Startup expansion into foreign clusters : managing differences

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Startup Expansion into

Foreign Clusters –

Managing Differences

Master Thesis Date January 24th, 2018 Supervisor E. Dirksen, MSc 2nd Supervisor Dr. I. Haxhi

Study MSc Business Administration – International Management

Student Alexander J. Kramer (11422955)

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Abstract

In the globalizing world we live in today, there is an increase in international interaction through the growth of the international flow of communication, culture, money and ideas. International business if flourishing and the importance of clusters as drivers of competiveness and economic development is increasing. However, international expansion is a complex endeavour in which many factors need to be taken into account. This exploratory case study goes beyond what already has been research and identifies elements that are key success factors in dealing with differences between the home and host country during the international expansion processes for startups moving to a foreign cluster. The findings provide best and worst practices and show how startups should approach their international expansion process.

Statement of Originality

This document is written by Student Alexander Kramer 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.

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1. Introduction

At a certain moment in time, young growing companies reach a moment where they want to

accelerate their growth. How to approach such a process is an all-encompassing complex

endeavour. There are many ways how startups can approach their international expansion, one

of the popular ways of expanding for startups is to expand into a so-called cluster within their

given industry. This cluster could be close to their home, but also located far away. Think

about starting a European clothing company. That will not move to for example Detroit, a

region that is widely regarded as an automotive cluster due to the automotive related heavy

industry. Chances are this fashion startup will end in fashion clusters like Milan or New York.

Cluster theory is an important determinant in both the approach and the success of the

international expansion process young ventures undertake. However, during the process of

expanding to such a cluster on an international level, startups will often experience countless

of differences between their home and host country. Not only on country-level but, also on a

regional and cluster-level startups can experience important differences that might impact

their expansion process. Although much research has been done in the field of clusters and

internationalization strategies, little is known about how startups should actually approach

these differences to make their expansion into a particular cluster as much of a success as

possible. From this perspective, this research will be aimed to answer the question “How

should Startups that engage in international expansion into economic clusters manage host

country and regional differences?” The research is aimed to find the keys to success in

international expansion processes for startups moving into foreign economic clusters. This

research is a qualitative paper conducted by exploratory research aimed to provide a

descriptive answer to the research question (Gephart, 2004). This approach is chosen because

it provides insights that are difficult to produce with quantitative research and combines

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2. Literature Review

2.1 Defining Startups: The Concepts

Before going in-depth on this topic it is important to understand some of the fundamental

concepts used in this research. The definition of a startup is a concept that is widely debated

and many different definitions exist. Successful entrepreneur Neil Blumenthal stated that “A

startup is a company working to solve a problem where the solution is not obvious and

success is not guaranteed” (Robehmed, 2013). That same article showed that other entrepreneurs see startups as “A state of mind” or “The act or an instance of setting in operation or motion” (Robehmed, 2013). There is no right or wrong definition of a startup. For the remainder of this research, Steve Blank’s critically and academically acclaimed

definition of a startup is used: ‘a temporary organization designed to search for a repeatable

and scalable business model (Blank, 2013)’. Startups are temporary organizations because the

purpose of a startup is not to remain a startup (Coelman, 2014). The aim is to get customers

on board, an income stream and grow. For selection purposes for the interviews conducted for

this research, startups are considered as new venture firms that are six years old or younger

(Brush, 1995). During this research, startups are looked at from a Western-European

perspective. In this research, scale-ups are also a topic of conversation. Alberto Onetti’s

(2014) definition of scale-ups is used in this research (Onetti, 2014). He identifies scale-ups

as; “development-stage businesses, specific to high-technology markets, that are looking to

grow in terms of market access, revenues, and number of employees, adding value by

identifying and realizing win-win opportunities for collaboration with established companies”

(Onetti, 2014). This definition is directly linked to Steve Blank’s main challenge of a startup:

the search for repeatable scalability (Blank, 2013).

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know the general context in which the startups are regarded in this document. In this research,

international expansion is a key factor. International expansion is the ongoing evolutionary

process shaped by an enterprise’s international experience, organizational capabilities, strategic objectives, and environmental dynamics (Luo, 1999). “That same research shows

that the strategic behaviour of the firm is generally mirrored in resource contribution, market

commitment, the size of the investment, product relatedness and entry mode selection” (Luo,

1999). In other words, the strategy determined is related to the nature of the company. In this

research we are looking not only at how startups engage in international expansion, but more

specifically how startups engage in international expansion into economic clusters. In the

context of this research, clusters can be seen as ‘geographic concentrations of interconnected

companies and institutions in a particular field’ (Porter, 1998). These clusters encompass a

variety of linked industries and other entities important to competition (Porter, 1998). An

important factor when choosing a cluster are the host country and regional differences. Not

only during the expansion process, but also in preparation of the expansion do not only

Multinational Enterprises (MNE’s) but also young ventures need to take these differences into

account.

Research by Harkema and Vermeulen (2017) has shown that the findings of their study point

to the need for more research on the relation between a firm's financial performance and its

foreign entry mode choice (Barkema & Vermeulen, 1998). Choosing the most appropriate

mode for organizing its foreign business activities has a big impact on the successes of the

firm’s international operations (Hill et al., 1990). As cluster theory is related to entry mode choice, this already indicates a gap in available research. Even though some studies have

reported that international startups outperformed acquisitions (Li & Guisinger, 1991);

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expansion mode per se (Barkema & Vermeulen, 1998). There still is much to learn. In their

research, they have shown that the positive correlation between international startups and a

firm's financial performance may be caused by a third variable; the strong technological

capability of the firm but again, this does not necessarily mean that startups are a superior

expansion mode per se. Future studies may provide more insight into this issue (Barkema &

Vermeulen, 1998). This goes to show that startup expansion comes with its own challenges.

Based upon the characteristics of the company, technological capability and financial

performance; startups have to choose the right expansion mode. However, the importance of

the technological capability highlighted here indicates that startups with strong technical

capabilities seeking to engage in or to move to a technological cluster like for example Silicon

Valley might experience significant benefits over less technical ventures in the process of

international expansion.

2.2 Cross-border expansion

Going more in-depth with the concepts mentioned earlier, it is necessary to understand

cross-border expansion thoroughly. Many academic books and journals have been written about

cross-border expansion strategies and many important theories have been developed already.

In this part we will have a look at a number of the most important theories applicable to this

research. The following literature is relevant for the basis of this research and for getting a

general understanding in the world of cross-border expansion.

Engaging in cross-border expansion seems like it is not just about simply opening up shop in

another country anymore. Cross-border expansion nowadays is about much more than that; it

is an all-encompassing definition of an extensive and integrative expansion approach. In IB,

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understand the dynamics involved in international expansion. One of those theories is

transaction cost theory. In regards to the study of economic organization, the transaction cost

approach serves as the basic unit of analysis (Williamson, 1981). Transaction costs are the

costs involved in making an economic trade and Williamson’s three level analysis1_{of the}

transaction cost theory shows that an understanding of transaction cost economizing is central

to the study of organizations and thus also why they decide to expand (Williamson, 1981). In

further research by Douglass North, he argued that the set of institutions also influenced the

transaction costs (North, 1992). He sees institutions as the set of rules in a society and argues

that those institutes to a large extent determine the expenses and thus the transaction costs that

occur when selling or buying a product or service (North, 1992). In other words, when the

certain characteristics of a cluster influence the determinants in a negative way, transaction

costs are likely to rise making that cluster less attractive for international businesses. Both

related researches therefore showed the importance of transaction costs in international

expansion. Another important concept to understand in IB is the size and complexity of all

participants in a market/industry and how they affect each other. The exchange network

theory shows how communications or any other form of exchanges (for example exchanges of

information and communication) are affected by the structures of the relationships amongst

the participants (Jackson, 2008). In other words, being aware of the relationships between all

participants in an economy helps to better approach international expansion. Another

interesting observation in international expansion is that firms often gradually intensify their

activities in foreign markets (Johanson & Vahlne, 1977). Companies often start small and

slowly increase their investments abroad. This idea stems from the Uppsala model that shows

that firms first like to gain experience in the home country before moving to foreign markets

(Johanson & Vahlne, 1977). When firms are ready, they then tend to move to geographically

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and culturally proximate countries first. After that, firms gradually move to more

geographically and culturally distant countries (Johanson & Vahlne, 1977). The Uppsala

model in that sense, helps to better understand how startups choose the country and/or region

where they are expanding to.

Although above literature gives a good overview of the complexity of the process involved in

internationalization, it is time to have a look at the main drivers why young companies want

to grow internationally to better understand the concept of cross-border expansion. Dunnings’

OLI paradigm says there are three pillars that drive internationalizing; Ownership, Location

and Internalization (Dunning, 2009). In an elaboration of this theory he shows that there are

four reasons why MNE’s invest abroad; Market seeking-, Efficiency seeking-, Resource seeking- and Strategic asset seeking- motives (Dunning, 2009). Dunning’s theory is an

exquisite example that highlights the importance of location in an internationalization process

(Dunning, 2001). “Research has shown that the importance of intangible assets, and

particularly intellectual capital, in the wealth-creating process, and the need of companies to

harness, as well as to exploit these assets from various locations is growing” (Dunning, 2009).

Besides that, Dunning (2009) emphasizes the changing role of location-based assets, which

mobile investors look for as complements to their own core competencies by highlighting the

increased significance of create assets and show the benefits which spatial clusters offer

whenever distance-related transactions and coordination costs are high (Dunning, 2009).

Moreover, he argues that, to adequately incorporate the activities of MNEs within existing

trade type theories of the international allocation of economic activity, more attention needs to

be given both to the specific motives, determinants and consequences of the common

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Now we know what drives internationalization, it is time to look at how to approach it. Where

to start with an internationalization process is a question often raised by entrepreneurs and in

reality depends on many factors. We have already seen that in an internationalization process

the ownership advantages, location advantages and internationalization advantages such as the

creation and exploitation of their core competences are of great importance (Dunning, 2009).

Moreover, research has shown that the choice of country to begin with does also matter in the

process of internationalization (Makino et al., 2004). A part of this can be accounted to

culture. In his research, Geert Hofstede describes the scope of work-related cultural

differences and determines the major cultural dimensions that are crucial in international

business (Hofstede, 1984). The importance of managing culture is emphasized in this research

and already indicates that this is an important aspect in this particular research too. Later in

this research it will become clear that culture is not the only difference that needs to be

managed. Research by Zaheer and Nachum (2011) shows that location resources and

locational capital are important in choosing and operating in a certain region (Zaheer &

Nachum, 2011). Their approach adds a locational dimension to the conceptualization of firms

as heterogeneous entities that differ from one another in terms of the resources they control

and to which they have access (Barney, 1991). In addition, this research suggest that firms can

also be seen as bundles of locations that are made up of subunits in different places from

which they can draw resources. Potentially, synergies can be gained from internationalization

in this way. Just as a unique resource bundle creates the unique character of a firm, so too

does a distinctive configuration of the locations of its subunits (Schoenberger, 2000). This

research by Zaheer and Nachum (2011) is important in this research as it shows that the

location can be used as a competitive advantage. This theory is closely related to the cluster

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Taken all factors mentioned above into account, eventually strategy needs to be determined.

Michael Porter (1990) shows there are five competitive forces that shape strategy on an

industry level (Porter, 2008). He argues that the threat of new entrants, threat of substitute

products or services, the bargaining power of suppliers, the bargaining power of buyers and

the rivalry among existing competitors shape a business’ strategy (Porter, 2008). Besides that,

research by Rugman and Verbeke (2004) shows that globalization, in terms of a balanced

geographic distribution of sales across the triad, thus reflects a special, and rather unusual,

outcome of doing international business (Rugman & Verbeke, 2004). The regional

concentration of sales has important implications for various strands of mainstream IB

research, as well as for the broader managerial debate on the design of optimal strategies and

governance structures for MNEs (Rugman & Verbeke, 2004). This research shows that there

are different perspectives on regional and global strategies of multinational enterprises

(Rugman & Verbeke, 2004). As startups are temporary organizations looking to grow and

potentially eventually become MNE’s themselves, it goes to show that startups also need to be aware of these different perspectives as well (Blank, 2013).

2.3 Cluster Theory

There is a paradox when it comes to economic geography during an era of global competition.

It has been recognized by many that changes in competition and technology have diminished

many traditional roles of location (Porter, 2000). Yet, geographic concentrations of

interconnected companies, also known as clusters, are a striking feature of virtually every

regional, national, state and metropolitan economies (Porter, 2000). This especially applies to

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is argued that one of the four forces that dominates the competitive environment of countries

is the economy of globality and proximity (Garelli, 1997).2

The prevalence of these clusters in economic regions revealed important insights about the

microeconomics of competition and the role of location in competitive advantage within that

region (Porter, 2000). Michael Porter says that: ‘even as old reasons for clustering have

diminished in importance with globalization, new influences of clusters on competition have

taken on growing importance in an increasingly complex, knowledge-based, and dynamic

economy’ (Porter, 2000). These clusters represent a new way of thinking about national, state, and local economies, and they necessitate new roles for companies, government, and other

institutions in enhancing competitiveness (Porter, 2000). However, not everyone is as

enthusiastic about the cluster theory. In his research, Yasuyuki Motoyama reviews the

critiques on this research and provides a synthetic view of those critiques (Motoyama, 2008).

Also, it reveals two fundamental new limitations to cluster theory that are important to keep in

mind. The current theory is more focused on describing how a cluster is organized today

rather than how a cluster emerged. Incorporating the historical process in shaping the right

strategy can strengthen the practical application of successfully dealing with the dynamic

environment of economic clusters (Motoyama, 2008). Knowing how a cluster came to exist

might be beneficial in a startups expansion process. Using the Silicon Valley tech cluster as a

prime example, history has teached us to economic prosperity in certain industries is not static

and changes over time (Blank, 2012). Silicon Valley has known waves of innovation, see

Appendix 1 (Blank, 2012). Looking at this cluster’s history, it is safe to say that in ten years

the true innovation will likely happen in another sector than it does today. For this reason it is

important for startups to incorporate the historical process of a cluster in their international

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expansion strategy as well. Second, the interconnectedness of a cluster is hard to measure

empirically, and moreover, the theory does not explain how exactly the public sector can

strengthen this aspect (Motoyama, 2008). It has been argued that dialogue with networking

theories can potentially improve the success of the expansion process as well (Motoyama,

2008). Being aware of network theory helps to better examine the structure of relationships

between social entities and eventually helps finding optimal ways of dealing with social

challenges or problems (Wasserman & Faust, 2012)

2.3.1 Advantages of Economic Clusters

Clusters are very popular these days as moving into clusters comes with numerous

advantages. Some of those benefits when moving to a cluster from a demand side include;

reduced customer search costs, consumer proximity, and an increase in reputation (Swann et

al., 1998). From the supply-side, some of the benefits include infrastructure benefits,

knowledge spillovers and an often highly specialized labour force (Swann et al., 1998). Both

sides can benefit from information externalities (Swann et al., 1998). Research has shown that

the coming together firms in related industries co-localizing will besides the possibility of

creating scale economies, both help diminish transaction costs and align incentives (Maskell,

2001). Related research has actually suggested that while the cluster’s particular set of

activities affects what is done within and among the firms in the cluster and therefore also

what is learned, it is the institutions in the cluster that define how things are done and

consequently how that learning takes place (Lundvall & Maskell, 2000). This indicates that

although the startups have the possibility of having a potential influence on the cluster and

therefore indirectly on the industry as a whole, it is actually the knowledge institutes that are

able to drastically change certain aspects of a cluster. This matches North’s view on clusters

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costs (North, 1992). With that, the question rises whether startups can not only benefit from

the regular advantages of co-localization, but actually also have the ability to have impact on

the industry as a whole. In order to see how startups that engage in international cluster

expansion should manage host country and regional differences, in this research it is

important to also look at this impact when talking to industry experts and experienced

entrepreneurs.

2.3.2 Challenges of Economic Clusters

It is now clear that the cluster theory is an interesting and complex theory that is more

important now than it ever was before. Although moving to a cluster comes with various

major advantages, there are also several downsides to it. Examples of this is knowledge spill

overs in research and development (Audretsch & Feldman, 1996). The possible loss of

proprietary knowledge is a disadvantage in expansion into clusters (Aghion & Jaravel, 2015),

especially when the company moves into a cluster in which its direct competitors are located

as well (Mochari, 2015). In other words, it is of great importance that in doing research before

expansion, the startups study their competitors and competitive landscape within the cluster.

Based on that research, those startups may decide whether or not to accept that potential loss

of proprietary knowledge (Mazur et al., 2016). Another challenge is that each cluster is

unique. The uniqueness of each cluster can lead to considerable complication of efficiency

assessment of its functioning (Mazur et al., 2016). Comparison with other clusters might be

difficult. Because clusters come in all sorts and forms, the nature of the cluster might be the

most important factor to take into account (Mazur et al., 2016). In more isolated clusters for

example, the absence of competitors might actually diminish the need for constant innovation

of the production and sales process (Mazur et al., 2016). Ventures should always look if the

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Although clusters are potentially very powerful tools in the international expansion process, it

is clear that moving to a cluster remains a challenge. When moving to an economic cluster,

startups will experience differences between their home and host country. The same rules and

regulations and norms and values in their host country might differ from their home country.

These so-called distances between home and host country need to be managed accordingly

and be put to their advantage rather than letting it have a negative influence on their success

of their international expansion process. An extensive in-depth review of these distances is

provided in part 2.5 of this document.

2.3.3 Silicon Valley

As this research is designed to look at how startups that engage in international cluster

expansion should manage host country and regional differences, there has been made use of a

recurring example of a highly successful cluster. In this research, Silicon Valley is chosen as

the leading example that helps to put the literature used in a practical perspective. By using

this key cluster as an example throughout this research, we can generalize theory and look at

how specific characteristics of expanding to a cluster have had influence on the expansion

processes of startups.

Silicon Valley is an economic cluster in the southern part of the San Francisco Bay Area and

is the epicentre in the world for high-tech innovation and development (Engel, 2015). This

region can be considered as a global cluster of innovation. In places like Silicon Valley,

Industry participants rely on the benefits of proximity to help build and manage global-scale

production networks (Sturgeon, 2003). Some of the components and behaviours that make

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venture capital firms, mature corporations, research centres and service providers (Engel,

2015). A broad palette that helps to create Silicon Valley’s achievements.

2.4 Liability of foreignness

This study established that a liability of foreignness exist in a competitive industry (Zaheer,

1995). Liability of foreignness can come in many different forms. Think about the negative

impact of cultural distance or institutional differences for example (Ghemawat, 2001), (Xu &

Shenkar, 2002). The results suggest that firm-specific advantage, as embodied in imported

organizational practices, may be a more effective way to overcome the liability of foreignness

than imitation of local practices (Zaheer, 1995). Although local isomorphism was related to

differences in profitability, the relationship was not always in the direction predicted by

institutional theory (Zaheer, 1995). For example, greater distances from local practice in the

area of market controls were related to better performance (Zaheer, 1995). “It became

apparent in this in-depth study of one industry that a multinational subunit trying to overcome

its liability of foreignness is likely to be drawn toward models both from its local and its home

environment in complex and subtle ways, with its administrative heritage influencing the

effectiveness with which it can implement certain organizational practices overseas” (Zaheer,

1995). For that reason, startups should be aware of the existence of that liability as well.

Because startups are younger and are less dependant on administrative heritage and models

from its home environment influencing their decisions, they have the ability to pivot more

easily and potentially deal with liability of foreignness in a more effective way.

2.5 Host country and cluster differences

With the literature above we have seen that host country differences is actually a fairly broad

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differences on a country level alone might be too broad. However, certain cultural or

institutional aspects on a national level might still be relevant. To not exclude that dimension,

we are approaching this research with a multi-level analysis. In this research, a combination

between country level and cluster level analysis is used to discern the host differences from

the home differences. To categorize these differences between host and home country, we

make use of Ghemawhat’s (2001) global distances framework as well as looking at characteristics of specific clusters (Ghemawat, 2001).

In his work, Ghemawat (2012) identified and prioritized the differences between countries

that companies must address when developing cross-border strategies (Ghemawat, 2012). He

integrated his results in his CAGE Distance framework. This framework disaggregates

differences into four major categories (Ghemawat, 2001). These categories are: Cultural,

Administrative, Geographic and Economic. One of the distinctive features of this framework

is that on country level it encompasses a bilateral approach in which both bilateral attributes

of the country pairs as well as the unilateral attributes of individual countries are considered,

see Appendix 2.

Important to understand in this theory is that the importance of certain distances can vary

amongst different industries (Ghemawat, 2001). Depending on the nature of the company and

the industry it is in, some distances might be more important to certain companies than others

(Ghemawat, 2001). For example, Ghemawat has shown that the potential impact on the

percentage of change in trade through Administrative and Geographical factors can

potentially be higher than of Cultural factors (Ghemawat, 2012). An overview of the

characteristics that are likely to make an industry sensitive towards specific distances can be

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2.6 Linkage concepts

This research will make use of several existing theories in critically acclaimed literature. The

most important theories used in this research are; Cluster Theory, Internationalization Theory,

Porter’s Five Forces, Globalization and Semi-globalization, The CAGE Framework,

Transaction Theory and the Uppsala Model. These theories are used to explain the complex

process of international expansion. The results from this research are linked to several of these

existing theories. With this literature in mind, there will be a sufficient theoretical foundation

to test the results of this research and make this research a relevant contribution to existing

academic literature.

2.7 Research Question Development

With the above literature in mind, it is shown that much research has been done in the field of

international expansion by MNE’s. Looking at all these theories, a gap in the research has been identified. Theories about choice of country and entry modes, locational capital and

knowledge management, the importance of cultural distance, institutionalism, motives for

international expansion and expansion strategies all show the complexity of international

expansion. However, bringing cluster theory into the mix allows for a unique point of view.

Although some significant academic literature about clusters is available, not much has been

written about the cluster theory in the actual international expansion process yet. Especially

for startups this is the case as most research conducted is focused on MNE’s. Combine this

with not looking from an MNE perspective, but a startup perspective allows for a unique point

of view and interesting contribution to existing scientific literature. This scope leads to the

following research question:

“How should Startups that engage in international expansion into economic clusters manage host country and regional differences?”

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To research this topic, we need to get an in-depth understanding of international expansion

processes and host country and regional differences from a startup point of view. To do this

properly we will look at the perception and experiences before, during and after the actual

expansion. This enables for an extensive in-depth review of obtained knowledge, lessons

learned and best practices. With that in mind, several propositions have been constructed. The

first question looks at the framework proposed by Ghemawat (2001) and assesses how

startups perceive differences between home and host country before they internationalize.

What do they expect? Are they aware of differences that exist? This proposition is designed to

show how startups perceive the differences beforehand and how they usually plan on dealing

with them. For startups to perceive their international expansion to be a success, there needs

to be a match between perceived view on differences as well as the perceived outcome. To

research this, it is important to know whether a startup is aware of the differences between the

home and host country and how this is related to the outcomes they want to get from their

international expansion. Besides that, it indicates what drives startups to engage in

international cluster expansion. This leads to the following proposition.

Proposition 1

“Startups perceive differences between home and host country before their international

expansion. This perception matches the CAGE framework by Ghemawat (2001)”

Startups want value for their money. They want to put their valuable resources to good use

and not waste any money on adventures that might not be beneficial to the company at all. It

is valuable to this research to look at how a startup bases its decision on whether the

international expansion into a cluster meets its needs or not. The drivers behind the expansion

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Proposition 2 is designed to assess the awareness of potential benefits and risks. Next to the

previous points, this proposition also indicates to what extent the startups are prepared for

their international adventure. The awareness of benefits and risks indicates the level of

preparation the startups had. When researching this, it might be interesting e.g. to see whether

startups set specific targets as to what they want to take advantage of in engaging in a specific

cluster.

Proposition 2

“Startups are sufficiently aware of what the potential benefits and risks are when engaging in international expansion into clusters”

After it is clear how startups engage with host country differences before their expansion into

a cluster, it is time to research how they cope with these differences during their actual

expansion process. How do startups act and interact with inputs and outputs during their

expansion process? Do the host country and regional differences influence the decision

making processes that are so important during expansion? The third proposition looks into

this issue by looking at how those differences influence the startups strategy and decision

making and how it eventually influences the success of the startup in question.

Proposition 3

“Host country and regional differences have a negative influence on the success of the startups international expansion process”

There is probably no one better to learn more from then the startups and businesses that have

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approach internationalization and what they have experienced with this approach during this

process. As a recap of their experiences and how they perceived their expansion processes,

the respondents were questioned how they perceived their international expansion into

clusters afterwards, leaving room for additional comments to discover best practices into how

future startups should approach their expansion. Those additional comments can be found in

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3. Methodology

3.1 Research methods

This research is of qualitative nature. For this research, both primary and secondary data will

be used. To accumulate the necessary primary data, interviews with industry-experts will be

carried out in addition to the researcher’s own observations. To supplement the primary data,

additional existing literature will be used as well. This data is relevant for this research project

but was originally collected by other researchers for other purposes. Most of the secondary

data that will be used are academic papers, available statistics, databases and knowledge from

KI’s.

3.2 Research design

With determining the research design, it is important to indicate to what extent the results of

the research may be biased. Five expert interviews have been conducted with representatives

of Dutch start/scale-ups that have, successfully or not successfully, internationally expanded

into an economic cluster. Besides that, another five expert interviews have been conducted

with representatives of knowledge institutes representing certain clusters. Although this

approach is a great way of generating theory, this has a great chance of having a distortion in

the outcome due to systematic errors caused by the way the study has been designed or

conducted. This research potentially has a significant chance of being biased, hence to the

degree to which alternative explanations for the research results are possible. From framework

to creating the right interview questions; it is of high importance to create the right design to

reduce risks as much as possible. The objective of this research is of an exploratory nature.

The research will be conducted as a cross-sectional issue of time, with various expansion

examples over the last ten years. Theory and primary research findings are linked to snapshots

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3.3 Interview approach

The expert interviews will be conducted for data collection. Based upon the literature review

and the proposed research question, several questions for the experts arise. Several startups

and knowledge institutes will be invited by either telephone or e-mail to participate in an

in-depth interview. These interviews will focus on the perception of their internationalization

process before and after actual expansion.

Representatives of the startups and knowledge institutes are asked about their experiences.

The interviews are designed in a semi-structured way, allowing enough room for a company’s

opinion and interesting side-stories whilst the structure in the interview approach still makes it

possible to compare given answers and increase validity. These type of interviews are

semi-structured in order to gather a variety of data and make an exploratory research possible. The

interview questions are derived from a combination of all literature used in this research and

the research gap identified.

3.4 Description of Case Studies

“The case study is a research strategy which focuses on understanding the dynamics present in a case” (Eisenhardt, 1989). Case study refers to the unit of research and is in this situation the actual startups that are represented by the interviewees. Research collected by these cases

is from qualitative nature.

Semi-structured expert interviews have been conducted with both representatives of Dutch

start/scale-ups that have expanded internationally into an economic cluster and knowledge

institutes that represent national or regional clusters. Dutch organizations have been chosen to

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field. The ten interviews that have been conducted were with respectively five knowledge

institutions, three startups (chosen based on the criteria above) and one that can be considered

as both. The latter one is a hybrid between a startup and knowledge institute. The last

company interviewed is according to the definitions above not a startup anymore but due to

the relevant experience of its founder still a valid case study to this research. Although that

company is not a startup anymore, the founder talks about his experiences during the

company’s startup phase. Besides that, the five knowledge institutes that have participated in this research all have been selected on their expertise and involvement with international

expansion processes. Both knowledge institutes that represent national and regional clusters to

learn about their experiences and best practices. Amongst these knowledge institutes are both

governmental and privatized organizations, all with a common goal: to help and assist startups

in their international expansion process. Besides that, one of the leading examples in this

research will be the Silicon Valley cluster because of the existing literature available and its

relevance in the world, these findings are matched, linked and contrasted with existing

literature.

The objective of this research is of an exploratory nature and multiple case studies are used

(Saunders et al., 2012). Using several cases improves the reliability and generalizability of

this research because it contributes to the ability of replicating findings across the vast array

of cases (Baxter & Jack, 2008), (Denzin & Lincoln, 1994). This research will be conducted as

a cross-sectional issue of time. Theory and primary research findings are linked to snapshots

and a particular topic at a particular moment in time to find out the best practices in the

coming years (Saunders et al., 2012). Access to these cases has been ensured by consulting

the researcher’s personal network and approaching governmental and knowledge for either

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Dutch startups that have expanded or moved their business into a cluster in a foreign country

and the five representatives of knowledges institutes please see Appendix 4.

3.5 Data processing

The interviews are the primary source of data collection. Based upon the literature review and

the proposed research question, a semi-structured interview-guide was created. Startups and

knowledge institutes have been invited by e-mail to participate in semi-structured in-depth

interviews. These purposeful discussions between two or more people will focus on the

perception of their internationalization process before, during and after actual expansion

(Kahn & Cannell, 1957).

Representatives of the startups are asked about their internationalization experiences (Leech,

2002). The semi-structured design of the interviews allows for enough room for opinions and

interesting side-stories whilst the structure in the interview approach still makes it possible to

compare given answers and increase validity (Leech, 2002). The interview questions are

derived from a combination of literature used in this research. The interview guide is based

upon the three propositions (and one additional sub question) of the research proposal. For

each section, specific questions are asked. This structure enables for an approach in which the

accumulated data can be divided into experiences and lessons learned before, during and after

the actual expansion took place. A last question will give room for any additional comments

by the interviewee. The interviews have been recorded and transcribed accordingly by using

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3.6 Analysis Structure

Multiple case studies have been used to gather relevant qualitative data in order to provide an

answer to the research question (Saunders et al., 2012). In this research, the respondents are

indicated from R1 to R10. An overview of the interviews and respondents can be found in

Table 1.

Table 1. Overview of Case Studies and Interviews

R Start/Scale-up or Knowledge Institute Function interviewees

Interview date

1 ACT Commodities Founder and CEO 22-11-2017

2 TheHagueBusinessAgency Intl. Business Advisor

7-12-2017

3 TheHagueTech Founder 7-12-2017

4 Ministry of Economic Affairs Startup officer 8-12-2017

5 Parkbee Founder and CEO 13-12-2017

6 Sinner Founder 21-12-2017 7 SnappCar VP International Growth 23-12-2017 8 StartupDelta Operations Manager 4-1-2018

9 Dutch Consulate General San Francisco Senior Economic Officer

5-1-2018

10 Netherlands Enterprise Agency (RvO) Business Advisor 17-1-2018

As mentioned before, this research is divided into three parts: the perception before

expansion, the actual experiences during expansion and the lessons learned after expansion.

Both interview guides for the organizations as well as the knowledge institutions and the

analysis of the data is designed based on that structure. An overview of the interview guides

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on the conceptual model that can be seen in Figure 1, a list of nodes was created to categorize

the qualitative findings in the same way as the structure of this research. Some nodes were

added later in the process of transcribing. For an overview of the nodes used in this research,

see Appendix 7. To provide an overview of the findings, a cross case analysis was created

(Yin, 2009). This analysis allows for a structural approach that makes identifying

relationships and systematic patterns possible (Miles & Huberman, 1994).

3.7 Conceptual Model

The following conceptual model is created based upon the literature and methodology used in

this research and represents the concepts and structure of this study, see Figure 1.

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4. Results

In this section the results of this research are presented. The semi-structured interviews

allowed for purposeful discussions between two people and showed interesting results (Kahn

& Cannell, 1957). The results are presented in the same way as this research has been set-up.

First we look at the perception before expanding, than the experiences during expansion and

after that the lessons learned after expanding. The last section of the results offers rooms for

additional comments, discrepancies or other important factors worth to mention. For the sake

of continuity in the results section, per research question the startups will be discussed first

and the knowledge institutes second. Appendix 8 shows the most talked about topics during

the interviews and already indicates the importance of some of the key factors such as culture,

risks, timing and locality.

4.1 Proposition 1: Perception before expansion

Firstly, the participants were asked several general questions to sketch the situation as

accurately as possible. Secondly, following the structure of this research, the first part of the

interview was designed to see what kind of differences startups expect between the home and

host country before their expansion took place.

P1. “Startups expect differences between home and host country before their international expansion. This perception matches the CAGE framework by Ghemawat (2001)”

The awareness of these differences was divided into the four major subjects identified in

Ghemawat’s (2001) distance framework. Analysis of the data show that all respondents

express awareness of differences between their home and host country but some more than

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explains that although being aware, as an entrepreneur it is not something to worry too much

about as the problems that arise from this can be solved along the way (R6). One of the

interviewees mentioned that the awareness is related to the nature of the organization; the

higher the overall level of education within the organizations is, the more aware they are than

lower educated startups (R3). Although these findings indicate that start/scale-ups are aware

of differences in general, the data shows that they are often overall only moderately aware as

they tend to focus more on certain distances than others. An interesting observation is that

startups tend to be more aware during and after the expansion process than they were before

expansion. The knowledge institutions all agree that the startups expect differences in their

international expansion process. The knowledge institutes seem to agree on the awareness of

differences amongst startups. Questioned about the awareness of differences amongst startups

the following statement by a representative of one of the knowledge institutes represents the

overall feeling of the knowledge institutes well: “I always thought we are the same as

Americans because we look alike but, when we went to a trade mission you see that there is a

huge difference. In my experience, it depends on the people and how they do their research. In

reality you only start to notice those differences once you are actually here” (R9). This is in

line with the fact that startups are indeed aware of the differences, but less aware before their

expansion then they are after expanding. On top of that, one of the respondents states that

their awareness is the reason why these companies get in touch with those knowledge

institutions in the first place, as they are aware that there are differences but they are not

always sure how to deal with them (R2). Many of the startups said that with the decision of

choosing the first country to expand to the geographical and cultural proximity played an

important role. That matches with the Uppsala model that shows that firms tend to move to

more geographically and culturally proximate countries first and after that gradually move to

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startups are aware of the differences and try to minimize liability of foreignness by means of

choosing a country they believe is similar to the home country. In the end, as one of the

respondents accurately points out: “As a Dutch company, even going into Belgium is not the

same as doing business in Holland” (R10). This goes to show that even when choosing a country that is culturally or geographically proximate, there are always differences in doing

business between the home and host country.

From the four major distances in the CAGE framework, start/scale-ups seem to focus more on

the cultural aspect than any other distances in their preparation for expansion (see Appendix

3). The knowledge institutions questioned in this research seem to agree on this and focus

more on cultural aspects such as business culture and norms and values than administrative,

geographical or economic factors, see Table 2. After the cultural factor, economic and market

factors are the most important factors in no particular order. For further analysis, it must be

kept in mind that it seems that economic and market factors are very dependent on the

industry the organization is operating in and the product(s)/service(s) it offers. Surprisingly,

being questioned about their expectations of differences between home and host country, they

almost never talk about geographical distances. All in all, the results of this research show that

startups do expect differences between home and host country but that, amongst the

respondents, the importance and awareness of the differences is not equally distributed over

the four attributes in the CAGE framework. Although it seems that they are very much aware

of the cultural aspect, the results indicate in some cases a lower level of awareness in the other

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4.2 Proposition 2: Awareness of risks and benefits

After their expectation of differences between their home and host countries has been made

clear, it is time to look at the reasons and drivers of why these organizations want to expand.

Their awareness of risks and benefits when engaging in international expansion into economic

clusters shows the level of preparation the startups have put in it. There are countless ways of

approach an expansion process, some do more research on it than others. This topic is divided

between the awareness of potential benefits and potential risks in their respective expansion

processes. Both cases are related to the findings in Table 2.

P2. “Startups are sufficiently aware of what the potential benefits and risks are when engaging in international expansion into clusters”

Benefits

Asked about their reasons for expansion, all startups provided reasons of expanding that were

directly linked to certain opportunities they could benefit from. They all were able to indicate

beneficial factors of why they had to participate in the expansion processes they eventually

undertook. Besides that, the knowledge institutions all believed that the start/scale-ups they

are in contact with are very much aware of those benefits as well. Some of the startups have

point out very specific opportunities as why their undertaken expansion process is beneficial,

for example a by research identified similar but untouched market they could potentially

benefit from (R7). Others have less specific reasons and base their reasons on more general

arguments like size of the market, or geographical proximity to the home country (R6, 10).

These findings are supported by several knowledge institutes (R2, 4, 8, 9). Overall it can be

said that the benefits are the reason why start/scale-ups want to expand to a certain region in

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a marketing tool to attract foreign start/scale ups to the regions they represent. Overall it is

observed that when startups see a beneficial opportunity their entrepreneurial instinct kicks in

and that they just want to go for it, whether it is a very specific opportunity or just a vague

expectation of circumstances to benefit from. One of the respondents showed that very well

by saying: “We took advantage of the momentum we had, rather than overanalysing it” (R7).

An opportunity was identified and action needed to be undertaken.

Risk

The awareness of risks seems to vary drastically, especially opposed to the awareness of the

benefits. On the one hand it seems that all parties have tried to prepare them for risks in the

expansion process. This indicates that in general startups are aware of the risks involved in

expanding. On the other hand it looks like the startups are often prepared only to a certain

limit and leave the other part in the hands of destiny. Although this differs amongst the

startups, overall they tend to undertake an approach with more risks as the approach the

knowledge institutions would like to see. One of them actually stated that he was not

particularly worried about the risks that existed from differences between home and host

country, as he explained that in doing direct business with a party in the host country you are

not the only one that has to deal with this issue; the other party is also struggling with this

problem (R6). In other words, this respondent stated that when both parties are aware of

differences, than there would not really be a problem (R6). This is amplified by the comment

of another respondent that stated: “when we are talking startups, we are automatically talking

the international system” (R4). This matches with the definition of startups used in this research that startups are designed to search for a repeatable and scalable business model

(Blank, 2013). In other words, in limited markets startups soon found themselves needing to

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expect differences amongst each other resulting in a decrease in liability of foreignness. An

interesting way to look at it. On the other hand some of the interviewees questioned were

highly prepared with thorough future forecasts and market and industry analyses (R5, 7).

Especially the knowledge institutes all offer specific help in reducing distances and risks for

startups and companies that are expanding internationally. Questioned about how they can

help startups reducing risks, one of the knowledge institute representatives says: “We try to

help them lower the risks; we always advise them to start small and hire someone local

because they know the market, the culture and the language” (R2).

Although some are very risk aware, many organizations tend to move bluntly into a market

based on an emotion or on a feeling (R1, 2, 6). That latter group seems to be able to benefit

most from a better approach to risk preparation and therefore become better aware of not only

the benefits, but also the risks involved in international expansion. Although it can be argued

what is right or wrong, all startups have mentioned the importance of the entrepreneurial

factor in this process. What is doing business without taking risks sometime? To what extent

those risks should be taken into mind seems debatable. Figure 2 shows the level of risk both

the startups and the knowledge institutes have undertaken in expansion processes. It is

observed that the startups overall are less prepared for risks than the knowledge institutes

would like to see and or expect.

Figure 2. Level of Preparation for Risks

1

2 3 4

6

5

Low RISK APPROACH High

Level of Preparation 7

6

8 9

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4.3 Proposition 3: Experiences during expansion

Central in this part of the results is the question whether their eventual experiences match with

the expectations they had before expansion took place. After knowing whether those startups

are aware of their potential benefits and risks or not, it is time to see whether the potential

benefits and risks of host and home country differences have actually influenced the success

of the start/scale-ups international expansion process.

P3. “Host country and regional differences have a negative influence on the success of the startups international expansion process”

An interesting finding is that some representatives of knowledge institutions state that those

differences have influenced the startups international expansion process, but as you might not

expect from existing literature, not necessarily in a negative way (R2, 3, 4). They state that the

influence can in fact also be positive when the awareness of the differences lead to the

organizations taking action towards dealing with those differences. An example given by one

of the respondents was when a firm expanding to Germany hires a German employee to take

the lead on expanding to Germany (R7). In this case, the awareness of the differences has led

to a decision that had a positive influence to the success to the startups international expansion

process (R7). Related to the last question of this research, the respondents are also asked

about their own perception of how their internationalization process went, after the expansion

took place. A summary of this all can be found in Table 2.

But it is not all positive. Some of the startups pointed out examples of when certain

differences influenced the success of the startups in a negative way. One of the interviewees

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the agricultural and food sector. However, one of the interviewees had already witnessed

several times American companies wanting to do business in The Netherlands (or even in

Europe in general) were discouraged to do business here because the rules and regulations

were way more strict compared to their home country (R4). Administrative differences had a

negative impact on the success of the international expansion. Another example is the

influence of choosing the right geography. One of the interviews mentioned their initial

mismatch of their product and choosing geography, this costed them a lot of resourced before

pivoting to the right geography within the same country (R1). Besides that, culture remains

the most talked about difference yet again. An example was given in which a Western

company was not aware of the power distance in Asia. By cancelling a meeting with the CEO,

he had mistreated local norms and values. The company was never able to build a relationship

with them anymore and he missed out on a possible partnership (R4). This was not the only

example of which differences in culture had a direct impact of the success of the international

expansion process. Several interviewees provide concrete examples (R1, 3, 4, 5, 7)

Interesting side note to this negative impact is that all respondents that provided one of these

examples also gave a positive twist to it. They each explained why either, although this had a

negative impact, they learned from it and/or observed the other party to learn from it which

resulted in applying that knowledge they gained from those experiences in future operations.

This cycle is also illustrated in the conceptual model above. The lessons learned from

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Table 2. Overview cross-case analysis C A S E Type of org. S: Startup KI: Knowledge institute Awareness differences (CAGE) Awareness benefits / risks BEFORE expansion Awareness benefits / risks AFTER expansion

Differences influenced success

1 S.

(Financial sector)

Yes, mostly; - Business cultural - Administrative

High / Moderate High / Advanced Yes

- First negative

- Later turned into advantage

2 KI Yes, mostly; - Cultural - Administrative - Economic - Geographical

High / High High / High n.a.

3 S / KI Yes, mostly; - Cultural - Economic

High / Moderate High / High n.a.

4 KI Yes, mostly; - Cultural - Economic - Administrative

High / High High / High Yes.

- Several cases

- Mostly clashes with culture

5 S (Service industry) Yes, mostly; - Cultural - Administrative - Economic

High / Advanced Advanced / Advanced Not much because well prepared.

6 MNE (Fashion industry) Yes, mostly; - Cultural - Administrative

High / Low High / Moderate Yes,

- but there was always a way to manage these influences

- Clashes in administrative differences asked for creativity in funding

- Major risks and financial commitment was taken to deal with administrative differences 7 S (Service industry) Yes, mostly; - Cultural - Administrative

High / High High / Advanced Yes,

- Culture had a big impact on their model

- Business model needed to be localized

- This costed the organization significant resources 8 Knowledge Institute Yes, mostly; - Cultural Moderate / Moderate Moderate / Moderate n.a. 9 Knowledge Institute Yes, mostly: - Cultural - Administrative - Geographical

High / High High / High n.a.

10 Knowledge Institute

Yes, mostly: - Administrative

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4.4 Key Success Factors

After looking at their initial perception and eventual experiences during expansion, it is

beneficial to this research to look back at their journeys and see what the respondents

identified as their major learnings and ask how they would approach internationalization now

with their learnings in mind. This part of the research provides room to derive best practices

and major lessons learned from the accumulated data. Besides that, any additional comments

worth mentioning are incorporated in this part of the research too. The respondents were all

asked the following question:

“How did startups perceive their international expansion into clusters afterwards?”

Although reactions to this question vary widely, it was clear that all startup representatives

learned valuable lessons from their internationalization endeavours. Recurring factors were

the importance of conducting market research before expanding, the value in having the right

team and the importance of network(ing).

An interesting observation is that with this question, the startup representatives tend to focus

more on problems they encountered during the process of expansion, whilst the

representatives of the knowledge institutes mainly demonstrated the importance of the

preparation phase. Many of the key lessons learned the startups are mentioning are focused on

dealing with problems that are encountered along the way as effectively as possible. This

statement by one of the startup representatives shows that very well: “Try to utilize things

already done by other startups and companies. Do not reinvent things when it is not

necessary” (R5). This goes especially for economic clusters, as the proximity of talent, knowledge and infrastructure is a huge advantage. The availability of talent seems to be an

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important decision maker in what country to expand to. One of the respondents stated: “if you

are in the tech business, you want to move to San Francisco because you know that if you are

there all the tech companies will be around you and you can easily switch jobs” (R1).

Another startup described how his company moved to Berlin because he knew about the

highly skilled labour force in the region from the time he studied in that city (R7). This shows

that the startups are aware that people actually move to certain clusters to be able to work in

the field that a cluster represents, in this case the tech industry in Silicon Valley. Questioned

about their keys to success in international expansion, the knowledge institute representatives

tend to focus more on factors like conducting thorough market research on the cluster of

choice before internationalizing than solving problems during their expansion. This approach

is more aimed at preventing problems, rather than solving them along the way. Some other

valuable lessons can be taken away from this as well. Many of the knowledge institutes argue

the importance of hiring local people and being introduced to the right network (R2, 3, 4, 9,

10). Although the startups focus less on local people than the knowledge institutes do, they do

highlight the importance of choosing the right team (R1, 5, 7).A summary of the key lessons

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Table 3. Key lessons learned Respondent R1 startup R2 knowledge institute R3 startup/KI R4 knowledge institute R5 startup Key Lessons Learned - Setting up a team on the ground

- Choose the right cluster

- Market research - Creater proper business plan - Start small - Choose the right partners - Start in business center - Importance of community - Importance of network - Focus on cross-cluster synergies - Market research - Collect the right data - Prepare for Administrative factors - Know boundaries - Start small - Build network - Focus on useful events - Market research - Utilize existing things - Aim on long term - Have your finances in order - Adapting to local culture Respondent R6 startup R7 startup R8 knowledge institute R9 knowledge institute R10 knowledge institute Key Lessons Learned - Creativity (problems are there to be solved) - Look from a customer perspective - Trial-and-error approach - Entrepreneurial Spirit - Market research - Balance between localization and centralization - Being consistent in executing strategy

- Learn from your mistakes

- Make sure your company matches with the cluster of choice - Connect to local hubs - Focus on obtaining knowledge and a local network - Come to the cluster first and gain knowledge

- Focus on network and speaking to the right people - Talk to knowledge institutions

- Focus on creating the right team with all skills needed to succeed - Focus on network - Know what your strengths and weaknesses are

Startup expansion into foreign clusters : managing differences