Growth through Internationalisation among Entrepreneurial Firms - Essay Example

Growth through Internationalisation among Entrepreneurial firms Table of Contents Introduction 2 Method 2 Analysis of Literature 2 Conclusion 8 Bibliography 12 Introduction Dunning (1977) popularized the concept of internationalization. He stated that entrepreneurial firms appear as multinational enterprises due to of the advantages of the eclectic paradigm. The eclectic paradigm suggests that a company adopts an overseas business operation because of three major competitive advantages which are advantage of ownership, advantage of the business location and advantage of internalization (Dunning, 1977). The concept of internationalization or global/overseas expansion has been adopted by several companies as a major tool for their growth. This paper highlights the growth opportunities of entrepreneurial firms through internationalization, i.e. by overseas expansion. The study is based on some journal articles which describes internationalization and its effects on entrepreneurial companies. Method The study of internationalization and its effects on growth of entrepreneurial firms have been studied using secondary data from relevant articles. These articles are chosen based on its topic and content, which is relevant in the study of internationalization and its effect on the growth of entrepreneurial companies. Each of the articles is thoroughly analyzed and the information recovered from them is used to discuss its implications on entrepreneurial activities. Analysis of Literature The journal article by Buckley and Hashai (2009) is chosen for its analysis. Their article “Formalizing internationalization in the eclectic paradigm” is based on an equilibrium model which describes internationalization in the light of competitive advantage. It explains why firms adopt overseas expansion strategies and how it acts on behalf of their growth. The aim and objective of this article is to establish a formalized theory on internationalization in the light of eclectic paradigm by reconfiguring certain neo-classical economic theories. A set of inequalities has been formulated to establish the role of eclectic paradigm in overseas expansion. The equilibrium is based on the concept of ownership advantage, location advantage and internalization advantage which has been incorporated into the general equilibrium model, mostly preferred by economists. Foreign Direct Investment (FDI) is explained as an operation model which maximized the utility of workers and entrepreneurs simultaneously. A firm adopts an overseas operation only when the total utility received from FDI activities in a host country is more than the total utility received from the exports, domestic consumption and inward FDI. The three elements of the eclectic paradigm are ownership, location and internalization advantages. These are continuous in nature and often tend to support each other. The decrease in one advantage can be compensated by the other two. These competitive advantages are leveraged by the entrepreneurial firms to enhance their growth overseas and gain an edge over its competitors. The journal article “Defining International Entrepreneurship and Modelling the Speed of Internationalization” by Oviatt and McDougall (2005) has been chosen because it explains how the fast rate of entrepreneurial growth in foreign countries is influenced by various factors. This article aims to find out about the future opportunities associated with internationalization which the entrepreneurial firm can take advantage of. It also discusses the contributing factors of technology, competitive advantage, entrepreneurial behavior and knowledge management in the fast growth rate of entrepreneurial firms in a foreign land. The authors described international entrepreneurship as an innovative, risk taking, and proactive behavior of the firms which extends across borders and is responsible for the growth and value creation for the firm. The entrepreneurs have been defined as individuals who not only act proactively and by taking risks, but also the one who seek out for new ventures and create new organizations. The internationalization of entrepreneurial firms is discovering new expansion opportunities overseas by enacting, evaluating and exploring the advantages in a foreign land to develop new products. The fast growth rate of entrepreneurial firms across borders is explained by factors like fast and efficient transportation, technological advantage in product development and cost reduction, a vast ground competition, behavioral traits of entrepreneurs (Oviatt and McDougall, 2005). Efficient transportation across several countries has reduced the cost of logistics. Transportation of goods and supplies takes place is a much time efficient way. The foreign host country may have certain comparative technological advantage which the firm can leverage in order to produce their goods or services at a lower cost than its home country. Competition among rival firms has always been a fierce battle of innovative technology and marketing strategies. The entrepreneurs often take preemptive approach by shifting its operation to another country so that it can enjoy a “first-mover” advantage over its rivals. Finally the personality and behavioral traits of entrepreneurs also play a major factor in the growth of the firms. The risk taking attitude, thinking in a different manner than competitors, innovative product development and proactive approach to business, etc. allows the entrepreneurs to grow at a fast rate than traditional firms and also other rivals (Oviatt and McDougall, 2005). The journal article by Lau (1992), “Internationalization, Internalization, or a New Theory for Small, Low technology Multinational Enterprise?” is chosen for the study of Internationalization and how newly developed small firms are associated with it. This article aims to discuss how internationalization of multinational enterprises is favored by various factors. The author has used secondary historical data regarding Hong Kong Garment companies in his research. He has summarized the process of internationalization in eight steps mentioned in the following flowchart. The above mentioned steps are followed by newly developed entrepreneurial companies in order to gradually expand their business operation overseas. The author has mentioned that firms of developing countries enjoy certain firm-specific advantages which lead to their growth on a global scale through FDI activities. The advantages are, a) adoption of machinery which allows flexible production, b) pre-owned machineries are more efficiently used, c) production is emphasized over marketing expertise, d) Firm personnel require lesser salaries than those of the developed countries, e) lower setup cost, due to familiarity with unfavourable conditions, f) low formalization in the organization structure allows the firm to implement new innovative managerial and financial processes. However, these advantages may be different from the firms emerging from a developed country. The firms from developed countries mainly look for comparative advantage in regard to lower production costs. The production cost can be lower in the host country because of their technological expertise and/or low labour costs. The approach may be different for different firms depending on their background and country of origin, but the overall motive is universally the same. The main reason why a firm opts for internationalization is to move closer to the new market; as a result it helps them to develop deeper market penetration. Secondly, the firm gains certain advantages on production and it also develops a long term business relationship with the local government as moving business into the host country leads to rise of employment and improvement of the economy. Thus, the internationalization for new firm’s acts as a symbiotic relationship which leads to the growth of the company and at the same time it improves the economy of the host country. The article by Onetti and his colleagues (Onetti et al, 2010) named, “Internationalization, innovation and entrepreneurship: business models for new technology-based firms,” has been chosen for the study of internationalization and how it is adopted by technology based firms. The article aims to find out how the growth process of a firm is related to the internationalization, entrepreneurial approach and innovation. These processes are the key determinant of the strategic decisions like location of operations, prioritization of activities, organizational boundaries and identifying and managing stakeholders’ interests. The entrepreneurial approach has been defined as an exploring and exploiting opportunity by taking advantage of the ability to manage risks and uncertainty. The recent market environment is characterized by globalization and increasing intensity in competition. The newly based entrepreneurial firms consider innovation, entrepreneurial approach and internationalization in a holistic manner. These three elements are an integral part of the overall growth process of the firm (Onetti et al, 2010). The firms leverage the domestic and international relationships to exploit overseas business opportunities. Good international relationships allow firms of the home country to gain access to new technology of the host country. The authors also mentioned that previously internationalization and innovation were considered as independent and alternative ways to business expansion, however now-a-days most entrepreneurial firms adopt overseas expansion as a primary tool for growth. Adopting an overseas expansion strategy should be based on as the author termed as “locus, modus and focus.” Locus refers to the location of the firm’s operations. Modus refers to the inter-firm relationships and defines organizational boundaries and Focus refers to the firm’s effort and core competencies. Growth can only be achieved if the comparative advantages of the location, the level of competition among fellow firms and international relationships and the company’s core competencies are integrated together. A mere shifting of business is bound to fail if the organization does not have a good relation with the host country and also if it fails to realize that whether or not its core competencies are in line with the business environment of the host country (Onetti et al, 2010). The journal article by Fletcher (2004), “International entrepreneurship and the small business” has been chosen for this study because it highlights that the entrepreneurial activities like “pro-active broking” and risk taking attitude have merged with cross border trading. This article aims to define international entrepreneurship in the light of the growth opportunities of newly developed small firms. This article is based on qualitative primary data gathered during interviews with some of entrepreneurial firms’ owners which has eventually moved to international market. Based on the gathered knowledge the author has described that the process of internationalization for smaller firms does not occur by following any particular sequential process or steps. The process is mostly iterative in nature as well as fluctuating. The traditional marketing models, like the business life cycle often fail to describe how the newly developed small entrepreneurial firms despite of their limited resources are able to respond to the opportunities of overseas business activities (Greiner, 1997). However, their cross-border success can be described in the light of opportunistic decision making which leads to incremental leaps. The development by internationalization is mostly a ‘processual’ approach, where the emphasis is given on the organizational learning, however in some cases as mentioned by the author the process follows a different path (Fletcher, 2004). He mentioned that in some cases, the firms did not take pro-active steps to adopt internationalization, but they mere used the “window of opportunity”. This reflects the importance of gauging market opportunities overseas. Growth of the firms by internationalization is mainly because of the activities like leveraging resources, brokering and risk taking activities. Irrespective of the process, the growth of entrepreneurial firms by internationalization is primarily because of the management’s attitude towards risk taking and leveraging the comparative advantage of the host country. The article by Coviello and Munro (1995), “Growing the entrepreneurial firm: Networking for international market development.” has been chosen because it emphasizes the need to break out of the domestic niche market by internationalization which results in organizational growth. This paper aims to find the technology based entrepreneurial company’s approach to global market development. It also puts stress on the use of multi network relationships to foster international business activities. This work is based on two set of data, one is secondary data collected from four case studies and the other is primary data collected from 60 firms. The study of the secondary data found that most of the firms which had rapid growth in the international market did not follow any tradition steps of internationalization. This explains the entrepreneurial nature of those firms, as they avoided the traditional rules and followed something out of the box. The firm took advantage of establishing international market relationships by building networks. However, the authors also mentioned that establishing strong international networks also forces the firms to be dependent on the decisions of the major players in the network. This may eventually lead to domination of weaker firms by the stronger ones. Analyzing the primary data showed that almost 64 percent of the firms that were surveyed, mentioned that their international business decision and market selection was initiated by opportunities that came to them via formal or informal networks. They did not take any proactive action to seek out international expansion opportunities. Potential linkages were discovered in general business deals and contracts, which enabled the firms to indentify foreign markets. 34 percent of the respondents mentioned that internationalization occurred in their firms due to presence of crucial relationships with foreign market. Thus, it is seen from this article that rapid growth in overseas trading of entrepreneurial firms is mostly by establishing business networks with the foreign market. Conclusion Studying these six journal articles have shown that the growth of entrepreneurial firms by internationalization is because of multiple reasons. The entrepreneurial behaviour of risk taking and seeking out for new ventures is one of the reasons why the firms do not fail to grab international expansion opportunities. Building strong international network allows the firms to foster the leverage of “piggy backing” and financial support of the strong players present in the network (Yifan, 2012). The advantages of foreign expansion of an entrepreneurial firm are far reaching. The firms enjoy comparative advantage of the host country where they can produce their goods or services at a lower production cost. Moreover, they can also take advantage of the host country’s technological advancement for improving their business activities, by building a good symbiotic relationship with the host country. Companies like Apple, Microsoft, and Google started with limited funds and eventually grew in the international market at a rapid pace. Apple took the advantage of low labour cost in China by setting up the manufacturing plants there (Yifan, 2012). Although each company followed different paths to internationalization but all of them had the same motive of growth and expansion. Google expanded itself by making several acquisitions of several software companies all over the world and eventually increased its product portfolio to become an IT giant. Google realized that growth through developing a software product takes more effort than acquiring a company that makes that product (Smith, 2014). In this way, the company grew at a remarkable speed. IBM also started as a small firm which manufactured computer systems for business requirements; eventually the company expanded its market in foreign lands and simultaneously increased its product portfolio (IBM, 2014). Looking at these companies it can be concluded that internationalization is perhaps the most crucial factor responsible for the growth of an entrepreneurial firm. This study is limited to entrepreneurial firms and its unorthodox approach towards growth by internationalization; however there are further opportunities in the study on the process of internationalization. The steps followed by entrepreneurs are mostly unclear in these articles, further study is needed on the details and steps required for an entrepreneurial firm to commence business across border. This is a vital process as newly developed firms can learn from the study and adopt the process of internationalization following the footsteps of its processors. Future studies should involve analytical study on data collected from international entrepreneurial companies and their success story should be broken down in to generalized steps that can be followed by new firms. Reference Buckley, P. J. and Hashai, N., 2009. Formalizing internationalization in the eclectic paradigm. Journal of International Business Studies, 40, pp.58–70. Coviello, N.E and Munro, H.J. 1995. Growing the entrepreneurial firm. European Journal of Marketing, 29(7), pp.49- 61. Fletcher, D. 2004. International entrepreneurship and the small business, Entrepreneurship & Regional Development: An International Journal, 16(4), pp.289-305. Dunning, J. H., 1977. Trade, location of economic activity and the MNE: A search for an eclectic approach. The international allocation of economic activity, pp.395–418. Greiner, L., 1997. Evolution and revolution as firms grow. Harvard Business Review, 75, pp.37–46 IBM. 2014. The birth of the IBM PC. [online] Available at:< http://www-03.ibm.com/ibm/history/exhibits/pc25/pc25_birth.html > [Accessed 22 November 2014] Lau, H., 1992.Internationalization, Internalization, or a New Theory for Small, Low-technology Multinational Enterprise? 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