7 Small Business as Multinational Companies: Overcoming Barriers and Finding Opportunities

Learning Objectives Understand the basic definitions of small business and entrepreneurship Explain how small businesses can begin as global start-ups or follow the stages of internationalization Understand how small businesses can overcome barriers to internationalization

Learning Objectives Identify when a small business or entrepreneurs should consider going international Understand how small businesses or entrepreneurs can find customers, partners, or distributors aboard Understand how new venture wedge strategies can be used in foreign markets Understand factors driving entrepreneurship at an international level

What Is a Small Business? “Small” business – many definitions UN: less than 500 employees The popular press: less than 100 employees U.S. small business administration has more complex definitions - Definition varies by industry, sales revenue, and the number of people

What Is a Small Business? “Small” businesses - Over 98% businesses in Europe, N. America, and Japan - Employ more than 50% of local populations - Produce nearly 50% of the countries’ GNPs - Create more than 2/3 of new jobs

Internationalization and the Small Business Two models - Small business stage model: process of following incremental stages of internationalization - Global start-up or Born-global firm: company that begins as a multinational company

Small Business Stage Model: Six Stages Stage 1: Passive exporting - Company fills international orders but does not seek export business Stage 2: Export management - Specifically seeking exports—usually rely on indirect exporting Stage 3. Export department - Significant resources dedicated to seek increased sales from exports

Small Business Stage Model Stage 4: Sales branches - High demand justifies setting up local sales office Stage 5: Production abroad - Use licensing, joint ventures of direct investment - Difficult stage because of the risk of failure Stage 6: The transnational - Develop global integrated network

Small Business Global Start-up or Born-Global Firms Key elements favoring global start-ups - Dispersed human resources - International sources of venture capital - The existence of a global demand - The lack of a geographically protected market - The necessity of worldwide sales to support the venture - The potential to avoid later resistance to internationalization

Exhibit 7.1: Major Differences on Key Aspects of The Traditional Internationalization Stages between Born-Global Firms

Small Business E-Commerce Web sites offer a rapid way to go international Web site configured for e-commerce is low cost Quick way to sell across national borders

Advantages of Small-Business E-Commerce Ability of small firms to compete with other companies Creates the possibility and opportunity for more diverse people to start a business Convenient and easy way of doing business Low cost to compete Makes domestic products available in other countries Utilize the Internet have higher revenues

Challenges of Small-Business E-Commerce Managing upgrades Language barriers Shipping and returns Assuring security for a Web site Fraudulent activities online Receiving international payments Costs required to maintain the site Finding and retraining qualified employees

Overcoming Small-Business Barriers to Internationalization Liabilities of newness: a large percentage of new businesses fail within a year Liabilities of size: lack of scale to produce goods or services as efficiently as larger companies

Overcoming Small-Business Barriers to Internationalization Managers’ limited international experience Managers’ negative attitudes - Belief that venture too risky and not profitable - Competition seen as domestic - Ignoring of international opportunities

Developing a Small-Business Global Culture Global culture: managerial and worker values that view strategic opportunities as global and not just domestic Framework to understand international operations

Small-Business Global Culture Characteristics of decision makers affecting development of a global culture - Perceived psychic distance to foreign markets - International experience - Risk aversion - Overall attitudes toward international strategies

Developing a Small-Business Global Culture Changing attitudes of key decision makers - Being close in culture and geography - Overcome skepticism regarding the international markets - Positive attitudes more necessary for global start-ups

Exhibit 7.2: Attitudinal Differences Concerning Internationalization

Duties and the Personal Life of the Small-Business CEO For small firm, opening new markets is CEO’s responsibility. CEO must bear social and business costs - Increased travel and stress from undertaking a new venture - Can adversely affect family life - Takes away from the daily management

Exhibit 7.3: Training and Knowledge Needs of Small Firm CEOs Entering Internationalization

Size and Small Business Internationalization Size barrier to internationalization - Larger firms have more resources to support international operations Size is an issue only in the internationalization decision, however. Eventually, international sales intensity of small firms exceed that of big firms. - International sales intensity: amount of international sales divided by total sales of the company

Small Business Advantage Speed becomes the small business advantage - Faster innovation - Can change products and internal operations faster - Speed can overcome size disadvantages - Larger firms must often overcome bureaucratic procedures

The Future: Falling Barriers for Small Businesses Barriers are becoming easier to overcome Government support programs for small businesses are increasing Trade agreements are making trade easier Increase in small businesses engaged in international operations also makes it easier

When Should a Small Business Go International? If the following questions are answered positively, small business is ready. - Do we have a global product or service? - Do we have the managerial, organizational, and financial resources to internationalize? - Is there willingness to commit resources to face the risks of internationalization? - Is there a country in which the company feels comfortable doing business?

When Should a Small Business Go International? (cont.) - Is there a profitable market for product or service? - Which country should be entered? - Do we have a unique product/service that is not easily copied by multinationals or local entrepreneurs? - Do location advantages exist upstream in the value chain? - Can we afford not to be a multinational?

Exhibit 7.4: Questions to Consider in the Small Business Decision to Go International

Exhibit 7.5 Steps in Picking a Foreign Market

Getting Connected to the International Market Participation strategies - Same participation options as larger firms - Exporting, licensing, joint ventures, and foreign direct investment - Most small businesses often emphasize exporting

Finding Customers and Partners: Customer Contact Techniques Trade shows Catalog expositions International advertising agencies and consulting firms Government-sponsored trade missions Direct contact

Exhibit 7.6: Selected U.S. Government Programs for Making International Contacts

Exhibit 7.7: International Trade Leads: A Web Sampler

Exhibit 7.7: International Trade Leads: A Web Sampler

Exhibit 7.7: International Trade Leads: A Web Sampler

Ready to Go and Connected: A Synopsis Finding the right overseas partner: the most important step Find a good wedge to break into a new market

New-Venture Strategies for Small Multinational Companies Entry wedge: company’s competitive advantages for breaking into the established pattern of commercial activity

New Product or Service and First-Mover Advantage Being the first to introduce a product or service - Must be innovative - Must be comprehensive Must meet customer expectations in areas such as warranty and expected components Technological leadership—most common source - Being first to use or introduce a new technology

New Product or Service and First-Mover Advantage Have firsts access to natural and social resources - Can choose the best locations Can have the best access to social relationships - Lead to the personal contacts to build effective channels of distribution - Lead to trust and commitment from business partners and customers

New Product or Service and First-Mover Advantage Switching costs: occur when customers face some loss in turning to a competitor’s products - because of brand loyalty, many customers may not want to face the discomfort of switching to another brand of a product or service

Copycat Business Copycat Business - The “me too” strategy - Adopt existing products or services - Find a niche or slight innovation to attract customers

Successful Copycat Moves Be the first to a new standard Go after the toughest customers Play to different customer needs Transfer the location Become a dedicated supplier or distributor Seek abandoned or ignored markets Acquire existing business

International Entrepreneurship Entrepreneur: person who creates new ventures that seek profit and growth - Faces risks and uncertainty of new and untested business New ventures: entering a new market - Offer a new product or services - Introduce a new method technology or innovative use of raw materials

International Entrepreneurship International Entrepreneurship: refers to the “discovery, evaluation and exploitation of market opportunities.”

Why is International Entrepreneurship important? Most experts consider entrepreneurship the driving force of all small businesses If we want to get a complete understanding of small businesses in any nation, we need to examine the level of entrepreneurship in that country Entrepreneurship is also seen as the driver of innovation and economic development for any nation Entrepreneurship not only creates new job but also generates new wealth and growth

International Entrepreneurship and Small Businesses Many multinational firms rely on entrepreneurs and small businesses to do business when entering a new country Small businesses can play an important role in assisting existing multinational companies in developing or offering new products that can improve productivity

Exhibit 7.8: Entrepreneurial Activity Ratings by Country

Conclusion Small businesses are important aspects of economies of all nations Small businesses provide jobs, economic growth and innovation Chapter provides crucial background information on small businesses Chapter also discusses international entrepreneurship