AMSTERDAM BUSINESS SCHOOL International Management Track Master Thesis 27-11-2013 Supervisor: Msc. Erik Dirksen Second Reader: Dr. Johan Lindeque Internationalization behavior of Internet SMEs How Internet SMEs internationalize: a qualitative research Student Remi van der Zijde Studentnumber 5898323 Address Bosboom Toussainstraat 28-2, 1054 AS Amsterdam Telephone +31681656660 1 Introduction ......................................................................................................... 4 1.1 Overview ............................................................................................................. 4 1.2 Contribution ........................................................................................................ 5 1.2.1 Theoretical contributions .............................................................................. 5 1.2.2 Managerial contributions .............................................................................. 6 2 Theory ................................................................................................................... 8 2.1 Internationalisation theories ............................................................................... 8 2.1.1 Transaction costs theory ............................................................................... 9 2.1.2 Internalization theory .................................................................................. 11 2.1.3 Eclectic paradigm ........................................................................................ 14 2.1.4 Uppsala model ............................................................................................. 16 2.2 Entry modes ...................................................................................................... 19 2.3 Internationalization of SME firms ...................................................................... 22 2.4 Internationalization of Internet firms ................................................................ 23 2.5 Sub-questions .................................................................................................... 27 2.5.1 Psychic distance .......................................................................................... 27 2.5.2 Stages approach .......................................................................................... 29 2.5.3 Knowledge .................................................................................................. 30 2.5.4 Entry modes ................................................................................................ 32 3 Methodology ....................................................................................................... 33 3.1 Research Design................................................................................................. 33 3.2 Semi-structured interviews ............................................................................... 34 3.3 Samples ............................................................................................................. 34 3.4 Data processing ................................................................................................. 36 4 Results ................................................................................................................. 37 4.1 Psychic distance ................................................................................................. 37 4.2 Stages approach ................................................................................................. 42 4.3 Knowledge ......................................................................................................... 46 4.4 Entry modes ...................................................................................................... 50 5 Discussion ........................................................................................................... 57 6 Conclusion .......................................................................................................... 57 References ................................................................................................................. 62 Appendices ................................................................................................................ 66 THESIS – REMI VAN DER ZIJDE - AMSTERDAM BUSINESS SCHOOL 2 Abstract The main internationalization theories are emerged in the ‘70s and ‘80s. Major changes have occurred in the business environment since then. Questionable is: are those ‘old’ theories still applicable for today’s firm’s internationalization behaviour. This is especially interesting when we take Internet SMEs into considering, who possess other characteristics comparing to large manufacturing firms, where most internationalization theories are build on. In this study we investigate how Internet SMEs internationalize with four sub-questions, discussing psychic distance, velocity and stage's approach, knowledge and entry modes. With a literature review and a qualitative research of own empirical data obtained from 12 Internet SMEs the research question is answered. This study contributes to the understanding of the internationalization behaviour of Internet SMEs and gives deep insights how this type of firm internationalizes. Keywords: Internet firms, Internationalization theories, SME, Qualitative research. THESIS – REMI VAN DER ZIJDE - AMSTERDAM BUSINESS SCHOOL 3 1 Introduction 1.1 Overview During the past decades, the Internet has changed a lot in our everyday lives. Computers and especially laptops, tablets and smartphones made it possible that people are online throughout the day. Businesses have responded to these developments by opening online shops besides their physical stores. Some companies are using the Internet as their only channel of sales, so called ‘Internet firms’. Firms that are present at the Internet are accessible from all over the world, whether they want it or not. Interesting is to look at this business environment and how Internet firms deal with their internationalization opportunities. To form a well-funded base the main internationalization theories are studied, which have their roots in industrial organization and economics and originate from the 1970s and 1980s (Axinn & Matthyssens, 2002; Forsgren & Hagström, 2005). An example of such a theory is the Uppsala model. This model, developed by Johanson and Vahlne (1977), explains internationalization behavior in gradual patterns. The amount of knowledge of the foreign country is critical for the commitment firms invest in a country. The transaction costs theory and the internalization theory are also developed in that era. These theories are relying on the ‘learning-by-doing’ concept of Multinational Enterprises (MNEs). The Internet has changed the way firms handle some of the concepts that the main internationalization theories use. For example, the Internet has the capacity to significantly increase the efficiency of market transactions and enhance the learning process about international operations though faster, cheaper and more extensive access of relevant information. Therefore, the Internet has the potential to lower entry barriers and decrease costs (especially transactions costs) in the internationalization process, therefore is able to reduce market uncertainties (Dung Le, Rothlauf, 2008). In this light it is not strange that some Internet firms have received attention for their incredible speed of internationalization (Forsgren & Hagstrom, 2007). The scientific world is despite of these developments still heavily relying on the relatively old internationalization theories of the 1970s and 1980s. Therefore we need to critically THESIS – REMI VAN DER ZIJDE - AMSTERDAM BUSINESS SCHOOL 4 assess whether those theories are still applicable for contemporary Internet firms, especially smaller firms comparing to MNEs, so called small and medium sized enterprises (SMEs). To investigate this phenomenon I formulated the following research question: How do Internet SMEs internationalize? 1.2 Contribution By answering the described problem statement, this study contributes to the understanding of the internationalization process of Internet SMEs. By diving deeply into the internationalization behaviour of Internet SMEs, this study present findings of this relatively new phenomenon. Besides providing an overview of the internationalization behaviour of this type of firm (descriptive character) this study will also attempt to explain this phenomenon (explanatory character). 1.2.1 Theoretical contributions This research is relevant to the academic community because the findings of this study are not available in the scientific world yet. By adding qualitative data from Internet SMEs this research is filling an empirical gap that contributes to the current level of scientific knowledge about internationalization theories and especially of internationalization of Internet SMEs. A lot of previous research is conducted in the United States of America where the transferability of the findings and the replicatibility of the studies are, giving the differences in context, difficult. Moreover, most former research about internationalization of Internet firms is becoming aged. For instance, Forsgren & Hagström (2005) collected empirical data for their research from 1995 till 2000. When we look at the incredible speed of development of the Internet it is safe to state that most existing research on Internet firms is investigated in a completely