Chapter 11 - Innovation

Slide 11.
Chapter 11
Innovation, Entrepreneurship and

Born Global Firms
Rugman and Collinson, International Business, 6th Edition, Pearson Education Limited 2013
Slide 11.2
Innovation, Entrepreneurship and Born

Global Firms
Objectives
Introduction
The location of innovation activities in the MNE
International small- and medium-sized enterprises
(SMEs)
International business theory and international
new ventures
Dynamic capabilities and small firms
The practical challenges for internationalizing
SMEs.
Slide 11.3
Objectives
Understand the international dimensions of innovation, for
large and small firms. What innovation advantages can firms
gain from being international, in theory and practice?
Examine how companies in various industries can organize
different kinds of innovation activity in different locations, to
derive particular benefits.
Analyze small- and medium-sized enterprises (SMEs), with
a particular focus on why and how they internationalize, the
practical challenges they face and the kinds of theories that
help explain why they venture beyond their own national
borders.
Explain, using concepts such as dynamic capabilities, born
global and born regional, entrepreneurial life cycles,
networks and industry clusters, what differentiates success
from failure for international and innovative small firms.
Slide 11.4
Introduction
Innovation is the renewal and enlargement of the range of

products and services and the associated markets; the
establishment of new methods of production, supply and
distribution; the introduction of changes in management,
work organization and the working conditions and skills of
the workforce.
Entrepreneurship and innovation go hand-in-hand.
Entrepreneurs, whether they are working in small or large
firms, as owner-managers or employees, are distinctive
because they have the capability and motivation to pursue
innovative commercial opportunities that are riskier and
more radical than normal. They identify such opportunities
and assemble the resources and capabilities needed to
create value.
Born global is a term used to describe a firm that is, from
its beginnings, immediately or very quickly reliant on a global
presence to survive and succeed.
Slide 11.5
International dimension of innovation
Slide 11.6
International dimension of innovation

MNEs manage business operations across a range of
country contexts, each of which represents a different set
of opportunities for innovation, in two specific ways:
innovation input opportunities
distinctive output opportunities.
National Innovation Systems (NIS) are characterized by
the quality of local scientific, technological, design-related
and creative expertise, combined with institutional
relationships between enterprises, universities and
government research organizations. Regional variations in
these components partly account for firm-level differences
in innovation-related capabilities and competitiveness.
Internationalization is related to innovation in MNEs. The
two main forms of internationalization, namely, marketseeking and resource-seeking very often go hand-inhand.
Slide 11.7
Figure 11.1: Internationalization
drivers for the innovative multinational firm

Slide 11.8
The location of innovation activities in

the MNE
Slide 11.9
Figure 11.2: Structural,
strategic and organizational dilemmas for the innovative
multinational firm
Source: Adapted from Bartlett and Ghoshal (2002)
Slide 11.10
Innovation activities and structural

archetypes
Three generic forms of innovation activities:
Sensing
Responding
Implementing.
Four basic structural archetypes for the
location of three innovation-related activities:
Center-for-local
Local-for-local
Local-for-global
Global-for-global.
Slide 11.11
Figure 11.3: Global MNE structures for

Source: Adapted from Nohria and Ghoshal (1997)
managing innovation
Slide 11.12
The innovative MNE as a differentiated

network
Slide 11.13
The innovative MNE as a differentiated

network
Recombination capability is the capability to combine (and

continually recombine) various inputs (particularly knowledge
and expertise) into the innovation process, from different
locations, to serve different customer needs across a variety of
markets.
The ability to exploit this advantage depends to a significant
degree on how they are structured to manage networks that
connect these locations and incentivize specialists to connect
across these networks to add value.
Differentiated networks require strong integrative and dynamic
capabilities to operate effectively.
Firms that operate as dynamic networks also balance the
division of decision-making responsibility for innovation
between headquarters (the center) and subsidiaries (the
periphery). They need to develop appropriate organizational
mechanisms.
Ambidexterity is the ability to be aligned and efficient in its
management of today's business demands while
simultaneously being adaptive to changes in the environment.
Slide 11.14
International small- and medium-sized

enterprises (SMEs)
Slide 11.15
What are small firms?

SMEs or small- and medium-sized enterprises
(SMEs) are defined by Governments using
different criteria for policy purposes. SMEs are
firms with less than 250 employees in Europe,
but less than 500 in the US. Indian
manufacturing firms qualify as SMEs if they
invest less than US$2 million in plant and
equipment.
Slide 11.16
Table 11.1 Various
definitions of small and medium-sized enterprises
Sources: Annual Report, 2008-09. Ministry of Micro, Small and Medium Enterprises, India; www.msme.gov.in; Shambhu
Ghatak, 2009. Micro, Small- and Medium Enterprises (MSMEs) in India: An Appraisal:
http://www.esocialsciences.com/data/eSSResearchPapers/ eSSWPArticle20091126151144.pdf; EU Enterprise and Industry
directorate, SME definition: http://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/sme-definition/index_en.htm;
USAID, 2007, Booklet of Standardized Small- and Medium Enterprises Definition-2007, the United States Agency for
International Development http://pdf.usaid.gov/pdf_docs/PNADM845.pdf
Slide 11.17
SMEs and innovation activities

Within studies of SMEs in general, there is some
evidence that they are more innovative than their
larger counterparts. According to the US Small
Business Administration (US-SBA), this set of
firms does stand out for their innovativeness.
They hire 40 percent of high-tech workers such as
scientists, engineers and computer programmers.
They produce 13 times more patents per
employee than large patenting firms and these
patents are twice as likely as large firm patents to
be among the one percent most cited.
Slide 11.18
International activities of SMEs
Slide 11.19
The data shows that, in general, a relatively small number of

SMEs sell products and services outside their domestic
market, compared to the total number of active SMEs. When
we consider another key measure of internationalization,
foreign direct investment (FDI), again SMEs are less
prominent than large multinational firms as sources of FDI.
In the European Union, just a quarter of all SMEs export or
have exported at some point during the last 3 years.
Moreover, their international activities are mostly geared
towards other countries inside the internal European market
and only about 13 percent of EU SMEs are active in markets
outside the EU.
In India, SMEs account for an estimated 40 percent of total
exports.
In the U.S. just over 97 percent of all identified exporters are
SMEs, and these firms produce 30 percent of the known
export value.
Slide 11.20

(Continued)
International SMEs can be engaged in trade and/or FDI
to access inputs or to sell outputs from abroad. If they
stick to trading via imports (for inputs such as resources,
materials or expertise) and exports (for their outputs, i.e.
products or services) then they are relying solely on
international market transactions to underpin their
relative position in the industry value chain. By engaging
in FDI a firm internalizes a particular input or output
activity based outside its home region. In this way it
becomes a multinational firm.
Given firms have the option to import or export and
engage in FDI instead of one or both of these forms of
trading, we can map out four modes of international
operation (1a and 1b plus 2a and 2b in Table 11.2).
Slide 11.21
Table 11.2 Types
of international SMEs by trade and FDI up and down the value
chain
Slide 11.22
International business theory and

international new ventures
Slide 11.23
Born global firms
Born global firms are also referred to as international new

ventures (INVs) in the international entrepreneurship literature.
They can be defined as business organizations that, from
inception, seek to derive significant competitive advantage from
the use of resources and the sale of outputs in multiple
countries.
A number of ongoing debates have developed around the
concept and the empirical reality of the born global firm. Three
key areas of dispute:
The applicable definition of global, specifically, is a firm born
global (or global at all) if it simply exports and imports products
and services and has no FDI (which is a common definition of
an MNE)?
Are born global really global in terms of their cross-border trade
and/or FDI, or are they regional?
How quickly does a small firm need to develop a global
presence to be called a born global firm? That is, what does
from inception mean in the above-mentioned definition?
Slide 11.24
Born global firms (Continued)

Some studies define new in this context as less
than 6 years old and it was this aspect of INVs
that was most at odds with established theories
of internationalization. As many small firms do
rapidly internationalize, without going through the
gradual, stepwise process depicted by the
Uppsala model, this presents a challenge for
international business theory.
Slide 11.25
Born global vs. Born regional
Another debate has focused on the scope of internationalization by

small firms.
Based on the broad concept of the triad regions (i.e. North America,
European Union and Asia-Pacific), Rugman and Verbeke introduced
a regional aspect to the Uppsala schools stepwise and incremental
internationalization process of multinational enterprises. The worlds
largest MNEs do not operate globally and evenly across the triad, but
tend to be clustered in the nearby countries of their home region of
the triad.
This same argument therefore applies to international new ventures.
INVs are subject to the multiple liabilities of smallness, newness and
foreignness, they are expected to show stronger home region
orientation than large-sized and already-established multinational
enterprises.
Given their limited resources, small firms can be expected to reduce
risk by selecting nearby countries in their home region as the final
destination of their internationalization strategy from inception.
INVs are likely to be born regionally, not globally, within their
home region of the triad when going abroad into foreign
markets.
Slide 11.26
Born global vs. Born regional

(Continued)
Other theoretical perspectives (the resource-based view

of the firm, transaction costs economics, organizational
learning) in the management field can be found to support
the assertion that international new ventures are more
likely to be born regional, not global.
Born regional firms tend to locate their overseas
businesses in their home region of the triad to escape the
liability of interregional foreignness.
Born global firms are identified in other studies may well
be the exception, rather than the rule.
Slide 11.27
Slide 11.28

Dynamic capability is the firms ability to
integrate, build and reconfigure internal and
external competences to address rapidly
changing environments. The dynamic
capabilities approach has also been seen as a
useful conceptual and analytical framework for
understanding small, adaptable firms.
Dynamic capabilities relate to the processes by
which, and the success with which, small firms
learn to grow and adapt to changing threats and
opportunities in their surrounding competitive
environment.
Slide 11.29
Life cycles, networks and clusters

Life cycle models are commonly used to depict the
growth profiles of SMEs. Creating, developing and
leveraging personal networks to steer the small firm
through these obstacles to growth is the core
dynamic capability of the entrepreneur.
Local networks or clusters are the lifeblood of
new business growth. A unifying theme is the need
for a critical mass of entrepreneurs, venture
capitalists and particular kinds of specialists plus a
risk-embracing culture of trial and error. The
ingredients create a dynamic mix underpinning a selfreinforcing local growth cycle.
Slide 11.30
The practical challenges for

internationalizing SMEs
SMEs face significant limitations compared to
large firms, making internationalization strategies
riskier. These limitations mean that small firms
often need to be that much more entrepreneurial
and innovative and/or take risky shortcuts, to
expand across national borders.
Slide 11.31
How do SME managers know which

markets to enter?
Mathews and Zander propose three milestones of international

entrepreneurial processes:
(1) The discovery of new opportunities
(2) The deployment of resources in the exploitation of these
opportunities
(3) Engagement with competitors.
The first major challenge for any firm looking to expand
internationally is to decide which market location offers the best
costbenefit opportunity.
A study by Collinson and Holden (2005) used mental maps to
capture the perceptions of decision makers in a sample of British
SMEs of the relative risks and rewards of foreign markets.
Mental maps are defined as cognitive representations of the
nature and attributes of the spatial environment. They represent
images of spatial environments developed by individuals based on
their collated influences and experiences and information available
to them.
Slide 11.32
Modes of entry and adaptation for

success in foreign markets
SMEs are often assumed to opt for low equity and cooperative
strategies because they have less access to financial assets or the
level of human resources needed to support these higher
commitment modes of entry. This also means that they have to
quickly reach a level of profitability when they enter new markets
because of their limited ability to raise investment capital.
Clearly, the specific challenges vary depending on the nature of

the target country market and the individual firm. One in-depth
study of British SMEs in Japan (Collinson, 1996) confirmed the
general conclusion above, showing that small firms tended to
enter into joint ventures and collaborative alliances with Japanese
enterprises in order to gain local knowledge and credibility with
keiretsu networks and to share the investment risks. The study
also showed how market barriers faced by all firms proved to be
more challenging for small firms.

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Chapter 11 - Innovation

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Slide 11.

Innovation, Entrepreneurship and

Innovation, Entrepreneurship and Born

Innovation is the renewal and enlargement of the range of

International dimension of innovation

International dimension of innovation

Figure 11.1: Internationalization

drivers for the innovative multinational firm

The location of innovation activities in

Figure 11.2: Structural,

strategic and organizational dilemmas for the innovative

Innovation activities and structural

Figure 11.3: Global MNE structures for

The innovative MNE as a differentiated

The innovative MNE as a differentiated

Recombination capability is the capability to combine (and

International small- and medium-sized

What are small firms?

Table 11.1 Various

definitions of small and medium-sized enterprises

SMEs and innovation activities

International activities of SMEs

International activities of SMEs

The data shows that, in general, a relatively small number of

International activities of SMEs

Table 11.2 Types

of international SMEs by trade and FDI up and down the value

International business theory and

Born global firms

Born global firms are also referred to as international new

Born global firms (Continued)

Born global vs. Born regional

Another debate has focused on the scope of internationalization by

Born global vs. Born regional

Other theoretical perspectives (the resource-based view

Dynamic capabilities and small firms

Dynamic capabilities and small firms

Life cycles, networks and clusters

The practical challenges for

How do SME managers know which

Mathews and Zander propose three milestones of international

Modes of entry and adaptation for

Clearly, the specific challenges vary depending on the nature of

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