INTERNATIONAL DIVERSITY BY ENTREPRENEURIAL FIRMS: COOPERATIVE RELATIONSHIPS, CORE COMPETENCIES AND PERFORMANCE
Kendall W.
Artz, Baylor University
R. Duane Ireland, Baylor
University
Michael A. Hitt, Texas A&M
University
ABSTRACT
INTRODUCTION
THEORY AND HYPOTHESES
METHOD
RESULTS
DISCUSSION
TABLE 1
CONTACT
REFERENCES
This study argues that the success of an entrepreneurial firm’s international diversification efforts is influenced by the use of cooperative relationships, and the type and extent of firm resources. Hypotheses were tested using data from 219 small manufacturing firms. Results revealed that international diversification may not necessarily improve firm performance as some authors suggest. The use of cooperative strategies was found to positively interact with international diversity to improve firm performance. Strong capabilities in developing and utilizing human capital, and maintaining effective relations with governmental agencies were also found to positively moderate the relationship between international diversity and entrepreneurial firm performance.
The new competitive landscape forged by the technological revolution and increasing globalization presents many challenges for growing entrepreneurial firms (Ireland and Hitt, 1999). Among the most difficult challenges facing firms concern how to manage in an increasingly complex environment in which conditions change rapidly and unpredictably (Cooper, 1996). Yet, this dynamic and challenging environment may also yield significant opportunities (Zahra, 1993). Among these is the opportunity to expand into international markets. Indeed, in a growing number of instances, entrepreneurial firms, especially early-stage technology-based ventures, are maintaining an international presence almost from the outset of their establishment (Preece, Miles & Baetz, 1999). Moreover, the heightened uncertainty and complexity of a dynamic environment often negates the scale advantages of larger, more established firms operating in international markets. In fact, especially in emerging markets, large multinational corporations do not automatically have competitive advantages relative to their local and often smaller rivals (Dawar & Frost, 1999). In a world of constant and rapid change, a firm’s ability to respond quickly and frequently may be the key criterion to developing and/or maintaining competitive advantage (Barney, 1991). A rapid response capability becomes more significant, as a source of competitive advantage, once it is integrated into the firm’s knowledge routines (Grant, 1996). Some even argue that at its core, a firm can be understood to be a social community that specializes in the rapid and efficient creation and transfer of knowledge throughout its units and functions (Kogut & Zander, 1996; Nahapiet & Ghosal, 1998). Thus, given the link between knowledge and performance, successful firms develop specific strategies to manage the creation and transfer of knowledge (Hansen, Nohria & Tierney, 1999).
Traditionally, entrepreneurial firms have operated in unstable industries or in unstable market segments within industries (Ireland, Hitt & Sexton, 1996). Because of the changing criteria for success, smaller, entrepreneurial firms are able to compete more successfully in multiple environments (Hitt & Bartkus, 1997). Such firms are usually more flexible, which enables them to operate effectively in volatile environments. Furthermore, their flexibility allows them to adjust more quickly to or even to enact their own environment (Weick, 1979). With adequate experience operating in rapidly changing environments, entrepreneurial firms should be better able to predict changes and/or understand how to adapt to them. Larger firms, lacking the flexibility of their more entrepreneurial counterparts, may be at a competitive disadvantage. Thus, pursuit of international activities by entrepreneurial firms is facilitated by their small size. Size is not necessarily a barrier to entering foreign markets, and may actually be a strength in achieving competitive success.
Because of the opportunities available, and their advantages as explained above, small firms are increasingly entering foreign markets (McDougall & Oviatt, 1996; Oviatt & McDougall, 1994). This trend toward greater emphasis on international markets by entrepreneurial firms appears to be widespread. It is occurring more frequently in both U.S. and foreign-based entrepreneurial ventures (Kim, Westin & Dholakia, 1989) and in both manufacturing (Bloodgood, Sapienza & Almeida, 1996) and service industries. This international diversity has been found to positively influence an entrepreneurial firm’s performance. International diversification allows a firm to leverage its resources and capabilities in new markets (Simonin, 1997). Moreover, acquiring and mastering new skills through organizational learning is enhanced by moving into international markets (Oviatt & McDougall, 1995).
While evidence suggests clearly that an entrepreneurial firm can potentially benefit by pursuing an international diversity strategy, successful implementation of this strategy is complex and challenging. Many small firms lack the experience necessary to transfer their skills and knowledge developed in their home country to foreign markets (Zahra, Ireland & Hitt, 1999). Even when an entrepreneurial firm possesses a technologically superior product, successfully entering foreign markets may require the firm to acquire or develop new skills in the areas of marketing, human resources, operations and the like (McGrath, MacMillan & Venkatraman, 1995). This problem is compounded by the likelihood that small firms will be managed frequently by people with strong technological backgrounds, but limited competencies in other areas. While some entrepreneurial ventures may attempt to develop these skills internally, others seek to acquire them through cooperative relationships with other organizations. Cooperative relationships provide the opportunity for entrepreneurial firms to acquire knowledge and skills and enable them to capitalize on their own resources (Eisenhardt & Schoonhoven, 1996; Oster, 1994).
An entrepreneurial firm’s likelihood of successful international diversity depends on its ability to develop and exploit skills and competencies that enable it to effectively implement an international diversification strategy. For example, the presence of strong technological capabilities (Bloodgood et al., 1996; Eriksson, Johanson, Majkard & Sharma, 1997), the ability to market products to international customers (McGrath et al., 1995) and the ability to maintain effective relationships with government agencies (Hitt and Ireland, 1985) may be important requirements to effectively enter foreign markets. Thus, the ability of an entrepreneurial firm to achieve superior performance via international diversity is dependent on the unique constellation of resources and capabilities it possesses. What then, are those combinations of resources and capabilities that improve an entrepreneurial firm’s chances of successful international diversity? The objective of this research is to examine this question. More specifically, we develop and empirically examine a model that investigates the relationship between different groupings of an entrepreneurial firm’s core competencies, international strategy and resulting financial performance.
As observed herein, small businesses and entrepreneurial firms are increasingly entering international markets. Furthermore, the decision for the firm to become international is occurring earlier in firms life cycles (Oviatt & McDougall, 1994). Surveys suggest that the percentage of U.S. small businesses entering international markets has increased from 20 percent in the early 1990s to over 50 percent in the middle and later 1990s (Hitt & Bartkus, 1997). Small and entrepreneurial firms can gain several of the benefits enjoyed by large businesses when entering international markets. International diversification allows firms to leverage their resources and capabilities in new markets (Simonin, 1997). International markets provide the opportunities to gain additional economies of scale and scope that often elude entrepreneurial firms. International diversification provides a larger market from which to earn returns on innovations and greater revenues to reinvest in the business (Hitt, Hoskisson & Kim, 1997). Entry into new international markets also provides small firms the opportunity to learn new skills (Oviatt & McDougall, 1995). As a result, research suggests that small entrepreneurial firms entry into international markets has a positive effect on performance (Bloodgood et al., 1996). Based on this reasoning, we present the following hypothesis.
Hypothesis 1: International diversity will be positively related to an entrepreneurial firm’s performance.
Cooperative Relationships
Some argue that the world is witnessing an unprecedented amount of growth in the quantity of interfirm cooperative arrangements (Gulati, 1995). Firms can facilitate their entry into foreign markets through cooperative relationships. This logic is based on the argument that a firm’s most valuable resources may span organizational boundaries and may be embedded within a complex set of interfirm routines and activities (Dyer & Singh, 1998). Cooperative relationships can assume numerous forms such as R&D agreements, technology transfers, buyer-supplier alliances and joint marketing or distribution agreements (Kotabe and Swan, 1995). Cooperative relationships provide potential access to resources and capabilities that a firm does not possess, allow sharing of the costs of innovation and are an important determinant of firm performance and survival (Artz & Brush, 1999; Shan, Walker and Kogut, 1994).
Research has found that the fastest growing firms make greater use of cooperative relationships (Jarillo, 1989). By using cooperative strategies to grow, firms can more rapidly develop economies of scale, enabling them to operate with a competitive cost structure (Shane, 1996). Vertical cooperative relationships, such as those between manufacturers and suppliers and/or distributors can reduce the costs of exchange, lower inventory costs and improve performance (Artz, 1999, Walker and Poppo, 1991). Because of their multiple benefits, small firms are increasingly turning to cooperative strategies to provide them an economical and flexible way to cope successfully with greater levels of market turbulence, uncertainty and scope (Larsen, 1992). Entrepreneurial firms that become skilled at combining resources with others in unique and competively relevant, idiosyncratic ways may have established a competitive advantage over rivals who are unable (i.e., they lack the requisite skills) or unwilling (i.e., they lack the requisite commitment) to do so (Dyer & Singh, 1998).
For an entrepreneurial firm, cooperative relationships may be particularly useful in facilitating its international diversity efforts. For example, an entrepreneurial firm entering a foreign market may find that it must market and distribute its product through unfamiliar channels and that dissimilar cultural expectations and desires may require changes in its products or services. Moreover, legal requirements concerning import restrictions, consumer protection, contracting and so forth may be a formidable barrier to successful international diversification (Kanter and Dretler, 1998). While some large firms may possess the necessary resources and capabilities to enter foreign markets, smaller, entrepreneurial firms often have limited resources (Ireland et al., 1996). Therefore, combining resources with a local firm allows entrepreneurial firms to gain access to the resources to enter markets where they could not do so alone. In addition, entrepreneurial firms can gain strategic flexibility from their cooperative relationships (Hitt, Keats & DeMarie, 1998). By utilizing resources from its partners, rather than relying solely on its own, a firm can participate in more markets simultaneously than if it were to attempt to enter each market alone. Additionally, leveraging the resources of an alliance partner can reduce the resources and market power advantages of large firms, allowing smaller, entrepreneurial firms to compete successfully in international markets. Multiple cooperative relationships also provide information on the environment, thereby enabling a firm to adapt more quickly to environmental changes (Levenhagan, Porac & Thomas, 1993).
This evidence suggests that the use of cooperative relationships by entrepreneurial firms may enable them to overcome the barriers associated with international diversification (expansion) and improve their performance as a result of doing so. This expectation results in the following hypothesis:
Hypothesis 2: The use of cooperative relationships will positively moderate the relationship between international diversity and performance.
While evidence suggests that entrepreneurial firms can benefit from international diversification, they also face significant obstacles. Among these is the likelihood of increased competition in international markets. While entrepreneurial firms may attempt to avoid competition by targeting a market niche, competitors are likely to enter the market niche when the entrepreneurial firm earns attractive levels of economic rents. Internationalization also greatly increases the complexity of operating a business. Differences in infrastructure and/or traditional practices may exist between a firm’s foreign and domestic markets, creating a need for the firm to customize its products or services accordingly. Differences in distribution channels may necessitate an adoption of new marketing practices. Differences in economic and political systems may require a firm to change its pricing policies, or require it to move some production facilities into the foreign markets served (Prahalad and Doz, 1987). Because of the demands placed on firms as a result of this increase in complexity, larger firms, with their greater resources, may be better able to manage the complexity. Moreover, large firms have more experience managing diversity within the organization and often have established a structure that can facilitate the management of diverse operations (Ireland et al., 1996). Empirical evidence showing that larger, more diversified firms achieve higher performance from their international diversification efforts than do single-business firms, which includes most entrepreneurial firms (Hitt et al., 1997), supports this view.
Thus, despite the potential opportunities that exist for entrepreneurial ventures, success through international diversity is difficult to achieve. Small firms may find it difficult to take advantage of international opportunities unless they currently possess or can develop the requisite skills that facilitate effective operations in foreign markets.
In the following discussion, we describe numerous resources and capabilities that may allow a firm to successfully implement its international diversity strategy.
Functional Competencies
The success of an entrepreneurial firm’s international diversification efforts depends on its ability to develop (often through knowledge creation and transfer) and maintain (through effective resource allocation patterns) a unique bundle of resources. These resource sets are integrated to create capabilities and competitive advantages (Hitt, Hoskisson & Ireland, 1994; Hitt et al., 1998). For example, a small firm seeking to enter a foreign market may need the capabilities to establish effective working relationships with host governments. Strong marketing capabilities may be required to design appropriate pricing and promotion strategies that will appeal to foreign consumers. Similarly, effective human resource practices may be necessary to successfully motivate and compensate foreign workers and to comply with local labor laws. Thus, the extent to which an entrepreneurial firm possesses appropriate competencies in functional areas is likely to affect a firm’s expansions efforts.
An organization’s core competencies result from the combination of resources and capabilities that serve as a source of competitive advantage for the firm over its rivals (Hitt & Ireland, 1986). As suggested above, core competencies typically are related to the firm’s functional skills. For example, the marketing function has long been identified as a core competence for Philip Morris, Gillette and Nordstrom. For Wal-Mart, distribution is a core competence while manufacturing skills are a competence for Komatsu and Sony (Hitt, Ireland & Hoskisson, 1999). Core competencies emerge over a period of time through the firm’s accumulation of knowledge regarding how to combine and deploy resources and capabilities in idiosyncratic yet competitively-relevant ways. As a capacity to take action, core competencies “are the essence of what makes an organization unique in its ability to provide value to customers over a long period of time” (Bowen, Clark, Holloway, Leonard-Barton and Wheelwright, 1994).
Research results have long indicated the relative importance of competencies in different functional areas to the firm’s performance under varying conditions (e.g., Hitt et al., 1982; Lawrence & Lorsch, 1967; Miles & Snow, 1978; Woodward, 1965). Aguilar (1967), for example, found competencies in general administration, engineering, research and development and production to have a stronger positive effect on the firm’s performance than did competence in the marketing function. Recently, Brush and Chaganti (1999) found that for small service and retail businesses concentrating on positive cash flows as an indicator of effective performance, it is necessary to pay close attention to the specific combination of human and organizational resources existing in the firm. These results imply the importance of different configurations of competencies in different functional activities when considering enhancement of the firm’s performance. Other research suggests that competencies in different functional activities may vary by stages in the product life cycle (Fox, 1973). Competence in the general administration function has been found to be important across firm types and industry types; however, competence in this function may be especially critical for firms seeking to enter foreign markets (Madhok, 1997). Among other outcomes, a general administration competence may facilitate managers’ efforts to effectively organize the firm given the complexity of international operations and to create and communicate a strategic vision (Lado, Boyd & Hanlon, 1997). Competencies in the operations and research and development functions may help the entrepreneurial firm develop innovative products and to reengineer products for international markets in ways that provide value (Arora & Gambardella, 1997). A core competence in the area of finance may facilitate the entrepreneurial firm’s efforts to control or bound its financial exposure as it enters what are dynamic and rapidly changing international markets.
Combined this evidence suggests that the entrepreneurial firm possessing core competencies in different functional activities may improve the likelihood that it can improve its performance through international diversification. Thus, we offer the following hyupothesis:
Hypothesis 3: Functional competencies will positively moderate the relationship between international diversity and performance.
Control Variables
This study also included an additional variable that may affect the relationships identified in the hypotheses, organization size. Company size may affect the ability of an organization to learn (Pennings, Barkema & Douma, 1994; Simonin, 1997), diversify its operations internationally (Eramilli & D’Souza, 1993) and survive in international markets (Li, 1995).
Our study used a survey sent to a random sample 1372 top executives in entrepreneurial firms appearing in the 1997 Texas Directory of Manufacturers. These individuals were located in companies representing a wide range of industries. Several of the surveys were returned due to inaccurate addresses, changes in executives or firm was too large. These were deleted. Thus, our useable sample was 1093. A total of 219 usable surveys was received from this group. As a result, our response rate was 20%, the predicted rate based on Gaedeke and Tootelian (1976).
Measures
With the exception of the performance metric, each of the constructs in our model was estimated using multiple measures. The measurement of competencies drew heavily from earlier work by Hitt, Ireland and Palia (1982) and Hitt and Ireland (1985). These researchers argue that functional activities may become firm competencies. As competencies, functions become a source of competitive advantage. In the current study, 40 distinct functional activities were categorized into one of 7 primary functions, i.e., general administration, operations, research and development, marketing, finance, human resources and government relations. Survey respondents were asked to rate each activity on a seven-point Likert scale ranging from “of very little strategic significance” to “of the greatest strategic significance.” The ratings were grouped by function and summed to create the metrics used in our model. Earlier studies (Hitt et al., 1982; Hitt, Ireland and Stadter, 1982) found that these constructs possess strong validity. In addition, we evaluate the reliability of the respective measures by analyzing their internal consistency (Pedhauzer and Schmelkin, 1991). Internal-consistency reliability estimates were assessed through Cronbach’s alpha (Cronbach, 1970). Although there is some disagreement about what constitutes acceptable levels of reliability, alpha coefficients of near .70 or above are often cited as constituting an “acceptable” level of reliability (Nunally, 1978). Alpha for all the multi-item measures in this study exceeded .70, thus indicating acceptable reliabilities.
Performance. Firm performance was measured by comparing the entrepreneurial firm’s average sales growth over the previous five years compared to firms of similar size in the focal firm’s principal industry and region. Respondents were asked to indicate the percentile that best described their firm: The lowest 20%, 21-40%, 41-60%, 61-80%, or in the top 20%.
International Diversity. Three items were standardized and summed to assess the entrepreneurial firm’s extent of involvement in international markets. These items were a) the percentage of total annual sales from outside the firm’s home country (Hitt et al., 1997; Sambharya, 1995), b) the number of countries in which the firm has physical operations (Tallman & Li, 1996; Hitt et al., 1997), and c) the number of countries in which the firm’s products or services were distributed.
Cooperative Relationships.Cooperative relationships were defined as: any formal agreement between the focal firm and another organization where resources are combined to pursue joint interests in purchasing, developing, manufacturing and/or distributing goods and services. The extent to which an entrepreneurial firm utilizes cooperative relationships was assessed by five items. These items measure how dependent the focal firm is on cooperative relationships, the importance of these relationships and whether cooperative relationships have increased in importance over the past five years.
General Administration. Eight items were used to measure the strategic importance of general administration. These items evaluate the importance the company places on strategic planning systems, ongoing training and development, recognizing new opportunities and threats and maintaining company focus.
Operations.The importance of production/operations to a firm was assessed by 10 items. These items measure the firm’s emphasis on manufacturing technologies such as computer-aided design and manufacturing, robotics and flexible manufacturing systems, real-time process controls and automated material handling and vision systems.
Research and Development. Four items were used to measure the emphasis a firm places on research and development. They include improving its research and product development capabilities, using techniques to improve manufacturing processes and improving the productivity of research and development.
Marketing.The strategic emphasis that a firm places on developing its marketing capabilities was measured by seven items. These items measure dimensions such as the value placed on market research, developing effective pricing strategies and promotional campaigns, improving product distribution and developing and maintaining a highly competent and motivated salesforce.
Finance.To evaluate the extent to which financial considerations were critical to implementing the firm’s strategy, we included four survey items asking about the firm’s ability to develop and maintain a sound financial base, its credit and receivables policies, its emphasis on managing and monitoring cash flow and its ability to generate additional capital.
Human Resources. Four measures were used to assess the strategic importance of human resources. They include evaluating the organization’s emphasis on training, compensation systems, employee evaluation and employee motivation and morale.
Government Relations. Three survey items were used to measure a firm’s ability to maintain effective relations with domestic and foreign government agencies at the state, local and federal levels.
Size. The control variable in this study, firm size, was measured by the number of employees in the firm
Our hypotheses were tested using hierarchical regression analysis (Pedhazur, 1982). Before testing the significance of the individual interaction terms in our model, it is important to assess the aggregate impact of the group of moderators. Unless these moderators as a group contribute significantly to the model’s predictive power, any observed relationship for individual terms in a set of data may be simply due to random fluctuations. Hierarchical regression allows us to test the notion that, when examined as a group, the interaction variables significantly increase the predictability of the overall regression model.
We began by regressing performance on only the direct effects of the variables of interest (Table 1). The R2 of this reduced model was .598. We then estimated a full model that included both the direct and interaction terms. Specifically, the variables of interest here, cooperative relationships, and the respective functional competencies, were entered both as a direct effect and in multiplicative terms with the international strategy variable. Despite the expected non-significant direct effects of the relational variables, partialling the direct effect from the product term is essential when testing for interaction effects (Cohen and Cohen, 1975). The R2 of the full model was .677. The significant change in R2 between the full and reduced model (F = 6.053, p<.001) provides support for the claim that the cooperative relationships and functional moderators act to significantly influence firm performance. Thus, the full model will be used to test our hypotheses (Table 1).
H1 stated a positive relationship between a firm’s international diversity and performance. The international strategy main effect was not significant, thus providing no support for this hypothesis. It should be noted that main effects become conditional in the presence of significant interaction terms (Jaccard, Turisi & Wan, 1990). Hence, this relationship is interpreted as the effect of international strategy on performance when cooperative strategy and the functional variables are absent. Support was found for H2, which stated that the use of cooperative strategies by the entrepreneurial firm will positively moderate the relationship between international diversity and performance (p<.001). Only limited support was found for H3. Although both Human Resources and Government Relations did positively interact with international strategy as we expected (both at p<.001), neither the R&D nor Marketing interactions were significant. Moreover, General Administration, Operations and Finance were found to negatively, not positively, interact with international strategy (p<.05). Finally, our control variable, firm size, was also found to be an important predictor of firm performance (p<.001).
In this examination of factors that determine an entrepreneurial firm’s ability to successfully enter foreign markets, several findings seem apparent. While there is evidence suggesting that an entrepreneurial firm can improve its performance by leveraging its capabilities through international diversification (Simonin, 1997), for the firms in this study, we did not find that to be the case. We found no evidence to suggest that simply becoming more involved in international markets will enable a firm to improve its performance related to its peers. While this finding may seem surprising, a couple of possible explanations are apparent. First, it may be as Zahra et al. (1999) suggest, that many of the firms in our study simply do not possess the necessary skills to allow them to successfully enter foreign markets. The added complexity created by international diversity may require the small firm to develop or acquire a very different set of skills than it possesses currently. Because small firms are limited in the resources they possess, acquisition of the skills necessary for successful international diversity may be difficult.
In considering the lack of significant findings between international diversity and performance, there may be an additional plausible explanation. Specifically, this may be a result of the manner in which the firms in this study measured performance. Our measure of entrepreneurial firm performance is not an absolute measure, i.e., one that examines simply whether a firm’s performance improves or declines. Rather, we asked firms to assess their growth in sales, relative to their competitors. It may be that international diversity actually improves a firm’s sales, but by itself, it is not sufficient to enable a firm’s sales growth to surpass that of its rivals.
A somewhat less surprising result was the finding showing that by using cooperative relationships, small firms can increase the likelihood that their international diversification efforts will result in improved performance. While the potential advantages of cooperative relationships in facilitating a firm’s international diversity efforts is well-documented, the ability to form and manage these relationships may be particularly important for small, entrepreneurial firms. Because small firms often lack the resources necessary to enter foreign markets independently, their ability to form alliances and the like may be the only practical way to enter foreign markets. Indeed, for small entrepreneurial firms, our results indicate clearly that making the development of cooperative relationships a strategic priority may be key to differentiating between successful and unsuccessful international diversity efforts.
As noted above, the results regarding core competencies in functional areas and their moderating effect on the relationship between international diversity and firm performance are surprising. The interaction of general administration, as a functional competence, suggests that using training and compensation systems that develop and reward employees in ways that cause them to become and remain as a core competence is valuable when the firm diversifies its operations through entry into international markets. This is partially consistent with Brush and Chaganti’s (1999) findings regarding the link between human resources and firm performance. Additionally, this result at least partially supports the argument that the knowledge possessed by the firm’s human capital or resources may ultimately be at the root of all competitive advantages (Hitt et al., 1999). Microsoft, for example, indicates that its most competitively valuable asset is the “intellectual horsepower” of its employees. In light of this, the company seeks across time to hire individuals who are more talented and capable than are the current employees (Davies, 1996). The significant and positive finding regarding the value of government relations as a core competence for entrepreneurial firms pursuing international diversity appears to highlight the need to understand fully a nation’s policies and their enforcement. Beyond mere understanding, though, this finding implies that the entrepreneurial firm should be competitively competent in terms of being able to first develop and then maintain effective relations with both domestic and foreign government agencies.
The findings that are in the direction opposite of what we hypothesized were, of course, unexpected. Further consideration of these results, however, seems to suggest interesting possibilities for the entrepreneurial firm that is pursuing international diversity. The finding regarding general administration may indicate a need for a high degree of strategic flexibility among the entrepreneurial firm’s key leaders. Perhaps the speed of change and the dynamism of international markets and their accompanying general environments cause a competence in the use of formal planning systems and the maintenance of an established market focus to be counterproductive. As they become more diversified internationally, entrepreneurial firms may be served better by developing adequate or acceptable general administration capabilities rather than using resources to form a core competence in this area. Similarly, the results appear to suggest that allocating what often are limited resources to develop core competencies in terms of finance and marketing is less effective than is using scarce resources to form core competencies in the areas of human resources and government relations. The finding in terms of the finance function may also indicate that for these particular firms that have chosen to become more diversified internationally, strategic controls are of greater value than are financial controls. The negative interaction between marketing and international diversity may suggest that for entrepreneurial firms, the marketing function is more tactical than strategic. The items used in our survey to measure the marketing variable were strategic in nature rather than tactical. Thus, in the competitive scenario we investigated in this study, it seems that strategic marketing factors should not be emphasized to the point that they become a core competence.
Although examination of the connection between firm size and performance was not a primary focus of this research, we were able to cast some light on the relationship. Our findings revealed that the larger the entrepreneurial firm, as measured by the number of employees, the more likely it was that its annual percentage sales growth would outpace the growth of its industry rivals. On the one hand, this is somewhat counterintuitive, since it should be easier for smaller firms to obtain large annual percentage increases in sales than it is for larger firms. However, for the manufacturing firms in this study, the scale advantages of the larger firms apparently more than offset the flexibility advantages of the smaller.
What are the implications of these findings for entrepreneurial firms? The results clearly suggest that entrepreneurial firms can increase the likelihood that their efforts to diversify through operations through international expansion activities will succeed by utilizing cooperative relationships to facilitate expansion. These relationships can enable the entrepreneur to obtain the necessary resources without having to develop them internally.
CONTACT: Kendall Artz, Baylor University, Waco, TX 76798; (T) 254/710-4169; (F) 254/710-1093; Kendall_Artz@baylor.edu
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