The effect of international venturing on firm performance: The moderating influence of absorptive capacity

Available online at www.sciencedirect.com

Journal of Business Venturing 23 (2008) 195 – 220

The effect of international venturing on firm performance: The moderating influence of absorptive capacity ☆ Shaker A. Zahra a,1 , James C. Hayton b,⁎ a

b

University of Minnesota, Carlson School of Management, 321 19th Ave. South Minneapolis, MN 55455, United States SDA Bocconi/Università Bocconi, Istituto di Organizzazione e Sistemi Informativi (IOSI), Viale Isonzo, 23 - 20135 Milano, Italy Received 1 January 2004; received in revised form 1 January 2006; accepted 1 January 2007

Abstract Companies have vigorously pursued opportunities for profitability and growth through international venturing. Yet, research evidence on the performance benefits of international venturing activities has been contradictory. Applying an organizational learning framework, we propose that the expected effects of international venturing activities on financial performance depend on companies' absorptive capacity. Data from 217 global manufacturing companies show that absorptive capacity moderates the relationship between international venturing and firms' profitability and revenue growth. These results urge executives to build internal R&D and innovative capabilities in order to successfully exploit the new knowledge acquired from foreign markets. © 2007 Elsevier Inc. All rights reserved. Keywords: International venturing; Alliances; Acquisitions; Corporate venture capital; Absorptive capacity

☆ We acknowledge, with gratitude, the comments and suggestions of S. Venkataraman (editor), anonymous JBV and Academy of Management reviewers, and Gerard George in discussions of this research. An earlier version of this paper was presented at the 2004 Academy of Management. We thank the Glavin Center for Global Management at Babson College for its financial support and Patricia H. Zahra for her helpful assistance. ⁎ Corresponding author. Tel.: +39 02 5836 2632; fax: +39 02 5836 2634. E-mail addresses: [email protected] (S.A. Zahra), [email protected] (J.C. Hayton). 1 Tel.: +1 612 625 2442; fax: +1 612 624 2046.

0883-9026/$ - see front matter © 2007 Elsevier Inc. All rights reserved. doi:10.1016/j.jbusvent.2007.01.001

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1. Executive summary Over the past decade, entrepreneurship researchers have shown a strong interest in understanding the patterns and effects of corporate venturing. Venturing focuses on creating new businesses by exploiting opportunities in domestic and international markets. While researchers' attention has centered on a firm's domestic operations, more and more companies have engaged in international venturing. Contradictory findings have been reported in the literature on the effect of international venturing activities such as acquisitions, alliances and corporate venture capital (CVC) funds on a firm's financial performance. This study uses an organizational learning perspective to propose that firms engage in international venturing activities to gain new knowledge and capabilities that allow them to successfully exploit new opportunities in foreign markets. The study also argues that greater benefits could be realized from international venturing through the successful integration and exploitation of new knowledge and capabilities gained from foreign markets. Therefore, firms should build a stock of related knowledge within their own operations. Firms' investments in building the absorptive capacity are expected to positively influence their ability to obtain the anticipated performance benefits from international venturing. The study develops and tests six hypotheses: H1. The strength of the relationship between international acquisitions and a firm's profitability is positively related to its level of absorptive capacity. H2. The strength of the relationship between international acquisitions and a firm's revenue growth is positively related to its level of absorptive capacity. H3. The strength of the relationship between international alliances and a firm's profitability is positively related to its level of absorptive capacity. H4. The strength of the relationship between international alliances and a firm's revenue growth is positively related to its level of absorptive capacity. H5. The strength of the relationship between international CVC and a firm's profitability is positively related to its level of absorptive capacity. H6. The strength of the relationship between international CVC and a firm's revenue growth is positively related to its level of absorptive capacity. Using a mail survey of 217 global manufacturing firms, the six hypotheses were tested using hierarchical regression modeling. Separate regression analyses were run for return on equity (ROE) and revenue growth. The results support the hypotheses. There is no statistically significant relationship between international acquisitions, alliances and CVC funds on ROE or revenue growth. However, the interaction between a firm's absorptive capacity and the international venturing variables is significant and is positively related to ROE and revenue growth. The results are most clear when venturing activities are related to firms' primary business activities. That is, in the case of related activities, absorptive capacity consistently positively moderates their influence on both ROE and revenue growth. However, when the effect of absorptive capacity is considered, there is no

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significant association between unrelated acquisitions, or unrelated CVC, and ROE and revenue growth. This result reflects the importance of relatedness of new knowledge to existing knowledge stocks. This study provides an explanation of the previously mixed results concerning firms' gains from international venturing. These results show the importance of absorptive capacity for achieving profitability and growth. The study offers an empirical examination of the association between CVC and firm performance, an issue that has received little attention to date. Given that investments in CVC are estimated to be several billion dollars a year, this study documents the potential performance gains from these investments. The results also indicate that firms seeking to exploit new knowledge and capabilities acquired through international venturing should develop their absorptive capacity. Firms that build their stocks of relevant knowledge can assimilate and commercially exploit the knowledge gained from external sources by continuing to invest heavily in their internal knowledge development through R&D. The globalization of businesses has encouraged companies to expand internationally and revitalize their operations to create new revenue streams. Some companies have incubated new businesses within their international operations, hoping to develop them into viable growth markets (Takahashi, 2000). Others have sought growth by entering new markets that lie outside their existing operations, seeking to improve their financial performance (Keil, 2002). This paper focuses on the external venturing activities that companies undertake in their international markets (hereafter “international venturing”). Specifically, international venturing refers to new business creation through foreign acquisitions, international alliances, and corporate venture capital (CVC). Researchers have examined the factors that support international venturing activities (Zahra and Garvis, 2000). Others have explored the effects of these activities, concluding that companies' growing emphasis on international venturing does not always improve organizational performance (e.g., Hastings, 1999; Peek et al., 1999; Serapio and Cascio, 1996). International venturing may give firms new knowledge and skills that can fuel their innovation and new business creation, but some companies do not have the requisite absorptive capacity to capture and effectively exploit this knowledge (Hamel, 1991). Cohen and Levinthal (1990) define absorptive capacity as the firm's ability to import, comprehend and assimilate the knowledge obtained from external sources (e.g., suppliers and customers in foreign markets). This capacity enables the firm to import externally created knowledge and transform it into innovative products and gain a competitive advantage (Zahra and George, 2002). Researchers have not documented the implications of absorptive capacity for the relationship between international venturing and a firm's financial performance. Companies that compete in foreign markets have to absorb a great deal of information quickly to exploit new business opportunities in these markets and gain a competitive advantage. This task is complicated by the fact that the knowledge gained from international markets is often tacit and socially complex, reflecting the cultures and locales in which it was developed. The ability of the firm to absorb, internalize and exploit this knowledge can influence the extent to which it can achieve higher profits or revenue growth from international operations. Therefore, we propose that a firm's absorptive capacity can moderate the international venturing–organizational performance relationship.

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This paper empirically addresses the question: Does the firm's absorptive capacity moderate the relationship between international venturing and company performance? In answering this question, the paper makes two contributions to the field. The first is examining international venturing and its implications for a company's performance. Venturing is a time consuming and costly process (Block and MacMillan, 1993) and therefore it is important to evaluate its potential effect on a company's profitability and growth. Companies that pursue international venturing have to address a myriad of complex cultural issues, different political environments, and regulatory requirements. Companies need also to select the most effective modes of entry in order to build their international presence. These modes of entry have different payback periods, possibly influencing the firm's performance. Indeed, researchers have reported contradictory results on the effects of international alliances (e.g., Serapio and Cascio, 1996; Welch, 1992) and acquisitions (e.g., Hastings, 1999; Li, 1995; Peek et al., 1999) on a company's financial performance. The effect of CVC on a company's financial performance has not been well documented in the literature (Chesbrough, 2002). Companies spend billions of dollars a year on CVC (McNally, 1995) and therefore the implications of these investments for company performance should be explored. Few empirical studies have investigated this important issue (Dushnitsky and Lenox, 2002). The paper's second contribution lies in recognizing absorptive capacity as a moderator of the relationship between international venturing and a company's financial performance. Past researchers (e.g., Hastings, 1999; Takahashi, 2000) have overlooked the importance of a firm's ability to acquire, assimilate and creatively exploit knowledge gained from foreign markets. By considering the significance of absorptive capacity, we highlight a key managerial role in harvesting knowledge and other resources, which could influence a company's financial gains from international venturing. The next section of the paper develops the concept of international venturing and its effects on company performance. Building on organizational learning theory (Argyris and Schön, 1978; Dodgson, 1993; Huber, 1991), the paper develops specific hypotheses about the moderating effect of absorptive capacity on the relationship between international venturing and a company's financial performance. The paper then presents an empirical study that tests these hypotheses. The paper's final section discusses the study's findings and their implications for practice and future research. 1.1. International venturing, absorptive capacity and company performance Venkataraman, MacMillan and McGrath (1992:488) define venturing as “the process by which members of an existing firm bring into existence products and markets which do not currently exist within the repertoire of the firm.” Venturing could be internal or external. Internal venturing occurs within the boundaries of a firm's existing businesses (Zahra, 1991), as happens in the formation of joint ventures across the firm's different divisions. External venturing centers on exploring and exploiting business opportunities outside the firm's existing boundaries (Keil, 2002); it could be domestic or international. Given the globalization of business activities and that most prior research has explored internal venturing (e.g., Burgleman, 1983), this study focuses on international venturing. This focus is consistent with Dess et al.'s (2003) call for more research on this issue.

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Three of the most commonly used approaches to international venturing are acquisitions, alliances, and CVC (Sathe, 2003). Acquisitions refer to the purchase of other businesses, whether foreign start-ups or established companies. International alliances are arrangements between two or more firms from different countries, seeking to share resources and skills in order to fulfill joint (common) organizational objectives. Alliances include joint ventures, marketing or product development partnerships, and technology licensing that transcends national borders. CVC refers to the creation of corporate funds that invest in foreign start-ups to learn about new opportunities or new technological fields in other countries (Rice et al., 2000). Companies also use CVC funds to monitor technological developments in and outside their industries and identify potential foreign alliances or acquisition targets. Organizational learning theorists (Dodgson, 1993; Huber, 1991; Lyles and Salk, 1996) suggest that international venturing can enhance the learning of new skills and capabilities that significantly improve a firm's ability to innovate, take risks and develop new revenue streams. Learning refers to the firm's ability to acquire new knowledge that it can use in its operations (Huber, 1991). According to organizational learning theory, international venturing exposes the firm to new environments that have different systems of organization, inducing firms to learn the best practices in foreign markets (Dess et al., 2003). The diversity of foreign cultures, consumer groups, and political systems associated with international venturing can also broaden the firm's search for new knowledge (March, 1991). Countries also differ in their systems of innovation (Nelson, 1993) and those companies that venture across international borders might benefit from their exposure to these diverse systems. While learning is a slow process, it frequently challenges and changes the firm's view of the industry and competition. It also enables the firm to conceive new ideas, systems, processes, and products (Henderson and Cockburn, 1994), possibly improving its profitability and growth. International venturing also enhances a firm's ability to exploit its existing capabilities and resources while exploring new growth options. Exploitation centers on using the firm's existing knowledge, capabilities and resources in current and new foreign markets (Audia et al., 2000). However, excessive focus on the exploitation of existing capabilities can lead to organizational myopia (Audia et al., 2000; March, 1991) and stagnation. International venturing reduces this risk by promoting exploration activities. CVC, foreign acquisitions and international alliances allow the firm to identify emerging technological, marketing, and competitive trends in foreign markets. This can stimulate innovation and enhance the variety of the firm's strategic options (Beinhocker, 1999). The above discussion suggests that simply engaging in international venturing does not guarantee superior performance. Much depends on the firm's ability to identify fruitful ways to exploit its skills and capabilities and absorb new knowledge from its foreign markets. To some extent, this ability rests with the firm's absorptive capacity (Zahra and George, 2002). In turn, gains through absorptive capacity depend on the relatedness of a firm's existing knowledge base to its external knowledge (Lane and Lubatkin, 1998). Without some relatedness, the firm may find it hard to integrate external knowledge into its existing knowledge base, especially that which is acquired through foreign acquisitions. 1.1.1. Foreign acquisitions Companies have long used international acquisitions to broaden their business definition by entering new markets. Acquisitions enable the firm to rapidly enter foreign markets,

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overcome barriers to entry (Vermeulen and Barkema, 2001), acquire new skills, knowledge, resources and technological capabilities (Ahuja and Katila, 2001), and gain access to the knowledge derived from unique locational advantages (Makino and Delios, 1996). Frequent interactions between the parent firm and its foreign acquisitions expedite the transfer of tacit knowledge (Lane and Lubatkin, 1998), stimulating radical innovation that fosters growth. Still, companies that venture through cross-border acquisitions do not always improve their financial performance (Vermeulen and Barkema, 2001). This may happen because the integration of acquired firms is time-consuming (Jemison and Sitkin, 1986) and can disrupt the operations of both acquiring and acquired companies (Ahuja and Katila, 2001). Technological knowledge is also usually grounded in national cultures and traditions, inhibiting the transfer of this knowledge. Thus, organizational learning plays a key role in the success of foreign acquisitions. An important variable that can determine the payoff from foreign acquisitions is the complementarity of firms' knowledge bases. Learning crystallizes when the new information encourages the organization to reexamine its assumptions, combine the new knowledge with existing knowledge, or modify its procedures and practices (Zahra et al., 2000). Greater opportunities to acquire, understand and assimilate new knowledge exist when foreign acquisitions complement rather than substitute their existing knowledge (Hoskisson and Busenitz, 2001). If the recipient firm has the requisite absorptive capacity, it can quickly assimilate and later exploit the knowledge gained from its international acquisitions. This can facilitate new product and process developments that improve profitability and growth (Block and MacMillan, 1993). Consequently, the acquiring firms that have high absorptive capacity are more likely to benefit from their foreign acquisitions in gaining superior profits and higher rates of growth. Therefore: Hypothesis 1. The strength of the relationship between international acquisitions and a firm's profitability is positively related to its level of absorptive capacity. Hypothesis 2. The strength of the relationship between international acquisitions and a firm's revenue growth is positively related to its level of absorptive capacity. 1.1.2. International alliances Companies have also used international alliances to enter foreign markets, learn about new industries, and acquire new knowledge from foreign partners. Learning is a major objective for the formation of international alliances (Hamel, 1991; Makino and Delios, 1996). International alliances enable the firm to learn from its foreign partners' experiences, systems, and managerial practices (Lyles and Salk, 1996). These alliances also give the firm access to new knowledge, shortening its learning cycle and expediting its response to the needs and expectations of its customers. Alliances also connect the firm to foreign companies in their business fields or other industries. These links facilitate the acquisition of knowledge that differs from a firm's existing knowledge base. According to organizational learning theory, the infusion of such different and diverse knowledge into the firm's operations can enhance and expedite a company's learning process, improving its profitability and growth. Despite the potential value of international alliances, they may not stimulate the acquiring firms' learning. Foreign partners' unwillingness to share the information might contribute to this problem. Even when partners share their expertise, the recipient company

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might not have the absorptive capacity required to assimilate and exploit the knowledge it gains from international alliances (Hamel, 1991; Lyles and Salk, 1996). Conversely, the higher the absorptive capacity, the stronger the relationship between the firm's use of international alliances and performance. Therefore: Hypothesis 3. The strength of the relationship between international alliances and a firm's profitability is positively related to the level of its absorptive capacity. Hypothesis 4. The strength of the relationship between international alliances and a firm's revenue growth is positively related to the level of its absorptive capacity. 1.1.3. Corporate Venture Capital (CVC) Companies have also used CVC to promote international venturing (Dushnitsky and Lenox, 2002; McNally, 1995). Intel, Merck, Cisco, Dell, Lucent Technologies, Eli Lilly, and Millennium Pharmaceuticals are among the companies that have used this approach (Chesbrough, 2002). Some CVC efforts focus on finding synergy between existing operations and start-ups, aiming to increase sales and improve their profit margins (Gompers and Lerner, 1999; Takahashi, 2000). Established corporations can stimulate innovation and new business creation by using the same strategies that venture capitalists employ to fuel the growth of new ventures (Hamel, 1999). For example, Intel uses its CVC program to nurture the development and growth of new businesses outside its core business (Takahashi, 2000). Nokia uses CVC to monitor worldwide technological developments in a wide range of fields that could complement or even replace its existing businesses. A company's ability to gain the benefits associated with CVC hinges on the synergies that exist between its operations and the foreign start-up businesses in which it invests (Gompers and Lerner, 1999). When foreign start-ups are related to existing businesses, the firm's ability to comprehend, assimilate and exploit the knowledge gained from foreign start-ups increases (Chesbrough, 2002). When the firm's absorptive capacity is high, the company can extend its existing skills or build new ones. Thus, the higher the firm's absorptive capacity, the stronger the relationship between international CVC activities and a company's performance. Therefore: Hypothesis 5. The strength of the relationship between CVC and a firm's profitability is positively related to the level of its absorptive capacity. Hypothesis 6. The strength of the relationship between CVC and a firm's revenue growth is positively related to the level of its absorptive capacity. 2. Method 2.1. Sample To test the study's hypotheses, we collected data from the Industry Week 1000 (1998) global manufacturing companies. The list included only publicly traded manufacturing companies from 36 countries, allowing us to collect data from multiple sources about their size, industry conditions, and financial performance. Information about global operations and financial performance are often hard to find for non-traded companies, but the Industry

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Week 1000 annual lists (2000, 2001, 2002, 2003) enabled us to track this population and determine the effect of their international venturing on financial performance. The Industry Week list included only manufacturing companies—covering 22 major industry sectors. Given the significant differences that exists between service and manufacturing companies that appear on other global lists such as Business Week (1998– 2002) Global 1000, we sought to avoid making difficult judgment calls about the differences between these populations. Manufacturing is one of the most important sources of global competitive advantage (Chakravarty, 2005). Yet, manufacturing bases have shifted around the globe, intensifying international venturing. Companies appearing on the Industry Week 1000 were ranked based on their revenues in international markets; they were chosen by an independent accounting firm. In selecting companies on the list, the accounting firm emphasized the following (a) manufacturing companies that generated a majority of their business in a manufacturing industry; (b) firms that generated less than 50% of their revenues from manufacturing, but more revenue from manufacturing than the lowest-revenue-producing companies on this year's list, and (c) the list also included computer software firms whose primary business was the manufacture of software programs. The list also included oil and gas companies that obtained at least 50% of their revenues from the refining of oil and gas products. Finally, the list included companies which had at least 50% of their revenues from the manufacture of mined materials (Industry Week, 1999–2003). Companies in the sample were established in their industries, averaging 29.7 (SD = 31) years in age. On average, firms employed 39,823 (SD = 43,398) people and had an average return on equity (ROE) of 5.1 (SD = 8.29) percent. The average company in the sample achieved 3.6 (SD= 4) percent growth in their revenues over the three-year period examined. Data came from secondary and primary sources (mail survey). Initially, mail questionnaires were sent to the CEO and the company's most senior executive responsible for international operations. Names of these executives came from Business Week, Fortune, Industry Week, Financial World, corporate websites and corporate publications (e.g., annual reviews). Two rounds of mailings were sent out, resulting in 217 responses from the CEO or highest executives, for a response rate of 21.7%. We also received 231 responses from senior executives responsible for international operations, for a response rate of 23.1%. Given that senior executives have busy schedules and receive numerous requests to provide data, these response rates compare well with those reported in previous research (e.g., Zahra, 1991). Two responses (one from the CEO/President or similarly highly-placed executive and the other from the international or global business executive) were received from 143 companies, allowing us to examine inter-rater reliability by comparing the data we received from the two respondents. To do so, we examined the simple correlations between the respondents on the items used in the study, obtaining an average simple correlation of .64. Given that CEOs and other executives focus on different but overlapping business activities and differ in their ability to recall different transactions conducted, this moderate but significant correlation coefficient provided support of inter-rater agreement on the measures. 2.1.1. Testing for response bias We also examined response bias. Initially, we used multivariate analysis of variance (MANOVA) to compare responding companies and non-responding companies in their

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assets (US million), sales, size (overall number of employees), ROE, and revenue growth. We found no significant differences between the two groups on any of these measures or overall ( p N .05). We also used the X2 test to determine if there was a significant association between industry type and response status (responded vs. did not respond) and the results were also not significant ( p N .05). Second, we grouped respondents into three waves: (1) those who responded within the first three weeks, (2) those who responded in the next three weeks, and (3) those who responded in the seventh week or later. We compared these groups based on their assets, sales, employees, ROE, and revenue growth. There were no significant differences ( p N .05). Finally, we compared the three waves of respondents on their replies to the questionnaires and found significant differences ( p b .05 or better) only in 3% of the items. Overall, these different tests indicated that there was no response bias. 2.2. Measures We used the data received from the 217 CEOs/Presidents to construct the study's various measures. We chose the data from CEOs who were better positioned than other managers to know their companies' overall operations. Given the complexity of the various business operations of the companies studied, busy schedules and faulty recollection might limit the validity of data obtained from these managers. To address these concerns, we collected data from various secondary sources to establish the validity of the survey-based measures, as reported below. 2.2.1. International venturing Twenty-two survey items captured a company's focus on international venturing. Items followed a five-point Likert-type scale (1 = strongly disagree vs. 5 = strongly agree). In each case, we measured related and unrelated international venturing activities separately using the multiple items shown in the Appendix. In each case, we added the scores across items and then used the simple means in the analyses. Items for all international venturing measures appear in the Appendix. As reported in the Appendix, we captured related and unrelated international acquisitions using three items each. Both measures had acceptable Cronbach coefficient α's (related α = .71 and unrelated α = .73). We measured related (α = .73) and unrelated (α = .70) international alliances using four items each; both measures were reliable. We measured related (r = .70) and unrelated (r = .68) international CVC using two items each. Using survey measures to capture international venturing has its shortcomings. Therefore, we validated the results using the multi-item international venturing index by asking respondents “how many joint ventures or alliances in foreign markets (markets outside your home country has your company) completed over the past three years?” Only 70% of the respondents provided this data, which we used to validate the scale based measures described in this section. The correlation was high and significant (r = .76, p b .001), validating the survey-based measures. To further establish the robustness of the results, we used the data that companies provided on their international alliances to test the hypotheses. We applied the same procedures with the survey-based measures. The results utilizing the interval measures were somewhat stronger in magnitude but consistent in direction with those found employing the survey-based measures.

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We also validated the international venturing measures by collecting secondary data on international acquisitions, alliances and CVC by companies in the sample. Lexis.Nexis, a leading and comprehensive computerized database, provided data for international acquisitions (n = 83 firms) and international alliances (n = 74 firms). We searched for announcements made in the press by (or about) each responding company in the database focusing on the following terms: “international acquisition,” “international and acquisition,” “foreign acquisitions,” “foreign and acquisitions,” “international alliances,” “international and alliances,” “international joint ventures,” “alliances and foreign companies,” “alliances in foreign countries,” “joint ventures with foreign companies,” and “joint ventures in foreign countries.” As just noted, we used Lexis.Nexis to locate corporate and press releases about companies, following the literature (e.g., Pennings and Harianto, 1992; Steensma and Corley, 2000, 2001; Zahra et al., 2000). Once relevant announcements were identified about each company, three MBA students reviewed them to ensure consistency with the study's theory and constructs. Given that some announcements referred to multiple transactions, we counted each transaction only once. For each company, all announcements for a given transaction type (e.g., international alliance) were summed over the three-year period. The resulting figures were significantly correlated with the survey data: international acquisition (r = .71, p b .001) and alliance (r = .62, p b .001). Data on CVC funds came from Venture Economics (1999–2003) and these figures were positively associated with the survey-based measure (n = 89 firms; r = .74, p b .001). 2.2.2. Absorptive capacity Researchers have utilized different measures to capture a firm's absorptive capacity (Zahra and George, 2002). Prior measures included the number of scientists and engineers working for the company or represented on its top management teams and the number of patents the firm obtained as a consequence of its R&D investments. However, the most popular measure of absorptive capacity is R&D spending (Cohen and Levinthal, 1990), which usually provides the foundation for knowledge creation and subsequent exploitation (Brown, 1991; Cohen and Levinthal, 1990). Therefore, we used a firm's R&D spending as a proxy for absorptive capacity. Where possible, we collected data from multiple secondary sources and then compared the R&D investment figures for accuracy. Data on R&D spending came from corporate annual reviews, and web sites, Technology Review (2000, 2002, 2003, 2004), and Business Week (1998–2003). Also, for US companies, we reviewed articles published between 1998 and 2001 in Fortune, Forbes, Wall Street Journal and R&D announcements made in trade press and appeared in Lexis.Nexis. Data for European companies were gathered from the National Science and Technology Board (2003), The American Institute for Physics, web pages (2003); Mergent's Industry Review (Mergent Online); and OECD, online (2001, 2003). We also used Canadian Research Expenditures (2004), Dutch Research & Development Presidency Website (2005), Science & Technology Indicators for APEC Economies (2004), Trends in R&D—European Union (2003), UNESCO (1995–2003), the U.S. Statistical Abstract (1995–2003), and Velho (2004). Data for Latin American and several European companies also came from Hill (2000). Data for Australian companies came from Benchmarking Australia's investment in R&D, online (2002).

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To establish the robustness of the results based on R&D spending, we reanalyzed the data employing the number of patents granted to companies by the US Patent office. Data were available for 151 of the 271 companies. Though different in magnitude, the results were significant and in the same direction as those derived from R&D spending, further reinforcing Cohen and Levinthal's (1990) position that R&D is the foundation of a company's absorptive capacity. 2.2.3. Company performance: profits and growth Two measures captured a company's performance in this study. The first was the threeyear average ROE, a widely used measure of profitability (Zahra, 1991). The second was the average year-to-year change in a company's overall revenue (measured in US$ millions). Data for the two measures came from Business Week (1995–2003), Fortune (1995–2003), Japan Company Handbook (2000–2003), Industry Week (1995–2003), and Standard & Poor's (2004). We employed two measures of a company's performance because international venturing might influence profitability and revenue growth differently. 2.3. Control variables The analyses also controlled for several company-related variables (age, size, slack resources, and liquidity). We controlled also for country and industry effects, as explained below. 2.3.1. Company age Analyses controlled for a company's age because older companies might be reluctant to pursue international venturing. Inertia and sunk costs in ongoing operations might inhibit these companies' ability to explore innovative ventures outside their boundaries (Zahra, 1991). However, older companies might use international venturing to revitalize their operations and incubate new ventures. Older firms also have relationships with companies in and outside their industries, promoting international venturing. Given these potentially contradictory effects of company age on international venturing, we controlled for this variable in the analyses. Age was measured by the number of years a firm has been in existence using information gathered from annual reports and corporate websites, Business Week (1995–2003), Industry Week (1995–2003), Fortune (1998–2003), Japan Company Handbook (2000–2003), and Standard & Poor's (2000–2004). 2.3.2. Company size Larger companies usually have the slack resources for international venturing. Size also gives these firms the market power to preempt competitors' entry and reap higher than normal rates of performance. Conversely, some larger organizations are bureaucratic and therefore slow to adapt to change through international venturing activities (Block and MacMillan, 1993; Hastings, 1999). Given these divergent scenarios, we controlled for the effect of company size, measured by the log of the firm's employees (Hoskisson et al., 2002). Data came from Business Week, Industry Week (1995–2003), Business Week (1995–2003), Fortune (1995–2003), Technology Review (2000, 2002, 2003, 2004) R&D Scorecard lists, and company annual reports.

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2.3.3. Slack resources Analyses also controlled for the existence of slack resources by including the firm's current ratio, measured by its current assets to current liabilities (Zahra, 1991). Companies' slack resources support its innovative and entrepreneurial activities (Tan and Peng, 2003), such as international venturing. We gathered information for this variable from multiple sources that included Almanac of Business and Industrial Financial Ratios, online (Troy, 1995–2003); Encyclopedia of Global Industries (2003), Japan Company Handbook (2000– 2003), Roderck Seeman's Japan Financial Statements (2005), and Thomson Research (2004). 2.3.4. Liquidity We controlled also for a firm's liquidity ratio, defined by its total debt to total assets (Hoskisson et al., 2002). Highly leveraged companies may not have the resources (or even discretion) to pursue international venturing (Zahra, 1991). Further, potential foreign alliance and acquisition partners may not want relationships with these firms. Data came from Almanac of Business and Industrial Financial Ratio, online (Troy, 1995–2003); ISI Emerging Markets, online (2004), Japan Company Handbook (2000– 2003), Roderck Seeman Japan Financial Statements, online (2005), and Thomson Research (2004). 2.3.5. Innovativeness of country of origin Countries differ in their commitment to risk taking, venturing, alliance formation, innovation, and R&D spending (Hayton et al., 2002). These differences might influence the strategic choices companies make about R&D investments, the study's potential moderator. Given that the companies represented 36 countries, we controlled for country effects by including the national three-year average R&D spending. Data came from Canadian Research Expenditures (2004), CSIRO International: Country Science Briefs, Korea, online (2004), Department of Trade and Industry, UK, online (2002); the Economist Intelligence Unit (sections on country reports, profiles, finance, and commerce), ISI Emerging Markets, online (2004), Statistical Abstract of the US (1995– 2003), Thomson Research (2004), UNESCO (1995–2003), and World Bank Group World Development Indicators, online (2004–2005). Countries in which companies were headquartered were also listed in Business Week Global 1000 (1999, 2001, 2003), Fortune Global 500 (2000), Industry Week (1995–2003), and Wall Street Journal's World Business (2000). 2.3.6. Industry-related controls Analyses also controlled for three sets of industry related variables: industry type, past industry performance, and technological opportunities, as follows. 2.3.6.1. Industry type. Companies in different industries face different competitive challenges, causing them to use different approaches to international venturing (Zahra, 1991). The payoff from international venturing might vary also by industry type. Industry Week (1999) listed the primary industry in which each firm competed. Industry classifications were cross-checked using information from the Fortune Global 500 (2000–2003) and

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Business Week Global 1000 lists (1999, 2001, 2003). To control for industry type, companies were assigned to one of four groups based on their major industry: consumer non-durable goods, consumer durable goods, producer goods and capital goods industries. Three dummy codes were entered in the analysis, with the capital goods industries serving as the reference group. 2.3.6.2. Past industry performance. Industries that reward risk taking might encourage international venturing. Consequently, we controlled for this possibility using industrywide ROE over the preceding three years. Data on this variable came from multiple sources that included Almanac of Business and Industrial Financial Ratios, online (Troy, 1995– 2003), Business Week (1995–2003), Dun and Bradstreet (1995–2003), Fortune (1995– 2003), Fortune Global 500 (2000–2003), ISI Emerging Markets, online (2004), Industry Week (2000–2003), Japan Company Handbook (2000–2003), Standard & Poor's (2004), Encyclopedia of Global Industries (2003), Roderck Seeman's Japan Financial Statements (2005), and Thomson Research (2004). 2.3.6.3. Industry-wide technological opportunities. Analyses also controlled for industrywide technological opportunities, defined as perceived opportunities for innovation. When such opportunities were abundant, companies were expected to encourage R&D and innovation. Commonly used measures of technological opportunities included industrywide R&D spending and patent counts. We used patent counts to avoid potential multicolinearity with the study's suspected moderator (absorptive capacity). We obtained the data from Almanac of Business and Industrial Financial Ratios, online (Troy, 1995– 2003), National Science Foundation, online (1995–2004), South African Science Council, online (2004), Statistical Abstract of the United States (1995–2003), and Technology Review (2000, 2002, 2003, 2004). 3. Analysis Table 1 presents the means and standard deviations for the study's variables. It also displays the intercorrelations among the variables. Table 1 shows that the three measures of international venturing were relatively independent, with simple correlations ranging from − .21 to .34. Table 1 further shows that average national R&D spending was also moderately associated with absorptive capacity (r = .15, b.05). To test the hypotheses, we ran separate hierarchical regression analyses for ROE and revenue growth. The analyses tested three models. First, in model 1, company performance was regressed on the study's control variables. Second, in model 2, we added the six international venturing variables to the control variables already in model 1. Third, in model 3, interaction terms were added to the variables already in model 2. Interaction terms were created by multiplying R&D spending (the “absorptive capacity” measure) by each of the study's six international venturing measures. To ensure accurate results, separate analyses were run for each of six dimensions of international venturing. Finally, we tested for improvements made in the explanatory powers between successive steps, applying the procedure suggested by Cohen and Cohen (1975).

208

Variables

X

SD

1

2

3

1 2 3 4 5 6 7 8 9

4

5

6

Company age 29.71 31.03 Company size (log employees) 5.11 8.29 .29 Liquidity 2.19 1.56 .15 .29 Current ratio 1.16 1.89 .09 .09 .23 Consumer non-durable industry .31 .21 −.16 .09 .10 .21 Consumer durables industry .28 .19 .14 07 .12 − .09 − .19 Producer goods industry .21 .15 −.09 .13 − .15 .07 .13 .23 Industry Past ROE 4.87 6.01 .14 .09 .12 .15 .14 .13 Industry technological 3.04 2.09 .12 .16 .11 .17 .28 .09 opportunities (logged) 10 Country of origin (logged) 2.93 3.71 .16 .19 .20 .22 .27 − .09 11 Related international 2.94 1.05 −.08 .33 .15 .20 .17 − .08 acquisitions 12 Unrelated international 3.04 .88 −.11 .25 .13 − .06 .10 − .09 acquisitions 13 Related international alliances 3.45 .97 .21 .13 .04 .09 − .21 − .11 14 Unrelated International 2.67 1.23 .17 .15 .07 .03 .08 − .13 alliances 15 Related international CVC 3.07 1.09 .27 .23 − .08 .14 − .05 .16 16 Unrelated international CVC 2.23 1.07 .34 .27 − .04 − .09 .07 .12 17 Absorptive capacity 2.05 3.14 .09 .11 .13 .10 .09 .14 18 ROE (logged) 5.11 8.29 .12 .17 .18 .15 .09 − .17 19 Revenue growth 3.61 4.03 .13 − .11 .19 .14 − .07 .12 Simple correlations have to be at least .13 to be significant at p b .05.

7

8

9

10

.11 − .05

.23

.17 − .09

.18 .11

.13 .09

.07

− .06

.12 − .05

.05

.09 .09

11

12

14

15

16

17

18

.25

− .09 .12 .20 .21 − .07 .05 − .07 − .04 − .09 − .04

− .13 − .07 .13 .− 18 − .05 − .09 − .12 .19 .20 .16 .31 .17 .03 .25 .15

13

.10

.12 .04 .05 .06 .09 .10 − .13 .06 − .09 .05 .18 .15 .16 .05 .05 .12 −.05 .03 .14 .10 − .04 .07 − .03 .02 .06 .21 .07 .09 − .03 .08 − .06 .05 .08 .15 .25

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Table 1 Means, standard deviations and intercorrelations among the study's variables (N = 217)

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4. Results 4.1. Results for Return on Equity (ROE) Table 2 presents the results of moderated regression analysis for ROE. Model 1 regressed ROE on the control variables and was significant ( p b . 001), explaining 19% of the variance. Table 2 Moderated regression results for Return on Equity (ROE) Variables

1

2

3.1

3.2

3.3

3.4

3.5

3.6

Intercept Company age Company size Liquidity Current ratio Consumer non-durable Consumer durables Producer goods Industry past performance Industry technological opportunity Country of origin Related international acquisitions Unrelated international acquisitions Related international alliances Unrelated international alliances Related international CVC Unrelated international CVC Absorptive capacity (AC) AC⁎ related international acquisitions AC⁎ unrelated international acquisitions AC⁎ related international alliances AC⁎ unrelated international alliances AC⁎ related international CVC AC⁎ unrelated international CVC Adjusted R2 F-value Change in R2 F-value for change in R2

.45 − .13⁎ − .07 − .15⁎ .20⁎ − .04 .02 .07 .43⁎⁎⁎ .29⁎⁎⁎

.73 − .13⁎ − .05 − .14⁎ .20⁎ − .04 .05 .01 .41⁎⁎⁎ .25⁎⁎

.59 − .14⁎ − .09 − .11@ .24⁎ − .07 .09 .01 .37⁎⁎⁎ .24⁎

.51 − .17⁎ − .08 − .16⁎ .22⁎ − .03 .03 .06 .31⁎⁎ .28⁎⁎

.57 −.15⁎ −.08 −.12@ .17⁎ −.03 .07 .00 .40⁎⁎⁎ .35⁎⁎

.62 −.18⁎ −.04 −.20⁎ .15⁎ −.03 .09 .07 .25⁎⁎ .33⁎⁎

.69 − .17⁎ − .06 − .20⁎ .19⁎ − .08 .06 .07 .32⁎⁎ .30⁎⁎

.50 − .11@ − .08 − .12@ .15⁎ − .07 .05 .03 .37⁎⁎⁎ .37⁎⁎⁎

.13⁎

.16⁎ .09

.19⁎ .06

.18⁎ .08

.17⁎ .05

.15⁎ .08

.13⁎ .08

.19⁎ .06

.06

.06

.08

.08

.07

.02

.05

.08

.05

.07

.09

.08

.03

.07

.10

.10

.07

.04

.05

.02

.04

.05 .09

.05 .07

.05 .06

.08 .07

.06 .07

.09 .07

.07 .01

.23⁎

.21⁎ .26⁎⁎

.25⁎⁎

.28⁎⁎

.27⁎⁎

.23⁎

.18⁎

.28⁎⁎ .32⁎⁎ .35⁎⁎ .31⁎⁎ .13 .19 .31 .34 .31 .34 .35 .32 .31 4.91⁎⁎⁎ 7.38⁎⁎⁎ 9.05⁎⁎⁎ 7.05⁎⁎⁎ 9.13⁎⁎⁎ 9.41⁎⁎⁎ 8.89⁎⁎⁎ 7.89⁎⁎⁎ .03 0 .03 .04 .01 0 9.09⁎⁎⁎ 9.09⁎⁎⁎ 10.47⁎⁎⁎ 3.51⁎⁎⁎

@p b .10; ⁎p b .05; ⁎⁎p b .01; ⁎⁎⁎p b .001.

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Company age and liquidity had negative and significant coefficients ( p b .05). The current ratio ( p b .05), past industry ROE ( p b .001), industry technological opportunities ( p b .001), and country of origin ( p b .05) had positive and significant coefficients. Model 2, which included the control and international venturing variables, was also significant ( p b . 001) and explained 31% of the variance in ROE. The six international venturing measures were not significant, but absorptive capacity was positively associated with ROE ( p b .05). The third step of the analysis (Table 2) tested six moderated regression models (3.1 through 3.6). In the first regression run, the interaction term for related international acquisitions (i.e., related acquisitions multiplied by R&D spending) was added to the variables already in model 2. The analysis was significant ( p b .001), explaining 34% of the variance in ROE. The interaction term was also significant and positive ( p b . 01). The addition of the related international acquisitions interaction term improved the overall model's R2 by 3% ( p b .001). In model 3.2, we repeated the analysis using an unrelated international acquisitions interaction term. The analysis was also significant ( p b .001), with an R2 of 31%. Though the interaction term had a positive and significant coefficient ( p b .001), having it in the equation did not improve the explanatory power of model 2. In model 3.3, we ran the analysis using the interaction term for related international alliances. The analysis was also positive and significant ( p b .001) and the interaction term for related international alliances was also significant ( p b .01). The model explained 34% of the variance, which was significantly higher than model 2 ( p b .001). In model 3.4, we added an interaction term for unrelated international alliances. The analysis was significant, explaining 35% of variance in ROE. The interaction term was positive and significant ( p b .01), adding 4% to the explanatory power of model 2. This improvement was significant ( p b .001). In model 3.5, we introduced an interaction term for related international CVC. The analysis was significant, explaining 32% of variance in ROE. The interaction term was positive and significant ( p b .01), adding 1% to the explanatory power of model 2. This improvement was also significant ( p b .05). Finally, model 3.6 included an interaction term for unrelated international CVC, which was positive but insignificant. The explanatory power of model 3.6 did not improve above and beyond that of model 2. 4.2. Results for revenue growth Table 3 presents the results of the moderated regression analysis using a company's three-year average revenue growth as the dependent variable. Analyses followed the same three steps used with ROE. In model 1, we entered the control variables. The model was significant ( p b .001), explaining 16% of the variance. The current ratio, competing in producer goods industry, past industry performance, and industry technological opportunities were positively and significantly associated with revenue growth ( p b .05 or better). Liquidity had a negative but significant coefficient ( p b .05). Model 2 added the six international venturing variables, and the measure of absorptive capacity to the variables already in model 1. Model 2 was significant ( p b .001), explaining an additional 9% of variance. However, none of the six international venturing measures was significant. Absorptive capacity was positively related to revenue growth ( p b .05).

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Table 3 Moderated regression results for revenue growth Variables

1

2

3.1

Intercept .65 .84 .91 Company age − .08 −.09 − .10 Company size .07 .09 .10 Liquidity − .12⁎ −.10 − .05 Current ratio .15⁎ .14⁎ .17⁎ Consumer non-durable .02 .06 .06 Consumer durables .05 .08 .11@ Producer goods .15⁎ .17⁎ .18⁎ Industry Past performance .29⁎⁎ .31⁎⁎ .32⁎⁎ Industry technological .21⁎ .21⁎ .19⁎ opportunity Country of origin .07 .11@ .09 Related international .08 .05 acquisitions Unrelated international .05 .05 acquisitions Related international .04 .09 alliances Unrelated international .09 .04 alliances Related international CVC .07 .05 Unrelated international CVC .03 .06 Absorptive capacity (AC) .14⁎ .17⁎ AC⁎ related international .23⁎ acquisitions AC⁎ unrelated international acquisitions AC⁎ related international alliances AC⁎ unrelated international alliances AC⁎ related international CVC AC⁎ unrelated international CVC .16 .25 .28 Adjusted R2 F-value 3.71⁎⁎⁎ 5.92⁎⁎⁎ 6.56⁎⁎⁎ ΔR2 .03 F-value for ΔR2 .7.89⁎⁎⁎

3.2

3.3

3.4

3.5

3.6

.78 − .11 .11 − .06 .20⁎ .06 .12@ .14⁎ .34⁎⁎ .18⁎

.67 − .11 .09 − .08 .17⁎ .03 .07 .09 .35⁎⁎ .25⁎⁎

.63 − .10 .06 − .13⁎ .19⁎ .09 .05 .05 .21⁎ .23⁎

.73 − .07 .07 − .06 .18⁎ .03 .04 .13⁎ .23⁎ .21⁎

.59 − .06 .05 − .01 .22⁎ .03 .03 .11@ .27⁎⁎ .18⁎

.09 .08

.05 .05

.13⁎ .05

.14⁎ .12@

.15⁎ .07

.06

.08

.06

.10

.08

.05

.09

.03

.07

.08

.07

.04

.05

.08

.06

.03 .02 .15⁎

.08 .07 .18⁎

.06 .09 .17⁎

.09 .07 .19⁎

.05 .09 .11

.11 .20⁎ .25⁎ .27⁎ .06 .25 .26 .28 .27 .25 6.41⁎⁎⁎ 6.01⁎⁎⁎ 6.41⁎⁎⁎ 6.21⁎⁎⁎ 5.31⁎⁎ 0 .01 .03 .02 0 2.58⁎⁎⁎ 7.89⁎⁎⁎ 5.23⁎⁎⁎

@p b .10; ⁎p b .05; ⁎⁎p b .01; ⁎⁎⁎p b .001.

Table 3 also shows that we tested six moderated regression models (3.1 through 3.6). In each of these models, a single interaction term was added to the variables included in model 2. In model 3.1, the interaction term for related international acquisitions and absorptive capacity was significant ( p b .05). Model 3.1 itself was significant ( p b .001), adding 3% to the variance explained by model 2 ( p b .001). In model 3.2, the interaction term for unrelated international acquisitions and absorptive capacity was not significant ( p N .05).

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Though model 3.2 was significant ( p b .001), it did not explain any additional variance over and beyond model 2. Table 3 displays the results for model 3.3, where the interaction term for related international alliances and absorptive capacity was significant ( p b .05). Model 3.3 was also significant ( p b .001), explaining an additional percentage point over and beyond model 2 ( p b .001). In model 3.4, the interaction term for unrelated international alliances and absorptive capacity was significant ( p b .05). The overall model was also significant ( p b .001), explaining an additional 3% of variance over and beyond model 2 ( p b .001). Table 3 also shows that model 3.5 was significant ( p b .001) and the interaction term for related international CVC with absorptive capacity was significant ( p b .05). Model 3.5 explained an additional 2% in variance in revenue growth above and beyond model 2 ( p b .001). Finally, model 3.6 was significant ( p b .001), explaining 25% of the variance in revenue growth. The interaction term for unrelated international CVC and absorptive capacity was positive but not significant. 5. Discussion International venturing through acquisitions, alliances and CVC funds gives firms rapid access to new markets and knowledge (e.g., Hamel, 1991; Tsang, 2002) that can enhance financial performance. However, this study was motivated by the observation that international venturing does not always result in improved organizational performance (Hastings, 1999; Peek et al., 1999; Vermeulen and Barkema, 2001). Therefore, we proposed that a firm's absorptive capacity would moderate the association between international venturing and a firm's profitability and growth. The results show that the association between international venturing and performance is contingent upon the firm's absorptive capacity. The results support the study's predictions regarding the relationship between a firm's international venturing and profitability. When examined without potential moderators, neither related nor unrelated international acquisitions, alliances, and CVC funds were associated with ROE. This reflects the short-term inefficiencies and costs associated with each of the various components of international venturing, possibly mitigating any shortterm financial gains from these transactions. Companies may also trade off short-term ROE and revenue growth for gaining access to knowledge that can create long-term capabilities. Conversely, consistent with Hypotheses 1, 3, and 5, when absorptive capacity is included in the analyses, there is a positive and significant association between the interaction terms (international venturing dimensions and absorptive capacity) and ROE. The results were most clear for venturing activities that were in the same industry (i.e., related activities), suggesting that absorptive capacity is an important contingency factor in explaining the association between international venturing and ROE. These results support organizational learning theory and our proposition that absorptive capacity may facilitate the flow of knowledge that enables the firm to upgrade its products and develop new ones, achieving higher short-term performance (Zahra and George, 2002). The results also support the argument that relatedness of new knowledge is an important contingency factor that influences the absorption and subsequent exploitation of that knowledge (Lane and Lubatkin, 1998). Relatedness influenced the results for both international acquisitions (Hypothesis 1) and international CVC

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(Hypothesis 5) such that absorptive capacity facilitates learning from these activities only when they are in related knowledge domains — operationalized here as the same industry. When international acquisitions and CVC were conducted in unrelated industries, firms' absorptive capacity did not influence the relationship between these activities and firm profitability. In contrast, consistent with Hypothesis 3, absorptive capacity was an important moderator for both related and unrelated alliances on the impact on profitability. The study has also explored the association between international venturing and firm growth, indicated by growth in revenue. Some research reveals that firm growth is enhanced by venturing activities that offer firms the opportunity to exploit existing capabilities while building new ones (e.g., Lorenzoni and Lipparini, 1999; Sarkar et al., 2001). We have argued that the expected positive association between international venturing and revenue growth is contingent upon a firm's absorptive capacity. The results support this proposition. Neither related nor unrelated international acquisitions, alliances, and CVC were significantly associated with revenue growth. However, once the interaction term between the firm's absorptive capacity and international venturing variables was considered, we found statistically significant effects. The interactions between absorptive capacity and related international acquisitions (Hypothesis 2), international alliances (Hypothesis 4), and international CVC (Hypothesis 6) were positively and significantly associated with financial performance. These results support prior research (e.g., Lyles and Salk, 1996), indicating that absorptive capacity should be managed so that a firm can derive the expected revenue growth from its international venturing activities. However, in the case of unrelated international venturing activities, we find that absorptive capacity significantly moderates the association between international alliances and firm growth (Hypothesis 4), but not the effects of either international acquisitions or international CVC. These results provide further evidence that absorptive capacity is of greatest importance for related international venturing activities (Lane and Lubatkin, 1998). Still, the interactions between absorptive capacity and unrelated international acquisitions and unrelated international CVC were not significant in predicting firm revenue growth. We believe two reasons may account for these results. First, unrelated acquisitions require the absorption of new unrelated knowledge as well as the integration of distinct organizational systems and structures. Therefore, the time lags involved to achieve new growth may be more significant than those included in the present study. Second, with respect to international CVC, these activities may focus on the early, explorative side of organizational learning (e.g., Chesbrough, 2002). Managers recognize that CVC connects them to new sources of knowledge about potential technological change in their industries. Executives understand that access to this knowledge, though vital, is not sufficient to reap short-term financial gains. Incoming knowledge should be internalized (i.e., assimilated) and exploited in ways that strengthen companies' existing competitive positions or enter new business fields. Thus, the financial payoff from international CVC may be more long term, relative to learning and growth, than either international acquisitions or alliances. If there is a significant relationship between unrelated international acquisitions and CVC funds and organizational growth, uncovering this relationship may require a longer time lag in future studies. The results indicate absorptive capacity is a capability that specifically supports the acquisition, assimilation and exploitation of related knowledge (Cohen and Levinthal, 1990; Lane and Lubatkin, 1998). It is therefore not surprising to find that the financial

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effects of unrelated international venturing activities are not enhanced by the presence of absorptive capacity. It is perhaps more surprising to note that absorptive capacity, indicated by R&D investments, positively influences the performance enhancing effects of international alliances that are unrelated to a firm's current activities. Perhaps, such investments help create a more general capacity for learning from external sources, which is realized most rapidly in the context of international alliances. Therefore, even though it has been hypothesized that strategic fit (Gompers, 1999) or relatedness (Lane and Lubatkin, 1998) are important considerations in the process of acquiring and leveraging new knowledge sources, further research should carefully consider the influence of time lags and determine how the absorptive capacities of firms influence their progress along technological trajectories. It appears from the current study that there is a relationship between the notion of relatedness and the time required for knowledge assimilation and exploitation. Understanding the impact of these time lags will enrich our understanding of the important contingency of relatedness of new knowledge to firms' existing knowledge bases. A further consideration in exploring these findings is in the structural complexity of the venturing relationship. Each type of venturing activity we examined in this study involves distinct organizational capabilities that extend beyond absorptive capacity. Successful unrelated international acquisitions are certainly dependent upon the ability to identify and assimilate new knowledge, but they also represent organizational challenges that include the integration of diverse organizational structures and cultures, as well as the rationalization and integration of product and service mixes. Unrelated international alliances are also complex, with the potential for knowledge asymmetries, and opportunistic behavior by parties. However, these may also be relatively simpler relationships to create and exploit as they are arms–length relationships that are easily dissolved once their goals are accomplished or in the event of failure. Unrelated international CVC investments are also arms–length relationships, but also involve the greatest level of uncertainty. They typically involve high levels of asset specific investments, high levels of asymmetry of knowledge and high levels of performance ambiguity. It is conceivable that the relative simplicity of unrelated international alliances allows firms to quickly exploit a generalized capability to learn by investing in building and upgrading their absorptive capacity. The complex dynamics of acquisitions, the arms–length relationships involved in CVC, and their greater uncertainty are likely to make the impact of a firm's absorptive capacity less significant, particularly in the short run. It is likely that a combination of these three explanations – the relatedness of the new knowledge, the time lag required for assimilation of knowledge, and the structural complexity of the international venturing activity – together account for the differences we observed in results across related and unrelated international venturing activities. These considerations will likely prove fruitful and valuable areas for future research. 5.1. Managerial implications One of this study's key findings is that international venturing may not directly influence a company's short-term performance. Venturing is costly in terms of financial and other resources such as managerial time and attention (Tsang, 2002). These high costs are probably one reason for the mixed evidence on the benefits of international venturing (e.g., Peek et al., 1999). This finding reinforces the importance of patient investments in international venturing activities.

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The results also highlight a need for managerial action that builds and harvests a firm's absorptive capacity. This capacity interacts with various measures of international venturing to improve a firm's financial performance. A firm should build its R&D capabilities and gain the knowledge essential for success in international venturing. Without a sufficient stock of related knowledge, the firm cannot recognize, assimilate, and exploit new knowledge or acquire the other capabilities to be gained from international operations. This finding indicates that potential financial gains depend on having the requisite absorptive capacity. Thus, companies cannot forgo investments in R&D as they expand overseas. Companies may opt to simply adapt and sell products that have proven to be successful in domestic markets. Other firms may view foreign alliances and acquisitions as substitutes for their in-house innovation activities. Companies that do so may gain short-term advantages by exploiting existing innovative capabilities but fail to reap the long-term financial benefits associated with international venturing. 5.2. Implications for future research The study also underscores the importance of defining the scope of international venturing, emphasizing three of its key dimensions. Future researchers need to determine if there are other dimensions of international venturing that deserve exploration and to establish the relationships among these dimensions. Further, given that some of the results are based on survey measures of international venturing, other data sources should be considered. Even though we presented evidence of reliability and validity earlier, replications using secondary data should enhance confidence in the results. In analyzing the role of absorptive capacity, the study has employed the firm's R&D spending, a popular measure in the literature. Alternative measures of absorptive capacity can establish the robustness of our results. These measures might include the firm's patent portfolios or the number of scientists and engineers it employs (Zahra and George, 2002). One of the study's key propositions is that international venturing induces and enhances organizational learning (Floyd and Wooldridge, 1999). It would be useful to document the various types of knowledge a firm might gain from international venturing and the specific types of knowledge associated with various approaches to international venturing. Learning is not an automatic outcome of international venturing, and companies have to devote the resources necessary to build the systems that induce and capture learning. Therefore, researchers need to explore the managerial systems and processes that enhance learning through international venturing. The learning that occurs in international venturing can be explorative or exploitative. In theory, the payoff from exploitative learning can be more immediate than in explorative learning. This proposition should be tested empirically in order to document the implications of learning in international markets on a company's financial performance, both short and long term. How companies balance explorative and exploitative learning can also influence a company's financial performance. This issue also deserves attention in future research. 6. Conclusion International venturing is a popular approach for firms seeking to grow, achieve profitability and extend their capabilities. Our results show that international venturing is

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unlikely to improve short-term profitability and growth unless the firm invests in building its own absorptive capacity. Firms seeking to gain the financial rewards of international venturing should be prepared to acquire, assimilate, and creatively exploit new knowledge from their foreign operations. Firms must invest in improving their knowledge base and keep it current by building their innovative capabilities through sustained investments in R&D. Appendix A This appendix presents the survey items used to measures international venturing. As indicated in the text, all items followed a five-point response format (1 = strongly disagree vs. 5 = strongly agree, with 3 being a neutral response). We used mean responses to the items related to each measure in the analyses. Internal consistency score, measured by Cronbach α, are reported in the text. A.1. Related international acquisitions • Acquired many established foreign companies in the same industry. • Acquired many foreign start ups in the same industry. • Has been active in acquiring other companies in its major industry. A.2. Unrelated international acquisitions • Acquired many established foreign companies in other industries. • Acquired many foreign start ups in other industry. • Has been active in acquiring other companies outside its major industry. A.3. Related international alliances • • • •

Entered Entered Entered Entered

many many many many

marketing alliances with foreign companies in the same industry. production alliances with foreign companies in the same industry. distribution alliances with foreign companies in the same industry. R&D alliances with foreign companies in the same industry.

A.4. Unrelated international alliances • • • •

Entered Entered Entered Entered

many many many many

marketing alliances with foreign companies outside its major industry. production alliances with foreign companies outside its major industry. distribution alliances with foreign companies outside its major industry. R&D alliances with foreign companies outside its major industry.

A.5. Related international CVC • Invested in foreign start up businesses in the same industry. • Increased its equity holdings in new foreign companies (ventures) in the same industry.

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