Think at London Business School: fresh ideas and opinions from LBS faculty and other experts direct to your inbox
Think at London Business School: fresh ideas and opinions from LBS faculty and other experts direct to your inbox
Alina Kudina, Assistant Professor of International Business at the University of Warwick, George Yip, Professor of Management and Co- Director, Centre on China Innovation at China Europe International Business School, and Harry Barkema, Professor of Strategy and International Business at Tilburg University, studied a dozen such firms all located in Silicon Fen. Such companies, the authors believe, have lessons to teach in an increasingly international marketplace.
Most multinational companies – such as BT, Microsoft, Matsushita and Siemens – grew big in their home markets before they went overseas. More recently, a number of newer companies (mostly small and medium-sized enterprises) have gone international within a few years of inception, even while quite small and unknown at home. Furthermore, these so-called “born globals” rapidly reach very high percentages of international revenues, sometimes 100 per cent of their total revenues. In contrast, in most countries, most companies manage only token levels of internationalisation. For example, of the 300 or so largest publicly listed UK companies, fewer than 30 per cent generate half of their total revenues from international sales.
Born-global companies merit much more attention than they are receiving, as their growth strategies could provide lessons for many other organisations. We have been studying such firms to unlock their secrets to success. Specifically, we have been trying to pin down when a firm should seek early and rapid internationalisation – and how to do it successfully.
First, let’s define the genus of business that we have been studying. Classically, born globals, or international new ventures (INVs) are defined by one source as “business organisations that, from inception, seek to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries”. A more quantitative definition, from another source, describes born globals as “companies who have reached a share of foreign sales of at least 25 per cent within a time frame of two to three years after their establishment”. Definitions aside, what’s most intriguing is how they became global enterprises so quickly.
The traditional approach to internationalisation has been described as a “stage” model, in which a company first grows solidly in its home market, and then starts exploring opportunities for expansion into adjacent countries in the region. As the company’s experience and familiarity with foreign markets grows, it subsequently ventures farther overseas. A number of large multinationals have followed this path, starting with old European companies like BP, Philips and Santander, and continuing with much younger technology companies like Nokia and Ericsson.
However, as noted, a growing number of companies are venturing international having just been founded; their path to internationalisation is much more rapid than the traditional one. Prior research has found three key reasons for the emergence of born globals: new market conditions, advances in technology and managerial change.
Nevertheless, a question that remains largely unanswered is why some new ventures opt to go international from their inception, whereas some choose the traditional path of developing their domestic markets first. Prior experience of the founders, their international experience and recognition of international business opportunities, followed by the level of global integration of the industry in which a company operates – these are some of the reasons that have been put forward most often as possible explanations. Perhaps a more critical way of looking at this question is from the viewpoint of a company’s top management. When should they seek to go international early? After all, foreign business is generally much tougher than domestic business. Why not stay at home as long as possible?
We knew that high-technology companies were particularly prone to the born-global effect, and we wanted to investigate why some of these companies were more successful in their internationalisation efforts than others. In order to control for as many confounding factors as possible, we studied only companies in the same geographic area, an area of Britain known as the Greater Cambridge Area Cluster or, more colloquially, “Silicon Fen”. This meant that all the companies were subject to the same geographic influences, particularly through the role of the University of Cambridge in generating technology innovation and related business start-ups.
Cambridge has been acknowledged as one of the world’s leading high-technology business clusters by various publications including Time, Fortune and Wired. For example, Time assessed the top 50 high-technology companies in Europe, and nine were based in Cambridge. Also, this area is one of a handful of regions to be consistently ranked by the European Commission as “excellent for its support of innovative start-ups”. Currently, Cambridge Technopole (another name for the region) is home to over 1,500 high-technology ventures employing around 45,000 people.
In the summer of 2006, we began an intensive study of one dozen high-technology companies located in the Greater Cambridge Area Cluster. The sector includes computer services, internet, software, computer hardware, electronic office equipment, semiconductors and telecommunications equipment.
The companies we studied, in addition to being in the same sector, also shared a number of similar characteristics. They were all less than 20 years old, all had started international operations early (at an average age of 2.5 years), had a very high percentage of international revenues (69 per cent on average) with rapid growth (more than 60 per cent a year on average over the previous five years). However, the companies ranged widely in size, from £2–270 million in revenues.
The most striking thing we learned about these companies was that their imperative for venturing overseas arose from the inadequacy or even non-existence of the domestic UK market for their products or services. On the other hand, the home environment was conducive to the companies developing a competitive advantage (primarily based in technology) strong enough to compete internationally. Another important driver for internationalisation was the need to serve global or multinational customers, which are prevalent in high-technology industries.
It may seem strange that even the fourth-largest economy in the world, the United Kingdom, is too small to provide an adequate market for these companies. But we need to recognize that size depends on the industry sector. Medium-sized economies, such as the UK, actually have some sectors that are very large even by global standards and can support large companies from domestic-only demand. But, in high technology, British companies underperform relative to the economy as a whole, implying relatively smaller domestic demand.
As modern software and hardware IP companies typically use a licensing and/or royalty model, they need huge volumes of chips using their design to be sold to generate significant revenues. Hence, these companies need to operate in a market that is far bigger than that in the UK. Furthermore, these companies also recognise the importance of setting the global standard within their niche, which prompts them to expand into international markets fast.
A recent study found that public UK companies in high-technology industries had generally much lower levels of global market share than those in other industries. Only one industry, aerospace (represented primarily by BAE Systems), had a global market share above the UK average of 8.8 per cent (the latter being the revenues of all UK public companies as a percentage of the revenues of all public companies in the world). On the other hand, these industries also showed higher levels of internationalisation for UK companies relative to other industries.
We found that home market demand is a very important determinant of international strategy for this sample of high-technology UK companies. The absence of the strong home market pushed high-technology UK companies to go international straight away. These companies would have not been able to survive, had they not gone overseas. Internationalisation was not a matter of choice for them: it was a must.
On the other hand, we found home supply conditions contributing to international success in a positive way. It strengthens their competitiveness from the supply side. The presence of many of the world’s top scientists and engineers in the Cambridge area, who are also less costly than their peers in Silicon Valley, coupled with government policies aimed at the development of the UK-based high-tech cluster, created a favourable environment for the development of a competitive edge by high-technology UK firms. Apart from home conditions, we found that a number of other factors also drove these firms’ early internationalisation moves. In particular, we found the following factors contributing to the decision to internationalise early:
We also found an additional driver that had not been previously mentioned in the literature on INVs. Providing quality customer service to highly demanding clients located overseas also necessitated opening overseas offices for a few of the companies. This is different from a motive to follow customers. These companies have been selling internationally since the moment of their inception and gained new clients in the international markets. However, they felt they needed to have a physical presence in the country to remain competitive. In addition, opening of the overseas offices allowed the companies to tap into technological innovation and networks abroad that, when combined with improved customer service, was perceived to be an important success factor. Interestingly, opening of the office did not normally have a drastic effect on their performance (for example, sales in the country would increase only marginally as a result); nevertheless, the companies considered this step as an essential factor of their continuing success in overseas markets.
Having analysed what drove the companies to venture overseas, we turned our attention to the factors that facilitated the companies’ international operations. Factors such as knowledge intensity of the business, ease of imitation and global mindset of managers have been previously suggested to be conducive to early internationalisation. Apart from these factors, we also enquired whether there were other causes that companies felt to be important enablers of their internationalisation.
A distinctive feature of the interviewed companies is that they conduct the majority of research and development (R&D) domestically in the UK, although in a very few cases, the companies were conducting a substantial amount of R&D abroad. Largely, the companies develop technology in the UK, manufacture products in Asia, and sell them in the US or Asia (typically to the subsidiaries of multinational companies). However, an ability to learn from the local environment and tap into the local knowledge base have become two of the important factors that affect differences in the performance of these companies. The best companies developed products domestically in the UK, yet stayed alert to the latest market developments by actively learning from their international exposure.
Another important enabler is that these companies’ technologies are typically very difficult to imitate. This protection from imitation provided the UK firms with a competitive edge in the global market. A competitor would need to spend about two years on average to develop a similar product. These substantial development costs impeded the development of competitors whether from within the markets served or from elsewhere. Furthermore, due to high scalability of the products, a handful of producers could serve all customers, again reducing scope for additional suppliers.
These companies typically compete on differentiation. Cost is also important, but not paramount. As some of the interviewees told us, “We never lost a contract on the basis of cost.” Competition in these sectors is mostly based on differentiation and the company’s ability to be flexible and adapt its product to the needs of the market (or better foresee the market’s needs). A consequence of the role of differentiation is that most of the companies need to have sizeable funds to invest in the development of technology, this providing a further barrier to new competition.
Having analysed the similarities of the companies, we also investigated whether there were differences in internationalisation strategy, particularly those that might relate to differences in performance. We found two notable differences in strategy:
In the case of technology acquisition, one group of companies made minimal (or no) technology acquisition from overseas, while another group had notable technology acquisition from overseas. In the case of R&D, we also detected two differentiable groups: some of the companies carried out less or the same level of R&D as the average in their industry while others conducted more R&D than their industry average.
Were these strategy differences associated with any differences in performance? Appreciating that companies have different performance targets, we assessed performance with respect to the target that was stated to be of primary importance by the company, in most cases revenue growth. Hence, we designated those companies that grew faster than the sample average as highly successful, those that were growing slower than the sample average as less successful.
Combining these strategy and performance measures, companies that acquired some technology from overseas operations performed better than the companies that relied solely on domestic R&D. Hence, those companies that learn from foreign markets about new technological trends and competencies enhance their performance by benefiting from their international exposure. This result confirms earlier research findings on the importance of technological learning for the performance of the international new ventures. However, we did not find any clear association between the percentage of R&D (relative to the industry average) and performance.
Consequently, in our study, performance correlates with technology acquisition but not with R&D levels. Apparently, what matters is not how much a company spends on R&D or new technologies but how it spends it: externally (technology acquisition) or internally (in-house R&D). We also explored whether there were other factors that companies considered to be important to their international success. Some key themes emerged, such as the importance of trust, personal relationships and social capital. Having a network of people they knew and trusted helped companies’ international operations succeed. Also, knowing well and trusting the people who run the international offices was crucial for maintaining a competitive position in the market at later stages.
A quick note about trust: this turned out to be important because it improved the value of created social capital and helped build long-term relationships with customers and suppliers. Furthermore, when relationships are based on trust, they often evolve into other areas of business, thereby opening up new opportunities for the company. Trust turns out to be a form of “glue” for doing business internationally.
Another essential factor for many successful companies is a lack of fear of internationalisation. Having a mindset that “it is not hard” is very important for early internationalising companies, as it speeds up their entry into new, foreign markets. Because of first-mover advantages in these industries, these early entries typically strengthen their later positions in foreign markets. It is interesting that a fearless mindset, which was previously reported to be an important success factor for companies from emerging markets, is also an essential factor for the companies coming from developed countries, such as the UK. Hence, we suggest that this factor may have a wider relevance for international success.
Other suggested enablers for successful early internationalisation were hiring local managers and having a long-term view of the market. These factors are not entirely new or particular to international new ventures, and they are similar to those mentioned in the mainstream international strategy literature. However, we find that, in order to be successful in internationalisation, it is important not only to hire locals but also give them sufficient amount of discretion and trust to enable them to build operations in a foreign market. Discretion and trust give local managers the means to be responsive, entrepreneurial and quick in their operations in their country markets, which is one of the key success factors in such a rapidly developing sector as high technology.
And finally, flexibility of the management team, product and workforce was also mentioned as an important determinant of successful internationalisation. Given the high dynamism of the contemporary business world, it is essential for businesses to be flexible to respond to opportunities when they arise, and that, in turn, implies flexibility of the product and employees.
We can also attribute the success of many of these companies to their effective use of networks. First, there is the local network or ecosystem at Cambridge, made up of the university and other companies in the same industry. This network results in a flow of technological knowledge, experienced people, contacts with local venture capitalists and so on. These local networks and the knowledge they imply are also a basis of global competitive advantage.
Second, there are the networks formed between the Cambridge operations of the companies and their foreign sales subsidiaries. Those we interviewed mentioned trust and related factors. Trust-based networks with foreign operations can obviously be built, just as can networks at home with the university, other companies, venture capitalists and so on. For example, ARM (www.arm.com), as their website claims, “provides... everything you need to create an innovative product design based on industry-standard components that are ‘next generation’ compatible”. As one way to build trust, ARM holds an annual or semi-annual reunion day for a large proportion of its employees internationally.
Of course, this is not unique to born globals, but it is a good way to build contacts and trust internally. Internal networks are also important for other reasons: for internal product development (to source and combine knowledge from experts spread internationally within the firm), for sales representatives to facilitate direct contact between engineers and clients to satisfy clients’ specific needs, to win business and so on.
Third, there are networks between foreign sales subsidiaries and local clients that are important for high-quality service. They are also key for close contact with the customer (especially for software products that involve proprietary knowledge) in order to understand the client’s needs for product development and to determine how to make the client more successful and more innovative for its own clients. In addition, these contacts may help companies to obtain technological knowledge from the client or through the client’s business partners that they would otherwise have to develop themselves. Considering that many of these UK firms are, or were, small and did not have extensive networks from the start, the contacts in their emerging networks were important for rapid internationalisation to secure business and to source knowledge. This mechanism is probably also behind one of the very interesting findings of the study, that the successful firms in our sample are successful in acquiring new technologies from overseas operations.
Fourth, a company is successful because it has created an ecosystem (that is, a whole network) of companies beyond its clients. It comprises not only almost all companies in the industry in which it has clients, but also companies in many industries that are related to its own industry. At ARM, these companies meet annually on a day that it organises. This helps to secure its clients as part of its ecosystem, is a huge source of innovation, is a great platform for announcing its own technological or product agenda, and synchronises the clients’ needs with it in real time. It also helps ARM to reach huge economies of scale, because it knows the needs of all its clients for the next three to five years, so it can develop a “grey version” or common denominator that can be customised at relatively low cost for each client. Literally hundreds of the 1,500 or so employees at ARM are involved in building and maintaining the different types of networks we have discussed, a huge investment and cost factor. However, their skills in building and maintaining networks, trust, and social capital have made the company highly successful year after year.
Therefore, networks are at the very heart of successful companies. The presence of networks allows the company to learn about long-term agendas of its local and overseas customers, which in turn feeds product development and secures (to some extent) success/demand of its new products. Consequently, network development is crucial not only for international success, but also for the overall success and growth of the company.
As Sir Christopher Gent, the chief executive who orchestrated Vodafone’s remarkable international success (and who has since become chairman of GSK) put it, “The firms that succeed are those that have an international outlook to start with... and the UK has a very open economy, particularly in technology- and science-based industries.” Not surprisingly, our analysis of the UK high-tech born global companies confirms Gent’s belief. Furthermore, we also find that the patterns of internationalisation of these companies are similar to those in the literature on INVs.
One of the key findings of our study is that all the companies we explored were “forced” to go international, since the UK market for their products was very small or non-existent. Their early internationalisation was not a matter of choice, but the only means of survival. Hence, we conclude that the reasons for the emergence of INVs are different for companies coming from large markets (such as the United States or Japan), medium-sized markets (such as the United Kingdom) and small markets (such as New Zealand). As a result, if a company operates in a sector with a very limited home-market potential (or if it thinks of starting business in a market in which there is little home demand), then going international fast seems to be a sound strategy.
We also identified factors that facilitate successful international expansion of firms in this study: the importance of trust, personal relationships, and social capital for successful rapid internationalisation of smaller companies. Furthermore, lack of fear of internationalisation prompted many companies to aim for international markets very early.
Perhaps most important, our study indicated a potential relationship between acquisition of technology overseas and improved performance. Treating international operations as both the means of survival and an opportunity to learn and develop has clear benefits in terms of performance. Furthermore, acquiring technology abroad seems to be more beneficial than investing into internal R&D. This suggests that companies may find that devoting some resources to learning about the latest technological developments and trends in the international markets in which they operate is beneficial to their future competitive position and performance.
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