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«INTRODUCTION The study of the multinational enterprise (MNE) has focused on large, mature corporations.Historically, many MNEs developed from large, ...»

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TOWARD A THEORY OF INTERNATIONALNEW VENTURES

Benjamin M. Oviatt*

Georgia State University

Patricia Phillips McDougall**

Georgia Institute of Technology

Abstract. The formation of organizations that are international

from inception-international new ventures-is an increasingly

important phenomenon that is incongruent with traditionally

expected characteristics of multinational enterprises. A framework is presented that explains the phenomenon by integrating

international business, entrepreneurship, and strategic management theory. That framework describes four necessary and sufficient elements for the existence of international new ventures:

(1) organizational formation through internalization of some transactions, (2) strong reliance on alternative governance structures to access resources, (3) establishment of foreign location advantages, and (4) control over unique resources.

INTRODUCTION

The study of the multinational enterprise (MNE) has focused on large, mature corporations.Historically, many MNEs developed from large, mature, domestic firms [Chandler 1986], and they commanded attention because they wielded significant economic power, especially after World War II [Buckley & Casson 1976; Dunning 1981; Hennart 1982]. However, recent technological innovation and the presence of increasing numbers of people with international business experience have established new foundations for *Benjamin Oviatt Assistant M. is Professor Management Georgia of at StateUniversity.

He receivedhis Ph.D.in strategic fromthe University SouthCarolina.

of management His research focuses on strategic management,organizationalturnaround, and international new ventures.

**PatriciaPhillips McDougall is Associate Professorof StrategicManagementat GeorgiaInstituteof Technology.She receivedher Ph.D. in strategicmanagement from the Universityof SouthCarolina. Her researchfocuses primarily new and on young firms, with a special emphasison strategiesand internationalization.

This articlewas awardedfirst prize in the 1993 Competition the Best Paper on Entrepreneurship for and Innovation sponsoredby New York University'sCenterfor Entrepreneurial Studies.The authors gratefullyacknowledgefinancialsupportfor this researchfrom the Bernard & EugeniaA. Ramsey B.

Chairof PrivateEnterprise GeorgiaStateUniversityandfrom the Society of Interna

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MNEs. An internationally experienced person who can attract a moderate amount of capital can conduct business anywhere in the time it takes to press the buttons of a telephone, and, when required, he or she can travel virtually anywhere on the globe in no more than a day. Such facile use of means that the ability low-cost communication technology and transportation to discover and take advantage of business opportunitiesin multiple countries is not the preserve of large, mature corporations. New ventures with limited resources may also compete successfully in the international arena.

Since the late 1980s, the popular business press has been reporting, as a new and growing phenomenon, the establishment of new ventures that are international from inception [Brokaw 1990; The Economist 1992, 1993b;

Gupta 1989; Mamis 1989]. These start-ups often raise capital, manufacture, and sell products on several continents, particularly in advanced technology industries where many established competitors are already global.

LASA Industries, Inc., which sold an unusually efficient microprocessor prototyping technology, is representative of these internationalnew ventures formed within the past decade. As detailed by Jolly, Alahuhta and Jeannet [1992], LASA's strategy was international in multiple respects. Its founders were American, Swiss, and French.Its funding was European.The operational headquarters and R&D were located in the United States, while marketing was managed from France and finance from Switzerland. Manufacturing was centered in Scotland to take advantage of attractive regional grants, and initial sales were in France and the United States.

IXI Limited, a British venture that became a leading supplier of desktop windowing computer software for UNIX operating systems, violated the usual expectation that finns begin with sales in their home country and later sell to foreign countries. Ray Anderson, the venture's founder and chairman, had previously worked for a British computer company that failed. Through Anderson's work in that company's Boston and Canadian operations he became aware of the needs of the North American market. While discussing the failure of his former company Anderson said,... it did not succeed because we tried to sell the productby starting-up in Englandand then selling in the U.S., and by that time it was too late.

We should have developed our productsfirst of all for the U.S. market and then sold it back into England.[Anderson1992] When Anderson started IXI, his stated strategy was to target the United States first, Japan second, and then move back into the United Kingdom.

Funding for the venture was from the United Kingdom, Germany, Austria and Japan. Foreign subsidiaries were set up in the United States and Japan.

Only after establishing itself in both those countries did IXI turn its attention to its home country, and then to mainland Europe. In an interview four years after the product's introduction, Anderson estimated 60% of IXI's revenues came from the United States, 20% from the United Kingdom, 10% from Japan, and 10% from other countries.





INTERNATIONALNEW VENTURES 47

Actually, international new ventures have existed for centuries. The famous East India Company was chartered in London in 1600 [Wilkins 1970]. In early 19th century America, the unprecedented value of cotton exports gave birth to specialized cotton traders[Chandler1977]. The Ford Motor Company also seems to have been an internationalnew venture at its founding in 1903 [Wilkins & Hill 1964]. However, the focus of interest has been on MNEs that developed over time from large, mature, integratedenterprises [Chandler 1986], and we believe that has obscured the existence of international new ventures.

As a result, scholars of organization science have ignored international new ventures until very recently. Figure 1 depicts our sense of the domain of scholarly literatureon organizations.A substantialbody of research has been published on established firms, both domestic and international, and on domestic new ventures. However, there is much less work in the quadrant of internationalnew ventures.Entrepreneurship researchon internationalissues has largely concerned itself with (1) the impact of public policies on smallfirm exporting (e.g., Rossman [1984]), (2) entrepreneursand entrepreneurial activities in various countries (e.g., Ohe, Honjo, Oliva, Considine & MacMillan [1991]; Westhead [1990]), and (3) comparisons between smallfirm exporters and non-exporters (e.g., Kedia & Chhokar [1985]).

The age of an organization when it internationalizes has been considered infrequently. Vozikis and Mescon [1985] did show that exporters that were start-ups reported more problems with export operations than did mature small exporters. More often, reports of new ventures that were international at or near inception have been regarded as exceptional (e.g., Welch & Loustarinen [1988]). In addition, the age of small exporters has frequently been viewed as an unimportantdemographic characteristic(e.g., Malekzadeh & Nahavandi [1985], or a side issue (e.g., Cooper & Kleinschmidt [1985]).

However, since 1989, reports based on case studies of international new ventures have begun to appear from scholars of entrepreneurship. Some have shown that such ventures form because internationally experienced and alert entrepreneursare able to link resources from multiple countries to meet the demand of markets that are inherently international [Coviello & Munro 1992; Hoy, Pivoda & Mackrle 1992; McDougall & Oviatt 1991;

Oviatt, McDougall, Simon & Shrader 1994; Ray 1989]. Other case studies have shown that the success of international new ventures seems to depend on having an international vision of the firm from inception, an innovative product or service marketedthrough a strong network, and a tightly managed organization focused on international sales growth [Ganitsky 1989; Jolly et al. 1992; McDougall, Shane & Oviatt 1994].

Collectively, these case studies indicate that international new ventures are an importantphenomenon. They have identified the formation of international new ventures in more than ten countries in all parts of the world, suggesting that global forces may be promoting their development. In addition, the

JOURNAL OF INTERNATIONALBUSINESS STUDIES, FIRST QUARTER 1994

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studies show that interestin the topic is recent and has emerged independently and nearly simultaneously from several groups of scholars. Finally, while many of the ventures studied were in high-tech businesses, services and even aquaculturewere represented,suggesting that internationalnew ventures may appear in a wide range of industries.

Additional indicators of the emergence of international new ventures have also appeared. Brush's [1992] study of small, internationalized, U.S. manufacturers found 17 firms- 13% of her random nationwide sample-were internationalized during their first year of operation. Ernst and Young's survey of 303 firms in the North American electronics industry [Burrill & Almassy 1993] showed that in 1987 53% of the firms in the industry were operating domestically. In 1992, only 17% were domestic, and by 1997 only 9% were expected to be. A third of the firms surveyed were still in development with less than $5 million in revenue.

The fact that the business press believes the emerging phenomenon of international new ventures is important and that some academics working independently around the world have described similar organizationsindicate a need for systematic research on these infrequently studied new ventures.

However, the overall purpose of this paper is not to add to the growing descriptions of particular international new ventures. Rather, it is to define and describe the phenomenon and to present a framework explaining how international new ventures fit within the theory of the MNE. We hope that a well-delineated, theoretical framework will unify, stimulate and guide research in the area.

INTERNATIONALNEW VENTURES 49

The next section provides a formal definition of international new ventures.

Following that, certain problems are considered regarding the application of standardMNE concepts to internationalnew ventures. Next, a theoretical framework explaining international new ventures is presented. It integrates accepted MNE theory with recent developments in entrepreneurship and strategic management research. Finally, four types of international new ventures are described in terms of our internationalnew venture framework, the number of value chain activities they coordinate [Porter 1985], and the number of countries in which they operate.

A DEFINITION OF INTERNATIONALNEW VENTURES

We define an internationalnew venture as a business organizationthat, from inception,seeks to derive significantcompetitiveadvantagefrom the use of resources and the sale of outputsin multiplecountries.The distinguishing feature of these start-ups is that their origins are international, as demonstrated by observable and significant commitments of resources (e.g., material, people, financing, time) in more than one nation. The focus here is on the age of firms when they become international, not on their size. In contrast to organizations that evolve gradually from domestic firms to MNEs, these new ventures begin with a proactive international strategy.

However, they do not necessarily own foreign assets; in other words, foreign direct investment is not a requirement. Strategic alliances may be arranged for the use of foreign resources such as manufacturing capacity or marketing. Thus, consistent with Buckley and Casson's [1976] definition of the multinational enterprise, the definition of the international new venture is concerned with value added, not assets owned [Casson 1982].

The fact that international new ventures are international from inception implies that some decision must inevitably be made about when inception occurs. Much has been written in the entrepreneurshipliterature concerning the point at which a new venture is considered to exist as an organization (e.g., Katz & Gartner [1988]). However, Vesper argued that there can be no ultimate resolution, because the emergence of a venture is "spread over time in which its existence becomes progressively more established" [1990, p. 97]. Thus, empirical studies of international new ventures must resolve a definitional ambiguity. We believe researchers should rely on observable resource commitments to establish a point of venture inception. For new ventures that have no sales because their product or service is under development, there must be a demonstrated commitment to sell the output in multiple countries upon completion of development.

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inappropriate explanations of multinational business activity for new ventures that are instantly international.

The Stage Theory of MNE Evolution MNEs are believed by many people to evolve only after a period of domestic maturationand home market saturation[Caves 1982; Porter 1990]. Empirical researchers have in the past found that large, mature MNEs and small exporters go through distinct stages in the development of their international business. They begin perhaps with an unsolicited foreign order, proceed sometimes throughexportingand the development of an internationaldivision, and occasionally advance to the establishment of a fully integrated, global enterprise [Aharoni 1966; Bilkey & Tesar 1977; Czinkota & Johnston 1981;

Stopford & Wells 1972].



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