Are Knowledge-Based Firms Different?, The

Effect of Environmental Turbulence and Leader Characteristics on International Performance: Are Knowledge-Based Firms Different?, The

Kuivalainen, Olli

Abstract

The aim of this paper is to study the effect of environmental turbulence and leader characteristics on international performance. It is suggested that these phenomena explain the differences between knowledge-intensive companies and traditional industrial enterprises in the internationalisation process. The empirical part of the study is based on a large cross-industrial survey of Finnish small and medium-sized enterprises. Our results indicate that knowledge-intensive firms have experienced more intensive international growth than other firms. They are also operating in an environment in which technological turbulence is significantly higher, and their leaders put more emphasis on internationalization. Generally, environmental turbulence is a better indicator of international performance in knowledge-intensive firms than in others.

Resume

Dans le present article, nous etudions l’impact de la turbulence environnementale et des caracteristiques des leaders sur la performance internationale. On estime que ces phenomenes rendent compte des differences qui existent, dans le processus d’internationalisation, entre les entreprises a forte concentration de savoir et les entreprises industrielles traditionnelles. La partie empirique de l’etude s’appuie sur une grande enquete trans-industrielle de petites et moyennes entreprises finnoises. Nos resultats indiquent que les entreprises a forte concentration de savoir connaissent une croissance internationale plus grande que les autres entreprises. L’etude montre aussi que les entreprises a forte concentration de savoir operent dans un environnement marque par une plus grande turbulence technologique. Par ailleurs, leurs leaders mettent plus l’accent sur l’internationalisation. D’une facon generale, la turbulence environnementale permet de mieux apprecier la performance internationale dans les entreprises a forte concentration de savoir que dans d’autres entreprises.

Growth through internationalization is an important strategic option for small and medium-sized enterprises (SMEs). Since the late 1980s there has been a lot of published evidence and research on the internationalization of small, service, and knowledge-intensive firms (Bell, 1995; Coviello & Munro, 1997; Oviatt & McDougall, 1994, 1997). As Zahra, Ireland, and Hitt (2000) point out, prior studies (e.g., Brush & Vanderwerf, 1992) have shown that a combination of institutional (regulations, trade barriers), industry (competition), and organizational factors (resources and capabilities) increases international expansion by new venture firms.

As more and more firms are becoming international, often in an increasingly competitive environment, there is an growing need to identify factors that affect international performance. Despite the concentration on export performance in the literature, there is a scarcity of empirical studies on its relationship with a firm’s external environment (Zahra, Neubaum, & Huse, 1997). The broad theoretical acceptance of this link (Madsen, 1994) has received mixed results in a limited number of empirical studies (Calof, 1994; Samiee & Walters, 1990). Walters and Samiee (1990) argue that this lack of consistency indicates the need to explore various contextual dimensions of export performance.

It has been argued that knowledge and ability to learn are the only keys to sustainable competitive advantage in a dynamic environment (Eisenhardt & Martin, 2000; Teece, 1998). By controlling several organizational variables, we examine the impact of environmental turbulence and leader mindset on international performance. Knowledge-intensity affects both of these issues.

The empirical part of this study is based on a cross-industrial survey of Finnish small and medium-sized enterprises. Our results indicate that knowledge-intensive firms have experienced more intensive international growth than others. They also operate in an environment in which technological turbulence is significantly higher and their leaders put more emphasis on internationalization. There were notable differences in the significance of the explanatory variables. This notion could significantly affect the internationalization strategies of knowledge-based firms. Guidelines for both academics and practitioners are given at the end of the paper.

Literature Review, Theory, and Hypotheses

The Internationalization of Small Knowledge-Intensive Firms

Traditionally, most theories of international business have focused on large, established corporations (Knight, 2001; Oviatt & McDougall, 1994). However, as SMEs become more active in international markets and their role in economic growth increases, this situation is changing.

Knowledge-intensity has been found to be a regulator of the internationalization patterns of new technology-intensive or high-technology firms (Autio & Burgel, 1999; Crick & Jones, 2000). According to Autio, Sapienza, and Almeida (2000) knowledge intensity reflects “the extent to which a firm depends on the knowledge inherent in its activities and outputs as a source of competitive advantage” (p. 913). There is increasing evidence that small knowledge-intensive firms in particular ignore their home markets and target “lead” markets or enter domestic and international markets simultaneously, almost from inception (see e.g., Bell, McNaughton, Young, & Crick, 2001; Madsen & Servais, 1997; Madsen, Rasmussen, & Servais, 2000). Madsen and Servais (1997) suggest that such “born globals” tend to have more focused competitive strategies. They often have more international experience, operate in a geographically wider market area, and dispense their knowledge resources better. This should lead to better international performance. In our study we build on this notion and compare knowledge-intensive and non-knowledge-intensive SMEs in addressing the question of whether or not “knowledge-intensive small firms are different”. First we clarify what is meant by international performance and what determinants it has.

International Performance and its Determinants

There is a substantial body of empirical research on export success factors, and numerous variables have been identified as determinants of success (Leonidou, Katsikeas, & Samiee, 2002). Yet, only a few studies concentrate on the effects of internationalization on SME performance, although this is of central concern to entrepreneurs (Coviello & McAuley, 1999; Lu & Beamish, 2001). According to Lu and Beamish (2001), this is due primarily to the fact that detailed information is hard to obtain. However, in a turbulent, unstable environment, entrepreneurial firms pursuing more expansive strategies or ranges of activities are more likely to perform well (Bantel, 1998).

There are significant differences in conceptual and operational definitions and measures of international or export performance (Shoham, 1998; Walters & Samiee, 1990). It is a complex and multi-level concept, and the performance and success factors may vary by industry, company, and market area. Leonidou et al. (2002) integrated the different variables into three groups: managerial characteristics, organizational factors, and environmental forces. Most of the export success factors that have been frequently discussed can be grouped under these three headings, although their relative importance has varied in many studies (Walters & Samiee, 1990). Walters and Samiee reviewed 31 studies and found that the majority of those on export performance (68%) used the proportion of export sales as one of their measures. This measure was followed by growth in export sales (42%), export profitability (20%), absolute export sales volume (16%), and number of export markets (13%). The use of multiple measures is common and is considered necessary by many authors (see e.g., Zahra et al., 1997).

The diversity of research on the determinants of small firms’ international performance supports the argument that an emphasis on the contextual situation offers a fruitful approach to understanding the determinants of export success (Walters & Samiee, 1990). Many trends and factors that have made it possible for small entrepreneurs to compete successfully in international markets occur in the firm’s external environment, and are consequently beyond management control (Knight, 2001). Thus, there is a need to consider the external environment as well as the firm’s internal characteristics and capabilities, as both industry- and firm-level factors may be significant determinants of performance.

The Role of the Environment

Among the most important and interesting business developments in recent years has been the emergence of markets in which time plays a dominant role (Glazer & Weiss, 1993). These markets are often associated with high technology products (Weiss & Heide, 1993; Weiss & John, 1989) or with the dominant role of information technology (Glazer, 1991). They are also considered to be information intensive (Glazer).

The industry structure in which the firm operates may have a significant effect on the international operations of a new venture (Oviatt & McDougall, 1994; Walters & Samiee, 1990). Oviatt and McDougall (1994) notice that “increasing numbers of business executives and entrepreneurs have been exposed to international business” (p. 52). Firms are either becoming international themselves or are finding international competition in their home markets. Management research suggests that perceptions of industry complexity, heterogeneity, and turbulence affect managerial decision-making and strategies (Keiser & Sproul, 1982). According to many studies, heterogeneity (diversity of market segments), dynamism (rate and unpredictability of change), and hostility (unfavourable business climate, high level of competitive intensity and uncertainty) are important dimensions of the external environment (Zahra & Bogner, 1999; Zahra et al., 1997). Possible turbulence can be measured by studying the different environments in which the firm operates in terms of competitors, the market, and technological and regulatory turbulence (Cadogan & Paul, 1999).

Zahra et al. (1997) suggest an association between a firm’s domestic environment and its export performance: when the executives of a new venture consider their environment turbulent, they are likely to intensify exporting activities and improve export performance. However, when hostility intensifies, the cost of foreign operations may increase (more marketing, advertising, and customer loyalty development), which in turn may lead to reduced profits, especially in a hostile international market environment (Zahra & Garvis, 2000). Thus, although environmental hostility may positively influence company performance, firms competing in excessively hostile international environments may experience diminishing and negative returns (Zahra & Garvis). Drawing a line between negative and positive outcomes is hard, as international markets are generally described as hostile (Hitt, Hoskisson, & Kim, 1997). We expected to find more negative influence because turbulence may be extremely high for technology-based, knowledge-intensive small firms, and technological and regulatory uncertainties surround new products that have not been tested. Eisenhardt (1989) notes that high-velocity (i.e., turbulent) environments are “particularly challenging because information is poor, mistakes are costly, and recovery from missed opportunities is difficult” (p. 570).

The Role of Firms’ Internal Capabilities and Knowledge

The development of capabilities and competencies in firms has been shown to have a positive effect upon various facets of performance (Lyles & SaIk, 1996). The resource-based view (RBV) of the firm has been an influential theory in studies on international entrepreneurship (McDougall & Oviatt, 2000). It suggests that so-called VRIN attributes (valuable, rare, inimitable, and nonsubstitutable) of physical, human, and organizational resources are the main source of competitive advantage (Barney, 1986). SMEs, which tend to have fewer resources than their larger counterparts to invest in internationalization, should have superior (tacit, VRIN) knowledge about global opportunities and superior leverage capabilities in order to gain competitive advantage and overcome barriers to entry (Fahy, 2002; liesch & Knight, 1999). Eventually, this competitive advantage should lead to superior performance.

Empirical research on different resources and capabilities has not yet reached maturity; however, there are many studies showing a positive relation between knowledge and expertise in different functional competencies and international growth (Cavusgil & Zou, 1994; Kogut & Zander, 1993). Knowledge can be seen as an organizational capability, and there is a challenge for firms to develop, integrate, and leverage new knowledge internally. Miller and Shamsie (1996) argue that knowledgebased resources (i.e., capabilities) are likely to contribute most to business performance in changing and unpredictable environments. Knowledge and learning are intertwined; learning has become critical for international success. The ability to learn, or learning orientation, and innovativeness are often mentioned as the determinants of long-term competitive advantage and performance (Calantone, Cavusgil, Zhao, 2002; Teece, 1998). The concept “learning orientation” refers to a commitment to learning, shared vision, open-mindedness, and intra-organizational knowledge sharing, which facilitate the generation of essential resources and capabilities (Calantone et al, 2002; Sinkula, Baker, & Noordwier, 1997). The more imperfect the learning process of the firm, the greater the probability that it will fail in its international operations.

After studying RBV-inspired literature on entrepreneurship and conducting their own research, Lee, Lee, and Pennings (2001) came up with three important internal capabilities that significantly influence the performance of new ventures: entrepreneurial orientation, technological capabilities, and financial resources invested during the development phase. The role of the management team has been emphasized in many studies (Eisenhardt & Schoonhoven, 1990) and knowledge, in terms of experience, skills, and capabilities, is one of the key factors in the internationalization of SMEs.

Technological capabilities are among the most recognized determinants of the success of small knowledgeintensive firms (McGrath, 1994; Zahra, 1996). Technology could be seen as the sum of a firm’s knowledge and skills, which determines the ability of new ventures to offer products and services, gain market acceptance, survive in the long run, and achieve financial success (Zahra & Bogner, 1999). In this study, technological capabilities are seen as knowledge, and knowledge-intensive and technology-based firms and industries generally invest more in research and development than their non-knowledge-intensive counterparts (OECD, 2001). In this we follow Berry and Prashantham (2001) who note that high technology or technology-based firms could also be categorized as knowledge-intensive.

We use two concepts to study the internal characteristics of knowledge-intensive small firms further: (a) the leader mindset, including both entrepreneurial orientation and the leader’s export market orientation and propensity to internationalization, and (b) leader characteristics, in which we include the importance of training for international operations and the skills/knowledge the management possesses. Both concepts could be considered components of knowledge-based management capabilities of the firm.

The leader mindset. To date, the role of entrepreneurship and its linkage to marketing strategy, tactics, and corporate performance in internationalizing SMEs has not been the focus of many studies (Knight, 2001). Dess, Lumpkin, and Covin (1997) conclude that uncertain and complex environments often demand a strong entrepreneurial stance in strategy making. Entrepreneurial orientation (EO), or emphasis on entrepreneurship, may be associated with opportunity-seeking (i.e., risktaking propensity), innovativeness, and proactiveness (Dess et al., 1997), dimensions that have been used in various studies (Davis, Morris, & Alien, 1991; Lee et al, 2001; Lumpkin & Dess, 1996). The innovativeness of the firm is seen in its propensity for new idea generation, experimentation, and R&D activities resulting in new products and processes. Risk taking represents managers’ willingness to pursue opportunities that carry a reasonable risk of costly failure. The EO concept is used to describe entrepreneurship that has extended from the individual to the organizational level, that is, corporate entrepreneurship (Covin & Slevin, 1991; Lumpkin & Dess, 1996).

A highly correlated relationship between entrepreneurial orientation and marketing orientation has been found in many studies and in the international context (Davis et al., 1991; Yeoh & Jeong, 1995). Cadogan and Paul (1999) suggest that the top management plays an important role in facilitating the export market-oriented (i.e., international) activities within the firm. They should also emphasize this to all the employees of the firm. Yeoh and Jeong (1995, p. 98) note that both marketing and entrepreneurial orientations tend to represent the strategic responses of a firm to environmental uncertainty. An entrepreneurial strategic posture has been found particularly beneficial to small firms in turbulent, hostile environments (Covin & Slevin, 1989).

Management emphasis on internationalization is related to attitudes and expectations about goals, profitability, and the associated risks. Management expectations also play a key role on the business level. Favourable management attitudes are likely to lead to greater commitment (Gencturk, Childers, & Ruekert, 1995).

Leader characteristics. Different leadership factors have an effect on international performance. International operations hinge on knowledge and experience, and behavioural models in particular (the stages model) emphasize knowledge acquisition (Samiee & Walters, 1999). Information regarding international operations and markets is an important resource in international expansion (Johanson & Vahlne, 1977). For example, gaps in exporting knowledge and lack of education, experience, and language skills among top management can prevent or slow down the decision to internationalize.

Skills in international operations could be seen as capabilities. During the first stages of internationalization the emphasis is on technical knowledge, to do with regulations, export documentation, and other formalities (Hendry, 1994). Later, when the basics have been learned, the focus turns to tactical knowledge, which the firm needs to operate more effectively in the international context, to gain tacit knowledge from its different actions, and to establish a common knowledge base (Anderson, Graham, & Lawrence, 1998). In turbulent markets, where changes are non-linear and less predictable, boundaries are blurred, players are ambiguous and shifting, and the most effective capabilities involve simple routines that keep managers focused on broadly important issues (Eisenhardt & Martin, 2000). The challenge is to define suitable management practices that nurture learning and direct the best possible resource configurations for long-term success. Knowledge-intensive firms focusing on knowledge creation and exploitation as the source of advantage are more likely to develop learning skills that are useful for adaptation and successful growth in new environments (Autio et al., 2000).

Experiential knowledge in particular is seen as a key to success in international markets; dissemination and integration is another big issue. The dilemma for managers is that organizational capabilities that require more specific knowledge do not allow for as much common knowledge between team members (Grant, 1996). Jaworski and Kohli (1993) argue that if leaders can develop an organizational culture in which the workers are strongly motivated to following competitor moves, customer needs, and market trends, they are more likely to generate and disseminate information at all levels of the organization. Koh (1991), in particular, points out the role of education as a determinant of export performance. According to Samiee and Walters (1999), in general, the higher the educational level of the export-related employees in a firm, the greater interest there is in acquiring exporting knowledge through specialized programs.

The Conceptual Framework and Hypotheses

On the basis of the above discussion, we have formulated a conceptual model in which certain external and internal factors and their effect on international performance are hypothesized. These factors could be considered contingencies that have a different effect on knowledge-intensive and less knowledge-intensive firms. They are presented in Figure 1. As mentioned, contextual factors may affect the success of the firm’s international entrepreneurial activities (Covin & Slevin, 1991; Walters & Samiee, 1990). For example, environmental hostility may have a significant moderating influence on the EOfirm performance relationship (Zahra & Covin, 1995). High environmental turbulence and environmental hostility present a great threat to small firms, which need to compete with limited resources. Thus, we hypothesize:

H1: Environmental turbulence has a negative effect on a small firm’s international performance.

We believe that environmental turbulence is generally higher for technology-based, knowledge-intensive small firms than for non-knowledge-intensive firms. Thus, we hypothesize:

H2: Knowledge-intensive small firms sec their environment as more turbulent than non-knowledgeintensive small firms.

The attitudes and commitment of management have proved to be an important factor in small firms’ internationalization (see e.g., Knight, 2001). As a small firm could be seen as an extension of its management’s attitudes, the emphasis on internationalization, export market orientation, and entrepreneurial orientation, have an effect on international performance. Thus, we hypothesize:

H3: A positive leader mindset (i.e., management attitude) towards internationali/,ation has a positive effect on a small firm’s international performance.

An increasing number of firms in knowledgeintensive industries do not follow the traditional stages model of internationalization. The international vision is often based on earlier management experience and knowledge. Such firms also tend to share entrepreneurial orientation and to be more innovative and risk-taking. Thus, we hypothesize:

H4: Knowledge-intensive small firms have a more positive leader mindset towards internationalization than non-knowledge-intcnsive small firms.

As discussed above, leader characteristics have an effect on the internationalization strategy. The management’s capability to share skills and train and motivate staff is likely to have a positive effect on internationalization. Thus, we hypothesize:

H5: Management skills in and knowledge of internationalization have a positive effect on international performance.

Knowledge-intensive small firms could be seen as able to manage (i.e., to identify, distribute, gain, and develop) the knowledge needed to operate in international markets more effectively than their counterparts. Thus, we hypothesize:

H6: Knowledge-intensive small firms have better skills in and knowledge of internationalization than non-knowledge-intensive small firms.

Although knowledge-intensive firms could be seen as operating in more turbulent environments in general, they should be able to create and exploit knowledge as a source of competitive advantage and adapt to new environments more successfully (Autio et al., 2000). This ability to regenerate knowledge by learning should moderate the effects of high turbulence. In an equally turbulent environment, greater knowledge intensity should lead to faster international growth. Knowledge-intensive firms also tend to be more entrepreneurial and to put more emphasis on internationalisation. Thus, we hypothesize:

H7: Knowledge-intensive small firms have better international performance than non-knowledgeinlensivc small firms.

Data and Measures

Data

The study sample was drawn from the Kompass Finland database (SKOD, 1998). Companies involved in export and employing more than 50 persons were chosen, and a questionnaire was mailed in spring 1999. In total, 783 usable responses were obtained, corresponding to an effective response rate of 81% (783/970). Nonresponse bias was not an issue (Armstrong & Overton, 1977). The informant in the firm was the export director/manager, CEO, marketing director/manager, or some other person who was considered to have the best knowledge about the export function. Since we were interested in SMEs, only companies employing less than 250 persons were chosen for further analysis. Thus, our final sample consisted of 513 firms, out of which 45 were classified as knowledge-intensive and the rest (468 firms) were regarded as non-knowledge-intensive. Industries were classified as knowledge-intensive and non-knowledge-intensive based on their investments in research and development (R&D). Several researchers have used R&D as a proxy for technological capabilities (Hitt, Hoskisson, & Ireland, 1994). Normally, R&D is also seen as an indicator of knowledge intensity, and high-technology industries account for more than 50% of total manufacturing R&D within the OECD area (OECD, 2001). Accordingly, knowledge creation and use have been especially noticeable in high-technology sectors (Eisenhardt & Schoonhoven, 1990): electronics are generally believed to be more knowledge-intensive than pulp and paper. A recent OECD publication classified the following as high-technology industries: radio, television and communications equipment (the OECD average in 1991-1997 of direct R&D expenditures as a percentage of production, i.e., gross output, was 8.0); medical, precision, and optical instruments (7.3); and office, accounting, and computing machinery (9.3). Medium-low or low technology industries include textiles (0.3); food products, beverages, and tobacco (0.3); rubber and plastic products (0.9); and basic metals (0.8) (OECD, 2001) (See Table 1).

Measures

We measured environmental turbulence, leader mindset, and leader characteristics with seven-point Likert scales. Environmental turbulence consists of four sources of turbulence: technological turbulence, competitor intensity, changes in customer preferences, and regulatory environment. Environmental turbulence measures were adapted from Jaworski and Kohli (1993) and Dwyer and Welsh (1985).

Leader mindset was assessed using three separate but interrelated measures: propensity to internationalization (see Gencturk et al., 1995), export market orientation (adapted from Jaworski & Kohli, 1993), and entrepreneurial orientation (Doucette & Jambulingam, 1997).

Following our literature survey, we decided to include factors related to internationalization skills and training under leader characteristics. For a small firm, management attitude towards these issues is the basis for organizational culture. The scale used for measuring export training was based on the one suggested by Ruekert(1992).

To ensure scale reliability each scale was confirmed to have a coefficient alpha, which exceeded the value of .70 recommended by Nunnally (1978).

International performance was measured using absolute, relative, and subjective measures. Absolute export performance was measured with export growth percentage and export sales per employee, and with two subjective measures: export profitability in the year 1998 and export performance over the previous three years. Relative export growth was measured according to perceived growth compared to the industry average. Export experience was assessed in terms of the number of countries to which the firm exported.

Analysis and Results

On average, the firms had been doing business for almost 44 years, whereas the knowledge-intensive firms had been operating for 30 years and the non-knowledge-intensive ones for 45 years. Average exporting experience was almost 21 years. The non-knowledge-intensive firms were apparently more experienced, with an exporting history of 21 years compared to the 16 years of the knowledge-intensive firms. However, assessed by number of export countries, the former were a little more experienced with 21 export countries compared to 15 of the latter. The average turnover was approximately euro21.8 million and the average number of employees was 113. Interestingly, the knowledge-intensive firms had a relatively lower turnover but more employees. The reason for this could have been that knowledge intensity and labour intensity are positively related, and non-knowledge-intensive firms are more capital intensive. On the other hand, knowledge-intensive firms seem to be more international as they derive 54% of their sales from foreign operations (compared to 43% for non-knowledge-intensive firms). These findings are illustrated in Table 1.

We used linear regression analysis to study how environmental turbulence (H 1), leader mindset (H3), and leader characteristics (H5) affected international performance. T-tests were used to assess whether knowledge-intensive firms differed from the so-called non-knowledge-intensive firms on the three dimensions (H2: environmental turbulence, H4: leader mindset, and H6: leader characteristics) suggested above. We also studied whether there were true differences in international performance (H7). No significant differences in leader characteristics were found (see Table 2). The technological turbulence surrounding knowledge-intensive firms is apparently far fiercer than that experienced by nonknowledge-intensive firms. The other three environmental conditions (competitive, customer, and regulatory turbulence) did not seem to differ. Another significant difference was related to the leader mindset scales, as the managers in the knowledge-intensive firms apparently put significantly more emphasis on the internationalization process.

The analysis of differences in international performance revealed that, in general, knowledge-intensive firms had better performance and more intensive growth in international markets, but the differences were significant only for the absolute growth percentage and the number of countries (see Table 2).

Environmental Turbulence

On the basis of the regression results, we could neither reject nor accept our first hypothesis (Hl), that environmental turbulence has a negative effect on a small firm’s international performance, as the results were ambiguous (see Table 3). However, some conclusions could be drawn when each environmental variable was examined separately.

In two cases we found support for Hl as regulatory turbulence was significantly and negatively related to two performance indicators, namely the company’s three-year performance and the number of export countries. These results held only for non-knowledge-intensive firms, however. The relationships were not significant for knowledge-intensive firms and actually were positive, contrary to our hypothesis. What was also against our hypothesis was that regulatory turbulence had a significant and positive relationship with sales per employee – a performance indicator for knowledgeintensive firms.

Our results (see Table 3) concerning the effects of technological turbulence were contrary to Hl, as the few relationships that turned out to be significant were actually positive. It seems that, especially in knowledgeintensive firms, higher technological turbulence leads to better performance: there were positive relationships between technological turbulence and growth percentage, as well as between sales per employee. The findings were partially contrary to our hypothesis for non-knowledge-intensive firms too, as the relationship between technological turbulence and performance (number of export countries) was significant and positive, indicating that high technological turbulence leads companies to internationali/.e more intensively.

Only two significant relationships between competitive turbulence and the performance indicators were identified: the competitive turbulence faced by knowledge-intensive firms increases their performance (sales per employee) and weakens the profitability of nonknowledge-intensive firms (see Table 3).

H1, concerning turbulence in the customer environment especially in the case of knowledge-intensive firms, held that the relationships between environmental turbulence and company performance were significant and negative. We could not confirm that customer turbulence had a significant effect on the performance of nonknowledge-intensive firms, which is very surprising (see Table 3).

H2 stated that knowledge-intensive small firms considered their environment to be more turbulent than nonknowledge-intensive firms. We found only weak support for H2 as these two types of companies differed only in their perceptions related to technological turbulence: the former experienced significantly higher levels. Interestingly, all other indicators of environmental turbulence were higher for the non-knowledge-intensive firms, although the differences were not statistically significant (see Table 2).

Leader Mindset

We found partial support for H3, that a positive leader mindset towards internationalization has a positive effect on a small firm’s international performance. The relationship between leader mindset (attitudes towards internationalization) and company performance was significant and positive for all the performance indicators for the non-knowledge-intensive firms. However, no significant relationships could be identified between any leader mindset indicators and performance in the knowledge-intensive firms. This surprising result could possibly stem from the fact that the latter placed higher emphasis on internationalization in general. There may be a certain threshold of management emphasis, which is something that almost all knowledge-intensive firms have crossed, that is, they take internationalization for granted. Thus, further increase in leader emphasis has no meaning. Leader emphasis on export market orientation did not support H3 since no significant relationships were found with company performance. Entrepreneurial orientation was not significantly related to performance either, except for the relationship with sales per employee, which was significant but negative among the knowledge-intensive firms (partly rejecting H3) (see Table 3).

H4, that knowledge-intensive small firms have a more positive leader mindset towards internationalization, was not supported as these firms differed from the non-knowledge-intensive ones only in one case, namely emphasis on internationalization. However, we would not like to reject this hypothesis completely, as the knowledge-intensive firms had higher means in all cases, although there were no statistically significant differences between the two types (see also Table 2).

Leader Characteristics

We hypothesized that management skills and knowledge of internationali/.ation (i.e., an internationally-oriented leader) would have a positive effect on international performance (H5). This was partly supported, as in many cases the relationship between the leader’s skills and the firm’s international performance was significant and positive, but mainly for the non-knowledge-intensive firms, with the exception of profitability. It seems that leader characteristics do not explain the performance of knowledge-intensive firms well, or that the constructs used were not able to measure this accurately. Interestingly, training had a negative effect on almost all performance indicators, although these relationships were not statistically significant (see Table 3). This result warrants further research on the effectiveness and efficiency of training.

H6 stated that knowledge-intensive small firms would have better skills and knowledge of internationalization. Unfortunately, we did not find any support for this proposition, as the differences between the two types of firms were not significant. The non-knowledge-intensive firms had a slightly higher level of training and leadership skills (see Table 2).

Our final hypothesis (H7) was that knowledge-intensive small firms have better international performance than non-knowledge-intensive small firms. Partial support was found for this, as two of the six performance indicators revealed significant differences. The former had much higher absolute growth and a significantly higher number of export countries (see Table 2).

Discussion

The purpose of this paper is to address the question of whether or not knowledge-based firms are different, with respect to knowledge-related internal factors and external turbulence that affect international performance. According to the data, knowledge-intensive firms had experienced more intensive growth and were operating in a greater number of foreign countries than non-knowledge-intensive firms. Thus, the general answer to our question is affirmative, although some of our hypotheses did not hold and most of them were supported only partially. Thus, our results seem to support the recent arguments and empirical results presented by Autio et al. (2000), for example. According to them,

Knowledge and learning can be expccled Io have an impact on international growth in that internationalising firms must apprehend, share, and assimilate new knowledge in order to compete and grow in markets of which they have little or no previous cxpcrience”(p. 911).

The explanatory factors in the dimensions used were almost always higher for knowledge-intensive firms. Thus, we believe that these attributes have more effect on performance in knowledge-intensive industries (at least given a similar sample of firms).

The attributes that seem to contribute most to international performance are environmental turbulence and skills, and the capabilities of the management (i.e., leader characteristics). However, the more specific analysis showed that different attributes of the studied dimensions had different effects on the performance. This supports the notion that various factors influence international performance (Walters & Samiee, 1990).

One of the most interesting results of our study is that the higher the technological turbulence, the bigger the growth percentage, especially for knowledge-intensive firms. The reason for this may be that firms that perceive turbulence as high are forerunners in their specific industries. These innovators may be able to penetrate the markets with novel technology, although their long-term position may be unstable when competition begins or intensifies. However, there is no such effect on other environmental turbulences; high customer turbulence means smaller growth for knowledge-intensive firms. In addition, high customer turbulence had a negative effect on sales per employee and growth in comparison with the industry average. This may imply that knowledge-intensive technology-based firms are too much technology oriented and not sufficiently customer oriented. Customer needs may not even exist in novel markets with radical innovations. Thus, we argue that actively following customer and market needs, and how these follow technological development, helps to ensure success in the long run. A knowledge-intensive small firm should be able to adapt to environmental changes and should be customer-oriented. Eisenhardt and Martin (2000) support this view in stating that the strategic imperative is to change not to leverage capabilities.

The leader mindset-by which we mean management attitudes towards internationalization, export market orientation, and entrepreneurial orientation-was not a significant predictor of international performance for knowledge-intensive firms, although the managers were more positive. This is somehow contradictory to our expectations, as Knight (2001) noted: “international entrepreneurial orientation is a fundamental corporate posture and contributes strongly to the international performance” (p. 159). We can only speculate that there might have been other strong contingencies in our sample that affect performance. For example, market conditions may push firms towards rapid international expansion (Oesterle, 1997), but profits may still be scarce. However, the leader mindset explained to some extent the performance and the number of foreign countries served among the non-knowledge-intensive firms.

The knowledge-intensive firms differed from the non-knowledge-intensive firms in the predictors of profitability. Although there were no significant differences in the self-assessed skills and knowledge levels between the two, the training and knowledge the management possessed explained the profitability of the former. This suggests that knowledge intensity has an effect on growth in international profitability. One reason could be the ability to leverage knowledge resources more effectively, from which a firm gains in profit margin, and skims the markets with higher prices. However, we also have to acknowledge that skills proved to be more significant for non-knowledge-intensive firms in many other performance dimensions, and our results are ambiguous.

Limitations

Although we have included several dimensions of international performance in our model, their number is still a limitation as the factors affecting internationalization and international performance are often context specific (Walters & Samiee, 1990). Another limitation is the heterogeneity of the firms. The measurement of knowledge intensity was carried out at the industry level. If possible, this should also be done at the firm level and with a longitudinal survey. In general, the cross-sectional nature of the data limits the possibility of drawing strong conclusions from the processes and relationships between the different constructs presented in the framework of the study.

It is also important to note that the indicators in our survey were questions about perceptions. Although the respondents, who were mostly managing or export directors, could be seen as possessing the best available knowledge of the international activities of their firms, the performance measures were self-assessed. Even though perceptions are good indicators of actual behaviour (Spanos & Lioukas, 2001), secondary data or multiple respondent samples should also be used, if possible. These types of samples could further improve external validity.

Finally, the fact that the study focused on a single country is a limitation. all the data were collected in Finland and characteristics of the home market vary depending on the contingencies affecting the firms. However, as all the firms were exporters and operating internationally, most of the results could be considered valid in an international context, particularly in small open economies such as Sweden, New Zealand, and Ireland.

Implications

Managerial Action

There are several managerial implications from our study. First, as knowledge intensity has an effect on international performance, firms should plan the development, distribution, and recreation of knowledge creation more effectively. They could initiate various organization-wide activities to enhance competitive advantage such as obtaining and sharing information about customer needs, market and industry changes, and competitor actions, as well as developing or purchasing new technologies to create new products and services that are superior to those of competitors (Calantone et al., 2002).

Second, this is even more important in the turbulent environment in which knowledge-intensive technology-based firms often operate. Internationalisation strategy planning should focus on knowledge management and the development and rapid adjustment of capabilities. Managers need to know the strengths and weaknesses of the firm and be able to identify the areas that need additional knowledge and capabilities. They should also realize that learning and developing capabilities takes time and requires the implementation of effective routines.

Third, since customer turbulence seems to lead to poorer international performance, knowledge-intensive firms need to put more emphasis on customer relations and on innovativeness/product development, which has close links to customers and their needs. For example, industries in which significant innovations can be expected (e.g., the high-technology sector) face the constant need to foster innovation and knowledge management continuously in cooperation with current and potential customers. This could mean joint development projects, networking, or other types of collaborative agreement.

Finally, the significance of well-defined internationalization goals should be acknowledged. International performance has been found to be a complex and multifaceted construct. Various measures are used, including financial (turnover) and strategic or procedural outcomes (number of target markets/countries served). In this sense, internationalisation and performance outcomes are often measured using the same variables, which may cause problems. For example, managers might not be happy with the financial results of their internationalization but they may be satisfied with the image it has created. As it is still a costly challenge, this might be enough for a start in many cases. However, the analysis is easier if there are well-defined criteria, which should include both financial and non-financial measures, ranked in order of importance.

Public Policy Makers

Building support mechanisms for these types of activity is also a challenge for public policy makers, as industries are affected by different contingencies. As the nature of the competitive environment changes, the need for the constant development of supporting activities grows. First, governmental development agencies and other supporting organizations need to be able to follow the growth and development of firms. There is a need for the “right support in the right time”. As firms need different skills and capabilities in their life-cycles, they also need different types of support, be it money from venture capitalists, help with external funding, or connections to marketing networks abroad.

Second, knowledge-intensive firms operating in a more turbulent and changing environment might need different kinds of support at the same time. Born global strategies (accelerated internationalization) need money for product development and internationalization skills and capabilities simultaneously. Providing tailor-made public support services for high growth-high risk firms is a challenge.

Third, in the current competitive marketing environment it is important to remember that the “need for speed” in internationalization process means that support should focus on marketing activities. For example, the money given by the Finnish National Technology Agency (TEKES) has traditionally been targeted at product and technology development. However, channel building, networking with value-adding partners, and other similar activities are also important and their role in the support process should be increased. The results of this study could be seen partly as supporting this claim.

Future Research

The findings of this study support the role of technology or knowledge-intensity in internationalization and international performance: knowledge-intensive firms experienced more intensive growth and were operating in a greater number of countries than nonknowledge-intensive firms. These results support recent arguments (Autio et al., 2000) in the sense that knowledge-intensive industries tend to foster more firms aiming at accelerated internationalization and born global strategies. However, although it has been widely claimed that knowledge is the most important source of competitive advantage and superior (international) performance (McEvily & Chakravarthy, 2002), there has been a lack of empirical evidence and most existing studies are conceptual, exploratory, and case based in nature. This study represents one attempt to make up this deficiency; however, there is still a need to better understand the processes through which knowledge is generated, managed, and used to gain competitive advantage and superior performance. Further research could include more firm-level analyses of the effects of knowledge intensity on international performance.

It would also be fruitful to develop a contingency model with more dimensions related to internal and external forces driving firms towards internationalization, and to put more emphasis on the strategic patterns that lead to international performance. As Leonidou et al. (2002) note, there is a limited number of studies on how the managerial, organizational, and environmental elements that influence export marketing affect the marketing strategy in practice. Accordingly, several firm-level strategic orientations could be incorporated to complement the entrepreneurial orientation approach taken now. However, there are problematic issues here too, as learning orientation (Calantone et al., 2002) and entrepreneurial orientation are concepts that partly overlap. Future studies should aim to clarify the impact of these different types of strategies and orientations on the international performance of small firms.

It is worth mentioning that the results of this study could have been rather different given different measures of international performance. International performance is a complex and multi-level concept, and various measures have proved effective. Thus, the cross-industrial nature of our study proved to be an appropriate way to gain more understanding of this matter, and similar studies are needed in the future.

Finally, another important implication for the future research concerns the actual nature of the relationship between environmental turbulence, leader characteristics, knowledge-intensity, and international performance. This is not a straightforward issue, as the effect of the level of turbulence or hostility is sometimes curvilinear (Zahra & Garvis, 2000). Moreover, the generation of knowledge or learning within the firm changes over time, during different stages of the business life cycle. Thus, longitudinal studies are needed to provide a more comprehensive picture of this phenomenon.

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Olli Kuivalainen

Sanna Sundqvist

Kaisu Puumalainen

Lappeenmnta University of Technology, Finland

John W. Cadogan

Loughborough University, UK

Address correspondence to Olli Kuivalainen, Lappeenranta University of Technology, Telecom Business Research Center, P.O. Box 20, FIN-53851 Lappeenranta, Finland. E-mail: Olli.Kuivalainen@lut.fi

Copyright Administrative Sciences Association of Canada Mar 2004

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