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The Internationalization of Indian SMEs:

Strategic Issues, Organizational Transformation
and Performance

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The Internationalization of Indian SMEs: Strategic Issues,
Organizational Transformation and Performance

Author-I
Dr. POOJA JAIN
Professor, SGRR College, Dehradun
+91-9897836498

Email ID-dr.pujajain@gmail.com

Author-II
PROFESSOR (Dr.) VISHAL BISHNOI
Institute of Management & Research
Gaziabad, Uttar Pradesh
+91-9411261432
Email-vishalbishnoi2007@gmail.com
Author-III

SOMPRABH DUBEY

Assistant Professor
Institute of Management & Research
Gaziabad, Uttar Pradesh-
+91-8126973580, 9410608583
Email-dwivedi24@rediffmail.com
ssom.prabh@gmail.com
 ABSTRACT

The investment firm Goldman Sachs estimates that by 2050 the Chinese and Indian economies
will be respectively the second and third largest economies in the world. Already, companies
from these countries are emerging as important players on the global landscape. The process of
internationalization of firms from these and other emerging economies is however relatively
under researched from an academic point of view. The present study seeks to contribute to this
research stream by examining key strategic issues involved in the internationalization process of
Indian firms. The study also proposes to look inside these firms, to examine evidence of
organizational transformation, and the emergence of newer organizational forms and
capabilities in this internationalization context. In the Indian context, subject literature and
reports in the media suggest an ongoing transformation in the economy and in Indian companies
over the last few years, as India has opened itself to world markets. Working inductively from
this observation, this study examines the literature on internationalization theory, organization
theory, and the research on organizational transformation and capabilities, to identify what
strategic issues and organizational design factors are suggested to be important in the
internationalization context. The focus is on the emerging economy context in general and the
Indian context in particular. Hypotheses and study questions are developed, which are finally
tested via a grounded methodology, including case study and secondary data and survey
analysis. Key findings will suggest that simultaneous to the opening up of the Indian economy to
international markets, leading Indian companies have undergone significant transformation
towards newer forms of organizing over the last 5 years. This transformation is seen across a
range of organizational variables grouped under structure, processes, human resources,
leadership, and culture. The study also finds evidence to support the hypotheses that such
organizational transformations are associated with organizational performance. In addition, the
findings will throw light on key strategic issues such as internationalization-related modes,
competitive drivers, geographical foci, and aspirations, as well as drivers of organizational
transformation of internationalizing Indian companies. Finally, the study finds evidence of an
inverted U-shaped relationship between increasing internationalization and organizational
performance in a large sample of Indian companies. Given its extensive literature review and
significant empirical findings, this study could be of particular value to practitioners including
top managers of internationalizing companies, policy makers, and to the general academic field.

Key words- Global landscape, Internationalization, Strategic issues, U-shaped relationship,

Organizational design factors.
 Introduction
Internationalization is the process of increasing involvement in international operations (Welch
and Luostarinen, 1988). Internationalization is a synonym for the geographical expansion of
economic activities by firms over a national countrys border (Ruzzier, et al, 2006). Geographic
expansion is one of the most important paths for firm growth. It is a particularly important
growth strategy for SMEs whose business scope has been geographically confined (Barringer
and Greening, 1998). Internationalization is the extent to which a firm is involved in
international business. It includes exporting, the presence of foreign subsidiaries, share
ownership by foreigners and the appointment of foreigners in the organizational structure
(Chelliah, et al, 2010).Small and Medium Enterprises (SMEs) are increasingly operating in
international markets. Trade liberalization and the concomitant international competition exert
twin pressures on firms. They need to maintain a sustainable competitive advantage owing to the
complexities of international trade. New ways are required to compete, as the earlier competitive
strategy of differentiation based on price, product or technology, is losing value (Lloyd-Reason,
2003). According to Hessels (2008) SMEs in general can adopt internationalization as a strategy
to access or build up resources because European SMEs use internationalization as a means of
overcoming resource constraints. But Baldegger and Schueffel (2010) contend that the most
prominent factors influencing the internationalization of SMEs are resources, the environment,
the industry type the firm is engaged in and the firms personnel. SMEs tend to move into
foreign markets as exporters and/or as foreign investors (Reynolds, 1997). In general, SMEs can
use one or more of the four modes for internationalization: exports, contractual agreements,
production investments and strategic alliances (Codotto, 2008). But exporting has been
traditionally regarded as the first step to enter international markets serving as a platform for
future international expansions (Kogut and Chang, 1996). This strategy is particularly applicable
to the internationalization of SMEs because SMEs frequently lack the resources, financial or
otherwise, for FDI (Zahra, et al, 1997).
Indian markets have opened to foreign companies since 1991. Small and medium enterprises
face the competitive pressure of both domestic and overseas rivals. SMEs respond by entering
foreign markets, motivated by both push and pull factors (Lloyd-Reason, 2003). As the reduction
in the barriers for global commerce continues and the world economy becomes more integrated,
there is an increase in the attention being placed on the internationalization of small and
medium-sized enterprises (SMEs) (Lu and Beamish, 2001; Knight, 2001). As more and more
firms enter the international business environment, there is increased competition. Increasing
competition results in a reduction in the ability of SMEs to control their own developmental
paths (Etemad et al., 2001).In a very competitive environment, there is a need to identify and
understand factors that impact international performance (Kuivalainen et al., 2004). SMEs
represent a sector of growing importance and play an important role in the growth of emerging
nations especially with regards to providing employment and driving economic development
(Kula and Tatoglu, 2003).

Modern empirical findings worldwide show that SME internationalization modes are not path-
dependent, emergent, or incremental (Schulz, 2006). Internationalizationtheories are effected by
the research on large-scale enterprises, although it has already been clear for some time that "a
small business is not a little big business" (Welsh and White, 1980). In the SME research, it
apparently has become clear that "size does matter" (Wincent, 2005). Nevertheless, the initial
theoretical approaches that attempt to explain the full range of SME internationalization
processes have widely failed (Smolarski and Wilner, 2005). But current SME research still
uses stage models and learning-based stage models or network approaches to explain
internationalisation patterns of SMEs. However, even discontinuous stage models cannot cover
the range of phenomena, such as "born globals" or "instant internationals" (traditional SMEs
which enter the international field or are successfully operating in foreign countries),
"backsourcers" (who re-concentrate their international activities back to the home base), "born
regionals" (who gain their force out of a local embeddedness and never shift capacity beyond
export activities).
The study of SMEs in general has received the attention of academicians but their role in
emerging economies has yet to be actively explored. Moreover, the internationalization process
of SMEs demands more research as they continue to expand overseas since the commencement
of transformation process. This paper focuses on internalization process, theoretical aspects and
the practical aspects of the internationalization process of the SMEs.
From a historical perspective, internationalization of businesses and firms began with mankinds
ability to travel across the seas and borders. Scholars and academics have tried to define
internationalization on many occasions using many different perspectives and variables. The
term internationalization is ambiguous and definitions vary depending on the phenomenon they
include. Penroses (1959) point of view on the topic focuses on the firms core competences and
opportunities in the foreign environment .Welch and Luostarinen (1988) defined
internationalization as the process in which firms increase their involvements in international
operations. Johanson and Vahlne (1977) agree with that. By some scholars internationalization is
also defined as the process by which firms both increase their awareness of the direct and
indirect influences of international transactions on their future and establish and conduct
transactions with other countries. Later on, Calof and Beamish (1995, p. 116) defined
internationalization as the process of adapting firms operations (strategy, structure, resource,
etc.) to international environments.
Characteristics of SMEs

In order to achieve the purpose of our research, it is important to understand their inherent
characteristics. Organizational structure in SMEs is organic compared to a more bureaucratic
structure in large firms (Ghobadian & Gallear, 1996). A salient feature of an organic
organization is the absence of standardization and the prevalence of loose and informal working
relationships (Ghobadian & Gallear, 1996). These characteristics make SMEs more flexible to
environmental changes and research has found that small firms are perceived of as being
significantly more flexible than large firms (Levy & Powel, 1998). Therefore, SMEs are more
likely to survive in turbulent environments than large bureaucratic organizations, where
innovation and/or flexibility to adapt to new situations are the key factors. The flat structure of
SMEs and lack of hierarchy allow them to have a more flexible work environment and enables
the top management to build a strong personal relationship with employees (Ghobadian &
Gallear, 1996). SMEs then are characterized by an absence of standardization, formal working
relationships and having a flat organizational structure where staff development is limited.
Hollensen (2001) explains some of the characteristics of SMEs as follows:

i. Organization: the employees of SMEs are really close to the

entrepreneur/owner/manager of the firm. They are easily influenced by this actor.
ii. Risk taking: can occur in situations where the survival of the enterprise may be
threatened, or where major competition is undermining their activities. By not having
experience or information about foreign markets, the entrepreneur or management team
take risk on decision making.
 iii. Flexibility: the communication experienced by SMEs and its customers helps them react
faster and more flexible to the customers needs.
II. Internationalisation Of SMEs
Study on Small and medium enterprises are critical for a countrys economic welfare and social
development. The plethora of government policies and programmes for the encouragement of
SMEs underline their significance for national development. SMEs also play a major role in
sustaining home country businesses in the face of pressure from the foreign firms entering the
home market (Pollard, 2001). In the Indian context, small and medium enterprise sector has
made a phenomenal contribution to the Indian economy. It comprises around 13million units,
employing about 41million people, having an approximate share of 45% of manufacturing output
and 40% of exports and contributing almost 8-9% of GDP (MSME Overview, 2007).
This definition outlines that internationalization has both economic and behavioural component
and it is a process and not an event (Pollard, 2001). Gibb (1993) define internationalization as
the process of increasing involvement in international operations. It is the change in the level
of international orientation and/or activity over time. The process of internationalization is
strategic, gradual, and incremental (Lloyd-Reason, 2003). Internationalization can be termed as
a process of adaptation (cf. Calof and Beamish, 1995).
There is insufficient knowledge on the internationalization of small firms (Bilkey & Tesar, 1977)
since the typical unit of analysis has been large multinational firms. The majority of prior
research examining SMEs has been non-random case studies with a focus on exporting of
manufacturing firms (Coviello & McAuley, 1999).
SMEs face not only the same challenges as larger firms, but also potential deficiencies in
resources not present in larger firms. Barriers to SME internationalization are well documented.
Barriers to SME internationalization include:

I. lack of strategic resources, such as an experienced manager to oversee the international

expansion process,
II. operational deficiencies, such as the ability to use the marketing mix to meet foreign
market requirements,
III. informational related barriers, which entail limited intelligence generating capabilities,
and
IV. Process-based restrictions or problems in the communication process needed to create
and deliver the product (Shuman & Seeger, 1986).
Yet SMEs exhibit successful internationalization and at speeds greater than resource rich
MNEs. Furthermore, the process of SME international is not systematic and is in direct
contrast to the traditional stage process of internationalization. Factors found to be the
driving forces of SME internationalization that overcome barriers include:
I. prior international experience,
II. foreign travel,
III. The number of foreign languages spoken (Hutchinson, Quinn, & Alexander, 2006).
Internationalization. Several authors conclude that management significantly influences
international activities (Johanson & Vahlne, 1977) by affecting the speed, mode, and direction of
internationalization. A review of export literature by Leonidou Katsikeas, and Piercy (1998)
finds that both objective and subjective managerial factors influence SME internationalization.
Objective factors, such as education, experience, and foreign exposure, positively influence
international expansion, with experience having a strong effect. Subjective perceptions of
opportunities and barriers, and managers attitudes toward risk were also found to affect SME
internationalization.
III-Theoretical Framework Of Internationalization
The existing papers study the theories and the practical aspects of SME internationalization.
Among the theories, the resource based view and the knowledge based view are the most
significant to explain international entry of SMEs.
Research on SMEs increased in the early 1990s in an effort to understand the challenges and
behavior of small firms. Several literature reviews of smaller firm internationalization have been
conducted (Fillis, 2001). A review of SME literature by Calof and Beamish (1995) finds
consistent reporting of SME leapfrogging through internationalization stages, multiple strategies
being pursued simultaneously, and evidence of both supporting and contradictory findings of
SME internationalization via incremental stages.
As per Resource Based View (RBV), the firm is considered as a bundle of linked resources
(Rumelt, 1984). Various resources like technological, financial, human, physical and
organizational are acknowledged in the literature. The RBV is applicable for the growth of small
firms and also for their internationalization activities. Wernerfelt (1984) observes that a firms
growth emerges from the balance between exploitation of existing resources and development of
new resources. Wernerfelt (1984) opined that international market diversification had a role in
new resource building. Outward FDI in subsidiaries and offices is a way of diversifying markets
internationally. The RBV considers firms resources as determinants of internationalization
activity. This view has been widely studied. However internationalization can itself emerge as a
firm resource for superior performance. The present study is an attempt to study the latter aspect
which deserves more attention in the context of emerging economies.
The Knowledge Based View (KBV) of the firm has emerged as an extension to RBV. According
to Kuivalainen (2003), KBV accepts much of the contention of RBV and also emphasizes the
process of evolution of specific capabilities. The idea of the evolution of resources, capabilities
and knowledge emerges from evolutionary economics (Foss and Eriksen, 1995), in which
learning is central to superior performance (Teece et al., 1997).
Kuivalainen (2003) views firms as repositories of knowledge, and Miller and Shamsie (1996)
observe that, in increasingly unstable environment, knowledge-based resources contribute most
to firms performance. Kuivalainen and Bell (2004) also view that the entrepreneur(s) is the
catalyst for new resources, capabilities and knowledge. KBV does not focus on resources per se
but on the evolving internationally acquired routines and capabilities (Kuivalainen and Bell,
2004). However, as this approach is relatively new, and there is little empirical support in
existence, the present study seeks to further investigate these issues by focusing on capabilities
of SME management/CEO and their impact on firm performance.
Two distinct streams have emerged in literature to address SME internationalization (McDougall
& Oviatt, 2000).
I. One stream focuses on international new ventures that are international from inception,
where researchers examine both the antecedents and consequences of internationalization
(Zahra & Garvis, 2000).
II. The second stream examines internationalization of established SMEs, where researchers
focus on SME export antecedents, and the process of exporting, export performance, and
the patterns of internationalization (Bell, 1995).
A review of SME literature (Rialp, Rialp, & Knight, 2005) reveals that early internationalization
of small firms is evidenced across the globe and is not country or industry specific, an
observation also noted by Coviello and McAuley (1999). This view is echoed by Fillis (2001) in
a review of SME literature. These authors note that early internationalization may be most
similar to the knowledge-based view. Several researchers perceive born-global firms and
international new ventures as entrepreneurial firms whose managers perceive the world as their
marketplace from inception. In comparison to exporters, born-global firms and INVs generally
are niche marketers.
Theories of Internationalization
Network Theory
Uppsala-model has been challenged by network theorists in recent years, whose fundamental
argument is that modern high-technology firms do not exhibit the incremental process; rather
they achieve a faster internationalization through the experience and resources of network
partners (Mitgwe, 2006). All firms in a market are considered to be embedded in one or more
networks via linkages to their suppliers, subcontractors, customers and other market actors
(Johanson & Mattsson, 1988). According to Emerson (1981) a network is a set of two or more
connected business relationships, in which each exchange relation is between business firms that
are conceptualized as collective actors. Network theorists see firms internationalization as a
natural development from network relationships with foreign individuals and firms (Johansson &
Mattson, 1988). Networking is seen as a source of market information and knowledge, which are
often acquire in longer terms when there are no relationships with the host country. Therefore,
networks are a bridging mechanism that allow for rapid internationalization (Mitgwe, 2006). The
emphasis of the network approach is in bringing the involved parties closer by using the
information that the firm acquires by establishing close relationships with customers, suppliers,
the industry, distributors, regulatory and public agencies as well as other market actors.
Firms establish and develop position in the market in relation to other actors in a foreign network
(Johanson & Mattsson, 1988). Firms, while going abroad are engaged in a domestic network
with the main goal to develop business relationship in a foreign country. Firms position in the
local network determines its process of internationalization since that position determines their
ability to mobilize their resources within the network. All firms in the market are related in a way
to other actors, whether they are local or international. As actions take place on the firms
interacting in the network, their activities should be coordinated in order to get a better profit
from those relations. In such a way a firm can have better understanding with a supplier, or with
other companies. Coordination in the market comes from the interaction of the firms involved in
the network, where price is only one of the many factors influencing decision (Lindblom, 1959).
The ties resulted from the firms network, are hard to imitate. These ties have consequences in
three dimensions: a) the information is available to the parties involved in the relationship; b)
timing, and c) referrals (Burt, 1997). Firms learn from the ties made in the network, information
about what is going on in the market is open to the network itself. Thus, there is information that
is not available for everyone. Ties also influence on timing when some information reaches a
particular firm. And referrals firms get interested on other firms, in the right time and place. Ties
may be strong or weak. Granovetter (1973, p.1361) defines the strength of ties as a combination
of time, emotional intensity, intimacy and the reciprocal services of the ties. They are weak when
they are low, the relationships are distant. When there is a tight interaction the ties are strong,
parties involved enjoy autonomy and easily adapt to each other. No tie is static. As time passes
by firms can make the ties become stronger or weaker depending the relation between them.
International Entrepreneurship Theory (IET)
According to Zahra and George (2002), the term international entrepreneurship first appeared
in a short article by Morrow in 1988. Morrow (1988) suggested that advancements in
technology, declining cultural barriers and increasing cultural awareness has opened once-remote
foreign markets to all kinds of companies; small firms, new ventures as well as established
companies. Soon after that, McDougalls (1989) empirical study comparing domestic and
international new ventures paved the way for academic study in international entrepreneurship
(McDougall & Oviatt, 2005,p. 537). International entrepreneurship is the study of cross-border
entrepreneurial behavior focuses on how actors discover, enact, analyze and exploit opportunities
in the creation of new goods or services. McDougall and Oviatts (2000, p. 903) introduced their
definition of international entrepreneurship as a combination of innovative, proactive and risk
seeking behavior that crosses national borders and is intended to create value in organizations.
This definition has been one of the most widely accepted. Afterwards, they embraced a deeper
concept of entrepreneurship, defining it as the discovery, enactment, evaluation, and exploitation
of opportunities across national borders to create future goods and services (McDougall &
Oviatt, 2005). Discovery refers to finding innovative opportunities. Enactment means to
proactively put opportunities into use acquiring a competitive advantage. Evaluation is required
to interpret the actions taken developing experience and knowledge. International
entrepreneurship theory argues that individual and firm entrepreneurial behaviour is the basis of
foreign market entry (Mtigwe, 2006, p. 16). Technological advancements, cheap and easy ways
to access to information and better communication between the countries have helped SMEs to
go abroad. Nowadays SMEs are gaining internationalization very rapidly, if not by inception as
in the case of international new ventures.
A modification of McDougall and Oviatts (1994) definition of entrepreneurship is given by
Stevenson and Jarillo (1990, p. 23), for them entrepreneurship is a courageous managerial value
creation process through which an individual engages innovative, proactive, calculated risk-
taking behavior designed to prosecute foreign business opportunities presented by multinational
market successes and imperfections for financial and non-financial rewards. International
Entrepreneurship has been receiving a lot of interest from researchers and academics. According
to IET, the key to internationalization nowadays is the entrepreneur. He is the one that possesses
the skills and enough information to measure the opportunities in the market with ability to
create and make stable relationships with other firms, suppliers, customers, government and
media. He can be the one that has experiential and objective knowledge. Since he is a risk seeker,
he is also able to commit the resources in an efficient way to achieve competitive advantage. In
the international entrepreneurship theory, the entrepreneur needs to be opportunity seeking and
internationally experienced in order to exploit the opportunities he might see in the market and
be able to commit to it through entrepreneurial activities that would be translated as
entrepreneurial services.
An essential part of the discussion about international entrepreneurship theory is international
new ventures (INVs), because they are closely related to each other; we have discussed the INVs
and their challenges to the U-model earlier.
 IV-Practical Aspects Of Internationalisation
The authors concluded that one theoretical framework does not capture the complex SME
internationalization process. Evidence of accelerated internationalization infers that prior theories
do not explain the internationalization of small, knowledge-intensive, and service-intensive firms
(Rialp, Rialp, & Knight, 2005). The concentration on an independent theoretical concept of SME
and internationalization is therefore essential and indispensable. The practical aspects include the
concept and the process of internationalization, its approaches, motives, barriers, and its various
dimensions. These issues are discussed as follows:
For SMEs, with their limited financial resources, home country focus and small geographic base,
international activity is a significant step. Most of them lack the resources required for engaging
in overseas activity (Kirby and Kaiser, 2003). However globalization, technology, information
availability and changed organizational structure have enabled SMEs to venture overseas. SMEs
have been engaged in export/import, alliances, mergers and acquisitions (OECD 2005).
Traditionally, internationalization was understood as a sequential process moving in four discrete
stages of:
I. intermittent exports;
II. exports via agents;
III. overseas sales via knowledge agreements (licensing or franchising);
IV. foreign direct investment (Johanson and Widersheim-Paul, 1975).
However new research indicates that firms does not necessarily follow this sequential pattern
(Benito' and Welch, 1993). As per the New Venture Internationalization Theory",
entrepreneurial vision and the initial resource endowment, influence early internationalization
decisions (Autio and Sapienza, 2000). This is particularly true for knowledge-intensive industries
(McDougall and Oviatt, 1996) like in case of software SMEs.
Beamish (1990) defines internationalization as 'a process by which firms both increase their
awareness of the direct and indirect influence of international transactions on their future, and
establish and conduct transactions with other countries. SMEs are actively involved in
international markets, but they face problems in entering these markets (Reynolds, 1997). These
problems are due to lack of knowledge about exports, marketing etc. SMEs internationalize
through different ways which include networking with foreign firms, accessing foreign countries
through trade fairs, exporters and publications. Other mechanisms for internationalization
include entering into joint ventures, licensing arrangements and subcontracting (Pollard, 2001).
Research finds that in some cases, firm size (Holden, 1986) and resources affect the
internationalization of small firms (Moen, 1999). Bilkey and Tesar (1977) found smaller firms
were more likely to export as opposed to entering foreign markets in a manner that required
greater investment. An examination of 164 Japanese SMEs in 19 industries by Lu and Beamish
(2001) concluded that SMEs face a liability of foreignness when first entering international
markets. However liabilities of foreignness are reduced through experience (Lu & Beamish,
2001).
However, size may not be an impediment to internationalization. Small firms are able to
overcome their small size (Baird, Lyles, & Orris, 1994). According to Wolf and Pett (2000,
2007), there is no significant difference between small and large firm export intensity. In fact,
prior studies indicate that small firms are:
I. less affected by adverse external changes than large firms,
II. able to adapt prices to currency fluctuations more quickly,
III. more flexible, and

IV. Willing to take on greater risk.

A study of SMEs by Calof and Beamish (1995) concluded that size was not a barrier to
internationalization and that SMEs find unique ways to overcome smallness. Cavusgil (1984)
found no significant relationship between firm size and the propensity to export. Westhead, et.al
(2001) argue that the ability to export is not a function of firm size and age but more importantly,
entrepreneurial human capital and the internal resources of the firm. A review of small firm
internationalization literature spanning several decades by Lu and Beamish (2001) notes that
innovative thinking; creativity, opportunity recognition, and risk-taking positively influence firm
internationalization. As evidence of this observation, a study of 105 small U.S. manufacturing
firms found that an entrepreneurial orientation focused the firms efforts and significantly
increased international growth in the number of customers, sales, and market share (Fillis, 2001).
Wolf and Pett (2007) state that an entrepreneurial orientation aids in overcoming size barriers for
international growth.
 V. Conclusion
Globalization has offered new opportunities to SME sector much more than before and there
were clear indications that the sector in fact has been taking advantage of it, particularly in the
global market. SME sector has grown more towards the international market than towards the
domestic market in the globalization era. Therefore contrary to expectations, example the Indian
SSI has been registering an impressive growth of exports since 1990/91. However this trend is
not India specific. In the last few decades, many Small and Medium Enterprises (SMEs) have
successfully set up activities beyond their home markets and their role is increasingly crucial in
contributing to future growth (Gjellerup, 2000). A significant development within the broad
internationalization trend has been the increasingly active role played by SMEs in international
markets. The internationalization of SMEs can be expected to gain further momentum because
the world economy is becoming increasingly integrated with continued declines in government-
imposed barriers and continued advances in technology.

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