The Concept of Internationalization and its Relevance to Small and Medium Service Enterprises (SMSEs)

Dr. John Stanton, University of Western Sydney, Parramatta, Australia Dr. Patricia Stanton, University of Newcastle, Newcastle, Australia

ABSTRACT This paper challenges the narrow concept of internationalization widely used by international business researchers, that potentially excludes a growing array of different types of SMSEs that have the potential to become involved in the international exchange process. After reviewing the growing scope for different forms of international services exchange and how this tends to not be reflected in measurement, the paper proposes a widened and more dynamic view of the internationalization process SMSEs may pursue. The core argument is that a restricted view of the internationalization process underestimates services involved in this process and neglects opportunities for encouraging SMSEs to internationalize. INTRODUCTION This paper challenges a narrow approach used by international business researchers in studies of the internationalization process, an approach that potentially excludes a growing array of different types of SMSE firms that have the potential to become involved in the international exchange process. Examination of relevant research is used to identify research gaps pertaining to services varying widely both in their tangibility characteristics and in their mode of international supply. Following Gronroos (1999, p.203), there is an underlying premise that the type of service will affect the degree to which internationalization is possible. Rather than a restriction, this paper argues that ongoing changes in the global regulatory and technological environment are changing the types of services in which internationalization is possible, expanding opportunities for SMSEs. Following Axinn and Matthyssens (2002), the study highlights the inadequacy of dominant internationalization theories to explain observed service firm behaviors and proposes a widened and more dynamic view of the internationalization process SMSEs may pursue. While the internationalization of manufacturing enterprises appears the main focus when studying the internationalization process, recently a growing literature has focused on the growing importance of international trade in services and the opportunities and impediments for SMSEs to participate (Productivity Commission, 2002). Given the heterogeneity of economic activity encompassed in manufacturing and service activities, aggregated, quantitative studies seeking to understand the drivers and impediments of service firm internationalization may result in generalizations that obscure contextual differences. In particular, given that services encompass a spectrum of activities varying in the importance of the tangibility component in the value delivered (Lovelock et al., 2007), at one extreme similarities to manufacturing could well be expected but with increasing importance of performance and experience in the value delivered, increasing dissimilarities at the other extreme. Further, because of intangibility within services, the delivery of value across international borders, encountering possible physical and psychic distance, also impinges differently on services and their internationalization; a factor that until recently has led economists to assume services were largely non-tradable (Productivity Commission, 2002, p.61). This study examines how differences in the properties of service activities may influence the internationalization process of services, with internationalization itself taking different forms of behavior. The aim is to focus on current shortcomings in assessing the internationalization process of service firms in particular and hence the issues that arise. The core argument advanced is that a restricted view of the internationalization process underestimates services involved in this process and neglects opportunities for encouraging SMSEs to internationalize. SERVICES DEFINITIONS AND CLASSIFICATIONS There is no universally accepted definition of services (Productivity Commission 2002). For measurement of economic activity, for example, services have been defined as a residual: activities not defined as mining,

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manufacturing or agriculture. Using this definition, the Productivity Commission (2002) uses five sub-groups to examine and analyze changes in service activity. The five are:
1. Distribution services, including transport, storage, and communications; 2. Social services, including education, government administration and defense; 3. Producer services such as property, business services and finance; 4. Personal services, that include accommodation and restaurants, all forms of personal services as well as cultural and recreational services; and 5. Utilities and construction services.

While useful for this purpose, a functional classification of this form may be unsuitable for understanding why services and in particular, service firms, may vary in their international involvement. Erramilli (1990) for example, for export of services distinguishes between hard services that can be delivered across borders with very little local presence (effectively consumption can be separated from production) and soft services such as fast food retailing and most forms of medical treatment, where little local presence is not possible. Thus the properties of services that distinguish them from goods as well as each other may need to be considered to understand differences in the marketing of services and their internationalization process. Importance of Tangibility The usefulness of separating goods and services for marketing purposes is not universally recognized. Enis and Roering (1981) expound the development of marketing strategies based on the benefits provided by goods and services, rather than on the classification of goods and services based upon hypothetically unique characteristics. Others (Murray and Schlackter, 1990; Hartman and Lindgren Jr., 1993) reach similar conclusions by different paths, using three 'simplifying evaluative dimensions' of goods and services (customization, evaluation and delay), while Murray and Schlackter argue that consumers make clear distinctions between consumer items on the basis of the qualities of goods and services. Nevertheless, the proposition that services are different from goods remains largely undisputed. Arguably, the intangibility of services makes it difficult for customers to understand what is being offered, to identify potential providers, and to evaluate alternatives (Legg and Baker, 1987). Consequently, characteristics of services necessitate different consumer evaluation processes from those used when assessing goods (Zeithaml, 1981), and require distinct marketing techniques (Zeithaml et al., 1985), both raising significant market research issues if firms seek to market internationally. The services marketing literature commonly grounds the uniqueness of services on four main characteristics: intangibility, simultaneity (and inseparability), heterogeneity (or variability, or inconsistency) and perishability (Lovelock et al., 2007; Hoffman and Bateson, 1997). Implications of intangibility for the consumption of services are addressed. Tangibility refers to the physical nature of the core product, the basic, generic central thing that is exchanged (Levitt, 1997). Physical goods may be displayed and examined by prospective purchasers, often without interaction with the provider. Indeed, retail stores generally display a number of company brands and a variety of models for each brand name. This arrangement provides the consumer with the opportunity to make physical comparisons and to set standards on which to make purchase decisions (Hartman and Lindgren Jr., 1993, p.12). Services can vary widely in their intangibility (Lovelock, 1996; Rathmell, 1966; Shostack, 1977) allowing them to be plotted on a continuum according to their tangibility. Intangibility emphasizes services as performances resulting in a service experience, so that some services may be argued to have no existence apart from the interaction between the people, both provider and consumer, who experience the service together (Friedman and Smith, 1993). This property of personal interaction reflects the inseparability characteristic of relatively intangible services. Even when a service has high tangibility, physical comparison may not always be sufficient for consumers to evaluate a complex product conclusively, or to choose between brands. Reassurance may be sought from service personnel and free trials, or the promise of a 'satisfaction or money back guarantee' may help resolve evaluation and purchase difficulties. Tangibility offers those with communication problems (e.g., understanding another language) the ability to make physical comparisons across a service. If a service requires interaction with providers, this also may be particularly challenging for both consumers and providers in a cross-cultural setting. The difficulty faced by consumers in evaluating a service offer tends to be inversely related to the dominance of its tangible element. Highly intangible services, therefore, can require that the service provider develop high trust or credibility, an important consideration when considering a service firms internationalization strategy.

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Services also can be distinguished by the qualities of search, experience and credence. Highly tangible services are likely to be high in search qualities associated with some characteristic (such as appearance, colour or smell) that can be predetermined before purchasing takes place. Services that involve characteristics that can only be discerned after purchase or during consumption (such as taste or ease of handling) are likely to be high in experience qualities (Nelson, 1970). At the highly intangible end of the continuum, services may be impossible to evaluate even after consumption. These services are said to be high in credence qualities (Darby and Karni, 1973). Intangibility, personalization (the social content between customer and service provider) and the limited ability to replicate service performance associated with heterogeneity can be expected to limit consumers ability to evaluate the quality of services (Mittal and Lassar, 1996). Customer satisfaction and repeat patronage may be determined solely by the quality of the personal encounter (Solomon et al., 1985, p.100). Measuring quality for medical services, for example, is likely to be more difficult than for childcare services, thus implying the need for greater perceived provider credibility in the first case. Intangibility together with other service characteristics such as heterogeneity and inseparability can create evaluation difficulties for all consumers, even those with substantial market knowledge. In contrast with physical goods, highly intangible services are performances that cease to exist once consumed. This perishability reinforces the difficulty of evaluating intangibility (Hartman and Lindgren Jr., 1993). Clarification of the importance of intangibility for consumption behavior is complicated by the subjectivity underlining categorization of services according to their tangibility. Additionally, the relevance of intangibility, heterogeneity, simultaneity and perishability has been questioned on the grounds that they are not universally applicable to all services (Lovelock, 1996). Because of differing service characteristics, they do not all pose similar challenges to consumers or the same strategic opportunities for providers. Similarities and differences between services need to be identified in order to understand how internationalization opportunities and processes may differ. INTERNATIONAL TRADE IN SERVICES Referring mainly to the UK, Bannock (2004) observes that while small and medium businesses are predominantly local in their operation, many are internationalising, increasingly in service activities. International regulatory and technological advances since the early 1990s, particularly the General Agreement on Trade in Services (GATS, 1995) and advances in information communication technologies use, appear to offer increased scope for businesses to internationalise. GATS (1995) has not only provided a more conducive environment for services trade but it has also widened the scope for different types of service by extending most favored nation treatment to different modes of exchange. There are four broad possibilities (Bhagwati, 1984): 1. Cross border trade when there is an international border separating the buyer and seller and the service (not the supplier) crosses this frontier. While such trade is the predominant form for highly tangible products, for services this is an emerging form spurred by communication technologies that facilitate delivery of services electronically such as online education, and a wide range of services from entertainment to business and professional services such as insurance, plans and designs. 2. A longstanding form of international service supply, typified by tourism, and students studying abroad, where the consumer or buyer crosses an international border to consume or purchase the service. Again, this is an expanding form in terms of service activities increasingly engaged in seeking to attract buyers from beyond domestic borders, for example, persons travelling abroad for medical and surgical procedures. 3. A commercial presence in a foreign country to supply a particular service. This commonly requires foreign direct investment in the market and is prominent in the global activities of MNEs in the area of finance, insurance and banking, but also in education, retailing, including fast foods, and many other services. 4. A natural person (the service provider) temporarily travels abroad to provide the service. Examples in this growing category include consultants engaged in consultancies beyond their domestic market and security staff operating in foreign countries.

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The concept of export and import, in terms of a cross-border physical transfer of a product is too narrow a conception of the international exchange process for services. In addition, changing technologies and other changing environmental conditions (such as the introduction of GATS) can influence the strategic choices of service businesses and their approaches to internationalization (Horizontal Issues Group, 2004), meaning that service activities in some cases may be able to change their supply modes. Nevertheless, alternative modes of service supply should retain some links to different types of services because the characteristics of a service (for example in terms of the dominant search, experience or credence qualities) may deter or recommend particular supply modes. While there is debate on whether the findings on internationalization derived from many studies of the manufacturing sector also generally apply to services (Javalgi, et al., 2003), this application appears to be focused on particular modes of supply, particularly cross-border and foreign direct investment. New forms of international services exchange appear to be emerging in the services sector reflecting their different qualities, environmental changes and changing technologies (Gronroos, 1999; Axinn and Matthyssens, 2002; Horizontal Issues Group, 2004) suggesting that this dominant (manufacturing) construction of internationalization is too restrictive for services. Separating Exporting from Internationalization Examination of merchandise-based definitions for exporting and internationalization reveals inadequacies when applied to services. Merchandise or goods exports are commonly defined as transactions which subtract from the stock of material resources in the exporting country as a result of their movement out of the country, these goods having been produced or manufactured in that exporting country (ABS, 1998). Such a definition is inadequate for the export of services because various modes of supply (see above) do not require such cross border movement while the high intangibility of many services does not alter the stock of material resources. The manner in which government statistical agencies recognize services trade is indicative of diverse possible forms of business involvement. In Australia, services exports are defined in terms of services rendered by Australian residents to nonresidents (credits); and service imports are services rendered by non-residents to residents (debits) (ABS, 1998). The cross-border concept of exporting is only one of the possible ways in which service firms can internationalize, but it is the dominant approach as reflected in Patterson (2004). He examined Australian service firms perceptions and attitudes towards exporting, comparing exporting and non-exporting firms. His conceptual model focuses on barriers to internationalization in a foreign market context; perceptions of benefits and risks of exporting; assessment of the domestic competitive environment and service environment changes; firm capabilities and characteristics; and managerial characteristics. Because of the lack of constructs that could be drawn from the services literature, the constructs were drawn from the international manufacturing export literature with measures checked for face validity in the services area. The question asked of respondents was whether or not their organization had exported services in the past three years, with the term left undefined. The process of exclusion of small firms deemed to have little potential to export and the focus on overseas markets meant both the export decision and internationalization process were framed with cross-border and foreign direct investment supply modes in mind. While the meaning of internationalization is often implicit in the research focus of internationalization studies rather than explicitly stated (Cavusgil, 1984, OFarrell, et al 1998; Gronroos, 1999; Harcourt and Shepherd, 2001), the current dominant meaning is a process involving firms shifting their focus from their domestic market to international markets. The elements of international involvement vary with the focus of researchers, sometimes giving a construction of the internationalization process that emphasizes particular modes of exporting activity alone. In particular, this can exclude consideration of an exchange process where buyers may cross borders physically or electronically; and natural persons may deliver a service without any FDI presence (Casvusgil, 1984; Jones, 1999; Patterson, 2004). Other examples are OFarrell et al. (1998) whose study of business service SMSE internationalization is largely involvement with foreign markets, in particular market selection and entry mode choice, thus, is mainly export oriented. Similarly, Javalgi et al. (2003, p.186) citing prior work, refer to internationalization as the process through which a firm moves from operating solely in its domestic marketplace to international markets. Even Etemad (2004), whose internationalization process framework is advocated below, views the process as one of movement from local to international markets. In contrast, Welch and Luostarinen (1988, 1993) initially view internationalization as a process of outward movement in international operations but subsequently broaden the perspective to include inward activities and cooperation as part of the process. Similarly, Harcourt and Shepherd (2001) while not offering an explicit definition,

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reject internationalization as just a fancy word for trade. In viewing internationalization as a process of becoming involved in international business activities they include both exporting and importing. Their survey of 1800 SMEs revealed that exporting and importing were the most important forms of international business activity followed by acquiring a license or franchise from an overseas partner, and participating in a joint venture with a foreign partner. A non-exhaustive list of other forms of internationalizing included registering in a global supply chain, granting a license or franchise to an overseas partner and accepting investment by a foreign entity. Following this broader perspective, the study of actions taken by firms to internationalize has been defined by the United Nations Economic Commission for Europe [UNECE] (Szabo, 2002) as the group of manoeuvres or coordinated actions, which an enterprise may make to penetrate other markets or to benefit from resources originating from other markets. Whilst including firm importing and exporting activity and FDI, it again recognizes more ways to deliberately interact in foreign markets. Using this definition widens the scope of questions one needs to ask firms to assess their international involvement beyond even the export supply modes noted by Bhagwhati (1984). It also raises the need to consider how to measure such involvement. Measurement appears deceptively simple when the focus of internationalization is the extension of a firms activities into overseas markets. Roberts (1999) argues that the more involved firms are in such markets the greater the level of internationalization. She suggests (p.86) that overseas activity can be measured in terms of the proportion of company turnover derived from overseas markets, similar to the export/sales ratio used by Cavusgil (1984). As long as this includes all forms of sales to non residents, irrespective of location, different supply modes for exporting are catered for. However her alternative, the proportion of a firms assets in overseas locations, which she argues may be a less biased indicator for service firm internationalization given the property of many services to require simultaneous production and consumption, becomes inherently biased when all possible supply modes are viewed as ways to internationalization. Nevertheless, Roberts cautions against using a single criterion. Cavusgils (1984) study of differences between firms in their degree of internationalization tended to move away from single measures and also from accounting based figures. Firms were classified to one of three stages not only in terms of degree of involvement to overseas markets measured by the export to sales ratio, but especially by the expressed attitudes and behavior of management and their commitment. Using the UNECE definition of internationalization and allowing for different possible modes of international supply, requires evaluation of the suitability of existing measures. Such measures need to be linked to the determinants of internationalization. UNDERSTANDING THE DETERMINANTS OF THE SMSE INTERNATIONALIZATION PROCESS Studies researching SMEs and their direct participation in the international economy have focused on various elements. The terminology used is varied, apparently often referring to the same issues. A general concern with seeking to encourage SMSE internationalization has led to both quantitative and qualitative research that focuses on parts or all of this process in terms of assessing the determinants of internationalization, as well as research seeking to understand the dynamics of firm movement through this process. In terms of determinants of individual firm involvement, research has tended to focus on particular aspects rather than a holistic approach. An exception is Etemad (2004). His framework integrates pushing and pulling forces, mediating forces and the internal dynamics of the firm, with interaction between forces influencing the internal dynamics, including management attitudes and strategies. Push forces are drivers that exert pressure on the firm from the inside to internationalize (p.6). A literature derived taxonomy of drivers expands on such factors as manager characteristics, the economics of operations, the characteristics of competition and strategy, the characteristics of the products technology and markets and the strategic logic of international operations. Pull drivers are environmental factors external to the firm (p.6), providing incentives for it to internationalize. Again, a literature derived taxonomy focuses on environmental changes related to the liberalizing of international markets, advances in technologies that facilitate internationalizing, the attraction of potential partners and resources, and the attraction of servicing current buyers and suppliers needs. The intermediating and interactive forces result from the interaction of push and pull drivers as well as the firms own dynamics influencing the interplay and outcome of the push and pull drivers. These intervening set of forces can be classified in terms of interaction between push and pull factors; the interaction between these interactive factors and the environment; and the interaction between the firms own characteristics including its own internal dynamics, and other components of the model. Application of such a framework can provide a more dynamic framework for appraising how export stimuli (Leonidou et al., 2007) impact on the internationalization process. Although Leonidou et al. (2007) classify export

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stimuli as either internal or external, reactive or pro-active, the interaction between them determines the outcome. Barriers to internationalization (Szabo, 2002) that may cover factors such as lack of management skills to inadequate intellectual property protection in foreign markets can be examined within such an holistic framework. In terms of studies examining stages of internationalization (Cavusgil, 1984; Gankema et al., 2000; Roberts, 1999), the framework can be used to show differences in the importance of the push, pull and intermediating forces at each stage. While a framework such as that used by Javalgi et al. (2003) addresses factors influencing internationalization within a systematic framework, the dynamics of the process are elucidated more clearly in Etemad (2004). In short, research on internationalization of both manufacturing and service firms has often been partial in terms of a focus on a particular concept of internationalization or in partial approaches to understanding its determinants, focusing at times on management attitudes (Patterson, 2004), barriers and stimuli that perhaps could benefit from being examined within an integrated, potentially dynamic framework. Etemads (2004) integrative framework encompasses most studies of the internationalization process of SMSEs, in terms of such research addressing a particular component within the framework. IMPLICATIONS AND FUTURE RESEARCH DIRECTIONS Research seeking to understand the potential for SMSEs to internationalize, determinants of the process as well as its dynamics, appears to be heavily influenced by internationalization research emanating from the study of manufacturing firms. This influence is apparent in the focus on the service firm export process as largely the same supply mode as manufacturing; either cross border and/or FDI. This paper has argued that an examination of the internationalization process for services must recognize the more varied forms of international trade in services than exist in manufacturing. Further, and as a consequence of this widening, the definition of internationalization is more appropriately one that focuses on actions taken to penetrate foreign markets (not necessarily by cross border direct exports) as well as actions taken to benefit from resources originating from other markets. Another point to emerge from this review is that the diversity of services in terms of a key characteristic of services, intangibility, is likely to raise different issues for SMSEs. Services high in credence qualities may face different problems in seeking to internationalize than those services with a high tangibility component where search can be more readily undertaken by potential overseas customers. Ongoing changes in communication and transport technologies, combined with regulatory changes at the national and international level in relation to the trade in services, provide further complications to understanding the potential for SMSEs to internationalize, with the potential for services previously considered non-tradable to become tradable and to have alternative choices of supply mode. In seeking to understand the determinants of a broader SMSE internationalization process prior research has largely provided only a partial analysis of such determinants, focusing on specific areas such as barriers or management attitudes or stimuli. Although such studies provide their own conceptual frameworks that link the particular determinants to an internationalization outcome, an explanation of the internationalization process is incomplete without consideration of the interaction between the various positive and negative determinants and the mediating role of other forces such as management and enterprise resources. The integrative framework developed by Etemad (2004) recommends itself for that purpose because it can accommodate alternative service supply modes. The international supply of services can take various modes that can differ significantly from the supply of goods internationally. Approaching the concept of internationalization from a broader and more inclusive perspective, consistent with the trade in service categories recognized by GATS (1995), offers opportunities for more small firms to think in a more open and global context. Key properties that distinguish services from goods cover a wide spectrum that is likely to influence strategy development and the potential for internationalization of SMSEs. Changes in communication and transportation technologies, combined with reducing barriers to services trade, are changing the spectrum of services, perhaps in the past considered non-tradable, into tradables. In terms of marketing strategy, these environmental changes are further confusing the internationalization process, opening alternative modes of international supply for consideration by SMSEs. An integrative framework addressing the internationalization process is necessary to understand the interaction between the various types of drivers, the effects of disincentives, and management and firm resources. Whether the push, pull and intermediating elements that provide a general framework to explain the process of

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