value insights

Global entrepreneur strategy: creating new combinations and businesses- Valutrics

Sharing knowledge across countries is a key aspect of the global entrepreneur strategy. Global companies are establishing R&D facilities in multiple countries to tap into diverse local talent. Companies such as Cisco Systems, GE, IBM, Intel, Motorola, and Texas Instruments have established R&D facilities in India and filed significant numbers of US patent applications. GE, IBM, Intel, Microsoft, Motorola, and other companies also have research centers in China. Just as production is carried out by the global factory, so R&D is fragmenting into the global lab – with stages of research performed at the most effective location.
Having established global R&D networks, these companies benefit by
applying the technology developed in each center across their international
operations. US pharmaceutical companies conduct R&D in multiple countries
and transfer technology within their organizations, and also extensively
license drugs from independent inventors in Europe and Japan. There also
is growing evidence of globalization of R&D. China, India, and other emerging
market countries contributed 17 percent of world R&D expenditures
although they provided a small share of inventions, with less than 1.5 percent
of patent families.
The global entrepreneur strategy involves bringing together buyers and
sellers across borders in new ways. Adam Smith observed long ago that innovations
are made by “men of speculation, whose trade is not to do anything but
to observe everything; and who, upon that account, are often capable of combining
together the powers of the most distant and dissimilar objects.” The
global entrepreneur discovers new forms of business organization, new types
of contracts, new sources of supply, new ways of serving customer needs, and
new applications for R&D. Entrepreneurs then act as international interme-
diaries between suppliers of technology and those who derive benefits from
employing the new technology, whether they are consumers or firms.
The global entrepreneur establishes new businesses that span borders. The
international context presents some difficulties for the entrepreneur, particularly
in developing countries. Obstacles to new businesses include restrictions
on hiring and firing workers, registering property, protecting investors,
enforcing contracts, and closing a business. Most significantly, the time it
takes to start up a business varies greatly across countries, mostly because of
differences in government regulation. The countries with the fastest startup
times are Australia (2 days), Canada (3 days), Denmark (4 days), the US
(5 days), Puerto Rico (7 days), France and Singapore (8 days). The countries
with the slowest startup times include Venezuela (116 days), Azerbaijan
(123days), Burkina Faso (135 days), Angola (146 days), Indonesia (151 days),
Brazil (152 days), Mozambique (153 days), Democratic Republic of Congo
(155 days), and Haiti (203 days).

The World Bank found that procedural complexities, bureaucratic delays,
the cost of official fees, and minimum capital requirements posed challenges
for entrepreneurs in many countries. The global entrepreneur strategy for an
international business should be adjusted to recognize country differences.
The international business manager may avoid creating subsidiaries in some  countries with high transaction costs and high costs of starting a business. In
some countries, however, the international business may recognize an opportunity
to start up new businesses by using its expertise to speed up the process
of establishment. The global business can use its access to international capital
markets to provide the necessary startup capital. The global business can also
apply its knowledge and investment to assist local entrepreneurs in establish-
ing new business. This can provide new customers, suppliers, and partners for
the international business in emerging markets.
Entrepreneurs create firms that offer new combinations of products,
processes, and transactions. Established companies or entrants create
entrepreneurial innovations by bringing together their suppliers and customers in
novel ways. Companies developing and applying entrepreneurial innovations
need not be the original creators of product, process, or transaction innovations.
Rather, they bring one or more of those innovations to the market
place. Entrepreneurial innovation creates competitors with original combinanations
of products and services, manufacturing technology, and transactions.
The noted economist Joseph A. Schumpeter describes an entrepreneur as
someone who introduces technological change to the market place. He gives
the now-classic example of an individual who first introduced the power loom
to some segments of the textile industry during the Industrial Revolution in
Britain; prior to that time the textile industry had relied on manual labor. The
entrepreneur does not need to be a manufacturer, either of the capital equip-
ment or of the final product. The profit earned by the entrepreneur is not a
return to ownership of capital equipment nor is it a return to ownership of
the firm through the provision of finance. The entrepreneur’s profit is not a
return to the research that produced the innovation. Finally, the entrepreneur
does not need to be the risk bearer, unless he chooses to self-finance.
The entrepreneur earns a return from making the deals needed to introduce
the innovation, and by founding new businesses. By introducing the power-
loom to the textile industry the entrepreneur earns the initial returns due to
the increased productivity in textile manufacturing. Generally, he earns the
initial returns to the new combination, but after a time competitors imitate or
surpass the innovation, eroding the returns.

Entrepreneurs discover arbitrage opportunities. Arbitrage, as we have seen,
refers to profit making activities that connect suppliers and customers. The
firm resells or transforms products and services obtained from suppliers to
meet the needs of its customers. Arbitrage profits depend on rapid action
since arbitrage opportunities can be eroded in the blink of an eye in the most
competitive markets. Managers must have up-to-date knowledge of shifting supplier capabilities and changing customer requirements. Managers must
develop the ability to recognize these opportunities and to execute rapidly the
necessary transactions.
What makes entrepreneurial arbitrage possible is the existence of substantial
market frictions; without these frictions, arbitrage opportunities would be neg-
ligible. Transaction costs are pervasive in international business, including the
costs of gathering and comparing price and product information and the costs
of searching for customers and suppliers. The ability to create better transac-
tions is offset by the potentially high costs of negotiating, writing, and monitoring
contracts. Moreover, managers have different perceptions and possess
asymmetric information about technology, customer characteristics, and supplier
capabilities. Natural limitations on the cognitive capacity of market
participants constrain their ability to discern complex market opportunities, even
with the aid of advanced data processing techniques.
Entrepreneurial innovations combine customers and suppliers in new
ways, through new products and services, or by adding new customers
and suppliers. To create entrepreneurial innovations requires managers to
monitor markets continually for potential arbitrage opportunities. The tools
of external analysis of customers, suppliers, competitors, and partners out-
lined previously are essential in discovering new combinations.
Managers should ask some or all of the following questions:
• Are there innovative products and services that have not been brought to
target countries that would serve customer needs?
• Are there customers whose needs are not being addressed by competitors?
• Are there advances in transaction technology that permit the introduction
of new goods and services?
For established companies, discerning transaction opportunities depends on
the encouragement of creativity within the organization. The “Star Analysis”
should support these activities.

An important source of entrepreneurial returns is to bring existing
technology to new applications. In addition, entrepreneurs bring new technologies
to market by acquiring the technology from inventors and reselling it to
companies that will apply it to produce goods and services. Identifying technology
for acquisition requires monitoring innovative startup companies,
university and government laboratories, and other technology sources.
Global managers need to determine the quality of the company’s business
processes and its ability to develop innovative transaction technologies:
• How sophisticated are its customer transactions, including sales and
customer service?

• How effective are its supplier interfaces?
• How efficient are its back-office systems?
• How well integrated are its demand-side management systems and supply-
chain management systems with the company’s enterprise management
The manager should determine how well the company’s cross-border trans-
action systems perform in comparison with market alternatives. In addition,
the manager should consider the organization’s ability to carry out improvements
in transaction technology, or whether it should rely on customers, sup-
pliers, or partners for such enhancements.
To innovate as a global entrepreneur, the company must continually refine
and improve its market monitoring capability. Managers need to determine
the company’s ability to identify new technologies and customer applications.
It is commonly recognized that organizations can become less entrepreneur-
ial over time: companies may become less willing to take risks or to embrace
different approaches to the business. Managers should adjust internal rules
and procedures to take advantage of market opportunities.
The global firm disperses its value added activities around the world.
The interactions between the parent company and subsidiary managers are
important drivers of company decisions. Julian Birkinshaw, in his study
of entrepreneurship in global firms, emphasizes the benefits of internally
driven changes in strategy and organizational structure. Birkinshaw notes
that local subsidiaries in international business should take the initiative
because they are at the intersection of the local market, the company’s internal
market, and the global market. The manager of the local subsidiary can act
as an entrepreneur by taking the initiative for change. Birkinshaw points out
that even though MNCs have a strategic imperative to listen to the ideas and
advice of subsidiary managers, “the evidence clearly shows that many MNCs
disregard it.”
The global entrepreneur strategy yields a competitive advantage for
the international business that continually creates innovative cross-border
transactions. By drawing on inventions from its dispersed R&D units and
transferring that technology around the world, the international business
creates global market innovations. By considering carefully the ideas of local
managers, products from subsidiaries, and business methods from local
units, the international business gains a richer and diverse source of business

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