an award in Gaoxin (Hi-Tech Park) District. We needed National Level support, so
it couldn’t be Yinzhou District. Speaking of National Level, one is Gaoxin District, another
is Beilun District. If we are in Gaoxin District, we can apply as National projects directly
and do not have to go through the Provincial (governmental) level. So it was more con-
venient (SHOU, direct entrant).
Actually in China there are lots of events to which you are invited to attend, including some
from government officials. For example, in the Ningbo Municipal Party Committee has
organized a class of CEOs and there are all kinds of entrepreneurs and business people in
the class. So we are familiar with around 30-40 of them (TING, direct entrant).
The other direct entrant, Jun identified an important gap and need in the market
place (i.e., employment and work experience placements for students) while abroad
which attracted attention from the government through his strong family ties
(Appendix 1). The mobile phone application technology is imported. His family
financially sponsored the forming of his firm and consequently, through their strong
ties with the government, opened considerable funding opportunities and net-
working opportunities with potential clients as illustrated as follows:
We connected with the 15 universities in Ningbo through the government connections. It
makes the connections much smoother (JUN, direct entrant).
Strong family ties were cited as a strong motivation for REs to return to China.
Since these REs were educated overseas, we can presume that their education was
paid for by their parents. Some families were already in business, but not all
families were supportive of their children becoming entrepreneurs. Shou reported
resistance from his parents to his decision to form a new firm as outlined below:
First, let’s talk about my parents. They do not have high education. They both are ordinary
workers. They have the most impact for me…. They once looked down upon those
business people as ‘old concept’ (negatively) but they changed their minds to adapt to the
new society… (SHOU, direct entrant).
Following from the findings we offer two propositions for future exploration.
Proposition 3.1 Compared to Indirect Entrants, REs who are Direct Entrants with
Clear Ideas are more likely to exploit strong ties at home, whilst in their host
country, to substitute weak governmental ties at home for new firm formation.
Proposition 3.2 Compared to Direct Entrants with no Clear Idea, REs who are
Direct Entrants with Clear Ideas are more likely to exploit strong ties in their host
country, whilst in their home country, to validate their idea.
The one indirect entrant in this category, Yang, reported confusion from his parents
about his decision to become an entrepreneur and to further work in a small
company in China prior to the formation of his own firm, when, in their eyes, he
had the capability to command good conditions in a large company in Shanghai
(Quadrant 2, Table 3.2). Although some families were often against the concept of
their siblings embarking on an entrepreneurial career, they nevertheless provided
68 M. Farquharson and S. Pruthi
emotional support which confirms previous studies (Arregle et al., 2013) as outlined
in the following quote:
In principle they (the family) disagreed (with me setting up a business) because my life
abroad was pretty good. My family believed that it would be ok if I became a manager in a
big Shanghai Company since the salary is more or less the same as that abroad. However, I
decided to go back to Ningbo and they didn’t understand. The company I joined was pretty
small. But I persisted. In action, they supported me. The first investment I had was from my
family… It shows that they do support me in action even though they don’t in their minds
(YANG, indirect entrant).
Yang was sought out by government officials as ‘special talent’ to apply for
governmental funding and was offered a sponsored location (i.e., an incubator unit).
One quotation reveals his lack of experience highlighting the reason why he became
an employee first:
They (the government) mainly helped me gather information through different channels.
The Director of the Park gave me some very clear entrepreneurial advice which was very
important to me because I didn’t know much when I returned to China (YANG, indirect
entrant).
Like his direct entrant counterparts, he also had cultivated strong industry and
university ties by working in companies in his host country and in China prior to
forming his new firm, thus establishing strong industry and university ties at home.
All experience was relevant to his new firm promoting imaging software. He
enhanced his technical capabilities through paid employment (abroad) and during
this period established international networks with relevant academics (abroad).
Yang was asked to join an R&D institute in China by the Swedish company he was
working for indicating his strong industry ties (Appendix 1). The network of
contacts established overseas, either through work or research collaboration (i.e.,
strong ties), was reported as sometimes resulting in both foreigners and overseas
Chinese residents becoming potential clients of his new company as outlined in this
quotation below:
When I studied abroad I met a German who is my company’s client now. I had some
communication about technology issues with him and one of his employees. We are kind of
friends now. I was researching ultrasonic imaging software and his company focuses on the
area of heart ultrasonic research. Later when I moved to this field, they gave me some
business support like friends (YANG, indirect entrant).
He then validated his idea through strong friends’ ties (at home) which substi-
tuted for weak governmental ties, but there was strong governmental interest in the
quality and local application of his software products as illustrated in the following
quote:
Some of my classmates became officials in the Ningbo government and we have always
maintained good relationships. By communicating through these networks I can get
first-hand information about technology. Also I get to know the trend of industry policies
and government plans for the future. That’s why I chose to start up in Ningbo and why I
want to do high-tech. It is partly because of the advice from the leaders of Ningbo gov-
ernment (YANG, indirect entrant).
3 Returnee Entrepreneurs (REs): A Comparison Between Direct … 69
Insights into indirect entrants with no clear ideas prior to return prompted the
following propositions:
Proposition 3.3 Compared to Direct Entrants with Clear Ideas, REs who are
Indirect Entrants with Clear Ideas are more likely to exploit strong ties in their host
country, whilst in their host country, to validate their idea.
Proposition 3.4 Compared to Direct Entrants, REs who are Indirect Entrants with
Clear Ideas are more likely to exploit strong ties at home, whilst in their home
country, to substitute weak governmental ties at home.
The indirect entrants with no clear idea about new firm formation, of which there
were five (Quadrant 3, Table 3.2), reported that they worked as employees in
different companies mostly to garner experience, access resources, and access
information about governmental support or simply serendipitously meeting
potential partners as illustrated in this quote:
In 2006, one of my father’s students asked for my help in one research institution and I
went to help them. I met my present partner of my company there whilst helping at the
institution (KONG, indirect entrant).
All REs with no clear ideas for new firm formation chose to work as employees
in other companies in China prior to embarking on entrepreneurship. Cases Ren,
Shi, Tong, Kong, and Li worked in companies to boost their skills and to accli-
matize to the culture in China. Participant Li, whose company collected behavioral
data, had been absent from China for the longest period (17 years) and was one of
the first batches of students to be sent overseas for further education after the
Cultural Revolution (and therefore identified as extremely talented). He found it
difficult to settle and acclimatize to China. Li had strong ties to friends at home and
overseas and strong industry ties but weak ties with the government (Appendix 1)
as stated here:
There is some (governmental) relationship in my background. My father and mother were
within the University sector, and the relationship with the government was a bit weak. My
parents were academics (LI, indirect entrant).
Tong keeps in contact with his teachers at his university in Sweden and
appreciated the Western approach to education indicating strong educational ties.
Through his strong ties with friends at home, he was identified as having appro-
priate skills for data analysis and was asked to join a project by a friend. During the
completion of the project, the two friends stumbled upon a business opportunity
involving data mining and analysis and applied for governmental funding which
they won. From this success came publicity and exposure within their industrial
sector. Being seen as having won government support increased his reputation and
70 M. Farquharson and S. Pruthi
kudos. His strong ties with friends, winning government funding, and strong ties
working at universities in China (Appendix 1) not only funded his start-up but also
allowed access to market information as outlined here:
First, we three friends are co-financing ourselves. Second, the government gave us some
funding when entrepreneurial start-up capital was introduced specifically for REs (TONG,
indirect entrant).
Shi still exploits his strong ties with his academic supervisor in Sweden for
technical advice and used his strong industrial ties and experience in Sweden to
hone his managerial and technical skills, especially when conducting industrial
consultancies. He gathered further skills in a major computer company in Shanghai
when he returned to China where a senior mentor encouraged him to form a new
firm exploiting software applications for the real estate sector. His government tie,
however, was quite exploitative (Appendix 1), and he used his connections to
gather real estate information and future policy decisions as outlined in the quo-
tation below. His company has subsequently gone into liquidation (2014).
In terms of the industry trend in real estate, a real estate company needs to move ahead
before government policy is published, if they want to make a lot of money. The company
should have some connections with officials who are in government who are knowledge-
able about real estate policy. Some experienced real estate brokers try to get the latest,
useful information from them. Based on this information, the real estate company can
predict the trend in the future by taking actions beforehand. The network is the main
competitive advantage (SHI, indirect entrant).
Ren also worked in other companies in the UK, traveled extensively in Europe,
and worked at a research institute in China on his return where he was also men-
tored to consider entrepreneurship as a career option by a senior figure in the
institute in which he worked. His firm promotes information sharing platforms for
SMEs. His strong ties with the research institute (i.e., strong industry ties at home)
brokered access to government officials (i.e., weak ties) who supported not only the
RE but also the research institute (Appendix 1) as illustrated below. Ultimately, the
government became a customer and recommended clients to use Ren’s service:
Ningbo City initiated the Smart City project. The construction of the Smart City initiative
requires the support of some advanced top-level design and high intelligence. So, they
talked to us 2 years ago and they thought our team was good. Moreover, they want to send
some advanced technicians to work on the R&D of some underlying core technologies. So,
we then established the information technology research institute with 45,000,000 RMB
investments (REN, indirect entrant).
REN also relies on his strong ties to friends, all educated overseas, and returned
home to join their family businesses. They are simply open for consultation about
any business matter as outlined here:
I am from Ningbo and I have my family business. I am in this business environment and I
know people in the industry and some team members. Originally I prepared to stay abroad
for a longer time, but at that time my Dad’s health went down so I came back to take care of
him. And I didn’t stay at home all the time in that period. I wanted to find a place to try
3 Returnee Entrepreneurs (REs): A Comparison Between Direct … 71
something out and see whether there is any place suitable for me. Since people were
making electronic chips here I thought that could fit me (REN, indirect entrant).
Case Kong actually did not intend to form a new firm and is of interest because
he is passionate about his product based in pure mathematics and smart algorithms
for Business Intelligence. He had a successful career developing distribution soft-
ware systems for different companies in North America and therefore developed
strong industrial ties overseas, prior to being invited back to China by friends (i.e.,
strong ties) to develop and build a software system for a shipping company. This
ambitious and expensive project was closed by the government because it was seen
as being potentially problematic. Subsequently, he worked for other companies
(and in multiple sectors) in tandem with two major research institutes in China but
gained little personal success. His father, an academic, has pushed him to consider
forming his own firm but has no useful ties for new firm formation. Describing
himself as a ruffian, he admits that he is motivated by challenges (which no one else
can handle) and as such is still employed in a research institute while also devel-
oping his firm with the help of one of his father’s students, who brought the
business idea to him (i.e., big data analysis). His strong ties with the research
institute act as leverage to contact companies, but he realizes that he needs to build
further relationships with entrepreneurs in Zhejiang (Appendix 1). He also uses the
strong ties with the research institute to access funding for new firm formation but
states that contracts with companies are gained because of the quality of his product
not because of network alliances.
Findings led to the formulation of two propositions for future research:
Proposition 3.5 Compared to Direct Entrants with Clear Ideas, REs who are
Indirect Entrants with No Clear Ideas exploit strong ties to industry in their home
country, whilst in their home country, to substitute weak government ties.
Proposition 3.6 Compared to Direct Entrants with Clear Ideas, REs who are
Indirect Entrants with No Clear Ideas exploit strong industry, educational and
friend ties in their host country, whilst in their host country, to validate their idea.
insisting this was high risk but through which he has penetrated governmental
networks for funding (Appendix 1). Although potentially interesting (new materials
for dentistry) his approach is chaotic and he admits to not writing business plans or
understanding the market completely as outlined in this quotation:
There is another weakness, as we don’t really have a business plan; it is all step by step
reaction to the market, not planned. This is something that we need to do, and this is the
weakness of technicians, who rarely do any business planning…. To say it in a bad way, we
didn’t do any preparation, nor did we research the market; it was kind of an impulsive
decision. Once we entered this market, we started to slowly understand this market, ...... but
only when we started doing it we realized different business opportunities were available
(CHENG, direct entrant).
Data patterns clearly indicated that strong friend ties both in the host and in the
home countries benefitted REs’ network access to resources, technology
know-how, governmental connections, etc… Often, the RE reported establishing
connections with friends, normally, but not always from China, when they were
studying abroad, who had superior technical knowledge or had working experience
in overseas companies. Through discussion groups with friends, who included
classmates, often involving social media networking, they identified their diverse
array of resources and capabilities (i.e., human capital in relation to specific tech-
nical knowledge and working experience) and saw synergy in their talents so
followed each other home to directly establish a new firm as outlined in this
quotation:
The person (from China) who has many skills was an Assistant Professor at the University
of Mexico, and as he slowly started working in this area, he received an established plan
from the government in China, so he came back to do this. There is another person (from
China) in England, who has finished his Masters. Whilst studying for his Masters, he also
got involved with some real business in UK: For me, I don’t have any (work experience); I
did some research work abroad and got to know them and was able to communicate well
with them, so we came back to do some things (CHENG, direct entrant).
The exploitive combinations of weak and strong ties at home and in host
countries allow for the creation of propositions for future quantitative research
Proposition 3.7 Compared to Indirect Entrants, REs who are Direct Entrants with
No Clear Idea are more likely to exploit strong ties in their host country, whilst in
their host country, to form managerial social capital.
Proposition 3.8 Compared to Direct Entrants with Clear Ideas, REs who are
Direct Entrants with No Clear Idea are more likely to exploit strong ties with
friends in their home country, whilst in their home countries, to substitute weak ties
to the government.
3 Returnee Entrepreneurs (REs): A Comparison Between Direct … 73
3.14 Discussion
Data indicate that direct entrant REs who validated their idea exploiting their strong
ties through industrial and educational exposure abroad generally returned to China
to exploit their strong ties with family and friends to form their new firms quickly.
Exploiting strong family ties was more likely to be reported by direct entrants than
indirect, who met with either parental resistance to entrepreneurship, parental
wishes for the REs to join the family business or parents with constraining and
restrictive social capital irrelevant to new firm formation (i.e., parents who were
academics). Validation of firm formation through family ties while abroad may
have helped the REs form a firm directly on return. Part of this reasoning is that
some of these families were already connected through business dealing with
governmental officials, relationships which could subsequently also be exploited by
their children quickly (i.e., substituting weak ties with strong).
Indirect REs, who had not validated their ideas sufficiently in terms of resource
needs or opportunity when abroad, returned to rely on local ties. However, their
reliance on strong family ties at home was redundant for start-up and gave them
little or no leverage to resource providers, like the government, and as a result, they
were generally less successful in attracting government assistance. Since all the
indirect returnees first took up employment, it might be speculated that those with
weak ties to government networks gained access to governmental resources, not
because of the strength of their ties, but on the quality of their idea, indicating that,
in 2014, quality of idea is perhaps more important than the strength of social tie
within a network.
Quality or value of idea is of interest because the infrastructural development of
the city of Ningbo is planned, rapid, and effective, but the local government is
aware that it needs to be made more efficient. In relation to urbanization, the
modernization of this international trading city is emphasizing high technology to
monitor industrial production processes (Kong, indirect entrant), to control real
estate (Shi, indirect entrant), to conduct big data analysis for decision making
within companies (Li and Tong, indirect entrant), and to design information sharing
platforms for governmental departments including port authorities (Ren, indirect
entrant). In two of the cases, where government had sought out indirect entrants
Ren and Yang, the government not only supplied funding but also subsequently
became their customers. Some ideas and products thus dovetailed with the needs of
a growing Smart City.
Considering the context of this research (i.e., in a party state), we have added
upon previous research by enhancing our understanding of the importance of
government ties. In order to follow central governmental objectives related to
promoting high technology at national, provincial, and municipal level and to
encourage highly skilled REs to form new businesses, government is proactively
seeking out REs (i.e., head hunting) and inviting them to return by offering
resources associated with location (i.e., incubator units), access to funding, and
access to other talented people through associations and research institutes. Probing
74 M. Farquharson and S. Pruthi
REs’ social ties provided a unique understanding of the role of the government.
Although our sample is small a pattern emerged between the two groups, avail-
ability of funding opportunities, and the location benefits and consequences
thereafter of being placed either in a location eligible for provincial funding or
national funding because they substituted their weak government ties through their
strong family ties. Indirect entrants, on the other hand, reported that they first had to
build their knowledge about forming a new high-tech firm and substitute other
strong ties to act as brokers to government connections (i.e., though strong friends
ties). From Table 3.1, we estimated that indirect entrants waited an average of two
years prior to new firm formation and we suggest this waiting period as a future
research topic.
Strong family ties substituting weak governmental ties were indispensable for
direct entrant REs at the firm formation stage, but we speculate that REs’ inter-
national ties might be of more benefit when developing their firms, an observation
supported by Sullivan and Ford (2014). In addition, the local government was
endeavoring to establish formal institutions to support future entrepreneurship
activity (i.e., CEO networking events). These events may well stimulate the
accumulation of weak ties which may provide the REs with additional networks not
yet currently part of their repertoire. Such an observation is in tune with previous
literature (Granovetter, 1973; Burt, 1992; Elfring & Hulsink, 2003). Exploring
weak ties may open routes to needed future resources if not expand the size of the
REs’ network and facilitate access to social capital (Sullivan & Ford, 2014).
All REs had spent time in their host countries studying and/or working, and all
had built strong ties with their educational institutes, teachers, supervisors, and, in
some cases, to managers in the companies in which they worked abroad. This is not
uncommon in a society where respect for the teacher or the boss is revered as in
Confucian thinking. Normally, REs reported that their strong ties with educational
networks abroad were specifically exploited for technical knowledge procurement
and confirmation, while strong industrial ties were seen as offering an opening for
identifying potential, future customers. This is already known from the literature
where strong ties provide network partners access to similar others (Burt, 1992;
Granovetter, 1973). These reported strong ties abroad, however, were actually not
as important for new firm formation as the local ties. The strength and value of their
local ties influenced ease of firm formation, timing of formation, and the process of
idea validation.
A future study might reveal if the REs are putting themselves at a disadvantage
by relying so heavily on strong ties at the new firm formation stage, but we concede
that the substitution of strong ties gave access to weak ties. It has been suggested
that highly embedded strong ties may restrain access to new resources, new part-
ners, new opportunities; lower economic performance; reduce access to informa-
tion; lower efficiency; stifle innovation; and contribute to corruption (Uzzi, 1997;
Jack, 2005; Sun et al., 2012). At the new firm formation stage, we did not record
such events. We concluded findings similar to Jack (2005) who studied a rural
3 Returnee Entrepreneurs (REs): A Comparison Between Direct … 75
number of years. The pool of REs is a heterogeneous group, and those with weak
ties should be evaluated on their potential contribution for access to governmental
resources (rather than on the strength of tie). Employing REs in appropriate com-
panies to help acclimatization may further stimulate and influence further entre-
preneurial behavior. Formal networking activities, already undertaken, might be
sponsored by multinational companies to assist newly formed firms access domestic
talent and future markets. Internationally, social media networking sites dominated
communication patterns were often free, mobile, accessible, and vital for main-
taining communication. REs, who have been overseas for long periods, need to be
made aware of the high penetration and use of mobile devices in China and how
they are used to build and maintain ties.
Future research might attempt to explore the effect of length of stay overseas on
new firm formation and explore the effect of the generation in which the RE was
born. A comparative study between high-tech and non-high-tech REs on leveraging
resources might indicate differences in network structures and throw up differences
in the function and utility of network ties dependent on the value of their idea. It
may also be worth investigating the firm formation process from a longitudinal
perspective to gauge changes in network structure, value of and strength of relations
to explore further the strong industrial and educational ties reported in this study.
Although most REs wanted to harness the domestic market their propensity to
internationalize could also be studied. Nascent, habitual, or serial REs might also be
explored to expand the understanding of prior knowledge, prior experience, and
human capital on firm formation (Westhead & Wright, 1998). This is qualitative,
exploratory research and, in future, specifically using the constructed propositions,
there is ample room to conduct a large-scale quantitative study. Finally, a research
team dedicated to a guanxi led study may introduce an indigenous theory of net-
working which would be more fitting to the RE environment (Luo et al., 2012).
3.15 Conclusion
not world leading and unique but simply new to China (Zweig et al., 2006). One
explanation for not introducing innovation which causes ‘creative destruction’
might be that it is too expensive and time-consuming for a country which needs to
keep its GDP growth up at 7%. We note that the concept of innovation from a
‘creative destruction’ position relies heavily on opening a new market for already
existing technology products (Schumpeter, 1934). A knock-on effect for potential
high-tech entrepreneurs might, therefore, be a reluctance to experiment with the
latest technology and develop a new commodity.
Besides potential restriction on technological exploration, REs in this study
exploited different types of social networks (business advice, business resource,
friendship ties, and emotional support) to achieve different objectives during firm
formation. At times, the relationship was important, at others the value of their idea
important, and at others their access to human capital validated their ideas. The
predominance of strong ties at this firm formation junction goes against the tide of
literature calling for the maintenance of a network harnessing both strong and weak
ties to increase the social context (Granovetter, 1973). What we observed was a
reciprocal utility of the function of the REs’ idea and value of the relationship rather
than action or support being offered solely on the strength of the tie. The value
associated with the tie was important. Strong ties, however, remained a mechanism
through which REs generated knowledge and resources. One negative speculation
associated with strong ties for high-tech REs is that they target local needs rather
than experiment with new technologies. We therefore speculate that strong ties
might restrict creativity. Notwithstanding, strong governmental ties exploited dur-
ing the REs parents’ generation, based on trust, opened social contexts offering REs
access to weak ties for business development, for marketing, for internationaliza-
tion, etc… We see from this research that different social networks and their
contexts affect different parts of firm formation and that a longitudinal study may
well reveal that networks are dynamic (and that guanxi is fluid to appreciate the
changes in relationships or circumstance) and that REs be aware of the responsi-
bility of developing and maintaining ties within the context of Ningbo.
Acknowledgements The authors are grateful to Nottingham University Business School (Small
Grant Fund) and the Institute of Asian and Pacific Studies, both of the University of Nottingham
Ningbo China, for supporting and funding this research.
78 M. Farquharson and S. Pruthi
Key:
Strong ties:
Weak Ties:
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Author Biographies
Sarika Pruthi is Assistant Professor in Entrepreneurship at San Jose State University (SJSU),
California, USA. Her research examines International Venture Capital, and Transnational and
Returnee Entrepreneurship. Sarika’s work has appeared in the Asia Pacific Journal of
82 M. Farquharson and S. Pruthi
4.1 Introduction
High-tech start-ups have been recognized as the key contributors to job creation,
innovation, and economic growth of countries (Kirchhoff & Spencer, 2008). For
example, high-tech start-ups emerged as the key drivers for economic growth in the
USA, post the recession of decade of 1970s. Rapid pace of technological change
during the two decades of 1970 and 1980 opened up new opportunities for
high-tech entrepreneurship in developed economies. Globalization and internet
becoming a general purpose technology enabled the creation and growth of
high-tech start-ups in the emerging economies as well (Start-up Genome Report,
2012).
India has emerged as the third largest base for high-tech start-ups in the world,
with approximately 3100 start-ups operating in the country. The start-up ecosystem
in India attracted 300 venture capital/private equity and 225 angel investment deals
worth over $2.3 billion since 2010 and over 20 mergers and acquisitions worth $1
billion in the last 3 years. Over the last 12 months alone, 805 technology product/
digital start-ups were set up across the country, which is projected to grow fourfold
to hit 2,000 by 2020 (NASSCOM, 2014).
An earlier version of this chapter titled Transnational Entrepreneurship and Indian High-tech
Start-up Survival: An Empirical Investigation was published in a Special Issue of the South
Asian Journal of Management (SAJM), Volume 22, Issue No. 2, dated April–June 2015, on the
theme of Entrepreneurship in a Globalizing World.
While the above data paints an impressive picture, it must be noted that across
the world, the above contributions are made from a very small percentage of
high-tech start-ups, which have successfully managed to overcome the challenges
during initial stages of the firm life cycle. It has been well established that high-tech
start-ups suffer a very heavy failure rate (Stinchcombe, 1965; Certo, 2003). These
start-ups face many unique constraints during their initial stages of operation that
makes them highly amenable to failure. Therefore, a start-up would be able to
survive and sustain only if it can successfully overcome the liability of newness,
fighting against the uncertainty of value it promises to its stakeholders and dealing
with underdeveloped markets (Bala Subrahmanya, 2015).
From an entrepreneur perspective, two key abilities of the entrepreneurs have
been identified as pivotal to tide over the challenges during their start-up’s initial
years and to survive. These are the abilities to recognize and act on entrepreneurial
activities (Shane and Venkataraman 2000) and coping with liabilities of newness
(Stinchcombe, 1965; Shepherd, Douglas, & Shanley, 2000). Prior research has
suggested that transnational entrepreneurs and their communities enable diffusion
of knowledge and creation or upgrading of local capabilities. Saxenian and Li
(2003) noted that transnational entrepreneurs built specialization and innovation by
simultaneously maintaining connections with their host country and country of
origin. They observed that this mechanism helped them to monitor and respond to
changes in markets and technology.
Given the above background, this paper investigates whether transnational
entrepreneurs who create and operate high-tech start-ups in India are more likely to
survive and sustain in comparison with local entrepreneurs.
characteristics and behavioral attitudes; (ii) studies that use the characteristics of the
firm (organization); and (iii) studies that rely on evaluating the interplay of external
environmental parameters that influence the survival of high-tech start-ups. We
believe that this framework provides good context to understand the gaps in
existing literature, as well as help us in developing a theoretical framework to
further extend the existing knowledge that links transnational entrepreneurship to
high-tech start-up survival.
A few decades ago entrepreneurial research heavily focused on relying on the traits
and behavioral attributes of the entrepreneur to explain start-up survival. Factors
such as the need for achievement (McClelland, 1961), risk taking propensity
(Brockhaus, 1980), locus of control (Brockhaus, 1982), tolerance to ambiguity
(Schere, 1982), previous employment and education (Storey, 1982) have been
established as the necessary but not sufficient factors in determining survival.
In recent years, studies have shown that necessity-driven entrepreneurs
demonstrate lower survival rates in contrast to the opportunity-driven entrepreneurs
(Caliendo & Kritikos, 2010). Furdas and Kohn (2011) used a decomposition
approach to arrive at the same results. They showed that opportunity-driven
entrepreneurship as being associated with pull factors, and necessity-driven
entrepreneurship being associated with push factors.
The age of the entrepreneur has been established as an important determinant in
ensuring survival of start-up. Furdas and Kohn (2011) argued that age is considered
a substitute for general and specific knowledge, and hence, one should expect the
age of the entrepreneur to have a positive impact on the duration of
self-employment. They also examined the impact of education, experience in paid
employment, self-employment experience, and unemployment experience for their
effects in influencing survival of the start-up. They concluded that studies on these
entrepreneurs’ background have provided mixed results.
Prior research on firm-specific factors indicates that human capital of the
start-up, financial capitalization, and the market awareness capabilities of start-ups
is the key influencing factor for survival. Kim, Aldrich, and Keister (2006)
explained that human capital of the firm will help the firm to overcome challenges
and difficulties related to the functional aspects of the firm, such as finance, sales,
and marketing and in formation of new networks. To justify their explanation, they
provided examples of educated entrepreneurs being able to obtain credit more
easily, or that skilled entrepreneurs could identify the market needs better than the
rest, or that by virtue of education and/or skills, some entrepreneurs may be able to
create and sustain better social status and networks.
Gries and Naudé (2009) reviewed the capital requirements of high-tech start-ups
and their influence on the start-up creation and survival. They concluded that there
is mixed evidence on the impact of financial capitalization of the start-ups’ survival.
86 H. S. Krishna and M. H. Bala Subrahmanya
Higgins and Gulati (2006) noted legitimacy establishment of the start-up as one of
the key aspects contributing to the survival of high technology start-ups. They
identified three types of legitimacy, namely the resource, role, and endorsement
legitimacy as the key elements that influence the survival of high technology
start-ups.
Shepherd et al. (2000) developed a theoretical model to explain new venture
survival through the construct of mortality risk. They argued that the liability of
newness of a high technology start-up is dependent on the degree of novelty (ig-
norance) associated with the new start-up. Three different dimensions of novelty
(market, production, and management) were proposed to explain the survival
through these measures.
From an external environment perspective, factors such as the industry structure,
product–market mix, the regulatory environment, human capital, and financial
capital environment are the principal drivers influencing the survival of high-tech
start-ups. Audretsch (1995) studied the influence of industry-specific factors in
influencing start-up survival. His work brought out the impact of the macroenvi-
ronment factors specific to an industry sector—such as the growth and profit rate of
the industry sector, minimum efficient scale, degree and intensity of innovation on
start-up survival.
Roininen and Ylinenpää (2009) noted that the differences in high-tech start-up
survival and growth emanates from different factors such as the product charac-
teristics, the product/service being offered, the markets being considered by the
start-up, and the resources and strategies that the start-ups possess.
With this overview of key factors influencing high-tech start-up survival, we
now focus our attention toward examining the existing literature that discusses
transnational entrepreneurship.
1989); from a geography and industry sector specific lens (Light & Bonacich,
1988); behavioral aspects of transnational entrepreneurs (Portes, 1995; Light &
Gold, 2000); and also through economics-related aspects such as creation of new
business opportunities and technology transfer (Saxenian, 2002).
A review of individual factors influencing transnational entrepreneurship reveals
that the experience of immigration measured in terms of years of residence or
immigration class of the transnational entrepreneur as one of the key factors
influencing the phenomenon. Further, transnational entrepreneurs have a better
standing in their ethnic communities in many ways, be it human capital, social
capital or financial capital, and legal status (Portes, Haller, & Guranizo, 2002).
Light and Gold (2000) listed the resources such as professional knowledge and
skills, material resources, cultural capital, social position within an organization,
familial and communal lineage as being factors that enhance or constrain
transnational entrepreneurs. These factors, along-with the individual factors that
have been examined as the key influencers in the previous discussion on start-up
survival, help us understand the entrepreneur-related factors influencing transna-
tional entrepreneurship.
As regards the firm-specific factors influencing transnational entrepreneurship,
the human, social, and financial capitals of the firm have been examined as the key
factors influencing the start-up life cycle. In particular, the social capital of the firm
has been identified as playing a pivotal role. Davidson and Honig (2003) stated that
the social aspect of being a transnational entrepreneur allows access to both tangible
(capital, technology) and intangible (emotional support) resources.
Appropriate financial capitalization has always been seen as critical aspect of
enabling creation, survival, and sustenance of transnational enterprises. As venture
capital firms start making deals on a sustainable basis in emerging markets,
transnational entrepreneurs would view this development as being beneficial to
relocate part of their business activities to these geographies. These activities result
in mutually beneficial synergies and aid in development of the economy of the
emerging markets (Cumming, Fleming, & Schwienbacher, 2009).
From an external environment perspective, Portes (2003) deduced that factors
such as globalization, the market, and social conditions in the host countries as the
key influencers on the growth of transnational entrepreneurship. Yeung (2002)
observed that transnational entrepreneurs must also deal with the institutional
constraints of two or more geographies. He noted that transnational entrepreneurial
activities have to learn to withstand and change their mode of operations in tune
with the institutional environment in both home and host countries.
In the case of India, the government policies, post 1991, have enabled a rise of
transnational entrepreneurship. Levitt (2001) studied the relationship between
economic development of home countries and transnational entrepreneurship. It
was observed from the study that transnational entrepreneurship contributed to the
economic development in many countries of origin of transnational entrepreneurs
through investments and technology transfer. The study further noted that
transnational entrepreneurship resulted in countries modifying the citizenship or
88 H. S. Krishna and M. H. Bala Subrahmanya
The literature review provides a summary of the factors that influence survival of
high technology start-ups on the one end and transnational entrepreneurship on the
other end. However, a careful analysis of existing literature reveals that, to the best
of our knowledge, not much attention has been devoted on examining the linkage
between these two areas. Chen and Tan (2009) observed that there is a lack of
studies related to the transnational entrepreneurship field, which examine the scope,
mechanisms, and consequences of the domain.
The study of examining the extent and direction of influence of transnational
entrepreneurship on the survival of high-tech start-ups is very relevant and
important, especially, in the context of emerging economies like India. As discussed
earlier, India has emerged as the third largest base for high-tech start-ups in the
world, with approximately 3100 start-ups operating in the country. In order for
these high-tech start-ups to make a significant dent in shaping up the Indian
economy, suitable policy interventions are being made. In this context, under-
standing the influence of transnational entrepreneurs in shaping the Indian start-up
ecosystem is crucial.
Given the above background, this paper investigates whether transnational
entrepreneurs who create and operate high-tech start-ups in India are more likely to
survive and sustain in comparison with local entrepreneurs. Answers from this
research objective will aid in identification and creation of suitable policies toward
transnational entrepreneurs. It will also help in shoring up the policies targeted at
local entrepreneurs who are starting up high-tech ventures in the country.
The conceptual framework that is used to examine the objectives of this paper is
presented in Fig. 4.1.
Figure 4.1 framework indicates that entrepreneurial capabilities (individual
entrepreneur-specific factors) and the firm-specific resources impact the
entrepreneurship activities of a given region of study. Further, the survival of the
high technology start-ups is influenced by these factors, as well as from the external
ecosystem factors. Factors such as age, education, previous work experience, prior
start-up experience represent the “entrepreneurial capabilities.” Factors such as the
financial capitalization of the start-up, the development, and sales resources of the
start-up represent the “firm-specific resources” in the above conceptual framework.
4 Survival of Indian High-Tech Start-Ups: A Comparison … 89
The government regulations on start-ups and taxation policies represent the “ex-
ternal environmental parameters” in the above conceptual framework.
Based on the above conceptual framework, the objective of this study is to
examine whether transnational entrepreneurs who create and operate high-tech
start-ups in India are more likely to survive and sustain in comparison with local
entrepreneurs.
In order to validate the above objective, the following hypothesis is derived:
Ho: Ceteris Paribus, local, and transnational high-tech start-up entrepreneurs
have the same survival rates for the firms set up in India
The following sections will detail the research design, methodology, and the
statistical analysis that are used to validate the above objective and hypothesis.
For the purpose of this study, the geographical location is set as India, and by
design, the external environmental parameters are taken to be constant across all the
samples collected during the study. Also, to ensure homogeneity of data, only the
high-tech start-ups that are offering products and cloud-based solutions in the ICT
sector are considered. Hence, the design of this study enables us to control the
entrepreneurial and firm-specific factors on the survival of high technology
start-ups.
90 H. S. Krishna and M. H. Bala Subrahmanya
The paper uses primary data from 45 high-tech start-ups headquartered and oper-
ating across different locations in India for the purposes of analysis. Survival
analysis of the data using accelerated failure time models is conducted to determine
which entrepreneurial and firm-specific factors have a significant influence on the
survival of the start-ups and to what extent do they impact the survival.
A questionnaire was developed to collect data and validate the objectives of this
study. The questionnaire was designed to collect basic profile-related information
related to the founder and the start-up, as well as to collect information related to the
development and sales capabilities, funding status of the start-up, and time it took
for the start-up to reach the survival milestone. The data on the development and
sales capabilities were standardized to ensure comparison across the samples.
As indicated earlier, the scope of the study was restricted to ICT high-tech
start-ups who have their registered headquarters in India. Since there is no single
credible database of start-ups operating out of India, different data sources such as
industry associations—National Association for Software and Services Companies
(NASSCOM), Indian Software Product Industry Round Table (iSPIRT), Incubation
Centers such as Microsoft Accelerator, T-Labs, N S Raghavan Center for
Entrepreneurial Learning at IIM Bangalore—were contacted to identify the
start-ups. The questionnaire was personally administered by the researcher or
administered over the telephone to all the founders who agreed to participate in the
study during the month of February 2014.
on Indian start-ups, and compared it with our data. From the descriptive statistics
presented in the iSPIRT Report, we observed that the duration of operations of
start-ups profiled for the Report was between 2 months to 25 years. Further, about
95% of the founders had prior work experience. About 61% of the founders did not
have prior start-up experience as a founder. About 93% of the founders had their age
ranging between 21 and 50 years. In terms of education of the entrepreneurs, 43% of
the founders had an engineering bachelor’s degree, whereas 46% of the founders had
masters’ degree or higher educational qualification when they started their venture.
Based on the similarities of the descriptive statistics of the iSPIRT Report with our
data sample, we conclude that our sample is representative on all dimensions that we
could assess: industry demographics such as location, age of the start-up, market
sector, founder profiles such as education, experience and external funding status.
and the second dummy variable indicating education with a technical master’s
degree or above (Watson, Steward, & BarNir, 2003).
Sales capability of the start-up: The sales capability of the start-up is measured
as the number of customers/product offering at the time of the data collection
(Ensley, Pearson, & Pearce, 2003).
R&D capability of the start-up: The R&D capability of the start-up is measured
as the average work experience of the R&D team at the time of the data collection
(Thornhill 2006).
Financial capability of the start-up: Measured by a dichotomous (dummy)
variable which indicates whether or not the start-up obtained funding external to its
founder’s and his family’s funds. A value of 1 for this variable indicates that the
start-up was funded, and vice versa.
As indicated earlier, the external environment factors such as industry sector,
region/geography, and policy are ensured to be controlled by the research design by
limiting the scope of study to one industry based out of one country that has the
same policies at macroeconomic levels.
In this study, we use survival analysis as the method to understand the key factors
that impact survival of high-tech start-ups in India. Survival analysis deals with
analyzing the time to event-related data. The survival analysis model is advanta-
geous in scenarios such as the present study, because it has the ability to deal with
missing information called censored information. The model built for survival
analysis takes into account the time elapsed till the point of data collection, even for
the units of observation for which the event under observation has not occurred
(Aalen, Borgan, & Gjessing, 2008).
In our study, if the start-up did not yet achieve the product–market fit at the end
of the observation phase, then this start-up was censored “on the right”, that is, we
know that this particular start-up’s survival time is known to exceed the time
duration between its formal creation and the closure of observation. This censored
data provides additional information for statistical analysis, which is the reason
survival analysis is used in lieu of linear regression models.
The descriptive statistics for the variables that were used in the analyses are pre-
sented in Table 4.1.
The full model containing all independent variables and control variables rep-
resented in R—an open-source statistical software package is provided below:
4 Survival of Indian High-Tech Start-Ups: A Comparison … 93
Table 4.2 AIC computation for AFT models with different assumed distributions
Distribution Least AIC value Optimum model corresponding to least AIC value
Exponential 336.24 surv_data * fsexp + age + te
Weibull 309.61 surv_data * fsexp + age + fin + te
Log-logistic 310.75 surv_data * fsexp + age + fin
Log-normal 309.64 surv_data * fsexp + age + fin + te
Source Author calculations
[ model1 ¼ model1 ¼ surv data fi exp þ fs exp þ fage þ sales þ dev þ fin þ te
[ model1:step ¼ stepAICðsurvregðmodel1ÞÞ
For arriving at the most parsimonious model from the above full model,
Akaike’s Information Criterion (AIC) (Akaike, 1974) was used. AIC is a numerical
measure that weighs the likelihood of a model against its complexity. The AIC of
the AFT model is defined as: AIC = −2LL + 2(c + a) where LL is the logarithm of
the model likelihood (log-likelihood), c is the number of covariates and a is the
number of ancillary parameters (Weibull distribution has two parameters, k and a,
while exponential has only one parameter, k). A lower value of the AIC suggests a
better model.
The appropriate distribution of survival times to be used for analysis is deter-
mined by building AFT models for the above data using each of the following
distributions: Exponential, Weibull, and Log-logistic. The resulting AIC computed
for each of the distributions used which provides the most optimal model containing
the independent variables is presented in Table 4.2.
Since the Weibull model is found to have the lowest AIC for most of the models,
we choose to use this as the standard distribution that we subsequently discuss in
94 H. S. Krishna and M. H. Bala Subrahmanya
this study. The output of the computation using the Weibull distribution is provided
in Box 1.
All the variables present in the most efficient model are highly significant with
very small p values, significant at 0.001 levels.
The results indicate that entrepreneur’s prior start-up experience, transnational
status, and the financial capitalization of the start-up reduce the time to survival,
whereas the age of the entrepreneur marginally increases the time to survival of
Indian high-tech start-ups. These results are interpreted in the further paragraphs of
this section.
The key objective of this study was to examine whether or not transnational
entrepreneurs are able to reduce time to survival of their start-ups. The results
provide sufficient evidence that transnational entrepreneurs are able to reduce time
to survival of their start-up by a factor of exp(−0.314) = 73% shorter survival time
in comparison with the baseline. Hence, the null hypothesis proposed in the
framework section is invalidated. This result provides empirical evidence to support
many of the qualitative and theoretical propositions made in earlier transnational
entrepreneurship literature.
It is important to elaborate why transnational entrepreneurs fare well in com-
parison with local entrepreneurs of emerging economies. To begin with, transna-
tional entrepreneurs usually have better access to resources (Davidson & Honig,
2003). Most of the transnational entrepreneurs successfully leverage the best of
both countries (their current host country and country of origin). The most prevalent
model of such successes is to deploy capital, information, and technology from the
developed country to markets of countries of their origin.
In this study, prior industry experience and prior start-up experience were
introduced as two independent variables. The results indicate that prior start-up
4 Survival of Indian High-Tech Start-Ups: A Comparison … 95
experience will impact the survival time of a start-up rather than prior industry
experience. The results indicate that prior start-up experience will accelerate the
time to achieving survival by a factor of exp(−0.413) = 66% shorter survival time
in comparison with the baseline.
This is explainable, due to the fact that in a start-up, an individual will be
exposed to accelerated learning on multiple facets due to involvement in selling to
skeptical customers, developing a completely new product or service, creating a
business plan, organizing for resources and finance etc. In contrast to the above, in a
corporate or salaried environment, most often, an individual would need to work
according to previously discovered set of rules and processes across these func-
tional activities—hence leaving him with less room to gain further knowledge.
Besides the above, if the individual failed on account of not performing any of
the above stated activities correctly, resulting in closure of his start-up, the expe-
rience and learning obtained out of this will provide him much deeper insight on
how things should be done right the next time. This explains why prior start-up
experience and not prior industry experience will reduce time to survival of
high-tech start-ups.
The factor of funding has long been researched and established as a key factor
that contributes to survival of the start-up. The results indicate that funding will
accelerate the time to achieving survival by a factor of exp(−0.482) = 62% times
shorter survival time in comparison with the baseline. Funding of the start-up helps
the entrepreneur in multiple ways. It frees the entrepreneur to focus his energies and
abilities to exploit the entrepreneurial opportunity and also provides additional
cushion to react and deal with uncertain circumstances that a start-up faces in its
early stages. Further, the ability of the start-up to raise funds signals legitimacy and
has further network effects which positively impact the time to survival of start-ups.
The age of the entrepreneur is shown to marginally increase the time to survival,
based on the result obtained. Specifically, results indicate that age of the entre-
preneur will lengthen the time to achieving survival by a factor of exp(0.037) = 3%
times longer survival time in comparison with the baseline. This implies that
younger entrepreneurs are more likely to achieve survival faster, when compared to
older aged entrepreneurs.
It has to be noted that all entrepreneurs in this study had the basic level of
education of a degree at least. Given this background, all of these individuals would
already have the necessary and sufficient basic skills to pursue an entrepreneurial
opportunity. Younger generation entrepreneurs, below the median age of 32 years,
clearly have more exposure to the possibilities of leveraging ICT as the technology
as against the older generation entrepreneurs of median age 32 and above. This is
because, the technology maturity occurred only a couple of decades back and
clearly, the younger generation entrepreneurs can be expected to be more respon-
sive and dynamic in responding to an entrepreneurial opportunity. Hence, these
results indicate that given the minimum education, younger individuals are more
likely to achieve survival than the older individuals.
96 H. S. Krishna and M. H. Bala Subrahmanya
4.6 Conclusion
In the emerging countries, it is not clear as to which factors contribute or hinder high-tech
start-up survival. Our study has attempted to empirically examine which factors con-
tribute to the reduction of time of survival of high-tech start-ups by using primary data.
The outcomes of this study benefit both the entrepreneurs and policy makers.
The results indicate that transnational entrepreneurs are more likely to achieve
survival of their high-tech start-up in comparison with their local counterparts. In
addition, our findings establish that young technical transnational graduates, with
prior entrepreneurial experience and who have obtained early funding, will have
higher probability of achieving survival of their high-tech start-ups in India.
This study has attempted to investigate the broad phenomenon of start-up survival
in emerging countries, using transnational entrepreneurship literature as a lens of
examination. There are a few limitations and aspects for further research that need to
be noted. While the results obtained add to the existing knowledge on transnational
entrepreneurship, this study can further be extended in multiple ways in future. For
example, this study takes into account, only the high-tech start-ups in one country for
examination. While India as a country is a great representative of emerging econo-
mies, it will be prudent to enhance this study to include data from other emerging
economies and examine if the same results are obtained. Secondly, this study has
been conducted with a modest sample size. A larger sample would provide more
statistical validity and help extend the empirical relevance of the contributions of this
study. Thirdly, it is well acknowledged that entrepreneur-specific factors may have an
impact on the outcome of the firm-specific factors. These aspects have not been taken
into account in the present study, since the focus of the current study was to
understand the impact and influence of the main factors.
The outcomes of this study benefit both the entrepreneurs and policy makers. For
high-tech transnational start-up entrepreneurs looking to operate out of India, it
provides insights on the factors they need to focus on enhancing their chances of
survival. For policy makers, investors, and practitioners focused on emerging
economies, it reveals the type and kind of factors that should be examined to enable
a vibrant start-up ecosystem in the region.
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98 H. S. Krishna and M. H. Bala Subrahmanya
Author Biographies
5.1 Introduction
The high rates of economic growth of developing countries have provided enor-
mous opportunities for business expansion for Small and Medium Enterprises
(SMEs). These enterprises have considered international trade and alliances over
the years, and due to the increased globalization, the internationalization of smaller
firms was enhanced (Gjellerup, 2000).
The development of a global market was driven by the development of low cost
technology, new markets being opened and a decrease in trade barriers (Axinn,
2002). These emerged markets became places for investments by firms as they were
enabling further growth opportunities (Etemad, 2004). Small and Medium
Enterprises are progressively more functioning in global markets and the trade
liberalization and global rivalry puts forth further stress on firms. The firms must
withhold a viable competitive advantage due to the intricacies of global trade. As
the initial competitive strategies like differentiation based on the product devel-
opment, price, or technology have become less appealing, new methods must be
proposed (Lloyd-Reason, 2003).
Even though international business expansion of SMEs in business contexts has
been highly dissimilar, research studies on SMEs and individual entrepreneurs
The Government of India has propounded the Micro, Small and Medium Enterprises
Development (MSMED) Act-2006 where micro, small and medium enterprises are
defined as ‘enterprises engaged in the manufacture or production, processing or
preservation of goods as specified’ (MSME, 2015). The microenterprise is where the
investments in plants and machinery do not exceed Rs. 25 lakhs. Small enterprise is
where the investment is more than Rs. 25 lakhs but does not exceed Rs. 5 crores in
plant and machinery. In medium enterprise, the investment with respect to plant and
machinery will be more than Rs. 5 crore but not exceeding Rs. 10 crore. The
enterprise which provides or renders services is being defined by MSME Act-2006
as: microenterprise—investment in equipment does not exceed Rs. 10 lakhs, small
enterprise—investment is more than Rs. 10 lakh but not exceeding Rs. 2 crores in
equipment, medium enterprise—investment in equipment is more than Rs. 2 crores
but not exceeding Rs. 5 crores (MSME, 2015).
Internationalization is an activity which is an organizational level activity, but
which crosses the national borders (Wright, 1994). According to (Jones, 2005),
internationalization is characterized as ‘patterns of behavior, formed by an accu-
mulation of evidence manifest as events at specific reference points in time’. The
cross-border cooperation is often a viable form of internationalization for SMEs.
The relationships between cooperating partners and the form of cooperation are
very important for their success.
Internationalization is where the associations in international operations are at an
elevated level (Welch & Luostarinen, 1988). It can also be considered as a
cross-border expansion of economic activities by firms (Ruzzier, 2007). The
expansion of firms geographically is one of required ways which accelerates the
5 Entrepreneurs to Enterprise (E2E): Facilitating … 101
firm’s growth. It is a significant growth strategy for SMEs which has a geographically
restricted business span (Barringer, 1998). Internationalization is also considered as a
process of adaptation. The researches made earlier exploring SMEs were majorly with
emphasis on growth aspects of industrial firms through exporting (Kiran, Majumdar, &
Kishore, 2013), and very less data on the internationalization of smaller firms are being
researched on since large multinational firms were being a typical unit of analysis.
SMEs can use various modes of internationalization including strategic alliances,
production investments, exports, and contractual agreements. Earlier exporting was
considered as a determined entrance to international markets as it serves as a base
for international expansions in the future (Kogut, 1991). The SMEs faces compe-
tition from both domestic as well as overseas rivals (Lloyd-Reason, 2003). The
barriers for international commerce continue to decrease as the economy across the
world is more integrated, and there is enormous attention regarding the interna-
tionalization of SMEs (Lu, 2001). There has been an increased competition since
substantial number of firms enters the international business environment, which
reduces the capability of SMEs for controlling its own incremental paths to success
(Kiran et al., 2013). Considering the competitive environment prevailing now, the
need to identify and comprehend the factors which impacts international perfor-
mance has become a requirement (Kuivalainen, 2012). SMEs are considered as an
emerging sector, and it plays a crucial role in providing employment, and as a
driving force for economic development, it in turn enables the growth of emerging
nations (Kula, 2003). Internationalization theory is considered to affect large scale
enterprises research (Welch, 2009) and so for SME research, apparently size of the
firm does matter (Andresen, 2014).
Study of SMEs has been open for research but the role of SME is not yet actively
explored considering emerging economies. Since overseas expansion due to the
commencement of transformation process has made SME internationalization more
demanding and so research has become inevitable. So, there is more focus on the
theoretical aspects of the process of internationalization of the SMEs (Kraemer-Eis,
2014).
Studies on SMEs are very significant for social development and economic
welfare of a country. The encouragement of SMEs by providing an abundance of
government programs and policies emphasizes their significance which is aimed at
the national development. The SMEs have a crucial role to sustain the parent
country businesses with considerable pressure from foreign entrants in the home
market. In India, SMEs have made exceptional contribution to the economy. The
Micro, Small and Medium Enterprise (MSME) sector is also very crucial to the
economy as it consists of 29.8 million enterprises present in various industries, and
which employs around 69 million people. The sector also accounts for around 45%
of the industrial output and 40% of the overall exports. About 94% of MSMEs are
not registered, but the contribution of the SMEs to India’s GDP is consistently
increasing at a rate of 11.5% a year and is higher than the 8% of overall GDP
growth (MSME, 2015).
High-tech SMEs in India are a significant driving force considering the growth
of the manufacturing industries in the Indian industry. The technological
102 L. S. Mathew et al.
To sustain themselves in the global economy, SMEs must improve their prod-
ucts and processes by taking advantage of the intellectual capital by getting
involved with an active system of knowledge-intensive relations across borders.
The use of Information Technology to enhance the product designing and business
operations especially in SMEs are limited regardless of the extensive promotion of
information technology. SMEs also have limited capital investment that can be
utilized for regular usage of information, for developing efficient organization
processes, and for technology development. It is a clear indication that SMEs are
not utilizing the probable benefits of Information Technology (IT) (Ebrahim, 2009).
Factors such as innovative thinking and opportunity and risk taking predomi-
nantly impact a firm’s motive for internationalization (Lu, 2001). The barriers to
internationalization of SMEs can be drastically minimized by the concept of E2E
framework which arises from the conceptual framework of Virtual Enterprise.
Virtual enterprise is defined as ‘a temporary network of independent institutions,
businesses or specialized individuals, which works together in a spontaneous
manner by way of information and communication technology, to gain an extant
competitive edge. It integrates vertically, unifies their core competencies and
function as one organization (or organizational unit)’ (Christie, 1998). Virtual
corporation is stated as ‘a temporary or short-term network of independent com-
panies, suppliers and customers linked by information technology to share skills,
cost and access to one another’s core competencies’ (Barnatt, 1997). Virtual
organizations create a network or coalition of valid providers, manufacturers, and
administrative services that enables them to achieve the specific objectives of the
assignments taken up. When the objectives get accomplished, the organizational
relationships are then dissolved (Christie, 1998). This virtual network which mainly
supports the collective interest for executing common tasks and which also supports
the community members through the mutual interactions is the factor which binds
trust among the members. It thereby enables the members in the organizational
structure that are geographically dispersed to communicate, collaborate, maintain,
and sustain the one-to-one relationships between members in the disseminated work
environment of virtual world through the various medium of communications
(Crespo, 2012).
As per researches, entrepreneurial teams are considered as key features in the
international economic set-up and which gains a thrust by the dynamic forces and
complexities related with globalization (Covin, 1994). Also, the creation of ‘virtual’
or distributed knowledge teams has been followed frequently in start-ups and in
established organizations which generates new sources of value (Warkentin, 1997).
The entrepreneurial teams are a defined group of individuals that holds together the
foremost organizational events as a specific collective goal for a new venture for-
mation or as the initiation of innovation and strategic replenishment within pre-
vailing organizations (Andresen, 2014). The virtual teams include individuals who
are disjointed by time and space and who depend on communication technologies
to connect the geographic boundaries and wherein they aim to accomplish the
common goal (Leimeister, 2006). So, virtual entrepreneurial team can be consid-
ered as two or more individuals who engage collectively in innovative and
104 L. S. Mathew et al.
inventive activities together which in turn are proposed to form new ventures or
which enhances organizational mission as a shared goal even in the absence of
face-to-face contact between the members. Inadequate and contradicting results
which were set up in team configuration studies (Chowdhury, 2013) directed
researchers to give emphasis to resource-centred theory and to improve new
insights regarding how entrepreneurial teams should function.
Enterprises in the modern world need to become accustomed to the increasingly
competitive environment with rapid changes and should be able to adapt with the
unstable and volatile environment. To address this instability, many organizational
models and enterprise network models such as the comprehensive enterprise, net-
worked enterprise, agile manufacturing system, and the virtual enterprise have been
proposed (Abramovici, 2011). These innovative models can replicate the present
business scenario where competition is among enterprise networks and is no longer
between the enterprises since the individual enterprises have a lack of essential
skills which is required to fulfil the new market necessities (Filos, 2006). Even
though enterprise networks have become a very attractive and strategic option,
many strategic alliances were unstable and ineffective in the working scenario
(Mun, 2011).
The enterprise creation process starts when a business opportunity arises from the
consumer demand (Davidrajuh, 2003). The entities with qualifying competencies
come together wherein the partners through the process are formed. When an
assignment is floated, the leading entities quests for the prospective partners in the
central hub by using a broker which is denoted as proxy server. Once the potential
partners are identified, the trust values of trustees are evaluated and an Enterprise is
created by the negotiation process with the other alternatives available as in
Fig. 5.1. During the process of creating demand, the project constrictions and
strategies are revised and optimized accordingly (Mun, 2011).
Once the entities choose the partners, they will form an enterprise and each allotted
work will be carried out by the respective entities according to their core compe-
tencies. A frame work is shown in Fig. 5.2.
The ‘goal-oriented entity selection’ proposes the core paradigms of the trust model
developed which evaluates the trust values of the entities. Here, entity refers to an
entrepreneur which can be an individual or an organization itself. The entities
created for the common purpose will together form an enterprise (Mun, 2011). In
this model, the trust value created of entity A to entity B is fully subjected to the
goal of association by which distributed entities are integrated and entity network is
optimized (Yasir, 2013). In Fig. 5.3, the method of goal-oriented partner entity
selection is being depicted. Here, when an entity also called as a ‘trustor’ takes up a
business prospect and adopts to seek external resources, it generates an association
called Business Organization Management (BOM) to find its partners (i.e. other
entities). Based on it, the proxy server directs the information regarding the
potential entities, and the ‘trustor’ creates a virtual organization or the enterprise by
Fig. 5.3 Goal oriented entity selection (adapted from: Mun, 2011)
procedure of goal formation. The ‘trustor’ will then evaluate the trust values for
prospective partners considering the earlier predefined goals of the respective
assignment (Mun, 2011).
Fig. 5.4 E2E business process management framework (adapted: Romero & Molina, 2009)
108 L. S. Mathew et al.
The second step in VOCF is the representation of the CO recognized and to create
the draft plan for the prospective VO. Here, the VO organizer will characterize and
define strategies for reacting to the identified CO, which is enabled by the scheme
of a draft plan intended for the formation and operation of potential VO (Sitek,
2007). The third step of VOCF is partner search and selection process and aims to
enhance the potential VOE partner identification process and the valuation and
selection process where CO is recognized. VOE planner carries out the VO partner
search based on competency requests recognized in the process of CO characteri-
zation (Serrano, 2007). The last step of VOCF is the modelling of contracts and
agreements between VO entities which reflects a collaborative process through the
entire VO creation process. It is designed to support VOE planner, VOE coordi-
nator, and the potential VO partners in negotiations involved in a VO
(Camarinha-Matos, 2005).
VO Management Framework (VOMF) has the aim to integrate all the activities,
measures, and processes to regulate the VOE’s processes (operational), the specific
tasks and the probable interdependencies which supports in attaining specific VO
objectives and to meet the prerequisites and expectations of VO customer without
altering VOBE specific rules (Romero & Molina, 2009). The VO Management
Framework has 4 parameters which include VOE Initiation, VOE Operation, VOE
Evolution, and VOE Dissolution.
VO registration is where the VO profile is created which includes the broad
details about VO and about the partners and the competency-related information
(Karvonen, 2005). VOE performance measurement deals with giving support to the
VO coordinator on the process of visualization, monitoring, and alerting the
functionalities and thereby managing various sources of data from the VO partner’s
processes. In VO Dissolution which consists of Inheritance information manage-
ment Process, the VOBE management involves in the VO management as a support
to inheritance process. Valuable immaterial assets are formed in the VO creation
process. Operation of VOs creates several categories of assets in the life cycle; so as
a support to these, VO Dissolution is being made use of (Romero & Molina, 2009).
The VOBE management facilitates the success of various activities in the VOBE
and the fruitful conformation of VOs. The VOBE administration supports and
coordinates the activities that are required to be executed throughout the VOBE life
cycle stages from the first step of VOBE formation to the last phase of dissolution
(Romero & Molina, 2009). VOBE General Management Framework includes the
Management functions relating to areas such as marketing management, finance
and accounting, governance, managing assets, and other functions such as Value
System Information Management (VSIM), ICT Management (ICTM) and Support
Institutions Information Management (SIIM).
Strategic management outlines the method of creation of strategies by outlining
activities that would assist to align VOBE entity’s interests by means of their
respective proficiencies and towards the external business environment that VOBE
and other entity’s experience. The process of marketing which includes the
branding process will promote competencies of VOBE with the potential VO
110 L. S. Mathew et al.
the various administrative resolutions that are taken to appropriately manage the
numerous events and roles which are defined in a VOBE. So, a Decision Support
System (DSS) tool helps VOBE administration and the VOBE members to retain
the increased levels of competitiveness and to maintain the performance at peak
level by taking the right decisions (Sitek, 2007).
The E2E Integral Business Process Management Framework of establishing an
enterprise wherein entities join can be instituted more firmly by the defined group of
process models that confers to instances during the management processes. This
will thereby enable a firm structure of operation for the framework.
The research on the Entrepreneurs to Enterprise framework is revised model of
the Virtual Entrepreneurship Model wherein the researches are not yet done. The
Virtual Entrepreneurship combines sources across the globe to work together to
achieve a common goal. Virtual Entrepreneurship Model has no definite structure as
that of an enterprise and is also not involved in the profit sharing methodology,
decision-making or share of liability (Khayami, 2011). But in E2E Model, the
entrepreneurs will join to form an enterprise where it forms a structure of an
enterprise and works in a profit sharing mode. Here, the characteristics of an
enterprise which includes the liability, decision-making, management responsibil-
ities, accountability etc. are being incorporated in the Model. So, E2E model
functions virtually but as an enterprise.
The E2E Structure Diagram is depicted in Fig. 5.5. It represents a hub which has
many entrepreneurial entities and for an assignment, a set of entities will partner
together to form an enterprise. The hub will have many enterprises and the entre-
preneurial entities can be present in more than one enterprise. So, this encompasses
the Entrepreneur to Enterprise (E2E) framework.
The assignments will be floated in the common portal and entities can register
for the same. A goal-oriented entity selection as in Fig. 5.2 will be made. The
112 L. S. Mathew et al.
entities must register with respect to the skill set it has and it will be evaluated and
qualified by Common Portal. The entity selection will be in will follow the
‘Identification of entity partners by Core Competency requirements’. The areas
required for the assignment and other requirements will be specified and according
to the registrations by the entities, the enterprise will be formed. Each entity will
have to adhere to the deadlines of time. Termination of an entity from the
assignment can be done in case of not meeting up with the quality or time. The E2E
overall Structure will follow the ‘E2E Integral Business Process Management
Framework’ for defining its business processes.
5.5 Conclusion
marketplace while compared with the domestic market. The Indian SMEs are
having an impressive growth of exports since liberalization in 1991. The SMEs in
international markets of service sector also have a key role played wherein it
becomes the key contributor to the overall export of the country. The internation-
alization of service sector SMEs is projected in gaining better prospective since the
global economy has its continuous advances in technology.
But the barriers faced by SMEs which includes factors such as limited capital,
non-accessibility to technology, low production capacity, the rising constraints on
updating and expansions, scarceness of skilled labour largely impact in limiting the
growth of International SMEs. SMEs struggle with capital constraints matching
options to utilize a recognized opportunity and making intensive use of technolo-
gies to organize and partner with already existing organizations.
The ‘E2E’ structure will enable to bring the members for an access to global
markets and thereby makes it possible to globally share skills, knowledge, resources
and capital and so the barriers to internationalization of service sector SMEs can be
drastically minimized by the concept of E2E framework which adheres to the
concept of Virtual Enterprise. The key advantages of ‘E2E’ over a traditional
organization are that it has an extended flexibility, adaptability, responsiveness and
the synergy between the Entities. The ‘goal-oriented entity selection’ will identify
the ideal ‘Entities’ to partner for becoming the ‘Enterprise’. The entity selection will
be in will follow the ‘Identification of entity partners by Core Competency
requirements’. The E2E overall Structure will follow the ‘E2E Integral Business
Process Management Framework’ for defining its business processes.
‘E2E’ model suggests a change in the existing organizational structure which
incorporates a conceptual framework which will identify the supporting forces and
thereby promotes virtual entrepreneurship in the broad areas of business.
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Author Biographies
6.1 Introduction
Venture capitalist (VC) firms are financial intermediaries focused on funding projects
in emerging high-technology realms. Nascent technologies, domains and business
models and most importantly intangibility of assets are the mainstay of such
VC-funded projects. This results in an extreme level of information asymmetry, and
thus funding these projects warrants specialized risk assessment skills. In fact, VC
firms are known to possess the forte in selecting and monitoring ventures with an
extreme level of information asymmetry (Chan, 1983; MacIntoch, 1994; Sahlman,
1990; Amit, Glosten, & Muller, 1990, 1993; Amit, Brander, & Zott, 1998).
Information asymmetry results in two distinct kinds of risks—adverse selection
and moral hazard. Adverse selection risks are those resulting from hidden infor-
mation (i.e., entrepreneurs possess certain information not known to the VCs).
Moral hazard risks are the ones emanating from hidden actions (i.e., entrepreneurs
can take certain actions not observable by the VCs). As niche financial interme-
diaries, VC firms are known to be well-versed with strategies to tackle both of
these. While adverse selection is tackled by intensive proposal screening and due
An earlier version of this chapter titled Information Asymmetry Risks in Venture Capital
Investments: Strategies of Transnational Venture Capital Firms in India was published in a
Special Issue of the South Asian Journal of Management (SAJM), Volume 22, Issue No. 2,
dated April–June 2015, on the theme of Entrepreneurship in a Globalizing World.
K. Joshi (&)
National Institute of Advanced Studies (NIAS), Indian Institute of Science Campus,
Bengaluru 560012, India
e-mail: [email protected]
M. H. Bala Subrahmanya
Department of Management Studies, Indian Institute of Science, Bengaluru 560012, India
e-mail: [email protected]
The domain of specialization of the VC firm is among the most important guiding
factors in its investment decisions. Each VC firm consciously maps the domain of
the potential new deal with its own specialized domain. As such, VC firms are not
‘generalists.’ In fact, they tend to specialize by industry (such as biotechnology or
information technology), life stage of the venture (early, growth, late), geography,
or even the funding size (Ruhnka & Young, 1991; Gupta & Sapienza, 1992). The
resource-based view propounds that specialization provides the firm with
idiosyncratic or tacit knowledge about a domain which, in turn, enables the VC
firms to clearly weed out the riskiest projects thus reducing the intensity of the
adverse selection problem. In fact, it is this tacit knowledge that enables the VC
firm to derive its niche competitive advantage (Barney, 1991; Barney, Wright, &
Ketchen, 2001; Newbert, 2007). Thus, in general, any potential project whose
6 Information Asymmetry Risks in Venture Capital (VC) Investments … 121
profile does not match with the specialization domain of the VC firm is deemed to
be risky and hence not considered viable for funding.
Syndication or co-investing with other VC firms is another important signal of
potential risk. Different venture capitalists coming together and jointly investing in
a single deal is known as syndication. Usually, VC firms are more comfortable with
a deal when other VC firms of similar experience are willing to invest as well
(Lerner, 1994). The rationale behind syndication is that if multiple entities review
risk, it might be possible to reach closer to the ‘true’ estimate of risk. This leads to a
superior selection of investments (Sah & Stiglitz, 1984). Also, syndication can help
in spreading the risk across multiple entities thus providing the motivation to the
VC firms to consider those investment projects which would not have got con-
sidered earlier (Barry, 1994). Syndication not only helps in spreading risks but also
brings together more expertise and support that is warranted to add value to the
venture (Gompers & Lerner, 2004). Thus, syndication may actually help in alle-
viating the agency risks as well. For transnational VC firms spreading their wings to
Asian economies, syndication with the local VC firms proves to be an important
strategy of handling the information asymmetry risks associated with geographical
distance and cultural differences (Dai et al., 2012). However, it must be understood
that not all VC firms view syndication favorably. In the event of conflicts of interest
among co-investing VC firms, syndication might actually result in negative syn-
ergies (Lerner, 1994; Gompers, 1996; Gompers & Lerner, 2004).
Geographical distance between the VC and the investee firm is another potential
indicator of riskiness. It is a proxy for the extent of monitoring that is possible. Since
monitoring is critical for reducing agency risks, lesser geographical distance is typ-
ically associated with lower risk (Sapienza, 1992; Lerner, 1995; Sapienza, Manigart,
& Vermeir, 1996; Manigart et al., 2002; Sapienza, De Clercq, & Sandberg, 2005;
Cumming & Dai, 2010). Geographical distance not only impacts the risks emanating
from moral hazard but those from adverse selection as well. In the VC industry, the
information on investment opportunities is not public. Rather, it is only discretely
available through organizational networks. A high geographical distance reduces the
effectiveness of these channels and thus affects the ability of the VC firms to access
high-quality investment opportunities (Cumming & Dai, 2010).
Synergies between the proposed venture and the existing portfolio of VC
investments are regarded to be quite important in estimating risks. The proposed
new venture may either compete with the existing ventures in the VC’s portfolio or
may complement it. In either way, this would create significant synergies. In case of
competing deals, there may be economies of scale and scope to be leveraged and
risks reduced. However, these might also result in a mutual conflict of interests or
end up in the cannibalization of one another’s market share. In case of comple-
mentarities, the deals may potentially add significant value to each other thus
reducing the overall risk from both investments. In fact, it has been pointed out in
the literature that at certain times, the new venture would not have got selected on a
stand-alone basis, if not for the synergies it has with the rest of the portfolio
(Chesbrough, 2002; Petty & Gruber, 2011).
122 K. Joshi and M. H. Bala Subrahmanya
Expectations about the current and future macroeconomic environment are critical
for VC firms. A boom goes hand in hand with a liquidity of the markets and hence
directly affects the ease of exit. Exit is the only mechanism for a VC firm to realize
its return on investment and thus VCs closely monitor any conditions that could be
possible deterrents to successful exits (Schwienbacher, 2005, 2009; Cumming &
Johan, 2010). The other area that is of importance to VC firms is the favorable
government policies pertaining to VC investments in general—particularly, those
relating to taxation (Poterba, 1989; Gompers & Lerner, 2004).
Over and above the set of signals discussed in this section, we have identified
other relevant signals that are pertinent in the Indian social and cultural milieu.
These have been discussed at length in Sect. 6.3.1.
As of 2015, India ranked among the fastest growing global economies and is likely
to retain that position over the near future. Given its demographic dividend, India
needs to create about 10−15 Mn jobs annually over the next 10 years in order to
provide gainful employment opportunities to its young population (India, Planning
Commission, 2012). Moreover, it is well-understood that these jobs are unlikely to
emerge from either government or private sector but rather from innovative
entrepreneurial ventures (India, Planning Commission, 2012).
Likewise, India possesses an abundant pool of trained engineers and scientists.
There exist about 3450 engineering institutes (India, Economic Survey, 2014–2015)
that produce about 14 lakh technical graduates a year (All India Council for
Technical Education, 2016). Simultaneously, there exists no dearth of viable
problems (such as high-quality education, affordable health care, clean energy,
waste management, and financial inclusion among many others) that warrant urgent
attention (India, Planning Commission, 2012). And increasingly it is believed that
the innovative technology start-ups are best positioned to provide non-conventional
solutions to address the same (India, Planning Commission, 2012). Furthermore,
India’s consumer market is among the largest in the world and will continue to
remain so till 2030 (BCG, 2013). Given these factors, it should not be surprising
that India has indeed established itself as one of the most attractive destinations for
the deployment of global VC funds.
1
This section draws from the author’s published open access article “Managing the risks
from high-tech Investments in India: differential strategies of foreign and domestic venture capital
firms”, in 2018 in SpringerOpen journal Journal of Global Entrepreneurship Research, and can be
accessed via https://doi.org/10.1186/s40497-018-0106-6.
6 Information Asymmetry Risks in Venture Capital (VC) Investments … 123
Since the last decade, VC has been one of the prominent routes for funding
emerging businesses in India (Planning Commission, 2012). Although India has
had a rich historical tradition of entrepreneurship, the strategy of building busi-
nesses to sell is albeit a relatively recent phenomenon (India, Planning Commission,
2012). Among others, this change in the perspective of the Indian entrepreneurs can
be thought to be one of the principal factors responsible for the rapid emergence of
the VC industry here. Reverse migration of transnational entrepreneurs is another
noteworthy influence that has contributed to its evolution (Madhavan & Iriyama,
2009; Saxenian, 2010).
While VC as source of finance had been in existence in India since the late
1980s, it started playing an instrumental role in supporting emerging businesses
only during the post-dot-com era (Planning Commission, 2005). The growth of
VCs and the emergence of High-Tech start-ups in India has happened almost
parallely, with both of them having witnessed a significant boom since the latter
half of the past decade (Planning Commission, 2012). As of 2014, there are more
than 400 VCs in India, with about 309 of them being active. Collectively, these
have funded about 6000+ deals (Venture Intelligence, 2014) as the VC investments
in India in dollar terms have grown at a compounded annual growth rate of 30%.
The financial crises of 2008-09 that largely impacted the western world, in
particular the US, acted as a significant ‘push’ factor that drove VC funds to
emerging economies such as India and China in search of better returns.
Incidentally, the technology start-up landscape in the latter economies was just
developing wherein the VC funds acted as a much needed catalyst (Bain
Consulting, 2011, 2012). This was also the period when India witnessed high
interest rates regime (owing to high inflation rates), thus making VC funds an
attractive source of funding for technology entrepreneurs (Joshi & Bala
Subrahmanya, 2014).
Transnational VCs have led the rally of VC investments in India. About 80% of
the VC invested in India originates abroad and about 54% of Foreign Direct
Investment in India is in the form of VC and Private Equity (Bain Consulting, 2011,
2012, 2013; Ernst & Young, 2014; Delloitte, 2010). Several notable multinational
technology companies (such as Microsoft, Intel, Qualcomm, SAP, Amazon) have
established their own corporate VC set-ups to leverage the technologies developed by
the latter, while many others have set up their own business accelerators that incubate
young companies (Planning Commission, 2012; Venture Intelligence, 2014).
The growing investments by transnational VC firms have many aspects to it; the
most important among them being the restrictions on Indian fund providers to
contribute to the VC fund pool. In the interest of retail investor protection, in India
there exist several restrictions on pension funds, insurance companies, and provi-
dent funds contributing towards VC fund corpuses (Planning Commission, 2012).
However, it would be wrong to say that transnational VCs provide just finance,
rather they are known to possess the niche for ‘opportunity recognition’ in
high-tech domains. Additionally, they bring with them international networks that
provide access to markets abroad which is critical during scale-up phases of the
businesses (Devigne et al., 2013). On the contrary, domestic VCs have limited
124 K. Joshi and M. H. Bala Subrahmanya
For gaining an insight into the set of signals that mattered in the Indian milieu, we
consulted with several VC firm executives during the pre-data collection phase.
Additionally, we also perused through numerous VC industry reports that highlight
from time to time, the concerns of the VC firms operating in India (Bain
Consulting, 2011, 2012, 2013, 2014; Ernst & Young, 2014). Based on the same, we
identified a set of factors that we believe to be germane in the Indian context and
hence decided to probe these further.
The first among these pertains to the nature of ownership of the investee firms. In
particular, we are interested in understanding how the Indian VC firms view
family-owned businesses as potential targets for funding. A family-owned business
is defined as a one in which the firm is owned and managed by one or more family
members (USA, National Family Business, Survey, 1997). In India, the
family-owned businesses generate about two-third of the total GDP (90% of the
aggregate industry output) and account for 79% of the organized private sector
employment (KPMG, 2013). Naturally, such businesses are expected to provide an
attractive source of deal flow for the VC firms. However, on the other hand the
family-owned businesses are known to encounter significant corporate governance
issues (PwC, 2012–2013). This lack of corporate governance standards is likely to
further compound the magnitude of agency problems for the VC firms. Given the
above, we believe it will be interesting to probe how the Indian VC firms view firms
that are family-owned and entrepreneurs coming from business families.
6 Information Asymmetry Risks in Venture Capital (VC) Investments … 125
The channel of origination of the sourced deal is another important attribute that
we believe needs to be probed in the Indian context. Currently, the Indian market is
heavily intermediated, with about 80% of the deals being directly sourced from
investment banks and other networks. In fact, very few VC firms are known to
possess the proprietary edge in proactively sourcing prospective deals (Bain
Consulting, 2012). Of late, the Indian government too has been making efforts
toward augmenting the early-stage deal flow by actively promoting setting up of
academic and industry incubators (Ministry of MSMEs, 2013; Union Budget,
Ministry of Finance, 2014). These multiple channels of deal flow may be classified
into—‘warm’ referrals (those received from other VC firms, investment bankers,
and other existing entrepreneurs on their portfolio), ‘cold’ leads (from business
founders erstwhile unknown to the VC), and those that have been ‘proactively
sourced’ by the VC firms themselves. Generally, the risks associated with deals
coming via ‘warm’ referrals and ‘proactive sourcing’ are considered to be much
lower than those from the ‘cold’ leads. In fact, some of the most successful deals are
often those that have been actively sourced by the VC firms themselves (Tyebjee &
Bruno, 1984; Steier & Greenwood, 1995; Van Osnabrugge, 2000). Thus, in this
regard, we feel that it might be interesting to investigate how the VC firms view the
origination source of a prospective deal specifically from the viewpoint of being a
signal of potential risk.
Lastly, we believe it is important to probe how the Indian VC firms view
businesses necessitating a high interface with the government. The reasons for the
same are quite apparent. India is often viewed as a country where understanding
government procedures/regulations and maneuvering through them can be a cum-
bersome and notorious process. India’s poor rankings in ‘Ease of Doing Business’
and ‘Public Sector Corruption’ indices well support this fact.
Based on the review of the literature discussed in the previous section, we have
developed a conceptual framework identifying and linking the key variables.
Figure 6.1 presents the conceptual framework for this study that has been derived
based on the review of literature.
Based on the proposed framework in Fig. 6.1, our proposition is that the latent
signals used by the VC firms in India in assessing the risks of a prospective investee
firm can be divided into the following categories: entrepreneurial signals, VC firm
and deal signals, macroeconomic and policy-related signals, and relevant economic/
political/cultural/social signals. Each of the above signals is further divided into
multiple sub-categories. A VC firm intensely analyzes all of the above signals
to arrive at an estimate of potential venture risk. The nature of signals used to
arrive at risk estimates distinctly differs across domestic and transnational VC
firms.
126 K. Joshi and M. H. Bala Subrahmanya
Based on the proposed framework given in Fig. 6.1, we propose the fol-
lowing nine hypotheses regarding the signals used by the transnational VC
firms in India.
Hypothesis 1 In the absence of tangible historical performance data on the venture,
the transnational VC firms extensively use entrepreneurial signals.
Hypothesis 2 Specialization is regarded as an important risk assessment strategy
by the transnational VC firms.
Hypothesis 3 Transnational VC firms are more likely to use syndication as a
strategy for overcoming information asymmetry risks as compared to
domestic firms.
Hypothesis 4 Transnational VC firms are more likely to stay away from
early-stage deals as they are likely to possess a high degree of
information asymmetry.
Hypothesis 5 Geographical proximity between their own location (in India) and
that of the investee firm is important to transnational VC firms in
overcoming agency problems arising from information asymmetry.
Fig. 6.1 Conceptual framework: risk assessment based on latent signals. Source Authors’
proposition
6 Information Asymmetry Risks in Venture Capital (VC) Investments … 127
6.5 Methodology
The research design and methods of analysis are presented in the present section.
This study is mainly based on primary data collected from the VC professionals
across 72 active VC firms in India during the period from July 2013 to May 2014.
The VC firms in our sample have funded about 70% of the VC deals in India
between 2007 and 2013. These VC firms are spread across all major Indian cities—
Mumbai, Bengaluru, Chennai, Delhi (NCR area), Kolkata, Hyderabad, and
Ahmedabad.
To start with, we established contacts with the VC professionals in our sample
via multiple sources. To start with, we obtained their contact details from the India
Venture Capital Association (IVCA) Directory and the Venture Intelligence
Database. These directories list down the contact details (email addresses, telephone
numbers, and postal addresses) of these professionals. The professionals were then
contacted via emails and LinkedIn (professional networking Web site). Additional
contacts were also established by attending various professional networking events
(such as VC—entrepreneur meet-ups, seminars, and workshops). VC professionals
who exhibited an active interest in our study were requested to provide us further
references to their peers from the same domain.
As noted earlier, the VC firms in our sample have been categorized into two
distinct categories—those of domestic origin and others of transnational origin.
The VC firms of transnational origin are offshoots of larger transnational VC firms
or other multinational corporate entities. While a majority of them have established
registered offices in India, a few do not have any formal setup in India and primarily
128 K. Joshi and M. H. Bala Subrahmanya
operate from their countries of origin. Domestic VC firms are primarily of Indian
origin and are either offshoots of financial institutions/domestic corporates or are
independent VC entities themselves. It must be noted here that although a majority
of domestic VC firms too rely on overseas sources of funds, yet we have classified
them as domestic VC firms since their primary destination of investment is India
(Table 6.1).
Transnational and domestic VCs in our sample are both approximately of the
same age, viz. 6–7 years in terms of their years of operations in India. Each of them
has funded about 18 deals between the period 2008 and 2013 and has experienced
about 4–5 successful exits (mergers, acquisitions, and IPO exits). About 48% of the
transnational VCs are in Bengaluru as compared to just 27% of the domestic VCs.
The possible reason for this could be to effectively leverage the existing start-up
ecosystem, given their limited social capital. About 30% of the former are focused
on funding early-stage deals as compared to that of 47% for the latter. About 48%
of the transnational VCs are focused on funding ventures in high-tech domains (as
defined by deals in IT and ITeS and biotechnology sectors) as compared to that of
33% for their domestic counterparts. About 22% of these transnational VCs have
been started by erstwhile entrepreneurs as compared to that of 27% for the domestic
VCs.
Semi-structured questionnaire approach was used as the tool for primary data
collection. This was complemented by either face-to-face or telephonic interviews.
Along with primary data, we have also used secondary data from the Venture
Intelligence Database (2014) and in some instances from the respective VC fund
Web sites after seeking relevant clarifications with the concerned VC professionals.
The unit of analysis for the study is an individual VC firm (each of which has been
divided into either transnational or domestic).
Data analysis involved two steps: Exploratory Factor Analysis—EFA (to vali-
date and quantify the latent signals) and Logistic Regression Models to distinguish
between the signals used by transnational VC firms vis-à-vis domestic ones. The
analysis was performed using SPSS 21.0.0.0 software. For factor analysis, we
report the Cronbach alpha values. For logistic regression, we report the chi-square
values for model coefficients, Nagelkerke R2, −2 log likelihood, overall model
chi-squared value, Hosmer–Lemeshow statistic and the percentage of pairs cor-
rectly classified.
To start with, we provide a brief description about the VC firms from our sample.
Our sample comprised 29 transnational VC firms (about 40%), and 43 domestic VC
firms (60%). About 33% of the VC firms in our sample belonged to Bengaluru,
16% to Delhi, 40% to Mumbai, and the rest 11% to other cities in India.
While majority of the transnational VC firms were based in Bengaluru (43% of
all transnational VC firms), an overwhelming proportion (viz. 50%) of all domestic
VC firms belonged to Mumbai. This reaffirms the commonly held notion about
Bengaluru being one of the top emerging global technology hubs (Pullen, 2013).
Bengaluru is known to have one of the most vibrant start-up ecosystems in the
world (Pullen, 2013). Given the fact that transnational VC firms may not have
well-entrenched networks of their own in the local economy, they are more likely to
leverage such networks where they already exist (Dai et al., 2012). Thus, naturally,
they seem to gravitate toward Bengaluru as it has an already existing ecosystem of
incubators, accelerators, and a critical mass of early-stage companies. Mumbai, on
the other hand, is home to majority of the financial institutions. In fact, most of the
domestic firms that are offshoots of these institutions are located there.
The average age of VC firms (number of years of operations in India) in our
sample is about six years. Each of them has on an average funded 18 deals and
witnessed five exits. Both average age and the number of funded deals and exits do
not differ significantly across domestic and transnational VC firms. About 52% of
the domestic VC firms are registered with the Securities and Exchange Board of
India (SEBI—the official governing body for all VC firms operating in India) as
compared to that of 19% for the transnational VC firms. While it is mandatory for
most domestic VC firms (ones relying on pooled capital) to get registered with
SEBI, the same is not true for transnational firms. They can choose to invest in
India via the Foreign Direct Investment route with automatic approval from the
Reserve Bank of India or Foreign Investment Promotion Board (Desai, 2012). It
must be pointed out here that while it is not mandatory for all transnational VC
firms to register with SEBI, registration brings in some added benefits such as tax
pass through status. However, it also imposes constraints in terms of the exposure to
certain categories of firms, sectors of funding, and also the lock—in period for exits
(SEBI, 2012a, b). Thus, most transnational VC firms prefer to bypass the SEBI
route.
130 K. Joshi and M. H. Bala Subrahmanya
This section is divided into two subsections. The first section discusses the results
from Exploratory Factor Analysis (EFA). This is followed by the discussion on the
results obtained from the Logistic Regression Models.
The data obtained from the questionnaire were subjected to the EFA procedure. The
purpose of EFA is twofold. First is to validate the constructs proposed by us.
Second is to obtain the numerical value of each sub-construct (latent signals in this
case) based on factor scores. The factor scores obtained from the exploratory factor
analysis procedure are used as explanatory variables in regression models.
Our questionnaire comprised 40 items relating to four broad constructs about the
latent signals—entrepreneur and team, deal- and VC firm-related characteristics,
macroeconomic and policy-related characteristics, and India-specific attributes.
While a majority of the questions were based on the review of the literature, others
were arrived at after an initial round of discussions with VC industry professionals.
Each item listed in the questionnaire was aimed at measuring ‘the favorability with
which the VC firm viewed a prospective deal if it were to exhibit the stated
attribute’ (as mentioned in the item).
Content validity was taken care of based on expert opinion. In this regard, we
contacted both academicians and industry professionals. Among academicians, we
contacted other professors from reputed institutes in India working in similar
domains. Among industry professionals, we established an initial set of contacts
with a few VC professionals in Bengaluru and solicited their feedback on the
questionnaire. The feedback thus obtained from the two categories of experts was
incorporated in the latter version of the questionnaire. Construct validity was
measured using EFA. Reliability was assessed using Cronbach alpha values.
Varimax rotation was applied to principal components in order to extract factors.
Each of the constructs was separately factor analyzed to identify the sub-constructs
therein. Items that exhibited high reliability (Cronbach’s alpha >0.60), high factor
loadings (>0.40), and low cross-loadings (<0.40) were chosen to represent factors.
Based on the EFA results, each construct was further subdivided into multiple
sub-constructs. The Cronbach alpha values have been given in Table 6.2.
The construct on entrepreneurial signals got further subdivided into six
sub-constructs. Educational Pedigree measures the importance that the VC firms
would attach to factors such as entrepreneur being an alumni of top engineering or
B-schools in India or having a degree from abroad. Team Size and Composition
measures the relative importance of factors such as team size and diversity within
the founding team (in terms of experience and education). Past Founding
6 Information Asymmetry Risks in Venture Capital (VC) Investments … 131
Having discussed the results obtained from the EFA procedure, we now move on to
the discussion of the regression results. The results from the Logistic Regression
Model have been given in Table 6.3. To reiterate, the primary conjecture in these
models is—transnational VC firms encounter severe information asymmetry risks
while investing in countries different from their country of origin. Thus, they
intensely need to rely on tacit signals in their risk assessment while making
investment decisions.
The information on tacit signals is quantified using the factor scores. In addition
to these, we have used additional variables pertaining to the VC firm profile in the
regression models. These are the following: indicator variable for an early-stage VC
firm, indicator variable for SEBI registration, and indicator variable for the location
of the firm. Due to the correlation between the variables—Family Ownership Type
and Owner Characteristics and Limited Government Interface, these have been
included in separate models.
Coming to the discussion of model variables, we find that syndication is an
important signal relied on by the transnational VC firms while making their
investment decisions. The transnational VC firms in our sample have a lower
number of non-syndicated deals (consequently, a higher number of syndicated
deals) as compared to the domestic VC firms. This finding is well-supported by the
academic literature. It has been found that the information asymmetries between the
VC and its portfolio companies are often difficult to resolve when the portfolio
company is located outside the VC’s own home country (Schertler & Tykvová,
2011).
Although transnational VC firms have advantages in terms of the magnitude of
their large financial resources, international experience, and wider networks, they
are hugely constrained by the information asymmetry while investing in foreign
destinations (Delloitte, 2010). Co-investing with the local VC firms aids in
6 Information Asymmetry Risks in Venture Capital (VC) Investments … 133
Table 6.3 Logistic regression results—transnational VC firms and the use of latent signals
Dependent variable: transnational VC firm = 1; domestic VC firm = 0
Number of observations = 70
Latent signals
Model 1 Model 2
Beta-coefficient Chi-square Exp Beta-coefficient Chi-square Exp
statistic (b) statistic (b)
Constant 0.985 0.149 2.677 −0.918 0.297 0.399
Latent signals
Portfolio 0.971** 4.544 2.641 – – –
diversification fit
Business ownership 1.034** 3.905 2.813 – – –
type and owner
characteristics
Proportion of −2.246* 3.699 0.106 – – –
non-syndicated deals
Past start-up 2.276** 3.862 9.744 – – –
experience
Geography −0.923** 4.885 0.398 – – –
Trust 1.076** 4.590 0.032 – – –
Limited Government – – – 0.715 2.351 2.044
Interface
VC firm profile-related variables
Early-stage deals −3.452*** 8.294 0.032 −2.802*** 9.616 0.061
SEBI registered −1.622* 3.295 0.069 −1.918*** 7.622 0.147
Located in Mumbai −3.505*** 8.372 0.030 −1.534** 5.213 0.216
Model statistics
Nagelkerke R2 0.605 0.395
Cox and Snell’s R2 0.448 0.292
−2 log likelihood 52.683 70.049
Model chi-square 41.539 with 9 degrees of freedom. p- 24.173 with 4 degrees of freedom. p-
statistic value 0.000 value 0.000
Hosmer–Lemeshow 0.832 0.877
goodness of fit
statistic
% Correctly classified 85.7% 71.4%
Note *indicates significance at 10% level, **indicates significance at 5% level, ***indicates significance at
1% level
Source Authors’ calculations
Typically, domestic and transnational VC firms possess different types of skill sets.
While the domestic companies have well-developed regional networks with
potential vendors, customers and other significant stakeholders in general, the
transnational VC firms possess the financial muscle and networks to scale up and
grow internationally (Devigne et al., 2013). Thus, syndication of deals between the
two parties enables each of them to leverage the skill sets of both these parties.
Apart from explicitly syndicating with the local VCs, the transnational VCs are
known to extensively hire their investment teams by poaching from the former
(Dossani & Kenney, 2002). This helps them in piggybacking on the social networks
of these local professionals.
Specialization as a signal did not turn out to be significant in our models. This
may possibly be attributed to two factors. On the one hand, the Indian market is not
yet deep enough in terms of the number of prospective deals available for invest-
ment. The depth of the market can be established by the volume of VC investments
in a region—the average annual VC investments between the years 2006 and 2013
were USD 31.2 Bn in the USA as compared to that of USD 1.23 Bn for India
(Ernst & Young, 2014). Second, the transnational VC firms have relatively larger
fund sizes (as compared to their domestic counterparts) thus making niche domain
specialization even more difficult in the face of an already existing low-depth
market. The average fund size of transnational VC firms is USD 95 Mn as com-
pared to USD 53 Mn for domestic ones (Venture Intelligence, 2014).
It is also observed that transnational VC firms consciously stay away from
funding early-stage deals. It is well-understood that transnational VC firms prefer
investing in informationally transparent ventures (Dai et al., 2012). Early-stage
firms belonging to technology domains have a huge level of information asymmetry
associated with them consequently adding an additional layer of risks. Handling
these risks warrants a deep understanding of local conditions. Since such abilities of
the transnational VC firms are likely to be quite limited, they stay away from such
ventures. Also, the early-stage companies require a much higher level of involve-
ment on the part of the VC firm (Gupta & Sapienza, 1992). Given their in-depth
understanding of local conditions, the domestic VCs are well positioned to assist
investee firms during their earlier phases (Devigne et al., 2013). Thus in general,
since the local VC firms are more likely to possess the requisite skill sets for
investing in and managing the early-stage ventures, investment in such ventures is
usually considered a prerogative of the domestic VC firms.
Another signal that is considered important by the transnational VC firms is the
past start-up experience of the prospective founder. Since local networks of the
transnational VC firms are expected to be quite limited, they seem to place a high
value on prospective founders who have set up ventures of their own in the past.
Such founders are likely to have well-developed networks of their own due to their
prior involvement with community-based entrepreneurial clubs, events, and media
(Hsu, 2007). Above all, their prior founding experience enables them to have an
intimate understanding of the legal and institutional mechanisms. To sum up, such
founders with prior founding background are seen to be well-endowed with sig-
nificant social capital as compared to others (Hsu, 2007). These findings are
6 Information Asymmetry Risks in Venture Capital (VC) Investments … 135
well-supported by the resource-based view of the firm which propounds that tacit
knowledge possessed by a firm is associated with superior performance since such
resources are valuable, rare, inimitable, and non-substitutable (Barney, 1991;
Kraaijenbrink, Spender, & Groen, 2010; Dimov & Shepherd, 2005). Links to the
existing networks and an intimate understanding of the legal and institutional
mechanisms may be viewed as one of such potential sources of tacit knowledge.
Geographical proximity is another important signal used by all categories of VC
firms in general (Cumming & Dai, 2010; Dai et al., 2012). In general, VC firms are
known to possess a strong local bias in their investments (Dai et al., 2012).
However, in our regression model the variable Geography enters with a negative
sign. This means that geographical proximity is not regarded as important by the
transnational VC firms. This can be explained in many possible ways. First, the
market for deals in India lacks sufficient depth to permit intense geographical
specialization. Thus, they are forced to invest in deals even if they are geograph-
ically quite distant from the location of their offices. Second, many transnational
VC firms have more than one regional offices in India well-spread across geo-
graphical regions. Thus, in principle, they do ensure that the location of the investee
firm is closer to at least one of their local offices. Third, they intensely syndicate
with the local VC firms when investing in geographically distant ventures.
Syndication with the local VC firms ensures smooth information flow and moni-
toring (Bergemann & Hege, 1998; Wright & Locketst, 2003; Manigart et al., 2006)
which makes up for the physical distance.
Portfolio Diversification Fit of the prospective deal is another important signal in
the context of transnational VC firms. As discussed earlier, VC firms may either
have ‘deal-specific’ or a ‘portfolio-specific’ view to investments. Our results reveal
that as compared to the domestic VC firms, transnational VC firms are more likely
to assess how well a prospective deal fits their preexisting portfolio from the
viewpoint of risk diversification. We believe there to be two reasons for the same.
Since the relative deal sizes are much larger for transnational VC firms, risk
diversification becomes a necessity to consciously avoid overexposure to certain
sectors or investment stages. The average size of an early-stage deal is about USD
4.8 Mn for transnational VC firms as compared to that of USD 2.4 Mn for domestic
VC firms (Venture Intelligence, 2014). Second, since the relative fund size is also
much higher for transnational VC firms as compared to their domestic counterparts,
diversification is also feasible. The average fund size of transnational VC firms is
USD 95 Mn as compared to USD 53 Mn for domestic ones (Venture Intelligence,
2014). Although many domestic VC firms would certainly like to practice diver-
sification, their smaller fund sizes inhibit them from doing so.
Coming to the economic, political, social, and cultural signals relevant to India,
we found Business Ownership Type and Owner Characteristics to be an important
signal for the transnational VC firms. This factor assesses how the VC firm views
attributes such as the prospective venture (not) being a family-owned business and
the entrepreneur being a first-generation entrepreneur. The transnational VC firms
were very particular that they would refrain from funding family-owned businesses
and fund only first-generation entrepreneurs. It was quite commonly felt that
136 K. Joshi and M. H. Bala Subrahmanya
enable both the parties to set up mechanisms (viz. in the form of appropriate
contracts) to alleviate these.
From the policy angle, we can draw a few interesting conclusions. We find that
lack of depth of the Indian VC market emerges as one of the major areas of concern.
Of late, the government has taken several steps to enhance the deal flow. One of
these is the emphasis on setting up more and more incubators (Ministry of MSMEs,
2013). However, most VC firms in our sample consider the academic incubation
setups far from satisfactory. Rather, it is felt that these incubators are not functional
in the true sense, i.e., they provide just physical infrastructure but not the requisite
technical know-how, mentoring, and access to other vital networks. Another
important factor is the lack of local networks that deters the transnational VC firms
from investing in early-stage ventures. To resolve this issue, it also important to
encourage local private intermediaries that will facilitate the transnational VCs to
develop their own networks and thus facilitate in resolving the underlying infor-
mation asymmetry.
The importance of early-stage investments has been well-recognized by the
policy makers (Planning Commission, 2012). Also, given its mammoth techno-
logical man power, India has a comparative advantage in terms of establishing
businesses in the high-technology arena. Hence, it is important that government
policies need to focus on facilitating the networks between local and transnational
entrepreneurs, VC firms, and other financial intermediaries via formal or informal
channels; such that the transnational VC firms will be more amenable to investing
in early-stage technology ventures.
We believe that there can be two possible extensions of this study. First, it is
necessary to undertake this study at a deal level in order to probe the nature of
signals with greater granularity. We were unable to do so currently due to data
limitations. Second, we believe that the VC firms in India may be additionally
segmented into early- versus late-stage VCs and those that have been set up by
erstwhile entrepreneurs versus those that are not. Naturally, the signals influencing
each of these categories of VCs are expected to be very different from one another.
This needs to be further probed.
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142 K. Joshi and M. H. Bala Subrahmanya
Author Biographies
Kshitija Joshi is currently Assistant Professor at the National Institute of Advanced Studies
(NIAS), IISc Bangalore campus, Bengaluru. She has completed her Ph.D. in the area of Venture
Capital Investing in India from the Department of Management Studies, IISc, Bengaluru, in 2016.
Prior to that, she has worked for about 11 years in the Business Analytics Industry in Bengaluru.
She also holds an MPhil degree from Indira Gandhi Institute of Development Research (IGIDR),
Mumbai, and has several journal and conference publications to her credit.
R. Rajendran
7.1 Introduction
An earlier version of this chapter titled Influence of Information Systems Strategic Orientation
on SMEs’ Perception of Export Barriers was published in a Special Issue of the South Asian
Journal of Management (SAJM), Volume 22, Issue No. 2, dated April–June 2015, on the theme
of Entrepreneurship in a Globalizing World.
R. Rajendran (&)
SRIT Business School, Sri Ramakrishna Institute of Technology (SRIT), Pachapalayam,
Perur Chettiplayam, Coimbatore 641010, Tamil Nadu, India
e-mail: [email protected]
come under firm perspective. The Uppsala internationalization model (U Model) and
the innovation related model (I Model) are the two primary stage models (Gankema,
Snuif, & Zwart, 2000). U Model is a learning dynamic model that considers the
international expansion involves small incremental steps whereas I Model considers
each phase of internationalization as an innovation (Knight & Cavusgil, 2004).
In network approach, the network is used as the starting point. The SMEs
internationalize following the other firms in their international network (Holmlund
& Kock, 1998). Resource based approach is another perspective on SME interna-
tionalization focusing on their critical resource development and SME strategic
behavior.
International entrepreneurship is a new emerging perspective to SME internation-
alization. This is a process approach primarily focusing to the strategic entrepreneurial
behavior of international start-ups and this model is more relevant to the born global
manufacturing SMEs (Andersson, 2000; Hitt, Ireland, Camp, & Sexton, 2001).
The most commonly discussed topic in SME internationalization reports is the bar-
riers for internationalization as perceived by the SMEs (Leonidou, 2004) and the
barriers are more important the smaller the SME (European Commission, 2010). An
extensive literature is available regarding the importance and extent of various
internationalization export barriers (Bauerschmidt, Sullivan, & Gillespie, 1985; Kedia
& Chhokar, 1986; Namiki, 1988; Sharkey, Lim, & Kim, 1989). Leonidou (1995a)
made an attempt to integrate the relevant literatures. There is no consensus in usage of
export barrier measurement scale (Arteaga-Ortiz & Fernandaz-Ortiz, 2010). Hamill
and Gregory (1997) classify the export barriers into four major categories namely
organizational barriers, operational barriers, product and market barriers, and psy-
chological barriers. The psychic distance is another set of barriers. Leonidou’s
(1995b) study among 112 SMEs reveals that the biggest hindrance to export
development activities is fear of acute competition in the international market.
Bennett (1997) finds that with usage of Web for export marketing, some of the
basic reasons for the progressive internationalization of enterprises (Gankema et al.,
2000) are no longer relevant in the SME context (Arenius et al., 2005; Knight &
Cavusgil, 1996). Hornby, Goulding, and Poon (2002) concludes that usage of
Internet made Australian SME exporters perceived export barriers less severe than
that perceived by SME exporters in UK. However, Vivekanandan and Rajendran
(2006a) finds among born global manufacturing SMEs the Web presence alone do
not significantly influence the perception of severity of export barriers. Only in the
case of growth oriented young SMEs with the company age less than 10 years, the
website ownership has significant influence on perception towards export barriers.
The perception towards export barriers significantly differs among the adopter
categories of electronic commerce (Vivekanandan & Rajendran, 2006b).
146 R. Rajendran
The application of information systems in general, the Internet and Web tech-
nologies in particular provide not only operational, managerial and strategic
advantages to manufacturing SMEs, but also provide them opportunities for
internationalization (Bell & Loane, 2010; Loane, 2005). For young born global
startup firms, their web presence lessens the perception of severity of export barriers
(Vivekanandan & Rajendran, 2006a). European Commission (2010) concludes
the Internet enabled SMEs of all sizes to break the export barriers to
internationalization.
Raymond, Bergeron, and Blili (2005) emphasis the investment in E-business can
ensure greater performance only when SMEs are aligned with their business
strategies. Rajendran and Vivekanandan (2008) found the strategic orientation of
the existing portfolio of information systems applications, representing the infor-
mation systems strategies realized from the process of strategic alignment had
business performance implication for born global Indian SMEs.
The SME business strategy literature provides evidence that SMEs have to adopt
numerous strategies. These studies have formulated on typologies based on large
firms namely Ansoff’s (1965) matrix of strategies and Porter’s (1980) generic
strategies but failed to draw a consensus model for strategies of small businesses
(Southern & Tilley, 2000). As the SME business strategy formulation is informal,
implicit, intuitive and incremental (Mintzberg, 1988), the explicit identification is
found to be more elusive (Lefebvre, Langley, Harvey, & Lefebvre, 1992).
Cragg, King, and Hussin (2002) extracted a list of strategies that contributed
toward SMEs business competitiveness from these studies and refined the list to
arrive a total number of nine business strategies. To capture the actual and realized
deployment of information systems applications, the researchers design the
instrument for information systems strategies around the same nine business
strategies that are aimed for alignment (Bergeron, Raymond, & Rivard, 2004;
Henderson & Venkatraman, 1993). The assessment reveals the extent to which the
information systems support that particular aspect of business strategy. The
7 Influence of Information Systems Strategic Orientation on SMEs’ … 147
underlying factors of these variables reveal the strategic orientation (Rajendran &
Vivekanandan, 2008).
The strategic orientation of information systems applications represents the
general pattern of realized information systems strategies. This strategic orientation
of information systems provides valuable predictive information on perceived
business performance. Rajendran and Vivekanandan’s (2008) survey among the
born global manufacturing SMEs revealed the three dimensions of information
systems strategic orientation named as Cost—Quality Leadership, Product
Development and Market Development.
Mohamad and Ismail (2013) confirm a positive relationship between usage of
E-business applications and the cumulative business value for SMEs. Dutot et al.
(2014) call for a deeper understanding of how SMEs are developing their infor-
mation management capabilities based on various business strategies to insure
greater international performance.
The current research study extends the earlier research studies on export barriers
(Vivekanandan & Rajendran, 2006a) and information systems strategic orientation
(Rajendran & Vivekanandan, 2008) a step further by investigating the impact of
information systems strategic orientation on perception towards export barriers to
reveal the inner mechanism of SME rapid internationalization through the more
advanced data analysis techniques.
The present study examines the direction, strength and significance of the influence
of the Information Systems Strategic Orientation (ISSO) on the perception of
Internationalization Export Barriers (IEB) among born global manufacturing SMEs.
The second order reflective construct ISSO has three dimensions namely
Cost-Quality Leadership (CQL), Product Development (PD) and Market
Development (MD). The four indicators of the second order construct IEB are
Organizational Barriers (ORB), Product and Market Barriers (PMB), Psychological
Barriers (PSB) and Operational Barriers (OPB). The Psychic Distance Barriers
(PDB) is considered as part of PSB for parsimony.
Various researches found the information systems that facilitate the electronic
commerce and electronic business practices lessen the severity of export barriers
perceived by SMEs. Hamill and Gregory (1997) concluded that the effective usage
of Internet (Loane, 2005) could not only support SMEs in overcoming the export
barriers bust also result in rapid internationalization. The development of infor-
mation technology capabilities was found positively influencing the SMEs inter-
nationalization (Hassouneh & Brengman, 2011; Raymond & Bergeron, 2008) and
their organizational performance (Zhang, Sarker, & Sarker, 2008). However Chae
et al. (2014) found the link between information technology capabilities and
business performance does no longer exist for larger firms.
148 R. Rajendran
7.3 Method
The participants of the mail survey conducted for the study are the SME exporters
of Tirupur, a town of export excellence in the state of Tamil Nadu, India. This
industrial natural cluster of manufacturing SMEs is well known for its excellent
export performance and its participation in the global apparel supply chain as a
quality supplier.
The first hosiery factory was setup in 1935 with hand-operated sewing machines.
From the early 1980s onwards, the focus of this cluster shifted from domestic to
international market. From 1995 onwards, the SMEs are active members of the
global apparel (readymade garment) production network. The social capital with
flexible specialization is the most important facilitator of the fast growth of the
industry. The industrial natural cluster is dominated by born global SMEs
(Svensson & Payan, 2009).
The ownership status of majority of the participating SMEs is Partnership and
three-fourth of the SMEs are more than ten years old. Two third of the SMEs have
grown beyond stabilization phase in their growth stages. Europe and North America
are the primary export market for these SMEs. The usage of computer systems has
become ubiquitous among these SMEs. Eighty three percentage of the SMEs are
using Internet for more than three years and sixty one percentage of the SMEs have
their own websites.
The 1100 active member SMEs of Indian Apparel Export Promotion Council, a
Government of India organization sponsored by Ministry of Textile and registered
under section 25 of Indian Company Act was considered as sample frame. Using
simple random sampling method 150 SMEs were selected for pilot study from this
sampling frame. The remaining 950 members were contacted through postal service
7 Influence of Information Systems Strategic Orientation on SMEs’ … 149
for main survey. In total 127 valid filled in questionnaires were received. The final
response rate is 14%, which is within the typical response range of 10–15% for
similar SME survey (Karimabady & Brunn, 1991). For non-response bias
(Armstrong & Overton, 1982), the data of the first thirty respondent SMEs and last
thirty respondent SMEs are analyzed and found no significant difference suggesting
no non-response bias.
7.3.3 Measurement
The sixteen barriers derived by Vivekanandan and Rajendran (2006a) from a list of
export barriers arrived from the literature was considered as export barriers for this
study. To measure the perception among exporting SMEs toward these export
barriers, the five point Likert scale (1—very minor problem and 5—very major
problem) employed by Bennett (1997) was adopted.
The nine strategies identified by Cragg et al. (2002) were considered as Business
strategies of these born global manufacturing SMEs. The instrument for informa-
tion systems strategies was designed around these nine business strategies. A five
point Likert scale (1—strongly disagree and 5—strongly agree) was used for
measurement of information systems strategies by assessing the extent to which the
information systems support that particular aspect of business strategy (Chan, Huff,
Barclay, & Copelan, 1997). The structure of information systems strategic orien-
tation found by Rajendran and Vivekanandan (2008) was considered as the
dimension of strategic orientation and concerned information systems strategies as
their indicators.
The questionnaire was subjected to a pre-testing with professionals and practi-
tioners and then to a pilot study to refine at three stages. Each questionnaire was
mailed with a prepaid business reply envelope accompanying a letter explaining the
purpose of the research study.
The causal research design was adopted for this study. A research model has been
developed and a hypothesis was proposed for analysis. A mail survey was con-
ducted for data collection. The collected data were analyzed using structural
equation modeling (Gefen, Rigdon, & Straub, 2011) with SPSS AMOS. The
structural equation modeling is selected for its ability to assess the modeled rela-
tionships comprehensively with confirmatory analysis. AMOS, analysis of moment
structure is a software tool that provides an advanced computing engine for
structural equation modeling with an easy to use graphical interface for analysis.
150 R. Rajendran
7.4 Results
The respondent SMEs perceived the four export barriers—Fall in the international
market prices, severe competition in the foreign markets, Import restrictions in
foreign market and Training and holding skilled labor as their major problems in
their internationalization. Whereas the export barriers perceived as minor problems
are Getting payment, Inability to use foreign language, Documentation problems
and Transport problems. The indicators of international export barriers
(Vivekanandan & Rajendran, 2006a) and information systems strategic orientation
(Rajendran & Vivekanandan, 2008) are presented in the Tables 7.1 and 7.2
respectively with concerned internal reliability coefficients.
To minimize the common method bias (Change, Witteloostuijn, & Eden, 2010),
different scale points were used in the instrument to provide individual context for
the two concepts measured (Podsakoff, MacKenzie, & Podsakoff, 2003). However
to analyze the extent of the common method bias, the principal component analysis
was carried out and the Rotation Sums of Squared Loadings (% of Variance
Explained) for the first three components (17.47, 10.55 and 10.37 respectively)
show that the common method bias is not a significant problem that could affect the
results of the data analysis.
The average variance extracted (AVE) was calculated for first order and second
order constructs and it ranges from 0.4 to 0.7. Except for a few items, all values are
greater than minimum value of 0.5, supporting convergent validity.
The comparison of the square root of average variance explained (normally shown
as the diagonal elements) with the correlation coefficient among the constructs
152 R. Rajendran
The structural equation modeling (Fornell & Larcker, 1981) was used to test the
hypothesis proposed. The path diagram of the research model with resulted stan-
dardized regression weights and squared multiple correlation is shown in Fig. 7.1.
The result (Table 7.3) supports the hypothesis H1: The information systems
strategic orientation has a significant negative effect on the perception towards
internationalization export barrier (b = −0.473, p < 0.001). The information sys-
tems strategic orientation explains the variation in the internationalization export
barriers to the extent of 22.4% (R2). Overall the model demonstrates adequate fit to
the data (Table 7.4).
To explore the improvement of the fit, the modification indices were examined
by setting the threshold value as four (Hair et al., 2005). The largest modification
index (Table 7.5) obtained with the research model (Model A) suggests adding a
covariance between e20 and e25. This allows e20 and e25 to be correlated
ORB
R2=0.81
0.90***
CQL
R2=0.67
0.82*** PMB
0.71*** R2=0.50
-0.47***
0.81***
PD ISSO IEB
R2=0.65 R2= 0.22
0.61*** PSB
0.72***
R2=0.37
MD
R2=0.52
0.78***
OPB
R2=0.62
***
Fig. 7.1 Path diagram of research model. Significant at the 0.001 level
7 Influence of Information Systems Strategic Orientation on SMEs’ … 153
(Table 7.6). The results are shown in the Tables 7.7 and 7.8. The resulted model A1
is an improvement over Model A but not enough of an improvement.
This exercise was again repeated resulting in again adding a covariance between
e20 and e24. The second modified model is presented in Fig. 7.2. The results are
shown in Tables 7.7 and 7.8. Again the Model A2 is an improvement over Model
A1 and A, but not enough of an improvement.
154 R. Rajendran
e29 1
OR1 e10
11
1
OR2 e11
1
ORB 1
e26
OR3 e12
e1 CQ1
1 1
1
OR$ e13
e2 CQ2
1 CQL e30 1
e3 CQ31 1 11 PM1 e14
1 1
e4 CQ4 1 e33 PM2 e15
e27
PMB 1
1 PM3 e16
1 1
e5 PD1 1
1 PM4 e17
e32 1
11 OP1 e22
1
OP2 e23
OPB 1
OP3 e24
1
OP4 e25
7.5 Discussion
The export barrier—getting payment receives the lowest rating indicating that the
products/services of these SMEs are of acceptable international quality. The
information systems strategy—quality service receives the highest mean score and
it is followed by process efficiency and cost reduction strategies. The mean score of
all the information systems strategies are above 3.0 in a five-point scale. This shows
that the information systems in general support their business strategies.
The mean score for all dimensions of internationalization export barriers except
for the psychological barrier are lesser than the mean value of 3.0 that reveal the
expertise of the industry in international business. The descriptive statistics of
information systems strategic orientation indicates their highest priority is to cost—
quality leadership and thereby their primary focus is to internal.
The data support the hypothesis H1: Higher the information systems strategic
orientation, the lesser the severity of internationalization export barriers perceived
by the SMEs. The negative relationship explains how the information systems
strategic orientation facilitates SMEs to overcome internationalization export bar-
riers. A significant amount of variation in SME internationalization export barriers
is explained by their information systems strategic orientation. Thus, information
7 Influence of Information Systems Strategic Orientation on SMEs’ … 155
systems strategic orientation is one of the important factors that could influence
internationalization export barriers.
As the possible covariance suggested by the modification index, between error
term of the export barrier—restriction in foreign market and the error terms—
documentation problems and import restriction of capital goods are logical, the
alternative models are examined by imposing these constrains in structural equation
modeling. Even though the resulted improvements in parameters are marginal the
improvement in the fit indices are considerable.
The standardized direct, indirect and total effect of information systems strategic
orientation and internationalization export barriers on the various dimensions of
internationalization export barriers are provided in the Table 7.9. Based on the total
effect, the order of impact is on organizational barriers, operational barriers, product
and market barriers and then on psychological barriers.
These results clearly indicate the hindrance for SME internationalization arises
mainly from organizational barriers and other non-psychological barriers and the
orientation of their portfolio of information systems correctly addresses these
concerns. The direct effect of information systems strategic orientation on
cost-quality leadership, product development and market development are 0.817,
0.808 and 0.723 respectively. Stronger the information systems strategic orienta-
tions, the born global manufacturing SMEs are more competitive in addition to be
psychologically comfortable. Thus the strategic usage of information systems (Levy
and Powell 2000) in pursuit of achieving the strategic alignment with their business
strategies (Chan et al., 1997; Henderson & Venkatraman, 1993) put these SMEs in
correct direction in the presently emerging business environment that governed by
liberalization, the globalization of markets and productions and the need for higher
productivity and competitiveness (Rialp, Rialp. & Knight, 2005). This emphasizes
the need for strategic management practices among SMEs (Kalantaridis, 2004;
Raymond and St-Pierre 2013).
As an industrial natural cluster, these SMEs are subjected to institutional iso-
morphic pressures in adoption of strategic information systems (Rajendran &
Elangovan, 2012). These SMEs normally consider the strategic information sys-
tems as innovations of type III (Swanson, 1994). These born global manufacturing
SMEs are driven by international entrepreneurship (Ruzzier et al., 2006) and the
core of their entrepreneurial activities is innovation (Hitt et al., 2001; Rogers, 1995).
The findings give richer insight into the role of information systems and its strategic
orientation in SME internationalization process.
SMEs have to use different strategies to compete internationally. These SMEs also
face two types of competitive pressures namely pressure for cost reduction and
pressure to be locally responsive and have strategic choice among four basic
strategies ranging from international strategy to transnational strategy. The extent of
pressure for cost reduction and local responsiveness determine the appropriateness of
each strategy (Hill & Jones, 2010). The international strategy is appropriate when the
pressure for local responsiveness and cost reduction is low and the transnational
strategy is required when pressure on cost reduction and local responsiveness is high.
Being in the middle of global apparel supply chain with B2B relationship, these born
global manufacturing SMEs are gaining a competitive edge by localization. However
the globalization of production and markets with intensification of competition in the
foreign market forces these SMEs to reorient towards transnational strategy. The
findings demonstrate the capability of their information systems portfolio and its
strategic orientation in supporting these SMEs moving towards transnational strategy
to successfully face the international competition in the emerging economies.
The implication of these findings is that the government organization and
non-government organization promoting SME internationalization should focus to
the information systems strategic management among SMEs (Bharadwaj, El Sawy,
Pavlou, & Venkatraman, 2013; Knight & Liesch, 2002; Levy, Powell, & Galliers,
1999) in addition to merely providing financial export incentives. The industry
could play a major role in providing an institutional isomorphic pressure to create a
force towards adoption of strategic information systems (Rajendran & Elangovan,
2012; Liang, Saraf, Hu, & Xue, 2007). In the same time they should adopt an
audience segmentation strategy in bringing a greater equality in the distribution of
the beneficial consequences to avoid the small business digital divide
(Vivekanandan & Rajendran, 2006b). The individual SMEs should adopt an ‘inside
out’ approach in deriving the competitive advantage.
The study emphasizes the importance of realized strategy and highlights the
need for going beyond strategy formulation (Chan et al., 1997). The SMEs should
understand the need for fine tuning their information systems investment (Weill &
Vitale, 2002) and adjusting the existing portfolio of information systems application
by knowing the efficacy of their information systems strategies and their orienta-
tions (Dutot et al., 2014; Grover & Kohli, 2013) in internationalization of their
businesses in a given business setting (Jobnston et al., 2007; Raymond et al., 2005;
Zhang et al., 2008).
7.6 Conclusion
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160 R. Rajendran
Author Biography
R. Rajendran is the Dean of SRIT Business School at Sri Ramakrishna Institute of Technology
(SRIT), Coimbatore, India. He holds an M. Phil. and a Ph.D. in Management from Bharathiar
University, Coimbatore, India and an MBA and BE (Hons) in Mechanical Engineering from
Madras University, India. He has 15 years of industrial and 16 years of research and teaching
experience. His research focuses on Strategic Information Systems Management in Indian small
businesses.
Chapter 8
Strategies and Processes
of Internationalization: A Case Study
of the KARAM Group of Companies
8.1 Introduction
Small and Medium Enterprises (SMEs) currently have emerged as a prime par-
ticipant in international trade. Organization for Economic Cooperation and
Development (OECD) reports that products sourced from SMEs constitute a size-
able share of exports from most developing nations. Not much information is,
however, available on the benefits of having an international entrepreneurial ori-
entation or the contribution of specific strategies followed by them on the perfor-
mance of these firms. Paunovic and Prebezac observed in 2010 that business
internationalization is emerging as an imperative ingredient for further growth and
development.
Ahroni (1999) and Ghanatabadi (2005) identified two sets of factors that propel
entrepreneurs toward international markets, firstly those emanating from the
domestic environment, for instance, strong competition, uncertainty and instability,
lack of foreign exchange, etc., and secondly the predisposition of the entrepreneur
to internationalize.
An earlier version of this chapter titled Internationalization of the KARAM Group of Companies:
Experiences, Imperatives and Challenges was published in a Special Issue of the South Asian
Journal of Management (SAJM), Volume 22, Issue No. 2, dated April–June 2015, on the theme
of Entrepreneurship in a Globalizing World.
J. Dewan (&)
Institute of Management, Commerce and Economics (IMCE), Shri Ramswaroop Memorial
University (SRMU), Hadauri Village, Tindola Post, Lucknow-Deva Road, Barabanki
225003, Uttar Pradesh, India
e-mail: [email protected]
A. K. Singh
Shri Ramswaroop Memorial University (SRMU), Hadauri Village, Tindola Post,
Lucknow-Deva Road, Barabanki 225003, Uttar Pradesh, India
e-mail: [email protected]
As established by a report published by Grant Thornton India LLP and FICCI (2013),
Micro, Small and Medium Enterprises (MSMEs) play an important and defining role
in the world economy, specifically in India where they comprise nearly 94% of the
industrial organizations in the country. ‘The sector contributes 36% of the total value
of the exports of the country and employs over 80 million people. The contribution of
this sector to the output of the country is 40% and to the GDP is over 8%.’ In the past
few years, it has been observed that the MSME sector has unfailingly registered
growth greater than the industrial sector. Now as the world is being considered a
‘global village,’ companies who do not capitalize on the benefits of international-
ization may suffer a downtrend in terms of market share and profitability.
Ridderstrale and Nordstrom (2002) aver that the international economy is exposed
to strong globalization processes and a speedy introduction of IT technologies. It is oft
reiterated that enterprises desisting internationalization of their business can have no
long-term prospects in any modern economy. In summation, instead of being reactive
or defensive, a discerning marketer must not be rigid and adopt a more progressive and
flexible view of the international market. This will assist them in transforming
potential problems into challenges and opportunities (Onkvisit & Shaw, 2009).
Exhibit 1 demonstrates the role of MSMEs in the Indian economy.
Exhibit 1: Contribution of Micro, Small and Medium Enterprises in the Indian
Economic Scenario
More than 440 lakh MSME units contribute a gross output of over Rs.1.8 lakh
crore in India.
An observation of the growth pattern of the past four years has revealed that the
MSME sector has proven double-digit growth.
With more than 40% contribution towards the complete output of the country and
8%-10% contribution to the GDP the MSME sector is expanding rapidly.
Yielding more than 6,000 products, the MSME units are a valued component of
national growth.
Source: Adapted from Grant Thornton India LLP and FICCI (2013)
8 Strategies and Processes of Internationalization: A Case Study … 165
In view of the given figures, it is estimated that since the MSME sector is thriving
in the domestic market, by going global it will add to foreign exchange earnings for
the nation and help these organizations grow in stature. Internationalization will
further provide them economies of scale, release sources of better and cheaper raw
material, generate multiple revenue streams and accrue other added benefits.
‘Small and medium sized firms face two challenges in globalization: property rights
protection and barriers to entry’ (Acs, Morck, Shaver, & Yeng, 1997). Some of the
recognized barriers are demonstrated in Exhibit 2.
The above-mentioned barriers are applicable in the current Indian context too,
and are the reason why the prime minister has given the clarion call for ‘Make in
India’ and the latest union budget has funds ear-marked for promoting
entrepreneurship. Indian bureaucracy is known for its delays, as is the slow progress
of paperwork in the financial arena. Low percolation of technology also limits
people from internationalization which requires high degree of standardization and
adherence to quality. Entrepreneurs in India with its myriad languages and low
English literacy face even more resistance when transacting abroad, where the
entrepreneur has to grapple with newer languages. Lack of trustworthy interme-
diaries and agents also acts as a deterrent. Complicated trade documentation leaves
many dumbfounded. Successive governments have laid out several schemes and
incentives, such as low import duty for raw material or tax holiday for
export-oriented units; however, the dissemination of this information is not very
good. Low awareness exposes the businessmen to risks of intellectual property theft
too.
One needs to look into the imperatives that entrepreneurs need to inculcate, in order
to court success in the international arena. An amalgamation of government policy,
educational orientation, and exposure to the international environment and tech-
nology is essential for the same. Companies can be initiated as international firms or
export-oriented units, or they can gradually test the water and grow into the area by
natural progression, viz. selling, offshoring, outsourcing, foreign market entry, and
foreign direct investment as they grow incrementally in competitiveness.
The Government of India has introduced various policies at the national level and
state level, special incentives for women entrepreneurs and cluster development.
However, much needs to be done to propagate these schemes and inform the
beneficiaries about them.
The international arena is very sensitized to ethical trade practices such as Forced
and Child labor, and needs certification ensuring that such measures have not been
utilized in the manufacturing process. Provision of safe and healthy working con-
ditions in a nation burgeoning with population and unemployment is another
8 Strategies and Processes of Internationalization: A Case Study … 167
concept that needs to be understood. Delimitation of working hours, equal pay for
equal work in a society divided along caste and gender lines is also a challenge.
Sensitivity to the environment and its preservation is taught by all our religious and
mythological text, but we have meandered away from it in the complex process of
modernization. All the above-mentioned issues have to be consciously dealt with
and inculcated into the fabric of Indian business culture, for our products to gain
international acceptance.
Companies also need to learn the art of developing customers and the use of
networks, referrals, bidding for tenders, participating in exhibitions and building
alliances through industry associations like FICCI, CII etc.
Over the years, in order to better understand the internationalization process, var-
ious researchers on the basis of their observation and research have made different
models which claim to provide success to a firm in the process of entering and
sustaining themselves in the international market. Li, Li, and Dalgic (2004)
168 J. Dewan and A. K. Singh
This theory is rooted in the empirical behavior and development of enterprises and
is called the ‘incremental internationalization model’ or Uppsala model, which is
shown in Exhibit 3. It explains the ways in which prevailing knowledge regarding
foreign markets aids in crafting the strategy of entry and also impacts a change of
strategy for businesses. An organization undertakes internationalization in stages,
gradually while adding knowledge at each stage (Scholl, 2006). However, it was
observed that this model does not foretell the speed of moving from one stage to the
next and neither does it explain why some organizations may skip a particular step
and still be successful.
This model assumes that internationalization is a precise process in which each step
follows the other sequentially. Several authors such as Miller and Root have
worked on it. Yip calls his systematic planning model ‘Way Station Model’ of
internationalizing Small and medium enterprises and includes the following six
steps in this process which have been visualized in Exhibit 4 (Yip et al., 2000):
motivation and strategic planning, research of the market, selection of the market,
selection of entry strategy, problem shooting, and post-entry behavior. However,
the systematic models are criticized on the grounds that some organizations often
move in several directions concurrently and not in a serial manner, and hence, the
success of such organizations does not validate the systematic planning models.
Also, in the modern era, the variables change so fast that giving weightage to each
aspect over time may be difficult.
8 Strategies and Processes of Internationalization: A Case Study … 169
Planning ffor
S
Selection off Market
anticipateed Review
w of activitties
Entry Strrategy
problemss
The hybrid model (Li et al., 2004) evolved by integrating the systematic planning
and experiential learning models. In this way, a more balanced process of inter-
nationalization emerged. This is demonstrated in three main phases: basic (an-
tecedent), planning, and execution phases. Exhibit 5 demonstrates the hybrid model
of small and medium sized enterprises’ internationalization.
8 Strategies and Processes of Internationalization: A Case Study … 171
This describes a sudden spurt into the global arena by a small firm. This has been
observed more in knowledge-based and software industry, e.g. Facebook, Skype,
Amazon etc. They capture a domestic niche quickly and start targeting their mar-
keting activities toward the global consumer within the first five years of existence
(Knight & Cavusgil, 1996). According to Sharma and Blomsterno (2003), the born
global companies are in possession of international market knowledge much before
their first foreign foray. Their choice of foreign market entry strategy is based on
their existing knowledge and the inputs provided by their networks.
All the above models have their limitations, and it has been observed that
companies often follow a combination of one or more models. Many times, they
follow a particular route and then adapt and innovate as per the dictates of situation.
172 J. Dewan and A. K. Singh
After a reading of various papers on the topic, it has been observed that in Small
and medium enterprises, it is the owner/decision-makers’ viewpoint/opinion/
attitude/motivation that directs the internationalization process. His assessment of
the environmental factors, cost–benefit analysis, and expectation of the outcome
plays a critical role in guiding the process. Exhibit 6 shows the factors that influence
the internationalization of enterprises.
This paper charts the growth of KARAM (P. N. International), a firm involved in
the manufacture and marketing of personal protective equipment (PPE) and sket-
ches it trajectory over the past 15 years. This company is taken as an example to
illustrate how firms establish a core competency, capture a niche market, gain a
dominating position in a small domestic market, and subsequently fan out into the
8 Strategies and Processes of Internationalization: A Case Study … 173
success in the international arena was ‘QUALITY’ which coupled with lower
manufacturing costs in India and their attitude of determination to ‘be the best’
would lead to success. They also learnt at the conference: the art of presenting at
exhibitions, soliciting customers, utilizing feedback loop to remain connected, and
the use of government incentives in various countries. Though the international-
ization of KARAM did not follow any particular model, it has elements of the
‘Uppsala’ model and ‘born global’ model. Gankema’s five stages of internation-
alization can also be traced in the evolution of KARAM.
8.7.3 Expansion
The parent company started by exporting surplus but with the earning of interna-
tional ‘quality certification,’ export-oriented unit was established to acquire benefits
offered by the Indian Government. Geographical areas where the governmnet has
provided tax concessions were identified for setting set up manufacturing units with
a fanning out of the marketing team in India and abroad. Exhibit 7 demonstrates the
five stages of internationalization.
(continued)
176 J. Dewan and A. K. Singh
(continued)
Proactive attitude of the owners coupled with their commitment to quality, pow-
ered by innovation generated thorough research and development, adherence to
time deadlines, adaptation to multiple national environments and customization for
customer satisfaction were found to be the main factors for success.
Exhibit 9 reveals the KARAM vision statement. The entire range of business
activities, products, and services is clearly outlined in the vision statement. It shows
the management’s intent to service international and domestic markets. However,
the international markets are mentioned first, which shows the focus, flow, and
dedication of resources. The company has worked hard to gain acceptance abroad,
and having gained quality certifications is keen to capitalize on it.
Vision Statement
1. To provide entire range of Fall Protection equipment to a global market, through sustained
efforts in R&D, manufacturing under cost effective, safe and systematic processes.
2. To reach out to customers in more than 200 countries across the globe providing prompt and
effective services to them.
3. To provide a full range of Personal Protective Equipment to our Customers serving the needs
of the workers in India.
4. To equip the workers in every part of India exposed to various hazards at their working
environment, with complete knowledge on Personal Safety. To dedicate efforts in reaching
out to them, understand their needs, and provide appropriate solutions through right
equipment selection and training.
KARAM prides itself in being customer centric and a good listener. Customer
feedback is scrutinized carefully, and quick action is taken. In rare cases of
defective product, complete replacement of consignment is offered, free of cost. It is
a company, where ‘Quality is a way of life,’ and this percolates to the smallest
activities. The factories are neat and clean, and provide good working environment.
Information technology tools (ERP, CRM) are used to make processes more effi-
cient and effective.
The company decided to use human touch to cement all relationships. It understood
the value of each employee to communicate the KARAM brand and philosophy.
Next-level managers were developed, empowered, and motivated by creating in them
a feeling of ownership. They were provided with travel budgets so they could visit
markets and get the bigger picture. The management took them deep into R&D and
manufacturing processes so that they were convinced of the quality of production.
Care is taken to ensure safety in the entire production cycle, and accidents are mini-
mized to almost negligible. Importance is given to both white and blue-collar workers.
The production process of PPE is labor intensive; hence, India and China have
inherent advantage. KARAM soon realized that India had an extra edge due to
greater dissemination of English (global language), better commitment to quality,
adherence to timeline, and honesty (surprisingly).
Market for PPE products is not so developed in India, due to poor enforcement
of norms. Abroad the market for PPE have matured as there are fines for
non-conformance to security norms. USA provides the largest market for personal
protective equipment with EU just a notch behind, but obtaining quality certifica-
tions is an uphill task. However KARAM soon surpassed the quality specifications
benchmarked by various countries.
The decision to go international can be traced back to the contact program initiated
by the Netherland’s Government with the objective of giving a boost to companies
178 J. Dewan and A. K. Singh
The company executed backward integration to make components with the basic
objective of ensuring and enhancing quality and reducing costs. This also helped to
create a monopoly and provide fast customization. Forward integration was done in
the area of after-sales-services, training, and providing safety assurance certifica-
tion. New products are constantly added. The company is expanding in the area of
warehousing and self-owned distribution channel to improve pace and provide price
flexibility.
8 Strategies and Processes of Internationalization: A Case Study … 179
Starting from safety nets and traffic cones (low-tech), KARAM moved on to lan-
yards, harnesses, eye, foot, and all body protection. Incremental innovation is
continuously followed by the company. Qualification of stringent quality norms
abroad fueled demand. In the meanwhile, domestic demand is also catching
up. Close at the heels of KARAM are a host of ‘me too’ companies, who imitate
their innovations and glut the market. Hence, KARAM has to innovate fast, resort
to premium pricing, and then move up the innovation chain. Training, consultancy,
and creating awareness also constitute part of the business paradigm. Care is taken
to use best instrumentation for manufacturing processes. A team is nominated to
visit tool exhibitions and work on constant upgradation of manufacturing facilities.
The market for PPE is a niche market, so research was primarily done while
attending conferences and trade fairs and using internet resources. Information was
also collected through trade magazines in order to identify target audience and
the products to manufacture. A team has also been formed for launching products
in new countries. Their job is to provide guidelines for culture fit and to establish an
edge over competition. Taking feedback from sales personnel is an important part
of the KARAM culture. Customer feedback is also dealt with solemnly.
The main objective of the SWOT analysis was to collect information concerning the
inherent strengths and weaknesses in order to equate them to opportunities and
threats that KARAM has to face in its operating environment. Exhibit 10 sums up
the SWOT analysis of KARAM.
180 J. Dewan and A. K. Singh
STRENGTHS WEAKNESSES
• Quality product • Product seen as expensive
• Young educated,
creative human
• Still working at going
international
managerial resources
• Cheap manual labor • Poor image of ‘Brand
India’
• Rich Technology
• Customer-oriented • Uncertainity in R&D
• ‘Can do’ attitude of owners • High turnover
OPPORTUNITIES THREATS
• Export Enterprise- • Unfavorable dollar
government incentives exhange rate
• Liberalization • Fast copy of product by
competition
• Govt. pressure to enforce
stronger safetyguidelines. • Problem with obtaining
quality certifications
• Formation of
International Economic • Problem with duties &
Blocks documentation etc.
Source: Authors
The next important step in external factor analysis is competition analysis. KARAM
is the clear leader in the niche. However, the nature of competition is such that one
has to continuously grapple with it, progressively each day. The follower compa-
nies are quick to imitate product and market-driven innovations carefully crafted by
KARAM through the expensive research and development process. There is
competition to reckon with at home and also in the external countries with better
R&D and more supportive government. Also quotas for local vendors in interna-
tional markets prove to be a hindrance. The PPE markets are more advanced and
developed in Europe and America so continuous upgradation is required. Local
markets are still developing.
8 Strategies and Processes of Internationalization: A Case Study … 181
quality and high technology used to manufacture products. Adequate credit cycles
are provided to facilitate the buyers.
Distribution
Immense care is given to the process of dealer selection, nurturing, and their
initiation into the company culture of quality and customer orientation. Within the
country, products are supplied through zonal dealers who are given quantity dis-
counts. The dealer/distributor network has expanded rapidly over the past few
years. It grew from 450 in 2010–11 to 575 in 2012–13 and expanded rapidly to
touch 933 in 2015–16. Hence, the dealer network doubled itself in the six-year
period from 2010 to 2016 (Nigam, 2016a).
Dealers are appointed in each country for further distribution of products.
However, attempts are being made to distribute directly in foreign lands through
subsidiaries. Here, the staff is being locally appointed for culture fit, and branding is
also changed so that it appears to be a local product of that particular country (e.g.
France). This mechanism is being used to bypass biased opinion toward ‘Made in
India.’ Cerrato and Piva (2007) make a similar observation and mention that ‘…
level of human capital and the presence of foreign shareholders in the SME posi-
tively influence both export propensity and the export intensity’.
Communication channels are established with all links in the distribution chain.
Customers are also solicited directly, using Internet and social media and through
interaction at trade fairs. E-Business model, with its extensive database, is used to
be in constant touch with distributors and customers alike.
By being a direct supplier, company saves middleman margin which is for-
warded to consumer (provides price flexibility) or used to augment company
reserves. Various entry methods such as operating through subsidiaries, agents, and
distributors are viewed as centers for building and sustaining relationships (Jansson
& Hilmersson, 2007).
Firms acquire knowledge about doing business abroad, in geographically and
culturally contiguous markets, and increase their involvement gradually, initiating
as agents, and graduating through sales companies to manufacturing operations
(Johanson & Wiedersheim-Paul, 1975; Johanson & Vahlne, 1977). This has been
chiefly observed in evolution of not only MNCs but also SMEs (Hohenthal, 2001).
Studies on the export of North American small and large corporations have revealed
similar results (cf. Cavusgil, 1980). However, ‘Born Globals’ or ‘International new
Ventures’ (that are formed with an international orientation) are inclined to follow a
different pattern (Madsen & Servais, 1997; Zahra, 2005).
However, in case of KARAM, the tipping point was a workshop organized by
Netherlands Government to promote exports from developing countries. Exports
started after gaining compliance for EU standards. So, the most difficult market was
initiated first, and geography did not play such a great role. Knowledge of the
process and handholding done by the workshop personnel initiated export
orientation.
8 Strategies and Processes of Internationalization: A Case Study … 183
…the findings indicated that …the initiating forces and knowledge of international market
opportunities resulted in the receptiveness of the entrepreneurs to available international
opportunities. (Kirzner, 1997).
Promotion
The chief motive of the promotion exercise is to create awareness regarding the
products, highlight their quality and technological superiority, and communicate
with domestic and global audience. A well-designed site is used for the purpose. The
website is closely monitored and updated with all new offers. This is followed up
with e-mails, which are customized as per requirements of the consumer. Products
are also presented at all prominent national and international trade fairs and in all
leading specialized trade magazines and publications. Since its inception, KARAM
has participated in 18 exhibitions in India and about 45 abroad (Nigam, 2016b).
Source: Authors
• Embellish a good product with a sound marketing mix on the basis of envi-
ronmental analysis supported by management information systems.
• Invest in managerial and ground staff. Build loyalty. Initiate organizational
culture. Create ownership and sense of pride. Develop work ethics.
• Invest in dealer loyalty programs. Provide sound margins and incentives.
• Feed other brands. Build own brand.
The above-mentioned steps are not necessarily sequential but have been aligned
to chart an approximate course of action to be followed by a firm planning to go
international. It is based on the KARAM experience and provides guidelines to
others. Unlike other models which use ‘push’ methods, this model is based on the
assumption that sound quality and innovation will create ‘pull’ factors for product
and provide repeat purchase. There is belief that alongside supplying to superior
brands attempts should be made to develop self-identity to indemnify against drop
in business. Alongside the marketing mix importance is given to people: customer
and employee.
The model is based on observations made in the ‘Personal Protective Equipment
Industry’ but may be used across sectors where quality is a prime consideration.
8 Strategies and Processes of Internationalization: A Case Study … 185
KARAM knows that the road ahead is not easy. But the key may be in keeping the
old managers motivated and also ensuring the next-generation ownership is com-
petent to take the venture forward through constant innovation and adaptation.
Competition has to be preempted and prepared for.
8.10 Conclusion
As the world, connected by the internet shrinks to a global village and online sale
and purchase of products permeates all sections of society, the consumer is spoilt
for choice and the producers and distributors have to compete in terms of quality
and price. In such circumstances, no business can afford to remain an island.
Internationalization becomes a necessity and not a choice. Business international-
ization is becoming an important precondition for further growth and development
as also pointed out by Paunovic and Prebezac (2010).
Only decisions regarding the degree of internationalization remain. However,
going global, one comes across numerous challenges in terms of culture, cost,
knowledge, exposure, attitude, and rules and regulations. The process can be made
more difficult for the Small and medium enterprises in view of the fact that they
may have limited funds and manpower at their disposal.
Some of the models discussed in the paper can be utilized by firms that have a
desire to have transnational operations. However, no model is perfect and a great
deal of adaptation is required. Due to the uncertainty of circumstances and huge
number of variables involved, predicting success is difficult. Each firm needs to
learn from the example of others and chart their own course. The onus of creating
awareness about the need for and advantages of internationalization and the asso-
ciated processes lies with educational institutions, governments and NGOs.
The burden of taking the international plunge lies with the owner of the company
(Cerrato & Piva, 2007). He has to decide when, how and the extent to which he
wants to handle international assignments and the results he can expect (Collinson
& Houlden, 2005). He has to be the motivator and has to have the vision in a
continuously changing environment. This vision needs to percolate through his
company to his employees and team members. The enclosed case study of a ‘started
small’ and ‘now’ midsize company, supplying to over 150 countries from Lucknow
in Uttar Pradesh, that has successfully identified a niche, provides useful infor-
mation about planning and execution of a foreign market entry strategy.
Care has been taken to include all important factors in internationalization, while
the model was being developed in this research, but the variables are not exhaus-
tive. Since the model is based on the experience of one company, further
researchers can test and build on it by considering inputs from a larger sample. It is
specifically suited for developing economies, where the world ‘quality’ perception
186 J. Dewan and A. K. Singh
is poor and needs correction. This model has evolved out of the models addressed
in the paper and hopes to take the study further by providing a unique Indian
dimension in the development of ‘a process for internationalization.’
From their experience, we learn that:
• Dedicated R&D is essential to establish identity and sustain lead.
• Investment in professional networks is of utmost importance (Welch &
Luostarinen, 1993).
• Attending trade fairs aids the process and helps stay competitive (Coviello &
Munro, 1997).
• Trust can be won by consistent striving.
• Technology helps leverage strengths and cut time (Jones, 1999).
• Certifications are essential for building trust.
• Listening to the customer is imperative (This is a firm KARAM conviction).
Brand India needs to improve its perception. Many times, our companies end up
being outsourcing units for big firms, with no identity, as they fight a losing battle in
terms of quality perception. Commitment to quality, consistency, and adherence to
deadlines can change consumer viewpoint over time as demonstrated by the given
case study.
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Author Biographies
Jyoti Dewan is Associate Professor, Institute of Management, Commerce and Economics (IMCE)
and Chairperson Industrial Collaboration, Interaction and Entrepreneurship, Shri Ramswaroop
Memorial University. She has the mandate for creating networks with international and national
institutes of higher learning and the industry for faculty and student development and enrichment
of curriculum and pedagogy. Jyoti is involved with creating an entrepreneurial ecosystem on
campus and developing synergy with various industry associations: CII, FICCI, TiE, LMA,
NHRD Network, etc. She has been a practicing entrepreneur and switched to academics after a
successful career in the industry. With employability and entrepreneurship as key research areas,
Jyoti has been an outstanding scholar and was awarded gold medal by Lucknow University for
academic excellence in the MBA program.
9.1 Introduction
A Serviced Apartment is often referred as “a home away from home” that provides
the guest with accommodations at affordable prices. Service companies and housing
developers let out fully furnished apartments as corporate housing units. Few
companies manage owned properties, and they are furnished by individual real
estate investors. The Serviced Apartment includes studio units, or two or three
bedrooms, which are furnished with all modern amenities like refrigerators,
kitchenettes, microwave ovens, televisions, and Internet facilities (Wi-Fi). It also
includes full housekeeping facilities which are mostly outsourced. They also pro-
vide other additional services like gyms, conference rooms, and party halls which
are not mandatory. All these are offered at prices lesser than five-star hotel tariffs
including the taxes.
Universally, Serviced Apartment is a term had been used to describe an alter-
native accommodation for long stay purpose in urban locations. The Global
Serviced Apartment Industry Report views that the term Serviced Apartment is
generic, just as the hotel is the umbrella term for a myriad of different products from
bed–and-breakfast to lodges, restaurants, pubs with rooms, and even private houses
—as well as traditional hotels. Each niche product has its own market, and each
market has seen homegrown products evolve.
In its process of transition between the hotel and residential worlds, the avail-
ability of amenities and services varies. Round-the-clock reception desks, on-site
staff or restaurants, have now become an exception, rather than the norm, but
customer service, cleaning, maintenance services, health, and safety compliance are
essential features of any Serviced Apartment (Krishna Kumar, 2015).
In July 2014, fifteen of Europe’s leading operators signed a charter at the second
Serviced Apartment summit held in London. This charter recognized Serviced
Apartment as the generic term for aparthotel and corporate housing, but stopped
short of recognizing terms, such as extended stay or branded residence, affirming
instead that the two distinct types of product fall under the umbrella term Serviced
Apartment.
In India, the Serviced Apartment Industry falls under the MSME sector as it
complies with the investment criteria—between Rs. 10 lakh and Rs. 5 crore in case
of a service sector enterprise. According to MSMED act 2006, enterprises are
classified into manufacturing and service enterprises. The manufacturing sector
would venture in plant and machinery whereas, the service sector for equipment.
The investment limit for these enterprises is as follows (Table 9.1).
This study has targeted 30 Serviced Apartment operators; in which most of them
belong to the startup category, whereas the others have entered the business because
of the market demand and to earn profit.
Since the Serviced Apartments (SA) sector is emerging, a very few research studies
have been pursued. Majority of the literature on the Serviced Apartments are either
press reports, expert interviews, or industry reports by consultancy firms. A glimpse
of selected research works is presented below:
• The alternative accommodation industry comprises of three types: Serviced
Apartments, guest houses, and commercial homes. Commercial homes have
been further classified into different categories such as bed-and-breakfast cot-
tages, bed-and-breakfast hotels, bed-and-breakfast inns, country inns, and
homestays (Gunasekaran & Anandkumar, 2012).
9 Serviced Apartments Industry in India … 191
9.3 Objectives
9.4 Methodology
A descriptive methodology has been employed in this study using both primary and
secondary data. Primary data was collected using a prestructured questionnaire
(provided in the appendix) from the owners/key executives of 30 selected Serviced
Apartments (SAs) in Chennai city, the capital of Tamil Nadu state in India. Simple
random sampling method was used to collect primary data. Secondary data used in
this study has been collected from published sources.
The GSAIR 2015/16 has highlighted that 72,857 Serviced Apartments are spread
across 551 locations in Asia in 2014–15, when compared to 49,480 Serviced
Apartments in 419 locations in 2013–14. This represents a sharp rise both the
number of SAs and locations. The GSAIR report states that “on the world’s total
supply of Serviced Apartments, Asia accounts for 9.6% in 5.5% of the world’s
Serviced Apartments’ locations.” Table 9.2 presents the Asian scenario.
Due to globalization over the last decade and the subsequent incursion of MNCs,
top executives, business travelers, professionals, expatriates, students, medical
tourists, and leisure travelers into the country, Table 9.3 indicates a positive trend in
different categories of foreign tourist arrivals in India.
According to industry experts, the Indian extended stay market broadly consists
of two segments, namely 3–4-star hotels and budget/economy hotels. India also has
a large number of smaller single property motels/guesthouses providing services to
the budget traveler. But there is definite emergence in the growth of dedicated
Serviced Apartment chains, especially in commercial cities.
Reputed chains of branded hotels like Hotel Leela Venture, Grand Hyatt, Hilton,
and Marriott International have their presence in the serviced apartment’s scenario
of India. Ascott is considered as the world’s largest recognized serviced residence
operator. It has its apartments operating across Mumbai, Bengaluru, Delhi,
Chennai, and Pune to utilize the opportunity and to bridge the demand–supply
gap. Top Serviced Apartment brands are operated by branded hotel chains so that
the operating costs can be lowered, and the staff/guest ratio can also be reduced.
A number of international brands have developed Serviced Apartments in associ-
ation with local developers, catering largely to the corporate sector.
In addition to standalone Serviced Apartment properties, several hotel chains are
offering a section of their suites as serviced residences and are even launching new
properties that will be operated as Serviced Apartments. GRT Hotels and Resorts,
for instance, is setting up serviced residence properties under the brand name GRT
Vibes, in Hyderabad and Coimbatore, investing close to Rs. 10 crore for each
Table 9.3 Foreign tourist arrivals (FTAs) in India and their purpose of visit 2009–2013
Year FTAs Business and Leisure, Visiting Medical Education Others
(numbers) professionals holiday and friends and treatment
recreation relatives
2009 5167699 15.1 57.5 17.6 2.2 – 7.6
2010 5775692 18.6 24.0 27.5 2.7 – 27.2
2011 6309222 22.5 26.0 24.9 2.2 – 24.3
2012 6577745 22.5 27.1 27.2 2.6 – 20.6
2013 6967601 20.9 30.3 25.9 3.4 1.9 17.6
Source India Tourism Statistics at a Glance (2013)
194 S. P. Deepeka and M. K. Badri Narayanan
project. Five-star hotels like Marriot, Hyatt, and ITC which offer Serviced
Apartments within their hotels and are seeing good growth. Hotels are motivated to
offer Serviced Apartments to guests as that would bring them assured occupancy
(Sushma, 2014). For instance, a guest might check out of a hotel for a week on
holiday but would not move out of the Serviced Apartment even if he was to go on
vacation for a week or more. Any guest who wishes to stay for longer than 15 days
is suggested a Serviced Apartment. It works well as expats who have just come into
India need not set up a house from scratch and for the hotel, revenues are better.
Industry sources are pegging the growth of Serviced Apartments in India at 20%,
while the overall hospitality market is growing at 4%.
The growth of sectors like IT, ITES, BPO, consulting, and financial services has
also driven this demand.
According to the GSAIR 2015/16, while the five-star hotels recorded a 5.2% dip
in overall RevPAR from 2012 to 2013 the budget hotels recorded a growth of
10.4%. Serviced Apartment RevPAR has been similar during the last 5 years,
whereas the revenues of hospitality industry have grown. The growth in revenue is
seen mostly outside the top five commercial cities in India, as shown in Table 9.5.
This supply and demand table indicates that the average room rate has gone
down, as the market is more competitive providing wider choices to the customers,
resulting in the lower average room rate with higher volumes. To make profits, it is
essential to offset the lower revenue by having a larger capacity.
The GSAIR declares that the fixed cost of marketing/commission per room has
slightly increased. This implies that to earn profits, a Serviced Apartment should be
large enough to sell rooms at a lower price and thus keep its occupancy percentage
high and enjoy overall higher revenue compared to a smaller establishment selling
at high costs.
Medical tourists prefer Serviced Apartments over hotels for a few, very solid reasons.
First, they are more cost-effective than hotels, offering private homes, where families
can cook, relax, and stay under one roof, for a reasonable price (Vaishna, 2013).
Second, most of them are professionally managed, with 24-hour concierge and
emergency assistance which are vital especially for patients who come from other
countries. Finally, apartments for patients must be planned well, with lifts and all
amenities. Hygiene is important, and rooms must be periodically cleaned and linen
changed. All this is a part of the Serviced Apartment contract. Typically, Serviced
Apartment costs for medical tourists are different from what is offered for short stay
corporate clients.
Online booking portals and global distribution systems are making online booking
easier and more convenient for Serviced Apartment users. Portals such as
Booking.com, Expedia, and others are managing real-time inventories of hotels and
are also offering useful reviews for guests to help making their decision making
process easier. The adoption even by smaller chains has been constructive, and
approximately, about 35% of all Serviced Apartment rooms are available on GDS.
Airbnb is offering leisure (and some corporate) travelers overnight accommo-
dation in privately owned houses for less than the cost of a hotel and mainstream
serviced apartments. A recent valuation has placed the Airbnb’s worth slightly
above that of Hyatt international—a 50-year-old hotel chain. In 2014, Airbnb was
among the fastest growing accommodation for corporate. Concur, a popular soft-
ware provider on expense management for 20,000 corporations has reported that
their clients’ use of Airbnb has quadrupled every year since 2010.
RoomLion.com, an online portal run by Scrappy Ventures, provides its cus-
tomers to search and book Serviced Apartments online in India. This portal offers
Google street view, 360° virtual tour of the apartments with basic furnishings and
9 Serviced Apartments Industry in India … 197
other mandatory facility like housekeeping. This portal has 7,800 Serviced
Apartments across nine cities registered under its portal. The owners of residences
can register free, and the company earns revenue based on bookings through the
site. Over a period of time, the apartment owners shall pay a registration fee. The
company aims to earn around Rs. 5 crore by the end of the year 2015. Apart from
metro cities of India, the company will also expand its services abroad. In the
future, RoomLion.com is also planning to run a chain of its own Serviced
Apartments apart from expansion through franchising (Vasumitra Adarsh, 2014).
There are companies such as Alacruity that take care of the entire pre- and
post-hospitalization services for both Indian and global patients. Among the ser-
vices offered long-term accommodation, which Alacruity does through Serviced
Apartments. They explore the options based on budget as well as requirements,
offer best terms, as the services are pre-qualified by Alacruity and they pre-negotiate
with service providers, thereby saving a lot of stress for the patient. In turn, they
charge a 15% commission.
Ascott Ltd., the global leader in this industry, has begun its second project in
Gurgaon, which is its eighth in India and has a size of more than 1,400 apartments.
It shall also be expanding its operations across Delhi, Pune, and Mumbai. Ascott
has partnered with Puri Constructions to manage Serviced Apartments.
StayWell Hospitality Group and VSR Infratech have signed a management
contract for a Serviced Apartment’s venture in Gurgaon’s sector 68. BridgeStreet
Global Hospitality is partnering with JNP Group and Homestead on a 20-year
tri-party agreement. BridgeStreet shall be providing asset and facilities management
services for Homestead’s upcoming new luxury serviced residences in Gurgaon
called Michael Schumacher World Tower and Ballet by Sharapova. BridgeStreet
and Everlike Buildcon Private Ltd., a (division of Silverglades) have also signed a
franchise agreement for 10 years, for a 2.75 acre Merchant Plaza that includes
commercial, retail, and Serviced Apartments in an area of 2.5 million square feet. In
Feb 2015, an online accommodation portal Stayzilla has brought in about Rs.
124 crore led by Nexus Venture Partners and also contributed by their prevailing
investors—Matrix Partners (Sell, 2014).
The funds will be used primarily to expand the niche alternative stays market in
India that largely includes lodges, cottages, home stays, unstructured ones like
secondary homes turned Serviced Apartments, and bed-and-breakfasts, among
others. These developments indicate increasing attention and investment by inter-
national brands and investors in the Serviced Apartments sector have marked the
initiation of internationalization process in the industry. The bare fact is that the
industry is still in its infancy, with the big branded hotels dominating the scenario,
followed by property developers, with their eyes set on the booming numbers of
business travelers due to the thriving multinationals in the country.
198 S. P. Deepeka and M. K. Badri Narayanan
Chennai has about eight organized operators, with an inventory of 450 rooms.
Some key players include Seasons, Ascott, Lotus, Blossoms, and Star City.
In 2012, Somerset Greenways came in with 187 rooms, while Shangri-La Hotel
planned to launch 52 apartments.
The Ascott Limited, which manages the Somerset Greenways in Chennai, has
reported occupancies of about 75% with CEOs and other top executives of several
companies checking into the serviced residences.
In Chennai, rents are low, when compared to other metros of the country
averaging from Rs. 2,200 to Rs. 3,200 per day, although there is a niche, upscale
segment serviced by companies such as Somerset Greenways. Hence, Chennai has
been purposively chosen for this study.
Being an emerging industry, there are several issues and challenges facing the
Serviced Apartments industry (Table 9.7).
In India, the destinations like Chennai, Bengaluru, Hyderabad, Mumbai are expe-
riencing growth in Serviced Apartments in the recent past. Also, Gurgaon and
Noida in the Delhi NCR are the upcoming destinations and have started to attract
the real estate developers for serviced residences.
Nevertheless, there are barriers in the hospitality sector viz. tariffs, price sensi-
tivity, and the prohibitive land prices. But due to its flexible nature, the Serviced
Apartment model shall be able to adapt to the place where it is located. In popular
areas, people are also converting their property’s top floors as Serviced Apartments,
whereas the bottom portion continues as a traditional hotel.
A standalone Serviced Apartment is unique because of its ability to provide the
essence of a serviced residence along with the traditional ways. Experience pro-
vided by these serviced residence is homely, and they provide a warm atmosphere.
The basis of operation of these apartments is determined by the land value if it is
feasible at the right market and target segment.
200 S. P. Deepeka and M. K. Badri Narayanan
Though across the globe, predominantly Serviced Apartments are yet to gain a
formal recognition; it is evolving as a recognized sector in the UK. Private equity
funds have entered the UK Serviced Apartments market largely through the cre-
ation of new owner-operated brands. This entry of private equity funds and rising
levels of committed resources means that the expansion of the sector shall be
significant. The association of Serviced Apartments providers (ASAP) is a not
for-profit association started in 2002 to represent Serviced Apartment operators in
the United Kingdom (UK) and Ireland. Founded in 2002, it has 94 members, 27
sponsor partners, and 11 agents. Over 14,000 properties are owned and operated by
its members across the major cities of UK and Ireland. Serviced residence opera-
tors, as well as Serviced Apartment agencies, are the members of this organization.
9.19 Membership
• Each operator will undergo a sample site visit, overnight quality assessment, and
a complete review of the core requirements and business practices annually.
• Every year, the assessor will experience the guest’s journey (guest cycle) from:
apartment selection, reservation and booking, arrival and check-in formalities,
an entire night’s stay and departure. Every aspect of this experience will be
measured and compared to ASAP’s quality, safety, and security standards.
• In addition to the overnight stay, a minimum sample of 10% of the operator’s
portfolio will also be assessed in order to ensure consistency throughout the
portfolio and accuracy of any marketing collateral.
• The assessment will also draw on an Internet review mechanism to validate
guest’s satisfaction as well as any internal processes used to capture guest
feedback. It is important that a cross section of data is used to ensure an accurate
and true reflection of the product offered.
On successful completion, an operator will be entitled to use the ASAP quality
accredited marque which will indicate full membership.
202 S. P. Deepeka and M. K. Badri Narayanan
• The SAs primarily targeted the working professionals 70%. The share of stu-
dents 5% and medical tourists 25% shows that the major target group is working
professionals, whereas medical tourists belong the emerging category.
• While the working professionals rented the SAs on yearly, half yearly, and
quarterly basis, the medical tourists stayed on a weekly basis which is basically
the period of follow up after their treatment. The students stayed on quarterly
basis (during their project period and final semesters).
• The average percentage of repeat customers was found a little more than 60%.
• All the apartments offered Wi-Fi facility. About 80% of them offered cab ser-
vices. About 82% of them offered complimentary breakfast for the guests.
About 58% had restaurants attached to them and 24% of the apartments offered
health center facilities.
• About 96% of the apartments used discounts and special services as models to
retain the customers.
• Sources of the distribution channel for these apartments were 97% through
corporate discounts, 80% through travel agent, 70% from third-party online
vendors, 40% through GDS, and 27% through hospitals.
• From the SA perspective, the factors influencing customer preference especially
in categories of education and medical tourism were dominated by tariff,
location followed by facilities, safety, and services.
• In consonance with the above findings, the respondent-SAs ranked pricing
followed by the location as the major strength of the competitor while service
quality and brand reputation scored the bottom ranks. This indicates the
necessity to sensitize on maintaining quality standards to achieve competitive
advantage.
• The major challenges faced by the Serviced Apartments are summarized in
Table 9.9.
The survey findings clearly indicate that the industry is emerging with activity;
there is an ambiguity in STP, lack of awareness about maintaining quality stan-
dards, price being the major differentiator; thereby increasing the pressure on cost,
lack of funding sources, licensing issues, etc. It reflects the trends of emerging
industry with the emerging entities and spin-offs playing in an uneven field, eyeing
the same market; but, their preparedness to harness the recent development of
internationalization process of the industry appears to be low.
9.24 Recommendations
Based on the above analysis, the following recommendations are made as follows:
• The room inventories for these apartments can be increased, as there is a lot of
demand for it. Moreover, GSAIR states that the viable operation size for the SAs
is more than 30 inventories.
204 S. P. Deepeka and M. K. Badri Narayanan
• Improving the online presence and advertising online is essential for the
Serviced Apartments to harness the emerging market.
• The Serviced Apartment operators can increase the number of employees,
especially in operational and support levels, as they are the ones who play a
major role in these kinds of accommodation to provide the quality service
experience.
• Quality of the services can be improved by introducing accreditation through
industry associations.
• There is lack of availability of man power in this industry. Creating awareness
and training will help them to understand the industry’s growth level.
• Medical tourism is an upcoming trend in India. So the service providers can also
concentrate on this sector by having tie up with hospitals accredited for medical
tourism.
• In order to retain the customers, these apartments can also opt for loyalty pro-
grams. Frequent follow ups with them will also help to retain them.
• Apart from the location, the service providers can also concentrate on safety
issues and facilities they provide to customers and offer friendly service.
• Government can also take initiative in providing license or certification as
almost all of service providers find difficulty in obtaining them, and few are not
aware on the process.
• Linking up the SAs with the new wave financing institutions like VCs, private
equity firms, crowd funding shall help to handle the issues of funding. Banking
sector should certainly be sensitized for working capital financing of this sector.
• The emerging business models like RoomLion.com, Alacruity have to be
replicated, scaled up, and integrated into the mainstream for activating more
start-ups to utilize the emerging opportunity.
9 Serviced Apartments Industry in India … 205
• Above all, a strong industry association like ASAP is required to guide and
support individuals, start-ups, and MSMEs, who shall otherwise find it difficult
to compete with the spin-offs from the star hotels. Apart from advocacy, this
association should also provide the services of policy advocacy, business
development, quality improvement, support, networking, and training, which
shall help the industry to a guided growth phase.
9.25 Discussion
9.26 Conclusion
India as an emerging destination for this industry can look up to these kinds of service
providers and can raise the industry standards. This study shows that the industry in
India has a long way to go to cope with other leading nations. The awareness among
the individual market players should be created so that they understand the positioning
of their product in the industry. With increasing international customers and investors to
the sector, it becomes an important requirement for building a strong industry asso-
ciation to guide and support individuals, start-ups, and MSMEs, who shall otherwise
find it difficult to compete with the spin-offs from the star hotels. With the vast
experience of India in promoting MSME clusters, development of this sector can be
effectively catalyzed by promoting the industry association which shall serve as a
206 S. P. Deepeka and M. K. Badri Narayanan
Cluster Development Agent for supporting the MSME players who are emerging. Such
an association can also play a vital role in framing a suitable policy framework for
governing this sector, since there is a complete policy vacuum for the sector which has
high growth potential.
Appendix
Serviced Apartments Industry in India: A Study on Issues, Growth Prospects and Best
Practices for Internationalization
Questionnaire
Dear Respondent, this is a Research study to analyze Serviced Apartments Industry in India: A Study on
Issues, Growth Prospects and Best Practices for Internationalization.
The Questionnaire is designed to collect required information from the selected reputed Serviced
Apartments in Chennai only. The details collected for the study shall be used only for academic research
purposes.
2. Type of room and tariff structure (if available in website, need not be mentioned)
Standard room Rs.______________ Double room Rs.______________
Suite Rs.______________ Others, Specify ______________
9 Serviced Apartments Industry in India … 207
5. Duration of Stay
Yearly Half yearly
Working Professionals
Quarterly Monthly
Weekly Day basis
Yearly Half yearly
Students
Quarterly Monthly
Weekly Day basis
Yearly Half yearly
Medical Tourists
Quarterly Monthly
Weekly Day basis
Laundry
Mess
Travel Desk
Cab Services
Housekeeping Services
Wi-Fi
11. What are the other sources of Distribution Channels to bring in Tourist/Guest?
Travel Agents / Tour Operators Global Distribution Systems (GDS)
Third Party Online vendors Corporate discounts
Hospitals Social Media
Others, Specify__________________
Location (proximity)
Ambience
Facilities
Tariff
Safety
Brand
Friendly Service
9 Serviced Apartments Industry in India … 209
15. Rate the following with reference to the Business challenges faced by you
Yes No
210 S. P. Deepeka and M. K. Badri Narayanan
18. What will be the future challenges for your business expansion?
Raising Capital
Increase in competitors
Maintenance Cost
Rent Fixation
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Author Biographies
10.1 Introduction
Small and medium enterprises (SMEs) contribute nearly 40% of the gross industrial
value and are the backbone for Indian economy playing an important role in the
growth of GDP, exports, and employment generation. In fact, SMEs are closely
associated with performance of the country (Chittithaworn, 2011). Overall, thirteen
million SMEs in India having an approximate share of 45% of manufacturing
output are employing 41 million people, contributing to 40% of exports, producing
more than eight thousand products and contribute to 35% of gross industrial
exports. The processes of liberalization and WTO regime have thrown the indus-
tries open to many opportunities and challenges (Ashtankar, 2012; Sonia, 2009).
SME definition varies from country to country. Egypt considers SMEs as compa-
nies which employ more than 5 and fewer than 50 employees, and in Vietnam
number of employees are between 10 and 300 (Pandya, 2012).
In India, SMEs are classified on the basis of investment in plant and machinery.
The classification in manufacturing sector is based on the investment in plant and
machinery, and in services sector it is based on the investment in equipment. The
classification of enterprises according to the MSME Act 2006 is as follows
(Table 10.1).
K. Prasanthi (&)
KL Business School, Koneru Lakshmaiah Education Foundation (KLEF)
(Deemed to be University), Vaddeswaram, Guntur, Andhra Pradesh, India
e-mail: [email protected]
M. Bhaskara Rao
ICFAI Business School (IBS), The ICFAI Foundation for Higher Education (IFHE),
Donthanapally, Shankarapalli Road, Hyderabad 501203, Telangana, India
e-mail: [email protected]; [email protected]
Small Scale Industries (SSI) have been renamed as Micro, Small and Medium
Enterprises (MSME) since the formation of the Micro, Small and Medium
Enterprises Development (MSMED) Act, 2006 (Sankara Rao, 2014). Organizations
such as Entrepreneurship Development Institute of India, District Industries
Centres, Small Industries Development Bank of India, Small Industry Development
Corporations, and State Trading Corporations established by the Central or the State
Governments contribute to development and growth of SMEs in India. Small firms
are contributing 25–35% of world’s export of manufactured products, and one-fifth
of the manufacturing firms receive 10–40% of cross-border activities (Andersson,
Gabrielsson, & Wictor, 2004).
The process of internationalization is not only studied by many scholars, aca-
demics, but also by governments (Francionii, 2013). SMEs are key source for
innovation which not only includes new products and services, but also new
improved designs and processes and adaption of new technologies (Ummu, 2012).
Internationalization leads to many changes in the market and competitive envi-
ronment. SMEs which are facing tough competition in both domestic and in foreign
markets can use the internationalization as a strategy to overcome the resource
barriers. New ways are to be developed for SMEs as the previous strategies of
differentiation of product and price have no more value for competitive advantage.
Internationalization is the process which involves flow of goods and services from
various economies of the world without any hurdles, technology, capital, and
human capital. Internationalization involves export and import activities, foreign
investment, international subcontracting, and international cooperation (Sauti,
2014). Innovative companies try to create their own niche markets, and they create
a global focus (Kumar, 2012). Indian market was open to foreign market since 1991
(Kiran, 2013) which provides an opportunity for SMEs as they are more flexible
and innovative than large firms (Reddy, 2010). Indeed, innovation and interna-
tionalization are sources for SME growth in the foreign markets (Melia, 2010).
Many studies proved the relationship between the innovation and
10 Motives, Drivers, and Barriers for Internationalization … 215
100%
90%
80%
70%
60%
50%
40%
Fig. 10.1 Percentage of international business activity. Source IHS Survey 2012
They are deciding—to internationalize or not, which market to enter, how to enter,
on global marketing programs and on global marketing organizations (Gustavsson,
2006). Each entry mode has its own limitations and risk as well as control and
potentials. The company needs to check whether to go international or not. Next,
they have to verify the risk and opportunities. Then, it has to identify the inter-
national markets to enter and decide on the objectives and policies. Usually, every
company selects only one or few companies and establishes a deep
relationship. Through the entry modes like mergers and acquisitions, foreign direct
investments or strategic alliances, it takes the entry. Next, it has to decide whether
to adapt marketing mix adjusted to each market or use standardized marketing mix.
The next stage is to decide on the global marketing program and integrate national
marketing program to international program. The final stage is global marketing
organization, which the firm has to decide upon.
Most of the companies commence internationalization process with the estab-
lishment of export department. According to Hollensen (1998), entry strategies for
international markets are the key strategic issues for the companies. Root (1994)
states that the entry strategies help firms to set the objectives, goals, deploy
resources, and implement policies which help in international business activities
and help in achieving sustainable growth in the international market.
There is no best way to enter a new market because each country has different
regulations, policies, strategies, and cultures. The top management and the entre-
preneur involve and take the decisions pertaining to the organization (Acedo, 2006;
Fernandez-Ortiz, 2009). Managerial factors like education, experience, foreign
exposure, positive influence to internationalization process, family management,
and human capital also affect the process of internationalization (Ruzzier, 2007a, b;
Cerrato, 2010; Rutihinda, 2008). The factors affecting the entrepreneurial percep-
tion and internationalization are competition, marketing, global value chains, open
networking (Chiarvesio, 2010), strategic orientation, technology, and government
support (Bhatti, 2012). The critical factors in the international cooperation are
10 Motives, Drivers, and Barriers for Internationalization … 217
There are many theories like Uppsala model, innovation-related model, network
model, and international entrepreneurship model, which show the patterns of
internationalization. But all these theories could not explain the process of inter-
nationalization for all the firms since each theory has its own drawbacks. The
underlying assumptions of these theories are enterprises that internationalize in an
incremental, stepwise, and gradual process of gaining knowledge (culture, lan-
guage, policies, political systems) (Sommer, 2010) and avoidance of risk factors.
The SMEs internationalize gradually by their age and size (Liesch, 1999). Uppsala
model (U-model), developed by Johansson and Wiedersheim-Paul in 1975, sug-
gests the enterprise to proceed in a logical way in acquisition of knowledge in
market (Toulova, 2015; Kubickova, 2014) and implication in market operations and
market (Yener, 2014). This ultimately results in market commitment. This model is
criticized by Mtigwe (2006), Anderson (1993), and many other scholars. The
U-model explains the enterprises only in the early stages, and it could not explain
the born global firms and large multinational firms. They argue how the knowledge
affects the commitment. International new ventures (INVs) and network theory had
criticized Uppsala model. Many of the SMEs are going global through INVs.
218 K. Prasanthi and M. Bhaskara Rao
According to Johanson and Mattson, through network the companies are dependent
on resources which are controlled by other firms (Lasse, 2012; Zizah, 2011)
through a position within the framework they can enter into the foreign market.
Many people had studied on these network-related models like Mtigwe (2006),
Emerson (1981), and Lindblom (1959). Uppsala model is challenged by
network-related model. According to Mtigwe (2006), modern high-tech firms
usually involve in the process of internationalization by their experience and
resources of network patterns (Musteen, 2014). Every firm in the market is related
or linked with their suppliers, customers, sub-contractors and other players in the
market thereby the business relationship is established between them through the
network, the market knowledge, technology (Buckley, 1997) and other resources
are shared among them. However, the newborn company takes the challenges in
entering this sort of networks. Born globals do not need any sort of network for the
process of internationalization (Masum, 2008; Yener, 2014; Madsen, 1997).
Global and local competitive pressures are most powerful drivers (Kadrolkar, 2011).
Drivers of internationalization could be internal or external or both. Internal drivers
are the factors which affect inside the firm, and external drivers are the factors which
affect outside the firm (European Commission, 2003). The driving forces of SMEs
which result in internationalization are new business opportunities in foreign markets,
unique organizational competencies, existence of idle operating capacity, pressure
from domestic competitors, prior international experience, foreign travel, communi-
cation skills, reputation (brand image, goodwill, loyalty), information and commu-
nication technology, firm size, corporate growth, new market opportunities,
international orientation, international networks (Rutihinda, 2008), international
opportunity, improved sales, advancement of technology, business partners, short
product life cycle, high cost of R&D, e-commerce (Ewa, 2013), born global, firm
CEO or entrepreneur age, and timing of market entry. SMEs internationalization is
also facilitated by international networks and foreign market knowledge.
At the industry level, there are four types of drivers for setting up of global
strategy, viz., market driver, cost driver, government driver, and competitive driver.
Market driver includes finding customers globally, customer behavior, and distri-
bution channel. Cost drivers include potential sourcing efficiencies, cost differen-
tials, skills availability, and realizing the overall economies of scale and scope.
Government drivers are the trade and industry policies, and compatibility of
technical standards or common marketing regulations. Competitive drivers are the
activities of the competitors. The push and pull factors determine the approach for
these drivers. Push factors are those which depend on the firm-specific resources,
domestic competition, and product cycle. Pull factors are globalization, liberaliza-
tion of global markets, information and communication technology, foreign
resources and partners, needs of the current buyers, and international presence of
supplier. The firm characteristics determine which of these two approaches is
adapted in the internationalization process. The interaction among the four drivers
results in the process of internationalization (Onkelinx, 2008; Etemad, 2004).
Technology drives the efficiency, economies of scale and scope, increases com-
petence in difficult markets, and explores new edge innovative technologies
(European Commission, 2007) (Table 10.2).
There are two types of barriers, viz., external and internal (Leonidou, 2004).
External barriers are those which are present outside the organization and affect the
process of internationalization. External barriers can be classified as the following:
10 Motives, Drivers, and Barriers for Internationalization … 221
Procedural barriers: Transactions and operations with the foreign country. This is
caused due to lack of knowledge and familiarity with the new procedures, tech-
nologies and communication failures;
Government barriers: Include support for potential exporters, incentives, and tariff
and nontariff barriers;
Task barriers: Hurdles in foreign markets faced by firms due to customers and
competitors;
Environment barriers: Legal, political, economic, social, and cultural environ-
ment of the foreign markets.
Internal barriers are those which are present inside the organization and act as a
barrier for the process of internationalization. Classification of internal barriers is
given below:
Informational barriers: Information inefficiencies, such as lack of information on
foreign business opportunities, lack of foreign market data and customers, can lead
to problems in identification, selection, and contacting in international markets.
Functional barriers: Factors such as inadequate trained workforce and insufficient
working capital refer to the functional barriers. These barriers may relate to orga-
nizational functions, viz., human resource, finance, marketing, production.
Marketing barriers: Firms operating in international markets face barriers related
to products, pricing, distribution channels, and promotional activities. However,
innovation reduces the possible economies of scale in exporting.
SMEs may also face problems related to social and cultural value systems, orga-
nization, supply of raw materials, environment, technology, availability and develop-
ment of suitable manpower, quality, marketing, exports, and finance (Baporikar, 2013).
Various barriers faced by the SMEs are foreign cultures, different business rules,
risks, lack of strategic resources, operational barriers, information barriers,
process-based restrictions, difficulty in expansion (for high cost of coordinating inter-
national operations), and difficulty in foreignness (because of different rules, norms,
policies, culture, language); difficulty in size (because of having small size, it has fewer
financial resources, lack of knowledge about the market, lack of human resource and
technology); difficulty in newness (compared to old firms) they experience disadvan-
tage due to lack of experience in foreign transactions and certain resources in market.
Survival, identifying foreign business, shortage of working capital, limited information
to locate/analyze market, inability to contact the foreign customers, lack of managerial
skills, inadequate and untrained personnel, transportation costs, lack of home govern-
ment assistance in foreign country, tariff and non-tariff trade barriers, legal issues
(Hajela & Akbar, n.d.), infrastructure, regulations, political instability, lack of finance,
product/process quality, and obstacles in strategy, operations, logistics, information and
processes. According to Anderson, Havila, and Salmi (2001), the main challenges for
internationalization are three—(i) whether to, when and where to operate in overseas,
(ii) long-term planning and business processes, and (iii) business operational systems to
cope up with the situations. Among the many challenges faced by the SMEs, survival is
one of the biggest challenges for SMEs in internationalization (Lee, 2012) (Table 10.3).
10 Motives, Drivers, and Barriers for Internationalization … 223
Vijayawada is the second largest city in the newly formed state of Andhra Pradesh
(AP) in India (after Visakhapatnam) and is closely located to the new capital
Amravati. The population of Vijayawada stood at 1,039,518 (Census 2011). The
city is a nodal commercial and transport center of the State, owing to its favorable
demographics due to which the city has witnessed major economic, cultural, and
administrative development over the last few years. The Autonagar estate in
Vijayawada is a base for several automobile spare part manufacturing companies,
engaged in manufacturing of items such as wheel bolts, cylinder liners, U-clamps,
leaf springs, brake drums, oil filters, body building, gaskets, and automobile
workshops. In the near future, this sector in Vijayawada is expected to benefit from
the growing industrialization and infrastructure development inclusive of SEZ and
industrial corridors. In view of the expected rapid development of Vijayawada in
224 K. Prasanthi and M. Bhaskara Rao
the wake of proximity to State capital in general and the Autonagar estate in
particular, the study was undertaken.
10.8 Objectives
This is a descriptive research design. The population for the study included 300
SMEs in the Autonagar cluster of Vijayawada. Sampling frame is an operational
SME of the cluster. Sampling unit is the individual enterprise. Sample size is 100,
i.e., 33% of the population. The promoter and/or the authorized officer of the SME
was/were the respondent. The selection of SME is done using simple random
sampling method. A questionnaire was designed for conducting the study. Primary
data was collected using survey method. Secondary data was collected from
Vijayawada Industrial Estate Manufacturer’s Association, Automobile Technician’s
Association, The Andhra Pradesh State Manufacturer’s Association, and other
published sources.
A pilot study was conducted initially with a sample size of 30 to validate the
research instrument. The data collected was checked for its reliability. The ques-
tionnaire was modified based on the feedback received from respondents. The final
questionnaire was used for collection of primary data. Partial list of items from the
questionnaire is presented in Appendix 1.
10 Motives, Drivers, and Barriers for Internationalization … 225
The survey was respondent administered. The questionnaire was circulated to the
promoter of the SME and collected subsequently. In certain instances, the promoter
has delegated the responsibility of filling the questionnaire to a senior officer. The
questionnaire included variables related to motives, drivers, and barriers, apart from
company and respondent profile. All the 100 responses were valid. The data col-
lected was codified and tabulated in IBM SPSS 20 for further analysis.
The questionnaire included 12 items on Likert scale. For these items, Cronbach’s
alpha quotient is 0.844 reflecting good internal reliability (Table 10.4).
All the SMEs in the region are private proprietorship enterprises. None of them
have tie-ups or collaborations.
The SMEs in the region are relatively small, and majority of them employ less than
20 persons (Fig. 10.3). However, there are enterprises which have 20–249
100 85 2012
80 74
70
2015
60
2018
40
15 13 1
20 8 599 11
6 1
2
0
1-9 10-19 20-49 50-99 100-249
employees, although the number is small. From the projected number of employees
for the year 2018, one can conclude that small companies are planning to grow to
slightly bigger size. There is no significant improvement in the projected number of
employees in the medium-sized enterprises for the next three years.
The annual growth rate of the enterprises from 2012 to 2015 is on actual, and for
the period 2016 and 2017 it is projected. Most of enterprises are registering a
moderate growth rate of less than 10%. Very few companies are registering growth
rate in excess of 10% (Fig. 10.4).
80
69
70
60
2012
57
60 54 2013
49 48
50 2014
40
38
35 2015
40
31 2016
28
30
19 2017
20 12
10 11 0
756
10 433
100 0 0 022 111111
0
Less than 1% 1 - 5% 5 - 10% 10 - 20% 20 - 50% More than
50%
Only three companies are having the international activities and have set up offices
outside India. These offices are used to conduct export and import activities and to
facilitate local production.
All SMEs have confirmed existence of their Web site for conducting online busi-
ness transactions (Fig. 10.5). The portal includes information on availability of
products for sale, placement of orders, and provisions for receiving payment in
certain cases.
Almost all the respondents stated that their company vision, mission, and strategy
reflect the aspiration for internationalization. While this is so at the highest lead-
ership level, it does not percolate down to other levels.
Only about 90% of the companies have thought about an action plan for starting
their internationalization process effective from the year 2015–16.
A quarter of the respondents are unaware of the government support programs such
as financial support, incentives for internationalization (Fig. 10.6). About 70% of
the respondents are aware of the support programs, but they lack expertise in
exploiting such programs and facilities. Consequently, most of the SME players are
unable to benefit from the government support programs.
Lack of exposure: Almost all the SMEs covered are not being involved in any
international business activity such as import or export.
Research and development: Only 5% of the enterprises are pursuing research and
development activities. These companies are pursuing innovation as strategy for
their internationalization.
Barring one company, all other companies do not have any investment directly
from their foreign counterparts. Only two companies have distributor/agent
arrangements abroad.
Internationalization in this region is at a nascent stage is reflected by the fact that
11% of respondents are involved in cooperating with their foreign partners. Only
83% of the respondents are attempting to trade through their e-commerce portal.
This means the remaining 17% are completely excluded from perceiving them-
selves to be globally connected.
Neutral 70
Disagree 21
Strongly disagree 4
0 20 40 60 80
230 K. Prasanthi and M. Bhaskara Rao
10.13 Discussion
Majority of the SMEs (88%) are aspiring for internationalization of their business.
The motives, drivers, and barriers for internationalization are examined in the SMEs
in Vijayawada in the following framework:
The SMEs in the region are keen for faster growth than the existing moderate
growth rate of less than 10% and consequently increase their profitability. The
promoters have well thought out vision and mission, but they lack strategy for
internationalization. The SMEs cannot afford organizing their own training pro-
grams. The training and development programs by the government lack credibility;
70% of them are indifferent to the government training programs, although 92% of
them feel the need for training in internationalization. The SMEs have the moti-
vation and aspiration, but lack strategy and training for converting their vision into
tangible action and goal achievement.
10 Motives, Drivers, and Barriers for Internationalization … 231
On the drivers’ dimension, 95% of SMEs have poor research and development
focus and thus do not have niche products for catering to global markets. In fact,
SMEs have not lack unique organizational competencies and do not have the
wherewithal for creating international networks for sustainable international oper-
ations due to resource constraints. While 83% of SMEs are gearing up for
e-commerce, still they are way behind compared to their corporate counterparts.
The pro-SME policies of government are not percolating down, and there is a need
to close this gap.
On the barriers dimension, Indian SMEs continue to face unhealthy competition,
lack of export culture, and suffer from obsolete technologies. Lack of competi-
tiveness results in poor export performance and culture by these firms. Most of the
SMEs reportedly depend on resources that are neither efficient nor sufficient. Due to
resource constraints, SMEs have difficulty in dealing with different cultures and
policies across nations. Hence, SMEs are unable to break the barriers and inter-
nationalize their operations.
10.14 Limitations
10.15 Conclusions
Appendix 1
Questionnaire
Respondent Profile
1. Name of the company:
2. Respondent name:
3. Respondent designation:
4. Department:
5. No. of years spent in the company:
10. Does the firm’s vision, mission, and strategy follow the internationalization
policy?
i. Strongly agree
ii. Agree
iii. Undecided
iv. Disagree
v. Strongly disagree
11. Workshops and training by the government to the employees are helpful
for internationalization of business.
i. Not at all use full
12. Do you agree that the R&D and innovation process is involved in the
internationalization of products?
i. Strongly agree
ii. Agree
iii. Undecided
iv. Disagree
v. Strongly disagree
ii. No
234 K. Prasanthi and M. Bhaskara Rao
14. Which form of e-commerce does your enterprise use? (Please tick
appropriately)
15. Please rank these barriers for your international business activities?
16. In your opinion, what makes you more competitive than your peers when
exporting? Select the top 3 responses and rank them top down.
i. Innovation
ii. Design
iv. Price
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10 Motives, Drivers, and Barriers for Internationalization … 239
Author Biographies
M. Bhaskara Rao is currently Associate Professor in the ICFAI Foundation for Higher Education
(IFHE), Hyderabad, India. He also heads the ICFAI Staff College. He teaches courses in Human
Resource Management (HRM) and Operations Management. He has over 15 publications,
including those with abstracts indexed in SCOPUS and published in ABDC-ranked journals. He
has 20 years of industry and 13 years of academic experience. He was formerly Dean (Academics)
in the ICFAI Group, and Director, KLU Business School and Dean (Planning & Development) in
KL University, Vaddeswaram.
Part III
Ecosystem for Internationalization
Chapter 11
Institutional Voids and Their Impact
on Transnational Entrepreneurship:
A Study of Sri Lankan Entrepreneurs
Rondy de Silva
11.1 Introduction
Emerging markets that are experiencing rapid economic change and development
have been of scholarly interest over the past few decades due not only to the
unparalleled growth they demonstrate but also because they are changing the global
economic map in terms of power structures. It is recognized that the academic
theories that have largely emerged from the West may not be directly applicable to
these markets (Young, Peng, Ahlstrom, & Bruton, 2002) due to the differing market
structures, business systems, and forms of capitalism. Further, it also becomes crucial
to extend our understanding as to how these economies are developing and the
challenges that hinder their development. Worker migration patterns show that
developing countries are symptomatic of brain drain where a much needed skilled
labor force leave their developing home countries for better opportunities in host
economies. However, with the rise of the new economic growth poles emerging in
Asia, scholars have identified that diaspora entrepreneurship has been a great con-
tributor to these developmental changes. Policymakers from developing nations are
looking for new ways to attract this type of investment (Riddle, Hrivnak, & Nielsen,
2010) as emerging markets are shown to benefit from the business skills and tech-
nological expertise of such transnational entrepreneurs especially in the development
of high-technology industries (Wright, Liu, Buck, & Filatotchev, 2008).
An earlier version of this chapter titled How Transnational Entrepreneurs are responding to
Institutional Voids: A Study of Transnational Entrepreneurs from Sri Lanka was published in a
Special Issue of the South Asian Journal of Management (SAJM), Volume 22, Issue No. 2,
dated April–June 2015, on the theme of Entrepreneurship in a Globalizing World.
R. de Silva (&)
Sheffield Business School, Sheffield Hallam University, Howard Street,
Sheffield S1 1WB, UK
e-mail: [email protected]
Circular Migration
Fig. 11.1 Conceptualizing bifocality and the transnational entrepreneur. Source Author’s own
work
246 R. de Silva
North’s (1990) definition of institutions as the “rules of the game” (p. 3) has proven
to be a popular explanation of institutions in institutional economic theory. It
provides clear demarcations between the formal and informal structures that exist in
a societal and national context that determine the norms that dictate behavior and
action. Because the institutional environment determines the structure of the
available political, social, and economic incentives, they also determine the
strategic choices that have to be made by individuals and organizations (DiMaggio
& Powell, 1983; Scott, 1995).
Institutions can be regulatory, normative, or cognitive in nature (North, 1990;
Scott, 1995). Regulatory institutions are the formal structures, codes that can be
enforced. Formal institutions include regulations, property rights, laws, codes of
conduct, which create defined boundaries for economic and social activity (North,
1990, 1991). Normative institutions are less formal but are typically manifested as
standards or conventions arising from professional bodies or trade associations.
Cognitive institutions on the other hand are the informal rules that are particular to a
culture or community that are based on expected standards of behavior learned
through social interaction. Informal institutions include customs, taboos, and cul-
tural conventions and similar to formal institutions they too can provide a structure
for governing actions albeit as informal mechanisms (Esterin & Preverzer, 2011;
Peng & Heath, 1996). Informal institutions are also shown to be more established
and harder to change than formal institutions as they are “much more impervious to
deliberate policies” (North, 1990, p. 6) due to the fact that they are steeped in
tradition and culture. North (1990) further proposes that most often formal insti-
tutions are established in line with the informal institutions that exist in a country.
As the “humanly devised constraints that govern human behavior” (North, 1991,
p. 97), these institutions can hinder or assist business activities. Formal institutions
can give rise to barriers to business activities by way of the regulatory framework
through taxes, policy changes, legislative changes, etc. Informal barriers on the
other hand can arise via corruption, unfair practices, and competition (Aidis, 2005;
Smallbone & Welter, 2012).
Recent research on institutions has also brought to the forefront the notion of
“institutional voids” (Khanna & Palepu, 1997, 2010; Mair & Martí, 2009; Mair,
Martí, & Ventresca, 2012). An institutional void is created when there is a lack of
11 Institutional Voids and Their Impact … 247
identify the existing opportunities. The argument is that what may be viewed as an
institutional void to some, may instead be viewed as an opportunity by the TE.
Therefore, this paper will focus on evaluating the formal institutional voids that
impact transnational entrepreneurial activity as well as explain how the TE over-
comes these voids and seeks to contribute to the debate that they do indeed benefit
from their ability to access the two contexts.
Situated in the Indian Ocean and separated only by 40 miles of water from its
neighbor India, Sri Lanka is a small island nation that is currently enjoying rapid
economic growth and change. This change has been so rapid that Sri Lanka is
presently recognized as one of the fastest growing nations in South Asia and is
ranked highly in the ease of doing business ranking in South Asia (Asian
Development Bank, 2015a, b).
With the end of a three-decade-long civil war that ended in 2009, and a stable
government in place, the country entered a growth phase that saw improvements
not only in income levels but also in areas of human development (World Bank,
2015).
In 2010, the Dow Jones classified Sri Lanka as an emerging market and the
country was also ranked at number 65 out of 148 countries surveyed in the Global
Competitiveness report published by the World Economic Forum in 2014. The
same report also describes the Sri Lankan economy as transitioning from the
factor-driven stage to the efficiency-driven stage.
Despite being a small country of 21 million people, its geographical location
enables it to serve a market of 1.6 billion and it is the gateway to the Indian market
via the South Asia trade agreements (UKTI, 2014).
During the civil war, there was large-scale migration of skilled workers, par-
ticularly in the ethnic minorities. With the end of the war, the ensuing period of
peace and development made the country more attractive for economic investment
as evidenced by the rates of growth in the island in past few years. The main reason
for the growth is associated with the investment-led model that was adopted by the
government after the end of the civil war (World Bank, 2015). Statistical data and
internationally published research on entrepreneurs in Sri Lanka are extremely
limited, and virtually no data on transnational entrepreneurs was encountered in the
literature search. This dearth of data highlights the additional need for this study in
order to address this gap.
11 Institutional Voids and Their Impact … 249
11.4 Methodology
As presented in Table 11.1, seven key themes from the data are identified for
discussion in the space of this paper. The subsequent discussion will elaborate on
the summary of key findings provided in Table 11.1.
Speaking to the transnational entrepreneurs, it was apparent that they all had a
shared sense of community and identity of being Sri Lankan, no matter what their
current citizenship status or length of domicile was in their host countries. Despite
their host countries varying from being the USA, Australia, Canada, UK, or New
Zealand, their sense of community is reminiscent of ethnic entrepreneurs operating
within their own enclaves, many echoed sentiments of patriotism and belief in the
potential of the country.
You know as Sri Lankans we are very unique, we are very enterprising. The country is
really a paradise on earth. The moment I went abroad I was thinking about when could
come back (TE1)
11 Institutional Voids and Their Impact … 251
There is this great communal attitude when it comes to work, the people are not afraid of
hard work and not worried about always looking after number 1. I have 200 people doing
the jobs that would require 800 in the West (TE5)
Despite their strong sense of nationalism, the TEs were not reluctant to share
their views on the areas they thought needed improvement and they were highly
critical of the existing institutional structures in Sri Lanka.
And many of the other TEs echoed the same sentiment that being exposed to
environments where they could see how other entrepreneurs and small businesses
were flourishing, inspired them more than any skills they received.
I think the biggest difference I saw is our ability to think big, when you are in those
countries and when you talk to start ups there and how you envision the future, they try to
develop products that serve the whole world. Our thinking here (Sri Lanka) is also small as
an island (TE2)
The TEs highlight the dearth of role models in the COO who they could look up
to and aspire to be like. They were more deeply impacted by the possibilities of
what they could achieve, by being inspired by the successes of entrepreneurs they
witnessed while they were in their host countries. The very notion of
entrepreneurship goes against the grain of traditionally risk averse and culturally
conditioned nations, where the mind-set of what it is to be successful is deemed by
profession.
When I was growing up in Sri Lanka I was always told I had to be a doctor or a lawyer.
Nobody told me any different in or out of school. The possibility that I could have any
career I wanted and be anything I wanted to be, I only encountered when I left Sri Lanka
(TE5)
252 R. de Silva
Here people don’t understand the value of equity or sweat equity is not understood here.
When I was starting up here (Sri Lanka) people don’t get the idea of working for equity or
the chance at glory. Whereas in Silicon Valley, that’s what it’s all about. You guard equity
with all your life, you don’t give it away. When you hit the one that does, it’s massive and
here people don’t understand what you can get out of equity so they want to sell. So straight
away you discourage people from thinking I will work for the idea, you know the idea
becomes successful then I will become successful. It’s a very short term level of thinking.
And I think that’s just generally encouraged from a young age to get these recognized
professions, not be break out and do you own thing. There is a lot of cultural conditioning.
You are told to get a job in these field, these are successful jobs, so taking a risk is not
encouraged (TE9)
The TEs also acknowledged that it was their exposure overseas that helped them
develop their own soft skills and knowledge of what constitutes excellence in
product and service standards.
Without having the exposure the intuitive understanding of what is something that is nice
and what is not so nice, you can’t do stuff. Local companies have a lot of technical capacity
but they don’t have the maturity to understand what the market wants and how it should
behave. The exposure helps you to mature (TE6)
The TEs show that they are able to cleverly mobilize their resources, most often
funding their businesses from the wages earned in their host countries knowing that
they will find it a challenge to secure funding from their home countries. The TEs
were all cognizant of the fact that there were no formal institutions that would be
able to support them financially or otherwise in the COO. While some of the TEs
secured grants from their host countries, several TEs actually secured funding for
their ventures from countries that they deemed were more investor-friendly, like
Singapore or Korea. A direct benefit that is visible in Sri Lanka is that the TEs in
return are now acting as angel investors. They are operating support networks and
creating their own funding bodies in order to foster entrepreneurship in Sri Lanka.
All the TEs that were interviewed are engaged in some sort of funding or philan-
thropic activity. They are attempting to fill the gap and foster more entrepreneurship
in their home countries, largely due to their own experiences. This type of angel
investment though important does not, however, completely fill the void created in
the need to foster entrepreneurial engagement on a national scale.
Another great source of frustration for all the entrepreneurs interviewed were the
levels of corruption in the formal governmental institutions.
The thing is whether you like it or not. If you want your product to enter the market in Sri
Lanka, the way it is to go through that registration process. The thing is you need to go up
the registration desk, you need to make friends with the peon, the you got to make friends
with the pharmacist, then you got to make friends with the technician, then make friends
with the director so he knows what’s happening. 150 files and if you want your files to be
picked out of that 150 you’ve got to have that connection (TE4)
254 R. de Silva
Mid-level connections matter a lot, sometimes more that the political connections. I have
heard numerous stories, and I have experienced it. The top guy says I will support your
project but the mid-level person who is supporting another horse purposely stalls it or
sabotages it. Sends it in another direction then you are at a loss (TE6)
Anyway when you have to work through the government bodies they call it actually ‘profit
sharing’ (Laughs) so it’s like kind of an expected thing. If you want something done then
you need to give something. Even if it is getting a payment out they can decide whether
they pay it within a month or one year (TE2)
While the local entrepreneurs were almost fatalist in their attitude toward the
institutions, the TEs were more pragmatic in their view in that they were aware that
corruption exists in most nations but stated that it had a greater visibility in the
home country.
Wherever you go in the world you will find corruption, it’s just more obvious here. You
also need to know how to deal with it. If your business model is dependent on favors and
political influence then you are putting yourself in a very vulnerable position and that’s not
being savvy (TE5)
This comparative view enabled them to highlight the inefficiencies and wastage
that occurs due to corrupt business practices such as bribery or unnecessary gov-
ernmental administrative procedures. The TEs recognize that while an outsider
coming into the country to work in such a context would find it particularly
challenging, they themselves are able to adapt their mind-set to the contexts they are
in. This is because they do not have the same expectations for each context, and
they are able to view both the potential and the faults of both contexts. This
evidences their bifocal world view.
The TEs also highlighted the fact that a lot of business is conducted on personal
relationships and that connections and well-positioned contacts can be useful in
furthering a business idea and overcoming regulatory red tape. This was in fact
echoed by all the participants who were interviewed. What was clearly apparent
through this research was that the TEs were well-connected both socially and
politically and indeed some have managed to rise to the ranks of the corporate elite
in Sri Lanka. Their networks have enabled them to enter the market with fewer
restrictions and this is consistent with the literature that shows that the TEs leverage
their social networks in order to operate in markets with less developed formal
institutions (Honig et al., 2010; Bagwell, 2014). Their ranking as corporate elites,
however, is not as a result of their networks but rather through the success of their
business ventures. Many of the TEs interviewed receive wide local media coverage
in Sri Lanka for the impact they have had on the economy in terms of the industries
they have built as well as the employment opportunities they have created in the
country. Many of them now serve as the aspirational role models they themselves
found lacking in the country previously.
11 Institutional Voids and Their Impact … 255
The most interesting outcome of the research was that it was evident that having
become successful in such a challenging institutional environment, many of the TEs
are now looking to serve markets with similar institutional voids. Using the same
business models adopted in Sri Lanka, the TEs were moving to markets in
Bangladesh, Pakistan, and even African markets which they see as being similar to
Sri Lanka’s position a few years back. The confidence of succeeding in a country
despite the constraints of the institutional voids makes the TEs keen to pursue
markets that others might be more wary of. As one TE explains,
The level of corruption is like oxygen, without it my business won’t succeed (TE1)
His service provision succeeded only because of the general mistrust of dealing
with governmental bodies. Individuals choose his service because it offers a means
of importing goods without having to deal with the importing authorities and
payment of bribes.
When you buy from my global shop, you pay the duty online and you don’t have to deal
with a corrupt customs officer to get your items (TE1)
With parallel markets we feel that we are in a good position, we have been to Nepal we
have been to Bangladesh and so on, so comparatively SL is a quite a few years ahead, I
would say almost 20 years ahead. So those markets we can deploy our learnings over
there…we can become innovators in those markets we understand the pain points, we know
what works and what doesn’t so there’s a lot (TE2)
it in house. I myself have gone couple of times trying to talk to lawyers and they say no you
still don’t have the rights protection for your ideas and things like that (TE2)
These all evidence that despite the nation having made great strides techno-
logically, the formal institutions are far from sophisticated in their abilities to
grapple with the demands of the new economic environment. This was echoed by
both the TEs, international entrepreneurs and local entrepreneurs.
For us it’s harder, what we try to do is to build in security measures. Copyrighting,
patenting and IPR is lagging behind here (TE8)
Having previously discussed that the nature of the TE is based on their ability to be
mobile and work within multiple contexts, the biggest challenge that the TEs were
encountering in relation to this was the prevailing citizenship regulations and the
property rights regulations. These are two of the fundamental institutions that had
the potential to impact the TE most. While many of the TEs held citizenship in their
host countries, the withholding of dual citizenship regulations that came into place
in 2012 not only has the potential to greatly impact on a TE’s travel between the
countries but also can affect the TE’s ability to own assets and property in Sri
Lanka. Some TEs were retaining Sri Lankan citizenship and passports purely for
this reason despite it being advantageous to hold certain Western passports for ease
of international travel. These regulations were deemed as the most detrimental to
their activities, and it also appeared to create an air of unease in the diaspora
community. The citizenship and property rights issues certainly were the harder
aspects for the TEs to navigate. One of the policy advisers interviewed also
highlighted that potential restrictions on property ownership would give a negative
impression of the country to international investors. The logic being that the
curbing of ownership of assets would deter foreign investment.
11 Institutional Voids and Their Impact … 257
The TEs interviewed recognized that they are able to reap the cost advantage of
hiring well-qualified state university graduates from Sri Lanka. However, the TEs
also feared the loss in this cost advantage due to the level of training that is required
for staff that they hire locally. They highlight that while the graduate recruits have
hard skills, they lack the necessary soft skills to attain international standards, for
example, high levels of customer service, communication skills, and overall
understanding the differentiation between what is adequate and what is excellent.
Here people fall into the, ‘it’s good enough’ mentality. And the persistence to really polish
and excel and to stand out in a really over competitive world is sort of missing here.
I definitely gained because I was there, so I you know, when you are in a really large world
capital like New York you have to perform at that level and when you come here to a much
smaller economy people are much more isolated from what’s happening with digital dis-
solving borders (TE9)
I think the most difficult problem that we are facing as a company is trying to locate the
right human resources. The good people are always looking to migrate. It is especially hard
to find people who can express themselves well in English. It is easy to find people with
good technical know-how but challenging to find those who also have the ability to deal
professionally with customers face to face. Eighty percent of the time we have to settle for
people who are technically sound, but are not able to present themselves well or converse
with a customer (TE10)
The transnational entrepreneurs stated that their preference was to always hire
individuals who had worked overseas and had international exposure wherever
possible to minimize the costs of training.
This research shows that in the case of Sri Lanka, the transnational entrepreneurs
interviewed are similar to the new Argonauts described by Saxenian (2002, 2006),
in that they bring with them new technologies, industries, skills, and knowledge that
can benefit their home countries (Wei & Balasubramanyam, 2006). The transna-
tional entrepreneurs interviewed are particularly active in the IT sector which has
enabled the creation of new products and services not only for the local market but
also in the country’s ability to service the world. In terms of their response to
institutional voids, it is clear that in the first instance they are able to recognize the
voids but not see them as impediments to their business. Their bifocality appears to
contribute to their ability to work with the existing challenges and in some instances
actually bring about institutional change. This adds to the existing literature that
bifocality is an important aspect not only in terms of strategy selection but also for
success in a transnational enterprise. There is also evidence to demonstrate that their
experience of working in a context with many institutional voids has given them the
258 R. de Silva
confidence to explore markets with similar voids so that they are able to capitalize
on their knowledge for economic gain.
While acknowledging that a single country context study is limiting in its
generalizability, Sri Lanka shares much in common with other developing nations
in South Asia and is currently in a position where less developed countries would
aspire to be. The sample size is small; however, the focus on this qualitative
research was to capture “rich, thick, descriptions” and provides views of TE
operating from different host countries that illuminate on their understanding of
their home country institutional environment. This paper extends the geographical
coverage of transnational entrepreneurship research.
Sri Lanka serves as a classic example of an emerging economy that is experi-
encing rapid economic growth in South Asia. This growth, however, is not mirrored
in the development of its formal institutions. It is apparent while diaspora
entrepreneurship from transnational entrepreneurs can contribute greatly to eco-
nomic development, it is crucial that measures be taken to address the deficiencies
in the formal institutions in the country. In this chapter, two critical areas that have
been identified in terms of policy development required to attract further investment
from TEs. Firstly, reinstating dual citizenship and the property rights associated
with citizenship should be one of the main priorities of the new government in Sri
Lanka. Secondly, regulatory frameworks to deal with new technologies as well as
complementary support systems will also need to be created. Further recommen-
dations for policymakers include addressing issues of widespread corruption and
administrative wastage within government institutions. It is also clearly apparent
that there should be more effort to promote entrepreneurship and provide more
accessible funding for start-ups in nontraditional industries. Policymakers would
also do well widen the education agenda to include the provision of soft skills to
enhance the quality of the labor pool in Sri Lanka in order to maintain global
competitiveness.
Further analysis of the data will take place in order to assess the impact of culture
and informal institutions on the business activities and strategies of TEs. It is also
intended to use the data to further profile the characteristics, motivations, and
drivers of the TEs in order to contribute to the greater understanding of the phe-
nomenon. Future research should investigate the roles of transnational entrepre-
neurs as agents of institutional change in emerging economies and highlight the key
economic opportunities that come with policy changes that foster investment from
the diaspora.
11 Institutional Voids and Their Impact … 259
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11 Institutional Voids and Their Impact … 261
Author Biography
Rondy de Silva is a Senior Lecturer in International Business at the Sheffield Business School,
Sheffield Hallam University (SHU), UK. She is also the course leader for the EPAS-accredited
MSc in International Business program and holds the role of International Recruitment Manager.
In her academic role, Rondy specializes in subjects related to International Business Management
which help build the links between theory and practice. Rondy is actively engaged in International
Business as part of the Sheffield Business School and supports international partnership
development, student recruitment, and university profile raising activities in India and the
subcontinent. Rondy’s areas of research interest are Transnational Entrepreneurship, Institutions,
and Institutional Voids in emerging markets. She completed MA in Political Communication from
the University of Sheffield and her Doctorate in Business Administration (DBA) from Sheffield
Hallam University.
Chapter 12
SME Performance and Access to Export
Markets: The Role of Institutional Credit
12.1 Introduction
Small and medium enterprises (SMEs) play an important role in economic growth.
Apart from catalyzing innovation, SMEs play a key role in employment creation,
particularly in developing economies. A common growth strategy that many SMEs
consider is to export their products. Internationalization is also considered as an
essential strategic choice for SMEs for pursuing growth (Wennekers & Thurik,
1999; Skrt & Antoncic, 2004). While internationalization includes various activities
such as setting up of branch offices, sources from overseas supplier, licensing of
technology in foreign markets, creation of joint ventures with foreign partners, it is
exporting that is the most common among SMEs.
Exports, however, create additional pressure for the SMEs because of the nature
of the export market. For example, exports involve additional costs in transporta-
tion. Therefore, average order sizes need to be higher so that the additional over-
head costs such as transportation can be allocated to more number of units in order
to keep the unit costs under control. The cash cycle of business is also longer for
exports, given the additional time it takes for the physical delivery and collection. In
addition, since many SMEs may not have the financial wherewithal to have their
An earlier version of this chapter titled SME Firm Performance and Access to Export Markets:
The Role of Institutional Credit was published in a Special Issue of the South Asian Journal of
Management (SAJM), Volume 22, Issue No. 2, dated April–June 2015, on the theme of
Entrepreneurship in a Globalizing World.
local presence in the export markets, they would have to rely on a chain of inter-
mediaries for order fulfillment and collection of revenues. All of these create the need
for additional capital for those SMEs pursuing an export-oriented growth strategy.
External financing of SMEs is characterized by information asymmetry problems
(Serrasqueiro, Nunes, & Leitao, 2011; Oliveira & Fortunato, 2006; Moreno &
Casillas, 2007). This problem is more acute in the case of young firms with little or no
credit history. Capital providers and investors realize this and factor these while
pricing the loans. This results in a higher cost of borrowing for many SMEs.
Therefore, many SMEs rely as much as possible on internal sources of funding.
However, SMEs pursuing export-led growth would need external funding because of
the significant capital needed to support the export activity. This study analyzes the
impact of external funding on two fronts: export and overall performance of SMEs.
The remainder of this chapter is structured as follows. The second section
provides a brief overview of the literature. The third section identifies the research
gaps to build hypothesis and a conceptual model based on theory. The fourth
section provides the description of data, its sources, and the methods of analysis.
The results and findings of the study are discussed in the fifth section. Finally, the
last section summarizes and concludes while highlighting the policy implications,
limitations, and scope for future work.
Literature on the export barriers faced by firms indicates that the topic has attracted the
interest of researchers for a long time. Barriers to exports have been broadly classified a
follows: market access barriers (Mejri & Umemoto, 2010; Musteen, Datta, & Butts,
2014); managerial barriers (Ruzzier, Hisrich, & Antoncic, 2006; Freeman & Cavusgil,
2007; Sommer, 2010); industry-specific barriers (Lee, Kelley, Lee, & Lee, 2012);
firm-specific barriers (Xiaobao, Wei, & Yuzhen, 2013); and financial barriers (Oliveira
& Fortunato, 2006; Minetti & Zhu, 2011). In almost all the classifications, it has been
implicitly acknowledged that financial barriers remain an important category of barriers
for exports. In this review, we concentrate on the literature on financial barriers.
Firms which are financially strong shall always have the initiative to export
(Minetti & Zhu, 2011). Financial constraints impact firm growth, which shall be
relatively more severe for small and young firms (Oliveira & Fortunato, 2006).
Sufficient financial resources are also required for SMEs to absorb the additional
cost associated with internationalization (Loane, Bell, & McNaughton, 2007;
Pinho, 2007). Das, Roberts, and Tybout (2007) also mention that the higher entry
cost associated with internationalization shall allow only firms with higher liquidity
to export. Shaw and Darroch (2004) argued that exporters and likely exporters
consider that finance and cost-related factors are the crucial factors hampering
internationalization. Access to credit is a significant factor that determines an
SME’s export behavior (Hobdari, Gregoric, & Sinani, 2011; Gashi, Hashi, & Pugh,
2014). External financial support is required at each stage of growth of SMEs since
12 SME Performance and Access to Export Markets … 265
most SMEs would be unable to fund growth from internal or retained earnings.
Halilem, Amara, and Landry (2014) found that financial supports have a significant and
positive effect on the probability of SMEs engaging in innovation process and in
exporting to distant markets. The firms having financial constraints may also restrict
themselves to export to a particular key region, a strategy usually not without risk
(Brouthers, Nakos, Hadjimarcou, & Brouthers, 2009; Cieslik, Kaciak, & Welsh, 2012).
These findings indicate the significance of credit availability in supporting exports.
We now look at the appropriateness of different sources of funding in meeting the
requirements of exporting firms. It is commonly argued that SMEs rely on internal
sources (retained earnings) for their diversification and growth (Becchetti & Trovato,
2002; Ou & Haynes, 2006; Vos, Yeh, Carter, & Tagg, 2007; Ughetto, 2008; Gonzalez
& Gonzalez, 2012). Firms with higher profits finance their investments through
retained earnings rather than raising debt (Degryse, de Goeij, & Kappert, 2012).
Moreover, SMEs also find raising external capital difficult because of limited track
record, information opacity, and so on (Lokhande, 2011). However, internal finance
alone may not be sufficient to accomplish their targets, since many of the SMEs do not
have strong profit margin. Jarvis (2000) argued that when SMEs require external funds
they do not attempt to get funds from external sources other than the bank as they fear
to lose their independence. Bank loans are considered as important source of formal
finance (Abe, Troilo, & Batsaikhan, 2015). Availability of formal source of finance is
very essential for SMEs and Ayyagari, Demirgüc-Kunt, and Maksimovic (2010)
showed that firms using informal external finance sources do not grow as fast or have
high productivity growth when compared to those firms financed by banks. These
findings form the basis for this paper. The objective of this paper is to understand the
effect of different sources of funding on the export and financial performance of SMEs.
impact on their growth (Oliveira & Fortunato, 2006). Researchers had long since
been arguing as to the type of finance that could augment SMEs’ growth. Abor and
Biekpe (2007) found evidence that pursuing growth puts a strain on retained
earnings and pushes the SMEs to borrow from external sources. In comparison to
low-growth firms, high-growth firms depend more on external sources of capital to
support their growth. Ayyagari et al. (2010) emphasized that bank finance enables
the growth of SMEs as compared to any other source of informal external financing.
All these arguments suggest the need for a deeper understanding of the impact of
different sources of finance on SME growth. Thus, the hypothesis:
H3: There is no significant impact of financing sources (internal finance, institutional
finance, debt capital and trade credit) on growth of Indian SMEs.
Financing sources have also been argued as important factors influencing per-
formance and efficiency of SMEs. Financially constrained firms are expected to be
characterized by low performance and efficiency levels. SMEs meet their funding
requirements from different sources depending upon their ability to access these
sources. The presence of information asymmetry makes internal finance as the most
preferred financing source for SMEs (Serrasqueiro et al., 2011). On the contrary,
Rocca, Rocca, and Cariola (2011) argue that debt is fundamental to business
activities in the early stages but when firms mature they rebalance the capital
structure to include more internal finance. Another argument is SMEs that generate
significant cash flows from operations prefer internal finance to other sources of
finance (Ughetto, 2008; Degryse et al., 2012; Gonzalez & Gonzalez, 2012). Bank
finance is considered as the most important formal source of finance (Abe et al.,
2015). Trade credit is the most sought after short-term credit by firms with inad-
equate liquidity (Bassey, Arene, & Okpukpara, 2014; Giannetti, Burkart, &
Ellingsen, 2011).
H4: There is no significant impact of financing sources (internal finance, institutional
finance, debt capital and trade credit) on the performance of Indian SMEs.
H5: There is no significant impact of financing sources (internal finance, institutional
finance, debt capital and trade credit) on the efficiency of Indian SMEs.
Firm Characteristics
Collateral
Age Size asset Exports
H6 H7 H8
H9
H4 Performance
Financing Return on
Sources assetsand
Growth H1
Internal Return on
finance H3 Growth in sales
assets and
Institutional
finance Growth in
Efficiency
sales H2
Debt capital Asset-
and turnover
ratio
Trade credit H5
H8: There is no significant impact of firm-specific characteristics (size, age, collateral and
exports) on performance of Indian SMEs.
H9: There is no significant impact of firm-specific characteristics (size, age, collateral and
exports) on efficiency of Indian SMEs.
The study is based on secondary data, which were collected from Centre for
Monitoring Indian Economy (CMIE) Prowess package for a period of 6 years on
year-to-year basis ranging from 2006–2007 to 2011–2012. All the SMEs involved
in ‘manufacturing activities,’ which were in need of significant funds to grow and
expand, were included in the sample. Manufacturing firms face higher obstacles to
financing while service firms are less affected by all obstacles (Beck et al., 2005).
Finance is more often sought by manufacturing firms than by service firms or other
businesses (Mina, Lahr, & Hughes, 2013). Hence, it would be right to include those
firms for a study on the financing sources.
According to Micro, Small and Medium Enterprises Development (MSMED)
Act, 2006, the manufacturing firms having investment in plant and machinery under
USD 2 million1 are considered as micro, small, or medium enterprises (MSMEs).
The same criteria have been applied in this study and the firms with plant and
machinery below USD 2 million for all the 6 years were included.
These were further reduced based on availability of data in all respect, and the
final sample constitutes 323 firms from Indian manufacturing sector. Table 12.1
shows the description of exogenous and endogenous variables.
To empirically test the robustness of the conceptual model (see Fig. 12.1), structural
equation modeling technique (i.e., path model) was used. Path model helps to propose a
model and tests it to find the interrelationship between variables in a multivariate
setting. The path model also accounts for covariance among variables within the model.
The final model (see Fig. 12.2) includes paths after incrementally rebuilding the model
to include the underlying causal paths revealing the variables influencing performance
and efficiency of SMEs. The dependent variables include return on asset (P_TASS) and
return on sales (P_SAL) as measures of performance of the firms. Efficiency of SMEs
1
USD = United States Dollar
12 SME Performance and Access to Export Markets … 269
is measured in terms of asset turnover ratio (ASS_TN_OV) which shows the pro-
ductivity (in terms of turnover) for the assets invested.
Path analysis allows the researcher to assess the relative strengths of each variable
and brings out their relationship with the dependent variables. AMOS software
package provides modification indices that enable to identify the underlying paths
not included in the conceptual framework and that may have significant influence
Table 12.2 Significant results of path model rejecting the null hypotheses
Path Standardized coefficient P-value
H1: There is no significant impact of growth on performance of Indian SMEs
P_TASS ← ASS_GW 0.074 0.037**
P_TASS ← SAL_GW 0.104 0.003***
H2: There is no significant impact of growth on efficiency of Indian SMEs
ASS_TN_OV ← SAL_GW 0.16 0.002***
H3: There is no significant impact of financing sources (internal finance, institutional
finance, debt capital and trade credit) on growth of Indian SMEs
ASS_GW ← TD_CR 0.138 0.029**
H4: There is no significant impact of financing sources (internal finance, institutional
finance, debt capital and trade credit) on performance of Indian SMEs
P_TASS ← INT_FIN 0.945 ***
P_TASS ← INST_FIN 0.633 ***
P_TASS ← DB_CAP −0.188 0.033**
P_TASS ← TD_CR −0.197 ***
P_SAL ← INT_FIN 0.559 ***
P_SAL ← INST_FIN 0.425 ***
P_SAL ← TD_CR −0.094 0.061*
H5: There is no significant impact of financing sources (internal finance, institutional
finance, debt capital and trade credit) on efficiency of Indian SMEs
ASS_TN_OV ← INT_FIN 0.138 0.02**
ASS_TN_OV ← INST_FIN 0.86 ***
ASS_TN_OV ← DB_CAP −0.763 ***
ASS_TN_OV ← TD_CR −0.389 ***
H6: There is no significant impact of firm-specific characteristics (size, age, collateral
and exports) on
INST_FIN ← SIZE −0.125 0.072*
DB_CAP ← SIZE −0.06 0.014**
INST_FIN ← AGE 0.137 0.03**
DB_CAP ← COLL_ASS −0.066 0.007***
(continued)
12 SME Performance and Access to Export Markets … 271
on the desired outcome. The final model includes some rebuild path in line with the
modification indices not assumed under the hypotheses revealing new insights.
Significant results alone are presented in Tables 12.2 and 12.3.
The growth and survival of SMEs have long since been a matter of concern for both
academic researchers and policy makers. The growth of SMEs is looked upon as a
means to foster the country’s economic growth. To achieve growth, the SMEs must
272 D. Raju and A. Thillai Rajan
be able to increase their performance and efficiency. The results show that (see
Table 12.2) ASS_GW and SAL_GW significantly influence P_TASS indicating that
growth in assets and sales increases the return on assets. This implies that SMEs are
capable of increasing profitability through additional investment in assets. This
disproves the general perception that SMEs’ performance dwindles when they
intend to expand their business. SAL_GW increases the performance and efficiency
of the firms. With every unit increase in SAL_GW, there is 0.104 raise in P_TASS
and 0.16 raise in ASS_TN_OV. Widening the market or increasing reach in the
present market will also be helpful to strengthen the performance of SMEs to a
certain level. Nevertheless, growth has to be backed with sufficient finance.
young SMEs is to reach the minimum scale of efficiency required for its survival.
INT_FIN and INST_FIN contribute positively to P_TASS and P_SAL. With every
one unit increase in INT_FIN, there would be 0.945 times increase in P_TASS and
0.559 times increase in P_SAL. The contribution of INST_FIN is comparatively
lesser. With every unit increase in INST_FIN, P_TASS increases by 0.633 and
P_SAL increases by 0.425. This showcases INT_FIN as the most important source
of finance to enhance its performance followed by INST_FIN. DB_CAP and
TD_CR exhibit significant negative impact on P_TASS. Such negative impact shall
be due to the reason that external debts other than INST_FIN are not intended to
serve the needs of well-performing firms. Ayyagari et al. (2010) also found that
firms relying on sources of informal external financing have lower profit rein-
vestment rates and do not grow faster than those firms which are financed by banks.
These sources are usually considered as an alternate financing choice by firms
having less access to INST_FIN due to their poor accomplishment record.
Firm-specific characteristics are the influential factors which help in resolving the
decision of financing choice. Financial constraints do not preface all SMEs. Newer,
younger, and less established firms suffer from such infirmities. Due to risk factors,
smaller enterprises have greater problems with bank credit (Aryeetey et al., 1994;
Abor and Biekpe 2007). Financing sources consider such flaws while extending
credit. They remain the decisive criterion for lenders. Analyzing the firms’ char-
acteristic impact on financing sources, we find that SIZE has significant negative
coefficient with INST_FIN (−0.125) and DB_CAP (−0.06). This implies that large
size firms have lesser dependence on external finance. Rocca et al. (2011) argued
that re-balancing of capital structure takes place as firms grow larger, as they
gradually substitute debt for internal capital. This also goes in hand with the
pecking order theory. AGE has significant positive coefficient (0.137) with
INST_FIN. AGE serves as a proxy for firms’ reputation (Ang, 1991). It hinders
young firms from accessing INST_FIN (Muller & Zimmermann, 2009; Mina et al.,
2013). Banks are also inclined to lend to older firms having credit history and
established relationship with banks (Lee, 2014). COLL_ASS has significant neg-
ative coefficient with DB_CAP (−0.066) and TD_CR (−0.111). A negative relation
of COLL_ASS with TD_CR is understandable, as this short-term credit passes on at
lesser cost from the supplier to the firms well-known to them. A significant negative
impact of COLL_ASS on DB_CAP would mean that the sample firms are either
self-reliant or firms with low growth. Only firms intending to grow seek external
debt (Degryse et al., 2012; Gonzalez & Gonzalez, 2012). However, this result
cannot be generalized to all SMEs without proof that the firms are self-reliant. The
negative impact can also be interpreted that the availability of collateral enables
274 D. Raju and A. Thillai Rajan
The analysis shows that SIZE (0.321) and COLL_ASS (0.186) have significant
positive impact on ASS_GW. Larger firms invest more in assets. The other
dimension of the result is to be interpreted to get a deeper insight. The positive
significant coefficient (0.181) of ASS_GW on SAL_GW shows that any additional
investment in asset is associated with growth in sales. Being manufacturing firms,
the growth is largely linked to ASS_GW. SIZE (−0.176) has significant negative
impact on P_SAL which shows that as the sales size increases the firms maintain a
lower profit margin. A low-profit margin is typically an indicator of either a highly
competitive market or an ineffectively run business. As a lower profit margin is
associated with a larger scale size, we can construe that these firms can typically
benefit from the economies of scale in a highly competitive market environment.
COLL_ASS (−0.243) has highly significant negative influence on ASS_TN_OV
which implies that the firm’s additional investment on asset is not productive
enough. This contradicts the earlier finding that ASS_GW increases SAL_GW and
P_TASS. This suggests that additional investment in asset does increase sales and
profitability. However, such increase is not proportionate to the investment made.
Thus, SMEs’ efficiency reduces with additional investments proving its inefficiency
to operate as larger organization.
While export activities incur additional expenses, beyond those required for
domestic operations (Minetti & Zhu, 2011), they also enhance a firm’s capabilities
and managerial skills and facilitate better performance (Katsikeas & Skarmeas,
2003). Results show that EX_PRO has significant positive influence on INST_FIN
(0.577) and DB_CAP (0.088). Thus, exporting firms have to rely on external
finance to meet out additional expenses needed for its international activities. For
each unit increase in INST_FIN, EX_PRO increases by 0.577 indicating the crucial
role played by formal credit in encouraging exports. However, DB_CAP (−0.743)
has a significant negative influence on EX_PRO. This inverse relation suggests that
financing export activities through external sources other than INST_FIN are
unfavorable. There also exists significant negative impact of INT_FIN (−0.859) on
12 SME Performance and Access to Export Markets … 275
EX_PRO as a proof that INT_FIN is also not that effective in boosting EX_PRO.
EX_PRO is not found to be a significant determinant of growth and performance
and is removed from the model.
Path model also helped to identify some unassumed relationships among the
variables (see Table 12.3). INST_FIN holds significant positive coefficient (0.973)
with DB_CAP as it holds a major share of the external credit of the firms. TD_CR
also has significant positive coefficient with INST_FIN. TD_CR is considered as an
alternate to bank credit-constrained SMEs that have little access to sources of
external funding (Biais & Gollier, 1997; Petersen & Rajan, 1997; Ogawa et al.,
2013). These studies suggest a negative relation between these INST_FIN and
TD_CR. TD_CR usually favors SMEs in critical situation as a source of ‘financing
of last resort’ (Fisman & Love, 2003). TD_CR is from suppliers who know their
customers and their ability and provides extended credit periods to enable them
recover from the crisis. These also form a guarantee for further borrowing from
banks when the firms are particularly young and have no credit history. Thus, there
exists positive relation between the two. TD_CR has significant negative coefficient
(−0.238) with DB_CAP. SMEs have the tendency to prioritize external fund
requirement with TD_CR. TD_CR is treated as the second-largest source of funding
for SMEs, after banks and private lenders. P_SAL also has significant negative
coefficient (−0.113) with P_TASS which also implies that the firm’s additional
investment on asset is not productive enough. The goodness of fit indices indicates
that the model is a perfect model revealing relationship among variables (see
Table 12.4). The chi-square value is not significant which means that the observed
model is similar to that of the predicted model. The goodness of fit index (GFI) and
comparative fit index (CFI) are close to one indicating that the model fit is good.
Root mean square error of approximation (RMSEA) and CFI show how close
the model corresponds with the data. Since the RMSEA value is less than 0.05, we
can consider that the estimation is acceptable and suits the sample data.
In this study, the impact of funding sources on the financial and export performance
of SMEs has been analyzed. Firm performance was measured in terms of prof-
itability, return on assets, and asset turnover. Export performance was measured as
a ratio of exports to total sales. Data from 323 manufacturing firms for the years
2007–2012 have been used for the analysis. Structural equation modeling technique
was used to understand the relationship between funding sources and variables of
interest. Our results indicated that source of funding is strongly associated with its
performance. However, the effect differed between financial performance (prof-
itability, return on asset, and asset turnover) and export performance.
It was seen that both internal finance and institutional finance had a positive
impact on profitability, return on assets, and asset turnover. However, the impact of
internal finance was higher in case of return on assets and profitability. The impact
of institutional finance was higher in case of asset turnover, which showed that
firms with institutional credit were more efficient in deploying their investment,
though they might not be very profitable. An interesting result was observed in the
case of total debt capital and trade credit. Total debt, which included funding from
non-institutional sources also, had a negative effect on return on assets and asset
turnover. This showed that obtaining credit from informal sources did not benefit
the SMEs. If we assume that firms resort to obtaining credit from informal sources
only when they are unable to secure credit from banks and institutions, our results
underline the need for enhancing the availability of bank credit to SME sector. The
effect of trade credit was also negative on all firm performance indicators, though
the coefficient was positive for growth. This showed that while trade credit might be
a quick fix solution to achieve growth, it does not make a significant contribution to
the long-term performance of the SMEs. Availability of long-term capital is
therefore critical in enhancing the performance of SMEs.
Our results indicate a positive relationship between institutional funding and
exports. Firms with higher ratio of export revenues are characterized by a higher
ratio of institutional funding. We, therefore, conclude that SME firms pursuing an
exports strategy prefer to avail bank or institutional credit since such credit benefits
the SME firm in some way to achieve better export performance. This has a clear
implication for policy making. If the policy imperative is to stimulate exports, then
access to credit from banks and institutions to the SMEs would have to be ensured.
Our results also show that increasing ratio of export sales is also associated with
higher total debt ratios, but the coefficient is not as high as what was obtained in the
12 SME Performance and Access to Export Markets … 277
case of institutional finance since total debt ratios include all other sources of debt
in addition to institutional finance. We, therefore, conclude that higher proportion of
export revenues is associated with the higher levels of institutional credit as com-
pared to debt from other sources. Further studies need to be done on understanding
the causal pathway of how institutional or bank finance has a positive impact on
exports.
Analysis of the intertwine relationship between internal finance and proportion
of exports shows that firms that rely significantly on internal finance do not have a
very high proportion of export revenues. The negative coefficient from the path
model predicates such a relationship. Interestingly, a high debt ratio is predicted to
have a negative relationship with the proportion of export revenues. This may seem
contradictory to the earlier finding that higher ratio of export revenues is associated
with a higher proportion of debt. In fact, the size of the coefficient indicates that the
negative effect of debt on export revenues dominates the positive relationship
between export revenues and debt. Our inference is that while bank or institutional
finance is associated with a positive impact on export performance, debt from
informal or other non-institutional sources has a negative impact on export per-
formance. Additional studies are needed to understand the role of debt capital in
export performance.
Acknowledgements Financial support from Indian Institute of Technology Madras, Chennai, and
All India Council for Technical Education (AICTE), New Delhi, is gratefully acknowledged. The
authors also gratefully acknowledge the insightful comments of the participants and reviewers of
the IIMB-SJSU International Conference on Transnational Entrepreneurs and International SMEs
in Emerging Economies: Drivers and Strategies.
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Author Biographies
Deepa Raju received her PhD from Pondicherry University, Puducherry. She was a Post-doctoral
Fellow at the Department of Management Studies, Indian Institute of Technology Madras (IITM),
Chennai.
A. Thillai Rajan is currently Professor in the Department of Management Studies, Indian Institute
of Technology Madras (IITM), Chennai. He is also an Associate at the Mossavar-Rahmani Center
for Business and Government, Harvard Kennedy School, Harvard University, USA and an
International Research Affiliate at the Coller Institute of Venture, Tel Aviv University, Israel. His
areas of research interest are Corporate Finance, Infrastructure Finance and Venture Capital.
Chapter 13
Internationalization of Auto-Component
MSMEs: A Study on the Role
of Institutional Networks
13.1 Introduction
13.1.1 Background
In recent years, the economic and social importance of small- and medium-sized
enterprises (SMEs) has been a major focus of emphasis regarding its enormous
impacts in building and revitalizing the economy and in India, especially the Indian
auto-component industry has become the nation’s manufacturing powerhouse over
the past two decades. Especially small- to medium-size auto-component manu-
facturing units account for over 95% of all auto-component enterprises in India and
which generates employment for about 30 million people. Investment of around Rs.
25–30 billion is expected in the next 2 years. An increasing presence of global
original equipment manufacturers (OEMs) is providing opportunity for interna-
tionalization to the Indian auto-component manufacturers. Many auto-component
Micro, Small, and Medium Enterprises (MSMEs) in particular have realized the
enormous impact of outward international expansion as a means for creating and
maintaining innovative capacity and resource generation (Green & Mole, 2006;
Zain & Ng, 2006). However, SMEs face particular difficulties which in the view of
globalization, chiefly consist of barriers to successful internationalization (Torkkeli,
Savitskaya, & Salmi, 2010).
SMEs internationalization can be grouped into internal and external barriers
(Fillis, 2000) whereby internal barriers include but not limited to inadequacies in
human capital, financial resources, expertise know-how and foreign market expo-
sure, and production capacity and/or machineries; while external obstacles include,
e.g., government policies and trade barriers, lack of awareness about foreign market
opportunities, no connections with potential foreign business contacts, hostile
competition from multinational enterprises (MNEs), little or no internationalization
support services, lack of credit facilities, market uncertainty and lack of protection
from economic and political uncertainties, competing with local competitors by
means of price and most importantly, non-connectedness with relevant support
networks (Fillis, 2000; Leonidou, 2000; Smallbone & Welter, 2001; Fliess &
Busquets, 2006; Ruzzier, Antoncic, Hisrich, & Konecnik, 2007; Torkkeli et al.,
2010). On the other hand, MNEs have more financial and human resource capa-
bilities as compared to SMEs and more vast in network relationships with both
public and private institutions. Therefore, with their gigantic resource advantage
combined with extensive network relationships, MNEs are more capable to lever-
age internationalization opportunities to their own advantage. Thus, this unique
advantage situation gives some MNEs greater edge or possibility to influence the
foreign market environment at both the policy level and the industry and business
outcome. To overcome this scenario, institutional support is the most important
parameter which works for SME and industry specific.
Based on the above discussion, it is clear that the importance of how networks
influence SMEs internationalization process cannot be over-emphasized. In this
13 Internationalization of Auto-Component MSMEs … 283
case, the focal interest of this study is to investigate the following research ques-
tions concerning what role institutional networks play in the internationalization
process of SMEs:
• What are the various international activities carried on among auto-component
SMEs?
• What is the influence of institutional networks on auto-component SMEs’
internationalization process?
• How do auto-component SMEs access and utilize institutional networks during
the internationalization process?
These research questions have been studied from both the “providers” and the
“network member” perspectives.
13.1.4 Purpose
The purpose of the current study is to examine the role of support institutions on the
internationalization process of auto-component MSMEs and observe how their
awareness, access, and usage of resources of institutional networks/support insti-
tutions have influenced their internationalization process. This study attempts to
elicit evidence of the influence of support institutions in the internationalization
process of ACMs. Why this knowledge is needed and for whom, shall be described
in detail in the section dealing with the managerial and academic implications of
this study.
discuss the implicate tendencies that hinder SMEs from internationalizing. Their
study suggests that perceptual and experiential factors such as perceived risks,
knowledge, and cultural differences are the major factors in determining the
internationalization propensity of entrepreneurial firms.
The above discussion implies that even though SME firms are disadvantaged by
their resource capacity, however, given the dynamics of network-resource-access,
the firm’s size limitations might no longer be an issue impeding the firm’s inter-
nationalization prospects (Calof, 1993; Arbaugh et al. 2008, p. 375). But SMEs rely
heavily on diverse external channels to gather both cultural and commercial
awareness regarding international opportunities, and to mitigate resource inade-
quacies—especially in the early phase of internationalization process.
Firm’s foreign direct investment strategy and speed is affected by different types of
institutional pressures prevalent in both home and host country environment
(Francis et al. 2009). Research findings have pointed toward government’s policy
implications in facilitating the establishment of active institutional networks for
promoting SME’s outward internationalization (Hessels & Terjeson, 2010, p. 217).
Leonidou (2004) has well documented classification of external environmental
barriers affecting SMEs international performance—among these are: unfavorable
home government rules, regulation and policies, lack of incentives/government
assistance programs, political instability in either home or foreign market, fluctu-
ating currency exchange rate, and high tariff and non-tariff barriers, etc.
The Indian auto-component industry is a sunrise industry which has grown from a
docile domestic supplier of components to a global hub for auto-components
supply. Today, the vehicles of General Motors, Toyota, Ford, and Volkswagen are
essentially assembled with the high-value and critical components made in India.
The Indian auto-component industry is already a proven model for the recent
“Make in India” campaign by the Government of India. With its pioneering suc-
cesses, the industry has contributed 2.40% of our GDP in FY12, generating an
employment (direct and indirect) for 19 million people. Several initiatives are
regularly taken to achieve the vision of automotive mission plan (AMP) 2006–2016
(Table 13.1).
Product range
The chart indicates the major product categories manufactured in India. These
categories have served as a base for choosing the firms for the current study
(Fig. 13.1).
With the increasing domestic and export growth prospects, the players in the
industry have to invest more to expand operations to harness the emerging
opportunities. However, the firms shall have to face several challenges facing the
industry, as listed below:
• Increasing demand for technical precision and quality standards by global firms
• Increasing prices of raw materials
• Global economic slowdown
• Weak bargaining power of supplier firms to OEMs
• Fragmented nature of the industry giving rise to increasing rivalry among
existing firms
• Increasing import of cheaper substitutes
• Infrastructure bottlenecks
• Dominated by small firms and their inability to heavily invest in R&D, product
innovation, and quality testing.
• Issues in raising finance for current operations and growth plans.
Given the nature of the auto-component industry, which is fragmented and
dominated by small firms, many of the above challenges cannot be met at the level
of individual firms. There is a felt-need for a pro-active role by industry associations
and networks which shall act as cluster development agents and facilitate the
process of internationalization.
13 Internationalization of Auto-Component MSMEs … 287
13.4 Methodology
The study is descriptive and is qualitative in nature. The broad purposes of the study
were to understand the subject in depth, to map the internationalization process, and
analyze the role institutional network in the same.
A multiple case-study approach has been adopted for the study and a comparison
between the case-firms has been done in order to arrive at a conclusion.
Both deductive and inductive logic have been combined to analyze this multiple
case study-based research paper in order to arrive at a most credible end result. To
make this study objective researchable, the problem propositions were converted
into two research questions to enable us to observe. The logical sequence is
developed for ease of analyzing the data which is represented in Fig. 13.2.
13.4.4 Sampling
Non-probability, purposive sampling has been used as the main sampling method to
select the companies that fit the set criteria of the study.
Awareness
SME's ACCESS Influence Outcome
knowledge usage of the Process effect Reflections on
about supports resources from on the the result, role
obtained from international internationalizat of insititutional
institutional networks ion project networks
networks
Fig. 13.2 Probabilistic logical sequence of SME’s and institutional network relationship
288 N. Madhumithaa and M. K. Badri Narayanan
For analyzing the data, research purpose and conceptual framework developed to
organize the data collected in order to reach the expected results (Yin, 2009) were
taken into consideration. In order to obtain the most important information to
realize the analysis, transcripts of all interviews were done. As mentioned before,
the use of the theoretical framework to do the analyses provides the needed tools to
select the appropriate data from the transcripts.
13 Internationalization of Auto-Component MSMEs … 289
The analysis section is sequenced with the set of variable, which is the base for the
study. Those more specifically consist of the SME’s awareness, utilization, process
impact, and results/outcomes of institutional network-based resources for and
during the process of internationalization. These variables are well connected to the
research questions and research objective, and the second part consists of findings
which are for secondary objective i.e., to know about the type of international
activity carried on and its relationship with products manufactured by the
case-firms.
This part of the investigation is related to the awareness aspect of the research
problem. First, the SMEs were asked to discuss the various forms of networks (if
any) which they might use for the purpose of international expansion. The aim is,
(1) to see how many of the types of network relationships in the process will fit into
the description of institutional networking in the context of the current study, that is,
without asking directly about institutional networks. (2) The second aspect directly
concerns their level of awareness about the different types of help or support
available through institutional networks which they could benefit especially from a
view of the resource demands for international expansion processes (Fillis, 2000;
Ruzzier et al., 2007; Hutchinson & Fleck, 2009).
According to the inserted extracts as mentioned in Table 13.3, it is evident that
IF-01 has association with three institutional support organizations (ACMA,
ECGC, and EEPC) which perfectly fit our definition of institutional networks,
except one which was mentioned as “supply-on software” because it is the support
provided from supplier end. Therefore, the response signifies a fair level of
awareness about institutional networking possibilities. The level of institutional
networks awareness depicted above is quite consistent with comments from the
other case-firms. For example, IF-02 mentioned: AIMA as a prominent support due
to their proximity and support received on day-to day-activity and rest other four
firms also mentioned ACMA, MSME, ECGC, EEPC. Altogether, these responses
indicate a certain level of awareness. A total of ten institutional network support
organizations were mentioned by the SMEs in this category without the inter-
viewers asking directly for institutions.
The finding suggests that each case-firm on average has associations with about
three different types of institutional network centers. The above analysis has
identified a fair level of SMEs association with certain types of institutional net-
works. ACMA and ECGC were the most mentioned, this could be due to the fact
that these case-firms are members of these two institutions and in fact referred the
290 N. Madhumithaa and M. K. Badri Narayanan
authors to them. AIEMA (only for the firms located in Ambathur Industrial Estate)
was the next most popular among respondents.
This aspect is analyzed to understand how the case-firms got to know about the
various institutional supports they have been associated with as they mentioned in
the preceding discussions. Also, it was intended to find out how easy or difficult it
was for SMEs to become aware of such institutional networks (Table 13.4).
From the responses, it is evident that the level of awareness about the institu-
tional network was fairly good across the respondent SMEs. Regarding the ease of
awareness, three of the case-firms said it was really easy to find this type of
institutions, whereas other three firms have mentioned it was easy to access the
resources which are generic/open to all, but to avail special schemes certain con-
ditions had to be met with, especially for financial assistance. It is important to note
13 Internationalization of Auto-Component MSMEs … 291
Table 13.4 SME’s awareness level of institutional network and resource accessibility
S. No. Awareness of institutional support Ease of accessibility to resources
provided by networks
IF-01 “From our inception days, we are “Yes, it is very easy for us to contact
associated with networks. My and access their resources as a member”
predecessor shall be aware of the
beginnings, as I have recently moved
from production to EXIM”
IF-02 “Accessing AIEMA has not been “Business needs pushed us to look for
difficult because it is located nearby and help from these networks and
provides generalized services. Access to information provided by them was
other networks was easy but awareness easily accessible as its member.
about their specific schemes was a For ECGC schemes, we needed to meet
problem—we didn’t have a clear and certain requirements like experience and
detail idea about them” profitable track record”
IF-03 “We were in need of their support and “It was pretty easy to approach them.
looked for them. They were easy to Market analysis details are open to all
approach. It was great as they helped me and members can avail it very easily.
in securing finance by making me aware But to get financial help, certain criteria
of what I didn’t know” have to be fulfilled”
IF-04 “We are associated with ACMA from “Of course general information is easily
the beginning and through them some accessible, but, to avail certain schemes
market research firms approached us. If we need to fulfill certain conditions”
they found us potential, it progressed
further through our personal networking
and industrial meetings. The initiation
happened there”
IF-05 “I am not aware of earlier days because “The common facilities provided by
it is quite an old organization. But at these networks are easily accessible.
present we continue our networking Only for financial assistance and to avail
with older networks. We get updates on special schemes certain conditions have
new schemes and our business to be fulfilled”
networking builds through these
institutional networks”
IF-06 “It differs from each institutional “Yes, it is very easy to contact them and
network AIEMA and ACMA are core they are constantly in contact to create
institutional network. As far as my awareness about the resources/schemes
experience goes, they contact us and available to us”
offer their services”
that the awareness patterns differed slightly according to each institution’s outreach
strategies.
At this point, it is important to analyze the way that SMEs contact institutional
network, Table 13.5 explains on it.
Institutions have confirmed that SMEs’ principal way of contact was through
email, phone calls, in our office, meetings and awareness programs (IN-01 to
IN-05). The SMEs use of email as the preferred method for contacting the insti-
tutions is not surprising in this digital era. It further illustrates the erosion of the
292 N. Madhumithaa and M. K. Badri Narayanan
previous expectation and/or conception that important formal contacts are made
personally by phone or through physical visits. All-in-all, the evidence indicates
that SMEs have easy access to the institutional network centers.
This aspect is related to both research questions, that is (a) the influence and (b) the
usage of institutional networks for internationalization of SMEs. In this line of
enquiry, the questions were focused to gain insights about what type(s) of resources
the firms actually seek for and utilize from the possibilities provided by the insti-
tutions. It is essential to understand the actual institutional network-based resources
utilized by the SMEs and the main benefits of such resource utilization during
internationalization which will eventually reveal the impact/ influence in the
internationalization process. Hence, obtaining this key information shall ultimately
point toward answering the overall research problem, which is to examine the role
of institutional networks in the internationalization process of SMEs, the challenges
faced by SMEs, and role of institutional networks in the internationalization pro-
cess. The excerpts are furnished in Table 13.6.
From the data, we could see that the main reasons why SMEs network with
institutional providers were to supplement their own insufficient resource pool, gain
market knowledge, build contacts, and define the most suitable entry strategy for
each foreign market. There are a few critical issues as that of finance, legal, and
other challenges, in which the network institutions confine their role to lobbying
and advocacy.
13 Internationalization of Auto-Component MSMEs … 293
This part of the enquiry sought to gain insight about how the SMEs perceive their
relationship with the institutions, and also how the relationships have been main-
tained or put away after they have been used for a particular phase of the inter-
nationalization process. The respondents were also asked to reflect on their
association with the institutions—What was the essence of such linkage? Can it be
measured or quantified? What did it cost the firms to obtain such connections (if
any)? What is the cost versus benefit ratio? This probing was made to relate it to the
research question “the significance of the institutional network relationship to the
SMEs.”
In this regard, first the SMEs were asked to describe their current relationship
with the institutional centers, and again the interviewees were further probed about
how important it was for them to have the relationships with institutional network
centers. From the responses, it could be inferred that institutional networks had a
positive influence on the international expansion process of SMEs. All case-firms
said that they recommend the various institutional network support centers to other
SMEs and entrepreneurs who might need the same resource benefits. The fact that
the case-firms are willing to recommend other firms to the institutional support
organizations could be an indication of their positive experience with the institu-
tions. Hence, the findings have shown that the SMEs actually get resource help
through institutional networking which then augments their resource incapacity and
as a result fosters rapid internationalization.
Furthermore, when both the SMEs and the institutions were asked about which
stage of the internationalization process the firms needed critical help, it was found
that while the institutions preferred to be involved with the projects at early stages,
the SMEs required institutional support at different stages but most preferably at the
market entry stage (Fig. 13.3).
The above model reflects the actual information contained in the data gathered
from both SMEs and institutions perspectives. And it is evident that the SME—
institutional network relationship—starts with the awareness of the international-
izing firm about the resources and types of helps available through the institutions.
The awareness then leads to establishing a connection, after which there will be a
decision to utilize certain types of support on offer, and this support means actual
institutional resource flow to the internationalization process. At the end, the
combined impact of institutional network resource utilization reflects on the
internationalization process as a whole.
And this model adheres to the logical sequence of SME—institutional network
relationship to make the findings much precise for better comprehension. The
process is graphically illustrated in Fig. 13.4.
296 N. Madhumithaa and M. K. Badri Narayanan
Interna onaliza on
Interna onaliza on
SME’s Awareness of SME
The discussion with the SME auto-component manufacturers reveals that, India
offers certain competitive advantages for the industry which differs from market to
market based on location. The preferred method of internationalization also varied
across markets depending upon the product category as listed in Table 13.7.
13 Internationalization of Auto-Component MSMEs … 297
InternaƟonalizaƟon
idea - SME
Market Knowledge
Successful
- InsiƟtuƟonal
InternaƟonalizaƟon
Network like ACMA,
- SME
AIEMA
Credit/Background Buyer/Partner
check - InsituƟonal Search - InsituƟonal
networks like ECGC, Networks like
ACMA ACMA, ECGC
Another significant point to be noted from the study is that presence of insti-
tutional network in India was much earlier before internationalization, which has
helped in better positioning of India as a destination for auto-component manu-
facturing hub and subsequently setting up of OEM’s and for which their presence
and activities have been catalytic (Table 13.8).
Hence, it could be evidently concluded that SME’s awareness and actual uti-
lization of institutional network-based resources induce rapid and successful
internationalization.
Various research studies have suggested that the resources external to the firm are
separate from the resources internal to firm, but current study findings have shown
that firms aiming to internationalize through any mode establish contact with
institutional network. The institutional network-based resource inputs has not only
helped the internationalization process but also guides toward the acquisition of
funds and other key resources for the internationalization project. Therefore, when
300 N. Madhumithaa and M. K. Badri Narayanan
One significant inference which will be helpful for the policy makers is, to step up
the efforts in promoting awareness of various institutional support centers and
networks that already exist on the local, national, and international level which
supports SMEs’ internationalization process.
Also, policy intervention has to be made to reduce certain bureaucratic barriers
highlighted by the case-firms like longer procedures to avail support/assistance
schemes provided by government, redefine the SEZ concept to acknowledge the
geographical outgrowth of firms beyond the SEZ area, reducing complexity in
export-related processes, which will lead to increase in ease of SMEs being able to
access the institutional network-based resources such as financial assistance and
improving the infrastructure like road and port facilities, supply of quality, and
uninterrupted power, etc., shall contribute greatly to “cost” competitiveness of SMEs.
There is a dire need to review the blanket-like definition of MSMEs, which
presently categorizes them based on their investment, which actually views a heavy
weight child company of a mighty MNC parent, on par, with that of a startup firm
promoted by a passionate technopreneur.
Finally, as indicated earlier, the government and policy makers should not only
concentrate on enhancing the ease for accessing resource but also increase fund available
for SMEs development, which will enable to help larger community of SMEs.
Because of time frame, the selection and the number of SMEs chosen to study was
limited. All the empirical data for this study were collected during a period of one
month; thus, interviews were conducted only with the case-firms who have vol-
unteered. Secondly, because the authors depended on the referrals from institutional
network providers to gain access to their client SMEs, it could be argued that access
to internationalizing SMEs was first restricted to the contacts that the network
institutions provided, and most importantly, access was restricted to only the firms
that agreed to grant interviews.
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Author Biographies
14.1 Introduction
S. Fazalbhoy (&)
Symbiosis Centre for Management Studies (SCMS), Symbiosis International (Deemed
University), Survey No. 231, Viman Nagar, Pune 411014, Maharashtra, India
e-mail: [email protected]
A. Naik
Sri Balaji Institute of Management, Survey No. 55/2-7, off Mumbai-Bangalore Bypass,
Tathawade, Pune 411033, Maharashtra, India
e-mail: [email protected]
the OECD for trade and development. This paper depicts the relevance and need of
reforming the existing policies for women entrepreneurs in the Indian scenario and
provides a comparative study of the OECD’s policies for women entrepreneurs.
Suggestions and recommendations have been provided to improvise the existing
policies by classifying women entrepreneurs in India into three levels based on the
classification obtained from Prahalad (2010).
jobs for others.” Study reveals that women entrepreneurs help in the growth of large
number of businesses both small and large and thus have a great impact on the
economy; however, this impact needs to be assessed. Women entrepreneurship is
relatively new in India dating back to the 1970s which saw the rise of the women’s
decade from 1975 to 1985. However, it was visible only in the state capitals and the
metros. It took a long time to reach out to other cities which were not developed. In
the modern era where women are showing their capabilities in various walks of life
(Veena & Nagaraja, 2013), women entrepreneurship is playing an important role in
economic development and industrial growth of the country, particularly in the case
of India (Siddique n.d.). To know the impact of policy measures on women
entrepreneurs, it is very important to include their dimension and views while
framing policies (OECD, 2004; Singh, 2014) periodically and allow for coordi-
nation and cooperation of activities between international organizations like
Asia-Pacific Economic Co-operation (APEC), European Union, International Labor
Organization (ILO), OECD, and the United Nations Conference on Trade and
Development (UNCTAD) in order to continually improve policies and programs by
exchanging best practices among them (OECD, 2004; Mahajan, 2013; Rajni &
Mehta, 2014). In India, a women’s cell has been introduced by the Office of the
Development Commissioner (MSME) to assist and coordinate specific problems of
women entrepreneurs. Many schemes have been initiated by the state and central
governments to give assistance for training and business generation activities to
make women independent economically. Small Industries Development Bank of
India (SIDBI) operates and executes special schemes for women entrepreneurs
(Dang, Malhotra, & Ghai, 2009). Currently, there are more than 27 schemes for
women executed by different departments and a ministry under the government of
India (OECD, 2004; Mahajan, 2013, Rajni & Mehta, 2014; Goyal & Parkash,
2011), but what is required is its regular and timely implementation. Most of the
government policies, though they offer new opportunities to women, they lack
regular and ongoing implementation. According to the Annual Report of Micro,
Small and Medium Enterprises (MSMEs), 2011–12, only 215,000 enterprises
across the country are owned by women. Government has started framing pro-
motion programs for women entrepreneurs since the last two decades. According to
OECD (2014), public policies to promote female entrepreneurship include: (i) cre-
ating a gender-neutral legal framework for business; (ii) reducing administrative
burdens and excessive regulatory restrictions; (iii) providing equal opportunities to
access finance for entrepreneurs of both genders through appropriate financing
schemes; and (iv) increasing access to coaching, consultancy services, mentoring,
and professional advice on legal and fiscal matters, and training and support net-
works. Sarfaraz, Faghih, and Majd (2014) have mentioned that entrepreneurship
impacts economy through many factors such as quality, gender, and composition,
and type of entrepreneurial activity. Women entrepreneurship is the key factor in
economic development.
308 S. Fazalbhoy and A. Naik
According to the 1981 economic census, there were only 1.5 lakh self-employed
women in the country, which was 5.2% of the total self-employed. It was only from
fifth five-year plan (1974–78) onward that women’s development was recognized
as an identified sector. The decade of the 1980s provided the real breakthrough for
women in many fields. The era during we saw the rise of women’s enterprise from
1975 to 1985 was known as the women’s decade. As per the information retrieved
from www.dcmsme.gov.in, the total number of women enterprises in SME Sector
was estimated to be 1,063,721 (10.11%), the estimated number of enterprises
actually managed by women being 995, 141 (9.46%).
Number of women enterprises in India from 2001–2002 to 2006–2007 as per the
census report of Government of India are as follows:
The above table shows that there is a rise in women entrepreneurship in India
over the years. Women entrepreneurs have been playing an essential role in
managing and growing small and medium enterprises. According to the National
Sample Survey Organization (NSSO) 2006, women own 14% of the businesses in
India; this is much less as compared to male-owned enterprises (www.indianweb2.
com). However, this number has increased over the years, and women have more
opportunities as entrepreneurs in the coming years. Most of these businesses are in
the MSME sector. Government of India has taken initiative in promoting women
entrepreneurship and has recently launched the Standup India scheme, under which
banks will be giving loans of up to Rs. 1 crore to SCs, STs, and female
entrepreneurs.
The research design is based on secondary data derived from extensive literature
review from reports of Organization for Economic Cooperation and Development
(OECD) for various years, a number of Indian government reports, official Web
sites, reputable journals, articles, and books. Data derived have been taken from
various reports of the government, Web sites, and census reports. A review of
relevant Web sites to derive literature has been done. The literature derived has
been chronologically arranged.
Women constitute a major part of India’s population. Hence, progress is not pos-
sible unless their needs and aspirations are completely met. According to Siddique
(n.d.), empowerment of women depends upon whether they are educated, well read,
and informed. Women are not treated equal to men, and gender bias exists in
societies. For women to enter into business, the consent of the head of the family is
required as businesses are known to be male preserves. These are the common
obstacles in their growth. The financial institutions are not confident upon them and
their entrepreneurial abilities. From this research, it continues that the banking
institutions consider giving loans to women as higher risk than giving to their male
counterparts. Family commitments of women also deter their success as entrepre-
neurs. According to (Thumma, 2012), though women entrepreneurs are job pro-
viders and exploit entrepreneurial opportunities and also give solutions to business
problems, they still represent a minority. Gender bias and discrimination that exist
in the society need to be overcome to provide women entrepreneurs due recogni-
tion. The existing set of policies though many in number require amendment in
terms of execution and implementation. The study focuses upon this need and
compares policies for women entrepreneurs in Organization for Economic
Cooperation and Development (OECD) as a base and provides suggestions for
policy amendments for women entrepreneurs in India.
Table 14.1 provides a comparison of the schemes and policies for women entre-
preneurs in India and Organization for Economic Cooperation and Development.
A discussion on the policies for women entrepreneurs will not be complete
without a mention of the how policies for women have evolved over the five-year
plans as discussed in Table 14.2.
310 S. Fazalbhoy and A. Naik
Table 14.1 Comparison of the policies for women entrepreneurs according to OECD and in India
Key Policy Key policies for Gaps identified in the Recommendations
recommendations of women entrepreneurs policies—OECD and suggested
OECD for women in India India’s policies
entrepreneurs-2004,
2009, and 2014
1. To provide equality No policy to correlate No specific policy in A policy in unison
at the work place for with the OECD policy India to cover the with the OECD policy
women and give dimension of can be framed to
them facilities for availability of provide affordable
child care during affordable child care at child care at the work
work hours (OECD, the work place place
2004; Singh, 2014;
Sangeetha)
2. Provide a platform SIDBI’s marketing There are policies in Policies which coexist
to women fund for women for India which cover the with the OECD’s
entrepreneurs by marketing of products aspects mentioned in policy need to be
organizing manufactured by the correlating OECD effectively
information women entrepreneurs policy e.g., TREAD implemented
seminars, meetings, (Sharma, 2013) scheme; however, the
and providing Schemes under the regular implementation
women with ministry of micro, of these policies must
web-based small and medium be ensured
information for industries-TREAD
starting or growing scheme-Trade-related
their business entrepreneurship
(OECD, 2004; jru. assistance and
edu.in; Singh, 2014; development scheme
Vijaya, 2013; to provide credit,
Sangeetha) training, counseling,
and information on
related needs
(Vossenberg, 2013;
Agarwal, 2014)
(introduced in the ninth
Eive-Year Plan 1997–
2002, will be
implemented in 2014–
15)
Mahila Coir Yojana—
women-oriented
self-employment
program (started in
November 1994)
3. Incorporate No specific policy to No specific policy in Women’s
women’s correlate with the India to incorporate entrepreneurial
entrepreneurial OECD policy women’s dimension needs to be
dimension while entrepreneurial studied before forming
forming policies dimension before SME-related policies
related to SME’s forming SME-related
(OECD, 2004; policies
Mahajan, 2013;
Rajni & Mehta,
2014)
(continued)
14 Development and Internationalization of Women’s Enterprises … 311
These plans are committed to ensure empowered lives for women who comprise
48% of the country’s population. Currently, the Government of India operates a
number of women-oriented schemes under the various ministries (Goyal & Parkash,
2011; Mahajan, 2013).
The above-listed five-year lpans indicate and support the development of
women; they focus on women empowerment in all spheres: education, overcoming
gender bias, inculcation of confidence, access to resources, and providing training
of skills for better employability. These initiatives of the government provide access
and awareness among women to set up their own business, thus promoting
entrepreneurship. As women form an essential component of the Indian population,
it is essential to focus on their needs particularly in the unorganized and rural sector.
These government initiatives are a step toward their development and empower-
ment; however, they lack in effective implementation.
14 Development and Internationalization of Women’s Enterprises … 313
As said by Shah (2013), apart from the five-year plans, there are a number of
other organizations which work to promote entrepreneurship among women at
national and state level, which are as follows:
The Federation of Indian Women Entrepreneurs (FIWE) was founded in 1993
during the fourth International Conference of Women Entrepreneurs held at
Hyderabad. FIWE facilitates interactions with women’s organizations to enhance
their involvement in a range of activities (Shah, 2013).
314 S. Fazalbhoy and A. Naik
We found that in comparison with the OECD’s policies for women entrepreneurs,
there are very few policies in India which cover the aspects listed in the OECD’s
policies, like no specific policy in India has been framed yet to cover the dimension
of availability of affordable child care at the work place; this is an essential
requirement, thus a policy in India to cover this aspect needs to be framed. In
comparison to the OECD’s policy, which suggests listening to the voice of women
entrepreneurs by organizing seminars, giving internet based services to women
14 Development and Internationalization of Women’s Enterprises … 315
longing to become entrepreneurs, there are certain similar suggestions made in the
TREAD scheme in India however implementation is a concern for which regular
monitoring is suggested by the researcher. Similarly, another recommendation of
OECD to include suggestions by women entrepreneurs while deciding and framing
policies for them has been observed by its member countries; however, no specific
policy has been so far framed in India to incorporate women’s entrepreneurial
dimension before forming SME-related policies. In the OECD’s policy, there is a
policy measure to promote and develop women entrepreneur networks (OECD,
2004) by facilitating interaction between women entrepreneurs through cooperation
between national and global organizations; this aspect needs to be covered in the
Indian scenario. It is necessary to evaluate the impact of the policies framed at
regular intervals; this aspect has been observed in the OECD’s policy framework;
however, it is lacking in the Indian policy framework. Policy recommendations
with respect to closing the gender gap in education and entrepreneurship have been
framed in the OECD’s policy recommendations. In India, the policies are now
being focused on closing the gender gap. Recommendations for policy measures to
ensure clarity, transparency, and make women aware of illegal practices in busi-
ness, and to encourage the potential of women to be job providers have been
ensured in the OECD’s policy; these measures need to focus on in the Indian policy
framework. The policies measures of OECD which are relevant to the Indian
scenario have been selected for the study and have been compared to analyze the
gaps. Suggestions and recommendations have been provided that would provide
benefits to the Indian women entrepreneurs and help them perform better.
As discussed above, a number of policies are formed in India, and in the OECD,
however, there are some gaps which can be eliminated and some suggestions which
can be absorbed from the OECD policies for the Indian framework to make the
policies more efficient and beneficial to the recipients. The five-year plans made by
the Indian Government have tried to focus on all aspects of development of women
entrepreneurs; however, a consolidated, comprehensive, and inclusive approach is
required, and implementation of these policies is a problem. The government’s
policies with reference to credit, promotion, and regulation are undertaken; how-
ever, very few of them focus particularly on women entrepreneurs. Some organi-
zations either private or government also exist and work to promote
entrepreneurship among women; however, women entrepreneurs lack the aware-
ness of their services. Indian government has set up the National Policy for the
Empowerment of Women (Singh, 2014). As an offshoot of this, many plans and
schemes have started functioning, but their proper execution is a challenge, and its
impact needs to be monitored. Women are not aware of the availability of financial
support and assistance; thus, in spite of financial support policies, actual finance has
316 S. Fazalbhoy and A. Naik
reached very few such women entrepreneurs. Due to the existence of gender bias in
the Indian cultural setup, motivation among women is limited. They are considered
to be most suited for domestic roles.
We would like to provide the following recommendations and suggestions:
• Policies should aim at start-ups along with growth of business ventures at all
stages. Training for appropriate funding at all stages of business must be
provided.
• There are a great number of women who are making growth strategies for their
businesses. Policies should focus on training, product development, consul-
tancy, and credit pools offering a variety of credit customized as per the needs.
• Growth-focused initiatives for women-owned enterprises varying in sizes could
focus on tax credit schemes, public-private partnership opportunities for women.
• Banks and supporting agencies must undertake stringent supervision and ensure
that no discrimination exists. Comparative analysis to study the impact of the
policies should be carried out.
• Gender-specific policy for education, employment, and entrepreneurship for
women must be developed. Women entrepreneurs must be involved in
policy-making decisions.
• Government initiatives through which small groups of entrepreneurs meet once
a month under the “leadership” of a successful female entrepreneur for sharing
their experiences and to develop business plans must be made (OECD, 1998,
1999). Self-help groups can be included in this policy measure as they are
effectively functioning in most rural parts of the country; this suggestion can be
imbibed in their regular monthly meetings.
own. Thus, the role of women changes in accordance with the culture prevalent.
Women need family understanding and support to help them in managing multiple
responsibilities. The needs and wants of women entrepreneurs also change, and
their constraints are different. The classification below helps to understand the
different constraints faced by these women entrepreneurs at different levels and the
support required by them.
Level 1
This level includes those women entrepreneurs who belong to large cities and have
greater professional and technical qualifications and are stable in terms of finance
(Vijaya, 2013). They are well established and do not need support at this stage of
their business ventures.
Level 2
These are those women entrepreneurs who required secondary support to overcome
cultural bias, societal pressures, family pressures, maintaining work-home balance,
financial advice for expansion, etc. These women have enough education and reside
in cities and towns; they deal in traditional and other items.
Level 3
In this level, there are those women entrepreneurs who belong to the lowest or base
category of the pyramid; they are mostly uneducated, inexperienced, and they
require support right from the inception of the business to its functioning in all
forms. They are uneducated and illiterate women, who render support in family
businesses in the areas of animal husbandry, agriculture, agroforestry, dairy, fish-
eries, handloom, power loom, etc. (Vijaya, 2013). It includes all the women
entrepreneurs who have the initiative and desire to set up a business. Women
entrepreneurs from the Women Empowerment Corporation (WEC) and many such
organizations can serve as an example of this level of women entrepreneurs.
• Banks and public support policies must provide for stringent supervision and
prevent discrimination. Comparative analysis to study the impact of the policies
should be carried out regularly. This would enable them to perform better as
healthy competition free from all kinds of corruption would be present, and
discrimination would be eliminated. This suggestion would benefit women
entrepreneurs from Levels 1 and 2.
• Gender-specific policies for education, employment, and entrepreneurship for
women must be developed. Women entrepreneurs must be involved in
policy-making decisions. This would enable them to give first-hand information,
and the struggle and obstacles can be clearly defined while making policies. This
would benefit women entrepreneurs form Levels 1, 2, and 3.
• Tax credit schemes, favorable lending ceilings, and public credit guarantees
would ensure the smooth functioning of the business activities, and thus, these
women entrepreneurs can focus on other developmental activities. This would
benefit women entrepreneurs from Level 2.
• It is pertinent to place a strong focus on factors that provide growth to female
businesses. Policies should focus on training, product development, consul-
tancy, and credit pools offering a variety of credit customized as per the needs.
This would enable these women entrepreneurs to clearly define their strengths
and weaknesses and overcome them through training and consultancy.
Customized credit would abstain them from over borrowing and suffice the need
as well. This would be beneficial to women entrepreneurs from Level 2 and 3.
• A government initiative through which small groups of entrepreneurs meet once
a month for 6 months under the “leadership” of a successful female entrepreneur
for sharing their experiences and to develop business plans (OECD, 1998,
1999). The Level 2 women entrepreneurs can benefit from this policy decision
as it would help them interact and grow with other like-minded entrepreneurs; it
would also give them an opportunity to discuss and overcome obstacles. For
Level 3 women entrepreneurs, the meetings would serve a new direction, and
the leadership of a successful entrepreneur would enable them to get motivated
to perform better.
14.12 Conclusion
The Indian social setup is a male-dominated one. The modern era is revolutionized
with a changing traditional setup. As Indian women are getting educated and aware,
they are aspiring for better living, and their lifestyle is changing. The three levels
classified above point out the different categories of women entrepreneurs in India,
whose needs and wants differ. As their requirements are different, policies also need
to be made accordingly. The paper has tried to focus on this need and provided
suggestions to overcome the existent problems of the current policies in India. The
comparison with OECD has brought to light many valuable suggestions which can
14 Development and Internationalization of Women’s Enterprises … 319
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14 Development and Internationalization of Women’s Enterprises … 321
Author Biographies
Sabiha Fazalbhoy is a Teaching Associate and Research Scholar, Symbiosis Centre for
Management Studies (SCMS), Symbiosis International University (SIU), Pune. She holds a
Master’s degree in Commerce with specialization in Entrepreneurship and Marketing followed by
a Post Graduate Diploma in Psychology. Sabiha is a dynamic professional with experience in
multicultural and diverse environments and has 7 years industry experience in corporate sales and
six-and-a-half years experience in academia.
Asha Naik is Professor, Sri Balaji Institute of Management, Pune. She has a rich experience of
over 35 years in corporate human resources (HR) and does consultancy in HR for leading business
houses across India and Bhutan.
Chapter 15
Ecosystem for Social Entrepreneurship
in India: Facilitating Returnee
Entrepreneurs
S. P. Tripathy (&)
Desai Sethi Centre for Entrepreneurship, Indian Institute of Technology Bombay,
Powai, Mumbai 400076, India
e-mail: [email protected]
N. Pandey
Vivekanand Education Society’s Institute of Management Studies and Research (VESIM),
No. 495/497, Collector’s Colony, Wadivali Village, Chembur, Mumbai 400074, India
e-mail: [email protected]
entrepreneurs to use their previous experience and networks to the fullest (Zahra,
Ireland, & Hitt, 2000). The sources needed for knowledge creation may reside
internal or external to the organization.
Drawing inspiration from a model presented in a paper titled ‘The Limits of
Brain Circulation’ (2008) in which returnee entrepreneurs in China have been
categorized into four different types along with their role in the technological
development, the following matrix categorizing the returnee entrepreneurs in India
has been created (Table 15.2).
Table 15.2 Returnee entrepreneur types based on nature of link with local ecosystem
Networks Strong connection with local Weak connection with local
ecosystem ecosystem
International Type A Type B
networks These are the most experienced These are also experienced
returnees in the class and are returnees but they are
characterised by their high-risk characterized by their capacity to
appetites integrate locally available
knowledge with a firm’s global
innovation networks
Degree of embeddedness: This Degree of embeddedness: This
refers to entrepreneurs deeply refers to entrepreneurs who often
embedded in the local public extract knowledge available
institutions to share inputs and locally by engaging their cultural
resources affinity
Limitation: These entrepreneurs There is a tendency in
face a higher risk of failing owing transnational firms to limit their
to many imponderables exposure to and engagement with
the local research and
development activities in order to
protect their intellectual property
Contribution: These entrepreneurs Limitation: There is ample scope
are active in the creation and for a bidirectional flow of
transfer of new technology into knowledge within the
the Indian domestic market. They transnational firms’ innovation
may also be porous technology networks. But sufficient
organizations permitting safeguards are deployed to check
knowledge spillover. They have a information leakages
tendency to send the accrued Contribution: The local firms may
benefits of their research and be affected indirectly through
entrepreneurship to India mismatching cultural and
knowledge management strategies
(continued)
15 Ecosystem for Social Entrepreneurship in India: Facilitating … 329
points of divergence. A social enterprise can succeed in the Indian social context if
it has access to four different types of enablers. They are
• Sowers of seed
• Pipeline creators
• Early supporters
• Late supporters
The ‘sowers of the seeds’ work more as triggers of the entrepreneurial ecosystem
facilitating youth fellowships and campus clubs that can serve as ‘points of baptism/
initiation’ to the social enterprise structure. The ‘pipeline creators’ work through the
academic and non-academic courses that can nurture the socio-entrepreneurial ideas
once they have been seeded. They serve as a crucial link as even if the ideas have
been seeded at an opportune time, they would fail to take off if not ‘incubated’ at
the right facility. The role of ‘early supporters’ is also pivotal to the growth of the
socio-entrepreneurial ecosystem as the ventures are too prone to failure to attract the
attention of serious venture capitalists at the early stage. Finally, the ‘late sup-
porters’ are needed to lend scale to the social enterprises which otherwise might die
premature deaths as ‘idealistic wishful thinking’. The prospect of their long-term
survival is also a function of their extended support network which includes
technical support like start-up consultancy, HR support and research and advisory,
network supports such as aggregators and conferences, advocacy support through
institutions like The Indus Entrepreneurs and the media (Fig. 15.1).
Network Support
-Aggregators - Conferences
Advocacy Support
-Sectoral Bodies - TiE
Media
Fig. 15.1 The social context. Source Shukla, Farias, and Raghuram (2012)
15 Ecosystem for Social Entrepreneurship in India: Facilitating … 331
Starting with the science, technology and innovation policy, 2013, we can see that
at a global level innovation, technology and science have evolved as the key drivers
of national development. It has reached a juncture where the country’s science,
technology and innovation policy determines the contours of national development.
The locus and focus of the Science and Technology Policy of India have
changed significantly over the years since independence. The thrust of India’s
Scientific Policy Resolution of 1958 was to foster and promote scientific research in
all aspects. The country’s scientific construct was envisaged to be the fountainhead
of solutions for the country’s technological needs. The need to achieve sufficient
competence in technological domains and self-reliance were the areas stressed in
the Technology Statement of 1983. The Science and Technology Policy of 2003
had a vision of creating a national innovation ecosystem bringing together science
and technology to collectively explore solutions to socio-economic problems in
India through rigorous research and development.
India is yet to adopt a model-based approach in which innovation is used as an
instrument of state policy. This is important as most of the countries at the forefront
of science and technology have adopted detailed models of innovation guiding their
respective policies. For a start, the decade 2010–2020 has been declared as the
decade of innovation. A national level innovation council has been convened with
the government stressing on the need to create a suitable policy that harmonizes
science, technology and innovation.
It is not necessary for policy, science and technology to cohabit in the same space.
But it is when the three inter-communicate for a higher purpose that new values
emerge. The extent of the contribution of science, technology and innovation
institutions to creating economic weal and social value would determine India’s
standing in the global competitiveness arena in the coming years. Thus, if a
framework can be created that works as an enabler to such a synchronization in
areas identified as priority by employing internal strengths, India can lunge ahead in
the Global Competitiveness Ranking. National problems like absence of universal
access to education in the country, dwindling natural resources and degrading
332 S. P. Tripathy and N. Pandey
environment and habitat point at the need to create new structures. Innovating for
the people needs to be added to the established priorities of science and technology
exploration in India. In other words, the government must recognize the Indian
demography as a vital actor in the science, technology and innovation ecosystem.
The solutions developed by the science, technology and innovation infrastructures
in the country must be affordable, accessible and available to the masses to have
any significant impact. Such inclusion in innovation can be achieved by effecting
revisions in the instruments of the science, technology and innovation policy of
India. This can also be achieved by nurturing a symbiotic relationship between the
science, technology and innovation ecosystem and the socio-economic policies.
The policy framework can lay emphasis on certain core areas as listed below to
inspire the aspirations of the emergent entrepreneur class in India.
• Talented youth may be encouraged to take up careers in science, technology and
innovation by making them more remunerative and less risky
• Creating a strong mapping between the components of the science, technology
and innovation ecosystem and the inclusive growth model by evolving a joint
priority list
• Encouraging the private sector to participate in research and development
• Creating enablers to convert the research and development outcomes emerging
from the different government sponsored laboratories into viable social appli-
cations on a commercial scale as well as creating public–private sector part-
nerships wherever feasible
• Establishing structures to seed science and technology-based high risk
innovations
• Cultivating innovations that use resources optimally and are good value for
money cutting across traditional boundaries
• Nurturing the required ambience that triggers changes in the mental makeup and
value systems of the Indian society by rewarding, recognizing and respecting
contributions by techno-entrepreneurs that create collective value from knowl-
edge derived from science and technology research
• Formulating a strong national level innovation ecosystem with special focus on
entrepreneurs
The National Entrepreneurship Policy ‘cognizant of the need for the full ecosystem
to be present to unlock entrepreneurial potential’ proposes a nine part
entrepreneurship strategy:
15 Ecosystem for Social Entrepreneurship in India: Facilitating … 333
(a) Educate and equip potential and early stage entrepreneurs across India
(b) Connect entrepreneurs to peers, mentors and incubators
(c) Support entrepreneurs through Entrepreneurship Hubs (E-Hubs)
(d) Catalyse a culture shift to encourage entrepreneurship
(e) Encourage entrepreneurship among under-represented groups
(f) Promote entrepreneurship amongst women
(g) Improve ease of doing business
(h) Improve access to finance
(i) Foster social entrepreneurship and grassroots innovation
Though the framework clearly identifies the need to encourage social
entrepreneurship in India it does not mention returnee entrepreneurs as a special
class who deserve special incentives.
have been extremely crucial for the success of the returnee entrepreneurs working in
the social sector.
AIC
The Atal Incubation Centres intend to establish new incubation centres across India
by providing them with financial support. Returnee entrepreneurs would have
benefited immensely from such centres which worked dedicatedly in the field of
social entrepreneurship in India.
BIPP
The Biotechnology Industry Partnership Program is a government partnership with
industries for support on a cost sharing basis for path breaking research in frontier
futuristic technology areas. It is focussed on the generation of intellectual property
with ownership retained by Indian industry and wherever relevant, by collaborating
scientists. It supports the development of appropriate technologies in the context of
recognized national priorities and supports high-risk, accelerated technology
development especially in futuristic technologies through research projects. Such a
program could have set the returnee entrepreneurs acting on high-impact social
enterprises on a firm footing.
Building further on the key principles identified by Isenberg (2011) at the beginning
of the paper, the government can consider acting on the following policy recom-
mendations to encourage high-impact returnee entrepreneurship in the social sector
in India
1. India as a nation has to learn to depend and nurture its local micro-ecosystem
that would in turn shape the larger entrepreneurial ecosystem to make it con-
ducive for the returnee entrepreneurs to contribute meaningfully in the social
sector.
2. Coopting the private sector should not be an option but a priority just as
according need-based special treatment to the returnees exuding high promise
and working on pressing socio-economic issues is.
3. Bringing a conspicuous winner on board, preferably a returnee, is also vital to
incorporate the returnee perspective into policy making. It would be more
pertinent to include a widely respected returnee who is also a philanthropist and
angel investor.
4. Addressing cultural differences sensibly should be a priority as the social
enterprises have a direct exposure to the demography. Returnees are often
15 Ecosystem for Social Entrepreneurship in India: Facilitating … 335
disconnected and disoriented in this area due to their prolonged stays in foreign
lands.
5. The government has to establish a coherent set of mechanisms and policy
frameworks cutting across departments which often do not communicate with
each other, that lays a strong cornerstone for the returnee entrepreneurs to work
on high-impact social enterprises.
6. The government also has to take steps to allow clusters of social enterprises
created by the returnees to grow organically. In other words, even as the
government might employ policy catalysts to expedite their growth, the clusters
themselves cannot be moved from one stage of development to another in
unrealistic sprints. Such action if attempted can be detrimental to the ecosystem
for the returnees as a whole.
7. The government has to be proactive in introducing time-bound reforms in the
legal, bureaucratic and regulatory frameworks wherever desirable to make them
accommodative of the aspirations of the returnees interested in creating
high-impact social enterprises. This includes enhancing the availability of tax
sops, legislation and policies closely aligned to the needs of the returnee
business class and existence of infrastructure like communication facilities and
transport.
8. Access to regular and relevant sources of education and training is also an
important enabler for the returnees. The upcoming paradigm of
university-based incubators is an important development in this regard. The
government should encourage setting up dedicated incubators at the national
and regional levels for returnees working on high-potential social enterprises.
9. The government can initiate a kind of ‘cultural renaissance’ fostering respect
for the idea of entrepreneurship among the larger Indian community. This
would not only make returnees acceptable in the Indian context but also furnish
them with the necessary social infrastructure to create high-impact social
enterprises.
10. Deviations from established mores of social entrepreneurship can be expensive
for the returnees in a country like India. As pointed earlier (Swidler, 1986),
institutions play a pivotal role in providing a ‘cultural toolkit’ that can create
conducive circumstances for entrepreneurship. Government again has to take
tangible policy decisions that make the entrepreneurial ecosystem more com-
prehensible and predictable for the returnees which would reduce their expo-
sure to risk. Institutions created for returnees, especially those engaged in
high-impact social enterprises should be imbued with self-reinforcing mecha-
nisms (Phillips et al., 2009), that strengthen them over a period of time.
11. Government can endeavour to create a symbiotic policy environment informed
by the latest advances in science and technology. This would not only auto-
matically align the returnee policy with the aspirations of the returnees but also
make it easier to achieve high impact in the social sector in a relatively shorter
duration of time.
336 S. P. Tripathy and N. Pandey
12. Policy created for the returnees should encourage them to create affordable,
accessible and available solutions for the masses.
13. Policy making for returnees should accept innovation as an instrument of state
policy.
14. Policy governing returnees working on high-impact social enterprises should be
guided by well-defined success indicators and they should be monitored at
regular intervals to gauge their impact. The policy should mark a clear dis-
tinction between the ‘easily achievable’ outputs and the ‘difficult to achieve’
outcomes in this regard.
15. Talented youth in India can be encouraged to collaborate with high-performing
returnees through an established mechanism. Such encouragement should be
more forthcoming and pronounced when the venture is a social enterprise.
University-based business incubators can be a good starting point in this case.
16. The returnees can be offered incentives to convert high-impact research and
development outcomes available in India into viable commercial enterprises.
Such enablers would also have the added advantage of building indigenous
capacity in India.
17. Establishing a culture of partnering with returnees in prototyping high-risk
innovations should become a priority particularly those directly impacting the
socio-economic sector.
18. The returnee policy should lay special emphasis on incentivizing
social-enterprises that utilize the resources, both natural and human, optimally
avoiding the extrema of over exploitation and under exploitation.
19. Government can consider initiating policy that triggers changes in the mental
makeup and the value system of the India society. It can achieve the desired
impact by rewarding, recognizing and respecting contributions by returnee
entrepreneurs that create collective value using knowledge derived from the
latest developments in science and technology in India.
20. The government can consider taking active steps in evolving a national inno-
vation ecosystem.
21. According to the newly discovered phenomenon of ‘brain circulation’, talented
youth should be encouraged to move abroad for higher studies and skill
up-gradation, against the traditionally held views on ‘brain drain’ that directed
policy to the contrary. Such youth can re-enter the Indian economy as returnee
entrepreneurs in the near future to create high-impact social enterprises among a
plethora of enterprises they may choose to start.
22. Dedicated research parks may be created for the returnees experimenting on
high-impact social enterprises.
23. Returnee policy should classify returnees depending on criteria like their degree
of embeddedness, experience, contributions and limitations. This would not
only streamline policy but also result in higher impacts on the socio-economic
front. A model classification has already been proposed in the paper.
24. Trust is an important ingredient in the returnee entrepreneurship ecosystem.
While the returnees must trust the government of the day to start their
promising social enterprises they should also at the same time trust their local
15 Ecosystem for Social Entrepreneurship in India: Facilitating … 337
partners. The government should consider taking active steps to promote trust
among the different stakeholders in the entrepreneurial ecosystem.
25. The Competition Commission of India can come up with special policy on
returnees engaging in high-impact social entrepreneurship in India.
26. Seeding of high-impact ideas in social entrepreneurship is a delicate process.
Government can take an active participation in this by doing it in a controlled
environment and creating appropriate incentive structures for the supporters.
27. ‘Pipeline Creators’ constitute a vital link in the social entrepreneurship
ecosystem, as already identified in the paper. The government can consider
special measures in this regard.
28. The social entrepreneurship ecosystem should afford the returnees ample scope
to scale up their nascent social enterprises. In other words, they should be
allowed to go public by the Securities and Exchange Board of India and should
such privilege be technically difficult to award the government may consider
creating a separate stock exchange for returnees as well as non-returnees
engaged in high-impact social entrepreneurship in India. They should have
legal access to risk capital.
29. The government can consider taking adequate measures to ensure the presence
of enablers like technical support, startup consultancy, HR support, research
and advisory network, network supports such as aggregators and conferences
and advocacy supporters such as TiE in the ecosystem for returnees in India.
30. The government should have a clearly spelt intellectual property policy for the
returnees. This should on the one hand encourage the returnees to interact freely
with their local partners in matters relating to technology transfer and at the
same time prevent the tendency to indulge in predatory behavior by either the
returnees or their local partners. The IP policy should also state in unambiguous
terms the norms for the transfer of technology from one entity to another and
also be at par with internationally accepted norms in this regard.
31. The government should facilitate the conduct of fora where the returnees can
exchange their knowledge and skills with their local and international peers.
This two-way flow would enrich the socio-entrepreneurial ecosystem in ways
more than one.
32. Arbitration and dispute settlement should be fast-tracked for returnees as the
probability of failure is relatively high in exercises trying to set up high-impact
social enterprises in a country like India. This should also improve India’s
standing in the ‘Ease of Doing Business’ Index.
15.8 Conclusion
From the given discussion, we can conclude that an ecosystem does exist for
entrepreneurship in India. But there is a clear lack of focus on encouraging the
returnee entrepreneurs to startup in the social sector in India. Returnee
338 S. P. Tripathy and N. Pandey
entrepreneurs have not been addressed adequately in India’s public policy dealing
with entrepreneurship. The government of India has to introduce the relevant leg-
islations in the regulatory and corporate governance framework in order to attract
high-performing returnees to come and contribute meaningfully in the social sector
in India.
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Author Biographies
Shakti Prasad Tripathy is a Project Manager at the Desai Sethi Centre for Entrepreneurship at the
Indian Institute of Technology Bombay, Mumbai, India. He has been a Teaching Assistant in the
entrepreneurship courses being offered by the Centre and is interested in research questions related
to early stage entrepreneurship and entrepreneurial ecosystems.
Nisha Pandey is an Associate Professor at VES Institute of Management, Mumbai, where she also
been appointed as the Chairperson of the Entrepreneurship Cell and Managing Editor of the
Journal of Development Studies. She has a total teaching experience of more than 14 years in
various reputed institutes across India and her research has appeared in more than 30 national and
international journals.
Chapter 16
Internationalization of Incubatee SMEs:
The Role of Government-Supported
Incubators
16.1 Introduction
The IT/ITES industry of India demonstrated astonishing growth over the past
couple of decades and has become the world’s largest destination for outsourced
technology services with a share of almost 55% of the global sourcing market. Low
costs and high availability of English speaking manpower have been judged as the
major reasons for this remarkable growth. IT/ITES industry has played a key role in
India’s socio-economic transformation over these years; with the industry estimated
to be employing approximately 3.5 million people directly and almost double of
that number indirectly. IT/ITES accounts for nearly 10% of the country’s GDP with
about 17,000 registered organizations, of which about 15,000 belong to SME
category. With its product and service offerings at three to four times cheaper rates
compared to its US counterparts, cost competitiveness continues to be the USP of
India’s IT/ITES sector.
India is identified as the fourth largest base for young businesses in the world,
according to NASSCOM. Annually, over 500 companies are added in the IT/ITES
sector if the recent years’ statistics are observed. The start-up ecosystem is in high
spirits particularly after tech giants like Google and Facebook made acquisitions
from the Indian tech start-up sector during the last couple of years. The financial
year 2013–14 saw the total revenue of the IT/ITES sector standing at $130 billion
with $88 billion accounting for revenues from export alone. Two-thirds of revenue
of the sector has been out of exports over the years, and the infrastructure devel-
B. Thomas (&)
Kerala State IT Mission, Collectorate, Alappuzha 688001, Kerala, India
e-mail: [email protected]
Sheena
School of Management, National Institute of Technology Karnataka (NITK),
Srinivasnagar Post, Surathkal, Mangalore 575025, Karnataka, India
e-mail: [email protected]
opment in India will increase the domestic market volumes as well in the upcoming
years. Schemes like “Digital India” by the central government that focus on
automation of maximum possible number of services will also act as a catalyst to
domestic demand for IT services. India’s Internet economy is expected to touch
$200 billion by 2020, accounting for 5% of the country’s GDP according to the
IT-BPM sector strategic review by NASSCOM (2015), as the user base of tech-
nology products and services are exceeding the once big markets like US as a result
of improving living standards of the urban and semi-urban masses of India.
Export of IT/ITES products and services has grown to become a predominant
part of export revenues towards India. The sector has also created a large number of
jobs and is now a promising sector for employment for many of our graduates and
post graduates. Many companies in this sector started in India attract huge
investments from foreign investors owing to the high growth rate offered by this
industry. As a result of these promising socio-economic factors, the governments at
central and state levels put their share of efforts to provide maximum aid to this
particular sector.
There are several ways in which our governments support an industry sector.
These include infrastructure support, R&D support and tax incentives. Several
initiatives are taken up by governments to promote the most happening industries of
those times in order to let the country as a whole leverage maximum benefit out of
the growth potential of that industrial sector. The government of our country as well
as our state governments have provided incentives to various industries during
different junctures of time over the years. In the recent years with the huge rise in
demand for India’s IT services across the globe, our governments have been sup-
porting industries in IT sector through several ways. In the Indian IT boom, the role
that was played by home-grown organizations was extremely commendable and
even now, these companies hold a significant share of the progress that is being
made by this sector. Even as international majors as well as Indian large cap
companies rule the show in terms of volumes in India’s IT exports, a significant
share is always contributed by small- and medium-scale IT firms which provide
back-end support to many price-conscious clients in India and abroad, and even
support the major big shot companies into technology sector itself, as they out-
source work to smaller units with an aim to cut their own costs.
In this scenario, the small- and medium-scale entities in the technology sector
deserve a special attention. If we look back to the history of many of today’s IT
majors, they all had very modest beginnings and have transformed into highly
successful businesses over the years through constant innovation and impeccable
service quality. Business incubators are facilities or institutions to provide the right
platform for young business ventures started by relatively inexperienced but tal-
ented people to build a strong foundation for their businesses and accelerate their
growth. Incubators are set up by private ventures, educational institutions, PPP
models, etc., with the objective of supporting and promoting start-up ventures. Most
of the incubation facilities set up these days in India incline towards the technology
sector. The governments support many such incubators as an initiative to support
young business ventures to scale-up. As mentioned earlier, export orientation of this
16 Internationalization of Incubatee SMEs … 343
industry is one major reason why governments find it important to support them,
and hence, it is relevant to know if these companies that benefit out of the aids
provided from public money are able to generate positive results in this regard. The
aim of this study is to generate an outlook of the internationalization of young
technology start-ups.
The focus of this study is on two government-backed incubators from Kerala—
Technopark Technology Business Incubator (T-TBI) and Start-up Village. Both of
them are technology sector-oriented business incubators strategically set up in key
hubs of IT business. Both these incubators are having as their promoters the
Department of Science and Technology, Government of India and Technopark
Trivandrum, one of India’s oldest and largest technology parks, which is an
autonomous society promoted by the Government of Kerala. T-TBI is located in the
campus of Technopark at Thiruvananthapuram while Start-up Village has been set
up near Kochi at KINFRA Hi-Tech Park Kalamassery. These incubators are in the
process of branching out to other cities as well, with T-TBI having several incu-
bation centres in association with top academic institutions of the state like NIT
Calicut and College of Engineering, Trivandrum, whereas Start-up Village is in the
process of setting up a new centre at Vishakhapatanam, Andhra Pradesh. These
incubators provide physical incubation which includes a small office space as well
as other common infrastructural facilities in access, and also a provision called as
virtual incubation where the companies are provided just an address to specify,
while they can work from the promoters’ home or garage. To undertake this study,
only the start-ups that are physically incubated at the main centres of the two
incubators were taken into consideration.
The state of Kerala is generally infamous for not having a very friendly envi-
ronment for large-scale industries due to issues like shortage of land, high labour
costs and ecological concerns, which make IT/ITES a business sector that is more
feasible to set up and run in Kerala in comparison to manufacturing industries, for
generating large-scale export revenues and employment opportunities in the state
and to keep its prospects at par the modern day business scenario. This makes a
study on the upcoming IT sector organizations of the state more relevant. Also, the
export-driven nature of technology industry demands the internationalization
strategies of these incubated companies to be effective enough to attract clients from
their target markets, and hence, a study on this ground will provide insights that
would be helpful to even technology start-ups from other locations as well.
There are many existing works on the areas related to the theme of this paper, which
are summarized in this chapter.
According to Sharma (2015), the process of internationalization is highly
specific to the context. Increasing globalization has given expansive scope for
internationalization to organizations from emerging economies as well as developed
344 B. Thomas and Sheena
framework to the industry to point out the advantages like innovation and quality
compliances, cost arbitrage, strong supporting sectors like educational institutions,
low infrastructural costs and the significant presence of non-resident Indians in key
positions across the world. It also suggests the organization in the industry to be
vigilant to leverage every opportunity and tackle every threat, since the sector is still
relatively new and continuously evolving. It suggests start-ups to focus niche areas
than going to be end-to-end providers as bigger players would be enjoying higher
competitive advantage with diverse product range.
Pant and Ramachandran (2012) have observed that new ventures in emerging
economies find it difficult to directly network and engage while dealing with
prospective foreign customers due to cultural disconnect, especially with those in
advanced economies. Such firms are suggested by the authors to cultivate and
leverage social ties with easy-to-access homophilous ethnic ties to compensate for
these liabilities. Hence, start-ups from India can leverage on making associations
with Indians or Indian ventures that are already engaging with such markets to
initiate business engagements. The study also suggests that in the process of
internationalization, the strategy should not be merely about setting up a compet-
itive advantage, but it should also be about overcoming the competitive disad-
vantage due to factors like perceived lack of confidence because of not being from
the host country.
Prashantham, Dhanaraj, and Kumar (2015) have studied the impact of social ties
in the internationalization of ventures with a special consideration to the Indian
software Industry. The migration of Indian software engineers, to countries
including the USA, Canada, UK, Middle East, etc., has resulted in an added
involvement of these countries with the Indian software industry. Social networks
have definitely got a big involvement in the way that the start-ups studied by this
paper internationalize as well, as it can be observed that the number of companies
doing business with a geographical region is somewhat influenced by the region’s
size of migrant Keralite population. Interactions with many Indian businesses
suggest that market opportunity identification and closure of deals in many inter-
national markets happen with the mediation of social ties with Indians present there.
Yoos (2012) proposes the market channels that start-ups can use to rapidly
internationalize. Communications, networks and alliances, marketing, promotional,
financial, educational and logistical support programs were identified as to help
start-ups to build customer relations overseas at a faster pace. The study suggests
that start-ups, if they put in significant efforts, can build very efficient and
cost-effective marketing and distribution channels that can help them to reach out to
international audiences with relatively better visibility in those unfamiliar market
regions. It suggests that entrepreneurs must carefully utilize their investments to
build multiple, diverse marketing channels to successfully internationalize at a rapid
pace. Going straight to the market without clear discretion of the channels and over
relying on the Internet to do the marketing of the product and the company might
potentially push start-ups into failure.
Roelen-Blasberg and Weiss (2014) says that incubators can influence resources,
network, capabilities, ideas and operations when it comes to internationalization,
346 B. Thomas and Sheena
The study was exploratory in nature and employs secondary data analysis of lit-
erature to find out the various proven techniques of internationalization, primary
data from structured surveys and interviews among start-up entrepreneurs and
incubator officials to validate the data recognized from literature reviews, to arrive
at conclusions through an inductive reasoning approach.
The study intended to cover a total of 101 start-up technology organizations
physically incubated at either T-TBI, which had 51 start-ups or Start-up Village that
accommodated 50 start-ups. With permission from the officials of the two incu-
bators, the request for participation in the data collection survey using a ques-
tionnaire was made to all the companies by personally visiting the two incubators,
to which 62 start-ups responded through either the hard copy questionnaire or
online questionnaire set up using Google Drive. Nine responses were rejected as
they were improper or carried insufficient data, and finally, the data of 53 organi-
zations were considered for the study. Out of the 53 start-ups, 39 were private
limited companies and 14 were limited liability partnerships.
The incubated companies and the T-TBI itself are comparatively older than the
Start-up Village. T-TBI operates in four buildings in a fully functional 19-year-old
dedicated Information Technology park of 300 acres in which is the Phase-1
16 Internationalization of Incubatee SMEs … 347
campus of Technopark, which opened as India’s first IT park in 1996. They work
alongside big shot IT companies setting a very formal corporate environment for its
physical incubatees. Whereas, the Start-up Village’s location is in two buildings of
KINFRA Hi-Tech Park is still in development stage and located at the industrial
satellite town of Kalamassery near Kochi. This park accommodates non-IT
industries as well. The first impression you will feel about Start-up Village is an
easier going place with relatively less or no corporate culture to be felt, as the park
currently is occupied by hardly any other companies than the Start-up Village
incubated ones. Start-up Village is many years younger in comparison to T-TBI,
and it is much more vibrant and energetic with its walls-free style of architec-
ture and a relatively casual environment.
The year of incorporation of the start-ups was found to be as shown in
Table 16.1.
The companies under consideration were all having a low number of employees
with 50 out of 53 having less than 20 employees. Twenty-seven start-ups, exactly
half of the part-takers, were found to have employee strength in the range of 5–10,
while 11 of them had less than 5 employees only. Most start-ups with less than 5
employees were relatively new ones among others. Table 16.2 shows the employee
strength of the start-ups.
The total annual revenue of the companies under consideration for the financial
year 2014–15 shows that 35 of the 53 start-ups had the annual turnover below INR
50 lakhs and 8 of them had the gross revenue over INR 1 crore. Total revenue
distribution for the start-ups is as shown in Table 16.3.
Considering the share of revenue these companies were generating from over-
seas businesses, the observation was that 10 start-ups were not generating any
foreign revenues, whereas 12 were generating over 75% revenues from overseas.
The distribution of revenue share from overseas is shown in Table 16.4. It indicates
that just like established IT sector firms, start-ups are also very much dependent on
export revenues.
Looking at the geographical distribution of customers of these companies shown
in Table 16.5, it is observed that nearly 50% of the companies studied have clients
from the North American region as well as the Middle East countries. This can be
due to the general high demand for North American markets to outsource tech-
nology processes to India and the influence that Kerala and its people have
established over the Arab countries owing to the dense migrant population in that
region, respectively. The Australian continent and UK also have a good NRK
population to their favour, and the regions follow UK English as their primary
official language. The distribution clearly reflects the impact of social networks in
Table 16.3 Gross revenue Revenue (lakhs of rupees) No. of start-ups Percentage
distribution of start-ups for
2014–15 <25 17 32.1
25–50 18 34.0
50–75 7 13.2
75–100 3 5.7
>100 8 15.1
Total 53 100
Source Survey Data
attracting business ties for these start-ups. Latin Americas, Central Asia, Euro zone
outside UK and Africa, which are regions having a meagre English speaking
population, are shown to account for outsourcing businesses to only below 15% of
the start-ups.
The companies under consideration were found to be using the US variant of
English in their websites and communication materials more than UK format.
Since US English is more popular throughout the digital world being the default
choice in all popular computing software and platforms, it is chosen, many a times
unknowingly also by start-ups, more than the UK English, which is the variant that
Commonwealth countries including India usually follow for official and academic
use. Table 16.6 shows number of companies using each version of English.
online media that were separately listed for Table 16.7 were concatenated to a
single variable for this data.
Factor analysis was used to find factors among the observations so that the data
containing many variables can be summarized to indicate concisely the perception
of the entrepreneurial ventures. Factor analysis groups the strategies with similar of
perception characteristics together. With the summarized data further analysis can
be made possible so as to work out further studies in the same area. In this research
factor, analysis testing was carried out in order to summarize the perception of
internationalization strategies of the 53 start-ups that were considered for the study.
The first step of factor analysis is to take the KMO measure that indicates the
sampling adequacy which should be greater than 0.5 to go ahead with a factor
analysis satisfactorily. If any pair of variables has a value less than this, they shall
be dropped from the analysis. The off-diagonal elements should all be very small
(close to zero) in a good model. As shown in Table 16.8 which was generated from
the data, the KMO measure was found to be 0.640, and hence, qualified for
proceeding.
Bartlett’s test is another indication of the strength of the relationship among
variables to be carried out in precedence to factor analysis. This tests whether the
correlation matrix is an identity matrix, a matrix in which all of the diagonal
elements are 1 and all off-diagonal elements are 0—implying no significance and
the absence of any relation. From Table 16.8 itself, it can be seen that the Bartlett’s
test of sphericity is significant with its associated probability being 0.00, which is
less than 0.05 implying that the correlation matrix, in this case, was not an identity
matrix.
The output of factor analysis next carries a table of communalities which show
how much of the variance in the variables has been accounted for by the extracted
factors. Closeness to 1 indicates that the model is able to explain the variance in the
model. Strategies with less than 50% of extraction were dropped from further
analysis. One of the 13 variables was dropped and this was the use of India-based
marketing partner/reseller. Table 16.9 shows the communalities of the 12 strategies
that are qualified for further analysis.
Table 16.10 in the analysis result shows all the factors extractable from the
analysis along with their Eigen values, the percentage of variance attributable to
each factor and the cumulative variance of the factor and the previous factors. It was
found that that the first factor is accounted for 27.933% of the variance, the second
14.947%, the third 11.831% and the fourth 11.375%. Remaining components were
insignificant in total variance and this indicated that four components or factor sets
were identified. Table 16.10 shows the component variance percentages.
Table 16.11 shows the component matrix with loadings of the twelve strategies
on the four factors extracted. The higher the absolute value of the loading, the more
the factor contributes to the variable. The bold values on the table represent the
loadings that are less than 0.5, and all other components are suppressed.
16 Internationalization of Incubatee SMEs … 353
From Table 16.11, it can be observed that tie-up with related business based at
target market location, marketing partner or resellers local to target market, business
partnership with India-based related sector business that has already made its
presence in the target market, demonstration of the company and its products and
services in business events outside India and referrals from existing clients abroad
are substantially loaded on factor 1. This means that the above five are the strategies
that are perceived by the entrepreneurs to be most effective while internationalizing.
All these strategies are costly on the monetary side and also demands extensive
networking to successfully implement, as the effectiveness of all those strategies
depends on the third party involvement and responses. This result explicitly points
finger to the need of good social networking skills for start-ups to establish and
grow in international markets. If compared with Table 16.7, it can be found that
although expensive they are being very well employed by a significant number of
start-ups considered. Interestingly, most of these tie-ups are actually being facili-
tated by social ties (friends, relatives, friends of the above two categories, etc.) than
actual business relations.
Marketing team working from India, partnering with or sponsoring with events
in targeted markets and the demonstration of the products and services at interna-
tional business events in India are loaded on factor 2. These strategies are also
favourites for the start-ups studied when it comes to actual implementation, except
354 B. Thomas and Sheena
16.4 Conclusion
The study has given a snapshot of the current status of internationalization by the
start-ups at the two incubators of Kerala. Following are the significant observations
made from the analysis of data on the 53 start-ups:
• About 19% of the companies do not earn any overseas revenue
• USA/Canada and Middle East are the biggest market for these start-ups
• Social networks and tie-ups are leveraged and converted to business very well
by many start-ups
• Non-English markets are rarely targetted
• There is no uniformity in the variant of English used for implementations and
communications-among the British and American variants
• The start-ups hardly diversify to international languages
16 Internationalization of Incubatee SMEs … 355
Appendix
16 Internationalization of Incubatee SMEs … 357
358 B. Thomas and Sheena
16 Internationalization of Incubatee SMEs … 359
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Sector. IIMB Management Review, 27, 19–34.
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Author Biographies
Sheena is Assistant Professor with the School of Management at National Institute of Technology
Karnataka (NITK), Surathkal. She holds a Ph.D. from the University of Calicut and has completed
her Bachelor’s and Master’s degrees in Commerce from the same university. Prior to joining
NITK, she has served as a faculty member at Pondicherry University and in various colleges under
University of Calicut for almost a decade. Her domains of expertise and interest include brand
management, rural marketing, marketing research, consumer behavior, etc. She is also undertaking
projects from reputed institutions like the University Grants Commission (UGC) and the Indian
Council for Social Science Research (ICSSR) and is active in several professional training and
outbound programs.
Part IV
Evolution and Organizational Change
for Internationalization
Chapter 17
Internationalization of SMEs:
A Darwinian Perspective
17.1 Introduction
and need to be responsive to these in their strategic environment. This not only calls
for a recalibration of the domestic-centred approach, but increasingly motivates
firms to go beyond the domestic borders. Putting aside the motives, the international
arena presents firms with chances to boost productivity and enhance the probability
of survival. For an SME, the local environment is subjected to constant transfor-
mation and growth. This transformation heralds in new markets and suppliers but
also brings with it threats of competition and shorter product life cycles.
Globalization and rapid progress of technology are making the world a more faster
and integrated world. Even if an SME decides to simply limit its focus to the
domestic market, the threat of international players invading that domestic market is
always real and therefore even an SME has to evolve its strategy to be an inter-
national player to ensure long-term survival and growth (European Commission,
2007).
Although internationalization may stimulate firms to grow and thrive in the long
run, freedom from failures or disintegration is not a guaranteed consequence. The
uncertainty and monetary implications stacked in the process are not small. Smaller
firms find it difficult to surmount these obstacles, and find often their relatively
smaller size and resources to be a hindrance in the quest to internationalise. The
financial hindrances in the internationalisation activities, the dearth of international
experience in their managerial force, the difficulty in identifying and catering to an
international market are some of the difficulties which hinder the internationaliza-
tion of SMEs. Nevertheless, progress in information technology and other tech-
nologies remarkably has mitigated the uncertainty involved in easing or bursting
into the international arena. This creates an increasingly conducive environment for
a rising number of small and medium-sized firms to make use of the opportunities
in foreign markets.
It is here, where one could draw a parallel from the Darwinian principles of evo-
lution to understand how an SME evolves into the international stage. Darwin himself
suggested generalising the core principles of Darwinism to cover the evolutionary
transformation of social entities (Howard et al., 2008). By using the Darwinian prin-
ciples to traverse the journey of an SME towards the international arena and thereby
identify and establish the various catalysts and obstacles that determine the dynamics of
the SME’s journey. In evolution, there are certain drivers and barriers that determine
the fate of the organism. This concept can be superimposed onto an organization to see
what are the evolutionary drivers and barriers that influence the growth of the orga-
nization to be an international one.
This conceptual paper aims to bring together the concept of biological evolution
and its dynamics onto a general platform. From there it will attempt to transpose it
onto an organizational-level evolution of an SME from being a domestic/regional
player to a more dominant state—the state of being international. On the roadmap
to internationalization envisaged by an SME, this paper aims to identify how the
SME will come up with the various catalysts and limits that influence its evolution
into the international state.
environment, how the diversity among them can be routed back to the same origins
and how adaptive or rather successful complexity, or design, accumulate through
replication. This explains also the aspect of the historical and ontological continuity
of the evolutionary processes as the necessary foundation of Generalized
Darwinism. The ontological continuity of all evolutionary processes dictates that
Generalized Darwinism should be one that is superimposed “from the bottom-up”.
The evolution of individual behavior is both the historical and ontological common
link between biological and cultural evolution and avital feature of unravelling why
and how such forms of social organization as the modern firm function (Stoelhorst,
2008).
One version of Darwinism as advocated by Pavel Pelikan is the evolutionary
developmental biology or simply known as “evo–devo”. This version projects itself
in triangular way:
(1) From genes to all genomes
(2) From how genomes replicate to how they instruct, with a plethora of
utility-oriented inputs from the surrounding and internal domains, the forming
and development of organisms and
(3) From fully developed organisms to the entire developmental process.
All three points convene onto an essentially vital concept: the pivotal nature of
instructions. This forms the link between development and evolution and provides
the main benchmark for differentiating between the two. A distinction may be made
as follows that evolution rolls out instructions for initiating and stimulating
development. Devoting special scrutiny to guidelines stimulates the stemming of a
new promising avenue for exploration and understanding, starting with the logically
obvious, but so far little-exploited principle: all the possible utility of commands
requiring prior required commands. It is from this proposition that a fascinating
limitation on what biological metamorphosis can, and what will not be able to, fulfil
will be dawned upon (Pelikan, 2011).
Those parts of Darwin’s theory that are applicable to organizations are:
• Evolution from first form of beginnings to the “latest” organizations of gradually
accumulating complexity
• Gradually increasing step-by-step processes of deviation influenced or carried
out by painstakingly slow processes of arbitrary trial and error and
• Laying importance on the specialised adaptation of individuals at least isolated
from, if not struggling with, the larger environment preparing for its survival and
eventual proliferation through the process of replication (Baskerville, 2006).
In the two disciplines of Economics and Accounting, there was an overpowering
metaphor of a mechanistic explanation for their subject matter. Economics, business
organizations, and capital markets were considered to operate as machines: inputs
and outputs, controls and regulators—a more of a system approach n view. There
was no Darwinist metaphor or inclination of a struggle for survival in the writings
368 A. D. George et al.
of researchers of the time. It was only later in the disciplines that the mechanistic
metaphor was replaced by a biological one (Baskerville & O’Grady, 2007).
This is where one really gets to visualise a parallel between the biological
evolutionary dynamics of an organism juxtaposed to the evolution and growth of an
organization into the international arena. An SME is like an organism. It hatches
out/born into an environment, tries to adapt and adopt, fights for survival and
constantly so because the environment as we all know is dynamic. Survival of the
fittest doesn’t just extend to the strongest, fastest, ruthless and cunning. It also
extends to the smaller, weaker, slower and socially cooperative organisms. This is
easily proven by the diverse variety of flora and fauna we have on this planet, in the
biological sense. The same can be seen with respect to the diverse kinds of busi-
nesses that are run all over the planet—big or small.
Porath (2003) the ability to be alive, be functional and reproduce depends on the
genetic information each organism contains. That information will enable it to build
the tools and structures it will require to survive when faced with both external and
internal requirements. This genetic information is coded into the DNA, an enor-
mous polymer chain made of four basic building blocks that make a code by groups
of three. These groups are then translated through the use of the RNA into proteins.
Proteins generally have the function of
(1) Building the cell structure, determining the in and out movement of materials
through its membranes and other same cellular functions
(2) A class of proteins known as enzymes determine, control and catalyse the
various chemical reactions taking place in a cell and in between cells.
Biological Evolution can be summed up to be a three-step mechanism where
variation or diversification occurs and mutation arrives. The traits that make a
mutation successful are selected and these are passes on through replication to
ensure survival and proliferation of the species. The enzymes perform complex
tasks—tasks that are in place due to evolution and adaptation throughout the course
of life on earth.
These enzymes are characterized by features such as:
• Function under certain conditions in a system
• React with the surroundings
• Be selective about what process to carry out
• Be highly efficient regarding the energy balance of the internal and external
environment
• And have a short lifetime
This behavior of enzymes makes the process of selection less random or less
accidental and takes us to the concept of “Directed Evolution”. A mechanism which
has four major steps is as follows:
1. Creation of a set of mutants
2. Selection of genes or successful genes in mutants that are successful in surviving
17 Internationalization of SMEs: A Darwinian Perspective 369
Porath (2003) in directed evolution in strategy and management sciences depicts the
process of evolution to be one where an organism is subjected to a mutation that
arises out from external and internal requirements to survive. Gathering from the
process, the unmutated variety and the mutated variety coexist till the mutated
372 A. D. George et al.
Organism SME
Fig. 17.1 Similarity between organism and an SME with respect to evolution as a common base
variety gains dominance. This dominance is achieved through the selection process
where the successful traits or rather traits that aid the survival of a variety are
selected and are replicated by passing it onto the next generation of the variety. So,
a variation–selection–replication cycle is at the core of the evolutionary process.
The same applies to an organization as well and for that matter of fact, to an
SME. The similarities between an organism and an organization are exhibited in
Fig. 17.1.
The process of internationalization of an SME is analogous to evolution of an
organism to a more dominant or better surviving mutant form. The “genes” of rules,
laws and procedures are at the centre with the “enzyme” of routines surrounding it.
The SME defines the environment it is operating in and the environment to which it
aspires to be in, the capabilities required to evolve and fit into that environment and
the required routines to achieve that goal. It begins with the “awareness phase”
where the management is aware of the opportunities that exist in the international
market. This awareness over a period of time creates an interest in the mind of the
management that is inclined to growth. It is here, in the “interest phase” that the
management inspired to expand the SME’s current operations and reach decides to
see what is required to become an international SME and slowly start incorporating
such measures and criteria into the routines. The requirements coupled with the
capacity of the organization influence the rate and extent of change it can make. The
set of routines along with the set of rules, laws and procedures undergo change or
are subjected to change to make the SME “evolved” into an international organi-
zation. The external and internal drivers such as growth opportunities, managerial
leadership and attitude, availability of various resources such as personnel, finance
aid the change,.whereas entry barriers, international competition, inexperienced
personnel, lack of knowledge could be the limits to such a transition. The change is
triggered keeping the old or previous set of routines and rules, laws and procedures
(for convenience sake it shall be referred to as RRLP) intact as a safety net to revert
to in the event of failure of the new “evolved” set of RRLP. Then arrives the trial
phase where the evolved set of RRLP is tested out to see if it will survive in the
17 Internationalization of SMEs: A Darwinian Perspective 373
international scenario. Here the evolved RRLP could either survive or perish in the
face of the international market demands and requirements. If met with success, the
evolved RRLP is maintained as devised. In other words, it is “selected” to replace
the old RRLP to completely adhere to the organization’s new goal of becoming
international. This is the adoption phase where the new “evolved” RRLP is set to be
passed on to be the base for further evolution. The environment in which any
organization operates, let alone an SME is dynamic and ever changing. Constant
evolutionary tweaks are required to the current operational set of RRLP to ensure
the SME can survive the competition, demands of the international market and
other threats/obstacles that pose a danger to its dominance or even its own existence
(Fig. 17.2).
As shown in Fig. 17.3, we can identify a roadmap for the internationalization of
an SME. Let this model be called the ESI model (evolutionary model of SME
internationalization). Making a generalized set of steps in the route to interna-
tionalization as per (Kontinen & Ojala, 2012) a firm begins with domestic opera-
tions and gains stability in the domestic operations as STEP 1. STEP 2 relates to the
firm doing experimental exports beyond its domestic operations—a phase of litmus
test for the firm to see how it reacts to the international market and also to see how
the international market reacts to the firm. STEP 3 is about establishing the success
in experimental export stage to start doing regular exports. Step 4 denotes the firm
gaining foothold in the foreign countries and start establishing subsidiaries in those
foreign countries to facilitate greater operational and growth control in line with its
internationalization policies. With the setting up of foreign subsidiaries, the firm
then sets up a representative office or control centre for those subsidiaries in the
foreign lands.
The ESI model acts as the transition or evolutionary phase for the SME to
progress from one step to another where the SME mutates its existing RRLP to
Rules, Laws
and
Procedures
Rou nes
374 A. D. George et al.
SME
In between each
Domes c Opera ons stage the ESI
model is
opera onal
Experimental Exports where the
transi on occurs
Regular Exports from one step to
another;
evolu on
toward being
Se ng up and establishing foreign interna onal
subsidiaries; se ng up representa ve office:
Interna onalisa on
progress to the next stage. If the RRLP mutation/evolution isn’t good enough to
stand the test of the requirements of the concerned step, the management reverts to
the previously successful state of RRLP and modifies it again but this time with the
help of experience and knowledge gained from the previous failure.
Just as in the biological world, where evolution happens to group or results in a
mutated group, the line of progress can be seen here in the case of an SME. The
success or failure in venturing into the international arena by an SME or several
SMEs is a subject of study with the intention of “selection”—the selection of what
to replicate and what not to or what to be wary of in the route to being international.
To the existing pool of knowledge, this study and its results are added. The purpose
of such selection and documentation of success is to make note of the best muta-
tions and make it a benchmark for future imitations and replications—for SMEs
operating in similar environment and circumstances—it will also serve as a point of
reference for those operating in different environments under different circum-
stances. The best mutants are analysed, and the change in routines responsible for
successful internationalization is documented. The resulting routines serve as the
foundation for further evolutionary progress work as the environment in which the
SME is operating is ever dynamic and constantly in itself a subject to evolution
thereby giving a modus-operandi on how to adopt the drivers and overcome the
limits in the route to internationalization (Fig. 17.4).
SME
In between each
Domes c Opera ons stage the ESI
model is
opera onal
Experimental Exports where the
transi on occurs
Regular Exports from one step to
another;
evolu on
toward being
Se ng up and establishing foreign interna onal
subsidiaries; se ng up representa ve office:
Interna onalisa on
Evolu onary State 4 Mul plies with the inten on of survival in numbers
Fig. 17.5 Juxtaposition of the similarities in biological evolution and SME evolution to the
international arena
376 A. D. George et al.
17.9 Conclusion
the evolutionary dynamics of success of not just an SME, but also for bigger
organizations such as MNCs that were once small organizations. This theoretical
framework would serve as a basis for further such research to be applied for
different kinds of organizations in different kinds of environment.
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Author Biographies
18.1 Introduction
It is now widely recognized that the small and medium enterprises play a significant
role in the economic development of practically all nations, be it developed or
developing. SMEs contribute 25–30% to the global exports of manufactured goods,
and exports account for 10–40% of the total sales revenue of about 20% of the
R. Narasimhan (&)
SVKM’s Narsee Monjee Institute of Management Studies (NMIMS), Bengaluru Campus,
Survey Nos. 90/3, 91/3 & 95/3, Kalkere Post, Jigani Hobli, Bannerghatta Main Road,
Bengaluru 560083, India
e-mail: [email protected]
M. V. Ravi Kumar
Indo-Korea Science and Technology Center (IKST), NCC Urban Windsor building,
3rd Floor, New Airport Road, Opposite Jakkur Aerodrome, Bengaluru 560064, India
e-mail: [email protected]
M. K. Sridhar
Bangalore University, Centre for Educational and Social Studies (CESS), ‘Pragnanam’,
No. 6/6, Beside Telephone Exchange, 10th Block, 2nd Stage, Nagarabhavi, Bengaluru
560072, India
e-mail: [email protected]
SMEs (OECD, 2000), as reported in Svante, Gabrielsson, and Ingemar (2004). The
Indian SME1 sector contributes 8% to the GDP, 40% to the manufacturing GDP,
and 40% to the manufactured exports of the country (Ministry of MSME India,
2014). The number of SMEs and their international activities have been growing
and accelerating, driven by globalization of markets for products, services, and
knowledge. It is reported that globalization has affected three-quarters of SMEs, and
those who remain focused only on the domestic market has been decreasing
(Rodriguez, 2007). The small firms are beginning to engage in internationalization
earlier than before (McDougall & Oviatt, 2000). Hence, the successful management
of the international activities of small firms is gaining critical importance (Svante
et al., 2004). But, the SMEs differ from their larger counterparts due to constrained
resources (Bonaccorsi, 1992), a low capacity to absorb risk associated with even
experimenting in foreign markets due to the general ‘liability of foreignness’
(Hymer, 1976) and ‘hyper competitiveness’ (D’Aveni, 1994), and a low tolerance
for temporal crisis (Castrogiovanni, 1996). Therefore, the theories and frameworks
developed in the context of the larger established firms would not usefully guide
SMEs aspiring for internationalization (Etemad, 2004). Also, SMEs in the emerging
economies could be expected to operate under more severe constraints compared to
their counterparts in the more developed economies. Moreover, the emerging
economy SMEs have been exposed to unprecedented changes in the economic
policies during the last three decades which have opened up new perspectives on
internationalization in terms of defensive survival strategies (Dawar & Frost, 1999;
Craig and Douglas 1997) and competitive strategies (Khanna & Palepu, 2006;
Mathews, 2006). Technology-intensive SMEs are reported to overcome some of the
key constraints faced by the SMEs by leveraging their capability to serve deeply
niche markets (Oviatt & McDougall, 1997). Technology-intensive sectors exhibit a
high level of creation and use of knowledge (Eisenhardt & Schoonhoven, 1990)
with research and development (R&D) activity often seen as an indicator of
knowledge intensity (see e.g., Kuivalainen, Sundqvist, Puumalainen, & Cadogan,
2004; Autio, Sapienza, & Almeida, 2000). Though the technical (or technological)
capabilities are among the most recognized determinants of success in small
knowledge-intensive firms (McGrath, 1994; Zahra, 1996), the process of interna-
tionalization implies the development, integration, and transfer of knowledge of
different types—business knowledge, institutional knowledge, and international-
ization knowledge (Johanson & Vahlne, 2003; Prashantham, 2005). The productive
integration of all such knowledge with other firm resources constitutes the overall
organizational capability (Penrose, 1959). Hence, understanding how these capa-
bilities transform as the technology-intensive SMEs internationalize and the man-
agement of the transformation is crucial from a managerial perspective (Nummela,
Loane, & Bell, 2006). Our paper is divided into five sections. In the first section, we
1
SME is a subset of a larger grouping called micro, small, and medium enterprises (MSME) in
India. But the SME sub-group would account for practically the entire share of the contribution
cited above.
18 Organizational Transformation of Internationalizing … 381
internationalize and that the FDI theory, stage model, and network perspective, are
related and complementary representations of the internationalization concept
(Coviello & McAuley, 1999). We have adapted the integrative framework proposed
by Etemad (2004) since it is the most inclusive that we have come across,
embodying ‘a range of influential forces at work and to reflect the early develop-
ments of the field’ (:5). We describe the model (Fig. 18.1).
General Perspective of the Model: The internationalization behavior of an
SME is driven by two sets of conceptually distinct, but interactive, factors, which
operate at the firm level and reside internal and external to the firm. These factors
directly act on the firm to motivate and influence the commitment of the firm toward
internationalization activities and are largely responsible for sustaining the con-
tinued international expansion of the firms (Johanson & Vahlne, 1977). These two
sets of factors or drivers are mediated by the inherent and idiosyncratic character-
istics of the firm: the propensity of the entrepreneur-manager to internationalize
based on the entrepreneurial orientation (Lumpkin & Dess, 1996; Kumar, 2013)
and global mindset (Nummela, Saarenketo, & Puumalainen, 2004), the adminis-
trative systems and processes (Lieberman & Montgomery, 1998), the organizational
structure, and the overall culture of the organization. All these factors interact in a
dynamic manner—through mutual shaping, feedback loops, and learning effects,
consistent with the evolutionary and behavioral theories of the firm (Cyert &
March, 1963; Nelson & Winter, 1982) to describe and explain how and why SMEs
undergo transformation as they engage in the internationalization as measured by
the degree of internationalization—internationalization performance of the firm.
Internal Factors: These factors act as impulses for the SMEs to identify inter-
national opportunities to market their products as well as acquire new technological
knowledge and capabilities (Chittoor, 2009). The economics of operations such as the
need to secure an adequate return on investment in either manufacturing or/and R&D
could be a strong motivational driver to foray into international markets (Coviello &
McAuley, 1999). Recognition of specific competitive advantages and determinants of
the level of competitiveness such as cost, product features, process technology,
quality or speed of delivery, or a combination of these resources could also propel an
SME toward internationalization (Sass, 2012).
External Factors: These factors attract the firm into the international market
fold. The size and attractiveness of the markets, the ease and the associated costs of
18 Organizational Transformation of Internationalizing … 383
transactions in the foreign markets, opportunities to link with and leverage suitable
partners in those markets, and institutional milieu promoting and supporting exports
and globalization (Che Senik, Scott-Ladd, Entrekin, & Adham, 2011)—all act as
drivers toward internationalization. The inertial constraints of the domestic market
environment such as bureaucracy, regulatory regime, local institutional rent-seeking
behavior could also act as important triggers in favor of internationalization.
Transformational Factors: While the presence of favorable internal and external
factors constitutes the necessary conditions for internationalization, they are not suffi-
cient. These factors are strongly mediated by the characteristics of the enterprise and its
management team as a whole. These include, inter alia, the mind-set (Nummela et al.,
2004), and orientation of the founding entrepreneur or team (Kumar, 2013), the
capabilities and resources of the firm, the organizational culture and structure
(Nummela et al., 2006; Knight & Cavusgil, 2004). The dynamic, interactive, and
evolutionary properties of these factors (Etemad, 2004) drive the first- and second-order
changes within the firm (Watzlawick, Weakland, & Fisch, 1974) and eventually, result
in its transformation. An organizational capability like the capacity to learn and absorb
new information and then knowledge and use them is paramount (Prashantham, 2005).
The mutual reinforcement of capability building and capability-leveraging is an aspect
of internationalization (Tallman & Fladmoe-Lindquist, 2002). We believe this virtuous
cycle is reflected in the organizational transformation propelling the firm toward growth
and international expansion.
Internationalization Performance: International revenue as a proportion of the
total sales revenue is a widely accepted measure of the international performance of
a firm. While the profitability of international operations is a useful metric, the
non-availability of this data due to its business confidentiality, especially in the
context of the SMEs, which are not public listed companies, renders the use this
measure problematic. However, we recognize that there are other measures of
internationalization like the strength of alliances with partners in foreign markets
(Lu, Lu, Beamish, & Beamish, 2001), foreign sourcing as a proportion of total
procurement value, number of geographical markets served (McNaughton, 2003),
and foreign R&D alliances (Svante et al., 2004). These measures are also an
indication of the capability of the firm to engage itself more in international
operations which in turn shaped by the experience and commitment of the firm to
international operations (Kuivalainen et al., 2010).
PEST and Industry Context: In our conceptualization, we have chosen to treat
the environmental context consisting of the broader political, economic, social, and
technological (PEST) factors and the industry context as either helping or hampering
the internationalization efforts of the SMEs, driven by a combination of the internal and
external factors discussed above. These are part of the critical contingencies in a firm’s
external environment which may influence a firm’s decision to internationalize and also
drive its pace and patterns of international expansion (Svante et al., 2004).
We believe, based on the aforementioned description, that this model would
serve as an useful conceptual lens to study the internationalization phenomena of
the technology-intensive SMEs and uncover the critical factors which could provide
an account of the ‘how and why’ of the process of transition and transformation
from a domestic engagement to an international one.
384 R. Narasimhan et al.
18.3.1 Methodology
Our study is aimed at unpacking the process of transformation within the enterprise,
as it travels along its internationalization trajectory. Investigation of such change
processes calls for a longitudinal and retrospective perspective (Nummela et al.,
2006). When investigating growth and development of capabilities and experience,
it would be better to use longitudinal research design (Kuivalainen et al., 2010).
This cannot be addressed through the examination of a few variables alone.
Moreover, the context is an integral part of the phenomenon, and the boundary
between the two is hazy. Therefore, this is essentially a process-oriented study and
not a variance-oriented study. The case study research would be the most appro-
priate methodology (Eisenhardt, 1989; Yin 1994).
though to varying degrees. Also, these technology-related efforts are critical for the
competitiveness and hence play a strategic role in the survival and growth of these
firms in their respective industries. Thus, we have ensured the case sample firms are
‘technology-based SMEs.’
This is a retrospective study and not longitudinal which would have been the most
appropriate design, primarily due to the demands of cost and time for the latter
(Nummela et al., 2006). The data collection was carried out at a point in time from the
three case study sites. Semi-structured interviews were conducted with respondents
ranging between 2 and 4 in each firm to achieve triangulation of data collection (Yin,
1994). The respondents were the founder-entrepreneur—CEO and a few senior
managers responsible for strategic and operational decisions and had been with the
company for a reasonably long period of time. The respondents were asked to
recollect when and how their company began to internationalize and the corre-
sponding changes, incremental as well radical, in their operations, technology,
products, and organizational structure. It should be noted that the data was based on
the respondent’s view of the various events and milestones but were triangulated with
the views of a few other senior functionaries in the same organization to ensure
internal validity (Gemser, Brand, & Sorge, 2004). These primary data was supple-
mented with secondary sources of data like news reports about the companies, reports
about the industry to which the company belongs, company, and product brochures,
company websites. The three case study sites are profiled broadly in Table 18.1. We
shall turn to a detailed description of each case study site in the following section.
Founded by an engineer in 1971, for close to 20-years SSS had been supplying
capacitors mainly to the public sector Indian Telephone Industries (ITI) for use in
the telecom equipment manufactured in collaboration with Bell Telephones
Manufacturing Company (BTM), Belgium. SSS worked closely with ITI and
developed indigenous MPET-dielectric capacitors, then the leading technology, as
per the drawings, as part of the import substitution efforts of ITI. Since ITI insisted
386 R. Narasimhan et al.
on ‘high-specs, low-cost,’ only those who could be cost and quality competitive
could remain a vendor in the long run. SSS continued to remain a key vendor to ITI
over 2 decades, before diversifying its customer base. SSS targeted customers who
were willing to pay for the quality and performance standards. Since the advent of
the New Economic Policy of the Indian Government in the early 1990s, MNCs had
begun manufacturing in India and demanded global standards of product perfor-
mance from their suppliers. In order to compete with these MNC players, the
domestic Indian players also had to upgrade their quality standards. The
Director-technical commented:
The efforts were to be the best in class in India, if not the world. We were not competing
with the imported GE and Matsushita capacitors. We kept on improving - our own labo-
ratories and process consistency.
SSS began exporting in 1995, nearly 23-years after its inception. The key motivator
was the need to diversify away from the domestic market since it was difficult for
quality-oriented capacitor manufacturers to compete with the tax-evading players in
the market. This was compounded by the market fragmentation—a large number of
small players, supplying to a few large customers, which intensified the degree of
unscrupulous competition.
The Southeast Asian market was the most appealing due to the proximity,
personal contacts, and the market potential for quality capacitors. Singapore was the
first halt, followed by Malaysia, Thailand, and Philippines. The market entry began
with the local electrical dealer markets that were serving the original equipment
manufacturers (OEM) and the after-market. There was demand for cheaper sub-
stitutes for the capacitors imported from Europe, USA, and Japan. The subsequent
foray into the Middle East (ME) market [Dubai, Saudi Arabia] was similar to the
SE-Asian market, beginning with the after-market and later gaining direct access to
the OEMS. In the European market, the local manufacturing base of capacitors was
gradually shifting to low-cost countries like Brazil, Slovakia. SSS tied up with a
Spanish manufacturer of capacitors who was on the verge of bankruptcy due to the
low-cost competition from East European and Asian players, as a contract manu-
facturer serving their markets in Europe, Middle East, South Africa, and Australia.
Later, SSS forged a similar arrangement with the affiliates of the Spanish company
who were operating in Slovakia and UK where similar cost pressures had driven
them to source capacitors from low-cost geographies. SSS’s share of international
business peaked at 70% of its total revenues in 2007–08 but dropped to 48% in
2010–11.
18 Organizational Transformation of Internationalizing … 387
Product technology had kept pace with the internationalization efforts. SSS had
developed burst-proof safety capacitors in 2004–05, dual-concentric winding
capacitors for AC (for compressor and fan separately) application in 2007 and was
exploring the adoption of segmented-film technology, an emerging product tech-
nology available with the Korean capacitor manufacturer. The quality assurance, for
both the domestic and export markets, was based on the more stringent international
IEC standards rather than the Indian BIS standards to meet the rising export volume
and gain better control over quality, cost, and delivery, SSS set up a plant for
in-house metallizing of raw capacitor films—a significant strategic decision for
backward integration. Exports, decisively, demanded a firm commitment to con-
sistency in quality, cost, volume delivery, and the product performance. The
capacitor winding technology (a key process technology in the manufacture of
capacitors) transformed progressively from manual to semi-automatic and eventu-
ally fully automatic, in line with the increasing export intensity. Automation
technology also enhanced the confidence of the management in securing essential
approvals for certifications such as ENEC for lighting applications for the European
market. A young member of the founding family had been inducted as the
Director-Technology to spearhead the implementation of ERP software. A shift in
the business strategy was under discussion, wherein the attempt was to balance the
domestic and export markets. The management perceived that the domestic market
was growing in volume as well as applications and had upgraded in terms of quality
and customer sophistication triggered by the entry of MNC players. The manage-
ment believed the domestic market had internationalized.
technical inputs from the equipment fabricators. AUL diversified its product port-
folio to serve a range of applications like paper coating, plastic-toys, and printing
ink. But the core product remained niche—the fluorescent pigment. By the end of
1980, AUL was capable of offering 500 product variants, which used 50–60 dif-
ferent chemicals, about 60% of which was sourced from across the world—both
developed and emerging countries. By the end of the decade of the 1980s, AUL had
managed to drive the domestic competition completely out of this niche market
segment due to its unbeatable combination of good and consistent quality coupled
with aggressive pricing.
AUL began its internationalization efforts with a big established textile company in
Thailand in 1989–90. The price difference—AUL was priced one-fourth with
respect to the suppliers from the west, served as the cutting edge of the wedge.
But AUL had to work with the customer to meet their quality standards. Over the
next few years, AUL expanded the presence to cover applications like paper,
plastic, and printing ink. AUL entered the Taiwan market in 1993, followed by the
South Korea market, within six months. Distributors were the key channels of entry
and penetration into these markets. AUL had to beat a hasty retreat from the US
market due to the poor perception of Indian brands. In the European market, AUL
had estimated it had a 60% ‘quality gap,2’ but the big customers were willing to
give a chance to a low-cost supplier like AUL. The UK turned out to be a tough
market due to strong local competition. The Scandinavian market proved relatively
easy to enter, albeit for the non-industrial ‘recreation segment’—Clay Pigeon.3
Soon after this, AUL entered the German and French markets for Clay Pigeons,
followed by the traditional applications such as textile, paper, and plastic. AUL had
to face significant gaps between the quality they offered and that demanded by the
customers in these developed markets. The industrial processes at these customers
were largely computerized and hence offered little tolerance for variations in
specifications. The stringency of specifications was applied right down to the
packaging4 of the pigments. In December 2010, AUL was actively engaged in
scouting for a suitable warehousing facility in Mexico to cater to the South
American market. AUL was in advanced stage of discussion with a large paint
manufacturer in the USA for a contract manufacturing alliance. AUL’s share of
international business rose to 57% in 2010–11.
2
Quality is measured in terms of color stability with respect to temperature and light and particulate
size.
3
Clay Pigeons are fluorescent colored small disk-shaped like saucers, which are shot-down as they
are tossed up by a machine, in an open playground. This recreational sport is supposed to help
relax the mind and enhance concentration.
4
Packaging had to be clean, easy to open, biodegradable, etc.
18 Organizational Transformation of Internationalizing … 389
5
The particulate size had to remain within the narrow band of 2–5 lm, else it would not pass
through the customers ‘mesh.’
390 R. Narasimhan et al.
HTPL, quite abruptly, found its C-DOT-licensee market dry up in the wake of the
change in the telecom licensing policy of the new government in 1993. The
management resolved to enter the foreign market. In the mid-1993, HTPL won the
first export order for transformers, though small in size, from a mid-size customer in
Switzerland. Later, HTPL got a breakthrough with Siemens who were making
transformers for telecom application in Munich. HTPL was chosen from among a
18 Organizational Transformation of Internationalizing … 391
number of contenders from North Africa, China, and India. Within a couple of
years of engagement with Siemens, HTPL struck similar contract manufacturing
deals with global players like ST microelectronics in Italy in 1998 and Nokia in
Finland in 1999. In fact, by 1997 HTPL was earning its entire revenues from the
international markets. By early 2000, the global ecosystem began changing, and
China was emerging as a destination of choice for large-scale manufacturing ser-
vices. HTPL found its global clients ‘migrating’ to China. HTPL after a couple of
years of adjustment to these changes (even shipped the transformers to China),
decided to exit what had become a ‘commodity business.’ In the mid-2000
Bengaluru began emerging as an aerospace hub for engineering and manufacturing
services, both software and hardware. HTPL was selected over an established
defense electronics company, as a manufacturing partner by UTC, a highly
diversified technology behemoth serving a variety of hi-tech applications, including
avionics and a Tier-1 supplier to Boeing, Airbus, and Lockheed. At the end of three
years of the arduous process of qualification of samples conforming to stringent
norms, HTPL progressively graduated from a ‘build-to-print’ to ‘build-to-spec’
vendor—for over 100 components. HTPL had begun its efforts to deepen and
widen its engagement with other global players in the aerospace industry.
HTPL assembled its manufacturing ‘machine,’ ‘part by part’. The formative years,
1988–1995, saw the company training and tutoring itself on good practices and
skills in assembly, quality assurance, and ‘impressing’ their customers, in order to
win more orders and customers. HTPL acquired capability in global sourcing on the
back of its deep and wide engagement with the telecom gear licensees, during the
early 1990s. The hallmarks were sound systems and processes resulting in deliv-
erables with a high degree of conformance to customer’s specifications. The
capability to procure customized multi-spindle CNC winding machines and inte-
grate them into the production system, was developed as HTPL ramped up the
volume from 4,000 transformers/day to 100,000 transformers/day, to serve various
international customers. HTPL invested in increasingly sophisticated transformer
winding machines including the high-end 16 and 18 spindle Italian machines. The
capability to maintain and manage these machines was developed through the
transfer of skills from the supplier and training of others in the company. HTPL also
adopted and further innovated the cell technology concept. Each line acted as a
semi-independent system with its own line leader, quality inspector, and mainte-
nance supervisor. The partnership with UTC had paved the way for the adoption of
the lean manufacturing system through a comprehensive program offered at the Eto
University6 set by UTC in China. Coupled with HTPL’s exposure to statistical
6
Named after the late Mr. Eto, the iconic former Head of Quality at Panasonic, Japan.
392 R. Narasimhan et al.
In this section, we compare and contrast the three cases on dimensions drawn from
the conceptual model (Fig. 18.1) and discuss the implications in the next section.
It is interesting to note that all the three case firms had embarked upon their
internationalization journey after 1990, when the epochal ‘liberalization, privati-
zation, and globalization’ policy of the Government of India was unveiled. This was
the overarching milieu of global opportunities as well as challenges, in which the
case study firms began their efforts toward internationalization. The gradual dis-
mantling of the ‘license raj’7 enabled the basic requirements for internationalization
—permission to import raw materials, intermediate goods, and capital goods at
reasonable tariff, availability of adequate foreign exchange for international travel
and transactions etc. Simultaneously, the protective mechanisms and the tariff
concessions for the SME sector were slowly withdrawn. These presented oppor-
tunities as well as threats for this sector. The more capable and entrepreneurial firms
leveraged the new ‘windows of opportunities,’ while preparing to face the threats.
This was reflected in the fact that independent of the industry context, whether
fragmented or oligopoly and mature or growing, all the three firms had embarked
on internationalization, strikingly, almost around the same time—during the 1993–
95 periods.
7
The Indian industry, since independence, had been controlled closely by the state through various
forms of licensing. This stifling regime was pejoratively known as the ‘License Raj.’
18 Organizational Transformation of Internationalizing … 393
The founding managers of all the three case study firms shared either a science or a
technology profile, especially in terms of the basic educational qualification.
Barring the founder—Chairman of AUL who had his master and doctoral education
in USA, the others had been educated in India and were the first generation
entrepreneurs AUL and HTPL had a strategic vision and a singular commitment to
internationalization. AUL had achieved market dominance in its niche segment in
the domestic market and had to look beyond for growth. HTPL had suffered a
reversion in its position as a national player, and the global markets offered the hope
of revival. These had acted as strong internal push-factors, which triggered the
international foray of these companies. The external factors which had pulled them
toward internationalization had been the relative attractiveness of the international
markets and their segments—be it the size of the market and segments,
value-for-money customers, the stability of the markets, the absence of unfair
practices, the professionalism in the customer–supplier relationships, and the
potential to learn and adopt best international practices.
All the three case study firms had, unambiguously and assiduously, developed their
mainsprings of competitiveness through their years of engagement in the domestic
market. The researchers could uncover two key forces at work—the genesis in the
form of ‘sowing the seeds’ and the subsequent process of ‘cultivation.’ The large
public sector companies had played a key role in ‘seeding’ the formative process of
building quality, cost, and delivery strengths. The import substitution regime, which
prevailed till the early 1990s, also seemed to have enabled the early formation of
competitiveness. The phase of ‘cultivation’ had been, understandably, longer, and
all the three cases demonstrate the impact and importance of the engagements. The
demands of the customers and the intense competition in a limited domestic market
had driven these companies to deepen their quality-cost advantages in order to
expand in the domestic market. SSS and AUL have had to benchmark against
established MNC and Indian competition and move up the value curve of quality
and cost. HTPL was driven more by the exacting standards of high reliability
expected by its clients. The competitiveness was further honed and deepened in the
domestic market. After the liberalization of the Indian economy, the entry of MNCs
led to an up-gradation of the standards of quality, delivery, and service and this
influenced the domestic players too. SSS, particularly, reported a significant
enhancement in the expectation of their Indian customers due to the heightened
competition from the MNCs in their respective product markets.
394 R. Narasimhan et al.
All the three case study firms had achieved a level of 50% international intensity
within the 10-year period. The pace of internationalization, in the product markets,
had varied among the three cases. SSS and AUL had achieved an international
intensity of 60 and 70% over a period of 15 years—1995–2010. On the other hand,
HTPL had completely moved out of the domestic market to achieve 100% inter-
nationalization. All the three case study firms had adopted a measured approach in
their market expansion strategy—as captured in the ‘psychic distance.’ Another
interesting metric of internationalization efforts and commitment is reflected in the
movement on the ‘Establishment Chain’—ranging from the low-cost and low-risk
entry modes like distributor or agent to a higher-cost and higher-risk investment in a
full-fledged subsidiary or warehousing logistic facility and an independent or joint
venture production facility. SSS had moved up a little with a contract manufac-
turing (OEM) arrangement with a Spanish company. AUL was close to setting up a
logistic facility in Brazil and actively working on a contract manufacturing
arrangement in USA—evidence of moving up on the ‘establishment chain.’ AUL
had the highest geographic and segment diversity—over 40 countries. SSS was
serving 15–20 countries. HTPL had been focused on two or three countries, in the
telecom and aerospace verticals. Another important characteristic of international-
ization is the degree or depth of end user engagement. SSS had been very shallow
on this dimension. HTPL emerged the strongest on this, followed by AUL. Yet
another measure of internationalization is in terms of the globalization of the
technology supply chain linkages—sourcing of the raw material, components, and
technology embodied in process machines. HTPL exhibited the highest depth—
about 60% of the inputs were imported, half of which were from the developed
countries and almost all their key machines had been sourced from Japan to Italy.
AUL scored high on raw material (chemicals) supplies—about 60% were sourced
from developed countries and emerging economies of Asia. SSS had been sourcing
its key process equipment from abroad (Sweden, South Korea, and China).
It was observed that all the case study firms have had to upgrade their technology as
they internationalized—product, process, and practices. However, the firms
exhibited variations in the degree of transformation on the three dimensions.
Process technology had witnessed the most transformation driven by the need to
automate the key process in order to secure higher volumes and consistency in
quality. The adoption of quality management practices had been varied. HTPL
adopted lean manufacturing and related practice technologies and had invested
significant efforts on training, facilitated by their international OEM partner. During
the process of internationalization, there were two key sources of potential learning
18 Organizational Transformation of Internationalizing … 395
—customers and suppliers. Firms with customer engagement like HTPL and AUL
had learnt from their international customers, with the former leveraging the most.
While suppliers of machinery had transferred the embodied technology and done a
little handholding initially, much of the learning had been in-house. The product
technological transformation had been led by R&D efforts. Most had graduated to a
level of capability, which allowed them to develop a product as per customer’s
specifications. The ability to secure stringent international product certifications was
a reflection of this capability. All the firms were open and keen to invest in addi-
tional R&D linkages and alliances to extend their capability in emerging areas and
strengthen the existing areas.
internationalization efforts. These factors are embedded in the industry and com-
pany context. This seems to shape a favorable attitude and propensity to interna-
tionalize. This phase could continue till a threshold level of internationalization is
achieved which could be about 25% of sales of the firm (Kuivalainen et al., 2004).
The ability of the firm to acquire adequate internationalization momentum and
move past the stage of initiation seems to be predicated on its degree of techno-
logical transformation covering product, process, and practices. A corresponding
and matching demand on the firm seem to be the commitment of its leadership
toward organizational transformation (Nummela et al., 2006). It is interesting to
note that these two transformational processes—technological and organizational—
act in close concert and appear to be ‘mutually shaping.’ Organizational learning
arising from the international engagement seems to play a dominant role in this
‘mutual shaping.’ The company context, quite understandably, has a mediating
influence during this stage of the internationalization process. The final interna-
tionalization performance of the technology-based SME is an outcome of a com-
plex interplay between the two key transformational processes (technology and
organization). The SME has to pass the ‘rites of initiation,’ before graduating to the
actual transformation processes. Firms, which have managed technological and
organizational transformation better, have either achieved or are well positioned to
achieve superior levels of internationalization performance. We recognize certain
limitations in our study. This study is based on only three cases and hence could be
viewed as exploratory. A larger sample of cases covering both mature and emerging
technologies like Internet and digital could strengthen the external validity of the
findings. Another limitation of the study arises out of the retrospective nature of the
study, which depends, largely, on the memory of the respondent—managers and
their perception of the nature of change, extent of change, and even the causal
attribution of the change.
18 Organizational Transformation of Internationalizing … 397
There are some interesting directions for future research. One could explore the
issues in the context of firms, which have been able to achieve rapid internation-
alization and some who were ‘born-global’ Do the same processes play out in the
same sequence? How does a born-global leapfrog the ‘domestication’ and the
‘initiation’ stages? Or is it a radically different internationalization phenomenon?
Our study has considered firms which had their inception as well as the start of their
internationalization ahead of the ICT revolution India witnessed since the beginning
of the twenty-first century. Would the internationalization process, facilitated by
ICT, be any different? Our study also offers some prescription for government
policy toward facilitation of SME internationalization. It is suggested that a gov-
ernmental or industry-level mechanism be established to incubate the SMEs during
the crucial stage of initiation into the internationalization process. The SME
techno-entrepreneur should be equipped with skills to manage the process of
organizational change in order to steer the enterprise through its internationalization
trajectory. We hope our study has been able to afford a view into the ‘black-box’ of
internal transformation of technology-intensive SMEs during their international-
ization journey.
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Author Biographies
M. V. Ravi Kumar Advisor to Indo-Korea Science & Technology Centre, Bengaluru, has done
his graduation in Electronics and Communication Engineering, MBA, and PhD, all from
Bangalore University. He had worked in a Public Sector Unit (PSU) as R&D Engineer for a
decade (1974–84) and later was a serial entrepreneur (1984–2001) manufacturing electronic
400 R. Narasimhan et al.
products. Since 2002, he has been a Management Consultant and Advisor and has acted as a
mentor for companies, academic institutions, and start-ups.
19.1 Introduction
R. Pandya (&)
Amrut Mody School of Management (AMSOM), Ahmedabad University,
Commerce Six Roads, Navrangpura, Ahmedabad 380009, Gujarat, India
e-mail: [email protected]
N. Kothari
School of Business and Law, Navrachana University, Vasna Bhayali Road,
Vadodara 391410, Gujarat, India
e-mail: [email protected]
In the modern management research, internationalization term has been used frequently
by the research scholars and academicians. The term was explained by the scholars of
Australia and published with much elaboration in research publications (Welch &
Luostarinen, 1988; Anderson, 2011; Knight, 2004). Internationalization is a very
important step for an emerging organization. It is an opportunity to exploit a new
market with core competencies of the organization (Lu, Zhou, Bruton, & Li, 2010).
In the last decade, small- and medium-scale industries (SMEs) have become
very important for the global economy. For example, 99% of the organizations in
the European Union are SMEs (Wymenga, Spanikova, Barker, Konings, & Canton,
2012) and 90% of Indian industry units are SMEs (Kathpalia & Raman, 2014).
Small-scale business is a critical factor for Indian economy with 8% of annual
growth rate (Arora, 2014). SMEs have been practicing internationalization in the
last few decades. Many of them are integrating internationalization by developing
import—export units in one or more countries (Todd & Javalgi, 2007; Armario,
Ruiz, & Armario, 2008). SMEs also have adopted a practice of partnership and joint
venture to establish their organizations in other countries. Collaborating with other
organizations has helped the Indian SMEs to learn and develop new knowledge
base which can be used to improve the products and services provided by them as
their core competencies to grow in the foreign markets (Javalgi & Todd, 2011).
domestic markets. It allows the organization to understand the global trends and
markets (Van Beers, Berghäll, & Poot, 2008; Shrader, 2001). SMEs can learn the
latest practices to compete in the international market with greater competency and
to serve a large number of potential customers from foreign markets. It also helps
the organization to innovate for competition with other international organizations
(Osarenkhoe, 2008).
Internationalization is an indicator of growth for small-scale business units
(Schweizer, 2012). The global presence of an organization is very important for the
sustainable growth. Internationalization for IT-based SMEs is very important, and it
is inevitable in the competitive economic condition and globalization (Todd &
Javalgi, 2007).
SMEs and start-ups take internationalization process as finding new customers for
their services and products. Information technology products and services have an
advantage that it does not require large capital funds to establish new facilities in
the different markets (Oviatt & McDougall, 1994). It requires basic infrastructure
which can be set up at a moderate cost in any part of the world. Selecting a new
international market is the most important challenge for the SMEs. Denis and
Papadopoulos suggest that international market selection should be based on a
systematic approach. Root’s model (1998) has emphasized on data-driven approach
about estimated market size and potential customers. Selecting the right interna-
tional market is also dependent on the external factors, i.e., economic policies,
stability, and business environment of the target country (Blomstermo, Deo
Sharma, & Sallis, 2006). Wrong market selection can cost huge to the organization,
and it can affect the core business strategy (Matenge, 2011).
In a large number of the SMEs and start-ups, the decisions of selection of market
are based on the ‘non-systematic approach’ (Agarwal & Ramaswami, 1992).
‘Opportunistic’ approach is adopted by the organizations considering the lesser
administrative capacities for market analysis and research. Karagozoglu and Lindell
(1998) found that lack of international managerial experience also affects the
decision of selecting the new international markets. Globalization has helped
IT-based companies for easy access to the information for new markets, but it
404 R. Pandya and N. Kothari
always needs skills and experience for selection and implementation of the new
international market strategy (Singh, Garg, & Deshmukh, 2008).
Organizations are made of people regardless of their size. Founders and employees
play a very important role in the performance of the IT start-ups and SMEs.
‘Human factor’ is more important for the international organization (Manolova,
Brush, Edelman, & Greene, 2002). It is essential to understand that the existing
philosophy of people management in domestic markets may not work for opera-
tions in international markets (Schuler, Tarique, & Jackson, 2004; Ruzzier,
Antoncic, Hisrich, & Konecnik, 2007). SMEs and start-ups must understand the
differences between cultures and attributes among the people of different geo-
graphical locations (Lu & Beamish, 2001).
An international firm operates in a dynamic and complex environment due to
multiple operations and a large number of stakeholders. The nature of challenges is
highly variable (Schoorman, 2000). Growing firms that internationalize rely on
recruiting the right kind of people who can manage and operate numerous opera-
tions and implement good international HRM practices. Having a right kind of
talent, partners and appropriate HR practices have been always an ideal combina-
tion for success in international business ventures (Mueller, 1996; Ruzzier et al.,
2006). SMEs and start-ups should also invest their resources in developing
knowledge management processes, global organizational culture, responsive
organization structure, and effective communication methods.
406 R. Pandya and N. Kothari
In the developing country like India, SMEs are very important for the growth.
Increasing SMEs are creating a competitive environment. In this age of competition,
hi-tech enterprises have a major challenge to sustain their edge over the market.
Technology life cycles and product life cycles are shortening due to cutthroat com-
petition in the market (Tiwari & Buse, 2007). This changing market forces SMEs to
adopt the new strategies and develop new technologies frequently to be in the com-
petition (Prange & Verdier, 2011). It is essential for them to reinvent their business
models according to the dynamic market needs. Varying business model is considered
as inconvenient for the SMEs. Due to limited resources and experiences, SMEs could
not survive in the market without innovating (Maitland, Rose, & Nicholas, 2005; Zarei,
Nasseri, & Tajeddin, 2011; Onetti, Zucchella, Jones, & McDougall-Covin, 2012).
Innovation for SMEs is very important as it gives them an edge over the market.
Collaboration in between the departments and with other firms can help the SMEs
to innovate (Narula, 2004). Expanding to different regions and partnering with
international firms for resources and technology are important for SMEs’ growth.
Innovation in different processes provides SMEs a competitive advantage (Lee,
Kelley, Lee, & Lee, 2012).
IT-based SMEs in India have created a competitive market. Due to this com-
petition, it is inevitable for them to avoid innovation. Vanhaverbeke, Vermeersch,
and De Zutter (2012) suggest two types of innovation methods: (1) technology
innovation and (2) business model innovation. For technology innovation, SMEs
have their in-house technology development cell. New technology becomes the
competitive advantage for the firm. Business model innovation is possible to do
without having in-house technology development facilities. SMEs can leverage
from the external technology partners and expand their services (Jones, 1999;
Giovannetti, Ricchiuti, & Velucchi, 2011).
Start-ups and SMEs are always caught in a dilemma. With the pressure of com-
petition, they are required to perform consistently. Expectations of higher quality by
the customers and tighter cost control strategies by SMEs make a practice of
innovative processes important (Vanhaverbeke et al., 2012). At the same time,
SMEs relate innovation always as associated with the risk. With the limited
information about markets and resources of managerial and technical expertise,
small businesses are skeptical about implementing the new ideas (Tidd, 2001;
Adam et al., 2006).
Ambiguous market condition refers to high risk and uncertain outcome about the
feasibility for internationalization success for new technology ventures. Moreover,
while considering the high-tech environment markets, ambiguous market condi-
tions are common due to the unexpected failures (Gassmann, 2006). There is a high
uncertainty about the rejection of the new technology in the market due to many
factors. The predictability of the market acceptance remains unclear. Considering
the international markets, the uncertainty could be higher due to factors like con-
sumer preferences, purchasing power, infrastructure, policy support, and adapt-
ability (Young, 1987). Developing a technological product for the international
market is strategically an important step but involves high risk. Understanding the
market needs, infrastructure to launch and sustain in the market, adaptability of the
target consumer, willingness to pay, and business-friendly environment are some of
the prevailing challenges for the internationalization. On the market side, perception
about the new technology and alternative products are always a challenge. In the
case of small technology ventures, target consumers may lack information about
product reliability, performance and value creation and side effects. It is also seen as
a threat to the existing technology and product (Liu, Ghauri, & Zou, 2010).
408 R. Pandya and N. Kothari
Smith (1776) proposed that international competition is very good for the nation.
He quoted ‘Consumption is the sole end purpose of all the production’ (Smith,
1776). Internationalization of the firms is essential for the growth of the economy. It
helps to expand the business into new markets and to serve a large number of
consumers in different geographical locations. IT-based SMEs and start-ups in India
have marked their presence in different countries of the world to get the higher
number of potential customers (Welch & Luostarinen, 1988; Bhatti, 2012). Many
companies have selected developed countries as their target market for interna-
tionalization. With different approaches, firms have internationalized, i.e., partner-
ship with local firms, establishing their facilities in other countries, and importing
and exporting of the services and products (Forsman, Hinttu, & Kock, 2002).
Internationalization provides start-ups and SMEs an opportunity to increase their
resources by reaching to the new markets. It helps them to leverage the financial
resources by serving to the new large segment of customers (Johanson & Vahlne,
2006). Internationalization also helps the organization to increase their technolog-
ical competencies by partnering with the local firms. It increases the chances of
19 Internationalization of New Technology Ventures: Organizational … 409
innovation. New markets and new consumers will challenge firms to innovate.
Innovation in the business models and technology according to needs of new
markets and customers increases company’s revenues (Oviatt & McDougall, 1994;
Zarei et al., 2011; Bhatti, 2012).
However, there are difficulties in the process of innovation in the internation-
alized firms in the transferability of the resources. Different cultures of the orga-
nizations affect the knowledge-sharing process and information flow. Lack of
strategic and managerial skills affects the innovation management and interna-
tionalization. It challenges SMEs and start-ups to select either innovation or
internationalization (Chelliah, Sulaiman, & Yusoff, 2010).
In the technology firms, protection of intellectual property rights is very
important to maintain the competitive advantage. Internationalization of a firm can
affect the protection of those rights while sharing the resources with other firms to
gain the larger international markets. It can become a threat to the technological
competency of the organization. Partnership terms must include the conditions for
sharing and protecting intellectual property rights.
Innovation process and management are very much integral part of the organi-
zation. It requires essential resources to innovate new products and services. SMEs
and start-ups who have ventured for late internationalization must redesign their
strategies to maintain common organizational goals across all the facilities of the
firm. All the centers of an organization should be working to achieve common
business goals and objectives. The inefficient organizational communication
channel can affect adversely to the performances of individual offices. It affects the
development and commercialization process of innovative technologies into large
markets. Human resources management is also a very important aspect which
affects successful internationalization and efficient innovation management in the
organization.
Hence, internationalization of the SMEs and start-ups is a huge opportunity for
them to expand their market reach and to grow faster and sustainably. However, it is
also a tough challenge for small- and medium-scale technology organizations to
manage all the possibilities with limited available resources.
Figure 19.1 shows the proposed model for internationalization considering inno-
vation management as a very important aspect. The model has focused on the
international partnership for advanced technological support and approaching to the
international customers. It helps SMEs to develop core technological competencies
without investing large capital investment into the research facilities.
The proposed model emphasizes on developing the common facilities and
shared facilities for different operations. Here, considered assumption is that
the partner is an international firm in the target market. Resource planning is
important in two stages: (1) product development stage, and (2) product
410 R. Pandya and N. Kothari
innovation, inside the firm itself. It helps the organization to protect the intellectual
property right violations. It also suggests that firms should have different innovative
products and services gradually in their portfolio to serve a large number of
international consumers in different geographies. Such strategic expansion is pos-
sible when the partnership has been successful in the process of internationalization.
Another important factor is knowledge management. As it includes various stake
holders and facilities like international customers, product development and testing
units, and international partner firm; knowledge management improves the inno-
vation outcome (Easterby & Prieto, 2008). A collaborative knowledge platform
should be helpful for the new product development team during the early stage. It
also helps organizations to understand the customer needs and market needs in the
global market (Eriksson, Johanson, Majkgard, & Sharma, 1997; Mudambi, 2002).
Sharing of resources and intellectual team members leads to the development of
better understanding of diverse customer requirements and helps to select the new
markets and new technology developments in the future (Lu & Beamish, 2001).
The development process of this model has considered all the possible chal-
lenges which are faced by the technology-based SMEs and start-ups. However,
there are certain limitations to this model which can be understood during the
implementation of the model. Let us understand different aspects of the proposed
model of the SME internationalization related to innovation management and
organization.
412 R. Pandya and N. Kothari
To sustain the organizational change, SMEs can focus on competitive capacity and
human resources of the firm. According to Beer and Noor, organizations which
focus on the both have been able to get good results while managing the change.
Organization change is a strategic decision in the process of internationalization.
Introducing the change of business goals, policies, structures, technology, target
markets, and more may affect the performance of the organization (McDougall &
19 Internationalization of New Technology Ventures: Organizational … 413
Indian economy has a high dependence on SMEs and start-ups as they contribute
90% of the total industrial firms in the nation. SMEs and start-ups have understood
the importance of internationalization and leveraged the benefits of globalization to
expand into new countries. Market expansion is a risk for small- and medium-scale
organization because it utilizes its limited resources to attract the large number of
potential customers (Berisha & Lama, 2013). There are challenges involved into
internationalization. It requires a thorough understanding of the new markets and
customer needs. IT-based organizations prefer to expand into developed economies
where the product life cycle and technology life cycle are getting smaller with the
competitive global environment. Hence, India-based technology SMEs must
understand the importance of innovation with internationalization. Innovation
management can give SMEs technological core competencies and helps organi-
zations to succeed in the competition to expand into the diverse markets. To be an
innovative organization, SMEs need to adopt a collaborative research and devel-
opment and knowledge management. It is recommended that Indian SMEs should
partner with international technology firms for resource sharing.
19 Internationalization of New Technology Ventures: Organizational … 415
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Author Biographies
Nirlesh Kothari is Professor and Dean, School of Business and Law, Navrachana University,
Vadodara, Gujarat. He is actively involved in research in the area of Operations Management and
has also served as a consultant to public sector organizations. He has completed the Fellow
Program in Management (FPM) from Indian Institute of Management Ahmedabad (IIMA) and
earlier completed his Master’s degree in Applied Physics from Maharaja Sayajirao University
(MSU), Vadodara.