Academic journal article American Journal of Entrepreneurship

How Far Will They Go? Intellectual Property and the Range of Market Participation by Nascent Firms

Academic journal article American Journal of Entrepreneurship

How Far Will They Go? Intellectual Property and the Range of Market Participation by Nascent Firms

Article excerpt

Introduction

In 2005, close to half a million individuals in the United States created a new business each month (Fairlie 2007). One of the many choices these nascent entrepreneurs must make is the geographic destinations of their products. For some new firms, it may be optimal to sell only to local customers. Others may find it optimal to expand participation to a broad national market or even to international markets. This paper considers whether nascent firms with a competitive strategy in intellectual property (IP) have a greater likelihood of servicing markets that are geographically farther in distance. IP can provide a firm with national and/or international protection and, subsequently, market power. Accordingly, firms with a strategy based on the exploitation of IPoriented market power are likely to extend the geographic scope of their customer base, despite the entry, transaction, and transportation costs associated with participation in these additional markets.

While it is common practice in international trade models to account for the geographic distance between two countries, data limitations in firm-level data have made it difficult to assess the distance between firms and consumers located within the same country. Instead, it has been more common in past literature to analyze the firm-level decision to remain domestic or to sell abroad. However, the Panel Study of Entrepreneurial Dynamics II (PSED2) provides unique data on which to explore the intended geographic range of market participation for nascent entrepreneurs by providing ordinal information on sales location: local, regional, national, and international. Using this unique data, we find that entrepreneurs that cite a competitive strategy in IP are more likely to (1) be "born national," (2) be "born global, " and (3) to participate in markets that are farther in ordinal distance (both domestically and abroad).

Related Literature

Early theories on market range suggest a sequential progression over time from local to regional to national to international markets, but do not consider the possibility that a firm will service the national or international market immediately upon start-up. Vernon (1966) was the first to relate the process of innovation to the geographic location of a firm's sales. In Vernon's Product Cycle Theory, when a new product is developed, sales begin locally and spread first throughout the domestic market before being exported to foreign markets. Once the product is standardized and competition becomes costbased, production moves overseas. Vernon's theory is complemented by the Uppsala Model (Carlson 1966; Johanson and Vahlne 1977, 1990), which argues that firm-level internationalization is a gradual process that occurs only after the firm has satiated the domestic market and begins to receive overseas requests. However, these early works overlook the possibility that new firms might immediately enter the national and/or global market.

The presence of "born global" firms has led to a new avenue of research, but the characteristics that result in the early internationalization of entrepreneurial firms are not universally accepted. Variables unrelated to innovation and IP (which is the focus of this paper) that have been found to impact early internationalization of entrepreneurial firms include: firm's management experience (Ibeh 2003), foreign ties (Carson et al. 1995; Jaffe and Pasternack 1994), and the education of decision makers (Kundu and Katz 2003). More closely related to IP, Allen and Stearns (2004) found that a firm's involvement in research and development (R&D) impacts their decision to be born global. Under a similar vein, Kundu and Katz (2003) suggest that new firms that are technologically innovative are more likely to be born global. Contrastingly, Bloodgood et al. (1996) do not find a significant relationship between innovation and the early internationalization of firms. Hansen and Shrader (2004) also find no link between innovation and early internationalization, but do note a positive relationship between early internationalization and high-technology products. …

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