Reasons for Born Global Firms - Essay Example

 BORN GLOBAL FIRMS Abstract The society today is witnessing unprecedented growth in the forces of globalization through telecommunication and transportation services. Though there are both opponents and proponents of globalization, there is a general agreement that it has certainly influenced business environment greatly and how organizations operate today. Cutthroat competition has been the major defining concept in globalization where the world has become a global village making it possible for firms to operate anywhere. Consequently, with developments in globalization, there sprouted a new type of organization, the born global firms. These firms are established to go global from the first day with a general view that the world is a single market and not an extension of the domestic market. Currently, there is a rapid increase in these firms, most of which have their origin from developed economies. Most of these firms are technological in nature and take advantage of the high technology developments in these countries. However, the firms are not limited to technology, but are distributed across other areas as well. This report seeks to understand born global firms to details regarding their formation and the mode of operation. Born Global Firms Introduction Born global firms are business entities that are formed with the single purpose of doing business internationally. From its formation, a born global firm has the main objective of attaining a competitive advantage from harnessing resources and selling its products in many countries, and in most cases, these firms go global within their three years of inception. Multinationals are usually referred to as global firms, though there are major differences between multinationals and born global firms. The major difference is that while multinationals are initially based in their country of origin for some times and expand to deal with an international market, born global firms in their inception are formulated and established to engage in harnessing global resources and selling their products and services on a global scale. This explains why within the first three years or less after they are established, born global firms will have spread in multiple countries; this is unlike multinationals that have to be based in their country of origin for long. Therefore, the main differentiating factor in these firms is that they have a borderless worldview and all their strategies are geared towards achieving a global presence. In this report, born global firms will be investigated in detail to understand the reasons behind the rapid increase in such firms in the recent past, how the companies undertake their operations, their features and the challenges that these firms face in their operations. The aim of this paper is to derive a better understanding of born global firms, the mode of operations in the global market and their differences from the conventional multinational organizations. Background study Michael Rennie coined the born global tag name in 1993 after studying a new concept of new firms that were established with the single purpose of competing on a global scale to harness resources in a number of countries at the same time (Jones et al., 2011). The interesting aspect of these firms is in the way a small firm is established with the single intention of meeting the varying needs of customers on a global scale. Such an approach requires a new focus in understanding the concept behind internationalization of firms and the need to attain a global status today. The new concept of a born global is to satisfy the need of customers on a global scale from its first day of inception, in that the firms are internationalized by design and not by emergence (Jones et al, 2011). In international trade models, a firm wishing to go global has to outlay the initial investment and make the entry costs before it commences operating globally. Consequently, only more productive firms can attain this end, which leaves less productive firms to serve a localised market and the least productive firms are pushed out of the market. However, born global firms decide to pay the huge sunk costs during inception where there exits limited or no cash inflows (Heldin, 2012). This means that the firms have exceptionally high expectations to attain high growth potential and high profitability in an international market without the need to try a localized market (Kudina et al., 2008). However, an important concept to note is that these firms have proved more profitable compared to domestic firms (Heldin, 2012). Therefore, the immediate entry into the international market and the high intensity in which these firms are involved in exporting of goods differentiates them from other international firms in the market today. Important to note, most born global firms are technological firms that are considering harnessing the current global technological thirst to offer services across the globe and due to universality of the required services, these firms become highly successful as the rapid forces of globalization take effect (Kudina et al., 2008). Discussion Reasons for born global firms Compared to traditional international firms, born global firms perceive the world as a whole market not as an extension of the domestic market (Zhang 2009). Usually, in the first two years of operations, the total sales of born global firms to international markets may surpass the 25% mark of the total sales of the company (Zhang, 2009). The firms are unique in that they are ingenious entrepreneurial business entities and are often characterized by new business style or technological advancements that add value, making their products competitive in the market (Zhang, 2009). Therefore, a major reason behind establishment of these firms is technology. Currently, there is an emerging market that thirsts for high technological advancement in production and unmatched professional talents in the market. In a details study by Rialp-Criao and Knight (2002), the main reasons that were established as to have resulted in the emergence of born global firms included a well-established global network alliance, an emergent market with new needs and unmatched technological developments. Internationalization theory was found to play no role in establishing these firms. In a study of Zhejiang firms in China, Chen (2008) carried out an empirical study on the correlation between company performance and entrepreneurship. Moreover, studies have been conducted in the effects of internationalization performance of entrepreneurial ideas and the expertise in born global firms in Shenzhen China. Chen observed the critical role played by technological improvement, global economy and development of unique market niches in these firms. Most born global firms in Zhejiang in China have been linked to the a complex network of businesses established globally, technological developments, unique and quality entrepreneurial efforts and development of a competitive market niche that enable new firms to compete on a global scale (Zhang, 2009). Born global firms have also been noted to have sprouted in response to changing consumer behaviours in the global market. In the last two decades, consumers have shown more preference towards shifting away from standardized products and services as was used by many multinationals under the internationalization theory. Today’s consumers are searching for more customized services and products that articulate and meet their unique needs (Hamza & Sulifiqar, 2011). In addition, with growth of communication technology, it has become much easier for companies to communicate with their customers and partners on a global scale, which has facilitated entrepreneurs to do business anywhere in the global market with much ease. The flexibility and adaptability that characterize small modern firms is another factor that has contributed to formation of born global firms. While multinational firms are inflexible and difficult to adapt to market forces, new firm models can easily adapt to these forces. In addition, the establishment of much faster and cheap transportation means across the globe has made the world a globe village facilitating many SMEs to have a stake in the international market (Hamza & Sulifiqar, 2011). Consequently, many SMEs took advantage of their flexibility and adaptability to assume the competitive advantage that was previously a monopoly of multinationals. The operations of these firms is largely marked by highly skilled resource management, enough resources to meet their production, ability to undertake sophisticated research and development, and sophisticated innovative ideas (Hamza & Sulifiqar, 2011). Another concept that has been credited to formation of born global firms is lack of a domestic market. In studying high –technological born global based in the UK, it was noted that lack of an adequate UK market for high-end technological products, pushed entrepreneurs to venture straight into the global market where they found ample market for their ventures (London Business School, 2013). Consequently, today in UK, it is possible to find high concentration of top-notch scientists and engineers in Cambridge region with these experts charging much less compared to their counterparts in Silicon Valley in the U.S (London Business School, 2013). Therefore, in UK lack of a market, alongside government policies that encouraged development of high-tech products encouraged UK based and other entrepreneurs to venture directly into the global market as born global firms (London Business School, 2013). In addition some firms in UK were eager to tap into the high technological expertise in areas such as Japan and South Korea, making them to start with the an idea of going global to take advantage of these unique capabilities(London Business School, 2013). Moreover, most of born global firms in UK were formed with the intention of serving a high-end customer niche, characterized by high demands and new requirements that could not be met adequately by conventional ways of doing business. To tap in the new rich market, some companies sprouted and sought to serve the sophisticated clientele on a global scale, making them to gain more clients across many nations than in their homeland. When such technological advancements, was coupled with high-end customer services and sophisticated networks to provide quality services, they marked the great success of most born global firms today (London Business School, 2013). Mort, Weerawardena and Liesch (2012) noted that born global firms have the main intentions offering quality products, creating business opportunities and utilize resources across the globe. These are the major reasons behind performance of these firms, which has been the major defining characteristic of born global firms. Generally, the reason behind formation and rapid increase in born global firms may be attributed to the entrepreneurial theory of firms. Entrepreneurs will operate in a highly uncertain environment where resources may be scarce or in abundance, they have imperfect knowledge the market, resources, opportunity and the effectiveness of the solution that they attempt to provide (Foss & Klein, 2012). Consequently, any entrepreneur with a great need to pursue an opportunity in meeting the needs of customers either real or imagined has to use their own assets to experiment and validate the viability of such opportunities. In case an opportunity does exist, they have to exploit it accordingly. Most born global firms were formed and operate in this mode. They were formed with a global market in mind, with either real or imagined consumer needs and with great entrepreneurial aspects, all which can be explained through the entrepreneurial theory. Features of born global firms They have high rates of activities on the global market from where they were founded or near and will start exporting their products immediately upon their inception. However, in a study about born global firms, internationalization was found not to be a necessary objective in their formation, especially in firms based in Denmark and Australia (Tanev, 2012). Internationalization in this case is characterized by the firm’s technology, its nature and area of specialty within its area of operation (Jones et al., 2011). In Norway and France, born global firm have portrayed that the extent of a firm being global or local depends on the firm’s own decisions, which have an impact on internationalization process (Tanev, 2012). Most born global firms are characterised by limited resources in their operations. Born global firms are relatively smaller than multinationals, and have much lower capacities in terms of human resources, financial and tangible resources (Cavusgil & Knight, 2004). Born global firms are established across industries, though are mostly considered to be technological firms, there are cases of firms spread widely beyond the technology field. In Denmark, there are some firms in consumer products, furniture and even in fabrication of metallic elements. Most of these firms use a differentiating strategy in that they have the ability to differentiate their strategies and designs to make their products unique and target a specific market, which many multinationals may find unappealing (Tanev, 2012). The aim of these firms is to meet the customers’ needs as precisely as possible in ensuring a customised and not standardised approach in production. These firms have the capacity to leverage communication technologies in segmenting customers in market niches with a view to serve their specialised needs and not offering similar services to customers across the board (Cavusgil & Knight, 2009). Born global firms usually rely on intermediaries in product distribution in the global market to ensure wide market coverage (Cavusgil & Knight, 2009). In addition, these firms will have to rely in international shipment to deliver products to clients, which requires establishment of facilitators to arrange such transportation. Some may even establish joint ventures or are I involved in foreign direct investments to spread their products. Challenges of born global firms Most born global firms will face challenges that are different from those faced by other organisations. Considering that these firms are formed for international operations from their inception, there are some challenges that may face such establishments. These will include challenges in management issues to manage diversified operations on a global scale, lack of enough resources in production and poor market information in some areas (Hamza & Sulfiqar, 2011). Others include financial problems and lack of enough muscles to ensure the right innovations in their products. Due to lack of sound financial strength, these firms may sometimes face acute problems in hiring expertise staff needed to offer high-end quality products to customers on a global scale. In addition, research and development is a complex and costly process that companies have to be involved in their operations to ensure they capture and offer the right products to the right market segment to attain competiveness (Hamza & Sulfiqar, 2011). Considering that some firms suffer from serious lack of market information, as they do not undertake the required research, such firms face a possible risk of failure in their operations. Conclusion Born global firms are formed with the sole intention of operating on a global scale from their inception. Different from other forms, they perceive the world as one borderless market with their operations spreading across the globe in the first two years of operations. Other reasons that explain formation of these firms include changing consumer behaviours towards use of customised and not standardized products. In addition, they result from the need to export high-end technological advancement that the local market cannot absorb and from establishment of highly established networking channels across the global. Others include the need for high quality products and the glowing technological growth especially on the internet platform, which makes the world a global village, implying it is easier to manage and operate from anywhere. These firms are characterised by highly sophisticated technologies and well-grounded information communication technologies alongside segmented markets that group customers according to their specialised needs. However, most born global firms are faced with immense problems related to lack of enough financials, lack of the required management skills, poor budgets that cannot attract high-end expertise and failure to support sophisticated research and development to come up with ingenious products. All the same, there is an increasing trend in formation of born global firms with their operations explained by the entrepreneurial theory, as the world becomes a global village and customers develop customised needs across the globe. List of references Cavusgil, S.T. & Knight, G. 2009. Born Global Firms. NY: Business Expert Press Chen, Z. & Hao, J. 2008. “Empirical study on the relation between the entrepreneurship of team and performance of firms (in Chinese).” Management Science, 21(1): pp9-48. Foss, N. J. & Klein. P. G. 2012. Organizing Entrepreneurial Judgment: A New Approach to the Firm. Cambridge: Cambridge University Press. Gillian Sullivan Mort, Jay Weerawardena, Peter Liesch, (2012) "Advancing entrepreneurial marketing: Evidence from born global firms", European Journal of Marketing, 46 (3/4), pp.542 - 561 Halldin, T. 2012. Born global firms – do they perform differently? CESIS Electronic Working Paper Series. 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