The 16th Annual McGill International Entrepreneurship Conference: Researching New Frontiers

Bell, Cooper - Networking for Internationalisation of Canadian Natural Health Products SMEs

By

Valerie A. Bell

PhD Management Student

University of Edinburgh Business School, The University of Edinburgh

Room 2.02, 29 Buccleuch Place, Edinburgh EH8 9JS, Scotland

Email: [e-mail]

Telephone: [phone]

and

Sarah Y. Cooper

Professor of Entrepreneurship and Enterprise Development

University of Edinburgh Business School, The University of Edinburgh

Room 3.14, 29 Buccleuch Place, Edinburgh EH8 9JS, Scotland

Email: [e-mail]

Tel: [phone]

Principal Topic

The internationalisation of SMEs remains an important topic for governments, business and academics, given their significant contribution to national economic development, employment and innovation. Canada, one of the most trade intensive of the G-8 countries, with 41% of its GDP and one in every three jobs coming from exports, has made bio-industries health and life science SMEs an international trade priority (DFAIT, 2011).

The natural health products (NHP), or dietary supplements industry as it is called outside Canada, remains virtually unstudied. Valued globally at $68 billion US and at $4.6 billion US in Canada, the Canadian industry comprises 10,650 small and medium-sized retail and manufacturing firms, of which 90% are privately-held entrepreneurial enterprises and 75% are Canadian-owned. This study investigated the motivations of three different types of NHP firms to export; identified obstacles encountered; determined how networking, learning and experience affected them; and explored their use of third-party resources including government, trade missions, consultants, and trade and multicultural networks.

Since every country has its own, highly differentiated regulatory requirements for NHPs with which exporting firms must comply (IADSA, 2011) internationalisation can be an expensive and protracted process. This study also identifies for the first time, how Canada’s unique new Natural Health Product Regulations, introduced between 2004 and 2010 affected exporters and their efforts to internationalise.

Method

This research explored the internationalisation of the Canadian NHP industry using nine case studies and three firm types of small and medium-sized international new venture (INV) firms, including two regulatory service consultancies (RSC), two combination firms that acted as both ingredient suppliers and contract manufacturers (ISCM), and five manufacturers with their own brands. A Delphi Panel consisting of two internationally-renowned industry experts and a university academic specialising in internationalisation independently reviewed and agreed with the findings and conclusions of the study.

Results This study generated research on the previously unstudied NHP industry. Eight of the nine firms internationalized, either upon or within two years of formation, similar to born-globals (Madsen and Servais, 1997), global start-ups (Oviatt and McDougall, 1995), and INVs (Oviatt and McDougall, 1994, 1995) but fit the definition of the latter. One mature firm required almost 20 years before entering its first export market, but having done so, it then internationalised rapidly like the others.

NHP firms viewed the world as one market, entered domestic and foreign markets concurrently or followed domestic clients (Bell, 1995; Madsen and Servais, 1997) but used a born-global-growing-more-global, sequential or staged internationalisation process, confirming Madsen and Servais (2001) and Moen and Servais (2002). They contradicted technology-based industry research that found these firms defied stage theories and sequential globalisation (Bell et al, 2004; Oviatt and McDougall, 1997, 2005).

The research had several unique findings. First, Canadian NHP SMEs utilized all network-related internationalisation processes simultaneously including Johanson and Mattson's (1988, 1993) network theory, Johanson and Vahlne’s (2003) updated Uppsala Model, and the resource-based perspective on network theory (Ruzzier et al, 2006). Secondly, they extensively utilized trade and multi-cultural networks in Canada and internationally, uniquely to: a) accelerate the time required to accumulate knowledge and experiences and access and deepen market penetration, b) overcome psychic distance, risk, and constrained resource obstacles, c) affect foreign market selection, d) locate resources, and e) leapfrog internationalisation stages. Secondly, this also confirmed Koot et al, (2003) that networks of destination, following immigration develop social capital in the form of trust and affection which enhance business opportunities and lead to cross national partnerships that may reduce the risk and complexity of global markets.

The data confirmed that firms can skip stages (Johanson and Vahlne (1977) and that psychic distance was short lived (Chetty and Campbell-Hunt, 2003). Thirdly, RSC and ISCM firms employed the same service firm market entry strategies as Erramilli and Rao (1990) but added a new ‘resource-seeker’ strategy. As relationships became more structured with clients, NHP service firms became more committed to foreign markets and sought out new markets, confirming Bradley (2009).

Their rate of internationalisation increased by building network relationships in new markets, connecting to existing networks in other countries, and allowing trust and commitment to increase prior to increasing investment, rather than because of any specific strategic or firm level advantages (Johanson and Vahlne, 2003; 2009). Exchanges within networks allowed these firms to acquire privileged knowledge about their relationship partners, resources, needs, capabilities, strategies and other relationships, which aided them to become successful internationalisers confirming Johanson and Vahlne (2009). Networking became more crucial when the firms were active in several countries (Forsgren, 2002) and relationship maintenance and management were important especially where resources were limited, confirming Johanson and Vahlne (2009).

NHP SME data confirmed that network relationships affected the patterns of international expansion (Martin et al, 1998); internationalisation strategy (Welch and Welch, 1996); location of foreign direct investment (FDI) (Chen and Chen, 1998); SME internationalisation (Chetty and Blankeburg Holm, 2000); and rapidly in technology firms in Canada (Loane and Bell, 2006). Learning improved their international performance, confirming Blomstermo et al (2004), and different types of knowledge were required for successful growth in overseas markets, confirming Fletcher and Harris (2012).

They adopted FDI, strategic alliances in accordance with Dunning’s OLI model (1997, 2000) and contractual arrangements rather than full ownership, like Hollenstein (2005) and used these to overcome obstacles and risk (Young, 1987; Buckley, 2009). Strategic alliances allowed them to take advantage of larger foreign markets, overcome the need for and lack of power, profile, knowledge and entry obstacles and when with larger firms, to gain insights into unfamiliar markets and generate new business opportunities, confirming Cooper (2001).