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ACCELERATED INTERNATIONALISATION OF KNOWLEDGE

INTENSIVE SMES: ESTONIAN CASES

Kalev Kaarna1

1University of Tartu, Estonia, kalev.kaarna@gmail.com

Abstract

The objective of the paper is to analyse the cases of accelerated internationalisation based on an

integrated model. The model is qualitative and is based on causal logic for integrating different research

results and principles of different theories applied in the field of International Entrepreneurship. The purpose

of the model is to build on the bases of internationalisation theory (U-model, I-model) and advance it further

in order to match the new realities, where knowledge intensive SMEs expand rapidly to global markets and

use several market entry models simultaneously.

The model is used for analysing accelerated internationalisation of three Estonian origin knowledge

intensive companies. Longitudinal case study method is used for analysing cases of two knowledge-intensive

Estonian SMEs. The analysis of cases gives evidence supporting the model, and raises questions about some

assumptions widely used in International Entrepreneurship literature. Implications for managers and

suggestions for further research are made.

Keywords: accelerated internationalisation, Born Global, International New Venture, International

Entrepreneurship, theories of internationalisation, business model, market commitment

Introduction

Understanding internationalisation of innovative companies, which base their growth on knowledge

intensive products and services, has become very actual during recent decade. International entrepreneurship

(IE) (McDougall and Oviatt, 2000) is a young research field dedicated to understanding the phenomenon of

accelerated internationalisation of companies. Currently the main focus has been technology or knowledge

intensive companies. Yet the research field has little theoretical background due to its phenomenological

nature. The start of research is the contradiction between SMEs becoming global right from founding and the

incremental internationalisation process described by such approaches as U-models (Johanson & Vahlne,

1977) and I-models (Bilkey & Tesar, 1977). The incremental view suggests step-by-step internationalisation

from home market to more psychically distant markets after the company has acquired sufficient knowledgeabout the foreign market. Yet researchers have found that either start as global companies or use multitude of

market entry modes simultaneously (Andersson & Wictor, 2003; Crick & Jones, 2000; McDougall et al.,

2003). Current stage of International Entrepreneurship research is in the phase, where different authors

suggest merging several theories in order to better describe and analyse the behaviour of knowledge

intensive companies and the phenomenon of accelerated internationalisation.

The objective of the paper is to analyse the cases of accelerated internationalisation using a

qualitative model, which is based on causal logic and integrates different research results and theories. d.

The research methods are causal qualitative analysis for building the model and longitudinal case study.

Longitudinal case study method is used for analysing cases of two knowledge-intensive Estonian companies.

Case companies were chosen due to their relative success in internationalisation and different

internationalisation paths. Substantial volume of publicly available information from newspapers, the

companys homepages, and the commercial register, including the company's annual reports, were gathered

and analysed. Public information, including interviews with CEOs available in the Estonian newspapers and

journals were also used.

The generally accessible public information permitted mapping of the main material facts of the

companys history, and a study of the balance sheets and management reports to the business register, the

main decisions taken and the resulting developments. It was also possible to derive from the public data the

major milestones, strategy, organisation structure, technology, skills and knowledge in every period. In

addition to publicly available data, several interviews were conducted. The main task of the interviews was

to ascertain the historical facts and the roles of the key figures.

The final text was completed after a critical comparison and analysis of different sources: annual

reports, interviews, newspapers, web pages and students graduate theses.

The scientific novelty. The paper is an attempt to combine assumptions and hypothesis of differentinternationalisation theories into on logical structure through causal relationships. Cases studies are used for

testing the proposed relationships. The results of the paper allow better understanding of rapid

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internationalisation, and building stronger theoretical framework for research and policy making for

supporting growth of innovative companies.

Theoretical frameworks used in International Entrepreneurship research

Keupp and Gassmann (2009) analysed 179 papers published in 16 peer-reviewed journals and

concluded that most articles do not use any theoretical frameworks. Most common are the incremental

models (internationalization theory), foreign direct investments models (OLI paradigm), network theory, andresource-based view (see Table 1).

Table 1.Theoretical frameworks used by authors of IE papers (Keupp & Gassmann, 2009). Note: None or

not specified includes literature reviews and editorial articles.

Theory # of papers Theory # of papers

None or not specified 82 Experiential learning 6

Internationalization theory23

Foreign direct investment

theory

5

Organizational learning 11 Social network theory 5

Eclectic (aka OLI) paradigm

(Dunning)10

Industrial economics4

Alliance or interfirmnetwork theory

8 International new ventureframework

4

Resource-based view 8 Entrepreneurial orientation 4

Transaction cost theory 7 Social cognition 4

In recent papers three approaches internationalisation theory (also called knowledge-based view: see

Freeman, 2009; Melen & Nordman, 2009), results of International Entrepreneurship research, resource-

based view, and organisational learning theory. Figure 1 represents the assumptions of original

internationalisation theory presented by Johanson and Vahlne (1977) and combined with current

understanding of the phenomenon. The original assumptions are marked with tick mark boxes. Tick mark

boxes are original assumptions of Johanson & Vahlne (1977), Plus mark boxes are assumptions of

Johanson & Vahlne U-model not directly stated in their original work, but necessary for validating the logic

of U-model. Exclamation mark boxes represent current understanding and statements made by researchersin the International Entrepreneurship field. Supportive assumptions in boxes with rounded corners are

added by the author in order to fill the gaps in the causal logic and disclose the hidden assumptions. The

boxes are numbered for easier reference, the sequence of numbers has no meaning.

The logic tree should be read from bottom to top following the arrows. The logic should be read using

the Ifthen sentences. For example: if (1) The firm strives to increase its long-term profitability AND

(2) The firm is... striving to keep risk-taking at a low level AND (3) Committing to the foreign market

opportunities allows to increase profitability, THEN (5) The firm is willing to make commitment

decisions, which have acceptable risk level. The ellipse over arrows represents sufficiency: all statements in

the beginning of the arrows have to hold in order to cause the effect (the statement at the end of the arrows).

One result can be caused by several independent causes.

Although some ground statements or assumptions of U-model still hold (statements 1, 2, 16), severalassumptions have been challenged, and are replaced by other theories.

Forsgren (2002) supports the assumption 6, which counters original understanding that firms commit

only if the market knowledge is high. Forsgren claims that that in addition to risk from low market specific

knowledge, the firm also considers the risk of not making the investment. Even in case of having low market

knowledge, the risk of not investing can be considered by a company as a very high risk activity.

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14. The optimal levelof commitmentdepends on thebusiness model

18. Some firms'commitment growthdecreases or stops

after acceleratedinternationalisation

12. Some firmsdecrease their

commitment afteraccelerated

internationalisation

8. Sometimesfirms over

commit

9. Throughentrepreneurial

learning firms learnabout optimal

commitment level

17. Some firms donot plan to increase

the commitmentbeyond distributors

level

6. Sometimes

not committingcan be riskier

choice for firms

16. Some firms'commitment to the marketincreases proportionally

with increase inexperiential knowledge

2. "The firm is...striving to keep risk-taking at a low level"

1. "The firm strives toincrease its long-term profitability"

3. Committing to theforeign market

opportunities allows toincrease profitability

5. The firm is willingto make commitment

decisions, whichhave acceptable risk

level

4. Many global marketshave the same perceivedrisk level as psychically

close markets

7. Some global marketsare perceived more

profitable than psychicallyclose markets

11. Firms arewilling to

commit toglobal markets

13. SMEs haveunique resources

making themcompetitive with

MNCs

10. SMEs canleverage their

existingresources

15. A number ofSMEs are

penetrating rapidlyglobal markets

Figure 1.Causal logic of International theory (authors drawing based on Johanson & Vahlne, 1977; Brennan

& Garvey, 2009). Tick mark boxes are original assumptions of Johanson & Vahlne (1977), Plus markboxes are assumptions of Johanson & Vahlne U-model not directly stated in their original work, but

necessary for validating the logic of U-model. Exclamation mark boxes represent current understanding

and statements made by researchers in the International Entrepreneurship field.

Melen and Nordman (2009) support the assumptions 17, and 18. They have found that companies can

be divided into categories according to their commitment behaviour (see figure 2). Not all companies want to

increase their commitment (in terms of moving from export or distributor model towards office or

manufacturing in foreign country) in order to grow and increase profitability. Such companies are labelled

low committers. Incremental committers follow more traditional route as they go from exporting activities

step-by-step to high commitment activities such as strategic partnerships or alliances. In case of the latter, it

seems that for some companies higher commitment might not mean higher profitability and they have

decreased their commitment over time (for example dismissing distributors). The high committers on theother hand use several commitment levels for different countries at once. But the high committers do not

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always increase their commitment rapidly over time. It seems that time and additional effort is needed for

making the instant commitments actually to work and only then the company can move on. Or the

companies find out that their optimal commitment level is already reached.

Author of current paper proposes that the optimal commitment level is determined mainly by the

firms business model, which is determined by mainly by resources (including intangible recourses such as

knowledge and networks) and value proposition (statement 14). The business model and optimal

commitment level help to explain the low commitment in IT-sector and decreasing the commitment afterrapid internationalisation.

Export Distribution/

agents

Strategic

alliances/ joint

ventures

Sales

subsidiaries

Manufacturing

Low committers

Incremental

committers

High committers

Figure 2.Commitment levels (based on Melen & Nordman (2009))

Data collection and research method

Empirical research is based on analysing the longitudinal cases according to identified theoretical

assumptions about accelerated internationalisation. The key questions are: pre-history, speed of

internationalisation, increase in commitment level, determinants decreasing perceived risk. Main criteria for

selection of a company for case study were the following:

Estonian origin of the company or/and tight relations to Estonia;

The company should be relevant to a success story, i.e. it should be already global;

The main development track of the company could be observed;

Main part of knowledge and technology is created in Estonia;

The companies represent technologies of different fields.

It was not possible to find many Estonian companies that met the described characteristics, thereforemore well-known of them were selected for the study. Current case studies are based on secondary data and

personal interviews. First of all, search for research publications was carried out using Google Scholar.

That gave possibility to learn the aspects researchers already covered about the case companies. Then

historical facts and general overviews were collected from previous researches (Kodres, 2006; Vissak, 2007;

Mets, 2008) and press (for example Reach-U, 2009). After that web-pages and annual reports of the

companies were studied. The facts collected during the previous studies as well as current research were

evaluated in the context of research questions. The aspects not covered before and newer trends were

mapped, also some interpretations were checked in interviews.

Cases of Estonian companies

Case of Asper Biotech small global biotech company (based on Kaarna & Mets (2009), Leego(2009), Mets (2009b), Vissak (2007), Quattromed AS (2001-2007), Quattromed (2009), Icosagen

(2009),Ustav (2009)). Founding. Asper Biotech AS was founded in 1999 by prof. Andres Metspalu and

Jaanus Pikani, former CEO of University Clinics. Initial productwas novel genotyping technology APEX

(instrumentation, software and bioinformatics solution) and service for identifying genetic components of

human disease, mostly customers of R&D field. Pre-history period: 1996-1999, prof. Metspalu worked in

the universities in France and USA working out a particular genotyping technology and building personal

network among scientists. Globalisation intention. Founders saw their market as global. First sales made

were to US and France in 2001, practically no domestic market. Commitment. Going from low to

medium/high. At first sales representative agreements were signed inJapan, USA, Norway and Italy (2001-

2002) for selling the APEX machine; 2003-2004, focus turned on direct contacts and shifted from product to

services; 2009: service clients in more than 40 countries. Network. Initially based on personal contacts of

the professor Metspalu. Difficulties going beyond personal contacts. Larger client network was established

through academic networks, conferences, and fairs. Financial leverage.Academic organizations were used

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for covering patenting costs in early stages; US origin risk capital fund SEAF in 2000, and later Baltic Small

Equity Fund (BSEF) for product development and organizational expansion; European Union Framework

Program funding of several projects. Changes in business model. From product based value proposition

(novel technology for genotyping) to service based value proposition (globally unique genetic analysis for

eye diseases). Also sales target shifted from research labs and genetic testing organizations to doctors,

genetic consultants and patient organizations. The APEX technology sale was moved to Asper Group

subsidiary Genorama Ltd.

Case of Regio mobile positioning software company (based on Kaarna & Mets (2009); Mets (2008,2009a), Regio (2001-2008); Reach-U (2009), Uustalo (2009)). Founding. State-owned firm was founded in

1988 under the rules of Soviet Union. In 1990 the company was privatized. Founders were geographers Jri

Jagomgi, Rivo Noorkiv, and Madis Michelson. Initial product. Privatized company started with R&D

services (regional studies), map and postcard production. Pre-history period: in case of Regio the prehistory

period overlaps with domestic period. In 1992 Regio mediation of Intergraph software; 1993, Teet Jagomgi

(23) appointed the CEO after training in 3D programming in USA; implementation of the geo-information

system (GIS); the first Estonian sea-map after Soviet occupation in 1940; 1994, complete digital map

technology using GPS; 1998, CD-Atlas. Globalisation intention. The company had an intention to grow

global since 1992. Yet it took them several years before they had a globally marketable product. First

attempts to export were made in 1992-1993. In 1999 Regio won the tender from Ericsson AB for mobile

positioning software (MPS), which became the breakthrough for globalization. Commitment. Regio has

used high commitment approach. In 2000, the company merged with the Finnish listed corporation Digital

Open Network Environment OY (DONE); 2001, drastic growth of exports to one fourth of sales; 2002,

bankruptcy of parent company; management buy-out of the company. In 2004 global reselling agreement

with Ericsson was signed. Partnering with Ericsson meant possibility to offer Regios software in countries,

where Ericsson had sold the infrastructure. In 2005 Regio delivered location based services (LBS)

middleware to Saudi Arabia, in 2006 to North Africa, and in 2008 entered the market in Mexico. Signing the

contracts with end clients still means negotiation and competing with other software providers. Regios

employees spend months in foreign countries for building client tailored software solutions. Network. Use

of network of Ericsson clients. Yet a lot of time and effort is spent for building strong personal contacts with

end users. Financial leverage. First, founders mortgaged their homes for bank loan on very unfavorable

conditions in 1993-1994. In 1998 Baltic Small Equity Fund (BSEF) became risk capital partner for Regio;

2000, merger with DONE (funding product development). In 2001 management buyout of the company fromDONE. Changes in business model. Shifting from post-cards and maps (B2C) to GIS, digital maps and

LBS (B2B).

Conclusions

Despite heavy criticism the original Internationalisation process theory (Johanson & Vahlne, 1977) is

based on assumptions, which still hold. Changing the assumptions, which have become invalid, adding new

assumptions from other theories and models allows better understanding of accelerated internationalisation

phenomenon.

The cases support the view that knowledge intensive SMEs can leverage their financial and other

resources (such as network, general market knowledge) in order to become global from the start. On the

other hand both cases prove that pre-history is important aspect for understanding accelerated

internationalisation. In case of Asper, the global product development and network building happened before

the initiation of the company. It took 6 years (1995-2001) to build technical knowledge base and develop a

product highly competitive on global market and first sales were made. In case of Regio the network

building and product development took 7 years (1992-1999) before first international sales were made based

on globally competitive product. Only major difference with Asper is that Regio was already established

during the network and product building phase.

The cases support the view that companies can be divided into categories according to their

commitment behaviour. There are companies, which business model does not need further commitment

beyond distributor stage (Asper), and there are companies, who start with high commitment partnership

contracts (Regio). The cases also show the need to redefine the low or high commitment. If higher

commitment should enable obtaining higher level in market specific knowledge, then the highest

commitment is direct and intensive partnership with end users on foreign markets. For many industries andbusiness models such intensive contact does not necessary mean sales office or manufacturing plant on

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foreign market. Therefore there is a need for differentiating exporting activities offering little possibilities for

obtaining market specific knowledge from direct contacts with high potential for experiential learning.

Further research is necessary for integrating different theories and conducting empirical research to

validate the integrated model.

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