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Int. J. Production Economics 89 (2004) 363378
Dynamic knowledge-related learning processes in internationalizing high-tech SMEs
Sami Saarenketoa,*, Kaisu Puumalainenb, Olli Kuivalainena, Kalevi Kyl. heikob a
b a Telecom Business Research Center, Lappeenranta University of Technology, P.O. Box 20, FIN-53851 Lappeenranta, Finland Department of Business Administration, Lappeenranta University of Technology, P.O. Box 20, FIN-53851 Lappeenranta, Finland
Received 15 April 2002; accepted 16 May 2003
Abstract This paper studies the internationalization of high-tech small- and medium-sized firms (SMEs). The traditional internationalization theories suggest that the firm's international involvement increases in stages as a result of incremental learning. However, the small information and communications technology (ICT) companies are often characterized as born globals, showing very rapid and intensive international growth enabled by the use of external resources, such as partnerships and networks. Adopting a knowledge-based view of the firm has proved to be a useful way to theoretically explain the internationalization process of these ICT SMEs. However, in our view, the crucial dynamic aspects of knowledge development have not received enough attention in previous empirical studies, which have typically been more like static snapshots. In this paper, we will first launch an evolutionary knowledge management model, derive then its basic theoretical propositions and finally test them empirically in terms of a longitudinal survey of small- and medium-sized software and content providers in the Finnish ICT-sector (from the year 1999 to 2001). Most of the results are straightforward and show that at least some of the proposed knowledge-related determinants really have significant effects on the dynamics of internationalization. r 2003 Elsevier B.V. All rights reserved.
Keywords: Internationalization; Knowledge-based view; ICT; SME
1. Introduction The internationalization process of small and specialized high-technology firms is often different from that of more mature industries. The established internationalization theories propose that the firm's international involvement increases in stages as a result of incremental learning. However, the
*Corresponding author. Tel.: [phone]; fax: [phone]. E-mail address: [e-mail] (S. Saarenketo).
small information and communications technology (ICT) companies are often characterized as born globals, showing very rapid and intensive international growth enabled by the use of external resources such as partners and networks. Adopting a knowledge-based view of the firm is a practical way to explain the internationalization process of these companies. Nevertheless, the dynamic aspects of knowledge development have not received enough attention in previous empirical studies. The main objective of this paper is to identify how development of knowledge and capabilities
0925-5273/03/$ - see front matter r 2003 Elsevier B.V. All rights reserved. doi:10.1016/S0925-5273(03)00185-3
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may contribute to the rapidity and extensiveness of internationalization. We have applied a general evolutionary knowledge management model that makes it possible to derive the basic determinants of the company's ability to leverage their knowledge in technology, marketing, resources and process management. We attempt to utilize these determinants when explaining the internationalization process and compare our results with the more traditional views about internationalization. From the model we have derived propositions on the dynamic knowledge-related learning processes and their effect on the scale and rapidity of internationalization. The propositions are tested empirically with a longitudinal survey of small- and medium-sized software and content providers in Finnish ICTsector. Most of the results are straightforward and show that at least some of the main proposed knowledge-related determinants have significant effects on the dynamics of internationalization. The paper consists of five parts. In the first part internationalization theories and particularly the learning aspects and challenges faced by the small high-tech firms are examined. In the subsequent section, the knowledge-based view of the firm is introduced generally. Then, our particular evolutionary knowledge management model for internationalization and propositions will be launched. The empirical part reports the results from our longitudinal data set and the last section concludes the paper with some implications and suggestions for further research as well.
2. ICT-industry--what is it all about? The ICT-industry has been one of the fastest growing industry sectors for several years. For example, European Information Technology Observatory (EITO) has recorded double digit growth numbers in 1999 for Europe and they expected similar trend to continue (EITO, 1999). Although not all the news from ICT firms was positive in 2001, the ICT-sector continues to grow, at least in the European market. In October 2001 EITO estimated that the Western European market would grow by 6.8% to h575 billion.
Research organization IDC's forecast is parallel, 67% in Western Europe and 46% in the United States (IDC, 2002). The size of the world market is estimated to be h2151 billion in 2001 (EITO, 2001). Although the international growth of services and especially information technology based services continues, certain segments of the ICTsector have been in a downturn. For many firms, the year 2001 meant disappointing sales, layoffs and deflated new technology expectations (e.g. last year was the worst ever for telecommunication manufacturers Motorola and Lucent) (Briody, 2002). The most problematic segments were related to telecommunications, especially to end user devices (EITO, 2001). Network carriers are also burdened with the high price of the license investments and this may hinder the service development. The diverse nature of the industry makes the analysis of the developments complicated. There are many different types of services and products, e.g. software business can be divided into packaged software, enterprise solutions and professional services related to software (Hoch et al., 2000). Convergence of the IT, communications and service industries, the increasing use of Internet and wireless technologies by traditional ``brick and mortar'' firms make the situation even more blurred. There will be many actors involved in the production of new types of offerings and many services accompany even highly tangible high-technology products (e.g. embedded software products). However, the complexity of the industry was not the only reason behind the crash of the dot-com boom. It is clear that the high expectations associated with the use of new technologies gave distorted signals to markets (i.e. to consumers, other firms and investors). Like in many cases when launching new disruptive technologies, many dot-com roll-outs were done without clear estimations of sales and costs (Porter, 2001). It appears that for many firms, Internet only was a substitute for a strategy and this is one of the reasons for the fall of ``brave'' new economy (Porter, 2001). High-tech small- and medium-sized firms (SMEs) in the ICT-sector are currently coping
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with the situation in which venture capital is no longer easily available and many products and services do not have markets which are ready to utilize the product yet or their demand has slumped. The situation is challenging, as the forces--related to products, markets, technologies, competition, etc.--pushing firms to become international have not disappeared. By using two data sets (1999 and 2001), we will propose how the firms within the Finnish ICT-sector really have developed (and how they should have been developed) their knowledge base and capabilities (i.e. we will focus on the industrylevel analysis). We have tried to include the recent changes in the industry environment (i.e. downturn in some market segments) into consideration.
3. Explaining the internationalization of the firm Internationalization can be explained as ``the process of increasing involvement in international operations'' (Welch and Luostarinen, 1988, p. 36). Traditional frameworks that explain firms' internationalization were formulated already two or three decades ago. At that time there were bigger barriers for entering foreign markets and the internationalization was the luxury of the largest and strongest firms. Hence, most of the early studies related to internationalization have dealt with the large manufacturing firms. More recently, as the focus because of deregulation and liberalization of markets has been enlarged to smaller firms and service firms as well, it has been noticed that in many cases existing internationalization theories in fact are not appropriate enough to explain not to say to predict the development. Reformulation and extension of theories is badly needed to be able to explain the accelerated internationalization of smaller knowledge-based firms. 3.1. Traditional models explaining internationalization The principal traditional theories are usually divided into (i) behavioral theories (stages theory
and network approach) and (ii) theories that borrow their main concepts from the field of economics. Although there have been a number of attempts to synthesize the internationalization literature (e.g. Andersen, 1993), a single, commonly accepted interpretation of ``internationalization'' is yet to be found. The internationalization patterns of individual firms seem to be rather unique and situation specific (Reid, 1983). The stages theories suggest that the international involvement increases in stages as a result of incremental learning. The most prominent formulation of stages approach, the Uppsala-model focuses on how organizations learn and how their learning affects their behavior (Johanson and Vahlne, 1977, 1990). The model is roughly based on the behavioral theory of the firm introduced by Cyert and March (1963). In stages theory, internationalization is being seen as an orderly process progressing from purely domestic operations, via exports and foreign direct investments, into fullfledged multinational business. Several studies have tested the model empirically during the last . couple of decades (see Bjorkman and Forsgren, 2000, for a review). Some studies have supported the model while some others have not (see e.g. Coviello and McAuley, 1999). Andersen (1997, p. 31) notes that the Uppsala model actually builds on the resource-based theory of the firm: Increased market knowledge is supposed to lead to increased market commitment and vice versa. It has been argued that the U-model is weak, because it uses only one explanatory variable (experiential knowledge) and hence, is not likely to provide any sufficient explanation for a firm's internationalization. Instead, it ends up being a mere description of a most typical sequence of internationalization (e.g. Johanson and Vahlne, 1990). Furthermore, as Autio et al. (2000, p. 909) have recently pointed out, this approach stresses the inertial and reactive character of business organizations, neglecting the entrepreneurial strategic choice opportunities. We do not fully share this critique, since inertial behavior can easily be understood from the pathdependency perspective typical for knowledgerelated specialization.
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A more recent perspective to internationalization is the network approach. This view focuses on non-hierarchical systems where companies are supposed to invest to build up and monitor their position in international networks (Johanson and Mattsson, 1988). As Coviello and McAuley (1999) note, ``according to this school of research, internationalization depends on an organization's set of network relationships rather than a firmspecific advantage''. These relationships often engage parties such as customers, suppliers, competitors, public support agencies, etc. Particularly interesting studies from our point of view have been conducted by, e.g. Coviello and Munro (1997) and Bell (1995), since they definitely focus on the network relationships and internationalization of small software firms. Economics-based explanations include, e.g. monopolistic advantage theory (Hymer, 1976), foreign direct investment (FDI) theories and internalization/transaction cost theory (see Buckley and Casson, 1976). Transaction cost theory has been used in the internationalization context especially to explain the choice of entry mode (Anderson and Gatignon, 1986; Erramilli, 1990; Erramilli and Rao, 1993; Kuivalainen et al., 2001). Most of these approaches are extensions of the theory of the firm. Firm-specific advantages overcome the disadvantages of operating in distant markets and shape the international operation modes as an extension of the more traditional ``boundaries of the firm'' explanation. Researchers seem to agree more and more about that none of the theories presented above can solely explain the dynamics of the internationalization of small knowledge- and service-intensive firms (Coviello and McAuley, 1999; Coviello and Munro, 1995; Bell, 1995). In fact, Coviello and McAuley (1999) suggest that the SMEs should be eclectically studied in terms of various frameworks and theories of internationalization to gain comprehensive understanding of the phenomenon. However, their meta-analysis of the current research focusing on SMEs' internationalization processes reveals that most of the studies were still based on a single framework and the stages theory still dominated the field.
3.2. Challenge of explaining the internationalization of the high-tech SMEs Empirical data concerning the rapid internationalization of knowledge-intensive high-tech SMEs clearly challenges all the conventional views of internationalization. There is an increasing amount of evidence that many firms within hightech industries do not follow the incremental paths to international markets. On the contrary, these companies aim at international markets from their very first day of existence and can be labeled as born globals. Hence, it is argued that most of the traditional theories do not apply within the dynamic, knowledge-intensive sectors such as information and communications technologies (ICT). This does not mean, however, that there is a need for a brand new theory. We are tempting to think that reformulation and extending of the frameworks is, however, required. International expansion is fueled by a combination of factors, which are often grouped to institutional, industrial, and organizational factors. Institutional factors deal with issues like regulations and competition policy followed. Within the ICT-industry we have seen a wave of deregulation and liberalization during the last decade. The monopoly based classic public telecommunication operator (PTO) model has no doubt come to its end in many countries. Companies are being privatized and the markets have been opened to keen competition. Consequently, new international market opportunities have emerged also for smaller firms to discover. The ICT-industry is nowadays global in its very nature. Quest for global standards in the telecommunications is making many of the products and services rather similar all over the globe. Therefore, there is a pressure for firms to internationalize their operations very early on to keep up with the competition. Concerning the organizational factors, there are three main drivers of rapid internationalization to be recognized (e.g. Preece et al., 1998). First, the SMEs within the high-tech sectors frequently operate within a narrowly defined market niche. Firms operating in, e.g. wireless data security cannot afford to target only to single (home)
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market. Specialization requires international expansion, if the firm aims to achieve sales growth. Second, firms are facing high R&D costs, which often come ``front-end'', i.e. before any sales are made. In order to survive firms must catch the growth track quickly to support these initial expenses. Third, the competition is very intense and products become obsolete rather quickly. If the company is to take full advantage of the market potential this means simultaneous penetration to all markets. Global pressures are not, of course, limited only to high-tech industries. Advances in communication technologies (e.g. Internet), cheaper and more rapid transportation and other innovations accelerate the push towards genuine global markets for multitude of firms (Porter, 1986) also within more traditional industries. 3.3. Rapid internationalization--rapid learning? ``Those who learn the quickest will be the winners'' (Bower, 1993). Because of many supply and, even more importantly, demand-related economies of scale (``network externalities'') learning has become critical for international success; the firms have to learn how to adapt and change and how to deal with radical uncertainty and dynamic forces in the market. The more imperfect the learning process of the firm, the greater the probability that the firm also fails in its international activities. The traditional stages approach suggests that management learning within the companies happens ``by doing''. This basic logic falls short primarily because it is a too time-consuming strategy for fast moving high-tech SMEs. The socalled opportunity windows in the markets are often short and there is not enough time to learn solely from one's own activities when pushing the process forward. Firms try to achieve the firstmover advantage and to lock-in their customers before subsequent competitors come into the play arena. Another fact is that knowledge about the markets may become obsolete very quickly, which emphasizes learning on a continuous basis. Rapid internationalization simply demands rapid learning. As Forsgren (2001) points out,
organizational learning includes several dimensions with consequences for firms' behavior. Although already Penrose (1959) suggests that experience is a prime source of learning in organizations, we should not restrict ourselves only to experiential learning. Other complementary ways to accelerate the learning and subsequently shorten the time to enter international markets are, e.g. the following (see Forsgren, 2001; Huber, 1991): (1) Learning through networking. Firms can gain access to new knowledge bases created by other firms through partnerships and network relationships, without precisely having to go through all of their experiences. At its best, collaboration may offer a faster track to international markets. However, there are several problems related to this alternative as well. For example, how to find the right and non-opportunistic partner, how to avoid of getting ``held up'' due to the asset specificity, how to avoid of losing the jackpot to complementary capability holders or how to manage even a trustworthy relationship in a winwin way? (2) Learning through grafting (Huber, 1991). Firms can also acquire another to get access to its knowledge base, resources and capabilities, or it can recruit most competent managers with idiosyncratic tacit knowledge that the acquiring firm is lacking (Segelod, 2001). Particularly the former is a more feasible option for the larger companies with bigger resources and more bargaining power to dictate the rules of the game. SMEs do not frequently have enough capital for major foreign acquisitions. There are also challenges in, e.g. how to identify the real value of tacit capabilities, how to integrate acquired pieces of knowledge with the existing knowledge base of the firm and how to valuate new knowledge sources. (3) Learning through imitating. Firms can also observe how other firms with ``high legitimacy'' enter international markets and try to imitate their behavior. Related to institutional theory (see e.g. Scott, 1987), firms tend to imitate actions that have been taken by large numbers of firms, because such practices have in a way survived the market selection test and hence got legitimized. (4) Learning through searching. Firms can proactively search for new information about
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the foreign markets. Nowadays, there are increasingly more sources (e.g. Internet) available that enable the managers to learn about the habits of international customers, competitors, etc. Obviously this kind of search cannot, however, substitute the experiential ``hands-on'' knowledge. In the fast evolving business environment of high-tech SMEs there is a danger that all learning is seen as a good thing. It has to be noted that ``learning can be as much a core rigidity as a core competence'' (Cassells, 1999). The firms have to be able also to unlearn and discover entirely new ways of conducting business. In Section 4 we try to link the concept of learning to the knowledge base and capabilities of the firm.
the growth and internationalization strategies of the firms. 4.1. Knowledge resources and capabilities Accordingly, many researchers have emphasized the very importance of intangible resources (often referred to as knowledge) to sustainable competitive advantage (see e.g. Kogut and Zander, 1992; Grant, 1996). In dynamic, i.e. changing and turbulent environments, the knowledge-based resources are seen to contribute most to the performance (Miller and Shamsie, 1996). Interestingly, there has not been much empirical research on knowledge resources and capabilities, although the importance of knowledge-related processes is widely acknowledged (Amit and Schoemaker, 1993; Miller and Shamsie, 1996; Spanos and Lioukas, 2001). Grant (1991) presented a classification of six types of resources, which were: physical, human, capital, financial, technological and reputational. Miller and Shamsie (1996) had only two main categories of resources: property- and knowledgebased. Spanos and Lioukas (2001) divided capabilities into organizational, technical and marketing capabilities. We see similar classification as a prominent way to analyze firm's resources and capabilities. However, it is important to notice that current resources and capabilities themselves do not give firms sustainable competitive advantage in the long run. Sustainable capabilities need to evolve over the time, i.e. they need to be dynamic by nature. Learning is seen as a key element for the long-term advantage (Teece et al., 1997; Kyl. heiko, 1998). a Teece et al. (1997) see firms as generators of dynamic capabilities (DCs) by which they meant ``yfirm's ability to integrate, build and reconfigure internal and external competences to address rapidly changing environments'' (Teece et al., 1997, p. 516). Eisenhardt and Martin (2000) see them more like tools by which firms can manipulate their resource configurations. The competitive advantage of the firm can be seen as based on DCs which are ``rooted in high performance routines operating inside the firm, embedded in the firm's processes, and conditioned by its
4. Knowledge-based view of the firm as a point of departure The static resource-based view of the firm (RBV) is a common framework for understanding how a firm's competitiveness can be achieved (see e.g. Wernerfelt, 1984; Barney, 1986; Grant, 1991; Foss, 2000). RBV regards a firm as a bundle of resources and it is the totality of unique idiosyncratic resources that only can give a firm a sustainable competitive advantage. Such resources or capabilities should be valuable, rare, inimitable and non-substitutable (i.e. the so-called VRIN attributes) and, therefore, hard to copy or transfer. RBV, although widely accepted, has also been criticized. For example, it has been called conceptually vague and tautological (see e.g. Williamson, 1999) and not applicable to dynamic markets as the sustainable competitive advantage is hard to achieve in such an environment (e.g. D'Aveni, 1994). However, this `static' RBV approach can be extended to more dynamic environments (see e.g. Teece and Pisano, 1994; Teece et al., 1997; Eisenhardt and Martin, 2000; Foss, 2000; Metcalfe and James, 2000; Blomqvist and Kyl. heiko, 2000; a Blomqvist et al., 2002). This dynamic process view, often known as knowledge-based view of the firm, is of great relevance in our endeavor since technological discontinuities and ability to manage knowledge acquisition in turbulent markets largely affect
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history'' (Teece and Pisano, 1994) Path-dependency, i.e. the history of the firm and its effect on the firm's future development is an important concept when analyzing the firm's growth. The window of opportunity for the firm is constrained by its existing routines and capabilities. 4.2. Knowledge categories The type or nature of knowledge has an effect on knowledge-related mechanisms. We divide knowledge base of the firm into three basic knowledge categories: (1) Tacit knowledge (``know-how'') is embedded in the organization of the firm as a whole or in the teams within the firm organization. Tacit knowledge is normally based on experience and it is easy to protect against the imitation attempts. It increases cumulative learningbased internalities, which enable firms to exploit economies of scale and scope either internally or externally (i.e. by using outsourcing or networking strategies). There are two types of mechanisms (i.e. learning effects) that make the internalities possible; replication (first loop learning) and partial replication (double loop learning). They create pathdependent firm-specific trajectories and help to explain differences between the firms in the same field of industry. The more tacit knowledge is, the more appropriate (i.e. easy to protect, so-called appropriability regime, Teece, 1986) is knowledge and vice versa. (2) Fully articulated codified information (``knowthat'') is knowledge that is a source of positive externalities. The most important mechanisms related to them are knowledge transferring and knowledge creation through integrating. Absorptive capacity of the firm is the key factor when acquiring codified information. (3) Generic knowledge is a combination of the two above-mentioned knowledge categories. According to our approach, the firm is viewed as a repository of knowledge (see e.g. Kyl. heiko et al., a 2002). Firms, which can create, manage and transfer knowledge that is valuable, rare, and hard to substitute in an international context are more
capable of sustaining competitive advantage in the long run. Change and development through learning are seen as key components in our evolutionary knowledge management model.
5. Evolutionarily inspired knowledge management model for explaining of internationalization Next we will compose our evolutionary, knowledge-based model for internationalization. Following Nelson and Winter (1982) we interpret evolution as historical transformation of a system through endogenously generated change. The starting point for the analysis is cultural evolutionary ``Blind Variation-Selection-Retention''triad. This scheme is closely connected with the evolution of knowledge, i.e. with the knowledge creation, transfer and integration process in the internationalization context (for more detailed discussion, see Kuivalainen et al., 2001). The main role of entrepreneurs is to trigger off variation-generating new combinations (e.g. new routines, management methods, products and services) from the knowledge base of the firm or from the external sources (e.g. from partners and from the other sources of generic knowledge). Learning through partial replication enables these new combinations. This may be time-consuming and inertia (i.e. no new combinations, static retention or replication) may also exist. Partial replication makes it possible to modify existing routines and change them drastically. This is the basic argument of the evolutionary explanation of the internationally sustainable competitive advantage. In the turbulent environment, simple experiential routines, which rely on newly created knowledge specific to the situation, are needed for the development of core or DCs (Eisenhardt and Martin, 2000). These core capabilities should be the basis for the formulation of the internationalization strategy. Our model is presented in Fig. 1. Although we believe that internal knowledge and capabilities of the firm matter most, it is important to notice that in addition to the firmspecific capabilities also external Porterian industry-level effects can contribute significantly to the firm's success (Spanos and Lioukas, 2001). These
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EXTERNAL: - Integration and transfer of different knowledge-bases through partnerships and generic knowledge SEARCH PROCESSES Performance: Scale and scope of internationalization GOAL: SUSTAINABLE COMPETITIVE ADVANTAGE
Nature of Firm-specific Knowledge Base
Routines, Capabilities, Core capabilities
Internationalization Strategy
LEARNING PROCESSES KNOWLEDGE DETERMINANTS: INTERNAL: - Appropriability - Technological capabilities - Threat of opportunism - Marketing capabilities - Economies of scale - Organizational capabilities - Economies of scope - Path dependency - Asset specificity - Strength of complementary providers
Fig. 1. Evolutionary knowledge management model for internationalization.
are included into the model by means of the ``external'' dimension. The basic knowledge determinants included in our knowledge-based view of the firm are as follows: (a) Appropriability: i.e. how easily a firm can protect its ideas from imitation. The appropriability regime (Teece, 1986) is closely related to the tacitness of knowledge and legal means of protection, such as patents and trademarks. (b) Threat of opportunism: this is related to Williamson (1975). Opportunism is one dimension of the hold-up problem when the firm becomes dependent on the asset specificity. (c) Economies of scale: through cumulative learning and specialization. A firm can exploit economies of scale, i.e. utilize the advantages of tacit internalities through replication. (d) Economies of scope: the synergies a firm can gain when it applies its already existing capabilities to other activities (e) Path dependency: a firm's earlier history matters, i.e. path dependency is a process in which the pattern of behavior of the firm is based on the earlier experiences and cumula-
tive knowledge of the firm. It can be fostered through replication mechanisms. (f) Asset specificity: knowledge is asset specific when there are no other alternative uses for capabilities. (g) Strength of complementary providers: i.e. how dependent the firm is on its partners and other actors it has connections with. Turning our focus again on high-technology ICT SMEs, we can now derive eight propositions as to the development of the main knowledge determinants, the type and level of knowledge and their effect on internationalization processes: P1: The role of the appropriability regime will be strengthened as the firms become more international. The perceived risk of opportunism is higher in international markets. The perceived risk of opportunism decreases the as industry matures. The more specialized the firms are, the more important is the role of the economies of scale. The more specialized the firms get, the more path-dependent they become.
P2: P3: P4:
P5:
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P6:
P7:
P8:
The more technological capabilities the firms have, the less dependent they are on complementary capability providers, i.e. the less is the danger of getting held up. The more technological and marketing capabilities the firms have had in the origin, the more international they become. The more the firms gain internationalization experience, the more important is the role of organizational skills they possess.
6. Empirical analysis Having outlined the theoretical framework and our evolutionary knowledge management model for internationalization, we now proceed in this section to describe the adopted methodology including data collection, development of measures and the actual results of our analysis. 6.1. Data collection The population of interest was defined as smalland medium-sized Finnish companies providing value added services in the ICT-sector. These include content providers and software providers for service platform and management systems. Hardware manufacturers and companies providing mainly educational or consultancy services were not included in the study. Due to the rapid development of the ICT-sector and the unsuitability of standard industry classification codes, there was no single up-to-date sampling frame available for the purposes of the study. Therefore, the names and contact information of the companies were searched from multiple sources, e.g. Kompass Finland Database, The Statistical Bureau of Finland database of Finnish companies, IT magazines, and Internet sites of the companies themselves, universities, cities, science parks, incubators, venture capitalists, and industry organizations. Since the companies of interest were operating in the ICT-sector, an Internet-based questionnaire was used for data collection. The questionnaire was extensive consisting of 15 pages divided into three parts: the first part included the basic information of the firm, its products, technologies,
employees, customers and competitors. The second part focused on the competitive advantages, position in the value chain and partnership issues. The final part included questions about internationalization and the future of the company. The questionnaire was pre-tested in five companies, and the time needed for completing the questionnaire was found to be approximately 45 minutes. In order to elicit responses, the respondents were offered a report of the results of the study, and a small personal gift. For the first round of data collection, altogether 405 companies were identified, and contacted by telephone between November 1999 and February 2000. In this phase, 17 companies were found ineligible, and 22 companies refused to participate in the study. Those 366 companies, who on the telephone agreed to participate, received the following day an e-mail message containing instructions for answering the web-based questionnaire. A reminder message was sent to those who had not returned their answer within 2 weeks. In the first round, 171 companies returned their answers, resulting in effective response rate of 47% (171/366). In light of the response rate, and the comparison of early and late respondents (Armstrong and Overton, 1977), non-response bias did not become a problem. From these 171 respondents, 71 reported having international operations. The second round of data collection was performed 2 years after the first round. In addition to the 405 companies of the first round, 88 new companies were added. The data collection procedure was similar to the first round, but the questionnaire was shorter (only two parts), and some of the questionnaire items had been modified. Of the 493 companies contacted, 33 were found ineligible, and 74 refused to participate. At the time of analysis, 87 companies had returned their answers, and the effective response rate was 22.5% (87/386). Forty-nine companies had international operations. 6.2. Measures of internationalization, level and nature of knowledge The internationalization variables include: (1) time passed from the establishment of the
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company to the start of international operations, (2) percentage of the company's customers that are foreign, (3) number of foreign partners, (4) number of countries where the company is involved, and (5) international share of revenues (%) in year 2002. The last four variables were combined to a single measure of intensity of internationalization. This measure was obtained by principal component analysis, where all items loaded on a single factor accounting for 58% of the variance in the four original items. According to Hair et al. (1998, p. 102), principal component analysis is appropriate when the primary concern is about the minimum number of factors needed to account for the maximum portion of the variance represented in the original set of variables. The nature of knowledge was measured on 30 Likert-scaled items. In the first survey round, principal axis factor analysis was performed on the items in order to uncover underlying dimensions. Principal axis factor analysis is most appropriate when the primary objective is to identify the latent dimensions represented in the original variables (Hair et al., 1998, p. 102). Nine factors with eigenvalues greater than one emerged, explaining in total 62% of the variance. The Varimax-rotated factor loadings are shown in Appendix A. The loadings below 0.3 were considered as insignificant (Hair et al., 1998) and are not shown in Appendix A. The factor structure conforms very well to the theory-based knowledge attribute variables (see Chapter 5); only synergies and autonomous versus systemic nature of the products seems to converge into one factor. The final measures for nature of knowledge were obtained by taking a mean value of items that loaded in the same factor. The Likert-scaled items used for measuring the level of knowledge are listed in Appendix B. A principal components factor analysis revealed three components with eigenvalues greater than one, namely marketing skills, technological skills and organizational skills, which accounted for 58% of the variance in the items. The final scales were computed by taking an average of the items from each factor. The resulting reliability coefficients (Cronbach a) were 0.76 for marketing skills, 0.60 for technological skills, and 0.59 for organizational skills, respectively, which are acceptable
according to the guidelines presented in Nunally (1978). 6.3. Results of the data analysis The means of all variables in both survey rounds are shown in Table 1. The last column of the table indicates which differences are statistically significant based on MannWhitney test. The rapidity of internationalization has not changed since the first survey round, but the companies in the second round of the survey have internationalized more intensively; they have more target countries, more foreign partners, and larger share of customers abroad. The international share of revenues in year 2002 is somewhat higher among the first-round respondents, but this may partly be due to the general optimism and hype within the industry at that time. The downturn faced by many market segments by the time of second round may have cut the managers' estimations of future revenues. The overall levels of marketing and technology skills have not changed during the 2 years between the surveys, but the organizational skills have generally improved. The second-round respondents feel less technological and market uncertainty, but more path dependency. They also benefit more from economies of scale. In order to compare the level and nature of knowledge between those companies who have international operations and those who operate only domestically, the means of knowledge variables were computed separately for both groups in both data collection rounds, see Table 2. The effects of data collection timing (survey 1999 versus 2001) and internationalization were tested using general linear model (GLM) univariate analysis of variance. The significance of main effects is shown in the last two columns of Table 2. The interaction effects are omitted, since none of them was statistically significant. International companies have better technological and marketing skills than domestic companies in both surveys. The level of organizational skills has improved, but there is no difference between international and domestic companies in that respect. International companies have larger
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S. Saarenketo et al. / Int. J. Production Economics 89 (2004) 363378 Table 1 Means of variables in the first and second round of survey Variable Year established Start year of international operations Time to start intnl operations Number of target countries Intnl % of revenues 2002 Number of foreign partners Share of foreign customers Intensity factor score Certainty Tacitness Asset specificity Path dependency Strength of compl. firms Econ. of scope Econ. of scale Opportunism risk Patent importance Marketing skills level Organizational skills level Technology skills level 2001 1994,15 1997,22 3.94 8.71 27.12 2.76 30.07 0.72 3.80 3.28 2.27 2.58 2.85 3.94 3.78 2.15 2.41 3.45 3.94 3.95 1999 1993,31 1994,95 3.64 5.01 31.50 0.60 7.19 0.01 3.17 3.35 2.14 2.35 2.65 4.00 3.06 2.28 2.25 3.31 3.12 4.05 Total 1993,60 1995,85 3.76 6.42 29.91 1.81 12.24 0.40 3.40 3.32 2.19 2.43 2.72 3.98 3.33 2.23 2.30 3.36 3.41 4.01 M-W sig. 0.024 0.000 0.300 0.000 0.045 0.019 0.000 0.020 0.000 0.628 0.129 0.018 0.123 0.754 0.000 0.214 0.344 0.214 0.000 0.177 373
Note: Bold items indicate that the difference is significant at the 0.05 level.
Table 2 Effects of internationalization and survey timing on the knowledge variables No international operations Survey 2001 (mean) Certainty Tacitness Asset specificity Path dependency Strength of compl. firms Econ. of scope Econ. of scale Opportunism risk Patent importance Marketing skills level Organization. skills level Technology skills level 3.83 3.35 2.17 2.75 2.82 3.93 3.36 1.99 2.26 3.34 3.89 3.80 Survey1999 (mean) 3.17 3.29 2.22 2.38 2.43 3.94 2.80 2.16 2.19 3.23 3.10 4.00 Total (mean) 3.40 3.31 2.20 2.51 2.57 3.94 3.00 2.10 2.22 3.26 3.37 3.93 Has internationalized Survey 2001 (mean) 3.78 3.22 2.35 2.46 2.91 3.94 4.09 2.29 2.51 3.52 3.99 4.04 Survey 1999 (mean) 3.16 3.43 2.06 2.31 2.89 4.09 3.27 2.37 2.27 3.40 3.11 4.12 Total (mean) 3.40 3.35 2.17 2.37 2.90 4.03 3.59 2.33 2.36 3.44 3.45 4.09 GLM main effect sig. Survey year 0.000 0.523 0.308 0.021 0.174 0.414 0.000 0.204 0.188 0.275 0.000 0.101 Intnlzn 0.757 0.960 0.918 0.103 0.066 0.409 0.000 0.011 0.171 0.100 0.534 0.034
Note: Bold items indicate that the effect is significant at the 0.05 level, italic at the 0.10 level.
economies of scale than domestic companies, and the amount of scale economies has generally increased. The perceived risk of opportunism has
remained on the same level between the surveys, but international companies face higher risks than domestic ones. In the first survey, international
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companies felt more dependence on the providers of complementary products or services, but the effect is less significant in the second survey. In the light of Tables 1 and 2 we can draw the following conclusions to our propositions. The majority of the propositions were supported or partially supported. P1 predicted that the role of appropriability regime (i.e. importance of patents and the tacitness of the knowledge) increases as the firms become more international. This proved to be partially supported; although the overall importance of tacitness or patents had not increased significantly, they were positively related to the intensity of international operations in the second survey. P2 proposed that the risk of opportunism for international firms is higher. This proved to be supported (po0:05). P3 was not supported since we found no evidence of decrease in the level of perceived risk of opportunism over time. P4 proposed that specialization increases the role of scale economies. Our surveys indicate that the role of scale economies has increased substantially over the past 2 years, and that they are positively related with the intensity of internationalization. However, we cannot specifically say if the companies have become more specialized over the 2 years. The same conclusion can be drawn for P5, since path dependency has significantly increased, but we can only speculate that the reason
for that might be increased specialization. P6 proposed that the more the firm possesses technological capabilities, the less dependent it is on complementary providers. This view was not supported in the survey. It seems that international firms have more technological capabilities and are somewhat more dependent on others than domestic firms. However, P7 was supported as internationally operating firms had more technological and marketing capabilities than firms that operated only in domestic markets. P8 suggested that by gaining experience firms learn and get more organizational capabilities. This view was supported in our survey. The general skill/capability level had increased; there was no difference between the domestic and internationally operating firms. The effects of knowledge on the rapidity and intensity of internationalization are shown in Table 3. In the 1999 survey there were no associations between the knowledge variables and the rapidity of internationalization, but in the 2001 survey better marketing skills are associated with slower start of international operations. Better technology skills were associated with more intensive internationalization in the first survey, but the association is no more significant in the second survey. Also the perceptions of economies of scope and future certainty
Table 3 Spearman correlations between knowledge and rapidity and intensity of internationalization Time to start Total Certainty Tacitness Asset specificity Path dependency Strength of compl. firms Econ. of scope Econ. of scale Opportunism risk Patent importance Marketing skills level Organizational skills level Technology skills level 0.019 0.011 0.046 0.027 0.063 0.055 0.053 0.013 0.090 0.053 0.117 0.063 2001 0.104 0.189 0.091 0.188 0.004 0.069 0.142 0.192 0.206 0.287 0.177 0.014 1999 0.093 0.089 0.012 0.038 0.103 0.162 0.118 0.142 0.041 0.092 0.033 0.072 Intensity factor score Total 0.252 0.008 0.051 0.050 0.135 0.176 0.391 0.025 0.161 0.106 0.090 0.212 2001 0.089 0.216 0.064 0.087 0.233 0.151 0.482 0.068 0.291 0.168 0.004 0.118 1999 0.352 0.101 0.407 0.419 0.001 0.484 0.042 0.205 0.076 0.067 0.193 0.489
Note: Bold items indicate that the correlation is significant at the 0.05 level, italic at the 0.10 level.
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were positively related to the intensity in the first survey, but the effects have disappeared in the second round. Path dependency and asset specificity had hindered internationalization in 1999, but not any more in 2001. Economies of scale are an important determinant for intensity in the new sample, while it had no effect in the older sample. Also appropriability (patents and tacitness) seems to be emerging as a determinant for intensive internationalization.
7. Conclusions This paper has focused on dynamic knowledgerelated learning processes in internationalizing high-tech SMEs. In our view, the knowledgebased view of the firm is a good point of departure when explaining the internationalization of firms. We have proposed an evolutionary knowledge management model for internationalizing SMEs within high-tech industries and made eight propositions. The propositions were related to the nature of knowledge and level of capabilities of the firms, and their effect on internationalization. The study supports the recent literature on born globals since the firms within our sample started their internationalization very early on and rather intensively. This committed internationalization cannot be explained by the traditional ``establishment chain'' (Johanson and Vahlne, 1977). Firms seem to utilize increasingly more partners and networks and this partly enables SMEs with limited resources to learn and get to the foreign markets sooner. One of the most interesting phenomena that happened during the 2 years (19992001) seems to be the shift of the focus from the economies of scope to the economies of scale as main explanatory factors of the internationalization process. This can be explained in terms of the need for more and more specialized capabilities fostered through partial replication processes. Our empirical results from two surveys (1999 and 2001) also show that internationalization of the firms within the Finnish ICT-sector has clearly become more intensive. This can be interpreted so that either the level of knowledge and capabilities
of the firms has been improved, or the nature of knowledge has been changed into the direction that enables easier achievement of international competitive advantages, i.e. the absorptive capacity has increased. Since the perceived uncertainty seems to have decreased, the firms also perceive fewer risks and internationalize therefore more intensively. A bit paradoxically, path dependency has also increased. Our attempt to explain this phenomenon goes like this. At the same time when the uncertainty has decreased the firms perceive themselves as more dependent on their previous technological choices. The firms may be better aware of the choices they have made and the risks related to the chosen paths. As mentioned, also the economies of scale have increased during the period. This may implicate that the companies have learned to commercialize their knowledge and capabilities more efficiently. The main managerial contribution of the paper is the recognition of knowledge determinants and capabilities, and their effect on the internationalization. This may serve as a useful benchmark in the strategic planning of the firm as it positions itself within the industry. For example, the development of technological and marketing capabilities tends to lead to more intensive internationalization. Most of the studies explaining the firm internationalization are cross-sectional in nature. With this study we have tried to fill this gap. Moreover, our longitudinal data set offers us plenty of avenues for further research. Interesting research will be generated when we continue our research and extend the level of analysis from industry level to individual firms.
Appendix A Varimax-rotated factor structure of knowledge attribute items (see Table 4).
Appendix B Level of knowledge--Varimax-rotated factor loadings (see Table 5).
376
Table 4 Item Patents act as references of our competence Patents effectively prevent our competitors from stealing our ideas Patents can help to shape the development of our industry, e.g. standards The competitors are able to break our patent We cannot exploit our competitors' ideas, because their patent protection strengthens Importance of patents for sustaining your competitive advantage Risk of opportunism by strategically important partners Risk of opportunism by large buyers Risk of opportunism by subcontractors Risk of partners breaking our contract Extent of scale economies in distribution Extent of scale economies in marketing Extent of scale economies in production Extent of scale economies in financing How can you adjust your key competencies to new technologies Extent of synergies in using your key competencies for different purposes Importance of quick absorption/application of new knowledge for sustaining your competitive advantage Our products/services can sold autonomously Our key competencies are in technologies that will substituted by others We are very dependent on other companies operating in the value chain Commercialization of our key competencies is heavily dependent on other companies operating in the value chain Our previous technology choices dictate the development of our key competencies Our previous technology choices make us vulnerable to radical changes in technological development Degree of uncertainty about market development Degree of uncertainty about technological development Patents are important for sustaining competitive positions in our industry A large buyers forces us to make heavy investments, increasing our dependency on them Our bargaining power weakens, when there are few potential buyers Importance of tacit knowledge for sustaining your competitive advantage Because of our tacit knowledge, we do not have to worry about our ideas leaking to others The factors were named as follows: Fac1: Appropriability/patent protection. Fac2: Threat of opportunism. Fac3: Economies of scale. Fac4: Economies of scope. Fac5: Strength of complementary providers. Fac6: Path dependency. Fac7: Degree of uncertainty. Fac8: Asset specificity. Fac9: Appropriability/tacitness. Fac1 0.79 0.75 0.73 0.60 0.54 0.51 0.82 0.79 0.72 0.71 0.73 0.65 0.61 0.51 0.70 0.68 0.55 0.53 0.46 0.84 0.84 0.84 0.77 0.77 0.66 0.41 0.41 0.62 0.53 0.80 0.69 0.40 0.44 Fac2 Fac3 Fac4 Fac5 Fac6 Fac7 Fac8 Fac9
0.35 0.42 0.35 S. Saarenketo et al. / Int. J. Production Economics 89 (2004) 363378
0.31
0.48
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0.39
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S. Saarenketo et al. / Int. J. Production Economics 89 (2004) 363378 Table 5 Marketing We We We We We We We We We We have a strong brand have good connections and networks are well known in our segment have good customer relationships have capable personnel are well coordinated have several distribution channels are good at developing new technologies have a clear vision of technological development have good technological competence 0.819 0.713 0.712 0.697 0.203 0.254 Organizational Technology 377
0.379 0.193 0.745 0.713 0.677
0.168 0.119
0.143 0.176
0.298
0.809 0.727 0.675
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