organizational dynamic capability and innovation: an empirical examination of internet firms

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Organizational Dynamic Capability and Innovation: An Empirical Examination of Internet Firms by Jianwen (Jon) Liao, Jill R. Kickul, and Hao Ma This paper extends the dynamic capability perspective into the study of innovation by entrepreneurial firms. Drawing from both the resource-based view and the dynamic capability perspective, this paper explores theoretically and examines empirically the different roles played by a firm’s resource stock (endowment of resources and capabilities) and its integrative capabilities (ability to recognize opportunities as well as to configure and deploy resources) in the process of firm innovation. Our structural equation modeling results, based on a sample of 120 Internet-based companies, indicate that both the firm’s resource stock and integrative capabilities affect its innovation. Additionally, we also found that the relationship between resource stock and innovation is mediated by integrative capabilities. That is, merely possessing well-endowed resource stock per se is not sufficient for innova- tion. Thus, it is the firm’s ability to mobilize its resources and capabilities and align them dynamically with the changing opportunities in the environment that is of vital importance as the firm constantly innovates to survive and create its own competitive advantage. In the hypercompetitive and fast changing Internet-based environment, such a need for dynamic capabilities is especially accentuated. Implications and suggestions for future research are provided. Jianwen (Jon) Liao is an associate professor of strategy and entrepreneurship in the Stuart School of Business at the Illinois Institute of Technology. Jill R. Kickul is the director of the Stewart Satter Program in Social Entrepreneurship at Stern School of Business, New York University. Hao Ma is a professor of management at University of Illinois at Springfield, and professor of management and director of Academic Committee at Beijing International MBA Program, China Center for Economic Research, Peking University. Address correspondence to: Jianwen (Jon) Liao, Illinois Institute of Technology, Stuart School of Business, 3424 S. State Street, IGT-Central Rm. 4A8-2, Chicago, IL 60616, USA. E-mail: [email protected]. Journal of Small Business Management 2009 47(3), pp. 263–286 LIAO, KICKUL, AND MA 263

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Page 1: Organizational Dynamic Capability and Innovation: An Empirical Examination of Internet Firms

Organizational Dynamic Capability andInnovation: An Empirical Examination ofInternet Firmsjsbm_271 263..286

by Jianwen (Jon) Liao, Jill R. Kickul, and Hao Ma

This paper extends the dynamic capability perspective into the study of innovationby entrepreneurial firms. Drawing from both the resource-based view and thedynamic capability perspective, this paper explores theoretically and examinesempirically the different roles played by a firm’s resource stock (endowment ofresources and capabilities) and its integrative capabilities (ability to recognizeopportunities as well as to configure and deploy resources) in the process of firminnovation. Our structural equation modeling results, based on a sample of 120Internet-based companies, indicate that both the firm’s resource stock and integrativecapabilities affect its innovation. Additionally, we also found that the relationshipbetween resource stock and innovation is mediated by integrative capabilities. Thatis, merely possessing well-endowed resource stock per se is not sufficient for innova-tion. Thus, it is the firm’s ability to mobilize its resources and capabilities and alignthem dynamically with the changing opportunities in the environment that is of vitalimportance as the firm constantly innovates to survive and create its own competitiveadvantage. In the hypercompetitive and fast changing Internet-based environment,such a need for dynamic capabilities is especially accentuated. Implications andsuggestions for future research are provided.

Jianwen (Jon) Liao is an associate professor of strategy and entrepreneurship in the StuartSchool of Business at the Illinois Institute of Technology.

Jill R. Kickul is the director of the Stewart Satter Program in Social Entrepreneurship at SternSchool of Business, New York University.

Hao Ma is a professor of management at University of Illinois at Springfield, and professorof management and director of Academic Committee at Beijing International MBA Program,China Center for Economic Research, Peking University.

Address correspondence to: Jianwen (Jon) Liao, Illinois Institute of Technology, StuartSchool of Business, 3424 S. State Street, IGT-Central Rm. 4A8-2, Chicago, IL 60616, USA. E-mail:[email protected].

Journal of Small Business Management 2009 47(3), pp. 263–286

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IntroductionA central concern of a firm’s overall

strategy and management is to maintain adynamic fit between what the firm has tooffer and what the environment dictates(Miles and Snow 1978; Learned et al.1965). As such, a firm must possessdynamic capabilities so as to constantlyreconfigure, renew, and redeploy itsresources and capabilities to bettercapture and exploit the changing oppor-tunities (Teece, Pisano, and Shuen 1997).Given their smallness and newness, theneed for dynamic capabilities and theleveraging of resources and capabilities inpursuit of new opportunities proves to bean extremely daunting task for manyentrepreneurial firms. This is especiallytrue for Internet based entrepreneurialfirms, as they jockey for positions in thehypercompetitive environment (D’Aveni1994), where Schumpeterian shocksoccur rather frequently (Schumpeter1938). Core competence often turns intocore rigidities (Leonard-Barton 1994), andcommitment in the wrong path easilyresults in a competitive lockout that pre-vents the firm from participating in thesubsequent trajectory of industry evolu-tion (Ghemawat 1998). This studyattempts to make a value-added con-tribution by extending the dynamiccapabilities perspective to the entrepre-neurship literature and the small businessmanagement setting by empirically exam-ining the relationship between dynamiccapabilities and firm innovation in thecontext of Internet-based companies.

More than ever, innovation in thedesign of products/services and theimplementation of key processes becomethe critical determinants of competitiveadvantage and its sustainability (D’Aveni1994; Rumelt 1987, 1984). The character-istics of the Internet business environ-ment, combined with the ever changingInternet technologies, have created one ofthe most challenging and competitiveenvironments for entrepreneurs (Vachani

2002). In particular, Internet technologyhas pressed many entrepreneurs toengage in careful and thoughtful assess-ment of how their firms gather, synthe-size, utilize, and disseminate informationacross customers, employees, and sup-plier networks, while also being innova-tive in their ability to create businessmodels and deliver value effectively andefficiently to all parties. Past research hasdemonstrated that entrepreneurs who arewilling to provide innovative productand service offerings are positioned tocompete most effectively (Hodgetts,Luthans, and Slocum 1999). For example,in their study of online virtual storesthrough a survey of 253 online consum-ers, Chen and Tan (2004) expand thetechnology acceptance model and inno-vation diffusion theory and empiricallytest a theoretical model of e-commercestrategies that combines product offer-ings, information richness, usability ofstorefront, perceived trust, and perceivedservice quality.

Hence, firm innovation, or its innova-tion practice and performance are ourmajor dependent variables examined inour study. From the dynamic capabilitiesperspective (Teece, Pisano, and Shuen1997), this study contends that innova-tion in Internet-based entrepreneurialfirms is derived from their abilities (i.e.,dynamic capabilities) to create, deploy,and configure resources and capabilitiesin the market place, and renew, recon-figure, and redeploy the firm’s resourcebase in adaptation to environmentalchanges and uncertainties. Such abilitiesare highly intertwined with and influ-enced by other resources and capabilitiespossessed by the firm (Dierickx and Cool1989).

In our study, we first distinguishbetween two constructs, resource stockand integrative capability, and thenexplore the relationship between thesetwo constructs and their impact on firminnovation. Resource stock refers to allthe items and ingredients that consist of

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the current endowment of a firm’sresources and capabilities (cf. Verona1999; Dierickx and Cool 1989; Penrose1959). Such resources and capabilitiesenable a firm to function more effectivelyand/or efficiently. These are essentialitems touted by the resource-based view,which form the backbone of the firm’sfunction-specific or business-specificadvantages (Pisano 1997; Amit andSchoemaker 1993; Barney 1991), rangingfrom tangible to intangible, technologi-cal, financial, to human capital (Grant1991). Integrative capability, as a specificand concrete representation of dynamiccapabilities (Eisenhardt and Martin2000), allows a firm to acquire, absorb,and assimilate internal and externalsources of knowledge (Cohen andLevinthal 1990; Henderson and Clark1990), configure and reconfigure a firm’sresource base (Teece, Pisano, and Shuen1997), and deploy and redeploy a firm’sresources based on entrepreneurialvisions and judgment (Rumelt 1987,1984).

We conjecture that (1) both firmresource stock and integrative capabilityaffect firm innovation; (2) firm resourcestock has an impact on its integrativecapability; and (3) The effect of firmresource stock on innovation is mediatedby its integrative capability. Our overallargument is that for Internet-based entre-preneurial firms in particular, it is notenough to simply possess certain qualityand unique resources and capabilities.Rather, it is more important that the firmpossesses and utilizes its integrativecapability to put its resources and capa-bilities into productive use.

Literature Review andTheoretical FrameworkThe Innovation Imperative:Emergence and Growth ofInternet-Based Entrepreneurship

Electronic commerce has continuouslyexperienced dynamic and rapid growth,

despite the major setbacks and retrench-ment that occurred at the start of 2001.Schumpeter’s (1938) notion of creativedestruction appropriately characterizeshow Internet technology has revolution-ized the way organizations function andoperate to bring value to their multiplecustomers and business partners. “Inter-net businesses are founded on and relyon nothing more remarkable thanthe technological and economic forcesof creative destruction—as usual”(McKnight 2001, p. 51). The rapid accel-eration and availability of Internet tech-nology are shaping the ways in whichemerging organizations establish theirvalue positions in their markets/indus-tries, as well as how they structure anddesign new processes and managementpractices within their own businesses.Effective Internet-based businessesseek out and act upon the demands ofthe market, differentiating themselvesthrough customer management, relation-ship marketing, and community building(Shannon 1999). In order to meet manyof their financial and operating goals andobjectives, many Internet-based busi-nesses are engaging in a variety ofcorporate initiatives that emphasizenew-market penetration, mergers andacquisitions, mass customization, andtechnology and process improvements(Hitt 1998; Morgan and Smith 1996).

Internet technology can assist busi-nesses in building new strategies thatadd value to new ventures through thedevelopment of new markets, opportuni-ties, and relationships. As previous workin this area has demonstrated, Internet-based entrepreneurs must search forinnovative ways of enhancing efficiency,lowering costs, and improving techno-logical processes throughout their entireorganizations. In addition, these compa-nies and their management teams mustformulate flexible strategies to permitredesign and reconfiguration of theirorganizations as they grow and mature.By utilizing the appropriate technology,

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entrepreneurs and existing businessescan pursue new opportunities by placingprocesses in place to gather information,organize it for the market, select what isvaluable, synthesize it, and finally dis-tribute the product/service. When com-bined with Internet technology, thesevalue-added steps make up the virtualvalue chain that can be used to identifyand exploit market needs, demands, andopportunities (Cartwright and Oliver2000; Rayport and Sviokla 1995).

The Role of Innovation inInternet-Based Entrepreneurship

A new set of core business valuesappears to distinguish Internet-basedentrepreneurial firms from others. Thesevalues are continual innovation, experi-mentation, and rapid change. Research-ers have postulated that the Internet hasfacilitated the development of new valuepropositions for firms, including thevalue-adding activities of search, evalua-tion, problem solving, and transaction(Lumpkin and Dess 2004). The environ-ment of e-commerce enables firms torapidly try new approaches, quicklyshare successes and failures, andmonitor what is new and useful (Oliva1998). The emphasis on innovation andchange will be oriented not only to theoutcomes of these organizations (e.g.,products, services, new markets, and soon), but to the structure and workarrangements of the ventures them-selves. Moreover, Internet-based entre-preneurs should assess whether thedigital economy has led to the emer-gence of new opportunities their firmsmay pursue by deploying their uniquecapabilities (Lumpkin and Dess 2004).

In the absence of unique or newbundles of resources, technology firms,Internet-based firms especially, may findit difficult to mitigate their liabilities ofnewness and smallness. Whereas theliability of newness concerns with theextra commitments (to product, marketand technological development) a new

Internet-based firms must make tocompete against older firms alreadyoperating in the market, the liability ofsmallness involves the extra costs anInternet-based firms must incur becauseof lack of scale and resources. Tosurvive and grow in the highly competi-tive Internet business environment,these firms have to search beyond theresources-based competitive advantages.Possessing, deploying, and upgradingcapabilities therefore become theprimary drivers of success in the Inter-net space and important predictors ofsustainable competitive position. In thisregard, the dynamic capability perspec-tive has vital implications for Internet-based entrepreneurs.

A Dynamic Capability Model ofInnovation for Internet-BasedEntrepreneurship

According to the resource-basedview, firms are seen as “bundles ofresources,” which are defined as bothtangible and intangible assets that aretied to the firm in a relatively permanentfashion (Hall 1992; Wernerfelt 1984;Penrose 1959). These resources confercompetitive advantages in and of them-selves (cf. Amit and Schoemaker 1993;Barney 1991; Rumelt 1987, 1984).According to Barney, “firm resourcesinclude all assets, capabilities, organiza-tional processes, firm attributes, infor-mation, knowledge, etc. controlled by afirm that enable the firm to conceive ofand implement strategies that improveits efficiency and effectiveness” (1991,p. 101). Resources are categorized intoseveral specific typologies, includinghuman, physical, capital, and techno-logical (Grant 1991). According to thisperspective, sustainable competitiveadvantage exists when the resourcespossess value, uniqueness, nonsubstitut-ability and inimitability (Barney 1991;Rumelt 1987, 1984). As a result, perfor-mance differences across firms arebecause differences arising from

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valuable, rent-generating, firm specificresources and capabilities.

However, accumulating valuableresources is not enough to support asustainable competitive advantage(Teece, Pisano, and Shuen 1997), espe-cially for Internet-based firms, wherethey could not afford making costly mis-takes in wrongful commitment but haveto be alert, flexible and adaptive. Theever-changing competitive Internet envi-ronments render seemingly sustainablecompetitive advantage obsolete. Instead,competitive advantages arise from afirm’s capability to constantly redeploy,reconfigure, rejuvenate, and renew itsresources and capabilities in respondingto the changing environmental condi-tions. Teece and Pisano (1994, p. 541)propose dynamic capability theory as the“subset of the competences/capabilitieswhich allow the firm to create newproducts and processes and respondto changing market circumstance.” Asa result, competitive advantages reston distinctive processes, shaped by thefirm’s asset positions and the evolution-ary paths followed. Dynamic capabilityrequires the capacity to extract economicbenefits from current resources andcapabilities and to develop new capabili-ties. Consistent with the dynamic capa-bility perspective, we differentiatebetween a firm’s resources stock from itsdynamic capability. While the formerfocuses on technical fitness, that is, effec-tively doing what a resource or capabilityis supposed to do, the latter emphasizesevolutionary fitness, that is, effectivelymaking a sustainable living in adaptationto the environment longitudinally (cf.Helfat et al. 2007; Teece 2007).

Resource Stock. Resource stock con-cerns with resources and capabilities thatare firm specific and can generate eco-nomic returns and competitive advan-tages. Notice here that, following thetradition of exposition in the resource-based view (cf. Barney 1991), we do not

make an attempt to differentiate thenuances between resource and capabili-ties. This definition accords well with thefundamental argument of the resource-based view that the firm is a bundle ofunique resources (Penrose 1959). It alsoreflects the actual level of endowment orstock (as apposed to flow) of the firm’sresources and capabilities (Dierickx andCool 1989), concerns with the routinecompetitiveness or competence depictedin evolutionary economics (Nelson andWinter 1982), and the existing standardoperating procedures and practice(March and Simon 1958). For instance,this definition is very consistent with thefirst type of organizational routineargued by Zollo and Winter (2002),which they refer to as involving “theexecution of known procedures for thepurpose of generating current revenuesand profits” (p. 241). In a similar vein,Verona (1999) referred these resourcesand capabilities as functional capabili-ties, for example, information technol-ogy, strategic planning, and strategicalliance, to name just a few.

Integrative Capacity. It refers to afirm’s capability in configuring andreconfiguring a firm’s resource stock anddeploying and redeploying it to captureand exploit changing opportunities. Itinvolves scanning external environmentand recognizing business opportunities,understanding internal resource stock’spotential and limitations, as well as align-ing and matching resource stock withopportunity lines. This definition accordswith the essence of the dynamic capabil-ity concept as advanced in Teece, Pisano,and Shuen (1997) and Teece (2007). Itreflects a higher order of organizationalcapability in utilizing existing resourcesand capabilities (Collis 1994). It is alsoconsistent with Zollo and Winter’s (2002)second type of organizational routine,which is conventionally identified assearch routines in evolutionary econom-ics (Nelson and Winter 1982).

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In the context germane to “high veloc-ity environment,” such as the one facingthe Internet firms, Eisenhardt and Martin(2000) argue that integrative capabilitiesare at the heart of dynamic capabilities.Such integrative capability involvesreleasing undesirable resources andcompetence while embracing newresources and routines, much necessaryfor Internet firms dealing with frequentchanges and adaptations. In the sametoken, Kogut and Zander (1992) usecombinative capabilities to capture theorganizational procedures that acquire,synthesize, and make sense of knowl-edge resources and apply them innew areas, similar to Hendenson andCockburn’s (1994) term “architecturalcompetence.”

Within the dynamic-capability litera-ture, there is also a tendency to dichoto-mize the dynamic capability, theintegrative capability in particular, intothe external–internal oriented: forexample, the ability to utilize existingroutines to explore opportunities ofrevenue-generating potentials in thechanging environment versus internal-oriented ones, such as resource-allocation routines that reconfigure andredeploy resources within the firmto capture emerging opportunities (cf.Eisenhardt and Martin 2000; Verona1999). Recently, Teece (2007), reflectingon Teece, Pisano, and Shuen (1997),clearly pinpoints and elaborates on thedifferent characteristics of the varyingcomponents of dynamic capabilities,with the more external-oriented onesinvolved more with the sensing, detect-ing, identifying, filtering, and calibratingmarket opportunities, and the internal-oriented ones dealing primarily withseizing, capitalizing, and exploitingopportunities through intrafirm struc-tures, procedures, designs, andincentives.

As such, we differentiate betweenexternal integrative capability for op-portunity recognizing and internal

integrative capability for opportunitycapitalizing. Opportunity-recognizingintegrative capabilities are associatedwith the dimensions of managerial pro-cesses, structures, information and mana-gerial systems, and networks, throughwhich external information and knowl-edge can be identified and importedacross organizational boundaries. Theseexternal integrative capabilities are espe-cially salient for the Internet-based firms,given the velocity of changes in technol-ogy and competition. On the other hand,the internal integrative capabilities foropportunity capitalizing attempt to capi-talize on, and exploit, potential businessopportunities through reconfigurationand redeployment of a firm’s resourcestock so as to align it with the environ-mental requirement and to exploit thesepotential opportunities.

Firm Innovation. Firm innovation, orinnovation practice and performance, isdefined as a firm’s ability to create newvalue propositions through offering ofnew products and services, adopting newoperating practice, technological, organi-zational, or market-oriented, or creatingnew skills and competencies (e.g., Milesand Snow 1978; Schumpeter 1938). Thatis, firm innovation is both content-wiseand process-wise. Content-wise, a firmcould produce tangible new value propo-sitions. Process-wise, a firm could createnew ways of conducting business, forexample, a new operating procedure inquality control, new configuration ofwork flow, gaining new competence inlocating valuable customers, etc. The ulti-mate purpose for firm innovation is thecreation of customer value in the forms ofnew services and new products. Further-more, the success of an Internet-basedfirm also depends on innovation in theform of process learning and knowledgeand capability creation.

Given this definition and interpreta-tion, we advance the following frame-work as the foundation for subsequent

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hypothesis development. Firm innova-tion is determined by its resource stockas well as its integrative capability indeploying and utilizing the resourcestock. A firm’s integrative capability isaffected by its resource stock, that is, theoverall endowment, munificence anddiversity, as well as organizationalroutine. Moreover, resource stock per sedoes not automatically translate intoinnovation or innovative practice.Instead, its effect, we posit, is mediatedby the presence and magnitude of thefirm’s integrative capability. This argu-ment is in general supportive of thebelief in the entrepreneurship literaturethat, for entrepreneurial firms, creativelyleveraging resources and potentialresources may be more important thanmerely possessing certain resource

endowments. Figure 1 highlights ouroverarching theoretical framework.

Hypothesis DevelopmentResource Stock and IntegrativeCapability

Integrative capability and resourceendowment are often intricately relatedand the former may also well be embed-ded within the later. First, consider thecase of absorptive capacity, a particulartype of integrative capability. Cohen andLevinthal (1990) argue that the ability ofa firm to recognize the value of newexternal information, to assimilate it andapply it to commercial ends is critical tothe firm’s innovation. Such absorptivecapacity does not exactly come intobeing independent of a firm’s resourceendowment or in isolated fashion.

Figure 1Dynamic Capability, Integrative Capabilities and Firm

Innovation: A Mediating Model

Opportunity RecognizingIntegrative Capabilities

Opportunity Capitalizing Integrative Capabilities

H1

H2

H3

H5A

H6A

H4

H5B H6B

Resource Stock

Technological

Alliance

Human Resources

Planning

Technological

Alliance

Human Resources

Planning

Opportunity RecognizingIntegrative Capabilities

Opportunity Capitalizing Integrative Capabilities

FirmInnovation

Integrative Capabilities

H1

H2

H3

H5A

H6A

H4

H5B H6B

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Rather, it is largely a function of a firm’sprior related knowledge and capabilities(Liao, Welsch, and Stoica 2003; Zahraand George 2002). Often times, it isprecisely the established routines andcapabilities within an organization (aresource stock variable) that makes afirm more sensitive to certain environ-mental signals, information, and knowl-edge that are consistent with theestablished frame of reference. Second,integrative capability has to be utilized inthe context of mobilizing existingresource stock of the firm in sensing andeven shaping opportunities and threats(Teece 2007). Without a critical mass ofresource stock, a firm lacks the basicingredients or building blocks for itsintegrative capability to leverage withand exercise on, hence hindering theeventual accumulation and utilization ofintegrative capability. The ability to rec-ognize opportunities depends in part onthe organizations’ capabilities and extantknowledge in areas such as technology,strategic alliance, human resources, andstrategic planning. The greater a firm’scapabilities in searching, monitoring,and scanning, the greater a firm’s absorp-tive capability, the greater the degree ofa firm opportunity recognizing integra-tive capabilities. Based on these ration-ales, we propose:

H1: Resource stock of an Internet-based firm is positively related to itsopportunity-recognizing integrativecapabilities.

An Internet firm’s resource stock, thatis, the possession of technological, infor-mational, and strategic planning capabili-ties, would affect not only its externalintegrative capabilities for opportunityrecognition, but also its internal inte-grative capabilities for opportunitycapitalizing—the abilities to configureand reconfigure resources and capabili-ties so as to exploit desirable and feasiblebusiness opportunities. An opportunity

is merely more than an idea (Timmons2003). Deciding on whether an idea is anopportunity or not involves judgmentsmade under conditions of uncertaintyand complexity (Das and Teng 1997).These judgments mainly concern withperceived risks and returns. The posses-sion of organizational capabilities inInternet-related business would mostlikely mitigate the perceived risks anduncertainty, while increasing the per-ceived potential returns at the same time.As a result, organizations are more likelyto commit themselves to explore andexploit these business opportunities.Additionally, seizing and addressingopportunities involve maintaining andimproving technological competencesand complementary assets (Teece 2007),Internet firms’ existing resource stocks ininformation technology and alliance arecritical for exploiting a recognizedopportunity. This is especially the casewhen network externalities are presentwhere early entry and commitment arenecessary and first-mover advantage iscritical. The greater the degree of anInternet firm’s resource stock, the greaterthe degree the firm’s integrative capabil-ity to select product architectures, designbusiness models, and manage comple-ments and platforms. Based on thesediscussions, we posit:

H2: Resource stock of an Internet-based firm is positively related to itsopportunity-capitalizing integrativecapabilities.

Resource Stock and FirmInnovation

We expect that a firm’s resource stockin terms of technology, alliance, strategicplanning and human resources wouldhave a direct impact on its innovation.More specifically, technological capabili-ties are often viewed as an especiallyimportant determinant of a firm’sinnovations. In their empirical researchof firm competence in pharmaceutical

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industry, Hendenson and Cockburn(1994) report a positive link betweenR&D capabilities and the productivityof new-drug development. In a similarvein, Pisano’s (1997) study of pharma-ceutical and biotechnology firms alsoreports a positive relationship betweenthe lead time of new molecular develop-ment projects and the manufacturingcapability. In the Internet business, thedominant business configuration is anetwork, Web or hub connected viainformation technology. Suppliers, cus-tomers, complementors, and alliancepartners engage in “coopetition” as theycollaborate via alliance and compete viacoalitions (Afuah 2000; Brandenburgerand Suart 1996). Competitive advant-ages for these Internet-based firmsmay rest on tacit, inimitable collabo-rative relationships with variousplayers within the network. These net-works of relationships provide a criticalsource of innovations (Ahujah 1996).Based on the foregoing arguments, weargue that

H3: Resource stock of an Internet-based firm is positively related to itsinnovation.

Integrative Capability and FirmInnovation

It must be noted that opportunity-recognizing integrative capabilities andopportunity-capitalizing integrative capa-bilities are not mutually exclusive.Instead, they are closely interconnected.Specifically, opportunity-recognizing in-tegrative capabilities refer to a firm’scapability to identify and acquire exter-nally generated knowledge that is criticalto its operation (Zahra and George2002). Acquisition of external knowledgereflects the identification function, whichrepresents the “generator” of intelligencefor the organization. External environ-mental signals are identified, and infor-mation on those signals is gathered and

transmitted across the organizationalboundary.

The more external knowledge andinformation that can be collected over agiven period, the better the opportunity-recognizing integrative capabilitieswork. Subsequently, the opportunity-recognizing integrative capabilities availthe Internet-based firms with a widerrange of ideas, more business opportu-nities, and prompt them to act andcapitalize on them. Limited opportunity-recognizing integrative capabilitiesmay constrain a firm’s opportunityrecognition, impeding its opportunity-awareness, willingness for resource com-mitment, and actual ability to mobilize itsresource base and realign it with thechanging opportunities in the environ-ment. As such, a firm’s integrative capa-bilities, opportunity-recognizing onesand opportunity-capitalizing ones, arepositively related and they reinforce eachother. Given these discussions, wecontend that

H4: Opportunity-recognizing integrativecapabilities of an Internet-based firmare positively related to itsopportunity-capitalizing integrativecapabilities.

Such integrative capabilities, bothopportunity-recognizing and oppor-tunity-capitalizing, should help fosterthe firm’s awareness of innovationpotentials and enhance their likelihoodof creating innovative product or serviceofferings and/or innovative operatingpractices while learning and acquiringnew knowledge and capabilities.Opportunity-recognizing integrativecapabilities also represent a constructthat refers to “active listening.” Informa-tion and knowledge can be obtainedfrom a wide variety of sources, using avariety of media. The generation ofexternal information should not be themonopoly of any one department butrather an organization-wide activity.

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Additionally, firms need to scan fre-quently and broadly (Hambrick 1982).Although there are some indications thatthe most important areas of knowledgecome from competitors and customers,the organization uses many more thanthe usual data-collection sources fromcompetitors and customers. The moreinformation the organization gathersthrough the search process, the moreoptions are there for identifying changesin the competitive and market environ-ment, and therefore, the better chance ofa firm to engage in innovation, bothcontent-wise and process-wise, inaccording to the external demands. Thus,we argue,

H5a: Opportunity-recognizing integra-tive capabilities of an Internet-basedfirm are positively related to itsinnovation.

Furthermore, we posit that oppor-tunity-recognizing integrative capabili-ties lead to firm innovation primarilythrough its providing a direction andopportunity context to deploy and utilizea firm’s resource stock, not merely by itsown direct effect. As such, we couldinterpret that an Internet-based firm’sopportunity-recognizing integrativecapabilities mediate the effects of itsresource stock on firm innovation.Therefore, we contend,

H5b: Opportunity-recognizing integra-tive capabilities of an Internet-basedfirm mediate the positive effect of itsresource stock on its innovation.

In a similar vein, opportunity-capitalizing integrative capabilities helpan Internet-based entrepreneurial firm tobe surely aware of an opportunity’s com-mercial viability, secure commitmentto the capitalizing and exploitation ofthe opportunity, and mobilizing thenecessary resources and capabilities inensuing execution. Such opportunity-

capitalizing integrative capabilities helpinsure a firm’s adjustment to and align-ment with the environment in a timelyfashion, and likely innovation in processlearning and eventual product andservice offering, innovation needed tocreate and capture customer value inhypercompetitive environment (D’Aveni1994). Similar to the arguments leadingto H5b, we again posit that suchopportunity-capitalizing integrative capa-bilities affect a firm’s innovation prima-rily by mediating the effect of itsresource stock. Based on these ration-ales, we hypothesize the following:

H6a: Opportunity-capitalizing integra-tive capabilities of an Internet-basedfirm are positively related to itsinnovation.

H6b: Opportunity-capitalizing integra-tive capabilities of an Internet-basedfirm mediate the positive effect of itsresource stock on its innovation.

Research MethodData Collection

Participants were 120 entrepreneursof Internet-based organizations whosebusiness activities are directly involvedwith and primarily rely on the Internet.The entrepreneurs and their respectivefirms were randomly sampled by theInternet sector of the CorpTechCompany Profiles Database. The majorityof the Internet-based entrepreneurs weremale (92 percent), with over 19 years ofbusiness experience and 15 years ofindustry experience. Previous studieshave utilized responses from the entre-preneurs on measures of top manage-ment team diversity and other variables(Miller, Burke, and Glick 1998). Over 80percent of the e-commerce organizationshad 50 or fewer employees and theaverage age of the firms was 7.09 years(median = 5 years). Twenty percent ofthe firms had annual sales greater than

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$8 million; 30 percent had sales of $8million to $2 million; 17 percent hadsales of $2 million to $1 million; 33percent had sales of less than $1 millionper year. Approximately 84 percent ofthe participating organizations are pri-vately held. According to CorpTech, theexpected annual growth rate, in terms ofsales, of the Internet-based firms in ourstudy is 41.6 percent.

All information was gathered fromthe entrepreneurs over a three-weekperiod, utilizing an online survey.E-mails were sent to the entrepreneurof the Internet-based organizationssampled, asking for their participationin the study. Within the text of thee-mail was a hyperlink that would directthem to our on-line questionnaire. Theentrepreneurs were told that we wereconducting research to better under-stand top managerial roles and practicesin Internet-based organizations. Theentrepreneurs were informed that theircandid opinions would help us to clarifythe different approaches entrepreneursand their top management teams take infinding and implementing new ideasand opportunities within their respec-tive markets. In addition to answering aseries of questions on personal charac-teristics, the entrepreneurs were askedto provide information regarding thetypes of business practices and innova-tions implemented into their Internetorganizations. Upon completion of thesurvey, their responses were submittedto a secured Internet database. Theoverall response rate was 20 percent(600 entrepreneurs were sent emails;120 responded to our questionnaire).

The entrepreneurs and their respec-tive firms were randomly sampled bythe Internet sector of the CorpTechCompany Profiles Database. To examinenonresponse bias, we test the differencesin demographic and organizational char-acteristics by response status throughChi-square tests for categorical variablesand t-tests for continuous variables.

Using a 0.05 level of significance, therewere no discernable differences betweennonrespondents (n = 480, those who didnot respond to the e-mail/Web-survey)and respondents (n = 120) on gender,industry experience, number of employ-ees, age of firm, and sales, therefore sug-gesting no sample bias was detected.

MeasurementResource Stock. To assess the resourcestock of an entrepreneurial firm withregard to its functional capabilities, weused the Hartman, Sifonis, and Kador’s(2000) Internet Readiness Measure.Items for each of the subscales (alliancecapability, technology capability,human resources, and strategic plan-ning) included, “We have a strong setof partnership with complementary–e-commerce players (alliance capabil-ity),” and “We have a strong relationshipswith our extended enterprise (e.g., sup-pliers, VARs, customers; alliance capabil-ity); “Our business has strong IS/IToperations capabilities (e.g., capacityplanning, networking strategy, andoperations, database administration,database management; technology capa-bility)”; “We have the technological infra-structure and competencies to engage ine-commerce initiatives (technology capa-bility)”; “We are providing the properincentives for our people to meettheir e-commerce objectives (humanresources),” and “Our e-commerceefforts help recruit and retain the besttalent in our organization (humanresources)”; “We have created a twelve-to-eighteen month road map, or journey,for success (strategic planning),” and“Our e-commerce efforts are mostlyfocuses on strategic/value creation areasrather on operational or marketing com-munications (strategic planning).” Entre-preneurs indicated how much they agreeor disagree with the statements on a five-point Likert scale (1 = strongly disagree;5 = strongly agree). Cronbach’s alpha ofthis scale was 0.85.

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External Opportunity-Recognizing Inte-grative Capabilities. To measure exter-nal integrative capabilities, we adaptedfour items from Hills, Lumpkin, andSingh (1997) scale on opportunityidentification/recognition. Entrepreneurswere asked to indicate the extent towhich ideas for new products/servicescome from external sources, including“observing customer’s needs/problems,”“observing competitors,” “observingproduct/service/process problems,” and“interacting with suppliers or vendors.”Entrepreneurs used a five-point Likertscale (1 = not a source; 5 = significantsource). Cronbach’s alpha of this scalewas 0.90.

Internal Opportunity-Capitalizing Inte-grative Capabilities. To measure inter-nal integrative capabilities, we adaptedthree items from Simons, Pelled, andSmith’s (1999) scale. These items assesshow top management teams assess/evaluate new ideas or opportunities.Items include, “To what extent do topmanagement team members weigh mul-tiple approaches against each other?”;“To what extent do top managementteam members examine the pros andcons of several possible courses ofaction?”; and “To what extent do topmanagement team members use multiplecriteria for eliminating possible coursesof action?” Entrepreneurs used a five-point Likert scale (1 = not at all; 5 = to agreat extent). Internal consistency(Cronbach’s alpha) of this scale was 0.78.

Firm Innovation. In order to measurethe types of innovative managerial prac-tices implemented in our sample ofe-commerce firms, we again used threeitems from Hartman, Sifonis, and Kador’s(2000) Internet Readiness Measure.Entrepreneurs indicated how much theyagree or disagree with the statements ona five-point Likert scale (1 = strongly dis-agree; 5 = strongly agree). Items include,“We are continually introducing new

product/service offerings”; “We continu-ally innovate our e-commerce product orservice offerings through iterativeprojects adding to their functionality”;and “We have a strong, rapid develop-ment approach for e-commerce applica-tions.” Cronbach’s alpha of this scale was0.87.

Common Method BiasBecause the effect of common method

bias is known to be a major validitythreat in behavioral research (Podsakoffet al. 2003), there was special emphasisat the beginning of the study designed tocontrol method bias. When designing thesurvey, we incorporated the recommen-dations of Podsakoff et al. (2003). Thatis, we choose clear and concise items,the use of different response formats,scale endpoints for the independent anddependent variables, and scale-lengthcontrol.

After data collection, Harmon’s one-factor test was conducted to examinecommon method variance (Podsakoffand Organ 1986). Four factors wereextracted, accounting for 61 percent. Thefirst factor contributed to 31 percent ofvariance. This pattern suggests thatcommon method bias is not a majorconcern in our data. In our follow-upsection on structural equation modelingand overall confirmatory factor analyses,we find additional support of discrimi-nant validity for the four factors:resource stock, external opportunity-recognizing integrative capabilities,internal opportunity-capitalizing integra-tive capabilities, and firm innovation.

Control VariablesWe control for the strategic orienta-

tion of the sampled firms. The relation-ship between firm’s innovation andstrategic orientation is well-establishedin strategy research. For example,Aragón-Sánchez and Sánchez-Marín(2005) find that there is a significant dif-ference in the degree of innovativeness

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among prospectors, analyzers, defend-ers, and reactors, with prospector amongthe most innovative one. In order todetermine the business strategy of thee-commerce firm, participants weregiven descriptions of four types of busi-ness strategies based on Miles andSnow’s (1978) typology (prospector,analyzer, defender, and reactor). Afterreading each description, participantswere asked to choose the one thatclosely portrays the type of organizationfor which they are currently working.For the prospector strategy category, itread, “Organization C makes relativelyfrequent changes in (especially additionsto) its set of products/services or facili-ties. It consistently attempts to pioneerby being ‘first in’ new areas of service ormarket activity, even if not all of theseefforts ultimately prove to be highly suc-cessful. Organization C responds rapidlyto early signals of market needs oropportunities.” For data analysis pur-poses, the prospector strategy was codedas “1” and the other categories werecoded as “0.” Type of business wasaccessed by asking entrepreneurs toallocate percentage of their business isbusiness-to-business versus business-to-consumer.

We also control for the diversity of topmanagement team. Top managementteam diversity is defined in this study torepresent the diversity of functionalbackgrounds that the assemblage of topmanagement members brings to theteam and decision-making responsibili-ties. The imputed logic by upper-echelontheorists is that having a heterogeneousteam enhances the knowledge base,cognitive abilities and overall problem-defining and problem-solving skills ofthe group (Bunderson 2003; Hambrick,Cho, and Chen 1996). In fast changing,dynamic environments such as the Inter-net industry, information processingrequirements call for identification ofgreater adaptive capabilities, thus favor-ing heterogeneous teams. Top Manage-

ment Team (TMT) heterogeneity is ofutmost importance to firms that operatein industries characterized by high-velocity environments. Similar to themeasure used by Simons, Pelled, andSmith (1999), top management teamdiversity scores are higher on ourmeasure when teams are comprised ofmany diverse functional specialties.

Additionally, we also control for theproactiveness of the entrepreneurs.Studies find that entrepreneurial proac-tiveness is a significant discriminatingfactor between innovative and noninno-vative firms (Khan and Manopichetwat-tana 1989). To assess proactive persona-lity, we used five items from Batemanand Crant’s (1993) scale. Items includedin this measure were “I enjoy facing andovercoming obstacles to my ideas,”“Nothing is more exciting than seeing myideas turn into reality,” “I excel at iden-tifying opportunities,” “I love to chal-lenge the status quo,” and “I can spot agood opportunity long before otherscan.” Participants rated these items on aseven-point Likert scale (1 = strongly dis-agree; 7 = strongly agree).

Finally, we also use a dummy variableto control for types of business of thesampled firms, B2C or B2B.

ResultsConfirmatory Factor Analysis

Following a two-step approach inwhich the measurement model istested before the full structural model(Anderson and Gerbing 1988), we con-ducted overall confirmatory factor analy-ses for our four scales: resource stock,external opportunity-recognizing inte-grative capabilities, internal opportunity-capitalizing integrative capabilities, andfirm innovation. For both steps, discrimi-nant as well as predictive validity can beassessed and determined. A covariancematrix was used as input for estimationof the models (using Lisrel VIII). Modelparameters were estimated using themaximum likelihood method.

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For our measurement model and con-sistent with our common method vari-ance analyses, a four-factor structure wassupported, obtaining good overall fit

with the data (see Table 1 for standard-ized Lisrel estimates). The model includ-ing resource stock, external opportunity-recognizing integrative capabilities,

Table 1Results of Confirmatory Factor Analysis of Independent

and Dependent Variables

Standardized LisrelEstimates

1 2 3 4

We are providing the proper incentives for ourpeople to meet their e-commerce objectives.

0.80

Our e-commerce efforts help recruit and retainthe best talent in our organization.

0.70

We have a strong relationships with ourextended enterprise.

0.78

We have a strong set of partnership withcomplementary e-commerce players.

0.58

We have the technological infrastructure andcompetencies to engage in e-commerceinitiatives.

0.53

Observing customer’s needs/problems. 0.85Observing product/service/process problems. 0.73Observing competitors. 0.70To what extent do top management team

members use multiple criteria for eliminatingpossible courses of action?

0.74

To what extent do top management teammembers weigh multiple approaches againsteach other?

0.72

To what extent do top management teammembers examine the pros and cons of severalpossible courses of action?

0.70

We are continually introducing new product/service offerings.

0.91

We have a strong, rapid development approachfor e-commerce applications.

0.78

We continually innovate our e-commerce productor service offerings through iterative projectsadding to their functionality.

0.61

Factors: 1 = resource stock; 2 = external opportunity-recognizing integrative capabili-ties; 3 = internal opportunity-capitalizing integrative capabilities; 4 = firm innovation.

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internal opportunity-capitalizing integra-tive capabilities, and firm innovationas distinctive dimensions had a c2 of88.11 (p = .08234) with 71 degreesof freedom. Our two incremental fitindexes, the comparative fit index (CFI)and the Incremental Fit index (IFI) wereboth 0.97. These indexes are indepen-dent of the size of the sample anddegrees of freedom (Bentler and Bonett1980). Bentler and Bonett recommendedthat a value of 0.90 or higher on the CFIand IFI indicates an adequate fit ofmodel to data. In addition, the CFI andIFI indicate relative improvement in fit ofa hypothesized model over a null model.Finally, additional goodness of fit statis-tics also supported the fit of this mea-surement model to the data (GFI = 0.90;NNFI = 0.91 [Tucker-Lewis]; RMSEA =0.045; RMR = 0.049).

Structural Equation ModelingBefore submitting our data to the

second step in our modeling, we wantedto confirm if any of our control variableswould affect firm innovation, beyond ourthree antecendents or dimensions. In ourmultiple regression analyses, businessstrategy, type of business, diversity of topmanagement team, and proactivity of theentrepreneur predicted firm innovation.

Thus, we thereby tested relationshipsbetween the dimensions of resourcestock, external opportunity-recognizingintegrative capabilities, internalopportunity-capitalizing integrative capa-bilities, and firm innovation using struc-tural equation modeling (SEM) since iteffectively estimates parameters betweenour study’s constructs. A covariancematrix was used as input for estimationof the structural models. Again, a cova-riance matrix was used as input for esti-mation of the model and parameterswere estimated using the maximum like-lihood method.

In testing our overall model as wellas the individual relationships, we firstreport the results from our overall model

and fit indices. The overall saturatedmodel was consistent with our mea-surement model (i.e., a c2 of 88.11(p = .08234) with 71 degrees offreedom). However, although we werelooking at the overall saturated model toanalyze how well the data fit our speci-fied model, we were more interested inthe individual relationships and thetesting of each of our hypotheses. Spe-cifically, structural coefficients were esti-mated within Lisrel, allowing for the testof our hypotheses. Table 2 summarizesour results, showing the standardizedstructural coefficients in the model. Spe-cifically, resource stock was positivelyrelated to both opportunity-recognizingintegrative capabilities (H1) andopportunity-capitalizing integrative capa-bilities (H2), as well as to firm innovation(H3). Support was also found for H4 inthat opportunity-recognizing integrativecapabilities were related to opportunity-capitalizing integrative capabilities.Finally, both types of integrative capa-bilities were positively related to firminnovation (H5a and H6b, respectively).

However, in analyzing the relation-ship between resource stock and innova-tion, the relationship was not significant.The omission of this relationship in theoverall model did not influence theoverall fit of model to data (c2(1) Differ-ence = 2.41, p = ns; support for paris-mony and mediated model). Thus, theseresults support our hypotheses H6a andH6b. Therefore, integrative capabilitiesserve as an important link between afirm’s resource stock (technological, stra-tegic, human resources, and strategicplanning activities, etc.) and its innova-tion performance.

DiscussionInformation and computer technolo-

gies have fundamentally changed theway many firms conduct business andhave led to the emergence of Internet-based entrepreneurship. New businessmodels, processes, and value proposi-

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tions continue to emerge and be imple-mented throughout the entire industry.Successful Internet-based entrepreneursare grounded in strategic innovationpractices and have adopted modesof experimentation and flexibility thatenable them to fundamentally alter thedesign, distribution, and sales of goodsand services (Lumpkin and Dess 2004;Amor 2000). As such, constant innova-tion, or creative destruction, propelledby the advent and diffusion of new tech-nology as well as increasingly demand-ing customers, has become a nontrivialimperative for Internet-based entrepre-neurial firms (D’Aveni 1994).

Indeed, e-commerce technology canoften assist businesses in building newstrategies that add value to newventures through the development of

new markets, opportunities, and rela-tionships. A variety of business modelshave proven to be effective for the saleof goods and services over the Web, suchas auctions, transaction brokers, andvarious subscription models. Companieshave been successful offering productsfor sale directly from the business to theconsumer (B2C), as well as selling prod-ucts directly to another business (B2B)through various forms of Internet-basedplatforms and channels. Innovation ine-commerce continues at fast paceunabatedly (Lumpkin and Dess 2004).

Many of the problems entrepreneurialfirms experienced with e-commerceoperations may be attributed to a lack offundamental frameworks, principles, andguidelines to help them direct thedecision-making processes in this drasti-

Table 2Test of Hypotheses: Individual Relationships and Mediated

Model Analyses

Hypothesis Relationships StandardizedLisrel Estimate

H1 Resource stock→External opportunity-recognizingintegrative capabilities

0.38*

H2 Resource stock→Internal opportunity-capitalizingintegrative capabilities

0.30*

H3 Resource stock→Firm Innovation 0.14H4 External opportunity-recognizing integrative

capabilities→Internal opportunity-capitalizingintegrative capabilities

0.36*

H5a External opportunity-recognizing integrativecapabilities→Firm Innovation

0.72*

H6a Internal opportunity-capitalizing integrativecapabilities→Firm Innovation

0.20*

H5b Test of Mediation = Model omitting relationship:Resource stock →Firm

c2(1)Difference

= 2.41, p = nsH6b Innovation = c2(72) = 90.52, p = .06904,RMSEA = 0.047, IFI, CFI = 0.97, GFI = 0.90,NNFI = 0.96; RMR = 0.050

*alpha < 0.1.

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cally dynamic and always hypercompeti-tive business environment (D’Aveni1994). Using more formalized academicresearch methods, this study hasattempted to provide a closer look at thecase of the Internet-based entrepreneur-ial firm, and examine the influence of itsresource stock and dynamic capabilitieson its innovation. This paper provides aconsistent framework for Internet-basedentrepreneurs, further demonstratingthat the dynamic process of innovationcan indeed be managed through thedevelopment and exercise of certaindynamic capabilities.

The empirical results from the modeltested in this study, based on responsesfrom 120 entrepreneurs of e-commercefirms, demonstrated that the firm’sresource endowment, for example, tech-nology infrastructure, serves an impor-tant antecedent to the firm’s innovationin product and service offering andbusiness process. This investigationmay provide insight as to which factorsare potentially more important indetermining how e-entrepreneurshipscan implement e-commerce techno-logies successfully to achieve greaterinnovations.

The environment in which Internet-based entrepreneurship exists is a chal-lenging one. The Internet environment ischaracterized by high-velocity marketsand rapid technological changes(Lumpkin and Dess 2004). To compete inthis environment, Internet-based firmsneed to continually build, adapt andreconfigure their resources and capabili-ties to achieve congruence with thechanging business environments. Priorstudies taking a resource-based viewbring a more systematic approach tofirm-level analysis and claim resources asa determining factor to firm innovationand performance (Barney 1996, 1991).They attribute the differences in innova-tion and performance to firms’ resourcedifferentials instead of market positions(cf. Barney 1991; Rumelt 1987, 1984;

Wernerfelt 1984). Accordingly, firms notmerely compete on new products or ser-vices, but rather on a deeper-level factor,that is, the unique resources and capa-bilities underlying the firm’s productmarket activities (Barney 1991; Prahaladand Hamel 1990; Selznick 1957).However, the resource-based view ofinnovation falls short in addressing thedynamic processes of how the resourcesand capabilities within a firm get config-ured and deployed to exploit the chang-ing opportunity lines. As such, theresource and capability effect on firminnovation remains largely a black boxphenomenon. To aid in the untangling ofthe black box, the dynamic capabilityperspective proves a fitting tool anduseful mechanism.

Conforming to the dynamic capabilitymotivated arguments, our findings (espe-cially from the mediation model) suggestthat resources and capabilities are impor-tant, but only to a certain extent. Moreimportant often are the integrative capa-bilities needed to mobilize and utilizethese resources and capabilities. That is,firm innovation does not only depend onthe endowment and munificence of itsresource base, but also, more impor-tantly, depends on its ability to creativelydeploy and utilize them. The primaryconstraint preventing these firms fromgrowing through innovation is not thelack of resources as suggested by theresource based theory, but the lack oforganizational integrative capabilities,for example, routines for integratingexternal knowledge and identifying busi-ness opportunities.

Our sample of Internet-based firmsdemonstrates that dynamic capabilities,integrative capabilities in particular,which allow the firm to continually build,renew, and reconfigure its resource stockand competence pool, are instrumentalfor the firm’s innovation practice andperformance. Such integrative capabili-ties exemplify the essential characteris-tics of dynamic capabilities as they

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engage routines, extant and emergentknowledge, as well as integrative andanalytic processes to create customervalue through innovation (cf., Teece2007; Teece, Pisano, and Shuen 1997).While our empirical study addresses theeffect of dynamic capability on firm’sinnovation in the Internet-firm settingwhere the Schumpeterian nature ofcompetition accentuates the need fordynamic capability, we suspect that ourresults and insights gained from thisstudy might also bear implications forother firms in general. However, we haveno intention to over extend this study’sgeneralizability to unwarranted settings,for example, the much more determinis-tic Porterian world.

Our study has a number of limitationsthat may assist us in generating newopportunities and agendas for futureresearch. While we conducted tests forcommon method bias, it would be inter-esting to bring in alternative perspectivesfrom multiple stakeholders (senior-levelmanagers, employees, suppliers, etc.) inthe organization. A “deep dive” into theirviewpoints in how the firm continuallybuilds, adapts and reconfigures theirinternal and external competence toachieve congruence with the changingbusiness environments would give usfurther insight into the dynamic capabili-ties modeling and approach. More of asystematic approach at multiple levels ofthe firm may tell us that firms do notcompete on new products or services,but rather on a deeper factor—the capac-ity to develop new product or service(Prahalad and Hamel 1990) for theirfirms and the economic growth of thecommunities they serve.

An additional limitation was thatour study was cross-sectional, yet thehypothesized model and relationshipssuggests causal direction. Causal infer-ences created from cross-sectionaldesigns are only inferences. Futureresearch should examine many of thesame relationships in our study with lon-

gitudinal data to assess causality. In fact,this type of data collection along with acase study approach may give us addi-tional perspective in how capabilitiesand innovation occurs throughout thelife cycle and strategy of the Internet-based firm. For example, several Internetcase studies have been developed thathave begun to test the interaction of thefunctional-level strategies in the organi-zation. For example, Kaplan andSawhney (2000) examine B2B hubs interms of what and how businessesmanage their purchasing processes andidentify four types of B2B exchangestrategies. De Figueiredo (2000) providesa conceptual mapping of marketing char-acteristics onto operating characteristicsto identify four promising e-commercestrategies. Feeny (2001) utilizes elementsof De Figueiredo’s (2000) model to delvedeeper into the nuances of matchingoperations and marketing strategiesfor e-commerce. While all of theseapproaches make intuitive sense andbegin to provide useful frameworks foreffective utilization of e-commerce, atthis point they remain firmly in thetheory-building stage based on a rela-tively loose collection of qualitative data.

ConclusionsE-commerce and entrepreneurship in

Internet-based firms are emerging andgrowing concerns for scholars in bothentrepreneurship and strategic manage-ment. How Internet-based firms evolve ine-commerce and what determine theirperformance and survival have attracted agreat deal of attention from both research-ers and practitioners alike. This study hassought to contribute to this nascent fieldof research, by helping to sharpen ourunderstanding of the entrepreneurial pro-cesses and outcomes that appear to makea difference in achieving organizationaleffectiveness and firm growth.

We focus on firm innovation as themajor dependent variable in our investi-gation. The reasons for this are multifold.

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First, in the long run, innovation is theonly way to sustain a firm’s competitiveadvantage (D’Aveni 1994; Rumelt 1984;Schumpeter 1938). Constant innovationhelp a firm jump to and survive multiplerounds of technological trajectoriesand industry evolution. Second, ine-commerce, where firms face hypercom-petition and Schumpeterian shocks occurrather frequently and only the paranoidsurvive, it is especially imperative for thefirm to be vigilant and innovative, so asto avoid competitive lockout or evenextinction.

In examining the determinants offirm innovation, we resort to both theresource-based view of the firm (Barney1991; Rumelt 1987, 1984; Wernerfelt1984) and the dynamic capabilityapproach (Teece, Pisano, and Shuen1997; Teece and Pisano 1994). Althoughthe firm’s innovative practice is closelyassociated with its resource endowment,its effectiveness is linked to thefirm’s ability to constantly mobilizing itsresources and capabilities to match thechanging opportunities. We posit thatboth the firm’s resource stock and inte-grative capabilities affect firm innova-tion. Building primarily on the dynamiccapability perspective, we further positthat the effect of resource stock on inno-vation is mediated by the firm’s integra-tive capability.

More specifically, when examiningfirm innovation, resource stock is neces-sary but not sufficient. What is essentialand of paramount importance for firmsto engage in innovation is their capabil-ity to utilize and transform such resourcestock into productive use throughout theentrepreneurial firm. Integrative capabil-ity, a representative and essential type ofdynamic capability, helps a firm recon-figure and redeploy its resource stock toexploit environmental opportunities andmaintain a dynamic fit between its inter-nal working and its external environment(Learned et al. 1965). In keeping fitwith the changing environment, the

firm is bound to experiment, adapt, andinnovate.

In hypercompetitive environments,resource mobility is typically high andunique resources and capabilities diffi-cult to sustain. It is therefore unlikely forInternet-based entrepreneurial firms tobuild deep pockets or any of those longlasting resource advantages typicallyenjoyed by monopolistic firms in estab-lished markets where margins for errorare high and resource uniqueness per sewill carry the firm through for quite along period of time (cf. Rumelt 1984).As such, it is especially important forthese Internet-based entrepreneur firmsto possess integrative capabilities. Suchintegrative capabilities gain addedimportance precisely because they couldhelp the firm leverage and mobilize itsexisting stock of resources and capabili-ties, however meager or munificent, andmaximize its potential to the fullest in theright market opportunities.

In extending the dynamic capabilityperspective into the entrepreneurship lit-erature, we empirically examined theeffect of resource stock and integrativecapability on firm innovation in thesetting of Internet-based entrepreneurialfirms. Our empirical results seem tosupport our arguments. In our investiga-tion in the e-entrepreneurship context,measures of resource stock, integrativecapabilities, innovation, and othercontrol variables are grounded solidly inprior scholarly work in both the main-stream strategy and entrepreneurshipliterature. It is anticipated thatthis application of measures validated inextant studies will more deeply informfuture research by enabling comparisonsamong e-entrepreneurships, includingsamples of firms that combine click-and-mortar with brick-and-mortar channels,and even among e-businesses utilizingdifferent levels and types of technology.

By examining and further refiningmodels of e-entrepreneurship in terms ofinnovation and growth, researchers will

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be able to capture a more completeassessment of an e-entrepreneur’s inno-vative practices and outcomes from animmediate and/or long-term perspective.For example, while the financial benefitsof implementing new methods of adver-tising or promoting a product or serviceon the Internet may not be readilyvisible, such innovations may give thebusiness a sustainable competitiveadvantage in building brand loyalty andcustomer satisfaction. Over a period oftime, however, these innovations maylead to positive financial rewards andbenefits for all involved stakeholders inthe Internet firm. Or, a firm may leverageits capability in clearly and preciselyidentifying and locating valuable custom-ers (Ma 2004). This way, it could useits limited advertising dollars wisely tofocus on the market opportunities thatare most fruitful and rewarding.

Several Internet case studies have beendeveloped that have begun to test theinteraction of the different resources andcapabilities of entrepreneurial firms. Forexample, Kaplan and Sawhney (2000)examine B2B hubs in terms of what andhow businesses manage their purchasingprocesses and identify four types ofB2B exchange strategies. De Figueiredo(2000) provides a conceptual mapping ofmarketing characteristics onto operatingcharacteristics to identify four promisinge-commerce strategies. Feeny (2001) uti-lizes elements of De Figueiredo’s (2000)model to delve deeper into the nuances ofmatching operations and marketing strat-egies for e-commerce. Though all of theseapproaches make intuitive sense andbegin to provide useful frameworks foreffective utilization of e-commerce, at thispoint they remain firmly in the theorybuilding stage based on a relatively loosecollection of qualitative data.

In the attempt to utilize e-commercetechnology to more effectively recognizemarket opportunities and then bringabout subsequent innovation in businesspractice, several challenges confront

entrepreneurs. Perhaps the economicdownturn seen in the past years hascreated an even greater set of difficultiesto overcome in this arena. One of thesechallenges is the slowed spending anddecreases in the availability of outsidecapital to fund and grow the firm. This inturn may impact the ability of thee-entrepreneur to capitalize on newopportunities available, and researchshould examine the influence ofresources on the formation andimplementation of innovative strategies,and overall effectiveness of e-entrepreneurship business models asthis dynamic environment continues toevolve.

Within an entrepreneurial organiza-tion, the adoption of new technology toincrease competitive advantage has beenhindered by issues surrounding potentialcosts, risks of failure, and an inherentlack of innovative awareness (Maxwelland Westerfield 2002). By analyzing thebenefits, as has been attempted in thisstudy, many of these issues are out-weighed by the diversity of oppor-tunities, process innovations, firmeffectiveness, and growth. With thealignment of information and computertechnology, knowledge, and resources,successful entrepreneurs can furtherseek out and act upon the demands ofthe market, differentiating themselvesthrough customer management, relation-ship marketing, and community build-ing. By exploring and incorporating newtechnology within their business models,entrepreneurs can leverage the informa-tion and experience they already haveand deftly apply new intelligence andknowledge within the framework andstructure of their firms. This, no doubt,calls for the nurturing and utilization ofdynamic capabilities.

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