Main contributions

The field of research in SMEs performance is fragmented and divided. Indeed, most studies on firm performance have been focusing on large-scaled corporations. The

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previous literature assessing large firm is dense and more unified than studies evaluating smaller firms performance. While some argues that the performance of small firms could be evaluated from a limited set of selected variables, some disagree and attempt to depict a more holistic model. Moreover, some studies may only focus on the effects of a single specific or narrow factor to assess SME performance, such as age, size or single industry sector for instance (Eisenhardt, 1999). However, as Storey (1994) argues, the effects of external factors must be taken into account in assessing performance; the firm’s internal characteristics alone aren’t enough to explain the effects of environment on the firm. Other authors have identified several attributes related to large-firm success, however, he argues that those characteristics are distinctive capabilities that cannot be replicate by other firms.

Therefore, a holistic perspective of firm performance would identify factors specific to a single firm and non-relevant for the development of a generic strategy. Even though the subject of SMEs’ performance has been explored (Bates, 1990); Cooper et al., 1994; Lussier, 1995; Lussier and Pfeifer, 2001; Roper, 1999), few studies have investigated the effects of interrelated factors on SME’s success (Gadenne, 1998). I merge the previous results of Lussier (1995); Lussier and Pfeifer (2001) and Maes, Sels and Roodhooft (2003) to identify the different factors and their variables that affect the firm’s performance. This study contributes in the harmonization of SME performance researches by testing the relevance of a set of limited variables in explaining small and medium firm performance. I will apply the variables of Lussier (1995) combined with literature-based selection of interrelated factors on foreign SMEs performance in the Taiwanese market. Finally, my study provides insight about the performance of small foreign direct investments in Taiwan

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CHAPTER 2

LITERATURE REVIEW

2.1 Theoretical perspectives of firm performance

Definition of performance

a. Success

Firm performance, in business researches takes on a multitude of different forms: there is no universally accepted definition of “success”, and “business success”

has been defined in many ways (Foley and Green, 1989); Morel d’Arleux, 1997). On the strategic level, firm performance is often defined as firm success or failure (Dess and Robinson, 1984; Ostgaard and Birley, 1994); in a general conception, “success” is referred as the achievement of the firm’s objectives or one’s own goals in whatever fields of life. However, in business studies, “success” is very often referred to a firm’s financial performance.

Due to the central role of an entrepreneur in a small firm, Jennings and Beaver (1997; 1995) argues that it would be accurate to consider the entrepreneur -the owner- and how he/she might define “success” or “failure” in the context of his/her firm. Success can be assessed in different ways: survival, profit, return on investment, sales growth, number of employees, reputation and so on (Vesper, 1990). There are at least two important dimensions of success:

i) financial vs other success ii) short vs. long-term success

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Performance is harder to measure in the case of small SME’s for several reasons. First, the main objectives of the firm may be other than financial, depending on the owner-manager’s expectations. Second, due to the fact that it is not compulsory for firms of this size to publish the financial data sheets, it is difficult to obtain reliable information concerning the financial situation of an SME. Moreover, in family businesses (and even in the case of a single owner-manager), it is difficult to take into account the individual inputs and expenses of the ownership that are not recorded following an appropriate accounting system. Third, SMEs may be very reluctant to provide financial data on their performance (Dess and Robinson, 1984). Finally, it may take several years before a new venture becomes profitable (Biggadike, 1979).

The main goal and objectives of the small and medium firms can be other than financial or can change frequently over the time. Rather than maximizing the financial performance of the firm, the owner-manager may seek for independence, financial comfort (without huge amount of revenues) and/or a particular style of life (Jennings and Beaver, 1995; Koiranen, 1998) for instance. Therefore, the influence of an entrepreneur’s values and expectations are very important in the definition of a firm’s purpose, success (achievements of goals) and failure (non-achievement of the goals).

However, in the long-run, even firms with non-financial goals should reach and maintain at least a minimum profitability in their operations; incomes should exceed costs to ensure the continuity of the operations. A firm’s profitability can be a useful measure of performance in the case of large companies.

b. Failure

There are several definitions of business failure (Watson and Everett, 1996;

1993). Firm failure has been described with many terms: bankruptcy, insolvency,

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liquidation, death, deregistering, discontinuance, ceasing to trade, closure and exit (Storey, 1994). Each of these terms have different meanings in different countries. It is important to notice that not all firms that go out of business do so as a result of failure, and those that do not should be separated from failure (Pasanen, 2003). For instance, the ultimate business failure for Lockett and Thompson (2001) happens when a business is liquidated or sold. However, I should make a distinction between optional and non-optional sales or liquidations. When there are no option for the owner-manager, the ceasing of the activities of the firm can be defined as failure. Hence, in this study, a failed firm is defined as a firm which has closed because of lack of necessary resources to maintain its activities. On the other hand, a business which is sold because, for instance, the owner-manager wants to realize a profit, is not considered as a failure.

Firm performance approaches

Firm performance is influenced by both the firm and its environment (Johnson and Scholes, 1993; Powell, 1992a; Hrebiniak and Joyce, 1985), performance can then be approached from an internal (firm) or an external (environment) viewpoint.

a. Resource-based view

The most popular recent approach used in the field of performance

assessment has been the resource-based view (Wernerfelt, 1984; Barney, 1991) and its extension, the knowledge-based view of the firm (Kogut and Zander, 1992; Spender and Grant, 1996).

The resource-based view (RBV) of the firm can be based on Penrose’s (1959) idea of viewing a firm as a bundle of resources. The theory argues that the resources hold by a firm (brand names, trade contracts, in-house knowledge of technology,

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employment of skilled personnel, machinery, efficient procedures, capital…) can be combined in some extent to create a competitive advantage (in terms of customer loyalty or technology leads for instance). “What a firm wants is to create a situation where its own resource position directly or indirectly makes it more difficult for others to catch up.” (Wernerfelt, 1984). In many studies later (Cooper, 1995; Cooper and Gimeno-Gascon, 1992; Cooper, Gimeno-Gascon, and Woo, 1994; Dunkelberg, Cooper, Woo, and Dennor Jr., 1987; Woo, Cooper, and Dunkelberg, 1988; Woo, Cooper, and Dunkelberg, 1991; Woo, Cooper, Dunkelberg, Daellenbach, and Dennis, 1989), it was then proved that the resources of a firm (capital, human, management skills) directly influence its performance and can be used as a way to overcome adverse obstacles for start-up ventures. Undoubtedly, the RBV is crucial in determining small firm success;

however in a continuously changing market, the RBV is not enough to predict foreign SMEs success or failure; too simplistic, it cannot be applied alone to new ventures and medium companies (Eisenhardt and Martin, 2000).

b. External viewpoint

The opposite approach, the external viewpoint, emphasized the influence of environmental forces and tries to explain organizational behavior based on environmental constraints. As a general term, environment refers here to all those arenas the firm is operating in and is attached to: it is defined by the PESTE frame as political, legal, economic, socio-cultural, technological and ecological factors which have indirect connections with firms. The firm interacts with its environment, additionally, the environment and its components affect firm performance directly and indirectly, in many ways.

Environment supports the survival of the fittest and destroy the less fitted

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ones. (Gimeno, Cooper and Woo, 1997). The environment carries needs and expectations (market opportunities) which the firm tries to match with its resources, capabilities and strategies. According to the contingency theory (Burns and Stalker, 1961), firm performance is the result of a proper match between the firm’s design and the environment it operates in. The better the match, the better the success.

As the environment is changing all the time, there is a continuous need for adjustment of the fit between the firm and its surrounding environment.

c. Strategic choice perspective

However, many theoretical constructions have been created based on empirical findings made from the observations of large firms. For the context of small firms, the business conception of Normann (1976) is seen to be the most fitted approach.

Strategic choice perspective. A strategic choice approach (Child, 1972; 1997) assumes that firms are in a state of continuous change, which is directed according to the actors’

subjective interpretations of the situation and their preferences (Vesalainen, 1995).

There are some external and internal constraints, but management keeps certain freedom regarding strategy formulation. According to Astley and Van de Ven (1983), the strategic choice approach emphasized on individuals and their interactions, social network constructions, autonomy and choices, as opposed to the constraints of their work responsibilities and functional interrelationships in the firm’s system. Both environment and structure are considered to influence and direct the actions of individuals.

This approach gives a pro-active role to entrepreneurs and a determinant role for the environment. Their choices are viewed as autonomous, and their actions

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are considered as energizing forces that shape the future of their firms.

2.2 Owner-manager characteristics

a. The Entrepreneur

Shane and Venkataraman (2000) emphasize that entrepreneurship emerges from two processes: i) the discovery of entrepreneurial opportunities, and ii) the exploitation of such opportunities. Shane (2000) poses the question: why some people discover opportunities and others do not?

He argues that people have different stocks of information and everyone’s way of acquiring information depends on how they live. More precisely, it plays a vital role in transforming incoming information into potential sources of opportunities.

Therefore, one with higher human capital quality should be able to identify an opportunity in a new economic activity and use his capital to exploit this activity successfully. For instance, prior knowledge influences social networks, which in turn influences entrepreneurial alertness and finally lead to the core process of opportunity recognition.

I define an entrepreneur (following Zhao, Seibert and Lumpkin, 2010) as the founder, owner and manager of a small firm. He/she is a capitalist who provides the main resources and capital for the new-venture, and a manager. As a manager, he/she supervises the organization’s activities, builds up the firm’s reputation and a system of cooperation within the organization.

There is no market for “opportunities”, therefore, an entrepreneur must

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previously develop his or her capabilities to obtain resources, discover and exploit opportunities (education, experience...). ( Lussier (1995) ) emphasizes on the general background of the entrepreneur in terms of knowledge that could lead to higher productivity and potential access to knowledge.

b. Human Capital

Many researches indicate that the work history and experience of the entrepreneur are crucial for entrepreneurship success (Bruno and Tyebjee, 1985;

Hisrich and Peters, 2002; Roberts, 1991; Sandberg and Hofer, 1987; Starr and MacMillan, 1990). Human capital is also the result of experiences and practical learning that takes place on the job, as well as non-formal education, such as specific training courses that are a part of traditional formal educational structures. Industry-specific knowledge and experience is also central in measuring performance. This knowledge is mostly tacit and costly to build up if the entrepreneur has no previous experience from the industry where the business is established. This view supports the strategic choice perspective in evaluating firm performance.

The firm founder’s performance is determined not only by his talent, the conditions of the environment but also by his human (experience and education), social and management capabilities. Bates (1990) and Lussier and Pfeifer (2001) have found education to be a significant predictor of business success. Roper (1999) found a positive effect of owner-manager education on both growth and profitability, while the age of the owner-manager had a positive effect on profitability (Maes, Sels and Roodhooft, 2003). Education and prior experience in business have been seen as critical success factors for small firms (Yusuf, 1995); Wijewardena and Cooray, 1996). The most recurring directly observable characteristics of the owner-manager in business

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performance literature are age, education, management, technical ability and management experience (Havaleschka, 1999; Lussier, 1995).

Start-up resources involve the core resources of the entrepreneur (owner-manager) and additional resources provided by third parties –capital-; Becker (1964) argues that broad labor market experience, as well as specific vocationally oriented experience is theoretically expected to increase human capital.

Oh et al. (2004) have studied the possibilities of social capital in the form of networks ties and the way its effects are influenced by human capital in the form of local language ability. This possibility is an important factor to consider in my study since the building of social network for foreign expatriates is mediated by the local language.

This would imply that expatriates that speak several languages or at least the local language will have larger social capital and, as a result, they will be able to identify more opportunities and mobilize more resources. Similarly, an expatriate that has better financial skills or managerial skills, can demonstrate his skills, attract and enter into a relationship with potential shareholders, or people who own bigger and more prestigious establishments from whom the entrepreneur would draw knowledge and/or resources. Researchers acknowledge that entrepreneurial activity is embedded in network relationships that direct resource flows to entrepreneurs who are better connected (Aldrich and Zimmer, 1986; Hoang and Antoncic, 2003).

In the case of Taiwan, psychic distance is the main obstacle to the firm’s adaptation to the local environment. When interacting with people from different

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cultures, it is natural to interpret their actions through the observer’s own culture’s standards, phenomenon which also occurs at the firm’s level due to the central influence of the entrepreneur. However, doing so can cause misunderstandings. When conducting business in foreign environment, misunderstandings could be avoided by recognizing cultural differences, such as communication styles, religious beliefs, power structures and attitudes toward time and work.

c. Social capital

Moreover, significant resources must be in place to produce success (Deeds and Hill, 1996; Teece, 1986). The important role played by social networks in the process of new venture creation was first studied by Birley (1985). Social capital theory refers to the ability of actors to extract resources from their social structures, networks, and memberships (Lin, Ensel and Vaughn, 1981; Portes, 1998). By personal network, I mean the family members, friends, and business contacts with whom an entrepreneur is directly connected and the indirect relations between them (Dubini and Aldrich, 1991). Maurer and Ebers (2006) also argue that social relationships or connections or ties are critical to the development of small firms. Since start-ups are initially often small in size and tend to fail at a very high rate as compared to established companies, building relationships with these entities are often determinants on their likelihood to survive and thrive.

Network connections enable entrepreneurs to identify new business opportunities, obtain resources below the market price, and secure legitimacy from external stakeholders.

As I stated before, the small firm is focused around its entrepreneur: they are

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more involved in daily firm operations, have greater discretion in decision-making, and more frequently perform key roles (Hite and Hesterly, 2001). Therefore, the individual-level social capital embedded in entrepreneurs’ personal networks may thus importantly influence small firm performance.

Social networks are theorized to supplement the effects of education, experience, and financial capital. Social capital is multidimensional and occurs at both the individual and the organizational levels. In this study, I focus on social capital in terms of social exchange to examine the effects of exchange ties on small firm’s performance. Social capital includes the actual and potential resources accessible through an actor’s network of relationships.

The nature of these exchanges may range from the provision of concrete resources, such as a loan provided by a relative to intangible resources such as information (which is crucial in a country like Taiwan where information is limited and detained by few members). Networks (whether personal and relation-based networks or strategic alliances) are also crucial in the acquiring of complementary resources and capabilities.

The strength of the “tie” or connections with individual increases the willingness and ability of an entrepreneur’s network contacts to provide needed resources. Uzzi (1997) shows that frequent and close interactions facilitates trusted resource exchanges and tacit knowledge transfer.

Social capital allows “asset parsimony”, which refers to the effort needed to acquire the minimum quantity of assets at the lowest possible cost. It is also a strategy

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often used in Taiwan to achieve a competitive advantage. Rather than paying the market price for resources such as labor, materials, and advice, social transactions through network ties can play an important role in acquiring resources at lower values.

Social capital can be a useful resource both by enhancing internal organizational trust through the bonding of actors, as well as by bridging external networks in order to provide resources.

The high-tech industry in Taiwan has numerous examples of successful SMEs that are using their networks to avoid high costs and grow. For instance, small and medium Taiwanese computer firms possess a very narrow knowledge base due to their small size and lack of resources. In order to gain the most important resource in this industry, “knowledge”, they are using their networks as external source of knowledge and cooperate with other bigger organizations and firms to create what is called “inter-organizational knowledge creation”.

Social capital and the nature of networks are multidimensional. In Taiwan’s environment, a certain structure of multiple, volatile and short-term links can create

“temporary spider-web” arrangements where limited financial and technology are exchanged for the duration of a particular project. This helps the firm to gather resources and knowledge at a minimum cost and in a flexible way (Ernst, 1998). I thus believe that a strong social capital greatly influence the performance of a foreign firm.

2.3 Management practices and SME performance

Another important variable or factor explaining SMEs’ success and or failure are the internal factors related to management practices. Ghosh and Kwan (1996), Yusuf

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(1995), and Wijewardena and Cooray (1996) also argues that effective management is an important success factor for an SME. Authors have found that firms that have a diversified range of management skills and competence (Various management functions covered by different individuals regrouped in management team) have a significantly greater chance to survive.

a. Organizational design

One of the most elementary decisions a small firm owner or manager has to make is the design of the firm’s organization. As soon as a small firm hires one or more employees, some kind of organization structure develops. The actual design of this organizational structure is a mix between intended, deliberate choices and unconscious, emergent developments. Who decides on what, who is responsible for what, and how do we coordinate these decisions and responsibilities effectively? The outcome of the organizational design process is unmistakably an important determinant of the performance of firms. Many authors agree that the lack of managerial experience or practice lead to small business failure (d’Amboise and Muldowney, 1988).

Organizational structure is also highlighted as a relevant factor in the regulation of a

Organizational structure is also highlighted as a relevant factor in the regulation of a