Government support can help SMEs internationalise – but it can also become a ‘golden cage’

Government support programmes can give SMEs access to funding, expertise and valuable international networks. But they can also come with targets, reporting requirements and other conditions that limit how freely companies can make strategic decisions.

A new study by Aleksi Niittymies, Assistant Professor at Aalto University, and researchers from the universities of Oulu and Tampere builds on 46 interviews with CEOs and senior executives of Finnish SMEs that were pursuing international expansion. The findings help to understand why sometimes governmental support can be highly valuable for firms’ international expansion and other times turn into a burden, and what the managers can do to better utilize the support.

The study shows that two factors are particularly important: how much managerial discretion companies retain and how closely the resources provided by a support programme match what the company actually needs.

‘There are really two fairly simple things to consider: how specific is the expertise the company needs for internationalisation and how much strategic discretion does it have within the support programme? If a company needs highly specialised expertise while its strategic discretion is constrained by the conditions of the support programme, that is a potentially dangerous situation,’ Niittymies says.

The support can be very valuable – if it fits the firm’s needs

Government support can be particularly useful when a company needs general market information, new contacts or help getting started in an unfamiliar market.

Companies interviewed for the study described how support programmes helped them find the right contacts, gather market intelligence and take part in international trade fairs and other events.

‘The positive examples were often cases where the company was still a little rough around the edges and needed quite basic support. They were introduced to people, taken abroad, helped to gather information or conduct research. It didn’t necessarily require a huge amount of money – sometimes it was simply about helping the company move forward,’ Niittymies says.

When a million-euro boost becomes a trap

The study includes cases where funding, and especially the conditions attached to it, shaped the companies’ strategies and their ability to adjust their direction.

In one case, a company received €1 million in support on the condition that it entered five foreign markets within a specified timeframe. The company later realised that the plan was not realistic. But by then, it had already spent part of the funding and could not afford to repay it. As a result, the company felt forced to follow the expansion plan and entered all five markets, which later resulted in notable losses.

The case illustrates what the researchers mean by a ‘golden cage’: support that initially looks like an opportunity can become a constraint when a company’s circumstances change. Internationalisation rarely follows a perfectly predictable path, and therefore it is very important that companies are able to adjust their strategy as they learn more about markets, customers and opportunities. In the case of the company receiving €1 million, the conditions effectively prevented it from adapting its original plan when it became clear that it was not working.

‘A million euros can be an enormous amount of money for an SME and can be quite blinding. But even if that million is being dangled in front of you, the company needs to make sure it retains ownership of the internationalization process. You cannot let the money lock you into a golden cage and take away your ability to adapt direction if needed,’ Niittymies says.

Keep control of the decisions that matter

The researchers argue that companies are not simply passive recipients of government support. Management can actively shape the relationship and decide where it needs flexibility.

Before joining a support programme, companies should identify which decisions they want to keep in their own hands – such as which markets to enter, when to expand and how to enter a new market.

It may also make sense to use support for specific, clearly defined needs: taking part in a trade fair, researching a particular market, building a network or carrying out an individual development project. This can give companies more room to adjust their strategy as circumstances change.

‘A support programme should not be seen as a package that you either take or leave. Companies should consider what they actually need and which decisions they need to retain control over. The support should serve the company’s strategy, rather than the company’s strategy becoming shaped by the conditions of the support,’ Niittymies says.

Moreover, the assessment should not stop once the support has been secured. As a company expands internationally, its needs can change quickly. A programme that provided exactly the right resources at one stage may no longer be a good fit later on. 

The researchers therefore emphasize the importance of actively managing the relationship over time – including changing, narrowing or ending the support when necessary. Their central recommendation is to actively work to maintain both managerial discretion and resource-fit as the relationship evolves.

‘Companies should really keep asking themselves whether the support is still useful to them. If their needs have changed but the support hasn’t changed with them, there’s no point in simply continuing in the same way,’ Niittymies says.

A broader lesson for government support

Niittymies stresses that the study looks at governmental support programmes in general, rather than any individual funding organisation. Business Finland is a key player in Finland’s internationalisation support system, but the research focuses more broadly on how companies and governmental support programmes interact. 

‘We also understand the challenging role of funding organisations: there is policy pressure to channel funding to SMEs, while the use of public funds requires clear rules. That is why we emphasise constructive partnerships and transparent dialogue,’ Niittymies says.

Christopher Palmberg, Head of Policy Insights at Business Finland, says research on public services supporting innovation and internationalisation is important.

‘The study provides valuable insights into the benefits and challenges companies experience when using public services. These perspectives are also useful for implementing Business Finland’s new strategy. Encouraging innovation-capable companies to internationalise boldly is particularly important now, as the Finnish economy is entering a period of growth and our role as an R&D funder is becoming increasingly important,’ Palmberg says.

Published in Academy of Management Perspectives, the study is based on semi-structured interviews conducted between 2019 and 2022 with 46 CEOs and senior executives of Finnish SMEs pursuing international expansion. The companies represented different industries.

The researchers are Aleksi Niittymies from Aalto University, Abdollah Mohammadparast Tabas from the University of Oulu, and Mika Yrjölä and Kalle Pajunen from Tampere University. 

Academy of Management Perspectives: Avoiding the Golden Cage: How to Capitalize on Governmental Support in SME Internationalization?