Studies related to knowledge-intens

Studies related to knowledge-intensive SMEs (Chetty and Campbell-Hunt, 2004;
Coviello and Munro, 1997; Moen et al., 2004; Spence, 2003) have focused mainly on
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qualitative case studies and evaluated psychic distances between countries by using
the concept of Johanson and Vahlne (1977) without trying statistically measure psychic
or cultural distance. The common finding in these studies has been that SMEs favor
countries with a low psychic distance when they start to internationalize their
operations. For instance, the study of Chetty and Campbell-Hunt (2004) on SMEs in
New Zealand proposed that entrepreneurial firms prefer countries within a low psychic
distance (such as Australia and the UK). This finding is also consistent with other case
studies (Coviello and Munro, 1997; Moen et al., 2004; Spence, 2003) and surveys (Bell,
1995). The reasons why knowledge-intensive SMEs favor countries with a low psychic
distance include limited resources, market knowledge, and network relationships (Bell,
1995; Coviello and Munro, 1997). Although these studies (Chetty and Campbell-Hunt,
2004; Coviello and Munro, 1997; Moen et al., 2004; Spence, 2003) have investigated only
the initial market entries, we can assume that target countries where cultural values
(even culture is only one dimension of the psychic distance as noted in Dow and
Karunaratna (2006)) are similar with the home country are easier to operate and
increase the attractiveness of that country. Thus, we hypothesize:
H1. Cultural distance is negatively related to market entry decision of software
SMEs.
Geographical distance and target country selection
Geographical distance has been found to be a significant factor when a firm selects its
target countries; a short geographical distance can often be equated with a familiar
business environment and lower operation costs (Chetty, 1999; Clark and Pugh, 2001;
Dow, 2000; Luostarinen, 1979). In software industry, products itself can very often be
delivered around the world without any significant distribution costs making physical
distribution a less important. However, in many cases, software products still require
an intensive cooperation with customers in pre- and after-sales phases (Ojala and
Tyrva¨inen, 2006). Hence, studies related to internationalization of software firms (Bell,
1995; Coviello and Munro, 1997; Moen et al., 2004; Ojala and Tyrva¨inen, 2007a) have
found evidence that software firms favor nearby countries in their internationalization
process. The study of Bell (1995) which included 88 small software firms from Finland,
Ireland, and Norway found that, for instance, Finnish’ firms entered first to Sweden,
Russia, and Norway whereas Norwegian’ firms entered first to Sweden, UK, Finland,
and Holland. These findings indicate that geographical proximity is an important
determinant when software firms select their target countries. On the other hand, the
study of Terpstra and Yu (1988) failed to find support for this. Their results, based on a
sample of US advertising agencies, indicate that these firms tend to favor countries
with a large market size instead of geographical proximity. However, in line with those
earlier studies investigating to the internationalization of software firms, we
hypothesize:
H2. Geographical distance is negatively related to market entry decision of
software SMEs.
Country risk and target country selection
The level of country risk has been recognized as having a major impact on market
entry decision (Ellis and Pecotich, 2001; Miller, 1992; Quer et al., 2007, among others).
Market entry
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Generally, firms avoid making direct investments to counties with a greater risk level
(Quer et al., 2007; Rothaermel et al., 2006) and use entry modes, which do not require
high investments (Shrader et al., 2000). In his study, Brouthers (1995) found a
significant relationship between the perceived risk in a target country and choice of
entry mode in the software industry. Firms that perceived a higher level of risk favored
independent entry modes such as licensing instead of integrated entry modes such as
wholly owned subsidiaries. These findings are in line with Shrader et al. (2000)
investigating the trade-offs between country risk and entry mode selection by US
international new ventures. In addition, the study of Ellis and Pecotich (2001) also
emphasizes the strong impact that risk and uncertainty have on managers’ market
entry decision in SMEs. The conceptual study of Gregorio (2005), on the other hand,
showed that entrepreneurial firms can use various strategies and exploit uncertainty
and risk in the target country as an opportunity. However, in line with earlier empirical
studies, we hypothesize that firms tend to avoid direct business operations in countries
with a high risk level.
H3. Country risk is negatively related to market entry decision of software SMEs.
Market size and target c