Chapter 9 - Growing and Internationalizing the Entrepreneurial Firm Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

LEARNING OBJECTIVES Define entrepreneurship, entrepreneurs, and entrepreneurial firms Identify the institutions and resources that affect entrepreneurship Identify three characteristics of a growing entrepreneurial firm Describe how international strategies for entering foreign markets are different from those for staying in domestic markets Articulate what you should do to strengthen your entrepreneurial ability on an international level

Identification and exploitation of previously unexplored opportunities Entrepreneurship Identification and exploitation of previously unexplored opportunities Entrepreneurs: Founders and owners of new businesses or managers of existing firms International entrepreneurship Innovative, proactive, and risk-seeking behavior that crosses national borders Intended to create wealth in organizations

9.1 Institutions, Resources, and Entrepreneurship

Institutions and Entrepreneurship Development of entrepreneurship within a country is based on its entrepreneur-friendly institutional framework Informal institutions Individualistic and low uncertainty-avoidance societies encourage entrepreneurship The more entrepreneur-friendly the formal institutional requirements are, the more flourishing entrepreneurship is, and the more developed the economies become and vice versa. Informal institutions such as cultural values and norms also affect entrepreneurship.

9.2 Average Ranking on the Ease of Doing Business A World Bank survey, Doing Business, reports some striking differences in government regulations concerning how easy it is to start up new entrepreneurial firms in terms of registration, licensing, and incorporation. Source: Data extracted from the World Bank, 2010, Doing Business 2010 (database at www.doingbusiness.org).

Resources and Entrepreneurship Value (V) Rarity (R) Imitability (I) Organizational (O) The resource-based view sheds considerable light on entrepreneurship with a focus on its value (V), rarity (R), imitability (I), and organizational (O) aspects. An entrepreneurial firm must take the VRIO framework into account as it considers how to leverage its resources. Entrepreneurial resources must create value. Resources must be rare. Resources must be inimitable. Entrepreneurial resources must be organizationally embedded.

Characteristics of a Growing Entrepreneurial Firm Attempt to fully utilize a firm’s potential resources and capabilities Growth Basis of entrepreneurship that gives a competitive edge Innovation Start ups require capital Financing Growth - The growth of an entrepreneurial firm can be viewed as an attempt to more fully use under-utilized resources and capabilities. An entrepreneurial firm can leverage its vision, drive, and leadership in order to grow, even though it may not have adequate resources such as financial capital. Innovation - Innovation is at the heart of entrepreneurship. Innovation allows for a more sustainable basis for competitive advantage. Entrepreneurial firms are uniquely ready for innovation because their owners, managers, and employees tend to be more innovative and risk-taking. Financing - All start-ups need capital. Start-ups are usually funded by founders, family, friends, and outside strategic investors. Strategic investors can be wealthy individual investors, venture capitalists, banks, foreign entrants, or government agencies. Microfinance is a new innovative solution for financing entrepreneurs in developing countries. It involves lending small sums ($50-$300) used to start small businesses with the intention of ultimately lifting the entrepreneurs out of poverty. Globalization of entrepreneurial firms Internationalization

9.3 Venture Capital Investment as a Percentage of GDP Source: Adapted from M. Minniti, W. Bygrave, and E. Autio, Global Entrepreneurship Monitor 2006 Executive Report (Wellesley, MA: Babson College/GEM, 2006) 49.

9.4 Informal Investment as a Percentage of GDP Source: Adapted from M. Minniti, W. Bygrave, and E. Autio, Global Entrepreneurship Monitor 2006 Executive Report (Wellesley, MA: Babson College/GEM, 2006) 53.

Internationalizing the Entrepreneurial Firm Many SMEs are now going international Born global firm: Start-up company that attempts to do business abroad from inception International transaction costs are high

International Strategies for Entering Foreign Markets Direct exports: Entrepreneurs sell products made in their home country to customers in other countries SMEs may not have enough resources to make profits Many SMEs reach foreign customers through sporadic exporting Sporadic (or passive) exporting: Sale of products is prompted by unsolicited enquiries from abroad Direct exports: The sale of products made by firms in their home country to customers in other countries. Sporadic (or passive) exporting: The sale of products prompted by unsolicited inquiries from abroad.

9.6 An Export/Import Transaction Export transactions are complicated. A major problem faced during export and import transactions is how to overcome the lack of trust between exporters and importers when receiving an order. Such a transaction can be facilitated by banks on both sides through a letter of credit (L/C)—a financial contract stating that the importer’s bank will pay a specific sum of money to the exporter upon delivery of the merchandise.

International Strategies for Entering Foreign Markets (continued 1) Licensing/franchising Allows foreign expansion without risking capital Licensors and franchisors may lose control over the usage of their technology and brand names Foreign direct investment (FDI) Involves: Strategic alliances with foreign partners Foreign acquisitions Greenfield wholly owned subsidiaries Licensing: Firm A’s agreement to give Firm B the rights to use A’s proprietary technology or trademark for a royalty fee paid to A by B. This is typically done in manufacturing industries. Franchising: Firm A’s agreement to give Firm B the rights to use A’s proprietary assets for a royalty fee pair to A by B. This is typically done in service industries.

International Strategies for Entering Foreign Markets (continued 2) Firms are psychologically and physically closer to foreign customers Have better control over the usage of their technology and brand names Expensive and complex FDI has several advantages over direct export or franchising/licensing. A firm becomes more committed to serving foreign markets, and it is psychologically closer to foreign customers. A firm is better able to control how its proprietary technology and brand name are used. However, it does have one major drawback, which is cost and complexity.

Stage Model Slow step-by-step process a firm goes through to internationalize its business International experience of entrepreneurs helps rapid internationalization

International Strategies for Staying in Domestic Markets Indirect exports Supply to foreign firms Become licensees or franchisees of foreign brands Become an alliance partner of a foreign direct investor Harvest and exit through sell-offs Indirect exports involve exporting through domestic-based export intermediaries. Export intermediaries perform an important middleman function by linking domestic sellers and overseas buyers who otherwise would not have been connected. Being entrepreneurs themselves, export intermediaries facilitate the internationalization of many SMEs.

Strengthening Entrepreneurship Institutional frameworks explain the differences in economic and entrepreneurial development in the world Institution-based view Intangible resources like vision, drive, and willingness to take risks fuel entrepreneurship around the globe Resource-based view

Implications for Actions Promote formal and informal institutions that help entrepreneurial development Engage in careful internationalizing Entrepreneurs should take risks without being reckless

Debate - Boom in Busts: Good or Bad? Allows for experimentation Helps societies develop Increases experience Bad Harsh bankruptcy laws and entrepreneur policies Numerous risks and uncertainties

Key Terms Small and medium- sized enterprise (SME) Entrepreneurship Entrepreneurs International entrepreneurship Microfinance Born global firms Direct export Sporadic (or passive) exporting Letter of credit (L/C) Licensing Franchising Stage model Indirect export Export intermediary

Summary Entrepreneurship is the identification and exploration of potential opportunities Entrepreneurs start and own new businesses or manage existing firms and make use of opportunities International entrepreneurship is a combination of innovative, proactive, and risk-seeking behavior that crosses national borders Formal and informal institutions affect entrepreneurship

Summary (continued 1) Characteristics of a growing entrepreneurial firm are growth, innovation, and financing Strategies to enter foreign markets Direct exports, licensing/franchising, and FDI International strategies to staying in domestic markets Indirect exports Become suppliers for foreign firms Become licensees or franchisees of foreign brands

Summary (continued 2) Become alliance partners of foreign direct investors Harvest and exit through sell-offs Entrepreneurs should have vested interest in formal and informal institutions in various countries