Why “born digital firms” must have a physical presence in foreign markets

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Foreign direct investment (FDI) and foreign sales among born-digital firms. This figure is based on a full list of 169 firms, not just the analytic sample used for hypothesis testing. The vertical axis shows the logarithm of the number of FDI projects, the horizontal axis shows the ratio of foreign sales to total sales of each firm. credit: Journal of Global Strategy (2023). DOI: 10.1002/gsj.1474

Companies whose roots are in the sale of non-physical digital products, also known as “born digital companies”, can establish an international presence without ever physically setting foot in another country. But experience shows that many born-digital firms still choose to establish a physical presence – funded through foreign direct investment – ​​in key markets.

A new study published in Journal of Global Strategy in February 2023 highlights the role of physical presence in foreign markets for born digital firms.

“Past research has shown that digital technologies are highly substitutable, meaning there is little relative difference in value when a resource is deployed from one market to another. Digital technologies are also considered to be highly scalable, meaning that the value of the resource does not decline sharply when the resource is made available to other markets. However, we argue that expanding digital technologies to foreign markets may require additional, physical resources that are not always fully interchangeable or scalable,” says Maximilian Stahlkamp, ​​lead study author who works as an assistant professor of international business and global strategy at Virginia Tech.

These additional resources include local human resources as well as context-specific expertise such as sales, customer service and stakeholder relations.

Stallkamp, ​​along with his co-authors Liang Chen of the Singapore Management University and Sali Li of the University of South Carolina, collected and analyzed data on 129 United States-based digital firms with 804 foreign direct investment projects in 39 countries. They used a conditional logistic model to determine the effect of various country-specific variables, including geographic and cultural distances from the United States, on foreign direct investment location choices.

“Our analysis shows that born-digital firms are more likely to locate foreign direct investment in distant and culturally very different countries. This decision was made to reduce the challenges associated with large geographical and cultural distances,” adds Chen, associate professor of strategy and entrepreneurship.

These findings suggest that establishing a physical presence can be important for successfully capturing the value of digital products by providing access to local resources in remote countries. Therefore, firms and executives should carefully decide whether and in which markets they should have a physical presence before making such investment decisions.

“Ours is one of the first studies to collect and analyze systematic data on foreign direct investment from native digital firms. It provides an important empirical basis for recent discussions of digitization in global strategy,” Li concludes.

More info:
Maximilian Stallkamp et al, Boots on the ground: Foreign direct investment from born digital firms, Journal of Global Strategy (2023). DOI: 10.1002/gsj.1474

Courtesy of Strategic Management Society

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