A recent McKinsey study of Australia’s high-value-added manufacturing exporters spotlights the rise of numerous small to medium-sized companies that successfully compete—virtually from their inception—against large, established players in the global arena. These firms did not slowly build their way into international trade. Contrary to popular wisdom, they were born global.

Exports account for a full 95 percent of Cochlear’s $40 million sales—sales that have been growing at a real annual compounded rate of over 25 percent throughout the last five years. Cochlear is a company specializing in the production of implants for the profoundly deaf. Based in Australia, it maintains an international technological lead through its strong links with hospitals and research units around the world and through its collaborative research with a network of institutions in Australia, Switzerland, Germany, and the United States. It is a prime example of a company that was "born global."

A recent study of Australia’s high-value-added manufacturers (see insert) identifies two very different types of exporting firm. The first, domestic-based firms, fit the traditional idea of an exporting firm. Their core businesses are well established, with strong skills, solid financial capability, and a sound product portfolio. Having achieved a sustainable base in their home markets, these firms then turn their sights to the potential growth available through export. Even so, the primary focus of their competitive activity remains the home market. The average age of these traditional firms at first export was 27 years, and their exports averaged 20 percent of total sales (Exhibit 1).

By contrast, the second group—the "born global" firms—began exporting, on average, only two years after their foundation and achieved 76 percent of their total sales through exports. Though small, with total average sales of $16 million, these firms are successfully competing—and winning—against larger established players worldwide. Despite their relative youth—their average age is only 14 years—they are currently responsible for almost 20 percent of Australia’s high-value-added manufacturing exports.

Exhibit 2 and Exhibit 3 contrast the profiles of the domestic-based and born global firms, and show some of the key issues they face at different phases in their evolution.

Born global firms are important for two reasons. Although small, they are:

• Strikingly competitive against larger established players, and their competitiveness has increased significantly in the past two decades.
• Managing profitable, fast-growing global business systems in a way that was impossible 20 or even ten years ago.

Why the old rules no longer hold

Born global firms are the most extreme example of the potential significance of small and medium-sized enterprises for a nation’s export growth

These firms are the most extreme example of the potential significance of small and medium-sized enterprises (SMEs) for a nation’s export growth. As noted, 20 percent of new trade growth in Australia comes from born global SMEs, and a further 60 percent from domestic-based SMEs with total sales of less than $100 million. This phenomenon is not confined to Australia. What information exists points to similar patterns emerging throughout the world. In Korea, for example—an economy renowned for the dominant export role played by large conglomerates, or chaebol—SMEs are responsible for a significant and growing share of export activity (Exhibit 4).

The rise of SMEs

Achieving economies of scale by expanding small enterprises has been one of the key building blocks of post-war industrial development. One consequence of this has been the expectation that small enterprises will occupy a declining share of national economies over time. This was certainly true until the mid-1970s, with employment in small businesses falling in many countries. But the trend has not continued. Indeed, evidence from throughout the world suggests that a reversal has taken place.

A landmark international study conducted by Sengenberger in 1990,¹ analyzing data from the United Kingdom, six other European countries, the United States, and Japan, identified a "V" pattern of decline in SMEs in the 1950s and 1960s followed by growth in the 1970s and 1980s, both in the manufacturing sector of each country and in its total economy. What is remarkable about this finding is not the growth in the share of employment in small firms, but, rather, the fact that, as Sengenberger noted, "the pattern of decline and then growth is so robust over such a wide sample of countries, sectors, size distributions, and institutions."

What is responsible for this global pattern of SME growth? Broadly, the causes lie in the dynamic interrelationships between changing consumer preferences, changing manufacturing and information technology, and changing competitive conditions:

• Consumer preferences have shifted radically in the past two decades. Standard products have had their day; consumers are now demanding specialized and customized products. As a result, niche markets have become an important source of opportunities for small firms, which are usually swifter than their larger competitors to adapt product offerings to meet emerging market needs.

  Niche markets have become an important source of opportunities for small firms

• Until the 1960s, process innovations usually favored large-scale operations that created economies of scale in production. With the advent of electronic process technology, however, SMEs are now able to compete with larger firms on cost and quality—often with more flexibility.

  With the advent of electronic process technology, SMEs are now able to compete with larger firms on cost and quality—often with more flexibility

• Developments in communications are affecting the boundaries between firms. Large, vertically integrated companies had a competitive advantage when information flows were expensive and slow. Using the latest telecommunications and computer technology, however, enables firms of any size to manage business systems that extend beyond their own boundaries. The Japanese—whose car industry is a leading example—were among the first to adopt this approach.

  Large, vertically integrated companies had a competitive advantage when information flows were expensive and slow

• In a world where product life cycles are shrinking and consumer tastes change quickly, smaller firms are often more adaptable and cost effective.

The ability to compete globally

It has long been thought that firms need to build a strong domestic base before venturing into overseas markets. One reason is the high fixed costs of entering a new market at a distance, including the costs of gaining market information and of managing agents or representatives to provide quick, effective sales and service response.

Dramatic changes have occurred in both these activities. Information on export markets is more readily available thanks to improvements in the recording of public and private data throughout most of the world, and information technology has substantially lowered storage and retrieval costs. Critical to the export of goods and people, transport—and airlines in particular—has become cheaper, more frequent, and more reliable. Similarly, international telecommunications have become much cheaper and more dependable. When asked how they actually do business, the born global firms in our survey said that the fax machine was paramount in allowing them to run cheap and responsive sales and services operations across languages and time zones. We met numerous firms with sales of barely a few million dollars running highly successful international businesses in specific niche markets. After an initial sales trip, day-to-day business is carried out by fax.

How do the born globals compete?

Born global firms were found in all industries, even in sectors considered to be declining

The born global story is not about particular technologies or sectors of the economy; fast-growing firms were found in all industries (Exhibit 5). Even sectors considered to be declining in global terms had their share of these firms. Born global companies are exposed to competition from international low-cost providers from the first day of their existence; to be successful, they need to compete on quality and value—with value created through innovative technology and product design. Cost competitiveness, though important, is taken for granted. Orders are won via superior quality and value at a competitive price (Exhibit 6). Two-fifths of the companies surveyed ranked technology as their most critical competitive lever.

Being close to customers was vital in creating the value that brought success. These firms "owned" customers, not products. By understanding and satisfying the needs of a particular group of customers better than anyone else in the world, they set out to create a market where they have virtually no competitors. Typically, they compete in niche markets, are very flexible, and move fast.

Implications for established players

Large established players may well find that competition is increasingly coming not from market entry by equally large international peers, but rather from smaller niche firms located all over the world, which cherry-pick the best business and customers. To defend against these tactics, established players can aim to neutralize their small competitors’ advantages by:

• Continuing to disaggregate customers and to focus clearly on the value proposition for each segment—particularly the more attractive ones.
• Maintaining a strong customer focus and including ongoing relationships with customers—not just products or existing capital base—among their chief assets.
• Striving to create the most flexible—and economical—business system possible by redesigning core processes and outsourcing both activity and risk where appropriate.

Implications for economic development

Our study indicated that SMEs are playing an increasingly important role in economic activity and trade performance. What is more, they are likely to be responsible for a large share of job growth throughout the western world during the next two decades. Their problems and constraints are, however, very different from those of larger firms. Both the born globals and the domestic-based SME exporters in our survey reported that the factors that most frequently hindered export growth were credibility, access to finance, market information, technology, and, most important, the lack of an innovative and international mindset.

Such issues deserve much more attention from governments over the next decade. Economies capable of tackling them will establish a competitive advantage and enjoy higher export and job growth.

A window on the future

Much of the growth in new business activity, both domestic and international, is likely to occur among small, innovative, flexible enterprises

The born globals are one chapter in a bigger story about a fundamental shift in the primary unit of economic activity. Large firms will always exist, but much of the growth in new business activity, both domestic and international, is likely to occur among small, innovative, flexible enterprises, which are forming and reforming more rapidly today than ever before. In devising their policies for the next century, governments will find themselves concerned less with protecting and enhancing the success of individual firms in global markets than with fostering an environment that supports a reservoir of trained and mobile individuals who can build and rebuild small, adaptable, and dynamic international companies.

Ken Ohmae’s "borderless world" has long since become a reality for major corporations. The born global firms are in the vanguard of its realization in small and medium-sized enterprises. They herald the promise of enormous benefits from the vast flow of ideas, goods, and people as hundreds of thousands of small firms trade with each other around a world that is rapidly becoming a genuine economic global village.