SMEs’ dependency on banks during international expansion

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SMEs dependency on banksduring international expansion

Angelika LindstrandDepartment of Marketing and Strategy, Stockholm School of Economics,

Stockholm, Sweden, and

Jessica LindberghCenter for Banking and Finance, KTH The Royal Institute of Technology,

Stockholm, Sweden

Abstract

Purpose The purpose of this study is to investigate whether banks are needed as partners for

internationalising small and medium-sized enterprises (SMEs) and, if so, in what ways they affectSMEs. The purpose can, in a wider sense, shed light on institutions intermediating functions fortransactions in the economy, both locally and internationally.

Design/methodology/approach A questionnaire was distributed to Swedish SMEs involved ininternational activities. A sample of 318 SMEs was used. The results are presented as descriptivestatistics and by using t-tests.

Findings The findings show that banks are the least used source of information forinternationalising SMEs. The results also show that banks do not participate in SME businessnetworks when SMEs are internationalising. SMEs that have been dependent on banks whendeveloping their international business relationships, however, tend to have previously depended onthe bank when conducting business.

Practical implications It is believed there is much to be gained, both for SMEs and banks, indeveloping their business exchange and reciprocal understanding. The bank can make SME

international operations and financial situations flow more efficiently. This in turn may improve SMEgrowth, thus creating more business opportunities between banks and SMEs.

Originality/value The study fills a gap in the literature and knowledge concerning banks effectson SMEs internationalisation.

Keywords Small to medium-sized enterprises, Banks, Sweden

Paper type Research paper

IntroductionInternational expansion requires countless resources in terms of knowledge ofinternational markets and of specific countries and partners to reduce risk and costs(Eriksson et al., 1997). For small and medium-sized enterprises (SMEs), which are

already limited by a lack of resources, internationalisation accentuates the difficultiesof expansion (Coviello and McAuley, 1999). Knowledge acquisition through interactionwith other firms in business relationships can help SMEs circumvent the problem oflimited international operations knowledge (Coviello and Munro, 1997; Jones, 1999). Bydoing business with other firms, such as customers, suppliers, competitors andinstitutional actors on foreign markets, SMEs gain experience of how tointernationalize (Majkgard and Sharma, 1998). These networks of firms, are theprimary vehicle for SMEs international expansion (Blomstermo et al., 2004).

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/0265-2323.htm

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Received December 2009Revised May 2010Accepted May 2010

International Journal of Bank

Marketing

Vol. 29 No. 1, 2011

pp. 64-82

q Emerald Group Publishing Limited

0265-2323

DOI 10.1108/02652321111101383


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Previous studies of knowledge acquisition in networks, during SME internationalexpansion have not focused on institutional actors such as banks (Chetty andBlankenburg Holm, 2000; Lindstrand et al., 2009). Thus, there exists a gap in ourknowledge of how these institutional actors can be of assistance to SMEs during their

internationalisation process. Because of their lack of resources (both knowledge andfinancial), SMEs are more dependent on institutional and financial actors whenexpanding internationally (Bell, 1997; Spence, 2003). Consequently, banks have acritical role to play not only as partners that can provide capital but also as partnersthat can increase the financial knowledge of firms by providing advice pertaining toinvestments and continued growth (Binks et al., 2006).

Todays strong focus on globalisation is derived from the growth of internationaltrade and the increasing internationalisation of firms. Simultaneously, banks all overthe world have expanded internationally by developing a foreign presence throughbranches or partner banks (Ambos et al., 2009; Parada et al., 2009). The purpose hasbeen not only to profit through banking with foreign customers but also to provide allcustomers with the benefits the banks international network conveys. If the banksbusiness is sufficiently integrated, domestic corporate advisors can contact foreignbranches to help customers do business in and gain knowledge of that specific foreignmarket. Considerable synergy effects and competitive advantage can be gained if thebank uses its resources efficiently and provides SMEs with services that will help themexpand their international businesses. It is currently unknown to what degree this isdone. Little research exists, and interviews with bank personnel and customers showthat the full potential for banks to use their international networks is seldom realised( Jonsson, 2009). Thus, research on the need for bank services and knowledge for SMEsinternational expansion is warranted. A prior guest editor for International Journal ofBank Marketing(Eriksson et al., 2009) has emphasised that the future of retail bankinglies in the importance of acknowledging the needs of the banks customers and to

develop more knowledge and methods as how to build business relationships. Hence,our study contributes to the knowledge and research on retail banking by studying thebusiness relationship between internationalising SMEs and banks.

The purpose of this study is to investigate whether banks are needed as partners forinternationalising SMEs, and if so, in what way they affect the SMEs. The purpose can,in a wider sense, shed light on institutions intermediating functions for transactions inthe economy, both locally and internationally. Based on a survey of 318 Swedish SMEsand their internationalisation processes, we expect to gain new insights into banksfacilitating roles in the international growth of their SME customers. The results of thestudy will show the effects of banks on SME international expansion.

A limitation of this study is that we cannot differentiate between the different typesof services and knowledge that banks provide. Thus, our main focus is on the need for

banks in general during SME internationalisation.

Internationalisation of SMEs International expansion and experience acquisitionThe most critical resources for SME internationalisation are knowledge of foreignmarkets and experience conducting business in these markets (Autio et al., 2000;Sharma and Blomstermo, 2003). To acquire experience, an SME has to be present in theforeign market (Eriksson et al., 1997). Presence in the market gives SMEs a deeper

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understanding of that market, which is required for successful international expansion(Yli-Renko et al., 2002). In the internationalisation process, knowledge based onexperience is more valuable than objective knowledge from secondary sources becauseexperiential knowledge can be used immediately in new situations and problems in

relationships with foreign counterparts (Johanson and Vahlne, 1977, 1990). An SMEsinternational expansion usually begins cautiously, with few resources at stake. Inreality, this means that firms initially export or do business through an agent ordistributor, which demands less investment. The more experience the firm gains, themore willing it becomes to commit to the new market and its foreign counterpartsbecause experiential knowledge reduces risks and uncertainties connected to themarket and business partners, such as cultural differences, business culturedifferences, and customer credit rating. Through the experience of doing business ina market, new business opportunities can be discovered which in turn can lead toextended international activities and new useful experiences (Sharma and Johanson,1987). The SME might discover new opportunities through its export business anddecide to invest resources towards a sales office or subsidiary to take advantage ofthese opportunities. These resource commitments increase the possibility of gaining adeeper understanding of the market and the firms foreign customers (Lindstrand,2003). A firms continued international business is based on previous experience of itsbusiness and markets. Previous experience can concern the home market, one specificforeign market, or different markets. What has been learned in one or several marketscan be used when entering new foreign markets (Eriksson et al., 1997). The SME canhave operated a short or a long time in that market and have experience from differentmodes of business engagements, such as exports, subsidiaries, distributors, agents andother types of co-operations. This gained experienced can also be used in the continuedinternationalisation. Knowledge about foreign countries has been shown to be easier toattain than experience concerning a specific foreign business relationship or experience

of doing business in numerous international markets (Chetty et al., 2006). The gainedexperience can serve as a template for continued expansion. Experiential knowledgehas thus been shown to be the most critical resource in the internationalisation processof SMEs (Coviello and Martin, 1999; Sharma and Blomstermo, 2003).

Business networks: means for SMEs resource acquisitionA general problem for SMEs is that they often face a situation of limited resourcescompared with large firms. During international expansion this situation becomes amajor constraint for SME growth (Coviello and McAuley, 1999). But by using itsexisting business relationships the SME can access needed resources, such as foreignmarket knowledge (Coviello and Munro, 1997; Jones, 1999). Thus, businessrelationships have been established as the primary vehicle for resource commitment

and experiential knowledge generation for international business development(Blankenburg Holm et al., 1996). Relationships are connected into networks, whichmeans that a firms knowledge of a market is based on experience gained whileinteracting in a network (Chetty and Blankenburg Holm, 2000; Lindstrand et al., 2009)(see Figure 1). Business networks used in internationalisation can include domestic,local foreign and international customers; suppliers; customers customers;sub-suppliers; banks and other institutional actors. These business networks areSMEs main instruments for acquisition of the experiential knowledge needed in

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international expansion (Madsen and Servais, 1997; Moen et al., 2004; Saarenketo et al.,2003). Business networks can also be used to access financial resources (Bell, 1997;Spence, 2003).

The relationships in the network are important assets for the firm because it is inthe daily interactions with network partners that the individuals of the firm learn how

to conduct operations in international markets (Lindstrand, 2003). SMEs can learnwhere to find resources, how to commit resources and with which firms they shouldconnect. Networks provide experiences that not only reduce uncertainties and risks butalso show opportunities (Achrol and Kotler, 1999; Gulati, 1999). Therefore, knowledgegeneration in networks is a prerequisite for and has a positive effect on theperformance and continued international expansion of SMEs (Blomstermo et al., 2004).Business networks can be seen as formations in which firms learn through socialexchange over time to cooperate and thereby coordinate their activities. Thiscapability to interact increases a firms access to knowledge, transfer of knowledge andintegration of knowledge residing both inside and outside the firm (Lorenzoni andLipparini, 1999).

Banks as partners in international business networksPrevious studies concerning network influence on SMEs internationalisation have notspecifically focused on banks, which is of concern because studies have shown thatbanks, as part of an SME network, could provide resources for SMEs (Bell, 1997;Spence, 2003). One of the many important tasks of banks is to facilitate transactionsbetween different business partners (North, 1991). In that way, the bank can be aco-creator of value in a business network by linking together different actors who wantto be co-dependent (Stabell and Fjeldstad, 1998; Thompson, 1967). To facilitate

Figure 1.Example of an

international businessnetwork

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international business transactions, banks can offer a number of services such asinternational cash management, payments and letters of credit. These services can, tovarious degrees, provide an SME with protection against the possibility of foreigncustomers faulty payments or discontinued business. Business and political risks in

the foreign market should in this way be reduced with the help of bank services. Bankscould, with their specialised knowledge of financial services, increase SMEsunderstanding of how payments and credits work in foreign markets. Banks could alsobe of assistance when evaluating financial risks based on the stability of foreigninstitutions.

In an article by Eriksson et al. (2009) concerning the importance of banks forinvestments in foreign business relationships, a short case illustrates the actions takenby a bank that facilitated the development of an SMEs foreign business relationship:

A Norwegian bank wanted to develop its business with the banks corporatecustomers who had export businesses. The bank used a customer relationship with aNorwegian fish producer to try a new model in which the bank shifted its focus fromthe firm to the business relationship in which the fish producer did business. The fishproducer encountered difficulties when expanding its business with a Braziliancustomer, a fish importing company, because of a lack of security in internationalpayments. The bank evaluated whether its actions could affect its customers exportbusiness in a positive way. The relationship manager at the bank enquired if the fishproducer could ask its Brazilian customer if she (the manager) could contact the localBrazilian bank. Through contacts between the two banks, a banking relationship wascreated that mimicked the business relationship between the corporate customers. Thisbanking relationship had a positive result for all involved parties. The Norwegian bankcould vouch for the fish producer and its products and, based on that information, theBrazilian bank could offer the necessary letters of credit for the fish importingcompany.

In this case, the fish producer business with the Brazilian importing companybecame dependent on the relationship between the banks for the growth of its exportand international business. As we previously discussed, a network of relationships wasneeded to achieve a comprehensive understanding and a manageable solution for thecustomer. The Norwegian bank became one of several necessary partners for the fishproducers international expansion. At the same time, the bank was able to develop itsown business with a new corporate customer. All involved parties gained experience inconducting successful international business.

Studies of bank relationships with corporate customers have shown that banks canmake their customers conduct business more efficiently, not only by offering servicesbut also by teaching their customers to think rationally with regard to financialmatters (Uzzi and Gillespie, 1999). For example, firms with stronger banking

relationships have less suppliers debt and customer credits compared to firms withweaker relationships (Uzzi and Gillespie, 2002). In a study on large retail multinationalsit is found that banks facilitate the international expansion and contribute to learningopportunities through corporate governance and advisory relationship. Thus, there isreason to expect that the same learning effect can be applied to other financialoperations, such as investments in export activities. Banks are specially equipped forthis because they act as intermediaries in the economy and create value by enhancingopportunities for their customers to conduct business together (Eriksson et al., 2007).

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Internationalisation is closely related to financial issues. The development of foreignbusiness relationships demands local investments, adapted credit times, internationalpayments, tax advice and investments to support international operations. In all ofthese examples, banks should be able to provide customers with knowledge and

services and, thus, contribute to the development of customers knowledge ofinternational operations. By interacting with banks as part of their networks, SMEscould acquire not only objective knowledge but also experiential knowledge becausebanks often possess good knowledge of local foreign companies and potential businesspartners, which for SMEs could lead to further interaction with foreign firms.Depending on the relationship between the bank and its customer, this access toknowledge, as well as other financial resources, could be of great importance for theinternational expansion of the SME. Previous international expansion successes, inwhich banks acted as partners for the SME, could serve as a template for future andcontinued expansion, where banks could be one of several critical partners forinternationalising SMEs.

To what degree this actually happens is unknown. Bell (1997) for example, revealedthat a major export problem for SMEs tends to be finance-related. Problems inobtaining financing were often connected to the fact that banks considered small firmsto be high risk. Zineldins (1995) study shows that banks lack in social and informationexchange activities particularly with small firms which hamper their ability to adapt toclients needs. Based on what we have discussed, there exists a motive for investigatingbanks roles in internationalising SMEs and answering the question of whether banksare needed as network partners for SMEs international expansion.

MethodologyOur interest in banks as needed network partners in SMEs international expansionrelates to networks as the main external source of resources for internationalization. As

discussed previously, research has shown these networks to have a strong effect onSMEs internationalization, mainly by providing the SME with knowledge and otherresources needed for expansion. Therefore our investigation aimed at mapping thedifferent business relationships within the network and how dependent the SMEs wereon these in their internationalization process. To include banks in such an investigationis quite novel, since not many studies have included, yet focused on banks in theinternationalization process of SMEs (Bell, 1997; Eriksson et al., 2009; Spence, 2003).We wanted to conduct a general investigation, and not focus on any specific type ofinternationalising SME since our aim was to get a broad understanding of all types ofSMEs: different sizes, industries, ages and international business. Consequently weneeded to conduct quantitative study with a random sample of SMEs withinternational sales. We decided that a questionnaire would best serve our purposes. To

help us distribute the questionnaire to a random sample of these firms, we utilised datafrom Statistics Swedens Business Register. At least 10 per cent of the sampled SMEsturnovers come from export activities, and all business sectors are included in thesample. From Statistics Swedens Business Register, we received data from a stratifiedrandom sample of two subgroups: small firms (six to 49 employees) and medium-sizedfirms (50-249 employees). From each of these populations, we received a sample of1,000 firms. The sample covered about 28 per cent of the small firms that we wereinterested in investigating and 90 per cent of the medium-sized firms. The reason for

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choosing a stratified random sample is that we expected there to be differencesbetween firms of various sizes and that a random sample from the whole populationwould give us a very large group of small firms. Firms with 50 or fewer employeescomprise about 96 per cent of all Swedish firms. After reviewing the sample and

excluding firms that did not meet our criteria firms that had less than 10 per centexports, had gone bankrupt or had been bought by foreign investors we had a finalsample of 1,666 firms.

The questionnaire was tested on six firms and following revisions, distributed in2005 to the chief executive officer (CEO), marketing manager or export manager of the1,666 firms in the sample. 188 firms were visited personally and the rest, which couldnot be visited were sent a web questionnaire. Of the total sample, 318 firms responded,giving a response rate of 19 per cent. We checked for differences between therespondents from the personal collection and those from the web questionnaire withrespect to industry, revenue, and number of employees: t-tests revealed no significantdifference regarding the means of industry distribution[1] (t 1:64), revenues(t 1:20), and number of employees (t 1:19). An inspection of the non-respondingfirms shows a similar distribution across firm size with the responding firms: 53 percent of the non-responding firms had between six and 49 employees (compared to 59per cent of responding firms) and 47 per cent of the non-responding firms had between50 and 249 employees (compared to 41 per cent of responding firms). A comparisonwas also made concerning export revenue between responding and non-respondingfirms. The t-test showed no significant difference regarding the means (t 20:253).

The questionnaireThe questionnaire used a combination of questions about a scenario and perceptivemeasures of acquisition of knowledge and experiences and use of networks. Thescenario was a real-life foreign business relationship (a customer, distributor or other

intermediary) that had been chosen and described by the respondent. For example, onerespondent chose a relationship with a distributor in China that stood for 50 per cent oftheir turnover. The respondent was then asked to rate how important various types ofnetwork relationships have been for the chosen relationship and what influence theyhad on the firms internationalization. The respondent was also asked to rate the typesof knowledge and resources the network relationships had provided and howdependent the firm was on these relationships. Some subjective performance questionswere included so that we could compare the answers to the objective measurementsbeing collected.

The questionnaire was 14 A4 pages in length and included the measurement of 322variables. We used a seven-item scale, ranging from low to high, to evaluate therespondents views on the various questions. The questionnaire was divided into three

parts: Part one was designed to answer general questions about the firm that cannot becollected from secondary sources. These questions addressed, among other things,how many patents the firm has (if any) and how many new customers the firm has soldproducts or services to during the past year. The second part of the questionnaire wasan effort to map the assignment. The questions related to the respondent firmsrelationship with a specific international business partner (a customer, distributor orother intermediary). The questions in this part concerned, among other things, theimportance of the contents of the business relationship when it comes to developing

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new products, technology, knowledge and international business. The final part of thequestionnaire mapped the local foreign and international network of the firm and theirinfluence on the SMEs internationalization. The focus was on the actors that surroundthe specific business relationship such as: customers, customers customers, suppliers,

suppliers suppliers, complementary suppliers, competitors, consultants and banks.This final part of the questionnaire also contained questions about knowledge drawnfrom past experiences. The questions about banks concerned which type of bank,dependency on present bank relationships and on experience of previous bankrelationships.

In addition to the questionnaire, background data on the firms in the sample werecollected from secondary sources and included 29 variables. These objective dataincluded information about age, size, export, year of international presence, financialinformation and information about industry and products.

Results

General characteristics of the respondent firmsThe mean turnover for the respondent SMEs was 14 million Euros, and they had, onaverage, 53 employees. Their sales abroad varied (a mean of 50.5 per cent of totalsales), with two distinct groups. The first group consisted of firms with 1 to 20 per centof sales abroad (27.7 per cent). The second group of firms had 80 to 100 per cent of salesabroad (24.1 per cent). The firms also differed in terms of their first sale abroad. Intotal, 50 per cent of them had their first foreign sale after 1984 and almost 20 per centstarted exporting during the last decade (1997-2006). The distribution of businesssectors in our sample is as follows; manufacturing firms 58 per cent, wholesale 32per cent, and service firms 9 per cent.

The chosen business relationship

The initiative to form the chosen relationship was taken by the firm itself (60 per cent),or a customer (25 per cent). The relationship, and the foreign market were handled bydirect export (57.6 per cent), fully owned, or majority-owned subsidiary (24 per cent) ora distributor (19 per cent). These data also show that some business relationships canbe handled in a number of ways. The most popular markets for the chosen relationshipwere (in descending order) Finland, the USA, Germany, Norway and Denmark (seeFigure 2). The firms have been present in the foreign market for a mean period of 14.5years and sell between 1 and 20 per cent of total sales to the chosen country (77 percent).

SMEs use of banks in international expansion Information sources in the initial stage of expansion. In the initial stage of an

international expansion, many different sources of information can be of importance anduse for an SME. The need for information and knowledge to reduce uncertainties andrisks is great, and the information and knowledge the firm acquires and uses will affectits continued internationalisation. In this study, we chose to investigate nine of the mostcommon information sources used: customers, suppliers, competitors, tradeorganisations, consultants, government authorities, banks, databases andnewspapers/magazines. The firms in our study responded that customers were themost important information source (with a mean of 4.3 and median of 5 on a seven-point

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scale where 1 is not at all important and 7 is utterly important) (see Figure 3). Thisfinding was expected because the customers, their interest in internationalising anSMEs products, information about what they need and their market context are thefactors that will affect the demand and, thus, the possibility for international expansion.Customers were followed by competitors (with a mean of 2.53 and a median of 2),indicating that benchmarking for guidance about successful market extensions arevaluable. Information gained from competitors might include which countries to enterand which customers to focus on, as well as both failure and success factors. Supplierswere the third most important source of information for the internationalising SME

Figure 2.The ten most popularmarkets

Figure 3.Which informationsources were important inthe initial stage of thebusiness relationship?

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(with a mean of 2.29 and a median of 2) most likely because they not only provideinformation about what product adaptations are possible for foreign markets but alsofunction, in the case of outsourcing, as the SMEs foreign counterpart.

When we considered the answers concerning the importance of banks as an

information source, we found that banks were actually the least important informationsource of all, with a mean of 1.53 and median of 1. Thus, most firms in this study didnot find banks to be a useful information source at the initial stage of a new foreignbusiness deal. Closer examination of the data revealed that 75 per cent of theresponding firms did not consider banks to be an important information source at all (1on a seven-point scale) and that 12 per cent considered the bank to be unimportant (2on the scale), all together making it a total of 87 per cent.

The chosen relationships dependency on present banks. To assess the need for andimportance of banks for the SMEs we asked how dependent the development ofrelationship, the international expansion was on different types of banks. Thedependency on banks lies in the knowledge, capital and services that a bank canprovide for the development of the chosen international relationship. In relation to thepresent local bank in the foreign market, 76 per cent answered that the relationshipwas not dependent on the local foreign bank (1 and 2 on a seven-point scale).

These results can be seen as a part of a trend when it comes to the firms and theirrelationships dependency on banks in general since 73 per cent answered that it wasnot dependent on their present domestic bank and 84 per cent stated that therelationship was not dependent on an international bank (see Figure 4). These resultsindicate that domestic banks were considered somewhat (by a few percentage points)more useful than local foreign and international banks.

The chosen relationships dependency on previous experiences with banks.International expansion research has shown that previous experiences regardingbusiness relationships and networks have a strong impact on SMEs international

expansion. Based on this finding, the firms were asked about their previousexperiences with banks. Of the SMEs, 81 per cent responded that the relationship wasnot dependent on previous experiences with local banks on the foreign market (1 and 2on the seven-point scale, see Figure 5). A total of 77 per cent, did not think therelationship was dependent on previous experiences with domestic banks and 83 percent stated that no dependency existed on international banks (Figure 8). These resultssuggest that SMEs were somewhat (by a few percentage points) more dependent onprevious experiences with domestic banks than experiences with local foreign andinternational banks.

The main result is that SMEs in general do not find banks useful for knowledgeacquisition in any stage of their expansion. Nor do they find experiences from previousrelationships with domestic, local or international banks useful during the development

of a foreign business relationship. Thus our study shows that the majority of SMEs didnot consider banks to be valuable counterparts in their business networks.

SMEs that do depend on banks. A minority (21.5 per cent) of the respondent SMEswere dependent on their domestic or international bank for developing their chosenforeign business relationship (answered 3-7 on a seven-point scale). a total of 24 percent were dependent on foreign local banks. Of the SMEs that indicated a dependencyon international or domestic banks, a majority (68 per cent) also considered their localforeign bank to be important. To test whether the difference between the two groups

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(dependent on banks and not dependent on banks) was statistically significant, we

performed an independent t-test using Statistical Product and Service Solutions (SPSS)software. We used the cut-off point, 3 on a seven-point scale, where respondentsanswering 1 and 2 did not consider the business relationship to be dependent ondomestic or international banks. Respondents answering 3-7 did consider the businessrelationship to be dependent on domestic or international banks. Of the respondingSMEs, 213 belonged to group not dependent on domestic/international banks: Nodepand 53 were in group dependent on domestic/international banks: Yesdep. We have amissing value for 52 firms. The result indicates that a significant difference of existsbetween the respondents who were dependent and those who perceived no dependencyon their domestic or international bank and their response concerning dependence offoreign local banks. The t-value is high (7.2) and the p-value is below 0.0001 (seeTable I).

Of the SMEs stating a dependency on banks in their business relationships, amajority were also more likely to use previous experiences with banks whendeveloping the foreign business relationship in addition to the current dependency ontheir bank relationship. For example, 76.5 per cent of the SMEs that were currentlydependent on their domestic or international bank had also experienced a priordependency on their domestic or international bank in the business relationship. As forthe local foreign bank, the results show that half of the respondents (50 per cent) thatcurrently experienced a dependency on their local bank had also experienced a prior

Figure 4.To what extent is therelationship dependent onyour most importantforeign local and domesticor international bank?

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dependency on that bank. An independent t-test was performed to determine whether asignificant difference exists between group dependent on banks: Yeslocal and groupnot dependent on banks: Nolocal. The test compared the means between respondentsstating a current dependency on local banks and those stating no dependency on localbanks and the responses concerning their prior dependency on local banks. The groupstatistics (see Table II) revealed that 66 SMEs had a dependency on banks (with a meanof 2.8) and that 202 SMEs were not dependent on banks (with a mean of 1.4). The

n Mean SD SE 95 per cent conf. Interval

Yesdep Nodep 53 3.42 1.802 0.248213 1.55 1.155 0.079

Diff. 1.866 0.260 1.346 2.385t-value 7.2 df 63 Sig. (two-tailed) 0.000

Table I.Independent samples testof groups dependence on

foreign local banks


Yeslocal Nolocal 66 2.80 1.899 0.234202 1.42 0.965 0.068


Table II.Independent samples test

of groups priordependence on foreign

local banks

Figure 5.To what extent is the

relationship dependent onprevious of foreign local,

domestic and internationalbanks?

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results show that the two groups are significantly different from each other, with at-value of 5.7 and a p-value of less than 0.0001 (see Table II).

We also checked whether group, dependent on banks: Yesbank and group, notdependent on banks: Nobank concerning domestic or international banks were

significantly different. We compared the means of respondents stating a dependencyon domestic or international banks and those stating no current dependency ondomestic or international banks and the responses concerning their prior dependencyon domestic or international banks. As shown in Table III, a group of 206 SMEsanswered not dependent on domestic/international banks (mean 1.3), and 52 SMEsresponded dependent on domestic/international banks (mean 3.5). The resultsshow that the two groups are different, with a t-value of 8.9 and a highly significantp-value (see Table III).

In summary, the results show that there is only a limited number of SMEs statingthat they are dependent of their bank when doing business in an international businessrelationship. However, of the SMEs that state some dependency on banks in theirinternational business relationship a majority of the firms have used previous

experiences with banks when developing the foreign business relationship in additionto the current dependency on their bank relationship. In addition, the firms dependenton domestic or international banks also show a dependence on foreign local banks.

DiscussionInternational expansion poses many risks and can involve high costs. For SMEs, themajor difficulty lies in allocation of limited resources: Which customers and markets tofocus on, how to find capital and reliable foreign partners, which adaptations to localinstitutions and firms are needed? Knowledge of solutions to these problems can befound in the business network that the SME is a part of. Some solutions will lie withinthe international business relationships that are involved in the expansion, others inthe financial services that accompany their development. Questions regardingsecurities in international payments, credits, and investments could be answered bythe banks to which the SME has relationships. Thus the purpose of this study was tofind out whether banks are valuable network partners for the internationalizing SME.Banks should have valuable knowledge of both domestic and international markets;which is especially true of banks with their own international operations. Banks arealso vital institutions of society through their intermediary and facilitating functionsfor transactions between firms. We have, however, shown in this study that a largenumber, even the majority, of our respondent SMEs have the perception that banksknowledge and services have limited value for them when expanding abroad.

Banks are not included in the most important information sources during the initialstage of expansion, instead it is the customers, competitors and suppliers that are


Yesbank Nobank 52 3.53 1.754 0.243206 1.33 0.712 0.050


Table III.Independent samples testof groups priordependence on domesticor international banks

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perceived as important. These three sources have one characteristic in common: Theyare involved in a business relationship with the respondent SME and are a part of itsbusiness network. They are counterparts with which the SME works on a daily basisor must take into account during international expansion. Thus, the information from

these sources is useful because it is adapted and idiosyncratic to the SME. Banks arenot even in the middle of the information source spectrum. Instead, respondent firmsmentioned newspapers, magazines and government agencies as more important,despite their low possibility of delivering customised information.

Our results show that banks are the least important information source in the initialstage. This finding was somewhat surprising, considering that bank relationships area part of the internationalising SMEs network. Like all the other parties (e.g.customers, suppliers, etc) in business relationships, banks participate in the firmsdaily operations in both domestic and foreign markets and should therefore be able toprovide useful, adapted information to the internationalising SME.

The SMEs continued phase of international expansion involves developingrelationships with international counterparts. The development of the chosenrelationships in our study depends on the knowledge, service and capital that areprovided through the network. In relation to this, a conclusion of our study is that thedependency on banks, as a network partner, is limited during SMEs internationalexpansion. Neither domestic, foreign local nor international banks are considereduseful in developing a present international business relationship. A reason could bethat the respondents perceive banks as ill equipped and therefore not useful forknowledge acquisition and other services. Additionally, as it relates to the result of lowdependency on previous experiences with banks, banks did not in the past have theknowledge and information needed for problems connected to the foreign relationshipand, therefore, were not of any use for its development. It seems that banks are not in aposition to provide these firms with useful knowledge or experiences that will facilitate

any stage in their international expansion.The results of this study clearly show that banks do not, with relation to SMEs, use

their potential as a supplier of financial services and knowledge to these customers.However, this study does support previous research that has demonstrated theimportance of other network actors as providers of useful knowledge for theinternationalisation of SMEs (Blomstermo et al., 2004; Coviello and Martin, 1999;Coviello and Munro, 1997; Jones, 1999). The fact that some of the firms (20 per cent) inour sample were new to international operations may help explain why they preferredto use partners they perceived as being closer to them for solutions with regard tointernational operations. The foreign partner in the business relationship might haveexperience with other foreign suppliers and already have functioning solutions forrelationship and transaction management. Thus, the respondent firms have found it

unnecessary to search for other solutions outside the relationship. In this circumstance,banks might have reacted to customers questions about services instead of proactivelyoffering customised information, knowledge and services.

In our sample, a minority of the respondent SMEs answered that they are dependenton banks for the development of foreign business relationships. We also find thatSMEs responding with a dependence on a domestic or international bank, to a largerdegree, find the local foreign bank important when conducting business with foreignbusiness partners. This shows that these SMES have stronger and more developed

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relationships to their banks. Dependency on one type of bank also has positive spillover effects on other bank relationships.

Our results also show that a large number of SMEs that depend on their bank todayhave also experienced a prior dependency, implying that the history of the

relationships between bank and SME affects the character of future relations(Levinthal and Fichman, 1988). Positive previous experiences of banks have lead to acontinued use and dependency on banks in present international business expansions.There may be several reasons for this. One possible reason is that the SME and thebank see each other as business partners and, as such, are important for each othersgrowth. Therefore, when a relationship develops, the dependency between the actorsalso increases (Blankenburg Holm et al., 1999). The SMEs use of bank services andincreased dependency may also be explained by the possible transfer of knowledgebetween banks and SMEs that are engaged in a particular relationship about, forexample, financial practice (Uzzi and Gillespie, 2002). On the other hand this meansthat negative or useless experiences of banks could lead to less dependency and use ofbank services in the future and continued internationalisation.

The results of our study cannot fully answer the question of why the majority ofrespondent firms did not consider the bank to be a needed partner in the developmentof a foreign business relationship. We can assume based on research regardingbanks customer relationships (Roig et al., 2006; Leverin and Liljander, 2006), banksown customer surveys and our interviews with bank employees that banks do notdeliver what corporate customers think they need and are, consequently, unsuccessfulin creating value for those customers. By studying the information and knowledgeexchange between banks and their customers with international operations, we can getcloser to answering why banks have such little impact on the internationalisation ofSMEs today. Previous studies have revealed that banks that use customer-orientedrelationship marketing programmes are accustomed to increasing the information

exchange between banks and corporate customers; in so doing, they enhance thesatisfaction and loyalty among customers (Barnes and Howlett, 1998; Ennew andBinks, 1996).

Managerial implicationsOur study indicates that banks are unexploited resources, which is a serious problemin light of the need for resources during the international expansion of SMEs. Forbanks the present under utilization of their services can be seen as a businessopportunity. Banks should be able, through a deeper and more developedunderstanding of SMEs foreign operations and their context, to become a valuableand contributing partner in these firms business networks in much the same waythat customers, suppliers and competitors already are. There is much to be gained,

both for SMEs and for banks, in developing an understanding of each othersknowledge and situation. Especially, since we have shown that SMEs that findprevious experiences with banks useful will continue to be dependent on bankrelationships. If the bank can prove its usefulness during the initial stage ofinternational expansion, the probability of a continued valuable relationship to thecustomer is great. By seeing themselves as a part of the SMEs business network andworking more proactively, banks will more easily become involved early in the SMEinternationalisation process, thus creating a relationship in which opportunities for

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learning about each others businesses can occur. When the SMEs internationalbusiness expands, there will be a greater demand for financial services that the bankmay be able to offer.

Such value creation requires customisation of bank knowledge and services with

regard to the firms actual operations, is a requirement. This can be accomplished bydeveloping methods to identify the specific elements that make up customertransactions and create services that simplify and develop the customers business inboth domestic and foreign markets.

Limitations and future researchA limitation of this study is that we could not differentiate between the different typesof services and knowledge that the banks provided. Future research shoulddifferentiate between the two and, specifically, take into consideration the automationand Internet development of bank services. Today, many of the services banks providecan and should be handled by the corporate customers themselves. The way to create

value lies in the development of customised services and knowledge solutions.Therefore, future research needs to make distinctions among services, knowledge, andvalue-creating activities to determine what SMEs need in their international expansion.Future studies could also investigate whether our results are typical for all institutionalactors. Are our results a general trend for network partners that the SMEs view asfurther away in the network or, in embeddedness terms, as weak ties (Granovetter,1985)? Additionally, longitudinal studies of SME-bank pairs could be valuable ininvestigating how these relationships develop and what banks could do to improvefirms perceptions of their usefulness in international expansion.

Note

1. The firms where categorised as manufacturing (58 per cent), wholesale (32 per cent), andservice (9 per cent) firms.

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About the authorsAngelika Lindstrand is an Assistant Professor in the Department of Marketing and Strategy,Stockholm School of Economics, Sweden. Her research concerns international marketing, theinternationalization process of firms, as well as business and social networks. AngelikaLindstrand is the corresponding author and can be contacted at: [email protected]

Jessica Lindbergh is an Assistant Professor at the Centre for Banking and Finance, RoyalInstitute of technology, Sweden. Her research interests are internationalisation process of firms,

institutional differences and retail banking/financial services for small and medium-sized firms.

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SMEs’ dependency on banks during international expansion