Governance Mechanisms of Small and Medium Enterprise ... - SSRN

British Journal of Management, Vol. 21, 754–771 (2009) DOI: 10.1111/j.1467-8551.2008.00620.x

Governance Mechanisms of Small and Medium Enterprise International Partner Management Pavlos Dimitratos, Spyros Lioukas,1 Kevin I. N. Ibeh2 and Colin Wheeler3 Department of Management Science and Technology, Athens University of Economics and Business, Greece, and Department of Management, University of Glasgow, UK, 1Department of Management Science and Technology, Athens University of Economics and Business, Greece, 2Department of Marketing, University of Strathclyde, UK, and 3Portsmouth Business School, University of Portsmouth, UK Email: [email protected] We examine how small and medium enterprises manage their international partners across different market servicing modes, namely exporting, joint ventures and wholly owned subsidiaries. The international business literature has placed emphasis on soft issues of international partner management (such as trust, cultural sensitivity etc.) in each mode category independently. Since network arrangements and knowledge sharing are involved in all these modes, we contribute to the literature by providing evidence on the mechanisms of international partner management across market modes. Specifically, based on agency and knowledge-based theories, we seek to understand the extent to which small and medium enterprises assign rights to make decisions to partners abroad, and the types of incentives and performance monitoring schemes they use. These mechanisms are drawn from agency theory. In-depth case studies were carried out in 14 Greek small firms that employed different modes to collaborate with their partners abroad. Seven of these firms had high levels of international performance while the other seven had low levels. We identify two distinguishable combinations of governance mechanisms being implemented by these two sets of firms: high performers pursue situational decision-making with outcome-oriented incentives/performance monitoring schemes, whereas low performers pursue centralized decision-making with behaviour-oriented incentives/performance monitoring schemes.

The theme under examination How firms can effectively manage their international partners is a theme that has considerable importance for research and management practice since successful orchestration of network partners appears to lead to enhanced performance (Hoffmann, 2007; Hung, 2002). However, two issues on which research has potential limitations are, first, the prior emphasis on primarily ‘soft’ aspects and, second, the separate investigation of foreign market servicing mode categories. To illustrate, the international business literature has predominantly dealt with soft issues such as trust, cultural sensitivity, cultural

affinity and satisfaction, which have to exist between international partners. These issues tend to be examined in isolation in different foreign market servicing mode categories that can broadly be distinguished into exporting modes, international joint ventures and multinational wholly owned subsidiaries. In general, past research findings suggest that the formation of a cooperative climate through development of trust, support and cultural sensitivity between the firm and its collaborators enhances export performance (Wheeler, Ibeh and Dimitratos, 2008; Zou and Stan, 1998) and joint venture performance (Currall and Inkpen, 2002; Sirmon and Lane, 2004) and decreases subsidiary opportunism and

r 2009 British Academy of Management. Published by Blackwell Publishing Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA, 02148, USA.

Governance Mechanisms of International Partner Management information asymmetries between headquarters and subsidiaries (Iwata, Kurokawa and Fujisue, 2006; Kaufmann and Reossing, 2005). Hence, research appears to have largely disregarded ‘mechanical’ aspects of international partner management mechanisms (IPMMs) linked to decision rights, incentives and performance monitoring (Doz and Hamel, 1998; Kumar and Seth, 1998). These three mechanisms are examined in the current study since they are fundamental to an effective governance structure (Denis, Denis and Sarin, 1997) in international activities. Also, these aspects of IPMMs form key notions of interest in the agency theory that serves as an important theoretical base in the current paper. The seeming research deficiency pertaining to these three mechanisms is also underscored in studies of each of the three mode categories. Specifically, in literature reviews, Leonidou (1998) and Wheeler, Ibeh and Dimitratos (2008) assert that governance procedures concerning management of export collaborators should receive greater attention. Similarly, inconsistent findings are obtained on the degree of optimal decision-making discretion that should be granted to international joint venture partners and the level of monitoring to use while collaborating with them (Killing, 1983; Ng, Lau and Nyaw, 2007). In addition, there is no agreement in the literature of multinational subsidiaries on the degree of decision-making rights that should rest with subsidiaries, the type of incentives provided and the form of monitoring that should be used with them (Birkinshaw and Hood, 1998; Paterson and Brock, 2002). The previous examination of soft management aspects in the three mode categories separately is important for understanding them in the context of specific international strategies. Nevertheless, such an unconnected investigation appears to provide a fractional portrayal of IPMMs because governance features may present commonalities across all market servicing mode categories. Network arrangements and knowledge sharing are involved in all foreign modes, regardless of whether these refer to managing an export agent or intermediary, a joint venture partner or a foreign subsidiary. The corollary of this argument is the fact that small and medium enterprises (SMEs), which are the focus of analysis in this paper, can regard all foreign market servicing modes as part of a single international strategy r 2009 British Academy of Management.

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(Baird, Lyles and Orris, 1994). In a related vein, both equity and non-equity alliances involving SMEs have similar characteristics in terms of contractual arrangements (such as examination and audit of records, arbitration clauses etc.) related to corporate governance aspects (Reuer, Arinˇo and Mellewigt, 2006). How small firms manage their partners abroad regardless of the mode used is a theme that has also significant managerial interest nowadays. There are considerable changes prompted by globalization on SME governance system mechanisms that aim at facilitating increased foreign market entry and cross-border alliances (OECD, 2002). Greek small firms are investigated in the current study. The examination of Greece as the home base of internationalized SMEs offers evidence on the theme of IPMMs for firms originating from a small country with a dynamic economy. Researchers (Katsikeas, Deng and Wortzel, 1997; Leonidou, Katsikeas and Samiee, 2002) stress the significance of examining international behaviour of SMEs from countries with advancing economies. The vibrant Greek economy, which is SME-dominated, is anticipated to continue to grow at rates higher than the EU average (EIU, 2007; OECD, 2007). Moreover, the examination of SMEs is important since they constitute the vast majority of firms in all modern economies, contribute significantly to employment and are increasingly involved in international activities. From a research perspective, Hofer and Schendel (1978) additionally posit that the organizational environment of small firms forms the context in which fundamental management tasks can be examined. Consequently, our research questions in the current study are, first, what are the characteristics of successful governance mechanisms of small firm international partner management referring to decision rights, incentives and performance monitoring; and, second, whether these governance mechanisms are recurring across alternative foreign market servicing modes. In-depth case studies were conducted on 14 Greek small firms that employed different modes to collaborate with their partners abroad. In order to draw possible comparisons across IPMMs, seven of these firms had high international performance whereas the other seven had low international performance. The findings of this study will be valuable for both researchers and management practitioners

756 as they provide insights into under-explored questions such as the following. In order for effective IPMMs to occur should internationalized small firms or their partners abroad make decisions? What types of incentives and performance monitoring schemes work best? Do these effective IPMMs exist across foreign market mode categories? In order to examine governance mechanisms linked to SME international partners, we employ the agency and knowledge-based theories that are relevant to the investigated theme. We define ‘focal firms’ as those international SMEs that are based in the home country and expand abroad through any type of market servicing mode. The paper is organized as follows. In the second section, we discuss the research background drawing from agency and knowledgebased theories as applied in the international business context. In the third section, we describe methodological aspects of the study. In the fourth section, we provide information on the individual firms examined and discuss the findings on interrelated IPMMs of decision rights, incentives and performance monitoring. The concluding section provides a summary of the paper, implications for research and management as well as ideas for further study.

Research background The agency theory (Fama, 1980; Fama and Jensen, 1983; Jensen and Meckling, 1976) would suggest that the internationalized firm (the principal) seeks to achieve its goals in foreign markets, and thus has to delegate responsibilities to export agents/intermediaries, joint venture partners or subsidiaries (the agents). This theory posits that because of partners’ differing goals and attitudes towards risk, collaborating parties may prefer dissimilar courses of action. Hence, the principal has to make sure that the agent behaves in its (the principal’s) best interests (Shapiro, 2005). The behaviour concerning the two parties is agreed in the ‘contract’ between the parties, whereby the decision rights, incentives and performance monitoring schemes concerning the agent are specified. In particular, alignment of interests between parties is achieved through assigning decision rights that suit the objectives of the principal; structuring agent incentives such

P. Dimitratos et al. that partner interests are aligned; and implementing performance monitoring systems that match partner objectives. We discuss each of these three mechanisms below. Agency theory has been used in international business in studies that have examined activities of firms that export (e.g. Karunaratna and Johnson, 1997), form joint ventures (e.g. Peng, 2000) or expand abroad through their subsidiaries (e.g. Roth and O’Donnell, 1996). However, these studies do not appear to deal with the three governance mechanisms of our research questions. Eisenhardt (1989) proposes that agency theory research would better focus on governance mechanisms in which cooperative rather than solely rivalistic principal–agent behaviour is involved. Furthermore, recently scholars (Reuer and Ragozzino, 2006; Uhlaner, Wright and Huse, 2007) called for the use of agency theory along with other theoretical lenses in order to examine network organizational phenomena. These are suggestions that we take up in the current study. Another research perspective that is of value to the investigated theme is the knowledge-based theory. According to it, a key resource that is shared between networks of small firms is knowledge (Zahra and Filatotchev, 2004). Firms are repositories of knowledge whose heterogeneous knowledge bases constitute major determinants of sustainable competitive advantage. As Grant puts it (1996b, p. 375), ‘the primary role of the firm, and the essence of organizational capability, is the integration of knowledge’. Because firms constitute social communities of knowledge, they may exploit knowledge resources within and outside firm boundaries, and search for complementary skills and expertise of network partners (Grant, 1996a; Kogut and Zander, 1996). Nevertheless, the appropriate sharing of knowledge in SME networks involves the formation of suitable governance mechanisms, which is a rather under-explored issue that deserves research attention (Zahra and Filatotchev, 2004). We seek to provide evidence on this theme in the present paper. The knowledge-based view has recently been used in studies examining firms that export (e.g. Morgan et al., 2003), form joint ventures (e.g. Inkpen and Dinur, 1998) or internationalize through their own subsidiaries (e.g. Kurokawa, Iwata and Roberts, 2007). However, it has not been used in the international business field in r 2009 British Academy of Management.

Governance Mechanisms of International Partner Management studies explicitly dealing with the three IPMM aspects that form the focus of enquiry in the current research. In this paper, we combine the agency and knowledge-based theories inasmuch as they can provide a more holistic view into the examined issue of governance mechanisms of SME international partner management. Such a combination is in accordance with the practice of very recent studies that examine organizational governance aspects (Connelly et al., 2007; King and Marks, 2008; Tiwana and Bush, 2007). We now turn discussion to the governance mechanism themes, notably decision rights, incentives and performance monitoring. Locus of decision rights Decision rights in the agreement between the focal firm and its partners refer to the set of rules for decision-making concerning long-term objectives and strategy (Fama and Jensen, 1983). These decision-making rules refer not only to operational decisions but also to decisions that are more strategic in nature within the context of agreed objectives. Such decisions may be the choice as to which product lines an exporting focal firm will market in the foreign market, which product markets of the foreign country the joint venture will target, or what types of capital expenditures the multinational focal firm will approve abroad. This decision-making issue is important inasmuch as potential disputes over which partner has the right to make these decisions can precipitate conflict between partners. Decision-making rights may rest with the focal firm, allowing a centralized style, or with both the focal firm and its partners, allowing a joint decision-making style. The agency theory would suggest that the principal specifies the terms of the agency contract, especially on the critical issue of deciding on the long-term objectives and strategy of the internationalization venture (Brunninge, Nordqvist and Wiklund, 2007; Eisenhardt, 1989). Since internationalization exacerbates agency costs by making monitoring of partners more difficult, the focal firm is likely to seek to maintain decision rights within its organization (cf. Carpenter, Pollock and Leary, 2003). This prediction would be supported by the fact that a centralized mode of decision-making is generally followed in SMEs, whereby the owners typically r 2009 British Academy of Management.

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wish to maintain control of their firms (OECD, 1997; Roth, 1992). These firms are usually familyowned, which is an additional factor that would probably contribute to the centralized decisionmaking style of IPMMs (Harris and Ogbonna, 2007), corroborating the rationale of the agency perspective. Nonetheless, the knowledge-based lens would favour the view that partners combine separate knowledge bases for the purpose of knowledge accessing (Grant and Baden-Fuller, 2004). In other words, international partners maintain their decision-making autonomy in potentially long-term network formations. It follows that, in contrast to the agency theory, the knowledgebased perspective would forecast that decision rights rest with the international partner that is most knowledgeable on a specific issue (cf. Zahra, Neubaum and Naldi, 2007). This line of reasoning is to some extent also strengthened by international business studies (which do not necessarily embrace a knowledge-based standpoint in an outright way) that provide evidence suggesting that international partners are often involved in the decision-making process of international activities. Analytically, export partners may offer support to focal firms in the form of business counselling, market research assistance or cooperative advertising and financing, rendering the export decision-making process a joint one (Albaum, Duerr and Strandskov, 2005; Leonidou, Katsikeas and Piercy, 1998). Also, focal firms engaged in international ventures can look forward to their partners’ local market knowledge and problem solving expertise, when appropriate (Lee and Beamish, 1995; Lorenzoni and Baden-Fuller, 1995). In a study espousing the knowledge-based view, Tsang, Nguyen and Erramilli (2004) additionally find that the amount of knowledge an international joint venture acquires from its foreign partner is positively related to the venture’s performance. Moreover, research on multinational subsidiaries stresses the increasingly important role of subsidiaries, bringing to light evidence on an emerging era of the multinational corporation evolution, namely the ‘liberalism era’ (Birkinshaw and Hood, 2001; Hedlund, 1994). In this period, foreign affiliates are delegated considerable decision-making power and responsibility, and implement their own subsidiary strategy.

758 Consequently, since foreign partners possess specific knowledge on international market idiosyncrasies, the knowledge-based view approves the expertise-based decision-making model, at odds with the agency theory that favours the centralized model. In addition, although the evidence is not conclusive, it seems that performance is a factor that would be interesting to incorporate in the present research inasmuch as findings of some studies (Birkinshaw and Hood, 2001; Lee and Beamish, 1995; Leonidou, Katsikeas and Piercy, 1998; Tsang, Nguyen and Erramilli, 2004) associate the two decision-making models with performance of the focal firm (or the alliance). Nevertheless, since the performance aspect has not been investigated systematically, we cannot draw a proposition on which of the two decision-making styles is connected to superior performance. Types of incentives and performance monitoring Incentives pertain to the kinds of motivation schemes that the focal firm provides to its international partners in order for them to carry out the agreed course of action (Jensen and Meckling, 1976). According to the agency perspective, fixed-salary compensation and fixed commission constitute behaviour-oriented incentives, while variable-commission schemes and non-monetary benefits such as bestowal of recognition or praise are outcome-oriented incentives (Anderson and Oliver, 1987). The performance monitoring schemes that the principal employs for its partner’s activities can again take the form of either behaviour- or outcome-oriented type (Fama and Jensen, 1983). In the former, agents are controlled more closely for their performance, are subject to considerable direction and are evaluated on an input basis by subjective and complex measures mainly in the areas of budgeting processes and strategic business plans. In the latter, agents are monitored less frequently for their performance, are offered little direction and are evaluated on an outcome basis by objective and simple measures mainly in the areas of operating expenditures and sales figures (Anderson and Oliver, 1987; O’Donnell, 2000). The agency and knowledge-based views offer incompatible suggestions on the theme of whether behaviour- or outcome-oriented incentives and monitoring schemes would work best in SME IPMMs. To elaborate, in favour of out-

P. Dimitratos et al. come-oriented schemes, the agency theory would posit that when the monitoring ability of the principal is low, outcome-oriented behaviour will be preferred (Eisenhardt, 1989). This appears to hold in the case of SME internationalization since it typically takes place over an extended period during which the focal small firm is unlikely to be able to control effectively the complex activities of its partners in foreign markets (Sanders and Carpenter, 1998). The knowledge-based view underscores the dissimilar knowledge bases of the parties. On the one hand, the focal firm underlines its own knowledge base that is likely to be strongly affected by its local industry and context, and reflect location-specific advantages of its home base (Porter, 1990). On the other hand, the focal firm’s partners in exporting, joint venture and subsidiary ventures have intimate knowledge of foreign market conditions. These dissimilar knowledge bases are potentially sources of conflict that can produce goal discord between partners over the objectives of the international alliance (Zahra, Neubaum and Naldi, 2007). When the potential goal conflict between partners is high, outcome-oriented behaviour will be preferred (Shapiro, 2005). However, both theories would also suggest behaviour-oriented mechanisms for other aspects of the investigated theme of internationalized small firm governance mechanisms. To illustrate, focal firms embark on international activities possibly facing significant uncertainty concerning the outcomes of their ventures. This is due to the fact that internationalization can be a process likely to beget considerable volatility in organizational performance (Buckley, Dunning and Pearce, 1977; Geringer, Beamish and daCosta, 1989). The agency theory suggests that this outcome uncertainty involves risk that is costly to shift to the agents abroad, hence favouring behaviour-oriented schemes (Eisenhardt, 1989). From a knowledge-based viewpoint, internationalization is usually a prolonged endeavour in which the focal firm will learn about its partner and acquire access to its knowledge domain (cf. Lambert, 1983). If this happens, the focal firm will be able to assess its foreign partner’s behaviour more readily and behaviour-oriented mechanisms are preferred (Zahra, 1996). It is also interesting to note that there is no agreement in the international business literature r 2009 British Academy of Management.

Governance Mechanisms of International Partner Management on which of the two incentive and performance monitoring types is associated with superior performance of the focal firm. Adopting the agency lens, Bello and Gilliland (1997) find that outcome-oriented monitoring is related to export performance, unlike behaviour-oriented monitoring that has no performance effect. In agreement with this evidence, ‘soft’ (outcome type) aspects associated with relationship building are seemingly more important for export performance than their ‘hard’ (behaviour type) counterparts (Piercy, Katsikeas and Cravens, 1997). Challenging these findings, Munro and Beamish (1987) observe that behaviour type incentives have a seemingly positive impact on export performance. In the international joint venture area, Fryxell, Dooley and Vryza (2002) find that focal firms with formal (behaviour type) controls in international partnerships suffer from low performance. On the other hand, Brouthers and Bamossy (2006) note that successful international joint ventures include both formal and social (outcome type) control mechanisms. Furthermore, in the multinational subsidiary literature, Chang and Taylor (1999) support the notion that, as the degree of ownership by the parent firm increases, the degree of outcome control rises as well. Additionally, espousing the agency view, Roth and O’Donnell (1996) find that the provision of (both behaviour and outcome) incentives positively affects subsidiary effectiveness. Therefore, based on the agency and knowledge-based theories as well as the evidence from the international business literature, it seems that there is no agreement as to the nature of (behaviour- or outcome-oriented) incentives and performance monitoring schemes that best applies to SME IPMMs across different market modes.

Methodology The case study approach A case study methodology was employed based on internationalized small Greek manufacturing firms. Such a qualitative methodology can offer a holistic view of the issue under investigation by providing retrospective in-depth insights into internationalized SME governance mechanisms. Specifically, the use of a case study is appropriate given that the current research involves an r 2009 British Academy of Management.

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exploratory examination into this under-investigated IPMM theme across dissimilar foreign modes. Hence, the objective in the present study is of a theory building nature and the case study research is the recommended method to employ (Eisenhardt and Graebner, 2007). Additionally, it may be likely that the mechanisms of decision rights, incentives and performance monitoring entail different meanings for managers who use each of the three foreign market servicing mode categories. Thus, open-ended interviews that are linked to case study methodology are favoured (Gummesson, 2003). The selection of the case study firms Investigated firms had to meet the following five criteria in order to be included in this research. They should (1) be independent Greek firms; (2) employ fewer than 250 employees and have an annual turnover of less that 40 million euros, which are the cut-off points used by the EU to define an SME; (3) be manufacturing firms because internationalized Greek products traditionally include manufactured goods rather than services; (4) have outward international activities; and (5) be either high or low performers as regards international performance in the recent four-year period. In relation to the last criterion, high-performing firms were those SMEs that enjoyed performance considerably superior to competition, which was determined by (a) a growth of more than 35% in (the absolute volume of) international sales during the four-year period – this 35% cut-off point was higher than the 30% threshold that was reported to be the average growth figure of international sales of Greek firms (Athens University of Economics and Business, 2002); and (b) an international sales ratio (international sales over total enterprise sales) of at least 50% in each of the four years during the same period – this 50% cut-off point was selected in order to examine firms that assigned primary significance to international markets. In order to corroborate the above two indicators, we also sought for (c) high perceived managers’ satisfaction. In particular, we asked managers to what extent they were satisfied during the four-year period with their international performance in relation to four areas: the average market share they achieved in their key foreign countries; the average return on

760 investment they had realized abroad; the international profits they had accomplished; and the specific objectives they had set in the foreign marketplace. Following managers’ responses, these objectives referred to entering particular foreign product markets or new countries; outdoing major competitors’ performance; servicing key foreign clients; or combining any of these targets. In contrast, in the low-performing group we selected SMEs that had performance considerably inferior to competition. By analogy with the criteria above, this meant (a) a growth of not more than 25% in (the absolute volume of) international sales during the same four-year period; (b) an international sales ratio of not more than 20% in each of the four years during this period in order to investigate firms whose international presence was of secondary importance; and (c) a low perceived satisfaction with international performance with reference to the aforementioned four areas. The rationale behind selecting SMEs with high and low levels of international performance was to acquire information-rich cases in order to study in depth the features of effective IPMMs. Information-rich cases are characterized as those from which the researcher can learn a great deal about the phenomenon of interest. As outlined in the research background section, international performance appears to be a factor likely to affect governance mechanisms of SME foreign activities. Consequently, we sought to examine to what degree high performers implemented different governance mechanisms compared with low performers; and, if they did, in which areas would their dissimilarities lie. Stratified purposeful sampling was used by investigating seven firms with high and seven with low international performance. In each of these two groups, we examined two firms that employed export agents and intermediaries; three firms that used joint ventures abroad; and two firms that expanded through their wholly owned subsidiaries. This qualitative design was designed to capture a common core theme as regards IPMMs across the three modes, yet identify also variations between them if they existed (Patton, 2002). The decision to terminate examination at 14 cases stemmed from the principle of theoretical saturation, in that no substantial further insights seemed to emerge from the addition of new firms.

P. Dimitratos et al. The data collection The data collection methods involved comprehensive interviews with knowledgeable top-level managers of the firms; examination of enterprise documents and archival data; and observation. Such a triangulation of methods contributed to acquisition of a comprehensive view and generation of valid interpretation of organizational phenomena. The interviews were based on an interview guide, which addressed key issues on IPMMs that focal firms applied. The interview guide was based on the agency and knowledgebased theories and pertained to the research questions of the present study, namely how were decision rights on long-term objectives and strategy allocated between partners, and what kinds of incentives and performance monitoring schemes were used. We also sought to investigate to what extent these governance mechanisms could be relevant to SME international activities across modes. Specifically, the open-ended questions of the interview guide were how focal SMEs cooperated with partners abroad; made decisions on their internationalization ventures; shared/gained information/knowledge on internationalization ventures; (dis)agreed on courses of action; provided incentives/motivation to their partners; and controlled them. These were the basic probes included in the interview guide. Apart from the basic probes, the guide included the explanatory and focus probes (Easterby-Smith, Thorpe and Lowe, 1991): the former category assisted in clarifying incomplete responses, while the latter category facilitated in refining specific information on a specific question. Following the critical incident technique, respondents were also asked to elaborate on critical events concerning IPMMs, as well as major facilitators and inhibitors to management of their international partners (cf. Plakoyiannaki, 2005; Schein, 1992). According to Roos (2002), the information stored in critical incidents assists researchers in discovering frames of reference and perceptions of respondents in relation to the phenomenon examined. In essence, these critical incidents served as milestones for revealing thoughts and viewpoints regarding governance mechanisms in the foreign marketplace. Interviewees were asked to discuss management practices in the period not extending three r 2009 British Academy of Management.

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Governance Mechanisms of International Partner Management years prior to the interview date, whenever possible. This fact along with the analysis of documents/archival data and observation, which checked evidence collected through interviews, assisted significantly in tackling possible respondent recall bias and post hoc rationalization. These practices are in line with research methodology suggestions (Huber and Power, 1985; Oppenheim, 2000). Data collection was carried out in four stages. In the first stage, an in-depth interview was conducted with the best-informed manager of the international activities of the SME. All interviews were transcribed. To ensure that no misinterpretations took place, the transcript of each interview was sent back to this manager a few days after the meeting. In the second stage, a second interview with the same respondent was organized to illuminate the points that were unclear during the first interview. In addition, this respondent was asked to identify another manager of the firm also involved in the management of international partners. This was considered essential because management of international activities and partners is usually the responsibility of more than one person. Therefore, in the third stage, a second interviewee was asked to answer the same questions. This interview was again transcribed. Each of the interviews lasted between one-and-a-half and two hours. All interviews took place on the premises of the firms. In the fourth stage, investigation of enterprise documents and archival data was undertaken.

Also, observational notes were kept throughout the duration of the data collection process. Observation assisted us to experience and record the daily reality of investigated SMEs and their setting. All impressions and insights from the fieldwork were transformed into notes on the same day that the observation took place (Eisenhardt and Bourgeois, 1988). The respondents were managers in each firm, who were the most knowledgeable persons on internationalization and management of international partners. Table 1 provides a list of the two interview respondents in each firm. In this table, the first seven firms (A, B, C, D, E, F and G) are high-performing SMEs, while the remaining seven (Alpha, Beta, Gamma, Delta, Epsilon, Zeta, Eta) are low-performing enterprises. Usually interviewees were ‘export’ or ‘international operations’ managers, but also functional area (marketing, sales, production, finance, information technology) managers, or even CEOs and owners of the firms. The whole data collection process lasted ten months. The data collection activities resulted in the completion of a retrievable database including 80 pages of structured field notes, 18 audiotapes, 240 pages of singlespaced interview transcripts, and other related documents such as trade press and archival data. The data analysis Collected data were content analysed. Specifically, the data analysis was based on the constant

Table 1. List of interview respondents Firm

Number of respondents

A B C D E F G Alpha Beta Gamma Delta Epsilon Zeta Eta

2 2 2 2 2 2 2 2 2 2 2 2 2 2

a

Managerial position Managing director; International operations Export; CEO Export; Marketing International operations; Information technology Managing director; Sales International operations; Marketing Managing director; International operations Finance; Export Sales; Production Owner; Finance CEO; Export Managing director; International operations International operations; Marketing CEO; Information technology

Male. Female.

b

r 2009 British Academy of Management.

Tenure (years) 13 15 8 12 22 15 20 6 10 22 23 17 7 30

10 30 11 4 5 4 15 10 15 5 10 18 15 9

Sex Ma M M M F M M M F F M M F M

M Fb M M F M M M M M M M F M

762 comparative analysis method (Dyer and Nobeoka, 2000). According to this method, as our research proceeded and new data were collected, they were constantly compared to prior data and theory in terms of categories and concepts. Numerous iterations were involved in this ‘systematic combining’ process whereby the data from the case study firms were continuously matched with theory (Dubois and Gadde, 2002). This process was reiterated until theoretical saturation was reached, i.e. until no new categories/concepts were generated out of the association of more recent data with prior data and theory. The data were systematically put into categories by means of the NUDIST software index. To sum up, in order to ensure the quality of the case study findings, we used various practices recommended in the literature in order to enhance the validity and reliability of the case study evidence. These practices involved data and between-method triangulation to describe the examined governance mechanism theme from different perspectives (Yin, 1989). Data triangulation is based on the collection and comparison of data from two respondents within each firm and different functional areas (Denzin, 1989). Between-method triangulation was based on the use of multiple methods (interviews, examination of enterprise documents and archival data, and observation). Other practices we employed to ensure the quality of the findings included the development of a retrievable case study database (Yin, 1989); the use of theory to structure the interview guide (Oppenheim, 2000); the circulation of enterprise case study reports and transcripts to the interviewees within each SME (Healy and Perry, 2000); and the discussion of the index system generated from the process of data analysis with knowledgeable scholars (Yin, 1989).

Presentation and discussion of findings The firms investigated The information concerning the industrial sector, size, international experience, international performance and market servicing modes for the 14 focal firms appear in Table 2. Investigated firms belong to the plastics, garments, textiles, chemical, food, beverages, electronics and metal products sectors. Although they are all SMEs, they vary in size as measured by the number of

P. Dimitratos et al. employees (from 30 to 245) and level of sales (from 0.5 to 32 million euros). None the less, apart from three smaller firms (B, E and Delta), the firms examined are of medium size. The firms of this study are also family-owned, which is a characteristic commonly encountered among SMEs. They possess considerable international experience of at least 11 years and market their products in up to 18 foreign countries. There is a marked difference as far as performance is concerned between high and low performers. As regards the former group, their international sales increased at a rate of at least 36% during a four-year period, while their average annual international sales ratio ranged from 57% to 100% in the same time. Similarly, investigated managers of high-performing firms were very content with international performance as captured through their perceived satisfaction. In contrast, during this same four-year period low performers experienced a change in their international sales from 15% to –10% and an average annual international sales ratio of not more than 16%. Their overall perceived satisfaction with international performance was low or non-existent. All managers interviewed view IPMMs as key to their international business activities and apparently assign the same meaning to governance mechanisms of decision rights, incentives and performance monitoring, irrespective of the foreign market servicing mode they employ. Their firms have initiated international business activities after acquiring significant experience in the domestic market. Thus, they are gradual internationalizers rather than ‘international new ventures’ (McDougall, 1989). They operate in traditional manufacturing industries, in which typically Greek internationalized products are found. In other words, no firms in knowledgeintensive sectors are analysed in this study. Furthermore, investigated firms are predominantly market seekers because their primary motive is to establish or increase market share in international markets. The firms in this research rather infrequently stated that in their prior international activities they sought access to low-cost inputs, economies of scale, diversification of risk or assets of foreign companies. Hence, they do not fall into the categories of resource, efficiency or strategic asset seeking firms (Dunning, 1993). r 2009 British Academy of Management.

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Governance Mechanisms of International Partner Management Table 2. Details of investigated firms Firm

A B C D E F G Alpha Beta Gamma Delta Epsilon Zeta Eta

Industrial Number Annual Number Number Intl sales sector of sales of years of foreign growth employees (million h) abroad countries over four years Plastics Garments Textiles Chemical Garments Food Textiles Beverages Electronics Garments Plastics Metal prod. Textiles Food

170 30 245 140 45 240 130 100 145 183 40 228 210 80

22.97 0.55 27.78 28.94 1.22 31.62 19.67 20.58 12.43 18.15 4.14 10.03 15.68 27.56

11 35 16 12 32 12 22 18 20 16 11 31 22 27

7 5 10 4 4 18 7 4 11 9 5 10 5 8

70% 40% 42% 58% 44% 65% 36% 15% 12% 5% 10% 0% 2% 4%

Ave annual Perceived intl sales international ratio over performance four years 80% 92% 95% 74% 100% 57% 88% 10% 16% 12% 6% 12% 7% 5%

    & & & | | |

   

International market servicing mode(s) MEJV,a EXPb intermed. EXP agents EXP intermediaries MEJV, EXP intermed. MEJV, EXP agents WOS,c EXP agents WOS, EXP intermed. WOS, EXP agents EXP intermediaries MEJV, EXP agents EXP agents MEJV, EXP intermed. MEJV, EXP intermed. WOS, EXP intermed.

 Satisfaction exceptionally present; & satisfaction noticeably present; | satisfaction weakly present; 

satisfaction absent.

a

Majority equity joint venture. Exporting through. c Wholly owned subsidiary. b

In general, although investigated firms employ different foreign market servicing modes, they share numerous similarities in terms of attention paid to IPMMs and firm characteristics related to internationalization, including late entry to foreign markets, activity in traditional industries and market seeking motivation abroad. These significant similarities suggest that examined firms are a quite homogeneous body of focal firms. Consequently, this facilitates the examination for recurring mechanisms of IPMMs referring to decision rights, incentives and performance monitoring schemes across different modes. Table 3 presents a case-ordered descriptive matrix (Miles and Huberman, 1994) with the evidence in relation to management mechanisms of decision rights, incentives and performance monitoring in each firm. Each type of governance mechanism (centralized or situational decisionmaking; behaviour- or outcome-oriented incentives/performance monitoring) is present to high, intermediate or low degrees. Two distinct types of IPMMs emerge. Situational decision-making at high or intermediate degrees is associated with high-performing firms, whereas centralized decision-making at again high or intermediate levels accompanies low-performing firms. Besides, outcome-oriented mechanisms of generally interr 2009 British Academy of Management.

mediate degrees refer to IPMMs of high performers, while behaviour-oriented mechanisms of all degrees are associated with IPMMs of low performers. We elaborate on these findings below. IPMMs Locus of decision rights. The findings of Table 3 suggest that for the high-performing group of firms ultimate decision-making discretion regarding activities abroad rests with the partner that possesses specific knowledge on the particular situation. This situational or expertise-based decision-making mode is favoured because neither the focal firm nor its international partners have perfect knowledge on all issues linked to foreign activities. Viewed in this light, such a collaboration is particularly facilitated once the knowledge areas of each partner are delineated and agreed upon. Nevertheless, managers of high-performing SMEs emphasize that getting to know the sphere of expertise of each partner involves significant efforts and amounts of time. These findings suggest that the situational approach based on knowledge possessed by each partner is associated with effective IPMMs and can enhance international performance, irrespective of the market servicing mode.

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Table 3. Governance mechanisms of international partner management in investigated firms Firm

Type of decision-making mode Centralized

A B C D E F G Alpha Beta Gamma Delta Epsilon Zeta Eta



Situational

  &  &   & & &

   

Type of incentives

Type of performance monitoring

Behaviour-oriented Outcome-oriented

Behaviour-oriented Outcome-oriented

& & & & & | & | & &



& &



& & & | | &

| & | & | &





Mechanism present to a high degree; & mechanism present to an intermediate degree; | mechanism present to a low degree.

The following quotes by high performers are illustrative of this approach. We don’t expect export agents to carry out ‘Greek’ decisions in relation to warehousing, storage and transportation abroad. We seek their specificmarket knowledge on these areas and support them in making these decisions. (Export manager, highperforming company B) We decide finally on what we know best and our Cypriot partners decide finally on what they know best. Specialization in knowledge makes decisions easier. (Managing director, high-performing company E)

Therefore, which partner possesses specialized knowledge rather than who the principal is seems to be the determining criterion in relation to allocation of decision rights for high performers. The findings of this study for high-performing SMEs are in accord with the knowledge-based view that backs the expertise-based mode of decision-making. In particular, the evidence from the current research confirms the premise that firms enter cooperative arrangements in order to access knowledge from each other (Grant, 1996b; Grant and Baden-Fuller, 2004). Investigated high-performing partners through combination of different knowledge bases concentrate on their specific areas of expertise, giving rise to effective decision-making for the partnership. When our subsidiary in Bulgaria uses its intelligence to make decisions on the stores that distribute our

dairy products and the price levels, the market knowledge of our whole multinational becomes specialized. We do not seek to get hold of their intelligence, but rather to safeguard it through offering them autonomy. (International operations manager, high-performing company F)

In the seven cases in which a high or intermediate level of centralized (rather than situational) decision-making is followed, firms perform poorly. In these cases, managers above all wish to keep ultimate decision-making authority in their organizational boundaries as they believe that this would help them retain control of their international activities. The following statement typifies this behaviour of low-performing firms. We often listen to what our joint venture partners say to us in relation to distributing our product in the Romanian market. But at the end of the day it is us who make the final decision on these issues. It is primarily our money that is at stake if something goes wrong, and we do not wish to surrender our privilege to make these crucial decisions. (Owner, low-performing company Gamma)

Consequently, the agency theory holds in this subject matter only for low-performing small firms. In contrast, the predictive power of the knowledge-based model is strong for high performers. High-performing firms actively sponsor and pave the way for effective situational decision-making related to international partners, r 2009 British Academy of Management.

Governance Mechanisms of International Partner Management depending on the specific knowledge possessed. The two theories offer a complementary view of the SME IPMM decision-making style in that they correctly predict the way decisions are made in two categories of focal firms with different international performance levels. Types of incentives and performance monitoring. Table 3 shows that the group of high performers employ to (primarily) intermediate levels outcome-oriented incentives, such as variable-commission schemes and non-monetary benefits, including bestowal of recognition and praise. Similarly, these focal firms implement outcome-oriented performance monitoring mechanisms providing little direction. In addition, they evaluate partners on an outcome basis by objective and simple measures mainly in the areas of operating expenditures and sales figures. In line with the respective predictions of the agency and knowledge-based theories, the monitoring ability of these SMEs is perceived to be low and goal conflicts between partners stemming from dissimilar knowledge bases frequent. Decision rights reside with knowledgeable partners, but this is the end-result that occurs after a lengthy and complex negotiating process. Therefore, outcome-oriented schemes are favoured by high-performing SMEs. We engage in long-lasting discussions with our US joint venture partner on how to achieve our market objectives in the USA. We reach consensus at the end based on what each of us knows best. But often I do not have a full picture on what these people do. I have to check them through regular visits and always look forward to their sales reports to examine results. (International operations director, high-performing company D)

The seven firms that perform poorly employ behaviour-oriented incentives and performance monitoring governance mechanisms. In the partnerships of these firms, schemes such as fixedsalary compensation and fixed commission, on the one hand, and close monitoring for partner performance mainly based on subjective and complex measures linked to budgeting and strategic business plans, on the other, are present. The reason for the use of these behaviouroriented schemes corroborates the logic of agency theory: these principals have adequately specified the jobs of their agents abroad through impler 2009 British Academy of Management.

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mentation of modern communication and information systems (Eisenhardt, 1989). Thus, it is preferable to use behaviour-based schemes since information about partner behaviour is readily isolated. We use management via our intranet to programme the tasks of our joint venture in the Netherlands. Our information systems offer us on-time information on their budgets and plans. Hence, it is costeffective to give them fixed commissions based on their forecasted sales. (Managing director, lowperforming company Epsilon)

This finding does not mean that high-performing internationalized SMEs adopt outcome-oriented schemes due to a lack of communication and information systems. High-performing firms also had communication and information systems in place that they implemented. It seems that the explanation lies in the fact that outcomeoriented governance mechanisms of incentives and performance monitoring are likely to be associated with provision to internationalized high performers of valuable information on non-quantifiable dimensions. More formalized behaviour-oriented schemes do not offer such information easily. In particular, the findings of this study indicate that outcome-oriented mechanisms are likely to be associated with supply of information in relation to networking synergies, information spillovers and positive competitive interactions abroad. Therefore, high performers seem to engage in partnerships whereby learning is crucial, and in which exploration (rather than only exploitation) objectives are also sought (cf. Koza and Lewin, 1998). The following quote is characteristic of this practice. We continuously praise and congratulate management of our Hungarian subsidiary on their good results. This brings them closer to us and then they often chat for hours on the positive way they deal with distributors and suppliers, and the information they gain through this interaction. We also acquire significant knowledge about opportunities through this interaction and I believe the way we motivate our Hungarian managers is key to this. (International operations director, high-performing company G)

It appears that high-performing focal firms frequently view their international networks as vehicles of both accessing and generating knowledge. On the one hand, the primary motive of

766 high performers appears to be to combine different knowledge bases and capabilities, as the knowledge-based view would posit (Grant, 1996b; Grant and Baden-Fuller, 2004). On the other hand, these firms also tend to seek to generate knowledge from their partners through employing outcome-oriented schemes, as the organizational learning perspective would suggest (Hamel, 1991; Kale, Singh and Perlmutter, 2000; Mody, 1993). In the former case, exploitation objectives in the form of accessing knowledge for the sake of purely market seeking goals are sought by the focal firm, whereas in the latter case exploration objectives in the form of acquiring knowledge towards forming new networks or gaining crucial information pertaining to competition are pursued. Consequently, in order to holistically illuminate the governance mechanisms of high-performing SMEs related to incentives and performance monitoring schemes, the knowledge-based view can be complemented by organizational learning theory (apart from the agency). Additionally, although there is difference in the findings between high- and lowperforming SMEs, the tenet of agency theory regarding the related conditions affecting outcome- and behaviour-based contracts is validated. All these findings refer to effective IPMMs of focal firms, no matter what mode is employed. Our findings tend to confirm those by Fryxell, Dooley and Vryza (2002), who find that focal firms with formal (behaviour-oriented) control mechanisms suffer from low international joint venture performance. On the other hand, they contradict in part those by Brouthers and Bamossy (2006), who provide evidence showing that successful international partnerships involve a high extent of both formal and social (outcomeoriented) mechanisms. We favour only the latter type of control mechanisms for the high-performing group. A likely explanation for this discrepancy may have to do with the fact that Brouthers and Bamossy examine international partnerships that are four to six years old, while we investigate focal firms with a minimum level of international experience (and familiarity with international networks) of 11 years. Consequently, in their research the partnerships are not likely to have reached the point where formal governance mechanisms exert a negative effect on performance. This point is estimated to be

P. Dimitratos et al. around five years (Fryxell, Dooley and Vryza, 2002).

Conclusions Synopsis In this paper, we provided some evidence on the theme of governance mechanisms that SMEs employ to manage their international partners, moving away from soft management aspects. Based on agency and knowledge-based theories, we sought to provide evidence related to two research questions: first, what are the characteristics of successful governance mechanisms of small firm international partner management referring to decision rights, incentives and performance monitoring; and, second, do these governance mechanisms recur across alternative foreign market servicing modes? In-depth case studies were performed on 14 Greek small firms that used different mode categories (exporting, joint ventures, subsidiaries) to collaborate with their partners abroad. Seven of these firms had high levels of international performance whereas the other seven had low levels. With regard to the first research question, situational decision-making and outcome-oriented performance monitoring mechanisms prove to be successful SME IPMMs. Specifically, our findings suggest the existence of two distinguishable categories of governance mechanisms. High-performing focal SMEs follow a situational decision-making mode as decision rights with regard to long-term objectives and strategy rest primarily with the partner that possesses specific knowledge on the particular issue. These firms additionally provide outcome-oriented incentives and outcome-oriented performance monitoring mechanisms to their partners abroad. In contrast, low-performing focal SMEs follow a centralized decision-making mode as decision rights rest principally with the focal SME. They also provide behaviour-oriented incentives and behaviour-oriented performance monitoring mechanisms to their partners abroad. As far as the second research question is concerned, the evidence suggests that these two categories of governance mechanisms in high- and low-performing small firms are indeed recurring across all modes examined, namely exporting, joint ventures and wholly owned subsidiaries. r 2009 British Academy of Management.

Governance Mechanisms of International Partner Management Implications This study offers some useful insights for researchers and managers. In relation to research, a major implication is that it pays to examine network arrangements on the issue of IPMMs without giving individual attention to the foreign mode used. Thus, it appears that a unified theoretical approach that transcends foreign market servicing mode categories can be followed with regard to the internationalized SME governance theme. By examining each of the three mode categories of exporting, joint ventures and subsidiaries independently, the international business research has offered a rather fragmentary and partial account of international management aspects. We sought to overcome this deficiency through the identification of common management mechanism characteristics associated with SME international partners. Another valuable implication of this study for research has to do with the fact that mechanisms of managing partners abroad seem to matter a lot. These governance mechanisms, modes and types can be associated with dissimilar levels of international performance. Given their potential impact on performance, it is perhaps surprising that the SME governance IPMM area has been rather under-explored until now. Researchers can seek to further illuminate this governance mechanism issue drawing from the findings of the present paper. An implication of this study for agency theorists is that this perspective has a relatively strong predictive power regarding the incentives and performance monitoring IPMM types. The agency perspective explains in a valid way the centralized decision-making mode of the lowperforming group but fails to clarify the expertisebased decision-making style of high performers. Another related implication for agency theory pertains to the evidence that outcome-oriented schemes can produce enhanced performance levels when matched with the situational decision rights allocation mode whereas different conclusions are obtained for behaviour-oriented mechanisms linked to the centralized mode. This evidence potentially paves the way for a contingency view of agency theory in the area of international partner management of SMEs. In general, this theory provides a useful tool to illuminate many aspects of governance mechanisms of internatior 2009 British Academy of Management.

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nalized small firms. Consequently, the agency viewpoint can effectively contribute to the internationalization context of this study to account for the findings provided. However, since agency theory falls short in taking into account the social context surrounding the principal–agent relationship (Bruce, Buck and Main, 2005), the knowledge-based view was employed in the present research to overcome this deficiency. Indeed the knowledge-based lens has effectively explained the expertise-based style of decision-making for high performers, and has shed light on aspects of the incentives and performance monitoring issue. However, it did not illuminate fully the aspect concerning communication and information systems for high performers in that the organizational learning theory had to complement the explanation on this finding. This concurrent application of these two perspectives is not surprising given that the two theories (with the respective exploitation and exploration objectives) may coexist and have been implemented in conjunction in other studies also (Inkpen, 1998; Mowery, Oxley and Silverman, 1996; Nakamura, Shaver and Young, 1996). Overall, a key implication for research refers to the suggestion for a multidisciplinary approach in studying management practices of international networks. This research has provided evidence on IPMMs through the use of agency and knowledge-based theories. The organizational learning perspective has been brought in so as to provide a more holistic view on the incentives and performance monitoring issue. The incorporation of all three theoretical lenses appears to adequately illuminate the internationalized SME governance theme and can be employed in future research. In relation to the implication for management practice, the evidence clearly suggests that managing SME international partners effectively involves working on a reinforcing set of mechanisms including situational decision-making on objectives and strategy, outcome-oriented incentives (such as variable-commission schemes and non-monetary benefits including bestowal of recognition or praise) and outcome-oriented performance monitoring (such as outcome-based objectives and simple measures mainly in the areas of operating expenditures and sales figures). Irrespective of the foreign market servicing mode, SME managers can work closely with their

768 partners and build their cooperation on these three interrelated mechanisms. The other IPMM arrangement involving centralized decision-making mode and behaviour-oriented incentives/ performance monitoring is associated with low international performance, and managers are advised to avoid implementing this combination of governance mechanisms. Future research directions The findings of this study would benefit from the implementation of stratified random sampling methods involving large numbers of firms in all three foreign market servicing mode categories in order to replicate the findings of the current research. Furthermore, while this paper provides evidence implying that international performance drops as the focal SME moves away from situational to centralized decision-making and from outcome- to behaviour-oriented incentives/ performance monitoring, research into other SMEs having a mixture of international performance levels is required. Moreover, the current study has examined the issue of governance mechanisms of SME international partnerships solely from the viewpoint of the focal firm. Nonetheless, the opinions, perceptions and performances of foreign partners have been overlooked and would provide a more comprehensive picture of the investigated issue. Thus, further research can take into account also the standpoint of the international partner along with that of its focal SME. Moreover, the evidence from this study concerns SMEs that are gradual internationalizers, operate in traditional industries and can be characterized predominantly as market seekers. Therefore, it would be valuable to investigate to what extent these combinations of effective IPMMs can be distinguished, if at all, from management mechanisms of international new ventures; firms that operate in knowledge intensive and service sectors; and resource, efficiency and strategic asset seekers. Moreover, most investigated firms in this research were medium sized and it remains ambiguous to what extent the findings could be extrapolated to firms of different sizes as well. For example, larger firms may build effective management of their international partners on similar governance mechanisms with those identified in this paper,

P. Dimitratos et al. but this is a conjecture that should receive empirical testing. Evidence from countries other than Greece as the home nation would also be welcome. Also, future examinations can include other variables likely to influence international performance. IPMMs are likely to be simultaneously investigated with parameters of the SME organizational environment as well as domestic and foreign country contexts. It would be useful to apply such a comprehensive framework in order to examine to what degree governance mechanisms enhance performance of the SME in the international marketplace when investigated in conjunction with other variables.

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Pavlos Dimitratos is an Assistant Professor in the Department of Management Science and Technology, Athens University of Economics and Business, Greece, and a Visiting Senior Research Fellow in the Department of Management, University of Glasgow. His research interests include international management, international entrepreneurship and entrepreneurship. He has published in journals such as Journal of Management Studies, International Small Business Journal, International Business Review, Journal of World Business, Management International Review and Journal of Business Ethics, among others. Spyros Lioukas is Professor of Business Strategy and Systems in the Department of Management Science and Technology, Athens University of Economics and Business, Greece. His research interests include business strategy, entrepreneurship and firm internationalization. He has published in journals such as Strategic Management Journal, Management Science, Long Range Planning, Organization Science, Journal of Industrial Economics and International Business Review, among others. Kevin Ibeh is Professor of Marketing and International Business in the Department of Marketing, University of Strathclyde, Glasgow, where he also serves as Director of Research. His recent research has focused mainly on small firm internationalization and international entrepreneurship. He has published in international peer-reviewed journals, including Management International Review, Transnational Corporations, Industrial Marketing Management, Journal of Business Ethics, Small Business Economics, European Journal of Marketing, International Small Business Journal and International Journal of Market Research. Colin Wheeler is Professor of Marketing at Portsmouth Business School, University of Portsmouth. His research interests include the internationalization of the small firm and international marketing strategy. He has co-edited several books on international business and internationalization and has published in journals such as Long Range Planning, European Journal of Marketing, International Small Business Journal, International Business Review and Journal of International Entrepreneurship.

r 2009 British Academy of Management.