The Pace of Internationalization of SMEs Born Global vs.

Gradual Global

Work in Progress

Siv Marina Karlsen PhD-candidate Department of Marketing Norwegian School of Management BI Elias Smiths vei 15, Box 580 N-1302 SANDVIKA, NORWAY Phone + 47 67 55 73 43 Fax + 47 67 55 76 76 E-mail: siv.marina.karlsen@bi.no

Abstract
The 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?

Introduction
Background The 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.

Knight & Cavusgil (1996) believe that the slowness of the process described in traditional internationalization literature, may be an indication of managements 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

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. inexperience in international transactions, high Whatever reason, increasing evidence shows that in spite of small size and 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 firms 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.

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 Framework
The existing literature has not reached an agreement as to which conceptual framework and constructs should be used to explain a firms 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 teams experience in global markets, new technologies or innovations, etc.). 5

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 firms 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

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. critical in both the They found that the networks key individuals content and direction of the companys brought to bear on the case companys international activities, were internationalization; much of the ability of the company to initiate and carry through international operations resided in the decisionmakers personal networks (p. 179).

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. consequence of the slowness of the whole process is a adaptations to changing firm and incremental

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. others: A global industry is, in this thesis, conceptualized in a manner consistent with an industry in which a firms 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

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 Collection

Research Design I want to know more about this new type of firm what characterizes born globals and their internationalization process? Quantitative It usually research looks at a large group of cases, people or units and measures a limited number of features. A case study is more distinct. involves qualitative methods and focuses on one or a few cases during a limited time period. Since few studies have investigated these issues indepth, 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

10

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 indepth, 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 Autumn 2001. The case companies have been selected from a pool of respondents to a survey that was carried out in 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 From this I draw (2002) found in their study of Danish and US BGs that the average number of employees in the Danish sample was 60. 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

11

view is supported by Solbergs (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).

12

Pace of internationalization The 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 Globalization Globalization 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 valueadded 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 industrys 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 industrys 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/background This 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? start-up (Harveston, Kedia & Davis, 20002)? Personal Network According 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 Personal relationships to be studied in this thesis thus, That may be relationships in their characteristics of prior relationships and the role they have played have been sought. were relationships that key employees define as having an impact on their road to internationalization. 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 Whether 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. Has he/she lived abroad (Meisenbock, 1988; Reid, 1981)? What was the mindset of founder at

14

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 characteristics I 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. Performance I 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 firms total sales over a certain period of time (Ford & Leonidou, 1991:13). I decided to measure performance after all and used Moens (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 Knights, 1997 study) in addition to getting financial data from the interviewees and from a national data base (Brnnysundregisteret).

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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 firms degree of internationalization/globality. several No. of continents one GG BGE < 50% < Export within 3 years Figure 2: Classification of global SMEs TBG = True Born Global BGM = Born Global on Market dimension BGE = Born Global on Export dimension GG = Gradual Global BGM TBG

Short description of the cases I had to select firms that satisfied the framework conditions. No. of areas Several Fras Kay Lindegaard Colormatic IRTech

16

Opera Optoflow

ICAS Incatel

Dolphin Nor-Reg Norsk Display Superject

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%. 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%. 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. They are They are

17

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

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Case descriptions
The 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. firm along a number of dimensions. This was done for each

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

Colormatic inkdoser (Background Tronrud Engineering purely marketing & sales)

Product development 1983 Thronrud Eng. Established 1990s Thronrud approached by 2 printers 1996 1997 1st ed. Start-up ready (no success)

1998 1999 2000 2001 Prototype *Schaefer USA Sell to 22 USA Trade fair employed Germ. countries Japan in Birming-England, France direct export & ham (Ipex) Belgium, distributors Denmark, Australia & New Zealand** Direct export

19

*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 Start-upDir.Export Move ownersh. Buy-up Agent USA to US co. in US France Sales subs. USA

2000 Agent England

2001 2002 Agent Germany

USA & Chin

FRAS Fluid sampler (Background Norske Veritas Mission critical)

1975 1986 1990 1991 1996 Parker Heglunds France Veritas Looking Haneyfin follow Product customers (Norske Skog)

Start-up

1998 1999 2000 2001 Lloyds Licens Germany(Statoil)

China

2003

for investor

All production at Brdrene 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 Start-up New law Finland Sweden (40%) Germany *Production Agent Germany the Czech Republic

2001 2003 Australia S-Africa Subsidiary England

Produced in Norway in 1990, but found it too expensive so started production in the Czec 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 1999 2001 Elkem 1st systemCzechFranceFrance Engl. Taiwan Engl. GermanyUSAElkem Start-up UpU develop Germany USA Germany Korea TaiwanEngl Austr.wantedItaly grade Elke system Direct Korea Japan Sweden out Engl. 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 IBM Vedeld (-92) Amis picked coworker now leader Incatel

1959 1961 Vedeld 1st computer program

early 80s 1987 1989 1991 1992 1993/94 1997 1999 2001 2002 F Pilot Sysscan Amis Vedeld Start-up Tele Chech Belgia Telia Telekom TeleINKA bank- in Tele- Incatel Danm.Telekom Telekom British verket rupt verket (KPN) Telekom CimageCorenaCorena (IBM) dissolved (1994)

Kay Lindegaard Incinerators (Background - Kay Lindegaard)

1932 1960 1970 1979 1990s 1999 2001 2002 Start-up Start-up Ovens Hendriksen ProductionStart-up Agents all Russia Kay L Kay L for ship Croatia KLI over the world ovens Poland 1st followed customers

S-Korea

NOR-REG Maskin Packaging machines (Background Nor-Reg) 21

1967 1997 1999 2000 2001 2002 Parentco. Agents Sales subs Start-up co. subsidiaries establishedDenmarkSweden, Establish Japan Germany, production UK in Germany

Merged

Aim to use

w/mother due to bad experience w/ agents again distributors Snacksmarket USA

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

Norsk Display - Electronic Signs

1994 1995 1996 1997 1998 1999 EstablishStart-up/Denmark Internet USA Belgium contact export Finland Homepage import. Netherlands Germany relation (dir.export)

2000 2001 2002 Direct export US & UK to approx. 8 countries (Netherl. US, Finl, Sweden, Germ, Belgia, UK, Denmark)

Ge

Opera Software (Background Telenor)

2003

1991

1994

1995

1996

1998

1999

2000

2001

2002

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 StartUp 1994 Reodor prize 1995 1996/97 1997 Product UK Employed 1st sale N OEM 3 people 2001 BioDetect Korea 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 Start-upSweden Nearly Denmark Direct bankrupt export Stokkan (then Finland agent) Distributor (Swe) Meet important relation (distributor/Swedish)

2000

2001 Germany

2002 France bid

Take-over

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 Product employees (export) 2001(after3yrs) NOK ColorMatic 3 1997(00) 95% (90%) 11 mill Dolphin Fras ICAS 10 4 65 1991(92) 1996(98) 1989(92) 65 2.5 90% (90%) 80% (20%) 45% (30%) 46 mill 7 mill 27 mill 25 mill Sales 2001 Profit 2001 Inkdoser Hardware

NOK 0.53 mill - 21 mill 0.35 mill

Incatel Software IRTech Crack Kay L

1993/4(96) 80% (50%) 1995(95)

Fluid sampler 2.05 mill Smoke detector - 43 mill 1.24 mill

100% (100%) 3.1 mill

4.6 mill

2 1999(99) Combustion

50% (50%)

detection - 0.15 mill

23

NOR-REG 20 Packaging NDisplay 3

2000(01)

75% (75%)

17 mill 3 mill 28 mill

oven 0.3 mill 0.03 mill machines Electronic display Opera - 21 mill Cytometer Seals

1993/4(94) 60% (65%) 110 1995(95)

99% (99%)

Software Optoflow Superject 10 4 1993(97) 1990(91) 85% (90%) 70% (70%) 3.6 mill 3.2 mill -5.53 mill 0.29 mill

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

No.of areas 7 6 5 4 3 2 * Fras * KLI

* Opera * Fras today * Optoflow * IRTech

BGM
* ICAS * Incatel

TBG

* ColorMatic * * Dolphin Incatel today

* Norsk Display * Nor-Reg * Superject

GG
One 25% 50%

BGE
75% 100%

Export within 3 years

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 24

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. and Incatel. ColorMatic, Superject and Optoflow have become slightly more global. I have just drawn in the most extreme changes e.g. Fras

Discussion Five 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. Norway and were chosen to take part in the These two firms, Incatel and Opera, was rated as 2 out of 26 hottest firms in Norwegian Tech Tour where they are to make themselves attractive for representatives of the

25

worlds 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

26

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 Operas 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. Operas 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 industrys level of globality as low in that there are different standards from country to country, while in Operas 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. Operas 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 ColorMatic Not relational Low one-shot He has relations will not emphasize abroad Sweden/Holland Dolphin Not relational Contract important Data/electronics Important research Sweden relations extensively in N cos Fras firms Very small industry barriers Very relational My friends Very high

Product Industrial Specialized Long PLC Unique

Experience Technical Bit business studies (US) Worked

Not price sensitive Inkdoser Engl/Swed/Germ Very High Industrial Physics Specialized Medium PLC Unique Not price sensitive Lived in Travelled Worked only

Hardware Engl/Germ/French Industrial Technical (eng/bus) Specialized Established 2 Long PLC Unique Not price sensitive Fluid sampler Always worked internationally see no

Engl/Germ/Swe/Da ICAS Very relational Low (eng/mrktg) Will not emphasize org. personal network experience from French worklife important Incatel IBM Business time in IBM & progr. Telenor Sweden & Very relational friends from Low

Consumer

Technical Worked in intl

Not specialized

Long PLC Never lived abroad Unique production English & Not price sensitive Smoke detectors Industrial 30 years in Very specialized Stats & Long PLC Unique Made computer Lived in

Not price sensitive US Software Eng/Germ/French

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IRTech (engineer) Geneve

Very relational personal friends Important network

Very high

Industrial Specialized Long PLC Very unique

Technical Worked in for 8 years, 1 Studied

in US from time in 3 years in Swe Elkem Engl/Germ/French KLI Varies (engineer) No own network extensively (agents) Engl/Germ/French NorReg Mach Not relational (technical) too technical mrkt/finance Have some network in US 4 years Packaging machines 1 year Engl/Germ/Fren/Span Norsk Display Relational (engineer) (attitude) wish it to be closer Engl/Germ/French 1 v.imp.relation Opera Very relational R&D cooperation w/customers most of CFO has netw. life (UK/Swe) imp.for finance French Optoflow Not relational (electronics) High? Industrial Simple Long PLC Unique Technical Little foreign experience and Germany Incinerator Medium Industrial Specialized Long PLC Unique Bachelor Lived 4 years Worked in Swe Not price sensitive System detect cracks Medium Industrial Specialized Long PLC Price sensitive Technical

Travelled never lived abroad

Electronic scales Very high Consumer (Technical) Specialized Business education Very short PLC Lived abroad Unique Price sensitive Software High Industrial grown English & Technical

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one-shot Will not emphasize extensively imp.of network US

Very specalized Only worked in N co Very long PLC Travelled Very unique in Europe and

1 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 projects in Swedish trading house Very unique Travelled extensively Not price sensitive English Seals to rotating shafts Figure 5 Summary dimensions One 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. Lchsen in Dolphin f.i describes the general business climate as largely of technical nature (Lchsen, 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. with the customers. The founder of Optoflow describes their sales as one-shot and there is thus no ground for building relations 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 dont know if hes still alive (Gjelsnes, 2002). In addition he has important relations with various research organizations such as Sintef, Radiumhospitalet and Veterinrhyskolen, that aid him on subjects where he has insufficient knowledge and they cooperate on R&D. This

30

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 NorReg. 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.

Conclusions
We 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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