Globalization creates opportunities for many domestic companies

Michael Nicholas, Jakarta

Changes in the business environment have made it easier for small and medium sized companies from countries such as Indonesia to access international business opportunities in a way never before possible. But research shows that managers will have to develop a more innovative and international mindset if they are to succeed in global markets.

At the recent ASEAN summit in Laos, leaders agreed to proceed towards a China-ASEAN Free Trade Agreement (FTA) which will create the world's largest free trade zone with a market of over two billion people.

ASEAN is also considering similar agreements with Japan, South Korea, and possibly even Australia and New Zealand. Meanwhile in January, officials from Indonesia and Japan met to lay the groundwork for discussions on a bilateral FTA. Falling import tariffs are just one of several global trends that have created unprecedented opportunities for companies from smaller markets on the periphery while at the same time increasing the amount of competition they will face at home.

Until quite recently, companies were constrained by various barriers of geography: Import tariffs, market regulation and expensive telecommunications and transport expenses that significantly increased the cost of doing business from a distance.

According to Lowell Bryan and Jane Fraser, these barriers favored local producers and provided companies that emerged in the large mass markets of the U.S., Japan and Western Europe after the World War II with an advantage in economies of scale that was hard to beat. These companies integrated vertically to overcome the high interaction costs of the market and then diversified horizontally into new industries to reduce risk. With their large size, they were better able to attract and access the scare resources needed to compete: Capital, skilled managers, technology and relations with governments.

But, times have changed dramatically. Barriers that once protected the large incumbents have crumbled under waves of deregulation, privatization, and new intermediary markets, allowing smaller companies from locations on the periphery to compete and win global market share. New technologies, including new computing and communications technologies, have cut transaction costs making it possible for companies to specialize more than ever before.

By combining the same small niche market in dozens of countries, companies can create one larger more attractive market. The increased availability and mobility of capital in new financial markets has diminished the corporation's role as a financial-portfolio manager. Investors can more easily diversify risks and generally prefer more focused "pure-play" companies to broad-scope ones.

This sea change has allowed specialized players to achieve dramatic growth and global scope rapidly giving rise to the emergence of small companies that are "born global". A McKinsey & Company study of Australia's high value-added manufacturing exporters highlights the rise of numerous small to medium-sized companies that are now able to successfully compete in global markets -- virtually from their inception -- against large, established players. These firms do not slowly build their way into international trade, but rather are born global in a way that would have been virtually impossible 20 or even ten years ago.

Born global companies began exporting on average only two years after their foundation and achieved about three-quarters of their total sales through exports. Though small, with total average sales of US$16 million, these firms can successfully compete against larger established players once they overcome set-up hurdles and develop both an innovative and international mindset.

An International Labor Organization (ILO) report found the same companies in most OECD countries. According to the report, the factors that most frequently hindered export growth were credibility, access to finance, market information, technology, and, most importantly, the lack of an innovative and international mindset.

The same phenomenon has also been found in developing countries such as Indonesia. In a study of companies from India, Brazil and the Philippines, Christopher Bartlett & Sumatra Ghoshal found many so-called late movers competing globally once they developed organizational confidence, a clear strategy, passion for learning and the leadership to bring these factors together.

The problem for multinationals in places like Indonesia is that they typically enter global markets at the bottom of the value curve and stay there. Managers either lack the confidence or the courage to climb the curve to higher value-added and higher margin sectors so the immediate challenge is to break out of this mind set. Once freed of this psychological burden, companies must develop a culture of continuous cross-border learning and find a strategy in which being a late mover is a source of advantage.

Late mover advantages are typically exploited in a couple of ways. One is to benchmark established global players and then maneuver around them, often by exploiting niches the larger companies overlooked. A riskier way is to challenge the rules of the game as a newcomer and capitalize on the inflexibility in the established player's business models.

Companies who enjoy global success understand how to learn from the constant flow of new demands, opportunities and challenges that international competition brings. The willingness to learn is the central skill that allows companies to move up the value curve.

Leaders of successful late mover companies shared two characteristics. First, was a commitment to global entrepreneurialism that was rooted in the belief that the company could succeed internationally. Second, they all exhibited a remarkable openness to new ideas that would facilitate internationalism -- even when those ideas challenged established practice and core capabilities.

Globalization has created unprecedented opportunities for companies from the periphery. Unfortunately, with trends such as the growing number of free-trade agreements, Indonesian companies no longer have the luxury of deciding if and when to compete internationally. In today's global markets, you don't have to go abroad to experience international competition. Sooner or later the world comes to you.

Michael Nicholas (mnicholas@shaw.ca) is a business manager and consultant based in Canada who has spent several years in Indonesia.