What are the major concerns for corporations in developing and retaining expatriate employees, especially managers?

 Use the attached as references and the answer must be at least 350 words in APA format.

Foreign value-adding of

industrial firms

Associations with international strategy and
market experience

Anders Pehrsson
School of Business and Economics, Linnaeus University, Växjö, Sweden

Abstract

Purpose – There is a lack of research on how the industrial firm’s international strategy is associated
with basic and advanced value-adding modes of the wholly owned foreign subsidiary. The purpose of
this paper is to fill the gap by answering two questions: how are relatedness between the firm and
the foreign subsidiary, and the firm’s international scope associated with foreign subsidiary’s
value-adding mode? How does the subsidiary’s market experience moderate the relationships?
Design/methodology/approach – The study develops a conceptual model that integrates strategy
theory and internationalization theory in order to explain basic value-adding modes (promotion, sales,
and after-sales services), and advanced modes that also include product development and/or
production. Also, the study tests the model using statistical data from subsidiaries of Swedish firms
operating in Germany, the USA, and the UK.
Findings – It was found that greater relatedness between the core business unit of the parent firm
and the foreign subsidiary favors a basic mode. However, the foreign subsidiary’s market experience
weakens the relationship, and the interaction triggers an advanced mode. Also, greater international
scope of the firm favors an advanced mode.
Research limitations/implications – The model test shows that research needs to consider both
international strategy and market experience in explaining value-adding modes of an industrial firm’s
wholly owned subsidiary.
Practical implications – By using the study contributions the industrial firm’s efforts to efficiently
implement international strategy would become more efficient as strategy coherence will increase.
Originality/value – This paper contributes to literature on international strategy and internationalization
by showing that international strategy and market experience of foreign markets mutually impact
value-adding modes of wholly owned foreign subsidiaries.

Keywords Value adding, Foreign subsidiary, International scope, International strategy,
Market experience, Relatedness

Paper type Research paper

Introduction
The mode of value-adding activity on a foreign market manifests the industrial firm’s
capacity to realize the international strategy (Calof and Beamish, 1995; Maitland
et al., 2005; Porter, 1985, 1990). Thus, by relying on coherent relationships between
international strategy and mode of local value-adding an industrial firm would gain a
solid ground for crucial decisions regarding implementation of international strategy.
However, despite the importance of the issue, there is a lack of research on relationships
between international strategy and mode of value-adding on a foreign market.

This study contributes to literature on both international strategy and
internationalization by developing and testing an integrated conceptual model that
draws on strategy theory and internationalization theory. The model explains basic
and advanced value-adding modes of industrial firms’ wholly owned foreign subsidiaries.

The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1755-425X.htm

Received 6 August 2013
Revised 15 November 2013

Accepted 16 November 2013

Journal of Strategy and Management
Vol. 7 No. 2, 2014

pp. 155-

171

r Emerald Group Publishing Limited

1755-425X
DOI 10.1108/JSMA-08-2013-0047

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The study establishes coherent relationships with firm/subsidiary relatedness and the
firm’s international scope. Furthermore, the study establishes that the subsidiary’s
market experience is a central moderator of the relationships.

A foreign subsidiary with basic value-adding activities is involved in promotion,
sales, and/or after-sales services, while an advanced mode also includes product
development and/or production (Delany, 2000). Relatedness is conceptualized as similarities
among organizational units along central product/market dimensions (Pehrsson, 2006;
Stimpert and Duhaime, 1997; Tanriverdi and Venkatraman, 2005). Furthermore, the range
of foreign markets in terms of countries or geographical regions penetrated by the firm
defines its international scope (Hitt et al., 2007), while the subsidiary’s market experience
concerns experience of market conditions such as the behavior and characteristics of
customers and competitors (Yeoh, 2004).

Investment in a basic value-adding mode in a foreign market is frequently
followed by investment in an advanced mode (e.g. Ambos et al., 2011; Delany, 2000;
Manolopoulos, 2006). In particular, the shift to an advanced mode is crucial as the
firm’s local investment in foreign product development and/or production means
extensive set up costs and a long term commitment that shapes future alternatives
(Maitland et al., 2005). Thus, the study’s examination of the crucial shift applies the
discontinuous view of internationalization (e.g. Pedersen and Shaver, 2011).

To my knowledge, despite its relevance the combination of firm/subsidiary relatedness
and international scope is an unexplored explanation of value-adding modes of
foreign subsidiaries. The combination would complement previous explanations that
apply internalization theory (e.g. Buckley and Casson, 1976; Hennart, 1982; Rugman,
1981), or localization theory (e.g. Dunning, 1993, 1998). For example, Buckley and Casson
(1976) explain localization of operations by the firm’s desire for internalizing activities
and keeping transactions costs low. Here, a foreign subsidiary will be responsible for
advanced value-adding as long as the benefits of internalization exceed the costs.
Localization theory (Dunning, 1993, 1998) underscores that the firm will locate activities
based on an evaluation of location-specific factors such as import barriers and structure
of the local market.

According to the stages model of internationalization (Johanson and Vahlne, 1977;
Luo and Wang, 2012; Malhotra et al., 2002) a firm goes international in an incremental
manner where export activities are generally followed by direct investments such as
establishment of local sales and production. In this evolutionary process of expansion,
increased market knowledge leads to extended market commitment. However, the
stages model does not acknowledge international strategy as a central antecedent
of the firm’s internationalization (Chetty and Campbell-Hunt, 2004) but considers path
dependence to be crucial (Malhotra et al., 2002).

The foreign subsidiary should be viewed as a semiautonomous organizational
unit (Birkinshaw et al., 2005) that influences decisions on value-adding. Thus, the
subsidiary’s market experience manifests path dependencies that may moderate the
relationship between the firm’s international strategy and the subsidiary’s mode of
value-adding (Pehrsson, 2009).

In summary, there is a lack of research on how the industrial firm’s international
strategy is associated with basic and advanced value-adding modes of the foreign
subsidiary. The study tries to fill the gap by answering two questions: How are
relatedness between the firm and the foreign subsidiary, and the firm’s international
scope associated with foreign subsidiary’s value-adding mode? How does the
subsidiary’s market experience moderate the relationships?

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Theory and hypotheses
This study tests relationships relying on strategy theory and internationalization
theory. It is assumed that the value-adding mode of a foreign subsidiary is associated
with the industrial firm’s international strategy in terms of firm/subsidiary relatedness
and firm’s international scope (Figure 1). Thus, a basic mode or an advanced mode
would be established locally in order to realize the strategy (Calof and Beamish, 1995;
Maitland et al., 2005; Porter, 1985, 1990).

First, this section of the paper conceptualizes basic and advanced modes of value-
adding activity. Second, discussions on the relevance of firm’s international strategy
lead to hypotheses on coherent associations regarding firm/subsidiary relatedness and
firm’s international scope. The relatedness discussion concerns relatedness between
the parent firm’s core business unit and the foreign subsidiary. Third, the moderating
role of foreign subsidiary’s market experience is hypothesized.

Basic and advanced modes of

value-adding activity

Porter (1985) conceptualizes value-adding as a set of activities that support the building
of competitive advantage. Categories of individual activities have been specified by
several scholars (e.g. Birkinshaw and Morrison, 1995; Hobday and Rush, 2007; Pehrsson,
2009; Roth, 1992) where the categories are due to the character of the firm. For example,
Hobday and Rush (2007) studied industrial firms and acknowledge product development
and production that add value beyond sales, while Pehrsson (2009) adds promotion and
after-sales services in a study of extent of international value-adding activity.

The framework of the current study uses product development, production,
promotion, sales, and after-sales services as these activities are appropriate for
examination of international industrial firms (Pehrsson, 2009). Product development
means that engineering takes place locally, and the subsidiary may customize
products, or design new products. A foreign subsidiary with production ability, such as
assembly and/or manufacturing, employs engineers to take care of the production

H1

H3a

H3b
H2

Relatedness
between the

parent firm’s core
business unit and

the foreign
subsidiary

Foreign
subsidiary’s

market
experience

Foreign
subsidiary’s mode

of value-adding
activity

Firm’s
international

scope

Note: H indicates hypothesis

Figure 1.
Conceptual model

for the study

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Foreign value-
adding of
industrial firms

efficiency, while a foreign subsidiary with a promotion activity takes part in the
development of promotion materials and one with a sales activity is involved in
sales operations. Finally, after-sales services mean that the foreign subsidiary is
involved in services after sales.

Various typologies distinguish roles of foreign subsidiaries where combinations of
individual value-adding activities are central (e.g. Delany, 2000; Feinberg, 2000; Hogenbirk
and van Kranenburg, 2006; Manolopoulos, 2006; White and Poynter, 1984). Furthermore,
Delany (2000), Feinberg (2000), Manolopoulos (2006), and Taggart (1997) identify stages
of development. In accordance with the pattern observed by Delany (2000) the role of a
foreign subsidiary frequently develops from a basic role to an advanced role where the
subsidiary becomes responsible for product development and/or production beyond
responsibility for basic activities such as promotion, sales, and after-sales services.

Association regarding firm/subsidiary relatedness
Firm/subsidiary relatedness enables integration (Robins and Wiersema, 1995;
Zaheer and Mosakowski, 1997) as relatedness facilitates common exploitation of
cross-business synergy originating from the firm’s resources (Slusky and Caves, 1991;
Tanriverdi and Venkatraman, 2005; Teece et al., 1994; Piscitello, 2004). Relatedness is,
thus, a source of economies of scale and scope deriving from the sharing of costs in the
production of multiple products, resulting in lower joint costs of production per unit of
output. In particular, relatedness favors the firm’s efforts to achieve coherence between
the international strategy and the mandate assigned to the foreign subsidiary.

A foreign subsidiary that wishes to realize the synergy potential of relatedness can
try to exploit core competencies of the parent firm’s core business unit (Pehrsson, 2010).
However, it is important to underscore that organizational units besides the parent’s
core business unit may be responsible for creating crucial competence as well (Gupta
and Govindarajan, 2000; Holm and Pedersen, 2000). A core competence is a firm-level
competence that provides potential access to many markets, makes a significant
contribution to the perceived customer benefits of the end product, and is difficult to
imitate (Prahalad and Hamel, 1990). Core competence provides a guide to market entry
and expansion (Goddard, 1997).

Extensive relatedness between the parent firm’s core business unit and the foreign
subsidiary is theoretically coherent with centralization of advanced value-adding activities
such as product development and production and, hence, a basic value-adding of the foreign
subsidiary (Prahalad and Doz, 1987). Advanced value-adding that is centralized to, for
example, the parent’s core business unit is a way of realizing synergy for extensively related
products. Centralization makes it easier to achieve cost advantages, while geographically
widespread activities often require investments in multiple sites and great set up costs.
In particular, simple products generally mean that value-adding tends to be centralized in
order to fulfill uniform needs of customers (Jarillo and Martinez, 1990; Taggart, 1998).

Furthermore, the argument of Luo and Zhao (2004) means that the relatedness
between a parent firm and a foreign subsidiary is great when the product is less complex
which generally implies a limited need for product customization and local activities for
value-adding. However, the subsidiary generally needs extensive corporate support to be
able to pursue a product-based strategy based on a basic value-adding mode:

H1. The greater the relatedness between a foreign subsidiary and the core business
unit of the industrial firm, the greater the probability of a basic value-adding
mode of the subsidiary.

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Association regarding firm’s international scope
The firm’s international experience originates from the international scope (Chang,
1995; Zahra et al., 2000; Tallman and Li, 1996). Exposure to diverse environments
promotes, for example, technological learning and market learning (Hitt et al., 1997;
Zahra et al., 2000; Yeoh, 2004).

Bartlett and Ghoshal (1989) and Birkinshaw and Morrison (1995) argue that
foreign subsidiaries’ access to international experience to a large extent determines
where the firm locates value-adding activities. In general, a subsidiary that is able to
extensively exploit the firm’s international experience becomes responsible for
advanced value-adding activities. The argument implies that knowledge flows
between the headquarters and subsidiaries, and between subsidiaries, are essential
to strategy coherence (Gupta and Govindarajan, 1991; Manolopoulos, 2008; Mudambi
and Navarra, 2004). In particular, the foreign subsidiary needs to integrate
and cultivate insights gained from other markets into value-adding activities in
order to be able to exploit international experiences of the firm (Hitt et al., 2006; Lei
et al., 1996).

Thus, international experience that stems from the firm’s international scope
may support extension of the foreign subsidiary’s value-adding activity. For example,
Zahra et al. (2000) found that a greater international scope leads to broader and
deeper technological learning facilitating local value-adding in terms of product
development or production. Furthermore, a foreign subsidiary that can rely on
extensive international experience of the corporation may develop into a product
specialist or a manufacturing specialist supporting the firm as a whole and the local
market (Delany, 2000). However, even a foreign subsidiary that has incorporated
extensive international experience may need corporate support (Luo and Zhao, 2004)
until the subsidiary eventually becomes strategically independent:

H2. The greater the international scope of the industrial firm, the greater the
probability of an advanced value-adding mode of a foreign subsidiary.

Associations regarding foreign subsidiary’s market experience
In a process extended in time, the foreign subsidiary accumulates market experience
by, for example, learning how to treat a diversity of customers (Yeoh, 2004),
segmenting the market and accessing distribution channels (Delios and Beamish, 2001;
Fang et al., 2007). Also, the subsidiary becomes experienced by learning from meeting
different competitors when trying to access customers (Grant, 1996; Ketchen et al.,
2004; Porter, 1985; Sutcliffe and Zaheer, 1998). Literature shows that experience gained
from handling diverse market settings is vital for foreign subsidiaries because it
increases the chances for successful strategy implementation (Kogut and Zander, 1992;
Lado and Martinez-Ros, 2004; O’Donnell and Jeong, 2000).

Furthermore, the foreign subsidiary’s market experience tends to moderate
relationships between firm’s international strategy and the subsidiary’s value-adding
mode. Ambos et al. (2011) show that a foreign subsidiary that gains greater experience
increases the chances of becoming responsible for advanced value-adding. More
precisely, extensive initial relatedness with the parent firm facilitates trust building
and favors the subsidiary’s influence on relevant decisions when the subsidiary has
become more experienced. Accordingly, it is logical to expect that greater market
experience of the foreign subsidiary weakens the association between firm/subsidiary
relatedness and a basic value-adding mode of the subsidiary. A foreign subsidiary

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possessing extensive market experience may, thus, be more capable of conducting
advanced value-adding.

Greater market experience facilitates the subsidiary’s efforts to exploit relatedness
and assimilate the parent firm’s core competencies (Pehrsson, 2010) that may help
building an advanced value-adding mode. For example, the subsidiary’s exploitation
of core competencies and reuse of technology knowledge reduces the subsidiary’s
costs for product development and production. Thus, the benefits of firm/subsidiary
relatedness involve efficient utilization of resources (Helfat and Eisenhardt, 2004) and a
possibility of achieving strategy coherence by transferring a greater amount of resources
to support an advanced value-adding mode of the foreign subsidiary provided that the
subsidiary has enough market experienced:

H3a. The greater a foreign subsidiary’s market experience, the weaker the
association between greater firm/subsidiary relatedness and a basic value-
adding mode of the subsidiary.

The firm’s international scope is a source of cross-market experience (Chang, 1995;
Zahra et al., 2000; Tallman and Li, 1996) that is associated with the value-adding mode
of the foreign subsidiary (Bartlett and Ghoshal, 1989; Birkinshaw and Morrison, 1995).
It is logical to expect that a subsidiary possessing great experiences of its particular
local market is able to extensively exploit and cultivate the firm’s international
experience. For example, as the subsidiary learns how to access customers and cope
with competitors the subsidiary will be more capable of efficiently pursuing customized
product development and other aspects characterizing advanced value-adding. Hence, as
the foreign subsidiary accumulates market experience the association between greater
international scope of the firm and an advanced value-adding mode of the subsidiary will
be stronger:

H3b. The greater a foreign subsidiary’s market experience, the stronger the
association between greater international scope of the industrial firm and an
advanced value-adding mode of the subsidiary.

Method
Sample and data collection
The unit of analysis was the wholly owned foreign subsidiary of an industrial firm.
Such firms were chosen as their foreign subsidiaries may be responsible for various
value-adding activities and no other owners influenced the subsidiaries. Furthermore,
the intention was to keep home country effects constant and enable control for
host country effects. Therefore, the sample consisted of Swedish industrial firms in
Germany, the UK, and the USA. These countries are the dominant export markets for
Swedish industrial firms, and, most probably, the firms would demonstrate experience
of the markets and variations regarding other issues of the study.

The Kompass search engine was used to identify firms to be included in the sample.
Annual reports of the identified firms were examined to secure that the firms targeted
business customers, and that the firms had established at least one wholly owned
subsidiary in Germany, the UK, or the USA. The resulting sample consisted of
303 subsidiaries.

Corporate data valid for 2004 were collected from annual reports. Furthermore,
telephone interviews were made in 2005 with the subsidiary executives responsible for

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the foreign operations. The interview method ensured that the intended respondents
were reached and delivered answers, and it was possible to avoid misunderstandings
pertaining to the questions. Eight managers representing firms similar to those in the
sample tested a draft questionnaire. The questionnaire was then tested in telephone
interviews with five respondents in Germany, the UK, and the USA, respectively. For
Germany, the questionnaire was translated into German and the answers were translated
into English. The tests showed that no major changes of the questionnaire were needed.

Two assistants with German and English as their first language made the telephone
interviews. The assistants and this author met during data collection to ensure that the
survey items were applied in accordance with the intentions and, for the German
part, translations were made correctly. However, our impression was that managers
uniformly understood the survey items. Yet, there may be response bias due to, for
example, respondents’ education level and culture (Chami-Castaldi et al., 2008).

Of the original 303 subsidiaries (105 in Germany, 108 in the UK, and 90 in the USA),
executives of 57 subsidiaries (40, nine, and eight, respectively) were too busy or did not
want to participate. Furthermore, the assistants did not reach executives of 55 other
subsidiaries (five, 25, and 25, respectively) after four phone calls. The outcome was 191
completed questionnaires corresponding to an overall response rate of 63 percent. The
response rates in Germany, the UK, and the USA were 57 percent (60 responses), 69
percent (74 responses), and 63 percent (57 responses).

The total number of parent firms was 136 and 36 parent firms were responsible for
two or more foreign subsidiaries. The maximum number of responding subsidiaries of
a parent firm was 4 and the median was 1. Furthermore, the mean number of foreign
countries in which a firm had subsidiaries was 16, and varied between 1 and 152. The
mean total foreign sales of the corporations in 2004 was 818 million SEK
(1 USD¼7 SEK), and varied between seven million and 9,400 million SEK.

A comparison of number of foreign countries with subsidiaries and total foreign
sales regarding the responding and non-responding subsidiaries showed no significant
differences of mean values. Most probably, the interview responses were representative
and the subsidiaries provided reliable information. However, the small sample size and
the missing cases together with the impossibility of later collecting information from
those subsidiary managers limit the possibility of generalizing the study results.

Dependent variable
The value-adding activities of product development, production, promotion, sales, and
after-sales services were captured in the study. In the questionnaire, respondents
marked the activities that their firms performed in Germany, the UK, or the USA. The
questionnaire indicated that a subsidiary employing design engineers was engaged in
product development. Having a production plant and engineers involved in local
assembly and/or manufacturing on a regular basis indicated the presence of production.
A subsidiary handling promotion, sales, or after-sales services meant presence of a basic
mode of value-adding activity. A subsidiary that also handles product development and/
or production represented an advanced mode. The dependent variable, mode of foreign
value-adding activity, could assume 0 or 1 corresponding to a basic value-adding mode
(n¼124) and an advanced mode (n¼67).

Independent variables
A formative scale ( Jarvis et al., 2003) was developed to measure firm/subsidiary
relatedness. This independent variable captured relatedness between the parent firm’s

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core business unit and the foreign subsidiary. Each respondent rated the degree of
relatedness regarding four items (product technology, product design, type of end
customer, and customer requirements, Cronbach’s a: 0.70). The interviewer informed
the respondent that the parent’s core business unit is viewed as a center of core
competence (Prahalad and Hamel, 1990). The ratings were made on five-point Likert
scales, on which scale point 1 represented “very low relatedness” and point 5 represented
“very high relatedness.” A subsidiary’s mean value of the scores for the items was used
as a score for the variable.

The independent variable of firm’s international scope was designed to
specify the firm’s international scope. The variable was measured by the number
of foreign countries with subsidiaries of the firm. Data were collected from
annual reports and transformed into logarithmic values. Finally, questionnaire
respondents reported the number of years the particular subsidiary had operated
in the market, and foreign subsidiary’s market experience was represented by
logarithmic values.

Control variables
As industries of the studied firms may reflect, for example, competition contingencies
(e.g. Ethiraj et al., 2005) industry effects were control for. Dummy variables, industry:
main products, captured industries of the firms according to the main products offered.
Data were collected from annual reports and five industries were represented: electrical
products (n¼42), machinery (n¼23), metal products (n¼41), products based on raw
materials (energy, food, wood, paper; n¼37), and miscellaneous products (n¼48)
which was treated as the base case in the analysis.

Product complexity may influence the local presence of value-adding activities
( Jarillo and Martinez, 1990) and more complex products would be expected to
provide buyers with additional values. Essentially, the product complexity of firms
offering individual products tends to differ from that of firms offering systems
comprising individual products. A dummy variable, product complexity, was included
in the analysis: 0 represented subsidiaries that primarily offer individual
products (n¼125), and 1 represented subsidiaries that primarily offer systems
of products (n¼66). The questionnaire asked respondents whether the subsidiaries
primarily offer individual products or systems composed of individual products.

Size was controlled for as smaller and larger firms generally possess different
resources that suit them to coping with value-adding on foreign markets. Corporate
sales in the last fiscal year were used as an indicator of corporate size. Sales data
(SEK millions) were transformed into logarithmic values.

Host country characteristics may have an impact on strategy issues (Makino
et al., 2004; Qian et al., 2008). In order to control for host country effects, two
dummy variables, foreign subsidiary: Germany and foreign subsidiary: the USA,
indicated if the subsidiary was located in Germany, or the USA, while the UK was
the base case.

Finally, foreign subsidiary performance was controlled for as high performance
generally tends to attract investments. All foreign subsidiaries were responsible for at
least sales and, therefore, respondents reported return on sales (ROS, percent) in the
last fiscal year as a basis for foreign subsidiary ROS. This is a common performance
measure in studies of foreign subsidiaries (e.g. Makino et al., 2004). However, biases
such as the effects of transfer pricing and corporate desires for different performances
might exist.

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Analysis procedure
As data regarding some subsidiary variables came from the same executive the
problem of common method variance may occur (Chang et al., 2010). In order to reduce
the likelihood of the problem Harman’s statistical single-factor test (Podsakoff and
Organ’s, 1986) was carried out. The test included three quantitative subsidiary variables
(foreign subsidiary ROS, firm/subsidiary relatedness, and foreign subsidiary’s market
experience) and identified two unrotated factors explaining 44 percent and 33 percent
of the variance in data. No single or general factor appeared and source bias was not a
serious problem.

Associations among the variables were examined in three steps. First, associations
were explored by comparing mean values of the independent variables across values
of the dependent variable. Second, correlations among continuous variables were
examined. Third, a regression analysis was conducted. The binary logistic regression
technique (Kachigan, 1986) was applied as the dependent variable was binary. Logistic
regression does not rely on distributional assumptions but multicollinearity among the
predictors can lead to biased estimates. However, a number of parent firms (n¼36)
were responsible for more than one foreign subsidiary and the analysis may be biased
due to common corporate policies and, thus, dependent observations. Therefore,

effects

of dummy variables for each repeated parent firm were tested in a logistic regression
analysis. The analysis did not show any significant effects and, thus, the observations
fulfilled the requirement on independence.

In the subsequent analysis the independent variable coefficients were interpreted
in accordance with recommendations for logistic regression (Pampel, 2000). In the
analysis, a positive coefficient means favor of an advanced mode of value-adding, while
a negative coefficient means favor of a basic mode. The control variables were entered
in the first regression model and independent variables were entered in the second
model, while interaction terms were added in the final model.

In order to eliminate problems due to multicollinearity the interactions were
orthogonalized (Little et al., 2006). For each interaction, the product term was regressed
onto the first-ordered effects and the residual then represented the interaction effect.
The variance of the interaction term contained the unique variance that fully
represented the interaction effect, independent of the first-order effect variance and
general error or unreliability.

Results
Table I shows mean values for the independent variables across mode of foreign
value-adding activity. The basic mode is associated with a greater relatedness between

Mode of foreign value-

adding activitya

Independent variables
Basic mode

(n¼124)
Advanced mode

(n¼67) Anova F

Firm/subsidiary relatedness 4.52 4.22 11.18*
Firm’s international scope: No. of foreign countries
with subsidiaries 12.44 23.73 11.03*
Foreign subsidiary’s market experience: No. of years
of foreign subsidiary operation 17.83 28.82 19.85*

Notes:
aLocal presence of product development and production means an advanced mode; lack of

these activities means a basic mode. * po0.001

Table I.
Mean values for

independent variables
across mode of foreign

value-adding activity

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the parent firm’s core business unit and the foreign subsidiary, than is the advanced
mode ( po0.001). On the other hand, the advanced mode is associated with greater
international scope and local market experience ( po0.001).

Table II contains descriptive statistics and Pearson correlation coefficients for the
variables in the study, except for dummy variables. As expected, there were significant
associations between the continuous control variables and independent variables
( po0.01). Also, the table shows a significant association between two independent
variables ( po0.01). The comparison of mean values across the value-adding modes
(Table I) and the correlation coefficients (Table II) indicate a need for further
exploration of the relationships.

Table III shows the results of the regression with mode of foreign value-adding
activity as the dependent variable.

The results support H1 predicting that the greater the firm/subsidiary relatedness
between a foreign subsidiary and the core business unit of the industrial firm, the
greater the probability of a basic value-adding mode of the subsidiary (Model 2,
po0.01; Model 3, po0.05). Also, H3a is supported ( po0.05) and greater market
experience of the subsidiary means a weaker association between the relatedness and a
basic value-adding mode of the subsidiary.

H2 predicts that the greater the international scope of the industrial firm, the
greater the probability of an advanced value-adding mode of a foreign subsidiary.
The test supports the hypothesis as the coefficient of international scope was positive
(Model 2, po0.05; Model 3, po0.10). However, the results did not support that
the foreign subsidiary’s market experience strengthens the relationship as predicted
by H3b.

As expected, the control of corporate size showed a positive association in all
models ( po0.001; po0.10; po0.05) consistent with the view that larger firms
generally possess more resources that suit them to coping with issues pertaining to
foreign value-adding. The test also confirms that industry characteristics and host
country characteristics may have an impact. The reason why subsidiary presence in
the USA favored a basic value-adding mode ( po0.05; po0.10) may be the
geographical distance to the domestic market in Sweden and accompanying risk
assessments.

The mean values of the independent variables across the value-adding modes of
foreign subsidiaries (Table I) confirm that the regression results are robust regarding
main effects. Thus, the basic mode of value-adding activity is associated with a greater
firm/subsidiary relatedness compared to the advanced mode, while the advanced mode
is associated with greater international scope of the firm. The correlation analysis
particularly underscores the importance of corporate size.

Variables Min. Max. Mean SD 1 2 3 4

1. Corporate size 0.60 3.96 2.55 0.80 –
2. Foreign subsidiary ROS 0.00 29.00 5.23 5.42 �0.04 –
3. Firm/subsidiary relatedness 2.00 5.00 4.42 0.61 0.00 �0.32* –
4. Firm’s international scope 0.30 2.18 1.00 0.41 0.57* �0.03 �0.02 –
5. Foreign subsidiary’s market experience 0.00 2.09 1.21 0.37 0.28* �0.01 �0.05 0.28*

Notes: n¼191. * po0.01 (two-tailed)

Table II.
Descriptive statistics and
Pearson correlation
coefficients

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Discussion and conclusions
Contributions to theory
The study examines associations between the industrial firms’ international strategy
and value-adding modes of wholly owned foreign subsidiaries. The discontinuous

Variables
Predicted

sign Finding
Model 1 control

effects
Model 2 main

effects
Model 3 all

effects

Intercept �1.33 0.53 3.67
(1.60) (2.13) (6.09)

Control variables
Industry: electrical products 0.21 0.14 �0.06

(0.53) (0.56) (0.58)
Industry: machinery 0.26 0.44 0.42

(0.60) (0.64) (0.64)
Industry: metal products �0.59 �0.30 �0.29

(0.49) (0.53) (0.54)
Industry: raw materials basis �0.82* �0.88* �0.91*

(0.49) (0.53) (0.54)
Product complexity �0.08 �0.29 �0.18

(0.37) (0.39) (0.40)
Corporate size 0.84**** 0.51* 0.65**

(0.23) (0.28) (0.30)
Foreign subsidiary: Germany �0.41 �0.05 0.06

(0.48) (0.51) (0.53)
Foreign subsidiary: the USA �1.01** �0.85* �0.87*

(0.42) (0.45) (0.46)
Foreign subsidiary ROS 0.04 0.04 0.06

(0.04) (0.04) (0.04)
Independent variables
Foreign subsidiary’s market
experience

1.10** 1.90

(0.57) (4.37)
H1: firm/subsidiary relatedness � Supported �0.90*** �2.72**

(0.31) (1.23)
H2: firm’s international scope þ Supported 1.08** 4.61*

(0.55) (2.56)
Interactions
H3a: foreign subsidiary’s
market experience � firm/
subsidiary relatedness

þ Supported 1.50**
(0.72)

H3b: foreign subsidiary’s
market experience � firm’s
international scope

þ Rejected �2.82
(1.86)

Nagelkerke R2 0.21 0.32 0.35
�2 log likelihood 215.62 197.70 190.90
w2 31.89**** 49.81**** 56.61****
Correct classifications (%) 70.20 75.40 78.00
Maximum VIF value 1.73 1.84 1.94

Notes: n¼191. H, hypotheses. aAdvanced value-adding, 1; basic value-adding, 0. * po0.10;
** po0.05; *** po0.01; **** po0.001,

Table III.
Binary logistic regression
of mode of foreign value-

adding activitya

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Foreign value-
adding of
industrial firms

step from a basic mode to an advanced mode is critical in the strategy implementation
as the firm’s investment in advanced local capabilities for product development
and/or production brings extensive set up costs. Also, the step signals a long-term
commitment that restricts the number of freedom degrees in formulating and
implementing future international strategies.

The study draws on strategy theory and internationalization theory, and develops
and tests an integrated model. Thus, the study establishes coherent relationships
among firm/subsidiary relatedness and foreign subsidiary’s mode of value-adding
activity, and firm’s international scope and the mode. First, it was found that greater
relatedness between the subsidiary and the core business unit of the parent firm favors
local presence of basic value-adding activities such as promotion, sales, and after-sales
services. Extensive physical similarities among products and markets do not favor the
building of advanced local value-adding activities. Rather, the finding indicates
support for the view that relatedness is a source of synergy (Slusky and Caves, 1991;
Tanriverdi and Venkatraman, 2005; Teece et al., 1994; Piscitello, 2004) that may be
exploited by centralizing advanced activities such as product development or production
to just a few sites and in that way facilitating the search for economies (Prahalad and
Doz, 1987). In principle, geographically widespread advanced activities are not coherent
with great product/customer relatedness. Thus, relatedness is a source of economies
of scale and scope enabling the sharing of costs by means of centralizing product
development and/or production. At the same time the foreign subsidiary needs corporate
support to be able to respond to local customer needs based on a basic value-adding
mode.

Second, the findings show an association between greater international scope of the
firm and an advanced mode of local value-adding. Great international experience of
the firm follows a broad scope (Hitt et al., 1997; Zahra et al., 2000; Yeoh, 2004) and,
provided that the foreign subsidiary is able to exploit the experience, the subsidiary
may be responsible for product development and/or production (Bartlett and Ghoshal,
1989; Birkinshaw and Morrison, 1995; Hitt et al., 2006; Lei et al., 1996). In particular, a
greater international scope leads to broader and deeper technological learning Zahra
et al. (2000) facilitating advanced value-adding in terms of product development
and/or production.

Third, the study findings underscore that path dependency, a dominating theme
of internationalization theory (e.g. Pedersen and Shaver, 2011), is a central moderator of
associations regarding international strategy. It was found that path dependency in
terms of greater market experience of the foreign subsidiary weakens the association
between firm/subsidiary relatedness and basic local activities. By accumulating
experience regarding local market settings the foreign subsidiary increases the
chances of becoming responsible for advanced value-adding despite relatedness with
the parent’s core business. An interpretation would be that initial relatedness facilitates
trust building and coming efforts of the subsidiary to influence decisions (Ambos et al.,
2011). A foreign subsidiary possessing extensive market experience may, perhaps,
become a production specialist serving the corporation as a whole (Delany, 2000).

By developing and testing the integrated model, the study contributes to both
strategy theory and internationalization theory. The model extends knowledge
on international strategy implementation as it demonstrates that both international
strategy and path dependencies are central to the foreign subsidiary’s mode of foreign
value-adding. The mode is crucial as it manifests the firm’s local capacity to realize the
international strategy (e.g. Maitland et al., 2005). More precisely, the integrated model

166

JSMA
7,2

contributes to strategy literature as the model establishes that a firm implementing its
international strategy on a foreign market needs to assess the subsidiary’s relatedness
with the parent firm’s core business unit, the firm’s international scope, and path
dependencies in terms of market experiences of the foreign subsidiary.

The study contributes to internationalization theory by underscoring the need to
recognize that local market experiences and international strategy may interact
in processes of internationalization. Setting up value-adding activities on a foreign
market with just a weak linkage to firm’s international strategy may seriously restrict
the firm’s possibility to strategically coordinate and integrate the local units into
the corporate framework. A firm that wishes to configurate its capacity in a foreign
country is, thus, better equipped if the firm not only pays attention to local experiences,
but also to firm/subsidiary relatedness and the firm’s international scope.

Managerial implications
By relying on the relationships established by the study the industrial firm may be able
to effectively implement international strategy and build strategy coherence in an
international context. The headquarters of the firm is advised to evaluate the degree
of relatedness between the core business unit of the parent firm and the foreign
subsidiary in making decisions on the international configuration of value-adding
activities. The study indicates that firm/subsidiary relatedness is associated with
centralizing advanced activities such as product development and production to just a
few sites, where an experienced foreign subsidiary may be a candidate to host
such activities. Furthermore, a broader international scope is associated with foreign
establishment of advanced local value-adding activity. The headquarters may
facilitate the transfer of international experience from elsewhere in the corporation to
support the expansion of the foreign subsidiary’s scope of value-adding. In addition,
headquarters need to pay attention to the subsidiary’s level of experience of the local
market as the experience is an important parameter in decisions on modes of value-
adding activity.

Limitations and future research
There are limitations to generalizing the results of this study. First, the study did not
analyze time-varying data and causality was not addressed which may limit the
contributions of the study. Second, the missing cases in the collection of data and
the impossibility of collecting information from those firms later restrict the possibility
of generalizing the findings. Third, the varying response rates of the sub-samples of
the study are limitations. Fourth, the survey was completed in 2005 and perhaps the
observed strategic pattern is not stable over time. Fifth, choice of other indicators than
those used in the study perhaps should have increased the number of correct
classifications in the regression analysis.

A future study may test hypotheses regarding causality by analyzing time-varying
data. What are the effects of changing firm/subsidiary relatedness and firm’s
international scope? Also, it would be interesting to repeat the study to test the stability
of the results using the same sample or samples covering, for example, subsidiaries
operating in emerging country markets. In particular, rigorous measurement invariance
tests require larger samples per country.

Furthermore, the study indicates a need for in-depth studies of relevant issues.
For example, a further study may examine the complementarity between firm/
subsidiary relatedness and international scope in-depth. Using a process approach it

167

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industrial firms

would be interesting to study whether a foreign subsidiary starts with a basic mode
of value-adding and then proceeds to an advanced mode, and what drives the process.
Will an analysis of the process show that the first state is associated with great
relatedness and a limited international scope of the firm? Is the second state associated
with low relatedness and a great international scope? Overall, additional data and
analysis are needed in which different techniques are deployed to further validate the
integrated model developed in the paper.

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Corresponding author
Professor Anders Pehrsson can be contacted at: Anders.Pehrsson@lnu.se

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CRITICAL SUCCESS FACTORS OF SME INTERNATIONALIZATION

Tarun Kanti Bose
Khulna University, Bangladesh

t.bose.1@research.gla.ac.uk

ABSTRACT

This study was directed towards investigating the critical success factors of SME
internationalization. Qualitative and explorative research work have been carried out to
detect the key underlying variables existing in the context. Thorough review of literature
reveals four important variables as key success factors. Those are: the current
internationalization scenario, future internationalization prospects, internationalization
competencies, and strategies for internationalization. A conceptual networking model was
established from the literature which describes the multidimensional and networking
relationship among the main variables and underlying constructs. This study contributed
toward developing a model for successful internationalization framework by covering
important literature in the field of SME internationalization.

Keyword: SME, internationalization, success factors, model of internationalization

87

mailto:Tarun84ku@yahoo.com

Journal of Small Business Strategy Vol. 26 ● No. 2 ● 2016

INTRODUCTION

Internationalization has been defined as the
process of going beyond domestic operation
and operating internationally. SME
internationalization is one of the highly
discussed issues in the modern literature of
international business. Internationalization of
SME operation is certainly not a new
phenomenon and it is a quite common practice
among Western business organizations. The
firms in third world countries are striving to
put their name on that list. Few firms from
developing countries like China, Malaysia and
Thailand have been successful with
internationalization. As everything is
becoming globalized, the traditional idea of
international operation solely applicable for
larger corporations is no longer valid. Smaller
firms particularly from the West are obtaining
remarkable success beyond the conventional
domestic territory. Modern communication
and transportation tools have further enhanced
internationalization. With globalization,
greater opportunities are provided
internationally as the domestic market is
continuing to shrink. With this trend, almost
every country view domestic market as
insufficient for ensuring business growth and
sustainability. This scenario has opened
diversified fields of research areas for
exploring and thus presents numerous scopes
to develop theories for the best possible
method of SME internationalization. This
study has tried to uncover the most important
success factors for SME internationalization.
To accomplish this, it has adopted the
literature review method and also builds a
conceptual model for describing the
multidimensional relationship among
different variables which plays important and
determining roles for successful

internationalization of small and medium
sized enterprises.

REVIEW OF RELEVANT RECENT
LITERATURES

Theories and Approaches of SME
Internationalization
Internationalization of different types of
business organizations including SMEs is a
popular subject of research in international
business (Buckley & Casson, 1976; Buehner,
1987; Geringer, Beamish, & da Costa, 1989;
Bloodgood, Sapienza, & Almeida, 1996;
Coviello & McAuley; 1999, Zahra, Ireland &
Hitt, 2000; Geringer, Tallman & Olsen, 2000;
Denis, Denis, & Yost, 2002; Bae & Jain, 2003;
Suarez-Ortega & Alamo-Vera, 2005; Ruzzier,
Hisrich, & Antonic, 2006, and Salahuddin,
Kahn, & Akram, 2008). Different approaches
have been developed over the years to explain
the pattern of internationalization including
the stage approach, network approach,
international entrepreneurship approach, and
integrated approach (Suarez-Ortega & Alamo-
Vera, 2005).

The Stage Based Approach
The Stage Based approach of
internationalization has been defined as a
linear and sequential process which
constitutes a group of unique stages. There are
mainly two approaches under this theory
which are Uppsala model (Johanson &
Vahlne, 1977) and Innovation related model
(Bilkey & Tesar, 1977, Cavusgil, 1980). The
Uppsala model has described
internationalization as a process of gradual
learning through experiences gained from
foreign markets (Ruzzier et al., 2006). It is
comprised of two basic concepts- the learning
process and psychic distance (Collinson &
Houlden, 2005). According to the theory

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Journal of Small Business Strategy Vol. 26 ● No. 2 ● 2016

developed by Uppsala model, the
internationalization is the process of
acquisition, integration, and utilization of both
knowledge and expertise in international
operations with incremental participation in
international markets. By integrating the
knowledge gained from international
experiences it becomes easier for the
enterprises to make decisions (Pett, Francis, &
Wolff, 2004). In this way, internationalization
can be regarded as the result of a series of
incremental decisions. This model is also
constructed on two essential elements: the
amount of resources committed and the degree
of commitment. The interaction between those
essential elements also results in two effects
known as the static effect and the dynamic
effect. The static aspect refers to the resources
committed to the target market and the related
knowledge. The dynamic aspect is relevant
with the influence of the resources on timely
decision making and the decisions related to
on-going activities (Khayat, 2004). Finally,
four steps were developed by the Uppsala
model which serve as the main ingredients in
the sequential process of internationalization:
irregular export activities, export through
independent agents, establishment of an
overseas sales subsidiary, and overseas
production or manufacturing units (Collinson
& Houlden, 2005). The Innovation-Related
Internationalization Model views
internationalization as a process in which the
steps are identical to new product introduction
and development (Dhanaraj & Beamish,
2003). The foundation of this ideology is that
the internationalization process requires
innovation for enterprise continuously, and
therefore it should be an incremental
development process. I-Models can be
essentially catergorized into three main stages:
pre-export stage, export trail stage and
advanced export stage (Coviello & Munro,

1997). In these stages, the degree of
innovation is normally higher in later stages
compared to the earlier stages.

Network Theory
Network theory of internationalization places
importance on the intra and inter-
organizational networks for successful
internationalization process. Research on
network theory is widespread and this concept
touches many aspects of business. In
explaining the internationalization process of
SMEs, Coviello and Munro (1997) pointed out
that SMEs show a pattern of externalizing
their activities during the internationalization
process by depending heavily on establishing
network relationships to select the market and
the entry mode. In addition, they have argued
that rapid internationalization is mostly
possible with building relationships and
networks. On the other hand, Johanson and
Mattson (1988) have argued that
internationalization is a process which
develops inside the network through
commercial relationships with other countries
and constitutes three steps-extension,
penetration and integration. The network is
defined by Cook and Emerson (1978) as a
junction of relationships. Coviello and Munro
(1997) have also stated that the degree as well
as the form of internationalization is
influenced by different types of relationships
that are developed in the networks. By
building financial, technological and market
relationships with other members of the
networks, the enterprise extends its
connection with other enterprises and slowly
increases its activities across national borders
until they become international.

The concept of international
entrepreneurship

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The concept of international entrepreneurship
is primarily defined as new international
operational activities by newly developed
enterprises (Ruzzier et al., 2006). In contrast
to the stage theory of internationalization, this
approach focuses more on rapid
internationalization. In addition, this theory
asserts has described that as
internationalization becomes a passion of new
entrepreneurs, they possess immense
inclination towards learning and adopting
supportive viewpoints, such as innovative
ideas, concepts, knowledge, and mechanisms
(Collinson & Houlden, 2005). Resource and
competency based theories of
internationalization are an important addition
in this area of literature. According to this
theory, resources and competency play key
roles in internationalization in all kinds of
firms including SMEs. Resources and
competencies play an important role in the
selection of internationalization strategies.
Factors such as financial capability, material
capability, and in relation to others, learning
capability are determining factors of
internationalization. Eventually, the process
of internationalization requires the
mobilization of resources and competences in
the enterprise (Ruzzier et al., 2006; Pantin,
2005). For SMEs to capture the opportunities
in the international markets, the
entrepreneurial resources, namely the
financial and technological resources of the
entrepreneur, are important (Dhanaraj &
Beamish, 2003).

IMPORTANT FACTORS OF SME
INTERNATIONALIZATION

Network, Alliance, Clusters
Business linkages such as networks, joint
ventures, and subsidiaries play an important
role in increasing the probability of export

(Gumede & Rasmussen, 2002). Networks can
be used in developing countries to encounter
export-marketing problems (Ghauri, Lutz, &
Tesfom, 2003). Availability of opportunities
arising from globalization, availability of
collaborative networks and availability of the
sources of funds not only influence, but also
dictate the terms in SME internationalization
(Zahra, Korri, & Yu, 2005). Anderson (2006)
developed a model for interpreting the
importance of personal networks for
collecting information for the sake of
internationalization of firms. Networking
capability enables the identification and
exploitation of market opportunities, which
facilitates the development of knowledge-
intensive products and firm international
market performance (Mort & Weerawardena,
2006). The involvement of a strategically-
focused supplier may strengthen and integrate
the resources and capabilities as well as
improvement with the international network
development and positioning (Johnsen, 2007).
There is strong evidence to suggest that a
cluster policy brings additional positive effect
to existing SME policy in industrialized
economies (Karaev, Koh, & Szamosi, 2007).
Due to both internal and external constraints,
SMEs should use partnerships or strategic
alliances to overcome resource and capability
deficiencies and to spread investment costs
and related risks among partners (Li & Qian,
2007). Agndal and Chetty (2007) have
investigated the importance of relationship in
various aspects of internationalization. For
manufacturing SMEs, building a relationship
through networks and alliances is the key to
growth in international markets (Sinha,
Akoorie, MIEM, Ding, & Wu, 2011). Cluster
supply chain plays an important role for
acheiving success in the international market
(Huang & Xue, 2012). Inter-personal
networking and inter-organizational

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networking have a strong positive impacts on
SME internationalization and marketing
(Eberhard & Craig, 2012). Haskell and Pons
(2012) explain how smaller enterprises benefit
from strategic alliances when they go for
internationalization. Varga, Vujisic, and
Zdravkovic (2013) have emphasized on
building innovation clusters for SMEs to
improve the competitiveness in international
business.

Capacity Building
Daniel and Wilson (2002) recognize the
importance of adopting and utilizing e-
commerce for international business. Four
constructs (competitive scope, organizational
capabilities, entrepreneurial competencies and
performance orientation) have a strong
influence for acheiving success in an overseas
territory (Man, Lau, & Snape, 2002).The
adoptions of e-business and e-marketing have
had varing impacts for countries with a
different cultural, technological and social set-
up (Fillis, Johannon, & Wagner, 2004).
Furthermore industry and sectorial factors
play key roles in the development of e –
business and its success for small and medium
sized firms’ internationalization and overseas
operations (Fillis et al, 2004). Financing
strategies and the commensurate finance
management capabilities play dominant roles
in the sustainable success of international
business particularly for small and medium
enterprises (Gabrielsson, Sasi, & Darling,
2004). For better performance in exporting
business, companies need to provide technical
and practical trainings (Ko¨ksal, 2006). The
decision makers of all internationally
successful companies possess a better
understanding of the international orientation
skills needed which include language and
cultural norms (Knowles, Mughan, & Lloyd-
Reason, 2006). Firms that share a common

language with their international counterparts
are able to internationalize faster and these
geographically diverse networks contribute to
superior performance in international markets
(Musteen, Francis, & Datta, 2010). Kenny and
Fahy (2011) finds that there is a positive
relationship between a firm’s network of
human capital resources and international
performance. Sinkovics, Sinkovics, and Jean
(2013) put forth, that online channel support
positively enhances export performance for
SMEs.

Policy
Rutashobya and Jaensson (2004) articulated
that export performance of developing
countries’ SMEs need to be bolstered by their
respective governments to create an
environment that will stimulate small firms’
competitiveness. Which in turn highlights the
importance of policy prescriptions and
executions. Balananis, Theodosiou, and
Katsikea (2004) place emphasis on few other
factors such as standardization and
customization, export development processes,
rapid technological, institutional, legislative,
economic and attitudinal changes for the
internationalization of all kinds of firms.
Neupert, Baughn, and Dao (2006) found
differences in the problems faced by the SMEs
in transitional and developed economies.
While SMEs from transitional economies
encountered export problems related to
product quality acceptance and logistics
management; the SMEs from developed
economies faced issues such as differences
between countries, general business risks, and
logistics. Ahmed, Julian, Baalbaki, and
Hadidian (2006) measured the importance of
export incentives for successful
internationalization. Export capabilities
among small and medium-sized enterprises
tend to depend on some key components of

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marketing management and also on the
blending of processes, practices, and activities
(Doole, Grimes, & Demack, 2006).Several
factors must be addressed before the SME can
achieve international growth including
specifically the utilization of technology and
domestic infrastructure (Todd & Javalgi,
2007). Shamsuddoha, Ali, and Nbudisi (2009)
found that market development-related
government assistance significantly
influences internationalization. Altintas,
Vrontis, Kaufmann, and Alon (2011)
investigated the impact of micro and macro-
environmental forces on SME
internationalization. Interaction of SMEs with
the Government also can be a major factor for
successful internationalization particularly for
the firms of developing and under developed
countries (Fornes, Cardoza, & Xu, 2012).

Innovations
International experience, the ability to
innovate, understanding growth potentiality
and market-specific knowledge are the keys
for successful internationalization (Pinho,
2007). Strategic orientations are related to a
firm’s international performance. This
relationship is moderated by its international
growth strategy (Jantunen, Nummela,
Puumalainen, & Saarenketo, 2008). In
addition, international trade shows play a
significant role in the internationalization
process of small exporting firms (Evers &
Knight, 2008). Man, Lau and Snape (2008)
pointed out that both direct and indirect
contributions of the entrepreneur’s
opportunity, relationships, ability to innovate,
and strategic competitiveness all affect the
long-term performance of an SME via
competitive scope and organizational
capabilities. Karra, Phillips, and Tracey
(2008) proposed that three entrepreneurial
capabilities which are particularly important

for successful international new venture
creation are international opportunity
identification, institutional bridging, and a
capacity and preference for cross-cultural
collaboration. Entrepreneurial orientation
coupled with a strong desire to seek growth in
international markets, always instigate rapid
internationalization of small company
(Ruokonen & Saarenketo, 2009). Casillas,
Moreno, Acedo, Gallego, and Ramos (2009)
has described the role of knowledge for the
successful internationalization process.
Organizational structure, the entrepreneurial
processes adopted in creating firms, as well as
marketing and learning orientations all are
important elements for better
internationalization of firms particularly from
emerging economies (Kocak & Bimbola,
2009). There is an empirical relationship
between organizational learning and
organizational performance. In practice, this
means that organizations reaching higher
levels of organizational learning probably
achieve higher performance (Michna, 2009).
The factors which dictate the performance of
international SMEs differ from non-
international SMEs in terms of international
entrepreneurship, organizational innovation
intensity and firm size (O’Cass &
Weerawardena, 2009). Chetty and Stang
(2010) also find out that innovation is also a
key ingredient of internationalization of
smaller firms. Dimitratos, Plakoyiannaki,
Pitsoulaki and T�̈�𝑢 selmann (2010) have
outlined international SMEs as global smaller
firms and described these firms as more
strongly entrepreneurial-oriented than normal
ones. Strategic variables for international
business, such as R&D intensity have
significant impacts for successful
internationalization (Li, Qian, & Qian, 2012).

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Benefits and Barriers
Altintas, Tokol, and Harcar (2007) measured
the impact of existing impediments on
internationalization. Profiling and
benchmarking the capabilities is an important
area of competency for small and medium-
sized enterprises (SMEs) to compete
internationally (Grimes, Doole, and Kitchen,
2007). Lages and Montgomery (2004) have
argued that past performance plays a pivotal
role in building SMEs’ commitment to
exporting and also in determining their current
marketing strategy. Long-term orientations on
financial export performance and strategic
export performance have long term impacts on
sustainable success in international business
particularly for SMEs (Ural, 2009).
Hutchinson, Fleck, and Lloyd-Reason (2009)
detected some internal and external barriers
which create serious impediments for both
internationalization and successful operations
in international business. These barriers are
primarily related to management and include
lack of vision, fear of losing control, lack of
knowledge, lack of resources, lack of
consolidation in domestic market, and the
external environment-legislation, currency,
cultural differences and logistics. Psychic
distance plays an important role in the
internationalization of family SMEs, mainly
because of their general cautiousness as a
result of family presence (Kontinen & Ojala,
2010). Hewapathirana (2011) studied women
entrepreneurs of Srilanka and concluded that
the social identity of women entrepreneurs not
only enabled them to break glass ceilings but
also emerge as competent entrepreneurs who
have potential to be successful internationally.
Zthis also supported by Al-Hyari, Al-Weshah,
and Alnsour (2012) who identified the barriers
to internationalization of SMEs from the
evidence of Jordan.

Future Prospects
Cort, Griffith, and White (2007) investigated
the importance of motivating factors for
managers for international business operation.
Babakus et al. (2006) focused on a few
important factors for internationalization
including perceived uncertainty, networking
and export performance. Chandra, Styles, and
Wilkinson (2009) tried to mitigate the gap of
existing internationalization theories by
placing importance on the fast recognition of
the international entrepreneurship opportunity
for successful internationalization. Cognitive
complexity acts as a platform for successful
processing of foreign market intelligence
which is found to have a value-added impact
on the SME’s export performance (Miocevic
& Karanovic, 2011). Mort, Weerawardena,
and Liesch (2012) identified four fundamental
strategies for entrepreneurial marketing and
for acheiving success in international
business. Those are opportunity creation,
customer intimacy-based innovative products,
resource enhancement and legitimacy.
Modern internationalization patterns of SMEs
are determined by international orientation,
growth orientation, communication capability,
intelligence generation capability and
marketing-mix standardization. The
interaction and inter linking relationship
among resources availability, goal
congruence, entrepreneur’s desire to
internationalize seem to have a combined
impact on international business performance
of SMEs (Rocha, Mello, Pacheco, and Farias,
2012). Those small firms tend to perform well
in the overseas markets which have prior
international business experience and
networks which help building knowledge
competencies (Park & Rhee, 2012). Hitt,
Beamish, Jackson, and Mathieu (2007)
identified opportunity creation as one of the

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critical success factors for SME
internationalization.

Timing of Internationalization
The importance of objective and subjective
characteristics of management is vital for not
only the initial decision to expand and the
support of overseas operations, but the
subsequent path and pace of international
development (Hutchinson Quinn, &
Alexander, 2006). Williams (2006) articulated
that only ambitious SMEs will gain rapid
success in international market. Ambitious
SMEs are those which are active with
marketing and information-gathering
activities, and tend to dedicate specific
financial and human resources to exporting.
Hermel and Khayat (2011) emphasized the
importance of leveraging between internal and
external resources for rapid
internationalization of micro-firms. Clercq,
Sapienza, Yavuz, and Zhou (2012) portrayed
the importance of learning and knowledge in
the process of early internationalization.
Meanwhile, D’Angelo, Majocchi, Zucchella,
and Buck (2013) measured the different
geographical pathways and the applicability of
those for successful international operations.
Success in an international set-up depends
heavily upon by the process through which
managers or organizations go about
internationalization. Sometimes re-
internationalization and de-
internationalizations are essential as an entry
and exit should not be universal, rather should
be based on situations and facts (Freeman,
Deligonul, & Cavusgil, 2013).

Modes of Internationalization
Interaction and balance between the
instruments of control for subsidiaries abroad
are also important to success for international
operations (Jaussaud & Schaaper, 2006).

Mtigwe (2005) identified four micro processes
that shape the internationalization process and
thus have influences on performance. Those
are accelerators, export barriers, selectors of
intra-stage foreign market development, and
foreign market outcomes. Acedo and Jones
(2007) studied the rate of internationalization
and focused on four aspects of managers in
international operations. Those are risk
perception, proactivity, tolerance for
ambiguity, and international orientation. Trust
based coordination and cooperative
arrangements can also be major ingredients
for successful exporting and international
operations of different types of firms (Fink &
Kraus, 2007). Miocevic and Karanovic (2012)
have outlined that a global mind-set and
broader attitude have a direct positive
relationship with export performances.
Ripolle´s, Blesa, and Moferrer (2012) outlined
that firms choose relatively low-resource
commitment entry modes to operate in foreign
markets, and thus have significant impact on
operations. Firms which presume greater risks
by committing higher resources also increase
their chances of getting far quicker results.

Destinations of Internationalization
Managing cultural distances, a supportive
local industry and positive customer response
will be the key to success in international
business for SMEs the coming century
(Sakarya, Eckman, & Hyllegard, 2007). On
the other hand Agndal, Chetty, and Wilson
(2008) have detected the importance of social
capital in the internationalization process.
Critical networks as well as actors and
stakeholders in those networks play critical
roles in the successful entry of foreign firms
especially in the emerging markets (Elg,
Ghauri, & Tarnovskaya, 2008). Opportunities
exploitation and success gained in
international business may be associated with

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cross-border combinations of resources and
markets (Gregorio, Musteen, & Thomas,
2008). Lan and Wu (2010) concluded that the
degree of success in international business
largely depends on the risk taking attitude,
diversification capabilities and competing
aggressively with the firms who are already
established in the market place. Management,
products, experience and geographical
location all have an indirect effect on the SME
internationalization (Su & Adams, 2010).
Hutchinson and Quinn (2012) identified five
traits of small specialist international retailers.
Those are possession of a strong company
brand image with market appeal, niche
strategy, dual strategy of expansion,
ownership characteristics defined by the
entrepreneurs and vertical integration from
manufacturing to retailing. Dimitratos,
Voudouris, Plakoyiannaki, and Nakos (2012)
added another dimension to the context of
international entrepreneurship and business by
pointing out the importance of the
entrepreneurship culture among the small and
medium firms when establishing successful
offshore operations. Sandberg (2013)
highlighted the importance of accumulated
societal, business network and customer-
specific experiential knowledge for SME
internationalization.

Operational Decisions of
Internationalization
Corporate culture particularly in the overseas
operation always enables all types of firms
including SMEs to gain significant
operational, strategic and competitive
advantages as this culture is key for ensuring
synergy in the organizational process (Gray,
Densten, and Sarros, 2003). Ibeh (2003) has
identified a number of factors that drive
positive international business performances.
These include: decision makers’ previous

experience, international contacts and
orientation, and firm-specific competencies
relating to planning orientation, adoption of
innovative technologies, foreign market
information search, and managing channel
relationships. There is also profound
relationship among risk, operation
characteristics and international business
performance (Gleason, Madura, and Wiggins,
2006). Product quality, rationalization of
operations and capital cost rationalization, and
less focus on system integration are important
for SME internationalization particularly for
manufacturing SMEs (Vaaland & Heide,
2007). Andersson and Flore´n (2008) studied
the importance of managerial behavior in
international small firms. Zeng, Xie, Tam, and
Wan (2008) have found that-technology level,
cost control, and brand consciousness are the
top three factors affecting the competitiveness
of internationalization of manufacturing
SMEs. The marketing capability of a firm
plays the most important role in improving the
performance of firms that embrace
internationalization (Zeng, Xie, Tam, and
Wan, 2009). Maurel (2009) divided export
performance into internal and external
strategy related variables and concluded that
business partnership, innovation, greater size,
and an effective export commitment are linked
to better export performance. Atristain and
Rajagopal (2010) investigated the importance
of operational efficiency for successful
internationalization of Mexican SMEs. Ethnic
workforce diversity plays a key role in
increased internationalization of SMEs and
also has greater impact on performance (Mohr
and Shoobridge, 2011). The ownership
structure has an important role in defining the
pathway to internationalization followed by
the family-owned SMEs (Kontinen & Ojala,
2012). Shirokova, Verga, and Sokolova,
(2013) identified entrepreneurial values,

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investments in internal resources, knowledge
management, and developmental changes as
key components for SME internationalization.

RESEARCH METHODS

The evaluation of critical success factors of
SME internationalization has considerable
significance and is an important addition to the
existing scientific literature in international
business. It is important to evaluate factors
comprehensively so that every important
variable is covered. Along with that it is vital
to demonstrate the relationship among those
variables and how they can contribute to
reaching success in international business if
utilized properly. To serve both of these
purposes, I used the literature review
methodology for this research. First of all, a
thorough review of literature took place, and
afterwards critical variables considered to be
important for SME internationalization were
detected. Finally, a conceptual model
incorporating the networking relationship
among these variables was developed to show
the sequencing and multi-dimensional nature
of this relationship. This model is particularly
applicable for SMEs, not for other businesses,
as it is developed from the literature review on
SMEs. The studies which were taken into
consideration conducted field work and
empirical research works on SMEs. Therefore,
the proposed model is only applicable for
SMEs.

Critical Success Factors
The term “critical success factors” was first
introduced by John F. Rockart in 1979 for
helping senior executives describe the vital
information they needed for successful
management of their respective organization.
This term, “critical success factors,” is the
extension of “success factors” developed by

Ronald Daniel in 1961. Over the years the
term “critical success factors” has been widely
used in a variety of fields from hospitality to
business and implied as important factors for
gaining success in any operation.

RESULTS

Critical Success Factors of SME
Internationalization
After reviewing the literature thoroughly and
evaluating the multidimensional relationship
among different variables, the first thing I did
was develop a conceptual networking model
for showing and interpreting the relationship.
In the literature the scientists in the field of
international business have detected and
highlighted a few factors which are the key
ingredients of SME success in the
international arena. My task was just to
develop a model with those variables and
establish a relationship for showing the
sequence as well as the multi-dimensional
relationship among those variables.

Current Internationalization to Future
Internationalization-Few Key Lessons to
Learn and Exploit:
As shown in figure 1, the success factors and
key prerequisites of SME internationalization
are actually rooted in the domestic set-up
where firms start their internationalization
process by observing the success stories of the
SMEs from the same territories. The current
internationalization scenario triggers future
internationalization as it exposes the potential
benefits and impediments for the SMEs. I have
observed that this process is similar to that of
traditional marginal analysis in economics, the
common process of evaluating benefits and
impediments.

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“The Current internationalization scenario
exposes the existing spectrum for SMEs to

do a Marginal Analysis for evaluating
future internationalization prospects”

Such old-fashioned marginal analysis which
exists in every human action allows the SMEs
to see the broader picture. After seeing the
broader picture, they are well informed about
their potentialities in an international set-up.
Through that process the firms also find
themselves in a suitable position of listing the
existing benefits and impediments. They can
make a list of different KPIs (Key
Performance Indicators) that are important
indicators for success. In addition they also
can estimate the probabilities of those KPIs
occurring. Sales, profits, growth, market
share, risks-the scenario of every business
parameters are to be evaluated. Afterwards the
summative picture of internationalization
prospects is in the hands of the firms for
decision making. Now, the key point here is
that the success stories of the SMEs depends
on two factors: a. How comprehensively and
flawlessly they evaluate the prospects and b.
How effective and efficient their
internationalization decision making is after
evaluating such a scenario. The gist of the
discussion is the current internationalization
picture and it’s in ascertaining future
internationalization prospects. The success of
the SMEs depends on thoughtful, well-timed,
and proper utilization of these variables for
gaining success in international set-up, which
is always more challenging than gaining
success in well-known domestic business
territory.

Internationalization Prospects Coupled
with Internationalization Competencies-A
Deadly Combination:

Future internationalization prospects trigger
SME internationalization. But as old theories
said-potentials are nothing if not explored and
utilized in proper ways. For proper utilization
of future internationalization it is essential to
build competencies among SMEs.

“Turning potentials into reality is the key-
Internationalization competencies are the

important moderating variables in that
context.”

According to many international business as
well as SME experts, competencies among
SMEs cannot be ensured unless both
administrators and SME owners act jointly. It
is a dual role that can ensure successful
enhancement of SMEs and make them
competent to face the music in international
business operations. In my model I have
developed four key ingredients which are
essential competencies for SMEs which are
going to operate internationally. Those are
developed from the concepts and evaluation of
relevant literatures in international business
and SME internationalization. Those KPIs of
internationalization competencies are capacity
building, policy development and
implementation, building cluster or strategic
networking, and innovation development.

Capacity building means making the local
SMEs capable of facing international
competition. It also means enabling SMEs to
progress. In this category, I envisage three
categories; the exporter, the potential
exporters, and the SMEs who have not
identified exporting as an internationalization
strategy. These three groups will have
different needs and support with regard to
capacity building. Therefore, the managerial
and organizational determinants will differ.
Utilizing the Stages Theory to explore the
development and the need for capacity

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building as the SME progresses from a
domestic operation to internationalization
would be appropriate. The process of capacity
building can be enhanced by government
assistance. Some countries directly empower
their domestic firms so that they can go for
early internationalization and thus can
contribute to the economic development in
better ways. Clusters Development or
Strategic Networking among business firms is
widely defined as the process by which those
firms came together to form a strategic
partnership in various aspects of their business
(Bari, Heema, and Haque, 2005). Those
include setting uniform prices, sharing
important machineries, forming joint projects,
creating lobbying groups, devising areas of
operation, carrying out joint advertising and
promotional campaign, sharing important
technological and infrastructural tools, and so
on (Barnett & Storey, 2000). Such networking
is widely accepted and used mostly by firms
within the same industry (Greenaway, Girma,
and Kneller, 2004). Business clustering,
sharing, and networking helps firms to
establish more competitive advantages and
also minimize risks. The SME development
policy can be categorized as policies that
include stimulatory, supporting, and
sustaining activities enacted by a policy maker
to accelerate the growth and development of
SMEs. These policies reflect the stages that
the SMEs progress through to achieve
internationalization. Stimulatory activities
involve acts for motivation to start a business
(Greenaway et al., 2004). Supporting includes
acts that help the SMEs in doing their
business. Finally, sustaining acts include those
activities which are directed towards ensuring
that SMEs will be able to survive in the
marketplace to achieve maturity and
capability for competing with larger firms and
other rivals. Innovation is the process of

altering something from its current
composition or introducing something
completely new. Innovation is normally of
two types -radical or incremental (Barnett &
Storey, 2000). It has its widespread
application in the areas of products, processes,
or services and in any organization.
Innovation can take place at all levels of
organizations or sometimes can be in few
areas where it is most important. Innovations
are hugely important for international firms as
competition is intense and customers are
demanding and educated. The term innovation
is complementary with few concepts like
change, creativity, design, and invention, but
certainly not the same as those.

Now, all of these internationalization
competencies not only makes SMEs more
competitive in an international market but also
increases their chances to survive. The
important discussion point here is that the
ultimate success of SMEs in an
internationalization process vastly depends on
how they build themselves and also how the
policy makers or relevant government back
them by incorporating proper policies
comprising both institutional and
infrastructural supports. When a large
potential market is served by the SMEs after
gaining suitable competencies success is
definitely imminent. Otherwise the story can
be the opposite, which normally happens to
large number of firms across the world.

Internationalization Prospects Coupled
with Internationalization Competencies
and backed by a Viable and Proper
Internationalization Strategy-The Ultimate
Success Mantra:
The last phase of my internationalization
success factors model constitutes a proper
strategic framework for SME
internationalization. Strategies are important

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both for utilizing competencies as well as for
extracting prospects and turning potentials
into realities in international business.
Strategies and also proper utilization of them
along with perfect timing are the keys for
international success. In the model I
developed, there are four main broad
categories of strategies for SME
internationalization. Those are modes of
internationalization, timing of
internationalization, destinations for
internationalization and also operational
decisions for internationalization.

“Many Businesses have potentialities, many
firms possess competencies, but ultimately

international success goes to those who have
proper strategies for implementation and

control”

Modes of internationalization consist of
different ways SMEs or other types of firms
can go international. The common modes of
internationalization are direct exports, direct
imports, foreign direct investment,
subcontracting, and international technical co-
operation. Modes of internationalization are
an important consideration in the
internationalization process as only
appropriate modes can ensure ultimate success
and not all types of modes are appropriate in
every case. Timing of internationalization
means the time when a firm or SME should go
international. It can be very early or may be
after several years of domestic operation.
Along with modes, timing is always important
as sometimes opportunities are short lived and
sometimes early internationalization can be
the nemesis of a firm. Therefore, wise and
calculative decision making for the entry is the

key for gaining success in the international
arena. Destinations for internationalization
mean the places or countries where a firm
should go for international operations. Finding
out appropriate destinations are always
important as this minimizes risk and ensures
profitability and growth. Destinations or
country evaluation requires intense research
and evaluation. There are different techniques
for evaluating among different probable
destinations. Adopting those techniques and
coming up with viable conclusion can ensure
early success for a firm. Operational
decisions in internationalization comprises
routine and regular decision making that every
firm needs to do in areas, such as marketing,
finance, operation, management, HRM,
information system, accounting, and auditing.
These are important matters as the success of
firms largely depends on appropriate strategy
making and implementing in the operational
areas. The cases of SMEs or other types of
firms are no different.

In my model my observation is that those
strategic decisions are the important final
touch for SME internationalization.
Therefore, it is critically important to
incorporate appropriate strategies to carry out
the internationalization process. All the four
elements of strategies are related with every
sphere of international business operation.
Selecting appropriate modes, timing the
internalization perfectly and also making
correct operational decisions along with
selecting destinations can turn the proper
prospects into reality and utilize the
competencies perfectly.

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DISCUSSION

This model which outlines the critical success
factors for the internationalization process of
SMEs has strong practical implications for the
operation and international expansion of
SMEs. The utilization of this model is not
limited only to theory development, but also
in real life practice. As suggested in the model,
current internationalization practices and
experiences of SME owners will dictate their
choices for future internationalization.
Therefore, in a practical sense it is evident that
SME owners or managers should utilize their
current experience for making future
internationalization decisions. In the process
of making such decisions they should clearly
evaluate the existing benefits and
impediments and thereby this model will help
them to assess their position as well as for
making internationalization decision. In the
next phase of the model, it has suggested four
competencies from the literature review for
developing proper internationalization
competencies. Those are cluster, innovation,
policy and capacity. All these traits have

strong practical implications from the
perspective of not only SMEs, but also for the
policy makers. The model has suggested that
for proper internationalization SMEs need to
be innovative, need to possess appropriate
capacities, need to be backed by governmental
policies, and also have to get the membership
of important networks or clusters. Therefore,
in practical sense this model is urging the SME
owners to develop networking, innovation,
and also capacities for internationalization. In
addition it is also prescribing the government
and other policy makers to make policies for
surging SME internationalization. In the final
phase the model has incorporated four
internationalization strategies for successful
internationalization. Those are timing, mode,
destination and operational strategies. By
doing so, it is practically implying that SME
owners must make effective practical
decisions about those variables for making a
successful entry into the international
marketplace.

CONCLUSION

SME internationalization is one of the most
highly discussed and debated issues of modern

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international business research. Evaluation of
critical success factors of SME
internationalization therefore is an important
addition to the exiting literature in this
scientific field. This article evaluated the
critical factors with the help of literature and
also utilized the researcher’s own
conceptualization. Such conceptualization
was utilized in developing a model for
elaborating the success factors and also
building and presenting the multidimensional
relationship among constructs. This article is
also contributing for explaining the existing
internationalization theories including stage
and process based theories. Further, it is also
contributing to assist researchers in carrying
out further research and testing of the model
into different internationalization contexts and
backgrounds and also in different situations.

Direction for Further Research
This model represents numerous scopes for
further research works utilizing this model as
a basis. It also gives opportunities to develop
lot of propositions for testing and carrying out
research in different places of the world. First
of all, several propositions which are
developed in the model can be tested in
different parts of the world and comparative
studies also can take place for detecting the
differences as far as critical success factors of
the SME internationalization are concerned.
For example, research can be done to test
whether cluster or networking is important for
SME internationalization in a same degree for
SMEs of Cambodia and Germany. Additional
propositions such as the importance of four
strategic concerns stated in the model can be
tested. That means research can be done to
assess whether all the four variables are of
equal importance and whether such
importance varied across the countries. Apart

from these, the model also presents several
others areas for further research works.

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Journal of Small Business Strategy Vol. 26 ● No. 2 ● 2016

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Tarun Kanti Bose is a PhD candidate in the
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are mainly in the areas of International
Business, Entrepreneurship-Linked with
Development. He is also an Assistant
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Journal of Small Business Strategy Vol. 26 ● No. 2 ● 2016

Table 1: Summary of Critical Success Factors of SME Internationalization from Recent Literatures

Broad
Success
Factors

Author/s Variables Covered Broad
Success
Factors

Author/s Variables Covered

Network,
Alliance,
Clusters

Gumede &
Rasmussen, 2002

Linkage, Network,
Joint Venture

Network,
Alliance,
Clusters

Li & Qian,
2007

Partnership, strategic
alliance

Ghauri et al, 2003 Network for export
marketing

Agndal &
Chetty, 2007

Relationship for various
aspects

Zahra et al, 2005 Collaboration for
funding

Sinha et al,
2011

Network, alliance for
manufacturing

Anderson, 2006 Personal network for
information

Huang &
Xue, 2012

Cluster in supply chain
management

Mort & Weera-
wardena, 2006

Network for
identification

Eberhard &
Craig, 2012

Inter-organizational
network

Johnsen, 2007 Suppliers relationship Haskell &
Pons, 2012

Strategic alliance

Karaev et al, 2007 Cluster in
industrialized
economy

Varga et al,
2013

Innovation cluster for
competitiveness

Capacity
Building

Daniel & Wilson,
2002

E-commerce adoption Capacity
Building

Ko¨ksal,
2006

Technical and practical
trainings

Man et al, 2002 Four capability
constructs

Knowles et
al, 2006

Language and cultural
ideas

Fillis et al, 2004 E-business and E-
marketing

Musteen et
al, 2010

Geographical
diversifications

Fillis et al, 2004 E-business for
overseas operation

Kennyand,
2011

Relationship among
human capital

Gabrielsson et al,
2004

Finance management
capabilities

Sinkovics et
al, 2013

Online channel support
for marketing

Benefits &
Barriers

Altintas et al, 2007 Existing impediments Benefits &
Barriers

Hutchinson
et al, 2009

Internal and external
barriers

Grimes et al, 2007 Profiling and
benchmarking

Kontinen &
Ojala, 2010

Psychic distances

Lages &
Montgomery, 2004

Past performance and
history

Hewapathira
na, 2011

Social identity of women
SME owners

Ural, 2009 Financial, strategic
export record

Al-Hyari et
al, 2012

Barriers to
internationalization

Future
Prospects

Cort et al, 2007 Motivating factors for
managers

Future
Prospects

Mort et al,
2012

Scope for innovation and
enhancement

Babakus et al,
2006

Prospects,
uncertainties, risks

Rocha et al,
2012

Inter-linkage among
resource affluent

Chandra et al, 2009 Entrepreneurship
opportunity

Park &
Rhee, 2012

Scope for knowledge
competencies

Miocevic &
Karanovic, 2011

Cognitive complexities

Timing of
International
-ization

Hutchinson et al,
2006

Path, pace for
internationalization

Timing of
International-
ization

Williams,
2006

Ambitious
internationalization

Hermel & Khayat,
2011

Leveraging
internationalization

Clercq et al,
2012

Knowledge-early
internationalization

D’Angelo et al,
2013

Geographical
pathways for timing

Freeman et
al, 2013

Re and de-
internationalization

109

Reproduced with permission of the copyright owner. Further reproduction prohibited without
permission.

Internationalization of Small and Medium-sized Enterprises: Barriers and Economic Incentives

Andrew Jonathan Beall, DBA

36 Carrier Bluff

Okatie, South Carolina 29909

Dr.AndyBeall@gmail.com

Earned Doctor of Business Administration (DBA) and Master of Business Administration

(MBA). Experienced executive who led international enterprises from regional firms to a S&P

500-level global enterprise. A practitioner and leader of complex organizations that served

heavy industry and global infrastructure. A strategic leader for fully-integrated, globally-

distributed operations requiring the merger of knowledge management, physical production, and

final delivery of complex assemblies. Through engagements with public and private South

Carolina enterprises, well versed in the challenges faced by leaders of small and medium-sized

business. Practiced and accomplished with solutions that promote successful, serial international

expansions into new global markets.

Johnny L. Morris, PhD

University of Phoenix

209 South Riverwalk Drive

Palm Coast, Florida 32137

Jmorrisphd2000@gmail.com

Earned Doctor of Philosophy (Ph.D.) and Master of Business Administration (MBA). Associate

Professor involved with the development of curriculum and teaching courses in the online

environment. Course delivery expertise includes accounting, capstone, entrepreneurship, finance,

leadership, management, organizational behavior, strategic management, and research. Teach

graduate and doctoral courses in classroom and online environments at accredited universities.

Senior executive leader in for-profit public companies. Experienced director of operations,

director of strategic planning, and director of community reinvestment activities for federally

chartered bank organizations. Research interests include integration of values-based leadership

skills, values, and concepts in global virtual environment.

Abstract

Enterprise leaders may improve outcomes and avoid costly mistakes through

understanding of economic incentives and barriers to international expansion.

Conclusions from a research study of small and medium-sized South Carolina

enterprises were triangulated with prior research to highlight leader

internationalization experiences. The globalization phenomenon of world

markets is a persistent trend that is accelerating. Growing global markets are

linked to increased opportunities for smaller enterprises to participate in

international commerce. Limited understanding of incentives that enable success

and techniques effective for overcoming barriers may restrict smaller firms from

rewarding participation in international markets. Not all commercial enterprises

are prepared organizationally nor properly resourced for international success.

Those firms that may benefit by accessing larger customer pools or expanded

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global supply networks may achieve higher levels of enterprise success by

overcoming barriers to new international market commerce.

Keywords: Internationalization, Small and Medium-sized Enterprises, International

Commerce, Business Networks, International Expansion Leadership, International

Decision-making, Barriers to Commerce, Economic Incentives, Global Supply

Chains

Introduction

Firms with fewer than 500 employees are the most frequent form of enterprise defined by

number of employees, representing 97 to 99% of businesses in market economies (Kumar, 2012;

K. London, 2010; Tesfayohannes & Habegger, 2011). These small and medium-sized

enterprises (SMEs) provide the majority of employment opportunities—from 51 to 86% of all

jobs in major market economies—yet only eight percent of small enterprises report revenues

from exports (Tesfayohannes & Habegger, 2011; Vasquez & Doloriert, 2011; Wright, Westhead,

& Ucbasaran, 2007).

Decision-makers for small business have limited resources when contrasted to large

enterprises (İPlİK, 2010; Rodrigues & Child, 2012). Small businesses are characterized as

founder-directed, entrepreneurial, nimble, flexible, niche marketers, and learning organizations

(Kontinen & Ojala, 2011). Leaders of small firms also are less able to guide the firm to

economies of scale, attend less effort at international market scanning, and are less able to

address large or risky projects (Nkongolo-Bakenda et al., 2010; Wright et al., 2007). Leaders of

SMEs make choices for the use of firm resources based on subjective expected utility, evaluating

the relative expected benefit and likelihood of accomplishment between alternatives (Fisher &

Lovell, 2009; Wright et al., 2007).

Expansion by SMEs into markets beyond home country borders follows patterns

described as proactive market-seeking, reactive, and client-following (K. London, 2010). SME

leaders may choose to engage in international business to pursue opportunity, at the request of

historical customers who initiate operations in foreign markets, and in response to competitive

market pressures (Hynes, 2010; Rodrigues & Child, 2012). Decision-makers may also choose to

not pursue international markets due to sufficient domestic market opportunities: “most stay at

home” (Wright et al., 2007, p. 1017). Leader prior experience and foreign market relationships

are associated with enterprise movement into international markets (Agndal & Chetty, 2006; K.

London, 2010).

Leader experience is a major factor in the ability of decision-makers to identify

opportunities and to structure the firm for success in foreign markets (Wright et al., 2007). The

SME decision-maker desire to internationalize is often accomplished with assistance gained

through relationships; customer, supplier, or professional contacts serve as a catalyst to launch

new international commerce (Agndal & Chetty, 2006). Leaders determine specific markets for

expansion, basing their decisions on conditions that attract or repel entrepreneurial interest

including business factors, chance opportunity, psychic distance, politics, or structural conditions

(Agndal & Chetty, 2006; K. London, 2010; Sherriff, Brewer, & Liesch, 2010).

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The decision to launch an international initiative for a small or medium-sized enterprise

represents both opportunity and risk for the firm (Lee, Kelley, Lee, & Lee, 2012). The low

percentage of all SMEs involved in international commerce is indicative of the choice by most

decision-makers to address only domestic markets. Increasingly, however, globalization is

encouraged by the adoption of standard business languages, ease of electronic communication,

and reduced trade barriers resulting in rising opportunities for cross-border commerce (Khapne,

2012).

Internationalization

The decision to expand internationally is no guarantee for the success of a new

international venture; however, successful expansion into international markets may significantly

increase total opportunity available to a firm (Lee et al., 2012; K. London, 2010). “Growth is a

multi-faceted phenomenon that is commonly associated with firm survival, achievement of

business goals and success, or scaling of activities” (Hynes, 2010, p. 89). Foreign activities

necessitate the commitment of resources and may involve risk to the firm, increasing the interest

and value of organizational knowledge for ventures active in economies beyond the domestic

market.

Theories of internationalization began with the work of Johanson and Wiedersheim-Paul

(1975) who first introduced research on the sequential, international, expansion experience of

Swedish product-producing companies. The work by Johanson and Wiedersheim-Paul, and

additional analysis by Johanson and Vahlne (1977), has been generalized to describe the

internationalization experience of product-producing enterprises. Subsequent scholarly work

explored additional aspects of internationalization, including born-global and rapidly expanding

new firms aided by electronic communication.

Uppsala Stage Theory

Johanson and Vahlne (1977) published research on Swedish firms that expanded from

historical service of the domestic Swedish market to participation in international markets. The

theory known in scholarly literature as the Uppsala stage theory, links to the association of the

authors with the Swedish University of Uppsala. The germinal theory is a stage theory; the

authors showed the international expansion of the studied firms to occur in stages defined by

time, commitment of resources, and the development of international market knowledge

(Johanson & Vahlne, 1977). Firms researched by Johanson and Vahlne included Sandvik, Atlas

Copco, Facit, and Volvo, and built on prior research on the same companies by Johanson and

Wiedersheim-Paul (1975). Each of the firms included in the study increased in international

exposure according to a particular pattern:

a) Initiating international activity through export sales, followed by
b) The selection and development of a foreign representative,
c) The subsequent establishment of a sales subsidiary, and, finally,
d) The commitment of a foreign direct investment of resources to produce goods and

services in the foreign country.

Uppsala stage theory includes the researcher hypothesis that psychic distance between

people groups impedes entry into a new foreign market. Psychic distance is a construct used by

scholars to describe differences in the norms of two people groups and is a factor that limits the

free flow of information between people in two economies (Johanson & Vahlne, 1977; Johanson

& Wiedersheim-Paul, 1975). Language, custom, social norms, education, business practices, and

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political barriers are factors that require experiential learning for people to master. Equally,

experiential learning is a necessary factor for the successful transfer of the particulars of internal

knowledge within the internationalizing firm expanding into a new market. The two-way

acquisition of knowledge of the foreign market and of the firm that wishes to expand requires

time-based development. Personal contact by market participants develops experiential learning

of foreign markets, which committed activity and direct resources placed within the expansion

market reinforces.

Johanson and Vahlne (1993) theorized that the internationalization of firms is a process,

which begins with the acquisition of market knowledge and continues with incremental

commitment of resources, thereby providing a feedback loop of additional knowledge to

reinforce further commitment. The authors concluded that the process, one of double-loop

(Argyris, 2002) and triple-loop learning (Senge, 2006), might not be abbreviated or accelerated.

The necessary form of market knowledge is experiential and a tacit understanding that cannot be

transmitted otherwise.

The Uppsala stage theory continues as the prime theory of the internationalization

process for enterprises that produce a physical product and involve the commitment of capital

assets (Oviatt & McDougall, 1994; Oviatt & McDougall, 2005). Subsequent research recording

the international expansion of service firms and those that provide intangible products has

challenged the theory for exclusivity (Knight & Cavusgil, 2004; Knight & Cavusgil, 2005;

Oviatt &

McDougall, 1994).

The Internationalization Continuum

Cavusgil (1980) built on the work by Johanson and Vahlne to introduce a continuum of

activity for the internationalizing firm. The process of international growth is “…a gradual

process, taking place in incremental stages, and over a relatively long period of time” (Cavusgil,

1980, p. 273). For manufacturing enterprises, the graduated progress to foreign market

effectiveness is decades-long (Ohmae & Rall, 1987).

Beginning with a domestic focus, ventures first satisfy opportunities in the home market,

and where the local market matches the ambition of the entrepreneur, the firm may never choose

to venture beyond the local economy. Leader curiosity about foreign opportunity may augment

focus on the domestic market. The second, pre-export internationalization stage includes

knowledge and information gathering activity by the enterprise leader. For example, a business

owner may pursue chance contacts with peers from international markets through informal

encounters at trade shows or training symposia. Networking with knowledgeable people and

their organizations is part of the first stage of developing needed social capital to assist a new

international venture (Rodrigues & Child, 2012).

Pre-export activity may develop through leader predisposition toward international

activity because of personal travel, a foreign living experience, speaking a second language, or

ancestral heritage (Cavusgil, 1980). Experimental international involvement in foreign markets

is a stage frequently initiated through an unsolicited order from an international customer

(Johanson & Vahlne, 1977; K. London, 2010). An established domestic customer of a domestic-

market supplier may launch international operations and invite the trusted local supplier to

support the foreign location as well. Similarly, an import company in a foreign nation may

acquire a good produced by a domestic-only firm resulting in an initial unsolicited export order.

In each of the described examples, the enterprise leader may fulfill the foreign order as an

experimental business activity to satisfy curiosity about foreign markets, or may respond to the

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simple profit incentive presented by an unanticipated order from a foreign market (Cavusgil,

1980).

Knowledge gained by domestic-focused enterprise leaders in the pre-export and

experimental stages of internationalization may stimulate leaders to initiate purposeful programs

of export commerce. Leaders of companies who direct expansion into foreign commerce choose

markets for initial activity that are regionally proximate and culturally similar to the home

market of the new international entrepreneur (Aspelund & Butsko, 2010; Cavusgil, 1980; Chetty

& Campbell-Hunt, 2003; Sherriff et al., 2010). A distinct offering or particular competitive

advantage may be a basis for a firm to export, and accelerate the acceptance of the product by

consumers in the import marketplace. Increased resource commitment and leader involvement

in the development of a foreign market builds knowledge of the expansion market (Cavusgil,

1980; Johanson & Vahlne, 1977). Successful experimental efforts at international activity and

the accumulation of tacit knowledge prepare people in the organization for the committed-

involvement stage of internationalization.

Organizations often must be redesigned to accommodate a committed engagement in

international commerce; the risk and effort required to thrive in foreign markets may exceed that

of the domestic market, requiring leaders to adjust product, staffing, and business practices

(Cavusgil, 1980). Committed engagement in foreign markets is a form of feedback loop of

knowledge acquisition leading to further resource commitment described by Johanson and

Vahlne (1977). Continuous and expanding international market involvement represents the final,

committed stage in Cavusgil’s continuum.

International New Ventures

Oviatt and McDougall (1994) concluded through their research the necessary and

sufficient conditions for the success of an international new venture:

a) Underserved market opportunities exist in accessible international markets.
b) Because of limited resources, the new venture achieves control of needed foreign assets

without direct ownership.

c) The international form of the organization is a competitive advantage.
d) The expanding firm controls unique and inimitable resources.

The speed at which international new ventures (INVs) engage in international commerce

when contrasted to the incremental and cautious internationalization described by the Uppsala

theory defines INV as competing theory of international growth. Hagen, Zucchella, and Larimo

(2010) conducted cluster analysis of internationalizing firms in Italy, Finland, Greece, and

Switzerland; findings in the study supported opposing developmental patterns, with one group

strongly internationally entrepreneurial and other groups reactive and non-strategic. Spence,

Orser, and Riding (2011) found international new ventures to be larger in terms of full-time

equivalent employees and financial parameters when compared with domestic new ventures of

the same age. The identification of markets that did not previously exist and the development of

a truly unique product or service are two compelling reasons for entrepreneurial SME decision-

makers to enter international markets.

Due to resource constraints, leaders of international new ventures develop network or

partner associations to gain access to needed resources a start-up firm cannot provide. The

unique resources controlled by the new venture define the attractiveness for pooling network

resources. The new firm quickly expands internationally through use of distribution and license

agreements, contract manufacturing, and simple export. A market-leader position for the unique

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product or service to be introduced to global markets is important for new international ventures.

Value chain activities are unbundled so that the firm may penetrate new markets without the

time-consuming, incremental expansion defined by stage-theory internationalization (Oviatt &

McDougall, 1994).

Scale and depth of resources are not attributes of small businesses; rather, SMEs

commonly operate with poverty of resources and organizational power (Knight & Cavusgil,

2005; Oviatt & McDougall, 1994). The successes of smaller firms organized to succeed in

international commerce from inception were studied by Oviatt and McDougall (2005); the

researchers discovered cases wherein the international development of subject firms was shown

to skip steps or bypassed the sequence of stage-theory internationalization altogether. A

resulting theory of international new ventures (INVs) provided a second potential path to

international market entry. Developments in technology and economical access to world

markets opened for SMEs the possibility to compete effectively with larger enterprises in

multiple global markets (Rennie, 1993). “Internationally experienced and alert entrepreneurs are

able to link resources from multiple countries to meet the demands of markets that are inherently

international” (Oviatt & McDougall, 1994, p. 3).

Prior international experience by founders for new ventures and the effective use of

technology together encourage decision-makers for small new ventures to engage competitively

in international markets when combined with low cost international transportation and

uniqueness of an offering to the marketplace (Oviatt & McDougall, 1994). Consistent with the

tenets of internationalization included in stage theory, market knowledge is a necessary element

for international expansion. Founders for new international ventures may launch the venture

already equipped with necessary international market knowledge, having acquired such

experiential knowledge of foreign markets through heritage, travel opportunities, studying

abroad, or international exposure in prior work experience.

New international ventures may be examples of how market knowledge may be added to

following the founding of the enterprise, rather than the organization beginning from a deficit of

foreign market knowledge, as is normally observed in stage-theory internationalization. New

venture entrepreneurs may have the needed market insight and design the venture for

international engagement when founding the firm. The international new venture avoids routines

of organizing a firm exclusively in a domestic economy and developing foreign-market

knowledge following the launch (Oviatt & McDougall, 1994).

Born Global

New international firms designed by their founders to utilize knowledge-based resources

to sell outputs in multiple countries are referred to as born global (Knight & Cavusgil, 2004). A

global mindset held by the entrepreneurial leaders of the new firm incorporates the idea of

serving international markets and is an important force for internationalization of the firm

(Miocevic & Crnjak-Karanovic, 2010). “The distinguishing feature of these firms is their origins

are international, as demonstrated by management’s global focus and the commitment of specific

resources to international activities” (Knight & Cavusgil, 2004, p. 124).

Rennie (1993) first introduced the notion to recognize the rising importance of small

firms to total export sales. Rennie observed from collected data the reversal in the declining

contribution to total exports produced by small enterprises. A declining contribution by small

firms was the norm during decades of global expansion by large multi-national enterprises

(Rennie, 1993). The scale and capital advantages of large enterprises that produce standard

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products at low cost are also impediments wherein speed, nimbleness, and the ability to address

small markets are required; small firms operate with speed, responding with quality products to

niche markets defined by consumer tastes for custom and specialized goods (Jamali, Jawad,

Shaikh, Shaikh, & Afridi, 2011).

Electronic access to information and the low cost to transfer both data and goods has

opened to enterprises of all sizes access to new markets, even allowing smaller firms to compete

with large enterprises on equal footing (Kumar, 2012). The lower cost of international business

opened the possibility for the formation of born-global enterprises that begin small and grow

rapidly (Knight & Cavusgil, 2005). Nimble small enterprises are effective competitors providing

quality and value that closely match the needs of a highly differentiated customer. Interest in

highly specialized niche markets is a phenomenon that differs from the past-dominant practice of

horizontal marketing (Rennie, 1993; Smith, 1956).

Members of born-global firms make generous use of electronic communication

technology to gain knowledge about foreign markets, to transmit information, and to conduct

commercial exchanges (Knight & Cavusgil, 2005). The exploratory, sequential, mixed-methods

study conducted by Knight and Cavusgil (2005) discovered organizational attributes that are

most associated with international performance: a) international entrepreneurial orientation, b)

technological leadership, and c) enterprise differentiation. A study comparing data from 400

Norwegian and French SMEs correlated further these conclusions (Moen, 2002). Smaller firms

constrained by available resources and personnel limitations performed best by adoption of an

international orientation early in the history of the firm, focus on a narrow market segment, and

by providing a differentiated offering to the markets served (Knight & Cavusgil, 2005).

Barriers and Economic Incentives that Influence Leader Decisions

Conclusions drawn from the results of a mixed-methods study of the internationalization

experiences of South Carolina leaders supported historical findings reported in scholarly

literature (Beall, 2013). Specific and distinct economic incentives motivated enterprise leaders

to expand international commerce. Similarly, leaders reported distinct barriers that frustrate

successful internationalization of the firm.

Economic Incentives to Internationalize

Economic incentives to internationalize include foreign market opportunity, access to

foreign suppliers, competitive threat, declining domestic demand, exploiting a particular

uniqueness, and utilization of excess capacity (Bartlett & Beamish, 2011; Bowonder, Dambal,

Kumar, & Shirodkar, 2010; Calof & Beamish, 1994; Cavusgil, 1984). South Carolina leaders of

small and medium-sized enterprises that view their firms to be international strongly consider

foreign-market opportunity and expanded supply chain options from foreign suppliers to be

incentives to internationalize (Beall, 2013). The data collected in the study recorded a strongly

favorable view expressed by participant leaders that international commerce influenced the

success of their firms (Beall, 2013).

Data collected in the study support the conclusion that the rate of growth for South

Carolina enterprises that are international exceeds the rate of growth for domestic-only firms

(Beall, 2013). The international South Carolina SMEs studied had larger numbers of full-time

employees, a higher rate of revenue growth, serve a larger number of customers each year, and

operate in a more intensely competitive environment (Beall, 2013). This outcome from the study

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aligns with earlier recorded findings by Spence, Orser, and Riding (2011) that show

organizational metrics for international enterprises are higher than domestic peers.

Internationalization may be an inevitable step in the enduring success of an enterprise

designed for competition in a global milieu (Antonie & Feder, 2009). Economic globalization is

an observed dynamic that results in increased competition from domestic and international rivals

offering access to comparable quality goods (Sinha et al., 2011). Economic incentives for

leaders to engage in international commerce have been described as proactive or push drivers

and reactive or pull drivers (Vasquez & Doloriert, 2011). Export activity may be grouped by

proactive, market-seeking or reactive, and client-following motivated actions (K. London, 2010).

External incentives include perceived demand, declining domestic demand, and potential for

reductions in supply chain costs. Internal incentives include excess capacity, the need to protect

competitive advantages, and the desire to exploit a particular uniqueness.

Developing global economies are neither behind those of developed economies, nor

converging into a homogenous pattern; rather, marketplaces throughout the world represent

potential opportunity for the international entrepreneur (Bhattacharya & Michael, 2008).

International markets are sources of potential demand beyond what is available in a domestic

marketplace. Potential new markets may provide the expanding company opportunity for

leaders to improve the financial position of the firm, create competitive advantage, more fully

utilize capacity, and build management skills (Arteaga-Ortiz & Fernández-Ortiz, 2010).

Barriers to Internationalization

Barriers reported in scholarly literature include leader inexperience, resource scarcity,

high costs to accumulate knowledge, expropriation risks, domestic market opportunity, and

disadvantages of size, newness, and foreignness (Arteaga-Ortiz & Fernández-Ortiz, 2010;

Chelliah, Sulaiman, & Munusamy, 2011; Hutchinson, Fleck, & Lloyd-Reason, 2009; Hynes,

2010; Knight & Cavusgil, 2005; Lu & Beamish, 2006; Sommer, 2010).

Leaders of SMEs in particular face challenges to internationalization due to the

disadvantages of smallness, inexperience, foreignness, and newness (Korsakienė &

Tvaronavičienė, 2012). Domestic opportunity, leader characteristics, and poverty of resources

are barriers to international entrepreneurship. Unique barriers that present challenges not faced

by smaller enterprises in domestic markets offset potential opportunities and incremental value

creation from international expansion (Miocevic & Crnjak-Karanovic, 2010).

Data in the study of South Carolina firms supported the view of participant leaders that

ample domestic opportunity is a barrier to internationalization (Beall, 2013). South Carolina

leaders consider domestic opportunity in the local region and across the United States is

sufficiently large. Consequently, domestically-focused firms do not pursue foreign markets.

SMEs leaders in the study that viewed their firm to be domestic-only did not consider lack of

knowledge of foreign markets or resource scarcity to be barriers (Beall, 2013). The leaders of

domestic-focused South Carolina enterprises simply did not consider foreign markets as

important to their success (Beall, 2013). The low level of perceived importance of the

international markets may explain the leader perception that resources and foreign-market

knowledge do not present internationalization barriers. A potential explanation of this

inconsistency with the literature is that leaders of enterprises with a domestic focus fail to

consider additional barriers because they have not investigated requirements for foreign-market

entry.

December 19, 2015 TAF000015December 19, 2015 TAF000016

Implications

Open international markets represent historically unprecedented opportunity for small

and medium-sized businesses (Kamakura et al., 2012). Once limited to large, resource rich

firms, international commerce is accessible to enterprises of all sizes with the organizational will

to expand overseas (Oviatt & McDougall, 2005). Action by decision-makers to reach the

benefits of internationalization is constrained by a poverty of knowledge of economic incentives

and barriers. Only a single digit percentage of SMEs in the United States are exporters, half the

internationally active level of SMEs in other developed world economies and a potential cause

for economic underperformance by smaller American firms (Tesfayohannes & Habegger, 2011).

The gap in what is known of internationalization by SME leaders in general is significantly

limiting for leaders of smaller firms.

Such uncertainty reflects a challenge to the entrepreneurial proclivity of the firm, affects

deployment of resources, impedes communication, discounts the need to align the organizational

supply chain, and deters needed capital infusion (Zhou, Barnes, & Lu, 2010). The globalization

phenomenon of world markets is a persistent trend that is accelerating, and leaders perceive

growing global markets as increased opportunities for smaller enterprises to participate in

international commerce (Ibeh, Carter, Poff, & Hamill, 2008). Limited understanding by leaders

of the incentives linked to international success and techniques effective for overcoming barriers

may restrict smaller firms from rewarding involvement in international markets.

Economic incentives that are motivations for leader decisions to expand company

involvement into international commerce include proactive market-seeking opportunity and

reactive client-following or competitor-matching responses (K. London, 2010). Barriers that

impede international expansion include poor organizational readiness, limited enterprise

resources, leader inexperience, limited knowledge of foreign markets, and competing domestic

opportunity (Hynes, 2010; Korsakienė & Tvaronavičienė, 2012; Rodrigues & Child, 2012).

Decision-makers who contemplate international expansion may do so in response to opportunity,

the urging of customers, as a reaction to competitor initiatives, following market momentum, or

as a reply to numerous business threats (Hynes, 2010; McMullen, Shepherd, & Patzelt, 2009;

Nkongolo-Bakenda et al., 2010). Entrepreneurial hubris is a contributing factor in enterprise

failure due to an overestimation by leaders of the likelihood of success; yet leaders naively

initiate new ventures with enthusiasm (Hayward, Shepherd, & Griffin, 2006). Leaders of smaller

enterprises benefit from information useful to identify economic incentives linked to a likelihood

of success. Leaders benefit as well from knowledge of barriers that are disincentives to

international expansion.

Conclusion

The increasingly global nature of commerce is an important business dynamic recognized

by enterprise leaders and scholars (Bartlett and Ghoshal, 2002; Hames, 2007; Ibeh, Carter, Poff,

& Hamill, 2008). Leaders who may not embrace foreign commerce may be less aware of the

potential threat or opportunity represented by cross-border trade. The United States economy is

large, providing considerable opportunity that was shown to be a barrier to internationalization

by some business leaders (Beall, 2013). Leader opinions studied in a verity of research projects

support the conclusion that decision-makers in positions of responsibility for enterprises that are

international feel international activity important to the success of the enterprise. Leaders who

December 19, 2015 TAF000016December 19, 2015 TAF000017

experience international business understand the importance of foreign-market commerce, the

potential risks, and the international opportunity available to businesses of all sizes.

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permission.

Disney’s successful adaptation in Hong Kong:
A glocalization perspective

Jonathan Matusitz

Published online: 28 October 2009
# Springer Science + Business Media, LLC 2009

Abstract This paper applies the principles of glocalization theory to Disney’s
successful adaptation in Hong Kong. Glocalization refers to the interface of the global
and the local. After Hong Kong Disneyland’s lack of success within a year of its
opening in 2005, Disney executives attempted to cater to the local Chinese context.
From a glocalization perspective, four major changes were made: (1) reduction of
prices; (2) adaptation to local visitors’ customs; (3) change of décors and settings; and
(4) adaptation of labor practices. Ever since, Hong Kong Disneyland has proved
successful: park attendance and revenues from growth have increased.

Keywords Adaptation . Business . China . Culture . Disney. Globalization .

Glocalization

The purpose of this paper is to apply the principles of glocalization theory to
Disney’s successful adaptation in Hong Kong. The theme park is known as Hong
Kong Disneyland. When it first opened in 2005, it was met with mitigated responses.
One of the main reasons is that Disney’s traditional method of imposing its US
products from its Burbank, CA headquarters to the Chinese local context did not
work. Amid many criticisms, employees complained that Disney’s labor practices,
restaurants, and various outlets were not “Chinese” enough, and Disney’s rides,
shows, and events were not appealing to Chinese visitors. To the locals, this
demonstrated too much Western cultural imperialism. As a result, Disney executives
attempted to cater to the local Chinese context and this is why the author adopts a
glocalization perspective. Glocalization refers to the interface of the global and the

Asia Pac J Manag (2011) 28:667–681
DOI 10.1007/s10490-009-9179-7

J. Matusitz (*)
Nicholson School of Communication, University of Central Florida, 600 Colonial Center Parkway,
Lake Mary, FL 32746, USA
e-mail: matusitz@gmail.com

local, a cooptation of the global and the local, the dynamics of cultural
homogenization and heterogenization, and the conflation of both universalizing
and particularizing tendencies. Ever since, Hong Kong Disneyland has proved fairly
successful: park attendance and revenues from growth have increased.

This paper begins with a detailed description of the theoretical concept of
glocalization, what the term means, in what areas it has been applied, and how it fits
into current globalization trends. Then, this paper proceeds to outline the history of
Hong Kong Disneyland from its opening to the present. What follows is the heart of
this analysis: the glocalization of Hong Kong Disneyland. As such, it is a section that
explains, in detail, the four major changes that have made Hong Kong Disneyland
more successful: (1) reduction of prices; (2) adaptation to local visitors’ customs; (3)
change of décors and settings; and (4) adaptation of labor practices. This paper ends
with a discussion section that also includes suggestions for future research.

Glocalization theory: A description

Developed by Robertson (1992, 1994), glocalization is a theoretical concept that is a
mélange of the words “globalization” and “localization.” Glocalization refers to the
interface of the global and the local (Andrews & Ritzer, 2007), a cooptation of the
global and the local (de Nuve, 2007; Swyngedouw, 1997), the dynamics of cultural
homogenization and heterogenization (Eric, 2007), and the conflation of both
universalizing and particularizing tendencies (Robertson, 1994). Whereas globalization,
in and of itself, stresses the omnipresence of corporate or cultural processes worldwide,
glocalization stresses particularism of a global idea, product, or service (Ritzer, 2007).

Communication scholar Marwan Kraidy has analyzed glocalization in detail. According
to Kraidy (2001), glocalization refers to a new cultural hybrid and change of norms and
practices aimed as adjusting to local mindsets (Kraidy, 2002). Glocalization is not merely
another take on niche-marketing, now global. Rather, glocalization also adds accuracy
to the present globalization approach among scholars and practitioners (Svensson, 2001).
Glocalization theory fuses relationships, balance, and harmony between cultural
homogenization and heterogenization, standardization and adaptation, homogenization
and tailoring, convergence and divergence, and universalism and particularism
(Robertson, 1995). Glocalization is important because it questions the very model of
Western cultural imperialism (Schiller, 1971). From this vantage point, globalization
strengthens the consciousness of the world that pervades both the local and the global
(Holton, 1998). This opposed the argument that globalization is a fully homogeneous
process. On the contrary, while globalization gears toward some degree of cultural
homogenization, it simultaneously permits people to identify more strongly with their
local culture (Maynard & Tian, 2004). Glocalization is tantamount to relocalization,
whereby the practice is to integrate local elements into global themes, products, or
services (Archer, 2008; Lee, 2003).

Glocalization emphasizes that relocating a theme, product, or service elsewhere
has a higher chance of success when it is accommodated to the local culture in which
it is introduced (Appadurai, 1996; Robertson, 2001). The fundamental thesis behind
glocalization is that imposing our home values in other cultures does not always bear
fruits. For Friedman (2005), in order to uphold cultural survival, local cultures must

668 J. Matusitz

forfeit some of their economic imperialism to global processes so that they can
achieve economic success by Western standards. Yet, to remain “local,” local
cultures must simultaneously maintain their local ways of life while undergoing
globalizing processes. Friedman (2005) refers to this as glocalization too.
Consequently, glocalization is a specific type of globalization that is receptive to
differences within and between areas of the globe (Robertson, 2001). The goal of
glocalization is to look for local market input and break out from the ivory tower.
This also means that no single approach is right in all instances.

Glocalization refers to both minor modifications to global products and more
significant changes to those products for a specific local market (Robertson, 2007).
From this perspective, direct associations exist between the local and international
levels (Mooney & Evans, 2007). Local forces work to alleviate the impact of
transnational institutions (Aliet, 2007). As explained in this paper in detail, one
of these transnational institutions is the economy of global scale set by a giant of
globalization: the Walt Disney Company. For the past two decades, one of the chief
concerns Disney has had with respect to globalization is determining the fit of what
it wishes to transfer abroad with new host cultures (Bartlett & Ghoshal, 1989, 1997;
Kogut, 1989; Kogut & Zander, 1992, 1993; Prahalad & Doz, 1987). Since the
headquarters of the Disney corporation in the US are considerably foreign from its
subsidiaries on other continents, the corporation is well aware that the transplanta-
tion of Disney assets may not fit the receiving environment in host countries
(Hymer, 1976; Kostova, 1999; Kostova & Roth, 2002, 2003).

Only when adaptation to foreignness is successful can glocalization become
successful. Generally, foreignness refers to dissimilarity—or lack of fit—in operating
contexts of a transnational corporation between home and host environments (Hymer,
1976; Kindleberger, 1969). Adaptation requires flexibility and tolerance, even the
promotion of differences. One of the biggest obstacles to effectiveness for executives
working outside their native culture is a lack of tolerance from the “locals.” However,
mere tolerance of differences is just the beginning. Real adaptation requires
executives to generate diversity vis-à-vis local conditions (Ulrich & Smallwood,
2006). People think they might know a great deal about foreignness, strategic fit, and
differences in host cultures, but there is something about the role of the country
environment in the global transfer of corporation assets that is missing (Brannen,
2004). As this case study on the glocalization of Hong Kong Disneyland will reveal,
glocalization theory helps fill this gap. Disney experienced unanticipated success in
Japan but an equally unanticipated lack of success in Hong Kong, even though both
places are in East Asia. This demonstrates that, somehow, in the transfer process, the
transplanted Disney assets—as well as the notion of foreignness itself—assume
unanticipated meanings that directly affect globalization outcomes (Brannen, 2004).

Hong Kong Disneyland: From its opening to the present

The Walt Disney Company is one of the biggest media and entertainment businesses
in the world. The company grew from a tiny business in 1923 to one of the
heavyweights of globalization. In the 1920s and 1930s, Disney consisted of only one
studio and one theme park. By the end of the twentieth century, the company had

Disney’s successful adaptation in Hong Kong: A glocalization perspective 669

numerous TV networks, additional theme parks openings, a cruise line, merchandising in
US malls and airports, publishing houses, real estate, hotel resorts, and so forth
(Clandinin, 2006). By 2005, the Walt Disney Company expanded to 129,000
employees (Page, 2006). This high number of employees stems from the fact that the
company has established, respectively in time, Disneyland, Disney World, Tokyo
Disneyland, Disneyland Paris, and Hong Kong Disneyland (Schmidt, Conaway,
Easton, & Wardrope, 2007). Building theme parks is the main foundation of Disney’s
strategy of global growth. According to Disney’s Chief Executive Bob Iger, overseas
markets are crucial because they offer clear growth opportunities for a business that still
earns more than 75% of its revenues from domestic sources (Marr & Fowler, 2005).

Hong Kong Disneyland is the most recent major theme park built by Disney. All
began in 1985 when Disney executives met with government officials of the Hong Kong
Special Administrative Region (HKSAR) to negotiate the company’s expansion there.
After years of talks, Disney opted for a park in Southern China (Marr & Fowler, 2005).
The Walt Disney Company and HKSAR reached an agreement to build the theme park
in Hong Kong in 1999 (Zhang, 2007). Even though Hong Kong was handed over to the
People’s Republic of China (PRC) in July 1997, there is still a one-country–two-
government-system that prevails. The HKSAR government agreed to invest $2.9 billion
(including infrastructure improvements and loans) and earn a 57% stake in the project
(about $780 million); Disney would own the remaining 43% (approximately $419
million) (Marr & Fowler, 2005). According to estimates from the HKSAR government,
the construction of the resort created 30,000 jobs (Wiseman, 2005).

The PRC is still the world’s most popular destination for the Walt Disney
Company because of the nation’s size. Investors predict China’s economy will
remain robust. A global business’s decision to make a foreign investment is
contingent upon economic and political factors. What mostly attracted the Walt
Disney Company to Southern China are low labor costs and less costly materials
(Schmidt et al., 2007). In China, Mickey Mouse, Daffy Duck, and Winnie-the-Pooh
are hardly household names. Disney wanted to change that. According to the World
Tourism Organization, an international group that oversees policy issues, the PRC is
expected to be one of the largest tourist destinations on earth in the next 15 years;
and Hong Kong is already in the top 15 (Holson, 2005). The hope is that Hong
Kong Disneyland will boost the tourism industry in the next two decades (Lee &
Haque, 2006).

Hong Kong Disneyland was built on a 250-ha plot located on Penny’s Bay and
sided by mountains (Holson, 2005). The precise location is the undeveloped Lantau
Island, 30 min away from downtown Hong Kong. The theme park can be easily
reached from Hong Kong by a Mass Transit Rail System (MTR). The resort is
themed around “four lands,” which are representative of other Disney resorts. The
lands are Main Street, USA, Tomorrowland, Adventureland, and Fantasyland. Each
land comes with star attractions (Ball, Horner, & Nield, 2007). Hong Kong
Disneyland also includes the first train line ever devoted to a theme park, with rail
cars sporting mouse head-shaped windows (McPhail, 2006).

Hong Kong Disneyland opened in September 2005 (McKercher, Wong, & Lau,
2006). Amid disappointing attendance (A Chinese Makeover for Mickey and
Minnie, 2008), the theme park only drew 5.6 million visitors during the first season.
This debut was marred by public relations debacles and protests over Disney’s

670 J. Matusitz

refusal to let Chinese food inspectors onto the premises (Wiseman, 2005). According
to labor leader and legislator Lee Cheuk-Yan, Hong Kong was not a good place for
being a colony of Disney. To begin, Hong Kong Disneyland could not manage to
draw customers because it was considered too small relative to other Disney theme
parks worldwide (i.e., Disneyland, Disneyworld, Tokyo Disneyland, and Disneyland
Paris). In fact, Hong Kong Disneyland was so small that visitors had to wait in lines
for hours before enjoying park rides and other attractions (Huang & Hsu, 2005).

In line with these contentions, after Hong Kong Disneyland opened, it was facing
competition from a neighboring attraction, Ocean Park, a marine-themed theme park
located in the Southern District of Hong Kong (Huang & Hsu, 2005). A few years
ago, approximately five million people visited Ocean Park, earning it the position of
the World’s Number 15 Theme Park by Annual Attendance. This figure was well
ahead of Hong Kong Disneyland (Fyall, Leask, Garrod, & Wanhill, 2008).
Additionally, the city of Hong Kong considered Disney’s presence as unacceptable.
Planting an American cultural and business institution on Chinese soil was expected
to be challenging from day 1 (Wiseman, 2005). Within days of its opening, the Hong
Kong Disneyland infuriated local pop stars, upset labor leaders, and received
criticism from the Hong Kong government, its own partner in the theme park.
Among other things, a discontented, fired employee climbed atop Space Mountain
and said he would kill himself until he was talked down (Wiseman, 2005).

Given these drawbacks, observers and analysts were questioning Disney’s latest
foray in a foreign culture. Among the rebukes, visitors from mainland China were
not familiar with both the Disney culture and Disney characters (Lee, Garbarino, &
Lerman, 2007). Likewise, they had no idea about how to behave or what to enjoy at
an amusement park. In fact, some visitors were entering the park, snapped a few
pictures, and then turned around to leave (Fowler & Marr, 2006). After months of
discussion, Disney executives realized that Hong Kong Disneyland was insuffi-
ciently catered to local customs and needed to undergo serious local adjustments in
order to become popular among the Chinese and Hong Kongers. The next section
discusses the glocalization changes brought forth by Hong Kong Disneyland.

The glocalization of Hong Kong Disneyland

Hong Kong Disneyland’s main challenge was to tailor its corporate philosophy and
niche attractions to the local Chinese culture, environment, and mindset while keeping
the Disney theme intact, something that has proved challenging to Disney executives
(Marr, 2007). By integrating itself into the Chinese context, the goal of Disney was
to avoid problems of cultural backlash, customs, and traditions. This section
explains, in detail, the four major glocalization changes that have made Hong Kong
Disneyland more successful: (1) reduction of prices; (2) adaptation to local visitors’
customs; (3) change of décors and settings; and (4) adaptation of labor practices.

Reduction of prices

When Hong Kong Disneyland opened in September 2005, the area had not fully
recovered from the late 1990s Asian financial crisis (Wiseman, 2005). In the

Disney’s successful adaptation in Hong Kong: A glocalization perspective 671

beginning, the admission ticket to the theme park was too high for local visitors.
Because China overall was still a nation with low income levels, the lack of
affordability of the Disney vacation experience did not help (Marr & Fowler, 2005).
Also, the theme park sold tickets that visitors could use on any day, without
considering China’s holiday schedule (Kwok, 2007). Executives at Hong Kong
Disneyland soon realized that finding strategies to drop prices and, ultimately, to fit
the nation’s low-income levels and holiday schedule was necessary (Marr & Fowler,
2005). Today, prices at HK$295 (US$38) for an admission ticket (for adults) on a
weekday are cheaper than at the other Disney parks (Year of the Mouse, 2005).
Because Hong Kong Disneyland was (and still is) the smallest Disney park
worldwide, another reason for promoting these low off-peak prices was an attempt at
crowd control—prices became higher on weekends and holidays. Now Hong Kong
Disneyland even offers lower prices for seniors. This is presumably an effect of the
family-oriented culture in Asia in regards to senior citizens (Zhibin Gu & Ratliff,
2006).

A third reason for cutting the price stems from the fact that China already has
numerous theme parks (although many of them are forced to close or are struggling
financially). The Walt Disney Company successfully conveys the message that its
parks are different from the more traditional thrill-ride parks that are the Chinese
standard today (Marr & Fowler, 2005). Not surprisingly, because China is a massive
country, the Hong Kong theme park is welcoming, yearly, at least a third of its
visitors from the mainland, not just from Hong Kong. However, it is important to
note that, nowadays, particularly this fiscal year 2009, the income levels of
inhabitants of Beijing, Shanghai, and Hong Kong have surpassed the income levels
of people who live in many other large cities worldwide (Prices and Earnings, 2009).
In fact, the economy in Hong Kong has so much improved that Hong Kong
Disneyland has recently increased its admission prices for Hong Kong residents
from HK$295 to HK$350 for adults, and from HK$210 to HK$250 for children.
Disney visitors have been charged these prices since the spring of 2009 (Lau &
Chen, 2009).

Adaptation to local visitors’ customs

People from mainland China have very different expectations than those from many
other places in the world. Generally, visitors from the mainland travel on package
tours that include group dinners. At first, Hong Kong Disneyland could not
accommodate such large groups. In addition, the ticket prices did not have adequate
commissions for the tour operators. Therefore, few of them included Disney on their
itineraries. Hong Kong Disneyland was so unpopular that a Hong Kong transvestite
bar nearby was attracting more visitors from the mainland (Holson, 2005). Today,
the theme park has significantly improved its collaboration with tour companies,
which now benefit from a share in attractions and steer their groups towards them
(Fowler, 2006). Disney marketing executives have also been training Asian travel
agents for months, where the firm expects one third of the park’s revenues to come
from (Martin, 2007).

In a similar vein, efforts by the Walt Disney Company to improve the attendance
at the Hong Kong Disneyland theme park have included adding local attractions and

672 J. Matusitz

entertainment offerings in 2008 (Ng & Orwall, 2007). For example, seasonal
entertainment, such as Disney’s Haunted Halloween (which was actually started by
Ocean Park), A Sparkling Christmas, and Disney’s Chinese New Year, are shown in
the park to celebrate main Chinese festivals. It is a truism that fireworks and
gunpowder were invented in China (Sardar & Masood, 2006). For this reason,
Disney managers made a wise move by holding fireworks extravaganzas in Hong
Kong Disneyland. The park also includes the world’s only Fantasy Gardens, where
children can meet famous characters (Reiber, 2007). Likewise, for a long time, China
was under communist rule. Today, this is still felt in Hong Kong Disneyland in the
sense that, for instance, Mickey and Minnie Mouse benefited from a communist
makeover in 2008. While Mickey was put in a bright red Mao suit, Minnie sported a
cherry-blossom red dress, in an attempt to appeal to Chinese tourists (A Chinese
Makeover for Mickey and Minnie, 2008).

Cast members at the theme park speak both English and local dialects. In Hong
Kong, one of the official dialects is Cantonese; in China, it is Putonghua (also
known as Standard Mandarin or Standard Chinese). Since Chinese visitors are still
not too familiar with the Walt Disney Company, the theme park has produced guides
describing attractions like rides and shows. Brochures and maps are printed in
traditional and simplified characters, Japanese, and English (Fowler, 2006). To
demonstrate its willingness to adjust to the Chinese tourist culture even more, Hong
Kong Disneyland will soon perform its own version of the show “It’s a Small
World,” with a lady doll in a traditional Chinese opera costume and a specifically
designed Hong Kong scene that features Victoria Harbor and the city’s landmark
skyscrapers. The goal of Disney is evident: to blend local, regional, and global
elements. New versions of the theme song—respectively in Mandarin, Cantonese,
Tagalog (the official language in the Philippines), and Korean—will be added to the
Hong Kong rendering of “It’s a Small World” (Epstein & Shapiro, 2007).

Visitors from both mainland China and Hong Kong will be pleased to see the
Jungle Cruise (Barrier, 2008). Indeed, the Hong Kong Disneyland version has new
features, whereby skippers conduct live commentary in Cantonese, Putonghua, and
English; guests can board whatever boat and the skipper speaks their language. The
skippers’ witticisms and jokes have also been tailored to local cultural sensibilities.
And, in contrast to the other Disney parks that also have the Jungle Cruise attraction,
Hong Kong Disneyland has added Cambodian ruins for guests to float past and an
unruly pack of hippos. In this case, there are no guns scaring off the hippos; the
hippos have bad breath and belch (Holson, 2005). All these new Disney facets seem
to exemplify the Disneyfication of the spectacle (Demossier, 2007). Nevertheless,
Hong Kong Disneyland recently came under fire for being so overcrowded on the
Lunar New Year holiday, so much so that ticketed guests had to be turned away
(Fowler, 2006).

In line with these contentions, to benefit the most from its guests, Hong Kong
Disneyland tried to make adjustments to local eating habits and food preferences.
One of the most challenging decisions by Disney was to include, in its menu, a
traditional but very expensive Chinese dish: shark’s fin soup. In some cases, it can
be as pricy as US$400 (HK$3,120), just for a bowl. Along with the soup, roast
suckling pig and sliced abalone were planned to be included in wedding banquets
that the firm was promoting at the two hotels at Hong Kong Disneyland (Year of the

Disney’s successful adaptation in Hong Kong: A glocalization perspective 673

Mouse, 2005). Shark’s fin soup is a long-established Chinese elegant dish popular at
weddings and other major social events. Shark’s fin soup holds cultural significance
and is considered luxurious and a sign of affluence and generosity.

However, even though the dish has been a conventional delicacy for centuries, the
method to catch and kill sharks (to provide the tasty ingredients) has been under
heavy criticism, especially with respect to the process by which fins are harvested.
Many sharks are endangered (Hills & Welford, 2006). As a result, environmentalists
pressured Disney to get rid of shark’s fin soup from its restaurant menus due to fears
over the diminishing shark population (Studer, Tsang, Welford, & Hills, 2008). For
example, non-governmental organizations (NGOs) such as the Sea Shepherd
Conversation Society, the Animals Asia Foundation, and Greenpeace lobbied to
great lengths to prevent Disney from serving the soup at Hong Kong Disneyland.

After its attempt to serve shark’s fin soup on the Wild West-themed Main Street,
USA was thwarted by those NGOs (Year of the Mouse, 2005), Disney finally agreed
(Bloomgarden, 2007). Today, the glocalization of other local food preferences has
really taken place; restaurants at Hong Kong Disneyland primarily serve Chinese
food (Hills & Welford, 2006). Disney’s intention to serve roast suckling pig and
sliced abalone in wedding banquets was followed through. At a recent event where
special dishes were served in the park’s eight restaurants—everything from curry to
noodles to sushi—Disney managers agreed that a specific type of Chinese
hamburger be prepared by a local chef (Holson, 2005). When the Walt Disney
Company realized that Chinese visitors usually take ten more minutes to eat than
Americans, the company added 700 seats to park dining areas. Hong Kong
Disneyland’s managing director, Bill Ernest, admitted that Disney is “still learning”
about Chinese culture (Martin, 2007).

Change of décors and settings

Another important glocalization move adopted by Hong Kong Disneyland was to
change décors and settings to fit in with Chinese culture more (Hills & Welford,
2006). Feng shui, an ancient Chinese disciple of arrangement, is now playing a key
role in the theme park’s design. For instance, the park moved its main entrance so
that it is facing the right direction. When building this new gate, Disney executives
shifted the angle of the front gate by 12° (Holson, 2005). The park also added a
curve in its walkway from the train station to the gate so that “chi” (or energy)
cannot flow into the South China Sea (Adekola & Sergi, 2007). In other words, chi
cannot slip past the entrance and out to the China Sea (Holson, 2005). Other feng
shui experts were hired to lay out the rides (Martin, 2007). Dazzling visual changes
and nods to cultural differences at Hong Kong Disneyland may appear to be so much
marketing (Holson, 2005), but feng shui consultants keep saying that these changes
ensure prosperity for the park (Year of the Mouse, 2005).

When the creation of each building was finished—one of the main ballrooms was
purportedly 888 m2 in size—incense was burned; the number eight is a lucky
number in Chinese culture (Hills & Welford, 2006). On the other hand, the number
four is believed to be bad luck. As a result, there are no fourth-floor buttons in any of
the elevators at Hong Kong Disneyland (Holson, 2005). Other feng shui
modifications have included bringing cash registers closer to corners or along walls,

674 J. Matusitz

where such placement is said to increase prosperity. In Crystal Lotus, the park’s
upscale restaurant, Disney put in a virtual koi pond where computer-animated fish
zoom away from guests who approach a glass screen. The pond is one of five feng
shui features in the restaurant; the others are wood, earth, metal, and fire. Bogus fire
glows on a screen behind bottles in the bar. Because of the fire code, real fire was
not allowed (Holson, 2005).

In a similar fashion, Hong Kong Disneyland has a topiary garden where people
dressed as Mickey Mouse, Minnie, and other cartoon characters pose for
photographs with guests, a favorite pastime with Asian parkgoers. Instead of buying
official photographs, visitors like to snap their own, even posing with shop toys,
although they tend not to buy them (Year of the Mouse, 2005). Products emblazoned
in cartoon characters come in solid gold. So, for the camera-rabid Chinese, there are
fewer frightening rides and more costumed staff roaming about for “photo-ops”
(Year of the Mouse, 2005). And once inside the theme park, Chinese visitors
consider it little more than a backdrop (theatrical scenery) for family snapshots.
Therefore, Hong Kong Disneyland began to distribute brochures that explained how
to enjoy rides. Disney even went as far as hiring “guestologists” to follow parkgoers
around with a stopwatch (Martin, 2007).

Adaptation of labor practices

A final major glocalization effort by Disney has been to adapt its US labor practices
to Chinese ones. Labor practices refer to employee traditions and overall corporate
philosophy. For example, Disney, as the “happiest place on earth,” is notorious for
implementing its “smile factory” strategy (Van Maanen, 1991). Yet, the “smile
factory” so dear to Disney proved unsuccessful among the Chinese crew personnel.
To begin, in Hong Kong, people who are overly friendly are looked upon with
suspicion. So, a smile is not automatically seen as a positive feature. By the same
token, park guests do not display interest in the displays and interest from park
employees (Bryman, 2006). For these reasons, Hong Kong Disneyland crew
personnel just could not smile to the level of Disney University standards (Doz,
Santos, & Williamson, 2001). In fact, they were required to smile at customers in
less than 60 seconds of their entering the theme park (Cheney, Christensen, Zorn, &
Ganesh, 2004), and that caused a mini revolution.

The “smile factory” was also a problem because Hong Kongers are not famous
for their hospitality (Adekola & Sergi, 2007). Providing a fake smile or smiling more
than one normally would is part of an overarching concept called “emotional labor.”
Emotional labor is an important site for resistance (Bryman, 2006). Emotional labor
is a type of emotional regulation whereby employees display the emotions that they
are expected to display as part of their duty. Emotional labor is commonly surface
acting: employees inhibit their real feelings and, rather, display emotions on the
“surface” (emotions that they do not actually feel) (Geist-Martin, Ray, & Sharf,
2003). Surface acting also implies that an emotional dissonance exists between inner
feelings and outer expression (Guy, Newman, & Mastracci, 2008).

In the same perspective, when Hong Kong Disneyland opened in 2005, cast
members were told that they would not go to work, but “put on a show.” They were
also instructed to act as if they were “on stage,” especially when being out in the

Disney’s successful adaptation in Hong Kong: A glocalization perspective 675

park. The dilemma is that Chinese culture is more conservative. They do not like to
be that expressive about feelings. This Disneyfication, this attempt to turn Chinese
crew members into smiling robots, did not work (Clandinin, 2006). So, the Disney
company had to make glocalization adjustments. Mr. Rasulo, one of the Disney
executives, conceded that Disney had to show flexibility, given the diverse cultures
in Asia. Park employees today speak three languages: English, Cantonese, and
Mandarin (Holson, 2005).

Let us not forget to mention that, during the first few years after the construction
of Hong Kong Disneyland began, the park was plagued with controversy. There
were complaints about not only environmental damage but also about pay and
conditions. For instance, cast members and construction workers complained of
short lunch breaks, long hours, and an insufficient number of staff (McPhail, 2006).
Their complaints also concerned low pay (as compared to other Disney parks) and
differentials between cast members. In the beginning, there were 5,000 original
employees, but 1,000 left (which is considered high in Hong Kong because it is very
customary to stay with one’s employer). As a result, Disney had to change direction
again. Today, employees have a trade union called the Hong Kong Disney Cast
Members’ Union. The union aims at improving pay and work conditions (Ball et al.,
2007).

The success of glocalization

The four glocalizing changes—that is, reduction of the price, adaptation to local
visitors’ customs, change of décors and settings, and adaptation of labor practices—
have turned Hong Kong Disneyland into such a successful venue that the theme park
announced in May 2007 it accumulated a double-digit percentage growth among
mainland Chinese visitors (Hong Kong Disneyland May Miss Lenders’ Target,
2007). It has been predicted that the park’s revenues will add $19 billion to the Hong
Kong area’s economic growth over the next four decades (Wiseman, 2005). The
theoretical concept of glocalization has validity in this case. In the beginning, the
theme park was not too popular. For the past 2 years, however, parents from all over
China have flocked with their children to Hong Kong Disneyland. The park has
grown seriously overcrowded, so much so that, at some point, it stopped selling
tickets (Fenster, 2007).

Even though the Chinese and Hong Kongers feel that Hong Kong Disneyland
lacks creativity and innovation to move beyond the Disney brand itself, crew
personnel at Hong Kong Disneyland are so busy that they cannot seem to catch a
break. While there were too few visitors after the park opened, today there are too
many. When the Chinese, on a week-long holiday, celebrate Chinese New Year,
thousands and thousands of guests from mainland China descend on Hong Kong for
a “Golden Week” of eating, shopping, and getting photos taken with Mickey,
Minnie, and the rest of the Disney gang (Einhorn, 2006). Echoes of Hong Kong
Disneyland’s growing popularity even triggered the idea, among executives of an
amusement park in Beijing (the capital city of China), to plagiarize Disney
characters by making them look like those at Disney. This caused anger and furor
ahead of critical US–China trade negotiations (Tschang, 2007).

676 J. Matusitz

The success brought forth by glocalization has led executives to consider
doubling the park’s capacity. For this reason, the Walt Disney Company has been
talking with the Chinese government about building a second Chinese Disney park.
Disney has chosen the metropolis of Shanghai, an appealing place for many Chinese
(Einhorn, 2006). This will not happen before 2012, though (Marr, 2007). In this
effect, Hong Kong Disneyland can be considered a warm-up act for Shanghai. The
company hopes that the Shanghai Disney theme park will have a bigger presence in
China for its themes, shows, movies, services, products, and other assets. By
satisfying China’s desire for a Shanghai theme park, Disney might be able to ensure
broader entrée into the world’s biggest consumer market (Marr & Fowler, 2005).
With proper glocalization in Hong Kong Disneyland, the theme park has served as a
splashy introduction to a new market in Asia, opening the door to other ventures. By
the same token, a second Disney park in China will boost economic growth and
employment, and further give Shanghai the shape of an international city (Marr &
Fowler, 2005).

Discussion and future directions

This analysis has demonstrated that, even Disney, the embodiment of a global firm
par excellence, has to show flexibility and adjustment to local preferences in order to
produce high profits and remain competitive in the global arena. As we have seen,
when Hong Kong Disneyland first opened in 2005, the Walt Disney Company failed
to understand not only Chinese local customs, but also their food preferences, eating
habits, and meal times, their conception of how much should be spent (or not spent)
on Disney admission tickets, their view of what Mickey characters and what settings
and backgrounds should look like, what shows and events are attractive to them,
employee customs and labor policies, and even their version of emotional labor.

Truly, this analysis of Hong Kong Disneyland illustrates that glocalization works:
Disney had to be flexible by factoring in Chinese culture and minimizing US
culture, because it was considered cultural invasion in Hong Kong. As firms go
global, executives have to weigh up the efficiency opportunities of global scale with
the effectiveness requirements of location adaptation (Ulrich & Smallwood, 2006).
With glocalization, scholars may reassess the concept of globalization and admit that
it cannot always be a successful practice if it operates entirely at a global scale.
Rather, globalization has to be localized through an assortment of strategies, based
on which region the corporation is located (Rugman & Hodgetts, 2001). Just as
Disney executives determine what is core and, therefore, universal across the firm’s
global operations, they must also establish what is noncore and, therefore, be open to
local adaptation. The world is too big and too different to even consider the idea that
every corporate philosophy, culture, policy, and practice (let alone product, service,
or process) can be applied universally everywhere. Disney demonstrates that it
simply does not work (Ulrich & Smallwood, 2006).

The glocalization of Disney also epitomizes the notion that the world is not being
turned into a single homogenized realm because, across the globe, there are sites of
resistance, in spite of the momentum of this well-regarded representative of popular
culture (Bryman, 2006). This means that we must give due consideration that we

Disney’s successful adaptation in Hong Kong: A glocalization perspective 677

cannot subscribe to a monolithic or one-dimensional view of globalization or
Americanization, a worldview that depicts icons of American culture spreading by
design worldwide and riding roughshod over local conditions and practices. Scholars
conducting studies on Disneyfication or similar research have suggested that it is
incorrect to think of globalization as a simple process of subsuming foreign cultures
(Bryman, 2006; Zaheer, 2002). Not only has Disney accommodated to China’s local
preferences, dietary requirements, and even tastes for décors and settings, but it has
also applied the glocalization model to different cultures, such as the one in Europe
after the Disneyland Paris (formerly Euro Disney) was opened in 1992 (Zhang,
2007).

Understanding the theoretical concept of glocalization is a specifically critical
matter, because Disney’s experience is one of the many instances that indicate the
current upward trend in the glocalization of corporations that increasingly transfer
complex assets abroad. Now, more than ever, corporations are not just adapting
ideas, themes, products, and services, but also entire organizations, including
corporate philosophies and strategies, operational procedures, models for supervi-
sor–employee relations, and so forth. These have to be ever more closely linked to
the contexts and the sociocultural environments in which they are performed
(Kostova & Roth, 2003).

Nevertheless, it would be useful to further analyze the concept of glocalization
not as a replacement of globalization, but as a process that gives globalization fresh
and unique insights. Even though this case study of Hong Kong Disneyland has
looked at one key aspect of glocalization—that is, local adaptation or Robertson’s
(1992) notion that glocalization refers to creating products or services aimed for the
global market but adapted to the local cultures—the very concept of glocalization
does not limit itself to such a narrow approach. For example, as Wong (2000) points
out, the idea of glocalization eliminates the fear from many that globalization is like
a cultural tsunami that erases all differences. In other words, Wong continues, a giant
corporation does not have to go global “all the way” to reach international success.
In a similar fashion, as Waters (1995) suggests, glocalization entails the
incorporation of certain global processes into the local setting. From this perspective,
glocalization is not “local adaptation,” rather, it is global inclusion.

For future research, it might also prove interesting to answer the following
questions: Does glocalization lead to the end of global strategy, when it was thought
that corporations could totally impose the global on the local and, hence, be ultra
penetrative to local cultures, to such a point that they would erode those cultures? In
other words, is the global getting out while the glocal getting in? In a similar vein,
does glocalization mean that a company like Disney, or even Wal-Mart, is now
expected to give more power to locals in order to successfully tailor its strategies for
the local markets? Hong Kong Disneyland demonstrated this when the company
replaced its own US supervisors with local supervisors who could speak English,
Mandarin, and Cantonese.

Finally, in the case of the Disney expansion worldwide, what would be better for
ideal glocalization success: to build large theme parks (like Disneyland, CA) on
other continents, or to create a stream of niche resorts and attractions in other
countries? Put it another way, does glocalization work best in small portions
worldwide, by adjusting painstakingly to local towns and regions, or in large

678 J. Matusitz

sections, by adjusting to larger populations? No matter what, for a long time it was
believed that the Walt Disney Company could be very successful by accelerating the
global spread of its underlying principles (Bryman, 2006). Yet, the reality is that
Disney’s traditional method of force-feeding its products from its Burbank, CA
headquarters to local contexts has fairly been altered (Marr & Fowler, 2007).

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Jonathan Matusitz (PhD, University of Oklahoma) is an assistant professor in the Nicholson School of
Communication at the University of Central Florida. Born and raised in Belgium, he earned a BA in
translation of foreign languages at the International Interpreters’ School in Mons (Belgium). In 2000, he
moved to the United States and pursued an MA in professional communication at the University of Alaska
Fairbanks. In 2006, he earned a PhD in communication at the University of Oklahoma. His current
academic interests include globalization studies, intercultural communication, organizational communica-
tion, and communication and technology. He has published numerous articles in academic journals such as
the Journal of Transnational Management, Planning Theory, and Journal of Popular Culture. He is now
working on globalization research, particularly with respect to Wal-Mart’s ventures in Asia and Latin
America.

Disney’s successful adaptation in Hong Kong: A glocalization perspective 681

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• c.10490_2009_Article_9179

Disney’s successful adaptation in Hong Kong: A glocalization perspective
Abstract
Glocalization theory: A description
Hong Kong Disneyland: From its opening to the present
The glocalization of Hong Kong Disneyland
Reduction of prices
Adaptation to local visitors’ customs
Change of décors and settings
Adaptation of labor practices
The success of glocalization
Discussion and future directions
References

© W. S. Maney & Son Ltd 2014 DOI 10.1179/1024529414Z.00000000060

competition and change, Vol. 18 No. 3, June 2014, 265–79

Managing Across Borders:
Global Integration and Knowledge
Exchange in MNCs
Kathleen Park
MIT Sloan School of Management, USA and Gulf University for Science
and Technology, Kuwait

Ursula Mense-Petermann
Department of Sociology, Bielefeld University, Germany

In this article we explore expatriate managers as international boundary
spanners and problem solvers in promulgating knowledge exchange in mul-
tinational companies (MNCs). Theoretical perspectives on agency, expatria-
tion and MNCs connect notions of individual volition with expatriation
interactions and organizational outcomes. This conceptualization questions
the exaltation of individual excellence in the earlier heroic perspective on the
expatriate. Rather, interculturally competent, strategically localized expatriate
managers address recurring global–local tensions in everyday interactions
with the host country subsidiary staff. The expatriates’ boundary spanning,
problem solving and knowledge exchange enhance the global integration,
national responsivenes s, and worldwide innovation and learning concomitan t
with the transnational form of the MNC.

keywords multinational companies, transnational management, expatriate
managers, intercultural competency, boundary spanning

Introduction

Since the end of the 1980s, inspired by the path-setting work of Bartlett and Ghoshal

(1989), scholars in organization studies, international business and strategic manage-

ment have investigated changes in the global strategies and organizational structures

of multinational companies (MNCs) targeting enhanced cross-border integration

of their worldwide activities. MNCs today must exploit opportunities arising from

the globalization of value chains, while confronting the difficulties of integrating

geographically dispersed processes of sourcing, production and sales. While the MNC

266 KATHLEEN PARK and URSULA MENSE-PETERMANN

headquarters represents the most important locus of organizational strategic decision

making, the headquarters does not function as the sole site of management or of

knowledge creation and dissemination. An essential challenge in the practice of inter-

national management consists of connecting knowledge distributed across different

locations and making productive use of that knowledge to gain competitive advan-

tage. Expatriate managers embody an indispensable aspect of the global dispersion

and development of organizational resources. We question the heroic, individualisti-

cally triumphant perspective on the expatriate by investigating conditions for the

successful fulfilment of the boundary-spanning and problem-solving roles antecedent

to knowledge exchange. These roles become crucial in balancing the tension between

global integration and national responsiveness inherent in achieving transnationaliza-

tion, where the transnational company represents the most efficacious form of the

MNC (Bartlett & Beamish, 2011).

In the transnationalization of multinational companies (MNCs) — that is, in the

realization of an MNC that functions simultaneously highly on global integration,

national responsiveness, and worldwide innovation and learning — the functions of

expatriate managers in the cross-border transfer of organizational models, work

structures and best practices assume pivotal importance. Expatriate managers possess

unique skills as internationalized agents impacting managerial and technological

practices in both their home and host countries (Hébert et al., 2005). This impact

occurs whether the home and host countries are at the same or disparate levels of

economic development (Luo & Zhao, 2013). In the context of globalization across

the economic gradient (Kim & Tung, 2013), expatriate managers serve MNCs

in processes of knowledge exchange and worldwide integration. We examine how

expatriate managers span boundaries and solve problems within and between borders

in transnationally-orientated MNCs.

The subjective and objective importance of global assignments has grown consider-

ably throughout the globalization of the economy and the increased cross-border

coordination of worldwide activities of MNCs (Dickmann & Doherty, 2008). While

debates on the globalization phenomenon initially focused on the organizational

level, with MNCs considered as central driving forces of global economic integration,

attention subsequently shifted increasingly to the level of actors putting organiza-

tional globalization into practice (Dörrenbächer & Geppert, 2006). The expatriate

manager hence becomes a central character.

Literature review and theoretical framework
Expatriate managers can be viewed as important actors in organizational global-

ization in two fundamental respects. Expatriates can play an important part in

implementing global programmes, distributing best practices and aligning the organi-

zational cultures of the headquarters and globally dispersed subsidiaries, thereby

furthering the global integration of MNCs (Black et al., 1992). In addition, expatri-

ates can acquire the breadth and depth of knowledge necessary to assist MNCs

in managing myriad intercultural factors reflecting both global and local forces

(Berthoin Antal, 2001). The expatriate manager has emerged as a boundary spanner

in accordance with the research of Ancona and Caldwell (1990, 1992), with the

appreciation and awareness of global and local forces as articulated by Au and

267MANAGING ACROSS BORDERS

Fukuda (2002). Expatriates form part of a core management cadre playing increas-

ingly indispensable roles in assuring both local responsiveness and global integration

as globalization continues.

The literature on expatriates and global assignments has grown in relation to

globalization of the economy and the expanded reach of MNCs. We focus on trends

related to corporations and careers as well as the worldwide economy, strategy and

knowledge management. Several intertwined strands emerge as especially important

for our conceptualization of the boundary-spanning and problem-solving capabilities

of expatriate managers: transnational management, bridging boundaries, global

career mobility and global career orientation. These strands are interrelated in the

convergence of, yet distinction between, global and local business forces and also in

a broader understanding of expatriation as a form of human agency. The agency

understanding marks the guiding edge of our conceptual framework.

Agency and expatriation
Agency perspectives illuminate expatriation as organizational instrument, human

capital consequence and career calculation. Agency concerns the capacity of indi-

viduals to make choices and to act on their decisions (Bandura, 1982). Expatriation

exhibits agency in that the expatriates — sometimes from individual assertion and

sometimes at institutional behest — have elected to take job assignments in locations

other than the home country. In this article, we use the term expatriates to mean

managers or experts dispatched by headquarters to a subsidiary of the MNC in a

different country for business enhancement purposes (Perlmutter & Heenan, 1974).

This definition of expatriate excludes other types of internationally mobile manager,

such as in-patriates (employed by a subsidiary of an MNC and assigned to the

corporate headquarters, usually for reasons of qualification), third country nationals,

or bicultural/bilingual persons recruited within the subsidiary country and referred to

as local hires. With our focused definition, we emphasize human agency within the

organization. For instance, structure–agency linkages have been previously explored

with respect to executive search firms and CEO labour markets (Khurana, 2002),

cultural differences in individual motivations (Hernandez & Iyengar, 2001) and sub-

sidiary learning as mediated by individual actors in MNCs (Saka-Helmhout, 2007).

We examine the links between organizational structure and human agency as

reflected in expatriate manager behavioural practices and promotion. Expatriation

becomes a mediating mechanism for understanding the relationship between human

agency and organizational global integration and knowledge integration, as well as

the relationship between agency and careers, as viewed in practices of managing

across national and cultural boundaries in MNCs.

Transnational management and expatriate managers
Multinational companies function as innovation and learning networks for partici-

pants across borders within these organizations, as exemplified by expatriate manager s

daily engaged in intercultural interactions (Park & Hollinshead, 2011). The transfer

of resources and capabilities across national and cultural boundaries occurs at expa-

triate levels from the top executive suite to the factory floor (Geppert & Clark, 2003).

We focus on expatriate managers with project and personnel oversight responsibilities

268 KATHLEEN PARK and URSULA MENSE-PETERMANN

and with divisional and bottom line accountability. In the range of MNCs — from

multinational to international to global to transnational — the transnational firm to

the greatest extent shares innovation and learning capabilities between headquarters

and subsidiaries. Intellectual competencies in the transnational are not concentrated

at headquarters, but rather exist worldwide through interconnections among

knowledge-intensive individuals and teams. These interconnections represent a meta-

network on which MNCs can draw to enhance their innovation and learning perfor-

mance (Ahuja, 2000). Knowledge flows between geographic nodes and the dispersion

of professionals facilitates the transfer of essential information to endorse the global

competitive advantage of the firm (Lazarova & Tarique, 2005).

The importance of knowledge transfer for MNCs in general, and for the transna-

tional type of MNC in particular, centres on this creating and sustaining of global

competitive advantage (Govindarajan & Gupta, 2001; Morris & Snell, 2011). Multi-

national firms must enhance core competencies in varied locations around the world

and must be continually on the lookout to anticipate and respond to competition,

whether global or local, in identified crucial markets. Whether the company occupies

the dominant strategic position of defending worldwide preeminence or the subordi-

nate position of challenging the global leader, it must engage in an iterative sequence

of tasks to identify issues, gather information, devise strategic actions, respond to

competitor reactions, and overall generate the tripartite performance (financial, social

and environmental) now expected of the largest MNCs in demonstration of their

global corporate citizenship (Rasche et al., 2013). The transfer of knowledge remains

vital for organizations operating in the global economy, in an information age where

leading-edge knowledge-based capabilities represent the intangible asset most in

demand for competitive advancement. For transnational MNCs, the flow of knowl-

edge becomes especially important because of the greater diffusion of capabilities and

responsibilities across national borders.

Expatriate managers and global assignments
During the past few years, global assignments have increasingly drawn the attention

of scholars in international business and management. Global corporations have

intensified integration of their worldwide activities, necessitating revised strategies

and enhanced understanding of both global and local cultural and competitive forces.

Three dominant perspectives can be identified — the managerial, organizational and

expatriate — in the literature on global assignments.

The global manager perspective

The entire world becomes the purview of a new breed of managers as well as the

scholars who study them (Sklair, 1995). The global manager successfully masters the

transnational challenge of balancing global integration and local responsiveness.

These world-class executives operate in companies interlinked through global value

chains — these managers are cosmopolitan, adept in varied geographic and social

settings, and adroit in bridging differences among actors (Kanter, 1995). Moreover

global managers excel in creating influential, boundary-spanning networks, the

potency of which derives from the managerial facility for moving easily within

multiple social spaces (Park, 2005). The intercultural, transnational managers become

269MANAGING ACROSS BORDERS

the essential economic agents for navigating cross-border activities in MNCs amidst

the competitiveness of global markets.

Crucially, global assignments develop managers who can oversee worldwide

coordination and control functions in addition to bilateral information flows across

borders (Hamori & Koyuncu, 2011). According to the global manager view, MNCs

adopt a geocentric management approach (Perlmutter & Heenan, 1974), responding

to the imperative to build a global management cadre meeting the challenges of

global competition (Bossard & Peterson, 2005). These managers are the progenitors

and heirs of the transnational capitalist class (Sklair, 2000) that began evolving in

modern form in the mid- to late twentieth century, with increasing prominence in the

present.

The organizational perspective

This perspective elucidates the organizational conditions that can make global assign-

ments successful. The research focuses on organizational practices such as selection,

training, compensation, performance appraisal and repatriation (Björkman & Schaap,

1994; Chang & Smale, 2013; Fish & Wood, 1996; McPhail et al., 2012; Peterson

et al., 2000). A range of questions has been considered: What strategic roles do

global assignments play for multinationals (Duncan et al., 2010)? How can MNCs

successfully expatriate and repatriate international managers (Cox, 2004; Fish &

Wood, 1996; Lazarova & Caligiuri, 2001)? What role do different individual alle-

giance patterns play in successful expatriation and repatriation (Black & Gregersen,

1992)? What can expatriates contribute to organizational learning (Berthoin Antal,

2000, 2001; Lazarova & Caligiuri, 2001; McIntyre et al., 2012; Wong, 2005)? These

contributions reprise the intra-organizational processes and practices connected with

expatriation and repatriation, and hence adopt an HRM perspective. Some research

has also resulted in best practice recommendations to MNCs for global assignment

policies.

Complementing the strategic HRM perspective, other researchers have adopted an

institutionalist perspective (Westney, 2005). Studies comparing staffing practices of

MNCs of different national origin reveal the importance of home country as well as

host country effects on the propensity to staff overseas management positions with

expatriates (Boyacigiller, 1990; Peterson et al., 2000). Boyacigiller (1990) considers

differing levels of political risk, cultural distance, and competition, and operations

with different levels of complexity and interdependence to be important host country

variables. Peterson et al. (2000: 145) differentiate at least three models — Anglo-

American, Japanese and German — of expatriate management and subsidiary con-

trol. Björkman and Lu (2001) studied HRM practices in Sino–Western joint ventures,

asking whether these practices more closely resembled those typical for the Western

MNC or for the local Chinese firms. They determine expatriates to be important

carriers of culture, implementing the practices of their home organizations. These

institutionalist studies consider the role of expatriate managers within a wider

perspective that addresses questions of organizational convergence or divergence

in the globalization process — one of the main areas of debate on organizational

globalization during recent years.

270 KATHLEEN PARK and URSULA MENSE-PETERMANN

The expatriate perspective

This literature identifies the problems and opportunities arising from global assign-

ments and explores the implications of these assignments for the expatriate roles of

boundary spanner (Au & Fukuda, 2002) and culture carrier (Björkman & Lu, 2001).

Issues of intercultural communication and transnational cooperation crystallize in

connection with these functions (Mense-Petermann, 2005). Not only intercultural dif-

ficulties during deployment but also difficulties relating to readjustment upon return

to the home country have been revealed by these investigations (Black et al., 1992;

Cox, 2004; Lazarova & Caligiuri, 2001). The alignment between expectations and

reality becomes crucial for expatriates in developing perceptions of success resulting

from their overseas career ventures (Harvey et al., 2012). Some studies extend the

perspective to include the partners and families of expatriates, examining the role

played by these important life-world members in the decision to accept a posting as

well as the success of that posting (Black & Gregersen, 1991; Harvey, 1997). In the

range of studies, cultural differences have clearly emerged as the main source of the

difficulties experienced by expatriates (cultural differences between the home and

host countries as well as between the headquarters and subsidiary offices). To cope

with these differences and to formulate effective intercultural collaborations (Gertsen

& Søderberg, 2011), the boundary-spanning and problem-solving aptitudes of the

expatriates come especially into play.

We continue now with the cultural strands of the perspectives, addressing expatri-

ates as boundary spanners and studying the prerequisites for fulfilling this role

successfully.

Expatriate managers as boundary spanners and culture carriers
Boundary management requires both an external and an internal orientation. Tradi-

tionally, management research focused on the internal orientation of groups for the

tasks required for group performance (Hackman & Morris, 1975). Later research on

the external orientation of groups explicated the associations between the group

and the wider organization and business environment (Ancona & Caldwell, 1988).

Likewise, the framework applies to individuals, who can cultivate external (inter-

organizational) and internal (intra-organizational) orientations as seen in three sets

of potential facilitative actions: (1) ambassador (persuading, lobbying and informing

actors at different hierarchical levels in the within-firm or between-firm network); (2)

task coordinator (discussing ideas, assimilating feedback and harmonizing activities

across network actors); and (3) scout (scanning the networks for ideas and informa-

tion) (Ancona & Caldwell, 1992). These diverse manifestations of boundary manage-

ment correspond to the nature of communications between the knowledge broker and

other information agents or recipients. The ambassador, task coordinator and scout

roles are not mutually exclusive; rather, they emphasize different aspects of exchange

of greater or lesser importance at various times. The boundary-spanning functions of

key individuals can, in addition, facilitate firms’ innovation performance (Levina &

Vaast, 2008).

Boundary spanning highlights issues related to progressively bridging cultural

differences (Harvey, 1996; Hofstede, 1997, 2001; Javidan & House, 2001) as well as

problems connected with the enduring juxtaposition between the headquarters and

271MANAGING ACROSS BORDERS

local subsidiaries (Black & Gregersen, 1992). The global integration and knowledge

exchange of MNCs surfaces in the actions, interactions and reactions among key

organizational actors, in particular expatriates.

Within the transnational type of MNC, boundary spanning occurs extensively

among the globally dispersed affiliates. As a result of their multiple locations, MNCs

are intrinsically embedded in multi-layered environments and confronted with con-

tradictory expectations (Westney & Zaheer, 2001, 2010). Organizations dealing with

conflicting expectations surfaced as a core issue in the seminal work of Meyer and

Rowan (1977) on the myth and ceremony of formal organizational structures. Meyer

and Rowan assert the importance of decoupling organizational units to cope with

inconsistencies in conjunction with interdependencies. Such decoupling can readily

occur, for instance, in the multinational type of MNC, which has relatively high

national differentiation and responsiveness in combination with relatively low global

coordination and integration (Bartlett & Beamish, 2011). Regardless of the particular

type of MNC or other organization, when decoupling cannot occur, conflicts erupt.

These conflicts must then be handled within the context of informal relationships

among individuals (Meyer & Rowan, 1977: 258). In transnational MNCs, expatriates

bear the responsibility for this intra-organizational boundary spanning and informal

relationship building.

Building on the work of Ancona and Caldwell (1992), Au and Fukuda (2002)

accentuate the directionality of the boundary-spanning role in the multinational con-

text. The ambassador tends to convey knowledge from headquarters to subsidiaries,

the scout from subsidiaries to headquarters, and the task coordinators in both

directions. Expatriates can play more than one role at different points in time. The

successful adoption and alternation of boundary-spanning roles depends on the effi-

cacious handling of cultural differences and intercultural translations by the expatri-

ate manager in the knowledge-intensive environment. The literature on knowledge

exchange has convincingly demonstrated the necessity of translating — that is, dis-

embedding and re-embedding — crucial knowledge (Becker-Ritterspach & Raaijman,

2013; Czarniawska, 2012; Mense-Petermann, 2005). Organizational learning and

knowledge transfer within MNCs unfolds as a series of intercultural interactions

between expatriates and local staff. The competence to successfully act in intercul-

tural situations therefore becomes central for expatriates in performing each of the

boundary-spanning roles.

Intercultural interactions occur between locals and expatriates. Expatriates can be

considered to be either those appointed by the corporation or those who have been

educated and gained work experience abroad who then return to their home country

(that is, a host country for the MNC) as so-called self-internationalizing expatriates

(Berthoin Antal, 2001). The self-internationalizing expatriates are in some sense

simultaneously local and global and hence possess the capability to function particu-

larly well as boundary spanners. This category of expatriate has been growing; China,

for instance, as a result of its economic ascendancy and greater career opportunities,

has increasingly lured back the diaspora of professional talent. The returning

well-educated, internationally-orientated individuals have the bilingual and bi-

cultural skills for facilitating cross-border, cross-functional and inter-organizational

communications and knowledge exchange.

272 KATHLEEN PARK and URSULA MENSE-PETERMANN

In addition, expatriates tend to occupy positions and acquire the knack for span-

ning inter- and intra-organizational boundaries. Expatriates can locate business

opportunities and disseminate information within global organizations. Also, expatri-

ates can serve as conduits for information flows between organizations at regional,

national or international levels. The performance of expatriates in these bridging

roles depends on the depth of experience in a particular locale and the extensiveness

of networks formed there. The fulfilment of a range of boundary-spanning functions

validates the sense of professional efficacy experienced by expatriates, leading also to

higher levels of job satisfaction and power within their positions (Au & Fukuda,

2002). The greater autonomy accorded to subsidiaries in the transnational model

underscores the importance of strategic interconnections and boundary spanning.

Expatriate managers embody linkages between the home and host countries. Drawing

on their intercultural savvy and interactions, expatriate managers facilitate knowl-

edge exchange, which leads to the embedding of innovations that can stimulate

world-class corporate performance. Delving further into the boundary-spanning

function illuminates the complexities and specificities of these home–host linkages.

We now turn to the differentiation of expatriates who prospectively fulfil these

functions.

Career orientations and boundary-spanning capacities
The career orientations of expatriates influence their boundary-spanning capacities,

as established in the work of Loveridge (2005, 2006b), who differentiates three career

types based on his intensive study of expatriates: (1) diplomats, whose role has been

mainly developing new international ventures and troubleshooting on a global scale;

(2) fast-trackers, also referred to as tourists, who have carefully calibrated and

monitored their career trajectories to benefit from relatively briefer overseas time, and

who exhibit a primary allegiance to headquarters as the source of promotion and the

location to which to return; and (3) locals, whose outlooks have been modified

through marriage, religious conversion or otherwise social assimilation into the local

community, and whose prospects and interests have accordingly changed to antici-

pate career trajectories and conclusions in their host (now home) countries. We focus

on locals and tourists as the key contrasting types of expatriate agent in relation to

their boundary-spanning and problem-solving capacities within MNCs.

In additional formative work, Loveridge (2006a) analysed the exchanges between

European MNCs and associated agencies in the host countries of Malaysia, Brunei,

Thailand and Singapore. He examined technology transfer between the host and

home sites in the context of expatriate managers navigating the local business terrain.

External interfaces and internal resources influenced the embedding of innovation, as

reflected in technologies for accelerating economic development in these regions. He

found that senior expatriate managers in the MNCs served in effect as diplomats,

with close ties to the heads of the host country agencies. These high-level connections

endowed them with the political capital and relational resources to get things done.

The fast trackers, also known as tourists, represented a group of rising expatriate

managers with shorter-term career horizons in the host countries, who nevertheless

functioned as goal-orientated pace setters with high managerial, technological and

innovation expertise. Toward the accomplishment of designated goals, the fast-

trackers benefited from the input of the local form of expatriate manager. Having

273MANAGING ACROSS BORDERS

longer-term career spans in the host country, these managers assimilated and accul-

turated to a greater extent. This localization conferred on them a relatively lower

status, as viewed by some corporate colleagues. As concluded by Loveridge, based on

his study of 20 European MNCs and their subsidiaries in assorted Asian host coun-

tries, both locals and diplomats demonstrate considerable skill in handling cultural

differences and facilitating knowledge exchange, while tourists typically excel much

less in these areas.

Extending the career influence perspective of Loveridge (2005, 2006a, 2006b), we

suppose that the career orientations and organizational allegiances of expatriates

affect the manner and intensity with which they immerse themselves in the local busi-

ness and social environment and culture. As expatriates differ in how their interna-

tional assignments relate to their short-, medium- and long-term career expectations,

expatriates involve themselves in their host countries to different extents. Differing

career orientations invoke varied boundary- spanning capacities in the respective

expatriates, as their career orientations are connected, for example, with levels of

willingness to learn the local language, to engage in local communication and con-

flict, to form relationships with local businesses, government officials (Heikkliä, 2012)

and other individuals, and generally to absorb the local worldview. Figure 1 provides

our conceptual overview of the expatriation context and anticipated outcomes, as

mediated by the capabilities of the differing types of expatriates themselves together

with specific aspects of the integration mechanisms of boundary spanning and

problem solving.

figure 1 Expatriate managers, global integration and knowledge exchange.

274 KATHLEEN PARK and URSULA MENSE-PETERMANN

Discussion

In this article we have explored expatriate managers as international boundary

spanners and problem solvers in relation to knowledge exchange across borders

within MNCs. Theoretical perspectives on agency, expatriation and MNCs link the

individual volition of the expatriation decision with organizational outcomes related

to those decisions. Specifically, the individual-level decision making of the agency

perspective leads into the inter-group interactions of the expatriates with the host

country subsidiary staff in terms of boundary spanning and problem solving, which

in turn impacts the MNC trajectory in relation to the apotheosis of transnationalism.

The more readily expatriation occurs as a desirable career development opportunity,

and the more readily the headquarters-dispatched expatriates intermingle with the

host country subsidiary staff and propagate bilateral knowledge exchange, the more

the MNC advances toward transnational realization along the triple dimensions of

global integration, national responsiveness and worldwide innovation and learning.

We find that the polarized tourist and local types of expatriate do not necessarily

distinctly occur. Likewise, the valiant ideal of the touristic expatriate manager

dramatically resolving tensions between global competitiveness and local responsive-

ness does not in reality exist. Interculturally competent, to some degree localized

expatriate managers instead address recurring global–local tensions through their

boundary-spanning and problem-solving capabilities. These capabilities occur in a

range of interactions between the host country subsidiary staff and the home country

expatriate managers sent from headquarters.

Building on the expatriate typology of Loveridge (2005) and identifying boundary

spanning and problem solving as the mechanisms for knowledge transfer, we have

identified the dynamic interplay between strategy, culture and career in MNC expa-

triation. Previous research has determined that MNCs tend to advocate the more

touristic transient form of expatriation over the local form, while locals experience

greater success than tourists in transferring knowledge as a result of their greater

intercultural competencies. At the extremes, the global mobility structures, processes

and policies of MNCs actively support and promote the tourist type of expatriate,

while disregarding and disadvantaging the local type. The disharmony between the

benefits devolving to the MNC from the locals versus the promotion by the MNCs

of the tourists can in part be resolved through the observation that no pure type of

expatriate in reality exists. The most successful expatriates combine elements of the

tourist and the local: in relation to the home country headquarters and the duration

of their assignments, they function as tourists; in relation to the subsidiary host

country, they function as locals. In this synthesis enacted through their intercultural

proficiencies and headquarters–subsidiary network connections, the successful

expatriates address the dialectic between home and host cultures and between global

competitiveness and local responsiveness.

Tourists and locals can be differentiated as ideal types, but expatriates in reality

display features of either type to greater or lesser degrees. We contribute to the

expatriation debate and extend the findings of Loveridge by positing that neither pure

type of expatriate best serves boundary spanning and problem solving. The tourists

lack the essential intercultural understanding and competencies, while the locals

lack the requisite relationships with headquarters. To succeed as boundary spanners,

275MANAGING ACROSS BORDERS

actual expatriates must balance local and headquarter perspectives in their everyday

work and interactions. Boundary spanning then manifests as a form of expatriate

agency, invoking individual capabilities, decisions and actions. Yet intercultural

competencies and understanding of local conditions (which require time to acquire)

and tied relationships with headquarters (which tend to loosen over time) mean that

expatriation does not represent the solution to the problem of global integration of

MNCs but rather presents an ongoing challenge.

Local expatriates are better equipped to manage knowledge transfer at the local

interface than are tourist expatriates, although tourists have access to the most recent

business and technological innovations and practices provided by headquarters. The

relative proficiencies of each type of expatriate provide potential for the synthesis of

orientations and capabilities, as seen in the most successful expatriates. With the local

expatriate orientated primarily toward the foreign subsidiary and the tourist expatri-

ate orientated primarily toward headquarters, integrative results can be obtained

through individual and collective efforts. The integration of capabilities and perspec-

tives can occur within an expatriate — for instance, multi-competency expatriates

functioning as highly-contributing individuals can incorporate aspects of both the

tourist and the local. Tourists and locals as pure types tend not to be both widely

hired in the same outpost; rather, expatriates can change from tourists to locals when

they stay long enough.

While the tourists and local type of expatriates are conceptually polarized and

seldom equally recruited at a particular location, the tourists and the local (host

country) subsidiary staff more widely rely on and need each other. The tourists

cannot so rapidly and frequently change country locations without the deeper

contextualized functioning of the local subsidiary staff to back them up. The local

staff cannot so well deploy their capabilities without the knowledge and authority

imparted from headquarters by the tourists. In the host country, the tourists in coop-

eration with headquarters have the international–global content, and the locals in

conjunction with their own networks hold the linguistic and cultural key for unlock-

ing dissemination into the foreign subsidiary. The global competitiveness and

national responsiveness mandates of the transnational corporation can be fulfilled,

for instance, in tourist expatriate–local staff combinations. The third required dimen-

sion of the transnational corporation, worldwide learning and innovation (Bartlett &

Beamish, 2011), occurs also through this collaboration. Innovation transpires at both

the headquarters and local levels and relies on bilateral knowledge exchange facili-

tated by the range of expatriates and local staff. Successful transmission across the

headquarters–subsidiary synapse requires a spectrum of expatriate–local interaction.

Expatriate professionals illustrate contradictions in the transnational model of glo-

bal operations. As boundary-spanners, expatriates work at the intersection between

headquarters and local subsidiaries. They mediate the conflicting rationalities of these

organizational units. As problem solvers, expatriate managers work in conjunction

with multiple organizational members on an array of issues requiring the integration

of diverse capabilities and perspectives in relation to global excellence. The allocation

of expatriates in itself becomes a dilemma for MNCs. The tension between local

responsiveness (which classically could best be addressed by the local type of expatri-

ate) and global competitiveness (which now becomes the domain of the tourist to

276 KATHLEEN PARK and URSULA MENSE-PETERMANN

support) appears in decisions concerning which expatriates to assign for fulfilling

which goals and responsibilities. These allocation decisions do not have easy answers.

The tourists experience pressure from both the business performance aims of head-

quarters and their own motivations and expectations for expatriation, while the

locals experience more pressure from within themselves to achieve the goals driving

their orientation within a new country and culture. This synchronization of individ-

ual and organizational expatriate aims, challenges and accomplishments becomes

essential to successful management across borders in the modern global MNC.

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Notes on contributors

Kathleen Park is Research Fellow in Global Studies and International Management

at the MIT Sloan School of Management, Cambridge, MA, USA and International

Faculty Fellow and Assistant Professor in Strategic Management and International

Management at Gulf University for Science and Technology, College of Business,

Kuwait. She received her PhD from the MIT Sloan School of Management. Her

research interests include international mergers and acquisitions, alliances, corporate

governance, executive careers and global leadership development. Dr Park is

279MANAGING ACROSS BORDERS

presently collaborating with Dr Ursula Mense-Petermann on ‘Expatriate managers:

A new cosmopolitan elite’. In addition, Dr Park has received grants for projects on

‘MNCs as family businesses? Drivers of growth and internationalization from the

GCC to the global economy’ and ‘Global leadership development in high-income

emerging economies in the Arabian Gulf’. Her work has been published in Competi-

tion & Change, Journal of International Management, Thunderbird International

Business Review, International Journal of Business and Economics Research, Rout-

ledge Companion on Mergers and Acquisitions and the Academy of Management

Best Papers Proceedings.

Ursula Mense-Petermann is Professor of Economic Sociology and the Sociology of

Work at the Department of Sociology, Bielefeld University, Germany. Prior to her

present chair at Bielefeld, she held a chair in Sociology at Klagenfurt University,

Austria, and she was previously Assistant Professor for Economic Sociology at

Bielefeld University. She earned her PhD with distinction at Magdeburg University,

Germany. Her current research focuses on economic globalization and transnation-

ally mobile work. The processes and problems of transcending political and cultural

boundaries in the economic realm are at the centre of her research interests. She is

principal investigator of three world society-related research projects: (1) Expatriate

Managers: A New Cosmopolitan Elite, (2) The Globalization of Small and Medium-

sized Enterprises, and (3) Global Mobility Policies as Mobility Regimes.

Correspondence to: Dr Kathleen Park, MIT Sloan School of Management, Building

E62-300, 100 Main Street, Cambridge, MA, USA 02142. Email: kmpark@mit.edu and

park.k@gust.edu.kw

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individual use.

Global Leadership, IQ and Global Quotient

Geoffrey VanderPal

The present paper aims to identify and explore the role of cultural values and global mindset in successful
international leadership and the effects of global mindset improvement on supporting leaders to provide
optimum solutions to challenging situations. The investigation of extensive scholarly works highlighted
that the importance of global mindset to global leadership (GL) has received only limited attention. This
article suggests that analytical intelligence (IQ), emotional intelligence (EI) and leadership behavior are
complemented by cultural intelligence (CQ) in achieving a highly performant global leadership.

INTRODUCTION

Under the empire of globalization, a world where any move spreads in a domino game hard to image
a decade ago (Adler, 2006), successful leaders are regarded as critical human assets for companies that
seek to gain or aim to expand their international reach (Conner, 2000). The past twenty years have been
marked by the efforts of the academic community and business arena to decipher, understand and develop
the competencies required by the continuously changing globalized environment (Caligiuri & Di Santo,
2001; Chin et al., 2001; Cseh, 2002; McCall & Hollenbeck, 2002; Bird & Osland, 2004; Jokinen, 2005;
Mendenhall, 2006; Bartlett & Ghoshal, 2008; Osland & Bird, 2008; Watkins & Cseh, 2009).

The new realities driven by globalization require that international leaders develop their ability to
rapidly react to changes and manage the complex interpersonal relationships in order to reach excellence
amid ambiguity driven by cultural differences in values, patterns, attitudes and behaviours (Earley, 2002;
Earley & Ang, 2003; Ng et al., 2009a, 2009b).

Global operations are different from domestic activities; while the “whats” maintain, the “hows” need
to be tailored to country specific factors (McCall and Hollenbeck, 2002). The main driver of differences
in “hows” is related to cultural patterns. Extensive scholarly works (inter alia, Deal et al., 2003; Javidan
et al., 2010) describe the ability to handle such cultural differences as one of the essential skills needed for
a successful international leader.

The complex study of Beechler and Javidan (2007) emphasized a practically endless list of global
leadership competencies, to the point they become useless. The authors presented global intelligence as
the interplay between a manager’s knowledge, cognitive skills and psychological traits that offer the
possibility to influence the various stakeholders. They analyzed the global mindset from the perspective
of a multidimensional notion illustrating the mixture of “an individual orientation towards the external
environment and the underlying openness to ideas and experiences” (Beechler and Javidan, 2007, p.154).

Mendenhall et al. (2008) stressed that the critical differences between global leaders and leaders refer
to the increased uncertainty and substantial contextual changes the former experience. In order to achieve
excellence, all managers must be open to ongoing learning and reshape their capacity to deal with
paradox, perplexity and ambiguity.

120 Journal of Management Policy and Practice vol. 15(5) 2014

The western Enlightenment tradition calibrated intelligence with the help of IQ. It was, and still is, the
most notorious criteria of leadership and general abilities in western scholarly works (Chen and Gaynier,
2005). In the 1990s, emotional quotient became increasingly popular (Goleman, 1995). In addition to the
critical need for IQ and EI, global managers experience the challenge of developing a new array of skills
that give content to cultural intelligence (Earley, 2002).

Despite rich evidences on the significant role of intelligence quotient in the facilitation of successful
performing of tasks, an entire plethora of academic papers highlighted the precedence of emotional
intelligence over IQ. As described by Lynn (2002), excellence and intellectual brightness are highly
important components in human resource practices, but cannot be treated separately and considered
sufficient to solve challenging managerial issues.

Considerable academic researches documented the relationship between cultural characteristics and
leadership excellence in various countries. In addition, we note the large array of studies that identified
and investigated the cultural values and traits in targeted regions (Hofstede, 2001; House et al., 2004;
Hadgis, 2005). Extensive analyses by specialists (inter alia, Thomas & Inkson, 2003; Walker et al., 2003;
Peterson, 2004) emphasize that cultural competencies and cultural intelligence are the prerequisites for
reaching a successful leadership in a world with rules rewritten by globalization. Despite all efforts of
organizations to improve their understanding of cross-cultural leadership abilities, scientific papers on
cultural intelligence are surprisingly limited (Groves and Feyerherm, 2011).

The literature and practical experiences have demonstrated that a refined understanding of
international relationships is essential for companies to operate effectively in today’s global business
environment. The parameters of this perception are closely connected to the possession of international
abilities within an organization (Gupta and Govindarajan, 2002).

LITERATURE REVIEW

Scholars have suggested that the leadership paradigm that governed the 20th century needs to be
refined to reflect an innovative way of thinking/behaving to meet best the requirements of a highly
interconnected, competitive and dynamic global society (Jeanet, 2000; Werhane, 2007; Bartlett &
Ghoshal, 2008; Adler, 2009). Nowadays, the corporate environment requires a superior quality of
interrelationships, collective understanding and improved outcomes in the working arena (Ashraf et al.,
2014). After an extensive investigation of scholarly works focused on leadership competencies, Jokinen
(2005) highlighted the lack of consensus regarding clear definitions and classifications of fundamental
concepts such as “global”, “leadership”, or “competency”.

Although in the last decade the importance of having successful global leaders has become more
obvious than ever (Adler and Bartholomew, 1992; Brake et al., 1995; Brake, 1997; Bonnstetter, 1999;
Morrison, 2000; Suutari, 2002), researchers agree there is a considerable gap between the transnational
human resource requirements of international strategies and their achievement (Adler and Bartholomew,
1992; Morrison et al., 1999; Engle et al., 2001). In addition, diversity and uncertainty increasingly mark
the domestic environment, as companies enjoy worldwide reach (Jokinen, 2005).

According to McCall and Hollenbeck (2002), the development of global capabilities should rely on
the foreign business strategy that establishes what kind of global presence is optimal, the number and
grouping of international assignments, task forces, projects and other kind of relationships that exist.

The study of relevant works in the literature showed an issue of missing unanimity related to global
leadership capabilities. Some researchers (inter alia, Thaler-Certer, 2000; Kets de Vries & Florent-
Treacy, 2002) stressed that successful domestic managers have the same competencies as global ones, but
that highly performing international leaders are able to use and retain these abilities to solve completely
unfamiliar issues. Although Kets de Vries and Florent-Treacy (2002) argued that emotional intelligence is
a major attribute of a highly performing global leader, the authors have provided no clear definition of
this characteristic.

The results of the literature review composition by Kokinen (2005) indicate that the most important
leadership abilities include self-awareness, engagement in professional improvement and inquisitiveness.

Journal of Management Policy and Practice vol. 15(5) 2014 121

These competencies are treated as essential prerequisites, and driving factors for the development of a
broader array of other capabilities. Cognitive abilities influence the way leaders experience and interpret
the business environment. They also calibrate the amount of new knowledge and the effectiveness of
learning from those interpretations and practical contact with challenging situations. Wills and Barham
(1994) described cognitive complexity as a fundamental competence of successful global leadership. The
international business arena is usually marked by rising uncertainty and ambiguity. Given that, routine
solutions provided by old knowledge are not the best option to consider (Gregersen et al., 1998). Instead,
relevant intelligence and findings offered by past experiences need to be redesigned to create innovative
solutions.

Additionally, in a dynamic global context, leaders must possess divergent thinking abilities and skills
to switch rapidly concentration focus from one issue to another (Mintzberg, 1975), quickly recognize
patterns and identify critical facts and atypical behaviors, enjoy high speed of closure and multiple
intelligences. Despite the importance of traditional IQ as the academic community and practitioners have
come to know, it does not take outstanding capabilities to have high intellect in other areas. The literature
offers multiple evidences that promote IQ, emotional intelligence or both as predictors of global
leadership performance. The most relevant leadership theories-behavioral, trait, situational, contextual, or
contingent constructs, do not yield a clearly articulated answer to the requirements of contextual
intelligence as a component of crossing cultures that can be defined, learned, calibrated and improved
(Service and Loudon, 2012).

Academic studies and practical experiences pinpoint the need for an extensive understanding of IQ in
order to achieve superior leadership performances across cultures at an ever-increasing pace. Many
authors (inter alia, Sternberg, 1996, 2003; Brooks, 2011; Hall, 2011) attached only a limited importance
to the traditional IQ and replace it with a concept known as “successful intelligence”.

Service and Loudon (2012) extended the notion to a contextual intelligence (GLO) that can guarantee
cross-cultural and different contextual fit effectiveness. The authors have built a global leadership
quotient (GLQ) describing a type of intelligence similar to IQ, emotional intelligence and leadership
quotient that can be used as a benchmark for assessment, strategic development and ongoing training. Lee
(2005) research showed that many companies that seek international expansion face difficulties when
selecting and managing the most appropriate individuals. In addition, Yukl (2013) noted that as
globalization is changing demographic patterns, it becomes increasingly important for leaders to
understand how to manage employees with different values, beliefs and expectations.

The notion of cultural intelligence that emerged into the business literature (Earley, 2002; Earley
&Ang, 2003) may provide indications of whose time has come. The construct essentially refers to the
capacity to manage effectively relationships within various cultures (Earley& Ang, 2003; Ang et al.,
2007; Thomas et al., 2008). Concepts that illustrate this approach such as global mindset or cross-cultural
abilities have existed for some time (Thomas, 2006). However, the efforts to shed light on this
multifaceted notion are still in infancy (Ang et al., 2007). Earley and Mosakowski (2004) described two
types of cultural intelligence: organizational CQ and CQ related to geographic/ethnic culture. Zecca et al.
(2013) analyzed the characteristics of critical variables a leader must understand before performing any
operation in a culture with new and different patterns and habits. Essentially, successful global leaders
should tailor and align their activities with cultural demands (Muczyk and Holt, 2008). And although
cultural preferences are relative, a complementary approach illumine an underlying cultural

intelligence

(Hampden and Trompenaars, 2006).‖

Extensive academic analyses pinpoint the strategic importance of investments in improving CQ
among organizations leaders, as a source of competitive advantages in a global business arena (Earley &
Petersen, 2004; Ang & Inkpen, 2008; Rose et al., 2010). Previous investigations examined the impact of
personality features (Ang et al., 2006) and international experience (Crowne, 2008) on cultural
intelligence. Although some leaders learn from the valuable insight provided by scholarly efforts, other
fail at a high cost (Hill, 2001). However, much less is known about the connection between learning
capacity and international experience (Spreitzer et al., 1997). This topic requires more in-depth

122 Journal of Management Policy and Practice vol. 15(5) 2014

exploration so that organizations can make use of their costly international endeavor to improve global
leadership abilities (Kohonen, 2005).

There is a common belief in the literature that international experience is essential for leaders that
seek success in a highly interconnected business world (Bisoux, 2011; Phan, 2011). The integration of
technologies, industries, markets, states, relationship and interests is a main characteristic of the XXI
century workplace (Potoker, 2011). In line with Shinn (2011) description of a successful global leader, the
manager of tomorrow is an individual who can go beyond boundaries and disciplines and explore cultural
and international patterns. Based on previous theoretical constructs on intelligence indicators such as
cognitive intelligence (IQ), social intelligence (SQ) and emotional intelligence, Early (2002) described
that a leader’s ability to adapt to unfamiliar cultural environments depends on three dominant factors:
cognitive, motivational and behavioral (Figure 1).

FIGURE 1

CULTURAL INTELLIGENCE

Source: adaptation after Earley, P.C. (2002) Redefining interactions across cultures and
organizations: Moving forward with cultural intelligence. In B.M. Staw & R.M. Kramer (Eds.),
Research In Organizational Behavior Vol. 24 (pp. 271-299). New York: JAI

The CQ model and its extensions build by Thomas (2006), Thomas et al. (2008) and Thomas and
Inkson (2009) highlighted that the mixture of knowledge, mindfulness and competencies help global
leaders improve their CQ level. Culturally intelligent managers have the ability to use their knowledge to
face the multiple dimensions of cultural habits that interfere with their activities. They apply cognitive
strategies to identify and solve any issue and build an array of skills that can be tailored and translated
into appropriate behaviors to face a wide range of situations (Thomas & Inkson, 2009; Tuleja, 2014).
These are the most relevant abilities of a successful global leader.

Chin and Gaynier (2005) stressed that in addition to significant levels of IQ and emotional
intelligence, XXI century global leaders abilities have to be complemented by CQ to navigate the
uniqueness of the international environment. The authors improved the global competency model (GLC)
designed to support managers’ efforts in achieving global leadership excellence.

The GLC model provides guidelines that conceptualize the steps of cultural intelligence development
(Figure 2). First introduced by Chin et al. (2001), the model reflects the ranking of competency elements.
Chin et al. (2001) suggested an evolutional path of global leadership from a low hierarchic stage of
ignorance to an ideal superior degree of competence: adaptability.

Cultural
intelligence

(CQ)

Cognitive:
-knowledge and skills

-meta strategies

Motivational:
-self-efficacy

-goals and conciousness

Behavioral:

-repertoire
-mimicry

-routines and rituals

Journal of Management Policy and Practice vol. 15(5) 2014 123

FIGURE 2
GLOBAL LEADERSHIP COMPETENCY (GLC) MODEL

Source: Chin, C., Gaynier, L. (2006) Global Leadership Competence: A Cultural Intelligence Perspective.
Presented at the 2006 MBAA Conference. Available from
https://www.csuohio.edu/sciences/dept/psychology/graduate/diversity/GlobalLeadership%2011206

The abilities investigated for each stage are in line with the EQ research of Goleman (1995) and with
Kegan (1982) adult development model. The elements of competence described from low to high include
ignorance, awareness, understanding, appreciation, acceptance, internalization, transformation. Chin
(2005) refined the model and replaced transformation with adaptation, in accordance to the construct of
Silverthorne (2000) that reveals a powerful connection between adaptability and effective global
leadership. The author also delineated acceptance and internalization and stressed the latter is a distinct
evolutional step.

The GLC model highlights the that a superior level of international management function is not only
desirable, but in fact required for achieving excellence in a globalized business environment. It has to be
noted that the GLC model is not merely a leadership model; rather, it is centered on the nature of cultural
abilities or literacy needed to be a successful global leader.

Although the concept of CQ and its measuring instruments have been heavily researched through
substantial theoretical and empirical analyses (Early & Ang, 2003; Ang & Van Dyne, 2008; Ng et al.,
2009; Moon, 2010), the investigation of CQ as a global leadership ability is still at an early stage.
Moreover, scholarly works that explored the unique impact of managers CQ on the performance
outcomes beyond other contemporary leadership competencies, for instance emotional intelligence, are
very scarce (inter alia, Ward et al., 2009; Chun et al., 2010). Despite extensive examination of CQ as a
key indicator of global assignment effectiveness (Kim et al., 2008), integration in cross-border teams
(Flaherty, 2008), and expatriate adjustment and outcomes (Shaffer & Miller, 2008), the CQ arena largely
lacks empirical investigations.

Hofstede (2001) was the first to strongly highlight the need to research the cultural characteristics of
nationalities. The analysis of cultural differences was neglected in the evolution of trading between
countries. The context complicates when multinational companies decide to participate to joint ventures
and engage in mergers, acquisitions and strategic alliances at a global level (Hofstede et al., 2002). The
findings of Hofstede (2002) revealed the significant failure rate of international ventures between firms
from different parts of the world with various cultural habits. In addition, Hitt et al. (2007) emphasized
the importance of a global mindset for the successful management and competition in worldwide markets.

124 Journal of Management Policy and Practice vol. 15(5) 2014

Given the current business realities, global markets require leaders of excellence with the ability to handle
substantial uncertainty, complexity and diversity and proper knowledge of complex social, cultural and
institutional constructs.

Extensive academic studies have proposed the global mindset as a vital construct for a global leader
to achieve mastery and increase performance (Kedia & Mukherji, 1999; Black & Gregersen, 2000; Oddou
et al., 2000; Pucik, 2006).

Global mindset is a notion that refers to holistic abilities and is usually associated with the
prerequisites of successful leaders. Although the literature has created several frameworks of global
mindset, we note the absence of a consensus. Despite the significant amount of analyses that claimed the
role of a global mindset in leadership performance, when it comes to empirical research, only a limited
number of authors focused on this subject. While the vast majority of scholarly works has explored the
antecedents and evolution of global mindset, the importance of the concept has generated only narrow
interest to the academic community and it has not been empirically established yet (Vakilbashi et al.,
2014).

Many authors stress the importance of local culture as a determinant of leadership performance and
styles (Den et al., 1999; Koopman et al., 1999; Hofstede et al., 2002; House et al., 2004; Scandura and
Dorfman, 2004). From the cultural intelligence perspective, global managers increasingly face the need to
dominate local mindset, go beyond cultural restrictions, cooperate with counterparties from different
nations and manage socially diverse relationships. Levy et al. (2007) argued that the best solution to deal
with these issues is to escape from an ethnocentric mindset and build a global mindset embedding CQ,
understanding of other cultures and international business vision.

Rhinesmith (1996) illustrated 24 competencies that a global leader should have and classified them by
scope as they connect to the company strategy, structure, corporate culture and staff. Kottolli (2007) study
linked the global mindset with both people and organizations. From the perspective of individuals, Levy
et al (2007) described global mindset as a multi-faceted notion that encompasses “a highly complex
cognitive structure characterized by an openness to and articulation of multiple cultural and strategic
realities on both the global and local levels” (p. 244).

Transnational competitors recognize the importance of having powerful leaders with a global mindset
(Yan et al., 2002; Earley and Peterson, 2004; Crowne, 2008). Businesses are in search of highly trained
individuals whose abilities would allow them to successfully work across multiple cultures and achieve
substantial performances. Given the critical role of a global mindset for both the academic community
and the business environment, the methods of acquiring and further improving it has been extensively
investigated (Somerville, 1998; Gupta & Govindarajan, 2002; Thomas & Inkson, 2004; Earley &
Peterson, 2004; Ang & Inkpen, 2008; Shapiro et al., 2008).

Although the techniques for designing a global mindset are various, researchers reveal that
international assignments are one of the most powerful methods to develop the competencies and
knowledge required by a successful leadership (Gregersen et al., 1998; Crowne, 2008). According to
Sambharya (1998), foreign assignments are usually treated as surrogates for a global mindset. However,
not every foreign assignment ends with the accomplishment by the manager of the company-established
goals.

Gupta and Govindarajan (2002) described the global mindset as a mixture of awareness and openness
to cultural diversity and markets of leaders with a high capacity to integrate within different
environments. As presented by Lovvorn and Chen (2011), a global mindset is an ongoing and
continuously evolving process supported by cognitive feedback structures encouraging the search for
experiences that enlarge and improve a manager’s mental constructions.

Danuser (2009) described the critical role of developing global attitudes and training international
leaders. From an economic standpoint, it is more expensive for companies to send an employee to a
foreign assignment as a leader. Hence, ineffective leadership performed by new staff in international
markets could endanger the opportunity to compete, hamper the return on investments, increase the risk
of losing precious business alternatives and decrease customer loyalty and market share (Vakilbashi et al.,
2014).

Journal of Management Policy and Practice vol. 15(5) 2014 125

An international transaction failure facilitates the grounds for managers’ loss of self-esteem, self-
confidence and status among staff and engagement with the organization. However, from a social
responsibility perspective, companies need powerful leaders with a global mindset that would follow the
international ethics and rules related to climate change mitigation and strategies for sustainability and
environmental protection.

Given that international experience per se is not a driver of the global mindset, Lovvorn and Chen
(2011) findings indicated cultural intelligence as a catalyst of the international experience, turning the
information obtained from the foreign assignment into valuable knowledge and ultimately into a global
mindset.

Kedia and Mukherji (1999) designed a two-tier construct to describe the determinants of a global
mindset and by synthetizing the approach of Srinivas (1996), emphasized that its foundation relies on
only two elements: knowledge and skills. According to the authors’ vision, knowledge refers to the
appreciation of the existence of differences and skills relate to the capacity to transform knowledge into
action.

FIGURE 3
DEVELOPMENT OF A GLOBAL PERSPECTIVE

Source: adaptation after Kedia, B.L. & Mukherji, A. (1999) Global managers: Developing a mindset for
global competitiveness. Journal of World Business, 34(3).

While explaining the types of knowledge required to build a solid global mindset, Kedia and
Mukherji (1999) explored three particular knowledge factors successful leaders must possess:

1) a high understanding of technology, information systems and telecommunications;
2) a fine perception of the social and political elements in different countries – host of the

organization’s activities;
3) an evaluation of the role of culture and cross-cultural aspects that influence leadership decisions.

The main underlying skills researched by Kedia and Mukherji (1999) include acculturation and the

capacity to improve management to face cross-cultural diversity. By combining knowledge with the
appropriate abilities, leaders build a global mindset that enhances overall performance.

Global mindset

Knowledge
-mastery of technology

-International socio-politic and economic
perspective

-understanding of cultural issues

Skills
-acculturation

-leadership and managing

diversity

126 Journal of Management Policy and Practice vol. 15(5) 2014

FIGURE 4
CULTURAL INTELLIGENCE AND GLOBAL MINDSET

Source: Lovvorn, A., Chen, J. (2011) Developing a Global Mindset: The Relationship between an International
Assignment and Cultural Intelligence. International Journal of Business and Social Science, 2(9)

The cognitive style of leaders with a global mindset is described by three commonalities (Oddou et
al., 2000; Nummela et al., 2004; Osland & Osland, 2006):

1) managers enjoy a superior tolerance to ambiguity and are able to perform well during times of
substantial uncertainty;

2) personal abilities array is broad with leaders capable to function with the support of a large
number of available tools and underlying networks when faced with the uncertainty of new
situations;

3) managers who possess global mindsets have the competencies to handle cross-cultural issues
triggered by interactions with counterparties from foreign countries based on a holistic versus an
analytic way of thinking;

In light of the relationship between CQ and the effectiveness of global leadership, Manning (2003)

noted the vital role of cross-cultural effective leadership and argued that international abilities,
particularly related to the capacity to handle rising cultural diversity is a prerequisite of management
excellence. Rosen et al. (2000) study returned two important findings. First, the authors revealed that
global literacies are the core of leadership universals; second, Rosen et al. (2000) showed that with the
increase of the world economic integration, the more significant cultural patterns become. Cultural
literacy-understand as the ability to value and turn cultural differences into benefits- is critical among the
competencies required by a successful leadership.

The perception of cultural literacy of Rosen et al. (2000) shows many similarities with Earley and
Ang (2003) construct of CQ and builds a relationship between this type of intelligence and the leadership
of excellence in the global environment. Offermann & Phan (2002) provided additional evidences of this
link and showed that cultural consistency between managers and subordinates is related to the superior
hierarchy relationships within the company, satisfaction level of the followers and work effectiveness.
Similar to the emotional intelligence concept, debates are structured around assessment, training and
experience (Alon & Higgins, 2005).

International experience
-Accumulation of cultural

knowledge
-Experience in the
expanding global

marketplace
-Broadened perspective
-Enhanced knowledge

base
-Heightened interpersonal
and communication skills

Cultural intelligence
-Cognitive

-Motivational
-Behavioral

Global mindset
-Openness to diversity

-Awareness to diversity
-Integrating & Synthetizing across

diversity

Direct effects

Moderating
effects

Journal of Management Policy and Practice vol. 15(5) 2014 127

The cognitive intelligence construct generated large debates as a product of nature predominantly or
nurture predominantly (Lovvorn and Chen, 2011). According to large academic evidences, a higher IQ is
postulated to improve the abilities of an individual related to cultural patterns and differences. However, it
is the combination of leaders’ native intelligence, personal motivation and behaviors that drives their
ability to possess CQ (Tan, 2004). The predisposition to develop and improve cultural intelligence is
given by global leaders’ incentive to persevere when faced with difficulties and failures and it underlies
the foundation of CQ.

A powerful international leader will never wait for guaranteed outcomes; rather, he will return to his
own cultural intelligence, innovate, experience failure, learn from mistakes and continue trying (Davies,
1996).

As described by Crowne (2013) cultural exposure and resulting CQ is a source of competitive
advantages for any company. Sternberg (2003) argued that success is generated by the interplay between
analytical, creative and practical capabilities. Groves and Feyerherm (2011) analyzed a myriad of studies
and showed that CQ enhances leadership outcomes in the increasingly globalized business environment.

To perform a leadership of excellence, global managers must be able to understand and handle local
cultural patterns and develop superior IQ, EQ and CQ. The graphical representation below illustrates a
conceptualization that connects all these three constructs.

FIGURE 5
ELEMENTS OF GLOBAL LEADERSHIP EXCELLENCE

Source: Alon, I., Higgins, J. (2005) Global leadership success through emotional and cultural intelligences.
Business Horizons, 48, 501—512

Although the scientific investigations focused on global leadership quotient have highlighted the role
and implications of various competencies, they have not always been clear on how these abilities
influence the performance results. This topic may be intensively explored and debated in other fields,
such as psychology.

CONCLUSION

The analysis of the relevant literature has highlighted that successful global leadership depends not
only on leadership behavior, but also on the interplay of intelligences: cognitive intelligence (IQ),

IQ
Verbal and mathematical

intelligence

EQ
Emotional intelligence

CQ
Organizational cultural

intelligence

Motivation
Elements and types of

motivation

Leadership
behaviors

Domestic
leadership success

CQ
Geographical/Ethnic
cultural intelligence

Global leadership
success

128 Journal of Management Policy and Practice vol. 15(5) 2014

emotional intelligence and cultural intelligence. Theoretical studies and practical experiences have
revealed the critical role of cultural intelligence in achieving global leadership excellence.

Given the highly interconnected business arena and the determinants of successful global leadership,
companies need to include emotional and cultural intelligence as a component of their GL programs.
Having a global mindset is essential for any leader activating both in the global environment and in the
domestic arena.

Scholarly works on global quotient of international leaders have provided dispersed outcomes and
thus, more synergistic scientific efforts are needed, complemented by a more extensive theoretical
framework, to understand the phenomena and relationships underlying the improvement of the global
leadership potential.

The academic interest in CQ has revealed an upward trend since the seminal work of Earley and Ang
(2003), who described cultural intelligence as the ability to operate in culturally diverse business
environments. The authors provided solid arguments that general capabilities such as IQ, emotional
intelligence and social intelligence that involve a familiar cultural context to guide leaders’ cognition and
social behaviors, do not hold when managers are engaged in international assignments with different
background counterparties.

From a conceptual standpoint, the construct of cultural intelligence needs to be further investigated
and operationalized so that it can bring maximum benefits to academic community and business
environment. In the absence of multiple measurement instruments to prove its reliability and validity, the
development of the concept will be substantially hampered. Only in the last decade, researchers have
started to quantitatively develop the notion (Ang et al., 2007). An operationalized framework should offer
the means for the scholars and practitioners to evaluate leaders on their potential skills to activate
effectively during a foreign assignment. The international assignment parameters could also be assessed.

Companies could make overseas assignments based on the level of CQ exhibited by the individual
leader and the degree of complexity and uncertainty that the individual is forecasted to experience during
the foreign posting. International leaders face difficulties hard to image a decade ago. Hence, their
competencies and those of subordinates needed to function effectively in a highly interconnected business
environment characterized by different cultural patterns requires a superior perception and understanding
of diversity in all its forms and an active integration of any new incentive into exiting mental layouts.
Only by enhancing the level of cultural intelligence, a successful leader can develop a broad global
mindset.

The estimation and investigation of the effectiveness of international leaders faced with cross-cultural
interactions has never been so important. The construct of CQ, as a mixture of capabilities that may
explain why some managers perform better than others, shows substantial promise. The definition of
intelligence, in all its dimensions, has been a challenging process, and CQ is similarly problematic.

However, analyses focused on the link between cultural intelligence and successful leadership within
a globalized business world are rather limited. We also note the lack of empirical papers and qualitative
works to enhance the viability of the theoretical models. In addition, most researchers centered their
interest on offering normative recommendations to global leaders and human resource professionals and
not on exploring the theoretical and empirical difficulties driven by a rigorous investigation,
conceptualization and establishment of the role of a global mindset in achieving leadership performance.

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