CHAPTER 5
GROWING AND INTERNATIONALIZING
THE ENTREPRENEURIAL FIRM
CHAPTER OUTLINE
I. OPENING CASE: Emerging Markets: The Rise of Alibaba
A. Founded in 1999 by former English teacher Jack Ma, Alibaba has become the largest e-
commerce firm in the world.
1. Value of goods sold on its platforms (US$170 billion in 2013) are more than Amazon
and eBay combined.
2. Alibaba started as a business-to-business (B2B) portal connecting overseas buyers
and small Chinese manufacturers.
B. Alibaba controls four-fifths of all e-commerce in China.
1. In 2013, on Single’s Day , Alibaba sold more than US$5.7 billion in merchandise.
2. September 19, 2014, Alibaba’s IPO on the New York Stock Exchange was the
world’s largest, raising US$25 billion.
C. The rise of Alibaba is a story of focus and innovation.
1. Alibaba largely focused on China to avoid head-on competition with the eBays of the
world, forcing eBay to retreat in China.
D. U.S. government placed Alibaba on the list of “notorious markets,” because counterfeits
could be bought and sold on its websites.
1. Alibaba has endeavored to remove fakes from its websites.
2. Recently removed from the US government’s list of “notorious markets.”
3. Western managers of genuine items on Tmall continue to complain that cheap fakes
can still be found on Taobao.
E. Alibaba’s business model grows on PC-based e-commerce, and China has become the
world’s largest market for smartphones.
Chapter 5 Growing and Internationalizing the Entrepreneurial Firm
b. Tencent is famous for its WeChat social messaging app, which is widely popular.
II. ENTREPRENEURSHIP AND ENTREPRENEURIAL FIRMS
A. Definitions
1. Entrepreneurship—the identification and exploitation of previously unexplored
opportunities
a. Concerned with
(i) Sources of opportunities
(ii) Processes of discovery, evaluation, and exploitation of opportunities
2. International entrepreneurship
a. Innovative, proactive, and risk-seeking behavior that crosses national borders
b. Intended to create wealth in organizations
III. A COMPREHENSIVE MODEL OF ENTREPRENEURSHIP
A. Industry-Based Considerations
1. Intensity of interfirm rivalry
a. Impacts probability of new start-up’s survival
(i) The fewer the number of incumbents, the more likely they are to collude to
keep out newcomers
2. Entry barriers
3. Bargaining power of suppliers
a. Entrepreneurs often search for opportunities that reduce bargaining power of
suppliers
(i) LINUX has emerged as an alternative to Microsoft’s operating system (OS)
4. Bargaining power of buyers
5. Threat of substitute products/services
a. Introducing substitutes can chip away competitive advantages held by incumbents
Chapter 5 Growing and Internationalizing the Entrepreneurial Firm
(i) Emails, attachments, and online payments substitute for faxes, express mail,
and paper check printing/processing
6. There is no guarantee that entrepreneurs will be successful, even when the industry is
conducive to entry by new start-ups
B. Resource-Based Considerations
1. Entrepreneurial resources must create value
2. Entrepreneurial resources must be rare
C. Institution-Based Considerations
1. Development of entrepreneurship around the world depends on formal institutions
that govern how entrepreneurs start up new ventures
2. Striking differences in government regulations concerning start-ups
a. Registration
b. Licensing
3. General conclusions
a. Governments in developed economies impose fewer procedures and a lower total
cost for new start-ups
b. Regulatory burdens on new start-ups are much harsher in poorer countries
c. The more entrepreneur-friendly a country’s formal institutional requirements are,
the more likely entrepreneurship will flourish and contribute to developing the
economy
IV. FIVE ENTREPRENEURIAL STRATEGIES—Not mutually exclusive; often pursued in
combination
A. Growth
1. Attempt to utilize resources and capabilities more fully
a. Entrepreneurial vision
b. Entrepreneurial drive
c. Entrepreneurial leadership
Chapter 5 Growing and Internationalizing the Entrepreneurial Firm
(i) First mover advantages
(ii) Disruptive technologies may redefine competitive rules and dynamics
(1) Recombine organizational routines to create novel product/service
offerings
(2) Many SMEs are founded by former employees who are frustrated by their
inability to translate innovative ideas into realities in large firms
C. Network
1. A network strategy refers to intentionally constructing and tapping into relationships,
connections, and ties that individuals and organizations have
2. Two kinds of networks exist : personal and organizational
a. Both are equally important
b. Prior to and during the founding phase, these two networks overlap significantly
i.e., entrepreneurs’ personal networks are essentially the same as the firm’s
organizational networks
3. Entrepreneurship can be regarded as a process of translating personal networks into
value-adding organizational networks
4. Three attributes —urgency, intensity, and impact — distinguish entrepreneurial
networking
5. Distinguishing characteristics of entrepreneurial networking
D. Financing and Governance
1. All start-ups need capital
2. Since a majority of start-ups end as failures, it is risky for anyone to invest in them
3. Many outside strategic investors often examine business plans, require a strong
management team, and scrutinize financial reviews and analysis before making
investments
4. Entrepreneurs need to develop relationships with these outside investors, some of
which are weak ties
5. Strong ties (e.g., family, friends, etc.) are the most likely sources of initial financing,
other than the entrepreneurs’ own resources
6. Outside investors usually demand collateral or some other assurance that the
entrepreneur will not take the money and run
a. Weak-tie investors (e.g., angel investors and venture capitalists) often demand
more formal governance mechanisms to safeguard their investment in
entrepreneurial ventures
7. Odds for survival during crucial early years are significantly correlated with firm size
a. Faster a new start-up can reach a certain size, the more likely they will survive the
first few years and overcome the liability of newness
b. Entrepreneurs often choose to accept more outside investment in order to reach a
large size and agree to give up some ownership control and rights
8. A new solution called microfinance has emerged in response to the lack of financing
for entrepreneurial opportunities in many countries
a. It involves lending small sums ($50-$300) used to start small businesses
b. The intention is to lift out the entrepreneurs out of poverty
c. Started in the 1970s in countries such as Bangaladesh and India
E. Harvest and Exit
1. Selling an equity stake to outside investors
2. Selling the entire business
3. Merger with another firm
a. Entrepreneurial firm may lose its independence
b. Individual entrepreneurs may have to leave the company
4. Considering an initial public offering (IPO)
a. Can increase firm’s financial stability
Chapter 5 Growing and Internationalizing the Entrepreneurial Firm
5. Declaring bankruptcy often the only alternative for firms that are failing
V. INTERNATIONALIZING THE ENTREPRENEURIAL FIRM
A. Entrepreneurs are challenging myths about internationalization
1. Large MNEs are not the only firms that internationalize successfully
B. Transaction Costs and Entrepreneurial Opportunities
1. Transaction costs are qualitatively higher in international markets
a. Numerous differences in formal institutions and informal cultures/norms can be
2. Many large and small firms decide not to internationalize because of high transaction
costs
3. Other firms may use innovative ways to reduce transaction costs
C. International Strategies for Entering Foreign Markets
1. Direct exporting: selling products made in domestic market to customers in foreign
markets
2. Licensing or Franchising
a. One firm purchases the right to use another firm’s proprietary technology and
trademark for a royalty fee
(i) Manufacturing setting, called licensing
(ii) Service setting, called franchising
3. Foreign Direct Investment (FDI)
a. Firm invests directly in production or service activities in another country
(i) Strategic alliances with foreign partners
(ii) Acquire foreign firms
b. Requires commitment to serving needs of foreign customers
c. Requires hands-on involvement in managing the foreign operation
Chapter 5 Growing and Internationalizing the Entrepreneurial Firm
d. Involves more complexity than exporting or licensing/franchising
D. International Strategies for Staying in Domestic Markets
1. Export indirectly
a. Export through domestic-based export intermediaries (e.g., trading companies and
export management companies)
(i) Link sellers and buyers overseas
2. Become suppliers of foreign firms doing business in entrepreneur’s home country
3. Become licensees or franchisees of foreign brands
a. Receive training and technology transfer in exchange for fee
b. Allows SMEs to learn a lot about operating according to world-class standards
c. Not necessarily a permanent relationship
VI. DEBATES AND EXTENSIONS
A. What motivates entrepreneurs to establish new firms? (Traits versus Institutions)
1. Personal traits of entrepreneurs are primary motivating factor
a. Strong desire for achievement
2. Institutions—environments that set formal and informal rules—are primary
motivating force, not the personal traits of entrepreneurs
a. Mainland China: virtually no entrepreneurship in the past because of harsh
communist policies
(i) But the Chinese have exhibited a high degree of entrepreneurship in Southeast
Asia, where government policies are more friendly towards entrepreneurship
(ii) Recent government reforms have made mainland China’s policies more
friendly towards entrepreneurship and the country has been flooded with
entrepreneurial activity
Chapter 5 Growing and Internationalizing the Entrepreneurial Firm
(ii) Family background and educational attainment also associated with
entrepreneurship
(1) Children from wealthy families are more likely to start new businesses
(2) Better educated people are more likely to start new businesses
3. Most scholars now agree that human behavior, such as entrepreneurship, is a result of
both nature (traits) and nurture (institutions)
B. Slow Internationalizers Versus Born Global Start-ups
1. It is possible for some SMEs to make very rapid progress in internationalization
2. But should SMEs internationalize rapidly?
a. Key strategic issue for entrepreneurial firms
(i) Firms that internationalize slowly and in stages might have to overcome
C. Anti-Failure Bias Versus Entrepreneur-Friendly Bankruptcy Laws
1. Entrepreneurs, scholars, journalists and government officials share an “anti–failure”
bias
a. Pay little attention to entrepreneurial failure
2. From an institutional perspective, it is important to ease the pain of failure in order to
encourage entrepreneurial activity
a. Bankruptcy laws vary by country in terms of their tolerance of failure
(i) U.S.: entrepreneurs can walk away from debts incurred in failed/bankrupt
ventures
(ii) Germany: bankrupt entrepreneurs can be held liable for unpaid debt for up to
VII. THE SAVVY ENTREPRENEUR
A. Entrepreneurs and their firms are engines of the creative destruction process
underpinning global capitalism
B. Insights on entrepreneurship from the three leading perspectives on strategy
1. Industry-based view
a. Entrepreneurial firms tend to choose industries with lower entry barriers
Chapter 5 Growing and Internationalizing the Entrepreneurial Firm
a. Differences in entrepreneurial activity and economic development around the
world can be explained by the institutional frameworks that either promote or
restrict entrepreneurship
C. Four important implications for action
1. Establish an intimate understanding of your identity to identify gaps and opportunities
D. Four fundamental questions in strategy
1. Why do firms differ?
a. Personal traits of entrepreneurs are different from non-entrepreneurs
2. How do firms behave?
3. What determines the scope of the firm?
4. What determines the international success and failure of firms?
a. Entrepreneurs’ ability to select the right industry
b. Entrepreneurs’ ability to leverage resources and capabilities
c. Entrepreneurs’ ability to take advantage of formal and informal institutional
resources, at home and in foreign markets
Chapter 5 Growing and Internationalizing the Entrepreneurial Firm
CHAPTER FIVE – LECTURE NOTES AND TEACHING TIPS
Teaching Tip: Ask students to consider why Alibaba might see low trust and underbanked
economies as likely places for growth. How do these economies fit the model successful in
China?
ENTREPRENEURSHIP AND ENTREPRENEURIAL FIRMS
How do small- and medium-sized enterprises (SMEs)—usually defined as firms with less than
500 employees—grow? How do they enter international markets?
Research suggests that firms grow largely through entrepreneurial activities. But isn’t
entrepreneurship about small firms? Current work in entrepreneurship argues that firm size and
age are not defining characteristics of entrepreneurship. Rather, entrepreneurship is defined as
“the identification and exploitation of previously unexplored opportunities,” thus its importance
for firm growth.
Each year 4-6% of adult working population in North America, Western Europe, Central and
Eastern Europe attempt to start a new venture.
Teaching Tip: It may be a good time to point out that some countries generate more SMEs than
other countries, while other countries are good at generating fast growth entrepreneurial firms,
Students could be asked to why they think this is. As an exercise or homework, they could visit
the GEM site above and scan some of the country results and read the discussion in the GEM
documents to answer that question.
Around the world, only a small number of entrepreneurial firms survive, and 60% of start-ups in
the U.S. fail within 6 years. A crucial time for firms that want to grow beyond SME status is
thought to be the 20-25 million U.S. dollar level in annual revenue. Usually the firm must grow
Chapter 5 Growing and Internationalizing the Entrepreneurial Firm
beyond a single product, its initial distributors, or a niche, as well as begin to think about selling
globally, if it has not done so already. Many business owners argue that this is the “grow or die”
stage in a firm’s life, and if the firm is having reasonable growth, it will usually be 5 to 10 years
after its founding.
A COMPREHENSIVE MODEL OF ENTREPRENEURSHIP
Industry-Based Considerations
The industry-based view, exemplified by the Porter five forces first introduced in Chapter 2,
suggests that (1) inter-firm rivalry, (2) entry barriers, (3) bargaining power of suppliers, (4)
bargaining power of buyers, and (5) threats of substitute products impact entrepreneurship.
Fourth, the bargaining power of sellers is important. An entrepreneur can reduce their power by
finding a solid niche. For example, Amazon have provided more outlets for publishers, so they
were not limited to selling to the major chains. Similar niches are appearing in the news media,
broadcasters, the film industry and many others, as the internet and inexpensive computing and
communications empower suppliers of content to the new “media” firms.
Finally, substitute products/services may allow great opportunities for entrepreneurs. Given that
it is difficult to compete against larger, more established incumbents in industries with high entry
barriers (noted previously), entrepreneurs who bring in substitute products that redefine the game
can effectively chip away some of the competitive advantages held by incumbents. For example,
internet telephony has created a niche that the established telecom firms have been hesitant to
enter, as this would (and has) reduced their long distance revenue. The start-ups in
telecommunication, such as internet phone provider Skype, may have found a niche where they
Chapter 5 Growing and Internationalizing the Entrepreneurial Firm
Resource-Based Considerations
The five forces are helpful and necessary for entrepreneurs to understand and work within (and
Third, resources must be inimitable. For instance, Amazon’s success has prompted many online
bookstores to directly imitate it and skeptics to dismiss Amazon as “toast” (soon to be burnt up).
But Amazon’s website, delivery system, search engine, wish lists, and other convenient software
have proven to be tougher to imitate than the skeptics thought.
other countries may have six or more characters (not just numbers). And many countries do not
use zip codes. So even if they say they ship overseas, it is very difficult to get around problems
like entering 5-digit zip codes or 10-digit phone numbers (most U.S. phone numbers are 10 digits
in total, including area or city codes), or other problems with the website. For instance, even
some of the major U.S. university publishers that have retail websites make some of these very
fundamental mistakes and make it very difficult to order if one is outside of the United States,
though one would think that they would know better.
Fourth, entrepreneurial resources must be organizationally embedded. A key strategy is to use
observable actions to signal that entrepreneurs are organizationally credible. Therefore, the best-
performing entrepreneurs are likely to be those with the best signaling capabilities. For example,
one way to signal credibility to consumers is to specialize in one area. Many Internet
entrepreneurs deliberately specialize in highly standardized commodities, such as books, CDs,
and airline tickets, to alleviate buyers’ concerns about product quality. Reputation is also
important, and Amazon takes advantage of both of these. For example, Amazon gives reasonable
prices on its products and usually avoids “sticker shock” shipping charges (e.g., charging $50 for
a $15 order, as some e-retailers do). If the product comes late or broken, it is not difficult to
return the product.