Born Global and Gradual Internationalization Essay Example for Free

Born Global and Gradual Internationalization Essay In traditional models, firm internationalization is seen as a gradual process of capability build-up by which firms slowly accumulate the resources necessary to face foreign market uncertainty (Eriksson, Johanson, Majkgard, Sharma, 1997). These models assume that firms grow in their domestic markets before they start to export extensively. This is supposedly so because there is a learning process involved in facing unknown markets, and such a process requires knowledge and resources to face and overcome uncertain outcomes and costly investments. Knowledge and resources are progressively acquired through experience, first in known domestic markets and then in larger foreign markets (for a review see Leonidou Katsikeas, 1996). Much literature has documented this liability of foreignness, or the cost faced by firms that operate abroad, and the need for companies to create capabilities in foreign markets (Mezias, 2002; Zaheer, 1995; Zaheer Mosakowski, 1997). Conventional models of internationalization have drawn criticism (Andersen, 1993; McDougall, Shane, Oviatt, 1994; Turnbull, 1987). There is empirical evidence that shows the existence of small, young firms, endowed with very limited resources, which begin to export immediately after their foundation. For instance, Moen and Servais (2002) reported, for a sample of Norwegian, French, and Danish firms, the existence of many companies exporting a large share of their total sales shortly after their establishment. Such empirical evidence suggests that the Uppsala model is not the only possible way to describe the firm internationalization processes. Turnbull (1987) criticizes the determinism inherent in stage-based models, and argues against the notion that all firms, regardless of industry type, country context, or other variables, must inevitably follow a fixed route to become international. Other authors (Chadee Mattsson, 1998; Erramilli Rao, 1993; OFarrell, Wood, Zheng, 1998) contend that the internationalization process is not equally complex and costly in all industries. In industries where trade barriers, fixed investment, and transportation costs are low, such as services, internationalization may be less costly in terms of monetary and organizational resources. The born global argument essentially states that firm internationalization does not have to go through the progressive accumulation of resources and capabilities. It posits that firms can start exporting from the moment they are created, and it asserts that firms are capable of penetrating markets that are far away, both geographically or â€Å"psychically† (on account of their different cultural and language traits), despite having limited resources and little accumulated organizational learning. The definition of a born-global firm was coined by McKinsey Co.in a report that analyzed a sample of Australian exporting firms (McKinsey Co. , 1993). It was used to describe firms that, apparently, had undergone faster processes of internationalization than would have been expected for firms of similar size, age, and nature. It was thus proposed that these firms were born globals. Cavusgil (1994), and also Knight and Cavusgil (1996), elaborated McKinsey Co. s empirical observation to argue against traditional models of internationalization. Cavusgil (1994: 18) went as far as to state that â€Å"gradual internationalization is dead. † These claims sparked an academic debate revolving around different theories of internationalization. Since then several authors (Collis, 1991; Knight Cavusgil, 2004; Madsen Servais, 1997; McDougall et al. , 1994; Oviatt McDougall, 1994) have attempted to provide a theoretical foundation for these empirical observations. The theory has focused on establishing the antecedents of such firm behavior. One research stream argues that the born global phenomenon will be most prevalent in knowledge-intensive firms, such as those that make software or information technology products. Once created, many knowledge-intensive products, such as software, can be replicated at low marginal cost. Amongst the 25% Born Global firms in Australia who achieved 76% of their sales through exports, several are high-tech firms, but the typical firm uses well-known technology. Because of this, it is argued that small knowledge-intensive firms can bypass the home market and target foreign markets, or enter domestic and international markets simultaneously (Bell, 1995; Bell, McNaughton, Young Crick, 2003; Boter Holmquist, 1996). Autio, Sapienza, and Almeida (2000) found that firm knowledge-intensity was positively correlated to international sales growth, and several studies (Bell, 1995; Boter Holmquist, 1996; Coviello, 1994) have documented the tendency for firms in knowledge-intensive sectors to internationalize rapidly. According to cavusgil, born global companies which normally compete in niche markets are very flexible and move fast. They are successful due to: 1. Skill to satisfy customized or specialised product requests from customers. 2. Advances in communication technology and let their managers work across boundaries and their response time is shorter and are very flexible and adaptable. A proposition often made is that the home market has little importance for the born-global firm, to the point of conjecturing that a small local demand might drive the firms efforts to seek opportunities abroad. Bell et al. (2003: 341), for instance, argue: â€Å"This behavior is particularly prevalent among firms operating in small open economies and in emerging nations, where domestic demand may be limited. † For example, Denmark is a very small market and firms are left with no other option but go to different markets to increase their sales and hence as a result there are many Born Global firms in Denmark. Approximately 39% of the firms in Denmark are born global. Most of the firms are extremely active exporters with exports accounting for almost 70% of their sales. Previous international experience of founders and employees has also been proposed as playing a mediating role in early internationalization (Bengtsson, 2004). Such experience enhances the firms ability to learn and, consequently, to internationalize rapidly. Some authors argue that the new firms knowledge and accumulated experience amount, in the end, to the entrepreneurs own knowledge about other markets (Knight Cavusgil, 2004). Madsen and Servais (1997) posit that differences between traditional exporters and born-global firms can be attributed largely to differences in their founders backgrounds. The founders international experience may affect the extent to which psychic distance from strategic markets is perceived to be an obstacle to internationalization. It is plausible that entrepreneurs with international experience have a well-developed network of contacts that allows them to internationalize earlier (Contractor, Hsu, Kundu, 2005; Kundu Katz, 2003). In the past 2 years several scholarly studies have focused on the network dynamics of international new ventures (Coviello, 2006; Mathews Zander, 2007; Mudambi Zahra, 2007; Zhou, Wu, Luo, 2007). To summarize, it appears that many theoretical and empirical considerations support the existence of born-global firms. This notwithstanding, extant theoretical developments and empirical studies are far from proving that â€Å"gradual internationalization is dead† (Cavusgil, 1994). The born-global literature is still lacking a precise definition of what a born-global firm is, and some existing definitions are tautological. Moen (2002) asserts, for instance, that â€Å"although firms that follow this incremental development pattern may still exist, the normal pattern may be different in the new millennium. † His assertion is supported by the fact that between 30 and 40% of the exporting firms in his sample of Norwegian and French firms were exporting within 2 years of their creation. The fact that 60–70% of firms in the sample were not exporting within those 2 years seems to be absent from the discussion. It also appears that the born-global argument can be made empirically stronger by simply changing the time span to first export required for a firm to be considered born global and also what percentage of sales should exports account for. Inconsistency in definition criteria makes it difficult to compare the born-global phenomenon across different studies. Another important thing in deciding whether a firm is truly global is to consider the Psychic distance I. e. ; the difference in culture, language and trade agreements between the firms country and the country to which it exports. For example, in Costa Rica many firms established a very dynamic trade with nearby countries. These countries – regional neighbours such as Nicaragua, Panama, El Salvador, Guatemala, and Honduras – are close to Costa Rica in terms of cultural traits and business practices. Few firms, however, exported upon birth to the more challenging strategic markets, such as the US and Europe, which have very different business and cultural practices. The majority of firms that were classified as â€Å"born global† firms, turned out to actually be â€Å"born regional. † This means that although they started exporting very early in their lives, and continued exporting a fairly large share of their sales, much of these exports were aimed at regional neighbouring countries. There was only one firm, whose current exports account for 81% of total sales, that started exporting, right from its inception, to the most strategic market: the United States. This firm can be said to be a true â€Å"born global† firm, because it started out with more than half of its customers in a foreign country located far in terms of psychic distance. The existence of born-global firms contradicts much evidence that has shown the predominantly regional focus of the international activities of multinational enterprises (Rugman Brain, 2003). In the absence of country-specific advantages, one should expect a strong firm-resource endowment in order for firms to expand abroad successfully (Rugman Verbeke, 2005). Finally, the born-global conjecture lacks empirical support from firms that start operating in small developing countries. Developing countries could prove a suitable litmus test for the born-global hypothesis. This is so because the internal markets of developing countries are small. Hence, according to these theories, firms must look to larger, foreign, markets in order to grow, and therefore firms that operate in small developing countries should have strong incentives to internationalize early. Gradual internationalization is a concept that is still very relevant depending on the industry of the firm and size of the market. If a firm is in a Industry where it takes time to learn and an Industry that requires huge investment and is based in very big market it will adopt the Gradual internationalization model.