INTERNATIONALIZATION OF SERVICESAppropriate non-equity modes of internationalization for small KIBSfirms Bachelor’s Thesis In International Business Author: Mikko Rindell 14416 Supervisor: M. Sc. Valtteri Kaartemo 16.4.2010 Turku
2CONTENTS1 INTRODUCTION ...................................................................................................3 1.1 Background ....................................................................................................3 1.2 About the study ..............................................................................................4 2 INTERNATIONALIZATION OF SERVICES.......................................................6 2.1 Nature and characteristics of services ............................................................6 2.2 Traditionally known internationalization strategies .......................................7 2.3 Internationalization strategies for services .....................................................9 3 KNOWLEDGE-INTENSIVE BUSINESS SERVICES ........................................12 3.1 Introduction of KIBS....................................................................................12 3.2 Core elements of KIBS.................................................................................13 4 INTERNATIONALIZATION SOLUTIONS FOR SMES OFFERING KIBS.....14 4.1 The role of the SMEs....................................................................................14 4.2 Applicable less resource-intensive strategies for service SMEs ..................15 4.3 Other views...................................................................................................17 4.4 ICT’s role .....................................................................................................18 5 CONCLUSIONS ...................................................................................................20 6 REFERENCES ......................................................................................................22
31 INTRODUCTION1.1 BackgroundThe service industry as a whole has not just stepped into the spotlight among the otherindustries, or so to say among manufacturing companies. It has actually began to definethe actions of other industries and forced to redefine many traditional businesses. Manycompanies have already accepted this change in the business environment and started tothink proactively but there is still much to learn. Joachim Singelmann recognized thisalready in 1978 as a trend in advanced industrial societies through the shift of labor andcapital from goods-producing industries to services (Singelmann 1978, 1). The last threedecades of last century were dramatic regarding the economic structural change inEurope where the most of the new value added has originated from services, while thetraditional economic activities like agriculture, mining and certain type ofmanufacturing have experienced a strong decline (Lovelock, Vanedermerwe & Lewis1996, 7). According to Javalgani, Griffith and White (2003) the Uruguay Round of theWorld Trade Organization (WTO) in 1986 began to reduce previous nationalrestrictions on marketing international services. Other factor of increased importance tostudy internationalization of services is the recent accelerating development oftechnologies. Services in fact are the fastest growing components of the global economy andforeign direct investments (FDI) in services have grown faster than in goods over thepast decade and a half (Mattoo, Stern and Zanini 2008). Already in 2002 servicesalmost accounted for two-thirds of the world’s total output (World Bank 2002 accordingto Javalgi and Martin 2007). The rising importance of services was as well seen whenthey were included in the multilateral architecture of the World Trade Organization(WTO) in the form of General Agreement on Trade in Services (GATS) in 1995.Already for decades the services sector has been the largest and fastest-growing sectorof the world economy, providing over 60 percent of the global economic output and inmany countries even a greater share of employment. The introduction of GATS was avery important milestone in history of services, while especially in markets wheresupply is inadequate; imports of essential services can be as vital as the imports of basiccommodities (WTO 2010). Recent developments in information and communication technology havedramatically increased the amount of performed cross-border export of services.Activities vary from software development in the Philippines to data processing inBarbados. Most of the business services’ (transport and travel excluded) exports still
4originate from OECD countries but the growth rate for business service exports wasabove 20 percent in countries like India, Israel, Dominica and Brazil already in thesecond half of the 1990’s. Respectively in the United States and Europe, of which boththe OECD countries basically consist, the growth rates were only 11 and 6 percentduring that time. (Mattoo et al. 2008.) The general discussion on knowledge-intensive business services has gained anincreased attention recently. As well, a decent amount of research has been conductedon KIBS’ importance for the innovation and growth processes of regions. So to say, theexistence and success of KIBS have shown to support other firms in the same region.Nevertheless, we still seem to be lacking a good overall picture of internationalizationin KIBS branches and it can be assumed that country-specific features have a strongimpact on the development of internationalization in KIBS. (Toivonen 2002.) KIBSbranches have been among the fastest growing branches in Western countries over thelast three decades. This Growth is bases on the increasing complexity of products,production processes and market environments. To master the complexity, specialexpertise and know-how is needed. KIBS have a special role in the expertise and know-how provision, often between global, national and regional levels. The information flowbetween the different levels occurs both through traditional hierarchical structures andthrough professional networks. Because of their flexibility, KIBS have a crucial role inthese networks in the interaction of different information levels and in the disseminationof rapidly improving technologies and updated knowledge. (Tekes 2009.)1.2 About the studyThe aim of this bachelor’s thesis is to find out whether there are any recommendablepractices for service business internationalization regarding the special needs of theKIBS firm. As a research process, this consists of three main parts. In the first part theinternationalization of services is reviewed, with the emphasis on the nature andcharacteristics of services in the background of actual internationalization. In the secondpart knowledge-intensive business services (KIBS) are introduced as a subsector withinthe services sector. In the third part solutions based on existing academic research aresought on less resource-intensive internationalization. The topic of the thesis is in line with author’s personal interest on internationalizationof services and scalable service business models. Notable is the fact that developedcountries, especially small ones with high labor costs and skew age distribution, arefacing severe problems in the years to come in case they do not adapt to the globaleconomic environment successfully. This is a concern of the author but it should be
5more importantly a nation-wide concern of high importance. Finally, the concept andmeaning of the innovation is mentioned but its wider contemplation has been excluded.
62 INTERNATIONALIZATION OF SERVICES2.1 Nature and characteristics of servicesBefore entering the world of service internationalization more precisely it is logical tohave a look at the services in general. Over time the definition services has beenexplained in many different ways by many authors. This is why discussion on servicescan often lead to disagreements in variety of forms. Core issues in avoiding this tohappen are to distinguish customer service from services and use the broad definition ofservices. Customer service is a service provided by all types of companies in support ofcompany’s product, no matter if the product itself is a physical one, purely intangible ora mix of two latter one’s. The broad definition of a service includes all economicactivities whose output is not a physical product or construction, is generally consumedat the time it is produced, and provides added value in forms that are essentiallyintangible concerns of its first purchaser. Services are so to say deeds, processes andperformances. (Zeithaml and Bitner 2003, 3–4.) Kotler (1991) noted that there are four generic differences in services compared tophysical products, intangibility, inseparability of production and consumption,heterogeneity (variability of quality) and perishability. These generic differences haveoffered a basis for more specific research during the last two decades. Grönroos (2001,46) points out that the processes consisting of activities or series of activities are one ofthe services’ main characteristics, adding simultaneous consumption and productionwith customer participation to the package. Miles and Kastrinos (1995, 6, 23) state thatthe close relations and high levels of interaction between service producers and theirclients is something that varies from service to service, even within a same branch ofservices like computer software. They as well introduce the broad classes of serviceprocess in terms of their main processes. The classification determines servicesregarding their involvement in processing whether people, physical goods orinformation. When introducing services as a concept or industry, or even trying to do that bothsame time (which often makes it so confusing and to lead to disagreements likementioned above) it is more than crucial shortly discuss one of the most raised topics inthis field of research, namely service-dominant (S-D) logic. This logic was introducedby Vargo and Lusch (2004) and it is built on the idea that the traditional dominant logicbased on the exchange of goods and focusing on tangible resources, embedded valueand transactions may not be the best one in today’s economy. According to them, overpast decades new perspectives have emerged that have a revised logic focused on
7intangible resources, the co-creation of value and relationships. They introduced sixattributes and eight foundational premises for helping present the patchwork of thisemerging dominant logic.(see Vargo & Lusch 2004a, 6–11.) Even though the S-D logicis in central role of defining services today it does not have so great meaning in light ofthis study. This is mainly because services discussed in this study are anyhow moreintangible without or with less physical elements, and because internationalization ofservices provision tends to follow the experiences and methods of manufacturingindustries whenever there are more physical elements involved. One of the Vargo and Lusch’s (2004) foundational premises was that all economiesare services economies. This leads us to the importance of services in wider scope. Theincreased importance of services in world trade cannot be condensed with only onemajor reason. Cicic, Patterson and Shoham (1999) recognize four remarkable sub-reasons to this. The first one is so called “hollowing out –effect” which refers to thegeneral shift of economic activity to service industries. Secondly, service providers havebeen forced to follow their globalized customers, manufacturers. Thirdly, technology inany form has made the national borders less important than in the past. Then, becausemost developed nations have reached high affluence levels, customers plainly demandmore services. Finally, the Uruguay round of GATT negotiation produced the first set oftrade rules for world services market. Javalgi et al. (2007) recognize three similar maindrivers in the world economy that are advancements in information andtelecommunication technology, tendency of manufacturers toward servicedifferentiation from intangible product differentiation, and the establishment of WorldTrade Organization (WTO) and regional trading blocks like NAFTA and EU. Grönroos’(1999) study is as well in line with these notions.2.2 Traditionally known internationalization strategiesThe examination of the most applicable strategy for a business service company isstarted by introducing the traditional and well-known internationalization strategies.This can be done shortly covering all the possible entry mode options. Of courseinternational strategy consists of many other elements as well but this conceptualizationof different entry modes is often the way we understand internationalization as aprocess. Albaum et al. (2002, 246) note that the choice of an entry mode is actuallymade to facilitate the firm’s international strategy and this kind of commitment is themost likely to foster the firm becoming internationalized, be the form exporting or someof the more complex entry modes. Other possible views on internationalizations offerfor example “the process of increasing involvement in international operations” (Welch& Luostarinen 1988, 36).
8 According to Hill (2009) there are six different modes for entering foreign markets.These include exporting, turnkey projects, licensing, franchising, establishing jointventures with a host-country firm, or setting up a new wholly owned subsidiary (WOS)in the host country. Nowadays management contracts are also often introduced as aseparate internationalization operation. In these a company provides personnel toperform general or specialized management functions for another company (Daniels,Radebaugh and Sullivan 2009, 65). Nevertheless, when it comes to entry modedecisions the first question is often what the price of a particular mode is for thecompany planning to internationalize. According to this, entry modes can be dividedinto two groups, ones that do involve equity and ones that do not (Peng 2006, 231).According to Peng (2006) this model of six steps introduced above can be divided intomore specific variations within these same entry modes. Non-equity entry modes canbe divided into exports and contractual agreements, from which both derive morespecific forms for internationalization. Exports brake up to direct, indirect and otherpossible types of exports while contractual agreements consist of licensing, franchising,turnkey projects, R&D projects and co-marketing. Equity entry modes, known as wellas foreign direct investments (FDI), likewise brake up to two subgroups where jointventures (JV) comprise minority JVs, 50/50 JVs and majority JVs. Wholly ownedsubsidiaries (WOS) consist of green-field projects, acquisitions and other possible typesof subsidiary structures. (Peng 2006, 231.) Daniels et al. (2009) introduce the sameforms of operations but they review those in a scale that is based on the approximateamount of partners involved and the ownership continuum. In this model, where thefocus is so to say on control of foreign operations, wholly-owned subsidiaries are placedin the other and management contract in the other end of the model. If highlighting the aspect of possible strategic alliances when making an entry modedecision the setting would be somewhat different while strategic alliances can involveentry modes from both equity and non-equity modes. More precisely the strategicalliances normally follow either the subgroup of contractual agreements (non-equity) orjoint ventures (equity). In this research, the strategic alliances’ role can be mainlyexcluded because only multinational corporations generally use it. Strategic alliancestend to be less easy to define in services than manufacturing mainly because they areharder to distinguish from other forms of co-operation (see O’Farrel and Wood, 1998).But in light of this study’s aim to find the best possible internationalization approach fora small service firm it is useful to cover all the entry modes possibly applicable to futureoutcomes. There are as well some already recognized unconventional entry modes likecyberspace entries, which refer to different types of entries using the e-commerce.These types of entry modes are normally attached to entrepreneurial high-growth firmsand born-global companies. (Peng 2006, 240.) Hamill and Gregory (1997) point out that
9the fundamental internationalization questions in small firms may appear quite differentwhen seen through this “cyberspace”. In light of the upcoming discussion on particularities of service internationalization itis reasonable to clarify the principles of so called “stages models”. The staged theorywas introduced very first time by Johanson and Wiedersheim-Paul (1975) when theysought to offer an explanation of how firms moved from comparatively small domesticoperations into fully fledged multinational corporations. Their model defined fourstages, indirect exporting, direct exporting, local sales office and local manufacturing.After this a lot of research has been done on defining the different stages more preciselyor redefining them completely. The definitions (Peng 2006; Daniels et al. 2009) usedearlier are as well applications of this model. (see Woods 2001, 101-102).2.3 Internationalization strategies for servicesGenerally, it can be stated that studies of services on topics such as the determinants ofthe decision of internationalizing, the internationalization process, and foreign marketentry strategies are still few. The focus of this study is not so much on the decisionwhether the firm should internationalize or not, while this is considered as the givenprecondition to find out possible new solutions to latter two topics. Nevertheless, it isworth mentioning that recent research indicates the attitude of management to be astrong predictor of the level of the internationalization of the firm within a serviceindustry context (Javalgi et al. 2003). Cicic, Patterson and Shoham (1999) state that international services are notcompletely different from international goods. According to them there are, though,particularities in the service sector that need some sort of adjustment for internationalmodels of behavior and this can often be seen as different foreign market selection,entry mode selection and foreign operations compared with goods. Within the sector,differences can be found in internationalization undertakings between servicesembedded in goods (“hard” services) and so called pure services (“soft services). Hardservices are more likely to internationalize by using traditional entry modes and beingsame time less influenced by communication technology and cultural distance, whilesoft services tend to require more adaptive models. (Erramilli 1990; Cicic et al. 1999.) According to Johanson and Vahlne (1977) the internationalization is largely based onthe behavioral theory of the firm. In their later study in 1990 (Uppsala SchoolInternationalization Model) they describe exporting behavior as a gradual and sequentialprocess, with market commitment, market knowledge, and current activities as theelements of the model (Johanson and Vahlne 1990, according to Cicic et al. 1999).
10Their findings (1990) suggest as well that the incremental and sequential processunderlying the “stages models” in the manufacturing sector may not be valid forservices. Due to the nature of services, a gradual process of sequential steps is notpossible in some situations. In other words, because of the generic differences(intangibility, inseparability, heterogeneity and perishability introduced by Kotler 1991)in services compared with products, the internationalization in general creates aremarkably different setting around a service firm. Especially inseparability is a hugechallenge when both service provider and consumer are involved in the production andconsumption processes of the given service. Nevertheless, Roberts (1999) suggestsbased on her empirical research on British business services firms that five stages canalso be found in this context. The number of stages through which service firms passand the length of the time spent in each one are variable. The stages in serviceinternationalization according to Roberts (1999): • Provision of services to domestic clients only (no exports). • Provision of services to foreign clients in the domestic market (domestically located exports). • Provision of services to foreign markets through embodied service exports, transhuman exports and wired exports. • Establishment of a presence through which to deliver a service largely produced in the domestic market (intra-firm exports). • Establishment of service production facility in the overseas market. Grönroos (1999) recognizes three general entry modes for services that are alreadypartly based on technological advancements (Internet, satellite and digital television)made by the late 1990’s. These are (1) client-following mode, (2) market-seeking modeand (3) electronic marketing mode. These different types of entry modes are not totallymutually exclusive, while a firm using electronic marketing for instance can be at thesame time market seeking and respectively a firm following a client abroad may havedecided to seek new markets actively as well. Cicic et al. (1999) identify two serviceinternationalization processes. The first process consists of two modes and it is valid formore intangible services, known also as “soft” services. These services, such asbusiness advisory, professional services and other intangible services, can becomeinternational through client-following and through one-off arrangements (often enteringand leaving foreign markets, according to one-time contracts). The firms using thesetypes of modes are likely to establish full international involvement with morecommitted entry modes. The second internationalization process type includes capital-intensive services, known also as “hard” services. Examples of this type are servicessuch as airlines, hotels, communication firms and banking. According to Cicic et al.
11(1999) these firms are faced with the choice between full foreign presences or noinvolvement at all, whereas they cannot internationalize incrementally. Grönroos (1999) recognizes five main strategies for service internationalization.These are (1) direct export, (2) systems export, (3) direct entry, (4) indirect entry and (5)electronic marketing. According to him direct export of services may basically takeplace on industrial markets when for example repair services on valuable equipment areoften exported in this way. The risk in this strategy lies in immediate production of theservice, without any step-by-step learning involved. Systems export is a joint exporteffort by two or more firms whose solutions complement each other, for example whena manufacturer delivers equipment or turnkey factories to international buyers, a needfor engineering services, distribution, cleaning, security and other services is oftenpresent. This mode has been recognized in literature to be a traditional mode of serviceexports. Direct entry means that the service firm establishes a service-producingorganization of its own on the foreign market. Normally, this requires the ability toproduce the entire service from very beginning by the local organization. Anotheroption for direct entry is an acquisition of local firm operating on the same serviceindustry. Third option is to create a joint venture with one of the locally operating firms.Direct entry strategy can be used for internationalizing consumer services as well asservices for industrial markets. Indirect entry is generally used when the service firmwants to avoid establishing a local operation that is totally or partly owned by it. Whereis it aiming at by this approach is anyhow the establishment of a permanent operation onthe host market. An example of this strategy is a consulting firm giving a host marketfirm exclusive rights to use its professional concept through a licensing agreement.Franchising is an often used concept for indirect entry in the restaurant and food serviceindustries. In the lodging business for example both franchising and managementcontracts, which are one type of indirect entry, are used. Cicic et al. (1999) support thisview when pointing out that most service marketers are required to visit foreignmarkets, operate with the customers directly, and produce the service locally. Accordingto them, these kinds of services include for example consulting, advertising, medicalservices and hotels. Electronic strategies are the last main strategy group recognized by Grönroos (1999).There occurred a huge amount of development in this field during the last decadethrough rapidly and constantly evolving communication technologies. The internetprovides firms with a way of communicating offerings and putting them up for sale, anda way of collecting data about the buying habits and patterns of its customers and usingnetwork partners to arrange delivery and payment. Risks recognized by Grönroos(1999) in use of this strategy are language barriers and electronic illiteracy. Electronicstrategies are in line with the view of Cicic et al. (1999) on modern communicationtechnologies’ impact on the process of internationalization of services.
123 KNOWLEDGE-INTENSIVE BUSINESS SERVICES3.1 Introduction of KIBSThere has been an increasing amount of attention paid to KIBS since the mid 1990’s.Even though both academic and general interest on it has increased, KIBS still todayremain poorly studied in comparison with any manufacturing sector. Their role in andmeaning for innovation and technological changes has been recognized but not wellincluded in innovation polices and systems set by authorities.(Müller and Doloreux,2007.) Nonetheless, the atmosphere is about to change. This is demonstrated e.g. inFinland in form of the report provided by Tekes (the Finnish Funding Agency forTechnology and Innovation) in November 2009 that clarifies the state of KIBS’internationalization and its meaning to the growth of companies (Tekes, 2009). Whatwe today understand by KIBS is largely based on our earlier understanding about theconcept of professional service. One of the pioneers introducing and adapting thisconcept to further marketing-related purposes was Evert Gummeson (see Gummeson1979, 7). Notable describing KIBS is generally the concept of business services. Theyare used ultimately by firms and other productive enterprises. By nature, they areextremely diverse; including the activities concerned both with handling tangiblephysical products, such as, machinery repair or catering, and providing intangibleexpertise, like accountancy or consultancy service. (Roberts, 1999.) When determining the concept of knowledge-intensive business services, it is usefulto recognize the distinction between knowledge and information regarding the servicesoffered. Granted that all the information-processing services include some knowledge-intensive elements (at least internal) we should note that e.g. basic telecommunicationand broadcasting services are mainly involved in storing and transporting data andinformation (Miles et al. 1995). Other determinant factor in understanding KIBS is therole of the customer in co-creating or “co-producing” the actual service. Especially inbusiness services the client’s contribution to the service delivery process is integral toservice success, affecting both the quality of the service outcome and, ultimately,clients’ satisfaction with the service solution provided. (Bettencourt, Brown &Roundtree 2002, 273.) The importance of successful service co-creation was as wellnoted by Tax, Golgate and Bowen in 2006 (see Tax, Golgate & Bowen 2006). Notablefor service taxonomies behind KIBS and other service-related research is that there aremany of them in the literature. An important taxonomy from the viewpoint of KIBS isthe one separating services linked with science, technology and innovation as a categoryof its own. (Soete and Miozzo, 1989, according to Toivonen, 2004.)
133.2 Core elements of KIBSAccording to Müller et al. (2007) KIBS are mainly concerned with providingknowledge-intensive inputs to the business processes of other organizations, which caninclude both private and public sector clients. Even though the standard approach andgenerally accepted definition of KIBS still remains undefined the NACE (Classificationof Economic Activities in the European Community) provides some guidelines foridentifying KIBS, at least in Europe.(Müller et al. 2007.) Anyhow, following interpretations can be found in literature on KIBS. Miles et al.(1995, 28) suggest that KIBS are (1) services generally relying heavily uponprofessional knowledge, (2) either supply products which are themselves primarilysources of information and knowledge to their users or use their knowledge to produceservices which are intermediate inputs to the clients’ own knowledge generating andinformation processing activities, (3) and have other businesses as their main clients.Miles et al. (1995, 18) condense this by stating that KIBS involve economic activitieswhich are intended to result in the creation, accumulation or dissemination ofknowledge. Toivonen (2004, 17) points out that KIBS are business services and at thesame time they are knowledge-intensive services. According to her, this is mainly whythere have been difficulties in finding a common understanding about them. In additionto this, difficulties arise from the indefinite character of the whole service sector and ofthe business services sub-category. In her dissertation Toivonen (2004, 36) comes to aconclusion that KIBS are part of a larger group of services, business services. These canbe defined as services that firms or organizations provide for other companies ororganizations and that are intermediate by nature, i.e. they are not targeted to end-usebut are inputs in manufacturing processes or in the production of other services.
144 INTERNATIONALIZATION SOLUTIONS FOR SMES OFFERING KIBS Traditionally there are two modes in which firms operate on the international market,foreign direct investments (FDI) and cross-border trade (exports). Of these two, the FDImechanism has been found clearly more general in KIBS (Toivonen, 2004). Takinggranted that smaller firms generally possess less resource, both financial and in amountof personnel, they need to track down the possible existence of less resource-intensiveinternationalization options available. In this chapter some of the options alreadyexperienced in SMEs from different fields and some theoretical frameworks areexplained, beginning with the definition of a SME.4.1 The role of the SMEsAccording to publication on small and medium-sized enterprises (SME) by EuropeanCommission there were about 23 million SMEs in 2005. 99 percent of all companies inEuropean Union are SMEs and they employ about 75 million people. The thresholdvalues within the SMEs are divided into three different groups which are microenterprises, small enterprises and medium-sized enterprises. Micro enterprises employ amaximum of ten people, turnover not more than two million euro a year or have notmore than two million euro in their assets. Small enterprises employ a maximum of fiftypeople, turnover not more than ten million euro a year or have not more than ten millioneuro in their assets. Respectively, medium-sized enterprises employ a maximum of 250people, turnover not more than 50 million euro a year or have 43 million euro or less intheir assets. The new regulation where company can choose between turnover andassets limits has been implemented due to different natures of branches SMEs areoperating in. (European Communities, 2006.) In this study, even though the concept of SME is generally used, the solutionssearched are mainly meant to those SMEs qualifying for the limits of micro and smallenterprises. This is because those enterprises qualifying for the limits of medium-sizedenterprises tend to posses more resources to use more traditional and same time moreresource-intensive international operations for new host markets, like establishingwholly owned subsidiaries (WOS). In the study of Henten and Vad (2001) on theinternationalization of Danish firms is shown the strong tendency toward exports andtemporary presence among small and medium-sized firms. Authors raise their concernreferring to Danish business structure with a large base of small firms and relativelyhigh number of firms with no ambitions outside the borders of Denmark. According to
15them, this may explain why Danish service firms have been losing market sharesinternationally.4.2 Applicable less resource-intensive strategies for service SMEsIn this chapter the focus is on export modes of internationalization and on alternativemodes deriving from them because they have generally been stated to be clearly lessuseful for service and particularly for KIBS use. Ball, Lindsay and Rose (2008) introduced a list of applicable modes for lessresource-intensive soft service firms. These modes were introduced in contrast of earlierresearch, like Erramilli (1990) having basically only stated that service firms andespecially soft service firms would need to establish more resource-based and higherinvolvement activities for foreign market entries. Other issue originating from formerresearch and experiences that the authors want to question that is the foreign marketinvolvement always incremental, introduced for example by Luostarinen (1980). Theinformation transformation model introduced by Ball et al. (2008) is largely based onthe value chain model (Porter 1985, according to Ball et al. 2008) and the dichotomybetween front and back office functions (Chase 1978, according to Ball et al. 2008),where the front office is the place for customer interaction and the back office for anyadditional processing attached to actual service. In addition to these components there isa focus on how information is used in the creation of value, for which the Rayport andSviokla’s (1996) model of “virtual value chain” (Rayport & Sviokla 1996, according toBall et al. 2008) provides a basis. The model consisting of these latter componentsincludes embodied object exports, embodied channel exporting, embodied peopleexports, domestically located exports, internationalizing by using host market networkpartners and leveraging the internationalization of home market partners. Thefollowing suggestions are largely based on the applied model (Ball et al. 2008)introduced above and then compared with other notions available from the literature. Embodied object exports are based on experience showing that output of softservices can often be embodied in some physical form (physical or digital reports anddocuments), after which a service firm can easily export this output. This of course, insome extent, mixes the boundaries of earlier introduced hard and soft services.Nevertheless, this view of the applicable output of information-intensive soft servicefirms as embodied objects creates a lot of potential in this type of internationalizationactivities. The same logic can be put to use in case of information input into the serviceproduction process when referring to embodied object importing. Embodied channelexporting is a situation similar to two latter ones where the information is embodied onthe channel established between the customer and service provider. An example of this
16is teleconferencing as the communication channel (audio or both visual and audio).Here the channel itself can be seen as an embodied object and it can be used for bothextracting and delivering the information.(Ball et al. 2008.) Respectively, Roberts(1999) recognizes these types of exports under the general term of embodied serviceexports where services are often provided for the overseas client in form of a letter orreport, and in case of referring to channels through which the service is electronicallytransmitted she calls it wired exports. The mode of embodied people exports especially tackles the prevailing assumptionconcerning the need for a permanent or at least a long-term local presence in hostcountry (Ball et al. 2008). Roberts (1999) calls this transhuman exports. It is clear thatface-to-face interaction remains a crucial and often the most effective way for servingthe customer in the host market. However, this model offers a new approach on howand when to locate the needed people in the specific market, often on a limited andshort-term basis. In other words embodied people exporting forms a setting, throughwhich information is carried from the home to the host market, within the employee.According to the literature there are successful experiences that sending staff to the hostmarket for a temporary time may be a relevant option (Aharoni 1993; Orava 2002,according to Ball et al. 2008). Functionally embodied people exporting can occur in twoways. A firm can use employees, which can handle all the needed (or at least most)functions in the value chain, optionally send the people (one person or many people)with the required set of skills to the host country whenever needed. The second way isto act more tactically. The idea is to send people to the host country only to take care ofthose functions of the value chain absolutely requiring a local presence. (Ball et al.2008.) Domestically located exports are a well-known concept in the business-to-customermarkets, namely in tourism services. The mode is based on the notion of pointing out toservice firms that provide output to foreign clients in the domestic market. This kind ofactivity is to wit exporting. Other industry where this is as well prevailing is medicalservices. The potential of domestically located exports has not yet been widely used andexplored but it is definitely also applicable to information-intensive soft service firms.(Roberts 1999; Ball et al. 2008.) The use of host market network partners refers to networking, which often plays acrucial part in internationalization processes for many sectors. The importance ofnetworks for information-intensive soft service firms may be even more crucial than inmany other industries while the networks might provide supplement or alternative localpresence in foreign markets. Many service firms tend to internationalize following theircustomers into overseas markets. This leveraging the internationalization of homemarket partners may alleviate setting up international activities while the service firmmay not need to concentrate on soliciting new business immediately. This kind of
17approach is stated to possibly provide leverage for service firm’s other internationaloperations. (Ball et al. 2008.) In the study of Anderson (2006) can be found supportivebut as well divergent notions for this theory. There the Swedish ERP (EnterpriseResource Planning) industries’ supportive services work as an example. The firms had astrategy of establishing partnerships. Anyhow this showed to be difficult withoutsufficient resources and the firms actually ended up establishing subsidiaries abroadfirst after having raised equity through listing in stock exchange. (Andersson 2006.) The next mode is contracting to another firm with international operations. Thistype of engaging, known as “piggybacking”, may be particularly beneficial forinformation-intensive soft services. This is commonly done by providing inputs, oftenso called supplementary services, into other firms’ production processes or systems andthereby being indirectly involved in outputs sold to foreign markets. The last suggestedmode is a combination of two latter approaches where the service firm is in contact witha local firm (another service firm or other type) and then jointly operates in the hostmarket by placing staff there on a temporary basis for chosen activities, for exampleorder solicitation, service production or service delivery itself. (Ball et al. 2008.)4.3 Other viewsOne view on service internationalization is frantrepreneurship that was introduced thefirst time in 2001 (Sundbo, Johnston, Mattson & Millet 2001). The frantrepreneur isdefined as a franchisee who innovates by adapting a standard service concept to meetlocal conditions. There are basically five constructs for this model which are the serviceconcept, franchising, internationalization, innovation and entrepreneurship.Frantrepreneurs do not passively accept the standard service concept and they developan unusual partnership role with their franchisor with a two-way influence over thebusiness. (see Sunbo et al. 2001) The role of the network relationships of knowledge-intensive SMEs forinternationalization was studied by Ojala (2007). According to his findings, knowledge-intensive SMEs, when entering distant markets, tend to first select the target countryand the entry mode without any influence of network partners. This is something thatdiffers from previous studies, which mainly indicate that formal and informal networkrelationships drive firms to geographically and/or physically nearby markets, becausethe firms tend to select their initial markets and entry modes by following their networkrelationships. This leads to a situation where market entry and entry mode choice can beseen more as a strategic decision than a simple decision of following other networkpartners. Other point is that firms should actively develop their network relationshipsand use connections (often individual) for further networking in the potential or
18attractive target country. If it just follows the existing network passively, it may end upnot noticing new market opportunities. (Ojala, 2007.)4.4 ICT’s roleThe role of information and communication technology has been an increasinglydiscussed topic both in internationalization and service literature. Nevertheless, therelationship between small business internationalization and ICT seems to be obvious inmany associations, as in some recent success stories like 37signals (37signals, 2010),but the question is that is enough empirical evidence for propositions of this kind there.In many cases the ICT works as facilitator like in above introduced embodied channelexporting or wired exporting but there may be some other forms as well. According to Aspelund and Moen (2004) there are two features, convenience andrichness of information, which make the execution of an international marketing andsales campaign possible with the limited resources of small and newly established firms.The third feature is the reduction in price of advanced information systems over the lastdecade. These features have recently been strengthened by the rise of cloud computingand its cost benefits (King, 2008). Nevertheless, small ICT-intensive firms have oftennot been able to find particular price and market advantages. This is mainly due to thefact that ICT in itself does not bestow competitive edge. It only does so when it is tunedwith organizational routines. A small firm, or so to say its management, needs a stronginternational vision to be able to make the most of ICT. Anyhow, advances in ICT haveplayed an important role in the growth of small international firms over the last decade.(Aspelund & Moen 2004.) Danford´s (2007) findings on ICT’s general use ininternationalization are in line with those introduced above. He suggests that it isrecommended to take a critical and cautious approach to the employment of ICT. Oftenindividual business functions can benefit the most. Due to this, firms should do theirbest to identify which functions are the particular ones and then allocate ICTdevelopment and implementation methodologies to the need for those businessfunctions. It is notable that these findings were made in the study focused on firmswhich have mainly physical goods in their selection. Experiences from engineering consultancy (Baark, 1999) have shown that use ofinformation technology and advanced telecommunications have provided the alternativepatterns of production and delivery engineering design services instead of establishinglocal affiliates in overseas markets. According to him, the assessment of the impact ofnew IT in the sector clearly pointed to the need for firms to plan strategically in order toexploit the benefits to IT-enabled production and delivery of services. It was noted that
19better IT employment often requires business process re-engineering to reach the long-term goals of new IT being implemented. (Baark, 1999.)
205 CONCLUSIONSInternationalization of knowledge-intensive business services (KIBS) among small andmedium-sized enterprises (SME) is a very complex area of research in light of thisstudy. Roots for this are diverse, and we cannot overemphasize the complexity of thefactors in the background, like the definitions of service and knowledge-intensivenessas such. The scope of this study could have easily been used purely for contemplatingsome components of those factors in very detailed level. This kind of level could not bereached with the resources available for this particular study. To proceed, the foundeddefinitions from the literature have to be taken as granted to be able to attain some sortof reasonable conclusion. Services and service sector as such still remain pretty much undefined compared tophysical goods, and whenever one definition achieves a stable foothold one newsuggestion attached to services arises. A possibly revolutionizing view on services is theservice-dominant logic (Vargo & Lusch 2004) which has been gaining “market share”at least among scholars but as well business practitioners. Thus setting all this, in someextent “undefined”, into KIBS context it is clear that getting the big picture may behard. Internationalization again is easier to comprehend even though it can be alsoreviewed from different angles. In case of this study meaningful issues ofinternationalization are the separation of entry mode decisions from internationalizationdecision and process, likewise the clear distinction between equity and non-equity entrymodes. This comes together with the characters and limitations of SMEs and KIBS. The optimal outcome of the study would have been a less resource-intensiveinternationalization mode through which a small firm offering knowledge-intensivebusiness service could have started its international operations, or optionally expandedthem, easily and without high extra costs in comparison with their existing homecountry activities. Nevertheless, based on the research made and the results presentedhere, it can be stated that there is no revolutionary or exclusive solution available for asmall firm in this field of business. The applicable solutions tend to be a case- and firm-sensitive, and if they are successfully adapted to firm’s overall business strategy as wellas daily routines they may result in good leverage for overseas operations. Even though the general goal of the study was to find internationalization modesoutside equity-based undertakings in foreign markets, the establishment of local marketpresence in form of subsidiaries or joint ventures may be the one and only solution for acompany in some circumstances. If this is the case, and the company lacks resources atthat particular moment it might be more advisable to wait for more proper timing or toseek alternative options for business expansion on the home market than to try tointernationalize by force. KIBS firms facing this are presumably following some sortsof stages in their internationalization when considered that they may have to look for
21the next step beginning for example from providing services to domestic customersonly, like in the stages model for service internationalization suggested by Roberts(1999). Those KIBS firms that recognize their possibility to internationalize withoutfollowing the stages model presumably whether possess more resources (which mayenable the short-term or long-term establishment of local presence on the host market)or find other types of internationalization suitable for their business model andorganization. These latter firms tend to find an appropriate operative set of tools byusing whether the applicable strategies of non-equity strategies introduced (Roberts1999; Ball et al. 2008) or can find leverage out of advanced ICT solutions for theirinternationalization. Often the appropriate set is a combination of these two, like in caseof embodied channel exporting or wired exporting where the ICT plays a significantrole. Nevertheless, all of these suggested less resource-intensive applicable models forinternationalization are basically extensions to known export modes used traditionallyin manufacturing industries. The use of them in light of this study remains mainlytheoretical. On the other hand, there is no doubt that further advancements in modernICT will provide more tools which will be found even more applicable for the use of themodels presented. It can be stated that there is no secret formula to run the internationalization ofknowledge-intensive service business. The firms of this field need to base theirdecisions largely on the combination of experiences from manufacturing and otherservices. These experiences then need to be adapted to firm’s particular strategy andexperiences. For future research on small KIBS’ internationalization will be crucial toattain more empirical evidence about experiences of discussed models’ usage in action.According to experiences of that kind could possibly be drawn guidelines for firmsbeing in the early phases of their internationalization. Then these types of firms with notmany resources for internationalization could possibly avoid investments in modes withweak return and generally become more motivated to internationalize.
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