African Journal of Business Management Vol. 4(14), pp. 3096-3109, 18 October, 2010 Available online at http://www.academicjournals.org/AJBM ISSN 1993-8233 ©2010 Academic Journals
Full Length Research Paper
The moderating effect of firm size: Internationalization of small and medium enterprises (SMEs) in the manufacturing sector Shankar Chelliah1*, Sivamurugan Pandian2, Mohamed Sulaiman3 and Jayaraman Munusamy4 1
International Business Section, School of Management, Universiti Sains Malaysia. Anthropology and Sociology Section, School of Social Sciences, Universiti Sains, Malaysia. 3 Department of Business Administration, International Islamic University Malaysia. 4 Centre of Postgraduate Studies, Limkokwing University of Creative Technology, Malaysia.
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Accepted 20 July, 2010
Previous research on the internationalization of small and medium enterprises (SMEs) explored the relationship between adoption of global orientation and competitive advantage, management attitude, and international knowledge and experience. However, there was a difference in opinion between those arguing that there is a positive relationship between these variables and others who contended that there is moderating effect of size on the internationalization. Within this context, this study sets out to further the discussion by comparing the global orientation of SMEs in Malaysia with their different level of size. In doing so, it draws upon the findings of survey of 300 internationalized enterprises located in northern region of Malaysia. The results suggest that size functions as moderating factor for internationalization only for relatively smaller firms. It has its biggest impact when relatively smaller SMEs acquire international knowledge and experience. They also note implications for managers and policy makers. Key words: Firm size, international knowledge and experience, competitive advantage, management attitude, index of internationalization. INTRODUCTION Today manufacturing small and medium enterprises (SMEs) are playing increasingly important roles in global markets. Some of these SMEs are generating earnings in international markets more than domestic markets. These firms, can be described as “born global” or “instant internationals”(traditional SMEs which enter international field almost from inception), “back sources” (SMEs who re-concentrate their international activities back to the home base) and “born regional’s” (SMEs that gain their force out of a local embeddedness and never shift capacity beyond export activities) (Bell et al., 2003; Oviatt and McDougall, 2005; Coviello, 2006; Schulz et al., 2009). These contemporary developments and understanding of
*Corresponding author. E-mail:
[email protected]. Tel: 653 5282, 012 4618731. Fax: 604 657 7448.
internationalization has aroused a lot of discussions in the areas of economic internationalization theories, traditional internationalization theories and international entrepreneurship theories, especially on the integration of multiple theoretical perspectives. For instance, some SMEs may not take the traditional path to internationalize when it has competitive advantage in terms of products or it resources. Does this notion can be generalized to all SMEs? The answer may not be yes, especially in emerging economies and developing countries like Malaysia. Many firms, however, start international operations when they are still comparatively small and gradually develop their operations abroad. Research on the exporting experience of small companies has explored a wide range of relevant issues; the impact of firm size (Ali and Swiercz, 1991), competitive advantages, managerial characteristics and expectations (Moini, 1995) and motivations for a firm to internationalize
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internationalize (Burpitt and Rondinelli, 2000). In another study, Baird, Lyles and Orris (1994) empirical findings on internationalization show that firms with an international strategy were significantly larger than non-internationally oriented firms. The task of advancing into overseas markets is impeded further by a number of disadvantages inherent to smaller organizations (Wilson, 2000). There are many disadvantages such as inability to control prices because of lack of market power, small customer base, and decision makers has limited access at the regional and national level (Aldrich and Auster, 1986). Ojala and Tyrvainen (2007) have considerably placed size as one of the important factor for SMEs internationalization. Therefore, it is worthwhile to understand the role of size in the SMEs internationalization process and also uncover the determinants of internationalization. The area of SMEs internationalization has received significant scholarly attention. However, the question of “Why SMEs in Malaysia internationalize?” has received much less attention. Extant of literature on the SMEs internationalization have focused much in North America and Europe (Coveilo and Munro, 1997; Gemser et al., 2004; Moen and Servais, 2002; Pangarkar, 2008). Only in the last half decade, there have been growing interest among both academics and researchers who have turned their attention to internationalization of SMEs in emerging economies, such as China (Ahlstrom et al., 2008), India (Saini and Budhwar, 2008), Malaysia (Shankar et al., 2010), Taiwan and Singapore (Sim and Pandian, 2003) and Vietnam (Thai and Chong, 2008). Broadly, the issues are mainly on the areas of patterns of internationalization (Andersson et al., 2006); impact of networking on Malaysian SME internationalization (Zain and Ng, 2006; Senik et al., 2007), and the role of government of Malaysia and the business strategy (Hashim and Hassan, 2008). It definitely shows that the antecedents and the role of size in internationalization are not fully understood in Malaysia. The above research issues provide plausible explanations to explore these in greater detail in present and in the future. LITERATURE REVIEW AND HYPOTHESES Small and medium enterprises in Malaysia The interest in the SMEs in Malaysia has witnessed a significant growth over the years. It operates in almost every key and major industry. Hashim (2000b) acknowledged the growing number of SMEs in Malaysia. The actual number of SMEs in Malaysia is however, yet to be determined. Based on the statements made by various organizations and ministries over the past decade, the total SMEs could be in the range of 10,000 to 30,000. Nevertheless, MITI expects the SME sector to contribute more between the period of 2000 and 2020. The SMEs are expected to contribute 50% of the gross
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domestic product (GDP) in 2020 (Hashim, 2000b). In broader perspective, Arbaugh et al. (2008) define enterprising firms as one which is designed to create wealth through new economic activity by bringing together unique packages of resources to exploit marketplace opportunities. The Small and Medium Industry Development Plan (SMIDP), defines SME as a firm with an annual sales turnover of not exceeding RM25 million or full time employees of not exceeding 150. Therefore, the SMEs in this study are observing these criteria for this study. The manufacturing sector in this study refers to the economic sector that is involved in activities such as processing, assembling and producing final products for the local market and for export. Abdul et al. (1997) have pointed out some critical evaluation concerning the relationship between firm size and attitudes toward exporting. The results demonstrated that SMEs have stronger tendency towards exporting activities than large sized firms. SMEs are also found to be actively exploring market potential in the international arena. In other words, these firms are looking for broader market for their products. Obviously, all firms in the study believe that exporting is a desirable activity and can contribute significantly to the firm’s growth and profit. Abdullah’s (1997) study on manufacturing SMEs located in Penang, indicated the various levels of perceptions, efforts and attitude by management towards training programs. The study revealed a number of interesting findings such as majority of the entrepreneurs realize the need for training for their employees; huge percentage realize the existing training programs are useful and relevant to their requirements and majority of the SMEs are not allocating budget for organizing training programs. The results suggest that efforts towards training among SME’s entrepreneurs are still limited despite the greater force for internationalization by the government. Hashim (2000a) has attempted to provide a new research agenda for SMEs in Malaysia by highlighting the shortcomings of previous studies as well as the major issues and research areas that have yet to be rigorously examined. Hashim (2000a) has suggested that future research should investigate the relationship between modern management theories and the performance of SMEs in the rapidly developing economy. Hashim (2000a) developed an integrative framework to examine and foster understanding of the strategic factors for managing SMEs successfully. The framework suggested that three factors should fit perfectly to make the SMEs successful entrepreneurial characteristics, the organizational context and the external environment. Some of the key strengths of the SMEs are the ability to produce economic output, provide employment opportunities, generate regional income, provide savings, be involved in training development, stimulate competition, provide aid to large firms, encourage innovation and flexibility and become breeding grounds for new entrepreneurships ventures and
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entrepreneurships. Their weaknesses are lack of capital and credit facilities, shortage of skilled workers, shortage of raw materials, inadequate infrastructure, and lack of managerial and technical expertise, marketing constraints and a limited application of new technology. Zulkifli and Jamaluddin (2000) have examined the existing practice in strategy, performance measurement being used and problems faced by local SMEs. The results showed that there are lack of skills and knowledge in organizing effective manufacturing and business strategy development. About 42% of the SMEs that were interviewed had prioritized quality and cost as their best weapons to compete regionally. The findings indicated that SMEs lacked a documented strategy and proper techniques to formulate develop and measure performance. Most of the companies could not plan more than five years, the long-term strategies which are crucial for internationalization. They commented that SMEs in Malaysia are very far behind compared to SMEs in Asian countries, such as, Taiwan, Korea or Singapore, in terms of innovation in design, speed of delivery and, huge choices and customized products for customers. The review of literature about the SMEs in Malaysia shows there is a need to explore the determinants of internationalization. This will help in a manifestation of the holistic approach of the government to internationalize as many SMEs as possible. Firm size A review of literature shown in Table 1 demonstrates mix results when the number of employees or sales value is used to indicate size. Reuber and Fischer’s (1997) research on SME internationalization resulted in findings that neither firm size nor firm age, directly and significantly, related to internationalization. However, firm size is positively and significantly correlated with the measure of the team’s international selling experience which shows that larger SMEs are more likely to have teams with international selling experience. Calof (1994) examined the direct and indirect effects of firm size on export behavior by focusing on three dimensions of the export behavior of 14,072 Canadian manufacturers: their propensity to export, countries they exported to and export attitudes. The results showed that firm size is positively related to all dimensions of export behavior. Nevertheless, its importance is limited as the degree of variance explained by size is very small. In early studies, Cavusgil (1984) found that when firm size is measured by number of employees, no relationship is found with export behavior, but a significant relationship exists when size is measured by annual sales. A firm can be considered small in two different but related ways, in terms of sheer organizational size or in terms of its industry market share. Although size and market share are conceptually different, they are correlated empirically. Firm size has long been considered one of
the most significant contingency variables in macroorganizational studies and its relationship with other important constructs, such as structure (Singh, 1986). Besides that, Hofer (1975) has also identified size as a critical contingency variable moderating the relationship between strategy and performance. A firm can be considered small in two different but related ways, in terms of sheer organizational size or in terms of its industry market share. Although size and market share are conceptually different, they are correlated empirically. Firm size has long been considered one of the most significant contingency variables in macro-organizational studies and its relationship with other important constructs, such as structure (Singh, 1986). Hofer (1975) identified size as a critical contingency variable moderating the relationship between strategy and performance. The study by Cavusgil and Nevin (1981) showed a positive relationship between firm size and export activity but another study by Cavusgil (1984) illustrated that size does not influence export activity except for small size firms. Besides that, Bonaccorsi (1992) studied the relationship between size and export behavior in 8,810 Italian companies and showed that firm size is positively associated with propensity to export and negatively associated with export intensity. Moreover, Vida, Reardon and Fairhurst (2000) found that firm size will be a determining factor for firm internationalization. This supports a wide range of literature review by Calof (1994) which indicates that most studies show a positive relationship between firm size and internationalization. For this study, firm size is represented by the sales volume. Therefore, the following hypothesis will explain the size as a moderating effect for internationalization of SMEs: H1: Moderating effect of firm size on the relationship between competitive advantage, management attitude and international knowledge and experience and internationalization. Internationalization Internationalization is the extent to which a firm is involved in international business. It includes exporting, the presence of foreign subsidiaries, shares ownership by foreigners and the appointment of foreigners in the organizational structure. Market liberalization and digitization are forcing large corporations and the SMEs to operate beyond their national borders and compete with each other in foreign countries and new regions (Barkema et al., 2002). Bartlett and Ghoshal (2000) have identified two main motivations for firms’ internationalization: traditional motivations and emerging motivations. Among the earliest motivations that drove companies to invest abroad was the need to secure key supplies, especially minerals, energy, and scarce raw material resources. Another
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Table 1. Review of selected studies on size and export behavior.
Study
Size of firm
Cavusgil and Nevin (1981)
Small/ Medium
Hester (1985)
Small/ Medium
Kaynak and Kothari (1984)
Small/ Medium
Cavusgil et al. (1979) Mugler and Miesenbock (1986) Cavusgil and Naor (1987) Hozlmuller and Kasper (1991)
Small/ Medium Small/ Medium Small/ Medium Small/ Medium
Size measure Sales Employees Sales Sales Employees Sales Employees Employees Employees
Results Positive Not significant Not significant Positive Positive Positive Positive Indirect
(Source: Adopted from Calof (1994), p. 369).
Another strong trigger of internationalization could be described as the market seeking behavior. This motivation was particularly strong in companies that had some intrinsic advantage, typically related to their technology or their brand recognition that gave them some competitive advantage in offshore markets. Another traditional and important trigger of internationalization was the desire to access low-cost factors of production. For example, the availability of lower-cost capital also became a strong force for internationalization. Bradley and O’Reagain (2001) examined how successful exporting SMEs allocate resources to international product-markets and how extensively they participate in the business system. The driving force for their study was lack of attention given in the literature to the approaches adopted by successful SMEs to initially establish themselves in international markets or to the policies they engaged to achieve growth through internationalization. The results showed that successful SMEs are more likely to choose market concentration and low cost strategy for internationalization. Literature on international entrepreneurships argues that personal factors or the owner’s or founder’s human capital resources strongly influence the choice and degree of internationalization in small firms. Personal factors include environmental perceptions and the business skills of the entrepreneurs. Manlova et al. (2002) examined differences in personal factors between internationalized and non-internationalized small firms by measuring four dimensions of human capital – international business skills, international orientation, perceptions of the environment and demographic characteristics. The study results showed that international business skills and perceptions of the environment of the entrepreneurs are the most important factors for firm internationalization. In addition, Casson (1992) portrayed internationalization as a possible approach of a firm to support corporate growth strategy. Internationalization is usually characterized as an incremental process evolving from non-exporting stages to high international marketing
involvement (Bilkey and Tesar, 1977; Cavusgil 1984; Johanson and Vahlne, 1977). The findings have contributed to a general assumption that small firms begin internationalization with the least risk and the lowest investment methods, such as indirect exports. They then move to higher-risk, higher-investment modes as the firms develop and gain experiential knowledge of foreign markets. Welch and Luostarinen (1988) described the process of internationalization as the outward movement of the international operations of an individual firm. In recent research, they included inward activities and cooperation as part of the process of internationalization. A study by Gankema et al. (2000) reveals a growing degree of international involvement by European SMEs over a period of time. The study used Cavusgil’s (1980) innovation-related internationalization model to examine SME internationalization. The study agreed that the five stages of internationalization are true for the SME understudy such as a domestic marketing stage, a preexport stage, an experimental involvement stage, an active involvement stage and a committed involvement stage. The study also showed that the time frame for transition from each stage takes approximately two years. Johanson and Wiedersheim-Paul (1975) also indicates that internationalization is a gradual process rather than large. Gankema et al. (2000) recommended more research on factors that influence internationalization and firm performance. Competitive advantage (CA) According to Barney (1991), a firm is said to have a competitive advantage when it is implementing a value creating strategy not simultaneously being implemented by any current or potential competitor; the latter is also unable to duplicate the benefits of this strategy. Barney (1995), in a further refinement of his definition, mentioned that a firm’s competitive advantage potential depends on the value, rareness and imitability of its resources and capabilities. In this study, competitive advantage is
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defined as a value creating strategy that enables internationalization of SMEs. Probably, the three most widely read books on competitive analysis in the 1980s were Michael Porter’s Competitive Strategy (Porter, 1980), Competitive Advantage (Porter, 1985) and Competitive Advantage of Nations (Porter, 1989). Porter stressed in all literature (Porter, 1980, 1985, 1989) that strategies allow organizations to gain competitive advantage from three different bases: cost leadership, differentiation and focus. According to Porter (1985), competitive advantage is dedicated to the task of pointing the way to specific means of achieving and sustaining an advantageous position. While competitive strategy broadly defines the territory of strategic decision, competitive advantage is intended as a roadmap to best traverse the territory. Reed and DeFillipi (1990) pointed out that there is a substantial agreement within the literature on the price, cost and differentiation definition of competitive advantage. The fundamental concept of competitive advantage can be attributed with linking advantage to competency. The authors further added that competitive advantage can be used within the firm’s strategy to achieve organizational goals. Therefore, it is concluded that competencies and competitive advantage are independent variables and performance is the dependent variable. In addition, Reed and DeFillipi (1990) described that competitive advantage can be derived from numerous sources. Competencies are within the firm’s control and can be manipulated within strategy to generate advantage for performance. In managing businesses in an increasing competitive environment, manufacturing SMEs need to plan their strategies to stay ahead of the competition. These SMEs can create a niche by making their products distinctively different from those of competitors. As a result, this can lead to brand loyalty, sustainable competitive advantage and finally improve the firms’ financial performance (Agus and Za’faran, 2000). The findings indicated that distinct competitive approaches varies for businesses exposed to an international context compared to businesses only exposed to a domestic context. These arguments are summarized in the following hypothesis: H2: There is a positive relationship between competitive advantage and internationalization. Management attitude (MA) Cavusgil and Nevin (1981) and Rosson and Stanley (1987) outlined the need for a favorable managerial orientation toward internationalization in terms of perceived risks, opportunities and costs of such a venture. In this research, management attitude referred to the decision makers’ subjective evaluation of problems and opportunities associated with SME internationalization. Entrepreneurs who sense an opportunity in foreign
market will be likely to expand internationally. Managerial decision-making characteristics will impact the SME internationalization process. Barney (1986) argued that the culture of an organization where managers are part of it, defines how an organization conducts its business. Managerial decision-making characteristics are not only linked to strategy through creating a key capacity to implement a particular strategy type, but they could be a direct source of competitive advantage as well. For example, openness in decision making occurs when multiple individuals or preferences are incorporated into the decision process. In broad geographical business discussions, managers interact on the basis of shared problem-solving efforts rather than relying exclusively on formal reporting relationships (Gupta, 1987). In an elaboration of management attitude and perception, Ogbuehi and Longfellow (1994) pointed out that personal commitment to exporting appear to be relevant explanatory for export success among the manufacturing SMEs in the United States. They concluded that as a firm’s commitment to exporting increases, managers tend to seek greater information regarding foreign markets and place greater emphasis upon a growth strategy for the organization. In another study of relationships between firm characteristics and the export entry decisions of small enterprises, Reid (1981) suggested a strong linkage between a firm’s export behavior and market expansion and the characteristics and experience of managers and decision makers. He further suggested that exporting firms are managed by decision makers who are internationally oriented and possess a favorable attitude toward exporting. Manlova et al. (2002) examined the differences in personal factors between internationalized and noninternationalized small firms. The study compared the relative importance of four dimensions of human capital: international business skills, international orientation, perceptions of the environment and demographic characteristics. Their research findings of 410 small firms showed that neither traditional demographic measures nor international orientations distinguish between internationalized and non-internationalized firms. Nevertheless, environmental perceptions and self-assessed strengths in international business skills are significant. Xia et al. (2003) examined the issue concerning firm resources on a subsidiary’s competitiveness in emerging markets. They investigated the performance of Singaporean SMEs in China. They identified firm resources that are used as competitive advantages such as technological resources, top managerial skills and capabilities, the Guanxi skills of employees and then professional knowledge, the firm’s internal relationships and its external relationships. The results showed that Singaporean SMEs have competitive advantages on their technological resources and top managerial capabilities but indicate no significant relationship with performance in China. Ainuddin and Junit (2001) studied the characteristics of
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entrepreneur-owned companies in terms of entrepreneur orientation (willingness to innovate, willingness to be proactive and propensity to take risks), business strategy, organizational structure and business performance. Based on the sample of 64 SMEs in Malaysia, the research findings showed that the business performance of these companies tend to vary with their willingness to innovate, risk taking potentials and the degree of organicity of their organizational structure. Thus, in order to integrate the constructs of these studies, it is worthwhile to study the impact of management attitude towards internationalization and performance. As a summary, relationship marketing is imperative in the organization to make internationalization successful. These arguments are summarized in the following hypothesis: H3: There is a positive relationship between management attitude and internationalization International knowledge and experience (IKE) According to Vida et al. (2000), the accumulation of experience in foreign markets is considered essential to reduce the perceived risk which increases the motivational level for internationalization. International knowledge is one of the key determinants of SME internationalization. International knowledge can be defined as knowledge in foreign ventures, foreign market information, multinational culture and the buyers’ behavior in the foreign market. International experience, on the other hand, refers to the dealings with foreign business partners and the formation of cooperative agreements with foreign agents. Knowledge and intellectual capital have become the two primary bases of core competencies and the key to superior performance. Lubit (2001) explored how companies can best nurture their knowledge resources to create competitive advantage. To provide sustained competitive advantage, one needs knowledge that is difficult for outsiders to copy as well as the ability to rapidly develop new knowledge. He had outlined two paths by which companies can use knowledge to create sustained competitive advantage: (a) tacit knowledge is knowledge that other companies find difficult to copy when it spreads internally, and (b) companies can create superior knowledge management capabilities and foster on-going innovation. Burpitt and Rondinelli’s (2000) study on 138 small firms with exporting experience in North Carolina found that firms that strongly value learning from international experience are more likely to continue exporting. Small firms that value the opportunity to develop new skills, technology and organizational capabilities tend to be involved in internationalization even when initial financial returns are disappointing. The resources of knowledge and skills can either be acquired by hiring managers with knowledge and skills in international markets or developed
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through training and experience. Bradley (1999) posited that lack of knowledge with respect to foreign markets and operations can be an important determinant to the lack of development of international operations. As a rule, knowledge and learning will be acquired through operating abroad over a period of time. Besides that, Reuber and Fischer (1997) examined the role of the management team’s international experience as a mechanism for the internationalization of Canadian SMEs in the software industry. The results showed that internationally experienced management teams are viewed as a resource that influences SMEs to engage in international businesses. They encourage firms to develop foreign strategic partners and to delay less in obtaining foreign sales after start-up. Many researchers agree that wider experience is closely linked to greater success in the organizations. This is shown in the study involving 51 entrepreneurs in SMEs in Kuala Lumpur to ascertain the usefulness of government supported programs to nurture SMEs in Malaysia (Abdullah, 1999). The research results showed that owners who are more experienced achieve higher performance in terms of profit, capital and employment. The findings illustrated that the knowledge, skills and exposure of entrepreneurs to general business are beneficial in helping SME performance, which leads to the following hypothesis: H4: There is a positive relationship between international knowledge and experience and internationalization. Research framework Based on these theoretical underpinnings, the conceptual model guiding the study is depicted in Figure 1. The framework shows that the present study is examining the relationship of competitive advantage, management attitude, and international knowledge and experience with internationalization. METHODS Sample Stratified random sampling, as its name implies, involves a process of stratification or segregation, followed by random selection of subjects from each stratum. In this study, the population of 1,363 SMEs in manufacturing industry was segregated based on the combination of criteria explained above. The manufacturing sector in this study refers to the economic sector that is involved in activities such as processing, assembling and producing final products for the local market and for export. The SME exporters are mainly located in the manufacturing sector (57.6%), services (40.6%) and agriculture (1.8%) (National SME Development Council, NSDC, 2007). Based on these criteria, total of 300 SMEs were selected from the total of 1,363 SMEs. Since only 300 SMEs qualify with the criteria, no random selection was used instead. All the selected 300 SMEs were used as sample in this study.
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Competitive Advantage
Internationalization
Management Attitude
International Knowledge & Experience
SME Size
Figure 1. The conceptual framework: The Determinants of Internationalization of small and medium manufacturing enterprises (SMEs).
Design and procedure The primary data were collected from top executives of SMEs who assumed the role of key informants through a mail questionnaire. The unit of analysis in this study is the individual SME. The respondents (that is, executives, CEOs and upper-level managers with a strategic responsibility for their firms) were identified on the basis of their job title and position within the company (Vida et al., 2000). They will be assumed to be knowledgeable and familiar with the operations related to the issues under investigation. The questionnaires were sent through post (60%) and e-mail (40%). Questions were pre-tested with a sample of 10 SMEs in order to ensure that they were clear and captured the desired information. Regression analysis was used to test the hypothesis. Measures In view of the high number of variables to measure internationalization, an index was created to measure internationalization appropriately. Since some international business researchers have expressed that a multi-dimensional measure of internationalization captures a firm’s international orientation more completely than the single-item foreign sales/total sales ratio (George et al., 2005; Reuber and Fischer, 1997; Sullivan, 1994), the author has developed an index to measure SMEs’ internationalization. A 5item measure was used to develop the index to capture firm internationalization activities. The index was named the index of internationalization (IOI). The excluded variables are the number of foreigners on the Board of Directors, the expatriates who act as managers or heads of departments and the percentage of shares owned by foreigners. Descriptive statistics shows that the majority of the respondents’ firms do not have foreigners on the Board of Directors or in top management; likewise, no shares are owned by foreigners. Even though these variables may well explain the presence of internationalization of any type of firm, this study only concentrates on SMEs solely representative of Malaysian ownership. Therefore, these variables were excluded from the index. Many studies have used the percentage of sales and profits from international sources as a better way to measure
internationalization. Almost all the literature uses these variables to measure internationalization because it reflects instantaneously the amount of export sales and profit from export businesses. It also shows that approximately 40% of the SMEs in this study achieve 11-20 % of their sales and profit from international sources. Therefore, the relatively higher weightage of 30 each was given for both constructs. Next, the number of countries a firm exports to and total overseas subsidiaries and joint ventures are given relatively a smaller weightage of 15 each. Approximately 75% of the SMEs in this study export to less than 10 countries while 60% of SMEs have less than three subsidiaries or joint ventures. Therefore, it is appropriate to give a smaller weightage for both variables. The lowest weightage of 10 is given to the duration a firm spends in international businesses. The literature review suggests that there are some SMEs who have been involved in internationalization since inception. Therefore, it is included in the index since the data shows that 78 % of the SMEs in this study have been involved in international business less than 15 years. This study will use variables established by Beal and Yasai (2000) to measure CA. It has 10-item to capture the firm’s competitive advantage position. A 5-point scale (1 = least applicable vs. 5 = most applicable) was used. The variables are: (a) innovation differentiation, (b) marketing differentiation, and (c) low cost leadership. The constructs for management attitude is adopted from study by Vida et al. (2000), as per the following: (a) attitude towards different cultures and languages in international markets, (b) attitude towards resource commitment, (c) attitude towards risks, (d) attitude towards economies of scale, (e) attitude towards future growth, (f) attitude towards opportunities in international market, and (g) attitude towards making a choice in identical opportunities. The CA scale was reliable with the Cronbach alpha score above 0.60. Consistent with previous international entrepreneurship research (Eriksson et al., 1997), the current study will measure IKE using the following constructs, 6-item with a 5-point scale (1 = strongly disagree vs. 5 = strongly agree): (a) the possession of business knowledge, (b) the possession of institutional knowledge, (c) the possession of internationalization knowledge, and (d) an understanding of perceived costs. These constructs composed of objective and experiential knowledge which is a central construct in the Uppsala internationalization process model, as it facilitates
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mobilizing the capital and human resources needed for international expansion. The IKE scale score reliability of 0.85. The MA variable is measured using the constructs established by Vida et al. (2000). The reliability scoring is 0.75. A six point Likert scale is used to measure MA as follows: 1 - Strongly Disagree, 2 Disagree, 3 - Slightly Disagree, 4 - Slightly Agree, 5 – Agree, and 6 - Strongly Agree. There is continuous argument regarding the choice of the correct measurement for size. In some studies, the number of employees was used as the measure (Bilkey and Tesar, 1977; Cavusgil and Naor, 1987), while some researchers have used sales levels of the firm (Hester, 1985; Holden, 1986). In this study, average sales for the last five years have been used to measure size as they appear to be most relevant in the review as shown in Table 1. Based on the review of research by Calof (1994), researchers prefer to use either sales or number of employees to measure size. But, sales was showing significant findings related to export behavior of firms. Therefore, this study is measuring size by using the average sales for the past five years. The Kaiser-Meyer-Olkin (KMO) measure of sample adequacy indicates that the 36-item sample was adequate for factor analysis (KMO measure = 0.77). The Bartlett’s Test of Sphericity shows the significance of p0.05 (0.98), then the independent variables do not explain the variation in the dependent variable. As a summary, the regression analysis shows that there is no significant relationship between competitive advantage, management attitude, international knowledge and experience with internationalization. This shows that SMEs in this study do not internationalize based on their competitive advantage, positive management attitude, international knowledge and experience, but, due to other factors that is not tested in this model. Therefore hypotheses two, three and four are not supported. These findings will receive further attention in the discussion of this paper. On the analysis of size as a moderating effect (as indicated in Table 4), model 2 shows that size is significant at p
