Cross-border success

Expansion abroad is a risky venture for most companies, but the process can be eased by focusing on finding the right people.

by Professor Philip Anderson, INSEAD
Last Updated: 23 Jul 2013

Imagine that you have started an entrepreneurial venture, have grown it to a respectable size and are ready to open your first office abroad.

How do you staff your first foreign office with the right people? Which country will you move to? What organisational and communication structures will you need to control your growth beyond borders? Questions such as these are more important for entrepreneurs than ever before.

For example, when the INSEAD research team contacted venture capitalists in Silicon Valley in early 2002 to talk about how their ventures internationalise, a shrug was a typical response. "By the time our portfolio companies open an office outside the US, we've already exited as shareholders," one prominent VC told us. International growth was seen as a challenge most businesses would face long after their founding.

By mid-2003, the mindset in Silicon Valley had changed dramatically.

Ventures that early in their lives had located operations in lower-cost areas such as India or China were reaping such important cost savings and tapping into such rich talent pools that the conventional wisdom among venture investors shifted rapidly. It became almost a truism that any serious business plan had to include an India strategy or a China strategy, and a road map showing when and how the prospective venture would locate operations in lower-cost regions.

So-called 'born global' ventures remain rarer than start-ups that build a solid domestic base before locating an operation in another country.

However, more and more enterprises are becoming multinationals at a relatively young age. This development has profound implications for many young enterprises.

In the portfolio of one venture capital investor, about half the companies failed after they opened their first office abroad. Either they had to close within a year or two, or they suffered significant turmoil, staff turnover and unexpected expenses, which damaged the bottom line and cost them at least six months' delay in their planned growth trajectory.

Even entrepreneurs in places such as Israel or Ireland often get it wrong, though growing abroad early is more common when domestic markets are small.

Establishing a foreign presence is an important and risky step - running cross-border operations adds a layer of complexity and cultural diversity that tends to change a young firm's identity irreversibly.

We have conducted intensive studies of 65 ventures headquartered in Israel, India, the US and the EU to understand how they took their first step abroad and why some failed while others succeeded. Our research, underwritten by the 3i Venturelab and the Rudolf and Valeria Maag International Centre for Entrepreneurship at INSEAD, has focused on firms that are less than seven years old and have established at least one office outside their home country.

Most advice on expanding abroad draws from the experience of publicly traded multinationals. This literature tends to focus on critical success factors, such as picking the right country, the right mode of entry, the right local partner and the right organisational structure. The general manager's task is framed as finding a location that fits the firm's competitive assets, is culturally compatible, has complementary local advantages and so on.

Our study suggests that entrepreneurs should instead focus on people.

Surprisingly, the characteristics of the country they enter, the specific location they choose and whether or with whom they partner with locally seem to have little impact. Entrepreneurs need to focus on putting together the people and relationships they will need to grow abroad, instead of devoting too many resources to analysing where and how to locate. Entrepreneurs agree that nothing matters more than putting the right person in charge of the new foreign presence.

Few forays abroad succeed as planned; those that thrive often do so for unforeseen reasons and overcome obstacles that were not anticipated. Consequently, the quality of the people who have to adapt to the unexpected has the most impact on the outcome. So how can an entrepreneurial venture pick the right people to lead its expansion across borders? Four factors seem to matter most: a trusted connection to the venture's management team; previous experience at building a new operation; an international work background; and recent experience in the country into which the firm is expanding. Other forms of experience appear to have no impact.

The person that an entrepreneurial firm sends to head its first foreign office must enjoy the trust of the venture's top team and trust is built by working together. The majority of unsuccessful venture entries had been headed by people recruited into the enterprise for the purpose of opening its initial foreign subsidiary. Typically, entrepreneurial teams searched for someone who looked great on paper and brought them into the venture only to be disappointed. A number of Israeli firms in our study found 'heavy hitters' via executive recruiting firms or their own personal networks to head operations in the US. Israeli firms typically move abroad early, and usually to the US, for several reasons: because that is where their primary markets are; they want to attract funding from the US; and they hope ultimately to exit by listing in America. Often, they locate headquarters in the US and hire a US-based CEO, typically leaving R&D or engineering resources in Israel.

Israeli entrepreneurs fiercely debate whether it's better to send an Israeli to the US as CEO or hire an American to succeed the founders as the top executive. Our research suggests the distinction is more subtle.

There is no consistent difference in the rate or magnitude of successful overseas expansion between firms making either choice. What matters is hiring someone who has worked with the venture's key executives before.

For example, one life sciences start-up developed its initial product in Israel, then shifted its headquarters to the US when it was ready to start clinical trials. It hired a high-profile American CEO from a well-known pharmaceutical firm to find strategic partners and a new round of funding. Within eight months, the founders and the board had fired the CEO, who had had difficulty dealing with Israeli ways of operating.

Does this mean that ventures should always send a local national overseas to head their first foreign subsidiary? Consider the experience of an Israeli software firm that hired as its chief of marketing for a new US subsidiary an Israeli who had spent nearly 20 years in the American software business before returning to Israel. Within a few months, the founders were feeling uncomfortable - despite daily phone calls and a blizzard of emails, they could not figure out what was really going on. After 14 months of mounting frustration and flagging sales, the marketing head left. The founders estimate that the entire affair cost them two precious years of growth and caused them to miss the opportunity to go public.

Does this mean entrepreneurs should never use executive recruiters and should rely only on their circle of friends? A number of the growth ventures did hire outsiders, who successfully took them overseas. The difference: they brought new talent in before they undertook a cross-border expansion and worked closely with the key executive for months in the home country to build a trusted relationship.

Trust is vital, because a foreign subsidiary usually has to make rapid, unforeseen adjustments to its initial plan. However, simply hiring people you know is no guarantee of success - witness the Indian firm that was founded by four close friends who had known each other since university.

When they decided to expand into Dubai, it seemed natural for the one who was most keen to go abroad to lead the new office. Unfortunately, although he knew a lot of people in Dubai and thought he had a strong local network, the co-founder had no idea how to build a business there.

He floundered for nearly two years before returning to India and eventually leaving the company.

This episode not only cost the founders money and time, but ruptured the friendship that had driven them to start a company together in the first place. In this case, the co-founder who went to Dubai was trusted, but lacked all three of the other key attributes of successful key executives opening offices abroad: he had never built a new operation; had never worked outside India before; and had never worked in Dubai.

Successful expansions abroad are almost always headed by someone who has had previous experience building a new organisation. We had imagined that previous experience in an entrepreneurial venture would be correlated with success, but approximately the same proportions of key executives fail whether or not they have worked in an entrepreneurial firm before.

Successful country pioneers typically have experience creating a new organisation.

Key executives in roles that are isolated from the challenge of building an organisation are just as likely to fail as those with no entrepreneurial experience.

Some form of international work experience seems to be essential for a key executive. Those who have never worked abroad seem poorly suited to leading cross-border expansion. One European firm wanted a marketing office in Germany to serve one of its large customers and hired a German multinational executive who had many connections inside the country.

In his previous job, he often travelled inside the EU and he had been responsible for sales throughout western Europe, but he had never relocated outside Germany.

The entrepreneurs didn't think this would be a problem, because he would be responsible principally for acquiring German clients. However, in less than a year, he left the venture by mutual consent because he found himself in constant conflict with other executives back at headquarters. Local knowledge and connections weren't enough - it seems that to understand what it takes for a company to cross borders, one has to have done that oneself.

Ventures often make the mistake of hiring executives who have lived and worked in the region in the past, but not recently. Indian firms seem especially prone to this problem. Again and again, we found cases of US firms founded by entrepreneurial teams that included at least one non-resident Indian (NRI), who was sent back to run the venture's Indian operations.

In many cases, the initial executive was unsuitable and had to be replaced at considerable cost in time and money.

India has changed so rapidly in the past decade that many NRIs have outmoded ideas about how to hire and retain talent, build and run an organisation and fit into the local ecosystem. One Silicon Valley venture capitalist said: "We figured that someone named Sanjay or Ganesh should be able to go to a place like Bangalore and start up operations there, but that can really backfire if they haven't worked in India for a while."

Another trap is assuming that language skills are vital. One venture team chose a second-tier manager to lead their push into China because he had grown up there and spoke Mandarin. Within a year, it became apparent that his leadership skills were not up to the task, so the firm replaced him with an insider, who spoke no Mandarin and had to rely on an interpreter.

Within six months, he had not only turned the business around, but was delivering speeches in Mandarin on the factory floor.

Our investigations convinced us that for a growth venture, internationalisation is more a matter of picking the right people than settling on the right strategy, location or organisational structure. The most important key to success is cultivating a trusted relationship early on with a key executive who has previous experience building a new organisation, has worked abroad and has recently worked in the target country.

- Philip Anderson is INSEAD alumni fund professor of entrepreneurship, and director of the Rudolf and Valeria Maag International Centre for Entrepreneurship

THE SKILLS AND EXPERIENCE YOU NEED TO RUN A CROSS-BORDER OPERATION ...
- A trusted connection to the venture's management team
- Previous experience at building a new operation
- An international work background
- Recent experience in the country into which the firm is expanding
AND THE SKILLS AND EXPERIENCE YOU DON'T NEED
- Time spent in large organisations
- Long residence in target country
- History working in start-up organisations.

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