chapter 11 - innovation

8/10/2019 Chapter 11 - Innovation

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Rugman and Collinson, International Business,6thEdition, Pearson Education Limited 2013

Innovation, Entrepreneurship and

Born Global Firms

Chapter 11


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Innovation, Entrepreneurship and Born

Global Firms

Objectives Introduction

The location of innovation activities in the MNE

International small- and medium-sized enterprises(SMEs)

International business theory and internationalnew ventures

Dynamic capabilities and small firms

The practical challenges for internationalizingSMEs.


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Objectives

Understandthe international dimensions of innovation, forlarge and small firms. What innovation advantages can firmsgain from being international, in theory and practice?

Examinehow companies in various industries can organizedifferent kinds of innovation activity in different locations, to

derive particular benefits. Analyzesmall- and medium-sized enterprises (SMEs), with

a particular focus on why and how they internationalize, thepractical challenges they face and the kinds of theories thathelp explain why they venture beyond their own national

borders. Explain,using concepts such as dynamic capabilities, born

global and born regional, entrepreneurial life cycles,networks and industry clusters, what differentiates successfrom failure for international and innovative small firms.


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Introduction Innovationis the renewal and enlargement of the range of

products and services and the associated markets; theestablishment of new methods of production, supply anddistribution; the introduction of changes in management,work organization and the working conditions and skills ofthe workforce.

Entrepreneurshipand innovation go hand-in-hand.Entrepreneurs, whether they are working in small or largefirms, as owner-managers or employees, are distinctivebecause they have the capability and motivation to pursueinnovative commercial opportunities that are riskier and

more radical than normal. They identify such opportunitiesand assemble the resources and capabilities needed tocreate value.

Born globalis a term used to describe a firm that is, fromits beginnings, immediately or very quickly reliant on a global

presence to survive and succeed.


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International dimension of innovation


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MNEs manage business operations across a range ofcountry contexts, each of which represents a different set

of opportunities for innovation, in two specific ways: innovation input opportunities

distinctive output opportunities.

National Innovation Systems(NIS) are characterized by

the quality of local scientific, technological, design-relatedand creative expertise, combined with institutionalrelationships between enterprises, universities andgovernment research organizations. Regional variations inthese components partly account for firm-level differences

in innovation-related capabilities and competitiveness. Internationalization is related to innovation in MNEs. The

two main forms of internationalization, namely, market-seeking and resource-seeking very often go hand-in-hand.

International dimension of innovation


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Figure 11.1: Internationalization drivers for the innovative multinational firm


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The location of innovation activities inthe MNE


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Figure 11.2: Structural, strategic and organizational dilemmas for the innovativemultinational firm

Source: Adapted from Bartlett and Ghoshal (2002)


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Figure 11.3: Global MNE structures for managing innovation

Source: Adapted from Nohria and Ghoshal (1997)

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The innovative MNE as a differentiatednetwork

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Recombination capability is the capability to combine (and

continually recombine) various inputs (particularly knowledgeand expertise) into the innovation process, from differentlocations, to serve different customer needs across a variety ofmarkets.

The ability to exploit this advantage depends to a significantdegree on how they are structured to manage networks that

connect these locations and incentivize specialists to connectacross these networks to add value. Differentiated networks require strong integrative and dynamic

capabilities to operate effectively. Firms that operate as dynamic networks also balance the

division of decision-making responsibility for innovationbetween headquarters (the center) and subsidiaries (theperiphery). They need to develop appropriate organizationalmechanisms.

Ambidexterity is the ability to be aligned and efficient in itsmanagement of today's business demands while

simultaneously being adaptive to changes in the environment.

The innovative MNE as a differentiated

network

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International small- and medium-sizedenterprises (SMEs)

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SMEs or small- and medium-sized enterprises(SMEs)are defined by Governments usingdifferent criteria for policy purposes. SMEs arefirms with less than 250 employees in Europe,

but less than 500 in the US. Indianmanufacturing firms qualify as SMEs if theyinvest less than US$2 million in plant andequipment.

What are small firms?

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Table 11.1 Various definitions of small and medium-sized enterprisesSources:Annual Report, 2008-09. Ministry of Micro, Small and Medium Enterprises, India; www.msme.gov.in; ShambhuGhatak, 2009. Micro, Small- and Medium Enterprises (MSMEs) in India: An Appraisal:http://www.esocialsciences.com/data/eSSResearchPapers/ eSSWPArticle20091126151144.pdf; EU Enterprise and Industrydirectorate, SME definition: http://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/sme-definition/index_en.htm;USAID, 2007, Booklet of Standardized Small- and Medium Enterprises Definition-2007, the United States Agency forInternational Development http://pdf.usaid.gov/pdf_docs/PNADM845.pdf

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http://www.msme.gov.in/http://www.esocialsciences.com/data/eSSResearchPapers/%20eSSWPArticle20091126151144.pdfhttp://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/sme-definition/index_en.htmhttp://pdf.usaid.gov/pdf_docs/PNADM845.pdfhttp://pdf.usaid.gov/pdf_docs/PNADM845.pdfhttp://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/sme-definition/index_en.htmhttp://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/sme-definition/index_en.htmhttp://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/sme-definition/index_en.htmhttp://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/sme-definition/index_en.htmhttp://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/sme-definition/index_en.htmhttp://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/sme-definition/index_en.htmhttp://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/sme-definition/index_en.htmhttp://www.esocialsciences.com/data/eSSResearchPapers/%20eSSWPArticle20091126151144.pdfhttp://www.msme.gov.in/


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Within studies of SMEs in general, there is someevidence that they are more innovativethan theirlarger counterparts. According to the US SmallBusiness Administration (US-SBA), this set of

firms does stand out for their innovativeness. They hire 40 percent of high-tech workers such as

scientists, engineers and computer programmers.

They produce 13 times more patents peremployee than large patenting firms and thesepatents are twice as likely as large firm patents tobe among the one percent most cited.

SMEs and innovation activities

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International activities of SMEs

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The data shows that, in general, a relatively small number ofSMEs sell products and services outside their domesticmarket, compared to the total number of active SMEs. Whenwe consider another key measure of internationalization,foreign direct investment (FDI), again SMEs are less

prominent than large multinational firms as sources of FDI. In the European Union, just a quarter of all SMEs export orhave exported at some point during the last 3 years.Moreover, their international activities are mostly gearedtowards other countries inside the internal European marketand only about 13 percent of EU SMEs are active in markets

outside the EU. In India, SMEs account for an estimated 40 percent of total

exports. In the U.S. just over 97 percent of all identified exporters are

SMEs, and these firms produce 30 percent of the known

export value.


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International SMEs can be engaged in trade and/or FDIto access inputs or to sell outputs from abroad. If theystick to trading via imports (for inputs such as resources,materials or expertise) and exports (for their outputs, i.e.products or services) then they are relying solely on

international market transactions to underpin theirrelative position in the industry value chain. By engagingin FDI a firm internalizes a particular input or outputactivity based outside its home region. In this way itbecomes a multinational firm.

Given firms have the option to import or export andengage in FDI instead of one or both of these forms oftrading, we can map out four modes of internationaloperation (1a and 1b plus 2a and 2b in Table 11.2).


(Continued)

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Table 11.2 Types of international SMEs by trade and FDI up and down the value

chain

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International business theory andinternational new ventures

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Born global firms Born global firmsare also referred to as international new

ventures(INVs) in the international entrepreneurship literature.They can be defined as business organizations that, frominception, seek to derive significant competitive advantage fromthe use of resources and the sale of outputs in multiplecountries.

A number of ongoing debates have developed around the

concept and the empirical reality of the born global firm. Threekey areas of dispute:

The applicable definition of global, specifically, is a firm bornglobal (or global at all) if it simply exports and imports productsand services and has no FDI (which is a common definition ofan MNE)?

Are born global really global in terms of their cross-border tradeand/or FDI, or are they regional?

How quickly does a small firm need to develop a globalpresence to be called a born global firm? That is, what doesfrom inception mean in the above-mentioned definition?

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Born global firms (Continued)

Some studies define new in this context as lessthan 6 years old and it was this aspect of INVsthat was most at odds with established theoriesof internationalization. As many small firms do

rapidly internationalize, without going through thegradual, stepwise process depicted by theUppsala model, this presents a challenge forinternational business theory.

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Born global vs. Born regional Another debate has focused on the scope of internationalizationby

small firms.

Based on the broad concept of the triad regions (i.e. North America,European Union and Asia-Pacific), Rugman and Verbeke introduceda regional aspect to the Uppsala schoolsstepwise and incrementalinternationalization process of multinational enterprises. The worldslargest MNEsdo not operate globally and evenly across the triad, buttend to be clustered in the nearby countries of their home region ofthe triad.

This same argument therefore applies to international new ventures. INVs are subject to the multiple liabilities of smallness, newness and

foreignness, they are expected to show stronger home regionorientation than large-sized and already-established multinationalenterprises.

Given their limited resources, small firms can be expected to reducerisk by selecting nearby countries in their home region as the finaldestination of their internationalization strategy from inception.

INVs are likely to be born regionally, not globally, within theirhome region of the triad when going abroad into foreignmarkets.

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B l b l B i l


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Born global vs. Born regional

(Continued)

Other theoretical perspectives (the resource-based viewof the firm, transaction costs economics, organizationallearning) in the management field can be found to supportthe assertion that international new venturesare more

likely to be born regional, not global. Born regional firms tend to locate their overseas

businesses in their home region of the triad to escape theliability of interregional foreignness.

Born global firms are identified in other studies may wellbe the exception, rather than the rule.

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Dynamic capabilityis the firms ability tointegrate, build and reconfigure internal andexternal competences to address rapidlychanging environments. The dynamic

capabilities approach has also been seen as auseful conceptual and analytical framework forunderstanding small, adaptable firms.

Dynamic capabilities relate to the processes bywhich, and the success with which, small firmslearn to grow and adapt to changing threats andopportunities in their surrounding competitive

environment.

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Life cycles, networks and clusters

Life cycle modelsare commonly used to depict thegrowth profiles of SMEs. Creating, developing andleveraging personal networks to steer the small firmthrough these obstacles to growth is the core

dynamic capability of the entrepreneur. Local networks or clustersare the lifeblood of

new business growth. A unifying theme is the needfor a critical mass of entrepreneurs, venture

capitalists and particular kinds of specialists plus arisk-embracing culture of trial and error. Theingredients create a dynamic mix underpinning a self-reinforcing local growth cycle.

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The practical challenges for

internationalizing SMEs

SMEs face significant limitations compared tolarge firms, making internationalization strategiesriskier. These limitations mean that small firmsoften need to be that much more entrepreneurial

and innovative and/or take risky shortcuts, toexpand across national borders.

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How do SME managers know which

markets to enter?

Mathews and Zander propose three milestones of internationalentrepreneurial processes:

(1) The discovery of new opportunities

(2) The deployment of resources in the exploitation of theseopportunities

(3) Engagement with competitors. The first major challenge for any firm looking to expand

internationally is to decide which market location offers the bestcostbenefit opportunity.

A study by Collinson and Holden (2005) used mental maps tocapture the perceptions of decision makers in a sample of BritishSMEs of the relative risks and rewards of foreign markets.

Mental mapsare defined as cognitive representations of thenature and attributes of the spatial environment. They representimages of spatial environments developed by individuals based ontheir collated influences and experiences and information available

to them.

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Modes of entry and adaptation for

success in foreign markets

SMEs are often assumed to opt for low equity and cooperativestrategies because they have less access to financial assets or thelevel of human resources needed to support these highercommitment modes of entry. This also means that they have toquickly reach a level of profitability when they enter new marketsbecause of their limited ability to raise investment capital.

Clearly, the specific challenges vary depending on the nature ofthe target country market and the individual firm. One in-depthstudy of British SMEs in Japan (Collinson, 1996) confirmed thegeneral conclusion above, showing that small firms tended to

enter into joint ventures and collaborative alliances with Japaneseenterprises in order to gain local knowledge and credibility withkeiretsu networks and to share the investment risks. The studyalso showed how market barriers faced by all firms proved to bemore challenging for small firms.

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