Innovative Management and Firm Performance

An Interdisciplinary Approach and Cases

M. Jakšic, S. Rakocevic, M. Martic, M. Jakšic, S. Rakocevic, M. Martic

• Publisher: Palgrave Macmillan
• Year: 2014
• Print ISBN:
  9781137402202
• eBook ISBN:
  9781137402226
• Topic: Business
• Subtopic: Strategia di business
• Index: Business

This book focuses on business firms as catalysts and agents of social and economic change, and explores the argument that sustainable development is the perfect opportunity for businesses to strengthen the evolving notion of corporate social responsibility, while achieving long-term growth through innovation, research and development.

Part I

Innovative and Cooperative Models for CSR and Sustainability

1

The Effect of Human Capital on the Internationalization of Professional Firms

Lori P. Radulovich, Rajshekhar (Raj) G. Javalgi, and Robert F. Scherer

1.1 Introduction

The tremendous growth of emerging markets has captured the attention of the world. Global trade in emerging economies continues to expand (UNCTAD, 2009a).^1,2,3 For instance, when developed markets experienced negative GDP growth in 2009, India reported growth of 5%, and China’s GDP grew by 7.8%. Service trade, a dominant component of world trade (WTO, 2009), has increased on average 10% per year since 2000 with notable growth from the emerging market of India (UNCTAD, 2009a;WTO, 2009). India, where service contributions to GDP outpace manufacturing, has experienced service trade growth over the past decade exceeding the global average (UNCTAD, 2009a). In fact, India is said to possess a comparative advantage in services (UNCTAD, 2008c).

Emerging markets have become resilient players in world trade (UNCTAD, 2009a). The fastest growth among service sectors has been seen in professional services (e.g., financial, legal, management consulting, engineering, architectural, education, and information technology) (Styles et al., 2005). Information and communication technology (ICT) services, a sector where exports grew six times faster than total service exports, are increasingly delivered by developing countries whose share has grown from 4% to more than 28% (UNCTAD, 2008a).

With unequal growth evident across nations and service industries, research has yet to address the drivers of such disparate growth and success. Do some service sectors, such as professional services, possess characteristics that facilitate internationalization among small firms in emerging markets? Professional services, a services sector, use highly skilled human assets that possess specialized knowledge (Hitt et al., 2006). Professional service firms that have intensive technology and human capital (HC) inputs are known as knowledge-based firms (Javalgi et al., 2011; Styles et al., 2005). These knowledge-based firms derive value from intellectual capital, which is comprised of human, structural (internal organizational capital), and relational capitals (Youndt et al., 2004). Since the professional service industry is uniquely characterized by expertise, human capital, relationships, and the knowledge flow between the provider and the customer, professional services warrant more research attention (Freeman et al., 2007; Lindsey et al., 2003). Given the considerable growth of professional service sectors in emerging markets, these remain important, underresearched markets (Javalgi et al., 2004). Consistent with this view, Freeman et al. (2007) and Coviello and Martin (1999) highlight the need to better understand the internationalization process of the firms in professional service sectors.

The entrepreneurial literature contends that an entrepreneurial orientation (EO) motivates SMEs to overcome their deficiencies and leverage their intangible resources for internationalization in emerging markets (Yamakawa et al., 2008); yet, significant gaps remain in understanding the role of entrepreneurship and resources in the internationalization of firms from emerging markets (Luo and Tung, 2007; Yamakawa et al., 2008). A 2008 review of research on entrepreneurial firms in emerging markets revealed only 43 studies (Bruton et al., 2008). The international entrepreneurship (IE) research, a relatively new and growing field positioned at the interface of international business and entrepreneurship research, includes the examination of entrepreneurial internationalization (Oviatt and McDougall, 2005). In the IE field, research has largely concentrated on developed economies (McDougall and Oviatt, 2000; Oviatt and McDougall, 1994), small venture firms, and antecedents, with a focus on individual sociocognitive factors and their direct effects on outcomes (Keupp and Gassmann, 2009). In an effort to advance the field of IE, Keupp and Gassmann (2009) undertook an extensive literature review of 179 articles published over 14 years from the disciplines of strategic management, international business, entrepreneurship, and technology and innovation management. The review reveals knowledge gaps among the various approaches to understanding IE. It also finds the lack of a cohesive theoretical framework for SME internationalization and the need for a strong theoretical foundation to align future studies to advance the field of IE. The same investigators note that within entrepreneurship journals, research that addresses IE comprises only 4.6% of all of the articles. Even more striking is the significantly small amount of research that utilizes the entrepreneur orientation (EO) scale (Miller, 1983; Covin and Slevin, 1989) in an international context (Slevin and Terjesen, 2011).

In response to a growing interest among the research community for a clearer understanding of IE, several focused journal issues have recently provided reflections, constructive analysis of the research to date, and recommendations to advance the field of IE research. A review of 323 articles on IE from 1989 to 2009 finds that human capital is a better predictor of internationalization than firm size or age (Jones et al., 2011; Westhead et al., 2001). These researchers also question the temporal effects of EO dimensions and suggest that an EO may be an outcome of internationalization for established firms. A need is evident for clarity on the effects of EO in international contexts (Jones et al., 2011). The recommended areas for research include the elements comprising an EO, access to resources, as well as knowledge and firm capabilities (Keupp and Gassmann, 2009). There is limited empirical evidence that identifies the capabilities that help SMEs internationalize early (Knight and Cavusgil, 2004).

We contend that professional service firms possess knowledge resources that facilitate internationalization. We build upon the findings of Hitt et al. (2006) and apply the resource-based view (RBV). The RBV is an appropriate approach when examining high-tech venturing, a subsection of professional services, such as computer and communications technology SMEs (Miller, 2011). We follow the approach of Keupp and Gassmann (2009) who extend the RBV by applying a knowledge-based perspective as the framework for examining knowledge-intensive services. As an extension of the RBV, the knowledge-based view (KBV) emphasizes intangible resources rather than physical assets, whereby knowledge is the most important resource. With regard to professional service SMEs, we contend that knowledge resources facilitate a SME’s speed and scale of internationalization in that a complementary relationship exists between firm resources and decision-making processes (Miller, 2011). We concur with the management research in that the primary asset base for professional service delivery is knowledge, and the development of human-capital knowledge capabilities generates relationship capital and facilitates international expansion (Hitt et al., 2003). A focus on knowledge resources provides an appropriate lens to examine professional human capital as the key to developing relationship capital between professional service employees and their international market customers for global expansion (Hitt et al., 2003). Hence, research can provide insight into the effect of entrepreneurial activities and human capital on the internationalization efforts of SMEs (Todd and Javalgi, 2007).

To address the compelling need for IE research, we empirically test a model of the drivers of service SME internationalization by surveying professional service SMEs in India to examine how the EO, human capital, and relational capital (RC) resources contribute to the speed and scale of internationalization. In a focused journal article that reflects upon entrepreneurial orientation research to date, Miller (2011) notes the growing awareness of the importance of entrepreneurship in regions such as India and asserts that globalization is a form of “new entry.” Areas of great research promise include the study of entrepreneurship in planned economies that are transitioning to market economies (Dess et al., 2011), as well as research that examines SMEs in emerging markets and their outward international expansions, a neglected research area (Bruton et al., 2008).

Given the pressing need for research, the intent of this study is to integrate entrepreneurship and strategic management research, which examines EO and human capital, with a subset of IE research that focuses on small firm internationalization. The extension of EO research into the field of IE is an area of meaningful research attention (Miller, 2011; Slevin and Terjesen, 2011). The findings of this study address a gap in the IE research (Keupp and Gassmann, 2009; McDougall and Oviatt, 2000; Styles and Seymour, 2006) and answer the call for a multidisciplinary approach to understanding small firm internationalization (Venkataramanaiah and Parashar, 2007). This study’s unique contribution is the context of an emerging market where resources are thought to be constrained. Furthermore, entrepreneurship research has not fully addressed the gap in extending and linking entrepreneurship with internationalization in a variety of contexts, nor addressed accelerated speeds of growth from emerging markets, or even from an SME perspective. In summary, this study provides the following contributions:

1.an empirically tested multidisciplinary framework that integrates and extends the fields of entrepreneurship, international entrepreneurship, strategic management, and management;

2.empirical evidence that the entrepreneurial orientation, human capital, and relational capital contribute to the internationalization of professional service SMEs from emerging markets;

3.empirical support for the resource-based view;

4.firm-level empirical evidence of accelerated SME internationalization in a context where the process theory of internationalization (Johanson and Vahlne, 1977) does not fully reflect the SME internationalization process; and

5.support for differences among the internationalization processes of professional service SMEs.

1.2 Resources as a basis for internalization

Research on service internationalization indicates that service firms are typically the first entrants into international markets as client followers (Calof and Beamish, 1995; Erramilli and Rao, 1993). The advances in technology and privatization and the opportunities in national markets resulted in tremendous growth in international business activity during the 1990s (Hitt et al., 2006). The interrelationship of national economies, international financial markets, and globalized industries led to the need for global laws and the movement of professional law firms into international markets (Hitt et al., 2006). Foreign professionals often attended US law schools then returned to their home countries. In this manner, knowledge, the basis of professional services, was acquired in a foreign market and transferred to the home country for global expansion. As a result, professional service firms that invest in human capital create highly valued, transferrable assets that facilitate international expansion. Resources, in part, explain the internationalization of professional service SMEs.

While there are several theories that attempt to explain the internationalization process of a firm, the traditional theories fail to consider entrepreneurial behavior or the resource needs of smaller firms (Knight and Cavusgil, 2004). As a result, the RBV (Barney, 1991) has emerged as a promising framework to explain SME internationalization. Moreover, the KBV, an extension of the RBV, is the dominant theory used to explain the internationalization of knowledge-intensive firms in dynamic environments characterized by highly competitive knowledge-intensive industries (Saarenketo et al., 2004). The KBV asserts that knowledge is a key factor that contributes to firm internationalization (Autio et al., 2000). The KBV agrees with traditional stage theory (Autio et al., 2000; Yli-Renko et al., 2001) in that knowledge and learning are key factors contributing to firm internationalization, and firms are repositories of knowledge (Saarenketo et al., 2004).

According to the RBV, firms possess unique resources and capabilities that explain rapid internationalization (Knight et al., 2004). The RBV explains differences among firms as being due to varying tangible and intangible resources (e.g., physical, human, and organizational) or differing capabilities in leveraging resources. The SMEs have resource deficiencies unlike large firms, such as limited financial capital and a smaller complement of human capital. However, SMEs have successfully internationalized at speeds faster than resource rich multinational enterprises (Calof and Beamish, 1995). The observed accelerated internationalization among small computer software firms indicates that technology intensive firms have not followed a sequential progression through the stages of internationalization (Bell, 1995). Given accelerated patterns of internationalization, Bell et al. (2003) contend that early internationalizing firms are typically knowledge or service intensive, both of which rely upon a sophistica...

Table of contents

• Cover
• Title
• Part I  Innovative and Cooperative Models for CSR and Sustainability
• Part II  Innovative Business and Management Approaches and Practices
• Part III  Managing and Measuring Performance
• Part IV  IT in Business and Management
• Index