International Strategy and Market Performance in New Biotechnology Firms

Joseph E. Coombs

• Publisher: Routledge
• Year: 2014
• Print ISBN:
  9781138972933
• eBook ISBN:
  9781317733751
• Topic: Business
• Subtopic: Business General
• Index: Business

The issues addressed in this study are: What internal factors support changes in the international operations of new firms? and What effect do these changes have on the firm's structure, control system, and market performance. To answer these questions, this work examines the internal resources and market performance of a set of publicly traded biotechnology firms. Findings support the view that new firms can enter international markets through a variety of strategies, including international joint ventures and subsidiaries. Changes in international operations also are found to enhance firm market performance when accompanied by changes in firm structure and control systems. However, managers must be patient because market performance only improves significantly two years after these organizational changes have taken place.

CHAPTER 1

Introduction

 

 

THE STATEMENT OF THE PROBLEM

Since McDougall’s (1989) finding that the strategic profiles of international and domestic new ventures are significantly different, a growing literature focusing on international entrepreneurship has developed (Almeida & Bloodgood, 1996; Bloodgood, Sapienza & Almeida, 1996; Fischer & Reuber, 1996; McDougall, 1989; McDougall and Oviatt, 1996; Oviatt and McDougall, 1994; Turnbull, 1987) to challenge the stages theory of internationalization (Johanson & Vahlne, 1977). Factors such as increasing homogeneity in international markets (Hedlund & Kverneland, 1985), increasing efficiency in the areas of international communications and transportation (Porter, 1990) and the near requirement of international operations in some industries (Burrill & Almassy, 1993) have acted to place further doubt on the validity of (Johanson and Vahlne’s (1977) theory. Johanson and Vahlne (1990) have suggested that these factors merely suggest the need to change their stages model. These authors argue that the stages theory is best applied to the early stages international activity except in three circumstances. First, firms with surplus resources may make unusually large internationalization steps. Second, given stable and homogeneous market conditions, market knowledge need not be gained through experience. Finally, firms with considerable experience may be able to generalize their knowledge and apply it to other, similar markets. Oviatt and McDougall (1994) argue, however, that these exceptions do not apply to international new ventures. Resources are constrained by the firm’s small size and relative youth, international new ventures often operate in very volatile markets, and by definition, new ventures have little market experience. This incompatibility between Johanson and Vahlne’s (1977) stages model and the finding that some firms are international from inception (McDougall, Shane & Oviatt, 1994) signifies the growing importance and influence of international new ventures and the need for development and testing of new theories to explain this incompatibility.

The U.S. government has also placed pressure on firms to operate internationally. Increased access to foreign markets due to regional (NAFTA) and worldwide (GATT) trade agreements has further increased the temptation for entrepreneurs to internationalize their operations. Government support for the internationalization of new and small firms has also increased due to the potential for increased job creation (Hanks, Watson, Jansen & Chandler, 1993), economic growth (Low & MacMillan, 1988) and tax revenues and innovation (White House Conference on Small Business Commission, 1995). In addition to the internationalization of operations, new ventures face other pressures for organizational change such as downsizing and restructuring, advances in technology, customization and individualization of products and services and new patterns of connectivity (U.S. Small Business Administration, 1995).

These pressures to internationalize and to change in general place a great stress on the management of new ventures. These managers may have little if any international experience and may have very firm specific resources that are difficult to transfer. In high technology industries especially, the period from growth to maturity may take only a few years leading to crises related to growth which firms in more stable environments are unlikely to face until they are much older (Hanks et al. 1993). High technology firms may also face industry pressures to internationalize their operations nearly from inception in order to compete effectively (McDougall & Oviatt, 1996). In order to increase our understanding of this growing phenomenon, the present study investigates the determinants and outcomes of changes in a firm’s international strategy based on a sample of new biotechnology firms. The resources necessary to commercialize the products of many biotechnology firms often are greater than the resources these new firms immediately control. Alliances with foreign partners are often a means of sharing the costs and risks of developing new products and are also used as a means of entering foreign markets (Deeds, 1994). However, the ability of resource constrained high-technology firms to change their international strategies (not necessarily sequentially) has not been studied. The aim of this study is to extend the literature in both the areas of determinants and outcomes of change in the firm’s international strategy. To this end, the firms examined in this study are those that have the following characteristics:

1. They had their initial public offering (IPO) of stock in or after 1982,

2. at the time of their IPO they were still new ventures (less than eight years old [McDougall and Oviatt, 1996]),

3. they are biotechnology firms.

RESEARCH GOALS

Three goals have been set for this research: (1) to develop models of the determinants and outcomes of changes in a firm’s international strategy, (2) to empirically test the models on a set of new biotechnology companies and (3) to develop recommendations for managers and researchers. Figures 1-3 present the models developed and tested in this study.

METHODOLOGY

This research utilizes a longitudinal design. Longitudinal research designs are not experimental and therefore the ability to establish causality may be questionable (Sherman, 1995). Longitudinal research can, however, establish with greater confidence the temporal ordering of a relationship, make the misspecification of models more obvious, can highlight the distinctions between organizational types, and can provide a rich understanding of context thus helping the researcher to interpret his or her findings (Miller and Friesen, 1982).

Figure 1. Determinants of direction of change in international strategy

 

Figure 2. Determinants of foreign revenue as a percentage of total revenue

 

Figure 3. Determinants of firm market value

The remainder of the paper is structured as follows: chapter two presents the literature review and hypotheses; chapter three presents the proposed methodology and variables; chapter four presents the analyses and results; chapter five presents the discussions and conclusions.

CHAPTER 2

Theory and Hypotheses

BIOTECHNOLOGY RESEARCH

According to Liebeskind, Oliver, Zucker & Brewer (1996), “the biotechnology industry consists of firms involved in the research, development, and commercialization” of products involving three technologies: (1) recombinant DNA technology, (2) monoclonal antibody technology or (3) protein engineering technology. The advancement of these three technologies has the potential to affect human health, agriculture, food processing and waste management (Liebeskind et al., 1996). Within the U.S., this industry has grown from a small group of start-up firms to a well-defined industry with a number of products being marketed around the world (Greis, Dibner & Bean, 1995). This has offered researchers an opportunity to examine both the development of an entirely new industry and the development of firms from startup to maturity. The biotechnology industry has especially offered researchers the chance to study the asset accumulation process of firms (Greis et al., 1995).

Researchers have recently examined the biotechnology industry to study various topics such as complementary and external linkages between and amongst firms (Arora & Gambardella, 1990), the market value of intangible resources (Coombs & Deeds, 1998), opportunism within inter-firm research alliances (Deeds, 1994), the amount of capital raised in a biotechnology IPO (Deeds, DeCarolis & Coombs, 1997), research productivity (Deeds, DeCarolis & Coombs, 1996), the performance of entrepreneurial firms (Deeds, DeCarolis & Coombs, 1998), inter-organizational relations (Freeman & Barley, 1990), external partnering as a response to innovation barriers (Greis et al., 1995), social networks, learning, flexibility and sourcing scientific knowledge (Liebeskind et al., 1996), scientific communication (Martens & Saretzki, 1993), the governance of innovation (Pisano, 1991) and the relations between technology strategy and performance (Zahra, 1996).

Much of the previous research in which the biotechnology industry has been examined has dealt with external linkages between biotechnology firms and external sources of knowledge (largely excluding an international dimension). This author knows of only two studies examining specifically the international operations or the international strategy of biotechnology firms (Bartholomew, 1997; Shan & Song, 1997). Bartholomew (1997) argues that complex interdependence within international markets is formed due to the particular characteristics of national systems of biotechnology innovation. Shan & Song (1997) have found that foreign direct investment in the U.S. biotechnology industry is drawn to firms with a high level of patent activity. One aim of this study is to correct the deficiency of international research within the biotechnology industry and to examine longitudinally the international involvement of new biotechnology firms. More specifically, this study investigates the determinants of change in the international strategy of biotechnology firms and the performance outcomes of these changes.

LITERATURE REVIEW: INTERNATIONAL ENTREPRENEURSHIP

Introduction

The purpose of this literature review is to describe those factors and theories important to international entrepreneurship literature and to summarize the relevant empirical findings. At the convergence of entrepreneurship research and literature on international management, scholarly investigations of international entrepreneurial firms holds the promise of enriching and broadening both fields by bridging a gap that has largely been overlooked (Coombs & Sadrieh, 1997). Since Mc-Dougall’s (1989) finding that the strategic profiles of international and domestic new ventures are significantly different, a growing literature focusing on international entrepreneurship has developed to challenge the stages theory of internationalization (Johanson & Vahlne, 1977). The stages theory of internationalization (Johanson & Vahlne, 1977), in which firms make “incrementally increasing commitments to foreign markets”, has lost much of its explanatory power (Brush, 1992; McDougall & Oviatt, 1996; McDougall, et al., 1994; Turnbull, 1987) due to the increasing homogeneity of international markets (Hedlund & Kverneland, 1985), increasing efficiency in the areas of international communications and transportation (Porter, 1990) and the near requirement of international operations in some industries (Burrill & Almassy, 1993). Johanson and Vahlne (1990) have suggested that these factors merely suggest the need to adjust their stages model.

Recent literature (Almeida & Bloodgood, 1996; Bloodgood et al., 1996; Fischer & Reuber, 1996; McDougall, 1989; McDougall & Oviatt, 1991, 1992, 1996; McDougall et al., 1994), summarized in Table 1, supports the position that firms do not necessarily internationalize gradually as has been argued (Johanson & Vahlne, 1977). Rather, internationalization, once inaccessible, or at best difficult and uncommon for small ventures, has become a strategic option for many and a necessity for some (McDougall et al., 1994; Baird, Lyles & Orris, 1994).

Additional evidence of the importance of global markets to small and new firms comes from scholars and business experts who enthusiastically recommend small and large business alike to compete in international markets (Reich, 1991). Furthermore, government agencies have supported a larger international role for small firms:

Almost every panel identified glo...

Table of contents

• Cover
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• Preface
• Acknowledgments
• List of Tables and Figures
• Chapter 1 Introduction
• Chapter 2 Theory and Hypotheses
• Chapter 3 Methodology
• Chapter 4 Analysis and Results
• Chapter 5 Discussion and Conclusions
• Appendix A Firms Included in Study
• References
• Index