Born Global Firms and Classic Internationalization Theories

Introduction

Thirty years ago, the multinational was distinct from national organizations both in its geographical reach and in the managerial complexity it confronted. Over time, the barriers to internationalization have fallen and the population of multinationals has mushroomed. Today there are few, if any, large commercial organizations that are entirely national in the scope of their operations — from supply chains to customers. Consequently, the distinction between multinational enterprise and "big business" has effectively disappeared (Wetzel, 2005). Many new firms are now "born global," especially in digital markets. For the purposes of organizational studies, interest has shifted into what can more generally be called corporate strategy. How can one satisfactorily explain the causes of firms' long-run performance? (MacMillan et al., 2005).

These questions share the common theme that it is not structure per se that shapes performance, but rather the informal structures — the underlying processes and the people. The field of strategy has moved well beyond the tenets of industrial economics. It is no longer held that industry structure is the prime determinant of firm performance: the variance of performance around the industry mean is simply too great. Besides, it is much less clear today than thirty years ago where the boundaries of an industry lie (Aspelund & Moen, 2001). US banks now channel less than 20% of the nation's money flow, having given way to new competitors such as supermarkets and pension fund managers. Similarly, competitors with similar strategies, structures, and resources will experience quite different outcomes. One must look at the "dominant logic" a management team has adopted to understand how resources are both created and allocated.

Early work in this area was done at a time when just a few multinationals were beginning to experiment with some form of matrix organization. These were the multinationals at the extremes of complexity in the array of products, technologies, geographies, and cultures assembled to deliver returns to shareholders (Moen & Servais, 2002). They faced the most severe managerial challenges. Since then, many others have joined those pioneers. Indeed, Knight and Cavusgil's (2009) "transnational" organization — a development of the early "grid" model — was presumed to be the ideal goal for multi-industry players. More recent evidence, however, has shown that the ensuing complexities for firms such as ABB acted to reduce margins and erode competitiveness over time. Even attempts to create a "mental matrix" rather than a structural solution have lacked conviction.

In organizations that have been dubbed "metanational," new approaches are visible to the old problem of managing the core asset of the firm: knowledge (MacMillan et al., 2005). Better ways to create and integrate knowledge across internal boundaries may in turn inspire a whole new generation of organizational solutions to the management of complexity. If the limits of both scale and complexity are pushed back, then perhaps the trillion-dollar corporation will become a reality (Madsen & Servais, 2007).

In addition to these internal process developments, complexity is also being addressed as managers choose different ways to draw a boundary around the assets they plan to own. This is an age of outsourcing, indirect supply chain management, and, most notably, strategic alliances. One does not need to own an asset in order to control it, or at least gain benefit from its existence under someone else's ownership. Whereas earlier debates about organization concerned markets versus hierarchies, today the role of contracts must also be considered. It is becoming commonplace for managers to talk about their "asset ecologies" — those assets that help create value for them (McNaughton & Bell, 2000). Microsoft, it has been estimated, owns a mere four percent of the assets that create its value, with the rest coming from contracts such as those with IBM. The consulting firm Accenture estimated that strategic alliances of all types could contribute more than $25 trillion to the revenues of US firms by 2004, and that a substantial number of Fortune 500 firms would have 40% of their revenues and profits from alliances (Lumme et al., 1998).

Should this occur, many firms would have to modify their approaches to organization quite seriously. The dominant logic of organizing a hierarchy — albeit a flattening one — is quite different from that required to manage collaborative arrangements. Whereas many firms currently regard their alliances as exotic options at the periphery of their empires, tomorrow they will have to create alliance management capabilities as a central plank of their strategies. All these options may serve to add new complexity for management until the governance provisions and logic are sorted out clearly. How managers go about this task will provide a fruitful and challenging domain for future research (Lautanen, 2000).

The internationalization process model, Vernon's product life cycle model, and various theories of corporate control and coordination have been examined to ascertain what insights they offer toward understanding the relationship between FDI and strategy (Mason & Harrison, 1999). The mechanistic nature of the product life cycle and internationalization process models meant they did not offer a role for strategic decision-making in either mode choice or locational choice. The literature addressing corporate governance systems, on the other hand, suggests that FDI — especially that funding wholly-owned subsidiaries — is likely in MNCs that have adopted integrated global governance structures, because of the control this mode offers. Such control is essential in highly integrated MNCs to ensure that interdependent subunits behave in a mutually supportive manner.

Research examining the internationalization of the Australian economy has focused primarily on macroeconomic aggregates such as the levels of imports and exports and the growing importance of these to Australian GDP (Aspelund & Moen, 2001). Relatively little attention has been given to the internationalization of the economy through offshore production by Australian firms or through production within Australia by foreign multinationals — the exceptions being McKinsey and Company (1993), Yetton, Davis and Swan (1991), the Department of Industry, Science and Technology (1994), and the Bureau of Industry Economics (1995) (McAuley, 1999). The dynamic nature of internationalization, and associated financing methods such as FDI, calls for research that is responsive to the longitudinal character of internationalization as a development process through time. While it is valuable to study individual events, a more complete picture is supplied when the whole development of a firm from its founding to the present is examined (Knight, 2006). Hence, a rich, broadly focused study resulting from careful examination of a few organizations over a long period of time may be superior to statistically rigorous but narrowly focused studies (Knight & Cavusgil, 2009).

Born Global Firms

Stage models of internationalization — including those of Vahlne and Johanson, Vernon, and evolutionary models of international structure including those of Stopford and Wells, Franko, and Bartlett and Ghoshal — are based on surveys of manufacturing firms. The internationalization of service firms and firms that combine goods and services requires more attention (Landstrom, 2004). This observation is highly relevant for Australian scholars, as the majority of Australian FDI abroad has been directed toward service firms (Johanson & Vahlne, 1990).

Even though classic internationalization theories dictate that foreign direct investment (FDI) is mostly sanctioned by larger, entrenched companies (Caves, 1971, 1996; Chandler, 1990), rapidly falling trade and investment barriers, technological progress, enhanced information technology, and diminished transportation costs have revealed that classic theories do not always represent genuine business performance. Globalization forces and environmental drivers — including increasing market liberalization and advances in information and communication technologies (Bell et al., 2004) — have changed the realities of conducting international business (Cavusgil et al., 2008).

Research should give attention to new patterns of internationalization, including that of born global firms. Have McKinsey's born global firms performed as well as those Australian firms that have pursued more traditional, sequential entry methods? Have service firms followed the same pattern? Do Australian firms move more quickly through the exporting stage, or even skip it, more rapidly than firms from other countries? If so, do geographic, structural, or historical factors explain the difference?

Research should also give more attention to the acquisition mode. Firms with what organizational patterns are more likely to acquire existing firms? At what stage of internationalization is acquisition more likely? Such research should not assume that these decisions are always rational. Irrational factors may at times be important. For example, it might be that the rush to acquire businesses in Europe prior to 1992 and in Asia in the mid-1990s reflected a bandwagon effect, with firms developing strategies to legitimize their investments after the decision had already been made (McDougall et al., 2004).

Research might also give attention to a broader range of entry modes beyond exporting, licensing, and FDI. Strategic alliances with local or other foreign firms may involve no transfer of funds. Alliances are another entry mode that delivers similar strategic advantages to joint ventures but has received little attention in the literature beyond firms whose home country is either the US or Japan (Moen, 1999). Studies of structure and coordination of MNCs have been characterized by cross-sectoral approaches and findings expressed in static models (McNaughton & Bell, 2000). How and why do control and coordination mechanisms change over time, and how do these changes interplay with strategic actions? Have Australian firms altered their international organizational structures over time? If so, have they followed the US pattern incorporating international divisions, the European pattern, some other pattern, or none at all?

Classic Internationalization Theories

Reference to internationalization theories suggests that the degree of internationalization might be seen from three perspectives: performance (what goes on overseas; Coviello & Jones, 2004), structural (what resources are overseas; Moen, 1999), and attitudinal (what is top management's international orientation; Freear et al., 2004). From this approach it follows that trade theory and the theory of FDI may be considered within the same theoretical context (Wetzel, 2005). This is further confirmed by the new approach that emphasizes firm-level sources of comparative advantage and international competitiveness.

Thus, in addition to the more conventional explanations based on industry- and country-level factor endowments, inter-firm gaps in technological capabilities and the duration and effectiveness of the learning process may determine a competitive edge internationally. Moreover, these intermediate forms of internationalization cannot be regarded as second-best entrepreneurial choices, but as genuine first-best options depending on the specific characteristics of the firm and the market. In this perspective, the choice of the preferred stage of internationalization takes on a strategic dimension (Aspelund & Moen, 2001).

However, the strategic choice of international expansion for a Small and Medium-size Enterprise (SME) is crucially different from that of a large corporation. This reflects the different capabilities to influence and cope with a complex external environment characterized by asymmetric information, different risk propensities, and different opportunities to exploit economies of scale and scope. Sometimes these capabilities are available in-house, but often they must be purchased from outside. A large corporation is often capable of internalizing these capabilities (Wetzel, 2005). In contrast, an SME must rely on real and financial services purchased from the market, and these services will be more varied and complex the more developed the stage of internationalization. For these reasons, and due to the high transaction costs involved, SMEs are expected, ceteris paribus, to confine their activities to the simpler stages of internationalization (Mason & Harrison, 1999).

Conclusion

Oviatt and McDougall's new venture internationalization theory identified knowledge as a unique resource and one of four necessary and sufficient elements in their model of sustainable international new ventures. Knowledge intensity has been identified as a key source of international competitive advantage by several international entrepreneurship scholars. In his internationalization studies, McNaughton (2001, 2003) found that knowledge-intensive firms served a broader scope of international markets and had a more rapid pace of internationalization as they sought to exploit narrow windows of opportunity and to gain first-mover advantage (Oviatt et al., 2005).