The internationalization and performance of SMEs

We discuss and explore the effects of internationalization, an entrepreneur ial strategy employed by small and medium-sized enterprises (SMEs), on firm performance. Using concepts derived from the international business and en trepreneurship literatures, we develop Sour hypotheses that relate the exte nt of foreign direct investment (FDI) and exporting activity and the relati ve toe of alliances, to the corporate performance of internationalizing SME s. Using a sample of 164 Japanese SMEs to test these hypotheses, we find th at the positive impact of inter-nationalization on performance extends prim arily from the extent of a firm's FDI activity. We also find evidence consi stent with the perspective that firms face a liability of foreignness. When firms first begin FDI activity, profitability declines, but greater levels of FDI are associated with higher performance. Exporting moderates the rel ationship FDI has,vith performance, as pursuing a strategy of high exportin g concurrent with high FDI is less profitable than one that involves lower levels of exports when FDI levels are high. Finally, we find that alliances with partners with local knowledge can be art effective strategy to overco me the deficiencies SMEs face in resources and capabilities, when they expa nd into international markets. Copyright (C) 2001 John Wiley & Sons, Ltd.