The development patterns of newly internationalising firms
What happens when a company decides to ‘go global’ and enter foreign markets? What are the typical growth patterns of international new ventures (INVs) as opposed to more traditional exporters? Vlerick’s Prof Leo Sleuwaegen and researcher Jonas Onkelinx have conducted a study that provides some interesting answers.
Despite a growing body of international entrepreneurship literature, the evolutionary patterns of international new ventures (INVs) − i.e. firms that start operating abroad from their inception − are not well understood. In their published paper, the authors track the evolution of newly internationalising firms over time, with a focus on export growth, commitment and survival of INVs. To this end, they have used a unique and large longitudinal micro data set covering Belgian firms' export operations across all industries over the period 1998–2005.
A strategic perspective
The authors use a strategic lens to help us understand why INVs are different from traditional exporters (firms that start exporting in a later stage) and also why not all INVs follow the same development path. In essence, the strategic approach holds that the firm's competitive environment and resource base will lead internationalising firms to adopt either a sprinkler or a waterfall strategy:
- The sprinkler strategy involves rapidly entering a wide range of markets in a committed and credible manner in order to secure a strong market position.
- The waterfall strategy, on the other hand, implies making small initial commitments and gradually penetrating additional markets over time.
Prof Leo Sleuwaegen: “We take a strategic perspective to help us better understand why newly internationalising firms show different development paths. This is important because, despite the considerable research attention paid to accelerated internationalisation, the paths of INVs after their initial entry into international markets remain unclear. In the paper, we investigate how the strategic intention is related to the firms’ performance in the international markets.
“We distinguish between companies that have a real international ambition from the beginning – which we call ‘global start-ups’ – and more traditional firms that enter international markets in a very gradual, incremental way:
- We find that the global start-ups start with a very strong initial commitment, which means large international sales from the start; they also grow faster than the traditional firms, and they are persistent and stay committed to their international markets.
- The traditional, incremental exporters do it in a more trial-and-error way − and if it doesn’t work, they often retreat from the international markets and focus again on their domestic markets.”
Findings for managers
Prof Sleuwaegen: “From a managerial perspective, our findings imply that, despite the constraints that young firms with limited resources face, various ways are available to them to successfully enter international markets and maintain growth. Success will depend on a careful choice of foreign market penetration strategies.
“In choosing between a sprinkler and a waterfall strategy, managers should seek to maximise consistency with the firm's overall competitive strategy, which, in turn, should be consistent with the industry environment of the different foreign countries that the firm has chosen to penetrate:
- In slowly growing industries – and in industries where competition is weak – a waterfall strategy allows firms to capitalise on lead and spill-over benefits and, at the same time, minimise risk as they expand abroad.
- In highly competitive industries, characterised by short product life cycles and rapidly growing markets, a sprinkler strategy is more appropriate. A sprinkler approach can maximise revenues for small firms operating in a global niche market, without necessarily adding excessive risk. Here, ex-ante analysis and active learning over the development process should help stimulate growth and reduce risk.
“Diversity in terms of markets is an asset, and managers should actively exploit the learning advantages from operating in differentiated markets. Being well prepared and making a commitment of time, people and resources to exporting reduces the short-term risk of failure, while continued international commitment can enhance survival in the long run.
“This should stimulate managers to see exporting as an important instrument for learning and continuous growth. It should, therefore, receive due attention at an early stage in the design and implementation of long-term competitive strategies.”
Source: 'International commitment, post-entry growth and survival of international new ventures' by Leo Sleuwaegen, Professor of International Strategy, KU Leuven and Vlerick Business School, and Jonas Onkelinx, Vlerick Business School. Published in Journal of Business Venturing 29 (2014) 106–120.