Internationalization of SMEs: Inward-Outward Patterns and Government Policy

Introduction While there has been extensive research in the last two decades on the internationalization process of small and medium-sized enterprises (SMEs), particularly through exporting, the connection to what might be termed inward international activities has received only limited attention - and often only indirectly (Luostarinen 1970, 1979, Buckely and Ghauri 1993, Welch and Luostarinen 1993). Inward international operations can be seen as the mirror image of outward operations, similarly covering a multiplicity of forms - such as imports of goods and services, finance and technology; through franchising, licensing, direct investments, alliance agreements, and the like (Luostarinen and Welch 1990). In this sense it is understandable that inward international operations have not been as strongly researched, especially as policies of companies and governments have focused on measures to facilitate more effective outward operations. Nevertheless, the perspective on this issue changes once it is considered that inward international activities might have an important impact on the likelihood and outcome of outward international steps. This consideration was recognized much earlier in the economics literature, with a focus on the impact of inward foreign direct investment and its ability to stimulate exports from the country in question - by foreign and imitating local firms (Brash 1966, Vernon 1966). The issue is clearly of concern to governments as they seek to stimulate greater exporting activity by domestic firms. In some cases governments have also supported and encouraged particular inward flows, especially technology and direct investments. Often there is an expectation on behalf of the government that the inward movement will be the basis of later exports. As an example, free trade zones are typically set up with a tax regime and other supporting benefits to encourage inward investments, but they are geared towards export-oriented operations (Robles and Hozier 1986). Taken to a broader level, if preceding inward international operations, in their variety of forms influence the outward process, a shift in the nature and focus of government export assistance programs may well be called for. Specifically, although probably viewed with alarm in some quarters, a more general program of assistance to inward operations could be argued as appropriate within overall support for internationalization. However, it is difficult to take a definitive stand on this issue because of the lack of any comprehensive data. In this article, the results of a broad study of the inward-outward internationalization patterns of SMEs in Finland are presented (Luostarinen et al. 1994). The Finnish government's approach to assistance on the inward side is considered in the light of the study's evidence and its implications. Previous Studies Research on specific international business operations such as international sub-contracting and alliance arrangements, as well as the activities of multinationals and countertrade, has often touched on aspects of the inward - outward relationships, although this has typically not been the focus of the research (Welch and Luostarinen 1993). Clearly though, international inward operations may have an impact on whether and in what form outward activities develop, at different stages of internationalization, and with different operation modes - including exporting. Within the exporting field a particular concern is whether inward international steps influence the very start of exporting activity, as alluded to in earlier economics' research (Vernon 1966). Previous research on the entry process of firms to international operations has tended to concentrate on exporting, which has been shown to be the primary starting point for outward internationalization by manufacturers (Luostarinen 1979). Results from various exploratory studies indicate that a number of activities and influences may be critical in the lead-up to export initiation, and affect its outcome - for example the background experience of key decision-makers in the company, and the type of domestic expansion process (Bilkey and Tesar 1977, Wiedersheim-Paul, Olson and Welch 1978). …