YOUNG START-UP
INTERNATIONALIZATION IN THE BIO-CHEMICAL SECTOR
A multiple Case-Study of The international Entrepreneurs’ impact
Gijs Spil
Copyright 2005 by Gijsbert Anton Peter Spil
Title: Young Start-up Internationalization in the Bio-Chemical Sector A multiple Case-Study of The international Entrepreneurs’ impact
Author: G.A.P Spil
Student number: 1274198
Address: Groningen Tel:
E-mail: g_spil@hotmail.com
First Supervisor: Dr. A. Saka-Helmhout a.saka@rug.nl Second Supervisor: Prof. Dr. A.M. Sorge a.m.sorge@rug.nl Rijksuniversiteit Groningen
Faculteit Bedrijfskunde Landleven 5
9747 AD Groningen Postbus 800
9700 AV Groningen
Preface
Four years ago, during an in-house day of the faculty of Business and Organization, University of Groningen, I got acquainted with a student that studied international business. This student made such an impression on me, that I immediately knew which master I should choose. Four years later, I have become that International Business &
Management student, now presenting this thesis.
During last years MsC course, Advanced IB: The Management Challenges of Globalisation, I became familiar with the label Born Global. These kinds of international firms are something totally different than the well known Multinationals or Global Firms that I previously heard about. The Born Global seemed to present some mysterious powers that enabled it to internationalize directly after inception, while this process normally takes several years. This took my attention and created an internal rush to search for answers.
In my search for answers on this phenomenon, I reviewed many articles on the determinants of Born Globals, their motivations (drivers) and the aspects on which these firms could be categorized. After using the university library as my own home for a full month, I managed to find a ‘missing piece’ of the jigsaw. This thesis tries to fill in the gap on the managerial influence on the internationalization of young start-up firms that can be categorized as International New Ventures.
The completion of this master thesis marks an end on my study of International Business
& Management at the University of Groningen. I consider this last piece of work as a crown on my efforts to graduate in the fine environment of Groningen. The four years of university and social life developed me in the person I am today.
I would like to thank my parents that made it in first instance practically possible for me to attend an university. Their unconditional support and love, especially during the times I had difficulties with my research or in my personal sphere created an internal drive to pursue my goals. Furthermore, I thank my first supervisor, Mrs. Saka-Helmhout for her commitment, time and efforts shaping my thoughts and developing this thesis. Also, I would to thank Prof. Dr. Sorge for illustrating concepts and clarifying useful directions for creating a well-thought-out thesis. Furthermore, I would like to thank Bart-Jan Pennink for his efforts in reviewing my interview protocol. In addition, I want to thank the all interviewees in my case study firms, which spend time and effort to provide me with crucial information and thoughts about their firms.
Gijs Spil, August Groningen 2005
Abstract
This exploratory research is performed in order to develop in-depth insights on the relation between the international experience of managers, their managerial characteristics, and the influence on the internationalization of International New Ventures.
Therefore, the following research question is answered in this study:
How does the international experience of the TMT of an INV influence the internationalization profile?
The internationalization process of firms received large amount of attention of international business researchers. The research, however, is foremost directed towards large international operating firms, focused on Multinationals. In the last decades, the internationalization of small firms became a new field of interest and after several pioneering studies, various new findings in the field of internationalization processes were revealed. In this new line of research, Born Globals or International New Ventures became the focus of research. New insights were presented on the new external environmental factors that facilitated rapid internationalization. Moreover, other external determinants for the internationalization path of these firms were found. However, little amounts of efforts were dedicated to the internal change agents of those firms, the managers and founders.
This research stands at the beginning to fill the research gap and identifies crucial factors that internally influence the internationalization path of International New Ventures. It draws on two major fields in the internationalization literature, combining the Process Theory of Internationalization (PTI) and the International New Venture (INV) theory to steer to alternative explanations for the internationalization process of young dedicated- life-science firms.
The study has a qualitative case-study approach, using four dedicated-life-science firms in the Bio-Chemical sector. The selection criteria for these firms are the generation of a minimum 25% of revenues from foreign markets within 3 years of existence.
The outcomes of this study show that the international experience of the top management teams (TMTs) before joining or founding the firms is an important influence on several managerial characteristics. Especially, the international experience of the TMTs was crucial for the development of a positive risk perception, an increased global mindset and establishment of networks in foreign markets.
The results of this study furthermore show that the managerial characteristics are important when becoming very international within three years after inception. The risk perception, the global mindset and the networks held by the TMTs can be perceived as important in the process of internationalization. Results show that in particular the managerial characteristics influence the selection of countries to which to internationalize, and the speed in which this is done. No support is found for the influence of international experience and managerial characteristics on the entry mode.
It seems like the internationalization of the firms in this research displays characteristics of as well the PTI and INV internationalization dimensions.
PREFACE... 4
ABSTRACT... 5
PART 1. PROBLEM STATEMENT ... 8
1.1 Introduction...8
1.2 Background of this research ... 8
1.3 Research objective ... 9
1.4 Research question ... 10
1.5 Definitions of INVs... 10
1.6 Overview of thesis ... 11
PART 2. LITERATURE REVIEW ...12
2.1 Proposition formulation - Previous research on manager’s impact on internationalization of INVs...12
2.2 International experience - Managerial characteristics...12
2.3 Risk perception - International Profile ... 15
2.4 International experience - International profile ... 17
2.5 The Global mindset - International Profile ... 20
2.6 Social and business networks - International profile... 22
2.7 Conclusions and implications research ... 25
PART 3. METHODOLOGY ... 26
3.1 Research methods ... 26
3.2 Quality considerations ... 26
3.3 Sample ...28
3.4 Measures ... 28
3.5 Sequence of variables... 33
PART 4. EMPIRICAL RESEARCH: MULTIPLE CASE-STUDIES 35 4.1 Case-study description...35
4.1.2 BIOBLEND Technologies ... 43
4.1.3 BIOlock B.V... 50
4.1.4 BestBIO B.V. ... 56
4.2 Results ...61
PART 5. FINDINGS... 63
5.1 The impact of international experience on managerial characteristics ... 63
5.2 The impact of the managerial characteristics on the international profile of ` the INVs. ... 66
5.3 Conclusion ... 71
6.1 Discussion... 72
6.1.1 The international experience influencing managerial characteristics ... 72
6.1.2 The managerial characteristics as mediating factor for the internationalization profile of INVs ... 74
6.2 The INV versus the PTI theory... 78
6.3 Conclusions...80
6.5 Limitations... 83
LITERATURE ... 84 APPENDICES ...ERROR! BOOKMARK NOT DEFINED.
Appendix 1 Types of international new ventures ... Error! Bookmark not defined.
Appendix 2 Conceptual model ... Error! Bookmark not defined.
Appendix 3 Overview of internationalization profile Gemser et al.(2004) ... Error!
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Appendix 4 Table 1. Overview of Cases ... Error! Bookmark not defined.
Table 2. Cultural dimensions and GDP/Growth GDP Error! Bookmark not defined.
Appendix 5 Overview of possible modes of entry... Error! Bookmark not defined.
Appendix 6 Propositions overview... Error! Bookmark not defined.
Appendix 7 Summary of propositions ... Error! Bookmark not defined.
Appendix 8 Interview Protocol ... Error! Bookmark not defined.
Appendix 9 Interview questions... Error! Bookmark not defined.
Part 1. Problem statement
1.1 Introduction
Throughout the last few decades, the international business literature has concerned itself primarily with the research on multinational companies, but studies are broadening their traditional focus to include entrepreneurial firms in their research agendas (McDougall & Oviatt, 2000). As Madsen and Servais (1997) argue there is a need for integration of the research streams in the areas of internationalization processes and entrepreneurship. This thesis researches international new ventures (INVs) (Madsen &
Servais, 1997) and tries to combine an international business perspective with entrepreneurial aspects and is thus in line with this new research agenda. New complex concepts like INVs call for exploration by using multiple perspectives and reap the benefits from doing so. This study researches INVs in the Bio-Chemical sector and draws on entrepreneurial, gradual, and born global internationalisation research to study the internationalisation process of four dedicated-life-science firms. This is done in order provide additional richness in the theoretical development of firms’ internationalisation by combining these major streams of research
1.2 Background of this research
The internationalization process of firms is a topic that received widespread research efforts. The significance of research in this area rises proportionally with the increase in international trade and has become a field of high interest for governments and firms. Since the mid 70s, two distinct streams of literature appeared on the internationalization process of firms. The first major approach to internationalization argued that firms internationalize gradually (Johanson & Wiedersheim-Paul, 1975;
Johanson & Vahlne, 1977; Bilkey & Tesar, 1977; Cavusgil, 1980). This stream of research conceptualizes internationalization as an incremental process, starting with a low-commitment, low risk entry mode and firms give incremental commitment to more risky investments after experiencing and learning about the new business context.
Underlying this model is the fact that firms develop a stable domestic position before going international. A second approach contains many empirical findings, which demonstrate that firms do not behave according to this gradual, path-dependent way of internationalizing. These firms create international activities direct after their inception,
either go to a very distant market directly, or target multiple countries at once. These firms are labelled High-Technology Start-ups (Jolly et al., 1992), Born Globals (Rennie, 1993; McKinsey, 1993), International New Ventures (McDougall & Oviatt, 1994) and Early Internationalizing Firms (Rialph et al., 2005). This thesis adopts the conceptualization of McDougall and Oviatt (1994). The label of McDougall and Oviatt (1994) represents the researched cases accurate (See Appendix 1), and will be therefore used throughout this study. Madsen and Servais (1997) conclude that the rise of the Born Globals may be attributed to at least three important factors: (1) new market conditions, (2) technological developments in the areas of production, transportation and communication (Knight & Cavusgil, 1996), and finally (3) more elaborate capabilities of people, including the founder/entrepreneur who starts the Born Global firm (Rialp et al., 2005). As suggested by various studies, environmental, organizational and managerial factors are all interrelated. The latter factor, the manager and founders, however are been taken into account by a few studies (Harveston, 2000A/B; Madsen & Servais, 1997), research on the effects of managerial attributes on the internationalization process of Born Globals is still underdeveloped. An exception is the work of Coviello and Jones (2005), who presents several aspects of the internationalisation and entrepreneurial research and develops more precise models on this crossroad. Filles (2001) argues that
‘There are BIOblendr merits for examining the contribution of the emerging marketing and entrepreneurship interface paradigm to understand smaller firm internationalization’.
This in line with the call of Autio (2005) for a more in-depth study on the international experience and competences of managers in the context of internationalizing new ventures. The research performed in this thesis is therefore important to the extent that it can fill the research gap on the effect of managerial characteristics on internationalization processes of INVs.
1.3 Research objective
The primary purpose of this thesis is to provide in-depth knowledge about the internationalisation process of international new ventures and about how the top management team (TMT) influences this process. It focuses particularly on relation between the international experience of TMT members, their characteristics and the internationalization profile of the firm, which consist out of three aspects: the country selection, entry mode and speed of internationalization. This thesis in line with previous
quickly after their inception, the so-called International New Ventures. The high technology industry in which these INVs are situated received large amount of attention of researchers. In spite of the fact that researchers use high technology industries to illustrate their argument, most efforts are directed toward organizational and environmental characteristics that influence the internationalization trajectory. This thesis takes the internal change agent’s perspective, researching the managerial impacts on the internationalization profile of INVs in an exploratory way.
1.4 Research question
To address this objective, the following research question is developed.
How do the international experience, the risk perception, the global mindset and the networks of the TMT of an INV influence the internationalisation profile?
This research question is operationalized by the development of propositions about the main relation. In this research, the researched relation (international experience and internationalisation profile) is mediated by the following variables that concern managerial characteristics: Risk perception, global mindset, and networks.
1.5 Definitions of INVs
Madsen and Servais (1997) point out that the research on the concept of Born Globals is not in accordance with each other. Different operationalizations are being made about what characteristics a Born Global should have. In research on this topic there is a general agreement on the fact that Born Globals develop almost instantly international activities. But dissimilarities exist on how much of the total sales should be derived from international activities and within which time-horizon this should be achieved.
The study of McKinsey (1993) categorizes firms in gradual and instant international firms. The latter are stated to derive 76 % of their total sales from export activities, within a timeframe of two years of operation. Oviatt and McDougall (1994) developed a similar concept to Born Globals, International New Ventures (INV), which they define as:
‘A business organization that, from inception, seeks to derive significant competitive advantage from the use of resources and the scale of outputs in multiple countries’.
They categorize INVs as firms that have a minimum of 25 percent of sales revenues from foreign activities within three years of the inception of the firm. This definition is in line within other research in this field of inquiry (Cavusgil & Knight, 1996; Harveston, 2000A/B). The INVs researched in this study generate revenues from foreign markets in the range of a minimum of 60% of their revenue from foreign markets to a full 100%, within three years after their inceptions. To give an overview of which characteristics a firm should have to be classified as an INV, Oviatt & McDougall (1994) deepen the understanding of these firms by giving a typology of different types of INVs. As can be seen in Appendix 1, four types of INV can be distinguished based on the number of value chain activities that are coordinated and by the number of countries in which a firm is present. The four INVs researched in this study are situated in the first quadrant, the Export/Import Start-ups. These so-called New International Market Makers profit by moving goods (services) from nations where they are to nations where the goods (services) are demanded (Oviatt & McDougall, 1994). In this kind of INVs, the direct investment in foreign countries is held to a minimum. As indicated by Oviatt and McDougall (1994), the INVs in this research create sustained competitive advantage by spotting and acting on emerging opportunities before increased competitions reduces profits in these markets, the knowledge of markets and the ability to attract and maintain a loyal network of business associates.
1.6 Overview of thesis
This thesis is structured as follows. After this introduction, Part 2 holds a review of the most important literature, in which various theoretical and empirical studies are dealt with. In combination with this review, the propositions are also formulated. Part 3 provides the methodology used in this study. In Part 4, the findings are presented. In Part 5, the cases are analysed on their congruence with the stated propositions. In the final section, Part 6, a discussion is provided on the result found in the previous parts, and an indication is given of further research and limitations of this study.
PART 2. Literature Review
2.1 Proposition formulation - Previous research on manager’s impact on internationalization of INVs
In this section, an overview is given of the propositions that will be dealt with in this thesis. Due to the fact that empirical studies on INVs are developed only recently, there are some issues in which the precise nature of relations is yet to be determined. This thesis will focus on the relation between the managerial characteristics and the internationalization process of an INV. This research is an exploratory in nature and the propositions that are presented below reflect this. This research relies heavily upon three distinct literature streams. The first major two are mainly focused on the internationalisation processes of firms, and reflect issues regarding the gradual internationalization process, in line with the Uppsala model of Johanson and Vahnle (1977) and the International New Venture literature, in line with the study of Oviatt and McDougall (1994). The third stream of literature, the international entrepreneur is more focused on the managerial characteristics that influence the internationalisation process of firms. These theories are used to illustrate the expected relations in the propositions.
2.2 International experience - Managerial characteristics
International experience of founders or managers is often seen as crucial in the internationalization process of small firms. Managerial international experience comes in different forms, either by work or assignments in previous jobs, education abroad or by cultural backgrounds. In this thesis, the international experience of a manager is seen as a determinant of managerial characteristics, e.g. the risk perception, the global mindset and the network of the manager.
This argument is supported by several studies, which report that the managerial experience influences the attitude towards developing international activities (Kedia &
Chhokar, 1985; Roth, 1992; Simpson & Kujawa, 1974; Perlmutter, 1969). Kedia and Chhokar (1985) suggest that managerial profiles regarding internationalization significantly differs between managers who previously conducted business in foreign environments and consequently perceive lower costs and associated risk than managers that lack this kind of experience. The created predisposition toward expansion of business by different mode of entries is likely to be caused by the previous international
experience of managers. This is in line with the results of Simpson and Kujawa (1974) that found that firms already active on foreign markets had a higher profit and lower risk perception of that market. Managers try to reduce risk as much as possible to secure a steady flow of return on assets. Perceived risks are related to actual risks in that sense, that risk can be assessed on knowledge of the market. Managers who are familiar with foreign markets, asses risk differently than managers without knowledge of the market.
This is supported by Harveston (2000A), who found that managers of Born Globals had a significantly higher tolerance of risk than managers of firms that internationalized incrementally. The different assessment of risk by INVs is reflected in the higher risk tolerance of managers. Also, the assessment of risk is related to the willingness to take risk. International experience influences the managerial attitude because of the familiarity with the market created increased willingness to go abroad and bare associated risk. Based on this argumentation, the following proposition is developed.
0.A. International experience is positively related to the risk tolerance and the willingness to take risk.
The nature and length of experience influences managers’ attitude and behaviour and these are the visible aspects that reflect parts of managerial characteristics. The attitude, or learned predisposition to respond in consistently favourable or unfavourable manner with respect to a given object, is found to be critical to the decision to internationalize (Nummela et al., 2004; Roy & Simpson, 1981). The attitude towards internationalization of managers can be represented by the (global) mindset he or she has. The global mindset consist of the pro-activeness of the manager to become international, the commitment (See paragraph 3.4 for a full overview) he displays in this process and the international vision he has, e.g. he makes no difference between the host and domestic market in terms of cultural similarities/dissimilarities. Studies on the relation between the international experience and the global mindset of manager report that this relation is significant when looking at international work experience of the manager (Nummela et al., 2004; Fischer & Reuber, 1996). This can be explained by the fact that the foreign environment in which he is situated conditions the manager. Expatriate literature points out that managers that spend time abroad probably acculturate (or even assimilate) with their host environment. The experience the manager carries influences the cognitive
he gained, the contact he had and the exposure to other business practises, he probably creates a mindset that has a wider set of considerations of countries when internationalizing, becoming more pro-active in the search for new markets. Based on these insights, the following proposition is developed.
0.B. The international experience of the TMT member is positively related to the global mindset of the TMT members.
In general, networks, either formal or informal, arise from previous contacts with the person or firm in question. A manager can have contacts that are actively or passively held. Harrington (2002) shows that instrumental (as opposed to affective) ties are the most important predictor of organizational performance. Instrumental ties among actors enhance performance at the organizational level in two ways: through group heterogeneity, which increases the information pool available to decision makers, and through task orientation which increases members willingness to engage in constructive debate about that info. Contacts of managers, especially in foreign countries originated typically out of previous work or study experience or by the cultural background of the manager. By actively using the contacts already established, an INV can overcome some barriers of internationalization. This is supported by the results of Coviello and Munro (1997), who argue that the internationalization of SMEs is supported by formal [business]
and informal [social] ties and relationships. Foreign contacts can facilitate an easy internationalization process by supplying resources, either financial or managerial but also additional knowledge and skills required to be active in that specific country. INV theory suggests that these sorts of information can be accessed through various channels, including networks contacts. Based on these arguments, networks in foreign markets can be related to the previous experience in these markets. The following proposition is formulated:
0.C. The international experience of the TMT members is positively related to the existence of business and social relations in foreign countries/markets.
2.3 Risk perception - International Profile
The managerial perception of risk is generally seen as an important factor when internationalizing. As Simpson and Kujawa (1974) point out, the decision to become international by for instance exporting, is a function of perceived risks and anticipated profits. Most research reports that when managers perceive lower amount of risk, they are more likely to develop international activities like exporting (Simpson & Kujawa, 1974; Roy & Simpson, 1981; Johanson & Vahnle, 1977).
Gupta and Govindarajan (1984) argue that different strategies are implemented to face different task environments (uncertainty) and that a particularly strategy requires different levels of risk taking by managers. Based on insights of the portfolio theory, the decision to go abroad can add or subtract risk to the firm. These risks originate either from the market itself, or from the governing institutions. In general, lowering the amount of perceived uncertainty in this market by learning about and familiarizing with this market can reduce the risk of the market. The perceived uncertainty should be in line with the tolerance of risk the managers are willing to bare. The development of international activities takes place in countries/markets where the both are in congruence.
Managers of an INV with related international experience in these markets probably prefer developing international activities in these markets before targeting less familiar markets. The following proposition can be formulated:
1.A. The risk perception of the specific country of the TMT members is positively related to the country selected to internationalize.
Numerous studies are performed on the relation between risk and entry mode, but consistent outcomes are not yet found. Most studies agree on the fact that there should be a trade-off between risk and returns. This in accordance with the assumption of the stage model: ‘The state of internationalization affects perceived opportunities and risks which in turn influence commitment decisions and current activities’ (Johanson &
Vahnle, 1997, p.27). The form of entry mode and coinciding commitments influence the risk a firm will have while operating in a foreign market. Exporting is regarded as the entry mode with a relatively low resource commitment and consequent returns, while equity investment create high commitments with similar returns. However, the entry mode is also influenced by the policies of the foreign country that impede certain forms
of investment (Agarwal & Ramaswami, 1992). Management can decide to use an alternative entry mode to overcome problems associated with withdrawing dividend or other profits. Furthermore, studies report that small firms that internationalize use cooperative strategies to overcome the resource constraints, while still having the option to gain economies of scale and scope (Gemser et al., 2004; Gomes-Casseres, 1999). As indicated by Das & Teng (2001), these inter-organizational relations bring risk by themselves. Risk arises by opportunistic behavior, a lack of competence, hidden agendas of one of the both parties. However, alliances also present the feature that they share risk among partners. International experience of managers in the market where the INV operates can reduce the risk from alliances significantly. Knowledge of the firms active on the markets and of potential partner firms, skills to operate high-commitment based forms of entry mode and a better ability to see possible opportunities are highly influenced by previous learning experience in those foreign markets and will consequently lower the risk perception as such. Based on these arguments, the below mentioned proposition can be formulated.
1.B. The form the entry mode will be positively influence by the risk perception of the TMT.
Decision theory points out that uncertainty goes in hand with risk. This is in line with the argument of Johanson and Vahlne (1977), who state that internationalization of firms take place in an incremental way based on previous learning. By internationalizing the firm faces a different task environment (uncertainty) and thus increases risk when committing financial and human resources in this process. The perception of managers if this additional risk is justified in the eyes of extra profit, is influence by the gained market knowledge by personal experience of the TMT in these markets. Managers that have a large amount of previous knowledge by experience in foreign markets should have a different risk perception of the market. This argument is supported by Bilkey and Tesar (1977) who concluded that non-exporting firms have a higher perception of risk, cost and had a lower perception of additional profits. Roy and Simpson (1981) also found that CEOs of non-exporting firms perceived risk greater in foreign market than in the domestic market. The knowledge already appropriated about the foreign market by TMT thus probably accounts for the difference in risk perception when looking at INVs.
Harveston (2000B) reports that managers of the born global firms had a significantly
higher risk tolerance than managers of gradual globalizing firms. The international experience of the managers enables the firm to balance additional risk (uncertainty) and potential profits more efficient, and directs the firm to developing international activities faster.
Based on these insights, the following proposition is developed.
1.C. The risk perception of the TMT is positively related to the rapid internationalization trajectory of an INV.
2.4 International experience - International profile
Various studies have found that international experience affects the internationalization process of a firm (Almeida & Bloodgood, 1996; Bilkey, 1978; Fischer & Reuber, 1996;
Oviatt & McDougall, 1994). After reviewing forty-three studies on export behavior, Bilkey (1978) states that annalists concerned with the initiation of the export process have tended to focus on the effects of change-agents, both internal and external. Change- agents, like chambers of commerce, industrial association, banks and other government agencies (Pinney, 1970) could be identified as factors that facilitate the small firms to internationalize, but that the ultimate decision process to internationalize is still to be found in the hands and heads of TMT members of a firm. As Pinney (1970) argues, an important internal change agent tends to be a member of the firm’s top management who is interested in and enthusiastic about starting international activities. The decision to go abroad is determined by several factors; regarding managerial characteristics, the managerial positive impression of the attractiveness to export is regarded as important (Simpson, 1973) and the firm’s (read managerial) previous learning experiences (Johanson & Valhne, 1975; Fischer & Reuber, 1996; Gridsrud, 1990) are crucial. Oviatt and McDougall (1994) show that a team of individuals with international experience typically founds firms that are international from birth. This relates to the results of Stuart and Abbeti (1990), who have found that the entrepreneur’s international experience had a significant impact on the early performance of new ventures. As argued by several studies, the skills and knowledge of the top decision makers are likely to be more of and influential on, the pattern and degree of internationalization (Miesenbock, 1988; Reid, 1981; Bloodgood et al., 1996).
As Reid (1981) reports, the selection of the foreign market to expand business can be seen as a decision-making process, which is based on the experience of the firm and on the experience of the decision maker (TMT). This paper assumes that INVs are relatively young (three years) so that actual experience of the firm can be mostly neglected. As pointed out by several studies (McDougall & Oviatt, 1994; Harveston, 2000A), the pre-firm international experience on the managerial level affects the internationalization of new ventures. Reid (1981) argues that the foreign exposure of the decision maker is likely to be critical when selecting a market. Foreign exposure, either by work experience, study or cultural background of the TMT creates momentum and motivation for an INV to internationalize in that country where the experience was gained. This is supported by the study of Johanson and Vahnle (1977) that points out that a firm initially seeks only familiar markets when internationalizing. To overcome the burden of large learning costs related to the unfamiliarity with the environment that occurs when developing international activities in markets where no previous experience is acquired, firms internationalize in countries where the ‘liability of foreignness’ is as low as possible. To have an efficient and effective international trajectory, international activity should be developed in those markets or countries in which the TMT has gained experience. The following proposition can be formulated.
2.A. The selection of a foreign country/market by the TMT of an INV is positively related to the previous international experience of the TMT in that specific market/country.
The study of Bloodgood et al. (1996), identified that the TMT of an INV influence the venture’s decision to internationalize its activities. They report that international work experience is related positively to the extent of internationalization, which they operationalized with the five primary activities of Porter value chain (1985). In short this indicates that firms with international experience in a foreign market in general use entry modes with more commitment and risk than firms with no previous learning opportunities. This is in line with the results of Fischer and Reuber (1996) that have found that international experiences TMT lead to a greater degree of internationalization.
Zhara (2005) reports that new ventures often enter foreign markets using higher order modes of entry. Internationalization by entry modes beyond export and licensing by firms, like Greenfield investments and wholly owned subsidiaries is also reported in
several other studies and is related to the perceived distance between the home and host country. This perceived distance decreases after exposure to the foreign market/country and consequently creates familiarity with the market due to learning experiences. These studies argue that the greater the perceived distance or ‘psychic distance’ is, between the home and host market, the more likely a firm will use low-commitment based modes of entry like exporting and licensing (Hill et al. 1990, Johanson & Vahnle, 1977; Stopford
& Welss, 1972). Shrader et al. (2000) found that new U.S. international ventures possessing management teams with long international experience tended to make use of equity entry modes, while firms with managers without extensive international experience tended to use non equity modes. Harveston (2000A) argues that managers of INVs display a global mindset, which allows them to consider the world as their market.
This research assumes that INV TMT members should have international experience in that the firm can internationalize with higher order entry modes. This leads to the following proposition.
2.B. The international experience of the TMT is positively related to extended forms of entry modes with presenting high-commitment and high risk that an INV uses to internationalize.
Fischer and Reuber (1996) conclude that SMEs internationalize early due to international experience of managers. As they point out, experience or knowledge of the foreign market makes it more likely to consider international expansion of the firm.
This is in congruence with the argument of McDougall and Oviatt’s (1994) theoretical work on INVs, which states that knowledge can be used as a competitive advantage when internationalizing early. This relates to the stage model argument of Johanson and Wiedersheim-Paul (1975) that regard knowledge of the market as crucial:
‘Prior experience of operating in a particular foreign market, in some way, is essential to the process of acquiring relevant market-specific knowledge, including perceptions of the market opportunities and problems, is acquired primarily through experience from current business activities in the market’.
In the case of INVs, the time to acquire such knowledge is very limited. INVs are
already be in the firm. The TMT can bring in this required international experience from either international assignments or work in previous jobs, which allows the INV to internationalize early because the learning and knowledge development already started before the birth of the firm. The following proposition is formulated:
2.C. The INV is more likely to develop international activities in an early stage due to the international experience of the TMT.
2.5 The Global mindset - International Profile
Contributors, either in empirical or theoretical research suggests that managerial cognitive processes (attitudes), especially those of the TMT of a firm affect the international strategic capabilities of the firm (Murtha et al., 1998, Perlmutter, 1969;
Bartlett & Ghoshal, 1989). A ‘transnational mentality’ (Bartlett & Ghoshal, 1989) and a
‘geocentric cognitive orientation’ (Perlmutter, 1969) are used to describe the individual global managerial mindsets of multinational companies (MNCs).
A few studies on managerial aspects argue that a global mindset is a prerequisite for the rapidly internationalizing firm (Townsend & Cairns, 2003; Harveston et al, (2000). The study of Cavusgil & Knight (1996) reports that the managerial mindset of born global firm is positively related to export-marketing performance. In general, there is a positive relation between international expansion and performance (Vernon, 1971) when expanding in the most lucrative markets available. This requires managers to have an international orientation of the market in which they are situated. The markets on under consideration should be large enough to sustain business and not depending on market differences. After a certain point, where the marginal benefit of expansion is equal to the marginal costs of expansion, the performance of international activities goes down. This in line with the definition used in this thesis (McDougall & Oviatt, 1994), where the INV selects markets where they can exploit their competitive advantage in the most effective way. The selection process regarding the selection of country to internationalize, is thus less influenced by the ‘psychic distance’ that the firm perceives, due to the international vision of the TMT, but more biased to the potential profits that can be made in a certain country. Based on these insights, the following proposition is formulated.
3.A. Due to the global mindset of the TMT an INV is more likely to select the country on a global scale, than on a scale of similarity.
Internationalization theory of suggest that small firms are put at a disadvantage due to the resource constraints they have, either financial of managerial. These firms see the low amount of knowledge and skills of the foreign markets as major barriers when internationalizing. In spite of the fact that in general the resource availability of skilled management in international markets is low, research suggest that TMT international experience is higher in Born Global firms than in gradual globalizing firms (Harveston, 2000A). This is in line with the argument of Nummela et al. (2004) in that international experience, either by international work and international education are considered as key factors in the internationalization process of SMEs. One of the problems a firm encounters is the uncertainty that comes with the penetration of new markets.
Uncertainty consists out of the cultural diversity, the newness of the business practices and other factors that lead to possible variability in returns. Especially when going abroad, difficulties arise dealing with these uncertainties. Most small firms respond to these uncertainties by using an entry mode that generally presents a low commitment of resources and a relatively low risk factor, like licensing or export (Johanson & Vahnle, 1977). Research suggests that the global mindset of the TMT is of high importance to increase the awareness of cultural diversity [and the resulting uncertainty] and facilitates the ability to handle this (Gupta & Govindajaran, 2002). A Global mindset thus in fact can partially substitute for other mechanisms that reduce uncertainty. The international vision of the TMT increases the awareness of opportunities abroad. This enables the managers to assess the potential gains from foreign markets and informs the TMT about the commitment needed to maximize the profits. This opens new doors for small firms to act in the most efficient way and select the appropriate entry mode based on their context related situation. The uncertainty created by the fact that firms are foreign, is thus decreased by the mindset of the TMTs, which should facilitate the usage of extended entry modes. Based on these insights, the following proposition is formulated:
3.B. The more the TMT displays global mindset, the more likely that the internationalization of the activities takes place by modes of entry that presents higher commitment and higher risk.
Research of Harveston et al. (2000) shows that managers of Born Global firms have a more global mindset than managers from more gradual internationalizing firms. In overall, the sample of managers of born global were much more positive towards internationalization than those of gradual globalizing firms. This is in line with the results of Kobrin (1994), which found that firms with a TMT that operates with a global mindset develop international activities more rapidly. Other studies suggest that there is a relation between the manager’s global mindset and the speed of internationalization (Harveston, 2000A, Knight, 1997). As pointed out by Harveston (2000A, p.24): ‘The mindset of the entrepreneur and the top management team affects the willingness to expand the firm’s activities into international markets’. The pro-activeness the management of an INV displays can affect the speed of internationalization. Based on these insights, the following proposition can be stated.
3.C. The global mindset of the TMT is positively related to the speed of internationalization process of an INV.
2.6 Social and business networks - International profile
The ‘network approach’ suggests that an international strategy of a firm is influenced by the sum of formal and informal networks that a firm has. Business and social relationships of the TMT of a firm are regarded as important factors when internationalizing (Johanson & Mattson, 1988; Fischer & Reuber, 1996; Coviello &
Munro, 1997). Business networks can be seen as sets of connected firms (Astley &
Fombrun, 1983). Johanson and Mattsson (1988) suggest that a firm's success in entering new international markets is more dependent on its position in a network and relationships within current markets, than on market and cultural characteristics. This is in line with the research of Coviello and Munro (1997), which found that successful New Zealand-based software firms are actively involved within international networks and that the internationalization process of these firms is fuelled by the networks in which these firms where situated. Networks also have the ability to lower barriers to entry and facilitate internationalization by using other firms in the networks to overcome the resource constrains that most small firms have (Dyer & Singh, 2002). The use of either joint –ventures, non-equity alliances and other relatively low-commitment forms of internationalizing with business relations could be formed to do so. Eisenhardt and
Schoonhoven (1996) state that alliances are formed when a firm is in a vulnerable strategic position to source resources like technical know-how, cash and legitimacy.
Eisenhardt and Schoonhoven (1996) found that more experienced top management teams are more likely to form partnerships because they have a better ability to know, attract and engage partners. This is line with the results of Gulati (1995), who states that the familiarity between organizations is created by previous experience with each other and thus breeds trust.
Seen in this way, it is not so awkward that INVs directly go to a foreign market to expand their business. This is in line with the conclusion of Burt (1992), which sees that network positions reduce market uncertainty by providing access to information and defining status hierarchies. Networks could facilitate the process to overcome the problems associated with the so-called liability of foreignness of the firm in a new market. Assuming that an INV prefers to have international activity in markets/countries where familiarity (by networks) is relatively high, the following proposition can be formulated:
4.A. The international expansion of a INV is more likely to be into countries/markets where social or business networks of the TMT are present or exist.
As indicated previously, networks facilitate the internationalization process of small firms because they can provide the needed resources to internationalize successful.
According to the incremental internationalization theory, firms, especially small firms, are destined to use fairly low-commitment, low risk forms of entry modes, like exporting or licensing. Due to the prevailing international networks of the TMT, a firm can effectively leap-frog into more profitable modes of entry. However, most research on market entry has neglected networks, but focuses on the economic structure of markets or financial resources of firms. Several studies, however confirm that market entry is influenced by the networks held, either domestically or internationally (Jensen, 2003;
Meyer & Skak, 2002). The gained market knowledge, could for instance facilitate a better awareness of opportunities, that influence the perception of the managers in such, that high-commitment mode of entry are most appropriate. This is in line with the argument of Meyer and Skak (2002), which state that firms accumulate knowledge interactively within their business networks, both domestically and internationally,
which forms a basis for a commitment to foreign market. Based on these insights, the following proposition is developed.
4.B. The INV is more likely to select forms of internationalization beyond those characterized by low-commitment, low risk because of the use of business and social relationships.
In the case of INVs, the very rapid internationalization can then partially be attributed to the human resource input of the TMT in the INV. Madsen and Servais (1997) offer an explanation of the rapid internationalization process of INVs by looking at the networks in which the firm (and the founder) are active during the founding period:
‘When studying a Born Global firm, the time perspective should be extended beyond its birth. Probably, many of its “genes” have roots back to the firms and networks in which the founder(s) and top managers gained industry experience. Basically, in many instances it may be doubtful whether a Born Global could be considered a new company.
In a legal sense the company may be new, but its skills and capabilities not often born and matured to its legal birth’.
(Madsen & Servais, 1997, p. 573)
The networks of the TMT that result from previous experience in those countries and markets thus substitutes for the absence of firm specific relations with other firms. In this way, the INV becomes an experienced player itself by using the learning curve of the managers. The rapid internationalization process of an INV can thus be partially explained by the networks present in foreign markets. Zahra (2005) argues that build relationships and gained access to existing networks is helpful to shorten and expedite the INVs’ learning path and can increase thus the speed of internationalization. Based on these insights, the following proposition is formulated.
4.C. The speed of internationalization activity of INVs is positively related to the existing social and business networks of the TMT.
2.7 Conclusions and implications research
The above literature review provides the structure of the remaining parts of this thesis.
The various propositions that are based on current streams of research suggest that relations can be expected in this research. The propositions expect a relation between the international experience and the managerial characteristics in the first stage of this research. In the second stage of this research, also the expectations are formulated in that the managerial characteristics have an influence the internationalization profile of INVs.
The constructs are in following parts described, analyzed and discussed.
PART 3. Methodology
3.1 Research methods
This thesis is based on empirical findings that are derived from an embedded multiple case study. As Yin (1984) suggests that case-based research allows dynamic decision- making processes to be much more deeply investigated. Yin (1984) indicates that ‘the investors goal is to expand and generalize theories (analytic generalization) and not to enumerate frequencies (statistical generalization). The rationale for choosing this approach is two-fold. First, the case study is used to extend the body of knowledge on the internationalization process of international new ventures. As indicated by Madsen et al (2000), little research is done on managers/founder of these firms as regarding their impact on the internationalization process and should be theoretically ‘filled in’. As argued by Yin (1984), multiple cases can be used to determine if the theory’s propositions (i.e. the international new venture theories) are correct, or whether some alternative set of explanations might be more relevant. This research is done to develop more insights in the internationalisation trajectory of INVs by focusing on managerial characteristics. Furthermore, because of the fact that the population of INVs is not large, a case study of this phenomenon is preferred over a survey or other quantitative research. The unit of analysis is the INVs internationalization, in which the founder/manager is a subunit of analysis. The case-studies will be based on semi- structured interviews, in which the questions are based on already validated constructs.
The interview protocol can be found in Appendix 8.
3.2 Quality considerations
The validity and reliability of this thesis relies on a rigorously, well-designed case study.
There are several aspects on which the quality of empirical research can be tested (Yin, 1984; Gill & Johnson, 2002). First, the construct validity is taken into account, which is to establish correct operational measures for the concepts being studied. This is realized by using multiple sources of evidence, establishing a chain of evidence (data collection phase) and having key informants review the draft case-study in the composition phase, as proposed by Yin (1984). Furthermore, to enhance the quality of the data obtained, the main instrument that is used (interviews) will be based on validated constructs, in that
the questions actually measure the variables in this research. This study accounts for internal validity by performing pattern matching, and explanation building, two concepts widely used to improve validity.
External validation regards the establishment of the domain to which study’s findings can be generalized and assess the extent to which conclusions might be generalized to other contexts. This study is based on four case-studies, from the bio-chemical industry and is situated in a small population of firms (less than 100). This study is not focused on establishing statistical generalisability but to theory, in which the main results of this study are generasible to the development of international activities of small firms. The reliability is taken into account by demonstrating that several aspects of this study, such as the data collection procedures can be repeated, with the result of having the same results. This done by giving disclosure of the data base and interview protocol used (See Appendix 8) and the procedures followed during the interviews themselves. In this study, reliability is achieved by carefully presenting the different phases in the data collection activity, by explaining the procedures followed, presenting the interview protocol and the case study database. Furthermore, the interview is piloted with managers and academics outside the research sample to increase reliability.
To enhance the validity of this research, triangulation is achieved by analyzing different sources of evidence to construct a more realistic holistic view of the internationalization process of an INV. In this research, open interviews will be combined with relevant written reports, and websites of the organizations in question. Using multiple research methods for gathering and analysing relevant data improves the robustness of the findings. The most important source of data is collected from key groups of individuals, i.e. founder(s), CEOs, managing directors. The cases are foremost based on one-hour- long interviews with these individuals and resulted in four 7–12 pages of interview transcripts each. Also the case study report is reviewed by experts on the field of international business/international entrepreneurship and submitted to respondents (at least to one manager/founder not interviewed) for feedback to ensure that this study presents the facts accurately.
3.3 Sample
The research is performed in the Netherlands on International New Ventures that originate from the Netherlands. The sample is drawn of the The Netherlands Life Sciences Sector Report 2004: Moving Forward (BioPartner Network, Hyphen Project Management) database, which contains information of small life-science firms. The database variables on which the firms were selected include year of establishment and industry. The sample is drawn from the life-science industry, in which the firms’
primary activities should be in the bio or fine chemicals sector. This industry is chosen because of two critical aspects that it displays. First, the Bio-Chemical market presents an inherent challenge towards incumbents, facing intense competition in the small home market, requiring them to internationalise directly at or soon after the inception. The degree of internationalization thus should be high, and this increases the possibility to find firms that use different modes of entry’s, in several countries within a certain amount of time. This in line with the argument of Ghoshal & Nohria (1993), who argue that a ‘fit’ between the firm and the industry structure exists. Secondly, high-technology industries received a great deal of attention by researchers (Jones, 1999; Jolly et al., 1992; Bloodgood et al., 1996) and is therefore an industry widely used to analyse and illustrate internationalization processes. The research undertaking here therefore can supplement these studies or develop more extended analyses of this market.These firms should display the following aspects, to be identified as an International New Venture.
The firms were selected on the criteria of Rennie (1993), which uses a minimum of 25%
of foreign sales from foreign activities and a maximum age of 3 years since establishment of the firm. This is in line with the general operationalization of Born Globals (McKinsey, 1993; Oviatt & McDougall, 1994; Harveston, 2000A/B).
3.4 Measures
This section provides an overview of the different variables used in this thesis. The measures are based on constructs developed in other empirical and theoretical studies.
First the independent variable in this study is presented and followed by the various dependent variables. The variables provided in this section can be found in Appendix 2, the Conceptual Model.
Independent variable - International experience
