ENTREPRENEURSHIP AND SMALL FIRMS

DEAKINS AND FREEL

3RD EDITION

STUDENT’S ON-LINE LEARNING RESOURCE MATERIAL

CHAPTER 11: INTERNATIONAL ENTREPRENEURSHIP AND THE GLOBAL ECONOMY

Introduction

This chapter obviously is inter-connected to other chapters, especially chapter 10, on entrepreneurial growth firms and chapter 8, on the knowledge economy and small firms. Notwithstanding this inter-connectedness, however, the chapter is different from others since it discusses international differences in entrepreneurial activity and culture. In doing this the chapter re-visits concepts that were introduced in chapter 1, especially Schumpetrian and Kirznerian concepts of entrepreneurship, but it also re-visits empirical evidence discussed before on entrepreneurial activity and the Global Entrepreneurship Moniter (GEM) project for some of the project’s results and findings.

Although, some of the issues discussed in this chapter are different, nevertheless they can be applied to other areas. For example, the discussion of entrepreneurial activity in transition economies discusses some of the barriers to developing such activity and the importance of networking, this bears some comparison to the barriers to growth firms discussed in chapter 10 and the importance of networks and co-operative behaviour discussed in chapter 9. In addition a mini case study introduced in this chapter, Nallatech, can equally be discussed in the light of the growth chapter, chapter 10 and the innovation chapter, chapter 7.

Nallatech Review questions: suggested answers

Why are technology-based entrepreneurs in global markets from an early stage?

Technology-based entrepreneurs are in global markets because of the specialised and technology-related features of their products. They are often, by definition, unique and solve problems that have global applications. We have seen this with a previous case, that of Aquamotive who were automatically in a global market due to the application of their fish-feeding process in fish farms. In the case of Nallatech, their breakthrough came with the contract with Xilinx to develop a board for their own design equipment, in the Xilinx XPERT programme. This automatically gave them a global presence.

Why is it often necessary for technology-based entrepreneurs to operate with an overseas office (rather than through an agent)?

Technology-based entrepreneurs are, as discussed, in global markets; but they have a choice in terms of entering those markets. Operating through an agent means that there is a loss of control of the distribution of the product and remoteness from the customer. In addition there may be after sales customer care that will require and overseas office. Thus the advantages of an overseas office, control and closeness to the customer are important attributes of this method of operation for a technology-based entrepreneur, making them effectively multi-national enterprises (MNEs).

Think Points 11.1: Suggested answers

1. What are the main forces of increased globalisation?

The main forces of globalisation are discussed in the main text and include: the development of the knowledge economy, increased speed of communications, greater mobility of the labour force and labour skills, new technological developments that favour smaller firms (e.g. biotechnology/micro-technologies), increased pace of change requiring flexible and speedy responses and the growth of capital markets.

One of the main factors in this has been the increased speed of communication, the rapid sharing of information and the immediacy of events. This has been no more dramatically illustrated than the events of September 11th when all parts of the globe were immediately affected by such events.

2. Why should no entrepreneur ignore these forces of globalisation?

An entrepreneur cannot ignore these effects even if they are trading only in local markets. Events in other parts of the world will affect all entrepreneurs, hence the example of September 11th. Ignoring global events will lead to strategies that are inappropriate for the modern economy. Entrepreneurs who do not develop appropriate strategies are likely to struggle to survive and certainly would not achieve successful growth.

3. What methods and approaches might enable a firm to become international in operation? And why might international entrepreneurial strategies vary?

The main text discusses a number of approaches to trading internationally; these include operation through agents or through an overseas operation. The overseas operation may involve a new start-up or take-over of an existing operation or a joint-venture. Alternatively the product could be made abroad under licence, retaining control of production but reducing costs.

The international entrepreneurial strategy from these options that is chosen will depend upon the nature of the product or service, the stage of production, the age of the firm, available resources and the sector that the firm operates in. We have discussed situations in which an entrepreneur will want to be close to the customer and invest in operations abroad, operating as an small firm MNE; other firms may want to operate through agents or partners retaining production and operations based in the UK. In other cases, such as, Aquamotive, we indicated that joint-ventures had advantages. Thus such strategies will vary and will depend upon the nature of the firm and the nature of the product and service.

4. Distinguish between high level and low level entrepreneurial activity. Give examples of countries that demonstrate such different levels of entrepreneurial activity.

High level entrepreneurial activity is regarded as being innovative and technology-related. It assumes that entrepreneurial activity is characterised by Schumpeterian innovation and technological investment and advance. The infrastructure and environment will be conducive to supporting such ‘high level’ entrepreneurial activity either through venture capital or through the banking system.

By contrast low level entrepreneurial activity is characterised by market trading activities that have little value-added. It assumes that entrepreneurial activity is characterised by Kirznerian opportunity exploitation through the entrepreneur acting merely as middleman and perhaps not engaged directly in production or innovation. It is likely also that the infrastructure to support entrepreneurial activity will be under-developed and perhaps deficient in financial institutions prepared to provide risk capital.

5. What are the main components of an economy that might affect the level of entrepreneurial activity according to the GEM approach?

The GEM model is based upon factors that affect entrepreneurial opportunity and factors that affect entrepreneurial capacity. There are four principal factors affecting both opportunities and capacity:

Demographic features; such as age structure, migration and location.

Education; used effectively as a surrogate for the entrepreneurial qualities inn the population. NB GEM assumes a liner relationship between education and entrepreneurial capacity but our discussion of education and growth firms (chapter 10) suggests that the relationship is not linear.

Economic infrastructure; includes the supportive environment for entrepreneurial activity such as the extent and development of financial institutions.

Culture; probably the most difficult to define, since cultures can be very different but still support entrepreneurial activity, however, GEM does not attempt to measure culture, given that this is a subjective and judgemental concept.

Think Points 11.2: Suggested answers

1. Give examples of nations that may be considered to be ‘economies of transition’ for the level of entrepreneurial activity?

Transition economies is the term given to nations that were formerly communist controlled and part of the Soviet Bloc. Transition economies is a term that could equally be applied to other nations that are gradually opening up their markets to advanced nations, such as China. However, transition economies are generally those from Eastern Europe and the Balkan states, they are states at present seeking full membership of the EU. They include the Baltic states; such as Latvia and Estonia; mid Eastern European states; such as Poland, Hungary and Czechoslavakia and the Balkan states; such as, Croatia and Bosnia. Although not a former communist state, Turkey is sometimes included and is also seeking full membership of the EU.

1. Why are there likely to be large differences in the levels of entrepreneurial activity in such nations?

Obviously with such a wide range of nation states, each one will be at a different stage of development. Historically, they all have key differences in their development that has influenced the development of entrepreneurial activity. For example, Poland is regarded as more advanced since it always had some entrepreneurial activity and therefore some entrepreneurial tradition. Other nation states will have no such history and therefore have had more difficulties developing entrepreneurial activity. This is notwithstanding the fact that some countries (the Balkan states) have had economic development disrupted by civil war.

1. What features are likely to mark out the more advanced economies that are in this category?

The main text discusses some of the features of ‘later stage’ transition economy development. These features are considered to be:

An essential legislative framework in place; a financial infrastructure adjusting to needs of private sector; a limited supply of investment finance; a developing business support infrastructure but still not comprehensive and increasing competition from other indigenous entrepreneurs and small firms (from Smallbone and Welter).

1. Why should levels of networking, trust and co-operative behaviour affect the level of entrepreneurial activity in different economies whether advanced, in transition or emergent?

Networking characterises entrepreneurial activity in advanced, but especially prosperous regions in advanced economies with a high level of SME activity such as areas of Spain (Valencia), Italy (the north-west); Germany (Baden-Wurttemberg) USA (Massachusetts). To be effective such networks depend on trust and co-operative behaviour. Within any nation; regions will be more prosperous than others and this will depend on networking behaviour; which in turn depends on trust and co-operation. This will be true whether we are dealing with developing, transition or advanced economies.

Think Points 11.3: Suggested answers

1. Give examples of nations that may be considered to be ‘emergent economies’ for the level of entrepreneurial activity?

These are the developing nations that contain the majority of the world’s population. They include South America countries; such as Brazil and Argentina; African countries such as Kenya and Nigeria and South Asian countries’ such as India and Pakistan.

1. Why are there likely to be large differences in the levels of entrepreneurial activity in such nations?

There will be large differences for similar reasons discussed earlier. Historically such countries have had very different status; in some cases they will be former colonies; with very different pattern of trading activities. Independence has been granted at different times and like transition economies some have suffered civil war. A complex range of factors will therefore affect the stage of entrepreneurial development.

1. Using factors discussed in this chapter, why might they encourage high levels of entrepreneurial activity in such nations?

Entrepreneurial activity can still be innovative, even if technology may be seemingly low level. This allows for greater value-added to contribute to GDP than mere trading activities. India, for example, has a thriving second-hand car parts industry to keep old cars on the move. This has provided scope for innovative activity, manufacturing spare parts and co-operative behaviour.