2 Introducing the Born Transnational Firm as a Distinct Type of International Start-Up

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1 2 Introducing the Born Transnational Firm as a Distinct Type of International Start-Up 2.1 The Notion of Transnational Networks As was indicated in the introduction, more and more firms tend to expand their business activities to international business environments. It is thus important to note that the very act of expanding across borders, especially through capital-intensive forms of foreign direct investment 1 (FDI), multiplies organizational complexity (Bartlett and Ghoshal, 2002: 77). Facing different organizational demands in international environments, firms need to employ an organization model that properly fits their particular foreign business strategies (Ghoshal and Nohria, 1993: 23; Hill et al., 1990: 117). Building upon interviews of more than 230 managers in nine of the world s largest internationalized corporations, including the leading American, European, and Japanese competitors in three different industries, Bartlett and Ghoshal (2002: 15-18; 1987: 8-10) stated that, until the 1980s, most industries were primarily dominated by a particular one-dimensional strategic requirement - the need for local responsiveness, global efficiency or worldwide learning. With this in mind, they developed a threefold typology of organizational archetypes: Multinational corporations focus on the need for local responsiveness by managing a portfolio of multiple national entities that are sensitive to varying local environments, global corporations focus on the need for global efficiency by developing products and services in a standardized manner for a unitary world market, and international corporations focus on the need of worldwide learning by transferring and adapting the knowledge of the headquarters to foreign markets. Considering the associated mentality, configuration and focus, Table 1 sketches the key characteristics of each of these three organization models. 1 FDI takes place when a firm from one country provides capital to an existing or newlycreated firm in another country for the purpose of having control over its production, distribution and other business activities (Jones and Wren, 2006: 7f.; Moosa, 2002: 1). M. Krikken, Social Capital and its Impact on Born Transnational Firms, BestMasters, DOI / _2, Springer Fachmedien Wiesbaden 2014

2 6 Introducing the Born Transnational Firm as a Distinct Type of International Start-Up Type Multinational Organization Model Global Organization Model International Organization Model Multinational Mentality Decentralized Federation Focus on Responsiveness Global Mentality Centralized Hub Focus on Efficiency International Mentality Coordinated Federation Focus on Learning Key Characteristics Management regards subsidiaries as a portfolio of independent businesses Many key assets, resources, responsibilities, and decisions decentralized Building strong local presence through sensitivity and responsiveness to local differences Management treats subsidiaries as delivery pipelines to an unified global network Most strategic assets, resources, responsibilities, and decisions centralized Building cost advantages through centralized globalscale operations Management regards subsidiaries as appendages to a central domestic corporation Many assets, responsibilities, and decisions decentralized, but controlled from headquarters Transferring headquarters knowledge and capabilities through worldwide diffusion and adaptation Table 1: Key characteristics of the traditional organization models Reference: Compiled by the author following Bartlett and Ghoshal (2002: 16-63) During the 1980s, however, changing business environments and technological improvements in the fields of transport, travel, information, and communication have transformed the global competitive game (McNaughton, 2003: 299) and, as a result, made it more difficult for a firm to succeed with a relatively unidimensional strategic capability that emphasizes only efficiency, or responsiveness, or learning (Bartlett and Ghoshal, 1987: 10). From this time forth, more and more firms have been urged to break away from the traditional organization models in search of a more integrated organizational response (Bartlett and Ghoshal, 2002: 65). In this regard, Bartlett and Ghoshal (1987: 7) introduced the transnational organization model as outlined in Table 2. The transnational corporation (TNC) manages business across borders in a highly integrated manner by developing global efficiency, local responsiveness and worldwide learning capabilities simultaneously (Kutschker and Schmid, 2011: 296).

3 The Notion of Transnational Networks 7 Type Key Characteristics Transnational Organization Model Transnational Mentality Integrated Network Management regards subsidiaries as strategic partners whose knowledge and capabilities are vital to the ability of the corporation to maintain a long-term global competitive advantage Dispersed and interdependent assets and resources, shared decision making, differentiated and specialized subsidiary roles, and joint development and worldwide sharing of knowledge Combined Focus Legitimizing diverse perspectives and capabilities, developing multiple coordination and innovation processes, and building shared visions and individual commitment Table 2: Key characteristics of the transnational organization model Reference: Compiled by the author following Bartlett and Ghoshal (2002: ) TNCs have a low commitment to their country-of-origin and can rather be understood as integrated multi-domestic networks with heterarchical structures (Bartlett and Beamish, 2011: ; Rugman et al., 2011: 253; Nohria, 1998: 287; Hedlung, 1986: 9-13). Ideal-typically, these hub-less transnational networks represent viable organizational systems with specialized subsidiary roles and responsibilities, large flows of components, products, resources, people, and information among strongly interdependent units, collective innovation and learning processes, and a rich portfolio of governance modes employed to efficiently manage multiple coordination processes (Bartlett and Ghoshal, 2002: 68-74; Burt, 1997: 359f.). However, it is necessary to note that building and managing transnational networks is a challenging task. In fact, the TNC must be able to reconcile the diversity of perspectives and interests it deliberately fosters, integrate the widespread assets and resources it deliberately disperses, and coordinate the roles and responsibilities it deliberately differentiates (Bartlett and Ghoshal, 2002: 192). Otherwise, specialized configurations of assets and differentiated subsidiary roles and responsibilities may result in internal fragmentation and dissipation, thereby reversing the strengths of transnational networks (Bartlett and Ghoshal, 2002: 77f.; Cray, 1984: 85).

4 8 Inb'oducing the Bom Transnational Finn as a Distinct Type of Intemational Start-Up Due to the conflictive requiremenls 01 global efficiency and local responsiveness, transnational networks are, moreover, likely to be confronted with the socalled 'GLOCAL dilemma' (Laudien and Freiling, 2012: 352; Harzing, 2000: ). In order to improve global efficiency, they endeavor to realize economies 01 scale and scope by slandardizing their worldwide business activities to a large extent (Laudien and Freiling, 2011: 1081.; Bartlett and Ghoshal, 2002: 68; Kogut, 1990: 47-49). This high level 01 slandardization, however, may interlere with their perception 01 local peculiarities, thereby jeopardizing their 10- cal responsiveness (Asmussen, 2009: 1194; Nachum, 2003: 1191; Zaheer and Mosakowski, 1997: 4391.). Having the mentality to simullaneously respond to both requiremenls, transnational networks are thus urged to cope with this GLOCAL dilemma'. 2.2 The Emergence of Born Global Firms Another relatively young and promising research stream in business science regards the growing emergence 01 firms that initiate international operations lrom or near their inception (Rialp et al., 2005: ; Oviatt and McDougall, 1994: 601.). Obviously, countless firms have engaged in international business and undertaken investment activities across borders throughout history. Traditionally, however, international business was primarily the domain ollarge, well-resourced enterprises, e.g. IBM, Siemens, or Toyola, which have typically eslablished a strong domestic base betore venturing into foreign markeis (Cavusgil and Knight, 2009: 6-9). It is thus remarkable that recent evidence hints toward an increasing number 01 small- and medium sized enterprises 3 (SME), appearing to challenge this conventional thinking by deliberately conducting international business lrom the earliest days after their inception (e.g. Karre et al., 2008: 442; Neupert et al., 2006: 536; Madsen and Servais, 1997: 562; Bell, 1995: 60). 2 In this context, Laudien and Freiling (2012: ; 2011: ) discussed the role of 'regional headquarters' in TNCs as a structural solution to the GLOCAL dilemma. S Following the definition of the European Union, SME are -enterprises which employ fewer than 250 persons and which have an annual tumover not exceeding EUR 50 million, and/ar an annual balance sheet total not exceeding EUR 43 million- (Publications Office of the Europoan Union, 2003: 39).

5 The Emergence of Born Global Firms 9 In contrast to the traditional internationalization pattern by which firms typically increase their business operations in the country-of-origin for many years, before gradually evolving into international trade (Johanson and Vahlne, 1990: 11-14; 1977: 26-31; Johanson and Wiedersheim-Paul, 1975: ), more and more entrepreneurial firms seem to embrace a borderless view of the world and develop the strategies needed to expand abroad at or near the firm s founding (Cavusgil and Knight, 2009: 1). In doing so, such firms accomplish a rapid internationalization, for the time span between their inception and their initial foreign market entry often does not even exceed five years (Autio et al., 2000: 915f.; Rennie, 1993; 46). Frustration with the inadequacy of accepted internationalization theories to explain this phenomenon has led to considerable research interest 4. Examining the entry modes of 18 Swedish firms into the Japanese market, Hedlung and Kverneland (1985: 56f.) were among the first authors to discover that a number of firms were shifting from a slow and gradual internationalization to a rapid and direct one. Furthermore, Ganitsky (1989: 52) investigated a sample of 18 Israeli firms serving foreign markets right from their inception and observed that they differ from firms internationalizing in an incremental manner in terms of their assessment of export options, export involvement, risk profile, and managerial attitudes and practices. Similarly, McDougall (1989: 387f.) posited that rapidly internationalizing start-ups typically exhibit a distinct strategy and industry profile by pursuing aggressive entry efforts. Moreover, she associated scholarship on these firms to the research field of international entrepreneurship. Considering evidence compiled since 1989, Oviatt and McDougall (1994: 47) hinted toward a growing occurrence of such internationalizing start-ups, thereby proclaiming that the distinguishing feature of these start-ups is that their origins are international, as demonstrated by observable and significant commitments of resources (e.g. material, people, financing, time) in more than one nation (1994: 49). Scholars in the field have subsequently employed the term born global 5 when addressing this specific type of entrepreneurial firm, which 4 For detailed overviews of the research activities in this field see Cavusgil and Knight (2009: 29-48), Oviatt and McDougall (2005: ), and Rialp et al. (2005: ). 5 The term born global was initially coined by Rennie (1993: 45). Synonymous terms include rapid internationalizers (Hurmerinta-Peltomäki, 2004: 64), instant internationals (Litvak,

6 10 Introducing the Born Transnational Firm as a Distinct Type of International Start-Up appears to be most frequently used in the recent literature (e.g. Coviello et al., 2011: 628; Wessely, 2010: 19; Knight and Cavusgil, 1996: 11). Despite the fact that these firms have been studied for over two decades now, theory and practice on this topic are still evolving and, thus far, there is no clearly accepted definition for the born global firm (Gabrielson et al., 2008: 385). For reasons of clarity, this study follows Knight and Cavusgil, who defined born global firms as business organizations that, from or near their founding, seek superior international business performance from the application of knowledge-based resources to the sale of outputs in multiple countries (2004: 124). As a matter of fact, existing research in the field indicated that numerous born global firms have eventually succeeded in achieving this superior international business performance (e.g. Cavusgil and Knight, 2009: 75; McDougall et al., 1994: 483; Oviatt and McDougall, 1994: 46). In doing so, they seem to have somehow attenuated their liabilities of newness, i.e. constraints caused by the state of being an inexperienced entrepreneurial firm (Knight and Cavusgil, 2004: 128; Stichcombe, 1965: ), their liabilities of smallness, i.e. constraints caused by scarce financial, human, and tangible resources (Aldrich and Auster, 1986: ), and their liabilities of foreignness, i.e. constraints caused by the unfamiliarity with the local culture and other aspects of foreign markets (Zaheer and Moskowski, 1997: 439f.; Zaheer, 1995: 341). Consistently, the widespread emergence of the born global firm shows that, given particular circumstances, any firm, regardless of its size, age, or resource base, may nowadays participate actively and successfully in international business activities (Cavusgil and Knight, 2009: 28; Gabrielson et al., 2008: 386). In order to get a better understanding of the circumstances mentioned, it seems further promising to outline some of the major internal and external explanatory factors associated with the arrival of the born global firm (Johnson, 2004: 144). As was briefly indicated above, industries have been exposed to a number of significant changes in international business environments over the last three decades (Bartlett and Ghoshal, 2002: 6-8; Oviatt and McDougall, 1994: 51f.). Following an external perspective, an early adoption of internationalization is 1990: 1), global start-ups (Oviatt and McDougall, 1995: 30), international new ventures (Oviatt and McDougall, 1994: 45), and innate exporters (Ganitsky, 1989: 50).

7 The Emergence of Born Global Firms 11 thus likely to be driven by at least two major forces. First, international business environments have been significantly influenced by the globalization of markets, which refers, among other things, to the reduction of barriers to trade and investment around the world and to the increase of cross-border convergence of buyer preferences and tastes (Cavusgil and Knight, 2009: 19). Insofar, globalization stimulates entrepreneurs to seek financial sources and business opportunities worldwide and, moreover, simplifies product development and positioning in foreign markets (Knight and Cavusgil, 2004: 125; Madsen and Servais, 1997: 565). Second, technological advances in manufacturing, transportation, information and communication have facilitated foreign market entry (McNaughton, 2003: 299; Levitt, 1983: 92). In this vein, smallscale manufacturing has become more profitable through novel production methods. Shipping goods has become cheaper and more reliable through globe-spanning transportation systems. And finally, conducting business in multiple countries from the same desk has become more manageable through modern communication devices (Madsen and Servais, 1997: 566). It becomes apparent that the combination of globalization and technological advantages has created many incentives for young firms to target foreign markets form the earliest days after their inception (Cavusgil and Knight, 2009: 19). However, these external driving forces by themselves are not sufficient enough to explain the rise of born global firms, because the ability to take advantage of business opportunities across borders is primarily a function of the internal capabilities of an organization (Knight and Cavusgil, 2004: 125f.). Accordingly, it is suggested that the development of superior organizational capabilities and the expertise and skills of the associated entrepreneurs play a pivotal role in the internationalization process of the born global firm (Madsen and Servais, 1997: ). In this regard, it is often the tacit knowledge about foreign markets as well as the efficiency with which it is acquired that determine the sustainable international performance of born global firms (Knight and Cavusgil, 2004: 127; Autio et al., 2000: 910). With this in mind, born global firms are attributed with highly efficient and elaborated knowledge-creation routines and learning capabilities (e.g. Bell et al., 2003: 339; Lewin and Massini, 2003: ; Kogut and Zander, 1993: 639). In addition, McDougall et al. (1994: 479) argued that born

8 12 Introducing the Born Transnational Firm as a Distinct Type of International Start-Up global firms are usually founded by entrepreneurs, who benefit from a significant amount of international experience and are particularly alert to the possibilities of linking resources from different national markets in an efficient manner. Likewise, the emergence of the born global firm may thus also be related to the greater accumulation of entrepreneurs with an international mindset, deliberately initiating an early internationalization due to their powerful drive to target foreign markets (e.g. Neubauer, 2011: 82; Jones, 1999: 18; Madsen and Servais, 1997: 563; Bloodgood et al., 1996: 72f.; Oviatt and McDougall, 1994: 45f.). 2.3 On the Nature of the Born Transnational Firm Bringing together the research streams on transnational networks and born global firms, which are obviously both concerned with recent developments in international business environments, this body of research eventually intends to analyze a relative new type of international start-up, i.e. the distinct breed of the born global firm that employs the transnational organization model, thus termed born transnational 6. Accordingly, the defining trait of born transnational firms is that their origins are transnational by means of transcending national borders from or near inception as rather hub-less and heterarchical organized networks with specialized but strongly linked local units, diverse governance modes employed to manage multiple coordination processes, and a combined focus regarding local responsiveness, global efficiency, and worldwide learning capabilities. Although research on international entrepreneurship abounds (e.g. Coviello et al., 2011: ; Cavusgil and Knight, 2009: 29-48; Rialp et al., 2005: ; Coviello and Jones, 2004: ), the phenomenon of the born transnational firm is, as of now, given little consideration in the literature dedicated to early adopters of internationalization. Instead, many studies focused on firms, which rapidly achieve a portion of sales in foreign markets through simply exporting goods across borders, thereby ignoring that by creating transnational resource configurations along their value chains, entrepreneurial firms 6 In order to avoid misunderstanding regarding the research field of transnational entrepreneurship, which examines individuals that start businesses after migrating from one country to another (Drori et al., 2009: 1001f.), the study at hand emphasizes its focus on a distinct type of corporate entity by referring, henceforth, to the born transnational firm.

9 On the Nature of the Born Transnational Firm 13 may be able to develop a source of competitive advantage to outperform localized competitors that is almost impossible to imitate and for which there are few substitutes (e.g. Di Gregorio et al., 2008: 188; Karra et al., 2008: ; Fletcher, 2001: 29-31). In fact, the dispersed and cross-border configuration of assets and resources in entrepreneurial firms seems to be increasingly imperative in international business environments, where political sanctions and unstable currencies are omnipresent, and, moreover, allows them to efficiently combine low-cost labor and materials with valuable knowledge all over the world (Bartlett and Ghoshal, 2002: 102f.; Ghoshal and Bartlett, 1995: 145). Despite the fact that the born transnational firm is a relatively new and rare phenomenon in international business environments, the lack of attention is even more disturbing as born transnational firms seem to be prime candidates of integrating, from or near inception, value-added processes in multiple foreign markets into an organizational entity, due to the employment of the transnational organization model (Bartlett and Ghoshal, 2002: 68-74; Golden and Powell, 2000: 378). In due course, the born transnational firm may thus revolutionize the conventional means of international entrepreneurship and, in economic thought, open the door to novel knowledge-enhancing combinations of resources across borders, as more and more firms integrate global production processes into heterarchical network structures (Di Gregorio et al., 2008: 188). In the spirit of Bartlett and Ghoshal, building a transnational network is eventually necessary for every company that operates in an international environment (2002: 20). As a matter of fact, the establishment of Logitech, one of today s most prominent manufacturers of peripheral devices for personal computers, may be an illustrative example from practice of how an entrepreneurial venture rapidly engages in transnational operations in multiple countries (Jolly et al., 1992: 71-79). Right from inception, Logitech was driven by the global vision of its three co-founders. As a result, Logitech was founded as a rather hub-less business organization, for it was initially headquartered in both Switzerland and the United States. In this vein, Logitech split the roles and responsibilities regarding manufacturing and R&D activities between these specialized local units (McDougall et al., 1994: 469). Within only a few years, Logitech then intensified its operations across borders by establishing engineering offices in Ireland

10 14 Introducing the Born Transnational Firm as a Distinct Type of International Start-Up as well as in Taiwan and, eventually, located its manufacturing facilities in China (Karra et al., 2008: 450). Taking it as the unit of analysis, this body of research brings the born transnational firm into sharper focus. For reasons of clarity, it is thus helpful to formulate an appropriate working definition of the born transnational firm. Considering the conceptual roots of the born transnational firm in this context, it seems practical to modify Knight and Cavusgil s (2004: 124) aforementioned definition of the born global firm in accordance with the notion of transnational networks. Hence, this body of research acknowledges the following working definition of the born transnational firm: BORN TRANSNATIONAL FIRM: A business organization that, from or near its inception, seeks superior business performance in multiple countries by employing the transnational organization model. As was mentioned above, little has been said so far on the nature of the born transnational firm in the field of international entrepreneurship. Consequently, there are few general statements about this type of start-up that can be proposed with great confidence. However, based on the extant literature on born global firms and transnational networks, this study attributes the born transnational firm with the following key characteristics: Active in transnational business operations from or near its inception Having a low commitment to the country-of-origin, born transnational firms are likely to enter domestic and foreign markets concurrently (Bell et al., 2003: 341; McNaughton, 2003: 299). Instead of establishing a strong domestic base before venturing into foreign markets, the born transnational firm is thus an early adopter of internationalization and typically engages in transnational operations in two or more countries from or within the first five years after founding (Autio et al., 2000: 915f.; Oviatt and McDougall, 1994: 49; Rennie, 1993: 46). As for the mode of entry into foreign markets, the born transnational firm owns or gains control over value-added activities across national borders through forms of FDI or, alternatively, through network-like cooperative alliances with foreign firms (Dunning, 1993: 1).

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