INTRODUCTION

Rapid internationalization has become a more desirable option for firms than it has been in the past due to improvements in international communication and transportation (Porter, 1990) and increased homogeneity of international markets (Hedlund and Kverneland, 1985). Both large, established firms and smaller, new firms are affected by these trends. Oviatt and McDougall (1994) argued that traditional stage (Stopford and Wells, 1972) and scale (Chandler, 1986) models of internationalization were not able to explain how and why new firms internationalized. Instead of looking to these existing models for explanation they suggested that we look at the important advantages for some firms to internationalize at or near their inception. There are two major reasons why new firms will attempt to internationalize (Bloodgood, Sapienza, and Almeida, 1996). First, industry conditions may dictate that the firm compete internationally in order to be competitive. Second, a new firm may want to exploit its unique set of resources by competing internationally. Extant research in this area has looked at what contributes to the level or extent of internationalization and the implications resulting from it (Bloodgood, Sapienza, & Almeida, 1996). While this research has resulted in some interesting findings, it does not provide adequate input on what types of internationalization are feasible and critical to new high potential ventures. The specific internal and external factors which drive new firms to compete internationally are not well understood (Oviatt and McDougall, 1994). This paper uses a resource-based framework to explore two critical questions that shed further light on some of the issues raised by Oviatt and McDougall.

1. Which value chain activities are most likely to be internationalized early on by new high potential ventures?

2. What are the antecedents to each of the different international value chain activities in new high potential ventures?

 

A Resource-Based View of New Venture Internationalization

While offering the resource-based theory as a new theory of the firm, Wernerfelt (1984) argued that firms are bundles of resources and that these resources are the source of competitive advantage for firms. When these resources are valuable, rare, inimitable and non-substitutable, the competitive advantage generated will be sustainable (Barney, 1991). These resources both enable and limit the strategic efforts of firms and thus impact firm profitability (Mahoney, 1995). By conceptualizing new ventures as representing bundles of resources, we can examine them within the framework of the resource-based view.

The ability of firms to engage in certain strategic efforts is dependent on its resource base (Hitt & Ireland, 1985; Miles & Snow, 1978; Snow & Hrebeniak, 1980). Some resources will be more instrumental in assisting new ventures to internationalize than other resources (Bloodgood et al., 1996). Firms that possess such resources will have a greater capability for internationalizing some of their operations than firms that do not possess these resources. Following this line of reasoning, certain resources will be more likely to assist a new venture in internationalizing particular operations of the venture than other resources will. And those firms that possess these particular resources should be able to more easily and effectively internationalize specific operations of the venture than they otherwise would. This paper examines the extent to which the presence of specific resources influences the decision of a High Potential Venture (HPV) to internationalize some or all of its primary activities in its value chain, at its inception. Since the empirical research on International New Ventures (INVs) has attracted attention only recently, there are a number of issues in which the precise nature of relationships is yet to be determined. Our study therefore assumes an exploratory character and the hypotheses have been presented in that spirit.

 

Internationalization of New Venture Activities

Porter (1986) provides some interesting insights for addressing the question of which value chain activities are more likely to be internationalized early on by new high potential ventures. Porter (1985) classifies Inbound Logistics and Operations as upstream activities while Marketing & Sales, and Service are classified as downstream activities. His classification of Outbound Logistics is not very clear since it could be included in either category, per his classification. For ease of exposition, we include Outbound Logistics in the category of upstream activities. Porter (1986) argues that downstream activities need to be located as close to the buyer as possible while the decision to locate upstream activities could "...conceptually be decoupled from where the buyer is located..." (p 23). Hence, downstream activities (marketing & selling, and service) are more likely to be internationalized than upstream activities (inbound logistics, operations, and outbound logistics). Additionally, it could be argued that downstream activities are easier for new firms to internationalize than upstream activities. One argument as to why upstream activities are more difficult than downstream activities to internationalize would be that setting up a manufacturing plant in another country tends to be a unique experience for new firms and requires an extensive amount of knowledge concerning country specific laws, regulations, and cultural issues. In addition, a network of contacts who are able to construct a manufacturing plant would be important, especially for those unfamiliar with the country the plant would be built in.

 

Antecedents to Internationalization of New Venture Activities

For identifying the antecedents to each of the different international value chain activities in new HPVs we can examine the literature on new venture strategies and the resource-based view. Porter (1980, 1985) used arguments from industrial-organization economics to posit that the strategy adopted by a firm should be a function of the competitive advantage that it seeks to develop and the market scope that it intends to target. His arguments have attracted a great deal of empirical and theoretical scrutiny. Researchers in the entrepreneurship field have also examined the applicability of his propositions in the context of new ventures. In their review of the new venture strategy literature, Carter, Stearns, Reynolds, and Miller (1994) observed that researchers have offered contrasting recommendations for strategies to be adopted by new ventures. Some have argued that new ventures should avoid competing directly with larger firms and instead pursue 'niche' strategies such as the design of specialized, high quality products targeted at market segments that have been overlooked by larger, more established firms (Cohn & Lindberg, 1974). On the other hand, Cooper, Willard, and Woo (1986) have suggested that a new venture must consider a broad range of strategies which may include competing head-to-head with the market leaders.

While researchers debate the most productive strategies for new ventures, a safe assumption would be that new firms may find success in using a somewhat different set of strategies than larger, more established firms. To the extent that different strategies require different combinations of resources to be most effective, the value of certain resources will vary depending on the extent to which the firm's strategy utilizes the resource. Different resources should therefore affect a firm's ability to internationalize differentially. Activities considered more difficult to internationalize (i.e. upstream activities) will be helped to a greater extent than activities that are easier (i.e. downstream activities) to internationalize. We would hence expect to see a much higher internationalization rate of upstream activities among firms with these resources than for firms without them. For example, it might be critical for new ventures to have both financial resources and top managers with international experience before a manufacturing plant could be built in another country.

Research has alluded to the benefit that top manager's experience and networks can provide. Eisenhardt and Schoonhoven (1990) said that Top Management Team (TMT) experience is important for growth in that firms tend to go into markets they know. Others such as Carsrud and Johnson (1989), Casson (1982), and Reynolds (1991) have argued that building dense networks is important in the growth phase of a firm. Social networks are linked to opportunities and obtaining resources, and their influence has been postulated to be partly influenced by the stage of the new venture (Bloodgood, Sapienza, & Carsrud, 1995). Past international experience of top managers in new ventures can provide a foundation for building and using networks to internationalize the value chain activities of the firm. International experience of top managers also provides the firm with familiarity within the countries in which the top managers have experience. Such experience can provide these firms with an increased ability to be alert to and take advantage of international opportunities. In this case market ignorance is reduced. New firms with internationally experienced top managers will know more of what to do and how to do it in the countries in which these managers have the relevant experience.

In addition to financial resources and TMT international experience, the size of new HPVs can benefit the internationalization process (Bloodgood et al., 1996). In addition to arguments from scale economies, institutional theory and the liability of newness postulate that size is instrumental in enabling new firms to build relationships with firms in other countries. These relationships could be very beneficial toward internationalizing the operations and marketing/sales activities. Other firms would feel more comfortable dealing with a larger firm because of the increased permanence that their size represents. It is therefore suggested that size may increase a firm's ability to establish relationships with foreign firms which will make it easier for new ventures to internationalize their operations and marketing/sales functions.

 

HYPOTHESES DEVELOPMENT

New ventures usually have fewer resources than older, established firms and have a greater likelihood of failure. In their effort to be judicious with their resources, international new ventures (INVs) will have to prioritize the internationalization of the activities in their value chain. They will be more inclined to internationalize their downstream activities as opposed to their upstream activities, if they intend to have better access to customers in the international market. However, this argument will be weakened in the case of INVs that enter the international market only to access some specialized inputs not available in the domestic market. This leads to our first hypothesis which states that downstream activities are more likely to be internationalized as opposed to upstream activities.

Hypothesis 1. Downstream activities in an INV are more likely to be internationalized as compared to upstream activities at the time of its Initial Public Offer (IPO).

A venture's choice of a strategy is influenced by its portfolio of resources. The presence of certain resources would render an otherwise infeasible strategy, attractive. While Hypothesis 1 is the general case, the presence of certain resources will influence the INV to also internationalize its upstream activities. Bloodgood et al. (1996) argued that the TMT of an INV influences the venture's decision to internationalize its activities. Specifically, INVs whose top management were exposed to the international arena due to their international work experience would be more likely to be internationalized. These arguments are also consistent with Stuart and Abetti's (1990) findings that the entrepreneur's experience with new ventures had a significant impact on the early performance of new ventures. INVs that have top managers with international work experience would be more likely to internationalize their upstream activities than they would be in the absence of this resource. Hence, international work experience would have a strong impact on the INV's decision to internationalize its inbound logistics, operations, and outbound logistics. Since the downstream activities are the first set of activities to be internationalized by the INV, the presence or absence of international work experience is less likely to impact the internationalization of those activities. Hence, we do not make any claim as to the impact of executive work experience on the internationalization of downstream activities. Our second hypothesis is presented as a set of three sub-hypotheses which describes the impact of this resource on each of the three upstream activities.

Hypothesis 2a/2b/2c. International work experience among top managers will be positively related to the decision to internationalize inbound logistics/manufacturing operations/outbound logistics at the time of its IPO.

The venture's sources of competitive advantage are important resources that can influence its internationalization decision (Bloodgood et al., 1996). According to Porter (1980), a venture may seek to create a competitive edge by developing a cost advantage or by differentiating its product from its competitors'. A preferential access to raw materials, the possession of proprietary technology, and the existence of economies of scale and/or scope are potential sources of cost advantage for a venture (Porter, 1980, 1985). A price differential for raw materials may exist between suppliers within versus outside a country. Also, some inputs may only be available outside the home market. Additionally, the domestic market may not be large enough for the venture to successfully exploit the economies of scale/scope. Such conditions would influence an INV seeking a cost advantage to do business across its borders. This leads to our third set of hypotheses which posit that the pursuit of a cost advantage strategy will be positively related to the INV's decision to internationalize its upstream activities at its inception. Downstream activities are associated with attempts to build a firm's reputation, brand name, and service network (Porter, 1986). These activities are more likely to be associated with an INV's attempt to pursue a differentiation strategy as opposed to a cost advantage strategy. Hence, we do not make any claim about the relationship between cost advantage and the decision to internationalize downstream activities. The third hypothesis is also presented as a set of three sub-hypotheses which describe the impact of following a cost advantage strategy on each of the three upstream activities.

Hypothesis 3a/3b/3c. The adoption of a cost advantage strategy by the INV will be positively related to its decision to internationalize its inbound logistics/manufacturing operations/outbound logistics at the time of its IPO.

A number of strategy researchers have argued that Porter's concept of differentiation advantage is too broad to be used as a composite construct (Miller, 1991; Mintzberg, 1988). Following Miller (1991), we treat differentiation as comprising two dimensions. The first based on product innovation is labeled product differentiation and the second, based on the use of marketing techniques to achieve perceptual differentiation is labeled market differentiation (Miller, 1991). The adoption of a product differentiation strategy has been observed to be positively related to the internationalization of the INV (Bloodgood et al., 1996). Following their arguments, we posit that the adoption of a product differentiation strategy is positively associated with the internationalization of the five value-chain activities. Our fourth set of hypotheses is comprised of five sub-hypotheses for each of the five activities.

Hypothesis 4a/4b/4c/4d/4e. The adoption of a product differentiation strategy will be positively associated with the INV's decision to internationalize its inbound logistics/ manufacturing operations/ outbound logistics/ marketing & sales/ service at the time of its IPO.

Bloodgood et al. (1996) have argued that an INV which adopts a market differentiation strategy is less likely to be internationalized. This argument flows from Ghoshal's (1987) assertion that resources required to build a competitive advantage in the domestic market are different from those that would be required to create a similar edge in the international market. Our fifth set of hypotheses are thus designed to reflect these arguments, albeit at the level of the individual value chain activities.

Hypotheses 5a/5b/5c/5d/5e. The adoption of a market differentiation strategy will be negatively associated with the INV's decision to internationalize its inbound logistics/ manufacturing operations/ outbound logistics/ marketing & sales/ service at the time of its IPO.

The INV that uses innovation as a means to develop competitive advantage may enter the international market to preempt foreign competitors and/or to rapidly recover its R&D investments since the domestic market may not be large enough to do so (Bloodgood et al., 1996). In an exploratory fashion then, our sixth set of hypotheses reflect these arguments.

Hypotheses 6a/6b/6c/6d/6e. The innovativeness of the INV is positively related to its decision to internationalize its inbound logistics/ manufacturing operations/ outbound logistics/ marketing & sales/ service at the time of its IPO.

The size of the INV will also influence its decision to internationalize its value chain activities. Larger, newer firms will have more resources but need not be encumbered by "inertial pressures" typically confronted by large, established firms (Bloodgood et al., 1996). As we argued earlier, a larger size can improve the ability of the INV to establish relationships with their counterparts in foreign markets. Our final set of hypotheses reflects the impact that the venture size has on its decision to internationalize the five primary activities in its value chain.

Hypotheses 7a/7b/7c/7d/7e. The size of the INV is positively related to its decision to internationalize its inbound logistics/ manufacturing operations/ outbound logistics/ marketing and sales/service at the time of its IPO.

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