Why don't entrepreneurial firms internationalize more?

The area of "international entrepreneurship" has received significant scholarly attention with the development of strong conceptual models during the last decade (e.g., McDougall and Oviatt, 2000; DeClercq et al., 2005; Zahra and George, 2002). These models consider the impact of organizational and environmental characteristics of entrepreneurial firms on the patterns of internationalization, wealth creation, survival, and growth. However, while internationalization and its consequences have been the focus of extensive research (Werner, 2002), the question of "Why don't firms internationalize?" has received much less attention. Considering that in spite of the "march of globalization" often trumpeted by the business press, the fact that most high-performing North American entrepreneurial firms still are domestically oriented (Cox and Camp, 2001) makes this an interesting question.

Research has concluded that the lack of age (Oviatt and McDougall, 1994) and size (Westhead et al., 2001) are no longer reasons for not pursuing internationalization. Therefore, perceptual and experiential factors may be primary reasons firms do not internationalize (Manlova et al., 2002). Two possible factors in this stream are domestic success and entry barriers. The "domestic success" argument, inherently assumed in the Uppsala model of firm internationalization (Johanson and Vahlne, 1977), suggests that firms will pursue international activities only when their domestic markets have matured. If there is abundant domestic opportunity, firms will not internationalize. Conversely, the "barriers to internationalization" argument suggests that firms do not internationalize because of differences in knowledge and/or national cultures between the headquarters country and other countries, and/or perceived financial or economic risks. According to this argument, firms may be interested in internationalization, but perceived external hurdles discourage them from doing so.

The issue of internationalization has become increasingly relevant for entrepreneurial firms. We define an entrepreneurial firm as one which is designed to create wealth through new economic activity by bringing together unique packages of resources to exploit marketplace opportunities (Davidsson, 2005; Davidsson et al., 2002; Ireland et al., 2001; Shane and Venkataraman, 2000). Recent entrepreneurship research suggests that while the markets and resources for pursuing these opportunities and activities increasingly will be located beyond the borders of the entrepreneurial firm's home country (Lechner and Dowling, 2003; McDougall and Oviatt, 2000), relatively few firms are growing domestically, let alone internationally (Barringer et al., 2005; Gilbert et al., 2006; Zahra et al., 2000). Therefore, research that investigates possible explanations for this state of affairs appears to be warranted.

This study considers domestic success and perceived entry barriers as possible explanations for "non-internationalization" by studying a sample of 872 entrepreneurial firms from 17 countries, thereby providing opportunity to extend this work beyond the U.S.-centric orientation of most entrepreneurial firm internationalization studies to date. We found that the perceived entry barriers of cultural differences and risk were significant negative predictors of internationalization, whereas domestic success, including firm growth rates, generally was not a predictor. The remainder of the article is divided into three sections. In the next section, we review literature on the domestic success and cultural barriers arguments for entrepreneurial firm non-internationalization. Then, we report the results of the study. The most noteworthy result is that cultural barriers are a stronger predictor of non-internationalization than is domestic success. In the final section, we describe how our findings build upon the work of previous literature, identify interesting directions for future research, and discuss potential implications for entrepreneurs and public policy makers.

LITERATURE REVIEW AND HYPOTHESES

Domestic Success and Noninternationalization

The pursuit of growth has long been a key aspect of entrepreneurship (Birch, 1979; Carland et al., 1984; Gilbert et al., 2006). In fact, recent scholars have argued that entrepreneurship must be linked with the creation of new economic activity (Davidsson et al., 2002). What is becoming particularly noteworthy is that this pursuit of new economic activity may not only have benefits for the firms and employees involved but also may influence the moral development of the cultures in which they exist. In a recent study of the history of economic development of the United States and European democracies, Friedman (2005) found that not only did standards of living advance with increased economic development, but so did those societies' tendencies to become more open, tolerant and democratic as they pursued economic growth. Therefore, it behooves a society to be supportive of its firms that are pursuing responsible growth. In fact, if a society supported growth, it would not be unreasonable to assume that it would be possible for firms to identify and pursue enough domestic opportunities that seeking them elsewhere would not be necessary. This is the "domestic success" argument for why entrepreneurial firms do not internationalize.

The argument that domestic success most influences a firm's decision not to internationalize has conceptual roots in the Uppsala model of internationalization (Johanson and Vahlne, 1977, 1990). This model contends that firms internationalize gradually, moving toward greater levels of commitment and investment in a country and toward countries of increasing cultural difference as they gain confidence in their internationalizing capability. This model contends that internationalization is a gradual process rather than something done from the firm's inception. Therefore, if the decision to internationalize is not made at inception and the firm continues to identify and develop domestic opportunities, then a firm might never decide to internationalize.

Success in domestic opportunities also may limit the firm's ability to conceive and pursue internationalization. As firms find domestic success, they tend to focus on cultivating domestic networks as opposed to investigating potential international markets (DeClercq et al., 2005; Oviatt and McDougall, 2005; Tseng et al., 2004). Recent models of internationalization suggest the need for environmental changes to drive the internationalization decision (Oviatt and McDougall, 2005; Zahra and George, 2002), suggesting some sort of triggering event is needed for the firm to pursue internationalization. However, sustained domestic success would reduce the likelihood that the leaders of the firm would perceive such changes even if they were to occur. These arguments are summarized in the following hypothesis:

Hypothesis 1: Firm performance will be negatively associated with an entrepreneurial firm's degree of internationalization.

Entry Barriers and Noninternationalization

Alternatively, entry barriers are considered a hindrance to internationalization. Some particularly noteworthy entry barriers are lack of knowledge of international markets and cultural differences between host and potential target markets. Such barriers appear to be particularly salient for entrepreneurial firms. The Global Entrepreneurship Monitor (GEM), a cross-national assessment of entrepreneurial activity, recently completed its eighth annual cycle of data collection (GEM, 2006). Its year-to-year findings suggest that these factors do constitute barriers to entry. National experts interviewed by GEM researchers reveal that countries differ with regard to their entrepreneurial knowledge, described by GEM as "entrepreneurial capacity" and defined as "the motivation and skill to take advantage of an opportunity through the creation of a new firm" (Reynolds et al., 2000: 25). Lack of knowledge with regard to regulations, language, technical standards, the availability of qualified international employees, and general information and understanding reduce the skill (and therefore capacity) of entrepreneurs to enter new international markets. Research consistently finds "culture" to be a key factor in country-level differences in entrepreneurship (Acs et al., 2004; Zahra and George, 2002). There is year-to-year stability within countries and relatively little change in rank orderings from year-to-year. As a result, GEM researchers conclude that "entrepreneurial activity may reflect, to a large extent, slow-to-change cultural and social norms and institutions" (Acs et al., 2004: 16). It seems obvious that cultural differences in a target country might discourage or inhibit international venturing.