Going global early pays off

16 May 2005

New research from the Graduate School of Business (GSB) has found that international-sales intensity among new ventures that internationalise early is more than twice that of those that do so later.

The research, conducted by the GSB, the London Business School, the Indian Institute of Management in Bangalore and IPADE in Mexico, examined 343 owner-managed firms from China, India, Mexico and South Africa (of these 47.5% qualified as international new ventures). These companies were drawn from five traditional manufacturing industries and seven knowledge-intensive industries.

"This was the first significant research on entry timing and the subsequent performance of new ventures from emerging markets," said Eric Wood, Liberty Life Professor of Entrepreneurship at the GSB and one of the authors of the research.

The findings can be divided into five key areas. Firstly, the research shows that delaying international market entry has a sustained negative effect on the potential for expanding international-sales intensity.

International new ventures are more heavily focused on international sales, whereas those firms that internationalise later appear to retain a strong domestic orientation well beyond their first international sale. Other research studies also indicate that these firms experience significant inertia in adapting their routines to the requirements of international markets. They also tend to remain focused on their domestic market.

Secondly, a company that has a proprietary technology at start-up, such as a unique software product, is more likely to be an international new venture. However, it was found that having a proprietary technology has a significant negative effect on international performance. This implies that many entrepreneurs in innovative firms overestimate their ability to expand their international sales.

Thirdly, external knowledge from foreign customers appears to play a crucial role in early international market entry and in expanding international sales.

An important common theme in the study concerns the valuable role that foreign customers play in identifying a business opportunity and transferring technical and market knowledge to the firms from emerging markets. Indian companies, for example, relied largely on foreign information-technology firms, both to obtain new business and to provide product specifications.

Fourthly, testing new products on foreign customers first is also linked to a significantly higher probability of an international new venture and significantly higher international-sales intensity.

Testing new products on foreign customers means that there is close interaction with them and that the new products are developed primarily for them. Establishing such relationships with foreign customers does not appear to depend on intensive research and development (R&D) activity.

This indicates that good international business opportunities exist for new ventures in emerging markets and that these can be exploited without significant R&D investment.

Fifthly, strategies based on cost advantages or on customers with specialised needs were associated with higher levels of international sales intensity.

Wood said that the above findings have important policy and management implications.

"The fact that neither unique knowledge assets nor intensive internal knowledge development are generally required for early international market entry implies that selling beyond national borders may be a viable option for a larger proportion of entrepreneurial ventures in emerging markets, and at a younger age than is generally thought to be the case."

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