23. International Entrepreneurship – International Business

23

International Entrepreneurship

LEARNING OBJECTIVES

After going through this chapter, you should be able to:

  • Define the term “entrepreneurship”

  • Understand the meaning of accelerated internationalization

  • Gain a perspective on the motives of international entrepreneurship

  • Understand the features of entrepreneurial orientation

  • Apply the concepts developed herein to emerging market situations

Accelerated Internationalization

eBay Inc., the largest platform for Internet auctions worldwide, was founded in California in 1995. Its first step into international operations was in the United Kingdom and Canada in 1998 by an adjusted Internet presence especially designed for local customers. In 1999, it entered Australia through a strategic partnership and expanded into Germany by acquisition. It made subsequent entries into France and Japan in 2000, and into Korea and Taiwan in 2001. In 2005, 10 years after its founding, the company had a presence in 29 countries, more than 6,000 employees worldwide, and had 46 per cent of its total sales coming from foreign operations.

Logitech is a personal computer peripherals manufacturer. Founded 1981 in Switzerland, the company relocated its head office to Silicon Valley a year later. It established production sites in Taiwan and Ireland in 1986 and 1988 and currently has wholly owned subsidiaries in the United States, Hong Kong, Taiwan, China and Switzerland as well as distribution centres and sales offices in the United States, Europe and Asia. In 2005, Logitech had more than 7,000 employees and sales of USD 1.5 billion, out of which 50 per cent are in Europe, 36 per cent in North America and 14 per cent in Asia.

Proteome Systems Ltd, founded by a former university professor together with five collaborators from the School of Biological Sciences at Macquarie University, Sydney, celebrated its IPO in October 2004, nearly five years after its founding, by which time it was already an established and influential firm in the new field of proteomics, or protein sciences.

Realizing the need for instrumentation in the newly emerging global business of proteomics, the newly founded firm developed its own proteomics platform, consisting of mass spectrometers, liquid chromatography and reagents, initially as a means of identifying and purifying human proteins of therapeutic interest. However, instead of trying to build a proteomics platform from scratch using its own resources, the company instead took the step of assembling the pieces of such a platform from the best international suppliers of hardware and software. Its collaborators included Shimadzu Corporation of Japan, Sigma-Aldrich Co. LLC, Millipore Corporation, Thermo-Finnigan, Alpha Innotech Corporation and the IBM Bioinformatics Group.

Once the firm was formed and was promoting its initial product, it sought to develop its customer base internationally from inception. Its pattern of market expansion was rapid and opportunistic, and focused on gaining access to resources wherever they might be available. In the United States it expanded by acquisition of the pieces left after a biotech firm in Boston went out of business. In Japan it entered into a strategic alliance with an established trading house, Itochu, which was itself looking to enter high-tech areas. In Malaysia it entered the market through the services of an agent. In other words, there was a heterogeneous, entrepreneurial process of market entry and resource deployments as and when circumstances and opportunities presented themselves, but always with a view to sustaining a global market presence from the outset.

 

Source: Information from Dirk Holtbrügge and Birgit Enßlinger, “Initiating Forces and Success Factors of Born Global Firms”, European Journal of International Management 3(2) (2009): 232–260; John A. Mathews and Ivo Zander, “The International Entrepreneurial Dynamics of Accelerated Internationalisation”, Journal of International Business Studies (2007): 1–17.

INTRODUCTION

Innovations in manufacturing, information and communication technology and increasing liberalization in the global economy have enabled the birth of a new class of start-ups that view the global market as their natural home. A multitude of small- and medium-sized firms have increasingly developed important sources of competitive advantage by organizing foreign operations at the time of founding or shortly afterwards, including not only exports but also more complex forms of internationalization such as joint ventures, wholly-owned subsidiaries or franchising networks. Variously described as “global start-ups”, “born globals”, or “international new ventures”,1 these bring to the fore complex forms of entrepreneurship involving high levels of uncertainty leading to their inclusion in international entrepreneurship literature. Firms such as eBay, Logitech and Proteome Systems are all examples of international entrepreneurship visible in different parts of the world.

 

From the Schumpeterian perspective, the entrepreneur disrupts the circular flow of the market by introducing actions that entail novel combinations of existing resources.

The earliest record of entrepreneurship studies can be traced back to the work of Richard Cantillon (c. 1730) and Jean-Baptiste Say.2 Cantillion considered entrepreneurs to be bearers of uncertainty, while Say believed that entrepreneurs were agents that assisted in bringing together all means of production in order to make profits. These ideas about what entrepreneurs did were rediscovered in the twentieth century. Thus, Frank Knight3 highlighted the entrepreneur's role in coping with the uncertainty of market dynamics, arguing that entrepreneurs were also required to perform fundamental managerial functions such as direction and control. Harvey Leibenstein, on the other hand, visualized entrepreneurship as the force that resolved market deficiencies through input completing activities.4

An alternate viewpoint on the advantages of entrepreneurship emerged from the writings of Joseph Schumpeter,5 who saw the entrepreneur as a heroic innovator implementing change in an existing market through “new combinations” of existing resources. From the Schumpeterian perspective, the entrepreneur disrupts the circular flow of the market by introducing actions that entail novel combinations of existing resources. These actions are “disequilibrating” in the sense that they disrupt established means–end relations and generate new sources of uncertainty.6 This has also been referred to as the strong premise for entrepreneurial action or Schumpeterian opportunities.7 Therefore, from the Schumpeterian perspective, entrepreneurial action contributes to economic development by increasing the potential value in an economic system, also referred to as adaptive efficiency.

The perspective of the Austrian economists such as Israel Kirzner8 emphasizes the role of the entrepreneur in moving markets back towards equilibrium by recognizing market opportunities and acting upon them. From this perspective markets are imperfect due to the dispersion and divergence in knowledge and opinions across time and space. Utilizing a market cue such as the price mechanism, entrepreneurs correct ignorance by engaging in arbitrage of tangible goods as well as information. These “equilibrating” actions move the market towards equilibrium. The Austrian perspective has been referred to as the weak premise for entrepreneurial action9, or Kirznerian opportunities.10

 

The perspective of the Austrian economists such as Israel Kirzner emphasizes the role of the entrepreneur in moving markets back toward equilibrium by recognizing market opportunities and acting upon them.

Entrepreneurial action contributes to economic development by enhancing the allocative efficiency of the system, as actions that exploit the dispersion of knowledge and other resources end up reducing that dispersion. The greater the dispersion of knowledge (for example, across national borders), the greater will be the opportunities to engage in entrepreneurial action to profit while reducing the dispersion of knowledge.

NEW INTERNATIONAL VENTURES11

International entrepreneurship as a newly emerging research arena began with an interest in new ventures,12 whose existence, evolution and performance were explained using a broad range of theoretical frameworks.13 The most prominent explanation concerns the phenomenon of the born global firm (BGF), which first appeared in the business literature over a decade ago when McKinsey and Co. identified a group of Australian manufacturers who were exporting just two years after establishment of their business. The study defined a born global firm as “one which views the world as its marketplace from the outset; they do not see foreign markets as useful adjuncts to the domestic market.”14

 

Born global firms are firms which view the world as their marketplace from the outset; they do not see foreign markets as useful adjuncts to the domestic market.

Prior to this, the phenomenon of rapidly internationalizing firms was discussed by Hedlund and Kverneland15 who discovered that some firms deliberately leapfrogged certain steps in the Uppsala model of Johanson and Vahlne.16 Concurrently, several other authors discussed this phenomenon of rapid internationalization. For example, there was Ganitsky,17 who analysed “innate exporters” who are not only more flexible but also have a management that is also more internationally orientated than that of so-called “adoptive exporters”. With growing research in this area, additional terms have emerged that all try to express the rising speed of internationalization. Oviatt and McDougall name such firms “international new ventures”;18 S. B. Preece, G. Miles and M. C. Baetz19 talk about “early-stage technology-based firms”; Litvak20 refers to them as “instant internationals”; Jolly, Alahutha and Jeannet21 speak of “global start-ups”; Jones22 uses the term “international entrepreneur”; and Hurmerinta-Peltomäki23 names them “rapid internationalizers”.

The link between international new ventures and entrepreneurship is therefore an acknowledged fact,24 and recent research has addressed this link more explicitly.25 There is a renewed focus on comparisons of entrepreneurial behaviour in multiple countries and cultures as well as the entrepreneurial organizational behaviour that extends across national borders.

MOTIVES OF ACCELERATED INTERNATIONALIZATION

There are several motives for the rapid internationalization of “born global” firms, leading to their global expansion. The most important among these is the increasing role of niche markets and greater demand for specialized or customized products. Shorter product life cycles is another factor causing born global firms to adopt an international perspective regardless of their age and size. These factors together have helped SMEs to consider exporting their products and getting internationalized early.

 

Developments in transport and communication technology, shorter product life cycles, and the growth of niche markets catering to specialized customized products are factors responsible for the rapid internationalization of “born global” firms.

Significant advances in the production, transportation and communication areas, the increased importance of global networks and alliances, and more elaborate capabilities of people, including those of the founder or entrepreneur who establishes the early internationalizing firms act as facilitators of the born global firm.

Oviatt and McDougall identified seven characteristics of successful global start-ups:

  1. From the beginning, there is a global vision that is easily communicated to others in the firm. Before a firm can be global, it must think global.
  2. Managers have prior international experience. Understanding of letters of credit, exchange rate risks, communication and cultural difficulties is necessary.
  3. They have strong international business networks, which identify opportunities, give advice and assist in negotiations.
  4. Pre-emptive technology or marketing is exploited. Born global firms overcome economies of scale handicaps by having a distinctively valuable product or service.
  5. A unique intangible asset is present. Sustaining the uniqueness of the product or service, usually through special knowledge or know-how, is important.
  6. Product or service extensions are closely linked. Continual innovation allows the small firm to continue to exploit its niche market.
  7. The organization is closely coordinated worldwide. A strong top management team ensures that R&D, procurement, production, marketing, distribution and sales are coordinated no matter how distant their physical locations.
PERSPECTIVES ON INTERNATIONAL ENTREPRENEURSHIP

There are three major perspectives that explain the phenomenon of international entrepreneurship.

Strategic Management Perspective

The strategic management perspective of international entrepreneurship emphasizes that all international activities are entrepreneurial because they can only occur through brokering, resource leveraging or stretching, value creation, and opportunity-seeking through a combination of innovative, proactive and risk-seeking behaviour.26 Proponents of this perspective define international entrepreneurship as a combination of innovative, proactive, and risk-taking behavior that crosses national borders and is intended to create value in organizations.27

 

The strategic management perspective views international entrepreneurship as a combination of innovative, proactive and risk-taking behaviour that crosses national borders and is intended to create value in organizations.

Individuals and Opportunities

A second perspective views international entrepreneurship as a nexus of individuals and opportunities. Proponents of this perspective are of the opinion that international entrepreneurship entails the discovery, evaluation and exploitation of opportunities to introduce new goods and services, ways of organizing, markets, processes, and raw materials through organizing efforts that previously had not existed.28 Opportunities are situations in which people believe they can use new means–ends frameworks to yield novel resource combinations for generating profit.29 Individuals typically discover opportunities based on their prior knowledge, which comes to bear on how they perceive external stimuli.

 

Opportunities are situations in which people believe they can use new means–ends frameworks to yield novel resource combinations for generating profit.

These authors build on the work of Schumpeter and Austrian economics, according to which entrepreneurial activity drives the market process and economic development by moving markets away from or towards equilibrium, while creating and resolving differences in knowledge and resources across time and space. Following Schumpeter,30 entrepreneurs create value that contributes to economic development by engaging in novel combinations of resources. In line with Austrian economics, the knowledge gained through the discovery of entrepreneurial opportunities by individuals makes markets more efficient. To them, entrepreneurship is viewed as focusing on opportunities that may be bought and sold, or they may form the foundation of new organizations.

The emergence of international new ventures is explained by the geographic dispersion of the key elements in the entrepreneurial process: individuals, the experience and other resources that individuals control, and opportunities for new international combinations of resources and/or markets. The core of this view is the nexus of individuals and opportunities.31 In the words of Shane, the individuals–opportunities nexus framework “examines the characteristics of opportunities; the individuals who discover and exploit them; the process of resource acquisition and organizing; and the strategies used to exploit and protect the profits from those efforts”.32

 

The individuals–opportunities nexus framework examines the characteristics of opportunities; the individuals who discover and exploit them; the process of resource acquisition and organizing; and the strategies used to exploit and protect the profits from those efforts.

Entrepreneurship as a Capability

A third perspective views entrepreneurship as a capability. It may be defined as a firm-level ability to leverage resources via a combination of innovative, proactive and risk-seeking activities to discover, enact, evaluate and exploit business opportunities across borders. This capability allows the firm to leverage firm resources, and discover and exploit opportunities in the international market in order to achieve superior business performance.33

 

Entrepreneurship as a capability may be defined as a firm-level ability to leverage resources and exploit business opportunities across borders.

This perspective considers entrepreneurship as a process of enactment and discovery. Proponents of this perspective do not agree that opportunities are “objective phenomena” that do not require subjective creation among people who are influenced by their social milieu.34 They also argue that opportunities may be enacted as well as discovered.35 In other words, people act and then interpret what their actions have created, and sometimes those creations are economic opportunities. Based on this, they define international entrepreneurship as the discovery, enactment, evaluation and exploitation of opportunities across national borders to create future goods and services.

This capability view is particularly helpful for born global firms because most born global firms are small, with scarce financial, human, and tangible resources. Thus, developing organizational capabilities, such as international entrepreneurial capability, to leverage firm resources for achieving superior performance in international market is essential for them.

INTERNATIONAL BUSINESS IN ACTION  |  Avapreneurship and Born Virtuals

Virtual worlds are computer-generated physical spaces, represented graphically in three dimensions, characterized by the fact that they can be experienced by many users, or so-called avatars, at once. Avatars are graphic representations of the self in a given physical medium that other users can see or interact within a virtual environment. Virtual worlds are common in multiplayer online games (such as citypixel), virtual environments (such as Second Life), and role-playing games (such as Entropia Universe and World of Warcraft). These worlds, thanks to recent advances in 3D graphics, bandwidth and network connectivity, are becoming increasingly sophisticated and realistic, enabling organizations and individuals to step into the Internet to communicate.

Using an analogy of the international entrepreneurship business literature that uses the term “born globals”, the term “born virtuals” is used to describe organizations that have been created to discover and exploit opportunities primarily within virtual worlds. Virtual worlds continue to grow both in size and sophistication and, as such, are attractive platforms for born virtuals as they enable economic activity through their own virtual currency. Individuals and organizations may develop and sell their own virtual products and services to others in the virtual world, receiving payments that can then be extracted and converted to real world currency. The range of a financial transaction is from a micropayment of less than one US dollar to the record breaking payment of USD 100,000 for the Asteroid Space Resort in Entropia Universe in 2007.

Adding up these transactions within one virtual world is quite substantial. For example, in 2008 the GDP of Entropia Universe was USD 420 million (in the range of the gross domestic products of smaller developing countries). Of further interest is that in March 2009 the Swedish government granted a real-life banking license to the Swedish virtual world provider, Mind Ark, thus guaranteeing all financial deposits by Entropia Universe members.

These organizations are established by entrepreneurial avatars called avapreneurs. While relatively easy to establish, the challenge for born virtuals and avapreneurs is to accomplish the critical task of coordinating the actions of multiple actors to achieve important outcomes—a challenge that has been repeatedly documented in research on virtual teams and organizations with geographically dispersed members.

Peace Train, a born virtual organization created in Second Life, was founded by three social avapreneurs interested in promoting peace in the world, and together with more than 100 volunteers organized PeaceFest 08, one of the largest fund-raising events to date in virtual worlds. It relied on technologies beyond Second Life to finalize planning (such as Google docs and calendars, team wiki and event blog). At no point in the planning did the members of Peace Train ever meet physically in person. The team took advantage of technologies that allow real-time communication and presentation of visuals as well as a growing network of performers and artists in the space to organize over 100 live events during the three-day PeaceFest from 15 to 17 August 2008. While some of these events were live interviews and presentations with representatives of various charitable organizations around the world, the bulk of these events were of an artistic nature—live music, poetry, visual two- and three-dimensional works, theatrical performances and even guided meditations and a virtual sailing contest. The event attracted 8,000 to 10,000 unique avatars and raised 870,000 Linden dollars from approximately 3,000 individuals from across the globe, which were then donated to 10 real-world charitable organizations.

 

Source: Information from Teigland Robin, “Born Virtuals and Avapreneurship: A Case Study of Achieving Successful Outcomes in Peace Train—A Second Life Organization”, Virtual Economies, Virtual Goods and Service Delivery in Virtual World, Journal of Virtual Worlds Research, 2(4), February 2010; Elia Giovacchini, Thomas Kohler and Robin Teigland, “Enabling SME User-Driven Service Innovation through Virtual Worlds”, paper at International Entrepreneurship Forum, University of Essex, June 2010.

CHARACTERISTICS OF ACCELERATED INTERNATIONALIZATION

There is increasing emphasis on the entrepreneurial initiative associated with newly internationalizing firms, their early entry points into the international economy and sometimes very rapid paths to becoming established international or global players, and the outcome of their early engagement in competition with other international firms. In this context, let's look at the basic characteristics of these rapidly internationalizing firms as compared to traditional internationalizes.

Speed of Internationalization

The first criterion to differentiate BGFs from traditional firms is the speed of internationalization. It can be described in terms of two different time spans, namely:

  1. The time span between founding and the first foreign market entry
  2. The time span between the first and the following foreign market entries

It is generally postulated that a time span of two to three years between the time of founding and first foreign market entry is considered worthy of a geocentric attitude. This definition is based on the consideration that it is hardly possible to speak of a global vision when the first internationalization step takes place after more than three years.

The time span between the first and the second foreign market entry is considered to be of significance and it is generally agreed that this time span should be shorter than between founding and first foreign market entry. It may be pointed out that firms in technology-intensive industries show shorter time spans between one foreign market entry and the next than do firms in other industries.

Geographic Scope of Internationalization

The geographic scope of internationalization of a rapidly internationalizing firm can be measured by the following criteria:

  • Number of countries
  • Number of cultural clusters
  • Number of geographical regions in which the firm is present

To call a firm global, some authors demand that it should have activities in at least five countries. Other authors claim that a further distinction between cultural clusters36 and geographical regions is necessary to clarify the physical and geographical distance of foreign markets from the home market. For example, Switzerland and South Africa fall into the same cultural cluster but represent two different geographical regions. In the opinion of others, speaking of BGFs requires at least activities in two cultural clusters and geographical regions.

Foreign Sales

Besides the number of foreign markets, the proportion of foreign sales compared to total sales of a firm presents a further criterion of accelerated internationalization. Kandasaami and Huang37 suggest a minimum of 10 per cent of foreign sales T. K. Madsen, E. Rasmussen and P. Servais38 claim at least a ratio of 25 per cent is necessary to speak of a BGF. The study by H. J. Lummaa39 revealed this ratio to be as much as 90 per cent in three or four cases.

 

Accelerated internationalization is distinguished from traditional internationalization by its speed, geographic scope and proportion of foreign sales to total sales.

INDUSTRY FOCUS  |  The Growth of Alibaba.com

Alibaba.com was founded in 1999 in China by a former English teacher turned Chinese entrepreneur Jack Ma, with financial and strategic support from 17 other partners in the United States, Japan and Europe as a trading platform for small manufacturers. It has since transformed into a B2B marketplace for small businesses around the world to identify potential trading partners and interact with each other to conduct business online. It completed its USD 1.7 billion initial public offering on the Hong Kong Stock Exchange in November 2007, the biggest Internet IPO at the time since Google's 2004 offering on the NASDAQ.

Alibaba.com is a clear example of an international new venture. The company received revenue from multiple countries, and the resources enabled the Alibaba business model to be adopted by multiple countries. Yet prevailing models for analysing international new ventures, which emphasize the internationalization process and related issues such as speed of internationalization of sales, appear inadequate for analysing this international new venture. For Alibaba.com, expanding into foreign markets was its raison d’être and not just an internationalization strategy. The venture did not seek to overcome the liability of its foreignness, but made it a core asset and source of competitive advantage. International revenue sources are important for the company, but its ability to create value by combining resources internationally is of equal or greater importance. Furthermore, the company's novel mechanisms for connecting small suppliers in China and elsewhere to global markets have contributed to regional economic development.

 

Source: Information from http://www.alibaba.com, last accessed on 25 September 2011.

ENTREPRENEURIAL ORIENTATION

The distinguishing characteristic of a born global firm is that it seeks to derive significant competitive advantage from the use of resources and sales of outputs in multiple countries. The ability to free the business from a single country or culture is a key element of the born global, and a key element of the founders’ thinking. A firm that is intrinsically “American” or “German” has rooted itself in a specific culture and place. The born global firm is free of this type of identity. Founders and managers of these firms develop geocentric mindsets through international experiences and have interest in the world at large.

Is entrepreneurship a set of personality traits and behaviours or the processes and actions associated with the founding of a firm? There is no consensus on the issue as different perspectives stem from multiple definitions of entrepreneurship. Theorists such as J.S. Mill40 were the first to bring the term “entrepreneur” into general use. He propounded that direction, control, superintendence and risk-bearing were distinctly entrepreneurial functions. The entrepreneurial orientation of a firm is the result of several factors, such as personal attributes, financial resources, institutional factors and networks of information—prominent among them being factors specific to the entrepreneur or founder.

 

Entrepreneurial orientation is a combination of personal attributes, financial resources, institutional factors and networks of information.

Personal Factors

These relate to the international vision of the founders that stems from their international experience,41 the ability to identify a specific international opportunity and desire to be an international market leader.42 Bygrave and Hofer43 define an entrepreneur as a person who perceives opportunity and creates an organization in order to pursue that opportunity.

Achievement Need

Gartner44 was one of the first to suggest that entrepreneurship is the result of individual traits (need for achievement, locus of control) activating a set of behaviours (locating a business opportunity, accumulating resources, etc.) that interact with the environment. An individual's entrepreneurial orientation is composed of personality traits (the internal environment), perception of the external environment (cognition) and actions or behaviours (manifestation of the internal into the external environment). The personality traits most frequently associated with entrepreneurship are achievement motivation, locus of control, and propensity for risk-taking. McClelland's45 theory of the need to achieve and Rotter's46 internal locus of control theory are commonly applied in the study of entrepreneurship. According to McClelland, individuals with a high need to achieve want to solve problems, set targets and strive to meet those targets. Preference for challenge, acceptance of personal responsibility for outcomes and innovativeness are all associated with high need for achievement. Individuals with a strong need to achieve frequently find their way to entrepreneurship and are more successful in their ventures.

Locus of Control

The internal locus of control expectation pertains to an individual's need to learn and the effort made for it. Internal control refers to an individual's control over his own life through his own actions, which largely depend upon his behaviour or personality traits. Individuals who have a strong internal locus of control do not feel controlled by luck or chance; they have full control over their actions and their consequences.

Risk-Taking Propensity

Risk-taking propensity is one of the most commonly identified traits in entrepreneurship literature. It refers to the rewards associated with a proposed new venture and is therefore more controversial than the need for achievement and internal locus of control. It is generally agreed that initiating a new venture involves a considerable degree of risk, but empirical support for risk-taking activities has not been easily found. The basic premise here is that an entrepreneur tries to take a middle path between his own internal personality traits and the external environment in dealing with the risk inherent in his business situation.

Complete Entrepreneur

Mitton47 has identified nine observable patterns of conduct (behaviours) as contributers to entrepreneurial success. He visualises a “complete” entrepreneur as an individual who has the ability to see the big picture, spot unique opportunities, make a total commitment to their cause, acknowledge the need for total control, view their actions in a utilitarian rather than moral dimension, be comfortable with and even welcome uncertainty, use personal contacts and connections to open doors, embrace competence, and possess a special know-how. He states, however, that these traits are found only in seasoned entrepreneurs and should therefore not be used as a general theory.

Proactive Personality

A proactive personality is a characteristic of entrepreneurship in an uncertain environment. The proactive personality belongs to an individual who is not deterred by situations and creates environmental change.48 Entrepreneurial orientation differs with the nature of the environment in which it has to function. In a certain and measurable environment such as in a developed economy, an entrepreneur is certain and uses analysis and data collection tools to discover the best possible strategy. On the other hand, a less certain environment leads to intuitive, rule breaking behaviour and the use of qualitative factors to achieve success. In an uncertain environment, such as in an emerging economy, the born global entrepreneur may not follow a straight path to success. In such an environment, the ability to be intuitive about one's environment and adjust accordingly may be a more critical attribute for survival than the ability to collect and analyse data. Uncertainty necessitates an ear-to-the-ground approach in which a proactive entrepreneur will scan for opportunities and take bold and aggressive steps into the market. The nature of the born global firm is one of scanning for opportunity and being aggressive in the marketplace. The desire to overcome an environmental problem is directly related to proactivity—the extent to which people take action to influence their environment. The born global entrepreneur must have a strong desire to overcome the structural limitations of an emerging economy and have high levels of determination to succeed.

Born Global Orientation

Over the years, there has emerged a set of characteristics described as a born global orientation in managers described as innate exporters, first identified in Australia and subsequently in other countries such as Germany.49 Managers of these firms experienced less psychic distance to foreign markets because they travelled more; had more education and were more proficient in a foreign language; did not feel job-related assignments abroad would have a negative effect on career and family; were adaptable, willing to change and less risk-averse; and had a positive attitude toward exporting as a business strategy.

The discussion thus far clearly shows that managers of global firms have a bundle of global dispositions and competencies. They are expected to exhibit higher levels of risk tolerance in ambiguous situations such as those involved in internationalization. This bundle of experiences includes international work experience, extensive international travel and schooling outside the home country. Entrepreneurial competencies acquired as a result of previous employment, technological expertise and existing networking links create an awareness of internationalization opportunities in niche areas.50 The age of the founder or founders also has a positive effect, meaning that elder (and ceteris paribus more internationally experienced) founders or top managers tend to an earlier and geographically more distant market entry than younger ones. Managers with these types of experiences tend to be more familiar with the foreign market conditions and opportunities available, and are more likely to successfully enter a foreign market. Physical presence is important. Managers with overseas responsibilities who remain in their home countries do not develop the same depth of understanding as managers who are required to live internationally. Managers with greater international business experience will also acquire the knowledge and skills to overcome culturally-related entry barriers.51

Networks of Information

Information can overcome a lack of resources. The born global entrepreneur is able to build social and business networks to gather reliable information on market conditions and opportunities. According to N. Coviello and M. Cox, “network” is a metaphor used to represent a set of connected actors.52 These actors may be either organizations or individuals, and the relationships that tie them together may take many forms such as those between customers, suppliers, service providers or government agencies. Such networks contribute to the success of firms by helping to identify new market opportunities and contribute to building market knowledge. Networks, thus, refer to organizational ties with customers, suppliers, service providers or government agencies.

 

Networks refer to organizational ties with customers, suppliers, service providers, or government agencies that allow the firm to overcome resource constraints.

The network, in providing information, supports the entrepreneur and allows the firm to overcome resource constraints. By accumulating international experience, the ability to build networks and relationships is strengthened. International networking capability refers to firms’ ability to obtain resources from the environment through alliance creation and social embeddedness to use in its activities in foreign markets. Networking is one of the major strategies pursued by entrepreneurial firms in order to gain access to resources and cope with environmental uncertainty and impediments in their operations.

Various studies point out that there is a very close connection between the integration of a company or founders in formal and informal networks and internationalization speed.53 One reason could be that companies or founders with well-developed networks are stimulated to a higher degree by their (potential) customers, suppliers or partners to internationalize (horizontal and vertical bandwagon and follower effect).54 Due to scarce resources in the beginning, companies are often dependent on the resources of their network partners to expand internationally.55 Besides, companies with a strong network integration can benefit from their experiences and gain relevant market knowledge as well as general knowledge about internationalization sooner than other companies.56 According to the Uppsala model, this has again a positive effect on internationalization speed and the degree of geographic expansion.

Financial Resources

Access to financial resources, particularly loan capital, and the possibility of additional partners are important initiating factors in the appearance of BGFs.57 It is contended that firms with access to financial resources coupled with a geocentric orientation are likely to make an early appearance on the global stage. In the emerging economy context, this is linked to institutional changes that make access to capital easier and faster.

According to the institutional economics perspective, the most significant role of networks in emerging economies is that it substitutes for external markets.58 The lack of an adequate legal framework and a stable political structure in emerging economies has resulted in the underdevelopment of strategic factor markets,59 which leads to difficulties in creating the competitive advantages necessary for international expansion. A basic characteristic of emerging economies is, therefore, underdeveloped external markets. Networks act as a substitute for these and provide firms with the resources that these markets would have.60 Institutional network ties refer to linkages with various domestic institutions such as government officials and agencies, banks and financial institutions, universities, and trade associations, and provide critical advantages for firms in emerging economies. From the resource dependence perspective, institutional networks are the resources that firms depend on in order to be able to operate in a market.61

In addition to getting permission from the government, links with domestic trade associations and professional bodies can provide intelligence on different markets and access to those markets for international operations. Also, owing to the lack of credit history and the liability of foreignness, it is difficult or costly for emerging-market firms to secure financial support in the host countries. On the other hand, the banking systems in most emerging economies are relational in nature, and banks are willing to provide long-term loans. Hence links with domestic financial institutions are another valuable tie that firms need to obtain for successful international venturing.

Institutional Factors

Institutions are conceptualized as “the rules of the game in a society”62 and institutional transitions are defined63 as the “fundamental and comprehensive changes introduced to the formal and informal rules of the game that affect organizations as players”. Changes in the business environment characterized by increasing competition, changing regulations, increasingly demanding customers, emergence of new business opportunities, etc.64 are equivalent to significant “institutional transitions”,65 leading to a variety of strategic responses. For instance, economic liberalization measures such as deregulation and privatization in hitherto protected economies such as India have been the source of both opportunities and threats. Economic liberalization is a unique and powerful environmental contingency faced by firms from these developing economies, whereas firms from advanced nations have traditionally been more market-oriented. This may translate into a defensive strategic positioning on the part of firms from developing economies aimed at protecting their position in the domestic market (which precludes internationalization) or an assertive strategy aimed at leveraging new strategies through internationalization.66 Thus, government-induced policy changes and institutional forces can act as a catalyst towards accelerated internationalization and the appearance of born global firms with international entrepreneurial orientation.

 

Institutions are conceptualized as the rules of the game in a society.

 

Institutional transitions are defined as the fundamental and comprehensive changes introduced to the formal and informal rules of the game that affect organizations as players.

MANAGERIAL PERSPECTIVE

The rapid growth of emerging markets during the late 1990s and early 2000s have been characterized by increased transparency, deregulation, privatization of state enterprises, a burgeoning middle class, availability of consumer goods and the existence of financial markets, all contributing to various stages of development. As these emerging economies stand poised for greater integration on the world stage, they offer great opportunities for the born global entrepreneur. Their large populations, resource bases and markets, as well as the fact that all of them are regionally powerful with strong geopolitical significance make them powerful breeding grounds for the international entrepreneur.

Emerging markets such as China, India, Mexico, Brazil and Turkey are poised to capture economic growth and have made important economic and structural changes and reforms in order to take advantage of the global marketplace. Existing facilities, transportation and living conditions in emerging economies all support the development of entrepreneurship in these countries. Developing economies can take part in the electronic commerce revolution by enacting regulations similar to those required for international trade, namely, an open economy that encourages competition. Internet use is expected to rise faster in developing countries over the next 10 years than it will in industrialized nations. For born global firms, the Internet gives virtual proximity to industrial markets and reduces costs associated with business transactions. The acquisition of appropriate knowledge is fundamental to successful market entry abroad, particularly for resource-constrained small firms. This information can be found on the Internet. The ability to connect to the world from anywhere at any time, distribute goods and services on demand and facilitate business transactions with very little cost gives entrepreneurs in developing countries a great opportunity to participate in the global marketplace.

Networks also play an important role in the development of a born global firm. Networks, formal and informal, exist in all cultures and are a primary method of facilitating market transactions. They share information about business opportunities, market barriers, and potential partners. The informal network especially serves a much more important purpose for developing economies where credit-rating agencies or chambers of commerce may not be available for screening of potential partners.

The enabling of firms to enter and exit the market without oppressive regulations promotes growth and entrepreneurship. Developing countries generally require more procedures to start a new venture and subsequently require a longer time horizon for full implementation of the new firm. This increases the cost of starting a new venture and encourages development of an underground economy as entrepreneurs seek faster, less bureaucratic methods of new business development. As developing economies liberalize, they will be able to capitalize on more than just natural resources and labour advantages. Innovations will occur not only in developed nations but also in the most advanced developing countries. The ability to take advantage of the niche markets inherent in the born global phenomenon will become faster, easier and less expensive.

As born global firms emerge in substantial numbers worldwide, they reflect an emergent paradigm, with the potential to become a leading species in the ecosystem of international trade. In this sense, the born-global phenomenon is heartening because it implies the emergence of an international exchange system in which any firm, regardless of age, experience, and tangible resources, can be an active international business participant. Although large global corporations and the negative aspects of globalization often dominate reports in the popular press with respect to the emergent world order, the increasing role of born globals implies a more optimistic view. In relative terms, born globals might be seen to herald a more diverse international business system in which any firm can succeed internationally.

CLOSING CASE  |  Born Global Acquirers from India

The rise of TNCs from emerging economies as important players in the global economy has been a distinctive development of the present century. The emergence of these firms from unique institutional and resource environments has been fraught with challenges as many of them are latecomers from economies with underdeveloped institutions and market intermediaries, overcoming resource disadvantages such as financial capital, advanced technologies and managerial capabilities. The period 2000–2007 witnessed an unprecedented boom in outbound mergers and acquisitions (M&A) activity from India, led by firms in the IT and pharmaceutical sectors. Firms that were less than five years old at the time of acquisition did 12 per cent of these cross border M&As, and were hence called born global acquirers (BGAs).

IBS Software Services

IBS was incorporated in 1997 in response to the global need for a software solutions company in the fast growing travel, tourism and logistics industry. It began global operations in 1998, had a presence in three different geographies by 2001 and made its first overseas acquisition in 2002. Its founder, V. K. Mathews, an aeronautical engineer from IIT Kanpur, has varied global experience in the travel industry. It has used a strategic mix of alliances and acquisitions to emerge as a leading international player in the travel space. Some of its notable alliances were with Oracle Corporation, Sun Microsystems and BEA Systems in 2001, and with Cendant Corporation, United States, in 2004. Its important acquisitions included TopAir, Avient Technologies, Discovery Travel Systems, L.P. and VISaer, Inc.

Four Soft

Four Soft is the world's largest transportation and logistics software products company. It was initially promoted as a private limited company by technocrat Palem Srikanth, whose global experience includes both his education at Stanford and prior global work experience in supply chain management. The company owes its existence to the government's EOU/STP scheme and has moved up the technological capability ladder by obtaining various ISO and SEI-CMMI certifications. It has used a variety of modes of international entry and has a global presence in 10 countries.

MphasiS

MphasiS was formed in June 2000 after the merger of the US-based IT consulting company MphasiS Corporation (founded in 1998) and the Indian IT services company BFL Software Limited (founded in 1993). The company was founded by Jerry Rao and Jeroen Tas, both former Citibank employees. Starting out as a BPO and application services outsourcer in the BFSI segment, it subsequently moved into telecom and health industries as well.

Its global character was evidenced by an Indian CEO, a Dutch president and more than a dozen subsidiaries in Europe, the United States and Asia. It enhanced its technological capability through both domestic and overseas acquisition-cum-alliances based strategy, making it among the top software exporters of the country within a couple of years of coming into existence. It was acquired by software services firm EDS in 2006, which in turn was acquired by HP in 2008.

MosChip Semiconductor

Founded in 1991, MosChip made its first acquisition in 2001. A firm with a geocentric orientation, its chips are designed in India, manufactured in Taiwan and sold through its offices in the United States. The firm's CEO, K. Ramchandra Reddy, is an electronics engineer with a global vision acquired through both his education at Winconsin and work in Silicon Valley, USA. A serial entrepreneur, Reddy has several start-ups to his credit, besides being responsible for designing the world's first DSP chip. He also has extensive experience in sub-contracting and manufacture of semi conductors. The firm has a global presence.

Vmoksha Tecchnologies

Vmoksha Technologies is an IT services company headquartered in Bangalore as a private limited company. Since its inception in May 2001, Vmoksha has emerged as a key player in the global IT outsourcing space. Vmoksha currently has operations in the United States, Europe and the Asia Pacific region (it has development centres in Bangalore and Singapore). It is the first company in the world to directly go for CMMI Level 5 assessment without being assessed at intermediate levels, and the 16th IT company in the world to achieve CMMI Level 5. It is the second company in the world to be assessed for all the four disciplines of CMMI—software engineering, system engineering, supplier sourcing, and integrated process and product development. The company was included among SMEs from India poised to succeed on account of the strong offshoring model and included among the top 100 outshorers of the world in terms of revenue.

These firms came into existence with the geocentric orientation that helped them consider the global market as their natural home, driven by personal characteristics of their entrepreneur and facilitated by changes in the institutional environment. The acquisition experience of these firms has been the result of innovation springing from internal R&D drawn from its own accumulated knowledge of the IT industry and domain experience gathered elsewhere. The linkages developed by entrepreneurs through prior experience in the IT industry and other domains enabled them to take the decision to acquire, facilitating leapfrogging and springboarding behaviour to be able to leverage their resources for acquisition purposes in the global market.

All firms profiled in the study have been led by individuals with prior international experience of both the IT industry and also other domains, using opportunities in prior networks and the tacit knowledge vested in these leaders for rapid internationalization. This is consistent with the contention that competencies embodied in the founder/entrepreneur often relate to a new and specialized technological niche which provides the opportunity for internationalization. These competencies are derived from previous employment, prior networks and technological expertise, which make them aware of new international opportunities that others remain unaware of.

Questions

  1. What are the distinguishing features of the firms profiled in the case study?

  2. Clearly enumerate the factors which acted as initiating forces of these born global acquirers.

Source: Sumati Varma, “International Entrepreneurship—An Indian Case Study”, paper presented at the “‘Emerging Multinationals’: Outward Investment from Emerging and Developing Economies”, Copenhagen Business School, 25–26 November 2010.

SUMMARY
  • Innovations in manufacturing, information and communication technology, and increasing liberalization in the global economy have enabled the birth of a new class of start-ups that view the global market as their natural home. A multitude of small- and medium-sized firms have increasingly developed important sources of competitive advantage by organizing foreign operations at the time of founding or shortly afterwards, including not only exports but also more complex forms of internationalization such as joint ventures, wholly-owned subsidiaries or franchising networks.
  • There have been two major viewpoints on entrepreneurship studies. The earliest acknowledged one by Joseph Schumpeter views the entrepreneur as an individual who disrupts the circular flow of the market by introducing actions that entail novel combinations of existing resources. These actions are “disequilibrating” in the sense that they disrupt established means–end relations and generate new sources of uncertainty.
  • An alternate viewpoint given by Israel Kirzner emphasizes the role of the entrepreneur in moving markets back towards equilibrium by recognizing market opportunities and acting upon them. Entrepreneurial action contributes to economic development by enhancing the allocative efficiency of the system, as actions that exploit the dispersion of knowledge and other resources end up reducing that dispersion.
  • A born global firm is the most common manifestation of international entrepreneurship. The distinguishing characteristic of a born global firm is that it seeks to derive significant competitive advantage from the use of resources and sales of outputs in multiple countries. It views the global marketplace as its natural home and does not consider the global market as an adjunct to the domestic market.
  • Developments in transport and communication technology, shorter product life cycles, and the growth of niche markets catering to specialized, customized products are factors responsible for the rapid internationalization of born global firms.
  • There are three basic views on international entrepreneurship. The first perspective, the strategic management perspective on international entrepreneurship views it as a combination of innovative, proactive, and risk-taking behaviour that crosses national borders and is intended to create value in organizations. A second perspective views international entrepreneurship as a nexus of individuals and opportunities. The individuals–opportunities, nexus framework examines the characteristics of opportunities, the individuals who discover and exploit them, the process of resource acquisition and organizing; and the strategies used to exploit and protect the profits from those efforts. A third perspective views entrepreneurship as a capability. Entrepreneurship as a capability may be defined as a firm-level ability to leverage resources and exploit business opportunities across borders.
  • An entrepreneurial orientation is the result of personal characteristics, networks of information and institutional transitions. Networks refer to organizational ties with customers, suppliers, service providers or government agencies, which allow the firm to overcome resource constraints. Institutions are conceptualized as “the rules of the game in a society” and institutional transitions are the “fundamental and comprehensive changes introduced to the formal and informal rules of the game that affect organizations as players”.
KEY TERMS

Born global firm

Entrepreneurial action

Entrepreneurial orientation

Entrepreneurship

Individual-opportunities nexus framework

Institutional transitions

Institutions

Networks

Opportunities

Strategic management perspective

DISCUSSION QUESTIONS
  1. What is international entrepreneurship? What are the different factors responsible for the emergence of the born global firm?
  2. Explain the different perspectives on the emergence of the international entrepreneur.
  3. International entrepreneurial orientation is a combination of several factors. Explain with suitable contemporary examples.
  4. Discuss the relevance of international entrepreneurship in today's global economy.
MINI PROJECTS
  1. The Global Entrepreneurship Monitor (GEM) is a research consortium that publishes information on global entrepreneurial activity. Prepare a summary of the GEM Report 2010 available at http://www.gemconsortium.org/download/1325501870939/GEM%20GLOBAL%20REPORT%202010rev.pdf.
  2. The Business Planet database (http://rru.worldbank.org/businessplanet/default.aspx?pid=8) provides measures of entrepreneurial activity calculated from data collected directly from the registrar of companies on the number of newly registered corporations. It uses different coloured markers to distinguish between different countries. Choose any three countries shown in different colours and make a comparative analysis.