Master Thesis
Research versus Development: Which one
matters more for international expansion?
Petra van den Dolder 11423234 23 June 2017
MSc Business Administration – International Management University of Amsterdam Final version Supervisor: Dr. Niccolò Pisani Second reader: Dr. Carsten Gelhard
STATEMENT OF ORIGINALITY
This document is written by student Petra van den Dolder who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
ABSTRACT
Extensive research has been conducted on the relationship between research and development (R&D) and internationalization. While previous studies have examined the role of these two activities jointly, recent works point to the notion that research and development are two significantly different activities. Therefore, the purpose of this study is to investigate whether research and development activities, taken separately, have a different impact on internationalization. We argue that a focus on development (versus research) has a bigger impact on a firm’s level of internationalization and that this relationship is positively moderated by a global (versus regional) orientation. To test our hypotheses, we used the PITEC survey of 2014, which provided us with a sample of Spanish manufacturing firms. The findings suggest significantly higher levels of internationalization for firms with a focus on development than firms with a focus on research. We argued that development rather than research is needed when adapting products to the host market needs. Additionally, we found that a global orientation has a significant negative moderating effect, indicating that firms with a global orientation do not have higher levels of internationalization with a focus on development than with a focus on research as opposed to firms with a regional orientation.
TABLE OF CONTENTS
1. INTRODUCTION ... 5
2. LITERATURE REVIEW ... 8
2.1 Internationalization ... 8
2.2 Effect of R&D on internationalization ... 10
2.3 Research versus Development ... 13
3. THEORETICAL FRAMEWORK ... 16
3.1 Research versus Development and a firm’s internationalization ... 16
3.2 The moderating effect of a firm’s global orientation ... 19
4. METHODOLOGY ... 24
4.1 Sample and data collection ... 24
4.2 Variables and measures ... 25
4.2.1 Dependent variable ... 25
4.2.2 Independent variable ... 25
4.2.3 Moderating variable ... 25
4.3 Data analysis and results ... 28
5. DISCUSSION ... 35
5.1 Academic relevance ... 36
5.2 Managerial implications ... 37
5.3 Limitations and suggestions for future research ... 38
6. CONCLUSION ... 40
ACKNOWLEDGEMENT... 42
REFERENCES ... 43
LIST OF FIGURES Figure 1 Theoretical framework ... 23
Figure 2 Two-way interaction on internationalization level ... 34
LIST OF TABLES Table 1 Operationalization of the variables included in the model ... 28
Table 2 Descriptive statistics; means, standard deviation and correlations ... 30
Table 3 Regression analysis results (Internationalization, Development versus Research and Global orientation) ... 33
1. INTRODUCTION
Innovation and technology are very important factors for a firm’s competitive advantage (Basile, 2001; Filatotchev, Liu, Buck, & Wright, 2009; Singh, 2009). A common proxy to identify the focus on innovation and technological capabilities is the investment in research and development, hereafter R&D (Singh, 2009). Higher levels of R&D expenditure help firms to create more added value through more sophisticated and higher quality products. Furthermore, R&D activity underpins the development of new capabilities and resources that may be leveraged across national markets (Autio, Sapienza, & Almeida, 2000; Filatotchev et al., 2009).
Because investments in innovation facilitate the achievement of a greater ability to meet demands of domestic as well as international markets and a greater ability to take advantage of international opportunities, R&D is an important driver of the internationalization of a firm (Filatotchev et al., 2009; Zahra & Covin, 1994). The relationship between R&D and a firm’s internationalization has been studied extensively, especially with a focus on export. Findings suggest that this relationship is positive and holds in different contexts (Basile, 2001; Cassiman & Golovko, 2011; Filatotchev et al., 2009; Filatotchev & Piesse, 2009; Singh, 2009). Next to a direct positive relationship, some studies also find an indirect positive relationship between R&D and internationalization (Cassiman & Golovko, 2011; Cassiman & Martinez-Ros, 2007). These studies argue that investment in innovation enhances the productivity of a firm, leading to the self-selection of the firm into international markets as productivity is a driver of international expansion as well.
However, all of these studies look at R&D as one activity. Having said this, already in the beginning of the 1980s, both Mansfield (1981) and Link (1982) suggested that research activities and development activities might be very different. This suggestion has not been picked up by the literature until 2014, when the authors Barge-Gil and López (2014a) studied
how these two types of activities differed from each other. They found that research and development activities differed in purpose, knowledge and people involved, management style, complexity, time horizon and type of risk. The same authors also studied if there is a difference in impact on innovation outcomes between the types of innovation activities. They found that development had more influence on product innovation and research more on process innovation. Furthermore, the results suggested that development activities have a higher impact on innovative sales as well (Barge-Gil & López, 2014a).
As research and development activities differ in characteristics and outcomes, the impact of both research and development activities on firms’ internationalization can differ significantly. Taking together both types of activities may cover up or balance out the lower impact of one of the types. Therefore, this thesis focuses on the relationship between R&D and internationalization from the perspective of disaggregating the R&D construct to examine whether research and development activities, taken separately, affect firm’s level of internationalization differently. Does one of the two matter more for international expansion?
In this study, we hypothesize that an internationalization strategy based on a focus on development is more effective for firms than one based on a focus on research. As the characteristics of development relate to the closeness to the market and the application of knowledge into new materials and products, we argue that a focus on development results in a greater ability to align the products with the host market. This, in turn, will lead to a higher level of internationalization. In addition, building on the study of Rugman and Verbeke (2004), we suggest that a global (versus regional) orientation positively moderates the relationship between a focus on development (versus research) and a firm’s level of internationalization. We hypothesize that firms with a global orientation have privileged access to a wider range of resources and more knowledge though experience and a diverse set of knowledge bases. As development is closer to the market, these resources and knowledge
could be more easily absorbed and applied when having a focus on development than on research. This would result in an increased ability to align the innovation outcomes with the host market, which in turn will lead to even higher levels of internationalization when having a global orientation.
We test our hypotheses by using the PITEC survey of 2014, which includes a sample of 7146 Spanish manufacturing firms. With regard to our first hypothesis, we found that a focus on development (versus research) has a positive direct effect on the firm’s level of internationalization. For our second hypothesis, we found the opposite of what was expected. Global orientation had a significant negative moderating effect on the relationship between a focus on development (versus research) and the level of internationalization. With this study, we contribute to a deeper understanding of the relationship between R&D and internationalization, by focusing on the disaggregated R&D construct. This way we extend the internationalization literature and emphasize the importance of studying research and development separately. This study also has managerial implications as the results can help managers to decide on their research and development expenditures when internationalizing.
The rest of this thesis is structured as follows. First, in section 2, the relevant literature related to research and development and internationalization will be discussed. In the next section a theoretical framework will be given and hypotheses will be developed. Subsequently, the methodology of this empirical study will be explained, followed by the description of the variables and the empirical results. In section 5 the discussion of the results, academic and managerial implications, and the limitations and suggestions for future research will be presented. Finally, the concluding remarks will be given in section 6.
2. LITERATURE REVIEW
2.1 Internationalization
Internationalization of firms can be defined as “the process of increasing involvement in international operations” (Luostarinen & Welch, 1990: 249, in Malhotra & Hinings, 2010: 330). This process of international expansion is one of the most important paths for the growth of firms (Lu & Beamish, 2001). By entering new markets, firms can broaden their customer bases and have the ability to achieve a larger production volume. Furthermore, by internationalizing, firms enter a position in which they can capitalize on market imperfections and thus gain higher returns on their resources.
In the field of international business many well-established theories of international expansion exist (e.g., Vernon, 1979; Dunning, 1988). However, two main frameworks can be identified in the literature of internationalization; the process theory of internationalization and the new venture internationalization framework (Sapienza, Autio, George, & Zahra, 2006). The base of process theory is one of the most cited articles related to internationalization, the article of Johanson and Vahlne (1977), in which the authors propose the Uppsala model. Process theorists depict internationalization as an incremental process in which multinational enterprises (MNEs) first expand into familiar and proximate countries and increase their commitment in foreign countries step by step when more experience and knowledge is gained. This way the MNE minimizes the uncertainty and risk related to unfamiliar countries (Banalieva & Dhanaraj, 2013; Barkema, Bell, & Pennings, 1996; Johanson & Vahlne, 1977, 2009; Johanson & Wiedersheim‐Paul, 1975). The process theory primarily draws on the behavioural theory of the firm (Cyert & March, 1963, in Sapienza et al., 2006) and the theory of firm growth by Penrose (1959, in Sapienza et al., 2006).
The second theory, the new venture internationalization framework (McDougall, Shane, & Oviatt, 1994; Oviatt & McDougall, 1994), challenges the process theory as the
process theory is unable to explain the internationalization of born-global firms. Born-global firms internationalize at their founding or very short thereafter, which is conflicting with process theory’s incremental internationalization (Rialp, Rialp, & Knight, 2005). The proponents of the new venture internationalization framework attribute the rapid internationalization of born-global firms to the entrepreneurial competencies of the firm’s management team (Sapienza et al., 2006). Therefore, the internationalization decision is seen as proactive and entrepreneurial. Several factors that make early internationalization possible, per the new venture internationalization framework, include the knowledge intensity of the resources of the firm, the use of alternative governance mechanisms to obtain and transfer resources across borders, and an improved infrastructure for operations across borders.
Although both theories focus on the internationalization process, both assume different goals for the firm (Sapienza et al., 2006). On the one hand, the process theory assumes that the main purpose of a firm when internationalizing is survival as firms try to avoid uncertainty while at the same time they seek growth. The new venture theory, on the other hand, considers growth to be the driver of internationalization. The view focuses on the positive outcomes of rapid internationalization and sees hesitation as a lost opportunity, whereas process theory supports the more hesitant approach, driven by the firm’s experience.
Growth is not the only driver for internationalization. In his article, Dunning (2000), describes four types of reasons for foreign direct investment (FDI). One of the reasons is indeed growth, the market seeking motive, but the other motives are resource seeking, efficiency seeking, and strategic asset seeking. Furthermore, Dunning (1980) describes three factors resulting in FDI: namely, firm-specific advantages, country-specific advantages, and internalization advantages. Following the process theory, with these factors firms can (partly) overcome the “liability of foreignness”, which refers to “all additional costs a firm operating in a market overseas incurs that a local firm would not incur” (Hymer, 1976 and
Kindleberger, 1969, in Zaheer, 1995: 6). In line with the process theory, the new venture perspective also supports notion that, firm-specific advantages are drivers of early internationalization, notably the ones specific to entrepreneurs (Zucchella, Palamara, & Denicolai, 2007). Organizational capabilities, knowledge accumulation, financial resources, equipment, and other resources are main drivers for established, large firms, however, small firms lack them. Therefore, the drivers for born-global firms are mostly the entrepreneurs’ international attitude, experience, orientation, network and positive international development (Ibeh & Young, 2001; Kuemmerle, 2002; Preece, Miles, & Baetz, 1999; Westhead, Wright, & Ucbasaran, 2001). A final driver that both theories acknowledge is innovation and technologies (Autio et al., 2000; Sapienza et al., 2006; Zahra, Ireland, & Hitt, 2000).
2.2 Effect of R&D on internationalization
A common proxy to identify a focus on innovation and technological capabilities is the investment in R&D (Singh, 2009). Through R&D activity firms can develop new capabilities, which can be leveraged across different markets (Autio et al., 2000). Furthermore, investments in innovation facilitate the achievement of a greater ability to meet demands of domestic and international markets, and a greater ability to take advantage of international opportunities (Filatotchev et al., 2009; Zahra & Covin, 1994). This suggests that R&D has a positive influence on the internationalization of a firm. This positive relationship has been confirmed by a large number of studies. The focus of these studies is mainly on internationalization through export.
One of the first authors that hypothesized that a firm’s initial innovation outcomes drive a firm’s internationalization is Vernon (1966, 1979). In line with the process theory, Vernon argues that firms follow a sequential internationalization path. As a first step firms innovate by generating a product based on opportunities detected in the home market. When the demand for the firm’s innovation increases in foreign markets, the firm decides to
internationalize. Hirsch and Bijaoui (1985) corroborate with Vernon’s hypothesis, as they find that firms possessing newly developed products start exporting to exploit their market power. Additionally, Hirsch and Bijaoui (1985) discover that the propensity to export is higher for innovating firms in a sector than the average propensity of the sector, when analysing the association between R&D expenditure and export behaviour in Israeli firms. Ito and Pucik (1993) study the same relationship in Japanese manufacturing firms. Their results support that R&D expenditures are positively associated with export, in this case export sales. Furthermore, Rodríguez and Rodríguez (2005) also show that R&D spending, but also product innovations and patents, have a significant and positive effect on export intensity in the context of Spanish firms.
Scholars also studied the relationship between R&D and internationalization in other contexts, such as emerging economies and newly listed firms. One study related to the context of emerging economies is the study by Singh (2009). The author studies the influence of R&D expenditure on export performance of emerging market firms. He finds that in the context of emerging economies, the relationship between R&D expenditure and export performance is positive as well. This result is also supported by the study of Filatotchev et al. (2009). When looking at Chinese firms, they observe that the influence of R&D intensity on export performance is positive. Kumar and Siddharthan (1994) also find that R&D expenditure and export are positively related in Indian firms. In the context of newly listed firms, Filatotchev and Piesse (2009) notice that R&D intensity is an important factor for the internationalization of the firms’ sales.
Next to R&D expenditure and R&D intensity, there are also other concepts used in the literature that are similar to R&D. One of those concepts is the innovation capability of a firm. In a study of the export behaviour of Italian manufacturing firms, Basile (2001) states that innovative capabilities help to explain differences in export behaviour. He finds that “the
export intensity of innovating firms is systematically higher than that of non-innovating firms” (Basile, 2001: 1185). Another similar concept to R&D used is product innovation. In the context of small and medium enterprises (SMEs), Cassiman and Golovko (2011) hypothesize that successful product innovation directly influences the decision to enter the export market. They argue that firms may start operations abroad when searching for a greater demand or when they want to spread out the costs of R&D over the larger sales volume. The results support this direct relationship, thereby confirming the results of prior articles that found that product innovation influences the firm’s decision to export (Basile, 2001; Becker & Egger, 2013; Cassiman & Martinez-Ros, 2007).
Cassiman and Golovko (2011) also propose an indirect relationship between innovation and export. Next to the direct relationship, whereby firms seek a greater demand or spread of costs, Cassiman and Golovko (2011) argue that innovation may serve to enhance the productivity of the firm. Through this enhanced productivity, a process of the firms’ self-selection into export markets occurs. Like the direct relationship, the results also support the indirect relationship.
Next to the studies that find a positive relationship, there are also studies that do not find such a relationship between R&D and internationalization. When looking at the relationship between R&D-related capabilities and SMEs’ export performance, Lefebvre, Lefebvre, and Bourgault (1998) do not find any relationship between the two. Also Wakelin (1998) finds that non-innovative firms are more likely to export than innovative firms. However, overall it can be said that the positive relationship between internationalization, expressed in export, and R&D is well established in the literature.
2.3 Research versus Development
All the above-mentioned studies related to the relationship between R&D and internationalization, treat research and development activities as one concept. However, Mansfield (1981) and Link (1982) argue that the R&D construct consists of a multitude of heterogeneous activities. When analysing the determinants of the composition of R&D expenditure and this composition’s effect on innovative outputs, Mansfield (1981) finds some correlation between the proportion of expenditure on basic research and the number of innovative outputs. As a result, Mansfield (1981) points out that the composition of the R&D expenditure may be as important as the total amount of expenditure (Barge-Gil & López, 2014a). Link (1982) also argues that firms differ in terms of R&D composition. Therefore both authors, Mansfield (1981) and Link (1982) note that the effects of the heterogeneity of R&D activities is worthy of further exploration.
Barge-Gil and López (2014a, 2014b) picked up this notion by performing this exploration and find support for research activities and development activities being very different in nature (Barge-Gil & López, 2014a, 2014b). According to the Frascati Manual (OECD, 2002) research and development activities can be categorized into basic research, applied research and experimental development1. However, in their article, Barge-Gil and López (2014a) give three reasons to only differentiate between research activities and development activities.
1 The three types of research and development activities are defined as follows according to the Frascati Manual
(OECD, 2002: 30): “Basic research is experimental or theoretical work undertaken primarily to acquire new knowledge of the underlying foundation of phenomena and observable facts, without any particular application or use in view. Applied research is also original investigation undertaken in order to acquire new knowledge. It is, however, directed primarily towards a specific practical aim or objective. Experimental development is systematic work, drawing on existing knowledge gained from research and/or practical experience, which is directed to producing new materials, products or devices, to installing new processes, systems and services, or to improving substantially those already produced or installed. R&D covers both formal R&D in R&D units and informal or occasional R&D in other units”.
The first reason they mention is that basic research and applied research share a lot of characteristics. These characteristics distinguish them from the development activities. The second reason mentioned is that, according to case studies, the differences between the two types of research are dispersed (see, e.g. Arnold, 2004; Van Ark, Dougherty, Inklaar, & McGuckin, 2008), which made some authors recommend to take basic research and applied research together when conducting an empirical study (Balconi, Brusoni, & Orsenigo, 2010). The last reason to collapse basic and applied research is that basic research represents only a small part of the total R&D expenditures. Following these three reasons, this study will also only differentiate between research and development activities.
In the same article, Barge-Gil and López (2014a) describe the factors that differ between research activities and development activities. According to the authors, the factors are the purpose of the activity, knowledge and people involved, management style, complexity, time horizon and type of risk. In addition, also the determinants and outcomes of research and development activities differ. Traditional determinants of R&D are demand pull, technological opportunity and appropriability (Barge-Gil & López, 2014b). Those same determinants hold when separating research and development activities, however demand pull and appropriability have a higher influence on development, whereas technological opportunity has a higher effect on research (Barge-Gil & López, 2014b).
One of the main outputs of R&D is patents. When disaggregating the ‘R’ and the ‘D’, Czarnitzki, Kraft, and Thorwarth (2009) find that research has a significant higher influence on the number of patents than development. However, Barge-Gil and López (2014a) do not support this outcome. In this second study, the authors do not find any difference when comparing the influence of research and development on patent application intensity, patent intensity and the probability of patenting. However, the authors mention that this difference in outcome of studies might be because of the differences in methods used.
Next to looking at patents, Barge-Gil and López (2014a), also study the impact of both types of activities on innovative sales and two types of technological innovation, product and process innovation. In the case of technological innovation, the authors find that development has a larger effect on the introduction of product innovation, while research has a higher influence on process innovation. In the case of innovative sales, development has a higher influence than research as well. Lastly, when looking at the moderation of industry on the effects, the results suggest that the payoffs of research are higher in low-tech industries, being higher than the payoffs of development as well.
Overall, it can be said that R&D is an important driver of the internationalization of firms. While prior research related to this relationship focused on R&D activities as one construct, recent studies find that research and development activities differ in terms of characteristics, determinants and innovation outcomes. It is therefore possible that one of the two types of activities has significantly more impact on the positive relationship between R&D intensity and firms’ internationalization. To close this gap, this thesis focuses on the relationship between R&D and internationalization from the perspective of disaggregating the R&D construct to examine whether research and development activities, taken separately, affect firm’s level of internationalization differently. The research question will be the following: “Do research versus development activities have a different impact on firms’ international expansion and which one matters more?”.
3. THEORETICAL FRAMEWORK
3.1 Research versus Development and a firm’s internationalization
As argued by Barge-Gil and López (2014a), research and development activities include a myriad of heterogeneous activities. In their article, the authors outline the factors that differ between research and development activities. These factors are the purpose of research and development activities, knowledge and people involved, management style, complexity, time horizon and type of risk. Due to these differences, it is likely to assume that both types of activities have a different impact on a firm’s level of internationalization.
The first two factors that are likely to influence the firm’s international expansion are the purpose of the activities and the type of knowledge involved. The purpose of research, both basic and applied, is to acquire new knowledge to extend the knowledge base of the firm. This makes research more theoretical in nature (OECD, 2002). The knowledge acquired is analytical knowledge, which leads to innovation by the creation of new knowledge. Furthermore, this type of knowledge is associated with scientific techniques, the use of methods like experimentation, and codified knowledge in patents and publications. The purpose of development, on the other hand, is to introduce new or improved products and processes, which makes development more applied as the outputs are mostly physical in nature. Development is therefore closely related to synthetic knowledge. This type of knowledge base leads to innovation by application or by new combinations of knowledge that already exists and the knowledge involved is mostly tacit involving know-how and practical skills.
Through research a firm can possess new knowledge. However, the application of this knowledge is a different capability and not necessarily a capability the firm possesses when focusing mostly on research. As development is “directed to producing new materials, products or devices; installing new processes, systems and services; or improving
substantially those already produced or installed” (OECD, 2002), it is expected that it will have a large role in allowing firms to successfully develop products that fit the market. The successful development of these products will allow the firm to sell them internationally as well, because of its features. On top of that, if a firm is capable of applying knowledge into new products successfully, adapting its products to different markets will be easier for this company.
The third and fourth factor that are likely to influence the firm’s international expansion are the people involved and the management style of the departments. Generally, the people involved in research are more qualified and specialized personnel, because the human factor and individuality are important for the effectiveness. The research units work relatively independent and are closely linked to universities and research centres. These research units are characterized by a flat hierarchy. On the other hand, the people involved in development are mostly generalists as a broader perspective is required. The development units work closely with other departments of the firm such as production and marketing, but also with the customers. These units have a much clearer hierarchy.
Because of this close link with other departments, innovations created by development are more related to what the firm can produce, by working together with the production department, and what the market wants, by interacting with the marketing department. Even more influential is the relation with the customer, which makes the innovations that come out of the development process more likely to fit the home, but also the host market needs. Furthermore, as the personnel involved has a broad perspective, these people have the ability to combine the different perspectives of the production department as well as the customers’. Research on the other hand is more focused on creating knowledge with universities and research centres, which are more distant from the market. It is therefore likely to assume that
firms that focus more on development in contrast to research are better equipped to internationalize.
The complexity, the time horizon and the type of risk of the activities also differ between research and development. Research is considered to be more complex as it involves more non-routine tasks and discontinuous jumps. The time-horizon of research is long and the risks are mostly related to technical uncertainty. Development is considered much less complex as it is more incremental than research. The time horizon is much shorter because of the pressure to market and the risks are mostly related to market risk. This also indicates that development activities are more focused on the market than research activities, which are more focused on knowledge breakthroughs. However, as argued earlier, the focus on the (host) market and its needs are of great importance to be able to expand internationally.
In addition, due to the differences in characteristics between research and development activities as described above, Barge-Gil and López (2014a) find that research activities are mostly related to process innovations and development activities to product innovation. As multiple authors find that product innovations are an important factor in explaining the entry of firms into the export market (Basile, 2001; Becker & Egger, 2013; Cassiman & Martinez-Ros, 2007), it can be argued that the same applies for development, which is related to product innovations. Process innovations, on the contrary, were not found to have such an effect (Cassiman & Golovko, 2011). Therefore, we hypothesize that development activities are likely to impact the firm’s level of internationalization and that research activities, related to process innovations, do not have a significant effect on internationalization, only when it is combined with high levels of product innovation.
Moreover, Barge-Gil and López (2014a) find that development activities have a much larger effect on the sales of new-to-the-market products than research activities. This can be
interpreted as the outputs of development being more successful in terms of sales, than the outputs of research. Going a step further, the innovations resulting from development activities are likely to be better aligned with the market than outcomes of research activities, resulting in a greater effect on the sales of those innovation. As two of the reasons to internationalize are the search for greater demand and spreading out the R&D costs over a larger sales volume (Cassiman & Golovko, 2011), it can be argued that development activities are more likely to help achieving these goals. Furthermore, as development leads to innovations that are wanted by the market, other countries can also have a demand for these innovative products. To reach those customers the company can internationalize, which in turn can lead to a greater sales volume. Therefore, we argue that development activities have a greater impact on a firm’s internationalization than research activities. Following this argumentation, we developed the next hypothesis.
Hypothesis 1: A greater focus on development (versus research) is positively related to firms’ level of internationalization.
3.2 The moderating effect of a firm’s global orientation
Prior literature shows that the majority of multinational companies has a very narrow scope of internationalization as they mainly focus on their home region (Oh & Rugman, 2014; Rugman & Verbeke, 2004). In 2004, on average 80 percent of the total sales of the Fortune Global 500 firms were in their home triad region (Rugman & Verbeke, 2004). In a period of ten years, this decreased to 70 percent of the total sales, however, this still indicates that the bulk of MNEs primarily focuses on their home regions (Oh & Rugman, 2014). Some researchers have argued that the few truly global firms are examples of best practices. On the other hand, the small percentage of global firms can also be interpreted as the rational preference for the home region, resulting from a carefully performed cost-benefit analysis
(Rugman & Verbeke, 2004). This is understandable as internationalization comes with some costs.
By crossing borders firms can experience costs resulting from doing business in a foreign country—these are generally termed as liabilities of foreignness (Hymer, 1976 and Kindleberger, 1969, in Zaheer 1995). These costs include costs directly associated with spatial distance, such as transportation costs, costs related to a lack of roots in the local environment, costs related to the lack of legitimacy and costs from the home country environment (Zaheer, 1995). The existence of these costs can put the firm in a disadvantageous position compared to local firms. However, the liabilities of foreignness tend to decrease when the firm improves its legitimacy and reputation in the host country it operates in (Barkema et al., 1996).
For firms with a global orientation it is likely that the liabilities of foreignness are lower, since firms with a global orientation have more experience with internationalization, which they gained through deriving 50 percent or more of their total sales from countries outside the home region. This experience presumably results in an improved legitimacy and deeper roots in the local environment, which decreases the liabilities and even translates these liabilities into a beneficial effect for development. As a result of the firm being more embedded in the local environment, it is easier for the firm to gain necessary knowledge about the market. Furthermore, the experience with cultural and administrative differences that come with crossing borders helps the firm to better understand the needs of the consumers in different countries and the local networks. This leads to a greater ability to align their products to the host market. As development is more closely associated with the market than research, the knowledge resulting from the experience of the firm can be absorbed and applied by development more easily than by research. Because of this advantage, development is able to realize an even higher level of internationalization for firms with a global orientation. Therefore, we assume that a greater focus on development (versus research) will result in an
even higher level of internationalization when the firm has a global orientation compared to a regional orientation as a result of the absorption of the experience and learning effects.
Furthermore, firms with a global orientation have the ability to draw from a diverse set of knowledge bases. By being present in multiple markets, especially markets that are distant, the knowledge stock of the firm can be enhanced by the diversity of the international environment through exposure to other systems of innovation and interactions with local bases of knowledge (Zahra et al., 2000). Through international diversity, firms are provided with the opportunity to capture new and diverse ideas from multiple different markets, as well as cultural perspectives (Hitt, Hoskisson, & Kim, 1997). The acquired new knowledge can be used to build value-creating skills that augment the firm’s current capabilities (Barkema & Vermeulen, 1998; Ghoshal, 1987). As development is closer to the market than research, it is likely that development is more capable of using the knowledge bases to enhance its application capabilities and apply the absorbed knowledge. This way the firm can use the diverse set of knowledge bases to improve the products and align those products to the markets, which in turn leads to a higher level of internationalization. Therefore, we hypothesize that firms with a global orientation are more likely to gain an even higher level of internationalization when increasing the focus on development than firms with a regional orientation as the former can draw from a diverse set of knowledge bases.
The final benefit of a global orientation is the ability to use a wider range of resources, which are only available globally (Kotabe, 1990). One of those resources is human capital. When internationalizing, firms have the ability to exploit local talent pools (Cheng & Bolon, 1993). Local talent can help the firm to improve its innovation capabilities by supplying more knowledge and expertise. Furthermore, a higher level of internationalization is likely to result in the improved quality of new products through a continuous flow of information within the firm’s international network about the requirements and changing needs of customers
(Kafouros, 2006). This way the firm may also improve its responsiveness in adapting its technologies to the local market (Cheng & Bolon, 1993). As development applies knowledge to create products for the market, this improved adaptation through local resources can help the firm to reach the international customers even better with the outcomes of the development process. Moreover, firms are required to have substantial and diverse resources as the increased R&D competition and continually shorter life cycles of products make the achievement of technological breakthroughs difficult (Kafouros, Buckley, Sharp, & Wang, 2008). Internationalization has been demonstrated to help generate these necessary R&D resources (Kobrin, 1991). As development is more related to the market, the time horizon of the development innovations is shorter and risks they face are mostly related to market risk. As a result, the increased R&D competition and shorter life cycles of products impact development more than research. The generated resources through a global orientation are thus more beneficial for development than for research, as the development department has to deal with the pressures of competition and short product lifecycles. Therefore, we argue that a firm with a focus on development (versus development) is likely to gain an even higher level of internationalization when having a global orientation compared to a firm with a regional orientation as the former has the ability to use a wider range of resources.
Following this argumentation, a regional versus global orientation moderates the relationship between a focus on development (versus research) and firms’ level of internationalization.
Hypothesis 2: Firm’s global orientation positively moderates the relationship between the focus on development (versus research) and firms’ level of internationalization. To illustrate the hypotheses constructed, figure 1 depicts the relationships between the variables.
4. METHODOLOGY
4.1 Sample and data collection
This study uses a cross-sectional research design to test the relationship between a focus on development versus research activities and the internationalization of a firm including one moderator, which is the firm’s global orientation. The database we used is the “Panel de Innovación Tecnológica” (PITEC). The data from this database comes from the Community Innovation Survey (CIS) performed in Spain, which has been carried out by the National Statistics Institute (INE) (The Technological Innovation Panel, 2014). We used the most recent dataset, which is from 2014 and includes a total of 7146 manufacturing companies. Due to missing values, we cannot make use of the data from all of these companies. Therefore, the final sample that we used to test our hypotheses consists of 7049 companies.
We used the PITEC database as it provides separated and detailed information on firms’ research and development activities (Barge-Gil & López, 2014b). Hence, allowing for the disaggregation of the R&D construct to investigate the difference in impact. Another reason for choosing this database is, as argued by Barge-Gil and López (2014a), that the PITEC is a CIS-type database, which is used by economists, policy observers and numerous business scholars (Audretsch, Segarra, & Teruel, 2014; Cantwell & Alvarez, 2011; Tamayo & Huergo, 2015). Therefore, the variables and innovation indicators are widely accepted. The 7049 companies included in our sample are Spanish firms from different sizes and industries. This way the results from this study are generalizable for a large population. Furthermore, Spain is an appropriate setting for this research as it has many commonalities with other countries. It is not a technological leader nor is it a bottom-ranked country (UNCTAD, 2005), which allows for a broad generalization of the results for different countries and sectors.
4.2 Variables and measures
4.2.1 Dependent variable. The dependent variable of this study is the firm’s level of
internationalization. The most widely adopted measurement of this variable is the ratio of foreign sales to the total sales of the firm (Almodóvar & Rugman, 2014; Lu & Beamish, 2001). Following prior research, we use the same measurement in this study. We name this ratio of foreign sales divided by the total sales Internationalization.
4.2.2 Independent variable. The independent variable used is the focus on
development versus research activities. To measure the focus of a firm we looked at the firm’s expenditure on research and development and created a dummy variable to compare both focuses. The value of 1 is assigned when the firm spends more than 50 percent of the total expenditures on development activities. When the firm spends less than 50 percent of the total expenditures on development activities, the value of 0 is assigned, indicating that the firm spends more on research activities. We name this dummy variable Development versus Research.
4.2.3 Moderating variable. The moderating variable used in this study is a firm’s
global orientation. We operationalize this variable the same way as Pisani, Caldart, and Hopma (2016). These authors base their categorization on the definition of the study of Rugman and Verbeke (2004), in which four types of international focuses are defined (home-region, bi-regional, host-region and global oriented). Identical to Pisani et al. (2016), we use only a dichotomous variable because the main objective is to distinguish between a regional and global orientation. The value of 1 is assigned when sales outside of the home region (i.e., EU) represent 50 percent or more of the total sales, otherwise the value 0 is assigned. We name the moderating variable Global orientation.
4.2.4 Control variables. This study controls for some of the key firm- and
industry-specific characteristics. The first of those characteristics is the size of the firm (Size). Bigger firms have multiple advantages when internationalizing compared to their smaller counterparts. These firms can benefit from, among others, the availability of financial and material resources, international marketing economies of scale and a lower risk perception (Bonaccorsi, 1992). Therefore, we control for the effect of firm size. We measure this variable by using the log transformation of the total number of employees.
Another control variable we control for is the age of the firm (Age). Older firms are more likely to have accumulated resources and experience (Dierickx & Cool, 1989). Firms that have resources are in a better position to internationalize. Furthermore, more experience can lead to a reduction in uncertainty to pursue opportunities overseas and the creation of firm-specific advantages (Dunning, 1988). Therefore, older firms may be willing to invest more and risk more to internationalize. Following prior internationalization research, this study also controls for the age of the firm at the year of the survey (2014) (Molero, 1998; Pisani et al., 2016). In the regression analyses, we used the log transformation of this variable.
Furthermore, foreign ownership can affect the knowledge a firm has of international markets and hence affect the overall behaviour of the firm (Fernández & Nieto, 2006). As previous studies found that higher levels of international expansion are associated with the presence of a majority foreign shareholder (Almodóvar & Rugman, 2014; Cerrato & Piva, 2012), another control variable is Foreign ownership. We measure this variable by using a dichotomous variable. The value of 1 is assigned when at least 50 percent of the firm’s equity is owned by a foreign corporation, otherwise the value of 0 is assigned.
Organization type is the fourth control variable. Listed companies are exposed to
about international markets and can more easily access the necessary resources to internationalize (Kunapatarawong & Martínez-Ros, 2014). We measure the type of organization by using a dummy variable. When the company is a public company the value of 1 is assigned, otherwise the value of 0 is assigned.
The last variable that we control for is the industry the firm operates in (Industry). Industries differ in several characteristics, such as the ability to accumulate knowledge, the competition, but also the demand for the product or service (Malerba, 2002). Therefore, this study controls for the industry, following prior research (Filatotchev et al., 2009; Pisani et al., 2016). We measure the industry by including eight dummy variables of the most represented industries in the sample. Together those industries represent 50 percent of the industries in which the companies in the sample operate.
Table 1
Operationalization of the variables included in the model.
Variable Operationalization
Dependent
Internationalization Foreign sales divided by total sales Independent
Development versus Research
A dummy variable indicating whether a firm has a greater focus on development or research (1 = When the percentage of expenditures on development activities is more than 50% of the total R&D expenditure; 0 = Otherwise)
Moderator
Global orientation A dummy variable indicating whether the firm has a global or a regional orientation (1 = When sales outside of the EU region represent at least 50% of the total sales; 0 = Otherwise)
Control Size Age Foreign ownership Organization type Industry dummy
Log transformation of the number of employees
Log transformation of the number of years of existence, from creation until the year of the survey
A dummy variable indicating whether the firm is controlled by a foreign corporation (with at least 50% of equity holdings) (1 = Yes; 0 = No)
A dummy variable indicating whether the firm is a private or a public company (1 = Public company; 0 = Private company)
Industry dummies corresponding to the eight most represented industries in the sample
4.3 Data analysis and results
Table 2 presents the descriptive statistics of the dependent, independent, and control variables used in this study (with the exception of the industry dummies). Instead of the log transformed age and size of the firm, we presented the absolute numbers in table 2, to be able to analyse the average age and size of the firms in the sample.
To test for multicollinearity, we assessed the variables using a correlation analysis. As can be seen in table 2, the variables Internationalization and Global orientation correlate moderately (0.46). However, this was expected, as both variables look at the global expansion of a firm. When a firm has a global orientation it has by definition a higher level of internationalization and when a firm has a high level of internationalization it is likely to have a high percentage of sales outside the home region – also termed as a global orientation. The other variables did not suggest multicollinearity. To ensure the absence of multicollinearity, we also analysed the Variance Inflation Factors (VIFs) and tolerance levels. All VIFs values are below 1.7, therefore they are below the severest limit of 5.3 (Hair, Anderson, Tatham, and Black (1998), in Pisani et al., 2016). Furthermore, according to Field (2009) tolerance levels are considered critical below 0.2. In this study, the tolerance levels are all higher than 0.2 and almost all around 0.9. This indicates that there are no issues with collinearity.
The descriptive statistics show that the average age of the firms in the sample is 31.91 years and that those firms have on average 393 employees. However, the number of employees, but also the other variables, do not follow a normal distribution. Only 6 percent of the firms generates 50 percent or more of the total sales in countries outside the European Union (global orientation), confirming prior research that found that the majority of the firms has a narrow scope of internationalization (Oh & Rugman, 2014; Rugman & Verbeke, 2004). Furthermore, 15 percent of the firms is majority-owned by foreign stakeholders and only 3 percent of the firms in the sample is a public company. We retrieved the level of internationalization, measured as foreign sales to the total sales of the firm, from 7061 firms. This data indicates that the firms in the sample have an average level of internationalization of 24.57 percent. Lastly, 25 percent of the firms spends more than 50 percent of its total R&D expenditure on development activities.
Table 2
Descriptive statistics; means, standard deviation and correlations (N = 7049).
Mean Std. dev. Min. Max. 1 2 3 4 5 6 7
Internationalization 1 24.57 31.97 0.00 100.00 1
Development versus Research 2 0.25 0.43 0.00 1.00 0.18*** 1
Global orientation 3 0.06 0.23 0.00 1.00 0.46*** 0.07*** 1 Age 4 31.91 21.60 0.00 550.00 0.05*** -0.00 -0.02 1 Size 5 393.09 1752.77 1.00 37835.00 -0.06*** -0.00 -0.03** 0.10*** 1 Foreign ownership 6 0.15 0.35 0.00 1.00 0.14*** -0.01 0.02 0.08*** 0.07*** 1 Organization type 7 0.03 0.16 0.00 1.00 -0.10*** -0.02 -0.03** 0.00 0.07*** -0.07*** 1 * p < 0.10 (2-tailed). ** p < 0.05 (2-tailed). *** p < 0.001 (2-tailed).
To test the hypotheses developed in this study, we used a multiple regression analysis. Table 3 displays the results of this analysis and presents a total of 3 models. Model 1 includes the control variables only: log transformed Age, log transformed Size, Foreign ownership, Organization type, and the eight Industry dummies. Model 2 includes the control variables
and the dependent variable Development versus Research. The last model, model 3, consists of the former variables, the moderating variable Global orientation and the interaction term Global orientation x Development versus Research. Per model the R2 increases, suggesting
that each model explains a bigger proportion of the variance of internationalization.
As can be seen in table 3, model 1 is statistically significant with F (12, 7036) = 76.308; p < 0.001 and explains 11.5 percent of variance in internationalization. We can conclude that firm size, foreign ownership and the type of organization are significant, indicating that these variables relate to the level of firm’s internationalization. Size and Foreign ownership have a positive effect (B = 0.759, 1.484; SE = 0.237, 0.626, respectively),
whereas the organization type has a negative effect (B = -6.286; SE = 1.316) on the level of internationalization. In this model, Age is not significantly related to the firm’s level of internationalization.
To test hypothesis 1, we added the independent variable Research versus Development to the multiple linear regression. Together with the control variables, this
model explains 13.5 percent of variance in internationalization. With a F-value (1, 7035) of 163.890 and a significance level of 0.000 this second regression model is significant. The relationships between Development versus Research and Internationalization is positive (B = 10.691; SE = 0.835) with a significance level of 0.000. Therefore, we can conclude that firms with a focus on development have a higher level of internationalization than firm with a focus on research, thereby supporting hypothesis 1.
To test the second hypothesis, we analysed a third model with a regression analysis, including the moderating factor Global orientation and the interaction term of Global orientation x Development versus Research. As can be seen in table 3, the interaction term
between global orientation and development versus research is significant (B = -9.613; SE = 2.850; p = 0.001). Interestingly, the interaction term is negative. In other words, global orientation negatively moderates the relationship between a focus on development (versus research) and the level of firm’s internationalization.Therefore, we reject hypothesis 2.
Table 3
Regression analysis results (Internationalization, Development versus Research and Global orientation).
Variables Model 1 Model 2 Model 3
Dep. var.:
Internationalization Dep. var.: Internationalization Dep. var.: Internationalization Coefficient s.e. Coefficient s.e. Coefficient s.e. Constant 17.422*** 2.363 15.446*** 2.342 10.789*** 2.098
Independent variables
Development versus Research 10.691*** 0.835 9.849*** 0.776
Moderator variable
Global orientation 61.682*** 1.748
Interaction terms
Global orientation x
Development versus Research
-9.613** 2.850 Control variables Age 0.956 0.703 0.994 0.695 1.542*** 0.622 Size 0.759** 0.237 0.565** 0.235 0.610** 0.210 Foreign ownership 10.942*** 1.055 11.168*** 1.043 10.356*** 0.933 Organization type -16.768*** 2.212 -16.026*** 2.188 -13.999*** 1.958 Industry dummies Included Included Included
Model fit N 7060 7060 7049 R2 0.115 0.135 0.308 Adj. R2 0.114 0.134 0.307 F value 76.308 163.890 78.517 P-value 0.000 0.000 0.000 * p < 0.10. ** p < 0.05. *** p < 0.001.
0 10 20 30 40 50 60 70 80 90 100
Focus on Research Focus on Development
Int erna ti ona li za ti on le ve l (pe rc ent ag e of fore ig n s al es to t ot al s al es ) Regional orientation Global orientation To visualize the outcomes of model 3, we illustrate the moderating effect of a global (versus regional) orientation on the relationship between a focus on development (versus research) and the level of internationalization in figure 2. As can be seen in figure 2, firms with a regional orientation have a higher level of internationalization when having a high focus on development (constant of 10.789 + 9.849) than when having a focus on research (10.789). Firms with a global orientation have by definition a higher level of internationalization, which can be seen by the vertical distance between lines of regional and global orientation (61.682). However, contrary to the line of regional orientation, the line of global orientation is almost horizontal due to the negative moderating effect. The positive effect of a focus on development (9.849) is almost completely eroded by the negative moderating effect of a global orientation (-9.613). This means that a global orientation dampens the effect of a focus on development (versus research) even to a level of no difference in impact on the level of internationalization.
5. DISCUSSION
R&D is an important driver of a firm’s internationalization. Investments in innovation help firms to achieve a greater ability to meet domestic and international demands, and a greater ability to take advantage of international opportunities (Filatotchev et al., 2009; Zahra & Covin, 1994). Despite the fact that different authors point out that research and development activities differ significantly (Barge-Gil & López, 2014a, 2014b; Czarnitzki et al., 2009; Mansfield, 1981), most IB scholars continue examining research and development as one construct. In this study, we viewed the relationship between R&D and internationalization from the perspective of disaggregating the R&D construct and examining the impact of research and development separately on internationalization.
By dividing the firms in the sample into two groups, firms that focus more on research and firms that focus more on development, the difference in impact could be measured. The findings suggest that there is indeed a significant difference between research and development as the focus on development activities has a higher impact on a firm’s internationalization than a focus on research activities. In other words, firms that invest more in development derive a higher percentage of sales outside the home country than firms that invest more in research. This was in line with our hypothesis.
We also looked at the moderating effect of global orientation on this relationship. Global orientation, measured as more than 50 percent of the total sales derived outside the home region, was expected to have a positive moderating effect. We hypothesized that firms with a global orientation would benefit even more from their focus on development in terms of internationalization because a global orientation is likely to provide the firm with a greater access to resources and more knowledge through experience and the ability to draw from multiple knowledge bases. As development is closer to the market than research, it was argued that the development department is more capable of absorbing and applying the
knowledge and resources available through a global orientation and will therefore have a higher level of internationalization. The findings suggested that a global orientation significantly moderates the relationship between development versus research and internationalization. However, the effect was the opposite of what we expected, namely a negative moderating effect. Contrary to firms with a regional orientation, firms with a global orientation showed little to no difference in effect between a focus on development and a focus on research on the level of internationalization.
In the following sub-sections the academic relevance, managerial implications, the limitations of this study and suggestions for future research will be described in more detail. 5.1 Academic relevance
This thesis contributes to the existing IB literature on the relationship between R&D and internationalization by shedding light on the impact of research and development activities separately and investigating the moderating relationship of a global versus regional orientation. Barge-Gil and López (2014a, 2014b) already argued that research and development activities differ in purpose, knowledge and people involved, management style, complexity, time horizon and type of risk. These differences translate into different innovation outcomes (Barge-Gil & López, 2014a). As hypothesised, we found a difference between the impact of research and development on firm’s internationalization which cannot be observed by combining both activities in one construct. Therefore, this study supports prior research which found that there is difference between research and development activities (Barge-Gil & López, 2014a, 2014b; Czarnitzki et al., 2009; Mansfield, 1981). This study, therefore, emphasizes the importance disaggregating the R&D activities when studying this construct.
When adding the moderating variable global orientation, we found a negative effect. This is the opposite of what we expected. A possible reason for this effect is that the closeness of development to the market is beneficial for the firm when the firm does not have much knowledge about the host markets. When performing development, the firm will be better able to improve its products and align those products to the host market, resulting in a higher level of internationalization. On the other hand, when the firm is already more internationalized and has already more familiarity with the host markets, the benefit of development being close to the market does not add much to the capabilities of the firm as the firm already has the knowledge about the host market. Therefore, a focus on development has a similar effect on the firm’s level of internationalization as a focus on research when the firm has a global orientation.
5.2 Managerial implications
The results of this present study have some important managerial implications. First, managers who want to increase their firm’s level of internationalization should look at where their focus lies, in research or in development. Firms that focus on development are more likely to gain a higher level of internationalization. Development helps the firm to gain a greater ability to improve its products and align those products with the host market. This does not mean that research activities should be neglected. Research leads to new knowledge which can be used for discontinuous innovations (Barge-Gil & López, 2014a), but when the goal is internationalization, spending more than 50 percent of the total R&D expenditures on development is more beneficial to achieve this goal.
Second, this positive effect of development is dependent on the orientation of the firm. As a result, when deciding on a focus on either research or development, managers should take into account whether the firm has a regional or a global orientation. If the firm is more regionally orientated and the firm wants to internationalize into other countries, a focus on
development is most suitable for this purpose. However, when the firm has a global orientation, a focus on research or development does not make a difference in terms of further internationalization. The manager should then look at which type of activities suit the firms needs and capabilities.
5.3 Limitations and suggestions for future research
This study also has its limitations. One of those limitations is that only Spanish firms were included in the dataset. Therefore, the results can be country related. Even though Spain is an appropriate setting for this study as it has many commonalities with other countries, data from other countries could give a more complete assessment of the relationships studied. It is therefore important that future studies look at different countries, including developing countries.
A second limitation is that this thesis only looks at data from one year, namely 2014. In other words, the data analysed is only a snapshot of the situation of the market. It is therefore possible that particular disturbing events resulted in some firms internationalizing more or less than they normally would. To counter this, future research should look at data spanning multiple years.
Moreover, this study measured internationalization as the ratio of foreign sales to the total sales. However, this way it is not possible to analyse the size of the effect of a focus on development on internationalization. By measuring internationalization as a percentage, firms with already a high level of internationalization have only a small margin of improvement, whereas a company with a low percentage of international sales has a bigger margin for improvement. Future research should therefore also take the absolute amount of international sales into account.
In addition, we chose to use a dichotomous variable to investigate the difference in effect between research and development on internationalization, but also to investigate the moderating variable. For further research, it can be interesting to look at these variables using scale variables. This way the findings are more nuanced and explanatory factors related to the negative moderating effect of a global orientation can possibly be found.
Lastly, the results encourage future research to focus on disaggregation of the R&D construct as the results indicate that research and development indeed differ in terms of effect. It is thereby interesting to look whether the difference in impact between research and development holds in other well established IB relationships.
6. CONCLUSION
The relationship between R&D and internationalization has been studied extensively. Findings suggest that this relationship is positive and holds in different contexts (Basile, 2001; Cassiman & Golovko, 2011; Filatotchev et al., 2009; Filatotchev & Piesse, 2009; Singh, 2009). Whereas prior studies looked at R&D as one activity, recent studies show that research activities and development activities are actually very different, thereby differing in purpose, knowledge and people involved, management style, complexity, time horizon and type of risk (Barge-Gil & López, 2014a). These differences make it possible that, when focusing on the relationship between R&D and internationalization, both types of activities differ significantly in terms of impact on firms’ internationalization.
The purpose of this study was therefore to examine whether research and development activities, taken separately, affect the firms’ level of internationalization differently. The question we asked was: “Do research versus development activities have a different impact on firm’s international expansion and which one matters more?”. We expected that development would matter more for international expansion than research, because the development process is directed and closely linked to the market. This would result in a better alignment of the products with the host market, which in turn would increase the level of internationalization. Furthermore, we looked at the moderating effect of global orientation. We hypothesized that a firm with a global orientation would benefit even more from its focus on development in terms of internationalization than firms with a regional orientation. We expected that a global orientation would provide the firm with access to a wider range of resources and more knowledge through international experience and the exposure to a diverse set of knowledge bases. As development is closer to the market, it would be more capable of absorbing and applying this knowledge and resources, resulting in better aligned products and in turn an even higher level of internationalization.
