Needs of Global Start-up companies (Deliverable 2) GlobalStart wp1 Studies Deliverable 2 Needs of Global Start-up Companies Table of contents p
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- Abstract
- Executive Summary
- Introduction
- The entrepreneurial process and global startups
- Early Internationalisation in the Literature
- Method
Peter van der SijdeDutch Institute of Knowledge Intensive Entrepreneurship University of Twente P.O. Box 217, 7500 AE Enschede, The Netherlands Phone: + 31 53 489 3907 Fax: + 31 53 489 2159 E-mail: i.a.m.wakkee@utwente.nl An Empirical Exploration of the Global Startup Concept in an Entrepreneurship Context AbstractIn this contribution the global startup concept is discussed in relation to similar concepts in the literature such as born global firms and international new ventures. Based on a review of the literature on new venture internationalisation and a series of ten structured longitudinal case studies twelve propositions regarding the nature of global startup firms are formulated. Following this a definition of the global startup concept is proposed which is both theoretically and empirically closer to the nature of such ventures. Executive SummarySome 20 years ago the phenomenon of “global start-up” companies entered the research arena for the first time. Since then many papers have been published on this phenomenon using different names and conceptualisations. In the first part of this contribution we review the literature in which the content of the “global start-up”, “international new venture”, “born global”, “global high technology firms”, and similar concepts are discussed. In the literature these concepts are often treated as being (almost) synonymous, even if authors use different definitions and operational measures. The current descriptions and definitions are also lacking in that they only capture part of what it means to start globally, by only focusing on international sales of young but already established companies. Based on an analysis of all the descriptions, definitions and operational measures found in the literature we identified eight characteristics to define a global startup: (1) scope of international activities, (2) international intensity, (3) company age, (4) time to entry, (5) global diversity of international activities, (6) purpose of international activities, (7) technology intensity, and (8) company seize. After reviewing these characteristics, we arrive at the following preliminary definition of a global start-up company as “a new venture that from its inception (“opportunity recognition”) seeks to pursue opportunities wherever they arise (i.e. global or in a limited number of countries around the world), it coordinates multiple activities in the value chain through interaction with network actors around the world. The company is led by (an) internationally experienced and skilled entrepreneur(s).” In the second part of the article we explore this preliminary definition on the basis of empirical data from case studies. From the new venture internationalisation literature, we selected five existing cases (Ecofluid, Logitech, Heartware International, Sci-Tex and ChipIdea) and we conducted five new cases (four cases from the Netherlands and one case from Spain). All of the cases were analysed to identify the presence of the eight characteristics which define global startups. Following this analysis we propose twelve characteristics of global start-up companies that form the basis for a new definition: “A Global Startup is a new venture in which the startup and internationalisation processes are intertwined. Global Startups begin international activities even before the start of the actual exploitation process and they are driven by the global pursuit of opportunities. Global startups are embedded in international networks and engage in a wide range of formal and informal value-added activities across national borders.” This new definition reflects the complex reality of these ventures and is grounded in entrepreneurship theory. Our research has implications for both theory and practice. With respect to theory, global startup companies can be identified from a very early stage of development, through which a new line of research, taking into account opportunity recognition and preparation for exploitation, is opened up. This allows us to gain a deeper understanding of how global startups come into existence. Also, in more general terms, by adopting an entrepreneurship perspective, it can clearly be seen that there is more to starting global than solely engaging in international sales from an early stage. With regard to the implications for practice and policy making this research provides several starting points for supporting the incubation process of global startups. First, our definition allows for identification of potential global startups much earlier in their (nascent) existence than was possible with previous descriptions and definitions. Second, by pointing to the fact that global startups are involved in a much wider scope of (formal and informal) cross-border activities, the findings suggest that a more holistic approach to supporting of these companies should be adapted. With respect to the latter, the European Union supports a project to improve the support to this type of company; this present study gives input to the project. IntroductionCompanies that are internationally active from inception have attracted considerable attention from researchers in the field of entrepreneurship and international management under a variety of concepts and definitions. Over the years this variety has lead to confusion with regards to whether or not researchers are actually talking about the same or related phenomena (Wakkee & Harveston, 2003). In our view most of the existing (theoretical) definitions fail to capture the complex reality faced by such companies. In this paper this phenomenon of rapid and extensive internationalisation is placed in the context of the entrepreneurial process and following this, an overview of the concepts and descriptions used in the literature is presented. From this we put forward a preliminary definition of global startups, which is discussed and expanded on the basis of a series of real life cases and the paper concludes with the presentation of a description of global startups, which differs from previous concepts seen in the literature. The entrepreneurial process and global startupsEntrepreneurial ventures typically follow a development process consisting of three stages: opportunity recognition, opportunity exploitation and value creation (Dominguinhos, 2002; Shane & Venkataraman, 2000; Van der Veen & Wakkee, 2004). During the opportunity recognition process entrepreneurs develop initial ideas into viable business opportunities by (mentally) matching attainable resources and perceived market needs. During the opportunity exploitation stage, the business opportunity is translated in a concrete business concept leading to exchange with the market. The business concept incorporates all ingredients, necessary to enable this exchange. These include the combination of necessary resources (see for example Brush, Greene, Hart & Haller, 2001), the creation of a (new) organisation (Bruyat & Julien, 2001; Gartner, 1985, 1988), developing a network (e.g. Greve, 1995), the development of products or services, and the marketing plan. When this leads to the creation of marketable products or services, exchange processes between the firm and its customers begin to take place. During the opportunity exploitation process the exchange with the market increases to a higher level. Entrepreneurs continue to update the opportunity by adding new or improved goods and services to the market and by improving the internal operations of the venture. This leads to the creation of value in terms of financial gain; innovation; more choice for customers; increased knowledge, etc. The creation of value might be regarded as the outcome of the entrepreneurial process. At this stage the venture starts to establish itself in the market place (Van Der Veen & Wakkee, 2004). ----------------------Insert Figure 1 here---------------------- The entrepreneurial process is opportunity-based, with the entrepreneur initiating and directing the process from the original idea to the exchange with the market. However, the entrepreneur is not an independent actor. Rather, the entrepreneur is embedded in a social context and needs to interact with other actors to exchange information and resources to fulfil his/her goals. Depending on the entrepreneur’s position in the network, his/her activities are channelled and facilitated, but also constrained and inhibited (Aldrich & Zimmer, 1986; Carsrud & Johnson, 1989). Throughout the entrepreneurial process, entrepreneurs interact with many actors, activating different parts of this network at different stages to exchange ideas, resources and other necessary ingredients to pursue the opportunity. This model of the entrepreneurial process is a generic model and applies to the pursuit of opportunities in all contexts. Yet, when we look at this model in the context of internationalisation considerable specifications have to be made. Typically the opportunity recognition and preparation stages take place in a regional or national context and internationalisation only begins in a stepwise fashion when the exploitation of opportunities is well under way. For some companies however, the entire entrepreneurial process takes place in an international or even global context right from the generation of the initial idea. Such firms have been called by a variety of names and described using various definitions. Early Internationalisation in the LiteratureThe concept Global Startup is first mentioned in a practitioner’s paper by Mamis (1989). He uses this label in relation to the case of ‘Technomed’, a firm which went international before it even had a product and which was conducting business in 28 countries by the age (Mamis, 1989). Technomed’s international activities included utilising international human resources at the headquarters and foreign subsidiaries from the very start. Around the same time, Ray (1989) conducted a series of four cases in which he used the term global startup; later he revised and expanded these case studies (Ray, 1995) but, like Mamis, no formal definition or description of global startups is provided. Yet from his descriptions it is apparent that the opportunity on which these firms are based is typically global in nature, in the sense that the ideas are found abroad or the resources, partners, and markets needed to exploit the opportunity cannot be found domestically, i.e. they are globally dispersed. The Global Startup is defined more formally by Oviatt and McDougall (1994) as one that seeks to derive significant competitive advantage from extensive co-ordination along multiple organisational activities, the location of which is geographically unlimited. Such firms not only respond to globalising market conditions but also proactively act upon opportunities to acquire resources and sell outputs wherever in the world they have the greatest value. Since the works of Oviatt and McDougall (1994, 1995) the name global startup has seldom been used (for an exception see Hordes, Clancy & Baddelay, 1995). Many authors (e.g. Blomstermo & Sharma Deo, 2002; Harveston, 2000; Madsen & Servais, 1997; Moen, 2002; Saarenketo, 2002) refer to global startups in their literature review but they treat this concept as being synonymous with the more commonly used ‘born global’ concept. Rennie (1993) introduces the concept of the born global firm. He describes a born global as a firm that from inception views the world as its market and acts accordingly. He further states that these firms are typically young and sell more than 75% of their produce abroad. From this description Knight derived a more operational measure of born globals (Knight & Cavusgil, 1996; Knight, 1997), in which firms are classified as being born global when they begin international activities within three years and reach an export sales level of at least 25% (at the time of investigation). While the born global concept has been most widely adopted in the literature (e.g. Autio & Sapienza, 2000; Harveston, 2000; Moen, 2002; Rasmussen et. al, 2001; Rialph-Criado, Rialph-Criado & Salas, 2002; Saarenketo, 2002), many researchers who have claimed to utilise this definition have made changes to the operational measures without explicitly stating or explaining why this was necessary (Wakkee & Harveston, 2003). For example, Kandasaami and Huang (2000) increased the number of countries to five and the percentage of international sales to 40%, and decreased the number of years to two. Similarly, Harveston (2000) defines a born global as one that reaches an international sales level above 25% and that has activities in at least three countries within three years of inception. Recently Moen (2002) classified firms founded after 1990 with international sales levels over 25% as ‘born globals’. Oviatt and McDougall (1994) introduce the concept International New Venture and define it as a firm that from inception seek to derive a significant competitive advantage from the combination of resources and sale of outputs around the world. This definition necessitates that a decision has to be made concerning the time of inception. According to these authors inception is a gradual process, therefore, to determine whether a new venture will be an International New Venture, researchers should ascertain if there is a demonstrated resource commitment to sell the outputs in multiple countries upon completion of the development of the product or service offering. They distinguish between four types of International New Venture based on two dimensions: (1) the number of countries in which the firm is active and (2) the number of activities along the value chain that are coordinated internationally. Their classification of companies based on these dimensions allows us to recognise that the International New Venture does not exist, but that international new ventures can take several shapes; a global startup being one of these (see Table 1). Oviatt and McDougall’s global startup is the most radical manifestation of the International New Venture because it derives significant competitive advantage from extensive co-ordination along multiple organisational activities, the location of which is geographically unlimited. Such firms not only respond to globalising market conditions but they also proactively pursue opportunities to acquire resources and sell outputs, wherever in the world they have the greatest value. Oviatt and McDougall’s terminology (International New Venture and Global Startup) has not been widely adopted in the literature. Rasmussen and Madsen suggest (2002), that ‘global startups’ might be considered to be the only real type of international new venture because they are extremely flexible, proactive on a global scale, and they work in a large number of networks and relations. Nevertheless, these authors chose to adopt the name born global to describe this type of firm, as this name is most widely used and as they have used it in their previous work (e.g. Knight, Madsen, Servais & Rasmussen, 2000; Madsen & Servais, 1997; Rasmussen, Madsen & Evangelista, 2001). Recently, several researchers have combined Oviatt and McDougall’s (1994) definition of the International New Venture and Knight’s (1997) definition of the Born Global. For instance, Dominguinhos (2002) and Hurmelinna et al. (2002) define born globals as firms that reach 25% foreign sales after exporting within 3 years, and that from inception seek to derive competitive advantage from use of resources and sales in multiple countries. The label International New Venture is found frequently in the literature, but only two articles (besides the works of McDougall and Oviatt) were found which elaborate the concept. Based on a sample 213 firms, Jones and Tagg (2001) identified different types of ‘internationalisation startup patterns’ and ‘further internationalisation patterns’ based on the time to entry, scope of the activities (marketing, R&D and production), location of the activities (inside, outside the continent) and the intensity (number of links). One group of companies is called the International New Venture. To add to the confusion regarding the different names and definitions, they indicate that the similarity between their International New Venture and the global startup as defined by Oviatt and McDougall (1994, 1995) is striking. While the firms identified by Jones and Tagg do indeed perform a wide range of international activities, their approach however does not include any measure of global diversity. Therefore, it is not clear if these firms are indeed globally active or if they focus on a specific region. Following Oviatt and McDougall’s original framework Knudsen and Madsen (2003) suggest the use of international sales and international sourcing as the main dimensions in categorising international new ventures. They classify their ‘born global’ as a firm that sells more than 25% and sources less than 25% outside the home continent, while they consider firms that sell less than 25% but source more than 25% (outside the home continent) to be ‘born international’. Knudsen and Madsen’s framework is an improvement on the original born global definition because it recognises differences within the group of firms, which aligns it with the international new venture concept, yet it does not capture the full range of value-added activities. Because of their neglect of other types of international activities, and their focus on sales rather than sourcing, the original framework offered by Oviatt and McDougall has more merit, especially considering the possibility that some startups might not yet be involved in sales activities but are nevertheless globally active. Besides the concepts global startup, born global (firms) and international new venture, a large number of studies were identified in which similar or related phenomena were discussed. Some good examples in this respect are ‘Global High Technology Firms’ (Roberts & Senturia, 1996) and ‘Early-Stage Technology Firms’ (Preece et. al., 1998). These firms are typically described as being active in a high tech industry or engaging in R&D activities and selling part of their produce internationally. Although research suggests that new venture internationalisation is most widespread in high tech industries, other studies have shown that it is not limited to such sectors. Indeed research has shown that the phenomenon also occurs in industries such as the wine industry (Moen, 2002) or footwear (Simoes & Dominguinhos, 2001). As Zucchella (2002): states ‘the “high tech bias” may lead research to indicate the industry/product as a qualifying feature of born global firms, while it is only one of their possible attributes”. Therefore, using names like global high tech firm and high tech startups as synonyms for born global firms or International New Ventures does not do justice to low tech startups that engage in rapid internationalisation. Also, not all global high tech firms are startups, and not all high tech startups are global. Diamitratos et al. (2003) and Ibeh (2002) introduce the concept of the Micromultinational. These firms are ‘a separate body of internalised SME’s that control and manage value-adding activities in more than one country, using such advanced market servicing modes as international licensing agreements, international franchising, international joint ventures or foreign subsidiaries’ (Ibeh 2003:2). This definition is clearly not limited to startup companies. Size rather than age is used as one of the defining criteria. Furthermore, the focus on companies with international subsidiaries again leads to the omission of firms involved in other types of international business activities. Looking at the literature several issues come to the fore. First, the labels do not always reflect the type of behavior exhibited by the firms; for example, many ventures identified as born globals are not really global at all. Second, authors make variations to the definitions using the same labels often without explicitly stating the reasons for their choice and/or why these changes were necessary. Third, the different labels are often used as synonyms despite authors adopting various definitions and operational measures in their research. From the previous discussion on the various definitions and conceptualisations eight characteristics can be extracted which need to be considered for formulating the definition of global startups. These shall be discussed in the following sections, in some instances two of the characteristics are discussed in the same section as they are intrinsically linked. Table 1 shows how each of these characteristics have been incorporated in the different definitions. ------------------Insert Table 1------------------------- Comparison and Integration (1) Age and (2) Time to entry Considerable debate exists with respect to company age and time to entry. In most born global definitions the moment when the firm begins its first cross border activity is set at three years; other definitions (e.g. Harveston, 2000) stipulate that the international activities reach a certain level by the end of the third year. In our view the latter approach is preferred over the former when studying new venture internationalisation. The reason for this is that some firms may begin international activities early in their existence but only expand these activities after a considerable period of time. For instance, Knight et al. (2000) included ventures up to 20 years old in their sample, many of which possibly followed such a process. In such cases internationalisation may start when the firm has been involved in value creation for a considerable period of time, while the opportunity recognition and opportunity exploitation processes took place entirely in a domestic context. The definitions of the International New Venture and global startup of Oviatt and McDougall, which specify that internationalisation for such firms truly begins from inception2 and often originates even before inception (during the opportunity recognition process), are more useful when studying the phenomenon on the basis of the entrepreneurial process. Indeed, this suggests that even during the opportunity recognition process the entrepreneur is operating in an international arena. For this reason the definition of a global startup should include a measure of company age and a measure of the timing of international activities (time to entry). (3) Purpose In the definitions of the International New Venture and global startup as offered by Oviatt and McDougall and some definitions of born globals (e.g. Dominguinhos 2002; Hurmelinna et. al., 2002) the purpose of the international activities is included as a characteristic of such firms, i.e. to seek a competitive advantage. Also in explaining his definition of a born global Knight (1997) suggests that such firms do not simply react to requests and orders from foreign customers but they proactively seek opportunities. Thus, international activities are not only the result of a strategic decision, but a strategic necessity, inherent in the orientation of the firm. This view is very much in line with the entrepreneurship perspective and is more appropriate to startups than the focus on creating a competitive advantage, which applies better to established companies. (4) Scope and (5) International intensity The strong focus on international sales as a measure of the intensity of internationalisation in the definitions of born globals of Knight (1997) and others, make these definitions less applicable in the context of entrepreneurship and the entrepreneurial process because in the entrepreneurial process sales start at a relatively advanced stage, i.e. during opportunity exploitation. Yet, many activities related to opportunity recognition and preparation may also already take place in an international or even a global context (Fletcher, 2001; Karagazoglu & Lindell, 1998; Korhonen, 1997). Therefore, excluding these activities from the definition of global startups might result in omitting firms from the analysis, which are actually highly international but not selling abroad and this may (in turn) result in a less than complete understanding of the early development process of such firms. In our view, the definitions of the International New Venture and global startup, as described by Oviatt & McDougall, as firms that combine resources and sales of outputs internationally, offer better alternatives to apply to the study of such ventures in the context of the entrepreneurial process. For this reason we feel that the level of international sales (as a measure of intensity) does not have to be included in the definition of a global startup. At the same time, a measure of scope should be included in the definition reflecting the wide variety of activities firms engage in during each stage of the entrepreneurial process. (6) Global Diversity Harveston (2000; Wakkee & Harveston, 2003) observed that despite the presence of the word ‘global’ in the label, very few authors have used a measure of global diversity in their definition of born globals resulting in some ambiguity. Hordes, Clancy and Baddelay (1995) state that from the beginning global firms are faced with a number of additional challenges than those faced by international startups in comparison to ventures that are merely international. Knight et al. (2000) did not include a measure of global diversity and they concluded that most of their born globals are not actually globally active, in fact, their activities are limited to European markets. A few authors have tried to deal with this problem by adding a measure of globalisation to their definitions. Harveston (2000) states that born globals have activities in at least three foreign markets, while Knudsen and Madsen (2003) differentiate between international and global firms on the basis of the activities performed outside the home continent. Oviatt and McDougall (1994) take a more qualitative approach and indicate that the activities should take place in multiple countries (International New Venture) or even in an unlimited number of countries (global startup). The more countries and continents in which the activities take place, the more the entrepreneur has to interact with an international network and deal with differences in legal systems, culture, language etc., such differences add to the complexity of the process but also lead to new or increasing opportunities for doing business. For this reason when doing research from an entrepreneurship perspective, it is essential that a measure of global diversity is included in the definition of a global startup. (7) Technology intensity Considering technology intensity, it is often suggested that new venture internationalisation is most widespread in high tech industries (Harveston, 2000; Roberts & Senturia, 1996). As we have previously seen it is not limited to such sectors, it is also prevalent in amongst others the wine (Moen, 2002) and footwear (Simoes & Dimunguinhos, 2001) industries. Zucchella (2002) warns against this “high tech bias”, noting that industry/product is only one of a number of qualifying features of born global firms. Including a technological dimension in the definition of born globals would therefore preclude rapidly internationalising low tech firms and thus warrants omission from the definition. (8) Company Size Authors who study microMultinationals have focused on the size of such ventures. As we are interested in startups we consider that size is not a highly relevant concept. However, we do realise that most ventures discussed above will be small sized, simply because of their young age. Consequently, in our view size does not need to be incorporated as a distinguishing dimension in a definition of a global startup. Other Considerations, leading to a working definition Looking at the definition of the microMultinational it seems that the entry mode (direct import/export, the use of agents, or foreign subsidiaries) could be relevant. Although these entry modes may offer some insight in the development process of global startups, the existence of foreign subsidiaries is not a distinguishing characteristic of such firms. Therefore, the presence of foreign subsidiaries as such does not have to be included in the definition of a global startup. Instead we will take a more general perspective and state that global startups are involved in a variety of entry modes. The concept entry mode is frequently used in relation to international sales (direct export, use of domestic or international agents, setting up sales offices abroad (e.g. Johanson & Wiedersheim-Paul, 1975; Cavusgil, 1980; Coviello & Munro, 1995; Jones, 2001). For instance, a company can use direct sales, agents, local distributors, or a local sales subsidiary to enter different markets. Yet, from an entrepreneurship perspective we also need to take into consideration the activities related to opportunity recognition and preparation. Consequently informal entry modes will also have to be considered including, for example, the use of internet forums to obtain ideas for applications and the use of informal ‘brokers’ to identify and mobilise the necessary and often scarce, knowledge and technology resources. More often than not, these resources have to be globally acquired. Clearly network contacts play an important role in both formal and informal entry modes and rather than using the label ‘market entry modes’ as is traditionally done in the internationalisation literature we use the label ‘network entry modes’. In order to operate in such a context the entrepreneur must have international skills and experience. Although most studies acknowledge the role of the entrepreneur, entrepreneur-based characteristics have so far been treated as factors influencing the internationalisation of new ventures (e.g. McDougall, Shane & Oviatt, 1994; Harveston, 2000) rather than as a part of the identity of global startups. As a consequence, we conclude that the role of the entrepreneur has to be added to the list of characteristics. From the preceding discussions based on the literature, the following preliminary definition of a global startup is derived: A Global Startup is a new venture that from its inception (“opportunity recognition”) seeks to pursue opportunities wherever they arise (i.e. global or in an unlimited number of countries around the world), it coordinates multiple activities in the value chain through the interaction with network actors around the world. They are led by (an) internationally experienced and skilled entrepreneur(s). In the next part of the paper this working definition will be empirically explored. 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