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Journal ArticleDOI

A combined focused industry and company size investigation of the internationalization-performance relationship: the case of small and medium-sized enterprises (SMEs) within the Swedish wood manufacturing industry.

01 Dec 2018-Forest Policy and Economics (ELSEVIER SCIENCE BV)-Vol. 97, pp 110-121

AbstractThe current literature has failed to deliver a coherent explanation of the internationalization-performance (I-P) relationship. The empirical findings are quite confusing and even contradictory. Re ...

Topics: Internationalization (52%), Manufacturing (51%)

Summary (3 min read)

1. Introduction

  • The theoretical underpinning of the I-P relationship is discussed in the next section.
  • Following that, the methodology of the research is presented, which is followed by the results and discussion, and rounded off with the conclusions.
  • To summarize the applicable conclusions and build a foundation for future research, the managerial implications, research limitations and suggestions for further studies are discussed at the end.

2. Theoretical frame of reference

  • Summing up on the use of theoretical frameworks explaining the I-P relationship, there is no single theory with the potential to cover all the aspects.
  • Therefore, researchers are recommended (de Chernatony et al., 2005; Jack and Raturi, 2006; Ma and Norwich, 2007) to triangulate existing theories with respect to the company situations and the specific environmental contexts.
  • Theory triangulation consists of using more than one theory to interpret a phenomenon (Jack and Raturi, 2006) .
  • Therefore, when a research question is approached from more than one theoretical perspective, it is called theory triangulation (de Chernatony et al., 2005) .

2.2. Empirical studies of the I-P relationship

  • All in all, the shape of the nonlinear relationship is determined by the situation in which the companies are performing when the research has been executed.
  • By learning how to handle these initial costs through adjusting organizational structures, processes and systems, companies start to receive more income while keeping costs under control (Contractor et al., 2003) .
  • Unfortunately, firms do not experience the infinite increasing performance consequences of internationalization, because at some point they face an "internationalization threshold".
  • Proponents of both the linear and the nonlinear explanations of the U-shape and inverted U-shape use transaction cost economies and the resource-based view as theoretical underpinnings.
  • The S-shaped relationship takes a longer view and follows the rationale of the sigmoid 3-stage theory to reconcile the contradictions between the U-shape and inverted U-shape explanations.

3.1. Sample selection and data sources

  • The process of deciding upon total populations and executing the surveys was the same.
  • First, a list of all active companies in the Swedish wood manufacturing industry was received from the industry organizations Swedish Wood and the Swedish Federation of Wood and Furniture Industry.
  • These lists were also compared to the companies listed in the official SIC statistics.
  • To increase the probability of getting a high response rate, a letter from the CEOs of those industry organizations was attached to the questionnaires.

3.2. Variables and measures

  • Internationalization is an extremely complex phenomenon, and its effect on performance is very likely to appear over time.
  • Therefore, studying the phenomenon over time is considered to be the proper approach to investigate the I-P relationship (Glaum and Oesterle, 2007) .
  • In order to incorporate the time-effect relationship into their research, the authors combined two independent surveys with data from the Swedish wood manufacturing industry, one from 2001 and one from 2014.

3.2.1. Performance: dependent variable

  • Another aspect which conveys a deeper explanation is performance growth.
  • While most researchers measure growth objectively, there are other studies which focus on subjective growth of companies (Davis and Harveston, 2000) .
  • The authors define growth as the changes in ROC from the time at which the data were collected to one year later.

3.2.2. Internationalization: independent variable

  • International business studies consider international SMEs as predominantly exporting companies in the sense that major assets are still kept in the domestic market, such as development and production.
  • In other words, SMEs mainly rely on the entry modes with low initial investment such as exporting rather than the heavy investment choices like foreign direct investment (FDI) or opening a plant in a foreign market.
  • For this kind of company, the scale of export is deemed to be more relevant for I-P analysis than the scope.
  • Thus, the independent variable of this study is defined as the international sales ratio, which is consequently operationalized as the ratio of foreign sales to total sales.
  • Secondly, international scale is the most relevant measurement to helping reconcile previous research because it is by far the most common operationalization used (Fernhaber, 2013) .

3.2.3. Control variables

  • Hierarchical regression is a useful technique when the predictors' variables are correlated with each other or to analyze the pure effect of predictors after controlling for disturbing variables (Pedhazur, 1997) .
  • Research intensity, however, has been controlled through hierarchical regression analysis.
  • Firm size is measured as the number of employees, and research intensity as the physical and monetary resources a company spends on designing and developing new products.

4. Results and discussion

  • To check the presence of homoscedasticity in the data, both Breusch and Pagan (BP) (1979) and Koenker (1981) tests were used.
  • Therefore, when there is a conflict between these two, the authors rely on the Koenker test.
  • To check the autocorrelation, the Durbin-Watson test was used which revealed no autocorrelation among errors in all the regression models.
  • A quick look at the descriptive statistics reported in Table 1 shows that the size of the companies which participated in the second survey is bigger and their export share is larger.
  • Regarding the scale of internationalization, the authors can conclude that, on average, about 17.9% of companies' sales in the sample come from the international market, which is a high rate for SMEs.

4.1. Performance and internationalization

  • The regression coefficients of square and cubic internationalization in all the models are not significant.
  • These results suggest that the connection between the degree of internationalization and performance among Swedish wood manufacturing companies is a persistent negative linear relationship.
  • Time in the pooled analysis and all its interactions with internationalization, square internationalization, and sigmoid internationalization are not statistically significant, indicating that the shape and direction of the internationalization-performance connection remains unchanged over time.
  • To summarize, the shape of the internationalization-performance relationship among Swedish wood manufacturing companies is linear and the direction is negative.

4.4. Segmented analysis

  • Figure 2 indicates a negative relationship between internationalization and growth for low internationalized companies in 2014 until the turning point is reached (7-8 percent).
  • This relationship becomes positive when the companies suppress the first turning point and is continuous until the maximum point (19-20 percent).
  • Generating more than 20% of total sales from international markets again reduces the growth of low internationalized companies.
  • This could be due to the costs associated with the liability of newness.
  • The experience and benefits gained from increasing involvement in international markets (from 7 to 20 percent) compensates for the costs of being new in these markets, and the new costs arising from managing the complexity of internationalization outweigh the benefit and reduce growth.

5. Conclusion

  • Perhaps the first limitation, which is actually an advantage of this study, is its limited focus on the Swedish wood manufacturing industry.
  • While the discussion of using a multi-dimensional measure of internationalization is well spoken for, supplemental empirical considerations such as availability and applicable guidelines to compose different measures of internationalization are lacking, which limits the use of such measures.
  • Third, this research follows a repeated cross-sectional design of longitudinal study which means taking independent samples from the same population over time.

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A combined focused industry and company size
investigation of the internationalization-
performance relationship: The case of small and
medium-sized enterprises (SMEs) within the
Swedish wood manufacturing industry
Mojtaba Hosseini, Staffan Brege and Tomas Nord
The self-archived postprint version of this journal article is available at Linköping
University Institutional Repository (DiVA):
http://urn.kb.se/resolve?urn=urn:nbn:se:liu:diva-153691
N.B.: When citing this work, cite the original publication.
Hosseini, M., Brege, S., Nord, T., (2018), A combined focused industry and company size investigation
of the internationalization-performance relationship: The case of small and medium-sized enterprises
(SMEs) within the Swedish wood manufacturing industry, Forest Policy and Economics, 97, 110-121.
https://doi.org/10.1016/j.forpol.2018.09.013
Original publication available at:
https://doi.org/10.1016/j.forpol.2018.09.013
Copyright: Elsevier
http://www.elsevier.com/

1
A combined focused industry and company size investigation of the internationalization-performance
relationship: The case of small and medium-sized enterprises (SMEs) within the Swedish wood
manufacturing industry
Abstract: The current literature has failed to deliver a coherent explanation of the internationalization-
performance (I-P) relationship. The empirical findings are quite confusing and even contradictory.
Researchers have found positive, negative, U-shaped, inverted U-shaped, S-shaped, and inverted S-
shaped relationships between degree of internationalization and performance. Based on plausible
theoretical explanations such as networking effects, cost and benefit mechanisms and minimum efficient
scale (MES), the recommendation for further research is to change focus from an overall level to a more
detailed country-industry and company size contextual level. The underlying assumption is that more
specific contextual aspects are paramount to the existence and shape of the I-P relationship. Building on
the resource-based view and the S-shape theory of internationalization, this paper aims at such an
empirically focused investigation of SMEs within the Swedish wood manufacturing industry. A repeated
cross-sectional survey study using hierarchical regression analysis has revealed a linear negative
relationship between internationalization and performance. Given that wood manufacturing is a low-tech
industry, not highly automated and with a low level of MES, the results are expected. The size of the
Swedish market is big enough to amortize the initial investments of establishing a small wood
manufacturing business, and the costs associated with internationalization diminish overall performance.
In addition, the follow-up tests of ANCOVA (analysis of covariance) and piecewise regression revealed
a non-linear relationship between (1) internationalization and performance for highly internationalized
firms in 2001, (2) internationalization and growth for low internationalized companies in 2001, and (3)
internationalization and performance for highly internationalized groups in the pooled dataset.
Considering the costs and benefits associated with international activities, the non-linear effects of
internationalization on performance or growth is plausible.
Keywords: Internationalization, performance, wood manufacturing industry, and S-shape theory.
1. Introduction
A quick look at the forest sector uncovers the increasing importance of internationalization in the industry,
especially in recent years. Foreign direct investment (FDI) (Laaksonen-Craig, 2004) and the global export value
(Zhang et al., 2014) have rapidly increased in the forest and wood manufacturing industry, and make
internationalization a necessity in forest economics. In their study of the economic impacts of trade in the forest
sector, Buongiorno et al. (2017) found international trade to be an important research area in the industry, one
which substantially affects the global welfare of the sector. Considering internationalization as a widespread
strategy for growth and performance, studying its consequences at corporate level has become a seminal issue, and
a large number of research outcomes has also led to a number of meta-analysis studies being published (e.g.,
Bausch and Krist, 2007; Marano et al., 2016). Unfortunately, this is not true in the case of the forest sector. Despite
the obvious lack of internationalization research from an organizational perspective in the sector and the recent
emphasis on examining internationalization from a strategic management research point of view (Zhang et al.,

2
2014), little effort has been devoted to the subject.
The dominant liberal capitalistic view is that increased international trade is positive for GNP growth and for
society at large. That presumption is easily transferred to be “the truth” for companies as well, and a large amount
of research in international strategy and international marketing more or less explicitly builds upon that assumption
(Contractor, 2007). However, this view quickly becomes more complicated and called into question when looking
at the results of empirical studies. Despite all the endeavors, the current findings show mixed results regarding the
empirically determined shape of the internationalization-performance (I-P) relationship, and a common theoretical
understanding is far from being reached. The current inconclusive empirical evidence shows that research has yet
to understand this complexity (Wiersema and Bowen, 2011).
The existing literature on the subject suggests a range of different causes for this inconsistency, such as the failure
to pay proper regard to the moderating effects of other variables (Grant, 1987; Kirca et al., 2011; Marano et al.,
2016), theoretical shortcomings, or even methodological and measurement problems (Contractor, 2007; Hennart,
2007; Sullivan, 1994). Research shows that internationalization is accompanied by essential benefits and costs
which can produce positive or negative performance consequences. Economies of scale, international arbitrage,
organizational learning, location-based advantages, and international opportunities are frequently mentioned as
the positive effects of internationalization. At the same time, the rising costs resulting from the complexity of
internationalization dynamics when expanding business activities beyond national borders have been considered
as a negative effect (Hennart, 2007). There is no clear consensus on how the costs and benefits of
internationalization interact to affect firm performance and growth. Until now, the most reasonable explanation in
this regard seems to be the S-shape theory (Contractor, 2007).
The massive number of empirical studies shows there is no universal I-P relationship. Therefore, new research on
the subject should not aim at generalization at the highest overall level covering all possible options (Bausch and
Krist, 2007). Instead, we need to develop finer-grained models and start a bottom-up process with the design of
studies with a limited focus on specific companies (e.g., SMEs or large companies) in a single industry and in a
homogeneous country (Elango and Sethi, 2007). In international business, a homogeneous context is defined as an
environment in which the psychic distance is low. Psychic distance is the perceived difference between two
culturally separated contexts or groups of people regardless of physical time and space (Johanson and Vahlne,
1977). In line with this recommendation, this study has limited its focus to Swedish SMEs in the wood
manufacturing industry (ranging from wooden components and low-value-added joinery to high-value wooden
products such as windows, doors, kitchen/bath interiors and prefabricated floor/roof and volume elements for
detached and multi-story houses, and also including furniture).
The aim of the study is not to formulate a general rule about the I-P relationship; instead, it is to understand the
relationship and its shape and direction among the SMEs within the Swedish wood manufacturing industry. The
wood manufacturing industry has a total revenue for 2012 of 87 billion SEK, with 33,000 people employed (Nord
and Brege, 2014). The wood manufacturing industry can be looked upon as low-tech in R&D, with a low degree
of automatization in production and with low levels of minimum efficient scale (MES) (Nord and Brege, 2014).
MES is the level of output at which the internal economies of scale have been entirely exploited, so the long run
average cost is minimized, and the operator achieves constant returns to scale. In other words, companies rely on
economies of scale to reduce their average cost in the long term. A given level of the production output that delivers

3
the lowest average cost is called MES. Sweden, located in the north of Europe, is also a unique setting because of
its small home market of nearly 10 million inhabitants.
Besides an industry focus, our study also has a second focus on small and medium-sized enterprises (SMEs). One
reason for focusing on SMEs is because the I-P relationship is widely explored among multinational large
companies, but comparatively little effort has been made to understand the relationship in reference to SMEs
(Chiao et al., 2006; Lu and Beamish, 2001, 2006). SMEs are not smaller versions of large companies; thus, the
results of large-firm studies cannot be automatically applied to them (Ruigrok et al., 2007). They have their own
specific style of strategic management and they are substantially different from large companies in their process
and policy of internationalization (Dana et al., 1999; Majocchi and Zucchella, 2003). Because of their limited
financial base, small geographical scope and domestic focus, entering international markets is a more critical
decision for SMEs (Lu and Beamish, 2006).
The remainder of the paper is structured as follows: The theoretical underpinning of the I-P relationship is
discussed in the next section. It is accompanied by a review of the empirical studies in general, and among wood
manufacturing SMEs in particular. Following that, the methodology of the research is presented, which is followed
by the results and discussion, and rounded off with the conclusions. To summarize the applicable conclusions and
build a foundation for future research, the managerial implications, research limitations and suggestions for further
studies are discussed at the end.
2. Theoretical frame of reference
2.1. Theoretical perspectives
I-P studies have mainly applied different mainstream theories such as finance theory of portfolio diversification,
the resource-based view, transaction cost economies, and organizational learning theory to understand how
internationalization affects company performance (Hennart, 2007; Tsao and Chen, 2010). However, again there is
no consensus about the most suitable frameworks to decipher the relationship. In his seminal discussion, Hennart
(2007) has critically evaluated the current arguments in the field and concluded that there is no theoretical basis
for expecting a systematic I-P connection. However, he suggested transaction cost economies as an applicable
rationale to explain the performance consequences of internationalization. The basic notion of this theory is that
markets and firms are interchangeable institutions to arrange exchange between firms in general, and that this
could also be applied to the analysis of firms from different countries. The efficiency of markets or firms as
coordinators of exchange is different and depends on the context. While markets rely on the price mechanisms,
firms establish an exchange through hierarchy (Hennart, 2000). One prediction, in line with transaction cost theory,
is that companies will invest in foreign markets that are close in cultural aspects; hence, they avoid the rising cost
of governance caused by cultural distance while, at the same time, enjoying the benefits of investing in different
countries (Hennart, 2007).
However, transaction cost economies give a rather limited perspective on internationalization (Contractor, 2007).
The resource-based view complements the theoretical foundation by focusing on resources that create a sustainable
competitive advantage by being unique, valuable, and very difficult to imitate (Barney, 1991). These resources
can be successfully transferred to international markets (Chiao et al., 2006), and internationalization can be a
powerful strategy for leveraging resources and further improving sustainable competitive advantage (Bausch and

4
Krist, 2007).
A new theoretical perspective which has better potential to explain the dynamic of the I-P relationship and
reconcile the existing conflicts among empirical findings is the promulgated 3-stage theory (Contractor, 2007).
According to this rationale, firms go through a sequential 3-stage path when increasing their international activities.
In each stage, there are incremental benefits as well as incremental costs for adding a new foreign country to the
international portfolio. In the first (early internationalization) and the last (excessive internationalization) stages,
the costs of adding a new nation outweigh the benefits and lead to a negative performance consequence. In the
middle stage of the internationalization path, adding a new country to the portfolio leads to a positive performance
consequence. In stage two, companies have acquired enough knowledge and experience to overcome the liabilities
of foreignness. Also, the number of countries in the second stage has not exceeded the optimum threshold of
handling and managing costs (Contractor, 2007).
Summing up on the use of theoretical frameworks explaining the I-P relationship, there is no single theory with
the potential to cover all the aspects. Therefore, researchers are recommended (de Chernatony et al., 2005; Jack
and Raturi, 2006; Ma and Norwich, 2007) to triangulate existing theories with respect to the company situations
and the specific environmental contexts. Theory triangulation consists of using more than one theory to interpret
a phenomenon (Jack and Raturi, 2006). Therefore, when a research question is approached from more than one
theoretical perspective, it is called theory triangulation (de Chernatony et al., 2005).
2.2. Empirical studies of the I-P relationship
Fortunately, besides theoretical frames of references, a massive body of empirical research exists on the I-P
relationship. Empirical results, generally, have been very inconclusive about the existence and shape of the I-P
connection, yielding support for no relationship (Majocchi and Zucchella, 2003; McDougall and Oviatt, 1996),
negative linear relationships (Lu and Beamish, 2006; Wan and Hoskisson, 2003), positive linear relationships
(Banalieva and Sarathy, 2011; Bausch and Krist, 2007; Elango, 2006; Elango and Sethi, 2007; Marano et al., 2016;
Tsao and Chen, 2010), inverted U-shaped relationships (Banalieva and Sarathy, 2011; Chen and Hsu, 2010; Chiao
et al., 2006; Elango, 2006; Pattnaik and Elango, 2009), U-shaped relationships (Assaf et al., 2012; Lu and Beamish,
2001; Ruigrok and Wagner, 2003; Thomas, 2006; Zhang and Toppinen, 2011), and S-shaped relationships
(Contractor et al., 2003; Lu and Beamish, 2004; Outreville, 2010; Ruigrok et al., 2007). Despite the vast number
of empirical studies in general, the lack of this kind of study in the forest industry is not easily explained. Until
Zhang & Toppinen’s (2011) quantitative analysis of the I-P relationship in the global forest industry, there was no
such research in the forest or wood manufacturing industry. Zhang & Toppinen’s study also suffered from some
serious shortcomings, such as having a very small sample size. In addition, they examined the I-P relationship
using a cross-sectional analysis, while the longitudinal study is recommended as the proper way to evaluate the
relationship (Zhang and Toppinen, 2011). Surprisingly, we could not find any other specific quantitative analysis
on the I-P relationship after Zhang & Toppinen (2011). This shows the necessity of performing a fresh longitudinal
quantitative analysis on the I-P relationship in the forest industry with a large sample size.
To combine the different results of existing studies and achieve a common conclusion regarding the existence and
shape of such a relationship, a number of meta-analysis studies have been performed. In a very recent meta-analysis
study, Marano et al. (2016) found a positive I-P relationship. But, as they clearly noted, the overall effect of the

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Frequently Asked Questions (1)
Q1. What are the contributions mentioned in the paper "A combined focused industry and company size investigation of the internationalization-performance relationship: the case of small and medium-sized enterprises (smes) within the swedish wood manufacturing industry" ?

Building on the resource-based view and the S-shape theory of internationalization, this paper aims at such an empirically focused investigation of SMEs within the Swedish wood manufacturing industry. A repeated cross-sectional survey study using hierarchical regression analysis has revealed a linear negative relationship between internationalization and performance. In addition, the follow-up tests of ANCOVA ( analysis of covariance ) and piecewise regression revealed a non-linear relationship between ( 1 ) internationalization and performance for highly internationalized firms in 2001, ( 2 ) internationalization and growth for low internationalized companies in 2001, and ( 3 ) internationalization and performance for highly internationalized groups in the pooled dataset.