ELSEVIER
NEW VENTURE
INTERNATIONALIZATION,
STRATEGIC CHANGE,
AND PERFORMANCE:
A FOLLOW-UP STUDY
PATRICIA PHILLIPS McDOUGALL
Georgia Institute o f Technology
BENJAMIN M. OVIATT
Georgia State University
Although many scholars, business experts, and government agencies enthusiastically advise allfirms, including new and small ventures, to internationalize, such advice does not appear to be based on empirical evidence.
Few researchers have empirically examined the link between new venture
performance and the internationalization of new ventures. At best, the evidence suggests that there is no significant relationship.
We used a sample of 62 U.S. new venture manufacturers in the computer and communications
equipment industries during the late 1980s. These industries were purportedly globalizing and may
have been leading other industries into increased international operations. We found that higher levels
of internationalization (percentage of foreign sales to total venture sales) were associated with higher
relative market share two years later. However, there was no significant direct relationship between
percentage of international sales and subsequent return on investment (ROI). Perhaps international
operations simply cost more than expected. Or perhaps, as MacMillan and Day (1987)found in their
study of corporate ventures over a 4-year time period, increases in market share may be a prelude to
higher ROI as scale benefits translate into higher profitability. However, the 2-year time period of our
study may simply not be long enough for investments in higher market shares to produce improved
profits.
During the 2-year study period, many of the ventures changed their level of internationalization.
Of the 36 ventures who were domestic (no international sales) in the prior study, 10 expanded into
international markets over the 2 years. Of the 26 originally international ventures (international sales
of at least 5%), half increased their percentage of international sales, nine reduced it, and four stayed
the same. Whereas the average change in international sales percentage of the ventures was only 2.9
EXECUTIVE
SUMMARY
Address correspondence to Patricia Phillips McDougall, School of Management, Georgia Institute of Technology, Atlanta, G A 30332-0520.
Journal of Business Venturing 11, 23-40
© 1996 Elsevier Science Inc.
655 Avenue of the Americas, New York. NY 10010
0883-9026/96/$15.00
SSDI 0898-6568(95)00081-I
24
P.P. MCDOUGALLAND B.M. OVIATT
percentage points, the large standard deviation of13. Opercentage points, and the leptokurtic distribution
(9. 2) reflected the dramatic changes made by some of the ventures.
Using subgroup analysis we examined these changes in percentage of international sales in conjunction with changes in strategies and performance. Ventures that had increased international sales,
relative to those that had not, exhibited more positive associations between the degree of strategic
change and performance as measured in terms of both relative market share and ROI. Increased
international sales in technology-based new ventures seems to require simultaneous strategic changes
in order to positively impact venture performance.
This study is a follow-up to McDougall's (1989)finding that technology-based new ventures that
had sales in foreign markets had significantly different strategies than similar ventures that soM their
products only domestically. The current study enriches the previous findings by adding consideration
of (1) changes in degree of internationalization, (2) changes in strategy, and (3) venture performance.
Although we found no performance penalty associated with increasing international sales alone,
indiscriminant advice for new ventures to sell in foreign markets without other supporting strategic
actions is inconsistent with our findings. Internationalization, alone, did not lead to increased profitabili~.
Entrepreneurs of young technology-based firms who are considering internationalization should
take heed of our results. Internationalization of sales does not appear to be a simple matter of applying
established strategies and procedures developed for a domestic arena. Successful internationalization
appears to require changes in the venture's strategy as well.
INTRODUCTION
Many scholars and business experts have been unrestrained in their recommendation that
more firms should be competing in international markets (e.g., Ohmae 1990; Reich 1991).
Government agencies have also enthusiastically encouraged firms, both new and established,
to export as a means to improve profitability. One such government source cites the improvement in overall return on investment (ROI) as a principal reason for exporting, and further
notes, " . . . the costs and risk of exporting can be less than those of selling domestically,
and more important, profits can be higher" (U.S. Department of Commerce 1991, p. vii).
The U.S. Small Business Administration is encouraging small- and medium-sized firms to
export their products to other nations in order to survive, to take advantage of higher growth
rates in other countries, to benefit from exchange rates for the dollar when they are favorable,
and to improve the balance of trade, (Small Business in the American Economy 1988).
However, such advice does not appear to be based on empirical evidence, as few researchers have empirically examined the link between new venture ~ performance and the internationalization of new ventures. Moreover, that link may not be a direct one. With many markets
becoming increasingly international, success would seem to require that new ventures (and
established firms) change their strategies in order to adapt to new global realities. Yet the
authors know of no published studies that have empirically and longitudinally examined the
link between new venture performance, internationalization, and strategic change. Indeed,
strategic change in new ventures is relatively unexplored in any aspect (McCarthy 1992).
The purpose of this study is to fill that void.
This study is a follow-up to McDougall's (1989) study, which compared the strategies
and industry structures of domestic and internationalized new ventures in the computer and
communications equipment industries. In the prior study, ventures were classified as "domestic" if they derived no sales revenue from foreign countries or "international" if sales in
Paralleling prior research (Biggadike 1979; Miller and Camp 1985) a firm was considered a new venture
if it was 8 years old or less.
NEW VENTURE INTERNATIONALIZATION
25
foreign countries comprised 5 % or more of their total sales. Using a discriminant analysis,
the strategy and industry structure profiles of the internationalized new ventures were found
to be significantly different from their domestic counterparts. Venture strategy distinguished
between the domestic and international ventures much more than industry structure did.
Thus, this follow-up study did not consider industry structure further. Venture performance
was not examined at all in the prior study.
Two closely related research questions will be addressed in this follow-up investigation:
Research Question 1: What is the impact of internationalization on new venture
performance?
Research Question 2: As new ventures internationalize, are changes in their
strategies necessary?
IMPACT OF INTERNATIONALIZATION
ESTABLISHED-FIRM P E R F O R M A N C E
ON
Many advantages associated with internationalization are well documented in the international
business literature. However, it is important to note that many of these studies have focused
on large, established multinational enterprises. The potential advantages for such firms include
scale economies (Caves 1971; Hymer 1976), sales stabilization over time (Hirsch and Lev
1971; Rugman 1979), tax rate arbitrage (Lessard 1979), profitable transfers of innovation
from one location to another (Bartlett and Ghoshal 1991), cheaper factors of production
(Porter 1990), and improved operations from facing greater competition (Porter 1990). High
firm growth has also been associated with a relatively high percentage of revenues coming
from foreign sales (Feeser and Willard 1990). Moreover, becoming or increasing a firm's
international presence may even be a requirement for survival in some markets (Ohmae
1990).
Yet internationalizing may be risky. Local firms nearly always enjoy certain advantages
over their foreign competitors, such as greater knowledge of the culture and a superior network
of local business partners. Thus, multinational corporations must have clearly offsetting
competitive advantages to be successful in foreign markets (Buckley and Casson 1976; Dunning 1981, 1988; Hymer 1976).
The empirical evidence concerning the financial benefits of firm internationalization is
mixed. Numerous studies, using a variety of performance measures, have found the performance of multinational enterprises to be superior to that of domestic firms (e.g., Vernon
1971; Dunning 1973; Daniels and Bracker 1989; Grant, Jammine, and Thomas 1988), leading
some scholars to conclude that the bulk of the evidence supports a positive relationship
between firm internationalization and firm performance (Markides and Ittner 1994). On the
other hand, studies have also reported a negative relationship (e.g., Michel and Shaked 1986;
Kumar 1984; Collins 1990), and still others have reported an indeterminate relationship
(e.g., Buhner 1987; Horst 1973). In general, the relationship between internationalization
and performance among established firms is influenced by a complex web of firm strategies
and industry conditions (Mitchell, Shaver, and Yeung 1992, 1993). Even the problems of
internationalizing a small subsidiary can affect an entire corporation (Newbould, Buckley,
and Thurwell 1978).
An additional body of research that has related internationalization and firm performance
is the export management literature. A fairly large body of empirical research on export
26
P.P. MCDOUGALL AND B.M. OVIATT
performance appeared in the decade of the 1980s (Madsen 1987), and many of these studies
used samples of smaller firms. Often these studies included a comparison of the performance
of exporters and nonexporters or of exporters of differing levels of commitment (e.g., Tesar
and Tarleton 1982). A number of these studies focused on marketing issues. For example,
Keng and Jiuan (1989) found that exporters, when compared to nonexporters, emphasized
the selection of distribution channels, marketing research, advertising and sales promotion,
and product packaging. However, the findings relating to export market expansion strategies
have been contradictory (Lee and Yang 1990). Numerous studies of small business have
confirmed their reluctance to export (e.g., Karafakioglu 1986; Tesar and Tarleton 1982;
O'Rourke 1985), have explored various ways that government policies might encourage small
firms to internationalize (e.g., Blackman and Thompson 1987; Rossman 1984), and have
shown that new small exporters report more problems than mature small exporters (Vozikis
and Mescon 1985). Nevertheless, in their review of the export management literature, Aaby
and Slater concluded that "given the quantity of published research on export practice, it is
surprising that so few solid conclusions are available" (1989, p. 23). And as this literature
has paid little attention to firm age, it provides few clues about the effect of internationalization
on new ventures.
IMPACT OF INTERNATIONALIZATION
VENTURE PERFORMANCE
ON NEW
Conventional theory suggests that internationalization occurs reluctantly in stages after a
period of home market growth and maturation (Johanson and Vahlne 1977, 1990). Certainly,
small new ventures would not be international, according to the theory. Some people have
even transformed the stage theory of internationalization into a prescriptive version and
proposed that firms should go international only incrementally (Bartlett and Ghoshal 1991).
Yet there is increasing evidence that the conventional stage theory of firm internationalization provides weak explanatory power for today's new ventures (Brush 1992; Welch and
Loustarinen 1988; Turnbult 1987; McDougall, Shane, and Oviatt 1994). The numbers of
international new ventures, firms that are international from inception, are reportedly increasing (McDougall, Shane, and Oviatt 1994; Oviatt and McDougall 1994). In some industries,
internationalization is soon expected to be a requirement for participation for all firms,
including newly formed ventures (Burrill and Almassy 1993).
Only a few empirical studies have investigated the relationship between internationalization and new venture performance. Brush (1992) found that venture age at the time of
internationalization was not significantly related to either sales growth or employee growth,
two common measures of new venture performance. That result is inconsistent with the
prescriptive version of the stage theory. Tyebjee (1990) found that profitability among high
technology new ventures that sold their products internationally was lower than ventures
that only sold domestically, but the relationship was not statistically significant, and it was
not a focus of his study. Thus, the relationship was not fully explored. Furthermore, both
Brush's (1992) and Tyebjee's (1990) studies were cross-sectional. Perhaps, the true relationship is only revealed longitudinally because the benefits of internationalization are realized
only after the venture's international position is established.
Earlier we explained that the relationship between internationalization and performance
among established firms was complex. Among new ventures, however, the relationship may
be simpler. The reason is that many new ventures that are international seem to be in high
NEW VENTURE INTERNATIONALIZATION
27
technology industries (McDougall, Shane, and Oviatt 1994) that may require some international sales as a condition of industry participation. The emergence of specialized global
market niches and the high costs of R&D make early international sales necessary for technology-based firms (Lindqvist 1990). Sales to a domestic market alone would not support the
required investments. Thus, in high technology markets, companies can no longer follow
the stage theory of developing the domestic market first and then seeking out foreign markets
(Seringhaus 1993). Moreover, new ventures that internationalize quickly seem to be highly
focused firms with an intangible knowledge-based competitive advantage (Oviatt and McDougall 1994). Of course, the knowledge must be kept proprietary to the venture through patents,
secrecy, or perhaps tacitness. Patented or secret knowledge that needs little local adaptation
may be embedded in the technology of the product and transferred to multiple locations at
a low marginal cost. Tacit knowledge is, of course, harder to transfer to additional locations
even within one firm, but where it can be done competitors will find expropriation of the
advantage extremely difficult. Thus, after a relatively short period to establish itself in foreign
countries, the more international the new venture, the more profitable it is. In summary, it
is possible that the relationship between international sales and performance is a simple one
for technology-based new ventures:
HI: Technology-based new ventures with higher levels of international sales
subsequently have higher levels of performance.
NEW VENTURE INTERNATIONALIZATION,
STRATEGIC CHANGE
PERFORMANCE,
AND
Perhaps that relationship is not so simple when it comes to changes in international sales.
An essential element of the strategic choice perspective is that as a firm's environment changes,
its strategies must also change to be congruent with its new circumstances (Child 1972).
Otherwise, the organization is unlikely to be effective (Fry and Smith 1987). Certainly,
international involvement is an important environmental contingency (Hambrick and Lei
1985; McDougall 1989; Porter 1980). For example, in addition to increased logistical costs,
entrepreneurs and managers may need to learn something about foreign laws, language,
culture, and competitors.
Organizational competencies that create competitive advantages in the international arena
may be very different from those that create advantages domestically (Ghoshal 1987). Although the original study upon which this follow-up is based (McDougall 1989) did not
consider firm performance, the strategies of purely domestic firms and those with international
sales were found to be significantly different. Therefore, it is reasonable to assume that as
ventures expand internationally they must make changes in their strategies to be congruent
with their new environment. Thus, successful increases in venture internationalization may
require broad strategic changes.
Indeed, the period while a venture is new or very young may be a critical time for
strategic change. Institutionalized routines, structures, investments, and relationships characterize mature organizations and create age and size related inertia that inhibits strategic change
(Freeman and Boeker 1984; Hannan and Freeman 1977, 1984; Tushman and Romanelli
1985). Therefore, the time of inception, or soon thereafter may be the best opportunity to
set or to change a venture's strategy so that it is consistent with the needs of the international
environment (McDougall, Shane, and Oviatt 1994).
28
P.P. MCDOUGALL AND B.M. OVIATT
In summary, perhaps strategic changes will be necessary for increased venture performance when technology-based new ventures increase their international presence. Exactly,
what those strategic changes should be will inevitably depend on unique firm technologies,
markets entered, and current strategies. At the current state of research on new venture
internationalization any attempt to specify what those strategic changes should be would be
speculative.
H2: Strategic change will be more positively related to performance among tech-
nology-based new ventures that have increased their internationalization than
among technology-based new ventures that have not increased their internationalization.
METHODOLOGY
Sample
The follow-up sample of new ventures in this study was originally part of a database of 247
new ventures. In the original study, following a pilot test, surveys were mailed to the heads
of new venture businesses in two related industry groups using addresses obtained from Dun
and Bradstreet. As noted by Hambrick (1981), general managers are typically the most
knowledgeable persons regarding their companies' strategies.
Each of the new venture manufacturers in the study was in some facet of the information
processing industry; more specifically, computer-related or communications-related equipment manufacturing. Thus, these ventures were technology-based new ventures. A total of
seven different, but closely related SIC codes were represented in the sample. Secondrespondent data showed acceptable levels of interrater reliability, with average correlations
of 0.58 on the 26 competitive strategy methods. A detailed description of the original data
gathering procedure and sample characteristics may be found in McDougall and Robinson
(1990), and the competitive strategy methods can be seen in the Appendix of this article.
Two years after the original data were gathered, heads of each of the 247 firms previously
sampled were mailed a follow-up questionnaire with a cover letter asking for their participation
in a longitudinal research project. Respondents were ensured confidentially. A second mailing
was sent to nonrespondents 3 weeks later.
Forty-three surveys (17%) were returned with no forwarding addresses. Although an
attempt was made to locate these ventures by calling the telephone information operator in
the city in which the venture had been located 2 years previously, none of the firms could
be reached in this manner. Of the 204 delivered questionnaires, 85 were returned for a
response rate of 42 %. Four of the returned questionnaires had notes indicating the new
venture was no longer in business.
The loss of 43 ventures for lack of a deliverable address 2 years later did not surprise
us. Whereas some ventures may have moved and the forwarding order expired, others probably were no longer in business or had been acquired by other firms. Financial constraints
prevented us from obtaining new addresses or confirming the failure of the nonrespondent
firms through Dun and Bradstreet.
As previously noted, the "new venture" definition in the original data paralleled prior
research (Biggadike 1979) and classified a firm as a "new venture" if it was 8 years old or
less. Thus, ventures in this sample that were 8 years old in the original sample were 10
years old in the follow-up sample. Miller and Camp (1985) classified firms of this age as
adolescent firms. Only two of the ventures in this follow-up study were adolescents. We
NEW VENTURE INTERNATIONALIZATION
29
have retained them in the sample, because the purpose of this study was to conduct a follow-up
of the new ventures previously studied.
In the first study comparing internationalized and domestic new ventures, ventures were
classified as either "domestic" or "international" using a polar extreme approach (Hair et al.
1979). Domestic ventures were those with no sales to foreign countries, whereas international
sales comprised 5 % or more of total sales of the international ventures. The technique excluded
ventures whose international sales were between 0% and 5 % of total venture sales. Of the
90 domestic ventures and 98 international ventures in the first study, 36 of the domestic
ventures and 26 of the international ventures provided sufficient follow-up data and are
included in this study. Statistical tests on time-period-one (time~)data between the respondent
and nonrespondent ventures indicated that the ventures did not differ significantly on age,
sales, or number of employees. A binomial test of survivor bias showed that the proportional
split between domestic and international ventures did not significantly differ from time~ to
time2 (ct < 0.05). Our inability to contact 43 of the original ventures is worth further comment.
Some of them may have failed or moved, as noted earlier. Given the industry segments in
which these ventures are operating, it is likely that some of these ventures may have been
acquired. Acquisition is a positive result, often the goal of the founder, that indicates the
venture has achieved significant value. Although an acquired firm is technically no longer
in business, acquisition should not be considered a failure as it is sometimes regarded in the
study of established firms. Thus, the test for survivor bias says little about either the international or the domestic ventures' propensity to fail.
Measures
Internationalization
All ventures in the study were headquartered in the U.S. Internationalization was measured
as the percentage of a sales in foreign countries to total venture sales. Internationalization
was measured in the same manner in both the original study (time0 and 2 years later in the
follow-up study (time2).
Strategic Change
Strategic change in this study is focused at the business level and described the content of
the venture's strategy as noted in McDougall (1989). It is operationalized as the sum total
of changes in a venture's competitive strategy methods. Each of the 26 competitive strategy
methods examined in the study captures some dimension of the venture's overall strategy,
and combined, they represent the venture's strategy. The competitive strategy methods are
presented in the Appendix. The use of competitive strategy methods to operationalize strategy
has been used extensively in strategic management research (e.g., Dess and Davis 1984;
Robinson and Pearce 1988). Whereas the operationalization of strategy in the original study
entailed a factor-analytic procedure to reduce the 26 competitive strategy methods to 10
strategy factors, factor analysis was inappropriate for the follow-up study given the smaller
sample size (Lawley and Maxwell 1971; Nunnally 1978).
The original and the follow-up surveys included exactly the same 26 competitive strategy
methods, each scored by the respondents from 1 through 7. The absolute difference between
a venture's response on the original survey and the follow-up survey was computed for each
of the 26 items. For example, for a venture scoring "3" on the original survey on concern
30
P.P. MCDOUGALL AND B.M. OVIATT
for lowest cost per unit and "5" on the follow-up survey, the absolute difference would be
two. Likewise, if that same venture had indicated a "1" in the follow-up the absolute difference
would also be two. The higher the score, the more change the venture had made in its overall
strategy. The individual absolute difference scores for each of the 26 strategy variables were
summed for the strategic change score. Absolute differences in the ratings of the competitive
strategy methods were used without regard to the direction of change, because there is a
lack of theory that indicates emphasizing or deemphasizing any of the methods is always
associated with performance differences or with differences in the degree of internationalization. Strategic change scores ranged from 16 to 65, with a standard deviation of 9.6.
Performance
Our research questions and hypotheses are concerned with the relationship among changes
in venture strategy, venture internationalization, and venture performance. In other words,
we did not restrict our interest to the performance of the ventures' foreign operations, because
it is likely that an effort to initiate international sales or to increase international sales has
strong side-effects on domestic operations (Newbould, Buckley, and Thurwell 1978). That
is especially true of the ventures in the present study. They are all relatively small and focused
on a product segment, and, on average, the ones that are international derive 18 % of their
sales from foreign markets (calculated from Table 1).
Measuring the performance of organizations is always a complex problem (Lentz 1981),
but is especially thorny for new ventures. There are no commonly accepted lists of performance variables or methods by which new ventures are evaluated (Biggadike 1979; Brush
and VanderWerf 1992). Strong profitability may or may not be an important objective for
a new venture, which is trying to establish a foothold in a market. Thus, as suggested by
Venkatraman and Ramanujam (1986), multiple measures of the concept were used in this
research. Return on investment has been a commonly accepted measure of new venture
performance (e.g., Biggadike 1979; Tsai, MacMillan, and Low 1991), although market share
gain has been proposed as the best measure (Tsai, MacMillan, and Low 1991). Thus, both
ROI (i.e., profit after tax divided by total investment) and relative market share (i.e., venture
market share divided by the market share of its largest competitor) were the performance
variables used. Objective measures of these variables were provided by the respondents.
ANALYSIS AND RESULTS
Sample characteristics of the 62 new ventures in this study are reported in Table 1. The
categorization of the ventures as "domestic" and "international" is reflective of the venture's
level of international sales in the original study (i.e., time0, whereas further breakdowns
within these two categories indicate the change in international sales that occurred over the
2-year-period.
The level of international sales at time~ for the ventures that participated in the follow-up
ranged from 0 to 100%, with one venture having 100% of its sales in foreign markets and
the other ventures having between 0 and 60% in foreign markets. Fifty-eight percent of the
ventures had no international sales at time~, whereas 18% reported international sales of
15% or more.
Two years later, the level of international sales ranged from 0 to 60%. Ten of the
original 36 domestic ventures had become international to some degree. Of the 26 originally
international ventures, half increased their percentage of international sales, nine reduced
35.1
(10.0)
32.1
(4.6)
37.8
(14.4)
34.5
(10.4)
34.2
(9.4)
34.7
(9.6)
$1,541,979
$3,283,184)
$4,006,370
($4,664,805)
$2,746,500
($3,014,226)
$3,185,154
($5,221,336)
$3,410,607
$4,595,261)
$2,361,553
($3,986,495)
14.3
(17.7)
35.7
(56.4)
38.8
(61.4)
31.8
(39.1)
34.2
(47.0)
4.6
(3.1)
4.8
(2.1)
4.0
(1.4)
4.3
(2.1)
4.0
(1.7)
Total international (n = 26)
Total sample (n = 62)
3.9
(1.4)
" Sales figures are missing for some ventures.
~'CHINT = Change in internationalization (time.,% international sales - time~% international sales).
International (CHINT > 0) (n = 13)
International (CHINT = 0) (n = 4)
International (CHINT < 0) (n = 9)
Total domestic (n = 36)
Domestic (CHINT > 0) (n = 10)
4.0
(1.3)
3.6
(1.4)
22.6
(34.4)
35.7
(11.0)
33.4
(6.7)
$993,742
($1,036,995 )
$2,748,100
($5,680,533)
12.0
(12.5)
20.1
(27.1)
Domestic (CHINT = 0) (n = 26)
New Venture Categories
Strategic
Change Score
Age (Years)
Time~
Sales
Time1"
Sample M e a n s and Standard Deviations
# Employees
Time~
TABLE 1
7.5%
(15.8%)
17.8%
(20.5%)
28.9%
(31.1%)
11.2 %
(6.3%)
12.2%
(9.1%)
0%
(0%)
0%
(0 % )
0%
(0%)
10.4%
(15.2%)
21.2%
(17.4%)
14.9%
(19.1%)
11.2 %
(6.3%)
28.7%
(15.9%)
2.5%
(5.9%)
0%
(0 % )
9.1%
(8.2%)
Time2
International Sales %
Time ~
2.9
(13.0)
3.5
(19.1)
-- 14.0
(18.1)
0
(0)
16.6
(11.1)
2.5
(5.9)
0
(0)
9.1
(8.2)
CHINT b
;>
,-d
t"
Z
;>
5
Z
2,-4
,--]
z
,-4
.<
z
32 P.P. MCDOUGALL AND B.M. OVIATT
TABLE 2
Correlation Matrix
Variable
1
1. Strategic change
2. International sales %
(at time1)
3. International sales %
(at time2)
4. ROI (time,,)
5. Relative market
share (time2)
6. Age (time~)
7. Number of employees
1.00
"p<
~p <
Cp <
dp <
2
-0.06
1.00
-0.02
-0.01
0.63 a
0.00
0.16
-0.10
-0.13
0.27 b
-0.07
0.15
3
1.00
-0.03
0.16
-0.11
0.24 a
4
5
6
7
1.00
-0.03
-0.16
1.00
0.2&
1.00
1.00
0.06
-0.09
-0.02
.1.
.05.
.01.
.001.
it, and four stayed the same. O v e r the 2-year period, the percentage o f ventures having no
international sales had d r o p p e d f r o m 58 to 45 %, and 31% o f the ventures had international
sales o f 15 % or more. H o w e v e r , the m e a n change in international sales was an increase o f
only 2.9 percentage points. The large standard deviation o f 13.0 percentage points along
with the leptokurtic distribution (9.2) suggests that changes in internationalization w e r e dominated by a small n u m b e r o f dramatic m o v e s .
Table 2 shows the correlations a m o n g the research variables. With the exception o f
the high positive correlation b e t w e e n international sale percentage at times and time2, the
correlations w e r e generally low. Only three other correlations a c h i e v e d conventional levels
o f statistical significance. Relative market share at time2 was positively related to the percentage o f international sales at timer, a preliminary indication that hypothesis 1 m i g h t be supported. Also, n u m b e r o f e m p l o y e e s at times was positively related to the percentage o f
international sales at time2 and to the age o f the venture at times, suggesting that larger
ventures w e r e older and had m o r e international sales.
R e g r e s s i o n analysis, controlling for times p e r f o r m a n c e , size (number o f employees),
and age was used to test hypothesis 1. T h e results are shown in Table 3. Hypothesis 1, that
TABLE 3
Regression Results for Internationalization
13
t
Relative market share (time2)
(R2 = 0.31, F = 5.45, df4,49)
Relative market share (time~)
Size
Age
International sales (time~)
0.471
-0.099
-0.044
0.331
3.839 c
-0.781
-0.352
2.714 b
ROI (timed
R2 = 0.01, F = 0.11, df4,44)
ROI (timel)
Size
Age
International sales (time~)
0.017
-0.023
-0.087
-0.002
0.112
-0.142
-0.551
-0.013
Up < .05.
bp < .01.
' p < .001.
NEW VENTURE INTERNATIONALIZATION
33
performance at time2 would be higher for ventures with higher internationalization at time1, was
supported for relative market share. However, the hypothesis was not supported for ROI.
Although these new ventures were unable to translate their international sales into higher
profitability over the two years, they did show significantly higher levels of relative market
share over the period. Perhaps, as MacMillan and Day (1987) found in their study of corporate
ventures over a 4-year time period, higher levels and increases in market share may be a
prelude to higher ROI as scale benefits translate into higher profitability. The 2-year time
period may simply not be long enough for investments in higher market shares to produce
improved profits. An alternative explanation for the absence of a higher ROI among the
more internationalized new ventures is that the costs of doing business abroad and competing
against indigenous rivals was greater than they expected.
Subgroup analysis was used to test the second hypothesis, that is, to determine whether
internationalization moderates the strength of the relationship between strategic change and
new venture performance. For hypothesis 2, the ventures were sorted into two groups. One
group was those ventures that had not increased their internationalization (i.e., domestics
that had remained domestic or internationals that had not increased their international sales
percentages). The other group included ventures that had a positive change in internationalization, either by expanding into international markets for the first time or by further penetration
of international markets.
Partial correlations, controlling for time1 performance, age, and size (number of employees), were computed within each subgroup to assess the strength of the relationship between
strategic change and performance. A modified version of the Fisher Z transformation statistic,
advocated by Schmidt, Hunter, and Pearlman (1981) was then used to determine whether
these coefficients differed significantly between ventures that had increased their international
sales and ventures that had not.
Table 4 shows the results of the subgroup analyses. Ventures with an increase in internationalization had significantly higher correlations between strategic change and both relative
market share and ROI. In addition, the partial correlation coefficients between strategic
change and the performance measures were significantly positive, suggesting that changes
in a strategy may be necessary for a venture to be successful with initial international sales
or with increases in international sales. For ventures showing no increase in international
presence, the partial correlation coefficients are both negative, although not statistically significant. Thus, hypothesis 2 is supported. 2
CONCLUSIONS
Two closely related major findings emerged from this research. First, although early internationalization by new ventures in certain technology-based industries was associated with
higher relative market share in subsequent years, there was no significant direct association
between internationalization and ROI. Second, new ventures that increased their internationalization over the 2 years of the study exhibited significantly positive associations between
2As might be expected, no single configuration of competitive strategy methods was consistently associated
with increased internationalization and superior new venture performance in our sample. Furthermore, small sample
size prevented us from identifying clusters of international ventures with competitive strategy methods that were
significantly higher in performance. Thus, the reduction in the number of respondents from the first round of data
collection to the second round prohibited this study from explaining fully the strategic changes needed for successful
new venture internationalization. Researchers investigating these questions in the future will need to take special
care in maintaining their relationships over time with respondents in order to avoid this unfortunate problem.
34
P.P. M C D O U G A L L AND B.M. OVIATT
TABLE 4 Subgroup Analysis
Subgroup Comparison
No increase in percentage
of international sales
Increase in percentage
of international sales
Comparison of r-values
Correlation Between
Strategic Change and
Relative Market Share (times)
Correlation Between
Strategic Change and
ROI (time,_)
- 0.1081
(n = 33)
0.5798"
(n = 21)
2.136"
- 0.1319
(n = 29)
0.5725 a
(n = 21)
2.078 a
"p < .05.
strategic change and venture performance (both relative market share and ROI), but ventures
with no increase in internationalization exhibited no such association. Taken together, these
findings suggest that having a higher or increasing percentage of foreign sales does not by
itself increase the financial performance of new ventures. We speculate that new venture
internationalization must be part of an overall organizational strategy to address foreign
rather than simply domestic markets.
Perhaps real strategic change requires a configuration of many organizational changes
(Miller and Friesen 1984; Miller and Mintzberg 1983), and perhaps new ventures anticipating
international operations should have policies, procedures, and cultures that are international
from inception (McDougall, Shane, and Oviatt 1994). Otherwise, when the venture eventually
internationalizes it risks weak performance due to path dependence on purely domestic activities. This may be an important point for new, smaller companies. In many instances, smaller
companies do not plan internationalization, but internationalize as the result of an unsolicited
order (Beamish and Munro 1986). To reap financial success from their internationalization,
firms may need to make changes in their strategy. However, such conclusions are speculative
and require additional research to confirm them.
Although we found no performance penalty associated with increasing international
sales alone, indiscriminant advice for new ventures to sell in foreign markets without other
supporting strategic actions is inconsistent with our findings. Internationalization, alone, did
not lead to increased profitability.
Some of our findings were puzzling. The new ventures in our sample increased their
international sales percentages by a mean of only 2.9 percentage points over the 2-year study
period. This was surprisingly small for an industry group (i.e., manufacturers of computers
and communications equipment) generally recognized as having global markets and perhaps
leading other firms and industries to increase their international sales. Furthermore, the
large standard deviation (13.0 percentage points) and the leptokurtic distribution (9.2) of
the percentage changes in international sales indicated that the sample was split between
ventures with little change and ventures with great changes. Concerning the latter ventures,
Table 1 showed some that were strongly international at the time of the original study had
retreated 2 years later, whereas some ventures that were originally only weakly international
aggressively sought foreign sales during the same period. Such a pattern is hard to explain
with the available data, but it suggests that there is no widely held consensus about the
appropriateness of international expansion among managers of new technology-based ventures. It may be that pecularities of the products, of the foreign markets, or of the interaction
between them dictate disparate strategic reactions among ventures that seem otherwise similar.
Certainly, more longitudinal research on venture internationalization is needed, and perhaps
NEW VENTURE INTERNATIONALIZATION 35
long periods of study are needed to more fully explain the association between new venture
internationalization and new venture performance.
Of course, there are important limitations to this empirical study. First, only small,
technology-related, new ventures were included in the sample. Thus, generalization beyond
this group is ill-advised. Second, the sample size was limited by the difficulty of obtaining
responses from a large group of new venture entrepreneurs and by the further difficulty of
obtaining responses from the same individuals 2 years later. Third, internationalization can
occur through various modes of entry (i.e., exporting, licensing, alliances, joint ventures,
direct investment, etc.), each requiring potentially different competencies and responsive
changes in strategy. Finally, this study examined only the internationalization of outputs;
that is, sales, and no attention was paid to the input and resource side of venture internationalization.
These limitations of our work suggest directions for future research. Ventures may need
to alter their routines and strategies when they increase their use of foreign markets for major
inputs and resources, just as our results suggest it is important when increasing international
sales of outputs. However, we know of no studies on this topic, and since imports are so
important for new ventures in many industries, research is needed on the association between
venture strategy, venture performance, and the internationalization of inputs.
We were, unfortunately, unable to detect a consistent pattern of change among the
competitive strategy methods that was clearly associated with venture internationalization.
A primary reason was the small sample size available in this study, which is a significant
problem for all longitudinal studies of this type. The whereabouts of 17% of the original
sample (time,) was unknown 2 years later, and several more observations were unavoidably
lost due to business failure and incomplete responses to the questionnaire at time2. To further
limit the possibility of finding statistically significant associations, the mean change in internationalization over the 2-year period was very small. Although a group of ventures in the
sample made large changes in the percent of international sales, some in that group increased
that percentage and some decreased it (see Table 1). Thus, with a small sample and inconsistent
behavior on the part of ventures in the sample, we believe it was simply not possible for a
statistically significant pattern of changes in the competitive strategy methods to emerge in
this study.
This is disheartening for researchers hoping to find consistent patterns of change in
strategy and international behavior over time among new ventures. Not only should the
research period be longer than 2 years (as discussed earlier), but the sample size should also
be relatively large in order to withstand inevitable losses of data over time and to detect any
patterns in what may be rather disparate venture behaviors. These are difficult challenges
for academic entrepreneurs.
Future research should also investigate the effect of mode of foreign entry on strategy
change and venture performance. Modes that require fewer resource commitments, such as
licensing and exporting through an agent, may require few strategic changes to increase a
venture's international presence. Indeed, the export agent's strategy may be the critical variable, not the venture's strategy. 3 Perhaps venture strategy is more important in firms that
have complex foreign alliances, joint ventures, and direct foreign investments. Again, we
know of no published research on this topic.
Our findings are important primarily for academics. However, practicing entrepreneurs
should take heed from our results. Internationalization of sales among high-technology new
3Thanks to an anonymousJBV reviewer for this suggestion.
36 P.P. MCDOUGALLAND B.M. OVIATT
ventures does not appear to be a simple matter of applying established strategies and procedures developed for a domestic arena. Successful internationalizationappears to be accompanied by changes in venture strategy. At this time, however, no consistent pattern of strategic
changes is clear from our research.
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40
P.P. M C D O U G A L L A N D B.M. O V I A T T
Appendix
Each o f the following items consists o f a pair o f statements w h i c h represent the two extremes on different methods
by which businesses m a y compete. Please consider each statement as it relates to y o u r business unit relative to
competitors. Place an X at the position on the scale that best describes the emphasis y o u r business unit has placed
on each in establishing y o u r competitive posture since entering the market.
F o r example:
Emphasis on
Maintain low inventory levels
I
Neither extreme
emphasized
I I r I Ixl
Emphasis on
I
Maintain high inventory levels
The X indicates that the business unit maintains inventory levels that are substantially higher than competitors in
the industry sector(s) in which the business unit competes.
Emphasis on
Neither
extreme
emphasized
Emphasis on
Manufacturing specialty products
Manufacturing commodity type products
Providing a narrow range of products
Providing a broad range of products
Serving limited or specific geographic
markets
Serving broad markets
Continued new product development
Maintaining current products
Reliance on proven manufacturing processes
Innovation in manufacturing processes
Providing minimal or no customer service
Provide high level of customer service
Lowest price offering
Premium pricing policy
Minimal advertising and promotion expense
High level of advertising and promotion expense
Lowest cost per unit not an overridilag
concern
Continuing, overriding concern for lowest
cost per unit
High capacity utilization
Excess capacity tolerated in anticipation of
future growth
Emphasis on serviceable product quality
Emphasis on superior product quality
Reliance on public domain processes and
technologies
Ownership of patents or other proprietary
knowledge
Let brand identification and name recognition take care of themselves
Developing brand identification and name recognition
Use only existing channels of distribution
Develop new channels of distribution
Absorb excess general and administration
expenses to build organization
Continuous concern with minimizing general and administration expenses
Small number of customers
Large number of customers
Customers make frequent purchases
Customers make infrequent purchases
Average customer order small
Average customer order large
Sell products to one market segment
Setl products to numerous market segments
No backward integration toward raw materials
Extensive backward integration toward raw
materials
No forward integration toward consumers
Extensive forward integration toward consumer
Single channel of distribution
Many channels of distribution
Generate capital through parent or operations
Generate capital through outside investors
Sut~contracting or sourcing of production
Fully integrated production
Flexible, short-term buyer contracts
Long-term buyer contracts
Entered the market(s) on a small scale
with steady, incremental growth objectives
Entered the market(s) on a large scale with
rapid, immediate growth objectives