resources of the firm, russian high-technology startups, and firm growth

Resources of the firm, Russian high-technology startups,

and firm growth

Garry D. Brutona,*, Yuri Rubanikb

aDepartment of Management, M.J. Neeley School of Business, Texas Christian University,

Fort Worth, TX 76129, USAbQuality Laboratory, Moscow Federal Institute of Electronic Technology, Moscow, Russia

Received 1 November 1998; third revision received 1 February 2001; accepted 1 February 2001

Abstract

Russia possessed many world-class technologies prior to the break up of the Soviet Union.

Entrepreneurial endeavors resulted from this technological ability as market forces encouraged

individuals to leave the large state enterprises that produced those technologies. Founding

characteristics of the firm impact the resources that are available to the startup firm. This study

investigates the extent to which founding factors in Russia help high-technology firms to prosper. It

was found that the team establishing the business mitigated the liability of newness. However, in

contrast to the US, the culture of Russia does not produce negative results if the founding team grows

very large. Additionally, it was shown that firms that pursued more technological products and enter

the market later performed best.

D 2002 Elsevier Science Inc. All rights reserved.

Keywords: Russia; High-technology entrepreneurship; Liability of newness; Emerging markets; Resource theory

1. Executive summary

Firms can be viewed as composites of various resources. In stable economies, it has been

argued that young firms do not do as well as more mature firms. The underlying reason for

such a liability of newness is the limited resources available to young firms. This emphasis on

0883-9026/02/$ – see front matter D 2002 Elsevier Science Inc. All rights reserved.

PII: S0883 -9026 (01 )00079 -9

* Corresponding author. Tel.: +1-817-257-7421; fax: +1-817-257-7227.

E-mail address: [email protected] (G.D. Bruton).

Journal of Business Venturing 17 (2002) 553–576

resources is supported in the entrepreneurship literature, which records that a principal cause

of high-technology firm failure is a lack of financial resources. However, Eisenhardt and

Schoonhoven (1990) argued that liability of newness of young high-technology firms could

be mitigated by the nature of the firm’s founding characteristics. Particularly, the character-

istics of the founding team, the innovativeness of the firm’s product(s), and the firm’s position

as a first mover can mitigate the liability of newness since these characteristics impact the

accessibility of resources.

Prior to its economic transition, Russia produced many world-class technological products.

Many of those individuals who left the technology-based state companies and research

laboratories have gone on to found their own high-technology-based new ventures. But, in

general, Russia’s transition to a market economy has been tumultuous. For example, the

monetary system of the country reflected an exchange rate for the ruble of 35 per US dollar in

April 1991 and this expanded to upwards of 26,000 per US dollar during November 1999 (in

nonredenominated terms). Additionally, the industrial output of the country has been

continuously falling since economic liberalization began. If Russia is to be a constructive

member of the world economy, it is critical that its high-technology entrepreneurs succeed.

This research found that the size of the team establishing the business can mitigate the

liability of newness in Russia. The larger the team, the greater the financial resources that can

be generated and the easier it is to accomplish the myriad administrative tasks associated with

starting a high-technology venture since there are more individuals available to do the work.

Additionally, it was found that the greater the technological innovativeness, the better the

performance of the startup. However, due to the limited resources available to high-

technology startups in a transitional economy such as Russia, later entrants perform better

than do earlier entrants. In a transitional economy, many resources that first movers can

obtain, such as dominance of distribution channels, can be illusionary and disappear over

time. Thus, before moving into a market in such settings, it is important that firms ensure that

the role and strength of various resources have been established before entrepreneurial firms

seek to control them.

The implications for Russian high-technology policymakers and entrepreneurs from these

findings are significant. Entrepreneurship in Russia offers a significant means for the

economy to reverse its decline. The mean increase in employment among the 45 firms

examined was 239%. Thus, the evidence presented here is that entrepreneurial startups have

the potential to provide significant employment opportunities for the nation. Additionally, for

entrepreneurs, it clearly signals that they can increase their chances of success by ensuring

certain characteristics are present as they establish their firm. High-technology entrepreneurs

in Russia would be well served by focusing their resources on building large founding teams,

seeking to ensure they have an innovative product, and building their competitive resources.

2. Introduction

The resource theory of the firm has gained increasing usage in the management literature

(Hoskisson et al., 1999). However, there has been only limited investigation of the theory in

G.D. Bruton, Y. Rubanik / Journal of Business Venturing 17 (2002) 553–576554

transitional economies (Javenpaa and Leidner, 1998). There is an increasing recognition that

research from nations with stable economic environments does not necessarily generalize to

those whose economies are transitioning from command to free market orientation (Boya-

cigiller and Adler, 1991). That nations with transitional economies are characterized by a high

degree of change and turbulence can be seen through the frequent legal and regulatory

changes, the level of currency-exchange fluctuations, and the uncertain position of private

enterprise in the political framework (Ahlstrom and Bruton, 2000). These environmental

characteristics may change which resources are valuable to a firm or how such resources are

gathered and employed.

Additionally, to date, the explicit usage of resource theory of the firm in the entrepreneurship

literature has also been limited. Its implicit usage is evident in the recognition of the ‘‘liability of

newness’’ or the fact that young firms have a greater propensity not to prosper (Stinchecombe,

1965). Such young firms have an absence of established relationships, roles, and routines, such

external and internal interconnections being critical resources of the firm (Pfeffer and Salancik,

1978). The absence of relationships, roles, and routines increase the financial pressure at a time

when new businesses have limited resources available (Eisenhardt and Schoonhoven, 1990).

The liability of newness has received support from the examination of a wide variety of or-

ganizations in stable economies (i.e., Freeman et al., 1983; Li and Guisinger, 1991).

Therefore, there is a need to investigate the resource theory of the firm as it relates to both

transitional economies and entrepreneurship. The role of resources in entrepreneurial firm

success is expected to be clearest in entrepreneurial ventures, which have high growth

potential as compared to small business ventures that require fewer resources. High-

technology ventures are prime examples of such high growth potential ventures and will

be the focus of this research. The Russian economy, prior to economic liberalization, was

particularly strong in high-technology domains (Machlis, 1994). Therefore, this research will

focus on high-technology firms in Russia.

Eisenhardt and Schoonhoven (1990) argued that the success (growth) of young high-

technology firms could be increased by the nature of the founding characteristics of the firm.

Thus, this research focuses on high-technology startups in Russia and the ability of founding

characteristics to mitigate the liability of newness (encourage firms to prosper or grow). The

ability to better understand the role of resources in such settings will not only aid in the

development of the theory but also aid in the understanding of how to help high-growth firms

prosper in such environments.

3. Conceptual foundations

3.1. Background on startup firms in Russia

Since 1990, economic changes in Russia have resulted in the development of a large

number of entrepreneurial firms as individuals leave large state enterprises to start their

own businesses (Ageev et al., 1995; McCarthy et al., 1993). While there is no estimate

of how many of these firms are high-technology firms, it is known that prior to its

G.D. Bruton, Y. Rubanik / Journal of Business Venturing 17 (2002) 553–576 555

economic transition, Russia was a producer of many world-class technological products

(Machlis, 1994; The Economist, 1997). Many of those individuals who left the

technology-based state businesses and research labs have gone on to found their own

technology-based ventures.

Russia’s transition to a market economy has resulted in a tumultuous environment for

business (Snavely et al., 1998; Kuznetsov et al., 2000). For example, the monetary system

of the country reflected an exchange rate for the ruble of 35 per US dollar in April 1991

and this expanded to the equivalent of 26,000 per US dollar by 1999.1 During this same

time, the industrial output of the country has fallen an estimated 45% (The Economist,

1999). The laws of the country remain in a continual state of flux. Frequent changes in

the laws drive many Western firms to limit their exposure in Russia. For example, in

1996, IBM exited one of the only high-technology alliances between a Russian firm and a

major international high-technology firm due to unexpected changes in the tax laws of the

country (Bruton and Samiee, 1998). Similarly, the protection of technological ideas

through patent protection remain of limited practicality for Russian firms (Bruton and

Rubanik, 1997a).

The environment for a startup business is even more difficult than for an established firm

such as IBM. Financial constraints often limit the growth of new firms in mature economies

(Eisenhardt and Schoonhoven, 1990). In Russia, such financial constraints, particularly for

high-technology firms, are heightened since the funding mechanisms for new firms are at best

rudimentary and at worst nonexistent (Bruton and Rubanik, 1997a; Kuznetsov et al., 2000).

For example, for practical purposes, the venture capital industry does not exist within Russia

at present (Barton and Shaheen, 1995; Kuznetsov et al., 2000). Similarly, the banking

segment of Russia remains in great fluctuation and its lending to new startup businesses is

very limited (Shleifer, 1997; Kontorovich, 1999). The interest rate for the best (prime) short-

term lending relationships in Russia is 28% (The Economist, 2000) and the rate for high-risk,

high-technology startups is even higher when funding is available. The result of these

difficulties is that Russian firms often use trade credit as an alternative to bank loans (Cook,

1999). But, even such trade credits, while available to small firms, are very limited for new

startup firms.

Thus, the environment of a transitional nation, particularly for a young high-technology

startup firm, is different from that of a stable environment such as the US. It has been

argued that firms in very turbulent environments have different strategic needs from that

of firms in stable environments (Ansoff and Sullivan, 1993). It is reasonable to question

whether theoretical predictions based on the findings from a stable environment like the

US are applicable to this environment. The impact of such environmental differences have

been recognized by resource-based theorists who have argued that if ‘‘opportunities and

threats of a firm change in a rapid and unpredictable manner’’ (typical of a transitional

economy), firms may not be able to maintain a resource-based competitive advantage

(Barney, 1997).

1 The Russian government redenominated money in 1998, removing three 0’s from the end of all bills. So,

what were 26,000 rubles in 1997 were 26 rubles in 1998.


3.2. Resource theory and liability of newness

In new firms, Penrose (1959) recognized that the absence of given resources could limit

the growth of that firm while the presence of given resources could promote growth in such

firms. Particular focus has been given to the role of financial resources in the success of the

startup firm. For example, Martin and Justis (1993) argued that access to capital was one of

the most critical resources for the success of new firms. More specifically, Bruno et al. (1986)

argued that the principal cause of high-technology firm failure was the lack of financial

resources. Thus, resource theory recognizes that the configuration of a startup firm’s

resources can have a critical impact on the firm’s ability to prosper with financial resources

being particularly important; financial resources reflect the firm’s tangible resources (Wer-

nerfelt, 1984).

Stinchecombe (1965) also recognized that resources for new firms were critical but from a

sociological point of view. He argued that young firms have a greater propensity to fail than

do more mature organizations principally because they have not established relationships

with suppliers and customers or established roles and routines within the firm. The absence of

these items places the firm’s financial resources under pressure (Eisenhardt and Schoon-

hoven, 1990). This leads to a ‘‘liability of newness’’ for startup firms. There has been strong

support for the liability of newness theory in stable environments (i.e., Freeman et al., 1983;

Li and Guisinger, 1991).2

The liability of newness has often been connected with firm failure. However, it should be

noted the term today is typically associated with a broader meaning that more accurately

implies the inability of a new firm to prosper. For example, Eisenhardt and Schoonhoven

(1990) studied the ‘‘growth’’ of new firms when examining the liability of newness. Thus,

both resource theory and the literature on the liability of newness recognize that resources are

critical to firm growth.

The question that arises naturally from the recognition that resources are critical to the

firm’s ability to prosper is how firms can mitigate the negative effect of their absence.

Resource theory of the firm has not examined this issue extensively. However, in the literature

on liability of newness, Eisenhardt and Schoonhoven (1990) discovered that the nature of the

founding team and the nature of the market in which the firm competed could mitigate the

liability of newness. Their findings are built on the rationale that these given founding

characteristics help the new firm overcome shortages in resources that might be present.

3.3. Transitional environments

The application of resource theory of the firm to settings outside of the US has received

only limited investigation (Javenpaa and Leidner, 1998). Such research has focused on how

knowledge-based resources are developed through the firm’s past history and current

2 There have been some studies that have called into question the efficacy of the liability of newness. For

example, Carroll and Huo (1986), Singh et al. (1986), and Staber (1989) did not find support for the liability of

newness. But, each of these findings were based on nonprofit activities and did not examine for-profit businesses.


market position to develop dynamic resources (Teece et al., 1997). However, for startup

firms in general and high-technology firms in transitional economies in particular, financial

constraints are the most pressing resource concern and prior research has yet to investigate

this concern.

The literature argues that the pressures associated with the liability of newness are

particularly severe in situations where an industry is in a formative period (Aldrich and

Fiol, 1994). The transitional nature of the Russian environment results in entrepreneurial

firms being a new form of business, which is not widely understood or supported in Russia.

This absence of understanding is demonstrated in the punitive registration documentation and

taxes required of even the smallest new venture in Russia (Kontorovich, 1999). The

registration documentation and taxes are often more severe than those required of large

mature businesses in Russia. This lack of understanding and support for new ventures

supports the belief that all entrepreneurial firms in Russia are in a formative stage and thus

under pressures that will make the liability of newness particularly severe. But, whether such

severity can then be mitigated by the nature of the founding team is unclear.

Prior efforts to examine the liability of newness outside the US have been limited. But, one

of the few studies that did, in an environment only slightly less stable than the US, raised

questions about the universal applicability of the theory (Bruderl and Schussler, 1990).

However, the results do bring into question, as Hofstede (1993) argues, whether management

theories are culturally and situationally bound.

3.4. Founding characteristics

Prior research on the liability of newness found that in a stable environment such as the

US, the liability of newness can be mitigated by the characteristics of the firm at its founding

(Eisenhardt and Schoonhoven, 1990). These resources act to mitigate the impact of the drain

on firm financial resources, which come from the firm’s newness. Specifically, three

characteristics at the startup at founding are of concern here: nature of the founding team,

the technological innovativeness of the firm’s product, and timing of entry into market.

3.4.1. Team size

There is empirical support for the research founding team idea that is able to mitigate the

impact of the liability of newness in the West (i.e., Eisenhardt and Bourgeois, 1988;

Eisenhardt and Schoonhoven, 1990). The benefits of larger teams include shared prior work

experience or shared common industry background that can overcome part of the costs that

arise due to the difficulties in building a new social structure. Larger teams also bring greater

resources to the new firm, which can offset the lack of access to financial resources (Roberts,

1991). Larger numbers of people in founding teams also ensure that organizational resources

are available to accomplish the numerous necessary activities associated with a high-

technology firm startup (Roberts, 1991). Most studies have discovered that firms founded

by larger teams do better due to the extra resources they bring to the founding (Cooper and

Gimeno-Gascon, 1992). However, it has also been shown that large founding teams can also

increase the complications in communication and decision-making (Kamm et al., 1989).


In Russia, there are fewer potential negatives associated with making the founding team

too large. The founding of almost all high-technology startup firms occurs in Russia when a

group of researchers leave an established research facility (Bruton and Rubanik, 1997a).

These individuals leave the facility as a team and found the business after working together

for a number of years. There is a strong emphasis in the Russian culture on relationships

developed when conducting business (Holt et al., 1994; Puffer, 1994). Thus, the founding

team, no matter how large, has worked closely with each other for years. This familiarity

and heterogeneity of experiences lead to improved communication and understanding

among participants.

Additionally, the term ‘‘team’’ often implies group decision-making in the US, but this is

not what typically occurs in Russia. Instead, while the nation’s collectivist culture results in

individuals clearly identifying themselves with the group, decision making remains hier-

archical (Elenkov, 1997, 1998; McCarthy et al., 1997). The result is that the lead

entrepreneur typically makes all of the key decisions (Elenkov, 1997). Similar results have

been found in other transitional economies with collectivist cultures (Yates and Lee, 1996).

Thus, the potential negatives that might arise from a larger team in the West would not be

expected in Russia.

However, larger teams do impact the financial resources available to the high-technology

startup in a transitional economy. As discussed previously, the ability of a new high-

technology startup business to prosper is closely tied to financial resources (Bruno et al.,

1986). In Russia, there are virtually no funds available to a high-technology startup firm

except those that are internally generated. The more individuals involved in the founding

team, the greater the capital resources that can be gathered.

Hypothesis 1: A positive relationship is expected between the number of founding team

members and the growth of high-technology startups in Russia.

3.4.2. Product innovativeness

Eisenhardt and Schoonhoven (1990) argue that the most relevant characteristic of a startup

firm when evaluating the liability of newness is the firm’s technical innovativeness. Technical

innovativeness is important since it impacts the resources of the firm including financial

resources (Romanelli, 1989). Innovative products can provide a competitive advantage to a

firm, but the greater the innovativeness of the technology, the greater the consumption of

resources since it requires high levels of competence in basic science and resources to

promote the new technology (Maidique and Patch, 1982). The resources to promote the

product are important since they ensure that the product’s innovativeness is accurately

perceived (Link, 1987).

Eisenhardt and Schoonhoven (1990) proposed that moderate levels of technological

innovativeness would be the most successful in promoting the growth of a high-technology

firm. However, they found no initial support for this hypothesis. Rather, they found that

less innovative strategies were beneficial in promoting the early growth of high-technology

firm. As stressed previously, the critical factor for a high-technology firm in a transitional

economy such as Russia’s is financial resources. Because a strategy that employs a unique


or differentiated technology is more expensive to develop and promote, this strategy will be

less successful for Russian entrepreneurs to pursue. While the startup firm may produce an

excellent technological breakthrough product, resources may not be available to fully

develop and promote the product. Therefore, in a manner consistent with Eisenhardt and

Schoonhoven’s (1990) findings in a stable environment, it is expected that the most

successful means to mitigate the impact of firm newness in Russia is not to emphasize

technological innovativeness.

Hypothesis 2: A negative relationship is expected between a high-technology startup

firm’s technological innovativeness and its growth in Russia.

3.4.3. Market entry

Firms also have the ability to make the strategic choice on whether they wish to enter the

market first, follow quickly after those firms first into the market have begun to establish the

market and its rules of competition, or enter the market once the market and its rules of

competition are clearly established; these respective strategic approaches to the market are

commonly referred to as first mover, early followers, and late followers. There are well-

recognized benefits to being a first mover in a new product market for high-technology firms

(Li and Guisinger, 1991). For example, the recent evidence from stable economies is that the

earlier the market entry, the more positive the impact on firm performance (Manu and Sriram,

1996; Szymanski et al., 1995). First movers have the benefit of preempting the acquisition of

resources (Lieberman and Montgomery, 1988). These resources can include geographic

resources (locations), technological resources (patents), or customer perceptions (Lieberman

and Montgomery, 1998). Firms can use such resources to build market share as they seek to

gain economies of scale and gain customer loyalty (Lieberman and Montgomery, 1988;

Szymanski et al., 1995).

However, first movers may miss the best opportunities and focus on obtaining the wrong

resources (Lieberman and Montgomery, 1998). Followers, either early or late, can capitalize

on the mistakes of the first mover firm (Golder and Tellis, 1993). Later entrants to the market

could perform better since they require fewer resources to educate consumers about the

product or to develop the market potential for the product. In general, most research supports

the belief that for technology-based firms, the earlier the firm enters the market, the more

successful they will be (Li and Guisinger, 1991). However, Eisenhardt and Schoonhoven

(1990) found that the number of competitors in the market (indicating in part when the firm

entered the market) did not impact firm growth.

To date, the impact of the timing of market entry on firm success in international settings

has yet to be significantly investigated. However, Lieberman and Montgomery (1998) argued

for a greater investigation of the (dis)advantages of first movers in international settings. In

such an exploratory domain, there is conflicting rationale on what to expect. For example, the

impact of being a first mover may be even more substantial in transitional Russia than in

stable environments (Lieberman and Montgomery, 1998). The benefits of capturing resources

in a transitional economy like Russia’s are even greater since resources may be even scarcer

than in an economy such as the US (Mascarenhas, 1992a,b). For example, obtaining


dominance of a resource such as distribution channels may have a greater impact since

distribution channels are more limited internationally. Thus, the benefit to early entrants is

even more dynamic in international settings.

However, firms may not benefit from being early movers in a transitional economy, which

is fragmented (such as Russia), because resources that could be obtained by a first mover are

not stable (Nakata and Sivakumar, 1997). Thus, obtaining first mover advantage in resources

such as distribution channel can be illusionary because the distribution channels are under-

going so much change that those obtained now may be replaced soon. Additionally, if the

startup does obtain the wrong resources in its first mover efforts, the effects will be more

serious in a resource-limited environment such as Russia.

Hypothesis 3: A positive relationship is expected between high-technology startup

firms, which enter a market early, and their growth in the Russian market.

4. Research method

4.1. Data collection

Data collection in Russia presents many unique and challenging problems. Most prevalent

is the desire of business people for secrecy. Several issues feed a concern about releasing

data. The tax rate for businesses in Russia can approach 70% (Khartukov, 1996). Tax

officials are paid a bonus for finding business people who have not fully paid their tax

assessment, whether underpayment occurred intentionally or not. Thus, releasing any data

that somehow shows that the business should be reporting more income than it does can

place the business person in a difficult situation. Combined with the concerns about taxes are

concerns about the Mafia. The Russian Mafia is already active in the general business

community (Zimmerman and Cooperman, 1995). It is common for an established business to

pay part of its income to the Mafia. However, a startup business may not have come to the

attention of the Mafia, and as a result, high-technology Russian business people are hesitant

to release any data to outside sources.

The gathering of data is further limited by the fact that many traditional means of data

collection are unfamiliar to Russian business people. Methods such as mail or telephone

surveys are largely unknown in Russia and are not well received. This resulted in the

most effective means of data collection for this research being structured interviews

(Filafotchev et al., 1996; Issac and Michael, 1984; Buckley et al., 1976). However, this

methodology requires that access and cooperation be granted to the interviewer. Thus, in

Russia, unless some sort of connection previously exists or an introduction can be made

by someone who has such a connection, it is very unlikely that business people in Russia

will consent to an interview.

For this study, an individual associated with the Moscow Federal Institute of Electronic

Technology (MIET) was utilized to gather the survey data through personal interviews with

participants. This institute was the leading university in the Soviet Union for microelectronic


technology. MIET graduates are historically the leaders and researchers at the nation’s

premier semiconductor, computer, and electronics firms. Thus, an interviewer associated with

the university brings recognized credibility. In addition, this research occurred in Zelenograd,

Russia, the once top-secret center of the Soviet Union’s microelectronic effort and home of

MIET (Port and Galuszka, 1996). Prior to the breakup of the Soviet Union, the economic

focus of the entire city of approximately 200,000 people was high technology.3 There is

a significant relationship between the University and most high-technology business activity

in the city.

The survey was initially formulated jointly in English by the American and Russian

authors. This survey was then translated into Russian by an individual not associated with the

research. The translation was then reexamined for accuracy by the Russian researcher and

then back translated to verify the translation by one other individual not associated with the

research. This survey instrument was pretested on a single high-technology startup firm and

appropriate changes were made in the instrument by the authors.

The individual from MIET who conducted the interviews to gather the survey data was

well known in the technological community. This individual was trained to conduct the

interviews through both verbal instruction and sample interview training sessions to ensure

that valid and reliable information was obtained.

4.2. Sample

The definition of what constitutes a high-technology firm has proven difficult for

researchers (McCarthy et al., 1987). Some researchers have defined a high-technology firm

in a quantitative manner by selecting firms spending some specified level of their budget on

research and development (Maidique and Hayes, 1984). Others have utilized a qualitative

measure such as the sophistication of the firm’s product (Riche et al., 1983). The reluctance of

Russian business people to provide financial data precludes the first option; therefore, this

research utilizes a variation of the latter method.

MIET has established an entity referred to as a ‘‘technological park’’ or ‘‘technopark.’’ The

use of the term ‘‘park’’ should not be confused with an incubator or research park in the US at

which all firms are in a given location. Rather, it is an organization, which provides services

to high-technology startup firms throughout Zelenograd. Some of the services are free, but

most services are provided for a fee. Items, which can be very hard for a startup firm in

Russia to gain access to such as fax machines, photocopying, legal services, strategic

planning, and design assistance, are provided. Due to the tremendous resource shortage in

Russia, particularly for startup firms, there are numerous applications to join the technopark.

However, the management of the technopark (which came from the academic staff of MIET)

focuses its efforts solely on high-technology firms; it is estimated that 75% have a micro-

3 Three of the six electronics firms in Russia chosen as ‘‘base enterprises’’ by the government on

which the national semiconductor industry is to be maintained were in Zelenograd (Andreyev, 1995) The

only microelectronics firm in Russia outside of Zelenograd of substantial size is the Svetlana Electronics

in St. Petersburg.


electronic focus (Zelenograd Scientific and Technological Park Report, 1995). Thus, they

supervise very closely which firms may join. As a result, it is believed that almost all high-

technology startup firms that are thought to exist in the area have chosen to participate with

the technological park in some manner. Additionally, while the chaos of the Russian economy

does not allow exact statistics on firms and their products to be available, it is believed by

government officials that these firms represent all of the known high-technology entrepren-

eurial startups with a microelectronic base in the Zelenograd area and a very high percentage

of such firms within Russia.

The 45 participants in the technopark with a microelectronic basis to their product were

utilized for the sample (see Bruton, 1997 for an in-depth review of technopark). The

participants had already been identified by the technopark’s management as high-technology

firms on the basis of their product. The researchers validated this designation by reviewing

the technological sophistication of each of the products of the park’s participating firms. This

review, particularly by the Russian coauthor whose academic training is on semiconductor

development and production quality, validated their designation as a high-technology firm in

each case. All 45 firms classified as high-technology startups through this process agreed to

participate in the research.

The principal founder of each firm was interviewed for this research. Such key informants

have proven to be accurate sources of data in the US (Brush and VanderWerf, 1992; Dess and

Robinson, 1984) and such single respondents have been utilized in prior US research

evaluating strategic concerns (Shortell and Zajac, 1990; Snow and Hrebiniak, 1980). The

use of such a single respondent would particularly be appropriate in Russia due to the

hierarchical nature of the decision-making process in a Russian firm (Elenkov, 1998). In such

situations, the principal founder of the firm is responsible for all key decisions, in much the

same way as Andrews (1971) described CEOs as the prime strategists in a business who

would have the most realistic understanding of their business.

The average age of the entrepreneurs interviewed was 41 years old, while the average

of the other founders of the firm was estimated by the principal founder to be 40 years

old. The principal founder and the other individuals in the founding team were

discovered to typically possess graduate technical degrees. The principal founder’s

education level was typically slightly higher than the other members of the team, with

a large number of the principal founders possessing the Russian equivalent of a PhD.

Prior to starting the firm, as expected, almost all members of the founding teams of the

high-technology firms worked together either immediately prior to starting the new firm

or in close proximity to founding the firm. In most cases, the lead founder of the high-

technology firm served a similar lead function at the prior employer, supervising the

other members of the founding team. The technology being produced by the startup firm

was reported as very similar to the prior employer’s technology. Additionally, as

expected, the principal founders almost always had no prior experience in areas such

as marketing and finance. Their employment and their experience prior to founding the

firm were focused on research and development and working in a large government-

related research institute. They estimated the average size of the government research

institutes they worked for to be 2600 employees. Prior to economic liberalization, of the


200,000 individuals living in Zelenograd, approximately one-quarter would have been

employed in such research institutions.

4.3. Variable definition

4.3.1. Performance

Russian entrepreneurs typically refuse to release accurate direct financial data, as do all

business people in Russia (Puffer and McCarthy, 1995). Thus, measures such as profit, value

of products shipped, or sales could not accurately be determined for a large sample of firms.

Instead, a commonly used measure of new venture performance, growth in firm employment,

was used (McDougall and Oviatt, 1996). Growth was also used by Eisenhardt and

Schoonhoven (1990) when they examined the liability of newness in high-technology firms

in the Silicon Valley.

Growth in employment indicates that a new venture’s sales are increasing (Brush and

VanderWerf, 1992). A similar impact can be assumed in Russia. Once a firm employs an

individual in Russia, the individual has certain protection under the law, and dismissal at will

is typically not possible even in an economic downturn. Additionally, the firm must begin to

contribute to various government funds for certain items including the employee’s retirement.

Thus, firms are unwilling to hire an individual unless they have a strong need for the person

and can generate the cash flow to support the person’s employment. This is particularly true

for the startup new venture, which has very limited resources. Therefore, the growth in

employment of the Russian startup firm is an indication that the firm’s sales are also growing;

sales growth has previously been used to determine the impact of mitigating factors of the

liability of newness (Eisenhardt and Schoonhoven, 1990).

The dependent variable in this study is the annual percentage growth in employment for

the firm. All of the firms interviewed were started since 1990 and are at least 1 year old. The

annual percentage growth in employment was determined by calculating total percentage

growth in firm employment over the life of the new venture divided by the number of years

the firm had been in existence. The correlation between the performance measure and the age

of the firm was examined and found to be nonsignificant.4

4.3.2. Independent variable: founding team

Previous research has defined the founding team in various ways with some researchers

not even clearly defining, apparently assuming it is self-evident (Doutriaux, 1992). Others

have defined the founding team as individuals who occupied an executive position in the firm

when it began (Eisenhardt and Schoonhoven, 1990). Alternatively, some have defined it as

4 To validate this measure, the researchers met with five of the entrepreneurs who were willing to discuss their

financial performance to a greater extent, although they still would not give exact numbers. These individuals were

asked initially to answer two qualitative questions based on Dess and Robinson (1984), which previously had been

shown to have a high degree of correlation with quantitative measures. The two researchers then discussed with

the entrepreneurs indications of their employee growth and financial results. Both the qualitative questions and the

verbal interactions supported employee growth as an appropriate indicator of the firm’s performance.


those individuals who work to some degree in the firm, invest in the firm, and can expect to

obtain the proceeds of any profits from the firm (by the implication from the discussion of

Cooper and Bruno, 1977). Our concern in examining startups by Russian high-technology

entrepreneurs are the factors that mitigate the liability of newness. Therefore, it is this last

definition of the founding team, which will be utilized in this study since it focuses on the

input of resources into the firm.

4.3.3. Independent variable: innovativeness

To measure the next two independent variables, secondary data would be available in a

manner similar to Eisenhardt and Schoonhoven (1990). In their research, they examine a

single industry, semiconductors. They were able to obtain secondary data on a single data

item, which allowed uniform comparisons on issues such as product sophistication (micron

line length) to classify product innovativeness. However, no such secondary information is

available in a transitional economy such as Russia’s.5

Thus, qualitative measures must be utilized. Such measures are not without their

drawbacks. However, in this exploratory research within the confines of what information

could be obtained, such information could provide the greatest insight from the largest

number of respondents. The accurate evaluation of the innovativeness of a product can be

difficult to obtain. Therefore, multiple questions were asked of the principal founder to

obtain a more accurate perspective on the issue. To date, no widely established multi-

dimensional qualitative measure of product innovativeness has been established. Therefore,

in a manner similar to Zahra and Covin (1993), a scale was created based on different

dimensions of the innovativeness of the firm’s product. The questions on these dimensions

were based on prior research and writings on innovativeness. The firm’s score on the

innovativeness scale was determined by summing the responses to these three questions.

The first question used in the scale employed a Likert type scale (1–5) and asked the

respondents to rate the technological uniqueness of their product in the marketplace

(1 = unique and 5 = copy). The second question was a dichotomous question, which asked

the respondents whether they choose to principally compete based on (1) better product or

(2) better price. Those entrepreneurs with the more innovative product were expected to

compete on the basis of better product while those with a less innovative product were

expected to compete on the basis of price (Porter, 1980). Finally, innovativeness should be

based not only on how the firm compares to other Russian firms but also to how it

compares to other worldwide competitors since technology is so mobile across borders.

Thus, the founding entrepreneurs were asked if there were international competitors in the

Russian market whose products were based on similar technology. If there were no

international competitors with similar technology, the firm’s product should be more

technologically innovative, while if there were international competitors with similar

technology, they were less technologically innovative. The dichotomous question was

5 Even if such information was available, it is unlikely that a researcher from the US could obtain it. Security

concerns reminiscent of the Cold War are still common in high-technology firms. The fact that an estimated 75%

of high-technology funding in the Soviet Union was military-related increases this tendency towards secrecy.


scaled 1 = no international competitors with similar technology and 2 = international compet-

itors with the same technology. Summing the three questions, a score of 3 was the lowest score

possible for an innovative product and 9 the highest score for a less innovative product.6

4.3.4. Independent variable: market entry

The expectation is that since most interaction with customers in the Russian market would

be conducted by the principal founder, they would be aware of other products against which

they were competing. Additionally, the limited size of the Russian market for high-

technology products makes it unlikely that the entrepreneur would be unaware of any similar

products. Therefore, the research instrument solicited along a continuum a response regarding

the firm’s market when they entered. A score of 1 on the scale indicated that the firm was first

in the market, a pioneer. If the firm entered a market where they were one of the lasts to enter,

they would be considered a late follower (5 on the Likert scale). The date was treated as

ordinal data since the relationship between each of the variables may be exact, but one

response does reflect a greater or lesser response than the other. Hypothesis 3 proposed an

inverse relationship: the earlier the entry into the market, the higher the growth. Thus, it

would be expected, based on the hypothesis, that the lower the score on the Likert scale, the

higher the growth.

4.3.5. Analysis

In constructing the regression, the measure of market entry was examined using

dummy coding in a manner consistent with Cohen and Cohen (1983); such a tradeoff

in this exploratory examination is appropriate. Such an analysis allows the impact of the

different responses to market entry to be evaluated while holding the other independent

variables constant.

The measures of the independent variables were validated by a pretest from an in-depth

interview with one of the respondent firms prior to the general survey. In the pretest,

responses to these questions were discussed in detail and supported the use of the measures

as a means of obtaining information on these aspects of the research. The analysis

performed was regression with the dependent variable Growth in Employees. The

independent variables included Founding Team Number, which was the number of

individuals who invested in the firm with the expectation of obtaining the proceeds of

any profits, and Product Innovativeness, which was a composite measure composed of

Product Uniqueness (Likert scale measured 1 = unique, 5 = copy), International Competitive

Products (international firms with similar products 0 =No, 1 =Yes), and Price or Product

Differentiation (0 =Differentiation, 1 = Price). Three categories of the Market Entry were

created. The first category of earlier entrants (1 on the Likert scale) was assigned the

intercept term. A second dummy variable was for the respondents who indicated that they

were one of the first few firms in a market (2 on the Likert scale) and those firms that

6 The higher the innovativeness score, the lower the innovativeness of the firm, while the lower the

innovativeness, the higher the innovativeness of the firm.


indicated they were neither one of the first nor one of the last, a later follower (3 on the

Likert scale). One firm indicated that it was a ‘‘4,’’ one of the later firms to enter the

market, and was assigned to category 2. The third category of firms, latter entrants (5 on

the Likert scale), was assigned to the second dummy variable.

5. Results

5.1. Variable means, standard deviation, and correlation

Table 1 provides the means for the variables. The average number of five founders in

Russian firms is large by the standards of established economies; prior research showed that

in the US, high-technology firms typically had three founders (Eisenhardt and Schoonhoven,

1990), while in Canada, three were two founders (Doutriaux, 1992). However, in examining

the standard deviation for the variable, it is quite clear that the range for the size of these

teams can be considerable. In fact, in the sample, the number of founders ranged from 1 to 20.

Table 1 also presents the correlation of the variables and demonstrates that multi-

collinearity should not be a concern with this sample. Additionally, the variance inflation

factors (VIF) were run to test for multicollinearity. The results for the variables were

approximately 1.0. Neter et al. (1989) argue that multicollinearity is not a concern if VIF

values are less than 10.0.

5.2. Regression results

Table 2 presents the results of the regression. The total regression was significant at 0.002

with a r2 of .36. Thus, the regression model accounted for a meaningful amount of variance in

new firm growth. Hypothesis 1 proposed that the larger the founding team, the greater the

firm growth. This variable was significant at .05. Thus, Hypothesis 1 was supported. The

regression estimate for the Technological Innovativeness variable was � 1.7 and significantly

different from zero, reflecting that less innovative startups will experience higher growth. The

negative sign denotes an inverse relationship; performance improved as technological

innovation increased.7 This result indicates that as firms sought to decrease technological

innovativeness, performance declined; thus, Hypothesis 2 was rejected. Hypothesis 3 argued

that earlier entry would lead to greater performance. Each of the variables was significant.

However, the variance explained by the ‘‘Later Followers’’ was twice the level of ‘‘First

Movers.’’ Thus, Hypothesis 3 was rejected; later followers were more likely to have greater

growth in employment.

To validate the importance of team size in obtaining resources for the firm, during the

interview, participants were questioned about the financial sources of their financing. Most

7 Normally, a hypothesized inverse relationship would yield a negative coefficient. However, since a low value

for the firm indicates high innovativeness, our hypothesis translates to an expectation of a positive coefficient.


Table 1

Mean, standard deviation, and correlation for dependent and independent variables (P values noted in parentheses)

Variable Number

of firms

Mean Standard

deviation

Founding

team

Product

innovativeness

First

mover

Early

follower

Late

follower

Product

uniqueness

International

competitive

products

Price or product

differentiation

focus

Growth 45 2.3 5.8 .32 (.04) � .36 (.01) � .201 (.18) � .11 (.46) .26 (.08) � .31 (.04) � .12 (.43) .26 (.08)

Founding team 42 5.2 4.0 � .10 (.55) � .18 (.25) .21 (.18) � .08 (.59) � .11 (.50) � .05 (.76) .01 (.96)

Product

innovativeness

45 5.3 1.5 � .26 (.09) .01 (.94) .17 (.26) .90 (.000) .35 (.02) .62 (.000)

First movers 45 0.13 0.34 � .29 (.05) � .40 (.01) .22 (.15) .07 (.64) � .35 (.01)

Early followers 45 0.51 0.50 � .76 (.00) � .05 (.76) � .03 (.87) .16 (.30)

Late followers 45 0.35 0.48 � .20 (.18) � .02 (.88) .08 (.58)

Product

uniqueness

42 2.3 1.1 .04 (.77) .40 (.01)

International

competitive

products

45 1.6 0.5 � .05 (.74)

Price or product

differential focus

45 1.4 0.5

Growth: percentage growth in started firm’s employees. Founding Team Number: number of individuals who invest in the firm and expect to obtain the

proceeds of any profits. Product Innovativeness: measure composed of composite of Product Uniqueness, International Competitive Products, and Price

Product Differentiation measures; most innovative firm product score 3, least innovative firm score 9. First Mover: ranking of firm on a five-point scale as a

first mover = 1, 0 if not. Early Follower: ranking of firm on a five-point scale as a 2 (not first but soon after) = 1, 0 if not. Late Follower: ranking of firm on a

five-point scale as either 3, 4 (either neither one of first nor last or as one of later entrants) = 1, 0 if not. Product Uniqueness: rating of technological

innovativeness of firm’s product: 1 = unique, 5 = copy. International Competitive Products: evaluation of whether there are products from international firms

with similar technological features: 1 = no, 2 = yes. Price or Product Differentiation Focus: evaluation of whether positioned firm against competitors based

on product differentiation or price of product: 1 = differentiation, 2 = price.

G.D.Bruton,Y.Rubanik

/JournalofBusin

essVenturin

g17(2002)553–576

568

refused to provide any information, but of those that did, none reported any venture capital,

bank, or government financing. Beyond the original founding team, the other source of

financing available to these firms were family members of the founding team.

6. Discussion

The results presented here are noteworthy in providing the first evidence that high-

technology firms and entrepreneurs in a transitional economy, such as Russia’s, have

similarities and unique differences, with high-technology entrepreneurs in more stable

economies. Specifically, this study provides evidence to support the predictions for the

size of the founding team (Hypothesis 1). In light of the severe resource shortage facing

Russian entrepreneurs, it is perhaps not surprising that the ability to integrate as many

individuals as possible into the operation of the firm mitigates the liability of newness

(Hypothesis 1). The larger team allowed the startup to generate more financial resources

internally. Additionally, the larger team limits the need for financial resources since

more individuals are available to do the myriad tasks necessary in a startup firm

(Roberts, 1991).

This study did not examine the manner in which the team members interact with each

other. In the US, it is typically believed that large teams can bring difficulties in management

and decision making (Kamm et al., 1989). However, the evidence here is that this is not the

principal concern in Russia but rather that resource access is the focus. This difference can, in

part, be explained by the nature of how the Russian teams are formed which is different from

those of the US. Typically, Russian founding teams involve individuals with a long history of

work with each other. This long history of working together can act to mitigate many of the

difficulties, which plague founding teams in the US whose members know each other far less

well. As the economic transition matures in Russia, it is likely that the situation, with respect

to founding teams, will change significantly. Increasingly, founding teams may not have such

a long common work history since, ultimately, most research teams leaving large state

businesses and research laboratories will have done so during this transitional period. One of

Table 2

Regression results (dependent variable: annual percentage growth in employment)

Independent variable Unstandardized regression coefficients; probability >F Standard error

Founding team number 0.4** 0.21

Product innovativeness � 1.7*** 0.58

First mover 5.28* 1.55

Early follower 8.26** 1.99

Later follower 11.897*** 2.83

Model r2 .36

Regression F value (df = 4,41) 5.16***

* P=.10.

** P=.05.

*** P=.01.


the longitudinal issues that merits future investigation in Russia is how such founding teams

change and impact firm success. Additionally, such longitudinal studies should examine the

ideal size for such teams. The larger team may aid in the initial growth of the firm; however,

as this large number of individuals must be supported, such large teams may not be ideal for

the survival of the firm.

Hypothesis 2 was significant but in the opposite direction predicted; thus, the more

innovative the product, the more the firm grew. Hypothesis 2 was consistent with evidence

from the West that innovativeness did not produce the best initial results in mitigating the

liability of newness. However, it was also previously noted that there is evidence from other

domains that support the benefit of technological innovativeness to firms in stable

environments (Doutriaux, 1992; Sandberg and Hofer, 1987). Thus, while the evidence

presented here is counter to that predicted, it is consistent with many findings in the broader

domain of entrepreneurship.

Many of the established high-technology firms in Russia that grew out of the old state

businesses have found a competitive niche by producing low cost, undifferentiated products

(Port and Galuszka, 1996). For example, one semiconductor firm located in Zelenograd,

Mikron now controls 20% of the world market for microchips used in watches while the

other large semiconductor manufacturer in the city, Angstrom, is a dominant provider in the

market for microchips used in handheld calculators. The production costs in Russia of

many large high-technology firms, like Micron and Angstrom, are such that they can

generate significant cash flow by becoming the lowest cost producer in a given market.

However, the pursuit of strategies relying on such a low cost strategy provides these large

firms with revenue without generating significant profits. Additionally, both of these large

high-technology firms have also pursued massive layoffs of workers during this time; for

example, Micron eliminated over half of its staff between 1992 and 1995 (Bruton and

Rubanik, 1997b). Thus, on neither the measure typically used for established firms’ profits

nor on that used here for entrepreneurial firms’ employee growth do the established

technology firms perform well.

The results of the research conducted here indicate that those firms, which can be most

technologically innovative or unique, will be the most successful. Therefore, rather than

replicate the difficulties of the large state firms (from where many of these entrepreneurs

came), they are seeking new strategic approaches. However, the firm’s expansion efforts are

still largely focused on Russia. The interviews disclosed a few firms that have attempted to

pursue international business beyond Russia. However, most of the firms that have attempted

such activities have quickly abandoned them. The resources to support wide geographically

spread entrepreneurial efforts simply are not available. Instead, Russian firms have sought to

target their products inside Russia where language barriers and cultural differences are

minimal and costs are lower.

Future research should expand the understanding of the role of technology in Russian

startups. For example, the evidence here is that greater technological innovation leads to

greater firm performance as measured by employee growth. But, the interaction may be more

complex. The level of capital requirements may interact with the nature of the technology of

the product and the economies of scale required for the product. A larger sample of high-


technology firms drawn from across Russia would allow greater investigation of such issues.

The Soviet Union historically established areas of concentration for its high-technology

businesses. Thus, under state planning, cities similar to Zelenograd include: Chernolgolovka,

which concentrated on laser technology; Rushkino, which concentrated on biology-related

areas; Monina, which concentrated on aviation; and Mitechi, which concentrated on space-

related areas. All these cities were closed cities prior to 1991 but now are open to Western

researchers. Therefore, future research should also investigate high-technology startups in

these cities to see if similar results are found.

The evidence from Hypothesis 3 is that the firms also lower the risk of their focus on

innovative products by moving into the market later rather than earlier. It has been recognized

that in emerging markets that are fragmented, there may be limits to advantages from being a

first mover (Nakata and Sivakumar, 1997). In a resource-limited environment such as Russia,

being the first mover has significant risks because choosing the wrong resources on which to

focus can be particularly damaging to a startup firm with limited resources. The fact that

transitional economies are so turbulent means that the potential for picking the wrong

resources is particularly high.

Focusing the research on Zelenograd startups resulted in an industry concentrated in

microelectronics. Study of a single industry provides better control over confounding

industry-related variables. For example, differing industry growth rates and industry struc-

tures may impact the research results in a sample from several industries but should not be a

factor in this study. However, future research should examine whether similar results

concerning technology are found in startups in other industries. Additionally, the addition

of other industries will allow bigger sample size, which will allow better testing of the impact

of the timing of market entry. Specifically, the sample size of six firms of the first entrants cell

in the analysis was relatively small. Therefore, the increase in sample size with firms from

other industries will allow greater certainty in the analysis that later entrants into a market

perform better.

7. Public policy implications

This research has significant implications for Russia. The nation’s gross domestic product

continued on a downward slide until this year when rising oil prices resulted in some relief for

the country. However, large-scale unemployment and underemployment remains chronic and

the nation’s industrial infrastructure continues to decline. The nation desperately needs to

invigorate itself if it is to become a world citizen whose economic power is comparable with

other world leaders. The mean increase in employment among the 45 firms examined was

239%. The evidence presented here is that entrepreneurial startups have the potential to

provide significant employment opportunities for the nation. However, the government will

need to promote entrepreneurial firms if they are to reach their full potential.

To date, the government has not actively sought to encourage small businesses or high-

technology ventures. Almost none of the high-technology startups examined here reported

preparing a business plan before beginning their business. Additionally, since the founding


team members came from the large research facilities where their sole focus was

technological issues, they had little preparation on topics such as financing the firm while

budgeting and marketing. Thus, helping entrepreneurs develop the necessary skills are

relatively simple activities that the government could encourage that could have significant

results for the nation.

8. Conclusion

This research, for the first time, examined resource theory in transitional economies and

high-technology firms. The research provided general support for the use of the theory.

Hypothesis 1 was supported: larger teams were likely produce greater resources and in turn

lead to greater firm success. Hypothesis 3 was not supported but, as noted in the development

of the theoretical rationale for Hypothesis 3, there has been a disagreement about what

resource theory would predict about first mover advantage in a transitional economy. The

authors’ rationale was consistent with the dominant Western logic but the evidence presented

here is that an alternative view of first mover advantage and resource theory in transitional

economic settings is more appropriate. The risk in identifying inappropriate resources to

focus plus the risk that resources such as distribution channels may even disappear is too high

for financially constrained firms.

Three specific founding firm variables were examined in this research. The exploratory

nature of this research in a single city where Russia’s microelectronic industry dominates

results in the use of a nonrandom sample. Future research should further our understanding

by examining a broader sample of firms with more numerous variables and richer multiple

scales. The variables examined here can provide a basis for the investigation of high-

technology firms in transitional economies. There will always likely be significant restraints

on the questions that can be asked of entrepreneurs in Russia. For example, due to

excessive taxation and a very active Mafia presence, financial data are almost never

released nor considered reliable when it is released. Thus, issues such as funding sources

and levels of startup capitalization cannot typically be investigated. However, future

research in startups should expand the variables examined to include topics such as the

relationship between planning and performance, the nature of the firm’s asset makeup, and

the firm’s international posture.

The research, also for the first time, identifies the means by which Russians can encourage

high-technology entrepreneurial ventures in their own environment. Russia continues to face

tremendous difficulties in its transition to a market economy. However, entrepreneurship

offers the potential for the nation to solve many of its economic problems (Hisrich and

Gratchev, 1993, 1995). The evidence presented here is that there are similarities between

high-technology firms in stable economies like the US and those in transitional economies

such as Russia. However, as detailed throughout this manuscript, there are also unique

differences, which cannot be overlooked. Future research should continue to expand the

investigation of this critical area not only by examining the similarities but also by seeking

differences. The findings not only will have a significant impact on the economic success of


Russia but will also ensure that future efforts between Russia and the world focus on

economic cooperation and not military competition.

Acknowledgements

Appreciation is expressed to Chuck Bamford, Gary Castrogiovanni, Karen Cravens, Vance

Fried, Benjamin Oviatt, George Vozikis, Margaret White, and Stuart Youngblood for their

comments on earlier versions of this manuscript.

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resources of the firm, russian high-technology startups, and firm growth

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