International corporate entrepreneurship and firm performance

INTERNATIONAL CORPORATE ENTREPRENEURSHIP AND FIRM PERFORMANCE: THE MODERATING EFFECT OF INTERNATIONAL ENVIRONMENTAL HOSTILITY SHAKER A. ZAHRA Georgia State University, Atlanta, Georgia

DENNIS M. GARVIS Washington & Lee University, Lexington, Virginia

Globalization of the world economy has encouraged U.S. companies to leverage their resources and skills by expanding into existing or new foreign markets. U.S. companies have also acquired new capabilities by locating important functional activities overseas, and joining with foreign partners in new markets through alliances and joint ventures. These opportunities, however, are tempered by the constraints imposed by the competitive forces that exist in international environments. Aggressive government intervention, technological changes, and fierce local rivalries all contribute to hostile international environments for U.S. firms’ global expansion. Success in global business operations requires resourcefulness and entrepreneurial risk taking. The

EXECUTIVE SUMMARY

Address correspondence to Dr. S.A. Zahra, Department of Management, J. Mack Robinson College of Business Administration, Georgia State University, Atlanta, GA 30303, (404) 651-2894, E-mail: Szahra @gsu.edu We acknowledge with gratitude the supportive comments of two anonymous JBV reviewers, Brett Matherne and Patricia H. Zahra. An earlier version of this paper appeared in the 1998 Academy of Management Best Papers’ Proceedings. The financial support of the Beebe Institute to the first author in data collection is also appreciated. Journal of Business Venturing 15, 469–492  2000 Elsevier Science Inc. All rights reserved. 655 Avenue of the Americas, New York, NY 10010

0883-9026/00/$–see front matter PII S0883-9026(99)00036-1

470

S.A. ZAHRA AND D.M. GARVIS

activities of U.S. companies in foreign markets, therefore, provide a unique opportunity to examine the effects of international corporate entrepreneurship (ICE) efforts on company performance. ICE is defined as the sum of a company’s efforts aimed at innovation, proactiveness, and risk taking. These efforts offer an important means of revitalizing and renewing established companies and improving their performance. Few studies have empirically examined the effects of ICE activities on companies’ financial performance. This study used data from 98 U.S. companies to: (1) determine the impact of ICE efforts on firm performance, and (2) explore the moderating effect that the perceived hostility of the international environment has on the relationship between ICE and company performance. The results showed that ICE was positively associated with a firm’s overall profitability and growth as well as its foreign profitability and growth. Those firms that aggressively pursued ICE in international environments with higher levels of hostility had higher return on assets (ROA) but did not achieve significantly higher levels of growth. However, as hostility in the international environment continued to intensify, ROA rose and then fell as companies increased their ICE activities. Thus, there was a point of diminishing returns to a company’s aggressive pursuit of ICE under excessive environmental hostility. The results highlight both the rewards and risks of pursuing ICE. Companies benefit from ICE activities by achieving higher overall performance as well as foreign profits and growth in revenue. However, the aggressive pursuit of ICE does not always guarantee superior performance. Our results show that the payoff from ICE is moderated by executives’ perceptions of the hostility of their firm’s international business environment. Our findings highlight the importance of ICE for organizational success, both overall and in foreign markets. Yet, the results compellingly suggest that there are upper limits to the potential gains a firm achieves from its aggressive pursuit of ICE when the international environment in which it competes is hostile.  2000 Elsevier Science Inc.

INTRODUCTION The globalization of the world economy has created countless opportunities for U.S. companies to grow and achieve profitability. Faced with abundant opportunities, some U.S. companies have sought to creatively leverage their resources and skills in foreign markets. Confronted by strong global rivals, companies have also acquired capabilities from several foreign sources (Leavy 1997). For example, seeking to increase their innovations companies such as Colgate-Palmolive and Intel have built research and development (R&D) activities in multiple centers around the globe (Chiesa 1996). Other companies such as Chrysler, Hewlett-Packard, Mattel, and 3M have built production facilities in several overseas locations to capitalize on local talents (Ferdows 1997) and incorporate this knowledge in new products for customers in foreign markets (Levy and Dunning 1993). Success in global business operations requires creativity, ingenuity, and calculated risk taking (Bossak and Nagashima 1997), because domestic strengths do not always guarantee success in foreign markets (Hu 1995; Vlasic 1998). Consequently, when expanding internationally, U.S. companies have explored new models of production, management, R&D, human resources, and marketing systems (Bannon 1998; Porter 1990). They have also learned and utilized different skills from those that have been used in their home markets (Smart 1996; Williamson 1997). Developing and exploiting these capabilities requires experimentation and risk taking (McGrath, MacMillan and Venkataraman 1995; Shama 1995). Entrepreneurial activities are, therefore, closely linked to firms’ global operations (Dean, Thibodeaux, Beyerlein, Ebrahimi and Molina 1993). The continuing globalization of business provides an important opportunity to study U.S. companies’ entrepreneurial activities in international markets. Even though

INTERNATIONAL ENVIRONMENTAL HOSTILITY

471

the motivations for, and effects of, these global activities have been explored from economic and organizational perspectives, rarely have they been viewed through an entrepreneurial lens. This paper fills this gap in the literature by examining U.S. firms’ corporate entrepreneurship (CE) activities in international markets. Even though entrepreneurial activities might permeate every aspect of a firm’s operations (Pinchot 1985; Zahra 1991), this study focuses on CE undertaken primarily in a company’s international operations. We refer to these activities as international corporate entrepreneurship (ICE). This study views ICE as the sum of a company’s innovation, risk taking, and proactiveness (Miller 1983; Covin and Slevin 1989; Zahra 1991). These activities usually seek to increase the firm’s innovativeness, adaptation, and agile strategic responses to changes in the external environment. Innovation refers to the firm’s ability to create new products and successfully introduce them to the market. It also indicates the company’s commitment to process and organizational innovations (Zahra 1993). Proactiveness shows a fie fie fie fie fie fie firm’s aggressive pursuit of market opportunities and a strong emphasis on being among the very first to undertake innovations in its industry. Risk taking is defined as the firm’s disposition to support innovative projects (e.g., international ventures), even when the payoff from these activities is uncertain. Collectively, these activities can enhance the company’s ability to recognize and exploit market opportunities well ahead of its competitors. Entrepreneurial activities can renew established companies (Kuratko, Montagno and Hornsby 1990; Pinchot 1985; Stopford and Baden-Fuller 1994). Renewal is usually achieved through innovation and venturing activities (Guth and Ginsberg 1990) that give the firm access to different skills, capabilities, and resources (McGrath et al. 1995). Innovation generates new products, processes, and organizational systems that set the company apart from its rivals as it expands its international operations (Hitt, Hoskisson, and Kim 1997). Innovation also revises the firm’s knowledge base, allowing it to develop new competitive approaches, which can be exploited in new foreign markets and achieve growth and profitability (Hitt et al. 1997; Hu 1995). Venturing activities emphasize the creation of new businesses by entering new foreign markets or expanding in existing ones (Bannon 1998; Bossak and Nagashimi 1997; Shama 1995). A firm, therefore, can revise its business base by entering new economic regions or foreign markets, capitalizing on the differences in the resources that may exist in various locations (Porter 1990). International venturing can also enhance a firm’s performance by using its existing knowledge and resources in new markets, as happened when many U.S. corporations successfully entered markets in Eastern Europe and the Commonwealth of Independent States (Shama 1995). International venturing can also expand the firm’s knowledge base (Schlender 1997), which increases the innovativeness of a firm’s products and strategy (Stopford and Baden-Fuller 1994). ICE, through international venturing, can thus renew a company by improving its ability to compete and take risks by redefining its business concept, reorganizing its operations, and introducing system-wide innovations (Miller 1983). Global business activities clearly offer an attractive setting in which to study entrepreneurship. However, while scholars have recognized the importance of entrepreneurial efforts in foreign markets and have called for research on this issue (e.g., Guth and Ginsberg 1990), only a few empirical studies have specifically examined ICE. One reason for this omission may be researchers’ preoccupation with defining the domain of corporate entrepreneurship and establishing its contributions to company performance.

472

S.A. ZAHRA AND D.M. GARVIS

Another reason is the difficulty of obtaining data on ICE. Consequently, little is known today about the effect of ICE on company performance. This study addresses this gap in the literature by exploring the link between ICE and a firm’s performance as well as its performance in international operations (hereafter “foreign performance”). Further, given that environmental conditions may vary dramatically between the firm’s domestic and foreign markets (Agrawal and Ramaswamy 1992; Miller 1993; Williamson 1997), the study also explores how these differences affect the ICE-performance relationship. This study extends prior research in two ways. First, it responds to prior studies’ call to broaden the research lens beyond domestic CE by examining ICE activities (Guth and Ginsberg 1990). Second, prior research has found significant relationships between the environment, CE, and firm performance (e.g., Covin and Slevin 1989, 1991; Zahra 1993). To date, however, researchers have relied almost exclusively on measures of CE and competitive environments within the firm’s domestic operations, failing to include its foreign operations, performance, or external environment. In contrast, this study focuses on the international aspects of CE as well as the firm’s environment and explores the moderating effect of the external environment. The results can clarify the effect of ICE on a company’s performance under different environmental conditions. The following section of the paper discusses the theoretical links between ICE and a company’s performance, with an emphasis on delineating the domain of ICE. Once this discussion has been completed, attention will focus on the relationships between a firm’s ICE and a company’s performance. This discussion and related hypotheses will also highlight the moderating role of a firm’s international business environment on the ICE-company performance relationship. The next section of the paper will then describe the data and analytical methods used to test the hypotheses. After presenting the results, the paper will discuss the study’s key findings and their implications for future research and managerial action.

THEORY AND HYPOTHESES The relationship between a firm’s international activities and company performance has been the subject of much discussion in the literature (Sullivan 1994). Using British (Grant, Jammine, and Thomas 1988), German (Buhner 1987), and U.S. data (Geringer, Beamish, and deCosta 1989; Hennart 1991; Kim and Hwang, and Burgers 1989, 1993), for example, researchers have sought to determine the sources of competitive advantages firms gain from internationalizing their operations. The present study examines entrepreneurial activities that occur in a firm’s operations (Dean et al. 1993; Guth and Ginsberg 1990). It suggests that, when undertaken in a firm’s international operations, entrepreneurial activities can give a company a competitive advantage in existing or new markets (Miller 1983; Stopford and Baden-Fuller 1994; Zahra and Covin 1995).

Innovation Entrepreneurial activities influence a company’s performance by increasing its commitment to innovation (Miller 1983; Lumpkin and Dess 1996) by offering innovative products or processes. ICE can therefore redefine the way the firm competes or redirecting the scope of its operations towards new segments (Zahra 1991). Established companies such as Chrysler (Vlasic 1998), General Electric (Smart 1996), and Mattel (Bannon 1998) have used this strategy in pursuing global market opportunities. These companies

INTERNATIONAL ENVIRONMENTAL HOSTILITY

473

have created innovative products to target new market segments and enter new foreign markets, a process that has renewed their operations and improved their profitability (Baden-Fuller and Stopford 1994). Significant advantages may also be gained from diffusing product and process innovations developed in various national markets throughout a multinational firm’s network (Bartlett and Ghoshal 1989). Currently, the nature of the relationship between international activities and firm performance is far from clear (Dess, Gupta, Hennart and Hill 1995). Prior studies, however, offer some insights into this relationship. For example, Morck and Yeung (1991) found that the interaction of internationalization and a firm’s R&D investments are significantly related to company performance, whereas internationalization alone was not. Hitt, Hoskisson, and Ireland (1994) also theorized that expansion into foreign markets results in greater returns from a firm’s innovations while reducing the risk of business failure. In essence, internationalization increases a firm’s ability to sustain the advantages it gains from innovation before competitors can overcome them. Hitt et al. (1994) also suggested that the presence of product and process innovations in international firms represents an ideal combination of strategic choices that generate optimal financial performance. Several empirical studies have also found that innovation in international operations can enhance a firm’s overall performance (e.g., Franko 1989; Kimura 1989). Innovation can also lead to the development of key capabilities that can improve a firm’s performance (Teece, Pisano, and Shuen 1997). The development of these capabilities is intimately linked to the countries in which the firm conducts its operations. Kogut (1991) suggests that competitive capabilities that result in performance differences do not always cross national borders, a factor which explains why firms invest in developing foreign markets as a means of gaining access to sources of innovations (Shan and Hamilton 1991). Florida (1997) also notes that firms increasingly cross international borders to pursue innovation and capitalize on the learning to be gained from local markets. Porter (1990) also argues that multinational firms can draw upon the advantages embedded in foreign countries by diversifying across borders. Access to diverse sources of knowledge can provide firms with significant learning opportunities that intensify product and process innovations. Innovation generates products, goods, processes, services, and systems that can be used to meet customer needs and build a strong international market position (Bannon 1998). Innovation can thus improve the firm’s profitability and fuel its growth.

Venturing ICE may take place also in new foreign markets as the firm utilizes its resources and capabilities in ways that create new revenue streams, as happened when several U.S. companies entered newly opened markets in the former Soviet Bloc (Shama 1995), Middle-Eastern (Dean et al. 1993), and Latin American countries. As these firms gain experience in these markets, they can use their capabilities in building new competitive positions and expand in other foreign markets (McGrath et al. 1995). U.S. companies have gained considerable skills from locating some of their manufacturing operations overseas and then creatively using the knowledge gained from foreign markets to widen their global reach. A firm may pursue ICE to learn about and enter new foreign markets, and establish gateways for future entry. It can also use its ICE activities proactively to preempt entry

474

S.A. ZAHRA AND D.M. GARVIS

by its future rivals, thereby creating a competitive advantage. Porter (1990) suggests that preemptive entry into foreign markets can erect strong mobility barriers that deter or minimize subsequent entry. Mascarenhas (1992a, 1997) concludes that firms that are first entrants have a higher rate of survival in foreign markets. These “first mover” companies can proactively set the rules of competition by setting product and technological standards, investing heavily in establishing and controlling distribution channels, and promoting their products in ways that reduce switching to subsequently entering rival brands. First movers also engage in significant product, process, and organizational innovations that strengthen their market positions and further enhance their profitability (Bannon 1998). For those firms that enter the market later, ICE can also be useful in revising industry boundaries as firms attempt to change the rules of competitive engagement. Late entrants can also use skills and resources that differ significantly from those of the early entrants and then proceed to claim key portions of the market. Some U.S. companies have successfully followed this approach in dethroning prominent multinational corporations in several foreign markets (Dean et al. 1993). These firms have also aggressively targeted new market segments and then shielded them from rivals through product and process innovations (Williamson 1997). The above-mentioned benefits from venturing into foreign markets are consistent with theories that depict internationalization as a process characterized by various stages of growing commitment (Johanson and Vahlne 1977). The knowledge gained at one stage can profoundly influence a future international expansion, as firms experiment, take risks and learn. International venturing can broaden a firm’s knowledge base through learning about new markets, customers, cultures, technologies, and innovation systems, which can enhance a firm’s performance. Of course, the benefits from international venturing are not unidirectional. The firm can transfer its best practices from its international operations back to its home market, which further increases the firm’s ability to innovate. Companies that are proactive in foreign markets also have available to them a broader base of skills and knowledge which they can exploit in building a distinctive competence (Kogut 1991).

Proactiveness Some companies undertake ICE to challenge the competition and revise the rules of rivalry in their industries. Proactive ICE indicates a company’s determination to pursue promising opportunities, rather than merely responding to competitors’ moves (Miller 1983). Morck and Yeung (1991) suggest that the interaction of a firm’s proactiveness and internationalization is significantly associated with performance, whereas internationalization alone is not significant. Proactive ICE, such as pioneering or first entry, can improve company performance. Kimura (1989), for example, has concluded that first entrants enjoyed significant strategic advantages in international markets. Mascarenhas (1992a,b) has also found that oil equipment companies that were first to enter international markets enjoyed important first-mover advantages derived from the barriers erected through technical leadership, resource commitments, and buyer switching costs. First-movers also survived longer in their foreign markets than late entrants. Mascarenhas (1992b) also uncovered a positive relationship between the timing of a firm’s market entry and its market share. Pioneering in several foreign markets concurrently, rather than sequentially, was also positively associated with market survival. Consequently, proactiveness in in-

INTERNATIONAL ENVIRONMENTAL HOSTILITY

475

ternational markets can be conducive to successful firm performance. The above discussion suggests the following hypothesis: H1: ICE will be positively associated with a firm’s financial performance.

Hostility of the International Environment as a Moderator of the ICE-Performance Relationships Research also suggests that contextual factors can affect the success of the firm’s entrepreneurial activities (Covin and Slevin 1991; Zahra 1991). Environmental hostility, in particular, can have a significant moderating influence on the CE-performance relationship (Zahra 1993; Zahra and Covin 1995). This study extends the literature by testing the effects of a firm’s international environment on the ICE-company performance relationship. Although the conditions of the home market often influence the firm’s success in international operations (Hitt et al. 1994), this study posits that the perceived characteristics of its international environment, especially hostility, will significantly moderate the relationship between ICE and performance. Environmental hostility indicates unfavorable external forces for a firm’s business. Unfavorable environmental conditions result from radical industry changes, intense regulatory burdens placed on the industry, or fierce rivalry among competitors (Werner, Brouthers, and Brouthers 1996). Hostility also results from perceived competitive-, market-, and product-related uncertainties (Dess and Beard 1984). Perceived hostility in the firm’s international markets also arises from other sources (Agrawal and Ramaswamy 1992), including changing demand conditions and radical innovations that render the firm’s basic technology obsolete. Rivalry, which can cause hostility, reflects the perceived nature of competitive dynamics (Porter 1980), the number of companies competing in an industry, and the intensity of competition in an industry (Grant 1995). Firms, therefore, must devote scarce resources to managing such an unfavorable environment in order to ensure the achievement of their organizational goals (Zahra 1993). International markets, in general, have been described as hostile (Hitt et al. 1997). One reason is that the external environments firms face in competing internationally are much different in that companies must address diverse and inconsistent laws, national cultures, and industry forces (Rosenzweig and Singh 1991). A firm, therefore, needs to invest heavily in understanding local conditions (Bartlett and Ghoshal 1989; Doz and Prahalad 1987), often for years without any guarantees of success (Vlasic 1998). Governments’ actions and policies in protecting national markets can also increase perceived environmental hostility. U.S. firms venturing into Taiwan, Korea, or Singapore have had to contend with the fact that governments in these countries have used multiple ways to support and protect their country’s producers (The Flexible Tiger, The Economist, January 3, 1998). Likewise, some European governments have enacted laws that favor their own domestic producers, causing U.S. companies to work harder at finding new sources of competitive advantage (Smart 1996). This study expects environmental hostility to significantly moderate the ICE-performance relationship. Several factors support this anticipated relationship. Specifically, given the skills and resources necessary to engage in ICE, firms may well be prepared to address problems presented by these environments, as found in some prior research (Miller and Friesen 1984; Covin and Slevin 1989; Zahra 1993; Zahra and Covin 1995). Furthermore, entrepreneurship is a logical means of exploiting business opportunities

476

S.A. ZAHRA AND D.M. GARVIS

in hostile environments (Covin and Slevin 1989, 1991). Consequently, as perceived hostility intensifies in a firm’s international markets, the payoff from ICE in the form of improved financial performance is expected to increase (Miller 1993). However, as hostility intensifies, the profits to be gained from ICE might decline because the firm has to work harder at building a strong market position, establishing its brand name recognition, and developing customer loyalty. The firm has to accomplish these goals while addressing a multitude of technological, social, political, and economic uncertainties (Williamson 1997). Under these conditions, the cost of foreign operations can increase, leading to reduced profits, as found in past research using data from U.S. companies’ domestic operations (e.g., Zahra 1993). In an environment characterized by increasing levels of intense hostility, it also becomes more difficult to gain additional market shares. Firms also have to engage in costly innovation and advertising and marketing to protect their market positions (Grant 1995). Growth in these environments is sometimes a zero-sum game insofar as it is achieved primarily by taking market shares away from rivals (Porter 1980). U.S. firms entering South Asian markets, for example, have had to build their positions by battling local and foreign rivals (Williamson 1997), a process that has slowed down their acquisition of market shares. Entry by some U.S. companies into foreign markets has also led local politicians to enact laws and regulations that have made it increasingly difficult to achieve further expansion. Local distributors and other intermediaries were also slow to give U.S. companies access to channels of distribution, further slowing down these companies’ expansion plans. Thus, while environmental hostility may positively influence company performance, the relationship may not be linear. Prior research indicates that excessive entrepreneurship can reduce the firm’s profits (Miller and Friesen 1984). As the environment becomes hostile, the payoff from ICE may decline further, as the firm must continually reconfigure its skill and resource bases. Firms that are competing in excessively hostile international environments, therefore, may realize diminishing and negative returns. Given the high costs of this strategy, combined with diminishing returns from additional market shares, increasing ICE efforts might not yield the same profit and growth outcomes achieved under low hostility (i.e., in placid environments). This discussion suggests the study’s final two hypotheses: H2: The relationship between ICE and a company’s performance will be moderated by international environmental hostility. Firms that pursue ICE in international environments with higher levels of hostility will have higher profits and higher growth. H3: The moderator effect of international environmental hostility on the relationship between ICE and company performance is curvilinear. Firms that over-pursue ICE in hostile international environments will generate diminishing profits and lower growth.

METHODS Sample To test the hypotheses, data were collected using a mail questionnaire, which was later supplemented and validated with secondary data. Initially, the names of 600 established companies competing in 20 manufacturing industries throughout the U.S were chosen. These industries were chosen because of their global business activities, using the lists

INTERNATIONAL ENVIRONMENTAL HOSTILITY

477

developed by Carpano, Chrisman and Roth (1994) and Roth (1992). These researchers recognized that, while these industries were global in their markets and customers, they varied considerably in their international sales, stage of development, intensity of the competition, and profitability. These variations were desirable to provide a reliable test of the hypotheses. Names and addresses of companies and their senior executives were obtained from multiple sources including Lexis-Nexis, most recent corporate annual reports, Business Week 1000, and Fortune 500. Initially, surveys were mailed to the chief executive officer (CEO) or the highest ranking officer of each firm, who were believed to be the most knowledgeable about their firm’s overall and international operations (Carpano et al. 1994; Roth 1992; Roth and O’Donnell 1996). These individuals are informed about their company’s ICE efforts (Miller 1983; Werner et al. 1996; Yeoh and Jeong 1995; Zahra 1991). Two mailings were used to ensure a high response rate. Of the 600 surveys, 23 were undeliverable. Completed responses were received from 149 companies, for a response rate of 25.82%, which compared favorably with those achieved in similar studies (e.g., Carpano et al. 1994). A second copy of the survey questionnaire was also sent to each of the vice presidents for international operations (or equivalent) in the 149 responding companies. Completed responses, which were received from a second group of 73 managers, were significantly correlated with those of the CEOs (or other senior primary respondents) on the study’s variables (p ⬍ 0.001), which supported inter-rater reliability. To establish the representation of the sample, responding and non-responding companies were compared based on their age, size (full-time employee), and sales volume. T-tests showed that the two groups did not differ significantly in these three variables. The X2 test also indicated that the association between a firm’s primary industry and response to the survey was not significant. Thus, there was no significant association between industry type and participation in the survey. Similarly, when the X2 test examined the association between company location (by state) and response to the survey, the result was not significant. T-tests also compared the first wave of respondents (those that sent their completed questionnaire in within the first two weeks) and later respondents (those that sent their replies within the third week or later). No differences were found in company age, size (full-time employees), or scores on the study’s variables. These results indicated that the sample represented its population.

Measures Data were collected from multiple sources, as follows: 1. ICE. A modified version of Miller’s (1983) 7-item measure was used to capture the firm’s ICE activities. A 5-point scale (1 ⫽ very untrue vs. 5 ⫽ very true) was used. Executives were asked to indicate the extent to which each item applied to their international operations (defined as those business activities conducted outside the U.S.) over the preceding 3-year period. Executives were also given the opportunity to indicate “not applicable” when responding to the survey. Miller’s measure was used because of its prominence in prior CE studies in domestic business (e.g., Covin and Slevin 1991; Zahra 1991; Zahra and Covin 1995), international operations (e.g., Dean et al. 1993; Knight 1997), and non-U.S. companies’ entrepreneurial activities (Werner et al. 1996). Previous researchers also found this measure to be reliable (Covin

478

S.A. ZAHRA AND D.M. GARVIS

and Slevin 1991; Werner et al. 1996; Zahra 1991) and valid (Knight 1997). Responses to the measure’s seven items were averaged, and the mean was then used in the analysis. The ICE scale was reliable (␣ ⫽ 0.78). Items for the ICE scale were: This company shows a great deal of tolerance for high risk projects; this company uses only “tried and true” procedures, systems, and methods (reverse scored); this company challenges, rather than responds to, its major competitors; this company takes bold, wide-ranging strategic actions, rather than minor changes in tactics; this company emphasizes the pursuit of long-term goals and strategies; usually, this company is the first in the industry to introduce new products to the market; and this company rewards taking calculated risks. Four additional analyses, using data from secondary sources, were performed to validate the ICE measure. Validation data were obtained from COMPUSTAT, Fortune 500, Global Business 1000, Global Scope, and Forbes. The first analysis examined changes in the firm’s diversification over a three-year period, a construct related to corporate venturing (Porter 1987). The ratio of the firm’s foreign sales to its total sales was used, as has been done in past research (Buhner 1987; Geringer et al. 1989; Kim et al. 1989, 1993; Ramaswamy, Kroeck, and Renforth 1996; Sambharya 1996; Sullivan 1994; Tallman and Li 1996). The correlation between this ratio and the ICE index was positive and significant (r ⫽ 0.59, n ⫽ 65, p ⬍ 0.001). The second validation analysis followed the literature by constructing an entropy measure of international diversification (Hitt et al. 1997) for a subset of firms. International diversification was a key approach to corporate venturing (Porter 1987). The change score in the entropy measure over a 3-year period was positively and significantly associated with ICE (r ⫽ 0.71, n ⫽ 53, p ⬍ 0.001). The third analysis focused on measures of proactiveness, a key component of ICE (Lumpkin and Dess 1996; Miller 1983). Given that Morck and Yeung (1991) suggest that advertising is an important measure of proactiveness, a company’s advertising in foreign markets was positively and significantly correlated with ICE (r ⫽ 0.57, n ⫽ 0.61, p ⬍ 0.001), supporting the validity of the ICE measure. The fourth analysis focused on R&D spending in foreign markets, a measure of innovation (Morck and Yeung 1991). The 3-year average R&D score (for the firm’s foreign operations) was positively and significantly correlated with ICE (r ⫽ 0.53, n ⫽ 58, p ⬍ 0. 01), which supported the validity of the ICE measure. 2. Hostility. Although several indicators of perceived hostility have been used in prior research (Dess and Beard 1984), the measures developed and validated by Miller and Friesen (1984) were employed in this study. Other researchers (Covin and Covin 1990; Zahra, 1991, 1993) used variants of this measure. Executives were asked to evaluate their foreign markets using six items: access to channels of distribution is difficult; access to capital is difficult; access to skilled labor is difficult; bankruptcy among companies in the industry is high; products become obsolete quickly; and demand for industry products is declining. Prior research that concluded that these perceptions shaped CE activities (Zahra and Covin 1995) and international business operations (Miller 1993) supported reliance on managers’ perceptions of foreign market conditions. Responses to the six items were averaged, and the mean was used in the analysis. The international business environmental hostility (hereafter “IHOST”) scale had a Cronbach ␣ of 0.70. 3. Company Performance. The study also used the following indicators of financial performance:

INTERNATIONAL ENVIRONMENTAL HOSTILITY

479

3.1 Overall performance. Companies undertake ICE to improve their overall financial positions (Baden-Fuller and Stopford 1994; Pinchot 1985; Stopford and Baden-Fuller 1994). The following two indicators of overall performance, therefore, were used in this study: 3.1.1 Return on assets (ROA) was used because ICE activities require the redeployment of the firm’s assets in innovative ways. The use of ROA to gauge the effect of ICE permitted an evaluation of a company’s innovative use of its assets in foreign markets. Prior researchers have also used ROA to assess the effect of CE on a company’s overall performance (Zahra 1991) and its success in foreign operations (Buhner 1987; Geringer et al. 1989; Grant 1987; Kim et al. 1989; Sambharya 1995, 1996). ROA data were available from COMPUSTAT for a subset of 63 of the 98 responding companies. When the 3-year average ROA for the 63 firms was correlated with the data gathered through the survey, the correlation was positive and significant (r ⫽ 0.84, p ⬍ 0.001). This analysis supported the validity of the ROA survey data. 3.1.2 Sales Growth was used because ICE involves costly venturing into dynamic and growth markets. Thus, ICE might increase company sales even though profits may lag. The growth measure, therefore, gauged the firm’s success in foreign venturing activities. Managers were asked to report “average annual growth (decline) in your company’s sales over the past 3 years.” To ensure the validity of this measure, two analyses were conducted. The first correlated managers’ responses to the above question with their responses to a two-item scale that followed a 5-point response format (5 ⫽ top 20% in the industry vs. 1 ⫽ lowest 20% in the industry). Items, which covered a 3-year period, were total sales growth and net income growth. The correlation between these two items and the study’s growth measured averaged 0.76 (p ⬍ 0.001). The second analysis used data on sales growth collected from COMPUSTAT for 59 of the 98 responding companies, and correlations between the COMPUSTAT and survey measure were significant (r ⫽ 0.87, p ⬍ 0.001), thus supporting the validity of the survey data. 3.2 Foreign Performance. As noted earlier, companies pursue ICE in foreign markets to achieve profitability (Hitt et al. 1997) and growth (Baden-Fuller and Stopford 1994; Leavy 1997). Obtaining data on foreign performance is difficult, however, because few companies are required to publicly report their international results separate from overall performance. Two measures of foreign performance were used, covering a 3-year period, as follows: 3.2.1 Foreign Profitability. Following the literature (Carpano et al. 1994), a firm’s profitability in international operations was measured using four items with a 5-point scale. Executives rated their company’s foreign operations relative to those of other companies in their industry (1 ⫽ lowest 20% in the industry vs. 5 ⫽ top 20% in the industry). Items were: return on assets, net profit margins, return on sales, and return on investment. Given that simple correlations among the four items averaged 0.83 (p ⬍ 0.001), responses were averaged and their mean was used in the analysis. 3.2.2 Foreign Growth. Companies pursue ICE to create opportunities for growth (Dean et al. 1993). Growth in international operations was measured by four items with 5-point scales. Executives rated their companies’ foreign

480

S.A. ZAHRA AND D.M. GARVIS

operations relative to others in their industry (1 ⫽ lowest 20% in the industry vs. 5 ⫽ top 20% in the industry). Items covered growth in: return on assets, net profit margins, return on sales, and return on investment. Given that simple correlations among these ratings averaged 0.78, the mean response on the four items was used in the analysis. 4. Control Variables. The study also controlled for a company’s size, age, global business scope, past performance, and industry type, as follows: 4.1 Company size was included as a control variable because of the significant association between this variable and corporate innovation and venturing (Zahra 1993), product diversification (Sambharya 1995), and international diversification (Tallman and Li 1996). A positive relationship was expected between company size and ICE because larger firms were expected to possess the slack resources necessary for ICE activities. Size was measured by the log of a firm’s total number of employees, which ranged from 68 to 14000. 4.2 Company age was included in the analysis because it influenced a firm’s international operations and entrepreneurial activities (Pinchot 1985; Zahra 1991). The number of years a company has been in operation was used as a control variable. 4.3 The scope of the firm’s international operations was measured by the number of countries in which a firm sold its products. This variable, therefore, served as a proxy of a firm’s global geographic diversity. The greater the global scope of a firm’s operations, the greater its opportunities to innovate, take risks, learn new skills, and explore new systems. Successful ICE ventures can also be transferred within a firm’s international operations, which can further increase ICE activities (Hitt et al. 1997). International diversification can also generate the capital necessary to support large-scale R&D projects by spreading the risk and providing markets in which the firm can recoup its investments (Kobrin 1991). Finally, global geographic diversity determines the firm’s overall performance (Grant 1987; Kim et al. 1989; Tallman and Li 1996). A positive relationship was expected between global scope and ICE. 4.4 Past company performance was included as a control variable because it affected the availability of slack resources. When a company performs well, financial slack increases and risk taking rises (Singh 1986). High past firm performance (relative to industry competitors) was expected to be positively associated with ICE. Consequently, the study asked executives to rate their companies’ performance on sales growth, return on assets (ROA), and return on investment (ROI) over the preceding three-year period. A 5-point scale was used (5 ⫽ top 20% vs. 1 ⫽ lowest 20%). Average scores on the three items were used in the analyses. 4.5 Industry type was included because of the interindustry differences in entrepreneurial activities, levels and patterns of internationalization (Grant 1995), and opportunities for innovation (Covin and Slevin 1991; Zahra 1993, 1996). For a given industry, therefore, the average for responding firms was subtracted from each firm’s score.

ANALYSIS Table 1 provides the means and standard deviations (S.D.) for the sample. Of the 149 responding firms, 111 reported international business roles. However, missing data on the study’s other variables further reduced the number of observations to 98. The 98

INTERNATIONAL ENVIRONMENTAL HOSTILITY

481

companies averaged 23.97 years (SD ⫽ 16.35) in age and reported having international operations in 5.21 (SD ⫽ 13.37) countries. On average, 29.44% (SD ⫽ 24.26) of companies’ sales were from foreign markets. The intercorrelation matrix presented in Table 1 showed that multicolinearity was not a problem in the database. To test the hypotheses, four moderated regression analyses (Cohen and Cohen 1983) were performed. For each of the study’s dependent variables, the analysis progressed in four steps. First, to test the effect of ICE on company performance, the dependent variable (Yij) was regressed on the control variables and ICE. Model 1, therefore, was as follows: Yij ⫽ f (Control variables, ICE). Second, to test the effect of international environmental hostility on performance, Model 2 was developed by adding the measures for IHOST and an interaction term created by multiplying ICE and IHOST. Model 2 was as follows: Yij ⫽ f (Control variables, ICE, IHOST, ICE*IHOST). Third, to test the possible curvilinear relationship between ICE and company performance, Model 3 was Yij ⫽ f (Control variables, ICE, IHOST, ICE2, IHOST*ICE2). Finally, the moderator effect was analyzed by comparing the R2s for Models 2 and 3 (Cohen and Cohen 1983). If the partial F-value associated with the change in R2 was significant, then the moderator effect was significant. The results from these analyses are presented next.

RESULTS ICE and Company Performance (H1) Tables 2 and 3 present the regression results for a company’s overall and foreign performance. Testing H1 required consideration of the results for Model 1 in both tables. Table 2, which reports results for overall performance, shows that Model 1 was significant (p ⬍ 00.001) and explained 13% of variance in ROA. As predicted in H1, ICE was significant and positively related (p ⬍ 0.05) to ROA. For revenue growth, Model 1 was also significant (p ⬍ 0.05) and explained 11% of the variance. ICE was also significant and positively related to revenue growth (p ⬍ 0.05). These results supported H1. Table 3 reports results for foreign performance. These results indicate support for H1. Model 1 for foreign profits was significant (p ⬍ 0.05) and explained 11% of the variance. ICE was significant and positive (p ⬍ 0.01). Model 1 for foreign revenue growth was also significant (p ⬍ 0.05), explaining 8% of the variance. ICE was also significantly and positively associated with foreign growth (p ⬍ 0.01). In summary, ICE was a significant and positive explanatory variable in all regression equations examining company performance.

The Moderating Effect of IHOST on the ICE-Company Performance Relationship (H2) Testing H2 was accomplished by examining Model 2 in Tables 2 and 3. With respect to overall performance reported in Table 2, Model 2 was significant (p ⬍ 0.01), explaining 19% of the variance in ROA. IHOST was negatively (but not significantly) associated with ROA; this negative sign was consistent with the literature (Dess and Beard 1984; Covin and Slevin 1989). However, as predicted in H2, the interaction term ICE*IHOST was significantly and positively associated with ROA. Following Covin and Slevin (1989), this positive sign indicated that the impact of ICE on ROA was greater under higher levels of environmental hostility.

2.79 23.97 5.17 11.73 19.88 24.43 2.39

1.1–4.7 1.83–4.38 1.4–4.8 12–78 1–43 (4.2)#–29.7 (4.7)–51.3 (12.1)–58.2 1.1–4.5

31.24 29.61 1.81

1.83 16.35 13.37 14.34

1.01 2.61

1.51

sd

0.29* 0.31* 0.34*

0.02 0.07 0.11 0.23*

0.20 ⫺0.03

1

0.15 ⫺0.13 0.16 0.09 0.17 0.06 0.12

⫺0.09 0.13 0.07

3

⫺0.09 0.05 0.16 ⫺0.02

⫺0.02

2

0.09 0.14 0.14

0.18 0.02 0.05

4

Means (unadjusted). Correlations were based on figures adjusted for industry; # ( ) indicate a loss or decline; * p ⬍ 0.05.

2.88 2.73

1.2–4.7

1. ICE 2. International E. Hostility [IHOST] 3. Company size 4. Past performance [index] 5. Company age 6. Global scope 7. ROA [overall] 8. Growth in sales [overall] 9. Foreign profits 10. Foreign growth [index]

a

2.94

Ranges

Variables

Meana

TABLE 1 Correlations among the Study’s Variables (n ⫽ 98)

0.09 0.34* 0.25*

0.11 0.28*

5

0.25* 0.13 0.31*

0.15

6

0.30* 0.23 0.18

7

0.07 0.34*

8

0.17

9

10

482 S.A. ZAHRA AND D.M. GARVIS

INTERNATIONAL ENVIRONMENTAL HOSTILITY

483

TABLE 2 Regression Results for Overall Company Performance Variable Model Constant Company size Company age Past performance Global scope ICE IHOST ICE *IHOST ICE squared ICE squared *IHOST R2 F value Change in R2 Partial F (Change in R2)

ROA #1

Revenue Growth

#2

#3

#1

#2

#3

1.09

1.13

0.98

0.67

0.79

0.74

⫺0.07 0.05 0.12 0.09 0.23*

⫺0.05 0.02 0.13 0.08 0.29* ⫺0.09 0.23*

⫺0.07 0.02 0.13 0.05 0.27* ⫺0.04

⫺0.08 0.03 0.02 0.08 0.26*

⫺0.05 0.01 0.07 0.14 0.33* ⫺0.02 0.28*

⫺0.01 0.01 0.05 0.13 0.33** ⫺0.05

⫺0.19* 0.15 0.13 2.71**

0.19 4.05** 0.06 3.29*

⫺0.17* 0.24*

0.21 4.61** 0.02 2.22*

0.11 2.11*

0.15 2.31* 0.04 2.61*

0.18 3.81** 0.03 3.22*

* p ⬍ 0.05; ** p ⬍ 0.01; *** p ⬍ 0.001.

The results for overall revenue growth also supported H2. Model 2 was also significant (p ⬍ 0.05) and had an R2 of 15%. IHOST was negatively but insignificantly associated with revenue growth. The interaction term ICE*IHOST, however, was positively and significantly associated with revenue growth (p ⬍ 0.05). Thus, the positive association between ICE and revenue growth was stronger under higher international environmental hostility. The data in Table 3 show that Model 2 was significant (p ⬍ 0.05), explaining 16% of the variance in foreign profitability. The interaction term ICE*IHOST was significantly and positively associated with foreign profitability (p ⬍ 0.01). The results for foreign revenue growth also supported H2, as Model 2 was significant (p ⬍ 0.05) and had an R2 of 15%. The interaction term ICE*IHOST was positively and significantly associated TABLE 3 Regression Results for Foreign Performance Profits

Revenue Growth

Variable Model

#1

#2

#3

Constant

0.44

0.37

0.07 ⫺0.03 ⫺0.07 0.13 0.37**

0.05 ⫺0.01 ⫺0.03 0.10 0.31** ⫺0.03 0.26*

Company size Company age Past performance Global scope ICE IHOST ICE *IHOST ICE squared ICE squared *IHOST R2 F value Change in R2 Partial F (Change in R2)

#1

#2

#3

0.38

0.59

0.69

0.41

0.02 ⫺0.01 ⫺0.01 0.12 0.37** ⫺0.05

0.02 ⫺0.03 ⫺0.03 0.19* 0.34**

0.03 ⫺0.02 ⫺0.08 0.20* 0.37** ⫺0.09 0.25*

0.02 ⫺0.01 0.04 0.14 0.29* ⫺0.04

⫺0.21* 0.19* 0.11 2.69*

* p ⬍ 0.05; ** p ⬍ 0.01; *** p ⬍ 0.001.

0.16 2.83* 0.05 2.65*

0.18 3.01** 0.02 2.17*

⫺0.20* 0.11 0.08 2.19*

0.13 2.37* 0.06 2.55*

0.16 3.91** 0.03 3.14**

484

S.A. ZAHRA AND D.M. GARVIS

with revenue growth (p ⬍ 0.05). Thus, like the results for overall performance, the positive association between ICE and foreign revenue growth was stronger under higher international environmental hostility. In all cases, the regression equations including interaction terms used to test H2 explained significantly more variance than the equations without these variables used to test H1. For overall performance, the R2 for Model 2 (0.19) was significantly higher (p ⬍ 0.05) than that of Model 1 (0.13) for ROA. For revenue growth, the R2 for Model 2 (0.15) was significantly higher (p ⬍ 0.05) than that of Model 1 (0.11). With respect to foreign performance, the R2 for Model 2 (0.16) was significantly higher (p ⬍ 0.05) than that of Model 1 (0.11) for foreign profitability. For foreign revenue growth, the R2 for Model 2 (0.13) was significantly higher (p ⬍ 0.05) than that of Model 1 (0.08). The ICE*IHOST interaction term was also a significant and positive explanatory variable in all regressions examining performance.

The Curvilinear Relationships between ICE and Performance: The Moderating Role of IHOST (H3) The results for Model 3, shown in Tables 2 and 3, provide some support for the predicted curvilinear relationship between ICE and performance. With respect to overall performance, Model 3 for ROA was significant (p ⬍ 0.01) and had an R2 of 21%. Consistent with H3, Table 2 shows that including ICE2 and the interaction term ICE2 *IHOST in the regression equation significantly (p ⬍ 0.05) improves the R2 above and beyond that found in Model 2 (R2 ⫽ 0.19). Also, ICE2 had a negative and significant coefficient (p ⬍ 0.05), confirming the predicted non-linear relationship. However, the ICE2*IHOST interaction term had positive and significant coefficients in the ROA equations, which was contrary to expectations. Table 2 also shows the regression results for overall revenue growth. Model 3 was significant (p ⬍ 0.01) with an R2 of 18%, which was significantly (p ⬍ 0.05) higher than Model 2 (R2 ⫽ 0.15). The ICE2 coefficient and its interaction with IHOST were positive and significant (p ⬍ 0.05). These results only partially supported H3 with overall performance. The data in Table 3 provide support for the predicted curvilinear relationship between ICE and foreign performance. Model 3 for foreign profits was significant (p ⬍ 0.01), with an R2 of 18%. The R2 for Model 3 for foreign profits was significantly (p ⬍ 0.05) higher than that of Model 2 (R2 ⫽ 0.16). The interaction term ICE2*IHOST was positively and significantly associated with foreign profits (p ⬍ 0.05), thereby supporting H3. Finally, the results for Model 3 for foreign revenue growth were also significant (p ⬍ 0.01). Model 3 had an R2 of 16% which was significantly (p ⬍ 0.01) higher than the R2 for Model 2 (R2 ⫽ 0.13). Although ICE2 had a negative and significant coefficient (p ⬍ 0.05), its interaction with IHOST was positive but insignificant, thus failing to support H3. These results only partially supported H3 with respect to foreign performance.

DISCUSSION This study examined the association between international corporate entrepreneurship (ICE) and company performance, and explored the moderating effect of hostile international environments on this relationship. Responding to calls for empirical testing of international entrepreneurial activities (Dean et al. 1993; Guth and Ginsberg 1990), the

INTERNATIONAL ENVIRONMENTAL HOSTILITY

485

results also clarify the relationships between ICE and company performance (both overall and foreign), as discussed in the following paragraphs.

ICE and Company Performance The results support H1, showing a positive relationship between ICE and a company’s performance. Findings that ICE is positively related to overall profitability and growth are consistent with prior research examining domestic entrepreneurial activities (e.g., Covin and Slevin 1991; Zahra 1991, 1993). Firms that engage in ICE can realize important financial benefits from their innovation, risk taking, and new business creation, a finding that supports past results (Baden-Fuller and Stopford 1994). The results extend the literature by showing that ICE is positively associated with the profitability and growth of foreign operations, which supports past research (Dean et al. 1993). Firms that pursue venturing and innovation in foreign markets can achieve profits and growth, which supports the literature (Bossak and Nagashima 1997). While the variance explained in the regression analyses is modest because many variables influence a company’s performance, the results show that ICE can be a source of profitability and growth, both overall and foreign. The results further extend the literature by showing that companies benefit in their profitability and growth when pursuing ICE. This finding supports the anecdotal evidence found in the business press (Bannon 1998; Smart 1996). This “double payoff” from entrepreneurial activities also supports some prior research findings (Zahra 1993). Thus, one should not presume a priori that tradeoffs exist between foreign growth and profitability as the firm engages in ICE. This potential double payoff from ICE might have been a primary force for the growing internationalization of U.S. companies’ operations (Shama 1995; Symonds et al. 1996). These results should be tempered with caution, however, given the study’s cross-sectional design. Longitudinal designs would help future researchers to better understand the relationship between ICE and overall performance.

The Moderating Impact of IHOST on the ICE-Performance Relationship (H2) The results also indicate that the association of ICE with performance is contingent on the perceived hostility of a firm’s international markets, which supports prior findings from domestic operations (Covin and Slevin 1989, 1991; Zahra and Covin 1995). This finding shows that this moderating effect exists also for the firm’s ICE activities, and for the company’s overall and foreign performance, measured by both profits and growth. Thus, when hostility is high, ICE can enhance company performance. While some managers’ impulse reaction to high international hostility may be to pursue more conservative options, the study highlights the desirability of a more proactive but calculated risk-taking. Managers need to be cautious because excessive pursuit of ICE can be counter-productive when environmental hostility in foreign markets is high.

The Non-Linear Relationships between ICE and Performance: The Moderating Role of IHOST The results reveal that complex associations exist between ICE and company performance. As reported earlier, and consistent with H3, firms initially realized profits then

486

S.A. ZAHRA AND D.M. GARVIS

experience negative returns from increasing ICE activities. These findings are not surprising, as other studies that have found inverted U-shaped relationships with respect to a firm’s innovation (Miller and Friesen 1984) and internationalization activities (Hitt et al. 1997; Tallman and Li 1996). Negative returns may be explained by the difficulties firms may experience in managing their complex foreign operations or from the costliness of coordinating, directing, and managing their venturing and innovation initiatives in multiple foreign markets. The transfer of the best entrepreneurial practices within a company’s international network can also be time consuming, costly, and challenging. Although this study did not measure possible causes for these diminishing returns, it shows the risks of excessive pursuit of ICE. The study also highlights the strong influence of environmental hostility on the relationship between ICE and performance, but in the opposite direction of that hypothesized. In foreign markets where competitive rivalry and hostility were viewed as intense, the performance of those firms engaged in higher levels of ICE was not as adversely influenced as the performance of those firms with low ICE levels. When considered as a predictor, perceived international environmental hostility did not significantly explain differences in a company’s financial performance. However, the interaction term ICE2* IHOST was positively associated with performance, supporting the predicted moderating effect of perceived hostility in international operations. Thus, the negative effects of high ICE levels on firm performance were somewhat reduced in hostile environments. There are several reasons why firms that aggressively pursue ICE might enjoy higher financial performance than firms that implement fewer ICE programs, even when IHOST is high. One reason is that ICE activities themselves may be the primary source of the hostility experienced in a firm’s foreign markets. Innovation or pioneering activities that firms pursue to capture market shares and profits may intensify competitive rivalries in markets that were formerly benign. Firms engaged in higher levels of ICE may be positioned to manage and even profit under high environmental hostility. The resources and skills necessary for successful innovation and venturing can give these firms the ability to take advantage of changing environmental conditions. Entrepreneurial firms are often more flexible in their approach to interacting with their environments, and are quicker than their rivals in seizing strategic initiatives even under challenging environmental conditions. This flexibility can enable the firm to achieve multiple points of distinction across its global operations, which can enhance a company’s performance.

Post-Hoc Analyses To put the above results in perspective, we identified the five companies with the highest ICE scores in placid vs. hostile environments. We conducted an extensive search (using Lexis-Nexis and newspaper data searches) about these companies’ ICE activities. Although the small number of observations (n ⫽ 10) was too small to confidently generalize findings, there were major differences between the two sets of firms in the objectives, content and effect of their ICE efforts. Companies in placid environments appeared to explain their high ICE efforts by a desire to: safeguard against strategic surprises, solidify their reputation, exploit their past successes, protect their markets, widen their growth options, and remain strategically focused. In this environment, companies that aggressively pursued ICE believed that their hospitable environment cannot last long, and they wanted to be prepared when change took place in their industries. However, those companies that aggressively

INTERNATIONAL ENVIRONMENTAL HOSTILITY

487

pursued ICE in hostile environments appeared to believe in the adage “innovate or die”. Therefore, they viewed ICE as a strategic priority, providing a basis for creating new niches and protecting existing markets. ICE served the dual purpose of preempting the competition while maximizing the firms’ competitive advantage. Companies also followed different paths to ICE. In placid environments, the focus was on frequent product upgrades and on being first to do so in the industry. In hostile environments, ICE efforts were more wide ranging, centering on frequent radical innovation, entering new foreign markets, and broadening the firm’s scope of global operations and services. Companies espoused an attitude of being on the “frontier” of ongoing global transformation. Generalizations from a small number of observations about the ICE-company performance link can be hazardous, at best. We caution the readers, therefore, to bear this in mind as they interpret the following observations. In placid environments, the five companies with the highest ICE scores reported higher scores on different measures of performance than other firms in the same environment but with lower ICE scores. Companies with high ICE in placid environments, however, had lower performance than firms with high ICE scores in hostile environments. Companies with low ICE scores in placid and hostile environments reported lower performance levels. Finally, we were interested in the causes of the curvilinear relationship found between ICE and performance in a hostile environment. One of the five companies we examined provided some important clues. Five years before our study, this company replaced its CEO. The new CEO and top management team made globalization the cornerstone of the company’s new competitive strategy. Consequently, the company quickly moved to acquire existing facilities in 11 countries, entered into a series of international strategic alliances, and devoted more resources for R&D both in the U.S. and abroad, generating a dizzying array of new products. The firm also spent heavily on its manufacturing, marketing and distribution, with the goal of achieving a “first-mover” status in several of its markets. Profits continued to rise but, in the past two years, they experienced a drop because of the high costs of global expansion and the unfavorable economic conditions in some of the countries the firm has entered.

Limitations Having discussed the results, it is important to recognize the study’s limitations. The most obvious is the use of survey data in measuring the study’s key variables. Despite the fact that secondary data supported the validity of the measures, one cannot totally dismiss source bias. Like other data collection techniques, mail surveys also have limitations that can affect the quality of the findings. Another limitation is the study’s short time frame, which does not permit an analysis of causal relationships among the variables. Fortunately, Block and MacMillan (1993) have concluded that the financial payoff from corporate venturing efforts quickly becomes evident. Likewise, the focus on the associations of ICE with firm performance, without exploring the effect of ICE processes, is a third limitation of the study. Detailed analyses such as those conducted by Baden-Fuller and Stopford (1994) would have provided deeper and richer insights into how, when, and why different ICE activities may impact a company’s performance. Still, the results have implications for managerial practice and future research on ICE.

488

S.A. ZAHRA AND D.M. GARVIS

Managerial Implications The findings of this study, in which ICE is positively associated with a company’s overall and foreign performance, suggest that firms should consider being actively involved in international entrepreneurial activities, but in moderation. Executives need to encourage and support ICE activities. Though time consuming, politically challenging, and expensive, ICE activities can be financially rewarding by creating opportunities that enhance growth and improve profitability. Nurturing and supporting risky ICE activities, therefore, should remain a top management priority. It is also clear from the results that the pursuit of ICE can be financially worthwhile, especially when environmental hostility in international markets is perceived as being high. ICE can widen a firm’s growth options, enabling it to enter new and profitable business fields (McGrath et al. 1995). ICE activities provide savvy firms with the means to seize advantages created by hostile and uncertain international competitive conditions. Indeed, managers who abandon innovation and risk taking when hostility increases in international markets may place their company’s long-term profitability and growth at risk. Executives need to recognize, however, that there are “upper-limits” to the financial gains from pursuing ICE. Taking calculated risks and promoting innovation can be important for achieving growth and profitability, up to a point where the costs are excessive, managers are over-extended, and firm performance suffers. There are also potential dysfunctional effects for excessive innovation and venturing when the firm’s international environment is excessively hostile. Sound judgment and experience can help executives to determine if their firms are approaching the appropriate point of moderation in pursuing ICE. Finally, managers need to devote the necessary resources to conduct effective competitive analyses and continually scan their international business environment. If perceptions of hostility matter this much in determining ICE and their effects, scanning international markets should be given attention. Scanning enables executives to gather, analyze and interpret the diverse dimensions that can increase or reduce IHOST. Using this information, managers can make effective strategic choices about the appropriate levels of ICE to be pursued.

Implications for Theory and Research The results reported in this paper indicate a need for studies that empirically explore the link between ICE and a firm’s performance. Longitudinal designs, in particular, are necessary to establish the nature and direction of the associations between ICE and company performance. These studies should give more attention to the measurement of ICE and identify its different dimensions and to provide a more complete picture of the benefits companies might gain from undertaking different ICE initiatives. Further, the links between ICE and company performance deserve a closer examination in future study. Given that these links lie predominantly in the learning achieved and the knowledge gained in international markets (McGrath et al. 1995), researchers need to study the impact of ICE or particular international ventures on the firm’s ability to generate and use different types of knowledge. This can be done using case studies, mail surveys, archival data or field research. Knowledge is a strategic resource that can spell the difference between success and failure in global markets. Researchers also

INTERNATIONAL ENVIRONMENTAL HOSTILITY

489

need to better understand the process by which ICE projects are initiated, managed, and institutionalized. Finally, future researchers need to give more attention to the factors that motivate firms to undertake ICE activities. These motives can explain the types of ICE activities pursued and their effect on a firm’s financial and non-financial performance outcomes. In recent years, U.S. companies have expanded their international business operations (Williamson 1997). Considerable innovation, risk taking and entrepreneurial activities have accompanied this globalization process (Carpano et al. 1994; Tallman and Li 1996). The results show that, even when the environment of foreign markets is considered hostile, international entrepreneurial efforts can enhance the growth and profitability of a firm’s performance. These findings should be tempered with caution because there is a risk that the financial payoff from excessive ICE activities in this environment may decline. Executives should not abandon entrepreneurial risk taking in their firms’ international business operations; instead, they need to proceed with caution.

REFERENCES Agrawal, S., and Ramaswamy, N.S. 1992. Choice of foreign market entry mode: Impact of ownership, location and internalization factors. Journal of International Business Studies 23(1):1–27. Baden-Fuller, C., and Stopford, M.J. 1994. Rejuvenating the mature business. Boston, MA: Harvard Business School Press. Bannon, L. 1998. Mattel plans to double sales abroad. Wall Street Journal February 11, A3 and A8. Bartlett, C.A., and Ghoshal, S. 1989. Managing across borders: The transnational solution. Boston, MA: Harvard Business School Press. Block, Z., and MacMillan, I. 1993. Corporate venturing. Cambridge, MA: Harvard Business Press. Bossak, J., and Nagashima, S. 1997. Corporate strategies for a borderless world: Sharpening your competitive Edge. Tokyo, Japan: Asian Productivity Organization. Buhner, R. 1987. Assessing international diversification of West German corporations. Strategic Management Journal 8(1):25–37. Carpano, C., Chrisman, J.J., and Roth, K. 1994. International strategy and environment: An assessment of the performance relationship. Journal of International Business Studies 25(3):639–656. Chiesa, V. 1996. Managing the internationalization of R&D activities. IEEE Transactions on Engineering Management 43(1):7–23. Cohen, J., and Cohen. P. 1983. Applied multiple regression/correlation analysis for the behavioral sciences. 2nd ed. Hillsdale, N.J.: L. Erlbaum Associates. Covin, J.G., and Covin T. 1990. Competitive aggressiveness, environmental context, and small firm performance. Entrepreneurship: Theory and Practice 14(4):35–50. Covin, J.G., and Slevin, D. 1989. Strategic management of small firms in hostile and benign environments. Strategic Management Journal 10(1):75–87. Covin, J.G., and Slevin, D. 1991. A conceptual model of entrepreneurship as firm behavior. Entrepreneurship: Theory and Practice 16(1):7–25. Dean, C.C., Thibodeaux, M.S., Beyerlein, M., Ebrahimi, B., and Molina, D. 1993. Corporate entrepreneurship and competitive aggressiveness: A comparison of U.S. firms operating in eastern Europe and the Commonwealth of Independent States with U.S. firms in other high-risk environments. Advances in International Comparative Management 8:31–54. Dess, G. and Beard, D. 1984. Dimensions of organizational task environments. Administrative Science Quarterly 29(1):52–73. Dess, G., Gupta, A., Hennart, J-F., and Hill, C. 1995. Conducting and integrating strategy research

490

S.A. ZAHRA AND D.M. GARVIS

at the international, corporate, and business levels: Issues and directions. Journal of Management 21(3):357–393. Doz, Y., and Prahalad, C.K. 1987. The multinational mission: Balancing local demands and global vision. New York, NY: The Free Press. The Flexible Tiger. 1998. Economist 346(8049): January 3, 73. Florida, R. 1997. The Globalization of R&D: Results of a survey of foreign-affiliated R&D laboratories in the USA. Research Policy 26(1):85–103. Ferdows, K. 1997. Making the most of foreign factories. Harvard Business Review 75(2):73–88. Franko, L.G. 1989. Global corporate competition: Who’s winning, who’s losing and the R&D factor as one reason Why. Strategic Management Journal 10(5):449–474. Geringer, J.M., Beamish, P.W., and deCosta, R.C. 1989. Diversification strategy and internationalization: Implications for MNE performance. Strategic Management Journal 10(2):109–119. Grant, R.M. 1987. Multinationality and performance among British manufacturing companies. Journal of International Business Studies 18(3):79–89. Grant, R.M. 1995. Contemporary strategy analysis: Concepts, techniques, applications. Second Edition, Cambridge, MA: Blackwell Publishers Inc. Grant, R., Jammine, A., and Thomas, H. 1988. Diversity, diversification, and profitability among British manufacturing companies. Academy of Management Journal 31(4):771–801. Guth, W.D., and Ginsburg, A. 1990. Guest Editors’ introduction: Corporate entrepreneurship. Strategic Management Journal 11(Summer):5–15. Hennart, J-F. (1991). The transaction costs theory of joint ventures: An empirical study of Japanese subsidiaries in the United States. Management Science 37(4):483–497. Hitt, M.A., Hoskisson, R.E., and Ireland, R.D. 1994. A mid-range theory of the interactive effects of international and product diversification on innovation and performance. Journal of Management 20(2):297–326. Hitt, M.A., Hoskisson, R.E., and Kim, H. 1997. International diversification: Effects on innovation and firm performance in product-diversified firms. Academy of Management Journal 40(4):767–798. Hu, Y-S. 1995. The international transferability of competitive advantage. California Management Review 37(4):73–88. Johanson, J., and Vahlne, J-E. 1977. The internationalization process of the firm—A model of knowledge development and increasing foreign market commitments. Journal of International Business Studies 8(1):23–32. Kim, W.C., Hwang, P., and Burgers, W.P. 1989. Global diversification strategy and corporate profit performance. Strategic Management Journal 10(1):45–57. Kim, W.C., Hwang, P., and Burgers, W.P. 1993. Multinationals’ diversification and the risk-return tradeoff. Strategic Management Journal 14(4):275–286. Kimura, Y. 1989. Firm-specific strategic advantages and FDI behavior of firms: The case of Japanese semiconductor firms. Journal of International Business Studies 20(2):296–314. Knight, G.A. 1997. Cross-cultural reliability and validity of a scale to measure firm entrepreneurial orientation. Journal of Business Venturing 12(3):213–225. Kobrin, S. 1991. An empirical analysis of the determinants of global integration. Strategic Management Journal 12(Summer):17–31. Kogut, B. 1991. Country capabilities and the permeability of borders. Strategic Management Journal 12(Summer):33–47. Kuratko, D., Montagno, R., and Hornsby, J. 1990. Developing an intrapreneurial assessment instrument for effective corporate entrepreneurial environment. Strategic Management Journal 11(Summer):49–58. Leavy, B. 1997. Innovation and the established organization. Journal of General Management 22(3):38–52.

INTERNATIONAL ENVIRONMENTAL HOSTILITY

491

Levy, D.L., and Dunning, J.D. 1993. International production and sourcing: trends and issues. Science Technology and Industry Review 13(Dec.):13–59. Lumpkin, G.T., and Dess, G.G. 1996. Clarifying the entrepreneurial orientation construct and linking it to performance. Academy of Management Review 21(3):135–172. Mascarenhas, B. 1992a. First-mover effects in multiple dynamic markets. Strategic Management Journal 13(3):237–243. Mascarenhas, B. 1992b. Order of entry and performance in international markets. Strategic Management Journal 13(7):499–510. Mascarenhas, B. 1997. The order and size of entry into international markets. Journal of Business Venturing 12(4):287–299. McGrath, R.G., MacMillan, I.C., and Venkataraman, S. 1995. Global dimensions of new competencies. International Entrepreneurship Birley, S. and MacMillan, I.C. (eds.). New York, NY: Routledge. Miller, D., and Friesen, P. H. 1984. Organizations: A quantum view. New York, NY: Prentice Hall. Miller, D. 1983. The correlates of entrepreneurship in three types of firms. Management Science 29(7):770–791. Miller, K.D. 1993. Industry and country effects on managers’ perceptions of environmental uncertainties. Journal of International Business Studies 24(4):693–714. Morck, R., and Yeung, B. 1991. Why investors value multinationality. Journal of Business 64(2):165–187. Pinchot, III, G. 1985. Intrapreneuring: Why you don’t have to leave the corporation to become entrepreneur. New York, NY: Harper and Row Publishers. Porter, M. 1980. Competitive strategy: Techniques for analyzing industries and competitors. New York, NY: Free Press. Porter, M. 1987. From competitive advantage to corporate strategy. Harvard Business Review 65(3):43–59. Porter, M. 1990. The competitive advantage of nations. London: Collier-Macmillan. Ramaswamy, K., Kroeck, G., and Renforth, W. (1996). Measuring the degree of internationalization of a firm: A comment. Journal of International Business Studies 27(1):167–178. Rosenzweig, P., and Singh, J. 1991. Organizational environments and the multinational enterprise. Academy of Management Review 16(2):340–361. Roth, K. 1992. International configuration and coordination archetypes for medium-sized firms in global industries. Journal of International Business Studies 23(3):533–549. Roth, K., and O’Donnell, S. 1996. Foreign subsidiary compensation strategy: An agency theory perspective. Academy of Management Journal, 39(3):678–703. Sambharya, R. 1996. Foreign experience of top management teams and international diversification strategies of U.S. multinational corporations. Strategic Management Journal 17(9):739–746. Sambharya, R. 1995. The combined effect of international diversification and product diversification strategies on the performance of U.S.-based multinational corporations. Management International Review 35(3):197–218. Schendler, B. 1997. Microsoft: First america, now the world. Fortune August 18, 214–217. Shama, A. 1995. Entry strategies of U.S. firms to the former Soviet Bloc and Eastern Europe. California Management Review 37(3):90–109. Shan, W., and Hamilton, W. 1991. Country-specific advantage and international cooperation. Strategic Management Journal 12(6):419–432. Singh, J. 1986. Performance, slack, and risk taking in organizational decision making. Academy of Management Journal 29(3):562–585. Smart, T. 1996. GE’s Welch: ‘Fighting Like Hell to be No. 1’. Business Week July 8, 48. Stopford, J., and Baden-Fuller, C. 1994. Creating corporate entrepreneurship. Strategic Management Journal 15(7):521–536.

492

S.A. ZAHRA AND D.M. GARVIS

Sullivan, D. 1994. Measuring the degree of internationalization of a firm. Journal of International Business Studies 25(2):325–342. Symonds, W.C., Bremner, B., Toy, S., and Miller, K.L. 1996. The Globetrotters take over: Worldwide champions outpace domestic competitors. Business Week July 8, 46. Tallman, S., and Li, J. 1996. Effects of international diversity and product diversity on the performance of multinational firms. Academy of Management Journal 39(1):179–196. Teece, D., Pisano, G., and Shuen, A. 1997. Dynamic capabilities and strategic management. Strategic Management Journal 18(7):509–533. Vlasic, B. 1998. The little car that could carry Chrysler overseas. Business Week January 19, 39. Werner, S., Brouthers, L.E., and Brouthers, K.D. 1996. International risk and perceived environmental uncertainty: The dimensionality and internal consistency of Miller’s measure. Journal of International Business Studies 27(3):571–587. Williamson, P.J. 1997. Asia’s new competitive game. Harvard Business Review 75(5):55–67. Yeoh, P-L., and Jeong, I. 1995. Contingency relationships between entrepreneurship, export channel structure and environment: A proposed conceptual model of export performance. European Journal of Marketing 29(8):95–115. Zahra, S. 1991. Predictors and financial outcomes of corporate entrepreneurship: An exploratory study. Journal of Business Venturing 6(4):259–285. Zahra, S. 1993. Environment, corporate entrepreneurship and financial performance: A taxonomic approach. Journal of Business Venturing 8(4):319–340. Zahra, S. 1996. Governance, ownership, and corporate entrepreneurship: The moderating impact of industry technological opportunities. Academy of Management Journal 39(6):1713–1735. Zahra, S., and Covin, J.G. 1995. Contextual influences on the corporate entrepreneurship-performance relationship: A longitudinal analysis. Journal of Business Venturing 10(1):43–58.