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Theory Development: Appropriate

and Novel Theories in International

Entrepreneurship research

Gary Knight

Professor of Global Management

Helen Jackson Chair in International Management

Atkinson Graduate School of Management

Willamette University

Salem and Portland, Oregon, USA

[email protected]

1

2

International Entrepreneurship (IE)

• Associated with globalization and advanced

technologies

• Emphasizes entrepreneurial internationalization of

young or small firms, or of ventures in established

firms.

• Young and small firms face limited resources.

• Internationalization provides various advantages,

but such firms typically face three liabilities:

newness, size, and foreignness.

• Represents a shift in the IB literature, which long

was dominated by FDI and large MNEs.

3

Milestones of IE

1998: McGill International Entrepreneurship Conference

launched (Hamid Etemad and Richard Wright)

2000: AMJ Special Issue on IE (there have been numerous

other special journal issues since)

2003: Journal of International Entrepreneurship launched

2004: Oviatt and McDougall won the JIBS Decade Award

for 1994 article on ‘‘international new ventures’’

2010: Academy of International Business add the track –

SMEs, Entrepreneurship, and Born Global – to their annual

conference. It has become one of the leading tracks.

2014: SDU Odense International Entrepreneurship

conference/workshop launched

4

Major Topic Areas to Date

• Early, exploratory research (e.g., Hedlund & Kverneland 1985; Ganitsky 1989;

McDougall 1989; Rennie 1993; Oviatt & McDougall

1994; Knight & Cavusgil 1996)

• General characteristics of INVs and Born

Globals (e.g., Fan & Phan 2007; Fernhaber,

McDougall, & Oviatt, 2007; Freeman & Cavusgil

2007; Knight 2000; Luostarinen & Gabrielsson 2006;

Madsen & Servais 1997; Rialp, Rialp, & Knight 2005;

Servais, Zucchella, & Palamara 2006; Zhou, Barnes,

& Lu, 2010)

5

Major Topic Areas to Date, cont’d

• Early internationalization

(e.g., McDougall, Oviatt, & Shrader 2003; Moen &

Servais 2002; Bell, McNaughton, Young, & Crick

2003; Hashai, N. 2011 McNaughton 2003; Chetty

& Campbell-Hunt 2004; Mathews & Zander 2007;

Fernhaber, McDougall, & Oviatt 2007; Zhou 2007;

Kudina, Yip, & Barkema 2008)

• Role of technology in IE (e.g., Loane 2006; Servais, Madsen, & Rasmussen

2007; Zhang & Tansuhaj 2007)

6


• Role of Networks in IE (e.g., Chetty & Campbell-Hunt 2003; Coviello 2006;

Coviello & Cox 2006; Knight & Cavusgil 1996;

Schwens & Kabst 2009; Freeman, Hutchings, Lazaris,

& Zyngier 2010; Sharma & Blomstermo 2003; Yu,

Gilbert, & Oviatt 2011; Zhou, Wu, & Luo 2007)

• International Entrepreneurial Orientation (e.g., Acedo & Jones 2007; Jones & Coviello 2005;

Kuivalainen, Sundqvist, & Servais 2007; Mathews &

Zander 2007; Weerawardena, Mort, Liesch, & Knight

2007; Zhou 2007)

7


• Role of strategy in IE (e.g., Knight, Madsen, & Servais 2004; Knight &

Cavusgil 2005; Knight & Kim, 2009; Freeman,

Edwards, & Schroder 2006; Laanti, Gabrielsson, &

Gabrielsson 2007; Mudambi & Zahra 2007;

Kuivalainen, Sundqvist, & Servais 2007; Aspelund,

Madsen, & Moen 2007)

• International entrepreneurship (e.g., Cavusgil & Knight 2009; Coviello & Jones 2004;

Danis, Kiss, & Cavusgil 2012; Jones & Coviello 2005;

Jones, Coviello, & Tang 2011; McDougall & Oviatt

2000).

8

• Unify and improve heterogeneous conceptual and

operational definitions.

• Employ better formulated and integrated theoretical

frameworks.

• Expand the base of explanatory perspectives, e.g.,

beyond internationalization models. Draw on

theories and frameworks from various domains,

including nonbusiness disciplines.

• Reconcile the fact that some aspects of IE contrast

with traditional views of internationalization.

• Integrate entrepreneurship and international

business, and span theoretical disciplines to create

new perspectives.

Research Needs

10

• A science is: -- a classified and systematized body of

knowledge;

-- organized around central theories, theoretical

perspectives, and numerous general principles

-- knowledge that permits the production and

(often) the control of future events.

• Explanation of phenomena is the essential role of

science.

• While business scholarship does not necessarily

constitute a “science”, scholars aim to follow

scientific approaches in business research.

What is Science?

11

• Science aims to develop theories and laws to

explain, predict, understand, and control

phenomena.

• Scholars generally believe that scientific

explanations should explain why, and often, what

questions. E.g., why did phenomenon X occur?

What factors give rise to phenomenon X? What

causal and other factors explain phenomenon X?

• Many explanations do not rise to the level of

theories. These can be called “models,” “views,”

or “theoretical perspectives”.

What is Science, cont’d

12

1. Development of new theories

2. Falsification of existing theories

3. Expansion of a theory to include new phenomena

4. Reduction of specific theories into more general

theories (“induction”)

• In general, new theories and explanations are

built on existing theories and explanations

How is Science Extended?

[Sources: Robert D. Buzzell, 1963, "Is Marketing a Science?" Harvard Business Review, 41

(January-February), pp. 32-40; Carl Hempel, 1970, Aspects of Scientific Explanation, New York:

Free Press; Shelby Hunt, 1991, Modern Marketing Theory, Cincinatti, OH: South-Western

Publishing; Ernest Nagel, 1979, The Structure of Science, Indianapolis, IN: Hackett Publishing]

13

• A theory is a systematically related set of

statements, including some lawlike generalizations,

that are empirically testable.

• A fully formalized theory consists of a formal

language system that has been axiomatized and

completely interpreted.

• Formal language systems contain

(1) elements,

(2) formalization rules, and

(3) a set of definitions,

• All three items above must be rigorously specified.

Theory: Background

14

• An axiomatic formal language system includes a set

of transformation rules showing how some

statements can be derived from other statements

and a set of fundamental statements that are

(a) free from contradiction,

(b) independent,

(c) sufficient, and

(d) necessary.

• Lawlike generalizations are statements that give

theories their explanatory and predictive power.

Theory, cont’d

Sources: Shelby Hunt, 1991, Modern Marketing Theory, Cincinatti, OH: South-Western

Publishing; Karl Popper, 1980, The Logic of Scientific Discovery, New York: Routledge

15

1. What: Which factors (variables, constructs, concepts)

should be logically included in the explanation of the

phenomenon of interest? Emphasize both

comprehensiveness and parsimony.

2. How: How are the factors specified above relate

to one another? Typically visualized via a path

diagram, in which two factors connected by a line

usually represent a hypothesis.

3. Why: What are the explanations (theories) from

economics, sociology, psychology, and other fields

that justify the factors and associated relationships?

I.e., hypotheses need to be rigorously justified.

4. Who, Where, When (“context”): These conditions

place limitations on the hypotheses and propositions

generated from a theoretical model.

A theory has four main elements:

16

• In developing a theory, logic replaces data as the

basis for evaluation.

• Good academic research aims to create new

knowledge or extend existing knowledge, not

simply replicate it.

• A statement such as "A causes B" can be tested

without understanding the Whys underlying the

model. However, this leads to data-driven

research rather than theory-driven research.

• What and How describe (descriptive research);

only Why explains (causal research).

Theory, cont’d

17

• Scholars propose a

theory (or an

explanation) to explain

a phenomenon.

• The theory gives rise to

hypotheses.

• Hypotheses are

subjected to rigorous

empirical tests, which

either support or ‘falsify’

the theory.

Theory: Background

Source: Karl Popper, 1980, The Logic of Scientific Discovery, New York: Routledge

Theory

Bridge Laws

or

Guiding Hypotheses

Research Hypotheses

Test

Analysis of

Results

CO

NF

IRM

DIS

CO

NF

IRM

19

Elements of Empirical Research

Source: Edmondson, A.C. & McManus, S.E. 2007. Methodological Fit in Management Field

Research. Academy of Management Review, 32(4), 1155-1179.

20

Methodological Fit: Mean Tendency

Source: Edmondson, A.C. & McManus, S.E. 2007. Methodological Fit in Management Field

Research. Academy of Management Review, 32(4), 1155-1179.

Exploratory

Confirmatory

Conceptual Framework

in International Entrepreneurship Environment / Context

Domestic market

-- Level of economic development

-- Risk / uncertainty

-- Size and growth rate

-- Economic conditions / dynamism

-- Institutions / political / legal

-- Culture / psychic distance

-- Presence of opportunities

-- Competitive intensity

-- Other characteristics

General environment

-- Globalization

-- Technology


Foreign market

-- Level of economic development

-- Risk / uncertainty

-- Size and growth rate

-- Economic conditions / dynamism

-- Institutions / political / legal

-- Culture / psychic distance

-- Presence of opportunities

-- Competitive intensity


Resources, Capabilities and Strategies of Born Global Firms

Resources Capabilities / Dynamic Capabilities Strategies

-- Monopolistic advantages

-- Knowledge / market knowledge

-- Capital

-- Top management characteristics

-- Human resources

-- Legitimacy

-- Social capital

-- Networks / alliances

-- Networking / partnering

-- Products

-- Digital technologies

-- International experience

-- Channel effectiveness

-- Government support

-- Others

-- Managerial vision / commitment

-- Managerial competence

-- Knowledge creation competence

-- Learning orientation / capability

-- Innovativeness / technological competence

-- Absorptive capacity

-- International growth orientation

-- International business competence

-- International entrepreneurial orientation

-- Proactiveness and aggressiveness

-- Risk-taking proclivity or tolerance

-- Flexibility / adaptability

-- Market orientation

-- Marketing competence

-- Networking / collaboration competence

-- Internal processes

-- Others

-- Internationalization / entry strategies

-- R&D intensity

-- Strategic orientation

-- Generic strategies

-- Niche market strategy

-- Integration / responsiveness

-- First mover / pioneer

-- Follower / imitation

-- Product standardization

-- Marketing communications

-- Distribution

-- Service / support

-- Digitalization

-- Servitization

-- Others

Firm

Performance

Firm Characteristics General Phenomena

-- Industry

-- Size

-- Structure

-- Age

-- Age at internationalization

-- Performance objectives

-- Others

-- Early and rapid internationalization

-- Liabilities of newness and foreignness

-- Opportunity creation

-- Opportunities discovery

-- Opportunities exploitation

-- Social responsibility / sustainability

-- Others

22

23

Major Theoretical Perspectives

International Business

• Internationalization Views

• International Entrepreneurship View

23

24

Theoretical Perspectives, Cont’d

Firm or Management Level

• Life-Cycle Theory

• Resource-Based View

• Knowledge-Based View of the Firm

• (Dynamic) Capabilities View

• Monopolistic Advantage Theory

• Strategic Choice Theory

• Generic Strategies Model

• Absorptive Capacity

• Effectuation

24

25


Firm Ancillary Level

• Agency Theory

• Network Theory

• Social Capital Theory

25

26


Market Level

• Stakeholder Theory

• Legitimacy Theory

• Service- Dominant Logic

• Perspectives on Risk and Uncertainty

• Institutional Theory

• Culture Explanations / Hofstede Typology

26

27


• Other perspectives from international business

• Other perspectives from entrepreneurship

27

29

• Uppsala Model

• Stages Model

• Internalization Theory

• Eclectic Paradigm

• FDI Theory

• Integration / Responsiveness Model

Internationalization Views

30

• Entrepreneurship is conceptualized in terms of

risk attitude, innovativeness, and proactiveness

• International entrepreneurship: Combination of risk-

seeking, innovative, and proactive behavior that

crosses national borders and aims to create value in

organizations

• Applies to born globals and international new

ventures

• Theories and models from international business

and entrepreneurship provide useful perspectives (e.g., Dana, Etemad & Wright 1999; McDougall & Oviatt,

2000; Zahra & George, 2002)

International Entrepreneurship View

32

• Firms encounter similar types of challenges at

specific stages in their development.

• Many challenges arise as a function of firm age,

size, and volume of activities.

• Where challenges

are predictable,

management can

anticipate and

devise strategies

to address them (e.g., Adizes, 1079; Churchill

& Lewis, 1983; Galbraith, 1982;

Greiner, 1972; Kazanjian, 1988)

Life-Cycle Theory

Source: Ichak Adizes

33

Infancy. Small size; young; inexperienced; informal

structure; risky decision-making; fewer resources and

capabilities; higher cost structure; innovative and

entrepreneurial; flexible; focus and differentiation strategies

Adolescence. Medium size; more formalized structure;

more formalized decision-making; less risky decision-

making; lower cost structure; more resources and

capabilities; less focus/differentiation, more cost leadership

Maturity. Large size; formal and bureaucratic structure;

formalized decision-making; abundant resources and

capabilities; low cost structure; less flexible and

entrepreneurial; strategic momentum; entrenched methods

and practices

Firm Characteristics at Different Stages

34

Possible Variables in a Life-Cycle Framework

Organizational structure

(e.g., centralization)

Specialization

Formalization

Level of resources

Level of capabilities

Strategic orientation

Learning orientation

Entrepreneurial

orientation

Innovativeness

Flexibility

Differentiation

Customer focus

Cost structure

36

• Differential endowment of organizational resources

helps determine firm strategy and performance.

• Resources include all assets, organizational

processes, information, knowledge, technologies,

etc., controlled by the firm.

• The most critical resources are those that are

superior in use and hard to imitate or supplant.

• Two main assumptions: (1) firms are heterogeneous

with regard to the resources they control; and (2)

resources are not perfectly mobile across firms;

hence, heterogeneity tends to be long-lasting (e.g.,

Barney 1991; Collis 1995; Porter 1991; Wernerfelt

1984)

Resource-Based View

37

• Firms function partly to integrate knowledge, which

they then leverage to support operations and enhance

organizational performance.

• KBV emphasizes learning and learning perspectives

• Development of strategy, products, marketing

activities, and services necessitate the input and

coordination of a wide range of specialized knowledge

• Knowledge is especially critical if international

performance depends on knowing markets and how to

do business there. Thus, very knowledgeable

managers are especially valuable assets (e.g., Grant,

1996; Nonaka, 1994)

Knowledge-Based View

38

• Organizational capabilities are the main source of the

firm’s performance advantages (e.g., Grant, 1991).

• They reflect the ability of the firm to perform

repeatedly productive tasks that create value through

effecting the transformation of inputs into outputs.

Dynamic capabilities are especially important.

• Examples: innovatory capacity; business

management capabilities; marketing capabilities

• Arise from the integration of individuals’ specialized

knowledge (e.g., Conner and Prahalad, 1996; Dierickx

and Cool, 1989; Grant, 1996; Leonard-Barton, 1992;

Nelson and Winter, 1982; Teece and Pisano, 1994)

Capabilities View

39

• Monopolistic advantage refers to resources or

capabilities that a firm holds that few other firms have.

• Successful internationalization (especially via FDI) is

partly a function of the possession of monopolistic

advantage(s) not available to firms in local markets.

• The advantage(s) must be ‘firm-specific’, that is,

available only or largely to the internationalizing firm.

• Examples include economies of scale; superior

technology; strong brand name; or superior

knowledge in marketing, management, or finance

(e.g., Hymer 1960)

Monopolistic Advantage Theory

40

• Managers can enact and actively shape the

environments where the firm operates.

• Managers’ decisions play a big role in the firm’s

success or failure.

• Strategic choice analysis emphasizes managers,

markets, and the relationship between them.

• The skill and nature of decisions depend on

managers’ capabilities and competencies.

• Socio-political systems within firms are a key

context (e.g., Child 1972, 1997).

Strategic Choice Theory

41

Cost Leadership: Cost minimization achieved through

efficient scale facilities; vigorous pursuit of cost

reductions through experience; tight cost and overhead

control; avoiding marginal customer accounts; cost

minimization in R&D, service, sales force, etc.

Differentiation: Offering a product that is perceived

industrywide as being unique. Usually achieved via

product design, branding, marketing, or service.

Focus: Focusing on a particular buyer group, segment

of the product line, or geographic market. Firm serves

its narrow strategic target more effectively or efficiently

than those competitors who compete more broadly

(e.g., Porter, 1980).

Generic Strategies Model

42

• Refers to the firm's ability to recognize the value of

new information, assimilate it, and apply it to

performing business activities.

• The firm must possess organizational routines and

processes to acquire, assimilate, transform and

exploit knowledge, in order to create dynamic

organizational capabilities.

• Innovation is critical to performance, particularly in

international business. Superior absorptive capacity

enhances the ability to innovate and learn, leading to

enhanced performance (e.g., Cohen and Levinthal,

1990; Zahra and George, 2002).

Absorptive Capacity

44

Traditional view of management:

• Future events in the firm’s external environment

are largely predictable.

• Managers can plan for predicted events and

develop strategies to deal with them (e.g., Ansoff,

1979; Porter 1980; Schendel and Hofer, 1979).

• Rational decision-making based on prediction

positively affects organizational performance.

Effectuation Theory

45

The effectuation view:

• Future events are hard to predict. Contingencies

arise that limit the utility of formal planning.

• Rather than expend limited resources on

predicting and planning, firms should adopt a

flexible and adaptive posture that will allow them

to improvise appropriate strategies as needed.

• Effectual logic emphasizes improvisation,

exploitation of contingencies, and market creation,

typically by partnering with others.

Effectuation Theory

46

• Effectuation theory more accurately represents

the way young, small firms operate.

• Such firms are relatively entrepreneurial, flexible,

and adaptive. They change course constantly to

manage environmental circumstances as they

arise (E.g., Chandler et al, 2011; Gabrielsson &

Gabrielsson, 2013; Read, Song, & Smit, 2009;

Sarasvathy, 2001, 2008; Wiltbank, Dew, Read, and

Sarasvathy, 2006)

Effectuation Theory, cont’d

47

Representative Literature

on Prediction and Control

Source: Robert Wiltbank, Nicholas Dew, Stuart Read and Saras D. Sarasvathy (2006). What to Do Next? The

Case for Non-Predictive Strategy. Strategic Management Journal, 27(10): 981-998.

49

• Internationalizing firms employ managers in foreign

subsidiaries, or in independent organizations such as

distributors.

• The theory delineates firm owners as principals that

hire agents (managers) to operate the organization.

• The “agency problem” arises when the interests of

owners and managers diverge. Due to information

asymmetry, managers may act opportunistically.

• Cross-cultural differences magnify the problems of

uncertainty, asymmetric information, and monitoring.

Thus, agency relationships are more challenging

internationally than in domestic environments (e.g., Bergen, Dutta, and Walker 1992; Jensen and Meckling 1976).

Agency Theory

50

• Refers to the firm’s system of relationships that match

its needs aimed at maximizing the firm’s performance.

• Relationships consist of actors, resource ties, and

activity links.

• Actors, including managers and organizations, control

the resources and perform the activities.

• Activities link resources to each other; an activity

occurs when actors combine, develop, exchange, or

create resources by using other resources.

• Resources include input goods, financial capital,

technology, personnel, and marketing (e.g.,

Granovetter 1973; Håkansson 1989; Thorelli 1986)

Network Theory

51

• Organizations and their markets constitute people

whose relationships and interpersonal assets (e.g.,

trust, cooperation) shape the firm’s activities and

performance outcomes.

• Sensemaking among individuals in and between

organizations is key to trust-building and maximizing

performance in value chains and markets.

• The theory is a good foundation for explaining

collaboration and competition (e.g., Bourdieu 1986;

Nahapiet and Ghosal; Homburg, Wieseke, and Kuehnl

2010; Gundlach and Cannon 2010)

Social Capital Theory

52

• Addresses the nature and interactions with various

constituent groups that aim to accomplish multiple,

and not always congruent, goals and purposes.

• Stakeholders include employees, suppliers,

shareholders, communities, regulators, the media,

and special interest groups.

• Firms should undertake ongoing efforts to develop

and nurture exchanges with various important

stakeholders, to achieve organizational objectives

and performance goals (e.g., Donaldson and Preston

1995; Freeman 1984; Mitchell, Agle, and Wood 1997)

Stakeholder Theory

53

• Legitimacy refers to the generalized perception or

assumption that the actions of an entity are

desirable, proper, or appropriate within some

socially constructed system of norms, values,

beliefs, and definitions.

• Legitimacy is a property of (social) objects that

conform to widespread, taken-for-granted systems

of norms or social codes.

Legitimacy Perspective

54

(a) Implies construction of social reality, consistent with

cultural beliefs, norms, values shared by local actors

(b) Fundamentally a collective process, although can

be influenced by individuals, e.g., opinion leaders

(c) Depends on apparent or actual consensus among

local actors regarding the validity and virtue of the

object’s attributes and actions

(d) Has both a cognitive dimension wherein some

social object is taken for granted, and a normative

dimension that prescribes the object’s morality (e.g., Berger and Luckmann 1966; Cattani et al., 2008;

Johnson et al, 2006)

Characteristics of Legitimacy

55

Legitimacy in International Business

SOURCE: Kostova, Tatiana and Zaheer, Srilata (1999), “Organizational Legitimacy under Conditions of Complexity: The

Case of the Multinational Enterprise,” Academy of Management Review, Vol. 24 Issue 1, p64-81.

57

• Argues that service provision rather than physical

goods is fundamental to economic exchange. Here,

“service” is the application of specialized knowledge

and competencies through deeds, processes, and

performances, to benefit of buyers. Goods are simply

a distribution mechanism for service provision.

• Focuses on intangible resources, the co-creation of

value with buyers, and buyer relationships.

• The firm’s goal is to customize offerings and create

‘value propositions’, partly by involving buyers in the

customization process, to better fit their needs and

wants (e.g., Lusch and Vargo, 2006; Vargo and Lusch

2004; Vargo and Morgan, 2005)

Service- Dominant Logic

58

• Entrepreneurs must make decisions under

uncertainty

• Uncertainty is distinct from risk, which can be

measured and predicted.

• In order to grapple with the natural uncertainty of the

marketplace, the entrepreneur attempts to optimize

his or her judgment by obtaining information on the

market.

• The entrepreneur who manages uncertainty through

superior judgement can maximize market

performance (e.g., Boudreaux and Holcombe, 1989;

Knight, 1921)

Risk and Uncertainty Perspectives

59

• Refers to the formal or informal procedures, routines,

norms, and conventions in the political economy of

nations. E.g., governments and political systems are

important institutions.

• Institutions provide resources, but they also impose

constraints on economic activity. Institutions limit

some forms of action and facilitate others.

• Institutions govern societal transactions in the areas of

politics (e.g., corruption), law (e.g., regulation), and

society (e.g., ethical norms, attitudes toward business) (e.g., DiMaggio & Powell, 1991; Hall and Taylor 1996;

Peng, Wang, & Jiang, 2008)

Institutional Theory

60

• Numerous explanations have been developed to

explain culture and cultural differences.

• Hofstede (1980) typology:

• Individualism/Collectivism: The key relationship

between an individual and his/her fellows.

• Power Distance: The way a culture deals with

people at differing levels of society, typically

related to differences in power and wealth.

• Uncertainty Avoidance: Extent to which people are

concerned about future uncertainties and risk.

• Masculinity/Femininity: Extent to which men and

women are free to take on each others roles.

Culture Explanations / Hofstede Typology

61

• From International Business

• From Entrepreneurship

Other Perspectives

63

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