An Exploratory Study of ‘Knowledge-intensive’ and

International Small Business Journal Copyright © 2004
SAGE Publications (London,
Thousand Oaks and New Delhi)
DOI: 10.1177/0266242604039479
Vol 22(1): 23–56

Small Firm Internationalization and
Business Strategy

An Exploratory Study of ‘Knowledge-intensive’ and
‘Traditional’ Manufacturing Firms in the UK


University of Ulster, UK


University of Central England, UK


University of Strathclyde, UK

The objective of this study was to explore the linkages between the overall
business strategies of small firms and their patterns, processes and pace of
internationalization. A qualitative approach was adopted, involving 30 in-
depth interviews with key decision makers of internationalizing small firms
based in 3 UK regions (15 ‘knowledge-intensive’ and 15 ‘traditional’ firms).
The findings suggest that business policies, including those linked to
ownership and/or management changes, had an important influence upon
the international orientation of many firms. There were close relationships
between product policies and market focus, with product or process
innovation often providing an important stimulus to international expansion.
However, differences existed in the patterns, processes and pace of
internationalization between small ‘knowledge-intensive’ and ‘traditional’
manufacturing firms. The implications of these results on firm strategy,
public policy and theory development are discussed and a series of research
questions are postulated for future investigation.

KEYWORDS: internationalization;‘knowledge-intensive’;SMEs;‘traditional’
manufacturing firms; United Kingdom


The literature on the internationalization process of small firms has been
reviewed by a variety of authors (see for example Andersen, 1993; Leonidou and


International Small Business Journal 22(1)

Katsikeas, 1996). Therein, various conceptualizations are postulated including
contingency, establishment chain, ‘stage’, network and resource-based theories.
Recently, Coviello and McAuley (1999: 223) concluded that: ‘. . . SME [smalland
medium-sized enterprise] internationalization is best understood by
integrating major theoretical frameworks’ and called for ‘future research based
on a more holistic approach to conceptual thought, empirical work and methodological
development’ (see also Fletcher, 2001). Recognizing the variety of frameworks
employed in prior research in the area and the diverse findings, we report
on a recent study designed to further investigate issues pertaining to SME internationalization.
The aims of the research were: first, to explore internationalization
behaviour within the holistic perspective of small firms’ overall business
growth strategies; and, second, to identify any differences in the patterns,
processes and pace of internationalization of smaller ‘knowledge-intensive’ and
‘traditional’ firms within the manufacturing sector.

The research focused on small firms because of their recognized importance to
economic activity, employment, innovation and wealth creation in many
countries (Acs et al., 1997; Katsikeas et al., 1998). Moreover, improving the international
contributions of the small business sector is widely regarded as an
increasingly important policy priority and the focus of public policy support in
many countries (Crick, 1997; EIM/ENSR, 1993; United States Small Business
Administration [US SBA], 1993; McNaughton and Bell, 2001; Organisation for
Economic Co-operation and Development [OECD], 1997). Factors such as
changing consumer preferences, developments in manufacturing, communication
and information technologies, and changing competitive conditions
provide a favourable environment for small firm internationalization now and
into the future. Exploring the diverse experiences of ‘knowledge-intensive’ and
‘traditional’ firms is important from both academic and public policy perspectives
since within the former category, in particular, are ‘born global’ firms that
compete globally virtually from inception (Crick and Jones, 2000; Knight and
Cavusgil, 1996; McKinsey & Co., 1993; Madsen and Servais, 1997).

In this study, the term ‘internationalization’ is used in the same context as that
defined by Welch and Luostarinen (1988), as ‘the process of increasing involvement
in international markets’. Business strategy is used as an umbrella term to
denote the broad range of strategic options open to the firm, including both
organizational and functional management strategies, product/market strategies,
and diversification strategies.1 ‘Knowledge-intensive’ firms are defined, following
Coviello (1994), as those ‘having a high added value of scientific knowledge
embedded in both product and process’. Although the term is widely used to
describe ‘knowledge based’ firms, typically in information and communication
technologies (ICT), it has been extended in the present study to incorporate high-
technology manufacturing firms in other sectors (see also the Research Focus and
Method section).

The empirical research focused on ‘traditional’ or ‘knowledge-intensive’
manufacturing firms in three locations. At each, 10 in-depth interviews were
conducted with CEOs or Export Managers of internationalizing firms (5
‘traditional’ and 5 ‘knowledge-intensive’) i.e. making 30 interviews in total. The

Bell et al.: Internationalization and Business Strategy

patterns and pace of firm internationalization were investigated and the relationship
between domestic and international activity explored within the broader
context of the overall business strategy of the firms.

Following a review of extant theories of small firm internationalization, the
methodology adopted in the study is outlined and justified. Thereafter, findings
are presented and discussed and issues for future research identified. Finally, the
implications for research in the area and for public policy in support of small firm
internationalization are considered.

A Critical Review of the Theoretical Frameworks of Small
Firm Internationalization

Internationalization Behaviour

Much of the early literature on internationalization behaviour concludes that the
process involves a series of incremental ‘stages’ whereby firms gradually become
involved in exporting and other forms of international business. As they do so,
they commit greater resources to the foreign market/s and target countries that
are increasingly ‘psychically’ distant (Bilkey and Tesar, 1977; Johanson and
Vahlne, 1977; Cavusgil, 1980; Czinkota, 1982). Although the number of stages
differs, a common underlying assumption of extant ‘stage’ models is that firms
are well established in the domestic market prior to developing international
strategies. Despite continued enthusiasm and support among many researchers
for this notion of incremental internationalization (Leonidou and Katsikeas,
1996; Petersen and Pedersen, 1997; Ellis and Pecotich, 1998), criticisms of this
view were being made as long ago as the late 1970s (see for example Bell, 1995;
Buckley et al., 1979; Cannon and Willis, 1981; Reid, 1983; Rosson, 1984; Turnbull,
1987). Indeed, Andersen’s (1993) conceptual critique focused on the weak theoretical
underpinning of many of the models and the lack of congruence between
theory and practice. He concluded that their ability to delineate boundaries
between stages, or adequately explain the processes that lead to movement
between stages, was rather limited. Moreover, the applicability of ‘stage’ theories
to internationalizing service firms has also been questioned (Chadee and
Mattsson, 1998; Knight, 1999).

In the last decade a new stream of research has emerged into ‘born global
firms’ (McKinsey & Co., 1993; Madsen and Servais, 1997). Also known as ‘international
new ventures’ (McDougall et al., 1994; Oviatt and McDougall, 1994),
‘committed internationalists’ (Bonaccorsi, 1992) and internationally focused
‘knowledge-intensive’ firms (Bell, 1995; Boter and Holmquist, 1996; Coviello,
1994; Jones, 1999), these tend to be smaller firms formed by active entrepreneurs.
Typically, their offerings involve substantial value added, often due to a significant
breakthrough in processes or technology (Knight and Cavusgil, 1996). A
characteristic is that management adopts a global focus from the outset and
embarks on rapid and dedicated internationalization (Jolly et al., 1992; McKinsey
& Co., 1993; Bloodgood et al., 1996). According to Knight and Cavusgil (1996),
the emergence of such firms can be explained by recent trends such as advances

International Small Business Journal 22(1)

in information and communication technologies, the increasing role of niche
markets, and the growth of global networks, which are facilitating the development
of mutually beneficial relationships with international partners.

There is little doubt that these trends will increasingly exert a strong influence
on small firm internationalization. What is also clear from these authors’
discussion of the ‘born global’ phenomenon, is that firms with ‘an international
vision . . . from inception’, or soon thereafter, (Oviatt and McDougall, 1994),
present a substantive challenge to internationalization ‘stage’ theories and the
notion of incremental internationalization (see also Madsen and Servais, 1997).
Indeed, divergent empirical results have led many authors to seek alternative
frameworks to the internationalization process models.

The internalization/transaction cost paradigm represents a generally accepted
model in the international business field, with substantial empirical support
especially in respect of the foreign direct investment (FDI) decisions of
multinational enterprises. The paradigm has been applied to the early internationalization
stages by Anderson and Coughlan (1987) who argued that
integration of marketing and distribution functions may be preferred when the
firm possesses specialized knowledge and when agents are difficult to find.
However, McDougall et al. (1994) found that in some international new ventures,
entrepreneurs did not make internationalization decisions on the basis of lowest
cost locations; and neither did they attempt to internalize activities to the point
where the benefits of further internalization were outweighed by the costs.
Furthermore, strategic alliances were found to be common for international new
ventures even though the firms ran the risk of losing proprietary know-how
through opportunistic partner behaviour.

Increasing interest has also been shown in network theory and internationalization
(Benito and Welch, 1994; Johanson and Mattsson, 1988; Johanson and
Vahlne, 1992). Based on detailed case studies of four software firms, Coviello and
Munro (1997) conclude that:

... our understanding of the internationalisation process for small firms, at least small
software firms, can be enhanced by integrating the models of incremental internationalisation
with the network perspective. (Coviello and Munro, 1997: 379)

These authors suggest that this externally driven view of internationalization
(the external web of formal and informal relationships) provides additional
insights to the internally driven perspective of Johanson and Vahlne (1990). In
the latter, the evolution of internationalization is based on managers’ cognitive
learning and competency development, which gradually increases through

There is no question that network relationships with partners (both direct and
indirect) offer helpful new insights and require to be incorporated into models
or frameworks of small firm internationalization. However, the cause and effect
relationships are not yet totally clear. Indeed, it might be argued that networks
provide mechanisms to overcome resource deficiencies, rather than being drivers
of internationalization per se.

Recognition that internationalization is affected by multiple influences has led

Bell et al.: Internationalization and Business Strategy

to growing interest in contingency approaches. Such a view was articulated by
Reid (1983), but did not attract much attention until recently. However, in the
last decade Woodcock et al. (1994), Yeoh and Jeong (1995), Kumar and Subramaniam
(1997) – among others – have developed contingency frameworks in the
international business and exporting fields. In justifying this perspective, Kumar
and Subramaniam (1997) argue that the existing literature has not devoted much
attention to evaluating market selection and mode of entry decisions as interdependent
decisions. One might go even further and suggest that the range of
the firms’ internationalization decisions, incorporating product decisions, market
choice and entry modes, are made in a holistic way (a notion initially presented
by Luostarinen, 1979).

In a similar vein, Bell and Young (1998) and Coviello and McAuley (1999)
have argued that excessive attention has been paid to the merits of competing
theories and models rather than to their potential complementarities. The latter
authors conclude that SME internationalization is best understood by integrating
major theoretical frameworks. Bell and Young (1998) contend that the nature
and pace of internationalization is conditioned by product, industry and other
external environmental variables, as well as by firm-specific factors.

Indeed, firm- and industry-specific influences merit further investigation as
particular ‘critical incidents’ may impact on firms’ overall business strategies and
market focus. Firms may also experience ‘epochs’ of internationalization,
followed by periods of consolidation or retrenchment, or they may be involved
in particular ‘episodes’ that lead to rapid international expansion or de-internationalization
(Crick, 2002; Oesterle, 1997; Pauwels and Matthyssens, 1999).
These ‘episodes’ or ‘epochs’ may be triggered by environmental forces that
impact on the strategies of domestic or overseas customers and other network
partners, as well as those that directly influence the focal firm.

Business Strategy and Internationalization

Melin (1992) has highlighted the limited attention that has been paid to the link
between ‘internationalization theory’ and strategy issues at both conceptual and
practical levels. The absence of linkages is perhaps most evident in relation to
small firm strategies and internationalization. In some respects this situation is
surprising, given that Ansoff (1965) identifies new market development (i.e.
internationalization) as a viable strategy for rapid small firm growth in his
product-market expansion matrix, as an alternative to developing new
product/service offerings for the domestic market.

However, in other respects the lack of attention is less remarkable and may be
partially explained by a number of factors. First, much of the early literature
characterizes small firms’ export behaviour as essentially unplanned and reactive,
with firms responding to unsolicited orders or enquiries rather than pursuing
proactive strategies (Bilkey and Tesar, 1977). Second, many of these contributions
tend to regard international involvement as of secondary importance to
domestic market activities and something that firms only consider once they have
established a secure foothold in the home market. Thus, domestic and international
developments are often viewed as diverse strategic solitudes, rather than

International Small Business Journal 22(1)

complementary strategies for firm growth. Third, the financial and human
resource constraints of smaller firms are well documented, as is an absence of
formal planning (Carson et al., 1995). This ‘resource poverty . . . requires some
very different management approaches’ (Welsh and White, 1981), which often
reflect the implicit, rather than explicit, nature of the process in small firms
(Pennings, 1985). In these circumstances, small firm internationalization is often
considered to be ad hoc and export activity regarded as ‘at best . . . unplanned,
reactive and opportunistic’ (Bradley and Mitchell, 1986; Westhead et al., 2002).

Nevertheless, Mintzberg (1973) and others (Timmons, 1978; Gibbs and Scott,
1985; Shuman and Seeger, 1986) observe that a major factor in the continued
success and expansion of small firms is the strategic planning activity undertaken
by CEOs and that strategy formulation is essentially a ‘top-down’ process. In this
context, it should be recognized that the absence of an explicit and formal
strategy does not equate to the lack of a strategic vision, whether or not this
involves a global focus. It is suggested that strategic planning activity will become
more formal and sophisticated over the life cycle of the business.

However, in this context, some work indicates that the motivation to think and
act strategically may only be brought about by a crisis within the organization
(Aram and Cowan, 1990). Other research shows that the ability to use strategic
management practices appropriately is a function of the entrepreneur’s previous
experience (Bracker et al., 1988); and of contact with external advisors or non-
executive directors (Berry, 1998). The latter two studies related to small firms in
growth/small high-tech sectors, and are thus significant in the context of the
present work on ‘knowledge-intensive’ versus ‘traditional’ firms. Related work
also concerns the influence of management buy-outs (MBOs): a review of studies
in the USA, France and the Netherlands (Wright et al., 1992) indicated that
short- and medium-term improvements in performance and strategic focus, at
least, were closely associated with the incentives of MBOs.

More recently, Welch and Welch (1996) have attempted to develop a longitudinal
conceptual model to identify the interrelationships between the two
streams of international business inquiry, that is, internationalization and strategic
management. The authors stress the significance of the ‘strategic foundations’
(knowledge, skills and experience, networks, etc.) of the enterprise and its
external environment, and identify planned and unplanned routes to internationalization,
with networking important in both. They conclude by calling for
‘empirical studies that specifically focus on strategy and internationalisation
process interconnections’ (Welch and Welch, 1996: 25).

Andersen and Kheam (1998) used a resource-based framework to explore the
international growth strategies of small- to medium-sized Norwegian exporting
firms. Ansoff’s (1965) product-market expansion matrix is used to classify
alternative growth strategies vis-a-vis market penetration, market development,
product development, and diversification growth. Julien et al. (1997) also
proposed a typology of the strategic export behaviour of SMEs based on their
case study research. In addition, the importance of the wider business strategy
context in internationalization is implicit in a number of other studies (Melin,
1992; Préfontaine and Bourgalt, 2002). For example, Coviello and Munro (1997)

Bell et al.: Internationalization and Business Strategy

identify issues such as product diversification and acquisition as influences in
international development. Additionally, Bell’s (1995) study showed examples of
software companies that followed clients into international markets or sought to
be acquired in order to sustain domestic and principally international growth.

The increasing interest in ‘born global’ firms is important in this context too,
since for such companies the key business strategy of the firm is rapid and dedicated
internationalization. This phenomenon suggests that many firms no longer
regard international markets as ‘simple adjuncts to the domestic market’
(McKinsey & Co., 1993), but that business strategies are developed from the
outset with global markets in mind. Boter and Holmquist (1996) compared cases
of traditional manufacturing (engineering) firms with innovation-oriented small
firms. The former were integrated into the manufacturing systems of large
companies, subcontractors and customers; operated with a production-oriented
culture; had a local rather than global focus; pursued a stepwise international
expansion; and were often family-owned. The latter were much more dynamic,
independent, globally focused firms that internationalized rapidly, with a lower
orientation towards the domestic market.

Thus, extant research suggests that a greater understanding of both the
domestic and international behaviour of smaller firms is still required. Moreover,
critical interrelationships between domestic and export activities also need to be
explored within the context of the firms’ overall business strategies. The present
study seeks to address this lacuna and provide additional research and public
policy support perspectives on these linkages. The specific objective of the
enquiry was to explore the interrelationships between overall business strategy
and internationalization. A number of key issues were empirically investigated
in depth. These included:

•firms’ initial business strategies, growth objectives and international orientation;

the stimuli which influenced the choice of strategies and subsequent operational
decisions; and,

the role of internationalization in the overall business strategy of the firms.
Research Focus and Method

The research adopted a case study approach involving 30 in-depth semi-structured
interviews with Chief Executive Officers (CEOs) or export managers of
small-to-medium sized internationalizing UK companies. A sample of five
‘knowledge-intensive’ and five ‘traditional’ manufacturing firms was selected for
investigation in each of three locations (England, Scotland and Northern
Ireland).2 The research objective and decisions relating to the choice of method,
sample selection, data collection procedures and analysis are elaborated upon

As previously indicated, the study adopted Coviello’s (1994: 17) classification
of ‘knowledge-intensive’ firms as those ‘having a high added value of scientific
knowledge embedded in both product and process. Often, this knowledge is also

International Small Business Journal 22(1)

required in sales and marketing functions’. Although this term has mainly been
applied to ICT firms (often, in the computer software sector), the definition was
extended to include other manufacturing companies in recognition of the
growing technological sophistication of firms in other industry sectors. For
example, many firms in the printing industry, which were once very traditional,
now use the latest computer technology in design and production and often
distribute products by electronic means. Similarly, some clothing and textile firms
are now producing garments using new fabrics that have a very high technological
content and frequently employ computer aided design (CAD) and/or computer
aided manufacturing (CAM) processes. Among ‘traditional’ manufacturing
firms, such as electrical/mechanical engineering or furniture manufacturing, the
technological content of products need not necessarily be high, although some
quite sophisticated ‘knowledge-intensive’ processes may often be involved, for
example packaging in the food and drink industries.

As already indicated, the main objective was to explore the interrelationships
between business strategy and internationalization. In addressing this objective,
the research design attempted to avoid what Kamath et al. (1987) refer to as a
‘dominant use of logical-empiricist methodology’, which has ‘bedevilled’ international
research. Instead, a qualitative in-depth interview approach was
adopted in order to seek richer and deeper insights into the complex phenomena
under investigation and to attempt to answer and explain ‘why’ and ‘how’ type
research questions (Easterby-Smith et al., 1994; Eisenhardt, 1989; Yin, 1989).

The approach selected is consistent with a growing trend towards qualitative
methods in empirical enquiries at the marketing/entrepreneurship/internationalization
interfaces (Carson and Coviello, 1996; Coviello and Munro, 1997; Julien
et al., 1997). These are also increasingly prevalent in industrial network research,
which has a strong business internationalization focus (Axelsson and Johanson,
1992; Melin, 1992). Indeed, Easton’s (1995) robust epistemological defence
concludes that they ‘are a powerful research method and one particularly suited
to the study of industrial networks’.

Another persuasive argument for adopting such approaches in small business
research is that it may be the only way of obtaining information from the key
decision makers, given their noted reluctance to complete questionnaires.
Moreover, a typical lack of published information (in the form of shareholder
reports, commercial analyses, etc.), poor recording of in

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