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«This Master thesis is submitted in part requirement for the MSc in International Marketing, Department of Social Sciences, Aalborg University. Heiki ...»

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The Faculty of Social Sciences

The Internationalization Process of

Estonian Software Companies


This Master thesis is submitted in part requirement for the MSc in International

Marketing, Department of Social Sciences, Aalborg University.

Heiki Koppelmann


The Internationalization Process of Estonian Software Companies


Place of study: Aalborg University

Level: Master

Field of study: Economics and Business Administration (International Marketing) Title of the project: The Internationalization Process of Estonian Software Companies Topic: What external factors drive internationalization process of Estonian software companies?

Keywords: Internationalization, SMEs, Porters Diamond Model, Estonian ICT industry and software sector, PLC, OLI Model, Uppsala Model Submission date: 06.03.2014 Number of words: 13694 Number of pages: 74 Supervisor: Mohammad Bakhtiar Rana External Examiner: Søren Eschen Written by: Heiki Koppelmann The Internationalization Process of Estonian Software Companies


During the past months I have had the opportunity to investigate an extremely interesting and fairly unexplored topic – the internationalization process of Estonian ICT companies. During the process there have been many knowledgeable people, to whom I am very grateful.

I would like to express my special gratitude to my Supervisor, Mohammad Bakhtiar Rana, who has guided me throughout the process of writing this thesis and to be able to finish my studies in Aalborg University.

I would also want to sincerely thank Senior Secretary, Birgitte Krogner, who’s fast and professional administration skills have helped me during my thesis writing and while studying in Aalborg University.

I would also like to thank my family and friends, who have supported me and gave me the strength to finish my thesis.

The Internationalization Process of Estonian Software Companies


This thesis was initiated because of the extremely interesting and fairly unexplored topic – the internationalization process of Estonian ICT companies. Applying the Porters Diamond Model to collect and interpret the secondary data from the internet, books, journals and statistical sources to find the external factors that influence the internationalization of Estonian ICT industry and identify the competitiveness of the industry.

To be able to describe the internationalization phenomena this chapter was divided into the theories related to firms regardless of the nature of the firms (Uppsala Model, The Product lifecycle theory) and into theories related to MNEs (OLI Model). Following theories were used as theoretical framework, while taking the SMEs perspective.

The main findings of the project were, that Estonia is one of the best environments to start ICT related business, because of the free and highly developed infrastructure environment and the competitiveness of the industry is one of the highest in Eastern-Europe.

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The Internationalization Process of Estonian Software Companies


Title sheet



List of abbreviations

Table of Figures

Table of Tables

1. Introduction and Research Question

1.1 Background of the Study

1.2 The Overview of Estonian ICT Industry

1.3 Research Question

1.3.1 Limitations

2. Methodology

2.1 Research Objectives

2.2 Research Design

2.3 Methodological Aproaches

2.3.1 Definition of Paradigm

2.3.2 Operating Paradigm

2.4 Six Social Science Paradigms

2.4.1 Explanatory and understanding creation of knowledge

2.5 Methodological Approaches in Business

2.6 Used Methodological Approach

2.7 Applied Methods

3. Literature Review

The Internationalization Process of Estonian Software Companies

3.2 Porters Diamond Model theory

3.2.1 Porters Diamond model in the Internationalization of SMEs

3.3 Internationalization phenomena

3.3.1 Product life cycle theory

3.3.2 The Uppsala model

3.3.3 International entrepreneurship theories

3.3.4 OLI Model

4. Applying Porters Diamond Model

4.1 Research results & Facts

4.1.1 Key Facts about Estonia

4.2 Government

4.3 Factor conditions

4.3.1 Human resources

4.3.2 Physical resources

4.3.3 Infrastructure

4.3.4 Knowledge resources

4.3.5 Capital resources

4.4 Demand Conditions

4.5 The related and supplier industries

4.6 Firm Strategy, Structure and Rivalry

4.7 Change

5. Porters Diamond Model Discussion & Conclusion

Further Research and suggestions


The Internationalization Process of Estonian Software Companies


Figure 1: Estonian ICT export

Figure 7: The Boundary Between Explanatics and Hermeneutics

Figure 2: The determining factors of diamond model

Figure 3: Organization theories

Figure 4: Internationalization of the firm

Figure 5: The Basic of Internationalization-State and Change Aspects

Figure 6: Eclectic paradigm

Figure 8: Economic Freedom Index 2014

Figure 9: All persons, 15 to 64, Employment/population ratio

Figure 10: OECD wireless broadband subscriptions per 100 inhabitants by technology............. 49 Figure 11: Estonian ICT Infrastructure index (2007)

Figure 12: 10 biggest exporting development problems

Figure 13: Estonian Science and Technology graduates vs. European Union average................ 52 Figure 14: Estonian ICT Human capital

Figure 15: FDI in Estonian domestic ICT sector (2000-2012)

Figure 16: Foreign FDI in Estonian ICT sector (2000-2012)

Figure 17: Estonian GDP per capita vs. European Union average GDP per capita

Figure 18: Estonian GDP growth vs. European Union GDP growth (2002-2012)

Figure 19: Number of total Estonian ICT companies

Figure 20: Adapted Porters Diamond Model


Table 1: Three Methodological Approaches Related to the Paradigmatic Categories................. 21 Table 2: Summary of the six Social Science Paradigms

Table 3: Top Estonian ICT companies (2012 data)

The Internationalization Process of Estonian Software Companies


This introduction chapter explains the background of the study area followed by the Estonian ICT sector overview, where the study area, which author has chosen to investigate will be explained more detailed.

1.1 BACKGROUND OF THE STUDY The competitive environment of companies has changed completely in the last 10-15 years. Today we live in the world of Internet, which means, that every company has a potential opportunity to internationalize and go global. More and more companies are getting involved in international activities. The ability to engage in international activities has become very important for the survival and growth of firms. This is particularly true within the knowledge-intensive sectors where firms often have high upfront research and development costs but operate in narrow market niches scattered thinly from one country to another (Saarenketo, 2002).

The internet offers completely new ways to export and to enter into the markets. Company can improve their efficiency by receiving orders on a global basis. This is a great opportunity for small and medium sized companies because of the limited resources they have (Bennett, 1997). Because of the internet´s influence companies from every part of the world will be competing – for customers, resources, talent and intellectual capital – with each other in every corner of the world’s markets. Products and services will flow from many locations to many destinations (Hollensen, 2011). E-commerce has provided a tremendous amount of benefits to Small and Medium-sized enterprise (SMEs), as e-commerce continues” (Ajmal & Mohd Yasin, 2012).

In Europe the small and medium size companies constitute 90% of the firms, which contributes tremendous part of European economy. More and more small and medium companies have international businesses, which are growing fast (Asc, 2002). New paradigms will have to be developed to take account of small and medium sized company’s internationalization process in the emerging electronic age (Liu & Li, 2004).

The Internationalization Process of Estonian Software Companies Estonia is a small country with the population of 1.3 million (Estonia, 2013), which means, that there is limited amount of customers and market volume. Estonia has been relatively competitive in attracting foreign direct investments (Varblane, 2011). These have been instrumental in accelerating the transition process and building up competitive advantages of the local enterprises.

On the other hand, because of the limited local market, for the sake of further growth, internationalization is inevitable for Estonian companies. (Reiljan, 2002). There have been numerous scholars suggesting, that the world of internationalization is changing because of the digital era of internet and companies can now “leapfrog” over stages of internationalization and become global players overnight. Is internet the new and powerful tool for Estonian small and medium sized companies to survive and become strong players without the resources and economies of scale? This topic has been explored more than 10 years ago by Varblane, (2011), Roolaht (2002) and Reiljan (2002), who have provided some insight into this specific field.

There have been several articles and books about the area, that because of the internet, it is possible for a company to go global over night by establishing a website. The purpose of this project us to investigate how Estonian software companies are acting and behaving in relation to internationalizing their businesses. Is that true, that company can internationalize overnight, especially for a technologically-leadenness companies with the special niche in the market. Estonia has one of the best soils for creation and internationalization of software businesses because of the high growth of the information technology, liberal conditions and closeness of Western Europe.

The project would be unique because as far as author knows, there have not been any studies made concerning the attempt of describing the internationalization processes of the Estonian software companies through internationalization theories and therefore it would be appropriate to raise the question of: What external factors drive internationalization process of Estonian software companies?

Since technology has affected the internationalization processes of companies, especially within knowledge-intensive sectors of Information and communication technology sector of Estonia (ICT), this topic is important, as ICT sector is one of the most the developed industries in Estonia, which has been effected most by the new advanced technologies. Porters Diamond Model theory, has been used in this paper to describe the external factors, that influences the internationalization The Internationalization Process of Estonian Software Companies decisions of Estonian software companies. To gather information about the most important external internationalization factors the secondary data from internet and various studies and reports are being reviewed to gather the necessary data.

In the following chapter the overview of Estonian ICT sector is presented with the deeper focus on the software companies and the recent studies done among them to familiarize reader with the essence of the study area.


The purpose of this section is to give a reader an overview of the study sector of Estonian ICT industry, of Estonia focusing on the software sector.

Software industries currently represent less than 10% of the total ICT market in the OECD area but they are growing rapidly. They also face many challenges as compared to ICT manufacturing industries, where efficiencies of scale and sales are on global level the local clustering of the software industries with other local sectors is more evident. (Week, 2003). Following let us take a closer look at the Estonian software sector.

The existence and development of ICT manufacturing and software industries is of great importance in the long run for any country as these industries directly or indirectly contribute to the production and export of internationally competitive products and services. (Kalvet, 2004) Estonia is one of the smallest EU acceding countries and the smallest Baltic country with a population of only 1.3 million. It is often introduced as one of the most positive and successful examples of the transition process and an emerging innovation-based economy (ibid). This is the reason, why Estonia has so many software start-up companies emerged in the last decade.

Estonian software sector compared with ICT (Information and Communication Technology) manufacturing industry, which is mainly consolidated export-intensive and largely based on FDI, is very different. The number of companies in Estonian software sector is high but the production

The Internationalization Process of Estonian Software Companies

volume and the amount of export is low (Kalvet, 2004). The evolvement of Estonian software sector was largely influenced by governmental structures, where legislation creation favors the environment. Estonian government has been active with procuring advanced solutions from local successful software companies, so the returns have been two-sided (Krull, 2003). This means, that large part of software companies have emerged as successful they have because of the government support and public procurement programs offering long-term cooperation. However for new startups, with niche software solutions have to think about entering into foreign market.

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