Internationalization of small and medium-sized enterprises and impact of institutions on international entrepreneurship in emerging economies: the case of Russia

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INTERNATIONALIZATION OF SMALL AND MEDIUM- SIZED ENTERPRISES AND IMPACT OF INSTITUTIONS ON INTERNATIONAL ENTREPRENEURSHIP IN

EMERGING ECONOMIES: THE CASE OF RUSSIA

Acta Universitatis Lappeenrantaensis 549

Thesis for the degree of Doctor of Science (Economics and Business Administration) to be presented with due permission for public examination and criticism in the Auditorium of the Student Union House at Lappeenranta University of Technology, Lappeenranta, Finland, on the 29th of November 2013, at noon.

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Supervisor Professor Sami Saarenketo

Department of Management and International Business School of Business

Lappeenranta University of Technology Finland

Professor Ari Jantunen

Department of Business Economics and Law School of Business

Lappeenranta University of Technology Finland

Reviewers Professor Tatiana Manolova Department of Management Bentley University

USA

Professor Asta Salmi

Department of Management and International Business School of Business

Aalto University Finland

Opponent Professor Tatiana Manolova Department of Management Bentley University

USA

ISBN 978-952-265-511-0 ISBN 978-952-265-512-7 (PDF)

ISSN-L 1456-4491 ISSN 1456-4491

Lappeenrannan teknillinen yliopisto Yliopistopaino 2013

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ABSTRACT

Daria Volchek

Internationalization of small and medium-sized enterprises and impact of institutions on international entrepreneurship in emerging economies: the case of Russia

Lappeenranta 2013 250 pages

Acta Universitatis Lappeenrantaensis 549 Diss. Lappeenranta University of Technology

ISBN 978-952-265-511-0, ISBN 978-952-265-512-7 (PDF), ISSN-L 1456-4491, ISSN 1456-4491

The doctoral study presents a comprehensive analysis of the impact of the institutional environment on the internationalization-based growth strategic choices of small and medium- sized enterprises (SMEs) in emerging economies.

In responding to the calls for more research on institutions and international entrepreneurship, this dissertation extends the linkages between the two to the context of emerging economies.

The study presents a comprehensive analysis of institutional challenges and their impact on the internationalization of SMEs in emerging economies, particularly in Russia. The research contributes to the adoption of the institution-based view in international entrepreneurship.

The dissertation is presented through five research papers. Based on primary and secondary data, the study categorizes the possible sources of institutional influences on internationalization and empirically tests their impact by applying a method triangulation research design.

The result of the conducted research is a proposed theoretical model of the institutional impact on the internationalization of SMEs in emerging economies. The model is specifically focused on the growth stage of the entrepreneurial process and considers only its internationalization facet. The research identifies and provides empirical support for the existence of a positive influence of a transparent and supportive regulatory environment, an institutionalized pool of general business knowledge, and collectivistic value orientation on the proclivity of SMEs to internationalize. A level of appreciation of entrepreneurial initiatives in home country and a greater positive institutional gap provide a positive impact on the international performance of SMEs. The research provides contextualized knowledge of the institutional impact on the internationalization of SMEs in Russia.

The obtained results present theoretical value in terms of showing how the environmental conditions effect the entrepreneurial internationalization-based growth in emerging economies, providing the methodological insights into the measurement of the institutional effects, and empirically contextualizing the linkage between institutions and internationalization in the Russian business environment. The research also provides value for the business and policy-

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making stakeholders by identifying ways of utilizing the conditions in the external institutional environment.

Keywords: international entrepreneurship, internationalization, emerging economies, institutional environment, Russia

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TIIVISTELMÄ

Daria Volchek

Pk-yritysten kansainvälistyminen ja instituutioiden vaikutus kansainväliseen yrittäjyyteen kehittyvissä maissa: tarkastelukohteena Venäjä

Lappeenranta 2013 250 sivua

Väitöskirjatutkimuksessa esitetään kattava analyysi institutionaalisen ympäristön vaikutuksesta kehittyvillä markkinoilla toimivien pienten ja keskisuurten (pk) yritysten kansainvälistymiseen ja siihen liittyviin kasvustrategioihin.

Tämä väitöstutkimus vastaa tarpeeseen syventää instituutioihin ja kansainväliseen yrittäjyyteen liittyvää tutkimusta. Tutkimuksessa laajennetaan analyysiä näiden kahden välisistä riippuvuussuhteista tarkestelemalla niitä kehittyvillä markkinoilla toimivien yritysten näkökulmasta. Tutkimuksessa esitetään kattava analyysi institutionaalisista haasteista ja niiden vaikutuksesta pk-yritysten kansainvälistymiseen kehittyvillä markkinoilla ja erityisesti Venäjällä. Tutkimus myötävaikuttaa osaltaan instituutioihin pohjautuvan näkemyksen (institution-based view) käyttöönottoon kansainvälisessä yrittäjyydessä.

Väitöstutkimus esitetään viiden tutkimusartikkelin kautta. Ensi- ja toissijaiseen aineiston perustuen tutkimuksessa luokitellaan kansainvälistymiseen vaikuttavien institutionaalisten vaikutusten mahdollisia lähteitä ja empiirisesti testataan niiden vaikutusta hyödyntäen triangulaatiota tutkimuksessa.

Tutkimustuloksena on saatu teoreettinen malli instituutioiden vaikutuksesta pk-yritysten kansainvälistymiseen kehittyvillä markkinoilla. Mallissa keskitytään erityisesti yrittäjyysprosessin kasvuvaiheeseen ja otetaan huomioon vain sen kansainvälistymisnäkökohta.

Tutkimuksessa tunnistetaan ja empiiristen löydösten kautta tuetaan oletusta siitä, että läpinäkyvällä ja tukevalla sääntely-ympäristöllä, yleisellä institutionalisoidulla liiketoimintatuntemuksella ja kollektivistisella arvosuuntautuneisuudella on positiivinen vaikutus pk-yritysten taipumukseen kansainvälistyä. Yrittäjyyden arvostus ja kohdemaan parempi institutionaalinen infrastruktuuri suhteessa kotimaahan vaikuttavat positiivisesti pk- yritysten kansainväliseen toimintakykyyn. Tutkimuksessa luodaan tietoa pk-yrityksiin vaikuttavista institutionaalisista tekijöistä Venäjällä.

Saadut tulokset ovat teoreettisesti arvokkaita siinä mielessä, että ne esittävät miten toimintaympäristön olosuhteet vaikuttavat kansainvälistymiseen perustuvaan kasvuun kehittyvillä markkinoilla. Tutkimus myös synnyttää tietoa institutionaalisten vaikutusten mittaamisesta ja empiirisesti kontekstualisoi instituutioiden ja kansainvälistymisen välistä

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yhteyttä venäläisessä liiketoimintaympäristössä. Tutkimus tuottaa arvoa liike-elämän ja päätöksentekijöiden sidosryhmille esittämällä kuinka voidaan parhaiten hyödyntää ulkoisen institutionaalisen ympäristön olosuhteita.

Avainsanat: Kansainvälinen yrittäjyys, kansainvälistyminen, kehittyvät markkinat, institutionaalinen ympäristö, Venäjä

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АННОТАЦИЯ

Дарья Волчек

Интернационализация малого и среднего бизнеса и влияние институциональных факторов на международное предпринимательство в странах с развивающимися экономиками на примере России

Лаппеенранта 2013 250 страниц

Данная докторская диссертация представляет собой всесторонний анализ влияния институциональной среды на стратегии роста, обусловленные процессом интернационализации, компаний малого и среднего бизнеса в странах с развивающимися экономиками.

При существующем недостатке научных исследований в контексте институциональных факторов и международного предпринимательства, данная научная работа вносит свой вклад в развитие взаимосвязей между этими двумя теориями. В этом исследовании проводится анализ институциональных факторов и их влияния на процесс интернационализации компаний малого и среднего бизнеса в странах с развивающимися экономиками на примере России. Диссертация вносит свой вклад в применение институционального подхода в международном предпринимательстве.

Диссертация представлена в виде совокупности результатов исследований, опубликованных в пяти научных статьях. Основываясь на первичных и вторичных данных, данная работа классифицирует возможные источники влияния институциональных факторов на интернационализацию и приводит эмпирические доказательства их влияния на основе применения методологии триангуляции в формате исследования.

Значительным научным результатом проведенного исследования является разработанная теоретическая модель влияния институциональных факторов на процесс интернационализации компаний малого и среднего бизнеса в станах с развивающимися экономиками. Данная модель направлена на стадию роста предпринимательского процесса и рассматривает только ее аспект интернационализации. В рамках исследования, определяются и эмпирически доказываются существование положительного влияния прозрачной и благоприятной нормативно-правовой среды, институционального пула общих знаний о бизнесе, и коллективистских ценностных ориентаций на склонность к интернационализации малых и средних компаний. Уровень оценки предпринимательских инициатив на домашнем рынке и значительный разрыв в

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степени развития институциональной среды в пользу зарубежных рынков обеспечивают положительное влияние на интернационализацию малых и средних компаний.

Исследование представляет теоретизированные выводы об институциональном влиянии на интернационализацию малых и средних компаний в России.

Полученные результаты имеют научную ценность в области обоснования влияния внешних условий на рост малых и средних компаний, обусловленного процессом интернационализации, в странах с развивающимися экономиками. Исследование предоставляет методологическое обоснование измерения институционального влияния, а также эмпирически доказывает связь между институциональной средой и интернационализацией в бизнес среде в России. Практическая ценность результатов заключается в определении возможностей использования условий внешней институциональной среды лицами ответственными за принятие решений в бизнесе и политике.

Ключевые слова: Международное предпринимательство, интернационализация, страны с развивающимися экономиками, институциональная среда, Россия

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Acknowledgements

Finalizing the doctoral studies journey, it is time to express my gratitude to all those who have walked this way with me, sharing their knowledge and experience and providing endless support for this research project.

First of all, I would like to thank my two mentors, who have guided me all the way through this research project: my supervisors, Professor Sami Saarenketo and Professor Ari Jantunen. Without your knowledgeable support, advice, and encouragement, the completion of this study would have been impossible. You taught me a lot of what I know and aim for now as a researcher, and I am thankful to you for inspiring me to continue walking along the academic pathway.

I express an outstanding gratitude to my two pre-examiners, Professor Tatiana Manolova and Professor Asta Salmi, who have provided their insightful comments on my research project, and thus enabled its significant improvement.

I would also like to thank all my co-authors, Sami Saarenketo, Ari Jantunen, Kaisa Henttonen, Jan Edelmann, and Daria Podmetina, for their valuable contribution to this study through our joint work. The value of the knowledge that you shared with me during this process is impossible to measure!

During my doctoral studies, it has been a privilege to visit Georgia State University (GSU), GA, USA, and to work there with an outstanding scholar and expert in the field of International Business, Professor Tamer Cavusgil. The time spent in GSU widened the horizons of my knowledge in both research and teaching, and gave me an inspiration to always aim for academic excellence. My GSU colleagues, Ilke Kardes, Ihsen Ketata, and Farrah Bernardino, made this visit interesting and enjoyable.

I gratefully acknowledge the financial support received from the Finnish Graduate School of International Business, the Research Foundation of Lappeenranta University of Technology (Lappeenrannan Teknillisen Yliopiston Tukisäätiö), and the Finnish Foundation for Technology Promotion (Tekniikan edistämissäätiö). The research project “International Niche-business Innovations,” financed by the Finnish Funding Agency for Technology and Innovation (TEKES), and other industrial partners provided a significant part of the funding for this research and data collection in Russia.

It has been very rewarding to work together with my project colleagues in Lappeenranta University of Technology, Jukka-Pekka Bergman, Tiina Jauhiainen, Jouni Koivuniemi, Vladimir Platonov, Jan Edelmann, Kyllikki Taipale-Erävala, Jukka Lempiäinen, and Hannu Virkkunen. I am especially thankful to Jukka-Pekka, Jouni, and Jan for opening a door into the LUT research community for me! Thank you for that!

I would like to acknowledge the unfailing support of Minna Ranta, Terttu Hynynen, Leila Armila, and Maija Nurkka, who have always helped to make things possible!

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Thanks to Eeva Häyrinen for taking care of the examination process of this dissertation.

And special thanks to Joan Nordlund and Bruce Marsland, who have put their incredible effort into improving my writing style and proofreading my research papers and this dissertation! Thank you Bruce for always being able to rely on you, even when the deadlines are improperly tight! One more acknowledgement goes to all the anonymous reviewers, who helped to improve the scientific quality of the research papers included in the dissertation. Thank you for your time and effort!

Work in the university would not have been as enjoyable without my colleagues and friends, Daria, Irina, Juha, Kristiina, Sanna-Katrina, Anssi, Maija, Justyna, Petr, and Veronika, to name just a few. Thank you for the support, inspiration, and enthusiasm that you shared with me at different stages of this research journey! My special thanks go to Daria and Irina, who have provided invaluable support, great company, endless optimism, and a lot of fun working long nights together! Special thanks to Daria for the invaluable role of keeping me connected to the world beyond my dissertation in the last days of finalizing the thesis!

I would like to express a deepest gratitude to my parents, Elena and Nikolay, who made me believe that everything new is interesting and definitely worth trying! Many thanks to my family and dearest friends in Russia, Switzerland, and Finland for your endless support of all my undertakings!

Last, but not least, this work would never have been completed in the way it is without the invaluable support of my hardest critic and the dearest person in my life, Joonas.

Thank you for everything! Let the next doctoral hat in our family be yours!

October 28, 2013 Helsinki, Finland

Daria Volchek

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List of publications

The dissertation consists of the introductory part (Part I) and the following publications (Part II). The publications comprising the second part of the dissertation are listed below, summarizing the contribution of the author of this dissertation. All publications were written in cooperation with other co-authors. However, the author of the dissertation was the first and corresponding author in all cases.

PUBLICATION 1

Volchek, D., Henttonen, K., and Edelmann, J. (2013) Exploring the role of a country’s institutional environment in internationalization: strategic responses of SMEs in Russia.

Journal of East-West Business, 19 (4), 1-34.

The author was responsible for the development of the research plan, collection and analysis of the interview data, and writing most of the manuscript.

PUBLICATION 2

Volchek, D., and Henttonen, K. (2012) Measuring institutional profiles for entrepreneurship: the case of Finland and Russia. Proceedings of the Institute for Small Business and Entrepreneurship Conference, 7-8 Dublin 2012, Cardiff, UK.

The author was responsible for the collection of the primary data in Finland and Russia, development of the theoretical framework of the study, setting the research questions, and discussion of the implications.

PUBLICATION 3

Volchek, D., Jantunen, A., and Saarenketo, S. (2013) The institutional environment for international entrepreneurship in Russia: Reflections on growth decisions and performance in SMEs. Journal of International Entrepreneurship.

DOI:10.1007/s10843-013-0115-z

The author was responsible for the development of the research plan, primary data collection in Russia, development of the theoretical framework of the study, setting of the hypothesis, data analysis, and reporting of the results and implications of the study.

PUBLICATION 4

Volchek, D., Podmetina, D., Saarenketo, S., Jantunen, A. (Forthcoming) To grow or not to grow: International growth of Russian SMEs in the context of a local institutional environment for entrepreneurship. Journal of International Business and Entrepreneurship Development.

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The author was responsible for the development of the research plan, primary data collection in Russia, setting of the hypothesis, data analysis, and reporting of the results and implications of the study.

PUBLICATION 5

Volchek, D., Saarenketo, S., and Jantunen, A. (2013) Structural model of institutional environment influence on the international entrepreneurship in emerging economies.

Proceedings of the Academy of International Business – UK & Ireland Conference, 21-23 March 2013, Birmingham, UK.

The article is revised based on the comments received after its presentation at the AIB- UKI Conference and is currently under development for submission to the Journal of World Business, special issue “Institutions, Entrepreneurship and Co-evolution in International Business”.

The author was responsible for the development of the research plan and the theoretical framework of the study, setting of the hypothesis, structural equation modeling, and reporting of the research results and implications of the study.

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List of figures

Figure 1. Theoretical framework of the study Figure 2. Positioning of the study within the literature Figure 3. Research design through method triangulation

Figure 4. The model of institutional impact on SME internationalization in emerging economies

Figure 5. The model of institutional impact on SME internationalization in Russia

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List of tables

Table 1. Foreign trade of Russian firms

Table 2. Theories of international trade, foreign direct investment, and firm internationalization

Table 3. Research questions, objectives, and publications

Table 4. Classification of the IE research themes in the context of institutional research Table 5. Core studies applying Institutional Theory in International Entrepreneurship research in emerging economies

Table 6. Summary of the objectives, methods of analysis, research findings, and implications of the publications

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List of abbreviations

CB-SEM – Covariance-Based - Structural Equation Modeling CIA – Central Intelligence Agency

CIPE - Country Institutional Profile for Entrepreneurship EE – Emerging Economies

GCR - Global Competitiveness Report

GEM APS - Global Entrepreneurship Monitor Adult Population Survey GEM NES - Global Entrepreneurship Monitor National Expert Survey GLM – General Linear Model

IB – International Business IBV – Industry-Based View IE - International Entrepreneurship

IEEE - International Entrepreneurship in Emerging Economies INV – International New Venture

KBV – Knowledge-Based View MNC – Multinational Corporation NIT - Neo-Institutional Theory OLS – Ordinary Least Squares

PLS-SEM – Partial Least Squares - Structural Equation Modeling RBV – Resource-Based View

REME - Rapidly Emerging Major Economies SME - Small and Medium-sized Enterprise

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1 Introduction

Contemporary research in the developing field of international entrepreneurship (IE) has shown a remarkable interest in the entrepreneurial activities in emerging economies.

The organizational behavior of the small- and medium-sized enterprises (SMEs) in these economies has attracted particular attention in the academic and business communities, as the growth of small innovative private firms in these economies is an important factor for successful economic development.

One of the important aspects of SMEs’ growth in emerging economies is internationalization. The liberalization of emerging economies provided an opportunity for the involvement of local SMEs in the global economy. SMEs involved in international operations often experience high growth due to their orientation towards new markets and niches, flexibility, and their ability to cooperate with foreign partners (Etemad 2013; Krasniqi 2012). Internationalization provides these firms with an opportunity to increase their knowledge base, which consequently leads to diversification and achievement of the economies-of-scope. This helps the SMEs to ensure their competitive advantage, both domestically and abroad, to mitigate the risks related to domestic market turbulence, and to improve financial stability. From the macroeconomic perspective, SMEs’ internationalization supports innovativeness and growth in employment and production, and thus stimulates economic growth.

Brazil, Russia, India, and China, as well as the emerging economies of the next tier, such as Indonesia, Mexico, Poland, South Korea, and Turkey, now comprise a third of the 25 largest economies in the world (Kiss, Danis, and Cavusgil 2012), with growth rates that significantly exceed those of developed economies. A high level of early-stage entrepreneurial activity in many emerging economies (e.g. in China, Brazil, Turkey, Mexico) contributes to their dynamic economic growth. However, Russia represents a case of the lowest level of early-stage entrepreneurial activity among all the other efficiency-driven emerging economies. Only 4.3% of adults aged 18-64 in Russia are identified as nascent and new entrepreneurs (Global Entrepreneurship Monitor 2013).

In 2011, 250 000 SMEs with 16 to 250 employees were registered in Russia, amounting to 1.7 per 1000 inhabitants, which exceeds, for example, German (1.2), South Korean (1.1), or Mexican (0.2) levels (OECD 2013). However, regardless of the big share of the SME sector in the total number of firms operating in the country (together with micro- firms and self-employed it accounts for 97.2% of all firms registered), its employment and output remain low. Russian SMEs employ only 27% of the workforce and contribute 23% of the country’s GDP (OECD 2013).

In 2013, the index of internationalization aspirations among Russian entrepreneurs was noticeably lower (0.02) than in other emerging economies, such as China (0.08), Indonesia (0.14), Mexico (0.25), and Turkey (0.36) (GEDI 2013). The percentage of Russian SMEs exporting directly or indirectly at least 1% of sales (9.1% for small and 14.6% for medium-sized firms) was also below the Eastern European and Central Asian

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(EECA) and world average. However, noticeably the proportion of directly exported foreign sales in the total sales structure of Russian SMEs resembled the EECA and world level (see Table 1).

Table 1. Foreign trade of Russian firms

Indicator Firm Size Russian

Federation

EECA All Countries

Percentage of firms exporting directly or indirectly (at least 1% of sales)

Small 9.1 16 10

Medium 14.6 28.3 20.8

Large 23.6 46.9 40.7

Percentage of firms exporting directly (at least 1% of sales)

Small 6.3 12.9 6.8

Medium 10.2 23.7 15.3

Large 13.5 41.2 32.7

Proportion of total sales that are exported directly (%)

Small 2.4 4.7 2.7

Medium 3.1 9.3 5.7

Large 1.6 20.1 15.7

Proportion of total sales that are exported indirectly (%)

Small 0.5 1.4 1.5

Medium 0.8 2.5 2.7

Large 4.0 4.0 5.1

Source: The World Bank, Enterprise Surveys, Russia, 2012

Earlier studies report that some of the barriers to Russian SMEs’ internationalization are related to the lack of financial capital and other firm resources, limited access to key infrastructure, limited managerial knowledge, and difficulties in finding potential overseas customers (OECD 2009). The Ministry for Economic Development of the Russian Federation reports that the barriers to SMEs’ foreign trade are also related to the firms’ lack of capacity to internationalize (APEC 2012). Other external obstacles emphasized by Russian exporting firms seem to be related to customs and trade regulations, business licensing and permits, tax administration and tax rates, corruption of domestic institutions, and political instability (Lamprecht 2011, based on the data of World Bank Enterprise Survey 2009).

The severe discontinuances in the institutional environment for entrepreneurship in Russia have been emphasized in a number of international studies, such as World Bank (Doing Business Index), World Economic Forum (Global Competitiveness Index), and Global Entrepreneurship Monitor (National Expert Survey). The level of development of the Russian institutional framework was ranked 121 out of 148 countries evaluated by the Global Competitiveness Index in 2013 (Schwab 2013).

This raises a question of the importance and composition of the institutional discontinuances affecting SME internationalization in Russia, and leads to an assumption that, in addition to the firm- and industry-specific constraints, there are other structural, institutional, and cultural distortions preventing entrepreneurial internationalization of the firms.

Contemporary research has emphasized, but not yet developed, a comprehensive understanding of how the domestic institutional environment in emerging economies

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affect SMEs’ international growth, and how consequently the international growth is reflected in the SMEs’ performance. Consideration of these issues has been previously addressed in the research focused on domestic small business entrepreneurship (see e.g.

Smallbone and Welter, 2012; Manev and Manolova, 2010; Manolova et al. 2008; Aidis et al. 2008) and internationalization strategies of bigger enterprises from emerging economies (see e.g. Meyer et al., 2009; Peng et al. 2008). However, the knowledge in the context of SME internationalization in emerging economies remains scarce.

Due to the lack of understanding related to the influence of formal and informal institutional structures on entrepreneurial internationalization of SMEs in emerging economies, the author initiated work on this doctoral dissertation. As a result of the study, a theoretical model of the institutional impact on internationalization proclivity and international performance of SMEs in emerging economies is developed. In addition, policy implications and managerial guidelines for utilizing the external institutional environment in emerging economies are provided.

1.1

Background of the study

Internationalization research has been informed by a very diverse range of theoretical perspectives, including international trade, foreign direct investment, and internationalization theories of the firm, which have respectively emphasized the role of a country’s trading patterns, market imperfections leading to internalization of transactions in multinational corporations, and microeconomic explanations of international trade (see Table 2 for an overview of theories). A notion of the external institutional environment as a dominating factor guiding a foreign market entry decision was not largely adopted in the field of international business (IB) until organization theory acquired a bigger niche in its theory development (Buckley and Lessard 2005).

Table 2. Theories of international trade, foreign direct investment, and firm internationalization

Theory Key propositions Credited authors

International trade theories

Classical trade theories Countries gain from international trade when devoting resources to the production of goods and services in which they have absolute or competitive advantage

Smith 1776; Ricardo 1817

Factor proportion theory Trade is caused by the fact that countries have different relative factor endowments. Countries specialize in the production of goods and services that utilize their most abundant resources.

Hecksher and Ohlin 1933

Product life-cycle theory (for international trade)

A trade cycle starts where a product is produced by a parent firm (MNE), then by its foreign subsidiaries, and finally anywhere in the world where costs are the lowest.

Vernon 1966;

Wells 1968, 1969

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Foreign direct investment theories

Market imperfections theory Firms constantly look for market opportunities. Their decision to invest abroad is explained as a strategy of capitalization on certain capabilities that the competitors in foreign countries do not possess. The capabilities or advantages of firms are explained by market imperfections for products and factors of production.

Hymer 1970

International production theory The propensity of a firm to internationalize depends on the specific attractions of its home country compared with resource implications and advantages of locating in another country, i.e. actions of a foreign government may affect a decision to internationalize.

Dunning 1980

Internalization theory Firms aim to develop their own internal markets whenever transactions can be made at lower cost within the firm. Internalization resembles a form of vertical integration bringing new operations and activities that used to be carried out by intermediate markets under the ownership and governance of the firm.

Buckley 1982, 1988;

Buckley and Casson 1976, 1985

Firm internationalization theories

Uppsala model The process of internationalization is founded on an evolutionary and sequential build-up of foreign commitments over time.

Johanson and Vahlne 1977

Helsinki model The process of internationalization occurs first through developing firm’s international competence at the domestic market (inward internationalization) and then foreign market entry.

Luostarinen 1979, Welch and Luostarinen 1988 Innovation-related stage theories The process of internationalization consists of a

sequence of discrete stages. Stable periods take place between the stages, when a firm consolidates and generates appropriate resource base to respond to environmental conditions which allow it to proceed to the next stage.

Bilkey and Tessar 1977, Cavusgil 1980, Reid 1981; Wortzel and Wortzel 1981;

Czinkota 1982; Lim et al. 1991; Rao and Naidu 1992 Network theory Firms are enabled to internationalize through business

networks that offer a variety of knowledge sets, capabilities, and resources that a firm would not be able to obtain or develop on its own.

Etemad et al. 2001;

Etemad 2004

International new venture theory International new ventures internationalize rapidly and intensively across culturally and geographically distant locations. In addition to firm level specific factors, the theory focuses on an individual entrepreneur, whose personal abilities and knowledge help a firm to succeed in foreign markets.

Knight and Cavusgil 2004; Oviatt and McDougall 1994;

Madsen and Servais 1997; McDougall and Oviatt 2000; Acs et al. 2003 Contextual theory of

international entrepreneurship in emerging economies

Internationalization of smaller, younger, entrepreneurial firms is caused by three main developments: the evolutionary socio-economic and political developments, technological innovations, and rapid growth of emerging economies.

Etemad 2013

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The adoption of the so-called “institution-based view” (Peng 2008), meaning dependence of the internationalization strategy of a firm and performance on the external institutional environment, was to a large extend triggered by a rapid growth in emerging market economies and an increased focus of multinational corporations (MNCs) on the opportunities to penetrate these markets. Thus, an institution-based view was adopted in the international business domain as the third leg of a strategy tripod (Peng et al. 2009), in addition to RBV and IBV, for developing MNCs’ entry strategies for entering emerging markets.

The institution-based view provides a context for the research in emerging economies (Kogut 2003), where application of the existing theories often requires major adjustments (Redding 2005; Teegen et al. 2004). Thus, adoption of the institutional theoretical lens provides researchers with an opportunity to answer such important questions in IB as, what drives a firm’s internationalization strategy in emerging economies and how could the effect of the institutional discontinuances be utilized in order to benefit the firm in its growth aspirations.

The institution-based view also proved to be helpful in entrepreneurship research, where it enabled researchers to explain the success of particular ventures by influences other than organizational or resource-related (Bruton et al. 2010). The main reason for the increased interest in the institutional perspective in entrepreneurship is dissatisfaction with the existing theories that underestimate the existence of the social context in the formation of an entrepreneurial action (Barley and Tolbert 1997). Formal and informal institutional frameworks developed in society provide a basis for legitimate entrepreneurial behavior, and thus can help to predict the required institutional conditions to stimulate the entrepreneurial intention and further the growth aspirations of the new ventures (Bruton and Ahlstrom 2003; Bruton et al. 2010). As a result, an ability to understand the impact provided by the country-level institutional environment for entrepreneurship on the formation and growth of new ventures is twofold. On one hand, it enables policy-makers to design the conducive policy structures supporting economic growth. On the other hand, it provides knowledge for the entrepreneurs on how to utilize the influence of the institutional frameworks in order to benefit the firm’s growth.

Recent studies in international entrepreneurship strongly emphasize the importance of the research on institutional differences across emerging economies and their impact on the firm-specific variables, such as resources, capabilities, internationalization strategies, and realized performance (Kiss et al. 2012). Small and medium-sized firms that often lack resources in emerging economies face particularly big challenges related to the influence of home macro-economic conditions, underdeveloped regulations, taxation policies, and, in some cases, unfavorable societal attitudes towards the phenomenon of entrepreneurship (Smallbone and Welter 2012; Manev and Manolova 2010). Research on the institutional environment for entrepreneurship in emerging economies could be broadly divided into two streams: (1) studies focused on domestic entrepreneurship and comparisons of the domestic entrepreneurial environments across

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countries (corresponds to Type B, Thematic area “Cross-country research” in Jones et al. 2011), and (2) studies focused on the phenomenon of entrepreneurial internationalization and its comparisons across countries (Type A, Thematic area

“Internationalization” and Type C, Thematic area “Comparative Entrepreneurial Internationalization” respectively, in Jones et al. 2011) (see Table 4 for more details).

According to Kiss et al. (2012), only about 40% of the studies in the field of International Entrepreneurship in Emerging Economies (IEEE) belong to Type A (Jones et al. 2011) and the remaining 60% are focused on the comparative Types B and C.

Although no clear estimation following this classification exists for the research focused on the institutional theory application in IEEE, the author of the dissertation evaluates the domestic entrepreneurship-based stream (Type B) as dominating the international one (Types A and C). This proportion remains particularly true in the case of Russia, where studies of the institutional environment for entrepreneurship in the domestic context significantly outnumber those of entrepreneurial internationalization, and only a few comparative internationalization studies, which are all linked to the formation of strategic alliances and joint ventures, exist, to the author’s knowledge (Li et al. 2012;

Young, Ahlstrom, Bruton et al. 2011; Hitt et al. 2004). Presenting the research gap that this dissertation aims to fill, the next chapter will tackle these issues in more detail.

1.2

Research objectives

Research gap addressed by the dissertation

Various streams of research on firm internationalization (e.g. Brouthers and Hennart 2007 on entry mode strategy and institutions; Peng et al. 2008 on IB strategy and institutions; Szyliowich and Galvin 2010 on international entrepreneurship theory of internationalization and institutions; Shirokova and McDougall-Covin 2012 on network theory of internationalization and institutions) have provided important findings related to the role of the institutional environment in internationalization strategy development and implementation. It has been maintained that institutional arrangements are mostly country specific, and they shape organizational practices through institutional pressures for isomorphism (DiMaggio and Powell 1983). Isomorphism has been found to be important, as it provides a firm with the desired legitimacy in a foreign market, particularly in the case of MNCs and their sub-units (Kostova 2008). The institutional environment has been found to grant legitimacy based on a firm’s compliance with institutional requirements in the host countries, and thus decrease its liability of foreignness (Kostova and Zaheer 1999).

When it comes to smaller firms, not only the liability of foreignness, but also a liability of smallness comes into picture (Aldrich and Auster 1986). Firm size imposes constraints on the available resources and is typically associated with the amount of market power possessed by a firm. Thus, resource-constrained and bargaining power- bounded SMEs looking for growth opportunities in the foreign markets become a subject for an exceptionally high influence by the institutional environment, which

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affects their behavioral patterns and allocation of entrepreneurial effort toward high- growth activities (Bowen and De Clercq 2008). The groups of institutional factors affecting high growth propensity include financial and human capital, regulatory framework (Baumol 1990; Bowen and De Clercq 2008; Stenholm et al. 2013), and other informal institutional factors (for example, trust, authority relations, and others) that affect economic behavior (North 1990).

However, when the discussion of SME high-growth entrepreneurship moves into the context of emerging economies, it becomes evident that the complexity of the relationships between the effect of the institutional environment, entrepreneurial effort, environmental turbulence, and resource constraints becomes hard to tackle (Kiss et al.

2012). As the growth of the private sector, which, to a large extent, consists of the SMEs, is an important factor for successful economic restructuring in emerging economies (Hoskisson et al. 2000), existing knowledge has covered in detail the antecedents and consequences of emerging economies’ institutional conditions for domestic entrepreneurship. The research findings indicate that the voids in formal institutional structures that are common in emerging economies become filled by informal ties and relational governance (i.e. Bruton et al. 2010). Reliance on informal norms of behavior, on one hand, may be costly for a firm, and thus may prevent it from further development and growth (Huang 2008; Bruton et al. 2010). On the other hand, an inadequate institutional infrastructure may push a firm to exploit the differences between the conditions of the home and host country institutional environments (Boisot and Meyer 2008; He 2012), and thus become a driver of internationalization.

He (2012, p.6) notices that “…research specifically focusing on emerging market SMEs remains relatively limited.” Jones et al. (2011, p.643) suggest that the research in international entrepreneurship “…could assess the impact of the institutional context on [internationalization] opportunity recognition”, entrepreneurial capabilities, and enactment of entrepreneurial internationalization opportunities. Thus, Jones et al. (2011, p.646) conclude that the IE research “…might benefit from the application of an institutional lens”, and that “…research with an institutional focus could be enriched through the application of a cultural perspective”. Last, but not least, Kiss et al. (2012, p. 266) state that “…our understanding of international entrepreneurship (IE) in emerging economies is quite limited. Consequently, a more systematic research approach is needed to improve our understanding of entrepreneurial phenomena in a wider range of cultural and institutional contexts.”

All this suggests that extant literature on international entrepreneurship in emerging economies identifies a close relationship between the internationalization strategy of SMEs and the domestic institutional environment in emerging economies, and even suggests that an unfavorable institutional environment could become a driver for a local SME to enter foreign markets. However, it leaves the specific relationships between the institutional factors and small- and medium-sized firms’ internationalization behavior not yet tackled. Thus, following the leads from the literature and merging them with the ideas gathered in the discussions with Russian SMEs, the author (and the fellow

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researchers) engaged in a thorough investigation of the current state of international entrepreneurship in Russia and its relationship with the contemporary institutional environment in the country.

On one hand, a gap in knowledge was identified concerning the effects of the institutional environment and the SMEs’ internationalization strategy. The heterogeneity of the institutional frameworks across and inside the emerging economies restricts the generalizations of institutional influences on SMEs’ strategic behavior (Kiss et al. 2012; He 2012). The inconsistency in formal and informal influences on firms’ behavior at different levels of the institutional environment within one emerging economy restricts the development of research assumptions and makes cross-country comparative studies difficult to execute (Eunni and Manolova 2012; Gupta et al. 2012 a, b).

On the other hand, it was realized that more attention should be given to the methodological issues related to measurement of the institutional effects. There is no consistent agreement among scholars upon the measurement instruments to be applied in quantifying the influence of the institutional environment on entrepreneurship across countries. Various measurement tools are used by researchers (Busenitz et al. 2000;

Descotes et al. 2011; Stenholm et al. 2013), however, special concern is raised by the scholars about the applicability of the existing measurement instruments in the context of emerging economies (Eunni and Manolova 2012; Gupta et al. 2012 a, b; Manolova et al. 2008).

In addition, even though extant literature has started to recognize the particular interdependence between firms’ internationalization behavior and the conditions of the institutional environment in emerging economies, there is an empirical gap in terms of the studies focusing on the impact of the institutional variables on the firms’ resources, capabilities, strategy, and performance in international entrepreneurship in the context of emerging economies (Kiss et al. 2012). The questions that still remain unclear are whether SMEs from emerging economies internationalize differently in comparison with SMEs from developed countries (He 2012), how they make a decision to internationalize, and what impacts their international performance after the foreign market entry.

Thus, investigation of the unique institutional conditions for international entrepreneurship in emerging economies, taking Russia as a specific case for investigation, creates a relevant research frontier and addresses theoretical, methodological, and empirical discontinuances in the existing knowledge on IEEE.

Scope and objectives of the study

The doctoral study presents a comprehensive analysis of the impact of the institutional environment on the internationalization of SMEs from emerging economies under the conditions of institutional uncertainty. Specifically, the research focuses on the context of Russian SMEs establishing their operations abroad.

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The research of the different institutional empirical contexts in emerging economies and their comparative analysis presents an avenue for the future advancement of both theoretical and empirical knowledge in the IEEE (Kiss et al. 2012). Due to the above- mentioned historical, social, and cultural heterogeneity of the institutional influences in emerging economies, context-based studies become particularly important for knowledge advancement. This guideline for future research is reflected in the scope of the dissertation, which focuses on the identification of the linkages between institutions and international entrepreneurship in the context of one chosen emerging economy - Russia.

Research on Russia, though claimed by some scholars to be the most elaborated among Eastern European countries, represents an interesting and broad empirical context, yet

“fragmented and not well integrated as it draws from many different disciplines” (Puffer and McCarthy 2011, p.21). For this reason, scholars (Puffer and McCarthy 2011;

Whetten 2009) call for new research contributing to the existing knowledge in two ways - both contextualizing the existing theories and theorizing about the context. In order to address this call, the dissertation is focused on the two research objectives that constitute the contribution of the study to the existing knowledge:

1. To theorize about the impact of the institutional environment for entrepreneurship on the internationalization proclivity and international performance of the SMEs in emerging economies, and

2. To contextualize the knowledge of the relationship between the institutional environment and international entrepreneurship in Russia.

The study addresses the following research question: How does the domestic institutional environment for entrepreneurship affect the entrepreneurial internationalization of SMEs in emerging economies (in the case of Russia), and how is this effect reflected in the performance of SMEs?

The following sub-questions help to provide the answers to the main research question, through the five research papers included in the structure of the dissertation:

1. What kinds of challenges does the home country institutional environment pose for internationalization of SMEs: the case of Russia? (Publication I)

2. How is the home country institutional environment for entrepreneurship in emerging economies measured: the case of Russia? (Publication II)

3. How does the home country’s institutional environment for entrepreneurship affect the identification and execution of an internationally based growth strategy and consequently the international performance of SMEs? (Publication III)

4. How does the domestic institutional environment affect the internationalization

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strategies and how does that, in turn, affect the realized growth and profitability of SMEs in the context of the domestic institutional environment? (Publication IV) 5. What are the multiple structural linkages underlying the relationships between the

country’s institutional environment for entrepreneurship, domestic market size, local rivalry, and internationalization aspirations of SMEs in emerging economies?

(Publication V)

The research process of the dissertation follows the following six steps. First, an analysis of the existing literature at the intersection between institutional theory, international business, entrepreneurship, and international entrepreneurship is conducted. Second, a qualitative investigation of the context-specific institutional challenges related to the internationalization of SMEs in Russia is performed. Third, a measure of the institutional environment for entrepreneurship is operationalized, and its validity and reliability in the context of emerging economies are tested. Fourth, a quantitative analysis of the influence of the home country’s institutional environment on the internationalization proclivity and subsequent international performance of Russian SMEs is conducted. Fifth, the quantitative analysis is expanded by testing the relationship between the internationalization growth strategy of Russian SMEs and their performance, meaning realized growth and profitability. Finally, a structural model of the influence of the home country’s institutional environment on international entrepreneurship across 27 emerging economies is built.

The study provides a theoretical contribution within the field of IE by addressing the study objectives and, in addition, develops managerial and policy-making implications.

From the theoretical perspective, this dissertation advances the understanding of the institutional influences on the strategic choices related to internationalization of SMEs in emerging economies. From the practical point of view, the study provides scientific grounds for advancing policies directed at the creation of a conducive environment for international entrepreneurship in emerging economies, particularly in Russia. The author believes that the study could become a small step towards the development of an adequate and supportive institutional environment for entrepreneurship in Russia, which will not only enable and encourage local SMEs to go international, but will also attract an increasing number of foreign investors, looking for a less turbulent institutional environment with high market potential.

1.3

Structure

The dissertation is structured as follows. The first chapter of the Introduction to the dissertation provides a background to the study and introduces the scope of the research and research objectives. The second chapter starts with the theoretical foundations of institutional theory as applied to organizational studies, and its embeddedness in the domains of international business and entrepreneurship. Drawing on the existing literature in international business, entrepreneurship, and international entrepreneurship, it explains the particular relevance of institutional theory to the studies of

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internationalization of SMEs in emerging economies. The third chapter summarizes the methodological issues of the study execution, and describes the method and data triangulation research design applied in the dissertation. The fourth chapter describes the objectives, content, and results of the publications included in the dissertation. The final, fifth chapter concludes by answering the research question of the study and providing a description of the dissertation’s contribution to the existing body of knowledge.

In order to provide a detailed description of the publications included in the dissertation, and to link them with the research sub-questions of the study, Table 3 is provided below.

Table 3. Research questions, objectives, and publications

Research questions Objective Publication title Research method and data Research Question 1:

What kinds of challenges does the home country’s institutional environment pose for the internationalization of SMEs: the case of Russia?

To provide background knowledge on the contemporary institutional shortcomings related to the internationalization of Russian SMEs

Exploring the role of a country’s institutional environment in internationalization:

strategic responses of SMEs in Russia

Qualitative interview-based

study; snowball

sampling; 5 SMEs

from Saint

Petersburg and

Moscow Research Question 2:

How is the home country’s institutional environment for entrepreneurship in emerging economies measured: the case of Russia?

To assess the applicability and invariance of the country’s institutional profile for entrepreneurship construct in the studies of emerging economies (particularly Russia)

Measuring

institutional profiles for entrepreneurship:

the case of Finland and Russia

CB-SEM with

LISREL software;

invariance analysis;

primary survey data from 193 Russian

and 122 Finnish

SMEs Research Question 3:

How does the home country’s institutional environment affect the identification and execution of an internationally based growth strategy and consequently the international performance of SMEs?

To study the influence that the institutional environment has on the internationalization- and innovation-based growth strategies of SMEs

The institutional environment for international entrepreneurship in Russia: Reflections on growth decisions and performance in SMEs

OLS (SPSS);

primary survey data from 188 Russian

SMEs from the

North-West region

Research Question 4:

How does the domestic institutional environment affect the internationalization strategies and how does that, in turn, affect the realized growth and profitability of SMEs in the context of the domestic institutional environment?

To examine the influence of the institutional environment on the choice of a growth strategy and the consequent performance

To grow or not to grow: International growth of Russian SMEs in the context of a local institutional environment for entrepreneurship

OLS and GLM

(SPSS); primary

survey data from 193 Russian SMEs

from the North-

West region

Research Question 5:

What are the multiple structural linkages between the country’s institutional environment for entrepreneurship, domestic market size, local rivalry, and internationalization aspirations of SMEs in emerging economies?

To study the structural relationships between the institutional environment, domestic market size and

competition, and

international entrepreneurial opportunity recognition

Structural model of institutional environment influence on international entrepreneurship in emerging economies

PLS-SEM with

Smart PLS software;

secondary data

(GEM NES; GEM

APS; GCR); 27

emerging economies

Internationalization of small and medium-sized enterprises and impact of institutions on international entrepreneurship in emerging economies: the case of Russia