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The Effects of Ownership and Governance on SMEs’ International Knowledge-

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Article  in  Small Business Economics · February 2007

DOI: 10.1007/s11187-006-9025-y · Source: RePEc


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3 authors:

Shaker A Zahra Donald O. Neubaum

University of Minnesota Twin Cities Oregon State University


Lucia Naldi
Jönköping University


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Wirtschaftswissenschaftliche Fakultät
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Internationales Management

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Jena, den 20.5.2008

Besprechung empirischer Artikel zu den Auswirkungen von unternehmerischen


In dieser Übung wollen wir zwei empirische Studien zu den Auswirkungen von
Internationalisierungsaktivitäten, Eigentümerstruktur und Governance diskutieren. Hierfür
bereiten die beiden Gruppen bitte jeweils eine ca. 30-minütige Präsentation vor, die den
entsprechenden Artikel zusammenfasst. Insbesondere soll dabei eingegangen werden auf:
(1) den theoretischen Hintergrund der Studie,
(2) das Modell,
(3) die empirische Methode,
(4) die Ergebnisse und deren Interpretation,
(5) sowie Schlussfolgerungen.

Gruppe 5:

Zahra, S.A., Neubaum, D.O., & Naldi, L. 2007. The Effects of Ownership and Governance
on SME’s International Knowledge-Based Resources. Small Business Economics, 29, 309-

Gruppe 6:

Zahra, S.A. & Hayton, J. 2008. The Effect of International Venturing on Firm Performance:
The Moderating Influence of Absorptive Capacity. Journal of Business Venturing , 23, 195-

Bei weiteren Fragen wenden Sie sich bitte an Dipl.-Kffr. Nina Rosenbusch
Small Business Economics (2007) 29:309–327 Ó Springer 2007
DOI 10.1007/s11187-006-9025-y

The Effects of Ownership

and Governance on SMEsÕ International Shaker A. Zahra
Donald O. Neubaum
Knowledge-based Resources Lucia Naldi

ABSTRACT. Small- and medium-sized enterprises (SMEs) ment of their knowledge-based resources and
play an important role in todayÕs global economy. However, internationalization efforts (Gedajlovic et al.,
there are significant differences in how they respond to the
2004; Reuber and Fischer, 1997). SMEsÕ influ-
opportunities and threats in international markets. This
study suggests SMEsÕ ownership and governance systems ence can not be debated as they account for
significantly influence the development of knowledge-based 60–70% of employment in most advanced
resources necessary for internationalization. Using a sample of economies (OECD, 2004). Nearly 25% of
384 US SMEs, we find a positive relationship between both manufacturing SMEs worldwide compete in
the equity held by top management team members and
international markets and approximately 97%
venture capitalists and the development of these important
resources. This positive association is further accentuated by of all US exporters are SMEs (OECD, 2004).
the presence of independent outside directors on SMEsÕ SMEs are also a key source of technological
boards, supporting their monitoring and enterprising roles. advances and the transfer of new technologies
and best management practices across interna-
KEY WORDS: governance, internationalization, owner-
tional borders. Though previous research on
ship, SMEs.
SMEsÕ internationalization has considered
JEL CLASSIFICATIONS: L26. industry conditions and competitive forces
(e.g., Zahra et al., 1997), more recent research,
however, has emphasized SMEsÕ ownership and
1. Introduction governance structures, resources and knowledge
as key drivers of their internationalization
While small and medium-sized enterprises (e.g., George et al., 2005). This study builds on
(SMEs) play an important role in the global this stream by considering how ownership by
economy, relatively little is known about the top management and venture capitalists, as well
nature of the relationship between their owner- as the presense of outsiders on their boards of
ship and governance systems and the develop- directors, are associated with the knowledge-
based resources necessary for SMEs to enter
Final version accepted on October 2006. international markets.
SMEs rely on a wide variety of resources but
Shaker A. Zahra their success depends largely on their ability to
Center for Entrepreneurial Studies & Strategic Management use knowledge to develop new products, services
& Organization Department Carlson School of Management
University of Minnesota,
and processes in domestic and international
321 19th Ave. South, Minneapolis, MN 55455, USA markets. Proponents of the knowledge-based
E-mail: view (KBV) believe a firmÕs competitive advan-
tage lies in its abilities to collect, accumulate,
Donald O. Neubaum integrate and use knowledge (Kogut and
Oregon State University College of Business, Zander, 1992; Nickerson and Zenger, 2004;
330 Bexell Hall, Corvallis, OR 97331-2603, USA
Szulanksi, 1996). This knowledge is usually
Lucia Naldi embodied in the human, technological and
Jönköping International Business School, relational resources the firm possesses. Building
PO Box 1026, 551 11, Jönköping, Sweden an infrastructure that facilitates the accumula-
310 Shaker A. Zahra et al.

tion and use of knowledge is a key task for ownership on the SMEÕs knowledge-based re-
SMEs managers and board members, leading us sources.
to focus on their investment in knowledge-based Agency theory-based research highlights the
resources for international expansion. monitoring and oversight role boards of direc-
Proponents of the KBV argue that the tors play (Zahra, 1996). Still, outside directors
knowledge-based resources SMEs control (e.g., can further add value by sharing their wealth of
human, proprietary and relational assets) can experience with TMT members. By assuming
influence their internationalization (Dunning, the crucial ‘‘enterprising’’ role (Keasey and
2000), especially sales and growth rates (Brush Wright, 1993), outside directors can encourage
and Chaganti, 1999; Westhead et al., 2001). In managers to focus on investing in knowledge-
fact, Johanson and Vahlne (2003: 90) observe based resources for internationalization that
that ‘‘the development [...] of knowledge should provide SMEs with knowledge and wisdom
be regarded as a critical aspect of the strategic gathered from their personal experiences. Thus,
management of internationalization.’’ The as the ratio of outside directors serving on the
process of developing and leveraging knowledge- board increases, these directorsÕ diverse experi-
based resources in international markets is ences, skills and capabilities will augment SME
largely a function of a firmÕs ownership and managersÕ insights into how to further develop
governance systems (Beatty and Zajac, 1994; SMEsÕ international knowledge-based resources,
Gedajlovic et al., 2004; Zahra, 1996; Zahra which can ultimately increase SMEsÕ perfor-
et al., 2000). These systems are critical to mance in international markets.
successful internationalization as they determine The literature suggests a growing recognition
the distribution of authority and expertise within of the importance of ownership and governance
firms (Gedajlovic and Zahra, 2005), influencing systems for SMEsÕ internationalization. Indeed,
SMEsÕ investments in the development of the OECD SME Policy Outlook (2002) illus-
knowledge-based resources. The exact nature of trates how the globalization and liberalization of
these relationships within SMEs, however, re- various markets have prompted changes in
mains largely unexplored. One of our paperÕs SMEsÕ governance systems to facilitate foreign
contributions is documenting this role. market entry and cross border alliances in a
broad range of countries. Further, venturing
into international markets is a risky activity
1.1. Study focus and contributions
(Carpenter et al., 2003), especially for resource
In this paper, we examine the impact of own- constrained SMEs (Buckley, 1997). As such,
ership and governance structures on SMEsÕ vigilant and effective governance systems are
knowledge-based resources, particularly those necessary to monitor managersÕ actions while
associated with internationalization activities. supporting the development of the knowledge-
Following Daily, McDougall et al. (2002), we based resources needed for internationalization.
focus on three sets of key actors who are di- The ‘‘monitoring’’ role centers on protecting
rectly responsible for SMEsÕ organizational shareholdersÕ wealth. According to agency
outcomes: top management team (TMT) and theorists, boards serve as the guardians of
venture capitalists (VC) and board of directors. shareholdersÕ wealth by being independent
Therefore, we propose that ownership by TMT monitors and controllers of self-interested
members and VCs encourage investments in managers. Thus, directors can give managers the
knowledge-based resources for internationali- right incentives to dedicate and deploy organi-
zation. Further, an effective governance system, zational resources for value creating activities,
characterized in our study by the presence of including those associated with building inter-
independent, active, vigilant and enterprising national knowledge-based resources.
outside directors on the board, will accentuate In addition to their monitoring roles, outside
the positive affect of both TMT and VC directors also give SMEs critical knowledge.
The Effects of Ownership and Governance on SMEs 311

This knowledge provision role is at the core of introduce the analyses and results. The final
the boardÕs enterprising function (Keasey and section of the paper discusses our key findings
Wright, 1993) that creates wealth for share- and their implications for practice and theory.
holders. An analysis of governance systems at
the different stages in the life cycle of firms
2. Theory and hypotheses
suggests the boardÕs enterprising function is
more important for young, growing firms (e.g., Knowledge-based resources are important for
Lynall et al., 2003), or those facing dynamic and gaining and sustaining competitive advantage
uncertain environmental conditions (Filatotchev (Grant, 1996; Kogut and Zander, 1992).
and Wright, 2005), such as those SMEs might Wiklund and Shepherd (2003) propose that
face in international markets. Dynamic condi- knowledge about markets and technology are
tions often found in international markets two key resources that influence a firmÕs
may prompt SMEs to develop new skills and performance. Market knowledge expedites the
competencies to ensure survival and create discovery and exploitation of opportunities by
wealth. Building these competencies requires increasing awareness of customer problems
SMEs to gain access to internal and external and needs. Knowledge about technology also
sources of knowledge, a process that is time facilitates the discovery of opportunities and
consuming and expensive. SMEs boards, there- the rapid commercialization of technological
fore, need to supplement their traditional breakthroughs on a worldwide scale. In an
‘‘monitoring’’ role by considering the ‘‘enter- international setting, knowledge about the stage
prise’’ functions that outside directors can play of a technologyÕs life cycle, its global substitutes,
(Short et al., 1998). Thus, boards can not only and its relative advantage compared to other
reduce managerial opportunism, but they can technologies found around the world can help
also motivate SME executives to invest in SMEs identify opportunities for international
long-term value creating resources, such as expansion.
knowledge-based resources for internationali- Knowledge about foreign markets also gives
zation. Boards often contribute their own SMEs the expertise to understand foreign
knowledge and experiences to this crucial pro- competitors, develop effective business models,
cess (Short et al., 1999). select viable modes of entry, and choose the
This study investigates how SMEsÕ owner- appropriate time for foreign market entry.
ship and governance systems influence the Westhead et al. (2001) report that SME
development of international knowledge-based managersÕ international industry experience is
resources. Our analyses show how agency theory positively associated with exporting, underscor-
applied to SME ownership and governance sys- ing the value of prior knowledge in locating
tems can explain the development of knowledge- international business opportunities. Some re-
based resources for internationalization. The search also shows that those SMEs led by man-
results help to clarify the ownership and gover- agers with international business experience and
nance conditions under which these resources are training are more likely to internationalize their
developed. Finally, by focusing on international operations (Bloodgood et al. 1996; Reuber and
knowledge-based resources, we recognize that Fischer, 1997). These experiences enable SMEs to
SMEsÕ greatest resources often lie in their intel- spot opportunities in foreign markets and devel-
lectual capital. By creatively leveraging these op the organizational systems necessary for
resources, SMEs can succeed in international internationalization. SMEsÕ employees and
markets. board members with varied skills and experiences
In the next section we develop our argument in international markets and countries also pro-
and accompanying hypotheses, connecting vide important and useful connections to existing
our agency and KBV arguments. Next, we institutions, companies and networks in target
summarize an empirical study that tested our foreign markets. They also facilitate gathering,
hypotheses, describing our data collection analyzing and interpreting information about
method, sample and measures. Thereafter, we opportunities around the globe. The develop-
312 Shaker A. Zahra et al.

ment of international knowledge-based Internationalization is a risky move because it

resources, however, is likely to be influenced by divides managersÕ limited attention across a
the SMEsÕ ownership structure and governance greater number of issues and contingencies
mechanisms, as discussed next. (Sanders and Carpenter, 1998). As the scope and
scale of SMEsÕ international operations inten-
sify, the attention given to any single market is
2.1. TMT ownership and knowledge-based
likely to decrease. Internationalization also
exacerbates agency issues by making the task of
The effect of TMT ownership on firmsÕ risk monitoring managerial actions more difficult.
taking behaviors has been the subject of interest One widely accepted solution to these agency
in prior research (Beatty and Zajac, 1994; issues, however, is to increase the equity stake
Wright et al., 1996; Zajac and Westphal, 1994), held by the TMT. Increasing TMT membersÕ
especially in the international context (Dess ownership in the SME aligns their interests
et al., 1995; Zahra et al., 2000). Investments in with shareholders while providing an efficient
and attention given to building an SMEÕs substitute for close and direct monitoring
international presence, as well as the interna- (Carpenter et al., 2003). Therefore, we believe
tional knowledge-based resources required to increased equity stakes encourage TMTs of
build an effective international position, are SMEs to invest in risky, value-creating resources
likely to be perceived as risky endeavors by and capabilities, such as knowledge-based re-
SMEsÕ TMT. These perceptions of risk would sources for internationalization. This view is
seriously limit TMT membersÕ enthusiasm for consistent with the findings of Sanders and
such investments and activities (Mitchell et al., Carpenter (1998), who found that long-term
1992). Encouraging the TMT to invest in such stock ownership by executives was positively
risky pursuits is a fundamental issue in agency associated with large firm globalization. This
theory research. Effective governance mecha- suggests that greater alignment between the
nisms, including ownership structures, can interests of the firm and its TMT owners will
encourage managers to invest in risk-taking increase SMEsÕ executivesÕ support of invest-
activities (Beatty and Zajac, 1994). In particular, ments in creating the knowledge-based resources
agency theorists observe that increasing the necessary for internationalization. Therefore:
equity stakes of TMT members can better align
their interests with those of other shareholders,
which we propose will increase SMEsÕ invest- H1 TMT ownership will be positively associated
ments in their knowledge-based resources for with SMEÕs international knowledge-based
internationalization. resources.
Although these issues have been widely dis-
cussed with reference to large firms with diffuse
ownership, they might be even more important 2.2. VC ownership and knowledge-based resources
for SMEs where ownership is typically less
dispersed and managers are more likely to own VCs usually specialize in funding risky new
large blocks of equity. Thus, managers of ventures. Carpenter et al. (2003) note that VCs
SMEs may have a strong financial interest, as are often described as risk-seeking, active
well as a direct and crucial influence on the participants in monitoring and establishing
firmÕs actions. Managers of larger firms, how- strategies for the companies in their portfolios.
ever, might have less equity and less influence VCs also have significant industry-specific
as more individuals might be involved in firm experience. They use their collective wealth of
decisions (Wiklund, 1998). We believe these knowledge and contacts to invest in high-risk
differences in agency effects make SMEs an firms and help these firms obtain the various
interesting arena in which to examine the resources needed to gain competitive advanta-
questions raised by this study and are widely ges. By sharing their knowledge and providing
studied in large firm settings. access to resources previously unavailable to
The Effects of Ownership and Governance on SMEs 313

SMEs, VCs can create value for the firms in both TMT and VC ownership and the invest-
which they invest (MacMillan et al., 1989; ment in international knowledge-based re-
Sapienza, 1992), By offering these context- sources, such that the aforementioned positive
specific skills to SMEs in their portfolios, VCs relationships will be stronger as the percentage of
can lower the real and perceived risk of many of outside directors on the board increases.
the options that these firms might pursue, and Outsiders are defined as directors who are
provide them with information on how best to neither members of the firmÕs TMT nor relatives
compete (Perry, 1988; Sapienza, 1992). In a of (or consultants to) the team. These directors
more practical sense, VCs also provide financial are presumed to be independent from senior
resources that can aid their investments in value- managers. Some outside directors might own
creating knowledge-based resources, including shares in the firms they monitor (Zahra et al.,
those associated with future internationalization 2000). Further, given that they do not have an
moves. Given their high tolerance for risk, VCs employment relationship with the firm, some
may seek and invest in SMEs they believe offer expect outsiders to act independently from
opportunities for significant returns. VCs, managers (Zahra and Pearce, 1989). While these
therefore, will value investments that build directors are typically chosen by insiders, they
SMEsÕ knowledge-based resources as these usually can employ several tactics to monitor,
investments usually match the risk-return ratio discipline, and even encourage investments in
that VCs prefer. Further, because of their knowledge-based resources for internationali-
experience in international settings, VCs can zation.
help SMEs avoid the mistakes often associated The independence of outside directors has
with internationalization while providing been widely debated in the literature (Johnson
their expert judgement of the value of SMEsÕ et al., 1996). Some argue that non-executive
investments in international knowledge-based directors might not be truly independent, as a
resources (Van de Berghe and Levrau, 2003). powerful CEO can appoint outside directors
VCs understand that international knowledge- sympathetic to their cause and thus wield their
based resources are intangible and cannot be considerable influence over the board (Wade
easily copied by the SMEÕs rivals, further et al., 1990). On this issue, however, we agree
protecting the companyÕs international market with Beatty and Zajac (1994) who posit that
positions. As such, VCs are likely to encourage even if one disputes the independence of outside
SME managers to invest in building these directors and views them as coopted by top
resources. Therefore: management, a heavy presence of insider direc-
tors on the board still suggests a condition of
H2 VC ownership will be positively associated weak monitoring.
with SMEÕs international knowledge-based The monitoring role of outside directors
resources. centers on observing and disciplining senior
managers to reduce agency problems and pro-
tect shareholdersÕ interests (Keasey and Wright,
2.3. The moderating role of outsiders on the boards
1993). As such, this role emphasizes the legal
of directors
authority of the board. Outside directors, how-
The monitoring and enterprise roles that outside ever, can perform a value-creating role besides
directors play highlight their potential contri- being merely a corporate watchdog (Short et al.,
butions to SMEs. Both roles suggest that having 1998; Van Gils, 2005). The role of directors
a high percentage of outside directors can influ- might be especially important in SMEs, where
ence organizational decision-making, including boards are likely to wield greater power and
those concerned with investing in knowledge- influence over firmsÕ actions and have a more
based resources for international expansion. direct relationship with TMT members (Bennett
Consistent with these two roles, we propose that and Robson 2004). The enterprise role that
the percentage of outside directors on an SMEÕs outsiders play complements the KBV of the
board will moderate the relationships between firms, suggesting that these directors often bring
314 Shaker A. Zahra et al.

unique experiences, talents and skills not well VC ownership and SMEsÕ international knowl-
represented on the TMT. Consequently, whe- edge-based resources, as discussed below.
ther or not outsiders truly operate independently
of managerial influence is not the only test.
2.4. TMT ownership and outsiders on boards
What matters most, especially for resource
of directors
constrained SMEs, is that outside directors can
draw on their personal experiences and their TMT ownership can align the interests of se-
knowledge gained in a competitive business nior executives and SMEsÕ other shareholders
context (Daily and Dalton, 1992; McNulty and (Zahra et al., 2000). This alignment can in-
Pettigrew, 1999). Having outside directors on crease investments in knowledge resources,
the board can give SMEs specialized skills and including R&D, specialized personnel, and
expertise (Gedajlovic et al. 2004; Sirmon and training for international operations, as we
Hitt 2003; Zahra and Filatotchev, 2004; Van suggested in Hypothesis 1. Outside directors
Gils, 2005). These directors might innovate or can further improve this alignment by helping
integrate different perspectives into the strategic managers to invest in and craft effective strat-
decision-making processes at SMEs. Reseach egies for developing and accumulating inter-
shows that the very introduction of external national knowledge-based resources. These
board members creates positive tensions and directors might also set milestones for firmsÕ
instills new ideas and ways of doing business, international expansion and tie SMEsÕ
especially with SMEs (Johannisson and Huse, achievements to the pay and rewards granted
2000). Outside directors are often leaders and to managers. Outside directors, who are usually
senior executives in their own companies and are knowledgeable about the industry and compe-
likely to recognize the importance of interna- tition, can give managers advice about how to
tional knowledge-based resources and therefore best assemble and develop key resources. These
encourage SMEsÕ investments in building them directors might suggest effective strategies to
(Zahra et al., 2000). recruit other managers, employees or consul-
Consistent with agency theory, outside tants who have expert knowledge. For instance,
directors can also curb SME managersÕ oppor- Le, Walters and Kroll (2006) suggest that
tunism and prompt them to sustain long-term outside directors indirectly influenced R&D
investments in knowledge creating activities spending through governance activities, such as
(Zahra, 1996), such as international knowledge- appointing the appropriate executives or
based resources. The knowledge perspective on developing effective internal governance mech-
governance would also indicate that these anisms. Outside directors might also help the
directors can augment the TMTÕs knowledge TMT develop effective strategies that leverage
about international operations. Being senior their SMEsÕ products, technologies or brands.
executives in their own firms, outside directors These intangible assets can influence decisions
usually have to tackle various challenges of about the SMEsÕ international operations
internationalization. Some outsiders might have (Dunning, 2000). These factors are likely to
worked abroad and managed international strengthen the effect of TMT ownership on the
operations, giving them first-hand knowledge of SMEsÕ international knowledge-based re-
the risks and rewards of these activities. These sources. Therefore:
experiences can enrich the boardÕs deliberations
about international operations and the risks H3 The ratio of external board members will
associated with SMEsÕ internationalization. moderate the relationship between TMT
Whether grounded in legal authority (the ownership and international knowledge-
‘‘monitoring perspective’’) or the KBV (the based resources such that the positive effect
‘‘enterprise perspective’’), we expect the influ- of TMT ownership on international knowl-
ence of outside directors will moderate the edge-based resources will be stronger as the
positive relationships between both TMT and ratio of external board members increases.
The Effects of Ownership and Governance on SMEs 315

2.5. VC ownership and outside directors 3. Method

on the board
Data Collection and Sample. Data on US-based
Hypothesis 2 also suggests that higher VC SMEsÕ internationalization, ownership and
ownership is likely to be positively associated governance are difficult to obtain from second-
with SMEsÕ investments in building knowledge- ary sources. SMEs are also often reluctant to
based resources for internationalization. We share information about their international
expect this relationship to be stronger when the operations. Therefore, we used a survey
board has a higher ratio of outside directors. methodology to collect data from SMEs in
Officials representing VCs often serve on boards manufacturing industries, complementing the
as outside directors, bringing new knowledge responses with information gathered from mul-
into the SMEsÕ deliberations about internation- tiple secondary sources. We targeted SMEs,
alization. Some VCs may have been involved in companies that have 500 or fewer full-time
managing international operations and, there- employees (Lu and Beamish, 2001; US Interna-
fore, may appreciate their importance for SMEsÕ tional Trade Administration, 2005), regardless
growth and profitability. VCs also follow of the firmÕs age. Our foucs on manufacturing
industry trends and are likely to appreciate the industries is justified by Westhead et al. (2001),
need for strengthening SMEsÕ market positions who found differences in service and manufac-
internationally as a means of harvesting their turing firmsÕ internationalization strategies. We
innovations. This understanding of industry identified these companies using published state
trends and international operations could be business directories that yielded 7260 company
useful in guiding SMEsÕ strategies. Some re- names. We randomly selected 100 companies
search shows that the board monitoring and from the list to pretest the survey, reducing the
enterprising functions that VCs perform appear potential target population to 7160 companies.
to intensify as the need dictates (Daily et al., Cost constraints forced us to select every third
2002). Having external, strong, independent, company name on the list for our survey (2350
and enterprising outside directors who serve on names).
the boards can help VCs as they seek to influ- Two mailings, conducted three months apart,
ence SMEsÕ investments in building knowledge- were used for data collection. A letter addressed
based resources for internationalization. Outside to the companyÕs highest ranking executive
directors can also share their expertise with VCs accompanied each questionnaire, requesting
about the types of knowledge-based resources participation in the research and providing
needed for internationalization. Outside direc- assurances of confidentiality. Sixty-one surveys
tors and VCs might also coordinate their work were returned undeliverable. We received 384
and jointly assist SME managers in this process. completed responses from SMEs representing 23
This knowledge sharing and coordination can different industries (defined by 4-digits SIC), for a
help accentuate the positive effect of VC own- 16.7% response rate. This rate compares favor-
ership on the accumulation of knowledge-based ably with those reported in prior studies using
resources for SMEsÕ internationalization. similar populations (e.g., Westhead et al., 2001).
Therefore: Response Bias. We compared the responses of
SMEs that replied to the first and second rounds
H4 The ratio of external board members will of the mail survey to ensure the representation
moderate the relationship between VC of the sample to its population. T-tests revealed
ownership and international knowledge- significant differences in four percent of the
based resources such that the positive effect items, indicating the absence of systematic
of VC ownership on international knowl- bias. We cross-tabulated responding and non-
edge-based resources will be stronger as the responding companies by location (state) and
ratio of external board members increases. industry type but the results were statistically
316 Shaker A. Zahra et al.

insignificant. We also tested for differences skills or experience or relative influence

between respondents and non-respondents in (see, Wright and Robbie, 1998) of any of the
employees and age (years); differences were not VCs in the sample. Data to test the reliability of
significant. the survey data were available from Venture
Source Bias. A common problem in SME Economics for 73 firms in the sample. These
research is gaining access to more than one figures were correlated positively and signifi-
respondent in order to minimize response bias. cantly with the survey data (r = 0.76,
Consequently, we canvassed secondary sources P < 0.01).
to gain as much information about the SMEsÕ
operations and history as possible. Information
about company age, size and industry type came 3.1.2. Outside directors on SMEsÕ boards
from different secondary sources. Information Outside director ratio was calculated by dividing
about international operations was available in the number of outside directors by the total
secondary sources for about 47% of the com- number of directors on the board, following the
panies, and we used this information to vali- literature (e.g., George et al., 2005; Zahra et al.,
date the information obtained in the survey 2000). We used data from the survey but vali-
data. Further, we sent a second survey to the dated this measure using information from the
‘‘Manager of International Operations’’ of the SMEsÕ websites, newsletters and publications
384 SMEs that responded to the original survey. (r = 0.87, n = 102, P < 0.001).
We received 92 replies, which we used to vali-
date the responses from the SMEsÕ first 3.1.3. Knowledge-based resources devoted
respondent, as reported below. to internationalization
The analyses captured SMEsÕ knowledge-based
resources dedicated to internationalization using
3.1. Measures
14 survey items that we derived from the liter-
3.1.1. SME ownership ature (e.g., Adler and Kwon, 2002; Dyer and
The measures covered TMT and VC ownership, Singh, 1998; Nahapiet and Ghoshal, 1998;
using data collected from the survey. In the case Oviatt and McDougall, 1997; Westhead et al.,
of TMT ownership, these responses were vali- 2001). We asked respondents to indicate the
dated by a second senior executive. extent to which their companies emphasized
each item, using a five-point Likert-type
(a) TMT ownership was measured as a percent of response format (5 = High emphasis vs. 1 =
an SMEÕs equity held by the group over the Limited or No Emphasis). An orthogonal factor
3-year period preceding the survey, follow- analysis with varimax rotation produced three
ing past research (George et al., 2005). We significant factors that contained 12 of the 14
defined the TMT to include individuals who original items. The first factor included five
held positions of vice presidents or general items (eigenvalue = 2.94; 26.31% of the vari-
managers or higher. They included founders ance captured; a = 0.72) and emphasized
and other senior managers who are influential having specialized human capital, with unique
in the SMEsÕ decision-making process (Daily skills that could be leveraged in internationali-
et al., 2002). zation activities. We labeled this factor ‘‘human
(b) VC ownership was measured as the average capital assets.’’ The second factor, labeled
percent of SME equity held by VCs in each of proprietary assets, included four items and rep-
the 3 years preceding the survey, following past resented the SMEsÕ possession of products,
research (George et al., 2005). This averaging brands, patents and other forms of intellectual
method homogenized the influence of VCs, resources (eigenvalue = 2.20; 19.68% of vari-
regardless of which investment round each ance explained; a = 0.70). The third factor
entered. This approach was appropriate be- (eigenvalue = 1.76; 15.75% of variance ex-
cause we could not make any attributions plained; a = 0.70) captured SMEsÕ investments
about the investment goals, international in knowledge-based activities that created
The Effects of Ownership and Governance on SMEs 317

international alliances and referrals. We named 1999). Proprietary assets enable SMEs to differ-
this factor ‘‘relational assets.’’ Together, the entiate themselves from competitors, spot
three factors explained 61.73% of the variance. opportunities and develop and introduce new
Factor analysis results appear in Table I. products, particularly when firms compete
Next, we established the content and predic- across national boarders. Indeed, there is a po-
tive validity of the knowledge-resource based sitive relationship between proprietary assets
measures. Focusing on content-related validity, and international geographic scope (Delios and
the three factors revealed by factor analysis Beamish, 1999). Internationalization studies
(Table I) are consistent with the KBV, especially have increasingly recognized the importance of
in the context of SMEsÕ internationalization. relational assets (Yli-Renko et al., 2001) for
Human capital assets are widely recognized as gaining access to new product or process tech-
key to SMEsÕ internationalization (Brush and nologies, entering new foreign markets (Acs and
Chaganti, 1999). Research has shown, for Preston, 1997), and overcoming resource limi-
example, that TMT international experience tations as firms expand internationally. These
encourages SMEs to export (Westhead et al., observations support the content validity of the
2001) and that the recruitment and training international knowledge-based resources.
of skilled employees are prerequisites for suc- We tested the predictive validity of our
ceeding in international markets (Bell et al., measures of international knowledge-based
2003). Delios and Beamish (1999) explain that resources by linking them to two dimensions of
‘‘proprietary assets can be knowledge that is SMEsÕ internationalization: scope and intensity.
unique to the firm; it might assume the form of We measured international scope by the number
specific trademark or brand built over time; or it of countries in which the SME conducted
might stem from a firm distinctive ability in operations, using survey data, following the
product R&D.’’ Having proprietary knowledge literature (e.g., Calof, 1993; Sriram and Manu,
does not guarantee innovation in the market- 1995; Zahra et al., 1997). We captured interna-
place, but affects whether a firm can innovate or tional intensity using managersÕ reports of the
respond to the innovation of others (Henderson, percentage of firmsÕ revenues from exporting

Factor analysis of SME knowledge-based resources

Items Factors

1 Human Capital 2 Proprietary 3 Relational

Investing in training employees about international business. 0.85 0.22 -0.21

Hiring highly skilled employees for international operations. 0.78 0.31 0.27
Hiring employees with international business experience. 0.75 -0.25 0.26
Hiring managers with experience in international business. 0.58 0.28 0.29
Assigning employees to analyze business opportunities in 0.5 -0.21 0.28
foreign markets.
Developing new products for foreign markets. 0.25 0.74 0.26
Using patents to gain access to foreign markets. 0.27 0.7 0.17
Using proprietary knowledge to build market share foreign markets. )0.27 0.57 0.21
Focusing R&D activities on foreign operations. 0.19 0.53 0.18
Developing alliances with foreign companies. 0.24 0.31 0.76
Developing business alliances in other countries. 0.3 -0.29 0.72
Using alliances to enter foreign markets. 0.26 0.21 0.63
Eigenvalue 2.94 2.2 1.76
% of variance explained 26.31 19.68 15.74
% of cumulative variance explained 26.31 45.99 61.73
a= 0.72 0.7 0.7
318 Shaker A. Zahra et al.

and all other international activities, following scale. We obtained data on company ROA from
prior research (e.g., Samiee and Walters, 1990; the surveys. Data on industry averages came
Zahra et al., 1997). Both scope and intensity of from Almanac of Business and Industrial Finan-
SMEsÕ internationalization were measured three cial Ratio, online (Troy, 1995–2003).
years following the international knowledge- Company internationalization objectives were
based resource measures. Examining simple measured by two survey items that followed a
correlations indicated that human capital, five-point scale (5 = Very Important vs. 1 =
proprietary and relational assets were positively Not Important at All). We asked respondents to
associated with international scope and intensity indicate ‘‘how important was each of the fol-
(all at P < 0.05 or better). Regression analyses lowing factors in your companyÕs decision to
also showed that the three dimensions of internationalize its operations....’’ The two items
international knowledge-based resources were were: growth in sales and growth in revenue. We
significantly related to scope and intensity (all used average responses in the analysis (r = 0.83,
at P < 0.05 or better). These results supported P < 0.001).
the predictive validity of the measures of inter- TMT international experience captured the
national knowledge-based resources. effect of senior managersÕ knowledge of inter-
national markets. This knowledge could influ-
3.1.4. Control variables ence the analyses of the risks associated with
Our analyses also controlled for several vari- SMEsÕ decisions about the scale and scope of
ables that could influence the relationships international operations. Secondary data on
examined in this paper: this variable were available for only 56 com-
Company age was measured as the number of panies. Therefore, to avoid sample shrinkage,
years an SME has been in existence. We did so we used survey responses to three items. We
because older companies were likely to interna- averaged the scores across these items and used
tionalize their operations (Calof, 1993; Zahra their simple average in the analysis (a = 0.67).
et al., 1997) and develop the expertise necessary When we correlated the survey mean response
to harvest these operations and increase their to secondary data, the correlation was 0.61
revenues. Data came from published trade (n = 56; P < .001), supporting the construct
associationsÕ directories and company websites. validity of the survey measure. Respondents
Company size was measured as the natural log rated the overall experience of their companyÕs
of the number of full-time employees (Lu and TMT on ‘‘experience in managing and leading
Beamish, 2001). We expected larger companies international operations,’’ ‘‘experience in
to be more active in exporting and other inter- working in other countries and cultures,’’ and
national operations (Calof, 1993; US Interna- ‘‘experience in coordinating international
tional Trade Administration, 2005), probably operations.’’ All items followed a five-point
because they have more slack resources. Larger response format (5 = Extensive vs. 1 = Lim-
companies might also have the specialized staff ited).
who explore foreign markets and oversee inter- CEO duality existed when the CEO also
national expansion. Data were obtained from served as board chair (Zahra et al., 2000). In this
the survey, company websites and trade associ- case, decisions on resource allocation and
ationsÕ directories. capability development were likely to become
Relative company performance was measured increasingly concentrated. The concentration of
by dividing its return on assets (ROA) over the executive powers was expected to expedite
preceding three years by the industryÕs ROA decision making, but it could also encourage
during the same period. We reasoned that managerial entrenchment, increase conserva-
companies that performed at or above the tism, and reduce managersÕ incentives to assume
industry level would pursue internationalization the risks of internationalization. SMEs whose
to achieve growth. Companies performing CEOs also served as board chairs were coded 1.
below the industry levels might avoid interna- Data were collected from company websites and
tional expansion or internationalize on a limited the mail survey.
The Effects of Ownership and Governance on SMEs 319

Debt ratio was defined as total debt to total is often necessary (Andersson, 2004). Incre-
equity (Zahra et al., 2000), using survey data. mental internationalization is more common in
We expected the higher the SMEÕs debt ratio, mature or low technology industries.
the fewer the resources it had for building the Industry R&D intensity, data for which was
knowledge-based resources necessary for inter- gathered from Statistical Abstract of the United
nationalization. Data came from Almanac of States (1995–2003), reflected the average R&D
Business and Industrial Financial Ratio, online spending in each SMEÕs primary industry over
(Troy, 1995–2003). the three years preceding the survey. In indus-
Past number of foreign markets (at t)3) served tries where knowledge was important for value
as a control variable because it could influence creation, highly skilled employees, researchers
future foreign revenues and determine the and scientists were likely to be hired to conduct
number of new foreign markets SMEs entered. R&D and other innovative activities.
It was measured by the number of countries in
which the firm had any international operations,
4. Analysis and results
using survey data.
Past revenue from international operations (at Table II presents the means, standard devia-
t)3) was another control variable because higher tions, intercorrelations, and levels of inter-rater
prior revenue might encourage SMEsÕ entry into agreement (where appropriate) for the key
new markets to generate even higher revenues. variables in the study.
Higher foreign revenues may generate the slack We used moderated regression analysis to test
resources to develop knowledge. We measured our hypotheses. Specifically, we used two mod-
this variable by the ratio of revenues from els: base and full. The base model (labeled 1)
foreign markets to overall company revenues, included all the control variables, the two own-
using survey data. ership variables and the ratio of outside direc-
Industry internationalization was also included tors. The full model (labeled 2) included all the
as a control variable that might influence SME variables in the base model plus two interaction
internationalization (Boter and Holmquist, terms that were created by multiplying TMT
1996). We expected those SMEs in industries and VC ownership by the ratio of outside
dominated by international competitors to be directors on the SME board. The independent
more international in their operations. Analyses and control variables were captured over
included the share of industry sales held by three years preceding the dependent variables.
affiliates for foreign companies working in the Table III shows the results.
US (Statistical Abstract of the United States, Results show that the full model (Model 1
1995–2003) as a control variable. We divided plus the two interaction terms) was significant
these companiesÕ annual sales by overall industry under each of the three components of knowl-
sales and then averaged these figures over the edge-based resources (all at P < 0.001). Adding
3-year period preceding the studyÕs dependent the two interaction terms to the base model
variables. raised the R2 by three points (partial F = 8.11,
Industry type served also as a control vari- P < 0.001) in the case of human capital, two
able. We classified firms as competing in high points (partial F = 5.26, P < 0.001) in the
(coded 1) and low (coded 0) technology case of proprietary capital, and one point
industries. In high technology sectors, an early (partial F = 2.47, P < 0.01) in the case of
international presence can enhance SMEsÕ sur- relational capital. Despite the strong correla-
vival and success. In these sectors the high tions among some of the variables presented in
costs of R&D can not be recovered only by Table II, inspection of the Variance Inflation
domestic operations and firms need to seek Factors (VIFs) suggested that multicollineari-
international customers (McDougall and Ovi- ty was not a serious threat. As reported in
att, 1996). In such growing industries, an Table II, variance inflation factors (VIFs) were
opportunity-based internationalization strategy below 6.0.

Intercorrelation Matrix, Means, Standard Deviations and Inter-rater Agreement

Variables 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

01 Human capital assets

02 Proprietary assets 0.27
03 Relational assets )0.12 0.37
04 VC Ownership 0.08 0.17 0.08
05 TMT ownership 0.23 0.32 0.18 0.25
06 Company age 0.10 0.18 0.19 )0.03 0.14
07 Company size 0.08 0.05 0.26 )0.07 )0.11 0.27
08 Relative past ROA 0.17 0.14 0.14 0.08 0.21 0.20 0.11
09 International 0.19 0.21 0.21 0.11 0.19 0.28 0.17 0.05
Objectives (Co)
10 TMT international 0.23 0.15 0.27 0.09 0.23 0.15 0.18 0.09 0.29
11 CEO duality (=1) )0.04 )0.09 0.03 )0.02 0.15 )0.07 )0.09 )0.07 )0.04 )0.09
12 Debt Ratio )0.15 0.12 0.08 0.11 )0.05 0.13 0.16 )0.03 )0.03 0.04 0.07
13 % Past Foreign 0.17 0.18 0.21 )0.04 0.13 0.19 0.14 0.18 0.17 0.15 )0.11 )0.10
Shaker A. Zahra et al.

14 # Past Foreign 0.16 0.15 0.28 )0.06 0.09 0.27 0.23 0.11 0.09 0.13 )0.05 )0.08 0.33
15 Industry 0.09 0.11 0.15 0.07 0.09 0.10 0.07 0.09 0.07 0.20 0.03 0.03 0.22 0.25
16 Industry Type 0.14 0.15 0.03 0.28 0.19 )0.09 )0.08 0.23 0.19 0.16 )0.05 0.29 0.28 0.19 0.31
(Hi Tech =1)
17 Industry R&D 0.23 0.11 0.07 0.15 0.25 )0.07 0.05 0.10 0.12 0.14 )0.03 )0.05 0.21 0.18 0.15 0.44
Mean (X) 0.58 0.48 0.33 6.18 39.09 29.34 67.13 1.43 3.07 2.91 0.73 28.89 15.02 0.26 3.19 0.46
SD 0.39 0.41 0.38 4.19 23.16 21.05 89.39 0.78 1.77 1.81 0.48 30.07 27.05 0.19 4.67 0.71
FIV 2.81 2.09 3.31 3.82 2.09 3.18 2.91 2.55 2.09 3.17 2.95 3.47 5.09 4.81 3.87 1.06
Inter)rater agreement 0.82 0.80 0.69 0.78 0.88 NA NA NA 0.71 0.63 0.88 0.71 0.72 NA 0.81 0.78

For N = 384, simple r has to be 0.11 to be significant at P < 0.05; 0.13 to be significant at P < 0.01; and 0.17 to be significant at P < 0.001.
The Effects of Ownership and Governance on SMEs 321

SME ownership, governance and knowledge-based resources

Variables Human capital Proprietary Relational

1 2 1 2 1 2

Company age 0.11 0.12 0.21* 0.20* 0.18* 0.17*

Company size 0.18* 0.17* 0.16* 0.15* 0.25** 0.23*
Relative past ROA (company) 0.13+ 0.15* 0.11 0.1 0.11 0.08
Internationalization objectives 0.1 0.1 0.13+ 0.13+ 0.15* 0.15*
TMT international experience 0.09 0.07 0.09 0.1 0.19* 0.18*
CEO duality )0.06 )0.05 0.07 0.08 )0.03 )0.02
Debt Ratio )0.15* )0.17* )0.11 )0.12 )0.04 )0.02
# of Foreign markets 0.08 0.09 0.11 0.13 0.09 0.08
Past foreign revenue 0.22* 0.21* 0.21* 0.22* 0.18* 0.17*
Industry internationalization 0.07 0.08 0.03 0.04 0.05 0.03
Industry type 0.17* 0.17* 0.16* 0.17* 0.05 0.02
Industry R&D intensity 0.15* 0.17* 0.14* 0.18* 0.12 0.11
TMT Ownership 0.33*** 0.31*** 0.27** 0.35*** 0.19* 0.18*
VC Ownership 0.18* 0.19* 0.21* 0.24* 0.08 0.07
Outside Directors Ratio 0.1 0.11 0.07 0.05 0.11 0.1
Outside Directors Ratio * TMT Ownership 0.37*** 0.24** 0.23*
Outside Directors Ratio * VC Ownership 0.22* 0.22* 0.16*
Adjusted R2 0.29 0.32 0.28 0.3 0.25 0.26
F 4.03*** 4.51*** 3.87*** 4.21*** 3.17*** 3.99***
D R2 0.03 0.02 0.01
Partial F-Value 8.11*** 5.26*** 2.47**

* P < 0.05; ** P < 0.01; *** P < 0.001.

4.1. Hypotheses 1 & 2 was positively associated with human capital

assets (b = 0.19, P < 0.05) and proprietary as-
The results for H1 and H2 appear in Table III.
sets (b = 0.24, P < 0.05). No significant rela-
All of the regression equations for the base
tionship, however, was detected between VC
models were significant (P < 0.001), explaining
ownership and relational assets.
between 25 and 32% of the variance in the
dependent variables. The full model (numbered
2 in Table III) explained 32% of variance in
4.2. Hypotheses 3 & 4
human capital (F = 4.51, P < 0.001), 30% of
variance in proprietary capital (F = 4.21, H3 and H4 suggested that the ratio of outside
P < 0.001), and 26% of variance in relational directors on the board would moderate the
capital (F = 3.99, P < 0.001). relationships predicted in H1 and H2. Table III
The data in Table III suggested that the ratio also shows the interaction term for outsidersÕ
of outside directors on the board was not ratio * TMT ownership was significant in the
significant in any of the base models. However, three regression equations (b = 0.37, P < 0.001
ownership by TMT was positively associated for human capital assets, b = 0.24, P < 0.01 for
with all three forms of knowledge assets proprietary assets, and b = 0.23, P < 0.05 for
(b = 0.31, P < 0.001 for human capital relational assets). These results supported H3.
assets; b = 0.35, P < 0.001 for proprietary as- The results also supported H4 as the interac-
sets; and b = 0.18, P < 0.05 for relational tion term between VC ownership and the
assets). H1, therefore, was supported. H2, which outside ratio was significant in the case of hu-
proposed that ownership by VCs would be man capital (b = 0.22, P < 0.01), proprietary
positively associated with knowledge-based as- (b = 0.22, P < 0.05), and relational capital
sets, received moderate support. VC ownership (b = 0.16, P < 0.05).
322 Shaker A. Zahra et al.

5. Discussion members feel like they have more control over

their companiesÕ strategic decisions and perfor-
Researchers have examined the determinants of
mance, or have more intimate knowledge of
SMEsÕ internationalization, using multiple per-
their companiesÕ operations. It is also possible
spectives (Brush and Chaganti, 1999; George
that the psychological contract between these
et al., 2005; Westhead et al., 2001; Zahra et al.,
managers and their firms is clearer and more
2000). In this paper, we have sought to integrate
enduring in SMEs. These managers are owners
the traditional agency (monitoring) and knowl-
who can shape the strategic directions of the
edge (enterprising) views of governance to better
companies they lead and see the effects of their
understand the international scale and scope of
own leadership. These factors might contrib-
SMEsÕ activities. In particular, we examined: (a)
ute to the willingness of TMT members of
how ownership and governance variables might
smaller firms to pursue more risky strategic
influence the development of knowledge-based
options. Future studies might consider firm
resources in SMEs and (b) how these resources
size or the TMTÕs perception of control as
are linked to SMEsÕ future international scope
important moderators to the ownership-risk
and revenue. Below, we highlight our key find-
ings and discuss their implications for effective
Our study has also found a positive relation-
managerial practice and theory.
ship between ownership by VCs and SMEsÕ
investments in building two types of knowledge-
based resources: human capital and proprietary
5.1. Ownership and SME knowledge-based
(but not relational), partially supporting H2.
resources (H1 & H2)
These results support previous studies examining
Consistent with H1, the study found that TMT the screening and funding criteria VCs employ to
ownership was strongly and positively associ- choose between multiple investment opportuni-
ated with SMEsÕ investment in building the ties (MacMillan et al., 1985; Tyebjee and Bruno,
knowledge-based resources devoted to interna- 1984; Zutshi et al., 1999). In particular, VCs
tionalization. It appears that as TMT ownership usually emphasize factors related to human
increases, so too does their willingness to invest capital and the experience of a firmÕs managers in
in value creating activities, such as knowledge- making their investment decisions. This focus
based resources for international expansion. appears to extend beyond funding the new ven-
TMT ownership allows them to better appreci- ture. In this study, we find that as VC ownership
ate the strategic importance of these resources increases, SMEsÕ emphasis on building human
for international expansion. Given that devel- capital also increases, consistent with VCsÕ
oping knowledge-based esources is a process preference for valuing entrepreneurial experience
that is fraught with risks and uncertainty, and knowledge. Further, some VCs tend to
ownership makes it somewhat easier for man- specialize in high technology ventures, recog-
agers to devote the resources and energy neces- nizing that companies with superior technologi-
sary to create and later use these resources. As cal assets are most likely to change the rules of
noted earlier, the relationship between TMT the game and gain superior advantages over
ownership and risk-taking has produced diver- existing rivals. As such, we would expect VCs to
gent results in prior empirical studies. Thus, it more readily invest in SMEs that have superior
would appear that the size of the firm matters in human and proprietary assets and be more
this relationship. In this and other studies willing to support future investments in their
examining smaller firms (e.g., Zahra et al., development, a belief supported by the findings
2000), TMT ownership has been positively of our study. These results bolster the knowledge
associated with risk-taking behaviors. Studies perspective on governance by VCs, further
considering larger firms (e.g., Beatty and Zajac, highlighting the pervasive influence of VCs on
1994; Zajac and Westphal, 1994) have found the SMEsÕ resource accumulation and potential
opposite relationship. Perhaps, in SMEs, TMT competence development.
The Effects of Ownership and Governance on SMEs 323

5.2. The moderating effects of outsiders on boards opposed to the conscious and deliberate effort
of directors (H3 & H4) on their part to encourage SMEs to increase
their investments in these resources. Future
We proposed that increases in the ratio of out-
researchers might wish to tease out this rela-
side directors on the board should intensify the
tionship more fully. Do VCs fund SMEs with
relationships posited in H1 and H2. We found
strong international knowledge-based resources,
that the ratio of outside directors significantly
or does their presence encourage SME managers
augments the positive relationships between
to invest more heavily in these risky, value-cre-
TMT members and VCs and SMEsÕ investments
ating resources? Our study only considered a
in all three types of knowledge-based resources.
small subset of ownership and governance
These results supported H3 and H4. Thus,
variables. Future researchers should explore
outside directors serving on SMEsÕ boards ful-
how other classes of owners, such as institu-
fill a valuable enterprise role in the governance
tional owners, and other governance variables
of these firms by offering new perspectives
might affect the relationship proposed in this
and ideas, and focusing managersÕ attention on
study. For instance, the analysis does not con-
the importance of building knowledge-based
trol for the public vs. private status of the firms.
resources. Still, our results appear to contradict
Whether the firms are public or privately listed
some earlier findings using data from larger and
might have an impact on the characteristics of
publicly held corporations (Zahra, 1996). Per-
the governance systems as well as on the firmsÕ
haps, outside directors have greater influence
objectives when internationalizing. Of course,
within SMEs, an issue that should be examined
managers and VCs need to pay attention to
more closely in future studies. Paradoxically,
other resources that go beyond those knowl-
while some of these outside directors are chosen
edge-based resources that we examined in this
by the CEO and other managers, they might
paper but influence internationalization. In
have greater influence than widely believed.
addition, the study is cross-sectional. Therefore,
They can use their direct access to managers to
the data do not allow an examination of the
offer suggestions and exert their influence.
cause-effect relationships among the studyÕs
Owner managers can not dismiss these directorsÕ
variable. Finally, the sample may not represent
ideas or suggestions for improvement without
all sectors of the US economy.
alienating them. In addition, outside directors
might understand SMEsÕ business operations
better, simply because of the scope of these 5.4. Implications for managerial practice
firmsÕ operations and their focused business
The results reinforce the importance of interna-
approaches. Regardless, as the equity stakes
tionalization for SMEsÕ successful performance.
held by TMT members or VCs increase, having
SMEs seeking to do well in an increasingly
more outsiders on the board might make SMEs
competitive and global economy are likely to
more attentive to building long-term, knowl-
benefit from internationalizing their operations.
edge-based resources for internationalization.
One of the key implications of our research is that
These results bolster the ‘‘enterprise’’ role of
internal variables matter a great deal in explain-
outside directors discussed earlier (Keasey and
ing SMEsÕ internationalization. In particular, the
Wright, 1993; Short et al., 1998, 1999).
results highlight the importance of SMEsÕ
knowledge-based resources in spurring interna-
tionalization. These accumulating research find-
5.3. Limitations
ings underscore the importance of managersÕ
The results should be interpreted with caution as attention to building these resources, a process
our analyses do not control for outsidersÕ or that sometimes takes years to pay off. SMEs,
VCsÕ international experience. Also, the positive though sometimes short on financial resources,
relationship identified between VC ownership often have organizational cultures that foster
and international knowledge based-resources patient investments in building knowledge-based
might be the result of VCsÕ selection criteria as resources. Managers, therefore, need to build on
324 Shaker A. Zahra et al.

these cultures as they map out their firmsÕ re- those employed in this study or connect them to
source base with a view on internationalization. other types and measures of knowledge-based
The capabilities that serve the firm well in home resources. It would be useful also to determine if
markets are not always those that help SMEs the relationships observed in this study remain
achieve survival and success in international in tact as researchers explore samples of SMEs
markets. in other industries or from other countries.
The study also emphasizes the importance of Ownership by the firmsÕ TMT emerges as an
having, and making effective use, of outsidersÕ important variable in the context of SMEsÕ
on SMEsÕ boards of directors. As noted earlier, internationalization. Given that the aspirations
having more outsiders on the board can better of these senior executives influence their com-
align the interests of various stakeholders with paniesÕ resource allocation and deployment for
SMEsÕ focus on internationalization by building internationalization, it is important to separate
knowledge-based capabilities. Some SME man- founding members from non-founding members
agers are reluctant to have outsiders on the of the TMT. These managers might have dif-
board because outsiders may not fully under- ferent financial and psychological stakes in the
stand the business or the strategic challenges the companies they run and might value interna-
firm faces. The results indicate that this may not tional expansion differently.
be the case because outside directors might give A worthwhile future research avenue to ex-
attention to the processes by which SMEs plore is the role of family ownership in the
assemble and build their knowledge-based re- development of SMEsÕ knowledge-based re-
sources for internationalization. Outside direc- sources. Many SMEs are family owned and
tors can also play an important enterprising role controlled businesses. Family firms encompass a
on the boards in which they serve, sharing their wide range of organizations that are likely to
skills and experiences with SME managers, differ along several dimensions including own-
especially regarding internationalization. ership and risk propensity. These firms might
Our results also show that SME ownership by vary in the extent of managerial control, their
TMT members has a positive impact on the culture, the number of generations involved in
development of knowledge-based resources. the business, and the number family members
This finding highlights the need to develop and who are involved in the business, among others.
maintain effective executive compensation and Research on the effect of family variables on
reward systems that tie TMT wealth to firm firmsÕ internationalization is limited (Zahra,
performance. Having and maintaining such 2003). Future studies can enrich our under-
systems is probably easier to accomplish in standing of this effect by separating the owner-
SMEs than in larger companies. Ownership ship of family and non-family members of the
often motivates SME managers to invest in their TMT and linking them to the scale and intensity
firmsÕ human and intellectual resources and of SMEsÕ internationalization. Further, the
gives them the incentive to actively search for ‘‘generational’’ effect of family firm ownership
international alliances that enable the firm to on internationalization decisions should also be
expand abroad. explored. Are founders (first generation) more
likely to resist internationalization? Are second
generation managers more likely to find inter-
5.5. Implications for theory and future research
nationalization an attractive means of expansion
A key feature of this study is recognizing both and profitability? What are the unique family
the monitoring and enterprise roles of directors. characteristics that can stimulate or discourage
The results show that both functions are needed internationalization? Finally, our results
to motivate SME managers to focus on the regarding the effect of TMT ownership may
creation and effective deployment of knowledge- depend greatly on whether these managers are
based resources in order to ensure successful family or non-family members. Examining the
internationalization. Future researchers might composition of these teams (based on family
explore more direct measures of these roles than ownership) can add clarity to our findings.
The Effects of Ownership and Governance on SMEs 325

SMEs might have different objectives when ronmental antecedents of internationalization,

they internationalize their operations. Some our study draws attention to several internal
focus on improving their profits by using their factors that can determine SMEsÕ international
knowledge and innovative resources. Others expansion. The results suggest that ownership
might wish to escape the harsh competitive and governance structures can be aligned to
domestic markets in which they compete. Still promote SMEsÕ investments in building knowl-
other SMEs might want to create growth edge-based resources for successful internation-
options. Of course, some SMEs might want to alization. We hope this study encourages other
achieve all these goals at the same time. Con- scholars to build upon our findings to identify
sequently, we have controlled for some of the other salient factors that might contribute to
differences in SMEsÕ internationalization objec- SMEsÕ international expansion in an ever
tives. Future researchers would benefit from growing but challenging marketplace.
examining the effect of these goals on SMEsÕ
decisions regarding the scope and intensity of Acknowledgments
their international operations.
Giving greater attention to the stage of the We appreciate the comments of Morten Huse,
SMEsÕ evolution might further improve our Lorraine M Uhlaner, Mike Wright, R. Isil Ya-
understanding of the current results, especially vuz, and Patricia H. Zahra on earlier drafts of
regarding the roles VCs play in spurring inter- this paper. Data collection was supported by a
nationalization. This influence might depend on grant from the Glavin Center for Global Man-
the funding rounds that SMEs undergo and any agement at Babson College.
concessions they make to obtain the financial
resources they need. How and where VCs
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Internationalization of New and Small Firms: A Re-
Available online at

Journal of Business Venturing 23 (2008) 195 – 220

The effect of international venturing on firm

performance: The moderating influence
of absorptive capacity ☆
Shaker A. Zahra a,1 , James C. Hayton b,⁎
University of Minnesota, Carlson School of Management, 321 19th Ave. South Minneapolis,
MN 55455, United States
SDA Bocconi/Università Bocconi, Istituto di Organizzazione e Sistemi Informativi (IOSI), Viale Isonzo,
23 - 20135 Milano, Italy
Received 1 January 2004; received in revised form 1 January 2006; accepted 1 January 2007


Companies have vigorously pursued opportunities for profitability and growth through
international venturing. Yet, research evidence on the performance benefits of international
venturing activities has been contradictory. Applying an organizational learning framework, we
propose that the expected effects of international venturing activities on financial performance
depend on companies' absorptive capacity. Data from 217 global manufacturing companies show
that absorptive capacity moderates the relationship between international venturing and firms'
profitability and revenue growth. These results urge executives to build internal R&D and innovative
capabilities in order to successfully exploit the new knowledge acquired from foreign markets.
© 2007 Elsevier Inc. All rights reserved.

Keywords: International venturing; Alliances; Acquisitions; Corporate venture capital; Absorptive capacity

We acknowledge, with gratitude, the comments and suggestions of S. Venkataraman (editor), anonymous JBV
and Academy of Management reviewers, and Gerard George in discussions of this research. An earlier version of
this paper was presented at the 2004 Academy of Management. We thank the Glavin Center for Global
Management at Babson College for its financial support and Patricia H. Zahra for her helpful assistance.
⁎ Corresponding author. Tel.: +39 02 5836 2632; fax: +39 02 5836 2634.
E-mail addresses: (S.A. Zahra), (J.C. Hayton).
Tel.: +1 612 625 2442; fax: +1 612 624 2046.

0883-9026/$ - see front matter © 2007 Elsevier Inc. All rights reserved.
196 S.A. Zahra, J.C. Hayton / Journal of Business Venturing 23 (2008) 195–220

1. Executive summary

Over the past decade, entrepreneurship researchers have shown a strong interest in
understanding the patterns and effects of corporate venturing. Venturing focuses on creating
new businesses by exploiting opportunities in domestic and international markets. While
researchers' attention has centered on a firm's domestic operations, more and more
companies have engaged in international venturing. Contradictory findings have been
reported in the literature on the effect of international venturing activities such as
acquisitions, alliances and corporate venture capital (CVC) funds on a firm's financial
This study uses an organizational learning perspective to propose that firms engage in
international venturing activities to gain new knowledge and capabilities that allow them to
successfully exploit new opportunities in foreign markets. The study also argues that
greater benefits could be realized from international venturing through the successful
integration and exploitation of new knowledge and capabilities gained from foreign
markets. Therefore, firms should build a stock of related knowledge within their own
operations. Firms' investments in building the absorptive capacity are expected to
positively influence their ability to obtain the anticipated performance benefits from
international venturing. The study develops and tests six hypotheses:
H1. The strength of the relationship between international acquisitions and a firm's
profitability is positively related to its level of absorptive capacity.
H2. The strength of the relationship between international acquisitions and a firm's
revenue growth is positively related to its level of absorptive capacity.
H3. The strength of the relationship between international alliances and a firm's
profitability is positively related to its level of absorptive capacity.
H4. The strength of the relationship between international alliances and a firm's revenue
growth is positively related to its level of absorptive capacity.
H5. The strength of the relationship between international CVC and a firm's profitability is
positively related to its level of absorptive capacity.
H6. The strength of the relationship between international CVC and a firm's revenue
growth is positively related to its level of absorptive capacity.

Using a mail survey of 217 global manufacturing firms, the six hypotheses were tested
using hierarchical regression modeling. Separate regression analyses were run for return on
equity (ROE) and revenue growth. The results support the hypotheses. There is no
statistically significant relationship between international acquisitions, alliances and CVC
funds on ROE or revenue growth. However, the interaction between a firm's absorptive
capacity and the international venturing variables is significant and is positively related to
ROE and revenue growth. The results are most clear when venturing activities are related to
firms' primary business activities. That is, in the case of related activities, absorptive
capacity consistently positively moderates their influence on both ROE and revenue
growth. However, when the effect of absorptive capacity is considered, there is no
S.A. Zahra, J.C. Hayton / Journal of Business Venturing 23 (2008) 195–220 197

significant association between unrelated acquisitions, or unrelated CVC, and ROE and
revenue growth. This result reflects the importance of relatedness of new knowledge to
existing knowledge stocks.
This study provides an explanation of the previously mixed results concerning firms'
gains from international venturing. These results show the importance of absorptive
capacity for achieving profitability and growth. The study offers an empirical examination
of the association between CVC and firm performance, an issue that has received little
attention to date. Given that investments in CVC are estimated to be several billion dollars a
year, this study documents the potential performance gains from these investments. The
results also indicate that firms seeking to exploit new knowledge and capabilities acquired
through international venturing should develop their absorptive capacity. Firms that build
their stocks of relevant knowledge can assimilate and commercially exploit the knowledge
gained from external sources by continuing to invest heavily in their internal knowledge
development through R&D.
The globalization of businesses has encouraged companies to expand internationally and
revitalize their operations to create new revenue streams. Some companies have incubated
new businesses within their international operations, hoping to develop them into viable
growth markets (Takahashi, 2000). Others have sought growth by entering new markets
that lie outside their existing operations, seeking to improve their financial performance
(Keil, 2002). This paper focuses on the external venturing activities that companies
undertake in their international markets (hereafter “international venturing”). Specifically,
international venturing refers to new business creation through foreign acquisitions,
international alliances, and corporate venture capital (CVC).
Researchers have examined the factors that support international venturing activities
(Zahra and Garvis, 2000). Others have explored the effects of these activities, concluding
that companies' growing emphasis on international venturing does not always improve
organizational performance (e.g., Hastings, 1999; Peek et al., 1999; Serapio and Cascio,
1996). International venturing may give firms new knowledge and skills that can fuel their
innovation and new business creation, but some companies do not have the requisite
absorptive capacity to capture and effectively exploit this knowledge (Hamel, 1991). Cohen
and Levinthal (1990) define absorptive capacity as the firm's ability to import, comprehend
and assimilate the knowledge obtained from external sources (e.g., suppliers and customers
in foreign markets). This capacity enables the firm to import externally created knowledge
and transform it into innovative products and gain a competitive advantage (Zahra and
George, 2002).
Researchers have not documented the implications of absorptive capacity for the
relationship between international venturing and a firm's financial performance. Companies
that compete in foreign markets have to absorb a great deal of information quickly to exploit
new business opportunities in these markets and gain a competitive advantage. This task is
complicated by the fact that the knowledge gained from international markets is often tacit and
socially complex, reflecting the cultures and locales in which it was developed. The ability of
the firm to absorb, internalize and exploit this knowledge can influence the extent to which it
can achieve higher profits or revenue growth from international operations. Therefore, we
propose that a firm's absorptive capacity can moderate the international venturing–organi-
zational performance relationship.
198 S.A. Zahra, J.C. Hayton / Journal of Business Venturing 23 (2008) 195–220

This paper empirically addresses the question: Does the firm's absorptive capacity
moderate the relationship between international venturing and company performance? In
answering this question, the paper makes two contributions to the field. The first is
examining international venturing and its implications for a company's performance.
Venturing is a time consuming and costly process (Block and MacMillan, 1993) and
therefore it is important to evaluate its potential effect on a company's profitability and
growth. Companies that pursue international venturing have to address a myriad of
complex cultural issues, different political environments, and regulatory requirements.
Companies need also to select the most effective modes of entry in order to build their
international presence. These modes of entry have different payback periods, possibly
influencing the firm's performance. Indeed, researchers have reported contradictory results
on the effects of international alliances (e.g., Serapio and Cascio, 1996; Welch, 1992) and
acquisitions (e.g., Hastings, 1999; Li, 1995; Peek et al., 1999) on a company's financial
performance. The effect of CVC on a company's financial performance has not been well
documented in the literature (Chesbrough, 2002). Companies spend billions of dollars a
year on CVC (McNally, 1995) and therefore the implications of these investments for
company performance should be explored. Few empirical studies have investigated this
important issue (Dushnitsky and Lenox, 2002).
The paper's second contribution lies in recognizing absorptive capacity as a moderator
of the relationship between international venturing and a company's financial performance.
Past researchers (e.g., Hastings, 1999; Takahashi, 2000) have overlooked the importance of
a firm's ability to acquire, assimilate and creatively exploit knowledge gained from foreign
markets. By considering the significance of absorptive capacity, we highlight a key
managerial role in harvesting knowledge and other resources, which could influence a
company's financial gains from international venturing.
The next section of the paper develops the concept of international venturing and its
effects on company performance. Building on organizational learning theory (Argyris and
Schön, 1978; Dodgson, 1993; Huber, 1991), the paper develops specific hypotheses about
the moderating effect of absorptive capacity on the relationship between international
venturing and a company's financial performance. The paper then presents an empirical
study that tests these hypotheses. The paper's final section discusses the study's findings
and their implications for practice and future research.

1.1. International venturing, absorptive capacity and company performance

Venkataraman, MacMillan and McGrath (1992:488) define venturing as “the process by

which members of an existing firm bring into existence products and markets which do not
currently exist within the repertoire of the firm.” Venturing could be internal or external.
Internal venturing occurs within the boundaries of a firm's existing businesses (Zahra,
1991), as happens in the formation of joint ventures across the firm's different divisions.
External venturing centers on exploring and exploiting business opportunities outside the
firm's existing boundaries (Keil, 2002); it could be domestic or international. Given the
globalization of business activities and that most prior research has explored internal
venturing (e.g., Burgleman, 1983), this study focuses on international venturing. This focus
is consistent with Dess et al.'s (2003) call for more research on this issue.
S.A. Zahra, J.C. Hayton / Journal of Business Venturing 23 (2008) 195–220 199

Three of the most commonly used approaches to international venturing are acquisitions,
alliances, and CVC (Sathe, 2003). Acquisitions refer to the purchase of other businesses,
whether foreign start-ups or established companies. International alliances are arrangements
between two or more firms from different countries, seeking to share resources and skills in
order to fulfill joint (common) organizational objectives. Alliances include joint ventures,
marketing or product development partnerships, and technology licensing that transcends
national borders. CVC refers to the creation of corporate funds that invest in foreign start-ups
to learn about new opportunities or new technological fields in other countries (Rice et al.,
2000). Companies also use CVC funds to monitor technological developments in and
outside their industries and identify potential foreign alliances or acquisition targets.
Organizational learning theorists (Dodgson, 1993; Huber, 1991; Lyles and Salk, 1996)
suggest that international venturing can enhance the learning of new skills and capabilities
that significantly improve a firm's ability to innovate, take risks and develop new revenue
streams. Learning refers to the firm's ability to acquire new knowledge that it can use in its
operations (Huber, 1991). According to organizational learning theory, international
venturing exposes the firm to new environments that have different systems of organization,
inducing firms to learn the best practices in foreign markets (Dess et al., 2003). The diversity
of foreign cultures, consumer groups, and political systems associated with international
venturing can also broaden the firm's search for new knowledge (March, 1991). Countries
also differ in their systems of innovation (Nelson, 1993) and those companies that venture
across international borders might benefit from their exposure to these diverse systems. While
learning is a slow process, it frequently challenges and changes the firm's view of the industry
and competition. It also enables the firm to conceive new ideas, systems, processes, and
products (Henderson and Cockburn, 1994), possibly improving its profitability and growth.
International venturing also enhances a firm's ability to exploit its existing capabilities
and resources while exploring new growth options. Exploitation centers on using the firm's
existing knowledge, capabilities and resources in current and new foreign markets (Audia
et al., 2000). However, excessive focus on the exploitation of existing capabilities can lead
to organizational myopia (Audia et al., 2000; March, 1991) and stagnation. International
venturing reduces this risk by promoting exploration activities. CVC, foreign acquisitions
and international alliances allow the firm to identify emerging technological, marketing,
and competitive trends in foreign markets. This can stimulate innovation and enhance the
variety of the firm's strategic options (Beinhocker, 1999).
The above discussion suggests that simply engaging in international venturing does not
guarantee superior performance. Much depends on the firm's ability to identify fruitful
ways to exploit its skills and capabilities and absorb new knowledge from its foreign
markets. To some extent, this ability rests with the firm's absorptive capacity (Zahra and
George, 2002). In turn, gains through absorptive capacity depend on the relatedness of a
firm's existing knowledge base to its external knowledge (Lane and Lubatkin, 1998).
Without some relatedness, the firm may find it hard to integrate external knowledge into its
existing knowledge base, especially that which is acquired through foreign acquisitions.

1.1.1. Foreign acquisitions

Companies have long used international acquisitions to broaden their business definition
by entering new markets. Acquisitions enable the firm to rapidly enter foreign markets,
200 S.A. Zahra, J.C. Hayton / Journal of Business Venturing 23 (2008) 195–220

overcome barriers to entry (Vermeulen and Barkema, 2001), acquire new skills, knowledge,
resources and technological capabilities (Ahuja and Katila, 2001), and gain access to the
knowledge derived from unique locational advantages (Makino and Delios, 1996). Frequent
interactions between the parent firm and its foreign acquisitions expedite the transfer of tacit
knowledge (Lane and Lubatkin, 1998), stimulating radical innovation that fosters growth.
Still, companies that venture through cross-border acquisitions do not always improve
their financial performance (Vermeulen and Barkema, 2001). This may happen because the
integration of acquired firms is time-consuming (Jemison and Sitkin, 1986) and can disrupt
the operations of both acquiring and acquired companies (Ahuja and Katila, 2001).
Technological knowledge is also usually grounded in national cultures and traditions,
inhibiting the transfer of this knowledge. Thus, organizational learning plays a key role in
the success of foreign acquisitions.
An important variable that can determine the payoff from foreign acquisitions is the
complementarity of firms' knowledge bases. Learning crystallizes when the new
information encourages the organization to reexamine its assumptions, combine the new
knowledge with existing knowledge, or modify its procedures and practices (Zahra et al.,
2000). Greater opportunities to acquire, understand and assimilate new knowledge exist
when foreign acquisitions complement rather than substitute their existing knowledge
(Hoskisson and Busenitz, 2001). If the recipient firm has the requisite absorptive capacity, it
can quickly assimilate and later exploit the knowledge gained from its international
acquisitions. This can facilitate new product and process developments that improve
profitability and growth (Block and MacMillan, 1993). Consequently, the acquiring firms
that have high absorptive capacity are more likely to benefit from their foreign acquisitions
in gaining superior profits and higher rates of growth. Therefore:
Hypothesis 1. The strength of the relationship between international acquisitions and a
firm's profitability is positively related to its level of absorptive capacity.
Hypothesis 2. The strength of the relationship between international acquisitions and a
firm's revenue growth is positively related to its level of absorptive capacity.

1.1.2. International alliances

Companies have also used international alliances to enter foreign markets, learn about
new industries, and acquire new knowledge from foreign partners. Learning is a major
objective for the formation of international alliances (Hamel, 1991; Makino and Delios,
1996). International alliances enable the firm to learn from its foreign partners' experiences,
systems, and managerial practices (Lyles and Salk, 1996). These alliances also give the firm
access to new knowledge, shortening its learning cycle and expediting its response to the
needs and expectations of its customers. Alliances also connect the firm to foreign companies
in their business fields or other industries. These links facilitate the acquisition of knowledge
that differs from a firm's existing knowledge base. According to organizational learning
theory, the infusion of such different and diverse knowledge into the firm's operations can
enhance and expedite a company's learning process, improving its profitability and growth.
Despite the potential value of international alliances, they may not stimulate the
acquiring firms' learning. Foreign partners' unwillingness to share the information might
contribute to this problem. Even when partners share their expertise, the recipient company
S.A. Zahra, J.C. Hayton / Journal of Business Venturing 23 (2008) 195–220 201

might not have the absorptive capacity required to assimilate and exploit the knowledge it
gains from international alliances (Hamel, 1991; Lyles and Salk, 1996). Conversely, the
higher the absorptive capacity, the stronger the relationship between the firm's use of
international alliances and performance. Therefore:
Hypothesis 3. The strength of the relationship between international alliances and a firm's
profitability is positively related to the level of its absorptive capacity.
Hypothesis 4. The strength of the relationship between international alliances and a firm's
revenue growth is positively related to the level of its absorptive capacity.

1.1.3. Corporate Venture Capital (CVC)

Companies have also used CVC to promote international venturing (Dushnitsky and
Lenox, 2002; McNally, 1995). Intel, Merck, Cisco, Dell, Lucent Technologies, Eli Lilly,
and Millennium Pharmaceuticals are among the companies that have used this approach
(Chesbrough, 2002). Some CVC efforts focus on finding synergy between existing
operations and start-ups, aiming to increase sales and improve their profit margins
(Gompers and Lerner, 1999; Takahashi, 2000). Established corporations can stimulate
innovation and new business creation by using the same strategies that venture capitalists
employ to fuel the growth of new ventures (Hamel, 1999). For example, Intel uses its CVC
program to nurture the development and growth of new businesses outside its core business
(Takahashi, 2000). Nokia uses CVC to monitor worldwide technological developments in a
wide range of fields that could complement or even replace its existing businesses.
A company's ability to gain the benefits associated with CVC hinges on the synergies
that exist between its operations and the foreign start-up businesses in which it invests
(Gompers and Lerner, 1999). When foreign start-ups are related to existing businesses, the
firm's ability to comprehend, assimilate and exploit the knowledge gained from foreign
start-ups increases (Chesbrough, 2002). When the firm's absorptive capacity is high, the
company can extend its existing skills or build new ones. Thus, the higher the firm's
absorptive capacity, the stronger the relationship between international CVC activities and a
company's performance. Therefore:
Hypothesis 5. The strength of the relationship between CVC and a firm's profitability is
positively related to the level of its absorptive capacity.
Hypothesis 6. The strength of the relationship between CVC and a firm's revenue growth
is positively related to the level of its absorptive capacity.

2. Method

2.1. Sample

To test the study's hypotheses, we collected data from the Industry Week 1000 (1998)
global manufacturing companies. The list included only publicly traded manufacturing
companies from 36 countries, allowing us to collect data from multiple sources about their
size, industry conditions, and financial performance. Information about global operations
and financial performance are often hard to find for non-traded companies, but the Industry
202 S.A. Zahra, J.C. Hayton / Journal of Business Venturing 23 (2008) 195–220

Week 1000 annual lists (2000, 2001, 2002, 2003) enabled us to track this population and
determine the effect of their international venturing on financial performance.
The Industry Week list included only manufacturing companies—covering 22 major
industry sectors. Given the significant differences that exists between service and
manufacturing companies that appear on other global lists such as Business Week (1998–
2002) Global 1000, we sought to avoid making difficult judgment calls about the
differences between these populations. Manufacturing is one of the most important sources
of global competitive advantage (Chakravarty, 2005). Yet, manufacturing bases have
shifted around the globe, intensifying international venturing.
Companies appearing on the Industry Week 1000 were ranked based on their revenues in
international markets; they were chosen by an independent accounting firm. In selecting
companies on the list, the accounting firm emphasized the following (a) manufacturing
companies that generated a majority of their business in a manufacturing industry; (b) firms
that generated less than 50% of their revenues from manufacturing, but more revenue from
manufacturing than the lowest-revenue-producing companies on this year's list, and (c) the
list also included computer software firms whose primary business was the manufacture of
software programs. The list also included oil and gas companies that obtained at least 50%
of their revenues from the refining of oil and gas products. Finally, the list included
companies which had at least 50% of their revenues from the manufacture of mined
materials (Industry Week, 1999–2003).
Companies in the sample were established in their industries, averaging 29.7 (SD = 31)
years in age. On average, firms employed 39,823 (SD = 43,398) people and had an average
return on equity (ROE) of 5.1 (SD = 8.29) percent. The average company in the sample
achieved 3.6 (SD= 4) percent growth in their revenues over the three-year period examined.
Data came from secondary and primary sources (mail survey). Initially, mail
questionnaires were sent to the CEO and the company's most senior executive responsible
for international operations. Names of these executives came from Business Week, Fortune,
Industry Week, Financial World, corporate websites and corporate publications (e.g., annual
reviews). Two rounds of mailings were sent out, resulting in 217 responses from the CEO or
highest executives, for a response rate of 21.7%. We also received 231 responses from senior
executives responsible for international operations, for a response rate of 23.1%. Given that
senior executives have busy schedules and receive numerous requests to provide data, these
response rates compare well with those reported in previous research (e.g., Zahra, 1991).
Two responses (one from the CEO/President or similarly highly-placed executive and the
other from the international or global business executive) were received from 143
companies, allowing us to examine inter-rater reliability by comparing the data we received
from the two respondents. To do so, we examined the simple correlations between the
respondents on the items used in the study, obtaining an average simple correlation of .64.
Given that CEOs and other executives focus on different but overlapping business activities
and differ in their ability to recall different transactions conducted, this moderate but
significant correlation coefficient provided support of inter-rater agreement on the measures.

2.1.1. Testing for response bias

We also examined response bias. Initially, we used multivariate analysis of variance
(MANOVA) to compare responding companies and non-responding companies in their
S.A. Zahra, J.C. Hayton / Journal of Business Venturing 23 (2008) 195–220 203

assets (US million), sales, size (overall number of employees), ROE, and revenue growth.
We found no significant differences between the two groups on any of these measures or
overall ( p N .05). We also used the X2 test to determine if there was a significant association
between industry type and response status (responded vs. did not respond) and the results
were also not significant ( p N .05). Second, we grouped respondents into three waves:
(1) those who responded within the first three weeks, (2) those who responded in the next
three weeks, and (3) those who responded in the seventh week or later. We compared these
groups based on their assets, sales, employees, ROE, and revenue growth. There were no
significant differences ( p N .05). Finally, we compared the three waves of respondents on
their replies to the questionnaires and found significant differences ( p b .05 or better) only
in 3% of the items. Overall, these different tests indicated that there was no response bias.

2.2. Measures

We used the data received from the 217 CEOs/Presidents to construct the study's various
measures. We chose the data from CEOs who were better positioned than other managers to
know their companies' overall operations. Given the complexity of the various business
operations of the companies studied, busy schedules and faulty recollection might limit the
validity of data obtained from these managers. To address these concerns, we collected data
from various secondary sources to establish the validity of the survey-based measures, as
reported below.

2.2.1. International venturing

Twenty-two survey items captured a company's focus on international venturing. Items
followed a five-point Likert-type scale (1 = strongly disagree vs. 5 = strongly agree). In each
case, we measured related and unrelated international venturing activities separately using
the multiple items shown in the Appendix. In each case, we added the scores across items
and then used the simple means in the analyses. Items for all international venturing
measures appear in the Appendix. As reported in the Appendix, we captured related and
unrelated international acquisitions using three items each. Both measures had acceptable
Cronbach coefficient α's (related α = .71 and unrelated α = .73). We measured related
(α = .73) and unrelated (α = .70) international alliances using four items each; both measures
were reliable. We measured related (r = .70) and unrelated (r = .68) international CVC using
two items each.
Using survey measures to capture international venturing has its shortcomings.
Therefore, we validated the results using the multi-item international venturing index by
asking respondents “how many joint ventures or alliances in foreign markets (markets
outside your home country has your company) completed over the past three years?” Only
70% of the respondents provided this data, which we used to validate the scale based
measures described in this section. The correlation was high and significant (r = .76,
p b .001), validating the survey-based measures. To further establish the robustness of the
results, we used the data that companies provided on their international alliances to test the
hypotheses. We applied the same procedures with the survey-based measures. The results
utilizing the interval measures were somewhat stronger in magnitude but consistent in
direction with those found employing the survey-based measures.
204 S.A. Zahra, J.C. Hayton / Journal of Business Venturing 23 (2008) 195–220

We also validated the international venturing measures by collecting secondary data on

international acquisitions, alliances and CVC by companies in the sample. Lexis.Nexis, a
leading and comprehensive computerized database, provided data for international
acquisitions (n = 83 firms) and international alliances (n = 74 firms). We searched for
announcements made in the press by (or about) each responding company in the database
focusing on the following terms: “international acquisition,” “international and acquisi-
tion,” “foreign acquisitions,” “foreign and acquisitions,” “international alliances,”
“international and alliances,” “international joint ventures,” “alliances and foreign
companies,” “alliances in foreign countries,” “joint ventures with foreign companies,”
and “joint ventures in foreign countries.” As just noted, we used Lexis.Nexis to locate
corporate and press releases about companies, following the literature (e.g., Pennings and
Harianto, 1992; Steensma and Corley, 2000, 2001; Zahra et al., 2000).
Once relevant announcements were identified about each company, three MBA students
reviewed them to ensure consistency with the study's theory and constructs. Given that
some announcements referred to multiple transactions, we counted each transaction only
once. For each company, all announcements for a given transaction type (e.g., international
alliance) were summed over the three-year period. The resulting figures were significantly
correlated with the survey data: international acquisition (r = .71, p b .001) and alliance
(r = .62, p b .001). Data on CVC funds came from Venture Economics (1999–2003) and
these figures were positively associated with the survey-based measure (n = 89 firms;
r = .74, p b .001).

2.2.2. Absorptive capacity

Researchers have utilized different measures to capture a firm's absorptive capacity
(Zahra and George, 2002). Prior measures included the number of scientists and engineers
working for the company or represented on its top management teams and the number of
patents the firm obtained as a consequence of its R&D investments. However, the most
popular measure of absorptive capacity is R&D spending (Cohen and Levinthal, 1990),
which usually provides the foundation for knowledge creation and subsequent exploitation
(Brown, 1991; Cohen and Levinthal, 1990). Therefore, we used a firm's R&D spending as
a proxy for absorptive capacity.
Where possible, we collected data from multiple secondary sources and then compared
the R&D investment figures for accuracy. Data on R&D spending came from corporate
annual reviews, and web sites, Technology Review (2000, 2002, 2003, 2004), and Business
Week (1998–2003). Also, for US companies, we reviewed articles published between 1998
and 2001 in Fortune, Forbes, Wall Street Journal and R&D announcements made in trade
press and appeared in Lexis.Nexis. Data for European companies were gathered from the
National Science and Technology Board (2003), The American Institute for Physics, web
pages (2003); Mergent's Industry Review (Mergent Online); and OECD, online (2001,
2003). We also used Canadian Research Expenditures (2004), Dutch Research &
Development Presidency Website (2005), Science & Technology Indicators for APEC
Economies (2004), Trends in R&D—European Union (2003), UNESCO (1995–2003), the
U.S. Statistical Abstract (1995–2003), and Velho (2004). Data for Latin American and
several European companies also came from Hill (2000). Data for Australian companies
came from Benchmarking Australia's investment in R&D, online (2002).
S.A. Zahra, J.C. Hayton / Journal of Business Venturing 23 (2008) 195–220 205

To establish the robustness of the results based on R&D spending, we reanalyzed the
data employing the number of patents granted to companies by the US Patent office. Data
were available for 151 of the 271 companies. Though different in magnitude, the results
were significant and in the same direction as those derived from R&D spending, further
reinforcing Cohen and Levinthal's (1990) position that R&D is the foundation of a
company's absorptive capacity.

2.2.3. Company performance: profits and growth

Two measures captured a company's performance in this study. The first was the three-
year average ROE, a widely used measure of profitability (Zahra, 1991). The second was the
average year-to-year change in a company's overall revenue (measured in US$ millions).
Data for the two measures came from Business Week (1995–2003), Fortune (1995–2003),
Japan Company Handbook (2000–2003), Industry Week (1995–2003), and Standard &
Poor's (2004). We employed two measures of a company's performance because
international venturing might influence profitability and revenue growth differently.

2.3. Control variables

The analyses also controlled for several company-related variables (age, size, slack
resources, and liquidity). We controlled also for country and industry effects, as explained

2.3.1. Company age

Analyses controlled for a company's age because older companies might be reluctant to
pursue international venturing. Inertia and sunk costs in ongoing operations might inhibit
these companies' ability to explore innovative ventures outside their boundaries (Zahra,
1991). However, older companies might use international venturing to revitalize their
operations and incubate new ventures. Older firms also have relationships with companies
in and outside their industries, promoting international venturing. Given these potentially
contradictory effects of company age on international venturing, we controlled for this
variable in the analyses. Age was measured by the number of years a firm has been in
existence using information gathered from annual reports and corporate websites, Business
Week (1995–2003), Industry Week (1995–2003), Fortune (1998–2003), Japan Company
Handbook (2000–2003), and Standard & Poor's (2000–2004).

2.3.2. Company size

Larger companies usually have the slack resources for international venturing. Size also
gives these firms the market power to preempt competitors' entry and reap higher than
normal rates of performance. Conversely, some larger organizations are bureaucratic and
therefore slow to adapt to change through international venturing activities (Block and
MacMillan, 1993; Hastings, 1999). Given these divergent scenarios, we controlled for the
effect of company size, measured by the log of the firm's employees (Hoskisson et al.,
2002). Data came from Business Week, Industry Week (1995–2003), Business Week
(1995–2003), Fortune (1995–2003), Technology Review (2000, 2002, 2003, 2004) R&D
Scorecard lists, and company annual reports.
206 S.A. Zahra, J.C. Hayton / Journal of Business Venturing 23 (2008) 195–220

2.3.3. Slack resources

Analyses also controlled for the existence of slack resources by including the firm's
current ratio, measured by its current assets to current liabilities (Zahra, 1991). Companies'
slack resources support its innovative and entrepreneurial activities (Tan and Peng, 2003),
such as international venturing. We gathered information for this variable from multiple
sources that included Almanac of Business and Industrial Financial Ratios, online (Troy,
1995–2003); Encyclopedia of Global Industries (2003), Japan Company Handbook (2000–
2003), Roderck Seeman's Japan Financial Statements (2005), and Thomson Research

2.3.4. Liquidity
We controlled also for a firm's liquidity ratio, defined by its total debt to total assets
(Hoskisson et al., 2002). Highly leveraged companies may not have the resources (or
even discretion) to pursue international venturing (Zahra, 1991). Further, potential
foreign alliance and acquisition partners may not want relationships with these firms.
Data came from Almanac of Business and Industrial Financial Ratio, online (Troy,
1995–2003); ISI Emerging Markets, online (2004), Japan Company Handbook (2000–
2003), Roderck Seeman Japan Financial Statements, online (2005), and Thomson
Research (2004).

2.3.5. Innovativeness of country of origin

Countries differ in their commitment to risk taking, venturing, alliance formation,
innovation, and R&D spending (Hayton et al., 2002). These differences might influence
the strategic choices companies make about R&D investments, the study's potential
moderator. Given that the companies represented 36 countries, we controlled for country
effects by including the national three-year average R&D spending. Data came from
Canadian Research Expenditures (2004), CSIRO International: Country Science Briefs,
Korea, online (2004), Department of Trade and Industry, UK, online (2002); the
Economist Intelligence Unit (sections on country reports, profiles, finance, and
commerce), ISI Emerging Markets, online (2004), Statistical Abstract of the US (1995–
2003), Thomson Research (2004), UNESCO (1995–2003), and World Bank Group World
Development Indicators, online (2004–2005). Countries in which companies were
headquartered were also listed in Business Week Global 1000 (1999, 2001, 2003), Fortune
Global 500 (2000), Industry Week (1995–2003), and Wall Street Journal's World Business

2.3.6. Industry-related controls

Analyses also controlled for three sets of industry related variables: industry type, past
industry performance, and technological opportunities, as follows. Industry type. Companies in different industries face different competitive

challenges, causing them to use different approaches to international venturing (Zahra,
1991). The payoff from international venturing might vary also by industry type. Industry
Week (1999) listed the primary industry in which each firm competed. Industry classifications
were cross-checked using information from the Fortune Global 500 (2000–2003) and
S.A. Zahra, J.C. Hayton / Journal of Business Venturing 23 (2008) 195–220 207

Business Week Global 1000 lists (1999, 2001, 2003). To control for industry type, companies
were assigned to one of four groups based on their major industry: consumer non-durable
goods, consumer durable goods, producer goods and capital goods industries. Three dummy
codes were entered in the analysis, with the capital goods industries serving as the reference
group. Past industry performance. Industries that reward risk taking might encourage
international venturing. Consequently, we controlled for this possibility using industry-
wide ROE over the preceding three years. Data on this variable came from multiple sources
that included Almanac of Business and Industrial Financial Ratios, online (Troy, 1995–
2003), Business Week (1995–2003), Dun and Bradstreet (1995–2003), Fortune (1995–
2003), Fortune Global 500 (2000–2003), ISI Emerging Markets, online (2004), Industry
Week (2000–2003), Japan Company Handbook (2000–2003), Standard & Poor's (2004),
Encyclopedia of Global Industries (2003), Roderck Seeman's Japan Financial Statements
(2005), and Thomson Research (2004). Industry-wide technological opportunities. Analyses also controlled for industry-

wide technological opportunities, defined as perceived opportunities for innovation. When
such opportunities were abundant, companies were expected to encourage R&D and
innovation. Commonly used measures of technological opportunities included industry-
wide R&D spending and patent counts. We used patent counts to avoid potential
multicolinearity with the study's suspected moderator (absorptive capacity). We obtained
the data from Almanac of Business and Industrial Financial Ratios, online (Troy, 1995–
2003), National Science Foundation, online (1995–2004), South African Science Council,
online (2004), Statistical Abstract of the United States (1995–2003), and Technology
Review (2000, 2002, 2003, 2004).

3. Analysis

Table 1 presents the means and standard deviations for the study's variables. It also
displays the intercorrelations among the variables. Table 1 shows that the three measures of
international venturing were relatively independent, with simple correlations ranging from
− .21 to .34. Table 1 further shows that average national R&D spending was also
moderately associated with absorptive capacity (r = .15, b.05).
To test the hypotheses, we ran separate hierarchical regression analyses for ROE and
revenue growth. The analyses tested three models. First, in model 1, company
performance was regressed on the study's control variables. Second, in model 2, we
added the six international venturing variables to the control variables already in
model 1. Third, in model 3, interaction terms were added to the variables already in
model 2. Interaction terms were created by multiplying R&D spending (the “absorptive
capacity” measure) by each of the study's six international venturing measures. To
ensure accurate results, separate analyses were run for each of six dimensions of
international venturing. Finally, we tested for improvements made in the explanatory
powers between successive steps, applying the procedure suggested by Cohen and
Cohen (1975).
Table 1
Means, standard deviations and intercorrelations among the study's variables (N = 217)

S.A. Zahra, J.C. Hayton / Journal of Business Venturing 23 (2008) 195–220

Variables X SD 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
1 Company age 29.71 31.03
2 Company size (log employees) 5.11 8.29 .29
3 Liquidity 2.19 1.56 .15 .29
4 Current ratio 1.16 1.89 .09 .09 .23
5 Consumer non-durable industry .31 .21 −.16 .09 .10 .21
6 Consumer durables industry .28 .19 .14 07 .12 − .09 − .19
7 Producer goods industry .21 .15 −.09 .13 − .15 .07 .13 .23
8 Industry Past ROE 4.87 6.01 .14 .09 .12 .15 .14 .13 .11
9 Industry technological 3.04 2.09 .12 .16 .11 .17 .28 .09 − .05 .23
opportunities (logged)
10 Country of origin (logged) 2.93 3.71 .16 .19 .20 .22 .27 − .09 .17 .18 .13
11 Related international 2.94 1.05 −.08 .33 .15 .20 .17 − .08 − .09 .11 .09 .07
12 Unrelated international 3.04 .88 −.11 .25 .13 − .06 .10 − .09 − .06 .12 − .05 .05 .25
13 Related international alliances 3.45 .97 .21 .13 .04 .09 − .21 − .11 .09 − .09 .12 .20 .21 − .07
14 Unrelated International 2.67 1.23 .17 .15 .07 .03 .08 − .13 .09 .05 − .07 − .04 − .09 − .04 .10
15 Related international CVC 3.07 1.09 .27 .23 − .08 .14 − .05 .16 − .13 − .07 .13 .12 .04 .05 .06 .09
16 Unrelated international CVC 2.23 1.07 .34 .27 − .04 − .09 .07 .12 .− 18 − .05 − .09 .10 − .13 .06 − .09 .05 .18
17 Absorptive capacity 2.05 3.14 .09 .11 .13 .10 .09 .14 − .12 .19 .20 .15 .16 .05 .05 .12 −.05 .03
18 ROE (logged) 5.11 8.29 .12 .17 .18 .15 .09 − .17 .16 .31 .17 .14 .10 − .04 .07 − .03 .02 .06 .21
19 Revenue growth 3.61 4.03 .13 − .11 .19 .14 − .07 .12 .03 .25 .15 .07 .09 − .03 .08 − .06 .05 .08 .15 .25
Simple correlations have to be at least .13 to be significant at p b .05.
S.A. Zahra, J.C. Hayton / Journal of Business Venturing 23 (2008) 195–220 209

4. Results

4.1. Results for Return on Equity (ROE)

Table 2 presents the results of moderated regression analysis for ROE. Model 1 regressed
ROE on the control variables and was significant ( p b . 001), explaining 19% of the variance.

Table 2
Moderated regression results for Return on Equity (ROE)
Variables 1 2 3.1 3.2 3.3 3.4 3.5 3.6
Intercept .45 .73 .59 .51 .57 .62 .69 .50
Company age − .13⁎ − .13⁎ − .14⁎ − .17⁎ −.15⁎ −.18⁎ − .17⁎ − .11@
Company size − .07 − .05 − .09 − .08 −.08 −.04 − .06 − .08
Liquidity − .15⁎ − .14⁎ − .11@ − .16⁎ −.12@ −.20⁎ − .20⁎ − .12@
Current ratio .20⁎ .20⁎ .24⁎ .22⁎ .17⁎ .15⁎ .19⁎ .15⁎
Consumer non-durable − .04 − .04 − .07 − .03 −.03 −.03 − .08 − .07
Consumer durables .02 .05 .09 .03 .07 .09 .06 .05
Producer goods .07 .01 .01 .06 .00 .07 .07 .03
Industry past performance .43⁎⁎⁎ .41⁎⁎⁎ .37⁎⁎⁎ .31⁎⁎ .40⁎⁎⁎ .25⁎⁎ .32⁎⁎ .37⁎⁎⁎
Industry technological .29⁎⁎⁎ .25⁎⁎ .24⁎ .28⁎⁎ .35⁎⁎ .33⁎⁎ .30⁎⁎ .37⁎⁎⁎
Country of origin .13⁎ .16⁎ .19⁎ .18⁎ .17⁎ .15⁎ .13⁎ .19⁎
Related international .09 .06 .08 .05 .08 .08 .06
Unrelated international .06 .06 .08 .08 .07 .02 .05
Related international .08 .05 .07 .09 .08 .03 .07
Unrelated international .10 .10 .07 .04 .05 .02 .04
Related international CVC .05 .05 .05 .08 .06 .09 .07
Unrelated international .09 .07 .06 .07 .07 .07 .01
Absorptive capacity (AC) .23⁎ .21⁎ .25⁎⁎ .28⁎⁎ .27⁎⁎ .23⁎ .18⁎
AC⁎ related international .26⁎⁎
AC⁎ unrelated international .28⁎⁎
AC⁎ related international .32⁎⁎
AC⁎ unrelated international .35⁎⁎
AC⁎ related international .31⁎⁎
AC⁎ unrelated .13
international CVC
Adjusted R2 .19 .31 .34 .31 .34 .35 .32 .31
F-value 4.91⁎⁎⁎ 7.38⁎⁎⁎ 9.05⁎⁎⁎ 7.05⁎⁎⁎ 9.13⁎⁎⁎ 9.41⁎⁎⁎ 8.89⁎⁎⁎ 7.89⁎⁎⁎
Change in R2 .03 0 .03 .04 .01 0
F-value for change in R2 9.09⁎⁎⁎ 9.09⁎⁎⁎ 10.47⁎⁎⁎ 3.51⁎⁎⁎
@p b .10; ⁎p b .05; ⁎⁎p b .01; ⁎⁎⁎p b .001.
210 S.A. Zahra, J.C. Hayton / Journal of Business Venturing 23 (2008) 195–220

Company age and liquidity had negative and significant coefficients ( p b .05). The current
ratio ( p b .05), past industry ROE ( p b .001), industry technological opportunities ( p b .001),
and country of origin ( p b .05) had positive and significant coefficients. Model 2, which
included the control and international venturing variables, was also significant ( p b . 001) and
explained 31% of the variance in ROE. The six international venturing measures were not
significant, but absorptive capacity was positively associated with ROE ( p b .05).
The third step of the analysis (Table 2) tested six moderated regression models (3.1
through 3.6). In the first regression run, the interaction term for related international
acquisitions (i.e., related acquisitions multiplied by R&D spending) was added to the
variables already in model 2. The analysis was significant ( p b .001), explaining 34% of the
variance in ROE. The interaction term was also significant and positive ( p b . 01). The
addition of the related international acquisitions interaction term improved the overall
model's R2 by 3% ( p b .001).
In model 3.2, we repeated the analysis using an unrelated international acquisitions
interaction term. The analysis was also significant ( p b .001), with an R2 of 31%. Though
the interaction term had a positive and significant coefficient ( p b .001), having it in the
equation did not improve the explanatory power of model 2.
In model 3.3, we ran the analysis using the interaction term for related international
alliances. The analysis was also positive and significant ( p b .001) and the interaction term
for related international alliances was also significant ( p b .01). The model explained 34% of
the variance, which was significantly higher than model 2 ( p b .001). In model 3.4, we added
an interaction term for unrelated international alliances. The analysis was significant,
explaining 35% of variance in ROE. The interaction term was positive and significant
( p b .01), adding 4% to the explanatory power of model 2. This improvement was significant
( p b .001).
In model 3.5, we introduced an interaction term for related international CVC. The
analysis was significant, explaining 32% of variance in ROE. The interaction term was
positive and significant ( p b .01), adding 1% to the explanatory power of model 2. This
improvement was also significant ( p b .05). Finally, model 3.6 included an interaction term
for unrelated international CVC, which was positive but insignificant. The explanatory
power of model 3.6 did not improve above and beyond that of model 2.

4.2. Results for revenue growth

Table 3 presents the results of the moderated regression analysis using a company's
three-year average revenue growth as the dependent variable. Analyses followed the same
three steps used with ROE. In model 1, we entered the control variables. The model was
significant ( p b .001), explaining 16% of the variance. The current ratio, competing in
producer goods industry, past industry performance, and industry technological
opportunities were positively and significantly associated with revenue growth ( p b .05
or better). Liquidity had a negative but significant coefficient ( p b .05).
Model 2 added the six international venturing variables, and the measure of absorptive
capacity to the variables already in model 1. Model 2 was significant ( p b .001), explaining
an additional 9% of variance. However, none of the six international venturing measures
was significant. Absorptive capacity was positively related to revenue growth ( p b .05).
S.A. Zahra, J.C. Hayton / Journal of Business Venturing 23 (2008) 195–220 211

Table 3
Moderated regression results for revenue growth
Variables 1 2 3.1 3.2 3.3 3.4 3.5 3.6
Intercept .65 .84 .91 .78 .67 .63 .73 .59
Company age − .08 −.09 − .10 − .11 − .11 − .10 − .07 − .06
Company size .07 .09 .10 .11 .09 .06 .07 .05
Liquidity − .12⁎ −.10 − .05 − .06 − .08 − .13⁎ − .06 − .01
Current ratio .15⁎ .14⁎ .17⁎ .20⁎ .17⁎ .19⁎ .18⁎ .22⁎
Consumer non-durable .02 .06 .06 .06 .03 .09 .03 .03
Consumer durables .05 .08 .11@ .12@ .07 .05 .04 .03
Producer goods .15⁎ .17⁎ .18⁎ .14⁎ .09 .05 .13⁎ .11@
Industry Past performance .29⁎⁎ .31⁎⁎ .32⁎⁎ .34⁎⁎ .35⁎⁎ .21⁎ .23⁎ .27⁎⁎
Industry technological .21⁎ .21⁎ .19⁎ .18⁎ .25⁎⁎ .23⁎ .21⁎ .18⁎
Country of origin .07 .11@ .09 .09 .05 .13⁎ .14⁎ .15⁎
Related international .08 .05 .08 .05 .05 .12@ .07
Unrelated international .05 .05 .06 .08 .06 .10 .08
Related international .04 .09 .05 .09 .03 .07 .08
Unrelated international .09 .04 .07 .04 .05 .08 .06
Related international CVC .07 .05 .03 .08 .06 .09 .05
Unrelated international CVC .03 .06 .02 .07 .09 .07 .09
Absorptive capacity (AC) .14⁎ .17⁎ .15⁎ .18⁎ .17⁎ .19⁎ .11
AC⁎ related international .23⁎
AC⁎ unrelated .11
international acquisitions
AC⁎ related .20⁎
international alliances
AC⁎ unrelated .25⁎
international alliances
AC⁎ related international .27⁎
AC⁎ unrelated international .06
Adjusted R2 .16 .25 .28 .25 .26 .28 .27 .25
F-value 3.71⁎⁎⁎ 5.92⁎⁎⁎ 6.56⁎⁎⁎ 6.41⁎⁎⁎ 6.01⁎⁎⁎ 6.41⁎⁎⁎ 6.21⁎⁎⁎ 5.31⁎⁎
ΔR2 .03 0 .01 .03 .02 0
F-value for ΔR2 .7.89⁎⁎⁎ 2.58⁎⁎⁎ 7.89⁎⁎⁎ 5.23⁎⁎⁎
@p b .10; ⁎p b .05; ⁎⁎p b .01; ⁎⁎⁎p b .001.

Table 3 also shows that we tested six moderated regression models (3.1 through 3.6). In
each of these models, a single interaction term was added to the variables included in model
2. In model 3.1, the interaction term for related international acquisitions and absorptive
capacity was significant ( p b .05). Model 3.1 itself was significant ( p b .001), adding 3% to
the variance explained by model 2 ( p b .001). In model 3.2, the interaction term for
unrelated international acquisitions and absorptive capacity was not significant ( p N .05).
212 S.A. Zahra, J.C. Hayton / Journal of Business Venturing 23 (2008) 195–220

Though model 3.2 was significant ( p b .001), it did not explain any additional variance over
and beyond model 2.
Table 3 displays the results for model 3.3, where the interaction term for related
international alliances and absorptive capacity was significant ( p b .05). Model 3.3 was also
significant ( p b .001), explaining an additional percentage point over and beyond model 2
( p b .001). In model 3.4, the interaction term for unrelated international alliances and
absorptive capacity was significant ( p b .05). The overall model was also significant
( p b .001), explaining an additional 3% of variance over and beyond model 2 ( p b .001).
Table 3 also shows that model 3.5 was significant ( p b .001) and the interaction term for
related international CVC with absorptive capacity was significant ( p b .05). Model 3.5
explained an additional 2% in variance in revenue growth above and beyond model 2
( p b .001). Finally, model 3.6 was significant ( p b .001), explaining 25% of the variance in
revenue growth. The interaction term for unrelated international CVC and absorptive
capacity was positive but not significant.

5. Discussion

International venturing through acquisitions, alliances and CVC funds gives firms rapid
access to new markets and knowledge (e.g., Hamel, 1991; Tsang, 2002) that can enhance
financial performance. However, this study was motivated by the observation that
international venturing does not always result in improved organizational performance
(Hastings, 1999; Peek et al., 1999; Vermeulen and Barkema, 2001). Therefore, we proposed
that a firm's absorptive capacity would moderate the association between international
venturing and a firm's profitability and growth. The results show that the association
between international venturing and performance is contingent upon the firm's absorptive
The results support the study's predictions regarding the relationship between a firm's
international venturing and profitability. When examined without potential moderators,
neither related nor unrelated international acquisitions, alliances, and CVC funds were
associated with ROE. This reflects the short-term inefficiencies and costs associated with
each of the various components of international venturing, possibly mitigating any short-
term financial gains from these transactions. Companies may also trade off short-term ROE
and revenue growth for gaining access to knowledge that can create long-term capabilities.
Conversely, consistent with Hypotheses 1, 3, and 5, when absorptive capacity is included in
the analyses, there is a positive and significant association between the interaction terms
(international venturing dimensions and absorptive capacity) and ROE. The results were most
clear for venturing activities that were in the same industry (i.e., related activities), suggesting
that absorptive capacity is an important contingency factor in explaining the association
between international venturing and ROE. These results support organizational learning
theory and our proposition that absorptive capacity may facilitate the flow of knowledge that
enables the firm to upgrade its products and develop new ones, achieving higher short-term
performance (Zahra and George, 2002). The results also support the argument that relatedness
of new knowledge is an important contingency factor that influences the absorption and
subsequent exploitation of that knowledge (Lane and Lubatkin, 1998). Relatedness influenced
the results for both international acquisitions (Hypothesis 1) and international CVC
S.A. Zahra, J.C. Hayton / Journal of Business Venturing 23 (2008) 195–220 213

(Hypothesis 5) such that absorptive capacity facilitates learning from these activities only
when they are in related knowledge domains — operationalized here as the same industry.
When international acquisitions and CVC were conducted in unrelated industries, firms'
absorptive capacity did not influence the relationship between these activities and firm
profitability. In contrast, consistent with Hypothesis 3, absorptive capacity was an important
moderator for both related and unrelated alliances on the impact on profitability.
The study has also explored the association between international venturing and firm
growth, indicated by growth in revenue. Some research reveals that firm growth is enhanced
by venturing activities that offer firms the opportunity to exploit existing capabilities while
building new ones (e.g., Lorenzoni and Lipparini, 1999; Sarkar et al., 2001). We have argued
that the expected positive association between international venturing and revenue growth is
contingent upon a firm's absorptive capacity. The results support this proposition.
Neither related nor unrelated international acquisitions, alliances, and CVC were
significantly associated with revenue growth. However, once the interaction term between
the firm's absorptive capacity and international venturing variables was considered, we
found statistically significant effects. The interactions between absorptive capacity and
related international acquisitions (Hypothesis 2), international alliances (Hypothesis 4), and
international CVC (Hypothesis 6) were positively and significantly associated with
financial performance. These results support prior research (e.g., Lyles and Salk, 1996),
indicating that absorptive capacity should be managed so that a firm can derive the expected
revenue growth from its international venturing activities. However, in the case of unrelated
international venturing activities, we find that absorptive capacity significantly moderates
the association between international alliances and firm growth (Hypothesis 4), but not the
effects of either international acquisitions or international CVC. These results provide
further evidence that absorptive capacity is of greatest importance for related international
venturing activities (Lane and Lubatkin, 1998).
Still, the interactions between absorptive capacity and unrelated international acquisitions
and unrelated international CVC were not significant in predicting firm revenue growth. We
believe two reasons may account for these results. First, unrelated acquisitions require the
absorption of new unrelated knowledge as well as the integration of distinct organizational
systems and structures. Therefore, the time lags involved to achieve new growth may be more
significant than those included in the present study. Second, with respect to international CVC,
these activities may focus on the early, explorative side of organizational learning (e.g.,
Chesbrough, 2002). Managers recognize that CVC connects them to new sources of
knowledge about potential technological change in their industries. Executives understand
that access to this knowledge, though vital, is not sufficient to reap short-term financial gains.
Incoming knowledge should be internalized (i.e., assimilated) and exploited in ways that
strengthen companies' existing competitive positions or enter new business fields. Thus, the
financial payoff from international CVC may be more long term, relative to learning and
growth, than either international acquisitions or alliances. If there is a significant relationship
between unrelated international acquisitions and CVC funds and organizational growth,
uncovering this relationship may require a longer time lag in future studies.
The results indicate absorptive capacity is a capability that specifically supports the
acquisition, assimilation and exploitation of related knowledge (Cohen and Levinthal,
1990; Lane and Lubatkin, 1998). It is therefore not surprising to find that the financial
214 S.A. Zahra, J.C. Hayton / Journal of Business Venturing 23 (2008) 195–220

effects of unrelated international venturing activities are not enhanced by the presence of
absorptive capacity. It is perhaps more surprising to note that absorptive capacity, indicated
by R&D investments, positively influences the performance enhancing effects of inter-
national alliances that are unrelated to a firm's current activities. Perhaps, such investments
help create a more general capacity for learning from external sources, which is realized
most rapidly in the context of international alliances. Therefore, even though it has been
hypothesized that strategic fit (Gompers, 1999) or relatedness (Lane and Lubatkin, 1998)
are important considerations in the process of acquiring and leveraging new knowledge
sources, further research should carefully consider the influence of time lags and determine
how the absorptive capacities of firms influence their progress along technological
trajectories. It appears from the current study that there is a relationship between the notion
of relatedness and the time required for knowledge assimilation and exploitation.
Understanding the impact of these time lags will enrich our understanding of the important
contingency of relatedness of new knowledge to firms' existing knowledge bases.
A further consideration in exploring these findings is in the structural complexity of the
venturing relationship. Each type of venturing activity we examined in this study involves
distinct organizational capabilities that extend beyond absorptive capacity. Successful
unrelated international acquisitions are certainly dependent upon the ability to identify and
assimilate new knowledge, but they also represent organizational challenges that include the
integration of diverse organizational structures and cultures, as well as the rationalization and
integration of product and service mixes. Unrelated international alliances are also complex,
with the potential for knowledge asymmetries, and opportunistic behavior by parties.
However, these may also be relatively simpler relationships to create and exploit as they are
arms–length relationships that are easily dissolved once their goals are accomplished or in the
event of failure. Unrelated international CVC investments are also arms–length relationships,
but also involve the greatest level of uncertainty. They typically involve high levels of asset
specific investments, high levels of asymmetry of knowledge and high levels of performance
ambiguity. It is conceivable that the relative simplicity of unrelated international alliances
allows firms to quickly exploit a generalized capability to learn by investing in building and
upgrading their absorptive capacity. The complex dynamics of acquisitions, the arms–length
relationships involved in CVC, and their greater uncertainty are likely to make the impact of a
firm's absorptive capacity less significant, particularly in the short run.
It is likely that a combination of these three explanations – the relatedness of the new
knowledge, the time lag required for assimilation of knowledge, and the structural
complexity of the international venturing activity – together account for the differences we
observed in results across related and unrelated international venturing activities. These
considerations will likely prove fruitful and valuable areas for future research.

5.1. Managerial implications

One of this study's key findings is that international venturing may not directly influence a
company's short-term performance. Venturing is costly in terms of financial and other resources
such as managerial time and attention (Tsang, 2002). These high costs are probably one reason
for the mixed evidence on the benefits of international venturing (e.g., Peek et al., 1999). This
finding reinforces the importance of patient investments in international venturing activities.
S.A. Zahra, J.C. Hayton / Journal of Business Venturing 23 (2008) 195–220 215

The results also highlight a need for managerial action that builds and harvests a firm's
absorptive capacity. This capacity interacts with various measures of international venturing to
improve a firm's financial performance. A firm should build its R&D capabilities and gain the
knowledge essential for success in international venturing. Without a sufficient stock of related
knowledge, the firm cannot recognize, assimilate, and exploit new knowledge or acquire the
other capabilities to be gained from international operations. This finding indicates that potential
financial gains depend on having the requisite absorptive capacity. Thus, companies cannot
forgo investments in R&D as they expand overseas. Companies may opt to simply adapt and sell
products that have proven to be successful in domestic markets. Other firms may view foreign
alliances and acquisitions as substitutes for their in-house innovation activities. Companies that
do so may gain short-term advantages by exploiting existing innovative capabilities but fail to
reap the long-term financial benefits associated with international venturing.

5.2. Implications for future research

The study also underscores the importance of defining the scope of international
venturing, emphasizing three of its key dimensions. Future researchers need to determine if
there are other dimensions of international venturing that deserve exploration and to
establish the relationships among these dimensions. Further, given that some of the results
are based on survey measures of international venturing, other data sources should be
considered. Even though we presented evidence of reliability and validity earlier,
replications using secondary data should enhance confidence in the results.
In analyzing the role of absorptive capacity, the study has employed the firm's R&D
spending, a popular measure in the literature. Alternative measures of absorptive capacity
can establish the robustness of our results. These measures might include the firm's patent
portfolios or the number of scientists and engineers it employs (Zahra and George, 2002).
One of the study's key propositions is that international venturing induces and enhances
organizational learning (Floyd and Wooldridge, 1999). It would be useful to document the
various types of knowledge a firm might gain from international venturing and the specific
types of knowledge associated with various approaches to international venturing. Learning
is not an automatic outcome of international venturing, and companies have to devote the
resources necessary to build the systems that induce and capture learning. Therefore,
researchers need to explore the managerial systems and processes that enhance learning
through international venturing.
The learning that occurs in international venturing can be explorative or exploitative. In
theory, the payoff from exploitative learning can be more immediate than in explorative
learning. This proposition should be tested empirically in order to document the implications
of learning in international markets on a company's financial performance, both short and
long term. How companies balance explorative and exploitative learning can also influence
a company's financial performance. This issue also deserves attention in future research.

6. Conclusion

International venturing is a popular approach for firms seeking to grow, achieve

profitability and extend their capabilities. Our results show that international venturing is
216 S.A. Zahra, J.C. Hayton / Journal of Business Venturing 23 (2008) 195–220

unlikely to improve short-term profitability and growth unless the firm invests in building
its own absorptive capacity. Firms seeking to gain the financial rewards of international
venturing should be prepared to acquire, assimilate, and creatively exploit new knowledge
from their foreign operations. Firms must invest in improving their knowledge base and
keep it current by building their innovative capabilities through sustained investments in

Appendix A

This appendix presents the survey items used to measures international venturing. As
indicated in the text, all items followed a five-point response format (1 = strongly disagree
vs. 5 = strongly agree, with 3 being a neutral response). We used mean responses to the
items related to each measure in the analyses. Internal consistency score, measured by
Cronbach α, are reported in the text.

A.1. Related international acquisitions

• Acquired many established foreign companies in the same industry.

• Acquired many foreign start ups in the same industry.
• Has been active in acquiring other companies in its major industry.

A.2. Unrelated international acquisitions

• Acquired many established foreign companies in other industries.

• Acquired many foreign start ups in other industry.
• Has been active in acquiring other companies outside its major industry.

A.3. Related international alliances

• Entered many marketing alliances with foreign companies in the same industry.
• Entered many production alliances with foreign companies in the same industry.
• Entered many distribution alliances with foreign companies in the same industry.
• Entered many R&D alliances with foreign companies in the same industry.

A.4. Unrelated international alliances

• Entered many marketing alliances with foreign companies outside its major industry.
• Entered many production alliances with foreign companies outside its major industry.
• Entered many distribution alliances with foreign companies outside its major industry.
• Entered many R&D alliances with foreign companies outside its major industry.

A.5. Related international CVC

• Invested in foreign start up businesses in the same industry.

• Increased its equity holdings in new foreign companies (ventures) in the same industry.
S.A. Zahra, J.C. Hayton / Journal of Business Venturing 23 (2008) 195–220 217

A.6. Unrelated international CVC

• Invested in foreign start up businesses in other industries.

• Increased its equity holdings in new foreign companies (ventures) in other industries.

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