Academic journal article Entrepreneurship: Theory and Practice

SME Entry Mode Choice and Performance: A Transaction Cost Perspective

Academic journal article Entrepreneurship: Theory and Practice

SME Entry Mode Choice and Performance: A Transaction Cost Perspective

Article excerpt

Although small and medium sized enterprises (SMEs) account for a significant portion of international trade, little is know about how they make international entry mode decisions. Transaction cost theory has been widely used to study entry mode selection for large firms. Here we apply the theory to SME mode choices. Further, we set out to determine if SME transaction cost mode choices provide superior performance to other mode choices. We found that transaction cost theory did a good job of explaining SME mode choice and that SMEs that used transaction cost-predicted mode choices performed significantly better than firms using other modes.

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International entry mode choice is considered a critical strategic decision (Lu, 2002). In an attempt to understand this choice, scholars have primarily focused on transaction cost theory (Brouthers & Brouthers, 2003; Brouthers, 2002; Delios & Beamish, 1999; Erramilli & Rao, 1993; Hennart, 1991; Gatignon & Anderson, 1988; Anderson & Gatignon, 1986). Yet as Zacharakis (1997, p. 26) suggests, although these "studies demonstrate the robustness of the [Transaction Cost] model, they fail to examine how the model applies to smaller entrepreneurial firms."

Small and medium-sized enterprises (SMEs) are not smaller versions of larger companies, but mainly due to their size they tend to interact differently with their environment (Shuman & Seeger, 1986). What differentiates SMEs from large multinational enterprises (MNEs) are their managerial style, ownership, and independence (Coviello & McAuley, 1999). Moreover, their limited resources may lead them to very different international strategic choices in comparison to larger firms (Zacharakis, 1997; Erramilli & D'Souza, 1993).

Studies of the international activities of SMEs tend to concentrate on the internationalization process (Wolff & Pett, 2000; Oviatt & McDougall, 1997; Barringer & Greening, 1998). These studies examine the characteristics, either firm or managerial, of SMEs that have decided to export abroad; their motivation for international expansion; the differences between international and non-international firms; the countries SMEs have entered and the modes of entry they have used; but not the reasons for selecting a particular mode (Coviello & McAuley, 1999; McDougall & Oviatt, 1997).

Few scholars have examined SME entry mode choice. Recent research by Nakos and Brouthers (2002), Yi-Sheng, Po-Yuk, and Wai-Sum (2001), and Brouthers, Brouthers, and Werner (1996) has applied Dunning's Eclectic Framework to SME entry mode choice. Others such as Shrader (2001), Burgel and Murray (2000), Shrader, Oviatt, and McDougall (2000), and Osborne (1996) have examined components of transaction cost theory such as R&D intensity, training costs, or country risk. However, we could identify no studies of SME entry mode choice that have examined the three main causes of transaction costs: asset specificity, behavioral uncertainties, and environmental uncertainties (Williamson, 1985).

Further, Lu and Beamish (2001) recently found that entry mode usage and SME performance are significantly related, indicating the critical importance of making the right mode choice. Despite this, few studies (including large-firm studies) have examined the relationship between entry mode choice and performance (Brouthers, 2002; Brouthers, Brouthers, & Werner, 1999).

Hence, if the entry mode decision is considered such an important strategic decision and "the success of SMEs under globalization depends in large part on the formulation and implementation of strategy" (Knight, 2000, p. 13), then the strategic behavior of smaller companies needs to be investigated. By examining the entry mode behavior of SMEs, we can determine whether they follow similar patterns as their larger counterparts and whether the strategic decision processes that influence success for larger companies have validity in smaller firms. …

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