Internationally competitive firms in small island developing states:
Why do they succeed?
Nick Scott, Sara Denize, Terry Sloan, University of Western Sydney
Abstract
Indigenous firms in small island developing states are improbable candidates as
internationally competitive firms. They are remote from markets and have limited resources,
yet despite these disadvantages some of these businesses have succeeded, and their success
has created important developmental benefits for the island nations in which they are located.
As exporters to world markets these businesses improve their countries’ balance of payments,
create employment and enhance regional stability. This paper examines the unique sources of
competitive advantage secured by these firms using a resource-based view of the firm as a
structuring theoretical framework.
Introduction
The ability of companies to achieve sustained competitiveness is particularly challenging for
those in remote locations. The United Nations Division for Sustainable Development
(UNDSD) identified a group of nations unusually disadvantaged by unfavourable geoeconomic circumstances: the small island developing states (SIDS). Among the 51 countries
listed by the UN as SIDS are the four Melanesian states of Papua New Guinea, Vanuatu, the
Solomon Islands and Fiji. The UN initiative of 1994 (the Barbados Programme), was
implemented as a mechanism to accelerate the development of these states. SIDS nations are
remote, are “limited in size, have vulnerable economies and are dependent both upon narrow
resource bases and on international trade, without the means of influencing the terms of that
trade” (UNDSD 1994 p.4). Their small populations are insufficient to generate economies of
scale, they have limited factor endowments, are subject to external shocks with consequently
unstable incomes, and communications and transport are infrequent and costly (UNDSD
1994).
Small and medium sized enterprises (SMEs) dominate the economy of developing countries.
Independent indigenous firms that emerge in small island states are generally smaller than
SMEs elsewhere (Granovetter 1984). They tend to operate in low value-added wholesale and
retail trades related to imported merchandise or services subject to few scale economies
(Baldacchino 2005). They have high cost inputs (Winters & Martins 2004), lack knowledge
of international markets and the commercial techniques to trade with them, and are
disadvantaged by poor telecommunications and limited access to venture capital (Baldacchino
2005).
Yet despite these handicaps some firms do exist in these states that have established a
competitive advantage in international trade (eg Baldacchino 1999, 2002, and 2005), making
them the subject of special interest to those seeking to identify sources of export success.
Furthermore, it is suspected that new technologies, particularly the internet and access to it
(due to its qualities of time and distance compression, direct access, global reach, and the
possibilities for disintermediation), open opportunities for more of these firms to overcome
SIDS-related barriers to international growth. Given these impediments, the few successful
exporting firms present rare research opportunities to understand the sources of competitive
advantage for these businesses.
It is for this reason that we contend SIDS export-generating firms offer a rigorous test of
models that seek to explain the determinants of international competitive advantage.
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However, as Etemad (2004) points out there are few theories that offer this insight from the
perspective of the SME and we suggest even fewer that deal with the particular circumstances
faced by SMEs in small island developing states. This paper examines the contribution of the
Resource-Based View as a framework within which to discover the enablers of success of
these internationalised small enterprises. We begin by summarising the limited empirical
work that describes successful exporting business in SIDS, and then after first briefly
describing key parts of the RBV framework we review its relevance as an explanatory
mechanism for the export success. We observe that while the RBV offers a comprehensive
theoretical framework, the extreme situations of firms in SIDS tests its usefulness as an
explanatory mechanism.
Sources of competitive advantage
The extant literature on internationalised firms in remote locations gives us some indication of
where such sources of competitive advantage might lie. The work of Baldacchino (1999,
2002, 2005) is notable. In his work investigating successful businesses in island states in Fiji
(1999), Prince Edward Island (2002) and five European island territories (2005) Baldacchino
identified a range of managerial competencies and resources which confer advantages to firms
operating in small island states. Like most businesses those in SIDS have high quality
products with privileged identity. Often (but not always) what distinguishes the brands from
their mainland counterparts is that they exploit the small-island “myth” to emphasis their
uniqueness (1999, 2002).
Other attributes of successful businesses located in small island locations have been the
ability to secure and activate network relationships. This is evidenced in a number of ways,
including stable labour markets and strong links to customer markets. Many of these
businesses benefit from a secure stable and loyal labour pool (Baldacchino 1999, 2005).
These businesses are embedded in labour markets which are mainly made up of family
networks, with high levels of sustained social capital. In fact many businesses had family
members spanning generations (Baldacchino 1999). This confers considerable advantage to
the business – resources which mainland businesses must allocate to training and re-training
high turnover labour forces can be directed to other areas.
Successful businesses have developed strong links with customer markets (Baldacchino
2005). These were often activated by the manager/CEO by building on their prior personal
connections. For example, many businesses are owned by expatriate entrepreneurs who have
developed considerable competencies in leveraging and managing their previous ‘mainland’
business connections. This access into markets is crucial and represents a considerable source
of competitive advantage for the island business. Finally, there is considerable evidence that
successful businesses in island locations have leveraged ICT capabilities, either by selling it
or by using it to maintain connections with markets, to overcome the problems of geography
and distance (Baldacchino 2005).
The aim of our proposed research is to validate our view that entrepreneurial competencies
and innovativeness will have been generated by successful firms through utilising one or
more of the following resources: high product quality with privileged brand identity,
leveraging ICT capabilities, stable labour resources, embedding manufacturing in local
networks, securing and activating network relationships, and exploitation of expatriate
entrepreneurs.
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The Resource-Based View
The most widely used theory identifying how companies achieve corporate success (and
retain it over an extended period) is the Resource-Based View (RBV), which is now
approaching paradigm status (Peng 2001, Peteraf 1993). The RBV seeks to explain sources
of sustained competitive advantage amongst firms which give rise to economic rents over an
extended period of time. This advantage is explained by the unique resources available to the
firm. Resources are categorised as physical, human or organisational, and in order to be a
source of advantage they must be valuable, rare, inimitable and non-substitutable (Barney
1991). To confer advantage these resources must be heterogeneously distributed within the
universe of firms and they must be sufficiently immobile to permit only some firms to benefit
from them.
We adopt Barney & Clark’s (2007) definition of competitive advantage as the creation of
superior economic value, and contained within this term are perceived benefits, that is
supernormal profits derived from consumers’ willingness to pay a price premium for
intangible or imputed values conferred by the product: in other words, a marketing advantage
(in fact heterogeneity in this context may be equated with the central marketing notion of
differentiation). To achieve competitive advantage a firm need only be in aggregate a better
performer in more factors than its competitors. It does not need to outperform others in all
factors (Barney 2007).
The RBV posits that the evolution of competitive advantage due to unanticipated changes in
the economic structure of an industry (Barney 1986) allows that technological change for
example, such as the availability of the internet, will give rise to new resources for firms.
Competitive advantage therefore, despite accruing to some companies due to the immobility
of certain resources, is not static and can vary with environmental changes, provided the
company has the capability to exploit the opportunity presented (Helfat & Peteraf 2003).
Following these arguments, sustainability is explained by the way in which the external (i.e.
industry) environment constrains this advantage from being competed away (e.g. by public
monopoly and barriers to entry - Porter 1980, 1985), or by the internal management of the
firm (e.g. retention of tacit knowledge; development of firm-specific skills; reinforced by
causal ambiguity etc - Penrose 1959, Wernerfelt 1984, Rumelt 1984, Barney 1986, Barney
1991). Either way sustainability endures when strategic factor markets are imperfect.
The RBV can provide considerable insight relevant to internationalising firms in small island
developing states. This is now considered.
RBV and the Internationalisation of Firms in SIDS
Resources contribute differently towards firm advantage depending on their institutional
context (Priem & Butler 2001). In terms of international markets each company’s home
country is a unique institutional context (Oliver 1997, Peng 2001, Brouthers et al 2008). The
limited literature so far published that describes internationalised firms in remote locations
gives us some indication of where such sources of competitive advantage might lie.
The RBV anticipates potential competitive advantage to appear as environments change. The
international environment, subject as it is to the accelerant of globalisation, changes more
rapidly than domestic markets. While all governments shape the environment in which firms
exist, particularly by providing the infrastructure necessary for business to thrive, small
economies are more responsive to economic management and policy adjustments. The most
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effective government contribution to competitiveness is in the long-term provision of
education, technology and innovation, and physical infrastructure (Yari & Duncan 2007),
although public-private sector partnerships may supplement government initiatives. In the
context of SIDS’ firms a critical variable will be telecommunications, particularly internet
access for the reasons mentioned previously. An example of rapid evolution of the
competitive environment due to technological innovation is presented by the South Pacific
island state of Niue, which in 2003 became the first county in the world to install a free
nationwide wi-fi internet service, funded by registrations of its .nu domain name at US$30
each (Anon 2003).
Another source of competitive advantage identified by the RBV is that of the brand
development potential promoting consumer perceptions unique to the product. These are
particularly likely to be sustainably inimitable since the associations established are specific
to the product itself or its location. Baldacchino (1999), in a case study of a Fijian exporter of
high quality soap, notes a key attribute of the company’s success was the “romancing” of the
“paradise island myth” in developing its brand persona. “Romancing the brand” was also, he
found, a success factor in his case study of a Canadian island food manufacturer (Baldacchino
2002). The nations of Melanesia that are proposed as the future research context for the
development of our ideas are rich in this imagery, and since in international markets each
country represents a different institutional context, each has a different set of endowment
factors to employ. It is suspected that the country of origin effect may be found to be a
valuable asset for these countries.
Finally the RBV is flexible enough to infer that firms may succeed in niche segments within a
larger market. This is important for the evaluation of SMEs in island states as their size and
limited resources inevitably limit them to international niche marketing strategies
(Baldacchino 2002), at least in their start-up phase. Given the small size of the companies
involved however, their intention can be anticipated to be to acquire a modest customer base
within a global product category market at inflated profit margins (producing economic
rents). Possessing only one or two factors in which the company holds an advantage may be
sufficient to ensure international niche market success, and additionally the small domestic
market may provide ex post limits to competition thus assisting the firm to sustain these rents
(Peteraf 1993).
Discussion
From our analysis we argue that successful businesses in SIDS have accessed resources to
neutralise the disadvantages of geography in entering international markets, and that the RBV
offers a viable theoretical framework within which to locate the sources of their success.
However there are particular reasons that justify further investigation of these firms.
The superiority of export-led growth as a strategy for economic development (Carbaugh
2007) and the observation that it is firms that compete and not nations (Krugman 1994)
emphasises the importance of those exports-generating firms to the countries where they are
found. Those agencies that concern themselves with indigenous development in these states
such as the UNDSDi, UN-ESCAPii, and the Commonwealth Secretariatiii, recognise the
special value of exports and exporters and “the need to develop overseas markets for valueadded exports in areas in which they are internationally competitive” (UNDSD 1994 p.42).
However, there are very few case studies published of exporters in small island states.
Baldacchino (1999) described one in Fiji and (2002) one in Prince Edward Island, Canada,
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and (2005) studied successful knowledge-driven SMEs from five European island territories,
but such examples are extremely rare. This is surprising given the heavyweight nature of the
involved parties such as the UN, but scrutiny of their publications and programs reveals their
focus is almost exclusively on governance and national infrastructure with little attention paid
to firms.
A citation count (albeit limited in scope) of RBV contributions to the International Business
literature by Peng (2001) found little at this level of enquiry. Having identified international
entrepreneurship within the RBV literature as the domain of SMEs, Peng found only four of
sixty-one citations to apply to these small companies, and noted that the RBV contribution
was “still in its infancy” in this area (p.815).
Finally, in considering the relative rarity of export-driven SMEs in small island developing
states it is worth quoting Barney & Clark (2007) to justify their enhanced value as exemplars.
“Resource-based theory is not about the mean, it is about the unusual, the outlier. Indeed,
standard statistical practice suggests throwing outliers out of a sample to generate more
efficient mean-based statistics. Resource-based theory suggests that, rather than throwing
outliers out of a sample, we should study them!” (p.255).
A Recommendation for Further Research
Despite the value of these successfully internationalised indigenous firms to their countries,
all of which are candidates for special assistance in the UNDSD Barbados Programme for
small island developing states, little empirical work has been done to characterise them. Case
studies undertaken to date, primarily by Baldacchino (1999, 2002, 2005), do not provide an
adequate body of work for analysis. From Fiji, a Canadian province and five European island
territories they are few in number and limited in comparability, being dissimilar in location,
economic provenance, national status and proximity to large markets.
We identify a need for a systematic study of such firms from a coherent set of countries that
satisfy the criteria for SIDS status. This study will start to address the want of evidence
identifying such companies’ sources of competitive advantage. We suggest the four
Melanesian island states of Papua New Guinea, Vanuatu, the Solomon Islands and Fiji as a
suitable grouping of subject countries, possessing both a degree of cultural homogeneity and a
sufficient variety of economic and commercial resources to provide empirical substance.
Endnotes: i United Nations Department of Economic & Social Affairs, Division for
Sustainable Development http://www.un.org/esa/sustdev/sids/sids_poa.htm; ii United Nations
Economic & Social Commission for Asia and the Pacific
http://www.unescap.org/EPOC/index.asp; iii Commonwealth Secretariat
http://www.thecommonwealth.org/subhomepage/33029/
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