Factors That Affect Performance of U. S. Small and Medium Sized Technology-Based Enterprises: Does Multinationality Matter?

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ABSTRACT

In recent years, small and medium sized technology-based enterprises (SMTEs) have quickened the pace of foreign expansion. This study investigates how foreign involvement influences their profit performance by controlling for several variables that may affect profitability. Results indicate that the degree of multinationality was positively and significantly related to profit performance. Firm size, advertising expenditure, and debt level was insignificant in explaining the changes in relative performance. Though small in size and short in history, SMTEs could benefit from foreign expansion if they focus on R&D and deliver product innovation continuously.

INTRODUCTION

Small and medium sized enterprises (SMEs) are a vital part of the U.S. economy (Carland et al., 1994). They currently comprise 96% of all manufacturers in the U.S. and more than half of all U.S. manufacturing employees (Pearson 8c Ellram, 1995). Among the SMEs, small and medium-sized technology-based enterprises (SMTEs) have grown most rapidly. The rapid growth of the SMTEs has been achieved by emphasizing research and development (R&D) to achieve continuous innovation and increased globalization to generate additional sources of profitability (Karagozoglu & Lindell, 1998).

The study of SMEs has received much attention in recent years, but relatively little has been achieved to deal with the effects of multinationality (i.e., foreign involvement) on relative performance of SMTEs. The present study, based on a sample of U.S. SMTEs, aims to extend our knowledge in this area and provide practical implications of the findings for management.

THE CHARACTERISTICS OF SMTEs

What classifies a firm as small/medium or large? According to the Small Business Administration (SBA) guidelines, SMEs are companies employing fewer than 500 people (Karlsson & Olsson, 1998). All of the firms included in our sample belonged to this category. The three-year (1991-93) average number of employees was 255.

The SMEs in this study represented technology-based industries (see Table 1). Although a variety of technology-based industries are represented by the sample, this presentation is not exhaustive. But due to the relatively homogeneous nature of technology-based industries in terms of rapid technological changes, product innovation, entrepreneurship, and high levels of competition, the sample was considered satisfactory (Karagozoglu & Lindell, 1998).

Most of the SMTEs had a relatively short history. Many of them started their business operations in the 1980s. Over one third of the SMTEs (37%) were formed after the mid-1980s. A few firms (15%) were founded before the 1980s.

Although they are small in size and short in history, most of these companies have spent heavily on R&D. The strategy is to maintain the leading position through technological innovations. Our calculation indicates that R&D expenditures average 14% of sales. More significantly, the ratio for four of the sampled firms was over 80%. We observed that increased R&D spending helps them outpace their competitors in developing new and better manufacturing processes and products.

CONCEPTUAL BACKGROUND

SMTEs that expand internationally have both advantages and disadvantages. Their expansion is motivated by perceived opportunities and perceived threats. On the one hand, SMTEs have technological advantages, thus providing strong impetus for them to compete in overseas markets. On the other hand, their efforts in international expansion traditionally have been limited by internal constraints (Buckley, 1997). Therefore, both advantages and disadvantages to expanding internationally coexist.

Specific Advantages and Disadvantages Pertaining to SMTEs

Participation in foreign activities is not the domain of large firms only. However, SMTEs have only limited operations abroad, though they have enjoyed technological advantages. …

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