Source data and collection

This study uses a survey to gather primary data about the foreign owner-manager’s background, perceptions of the local market in terms of competitiveness, cultural asymmetries and the actual management practices in small-and-medium scaled firms in Taiwan.

In general, this study can be said to follow the subjectivist rather than the objectivist approach. Hence, one of the assumption of this study is that reality is subjective and the participants in this study may see it in different ways, based on their cognitions. Perceptions are important because they are the basis for entrepreneurs’

actions ( Pasanen (2003) ). My perspective follows the one of Pasanen (2003):“I believe that the world can be understood only from the point of view of the individuals directly involved in the activities in question”. The owner-manager is then seen as the most appropriate informant, and the research method used is believed to provide valid information about the object of the research. A questionnaire was designed and send to foreign owners of small-to-medium- scale companies in Taiwan. According to their expectations, previous experiences and the nature of their interactions with the local environment, the entrepreneurs assess the performance, strengths or weaknesses of their

37

firm. Therefore, it is necessary that the owners or executives officers complete the questionnaire themselves.

An important step in the data collecting process is gaining direct access to the firm’s original owners. As I stated earlier, the community of foreign expatriates in Taiwan having grown during the past few years, is still rather small, compared to other countries (such as China or Japan). Consequently, they tend to gather into small social groups where members present common characteristics and experiences. The use of social networks is stronger among such small groups, especially when living abroad.

On the first hand, I used online social networks –Facebook- and e-mails to personally contact foreign entrepreneurs and collect questionnaires. On the second hand, I conduct personal interviews with 6 foreign owner-managers, which helps improve the reliability level of the survey answers. All of the interviewees were owners of restaurants and come from Asian cultures (Philippines, Korea and Thailand).

The questionnaire was designed to cover the four factors expected to influence firm performance, with one or more questions covering each type of variable.

Refer to appendix 1 for a complete version of the questionnaire. To assess the validity and accuracy of the survey items, the questions were pre-tested and refined by 5 foreign owners of SMEs and students chosen from the IMBA program of the National University of Kaohsiung.

The selection of the sample has been made without any restriction regarded the type of industry; I target foreign entrepreneurs gathered in common social groups on online networks.

38

The sampled firms are all owned by foreigners settled in Taiwan for a period of at least 4 months and present all the following features: 1) they employed fewer than 20 persons; 2) they are all located in Taiwan, on the main island or the peripheral small island belonging to Taiwan; 3) Performance: the performance of the SME sampled varies from closure to high profitability and long survival; 4) they are all owned by foreign expatriates living in Taiwan, in sole proprietorship or in partnership (no more than 2 partners).

The age of the owners range from 23 to 60 years old and the reasons for expatriation are diverse, such as work, study, travel and/or business purposes. Except for one respondent, all foreign entrepreneurs have reached at least the beginner level in mandarin proficiency at the opening of their businesses.

Among the 33 respondents, one company has ceased its activities. The sampled firms’ countries of origin vary from western cultures such as Europe (France, 8 firms, Spain 3 firms, and Belgium, 1 firm), North America (United States, 4 firms;

Canada, 3 firms), South America (Mexico, 1 firm) to South Africa (4 firms) and a few numbers from Asia (Philippines, 6 firms; Korea, 1 firm and Thailand, 2 firms).

39

CHAPTER 4

EMPIRICAL RESULTS

140 questionnaires were sent via email or online social networks and 33 valid answers were collected. The response rate is about 25%. 37% of the firm sampled belong to the restaurant industry, 21% to the retail industry, 15 % to the service industry, 12% from the wholesale industry, 6 % belong to the Technology and Communication industry, furthermore, 1 production company, 1 manufacturing company and 1 company from bar and nightclub industry also took part in the survey. Additionally, 6 foreign owners from restaurants industry in Taiwan were personally interviewed and asked what were the main challenges of the creation and development of their firms.

The survey sampled firms located mainly in Kaohsiung, but also cover area the north (Taipei, Hsinchu) and the East coast (Taichung). All the interviewees’ businesses are located in Kaohsiung.

Among the firms sampled, 21 have been created the last three years, 7 are 5-year-old or older, and 5 have been opened for 10 years or more. 25 % of them declared making more profits than industry-average, 45% of them considered making reasonably good profits while 30% estimate making poorer profits.

Based on the individual expectations of the owners, 51.5% declared having almost achieved or are very close to complete the purpose of creation of their business.

More detailed information are given in the descriptive statistics.

4.1 Descriptive statistics

40

In this part will be introduced the basic descriptive statistics of the variables.

The table 2 shows the mean of the first outcome variable –firm active or not (0, 1) at 0.939, with a median of 1, which also equals the first and third quartile, and corresponds to the maximum value. Due to the similarity of the answers -32 of the 33 companies were still active- the values of the first dependent variable are not suitable to obtain proper results from the analysis. Therefore, I discard this variable. On average, on a score range from 1 to 5, the firms make 2.939 % more profits than industry-average, with a median of 3 and a maximum of 5. The initial investment that has already been paid back average 0.606%, on a measure from 0 to 1, 1 being its maximum and 0 its minimum. The purpose of creation has been achieved on an average of 3.394, for a median of 4, a minimum of 1 and a maximum of 5, based on the score range 1 to 5.

The Panel B shows in detail the basic description of the independent variables.

According to the respondents and the distribution of the answers, only 3 variables appeared to be important in their firm performance’s evaluation: age, education and industry experience. Taiwan’s foreign owner-managers are on average 35.7 years old, the youngest being 23, the oldest 60, though most of them already are over 30(median:

34). Unexpectedly, most of the respondents have pursued studies until the university:

on a scale from 1 to 4, the average achieved educational level is 3.606, with a minimum of 2 (lower secondary) and a median of 4 (higher education). Both Bates (1990) and Lussier and Pfeifer (2001) have found education to be a significant predictor of business success. Additionally, Roper (1999) found a positive effect of owner-manager education on both growth and profitability.

41

Generally, the number of owners having experience related to their industry before the opening their company is limited. Many started without any previous insights about their branch of trade and learnt by “doing”.

However, the importance of establishing a business plan before running their business seems obvious to the respondents, though some did not have a clear strategy;

on a scale from 1 to 5, the plan is completed at 3.545, 1 being the least prepared and 5 being the most elaborated. Market research has been found to be more significant in foreign SMEs’ performance, on average, 3.394 of the market research is conducted before investing in new projects.

On average, many firms succeeded in attracting and retaining the qualified staff required to run their business: out of a range from 1 to 5, 3.183% represent qualified employees. Nonetheless, it appears to have limited impact on the firm’s performance. This can be explained in the types of industry: most of the firms sampled belonged to the restaurant, services, wholesale or retail sectors, in which the nature of the work do not necessarily require graduated or qualified employees to be done efficiently. Only one owner-manager from the technologies and communication industry would require qualified employees to run efficiently.

On a score range from 1 to 5, the amount of resources devoted to marketing average 3.576, with a median of 4, which implies that foreign SMEs understand the importance of marketing in the building of their firms’ legitimacy in a foreign market.

The foreign expatriates use it mainly to attract clients and settle their presence in the market. Generally, firms invest sufficient capital to cover the initial expenses and carry on the activities until the full payment of the capital.

42

Contrary to what has been assumed, the amount of the debt contracted by SMEs is minor and do not hinder the firms’ development: only 1.788 of debt was taken out. Nonetheless, Maes, Sels and Roodhooft (2003) have found a strong positive effect of avoiding cash credit (or bank overdraft) on firm profitability. Therefore, I could interpret this absence of debt by the owner’s individual judgment who understands the risks of taking out a debt from the bank, and would rather find resources in its relatives and social contacts for instance. Since the average size of the firms sampled is small (1.833), only a small amount of capital should be needed, which should not create any particular difficulties for the owner to obtain.

The control variables are detailed in Panel C. Concerning the company characteristics, I follow Maes, Sels and Roodhooft (2003) to control for company size – the number of employees-. As expected, the average size of the firms is set to 1.833, with a maximum of 4.5 on a range from 0.5 to 4.5. In general, foreign firms in Taiwan employ 1 to 3 employees (median 1.5) while some do not need additional staff to run their business. The business owners sampled in my survey present diversified profiles and characteristics. Due to the difference in their country of origin, the products or services they introduced in their company vary considerably among firms, which gives to each of them a particular competitive advantage on the other. By definition, a competitive advantage lead to better performance; it would then be pointless to analyze its effect on firm performance as an explanatory variable. Instead, I choose to observe the effects of other parameters on firm performance, when the competitive advantage variable remains constant.

At last, Panel D indicates the results for environment variables. However, I have decided not to include the Environmental factor in the model. Since all the

43

respondents are facing the same environment –Taiwan-, their evaluation of the surrounding market are all similar: customer needs and competition variables present the same means 4,182. According to foreign owners, bribery do not seem to have any significant influence in the business of their industry, flexibility is a common competence acquired by many and taxes represent a marginal cost which do not hinder their capabilities in any way. The fact that foreign entrepreneurs’ perceptions of the local environment depict a unified interpretation shows that the market provides common features to all its members without exception which are perceived in a very similar point of view. Consequently, including the environmental factor as explanatory variables in the model would not be of any significant relevance. Moreover, the standardization of the answers makes it incompatible for data analysis. Furthermore, the environment-related variables are best defined as general, widespread characteristics, rather than specific factors influencing performance.

In order to determine the nature and the possible relationships between the independent and outcome variables, I first run a Pearson’s product correlation coefficient analysis. Refer to table 3 for more details. The strongest and most significant relationships appear between the three outcome variables. The ability to pay back the firm’s initial investment is positively influenced by above industry-average profits. For obvious reasons, a detailed explanation of those results is not necessary: if the business is able to make more profits than its competitors, it is more likely to be able to take out its debts. The achievement of the firm’s purpose reveals a stronger positive connection with paying back the initial capital. Without a doubt, it is essential for a firm to settle any loan –and be financially independent- to start investing in new and ambitious projects which will help developing the firm and get nearer toward completing its goal.

I can also refer to the last explanation to interpret the strong and positive relationship

44

between the achievement of a firm’s purpose and the ability to make more profits than industry-average. In the case of Taiwan’s foreign entrepreneurs, many firms have been opened in the sole purpose of allowing its owner to be financially independent. The reimbursement of the debt can thus be considered, in some cases, to be the final purpose of the firm. As we can observe, the age of the owner-manager is positively correlated with the pay back of the investment: older entrepreneurs tend to settle their debts more often than younger ones. They may have a higher sense of responsibility, or a better access to resources (due to wider social contacts) or it may be simply due to the fact that they spend more time running their business than young entrepreneurs, thus having accumulated more capital. The same reasons can be used to explain the positive relationship between age and the achievement of the firm’s purpose of creation.

As we can expect, age and education present a negative relationship: indeed, older generation did not have the same access to schooling and spend less time on average at school than new generation entrepreneurs. In 1990, the schooling gap between a 25-year-old and 65-year-old people was 2.6 years, in favor of the younger.

Moreover, previous generation firm’s sectors may have focused more on manual technics and know-how such as railway or manufacturing industries before the ascension of the service sector.

A positive correlation between the qualified employees and the industry experience indicates that entrepreneurs with insights about their branch of industry might have either understand the importance of working with competent staff or acquire the ability to attract and retain such employees. Contrary to our expectations, the ability to make more profits than industry-average isn’t related to market research. We could assume that the extent to which a company invests in market research –or how well it

45

understands the needs and characteristics of the demand- may be the bonus that gives a firm a competitive advantage over the others. Additionally, they can adapt their organizational strengths to the environment to create a higher value proposition, to which they can derive an appropriate business plan. However, business plan do not seem to be connected to any of our dependent variables.

Business strategy is defined by some authors as a managerial response to environmental changes. I describe it as an objective analysis of the external and internal environment that facilitates the establishment of the firm-environment fit (Porter, 1980;

Greenley, 1986; Miller and Cardinal, 1994; Hax and Majluf, 1996 and Grant, 1998).

Others have defined it as a mean to improve the firm’s internal level of effectiveness (optimum allocation of resources), consequently, the effects of business strategy are obviously stronger on the organizational level than on the environmental level.

However, one of the biggest challenges foreign firms face is to develop in an unfamiliar environment. Therefore, I may believe that the best way for a foreign SME to fit its environment isn’t find in its firm’s organizational capabilities but in its understanding of the market’s structure, its needs, the nature of the demand and its existing competitors.

As marketing is one of the few strengths of small-and-medium enterprises, we can expect it to be positively related to market research: based on their understanding on the local market, they can respond with an optimal marketing strategy and attract clients. The amount of capital invested at the opening of the firm seems to be critical to achieve higher performance. First of all, an acceptable amount of money is necessary to be able to run the business without any interruption -caused by capital shortage for instance. Such situations turn to be costly –delay of activities and emergency loan costs- and limits the efficiency of the firm. An initial adequate capital

46

also allows the firm to select appropriate resources to carry out the activities (material, etc...). Due to limited budget, resources are very often not suitable to carry out the production –at the level of quality required-. Therefore, the company would be ready to operate at optimum capacity and make more profits than its competitors, as indicated by the positive relationship between initial investment and profits. Following this reasoning, the firm being able to perform better than their competitors, would be in ideal conditions to achieve their goal and grow into a bigger entity.

The positive correlation between initial investment and achievement of the firm’s purpose might imply that the breadth of the capital should match the breadth of the purpose. Whatever goal the owner-manager has set up, it should receive an appropriate funding, proportional to the firm’s objectives. Undercapitalization is a deadly position to SMEs for reasons that don’t need to be explained. Overcapitalization may lead the manager to unnecessary spending and make him lose track of the firm’s original and achievable targets

.

We can observe a connection between the initial amount of capital provided and the age of the owners. As I have described it earlier, an older owner-manager may benefit from his/her longer experience to evaluate properly the costs of a project, along with the safest and costless means to finance it. At the same time, a younger entrepreneur might compensate his/her limited experience with a deepen market research that would allow him/her to assess the initial capital to be invested with more accuracy; the relationship is shown on table 3.

The negative relationship between debt and profits indicates that firms having taken out heavy loans are slowed down in their activities and are expected to make less

47

profits than their competitors. The number of employees seems to be positively correlated with the payback of the investment and the achievement of the firm’s purpose.

Indeed, a firm’s human capital –employees’ collective knowledge, skills and abilities- contribute to the achievement of its business objectives (Baird and Meshoulam, 1988;

Jackson and Schuler, 1995; Schuler and Jackson, 1987). Moreover, Human Resource Management effectiveness has been proved to have impact on employees’ productivity, being reflected on the firm’s productivity. Consequently, employees may have a significant impact on the reimbursement of a firm’s investment loan. At the same time, businesses with accurate business strategies tend to employ more employees. This may be explained by the accuracy in the evaluation of a project’s needs: as I indicated earlier, a project’s extent needs to receive adequate and proportional financing which can also be expressed in human capital.

Unexpectedly, competitive advantage seems to be negatively correlated with education. This may be explained in the fact that innovation, which is one of the strengths of small scale businesses accounts for more in the building of competitive advantage than do education. Innovation can be applied in the field of marketing to convert good ideas and good products into sales revenues and profits (Lin and Chen),

Unexpectedly, competitive advantage seems to be negatively correlated with education. This may be explained in the fact that innovation, which is one of the strengths of small scale businesses accounts for more in the building of competitive advantage than do education. Innovation can be applied in the field of marketing to convert good ideas and good products into sales revenues and profits (Lin and Chen),