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The moderating effect of firm size: Internationalization of small and medium

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African Journal of Business Management Vol. 4(14), pp. 3096-3109, 18 October, 2010
Available online at http://www.academicjournals.org/AJBM
ISSN 1993-8233 ©2010 Academic Journals

Full Length Research Paper

The moderating effect of firm size: Internationalization

of small and medium enterprises (SMEs) in the
manufacturing sector
Shankar Chelliah1*, Sivamurugan Pandian2, Mohamed Sulaiman3 and Jayaraman Munusamy4
1
International Business Section, School of Management, Universiti Sains Malaysia.
2
Anthropology and Sociology Section, School of Social Sciences, Universiti Sains, Malaysia.
3
Department of Business Administration, International Islamic University Malaysia.
4
Centre of Postgraduate Studies, Limkokwing University of Creative Technology, Malaysia.
Accepted 20 July, 2010

Previous research on the internationalization of small and medium enterprises (SMEs) explored the
relationship between adoption of global orientation and competitive advantage, management attitude,
and international knowledge and experience. However, there was a difference in opinion between those
arguing that there is a positive relationship between these variables and others who contended that
there is moderating effect of size on the internationalization. Within this context, this study sets out to
further the discussion by comparing the global orientation of SMEs in Malaysia with their different level
of size. In doing so, it draws upon the findings of survey of 300 internationalized enterprises located in
northern region of Malaysia. The results suggest that size functions as moderating factor for
internationalization only for relatively smaller firms. It has its biggest impact when relatively smaller
SMEs acquire international knowledge and experience. They also note implications for managers and
policy makers.

Key words: Firm size, international knowledge and experience, competitive advantage, management attitude,
index of internationalization.

INTRODUCTION

Today manufacturing small and medium enterprises internationalization has aroused a lot of discussions in
(SMEs) are playing increasingly important roles in global the areas of economic internationalization theories,
markets. Some of these SMEs are generating earnings in traditional internationalization theories and international
international markets more than domestic markets. These entrepreneurship theories, especially on the integration of
firms, can be described as “born global” or “instant multiple theoretical perspectives. For instance, some
internationals”(traditional SMEs which enter international SMEs may not take the traditional path to internationalize
field almost from inception), “back sources” (SMEs who when it has competitive advantage in terms of products
re-concentrate their international activities back to the or it resources. Does this notion can be generalized to all
home base) and “born regional’s” (SMEs that gain their SMEs? The answer may not be yes, especially in emer-
force out of a local embeddedness and never shift capa- ging economies and developing countries like Malaysia.
city beyond export activities) (Bell et al., 2003; Oviatt and Many firms, however, start international operations when
McDougall, 2005; Coviello, 2006; Schulz et al., 2009). they are still comparatively small and gradually develop
These contemporary developments and understanding of their operations abroad.
Research on the exporting experience of small com-
panies has explored a wide range of relevant issues; the
impact of firm size (Ali and Swiercz, 1991), competitive
*Corresponding author. E-mail: [email protected]. Tel: 653 advantages, managerial characteristics and expectations
5282, 012 4618731. Fax: 604 657 7448. (Moini, 1995) and motivations for a firm to internationalize
 Chelliah et al. 3097

internationalize (Burpitt and Rondinelli, 2000). In another domestic product (GDP) in 2020 (Hashim, 2000b).
study, Baird, Lyles and Orris (1994) empirical findings on In broader perspective, Arbaugh et al. (2008) define
internationalization show that firms with an international enterprising firms as one which is designed to create
strategy were significantly larger than non-internationally wealth through new economic activity by bringing toge-
oriented firms. The task of advancing into overseas ther unique packages of resources to exploit marketplace
markets is impeded further by a number of disadvantages opportunities. The Small and Medium Industry
inherent to smaller organizations (Wilson, 2000). There Development Plan (SMIDP), defines SME as a firm with
are many disadvantages such as inability to control an annual sales turnover of not exceeding RM25 million
prices because of lack of market power, small customer or full time employees of not exceeding 150. Therefore,
base, and decision makers has limited access at the re- the SMEs in this study are observing these criteria for this
gional and national level (Aldrich and Auster, 1986). Ojala study. The manufacturing sector in this study refers to the
and Tyrvainen (2007) have considerably placed size as economic sector that is involved in activities such as
one of the important factor for SMEs internationalization. processing, assembling and producing final products for
Therefore, it is worthwhile to understand the role of size the local market and for export.
in the SMEs internationalization process and also Abdul et al. (1997) have pointed out some critical
uncover the determinants of internationalization. evaluation concerning the relationship between firm size
The area of SMEs internationalization has received and attitudes toward exporting. The results demonstrated
significant scholarly attention. However, the question of that SMEs have stronger tendency towards exporting
“Why SMEs in Malaysia internationalize?” has received activities than large sized firms. SMEs are also found to
much less attention. Extant of literature on the SMEs be actively exploring market potential in the international
internationalization have focused much in North America arena. In other words, these firms are looking for broader
and Europe (Coveilo and Munro, 1997; Gemser et al., market for their products. Obviously, all firms in the study
2004; Moen and Servais, 2002; Pangarkar, 2008). Only believe that exporting is a desirable activity and can
in the last half decade, there have been growing interest contribute significantly to the firm’s growth and profit.
among both academics and researchers who have turned Abdullah’s (1997) study on manufacturing SMEs
their attention to internationalization of SMEs in emerging located in Penang, indicated the various levels of
economies, such as China (Ahlstrom et al., 2008), India perceptions, efforts and attitude by management towards
(Saini and Budhwar, 2008), Malaysia (Shankar et al., training programs. The study revealed a number of
2010), Taiwan and Singapore (Sim and Pandian, 2003) interesting findings such as majority of the entrepreneurs
and Vietnam (Thai and Chong, 2008). Broadly, the issues realize the need for training for their employees; huge
are mainly on the areas of patterns of internationalization percentage realize the existing training programs are
(Andersson et al., 2006); impact of networking on useful and relevant to their requirements and majority of
Malaysian SME internationalization (Zain and Ng, 2006; the SMEs are not allocating budget for organizing training
Senik et al., 2007), and the role of government of programs. The results suggest that efforts towards
Malaysia and the business strategy (Hashim and Hassan, training among SME’s entrepreneurs are still limited
2008). It definitely shows that the antecedents and the despite the greater force for internationalization by the
role of size in internationalization are not fully understood government.
in Malaysia. The above research issues provide plausible Hashim (2000a) has attempted to provide a new
explanations to explore these in greater detail in present research agenda for SMEs in Malaysia by highlighting the
and in the future. shortcomings of previous studies as well as the major
issues and research areas that have yet to be rigorously
examined. Hashim (2000a) has suggested that future
LITERATURE REVIEW AND HYPOTHESES research should investigate the relationship between mo-
dern management theories and the performance of SMEs
Small and medium enterprises in Malaysia in the rapidly developing economy. Hashim (2000a)
developed an integrative framework to examine and
The interest in the SMEs in Malaysia has witnessed a foster understanding of the strategic factors for managing
significant growth over the years. It operates in almost SMEs successfully. The framework suggested that three
every key and major industry. Hashim (2000b) factors should fit perfectly to make the SMEs successful -
acknowledged the growing number of SMEs in Malaysia. entrepreneurial characteristics, the organizational context
The actual number of SMEs in Malaysia is however, yet and the external environment. Some of the key strengths
to be determined. Based on the statements made by of the SMEs are the ability to produce economic output,
various organizations and ministries over the past provide employment opportunities, generate regional
decade, the total SMEs could be in the range of 10,000 to income, provide savings, be involved in training develop-
30,000. Nevertheless, MITI expects the SME sector to ment, stimulate competition, provide aid to large firms,
contribute more between the period of 2000 and 2020. encourage innovation and flexibility and become breeding
The SMEs are expected to contribute 50% of the gross grounds for new entrepreneurships ventures and
3098 Afr. J. Bus. Manage.

entrepreneurships. Their weaknesses are lack of capital the most significant contingency variables in macro-
and credit facilities, shortage of skilled workers, shortage organizational studies and its relationship with other
of raw materials, inadequate infrastructure, and lack of important constructs, such as structure (Singh, 1986).
managerial and technical expertise, marketing constraints Besides that, Hofer (1975) has also identified size as a
and a limited application of new technology. critical contingency variable moderating the relationship
Zulkifli and Jamaluddin (2000) have examined the between strategy and performance.
existing practice in strategy, performance measurement A firm can be considered small in two different but
being used and problems faced by local SMEs. The related ways, in terms of sheer organizational size or in
results showed that there are lack of skills and knowledge terms of its industry market share. Although size and
in organizing effective manufacturing and business market share are conceptually different, they are cor-
strategy development. About 42% of the SMEs that were related empirically. Firm size has long been considered
interviewed had prioritized quality and cost as their best one of the most significant contingency variables in
weapons to compete regionally. The findings indicated macro-organizational studies and its relationship with
that SMEs lacked a documented strategy and proper other important constructs, such as structure (Singh,
techniques to formulate develop and measure 1986). Hofer (1975) identified size as a critical
performance. Most of the companies could not plan more contingency variable moderating the relationship between
than five years, the long-term strategies which are crucial strategy and performance.
for internationalization. They commented that SMEs in The study by Cavusgil and Nevin (1981) showed a
Malaysia are very far behind compared to SMEs in Asian positive relationship between firm size and export activity
countries, such as, Taiwan, Korea or Singapore, in terms but another study by Cavusgil (1984) illustrated that size
of innovation in design, speed of delivery and, huge does not influence export activity except for small size
choices and customized products for customers. The firms. Besides that, Bonaccorsi (1992) studied the
review of literature about the SMEs in Malaysia shows relationship between size and export behavior in 8,810
there is a need to explore the determinants of Italian companies and showed that firm size is positively
internationalization. This will help in a manifestation of the associated with propensity to export and negatively asso-
holistic approach of the government to internationalize as ciated with export intensity. Moreover, Vida, Reardon and
many SMEs as possible. Fairhurst (2000) found that firm size will be a determining
factor for firm internationalization. This supports a wide
range of literature review by Calof (1994) which indicates
Firm size that most studies show a positive relationship between
firm size and internationalization. For this study, firm size
A review of literature shown in Table 1 demonstrates mix is represented by the sales volume. Therefore, the
results when the number of employees or sales value is following hypothesis will explain the size as a moderating
used to indicate size. Reuber and Fischer’s (1997) effect for internationalization of SMEs:
research on SME internationalization resulted in findings
that neither firm size nor firm age, directly and H1: Moderating effect of firm size on the relationship
significantly, related to internationalization. However, firm between competitive advantage, management attitude
size is positively and significantly correlated with the and international knowledge and experience and
measure of the team’s international selling experience internationalization.
which shows that larger SMEs are more likely to have
teams with international selling experience.
Calof (1994) examined the direct and indirect effects of Internationalization
firm size on export behavior by focusing on three
dimensions of the export behavior of 14,072 Canadian Internationalization is the extent to which a firm is
manufacturers: their propensity to export, countries they involved in international business. It includes exporting,
exported to and export attitudes. The results showed that the presence of foreign subsidiaries, shares ownership by
firm size is positively related to all dimensions of export foreigners and the appointment of foreigners in the
behavior. Nevertheless, its importance is limited as the organizational structure. Market liberalization and
degree of variance explained by size is very small. In digitization are forcing large corporations and the SMEs
early studies, Cavusgil (1984) found that when firm size to operate beyond their national borders and compete
is measured by number of employees, no relationship is with each other in foreign countries and new regions
found with export behavior, but a significant relationship (Barkema et al., 2002).
exists when size is measured by annual sales. Bartlett and Ghoshal (2000) have identified two main
A firm can be considered small in two different but motivations for firms’ internationalization: traditional
related ways, in terms of sheer organizational size or in motivations and emerging motivations. Among the ear-
terms of its industry market share. Although size and liest motivations that drove companies to invest abroad
market share are conceptually different, they are correlated was the need to secure key supplies, especially minerals,
empirically. Firm size has long been considered one of energy, and scarce raw material resources. Another
 Chelliah et al. 3099

Table 1. Review of selected studies on size and export behavior.

Study Size of firm Size measure Results

Sales Positive
Cavusgil and Nevin (1981) Small/ Medium
Employees Not significant
Hester (1985) Small/ Medium Sales Not significant
Sales
Kaynak and Kothari (1984) Small/ Medium Positive
Employees
Cavusgil et al. (1979) Small/ Medium Sales Positive
Mugler and Miesenbock (1986) Small/ Medium Employees Positive
Cavusgil and Naor (1987) Small/ Medium Employees Positive
Hozlmuller and Kasper (1991) Small/ Medium Employees Indirect
(Source: Adopted from Calof (1994), p. 369).

Another strong trigger of internationalization could be involvement (Bilkey and Tesar, 1977; Cavusgil 1984;
described as the market seeking behavior. This motiva- Johanson and Vahlne, 1977). The findings have contri-
tion was particularly strong in companies that had some buted to a general assumption that small firms begin
intrinsic advantage, typically related to their technology or internationalization with the least risk and the lowest
their brand recognition that gave them some competitive investment methods, such as indirect exports. They then
advantage in offshore markets. Another traditional and move to higher-risk, higher-investment modes as the
important trigger of internationalization was the desire to firms develop and gain experiential knowledge of foreign
access low-cost factors of production. For example, the markets. Welch and Luostarinen (1988) described the
availability of lower-cost capital also became a strong process of internationalization as the outward movement
force for internationalization. of the international operations of an individual firm. In
Bradley and O’Reagain (2001) examined how success- recent research, they included inward activities and
ful exporting SMEs allocate resources to international cooperation as part of the process of internationalization.
product-markets and how extensively they participate in A study by Gankema et al. (2000) reveals a growing
the business system. The driving force for their study was degree of international involvement by European SMEs
lack of attention given in the literature to the approaches over a period of time. The study used Cavusgil’s (1980)
adopted by successful SMEs to initially establish innovation-related internationalization model to examine
themselves in international markets or to the policies they SME internationalization. The study agreed that the five
engaged to achieve growth through internationalization. stages of internationalization are true for the SME
The results showed that successful SMEs are more likely understudy such as a domestic marketing stage, a pre-
to choose market concentration and low cost strategy for export stage, an experimental involvement stage, an
internationalization. active involvement stage and a committed involvement
Literature on international entrepreneurships argues stage. The study also showed that the time frame for
that personal factors or the owner’s or founder’s human transition from each stage takes approximately two years.
capital resources strongly influence the choice and Johanson and Wiedersheim-Paul (1975) also indicates
degree of internationalization in small firms. Personal that internationalization is a gradual process rather than
factors include environmental perceptions and the large. Gankema et al. (2000) recommended more
business skills of the entrepreneurs. Manlova et al. research on factors that influence internationalization and
(2002) examined differences in personal factors between firm performance.
internationalized and non-internationalized small firms by
measuring four dimensions of human capital –
international business skills, international orientation, Competitive advantage (CA)
perceptions of the environment and demographic charac-
teristics. The study results showed that international According to Barney (1991), a firm is said to have a
business skills and perceptions of the environment of the competitive advantage when it is implementing a value
entrepreneurs are the most important factors for firm creating strategy not simultaneously being implemented
internationalization. by any current or potential competitor; the latter is also
In addition, Casson (1992) portrayed unable to duplicate the benefits of this strategy. Barney
internationalization as a possible approach of a firm to (1995), in a further refinement of his definition, mentioned
support corporate growth strategy. Internationalization is that a firm’s competitive advantage potential depends on
usually characterized as an incremental process evolving the value, rareness and imitability of its resources and
from non-exporting stages to high international marketing capabilities. In this study, competitive advantage is
3100 Afr. J. Bus. Manage.

defined as a value creating strategy that enables market will be likely to expand internationally. Managerial
internationalization of SMEs. decision-making characteristics will impact the SME
Probably, the three most widely read books on internationalization process. Barney (1986) argued that
competitive analysis in the 1980s were Michael Porter’s the culture of an organization where managers are part of
Competitive Strategy (Porter, 1980), Competitive it, defines how an organization conducts its business.
Advantage (Porter, 1985) and Competitive Advantage of Managerial decision-making characteristics are not only
Nations (Porter, 1989). Porter stressed in all literature linked to strategy through creating a key capacity to
(Porter, 1980, 1985, 1989) that strategies allow implement a particular strategy type, but they could be a
organizations to gain competitive advantage from three direct source of competitive advantage as well. For
different bases: cost leadership, differentiation and focus. example, openness in decision making occurs when
According to Porter (1985), competitive advantage is multiple individuals or preferences are incorporated into
dedicated to the task of pointing the way to specific the decision process. In broad geographical business
means of achieving and sustaining an advantageous discussions, managers interact on the basis of shared
position. While competitive strategy broadly defines the problem-solving efforts rather than relying exclusively on
territory of strategic decision, competitive advantage is formal reporting relationships (Gupta, 1987).
intended as a roadmap to best traverse the territory. In an elaboration of management attitude and
Reed and DeFillipi (1990) pointed out that there is a perception, Ogbuehi and Longfellow (1994) pointed out
substantial agreement within the literature on the price, that personal commitment to exporting appear to be
cost and differentiation definition of competitive advan- relevant explanatory for export success among the manu-
tage. The fundamental concept of competitive advantage facturing SMEs in the United States. They concluded that
can be attributed with linking advantage to competency. as a firm’s commitment to exporting increases, managers
The authors further added that competitive advantage tend to seek greater information regarding foreign
can be used within the firm’s strategy to achieve markets and place greater emphasis upon a growth
organizational goals. Therefore, it is concluded that com- strategy for the organization. In another study of
petencies and competitive advantage are independent relationships between firm characteristics and the export
variables and performance is the dependent variable. In entry decisions of small enterprises, Reid (1981)
addition, Reed and DeFillipi (1990) described that suggested a strong linkage between a firm’s export
competitive advantage can be derived from numerous behavior and market expansion and the characteristics
sources. Competencies are within the firm’s control and and experience of managers and decision makers. He
can be manipulated within strategy to generate further suggested that exporting firms are managed by
advantage for performance. decision makers who are internationally oriented and
In managing businesses in an increasing competitive possess a favorable attitude toward exporting.
environment, manufacturing SMEs need to plan their Manlova et al. (2002) examined the differences in
strategies to stay ahead of the competition. These SMEs personal factors between internationalized and non-
can create a niche by making their products distinctively internationalized small firms. The study compared the
different from those of competitors. As a result, this can relative importance of four dimensions of human capital:
lead to brand loyalty, sustainable competitive advantage international business skills, international orientation,
and finally improve the firms’ financial performance (Agus perceptions of the environment and demographic
and Za’faran, 2000). The findings indicated that distinct characteristics. Their research findings of 410 small firms
competitive approaches varies for businesses exposed to showed that neither traditional demographic measures
an international context compared to businesses only nor international orientations distinguish between interna-
exposed to a domestic context. These arguments are tionalized and non-internationalized firms. Nevertheless,
summarized in the following hypothesis: environmental perceptions and self-assessed strengths in
international business skills are significant.
H2: There is a positive relationship between competitive Xia et al. (2003) examined the issue concerning firm
advantage and internationalization. resources on a subsidiary’s competitiveness in emerging
markets. They investigated the performance of
Singaporean SMEs in China. They identified firm
Management attitude (MA) resources that are used as competitive advantages such
as technological resources, top managerial skills and
Cavusgil and Nevin (1981) and Rosson and Stanley (1987) capabilities, the Guanxi skills of employees and then
outlined the need for a favorable managerial orientation professional knowledge, the firm’s internal relationships
toward internationalization in terms of perceived risks, and its external relationships. The results showed that
opportunities and costs of such a venture. In this Singaporean SMEs have competitive advantages on their
research, management attitude referred to the decision technological resources and top managerial capabilities
makers’ subjective evaluation of problems and but indicate no significant relationship with performance
opportunities associated with SME internationalization. in China.
Entrepreneurs who sense an opportunity in foreign Ainuddin and Junit (2001) studied the characteristics of
 Chelliah et al. 3101

entrepreneur-owned companies in terms of entrepreneur through training and experience. Bradley (1999) posited
orientation (willingness to innovate, willingness to be that lack of knowledge with respect to foreign markets
proactive and propensity to take risks), business strategy, and operations can be an important determinant to the
organizational structure and business performance. lack of development of international operations. As a rule,
Based on the sample of 64 SMEs in Malaysia, the knowledge and learning will be acquired through
research findings showed that the business performance operating abroad over a period of time. Besides that,
of these companies tend to vary with their willingness to Reuber and Fischer (1997) examined the role of the
innovate, risk taking potentials and the degree of management team’s international experience as a
organicity of their organizational structure. Thus, in order mechanism for the internationalization of Canadian SMEs
to integrate the constructs of these studies, it is in the software industry. The results showed that
worthwhile to study the impact of management attitude internationally experienced management teams are
towards internationalization and performance. As a viewed as a resource that influences SMEs to engage in
summary, relationship marketing is imperative in the international businesses. They encourage firms to
organization to make internationalization successful. develop foreign strategic partners and to delay less in
These arguments are summarized in the following obtaining foreign sales after start-up.
hypothesis: Many researchers agree that wider experience is
closely linked to greater success in the organizations.
H3: There is a positive relationship between management This is shown in the study involving 51 entrepreneurs in
attitude and internationalization SMEs in Kuala Lumpur to ascertain the usefulness of
government supported programs to nurture SMEs in
Malaysia (Abdullah, 1999). The research results showed
International knowledge and experience (IKE) that owners who are more experienced achieve higher
performance in terms of profit, capital and employment.
According to Vida et al. (2000), the accumulation of The findings illustrated that the knowledge, skills and
experience in foreign markets is considered essential to exposure of entrepreneurs to general business are
reduce the perceived risk which increases the beneficial in helping SME performance, which leads to
motivational level for internationalization. International the following hypothesis:
knowledge is one of the key determinants of SME
internationalization. International knowledge can be H4: There is a positive relationship between international
defined as knowledge in foreign ventures, foreign market knowledge and experience and internationalization.
information, multinational culture and the buyers’
behavior in the foreign market. International experience,
on the other hand, refers to the dealings with foreign Research framework
business partners and the formation of cooperative
agreements with foreign agents. Knowledge and Based on these theoretical underpinnings, the conceptual
intellectual capital have become the two primary bases of model guiding the study is depicted in Figure 1. The
core competencies and the key to superior performance. framework shows that the present study is examining the
Lubit (2001) explored how companies can best nurture relationship of competitive advantage, management
their knowledge resources to create competitive attitude, and international knowledge and experience with
advantage. To provide sustained competitive advantage, internationalization.
one needs knowledge that is difficult for outsiders to copy
as well as the ability to rapidly develop new knowledge.
He had outlined two paths by which companies can use METHODS
knowledge to create sustained competitive advantage:
(a) tacit knowledge is knowledge that other companies Sample
find difficult to copy when it spreads internally, and (b)
companies can create superior knowledge management Stratified random sampling, as its name implies, involves a process
capabilities and foster on-going innovation. of stratification or segregation, followed by random selection of
Burpitt and Rondinelli’s (2000) study on 138 small firms subjects from each stratum. In this study, the population of 1,363
SMEs in manufacturing industry was segregated based on the com-
with exporting experience in North Carolina found that bination of criteria explained above. The manufacturing sector in
firms that strongly value learning from international this study refers to the economic sector that is involved in activities
experience are more likely to continue exporting. Small such as processing, assembling and producing final products for
firms that value the opportunity to develop new skills, the local market and for export. The SME exporters are mainly
technology and organizational capabilities tend to be located in the manufacturing sector (57.6%), services (40.6%) and
agriculture (1.8%) (National SME Development Council, NSDC,
involved in internationalization even when initial financial
2007). Based on these criteria, total of 300 SMEs were selected
returns are disappointing. The resources of knowledge from the total of 1,363 SMEs. Since only 300 SMEs qualify with the
and skills can either be acquired by hiring managers with criteria, no random selection was used instead. All the selected 300
knowledge and skills in international markets or developed SMEs were used as sample in this study.
3102 Afr. J. Bus. Manage.

Competitive
Advantage

Management Internationalization
Attitude

SME
Size
International
Knowledge &
Experience

Figure 1. The conceptual framework: The Determinants of

Internationalization of small and medium manufacturing enterprises
(SMEs).

Design and procedure internationalization. Almost all the literature uses these variables to
measure internationalization because it reflects instantaneously the
The primary data were collected from top executives of SMEs who amount of export sales and profit from export businesses. It also
assumed the role of key informants through a mail questionnaire. shows that approximately 40% of the SMEs in this study achieve
The unit of analysis in this study is the individual SME. The 11-20 % of their sales and profit from international sources. There-
respondents (that is, executives, CEOs and upper-level managers fore, the relatively higher weightage of 30 each was given for both
with a strategic responsibility for their firms) were identified on the constructs. Next, the number of countries a firm exports to and total
basis of their job title and position within the company (Vida et al., overseas subsidiaries and joint ventures are given relatively a
2000). They will be assumed to be knowledgeable and familiar with smaller weightage of 15 each. Approximately 75% of the SMEs in
the operations related to the issues under investigation. The this study export to less than 10 countries while 60% of SMEs have
questionnaires were sent through post (60%) and e-mail (40%). less than three subsidiaries or joint ventures. Therefore, it is appro-
Questions were pre-tested with a sample of 10 SMEs in order to priate to give a smaller weightage for both variables. The lowest
ensure that they were clear and captured the desired information. weightage of 10 is given to the duration a firm spends in inter-
Regression analysis was used to test the hypothesis. national businesses. The literature review suggests that there are
some SMEs who have been involved in internationalization since
inception. Therefore, it is included in the index since the data shows
Measures that 78 % of the SMEs in this study have been involved in
international business less than 15 years.
In view of the high number of variables to measure interna- This study will use variables established by Beal and Yasai
tionalization, an index was created to measure internationalization (2000) to measure CA. It has 10-item to capture the firm’s
appropriately. Since some international business researchers have competitive advantage position. A 5-point scale (1 = least
expressed that a multi-dimensional measure of internationalization applicable vs. 5 = most applicable) was used. The variables are: (a)
captures a firm’s international orientation more completely than the innovation differentiation, (b) marketing differentiation, and (c) low
single-item foreign sales/total sales ratio (George et al., 2005; cost leadership. The constructs for management attitude is
Reuber and Fischer, 1997; Sullivan, 1994), the author has adopted from study by Vida et al. (2000), as per the following: (a)
developed an index to measure SMEs’ internationalization. A 5- attitude towards different cultures and languages in international
item measure was used to develop the index to capture firm markets, (b) attitude towards resource commitment, (c) attitude
internationalization activities. The index was named the index of towards risks, (d) attitude towards economies of scale, (e) attitude
internationalization (IOI). towards future growth, (f) attitude towards opportunities in
The excluded variables are the number of foreigners on the international market, and (g) attitude towards making a choice in
Board of Directors, the expatriates who act as managers or heads identical opportunities. The CA scale was reliable with the
of departments and the percentage of shares owned by foreigners. Cronbach alpha score above 0.60.
Descriptive statistics shows that the majority of the respondents’ Consistent with previous international entrepreneurship research
firms do not have foreigners on the Board of Directors or in top (Eriksson et al., 1997), the current study will measure IKE using the
management; likewise, no shares are owned by foreigners. Even following constructs, 6-item with a 5-point scale (1 = strongly
though these variables may well explain the presence of disagree vs. 5 = strongly agree): (a) the possession of business
internationalization of any type of firm, this study only concentrates knowledge, (b) the possession of institutional knowledge, (c) the
on SMEs solely representative of Malaysian ownership. Therefore, possession of internationalization knowledge, and (d) an
these variables were excluded from the index. understanding of perceived costs. These constructs composed of
Many studies have used the percentage of sales and profits from objective and experiential knowledge which is a central construct in
international sources as a better way to measure the Uppsala internationalization process model, as it facilitates
 Chelliah et al. 3103

mobilizing the capital and human resources needed for international average annual sales of SMEs for the previous five years
expansion. The IKE scale score reliability of 0.85. indicates 49.4% achieve average annual sales of RM6 to
The MA variable is measured using the constructs established by
Vida et al. (2000). The reliability scoring is 0.75. A six point Likert
10 million while 28.6 % have average annual sales of
scale is used to measure MA as follows: 1 - Strongly Disagree, 2 - RM11-15 million. Table 3 shows the descriptive statistics
Disagree, 3 - Slightly Disagree, 4 - Slightly Agree, 5 – Agree, and 6 of the study’s variables.
- Strongly Agree. There is continuous argument regarding the Table 4 shows the regression results of three
choice of the correct measurement for size. In some studies, the independent variables on SME internationalization. The F
number of employees was used as the measure (Bilkey and Tesar, statistic is the regression mean square (MSR) divided by
1977; Cavusgil and Naor, 1987), while some researchers have 2
used sales levels of the firm (Hester, 1985; Holden, 1986). In this
the residual mean square (MSE).The F value is 0.14. R
study, average sales for the last five years have been used to is the proportion of variation in the dependent variable
2
measure size as they appear to be most relevant in the review as explained by the regression model. Adjusted R attempts
2
shown in Table 1. Based on the review of research by Calof (1994), to correct R to more closely reflect the goodness of fit of
researchers prefer to use either sales or number of employees to 2
the model in the population. The results show that R is
measure size. But, sales was showing significant findings related to 2
0.01 and adjusted R is -0.06. Small values indicate that
export behavior of firms. Therefore, this study is measuring size by
using the average sales for the past five years. the model does not fit the data well. Since the signi-
The Kaiser-Meyer-Olkin (KMO) measure of sample adequacy ficance value of F is p>0.05 (0.98), then the independent
indicates that the 36-item sample was adequate for factor analysis variables do not explain the variation in the dependent
(KMO measure = 0.77). The Bartlett’s Test of Sphericity shows the variable. As a summary, the regression analysis shows
significance of p<0.01. As can be seen from Table 2, the pattern of that there is no significant relationship between competi-
loadings suggests that the five- factor solution represents three
competitive advantage dimensions such as marketing differentiation
tive advantage, management attitude, international
(Factor 2), innovation differentiation (Factor 3) and low cost knowledge and experience with internationalization. This
leadership (Factor 5). The management attitude dimension is shows that SMEs in this study do not internationalize
represented by Factor 4 whereas the international knowledge and based on their competitive advantage, positive manage-
experience dimension is represented by Factor 1. Table 2 shows ment attitude, international knowledge and experience,
the reliability test results for each item in the respective factors. All but, due to other factors that is not tested in this model.
the five factors indicate high reliability.
Normality of this study’s variables was established by evaluating
Therefore hypotheses two, three and four are not
the data distributions for skewness and kurtosis. Based on the supported. These findings will receive further attention in
results of these tests, the histograms for the independent variables the discussion of this paper.
have normal distributions. The probability plot charts also show a On the analysis of size as a moderating effect (as
normal distribution where the points cluster around a straight line. indicated in Table 4), model 2 shows that size is
The mean value is equal to zero and standard deviation more than
significant at p<0.05. The beta value of 0.30 shows a
one which shows a normal distribution of the variables.
positive relationship between size and internationali-
zation. Model 3 indicates that interactive effect of size is
significant at p<0.05. The F change is significant at
RESULTS 2
p<0.05. The adjusted R change of 11% in Model 3
indicates Model 3 explains better than the Model 2 (Table
Response 4). Size moderates the relationship between international
knowledge and experience and internationalization at
A total of 300 companies were selected based on the p<0.05. The beta value of -1.58 shows that interactive
criteria described in chapter three. Eighty one effect of size and international knowledge and experience
questionnaires were returned, yielding a response rate of on firm internationalization is negative.
27%. One of the questionnaires received had to be This negative relationship can be further understood
removed because most of the important questions were through the Figure 2, which explains graphically the
not answered. Besides that, three more respondent phenomenon of interactive effect of size on internationali-
companies had to be removed because they did not meet zation. Size was operationalized as small and medium to
the sample criterion of being Malaysian origin. It shows provide clear distinction. The graph shows that only
that 85.7% of the companies are totally owned 100% by smaller firms show greater inclination to internationa-
Malaysians while Malaysians a majority share in the lization with the presence of international knowledge and
remaining 14.3 %. experience. Medium firms do not require international
The respondents in this research are involved in knowledge and experience as important as small firm for
various types of industry. They are divided into two major internationalization. The graph also depicts that medium
categories involved in manufacturing, either consumer or size firms are highly internationalized relative to smaller
industrial products. Companies producing industrial firms. Another important conclusion can be made is small
products made up 72.7% whereas the balances 27.3% firms need international knowledge and experience at the
were manufacturing consumer products. Majority (46.8 beginning stage of internationalization to spur export
percent) of the respondents held the position of activities and involve in international businesses
managing director. Marketing managers consisted of incrementally.
27.3%, the second highest number of respondents. The As a summary, small firms in this sample search for
3104 Afr. J. Bus. Manage.

Table 2. Results of factor analysis and reliability analysis.

Variable F1 F2 F3 F4 F5
International knowledge and experience (IKE)
Formation of foreign subsidiaries 0.74
Knowledge about foreign laws 0.77
Foreign languages 0.56
Foreign experience 0.80
Unique knowledge 0.80
Ability to analyze costs 0.64

Marketing differentiation (MD)

Building brand/company identification 0.80
Advertising/promotional 0.73
programs
Securing reliable distribution channels 0.78

Innovative differentiation (ID)

Marketing new products 0.65
Innovative marketing techniques 0.63
Product improvements 0.67
Improvement of sales force performance 0.74

Management attitude (MA)

Different cultures and languages 0.83
Internationalization drains a firm’s resources 0.81
Internationalization involves higher risks 0.64

Low cost leadership (LCL)

Efficiency and productivity improvements 0.76
Improvement of existing manufacturing processes 0.56

Reducing cost throughout the firms 0.64

Variance %( 59.81%) 26.57 11.67 9.31 6.55 5.71
Eigenvalue 6.11 2.68 2.14 1.51 1.31
Reliability (Cronbach alpha) 0.85 0.83 0.72 0.75 0.60
Mean value 4.3 4.1 4.1 3.4 4.3
Standard deviation 0.9 1.0 0.8 1.1 0.6

Kaiser-Meyer-Olkin (KMO) 0.77

Bartlett’s Test of Sphericity
Approximate chi-square 736.88
df 253
Significance 0.00

information that is related to international business more substantiated.

aggressively than medium-sized firms. Information
seeking behavior not necessarily gained through printed
media but also through experience that is shared by their DISCUSSION
friends in the business community. Interactive effect of
size between management attitude, competitive advan- Only interactive effect of size between international know-
tage and internationalization is not significant (p>0.1) as ledge, experience and internationalization is significant in
shown in Table 4. Therefore, Hypothesis one is partially this study. There is also a strong relationship between size
 Chelliah et al. 3105

Table 3. Sample Company profiles. Many foreign SMEs that are traditional suppliers of
large multinational companies located themselves in the
Profile Percentage (%) country for the purpose of continuing their relationship
Type of products with clients which have moved to Malaysia. Malaysian
Consumer products 27.3 SMEs need to be innovative to compete with these
Industrial products 72.7 foreign SMEs as mentioned in the Second Industrial
Total 100.0 Master Plan (1996-2005) by moving towards a global
orientation, information-intensive and knowledge-driven
Position of respondents processes, enhancing competitiveness, increasing
participation of Malaysian-owned companies, improving
Managing director 46.8
the economic foundation required in areas of managing
Marketing manager 27.3
human resources, technology and absorptive capacity,
Business development manager 14.3
physical infrastructure, and public and business support
Financial manager 5.2 services.
Project manager 2.6 A firm can be considered small in two different but
Marketing officer 3.9 related ways, in terms of sheer organizational size or its
Total 100.0 industry market share. Although size and market share
are conceptually different, empirically they are correlated.
SME ownership Firm size has long been considered one of the most
100% owned by Malaysians 85.7 significant contingency variables in macro-organizational
Majority owned by Malaysians 14.3 studies and its relationship with other important
Total 100.0 constructs such as international knowledge, experience
and innovation differentiation as found in this study. The
Number of years of establishment dominant logic of this study is further strengthened since
small firms need more support in terms of resources,
5-10 years 23.4
commitment and export skills. Apart from fulfilling this
11-15 years 31.2
study’s objectives and shedding some light on interactive
16-20 years 13.0 effect of size, the results may also provide a clue as to
21-25 years 9.1 why the results of past studies have been mixed. Given
>25 years 23.4 the low amount of variance accounted for by firm size,
Total 100.0 past studies may have had too few observations to
produce sufficient variance to reveal statistically
Total assets significant differences.
RM1-10 million 14.3 There is no significant relationship between interna-
RM11-25 million 45.5 tional knowledge and experience with internationalization.
RM26-50 million 27.3 The results were consistent with the findings of Eriksson
Total 87.0 et al. (1997) which showed that there is no direct effect of
the lack of international knowledge on internationali-
Note: Missing value for total assets is 13.0
zation. Moini’s (1995) findings showed that such
knowledge was not a significant factor in the export
success of smaller firms. Although the presence of
and internationalization. The findings are consistent with international knowledge and experience is high among
those of Vida et al. (2000) which showed that firm size the SMEs in Malaysia, as shown by the higher mean
has some influence on firm internationalization. It is scoring of above 4.0 for some of its constructs, it is not a
positively and significantly correlated with the measure of determining factor for internationalization. But, with the
the team’s international selling experience which shows presence of size as a moderating factor, it becomes an
that larger SMEs are more likely to have teams with important factor in SMEs internationalization effort.
international selling experience. This supports the wide There could be other variables that determine
range of literature review by Calof (1994) which indicated internationalization such as high networking relationship
that the majority of studies have showed firm size with their foreign counterparts which help them to export
influences internationalization. This study empirically successfully. SMEs may have acquired the necessary
shows that smaller firms need to seek knowledge and knowledge but it could have become non-relevant in the
experience in international business in greater effort dynamic environment. For example, laws related to
relative to larger SMEs. This is consistent with Johanson formation of subsidiaries in foreign countries could have
and Wiedersheim-Paul (1994) explanation on incremental changed due to the internal political instability and non-
process of internationalization. SMEs in Malaysia need to economical threat regionally. It could be acquiring
acquire these on an incremental basis to sustain its effort sufficient knowledge in finance and accounting that could
in long term. influences internationalization of SMEs. This may be the
3106 Afr. J. Bus. Manage.

Table 4. Hierarchical multiple regression analysis: Internationalization.

2 2 2
Model Variable Beta t-value Sig. R Adj. R R F * F Sig.
1 MD -0.04 -0.24 0.81 0.09 -0.06 0.09 0.14 0.98
ID -0.02 -0.14 0.89
LCL 0.01 0.06 0.95
MA 0.07 0.56 0.58
IKE 0.07 0.49 0.63

2 MD -0.03 -0.21 0.83 0.10 0.02 0.09 6.77 0.01

ID -0.05 -0.38 0.71
LCL 0.01 0.09 0.93
MA 0.11 0.88 0.38
IKE 0.09 0.66 0.51
SIZE 0.30 2.60 0.01

3 MD 0.01 0.08 0.93 0.25 0.13 0.16 2.75 0.03

ID -0.01 -0.07 0.94
LCL -0.06 -0.45 0.65
MA 0.06 0.44 0.66
IKE 0.35 2.22 0.03
SIZE 2.53 2.49 0.02
MD × Size -0.14 -0.21 0.83
ID × Size -0.96 -1.12 0.27
LCL × Size 0.13 0.12 0.90
MA × Size 0.28 0.76 0.45
IKE × Size -1.58 -2.43 0.02
*p<0.05. Note: MD = Marketing Differentiation, ID = Innovation Differentiation, LCL = Low Cost Leadership, MA = Management
Attitude, IKE = International Knowledge and Experience.

70

60

50

40 sme

small
IOI

30 medium
low medium high

IKWECAT

Figure 2. Interactive effect of size, international knowledge and experience on firm

internationalization.
 Chelliah et al. 3107

the situation faced by Malaysian SMEs if financial The study has attempted to use size as a moderating
institutions still focus their efforts in fulfilling the needs of factor. Admittedly it is still crude and could be improved,
large corporate customers. Haron (1990) had reported but a start has been made. Future research on size and
more than a decade ago that percentage of loan internationalization needs to emphasize on size
approvals for SMEs has been decreasing every year. measurement construction. Is sales volume a good proxy
for size? Sometimes sales volume could be very confi-
dential for some SMEs unless it is published in the official
Limitations document or released for press. There is a significant
relationship indicated between international knowledge
The findings of this current study are encouraging, as and experience with internationalization when size is
they provide insights into increasingly vital decisions used as a moderator. The findings also showed that the
made by the growing number of SMEs in Malaysia. importance of the size factor is reduced when SMEs
However, the interpretation of the findings has to be grow. A similar impact on internationalization is indicated
carefully considered within the context of the limitations since the importance of size is reduced when SMEs
and assumptions inherent in this research. grow. Without size, none of the competitive advantage
The current model should be improved since it does not variables shows any significant relationship with
adequately explain the determinants of internationalization. Size also successfully moderates the
internationalization. The independent variables, such as relationship between innovative differentiation and
competitive advantage, management attitude and performance. It warrants more research in the future.
international knowledge and experience, are internal Nevertheless, the SMEs in Malaysia have
variables. The constructs for these variables appear to be internationalized significantly as shown by the index of
unsuitable for Malaysian SMEs even though all of them internationalization. Almost 60% of the sample scored an
scored a high means. But standard deviations are also index of more than 60. It could be the SMEs in Malaysia
high. The respondents could have overestimated their and those in Western countries could be different in
competitive advantage and management attitude terms of the historical background. In Malaysia, SMEs
although no prima facie evidence is found. External can be established based on government support or
factors such as government support programs, bilateral individual wealth. In Western countries, SMEs have
trade policies, political relationships etc. may be the existed for a long time and evolved through major
influencing factors for the SMEs in their decision to recessions. Therefore, the factors that determine
establish themselves in international businesses, which is internationalization can vary distinctively.
worthwhile to study. The study offers additional implications of particular
On the research method, particularly the moderate interest to researchers in this field. The contributions of
response rate and small sample size, lack of time series the model used in the current study are that it integrates
data and possible bias from multiple informants, restrict previous theoretical and empirical knowledge in inter-
the robustness and generalizability of the conclusions. national businesses and adapts some components to the
The geographical region covered by the research is idiosyncrasies of the SMEs. As a result, this study brings
limited to northern region of West Malaysia only. The theoretical and empirical rigor to the Malaysian SME
SMEs in the manufacturing sector may have shown a literature, which is primarily theoretical and anecdotal.
different result for the determinants of internationalization
in other parts of Malaysia. The response rate was only
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