Competitive Advantage and Strategic Configuration of ‘Born
Global’ Firms: A Modified Resource Based View
By
Tamar Almor
School of Business Administration
College of Management – Academic Studies
7 Yitzhak Rabin Blvd., PO box 9017,
75910 Rishon LeZion
Israel
Tel. + 972 3 9634270
Fax + 972 3 9634117
e-mail: talmor@colman.ac.il
Niron Hashai
Jerusalem School of Business Administration
The Hebrew University
Mt. Scopus, Jerusalem 91905
Israel
Tel: +972-(0)2-5889999
Fax: +972-(0)2-5881341
E-mail: nironH@huji.ac.il
The authors wish to thank the Research Unit of the College of Management – Academic Studies for its
financial support. They further wish to thank Ms. Susanne Tam and Mr. Michiel Dijk for their excellent
work on the database.
Competitive Advantage and Strategic Configuration of ‘Born
Global’ Firms: A Modified Resource Based View
Abstract
This paper presents a modified version of the Resource Based View (RBV),
according to which firms create and sustain competitive advantage not only by
strengthening superior capabilities, but also by compensating for inferior ones. This is
done by choosing a strategic configuration that fits the firm’s resources and capabilities.
We demonstrate our framework by explaining how ‘born global’, hi tech firms
compete globally despite their relative resource scarcity. We will show that these firms'
superior R&D capability is strengthened by incorporating R&D in the value chain,
internalizing it and locating it at home., Contrary to conventional wisdom, production is
not viewed as a core capability and therefore frequently outsourced or performed
through strategic alliances. Marketing is considered a core capability and is therefore
incorporated in the value chain and internalized. Inferiority in marketing capabilities as
a result of size and distance is compensated for by locating it in host markets and by
focusing on market niches or commercial customers, thereby forgoing the need for
extensive, world-wide marketing, sales and after-sales operations.
1
Introduction
The phenomenon of born-globals, although still regarded as novel, is becoming an
accepted topic in literature.
Although substantial research has focused on the
emergence of ‘born global’ firms, no theoretical framework has been developed yet to
explain their success over time (Oviatt and McDougall, 1999). The international success
of ‘born global’ firms is, by definition, paradoxical. After all, how can one explain the
fact that small firms with limited resources and little managerial experience, are able to
operate globally and compete successfully as though they were large multinational
corporations (MNCs)?
This study analyzes how ‘born global’ firms create and sustain competitive
advantages in the international business arena by using a modified version of the
resource-based view of the firm. In order to carry out the study we chose to analyze the
competitive advantage of ‘born global’, knowledge-intensive firms that have matured.
In this study we label these firms: knowledge-intensive, small and medium sized
multinationals (knowledge-intensive SMMs). Taking into account the high ratio of
knowledge-intensive start-up’s failures (Ruhnka et al., 1992; Timmons, 1999), this
approach is underpinned by the assumption that knowledge-intensive SMMs are those
‘born global’ firms who survived the fierce competition in the international marketplace
and succeeded to create and sustain competitive advantage.
The Resource Based View of the firm has been used to extend international
business theories by specifying the nature of the resources and capabilities that provide
ownership advantages (Peng, 2001), as well as to demonstrate how firms employ their
resources and capabilities to exploit location specific advantages in host countries
(Tallman, 1992; Trevino & Gross, 2002). The current paper aims to contribute to this
2
field of inquiry by employing a modified version of the Resource Based View (RBV) to
analyze how knowledge-intensive SMMs create and sustain competitive advantage.
A Modified Resource Based View
The Resource-Based View of the firm has gained influence during the last
decade (Conner, 2002; Medcof, 2000). Scholars adhering to the resource-based view
(e.g., Barney 1991; Peteraf 1993; Wernerfelt, 1984) suggest that firms’ competitive
advantage may be best explained by the heterogeneity of firm-specific resources and
their application rather than by differences in industry characteristics. According to the
RBV, a firm may be perceived as a bundle of tangible, intangible and human resources
(R) that are pooled together to create organizational capabilities. We refer to capabilities
(C) as the capacity to undertake a particular function or value activity. While this
capacity is dependent upon various factors such as organizational structure and firmspecific routines (Barney, 1995; Nelson & Winter, 1982), it is believed to be a positive
function of the firm’s resources:
C
0
R
C=f(R) ;
(1)
Thus, if we compare the resource stock of two firms: A and B, we may deduce
that, other things being equal, if firm A’s resource stock is superior compared to firm
B’s, we expect firm A’s capabilities to be higher than B’s.
The gap in firms capabilities is expected to result with firm A having a
competitive advantage over firm B, i.e. being able to create a higher economic value to
its customers. The RBV further proposes that sustainable competitive advantage (SCA)
stems from having a set of unique resources that create value in the marketplace
(Medcof, 2000). Sustainable competitive advantage is defined as the firm’s ability to
3
outperform its competitors for the long run, i.e. when competitive advantage persists
despite efforts to duplicate or neutralize it (Barney, 1991). Firm A will be able to sustain
its competitive advantage over firm B only if the resources that create superior
capabilities are: (1) durable, (2) non-transferable and (3) non-replicable (Barney, 1991,
1995; Dollinger, 1999; Peteraf, 1993).
Although the insights of the RBV are powerful in explaining the competitive
advantage of firms, this framework says little regarding situations where some of the
firm’s capabilities are superior compared to its competitors, while other capabilities are
inferior (e.g. when a firm has a technological advantage but lacks marketing
experience). Conceptually, firm x overall capability (Cx, x=A, B) can be regarded as the
product of its specific capabilities:
Cx = Cx1 * Cx2*…* Cxn
(2)
Expression (2) reflects the concept of the value chain; lack of a specific
capability will destroy the overall capability of a firm.
We can therefore deduce that firm A has a competitive advantage over firm B if:
CA > C B
(3a)
CA1 * CA2*…* CAn > CB1 * CB2*…* CBn
(3b)
or
Expressions (3a) and (3b) imply that the higher is the CA/CB ratio, the larger is
firm A’s competitive advantage. This competitive advantage can be achieved if firm A
outperforms or at least matches each of firm B’s specific capabilities, as specified in
expression (4):
C Ai / C Bi  1 ;
for each i=1..n
(4)
This task however is not trivial at all. When firm A has a superior capability
over firm B (i.e. CAi > CBi), firm A will seek to maintain or widen the gap between the
4
firms’ capabilities. This is feasible as long as the resources that create these capabilities
are durable, non-transferable and non-replicable. But, how can firm A close the gap and
neutralize its disadvantage in resources which infer an inferior capability (i.e. CAi <
CBi)?
One way to close the gap is to develop resources that will create additional
capabilities (Itami, 1987; Porter, 1991). While, this view is consistent with the emergent
literature on dynamic capabilities (Eisenhardt & Martin, 2000; Teece, et al. 1997), the
basic notions of the RBV imply that this task is extremely difficult, requires tremendous
resource investment over long periods of time and sometimes is even impossible.
Thus the scope of maneuver left for firm A is quite limited. Firm A can acquire
the required capabilities from firm B or from the market. However, if certain
capabilities are available in the market it is reasonable to assume that the concerned
capabilities have a minor contribution to the process of creating customer’s value, i.e.
these capabilities are not a ‘core competency’ (Prahalad & Hamel, 1990).
If firm A wishes to compensate for inferior ‘core’ capabilities its only choice is
to operate in environments where its disadvantages are minimized. This is particularly
likely to reflect upon the product offering of firm A and its market selection. For
example, if firm A has an inferior technology or low quality production capability, it
may aim to compete in markets segments that are price sensitive rather than quality
oriented. On the other hand if firm A is disadvantaged in its marketing capabilities it
may choose to limit its market scope.
In this paper we argue that firms create and sustain competitive advantage by
choosing a strategic configuration that maximizes their advantage in superior
capabilities and minimizes their disadvantages in inferior capabilities. This view is
depicted in Chart 1. As detailed in the next section strategic configuration refers to the
5
firm’s decisions: (1) which functions or value activities to perform; (2) whether to
externalize or internalize these activities; (3) where to locate each activity; and (4) the
nature of markets targeted by the firm.
[Insert Chart 1 about here]
Next, we demonstrate how our modified resource base view applies to ‘born
global’ firms that have matured, i.e. knowledge-intensive SMMs. We start by
characterizing the resources and capabilities of these firms. Then we present a
conceptual framework that identifies how knowledge-intensive SMMs create and
sustain the superiority of their capabilities and how they neutralize their inferiority in
disadvantaged capabilities. Our framework is then empirically tested and finally we
present our findings and discuss their implications.
Resources and Capabilities of Knowledge-intensive SMMs
Our modified version of the RBV is applied to the resources and capabilities of
knowledge-intensive SMMs, by relating to specific value activities. Following Buckley
& Casson (1976), Jones (1999) and others, we focus on firms’ capabilities to undertake
three major value activities: (1) R&D – creation of knowledge and consumable
technology, (2) production – transforming inputs into outputs, (3) marketing - which
includes promotion, sales, distribution and after-sale services.
Knowledge-intensive, small and medium sized multinationals (SMMs) can be
generally characterized as relatively innovative, young and small firms that operate
internationally.
Proprietary technology is a resource around which distinctive capabilities
(Selznick, 1957) and the firm’s profit earning potential are developed (Grant, 1998).
Technology based firms will usually enjoy first mover as well as monopolistic
6
advantages, denoted by Wernerfelt (1984) as resource position barriers. Thus, unique
know-how and proprietary technology are a significant resource upon which a
competitive advantage can be created. Knowledge-intensive SMMs frequently introduce
a new technology that is so unique that it might be claimed that they are actually
inventing their own markets. Thus, technological capability is definitely a superior
capability that drives SMMs to the international markets in order to exploit first mover
advantages and monopolistic gains (Amin & Thrift, 1994; Keeble et al., 1997;
McNaughton, 2000). We therefore conclude that knowledge-intensive SMMs have a
superior R&D capability (Cx,R&D) compared to larger MNCs:
CSMM, R&D > CMNC,R&D
(5)
Firm age and size play an important role in achieving a sustainable competitive
advantage in the international business environment. While smallness usually
encourages the firm towards innovation and flexibility (Narula, 2002; Peng, 2001),
small and medium sized firms clearly suffer from disadvantages in financial and
managerial resources and capabilities (Buckley, 1989; Kaufmann, 1995; Lu & Beamish,
2001), which prevent or limit them to compete internationally (Calof, 1993; Lindell &
Karagozoglu, 1997). Large and mature companies have more resources, can control a
greater market share, can ride the experience curve faster, enjoy a strong bargaining
power with suppliers and customers and can weather more mistakes without incurring
failure (Aharoni 1994). This observation is crucial when we compare the production and
marketing capabilities of SMMs and MNCs.
While production processes of knowledge-intensive products vary considerably
from one product to another, it is possible to classify them into three categories. One
category refers to products that require basic or intangible production processes. The
production of these products incurs negligible marginal costs, whereas the developed
7
knowledge is transferred into a medium that is then distributed to customers (e.g.
copying software into a CD-rom or e-mailing software to customers). The second
category consists of products of which the developed knowledge is embedded in a
larger system (for instance knowledge embedded in a chip which allows high quality
digital photography). The third category relates to products in which mass
manufacturing of the product is required (e.g. mass production of a newly developed
drug).
None of the categories presented above match the capabilities of knowledgeintensive SMMs. In the first case production is virtually non-existent, or production
skills are so common that many firms can easily provide them. A knowledge-intensive
SMM does not gain a particular competitive advantage from engaging in production of
such products. The second and third categories require substantial economies of scale
and/or production efficiency that is gained through a superior position on the experience
curve, both of which inhibit young and small firms from gaining a competitive
advantage in production. We therefore conclude that production is not a ‘core’
capability for knowledge-intensive SMMs who are inferior in their production
capabilities (Cx,P) compared to larger MNCs, as specified in expression (6):
CSMM, P < CMNC,P
(6)
The relatively young age and small size of knowledge-intensive SMMs becomes
critical when we consider their international market dispersion. While ‘being global’
enables knowledge-intensive SMMs to exploit more opportunities by catering a larger
set of customers, it also requires the ability to operate and control multiple dispersed
activities and serve customers that are situated at distance from the firm's home country.
In that respect the capabilities of knowledge-intensive SMMs are inferior compared to
8
larger MNCs that have more resources and experience to establish and coordinate an
internationally dispressed marketing infrastructure. Hence we conclude that:
CSMM, M < CMNC,M
(Cx,M-marketing capability)
(7)
As noticed by Teece (1986) a firm is not likely to reap the benefits of proprietary
innovation if it does not control complementary assets such as production and
marketing. Thus, the relations in expressions (5)-(7) may well imply that the overall
capability of larger MNCs is superior compared to that of knowledge-intensive SMMs.
Based on the notation of expression (3b) we expect that:
(R*P*M)PSMM < (R*P*M) MNC
(8)
So how do knowledge-intensive SMMs compensate for their inferior overall
capability and compete globally with larger MNCs? We pose that the answer lies in the
choice of a strategic configuration that enables them to maximize their R&D advantage
and minimize their disadvantages in production and marketing.
The Strategic Configuration of Knowledge-intensive SMMs
Table 1 outlines the expected strategic configuration of knowledge-intensive
SMMs, according to their decisions which value activities to incorporate in their value
chain; whether to externalize or internalize these activities; where to locate each
activity; and the nature of their targeted markets. The rational for these decisions is
detailed below.
[Insert Table 1 about here]
Incorporation of activities in the value chain
Since ownership of technology is one of the most important bases for the
development of competitive advantage (Kogut & Zander, 1992) we expected
knowledge-intensive SMMs to incorporate R&D activities in their value chain in order
9
to create a competitive advantage around their unique know-how and proprietary
technology.
On the other hand, the inferior production capabilities of knowledge-intensive
SMMs leads us to expect that production may not necessarily be part of their value
chain, and it may be outsourced to independent firms. This is feasible as long as
proprietary know-how is protected (e.g. by patents).
Along this line of reasoning we would expect marketing not be included in the
value chain of knowledge-intensive SMMs. However we pose that marketing, unlike
production, is a core capability for knowledge-intensive SMMs since it has a major
contribution to the process of creating customer’s value. Marketing activities constitute
the basis for the firm interaction with its customers. Tight supplier-customer relations
allow firms to receive feedback regarding their technology through the processes of
distribution and after-sales services and may lead to further technological innovations.
Moreover, knowledge-intensive products require more frequent interactions between the
supplier and its customers compared to non knowledge-intensive products (Almor &
Hirsch, 1995; Hirsch, 1989). These interactions require unique skills and specific
expertise in the processes of distribution and after-sales services and are crucial factors
in building customer's loyalty and developing a strong clientele base. Knowledgeintensive SMMs therefore need to incorporate marketing in their value chain in order to
upgrade proprietary technological knowledge and to establish long-term relations with
its client base.
Following the discussion above, we hypothesize that:
Hypothesis 1: Knowledge-intensive SMMs incorporate R&D and marketing
in their value chain more frequently than production.
10
The question how knowledge-intensive SMMs compensate for their inferior
marketing capability still needs to be resolved. We address this issue when we discuss
the preferred control model over value activities.
Control of value activities within the value added chain
In order to sustain competitive advantages firms need to make sure their
resources and capabilities are durable, not easy to imitate, and difficult to transfer or
replicate (Barney, 1991, 1995; Dollinger, 1999; Peteraf, 1993). One way to enhance
such sustainability is by exploiting in-house resources, with which the firm will have
the capability to undertake certain value activities independently from other firms.
While the role of cooperative ventures (e.g. joint ventures or strategic alliances) in
achieving competitive advantage by leveraging the firm’s resources and capabilities has
been discussed extensively in the literature (e.g. Contractor & Lorange, 1988; Dunning,
1995), it is also clear that cooperative ventures may threaten competitive advantage if its
resources and capabilities are made redundant through the venture, e.g. in the case of
leakage of propriety know-how and loss of favorable access to customers (Buckley &
Casson, 1988; Inkpen & Beamish, 1997). Hence, the firm’s decision whether to
internalize a value activity (i.e. perform it within the boundaries of the organization) or
to engage in a cooperative venture, is expected to play a crucial role in its ability to
sustain competitive advantage. We refer to this decision as the chosen control mode
over value activities.
The need to control R&D resources by developing them within the organization,
through the organization’s employees, seems to need little additional explanation. As
stated before, R&D knowledge is a major determinant of competitive advantage for
knowledge-intensive SMMs. Internalization of R&D will enable SMMs to keep
technological knowledge proprietary and thus strengthen the sustainability of their
11
competitive advantage (Tallman, 1991). Therefore, we expect that R&D will be
performed in-house, so that R&D capabilities remain hard to copy and rare as long as
possible.
As noted earlier knowledge-intensive SMMs have inferior production
capabilities compared to larger MNCs. Cooperative ventures may be preferred over inhouse production since they enable access to complementary assets (Teece, 1986).
Thus, even in those cases where knowledge-intensive SMMs incorporate production in
their value chain, we expect production to be performed through cooperative ventures.
SMMs may produce only those components in which know-how is embedded (thus
protect their proprietary know-how) while using cooperative ventures to manufacture
standard components.
Sustaining competitive advantage in marketing is a more complicated issue.
While knowledge-intensive SMMs have inferior marketing capabilities compared to
larger MNCs, they still need their marketing function to interact with their customers in
order to benefit from customers-related technological spillovers and to create a strong
clientele base. Knowledge-intensive SMMs need to perform distribution and after sales
services in-house in order to prevent potential diffusion of propriety technological and
marketing know-how to partners in the process of joint operation (Simonin, 1999). On
the other hand, the limited size of knowledge-intensive SMMs makes it nearly
impossible to serve multiple foreign markets in-house. This task looks even harder
considering that managerial skills, international experience, human resources and
finance are all expected to be scarce resources for small firms.
We argue that the solution to this conflict, as well as to the conflict whether to
incorporate marketing activities within the value chain, lies in the selection of markets.
12
Let M denote the potential market size of a specific product and T denote the
average transaction value in that market. Obviously, the potential number of
transactions (N) a firm faces can be denoted by:
N=M/T
(9)
Due to their resource constraints, knowledge-intensive SMMs are expected to
minimize the number of transactions they execute. This may be done in two ways. One
way is to limit the size of M by targeting a global market niche that consists of few
customers (Gomes-Casseres, 1997; McNaughton, 2000). An alternative way to keep N
low is by increasing the value per transaction, by targeting large commercial customers
(e.g. by selling products OEM or through wholesalers, thereby foregoing contact with
final customers).
When serving commercial customers or specific market niches, the absolute
number of customers is much smaller than when serving mass-market consumers. By
serving a small number of commercial customers or by targeting market niches, the
need for a substantial distribution and after-sales services infrastructure is reduced and a
modest marketing entity may suffice. Thus a knowledge-intensive SMM is expected to
sustain its competitive advantage in marketing by internalizing marketing activities and
focusing on relatively few transactions that provide maximum value per transaction.
We therefore hypothesize that:
Hypothesis 2a: Knowledge-intensive SMMs perform R&D and marketing
activities in-house more frequently than production activities.
Hypothesis 2b: Knowledge-intensive SMMs that perform marketing inhouse, serve commercial customers or market niches more frequently than
those that employ cooperative ventures for marketing purposes.
Location of value activities
The decision of knowledge-intensive SMMs regarding the location of value
activities is a function of two major factors: (1) comparative advantage of the home and
13
host countries (in terms of cheaper country-specific inputs such as raw materials, and
labor); (2) distance to target customers in the host country.
Frequently the technological innovation around which knowledge-intensive
SMMs build their competitive advantage is the outcome of a home country comparative
advantage that stems from local networks and clusters of knowledge-intensive firms of
which the SMM is a part (Keeble et al., 1997; Porter, 1990), as well as from the
endowment of the home country in skilled and professional labor. In addition, resource
scarcity will make it difficult to establish and operate foreign R&D facilities. Thus,
knowledge-intensive SMMs are expected to sustain their superior R&D capability by
locating it at home.
The location of production is influenced by various contradictory considerations.
As noted earlier knowledge-intensive SMMs sell a large proportion of their products
outside their home country. Therefore, these firms need to ‘pay’ a certain premium for
their location disadvantage. In the case of production this premium mainly takes the
form of higher transportation, tariff and non-tariff barrier costs. These factors create
economic pressures to locate production outside the home country through market
seeking foreign direct investment (Dunning, 1988). On the other hand scarce financial
and managerial resources may inhibit many knowledge-intensive SMMs from locating
production outside their home country.
Moreover, as many knowledge-intensive
products are in the early stages of the Product Cycle there is a need for close proximity
between R&D and production (Vernon, 1966). Since we expect R&D to be located in
the home country the latter observation acts in favor of locating production in the home
country. Thus, our expectations regarding the location of production remain
inconclusive.
14
The distance from home to host markets largely influences the location of
marketing activities as well. In the case of marketing the premium that knowledgeintensive SMM have to bare for their distance from the host market is associated with
slower response rate, higher information flow costs, as well as higher interaction costs
with potential customers in comparison to indigenous competitors (Casson 2000;
Hirsch, 1989).
Large MNCs have the advantage of being dispersed around the globe and enjoy
proximity to their target markets. Since marketing activities were argued to be a ‘core’
capability of knowledge-intensive SMMs, these firms have to overcome the abovementioned location disadvantage and locate their marketing activities outside their home
country. This does not only imply to front line sales and services personnel but also to
the whole marketing headquarters.
The above discussion lead is to hypothesize that:
Hypothesis 3a: Knowledge-intensive SMMs locate R&D in the home
country more frequently than production and marketing.
Hypothesis 3b: Knowledge-intensive SMMs locate marketing in the host
country more frequently than R&D and production.
Data
Our sample consists of publicly traded Israeli knowledge-intensive SMMs. By
focusing on firms that are traded publicly we are able to examine firms with a proven
track record of business activity. We regard the ability of such firms to go through an
IPO (Initial Public offering) as an indicator that they have survived the initial growth
phases and by that exhibit a certain degree of competitive advantage.
Israel is regarded an international leader in terms of contribution of knowledgeintensive industries to overall exports as well as in terms of the high number of Israeli
15
firms traded on NASDAQ (New York) stock exchange (Almor, 2000; Blass & Yafeh,
1998), implying that Israel has a substantial comparative advantage in these industries.
Data availability considerations led us to focus on Israeli knowledge-intensive
SMMs traded on stock exchanges outside Israel during the year 2000.
First, we identified the research sample, which was defined according to the
following criteria:
1. Knowledge-intensity. The ratio of R&D investments to sales is frequently used to
measure knowledge intensity of firms (e.g. Almor & Hirsch, 1995; Jones, 1999; Trevino
& Gross, 2002). Industry data published by Israel’s Central Bureau of Statistics, show
that manufacturing industry can be sub-divided into low-tech and high-tech, whereas
the cut-off point between the two is 5% investment in R&D out of total sales. We
therefore selected a ratio of R&D investment to sales of at least five percent (in 1999) as
the threshold of classifying knowledge-insensitive firms.
2. Size. Small and medium sized multinationals (SMMs) are not defined in literature.
Thus, in order to define a size threshold of SMMs we initially examined the accepted
definitions of Small and Medium sized Enterprises (SMEs). We chose to use ‘number
of employees’ as a measure of size. Buckley (1997), as well as Fujita (1995) and Storey
(1994), use the term SMEs for enterprises that employ less than 500 people. However,
SME definitions are based on firms operating in local markets, while in this study we
focus on firms that are small to medium sized compared to MNCs. Therefore we limited
ourselves to firms that enroll less than 1% of the average number of employees in the
world’s 100 largest MNEs (UNCTAD, 2001). Thus, the largest firm in our sample
employs about 1000 employees.
3. Multinationality. To classify a firm as multinational we required the firm to own at
least one foreign subsidiary (Fujita, 1995).
16
4. ‘Born global’ firms. Knight & Cavusgil (1996) define ‘born global’ firms as firms
that (1) sell their first product in foreign markets within three years from their inception
and (2) derive at least 25% of their turnover outside their home market. This definition
is often used in ‘born global’ firms literature. However, our observations show that this
threshold may be inadequate for firms that do have an international orientation from a
very early phase of their organizational lives, but lack on one of the two criteria. For
instance, some firms reach the point where virtually all their turnover is derived from
foreign markets when they are still fairly young, although they started to
internationalize later than three years after their incorporation. We therefore designed
two alternative criteria to be met in order to be classified as a ‘born global’ firm: (1)
The first international sale took place within three years after incorporation and the
firm’s foreign sales account for at least 25% of its turnover; or (2) The first international
sale took place no longer than 9 years after incorporation and the firm’s foreign sales
account for at least 75% of its turnover.
Initially 140 Israeli industrial firms that are traded outside Israel were
identified. Firms that, during the year 1999, invested less than 5% in R&D, employed
over a thousand employees or did not satisfy the multinationality and ‘born global’
criteria were excluded from this list. Senior management of the remaining 75 firms was
approached to take part in an in-depth, face-to-face interview. Interviews were held with
CEOs or VPs of the companies by means of a structured questionnaire. The response
rate was 71% (53 firms).
The firms in the sample can be classified according to four industries: (1)
software (40%), (2) information and communication technologies - ICT (21%), (3)
electronics (25%) and (4) ‘other’, which include pharmaceutics, biotechnology and
medical technologies (14%).
17
Basic comparisons between the 53 participating firms and the 22 nonparticipating firms did not show evidence of any response bias in terms of firm sales,
number of employees, age, industrial classification and percentage of international
sales.
[Insert Table 2 about here]
Descriptive statistics presented in Table 2 show that the firms in our sample are
young and small (both in terms of sales and number of employees). These firms have a
very strong international orientation: most of their revenues are generated from multiple
international markets rather than from the Israeli market and the average time span from
firms’ incorporation to the first international sale is short. Moreover, it is noteworthy
that 71% of the firms sold their first product outside Israel. The firms in the sample may
be characterized as knowledge-intensive both in terms of the ratio of R&D investments
to sales and the percentage of innovative, self developed products they sell.
Since we focus on firms with a proven track record of business activity, the
firms in our sample are somewhat larger and older than the firms that are usually
included in ‘born global’ firms studies (e.g. Coviello & Munro, 1997; Keeble et al.,
1997; McNaughton, 2000). However, Gomes-Casseres (1997) and Knight (2001) relate
to firms of a similar size to ours.
Findings
The Cochran-Mantel-Heanszel statistic, a non-parametric measure, was used to
test the hypotheses, detailed above, on the sample described in the previous section. The
Cochran-Mantel-Heanszel statistic serves for testing hypotheses regarding equality of
two matched distributions, measured on a categorical (nominal) scale.
The first hypothesis concerned the incorporation of value activities in the value
chain. It was hypothesized that knowledge-intensive SMMs incorporate R&D and
18
marketing in their value chain more frequently than production. Findings presented in
Table 3 show that R&D and marketing are incorporated in the value chain significantly
more frequently than production, thus supporting hypothesis 1.
[Insert Table 3 about here]
Hypothesis 1 is further supported by looking on the most frequent perceptions
of firms regarding their ‘competitive advantage’ and ‘strategic capabilities’.
Sixty
eight percent of the firms identified their ‘unique technology’ as one of their three most
important bases for sustainable competitive advantage. Seventy seven percent of the
firms thought that ‘understanding needs of client’ is among their three most important
strategic capabilities and seventy two percent of the firms regarded their ‘innovation’ to
be as such. These perceptions clearly indicate that R&D and marketing are the major
determinants of knowledge-intensive SMMs’ competitive advantage.
Hypothesis 2a stated that R&D and marketing are performed in-house more
frequently than production. Indeed, the Cochran-Mantel-Heanszel statistic shows that
production was significantly less frequently performed in-house than R&D and
marketing, thus supporting the hypothesis (Table 3).
Hypothesis 2b posed that those firms that perform marketing in-house serve
commercial customers or market niches more frequently than those that engage in
cooperative ventures. Cross tabulations showed that the vast majority of the firms in the
sample serve commercial customers (87 percent of the sample) and market niches (76
percent of the sample), however, no significant relationship was found between inhouse performance of marketing and type of customers.
Hypotheses 3a and 3b concerned the location of value activities. It was
hypothesized that R&D is the most frequent value activity to be located in the home
country and that marketing is the most frequent value activity to be located outside the
19
home country. The Cochran-Mantel-Heanszel statistic, present in Table 3, shows that a
significant difference exists in patterns of location between R&D, marketing and
production. It further indicates that: R&D is located in the home country significantly
more frequently than marketing and that no significant difference is found between
location of production and R&D (albeit significance is just above the required norm).
Marketing is shown to be located significantly more frequently outside the home
country, compared to R&D and production.
Discussion
The major contribution of this paper is in its viewpoint that firms create and
sustain competitive advantage by strengthening and protecting superior capabilities as
well as by compensating for inferior capabilities. This approach is different from the
standard interpretation of the resource-based view that relates only to firms’ superior
resources and capabilities as sources of competitive advantage. We have demonstrated
how a specific type of firms (knowledge-intensive SMMs) creates and sustains
competitive advantage by employing a strategic configuration that strengthens superior
capabilities (R&D) while minimizing disadvantages in inferior capabilities (production
and marketing).
Our findings suggest that knowledge-intensive SMMs aim to strengthen their
superior R&D capability by incorporating it in their value chain, internalizing it and
locating it at home. Knowledge-intensive SMMs tend to use outsourcing or cooperative
ventures in their production activities, since production does not constitute a core
capability. The challenge for knowledge-intensive SMMs is how to handle their
20
marketing activities. Since marketing is considered a core capability, these firms aim to
incorporate marketing in their value chain and to internalize it. They try to compensate
for their inferiority in marketing capabilities by locating it in host markets and by
focusing on market niches or commercial customers, thereby forgoing the need for
extensive global distribution and servicing infrastructure.
These findings raise two questions: 1) Is the identified strategic configuration in
fact different from the configuration of traditional MNCs? 2) Is this configuration
different from the configuration of larger knowledge-intensive MNCs?
The first question addresses similarity between the resources and capabilities of
the firms in the sample and that of traditional MNCs and seems relatively easy to
answer. Knowledge-intensive SMMs differ from traditional MNCs in size, age, the
availability of financial and managerial resources, and the knowledge intensity of
products. These differences in resources and capabilities are reflected in the value
activities that shape competitive advantage for the two firm groups. Traditional MNCs
are based mostly in traditional manufacturing industries, which are driven by the
creation of cost advantages in their production processes (Dunning, 1988). We have
showed that production has a minor role in its impact over the competitive advantage of
knowledge-intensive SMMs.
When comparing the firms in this sample to larger knowledge-intensive MNCs,
we can find differences as well. Large knowledge-intensive MNCs (e.g. Microsoft, HP,
IBM, and Intel) also create and sustain competitive advantage around their R&D and
marketing activities and therefore aim to incorporate these activities within their value
activity and internalize them. However, the difference in size magnitude enables large
knowledge-intensive firms to establish R&D subsidiaries abroad and develop a
distribution and services infrastructure in host markets through direct investments
21
(whether greenfield or acquisitions) by exploiting their superior financial and
managerial resources, their monopolistic power and their brand name. This enables
larger knowledge-intensive firms to target mass-market consumers and not necessarily
aim at market niches or commercial customers.
Our findings imply that while internationalization is not limited to large firms, a
competitive international strategy of knowledge-intensive SMMs differs significantly
from that of large MNCs. This strategy is based on serving relatively few, large clients,
who are dispersed around the world, and who are mostly organizations themselves, by
marketing activities that are located close to them. R&D activities on the other hand, are
mostly based on exploiting the comparative advantage of the home country, whereas
production has a much lesser role in gaining competitive advantage internationally.
Although beyond the scope of this paper, the fact that knowledge-intensive
SMMs target mainly market niches and commercial customers raises the question of
firm growth. How, if at all, can such a SMM become a large MNC? If these firms wish
to grow, sooner or later they will need to penetrate mass consumer markets. Since we
have argued that size and experience constraints may inhibit knowledge-intensive
SMMs to target such markets, it seems unavoidable for these firms to pursue
cooperative ventures in order to enable growth. However, cooperative ventures may
play a contradictory role. While they may compensate for the cost and difficulty of
creating a distribution and after-sales services infrastructure in host markets (GomesCasseres, 1997), they also threaten the ability of knowledge-intensive SMMs to protect
their proprietary technological know-how their clientele market base. Is this conflict
inevitable? Will knowledge-intensive SMMs need to risk their proprietary know-how
and client base if they wish to survive in the global market place? Are there any
particular strategies that enable firms to protect their know-how while leveraging on the
22
distribution and services infrastructures of larger MNCs? All these are critical questions
that should be addressed in future studies.
23
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Strategic Management
Chart 1: Strategic Configuration and Capability Comparative Position
Capability Comparative Position
Inferior
Superior
Yes
Core
Target markets
in which
inferiority is
minimal
Strengthen
capability
superiority
Competency
Acquire
capability
from external
organizations
Contingency
No
decisions
(Incoming FDI)
Table 1 – Strategic configuration as a determinant of competitive advantage of
knowledge-intensive SMMs
Value activity:
R&D
Production
Marketing
Incorporation of
value activities in
value chain
Incorporated within
the value chain.
Not necessarily
incorporated in the
value chain.
Incorporated within
the value chain.
Internalization of value
activities
Location of value
activities
Kept in-house.
In the home country.
Conducted through
strategic alliances.
No particular
preference.
Kept in-house to serve
market niches and
commercial customers.
In the host country.
29
Table 2 –Descriptive statistics of Israeli knowledge-intensive SMMs (for the year 1999)
Variable
Year of establishment
Average
1988
Range
1950-1996
46
274
11
32
2.8
0-338
15-1020
0-60
1-86
0-9
25
5-246
54
0-100
Sales ($, M)
No. of employees
Percentage of sales in Israel
No. of foreign markets
Time span between incorporation and first
international sale
Ratio of investment in R&D to sales
(percentage)
Percentage of sales being of innovative, self
developed products
Table 3 – Distribution and Cochran-Mantel-Haenszel (CMH) statistics for strategic
configuration of value activities
Incorporation within VAC:
R&D and M vs. P
Internalizing value activities:
R&D and M vs. P
Location of value activities in
the home country (Israel)
Location of value activities in
Israel: R&D vs. P
Location of value activities in
Israel: R&D vs. M
Location of value activities in
Israel: P vs. M
Distribution
(percentage)
R&D-100
P – 76
M- 98
R&D-80
P – 28
M- 72
R&D-64
P – 44
M- 9
R&D-64
P – 44
R&D-64
M- 9
P – 44
M- 9
Legend
R&D - Research and Development
PProduction
MS Marketing
30
df
CMH
statistic
Probability
1
7.14
≤.0075
1
15.70
≤.0001
2
37.88
≤.0001
1
2.57
≤.1090
1
28.13
≤.0001
1
20.00
≤.0001