Traditionally, doing business internationally involved numerous considerations and had many potential roadblocks. It was't, and in most cases is still not, a trivial decision to internationalize. Market seeking firms had to figure out foreign laws, regulations and customs, as well as overcome any tariffs or logistical challenges of selling their goods in regions separated by political or geographic distance. Whether selling a product far across the Pacific, or in closed off markets such as the former Communist Eastern Europe, many markets were indeed distant if not inaccessible for bricks and mortar types of businesses.
As we move well into the digital and globalized age, there seems to be a new class of goods and services that in many respects defy borders and geographies. They are in this respect the epitome of Friedman’s flat world. Online and digital goods are breaking the fundamental rules and restrictions associated with traditional international commerce. Distance and the concepts we traditionally associate with international trade, such as a home country, are being blurred. And the question for these new digital firms is not “why internationalize?”, but “why would we not go international from the very beginning?”
Even through a resource light method of foreign expansion such as exporting, the obstacles are enough to prevent many businesses from only selling their goods and services only in fairly safe new geographic areas, such as Western Europe and Japan. If a 19th Century Viennese chocolate merchant wanted to sell his famous chocolates in the neighboring Hungarian part of the Empire he would be stymied by the 1-2 day travel that would make his chocolates (ones without preservatives) quite unsavory. For a large chunk of the 20th Century the merchant was blocked not by geography but by the Iron Curtain, which again made selling his products even 50km away impossible. Today the technological and political barriers are mostly gone, and the merchant can sell his goods under aegis of EU and WTO covenants. Yet even with a common set of laws, common currency, lack of import restrictions, and very manageable transportation costs, the merchant decides not to go beyond the borders his city of Vienna.
A large chunk of why this still may be the case can be explained by Ghemawat’s CAGE model. Even though the four domains of distance have largely been diminished in the past century through globalization and technological advances, they can still be pronounced for particular nations and within particular industries. Political hostility and government policies, for example, are particularly strong in sectors such as agriculture. Food and agricultural imports come under much more scrutiny and in many cases the entitlements and protections in local markets prevent the import of many food products.
Having said all that, for a relatively new class of products and services internationalization is not an option, it’s a given. The online world has completely removed the “geographic distance” pillar in Ghemawat’s model, while also greatly reducing or eliminating other aspects of the CAGE model. The use of English as a Linqua franca in the technology world and emergence of simplified, and seemingly universal online norms for communication, are very much removing “distance” in this type of commerce. And although there are still risks associated with some types of distance in this new digital world, they are becoming less and less prominent. So whether a company is resource seeking or market seeking, distance is become less and less relevant in this new online world of software development and consumption.
For resource seeking firms the barriers can still be somewhat pronounced. In software development, the key consideration is that programmers use and understand the same programming languages and development frameworks. And although this commonality is a large part of the “culture” context, development teams that are not in the same location do come into issues around other aspects of cultural and in many cases administrative distance. For example, different styles of communication need to be taken into account when dealing with remote teams from Germany compared with India, with the former being very low context and the latter high context. Despite these ongoing challenges, global delivery of software is still growing.
Returning to our Viennese merchant, let’s suppose he’s no longer selling chocolates but online software. That could be anything from traditional anti-virus software to online services that allow you to play games on your iPhone. He could also be selling this software directly or through the help of third party brokers/enablers such as PayPal or Apple’s App store.
The merchant may not care where his development team is and he definitely doesn’t care where his customers are. A customer using his software down the street or across the globe is in many ways the same customer. With a purely online product, the initial and subsequent interactions are largely all online, with only exceptions, such as service and support, breaking out of this form of interaction.
That’s not to say that there isn’t potential for distance in this new relationship. Cultural differences, such as the lack of localization and economic distances, namely the ability for consumers across to the world to pay the same price, may limit the success of the merchant. Also, there may still be “psychological distance” in buying or using services online rather than in person – a phenomenon that is quickly disappearing worldwide.
Yet for our Viennese developer, all he has to do is publish his software on Apple’s Apps store and suddenly he has customers all over the world. The infrastructure and global community is in place to enable this new type of commerce that is in many ways borderless.
Consumption of software and media in the past couple years has largely moved to a service model that is largely independent of location and even jurisdiction. Online services now exist in “the cloud” – a metaphor for the highly connected datacenters that host these services throughout the world. A service like Facebook can no longer be thought of as existing in one place. Technically, the service isn’t located in one place. It’s in multiple places around the world, simultaneously. Cloud services rely on redundancy and resiliency, which means they need to be available in multiple locations and synchronized in those multiple geographic locations all the time. We can no longer say that Google databases are being run from California or that a particular search is performed in one location. Depending on when and what the search is about it can actually be executed on the dozens of datacenters that Google owns or services providers it is partnering with around the world. Data and the processing of that data are fragmented throughout locations around the world, all the while existing in multiple locations at once.
This new paradigm shift is hard for customers and especially politicians/lawmakers to comprehend. It poses challenges for current laws that depend on a mindset that assumes laws are valid in a particular jurisdiction. Currently, debates and legal challenges are occurring in everywhere from tax dominion (California trying to tax Amazon which is based out of Washington State) to copyright/patent law, to security requirements related to online services (the Patriot Act and its effects outside the US). Fundamentally, how the global community deals with data and activities that are this nebulous form needs to be resolved. It’s very clear, however, the industry’s trajectory is not going to change. More and more services will live and be consumed in this new digital format – online through cloud services. We’re not going back to DVDs and installing software directly on PCs (as opposed to consuming them through the cloud).
A company like Facebook with an estimated valuation of over $80 billion (on secondary markets) has over 70% of its users outside of its home country of the US. Over half a billion users in virtually every country use Facebook on a daily basis, yet Facebook has almost no international presence. In Canada, Facebook has one office with a couple dozen employees serving over 15 million users. It has offices only in less than 10 countries out of the 150 plus countries that it has users. This is unheard of in any other industry.
Distance in this industry is from a day to day perspective mostly irrelevant when considering development of a product. Expatriates are not only not necessary; they in many ways represent an anachronism. Moving into a new geographic area can be viewed on par with adding a new functional feature to your product. Adding a new feature on a sub section of the homepage can be considered in the same way as localizing content for a particular area, such as Toronto. Applying the time/cost/quality triangle, a product manager has to decide what makes the most sense for his product based on customer demand coupled with current constraints. What will provide more bang for the buck, adding feature X (a new users function) or feature Y (a customization for Toronto users)?
A global strategy is therefore considered not in a unique context, but in a context of standard product development for many of these new online services and firms. The assumption is that you will have a global audience, and localization is a feature that is to be considered like any other feature request.
I was in China and noticed foursquare stopped working. It went down for a couple days without warning. The Chinese government had shut down access to the online service unexpectedly and it was conjectured that this was in conjunction with the a 100th Anniversary of the Chinese Revolution fall of the Qing dynasty. Foursquare allows multiple users to identify their location and activities online by checking into venues and leaving comments. For the Chinese government, such acts can be seen as a threat to the “harmony” of the nation as it was during the anniversary of the Tiananmen Square protests of 1989, when the service was also shut down.
The Chinese government has also had an uneasy relationship with other online service providers such as Google, which has for the most part left the country. Apple, as well, has also had little success in providing services through its online App store, due to the culture of piracy in China. China has also dictated that network and technology providers use unique “Chinese standards” when implementing their technology. These standards are not compliant with the standards adopted worldwide and are proving to be strong barriers online and technology companies because they mean giving up control over technology and, most importantly, data.
China is very much unique in this respect, in that is has managed to break the borderless world of online goods and services through its exceptional market size and mercantilist political system. To a smaller degree this is occurring in other countries as well. Canada has in the past year managed to gain worldwide attention through a report published by its Privacy Commissioner that suggested Facebook may be violating Canadian laws based on the way certain features are implemented. However, it was unclear how a maverick bureaucrat would force (or even possibly shut down) Facebook, a service being used at one point by half the Canadian population, if it didn’t comply with her recommendations.
The real question for leaders in the online industry is what will happen with China. Surely, we can’t have a global online world where over one billion people are excluded.
The Chinese problem is being worked on many fronts and with many approaches. Some firms are acquiescing to “Chinese standards” and demands in hopes of getting a payoff in the future, while others are taking a stronger stand and not giving in to Chinese demands. Also, shadow “Facebooks” and “Googles” are emerging within the Chinese online market. These enterprises closely collaborate with Chinese censors to ensure their survival. It’s unclear whether the whole world is also heading in a direction that is less open and more regulated. The EU could easily start adopting similar protectionist policies and limitations on digital content and delivery.
Are we in a Golden age of digital content that will soon disappear behind digital barriers? Or are we at the cusp on a new era of commerce that will increasingly have fever and fever distance limitations? So far, the evidence coming back is mixed. Technology has allowed for a distance to be become less and less noticeable, if not invisible in the online world. Yet some governments have managed to reintroduce new forms of distance, creating uncertainty and risk in this new medium.