the internationalization of e-business born-global companies in the [PDF]

(CDN 2013)

Wageningen University and Research Centre

‘’THE INTERNATIONALIZATION OF E-BUSINESS BORN-GLOBAL COMPANIES IN THE EARLY GROWTH PHASES’’ MS c-THESIS

(CABI 2014)

(R-iv 2014)

Jeroen Roelofzen 9th of July, 2015

Study programme: MSc Management, Economics and Consumer studies Specialization: Management Studies Registration number: 900220700080 ECTS: 33 Supervisor: Dr. E.F.M. Wubben Second supervisor: Dr. Jos Bijman Company supervisor: Pepijn Meddens Company: Mempay B.V.

ABSTRACT Born-global companies are known to pose an important new challenge to traditional theories of internationalization and emerge in substantial numbers worldwide. This explorative research has the objective to provide insight in the internationalization of the e-business born-global company (EBBGC) in the early growth phases of their organizational life. By reviewing the literature the E-BBGC is defined and four propositions are established based on the characteristics of the E-BBGC that internationalizes in the early growth phases. Theoretical findings are used as an input for semistructured interviews with employees or owners of international (business-to-business) e-business companies (n=13). The interviews with open and close questions were transcribed and analysed by open coding. Based on the empirical findings, propositions were evaluated. Research findings suggest that in order to advance internationalization in the early growth phases, the E-BBGC requires foreign market or experiential knowledge which is accessed by relying on a (local) partner, the owner(s), the human resources, or a local presence.

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EXECUTIVE SUMMARY Born-global companies are a category of SMEs that seek rapid internationalization in the early phases of their organisational life and are known for their large scope of international operations, and emergence in substantial numbers worldwide. By using internet-enabled business activities, ebusinesses have the unique ability to benefit from a globally connected economy. The specific internationalization challenges for e-business born-global companies are scarcely resourced in literature. Therefore, the research objective of this graduate thesis is: ‘’To provide insight in the internationalization process of e-business born-global companies in the early growth phases’’. The literature review focused on establishing a fitting definition of e-business and for the born-global company, the theories of internationalization, and the factors that determine the internationalization of born-global companies, the early growth phases of the organizational life cycle, the early growth of e-business, and the international strategies for e-business and software firms. The findings from the literature review were translated into three propositions that describe the challenges the E-BBGC faces and corresponding solutions it uses while internationalising in the early phases of its organizational life. First, when during internationalization in the early growth phases EBBGCS lack financial resources it is likely that they rely on venture capital finance Second, when during internationalization in the early growth phases E-BBGCS lack financial or human resources it is likely that they rely on virtual presence in foreign markets. Third, when during the internationalization in the early growth phases E-BBGCS lack foreign market and experiential knowledge it is likely that they rely on foreign network relationships. The nature of this research is explorative and for empirical research the research strategy of comparative case studies and explorative interviews with e-business start-ups were chosen. However, comparative case study research did not yield enough useful cases. Therefore, to verify the findings from literature, 13 e-business firms were interviewed on their international strategy, the challenges they face or faced when internationalising, and their critical success factors for internationalization. Empirical results indicated that only the relation between the challenge of a lack of foreign market knowledge and solving this challenge using foreign network relationships (partners) was supported. The conclusion of this research states that the E-BBGC can start operating international quickly after inception by relying on network relationships to accesses foreign market or experiential knowledge and resources. For Mempay it is recommended to investigate the potential of partnerships and to invest in a small scale local presence.

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PREFACE This report is written for a graduate MSC-thesis at Wageningen University, executed in the period July 2014-June 2015. This graduate thesis is written as a part of the master Management, Economics, and Consumer studies of the Wageningen University. It is supervised by dr. Emiel Wubben (associate professor at the management studies chair group). Looking back at the process of doing my Masterthesis, I have positive experiences as well as less positive experiences. After completion of the advanced business management course I discovered my interest in ebusiness. As I preferred the process to be practice-oriented, I knew I wanted to have my thesis commissioned. Via the network of a friend I came into contact with Pepijn Meddens, the owner of Mempay. After a meeting with Pepijn and having permission from Emiel Wubben, I could start my thesis. Pepijn required insights to base an international strategy for Mempay on. However, as the ebusiness literature is still underdeveloped the difficulties were to link it to a topic and a corresponding literature review and methodology that would provide enough academic opportunities. This resulted in a research topic related to the internationalization of e-business bornglobal companies in the early phase of their organizational life. I really enjoyed conducting the interviews with e-business firms. Although the process of finding case companies and acquiring respondents that were willing to cooperate was hard and time consuming the interviews were very interesting and inspiring. I am proud of realizing 13 interviews with ebusiness Moreover, finding and analysing definitions of the e-business and born-global concept I enjoyed doing. However, as there were very little useful sources the literature study was time consuming. Subsequently, combining the findings and translating them to a methodology for conducting empirical research were challenging. It was in particular these parts of my thesis that required extra time. Moreover, when I was at the end of the process of writing my thesis I came across an interesting intern position and after approval of Emiel Wubben decided to start with that already. I am glad to have finalized my thesis and am proud on the final report and want to thank several people that contributed to the process. First, I would like to thank my first supervisor Dr. Emiel Wubben for his useful comments, patience, time efforts, and for steering the process. Second, I would like to thank Jos Bijman for his feedback that helped me to underpin my research approach. Third, I would like to thank assigner Pepijn Meddens from Mempay for making this possible. Fourth, I would like to thank all the respondents that participated in my interviews for sharing their stories. Fifth, I would like to thank my parents, my girlfriend, and friends for their support. Enjoy reading this thesis, Utrecht, 9th of July, 2015 Jeroen Roelofzen

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LIST OF ABBREVIATIONS E-BBGC

E-business born-global company

E-BBGCS

E-business born-global companies

GBF

Get big fast

SAAS

Software-as-a-service

SME

Small and medium sized enterprise

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LIST OF TABLES Table

Page

1. Definitions of e-service and related concepts…………………………………………………………..11 2. Operationalization matrix…………………………………………………………………………………………40 3. Criteria for case company selection………………………………………………………………………….47 4. Characteristics of the dataset……………………………………………………………………………………48 5. Characteristics of case companies and their respondents…………………………………………49 6. Spread of international activities………………………………………………………………………………50 7. Strategic choices international strategy…………………………………………………………………….51 8. Challenges (grey) & solutions (white)………………………………………………………………………..52 9. Literature-based challenges & solutions……………………………………………………………………54 10. Literature-based challenges & Literature-based solutions……………………………………….56 11. Critical success factors……………………………………………………………………………………………..58 12. Checklist for international strategy………………………………………………………………………….69 13. Definitions of E-business………………………………………………………………………………………….78 14. Analysis of the academic literature………………………………………………………………………….81 15. Definitions of the born-global company…………………………………………………………………..85 16. Spread of value chain activities………………………………………………………………………………..87

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LIST OF FIGURES Figure

Page

1. Research framework…………………………………………………………………………………………………5 2. Categorization of E-business; E-service & SAAS………………………………………………………...12 3. The internationalization process of the firm (Andersen 1993)…………………………………..13 4. Five-phase life cycle model (Lester and Parnell 2008)……………………………………………….22 5. Theoretical framework……………………………………………………………………………………………..35

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TABLE OF CONTENTS ABSTRACT ...............................................................................................................................................................i EXECUTIVE SUMMARY ........................................................................................................................................ii PREFACE ................................................................................................................................................................ iii LIST OF ABBREVIATION S ................................................................................................................................... iv LIST OF TABLES .....................................................................................................................................................v LIST OF FIGURES.................................................................................................................................................. vi CHAPTER 1. INTRODUCTION ............................................................................................................................ 1 1.1 INTRODUCTION ........................................................................................................................................ 1 1.2 CONCEPTUAL RESEA RCH DESIGN ......................................................................................................... 4 CHAPTER 2: LITERATURE REVIEW ................................................................................................................... 8 2.1 E-BUSINESS ................................................................................................................................................ 8 2.1.1 Definitions of E-Business ........................................................................................................................ 8 2.1.2 Comparison of Definitions ...................................................................................................................... 8 2.1.3 E-service ............................................................................................................................................... 10 2.1.4 Suited E-business definition .................................................................................................................. 11 2.2 INTERNATIONALIZA TION OF BORN -GLOBAL COMPANIES ............................................................ 12 2.2.1 Internationalization theories ................................................................................................................ 12 2.2.2 The born-global company .................................................................................................................... 14 2.2.3 Concluding remarks .............................................................................................................................. 20 2.3 EARLY PHASES OF THE ORGANIZATIONAL LIFE CYCLE .................................................................. 21 2.3.1 The organizational life cycle ................................................................................................................. 21 2.3.2 The early growth of e-business start-ups ............................................................................................. 24 2.3.3 Concluding remarks .............................................................................................................................. 26 2.4 INTERNATIONAL E -BUSINESS STRATEGY .......................................................................................... 27 2.4.1 Internationalization of e-business ........................................................................................................ 27 2.4.2 Internationalization of software firms ................................................................................................. 29 2.4.3 Concluding remarks .............................................................................................................................. 30 CHAPTER 3: THEORETICAL FRAMEWORK .................................................................................................... 31 CHAPTER 4: METHODOLO GY .......................................................................................................................... 36 4.1 RESEARCH STRATEG Y ............................................................................................................................ 36 4.2 SAMPLE SELECTION ............................................................................................................................... 37 4.3 OPERATIONALIZATI ON .......................................................................................................................... 38 vii

4.4 INTERVIEW DESIGN ............................................................................................................................... 43 4.5 DATA ANALYSIS ...................................................................................................................................... 44 CHAPTER 5: RESULTS AND ANALYSIS ........................................................................................................... 46 5.1 DATASET ................................................................................................................................................... 46 5.2 INTERNATIONAL STRATEGY ................................................................................................................. 50 5.3 CHALLENGES AND S OLUTIONS ............................................................................................................ 52 5.4 LITERATURE-BASED CHALLENGES AND SOLUTIONS ...................................................................... 54 5.5 SUCCESS FACTORS INTERNATIONALIZATION .................................................................................. 58 5.6 REVIEWING THE PR OPOSITIONS ........................................................................................................ 59 CHAPTER 6: CONCLUSION, DISCUSSION, AND RECOMMENDATIONS .................................................. 63 6.1 CONCLUSIONS ......................................................................................................................................... 63 6.2 DISCUSSION ............................................................................................................................................. 66 6.3 RECOMMENDATIONS ............................................................................................................................ 68 REFERENCES ....................................................................................................................................................... 70 APENDICES .......................................................................................................................................................... 78 APPENDIX I: TABLES ..................................................................................................................................... 78 APPENDIX II: INTERVIEW PROTOCOL - DUTCH ...................................................................................... 88

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CHAPTER 1. INTRODUCTION This MSc Thesis report starts off with the introduction that presents the background of this research, the assigner Mempay, the factors recognized in literature, and the problem definition. The conceptual research design (section two) describes the objective of the research, the research framework and the research issue.

1.1 INTRODUCTION Where the international involvement of large multinational enterprises has increasingly become a focus of research in management (Hitt, Tihanyi et al. 2006), small and medium sized enterprises (SMEs) have become a more frequent actor in the global market (Smolarski and Kut 2011, Sandberg 2012). Consequently, the issues related to international strategy are becoming increasingly important for SMEs, especially those that are technology driven and internationalize during the early phases of their organizational lives (Filatotchev, Liu et al. 2009) . Born-global companies are a category of SMEs that seek rapid internationalization in the early phases of their organisational life and are known for their large scope of international operations, and emergence in substantial numbers worldwide (Weerawardena, Mort et al. 2007, Blomqvist, Hurmelinna-Laukkanen et al. 2008, Sepulveda and Gabrielsson 2013, Uner, Kocak et al. 2013) Since the internationalization literature considers internationalization as a gradual and incremental process (Moen 2002, Laanti, Gabrielsson et al. 2007) born-global companies pose an important new challenge to traditional views on the internationalization of the firm by directly entering global markets with highly innovative products (Knight and Cavusgil 2004, Weerawardena, Mort et al. 2007) The widespread emergence of born-global firms is mainly facilitated by two key trends; globalisation and advances in information and communication technologies (Knight and Servais 2004). First, the globalisation of markets facilitates internationalization in recently created enterprises by affording abundant opportunities abroad (Knight and Servais 2004, Knight and Cavusgil 2004). Second, by using internet-enabled business activities, e-businesses have the unique ability to benefit from a globally connected economy. This is since e-business enables to overcome the traditional barriers or difficulties of international expansion (Luo, Zhao et al. 2005). However, expanding ebusiness activities abroad also entails difficulties. Firms for instance need to be aware of cultural differences and the choice for an international standardization or localization strategy depends on whether firms are using the web for communication (advertising) or transaction objectives (Lituchy and Barra 2008). Moreover, technology-intensive born-global companies face many challenges that are different from those encountered by companies that internationalize at a slower pace (Blomqvist, Hurmelinna-Laukkanen et al. 2008).

Assigner In this research project the company Mempay is object of research. Mempay is a private company 1

started by the owners of CIB (Centraal Invorderings Bureau). CIB is a company specialized in payment collection. It is located in the Netherlands and employs about sixty people. Mempay is a small medium enterprise (5.5 FTE) that is managed by the owners of CIB and is specialised in providing business-to-business (B2B) invoice software. Mempays customers are companies that offer e-commerce products on a subscription basis (subscription e-commerce). Mempay provides these businesses invoice software that allows them to manage and adjust their payments. Since Mempay serves their customer with customized software, the company can be categorized as a B2B e-service software provider or software-as-a-service (hereafter by default referred to as ‘’SAAS’’) provider. Although the current customers of Mempay are located in the Netherlands and Belgium, the software for Mempay is developed by the company’s IT staff (consisting of two software developers) located in Moldavia. The owners of Mempay visit their IT personnel in Moldavia on a monthly basis. Mempay is a growing company started in 2013. The owners now believe they can expand business in Europe due to three reasons (Meddens 2014). First, the IBAN (international bank account number) recently became available for Europe. This change in law provides a lot of business potential for Mempay since it allows Mempay to collect payments in 33 European countries. It is in these countries Mempay wants to expand business. Second, subscription e-commerce is an emerging trend in the online shopping world, with every day new subscription e-commerce companies (Ammon 2014). In Europe Mempay believes this trend is upcoming. The owners of Mempay believe they can gain first mover advantage being among the first companies providing an e-commerce subscription IT service in the European market. Third, the owners of Mempay believe the technology and business model of Mempay is standardized and can easily be multiplied to other countries with small technological and operational adjustments. After initial entry in a European country they expect every new country to be entered in about three weeks. In addition, the owners of Mempay think they can more easily expand their other IT companies abroad when Mempay gained international experience and has become a first mover in the European market. The subscription e-commerce trend, the European availability of the IBAN, and the standardized business model of Mempay all argue for the SME Mempay to internationalise. However, until now the company lacks an international strategy.

Factors recognized in literature Although the internet was established for commercial use during the late 1990s, research on international information and communication technology (ICT) expansion is limited (Pezderka and Sinkovics 2011). More specifically, there is a shortage in the academic literature on the internationalization process of e-service born global companies in the early phases of their organizational life. To indicate this deficit, the researcher consulted several databases and applied several search strings. The names of the databases, the search strings and the results are listed 2

(Appendix I: Table 14). Although academic research on the internationalization of e-service born-global companies in the early phase of their organizational life is limited, different synonyms that can be grouped under ‘’ ebusiness’’ were found. When using ‘’e-commerce’’, ‘’internet’ ’, or ‘’e-business’’ instead of ‘’eservice’’ more results were yielded1. Therefore, in this research proposal, the researcher chose to either use the above mentioned terms as standalone concepts or, where possible, standardize these terms as ‘’e-business’’. This holds that in the continuation of this research the term ‘’e-business’’ is used as encompassing the terms ‘’e-commerce’’, ‘’e-service’’, and ‘’internet’’. So the same literature will be used while only formulating it as ‘’e-business’’. Despite the fact that research on the internationalization of E-BBGCs is limited, three issues are identified. First, the internationalization process of SMEs that internationalize in an early phase is accompanied by uncertainty and little agreement about what strategy to use (Hitt, Tihanyi et al. 2006). Moreover the born-global company challenges the conventional theories of internationalization since they target similar (foreign) countries simultaneously, internationalize very early, do not pass through incremental stages ,and their targeted markets may be physically distant from the home country (Knight and Servais 2004). Second, e-business start-ups are known their accelerated organizational life-cycle processes, which implies a quick growth but also fast maturing (Feindt, Jeffcoate et al. 2002, Drori, Honig et al. 2009). Moreover, the rise and fall of the dot-coms by the turn of the century raised questions as ‘’why did the rapid growth strategies pursued by so many dot coms fail?’’(Oliva, Sterman et al. 2003).The academic literature lacks an examination of the organizational life cycle processes taking place in new entrepreneurial organizations with rapid and short life spans like e-business firms (Drori, Honig et al. 2009). The quick growth and fast maturing makes it is difficult to predict the the early growth of e-business start-ups. Third, by using internet-enabled business activities, e-business firms are generally subject to fewer physical barriers in transcending national borders and are less susceptible to entry barriers associated with expensive physical presence and start up facilities (Luo, Zhao et al. 2005). However, the e-business marketplace is competitive and speed (quick and flexible customer response) is increasingly becoming a standard (Oliveira, Roth et al. 2002).This questions the required (physical) presence and the corresponding required international organizational structure in implementing a successful international e-business strategy.

Problem definition Limited research is conducted on the internationalization of e-service born-global companies in the early phases of their organizational life. Three factors can be identified in the literature. First, bornglobal companies challenge conventional theories of internationalization. Second, e-businesses start-

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Academic research on these terms seems to be less limited, for instance the search string: (international * "e commerce" OR "e business") yields 19200 results in Scholar. 3

ups are known for their rapid growth and fast maturing. Third, e-business firms operating internationally seem to have distinct international strategy challenges and prerequisites for success. This research addresses two problems by gathering lessons on the internationalization of E-BBGCs in the early phases of their organizational life. First, the internationalization of E-BBGCS is underdeveloped in literature. Second, Mempay wants to internationalize but lacks an international strategy. Since Mempay’s request for an international strategy is the main incentive for this research, it is a practice-oriented research. In practice-oriented research a problem is commonly solved using the intervention cycle (Verschuren and Doorewaard 2007).The intervention cycle consists of a number of phases that need to be walked through to solve a problem (Verschuren and Doorewaard 2007). This research will pass through the problem analysis phase and diagnostic phase. However, since it is conducted for a graduate thesis and since the topic is underdeveloped in the academic literature it is also partially theory-oriented.

1.2 CONCEPTUAL RESEARCH DESIGN In this section the research objective of the research project is elaborated .Further, this section depicts the research framework and describes the research issue.

Research objective The specific internationalization challenges for E-BBGCs are scarcely resourced in literature and Mempay does not know what choices to make regarding their international strategy. Accordingly, the main objective of this research is: To provide insight in the internationalization process of e-business born-global companies in the early growth phases.

Research framework In order to achieve the research objective a research framework is described (fig 1). The columns in a research framework globally present the necessary steps that will be taken during the research project (Verschuren and Doorewaard 2007).

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Figure 1: Research framework Our research framework consists of three parts; theory, diagnosis, and conclusions. A description of each (including the corresponding Chapter) is given below. The research objective is the final outcome of the research project and can be found on the right side of the research framework. I.

II.

Theory (Chapter 2). A literature review will be conducted on three topics; (1) Internationalization process of born-global companies: This part will focus on the theories of internationalization, the definitions of the born-global company and the factors that determine the early internationalization of born-global companies. (2) Early phases organizational life cycle: The early phases of the organizational life cycle and the growth of e-business start-ups during the early phases of the organizational life cycle will be studied in literature. (3) Internationalization of e-business: First, the definition and characteristics of ebusiness will be studied. Second, internationalization strategy elements that are specific for e-business will be studied. (4) Theoretical framework (Chapter 3): In this part, the findings from the earlier mentioned theory pillars will be integrated and analysed resulting in the theoretical framework. (5) Methodology (Chapter 4): The methodology chapter will describe how empirical research will be conducted in this research project. Diagnosis. In the diagnosis phase, the theoretical framework will be related to empirical research (6). The results will be analysed (7). 5

(6) Comparative case studies and interviews: The Case Centre, the Wall Street Journal, the Harvard Business Review and other sources are used to find comparative case studies related to topics and findings from the theoretical framework. The possibility of interviewing Dutch e-business firms will be investigated. (7) Results and analysis (Chapter 5): The results and analysis block consists of the results of empirical research (6) which are evaluated with propositions from the theoretical framework (4). III.

Conclusions (Chapter 6). A conclusion of this research is given. (8) Internationalization of E-BBGCs: The results and analysis (7) of empirical research and theoretical findings (4) are used to gather insight in the internationalization process of EBBGCs and to answer the main research question.

Research issue This subsection outlines the research questions that correspond with each part of the research framework. Main research question How can an e-business born- global company expand internationally in the early growth phases and what are common practices?

Sub research questions To answer the main research question several sub research questions are formulated. 1. What is the suited definition of e-business? 2. What are the definitions of a born-global company and what factors determine the early internationalization of born-global companies? 3. What characterizes the early phases of the organizational life cycle and the early growth of ebusiness start-ups? 4. What are appropriate international strategies for e-business and software companies?

Theoretical framework 5. According to the literature, what are the characteristics of e-business born-global companies that internationalize in the early growth phases?

Methodology 6. What methods should be used to select, analyse, and compare theoretical findings with empirical research? 6

Diagnosis 7. What determines international entry success for e-business born-global firms in the early growth phases?

8. What characteristics of e-business born-global companies determine international entry success in the early growth phases?

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CHAPTER 2: LITERATURE REVIEW This chapter describes the results of our literature review. In section 2.1 the concepts of e-business and e-service are introduced and suitable definitions are established. Section 2.2 presents the internationalization of the born-global company. In section 2.3 the early phases of the organizational life cycle are presented and finally section 2.4 describes the international e-business strategies from literature. 2.1 E-BUSINESS In this section the e-business concept is defined by answering research question one: ‘’what is the suited definition of e-business?’’ Objective of this section is to find fitting definition that suits both the topic and the assigner. In the first subsection, definitions of e-business from scientific publications will be presented. In the second subsection the found definitions will be analysed. In the third subsection a fitting definition will be established.

2.1.1 Definitions of E-Business There are many different definitions of e-business and there are a lot of related terms such as Internet business, Internet commerce, network economy, and electronic commerce (Eikebrokk and Olsen 2007). Furthermore everyone has a view on what the e-business concept is, but every individuals’ definition somewhat differs from the definition of others (Li 2006). In particular the distinction between e-business and e-commerce is often blurred (Fillis and Wagner 2005). To find a suitable and scientifically valid definition, the author will list prime definitions from leading (i.e. often cited) scientific articles on the e-business topic. For the times the publication was cited sources were Google Scholar (Google 2014) and Web of Science (Web of Science 2014). Table 13 (Appendix I) lists the results sorted by the number of times cited in Web of Science.

2.1.2 Comparison of Definitions Before interpreting and analysing the found definitions, the author has two remarks related to the results of table 13. First, the number of times cited in Web of Science of the two book publications by Li (2006) and Combe (2006) are not included in table 13 since the Web of Science database does not cover books. Second, since they use the terms ‘’internet-based tools’’ or ‘’internet-based technologies’’ and therefore were similar to the already listed definitions in table 13, the author decided to exclude the e-business definitions by Lin and Lin (2008) and Cagliano, Caniato et al. (2003). Table 13 arouses three observations regarding the scientific publications on the e-business topic and the definitions of e-business that were found. First, the number of publications and the times cited 8

indicate that the e-business topic is popular. Second, the more oft-cited articles from Google Scholar are also oft-cited in the more academic source Web of Science. Third, the definitions of e-business in table 13 differ strongly. Five aspects that relate to the similarities and differences between the found definitions of ebusiness (table 13) can be identified. First, most of the publications that define the e-business topic use ‘’business activities’’, ‘’value chain activities’’ (or related terms) in their definition of e-business, in combination with one of the terms ‘’internet’’ or ‘’web’’ (or related terms). The authors use different terms to describe ‘’value chain activities’’ (or related terms) to describe these activities in their definitions. The ‘’value chain activities’’ in the e-business definitions by Zhu and Kraemer (2005) and Zhu, Kraemer et al. (2006) are typical and include sales, customer service, procurement, information sharing, and coordination with suppliers (Zhu, Kraemer et al. 2006). Second, Wu, Mahajan et al. (2003), Koellinger (2008),Croom (2005), Fillis and Wagner (2005), and Combe (2006) include ‘’e-commerce website’’, ‘’sales’’, ‘’commercial transactions’’, ‘’electronic commerce’’ or ‘’buying and selling goods and services online’’ in their definition of e-business. These terms relate to the concept of e-commerce, that is defined by Chatterjee, Grewal et al. (2002) as ‘’the application of Web technologies for understanding customer needs, marketing products, services, and product-market solutions, and taking customer orders’’. However, Silveira (2003) defines e-commerce more specific as ‘’ the process of trading goods, information, or services via computer networks including the internet’’ (p. 201) and states that it can be distinguished from the broader concept of e-business (for Silveira’s definition see table 13). Although according to Silveira (2003) e-commerce can be distinguished from the broader concept of e-business, the terms e-business and e-commerce are often used synonymously (Combe 2006). In contrast, Johnson and Wang (2002) classify e-commerce as a subset of e-business and divide ebusiness applications into three categories: e-commerce, e-procurement, and e-collaboration. Also Phan (2003) yet again defines e-commerce as a subset of e-business. Combe (2006) argues that ecommerce only consists of the buying and selling of goods, while e-business for instance also refers to online customer service and automation of processes. As there seems to be more support for ecommerce as a subset of e-business, the definition of e-business used for this research will include ecommerce as a subset. Third, several authors identify external and internal e-business activities and focus on e-business as facilitating supply chain integration or communication, collaboration, and coordination between or within firms. For instance, Koellinger (2008) ,Wu, Mahajan et al. (2003), and Johnson, Klassen et al. (2007) describe either internal and external business processes, ‘’inter’’ or ‘’intra’’ organizational Internet-based information technologies or ‘’intra’’ and ’’ extranets’’. Fourth, several authors describe different parties like suppliers, customers, employees, business partners, and other stakeholders as involved in e-business activities. For instance, Zhu, Kraemer et al. (2004) focus on coordination with ‘’business partners’’, and Wu, Mahajan et al. (2003)

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characterize e-business as ‘’the use of internet technologies to link customers, suppliers, business partners, and employees’’. Fifth, several authors use different terms to describe the technologies that facilitate e-business. Most of the publications use ‘’the internet’’, ‘’information technologies (ITs), ‘’internet technologies’’, ‘’telecommunication’’, ‘’electronic network’’, ‘’web’’, or related terms to describe the technologies that facilitate e-business. This subsection compared the definitions of the bon-global company from the academic literature which resulted in three observations and five aspects.

2.1.3 E-service Fillis and Wagner (2005) include the selling of services in their definition of e-business. Since the eservice concept fits the assigner, as the assigner provides software as a service, it will be included in the e-business definition used for this study. Below the e-service concept will be defined. The e-service domain is under investigated in the academic literature (see section 1.1). However, the definitions of e-service by several authors seem to be in line (see table 1) and the definition by Boyer, Hallowel et al. (2002) will be used in this research. Further, Oliveira, Roth et al. (2002) define three different e-service business models based on the amount of physical presence (table 1). According to this categorization, the service delivery of digital dot-coms is digital, and therefore it can be delivered directly over the Internet. As the assigner’s offering is digital in nature or information based (software), the assigner can be categorized as a digital dot-com e-service business. Moreover, in software engineering different service concepts, that differ to the conventional way of buying software (in store) arise (Jaakkola, Heimbürger et al. 2010). A new on-demand software delivery model called SAAS is being recognized by IT executives and researchers (Benlian and Hess 2011). The customer or subscriber of SAAS can access a software application from a software provider or vendor through the internet (Wu 2011). The software our assigner delivers fits this concept, and therefore the assigner can be categorized as a SAAS provider. The author of this research categorizes the SAAS concept (table 1) as a subset of e-service since it is a service that is delivered on the internet.

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Table 1. Definitions of e-service and related concepts

Author(s)

Concept

Definition

Rowley (2006)

E-service

‘’Deeds, efforts or performances whose delivery is mediated by information technology (including the Web, information kiosks and mobile devices)’’(p. 341)

(Boyer, Hallowel et al. 2002)

E-service

‘’E-service is being comprised of all interactive services that are delivered on the Internet using advanced telecommunications, information, and multimedia technologies’’ (p. 175, 722)

Bricks-and Mortar

‘’e-services with a presence only in the physical space’’ (p. 722)

Clicks and mortar

‘’e-services with a presence both in the physical and virtual space’’(p. 722-723)

Digital dotcoms

‘’internet-based companies whose offerings are digital in nature, such as information providers’’

Physical dot-coms

‘’ physical dot-coms are based entirely on the internet but can sell physical products that are shipped to consumers’’

SAAS

‘’ an on-demand software delivery service model, which is part of the cloud computing phenomenon’’

Oliveira, Roth et al. (2002) (Rosenzweig, Laseter et al. 2011) Oliveira, Roth et al. (2002)

(Benlian and Hess 2011)

This subsection presented and analysed the definitions of e-service, showed three different e-service business models, and presented a definition of the SAAS concept.

2.1.4 Suited E-business definition To establish a valuable and fitting definition for the e-business topic and the assigner the author has built on the existing definitions of e-business and the above mentioned aspects. The definition by Amit and Zott (2001) is oft-cited and is classified ‘’classic’’, and will be included in the e-business definition of this study. Consistent with other research, also e-commerce will be included in our definition. Further, the use of web-based applications (Sanders, 2007) and a business model that is heavily IT enabled (Weill and Vitale, 2002) fit our assigner as a software provider and is therefore 11

included in our definition of e-business. Since the assigner of this research can be categorized as an e-service software provider the author will include e-service in our definition of e-business. The identified terms and their categorization in this research are visualized in figure 2. Taking the abovementioned into account, e-business is defined as follows in this study: ‘’Business conducted over the internet by using internet-based technologies, web-based applications or business models heavily IT enabled. E-business includes the buying and selling of goods, providing services (e-service) and value chain activities’’

E-Service

E-Commerce

SaaS

E-Business Figure 2. Categorization of E-business; E-commerce, E-service & SAAS

2.2 INTERNATIONALIZATION OF BORN-GLOBAL COMPANIES This section will answer research question two what is the suited definition of a born-global company, and what factors determine the early internationalization of born-global companies? In the first subsection, the theories of internationalization will be presented. In the second subsection, several definitions of born-global companies are presented with the objective of finding a definition that suits both the topic and the assigner. After the born-global company is defined, the internationalization process of born-global companies is studied in literature.

2.2.1 Internationalization theories In the academic international business literature two models are primarily used to describe the internationalization process of the firm, namely; the ‘’Uppsala Internationalization Model’’ (1), and the ‘’Innovation-Related Internationalization Models’’ (2) (Andersen 1993). These models have since 1977 been so influential that the international business literature presupposed them and have made an important contribution to the understanding of how firms internationalize (Mtigwe 2006). However, in recent years both models are challenged by the network theory that is more appropriate for modern (knowledge intensive) high-technology SMEs (Mtigwe 2006, Pykäläinen and Ojala 2009). The Uppsala internationalization model argues that the firm first establishes in the domestic market, that internationalization is the result of a number of incremental decisions, and that there are four 12

different stages to international expansion in individual countries (Johanson and Wiedersheim-Paul 1975): 1. 2. 3. 4.

no export activities export via independent representatives (agent) sales subsidiary production/manufacturing

Each subsequent stage of the Uppsala internationalization model leads to different market experience and market information for the firm and requires increasingly larger resource commitments (Johanson and Wiedersheim-Paul 1975). Johanson and Vahlne (1977) have further advanced the work of Johanson and Wiedersheim-Paul (1975) by contributing with a dynamic model (see figure 3) in which the outcome of one series of events forms the input for the next (Andersen 1993).

Figure 3. The internationalization process of the firm (Andersen 1993) This model describes market knowledge and market commitment (as the firms ‘resource commitment to the markets abroad) to affect both commitment decisions (which involve decisions to allocate current resources to foreign operations) and the way present activities (as the main source of experience) are carried out (Andersen 1993). These in turn influence the firms’ market commitment and market knowledge (Andersen 1993). So decisions to allocate further resources to particular operations abroad will more often be taken if market (or experiential) knowledge increases (Madsen and Servais 1997). This implies that decisions involving the allocation of additional resources to foreign markets frequently will be made in small incremental steps since it takes time to gather market knowledge about markets abroad (Andersen 1993, Madsen and Servais 1997). Furthermore, the process may be slow when the firm has a high risk aversion, high perceived uncertainty (related to the decision to internationalize), or similar factors (Madsen and Servais 1997). The Innovation-Related internationalization models describe the internationalization process similar to an innovation process; the adoption of new ways of doing business (Madsen and Servais 1997). Like the Uppsala models, the innovation related internationalization models present the internationalization process as a step-by-step development, where experience and the amount of involvement increases per stage (Andersen 1993). 13

An example of an innovation-related stage model for the export behaviour of small- and mediumsized firms, is described by Bilkey and Tesar (1977): 1. Management is not interested in exporting 2. Management does not explore the feasibility of exporting but would act on an export order 3. Management actively investigates feasibility of exporting (skipped if spontaneous export orders are already collected). 4. The firm experiments with exporting to a psychologically close country 5. The firm is an experienced exporter to that country and fine-tunes exports 6. Management investigates the feasibility of exporting to additional countries that are distant The network approach takes a different view of the internationalization process by arguing that a small or dependent firm can instantly start operating international supported by partners that have international experience and operations (Mtigwe 2006). In the network approach a firm internationalizes when it starts to develop relationships with actors belonging to another network in a foreign country, these relationships act as a bridge to foreign markets and the firm relies on resources controlled by the other actors in the network (Pykäläinen and Ojala 2009). A firm’s network relationships with foreign individuals and firms has great value as a source of market information and knowledge and the firm’s internationalization naturally develops from these network relationships (Mtigwe 2006). Foreign market positions are established using foreign network partners, this internationalization process is described by Johansson and Mattson (1988) and achieved through: -

International extension: entering new foreign markets by making use of new relationships with foreign network partners. Penetration: in markets where the firm has a presence it expands resource commitments International integration: the international network activities (spread around a number of countries) are co-ordinated.

This subsection indicated that the innovation-related as well as the Uppsala internationalization model conceptualize the internationalization process as a step by step process with several stages that each requires a certain level of experience and resources. In the internationalization process market knowledge is crucial; when a firm lacks market knowledge about foreign markets the internationalization process may be slow. The network approach fundamentally differs to innovation and Uppsala internationalization models as small, dependent firms can instantly start operating international by relying on network relationships.

2.2.2 The born-global company In the introduction (section 1.1) it was mentioned that born-global firms pose an important new challenge to traditional views on the internationalization of the firm. In this subsection the researcher will first present several definitions of the born-global company with the objective of finding a fitting definition for the topic and the assigner. Subsequently the researcher will further 14

investigate the extent to which the earlier described theories of internationalization apply to the internationalization of the born-global company in order to find the factors that determine the early internationalization of the born-global company.

Definition of the born-global company The subsequent paragraphs will explore and define the concept of the born-global company. While early internationalization (with articles published between 1993 and 1997) is not a new concept (Gleason and Wiggenhorn 2007). The term ‘’born-global’’ however, is considered of recent date (with most of the articles published after 1995). Although the definitions of the born-global company seem to be in line, the born-global literature is still lacking a precise definition of what a born-global company is (Kuivalainen, Sundqvist et al. 2007, Lopez, Kundu et al. 2009). Various definitions of the born-global firm can be found in academic literature. To find a suitable, scientifically valid definition for a born-global company the researcher lists prime definitions of bornglobal companies from leading (i.e., often cited) scientific articles in (Appendix I: Table 15). The articles were found by searching for the term born-global. For the times the publication was cited sources were Google Scholar (Google 2014) and Web of Science (Web of Science 2014). The results (Appendix I, table 15) are sorted by the number of times cited in Web of Science. Table 15 arouses five observations regarding the born-global phenomenon, its definition, and the academic publications on the topic. First, the number of publications on the born-global topic and the times cited indicate that the born-global topic is popular. Second, although the articles from Google Scholar are more often cited, the same articles are already oft-cited in the more academic source Web of Science. Third, the oft-cited articles by Madsen and Servais (1997) and Gabrielsson and Kirpilani (2004) are only available in the less academic source Google Scholar. However, the source of these publications (the international business review journal) is also associated with other publications from table 15 that were available in Web of Science. Therefore the author has no reason to doubt the academic reliability of these publications. Fourth, more recent articles define the bornglobal firm and its characteristics more extensive in terms of its customers (Business-to-Business) and its resources or sector (knowledge-based and technology-intensive). Fifth, many definitions of the born-global company overlap strongly. Therefore, two less often cited publications by Mort, Weerdawena et al. (2012) and Kim, Basu et al. (2011) that defined the born-global company in line with the more oft-cited articles were excluded from table 15. Six aspects that relate to the similarities and the differences between the found definitions can be identified. The researcher will elaborate these 6 items that will be combined into a suited definition. First, there seems to be agreement on the moment born-global firms start operating international or aim to operate international i.e. ‘’from inception’’ (frequently used), ‘’at inception’’ ,‘’from or near founding’’, or ‘’early stages’’ etc. The only exception is the definition by Madsen and Servais (1997) that uses ‘’right from their birth’’.

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Second, the born-global is defined as a small or small and medium sized (SME) enterprise by Hashai (2011), Zhou, Wu et al. (2007), Rialp, Rialp et al. (2005), and Gabrielsson, Kirpalani et al. (2008). Rialp, Rialp et al. (2005), and Hashai (2011). Since the born-global company as a SME fits our objective and is used by several authors it will be included in our definition. Third, some specific characteristics of the born-global firm are less often cited, because they are only more recently used to define the concept. For instance, Gabrielsson, Kirpalani et al. (2008), Knight and Cavusgil (2004), Uner, Kocak et al. (2013) ,and Hashai (2011) emphasize the technology aspect (‘’knowledge-based resources’’, ‘’technology-oriented companies’’, ‘’high-tech’’ or ‘’technologyintensive firms’’). Sepulveda and Gabrielsson (2013) define born-global companies as business-tobusiness (B2B) ventures. And Gabrielsson, Kirpalani et al. (2008) born-global companies are start-ups and have a global vision. ‘’Global vision’’ implies that management viewed the world as its marketplace right from the birth of the company (Madsen and Servais 1997). Fourth, three publications (Moen 2002, Kuivalainen, Sundqvist et al. 2007, Gabrielsson, Kirpalani et al. 2008, Jantunen, Nummela et al. 2008) use a more operational definition concerning the time born-global companies start operating international and the share of their foreign turnover. Here, the authors seem to agree and state that the born-global company starts foreign operations within three years of inception and derives at least 25% of their turnover from outside their home market. Moen (2002) uses an establishment date (post 1990) to operationalise the born-global company. This ‘’last decade’’ criterion is a result of the significance of ‘’driving forces’’ for the born-global phenomenon that are considered important for this period (Moen 2002). Where a common requirement for a definition is that it should be general; not bound by time and place aspects, this operationalization by Moen (2002) is considered remarkable by the researcher. Fifth, an aspect that authors disagree on is to whether born-global companies ‘’seek to’’, or already operate international. Rialp, Rialp et al. (2005), Zhou, Wu et al. (2007), and Jantunen, Nummela et al. (2008) define the born-global as ‘’ operating’’ or ‘’participating’’, and as gaining turnover in international markets. In contrast, the definition of a born-global as ‘’seeking international business performance’’ by (Knight and Cavusgil 2004) is more often cited by other authors (Weerawardena, Mort et al. (2007), Gabrielsson and Kirpilani (2004),Knight and Servais (2004), Laanti, Gabrielsson et al. (2007), Blomqvist, Hurmelinna-Laukkanen et al. (2008), Mort, Weerdawena et al. (2012)) . Sixth, a substantial set of articles uses the phrase: ‘’organizations or companies seeking to derive competitive advantage from the use of resources and the sale of outputs in multiple countries’’ (Mort, Weerdawena et al. (2012), Weerawardena, Mort et al. (2007), Gabrielsson and Kirpilani (2004), Knight and Servais (2004), Laanti, Gabrielsson et al. (2007), Blomqvist, Hurmelinna-Laukkanen et al. (2008)). The authors that use this phrase all refer to the older, oft-cited article by Oviatt and McDougall (1994) that define the international new venture (instead of the born-global firm) as: ‘’ A business organization, that from inception, seeks to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries’’ (cited 2556 times in Google

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Scholar, 674 times in Web of Science). This definition is classified as ‘’classic’’ and will be included in our definition of the born-global company. Considering the above mentioned, the following definition of a born-global company will be used in this research: ‘’ A small-and medium sized business, that is technology oriented, from inception has a global vision, and seeks to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries’’ The researcher came across several synonyms for the term ‘’born-global’’ in literature. Oviatt and McDougall (1994) use the term ‘’international new venture’’, the search string: (Topic: (international new venture)) yields 618 results in Web of Science. Yeoh (2000) uses the term ‘’global start-up’’, the search string: (Topic: (global start-up)) yields 206 results in Web of Science. The term ‘’hightechnology SME’’ is used by Filatotchev, Liu et al. (2009) and its’ search string: (Topic (high technology SME)) yields 109 results in Web of Science. The researcher will use the different terms as suits the sources and topics covered, but relate to born-global companies by default. In the previous paragraphs observations and six aspects related to the concept of the born-global company were analysed which resulted in a definition of the born-global company.

Internationalization of born-global companies The next paragraphs will describe the extent to which the stage model theories of internationalization apply to the internationalization of born-global companies and will present two external and four internal factors that specifically determine the early internationalization of bornglobal companies. Although the earlier described Innovation internationalization model and the Uppsala internationalization model, hereafter by default referred to as ‘’the stage models’’, have been used for much research around the world, the models are also criticized (Madsen and Servais 1997). First, the stage models (especially the Uppsala model) ignore competition and strategy dynamics as they focus on learning dimensions of firms (Li, Qian et al. 2012). Second, the constructs of the stage models could not be applicable to the contemporary international globalized economy since they were established decades ago (Li, Qian et al. 2012). Third, sufficient empirical research can be found, that indicates that not all firms internationalize according to the stage models (Madsen and Servais 1997, Laanti, Gabrielsson et al. 2007). In particular, born-global companies are known to challenge the conventional stage models (Oviatt and McDougall 1994, Laanti, Gabrielsson et al. 2007, Weerawardena, Mort et al. 2007, Melén and Nordman 2009, Uner, Kocak et al. 2013). Furthermore, the stages models focus on a firm level rather than on the level of the entrepreneur and their social network, which is suggested more relevant when researching the born-global company (Madsen and Servais 1997).

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Although the stage models have been criticized, the incremental principles of the stage models have some merit as there are assumptions in the stage models that apply to the born-global company and the theoretical reasoning of the stage models can be used to understand the internationalization of born global companies (Madsen and Servais 1997, Mtigwe 2006). In the next subparagraph the author will describe an element of the stage models that applies to the internationalization of bornglobal companies. The stage models highlight that internationalization is the consequence of a series of incremental (step-by-step) decisions. Mort, Weerdawena et al. (2012) argue that born-global companies have accelerated internationalization patterns and therefore do not pass through stages stepwise but target the international or global market from inception (Madsen and Servais 1997). However, also the firms in the early growth phases typically display the incremental development process (Mtigwe 2006) and according to the stage models, the decision to allocate further resources to specific foreign operations will more often be taken if market (or experiential) knowledge increases. In the case of the born-global company, the accelerated internationalization process could thus be explained by a greater amount of market or experiential knowledge. As mentioned above, the stage models dates back to 1977. The emergence of the born-global company is linked to two key trends that have occurred in the last decades and have, to a great extent, facilitated early internationalization (Madsen and Servais 1997, Moen 2002, Knight and Cavusgil 2004). In order to enable a thorough explanation of the internationalization of the bornglobal these two key trends will be explained below. The first key trend is the globalization of markets which is associated with increasing homogenization of buyer preferences around the world, international networks, specialization, and the development of niche markets (Knight and Cavusgil 2004). Stable, and homogenous market conditions facilitate gaining foreign market knowledge easier (Oviatt and McDougall 1994). Moreover, the homogenization of buyer preferences simplified product development and positioning in foreign markets whereas specialization and development of niche markets urged firms to enter foreign markets as domestic demand was too limited (Madsen and Servais 1997). The second key trend are the technological advances in production, transportation, information and communications technologies (Knight and Cavusgil 2004). In particular, changes in production technologies and better access to and lower costs of transportation and communication have driven the emergence of born-global companies (Madsen and Servais 1997). These two trends facilitate early internationalization and thus support the emergence of born-global companies (Laanti, Gabrielsson et al. 2007). However, they are insufficient for explaining the internationalization of born-global companies (Knight and Cavusgil 2004).In the academic literature four company internal factors that facilitate the early internationalization of born-global companies are identified. These four factors are listed in the next paragraphs.

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The first factor that facilitates the early internationalization of born-global companies is the amount of foreign market knowledge and experience (international work experience, education, network, and language skills) the owners(s) and employees of born-global companies possess (Laanti, Gabrielsson et al. 2007, Weerawardena, Mort et al. 2007, Sinkovics, Sinkovics et al. 2013). Here the network approach is relevant as born global companies owe to the international orientation of its management and social network of the entrepreneur (Madsen and Servais 1997, Mtigwe 2006). Moreover the born-globals’ owner(s) and employees typically gained international competencies (education) and experience prior to the start-up which significantly lowers the psychic distance2 to foreign markets by reducing uncertainty and supporting quick resource allocation decisions (Madsen and Servais 1997, Crick 2009, Sinkovics, Sinkovics et al. 2013). Born-globals can compete with larger firms over resources by building on the extensive skills and international experience of its managers and owners (Laanti, Gabrielsson et al. 2007). In particular, the international entrepreneurial orientation (a global vision from inception), innovative capability of the owners, ability to combine resources from different national markets, owner-manager3 characteristics, and the management team determine the speed of the internationalization process of born-global companies (Madsen and Servais 1997, Knight and Cavusgil 2004, Weerawardena, Mort et al. 2007, Crick 2009). The second factor that facilitates the early internationalization of born-global companies are the available resources. Internationalization requires resource commitments and since they often use an aggressive grow strategy, the internationalization of born-global companies requires unique resources and capabilities (Laanti, Gabrielsson et al. 2007). Hence, the greater amount of resources and capabilities that born global firms are able to obtain, the faster they internationalize (Laanti, Gabrielsson et al. 2007). In particular financial resources often enable the born global-company to accelerate internationalization, to progress to more advanced and demanding product categories, market strategies, operation modes, and global market presence (Laanti, Gabrielsson et al. 2007). However, usually born-global companies lack financial, human, and physical resources due to their young age (Knight and Cavusgil 2004, Laanti, Gabrielsson et al. 2007).Hence, born-global companies that are backed by external funding commit more resources and grow faster (Laanti, Gabrielsson et al. 2007). Further, human resources are one of the greatest challenges for the information, communication, and technology (ICT) sector born global firms as they often lack of adequate managerial resources to serve international functions (Laanti, Gabrielsson et al. 2007). In particular the managers of ICT born-global firms are often young and inexperienced and lack international business and business management experience (Laanti, Gabrielsson et al. 2007). The third factor that facilitates the early internationalization of born-global companies are its’ specialized and technological competences and resources. The born-global is known for its highly 2

Psychic distance is a key factor in foreign market entry strategies and refers to (1) the perception of ‘’how similar conditions in operating markets are to those in new markets’’ and (2) the perception of ‘’how good the prior experience predicts expectations in new markets’’ (Sinkovics et al 2013, Yamin and Sinkovics 2006). 3 The owner-manager can be categorized as primary owner of a small business while also active in full-time management within that business (Stewart et al 1998) 19

innovative products and innovation culture which facilitates the acquisition of knowledge and the accelerated internationalization (Knight and Cavusgil 2004, Weerawardena, Mort et al. 2007). Bornglobal firms have to focus on and protect their specialized and technological core competences and intangible resources (know-how and brands) and their technological pioneer position at low costs as it is difficult for the born-global company to compete with large firms over tangible resource (Moen 2002, Li, Qian et al. 2012). The fourth factor that facilitates the early internationalization of born-glob al companies is their flexibility. Smaller firms gain from their less bureaucracy, and internal conditions that stimulate innovativeness (Knight and Cavusgil 2004). Moreover, small and young born-global companies lack the deeply rooted administrative heritage of larger and older businesses (Knight and Cavusgil 2004). Before larger firms can learn new internationally oriented routines they must typically unlearn routines rooted in domestic operations (Knight and Cavusgil 2004). Moreover, since born-global companies are flexible in their internationalization modes they can adapt them to the needs of the individual market and clients (Melén and Nordman 2009). This subsection indicated that the stage models are criticized for three reasons. However, the requirement of market knowledge from the stage models is still assumed to apply to the born-global company. Further, two key trends facilitated (globalisation and technological advances) the emergence of the born-global company but are insufficient in explaining the early internationalization of born-global companies. The early internationalization of born-global companies is in particular determined by four company internal factors (the market knowledge and experience, available resources, specialized technological competences and their flexibility) 2.2.3 Concluding remarks Section 2.2 is aimed to answer research question two; what is a suited definition of a born-global company, and what factors determine the early internationalization of born-global companies? The stage models present internationalization as an incremental decision making process that involves a varying number of stages with market knowledge as the prime factor that determines the resource input of a firm in a foreign market. In contrast, in the network approach a small firm instantly internationalizes by relying on a foreign partner´s experience, market knowledge, and resources. The born-global company is a small-and medium sized business, that is technology oriented, from inception has a global vision, and seeks to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries. Consistent with the stage models, the born-global company is assumed to build on experiential and market knowledge. The stage models are challenged by the born-global company to the extent that they describe the process to be stepwise in nature and expect the internationalizing firm to first establish itself in the domestic market. However, the born-global company targets the international or global market from inception. Two key trends, the globalization of markets and the technological advances in production, transportation, and communication have during the last decade facilitated the quicker internationalization process of born-global companies. Further, four company internal 20

factors, the amount of available resources, the technological specialized core competences, and the innovativeness and flexibility of born-global companies determine its quick internationalization.

2.3 EARLY PHASES OF THE ORGANIZATIONAL LIFE CYCLE This section will answer the following research question: what characterizes the early phases of the organizational life cycle and the early growth of e-business start-ups? First, the theories on the organizational life cycle will be presented. Second, the early growth of ebusiness start-ups will be studied in literature. Final aim is to find out to which extent the theories of the organizational life cycle could predict the early growth of e-business start-ups.

2.3.1 The organizational life cycle A large academic management literature is devoted to describing and mapping the organizational growth and development of organizations (Ven and Poole 1995, Phelps, Adams et al. 2007, Lester and Parnell 2008). These so-called organizational life cycle models are designed to understand and predict the changes in organizational structure and behaviour for growing or declining organizations (Lester and Parnell 2008). In general, these models declare that change in an organisation is characterized by a predictable pattern that involves distinct phases of development (Dodge, Fullerton et al. 1994). In a classic publication (cited 880 times in Scholar) on the organizational life cycle, Kimberly and Miles (1980) describe three phases and argue that all organizations go through a developmental phase of birth; the creation, early development, infancy or start-up phase, a maturation or mid-life phase, and a termination or decline phase. Each phase presents the organization and its management with different requirements (Kimberly and Miles 1980). The organizational infancy phase is characterized by high uncertainty in decision making (Kimberly and Miles 1980). During the mid-life the organization goes through changes explained by factors such as environmental threats, opportunities, size, and technology. Decline refers to a decrease in the organization’s personnel, profits, budgets, clients etc. (Kimberly and Miles 1980). In an extensive review study, Phelps, Adams et al. (2007) describe 33 papers that deal with the lifecycle theory. From this study two characteristics of the organizational life cycle can be derived. First, the life-cycle literature mostly deals with small, new, or rapidly growing firms (Phelps, Adams et al. 2007). Second, distinct phases can be identified, and the order in which organizations go through this sequence of recognizable development phases is argued to be fixed, similar and hence, predictable for organizations (Phelps, Adams et al. 2007).

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Further, most of the papers (23 of 33) reviewed report between 3 and 5 phases, which is in line with a study by Lester and Parnell (2008) that build on empirical research that supports a three, four or five-phase life cycle model. Where Kimberly and Miles (1980) use a three phase model, Lester and Parnell (2008), integrate existing models with the aim to develop a mainstream view of life cycles and describe a five-phase organizational life cycle model that distinguishes between small and large businesses (see figure 4). However, such a categorization requires consideration as not all firms grow large and a medium size category also exists. Moreover, there is no globally accepted definition of a small or large firm and even the small and medium-sized enterprise category lacks a universal definition (USITC 2010). The model can be used to predict het management needs and issues of growing organizations (Phelps, Adams et al. 2007). As managers can change the organizational factors that determine the life cycle, Lester and Parnell (2008) argue that organizations can ‘’renew themselves, move backwards from renewal or maturity (success), or escape decline by re-entering the growth, maturity or renewal phase’’ which is represented by the arrows in Figure 4. As the focus of this research is on SME’s and on the early growth phases, this research will focus on the first two phases (existence and survival) of the model (see Fig. 4).

Figure 4. Five-phase life cycle model (Lester and Parnell 2008) Lester and Parnell (2008) describe five phases: Phase one: existence; this phase is the entrepreneurial or birth phase and is the beginning of organizational development. Focus is on viability; identifying a sufficient number of customers to sustain existence of the organization(Lester and Parnell 2008). Also initial capital, centralization, a tendency for risk-taking, and the need to learn how to manage innovation are crucial (Drori, Honig et al. 2009). Decision-making and ownership are in the hands of one, or a few, and the organizational structure is simple and informal (Drori, Honig et al. 2009). 22

Phase two: survival: in this phase firms seek growth, development of a formalized structure and establishment of its’ own distinctive competencies. The organization routinely formulates goals and has the aim to generate enough revenue to continue operations and to finance sufficient growth to stay competitive. Most organizations are structured in a functional manner, decentralize decisionmaking, and grow (Lester and Parnell 2008, Drori, Honig et al. 2009). Phase three: success: this phase is also generally called ‘’maturity’’. An organizational form with formalization and control through bureaucracy characterize this phase(Lester and Parnell 2008). Phase four: renewal: the organization wants to return to a leaner form where teamwork and collaboration facilitate innovation and creativity. However, decision-making is quite decentralized and the organization is still large and bureaucratic. Phase five: decline: politics and power characterize this phase as the organizational members become more concerned with personal goals than with organizational goals. Consequences are a loss of market share and a lack of profit. Eventually, control and decision making return to a small group of people. When using organizational life cycle models and our life cycle model (fig. 4) to predict and map the growth and development of organizations, consideration is required concerning two limitations. First, Lester and Parnell (2008) distinguish between small and large organizations and argue that ‘’although firms may exit the life cycle at any phase, organizations that decline are naturally large firms’’. As mentioned earlier, there are problems related to the use of such a categorization. The validity of such a categorization is further questioned by the fact that although organizations in decline phases were managed much like small firms, other authors describe organizations in decline as similar in size to organizations in success phases (Lester and Parnell, 2008). Second, the distinction between phases and their length seems not universally defined. It is difficult to use a universal model for all types of organizations (Lester and Parnell 2008), and there is disagreement in the life-cycle literature concerning the number of phases organizations pass through and what it is that precisely constitutes a phase (Phelps, Adams et al. 2007).Moreover, consistent with dispute over the number of phases, authors also disagree about the time each phase lasts, varying from three to 15 years per phase (Phelps, Adams et. al, 2007). Given its limitations, the organizational life cycle model literature describes two factors relevant for fast growing smaller firms. First, in the existence phase the organizational structure is simple and informal, subsequently growth causes business activities to become more formalized (in terms of control and coordination) and rational (Phelps, Adams et al. 2007). In particular smaller software firms gain by using formalized systems as they enable to focus limited resources and efforts, become more effective, improve morale, increase innovation, and make better choices regarding new product development (Phelps, Adams et al. 2007).

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Second, as small businesses grow they need to develop and improve their human resource management capability accordingly. This for instance implies that managers have to change their role as supervision, responsibility, and delegation are required (Phelps, Adams et al, 2007). Rapid growing firms increase in size quickly and geographically differentiated offices, constant inflow of new employees, too many people to be managed, and the establishment of different product or functional teams can cause high stress levels, inadequate skill levels and disaffection from the organization (Fischer and Reuber 2003, Phelps, Adams et al. 2007).Furthermore, the owners may have strong start-up skills but may not possess the skills required to manage growth (Fischer and Reuber 2003). Especially for an e-business firm in the early growth phases the quality of employees is crucial since the quality of its’ website, fulfilment operations, and customer service depends on the skills, experience, and firm-specific knowledge of the employees (Oliva, Sterman et al. 2003). This subsection highlighted two factors characteristic for the early growth phases. First, the early phases of the organizational life cycle are characterized by an informal and simple organizational structure, a focus on acquiring enough initial capital, and identifying a customer base for survival. In these phases organizations are structured in a functional manner and decision-making becomes more decentralized. Here the firm should develop some formalization of structure and distinctive competencies. Second, as small firms grow they need to develop and improve their human resource capability, which implies that managers need to change their role, owners need to acquire the skills to manage growth, and the quality of employees is crucial and needs to be ensured. 2.3.2 The early growth of e-business start-ups As mentioned in the introduction (section 1.1), internet start-ups are known to have accelerated organizational life cycle processes (Drori, Honig et al. 2009). Firms that grow rapidly experience specific problems that pressure their existence (Fombrun and Wally 1989). This subsection will explain the early growth patterns of e-business SMEs.

Growth strategies High growing firms have a structured approach in organizing their business and move their strategic orientation from opportunistic and reactive working (‘’strategy free’’ approach) to a more deliberate and considered (‘’thought out’’) strategy (Phelps, Adams et al. 2007). Furthermore, strategic planning is crucial for e-business SMEs since these firms in particular need to identify ‘’how to use e-business’’ (Porter 2001, Eikebrokk and Olsen 2007). In the academic literature the concept of network effects4 is linked to the growth strategies of ebusiness firms. High growth e-business strategies are defined as ‘’efforts to acquire customers rapidly in new markets through aggressive marketing, discounting, or absorbing rivals through mergers’’ (Eisenmann 2006). They are commonly called ‘’accelerated growth strategies’’ or ‘’get-big fast strategies(GBF)’’ and involve pricing low (below short-run profit level), rapidly expanding capacity, and using an aggressive marketing strategy (advertising heavily), and forming alliances to build user 4

‘’Networks effects arise when the value one user places on a good depends on how many other people are using it’’ (Shapiro and Varian, 1999). 24

base, grow as quick as possible to pre-empt rivals (Oliva, Sterman et al. 2003). These strategies are often used in winner-take-all markets which are markets in which a single technology or firm is dominant (Shapiro and Varian 1999, Eisenmann 2006). In a winner-takes-all market with strong network effects and high switching costs5, e-businesses can use high growth e-business strategies to achieve competitive advantage, differentiation, and cost advantage by entering markets early, acquiring more customers than competitors in the early phase the organizational life cycle, and developing into large players (Oliva, Sterman et al. 2003, Chang 2004, Eisenmann 2006). In these markets, users want to select the network, firm or technology that will succeed and that has (or will have) the most users (Shapiro and Varian 1999). Furthermore, switching costs in these markets arise when there is a desire for standardization (Shapiro and Varian 1999). Sellers of software can anticipate on this desire for standardization for instance by offering quantity discounts (Shapiro and Varian 1999). Moreover these high-growth e-business strategies are based on positive feedbacks6 that create increasing returns, are sources of competitive advantage and favour aggressive firms (Oliva, Sterman et al. 2003) Although the high growth e-business strategies are regarded as effective strategies for e-business, there are five drawbacks for using these strategies. First, pioneers that use accelerated growth strategies are more likely than late entrants to change business models since pioneers face uncertainty about customer needs and the risk of adopting technologies that later become obsolete (Eisenmann 2006). Second, high growth e-business strategies create financial risks as they require huge initial investments in customer acquisition, low prices, and assure only long-term profits which results in a demand for cheap capital (Porter 2001, Oliva, Sterman et al. 2003). Third, intense competition for new users makes it difficult for firms to obtain the benefits of network effects in a market. The high switching costs and the openness of the internet make it difficult for a single firm to build an internet brand and obtain and secure the benefits from network effects (Porter 2001, Eisenmann 2006) . The effect of upfront competition could eventually be a reduced potential of the available rents from customers that are locked in7 (Eisenmann 2006). Fourth, in some markets network effects are not present or are not strong enough to benefit from. The majority e-businesses that were seeking to get big but failed did not investigate if there were any network effects that could result in positive feedbacks that would gain the largest player (Oliva, Sterman et al. 2003).

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‘’Switching costs include relation-specific investments and inconveniences incurred when a customer changes form one ex ante homogenous supplier to another ‘’ (Eisenmann, 2006). 6 ‘’Positive feedback is caused by network effects and implies that ‘’the strong get stronger and the weak get weaker and leads to extremes: dominance of the market by a single firm or technology’’ (Shapiro and Varian, 1999, Oliva, Sterman et al. 2003) 7 ‘’Lock-in prevents the migration of customers and strategic partners to competitors’’ (Amit and Zott 2001). 25

Fifth, a strong focus on getting big fast can also create negative feedbacks. For instance rapid growth can contribute to a decrease in service quality, negative feedbacks, and a delay in growth (Oliva, Sterman et al. 2003). Ultimately this can cause the firm to enter a vicious circle in which it finally exits the market (Oliva, Sterman et al. 2003). Therefore, the high-growth e-business strategies need to be balanced between keeping and serving masses of customers, low prices, and aggressive marketing (Oliva, Sterman et al. 2003).

Finance During the early growth phases focus is on initial capital. Start-ups are generally small and lack financial resources which could lead to financial risks (Chang 2004, Eikebrokk and Olsen 2007). In particular, internet start-ups require huge up-front investments in technology and branding, and it may take a while until financial insight can be gathered on their performance (Chang 2004). Further, growing organizations are expected to move from reliance on initial funders to external finance providers and for technology-intensive firms self-financing and loans are the two most usual ways of financing (Phelps, Adams et al. 2007). With venture capital financing8 a start-up with high growth potential can access the required substantial funding and necessary complementary resources (such as managerial advice, recruitment, and partnerships with potential customers and suppliers) to fuel growth (Roure and Keeley 1990, Chang 2004). Moreover venture capital also indicates to other investors that it could be beneficial to invest in or to provide resources for the start-up (Chang 2004). Especially in the internet industry, that is uncertain in nature, the signalling and legitimizing role of venture capital firms may be crucial (Chang 2004).

2.3.3 Concluding remarks Section 2.3 is aimed to answer research question three; what characterizes the early phases of the organizational life cycle and the early growth of e-business start-ups? The early phases of the organizational life cycle (the existence and survival phase) are characterized by an informal and simple organizational structure and focus on identifying enough initial capital and a customer base for survival. In the survival phase the firm develops a functional and formalized structure, decentralized decision-making, strategic goals, a human resource capability, and distinctive competencies. The accelerated growth strategy and the GBF strategy are e-business growth strategies based on network effects. These strategies contrast with the early phases of the organizational life cycle model as these e-business growth strategies do not primarily have to focus on earning enough revenue to continue business; rather they focus on large investments in building a user base to generate long-term profits. Therefore, identifying enough (cheap) capital is crucial for 8

‘’Venture capitalists are full-time professional investors who invest for their partnership funds. Venture capitalists tend to closely follow the technology and market developments in their area of expertise in order to stay in the deal flow and to be able to make an informed investment decision’’ (Hellman and Puri 2000). 26

internet start-ups as the internet industry in particular is subject to uncertainty. Venture capital can provide a start-up with needed resources and can provide legitimacy to other stakeholders indicating that it is worth investing in the start-up.

2.4 INTERNATIONAL E-BUSINESS STRATEGY This section will investigate the international strategy elements that relate to e-business by answering the following research question: what are appropriate international strategies for ebusiness and software companies? The author will do so by reviewing the literature on the international strategy elements of e-businesses (2.4.1) and software providers (2.4.2).

2.4.1 Internationalization of e-business E-business is an international phenomenon (Zhu, Kraemer et al. 2004, Zhu and Kraemer 2005) and the internet may determine both the choice of entry form and market selection of firms entering international markets (Moen, Gavlen et al. 2004). In this subsection four international strategy elements for e-business will be presented. The first international e-business strategy element is psychic distance (defined in 2.2.2). Psychic distance is a key factor in foreign market entry strategies, but is less relevant for e-business as for non e-business firms. Since the internet-enabled firm communicates (primarily in English) with the entire world not hindered by economic and cultural differences between home and foreign markets, these differences will not be major obstacles to learning about foreign markets (Yamin and Sinkovics 2006, Sinkovics, Sinkovics et al. 2013). Moreover, the internet can provide a virtual localized presence in the foreign market and information-processing capabilities that support gaining foreign market knowledge (Sinkovics, Sinkovics et al. 2013). The internet supports entering international markets at low costs, and may help to overcome many of the barriers to internationalization commonly experienced by SMEs (Moen, Gavlen et al. 2004). However, online internationalization may also lead firms to believe that they have sufficient knowledge about a psychologically distant market without conducting market research (Yamin and Sinkovics 2006). Especially when selling digitalised products (e.g. software), the internationalising firm ‘sees’ the market and environmental conditions of foreign countries primarily through online interactions with its customers, which could result in ignorance of foreign market conditions (Yamin and Sinkovics 2006). This phenomenon is called the ‘’virtuality trap’’ and implies that experience acquired through ‘traditional’, on-site, interactions and linkages in foreign markets are fundamental in the internationalization process and without the cultural and business learning associated with physical presence, the internet on its own does not allow an e-business to achieve foreign market penetration (Yamin and Sinkovics 2006). Further, Oliveira, Roth et al. (2002) identify three e-service business models based on the amount of physical presence (see subsection 2.1.3). Critical issues pure dot-coms (with no physical presence) encounter are gaining access to resources, time to build a brand name (as virtual businesses are less 27

tangible to customers than traditional businesses), and developing a customer base before the competition does (Oliveira et al. 2002, Porter 2001).Moreover, the click-and-mortar businesses have low operating costs as they are able to serve their existing customers online and, at the same time, can focus on acquiring new customers offline (Oliveira et al. 2002). As an internet application and a traditional method can complement each other, combining the best of both (a physical and virtual presence) is suggested (Porter 2001, Schneor 2012). For instance, the site can automate the exchange of routine information and serve as a channel for leads whereas the sales force can compensate for the limits of the site by providing personalized advice and after-sales service (Porter 2001). In this case it is crucial that the sales force understands where it can complement the virtual Internet channel (Eid and Trueman 2004). The second international e-business strategy element is the use of internet for international marketing activities. Small niche firms with limited capital can gain cost advantages and become global marketers at an early phase in their organizational life by using the worldwide reach of internet marketing (Hamil and Gregory 1997, Sheth and Sharma 2005). Moreover, marketing resources may be more critical to e-business firms since they offer a quicker way to increase customer base, create information economies of scale and scope, exploit network effects, and ultimately generate fast cash flow (Park and Mezias 2005). Businesses that use the internet for business to business marketing activities have distinct marketing strategies. The subsequent paragraphs will highlight two international internet business to business marketing elements. First, effective (off or online) country specific communication and collaborating with foreign customers (actual and potential), partners, suppliers, agents, and distributors is crucial for e-business SMEs (Hamil and Gregory 1997, Eid and Trueman 2004, Berthon, Pitt et al. 2008). The internet has made partnering more comprehensive (Porter 2001) as it simplifies communicating with different actors in the firm’s international network (Hamil and Gregory 1997). Moreover, the technological and market uncertainty associated with the internet sector advocates the e-business start-up to cooperate with partners and customers in large networked communities (Chang 2004, Eid and Trueman 2004) . Second, a well-designed website and effective marketing of the site are important tools for companies that use the internet (that is anonymous and global) for their marketing activities (Hamil and Gregory 1997, Feindt, Jeffcoate et al. 2002, Eid and Trueman 2004). Given limited time of business decision makers, the most important design principle for business-to-business websites, is to keep it simple, accurate and easy to use (Eid and Trueman 2004, Mittal and Tsiros 2007). Further, as studying and understanding the foreign marketing environment is crucial, culturally adapted websites are recommended that show interest willingness to invest in the foreign culture and foreign demands (Eid and Trueman 2004, Singh, Fassot et al. 2006). The third international e-business strategy element is the ‘’Internetability’’9. The internetability indicates the market size and speed of foreign market entry and is a key criterion in a firm’s online 9

‘’Internetability refers to the actual usage of the internet technology in a country, which is often manifested by the proportion of a nation’s population who uses the internet’’ (Luo, Zhao et al. 2005).

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market selection (Hamil and Gregory 1997, Luo, Zhao et al. 2005, Schneor 2012). In particular international e-services, that lack the human element present in traditional service, are influenced by the internetability and therefore should take the internetability into account (Sharma 2007, Schneor 2012). When internationalizing international e-businesses are less affected by perceptions of psychic distance than traditional businesses and virtual presence can supplement and replace physical presence in foreign markets. However the internet on its own does not allow achieving foreign market penetration since experience gained through traditional, onsite interactions are crucial for effective internationalization. Moreover, collaborating with customers, suppliers, partners, agents, and distributors in a foreign market is crucial. E-businesses require in-depth understanding of foreign marketing environments and have to develop country-specific websites. Here, the internetability in a foreign country is a critical success factor.

2.4.2 Internationalization of software firms In subsection 2.2.1 the Stage models were discussed and it was found that not all firms internationalize according to these models. It is argued that high-technology, service and small software firms do not internationalize according to the ‘’stage models’’ (Bell 1995, Coviello and Munro 1997). This subsection will present two international strategy elements of small software firms. The software industry differs from many traditional manufacturing industries to the point that it has low entry barriers and the size of the enterprise is not critical for success (Bell 1995). Furthermore, software companies in the volatile, fast-changing and global software market experience highgrowth rates and internationalize their marketing and product development activities very early in their life-cycle (Pykäläinen and Ojala 2009). However, a small and young software firm has limited resources, limited experience in similar markets, and competes in volatile markets with rapid growth and technological change which makes market conditions difficult to predict (Coviello and Munro 1997). In the subsequent paragraphs the author will present two factors characteristic for the internationalization of small software firms. First, it is evidenced that using the network approach to internationalize is in particular evidenced in small software firms (Mtigwe 2006). Like for e-businesses, network relationships are important in the internationalization of small software firms. The network approach (network relationships) is particularly relevant for small software firms since they lack resources and experience, are faced with increasing demand, sophisticated customers, and an uncertain, volatile and competitive market, and a product that is strategically important or impossible to standardize (Bell 1995, Coviello and Munro 1997, Moen, Gavlen et al. 2004, Mtigwe 2006). Hence, depending on the available network relationships the software firm may choose one entry form in one market and a different one in another similar market (Moen, Gavlen et al. 2004). The second international strategy element for small software firms is the amount of local presence in 29

international strategies. Where local presence was considered of importance for e-business, for software products local presence is less important as software products can be sold and distributed electronically through the internet (Pykäläinen and Ojala 2009). However, software firms focus on their direct relationships with important customers since building a close relationship with the customer is crucial and visits to customers or local presence are often needed to understand the customers’ needs and requirements for specialized software products (Moen, Gavlen et al. 2004, Pykäläinen and Ojala 2009). Therefore, small software firms look for competent and stable international partners that can generate sales (Moen, Gavlen et al. 2004). Software companies experience high-growth rates and tend to internationalize early in the organizational life cycle. Due to a lack of resources and experience, increasing demand, sophisticated customers, uncertainty regarding the competitive and volatile market, and a product that is impossible to standardize, it is suggested that in particular small software firms rely on network relationships in foreign markets. Moreover, local presence seems less important for software products than for other products. However, in order to understand software requirements and to build a strong relationship with partners and customers, a local presence is often required.

2.4.3 Concluding remarks Section 2.4 is aimed to answer research question four: what are appropriate international strategies for e-business and software companies? Network relationships are of major importance for the internationalization of e-businesses, and for small software firms. Effective communications with foreign actors, a well-designed and easy to use website, and in-depth understanding of foreign marketing environments are essential for businesses that use the internet for their business-to-business marketing. International market entry decisions of e-business firms seem to be less affected by perceptions of psychic distance. Subsequently, in particular for small software firms, physical presence in foreign markets is less important than in traditional businesses. However, in order to avoid the ‘’virtuality trap’’; to understand the needs and requirements of customers, to build relationships with partners, and to achieve market penetration a mix between physical and virtual presence is eventually required. In such a strategy virtual and physical presence can complement each other.

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CHAPTER 3: THEORETICAL FRAMEWORK The results of the literature review conducted in chapter two brings together the relevant theory of this research project. By finding and analysing (causal) relations between the theoretical findings, the theoretical framework will describe international strategy related elements for an E-BBGC internationalising in the early phase of its organizational life. The following research question will be answered: according to the literature, what are the characteristics of e-business born-global companies that internationalize in the early growth phases? Section 2.1 and subsection 2.2.2 were devoted to constructing suited definitions of e-business and the born-global company. First, in this research e-business is defined as ‘’Business conducted over the internet by using internet-based technologies, web-based applications or business models heavily IT enabled. E-business includes the buying and selling of goods, providing services (e-service) and value chain activities’’. Next, the born-global company is in this research defined as ‘’ A small-and medium sized business, that is technology oriented, from inception has a global vision, and seeks to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries’’ . Elements from the e-business definition and elements from the definition of the born-global company will be combined to define the E-BBGC. First, the born-global company has a global vision from inception and seeks to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries. The author considers the use of resources and sale of outputs in multiple countries relevant, but as elements that follow from the born-global companies’ global vision from inception. Moreover, also to improve the readability of the E-BBGC definition, only the element of the global vision will be used to define the E-BBGC. Second, the author considers the use of internet-based technologies, web-based applications or IT enabled business models (definition e-business) more specific and typical for the E-BBGC than a technology orientation (definition bornglobal company). Therefore the former will be used to define the E-BBGC. Finally, the E-BBGC can be defined as ‘’a SME that from inception has a global vision and conducts business over the internet by using internet-based technologies, web-based applications or business models heavily IT enabled’’. Now we will summarize the literature in the form of four propositions that link four solutions to three fundamental challenges the E-BBGC encounters during internationalization in the early growth phases. The propositions are composed by combining theoretical findings related to the born-global company and theoretical findings related to e-business. Propositions will be used in empirical research and are visually presented in figure 5. We will first describe the three challenges, and subsequently describe the four solutions and four corresponding propositions.

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The first challenge the E-BBGC encounters during internationalization in the early growth phases is a lack of financial resources. Internationalization requires resource commitments and the amount of available resources (in particular financial and human resources) enable born-global companies to facilitate the accelerated internationalization process. The second challenge the E-BBGC needs to overcome is a lack of human resources in term of their managerial resources (managers with knowledge and experience) and international business experience as these are known as the greatest challenges for ICT born-global companies. Additionally, the international experience of the management team and owner(s) facilitate a quick internationalization process. Further, aggressive growth strategies for e-business require a substantial amount of financial resources since they involve huge marketing investments and low pricing. Moreover, as they are young and small in size, a challenge e-business and born-global companies need to overcome is a lack of (financial and human) resources during internationalization in the early growth phases. The third challenge the E-BBGC needs to overcome during internationalization in the early growth phases is a lack of foreign market or experiential knowledge. According to the Stage models the decision to allocate further resources to foreign operations will more often be taken if market or experiential knowledge increases. It is suggested that in order to accelerate internationalization during the early growth phases the born-global company requires a substantial amount of foreign market and experiential knowledge. Moreover, also the internationalization of e-business requires in-depth understanding of foreign marketing environments. However, a small and young software firm has limited experience in other markets with similar market conditions. Therefore it is argued that the E-BBGC lacks foreign market or experiential knowledge during the early growth phases. It is argued by the author that the E-BBGC can overcome the three challenges and can proceed internationalization during the early growth phases using three solutions. Below four propositions that link the challenges to these solutions are formulated. When taking into account the phases from our organizational life cycle model, the financial resources challenge can be considered relevant for the existence (accessing initial capital) as well as for the survival phase (finance sufficient growth) of our organizational life cycle model (see subsection 2.3.1). However, the human resources and market knowledge challenge can not in particular be appointed to either the existence or the survival phase. Therefore our propositions are considered phase-independent by the author. First, to overcome a lack of financial resources it is suggested that the E-BBGC relies on venture capital finance. With venture capital financing an e-business firm with high-growth potential can overcome a lack of financial resources and fuel growth. Moreover, in particular financial resources enable the born-global company to accelerate internationalization. Given the uncertain internet industry, venture capital finance can indicate that it is worth investing in an e-business start-up. Hence, the following proposition has been formulated:

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P. 1: When during internationalization in the early growth phases E-BBGCS lack financial resources it is likely that they rely on venture capital finance Second, to overcome a lack of financial and human resources it is suggested that the E-BBGC uses virtual presence in foreign markets. International market entry decisions of e-business firms seem to be less affected by perceptions of psychic distance compared to firms that do not use e-business. Subsequently, physical presence is regarded as less important in the internationalization of ebusiness. Moreover, the internet can be used to enter international markets at low costs and can provide a virtual localized presence in the foreign market. Furthermore, software products can be sold and distributed electronically through the internet. It is proposed that, due to the lack of financial and human resources of e-businesses and born-global companies during the early growth phases and the internet-based product delivery of e-business, the E-BBGC will only be virtually present in foreign markets during the early growth phases. The following propositions have been formulated: P. 2a: When during internationalization in the early growth phases E-BBGCS lack financial resources it is likely that they rely on virtual presence in foreign markets P. 2b: When during internationalization in the early growth phases E-BBGCS lack human resources it is likely that they rely on virtual presence in foreign markets Furthermore, it is suggested that the E-BBGC relies on foreign network relationships to overcome a lack of foreign market and experiential knowledge. Network relationships between firms act as a link to foreign markets and linkages in the foreign market are crucial for effective internationalization of e-business firms. As in particular software firms lack experience and need to understand the customers’ needs and requirements, they rely on network relationships and look for competent and solid international partners that are able to generate sales. Moreover, as the internet sector has a high level of technological and market uncertainty, the impact of aligning with partners for an internet start-up is very high. Therefore, network relationships are considered crucial for small software firms and e-business SMEs during internationalization in the early growth phases. Hence it is proposed that it is likely that the E-BBGC compensates for a lack of market and experiential knowledge using foreign network relationships. The following proposition has been formulated: P. 3: When during the internationalization in the early growth phases E-BBGCS lack foreign market and experiential knowledge it is likely that they rely on foreign network relationships Chapter six was aimed to answer research question five; according to the literature, what are the characteristics of e-business born-global companies that internationalize in the early growth phases? The E-BBGC is a SME that from inception has a global vision and conducts business over the internet 33

by using internet-based technologies, web-based applications or business models heavily IT enabled. During the early phases of its’ organizational life the E-BBGC encounters three challenges it solves to proceed internationalization during the early growth phases. First, it is proposed that due to a lack of financial resources, the E-BBGC start relying on venture capital. Second, due to a lack of financial and human resources the E-BBGC starts using virtual presence in foreign markets. Third, due to its young age, the E-BBGC has limited experience and market knowledge. Subsequently it is proposed that the E-BBGC relies on the international experience of the owner(s) and the employees, and uses foreign network relationships. Thus, the answer to research question five is that venture capital, virtual presence, the international experience of the owner(s) and the employees, and foreign network relationships determine the internationalization process of E-BBGCS in the early growth phases.

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P. 1

Venture Capital

Lack Financial Resources P. 2a

Lack Human Resources

P. 2b

Lack Experience and Market Knowledge

P. 3

Challenges

Virtual presence in Foreign Markets

Foreign Network Relationships (Partners)

Solutions

Internationalization during the early stages Figure 5: Theoretical framework

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CHAPTER 4: METHODOLOGY This chapter presents the methods used to conduct empirical research. Chapter two presented the literature study that investigated the e-business concept, the internationalization of the born-global company, the early phases of the organizational life cycle, and international e-business strategy elements. Together these theoretical findings are presented in the theoretical framework (Chapter 3) that consists of four propositions that will be used as input for empirical research. To conduct empirical research in a proper way, this chapter will answer research question six. RQ 6: What methods should be used to conduct empirical research and analyse, and compare theoretical findings with empirical research? To contribute to an answer, the first section of this chapter presents the research strategy (4.1), the second section describes the case selection (4.2), the third section describes the operationalization (4.3), the fourth section (4.4) describes the interview design, and the fifth section (4.5) describes the analysis.

4.1 RESEARCH STRATEGY ‘’The research strategy consists of the interrelated decisions about the way research is conducted’’ (Verschuren and Doorewaard 2007). As the internationalization of E-BBGCs in the early phases of the organizational life cycle has hardly been investigated so far, this research can be considered explorative in nature (see section 1.3). Moreover, the assigner wants to internationalize and therefore requires an international strategy. Subsequently, the main objective of this research is to provide insight in the internationalization process of e-business born-global companies in the early growth phases. In figure 5 challenges and solutions are linked in the form of propositions that will be further investigated in the empirical phase of this research. Using our four propositions from the theoretical framework as input for empirical research, the empirical phase of this research will investigate what determines the international entry success for E-BBGCS in the early growth phase (RQ 7, see ch.5).

Comparative case studies Database research (10th and 11th of December 2014) brought about 6 useful and comparative case studies on the internationalization of e-business. This is a small number. The author used several search strings related to e-business or the born-global company (e.g. ‘’international e-business’’, ‘’international e-business strategy’’, ‘’born-global’’) on the website of Case centre, the Harvard Business Review, and LexisNexis. However, cases on e-business were mainly dedicated to larger international e-commerce firms. And therefore, given the SME focus of this research, were considered less useful. Moreover, altogether the case study topics were 36

heterogeneous as they covered different regions (for international expansion) and varying managerial issues instead of success factors. Considering the limited amount of useful case studies (six) and higher expectations of interviews, the researcher decided not to use comparative case studies in the empirical phase of this research, but to rely on interviews.

Explorative semi-structured interviews To answer research question seven the author decided to use the strategy of semi-structured indepth interviews with e-business firms that operate international. As this research is explorative in nature, a qualitative approach for the empirical phase of this research is considered appropriate. Qualitative methods provide rich data about real life people and situations (de Vaus, 2002). Moreover, in an effort to understand the globalization strategies of business-to-business born global firms, Laanti, Gabrielsson et al. (2007) use a qualitative approach as they argue that it can help the researcher gather deeper insight in and find richer explanations about phenomena (Laanti, Gabrielsson et al. 2007). By using in-depth semi-structured interviews the researcher aims to gather a better understanding of what determines international entry success of E-BBGC in the early growth phases. Due to a high expected rate of non-response, a survey strategy or a written questionnaire is not considered for this research project. The questions in a qualitative interview are usually formulated in an open way (Verschuren and Doorewaard 2007). This holds that the researcher formulates certain topics and corresponding questions that he or she wants to discuss during the interview (Verschuren and Doorewaard 2007). To make sure that the elements from our propositions will be discussed during the interview and can be related to international entry success, semi-structured interviews are used. This implies that both open and closed questions (with pre-formulated answer categories) are used. In order to improve the participation rate, results in the form of a checklist for international ebusiness strategy will be offered to participating companies.

4.2 SAMPLE SELECTION As the aim of the empirical phase of this research project is to find out what determines international entry success for E-BBGCS, our sample selected using theoretical sampling. Theoretical sampling implies that cases (or case companies) that extend or replicate the emergent theory are chosen instead of cases that are randomly selected from a population (Eisenhardt 1989). Using theoretical sampling the researcher aims to get more insight in what determines international entry success of e-business firms in the early growth phases. Our selection criteria are relative, which implies that for interviews case companies are selected that meet at least two of the following four criteria: -

First, meet our established definition of an E-BBGC ; ‘’a SME that from inception has a global vision and conducts business over the internet by using internet-based technologies, webbased applications or business models heavily IT enabled’’. The European definition of a SME 37

-

-

is used, which holds that firms employ less than 250 people. Questions related to turnover or balance sheet total are not included in the interview as it is expected that these will increase non-response as interview respondents might not be willing or able to share this information. Further, case companies are selected that are heavily IT enabled or can be defined as e-business companies. Second, home country is the Netherlands. As our assigner has its only location in the Netherlands and provides SAAS, focus will be on companies that have their home country in the Netherlands and provide SAAS. Third, are involved in commerce transactions with businesses (Business-to-Business). This implies that the customers are businesses. Fourth, have international business activities. Which is operationalized by the following three sub-criteria; first, an E-BBGC seeks to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries. This implies that case companies will be included that have international sales and use foreign resources. Second, a bornglobal company is expected to internationalize in three years after inception. So case companies will be selected that internationalized in three years after inception. Third, as our assigner wants to become a first mover in Europe, focus will be on companies that operate in Europe.

4.3 OPERATIONALIZATION In order to measure what determines international entry success concepts and propositions from the theoretical framework are operationalized in interview questions and corresponding measurement scales. Table 2 shows how concepts, variables, and propositions from the theoretical framework are operationalized in interview questions and corresponding measurement scales. Some of the interview questions were based on previous scientific work dedicated to international software, ebusiness, or other relevant research (references are included in table 2). Other interview questions were self-invented. Altogether, we arrived at 22 interview questions. For several interview questions possible answers were included as an example. A complete overview of all the interview questions can be found in the interview protocol (Appendix II). In the remainder of this section seven concepts from our operationalization are elaborated. First, the information that the respondent can provide the researcher about the internationalization process of the case company in the early growth phases depends on the period the respondent has worked at the case company (Q 1, Q2), the period the case company became internationally active (Q11), the respondent’s function (Q3, Q4, Q5), and his contribution during the internationalization (Q12). Interview questions related to these concepts were self-invented. To establish the formal function of the interviewee (Q5) seven answer categories (based on other scientific research) and an ‘’other’’ category were added (see table 2). Second, the founding date of the company provides the researcher an indication about in which 38

stage of the early growth phases the company was when it internationalized and if the case company can be considered a born-global company given our fourth selection criteria. It is not uncommon that economic activities were already performed before the actual founding date of the start-up. Therefore we distinguish between founding date and, based on academic research, the moment the decision to found a firm is made (Q6). Further, using our E-BBGC definition, internationalization implies the use of foreign resources and international sale of outputs, accordingly interview question 11 is included. The interview question (Q7) about the specialization of the case company (e.g., I read on your website that this company is specialised in…, can you confirm this?) was self-invented and specifies if the case company can be considered an E-BBGC according to our definition. Third, as stated in the previous section, case companies will be selected that are SMEs. The number of employees is measured using the full-time-equivalent (Q8). This is since more and more small firms start using part-time employees (Dandridge and Levenburg 2000) and the full-time-equivalent is considered a standard measure for measuring the number of employees in a firm. Fourth, central in our definition of the E-BBGC was its global vision from inception. Global vision can be operationalized as ‘’management views the world as its marketplace right from the birth of the company (see subsection 2.2.2). More concrete, we’ve operationalized this in: management had the objective from the firms founding to access the international market (question 9). To identify how significant this objective was, the respondent is asked if this objective was written down somewhere. Fifth, our E-BBGC definition included the ‘’sale of outputs and the use of resources in multiple countries’’. Moreover, it was suggested that in particular small software firms that have foreign sales look for competent foreign partners that can generate sales. Accordingly interview questions are included that provide information about the number of countries the company is active in and the activities that are conducted internationally (Q13, Q14). To distinguish between business activities that are conducted domestically or internationally, the value chain activities by Porter (1985) are used as a basis. Sixth, challenges and solutions from the propositions are first asked using open questions (Q 15, 16, 17). E.g. what challenges or problems did you encounter during the internationalization of this firm and in which phase? Subsequently, the researcher uses the identified challenges and solutions from the theoretical framework (fig. 4) as an evoked set to identify if these challenges are recognized as relevant (Q18, 19, 20). E.g. did you encounter the following problems or challenges during the internationalization of this firm? Seventh, as the aim of the empirical part of this research project is to find out what determines international entry success and as the results will be translated into a checklist (see table 12) for international strategy (that will be offered to participating companies) three interview questions are dedicated to critical success factors for international e-business strategy (Q 21, 22, 23). To find out if the critical success factors apply for other companies as well, the respondent is asked if the critical success factors are sector specific or unique. To identify the importance of the mentioned strategy elements the respondent is asked to rank them. 39

Table 2. Operationalization matrix Interview Question

Answer Category

Concept /Variable Introduction Function /Formal function

Founding/Decision Size/Full-time equivalent

5. What is your formal function? (1) ☐ Project manager ☐ Account manager ☐ Marketing manager ☐ Business developer ☐ Team Leader ☐ Sales ☐ Software developer ☐ Other, namely… 6c. When was the decision made to found this firm? (2)

Categories

8. Using the full-time equivalent, how many employees does this company have? (3)

Number

Open Year/month

Internationalization Global vision/ Management’s view Global vision/ reporting

9. Did the management of this company from the firms founding had the objective to access the international market? (4) 9b. Was this written down somewhere? If yes, where? (self-invented)

Internationalization/ International active Internationalization/ Contribution Internationalization/ Countries

11. When did this company become internationally active; when were the first international sales and when was the first use of foreign resources? (self-invented) 12. What was your contribution during the internationalization of this company? (self-invented)

Yes No Yes No Open Year/month Year/month Open

13. In which countries is this company internationally active? (self-invented)

Countries

40

Internationalization/ Value chain activities

14. In which countries does this company realise the following activities? (5) ☐ Production in …………………………………………………………… ☐ Marketing and Sales in ………………………………………………………….. ☐ Logistics in ………………………………………………………….. ☐ Service in …………………………………………………………... ☐ Procurement in …………………………………………………………… ☐ Infrastructure in ………………………………………………………….. ☐ Technology development in ………………………………………………………….. ☐ Human resource management in …………………………………………………………….

Challenges and solutions Challenges

Countries

10 11

Manifest

15. Which challenges does/did this company encounter during internationalization? And in which phase ? (selfinvented) 12 16. How do/did these challenges manifest in this company? (self-invented)

Open (2