Formal Inter-firm Cooperation and International Expansion: How Italian SMEs are Using the Network Contract

This paper analyzes a new legislative instrument called “network contract,” which was designed to support inter-firm cooperation, in order to verify whether this type of formal cooperation represents a relevant driver of change in small firms’ strategic orientation in regards to internationalization. Results indicate that internationalization does not represent the main goal of firms participating in network contracts: Italian SMEs use this instrument to achieve different strategies of growth and long-term objectives. We found some firms that have increased their business activity abroad after joining the network; however, firms with a previous history of internationalization do not seem to have changed their approach regarding the international dimension. Consequently, the network contract is not qualified to be the most suitable tool for promoting internationalization among domestic firms, although internationalization may emerge as a by-product of inter-firm relationships. INTRODUCTION Globalization, increasing competition, and the recent financial crisis have severely distressed small and medium-size European enterprises (SMEs). Today more than ever, SMEs need to rethink their strategies and organizational structures in order to be competitive and survive in the long term. In this context, and especially in Italy, networking still appears to be the most viable way to compensate for SMEs’ shortage of capabilities and financial resources, to expand their product offerings, and to attain international expansion, thus helping firms escape from domestic market constraints and search for new opportunities for growth. Past studies have already established the positive influence of network relationships (latu sensu) in the internationalization process of smaller firms through the traditional stage-wise development models, including the network perspective (Welch 1992; McDougall et al. 1994; Bell 1995; Jones 2001); although few studies have argued that inter-organizational relationships do not always have a positive impact (Coviello and Munro 1997; Ritter and Gemünden 2003; Sasi and Arenius 2008; Mort and Weerawardena 2006). Among different forms of networks available to companies, we decided to focus our research on formal networks, namely the network contract,: an example of which is a new legislative tool introduced by the Italian government in 2009 to support company innovation and competitiveness. We believe that firms’ commitment (somehow implied by the creation of a common entity and the establishment of specific functioning rules as indicated by the law) and related formal links, may have greater influence on firms’ decisions than loose relationships characterizing other types of organizational networks, including industrial districts (Kontinen and Ojala 2011). We chose this instrument, called formal networks, as the national data indicates that it is widespread among SMEs (Rapporto Unicredit 2011; Unioncamere 2012) and not exclusive to large corporations: 75 per cent of firms involved have less than 50 employees. Moreover, we decided to focus on the network contract since our previous research (Aureli et al. 2011) found that it is a flexible and dynamic instrument, which can be used to undertake a plurality of strategic objectives such as international expansion. The increase in contracts between SMEs in all sectors as well as the plurality of planned objectives and programs as recorded by Cafaggi et al. (2012) is testament to this fact. Consequently, this chapter aims to analyze if and how the internationalization process of single nodes is affected by network relationships,; therefore our research question is: Does SMEs’ involvement in formal networks contribute to start or, augment, its international expansion? Analytically, we first reviewed national and international literature on SMEs’ international strategy and networking. Second, we examined formal objectives associated with existing network contracts. Then, we shifted our basic unit of analysis from networks to single node by sending a semi-structured questionnaire to 231 Italian firms (which correspond to the first-built 39 formal networks). Data obtained from respondents were used to evaluate the effectiveness (and the limitations) of this new tool in starting or improving small business internationalization. This chapter aims to fill the current gap in the literature which has mainly investigated consortia as contract-based collaborative instruments for exporting purposes (Bertoli and Bertuzzi 2002; UNIDO 2009), while very few studies (with the exception of practically-oriented) refer to network contracts. Moreover, it aims to shed some light on the existence of goals’ differences among the single nodes and the network as whole (previously under-researched) which can potentially impact the process of internationalization. Structurally, the chapter first describes Italian small business internationalization patterns, revealing whether they focus more on upstream or downstream market expansion, the preferred foreign market modes of entry, the relevance, geographic scope and duration of international activity. Second, it explores the usage of the network contract for the development of international strategies in comparison with other purposes that may have led small firms to undertake formal cooperation. Last, but most importantly, the chapter points out in which cases companies belonging to a formal network have succeeded in starting or improving their international expansion, revealing the role played by dimension, and companies’ goals and the pre-existing relationships.