Working Paper #02-58(21)
Business Economics Series
December 2002
Cátedra de Iniciativas Empresariales y Empresa Familiar
Sección de Organización de Empresas de Getafe
Universidad Carlos III de Madrid
Calle Madrid, 123
28903 Getafe (Spain)
Fax (34) 91 624 5707


Zulima Fernández1 and María J.Nieto2


This paper analyses the relation between SME ownership and international
involvement. With a wide sample of Spanish firms, from 1991 to 1999, we test the
following hypotheses. Family SMEs results in lower involvement in international
markets, due to difficult access to necessary strategic resources. SMEs with another
company as a large-block shareholder will be more involved internationally, as they do
have access more strategic resources. Likewise, when another company invests in a
family SME, international involvement increases.

Keywords: internationalization, corporate governance, SMEs.

1Management & Strategy Division, Universidad Carlos III, C/ Madrid 126 (Getafe), 28903; E-
mail:, Director of the Chair for Business Initiatives and Family Firms.
2Management & Strategy Division, Universidad Carlos III, C/ Madrid 126 (Getafe), 28903;

* The authors gratefully acknowledge the financial support received from Andersen M.B.C., Deloitte &
Touche and EBN (Sociedad Española de Banca de Negocios).


The process of SME internationalization has become very widespread in recent years, and
therefore, it is advisable to examine this phenomenon in depth. Given that size seems to be less
and less important as a factor in international competitiveness (Bonaccorsi, 1992, Calof, 1994,
Wolf and Pett, 2000), other factors that could be limiting the access of SMEs to international
markets should be analysed. Limited international involvement is particularly pronounced in
family SMEs (Gallo and García-Pont, 1996), despite their weight in national economies (La
Porta et al. 1999). Because of this we are interested in studying the influence of the firm’s
ownership type, and more specifically the family ownership, on the international involvement.

Prior research on governance systems has broadly studied the differences between
concentrated and diffusely distributed share ownership structures. However there are few studies
examining the influences of different types of ownership on the strategic behaviour of SMEs.
Shrader and Simon (1997) described how corporate ventures and independent ventures
emphasized different resources and strategies. The possession of strategic resources and
capabilities is crucial to internationalise (Peng, 2001). Specifically, previous studies have identify
a range of resources that encourage small firms to enter international markets (Naidu and Prasad,
1994; McDougall et al., 1994; Reuber and Fischer, 1997; Westhead et al., 2001). Therefore it is
likely that the firm’s resources and capabilities will be influenced by the type of owner, and the
use of these resources and capabilities will actually affect the international strategy pursued by
the firm.

An SME can have different types of large shareholders. First of all we find family firms
that are run by the owner or founder or by his/her successors. These firms have a clear, long-term


perspective, and a sense of identification with and commitment to the business. They are usually
concerned about continuity through the next generation (Donnelley, 1964; Kets de Vries, 1993).
In addition, the owner will be directly involved in company management, which allows him to
closely control its decisions.1 In general, those firms seem to face the typical problems of SMEs.
They are often constrained by resource limitations and, consequently, their possibilities of
growth may be curtailed.

Other SMEs have a company among their shareholders. This will allow the SMEs to more
easily access financial, technological or commercial resources and capabilities. Also, this
corporate shareholder can provide information about foreign markets. Hence, unlike family
firms, these SMEs will be in a better position towards their international expansion.

This study focuses on the analysis of how different ownership types affect
internationalization decisions in SMEs. Specifically, we will address two types of owners: family
and companies. We will also study the case of family firms that have another company holding a
stake in the firm.

We analyse the export strategy to study the involvement of SMEs in foreign markets. The
data set used for empirical analysis is a large longitudinal sample of Spanish manufacturing
SMEs. The majority of studies have focused on the exporting activities of firms located in the
United States, and they have generally drawn upon non-random case studies or small (crosssection)
sample surveys. There is, then, a need to conduct studies in a wider range of cultural
environments and to improve the methodological shortcomings (Westhead et al., 2001). This
study aims to contribute to this endeavour.

The paper is set out as follows. In the next section, we present the conceptual foundations
for examining the internationalization strategy of SMEs with different ownership structures, and


related hypotheses. The empirical analysis is presented in the subsequent section, followed by a
discussion of results. Finally, we conclude with a review of implications for international
competitive strategies, limitations and directions for future research.


Internationalization Strategy

There are two broad theoretical approaches to the internationalization of the firm. One of
them focuses on studying the causes and the ways of the process; and specifically, it emphasizes
the role of basic competences in internationalization. This focus includes the eclectic theory
(Dunning, 1988), the resource-based view and the organizational learning (Kogut y Zander,
1993; Hitt et al., 1997; Peng, 2001). The other approach aims to explain where this
internationalization will lead. This focus includes the sequential models, such as the one
developed by Uppsala (Johanson and Vahlne, 1977).

The eclectic theory and the resource-based view emphasize how, in order to compete with
host country firms in their markets, the firm must have strategic resources and in particular,
superior knowledge that will provide it with a competitive advantage over these local firms. If
this advantage can be developed by the firm from its country of origin, it will export; if not, the
firm should exploit its advantage in the host country. The criteria for determining how the firm
will do this (FDI, licences, joint ventures, etc.) will vary according to the theoretical approach.
The eclectic theory focuses exclusively on minimization transaction costs. According to the
resource-based view and organizational learning approach, the way the firm enters the market


will depend on the characteristics of the resources and capabilities controlled by the firm. The
firm will directly invest when the characteristics of these resources and capabilities (complexity,
tacit nature, specificity, etc.) make their transmission to the market difficult (Kogut and Zander,
1993). The same analysis could be used to decide whether firms internalize their exports or not,
the mode of internalization chosen by the firm and the control of distribution channels abroad
(Campa and Guillén, 1999).

This latter theory provides a more powerful vision of internationalization, as it explains the
process not only in terms of minimizing transaction costs, but also in terms of the firm having a
strategic purpose (Madhok, 1997). The resource-based view also takes the analysis of
internationalization one step further by noting how firms approach foreign markets not only to
take utmost advantage of their competitive edges, but also to learn and develop resources and
capabilities that allow them to generate new advantages (Hitt et al., 1997). Subsidiaries are
capable of developing new resources and capabilities that are later extended to the rest of the
organization (Birkinshaw, 1997); in others words, they can learn.

In general, the idea of internationalization as a process of acquiring international
knowledge is the reasoning behind the Uppsala model. It proposes that international expansion of
the firm occurs by stages, including different export phases.

Exporting is a learning process, as it helps the firm to learn the characteristics of new
markets and how to work in them. It thus provides part of the information needed to approach
new markets with less uncertainty. In fact, lack of international and foreign market knowledge
causes a great deal of uncertainty (Eriksson et al., 1997). The cultural and regulatory diversity
that a firm encounters upon internationalizing the business results in higher transaction costs, and
this increases managerial information processing demands (Hitt et al., 1997).


Normally, the internationalization process of SMEs is analysed with the aid of sequential
models such as Uppsala’s (Lee and Yang, 1990; Leonidou and Katsikeas, 1996; Okoroafo,
1999). It emphasizes the role of international and foreign market knowledge, that the firm needs
to achieve international expansion. In any case, the exporting SME should have resources or
capabilities2 that allow it to gain an advantage over local firms, and it can exploit this advantage
via exports (Westhead et al., 2001). In terms of the resource-based view, the firm needs both the
internally-generated resources and the externally-obtained resources as result of its progressive
international activity.

However, the ability of an SME to access or generate these resources can be affected by its
type of ownership, which will in turn affect the strategy ultimately chosen by the firm. It is for
this reason that we are interested in more thoroughly examining different types of ownership.

Ownership Types

Little attention has been paid until now to an analysis of the relationship between different
ownership types of SMEs and their strategic behaviour. Studies based on the theory of agency
have addressed two types of issues. The first refers to the managers’ equity participation, for the
purpose of establishing an adequate incentive system. The second concerns the effects of
concentrating ownership in the hands of non-managerial shareholders (banks, institutional
shareholders) with sufficient incentives and information to control the firm’s operations (Wright
et al., 1996; Gillan and Starks, 2000; Gorton and Schmid, 2000).

In general there is evidence, though not fully conclusive, that concentrated ownership
reduces opportunist behaviour. The still unanswered question is if all relevant shareholders


behave in a similar way or if, on the contrary, they have different traits which result in different
strategies. The SME is a field of study very suited to this issue because, by definition, ownership
is concentrated in these firms.

In most continental European countries (such as Germany, Spain and Italy), as well as in
the rest of the non-Anglo Saxon world, enterprises are usually controlled by their founders or
members of the founder’s family, other firms, financial institutions and, until recently, the State
(La Porta et al., 1999; Becht and Röell, 1999).

Among SME owners, we can distinguish between families and other companies. There are
also cases – and these are addressed in our study – in which firms combine the two, i.e. they have
both a family and another company as shareholder.

In principle, family firms seem to have limited resources and capabilities. In particular, the
characteristics of these firms limit their chances of acquiring intangible strategic assets such as
technologies, reputed brands or qualified personnel. In addition, they will lack information on
foreign markets, which will reduce their predisposition to internationalize.

In a family firm, a high proportion of the owner’s wealth, and often of his/her family’s
wealth, is invested in the business. Therefore, as the investments of these firms are not
diversified, they can be expected to be risk-averse (Demsezt and Lehn, 1985). This also makes
them reluctant to lose control of their business (Storey, 1994). Traditionally, family businesses
seem to pay less attention to growth-oriented strategies and they generally show slower growth
(Harris et al., 1994; Donckels and Lambrecht, 1999), although in compensation they have a more
long-term business orientation (Mayer and Moores, 1999).

Maintaining the family’s independence and control will affect the firm’s financial
decisions. Family SMEs are not interested in issuing new shares if this implies the entry of new


shareholders, with a resulting loss of control (Hutchinson, 1995). In general, they avoid sources
of funding that undermine the identification of ownership with control. Therefore, their
possibilities for growth depend on internally generated funds; they will resort to external
financing only in the most extreme cases. Smaller SMEs even support themselves with funding
provided by the owner and his family (Romano et al., 2000). All this will affect the firm’s
resource endowment that will be able to support a competitive advantage.

The generation of new knowledge is a long process leading to uncertain results. The
accumulation of intangible assets involves risky investments that are ill-suited to the conservative
nature of a family business (Donckels and Fröhlich, 1991). Thus, the existence of a negative
relation between investment in intangibles and family ownership is observed (Nieto, 2001).

Likewise, family firms usually have a low level of qualified staff for two reasons. In the
first place, they prefer to employ family members for managerial positions, and these members
may not be sufficiently qualified or not have international experience (Gallo and García-Pont,
1996). Secondly, family firms usually find it more difficult to attract professional managers. The
unstructured nature of these firms, together with the difficulty of fully developing a professional
career in competition with family members, diminishes the appeal of these firms to qualified
professionals. Existing incentives and promotion systems are heavily biased toward family
members (Lansberg, 1983; James, 1999).

Moreover, according to available empirical research, decision-making in family firm
structures is centralized, there is little horizontal differentiation and formalization, lines of
authority are blurred, and controls are usually informal (Geeraerts, 1984). These characteristics
provide family firms with a good ability to respond, but they seriously hinder both national and
international expansion. Internationalization requires that more complex structures and formal


controls be implemented and that the firm be decentralized, which the owners may understand as
a loss of control (Davis, 1983; Ward, 1988).

Finally, independence makes it hard to obtain information on international markets, in both
the business and institutional realms, and this means that this type of activity will cause a great
deal of uncertainty. All this increases transaction costs and reduces the incentive to export.

In short, the family firm finds it difficult to amass the internal and external knowledge that
would provide it with a competitive advantage that could be exploited through
internationalization. Therefore, we do not expect the family firm to be very involved in
international markets. Thus, we postulate the following hypothesis:

Hypothesis 1: In SMEs, international involvement is negatively related to family


SMEs with a company as a shareholder would not be expected to suffer from the previous
limitations. When the SME has another company as a large shareholder, it is in a better position
to develop its own resources, and in some circumstances it can even access the resources of that
corporate shareholder.

These SMEs will have better access to financial markets thanks to their ties to that large-
block shareholder, which can finance them or provide guarantees to obtain funds on the market.
Moreover, the relationship between both firms may be interpreted as a good sign by capital
markets. The market anticipates efficient control by this large shareholder and financial support
from it when the firm faces financial difficulties.


This type of owner seems to be in a better position to help the SME undertake the
investments required to accumulate the intangible assets (Nieto, 2001), which will help it build a
competitive advantage in international markets. Unlike family firms, the owner’s investments are
more diversified, which makes it risk-neutral.

Moreover, the shareholder-company can provide access to other resources the firm needs.
Of these, managerial capabilities occupy an important place. Here the selection of managers is
guided by criteria of professionalism, just as the structures and management systems to be
implemented. In this way, Bijmolt and Zwart (1994) have found, in a sample of Dutch SMEs,
that dependent firms adjusted their organizational structure more often, and performed more
export planning activities than independent ones. The possession of routines to manage the
exporting activities is essential (Eriksson et al., 1997). To achieve them, the firm needs to devote
time and effort, which could be less with another company’s support.

Together with this knowledge internally-generated, firms need external knowledge. Having
another company as a shareholder helps the SME to obtain information on the foreign markets it
intends to enter. The connections that this owner provides help the firm to enhance its knowledge
of internationalization and foreign markets, and of how to compete in them. In other words, the
firm that has shareholding ties to others is better able to reduce uncertainty than an independent
firm. This facilitates and encourages its international expansion. Hence, these SMEs have a more
positive attitude toward export (Bijmolt and Zwart, 1994).

In conclusion, it is reasonable to think that another company investing in the SME could
encourage their achievement of foreign markets. The following hypothesis is formulated:


Hypothesis 2: In SMEs, international involvement is positively related to having a

company as a large-block shareholder.

In some family SMEs, the family share the firm’s capital with another company,
predictably, in order to avoid such resource constraints. These SMEs would probably have access
to superior resources. As a results of this equity participation, the shareholder-company can
provide financial, technological and human resources, marketing expertise and distribution

Together with these resources, managerial capabilities could be provided by the
shareholder company. Due to the implication of this new shareholder, the family SME is obliged
to manage the business in a more professional way. The use of inefficient and very centralized
organizational structures and informal controls cannot be continued. The need to account for its
actions to a third part requires that management be systematized, and conducted more

Finally, this large shareholder can help to minimize uncertainty because it can provide
information on foreign markets and how to operate in them.

As a result, this combination of shareholders helps to professionalize management of the
firm, while it allows family owners to maintain direct control and supervision, and to gain
additional resources. All this is likely to favour the creation of competitive advantages that can
then be exported. Therefore, when another company has a stake in a family SME, we expect this
firm’s international expansion to be encouraged. The following hypothesis is stated:


Hypothesis 3: In SMEs, international involvement is positively related to family

ownership when a company is another large-block shareholder.


Data Set and Variables

The source for the empirical work is the Survey of Business Strategies (SBS). It is a firm-
level panel of data compiled by the Spanish Ministry of Science and Technology from 1991 to
1999. The SBS covers a wide sample of Spanish manufacturing firms operating in all industry
sectors. The sample is representative of the population of Spanish manufacturing firms with 10 to
200 employees. In this range, the sample is random and stratified according to firm size (in terms
of the number of employees) and sector.

In this study, the figure of 200 employees is taken as the upper limit for definition as an
SME. Information is available for an incomplete panel data with 15,375 observations. According
to our classification, 10,579 of these observations pertain to SMEs, or nearly 70% of the total
number of firms. The proportion of family businesses amounts to 54% of all SMEs, whereas the
percentage of firms with other company as shareholder is almost 18% of SMEs. Only 3% of
SMEs can be considered as family business with another company investing in the firm.

Dependent Variables

Two dependent variables were used in the study to assess the degree of international
involvement of Spanish SMEs: the firm’s propensity of exporting and its export intensity, which


are two well-established measures of export-firm performance (Bonaccorsi, 1992; Calof, 1994;
Wakelin, 1998). Previous studies on Spanish firms confirm how the smallest ones prefer
exporting over direct investment (Pla-Barber, 2001). The fact that a firm exports does not mean
that it has deliberately become involved in an internationalization process. The decision to export
could be sporadic (Rao and Naidu, 1992), resulting from an unexpected order and not from a
clear, decisive readiness to export (Cavusgil, 1984; Gankema et al., 2000). Therefore, to really be
able to assess the degree of an SME’s internationalization, not only the propensity for exporting
but also the export intensity must be identified, i.e. the extent to which sales depend on the
foreign market:

Propensity for exporting, indicates if the firm is a nonexporter, i.e. export sales are equal to
zero, or a exporter, i.e. all other cases (PEXP).

Export intensity, is measured by the ratio of export sales to total sales (EXPINT).

Independent Variables

Different independent variables are included in the empirical models, as suggested by the
theoretical framework (see Table 1). In order to explain the effects of different types of
ownership, we distinguish three basic categories:

Family, the SME belongs to a family and one or more members of the owner family are in
management positions3 (FAM).

Company, another company is a large-block shareholder in the SME (COM).

Family+company, identifies SMEs belonging to a family, with one or more family
members in management positions, and with another company investing in the firm (FAMCOM).


Control Variables

Innovation. The empirical work generally concludes that innovation is an important factor
in explaining export performance (Ito and Pucik, 1993; Wakelin, 1998; Molero, 1998; Basile,
2001). To control the potential impact of innovation efforts on exporting behaviour, we use an
input variable as R&D expenditure (PID-1).

Alliances. Alliances and co-operative agreements can provide ways to improve the
international performance of SMEs, both by providing resources and mitigating the uncertainty
of the internationalization process (Welch, 1992; Berra, 1995; Kohn, 1997; Keeble et al, 1998;
Lu and Beamish, 2001). To consider the contribution of alliances to the international
involvement of SMEs, we use the available information on commercial agreements with
wholesalers and retailers (ALLIANC).

Age. The firm’s age variable is used to control the firm’s experience and accumulated
resources, as this is a process that takes time (Dierickx and Cool, 1989). It is used in other
internationalization studies (Reuber and Fischer; 1997; Preece et al, 1998; Chen and Martin,
2001) (AGE).

Foreign. We control the origin of the company-shareholder investing in the SME, because
different behaviours and knowledge of international markets could be expected. In fact, the
subsidiary firm of a MNE might well have been created with a global perspective. Hence it is
prepared to supply foreign markets or some segments of them as part of a transnational strategy
(Bartlett and Ghoshal, 1989). We include a variable to indicate foreign ownership (FOREIGN).

Size. We introduce the number of employees into the models, in order to control the effects
of firm size (SIZE).


Sector. By including the mean export intensity by industry and year, we can capture sector
characteristics (SECTOR).

Table 1 summarizes the variables included in the empirical analysis. Table 2 contains the
descriptive statistics and the correlations between variables.

Insert Tables 1 and 2 about here

Methodology and Results

Two basic empirical models of export behaviour are estimated to test our hypotheses. In
the first one (Model 1), we estimate a probit model to explain the decision to export or not. In
the second one (Model 2), we estimate a tobit model to analyse the determinants of export
intensity. In both cases the methodology is adjusted to process panel data. Table 3 gives details
of the models.

Model 1 is estimated in order to clarify the potential impact of the variables on the
probability of the firm to export. The model is statistically significant below the 1 percent level.
All the variables included, except FAM, are significantly associated with the dependent variable.
Hypothesis 1, i.e. negative relationship between international involvement (with export
propensity dimension) and the status of family firm, is not supported by these results. The model
shows that COM is a significant variable. Another company investing in the SME has a positive
effect on the probability of being an exporter. Therefore, Hypothesis 2, i.e. positive relationship
between international involvement and corporate ownership, is supported. The variable that
identifies family business with the participation of another company, FAMCOM, is also positive


and significant in the model, showing that the decision to enter international markets is
encouraged when another company is a large-block shareholder, together with the family
(Hypothesis 3 is supported).

Among the control variables, variable ALLIANC has a positive role in modelling the
propensity for exporting. And as expected, the R&D variable (PID-1) shows a positive
relationship with this propensity. AGE and SIZE exhibit a positive impact on the dependent
variable, consistent with previous research that found that the decision to achieve foreign markets
is positively associated with the age and size of the firm. A foreign origin of the company
investing in the firm also has a positive effect on the proba

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