Principal Topic
There is rapidly growing theoretical, empirical, and practitioner interest in the
internationalization of new ventures (INV) from emerging economies (Wright, Filatotchev,
Hoskisson, and Peng, 2005; Luo and Tung, 2007; Yamakawa, Peng, and Deeds, 2008; Khavul,
Perez-Nordtvedt, and Wood, 2010, The Economist, 2010). These firms represent a significant
percentage of the ‘emerging giants’ reshaping a number of industries and are often the sources of
new business models. Emerging economies are distinguished from developed economies in their
relatively high growth rates, large numbers of relatively poor citizens, uncertain (as opposed to
risky) business environments, and weak institutional environments dominated by elite coalitions,
which limit innovation to preserve existing economic rents (North, Wallis, and Weingast, 2009).
Despite elite limits on innovation, these factors have created competitive advantage for certain
firms in these settings, as evidenced by business models such as frugal production and reverse
innovation (The Economist, 2010).
However, the INV literature has not yet considered the role of venture capital (VC) as a key
resource in the development of rapidly growing new ventures (Cumming, Sapienza, Siegel, and
Wright, 2009). VC may also act as an intermediating element between antecedents of INV and
outcomes such as patterns and propensity of internationalization and performance (Keupp and
Gassmann, 2009). Conflicting views exist about the extent to which resources are required for
early and rapid internationalization (Keupp and Gassmann, 2009). Explanations based on the
resource-based view argue that the abundance of specialized resources—such as VC—is needed
for entrepreneurial activities (George, 2005) and internationalization. Others have suggested that
internationalization capabilities can be generated without such resources and may actually be
assisted by resource scarcity (Gassmann and Keupp, 2007; Katila and Shane, 2005; Sapienza,
Autio, George, and Zahra, 2006), causing entrepreneurs to internationalize in order to access
resources and opportunities (Mathews and Zander, 2007). Social ties may mitigate local resource
scarcity by facilitating foreign market entry (Ellis, 2000), learning new capabilities (Anand and
Khanna, 2000), and accessing distant resources (Kogut, 2000). Immigrants active in both homeand host-country technical networks have been associated with cross-border VC flows
(Madhavan and Iriyama, 2009), and syndication networks have facilitated more spatially distant
VC investing (Sorenson and Stuart, 2001). This view suggests that scarcity drives
internationalization and that poverty and uncertainty can be sources of competitive advantage,
with important implications for INVs from emerging economies where resource scarcity is a
fundamental attribute. As global economic conditions have shifted, innovation by local firms
serving the ‘base of the pyramid’ (BoP) has become a source of competitive advantage (Hart and
Christensen, 2002).
The purpose of this paper is to explore the role of VC in the internationalization of new ventures
from emerging economies in order to provide a more complete understanding of how weak
institutional environments and poverty can create competitive advantage. Weak property rights
protection has allowed ‘bandit’ or ‘guerilla’ innovation to emerge in a number of emerging
markets. An emerging management paradigm based on findings from emerging markets has been
articulated (Khanna and Palepu, 1997; Gulati, 2009; Immelt, Govindarajan and Trimble, 2009;
Prahalad and Mashelkar, 2010). This paper aims to extend earlier process-based INV studies
(Coviello, 2006; Mathews and Zander, 2007) by focusing on the central issue of resource
scarcity and utilizing institutional theory. Institutional theory is the most appropriate lens through
which strategic decisions in these settings can be studied (Hoskisson, Eden, Lau, and Wright,
2000), although it has not yet been widely applied to INV research (Cumming, Sapienza, Siegel,
and Wright, 2009). Most INV research has focused to date on the US, UK, and Canada, lacks
longitudinal data (Coviello and Jones, 2004), and does not consider that legal, institutional, and
cultural factors may vary with time (Cumming et al., 2010), limiting the generalizability of these
findings.
Method
Using longitudinal, quantitative and qualitative data from both primary and secondary sources,
we develop three exploratory case studies of internationalizing new ventures from Russia, South
Africa, and Peru. By comparing these three companies in three different countries, we can
explore internationalizing new ventures along a diversity of characteristics, as shown in the table
below:
Table 1: Three companies in three countries – diversity along a variety of factors
Industry
Russia
South Africa
Peru
Diversified business
Medical devices
Beverages
group
Legal origin
French
English
French
Firm size and age
Large, established
Small, established late
Medium, established
early 1990s
1990s
late 1980s
VC utilization
Limited
Extensive
None
Change in
Extensive
Moderate
Limited
institutional
environment
These cases are compared, from which a set of propositions are developed.
Entrepreneurship is a process, rather than a static pattern, in which planned behavior changes
over time in interaction with its external environment. Therefore, INV research is more likely to
be robust if designed as a longitudinal study. The relative scarcity of quantitative data on
entrepreneurial processes (Keupp and Gassmann, 2009) and the robustness of theory-building
based on both qualitative and quantitative data (Edmondson and McManus, 2007) suggest that
the use of comparative case analysis can be a source of research propositions in this immature
field of study.
Results and Implication
We generate a set of propositions concerning the role of VC in INVs from emerging economies.
These include:
Proposition 1: If resource scarcity drives internationalization, then we can expect to see
successful internationalization from emerging economies with lower levels of VC in comparison
to INVs from economies with higher levels of VC.
Proposition 2: In resource scarce emerging economies we can expect to find a higher reliance on
social networks to facilitate internationalization.
Proposition 3: The legal origin of home countries influences the effectiveness of INVs and their
utilization of VC.
Proposition 4: Changes in the institutional environments have an impact on VC’s role in the INV
process in emerging economies.