The impact of SME internationalization on innovation: The mediating role of market and entrepreneurial orientation
Introduction
In an increasingly competitive global environment, small and medium-sized enterprises (SMEs) exert a great impact on the economies of countries due to their large number and the share of the workforce involved in them. Especially in emerging countries, SMEs make up the vast majority of businesses and create most of the jobs. They have a strong influence on the economies of such countries and are the engine of economic growth (Bruque & Moyano, 2007; Peres & Stumpo, 2000). SMEs in the Gulf region form the backbone of the private sector—representing 90% of all commercial activities (Rettab & Azzam, 2011). Moreover, SMEs in the Gulf region accounts for >80% of the overall workforce and 60% of gross domestic product (PWC, 2016). Therefore, enhancing the competitiveness of SMEs in emerging markets is crucial for the economic growth of those markets.
We collected our data from the United Arab Emirates (UAE), one of the most active countries in economic development within the region. In particular, the UAE national economy experienced constant GDP growth rates, which averaged 3.8% from 2002 to 2016. SMEs are key contributors to the UAE's economic and employment growth, which can be attributed to their dynamism and capacity to exploit new opportunities and new knowledge. Furthermore, the UAE economy has been underpinned by wealth derived from the large national oil reserves, which has sustained the strong and growing national economy. This wealth combined with rewarding trading policies, a favorable tax requiem, and loose employment regulations has allowed manufacturing and industrial companies the ease and affordability to purchase capital equipment and hire talent from abroad. Likewise, SMEs have also taken advantage of foreign purchases of consumer and commercial goods to satisfy the growing demand within the country. In the Abu Dhabi Economic Vision 2030, the Abu Dhabi government stipulates that one of their action plans for a more sustainable and diversified economy is to stimulate local innovation development in business enterprises. Thus, promoting innovation among SMEs is seen as the way forward given their greater flexibility and motivation to gain a competitive advantage in international markets (GEM-UAE, 2016). Moreover, SMEs in the UAE have been recognized for their affordability of the latest technology and for outside consultants. Furthermore, the UAE is cited as having entrepreneurial capacity. One of the contributing factors to the UAE's high entrepreneurial capacity rating is its strong international business perspective evidenced by a majority of SMEs having some international customers (GEM-UAE, 2016).
Although SMEs dominate the economy in terms of magnitude and employment, they generate relatively low levels of value-added products/services and exports. One of the reasons for this situation is the lack of innovation in SMEs. While the importance given to innovation increases day by day, only half of SMEs are involved in some sort of innovation (Ozer & Dayan, 2015). The competitive environment that SMEs face today has encouraged them to look for ways to improve their innovativeness and hence competitiveness. Therefore, innovation is becoming an essential requirement for SMEs to compete in local and international markets (Zahra & George, 2002). SMEs that innovate have higher productivity and growth rates and are more profitable than their less innovative counterparts (Geroski, Machin, & Van Reenen, 1993; Roper & Hewitt-Dundas, 1998).
The accelerated globalization of world markets in the past decades has also affected SMEs, which has driven attention to the increasing importance of internationalization for SMEs (Gurău & Ranchhod, 2006). Internationalization is viewed as a “process through which a firm moves from operating solely in its domestic marketplace to international markets” (Javalgi, Griffith, & White, 2003: p. 185). Due to declining barriers to trade and improvements in transportation technologies (Oviatt & McDougall, 1994), SMEs have been expanding to international markets more rapidly (Coviello & Munro, 1997; Young, Hamill, Wheeler, & Davies, 1989). In addition to the market expansion benefits, internationalization may lead to a learning effect. Performing international activities can lead firms to acquire several skills and competencies that may, in turn, make them more innovative. In spite of enjoying these benefits of internationalization, SMEs face great challenges by being exposed to increasing global competition. Different from large multinational enterprises, SMEs often lack the necessary resources and capabilities, which makes their internationalization process more challenging.
Innovation is one major way to stay competitive as it leads to cost reduction and/or product differentiation (O'Dwyer, Gilmore, & Carson, 2009; Rosenbusch, Brinckmann, & Bausch, 2011). Firms that do not make product and service improvements become even more vulnerable to competition at the international level. Internationalization might drive firms to innovate in order to survive and compete effectively in global markets (Selnes & Sallis, 2003). Not every SME that engages in international activities innovates. Therefore, the question to explore is when and how internationalization motivates SMEs to innovate. We believe the relationship between internationalization and innovation is not straightforward but rather complex. However, little effort has been made to test and examine how internationalization fosters or hinders a firm's innovation performance. Among the few studies that have examined this issue (e.g. Chang, Chang, Hsu, & Yang, 2018; Ren, Eisingerich, & Tsai, 2015), there is no consensus about the underlying mechanism of this relationship and direct and/or indirect effects of seeking internationalization on innovation.
The aim of this study is to fill this gap by looking at an understudied area and investigate the relationship between internationalization and innovation performance in the context of emerging-market SMEs. This study contributes to the literature in several important aspects. First, different from the prior literature, where only the direct effect of internationalization on innovation has been studied, we explore the underlying mechanism of this relationship. In particular, we study the mediating effects of market and entrepreneurial orientation between internationalization and innovation performance. We propose that being more internationalized can lead SMEs to become more market and entrepreneurial oriented, which, in turn, makes them more innovative. The link between internationalization and being market and entrepreneurial oriented is the learning effect. If this link is broken by SMEs that do not see the opportunities of internationalization beyond just “selling more units,” innovation outcomes become hard to achieve. Second, most of the existing studies have examined this issue in the context of developed markets (Delmar, Davidsson, & Gartner, 2003; Golovko & Valentini, 2011) and few studies have been conducted about emerging countries (Carolina Zonta & Amal, 2018). Emerging market firms use internationalization as a learning advantage and an opportunity to upgrade innovation capabilities (Guillén & García-Canal, 2009), but the underlying mechanism of how this happens is still unclear (Chittoor, Kale, & Puranam, 2015). Moreover, there has been an increasing attention to the drivers of innovation for SMEs in the Gulf Region (e.g. Pervan, Al-Ansaari, & Xu, 2015). In this regard, this study fills a gap in the literature and responds to the calls for research on SME internationalization in emerging economies at a greater depth (Ibeh & Kasem, 2011; Kiss, Danis & Cavusgil, 2012). With this theoretical contribution, we shed light on the relationship between internationalization and innovation and, to the best of our knowledge, become the first study that investigates market and entrepreneurial orientation as the mediating factors of this link. As a result, this study contributes to the internationalization of business and innovation and SME literatures.
We tested our model and hypotheses with 235 SMEs in the UAE business to business (B2B) market, which is an emerging economy. We selected the UAE because it strongly encourages firms, in particular SMEs, to innovate, as it has been trying hard to transform from oil-based to innovation-based economic growth. We conducted face-to-face surveys with the managers of these SMEs. The results of our study indicate that the degree of internationalization positively affects innovation performance and, more importantly, that this relationship is fully mediated by market and entrepreneurial orientation. Our results support the proposed model and provide new insights into the relationship between internationalization and innovation. We highlight that the impact of internationalization on innovation is indirect and mediated by market and entrepreneurial orientation.
Our paper is structured as follows. First, by providing a theoretical background to the study, we establish the theoretical relationships among internationalization, market orientation, entrepreneurial orientation and innovation performance, followed by our hypotheses. We then introduce the methodology and analytical procedure and report the results of the analyses. Finally, we close by discussing conclusions, highlighting implications for practitioners, and presenting limitations and suggestions for future research.
Section snippets
Innovation in SMEs
Growing globalization, increasing competition, change, and uncertainty within many markets have placed tremendous pressure on firms. Another issue in today's business environment is the shortening of product and service life cycles (Hamel, 2000). Accordingly, the future profits from existing products and services are uncertain and businesses need to continuously explore new products and services to offer. It is widely accepted that regardless of the size of the firm and the country in which
Development of the survey instrument
We used a survey methodology to collect the data and test the proposed hypotheses. The questionnaire was developed based on an extensive literature review. The review considered both empirical and conceptual studies in the fields of international business, innovation management and marketing, and SMEs. The survey instrument comprised 34 items. We adapted all survey items from the existing literature (see Appendix A for the survey items). The survey instruments were pretested with six owners and
First-order measurement model
All the indicators had factor loadings higher than the benchmark level of 0.50 (p < .001), except for the following items: “FSTS” and “IMPORT” in “DoI construct” (loading = 0.34 and loading = 0.24, respectively). Thus, these two items were excluded from further analysis in order to provide support for convergent validity (Bagozzi & Yi, 1988). Convergent validity was also supported with the scores of the average variance extracted (AVE) of all constructs exceeding the benchmark of 0.50 (Fornell
Discussion
Emerging markets have had a growing impact on global trade. China was once known as an emerging market; now it has become the third biggest economy in the world plus the biggest exporter (Anonymous, 2017). During 2000–2010, two-thirds or more of world GDP growth occurred in emerging economies. Emerging markets are located where 85% of the world's population lives and where the potential for continued growth is high because average per-capita incomes are still only a fraction of that in the West
Managerial implications
This study has several implications for managers. Today an increasing number of SMEs are going international in order to access a wider market and escape from the mature domestic market. International environment is challenging and many firms fail to succeed. However, there are also several benefits, other than increasing sales, of internationalization such as enhancing innovation. Our results have certain implications for SME managers in emerging markets for their survival in competitive
Limitations and future research
Our study has several limitations that present opportunities for future research. First, as our sample comprises SMEs in the UAE, future work assessing the impact of internationalization on the innovation performance of SMEs from other emerging countries could provide additional insights. Moreover, our model, which is supported in an emerging market context, can be tested in developed countries. Second, consistent with other studies (e.g. Rauch, Wiklund, Lumpkin, & Frese, 2009), we employed
Conclusion
This research study investigated an understudied phenomenon and proposed a new model that provides a better understanding of the link between internationalization and innovation for emerging-market SMEs. Overall, internationalization has a positive effect on innovation performance. In particular, this study demonstrates that this effect is indirect through MO and EO. Therefore, for internationalized SMEs, MO and EO are two basic pillars of obtaining better innovation performance.
Acknowledgements
This research was supported by UAEU Program for Advanced Research (UPAR)-Grant #31B089
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