Abstract
The internationalisation of small firms has become a significant focus in academic research and practical business strategy, particularly as globalisation and technological advancements have enabled even the smallest firms to expand their operations into foreign markets. Despite internationalisation's numerous opportunities, small firms face unique challenges, including limited resources, liabilities (such as smallness and newness), and intensive uncertainty, particularly in highly dynamic and unpredictable foreign markets. These challenges call for innovative foreign market entry (FME) approaches that prioritise flexibility, helping small firms balance structured decision-making with adaptive responses to the uncertainties inherent in international business environments. While previous research has explored structured and predictive FME strategies, less attention has been paid to how small firms navigate these challenges using both systematic selection and entrepreneurial creation of entry options. This thesis addresses this gap by developing and testing an integrated framework that merges real options reasoning (ROR) and effectual reasoning, explaining how small firms discover, select, and create FME options while managing uncertainty, leveraging resources, and mitigating risks.
The study begins by discussing the significance of small firms in international business research and the growing interest in understanding how these firms engage in international markets. Despite their liabilities, small firms play a crucial role in global trade and innovation but often lack the extensive resources and market knowledge that larger corporations possess. This research highlights the limitations of traditional internationalisation models, which primarily focus on incremental learning (e.g., the Uppsala model) or cost-based decisions (e.g., Transaction Cost Economics), and proposes an alternative decision-making approach that accommodates structured planning and flexible adaptation. Central to this study is the role of foreign market entry strategies, which include different entry options, each impacting the firm’s approach to extending its reach into foreign markets. The literature emphasises that small firms’ success in international markets often depends on their flexibility and agility, which are important in responding to market opportunities and uncertainties. However, a key gap remains: How do small firms effectively balance the need for structured decision-making with adaptive, entrepreneurial strategies in foreign market entry?
This thesis develops and applies a novel theoretical model that integrates real options reasoning and effectual reasoning to enhance small firms' ability to manage the uncertainties of internationalisation. Real options reasoning provides a structured approach to managing uncertainty through staged investments, risk assessment, and sequential decision-making, helping firms treat their resources, commitments, and networks as real options. However, traditional applications of ROR predominantly emphasise financial metrics, such as net present value and option valuation, without fully accounting for the cognitive and behavioural complexities that influence internationalisation decisions. To address this gap, this thesis extends ROR by incorporating behavioural uncertainty and affordable loss as key behavioural constructs, introducing these elements as mediators that shape how firms evaluate and execute FME options.
Effectual reasoning, in contrast, offers a behavioural lens that complements ROR by prioritising flexibility, leveraging available resources, and emphasising affordable loss logic. This study challenges the conventional divide between predictive and control-oriented approaches by showing that small firms often navigate FME decisions through a combination of structured, risk-managed choices and emergent, opportunity-driven actions. Effectuation encourages small firms to focus on factors within their control, co-creating opportunities with partners and iteratively adjusting market entry strategies. By integrating effectual principles with real options reasoning, this study introduces a decision-making model that enables small firms to systematically evaluate existing entry options while simultaneously creating informal options through adaptive strategies.
The research method involved surveying 274 small firms from New Zealand, focusing on decision-making processes related to foreign market entry options. Using a variance-based partial least square structural equation modelling (VB-SEM) approach, also known as PLS-SEM, the study tested the relationships between key behavioural and cognitive antecedents, including behavioural uncertainty, irreversibility, and entrepreneurial flexibility, and the mediating mechanisms of staging logic and affordable loss. The findings reveal that integrating behavioural constructs into the real options reasoning framework enhances small firms’ ability to identify and select FME options and enables them to create informal options that extend beyond purely financial considerations, mitigating the risks associated with foreign market entry.
This thesis makes several key contributions to the literature on international entrepreneurship, small firm internationalisation, and strategic decision-making. First, it extends the application of real options reasoning by incorporating behavioural dimensions, bridging the gap between financial valuation models and the entrepreneurial realities of small firms. Second, it advances effectuation theory by demonstrating how small firms integrate control-based heuristics with structured investment logic to manage uncertainty in foreign market entry. Third, it refines existing internationalisation theories by showing that small firms do not rely solely on staged, incremental commitments (as suggested by the Uppsala model) or cost-driven market entry strategies (as in Transaction Cost Economics) but rather follow a hybrid path that strategically combines selection and creation of FME options.
Beyond theoretical contributions, this study offers practical insights for small firm managers, policymakers, and industry stakeholders. It highlights the need for internationalising firms to leverage predictive and control-oriented approaches, strategically balancing structured investment decisions with adaptive, entrepreneurial tactics to manage and mitigate market uncertainty effectively. By using staging logic and affordable loss as key mechanisms, decision-makers in small firms can make more informed choices about when to invest, delay, or adjust their market entry strategies, ensuring flexibility in highly uncertain conditions and ultimately improving their international performance. For policymakers, the findings suggest the need to design support programs that facilitate both structured market entry planning and experimental, flexible strategies for small firms expanding internationally.
By presenting an innovative decision-making framework, this research advances our understanding of how small firms can achieve sustainable success in international markets, providing a more comprehensive and behaviourally informed approach to foreign market entry strategy.