The effect of geographic scope on growth and growth variability of SMEs

Abstract

The impact of international expansion on the success of small and medium enterprises (SME) has been extensively studied, particularly with respect to the performance implications of expansion into foreign markets. Yet, the literature is still unclear on the consequences of the SME's geographic scope (i.e., the number of countries a firm operates in). Drawing on the contemporary internalization theory, we build a theoretical framework suggesting that SMEs’ geographic scope positively impacts firm growth rate, yet makes it less reliable, i.e., a positive effect on both the mean and the variability of growth. We also suggest that this relationship is highly context-dependent. The positive benefits of the increasing scope materialize only when the firms can manage the rising complexity of operational governance through leveraging the managerial international competencies (obtained, e.g., through international education and international experience) and constraining the geographic expansion to their home region. The framework is empirically tested on data from Swiss SMEs engaged in international operations, employing the multiplicative heteroscedasticity regression model specification with endogenously modeled scope.