Internationalization of Services (KIBS)

INTERNATIONALIZATION OF SERVICES

Appropriate non-equity modes of internationalization for small KIBS firms

Bachelor’s Thesis In International Business Author: Mikko Rindell 14416 Supervisor: M. Sc. Valtteri Kaartemo 16.4.2010 Turku

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CONTENTS

1   INTRODUCTION ...................................................................................................3  

1.1   Background ....................................................................................................3  1.2   About the study ..............................................................................................4  

2   INTERNATIONALIZATION OF SERVICES.......................................................6  

2.1   Nature and characteristics of services ............................................................6  2.2   Traditionally known internationalization strategies .......................................7  2.3   Internationalization strategies for services .....................................................9  

3   KNOWLEDGE-INTENSIVE BUSINESS SERVICES........................................12  

3.1   Introduction of KIBS....................................................................................12  3.2   Core elements of KIBS.................................................................................13  

4   INTERNATIONALIZATION SOLUTIONS FOR SMES OFFERING KIBS.....14  

4.1   The role of the SMEs....................................................................................14  4.2   Applicable less resource-intensive strategies for service SMEs ..................15  4.3   Other views...................................................................................................17  4.4   ICT’s role .....................................................................................................18  

5   CONCLUSIONS ...................................................................................................20  

6   REFERENCES ......................................................................................................22  

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1 INTRODUCTION

1.1 Background

The service industry as a whole has not just stepped into the spotlight among the other industries, or so to say among manufacturing companies. It has actually began to define the actions of other industries and forced to redefine many traditional businesses. Many companies have already accepted this change in the business environment and started to think proactively but there is still much to learn. Joachim Singelmann recognized this already in 1978 as a trend in advanced industrial societies through the shift of labor and capital from goods-producing industries to services (Singelmann 1978, 1). The last three decades of last century were dramatic regarding the economic structural change in Europe where the most of the new value added has originated from services, while the traditional economic activities like agriculture, mining and certain type of manufacturing have experienced a strong decline (Lovelock, Vanedermerwe & Lewis 1996, 7). According to Javalgani, Griffith and White (2003) the Uruguay Round of the World Trade Organization (WTO) in 1986 began to reduce previous national restrictions on marketing international services. Other factor of increased importance to study internationalization of services is the recent accelerating development of technologies.

Services in fact are the fastest growing components of the global economy and foreign direct investments (FDI) in services have grown faster than in goods over the past decade and a half (Mattoo, Stern and Zanini 2008). Already in 2002 services almost accounted for two-thirds of the world’s total output (World Bank 2002 according to Javalgi and Martin 2007). The rising importance of services was as well seen when they were included in the multilateral architecture of the World Trade Organization (WTO) in the form of General Agreement on Trade in Services (GATS) in 1995. Already for decades the services sector has been the largest and fastest-growing sector of the world economy, providing over 60 percent of the global economic output and in many countries even a greater share of employment. The introduction of GATS was a very important milestone in history of services, while especially in markets where supply is inadequate; imports of essential services can be as vital as the imports of basic commodities (WTO 2010).

Recent developments in information and communication technology have dramatically increased the amount of performed cross-border export of services. Activities vary from software development in the Philippines to data processing in Barbados. Most of the business services’ (transport and travel excluded) exports still

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originate from OECD countries but the growth rate for business service exports was above 20 percent in countries like India, Israel, Dominica and Brazil already in the second half of the 1990’s. Respectively in the United States and Europe, of which both the OECD countries basically consist, the growth rates were only 11 and 6 percent during that time. (Mattoo et al. 2008.)

The general discussion on knowledge-intensive business services has gained an increased attention recently. As well, a decent amount of research has been conducted on KIBS’ importance for the innovation and growth processes of regions. So to say, the existence and success of KIBS have shown to support other firms in the same region. Nevertheless, we still seem to be lacking a good overall picture of internationalization in KIBS branches and it can be assumed that country-specific features have a strong impact on the development of internationalization in KIBS. (Toivonen 2002.) KIBS branches have been among the fastest growing branches in Western countries over the last three decades. This Growth is bases on the increasing complexity of products, production processes and market environments. To master the complexity, special expertise and know-how is needed. KIBS have a special role in the expertise and know-how provision, often between global, national and regional levels. The information flow between the different levels occurs both through traditional hierarchical structures and through professional networks. Because of their flexibility, KIBS have a crucial role in these networks in the interaction of different information levels and in the dissemination of rapidly improving technologies and updated knowledge. (Tekes 2009.)

1.2 About the study

The aim of this bachelor’s thesis is to find out whether there are any recommendable practices for service business internationalization regarding the special needs of the KIBS firm. As a research process, this consists of three main parts. In the first part the internationalization of services is reviewed, with the emphasis on the nature and characteristics of services in the background of actual internationalization. In the second part knowledge-intensive business services (KIBS) are introduced as a subsector within the services sector. In the third part solutions based on existing academic research are sought on less resource-intensive internationalization.

The topic of the thesis is in line with author’s personal interest on internationalization of services and scalable service business models. Notable is the fact that developed countries, especially small ones with high labor costs and skew age distribution, are facing severe problems in the years to come in case they do not adapt to the global economic environment successfully. This is a concern of the author but it should be

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more importantly a nation-wide concern of high importance. Finally, the concept and meaning of the innovation is mentioned but its wider contemplation has been excluded.

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2 INTERNATIONALIZATION OF SERVICES

2.1 Nature and characteristics of services

Before entering the world of service internationalization more precisely it is logical to have a look at the services in general. Over time the definition services has been explained in many different ways by many authors. This is why discussion on services can often lead to disagreements in variety of forms. Core issues in avoiding this to happen are to distinguish customer service from services and use the broad definition of services. Customer service is a service provided by all types of companies in support of company’s product, no matter if the product itself is a physical one, purely intangible or a mix of two latter one’s. The broad definition of a service includes all economic activities whose output is not a physical product or construction, is generally consumed at the time it is produced, and provides added value in forms that are essentially intangible concerns of its first purchaser. Services are so to say deeds, processes and performances. (Zeithaml and Bitner 2003, 3–4.)

Kotler (1991) noted that there are four generic differences in services compared to physical products, intangibility, inseparability of production and consumption, heterogeneity (variability of quality) and perishability. These generic differences have offered a basis for more specific research during the last two decades. Grönroos (2001, 46) points out that the processes consisting of activities or series of activities are one of the services’ main characteristics, adding simultaneous consumption and production with customer participation to the package. Miles and Kastrinos (1995, 6, 23) state that the close relations and high levels of interaction between service producers and their clients is something that varies from service to service, even within a same branch of services like computer software. They as well introduce the broad classes of service process in terms of their main processes. The classification determines services regarding their involvement in processing whether people, physical goods or information.

When introducing services as a concept or industry, or even trying to do that both same time (which often makes it so confusing and to lead to disagreements like mentioned above) it is more than crucial shortly discuss one of the most raised topics in this field of research, namely service-dominant (S-D) logic. This logic was introduced by Vargo and Lusch (2004) and it is built on the idea that the traditional dominant logic based on the exchange of goods and focusing on tangible resources, embedded value and transactions may not be the best one in today’s economy. According to them, over past decades new perspectives have emerged that have a revised logic focused on

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intangible resources, the co-creation of value and relationships. They introduced six attributes and eight foundational premises for helping present the patchwork of this emerging dominant logic.(see Vargo & Lusch 2004a, 6–11.) Even though the S-D logic is in central role of defining services today it does not have so great meaning in light of this study. This is mainly because services discussed in this study are anyhow more intangible without or with less physical elements, and because internationalization of services provision tends to follow the experiences and methods of manufacturing industries whenever there are more physical elements involved.

One of the Vargo and Lusch’s (2004) foundational premises was that all economies are services economies. This leads us to the importance of services in wider scope. The increased importance of services in world trade cannot be condensed with only one major reason. Cicic, Patterson and Shoham (1999) recognize four remarkable sub-reasons to this. The first one is so called “hollowing out –effect” which refers to the general shift of economic activity to service industries. Secondly, service providers have been forced to follow their globalized customers, manufacturers. Thirdly, technology in any form has made the national borders less important than in the past. Then, because most developed nations have reached high affluence levels, customers plainly demand more services. Finally, the Uruguay round of GATT negotiation produced the first set of trade rules for world services market. Javalgi et al. (2007) recognize three similar main drivers in the world economy that are advancements in information and telecommunication technology, tendency of manufacturers toward service differentiation from intangible product differentiation, and the establishment of World Trade Organization (WTO) and regional trading blocks like NAFTA and EU. Grönroos’ (1999) study is as well in line with these notions.

2.2 Traditionally known internationalization strategies

The examination of the most applicable strategy for a business service company is started by introducing the traditional and well-known internationalization strategies. This can be done shortly covering all the possible entry mode options. Of course international strategy consists of many other elements as well but this conceptualization of different entry modes is often the way we understand internationalization as a process. Albaum et al. (2002, 246) note that the choice of an entry mode is actually made to facilitate the firm’s international strategy and this kind of commitment is the most likely to foster the firm becoming internationalized, be the form exporting or some of the more complex entry modes. Other possible views on internationalizations offer for example “the process of increasing involvement in international operations” (Welch & Luostarinen 1988, 36).

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According to Hill (2009) there are six different modes for entering foreign markets. These include exporting, turnkey projects, licensing, franchising, establishing joint ventures with a host-country firm, or setting up a new wholly owned subsidiary (WOS) in the host country. Nowadays management contracts are also often introduced as a separate internationalization operation. In these a company provides personnel to perform general or specialized management functions for another company (Daniels, Radebaugh and Sullivan 2009, 65). Nevertheless, when it comes to entry mode decisions the first question is often what the price of a particular mode is for the company planning to internationalize. According to this, entry modes can be divided into two groups, ones that do involve equity and ones that do not (Peng 2006, 231). According to Peng (2006) this model of six steps introduced above can be divided into more specific variations within these same entry modes. Non-equity entry modes can be divided into exports and contractual agreements, from which both derive more specific forms for internationalization. Exports brake up to direct, indirect and other possible types of exports while contractual agreements consist of licensing, franchising, turnkey projects, R&D projects and co-marketing. Equity entry modes, known as well as foreign direct investments (FDI), likewise brake up to two subgroups where joint ventures (JV) comprise minority JVs, 50/50 JVs and majority JVs. Wholly owned subsidiaries (WOS) consist of green-field projects, acquisitions and other possible types of subsidiary structures. (Peng 2006, 231.) Daniels et al. (2009) introduce the same forms of operations but they review those in a scale that is based on the approximate amount of partners involved and the ownership continuum. In this model, where the focus is so to say on control of foreign operations, wholly-owned subsidiaries are placed in the other and management contract in the other end of the model.

If highlighting the aspect of possible strategic alliances when making an entry mode decision the setting would be somewhat different while strategic alliances can involve entry modes from both equity and non-equity modes. More precisely the strategic alliances normally follow either the subgroup of contractual agreements (non-equity) or joint ventures (equity). In this research, the strategic alliances’ role can be mainly excluded because only multinational corporations generally use it. Strategic alliances tend to be less easy to define in services than manufacturing mainly because they are harder to distinguish from other forms of co-operation (see O’Farrel and Wood, 1998). But in light of this study’s aim to find the best possible internationalization approach for a small service firm it is useful to cover all the entry modes possibly applicable to future outcomes. There are as well some already recognized unconventional entry modes like cyberspace entries, which refer to different types of entries using the e-commerce. These types of entry modes are normally attached to entrepreneurial high-growth firms and born-global companies. (Peng 2006, 240.) Hamill and Gregory (1997) point out that

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the fundamental internationalization questions in small firms may appear quite different when seen through this “cyberspace”.

In light of the upcoming discussion on particularities of service internationalization it is reasonable to clarify the principles of so called “stages models”. The staged theory was introduced very first time by Johanson and Wiedersheim-Paul (1975) when they sought to offer an explanation of how firms moved from comparatively small domestic operations into fully fledged multinational corporations. Their model defined four stages, indirect exporting, direct exporting, local sales office and local manufacturing. After this a lot of research has been done on defining the different stages more precisely or redefining them completely. The definitions (Peng 2006; Daniels et al. 2009) used earlier are as well applications of this model. (see Woods 2001, 101-102).

2.3 Internationalization strategies for services

Generally, it can be stated that studies of services on topics such as the determinants of the decision of internationalizing, the internationalization process, and foreign market entry strategies are still few. The focus of this study is not so much on the decision whether the firm should internationalize or not, while this is considered as the given precondition to find out possible new solutions to latter two topics. Nevertheless, it is worth mentioning that recent research indicates the attitude of management to be a strong predictor of the level of the internationalization of the firm within a service industry context (Javalgi et al. 2003).

Cicic, Patterson and Shoham (1999) state that international services are not completely different from international goods. According to them there are, though, particularities in the service sector that need some sort of adjustment for international models of behavior and this can often be seen as different foreign market selection, entry mode selection and foreign operations compared with goods. Within the sector, differences can be found in internationalization undertakings between services embedded in goods (“hard” services) and so called pure services (“soft services). Hard services are more likely to internationalize by using traditional entry modes and being same time less influenced by communication technology and cultural distance, while soft services tend to require more adaptive models. (Erramilli 1990; Cicic et al. 1999.)

According to Johanson and Vahlne (1977) the internationalization is largely based on the behavioral theory of the firm. In their later study in 1990 (Uppsala School Internationalization Model) they describe exporting behavior as a gradual and sequential process, with market commitment, market knowledge, and current activities as the elements of the model (Johanson and Vahlne 1990, according to Cicic et al. 1999).

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Their findings (1990) suggest as well that the incremental and sequential process underlying the “stages models” in the manufacturing sector may not be valid for services. Due to the nature of services, a gradual process of sequential steps is not possible in some situations. In other words, because of the generic differences (intangibility, inseparability, heterogeneity and perishability introduced by Kotler 1991) in services compared with products, the internationalization in general creates a remarkably different setting around a service firm. Especially inseparability is a huge challenge when both service provider and consumer are involved in the production and consumption processes of the given service. Nevertheless, Roberts (1999) suggests based on her empirical research on British business services firms that five stages can also be found in this context. The number of stages through which service firms pass and the length of the time spent in each one are variable. The stages in service internationalization according to Roberts (1999):

• Provision of services to domestic clients only (no exports). • Provision of services to foreign clients in the domestic market (domestically

located exports). • Provision of services to foreign markets through embodied service exports,

transhuman exports and wired exports. • Establishment of a presence through which to deliver a service largely

produced in the domestic market (intra-firm exports). • Establishment of service production facility in the overseas market.

Grönroos (1999) recognizes three general entry modes for services that are already

partly based on technological advancements (Internet, satellite and digital television) made by the late 1990’s. These are (1) client-following mode, (2) market-seeking mode and (3) electronic marketing mode. These different types of entry modes are not totally mutually exclusive, while a firm using electronic marketing for instance can be at the same time market seeking and respectively a firm following a client abroad may have decided to seek new markets actively as well. Cicic et al. (1999) identify two service internationalization processes. The first process consists of two modes and it is valid for more intangible services, known also as “soft” services. These services, such as business advisory, professional services and other intangible services, can become international through client-following and through one-off arrangements (often entering and leaving foreign markets, according to one-time contracts). The firms using these types of modes are likely to establish full international involvement with more committed entry modes. The second internationalization process type includes capital-intensive services, known also as “hard” services. Examples of this type are services such as airlines, hotels, communication firms and banking. According to Cicic et al.

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(1999) these firms are faced with the choice between full foreign presences or no involvement at all, whereas they cannot internationalize incrementally.

Grönroos (1999) recognizes five main strategies for service internationalization. These are (1) direct export, (2) systems export, (3) direct entry, (4) indirect entry and (5) electronic marketing. According to him direct export of services may basically take place on industrial markets when for example repair services on valuable equipment are often exported in this way. The risk in this strategy lies in immediate production of the service, without any step-by-step learning involved. Systems export is a joint export effort by two or more firms whose solutions complement each other, for example when a manufacturer delivers equipment or turnkey factories to international buyers, a need for engineering services, distribution, cleaning, security and other services is often present. This mode has been recognized in literature to be a traditional mode of service exports. Direct entry means that the service firm establishes a service-producing organization of its own on the foreign market. Normally, this requires the ability to produce the entire service from very beginning by the local organization. Another option for direct entry is an acquisition of local firm operating on the same service industry. Third option is to create a joint venture with one of the locally operating firms. Direct entry strategy can be used for internationalizing consumer services as well as services for industrial markets. Indirect entry is generally used when the service firm wants to avoid establishing a local operation that is totally or partly owned by it. Where is it aiming at by this approach is anyhow the establishment of a permanent operation on the host market. An example of this strategy is a consulting firm giving a host market firm exclusive rights to use its professional concept through a licensing agreement. Franchising is an often used concept for indirect entry in the restaurant and food service industries. In the lodging business for example both franchising and management contracts, which are one type of indirect entry, are used. Cicic et al. (1999) support this view when pointing out that most service marketers are required to visit foreign markets, operate with the customers directly, and produce the service locally. According to them, these kinds of services include for example consulting, advertising, medical services and hotels.

Electronic strategies are the last main strategy group recognized by Grönroos (1999). There occurred a huge amount of development in this field during the last decade through rapidly and constantly evolving communication technologies. The internet provides firms with a way of communicating offerings and putting them up for sale, and a way of collecting data about the buying habits and patterns of its customers and using network partners to arrange delivery and payment. Risks recognized by Grönroos (1999) in use of this strategy are language barriers and electronic illiteracy. Electronic strategies are in line with the view of Cicic et al. (1999) on modern communication technologies’ impact on the process of internationalization of services.

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3 KNOWLEDGE-INTENSIVE BUSINESS SERVICES

3.1 Introduction of KIBS

There has been an increasing amount of attention paid to KIBS since the mid 1990’s. Even though both academic and general interest on it has increased, KIBS still today remain poorly studied in comparison with any manufacturing sector. Their role in and meaning for innovation and technological changes has been recognized but not well included in innovation polices and systems set by authorities.(Müller and Doloreux, 2007.) Nonetheless, the atmosphere is about to change. This is demonstrated e.g. in Finland in form of the report provided by Tekes (the Finnish Funding Agency for Technology and Innovation) in November 2009 that clarifies the state of KIBS’ internationalization and its meaning to the growth of companies (Tekes, 2009). What we today understand by KIBS is largely based on our earlier understanding about the concept of professional service. One of the pioneers introducing and adapting this concept to further marketing-related purposes was Evert Gummeson (see Gummeson 1979, 7). Notable describing KIBS is generally the concept of business services. They are used ultimately by firms and other productive enterprises. By nature, they are extremely diverse; including the activities concerned both with handling tangible physical products, such as, machinery repair or catering, and providing intangible expertise, like accountancy or consultancy service. (Roberts, 1999.)

When determining the concept of knowledge-intensive business services, it is useful to recognize the distinction between knowledge and information regarding the services offered. Granted that all the information-processing services include some knowledge-intensive elements (at least internal) we should note that e.g. basic telecommunication and broadcasting services are mainly involved in storing and transporting data and information (Miles et al. 1995). Other determinant factor in understanding KIBS is the role of the customer in co-creating or “co-producing” the actual service. Especially in business services the client’s contribution to the service delivery process is integral to service success, affecting both the quality of the service outcome and, ultimately, clients’ satisfaction with the service solution provided. (Bettencourt, Brown & Roundtree 2002, 273.) The importance of successful service co-creation was as well noted by Tax, Golgate and Bowen in 2006 (see Tax, Golgate & Bowen 2006). Notable for service taxonomies behind KIBS and other service-related research is that there are many of them in the literature. An important taxonomy from the viewpoint of KIBS is the one separating services linked with science, technology and innovation as a category of its own. (Soete and Miozzo, 1989, according to Toivonen, 2004.)

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3.2 Core elements of KIBS

According to Müller et al. (2007) KIBS are mainly concerned with providing knowledge-intensive inputs to the business processes of other organizations, which can include both private and public sector clients. Even though the standard approach and generally accepted definition of KIBS still remains undefined the NACE (Classification of Economic Activities in the European Community) provides some guidelines for identifying KIBS, at least in Europe.(Müller et al. 2007.)

Anyhow, following interpretations can be found in literature on KIBS. Miles et al. (1995, 28) suggest that KIBS are (1) services generally relying heavily upon professional knowledge, (2) either supply products which are themselves primarily sources of information and knowledge to their users or use their knowledge to produce services which are intermediate inputs to the clients’ own knowledge generating and information processing activities, (3) and have other businesses as their main clients. Miles et al. (1995, 18) condense this by stating that KIBS involve economic activities which are intended to result in the creation, accumulation or dissemination of knowledge. Toivonen (2004, 17) points out that KIBS are business services and at the same time they are knowledge-intensive services. According to her, this is mainly why there have been difficulties in finding a common understanding about them. In addition to this, difficulties arise from the indefinite character of the whole service sector and of the business services sub-category. In her dissertation Toivonen (2004, 36) comes to a conclusion that KIBS are part of a larger group of services, business services. These can be defined as services that firms or organizations provide for other companies or organizations and that are intermediate by nature, i.e. they are not targeted to end-use but are inputs in manufacturing processes or in the production of other services.

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4 INTERNATIONALIZATION SOLUTIONS FOR SMES OFFERING KIBS

Traditionally there are two modes in which firms operate on the international market, foreign direct investments (FDI) and cross-border trade (exports). Of these two, the FDI mechanism has been found clearly more general in KIBS (Toivonen, 2004). Taking granted that smaller firms generally possess less resource, both financial and in amount of personnel, they need to track down the possible existence of less resource-intensive internationalization options available. In this chapter some of the options already experienced in SMEs from different fields and some theoretical frameworks are explained, beginning with the definition of a SME.

4.1 The role of the SMEs

According to publication on small and medium-sized enterprises (SME) by European Commission there were about 23 million SMEs in 2005. 99 percent of all companies in European Union are SMEs and they employ about 75 million people. The threshold values within the SMEs are divided into three different groups which are micro enterprises, small enterprises and medium-sized enterprises. Micro enterprises employ a maximum of ten people, turnover not more than two million euro a year or have not more than two million euro in their assets. Small enterprises employ a maximum of fifty people, turnover not more than ten million euro a year or have not more than ten million euro in their assets. Respectively, medium-sized enterprises employ a maximum of 250 people, turnover not more than 50 million euro a year or have 43 million euro or less in their assets. The new regulation where company can choose between turnover and assets limits has been implemented due to different natures of branches SMEs are operating in. (European Communities, 2006.)

In this study, even though the concept of SME is generally used, the solutions searched are mainly meant to those SMEs qualifying for the limits of micro and small enterprises. This is because those enterprises qualifying for the limits of medium-sized enterprises tend to posses more resources to use more traditional and same time more resource-intensive international operations for new host markets, like establishing wholly owned subsidiaries (WOS). In the study of Henten and Vad (2001) on the internationalization of Danish firms is shown the strong tendency toward exports and temporary presence among small and medium-sized firms. Authors raise their concern referring to Danish business structure with a large base of small firms and relatively high number of firms with no ambitions outside the borders of Denmark. According to

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them, this may explain why Danish service firms have been losing market shares internationally.

4.2 Applicable less resource-intensive strategies for service SMEs

In this chapter the focus is on export modes of internationalization and on alternative modes deriving from them because they have generally been stated to be clearly less useful for service and particularly for KIBS use.

Ball, Lindsay and Rose (2008) introduced a list of applicable modes for less resource-intensive soft service firms. These modes were introduced in contrast of earlier research, like Erramilli (1990) having basically only stated that service firms and especially soft service firms would need to establish more resource-based and higher involvement activities for foreign market entries. Other issue originating from former research and experiences that the authors want to question that is the foreign market involvement always incremental, introduced for example by Luostarinen (1980). The information transformation model introduced by Ball et al. (2008) is largely based on the value chain model (Porter 1985, according to Ball et al. 2008) and the dichotomy between front and back office functions (Chase 1978, according to Ball et al. 2008), where the front office is the place for customer interaction and the back office for any additional processing attached to actual service. In addition to these components there is a focus on how information is used in the creation of value, for which the Rayport and Sviokla’s (1996) model of “virtual value chain” (Rayport & Sviokla 1996, according to Ball et al. 2008) provides a basis. The model consisting of these latter components includes embodied object exports, embodied channel exporting, embodied people exports, domestically located exports, internationalizing by using host market network partners and leveraging the internationalization of home market partners. The following suggestions are largely based on the applied model (Ball et al. 2008) introduced above and then compared with other notions available from the literature.

Embodied object exports are based on experience showing that output of soft services can often be embodied in some physical form (physical or digital reports and documents), after which a service firm can easily export this output. This of course, in some extent, mixes the boundaries of earlier introduced hard and soft services. Nevertheless, this view of the applicable output of information-intensive soft service firms as embodied objects creates a lot of potential in this type of internationalization activities. The same logic can be put to use in case of information input into the service production process when referring to embodied object importing. Embodied channel exporting is a situation similar to two latter ones where the information is embodied on the channel established between the customer and service provider. An example of this

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is teleconferencing as the communication channel (audio or both visual and audio). Here the channel itself can be seen as an embodied object and it can be used for both extracting and delivering the information.(Ball et al. 2008.) Respectively, Roberts (1999) recognizes these types of exports under the general term of embodied service exports where services are often provided for the overseas client in form of a letter or report, and in case of referring to channels through which the service is electronically transmitted she calls it wired exports.

The mode of embodied people exports especially tackles the prevailing assumption concerning the need for a permanent or at least a long-term local presence in host country (Ball et al. 2008). Roberts (1999) calls this transhuman exports. It is clear that face-to-face interaction remains a crucial and often the most effective way for serving the customer in the host market. However, this model offers a new approach on how and when to locate the needed people in the specific market, often on a limited and short-term basis. In other words embodied people exporting forms a setting, through which information is carried from the home to the host market, within the employee. According to the literature there are successful experiences that sending staff to the host market for a temporary time may be a relevant option (Aharoni 1993; Orava 2002, according to Ball et al. 2008). Functionally embodied people exporting can occur in two ways. A firm can use employees, which can handle all the needed (or at least most) functions in the value chain, optionally send the people (one person or many people) with the required set of skills to the host country whenever needed. The second way is to act more tactically. The idea is to send people to the host country only to take care of those functions of the value chain absolutely requiring a local presence. (Ball et al. 2008.)

Domestically located exports are a well-known concept in the business-to-customer markets, namely in tourism services. The mode is based on the notion of pointing out to service firms that provide output to foreign clients in the domestic market. This kind of activity is to wit exporting. Other industry where this is as well prevailing is medical services. The potential of domestically located exports has not yet been widely used and explored but it is definitely also applicable to information-intensive soft service firms. (Roberts 1999; Ball et al. 2008.)

The use of host market network partners refers to networking, which often plays a crucial part in internationalization processes for many sectors. The importance of networks for information-intensive soft service firms may be even more crucial than in many other industries while the networks might provide supplement or alternative local presence in foreign markets. Many service firms tend to internationalize following their customers into overseas markets. This leveraging the internationalization of home market partners may alleviate setting up international activities while the service firm may not need to concentrate on soliciting new business immediately. This kind of

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approach is stated to possibly provide leverage for service firm’s other international operations. (Ball et al. 2008.) In the study of Anderson (2006) can be found supportive but as well divergent notions for this theory. There the Swedish ERP (Enterprise Resource Planning) industries’ supportive services work as an example. The firms had a strategy of establishing partnerships. Anyhow this showed to be difficult without sufficient resources and the firms actually ended up establishing subsidiaries abroad first after having raised equity through listing in stock exchange. (Andersson 2006.)

The next mode is contracting to another firm with international operations. This type of engaging, known as “piggybacking”, may be particularly beneficial for information-intensive soft services. This is commonly done by providing inputs, often so called supplementary services, into other firms’ production processes or systems and thereby being indirectly involved in outputs sold to foreign markets. The last suggested mode is a combination of two latter approaches where the service firm is in contact with a local firm (another service firm or other type) and then jointly operates in the host market by placing staff there on a temporary basis for chosen activities, for example order solicitation, service production or service delivery itself. (Ball et al. 2008.)

4.3 Other views

One view on service internationalization is frantrepreneurship that was introduced the first time in 2001 (Sundbo, Johnston, Mattson & Millet 2001). The frantrepreneur is defined as a franchisee who innovates by adapting a standard service concept to meet local conditions. There are basically five constructs for this model which are the service concept, franchising, internationalization, innovation and entrepreneurship. Frantrepreneurs do not passively accept the standard service concept and they develop an unusual partnership role with their franchisor with a two-way influence over the business. (see Sunbo et al. 2001)

The role of the network relationships of knowledge-intensive SMEs for internationalization was studied by Ojala (2007). According to his findings, knowledge-intensive SMEs, when entering distant markets, tend to first select the target country and the entry mode without any influence of network partners. This is something that differs from previous studies, which mainly indicate that formal and informal network relationships drive firms to geographically and/or physically nearby markets, because the firms tend to select their initial markets and entry modes by following their network relationships. This leads to a situation where market entry and entry mode choice can be seen more as a strategic decision than a simple decision of following other network partners. Other point is that firms should actively develop their network relationships and use connections (often individual) for further networking in the potential or

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attractive target country. If it just follows the existing network passively, it may end up not noticing new market opportunities. (Ojala, 2007.)

4.4 ICT’s role

The role of information and communication technology has been an increasingly discussed topic both in internationalization and service literature. Nevertheless, the relationship between small business internationalization and ICT seems to be obvious in many associations, as in some recent success stories like 37signals (37signals, 2010), but the question is that is enough empirical evidence for propositions of this kind there. In many cases the ICT works as facilitator like in above introduced embodied channel exporting or wired exporting but there may be some other forms as well.

According to Aspelund and Moen (2004) there are two features, convenience and richness of information, which make the execution of an international marketing and sales campaign possible with the limited resources of small and newly established firms. The third feature is the reduction in price of advanced information systems over the last decade. These features have recently been strengthened by the rise of cloud computing and its cost benefits (King, 2008). Nevertheless, small ICT-intensive firms have often not been able to find particular price and market advantages. This is mainly due to the fact that ICT in itself does not bestow competitive edge. It only does so when it is tuned with organizational routines. A small firm, or so to say its management, needs a strong international vision to be able to make the most of ICT. Anyhow, advances in ICT have played an important role in the growth of small international firms over the last decade. (Aspelund & Moen 2004.) Danford´s (2007) findings on ICT’s general use in internationalization are in line with those introduced above. He suggests that it is recommended to take a critical and cautious approach to the employment of ICT. Often individual business functions can benefit the most. Due to this, firms should do their best to identify which functions are the particular ones and then allocate ICT development and implementation methodologies to the need for those business functions. It is notable that these findings were made in the study focused on firms which have mainly physical goods in their selection.

Experiences from engineering consultancy (Baark, 1999) have shown that use of information technology and advanced telecommunications have provided the alternative patterns of production and delivery engineering design services instead of establishing local affiliates in overseas markets. According to him, the assessment of the impact of new IT in the sector clearly pointed to the need for firms to plan strategically in order to exploit the benefits to IT-enabled production and delivery of services. It was noted that

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better IT employment often requires business process re-engineering to reach the long-term goals of new IT being implemented. (Baark, 1999.)

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5 CONCLUSIONS

Internationalization of knowledge-intensive business services (KIBS) among small and medium-sized enterprises (SME) is a very complex area of research in light of this study. Roots for this are diverse, and we cannot overemphasize the complexity of the factors in the background, like the definitions of service and knowledge-intensiveness as such. The scope of this study could have easily been used purely for contemplating some components of those factors in very detailed level. This kind of level could not be reached with the resources available for this particular study. To proceed, the founded definitions from the literature have to be taken as granted to be able to attain some sort of reasonable conclusion.

Services and service sector as such still remain pretty much undefined compared to physical goods, and whenever one definition achieves a stable foothold one new suggestion attached to services arises. A possibly revolutionizing view on services is the service-dominant logic (Vargo & Lusch 2004) which has been gaining “market share” at least among scholars but as well business practitioners. Thus setting all this, in some extent “undefined”, into KIBS context it is clear that getting the big picture may be hard. Internationalization again is easier to comprehend even though it can be also reviewed from different angles. In case of this study meaningful issues of internationalization are the separation of entry mode decisions from internationalization decision and process, likewise the clear distinction between equity and non-equity entry modes. This comes together with the characters and limitations of SMEs and KIBS.

The optimal outcome of the study would have been a less resource-intensive internationalization mode through which a small firm offering knowledge-intensive business service could have started its international operations, or optionally expanded them, easily and without high extra costs in comparison with their existing home country activities. Nevertheless, based on the research made and the results presented here, it can be stated that there is no revolutionary or exclusive solution available for a small firm in this field of business. The applicable solutions tend to be a case- and firm-sensitive, and if they are successfully adapted to firm’s overall business strategy as well as daily routines they may result in good leverage for overseas operations.

Even though the general goal of the study was to find internationalization modes outside equity-based undertakings in foreign markets, the establishment of local market presence in form of subsidiaries or joint ventures may be the one and only solution for a company in some circumstances. If this is the case, and the company lacks resources at that particular moment it might be more advisable to wait for more proper timing or to seek alternative options for business expansion on the home market than to try to internationalize by force. KIBS firms facing this are presumably following some sorts of stages in their internationalization when considered that they may have to look for

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the next step beginning for example from providing services to domestic customers only, like in the stages model for service internationalization suggested by Roberts (1999). Those KIBS firms that recognize their possibility to internationalize without following the stages model presumably whether possess more resources (which may enable the short-term or long-term establishment of local presence on the host market) or find other types of internationalization suitable for their business model and organization. These latter firms tend to find an appropriate operative set of tools by using whether the applicable strategies of non-equity strategies introduced (Roberts 1999; Ball et al. 2008) or can find leverage out of advanced ICT solutions for their internationalization. Often the appropriate set is a combination of these two, like in case of embodied channel exporting or wired exporting where the ICT plays a significant role. Nevertheless, all of these suggested less resource-intensive applicable models for internationalization are basically extensions to known export modes used traditionally in manufacturing industries. The use of them in light of this study remains mainly theoretical. On the other hand, there is no doubt that further advancements in modern ICT will provide more tools which will be found even more applicable for the use of the models presented.

It can be stated that there is no secret formula to run the internationalization of knowledge-intensive service business. The firms of this field need to base their decisions largely on the combination of experiences from manufacturing and other services. These experiences then need to be adapted to firm’s particular strategy and experiences. For future research on small KIBS’ internationalization will be crucial to attain more empirical evidence about experiences of discussed models’ usage in action. According to experiences of that kind could possibly be drawn guidelines for firms being in the early phases of their internationalization. Then these types of firms with not many resources for internationalization could possibly avoid investments in modes with weak return and generally become more motivated to internationalize.

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