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Venture
Venture adolescence adolescence
Internationalization and performance
implications of maturation
James M. Bloodgood 67
Department of Management, College of Business Administration,
Kansas State University, Manhattan, Kansas, USA

Abstract
Purpose – The purpose of this paper is to investigate how early internationalization and the use of
generic strategies by new ventures affect the performance and internationalization efforts of those
ventures as they move beyond the period of initiation.
Design/methodology/approach – A total of 37 venture capital backed new ventures within the
USA were studied from 1991 to 1999. Annual 10-K filings were used as sources for financial and
management data about the new ventures. Industry data were collected from Dunn’s Industry Ratios.
Findings – Results suggest that ventures which internationalize early are more likely to continue
internationalizing at a higher rate as they mature. Early internationalization did not affect sales
growth or financial performance of new ventures in the period after initiation. In addition, generic
strategies of these ventures affected internationalization and financial performance differently.
Research limitations/implications – The importance of venture strategy and prior
internationalization effort should be considered when investigating the internationalization patterns
and outcomes of new ventures. The small size of the sample and the focus on a limited number of
variables limit the generalizability of this study.
Practical implications – New venture managers should consider the role of generic strategy and
prior internationalization efforts when planning future internationalization.
Originality/value – This research provides an initial understanding of what happens to new
ventures as they begin to mature and in particular, the effects of early generic strategy and
internationalization on later venture performance are identified.
Keywords International business, Organizational performance, Entrepreneurialism,
United States of America
Paper type Research paper

Introduction
Although changing global business conditions have spurred many researchers to
investigate the resulting effects on large, multinational organizations (e.g. Bartlett and
Ghoshal, 1991), the internationalization of new ventures has also received a lot of
attention recently from researchers. International new ventures (INVs) are very young
firms that engage in international activities. These firms are distinct organizations that
are considered INVs when they begin to make resource commitments toward
internationalization (Oviatt and McDougall, 1994). INVs quickly begin
internationalizing rather than steadily moving toward internationalization over time.
International Journal of
These ventures are increasing in number, in part, because of several changes that are Entrepreneurial Behaviour &
occurring around the world (Root, 1994). One change is the interaction of the dual Research
Vol. 12 No. 2, 2006
forces of increased technological innovation and the advances in communications. This pp. 67-84
interaction causes new product demands in global markets and makes it easier for new q Emerald Group Publishing Limited
1355-2554
ventures to establish the all-important coordination of engineering, manufacturing and DOI 10.1108/13552550610658143
IJEBR marketing abilities on a global scale (Saunders et al., 2004). In trying to comprehend
12,2 these phenomena in terms of existing theory, prior stage theories of
internationalization are of little help (Oviatt and McDougall, 1994). In response,
numerous studies have focused on the descriptive and competitive characteristics of
these ventures (e.g. Kickul and Walters, 2002) in order to increase our understanding of
INVs.
68 Although the study of the initiation of INVs is far from complete, many INVs are
moving past their initiation period and becoming larger and more successful firms. As
INVs become increasingly prevalent and their maturation continues the question is
raised as to what happens as these ventures start to mature. Existing theory does not
provide a unified picture of probable effects. It can take several years to discern the
effects of initial strategies (Root, 1994). INVs could begin to resemble large, existing
global firms, or they could take a different path and become distinct from existing
global firms. What we do not yet know is what types of strategies enable ventures to
internationalize more quickly and to a greater extent, and what the performance
implications are of rapid internationalization. These inquiries are particularly acute for
ventures as they mature and become more visible to larger, more veteran competitors
who may begin to view them as a significant threat (Porter, 1985).
In an effort to address this knowledge gap, this research study examines several
issues pertaining to the maturation of INVs. First, the effects of some of the initial
conditions of the venture on venture performance, sales growth, and
internationalization eight years after initial public offering are evaluated. Second,
the effect of strategy on venture performance, sales growth, and internationalization
eight years after initial public offering is evaluated. Finally, the effect of industry sales
growth on internationalization is examined to see if slow-growing industries compel
ventures to accelerate their internationalization in order to maintain sufficient growth.

INVS: growth after initiation


The recent observation that significant numbers of new ventures are engaging in
international activities, in many cases from the point of initiation, has heightened
interest in entrepreneurship and international management research and has spawned
a number of studies attempting to delineate the characteristics of the development of
these ventures. For instance, new ventures that use a product differentiation strategy,
are large in size, or have directors with international work experience are more likely to
internationalize (Bloodgood et al., 1996). In addition, new ventures that internationalize
early on have been shown to have higher financial performance. International
expansion has also been associated with increases in customer and competitor
internationalization (Martin et al., 1998).
New ventures, like all firms, may internationalize their operations for a variety of
reasons. For the most part, these reasons can boil down to two main categories. The
first category is cost reduction. Labor and other inputs can often be obtained at lower
costs in other countries. For example, Asia is currently a popular choice for obtaining
low-cost assembly labor and low-cost, labor-intensive raw materials or parts. In order
to match or beat the cost levels of competitors, new ventures and other firms may
access these sources of lower costs. Internationalization can also provide opportunities
for increased revenue for new ventures and other firms (Westhead et al., 2004). One
source of higher revenue is the markets available when a firm enters new countries. In
addition, access to unique resources and inputs from other countries can differentiate a Venture
firm’s products, thus providing the opportunity to reach additional customers or adolescence
charge premium prices.
The question of what happens to INVs as they move beyond their initiation period
is becoming increasingly important. While there is no consensus about the period of
time for which a venture is considered “new” several authors use five to seven years as
a cutoff point. When INVs move beyond newness, do they exhibit characteristics of 69
more mature firms or do they possess features that are unique and associated with
their early internationalization?
To begin to answer the question of what happens to these ventures as they
start to mature, we can look to two opposing viewpoints. Both views adopt the
assumption that initial conditions affect the path of a firm by constraining and
enabling it (Collis, 1991; Zyglidopoulos, 1999). The first view is that the initial
conditions of the venture could have a compound effect on the venture
(Stinchcombe, 1965). That is, the initial conditions, such as size and degree of
internationalization could be the building blocks for the venture’s future. In order
to prosper, firms should set their initial conditions wisely in an attempt to be
congruent with their environment (Thompson, 1999). The initial conditions could
have an ongoing effect on the venture as it matures (Hannan and Freeman, 1977),
such that the venture may be guided by or be trapped in its initial trajectory
(Zyglidopoulos, 1999). For example, a new venture may use a low cost strategy
whereby its employees build a culture that is strongly conducive to cost cutting.
As time goes on, the cost-cutting culture may become increasingly powerful,
perhaps to the point where any ideas that new employees suggest that are not in
line with lowering the cost of the product are ignored. The venture may find that
the low cost strategy is difficult to change, and that its effects on the employees
and the performance of the venture continue or are even amplified (Weick, 1979).
Another example of initial conditions having a lasting effect on ventures was
illustrated by Harrison (2002). Harrison found that organizations tended to focus their
innovation efforts more on current products rather than new products. This could
demonstrate the ongoing connection to the initial products that a venture started with
during its formation. As the venture matures, it may fail to recognize the relative
importance of new product efforts as compared to existing products.
The second view on maturing ventures is that the initial conditions become less
important over time. This suggests that ventures can outgrow their initial conditions
(Weick, 1979) and change to more favorable structures as time goes on, and, perhaps,
as their environment or situation changes (Child, 1972). This view assumes that the
factors that influence initial strategic efforts of firms may change or cease to explain
later strategic actions (Chang and Rosenzweig, 2001). One possible source of change
may come from the transformation of goals that can occur as firms grow or shrink
(Dent, 1959). For instance, growth can be associated with new capabilities and these
new capabilities can lead to the selection of new strategies (Sparrow, 1998). For
example, a new venture successfully using large size to gain efficiencies and profits
may find that it can fairly easily change to a smaller size according to environmental
conditions.
Although knowledge of the resources and strategies that assist new ventures in
internationalizing and obtaining high levels of performance within two years of
IJEBR formation is useful, it is also important to determine what types of resources and
12,2 strategies are useful during the next stage of a venture’s life. The same resources that
were helpful early in a venture’s life may be more, similarly, or less helpful years later
(Sandberg, 1986). One major reason that resources and strategies may change in their
effectiveness is because competitors can imitate them. Mansfield (1985) found across a
wide array of industries that most competitors could imitate a firm’s new products or
70 processes within two years. Another reason for a change in the use and effectiveness of
various strategies is that time increases the number of interactions that occur within a
firm, and these interactions can lead to increased consensus (Rentsch, 1990; Sparrow,
1998) which is sometimes necessary for certain types of strategies (e.g. risky,
substantial resource commitment, revolutionary). The intent of this research is to
identify the specific resources and generic strategies that are most conducive to a new
venture’s internationalization and performance during the post-start-up period
(approximately three to eight years after formation) in order to examine these ventures
during the period that competitors are likely to be actively imitating them. It is
expected that there will be some similar effects of resources and strategies as found
during the first two years after formation, but it is also expected that new resources
and strategies could be developed after the period of formation that may facilitate or
hinder internationalization and performance in later years (Root, 1994). This view is
consistent with that of Huy (2001), who explains how different portions of an
organization can change at different speeds.

Hypotheses
Although strategy formulation is equally important for both domestic and
international ventures, the context of international business can be different and
much more complex. Besides geographical dispersion, international business has the
additional element of multi-nation economic and political differences (Fayerweather,
1981). In the past, these factors have influenced the ability of firms to expand
internationally. However, in recent decades the speed with which new ventures have
been able to internationalize their operations has increased tremendously (Timmons
et al., 1985). With internationalization providing an opportunity for new ventures to
compete on equal footing with larger, more-established firms (Oviatt and McDougall,
1994), the antecedents and outcomes of internationalization become an increasingly
important area of study. Previously, stage theories of internationalization provided the
model for firms beginning internationalization (Stopford and Wells, 1972). These
models suggested that internationalizing in small steps is the safest and most
productive approach. Risk is reduced and international knowledge is slowly absorbed
within the firm. Therefore, it was not recommended that new ventures immediately
begin internationalizing the majority of their operations. Rather, ventures delayed
internationalization until growth in domestic demand was declining or sources of
domestic supply were diminishing.
The principles of these stage theories are not invalid, rather they just may not be
critical enough to guide the internationalization of new ventures completely. For
example, resources have been noted to assist firms in achieving their goals as well as
placing limits on them (Collis, 1991; Mahoney, 1995; Penrose, 1959; Tallman, 1991).
Bloodgood et al. (1996) demonstrated that certain internal resources help new ventures
internationalize and incur performance increases soon after venture formation, while
other resources appear to have no effect on internationalization and new venture Venture
performance during this period. Therefore, resources or other initial conditions may adolescence
still influence new ventures to some degree.

Initial international conditions


Recently, firms have been found to internationalize earlier in life than in decades past.
Of interest is whether or not these internationalized new ventures are likely to continue 71
internationalizing their operations. The concept of organizational inertia (Hannan and
Freeman, 1984) suggests that those firms that begin internationalizing at an early stage
will continue to do so over time unless there is a compelling reason to discontinue the
practice. These habits and routines can be quite productive depending on the stability
of the environment (Weick, 1979). As these habits and routines develop and mature
(Nelson and Winter, 1982) they can also reduce the likelihood of change.
Moreover, when firms internationalize they build a knowledge base that enables
them to be more effective at internationalizing their operations in the future. Not only
does the base of knowledge increase, but also the absorptive capacity of the venture
increases (Cohen and Levinthal, 1990). Thus, the venture is better able to expand the
types of internationalization it engages in and the number of countries in which it can
operate because it can recognize and understand new information and knowledge more
easily.
Therefore, not only should firms be able to internationalize more because of prior
internationalization, but also they should be freer to grow sales and profits in the future
because they have greater access to markets and sources of supply. In effect, prior
internationalization increases the value the firm can provide to international markets.
To the extent that this value surpasses the costs to the firm of providing it, the firm will
increase its international efforts (Martin et al., 1998). Therefore:
H1a. New ventures that engage in greater internationalization during their
initiation period will be more likely to engage in international activities in the
period after initiation.
H1b. New ventures that engage in greater internationalization during their
initiation period will have higher sales growth and financial performance than
other ventures in the period after initiation.

Effect of size on performance


Past studies of the effect of size on performance have shown the advantages and
disadvantages that are present with large firms (Dhawan, 2001). Large ventures
typically have greater economies of scale and the potential for more organizational
slack than do small ventures (Porter, 1980). These advantages can occur in multiple
areas of the organization such as manufacturing or marketing (Merrill and Sedgwick,
1987). However, large firms also have to deal with communication and decision-making
inefficiencies (Hitt et al., 2001). These effects of firm size are likely to affect ventures
after the period of initiation in a similar manner as they to do to older, more established
firms.
In addition to the actual effects of size on venture performance, perceptions of the
limitations that small size has on ventures can inhibit new ventures from trying certain
courses of action (Root, 1994). Managers of smaller firms may view their venture as
IJEBR unable to effectively engage in activities that may require extensive capital or human
12,2 resources. Thus, venture size can influence venture performance. Resources related to
size have been found to be positively associated with sales growth for new ventures
during the start-up period. Size could continue to influence performance of ventures
positively after the start-up period because of the importance of market power in
industries as they begin to mature (Agarwal and Audretsch, 2001). Increased size also
72 offers a venture the opportunity to take advantage of revenue and cost cutting
opportunities that smaller ventures may not be able to access (Lawler, 1997). Therefore:
H2. Ventures with greater size during their initiation period will have higher
financial performance than other ventures in the period after initiation.

Effect of strategy on performance, sales growth, and internationalization


Bloodgood et al. (1996) found that various firm strategies can influence the level of
internationalization and performance of new ventures shortly after formation. For
instance, a low-cost strategy is associated with increased sales growth, while a product
differentiation strategy is associated with increased internationalization and increased
sales growth. A marketing differentiation strategy, on the other hand, has been
associated with reduced levels of internationalization. Although these findings can
help new ventures structure themselves in a way that can increase their potential for
rapid internationalization and sales growth soon after venture formation, the effects of
these resources and strategies on the venture during the next stage of their life is
unknown.
As industries and product/market combinations mature, low-cost strategies become
more important (Hitt et al., 2001). Low-cost strategies are expected to increase in
frequency during the period after formation because of the normal maturation of
industries (Porter, 1980). Cost competition increases as time passes, so even new
ventures should be reacting to cost pressures during the period after formation (Pope,
2002). Because of these cost pressures, it would be expected that ventures engaged in a
low-cost strategy would seek low-cost sources of raw materials and other inputs as
well as low-cost assembly labor. Often these low-cost options are primarily available in
other countries.
A product differentiation strategy could remain viable for new ventures, however
the role of this strategy is likely to be diminished with this set of ventures for two
reasons. First, the low cost strategy becomes more important at this stage and firms
can have a difficult time trying to use a low cost strategy and a product differentiation
strategy simultaneously (Porter, 1980), so some ventures are likely to discontinue the
product differentiation strategy. Second, a product differentiation strategy is a
common mode of market entry (Vesper, 1980), so a normal reduction would occur as
new entrants move out of their entry strategy and into a more sustainable or effective
strategy. However, a product differentiation strategy is an effective way to compete
even in mature industries because of the demand that can be developed for a unique
version of a product. Unique resources that may be required for a product
differentiation strategy can come from other countries, and other countries can provide
additional markets for the venture. Therefore:
H3a. New ventures that engage in a cost leadership strategy will be more likely to
engage in international activities in the period after initiation.
H3b. New ventures that engage in a product differentiation strategy will be more Venture
likely to engage in international activities in the period after initiation. adolescence
For many of the same reasons that the use of a cost leadership strategy or a product
differentiation strategy assists a venture in internationalizing, these strategies also
assist ventures in increasing sales growth and financial performance. These generic
strategies help ventures focus on coordinated tactics that provide access to an
increased customer base or customers who are willing to pay higher prices for unique 73
products (Porter, 1980). Therefore:
H3c. New ventures that engage in a cost leadership strategy will have higher sales
growth and financial performance than other ventures in the period after
initiation.
H3d. New ventures that engage in a product differentiation strategy will have
higher financial performance than other ventures in the period after initiation.

Industry growth and venture internationalization


Although firm resources and strategy can strongly affect the operations and
performance of a venture in the period after initiation, the external environment can
also affect venture behavior (Sandberg, 1986; Pfeffer and Salancik, 1978). Aspects of
the general environment as well as organizations in a venture’s organizational field
(DiMaggio and Powell, 1991) provide a wide variety of factors that can affect a venture.
Therefore, it is important to consider industry effects on the internationalization of
ventures after the period of initiation (McDougall, 1989).
One of the most discussed industry variables in regards to internationalization is
the rate of sales growth present in an industry. Firms in slow-growing industries are
inclined to look to international markets as a means of avoiding the reduction in
demand growth for their industry (Porter, 1980). Thus, there is likely to be a negative
relationship between industry sales growth and internationalization after the initiation
period. Therefore:
H4. Ventures in slow growth industries will have higher rates of
internationalization in the period after initiation than will ventures in fast
growing industries.

Methods
A sample of 37 firms was drawn from a population of 76 venture capital-backed US
firms that had an initial public offering (IPO) of stock in 1991. Although there can be a
wide variety of factors that characterize firms that utilize IPOs, the majority of firms in
this sample could be considered small to medium-sized start-ups that recently formed
and had enough future potential to engage in an IPO. In addition, most were not
directly or legally associated with any existing public corporation. Of the original 76
ventures, 15 were initially eliminated because the Securities and Exchange
Commission did not have an available prospectus from 1991 or because they were
not included on the 1993 Compact Disclosure database. A total of 24 firms were
eliminated because they were no longer viable, independent firms in 1999. Most of the
24 eliminated firms had merged with other firms before 1999. The size of the firms
ranged from $0 to $6.3 billion in annual sales, with an average of $605 million. By using
IJEBR only venture capital-backed firms we limited the study to growth-oriented firms. By
12,2 focusing on venture capital-backed firms, we also were able to control for variations in
internationalization that occur because of growth goals. In addition, by using ventures
with IPOs from the same year we were able to help control for differences in goals that
can occur because of firm age (Starbuck, 1971).
To obtain resource, financial, and strategic data on the ventures, their 10-K filings
74 were analyzed. In the USA, public corporations are required annually to issue a 10-K
filing. The 10-K contains a variety of information about the firm that may be of interest
to a variety of stakeholders. In particular, investors, banks, and competitors find the
10-Ks most useful. In the 10-K, firms present their financial statements and describe
their current and historical business situation. Some examples of information about the
business situation included the number of employees, business location, regions of the
world where products and services were marketed, strategic endeavors and a general
business model. Firms are required to include any material matters when describing
these business areas. The 10-Ks are very useful for performing longitudinal analysis
because they offer explicit information in a consistent manner from year to year, thus
making comparisons fairly straightforward.
For this study, financial information and some resource information were drawn
from the balance sheets and income statements provided in the 10-Ks. Other resource
information and strategic information were drawn from qualitative information in the
business sections of the 10-Ks. The strategies of low cost and product differentiation
were determined by matching the strategic emphases discussed in the 10-K compared
to documented characteristics of those strategies in prior research (Porter, 1980).
Although this matching effort may not be a perfect process, the ability to distinguish
among these generic strategies was not too difficult given the information available in
the 10-Ks. The degree of internationalization was determined by identifying which
primary activities of the value chain are engaged in countries other than the USA (as
discussed in the 10-K). Firms are required to include all material changes from previous
years as well as all of their locations in the 10-K. Two performance indicators, sales
growth and earnings before interest and taxes, for each firm were drawn from the
income statements found in the 10-Ks. Sales growth is an important performance
indicator for new ventures that may have high initial costs, and thus no profits. Both
performance indicators were controlled for by industry by dividing each amount by the
industry average. Industry averages for sales growth and profitability were taken from
Dun’s Industry Ratios based on four-digit SIC codes.

Criterion and predictor variables


A description of each criterion and predictor variable is located in the Appendix.

Control variables
Industries and types of firms can vary in their resource needs (Bollingtoft et al., 2003).
Thus, some industry- and firm-level factors were controlled for in this study in order to
take these differences into account:
.
Industry sales growth. The growth rate in industry sales was determined by
finding the difference between the average firm sales for a venture’s primary
industry (four-digit SIC code) for 1999 and 1993 and then dividing it by average
firm sales in 1993. This information was drawn from Dun and Bradstreet’s Venture
annual industry ratios. adolescence
.
Industry gross profit. Industry gross profit was calculated by dividing average
firm gross profit by average firm sales in 1999 for the primary industry in which
each venture was operating. This information was drawn from Dun and
Bradstreet’s annual industry ratios.
.
Performance – 1991. Venture performance for 1991 was measured by using 75
earnings before interest and taxes (EBIT) from the 10K report filed for fiscal
1991.
. Sales – 1991. Venture sales for 1991 was taken from the 10K report filed for
fiscal 1991.

Analysis
Correlations of the independent, control, and dependent variables can be found in
Table I. Linear multiple regression was used to test the hypotheses (see Table II).
Individual models were used for each dependent variable (EBIT, sales growth, number
of international regions, and growth in number of international regions). For EBIT, the
model includes a control for 1991 EBIT and the independent variables of size, cost
advantage, differentiation, and number of international regions (1993). For sales
growth, the model includes a control for 1991 sales and the independent variables of
size, cost advantage, differentiation, and number of international regions (1993). For
number of international regions and growth in number of international regions, the
model includes controls for industry profitability and firm size for both number of
regions and growth in number of regions, and independent variables of cost advantage
and differentiation. In addition, the number of regions during initiation was used as a
control for the growth in number of regions and it was used as an independent variable
for the number of regions.

Results
Early internationalization, by engaging in international operations in multiple regions
of the world during the period of initiation, was found to positively influence the
number of international regions that ventures operated in the period after initiation,
but not the growth in number of international regions after the period of initiation.
Thus, H1a was only partially supported. The number of regions of the world a venture
operated in during its initiation did not affect sales growth or financial performance,
thus H1b was not supported.
Size was found to influence positively the profitability of the venture after the period
of initiation. Thus, H2 was supported. The use of a cost leadership strategy was not
found to assist a venture in internationalizing its operations during the period after
initiation. Thus, H3a was not supported. On the other hand, a product differentiation
strategy was found to be associated with an increase in, and the total number of,
regions of the world in which a venture operated. Thus, H3b was supported.
A cost leadership strategy was found to increase both sales growth and financial
performance of the venture in the period after initiation. Thus, H3c was supported.
However, a differentiation strategy was not found to increase the financial performance
of a venture in the period after initiation. Thus, H3d was not supported.
76
12,2

Table I.
IJEBR

zero-order correlations
Descriptive statistics and
Variables 1 2 3 4 5 6 7 8 9 10 11 12

1. Performance (EBIT 1999)


2. Sales growth 2 0.01
3. Growth in number of international regions 1993-1999 2 0.12 0.23
4. Number of international regions – 1999 0.08 0.08 0.75
5. Number of international regions – 1993 0.27 20.21 20.18 0.51
6. Size 1991 0.68 0.06 20.14 0.14 0.39
7. Cost leadership strategy 0.37 0.56 0.13 0.11 2 0.02 0.37
8. Differentiation strategy 0.08 20.15 0.35 0.37 0.10 0.04 0.11
9. EBIT 1991 0.58 20.03 0.24 0.00 0.31 0.57 0.06 0.00
10. Sales 1991 0.25 20.13 20.27 2 0.15 0.13 0.60 20.10 0.09 0.58
11. Industry sales growth 1993-1999 2 0.26 20.51 20.08 2 0.09 2 0.04 20.38 0.00 0.28 20.16 20.22
12. Industry profitability 1999 2 0.20 0.13 0.21 0.15 2 0.05 20.20 0.17 0.13 20.16 20.19 0.45
Mean 28.39 21.66 1.46 2.54 1.08 2.37 0.11 0.92 2.19 63.57 293 2,837
Standard deviation 96.97 31.85 1.80 2.06 1.38 0.82 0.32 0.28 12.60 125.30 143 2,877
Notes: p , 0:05 for correlations . 0:35; p , 0:01 for correlations . 0:45; p , 0:001 for correlations . 0:51
Venture
Internationalization
Sales Growth in Number adolescence
Independent and control variables Performance growth number of regions of regions

Number of international regions – 1993 0.021 20.098 2 0.150 0.581 * * *


Cost leadership strategy 0.238 * 0.617 * * * 0.088 0.231
Differentiation strategy 0.039 20.209 0.431 * * 0.468 * * 77
Size 1991 0.413 * * 20.169 2 0.202 2 0.369 *
EBIT 1991 0.323 *
Sales 1991 0.070
Industry sales growth 1993-1999 2 0.397 * 2 0.507 *
Industry profitability 1999 0.275 0.121
R2 0.560 0.376 0.299 0.538
Adjusted R 2 0.489 0.275 0.159 0.428
df 5, 31 5, 31 6, 30 6, 25
Table II.
F 7.894 * * * 3.737 * * 2.137 * 4.859 * *
Results of regression
Notes: * p , 0:05, one-tailed tests; * * p , 0:01, one-tailed tests; * * * p , 0:001, one-tailed tests analysis

Ventures in slower growing industries were found to have higher rates of


internationalization and total number of global regions in which the venture
operated. Thus, H4 was supported.

Discussion
This study found that early internationalization does not affect the growth and
profitability of a venture in the period after initiation, but it does positively affect the
future internationalization of the venture. Thus, there is support from this data sample
for a path dependent view of new ventures as they mature (Hannan and Freeman,
1977). Here, ventures that internationalized early were more likely to continue
internationalizing when compared to ventures that did not internationalize early or
internationalized less. These ventures continued internationalizing even when it did
not improve their growth or financial position in the period after initiation. This
tendency supports the findings of Duysters and Hagedoorn (2001) who found early
behaviors had a lasting effect on firms.
This finding raises an interesting issue. Why would a venture, or any firm, continue
to internationalize if it does not help to increase its performance? In the sample used
here, all of the firms were backed by venture capitalists. Would not venture capitalists
be most interested in investing in ventures that focus primarily on
performance-enhancing activities rather than somewhat risky endeavors that do not
have a positive payback? Although a complete answer to this question is beyond the
scope of this study, some possible reasons for these ventures to continue pursuing
internationalization even when there is no apparent payoff can be offered. First, as
mentioned earlier, there could be inertial factors at work that cause the habits and
routines of internationalizing to continue (Hannan and Freeman, 1977). After a venture
has been internationalizing for a period of time, it may develop routines that cause it to
automatically continue to look for new internationalization opportunities and to initiate
them. These could be in the form of certain routine procedures that take place in
various parts of the venture (Nelson and Winter, 1982). These procedures could be
IJEBR elements of the organizational structure that was initially set up to establish the
12,2 venture and to initiate international activities. Sometimes organizational structure will
continue to operate as originally intended even when changing conditions warrant a
change in structure.
A second reason that the venture may continue internationalizing even when it is
not contributing positively to performance is that the ventures founders, as well as the
78 venture capitalists, may not be aware that the internationalization is not going to
benefit the venture. Perhaps there is too much change and complexity for effective
analysis of causal links to performance to occur (Chi, 1994; Reed and DeFillippi, 1990).
Alternatively, the lack of enhanced, current performance may not be a concern as the
founders may be looking for longer-term performance increases, and are not as
concerned about short-term performance results or are not sure what they should be at
the current time.
A third possible reason for continuing internationalization under these conditions
may be related to the concept of escalation of commitment (Staw, 1976). The founders
of a venture have likely put in an extraordinary amount of time and money into the
internationalization of the venture and they may not be willing to accept that this
investment is not going to pay off in the future. So, when performance does not
increase after internationalization efforts, the founders may be assuming that the
implementation is at fault rather than the strategy. Thus, the founders may continue to
look and invest in new regions in order to make the plan work.
To compound the ambiguity surrounding this issue, the relationship between
internationalization and performance may be even more complex than first thought.
Recently, Lu and Beamish (2004) found evidence for a horizontal S-curve relationship
between internationalization and performance. This relationship is characterized both
by increasing and decreasing performance as the level of internationalization
increases. Additional study of this phenomenon will be needed to identify the full
extent of its impact.
Similar to internationalization, a product differentiation strategy was not found to
influence the performance of a venture in the period after initiation, but it was found to
influence positively the internationalization of the venture. Other ventures that were
not using a product differentiation strategy were less likely to internationalize. Typical
reasons for internationalizing in support of a product differentiation strategy include
obtaining unique sources of raw materials or inputs (Kuemmerle, 1999), and marketing
to particular customers in new markets (Pope, 2002; Vernon, 1996). Based on
information in the 10-Ks, both of these reasons were used by the ventures in this
sample.
The findings here suggest that strategic direction more than venture resources may
influence internationalization during the period after initiation. Ventures that followed
a product differentiation strategy increased the number of international regions they
operated in more than other ventures did. However, for the cost leadership strategy
there was no increase found. Even though there are logical reasons for
internationalizing with a cost leadership strategy, such as obtaining cheaper inputs
or lower cost operations, the new ventures in this sample that followed that strategy
were not internationalizing to the same extent as other new ventures. One possible
explanation for this would be that once the lowest cost source of inputs is found,
further exploration would be fruitless (at least in the short run). Thus, the choice of Venture
strategy can influence internationalization efforts and success. adolescence
The initial size of the firm, based on the number of employees, was positively
related to profitability. This finding is consistent with prior work that shows how size
can offer benefits such as market power and economies of scale (Hitt et al., 2001).
Speculatively, existing firms are likely to be larger than the new ventures entering their
industries, so it cannot be determined whether the new ventures that are growing are 79
doing so in an effort to imitate the existing competitors or they are growing purely to
increase performance.
In addition, a venture’s industry has an effect on the venture’s rate of
internationalization. In this study, slower-growing industries were associated with
faster internationalizing ventures. Although it is not known whether existing firms in
these same industries also internationalize faster, and thus these ventures could be
imitating these existing ventures (McDougall, 1989), the industry growth rate does
influence new firms.
There are important implications for new venture managers that this research
uncovers. First, this research demonstrates the degree to which ventures should
focus on their progression of internationalization and their generic strategy when
forecasting future internationalization efforts. Using the right strategy and a
consistent internationalization effort can result in more extensive
internationalization if desired. In addition, certain strategies may lead to more
rapid internationalization, but they may not lead to increased financial performance.
Managers may need to evaluate the short- and long-term needs of their venture in
order to determine the extent to which their venture can be sustained while
internationalization takes place, perhaps at the expense of increased performance in
the short run.
Another consideration for managers is to decide consciously whether their venture
should attempt to be similar to existing, mature firms in their industry or if the venture
should just aim to use its resources in its own unique manner. Imitation may provide
the firm with some legitimacy, but it may not enhance performance (Meyer and Rowan,
1977). This decision by managers will be influenced, in part, by the degree of
uncertainty present in the environment. More uncertainty can lead to increased
imitation as organizations attempt to deal with the uncertainty in an efficient or low
risk manner (Cyert and March, 1963; DiMaggio and Powell, 1991).
Researchers should be aware of the importance of including firm strategy, firm
resources, and prior internationalization efforts when investigating the
internationalization of ventures as they mature. In addition, the characteristics of
firm investors may also influence the international strategies of firms (Tihanyi et al.,
2003). All of these factors can influence the type and extent of internationalization that
firms engage in at various stages. Failure to include these factors in research could
confuse any findings that future researchers obtain.
There are several limitations of this research that deserve mention. First, the study
was very limited in size. The number of ventures, although comprehensive for a
particular year, was very small. Additional studies need to be completed to verify the
findings. Second, the causality of studies like this is always of concern. In an effort
partly to address this concern, some of the variables were separated by time, but others
were not. Thus, some of the implied causality may not actually hold true. Third, some
IJEBR unmeasured, additional factors could be influencing the hypothesized relationships.
12,2 For example, the level of venture capital support and specific experiences of the
management team may influence the degree and type of internationalization that takes
place. An attempt was made to control partially for venture capital support by
including only venture capital-backed new ventures, but it is possible that specific
venture capitalists may vary in their inclination to push internationalization. Factors
80 associated with the organizational origin of INVs may also influence the relationships
hypothesized in this study. For example, an INV may start out with one or two
founders with few resources, or it may be a spun off from a larger firm with more
resources. The size of the sample did not enable us to control for these potential
differences, other than size, so future studies might attempt to establish if there are any
differences stemming from these characteristics. Finally, this sample was entirely of
ventures based in the USA in the early 1990s. Ventures from other countries or from
other time periods may result in different findings (Chang, 1995). Although industry
factors were controlled for, time factors could alter the results found here. Researchers
should consider including some of these variables in future studies in order to add to
the growing knowledge base of INVs.
This research provides new information about the internationalization of new
ventures as they mature. The main focus is on the effects of venture resources,
strategies, and prior internationalization efforts on internationalization, financial
performance, and sales growth in the period after initiation. Although the findings here
are beneficial to ongoing research efforts in internationalization, much more needs to
be done before a comprehensive understanding of the process is achieved.

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Appendix. Criterion and predictor variables


Earnings before interest and taxes
Earnings before interest and taxes (EBIT) was measured by using earnings before interest and
taxes from the 10K report filed for fiscal 1999. To control for industry, the EBIT was then divided
by the industry firm average from Dun’s Industry Ratios based on four-digit SIC codes.

Sales growth
Venture sales growth was calculated by dividing the change in sales from 1993 to 1999 by 1993
sales (from 10K filings). To control for industry, venture sales growth was then divided by the
industry firm average from Dun’s Industry Ratios based on four-digit SIC codes.

Number of international regions – 1999


For each of six geographic regions in the world (North and Central America, South America,
Europe, Asia, Africa, and Australia/New Zealand) that each venture’s 10K mentioned that the
venture was engaged in business operations, a one was recorded. These scores were added up
and the sum (from zero to six) was used as the score for the number of international regions.

Number of international regions – 1993


Similar to the way that the number of international regions was calculated for 1999, for each of
six regions in the world (North and Central America, South America, Europe, Asia, Africa, and
Australia/New Zealand) that each venture’s 10K mentioned that the venture was engaging in
business operations, a one was recorded. These scores were added up and the sum (from zero to
six) was used as the score for the number of international regions.

Growth in number of international regions


The growth in number of international regions was calculated by subtracting the number of
international regions in 1993 from the number of international regions in 1999.

Cost leadership strategy


Qualitative information from the 1999 10K reports were used to determine if the venture was
using a low cost strategy as conceptualized by Porter (1980). If it was determined that the venture
was engaging in actions consistent with a low cost strategy, a one was recorded. If was
determined that a low-cost strategy was not being followed, a zero was recorded.

Differentiation strategy
Qualitative information from the 1999 10K reports was used to determine if the venture was
using a differentiation strategy as conceptualized by Porter (1980). If it was determined that the
venture was engaging in actions consistent with a differentiation strategy, a one was recorded. If
was determined that a differentiation strategy was not being followed, a zero was recorded.
IJEBR Size
The logarithm of the number of employees listed in the 1991 10K report was used to measure the
12,2 size of the firm. The logarithm was used to take into account the wide distribution of employees
in these ventures. Sales were not used because many of these ventures did not have sales
initially, and some were still primarily in a research and design stage.

84 Corresponding author
James M. Bloodgood can be contacted at: jblood@ksu.edu

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