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EXPLAINING THE FORMATION OF INTERNATIONAL NEW VENTURES: THE LIMITS OF THEORIES FROM INTERNATIONAL BUSINESS RESEARCH

Patricia P. McDougall
Scott Shane

School of Management
Georgia Institute of Technology
Atlanta, GA 30332-0520

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(404) 894-4373

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(404) 894-6030

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(404) 894-3979

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(404) 894-6030

Benjamin M. Oviatt

Department of Management
P. 0. Box 4014
Georgia State University
Atlanta, GA 303302-4014

Telephone
(404) 651-3021

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(404) 651-2804

Principal Topics
Recent research has reported the existence of international new ventures (INVs). An INV is a business organization that from inception, seeks to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries (Oviatt and McDougall, 1994). Using 24 case studies, this paper shows that existing theories from the field of international business do not adequately explain the formation process of INVs and proposes that new theoretical arguments are necessary. A new explanation of INV formation is provided as this paper addresses three questions:

(1) Who are the founders of INVS?

(2) Why do these entrepreneurs choose to compete internationally rather than just in their home countries, and

(3) What form do their international business activities take?

Method
We examined 24 case studies of INVS. Twelve INVs were identified from academic journals and meetings. The other twelve cases were compiled by two of this study's authors. For the latter twelve, the method of investigation involved analysis of three sources of evidence: (1) documents, such as business plans, financial statements, letters, faxes, and minutes of meetings; (2) physical artifacts, such as the firm's products, and (3) personal interviews.

Major Findings
We found that the formation process of INVs is not explained by existing theories from the field of international business. Specifically, neither monopolistic advantage theory, product cycle theory, stage theory of internationalization, oligopolistic reaction theory, nor internalization theory can explain the formation process of INVS. These theories fail because they assume that firms become international long after they have been formed, they highlight large, mature firms, and they focus too much on the firm level and largely ignore the individual and small group level of analysis (i.e., the entrepreneur and his or network of business alliances).

We propose that an explanation for the formation process of INVs must answer three questions about the internationalization of firms that are roughly analogous to Hymer's (1960) original questions, but at a different level of analysis. First, who are the founders of INVS? We argue that founders of INVs are individuals who see opportunities from establishing ventures that operate across national borders. They are "alert" to the possibilities of combining resources from different national markets because of the competencies (networks, knowledge, and background) that they have developed from their earlier activities. Following the logic of the resource-based view of the firm, we argue that the possession of these competencies is not matched by other entrepreneurs. Only the entrepreneur possessing these competencies is able to combine a particular set of resources across national borders and form a given INV. Second, why do these entrepreneurs choose to compete internationally rather than just in their home countries? The founders of INVs recognize they must create international business competencies from the time of venture formation. Otherwise, the venture may become path dependent on the development of domestic competencies and the entrepreneur will find it difficult to change strategic direction when international expansion eventually becomes necessary. Third, what form do their international business activities take? Founders of INVs prefer to use hybrid structures (i,e., strategic alliances and networks) for their international activities as a way to overcome the usual poverty of resources at the time of start-up.

Implications
In financing decisions relating to INVS, venture capitalists and other venture financiers should took for entrepreneurs who have a global vision, international business competence, and an established international network. When entrepreneurs start INVs they should create hybrid structures to preserve scare resources. Given the path dependence of competence development, founders of new ventures should consider whether establishing a domestic new venture with plans to later internationalize will be as successful a strategy as establishing a new venture that is international from inception. Finally, researchers need to develop a richer explanation for INVs that goes beyond the concepts expressed here and by Oviat L ,and McDougall (1994).

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