Born global or Uppsala steps: which path fits a Vietnamese SME?

A software studio in Da Nang has its first paying customers in Australia and Japan and none in Vietnam. A furniture workshop in Binh Duong gets its first order from an agent in the US after ten years of selling only at home. Both are "international", but should they follow the same path? The Uppsala model says firms raise their commitment step by step; the born-global literature says some firms are international from the start. This post sets the two side by side and then applies them to the two invented SMEs.

What does the Uppsala model say about going step by step?

Uppsala holds that internationalisation is a chain of small decisions, because in the authors' model lack of knowledge about foreign markets is an important obstacle (Johanson and Vahlne, 1977, p. 23). Johanson and Vahlne (1977) start from observations of Swedish firms: they typically began by exporting through an agent, then set up a sales subsidiary, and sometimes ended up producing locally (Johanson and Vahlne, 1977, p. 24). In the four engineering firms they studied, 56 of 63 sales subsidiaries were preceded by an agent, and no firm produced in a country where it had not first sold through an agent or a sales subsidiary (Johanson and Vahlne, 1977, pp. 24-25).

The mechanism lies in the kind of knowledge involved. The authors separate objective knowledge, which can be taught, from experiential knowledge, which can only be learned through doing. Abroad, a firm has no ready-made base of experience to add to, so it has to build it up during operations in that country. They think experiential knowledge is especially important for activities that rest on relations between people, such as marketing complex, software-intensive products (Johanson and Vahlne, 1977, p. 28).

The model also says when bigger steps are allowed: when the firm has very large resources, when market conditions are stable and homogeneous, or when it has plenty of experience of similar markets (Johanson and Vahlne, 1977, pp. 30-31). The 1977 paper admits its predictive value is limited because it sets aside the decision-maker's own style (Johanson and Vahlne, 1977, p. 23). Forty years on, Vahlne and Johanson (2017) recast it as a general model of how the multinational business enterprise evolves (Vahlne and Johanson, 2017). I have read only the abstract of that paper.

What is a born global firm, and what lets it exist?

An international new venture is an organisation that, from inception, seeks significant competitive advantage from using resources and selling outputs in several countries. Oviatt and McDougall (1994) focus on the firm's age when it goes international, not its size, and state plainly that direct investment is not required (Oviatt and McDougall, 1994, p. 49). The site's library treats "born global" as another label for this type international new venture.

The article sets out four elements. Its abstract calls all four necessary and sufficient for existence (Oviatt and McDougall, 1994, p. 45), but the text says the first three are the necessary conditions for existence and are not enough for sustainable competitive advantage, which needs the fourth (Oviatt and McDougall, 1994, p. 56).

For a software SME the element to look at first is location advantage: private knowledge moves at near-zero marginal cost, and software, once written, can be copied again and again at insignificant extra cost (Oviatt and McDougall, 1994, pp. 55-56). The fourth element is the flip side: knowledge that spreads easily is hard to keep unique, so it has to be protected by patents, secrecy, difficulty of imitation, licence pricing or networks (Oviatt and McDougall, 1994, pp. 56-57).

As for the numbers of the time: in a random nationwide sample of small internationalised US manufacturers studied by Brush, 17 firms (13%) went international in their first year. An Ernst & Young survey of 303 North American electronics firms found 53% operating domestically in 1987 and 17% in 1992, with 9% expected by 1997 (Oviatt and McDougall, 1994, p. 48).

What three liabilities weigh on a young firm that goes abroad early?

Speed has a price. The framework on the triple liability of young international firms names three: newness (no track record), smallness (thin resources) and foreignness (the outsider's disadvantage). For the third, the typical response is licensing, franchising and networks.

I name the three liabilities from the library framework summary. Oviatt and McDougall's article holds the pieces. New ventures usually lack the resources to own many assets and must rely on alternative structures (Oviatt and McDougall, 1994, p. 54). A firm transacting abroad is at a disadvantage against indigenous firms, through trade barriers and an incomplete grasp of laws, language and business practices (Oviatt and McDougall, 1994, p. 55). And the article cites research showing that start-up exporters reported more problems with export operations than mature small exporters (Oviatt and McDougall, 1994, p. 47).

Which path does the evidence favour?

The sources I read do not name a winner. Oviatt and McDougall argue that stage theory needs more than a minor adjustment, because the three exceptions in the Uppsala account (large resources, stable markets, similar experience) do not seem to apply to new ventures (Oviatt and McDougall, 1994, pp. 50-51). They also say the established theories are not wrong and still apply to some firms and industries (Oviatt and McDougall, 1994, p. 52). McDougall, Shane and Oviatt (1994) used 24 case studies and concluded that the formation of international new ventures is not explained by existing theories from international business research (McDougall et al., 1994).

Chetty and Campbell-Hunt (2004) offer another view. They analysed 16 New Zealand firms and found that many attributes of the born-global model were also present in firms that began along traditional lines and were then radically transformed as they reached global scale. They call the consequence of very rapid international growth "the gusher", with destabilising effects as the firm is taken in unexpected directions. In their view, the born-global model has much in common with the internationalisation of small entrepreneurial firms, and it demands more aggressive learning (Chetty and Campbell-Hunt, 2004).

None of these sources measures which path yields better profit or survival. This post can say which conditions make each path reasonable, not which path is better.

Which path should a Vietnamese SME take? Five questions and two invented examples

Ask five questions in order: does your asset copy at almost no cost; do customers need direct relationships; is the target market close or far; has anyone on the team worked there; can the firm survive a sudden surge of growth? The two examples below are invented: the studio, the workshop and the details are mine.

Cỏ Ba Lá Studio in Da Nang has 25 people and sells an appointment-booking app to beauty salons; its first paying customers are in Australia and Japan. Nhà Cây Furniture in Binh Duong has 150 workers and sells timber furniture; its first US order came through an agent.

The studio leans towards born global because its knowledge sits in software, which Oviatt and McDougall describe as copyable at near-zero marginal cost (Oviatt and McDougall, 1994, pp. 55-56). But Johanson and Vahlne say experiential knowledge is especially important when marketing software-intensive products (Johanson and Vahlne, 1977, p. 28). It should hire a customer-support person who has lived in Australia or Japan. Oviatt and McDougall also suggest that founding teams must usually include internationally experienced business people, so that the networks protecting a venture's knowledge can exist (Oviatt and McDougall, 1994, p. 57). If nobody on the team has that, the fast path is riskier than the table suggests.

The furniture workshop suits the step-by-step path because its value lies in production at home and every extra order is real goods. The first move is to do what the Swedish firms did: run the US agent for a year or two to learn about customers, standards and channels, and only then consider a sales subsidiary. This suits you if you can bear the time it takes to learn. It does not suit you if the single agent is a bottleneck: in that case, according to Johanson and Vahlne, the quickest way to get market experience is to hire a representative's salesman or buy all or part of the firm, though that experience is often not for sale (Johanson and Vahlne, 1977, p. 29).

The starting path does not lock you in. Chetty and Campbell-Hunt found that firms starting traditionally could still be radically transformed on the way to global reach (Chetty and Campbell-Hunt, 2004).

Going deeper: what does each source tell us, and what could I not check?

I read Johanson and Vahlne (1977) and Oviatt and McDougall (1994) in full, through automated text conversion of the PDFs in which a few lines were cut, so I use only passages that read clearly. Johanson and Vahlne's data are Swedish firms in studies from the 1960s to the early 1970s; Oviatt and McDougall rely on press reports and case studies from the early 1990s. None of the sources is about Vietnam.

For Vahlne and Johanson (2017) and Chetty and Campbell-Hunt (2004) I have only the abstracts; for McDougall, Shane and Oviatt (1994) I have only the one-sentence summary of results on the publisher's page. I do not know how they measured performance or chose samples, so the post does not state those details. The application to Vietnamese SMEs is my own inference and has not been checked against data on Vietnamese firms.