Academic journal article Multinational Business Review

Networks, SMEs, and International Diversification

Academic journal article Multinational Business Review

Networks, SMEs, and International Diversification

Article excerpt

Abstract:

Despite changes in international trade agreements and the introduction of new technologies that facilitate international business, many firms, especially SMEs, still do not diversify into international markets. In this paper, we suggest that an important factor that can influence the international diversification decision is social networks. We hypothesize that both the strength of the ties to international firms and the size of a SME's international network influence its decision to diversify internationally. Our analysis suggests that the strength of international network ties significantly influences SME international diversification, but that the size of the international network does not. These results have important implications for researchers, managers, and public policy makers.

The past fifty years have witnessed exceptional expansion in world trade, with merchandise exports growing on average by six percent annually and total trade in 2000 up 22-fold from 1950 levels (World Trade Organization 2005). Despite these increasingly wide open doors, some firms have embraced global business opportunities while other similar firms have remained stubbornly domestic. Consider, for instance, two U.S. food giants ConAgra (Hunts) and Heinz. Although both firms are in the same industry and have significant resources to apply to international expansion, Hunts' international sales have constituted roughly 10% of total sales (ConAgra 2004), while Heinz has become a global food company with over 60% of total sales being generated in international markets (Heinz 2003). Small- and medium-sized enterprises (SMEs) are even less likely to be internationally diversified (World Trade Organization 2005).

Hitt, Hoskisson, and Ireland (1994, p. 298) define international diversification as "expansion across country borders into geographic locations (e.g., markets) that are new to the firm." Li and Qian (2005, p. 7) define international diversification as "expansion across borders of global regions and countries into different geographic locations, or markets," while Tihanyi, Ellstrand, Daily, and Dalton (2000) refer to it as diversification of business activities across national borders. Studies indicate that SME international diversification may be restricted by factors such as limited financial and managerial resources, lack of knowledge of international opportunities, perceptions of risk, and lack of managerial experience (Javalgi, White, and Lee 2000; Leonidou, Katsikeas, and Piercy 1998; Samiee, Walters, and DuBois 1993).

There is a small but growing literature that suggests that social networks may also help explain differences in SME international diversification because social networks have an influence on the information and resources available to a firm (Brass, Galaskiewicz, Greve, and Tsai 2004). Welch and Welch (1996) theorize that social networks both drive foreign market expansion and are an outcome of the expansion. Athanassiou and colleagues (1999, 2002) stress the importance of internal social networks (i.e., advice networks within a firm) in enhancing firms' awareness of international market opportunities. Gao (2003) suggests that networks promote international trade and investment by assisting businesses to overcome informal barriers. He finds an association between the presence of ethnic Chinese in the home country and foreign direct investments (FDI) into China. Several studies (Chen 2003; Ellis and Pecotich 2001; Lin and Chaney 2007) use case studies to explore how networks influence FDI location choices, provide international competitive advantage, and help firms identify international market opportunities. Ellis' (2000) work involving Hong Kong toy companies indicates that awareness of international opportunities may be associated with existing social ties although no specific empirical tests are conducted. Recently Yiu, Lau, and Bruton (2007) find that domestic business and institutional networks (e. …

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