The Pace of Internationalization of SMEs – Born Global vs. Gradual Global

Work in Progress

Siv Marina KarlsenPhD-candidate

Department of MarketingNorwegian School of Management BI

Elias Smiths vei 15, Box 580N-1302 SANDVIKA, NORWAY

Phone + 47 67 55 73 43Fax + 47 67 55 76 76

E-mail: siv.marina.karlsen@bi.no

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AbstractThe objective of this study was to describe the process of internationalization of SMEs and to explore/explain why some become more gradual global and some are born global. This is due to the fact that increasing evidence shows that in spite of small size and inexperience in international transactions, high value-adding manufacturing firms are capable of outperforming their larger, more resourceful counterparts in foreign markets. The aim was to get more knowledge about this new type of firm – what characterizes Born Globals and the internationalization process?

IntroductionBackgroundThe objective of this study is to describe the process of internationalization of SMEs and to explore/explain why some become more gradual global and some are born global. Empirical evidence from many countries support the notion that firms often internationalize like “rings in the water”; their market knowledge increases gradually and hence uncertainty as well as risk is reduced over time for each country market. However, in 1988 Johanson & Mattson pointed out that some firms follow other internationalization patterns. They argued that the degree of internationalization of markets (i.e. the frequency, intensity, and integration of relationships across borders in the particular industry market) has an impact on the internationalization process of the individual firm. In highly internationalized markets, firms may leapfrog some of the stages or rings in the water. More recently many authors, (f.ex. Oviatt & McDougall, 1994; Knight & Cavusgil, 1996; Madsen et al, 1999), have found empirical evidence of yet another type of exporters often labeled “born globals” (BGs), which aim at the international markets or even the global market right from their birth and do not seem to follow any kind of stages e.g. they go beyond leapfrogging.

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Knight & Cavusgil (1996) believe that the slowness of the process described in traditional internationalization literature, may be an indication of management’s aversion to risk-taking and their inability to acquire relevant knowledge and information. The fact that the process seems to be speeded up now, may partly be explained by the so called born globals’ management being less risk-averse and/or they having easier access to relevant information. The environment has changed a lot since the “traditional internationalization theories” were developed f.i. the increased level of globalization in many industries, may make out part of an explanation for the observed increase in pace of internationalization of firms. This increased globalization, which is believed to lead people to perceive the world as smaller, may thus also make the manager perceive the risk of entering foreign markets, as smaller. One driver of globalization is believed to be the development of advanced communication technology i.e. an industry described as having high degree of globalization will by definition be characterized by having information transferred easily and faster than in industries less globalized. This increased access to information may decrease the psychic distance between countries, which have previously been seen as a major obstacle for international expansion of firms (e.g. Johanson & Vahlne, 1977).

Oviatt & McDougall (1994) state that recent technological innovation and the presence of increasing numbers of people with international business experience have established new foundations for MNEs. Traditionally these were developed from large, mature, domestic firms, but the facile use of low-cost communication technology and transportation means that the ability to discover and take advantage of business opportunities in multiple countries is not the preserve of large, mature corporations anymore. Crick & Jones (2000) for instance, found that several firms were set up by managers with experience, operating in international markets from previous firms in which they were employed. Thus, they have got experience in dealing with the

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complexities of international operations, they have acquired an appreciation of the risks and resource implications, and last but not least, they have developed a network of customers and contacts on which they can build on after setting up their own firms. Whatever reason, increasing evidence shows that in spite of small size and inexperience in international transactions, high value-adding manufacturing firms are capable of outperforming their larger, more resourceful counterparts in foreign markets.

According to Bradley (1995), there are basically two dimensions, which represent the key strategic decisions in connection with a firm’s internationalization, (1) international market selection, and (2) choice of entry mode. With regard to the market selection dimension, BGs often start activities in many markets fast (simultaneously) and not always in close markets first. The product is often developed for a global-/international market (Madsen et al, 1999). Bell (1995) explains this in the following way: “..psychic distance has become much less relevant as global communication and transportation infrastructures improve and as markets become increasingly homogeneous”, (p.62). Hedlund & Kverneland (1985) also provide evidence of a speeding up of the internationalization process and posit that: “the establishment and growth strategies on foreign markets are changing towards more direct and rapid entry modes than those implied by theories of gradual and slow internationalization processes”. In other words, it seems the internationalization process of firms is currently proceeding faster on both dimensions (market selection and entry mode) than traditional theory predicts. Traditional theory is here seen as the Process model or Uppsala perspective (Johanson & Vahlne, 1977/1990). Traditional internationalization theories describe a process in which the firm gradually becomes involved in international business and enters foreign markets and this view seems to enjoy general acceptance among most international business scholars.

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According to the studies I have found (Knight, 1997; Knight & Cavusgil, 1996; Harveston, 2000, Madsen, Servais & Rasmussen, 1999; Junkkari, 2000), BGs are defined as SMEs with an export rate of more than 25% within three years of founding. I see this as too broad a definition, for instance, if a Norwegian SME export 30% of its products to Sweden and Denmark (within three years) one can hardly call the firm global. In other words, we need to incorporate what type of market (and how many) an SME should be present in to be termed a BG in addition, most very international SMEs usually have a far higher percentage of foreign sales than 25% (e.g. Luostarinen & Gabrielsson, 2001). I therefore choose to define a born global as an SME that export a minimum of 50% within 3 years of founding. But, in addition, to be defined a “true Born Global” (TBG), the SME has to be present in more than one continent simultaneously, e.g. for a Norwegian SME to export 80% to European countries do not qualify to be termed a TBG. For a firm to be labeled BG, Luostarinen and Gabrielsson (2001) also emphasized the presence on several continents. They made a distinction between internationalization degree of a firm (Finnish BGs had more than 80% sales outside home) and globalization degree (Finnish BGs were found to have more than 30% sales outside home continent), it might be worth noticing that they used a time frame of 10-15 years.

Conceptual FrameworkThe existing literature has not reached an agreement as to which conceptual framework and constructs should be used to explain a firm’s foreign market entry mode (Andersen, 1997). The present framework will be based on my perception of the most important contributions to explain the pace of internationalization of SMEs. Bloodgood, Sapienza & Almeida (1996), argue that new ventures will seek an international presence for two reasons: industry conditions (e.g. increased globalization) may require an international presence for the company to be competitive and secondly, a venture may seek a global presence to capitalize on its unique set of resources (e.g. management team’s experience in global markets, new technologies or innovations, etc.).

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According to them, such conditions must be present for rapid internationalization to be viable.

Type of product may also have an influence on the strategies chosen for going international/global. Increasing global competition, together with increasing speed in the development of new technologies, have led to shorter product life cycles and higher innovation intensity. The shorter product life cycles have led to more emphasis on R&D, and on recognizing new opportunities and exploiting them quickly with successful timing (ex. PCs and cellular phones). Product characteristics, thus, are another aspect to be considered. The shorter the PLC, the shorter the time in which returns on investment in product development can be earned. Thus, especially companies with small domestic markets need global volumes over which these costs can be divided.

Experience/background of founders and their relationships make out important resources of a firm and are important drivers or facilitators of internationalization. International experience is defined as the understanding and realistic perceptions of foreign operations, risks and returns in foreign markets (Aulakh & Kotabe, 1997). The reasoning here, which is based on the organizational capability of the firm, is that firms are initially risk-averse when entering new markets, and therefore not willing to invest substantial resources in unfamiliar terrain. As firm management gets a better feel for the foreign markets, it has better perceptions of the risks and returns, and therefore becomes more confident and aggressive, but also more realistic. This may be manifested in a willingness to commit more resources and also enable them to make better investment decisions. International experience has traditionally been measured at firm level as for instance, geographic scope of a firm’s experience (number of different countries a firm is active in) and length of experience (number of years a firm has been active on the international arena) Erramilli (1991). In the present study the variable will be analyzed at the individual level, that is, information

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of the founder(s)’ and/or other key employees’ international experience will be collected. It seems most appropriate since a BG is by definition not experienced if analyzed at firm level, but several studies (Oviatt & McDougall, 1994; Reuber & Fischer, 1997; Ellis, 2000), show that key employees in socalled BGs very often have extensive experience from previous employment.

Reuber & Fischer (1997) argue that decision-makers with more international experience, are more likely to have in place a foreign business network and are more likely to have developed the skills needed to identify and negotiate with firms in a different culture. Oviatt & McDougall (1994) further argue that partnerships provide concrete critical resources such as specific skills and financial resources, as well as more abstract resources such as legitimacy and market power. These resources are seen as particularly important when a new and young firm with poverty of resources is attempting to increase foreign sales. The relationships may thus, enable the firms to enter new markets at a faster rate than otherwise possible (e.g. by providing firm with complementary resources and by opening up markets). This view is supported by Ellis’ (2000) findings, which support the notion that awareness of foreign market opportunities (which has been identified as a critical antecedent of foreign market entry) is commonly acquired via existing social ties. McGaughey, Welch & Welch (1997), also emphasize the important role of personal networks in triggering initial export inquiries or orders. They found that the networks key individuals brought to bear on the case company’s international activities, were critical in both the content and direction of the company’s internationalization; “…much of the ability of the company to initiate and carry through international operations resided in the decision-makers’ personal networks” (p. 179).

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Contingency variables- Product/Industry- Network- Skills/Background of entrepreneur

Performance variables- Financial performance

(mis)fit - Survival - De-internat./Divestment

- TBG- BGE- BGM- GG

Response variables

Figure 1: Conceptual Framework

One reason for the difference observed in the speed by which traditional MNEs and BGs become international/global, may be due to different environmental conditions. “…the slowness of the whole process is a consequence of incremental adaptations to changing firm and

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environmental conditions rather than the result of a deliberate strategy” (Knight & Cavusgil, 1996:13). In other words when the environmental conditions change fast, as in increased globalization, the process of internationalization is likely speed up as well. In a closed, domestic industry, a company accustomed to weak competitors and undemanding customers has little to fear – there is no source of new competitors that might grow strong in more demanding competitive arenas. In an open, globalized industry, such newly strong competitors abound (Yip, 1992). That is why it is important to understand how the industry globalization drivers affect the competitive environment of SMEs.

Boundaries between domestic and international markets are becoming less relevant as businesses increase their activities abroad. A global industry is, in this thesis, conceptualized in a manner consistent with others: “an industry in which a firm’s competitive position in one country is significantly affected by its position in other countries or vice versa” (Makhija, Kim & Williamson,1997: 680). In this regard, the global industry “is not merely a collection of domestic industries, but a series of linked domestic industries in which rivals compete against each other on a truly worldwide basis”, (Porter, 1986:18).

In order to find an explanation to why some SMEs still follow a more step-by-step approach while other choose the faster and more erratic approach of jumping stages, Madsen, Servais & Rasmussen (1999) argue that the development (globalization) may enable firms to more freely choose their own model of becoming international. International sales both become easier and more difficult in that international markets have become more accessible for most firms – while on the other hand the degree of competition and demands for international competence has increased. In other words there is both a “positive” pressure from increased level of globalization – increased accessability to markets, and a “negative” pressure – tougher competition, it is a necessity for a new

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company to be present in many markets. The result on the pace of internationalization is the same for both “pressures” - it increases.

The pressures may work differently according to size of home market. According to Bloodgood, Sapienza & Almeida (1996), new European firms are more likely to consider internationalizing some of their activities at the outset than are new US firms. One reason is the fact that whereas a new US firm operating in 500-mile radius around its base may do so without crossing borders, a European firm with the same geographic scope may have to deal with five or six other countries. Luostarinen & Gabrielsson (2001) state that globals of large countries globalize because of the demand-based pull forces in global markets, but BGs of small and open economies globalize due to the push and pressure forces based mainly on the smallness of domestic markets and on the fear of expected future competition coming from BGs located in large nations. According to Hamel & Prahalad (1985), companies that nestle safely in their home beds will be at an increasing resource disadvantage. “They will be unable to marshal forces required for a defense of the home market” (p. 146).

Research Design and Data CollectionResearch Design

I want to know more about this new type of firm – what characterizes born globals and their internationalization process? Quantitative research looks at a large group of cases, people or units and measures a limited number of features. A case study is more distinct. It usually involves qualitative methods and focuses on one or a few cases during a limited time period. Since few studies have investigated these issues in-depth, it seems most appropriate to start with an exploratory, in depth study to get a better understanding of the topic at hand.

Case studies are very demanding to carry out, and for this reason only relatively few cases are chosen. In this study twelve case firms have

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been studied – one firm representing one case. The advantages of carrying out more in-depth case studies are that it allows the researcher to study complex issues in their real-life context and to collect and analyze multiple types of data (Yin, 1994). It is worth noting that qualitative and case study research is not identical, but “almost all qualitative research seeks to construct representations based on in-depth, detailed knowledge of cases” (Ragin, 1994:92). I started by contacting the founder/CEO or another key employee (which has been in the company from the start) of the firms I have found fulfill my criteria, with a request that they participate in the study. The potential case companies were selected using theoretical sampling (Glaser & Strauss, 1967; Yin, 1994). Thus, the logic of sampling was not random selection for statistical purposes but rather purposive sampling based on theoretical considerations. Because statistical sampling logic was not used in this study, the typical criteria regarding the actual sampling size were also relatively unimportant. What is important is the potential of each case to aid in developing theoretical insights into the dynamics of the internationalization being studied. During the first meeting with a representative of the firm concerned, I presented the aim of the study and the data gathering process. The case companies have been selected from a pool of respondents to a survey that was carried out in the Autumn 2001. The population of that survey was defined to be SMEs in Norway, founded after 1990 (registered in the Kompass database), an SME being defined as firms with less than one hundred employees. The reason why relatively recently established firms are chosen, are to ensure that the details surrounding the founding of the firm are not lost to history. The definition of an SME is based on the fact that several studies have found that most of the fast internationalizing firms have far less than 100 employees. Knight, Madsen & Servais (2002) found in their study of Danish and US BGs that the average number of employees in the Danish sample was 60. From this I draw the conclusion that to study Norwegian BGs it is sufficient to draw a sample from a population of firms with less than 100 employees. This

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view is supported by Solberg’s (1988) findings that successful exporters were significantly smaller than unsuccessful exporters. This finding lead him to suggest that smaller units are better able to create the right atmosphere for successful exporting, necessitating a closeness to the market and an open minded organization not always present in large corporations with rigid bureaucratic decision procedures. The SMEs also had to be exporting (obviously). In addition I aimed to select firms that were a stand-alone entity. The reason for this, is that it is expected that sub-units of larger firms have greater access to resources such as capital, human resources and information (Harveston, 2000). Despite this, I ended up having three cases that were not independent, partly because to draw a line between dependent/independent is not always that simple and because it has been suggested that it might be useful to have some cases that are not independent for reasons of comparison. A relatively wide population was chosen at the outset in order to enable me to draw a continuum where more gradual internationals are at one extreme and true born globals at the other. The main cut-off point for the different types of “globals” were made according to the market selection dimension and export rate (after three years). For instance an SME exporting only to Scandinavian countries may be termed gradual global – if the export rate within three years are less than 50%. An SME exporting to both Scandinavia and Western-Europe is slightly more global and so on. The world is divided in seven parts with increasing psychic distance from home market (in this case Norway); Scandinavia, Western Europe, Eastern Europe, North-America and Australia, rest of Americas, Asia and the remaining parts of the world (Africa and Arab countries). This division is more or less in accordance with Junkkari (2000:160), who classifies areas from hot (close in terms of business distance) to cold (far away).

Operationalization

While measures of imprecise concepts are never completely valid or reliable, researchers strive to maximize these qualities (Knight, 1997).

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Pace of internationalizationThe pace of internationalization was measured as how many markets (regions) an SME is entering in a certain time period and also to which type of regions the firm is entering and in what order (close or far away from home market in terms of psychic distance). In addition I measured how fast, after founding, the SME reached an export rate of say 25%, 50%, 75% and 100%.Degree of GlobalizationGlobalization may be conceptualized in terms of a continuum from low to high, along which different industries fall (Porter, 1986). An industry at the very low end of globalization is highly independent of industries in other countries. An industry at the very high end is significantly linked to similar industries in multiple countries in which its various value-added activities are located. The extent to which an industry is characterized by international linkages is seen as an important indication of its level of globalization (Makhija, Kim & Williamson, 1997). It is rather difficult to find good measures of an industry’s globality, but to adequately examine global strategies it is, according to Porter (1986) and Bartlett & Ghoshal (1989), required to establish the extent to which an industry is global. Each industry’s unique blend of competitive pressures is likely to result in varying levels of globalization, which in turn are reflected in the strategies the firm utilize in these industries (Prahalad & Doz, 1987; Yip, 1992). One way of measuring this is using the ranking of different industries in Yip (1992:34) or use subjective measures asking the managers in the SMEs how they perceive their industry according to certain set dimensions of globality (Solberg, 1997:5). These determinants may be useful even if they are based on a more traditional view on globalization, but it is probably useful in this study also to add some questions on what type of markets they are aiming for (niche versus large markets), and degree of specialization of products (Madsen & Servais, 1997).

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Top management experience/backgroundThis construct is defined as the amount of experience that a manager has accumulated in an international context. Harveston, Kedia & Davies (2000), state that most studies using this construct have used amount of time spent in the form of foreign assignments, education, or vacations as a proxy to international experience. This covers one dimension of the construct, length. From which continent(s) the key employees have experience and whether the key employees have mainly worked abroad or at home, covers the second dimension, scope.

Other proxies to foreign experience are; to which extent has the manager engaged in foreign travel? How many languages does the manager speak and how fluent is he in the different languages? Was the top decision maker born abroad? Has he/she lived abroad (Meisenbock, 1988; Reid, 1981)? What was the mindset of founder at start-up (Harveston, Kedia & Davis, 20002)?Personal NetworkAccording to Solberg (1997:16) the more global the industry structure – the more important becomes the presence of an active and widespread network. Motives for entering a new market were queried and the characteristics of prior relationships and the role they have played have been sought. Personal relationships to be studied in this thesis thus, were relationships that key employees define as having an impact on their road to internationalization. That may be relationships in their home country or relationships in the target country, from working abroad previously or from studying abroad or just a network they have developed through their previous work assignments in their home country. I wanted to establish what type of relation exists between the key employees and their stated important network – how close are they? This can be measured as frequency of contact (daily, weekly, monthly) and type of contact (face to face, telephone, mail). We may assume that the more frequent their contact and the closer type of contact used (e.g. face-to-face), the more trust exists among the parties. Whether

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the contact is formal or informal may also be of some importance assuming the more informal the contact the closer the relation and the more bindings between the parties exist in terms of trust.Product characteristicsI asked questions about how unique the product is considered to be, compared to competitive products, is it “one of a kind”? Is it meant for the consumer market or the industrial market. It is also considered important whether the product is sensitive to changes in trends, price and/or quality and whether they consider the product life cycle to be long or short.PerformanceI did not intend to measure performance at this stage – I assumed that firms internationalize in order to capture potential profit opportunities outside the home market or to withstand competitive pressure, i.e. factors that influence the firm to internationalize also contribute to its increased profitability. It was in other words assumed that the more international/global a firm is, the better it is performing. This may be a bit off the mark, but since these are still very young firms I believe a follow-up study will be in place in a few years to find f.i. survival rates and how outspread deinternationalization is among the sample.

It is seen as difficult to measure whether an exporter is successful or not (most measure success as the proportion of export sales to the firm’s total sales – over a certain period of time (Ford & Leonidou, 1991:13). I decided to measure performance after all and used Moen’s (2000) performance measure, a four-item subjective scale including perceived profitability, growth as compared to competitors, satisfaction with market share and the overall rating of export performance (items taken from Knight’s, 1997 study) in addition to getting financial data from the interviewees and from a national data base (Brønnøysundregisteret).

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Selection of Cases (sampling)

In case studies you usually select cases based on theory (theoretical sampling). When using several cases, they should be selected so as to a) predict same results, or b) give opposite results, but for predictable reasons (Yin, 1994). When using several cases, it can be useful to use an explicit framework to choose from. This frame should be guided by the research question and the conceptual framework. The framework developed consists of a 2x2 matrix (see Fig. 2). The horizontal line stating volume of export reached within three years of founding and the vertical line stating number of market areas the firm is present in, i.e. it includes my two main dimensions measuring a firm’s degree of internationalization/globality.

several

No. of BGM TBGcontinents

one GG BGE < 50% <

Export within 3 yearsFigure 2: Classification of global SMEs

TBG = True Born GlobalBGM = Born Global on Market dimensionBGE = Born Global on Export dimensionGG = Gradual Global

Short description of the casesI had to select firms that satisfied the framework conditions.No. of areasSeveral

Fras ColormaticKay Lindegaard IRTech

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OperaOptoflow

ICAS DolphinIncatel Nor-Reg

Norsk DisplaySuperject

One < 50% <Export within 3 years

Figure 3. The case companies

Gradual Global (GG)ICAS AS was established in 1989 and started exporting in 1992. Current export rate is 45% - after three years it was 30%. They are present in Europe and sporadically in South-Africa (2001) and Australia (2000).

Incatel AS was established in 1993/94 and started exporting 1996. Current export rate is 80% - after three years it was 50%. They are present in Europe. Born Global on Market dimension (BGM)Fras AS was established in 1996 and started exporting in 1998 (90). Current export rate is 80% - after three years it was 20%. They are present on ships all over the world.

Kay Lindegaard Incinerators was established in 1999 and started exporting the same year. Export rate after three years was 50%, same as today. They are present all over the world.

Born Global on Export dimension (BGE)Dolphin Interconnect Solutions AS was established in1991 and started exporting in 1992. Export rate after three years was 90% the same as today. They are present in North-America, South-America, and Europe.

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Nor-Reg AS was established in 2000 and started exporting in 2001. Export rate after three years was 75%, same as today. They are present in Western Europe and Japan.

Norsk Display AS was established in 1993/1994 and started exporting in 1994. Current export rate is 60% - after three years it was 65%. They are present in Western Europe and North America.

Superject AS was established in 1990/1991 and started exporting in 1991. Current export rate is 80% after three years it was 70%. They are present in Europe (mainly Western part).

True Born GlobalColormatic AS was established in 1997 and started exporting in 2000. Export rate after three years was 90% - today it is 95%. They are present in Scandinavia, Western-Europe, North America, Australia and Asia.

IRTech AS was established in 1995 and started exporting the same year. Export rate after three years was 100% - the same as today. They are present in Europe, North America, Australia, and Asia.

Opera Software ASA was established in 1995 and started exporting the same year. Export rate after three years was 99%, same as today. They are present all over the world.

Optoflow AS was established in 1993 and started exporting in 1997. Current export rate is 90% and after three years it was 85%. They are present in Scandinavia, Western Europe, North America/Australia, Asia and Africa/Arabia.

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Case descriptionsThe analysis in this section is based on twelve cases and seeks to generate propositions that can be tested with large scale data sets (Eisenhardt, 1989). Analysis and proposition development will be segmented into four topics: (1) experience/background of founders, (2) personal networks, (3) product characteristics, (4) industry globality. In the interviews, I focused on understanding the drivers for the international character of the SMEs in greater detail.

I use within-case analysis as well ass cross-pattern search (Eisenhardt, 1989) to analyze the data. Data and interview notes were coded by the author using the software “HyperResearch”. This was done for each firm along a number of dimensions.

Background of each caseSince data displays help the researcher see patterns (Miles & Huberman, 1994:433) I have decided to draw up critical events of each case’s history (see below):

Colormatic – inkdoser (Background Tronrud Engineering – purely marketing & sales)

Product development

1983 1990s 1996 1997 1998 1999 2000 2001Thronrud Thronrud 1st ed. Start-up Prototype *Schaefer USA Sell to 22 USAEng. Established approached ready Trade fair employed Germ. countries Japan

by 2 printers (no success) in Birming-England, France direct export & ham (Ipex) Belgium, distributors

Denmark, Australia & New Zealand**

Direct export

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*Schaefer was employed to strengthen the marketing and sales efforts. ColorMatic is purely a marketing and sales organization w/ some product development – Tronrud Engineering does the production and the main part of the product development part.**They had all seen it and become interested at the trade fair in Birmingham the year before. Only have 1 employee abroad – sales office in England to get more control.

Dolphin – Hardware (Background Norsk Data)

1991/19921992 1994 1996 1997 2000 2001 2002Start-upDir.Export Move ownersh. Buy-up Agent Agent Agent USA & China

USA to US co. in US France England Germany Sales subs. USA

FRAS – Fluid sampler (Background – Norske Veritas – Mission critical)

1975 1986 1990 1991 1996 1998 1999 2000 2001 2003Parker Heglunds France Veritas Start-up Lloyds Licens China LookingHaneyfin follow Product Germany(Statoil) for investors

customers (Norske Skog)

All production at Brødrene Jonsen in Ski – they are a development company. They do not aim at country markets, but productmarkets; offshore, ship,

processindustry and energyproduction follow large customers out (e.g. Norske Skog, Shell, Statoil, Esso, Hydro, Lloyds)

ICAS – Smoke detector

1989 1990/91 1993 1997 2000 2001 2003 Start-up New law Finland Sweden (40%) Australia S-Africa England Germany

*Production Agent Germany Subsidiary England the Czech

Republic

Produced in Norway in 1990, but found it too expensive so started production in the Czech Republic from 1991 all production take place there - only marketing and sales in Norway

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IRTech – system for detection of cracks in steel(Background – Elkem - just support and upgrading today – mission critical)

Hovland In Elkem (-81)

1980s 1982/83 1984 1985 1986 1987 1988 1989 1990 1992 1993 1995 1999 2001 Elkem 1st systemCzechFranceFrance Engl. Taiwan Engl. GermanyUSAElkem Start-up Up- Use develop Germany USA Germany Korea TaiwanEngl Austr.wantedItaly grade Elkem’s system Direct Korea Japan Sweden out Engl. agents

export Turkey

Today have 1 plant in Czechoslovakia, 1 in Turkey, 1 in Korea, 1 in Japan, 1 in Italy?, 2 in France, 2 In USA, 3 in Germany and 3 in England .

During last two years 1 plant has been closed down in Australia, 1 in Sweden, 1 in Korea and 1 in Taiwan.

Incatel – Software(Background IBM – mission critical)

Vedeld Vedeld (-92) IBM Amis picked coworker

now leader Incatel

1959 1961 early 80s 1987 1989 1991 1992 1993/94 1997 1999 2001 2002 FranceVedeld 1st Pilot Sysscan Amis Vedeld Start-up Tele Chech Belgia Telia Telekomcomputer Tele- INKA bank- in Tele- Incatel Danm.Telekom Telekom Britishprogram verket rupt verket (KPN) Telekom

CimageCorenaCorena (IBM) dissolved

(1994)

Kay Lindegaard Incinerators (Background - Kay Lindegaard)

1932 1960 1970 1979 1990s 1999 2001 2002Start-up Start-up Ovens Hendriksen ProductionStart-up Agents all RussiaKay L Kay L for ship Croatia KLI over the world S-Korea

ovens Poland 1st

followed customers

NOR-REG Maskin – Packaging machines (Background – Nor-Reg)

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1967 1997 1999 2000 2001 2002Parentco. Agents Sales subs Start-up co. Merged Aim to use only own subsidiariesestablishedDenmarkSweden, Establish w/mother due to bad experience w/ agents &

Japan Germany, production again distributors UK in Germany Snacksmarket

USA

Are present in 7 countries – Sweden, Germany, UK, Denmark, Japan, Spain & Ireland.

Norsk Display - Electronic Signs

1994 1995 1996 1997 1998 1999 2000 2001 2002EstablishStart-up/Denmark Internet USA Belgium Direct export US &contact export Finland Homepage UK to approx. 8 Germanyimport. Netherlands Germany countries (Netherl.relation (dir.export) US, Finl, Sweden,

Germ, Belgia, UK, Denmark)

Opera Software (Background Telenor)

1991 1994 1995 1996 1998 1999 2000 2001 20022003 Cofounder Telenor Start- 1stOpera EmbraceUS Free ad- Symbian**

Cellularphones Tezchner project up browser emerging sponsored Holland Digital-TV Telenor Export released market of versions released internet internet Commercial

devices breakthrough *Opera team up w/key players in Internet device mrkt Acquired Hern Lab (Sweden) R&D Repr. Office (US) S&M UK web developer

* Ericsson, Nokia, Sony, IBM, Psion.

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* * Symbian = Strategic alliance of leading handset and mobile computing manufacturers (Ericsson, Motorola, Nokia, Panasonic and Psion).

Optoflow AS – cytometer

1993 1994 1995 1996/97 1997 2001Start- Reodor Product UK Employed BioDetect KoreaUp prize 1st sale N OEM 3 people Japan

distributor

2 agents in USA, 1 in France, 1 in Italy 1 distributor in Japan, 1 in England and 1 in Germany

Superject – seals

1990 1992 1993 1994/95 2000 2001 2002Start-upSweden Nearly Denmark Germany France Take-over

Direct bankrupt bidexport Stokkan(then Finlandagent) Distributor (Swe)

Meet importantrelation (distributor/Swedish)

Today distributors in Sweden, Denmark, Finland, Germany and France. Direct export to USA, Italy, Poland + + Most important product market: pulp & paper (30%) and country market: Sweden (25%)

Summary

No of Founded Internat.sales Sales 2001 Profit 2001Product

employees (export) 2001(after3yrs) NOK NOK ColorMatic 3 1997(00) 95% (90%) 11 mill 0.53 mill Inkdoser

Dolphin 10 1991(92) 90% (90%) 46 mill - 21 mill Hardware

Fras 4 1996(98) 80% (20%) 7 mill 0.35 mill Fluidsampler

ICAS 65 1989(92) 45% (30%) 27 mill 2.05 mill Smokedetector

Incatel 65 1993/4(96) 80% (50%) 25 mill - 43 millSoftware

IRTech 2.5 1995(95) 100% (100%) 4.6 mill 1.24 millCrack

detectionKay L 2 1999(99) 50% (50%) 3.1 mill - 0.15 mill

Combustion

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ovenNOR-REG 20 2000(01) 75% (75%) 17 mill 0.3 mill

Packagingmachines

NDisplay 3 1993/4(94) 60% (65%) 3 mill 0.03 mill Electronicdisplay Opera

110 1995(95) 99% (99%) 28 mill - 21 millSoftware

Optoflow 10 1993(97) 85% (90%) 3.6 mill -5.53 mill Cytometer

Superject 4 1990(91) 70% (70%) 3.2 mill 0.29 mill Seals

* I verified all the numbers from the interviewees with transcripts from the “Brønnøysund register” except for Nor-Reg Machine AS where I only managed to find the financial statements of the parent company.

Figure 4 The case companies degree of globalization

Fras has today moved from being a born global on the market dimension 3 years after start-up to becoming a true born global. Dolphin, IRTech, KLI, Nor-Reg, and Opera have remained at the same level of

No.ofareas

One

7

6

5

4

3

2

25% 50% 75% 100%

Export within 3 years

GG BGE

BGM TBG

* ICAS *Incatel

* Fras * KLI

* Dolphin

* Nor-Reg* Superject

* Norsk Display

* IRTech

* Optoflow

* ColorMatic

* Opera* Fras today

*Incatel today

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internationalization while Norsk Display has reverted a bit without changing category. The two gradual globals, have both become more global, ICAS has increased its export rate slightly and thus moved to the right while Incatel has both entered more markets and increased their export rate significantly and thus is today a born global on the export dimension. ColorMatic, Superject and Optoflow have become slightly more global. I have just drawn in the most extreme changes e.g. Fras and Incatel.

DiscussionFive out of the twelve cases had negative results in 2001, but two of the firms with the largest negative results, Opera and Incatel, with -21 mill and – 43 mill respectively, are both positive of the future, Opera expects to have a positive result of about 10-20 mill this year (2003) and Incatel has forecasted to have a positive result of about 10 mill by 2002 following from the contract with Telia. Incatel in the “Information Memorandum” describes themselves as having “stable growth and healthy economics” (p.20) – they achieved revenue growth of 35% from 1994 (9 mill) to 2000 (54 mill) and they have been around break even or profitable every year except for year 2001. The reason for the fall in revenue growth in year 2000, and the weak revenue and profit figures in year 2001 was due to a significant investment in product development, and that they increased sales and marketing efforts to strengthen their Nordic position and also the fact that the times were difficult in the telecom markets in 2001. The efforts in product development and sales and marketing seems to have paid off for 2002 and the years to follow, they have forecasted revenues of 80 mill for year 2002. These two firms, Incatel and Opera, was rated as 2 out of 26 hottest firms in Norway and were chosen to take part in the “Norwegian Tech Tour” where they are to make themselves attractive for representatives of the

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world’s largest venture-moneybags. The criteria to be selected were that the firms had to be in ICT (Information Communication Technology), energy or biomarin business, they should be in a phase of expansion, have unique technology and be international on a large scale. The administrator of Norwegian Tech Tour Mr. Vaksvik, believes they have selected the 26 firms, out of 115 applicants with the greatest international potential (Nettavisen, 28.08.2002).

Dolphin also with the next largest negative result (-21 mill), explains this by the fact of the USD falling in March 2001, the result in 2000 was 79 mill and turnover was 63 mill in year 2000, the sales and the profits accordingly thus seems to fluctuate quite a bit.

ICAS is the case with the best result out of these twelve cases, this may be explained partly with the firm being cautious in their expansion strategy, ref. their slow internationalization – they still only have an export rate of about 45% 13 years after start-up and they are present in about 6 countries mainly in Europe, with Sweden being their most important market accounting for 40% of their total sales. Another explanation for the good results may be that the product ICAS sells is a rather simple product made for a mass market and thus not demanding large investments in product development. Last, but not least, ICAS is the “oldest” firm of the sample (established in 1989) and it follows then that it has had the time to get established in the market and to pay off debt. We saw above that both Opera (established in 1995) and Incatel (established in 1993/94) with relatively large negative results expect this to change in the very near future, the picture might thus look a bit different in a couple of years.

ICAS is the least global case and Opera the most global why is that so – what is the big difference between these two firms that can explain their different paces of internationalization? Let us look at the facts, both ICAS and Opera produce consumer goods, but Opera also has large

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industrial firms as customers. It is a fact that Norway is traditionally not that strong on massproduction of consumergoods. Opera also has a large and powerful supporter in Telenor, where the founder worked previously, they supplied them with consultancy and also locations at the time of start-up. ICAS has no such “sugardaddy” in the back. The products of these two firms are also very different, while Opera’s software has very unique features and is very specialized differentiating it from other similar products and a very short product life cycle demanding constant updates, are ICAS’ smoke detectors neither unique nor specialized and they have a long product life cycle. Opera’s product is also very special in that it can be distributed over the internet, it makes thus no difference where the customers are located as long as they have access to the internet, this obviously simplifies the process of internationalization. Last but not least, the founder of ICAS describes the industry’s level of globality as low in that there are different standards from country to country, while in Opera’s case, level of globalization is described as very high with no barriers whatsoever and the demand pattern is also described as global. Both founders describe competition as very strong, but while Opera describe their competition coming from a few, very large, American companies such as Microsoft, describes ICAS’ founder the competition as coming from many both small and large companies, especially from China. Another factor that might have influenced these two “extreme” firms’ pace of internationalization, might be the characteristics of the founders. Opera’s founder is currently 35 years old and he has extensive experience from abroad while ICAS’ founder is 57 years old and he has never lived nor worked abroad, although he has some experience from international firms.

I will now go on to discuss the case firms and how they may have been influenced by each of the different dimensions in some more detail, but first a summary (see figure below).

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Firm Relational Globality Product Experience ColorMatic Not relational Low Industrial Technical

“one-shot” Specialized Bit businessHe has relations Long PLC studies (US)will not emphasize Unique Worked

abroadNot price sensitive

Sweden/Holland Inkdoser Engl/Swed/Germ Dolphin Not relational Very High Industrial Physics

Contract important SpecializedData/electronics

Important research Medium PLC Lived in Sweden

relations Unique Travelled extensively

Not price sensitive Worked only in N co’s Hardware Engl/Germ/French Fras Very relational Very high Industrial Technical (eng/bus)

“My friends” Specialized Established 2 firms

Very small industry Long PLC Always worked Unique internationallyNot price sensitive “see no

barriers” Fluid sampler Engl/Germ/Swe/Da ICAS Very relational Low Consumer Technical (eng/mrktg)

Will not emphasize Not specialized Worked in int’l org.

personal network Long PLC Never lived abroad“experience from Unique production English &

Frenchworklife important” Not price sensitive

Smoke detectors Incatel Very relational Low Industrial 30 years in IBM

“friends” from Very specialized Stats & Business

time in IBM & Long PLC Made computer progr.

Telenor Unique Lived in Sweden &

Not price sensitive US Software Eng/Germ/French

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IRTech Very relational Very high Industrial Technical (engineer)

“personal friends” Specialized Worked in Geneve

Important network Long PLC for 8 years, 1 in US

from time in Very unique Studied 3 years in Swe

Elkem Not price sensitiveEngl/Germ/French

System detect cracks KLI Varies Medium Industrial Technical (engineer)

No own network Specialized Travelled extensively

(agents) Long PLC never lived abroadPrice sensitive

Engl/Germ/French Incinerator NorReg Mach Not relational Medium Industrial

(technical)“too technical” Specialized Bachelor

mrkt/financeHave some network Long PLC Lived 4 years

in USUnique Worked in Swe

4 yearsPackaging machines and Germany

1 year Engl/Germ/Fren/Span Norsk Display Relational High? Industrial Technical (engineer)

(attitude) Simple Little foreignwish it to be Long PLC experiencecloser Unique

Engl/Germ/French 1 v.imp.relation Electronic scales Opera Very relational Very high Consumer (Technical)

R&D cooperation Specialized Business educationw/customers Very short PLC Lived abroad

most ofCFO has netw. Unique grown

life (UK/Swe)imp.for finance Price sensitive English &

French Software Optoflow Not relational High Industrial Technical (electronics)

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“one-shot” Very specalized Only worked in N coWill not emphasize Very long PLC Travelled

extensivelyimp.of network Very unique in Europe and

US1 v.imp. Swiss Not price sensitive

Ebgl/Germ/French “experience fr. worklife” Cytometer Superject Varies Very high Industrial Technical (engineer)

1 very important Very standardized Worked abroad on

relation since 1993 Very long PLC N projectsin Swedish trading house Very unique

Travelled extensivelyNot price sensitive English

Seals to rotating shafts

Figure 5 Summary dimensionsOne surprising finding is that even though the founders state that they have a network of importance and find it rewarding to cultivate these relations, they might not have a very relational attitude towards other actors in the market f.i. customers. Mr. Løchsen in Dolphin f.i describes the general business climate as “largely of technical nature” (Løchsen, 2002), at the personal level on the other hand, he has a network of importance – the relations he has through a European Research Cooperation is emphasized. The founder of Optoflow describes their sales as “one-shot” and there is thus no ground for building relations with the customers. Mr. Gjelsnes in Optoflow states that “work methodology” is the most important he has got from life, not relationships – experience from previous work-life and finding which methods that work, is seen as most important for the success of the firm. This is said despite the fact that a very important Swiss connection aided him at start-up. Mr. Gjelsnes admits that this man was very important at the time, but he has no contact with him presently, “I don’t know if he’s still alive” (Gjelsnes, 2002). In addition he has important relations with various research organizations such as Sintef, Radiumhospitalet and Veterinærhøyskolen, that aid him on subjects where he has insufficient knowledge and they cooperate on R&D. This

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finding is supported by Uzzi (1997),who states that assumptions about individuals being either innately self-interested or cooperative are too simplistic, he found that individuals simultaneously acted “selfishly” and cooperatively with different actors in their network.

I have found that the three “subsidiaries” KLI, Nor-Reg Machine and ColorMatic is not very relational – is it because small companies need it more? In addition I found that the founders of Fras, Incatel and IRTech all refer to their business relations as “personal friends” – these companies are also the ones that sell products that are supporting needs at the customers that are referred to as “mission critical” – is there a connection? The customers with processes of the type, mission critical, are obviously very dependent on reliable suppliers.

Even if there are only three “subsidiaries” out of the twelve cases, eight of the cases have large, well-known companies in the back and of the last four cases, three have strong relations to at least one important actor to, as the founder of Superject put it; “get associated with something bigger” (Stokkan, 2002). ColorMatic is the “subsidiary” of Tronrud Engineering, KLI of Kay Lindegaard and Nor-Reg Machine of Nor-Reg. The large company in the back of Dolphin is Norsk Data, of Fras is Veritas, of Incatel is IBM and Telenor, of IRTech is Elkem and of Opera is Telenor. ICAS closely cooperate with insurance companies, Optoflow has very close relations to different research institutions and Superject has a very strong and long-lasting relationship with a large distributor, Elof Hanson in Sweden. The last firm, Norsk Display does not have a large firm in the back, but the founder expresses a wish to have closer relationships with the customers, he does not feel they have succeeded in that. This supports the findings of Crick and Jones (2002) who found that several firms were set up by managers with experience from international markets and most importantly they have developed networks and made contacts on which they could build on after setting up their own firms.

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When it comes to the background of the founder, the most striking is the fact that most of the founders have technical background. In addition, it seems that the founders of the two gradual global firms have quite extensive international experience and it is thus slightly puzzling why they have not moved faster on the internationalization process (might find answer to that in type of product and globalization of industry which is low for both firms).

Almost all of the cases’ products have a long or very long product life cycle no matter which category they belong to, this is quite opposite of what I was expecting. Not so surprising is the fact that all but two cases produce and sell industrial products, only Opera (software) and ICAS (fire alarms) sell consumer goods, Norway has no tradition of mass production at least not for a foreign market.

ConclusionsWe can assume that globalization will continue to escalate, bringing about fundamental changes in the traditional boundaries of nations, industries and market. This increased globalization creates great opportunities, but also poses significant challenges for managers and founders of new international ventures, opportunities and challenges that is important to understand to operate successfully in the new world market.

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