Choose Your Friends Carefully: Home-Country Ties and New Venture Internationalization

Abstract

While host-country relationships are known to help new ventures internationalize, we know little about how a firm’s home-country relationships affect its subsequent internationalization. We develop new theoretical arguments by combining social capital theory with reference group theory, to suggest that internationalization is in general adversely affected by home-country relationships, but facilitated by a specific networking strategy viz. of joining an aspirational local industry group in the home market. Based on a mixed-method study, with quantitative analysis of 102 Indian software firms and a longitudinal study of four firms, we find support for our arguments. Our process-based qualitative findings provide useful insights into the way new venture founders actually make sense of their relationship-building activities in the pursuit of international growth. A particularly novel facet here is the aspiration-building part of the process that is suggested by reference group theory, which has not been previously analyzed in the international business context.

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Fig. 1

Notes

  1. 1.

    We conceptualize relationships at the interorganizational level. In young firms, however, in reality, the entrepreneur’s relationships and the firm’s relationships are often effectively interchangeable.

  2. 2.

    To illustrate, the Microsoft India website articulates that MNE affiliate’s mission as follows: In India, as the country moves towards a leadership position in the global knowledge economy, Microsoft works closely with the government, the IT industry, academia and the local developer community to partner in India's growth.

  3. 3.

    While MNE affiliates certainly have the potential to be a source of internationalization capability learning to indigenous ventures (Prashantham and Dhanaraj 2015), when it comes to actual internationalization, they often exert a “gravitational” pull (cf., Cantwell and Mudambi 2011) towards the domestic market in important emerging economies like India. Consequently the translation of learning outcomes into actual internationalization for Indian ventures is potentially thwarted. How this pull towards the domestic market can be overcome represents an interesting question but is beyond our scope (however see Prashantham and Dhanaraj 2015 for a discussion of this issue).

  4. 4.

    In the Indian software industry context there are large Indian IT firms—such as TCS and Infosys—which might be included in this reference group of high-aspirants (more specifically, in these case, high-achievers) since such firms are often well represented in industry groups.

  5. 5.

    The 12-year threshold represents relative youth in an Asian context. Though higher than some US-based studies, it is justified by ventures’ lower availability of early-stage equity funding and typically longer maturation process. The study’s results remained stable at lower age cut-offs (less than 10 and 8 years).

  6. 6.

    The most common employee cut-offs in international entrepreneurship research are 250 and 500 employees (Jones et al. 2011). In this study the former was chosen because of the nascent empirical setting.

  7. 7.

    The core business of the population of firms we studied is software development. Call centres were thus excluded. The main source of international revenue for the firms in the study is outsourced software development. Revenues are deemed international if payment is made by clients in an overseas market. We are inattentive to entry mode, so they may or may not have a physical presence in the host market, and to market diversity. Our measure of internationalization is admittedly narrow but was the only dimension on which we could obtain reliable data from a secondary source. We therefore traded off measurement breadth for measurement rigor (in relation to avoiding common method variance concerns).

  8. 8.

    We focused on peers (fellow-SMEs) rather than large Indian firms (e.g., TCS) because in our early fieldwork, Indian software entrepreneurs bemoaned the lack of engagement by large Indian firms with domestic young firms. Therefore, we reasoned that the positive role that such firms might play would be as aspirational referents in industry networks.

  9. 9.

    We also used age at internationalization as an alternative control but got highly consistent results.

  10. 10.

    Although a control variable in terms of main effects, we instrumented host-country ties as well using the corresponding perceptual measure that we used for home-country ties (“we are aware of potential alliance partners in our lead international market”). Sargan test results failed to reject the null hypothesis of validity.

  11. 11.

    Ideally every questionnaire would have been completed by multiple respondents but often this is not feasible in smaller Asian firms (Filatotchev et al. 2009); hence the follow-up to confirm survey data.

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Acknowledgments

An earlier version of this paper was presented at the 2012 Strategic Management Society conference where it was nominated for the Best Paper Award for Practice Implications. The manuscript has benefited from helpful comments from Erkko Autio, Charles Dhanaraj, Yiannis Ioannou and Stephen Young. We are grateful to Nana Kufuor for his patient and insightful guidance on the econometric analyses. Financial support from the Carnegie Trust for the Universities of Scotland is gratefully acknowledged.

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Correspondence to Shameen Prashantham.

Appendix

Appendix

Measurement items and validity assessment

Construct Items
1 = completely disagree;
7 = completely agree
Composite reliability (α) Literature Source
International intensity (%) (International revenues) × 100 (total revenues) n/a Lu and Beamish (2001) Nasscom
Strength of host-country ties
With respect to (a) firms run by fellow-Indians and (b) other firms in your lead international market…
[Scores for (a) and (b) aggregated]
(1) We actively utilize these relationships in our business
(2) These relationships are characterized by close interactions
(3) These relationships are characterized by mutual trust
(4) These relationships are highly reciprocal
(5) These relationships have ‘opened new doors’ for us
0.98 Kale et al. (2000), Yli-Renko et al. (2001) Survey
Strength of home-country ties
With respect to (a) other SMEs and (b) MNC subsidiaries (e.g., Microsoft India) in the home market…
[Scores for (a) and (b) aggregated]
(1) We actively utilize these relationships in our business
(2) These relationships are characterized by close interactions
(3) These relationships are characterized by mutual trust
(4) These relationships are highly reciprocal
(5) These relationships have ‘opened new doors’ for us
0.96 Kale et al. 2000; Yli-Renko et al. 2001 Survey
Knowledge-intensity (1) We have a strong reputation for technological excellence
(2) Technological innovation is a primary goal for us
(3) There is a strong knowledge component in our products/services
(4) Most of our employees have strong technical skills
0.85 Autio et al. (2000), Yli-Renko et al. (2002) Survey
Activity scope Overall problem definition, conceptual design, physical system design, programming, testing and reviewing, maintenance and support, and documentation n/a Generated through pre-survey interviews Survey
Internationalization capability (1) We are knowledgeable about international business strategy
(2) We are competent at identifying international business opportunities
(3) We are competent at international marketing
0.86 Eriksson et al. (1997) Survey

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Prashantham, S., Birkinshaw, J. Choose Your Friends Carefully: Home-Country Ties and New Venture Internationalization. Manag Int Rev 55, 207–234 (2015). https://doi.org/10.1007/s11575-015-0244-9

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Keywords

  • New venture internationalization
  • International new venture
  • Born global
  • Social capital
  • Networks
  • India