The District Advantage in Small-Medium Firm Internationalisation

Abstract

Studies on the internationalisation of Small and Medium Enterprises (SME) emphasise difficulties that these firms have in making direct investment abroad due to high transaction and information costs and to an equally high investment risk [Bagella, Pietrobelli 1995]. The recent Italian economic history has been characterised by the development of “industrial districts” [Becattini 1979]. The fact that SMEs in Italy are often members of a “district”, prompts us to ask if this membership is an advantage to operate successfully not only on internal markets, but also on foreign markets. More specifically, we argue that the “district” may generate in some activities economies of scale, which reduce barriers to internationalisation. A district SME, especially if the district has strong product specialisation, may have greater access to a wide range of information on foreign markets, alternative products, technologies and sources of finance. Conversely, when it comes to making productive investments abroad, whatever the form and nature, such an advantage decreases substantially. The SME needs to invest in acquiring quantitative and qualitative information and “relational goods” [Brunetta R., Tronti 1995; Scandizzo 1995] in countries in which it wants to operate. The investment considerably increases not only internationalisation costs but also the variance of expected returns from the project. The realisation of the project within a district may help SME to dampen the above mentioned negative effects through risk sharing. Another potential advantage for small medium firms in a district is the opportunity of sharing the project with an enterprise that belongs to a district and is considered a market leader. This firm may have more experience, well established relationships and trading activities with the foreign market to which the foreign investment is directed. The aim of this paper is to investigate this second hypothesis by using a financial investment portfolio approach. The first section analyses the investment choice on the basis of a standard risk-return approach; the second section specifies conditions under which the SME will find the investment profitable. The third section outlines some policy implications of the paper.

Translated from “Internazionalizzazione della piccolo e media impresa in America Latina”, M.Bagella (ed.), il Mulino, Bologna, 1996.