University of Southern California

Taking Young Companies International
January 21, 2011
Category: 
Strategy

Young companies often seek to expand by entering international markets. But what guides their decisions about where to expand and how, and what determines their success in internationalization? These are the questions USC Marshall Assistant Professor Helena Yli-Renko and her colleagues J. Bruneel and B. Clarysse sought to answer. Their research on international expansion of young companies, published in the Strategic Entrepreneurship Journal, found that firms tend to start with entry modes such as exporting that require less resource commitment, and they first enter markets that are geographically and psychically close to their home country. Then, as companies gain experience and confidence, they raise the stakes—by investing in foreign subsidiaries, for instance, or expanding to more distant markets.

Can this step-by-step process be speeded up? It turns out the answer is, "Yes." A young firm does not have to wait to gradually accumulate first-hand international experience, but can instead draw on two alternative knowledge sources: the management team's prior experience and the young firm's business partners. "[T]he more international experience founders have, the more alert and exposed they will be to opportunities in foreign markets and the less risks they will perceive associated with internationalization," the authors explain. These companies feel more comfortable expanding at a quicker pace, and at a greater distance; they also have a competitive edge as they develop and execute international strategies.

Interaction with business partners, such as suppliers, customers, and investors, further boosts a young company's international learning curve. These partners assist by providing on-the-ground insights and practical knowledge about foreign markets and international business practices. And such learning can come from seemingly unlikely sources. "…Acquisition of foreign market knowledge and internationalization capabilities can take place even if the partner-organization is located in the young firm's home market," they note.

Interestingly, the authors found that the impact of these factors on international expansion depended on whether the firm as a whole had a lot of experience or little experience. Specifically, while management experience and learning from business partners can accelerate a young company's international expansion, their value is greatest when the firm as a whole is inexperienced in foreign markets.

The Bottom Line: Young firms can compensate for their inexperience and gain greater international momentum by drawing on their management team's prior experience and by learning from interactions with their customers, suppliers, investors, and other business partners. By showing that such alternative learning mechanisms are available for young firms, the authors help explain the phenomenon of "born-globals"—how young firms are able to successfully internationalize early on.

Helena Yli-Renko is Assistant Professor of Entrepreneurship in USC Marshall's Lloyd Greif Center for Entrepreneurial Studies. To learn more about Assistant Professor Yli-Renko and her work on factors impacting the success of young organizations, please visit her webpage