Network Approach

A network is regarded as a potential means to facilitate an SME's internationalization. Based on indications from a previous ESRC-funded project (Child, Rodrigues and Frynas 2006a), SMEs are likely to have a "core" relationship with a partner or agent in a given foreign and/or their domestic country which then links them into a wider "secondary" network relevant to doing business with the focal foreign country.

For example, Bell (1995) observed that the network approach does not explain the internationalization patterns and processes of some firms which apparently do not have any close connections or contacts with foreign suppliers or distributors. It also ignores the importance of decision-maker and firm characteristics in taking up opportunities for international penetration, extension and integration that emerge from the networks (Chetty & Holm 2000). However, networks seem to have considerable significance for SME internationalization and their process aspects remain poorly charted.

Internalization approach

Transaction cost economics (TCE) has strongly informed the internalization approach to the internationalization of MNEs, especially concerning the choice of foreign markets to enter and of entry modes (Buckley & Casson 1976, Rugman & Verbeke 2003). Its assumption that environmental conditions (uncertainty and number of competitors) and conditions internal to the firm or its transactional relationships (asset specificity, opportunism) are the main factors bearing on choice of transaction governance can be extended to the choice of an internationalizing SME (1) whether or not to enter into a given network relationship and (2) if it does, the basis on which it seeks to govern and nurture the relationship. An issue that has interested students working with a TCE perspective is whether and how trust can lower transaction costs. The reasoning is that trust reciprocated between two transacting parties may compensate for the incompleteness of contracts (or other formal governance mechanisms) and reduce the likelihood of opportunism (Zaheer & Harris 2006). However, transaction costs alone are not enough to explain cooperation (Granovetter 1985). There is also a need to examine the processes of how such relations are built and maintained.

Trust and contract

Relationships in networks can be regulated by contracts, inter-personal trust, or both. Contracts are based on price mechanisms and penalties for lack of compliance (Hendrischke 2004). The willingness to commit to a contract may itself be influenced by the reputation of the prospective entrant, and/or by the fact that the newcomer is already known to an existing network member, both attributes implying trustworthiness. The respective roles of contracts and trust in SME network relations deserve more investigation because there is considerable uncertainty in the literature concerning the relationship of contract and trust in the management of inter-organizational relationships (Woolthuis, Hillebrand and Nooteboom 2005: 814). These authors offer tentative conclusions based on four Dutch case studies which can serve as hypotheses for further study.

Factor approach to Internationalization

According to Oviatt and McDougall (1994) valuable unique assets should permit companies with scarce resources to enter international markets. A shorter internationalization process should also be possible based on the homogenization of markets and the developments in technology related to communication and transportation. This means that companies may skip stages of international development or that internationalization may not occur in stages at all (Oviatt and McDougall 1994).Knight and Cavusgil (1996) mention six factors that have contributed to the rise of born global companies. The first factor is related to the importance of niche markets that have followed the growing demand of specialized and customized products.

A second important is the recent advances in process technology that have made small scale production economically viable. Knight and Cavusgil (1996) further mention the recent advances in communication as a third trend. The fourth factor is related to small companies' advantage of quicker response time, flexibility and adaptability. This means that small companies may be more flexible and quicker to adapt to foreign tastes and international standards. A fifth factor concerns that knowledge, technology, tools, facilitating institutions and so forth are becoming more accessible for all companies. Finally, the last factor relates to the trend of global networks and the importance of partnerships that facilitate international commerce. By building long term alliances with foreign partners inexperienced managers may improve their chances for success.