Resource Allocation Decisions for the Internationalization of Small and Medium-Sized Manufacturing Firms
Adegorite, Adeoye Inaolaji
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Abstract This research explores the problems of resource allocation during the process of internationalization by small and medium-sized manufacturing firms. The literature largely portrays a positive view of internationalization with respect to increased firm performance or growth. However, particularly for Small and Medium-Sized Enterprises(SMEs), growth through internationalization increases uncertainty and may jeopardize firm performance and even threaten survival of the firm. The literature indicates that some SMEs fail during the process of expanding to foreign markets (Brewer 1981;Ramaswamy 1992; Mudambi and Zahra 2007). Many of these failures are due, in part,to the challenges of allocating limited resources during and after internationalization(Chen and Hsu 2009). Given the challenge of internationalizing, this research examines the influence of resource allocation on firm performance with the aim of providing recommendations on how entrepreneurs can make better resource allocation decisions that in turn may lead to improved performance. To address the problem of allocation of limited resources during and after internationalization, theoretical propositions are developed based on modern portfolio-theory (Markowitz 1952; 1959; 1991) that explains the risk-return tradeoffs with regards to resource allocation to domestic, U.S., and foreign markets and possible effects on firm performance. This research applies a multiple case-study approach based on critical realism, a qualitative philosophical research paradigm. Data collection is through in-depth interviews with executives of twenty-two small- and medium-sized manufacturing firms located in Canada. Within-case and cross-case analyses findings are used to confirm or modify the propositions, resulting in a descriptive model that best explains resource allocation decisions and the effects on performance. The findings indicate that resource allocations to domestic, U.S., and foreign markets have different contributions to overall firm performance. However, the way in which resource allocation trade-offs are decided between these markets is largely dependent on the firms or owners/manager’s disposition to risks and returns. Findings from this research also show that decisions by firm managers to allocate resources to a particular market depend on their assessment or anticipation of risks and the potential mitigation strategies that are required in order to maximize returns. This, consequently, determines the firm’s performance during the process of internationalization. This research contributes to the literature in international entrepreneurship, management of technology, and decision analysis. While there is an extensive body of literature that focuses on the output of internationalization (i.e., where, when, and how firms export their products), few studies have specifically examined the inputs that make this happen (one of these being the allocation of resources). Rugman et al. (2008) examines the resource allocation decision between domestic and foreign markets for Multinational Enterprises (MNEs) and the impact on firm performance. No known study has specifically explored resource allocation decisions between domestic, U.S., and foreign markets for SMEs and the influence on firm performance. This research fills the identified gap by making a significant theoretical contribution to this field by adopting portfolio theory to the challenge of allocating resources between domestic and foreign markets.