The Mark 2010

While some industries are better suited to foreign expansion than others, successful internationalization ultimately comes down to managerial will and skill.

When Daniel Debow and David Stein started Rypple, a company that provides collaborative online tools for obtaining personal feedback, they sought customers in foreign markets from the outset. They soon had endorsements in international publications like BusinessWeek and The Economist and prestigious clients like Mozilla.

It is not surprising that Debow and Stein viewed their market as an international one. They had lived and worked in other countries and sold workforce management software to firms like British Airways and Walmart for their previous venture, Workbrain. These experiences taught them that Canadian companies could build an international customer base to take advantage of foreign opportunities. It was inconceivable for them to think of their market in purely domestic terms.

A recent study of past research on international entrepreneurship by the Conference Board of Canada suggests that such international experience is invaluable. People who have lived or worked outside of Canada perceive fewer barriers to successful internationalization and are more committed to doing business in foreign markets. They have stronger international skills too – they understand how to develop a network of enthusiastic collaborators, such as multinational customers who will disseminate their products to branches in other countries, foreign distribution partners who are willing to take a chance on their product, and bankers who understand export financing.

Should all entrepreneurs consider foreign markets at start-up? Probably, but it’s important to be aware of industry differences. The Conference Board study reports that businesses in some industries tend to internationalize earlier and more extensively than in others.

Some industries – including most technology-based industries – are inherently global. Let’s say your firm has developed new film animation software. Great software is complex and expensive to develop, but the requirements of potential buyers everywhere are similar in that the system has to adhere to universal standards to be able to run on specific hardware platforms. Software is a digital product and so you can distribute it electronically and seamlessly throughout the world, without worrying about shipping, inventorying, or warehousing. Finally, if your company is Canadian, you probably have to sell your software in foreign markets at the outset because the Canadian market for a specialized product like film animation software is too small for your company to be viable. You need a larger market over which you can recoup the R&D costs of the software development. So, although you need strong technological capabilities to produce software that people want to buy, selling the software outside Canada is relatively straightforward. It is not surprising, then, that roughly 70 per cent of the software developed in Canada is exported to other markets.

On the other hand, if you’ve developed a new type of potato chip, the market barriers are higher. People’s taste in food varies regionally, and so Maritimers, Texans, and Australians are likely to prefer different types of chips. Different countries, provinces, and states have different packaging and labeling requirements, and they will also have different regulations about food imports. This means that you will have to modify the product and packaging for different export markets. You will also have to physically ship your potato chips to different markets and deal with inventory and warehouses. The end user of your product – the teenager eating your chips in front of the TV – is probably not the person you sell to directly, and so you will have to develop agreements with foreign retailers, agents, and distributors. Finally, there are lots of people who buy chips in Canada, and so it may be possible to have a successful business with no foreign sales at all. In industries like these, the requirements for technological know-how are not as high, but you need to learn about each foreign market separately. This is why a much lower proportion of food items manufactured in Canada – less than eight per cent of snack foods in fact – is exported.

Such industry challenges are real but can be overcome. For example, exports account for 60 per cent of the sales of Manitoba Harvest Hemp Foods & Oil, a company that was recently recognized by Profit Magazine as one of Canada’s fastest growing companies. Regardless of industry, the important determinants of successful internationalization are managerial will and skill. The Canadian firms which are able to sell successfully in foreign markets very soon after start-up are those innovative firms led by internationally-experienced entrepreneurs who develop great products, understand their foreign markets, and are able to get buy-in from committed stakeholders in them.