International expansion: mediation of dynamic capabilities

Depósito de investigación de la Universidad de Sevilla https://idus.us.es/ “This is an Accepted Manuscript of an article published in Marketing Intelligence and Planning on 2020, available at: https://doi.org/10.1108/MIP-05-2019-0269.” 1 Pre-print: Ledesma-Chaves, P., Arenas-Gaitán, J. and Garcia-Cruz, R. (2020), "International expansion: mediation of dynamic capabilities", Marketing Intelligence & Planning , Vol. 38 No. 5, pp. 637-652. https://doi.org/10.1108/MIP-05-2019-0269 International expansion: Mediation of dynamic capabilities. Abstract Taking into account the Resource-Based View and the Dynamic Capabilities Theory, the main aim of this researchis to analyse how the intensification of the internationalisation process entails a solution for the problems generated by an economic crisis in the national market.To do so, we establish two specific goals. The first is to find out the mediator value of the Dynamic Marketing Capabilityin the relation between the strategy of increasing markets and performance. The second is to determine if there exist differences in this relation between firms of gradual internationalisation and firms of early internationalisation, called International New Ventures (INV).The study provides information on these problems via testing hypotheses of a conceptual model which uses a sample of 145 Spanish export firms. The data analysis employs structuralequationmodelling(SEM) through Partial Least Squares (PLS) as a statistical instrument. The results lead to two main conclusions: (a) in times of economic crisis, the dynamic marketing capability plays a mediator role between the increase of the number of international markets served and the international and national results; (b) the Dynamic Marketing Capabilities bring about learning effects in the internationalisation process which affect gradual firms and INV differently. Keywords: Dynamic capabilities; marketing capabilities;crisis; international business; INV. Introduction The growth models of economies are basedon two options: the internal demand incentivised by credit or the external sector, obtaining surpluses. At times of economic crisis, dynamic and strong external sectors mean a source of financing for a sagging internal demand (Beliaeva et al. 2018)and act as a hub of growth and dynamism. Therefore, the growth of the external sector makes countries improve both their imports and their exports, increasing their growth levels. This is why, beyond the recent recessive situation that most of the developed countries have been going through, exporting is the best way of growing in the short term. This advances a 2 situation which, more than a passing solution, should be a first level strategic option, although in specific sectors it is seen simply as a complementary way out. Even so, the business tissue must be promoted and oriented towards international markets at all times, as this means a process of development, specialisation and competitiveness which enables the firm to compete in better conditions(C. Zhou, 2018).Postponing this decision to the following economic cycle would suppose a disadvantage when the market again does not respond optimally to transform part of the production structure. In this way, the firm can have a more solid and stable growth model in the future(Tan & Sousa, 2015). The proposal of this business problem leads us to elaborating a work with the following aims. The main goal is to analyse how the intensification of the internationalisation process means a solution for the problems generated by an economic crisis in the national market, affecting the dynamic marketing capability, the national and the international results. To do so, we establish two specific objectives. The first is to find out the mediator value of the dynamic marketing capability between the increase of markets strategy and performance. The second is to determine if there exist in this relation differences between gradual internationalisation firms and early internationalisation firms, the so-called International New Ventures (INV). Our study contributes to the extant literature in various aspects. Firstly, although there are works which directly relate the dynamic marketing capability with performance(Konwar et al., 2017),we have not found one which analyses the mediator power of this capability between the internationalisation strategy and the results obtained (Dias & Renato, 2017; Takahashi et al. 2017). Secondly, most works which deal with the dynamic marketing capability do so from a transversal perspective, with a one-off measurement (Takahashi et al., 2017), while our work carries out a comparative study of two time moments, differentiated by a milestone or a decisive business moment, such as the economic crisis has been. Thirdly, although there is an abundant corpus of work comparing the gradual and accelerated internationalisation processes (Knight & Liesch, 2016), our work contributes an analysis of how both models have faced the crisis period and in what way this has affected their results. Fourthly, most existing studies about the dynamic marketing capability associate their results with international environments (Dias & Renato, 2017), there being very few which relate the international results with the national results (Álvarez-López et al. 2016). Our work contributes a view of how the advance in the internationalisation process and the increase of the dynamic marketing capability affect both the national and the international results. To achieve these aims, this work is structured as follows. First, a literature review enables us to formulate the hypotheses and the proposed research model. Second, we describe the methodology used to test this model. Third, we offer the results of our research. Fourth, we discuss the results, comparing them with the existing literature. Finally, we offer our main conclusions and the limitations of our work. 3 Literature Review Crisis and international performance An unprecedented crisis took place approximately between 2007 and 2016 in the majority of the developed countries. This affected all the strata of the economic system, both public and private. The saturation of the internal demand, caused by the absence of credit, as well as by the slump of the building sector meant a real setback for economies historically based on a strong internal demand. However, specifically in the case of Spain, during the hardest years the external sector began to grow at levels above 5% annually, reaching coverage rates of imports over 90%, even having a positive balance if we deduct the effect of energy and its derivatives (INE, 2018). Furthermore, this boost has supposed a historic record of exporting firms in Spain. Setting out from the Spanish example and observing similarities in the rest of the developed economies (Ivlevs & Veliziotis, 2017), the first consequence that we obtain from the data is that the transformation carried out by the production systems of the developed countries not only responds to a specific moment but also that firms have known to look towards the future and have taken advantage of the crisis to transform their production structures. They havedeveloped dynamic capabilities and have been able to attain a more solid and stable growth model, boosting the external sector and the internationalisation process. Internationalisation The internationalisation process is possibly one of the most studied aspects in the literature about firms (Peng & Lin, 2017). Our work considers this phenomenon from the Resource-Based View, within the Theory of Resources and Capabilities, as well as Dynamic Capabilities Theory as a setevolved from them which we believe encompasses better the dynamic of processes thatarecurrently being developed in international markets.The Resource-Based View (Schu et al. 2016)can be seen as normative guidelines for a firm’s export activities as it deals with the origins of competitive advantage. It argues that the differences of performance between organisations come from resources which can create idiosyncratic internal capabilities (Atuahene-Gima, 2005). A resource is an observable asset (not necessarily tangible)which can be valued and commercialised, while a capability is not observable (and therefore necessarily intangible) and changes hands only when as part of all its unit (Makadok 2001). Capabilities are the accumulated knowledge and skills of a firm which enables it to use and improve the value of its resources (Murray et al., 2011).There are studies that have in the last two decades examined the link between internationalisation, marketing capabilities and performance (Yi et al. 2015). Our analysis considers this strategic decision in two ways in accordance with two 4 different firm models. The first are those which we consider as gradual or late internationalisation, whose entrance into foreign markets takes place after a more or less long period in the national market (Vahlne & Johanson, 2013), and firms of fast internationalisation (International New Ventures – INV) which from their birth, or very soon after, decide to launch themselves into international markets (Knight & Liesch, 2016). We consider that to understand the process under the conditions developed in our study, it is necessary to turn to the concept of dynamic capabilities, which enables a better explanation about the adaptation of firms to international environments. Dynamic Capabilities Dynamic capabilities has been a topic of importance in the literature since a few years ago (Laaksonen & Peltoniemi, 2018). Due to the great amount of works published, a structured systematic review is especially interesting to establish the state of play as well as the most important research points. In this view, Fainshmidt et al. (2016) indicate that the research works on dynamic capabilities are concentrated around two perspectives (Helfat & Martin, 2015): (1) The contribution of dynamic capabilities to performance and (2) that the value of dynamic capabilities is more pronounced in the environments characterised by fast changes. With this statement our work covers the two main researchareas on the matter by analysing the influence of them on firm results in a turbulent environment characterised by the economic crisis. In spite of the interest of the research community in the concept of dynamic capabilities, the implications and consequences for performance still remain little studied (Fainshmidt et al. 2016). Dynamic capabilities can be defined as higher strategic processes that integrate, combine and generate new technological and marketing resources which in turn shape the organisation’s performance (Takahashi et al., 2017), and whose utilisation becomes indispensable to compete in international environments (Peng &Lin 2017; Yi et al. 2015).The key to achieve a competitive advantage is to permanently reconfigure capabilities as a response to the changes in the environment (Dias & Renato, 2017; Peng & Lin, 2017). The capabilities can be observed at different levels of the organisation, and entail a permanent situation of effort for the change and adaptation of the firm’s resources and capabilities(Peng & Lin, 2017). Finally, among the dynamic capabilities which have been addressed in research works, dynamic marketing capability is especially interesting for our work (Morgan et al. 2009; O’Cass & Sok, 2012). Dynamic Marketing Capability 5 The concept of dynamic marketing capability is still relatively new within the discipline of marketing (Bendig et al. 2018; Kachouie et al. 2018), so research in this field remains fragmented (Kachouie et al., 2018). The research on dynamic marketing capability has defined the term as the skill of the firm to use resources available for the performance of marketing tasks and attain the aims of marketing markets (Morgan et al. 2012). Our analysis of the concept continues the complete meta-analysis of the literature done by Morgan el al. (2017). Their literature review suggests thatdynamic marketing capabilities are especially valuable, inimitable (Morgan et al., 2009)andirreplaceable when creating a competitive advantage and a higher performance in the firm (Krasnikov & Jayachandran, 2008),as well as being a permanent capability for the renovation and improvement of the firm’s marketing capabilities (Day, 2011). In international markets dynamic marketing capabilities have also shown the improvement of the firm’s performance, raising the level and capability of maintaining the competitive advantage (Tan & Sousa, 2015). Themeta-analysis Morgan, Feng and Whitler (2017)used also identifies an important gap in the research literatureon marketing international capabilities and the results obtained in the international and domestic markets. Our work aims to cover how this affects the result, analysing both markets and their differences in the presence of dynamic marketing capabilities. In this study, the dynamic marketing capability is defined as those specialised, architectural, cross-functional and dynamic processes via which the resources of marketing are acquired, combined and transformed into offers of value for the target market (Morgan 2012). Dynamic marketing capabilities are developed based on knowledge that is unique and difficult to copy by the competitors (Konwar et al., 2017; Krasnikov & Jayachandran, 2008). It is considered that the presence of dynamic marketing capabilities is developed at different levels within the firm, from the individual level to the corporate level (Protogerou et al., 2012).Marketing capabilitieshave become a clear priority among scholars during the last decade(Bendig et al., 2018). Research Model andHypotheses The impact of internationalisation on performance has generated the interest of the research community (Fernández Olmos & Díez-Vial, 2015). In principle, various advantages are expected to be obtained: scale economies, effects on the power and control of markets,and risk reduction or learning effects, to name just a few of them (Pla &Cobos 2002). It should be highlighted that, as we have indicated, internationalisation is therefore a strategic option which can be attained through the design of different routes (Thompson & Zang, 2016). Following the literature, we propose this hypothesis: 6 H1: The number of foreign markets is positively related to the export performance. On the other hand, we consider that the effects of going deeply into the internationalisation process on organisational routines will also have an influence on national markets (Li, 2002). The very basis of the theory of gradual internationalisation indicates that the increase of the number of international markets served increases the capacity of obtaining own advantages and therefore must lead to a higher performance(Johanson & Vahlne, 1977). As Fernández Olmos and Díez-Vidal (2015) point out, the increase of experimental knowledge reduces the mental barriers between countries, so the flow of information between the firm and the market improves. Through the participation of the firm in internal markets better learning opportunities to develop more capabilities are obtained. These will be available both in the international and national markets (Fernández Olmos & Díez-Vial, 2015; Li, 2002). Following this argument, we propose the following hypothesis: H2: The number of foreign markets is positively related to the national performance. However, internationalisation does not always represent for firms a direct winning way which leads them to an increase of performance as, in turn, specific negative effects can take place concerning the business management derived from aspects such as a lack of resources to face new investments (Fernández Olmos & Díez-Vial, 2015), financial problems, scarce innovation capability and cultural distance problems (Zahra, 2005). Consequently, the results concerning performance in international markets have brought about different, opposing orientations. That is to say, we find both authors who qualify the internationalisationand performance relation as linear (Daniels & Bracker, 1989)and others who describe it as negative or inverse (Kumar, 1984), or even those who do not find a direct relation or simply note a lack of relation (Morck & Yeung, 1991). Moreover, the impact of the relation depends on the firm’s degree or level of internationalisation (Ruigrok & Wagner, 2003). For our part, we believe that the development of a capability, such as that of marketing, is necessary. This materialises the effects of learning in the new international markets to lead to performance. That is to say, the increase of international markets meansbeing exposed to a new environment, to a learning which is embodied in marketing capability improvements (Murray et al. 2011). Following this argument, we define the following: H3: Dynamic marketing capabilities are positively related to the number of foreign markets. 7 The dynamic marketing capability is based on the knowledge of the market, which can make firms successful or not in international environments (Tan & Sousa, 2015; Zhou et al. 2010). The knowledge of the market derived from the dynamic marketing capability becomes an inimitable feature or characteristic of the firm (Martin & Javalgi, 2016), whose presence is manifested at all its levels (Takahashi et al., 2017). This enables the development of a competitive advantage which is transformed into higher performance (Krasnikov & Jayachandran, 2008). Dynamic marketing capabilities allow firms to create profitable relations with their customers and maintain the customer base that they have already achieved, which in turn impacts the organisation’sperformance (Wilden & Gudergan, 2017). Dynamic marketing capabilities affect performance by generating satisfaction and loyalty and a higher market performance (Hooley et al., 2005), and firms can use them to be placed more advantageously, to launch better products, to adjust their price system, to distribute more effectively and to develop a closer relationship with their customers(Martin et al. 2016). They thus improve their performance (Krasnikov and &Jayachandran, 2008) and adapt faster to changes (Konwar et al., 2017). In other words, the increase of the dynamic marketing capability can lead to improving the firm’s national and international performance. In this sense, we formulate the following hypotheses: H4a: Dynamic marketing capabilities are positively related to the export performance. H4b: Dynamic marketing capabilities are positively related to the national performance. Researchers have determined that dynamic capabilities are fundamental in the firm’s success both in international and domestic markets (Murray et al., 2011; Takahashi et al., 2017). The effects on the Spanish economy of its firms’ investment abroad has hardly been the subject of study until now (Álvarez-López et al. 2016). Nevertheless, there are signs about the enhancement of results in both directions, both national and domestic, when one of the two environments improves (Tacero et al. 2017). This is due especially to the effects associated with the learning and a diffusion of knowledge and capabilities to all the firm. There are factors such as internal employment (Bajo&Díaz Mora 2014), or the competitiveness of investing firms, which show improvements in their productivity, in the qualification of their workers and in their exports. Therefore, we consider that the improvement of results in national markets positively affects the international markets, formulated as follows: H5: The national performance is positively related to the export performance. 8 Our study considers dynamic marketing capabilities as a mediator element between the development of a strategy of increasing international markets and performance.Through it, the development of internationalisation strategies is favoured by the increase of the absorptive capacity which allows a continuous development in international markets (Zahra 2005; Zahra & George 2002). Furthermore, the marketing capabilities enable a better adaptation to international environments (Lianxi Zhou, Aiqi Wu, &Bradley R. Barnes, 2012), especially to turbulent environments, such as an economic crisis. Marketing capabilities also indirectly affect performance via obtaining better positional advantages in international markets (Zou, Fang,& Zhao, 2003). Due to all this, we consider that they contribute to the implementation of international strategies, increasing the performance, and that those organisations which have them get better results in the development of their strategies. So: H6: The dynamic marketing capability has a mediator role between the increase of international markets and the performance. Our analysis considers that the strategic model of internationalisation which firms develop when going international can have differential consequences for the external performance (Pimenta et al., 2017). That is to say, the international path taken is expected to bring different levels of results (Fernández Olmos & Díez-Vial, 2015). Specifically, our study carries out a comparison between early internationalisation firms or international new ventures (INV)and gradualinternationalisation firms. The former are those which simultaneously and quickly aim at various international markets, practically from their birth, although in this group we also include those firms which, having remained in their domestic market for many years, later swiftly target foreign markets, motivated by a critical event (Bell et al. 2001). By their international and learning orientation, the firms in this strategic model are competent to obtain good results in international markets (Almor, 2018; Øyna & Alon, 2018). On the other hand, the so-called gradual internationalisation firms step by step acquire the experience necessary to enter an increasingly greater number of markets and as they attain that knowledge assume greater risks in external markets (Vahlne & Johanson, 2013). Due to our analysis, we considered it interesting to evaluate if there have been differences as to the results of these two strategic models of internationalisation. Therefore: H7: There are significant differences in the explanatory model of the performance between INV andgradual internationalisation firms. Methodology Sample 15 and developing specific capabilities which more directly affect the export performance, such as the marketing capability, being aware of the powerful tool that this is(Tan & Sousa, 2015). Moreover, these policies must consider the management and organisational differences of INV firms and gradual internationalisation firms, so that each one is contemplated with its special characteristics to face the internationalisation process. The significant differences of the hypotheses tested imply that the managers of these firms must particularly consider the strategic characteristics of their firms in the internationalisation process, as well as the application of solutions to the drops in demand caused by an economic crisis.To make decisions from a sole strategic point of view without contemplating these differences will lead to mistakes which may be fatal in the internationalisation process. Therefore, the new strategies to develop and the applications in the management field must take into account the differences in the strategic conception of the internationalisation of both models of firms (Paul & Rosado-Serrano, 2019). Conclusions This work explores, in times of crisis, how internationalisation becomes a way out for firms to increase the levels of demand and improve theirgeneral performance. Furthermore, it also analyses the mediator role of the dynamic marketing capability in the relation between the increase of the level of internationalisation and the firm performance. In this relation, it establishes that there are significant differences in the results obtained between gradualinternationalisation firms and INV, determining the notable strategic differences between the two management models when facing periods of economic recession. Our discoveries and their implications contribute to the literatureconcerning the firm’sdynamic capabilities, helping towards a better comprehension of how the mediator role functions between internationalisation and performance, understanding more advantageously the mechanisms which determine this relation. Limitations and future research lines This analysis can be enriched once the theory about dynamic capabilities is more developed (Kachouie et al., 2018), and therefore the measurement scales are more precise and generalisable. Likewise, the correct determination of the components of the dynamic marketing capability construct (Xu et al. 2018)would add more precision to the results and it would determine to a greater extent the option of introducing mediator variables which could establish more opportune and logical relations throughout the model. The comparison of our research is also compromised by the questions being asked with respect to two different time moments separated by the time milestone of an economic crisis. Due to this, it would be necessary to 16 again be in a period of recession which would enable the same format to be carried out and, therefore, the results compared. The sample is made up exclusively of Spanish firms, so it would be useful and interesting to do this analysis in countries with other cultural influences and ways of facing recession periods to test the hypotheses. 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