Uncovering the role of arbitrage strategies on SMEs’

scale and scope of internationalization:

The case of the Dutch horticultural industry

Master Thesis

MSc Business Studies – International Management

Amsterdam Business School – University of Amsterdam

Student name: Judith van Duijn First Supervisor: Dr. Niccolò Pisani

Student number: 10665730 Second Supervisor: Dr. Lori DiVito

Date: June 27th

2014

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ABSTRACT

This research investigates the role of arbitrage strategies on small and medium-sized

enterprises’ (SMEs) internationalization paths. The goal of this study is to determine how the

cultural, administrative, geographical, and economic dimensions of arbitrage relate to the

scale and scope of SME internationalization. To achieve this goal, an in-depth qualitative

multiple case study is used in which qualitative data is acquired through semi-structured

interviews with CEOs and top management team members of four Dutch horticultural SMEs.

Secondary data sources are used to complement this data. The results show that arbitrage

strategies play a determinant role in the internationalization of SMEs, in combination with

adaptation strategies. Moreover, SMEs’ ability to exploit cultural, geographical and economic

differences positively influences the scale and scope of their internationalization.

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ACKNOWLEDGEMENTS

I would sincerely like to thank my supervisor Dr. Niccolò Pisani. His input, patience, and

feedback were highly valuable. His insightful comments and suggestions pushed me in the

right direction and have been of great importance for the completion of this thesis.

Furthermore, I would like to thank all the respondents for their time and valuable

contributions to this study. Their participation has been of utmost importance. Last but not

least, I would like to thank my family and friends for their support, encouragement and

feedback.

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TABLE OF CONTENTS

ABSTRACT ............................................................................................................................... 2

ACKNOWLEDGEMENTS ....................................................................................................... 3

1. INTRODUCTION .............................................................................................................. 6

2. LITERATURE REVIEW ................................................................................................... 8

2.1. Internationalization of SMEs ........................................................................................... 8

2.2. Factors affecting internationalization of SMEs ............................................................. 10

2.2.1. Country-level factors .............................................................................................. 10

2.2.2. Industry-level factors .............................................................................................. 12

2.2.3. Firm-level factors ................................................................................................... 13

2.3. International strategy ..................................................................................................... 17

2.3.1. International strategy of SMEs .............................................................................. 17

2.3.2. Global integration – national responsiveness tradeoff .......................................... 18

2.3.3. The AAA Triangle ................................................................................................... 18

2. 4. Research gap and research question ............................................................................. 20

3. THEORETICAL FRAMEWORK ................................................................................... 22

3.1. International strategies for SMEs .................................................................................. 24

3.2. Cultural arbitrage ........................................................................................................... 25

3.3. Administrative arbitrage ................................................................................................ 26

3.4. Geographical arbitrage .................................................................................................. 26

3.5. Economic arbitrage ........................................................................................................ 27

4. METHODS ....................................................................................................................... 29

4.1. Research design ............................................................................................................. 29

4.2. Data collection ............................................................................................................... 30

4.2.1. Sampling and selection of the cases ....................................................................... 30

4.2.2. Collecting the data ................................................................................................. 33

4.3. Data analysis .................................................................................................................. 34

4.4. Results ........................................................................................................................... 35

4.4.1. SMEs’ adoption of the arbitrage and adaptation strategy ..................................... 35

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4.4.2. The influence of cultural arbitrage on SME internationalization .......................... 37

4.4.3. The influence of administrative arbitrage on SME internationalization ............... 38

4.4.4. The influence of geographic arbitrage on SME internationalization .................... 39

4.4.5. The influence of economic arbitrage on SME internationalization ....................... 40

5. DISCUSSION .................................................................................................................. 45

5.1. Scientific relevance and managerial implications ......................................................... 47

5.2. Limitations of research .................................................................................................. 47

5.3. Suggestions for future research ..................................................................................... 48

6. CONCLUSION ................................................................................................................ 49

7. REFERENCES ................................................................................................................. 50

APPENDIX A – Interview Protocol ........................................................................................ 65

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1. INTRODUCTION

Small and medium-sized enterprises (SMEs), being the majority of enterprises in the private

sector, are the engine of modern developed economies. They are an essential source of

employment, drive economic growth, create entrepreneurial spirit, and stimulate innovation

(European Commission, 2005; Hessels & Parker, 2013). Advances in information and

communication technology have contributed to their internationalization. As a result, SMEs

are responsible for a major share of export growth and economic prosperity in many countries

(Knight, 2001). In 2012 the European Union counted 20.7 million SMEs, corresponding to

more than 98 percent of the total number of enterprises and employing 67 percent of the

population (Ecorys, 2012; Eurostat, 2009).

In order to be classified as an SME, a firm needs to be non-subsidiary, independent,

and of a limited size. This size can be related to a number of quantitative measures, such as

the number of employees, the amount of total sales or total assets of the firm (Hsu, Chen &

Cheng, 2013). Such quantitative definitions can differ among countries; for example, relating

to the number of employees. The limit most frequently used for designating SMEs is 250

employees, which is maintained in the European Union. However, the maximum number in

the United States is 500 employees, while other countries consider only firms with fewer than

200 employees to be SMEs (OECD, 2005).

The European Commission defines medium-sized firms as companies counting less

than 250 employees and with an annual turnover of less than €50 million or an annual balance

sheet total of less than €43 million. Small firms count less than 50 employees and have an

annual turnover of less than €10 million or an annual balance sheet total of less than €10

million (European Commission, 2005). This definition is widely employed in industrialized

countries as well as in several academic articles focused on SMEs (Majocchi, Bacchiocchi &

Mayrhofer, 2005; Hessels & Parker, 2013). Accordingly, it will also be used in this thesis.

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This thesis starts with an overview of the significant literature available

regarding the internationalization of SMEs, followed by a discussion of the most relevant

country-, industry-, and firm-level factors affecting SME internationalization. Then, we will

focus on the international strategy of SMEs, and present the AAA Triangle first proposed by

Ghemawat (2003; 2007; 2008). The research gap will then be established and the research

question of this master thesis will be formulated. In the following chapter we will introduce

the theoretical framework and the propositions that will be tested. The methodology of the

research will come after this, followed by the results obtained. The validity of the propositions

will be reviewed in the results and discussion section. The study will conclude with a

summary of the key findings, scientific relevance, managerial implications, research

limitations and recommendations for future research.

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2. LITERATURE REVIEW

2.1. Internationalization of SMEs

Since SMEs increased their involvement in international markets and internationalized their

activities, they have started to play a critical role in international trade (Coviello & McAuley,

1999; Kalinic & Forza, 2012; Ruzzier, Hisrich & Antoncic, 2006).

Internationalization can be defined as the process of geographical expansion of

economic activities across national borders (Ruzzier et al. 2006). This internationalization

process can be driven by several motives. Dunning (1998) distinguishes four motives that can

drive internationalization. The first motive is resource seeking, as foreign markets can be

interesting because of the availability, price, and quality of natural resources. Market seeking

is the second motive, which can push firms to expand across borders in search of new clients.

Firms can be attracted to foreign markets with a high growth rate. Another motive is

efficiency seeking. Low labor costs or other factors that can lead to lower production costs

can be drivers for firms’ internationalization. Lastly, companies can cross borders to seek

strategic assets. This motive involves the availability of knowledge-related and other

intangible assets.

Research regarding internationalization of SMEs started around the 1970s. One of the

first models that describes the internationalization process of the firm is developed by

Johanson and Vahlne (1977). This model, also known as the Uppsala model, explains how

firms gradually acquire, integrate and use knowledge about foreign markets and operations.

The Uppsala model focuses on the increasing involvement in foreign countries (Johanson &

Vahlne, 1977). According to the Uppsala model, firms internationalize in small steps. More

recent studies explaining SME internationalization have opened new research streams that

have become relevant in the literature of internationalization (Rialp, Rialp, Urbano &

Vaillant, 2005), focusing on born globals (Knight & Cavusgil, 2004), international new

9

ventures (Oviatt & McDougall, 1994), and international entrepreneurship (McDougall &

Oviatt, 2000). International new ventures or born globals can be defined as business

organizations, that from their very inception, seek to derive significant competitive advantage

from the use of resources and the sale of output in multiple countries. Thus, they differ from

traditional SMEs insofar as their origins are international and they start with a proactive

international strategy from the very beginning. In other words, they do not gradually expand

abroad (Oviatt & McDougall, 1994). Studies identifying and describing born globals and

international new ventures emphasize their early and rapid internationalization (Autio,

Sapienza & Almeida, 2000), the use of networks in SME internationalization (Lu & Beamish,

2001), and the expansion in domestic and international markets (Coviello & Munro, 1997).

Studies regarding international entrepreneurship focus on the importance of entrepreneurs as

the decision makers within the organization. Their international orientation and attitude

towards internationalization thus influences the internationalization patterns of SMEs (Acedo

& Jones, 2007; Oviatt & McDougall, 1994; 2005). Although born global and international

new ventures play an important role in the literature of SME internationalization, this study

focuses on traditional SMEs using the gradual approach for internationalization (Kalinic &

Forza, 2012). Therefore, hereinafter the term SME refers to traditional SMEs.

SMEs cannot enjoy all the options in the internationalization process due to several

constraints (De Chiara & Minguzzi, 2002). Limited financial resources represent the biggest

constraint for smaller firms (De Maeseneire & Claeys, 2012). This makes it harder for them to

follow an internationalization strategy based on direct foreign investments, or that anyway

require a high amount of financial assets (De Chiara & Minguzzi, 2002). Other internal

constraints faced by SMEs are the lack of management skills and time. However, besides

these internal difficulties there are also external barriers limiting the internationalization

possibilities for SMEs, like adverse market conditions or institutional arrangements. The

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perception of barriers differ for firms in different stages of internationalization (Ulner, Kocak

& Cavusgil, 2013). For instance, the results of Hessels & Parker’s (2013) study demonstrate

the importance to distinguish different dimensions of internationalization and inter-firm

collaborations – in particular between importing and exporting, and between formal and

informal collaborations – as well as context-specificity of strategies. The limitation in

resources can restrict SMEs in their usage of equity entry modes for their international

activities, such as equity joint ventures or wholly owned subsidiaries. Therefore, SMEs tend

to use non-equity modes, such as export and contractual agreements (De Chiara & Minguzzi,

2002; Erramilli & D’Souza, 1993; Maekelburger, Schwens & Kabst, 2012).

2.2. Factors affecting internationalization of SMEs

The internationalization of SMEs is influenced by several factors, which can be mainly

divided into three levels; country-level factors, industry-level factors, and firm-level factors.

2.2.1. Country-level factors

The internationalization of SMEs is affected by several country-level factors. Birkinshaw et

al. (1995) identify the differences in comparative advantage across countries as the main

drivers of internationalization. Comparative advantage – or location-specific advantage –

influences the decision of where to source and market (Kogut, 1985). Factor costs, such as

wages, materials, and capital can significantly differ from country to country, favoring cross-

border activities in industries that use this factor intensively (Johnson Jr., Arya &

Mirchandani, 2013; Kogut, 1985; Porter, 1986). Ghemawat (2008) emphasizes the importance

of considering sustained differences between countries as an important driver of global

integration strategy. Examples are the international variation in the availability of specialized

inputs, taxes, labor costs, and the legal environment (Johnson Jr. et al., 2013).

Another country-level determinant of internationalization is country risk. Country

risks are the uncertainties in political, legal, cultural, and economic environments, which can

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threaten the stability of business operations. Higher country risk in a host country leads to a

lower likelihood of that country being selected by an internationalizing firm (Demirbag &

Glaister, 2010; Rasheed, 2005). When entering a foreign market, firms aim to minimize the

risks associated with these uncertainties, because they complicate the structural, transactional,

and resource dynamics of transnational activities (Demirbag & Glaister, 2010; Ghoshal, 1987;

Rasheed, 2005).

The influence of the home institutional context on the internationalization of SMEs

has also been widely studied. However, the results regarding this relationship remain

inconclusive (Schwens, Eiche & Kabst, 2011). Institutions can be defined as “the rules of the

game in a society” and focus on social actors and “the ways that differently constituted

groupings of social actors control economic activities and resources” (North, 1990: 3;

Whitley, 1999: 32). Institutions can be distinguished in informal and formal institutions.

Informal institutions refer to cultural background and behavior concerning trust,

collaboration, identity, and subordination (Peng, 2000; Schwens et al., 2011; Whitley, 1999).

Formal institutions are manifested in political rules, legal decisions, and economic issues

(Peng, 2000). Large informal institutional distance increases the challenge of doing business

in the host country (Xu & Shenkar, 2002). The larger the cultural differences between host

and home country, the larger the risks of doing business, and the greater the informal

institutional distance. In return, it is more difficult to transfer in the host country the

management model used at home and adapt to local practices and preferences (Gelbuda,

Meyer & Delios, 2002; Slangen & Van Tulder, 2009). Despite the fact that the direct

influence is still inconclusive, several studies show a moderating effect of institutional

context. Schwens et al. (2011) find a moderating influence of institutions on the relationship

between international experience, proprietary know-how, and strategic importance and the

entry mode choice of SMEs. Existing research also indicates that institutional factors

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moderate the relationship between export strategy and firm performance (Nguyen, Le &

Bryant, 2013).

2.2.2. Industry-level factors

The internationalization of SMEs is also influenced by industry-level factors, like the amount

of competitors, the size, maturity, and technological intensity of the industry.

Research documents that the size of the domestic market affects the

internationalization process of SMEs (Bell, Crick & Young, 2004; Crick & Jones, 2001;

Elango, 1998). A firm needs to make a tradeoff between entering foreign markets and

accessing its domestic market. If the domestic market is sufficiently large and accessible

compared with the foreign markets, it is likely for the firm to stay within the home market.

When the size of the domestic market is insufficient, firms are more likely to cross borders

and enter international markets. This is also the case if firms have to compete in a hostile or

mature domestic industry (Elango, 1998). The number of competitors and the degree of

rivalry have an impact on the prices offered to customers and hence profits to the firms. In

addition, saturation of the domestic market forces companies to search for additional foreign

markets (Bell et al., 2004; Crick & Jones, 2000; Fan & Phan, 2007).

Another determinant of internationalization at the industry level is the technological

intensity in the industry, which is often measured by R&D expenditures as a percentage of

sales. Firms competing in a technologically intensive industry are more likely to

internationalize. This relationship can be explained by the ownership advantages possessed by

companies operating in technologically intensive industries, which make foreign market entry

easier and more profitable. Moreover, these firms are characterized by higher levels of both

tangible and intangible assets as well as accumulated knowledge, which clearly enhance the

likelihood to expand across borders (Anand & Kogut, 1997; Driffield & Munday, 2000; Kim

& Lynn, 1987; Kuemmerle, 1999).

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2.2.3. Firm-level factors

Prior studies show that firm and entrepreneurial characteristics also influence the

internationalization of SMEs. For instance, the size of the firm influences the

internationalization of SMEs. The relationship between firm size and export intensity is one

of the most widely analyzed links in the international business literature. However, this

relationship is still controversial as the empirical findings remain contradictory (Majocchi et

al. 2005; Pla-Barber & Alegre, 2007). Some studies show a positive relationship between the

two variables (Wagner, 1995), while other articles do not find any support for this relationship

(Bonaccorsi, 1992; Moen, 1999; Pla-Barber & Alegre, 2007). According to Fernhaber et al.

(2008) firm size has a moderating influence on the positive relation between location and new

venture internationalization. Results show that firm size is the most important firm

characteristic influencing this relationship. Majocchi et al. (2005) confirm a strong positive

relationship between firm size and export performance and this relationship holds even if the

analysis is longitudinal. According to Johanson & Valhne (1977) export activities can be an

important step in the process of internationalization. Exporting can contribute to the

acquisition of international experience and can help to reduce uncertainty in foreign markets.

Export activities can be considered as valuable means of internationalization, because firms

are allowed to accumulate institutional, business, and internationalization knowledge (Sharma

& Blostermo, 2003). Therefore, exporting can be an effective way to enhance

internationalization. Having said that, it takes time to gain the knowledge and the

organizational capabilities necessary to craft an effective international strategy (Majocchi et

al., 2005).

The age of the firm seems to have a negative relationship with international growth.

Young firms have learning advantages over old firms in terms of assimilating new foreign

knowledge. First, young SMEs can adapt and modify the cognitive, political, and relational

patterns more easily than older firms (Autio et al. 2000). Internationalizing SMEs have to

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learn new routines, which requires the unlearning of old ones. This is becoming more difficult

as the firm gets older (Barkema & Vermeulen, 1998). Secondly, early internationalizing

SMEs will adopt an international identity, which allows firms to be more aware, capable, and

willing to pursue international opportunities (Autio et al. 2000; Penrose, 1959).

Another firm-level determinant of internationalization is knowledge intensity.

Knowledge intensity can be defined as the extent to which a firm depends on the knowledge

inherent in its activities and outputs as a source of competitive advantage (Autio et al. 2000).

Knowledge creation and exploitation lead to developing learning skills, which can be used for

adaptation and growth in new markets and environments (Grant, 1996). Furthermore, firms

with a higher level of knowledge-intensity perform better in dynamic environments (Gaur,

Mukherjee, Gaur & Schmid, 2011; Miller & Shamsie, 1996). Several studies support the

positive relationship between knowledge-intensity and international growth. For instance, the

study of Autio et al. (2000) shows that firm knowledge about international markets and the

efficiency by which such knowledge is learned represent an important driver of international

sales growth. Knowledge is also indispensable when an SME enters markets in which it has

little or no previous experience. In such markets new knowledge on how to compete and

prosper must be apprehended, shared, and assimilated (Autio et al. 2000). Fernhaber et al.

(2008) quantify knowledge-intensity by dividing the R&D expenditures by the total number

of employees. The results of this study suggest that a higher knowledge-intensity helps

organizations expanding across multiple geographic regions to minimize the effects of

competition in the local region (Fernhaber et al., 2008).

The internationalization of SMEs is also influenced by their previous international

experience. Prior studies show a positive relationship between international experience of the

firm and international growth (Forsgren, 2002; Sharma & Blostermo, 2003; De Chiara &

Minguzzi, 2002). International expansion is a learning process where firms gain international

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experience, reduces uncertainty in foreign markets, and leads to increasing commitment to

foreign markets (Forsgren, 2002; Johanson & Vahlne, 1977; 1990). International experience

allows firms to acquire institutional, business, and internationalization knowledge (Sharma &

Blostermo, 2003). Firms can discover different national market rules (institutional

knowledge), become familiar with different clients’ preferences (business knowledge), and

develop internal resources that can be useful in other international markets

(internationalization knowledge) (De Chiara & Minguzzi, 2002; Majocchi & Zucchella, 2003;

Majocchi et al. 2005). International experience leads to better knowledge and insight in

business opportunities in both the domestic and international domain (Hulbert, Gilmore &

Carson, 2013; Maekelburger et al., 2012).

Network relationships also positively influence SME internationalization

(Maekelburger et al., 2012). Ojala (2009) finds that network relationships are actively utilized

and developed to achieve market entry. Eberhard & Craig (2013) distinguish network

relationships in inter-personal networking and inter-organizational networking. Inter-personal

networks enable the decision maker to access new and different types of information and

ideas (Cao, Simsek & Zhang, 2010; Sharma, Young & Wilkinson, 2006), while inter-

organizational networks are primarily helpful for opportunity exploitation through mobilizing

resources and boosting firm reputation (Eberhard & Craig, 2013). Dai & Liu (2009) show a

positive relationship between international inter-personal networks and firm performance.

Furthermore, inter-personal networks play an important role in the innovation processes of the

firm because the knowledge necessary for innovation is derived from multiple individual

sources (Kanter, 1983; Nelson & Winter, 1982). Individuals with more informal contacts

outside the organization are critical for importing novel knowledge contributing to innovation

(Allen, 1977). Through innovation firms can enter new markets with novel and better

products, which make export more successful (Cassiman & Golovko, 2011; Golovko &

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Valentini, 2011). Inter-personal network activity can be seen as an important predictor of

managers’ involvement in innovation and consequently in internationalization (Eberhard &

Craig, 2013), especially early in the institutional transition process (Danis, Chiaburu & Lyles,

2010). Inter-organizational networks also affect the internationalization process positively.

SMEs usually suffer from a lack of established resources, which are required for expanding

abroad (Dubini & Aldrich, 1991; Hitt, Bierman, Uhlenbruck & Shimizu, 2006). Inter-

organizational networks help to access key resources, skills and knowledge controlled by

others (Jarillo, 1989), and therefore have a positive effect on internationalization. This effect

is larger for geographically diverse networks and firms sharing a common language (Musteen,

Francis & Datta, 2012).

Organizational ambidexterity represents the ability of an organization to efficiently

exploit existing market opportunities while exploring the innovativeness to meet the

challenges of future markets, which can contribute to successful internationalization (Patel,

Messersmith & Lepak, 2013). Voss & Voss (2013) show a positive relationship between

product ambidexterity and revenues in larger firms, while market exploration benefits smaller

firms.

Specific strategic focus is another determinant of internationalization, because it

allows SMEs to internationalize operations rapidly and to change the speed and the

commitment to internationalization (Hagen, Zucchella, Cerchiello & De Giovanni, 2012). In

addition, strategic flexibility inures the fast development of commitment in the host country.

This allows SMEs to react quickly to feedback and changing environments (Kalinic & Forza,

2012).

Not only firm-specific factors can drive firms to internationalization, also

entrepreneur-specific determinants are important in the internationalization process, especially

for SMEs. As a matter of fact, entrepreneurs play an unique and crucial role in the SME and

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the internationalization the firm (Keupp & Gassmann, 2009). The decisions in the

organization are often made by the entrepreneur (Westhead, Wright & Ucbasaran, 2001;

Zucchella, Palamara & Denicolai, 2007). Prior studies researched the importance of

entrepreneurs and their influence on international growth. The findings show a positive

relationship between the entrepreneurs’ international attitude, orientation, experience,

network, and positive international development (Kuemmerle, 2002; Preece, Miles & Baetz,

1998; Westhead et al., 2001; Zucchella et al. 2007). Literature regarding the relationship

between the international experience of managers and internationalization show similar

results. Managers with international experience move SMEs more quickly toward

internationalization than managers that lack international experience (Fernhaber et al., 2008;

Reuber & Fischer, 1999). Personal characteristics of the entrepreneur also play an important

role and influence the international orientation of entrepreneurs. For example, a high level of

education and previous work experiences are related to a strong international orientation.

Personal life experiences like foreign education, or work experience, travel, foreign birth or

knowledge of foreign languages also shape entrepreneurs’ international orientation, allowing

them to discover and filter international opportunities (Cavusgil, 1984; Filatotchev, Buck &

Wright, 2009; Ganotakis & Love, 2012; Ibeh, 2003; Jones & Coviello, 2005; Stoian, Rialp &

Rialp, 2011; Zucchella et al., 2007).

2.3. International strategy

This section reviews the available literature regarding international strategy of SMEs.

Furthermore, we will present Ghemawat’s AAA Triangle (Ghemawat, 2003; 2007; 2008).

2.3.1. International strategy of SMEs

The relationship between strategic orientation, strategic behavior, and international

performance is a relevant issue for entrepreneurs and managers (Hagen et al., 2012). Melin

(1992) emphasizes the link between internationalization and strategy. However, the

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international strategy of SMEs has been a relatively neglected topic in international business

research (Hagen et al., 2012; Ricard, Enright, Ghemawat, Hart & Khanna, 2004). The

international business literature is in fact dominated by studies on the large multinational

enterprises (MNEs). Consequently, the international strategy of SMEs remains a relatively

neglected research field (Bell et al., 2004; Hagen et al., 2012). The lack of research of the

international strategy of SMEs can be partially explained by the unplanned and reactive or

opportunistic behavior of SMEs (Bilkey & Tesar, 1977; Westhead, Wright & Ucbasaran,

2002). This behavior makes it even more difficult to gather data regarding international

strategy. However, the absence of an explicit and formal strategy does not equate to the lack

of strategic vision, whether or not this involves a global focus (Bell et al., 2004).

2.3.2. Global integration – national responsiveness tradeoff

Traditionally, the literature regarding international strategy emphasizes a tradeoff between

global integration and local responsiveness (Bartlett & Goshal, 1989; Ghemawat, 2008). This

tradeoff can be traced back to Fayerweather (1969), who discusses the tension between the

pressure for companies to unify and standardize their products and activities, and the pressure

to adapt to local environments and to differentiate. Prahalad and Doz (1987) elaborate on this

tension into the global integration – national responsiveness tradeoff. However, Prahalad and

Doz (1987) argue that companies do not have to focus on one alternative or the other, as the

multifocal strategy allows firms to be both globally integrated and locally responsive.

2.3.3. The AAA Triangle

Ghemawat (2007) adds a third dimension to this discussion for his new framework for

approaching strategy, called the AAA Triangle. This framework allows managers to see

which of the three strategies – or combination of strategies – is likely to afford the most

leverage for their companies or in their industries overall. The three As represent distinct

types of global strategy; adaptation, aggregation, and arbitrage. Each A is associated with

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different organizational types. Adaptation strategies seek to increase revenues and market

share by maximizing a firm’s local relevance. When adopting adaptations strategies, the firm

adjusts to differences between the home country and host country. If adaptation is the main

objective for a firm, a country-centered organization suits best. Aggregation strategies attempt

to deliver economies of scale by overcoming differences between countries. This can be done

by creating regional or global operations, thus involving a high degree of standardization.

Cross-border groupings are best when aggregation is emphasized. Arbitrage is the

exploitation of differences between national or regional markets. Ghemawat (2003)

distinguishes four dimensions of arbitrage; cultural, administrative, geographical, and

economic arbitrage. The cultural, administrative, geographical, and economic differences

between countries can be a source of value creation, rather than a constraint. This argument is

based on Kogut’s (1985) initial assessment of arbitrage to which firms differ in location of

sourcing of their production, which enables firms to acquire a competitive edge based on the

superior exploitation of the comparative advantages among countries. Arbitrage is best

pursued by a vertical or functional organization that plays explicit attention to the balancing

of supply and demand within and across organizational boundaries (Ghemawat, 2007; 2008).

Although many companies follow strategies that involve the pursuit of just one of the

three As, there are also companies that attempt to employ a combination strategy. These AA

strategies can lead to success in two different ways. Some companies win by beating its

competitors along both dimensions at once. More commonly, companies win because they

manage the tensions between two As better than their competitors do. However, the pursuit of

AA strategies requires considerable organizational and material innovation (Ghemawat,

2007). Table 1 explains and compares the three As in more detail.

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TABLE 1

Comparing adaptation, aggregation and arbitrage

Adaptation Aggregation Arbitrage

Competitive advantage

Why globalize at all?

To achieve local relevance

through national focus

while exploiting some

economies of scale.

To achieve scale and scope

economies through

international

standardization.

To achieve absolute (non-

scalar) economies through

international

specialization.

Configuration

Where to locate overseas?

Mainly in foreign countries that are similar to the home

base, to limit the effects of cultural, administrative,

geographic, and economic distance.

In a more diverse set of

countries, to exploit some

elements of distance.

Coordination

How should international

operations be organized?

By country, with emphasis

on achieving local

presence within borders.

By business, region, or

customer, with emphasis

on horizontal relationships

for cross-border economies

of scale.

By function; emphasis on

vertical relationships,

including across

organizational boundaries.

Checks

What to watch out for

strategically?

Excessive variety or

complexity.

Excessive standardization,

with emphasis on scale.

Narrowing spreads.

Corporate diplomacy

Which public issues need to

be addressed?

Potentially discrete and

robust given emphasis on

cultivation of a local face.

Appearances of and

backlash against

homogenization or

hegemonism.

The exploitation or

displacement of suppliers,

channels or intermediaries;

potentially most prone to

political disruption.

Corporate strategy

What strategic levers do we

have?

Scope selection, variation,

decentralization,

partitioning,

modularization, flexibility,

partnership,

recombination, innovation.

Regions and other country

groupings, product or

business, function,

platform, competence,

client industry.

Cultural (country-of-origin

effects), administrative

(taxes, regulations,

security), geographic

(distance, climate

differences), economic

(differences in prices,

resources, knowledge).

Derived from Ghemawat (2003; 2007; 2008).

2. 4. Research gap and research question

As discussed, the international strategy of SMEs has been a neglected topic in international

business research, since the main focus has been on multinational enterprises (Bell et al.,

2004; Hagen et al., 2012; Ricard et al., 2004). Additionally, the arbitrage strategy is often

undervalued as a global strategy (Ghemawat, 2003). This partly reflects the tendency of

companies to equate size with a global presence, which emphasizes on scale economies rather

than on the absolute economies that underlie arbitrage. However, arbitrage may offer

relatively sustainable resources of competitive advantage.

21

This study contributes to international business literature by investigating the strategic

intent behind SME internationalization, focusing on the arbitrage concept and applying it to

SMEs. Thus, the emphasis will be on different dimensions of arbitrage and their influence on

the internationalization of SMEs. Stated otherwise, the research question that will be

investigated is:

“How does arbitrage influence the scale and scope of internationalization of SMEs?”

22

3. THEORETICAL FRAMEWORK

Internationalization can be divided into three main dimensions; scale, scope and pace of firm

internationalization (Taylor & Jack, 2012). The speed or pace of internationalization refers to

the time taken between the inception of the firm and its entry into international markets

(Taylor & Jack, 2012). However, this study focuses on traditional SMEs, which have gone –

by definition – through a gradual internationalization process and therefore a relatively stable

pace of internationalization (Kalinic & Forza, 2012). Therefore, the pace of

internationalization will not be investigated.

The scale and the scope of firm internationalization concern the degree to which the

firm involves itself in international operations – also referred to as the degree of

internationalization (Hilmersson, 2013; Taylor & Jack, 2012). The scale of

internationalization relates to the extent of a firm’s international operation. Determination of

scale can be assessed by looking at the percentage of turnover derived from international

markets and thus refers to the reliance on foreign sales. Companies are acknowledged to be

international if at least 25 percent of their total annual turnover is generated in foreign markets

(Knight & Cavusgil, 1996; 2004; Moen, 2002; Taylor & Jack, 2012). The scope of

internationalization can be determined by the number of markets served and denotes the

international geographic reach of the business (Crick, 2009; Hilmersson, 2013; Kuivalainen,

Sundqvist & Servais, 2007; Taylor & Jack, 2012).

Building on the literature introduced in the preceding chapter, this study presents six

propositions on the arbitrage strategy and the influence of cultural, administrative,

geographical and economic arbitrage on the scale and scope of SMEs’ internationalization.

The conceptual framework is detailed in Figure 1.

23

P3

FIGURE 1

Conceptual Framework

P5

P6 P4

P2 P1

International Strategy

Adaptation Aggregation Arbitrage

Cultural arbitrage

Administrative arbitrage

Geographic arbitrage

Economic arbitrage

Scale of SME

internationalization

Scope of SME

internationalization

24

3.1. International strategies for SMEs

Ghemawat (2003; 2007; 2008) distinguishes three international strategies; adaptation,

aggregation, and arbitrage. Research has shown that SMEs face internal and external

constraints, such as limited financial resources, small firm size, lack of management time and

skills (De Chiara & Minguzzi, 2002; De Maeseneire & Claeys, 2012). Due to these

constraints, SMEs cannot aim to leverage on scale and scope economies, which are required

for the aggregation strategy (De Chiara & Minguzzi, 2002; Ghemawat, 2003; 2007; 2008). In

addition, the adaptation strategy requires the achievement of local relevance, while some

economies of scale are exploited (Ghemawat, 2003; 2007; 2008). The constraints faced by

SMEs also make it difficult to apply a pure adaptation strategy.

Because it is hard for SMEs to pursue aggregation or pure adaptation strategies, we

posit that SMEs’ international strategies are mostly related to the notion of arbitrage. The

arbitrage strategy is about exploiting differences between countries and achieving absolute

economies, which is best suited for SMEs, and can be a critical source for their creation of

value. For instance, differences between countries offer greater access to a variety of

knowledge and sources of learning, and can also provide the opportunity to optimize the value

chain through creative locational disaggregation (Zaheer, Schomaker & Nachum, 2012).

Although some level of awareness of and attention to each of the three As is necessary

in international competition, it is not possible or advantageous to focus on all three As.

Companies should focus on one or at most two international strategies. When firms attempt to

pursue a combination of two international strategies – an AA strategy – this will be a

combination of arbitrage and adaptation strategies, because these strategies are best suitable

and achievable for SMEs. Therefore, we posit the first and second proposition as follows:

Proposition 1: When SMEs cross borders, they adopt arbitrage strategies.

25

Proposition 2: When SMEs cross borders and rely on a combination of international

strategies, they adopt a combination of arbitrage and adaptation strategies.

3.2. Cultural arbitrage

Arbitrage strategies have long exploited differences in culture and country-of-origin effects.

For instance, French culture has underpinned the international success of French haute

couture, cuisine, wines, and perfumes. The country-of-origin effects are often used in

marketing. Several producers use cultural stereotypes to promote their products to their target

groups. For example, when Molson Coors Brewing Company launched its brand A Marca

Bavaria – a premium beer imported from its Brazilian subsidiary – in the Canadian market,

they used its association with Brazil’s high-energy and sensual image to promote its products

(Ghemawat, 2003). New opportunities for reinforcing cultural arbitrage appear all the time.

For example, The European Union restricts labels, such as Cognac brandy and Parma ham, to

only those products that actually come from those places to reinforce the natural advantages

of particular geographical areas. Firms can exploit these country-of-origin effects to make

their products more attractive to customers in foreign markets, which can stimulate firms to

expand across borders. (Ghemawat, 2003).

When cultural differences between home and host country are present, firms can use

cultural arbitrage – and especially country-of-origin effects – to create value for customers in

the host country. Cultural arbitrage can therefore stimulate firms to internationalize and

exploit cultural differences across borders (Ghemawat, 2003; 2007; 2008). Accordingly, the

third proposition is framed as follows:

Proposition 3: SMEs’ ability to exploit cultural differences between the home and host

country is positively associated to their scale and scope internationalization.

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3.3. Administrative arbitrage

Opportunities for administrative arbitrage occur when there are legal, institutional, and

political differences across countries. The most obvious example of administrative arbitrage

are tax differentials. Tax differentials have always been present and research corroborates the

notion that such differentials have played a large influence on multinationals’ investment and

financing decisions over time (Desai, Fritz Foley & Hines Jr., 2006). Another example of

administrative arbitrage is the membership in different regional trading agreements, like

NAFTA. Despite the important role of these types of administrative arbitrages, the most

commonly used kind involves working with or around given rules. In some cases companies

can even leverage political power in the host country to try to modify specific rules in their

favor (Ghemawat, 2003).

Although the use of administrative arbitrage sounds unattractive to many, the potential

for using government influence to create administrative arbitrage opportunities remains high,

and can be a driver for internationalization (Ghemawat, 2003). Lower tax rates or a favorable

legal or institutional environment in foreign markets can be particularly attractive for SMEs.

Therefore, administrative differences across countries can positively affect the scale and

scope of SME internationalization. Hence, the fourth proposition is framed as follows:

Proposition 4: SMEs’ ability to exploit administrative differences between the home and host

country is positively associated to their scale and scope of SME’s internationalization.

3.4. Geographical arbitrage

The exploitation of geographical distance and climate differences are examples of

geographical arbitrage. Last few decades, the transportation and communication costs have

dropped significantly. However, this drop does not necessarily translate into a decrease in the

scope of geographic arbitrage strategies. Geographical arbitrage uses the differences in

27

physical location as an advantage. A well known example of geographical arbitrage is the

import of fresh products during the winter. The cut flower business exploits geographical

differences to sell flowers throughout the year (Ghemawat, 2003). The advantages offered by

geographical arbitrage make internationalization for firms more attractive, and therefore

positively affects the scale and scope of SME internationalization. Hence, the fifth proposition

is framed as follows:

Proposition 5: SMEs’ ability to exploit geographical differences between the home and host

country is positively associated to the scale and scope of SME’s internationalization.

3.5. Economic arbitrage

Economic arbitrage refers to the exploitation of specific economic factors that are not derived

directly from culture, geography, or administrative context. Examples of economic arbitrage

are differences in the costs of labor and capital, as well as variations in more industry-specific

inputs, such as knowledge or the availability of complementary products, technologies, and

infrastructures. The exploitation of differentials in labor costs represents the best-known type

of economic arbitrage, which can also be applied to R&D (Ghemawat, 2003). Via the

exploitation of knowledge differentials companies can recruit knowledge workers from

graduates of leading businesses and other professional schools around the world (Ghemawat,

2003).

Differences in costs are the main reason for the exploitation of economic differences.

Therefore, economic arbitrage can be linked to Dunning’s (1998) efficiency seeking motive

and strategic asset motive. Dunning’s (1998) efficiency seeking motive argues that lower

costs, such as lower labor costs, production costs or capital costs can be drivers for

internationalization. The exploitation of knowledge and other industry-specific inputs can be

linked to Dunning’s (1998) strategic asset motive, which relates to the availability of

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knowledge-related or other intangible assets that can drive internationalization. Based on this

overview of economic arbitrage, we posit:

Proposition 6: SMEs’ ability to exploit economic differences between the home and host

country is positively associated to the scale and scope of SME’s internationalization.

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4. METHODS

This chapter discusses the methodology used in our study. First, we will discuss the research

design and explain the methodological choices. Thereafter, we will discuss the sampling

method and the selection of the cases. The chapter proceeds by discussing and explaining the

data collection and analysis methods,. Finally, we will show the results obtained.

4.1. Research design

The research design explains the structure, the conduction and the analysis of the research

(Van der Velde, Jansen & Anderson, 2004). When researchers aim to discover causal links

between two or more phenomena, quantitative research is most useful. Qualitative research is

most appropriate when researchers study the motivations, perceptions and beliefs of certain

variables (Eisenhardt, 1989; Van der Velde et al., 2004). Given that the precise influence of

arbitrage strategies on SMEs’ international growth has not been studied in-depth yet, a

qualitative approach may help to understand this relationship and the complexities underlying

it.

This study applies a qualitative multiple case study design, which is considered as a

particularly valuable research technique in this context, with the firm as the main unit of

analysis (Eisenhardt, 1989; Yin, 2009). The multiple case study design can be defined as “the

research strategy that focuses on understanding the dynamics present within single settings”

(Eisenhardt, 1989: 534). This approach aims to describe, rank, and explore data with the aim

of generating propositions or illustrating existing theory. This is particularly useful in those

research contexts where previous theory seems inadequate or incomplete and deeper

theoretical development is required (Yin, 2009; Eisenhardt, 1989). The multiple case study

approach is preferred over a single case study, because the analysis of multiple cases enables

the use of replication logic among cases.

30

The case study in this research leads to greater insights in the motivations and

perceptions of SMEs to internationalize (Yin, 2009). Having said that, the case study also

brings some disadvantages and limitations. The investigation of a phenomenon with few units

of analysis results in the perceived inability to statistically generalize the findings to a broader

level (Yin, 2009).

4.2. Data collection

Semi-structured interviews were used as a primary source to collect the qualitative data

necessary for the purposes of this study. This section gives an overview on the sampling of

the cases and on the collection of the data.

4.2.1. Sampling and selection of the cases

Unlike quantitative studies that benefit from random sampling, in qualitative studies samples

are best chosen purposively to yield information-rich cases that exhibit the researched

phenomenon (Bangara, Freeman & Schroder, 2012; Patton, 2002). We aimed to compare the

phenomenon in companies in the same industry, in this case the Dutch horticultural industry.

The Dutch horticultural industry is recognized by the Dutch government as one of nine

leading sectors in the Dutch economy, and employs approximately 4,4 percent of the Dutch

labor force (Topsectoren, 2013). In addition, the Dutch horticultural industry is the second

largest exporter of nutritional horticulture products in the world (Topsectoren, 2013; 2014).

The Netherlands represent the heart of an international network for floriculture, bulbs, fruit

and vegetables. The central location of the Netherlands and the presence of important

logistical hubs – such as the Port of Rotterdam and Amsterdam Airport Schiphol – contribute

to an easy and efficient connection to foreign markets. Moreover, 99 percent of the Dutch

horticultural companies are SMEs, which is substantially equal to the percentage of SMEs in

the Dutch economy (Economisch Instituut voor het Midden- en Kleinbedrijf, 2014; Panteia,

31

2014). Therefore, the Dutch horticultural industry is particularly well suited to test the six

propositions advanced in the previous section.

To employ the multiple case study design, we considered four Dutch horticultural

SMEs. As anticipated in the introduction, we utilized the definition maintained by the

European Commission (2005) as our first selection criterion; companies counting less than

250 employees, and reporting an annual turnover less than €50 million or an annual balance

sheet total less than €43 million. The second selection criterion is that the chosen firms should

be internationally active, so their international strategy can be investigated. The four

companies were judgmentally selected from the Hillenraad100 2013, which is a list of the 100

leading companies in the Dutch horticulture industry. Judgmental selection is often used for

small sample, qualitative research and is the most appropriate choice for the sample selection

of this research (Short, Ketchen Jr. & Palmer, 2002). In the following paragraph we will

discuss in detail each of the four companies and highlight the rationale behind their selection.

The four selected companies are; a producer and packer of snack vegetables (Firm 1),

an international leading consultancy and research company (Firm 2), a supplier of process

automation in the horticultural industry (Firm 3), and a producer of micro-vegetables (Firm

4). These four companies are suitable cases for the purpose of this study. First of all, the four

companies all gradually internationalized their activities, and are recognized companies in the

Dutch horticultural industry. Although the companies compete in the same industry, they all

focus on different segments, which broadens the understanding of arbitrage strategies.

Contact with the CEOs and top management team members of the firms was

established by telephone and e-mail. After explaining the aim of the study, the entrepreneurs

agreed to participate in the study. Detailed descriptions of the selected cases are shown in

tables 2 and 3.

TABLE 2

Description of the selected cases

Firm 1 Firm 2 Firm 3 Firm 4

Description Firm 1 is a producer and packer of

snack vegetables. The company was

established in 2005, when several

tomato growers combined their

strengths and started to produce and

pack snack vegetables together.

Originally, the firm focused on the

domestic market. However, the

small Dutch market forced the

company to look across borders for

new opportunities. In 2006, the

company started to export the snack

vegetables to Germany, other

countries followed quickly.

Nowadays, the company owns six

production locations in the

Netherlands and has joint ventures

in Spain, Morocco and Mexico.

These production locations

contribute to the supply of snack

vegetables throughout the year,

which is essential for the company.

In addition, the firm exports to

Europe, Russia, the Middle East, the

United States, Japan and Hong

Kong. Currently, the firm is looking

for possibilities to produce in Japan.

Firm 2 is a consultancy and research

company, which supplies specific

knowledge and expertise to improve

and optimize the cultivation process

of covered crops.

The company was forced to

internationalize their activities, due

to a strong player in the domestic

market and a mismatch with the

demands of the domestic markets.

However, there was demand for this

type of knowledge supply in foreign

markets. Shortly after the

establishment of the firm,

knowledge was exported to Canada,

Poland and the United States.

Today, the company also exports to

Mexico, Europe, Azerbaijan,

Russia, Kazakhstan, China, East

Africa and South Africa. The firm

has a joint venture with a local

company in Japan. In Poland the

firm has a wholly owned subsidiary

with six employees. At the moment,

the company is setting up wholly

owned subsidiaries in China and

Turkey.

Firm 3 is founded in 1959 as a trade

organization for agricultural

products, and has developed into

one of the leading supplier of

process automation in the

horticultural industry. The company

became a large player in the

domestic market before it started to

export to Belgium, Germany and the

United Kingdom in the seventies.

The company’s growth objective

was the main driver to expand

abroad.

When the Dutch horticultural

industry expanded abroad, the firm

also took the step to enter foreign

markets, such as France and Spain.

In the eighties the company set up

offices in the United Kingdom,

Belgium and France, followed by

Spain in the nineties. Due to the

maturation of the market, the offices

in the United Kingdom and Belgium

have been closed in 2012. These

markets are now served by the

Dutch location. In the same year the

firm set up offices in Mexico and

the United States. Nowadays the

company serves sixty countries all

over the world – mainly by using

partnerships.

Firm 4 is a producer of micro

vegetables. Although the company

is established in 1988, the major

successes were initiated when the

current owner took over the

company in 2002. Before the

takeover, the company already

exported products to Belgium,

Germany and the United Kingdom.

The small domestic market was the

main reason to internationalize.

Over the years, the company also

started to supply to other countries

in Europe, such as Italy, Spain,

Portugal, France and Scandinavia.

Furthermore, the firm has a

production location in Kenya, and

set up a franchise formula in Japan.

In 2006, special greenhouses were

prepared on Long Island to generate

a reliable supply of fresh products in

the United States.

TABLE 3

Firm characteristics of the selected cases

Firm 1 Firm 2 Firm 3 Firm 4

Established 2005 2004 1959 1988

Main product Snack vegetables Horticultural

knowledge

Process

automation Micro vegetables

Year of

internationalization 2006 2004 1970 Early Nineties

Initial foreign markets Germany Canada / Poland

Belgium /

Germany / Great

Britain

Belgium /

Germany / Great

Britain

Subsequent foreign

markets

Europe, Russia,

US, Japan, Hong

Kong.

US, Mexico,

Europe, Russia,

Azerbaijan,

Kazakhstan, China,

Japan, East Africa

and South Africa

France, Spain,

Canada, US,

Mexico, South

Africa

Western Europe,

Scandinavia, US,

Japan

Percentage of revenue

generated abroad 70 % 25 % 70 % 90 %

Main informant Top management

team member CEO CEO CEO

4.2.2. Collecting the data

To achieve construct validity multiple information sources are used to establish triangulation.

The primary data source are four semi-structured interviews with either the CEO or a top

management team member of the firm, who are thus involved with key decision-making in

the internationalization of the firm. In addition, internal documentation, company websites,

firm brochures and other secondary data are used (Andersen & Skaates, 2004; Ghauri, 2004).

The interviews were in-depth and semi-structured in nature and conducted using an interview

protocol to guide the discussion (Appendix A). All interviews lasted from 45 to 90 minutes

each and took place in April 2014. Because the native language of both the researcher and the

interviewees is Dutch, the interviews were conducted in Dutch. Three interviews were

conducted in the company’s premises, one interview was conducted by telephone. The

interviewees were informed that the interview would be conducted and reported

anonymously. At the beginning of each interview the research was explained and the

interviewees were asked if it was possible to record the interview. All interviewees agreed to

34

the recording. Through the data analysis phase, we maintained contact with the interviewees

via e-mail or telephone to clarify issues as they arose.

4.3. Data analysis

After the collection of the required data by conducting the semi-structured interviews, the data

were analyzed to test the propositions formulated. This section gives an overview of the data

analysis methods.

After each interview, the impression and memories of the interview were noted. The

recorded interviews were subsequently transformed into verbatim transcriptions. These

verbatim transcriptions were used to code the data. As the interviews were conducted in

Dutch, the transcriptions were also conducted in Dutch and analyzed in this form. The quotes

reported in the text are an accurate English translation of the original quote in Dutch. The

information obtained through interviews was compared with internal documents and the

companies’ websites. The use of different sources of data leads to triangulation, which

improves the reliability and validity of the research (Andersen & Skaates, 2004). The next

step in the analysis process is the thematic analysis of the transcriptions, which is a key

technique in the analysis of qualitative data (Ryan & Bernard, 2003). This refers to the

method of identifying and investigating themes of which the objective is to establish an

understanding of a particular phenomenon and to find patterns within the data (Ryan &

Bernard, 2003). Ryan & Bernard (2003) connote these themes as the fundamental concepts to

describe the phenomena.

In this study, based upon the conceptual framework and propositions about SMEs’

internationalization and the arbitrage strategy, the following themes were identified for

analyzing: ‘drivers of internationalization’, ‘entry modes’, ‘arbitrage strategy’,

‘arbitrage/adaptation strategy’, ‘cultural arbitrage’, ‘administrative arbitrage’, ‘geographical

arbitrage’, and ‘economic arbitrage’. These themes are used to categorize the data in

35

meaningful clusters of analysis (Miles & Huberman, 1994). Sub-codes were assigned to these

main themes in order to categorize more specific information, causes and links in the data,

and to find evidence for their relevance (O’Dwyer, 2004). The transcriptions were coded and

analyzed using the qualitative data analysis software program NVivo. After the data analysis,

we produced a document with quotes from the transcriptions to support the trustworthiness of

the results (Guba & Lincoln, 1994; O’Dwyer, 2004).

4.4. Results

In this section we present the results of the case analysis. After a general assessment of

companies’ international activities, we will focus on the application of arbitrage strategies.

Table 4 gives a summary of the findings and table 5 presents illustrative or ‘proof’ quotes

from the key respondents of each firm. The use of proof quotes highlight prevalence of a point

and enhances the triangulation of qualitative data (Pratt, 2008; 2009; Taylor & Jack, 2012).

4.4.1. SMEs’ adoption of the arbitrage and adaptation strategy

All four companies use several aspects of arbitrage strategies in their internationalization.

Having said that, only Firm 1 categorizes its international strategy as a pure arbitrage strategy.

Firm 1 exploits several aspects of differences between countries. Examples of the use of such

differences are discussed in the next sections. Firm 1’s top management team member

highlights the importance of the benefits coming from the differences between the home and

host countries.

“When I look at the three international strategies, I think the arbitrage strategy is the

one that is closest to our strategy. Our company is like a chameleon and uses the

differences between the home and host countries in our advantage”. (Top

management team member, Firm 1)

36

In contrast to Firm 1, the other three companies (Firm 2, 3 and 4) highlight the

adaptation strategy as their key strategy. However, these three respondents indicate that

arbitrage advantages are also used in combination with their adaptation strategies. The CEO

of Firm 2 emphasizes the necessity to adapt to the local market, and to match the knowledge

provided by the company to the demand in the market and the clients. While the process of

adaptation is recognized as the success factor of the company, the firm is deliberately

combining this strategy with the arbitrage strategy.

The application of the adaptation strategy is also recognized in the case of Firm 3. The

CEO of the company states that the success of the company precisely lies in the adaptation of

the technology owned by the company to local needs in the host country. Because the Dutch

technology is well ahead of the technology compared to the foreign markets served, the firm

has to adapt its products to the requirements of the local markets. Next to the adaptation

strategy, the company also applies the arbitrage strategy. This is also the case in Firm 4,

which adopts the adaptation strategy as the key strategy of the firm, but also applies several

dimensions of the arbitrage strategy. A finer grained assessment of the particular types of

arbitrage strategies adopted by the surveyed companies will be examined in the following

sections when discussing the CAGE differences.

“We even mention our adaptation strategy in our marketing plan. Our success lies in

the adjustment of the technology. However, I think we will always look for a

combination”. (CEO, Firm 3)

Furthermore, all interviewees acknowledge that SMEs have to deal with several

limitations in their cross-border operations. Such limitations include, among others, limited

financial resources, a small firm size, and lack of management time. These restrictions make it

37

hard to achieve scale and scope economies, thus the application of an aggregation strategy

appears as an impossible venue for them. The CEO of Firm 3 states that because of their small

size SMEs tend to be more flexible. However, this flexibility is also restricted by limitations

in financial resources and lack of management time. For instance, Firm 3 set up locations in

Canada and Mexico at the same time. This required too much time, as well as too many

financial resources from the local organization in the Netherlands to support these setups. To

avoid these occurrences in the future, Firm 3 realized the need to make thoughtful decisions

when considering to internationalize.

These findings indicate support for propositions 1 and 2. All four companies apply

several dimensions of the arbitrage strategy. Three of the four surveyed companies adopt the

adaptation strategy as key strategy and complement this strategy with aspects of the arbitrage

strategy.

4.4.2. The influence of cultural arbitrage on SME internationalization

All four firms exploit differences in culture to create value. Especially the country-of-origin

effects are commonly used. Dutch horticultural companies are well known for their

knowledge, expertise, and experience in the industry. The four companies use their Dutch

origin in their marketing, and exploit this image to increase international sales. However, the

respondents from Firm 2 and Firm 3 indicate that using this image can also lead to an opposed

effect. For some countries the Dutch technology is too expensive, advanced and high-tech.

That is the reason why these two companies try to balance the use of the country-of-origin

effects.

“The Netherlands are known as the best of the best of the horticultural industry. We

want to let our customers know that we are a Dutch company with a good position in

the Dutch market”. (CEO, Firm 2)

38

The CEO of Firm 4 recognizes the exploitation of differences in national culture to

create new products. These advantages mainly come from differences between host countries,

and do not involve the country-of-origin effect. The firm gets inspired by foreign cultures, and

uses some elements of these cultures in other countries. Many concepts and products come

from Japan and are translated to fit in the European markets. The inspiration also comes from

other countries, such as Chile, Peru, France and Scandinavia. Firm 4 recently launched new

herb leaves in the European market. These herb leaves are commonly used in the Asian

cuisine. In sum, the findings regarding cultural arbitrage support our third proposition.

4.4.3. The influence of administrative arbitrage on SME internationalization

None of the companies exploit administrative differences between countries. This aspect of

arbitrage is seen as not important or as an impediment, rather than an advantage. The CEO of

Firm 3 sees legal, institutional, and political differences as barriers, which lead to higher

costs. The respondent of Firm 3 admitted there might be aspects that drive companies to

locate in certain countries, such as Brazil. These countries have high import tariffs to force

foreign companies to locate equity affiliates there, in order to bypass their high import tariffs.

However, CEO from Firm 3 recognizes that it takes considerable time and effort to get the

administrative and legal aspects right. Intercompany supply, transfer pricing, and other tax

receipts are also seen as barriers, rather than advantages. In addition, the Netherlands are the

top ranked country on the DHL Global Connectedness Index, which is an analysis of the state

of globalization around the world. This analysis shows that the Netherlands are considered as

one of the best places to do business in the world (DHL, 2012). Because the host countries are

lower ranked in the Global Connectedness Index than the Netherlands, the host countries are

less attractive to do business. This can be another explanation for the fact that the CEOs and

top management team member of the surveyed companies consider administrative differences

as irrelevant. Therefore, the fourth proposition is not supported.

39

“No, we do not exploit administrative differences. I see those differences more as

impediments, rather than advantages. Once you are in a country, you have to deal

with inter-company supply, transfer pricing, and different tax receipts. This is more a

barrier in our industry”. (CEO, Firm 3)

4.4.4. The influence of geographic arbitrage on SME internationalization

Geographical arbitrage seems to be an important factor in the internationalization of SMEs.

Especially the differences in climate are particularly important drivers for firms to produce

abroad. Firm 1 and Firm 4 use production locations in countries with favorable climates to

guarantee supply throughout the year, which is very important in the horticultural industry.

The respondent of Firm 1 states that their production facilities in Spain and Morocco are

crucial in order to guarantee the year round supply of snack vegetables. The CEO of Firm 4

also highlights the necessity of supply throughout the year and argues that this is the reason

for locating the production facility in Kenya. The CEO of Firm 2 states that the company

analyzes and assesses the environment and climate before it starts with its projects. The firm

uses this information and experience in other environments.

“The climate differences are extremely important, because they enable supply

throughout the year. We have a production location in Kenya because of the

favorable climate there”. (CEO, Firm 4)

Apart from the differences in climate, overcoming the physical remoteness between

countries is also an essential geographical factor. Firm 3 set up foreign locations to improve

the service provision in foreign markets. Because this firm produces technical products,

physical proximity to the customers is a requirement in order to provide after sales support.

Currently, the company has locations in Europe, North America, and Mexico. The CEO of the

40

firm states that opening a location in Asia might complement the current locations. The

opening of a location in Asia would guarantee a twenty-four hours a day attainability. The

findings indicate the support of the fifth proposition.

4.4.5. The influence of economic arbitrage on SME internationalization

Firm 1, 2, and 4 use economic differences in their advantage. For Firm 1 the low labor costs

are an important driver to produce in Spain, Morocco and Mexico. The US market is served

by the production facility in Mexico. In Mexico, the labor costs and production costs are

lower than in the US. The decision to produce in these countries is made because of the

availability of good partners, which are able to deliver good products with low labor costs.

This is also the case for Firm 4, which partly produces in Kenya because of the lower labor

costs. Another reason to produce in Kenya is the ability to use the logistics of the rose

growers in Africa, which leads to cheaper and faster transport.

The advantage of lower costs is also used by Firm 2. The company employs local

teams to reduce cost and be competitive in the local market. However, differences in labor

costs do not represent the most important drivers for Firm 2. Because Firm 2 is a supplier of

knowledge and expertise, the company mainly exploits differences in knowledge. An

important aspect of their international strategy is the replication of knowledge and experience

gained in one country in another foreign market. For instance, the company uses its

knowledge and experience regarding cultivation in subtropical climates gained from projects

in Taiwan in other countries with the same climate, such as India or Vietnam. The company

aims to be present in as much countries and regions as possible, so the knowledge and

expertise can be used and distributed from one country to another. The results regarding

economic arbitrage indicate the support of the sixth proposition.

41

“We want to be present in as many countries and regions as possible, so that we can

use and distribute the knowledge and expertise from one country to another”. (CEO,

Firm 2)

TABLE 4

Summary of findings

Supporting

case

Outcome Quotes

Proposition 1

The adoption of

arbitrage strategies

Firm 1 One of the firms adopts the arbitrage

strategy as the key strategy. The other

firms highlight the adoption of the

adaptation strategy in combination

with the use of certain aspects of the

arbitrage strategy.

“The arbitrage strategy

is the one that is closest

to our strategy”. (Top

management team

member, Firm 1)

Proposition 2

The adoption of a

combination of the

arbitrage strategy with

the adaptation strategy

Firm 2, Firm 3

and Firm 4

Three firms privilege the adaptation

strategy as their key strategy. The

arbitrage strategy is used to

complement the adaptation strategy.

“The adaptation strategy

is key. However, we also

use several differences

between countries”.

(CEO, Firm 4)

Proposition 3

Positive association

between cultural

differences and the scale

and scope of SME

internationalization

Firm 1, Firm 2,

Firm 3 and

Firm 4

All four firms exploit country-of-

origin effects to improve the

international sales. However, Firm 2

and 3 indicate that using the Dutch

horticultural image can also lead to an

opposed effect. Firm 4 uses

differences in culture for inspiration

to create new products.

“Many concepts and

products come from

Japan. These ideas are

translated to fit in the

European markets”.

(CEO, Firm 4)

Proposition 4

Positive association

between administrative

differences and the

scale and scope of SME

internationalization

None None of the firms exploit

administrative differences. The

administrative dimension of arbitrage

is seen as not important or as an

impediment, rather than an

advantage.

“We do not use

administrative

differences”. (CEO, Firm

3)

Proposition 5

Positive association

between geographical

differences and the

scale and scope of SME

internationalization

Firm 1, Firm 2,

Firm 3 and

Firm 4

Firm 1 and Firm 4 have production

locations in countries with favorable

climates to be able to supply

throughout the year. Firm 2 uses the

experience of working in a certain

region in other environments. Firm 3

set up foreign locations to improve

the service provision.

Geographic differences

are extremely important

for our company.

Especially differences in

climate, which make it

possible to supply

throughout the year (Top

management team

member, Firm 1)

Proposition 6

Positive association

between economic

differences and the

scale and scope of SME

internationalization

Firm 1, Firm 2

and Firm 4

For Firm 1 and Firm 4 low labor costs

are an important driver to produce

abroad. Firm 4 also chose its

production location to use the

existing logistics, which leads to

cheaper and faster transport. Firm 2

also exploits the advantage of lower

costs, to reach the same economic

standard as its clients. The knowledge

and experience that Firm 2 gained in

one country, is used in other

countries.

“We learn in one climate

and apply this knowledge

and expertise in another

climate”. (CEO, Firm 2)

TABLE 5

Supporting interview quotes

Firm 1 Firm 2 Firm 3 Firm 4

International

strategy

“I think we definitely use

differences between locations and

countries in our advantage. So, that

would be the arbitrage strategy”.

“I would say we apply the

adaptation strategy. Because we

are a supplier of knowledge, we

have to make sure that we adjust to

the local markets. Otherwise, we

will not be successful. On the other

side, we want to be active in many

countries and regions, so we can

use the knowledge of one country

in another. That would be more

like arbitrage”

“We put our bets on the adaptation

strategy because the markets we

operate in differ enormously. This

is our way to success. However, the

combination with arbitrage is

important”.

“I think adaptation is most

applicable. Only for our production

facility in Kenya we use the

advantages of cheap labor and the

favorable climate”.

Cultural arbitrage “We use the Dutch reputation as

horticultural country in our

marketing. We use it to show how

we think, how we act, how we

perform, and how we deliver on the

expectations”.

“We want to show the world that

we are a Dutch company, so we

can show we are the best of the

best. On the other side, we try to

avoid creating a large gap with our

customers”.

“Our Dutch origin and image is

very important. Especially in our

marketing we use ‘Holland

branding’. This ‘Holland branding’

is widely used by Dutch

horticultural companies”.

“From a cultural perspective, I

have a very special company. I get

a lot of inspiration from foreign

cultures. In return, I can inspire

these foreign cultures with

concepts stemming from other

countries”.

Administrative

arbitrage

“No, we will not take

administrative differences into

account. Potential administrative

advantages are not that important

for our company”.

“We do not use administrative

arbitrage. We do not pay attention

to those factors”.

“In our sector administrative

differences are more impediments,

rather than advantages”.

“Administrative differences are not

important. I do not see any

advantages”.

Geographic

arbitrage

“For our company it is important

to supply throughout the year. That

is the reason why we work together

with our partners in Spain and

Morocco”.

“Climate is very important and

decisive for our business. The first

thing we do when we start a

project, is analyzing and assess the

climate. We use this information

and knowledge in other

environments”.

“The geographical aspect is

definitely an influencing factor.

Especially for our service provision

is this an issue”.

“Due to the favorable climate, our

production facility in Kenya

guarantees supply throughout the

year.”

44

Economic arbitrage “We definitely use differences in

costs. The production costs in

Spain are lower than in the

Netherlands. In addition, we have

deliberately chosen to produce in

Mexico, instead of the United

States, due to the lower costs”.

“We want to be present in as many

countries and regions as possible,

so we can use and distribute the

knowledge and expertise from one

country to another”.

“Economic arbitrage is not

relevant for our company. There

are few benefits to be gained with

the use of local knowledge or low

labor costs”.

“One of the reasons we choose to

produce in Kenya are the lower

labor costs. Another reason is the

ability to use the logistics of the

rose growers in Africa, which leads

to cheaper and faster transport”.

5. DISCUSSION

The results of our study confirm that all four SMEs adopt arbitrage strategies when

internationalizing their activities. The findings bring forward that SMEs apply the adaptation

strategy as key, complemented by the arbitrage strategy. Therefore, the first and second

proposition are supported. Furthermore, the findings suggest that limitations in financial

resources and lack of management time make it difficult for SMEs to aim for scale and scope

economies, thus the application of the aggregation strategy. This outcome is in line with

existing literature (De Chiara & Minguzzi, 2002; De Maeseneire & Clayes, 2012).

The findings show that differences in culture are exploited by SMEs and influence the

scale and scope of SMEs’ internationalization. Especially the role of country-of-origin effects

in the scale and scope of internationalization is emphasized. The companies use their Dutch

origin in their marketing strategy to exploit the Dutch reputation to increase international

sales, and thus to increase the scale of SME internationalization. However, there is a turning

point for the country-of-origin effects. The findings indicate that when the differences in

culture are too large, the country-of-origin effects will be a barrier, rather than an incentive.

Differences in national culture can be an inspiration for SMEs. These differences can be used

to create new products or concepts, which can be a success in other countries. Moreover,

companies can be stimulated to go across borders to get inspired by other cultures and to

bring these cultures to other host countries. In contrast to the expectations, the administrative

dimension of arbitrage does not influence the scale and scope of SMEs’ internationalization.

Our findings indicate that legal, institutional, and political differences across countries are

more an impediment, rather than a driver for SMEs to internationalize. Although

administrative arbitrage can potentially play a major role in the internationalization path of

SMEs, our results confirm that this dimension is rarely used as a strategic tool, consistently

with previous literature (Ghemawat, 2003).

46

As proposed, geographical differences are an important driver of the scale and scope

of SME internationalization. Especially, the differences in climate are an essential motive to

produce abroad. SMEs search for locations with favorable climates to set up production

facilities, which make it possible to produce throughout the year. Another geographical factor

influencing the scope of SME internationalization is the improvement of after sales support.

The proposition about the influence of economic arbitrage on the scale and scope of

SME internationalization has found support within this research. The findings indicate that

economic differences play an important role in the scale and scope of SME

internationalization. Particularly, lower labor costs are an essential driver for SMEs to

internationalize. Other economic factors influencing the scale and scope of SME

internationalization are the availability of good logistics, and knowledge differentials. These

findings are aligned with existing literature (Dunning, 1998; Ghemawat, 2003).

The propositions and the results are presented in table 6.

Table 6

Results of the propositions

Proposition Result

Proposition 1 When SMEs cross borders, they adopt arbitrage strategies

Supported

Proposition 2 When SMEs cross borders and rely on a combination of

international strategies they adopt a combination or arbitrage

and adaptation strategies.

Supported

Proposition 3 SME’s ability to exploit cultural differences between the home

and host country is positively associated to the scale and scope

of SME’s internationalization.

Supported

Proposition 4 SME’s ability to exploit administrative differences between the

home and host country is positively associated to the scale and

scope of SME’s internationalization.

Not supported

Proposition 5 SME’s ability to exploit geographical differences between the

home and host country is positively associated to the scale and

scope of SME’s internationalization.

Supported

Proposition 6 SME’s ability to exploit economic differences between the

home and host country is positively associated to the scale and

scope of SME’s internationalization.

Supported

47

5.1. Scientific relevance and managerial implications

Academic researchers and international business theorists can learn from this study that the

arbitrage strategy can offer relatively sustainable resources of competitive advantage for

SMEs. The existing literature mainly focuses on the tradeoff between global integration and

local responsiveness, which respectively relates to aggregation and adaptation (Bartlett &

Goshal, 1989; Fayerweather, 1969; Ghemawat, 2008; Prahalad & Doz, 1987). In addition, in

the international business research the main focus has been on multinational enterprises (Bell

et al., 2004; Hagen et al., 2012; Ricard et al., 2004). This thesis contributes to international

business literature by focusing on the strategic intent behind SME internationalization, and by

extending the arbitrage concept and applying it to SMEs. Moreover, this study demonstrated

the application of the arbitrage strategy by SMEs and the results show a positive influence of

cultural, geographic and economic arbitrage on the scale and scope of SME

internationalization.

Entrepreneurs and managers of SMEs can learn from this research that arbitrage

strategies can be a source of value for their companies and can provide competitive

advantages. Another implication for entrepreneurs and managers consists of showing how the

cultural, administrative, geographical, and economic dimensions or arbitrage importantly

relate to the scale and scope of SME internationalization.

5.2. Limitations of research

Limitations of this research can mainly be found in the generalizability of the results. This

study is based on the analysis of a small number of cases. In order to assess the

generalizability it is necessary to test the results, which can be done through a quantitative

approach. Another limitation of this study is that it operates in a specific industry. The

investigated variables influencing the scale and scope of SME internationalization might be

different for SMEs in other industries. Moreover, the investigated companies are from the

48

same region. Therefore, it is necessary to repeat the research in other countries and areas to

control the possible existence of country-dependency. In addition, all firms were successful in

their internationalization. Carrying out the same research with unsuccessful cases of

internationalization would allow having a control group. This can also be used to understand

whether the strategic focus differs between successful and unsuccessful internationalization.

5.3. Suggestions for future research

The analysis that emerges from this study can serve as a starting point to understand the role

of arbitrage strategies in SMEs. Future research on this subject should investigate this

phenomenon on a larger scale and test the results through a quantitative approach. Moreover,

future research should investigate if the findings obtained remain valid for other industries

and other countries. Finally, a longitudinal approach would create greater understanding about

this phenomenon. This can be done by observing the internationalization process in different

points of time, by coming back to the companies from time to time, and by personally

pointing out the differences.

49

6. CONCLUSION

This research investigated the strategic intent behind SME internationalization and the

influence of the arbitrage dimensions on the scale and scope of SME internationalization.

Prior research has indicated that the international strategy of SMEs has been a neglected topic

in international business research, since the main focus has been on MNEs (Bell et al., 2004;

Hagen et al., 2012; Ricard et al., 2004). In addition, the arbitrage strategy is often undervalued

as a global strategy. However, arbitrage strategies can offer relatively sustainable resources of

competitive advantage (Ghemawat, 2003).

This research addressed the gap in the literature by conducting an in-depth multiple

case study of four Dutch horticultural enterprises. The goal of this research was to investigate

the role of the arbitrage strategy in SMEs and how the arbitrage dimensions influence the

scale and scope of SME internationalization.

The findings of this study suggest that arbitrage strategies play an important role in the

internationalization process of SMEs, and can be an important source of value. These

arbitrage strategies are combined with adaptation strategies. Aggregation strategies are not

adopted by SMEs because of limitations in financial resources and lack of management time,

which make it difficult to aim for scale and scope economies.

The empirical evidence suggests that SMEs exploit the cultural, geographical, and

economic dimensions of arbitrage. These three aspects of arbitrage influence on the scale and

scope of SME internationalization positively. On the contrary, administrative arbitrage does

not have a positive influence on the scale and scope of SME internationalization.

50

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APPENDIX A – Interview Protocol

Main question Probing question

Can you give me some background information on

your company? What industry do you operate in?

How long has the company been established?

What products/services does the company deal in?

Ownership structure of the business?

How many people does your business employ?

Is your firm categorized as a small or medium-sized

business?

Can you give me some background information on

your position within the company? What is your position within the firm?

How long have you been in this position?

How many years of experience do you have in

international operations?

Can you tell me something about the international

operations of your firm? When did the company first go abroad?

How many years had your business operated in the

domestic market before venturing abroad?

Which country did your firm first internationalize

to?

How many foreign markets do you currently

operate in?

How many world regions does your firm serve?

Which of these markets are most important to your

business?

How long has your firm been operating in these

markets?

How much of the total revenue is generated

abroad?

Why did you enter foreign markets? What was the primary motivation for your firm to

go abroad?

What did you find attractive of the host countries

that you selected?

How did you make the decision to enter specific

countries?

Through which mode have you entered foreign

markets?

(Exporting / alliance / wholly owned subsidiary)

Are there any particular reasons why you chose this

mode for a particular country?

Do you tend to use different modes of entry across

countries?

What is the most used mode of entry?

What mode of entry is used for the most important

market?

How would you define the international strategy of

your company? If you were to select among three alternatives:

adaptation, aggregation or arbitrage; which one

would you say is the closest to your strategy?

Would you agree if I say that SMEs mostly focus

on leveraging particular elements of distance across

countries that favor them and for which they can

establish arbitrage opportunities?

How does your firm exploit differences in culture? How does the firm use the country-of-origin

effects?

Are there any other ways in which differences in

culture are exploited?

66

Do you think cultural differences play a role in the

international expansion of your company? In which

sense?

How does your firm exploit administrative

differences? How does your firm make use of administrative

differences, such as tax differentials?

In which way does your firm exploit geographical

differences? Do you think that the geographic distance matters

to the international expansion of your company? In

which way?

How does your firm exploit economic differences? How does your firm exploit cost differences?

In what way does your firm make use of differences

in knowledge?

How does your firm exploit the availability of

complementary products, technologies or

infrastructures?

Which ones out of the four arbitrage dimensions

matter the most for the company?

How do the dimensions of arbitrage impact the scale

and scope of internationalization of your firm? Do you think that the exploitation of CAGE

differences have impacted the way in which the

company expanded abroad?

Do you perceive this as a strength?

How do you think this will affect the future foreign

expansion?

Do you think other elements of the CAGE model –

that have been less important until now – might

become more important in the future?

Do you think this is going to affect the scale and

scope of internationalization in the future?