Internationalisation path heterogeneity and growth for international new ventures

Abstract

An increasing number of new venture firms are internationalising their business operations early in their lifecycles to achieve superior performance. Taking the perspective of dynamic capability theory, our study sheds light on the effect that heterogeneity in experiential learning has on international new venture (INV) growth in terms of a curvilinear relationship. Specifically, we introduce the concept of internationalisation path heterogeneity to capture the path-specific features of INV experiential learning and capability building and explore the relationship between internationalisation path heterogeneity and INV firm growth. We also argue that this relationship will be moderated by environmental munificence because the cost and benefit of path heterogeneity is bounded. We test the hypotheses based on empirical analysis of a longitudinal dataset of 1054 INVs from 58 countries. Overall, this study provides a dynamic and fine-grained view of the role played by internationalisation path heterogeneity in driving the growth of INVs.

Keywords

dynamic capability firm growth international new venture path heterogeneity

Introduction

The term ‘international new venture’ (hereafter, INV) refers to firms that seek to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries from inception (Oviatt and McDougall, 1994). Growth is especially important for INVs. However, unlike established firms that have rich connections and channels to obtain resources from the outside, new ventures, as young start-ups, are subject to resource constraints due to the joint liabilities of newness and smallness (Bruderl and Schussler, 1990; Zaheer and Mosakowski, 1997; Zahra, 2005). Thus, in the absence of growth, the survival probabilities of new ventures may be significantly reduced (Gilbert et al., 2006). INVs characteristically suffer, however, from the liability of foreignness in their international expansions and operations due to the institutional and cultural distance between their home and host countries (Li and Deng, 2017) and are less likely to benefit from their market position before building requisite scale (Larrañeta et al., 2014). Thus, prior studies often pay more attention to examining the strategic actions that lead to INV growth (Fernhaber and Li, 2010; McDougall et al., 1992).

It is worth noting that the growth of INVs is a process that includes the dual nature of business development as a new venture and international expansion as an internationalised firm. On the one hand, INV growth is a combinative process of resource acquisition and opportunity sensing (Box et al., 1993). The effectiveness of INVs in sensing opportunities and acquiring resources within uncertain environments is highly dependent on their internal capabilities, which are developed gradually along with their continuous operations (Bloodgood et al., 1996; Coviello and Munro, 1995). Conversely, the capabilities of INVs for opportunity sensing and complementary resource acquisition are established during their overseas expansions. INVs inevitably experience external and organisational shocks in their early foreign market expansions due to the liabilities of foreignness and resource constraints (Sapienza et al., 2006). The growth of INVs against those shocks largely depends on whether the companies are capable of developing new streams of capabilities and improving their existing ones to overcome the peculiarities of foreign markets (Knight and Cavusgil, 2004).

As such, dynamic capability theory (DCT) provides a useful lens to capture the nature of INV growth. According to Teece (2007), sensing capabilities are recognised as fundamental to dynamic capabilities. In addition, resource acquisition and learning capabilities are important for achieving a sustainable competitive advantage (Teece et al., 1997). INVs need to develop such capabilities simultaneously and apply them to build and maintain firm growth (Khan and Lew, 2018). More importantly, according to DCT, ‘the competitive advantage of firms lies with its managerial and organisational process, shaped by its specific asset position, and the paths available to it’ (Teece et al., 1997: 518), and ‘where a firm can go is a function of its current position and the paths ahead. Its current position is often shaped by the path it has travelled’ (Teece et al., 1997: 522). As such, Al-Aali and Teece (2014) argue that dynamic capability is the foundation of the long-run success of an INV.

Therefore, a heterogeneous path, which is gradually shaped by foreign market entries, can provide INVs with different learning opportunities and specific resources to build dynamic capabilities as the foundation of competitive advantage and firm growth. However, the impact of path-specific experiential learning on INV growth is not well documented in the literature. The majority of INV studies addressing the issues of internationalisation deal with why and how INVs have internationalised during the early period at a given point in time without considering the path-specific features. Furthermore, new venture studies from an entrepreneurship perspective mainly focus on the relationship between entrepreneurial characteristics and firm growth (Gilbert et al., 2006), as well as the importance of resources (Arthurs and Busenitz, 2006). To address this gap, we introduce the concept of internationalisation path heterogeneity to capture the path-specific features of INV experiential learning and capability building and explore the relationship between the internationalisation path heterogeneity and firm growth of INVs.

Internationalisation path heterogeneity in this study is defined as the degree of ‘being different’ for a given INV in a particular industry based on comparison with its industry peers in terms of the temporal sequence of foreign entries. To ensure growth, INVs need to not only learn from their peers or established firms to gain experience (Deng et al., 2018) but also acquire and accumulate resources efficiently since growth is a resource-consuming process. As such, INVs with heterogeneous paths can gain better access to heterogeneous resources from outside, which are essential for buffering the business uncertainty caused by the liabilities of foreignness and newness (Reuer and Lahiri, 2014). However, INVs with heterogeneous paths may suffer from a potential mismatching problem in targeting and engaging customers or partners. Hence, we expect a curvilinear relationship, with an inverted U-shape, between internationalisation path heterogeneity and firm growth. In other words, the increase in internationalisation path heterogeneity has both positive and negative impacts on firm growth. We also argue that the relationship between path heterogeneity and firm growth will be moderated by environmental munificence because the cost/benefit of heterogeneous paths is bounded by the environmental munificence faced by INVs in their international operations.

Based on empirical analysis of a longitudinal dataset of 1054 INVs with 4413 observations from 58 countries and 24 two-digit SIC (standard industrial classification) industries during the period of 1989 to 2016, this study aims to make the following contributions. First, our study contributes to the INV literature by linking a path-based view of international expansion to firm growth in international markets. Taking the dynamic capability framework, we provide a dynamic and fine-grained view of the role played by internationalisation path heterogeneity in the growth of INVs. Second, our study offers insight into the effect that heterogeneity in experiential learning has on new venture growth. Although traditionally the DCT and resource-based view make an implicit assumption that heterogeneity can result in a competitive advantage (Barreto, 2010; Wernerfelt, 1984), our study reveals a curvilinear effect of heterogeneity on firm growth, which complements extant studies on the positive influence of resource heterogeneity. In this way, we respond to the calls to investigate dynamic capability in the international business context (Teece, 2014).

The remainder of this study is organised as follows. We first present our theoretical background and hypotheses. Then, we introduce our data and empirical design and report the main results of the study and robustness checks. We provide conclusions and a discussion in the final section.

Theoretical background and hypothesis development

International expansion into foreign countries by new ventures is challenging because of the liabilities of foreignness and newness and the need to manage the complexity of international operations (Hitt et al., 1997; Lu and Beamish, 2004; Zaheer, 1995). Considering that INVs as entrepreneurial firms are an extension of their entrepreneurs, prior literature notes that the characteristics of entrepreneurs, such as educational background (Sapienza and Grimm, 1997) and prior related industry experience (Baum et al., 2001), are influential in enabling entrepreneurs to know where to go to obtain information relevant to the venture and how to deploy the resources they obtain (Kirzner, 1983). Moreover, the importance of network-based conditions of INVs (Hughes et al., 2019) and INV strategies (Zhou et al., 2010) are also highlighted by prior research. However, it is worth noting that at a given point in time, INV capabilities and resources are established by all their prior international activities (Schreyögg and Kliesch-Eberl, 2007). The previous international expansion path of an INV is not only a process of combining internal capabilities and resources with external opportunities, but also of developing capabilities through experiential learning.

Path heterogeneity can influence firm growth via resource acquisition, opportunity sensing and (mis)matching mechanisms as such mechanisms can significantly determine the costs and benefits of being different. On the one hand, both heterogeneous resources and the ability to sense opportunities are important elements of dynamic capabilities (Teece, 2007; Teece et al., 1997), and the greatest challenge faced by new ventures is sensing opportunities and acquiring resources because new ventures lack a reputation and potential resource providers, which may heighten the perception of risk (Brush et al., 2002). As such, a heterogeneous path can be a visible signal that helps INVs attract diverse partners (Haans, 2019). In this way, INVs with heterogeneous paths can gain access to heterogeneous resources from outside (Reuer and Lahiri, 2014). By acquiring resources from their partners, INVs can buffer the business uncertainty caused by the liabilities of foreignness and newness. INVs with superior resources acquired from their partners will have a greater chance to exploit the opportunities available in the international market (Nason and Wiklund, 2018; Ucbasaran et al., 2003). In addition, INVs with heterogeneous paths can establish heterogeneous resource bases through networking with diverse partners and developing distinct network ties, which are essential in sensing business opportunities within the certain requirements or thresholds of their resource bases (Khan and Lew, 2018; Zhou et al., 2012). Thus, INVs with heterogeneous paths can enhance their growth performance through both resource acquisition and opportunity-sensing mechanisms.

On the other hand, INVs may suffer from the potential mismatching problem of having a heterogeneous path. INVs encounter great uncertainty during their international expansions, and learning from imitating their peers is an important advantage for INVs to overcome business uncertainty and develop capabilities (Wu and Voss, 2015). According to DCT, learning is the fundamental process to build dynamic capability and requires common codes of communication when INVs attempt to develop their dynamic capabilities through learning from their peers in host countries with similar strategies (Teece et al., 1997). Hence, being different makes it difficult for INVs to directly imitate peer experience and practice. Meanwhile, heterogeneous firms have relatively fewer target customer groups to match their market positioning (Haans, 2019), and customers may be reluctant to accept a product if the installed base of users is relatively small (Teece, 2007). In addition, being different may mean that it is difficult for INVs to obtain adequate resources from outside in translating potential business opportunities into realised growth. This is because differentiation strategy requires a quite different set of resources and capabilities to create and maintain the differentiation advantage (Prange and Verdier, 2011).

Path heterogeneity and INV growth

A firm with a heterogeneous internationalisation path is characterised by a highly differentiated temporal distribution of the numbers of foreign subsidiary establishments compared with other firms in the same industry, as a kind of deviation from the foreign entry choices of their rivals or potential rivals along with the timeline. Prior studies have argued that the establishment strategy of overseas subsidiaries has an important influence on resource and information acquisition (Li et al., 2017; Zhang et al., 2007). When the path formed through the establishment of subsidiaries is more heterogeneous, a ‘different horizon’ and a ‘heterogeneity-oriented’ perspective dominate INV strategy. As such, path heterogeneity can create positive benefits for INVs for two reasons. First, heterogeneous paths allow INVs to stand out and attract attention from potential resource-providing audiences and allow them to have a greater chance of acquiring valuable resources for building dynamic capabilities (Taeuscher et al., 2020; Teece et al., 1997). A heterogeneous path can influence the formation of external ties of INV top team members since the similarity is most emphasised when working with other firms (McKnight and Zietsma, 2018). In this way, a distinctive tie portfolio of partners is built at the firm level (Carpenter and Fredrickson, 2001). These ties help the firm acquire heterogeneous resources and information, which is one of the foundations of dynamic capabilities. By acquiring externally accessible resources, INVs will have a greater chance to buffer against business uncertainty during international expansion and overcome the liabilities of newness and foreignness (Gerschewski et al., 2018) to exploit the opportunities available in international markets despite their lack of prior experience and internally developed resources (Ucbasaran et al., 2003). As a result, path heterogeneity would become a sustainable source of competitive advantage in an institutionally and culturally different market (Teece et al., 1997).

Second, path heterogeneity enhances a firm’s ability to sense business opportunities. Suffering from the liabilities of foreignness and newness, the growth of an INV requires effective and timely opportunity sensing, but the lack of prior experience would be expected to have a negative effect on opportunity sensing (Shane, 2000). This capability can be accumulated through the path travelled by INVs in their past foreign operations, showing the connections between experience and organisation strategy (Agrawal, 2006). As emphasised by Teece et al. (1997), the path a firm travels is an important kind of experience and can also help firms establish cognitive mechanisms for sensing opportunities in variance and uncertainty; a heterogeneous path can, hence, help INVs accumulate distinctive experiences to sense opportunities. Moreover, by taking a different path than their rivals, INVs can further utilise heterogeneous experience and knowledge to better sense opportunities in a niche market without high levels of competition (Baum and Singh, 1994; Connelly et al., 2019).

The above arguments suggest that increasing the level of path heterogeneity enhances the capacity for both resource acquisition and opportunity sensing and thus has a positive effect on firm growth. However, learning is an important potential advantage for INVs to enable tasks to be performed better and more quickly (Autio et al., 2000; Oviatt and McDougall, 1994). Firms can minimise uncertainty by learning through experience (Casillas and Moreno-Menéndez, 2014). As the level of path heterogeneity increases, overlap between the focal firm and its rivals’ knowledge pool decreases (Haans, 2019; Teece et al., 1997). Thus, with an increase in path heterogeneity, firms will be more unlikely to match their peers, from whom their experiential learning opportunities have been reduced, either in the form of imitation or knowledge spillover (Wu and Voss, 2015). In this case, taking a heterogeneous path involves great uncertainty; thus, the likelihood that an INV can benefit by learning from peers is greatly reduced.

Last but not least, a heterogeneous path will make it difficult for INVs to match complementary assets and customers in serving the market. The value of dynamic capabilities can be enhanced by recombining suitable complementary assets (Teece et al., 1997). Most often, INVs are highly dependent on externally accessible complementary assets to achieve high efficiency and flexibility in market competition due to internal resource constraints (Plummer et al., 2016). Along with the increase in path heterogeneity, the possibility of matching useful complementary assets will decrease significantly. Meanwhile, as the firm’s value offerings are dissimilar to those of mainstream markets, the risk of losing customers en masse also increases because the value offerings become less attractive to mainstream customers (Zhang et al., 2020). The scale of the potential customer base also tends to decrease in this case (Haans, 2019). Therefore, being different can be quite risky in that it is likely to result in a significant decrease in sales potential, which will eventually slow the growth of an INV.

In sum, the escalating damage to benefits and the risk of losing customers and complementary assets may reach a level at which the cost of risk outweighs its benefit, and at this level, the motivation to be heterogeneous starts to decline, resulting in an inverted U-shaped relationship between internationalisation path heterogeneity and firm growth. Hence, growth peaks at the medium level of internationalisation path heterogeneity. We propose the following hypothesis:

Hypothesis 1. There is a curvilinear relationship (which has an inverted U-shape) between internationalisation path heterogeneity and firm growth for INVs.

The moderating role of environmental munificence

We further contend that this curvilinear relationship is subject to the influence of the environment munificence within which the INV and its counterparts are embedded. Environment munificence refers to the extent to which the environment could support sustained growth of the firms (Dess and Beard, 1984; Starbuck, 1976; Staw and Szwajkowski, 1975). Castrogiovanni (1991) indicates that environmental munificence is the scarcity or abundance of critical resources needed by firms operating within an environment. We argue that this kind of environmental munificence attenuates the inverted U-shaped relationship between path heterogeneity and firm growth by (1) lowering the firm’s benefit from opportunity sensing and resource acquisition and thus weakening the linkage between path heterogeneity and firm growth when the path of the INV is less heterogeneous and (2) increasing the possibility of mismatching problems when the path of the INV is more heterogeneous.

Specifically, when the environment is more munificent, the effect of path heterogeneity on INV growth decreases at low to medium levels of path heterogeneity for two reasons. First, the more munificent the environment is, the more accessible are the resources that exist for INVs (Dess and Beard, 1984). Hence, although an INV with a homogeneous path may lack dynamic capabilities, it can still establish sufficient external ties to acquire the external resources needed to exploit opportunities and alleviate business uncertainty (Li et al., 2013). Second, when environmental munificence increases, more opportunities exist because the pursuit of alternative goals and strategies becomes possible (Castrogiovanni, 1991; Li et al., 2013), and the competitive intensity within the industry or market also decreases (Goll and Rasheed, 1997). In this case, although INVs with homogeneous paths may lack strong opportunity-sensing capabilities, they can still make full use of the opportunities within the environment to overcome the liability of newness and attain substantial growth. Thus, the mechanisms of both resource acquisition and opportunity sensing are greatly weakened.

In addition, a munificent environment alleviates the negative effect of path heterogeneity on INV growth at medium to high levels of path heterogeneity. On the one hand, a munificent environment decreases the cost of the ‘mismatching problem’. In munificent environments, even when INVs with heterogeneous paths have difficulty learning from the experiences of their peers, they can obtain slack resources much easier as a buffer against random shocks during international expansions (Su et al., 2009), and mistakes are not as costly as in less munificent environments (Castrogiovanni, 1991). In this way, INVs with heterogeneous paths can gain more chances and time to match their internal capabilities with external opportunities (Dess and Beard, 1984). In contrast, in a less munificent environment, INVs with homogeneous paths are more likely to lose their first-mover advantages because it is difficult to learn from their peers, while internal accumulation is often time-consuming (Sadeghi et al., 2018). In other words, heterogeneous paths are more important in munificent environments. Moreover, internal resources accumulated from munificent environments to some extent alleviate the disadvantage of resource constraints in seeking and matching complementary assets or even increase the possibility of expanding the scope of complementary asset searches (Tang et al., 2015). In this way, the negative impact of mismatching has been largely mitigated.

To summarise, an INV’s benefit is reduced at low to medium levels of path heterogeneity, while its mismatching problem is also alleviated at medium to high levels of path heterogeneity. The effect of path heterogeneity on INV performance is thus attenuated on both sides of the inverted U-shape. The overall slope of the relationship between path heterogeneity and firm growth is therefore likely to be flattened, which leads to our next hypothesis:

Hypothesis 2. The munificence of the environment negatively moderates the relationship between internationalisation path heterogeneity and firm growth for INVs such that the inverted U-shaped is flattened when the munificence of the environment is higher.

Methodology

Data and sample

The hypotheses developed above are tested using a panel dataset of international new ventures. Although Oviatt and McDougall suggest that the distinguishing feature of an INV is that it is international ‘at inception’ (Oviatt and McDougall, 1994), in general, the length of time considered to define an INV varies from three years (Knight and Cavusgil, 2004) to six years (Zahra et al., 2000) to eight years (McDougall and Oviatt, 1996) after the firm’s creation. In this literature, INV tends to be characterised as an international market entry process that occurs within three years of a firm’s inception (Zhou et al., 2010). However, since the aim of this research is to study how international path heterogeneity can influence the growth of INVs, we required our sample firms to have been operating for a maximum of eight years allowing them time to build their paths (Larrañeta et al., 2014; Zahra, 1996). Then, we only keep sample firms whose first foreign entry had happened within three years of the firm’s inception (Knight and Cavusgil, 2004) but keep observations for eight years. The dataset was collected from the Orbis databank, which has been used by many prior studies (Belderbos et al., 2017; Bhaumik et al., 2010; Chang et al., 2016; Cui and Jiang, 2012). The database records a wealth of information spanning all levels of global listed and unlisted multinational companies and contains detailed financial and performance records of approximately 275 million companies from over 200 countries. This database provides detailed accounting and financial information of public and private firms across the world and is widely used in the international business research field. The data in this database come from more than 160 independent data providers. Bureau van Dijk (BVD) has made global companies comparable through a series of processing and standardisation. The database mainly provides information of the parent company, subsidiaries, shareholders and executives, and macro levels. One of the advantages of this database is the relationship between parent and subsidiary companies. Each pair of parent and subsidiary companies has a unique identification code. This article identifies a subsidiary company as an overseas company based on the location of the subsidiary company. We first selected panel data from Orbis and then combined them with its subsidiaries data based on the BVD number.

We selected our sample based on the following rules: (1) we selected a sample of international new ventures that had already established their international presence in foreign markets (in terms of the establishment of a subsidiary overseas); (2) sample firms with sales observations that had been missing for three years or more during our time window were removed; (3) sample firms whose first foreign entry had occurred later than three years from inception were removed; and (4) tax haven cases were not included in our sample (Peng et al., 2011; Shi et al., 2017; Sun et al., 2014). Finally, our panel sample (unbalanced) consisted of 1054 INVs with 4413 observations from 58 countries and 24 two-digit SIC industries during the period of 1989 to 2016. Thirty-eight percent of the sample INVs come from the United States, China and Italy, and 30.7% of those INVs come from the industrial, commercial machinery and computer equipment industries (US SIC = 35) and the electronic, other electrical equipment and component industries (US SIC = 36). Regarding the number of subsidiaries established by a focal firm, the largest number is 57 and the smallest is only 1.

Measures

Dependent variable

Firm growth: The dependent variable in this study is the growth of the focal firm. We measure firm growth by the sales growth ratio. Sales growth provides evidence of how the revenues of a venture change over time. Sales growth indicates the extent to which customers are increasingly accepting the products or services offered by the firm (Robinson, 1999). As such, sales are the most commonly used indicator of new venture growth (Murphy et al., 1996; Weinzimmer et al., 1998). When sales growth occurs, a venture is supplied with revenues that can be reinvested into resource expansion or capability development. We measure the sales growth ratio as total sales in year T minuses total sales in year T-1, and then divided by total sales in year T-1.

Independent variable

Internationalisation path heterogeneity: Jaffe (1988) used angular separation to calculate the technology proximity of two firms. To enrich the ways of measuring the path, we similarly constructed a proxy to measure the internationalisation path heterogeneity of an INV using the distance of an investment series, which was presented by the time of the establishment of the subsidiaries overseas, between firm i and the mean of all firms in our sample. Specifically, the internationalisation path heterogeneity of firm i is computed as

P_{het} = \sqrt{\sum^{} {(x_{i t} - a_{t})}^{2}}

where $x_{i t}$ is the number of subsidiaries established by firm i in year t and $a_{t}$ is the mean value of subsidiaries established by all the firms in year t. Firms with high P_het scores are more heterogeneous in the internationalisation path.

Moderator variables

Environment munificence: Munificence reflects the availability of resources to support environmental growth. Following Dess and Beard (1984), we measured munificence as the growth rate according to the value of total employment, which was calculated using industry-level data since this is an industry-level construct as the growth in industry-level employment reflects increases in resource commitments at different stages of the manufacturing process (Palmer and Wiseman, 1999; Tang et al., 2015).

Control variables

We controlled for several variables that serve as standard controls in studies on performance, as well as variables specific to our context. We first included several firm-level control variables. Because the size of a firm is likely to influence firm performance, we controlled for firm size, which was measured as the natural logarithm of total assets. Moreover, given that resources are likely to be more critical in younger firms (Vanacker et al., 2017) and because firm age has been suggested to influence a firm’s competitive advantage (Zahra et al., 2000) as well as the extent of patterned forms of behaviour underpinning dynamic capabilities (Helfat and Peteraf, 2003), we controlled for firm age, which was measured as the number of years since the establishment of the firm. Our measure of unabsorbed slack was the current ratio (i.e. assets divided by liabilities) (Tang et al., 2015). In coding Industry Dummies, we followed National Bureau of Statistics of China’s (NBSC) industry classification standard and assigned every industry a two-digit classification-level dummy value (a total of 29 industries) (Shi et al., 2017). Firms with more intangible assets, such as patents, licences and know-how, are likely to develop a relatively broader knowledge base that underpins their current R&D activities (Filatotchev and Piesse, 2009; Tian, 2007). We used R&D intensity (R&D expenditures expressed as a percent of sales) and advertising intensity (advertising expenditures expressed as a percent of sales) to measure intangible assets (Lu and Beamish, 2004) and obtained data on this variable from the Orbis database.

Estimation method

The means, standard deviations, and minimum and maximum values of the variables included in our analysis are presented in Table 1, while Table 2 shows the correlations of the variables. Based on the results of the F-test (p = 0.00), we chose the panel data method instead of the pooled ordinary least squares approach. Then, the results of Hausman tests (p = 0.027 < 0.05) revealed that the explanatory variables were correlated with the unobserved effects, and thus, fixed effect models should be used. We tested our hypotheses using a fixed effect model, which was expected to solve the problem that the explanatory variables were correlated with unobserved individual effects (Wooldridge, 2010). We also used a one-year time lag for our independent variable. To test the moderating effects of the munificence of environment, we produced interaction terms (munificence of environment × international path). Consistent with ‘p < 0.05’, meaning ‘less than 5% risk of a false positive when the null hypothesis is true’, we report significance for the hypothesised relationships.

Table 1.

Descriptive statistics.

	Mean	Standard deviation	1	2	3	4	5	6	7
1. Firm growth	1.91	64.79	1
2. Path heterogeneity	0.99	1.13	−0.00	1
3. Environment munificence	2.42	46.72	0	−0.00	1
4. Slack	2.3	4.03	−0.00	−0.01	−0.00	1
5. Firm size	4.14	2.90	0.04***	0.32***	0.02**	−0.05***	1
6. Firm age	5.63	2.72	−0.02	−0.00	−0.01	−0.02	0.13***	1
7. Intangible assets	249.16	1946.61	0.03**	0.27***	−0.00	−0.02*	0.25***	0.03***	1

n = 4413 firm-year observations.

Year dummy and industry dummy are not included in this table for space reasons but are included in all models.

p < 0.1; **p < 0.05; ***p < 0.01.

Table 2.

Regression results.

	(1)	(2)	(3)	(4)
	Model 1	Model 2	Model 3	Model 4
Slack	−0.234**	−0.234**	−0.236**	−0.206*
Slack	(0.109)	(0.109)	(0.109)	(0.106)
Firm size	−0.062	−0.082	−0.076	1.271**
Firm size	(1.077)	(1.076)	(1.079)	(0.522)
Firm age	−0.733***	−0.725***	−0.720***	−0.568***
Firm age	(0.151)	(0.148)	(0.146)	(0.116)
Intangible fixed Assets	0.000(0.000)	0.000*(0.000)	0.000(0.000)	0.000(0.000)
Year dummy	Included	Included	Included	Included
Industry dummy	Included	Included	Included	Included
Path heterogeneity		0.517***	0.902***	0.034
Path heterogeneity		(0.094)	(0.192)	(0.227)
Path heterogeneity			−0.043***	−0.015
Path heterogeneity			(0.013)	(0.012)
Environment munificence				−1.315***
Environment munificence				(0.508)
Environment munificence × path heterogeneity				2.123**
Environment munificence × path heterogeneity				(0.843)
Environment munificence × path heterogeneity²				0.524**
Environment munificence × path heterogeneity²				(0.244)
_cons	−1.1e + 03	−1.3e + 03	−1.3e + 03	−1.3e + 03
_cons	(844.102)	(850.088)	(855.785)	(855.001)
N	4413	4413	4413	4413
r2_w	0.003	0.004	0.005	0.011
F	2.327	2.923	2.562	4.013

Estimated coefficients and associated robust standard errors (in parentheses) are reported.

p < 0.1; **p < 0.05; ***p < 0.01.

Results

Table 1 presents the descriptive statistics and correlation metrics. The correlation table suggests that multicollinearity is not an issue. The dependent and independent variables show considerable variance, and the correlation coefficients are consistent with our expectations.

We then ran fixed effects models following a hierarchical approach: Model 1 includes only the control variables, while Models 2–4 add the independent and interaction variables and Model 4 is the full model, including all independent and interaction variables.

In Model 3 of Table 3, we tested Hypothesis 1 by introducing both the linear and quadratic terms of international path heterogeneity. The result shows that firm growth first increases with path heterogeneity (b = 0.9) and then decreases significantly as path heterogeneity continues to increase (b = –0.04). This result indicates a curvilinear relationship (which has an inverted U-shape) between path heterogeneity and firm growth. Following the three steps suggested by Lind and Mehlum (2010), we first examined whether the second-order term was significant and of the expected sign, which was confirmed by the result. Second, we tested whether the slope was indeed sufficiently steep at both ends of the data range of path heterogeneity. Using the ‘utest’ command in Stata 14 (Lind and Mehlum, 2010), we confirmed that when path heterogeneity = 0, slope = 0.901 (p = 0.015), and slope = −1 (p = 0.005) at path heterogeneity = 22.17. Third, we tested whether the turning point was located within the data range of path heterogeneity. We confirmed that the turning point was located within the data range of path heterogeneity also using the ‘utest’ command in Stata 14 by showing that the inverted U-shape turns when path heterogeneity = 10.53 is within the value range of path heterogeneity. Overall, the inverted U-shape is supported, with p = 0.005. We provide additional support by plotting this relationship in Figure 1. These findings suggest that Hypothesis 1 is supported.

Table 3.

Summary of literature related to INV growth.

Authors	Key concept	Key findings	Method	Sample
Gabrielsson et al. (2014)	International Entrepreneurial Culture (IEC): international motivation, innovation propensity, risk attitude, market orientation, proactiveness, learning orientation, networking orientation	Various IEC dimensions affect the growth of INVs across their different phases:1. International motivation, innovation propensity, risk attitude, market orientation and proactiveness positively affect INV growth through early phases, while negatively affecting INV growth in the later phases2. International learning and networking positively affect INV growth throughout all its phases	Multiple case study	Four Finnish INVs
Gabrielsson and Gabrielsson (2013)	Items affect survival/advancement of INV: knowledge of opportunities, existence of resources and substantive capabilities, dynamic and networking capabilities, entrepreneurial orientation	Provide an explanation of the phases through which business-to-business INVs evolve as they mature and then develop a dynamic model explaining this process	Multiple case study	Four Finnish INVs
Prashantham and Dhanaraj (2010)	Global connectivityInitial/dynamic social capitalInternational growth of new ventureNetwork Learning: market knowledge, technology know-how, alliance practices	1. Provide a nuanced analysis of the dynamic processes involved in the evolution of social capital and highlight the mechanisms of decay and replenishment over time2. Network learning plays a critical role in a new venture’s ability to realise the potential contribution of social capital to international growth	Inductive case study	Four new ventures in the software industry over a three-year period (2002–2005)
Fernhaber and Li (2010)	DV: international entry, firm performanceIV: industry internationalisation – all firms (frequency-based imitation), industry internationalisation – largest firms (trait-based imitation), industry internationalisation – fastest-growth firms (outcome-based imitation)	1. New venture international entry is in part an imitative response to the internationalisation of other firms in the venture’s home country industry and/or subsets of firms with certain traits or outcomes2. Interorganisational imitation moderates the relationship between new venture international entry and profitability	Two-step analytical technique: logistic regression and treatment-effects model	150 US-based publicly held new ventures
Hughes et al. (2019)	NetworkKnowledgeBorn GlobalLate internationalising SMEs	Both BGs and late internationalising SMEs rely on network size; BGs rely much more on collaboration intensity as well as international market knowledge and education	fuzzy set qualitative comparative analysis (fsQCA)	data from managers and founders of 365 international companies
Zhou et al. (2010)	IV: international entrepreneurial proclivity (proactiveness, risk-taking, innovativeness)Mediators: knowledge capability upgrading, Network capability upgradingDV: international performance	Describes how the performance implications of LAN (learning advantages of newness) can be achieved through the mediating mechanisms of both knowledge and network capability upgrading at early stages of INV	Structural Equation Modelling (SEM)	436 young INVs from China
Prashantham and Floyd (2012)	IVs: ostensive aspects of organisational routines, performative aspects of organisational routinesDVs: new capability development, existing capability improvementModerators: psychic distance, social capital	1. Variability in the performative aspects of internationalisation routines is associated with improvisational learning and new capability development2. Variability in the ostensive aspects is associated with trial and error learning and existing capability improvement3. Psychic distance moderates these relationships (moderate psychic distance is the best)4. Social capital may mitigate the negative effects of high psychic distance	Theoretical analysis(propose micro-level explanation)
Jones and Coviello (2005)	The entrepreneurThe firm structureThe environmentPerformance	Presents a three-level process of conceptual developmentDevelop a general model of entrepreneurial internationalisation composed of two primary process dimensions (time and behaviour) and four key constructs (the entrepreneur, firm, environment and performance)	Conceptual development

INV: international new venture; BG: born global; SME: small and medium-sized enterprises; DV: dependent variable; IV: independent variable.

Figure 1.

Relationship between internationalisation path heterogeneity and firm growth.

In Model 4, the interaction terms between both the linear and the quadratic terms of path heterogeneity and environment munificence are introduced to test Hypothesis 2: whether environment munificence negatively moderates the inverted U-shaped relationship. This moderation effect is supported if the second-order interaction term is significantly positive (Haans et al., 2016). As confirmed by our results, the second-order interaction term is indeed positive (b = 0.52). Figure 2 illustrates this moderation effect, showing that the inverted U-shape is flattened when the value of environmental munificence is higher, supporting Hypothesis 2. Model 4 is the full model, including all control, independent and interaction variables, and all the results from the models hold.

Figure 2.

Moderating effect of environmental munificence.

Robustness test

We performed a number of tests with alternative specifications of the empirical model as robustness checks. First, we checked whether the results were robust to alternative industry classification. Second, we conducted additional tests with alternative dependent variables. Specifically, we used firm profit growth as the dependent variable. Firm profit growth was measured as the average year-to-year profit change for a given firm. We then ran the models again, and the obtained results were consistent. We also used a two-step System Generalised Method of Moments (GMM) estimator and ran the dynamic model; the result (p < 0.1) also supported our hypotheses.

Discussion

Following DCT, we introduce the concept of internationalisation path heterogeneity, the degree to which a given INV in a particular industry is different from its competitors or counterpart firms within the same industry in terms of the temporal sequence of foreign entries, to capture the path-specific features of INV’s experiential learning and capability building and to explore the relationship between internationalisation path heterogeneity and firm growth performance of INVs. While it has been acknowledged that path is a relevant dimension in assessing INV growth (de Mello et al., 2019), it is still unclear how the heterogeneity of experiential learning would affect firm growth. It is worth noting that the internationalisation path an INV has been through is also a reflection of its experiential learning process. We argue that the relationship between path heterogeneity and firm growth is moderated by environmental munificence because the cost/benefit of heterogeneous paths is bounded by the environmental munificence faced by INVs in their international operations. Using a comprehensive panel dataset of INVs, we find that there is an inverted U-shaped relationship between internationalisation path heterogeneity and firm growth for INVs, and this curvilinear relationship is weakened with increasing environmental munificence.

Theoretical implications

Prior studies mainly focus on whether the characteristics of principal founders (Hughes et al., 2019), businesses strategies (Fernhaber and Li, 2010) and the external environment (Jones and Coviello, 2005) at one point in time can be used to explain why some firms report better growth performance than others at a later date (see Table 3 in detail).

For example, Gabrielsson et al. (2014) found that international learning, motivation, innovation propensity, risk attitude and networking positively affect INV growth throughout all its phases. Hughes et al. (2019) also highlight the importance of bringing together network-based and knowledge-based conditions of INVs. Zhou et al. (2010) believe that INV strategies (i.e. proactiveness, risk-taking and innovativeness) are the most important factors in INV growth and claimed that this impact of strategies is achieved through the mediating mechanisms of both knowledge and network capability upgrading at early stages of INV. The results of Jones and Coviello (2005) indicate that to achieve superior growth, INVs should focus not only on the characteristics of entrepreneurs or businesses but also on the external environment. By introducing autonomy, a key entrepreneurial orientation (EO) dimension, Yu et al. (2019) found that, in dynamic environments, autonomy has a positive relationship with new venture performance in the United States but a negative relationship in Taiwan. The foreign investment decisions made by firms are influenced by the unique competencies they develop over their histories, and the dynamic view of the nascent stage of the entrepreneurial process believes that the beliefs and knowledge of entrepreneurs change over time (McCann and Vroom, 2015). Only focusing on the characteristics of INVs at a given point in time can only partially reflect the effect of the competencies of INVs. Although there is evidence upon the influence of the internationalisation trajectory on INVs, scholars have only recently paid attention to the accumulative nature of experiential learning over time (Romanello and Chiarvesio, 2017). Moreover, this line of inquiry is still at a very early stage and is insufficiently understood (Knight and Liesch, 2016). Prior studies have not yet fully determined the conditions under which, and through which mechanisms, the effects of dynamic capability, accumulated by experiential learning over time, on performance are realised (Jantunen et al., 2018).

Our study contributes to this line of investigation in the following ways. First, this study extends the literature on international business from the dynamic perspective of INVs. Prior studies have long argued that foreign investments of INVs can influence firm growth performance because of learning advantages (Wu and Zhou, 2018). More specifically, at the point of first international sales, young firms possess some learning advantages over old firms in terms of assimilating new foreign knowledge and unlearning the old knowledge more quickly (Autio et al., 2000). However, the internationalisation process theory primarily bases its assumptions on the behavioural theory of the firm and suggests that internationalisation is an incremental process of learning through which internationalising firms accumulate knowledge over a period of time to avoid risks in international markets (Johanson and Vahlne, 2009). This learning is important in determining the direction and the subsequent performance of the firm in overseas markets (Mudambi and Zahra, 2007; Zahra et al., 2000). Such an accumulative feature also indicates that we cannot only focus on a given position of resources and capabilities, and we need to investigate the path an INV has travelled in its internationalisation history. We extend this stream of literature by identifying the impact of paths as a dynamic learning process of INVs. In this way, our study bridges two streams of research, dynamic capability and international business, by offering a framework to explain how path heterogeneity influences INV growth. Moreover, although scholars emphasise the importance of heterogeneous paths to firm performance (Teece et al., 1997), few empirical studies have provided evidence of the relationship between paths and performance due to the difficulty in measuring path constructs. Thus, we also contribute to this stream of literature by offering a measure of the internationalisation path of INV using secondary data.

Second, this study contributes to the long-discussed, and one of the most interesting, question about dynamic capability: under what conditions can dynamic capability lead to optimal performance (Schilke, 2014). For example, Drnevich and Kriauciunas (2011) suggest that under high levels of dynamism, the effect on competitive advantage is comparatively stronger, but others raise doubts about this relationship (Eisenhardt and Martin, 2000; Schreyögg and Kliesch-Eberl, 2007). Focusing on alliance management capability, Schilke (2014) suggests that when interacting with external environment dynamism, there is an inverted-U shape between dynamic capability and competitive advantage. By focusing on path, which is one of the three underlying dimensions (i.e. path, position and process) of dynamic capabilities (Teece et al., 1997), this article contributes to this stream of literature by providing more evidence for the nonlinear relationship between dynamic capability and performance. In addition, our finding on the relationship between path and performance highlights the boundary context of DCT that only under moderate levels of path heterogeneity can optimal performance and environmental munificence negatively moderate this relationship.

Third, organisational and management researchers have debated how firms can strategically manage the dual pressure of conforming to institutional requirements to gain basic legitimacy while forging unique or differentiated identities to achieve a competitive advantage (Deephouse, 1999; Durand and Kremp, 2016). The notion of optimal distinctiveness provides a useful conceptual focal point to synthesise a diverse literature on this common problem (Zhang et al., 2020). Our study contributes to this stream of literature by theoretically articulating and empirically testing the underlying mechanisms in terms of both the cost (mismatching problem) and benefit (opportunities sensing and resources acquisition) of heterogeneity. By so doing, we provide an alternative way to explain why firms with a medium level of heterogeneity can achieve the best performance. In particular, it is worth noting that our study explores the optimal distinctness issue in a unique context of INVs. The current understanding of optimal distinctness in the literature mainly rests on established firms (Miller et al., 2013; Zhang et al., 2020). Compared with established firms that have already occupied a significant part of market share and have more social identity or legitimacy (Fisher et al., 2017), INVs generally lack resources and experience to make up for the cost of learning by trial and error and the higher risk of failure (Fisher et al., 2016). At the same time, INV internationalisation during the initial stage will receive less understanding or recognition from the host country because INVs have not yet been tested by the market, and different countries have different market settings (Khan and Lew, 2018). It can be seen that both efficiency and legitimacy mechanisms have been amplified in INVs. As such, identifying the achievement of optimal distinctness is much more important for INVs.

Fourth, because the INV, as a research subject, naturally and simultaneously blurs the lines between international business and entrepreneurship, this research also contributes to the literature on entrepreneurship by revealing ‘how’, rather than simply ‘what’, new venture growth is realised. By mainly focusing on five perspectives, including the characteristics of top management team members (Amason et al., 2006), resources (Lee et al., 2001), location (Folta et al., 2006), EO (Karami and Tang, 2019; Wales et al., 2019) and strategy (Smith et al., 2001), prior entrepreneurship studies on new venture growth theoretically articulate the opportunity identification and resource acquisition mechanisms (for a review, see Gilbert et al., 2006) and generally suggest that new ventures pursue strategies of focusing on the accumulation of heterogeneous resources.In this way, new ventures can establish resource position barriers and achieve sustainable growth (Wernerfelt, 1984). However, according to DCT, a firm’s competitive advantage not only comes from its resource position but also the path it has travelled (Teece et al., 1997). Actually, path dependence not only results in lock-in but also forms an essential property of capabilities (Vergne and Durand, 2011). Meanwhile, the internal strategy and external environment can change greatly over time, and firms need to constantly learn from past experience accumulated through a series of investment decisions. Hence, only knowing the position of a focal firm is far from sufficient to understand the source of its competitive advantage in a turbulent environment (Teece et al., 1997). The introduction of the path concept can better depict a firm’s ability to sense opportunities and accumulate resources in building its growth.

Managerial implications

Importantly, our findings suggest that being different can not only cultivate the capabilities of opportunity sensing and resource acquisition, which are drivers of enhancing growth performance, but also bring mismatching problems that have a negative influence on firm growth. Thus, INV managers are well advised to establish a moderate number of overseas subsidiaries compared to their peers and to try to build a path of moderate heterogeneity to improve firm growth performance and further increase the survivability of firms.

Our findings also suggest that managers may wish to consider environmental conditions when making entry decisions. Although whether INVs establish a moderate number of overseas subsidiaries compared to their peers can have both positive and negative influences on firm growth, such influences, to some extent, depend on contextual conditions, such as environmental munificence and resource constraints. In particular, building a moderately heterogeneous path is more important for INVs in a less munificent environment. In this regard, we hope our study provides some practical guidance for managers concerning the relationship among environmental conditions, foreign entry strategies and firm growth.

Limitations and future research directions

This study has some limitations that offer fruitful opportunities for future research. First, we examined the role of path heterogeneity by focusing on foreign investment. Our findings provide an overall picture of how the internationalisation path of an INV influences its growth outcome. Future studies may examine more specific dimensions of paths, such as host country distributions or the amount of foreign investment. Second, due to data constraints, we only use foreign investment as the building block for constructing the measurement of the internationalisation path. One possible direction for future research is to examine other methods of foreign activities, such as exports or mergers and acquisitions (M&As), or to subdivide foreign direct investment (FDI) into sales subsidiaries, production and R&D subsidiaries. As an important learning process in the Uppsala model, exports and M&As may also play an important role in shaping the internationalisation path and growth performance. The type of operation mode is also important for INV research since INVs often have many sales subsidiaries but fewer production subsidiaries. Third, other environmental munificence factors (such as price-cost margin) that have been less examined and are worthy of investigation in future studies. Fourth, future studies can introduce path heterogeneity formed by the previous internationalisation experience of TMT members to explore the impact of path heterogeneity at the TMT level on the growth of INVs. Fifth, future studies can validate the robustness of our findings by using different measurements of the dependent variable, that is, firm growth. For example, firm growth can be put in relation to the country-level average of growth.

Conclusion

This article introduced the concept of internationalisation path heterogeneity to capture the path-specific features of INV experiential learning and capability building and to explore the relationship between internationalisation path heterogeneity and firm growth of INVs. Based on the empirical analysis of a longitudinal dataset of 1054 INVs with 4413 observations, we found that there is a curvilinear relationship, which has an inverted U-shape, between internationalisation path heterogeneity and firm growth for INVs. In addition, the munificence of the environment negatively moderates this relationship. We therefore, extend the literature on international business from the dynamic perspective of the INV and address the question, ‘Under what conditions can dynamic capability lead to optimal performance?’ In addition, we contribute to the literature on entrepreneurship by revealing ‘how’, rather than ‘what’, new venture growth is realised. Not only does this study have definite implications for the management of INVs, but it also suggests that future research lies ahead in understanding the accumulative nature of experiential learning over time.

Footnotes

Funding

The author(s) received no financial support for the research, authorship and/or publication of this article.

ORCID iD

Zhen Wang

Author biographies

Bin Guo is a Professor of Department of Innovation, Entrepreneurship and Strategy School of Management at the School of Management, Zhejiang University, China. He received his Ph.D. in Management from Zhejiang University (1998). His research interests are in the areas of management of innovation and international business. His research has been published in journals such as Research Policy, Technovation, International Business Review and others

Zhen Wang is a Ph.D. candidate at the School of Management, Zhejiang University, China. He received his Master’s degree in Management in 2015. His main research areas relate to International Entrepreneurship and International New Ventures.

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