Journal of US-China Public Administration, ISSN 1548-6591 August 2011, Vol. 8, No. 8, 937-943

Exploiting Enterprise-University Cooperation in the Internationalization Process of SMEs∗ Lingyun Wang, Matti Muhos, Pekka Kess University of Oulu, Oulu, Finland

This single case study illustrates a Finnish SME (small and medium enterprise) cooperation with Chinese universities in the internationalization process to China. The reasons to utilize enterprise-university cooperation are to access to the supplementary competence and to enter into the Chinese market. The Finnish SME realizes the enterprise-university cooperation through the social relationship of its Chinese employee. The Finnish SME exploits the enterprise-university cooperation on R&D activities, HRM (human resource management) practices and marketing channel establishment in China. The case study provides an idea that SMEs could—besides traditionally focusing on suppliers and customers—explore university in a target market as a potential partner in the business networks for their internationalization. Moreover, exploiting the relationship with university can provide more assistance on the operations of the SME in the target market rather than merely on R&D activities. Keywords: enterprise-university cooperation, internationalization, SME

The internationalization of small and medium enterprises (SMEs) attracts the attention of many researchers. Internationalization is variously defined mainly from such perspectives as process, relationships, networks, and firms’ operations (Ruzzier, Hisrich, & Antoncic, 2006, pp. 476-497). Based on the resource-based view, Ahokangas (1998) defined the internationalization as “a process of mobilizing, accumulating, and developing resources stocks for international activities”. Reid (1981, pp. 101-112) pointed out that the internationalization process of SME was more innovative and strongly influenced by managerial variables. At the same time, resource constraint, lack of brand recognition, and inadequate management are significant barriers in the internationalization process of SMEs (Zhao & Hsu, 2007, pp. 815-844). With the boom of the “born global” companies, network theory is developed to explain the phenomenon of rapid internationalization process of SMEs (Hermannsdottir, 2008). Network theory focuses on the impact of the informal and formal business relationships on the growth and internationalization of firms (Mort & Weerawardena, 2006, pp. 549-572). Networking is regarded as a major way for the SMEs to solve the problem of resource constraint (Premaratne, 2001, pp. 363-371). Mtigwe (2006, pp. 5-25) stated that the network of a firm put effort to ∗

This paper is funded by the Finnish Centres for Economic Development, Transport and the Environment (ELY-Keskus) and the European Regional Development Fund. Corresponding author: Lingyun Wang, Ph.D., researcher, Department of Industrial Engineering and Management, University of Oulu; research fields: business relationship management, internationalization, business model innovation and qualitative method. E-mail: [email protected] and [email protected]. Matti Muhos, Ph.D. candidate, Department of Industrial Engineering and Management, University of Oulu; research fields: the growth and in internationalization of technology intensive SMEs including configurations and management viewpoints. Pekka Kess, professor, Department of Industrial Engineering and Management, University of Oulu; research fields: strategic management, production organizations, knowledge management and quality management.

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the internationalization process of the firm as a third party so that a rapid internationalization was possible. Networks of a firm are studied from different perspectives by researchers. Hailinen and Törnroos (1998, pp. 187-205) identified the network from vertical and horizontal dimensions. At the vertical levels, the networks can be classified into such as, geographical levels from local to international, value chain levels including supplier, manufacturer, distributor and customer, and business setting level including industry, company, department and individual. At the horizontal level, the firms have either competitive or cooperative relationship within a specific network level. However, Brandenburger and Nalebuff (1997) proposed a mindset combining competition and cooperation in a value net of a firm which comprising suppliers, competitors, customers, and complementary. In their study on networks in the context of business incubators and SMEs, Smilor and Gill (1986) identified six types of actors in a small firm’s business network. They are large and small firms, universities, public sector such as state and local supporters, and professional advisers such as trade and other associations, chambers of commerce etc. (see Figure 1). These actors are assumed to support small firms in their internationalization. Large firms Professional advisers in the private sector

Universities

SME Public sector organizations Associations Small firms Figure 1. The business network of a small firm. Adapted from Smilor and Gill (1986).

Ritter, Wilkinson and Johnston (2004, pp. 175-183) stated that the focus of research was switching from understanding business networks to managing business networks. They believed that the ability of a firm to successfully develop and manage its relationships with other firms can be regarded as a core competence of the firm. It is even can be an important source of competitive advantage (Day, 2000, pp. 24-30). Coviello and Munro (1997, pp. 361-386) stated that the network of small firms impacts on the foreign market and entry model selection in their internationalization process. The study of Johanson and Vahlne (2003, pp. 83-101) suggested a network model for internationalization process which focused on experiential learning with partners and incremental commitment on time and resource. Although there are some case studies in the existing literature, Ritter, Wilkinson and Johnston (2004, pp. 175-183) suggested that more empirical studies were needed to reveal the network management in terms of network development and firm’s performance in network context. Nummela (2002) also noted that business network was supposed to provide some assistance to small firms, whereas there was little empirical evidence in the existing literature. In their study on SMEs, Bell, Murray and Madden (1992, pp. 37-53) and Rothwell and Dodgson (1991, pp. 125-137) argued that not all of the potential partners in the network were aware by SMEs. Furthermore, SMEs do not know how to exploit the relationships with the different partners in the network. These problems showed that probably very few SMEs could effectively utilize the advantages of their networks (Nummela, 2002).

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Based on the network proposed by Smilor and Gill (1986), this paper reveals some empirical evidences of university-enterprise cooperation in the internationalization process. It addresses two research questions. The first research question is: Why does SME cooperate with the university in a foreign country? The second research question is: How does SME exploit the relationship with the foreign university in the internationalization process? Koze and Lewin (1999, pp. 146-151) put exploration and exploitation logic into their framework for raising the odds of successful partnerships. Exploration referred to “experimenting with or establishing new assets and new capability”. Exploitation referred to “the elaboration, deepening of existing capabilities and incremental improvements in efficiencies”. The logic of exploitation will be applied to this paper. The paper tries to answer the research questions through illustrating how a Finnish SME exploits the cooperation with Chinese universities to support its operations in the internationalization process to the Chinese market. Moreover, the study also shows some evidences that exploring the non-traditional partner in the networks to support the internationalization process of SMEs. The paper is organized as follows. First, it describes the network study in the internationalization process. Research questions are proposed to learn the enterprise-university cooperation in the internationalization. Second, research method of the study is presented. Third, case study is described to illustrate a Finnish SME utilize enterprise-university cooperation in its internationalization process to China. Consequently, the case study is discussed. Finally, the conclusion and research limitation end up the paper.

Research Method This paper is a part of a project which studies the internationalization process of Finnish companies, especially SMEs, to Chinese market. As mentioned in the research background, more empirical research is expected to show the interaction between firms and their networks in the internationalization process (Ritter, Wilkinson, & Johnston, 2004, pp. 175-183; Nummela, 2002). It leads to taking qualitative study into account in the research, as qualitative methods can be used first to better understand the phenomenon about which remains unknown; second, to gain new perspectives on matters about which is already known much, and third, to gain more in-depth information that may be difficult to convey by quantitative means (Strauss & Corbin, 1998). A case study is one of typical methods of qualitative research. Yin (1994) stated the case study was the preferred strategy when “how” or “why” questions were being posed, when the investigator had little control over the events, and when the focus was on a contemporary phenomenon within some real-life context, especially when the boundaries between phenomenon and context were not clear cut. The project explores the practices of Finnish companies in the process of internationalization so that more research questions are proposed on “how” and “what” aspects. Consequently, qualitative method is assumed to fit the research questions, as it can generate rich information which is not obtainable by utilizing statistical sampling techniques (Hoepfl, 1997, pp. 47-63). The case companies of the project are selected from those companies who are currently operating in Chinese market. The data are collected from the case companies through a structured questionnaire and a face-to-face interview. The interviewees are the persons in the management level of the case companies, who are the right persons to the investigation as they are personally involved in the internationalization process to China. The structured questionnaire is designed to gain some basic information of the case companies in the internationalization. All the case companies answer the same questionnaire. The other questionnaire of the interview is designed based on their answers of the first questionnaire in order to get more in-depth information.

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Therefore, the questionnaires of the interviews are different according to the different case companies. This paper uses a single case study method. Referring to Yin (1994), the rationale for a single case can be one case “represents an extreme or unique case” or “the case is a revelatory case”. In the paper, the case company highlights a special feature on the network to utilize enterprise-university cooperation in the internationalization process. It is supposed to give some indications on the network theory and managerial implications of SMEs in the internationalization process. The name of the case company is not disclosed in order to respect the confidentiality of the company.

Case Study The case company is a medium-sized Finnish company which provides electrical products and service for industrial application. It established a wholly-owned enterprise (WOE) in China in 1999. Chinese market entry was one important motivation of the case company. It is looking for stable growth opportunity of business development. The internationalization process to China was started by its first Chinese employee in the company. The starting point was R&D cooperation with a Chinese university through the personal network of the Chinese employee before the WOE was established. The case company had access to a specific competence that enabled the company to make the product in China. This was the main reason to cooperate with the Chinese university. The relationship with the Chinese university was a case-by-case cooperation on R&D activities. At the same time, the case company also had R&D cooperation with other Chinese universities and institutes in the beginning stage of internationalization. The cooperation with the Chinese universities is in a both formal and informal relationship on the base of case by case. Besides the cooperation on R&D activities, the case company utilized its network with universities to recruit employees. It was regarded as a good source of engineers, as the case company works with the universities in a long term to develop the engineers needed by the company. The university students took the internship opportunities provided by the case company and acquired the job positions later through internship in the case company. On the other hand, some new employees were recruited through the recommendation by some of the employees who had studied in those universities. Although it is not a major part of the customer base, some spin-off companies of the universities are the customers of the case company. The spin-off companies are start-up and developing companies. Some cooperation with those spin-off companies is on the condition of customer-supplier relationship.

Discussion Enterprise-university cooperation is not a new topic in the research. Geisler (1995, pp. 217-229) studied the reasons for enterprise-university cooperative R&D based on the theory of resource interdependence and interaction. He stated the factors affecting the survival of enterprise-university R&D cooperation include: (1) relationship with focal university; (2) relationships with industry; (3) internal management; (4) research and technology strategies; and (5) individual attributes of the founders and managers (Geisler, Furino, & Kiresuk, 1990, pp. 99-109). Cooperating with university, especially on R&D activities, is acquainted by the SMEs in case of necessary when operating in their homeland. However, few SMEs transplant the same idea when facing resource disadvantage in their internationalization process to a foreign country. Confronting new business environment, resource constraint limits the business development in the activities such as human resource management and

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marketing network establishment besides R&D activities in the foreign market. In this case, there are two main reasons for the Finnish SME to cooperate with the Chinese universities. One is to accesses to the supplementary competence. The other is Chinese market entry. The case company illustrates that its cooperation with the Chinese universities plays a role of resource supplementary in the internationalization process. The case company takes advantage of the resources of the Chinese universities when some competences relate to the R&D activities is not sufficient. The case company is wisely to cooperate on the R&D activities—the very beginning stage of product development in Chinese market. The activities support not only on the development of product in a target market, but also for the new market learning in the process. The case company are actively working with a few universities in China. It enlarges the external resources that can be potentially utilized in their process of business development. The relationship with the Chinese universities is established in a both formal and informal way during the process of business development in China. Human resource management (HRM) is a big challenge and one important factor for business success when a foreign company is operating in China (Björkman & Lu, 1999, pp. 306-324). The functions of human resource management such as recruitment, training and development, can be problems for foreign investment companies in China (Leung & Kwong, 2003, pp. 85-105). The case study shows that the case company utilizes the cooperation with the Chinese university to facilitate the recruitment and training. The process helps the case company to localize human resources with relevant expertise in a very effective way. At the same time, personal relationships of the Chinese employees are taken advantage of to recommend the new employees to the company. It is supposed a way to establish the loyalty of Chinese employees in order to reduce the turnover of personnel in a dynamic and rapid changing environment. Furthermore, it also helps the company to overcome the problems of knowledge loss by retaining the employees with relevant knowledge (Wang, 2007). Marketing activities are the key to the successful business development in the internationalization process to a foreign country. It is important to reach the target customers and build marketing channels, although it is a tough task in the foreign market. The case company illustrates that the customer relationship is partly established with the spin-off companies of the Chinese universities. The case study provides an idea to fully exploit the cooperative relationship with universities in a foreign country. Although the spin-off companies are newly established companies and not a major part of the customer base of the case company, it is a business opportunity for the case company with those companies development in the future. In this case, there are three factors to trigger the relationship with the Chinese universities. First is the motivation of Chinese market entry in the case company. Second is the personal relationship of the Chinese employee. Finally there is such a supplementary resource of the Chinese universities seeking by the case company. The case study illustrates that the strategy and internal resources of the case company help to establish and exploit the enterprise-university cooperation in the Chinese market. This kind of cooperation can potentially support several operations of the company instead of merely limited in R&D activities. The case study enlightens to explore more partners of the business networks besides suppliers and customers in the foreign market. Moreover, especially for SMEs with limited resources, it can be a competitive advantage for business development by fully exploiting the relationship to support more activities in the foreign market.

Conclusions and Research Limitation This study provides a real-life example of SMEs exploiting enterprise-university cooperation to boost the

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internationalization process to China. The reasons to utilize enterprise-university cooperation are to access to the competence and to enter the Chinese market. The Finnish SME realizes the enterprise-university cooperation through the social relationship of its internal resource, e.g., its Chinese employees. The Finnish SME exploits the enterprise-university cooperation on R&D activities, HRM practices and marketing channel establishment. The case study provides an idea for SME on how to develop their business in China by exploring more partners such as universities in the business networks besides traditionally focusing on suppliers and customers. Moreover, exploiting the relationship with universities can provide more assistance on the operations of the SME in China rather than merely on R&D activities. It is a single case study with unique aspect and some revelatory implications, as few SME utilize enterprise-university cooperation in its internationalization process to a foreign market. Obviously, the case study illustrates a possible solution for SME when confronting resource disadvantages in the internationalization. The study partly contributes to the bilateral relationship management in the network development. It also provides an empirical study that how SMEs exploit the relationship to effectively utilize the advantages of their network which is little in the existing literature. The practices of the case company supply some managerial implications for SMEs on R&D activities, HRM practices and marketing activities in the internationalization process to China. The single case study is easily subject to the question of generalization. The first research limitation is the replication logic. The case study can be questioned as a contingency instance. Can the case be duplicated in any other context such as by other firms in the Chinese market or in other target market in the process of internationalization? Second, since the case study shows that enterprise-university cooperation supports some operations of business development, what are the conditions to form the enterprise-university relationship in a foreign market? Besides social relationship, are there other channels for a foreign company systematically seeking enterprise-university cooperation to support the operations in a target market? These are questions can be further studied in the internationalization process of SMEs.

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