Dr. Ashraf Mahate, Head of Export Market Intelligence, Dubai Exports, and Vice Chair of the Economic Policy Committee, Dubai Economic Department, explains what it takes to be a “Born Global” SME. He also explains how a traditional firm can be reborn so that it acquires a global perspective.
Dubai Exports, an agency of the Dubai Department of Economic Development (DED), Government of Dubai, worked with Guarana, a recently formed Dubai based soft drinks producer, to become a strong player in the global beverage market. Although, the company is less than a year old its owners and management are already thinking beyond their national boundaries and developed strategies in association with Dubai Exports so as to capture an ever increasing global market. Mohammed Ali Al Kamali the Director of Dubai Exports remarked that “SMEs should look at the global market if they are to continue to grow from the time that they are established.”
The idea that SMEs consider the global market rather than their domestic one has received considerable attention in recent years not only from academics but also policy makers. There is considerable evidence to suggest that companies that think global actually behave very differently from those that have only the domestic market viewpoint. More importantly, anecdotal evidence suggests that firms which target the global market tend to have a much higher survival rate compared to those that are domestically focused.
What is a “Born Global” SME?
The “Born Global” SMEs, a term that was coined by the management consultancy firm McKinsey, are companies that, though small in size, incorporate features of large, or even multinational enterprises, as far as their global activities are concerned. Born Global SMEs tend to have revenues that are largely generated overseas across a range of countries. More importantly, their dependence on the domestic market is minimal at best. Technically, a Born Global firm needs to export 25% of its output within three years of establishment. However, most of the Born Global firms tend to export three times this figure – that is 75% of their output by three years of establishment.
Every firm would like to be global from its establishment because of the benefits that such a strategy provides the owners. The real question is how is this internationalisation achieved from such an early stage? The traditional viewpoint is that SMEs gradually develop their overseas business in an evolutionary manner. In this way, as the knowledge and experience of the SME increases so do its overseas activities. Of course in reality knowledge also increases confidence and hence commitment to overseas activities.
This developmental approach to internationalisation assumes that the typical SME is restricted by the “physic distance” which is not the same as the geographical distance. The physic distance is a combination of different psychological factors which hinder a firm’s path to internationalisation. Some of the common psychological factors that tend to hinder SMEs from exporting include the culture differences between the exporting and importing countries, language, general exporting skills and experience of the SME owner, and the general inertia towards exporting.
The Born Global SMEs have turned the physic distance concept on its head and, in the process, have challenged the commonly held constraints. All too often SMEs argue that overseas expansion is not possible for them as they lack the financial resources, sufficient managerial experience in overseas business, and also face uncertainty as to whether the foreign activities will generate the same returns as their domestic operations.
As a result the typical SME has been reluctant to commit resources to international activities. In contrast the Born Global SMEs are able to instantly internationalise their activities and overcome the commonly cited obstacles. Commentators argue that the Born Global SMEs have the ability to raise capital externally – that is outside of the firm – through either international networks or strategic alliances. As a result of this the Born Global SMEs are able to substitute external capital for their own. Second, their dependence on the domestic market is kept intentionally low so that they become reliant on the global market for revenues. Third, the Born Global companies are at a disadvantage in their home market due to stronger competition or weaker knowledge and other such factors.
Seeing the big picture
The biggest differentiator is that Born Global firms view the world as their marketplace from the very beginning and they tend to have a wider vision, unlike traditional firms. Very often, the Born Global SMEs start business developing a product not for just the domestic marketplace but for the global arena. This means that the product needs to be designed in such a manner that it is appealing as well as accepted (from the viewpoint of import controls) in many markets.
To a certain extent the growth of communication in the form of films, television, Internet, magazines and so on has meant that the global marketplace is now becoming increasingly homogeneous. As a result, it is now much easier to create a single product that meets the needs of different markets. At the same time there has been a greater move towards global standardisation and hence the differing country requirements have been replaced by, at worst, regional ones and, at best, a single global standard.
The Born Global SMEs have also benefited from the globalisation process which has changed the environment in which business is conducted. Environmental factors tend to impact the viewpoint of managers and their outlook on global activities. Increased globalisation is argued to make people perceive the world as being smaller. As a direct result managers may tend to perceive overseas activities with a much lower level of risk. At the same time the drivers of globalisation have enhanced the speed at which firms take their business overseas.
For instance the traditional exporting process is continuously being simplified and obstacles are being removed. One reason for this is that each country wants to be viewed as business friendly in order to attract foreign direct investment. This is more so the case in recent years to fill the gap created by the lack of domestic investment. One important factor in attracting foreign direct investment has been the various indices and rankings of doing business or ease of trade. Therefore countries have made it a priority to change the manner in which business is carried out so that they can move up these rankings As a direct result of this, new firms which do not have the “historical baggage” find that they can export their products and services with ease and hence focus more on global rather than domestic markets. At the same time globalisation has allowed for a freer trade environment through the reduction in tariffs and non-tariff barriers.
It’s not just the psychological nature of the Born Global firms that is different to the traditional ones but also their ability to leapfrog the developmental stages. Academics have found that Born Global SMEs tend to have products which are likely to be innovative and have been developed in response to global industry changes. Their innovative nature and global competition implies that there is that there is rapid product development. As a result the products tend to have a short life cycle and a correspondingly shorter time period within which to recoup their research and development costs as well as earn a reasonable return. Therefore, these firms need to generate high volumes which naturally imply a business model that is focused on global sales. Moreover, the constant pace of change and the continual need to launch new versions or models forces these firms to pursue global markets.
How to be reborn global
The natural question that arises from the discussion above is how can a traditional firm be reborn so that it acquires a global perspective? The simple answer to this question is that it should revisit its products or services so that it is able to satisfy the demand from new global customers. The firm will need to assess its processes and the use of technology so as to reduce costs and improves quality. This may also involve up-skilling its employees so that they are able to meet the new challenges and to view the global marketplace as the avenue of growth.
To become global the firm will need to make effective use of advances in communication technology so that it can conduct business across boundaries. In global markets speed is very important and hence the firm will need to take advantage of quicker response time as well as being flexible. Of course the road to being global is not easy for any company but it is rewarding. After all in today’s globalised and technologically sophisticated business world gradual internationalisation is not really an option.
Dr. Ashraf Mahate is the Head of Export Market Intelligence at Dubai Exports (formerly known as the Dubai Export Development Corporation), which is an agency of the Dubai Economic Department. Dr. Mahate is also the Vice Chair of the Economic Policy Committee with the Dubai Economic Department. He has written a number of journal articles, chapters in books and edited books in the areas of economics, finance and banking. He has also presented papers at major international conferences. Dr. Mahate has provided extensive consultancy services to various organisations in the areas of banking, economics and finance. He has been a director of a number of companies including a venture capital company and a private equity fund.
Dr. Mahate received his doctorate from Cass City University Business School in London (UK) which was ranked by the Financial Times newspaper as the 12th best university in the world for finance. He read Economics at University College London, followed by a Masters in International Economics and Banking at the University of Wales in Cardiff. Dr. Mahate is a professional educator and received his training at the Institute of Education (University of London). He is a member of the Chartered Institute of Managers (UK) and a Member of the Institute of Commercial Management (UK). He is also a member of the Association of Certified Anti-Money Laundering Specialists (ACAMS).