Knowledge and internationalization of returnee entrepreneurial firms

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Knowledge and internationalization of returnee entrepreneurial firms Wensong Baia,* ,1, Martin Johansonb,1, Oscar Martín Martínc,1 a

Department of Business Studies, Uppsala University, Box 513, 751 20 Uppsala, Sweden Mid Sweden University/Uppsala University, Department of Business, Economics and Law/Department of Business Studies, 851 70 Sundsvall, Sweden c Public University of Navarre/Uppsala University, Business Administration Department/Department of Business Studies, Campus Arrosadía s/n, 31006 Pamplona, Navarre, Spain b

A R T I C L E I N F O

Article history: Received 6 April 2015 Received in revised form 14 December 2016 Accepted 15 December 2016 Available online xxx Keywords: International new ventures International experience Internationalization Knowledge-based view Level of internationalization Market commitment Market knowledge Returnee entrepreneurs

A B S T R A C T

This study aims to answer whether and how returnee entrepreneurs’ international experience and returnee entrepreneurial firms’ international market knowledge influence these firms’ internationalization. Anchored in a framework combining an entrepreneurial and knowledge-based view, we develop a model and four hypotheses on the relations between returnee entrepreneurs’ international experience, international market knowledge, international market commitment, and level of internationalization of the returnee entrepreneurial firm. Empirical evidence of the proposed model is derived from a recent sample of Chinese returnee SMEs in knowledge-intensive and high-technology industries. The main finding is that returnee entrepreneurs’ international experience nurtures international market knowledge of returnee entrepreneurial firms, which in turn has a positive effect on these firms’ international market commitment and level of internationalization. In terms of theory, the study extends our understanding of returnee entrepreneurial firms by uncovering the role of returnee entrepreneurs’ international experience and returnee firms’ international market knowledge during their initial and early international expansion. © 2016 Elsevier Ltd. All rights reserved.

1. Introduction In an increasingly globalized business world, entrepreneurial mobility is an attractive research area, offering opportunities for researchers interested in labor mobility and its association with entrepreneurship activities. According to Wright (2011: 137), “research on entrepreneurial mobility is fragmented and many aspects are largely neglected.” One of the entrepreneurial mobility streams of research is focused on returnee entrepreneurs, a relatively new phenomenon associated with entrepreneurship, strategy, and international business (IB). Returnee entrepreneurs have been defined as individuals who return to their home countries to start up a new venture after several years of living abroad (Drori, Honig, & Wright, 2009). Often they are scientists, engineers, professionals, and students who have business experience and/or have studied in other countries (Dai & Liu, 2009; Filatotchev, Liu, Buck, & Wright, 2009), particularly in developed countries. On this basis, returnee entrepreneurial firms can be

* Corresponding author. E-mail addresses: [email protected] (W. Bai), [email protected] (M. Johanson), [email protected] (O. Martín Martín). 1 All authors have contributed equally to this paper.

defined as businesses created by returnee entrepreneurs in their home countries after coming back from having lived abroad. Existing IB literature focuses on returnee entrepreneurs in China and India, and indicates that these individuals typically have valuable international experience and knowledge as well as managerial and entrepreneurial skills (Chen, Tan, & Jean, 2016). Furthermore, it suggests that they are familiar with different institutional and market environments and may have acquired technical expertise and developed social and business networks abroad (Filatotchev et al., 2009; Kenney, Breznitz, & Murphree, 2013). The literature discusses the contribution of returnee entrepreneurs to innovation and the economic development of emerging markets (Filatotchev, Liu, Lu, & Wright, 2011; Kenney et al., 2013; Liu, Lu, Filatotchev, Buck, & Wright, 2010; Saxenian, 2005; Wang, Zweig, & Lin, 2011), as they are conducive to knowledge spillovers and innovation through mobility across national borders (Filatotchev et al., 2011). Returnee entrepreneurs facilitate direct technology transfer and indirect technology spillovers to local firms, thereby helping the technological development of the home countries (Pruthi, 2014). In addition, their entrepreneurial abilities and the economic impact of “brain circulation” awaken interest among some emerging countries’ governments, which materializes in the form of policies and incentives favorable to the

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Please cite this article in press as: W. Bai, et al., Knowledge and internationalization of returnee entrepreneurial firms, International Business Review (2016), http://dx.doi.org/10.1016/j.ibusrev.2016.12.006

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establishment of returnee entrepreneurial firms (e.g., Kenney et al., 2013; Zweig, 2006). Given the newness of this stream of research, the literature on returnee entrepreneurial firms is scarce. Most empirical studies are based on samples of high-technology SMEs in China (e.g., Filatotchev et al., 2009, 2011; Liu et al., 2010; Wright, Liu, Buck, & Filatotchev, 2008) and focus on issues such as the creation of returnee entrepreneurial firms and the role of knowledge transfer (Lin, Lu, Liu, & Zhang, 2016), social ties (e.g., Pruthi, 2014), and peer networks (Qin & Estrin, 2015). The characteristics of returnees and the effect they have on exports (Filatotchev et al., 2009), entrepreneurial practices (Liu & Almor, 2016), and domestic growth of local firms (Chen et al., 2016) have also drawn the attention of scholars. Other topics recently studied include the population density of returnees and other determinants of innovation performance for non-returnee SMEs (Filatotchev et al., 2011; Liu et al., 2010) and returnees’ characteristics as determinants of business performance (Bai, Holmström, & Johanson, 2016; Dai & Liu, 2009). Yet, there are gaps in understanding these firms’ international expansion, and the extent to and the way in which the experience gained abroad can be useful in the first steps of returnee firms’ internationalization. Interesting in this context is the role of individual experience in relation to firm-level knowledge, as the returnee gains the experience before the inception of the firm, while the firm knowledge is developed after the firm’s creation. This is not only an interesting research issue affecting returnee entrepreneurial firms, it may also have implications for international new ventures. To date, research on the internationalization of returnee entrepreneurial firms has been sparse. Two articles, by Filatotchev et al. (2009) and by Dai and Liu (2009), have discussed in some detail issues related to foreign markets, but no research has focused on the internationalization of these firms as its main objective. We argue that returnee entrepreneurial firms’ international and technological knowledge, based on returnee entrepreneurs’ experience gained abroad, may not only be useful in domestic markets but could also contribute to their early internationalization (Drori et al., 2009; Filatotchev et al., 2009). “Returnee entrepreneurs are expected to be the early adopters and promoters of internationalization” (Filatotchev et al., 2009: 1010), and returnee entrepreneurial firms’ internationalization is likely to display some common characteristics with the expansion of international new ventures (Jones & Coviello, 2005; Knight & Cavusgil, 2004) because of their possession of entrepreneurial abilities, knowledge and experience with doing business abroad from inception. Although returnee entrepreneurial firms have an international entrepreneurial orientation that enhances performance (Dai & Liu, 2009), and they are positively associated with export orientation and performance (Filatotchev et al., 2009), there are no studies focusing on and explaining the initial internationalization of these firms. This paper aims to fill this gap in understanding the factors explaining the initial internationalization of returnee entrepreneurial firms by developing a model where the entrepreneur’s international experience is expected to have a positive influence on the firm’s international market knowledge, which in turn may affect its commitment to foreign markets as well as its level of internationalization. In line with Oviatt and McDougall (1994), we assume that returnee entrepreneurial firms are relatively new and opportunity-seeking and that they pursue a proactive strategy, and thus it is reasonable to focus on the first steps in the process. We anchor the model theoretically in an entrepreneurial and knowledge-based view, and we test it on a recent sample of Chinese returnee SMEs in knowledge-intensive and high-technology industries. We contribute to the literature on returnee entrepreneurs and IB by proposing an internationalization model

uncovering the importance of returnee entrepreneurs’ international experience and returnee entrepreneurial firms’ international market knowledge during the initial international expansion of these firms. In the next section, we provide a theoretical background on the internationalization of returnee entrepreneurial firms. We then formulate four hypotheses connecting four critical constructs, namely, returnees’ international experience, returnee entrepreneurial firms’ international market knowledge, international market commitment and level of internationalization. Later, we describe the methodology and present the results. A discussion of the findings leads to our final remarks, including the identification of managerial, policy and research implications, and limitations and future research avenues. 2. Theory 2.1. The role of knowledge in firm internationalization Derived from the resource-based view that perceives the firm as a unique bundle of idiosyncratic resources and capabilities, the knowledge-based view posits that a firm’s value-creating activities are knowledge dependent (Grant, 1996; Liebeskind, 1996). Accordingly, knowledge is the most strategically important resource through which a firm coordinates other resources and builds its competitive advantage, which underpins firm growth (Barney, 1991; Kogut & Zander, 1993; Penrose, 1995; Spender & Grant, 1996). A firm’s knowledge is also viewed as the single most important factor in theories of internationalization (Prashantham, 2005) such as the original Uppsala internationalization model (Johanson & Vahlne, 1977), which stands in contrast to other internationalization theories (e.g., the eclectic framework and internalization theory) where control is the main mechanism used to reduce uncertainty. Knowledge is the result of various forms of learning (De Clerq, Sapienza, Yavuz, & Zhou, 2012), including experiential, vicarious, congenital, or grafting. It is difficult to ignore the importance of knowledge in internationalization (Clarke, Tamaschke, & Liesch, 2013; De Clerq et al., 2012) because it is the essential resource that enables a firm to address complexity and uncertainty (Grant, 1996; Liesch & Knight, 1999), and it also provides the platform on which firms can identify opportunities in foreign markets. Thus, it can be seen as a key driver for internationalization (Papadopoulos & Martín Martín, 2010). Indeed, the Uppsala school conceptualizes internationalization as a process resulting from the interplay between market knowledge and commitment, as well as current activities and commitment decisions, where a firm’s stock of knowledge determines its market commitment (Johanson & Vahlne, 1977). While the new approach of international entrepreneurship (IE) underscores early and rapid internationalization of firms, it still centers on the significant role of knowledge and asserts that the international experience gained by top management prior to the company being established, as well as the firm’s knowledge intensity and learning ability, constitute a firm’s core strengths enabling early internationalization (Oviatt & McDougall, 1994). However, the knowledge discussed in the traditional Uppsala model (Johanson & Vahlne, 1977) is different from the IE approach. The former emphasizes experiential knowledge gained from a firm’s practice in international markets and explains why the firm increases its international commitment. In contrast, IE emphasizes the role of an entrepreneur’s personal international experience and technology-oriented knowledge, as these firms often operate in high-technology markets, in pursuit of growth opportunities through fast and early internationalization (Autio, 2005; Sapienza, Autio, George, & Zahra, 2006).

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Despite the disparity between the two streams of thinking, they, and the most recent formulation of the Uppsala model (Johanson & Vahlne, 2009), have common ground in terms of the importance given to knowledge (Prashantham, 2005; Zhou, 2007). According to some scholars (Casillas, Moreno, Acedo, Gallego, & Ramos, 2009; Chetty, Johanson, & Martín Martín, 2014; Johanson & Martín Martín, 2015), these two approaches could be complementary and become an integrative mode, thus incorporating a wider set of knowledge types, roles, and sources. This view includes prior individual knowledge that may explain how internationalization starts, and new knowledge such as that acquired through international practice (Casillas et al., 2009; Prashantham, 2005), thus providing a more comprehensive theory of new firm internationalization (Autio, 2005). Our study focuses on returnees’ international experience and returnee entrepreneurial firms’ international experiential and technological knowledge, which may drive the early internationalization of these new ventures. 2.2. Returnee entrepreneurs, knowledge, and internationalization Returnee entrepreneurs have been recognized as relevant players in high-technology firm internationalization from emerging markets such as India and China (Prashantham & Dhanaraj, 2010). Returnee entrepreneurs’ international experience and R&D capabilities enable their entrepreneurial role. In the IB literature, researchers note that the prior international experiences of a firm’s management team constitute its primary source of international knowledge (Fernhaber, Mcdougall-Covin, & Shepherd, 2009). This experience thus plays a crucial role in the firm’s internationalization by improving its ability to perceive and promptly react to opportunities, and facilitating access to international markets (Johanson & Vahlne, 2009; Sapienza et al., 2006; Yeoh, 2004). This is particularly important for small firms (like returnee entrepreneurial firms in general) that are short on resources and have to strive to survive and grow (Reuber & Fischer, 1997; Sapienza et al., 2006; Zucchella, Palamara, & Denicolai, 2007). Furthermore, internationalization is an innovative act that exposes a firm to the environment of international markets. A firm’s R&D capabilities could bring forth the development of new products and novel ways of doing business, and thus can be seen as another pillar of internationalization (Knight & Cavusgil, 2004; McDougall & Oviatt, 2000; Oviatt & McDougall, 1994). International knowledge and R&D capabilities – two essential resources for the internationalization of new ventures – have become more easily developed and widely available with the increasing integration of international markets (Autio, 2005). They are nevertheless still scarcer in developing and emerging markets, where returnee entrepreneurs can offer value by filling the entrepreneurial and technological gaps between emerging and developed economies (Li, Zhang, Li, Zhou, & Zhang, 2012; Saxenian, 2002). From the literature (e.g., Filatotchev et al., 2009; Liu et al., 2010; Pruthi, 2014; Wright, Liu, Buck, & Filatotchev, 2008), we derive two views of the returnee entrepreneur’s knowledge. The first, which can be seen as theoretical, is the idea that because they have lived abroad, returnee entrepreneurs have gained knowledge that can be useful in various fields when they move back to the home country and establish a company. The second is empirical and gives evidence that when they return to the home country, their entrepreneurial activities create knowledge spillover for technology development and innovation. Returnee entrepreneurs tend to apply the experience gained while living abroad in starting ventures that may target markets outside of their home country (Yamakawa, Khavul, Peng, & Deeds, 2013), since they already understand the niche market for opportunities, and experience is likely to make the first steps abroad quicker and smoother. Moreover, having experience in

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different types of markets seems to positively influence a venture’s entry into culturally distant markets, as it prepares the firm to face environments different from the home market (Saxenian, 2002). The importance of experience comes from the fact that it can be transformed into experiential knowledge (Hohenthal, Johanson, & Johanson, 2014). Experienced managers use more foreign strategic partners and their firms internationalize more quickly than firms with less internationally experienced managers (Reuber & Fischer, 1997). For example, Chinese returnee entrepreneurs understand Western science and technology and business practices (Liu & Almor, 2016), which allows for easier access to strategic R&D alliances and venture capital abroad (Lin, 2010; Wang et al., 2011). Another aspect of returnee entrepreneurs’ knowledge is the technological dimension. Because many returnees are engineers and scientists who have worked in labs around the world, the technological knowledge they acquired from operating in international high-technology markets is likely to have an effect on their firms’ internationalization (Filatotchev et al., 2009). High-technology markets are dynamic and characterized by innovation and ongoing changes in products and process technology. Therefore, it is important to have knowledge about not only selling and producing but also developing and integrating new products in international markets. Returnee entrepreneurs prefer to aim for new products that have potential in global markets (Dai & Liu, 2009), and are capable of engaging in original technology and product development (Lin, Lu, Liu & Choi, 2014). In addition to technological knowledge, returnee entrepreneurs also have knowledge about how institutions and culture affect high technology, and in particular how to interact with customers and authorities (Lin, 2010; Liu & Almor, 2016), which has an impact on the development of new products. 3. Hypotheses 3.1. Returnee entrepreneurs’ experience and firms’ international market knowledge According to literature on SMEs, managers’ characteristics and motivations strongly influence their firms’ characteristics, decisions, and behavior (e.g., Acedo & Galan, 2011; Delmar & Wiklund, 2008). We therefore assume that the experience of individual returnees can influence their firms’ knowledge. The returnee entrepreneur’s international experience is related to the time spent abroad, usually studying or working, and it is likely that the longer and the closer that experience is to the operations of the firm, the more important and useful it is for the firm’s internationalization. As a result of the time spent abroad and activities carried out there, returnee entrepreneurs are expected to have built up an international mindset that enables them to be alert to opportunities in international markets and to better handle risks associated with internationalization (Lee & Roberts, 2015). They are likely to capitalize on their international experience and to transfer part of this experience to the firm. This is especially the case when the firm is young and small; there are few employees, and consequently the total stock of knowledge is limited. Accordingly, returnee entrepreneurs play a leadership role that may influence and enhance the development of firms’ international market knowledge (Cui, Li, Meyer, & Li, 2015). First, returnee entrepreneurs share and distribute the experience to other managers/employees. In light of the entrepreneurial and technological gaps between developing and developed countries, other managers/employees in developing home countries are less likely to be familiar with international markets (Klaus & Peng, 2016). The returnee entrepreneurs can transfer part of their experience to other managers/employees in the firm, which may enable them to implement an internationalization strategy where

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mistakes could be avoided and where the returnee entrepreneurs’ experience may serve as a springboard that gives firms a learning advantage (Chen, Tan, & Jean, 2016). Second, according to the theory of the learning advantage of newness (e.g., Autio, Sapienza, & Almeida, 2000; Prashantham & Young, 2011; Sapienza et al., 2006), when firms are new and have not had time to build up a rigid organizational structure, they are more likely to develop routines and structures directly from the knowledge they have access to (Liu & Almor, 2016). This is especially the case for returnee entrepreneurial firms, which are new and small and make use of the international experience of their founders. As a result, returnee entrepreneurial firms may not have developed routines and structures that would hinder the transformation of international experience into the firms’ market knowledge. And less rigid routines promote the internal transfer of knowledge, which is the case at the beginning of a rapid internationalization (Sapienza et al., 2006). Moreover, the more closely the entrepreneur’s international experience is linked to the operations and business of the firm, the more useful this experience is for the development of knowledge at the firm level. It seems that these firms are characterized by double advantages of newness: first, no rigid structures and routines have been developed for their domestic markets, and second, key people in the firms have relevant international experience. This combination makes it easier to transfer the returnee entrepreneur’s international experience to the firm and to transform the experience into knowledge, which can be shared and distributed to other employees. The critical knowledge in this case is related to international markets, and we define international market knowledge as returnee entrepreneurial firms’ experiential and technological knowledge in foreign markets (Autio et al., 2000; Johanson & Vahlne, 1977). In light of the above, we hypothesize: H1: There is a positive relation between returnee entrepreneurs’ international experience and the international market knowledge of returnee entrepreneurial firms. 3.2. International market knowledge, and international market commitment and level of internationalization Countries differ in terms of markets, business systems, institutional and political factors, and culture (Drogendijk & Martín Martín, 2015). It has been noted that such differences are particularly large between emerging and developed countries (Bruton, Ahlstrom, & Obloj, 2008). Thus, for firms from emerging markets, learning and knowledge are especially important in diminishing such distances (Mathews, 2006; Zou & Ghauri, 2010) and uncertainties (Johanson & Vahlne, 1977). Returnee entrepreneurial firms develop international market knowledge from the international experience and knowledge that returnee entrepreneurs transfer to them. The transfer involves other managers/ employees of the firm as knowledge recipients who learn and exploit returnee entrepreneurs’ experience. They apply knowledge to engage in internationalization, and develop and accumulate their own understanding of international markets through business practices. So the firm’s international market knowledge is the composition of returnees’ experiential knowledge and other managers’/employees’ knowledge input. Moreover, the firm’s knowledge is directly relevant to operations in specific areas of business, leading to the development of organization structure, management routines, and practices for internationalization. The resource-constrained new ventures are essentially interested in leveraging this international knowledge to expand international markets. Revenues generated from foreign markets can support a venture’s domestic market learning (Sapienza, De Clercq, & Sandberg, 2005) and growth.

In addition to cultural and historical, physical and socioeconomic, as well as institutional distance (Martín Martín & Drogendijk, 2014), one can argue that technological distance may also be relevant during the initial period of internationalization and that this may add to uncertainty. Inheriting from returnee entrepreneurs who are transferors of technological knowledge across markets, returnee entrepreneurial firms tend to have knowledge in leading-edge R&D (Filatotchev et al., 2011; Lin, 2010). It follows that the returnee entrepreneurial firm’s knowledge of developing high-technology products and pursuit strategies for these products in international high-technology markets may contribute to overcoming the technological distance. Knowledge is instrumental in reducing hazards, uncertainty, and risk, which in turn favors additional commitment. More importantly, leading-edge knowledge forms a competitive advantage that may be in demand and exploited in several markets. To seize the opportunity and dominate the emergent niche market, it is necessary for the firm to make a commitment to finding customers and developing business relationships (Oviatt & McDougall, 2005). International commitment refers to the amount of resources invested in foreign markets (Johanson & Vahlne, 1977). Existing theory suggests that entry modes and market commitment are closely related (Bilkey & Tesar, 1977; Johanson & WiedersheimPaul, 1975). Commitment is a result of sacrifices or investment of resources and knowledge, and it also reflects the intention to maintain the current operations and to stay in a market. Correspondingly, it results in the exclusion of alternatives, and it entails risk. International commitment denotes how the firm makes additional investments of substantial resources and may go from exports to setting up subsidiaries abroad. Since returnee entrepreneurial firms tend to operate in high-technology sectors and most of them pursue international growth at an early stage (Filatotchev et al., 2009), they may show interest in establishing subsidiaries and locating production and R&D abroad. An increased interest and commitment would be reflected by investments of resources in organizational structures and functions that are used in markets other than the domestic one. Due to market heterogeneity, firms’ new market entries and additional commitments made to foreign markets are more likely to take place when uncertainty is reduced. High-technology new ventures in particular suffer from the liability of newness and have to be cautious of intensive commitment, especially when they want to make a less fungible and more permanent commitment in a specific market. As discussed above, the returnee entrepreneurial firm’s international market knowledge gathered in one or more host countries forms the knowledge base that constitutes a key strength, which is conducive to lessening liabilities and can therefore be perceived as a driver of international commitment and expansion. Considering the capabilities made possible by this knowledge base, as well as the imperative of generating cash flows through exploiting existing international market knowledge, an increasing stock of international knowledge is beneficial to higher market commitment. This is consistent with the literature that argues for a relationship between market knowledge and commitment (Johanson & Vahlne, 1977). Therefore, we postulate: H2: There is a positive relation between international market knowledge and the international market commitment of returnee entrepreneurial firms. A firm’s level of internationalization has been defined as the degree to which the firm is connected to foreign markets in terms of export intensity and other factors, or the extent to which the firm is internationalized at any given point in time (Papadopoulos & Martín Martín, 2010). A returnee entrepreneurial firm’s international market knowledge is conducive to the initiation of early internationalization (Filatotchev et al., 2009). First, the firm is

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capable of discovering and formulating opportunities based on experiential knowledge of markets, customer needs, and problems, technologies, and ways to serve markets (Johanson & Vahlne, 2006, 2009; Shane, 2000). This may have a positive effect on the development of international business relationships, the identification of new customers, and the ability to market and sell its products in foreign markets. Second, international market knowledge enables the firm to be more aware of potential problems and risks that come along with opportunity exploitation, thus increasing the success rate of new business development (Eriksson et al., 1997). Finally, it could facilitate the development of managerial routines and processes that enable better exploitation of opportunities (e.g., R&D capability) and new market entry. Such experience derived from other markets gives the firm a sort of platform from which to see, compare, and reflect on opportunities to develop its business (Eriksson et al., 2000). In short, these firms’ knowledge of foreign markets promotes effective internationalization, which is reflected by the level of firm internationalization (Ramaswamy, Kroeck, & Renforth, 1996). In light of this, we postulate that: H3: There is a positive relation between international market knowledge and the level of internationalization of returnee entrepreneurial firms. 3.3. International market commitment and level of internationalization We have already referred to international market commitment as the amount of resources invested in a firm’s international operations. The investments give the firm a foundation from which to conduct international activities, and as most SMEs mainly internationalize through export, the commitments that support these activities are especially important for the returnee entrepreneurial firm’s internationalization. International market commitment gives the firm a presence in foreign markets, which in turn provides an opportunity to use the knowledge and, more importantly, its position in the market. Commitment implies being an insider in the foreign market’s network, and with the aid of this position, the firm can identify new opportunities that are not observable or reachable by firms outside the market (Johanson & Vahlne, 2009). This is especially important for the growth of sales, as the entrepreneurial firm’s business network and social relationships in the foreign market affect sales opportunities. Moreover, being committed to a foreign market also signals to other actors in the market that the intentions are serious and longterm, which in turn increases the legitimacy and trustworthiness of the returnee entrepreneurial firm. At the same time, this reduces

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the uncertainty that both the entering firm and local firm may perceive. Internationalization of returnee entrepreneurial firms is the primary outcome of firms’ international activities and successful foreign market commitment. With increasing international market commitment, the firm becomes less dependent on the domestic market, and instead transfers resources to other markets. As previously suggested, the commitment provides a solid foundation, which enhances the ability to seize international growth opportunities. Consequently, returnee entrepreneurial firms with a high level of international market commitment are more likely to achieve a high level of internationalization (Papadopoulos & Martín Martín, 2010). We posit the following hypothesis: H4: There is a positive relation between international market commitment and the level of internationalization of returnee entrepreneurial firms. Fig. 1 provides a visual representation of the hypothesized model of returnee firm internationalization. 4. Methods 4.1. Sampling and data We identified China as a suitable country in which to carry out our empirical study on returnee entrepreneurial firms. China is the second largest economy in the world, has a long history of sending students abroad, and has favorable governmental policies towards returnees (Kenney et al., 2013). It is indeed the most frequent data collection place for researchers interested in returnee entrepreneurial firms. However, in contrast with previous studies (cf. Dai & Liu, 2009; Filatotchev et al., 2009, 2011; Liu et al., 2010), we did not limit our data collection to an entrepreneurial business park (Zhongguancun) in a particular city (Beijing), but rather focused on an entire economic region, the Pearl River Delta Economic Zone. This zone, with a population of 56 million and per capita GDP of USD 17,260 in 2015, is one of the most developed regions in China and one of the top three destinations attracting returnee entrepreneurs (Wang & Miao, 2013). We targeted returnee entrepreneurial firms in six parks and towns including Shenzhen, Guangzhou, Dongguan, Zhuhai, Zhongshan, and Foshan. To develop the sampling frame, we first asked the Administrative Committee of the returnee entrepreneurial business park in each city for their list of returnee firms. We then cross-checked the lists received with lists that we generated using the Internet. For relatively small cities such as Zhuhai, Dongguan, Zhongshan, and Foshan, the lists obtained from both sources were highly consistent, while in the large cities of Guangzhou and Shenzhen

Level of internationalization H3 Returnee entrepreneurs’ experience

H1

International market knowledge

H4

H2 International market commitment

Fig. 1. The hypothesized model of returnee firm internationalization.

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returnee firms were also found spread out around the city. Therefore, we added business ventures outside the business parks to the latter two lists. As a result, the initial list of returnee entrepreneurial firms consisted of 1915 companies distributed as follows: Shenzhen (738), Guangzhou (726), Dongguan (220), Zhuhai (111), Zhongshan (25) and Foshan (95). In a second stage, we contacted all 1915 returnee firms, explained the purpose of the study, and excluded those that did not qualify after applying three sampling criteria. First, with a confirmatory purpose, we made sure that a returnee had in fact created the firm. Second, the firm had to be operating for more than two years, to ensure it was an already established and functioning business. Finally, the firm had to be involved in international operations; that is, it had to be internationalized. In this manner we obtained a comprehensive sampling frame composed of 836 internationalized returnee entrepreneurial firms. As another positive feature of our data, we invited the 836 internationalized returnee firms listed in the sampling frame to participate in our study instead of applying a sampling procedure to draw a sample. Our sample also contrasts with previous quantitative studies in that, consistent with our purposes, it is based only on internationalized returnee entrepreneurial firms (cf. Dai & Liu, 2009; Filatotchev et al., 2009, 2011; Liu et al., 2010). After two rounds of repeated visits (some returnee founders were out of their office during the first visit), a total of 201 returnee entrepreneurial firms completed the survey. According to the Chinese definition of SME, most observations (165 or 82%) correspond to small firms, with a smaller number of micro (16), medium-sized (19), and large (1) firms. To keep relative homogeneity in terms of the size of the firms studied, we discarded the one large firm. Furthermore, one of our dependent variables had four missing values, so we decided to remove the corresponding four firms as well. The mean number of employees in the 196 returnee entrepreneurial firms used in the analyses is 37.3, with a mean turnover of RMB 20.5 million. Although the firms studied are relatively young, with an average age of 4.4 years, they began international activities early, and on average have entered 5.7 countries. Close to 67% of the returnee entrepreneurial firms first targeted the host country where the returnee entrepreneur previously lived, with around 88% of these first market entries taking place in developed countries. The USA (48%) and the UK (15%) were the most frequent cases. This is consistent with the fact that 91% of returnees’ host countries in our sample are developed nations. The top three countries are USA (92), UK (31), and Canada (17).

of the study, and interviewed the returnee entrepreneurs. To increase participation, we used a referral letter from a Chinese university, demonstrating our legitimacy for doing the survey in China. We followed one enumerator to observe the administration of the questionnaire in situ and made sure that the interview process was carried out as professionally as expected. The returnee entrepreneur respondents were the main founders of the company in charge of business operations at the time of the visit. After the two above-mentioned rounds of visits, we obtained the 201 usable questionnaires. The response rate was therefore 24%. The returnees themselves filled out each questionnaire. On average, it took approximately 25–35 min to complete it, and the field research spanned a period between October 9, 2013 and January 21, 2014. There are no significant differences between early and late respondents. We also tested non-response bias (Armstrong & Overton, 1977) and found no significant differences between respondents and non-respondents in terms of firm age and size. First, in an attempt to reduce the likelihood of common method variance (Chang, van Witteloostuijn, & Eden, 2010), the pretest of the questionnaire avoided using confusing, vague, and unfamiliar terms in the formulation of questions and indicators. Second, the sets of questions and indicators referring to the four main constructs and the controls either appeared in different sections of the questionnaire or were measured using different response formats and scales. Third, the number of members in the survey team diminished potential biases caused by interviewers’ verbal particularities and expectations. In addition, we randomly selected the responses of 30 sample returnee entrepreneurs and asked an alternative senior executive to complete the survey at each firm. When responses to these surveys were compared against the returnee entrepreneurs’ original survey responses, the results suggested that the two responses from the same company were highly consistent (Pearson correlation = 0.80). Furthermore, in a post-survey stage, we telephoned 55 of the original respondents to check their response accuracy, and the results showed a high level of consistency between their telephone interview reports and their survey answers. Finally, as a diagnostic and ex-post statistical test, we carried out a Harman’s one factor test to check for biases not minimized by the research design. We entered the 27 indicators in a principal components analysis, and the un-rotated solution yielded eight factors with eigenvalues over 1, which explained between 16 and 3.8% of the variance. In conclusion, the research design and the ad hoc analyses point to a limited likelihood of common method bias in our data. 4.3. Operationalization of the variables

4.2. Questionnaire and data collection In the context of a larger project, we designed a structured questionnaire considering the research objectives and relevant literature on returnee entrepreneurship, internationalization, international entrepreneurship, innovation, and networks. We initially designed the questionnaire in English and two researchers reviewed the English draft for minor modifications. The questionnaire was then translated into Chinese and sent to two Chinese scholars for language checking and back translation. After some small changes, the questionnaire was pretested in China with four returnee entrepreneurs. This pretest was useful in terms of further polishing ambiguous questions and items. To ensure high rates of survey completion and quality, we created a survey team consisting of one of the authors and five experienced enumerators. A two-hour training seminar with the enumerators allowed them to interact with the researcher in Chinese and go through the questionnaire, question by question, making sure that they understood all of them. After the training, the enumerators visited each firm in person, explained the purpose

The operationalization of the constructs (see Table 1) is based on their conceptualizations above and previous studies. First, consistent with most literature recognizing that both length of time and diversity of experience reflect the generation and accumulation of returnee entrepreneurs’ experience (e.g., Wright et al., 2008), returnee entrepreneurs’ international experience captures both the time returnee entrepreneurs have spent abroad and some qualities of the foreign experience (Chen, 2008; Velema, 2012). Specifically, the construct is measured by three indicators: the number of years spent abroad before the return to China (log transformation), the diversity of experience obtained abroad (education = 1, business = 2, combination of education and business = 3), and the extent to which the exploitation of networks established abroad (foreign networks knowledge) was important in the decision to return to China (seven-point Likert scale, from least to most important). The latter is also related to the qualities and intensity of the foreign experience: it captures how much knowledge about foreign networks the experience abroad provided.

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Table 1 Operationalization of the constructs. Construct/Indicator Returnee entrepreneurs’ international experience Number of years spent abroad Diversity of foreign experience Exploitation of networks established abroad (foreign networks knowledge) International market knowledge Number of foreign markets Time since internationalization began Number of international patents granted since founding International market commitment Entry mode commitment Share of total assets located abroad Level of internationalization International sales to total sales Performancea Market share Return on sales Return on assets International sales growth Importance of domestic knowledgeb New technological ideas New business ideas, opportunities Marketing knowledge Financial knowledge (how to acquire financial resources) Institutional knowledge Market uncertainty We perceive great uncertainty regarding the institutional system in the market It is difficult to forecast technology and product development in the market It’s difficult to forecast the market potential for a new product/service Understanding customers’ needs has become more difficult than ever before The changes of the government’s influence on business cause us great uncertainty Firm size (number of employees) Firm set up abroad before returning Industry (service vs. manufacturing) Ownership (% of stock owned by the management team) a b

Mean

SD

1.79 2.27 4.96

0.73 0.93 1.51

5.70 2.67 1.02

7.21 2.31 2.30

1.39 8.33

0.88 14.46

24.04

23.74

5.04 5.06 5.05 4.79

1.26 1.27 1.23 1.54

5.67 5.75 5.71 5.68 5.42

1.13 1.05 1.09 1.05 1.18

3.93 3.71 3.84 3.61 3.21 37.35 0.20 0.72 92.93

1.75 1.97 1.84 1.77 2.09 38.98 0.40 0.45 17.85

Label REE REE1 REE2 REE3 IMK IMK1 IMK2 IMK3 IMC IMC1 IMC2 LIN LINT PER PER1 PER2 PER3 PER4 IDK IDK1 IDK2 IDK3 IDK4 IDK5 MUN MUN1 MUN2 MUN3 MUN4 MUN5 SIZ FIR IND OWN

Compared to the average level of the industry, to what extent are you satisfied with your firm’s performance in the following aspects?. To what extent have the following types of knowledge from the domestic market been important in the growth of your venture?.

Second, international market knowledge uses three indicators, namely, number of foreign markets, the amount of time since internationalization began, and number of international patents granted since founding. As for the first two indicators, the literature acknowledges that both diversity of operations and time are related to experience (e.g., Brouthers, Brouthers, & Werner, 2008; Brouthers & Nakos, 2005; Chetty et al., 2014; Clarke et al., 2013). On the one hand, the number and diversity of foreign markets are recognized as measures capturing the variety of activities and markets, and therefore the experiences that the firm is confronting internationally (e.g., Brouthers & Nakos, 2005; Chetty et al., 2006; Johanson & Martín Martín, 2015; Papadopoulos & Martín Martín, 2010). On the other hand, the amount of time since the firm began internationalizing is an indicator used to reflect the length of the returnee entrepreneurial firm’s exposure to international situations (e.g., Chetty et al., 2014; Clarke et al., 2013). Finally, in the context of knowledge-intensive returnee entrepreneurial firms, the number of international patents granted since the creation of the company reflects how much technological knowledge the firm has amassed in the form of useful knowledge for developing foreign markets. The literature on returnee entrepreneurs has used the number of patents to measure the technological knowledge acquired (Dai & Liu, 2009) and considers patents to represent by definition “a unique and novel element of knowledge” (Liu et al., 2010: 1188). Third, international market commitment (i.e., the commitment of resources to international markets) is measured based on the level of commitment associated with the entry mode used by the firm and the volume of assets located abroad. On the one hand, based on Johanson and Wiedersheim-Paul’s (1975) four stages (but

adapted to our empirical context), we coded the level of commitment associated with the entry mode as “1” when the firm was indirectly exporting or exporting without agents and distributors abroad; “2” when the firm had developed agreements with agents and/or distributors abroad; “3” when the firm had established sales subsidiaries, and “4” when the firm owned production facilities abroad. On the other hand, we inquired about the share of total assets located abroad. Commitment decisions have been equated to variations of tangible and intangible assets abroad (Figueira-de-Lemos & Hadjikhani, 2014) and the literature has extensively discussed and supported the use of resources abroad and entry mode to capture market commitment (Johanson & Vahlne, 1977; Johanson & Wiedersheim-Paul, 1975; Papadopoulos & Martín Martín, 2010). Fourth, the most established operationalization of level of internationalization in the context of SMEs is the ratio of international sales to total sales (e.g., Papadopoulos & Martín Martín, 2010; Prashantham, 2011). We use this indicator to operationalize the fourth construct in our model. Although this indicator is also frequently employed as a measure of the degree of internationalization of MNEs (e.g., Riahi-Belkaoui, 1998), we see our single-item measure as consistent with the objective (and therefore potentially free from within-person ability to answer), concrete, and one-dimensional nature of the construct level of internationalization in the context of research on SMEs. This is supported by the argument that single-item measures can have acceptable psychometric properties under certain conditions, such as the concreteness and complexity of the construct (Fuchs & Diamantopoulos, 2009; Rossiter 2002; Sackett & Larson, 1990). We included several controls in the model (see Table 1) to partially eliminate the effects of other variables on our endogenous

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Table 2 Item and construct reliability and average variance extracted. Construct/Indicator

Returnee entrepreneur’s international experience REE1 REE2 REE3 International market knowledge IMK1 IMK2 IMK3 International market commitment IMC1 IMC2 Level of internationalization LINT Performance PER1 PER2 PER3 PER4 Importance of domestic knowledge IDK1 IDK2 IDK3 IDK4 IDK5 Market uncertainty MUN1 MUN2 MUN3 MUN4 MUN5

Item reliability

Construct reliability

Convergent validity Average Variance Extracted (AVE)

Loading

Composite reliability

0.66 0.86 0.57

0.74

0.50

0.80

0.58

0.83

0.72

1.00

1.00

0.90

0.70

0.87

0.57

0.93

0.73

0.87 0.80 0.60 0.81 0.88 1.00 0.80 0.80 0.79 0.95 0.75 0.76 0.84 0.72 0.70 0.82 0.85 0.92 0.81 0.86

constructs. First, firms experiencing satisfactory business performance may have more resources and be more often inclined to increase their international market commitment by investing more in entry modes requiring resources. They may also be more prone to designing strategies aimed at internationalizing as a way to achieve international earnings and satisfactory growth and performance in the future. Thus, we included a control for business performance reflecting four perceptual indicators of satisfaction with performance (e.g., Dai & Liu, 2009; Yiu & Lau, 2008): market share, return on sales, return on assets, and international sales growth. Second, we added a control for the importance of domestic knowledge in the growth of the business (e.g., Dai & Liu, 2009). The domestic market knowledge is the returnee entrepreneurial firm’s knowledge regarding characteristics of the home country market such as its marketing and financial features, institutions of the market system, technologies, and the characteristics and needs of customers and firms. Firms whose growth is mainly driven by possession of local knowledge in terms of new technological ideas, new business ideas and opportunities, marketing knowledge, financial knowledge, and institutional knowledge are expected to develop and exploit competitive advantages with a focus on the domestic market, and have lower levels of international market commitment and internationalization. Third, we controlled for the influence of returnee entrepreneurs’ international experience on firms’ international market commitment and level of internationalization, since the leadership role of returnee entrepreneurs may directly influence their firms’ internationalization. Fourth, we controlled for the market uncertainty of the firm’s product-market combination, as high levels of uncertainty and lack of market information may have a negative impact on the level of international market commitment and internationalization

(Johanson & Vahlne, 1977). Market uncertainty is “the decisionmakers’ perceived lack of ability to estimate the present and future market and market-influencing factors” (Johanson & Vahlne, 1977: 29). We measured this construct using five indicators including: (1) uncertainty in the institutional system as a whole, (2) the difficulty of forecasting the technology and product evolution in the market, (3) the difficulty of forecasting market potential for a new product, (4) the difficulty of understanding customers’ needs, and (5) the uncertainty in dealing with changes in governmental influence on business (Hilmersson & Jansson, 2012). Fifth, we controlled for firm size measured as the number of employees, since the resource and knowledge-based views imply that larger firms can be expected to have more knowledge and resources available for making international market commitments, and therefore higher levels of internationalization. Sixth, we entered a control for whether or not the returnee had experience in setting up a firm abroad before returning to China. Depending on the relation between the firm previously established abroad and the returnee entrepreneurial firm, creating a firm abroad before returning may have strong implications in terms of the returnee firm’s entrepreneurial experience and affect the likelihood of having resources committed internationally. Seventh, we controlled for whether the main industry of the firms in the sample was manufacturing or service. Finally, because previous studies have shown that ownership may influence the entrepreneurial activity of returnee entrepreneurial firms (e.g., Li et al., 2012; Liu et al., 2010), we included a control for the ownership of the firm in terms of the percentage of stock owned by the management team. Returnee entrepreneurial firms belonging to the entrepreneur and managers may have a higher propensity towards making international market commitment and internationalization.

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Table 3 Discriminant validitya :correlationsb and square root of the average variances extracted (AVE). Construct

REE

IMK

IMC

LIN

PER

IDK

MUN

REE IMK IMC LIN PER IDK MUN SIZ FIR IND OWN

0.71 0.22* 0.20 0.23* 0.31* 0.12 0.08 0.05 0.20 0.19 0.05

0.76 0.35* 0.43* 0.12 0.05 0.06 0.50* 0.11 0.17 0.04

0.85 0.53* 0.10 0.09 0.08 0.11 0.50* 0.00 0.07

1 0.13 0.20* 0.09 0.20* 0.17 0.14 0.04

0.84 0.17 0.06 0.03 0.14 0.10 0.10

0.76 0.09 0.00 0.02 0.03 0.03

0.86 0.03 0.02 0.10 0.02

SIZ

FIR

IND

OWN

1 0.00 0.16

1 0.10

1

1 0.07 0.00 0.09

a

Diagonal values in bold are the square roots of the variance shared between the reflective constructs and their measures. For discriminant validity to be established, the diagonal elements must be greater than the off-diagonal elements in the corresponding rows and columns. b (*) Correlation is significant at the 0.01 level (2-tailed).

4.4. Data analysis technique The data were analyzed using partial least squares modeling (PLS) (Wold, 1982). This is a variance-based structural equation modeling (SEM) technique (Hair, Ringle & Sarstedt, 2012) used in countless studies due to its minimal demands in terms of measurement scales, sample size, and residual distributions. The research objectives, the non-normal distribution of several indicators, and the relatively small sample size (Hair, Sarstedt, Pieper, & Ringle, 2012) supported its use. The software used was SmartPLS4 (Ringle, Wende, & Will, 2005). 5. Findings Before considering the structural model, we evaluate the measurement model (see Tables 2 and 3). First, all indicators have significant loadings, and in all cases except three (number of years spent abroad, exploitation of networks established abroad, and number of international patents granted) the item reliability is over the suggested 0.7 cut-off value. We decided to keep these three indicators in the model since the construct reliability and average variance extracted (AVE) are satisfactory. Second, the constructs present high construct reliability, ranging between 0.74 and 0.93 the composite reliability (Werts, Linn, & Jöreskog, 1974) of the constructs operationalized with multiple indicators. Third, AVE values are over the cut-off point of 0.50 (Fornell & Larcker, 1981); that is, each set of indicators represents one and the same underlying construct. Finally, discriminant validity is strictly respected; the correlations between the measures and their constructs are much higher than their associations with other constructs. We can therefore conclude that the model is tested using reliable and valid constructs. As for the structural model, first, a 5000-sample bootstrap shows that the four hypothesized relations find empirical support in our analyses. Thus, the model shows that returnee entrepreneurs’ international experience is positively associated with returnee entrepreneurial firms’ international market knowledge (H1) (b = 0.14, p < 0.01). In addition, there is a significant relation between international market knowledge and both commitment (H2) (b = 0.29, p < 0.001) and level of internationalization (H3) (b = 0.22, p < 0.01), as well as between international market commitment and level of internationalization (H4) (b= 0.45, p< 0.001) (see Table 4). Continuing with the significant relations in the model, the control firm size is positively related to firms’

4 The latest discussions and publications dealing with PLS and its limitations and advantages can be found, for instance, at the SmartPLS forum (http://forum. smartpls.com/).

international market knowledge (b = 0.49, p < 0.001). It suggests that other managers/employees also contribute to the stock of firms’ knowledge regarding international markets. Another control, capturing whether the returnee entrepreneur set up a firm abroad before returning home, is positively associated with international market commitment (b = 0.46, p < 0.001), suggesting that the international entrepreneurial experience of the returnee and the previous market commitments play an important role in the international market commitment of the returnee entrepreneurial firm created in China. In addition, the importance of domestic market knowledge for the growth of the venture also has a significant but negative impact on the level of internationalization (b = 0.18, p < 0.01). This finding means that firms possessing a large amount of local knowledge may prioritize the domestic market in their growth strategies. Second, the variance explained by the endogenous constructs is higher for the level of internationalization (R2 = 0.41) than for international market knowledge (R2 = 0.32) and international market commitment (R2 = 0.36). Third, the model has predictive validity according to the Stone-Geisser Q2 statistic, with results being 0.16, 0.20, and 0.28, respectively for international market knowledge, international market commitment, and level of internationalization. We can therefore conclude that the structural model is a valuable analytical tool for studying the internationalization of returnee entrepreneurial firms. As Fig. 1 showed, there may be indirect effects of returnee entrepreneurs’ international experience on the endogenous variables international market commitment and level of internationalization. We conducted mediation analysis to untangle the mechanism by which returnee entrepreneurs’ international experience may influence their firms’ internationalization. We followed the general recommendations given by Baron and Kenney (1986), and the PLS-SEM specific suggestions offered by, for example, Castro and Roldán (2013), Hair et al. (2012a, 2012b), and Nitzl, Roldán and Carrión (2016) to test mediation effects in PLS, and applied the bootstrapping procedure to examine the indirect effects (Chin, 2010). First, we examined the total effect (c) of the exogenous variable (returnee entrepreneurs’ international experience, REE) on the dependent variable (level of internationalization, LIN) (see Fig. 2A). Second, we introduced the two mediating variables (international market knowledge, IMK, and international market commitment, IMC) in the model at once (see Fig. 2B) and assessed the full PLS path model. Based on the coefficients of the direct paths (a1, a2, a3, b1, b2), we calculated the product of the direct paths that form the indirect paths between REE and LIN (including a1a2, a3b2, and a1b1b2) (Taylor, Mackinnon, & Tein, 2008). Third, we examined the significance of indirect effects with percentile bootstrap (Williams & MacKinnon, 2008), which resulted in a 95% confident interval (CI) for a1a2, a3b2, and

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Table 4 Endogenous variables: direct effects, explained variances and Stone–Geisser Q2 test. Effects on endogenous variables

Direct effect

Effects on international market knowledge Returnee entrepreneurs’ international experience Performance Importance of domestic knowledge Market uncertainty Firm size Firm set up abroad before returning Industry (service vs. manufacturing) Ownership Effects on international market commitment Returnee entrepreneurs’ experience International market knowledge Performance Importance of domestic knowledge Market uncertainty Firm size Firm set up abroad before returning Industry (service vs. manufacturing) Ownership Effects on level of internationalization Returnee entrepreneurs’ experience International market knowledge International market commitment Performance Importance of domestic knowledge Market uncertainty Firm size Firm set up abroad before returning Industry (service vs. manufacturing) Ownership

t value (bootstrap)

0.14 0.04 0.08 0.05 0.49 0.11 0.09 0.00

** n.s. n.s. n.s. *** n.s. n.s. n.s.

0.07 0.29 0.00 0.09 0.07 0.00 0.46 0.06 0.02

n.s. *** n.s. n.s. n.s. n.s. *** n.s. n.s.

0.09 0.22 0.45 0.06 0.18 0.05 0.02 0.09 0.08 0.05

n.s. ** *** n.s. ** n.s. n.s. n.s. n.s. n.s.

(2.65)

(7.38)

(3.36)

(5.76)

(2.75) (4.33) (2.60)

Variance explained

Stone-GeisserQ2

0.32 0.04 0.00 0.00 0.00 0.25 0.01 0.02 0.00 0.36 0.01 0.10 0.00 0.01 0.00 0.00 0.24 0.00 0.00 0.41 0.01 0.09 0.24 0.01 0.04 0.00 0.00 0.01 0.01 0.00

0.16

0.20

0.28

n.s. = not significant; * p < 0.05; ** p < 0.01; *** p < 0.001 (based on a one-tailed Student t(4999) distribution).

Mediation effects A. Model with total effect

Returnee entrepreneurs’ experience

Level of internationalization

c=0.170**

B. Model with a three-path mediated effect

c’=0.086 a2=0.225 Returnee entrepreneurs’ experience

a1=0.142**

a3=0.067

International market knowledge

b1=0.289***

Level of internationalization

b2=0.448***

International market commitment

c’ = REE →LIN a1a2 = REE → IMK →LIN a3b 2 = REE →IMC →LIN a1b 1b 2 = REE →IMK →IMC →LIN Fig. 2. Mediation effects.

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Table 5 Summary of mediation test. Total effect of REE on LIN

Direct effect of REE on LIN

Coefficient

Coefficient

c = 0.170**

t value

2.577

c’ = 0.086n.s.

Indirect effects of REE on LIN

t value

1.268

Point estimate

Total a1b1 (via IMK) a3b2 (via IMC) a1b1b2 (via IMK and IMC)

0.080 0.032 0.030 0.018

Percentile bootstrap 95% confidence interval Lower

Upper

0.0226 0.0057 0.0200 0.0035

0.1496 0.0784 0.0883 0.0411

n.s. = not significant; * p < 0.05; **p < 0.01; ***p < 0.001 (based on a one-tailed Student t(4999) distribution).

a1b1b2 respectively. If the interval for an indirect effect does not include zero, it receives support that the indirect effect is significantly different from zero with 95% confidence. Finally, we assessed the significance of the direct effect (c') of REE on LIN and compared it with the total effect (c) that has not controlled mediating effect. Table 5 summarizes the results of the mediating effect test. It shows that REE has a significant total effect on LIN (c = 0.170, p < 0.01). However, the direct effect of REE on LIN becomes not significant after introducing mediators (c' = 0.086). Furthermore, the indirect paths via IMK, and via both IMK and IMC, are significant, while the indirect path via IMC is not significant. The results indicate that IMK and IMC fully mediate the influence of REE on LIN (Baron & Kenney, 1986), including multiple mediation relationships and a three-path mediated effect (Castro & Roldán, 2013; Nitzl et al., 2016). Specifically, the indirect effects of REE on LIN go through both IMK and the mediational chain of IMK and IMC. We discuss these findings in the following section. 6. Discussion and implications 6.1. Discussion of findings In response to recent research calls, this study concentrates on returnee entrepreneurial firms and employs a database from an emerging economy to analyze their initial internationalization. It shows that international experience, conveyed by returnee entrepreneurs, and returnee firms’ international market knowledge act as driving mechanisms for these firms’ international expansion. As expected, returnee entrepreneurs’ international experience does not directly influence key internationalization constructs such as international market commitment and level of internationalization. Instead, firms’ international market knowledge mediates the influence of returnee entrepreneurs’ international experience on the firms’ level of internationalization. In parallel, international market knowledge and international market commitment jointly constitute a longer mediational chain transmitting the indirect effects of returnee entrepreneurs’ international experience on level of internationalization. Our main contribution to the literature on returnee entrepreneurs and IB is therefore that we uncover the connection between returnee entrepreneurs’ international experience and returnee entrepreneurial firms’ international market knowledge and their effects on internationalization during the initial international expansion of these firms. This may have important implications not only for returnee entrepreneurial firms but also for other small, young, and internationalizing firms such as international new ventures. Other relevant findings and issues are discussed in the remainder of this section. First, this study shows that firm size is also positively related to firms’ international market knowledge, which is consistent with the idea that a returnee entrepreneurial firm is a composite of the returnee entrepreneur and other

employees/managers. In other words, the positive association indicates that the larger the firm, the more likely that other employees/managers will also contribute to the firm’s international market knowledge and play a role in the firm’s internationalization. With the involvement of more employees in the firm’s operations and development, it is critical that other employees contribute refined international market knowledge beyond the returnee entrepreneur’s international experience. Second, international market knowledge has a positive impact on the international commitment of the returnee entrepreneurial firm. The results are in line with the literature on internationalization that argues for a relationship between market knowledge and commitment (Johanson & Vahlne, 1977). What is different, however, is that the sources of knowledge functioning during the early phase of the process include both the returnee entrepreneur’s existing stock of international market knowledge and knowledge learned through the latter’s practice in international markets. The former is consistent with international entrepreneurship literature, which argues that entrepreneurs’ prior international experience supports early and rapid internationalization of their firms (Oviatt & McDougall, 2005). Our study indicates that the experience functions mainly as input into the firm’s stock of knowledge. The firm has to develop its international market knowledge, and there the entrepreneur’s international experience plays a role. Third, we include technological knowledge as part of the relevant knowledge driving the international expansion of returnee entrepreneurial firms. The literature distinguishes between business, institutional, cultural, and general internationalization knowledge (e.g., Eriksson et al., 1997). Given that markets differ not only in terms of culture and institutions (Berry, Guillén, & Zhou, 2010; Drogendijk & Martín Martín, 2015; Drogendijk & Slangen, 2006), it is likely that other types of knowledge, such as technological knowledge, also affect internationalization. Knowledge about technology, innovation, and R&D is almost forgotten in the internationalization literature, which is surprising because both returnee entrepreneurial firms and international new ventures operate in high-technology industries. A final interesting finding to discuss is that the domestic knowledge returnee entrepreneurial firms possess affects the level of internationalization. One main reason driving returnees to start ventures in their home countries is that these countries are gaining economic strength and are therefore markets with huge potential (Kenney et al., 2013). Hence, these firms are interested in exploring and exploiting their home markets. Due to the liability of return, their domestic market knowledge may be relatively obsolete, but this does not pose a challenge for returnee entrepreneurial firms that apply their international market knowledge to exploit foreign markets first. In contrast, returnee entrepreneurial firms that manage to keep their domestic market knowledge updated are expected to put more effort into their domestic markets. Our findings suggest that firms whose growth is driven by possession

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of domestic knowledge are expected to have lower levels of internationalization, most likely because of a focus on the domestic market. 6.2. Implications for researchers, managers, and policymakers This study allows researchers, managers, and policymakers to better understand the role and value of returnee entrepreneurs and of their international experience and transferred knowledge in driving initial and early internationalization of returnee entrepreneurial firms. Thus, there are several relevant implications of our findings. First, as for academia, our study reveals the role of returnee entrepreneurs in the internationalization of their firms and supports the argument that international knowledge encourages international commitment and a higher level of internationalization of returnee entrepreneurial firms. In this light, the technological aspect of their knowledge profile can be assumed to play a distinctive role in internationalization. Yet, scholars within the international new venture stream of research have not paid much attention to this aspect when looking into new ventures from emerging markets. Therefore, researchers should consider the types of knowledge that may be more relevant in their conceptual and empirical settings. For instance, the role of technological knowledge in the internationalization of international new ventures from emerging markets should be more explicitly discussed. Second, concerning the managerial implications, our findings are consistent with studies suggesting positive effects of returnee managers on the internationalization of firms from emerging markets (Cui et al., 2015). Indigenous firms would therefore benefit from either recruiting returnees to support internationalization activities or from doing close business with returnee firms and becoming part of their supplier networks. In other words, the spillover of returnees’ international experience across indigenous counterparts in native countries may enhance the level of domestic firms’ internationalization. Further, in light of the number of scientists, engineers, and students moving abroad and back to their native countries, the competition among returnee entrepreneurs is intense. For returnee entrepreneurs who want to stand out, capability building through the development of international knowledge is critical. Returnee entrepreneurs who have their own intellectual property and are able to commercialize the property rights could greatly help to internationalize their firms. Hence, they would benefit from considering the role of technological knowledge in their profile from the beginning of their international careers. Third, governments in emerging markets have been aware of the value of returnees and their knowledge advantage in innovation and economic development (Kenney et al., 2013) and have therefore issued favorable policies toward returnees in order to exploit this resource. Yet governments are less aware of how and to what extent returnee entrepreneurs are capable of leading internationalization of new ventures from emerging markets. The study findings show that returnee entrepreneurs’ international experience and firms’ international market knowledge affect internationalization positively, but the international orientation of these firms and the liabilities of return can make the transfer of international knowledge to emerging markets difficult (Lin et al., 2016). Policymakers may therefore offer incentives not only for the creation of returnee entrepreneurial firms but also for domestic expansion so that knowledge spillovers are realized. Policymakers can also stimulate business cooperation and the creation of forums where returnee entrepreneurs could share international experiences. This may encourage business relationships, which may in turn alleviate the liabilities of return experienced by returnee

entrepreneurs and reduce the international market knowledge gap of domestic firms. In a similar vein, policymakers can stimulate the creation of returnee entrepreneur associations in native countries where returnees can share experience and develop networks with other returnees. If so, it would be possible for them to tap into the local and international market knowledge of other returnee entrepreneurs external to their firm. Returnee entrepreneurs may also warrant the consideration of host countries where they previously studied or worked (Liu et al., 2010), as they may target international markets. Host countries may not only enjoy products and services provided by returnee entrepreneurial firms from emerging markets but could also benefit from reverse knowledge spillovers. To facilitate this entrepreneurial mobility and the subsequent knowledge transfer, flexible migration policies of host countries towards returnee entrepreneurs would make temporal mobility easier. 7. Limitations and future study Several limitations exist in our study, which also provide opportunities for future research. First, our sample consists exclusively of firms that are internationalized. Although it was necessary to observe internationalized returnee entrepreneurial firms in order to realize our research aim, including noninternationalized returnee entrepreneurial firms would allow for comparisons between them. Further, the inclusion of international new ventures not created by returnees in future samples is another important research opportunity that would make it possible to compare these firms. Both of these more comprehensive samples could lead to a better understanding of the impact of returnee entrepreneurs on returnee entrepreneurial firms’ domestic growth and internationalization. Second, this study uses a cross-sectional research design and focuses on the early stage of internationalization. Thus, causal inferences cannot be made between the constructs in the model. However, the constructs embrace a built-in time lag: the returnee entrepreneur was living/studying/working in the foreign market before the returnee entrepreneurial firm was created. Therefore, future studies could apply longitudinal research designs to uncover the causal connections between the constructs and the evolution of these firms and to shed light on mature returnee ventures and explore the dynamic process of internationalization. One aspect related to the dynamic process is the fast-changing business environment, where knowledge that provides competitiveness quickly becomes outdated or invalid. It would not be surprising to learn that returnee entrepreneurs’ knowledge diminishes in value if they fail to update international market knowledge after basing themselves in the domestic market. To adapt to the changing environment, these firms have to develop a dynamic capability that allows them to link to, search for, and assimilate updated knowledge. Therefore, investigating internationalization from a longitudinal and dynamic perspective would be rewarding. Third, more attention needs to be paid to definitions of returnees and their business contexts across studies. For instance, the literature has not discussed the possibility that the entrepreneur could close a firm in a foreign country and reopen it in the home country, or whether the returnee entrepreneurial firm is a subsidiary of a foreign firm. Fourth, the value of the returnee entrepreneurs’ international experience does not describe the story of all returnee entrepreneurial firms. For many, the domestic market remains the business focus, and it is important that returnee entrepreneurs not overlook this. We expect the firms to draw lessons from the returnees’ international experience and their international market knowledge and to build and develop managerial routines and practices for the domestic market. Internationalization may also be helpful

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in supporting the domestic market learning and development of returnee entrepreneurial firms. Yet, how and to what extent returnee entrepreneurial firms’ international knowledge is transferable and applicable in the domestic market is still unanswered. Fifth, returnee entrepreneurial firms have so far mostly been studied as a typical emerging market phenomenon. Theoretically, however, they can originate in any country. An intriguing question is whether returnee entrepreneurial firms with roots in developed markets have the same knowledge advantage when their founder moves home after spending several years in an emerging market. In the same vein, future research may extend to other contexts where the phenomenon of returnee entrepreneurs is prominent. India and China have aroused academic interest, but the empirical observations may have biased the focus towards high-technology returnee entrepreneurial firms, which compromises the development of returnee entrepreneur research. Returnee entrepreneurial firms are becoming evident in other emerging markets and regions, such as Latin America, as well as in diverse sectors, including low-tech industries. Returnee entrepreneurs working in low-skilled jobs abroad and returning to their countries of origin with the savings to start a new business may challenge some of our assumptions on returnees’ characteristics. The diversity of research contexts and returnee profiles may therefore benefit the understanding and generalization of this field of study. Acknowledgement The authors would like to thank the Anna Maria Lundins Foundation at Småland nation, Uppsala University for financing the field study. References Acedo, F. J., & Galan, J. L. (2011). Export stimuli revisited: The influence of the characteristics of managerial decision makers on international behavior. International Small Business Journal, 29(6), 648–670. Armstrong, J. S., & Overton, T. S. (1977). Estimating nonresponse bias in mail surveys. Journal of Marketing Research, 14(3), 396–402. Autio, E., Sapienza, H. J., & Almeida, J. G. (2000). Effects of age at entry, knowledge intensity, and imitability on international growth. Academy of Management Journal, 43(5), 909–924. Autio, E. (2005). Creative tension: The significance of Ben Oviatt's and Patricia McDougall's article ‘Toward a theory of international new ventures'. Journal of International Business Studies, 36(1), 9–19. Bai, W., Holmström Lind, C., & Johanson, M. (2016). The performance of international returnee ventures: The role of networking capability and the usefulness of international business knowledge. Entrepreneurship & Regional Development, 28(9-10), 657–680. Barney, J. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17(1), 99–120. Baron, R. M., & Kenney, D. A. (1986). The moderator-mediator variable distinction in social psychological research: Conceptual, strategic, and statistical considerations. Journal of Personality and Social Psychology, 51(6), 1173–1182. Berry, H., Guillén, M. F., & Zhou, N. (2010). An institutional approach to crossnational distance. Journal of International Business Studies, 41(9), 1460–1480. Bilkey, W. J., & Tesar, G. (1977). The export behavior of smaller-sized Wisconsin manufacturing firms. Journal of International Business Studies, 8(1), 93–98. Brouthers, L. E., & Nakos, G. (2005). The role of systematic international market selection on small firms’ export performance. Journal of Small Business Management, 43(4), 363–381. Brouthers, K. D., Brouthers, L. E., & Werner, S. (2008). Resource-based advantages in an international context. Journal of Management, 34(2), 189–217. Bruton, G. D., Ahlstrom, D., & Obloj, K. (2008). Entrepreneurship in emerging economies: Where are we today and where should the research go in the future. Entrepreneurship Theory and Practice, 32(1), 1–14. Casillas, J. C., Moreno, A. M., Acedo, F. J., Gallego, M. A., & Ramos, E. (2009). An integrative model of the role of knowledge in the internationalization process. Journal of World Business, 44(3), 311–322. Castro, I., & Roldán, J. L. (2013). A mediation model between dimensions of social capital. International Business Review, 22(6), 1034–1050. Chang, S. J., van Witteloostuijn, A., & Eden, L. (2010). From the editors: Common method variance in international business research. Journal of International Business Studies, 41(2), 178–184. Chen, P.-L., Tan, D., & Jean, R. J. B. (2016). Foreign knowledge acquisition through inter-firm collaboration and recruitment: Implications for domestic growth of emerging market firms. International Business Review, 25, 221–232.

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