Post-entry survival of developing economy international new ventures: A dynamic capability perspective
Introduction
In this paper, we investigate how developing economy international new ventures (INVs) survive after internationalization. The emergence of INVs that operate and serve internationally has been one of the key subjects of interest across the globe (e.g., Autio, George & Alexy, 2011; Coviello & Munro, 1997; Knight & Cavusgil, 2004; McDougall, Shane & Oviatt, 1994; McDougall et al., 1994; Mudambi & Zahra, 2007; Oviatt & McDougall, 2005).
Surprisingly, however, the impact of the early internationalization of developing economy INVs on their ‘continued’ growth and ‘survival’, and the strategic implications for start-ups are not well documented in the INVs literature (Cavusgil & Knight, 2015; Gerschewski et al., 2015; Mudambi & Zahra, 2007; Sapienza, Autio, George & Zahra, 2006; Zahra, 2005). Recent research on developing economy company internationalization has focused on large emerging multinational enterprises (EMNEs) (Aybar & Ficici, 2009; Contractor et al., 2007; Luo & Tung, 2007; Ramamurti & Singh, 2008).
Also, the majority of INV studies addressing the issues of internationalization deal with why and how INVs have internationalized from their inception, mainly focusing upon the early internationalization period (Autio, Sapienza & Almeida, 2000; Coviello, 2006; Jones & Coviello, 2005; Weerawardena, Mort, Liesch & Knight, 2007; Zhou et al., 2007). Although successful start-up small and medium-sized enterprises (SMEs) play a crucial role in today's global economy, little research has endeavoured to track their evolution over time (Gerschewski et al., 2015, Jones et al., 2011, Knight, 2015, Zahra, 2004). Therefore, gaining a better understanding of the post-entry trajectory of internationalizing companies is important, as INVs from developing countries have not been sufficiently studied in the wider international business and organization literature (Gerschewski et al., 2015; Mudambi & Zahra, 2007). In the literature, it is widely suggested that, by entering into international markets, INVs increase their risk of failure. For instance, the existing literature suggests that the failure rate for such companies is of 40% in the first year and of 90% over 10 years (Timmons, 1990).
Few studies on INVs have investigated their growth and survival after their initial international success (Gabrielsson & Gabrielsson, 2013; Mudambi & Zahra, 2007; Prashantham & Young, 2011; Sapienza et al., 2006; Zahra, 2005). However, the key interests of these studies are rather conceptual and much of this research has been carried out on developed economy INVs. Investigating the post-entry survival of developing economy INVs is critically important because the initiating companies are more subject to liabilities of foreignness, newness, smallness, and social connectedness (Brüderl & Schüssler, 1990; Stinchcombe, 1965; Zaheer & Mosakowski, 1997; Zahra, 2005). The developing economy context is especially important because of the accentuated need for capability development brought about by its adverse external conditions—Pakistan being a case in point. The country has been negatively affected by frequent changes in government, high political instability, lack of domestic finance for SMEs, underdeveloped entrepreneurial ecosystem and lack of policies focusing on SME development. Research on developing country INVs can benefit new international start-ups, as it is important to understand how these companies cope with pronounced domestic resource constraints; an understanding of their post entry trajectories is therefore crucial. Why do some INVs originating in developing economies succeed and survive while others fail? It would appear that not much is known about the factors determining the post-entry survival of these INVs, as they remain an under-explored topic (Gabrielsson & Gabrielsson, 2013; Cavusgil and Knight, 2015Cavusgil & Knight, 2015; Keupp & Gassmann, 2009; Sapienza et al., 2006).
With regard to the above, Sapienza et al. (2006) argued that successfully growing INVs have experienced organizational shocks in their foreign market expansions. The survival of such INVs through those shocks might depend on whether the companies were capable of developing new streams of capabilities and improving their existing ones to overcome the peculiarities of foreign markets (Hashai, 2011; Knight & Cavusgil, 2004). Thus, INV survival may require higher order capabilities (e.g., dynamic ones) which could somewhat differ from those (e.g., ordinary or functional ones) needed for daily base business operations in local markets (Agarwal & Helfat, 2009; Audretsch, 1995; Teece, 2014). Although research on dynamic capabilities is growing, Teece (2007: 1341) comprehensively conceptualized dynamic capabilities as being related to the sensing, seizing, and reconfiguring dimensions: ‘The enterprise will need sensing, seizing, and transformational/reconfiguring capabilities to be simultaneously developed and applied for it to build and maintain competitive advantage’.
In this paper, drawing on Teece, 2007 dynamic capabilities approach from the sensing, seizing, and reconfiguring perspectives, we examine what key capabilities are pivotal for the post-entry survival of developing economy INVs. By doing so, we firmly bring the dynamic capabilities perspective into the understanding of the survival of developing economy companies, as this facet had hitherto been neglected. Our units of analysis are INV software companies from Pakistan. In this way, we respond to calls to investigate INVs from developing economies (Knight, 2015).
Given the lack of prior research on the factors determining the survival of SMEs from developing economy contexts, we use multi-case, inductive methods to investigate seven software INVs originating from Pakistan that have survived and one that did not. By including both surviving and non-surviving companies, we respond to scholarly suggestions to include both instances (e.g., Gerschewski et al., 2015). The approach adopted in this paper is also in line with suggestions for an integrated and more qualitative approach, as recommended by Coviello and McAuley (1999) and Gabrielsson and Gabrielsson (2013). We conducted in-depth interviews with multiple key informants from the software INVs, which were founded prior to 2000, went through the dotcom and financial crises, and, in seven out of eight cases, are continuously growing and operating in the international market.
Our findings suggest that those INVs that have survived the environmental crises have a common set of operational capabilities that feed back to dynamic ones. Firstly, the case companies were increasingly specializing as they internationalized; e.g., by developing focused and specialized products. What is more, the INVs’ development of dynamic capabilities was driven and supported by the individual entrepreneurs/founders’ stable leadership. This indicates that the specific actions taken and decisions made by the entrepreneurs/founders laid the foundations for the INVs’ post-entry survival (Gabrielsson & Gabrielsson, 2013; Knight, 2015; Teece, 2014).
Our study makes important contributions to the international business and entrepreneurship literature by linking a capability-based view of the SMEs to their survival in international markets. It demonstrates the importance and impact of dynamic capabilities in general—and of more specific-capabilities such as sensing, seizing, and transforming—on the post-entry survival of developing economy INVs. Furthermore, it extends the recent research on the role played by individual entrepreneurs in the dynamic capability framework of the developing economy INVs context. Lastly, we not only study survivors but also a non-survivor; by so doing, we provide a more fine- grained view of the role played by dynamic capabilities in the survival of INVs.
Section snippets
INV internationalization
INVs internationalize rapidly into foreign markets by utilizing their key resources and learning capabilities (Autio et al., 2000, McDougall et al., 1994). The previous internationalization process theory explains the risk adverse incremental internationalization of a company as being due to the psychic distance that exists between the foreign markets and the home countries (Johanson & Wiedersheim-Paul, 1975). An internationalizing company experientially learns about overseas markets (Johanson
Research context and methods
The research context is Pakistan’s IT-software industry, which is growing fast, with a global share in the range of $2.8 billion, $1.6 billion of which is generated through global sales (Pakistan Software Export Promotion Board, various reports). Around 700–1000 companies operate in Pakistan’s IT sector; of these, two are listed in the national Karachi Stock Exchange, two in NASDAQ, and one in the Dubai International Financial Exchange. The Pakistani IT industry has been evolving over the years
Findings
The findings suggest that dynamic capabilities (e.g., sensing, seizing, and reconfiguring) and the role played by a stable leadership have been crucial in driving the capability development process and ensuring the ultimate survival of the studied companies. Below, we discuss these findings in detail.
Discussion and conclusion
In a response to the call to fill the gap in the literature and develop our understanding of INV post-entry survival, this study set out to investigate, from a dynamic capability perspective, how INVs cope and survive in international markets. Applying the dynamic capability perspective to INV post-entry survival issues, we studied the behavior of INVs originating from Pakistan. This perspective helps to better understand why and how INVs from developing economies survive in international
Acknowledgements
We would like to thank Pervez Ghauri and two anonymous reviewers for their insightful comments and suggestions during the review process. We are also grateful to Oded Shenkar, Charles Dhanaraj, and the participants of the Academy of International Business 2013 Annual Meeting held in Istanbul, Turkey for their valuable comments on an earlier draft of this paper.
Zaheer Khan is a Reader (Associate Professor) in International Business at Kent Business School, University of Kent, UK. His research focuses on global technology management, with a particular interest in knowledge transfer through FDI to emerging economies. He received his PhD from the University of Birmingham, UK. His work has been published in the Journal of International Business Studies, International Business Review, the Global Strategy Journal, Journal of World Business, Critical
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2023, Journal of International ManagementCitation Excerpt :In this way, KCU supports sensing and responding appropriately to market changes, which is a prerequisite to assimilating and applying the relevant knowledge and creating competitive advantages. The importance of this capability is highlighted by Khan and Lew (2018) who found that knowledge-creation and renewal capabilities play a critical role in the post-entry survival of developing economy INVs. Thus, KCU is a key mediating variable in the PSI-performance relationship as it enables the rapidly internationalizing SMEs to overcome their liabilities of foreignness and newness and maintain their competitive position (Lu and Beamish, 2001; Luo, 2000).
Zaheer Khan is a Reader (Associate Professor) in International Business at Kent Business School, University of Kent, UK. His research focuses on global technology management, with a particular interest in knowledge transfer through FDI to emerging economies. He received his PhD from the University of Birmingham, UK. His work has been published in the Journal of International Business Studies, International Business Review, the Global Strategy Journal, Journal of World Business, Critical Perspectives on International Business, International Marketing Review, Human Relations, R&D Management, Industrial Marketing Management, and Human Resource Management Review, among others.
Yong Kyu Lew is an Associate Professor of International Business at Hankuk University of Foreign Studies, Seoul, Republic of Korea. He completed his PhD at Manchester Business School, UK. His research interests are strategic alliances, institutions and innovation, and knowledge. His recent work has appeared in Journal of International Business Studies, Global Strategy Journal, Long Range Planning, International Business Review,R&D Management, Industry and Innovation, and International Marketing Review, among others.