The Entrepreneur’s Path to Global Expansion

As entrepreneurs are considering international expansion earlier and earlier, it is crucial that they structure their ventures to anticipate and mitigate the tensions that can arise from the ongoing need to match perceived opportunities to available resources.

For much of the history of modern business, entrepreneurial ventures were inherently local during their early years. Most startup companies today, however, consider overseas expansion from their inception.1 Several developments have facilitated the trend. Technological progress — including the development of fast, low-cost telecommunications connections and the advent of the Internet — plus international airline competition and lower cross-border shipping costs for goods make it seem temptingly easy for startup companies to venture abroad.2 Yet it requires a lot of management bandwidth and experience to do things right.3 Entrepreneurs and their managers often underestimate the cost of an expansion move to foreign shores and, more critically, lack a clear conceptual framework for international expansion. Too often the results are haphazard decision making, insufficient intracompany communication and even financial disaster.

Many entrepreneurs behave reactively, expanding abroad in response to stimuli rather than according to a thoughtfully crafted strategy. Granted, it is hard for a company to develop a clear international expansion plan when its business model and organization are new, untested and still evolving. But there are some topics and dimensions with which entrepreneurs should be familiar. Over recent years, I have studied entrepreneurial ventures in more than 20 countries, many of which had expanded across borders. Examining why some of these ventures failed while others succeeded, patterns emerged. (See “About the Research.”) Ventures followed different expansion paths and the best entrepreneurs successfully anticipated and managed the tension that arose along these paths. To understand this, it is useful to view the path taken by an entrepreneurial venture as an ongoing matching of its perceived opportunities to its available resources.

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References

1. Several researchers have recently examined theoretical and empirical aspects of young firms that expand abroad. These researchers have found that traditional models of internationalization, namely stage-oriented models, do not fit the new empirical evidence well and that firms in high-technology industries in particular expand early in their lives. See for example: P.P. McDougall, S. Shane and B.M. Oviatt, “Explaining the Formation of International Ventures: The Limits of Theories From International Business Research,” Journal of Business Venturing 9 (1994): 469–487; and R.C. Shrader, B.M. Oviatt and P.P. McDougall, “How New Ventures Exploit Trade-Offs Among International Risk Factors: Lessons for the Accelerated Internationalization of the 21st Century,” Academy of Management Journal 43, no. 6 (2000): 1227–1247.

2. Many costs of doing business on an international scale have decreased substantially over the years. For example, a three-minute telephone call from New York City to London cost $717.70 in 1927 and 84 cents in 1999 (all in 1999 U.S. dollars). Shipping a 150-pound parcel by air from New York City to Hong Kong cost $2,188 in 1960 and $389 in 1999 (in 1999 U.S. dollars). Even more dramatic, transporting a container via ship from Los Angeles to Hong Kong cost $10,268 in 1970 and a mere $1,900 in 1999 (in 1999 U.S. dollars). Domestic communication and transportation rates also have decreased, but relatively less than did cross-border rates. See “Air Cargo” (Washington, D.C.: Air Traffic Conference of America, 1961), 58; “Air Cargo” (Washington, D.C.: Air Traffic Conference of America, 2000), 32; “Statistical Abstract of the United States” (Washington, D.C.: U.S. Bureau of Census, 1929), 153; “Statistical Abstract of the United States” (Washington, D.C.: U.S. Government Printing Office, 2001), 716; “Containerized Cargo Statistics” (Washington, D.C.: U.S. Department of Commerce, Maritime Administration, Office of Trade Studies and Statistics, February 1971), 57; and “Containerized Cargo Statistics” (Washington, D.C.: U.S. Department of Commerce, Maritime Administration, Office of Trade Studies and Statistics, January 2000), 164. (The 1999 U.S. dollar figures for earlier years were calculated by Research Services, Harvard Business School.)

3. A recent paper finds that there is an initial liability of foreignness. When small and midsize firms first invested in subsidiaries abroad, their profitability declined. With increasing foreign direct investment, profitability then increased. See J.W. Lu and P.W. Beamish, “The Internationalization and Performance of SMEs,” Strategic Management Journal 22, no. 6/7 (2001): 565–586. Another recent paper finds that prior marketing, new-venture and international experience by the top management team of a venture was positively correlated with the share of sales a venture generated abroad. R.C. Shrader, B.M. Oviatt and P.P. McDougall, “How New Ventures Exploit Trade-Offs Among International Risk Factors: Lessons for the Accelerated Internationalization of the 21st Century,” Academy of Management Journal 43, no. 6 (2000): 1227–1247. A third paper also finds a positive relationship between the international experience of young firms and their performance. S.A. Zahra, D.R. Ireland and M.A. Hitt, “International Expansion by New Venture Firms: International Diversity, Mode of Entry, Technological Learning, and Performance,” Academy of Management Journal 43, no. 5 (2000): 925–950.

4. Two recent papers highlight the positive role of networks on entrepreneurial activity. See A. Saxenian, “The Role of Immigrant Entrepreneurs in New Venture Creation,” in “The Entrepreneurship Dynamic,” eds. C.B. Schoonhoven and E. Romanelli (Stanford, California: Stanford University Press: 2001); and O. Sorenson and T.E. Stuart, “Syndication Networks and the Spatial Distribution of Venture Capital Investments,” American Journal of Sociology 106, no. 6 (May 2001): 1546–1589.

5. H.H. Stevenson and D.E. Gumpert, “The Heart of Entrepreneurship,” Harvard Business Review 63, no. 2 (March–April 1985): 85–94.

6. I define entrepreneurship as opportunity-driven behavior cognizant of the resources required to pursue the opportunity. The kernel of entrepreneurship is to identify a potential opportunity, match the opportunity and resources optimally, and keep adjusting that match as the opportunity materializes. Opportunities and resources are thus intertwined, and entrepreneurs must be mindful of constraints on access to resources. Stevenson defines entrepreneurship as “the pursuit of opportunity without regard to resources currently controlled.” He developed his definition mainly from the study of U.S. ventures, while I developed my definition from the study of a broad range of ventures domiciled in more than 20 countries. Though both of our definitions include opportunities and resources, mine suggests a closer connection between the two.

7. W. Kuemmerle, “Home Base and Knowledge Management in International Ventures,” Journal of Business Venturing 17 (2002): 99–122.

8. The challenges of international expansion have much to do with geographic distance. See P. Ghemawat, “Distance Still Matters: The Hard Reality of Global Expansion,” Harvard Business Review 79 (September 2001): 137–147. If a startup firm expands into a country that is geographically close, it will typically have an easier time being successful there. Cultural differences are often less significant in neighboring countries, and travel distances are short enough to accommodate frequent visits to new subsidiaries, especially during the critical early days. For this reason, it makes sense to think of international expansion along a continuum that includes a distinct intermediate category of “regional” expansion, a category somewhere between a purely local business and one that operates in all countries around the world. Firms that expand regionally will typically set up a small number of subsidiaries in neighboring countries.

9. The concept of the international expansion matrix was in part inspired by the product-process matrix developed by Robert H. Hayes and Steven C. Wheelwright. Their matrix juxtaposes manufacturing process structures and product life-cycle stages. They argue that most manufacturers are positioned along a diagonal because there is a natural fit between certain manufacturing processes and product life-cycle stages. See R.H. Hayes and S.C. Wheelwright, “Link Manufacturing Process and Product Life Cycles,” Harvard Business Review 57, no. 1 (January–February 1979): 1–9.

10. See E. Malmsten, E. Portanger and C. Drazin, “Boo Hoo — $135 million, 18 months ... a Dot.com Story From Concept to Catastrophe” (London: Arrow Publishing, 2002); and G.J. Stockport, G. Kunnath and R. Sedick, “Boo.com — The Path to Failure,” Journal of Interactive Marketing 14, no. 4 (2001): 56–70.

11. W. Kuemmerle, “Case Studies in International Entrepreneurship: Managing and Financing Ventures in the Global Economy” (Burr Ridge, Illinois: McGraw-Hill/Irwin, 2005), 60.

12. Ibid., 81.

13. Ibid., 273.

14. Ibid., 446.

15. Starbucks made its first foray into a foreign country through a joint venture in Japan in 1996. Starbucks now has joint ventures with local partners in most countries where it operates outside the United States. One notable exception is the United Kingdom, where Starbucks acquired an existing coffeehouse chain in 1998 and expanded from that base. See N. Koehn, “Brand New: How Entrepreneurs Earned Consumers’ Trust From Wedgwood to Dell” (Boston: Harvard Business School Press, 2001), 253. Other countries where Starbucks owns its stores are Australia, Canada and Thailand.