Evolutionary Theory on Internationalization of SME

and A Case Study

Sun Xuemin1, He Xiaoyin2,
1,2 School of Business, Zhengzhou University, P.R.China, 450052

1 Evolutionary Theory on Internationalization of SME

1.1 What is Evolutionary Theory on Internationalization of SME
Evolutionary Theory on Internationalization of SME, which can also be called Stage Model of
SME, appeared in 1970s, and now have been the classical theory in Internationalization of SME.
Swedish scholars Johansen and Paul are founders of this theory. They studyed four Swedish enterprises’
history of multinational operating, and put forward the law that enterprises international process
follows:“from easy to diffcult, and gradually escalating”.
The Evolution of SME Internationalization is in the following two aspects: Firstly, Evolution of
target markets’ choice, that is, from near to far, and from familiar to unfamiliar ones. Generally, the
geographic order of market expansion is: local market---district market---domestic market--- adjacent
overseas market---global market. For example, the first step that American enterprises expand their
，
overseas market is Canada. Secondly Evolution of multinational operating, that is, from easy to diffcult,
and gradually escalating. The general evolutionary order of multinational operating is : domestic
operating---export by brokers---export directly by enterprises themselves---set up overseas sale
divisions---set up overseas branches to product multinationally.
SME Internationalization can be divided into several stages by Evolution Theory:
Ⅰ .Domestic Marketing Stage. SMEs are busy with domestic production and sales, and have no
time to show concern for the international market in this stage.
Ⅱ .Pre-export Stage. The main feature of this stage is that SMEs begin to collect information on the
international market to do a preliminary feasibility surveys;
Ⅲ .Involved Experimentally Stage. SMEs start small-scale exports to1~2 countries they are familiar
with, and begin limited-scale international marketing activities, often indirect exports.
Ⅳ .Input Actively Stage. Experienced the first three stages’ brew, SMEs begin systematic research,
develop international market, and the market is drifting further and further.
Ⅴ . International Strategic Stage. In this stage, SMEs Internationalization have been gradually
deepened, they not only just regard international market as a substitution for domestic market, but also
plan their enterprise’s overall strategy according to the international market.
1.2 The rationality of adopting “evolutionary mode” in internationalization process for SME
Different scholars have different analysis with different emphasis point, when they do research on
reasons why SMEs adopt “evolutionary mode " in internationalization process. However, their basic
views can be unanimous.
Color, a US scholar, holds that it is impossible for almost all the SMEs to achieve globalization
management and the financial resources all of a sudden. Furthermore, the controllable evolutionary
internationalization process completely conforms to their strategic condition, and the very mode will be
helpful for the company to fall the risk to least. Meanwhile, their international management experiences
will be enriched, too.
Liu Haiyun, a scholar in China, believed that the process of one company’s development at the
same time is the one that accumulates and establishes its advantage, when he stated whether SMEs
could make direct investment to overseas.
Under modern circumstances, SMEs possess the same factors in international operations as big
enterprises, except they are in different steps, and they have different aims and actives when invest. And
they must endure a step for studying and accumulating experiences before they can make full use of the
adventure advantages.
Another scholar named liang Nengze in our country discussed the gradualism theory from the point

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of view that enterprise should continuously improve the ability of studying. The internationalization of
enterprises is not only enlarging simple production of their sales scale,but in fact, it’s the manager’s
studying, mastering and absorbing concerned knowledge, and the process of accumulating the
knowledge of international marketing. The process of studying is only a gradual one. On one hand, there
is an unknown international market, on the other, there is a limit ability of studying. The enterprise
promotes the process of internationalization during continuously solving the contradiction.
Besides the above viewpoints, this article also believes that, the process of gradual mode also is the
process which SME unceasingly grows, the internationalization of SMEs in the growth process not only
may take as the goal, but is the main one of the growth opportunity origins. The internationalization
management has provided the looser growing space and the more growing opportunities. In the
international market, there are numerous usable markets for SME. It is a vitality to change to the
international market when the domestic competition makes the growth space more and more narrower.
Through the more complex disciplining in the international market, the enterprise will attend to the
domestic market competitive more actively. So is the Jindan lactic acid. It is impossible to create good
growing conditions if there is not the international market attending when domestic market pressure is
heavier and heavier, and growing opportunity is smaller and smaller.
1.3 A brief comment on the evolutionary model
Evolutionary theory as the classic theory of the current internationalization of SME, to a large
extent, is suit for the actual process of the internationalization of SME, so it has strong vitality and
interpretative. Follow the evolutionary pattern, SME can rich its experience in international operations,
and reduce the risk to a minimum. But misinterpretation and abuse of such model may result in the
imbalance between domestic development and international development. SME may excessive focus on
domestic development in the present stage and view international development as task of the next phase
of growth, and neglect the current international development opportunities. The so-called "Poverty gives
rise to a desire for change ", the domestic market pressure will force SME to branch out abroad, but
domestic long-term and small-scale success will cause enterprises, particularly growing enterprises lack
of experience with a strong domestic tendency think the domestic environment is enough to support
the growth of enterprises, the overseas development of the domestic market is only giving an added
grace to what is already beautiful of domestic market. In fact, for such a business, the greatest obstacle
to internationalization is not the right time, and the lack of material conditions, but the lack of a global
enterprise culture. From this perspective, Western theory considers the progressive model as the
traditional model of the internationalization of SME, as opposed to the international pattern is " Start in
the whole world of SME." Start in the whole world means that SME start with transnational business
strategy, and possess the institutional framework that serve for strategy from the beginning. Along with
the development of advanced technology such as the Internet, SME with global capacity will increase in
Europe and the United States and other countries. But according to China's macroeconomic
development, enterprise technology, management level and industrial location at present, not many large
enterprises possess the ability to start international operations one step, evolutionary theory is still one of
the most suitable international patterns for Chinese SME.

2.Case study: internationalization process of Henan Jindan Lactic Acid Co., Ltd.
Henan Jindan Lactic Acid Co., Ltd. lies in Dancheng county Henan province. It is a state-owned
SME which set up in 1984.It was one of the initial enterprises who produce lactic acid and series of
products using biotechnology. It has been devoted to the development of Chinese lactic acid technology
and study for many years, has repeatly obtained National Prize for Progress in Science and Technology,
has more than 20 patents. Jindan lactic acid corporation already becomes the biggest lactic acid
production base of Asia, produces 15 kinds of series of products, the domestic market share is above 60.
In the course of undertaking in 20 years, the biggest achievement that Jindan lactic acid corporation
acquired lies in its export quantum which occupies the first place of the trade for several years.Its
product have succeeded in opening up more than 80 markets of countries and regions such as Japan,
U.S.A., Europe, Southeast Asia.
2.1 Backgrounds about opening up world market of Jindan corporation

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 At the beginning of 1990s, the extensive demand for the lactic acid of domestic market has not
shaped, most enterprises have not got rid of the constraint of the old system of planned economy either.
There were more than 80 enterprises in the lactic acid trade at that time, production scale close, the
products too homogeneity, the supply exceeds the demand on the market. In such excessive competition,
Jindan corporation has adopted the similar measures to its rival, such as discounting. Under the market
situation with low demand, such low level competition has not reversed the tide, but raised the cost
instead, led to the fact that the funds stagnated in a large amount, enterprise's business fund was scarce
seriously. Under the heavy burden account receivable, Jindan corporation has been closed for 2 years.
Jindan’s decision that explored world market started in 1993. After Jindan is forced to stop
production, Jindan corporation’s administration and supervision authorities begin to analyze the demand
characteristics and competition states of the domestic lactic acid market. Analysis indicates the overly
narrow domestic demand scale is not enough to support the further growth of enterprises, if Jindan is
still fighting for market share in the limited domestic market, this pie of domestic market will be
dismembered sooner or later. The ideal method is to do the overseas market that nobody shows any
interest before the rival, find new demand, remedy the decline of the sales amount of domestic market,
remedy domestic losses with foreign profit. Then opening the way for international market and opening
up the second battle field become Jindan’s whole idea, which can make Jindan corporation jump out the
excessive competition of domestic market, seek extensive production and the mass marketing. This can
be proved by the fact later on. By the middle period of the 1990s, domestic lactic acid enterprises had
already sharply reduced to more than 10 from more than 80, most lactic acid enterprises disappeared in
the excessive competition. Just think that if there is no the sharing of the international market, Jindan
corporation can not obtain such big growth chance on the domestic market, can not become the first
enterprises of domestic export quantum, the biggest lactic acid enterprises of Asia.
It is at the great pressure of the domestic market that Jindan turns its steps to international market
and begins its stage process of the internationalization in order to seek to survive, grow up in the space.
2.2 A few stages of the Jindan lactic acid’s internationalization progress
～
2.2.1 The first stage :1994 1997
The internationalization progress of Jindan began from 1994.At Guangzhou Export Commodities
Fair in 1994, the company of Albert Lubert of Germany became the first oversea customer of Jindan.
Then Jindan, at that time, has no internationalization experience, and bear the heavy pressure of market
in China. The only choice is " Do while learning " under the condition of one blank paper.
First, Jindan analyzes the characteristic of the international lactic acid market and regards export as
a new management opportunity.
After the first step getting in touch with international market, Jindan began to have a deeper
understanding to the lactic acid profession. First, in the developed country of Europe and America, as a
living creature, lactic acid substitutes the traditional acids and is used extensively. The more strong
realization the consumer have, the more high quality of life the consumer request, the more big demand
lactic acid would be needed, the lactic acid profession will have a vast development foreground.
Therefore, before the large-scale need of domestic market dosen't formate, the international market is
relative to stabilizely mature. Secondly, as a kind of middle product, lactic acid’s low difference’s need
degree is low. Even exporting to many nations, lactic acid also don't need to change product
specification frequently. The last, on the international market, the market share of Belgium and Holland
is very high, and there is a trend that developing toward the domestic gradually. Also because the lactic
acid’s production technique doesn't need absolute large-scale, as Jindan which is a SME can acquire an
own existence space completely on the international market.
Secondly, make use of small scale, low cost marketing method to decline the internationalization
risk to the lowest.
Because of the restriction of scale and strength, for Jindan thus of SME, the low cost marketing
method is the most ideal choice at the beginning of internationalization. At that time, "international
exchanges meeting" is one of the most important outlets that Jindan looks for oversea customer. In
addition to Guangzhou Export Commodities Fair, Jindan attends global large exchanges meeting far
across to England, France, the United States, such as FIE(the European exposition of the food additive)

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etc. Under the circumstance that funds extreme limited, even exhibition booth also can not afford,
Jindan still makes an effort to extend influence. When attending the exchange meetings, Jindan
personnel put on deep red T-shirt printed the product trademark, carry a big pack and send out publicity
data. Till several years later, many foreign merchant that year have a deep impression to the deep red
T-shirt of Jindan .
At last, Jindan’s increasing knowledge of international market and international experience through
contacting with overseas deeply.
Through an exchanging meeting, Jindan not only acquires new customers and understandings of
circumstance of international rivals, the most important is to understand the rule of international trade,
international product and profession standard. Because not enough experience, Jindan ever suffered
defeat for many times. Because not understanding international business management and product
standard, Jindan experienced several default penal and quality penal. But these are inevitable learning
process at the beginning of SME internationalization. Studying is an important factor of gradual mode,
and is also an important path for SME‘s growth .Only handing over the enough international fees ,we
can also obtain internationalizing experience.
Along with the development of import-export business, Jindan acquired import and export
management power in 1997.According to our country’s provision, the enterprise which dose not have
import-export management power only depends on foreign company to export. Even the customer is
oneself developing, they also have to hand over to foreign company. With the export of Jindan
increasing, the expenditure of paying to foreign company has been a big one. aslo at the same time, the
distance of Jindan with foreign customer is bigger. Jindan can not understand customer's demand in
detail in time, and have to ask for an indirect exit outlet, and also can't set up the good oversea
reputation of Jindan. Through acquiring import-export management power and lowering the export cost,
Jindan have a better position on the international market and start turning into the second stage of
internationalization.
2.2.2 The second stage :1997~2000
，
The company summarize experience and lessons at last stage consider that after getting the
engage in import and export trade , the main obstacle is international disparity on product quality .At
this stage , its guidelines is “Produce and management according to nternational standard , Integrate
international market actually ” . Concrete measures : to the quality problem , from technological
innovation 、 staff management and institutional framework etc. many aspects , positively promote
international business .
Firstly, to improve product quality , the company should start from the source of technological
innovation .
Lactic acid’s quality at home is generally relatively low , used in feed production mainly , only
small part is used to make food .To avoid fall into the price competition predicament again , the
company decide to depend on quality to succeed . For two years sesearch, after cooperating with
universitise and research institutions at Israel, it grasps direction of lactic acid technology .. Two items
of breakthrough technology compared with internatioanlly common used technology, save 50%
investment, cost reduce by 5000yuan per ton. That not only reduce the production cost, but also make
domestic lactic acid production technology international advanced level. Besides, Another independent
scientific research project have obtained the national patent. In view of its remarkable contribution on
the production technology to lactic acid, the company become one of the draftsmans of the lactic acid
products national standard. Break-through on technology, it have brought the improvement of product
quality and reducing of production cost directly, the competitiveness of the international market is
greatly improved too.
Secondly, accelerate the cultivation of international trade talents .
Lacking of international trade talents is a worldwide problem in the internationalized course of
SME. International trade talents need to master the foreign language, learn about the detailed conditions
of the international market, different cultural exchanges differences in all parts , need to spend and
establishing the steady relation of mutual trust with the customer for a long time even more .Beside
studying while doing , studying from reality , accumulateing little by little , it has no other way out . The

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company have spent almost ten years to train one set to master foreign language, familiar with the
talents of the business of international trade from 1993. So, it promotes the export business of
enterprises to further development, have also established the foundation on the human resources for the
red institutional framework which set up a internationalization of gold .
Thirdly, Establishing the international trading department, deepening the inside to manage ,
promoting the development of internationalization .
In the initial stage of internationalization, because there is less international portfolio, SME will
scarcely set up the organization department specially managing international trade. It is an important
sign that the internationalized process of SME accelerates to set up special international trading
department. It indicates SME begin to put into a large number of resources to expand export, the
administrator begins to internationalize it as a long-term strategic objective. In initial stage, it is still an
old-fashioned state-owned enterprise, influenced by great environment at that time, thoughts still not
been freed of the shackles of a planned economy, value production and market management ignored . It
has no special department in charge of international trade, even does not possess most basic market
management, consciousness marketted. Through the internationalization development of nearly 10
years , it has learned a lot of experiences and office procedures from international market . It began to
strengthen internal management consciously, do well in produce equilibrate, institutional framework and
equilibrium of business strategy, develop with international equilibrium of development at home in
market. With the efforts and cooperation of various fields of the technology, organization, personal
management , the company have made the good achievement of domestic first of volume of export .
2.2.3 The third stage: So far from 2000
Since 2000, Jindan has entered depth developing stage of internationalization. In this stages, Jindan
further exert the accumulate advantage, strive to make "make the big brand and launch international
cooperation extensively ". At this stage, management environment of Jindan had important changes.
First of all, after China join WTO, the first world largest lactic acid enterprise, Brank of Holland
locate on Shanghai, make direct threat to Jindan and domestic lactic acid enterprise.
Secondly, the domestic lactic acid trade says good-bye to the excessive competition gradually, form
the situation in which several big producers contend for markets. The following graph can shows the
analysis of management environment that Jindan faces at present by SWOT method,.

Opportunities (O)
After china enters the WTO,
looser internationalized
mamanagement environment

Strengths(S) Weaknesses(W)
Technique and scale The brand influence in the
advantage, experience of Jindan world is relatively low
the past ten years

Threats (T)
World-leading lactic acid
enterprise begin to permeate to
home, the chasing of the
domestic rival

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 Fig. 1 The management environment and advantage analysis of Jindan

In order to seek the new countermeasure under the new environment, Jindan retains the domestic
famous managerial expert to analyze the history of Jindan, current situation and International lactic acid
market developing state international lactic acid, draw the following conclusions: The domestic market
will enter the competition stage of brands gradually, Jindan as one of the minority surviving domestic
lactic acids enterprises, enterprise's history is relatively long, the popularity of domestic market is
relatively high, set up steady commercial network, enterprise's technology, scale advantage are obvious.
It is the brand advantage of the international market that is deficient. Though Jindan can produce the
third in world, first in Asia, the achievement that national export quantum is first, the marketing in the
past was not focus on this, can not change this into the intangible assets.
In order to promote Jindan’s brand influence, Jindan determines to implement famous brand
strategy, focus on" Jindan lactic acid, the largest in Asia "external, develop the internal education about"
implement brand strategy, promote enterprise's competitiveness ", excavate brand value, safeguard the
brand image. By 2003, the orientation" the largest in Asia ", " export at most ",has already bring a great
deal of front effects to Jindan., the brand loyalty of Jindan in the domestic and international markets is
improving constantly, products sales volume are being promoted fast. Jindan lactic acid products sales
volume by 3000 for 2000, rise to 5000 tons for 2001 year by year, 8000 tons in 2002, 15000 tons in
2003; Broke through 30000 tons of sales volume in 2004, world sales kept above 50% , realized first in
Asia of volume of production and marketing, good achievement of the third in world. At present,
enterprises are implementing the scale enlargement plan of producing ton 50000 per year, the general
headquarters of enterprises move to Zhengzhou of provincial capital too.
Meanwhile, the brand image of " Jindan lactic acid, the largest in Asia ",also brought the chance of
international cooperation to Jindan, many of lactic acid manufacturer of Holland and Belgium propose
the purpose of cooperation with Jindan, in course of negotiating at present. This indicates that Jindan
begins to break through the single internationalized marketing method, evolve to international
cooperation from exporting. This is the sign that Jindan internationalized intensity is strengthen, it is
also the great opportunity to further accumulates internationalized experience and grow up.

3 Summary and enlightenment of the internationalization process of Henan

Jindan Lactic Acid Co., Ltd.
Summarizing three stages of internationalization of Jindan, main method and experience of Jindan
can be revealed by the following table:

Table 1 Three stages of internationalization of Jindan

Internationalized Time Main way Main measure Important sign
stage
Obtain license to
Indirectly
The first stage 1994- 1997 “Do while learning” engage in import and
Exported
export
Produce and manage

～
according to the Establishment of the
Directly
The second stage 1997 2000 international standard, international trade
exported
completely integrate with department
the international market
Export / Make big brand, launch
so far from “Jindan lactic acid, the
The third stage international international cooperation
2000 largest of Asia ”
cooperation extensively

The 10 years internationalized process of Jindan corporation, make Jindan “the one largest in Asia”
from the one on the verge of stopping production. Therefore, there is important enlightenment to the
internationalized management of SME of our country.
3.1 Internationalized development is important to SME.

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 If Jindan has no support from the international market, it may be disappear under the excessive
competition in domestic market. The meanings of internationalization to SME can be summarized as
several respects: ① Avoid the competition in domestic market, realize the complementation and
promotion between two markets of domestic and international, guarantee enterprises to develop steadily
and surely; ② In accordance with the international standard, improving product quality, promoting
③ ④
enterprise's technological innovation; Lengthen the lifecycle of the products; Expand the volume of
⑤
production and sales, reduce the manufacturing cost; Improve the competitive level of enterprises,
promote the fast development of SME.
3.2 The Jindan case has proved that SME have possibility and advantage of internationalization
too
As to a lot of SME in our country, the greatest obstacle of the internationalization may not lie in
objective factors such as the scale, capability, etc. but lie in subjective factors of lacking initiative spirit
and market information from foreign countries to seek the international development. The traditional
idea does not think the high risk and high cost international market is the ideal choice for the growth of
SME. A lot of SME, under the long-term constraint of this kind of idea, long-standing neglect
international development, even in case of not doing any investigations, consider international
development dangerous subjectively, have lost a lot of good opportunities of utilizing the platform of
international market to further grow up. The Jindna case proves, the key whether SME could
internationalize does not lie in their abilities, but lie in daring to try. Difference between SME and big
enterprises is the advantage of SME (Small-business advantage). Comparing to the bureaucratic
procedure and delay of response of the big enterprise, flexibility of the institutional framework and fast
decision of SME can make SME innovate products, technology faster, and then enter the new market
earlier.

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