Jason Davis offers insights into how startups can effectively enter foreign markets

MIT Sloan Asst. Prof. Jason Davis

It used to be that a startup’s biggest goal was simply to survive. It was supposed to wait until it grew big and successful in its own country, and then expand into new international markets.

This is no longer the case. Of course every startup wants to survive, that hasn’t changed. But the technology boom of the late 1990s and the forces of globalization – namely the reduction of barriers to international trade, and the decline of limits on the movement of capital – have made it so that today’s startups can no longer afford to wait until they’re big in their home market before they go international. The sooner they expand into new regions and markets, the better off they’ll be.

Going global requires intense learning. Management needs to learn not only the nitty-gritty about how and where to set up shop and which IT system to use, but it also must learn about a new culture, different regulatory systems, and the best ways to approach new business colleagues.  Many of those things vary country to country. It’s daunting. So the question becomes: is there a way to improve how entrepreneurial companies learn that will in turn boost their chances for success when they enter new markets?

According to my latest research,* the answer is yes. With a grant from the National Science Foundation, my colleague, Christopher Bingham, a professor at UNC’s Kenan-Flagler Business School, and I looked at nine high-tech companies to determine how they learned and how they applied that learning to expand into new markets. We selected companies with headquarters in three culturally distinct markets: Finland, the U.S., and Singapore. We spent a lot of time on the ground with these companies: observing their practices, talking to managers, and seeing how they did it.

One important finding is that the most successful companies entered new countries one at a time. Sequential country entry allows companies to consolidate learning before the next entry.

A second key finding has to do with the methods by which these companies learned. We saw there were two dominant strategies: soloing and seeding. Seeding is when executives begin learning about foreign market entry by looking at what others have done or by seeking advice from experienced consultants or experts, and then build on that knowledge through experimentation or learning on the fly. Soloing is when managers learn about a foreign market through experimentation or improvisation, and then rely on similar approaches, such as trial and error, over time.

Which one should you choose for your company? We found that soloing companies, in the first two new countries they entered, took less time to capture their first sale, took less time to break even, and reported higher overall ratings of success than the seeding companies.

But before your company starts soloing, consider this: while companies that used seeding performed less well at first, they performed better in the longer run — when they entered their third and fourth international markets. With seeding, managers look to other companies around them for clues about how to break into new markets. They take ideas from the outside and then customize those to their particular circumstances. This is tricky to do in the short term because someone else’s good ideas may not work well for your immediate situation, but once you test those theories and then modify them for your individual business, you’ve got a powerful competitive advantage. It may take longer to apply the knowledge from seeding, but it is ultimately a more successful strategy.

A third finding is that companies with management teams that have broad international business experience are more successful than those whose managers do not have wide-ranging international experience. Recruiting talent with diverse experience is critical, especially for smaller organizations where senior staff is limited.

The reason this is so important gets back to the soloing vs. seeding decision. Companies with a broad and diverse management team tend to lean more heavily on seeding, and are therefore more successful in the long term. They have a bigger network so the knowledge they glean from others is that much greater and that much richer. These companies also seem more apt to spend a great deal of time figuring out and debating internally the best ways to apply that knowledge. This tends to lead to better decisions.

Read more in Business News Daily and Fox Business News

Jason Davis is an Assistant Professor of Technological Innovation, Entrepreneurship, and Strategic Management (TIES) group at the MIT Sloan School of Management

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