ACCELERATED INTERNATIONALISATION OF KNOWLEDGE

INTENSIVE SME’S: ESTONIAN CASES

Kalev Kaarna1
1
University of Tartu, Estonia, kalev.kaarna@gmail.com

Abstract
The objective of the paper is to analyse the cases of accelerated internationalisation based on an
integrated model. The model is qualitative and is based on causal logic for integrating different research
results and principles of different theories applied in the field of International Entrepreneurship. The purpose
of the model is to build on the bases of internationalisation theory (U-model, I-model) and advance it further
in order to match the new realities, where knowledge intensive SME’s expand rapidly to global markets and
use several market entry models simultaneously.
The model is used for analysing accelerated internationalisation of three Estonian origin knowledge
intensive companies. Longitudinal case study method is used for analysing cases of two knowledge-intensive
Estonian SMEs. The analysis of cases gives evidence supporting the model, and raises questions about some
assumptions widely used in International Entrepreneurship literature. Implications for managers and
suggestions for further research are made.
Keywords: accelerated internationalisation, Born Global, International New Venture, International
Entrepreneurship, theories of internationalisation, business model, market commitment

Introduction
Understanding internationalisation of innovative companies, which base their growth on knowledge
intensive products and services, has become very actual during recent decade. International entrepreneurship
(IE) (McDougall and Oviatt, 2000) is a young research field dedicated to understanding the phenomenon of
accelerated internationalisation of companies. Currently the main focus has been technology or knowledge
intensive companies. Yet the research field has little theoretical background due to its phenomenological
nature. The start of research is the contradiction between SMEs becoming global right from founding and the
incremental internationalisation process described by such approaches as U-models (Johanson & Vahlne,
1977) and I-models (Bilkey & Tesar, 1977). The incremental view suggests step-by-step internationalisation
from home market to more psychically distant markets after the company has acquired sufficient knowledge
about the foreign market. Yet researchers have found that either start as global companies or use multitude of
market entry modes simultaneously (Andersson & Wictor, 2003; Crick & Jones, 2000; McDougall et al.,
2003). Current stage of International Entrepreneurship research is in the phase, where different authors
suggest merging several theories in order to better describe and analyse the behaviour of knowledge
intensive companies and the phenomenon of accelerated internationalisation.
The objective of the paper is to analyse the cases of accelerated internationalisation using a
qualitative model, which is based on causal logic and integrates different research results and theories. d.
The research methods are causal qualitative analysis for building the model and longitudinal case study.
Longitudinal case study method is used for analysing cases of two knowledge-intensive Estonian companies.
Case companies were chosen due to their relative success in internationalisation and different
internationalisation paths. Substantial volume of publicly available information from newspapers, the
company’s homepages, and the commercial register, including the company's annual reports, were gathered
and analysed. Public information, including interviews with CEOs available in the Estonian newspapers and
journals were also used.
The generally accessible public information permitted mapping of the main material facts of the
company’s history, and a study of the balance sheets and management reports to the business register, the
main decisions taken and the resulting developments. It was also possible to derive from the public data the
major milestones, strategy, organisation structure, technology, skills and knowledge in every period. In
addition to publicly available data, several interviews were conducted. The main task of the interviews was
to ascertain the historical facts and the roles of the key figures.
The final text was completed after a critical comparison and analysis of different sources: annual
reports, interviews, newspapers, web pages and students’ graduate theses.
The scientific novelty. The paper is an attempt to combine assumptions and hypothesis of different
internationalisation theories into on logical structure through causal relationships. Cases studies are used for
testing the proposed relationships. The results of the paper allow better understanding of rapid

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internationalisation, and building stronger theoretical framework for research and policy making for
supporting growth of innovative companies.

Theoretical frameworks used in International Entrepreneurship research

Keupp and Gassmann (2009) analysed 179 papers published in 16 peer-reviewed journals and
concluded that most articles do not use any theoretical frameworks. Most common are the incremental
models (internationalization theory), foreign direct investments models (OLI paradigm), network theory, and
resource-based view (see Table 1).

Table 1. Theoretical frameworks used by authors of IE papers (Keupp & Gassmann, 2009). Note: “None or
not specified” includes literature reviews and editorial articles.
Theory # of papers Theory # of papers
None or not specified 82 Experiential learning 6
Internationalization theory Foreign direct investment 5
23
theory
Organizational learning 11 Social network theory 5
Eclectic (aka OLI) paradigm Industrial economics
10 4
(Dunning)
Alliance or interfirm 8 International new venture
4
network theory framework
Resource-based view 8 Entrepreneurial orientation 4
Transaction cost theory 7 Social cognition 4

In recent papers three approaches internationalisation theory (also called knowledge-based view: see
Freeman, 2009; Mele´n & Nordman, 2009), results of International Entrepreneurship research, resource-
based view, and organisational learning theory. Figure 1 represents the assumptions of original
internationalisation theory presented by Johanson and Vahlne (1977) and combined with current
understanding of the phenomenon. The original assumptions are marked with “tick mark boxes”. “Tick mark
boxes” are original assumptions of Johanson & Vahlne (1977), “Plus mark boxes” are assumptions of
Johanson & Vahlne U-model not directly stated in their original work, but necessary for validating the logic
of U-model. “Exclamation mark boxes” represent current understanding and statements made by researchers
in the International Entrepreneurship field. Supportive assumptions in “boxes with rounded corners” are
added by the author in order to fill the gaps in the causal logic and disclose the hidden assumptions. The
boxes are numbered for easier reference, the sequence of numbers has no meaning.
The logic tree should be read from bottom to top following the arrows. The logic should be read using
the “If…then” sentences. For example: if (1) “The firm strives to increase its long-term profitability” AND
(2) “The firm is... striving to keep risk-taking at a low level” AND (3) “Committing to the foreign market
opportunities allows to increase profitability”, THEN (5) “The firm is willing to make commitment
decisions, which have acceptable risk level”. The ellipse over arrows represents sufficiency: all statements in
the beginning of the arrows have to hold in order to cause the effect (the statement at the end of the arrows).
One result can be caused by several independent causes.
Although some ground statements or assumptions of U-model still hold (statements 1, 2, 16), several
assumptions have been challenged, and are replaced by other theories.
Forsgren (2002) supports the assumption 6, which counters original understanding that firms commit
only if the market knowledge is high. Forsgren claims that that in addition to risk from low market specific
knowledge, the firm also considers the risk of not making the investment. Even in case of having low market
knowledge, the risk of not investing can be considered by a company as a very high risk activity.

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 16. Some firms' 17. Some firms do 18. Some firms'
commitment to the market not plan to increase commitment growth
increases proportionally the commitment decreases or stops
with increase in beyond distributors after accelerated
experiential knowledge level internationalisation

15. A number of
SMEs are
penetrating rapidly
global markets 14. The optimal level
of commitment
depends on the
business model
13. SMEs have
unique resources
12. Some firms
making them decrease their
competitive with
commitment after
MNCs accelerated
11. Firms are
willing to internationalisation
10. SMEs can commit to
leverage their global markets
existing
resources
9. Through
8. Sometimes entrepreneurial
firms over learning firms learn
commit about optimal
7. Some global markets commitment level
are perceived more
profitable than psychically
close markets

4. Many global markets 5. The firm is willing

have the same perceived to make commitment 6. Sometimes
risk level as psychically decisions, which not committing
close markets have acceptable risk can be riskier
level choice for firms

3. Committing to the
1. "The firm strives to 2. "The firm is... foreign market
increase its long- striving to keep risk- opportunities allows to
term profitability" taking at a low level" increase profitability

Figure 1. Causal logic of International theory (authors drawing based on Johanson & Vahlne, 1977; Brennan
& Garvey, 2009). “Tick mark boxes” are original assumptions of Johanson & Vahlne (1977), “Plus mark
boxes” are assumptions of Johanson & Vahlne U-model not directly stated in their original work, but
necessary for validating the logic of U-model. “Exclamation mark boxes” represent current understanding
and statements made by researchers in the International Entrepreneurship field.

Mele’n and Nordman (2009) support the assumptions 17, and 18. They have found that companies can
be divided into categories according to their commitment behaviour (see figure 2). Not all companies want to
increase their commitment (in terms of moving from export or distributor model towards office or
manufacturing in foreign country) in order to grow and increase profitability. Such companies are labelled
low committers. Incremental committers follow more traditional route as they go from exporting activities
step-by-step to high commitment activities such as strategic partnerships or alliances. In case of the latter, it
seems that for some companies higher commitment might not mean higher profitability and they have
decreased their commitment over time (for example dismissing distributors). The high committers on the
other hand use several commitment levels for different countries at once. But the high committers do not

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always increase their commitment rapidly over time. It seems that time and additional effort is needed for
making the instant commitments actually to work and only then the company can move on. Or the
companies find out that their optimal commitment level is already reached.
Author of current paper proposes that the optimal commitment level is determined mainly by the
firm’s business model, which is determined by mainly by resources (including intangible recourses such as
knowledge and networks) and value proposition (statement 14). The business model and optimal
commitment level help to explain the low commitment in IT-sector and decreasing the commitment after
rapid internationalisation.
Export Distribution/ Strategic Sales Manufacturing
agents alliances/ joint subsidiaries
ventures
Low committers
Incremental
committers
High committers

Figure 2. Commitment levels (based on Mele’n & Nordman (2009))

Data collection and research method

Empirical research is based on analysing the longitudinal cases according to identified theoretical
assumptions about accelerated internationalisation. The key questions are: pre-history, speed of
internationalisation, increase in commitment level, determinants decreasing perceived risk. Main criteria for
selection of a company for case study were the following:
• Estonian origin of the company or/and tight relations to Estonia;
• The company should be relevant to a success story, i.e. it should be already global;
• The main development track of the company could be observed;
• Main part of knowledge and technology is created in Estonia;
• The companies represent technologies of different fields.
It was not possible to find many Estonian companies that met the described characteristics, therefore
more well-known of them were selected for the study. Current case studies are based on secondary data and
personal interviews. First of all, search for research publications was carried out using Google Scholar®.
That gave possibility to learn the aspects researchers already covered about the case companies. Then
historical facts and general overviews were collected from previous researches (Kodres, 2006; Vissak, 2007;
Mets, 2008) and press (for example Reach-U, 2009). After that web-pages and annual reports of the
companies were studied. The facts collected during the previous studies as well as current research were
evaluated in the context of research questions. The aspects not covered before and newer trends were
mapped, also some interpretations were checked in interviews.

Cases of Estonian companies

Case of Asper Biotech – small global biotech company (based on Kaarna & Mets (2009), Leego
(2009), Mets (2009b), Vissak (2007), Quattromed AS (2001-2007), Quattromed (2009), Icosagen
(2009),Ustav (2009)). Founding. Asper Biotech AS was founded in 1999 by prof. Andres Metspalu and
Jaanus Pikani, former CEO of University Clinics. Initial product was novel genotyping technology APEX
(instrumentation, software and bioinformatics solution) and service for identifying genetic components of
human disease, mostly customers of R&D field. Pre-history period: 1996-1999, prof. Metspalu worked in
the universities in France and USA working out a particular genotyping technology and building personal
network among scientists. Globalisation intention. Founders saw their market as global. First sales made
were to US and France in 2001, practically no domestic market. Commitment. Going from low to
medium/high. At first sales representative agreements were signed in Japan, USA, Norway and Italy (2001-
2002) for selling the APEX machine; 2003-2004, focus turned on direct contacts and shifted from product to
services; 2009: service clients in more than 40 countries. Network. Initially based on personal contacts of
the professor Metspalu. Difficulties going beyond personal contacts. Larger client network was established
through academic networks, conferences, and fairs. Financial leverage. Academic organizations were used

4
for covering patenting costs in early stages; US origin risk capital fund SEAF in 2000, and later Baltic Small
Equity Fund (BSEF) for product development and organizational expansion; European Union Framework
Program funding of several projects. Changes in business model. From product based value proposition
(novel technology for genotyping) to service based value proposition (globally unique genetic analysis for
eye diseases). Also sales target shifted from research labs and genetic testing organizations to doctors,
genetic consultants and patient organizations. The APEX technology sale was moved to Asper Group
subsidiary Genorama Ltd.
Case of Regio – mobile positioning software company (based on Kaarna & Mets (2009); Mets (2008,
2009a), Regio (2001-2008); Reach-U (2009), Uustalo (2009)). Founding. State-owned firm was founded in
1988 under the rules of Soviet Union. In 1990 the company was privatized. Founders were geographers Jüri
Jagomägi, Rivo Noorkõiv, and Madis Michelson. Initial product. Privatized company started with R&D
services (regional studies), map and postcard production. Pre-history period: in case of Regio the prehistory
period overlaps with domestic period. In 1992 Regio mediation of Intergraph software; 1993, Teet Jagomägi
(23) appointed the CEO after training in 3D programming in USA; implementation of the geo-information
system (GIS); the first Estonian sea-map after Soviet occupation in 1940; 1994, complete digital map
technology using GPS; 1998, CD-Atlas. Globalisation intention. The company had an intention to grow
global since 1992. Yet it took them several years before they had a globally marketable product. First
attempts to export were made in 1992-1993. In 1999 Regio won the tender from Ericsson AB for mobile
positioning software (MPS), which became the breakthrough for globalization. Commitment. Regio has
used high commitment approach. In 2000, the company merged with the Finnish listed corporation Digital
Open Network Environment OY (DONE); 2001, drastic growth of exports to one fourth of sales; 2002,
bankruptcy of parent company; management buy-out of the company. In 2004 global reselling agreement
with Ericsson was signed. Partnering with Ericsson meant possibility to offer Regio’s software in countries,
where Ericsson had sold the infrastructure. In 2005 Regio delivered location based services (LBS)
middleware to Saudi Arabia, in 2006 to North Africa, and in 2008 entered the market in Mexico. Signing the
contracts with end clients still means negotiation and competing with other software providers. Regio’s
employees spend months in foreign countries for building client tailored software solutions. Network. Use
of network of Ericsson clients. Yet a lot of time and effort is spent for building strong personal contacts with
end users. Financial leverage. First, founders mortgaged their homes for bank loan on very unfavorable
conditions in 1993-1994. In 1998 Baltic Small Equity Fund (BSEF) became risk capital partner for Regio;
2000, merger with DONE (funding product development). In 2001 management buyout of the company from
DONE. Changes in business model. Shifting from post-cards and maps (B2C) to GIS, digital maps and
LBS (B2B).

Conclusions
Despite heavy criticism the original Internationalisation process theory (Johanson & Vahlne, 1977) is
based on assumptions, which still hold. Changing the assumptions, which have become invalid, adding new
assumptions from other theories and models allows better understanding of accelerated internationalisation
phenomenon.
The cases support the view that knowledge intensive SMEs can leverage their financial and other
resources (such as network, general market knowledge) in order to become global from the start. On the
other hand both cases prove that “pre-history” is important aspect for understanding accelerated
internationalisation. In case of Asper, the global product development and network building happened before
the initiation of the company. It took 6 years (1995-2001) to build technical knowledge base and develop a
product highly competitive on global market and first sales were made. In case of Regio the network
building and product development took 7 years (1992-1999) before first international sales were made based
on globally competitive product. Only major difference with Asper is that Regio was already established
during the network and product building phase.
The cases support the view that companies can be divided into categories according to their
commitment behaviour. There are companies, which business model does not need further commitment
beyond distributor stage (Asper), and there are companies, who start with high commitment partnership
contracts (Regio). The cases also show the need to redefine the low or high commitment. If higher
commitment should enable obtaining higher level in market specific knowledge, then the highest
commitment is direct and intensive partnership with end users on foreign markets. For many industries and
business models such intensive contact does not necessary mean sales office or manufacturing plant on

5
foreign market. Therefore there is a need for differentiating exporting activities offering little possibilities for
obtaining market specific knowledge from direct contacts with high potential for experiential learning.
Further research is necessary for integrating different theories and conducting empirical research to
validate the integrated model.

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