SME Entry Mode Choice and Performance: A Transaction Cost Perspective

Abstract

Although small and medium sized enterprises (SMEs) account for a significant portion of international trade, little is know about how they make international entry mode decisions. Transaction cost theory has been widely used to study entry mode selection for large firms.Here we apply the theory to SME mode choices. Further, we set out to determine if SME transaction cost mode choices provide superior performance to other mode choices. We found that transaction cost theory did a good job of explaining SME mode choice and that SMEs that used transaction cost-predicted mode choices performed significantly better than firms using other modes.

International new ventures as “small multinationals”: The importance of marketing capabilities

“…The results of our research may help to explain the findings of these authors. Indeed, they would appear to suggest that, in order to analyze the suitability of an entry mode for INVs, the characteristics conditioning entry must be taken into account (Brouthers, 2002;Brouthers & Nakos, 2004). Along these lines, this study complements the work of Hashai and Almor (2004).…”

“…This diversity in empirical results is also accompanied by a great diversity in theoretical arguments concerning the influence of each entry mode on firm performance (Yip, 1982, and1982a). Therefore, rather than propose a better entry mode for an INV, it would appear more appropriate to propose a model that helps INVs choose between different entry modes by taking into account the circumstances in which entry occurs (Brouthers, 2002;Brouthers &Nakos, 2004, and. Based on this approach, it is argued that it is not a matter of better or worse modes, but rather of the correct choice of a mode that will yield the best results.…”

“…In this case, the risk that a firm's specific advantages might be expropriated through a license or a partner in a joint venture may be more significant than other factors in understanding why this choice was made (Brouthers & Nakos, 2004). …”

“…Based on this approach, it is argued that it is not a matter of better or worse modes, but rather of the correct choice of a mode that will yield the best results. The choice of a specific mode will positively influence performance when firms make this choice in accordance with the circumstances surrounding entry (Brouthers 2002;Brouthers &Nakos, 2004, and.…”

“…Of the possible factors influencing the choice of entry modes involving higher commitment of resources (Brouthers 2002;Brouthers & Nakos 2004), INVs' knowledge of foreign markets is key to understanding that choice. The greater the knowledge the more likely it is that the INV will use methods involving a higher resource commitment Vahlne 1977, and1990).…”