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International Business Review 7 (1998) 163184

Resource-based theory and international growthstrategies: an exploratory study

Otto Andersena,*, Low Suat Kheamb

aAgder State College, Tordenskjoldsgate 65, N-4604 Kristiansand, NorwaybNordlands Research Institute, N-8002 Bod, Norway

Abstract

The resource-based approach incorporates traditional strategy insights concerning a firmsdistinctive competencies. Furthermore, the resource-based approach also provides value-addedtheoretical propositions that are testable within the diversification strategy literature. This paperexamines to what extent the resource-based theory can be used to predict other growth stra-

tegies than diversification. Based on an exploratory study from an export growth strategycontext, the resource-based theory seems to be able to identify firms with growth ambitions,and to some degree to predict the intended growth strategy of the firm. The results andmeasurement problems are discussed. 1998 Elsevier Science Ltd. All rights reserved.

Keywords: Internationalization; Resource-based theory; Growth strategy

1. Introduction

In addition to providing insights on the rate of growth of the firm, the resource-based theory also provides value-added theoretical explanations about the directionof a firms diversification strategy. The direction of a firms diversification is believedto be due to the nature of its available resources and the market opportunities in theenvironment (Mahoney & Pandian, 1992; Peteraf, 1993). That is, firms tend todevelop new products and enter new markets where the resource requirements matchtheir resource capabilities. Several empirical studies suggest that firm-specific

* Corresponding author. Tel.: + 38141518; fax: + 38141061; e-mail: [email protected]

0969-5931/98/$19.00 1998 Elsevier Science Ltd. All rights reserved.

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164 O. Andersen, L. Suat Kheam / International Business Review 7 (1998) 163184

resources and relatedness of activities are important variables in the diversificationprocess (see, for example, Chatterjee & Wernerfelt, 1988, 1991; Datta, Rajagopa-lan & Rasheed, 1991; Ramanujam & Varadarajan, 1989).

Based on Ansoffs (1965) well-known productmarket expansion matrix, diversi-fication represents only one type of growth strategy. The other growth strategies aremarket penetration, market development and product development. The focus ondiversification could be due to the fact that it represents the most extreme form ofgrowth strategy, while product development or market development is consideredmore as continuums of the firms development (Abell & Hammond, 1979; Ansoff,1965). For small- and medium-sized firms however, even product or market develop-ment could be regarded as a discontinuance of previous development (cf. Barber,Metcalfe & Porteous, 1991)in particular, when the context is defined as choice ofinternational growth strategy.

This paper will explore the degree to which a resource-based approach can beused to identify firms with international growth ambitions and to predict the intendedinternational growth strategy of the firm. The rest of the paper is organized into sevensections: first, a short conceptual review of resources and competitive advantages ispresented; second, different resource-based research traditions that can be used inpredicting growth strategy are highlighted; third, the critical resource types connectedto international growth strategy are discussed; fourth, a discussion of the classi-fication of growth strategy and a conceptual framework is presented; fifth, the designof the study and methodological procedures are described; sixth, the findings of the

study are presented; and finally under discussion, limitations of the present studyand research implications are illuminated.

2. Resources and competitive advantage

Chatterjee and Wernerfelt (1991, p. 34) refer to a substantial body of literaturethat classifies resources into three categories: physical, intangible and financialresources. There is generally no disagreement over what encompasses physical orfinancial resources, as there is with intangible resources. For example, Grant (1991,

p. 119) categorized intangible resources into four subclasses: human resources, tech-nological resources, reputation and organizational assets. Organizationally embeddedintangibles have in earlier literature also been referred to as tacit knowledge (e.g.Polanyi, 1964); experiences, reputation and goodwill (e.g. Berg & Friedman, 1981;Duncan, 1982), organizational routines and skills (March & Simon, 1958; Nelson &Winter, 1982). On the other hand, Hall (1993) classifies intangible resources asassets or competencies: Intangible assets include having capabilities, which typi-cally are regulatory (e.g. patents) or positional (e.g. reputation) while intangible skillsor competencies are related to doing capabilities, which include functional capa-bility (e.g. know-how) and cultural or organizational capability (e.g. routines). Fur-

thermore, intangible skills are typically people dependent, while intangible assets areconsidered as people independent.

The boundaries between the concepts of resources, skills and capabilities are not


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clear. Ghoshall and Bartlett (1990, p. 610) also included as resources marketing skillsand management capabilities. Amit and Schoemaker (1993, p. 35), however, defineresources as the stock of available factors owned or controlled by the firm. Theseresources comprise, inter alia, of know-how that can be traded (e.g. patents andlicences), financial or physical assets (e.g. property, plant and equipment), humancapital, etc. They defined capabilities as a firms capacity to deploy resources, whichare based on the firms ability to develop, carry, and exchange information throughits human capital. Such information-based capabilities represent invisible assets.

The rather unclear typology of the concepts is probably due to the wide range ofapplications of the resource-based theory. There is however agreement that not alltypes of resources can constitute a sustainable competitive advantagethat is, gener-ate above-normal rates of return (Porter, 1985). Several authors have discussed theprerequisites of resources in order to constitute sustainable competitive advantage(see, for instance, Amit and Schoemaker, 1993; Barney, 1986, 1991; Derickx &Cool, 1989; Mahoney & Pandian, 1992; Peteraf, 1993; Wernerfelt, 1984).

3. Resource-based theory and prediction of growth strategy: different

research traditions

Concerning the use of resource-based theory to predict growth strategy, two differ-ent traditions can be identified. The first one relates to the large stream of research

on diversification strategy at the corporate strategy level, where attention is focusedon the role of corporate resources in determining the boundaries of the firms activi-ties. Diversification is seen as the result of excess capacity in resources which havemultiple uses and for which there is market failure (Peteraf, 1993, p. 188). Resourcesare seen as the driving forces for diversification, while market opportunitiesalthough mentionedare less focused on. In empirical studies, various types ofdiversification indexes based on S.I.C. (Standard of Industrial Classification) codesare used as the dependent variable, while the independent variables consist of differ-ent financial ratios and indirect measures used to capture physical resources andintangible assets. It is assumed that firms with generalizable or flexible resources

are able to diversify quite widely, while firms with specialized or inflexible resourceswill follow a rather narrow diversification strategy. For instance, Chatterjee & Wer-nerfelt, 1991 suggest that physical resources and intangible resources, which arebelieved to be quite inflexible, can be used to enter closely related markets, whilerelatively more unrelated diversification will be associated with financial resources.

The other tradition focuses on the business strategy level. Here the resource-basedtheory is used within the conversation of strategy analysis and strategy formulationprocess. The efforts within this tradition have been mainly to develop practical impli-cations for management, with few empirical studies (cf. Grant, 1991). When aresource-based approach is applied, the business is defined in terms of its resources

and capabilities instead of served markets. Internal resources and capabilities aredeveloped and exploited, and their potential to represent sustainable competitiveadvantage (SCA) is analyzed. The firm should then select a strategy which best


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edge about foreign markets and operations. The change aspects are decisions to com-mit resources and performance of current business activities, a mechanism shown inFig. 1 (Johanson & Vahlne, 1990, p. 12). Market knowledge and market commitmentare supposed to affect both commitment decisions and the way current decisions areperformedand these, in turn, change market knowledge and commitment.Additional market commitment is believed to be made in small incremental steps.

Although not explicitly stated, the internationalization model above rests on theresource-based theory. The core explanation of the model is that (increased) marketknowledge will lead to (increased) market commitment, and vice versa (cf. Andersen,1993). Johanson and Vahlnes classification of market knowledge is based on Penro-ses definition (1959, p. 53): One type, objective knowledge, can be taught; theother, experience or experiential knowledge, can only be learnt through personalexperience With experiential knowledge, emphasis is placed on the change in theservices the human resources can supply which arises from their activity. Experien-tial knowledge will thus be unique (this argument is based upon the historical notionof path dependency, cf. Nelson & Winter (1982)), while objective or general knowl-edge has more the property of being a public good, that is, it can be transferred atlittle or no cost.

The basic assumption of Johanson and Vahlne (1977, 1990) that performing activi-ties creates firm internal assets such as skills and (experiential) knowledge has alsobeen emphasized by others (cf. Porter, 1991). Furthermore, the idea that tacit knowl-edge creates competitive advantage that, in turn, can predict the growth of firms has

also been suggested for multinational corporations (Kogut & Zander, 1993).The empirical studies on the internationalization process have predominantly usedan ex post facto cross-sectional design. A large number of different categories ofpredictor variables have been proposed. Based on a review of previous literature,Cavusgil and Naor (1987) have hypothesized the following variables to be relatedto export activity: (1) unique firm advantages, (2) indicators of resource commitmentto exporting, (3) decision-maker characteristics, (4) perceived attractiveness ofexporting. From this list, categories (1) and (3) can be said to be resource-drivenpredictor candidates. When using a cross-sectional design, indicators of resourcecommitment to exporting (category 2) are too close to the dependent variable (degree

of international involvement) to have any scientific explanatory value. Perceived

Fig. 1. The internationalization process of the firm.


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attractiveness of exporting (category 4) could only indirectly be interpreted asresource related. The empirical findings have been mixed, presumably due to differ-ent types of samples, different conceptualizations and measurements, and differentanalytical approaches (cf. Cavusgil & Zou, 1994). Only in a study by Yang, Leoneand Alder, 1992 the argument of excess resource capacity has been used to predictexport activity. In some recent studies, knowledge and expertise in different func-tional competencies have been found to be positively related to international expan-sion (e.g. Agarwal & Ramaswami, 1992; Cavusgil & Zou, 1994; Kogut & Zander,1993; Yang, Leone and Alder, 1992).

5. A resource-based framework to predict international growth strategy

The theoretical perspective adopted in this paper is based on the resource-basedtheory. This theory will be used to predict the rate and the direction of growth offirms. Furthermore, attempts will be made to combine both traditions of previousresource-based research: research pertaining to boundaries of the firm and researchbased on strategy analysis and formulation. A conceptual framework to study thefirms direction of international growth strategy, founded on the resource-basedapproach, is proposed in Fig. 2.

The framework postulates that the direction of a firms growth is determined by(or aligned with) its capabilities and the market opportunities. In contrast to previous

empirical studies on firms boundaries, market opportunities is treated as a separatepredictor variable. Advocates for the strategy analysis and formulation traditionwould probably argue that the growth direction would depend on the firms resourcesand capabilities relative to external opportunities. The distinction between resourcesand market opportunities is not clear. For instance, knowledge of market opport-unities and access to customer relationships can be considered as a resource for thefirm. In particular, firms are likely to have different knowledge about new marketopportunities. In order to reduce the resource-based content from the concept ofmarket opportunities, it was decided to use demand conditions and profitability ofpresent international markets as indicators for market opportunities (see below).

Furthermore, a decision was made to use the concept of capabilities instead ofsustainable competitive advantage (SCA). A firms capabilities are typically ident-ified by asking what the firm can do more effectively than its rivals (e.g. Grant, 1991).

Fig. 2. Conceptual framework.


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According to Barney (1991), the following four characteristics are determinants ofthe sustainability of capabilities: valuable, rare, nonsubstitutable, and difficult to imi-tate. On the other hand, Grant (1991) uses the following criteria to capture the SCA:durability, transparency, transferability, and replicability. There is no consensus ofa theoretical definition of sustainability, some of the criterialike rareness and imita-bilityare closely linked, and it is still unclear whether the different criteria arenecessary and/or sufficient to create a SCA.

In fact, most of the empirical resource-based studies have measured the conceptof capabilities instead of SCA. An exemption is Halls (1993) attempt to identifyintangible sources of SCA by measuring imitability and durability, thus only captur-ing two of the criteria mentioned above. Based on the perceptions of managers ofonly six companies, no attempts of validations were made.

A complete understanding of a competitive advantage requires a complex, multidi-mensional portrayal of the points of superiority or deficiency between a businessand its competitors (Day & Nedungadi, 1994). It can, however, be argued that man-agers learn to interpret the state of advantage and how it was gained by payingattention to the most important information and that the managers representation ofcompetitive advantage is hypothesized to be a sensible adaptation to pastevents and

presentrealities (Day & Nedungadi, 1994; Hogarth, 1987; Kiesler & Sporull, 1982).To evaluate whether a competitive advantage is sustainable or not in a strategyformulation context would be a still more daunting task. In addition to knowing pastevents and the present state of advantage, the managers must also be able to evaluate

the future rent-generating potential of their competitive advantage (e.g. durability,imitability).To conclude, the somewhat unclear conceptual definition of sustainability and

measurement problems outlined above led to the use of capabilities instead of sus-tainable competitive advantage. In particular, the managers perception of capabilitiesis believed to be more relevant in a (international) strategy formulation process,than SCA.

6. Key components and relationships

6.1. Intended growth strategy

While previous empirical studies on the internationalization process of firms weredominated by studies attempting to predict the degree of international involvementor choice of entry form, the dependent variable in this study will be intended inter-national growth strategy. The productmarket expansion matrix of Ansoff (1965)will be used to classify the alternative growth strategies. According to Ansoff (1965),the four major types of growth opportunities are described as follows: (1) Market

penetration. Market penetration consists of the firm seeking increased sales for its

current products in its current (international) markets. (2) Market development. Thefirm seeks increased sales by taking its current products into new (international)markets. (3) Product development. Product development consists of the firm seeking


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increased sales by developing new or improved products for its current (international)markets. (4) Diversification growth. The firm seeks increased sales by developingnew products and taking these into new (international) markets. In turn, three broadtypes of diversification were identified: (a) concentric diversification, (b) horizontaldiversification, and (c) conglomerate diversification. In the present study, none ofthese three subcategories of diversification growth nor the various forms of integrat-ive growth strategies will be focused on.

The Ansoffs productmarket expansion matrix was chosen to represent the firmsalternative growth strategies for the following reasons. First, the matrix was presentedalmost 30 years ago, and it is reasonable to believe that a large number of the man-agers do know about this matrix and presumably have adopted it for strategy planningpurposes. Second, the growth strategies from the matrix should be applicable formost types of firms, regardless of firm size and industry type. Even service industriescan use this matrix with some modification. Third, the interpretation of the alternativestrategies should be straightforward. The strategies can be described by existing/newproduct(s)/market(s), which implies that no concepts have to be explained. It should,however, be noted that the matrix is not without its ambiguities (cf. Grnhaug &Kvitastein, 1992). For instance, how different must a product be to an existing oneto be classified as new? Does a group of non-user customers in a current marketarea represent a new market, or should a new market be reserved to a new geo-graphical area? Despite such ambiguities, use of the product/market expansion matrixshould give an indication of the direction of growth. Furthermore, in the present

context, all firms are already established in at least one international market. Theproblem of ambiguities would likely be more severe if the sample had consisted ofboth exporters and non-exporters.

As noted above, Ansoffs expansion matrix is considered to represent a simplealthough approximate remedy to identify the direction of a firms growth strategy.To identify the rate of growth, the following fifth option was included: continue withthe present level with international activities, i.e. no growth.

6.2. Capabilities

In order to predict international growth strategies, the frame of reference forresource evaluation had to be presented in an international context. To identifyresources that could be likely candidates to constitute capabilities on internationalmarkets, only intangible resources were included. Such resources are believed to beparticularly important for predicting growth strategy (cf. Chatterjee & Wernerfelt,1991; Grant, 1991; Peteraf, 1993). According to the classification of Hall (1993),the present study includes two groups that could be labelled as functional capabilityand one group that represent organizational capability. The following groups of intan-

gible capabilities are used: (1) International product and production (includingtechnology) capability (PRODCAP), (2) international marketing capability(MARKCAP), and (3) international management capability (MANCAP).


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6.3. Market opportunities

The selection of attractive foreign markets has been identified as being of primaryconcern in a firms internationalization process (Douglas & Craig, 1992). Foreignmarket conditions could represent both opportunities and threats for the exporters.The international growth strategy is likely to be conditioned by foreign marketcharacteristics (cf. Cavusgil, Zou & Naidu, 1993; Cooper & Kleinschmidt, 1985).Several studies indicate, however, that the information search and knowledge aboutforeign markets are rather low, especially for small- and medium-sized enterprises(SMEs) (cf. Papadopoulos & Denis, 1988). International market knowledge seemsto a large degree to be based on experiential knowledge, i.e. knowledge about presentmarkets (Johanson & Vahlne, 1990). Accordingly, it can be presumed that, at leastfor SMEs, the evaluation of present international markets concerning demand con-ditions and profitability will influence future growth strategy.

The relationships between the various types of capabilities, market opportunitiesand alternative growth strategies are grounded on a strategy formulation process.Once a firm has decided to grow, the type of growth strategy chosen should be suchthat it provides the firm with a competitive advantage. Resources are seen as thekey factors in explaining the choice of growth strategy (cf. Chatterjee & Wernerfelt,1991, p. 34), and this kind of relationship will in particular be focused on in thispaper. We do not have enough knowledge to hypothesize how the firms evaluationsof market opportunities will influence the choice of a specific growth strategy (cf.

Grant, 1991). Accordingly, we will only explore if and how market opportunitiesmay have an impact on the intended growth strategy.Firms that have no intentions for international growth are believed to have a rather

weak resource base. Even though the present strategy (international products andmarkets) offers rather low growth and profit opportunities, the lack of expansionability may represent a barrier to growth for such firms (cf. Bauerschmidt, Sullivan &Gillespie, 1985; Yang, Leone and Alder, 1992). This leads us to hypothesize that:

H1 SMEs with modest capabilities in marketing, production and managementare expected to prefer no growth strategy, while firms with large capabilities inmarketing, production and management are believed to prefer internationalgrowth.

Firms that perceive to have sufficient marketing, production and managementcapabilities are, in accordance with the idea behind the internationalization models(e.g. Johanson & Vahlne, 1977, 1990; Reid, 1982), believed to prefer continuedinternational growth. The assumption that the growth of SMEs follows the stagemodels (i.e. always follows both the same events and the same sequence of events)has been challenged (cf. Birley & Westhead, 1990). Instead, the firms choice ofgrowth strategy (market penetration, market development, product development anddiversification) could be seen as a part of an ongoing strategy process (cf. Melin,

1992). Choosing the growth strategy involves striking a balance between the exploi-tation of existing resources and the development of new ones (Wernerfelt, 1984).

In general, a market penetration strategy involves less investment than the other


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growth strategies (cf. Kotler, 1988). To follow such a strategy, the firm must havea competitve product and product technology. To increase sales of the firms presentproducts in present markets, most of the possible courses of action are marketingactivitieslike promoting new uses, promoting more frequent and/or larger quantityusage, and promoting product usage at new times (Kerin, Mahajan & Varadarajan,1990). Marketing capability is therefore assumed to be more critical than productcapability for firms planning to follow a market penetration strategy. The firms mayperceive that their general international management capability is not sufficient tochoose other growth strategies. This leads to the following hypothesis:

H2 The positive relationship between the capabilities and the intention to followan international market penetration strategy is strongest for marketing capability,followed by product capability, and least for management capability.

Some empirical findings indicate that the small business managers are morefocused on product and production technology than managers in larger firms (cf.Stanworth & Curran, 1986). SMEs are likely to pay considerable attention to bothproduct and process quality and to develop new products that are valued by theirinternational customers. SMEs that perceive their product and production technologyas strong are likely to further develop this resource into new products. That is, thefirms are believed to choose growth strategy from a position of strength. Even thoughproduct capability will represent the core capability for a product development strat-egy, the exporting SMEs are likely to have experienced that a successful new product

launching will also require considerable marketing capability. As previously noted,management capability is perceived as a highly flexible resource type and not restric-ted to a related (product or market development) strategy. We expect that

H3 The positive relationship between the capabilities and the intention to followan international product development strategy is strongest for product capability,followed by marketing capability, and least for management capability.

An international market development strategy is considered to be one of the mostimportant and critical tasks in the firms internationalization process (Douglas &Craig, 1992). To select a successful international market, the firm must have knowl-

edge about the different alternative markets and ability to market the products to theselected market. Marketing capability is likely to be the critical resource in a marketdevelopment strategy. As noted by other researchers, the international market selec-tion is closely connected to other dimensions of the firms internationalization pro-cess, in particular to the decision of mode-of-entry (Douglas, Craig & Keegan, 1982;OFarrel & Wood, 1994; Welch & Luostarinen, 1988). We therefore expect that aninternational market development strategy is relatively more demanding with respectto the management capability than an international product development strategy.The following hypothesis is stated:

H4 The positive relationship between the capabilities and the intention to followan international market development strategy is strongest for marketing capa-bility, followed by management capability and least for product capability.


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International diversificationnew product(s) in new international market(s)rep-resents the most extreme growth strategy compared to the firms present strategy.Previous studies indicate that the availability of highly flexible resources will leadto a more unrelated growth strategy than resources that are fairly inflexible(Chatterjee & Wernerfelt, 1991). Management capability represents the most flexibleresource type in our study and is believed to be the core capability for a diversifi-cation strategy. Furthermore, we will argue that marketing capability is a more flex-ible type of resource than product capability. Product capability is likely to containa higher proportion of physical resources (such as production equipment) than mar-keting capability. Physical resources are characterized by fixed capacity, and areusually useful to a limited number of purposes. Intangible resources tend to havesofter capacity constraints (Chatterjee & Wernerfelt, 1991). For instance, a strongmarketing team can successfully market new products in many different markets.We therefore expect that

H5 The positive relationship between the capabilities and the intention to followan international diversification strategy is strongest for management capability,followed by marketing capability and least for product capability.

In studying the relationship between resources and growth strategy, it is importantto establish the time order of cause and effect. A large number of previous studiesare based on cross-sectional design. This study is grounded on a strategy formulationprocess. That is, the firms are asked to evaluate resources at the time of interviewing,

and in addition they were later on in the questionnaire asked to specify the intentionto follow various growth strategies. It was outside the scope of the available datato measure actual behavior, i.e. the realized growth and growth strategies of thefirms. According to Fishbein and Ajzen (1975), the best predictor of behavior is theintention to act. Several studies have indicated a strong relationship between behaviorintentions and actual behavior (e.g. Schuman & Johanson, 1976; Foxall, 1984).Behavior intentions have been used as predictor for actual behavior in the exportmarketing literature (e.g. Andersen & Rynning, 1994, Yang, Leone and Alder, 1992).As our sample consists mainly of small firms, we believe that the CEOs personalstatements should represent reasonable predictions of the growth strategies that the

firm is likely to undertake. The link between behavior and intentions may not alwaysbe strong if there is a long time interval between intentions and behavior. Our modelis, however, primarily developed to predict intended growth strategies.

7. Methodology

7.1. Sample

The population of the study was small- to medium-sized Norwegian exporting

firms. All industries except for agents/wholesalers, financial institutions and servicesuppliers were included. In 1992, according to the Norwegian Central Bureau ofStatistics, more than 99 per cent of the Norwegian firms had 100 or less employees.


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The average number of employees in Norwegian firms is lower than in most of theWestern countries. For instance, the European Unions definition of a SME includesfirms up to 250 employees. In the face of contradictory definitions, this study hasdefined a SME as one with less than or equal to 200 employees, while exporters aredefined as those who were currently exporting in 1991 and 1992.

Because of its nation-wide coverage, Kompass Online was used as a samplingframe. This database includes all production firms with more than five employees.Previous studies have indicated that there are very few exporters with five or lessemployees (cf. Lorentzen, 1979). A search of the database turned up 2504 exportersas the target population. After a manual removal of subsidiaries and duplicates(firms which were registered under different industries), the population was reducedto 2400. It was decided to send the questionnaire to all the 2400 firms. This resultedin a return of 632 questionnaires, of which 54 of the addresses were registrated tohave moved. A second wave of questionnaires was sent 3 weeks later to non-respon-dents, including those which have moved and which had left a forwarding address.The second wave resulted in 289 returned questionnaires. From the total of 921questionnaires received, 196 responses had to be omitted for the following reasons:five had moved without leaving a forwarding address, 20 had gone out of business,118 were non-exporters or firms which have stopped exporting, five firms respondedto both wave 1 and wave 2, while 48 were subsidiaries. From the 725 responses,28 questionnaires were incomplete and therefore unusable. The final total usableresponse was 697 questionnaires, yielding a valid response of 31.6 per cent. Com-

pared to other mail-based collection studies, this response rate was considered accept-able (cf. Gemunden, 1991; Leonidou, 1995). High non-responses will distort thereliability of sample estimates. The aim of the present study is not, however, togeneralize sample estimates on resource profiles or growth strategies, but to explorethe relationships between these concepts. Early respondents and late respondentswere examined and no significant differences were found. Second, a 50 and a 75 percent sample were randomly extracted in the analysis process and no significant differ-ences were found. These techniques do not eliminate the concern of non-responsebias, but should indicate some representativeness.

The questionnaire was addressed to the Administrative Manager of the company,

who was likely to be the most knowledgeable about the competitive and marketenvironment. In many small firms, only the administrative manager was believed tohave sufficient knowledge to answer the questionnaire. Furthermore, other studieshave indicated that a simple average of responses from several informants is lessaccurate than using the most knowledgeable informant (Huber & Power, 1985).

7.2. Dependent measures: intended growth strategies

To allow for multiple strategies, the CEOs were asked to evaluate on a scale of1 to 5 (1 = strongly disagree, , 5 strongly agree) the extent to which their firms

future internationalization growth strategies were likely to be as follows: (1) maintainpresent international status quo (no international sales growth), (2) increase theexport share of current products to current international markets, (3) export new


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product(s) to current international markets, (4) export current product(s) to new inter-national market(s), and (5) export new product(s) to new international market(s). Ascould be expected, bivariate correlations were negative (p 0.001) between strategy1 (maintain present international status quo) and the other growth strategies, whilepositive correlations were found between strategies 2 and 5 (p 0.001).

7.3. Explanatory measures

7.3.1. Market opportunities

As discussed earlier, the managements evaluation of their firms internationalmarket conditions is expected to influence future growth strategy. The CEOs wereasked to evaluate (a) the profitability (1 = non-profitable, , 5 = profitable), and(b) the demand condition (1 =decreasing, , 5 =increasing) during the last 3 yearsin their most important international market. Even though the correlation betweenthese two measures wasr=0.32 (p 0.001), economic theory suggests that demandand profitability should be analyzed as two separate variables among others thatcould be included in market opportunities.

7.3.2. Capability

PRODCAP. OFarrell and Hitchins (1988) argue that production issues (such astechnology, design, quality control) in small manufacturing firms should be takeninto account when considering competitiveness and small firms growth because

getting production right is always a necessary condition of growth in small firms(p. 400). Based on several previous empirical studies (e.g. Aaker, 1989; Hitt & Ire-land, 1985), the following indicators of product and production (includingtechnology) capabilities were measured: (1) the technology of our products issuperior, (2) we have the highest product quality in industry, (3) our products havethe best warranty/service arrangements in the industry, (4) we have the mostadvanced production equipment in the industry. The CEOs were asked to comparethemselves with their most important competitors, which could be domestic or inter-national. All items were measured by a 5-point Likert scale (1 = strongly disagree,, 5 = strongly agree). The overall reliability of the four items was 0.65

(Cronbachs alpha).MARKCAP. The selection of foreign markets to enter and entry mode has been

characterized as two of the most important international marketing decisions, and anumber of researchers have suggested to use a systematic approach and analysisto reach the right decision (e.g. Papadopoulos & Denis, 1988; Root, 1994). Theimplementation of such systematic procedures presuppose higher-quality inter-national marketing management (cf. Bilkey, 1978; Bradley, 1995; Douglas & Craig,1992). To measure such international marketing capabilities the following two state-ments were used: (1) extent of analysis done when selecting foreign markets (1 =non-systematic market selection, , 5 = systematic market selection); (2) extent of

systematic selection of entry mode (1 =non-systematic selection of entry mode, ,5 = systematic selection of entry mode). To measure the ability to implement aninternational marketing program, the firms were asked about who performed the


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international promotion strategy (1 = promotion performed by others (i.e. importer,agent), , 5 = promotion performed by the firm itself). The reliability coefficientof these three items was 0.87 (Cronbachs alpha).

MANCAP. On the basis of Penrose (1959), Johanson and Vahlne (1977, 1990)and Hall (1993), we tried to identify general international management capabilitiesthat could represent the firms experiential knowledge. The MANCAP was measuredby the following statements: (1) our firm is among the most knowledgeable aboutexport procedure, and (2) our firm is among the best at developing internationalstrategy. Both items were measured by a 5-point Likert scale (1 =strongly disagree,, 5 = strongly agree). The Cronbachs alpha for these two items was 0.86.

In the following, validation efforts will only be made for the product, marketingand management capabilities concepts. As noted above, this study focus on the

influences of different types of capabilities on the firms intended growth strategy.Only two indicators are used to measure market opportunities in order to explore ifand how the CEOs perception of market opportunities may have an impact on theintended growth strategy. Future studies should elaborate the market opportunitiesconcept and develop alternative operationalizations.

First, the capabilities items were factor analyzed with varimax rotation in order toexplore the patterns of relationships. The KaiserMeyerOlkin measure of samplingadequacy was 0.69, indicating that use of factor analysis is acceptable (cf. Kaiser,1974). Three factors were identified: factor 1 that seems to represent marketing capa-bilities (including capabilities in market selection mode, entry selection, and pro-

motion strategy); factor 2 that apparently represents production capabilities(including technology, product quality, warranty/service, and production equipment);and factor 3 that seems to represent managerial capabilities (including knowledgeabout export procedure, developing international strategy).

A confirmatory factor analysis is particularly useful in the validation for themeasurement of specific constructs (Steenkamp & Trijp, 1991). While factor analysisis concerned with exploring the patterns of relationships among a number of vari-ables, structural equation modelling allows for a statistical test of the goodness-of-fit for the proposed confirmatory factor solution, which is not possible with principal

components/factor analysis. LISREL 8 (Joreskog & Sorbom, 1993) was used forestimation of the measurement model of capabilities and the construct correlations.Consistent with Anderson and Gerbing (1988) and as applied by Sujan, Weitz

and Kumar (1994), the measurement model was evaluated on the following criteria:unidimensionality, reliability, and convergent and discriminant validity. From Table1, the LISREL-based composite reliabilities were 0.86, 0.67 and 0.85. The lowestreliability coefficient was close to the recommended cut-off level of 0.70, indicatingthat the measures are relatively reliable. As Table 1 indicates all items had a signifi-cant loading on their corresponding construct. The lowest t-value is 10.34, whichexceeds the critical value for the 0.01 significance level (critical value = 2.576).

Accordingly, the results demonstrate adequate convergent validity. An assessmentof discriminant validity is to determine whether the confidence interval ( two stan-dard errors) around the correlation estimate between the two factors includes 1.0. A


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Table 1

Capabilities: measure validation

Measurement model Number of items Loadings Phi-values(standard errors)

(Construct reliability) (Convergent validity) (Discriminant validity)

MARKCAP 3 (0.86) MARKCAPPRODCAP:

Syst. market choice 0.83 (0.04) t = 21.13 0.18 (0.06)

Syst. entry mode 0.91 (0.04) t = 23.86

Promotion strategy 0.71 (0.04) t = 17.47

PRODCAP 4 (0.67) PRODCAPMANCAP:

Product technology 0.59 (0.05) t = 11.83 0.42 (0.05)

Product quality 0.68 (0.05) t = 13.54

Product warranty 0.52 (0.05) t = 10.34

Production equipment 0.52 (0.05) t = 10.35MANCAP 2 (0.85) MANCAPMARKCAP:

Knowledge of export 0.81 (0.05) t = 14.98 0.18 (0.05)

Ability in int. strategy 0.90 (0.06) t = 16.08

Overall fit indices: chi-square (24) = 55.36 (p 0.01); CFI = 0.98; RMSEA = 0.051; RMR = 0.039.

pairwise comparison of the constructs in Table 1 indicates that all the correlationsare significantly different than one, establishing discriminant validity.

From Table 1, the overall fit of the measurement model is acceptable. Although

the chi-square (55.36 with 24 degrees of freedom) is significant (p

0.01), it shouldbe noted that when the sample size becomes large enough, significant differenceswill be found for any specified model. The comparative fit index (CFI) of 0.98, theroot mean error square of approximation (RMSEA) of 0.051 and the root meansquare residual of 0.039 are satisfactory. To further examine the unidimensionality,the residuals and the modification indices were examined. Only two of the nor-malized residuals were statistically significant (exceeding 2.58). Two of the indi-cators (product quality and production equipment) had modification indices abovethe suggested level (3.84). The modification indices indicated that these variablesmight be indicators on the MANCAP construct, as well as PRODCAP (i.e. multiple

loadings). Theoretical support for such a structure is, however, difficult to find, andthe model was not respecified. Overall, the measurements that are posited as alternateindicators of each construct seem to be acceptably unidimensional.

On the basis of these results, factor-based scores were calculated and used in thesubsequent regression analysis.

8. Analysis and results

To study the influence of capabilities and market opportunities on intended growth

strategies, Ordinary Least Square was used to estimate the model parameters. Theintercorrelation matrix revealed relatively weak positive correlations between thefactors and the market opportunities items (all less than 0.2).


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Five separate models were estimated: model 1: no international sales growth,model 2: international market penetration, model 3: international product develop-ment, model 4: international market development, and model 5: international diversi-fication. Table 2 summarizes the regression results for each growth strategy.

With regard to the no growth strategy, the coefficients for all the capabilitiesvariables have the hypothesized negative signs (H1), however, not significant. Marketdemand was here perceived as declining while the profitability variable was shownto have no effect. As for the other growth strategies, all the coefficients of the capa-bility factors have positive signs as anticipated in H1 and except for managementcapability in model 2 (market penetration) they are significant (p 0.05). Concern-ing market penetration (model 2), marketing capability seems to be somewhat moreimportant than product capability while the impact of management capability is ratherweak. This gives some support to H

2

. Contrary to our hypothesis H3

, managementand marketing capabilities seem to be slightly more important than production capa-bility for an international product development strategy. As to market development(H4), the association seems to be strongest for management capability (p 0.0001)followed by marketing capability (p = 0.0002) and product capability (p = 0.028).For diversification strategy, the significance level is lowest for managerial capabilityfollowed by marketing capability and production capability, as predicted in H5.

The signs of market demand are positive for all growth strategies but significant(p 0.01) only for market penetration (model 2) and market development (model4). The signs of market profitability were all negative, but only to a certain degree

significant (p

0.10) for market penetration.

9. Discussion

To date, few published studies have focused on the prediction of a firms growthstrategies except for diversification. The purpose of our exploratory study is to exam-ine if the resource-based theory has a wider range of application than just predictingthe type of diversification strategy. We have in particular focused on the relationshipbetween the firms resource profile and the intended growth strategy. Overall, the

findings provide some support for the use of the resource-based theory to predict afirms planned growth strategy. Even though the goodness of fit of the various modelsis rather low, the adjusted coefficients of determination are not so much lower thanthe results from previous empirical diversification studies (e.g. Chatterjee & Werner-felt, 1991). It should be noted that while the diversification studies capture the reallo-cations of the firms resources between different product markets, as well as entryinto new product markets, the present study is more specific about the directionof growth.

Penrose (1955), in her seminal contribution to the resource-based theory, statedthat it is the resources of the firm which limit the growth and choice of markets it

may enter. Key resource constraints include (see also Mahoney & Pandian, 1992):(1) shortage of labor or physical inputs, (2) shortage of finance, (3) lack of suitableinvestment opportunities, and (4) lack of sufficient managerial capacity. In the


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Table2

Regressionequationsexplainingintendedinternationalgrowthstrategies

Model:

Model1

Model2

Model3

Model4

Model5

Ind.vari

ables

Nogrowth

Mark.pen.

Prod.

dev.

Mark.

dev.

Diversific.

Beta

p

Beta

p

Beta

p

Beta

p

Beta

p

MARKC

AP

0.0

58

0.2

40

0.1

91

0.0

001

0.1

81

0.0

002

0.17

6

0.0

002

0.1

16

0.0

19

PRODCAP

0.0

27

0.5

85

0.1

64

0.0

008

0.1

33

0.0

07

0.10

4

0.0

28

0.1

13

0.0

24

MANCA

P

0.0

13

0.7

88

0.0

61

0.1

96

0.1

90

0.0

001

0.19

3

0.0

001

0.1

36

0.0

07

Demand

4.2

66

0

.0001

0.1

37

0.0

06

0.0

78

0.1

22

0.15

1

0.0

02

0.0

83

0.1

15

Profitability

0.0

009

0.9

87

0.0

83

0.0

98

0.0

74

0.1

46

0.02

4

0.6

23

0.0

65

0.2

14

(Constan

t)

(3.6

5)

0

.0001

(3.7

3)

0.0

001

(3.3

0)

0.0

001

(3.40

)

0.0

001

(2.9

2)

0.0

001

Adj.R2

0.0

50

0.0

86

0.0

95

0.1

13

0.04

8

F-stat.

5.2

07

8.8

33

9.4

34

11.7

54

4.98

9

df

(5398)

(5412)

(5398)

(5418)

(5396)

sign.

F

0.0

001

0.0

001

0.0

001

0.0

001

0.000

2


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present study, firms with rather low functional and managerial capabilities seemedto have low growth ambitions. Furthermore, the perceived decreasing demand onpresent market could indicate that these firms lack suitable investment opportunities.

The diversification studies suggest that there is a systematic relationship betweenthe type of market a firm chooses to enter and its resource profile (e.g. Lecraw,1984; Montgomery & Hariharan, 1991). Our results indicate that the firms resourceprofile can have some influence on the intended growth strategy in general.

Even though market opportunities have been suggested to influence the choice ofdiversification strategy, the type of relationship has not yet been properly stated.From our study it appears that firms with international growth ambitions experiencedpositive demand conditions in its most important international market for the past3 years, while the profitability in the most important international market for the past3 years was perceived as rather low. The growth in export sales could have impliedinvestments and costs that as yet have not been paid back. Because the relationshipbetween market opportunities and intended growth strategy ex ante was ratherunclear, regression analysis was repeated with only the capability factors. This didnot, however, change the relative influence of the capabilities factors on the differentintended growth strategies, as shown in Table 2.

Several limitations of this research should be noted with a view towards extendingthe present study. First, the relationship between market opportunities and growthstrategy should be further investigated. At least two different approaches could beused to study the market opportunities: (1) the firms previous or present market

opportunities), and (2) the potential market opportunities. The first approach wouldto some degree depend on the present and previous stage of the product/market lifecycle. For instance, a present product/market could be in a question mark cell,characterized by high-growth markets but low relative market shares and profitability(cf. Heldey, 1977). Use of historical observable or perceived measures of marketopportunities could fail to predict future growth strategy if the CEOs anticipate thata present question mark is likely to be a future cash cow. The other approachwould incorporate aspects of strategy formulation, but in empirical studies, problemscould arise in specifying which market opportunities should be measured. Further-more, the CEOs evaluations of potential market opportunities are likely to be depen-

dent on the firms present resource base. As noted above, further research should beconducted concerning the influence and measurement of marketing opportunities.

Second, the present study is rather limited concerning the number and type ofexplanatory variables. According to the view that knowledge development is theprime force behind the firms internationalization process, only intangible resourcesrepresenting functional and managerial capabilities were included. For futureresearch to predict growth strategy in general, the influence of physical and financialresources should also be studied. Furthermore, in addition to market characteristicssuch as demand and profitability, other factors like competitive forces and macroenvironmental factors should also be included.

Third, the sample we used consisted of SMEs exporters. The development of newproducts or markets is believed to be of a more continuos character for larger firms,which would make it more difficult to predict growth strategy. By using the individ-


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ual venture as unit of analysis, some of these problems can be overcome. An inter-national venture can be defined as marketing of a specific product in a specific exportmarket (cf. Cavusgil & Zou, 1994).

Fourth, when predicting growth strategy a longitudinal design spanning over sev-eral years should be used in order to gain a richer understanding of the dynamicsand complexity of the resources, market opportunities, and growth strategy relation-ship. Even though we have no reason to believe that there is systematic bias in theanswers of planned growth strategy used in this study, the reliability and validitywould have been increased by using realized growth strategy.

Acknowledgements

The authors thank the IBRs anonymous reviewers for their helpful and construc-tive comments.

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