Student: Roos Prins
Student number: 10012281
Supervisor: E. Dirksen MSc
Second reader: dr. M.K. Westermann
Date: 28-08-2017 – Final version
MASTER THESIS, R. PRINS
The usage of firm specific advantages of internationalizing digital Firms
MSc. in Business Administration
International Management
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Statement of originality
This document is written by Student Roos Prins, who declares to take full responsibility for the
contents of this document. I declare that the text and the work presented in this document is original
and that no sources other than those mentioned in the text and its references have been used in
creating it. The Faculty of Economics and Business is responsible solely for the supervision of
completion of the work, not for the contents.
Abstract
Since the rise of digital technologies, a lot has changed within the business environment.
Traditional theories on internationalization are developed before digital technologies affected
internationalization patterns. This study provides a clearer view on internationalization patterns of
digital firms, the liabilities they face during this process and the firm specific advantages they use
to overcome these liabilities. After conducting a qualitative research, it seemed that most digital
firms follow other internationalization patterns than traditional firms do. Digital firms often
expand internationally short after their beginning of existence. They do not follow a gradual
process, but invest heavily from the beginning in order to grow as fast as possible in the host
country. Furthermore, cultural differences between the home country and the host country created
the biggest barrier of going abroad. Other languages and differences between corporate cultures
caused the biggest barriers. Physical distance is not considered as a barrier anymore, since the
internet enables firms to manage their business activities from their home country, without being
physically present in the host country. Investors and networks of digital firms formed the most
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Table of contents
Chapter: Page:
1. Introduction, motivation, contribution and structure 3
1.1 Introduction 3 - 4 1.2 Motivation 4 - 5 1.3 Contribution 6 1.4 Structure 6 - 7 2. Theoretical Background 7 2.1 Digital firms 7 - 8 2.2 Liabilities 8 – 9 2.2.1 Liability of Foreignness 9 - 10
2.2.2 The Cage Framework 10 - 14
2.3 Firm Specific Advantages 14
2.3.1 Resource-based view 15 - 16
2.3.2 Location bound and non-location bound FSAs ` 16 - 17
2.3.3 The recombination of NLB FSAs and LB FSAs 17
2.4 Propositions 17 - 20 3. Methodology 20 3.1 Research Design 20 - 21 3.2 Semi-structured interviews 21 - 22 3.3 Participating cases 22 - 26 3.4 Data analysis 27 4. Results 27 - 28
4.1 The internationalization process and patterns (Prop. 1) 28 - 31
4.2 Liabilities and distance (Prop. 2) 31 - 37
4.3 FSAs (Prop. 3) 37 - 40 5. Discussion 41 - 42 6. Conclusion 43 - 45 7. Future research 46 8. References 47 - 51 9. Appendixes 52
Appendix 1 – The interview protocol 52
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1. Introduction, motivation, contribution and structure of this study
1.1 Introduction
New digital technologies like analytics, social media and mobile applications are accelerating fast
within the current economic landscape. According to a recent study by Accenture and Oxford
Economies, the rapid growth of the use of digital technologies could add $1.36 trillion by 2020 to
total economic output (Forbes, 2015). The total global gross domestic product (GDP) is currently
sized at $77,98 trillion (Statista, 2017). The growth through the use of digital technologies may be
fraction of the total GDP, but it contributes substantial to its growth. These digital technologies are
widely used by both firms and consumers. For example, Facebook has more than one billion users
and is growing every day. Also, firms often have their own web shops and mobile applications
besides their physical stores, which are widely used by their consumers. The amount of firms that
only operate online is also growing tremendously. Furthermore, there are more than six billion
mobile phone users all over the world, which make use of various digital applications. It is even
possible that employees have better digital solutions at their home than they do at the place where
they work, such as laptops or tablets. Another recent trend that is upcoming in the digital landscape
are ‘platform’ firms. These firms are two-sided, which means that they connect users on both the
demand and supply side through digital platforms. Well-known booming examples of such global
firms are Uber, which connects people who need a ride with people who have a ride to offer, and
Airbnb, which connect homeowners with people who need a place for a short stay. These firms
appear to grow at high growth-rates. In fact, Uber appears to grow at a rate of 40% each quarter
(Forbes, 2017). These high growth rates are mainly due to their rapid internationalization process
(Business of Apps, 2016). Due to the internet, firms are able to internationalize easier without
crossing actual borders. They are able to spread their potential and reach a wider audience within a
small amount of time (Loane, McNaughton & Bell, 2004). If we look at Uber again, in November
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2015). Within the digital landscape, the launch of an application in a country could already be the
biggest step with pursuing business abroad for digital firms.
1.2 Motivation of this study
It is clear that digital technologies have changed the economic environment tremendously. As
mentioned in the introduction, the internet has a huge influence on the internationalization process of
firms and the way doing business is executed (Oviatt & McDougall, 2005). It makes it easier to cross
borders and reach a broad audience, without great effort or costs are absolutely needed (Kotha,
Rindova & Rothaermel, 2001). New communication technologies allows firms to cross borders by
launching a website, without being physically present in that country (Knight & Cavusgil, 2005).
The internet also provides a lot of relevant information, which makes it easier to gain relevant
information about, for example, certain countries. Traditional internationalization theories, such as
the Uppsala Model, state that the internationalization process of firms is a gradual process. Hymer
(1976) stated that this gradual process follows from incremental decisions, which can be described
by ‘learning by doing’. Johanson and Vahlne (1977), who developed the Uppsala model, claim that
firms follow four stages when they go abroad, whereby only experienced firms can skip a stage. The
first step concerns sporadic export activities to the host country. With the second step, the firm
exports via an independent representative. The third step is the establishment of a foreign sales
subsidiary. The last step concerns production or manufacturing activities in the host country. With
each stage the firm’s commitment to the host country increases. At first, firms will choose host
countries that are psychic nearby the home country. That means that they choose countries that have
less differences between cultures or language, or geographical differences. There, they enhance
knowledge of the market and get more control on resources. After they become more experienced
and acquired better resources, they expand to more psychic distant markets. Physic distance is also
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out its international business activities. However, at the time these traditional theories were
developed, there was no internet yet. Within the last two decades, a lot has changed due to the
internet and other digital technologies. Later research and the current internationalization behavior of
firms show that these theories do not apply anymore (Coviello & McAuley, 1999). According to
Forsgren & Hagstrom (2007), for example, digital firms are often already going abroad in the early
stage of their existence. Other earlier studies showed that expanding internationally does not only
bring advantages. Entering new countries, which have other cultures, languages or other differences
with the home country, also brings liabilities. These liabilities can cause many failures and
difficulties for the expanding firm, even when it is expanding to neighboring countries. These
theories were also developed when there was no internet yet. However, crossing digital borders could
take less effort and costs, these differences between countries do not disappear. Earlier studies also
mentioned that liabilities can be overcome with firm specific advantages, which are owned by the
firm. These firm specific advantages differ across firms. A lot of research is already conducted on
firm specific advantages of traditional firms, such as multinationals. However, digital firms are
relatively new within the economic landscape and it is possible that they possess different firm
specific advantages or make less use of such advantages during their internationalization process.
Therefore, the following research question is drafted:
“With what kind of firm specific advantages do digital firms overcome the liabilities they face when they expand internationally?”
In order to answer this research question, three propositions are designed. These propositions will be
6 | P a g e 1.3 Contribution of this study
Answering the research question of this study contributes to the understanding of the
internationalization process of digital firms and the use of firm specific advantages during this
process. This study builds on previous theories and studies, but will also look further by conducting
research at digital firms. Existing internationalization theories are mainly focused on large firms and
are developed before digital technologies changed the business environment worldwide. The
traditional firms, which were researched at the time these traditional theories were developed, are
different from firms that are mainly operating through digital networks nowadays. Not much
research is done regarding the current internationalization process of digital firms, since the
developments of these digital technologies are very young and are still improved every day. It is not
assumable that firms nowadays face the same liabilities when they cross borders as firms did before
the internet or other digital technologies were developed. Furthermore, digital technologies could
also provide a new kind of firm specific advantages for digital firms. This study will look to which
extent traditional theories can still be applied to the current digital business landscape, or whether
these theories fail to explain the current internationalization process of digital firms.
1.4 Structure of this study
At first, the theoretical background chapter (Ch. 2) will provide a clear explanation on digital firms
and digital technologies, which enabled these firms to carry out business through digital networks.
This chapter will also review traditional theories such as Liability Of Foreignness, the Cage
Framework which explains distance between the home and the host country, measuring cultural
differences and firm specific advantages or resources. After discussing the theoretical background of
these concepts, the propositions of this study will be addressed. Second, the methodology (Ch. 3)
section of this study provides an explanation and motivation about the research method of this study.
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The results section (Ch. 4) will present the results obtained from the interviews with digital firms and
compares these results with the earlier reviewed literature. After this section a discussion (Ch. 5) will
be addressed and thereafter the conclusion (Ch. 6) will be drawn. At last, possible future research
topics (Ch. 7) are mentioned.
2. Theoretical background
2.1 Digital firms
Firms that have enabled core business relationships with customers, employees, suppliers and other
parties through digital networks can be described as ‘digital firms’ (Laudon, 2004). These digital
networks are technology platforms that support the core business functions and services of the firm,
such as knowledge management systems, customer relationship management systems or supply
chain management systems. The networks are purposed to enable integration and information
exchange within the firm, to employees and outside the firm to suppliers, customers or other
stakeholders. Furthermore, the organizational business strategy of digital firms is executed by
leveraging digital resources, which support functional areas such as marketing, operations, supply
chain or purchasing (Conner & Prahalad, 1996; Wernerfelt, 1995).
During the last decade, communication, connectivity and information technologies have undergone
major improvements and therefore unleashed new functionalities (Banker, Bardhan, Chang, Lin,
2006). The post-dotcom decade shows that both established firms and start-ups are taking advantage
of these improved technologies. Lower performance and price levels of hardware and software and
global connectivity through the internet, enables firms to adapt a new business infrastructure which
suits to the digital era. The traditional business environment is fundamentally changed. Business
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distance, function and boundaries of time (Kohli & Grover, 2008). It is also possible that digital
platforms enable cross-boundary disruptions within industries, which could lead to new forms of
business strategies (Burgelman & Grove, 2007). Furthermore, digital technologies can also create
different forms of dynamic capabilities for firms, which are useful within turbulent environments
(Pavlou & El Sawy, 2010). These dynamic capabilities could build a competitive advantage.
The emerge of digital firms can be explained by several attributes (Casper & Whitley, 2004). At first,
being a digital firm enables the firm to manage key corporate assets, such as economic resources,
intellectual property or human assets through digital means. This gives the firm the ability to
optimally exploit these assets. Also, digital firms seem to be more flexible to survive. In time of
recession or when competition is growing for example, they adjust their business activities, such as
production or hiring personal, according the situation. Since their core business activities are mostly
digitally enabled, they obtain and possess information about the market through their information
systems. Furthermore, when a firm is operating digitally, there is no time and space shifting. Digital
firms are able to conduct business twenty-four hours a day, rather than only during working hours. It
is also possible that work that has to be accomplished can be done at any place in the world, since the
digital business processes are not location bound. At last, digital firms increase the global
opportunities of a firm. When the firm, or some activities of it, is managed digitally this is likely to
lower barriers of going abroad (Mansell, 2001).
2.2 Liabilities
According to several researchers in international business, it is theorized that firms that are going
abroad face liabilities, which are the result of unfamiliarity with the host country (Hymer, 1976;
Kindleberger, 1969, Zaheer, 1995). This liability of foreignness has been the fundamental belief
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order to overcome this liability of foreignness, firms need to provide their businesses abroad with
firm specific advantages (FSAs) (Buckley & Casson, 1976; Hennart, 1982). With these FSAs they
should create a sustainable competitive advantage, which allows them to compete successfully
against local firms. FSAs can exists of organizational or managerial capabilities or specific assets. In
order to provide a complete and clear view of these relating concepts, the general theoretical
backgrounds of these concepts will be discussed in this chapter. At first, the concept of Liability of
Foreignness, provided by Zaheer (1995), will be discussed. Thereafter, attention is paid to the Cage
Framework of Ghemawat (2001), which describes the concept of distance between the home and
host country. Also, attention is paid to measuring this distance between countries. At last, the
concept of FSAs will be discussed.
2.2.1 Liability of foreignness
The concept of Liability of Foreignness (LoF) rests on the perception that foreign firms are at
disadvantage compared to local firms in the host country. Local firms tend to have better access to
local information, avoid costs that new entrants face and may have a better position regarding the
government (Sethi & Judge, 2009). Therefore, they outperform foreign firms. The idea of LoF is
based on the theory of Hymer (1976), which was the first scholar who described ‘costs of doing
business abroad’. However, Zaheer (1995) is seen as the main actor about this subject. Zaheer (1995) defines LoF as follows: “All additional costs a firm operating in a market overseas incurs
that a local firm would not incur”.
According to Zaheer (1995), there are four sources of LoF. The cost due to spatial distance, like
transportation and coordination costs, concerns the first source. These are real direct costs.
According to the transactions cost economics, these direct costs will result in a growth of
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firms, the need of high frequency interaction and the uncertainty of the host country’s economic
environment. The second source refers to unfamiliarity with the local environment and the
associating firm-specific costs. These costs have more to do with cultural differences between the
home and host country of the firm. Business will be affected since employees can have different
backgrounds, norms or language (Hofstede, 1980; Shenkar, 2001). Business ethics, norms and
relationships with other parties such as clients and suppliers could also differ and therefore create
barriers for the foreign firm (Zaheer, 1997). The third and fourth source claim that firms can be
affected by nationalistic regulations. The third source concerns regulations which are set by the home
country, such as import costs. The fourth source concerns regulations set by the host country, which
are often set to protect local firms. These regulations might make it difficult for foreign firms to
pursue business across borders (Zaheer, 1995; Sethi & Judge, 2009). The costs resulting from these
sources can be called discriminatory LoF, since they discriminate between countries.
Except from Zaheer, other scholars claim that LoF can be seen as only a portion of the bigger
concept of costs associated with doing business abroad (Eden & Miller, 2001). Relative production
costs, the management of operations at a distance and relational hazards are also important to
consider.
2.2.2 The Cage Framework
Another concept that tries to explain liabilities of going abroad is the concept of distance. When
firms expand to foreign countries, they face challenges that they might not even expect. The media
giant Star TV from the U.S. for example, lost 500 million dollar trying to deliver TV programming to
media-starved Asian audience in 1991. By using satellites to beam English television programs into
the homes of Asian English speaking people, the firm was sidestepping the constraints of geographic
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that Asian people wanted English-language programming. However, this was not the case. This
made the decision to enter the Asian market a disaster for Star TV. Similar cases happen all the time
as firms pursue global expansion (Ghemawat, 2001). The attractiveness of foreign markets is
routinely overestimated. Firms become so dazzled by the immensity of untapped markets, that they
ignore the difficulties of pioneering new and often very different territories. According to Ghemawat
(2001), firms must look beyond a country’s sales potential and analyze the impact of distance, before
they decide to enter a foreign country.
Distance between countries creates barriers, which can result in risks and costs if a firm expands to
foreign countries (McDougall, Shane & Oviatt, 1994). But not only geographical distance is
important to take into account. Three other dimensions of distance are also important to consider.
Ghemawat (2001) provided a framework whereby four dimensions of distance are addressed, in
order to analyze the differences between the home country and the country of choice for foreign
expansion. This framework is called the Cage Framework. The first dimension concerns differences
in cultural factors. Cultural factors determine how people from one country interact with another and
with firms and institutions. Differences in social norms, language, race or religious beliefs can create
a distance between countries. According to Demirbag, Tatoglu and Glaister (2007), differences in
languages, for example, could increase transaction costs and reduce the interaction between
countries. According to Gomez-Mejia & Palich (1997), cultural distance affects firms in two ways.
At first, the degree of complexity and diversity of exogenous elements will be increased. Second, the
firm’s ability to cope with such complexity and diversity in host countries will decrease. When the
home and host country have great similarities between cultures, this could help firms to target new customers at lower costs and manage business activities more successfully (Barkema & Vermeulen, 1998). The second dimension concerns administrative distance. Political and historical associations
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increase trade by 900%. Furthermore, preferential trading agreements, political union and a common
currency can also boost trade by more than 300% each. The European Union can be seen as the
leading example of efforts to decrease administrative distance among countries. A lack of such
colonial ties, common currency or legal systems can create distance. Administrative distance can be
created by institutions, like governments or organizations that prescribe the rules of the game within
industries or societies (North, 1990). Institutions can be seen as stable, valued and recurring patterns
of behavior within societies. The term ‘institutions’ applies to formal and informal institutions.
Formal institutions are more about the formal rules within societies, while informal institutions are
more about the constraints. By entering new business environments, firms could face both formal
and informal constraints (North, 1989). The third dimension is about geographical differences.
Generally, the farther one country is away from another, the harder it will be for firms to conduct
business in that country. However, geographic distance is not only a matter of physical distance.
Other factors must also be considered, such as the size of a country, access to waters or the ocean,
climates and average within-country distances to borders. The last dimension concerns the economic
distance, whereby differences in consumer incomes and the availability of resources are addressed.
Wealth or income of consumers is the most important factor that creates distance between countries.
Furthermore, the cost, availability and quality of human, financial or other resources are also factors
that determine the distance between countries. In the table below (table 1) a complete overview of
13 | P a g e Table 1 – The dimensions of the Cage Framework
(Source: Cage Framework, Ghemawat 2001)
Petersen and Rajan (2002) argue that information technologies and global communications are
turning the world into a more homogeneous place, which means that differences between countries
are getting smaller. When it comes to business, Ghemawat (2007) states that this is an incorrect and
even dangerous assumption. Firms should explicitly and thoroughly account for distance, by making
decisions about global expansion, because this still matters in many other ways. Especially cultural
differences can have a big influence on carrying out business across borders. Differences in
language, religion, social norms or race can affect doing business with customers or distributors, but
also local offices that assist internally. So it is important that firms consider these differences, even
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In order to measure the first dimension of the Cage Framework, cultural distance between two
countries, the Cultural Dimensions Framework of Hofstede (1984) is one of the most used tools to
assess this distance (Kogut, 1988, Samiee, 2013). According to Hofstede (1994), national culture can
be defined as “the collective programming of the mind which distinguishes the members of one group
or category of people from those of another”. In other words, culture can be explained as the integrated pattern of human beliefs, behavior and knowledge, which is the result of their capacity for
learning and transmitting this knowledge through generations. Based on a country level factor
analysis, Hofstede classified at six cultural dimensions. The measurement tool of Hofstede is
probably the most widely used tool for measuring national culture. Beside the Cultural Dimensions
of Hofstede, there are more tools to measure cultural distance. Kogut and Singh (1988) developed a
single index, which expresses distance between country A and B through the single effects of
Hofstede’s dimensions. There are also critiques that criticizes Hofstede’s Cultural Dimensions.
Schwartz (1994) has drafted five main critiques. In order to overcome these critiques, Schwartz
carried out his own research and found seven dimensions.
2.3 Firm specific advantages
As stated earlier, firms face liabilities when they pursue doing business abroad. Therefore, they need
other ways to earn either higher revenues or outperform others in order to compete with competitors.
The firm must have internal advantages, which are not shared by its competitors (Barney, 1991).
These advantages must be specific and, at least partly, transferable within the firms network and
between countries. These advantages are called firm specific advantages (FSAs) and are owned by
the firm, which means that it has a monopoly over these FSAs. With exploiting these FSAs in the
home country or abroad, the firm can earn higher revenues or have lower marginal costs than
15 | P a g e 2.3.1 Resource-based view
The concept of Firm Specific Advantages are at first described by the resource-based view
(Wernerfelt, 1984). This view states that firms are able to create a competitive advantage with the
bundling of a set valuable and unique tangible and intangible resources and capabilities (Barney,
1991). Organizational skills, a good brand name, information knowledge or specific assets are
examples of these resources and capabilities. Pavlou and El Sawy (2010) state that digital resources
are also able to be unique and value creating, which could lead to a competitive advantage. In order
to transform a short-run competitive advantage into a sustainable competitive advantage, these
resources or capabilities must be heterogeneous and not perfectly mobile (Peteraf, 1993). To identify
the firm’s key resources, Barney developed a framework which provides four criteria these resources
must fulfill. They must be valuable, rare, in-imitable and non-substitutable (VRIN), this framework
is therefore called the VRIN framework. (Barney, 1991). These characteristics are individually not
sufficient conditions in order to create a sustainable competitive advantage. Within the
resource-based view, the chain is as strong as its weakest link is. Therefore, it requires the resource or
capability to present each of the four criteria in order to form a potential source of a sustainable
competitive advantage (Priem & Butler, 2001). With the development of resources that meet the
VRIN criteria, time plays an important role. At first, Barney (1991) states that the historical path that
firms have followed influence the strategies that firms have formulated and adopted, whereby it is
possible that they created unique value-creating resources through time. For competitors it is hard to
imitate such resources, since they did not walk down the same path. Furthermore, causal ambiguity is
another reason that makes it hard for competitors to imitate resources. It is possible that competitors
identify unique resources of a firm, but that does not mean that they understand how these resources
are used in order to gain a competitive advantage. It takes time to learn how the relationship and
interaction of such resources create value. Social complexity is the last aspect that Barney (1991)
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complex phenomena, such as a strong relationship with suppliers or an organizational culture, which
exists of certain attributes that create value. For competitors it is hard and almost impossible to create
identical conditions. Dunning and Rugman (1985) state that the bundle of tangible and intangible
resources and capabilities can also be seen as a firm’s FSAs, since they reflect a multinational
control and coordination of these unique assets in order to economize on transaction costs.
2.3.2 Location bound and non-location bound FSAs
FSAs are also described by Verbeke (2009), which state that these firm specific advantages are
resources, capabilities or knowledge. FSAs can be distinguished into seven types, namely: 1)
Physical resources, 2) Financial resources, 3) Human resources, 4) Upstream knowledge, 5)
downstream knowledge, 6) administrative knowledge and 7) Reputational resources (Verbeke,
2009). These FSAs can be location bound (LB) or non-location bound (NLB).
Non-location bound advantages, such as knowledge, licenses or end products, are easier to adapt and
exploit at a host location (Rugman & Verbeke, 2007). Location bound advantages are related to
regional advantages which are not transferable to other regions. According to Verbeke (2009), these
LB FSAs consist of four different types. The first type are stand-alone resources, which are related to
location advantages such as a monopoly over local resources. The second type includes resources
that are immobile, such as reputational resources or specific local market knowledge. However, it is
possible that these resources are not entirely immobile; reputational resources can be transferred to
other regions, but they may not have the same value there as they have in their home country. The
third type consists of a firm’s local best practices, which are not transferable towards the host region.
Highly efficient and effective routines within the supply-chain are an example of this type. The
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LB FSAs. When firms are able to successfully recombine these FSAs, this will result in a positive
effect on the performance within the local market (Rugman & Verbeke, 2007).
2.3.3 The recombination of NLB FSAs and LB FSAs
In order to create a competitive advantage towards local competitors, NLB FSAs should be
transferred to the host country to provide a foundation for performance. However, this is not enough
to compete successfully. These FSAs must be complemented with locational advantages from the
host country (Rugman & Verbeke, 2007). The recombination of these FSAs will result in the
development of new LB FSAs, which will contribute in reaching positive performance in the host
country (Rugman, 2005). When a firm is engaged with interaction with a host country, it is important
that it considers bounded rationality and bounded reliability (Verbeke, 2009). These concepts reflect
the limitations on an individual’s behavioral characteristics, which can affect performance abroad
since their rationality is limited by the information that is available. The motivation to expand
internationally is not always the same. The motive of a firm could be natural resource seeking,
market seeking, strategic resource seeking or efficiency seeking (Dunning, 1993). Based on the
firm’s motive, it is important that the firm takes the host regions locational advantages into account.
Selecting a host country based on locational advantages will increase the possibility of the
development of new LB FSAs, which will ultimately decrease the liabilities of foreignness.
2.4 Propositions
This section defines the propositions, which are derived from the discussed theory, in order to
answer the research question of this study. Each proposition will be explained by the relevant
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Several researchers claim that the business environment is tremendously changed due to digital
technologies. Nowadays most firms carry out (at least some of) their business through digital
networks. Firms that have enabled their core business activities through digital networks are
described as digital firms. Traditional theories, which are developed before digital technologies
affected the way of doing business, claim that the internationalization process of firms is an
incremental process, which can only be done by experienced firms. Hymer (1976) stated that this
gradual process follows from incremental decisions, which can be described by ‘learning by doing’.
Johanson and Vahlne (1977) developed the Uppsala model, which claims that firms follow four
stages when they go abroad, whereby only experienced firms can skip a stage. With each stage the
firm’s commitment to the host country increases. An important factor of the Uppsala model is
physical distance, the more experienced the firm gets, the further away it will carry out their
international business activities. Later, Coviello and Munro (1997) argue that firms can skip stages
because of digital developments and also ignore physical distance. Forsgren and Hagstrom (2007)
claim that digital firms often already go abroad in the early stage of their existence, without being
very experienced. Furthermore, Oviatt and McDougall (2005) argue that digital technologies, such as
the internet, makes it easier for firms to cross borders without great effort or costs are absolutely
needed. Knight and Cavusgil (2005) mentioned that there are other ways than ‘learning by doing’,
since the internet provides knowledge about markets and countries. These studies show that later
researchers challenge the traditional internationalization theories. In order to answer the research
question, it is important to see whether it can be expected that digital developments also affect the
internationalization patterns of firms these days and that digital firms therefore follow other
internationalization patterns. Therefore, the first proposition is drafted:
Prop. 1: Due to the arrival of digital technologies, the internationalization patterns of digital firms
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Several researchers in international business theorized that firms who go abroad, face barriers, which
are the result of unfamiliarity with the host country (Hymer, 1976, Ghemawat, 2001, Zaheer, 1995).
One concept that explains this is the concept of Liability of Foreignness, which rests on the
perception that firms are at disadvantage compared to local firms (Zaheer, 1995). New entrants face
costs, which local firms do not since they have better access to local information and better positions
with parties such as the government. Therefore, they outperform foreign forms. Ghemawat (2001)
states that the attractiveness of foreign markets is often overestimated. Firms must look beyond a
country’s sales potential and analyze the impact of distance, since distance can create barriers that
results in risks and costs when borders are crossed (McDougall, Shane & Oviatt, 1994). Distance is
described in several dimensions, such as cultural distance or economic distance, which describes
differences between countries which a firm should consider before they enter. According to Petersen
and Rajan (2002), information technologies and global communications decreases differences
between countries, since they turn the world into a more homogeneous place. Furthermore, Oviatt
and McDougall (2015) stated that digital technologies enables firm to manage their international
business activities at any place in the world, which decreases the impact of physic distance.
According to Ghemawat (2007) this is a dangerous assumption, firms should always account for
distance by making decisions about global expansion. Especially cultural differences can affect
doing business with customers or distributors, but also local offices that assist internally. However,
these studies show it is possible that digital technologies affect the kind of liabilities a firms faces
when they go abroad. Therefore the second proposition is drafted:
Prop. 2: Digital technologies changed the barriers of going abroad for digital firms, but these should
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As stated above, firms face barriers when they pursue business abroad. In order to compete with
competitors and generate profits, they need other ways to become successful in the host country. To
overcome these barriers, firms must use their firm specific advantages (Rugman & Verbeke, 2001).
Firm specific advantages can consist of organizational or managerial capabilities, a good brand name
or specific assets. Pavlou and El Sawy (2010) stated that digital resources are also able to be unique
and value creating, and therefore form a FSA. FSAs can be location bound or non-location bound.
Since this study assumes that digital firms face liabilities when they expand to foreign countries, the
following proposition is drafted:
Prop. 3: Digital firms use their FSAs in order to overcome the barriers they face when they pursue
business abroad.
3. Methodology
This chapter will describe how the research of this study was conducted and how the objectives of
this study were achieved. At first, the research design, a multiple-case study, will be discussed. A
deeper insight and argumentation of the used methods will follow. Second, the participating cases
will be described. At last, the method of the data analysis will be explained.
3.1 Research Design
In order to answer the research question, a qualitative study was conducted. Within a qualitative
study, deeper insights can be gained about certain aspects in order to reveal underlying motivations
(Boeije, 2014). A case-study design suits this study best, since this research design is an in-depth
exploratory method that shows the complexity and uniqueness of situations, within a real-life context
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multiple-case studies. Single-case studies are used when extreme or unique cases are investigated. A
multiple-case study is more appropriate to create an overview of multiple facets, whereby the limited
view of only one case is not enough (Yin, 2013). For this study a multiple-case study was most
appropriate, since patterns of behavior of different firms were the unit of analysis. During this study,
ten different cases were investigated. Furthermore, this research design made it possible to use and
combine different sources of data such as observations, literature, interviews and documents (Yin,
2013). Combining multiple research methods will result in a higher reliability of the results
(Saunders, 2009). The use of different sources of data also provided a broader perspective of the
studied cases, which are in this case the participating firms. The data sources used in this study were
obtained documents, academic literature and semi-structured interviews, which were held with
suitable digital firms.
3.2 Semi-structured interviews
For this study, ten semi-structured interviews were held with different digital firms that are active in
multiple countries. This way of interviewing makes sure that there is a clear focus on a certain
subject, but provides also the possibility to ask specific questions in order to obtain deeper insights
about certain topics that are discussed during the interview and which seem relevant at that moment
(Saunders, 2009). Questioning further on certain subjects makes sure that essential information will
not be missed. According to George & Bennett, 2005, composing a list of topics will provide a clear
structure during the interviews. Therefore, the following list of topics is drafted for this study:
1) Introduction and general information of the firm 2) General information about entering foreign countries
3) The liabilities the firm faced when they entered host countries 4) How did the firm overcome these liabilities
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5) The use of firm specific resources for overcoming these liabilities 6) Finalization of the interview
All the interviews were recorded with a mobile phone or laptop. The interviews took approximately
45 minutes. Before the interview started, permission was asked to record the whole conversation.
Thereafter, a short introduction of the researcher and the research itself followed. The interview
protocol (appendix 1) was used as a guideline, at the time the actual interview was held. It was
important that the interviewer stayed neutral during the interview and questions were asked short and
clear. The interviews were held in Dutch or English. After every interview, the data was first
analyzed before the next interview was held, in order to decide whether some aspects or topics
needed more focus during the next interviews. This made sure that as much as possible relevant
information was gained, without finding out afterwards important issues were missed or did not get
enough attention.
3.3 Participating cases
Digital firms were the unit of analysis of this study. It is important that they have enabled their core
business through digital networks. This means that they maintain their relation with their employees,
customers, suppliers or other external parties through these digital networks. These networks are
supported through technology platforms, which are leveraged within the firm in order to support the
services and functions of it. These technology platforms are purposed to digitally enable information
and integration exchange throughout the firm and outside the firm to relevant parties or customers.
The digital firms participating in this research were obtained through the researcher’s own personal
network and by searching the internet for suitable cases. An overview and introduction of the
23 | P a g e Table 2 – Participating case firms
Company Founded Main Markets Products
Boatsters 2015 France, Spain Online boat rental platform
Westwing 2012 Europe Web shop for home decoration
and furniture
Gigstarter 2015 Spain Online musicians platform
SumUp 2012 Europe, U.S., South America Wireless payment device
Innopay 2002 Germany Digital advising firm
Springest 2007 U.K., Germany Training and courses provider
Usabilla 2009 U.S, worldwide Collect user feedback method
and improve digital services of firms
Withlocals 2013 Europa, Asia Platform for connecting locals
and travelers
Cloud9 2012 U.S., Europe Development of software tools
and applications
Emesa 2005 Europe Online travel and leisure auction
platform
Boatsters
Boatsters is a firm that provides an online rental platform, which brings boat owners and people who
would like to rent a boat for a day or several days together. Boat owners can offer their boat through
the Boatsters platform and boat renters can search for a boat they like at that same platform. They
started in 2015 and there are currently working eleven employees. Short after they went online in
2015, they entered other countries, such as France, Spain and Croatia. Their biggest revenue markets
are currently Spain, especially Mallorca and Ibiza, and the south of France. Their biggest focus is on
this markets as well. They have an international mindset and are planning to enter more countries in
24 | P a g e Westwing
Westwing is a web shop that provides home and living decoration and furniture. They put four or
five campaigns online each day, whereby each campaign has its own theme or product category. The
campaigns are online for five days and the products are offered with a twenty percent discount
compared to their original prices. Their mission is to help people with creating a beautiful home.
They started in 2012 in Germany and after one year they entered several other European countries.
Most countries have their own local office. They have around 200 employees in total. Their biggest
revenue markets are Germany, Spain and the Netherlands.
Gigstarter
Gigstarter provides an online platform where musicians and DJs can offer their performances to
people who are looking for a band or DJ for a small event, such as birthday parties or weddings. The
firm was founded in 2015. Currently they are active in the Netherlands, Spain and Belgium and they
have plans to go to other countries as well in the future. At this point there are working seven
employees. Their most profitable market is the Dutch market.
SumUp
SumUp was founded in 2012. Their mission was to provide a wireless paying machine for small
firms in order to reduce costs that are associated with expensive payment methods. The machine is
linked to a mobile phone or tablet and enables customers to pay with their card easily through the
wireless machine. They also offer services for these small entrepreneurs, such as providing reports
about their selling behavior. They were founded in Germany and are currently active in three
continents and sixteen countries. The European market is their biggest revenue market. The firm has
25 | P a g e Innopay
Innopay is a small advising firm that is specialized in niche markets, such as payments, digital
identity and E-business. Firms can hire them for advice but they also develop their own digital
services and products, which they provide and sell to relevant firms. A well-known project they
developed is Ideal, an online payment method. Innopay was founded in 2002 in the Netherlands. In
2016 they opened an office in Germany and they are also planning on entering Scandinavian
countries in the future. Innopay has around 30 employees.
Springest
Springest is a website that connects providers of courses and trainings with people who would like to
follow one. Visitors of the website can find a huge variety of trainings and courses. Their mission is
to guide people with learning, finding the right learning method and the right course. Springest
started in 2007. In 2010 they entered the U.K. and Belgium, one year later they also entered
Germany. Their biggest revenue market is still the Netherlands. Currently Springest exists of around
60 employees.
Usabilla
Usabilla has developed a tool which can quickly collect user feedback from large groups. Continuous
user feedback of a firm’s website, service or application can be very valuable for the firm. Usabilla
optimizes the website or application of their client and collects feedback from the users of that
website or application. In that way they improve the user experience and increase engagement and
customer satisfaction. They have around 20.000 clients around the world. Usabilla started in the
Netherlands but their biggest revenue market is the U.S which is also their main focus market. They
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are planning to set up more local offices around the world. Currently the firm has around 90
employees.
Withlocals
Withlocals is an online platform that connects travelers who would like to meet up with locals of the
place they are visiting. Locals can offer experiences or activities, such as food tours, so travelers can
find out more about the city instead of seeing only the touristic things. Withlocals is founded in 2013
and based in the Netherlands. They are active in more than 20 countries, mostly European countries.
In Asia they are active in the bigger cities of countries such as Vietnam, Thailand and Cambodia.
Their main market is the European market, that is where their platform is used most. Withlocals has
around 90 employees.
Cloud9
Cloud9 develops tools and applications for their clients. They develop all kinds of software tools.
Clients can select which kind of functions or options they want in their tool or application, Cloud9
builds that tool or application. They are founded in 2010 in the Netherlands and online since 2012.
Their biggest market is the U.S. market, but they are also active in European countries. They have an
office in the Netherlands and San Francisco. Cloud9 has around ten employees.
Emesa
Emesa has a portfolio of several websites such as actievandedag.be or vakantieveilingen.nl, where
visitors can compare and book a trip or leisure package. Some websites have an auction structure,
where the highest bidder gets the trip or activity. This is very unique in the industry. Emesa is
founded in the Netherlands in 2005, they are now active in several European countries, such as
27 | P a g e 3.4 Data analysis
Conducting a qualitative research offers the possibility to obtain relevant data during a major part of
the study. If it turns out that, after the analysis of the first interview is conducted, relevant data is
missing, this should be taken into account with the following interviews. Therefore, every conducted
interview was analyzed before the next interview was conducted. It is also possible that non-relevant
information was obtained during an interview, in that case it was clear that this subject did not have
to be discussed during the following interviews. By constantly switching between data collection and
analyzing data, a clear view of the internationalization process of digital firms was drafted. With
analyzing the obtained data, both the ‘open coding’ as ‘axial coding’ method was used. By using
axial coding, previously studied theories can be examined to find certain patterns and statements
(Corbin & Strauss, 2004). The use of open coding provides a way to organize new insights and
results derived from the conducted interviews. Both methods were used because prior to analyzing
the data it was not clear whether the results were in line with earlier theories or provided new
insights and results. The data was sorted into themes, according to the propositions of this study. For
the coding process, the NVivo program was used. The obtained data was coded by using nodes,
which were developed according the structure of the interviews.
4. Results
This section presents the outcomes contrived from the data were gathered for this study. The
structure of this section is built on the structure of the semi-structured interviews and the order of the
drafted propositions. At first, this section will focus on the internationalization process of digital
firms, which patterns they showed and if there were differences between the case firms (Prop. 1).
Next, the liabilities and things that went well during the internationalization process of the case firms
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distance and helped overcome the liabilities faced by the case firms will be presented (Prop. 3). The
outcomes of the gathered data from the ten case firms are combined, structured and presented in a
clear overview, in order to provide a good basis for the discussion section of this study, which will
follow after this section.
4.1 The internationalization patterns of digital firms (Prop. 1)
As shown in the theoretical framework, traditional theories argue that the internationalization process
of a firm is an incremental process, which results from incremental decisions (Johanson & Vahlne,
1977). For example, the well-known Uppsala Model from Johanson and Vahlne (1990) states that
crossing international borders begins with analyzing risk, the possession of resources and gaining
knowledge. Firms internationalize with incremental investments and go through several stages.
However, as stated by Kim (2003), digital firms are able to enter international markets shortly after
their beginning of their existence. Oviatt and McDougall (2005) stated that the internet and digital
technologies have a huge influence on the internationalization process of firms, since crossing actual
borders is not necessary for entering other countries. Therefore, this study propositioned (Prop. 1)
that: “due to the arrival of digital technologies, the internationalization patterns of digital firms
differ from the internationalization patterns of traditional firms”.
The interviews show that the internationalization process of digital firms follows different patterns
among the selected case firms. However, there are also similarities. Fourof the ten case firms had an
international mindset from the beginning of their existence. They can be seen as a born-global. From
day one their strategy was focused on entering international markets. For some case firms their home
country was not even their main market to focus on, since other markets showed more potential for
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“We are active worldwide, but our main focus is the U.S. market. We are active here since day one” Five of the case firms are only based in their home country and manage their international activities
from there. They mentioned that this is possible through the internet. This is in line with Loane,
McNaughton and Bell (2004), who stated that digital firms are able to internationalize easier without
crossing actual borders. They are able to spread their potential and reach a wide audience through the
World Wide Web, without being physically present in that particular country. Twoof the case firms
entered several countries shortly after each other. When their business was up and running in their
home country, they entered other European countries. As one interviewee from a German case firm
said:
“After one year we also moved to other European countries, such as the Netherlands, Italy, France, Poland, Spain and Belgium. It was important to get things up and running in our home country,
before we entered other countries. But it was our mission from to beginning to become international.”
This internationalization process does not follow the pattern that is explained by traditional
internationalization theories. These firms entered other countries shortly after they were founded.
Furthermore, it was not an incremental process, which followed different stages and incremental
decisions. The most firms wanted to grow as fast as possible, and invested heavily in this process.
Entering different countries at the same time was not a problem for them. However, this was not the
case for all the studied case firms. One case firm was for fourteen years only active in the
Netherlands, their home country. After these fourteen years they entered Germany. Their next step is
focusing on Scandinavian countries as well, since they have an attractive business environment. But
their internationalization process can be seen as an incremental process with incremental decisions.
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and wanted to gain experience before they took things to the next level. As they mentioned in the
interview:
“At the beginning we choose the options which ware safe for us and, if necessary, would cost us less money and time to withdraw from the market. In Germany we invested more heavily, since we had
more experience with entering new countries and did know what we had to do.”
The internationalization patterns of these firms are more in line with the statements of the traditional
theories. They took incremental steps and tried to keep their risk and interests as low as possible. The
more experience they gained, the more they increased their interests and investments in their host
country.
As mentioned in the theoretical framework, firms can cross borders by launching a website in the
host country, without being physically present in that country. Therefore, great efforts or costs are
not absolutely needed (Kotha et all, 2001). The interviews show that firms can indeed decide how
deeply they invest in their internationalization activities, and that firms follow different pattern on
this matter. Some case firms immediately invested heavily in going abroad, but others took it more
slowly. One of the case firms entered the Spanish market without investing heavily from the
beginning. They took time to build up a network and grow incremental. Other case firms invested
heavily from the moment they entered the host country. One interviewee said:
“We see that being online has a lot of possibilities, also during our internationalization process. We didn’t had an exponential growth in costs with entering new countries. Because you can enter a country with content and supply through an online website. Then you need to target clients. But you
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This is in line with the statement of Knight & Cavusgil (2005), which claim that new communication
technologies allow firms to cross borders via a website. It appears that this is also in line with Kotha
et all. (2001), firms can cross borders easily, without investing heavily from the beginning. It is their
own choice how much effort and costs they spend on building up their business activities in the host
country. However, the outcomes of the interviews show that the effort and costs spend are linked to
the growth in the host country. The kind of business that is carried out also determines how heavily
firms invest setting up their business in other countries. Some case firms depend on other parties,
such as suppliers or business partners, in the host country. They often need to invest more heavily
from the beginning, in order to start as good as possible.
The results show that digital firms show different internationalization patterns. The statement of
Coviello & McAuley (1999), who claimed that traditional theories do not apply anymore, concerns
most digital firms, but not all of them. Therefore, proposition one is only partly accepted.
4.2 Liabilities and distance (Prop. 2)
As discussed in the theoretical framework, several researchers theorize that firms that are going
abroad face liabilities. There are several traditional theories and models that explain these liabilities.
Zaheer (1995) states that foreign firms are at a disadvantage compared to local firms, which results
in costs of doing business abroad. Another traditional framework, which explains liabilities of going
abroad, is the Cage Framework, which explains the concept of distance (Ghemawat, 2001). Later
studies state that digital technologies decreased distance between countries. However, Ghemawat
(2007) states that this is a dangerous assumption for firms. Therefore, proposition 2 was stated as
follows: “Digital technologies changed the barriers of going abroad for digital firms, but these
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The extent to which the case firms faced liabilities when they crossed borders differed a lot among
the selected firms. However, cultural differences seemed to cause the most liabilities among the case
firms. As mentioned in the theoretical framework, cultural differences can exist of language
differences or differences between norms or social networks (Ghemawat,2001). Most case firms
mentioned that language was often a barrier, with communication to other parties or clients but also
with the translation of websites or digital products to other languages. Gomez-Mejia and Palich
(1997) stated that differences in languages could increase transaction costs and reduce interaction
between countries. The youngest case firm mentioned that translating the website was very time
costly and had to be done as good as possible. They translated their website themselves, so not by
professional translators. As they said:
“It is very important that we translate all our tools and functions on our website as good as possible. When this goes wrong, it is very hard for our users to understand how the website works and we can lose potential clients. There were some simple words that we used wrong, such as the log in button,
in Spain they use separate words for logging in and making a new account, in Dutch the word ‘aanmelden’ can be used for both. Our Spanish users didn’t understand this.”
Furthermore, the differences between the use of language between countries was also mentioned by
several case firms. Countries differ in how people like to be approached. One country can prefer
formal ways of communication, while others prefer informal ways more. Some case firms mentioned
that they hired native persons, so they can operate in their own country and speak to others in their
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“English is possible of course, but we notice that speaking in your own native language is preferred by most of the people. Sometimes there are people from other levels which are not that good in speaking English, in order to provide a good collaboration it is important to have people who speak
the native language.”
Three case firms stated that the language of that country determined the choice of host country. They
choose to enter the U.K. or U.S. because of the country’s language English and the founders and
other employees of the case firms spoke that language. Another barrier created through language that
was mentioned, concerned the auditability of how business is executed in the host country. As one
interviewee said:
“The language barrier had an effect on the auditability of how business is being executed in the French speaking part of Belgium. I am responsible for the whole Benelux, but it is hard for me to
audit this French speaking part, since I don’t speak this language.”
Language was not the only cultural difference between countries, which caused liabilities for going
abroad for the selected case firms. Four case firms stated that within the German corporate business
culture, people are more used to hierarchy than the Netherlands. They are less direct and find it hard
to talk about things they disagree; when they talk about this they do it in a very polite way. Dutch
people tend to be more direct and less tactical on that matter. The stronger focus on hierarchy in
Germany seemed also to be a problem with the collaboration of Dutch employees and German
employees. German employees tend to respond to people who have a higher function within the firm,
but people with the same or a lower function were often ignored. With entering the German market
and working together with German employees and clients, the selected case firms had to learn to
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between corporate cultures of the different offices of the firm, but also among the customers or
clients of the case firms. Some host countries have a greater cultural distance between the home
country than others. The differences in culture of consumers in the host country compared to the
consumers in the home country made it harder for some case firms to carry out their business
activities there. This is also stated by Bakema & Vermeulen (1998), who argue that cultural
differences can affect the degree of success of managing business activities in the host country.
Product preferences, for example, were important to consider. One case firm, who is active in home
furniture and decoration, said that German customers prefer more glamourous products. They are
also more sensitive for high price levels, while Dutch customers are sensitive for discounts. They had
to adjust their product offerings to the preferences of customers of the host country. Cultural distance
created also differences between markets. As one interviewee said:
“Another thing we faced were differences between markets. Italy has seasonality, when it’s summer nobody buys stuff and in august everything is shut down in the whole country, also your suppliers and other partners there. Nobody works in that month. Furthermore, they take a siesta every day, so
nothing is happening at that time of the day.”
Seasonality and taking a siesta are traditions of customers or other important parties that affect the
way of how business is carried out in that country. A firm has to get familiar with such things and
adjust managing their business activities in such countries, in order to survive.
According to the Cage model physical distance, which is a part of geographical differences
according this model, could also create distance between the home and the host county (Ghemawat,
2001). However, digital technologies changed the business environment tremendously and enables
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The interviews show that this is the case; five from the ten cases are still based in the Netherlands,
without having a local office in the countries they have entered. Set up an office and being physically
present in these foreign markets would be very costly for these case firms, without adding great
value for them. All of their business activities can be done from their Dutch office, such as keep in
contact with clients and consumers or spread their potential among future clients. As one interviewee
said:
“We don’t have any troubles with operating from Amsterdam, since almost everything we do is through the online network and can be done at any place in the world technically. <..> The easiest
way to invest in these things is to be physically present, it will boost your growth faster. But is not necessary to survive. But this is one of the reasons we try to visit the U.S. market often.”
The results of the interviews show that digital technologies indeed have changed the economic
environment tremendously and that the internet has a huge influence on the internationalization
process of firms and the way doing business is executed (Oviatt & McDougall, 2005). Furthermore,
it shows that these firms are not focused on become successful in their domestic market, even though
are based here. As one interviewee said:
“Our strong focus on the U.S. market is a logic choice for us, since it is a big market and relatively easy to be present in with our service. Entering this market was our goal from the beginning. The whole U.S. is almost the same with payment methods, branding strategies that work, pricing models
and the way business is carried out. If we look at the European market, there are a lot more differences between countries.”
