small business strategy

SY

TRATEG

JOURNAL OF SMALL BUSINESS

RE-EXAMINING FIRM SIZE AND EXPORTING:

AN EMPIRICAL ANALYSIS OF SOUTH CAROLINA FIRMS

J. Kent Poff

North Georgia College & State University

kpoff@

Kirk C. Heriot

Columbus State University

Heriot_kirk@

Noel D. Campbell

University of Central Arkansas

ncampbell@

ABSTRACT

Mittlelstaedt, Harben, and Ward (2003) and Wolff and Pett (2000) offer contradictory

evidence on the impact of firm size (by employment) and the propensity to export. Using a

data t very similar to that of Mittelstaedt et al., we re-examine the issue. Although we find

that firm size has a significant impact on export propensity, we fail to find a threshold at

twenty employees, as Mittelsteadt, et al., did. Our findings are more supportive of Wolff and

Pett, who argue very small firms are capable of exporting. This paper concludes by

considering the implications for rearchers and policymakers.

INTRODUCTIONPett, 2000, and Mittelstaedt, Harben, and

Exporting by small firms is a significant

economic activity. The U.S. Bureau of

Census indicates that over 239,000 firms

exported goods in 2005. Small companies

account for 97 percent of all U.S. exporters,

a percentage that has rin slightly since

1995. Small exporters exported goods valued

at $228 billion, which reprented 29.1

percent of total U.S. goods exported (U.S.

Census Bureau, 2007).

McDougall and Oviatt (1999) are credited

with identifying a link between

internationalization and entrepreneurship.

However, they expresd caution that the

“born global” phenomenon was universally

appealing to all firms, regardless of size.

Their caution was guided by the fact that

they noted that there was largely no

empirical support for the recommendation

that firms internationalize.

Given figures such as the, it is unsurprising

that the academic literature explores the

relationship between firm size (by number of

employees) and exporting (e Wolff and

63

Ward, 2003). Although there any many ways

for firms to internationalize, like much of the

literature, we focus on exporting. The

findings are inconsistent in this area. Some

studies identified a positive relationship

between firm size and export success (e.g.,

Lall and Kumar, 1981; Kaynak and Kothari,

1984). Other studies found no relationship

(e.g., Czinkota and Johnson, 1983; and

Moini, 1995). Finally, another group of

studies found an inver relationship (e.g.,

Cooper and Klienschmidt, 1985).

Mittelstaedt, Harben, and Ward (2003)

argued that firms with fewer than 20

employees (hereafter, micro firms) fall below

a critical threshold and will face so many

major obstacles to exporting that they should

not attempt to export. However, their

conclusions contrasted with Wolff and Pett

(2000), who argued that micro firms are

capable of exporting, and with McDougall,

Shane, and Oviatt (1994) and Oviatt and

McDougall (1995) and others (e.g., Autio,

Sapienza, and Almeida 2000; Rialp-Criado,

Urbano, and Vaillant 2003), who argued that

Journal of Small Business Strategy

some new ventures are created with an intent In the next ction, we provide a brief review

to ll internationally. of the literature on exporting by small firms

The purpo of this paper is to revisit the

relationship between firm size and export

propensity, focusing on micro firms, using

Mittlelstaedt et al (2003) and Wolff and Pett

(2000) as our antithetical backgrounds, and

using a data t very similar to that of

Mittelstaedt et al. We argue that Mittelstaedt

et al. did not prove that micro firms are

incapable of exporting, but instead

demonstrate that micro firms are less likely

to export. Their 20-employee threshold is not LITERATURE REVIEW

an absolute value, but is the result of the

specific method Mittelstaedt et al. ud to

analyze their data. Although we find that

firm size has a significant impact on export

propensity, we fail to find a threshold at

twenty employees. Instead, we find that the

evidence supports the existence of a

“threshold” at any arbitrarily chon

partition value; that is, the evidence fails to

support the existence of a threshold at any

particular number of employees. Our

findings are supportive of the Wolff and Pett

argument, which said very small firms are

capable of exporting.

This is not a trivial result. Where there are

inconsistent results in the literature—

inconsistencies in what we know—there is

the incread likelihood of poor public

policy and poor business strategy decisions.

The two practical end products of academic

rearch in business are advice for public

policy makers and advice to business

strategy makers. Academic rearch would

fail in this regard if, for example, micro

business owners or business assistance

professionals fail to pursue exporting until a

firm has grown to a certain threshold size

becau of a mistaken academic result.

Academic rearch would fail in this regard

if, for another example, policymakers fail to

pursue the idea that economic development

can occur through exporting by micro firms

becau of a mistaken academic result. We

do not claim to have conclusively resolved

the empirical inconsistencies in the

relationship between firm size and exporting.

However, we do provide another piece of

evidence that moves us in that direction.

with a particular emphasis on size as a

determinant of exporting ability. Then, we

describe our rearch design and discuss our

results using a sample of firms obtained from

a databa of over three thousand firms

maintained by the South Carolina

Department of Commerce. In the final

ction, we discuss the implications of our

findings and make suggestions for both

future rearch and public policy officials.

Small firms and micro firms have emerged

as one of the most widely rearched topics

of the last 30 years (Wright, 1993; Autio,

Sapienza, and Almeida, 2000; Baird, Lyles,

and Orris, 1994; Aitken, Hanson, and

Harrison, 1997; and Oviatt and McDougall,

1995). This ction will emphasize particular

rearch relevant to firm size as a

determinant of exporting. While other forms

of market entry are available to small firms,

exporting remains a significant means of

foreign market entry (Pett and Wolff, 2003;

Hollenstein, 2003) and is the focus of this

paper.

Several studies have measured performance

outcomes in terms of export performance or

export intensity, with mixed results. Some

studies found a positive relationship between

firm size and export success (e.g., Lall and

Kumar, 1981; Kaynak and Kothari, 1984).

Other studies found no relationship (e.g.,

Czinkota and Johnson, 1983; and Moini,

1995). A final group of studies found an

inver relationship (e.g., Cooper and

Klienschmidt, 1985).

A study from the first group, Baird, Lyles,

and Orris (1994), found that international

firms are larger and tend to be industrial

firms rather than retail or rvice firms.

Dhanaraj and Beamish (2003) confirmed this

finding using a resource-ba theory of the

firm (Penro, 1959; Barney, 1991) in a

sample of Canadian firms.

Wolff and Pett (2000), however,

demonstrated that small firms are capable of

exporting. They concluded that small firms

u a different decision process to export

than do large firms. They argued that the

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Volume 19, Number 1 Spring/Summer 2008

resource-bad view of the firm may rve as relationship between firm size and the

a uful explanation for the success of the propensity to export. However, in this study,

small exporters. Very small firms in their the authors noted that their model captured

study appeared to capitalize on unique not only a difference in export propensity

resources that were independent of between small and large firms, but also

economies of scale or other cost efficiencies. between micro firms and small firms.

The results of Mittelstaedt et al. (2003) and Rearchers exploring the relationship

Mittelstaedt and Ward (2005) are in sharp between firm size and export propensity

contrast to tho of Wolff and Pett (2000). have continued to produce contradictory

Using a sample of manufacturing firms in findings. For example, Thomas, and Gros

South Carolina, they found that micro firms (2005) also suggested that firm size matters.

are far less likely to engage in exporting than Thomas and Gros (2005), ud size as an

small firms with between 20 and 500 indicator of resource availability. Their

employees (Mittelstaedt et al, 2003). initial hypothesis is consistent with

Significantly, they found that firms behave Mittelstaedt et al (2003). They argued that

as if 20 employees is a minimum threshold, “firms that posss higher levels of resources

below which firms do not export. are more likely to engage in exporting to

Mittelstaedt et al. concluded that micro firms exploit them” (Thomas and Gros, 2005).

simply do not have the resources to engage However, their results did not show a

in exporting. They concluded that “firm size positive relationship between firm size and

rves as a necessary as well as a sufficient export propensity. They identified a positive

condition for exporting relationship between firm size and

success.” (Mittelstaedt, Harben, and Ward, importing. They point out that their study

2003) They reasoned that “if minimum firm was limited to the study of the largest

size is a necessary condition for export Mexican firms. Thus, the authors noted the

success, then exporting firms will be larger range restriction of their measure for firm

than non-exporting firms” in the same size as a limitation, but noted that range

industry (Mittelstaedt, Harben, and Ward, restrictions are a significant problem with

2003). Our interpretation of their work is that much of the rearch on internationalization,

they viewed exporting success exporting, and firm size.

dichotomously rather than intensively,

wherein if a firm lf-reported any amount of

exports, then that firm is coded as a success.

To test their hypothesis, they calculated the

exporting conditional probabilities of firm

size distribution within a given industry.

They compare the calculated size

distribution with the actual size distribution

of exporting firms to determine whether

certain sizes of firms are

“underreprented” (Mittelstaedt, Harben,

and Ward, 2003). They found that small

firms are less likely to export than are large

firms. Thus, they write, “In the United

States, how small is too small to export? The

answer appears to be 20 employees,” (2003),

and “The bad news for most firms with

fewer than 20 employees is that they appear

to be too small to acquire the knowledge or

experience necessary to engage in the

exporting process.” (2003).

A more recent study by Mittelstaedt and

Ward (2005) also found a significant positive

65

Finally, a recent study by Hollenstein (2005)

argued that size may be a determinant of

exporting, but only up to a certain size

threshold (firms with up to 200 employees).

Hollenstein’s analysis of a sample of Swiss

firms was divided into three sub-samples to

capture subts bad upon three primary

size categories: small, medium, and large

firms. Firm size was not found to exert an

independent influence on internationalization

in the sub-sample of large firms (greater than

200 employees).

The contradiction between the conclusions

of Wolff and Pett (2003) and Thomas and

Gros (2005), and the conclusions by

Mittelstadt et al. (2003), Hollenstein (2005),

and others, is more appearance than

substance. We argue that Mittelstaedt et al.

did not conclusively demonstrate that micro

firms are incapable of exporting. Rather,

they demonstrated that micro firms are less

likely to export than larger firms. We argue

Journal of Small Business Strategy

that the 20-employee threshold is not an “yes” or “no” basis. Thus, if a firm reports

absolute value, but is the result of the exporting, we coded that firm as an export

specific method Mittelstaedt et al. ud to success. The data did not allow us to

analyze their data. measure sales volume or profit volume of

METHODOLOGY AND RESULTS

We examined data from the 2000-2001

South Carolina Industrial Directory to

determine whether firm size rves as a

necessary and sufficient condition for export

success among small manufacturing firms.

We ud data drawn to replicate the

Mittlelstaedt et al (2003) study. More

1

current versions of the South Carolina

Industrial Directory are available, but we

ud the 2000-2001 edition to remain

consistent with the prior study. We believe

this is a methodological strength for us, as it

allows us to test their conclusion that 20

employees are a necessary condition for

exporting, using what is esntially their own

data t.

We examined the data to determine whether

South Carolina firms with fewer than 20

employees export. If 20 employees is a

necessary condition for exporting, then one

should be unable to obrve firms with fewer

than 20 employees actually exporting.

After sorting the datat by SIC code, we

conducted chi-squared tests after partitioning

the sample using arbitrarily chon firm

sizes. If, using a chi-squared test, we find

evidence that an “exporting threshold” exists

at an arbitrarily chon cut-off number of

employees, then the similarly derived

evidence for a threshold at 20 employees

will fail to persuade.

Mittelstaedt et al. examined 2,848 firms from

49 three-digit SIC industrial ctors. The

current study from the same data t us

3,771 firms. The specific 49 ctors were not

listed in the first paper, so our data could not

be restricted to the ctors.

We wish to emphasize what constitutes an

“exporting firm” for the purpos of this

paper, given the datat we ud. The data

recorded lf-reported answers measuring

whether a firm exported during the year, on a

exports, nor did it allow us to measure export

intensity or export intentions.

It is helpful to plot the data, as shown in

Figure 1, to obtain a general understanding

of the data. Figure 1 shows the percentage of

firms that export by the number of

employees in the firm (from 0 – 500

employees). Figure 2 is identical to Figure 1,

except it emphasizes very small firms (0 – 50

employees). As most rearch suggests,

Figure 1 shows that larger firms are more

likely to export than smaller firms. The

figure shows that 15 percent of firms with

one employee export and this percentage

gradually increas with no discontinuities

until 37 percent of firms with 500 employees

export. Figure 1 and Figure 2 plot the

number of employees against the cumulative

percentages of firms that export. For

example, 37 percent of all firms with up to

500 employees export. The cumulative

percentage is ud to reduce random

fluctuations in the exporting percentage of

firms with different number of employees.

The random fluctuations make interpreting

the graph very difficult.

Visual obrvation of the raw data does not

appear to support the Mittelstaedt et al.

conclusion that micro firms with fewer than

20 employees cannot export. Although larger

firms are more likely to export, micro firms

in South Carolina do export over the

obrvation period, and the data show no

unusual patterns around the 20-employee

mark. Figure 2 emphasizes very small firms

and shows that 44 percent of firms with zero

employees export. A firm with zero

employees would be a lf-employed person

with no additional employees. Remember, a

lf-employed person is not an employee of

the firm. This export percentage is higher

than the average export percentage of any

other level of employment. This obrvation

is consistent with anecdotal evidence that

micro firms with a web site or eBay prence

will export. The results are qualitatively

1

The data ts ud by the other rearchers (e.g., Hollenstein, 2005 and Thomas and Gros, 2005)

were not available to the rearchers.

66

Volume 19, Number 1 Spring/Summer 2008

Figure 1.

Figure 2.

Journal of Small Business Strategy

unchanged if we censor our sample to micro firms, we expect that 44.33 of the

exclude zero-employee firms. Although the firms will export.

percentage of exporting companies falls after

censoring the data, it never dips below 15

percent of firms. Whether we include or

exclude zero-employee firms in our sample,

the evidence indicates that a sizeable portion

of micro firms are exporting.

Mittelstaedt et al. sorted the South Carolina not export), sum to zero across the columns

firms by three digit SIC codes and then and down the rows. Therefore, when firms in

partitioned each lection of firms into four some categories export more than average

groups: micro (fewer than 20 employees), (i.e., large firms), then it follows that firms in

small (20-99 employees), medium (100 – some other category will have to export less

499 employees), and large (500+ than average (i.e., small firms). We then

employees). They counted firms that export calculated the sum of squared errors. The test

and firms that do not export by SIC statistic was formed by the total sum of

classification within each size group. They squared errors, and takes a chi-squared

performed Chi-square tests on each SIC distribution. Figure 1 and Figure 2 show that

classification. They found 31 of the 49 SIC small firms export less, therefore any

classifications studied have statistically partition of firms according to SIC code will

significant differences across firm sizes. show that smaller firms export less than

Mittelstaedt et al. gave a very helpful

example on pages 71-72 of their paper, in

which they demonstrated their analytical

technique in detail for one business ctor,

rather than simply reported 49 chi-squared

test results. We followed their lead, and also

analyzed one ctor in detail, as an

illustrative example of the general procedure. Rather than demonstrating that firms with

The example concerns SIC code 355 fewer than 20 employees are too small to

(Special Industry Machinery and Equipment) export, this example (and the original

which has a total of 120 firms, which they examples in Mittelstaedt et al.) shows that

partitioned by number of employees. Plea micro firms do export; albeit a smaller

e the left-hand side of Table 1, wherein we percentage of the firms export than would

offer a similar example, with the data be expected bad upon the average of all

partitioned as Mittelstaedt et al. did. firms in SIC code 355. This argument is

The left-hand side of Table 1 shows the

numbers of firms that export and do not

export in each partition, and also shows the

calculation of the chi-square test. We

calculated the expected values by assuming

that the average percentage of firms

exporting within the sample will be the same The Mittelstaedt et al. finding that firms with

as the average percentage of firms that fewer than 20 employees are too small to

export within each partition. This is what one export is a result of their particular partition

would expect if there were no relationship of the datat at 20 employees. To

between firm size and export propensity. For demonstrate this, we partitioned the data

example, 63.33 percent (76 firms out of 120 using arbitrarily chon threshold figures, to

firms) of the firms in this SIC classification determine whether the data also supports any

choo to export. Therefore, 63.33 percent of arbitrarily chon partition as an export

firms will export in each partition. Of the 70 threshold. We partitioned the data from SIC

This analysis creates an allocation exerci;

therefore, the actual value minus the

expected value is a zero sum calculation.

That is, the actual number of firms that

export (and do not export), minus the

expected number of firms that export (and do

larger firms. This is what Table 1 shows:

statistically, significantly fewer firms than

expected export within the “under 20

employees” partition. Our conclusion is that

size matters, and we reject the hypothesis

that there is no relationship between firm

size and export propensity.

consistent with the evidence obtained from

Figure 1 and Figure 2. Contrary to the

Mittelstaedt et al. asrtion (2003), firm size

is not a necessary condition for exporting

success, whether firm size is fewer than 20

employees or more than 20 employees.

code 355 into firms with fewer than 100

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Volume 19, Number 1 Spring/Summer 2008

Table 1. Example of Chi-Squared Tests of Partitioning the Sample at Different Values

SIC Code 355, Special Industry Machinery and Equipment

Initial Partition Into Four Sizes Of An Arbitrary Partition Into Four Sizes

FirmsOf Firms

Actual Values

<20500+Total<100500+Total

3925108227664276

20-100-100-200-

99499200500

000311304444044

1082703821201082120

Expected Values

6.331.2768.405.071.271.27Export44.3324.07

3.670.734439.602.930.730.7342.5325.6713.93

1021201088221167038

Actual - Expected Values

0.73-4.402.930.730.73Export-5.330.933.67

-0.730.004.40-2.93-0.73-0.730.005.33-0.93-3.67

0.000.000.000.000.000.000.000.000.000.00

Total Total

0.000.00

Total Total

7673.47

Export

Don't

Export

Total

Don't

Export

Total

Don't

Export

Total

Test Sum Sq Sum Sq

StatisticErrorsErrors

0.640.042.120.420.281.700.420.422.83

1.110.063.670.735.570.492.930.730.734.89

3.23

8.80 7.72

p-p-

Value*Value*

0.0320.052

*

p-Values indicate statistically significant differences in export propensity across differently-sized

firms, indicating that smaller firms are significantly less likely to export than larger firms. However,

as the right-hand column indicates, the number of employees at which this threshold occurs is

arbitrary, and at the choice of the analyst.

69

Journal of Small Business Strategy

employees, firms with 100-200 employees, of Wolff and Pett (2000), Autio et al. (2000),

firms with 200-500 employees, and firms and others.

with more than 500 employees. We report

the results on the right hand side of Table 1.

This example shows that 4.40 fewer firms

with less than 100 employees export than

would be expected. The test statistic reveals

statistically significant differences. The p-

values indicate statistically significant

differences in export propensity across

differently sized firms, and indicate that

smaller firms are significantly less likely to

export than larger firms. However, as the

right-hand column indicates, the number of

employees at which this threshold occurs is

arbitrary and at the choice of the analyst.

Therefore, the data provides the same pursue the performance implications of

support of the existence of a threshold at an exporting by very small firms, rather than

arbitrary division of the data (100 pursue more correlation studies of the sort

employees) as it does for the Mittelstaedt et we have prented in this study.

al. division of the data at twenty employees.

The evidence for the existence of an

exporting threshold at 20 employees is not

compelling, and we view the existence of an

exporting threshold at 20 employees as

possible, rather than conclusive. Our analysis

of a very similar data t fails to support the

Mittelstaedt et al. conclusion that “firm size

rves as a necessary as well as a sufficient

condition for exporting success” (2003). Our

evidence does support the conclusion of

Wolff and Pett (2000) and others who

conclude that even micro firms are capable

of exporting.

RESEARCH AND POLICY

IMPLICATIONS

Although we find that firm size has a growth. Furthermore, export activity is not

significant impact on export propensity, we neatly described in a simple 1-2-3 fashion.

fail to find a threshold at twenty employees. Early rearch accepted the stages model of

In fact, we find that even the smallest firmsinternationalization (Johanson and Vahlne,

—tho with zero or one employees—are 1977), which argued that small firms

capable of exporting. We find that 20-gradually began exporting and escalated

employee threshold is not an absolute value, their efforts as they grew and gained

but is a result of the specific partition of the experience. Bilkey (1978) and others

datat. We find that the evidence supports esntially argued that exporting is a process

the existence of a “threshold” at any of development. However, more recent

arbitrarily chon partition value; that is, the rearch questions this perspective.

evidence fails to support the existence of a McDougall, Shane, and Oviatt (1994) and

threshold at any particular number of Oviatt and McDougall (1995) argued that

employees. Our evidence fails to support the some ventures are created with the intent to

Mittelstaedt et al. (2003) findings; however, ll internationally. Autio, Sapienza, and

our evidence is consistent with the findings Almeida (2000) and Rialp-Criado et al.

70

With this paper, our contribution to the

literature is an additional t of results

showing that all firms, even very small

firms, are capable of exporting. With this

finding, we help dispel some of the

inconsistencies regarding the relationship

between exporting and firm size reported in

the literature. We have not conclusively

resolved the empirical inconsistencies in the

relationship between firm size and exporting,

but we do provide another piece of evidence

that moves us in that direction. Like Olson

and Gough (2001), we conclude that future

studies would be more uful if rearchers

Mittelstaedt et al. (2003) also offered

suggestions to policy makers bad upon

their conclusions about firm size and export

activity. They argued that policy makers

should focus on fostering domestic growth

strategies rather than exporting growth

strategies for micro firms, given their result

that micro firms are too small to effectively

export. Given our inability to support their

rearch finding, we conclude that this

advice may be misguided to the extent that it

is bad upon their empirical finding.

Large firms usually start as small firms and

grow over time. Rather than growing in a

consistent and predictable fashion, small

firms follow many different paths toward

Volume 19, Number 1 Spring/Summer 2008

(2003) label this the “born-global” trend, of firms. Journal of International

whereby new ventures are launched with Business Studies, 9: 33–46.

cross-border business activities in mind.

Given our findings that micro firms can and

do achieve export success, we argue that if

policy makers continue to assist micro firms

with their exporting efforts, then the firms

may grow to become large firms.

Our results have a practical message for

business owners and business assistance

professionals. Our results imply that business

owners should not be dissuaded from

exporting simply becau their firm is very

small. We find no evidence of a minimum

size below which exporting is necessarily a

losing proposition for firms. What we find is

that the smallest firms are capable of

exporting, even if fewer micro irms export

than do larger firms. Our results have a

similar message for business assistance

professionals. Given the ability of micro

firms to export and the abnce of a

minimum size threshold for exporting ability,

business assistance professionals should not

hesitate to recommend or support micro firm

exporting, on general principle. A micro

firms’ exporting success will depend on the

firm’s particular market and on the skill and

strategy of the business strategist, but not on

the number of employees.

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Volume 19, Number 1 Spring/Summer 2008

Wright, P.C. (1993). The personal and the

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Small Business Management, 31: 83.

J. Kent Poff is an associate professor of

accounting at North Georgia College and

State University. He teaches accounting and

tax with an emphasis on tax issues for micro

business. His current rearch interests

include exporting activity by small

business, mathematical analysis of tax

issues, and legal analysis of tax issues.

Kirk C. Heriot is an associate professor of

management and the Crowley chair in

entrepreneurship at the Turner College of

Business at Columbus State University. His

current rearch interests focus on

entrepreneurship under adver conditions

and exporting efforts of small firms.

Noel D. Campbell is an associate professor

of economics at the University of Central

Arkansas. His rearch interests include

small business entrepreneurship, state

lotteries, and state public finance.

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