Tuesday, February 2, 2016

How Start-ups from Emerging Economies make Inroads Abroad

By Associate Professor of International Business and Strategy Shameen Prashantham

China's Lenovo and India's Tata are often mentioned in conversations about companies from emerging economies that have had success at the international level. However often-overlooked newer ventures can, and do, win globally. How do they do it?

Generally speaking, new ventures – from both developed and emerging economies – globalise by leveraging network relationships (related video). This is because entering international markets typically involves building and leveraging these relationships, and new ventures rarely have the wherewithal to internationalise exclusively on the basis of their own resources.

Network relationships are important to new ventures generally, but in emerging economies like China and India their significance is even greater. In such countries, new ventures have greater constraints to overcome than do their counterparts in advanced economies. Notably, they typically operate in weaker entrepreneurial ecosystems, lack exemplars and role models, and lack legitimacy in the eyes of prospective overseas customers.

Centurion AD, a new venture in China's Zhejiang province which is well known for its entrepreneurialism, did a good job of strategically leveraging network relationships to facilitate its foray overseas. The venture is the brainchild of Dwayne Mason who had previously worked in Shanghai following several years with Sony in the US.

Mason founded Centurion AD in association with a former Chinese colleague, Leon Zhang, with the goal of targeting Western markets with offshored graphic art and animation production. Here's what the company did right:

  • Centurion leveraged network relationships proactively. For instance, Mason went back to one of his previous employers in the US, and managed to persuade them to give Centurion AD some business. This enabled the fledgling start-up to rapidly get a name on its client roster.

  • Centurion leveraged network relationships discerningly in that it tapped different types of networks in different ways. Thus certain local strong ties in China were leveraged for much needed capital investment to help it get started, whereas overseas weak ties in North America were leveraged to gain new international business.

  • Centurion leveraged network relationships reflectively in that it sought to attain new learning outcomes about, for instance, new international markets that it might tap. A case in point is the manner in which Leon Zhang leveraged former employer relationships through which he spent time gaining information and advice about the Scandinavian market. These relationships proved to be a valuable source of learning about subtle differences between European and US clients. This knowledge eventually led to new business in Europe and widening of the company’s international market portfolio, thereby ensuring it was not overly dependent on the US market.

From low cost to high end, from easy-to-access to difficult-to-access networks

When seeking to pursue higher levels of technological innovation, one of the key discernments that internationalisation-seeking new ventures need to make is between the relative benefits of easy-to-access versus difficult-to-access network relationships.

Typically, relationships with other actors of a similar status to oneself are easier to access. At the interpersonal level, this could be co-ethnic ties. So Chinese and Indian entrepreneurs may find it relatively easy to access fellow-Chinese and fellow-Indians, respectively, within their Diasporas. Such relationships can provide an excellent base for initial explorations in a foreign market. To illustrate, a vast Chinese merchant Diaspora in Western markets hails from the eastern port city of Wenzhou. Wenzhounese merchants are widely admired, and occasionally envied, for their mutual solidarity.

Of course operating within specific ethnic Diasporas can yield solidarity, but they can also be somewhat limited in their capacity to sustain internationalisation of new ventures over time. This is because in such networks everyone tends to know everyone else, which means having multiple relationships does not, beyond a point, necessarily generate novel  information about business opportunities. Thus part of the challenge of leveraging networks is to recognise the limits of relationships, such as ethnic networks, that are easy to build and can help early on – but may have limited benefits to offer in the longer run, especially for highly innovative ventures which need a constant flow of novel information, ideas and opportunities.

Therefore, some other less easy-to-access networks must also be considered if the new venture's internationalisation is to be sustained over time. At the interpersonal level, going beyond co-ethnic ties to build non-ethnic ties overseas could be crucial to ensuring growth in the medium to long term. Similarly, at the inter-organisational level, while relationships with other local smaller firms are generally easy to forge, and might be a useful source of moral support and advice regarding common pitfalls encountered whist attempting to internationalise, cultivating and leveraging other more difficult-to-access relationships may be more effective for new ventures, with high innovation aspirations.

Difficult-to-access MNC relationships

My research over the past decade in India, and over the past three years in China, suggests that relationships with large multinational corporations (MNCs or gorillas) represent a potential conduit to international markets – in particular for highly innovative new ventures. New ventures need to recognise that MNCs remain important and powerful actors on the global stage. Partnering with MNCs, although not easy, can yield mutual benefits (related video). While it is true that new ventures could gain considerably from MNC relationships through enhanced legitimacy, resources and opportunities, MNCs can also benefit from the innovation, nimbleness and novel perspectives that new ventures are capable of bringing to the table.

In emerging economies such as China and India, in particular, interesting opportunities exist because MNCs recognise that these are vitally important markets and so give them considerable attention. And in emerging economies, MNCs need to work hard to be innovative and successful, thus rendering valuable the complementary assets that indigenous new ventures can create.

By recognising that MNC networks can be a useful – although not the only – pathway to international markets, new ventures in emerging economies can increase their chances of internationalising effectively.

One of the most striking examples of this is Skelta, a Bangalore-based software venture that built its software products on Microsoft platform technology. Its CEO, Sanjay Shah, worked hard with the other founders of the company to cultivate a relationship with Microsoft. Because of the quality of their innovation, they were able to get the attention of Microsoft managers in the Indian subsidiary. Shah and his colleagues then actively participated in Microsoft conferences and other events in the US, and were able to make new connections in other subsidiaries of Microsoft. They also formed relationships with other small companies from around the world who were also Microsoft partners. These companies became Skelta's distributors in over 20 countries. In this way, Skelta was able to use its relationship with Microsoft to rapidly build a presence around the world.

Chinese new ventures have also been successful in partnering with large multinationals. An excellent example is the Beijing-based company, Gridsum. Founded by Qi Guosheng, a brilliant young computer scientist who had interned at Microsoft Research while studying at Tsinghua University, Gridsum has been able to build a high-profile relationship with Microsoft. Having built its technology on Microsoft platform technology, Qi was able to leverage the Tsinghua alumni network to foster links with another Tsinghua alumnus, Xu Yun, a Microsoft manager who had just been tasked with building start-up relationships. They built a strong partnership which led to Gridsum’s innovative technologies being showcased to senior Microsoft executives, and eventually led to an event in Beijing in which Qi was one of two keynote speakers; the other was the then CEO of Microsoft, Steve Ballmer.

To conclude, undertaking new venture internationalisation calls for special capabilities, most of all the capacity to cultivate and leverage network relationships strategically. As new ventures uplift their innovative capacity they are more likely to need difficult-to-access network relationships in order to access the novel information, ideas and opportunities they need to succeed. This is vitally important for emerging new ventures that seek to be highly innovative and to win not just at home but globally. A particularly important pathway to achieving this is by dancing with gorillas, the big name MNCs. This is not for the faint-hearted – but for new ventures that pull it off successfully, the payoff can be considerable.

Shameen Prashantham is Associate Professor of International Business and Strategy at China Europe International Business School (CEIBS). His research and teaching interests relate to international entrepreneurship and strategy (related video).

This article was first published by The Economist Intelligence Unit.