Opportunities and threats of the ‘born global’
in contrast to the traditional way of going international.
Question: Some SMEs do not follow traditional patterns of internationalization and are considered ‘born global’. Discuss opportunities and threats of this way of going international.
Globalisation is omnipresent in today’s society and economy. The reduction of international communication and logistic costs, the increase in customer mobility and market homogeneity and other present-day trends are among the reasons for the emergence of small and medium firms which are able to operate internationally rapidly after inception – so-called ‘Born globals’. But while the new research field of ‘International entrepreneurship’ focuses mainly on the phenomenon and process of internationalization a lack of insight into the challenges, which Born globals are confronted with during their internationalization process, is apparent. Important in this case is the question of how these challenges differ from those of traditional internationalizing small and medium enterprises. This essay will examine the definition and characteristics of born global small and medium enterprises, and will then go on to analyse the reasons for the emergence and review related literature to found conceptual foundation for the discussion. Subsequent will be the discussion of opportunities and threats of the born global way in contrast to the traditional way of internationalization. Finally, a conclusion will reflect on the main findings of this work.
There is no general, international definition of Small and Medium Enterprises (SME). Several organizations and governments propose own varying definitions (Appendix 1), however the most recent definition of SMEs proposed by the European Commission (Appendix 2) will be used in this work.
Research has found four key advantages and disadvantages of SMEs. The first, ‘Flexibility’, resembles the “ability to pursue more flexible strategies compared to [large enterprises]” (Wilson, 2000, p. 202). Piore and Sabel (1984; cited in Wilson, 2000, p. 202) impose the term “flexible specialisation”. This refers to the production constantly adjusted products – a focus on “permanent innovation” (Wilson, 2000, p. 202) which builds the second advantage. Because of their lower investments and sunk costs compared with the pursuit of advantages (based on efficiencies and scale) SMEs are able to develop and diffuse new technologies during prosperous times (Wilson, 2000). According to Aldrich and Auster (1986; cited by Wilson, 2000) the disadvantages of SMEs are difficulties to raise capital (‘liability of smallness’) and aquire/attract resources (‘liability of newness’). Appendix 3 shows the different relationships to large enterprises, which are important for the start-up setting.
Since the late 1980s, the business press has been reporting the emergence of new SMEs that are international from start-up as a “new and growing phenomenon” (Oviatt and McDougall, 2005, p. 1). The term used is still varying (Thai and Chong, 2008, p. 73), most common is Rennie’s (1993, p. 1) term “Born global” (BG).
Appendix 4 illustrates the definitions of BGs in the field of research. The varying criteria are age, minimum number of entered foreign markets and share of exports on the total turnover (Lehmann and Schlange, 2004). However, as Appendix 5 shows, recent research is in relative agreement about the basic characteristics of BGs. Traditional internationalizing enterprises share the characteristics of targeting international markets and attending in value creating international activities (Oviatt and McDougall, 1994; cited in Lehmann and Schlange, 2004) As a result of the varying defining criteria and definitions, the recent definition of Servais et al. (2007) will be used to refer to a BG.
In order to explain the emergence of the phenomenon several approaches focusing on macroeconomic and microeconomic factors and trends were developed:
Globalization, as a macroeconomic trend, has three driving forces (Gjellerup, 2000; Acs et. al., 2001; cited in Ruzzier et. al., 2006), lowering the entry limits of internationalization: Firstly, the rapid spread of low-cost technology connects people and locations, whose severity of impact on the emergence of BGs is disproved by Thai and Chong (2008). Secondly, ongoing reductions of trade barriers and financial deregulation occur. Finally, the worldwide economy’s restructuring and liberalization after the fall of socialism, as well as the geographical expansion of Asian markets impact here. By offering plenty opportunities abroad the globalization of markets encourages the widespread emergence of BGs. (OECD, 1997; Zahra et al., 2000; Moen and Servais, 2002; cited in Knight et. al., 2004).
Microeconomic factors are the existence of a vision of an international enterprise and the availability of resources. (McDougall et. al., 1994; cited in Lehmann and Schlange, 2004). Evidence suggests that developments of the 1990’s strengthened the incentives for internationalization and entrepreneurs got more susceptible for the BG way of going international. This shortened the process of internationalization. Subsequently the entrepreneur is influenced by internal and external incentives to go international but the speed of internationalization depends on the foreign-orientation of the entrepreneur (McDougall et al., 1994; Harveston et al., 2000; cited in Lehmann and Schlange, 2004).
These approaches explain why the BGs emerged and the subsequent competitive disadvantage for national-focused SMEs, they however do not explain the contradiction of most SMEs “stay[ing] at home” (Acs et. al., 1997; Knight and Cavusgil, 2004; cited in Gassmann and Keupp, 2007, p. 352).
The evidence is that common theories of internationalization are hardly adaptable on BGs (Schmidt-Bucholz, 2001, p. 13; cited in Lehmann and Schlange, 2004; Chetty and Campbell-Hunt, 2004; cited in Gassmann and Keupp, 2007): They assume an established domestic base of operations, which is not given by BGs. Furthermore the theories focus on large multinational enterprises (MNE) and cannot always be applied to SMEs (Ahokangas, 1998; cited in Ruzzier et. al., 2006), because SMEs have different settings to build up on. Moreover they only describe the incremental process of change but not the different approaches used by enterprises in order to develop activities (Ahokangas, 1998; cited in Ruzzier et. al., 2006). Additional critic is supported by Andersen (1993, p.221; cited in Fillis, 2001) and Gassmann and Keupp (2007), especially on their export-orientated view, as it excludes internationalization without export.
New frameworks, which prove to be useful for the analysis of the patterns and processes of internationalization of SMEs (Gassmann and Keupp, 2007), for example the profile models by Rennie (1993) (Appendix 6), are not suited to illustrate opportunities and threats of the process: After a review of research literature, including frameworks of Thai and Chong (2008), Gassmann and Keupp (2004), Knight et al. (2004), it can be concluded that no apparent framework suits the requirements of this paper in the preferred complexity and focus.
As a consequence this paper uses its own conceptual model (Appendix 7) with the four basic steps in launching a BG. On the basis of Lehmann and Schlange (2004) we will use it to further illustrate the challenging aspects, from a ‘network’ and ‘resource’ point of view (Review of conceptual approaches in Appendix 8), during the process of starting a sustainable business the BG way.
The first important requirement is the entrepreneur himself. The persona and characteristics of the entrepreneur are a determinant for sustainable success according to Thai and Wong (2008). The ideal entrepreneur is characterized as an international and industry experienced, global-orientated, multiple language speaking, part of an established international network, person, with high global visions (Thai and Chong, 2008; Karlsen, 2007). Regarding the network and knowledge approach flaws in this attributes impact success negatively.
The network of the entrepreneur consists of ‘weak’ and ‘strong’ (family and close friends) ties (Blomstermo et. al., 2004a, b; cited in Loane and Bell, 2006). The ‘weak’ networks need to be distinguished between expert (research and educational institutions) and business networks. As the case study by Loane and Bell (2006) indicates, only 25% of 137 international BGs relied on existing business contacts upon entering a new market, but 43% built new business networks. Hence both networks are an opportunity rather than a requirement, with an offer to finance and support the start-up. In contrast expert networks need to be “nurtured” and are most prevalent in BGs (Karlsen, 2007, p.126). From a knowledge-based view this is an important advantage, because of the costless obtained information by solidarity (Gassmann and Keupp, 2004). Case studies show that this way resource- and knowledge-deficits (Young et. al., 1999; cited in Loane and Bell, 2006) and ‘liabilities of newness and foreignness’ can be overcome (Loane and Bell, 2006). Benefiting from existing value chain activities the faster internationalization of subcontracting (dependent) BGs is considerable (Gassmann and Keupp, 2004; Karlsen, 2007).
Another challenge is the finance aspect. SMEs in general have the disadvantage of ‘liabilities of smallness’, whose impact is even increased due to the higher market (entry) risk of BGs. The simultaneous entry in multiple markets gives on one side the opportunity to gain share of the huge sales potential, but on the other side the threat of lacking market analysis. If the entry is a success large turnovers can be generated, otherwise the reputation of the enterprise and the entrepreneur gets heavily damaged (Lehmann and Schlange, 2004). The investment into a BG carries a higher risk for investors than investing in traditional MNEs and is a threat for BGs, but this threat can be overcome by networks.
The product and process aspect holds a major opportunity for BGs from a resource point of view, distinguishing intangible and tangible resources. The adjustment of products and processes to the various demands of foreign markets gives two different challenges: traditional MNEs need to modify running processes and existing products constantly for new demands, BGs start facing this problem from the beginning and can implement a high homogeneity on processes and products. Hence making processes and products unique creates competitive advantage (Knight et. al., 2004; Gassmann and Keupp, 2007). The development time and costs are enhanced by adjustment to foreign regulations and laws, which is therefore a threat towards the sustainable success of BGs (Lehmann and Schlange, 2004).