Elsevier

Industrial Marketing Management

Volume 82, October 2019, Pages 253-264
Industrial Marketing Management

The impact of SME internationalization on innovation: The mediating role of market and entrepreneurial orientation

https://doi.org/10.1016/j.indmarman.2019.01.008Get rights and content

Highlights

  • This is the first study that analyze the link between internationalization and innovation performance through mediators.

  • A theoretical model is developed where MO and EO act as mediating factors between internationalization and innovation performance.

  • The proposed model is tested with a sample of 235 SMEs in the United Arab Emirates.

  • The findings of the study show that the influence of internationalization on innovation is indirect and fully mediated by market and entrepreneurial orientation.

  • This model has been tested in an under researched context which is emerging-market SMEs.

Abstract

In today's highly competitive global environment, even small and medium-sized enterprises (SMEs) need to make product and process innovations in order to outperform the competition and satisfy global customers. Investigating the success factors of innovation performance has become critical for the survival and competitiveness of SMEs. The aim of this study is to explore the impact of the degree of internationalization (DoI) on innovation performance through the mediating factors of market and entrepreneurial orientation in the context of emerging-market SMEs. We tested our model and hypotheses with 235 SMEs in the United Arab Emirates, which is an emerging market. The results obtained from partial least squares estimates indicate that the degree of internationalization positively affects innovation performance and, more importantly, that this relationship is indirect and fully mediated by market and entrepreneurial orientation for SMEs. These results shed light on the mechanism of the effect of DoI on innovation performance in the emerging-market SME context.

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

References (162)

  • L. Cui et al.

    Explicating the relationship of entrepreneurial orientation and firm performance: Underlying mechanisms in the context of an emerging market

    Industrial Marketing Management

    (2018)
  • L. Dai et al.

    Entrepreneurial orientation and international scope: The differential roles of innovativeness, proactiveness, and risk-taking

    Journal of Business Venturing

    (2014)
  • F. Delmar et al.

    Arriving at the high-growth firm

    Journal of Business Venturing

    (2003)
  • F. Eggers et al.

    Traveling into unexplored territory: Radical innovativeness and the role of networking, customers, and technologically turbulent environments

    Industrial Marketing Management

    (2014)
  • R. Frietsch et al.

    There's a new man in town: The paradigm shift in optical technology

    Technovation

    (2006)
  • F. García et al.

    Learning from exporting: The moderating effect of technological capabilities

    International Business Review

    (2012)
  • J. Hagedoorn et al.

    Measuring innovative performance: Is there an advantage in using multiple indicators?

    Research Policy

    (2003)
  • J.F. Hair et al.

    Partial least squares: The better approach to structural equation modeling?

    Long Range Planning

    (2012)
  • C. Hsu et al.

    R&D internationalization and innovation performance

    International Business Review

    (2015)
  • N. Hurtado-Torres et al.

    How does R&D internationalization in multinational firms affect their innovative performance? The moderating role of international collaboration in the energy industry

    International Business Review

    (2018)
  • K. Ibeh et al.

    The network perspective and the internationalization of small and medium sized software firms from Syria

    Industrial Marketing Management

    (2011)
  • K.I.N. Ibeh et al.

    The drop and collect survey among industrial populations: Theory and empirical evidence

    Industrial of Marketing Management

    (2004)
  • M.I. Kafouros

    The impact of the internet on R&D efficiency: Theory and evidence

    Technovation

    (2006)
  • M.I. Kafouros et al.

    The effects of global knowledge reservoirs on the productivity of multinational enterprises: The role of international depth and breadth

    Research Policy

    (2012)
  • M.I. Kafouros et al.

    The role of internationalization in explaining innovation performance

    Technovation

    (2008)
  • A.N. Kiss et al.

    International entrepreneurship research in emerging economies: A critical review and research agenda

    Journal of Business Venturing

    (2012)
  • I. Kujala et al.

    Internationalizing through networks from emerging to developed markets with a case study from Ghana to the U.S.A

    Industrial Marketing Management

    (2018)
  • R. Lee et al.

    Introduction to the special issue on “Innovation in and from Emerging Economies”

    Industrial Marketing Management

    (2015)
  • Y. Lee et al.

    The changing pattern of SME's innovativeness through business model globalization

    Technological Forecasting and Social Change

    (2012)
  • A. Lindgreen et al.

    Past, present, and future business-to-business marketing research

    Industrial Marketing Management

    (2018)
  • J.H. Love et al.

    Learning by exporting: Lessons from high-technology SMEs

    International Business Review

    (2013)
  • J.H. Love et al.

    Exporting and productivity in business services: Evidence from the United States

    International Business Review

    (2009)
  • B. Merrilees et al.

    Marketing capabilities: Antecedents and implications for B2B SME performance

    Industrial Marketing Management

    (2011)
  • S. Agarwal et al.

    Market orientation and performance in service firms: Role of innovation

    Journal of Services Marketing

    (2003)
  • G. Akman et al.

    Innovative capability, innovation strategy and market orientation: An empirical analysis in Turkish software industry

    International Journal of Innovation Management

    (2008)
  • R. Alvarez et al.

    Exposure to foreign markets and plant-level innovation: Evidence from Chile and Mexico

    The Journal of International Trade & Economic Development

    (2004)
  • Anonymous

    What are emerging markets and why are they important?

  • J.S. Armstrong et al.

    Estimating nonresponse bias in mail surveys

    Journal of Marketing Research

    (1977)
  • K. Atuahene-Gima et al.

    An empirical investigation of the effect of market orientation and entrepreneurship orientation alignment on product innovation

    Organization Science

    (2001)
  • R.P. Bagozzi et al.

    On the evaluation of structural equation models

    Journal of the Academy of Marketing Science

    (1988)
  • W.E. Baker et al.

    Market orientation, learning orientation and product innovation: Delving into the organization's black box

    Journal of Market-Focused Management

    (2002)
  • W.E. Baker et al.

    The complementary effects of market orientation and entrepreneurial orientation on profitability in small businesses

    Journal of Small Business Management

    (2009)
  • S. Banerjee et al.

    Indirect learning: How emerging market firms grow in developed markets

    Journal of Marketing

    (2015)
  • B.R. Barringer et al.

    The relationship between corporate entrepreneurship and strategic management

    Strategic Management Journal

    (1999)
  • S. Bhaskaran

    Incremental innovation and business performance: Small and medium-size food enterprises in a concentrated industry environment

    Journal of Small Business Management

    (2006)
  • K. Blind et al.

    Foreign direct investment, imports and innovations in the service industry

    Review of Industrial Organization

    (2004)
  • K. Bollen et al.

    Conventional wisdom on measurement: A structural equation perspective

    Psychological Bulletin

    (1991)
  • K.A. Bollen

    Total, direct, and indirect effects in structural equation models

    Sociological Methodology

    (1987)
  • C. Brush et al.

    The impact of resources on small firm internationalization

    Journal of Small Business Strategy

    (2002)
  • T. Carolina Zonta et al.

    Internationalization and innovation: The case of a born global from Brazil

    Internext: Revista Electrônica De Negócios Internacionais Da ESPM

    (2018)
  • Cited by (0)

    View full text