International Social Capital, Technology Sharing, and Foreign Market Learning in Internationalizing Entrepreneurial Firms

Internationalizing new firms face the dual challenge of overcoming the liabilities of newness and liabilities of foreignness (Stinchcombe, 1965; Dunning, 1981; Zaheer, 1995). Because of their newness, new firms are constrained in their ability to access external resources required for survival and growth. Because of their foreignness relative to the foreign target market, internationalizing firms are disadvantaged relative to domestic firms when establishing business relationships. These disadvantages are exacerbated by the additional knowledge inputs required by the internationalization process itself: internationalizing firms face the dual challenge of both learning how to do business in a new national and institutional environment while also learning to manage the inherently complex international business organization (Johanson & Vahlne, 1990). The skills required for managing a complex business operation can mainly be learned through internal experience. However, for many other types of critical knowledge inputs, the internationalizing new firm needs to secure access to external sources of knowledge and learning. In order to cope within the new institutional environment, the new firm needs to access "foreign organizing knowledge" (Johanson & Vahlne, 1977), that is, knowledge about local markets, institutions, and ways of doing business. This knowledge resides, by definition, in sources external to the new firm. The new firm also needs to develop an intimate access to knowledge about local customer needs and wants in order to optimize its offering for these. For these knowledge inputs, too, the internationalizing firm needs to secure access to external sources of learning. Therefore, the ability of an internationalizing new firm to access external sources of learning in foreign market environments should constitute an important determinant of its performance. While knowledge and learning have been given a central role in theories concerning the internationalization of small- and medium-sized entrepreneurial firms (e.g., Johanson & Vahlne, 1977; Oviatt & McDougall, 1994; Sapienza, Autio, George & Zahra, 2005), the theories remain largely silent about how the critical inputs of external knowledge are realized. In received theories and frameworks on the topic, knowledge is usually seen as either acquired through "experiential learning" (e.g., Eriksson, Johansson, Majkgård, & Sharma, 1997), or it is treated as an endowed resource that enables the firm to rapidly expand its international operation (Oviatt & McDougall, 1994). In the former view, "foreign organizing knowledge" (i.e., organizational knowledge) is seen as accumulating gradually over time, as the internationalizing firm increases its resource commitments to the foreign market. In the latter view, it is the very mobility of knowledge, as embedded in products and services, which makes it possible for a young firm to expand rapidly beyond national borders. However, the received theories have little to say about what determines the efficiency with which the internationalizing firm connects to local sources of knowledge and learning, and why some firms may be better able to take advantage of their knowledge inputs than other firms (Autio, 2005). The study of such issues is important for the advancement of our understanding in international entrepreneurship. Like all new firms, early internationalizing firms also face the liability of newness, which hampers their ability to access and mobilize resources. In an international context, this liability is exacerbated by the liability of foreignness (Zaheer, 1995; Zaheer & Mosakowski, 1997). Together, these liabilities contribute to a high rate of mortality among early internationalizing firms (Sapienza, Autio, George & Zahra, 2005). Social capital has been shown to be an effective vehicle for resource (particularly, knowledge) mobilization for new firms (Yli-Renko, Autio, & Sapienza, 2001; Shane & Stuart, 2002). As we are moving toward a knowledge society in which knowledge constitutes the central resource for value creation by entrepreneurial firms, the study of knowledge-based influences on firms and their performance is likely to increase in relevance. However, while knowledge mobilization and acquisition have been studied in national contexts, only few studies have examined cross-border learning. Fewer studies still have explored international social capital (Yli-Renko, Autio & Tontti, 2002; Arenius, 2002; Li, 2004; Yeoh, 2004). Because knowledge is arguably the most important resource particularly for knowledge-intensive internationalizing firms, it is therefore important to shed more light on the effect of social capital on external knowledge acquisition in internationalizing new firms. In this chapter, we seek to contribute to received theories and frameworks on international entrepreneurship by studying the determinants of external knowledge acquisition in internationalizing new firms. In particular, we seek to analyze the facilitating influence of relationship-specific social capital on the sharing and acquisition of technological and foreign market knowledge in relationships between internationalizing new firms and their collaboration partners in foreign target markets. Focusing on the single most important international collaborative relationship of a group of independently held, small Finnish software firms, we develop a model that explicates the influences of relationship-specific social capital on efforts to share technological knowledge with the international partner, on technological learning outcomes from the collaborative relationship, and on the acquisition of "foreign organizing knowledge" through this relationship. By doing so, we seek to make several contributions to the understanding of international entrepreneurship and the internationalization process of small- and medium-sized knowledge-intensive firms. First, we contribute to the opening-up of the black box of technological and internationalization learning in international collaborative relationships, thereby shedding light on a central resource-acquisition mechanism for internationalizing firms. Second, we extend the applications of the emerging theory of firm-specific social capital and relational learning to international contexts. So far, the applications of social capital have been predominantly limited to national contexts (e.g., Tsai & Ghoshal, 1998; Yli-Renko, Autio & Sapienza, 2001; Shane & Stuart, 2002). Third, we seek to advance theory development on international entrepreneurship, focusing particularly on the determinants of knowledge acquisition during the internationalization process. Fourth, we seek to contribute to the operationalization of social capital and knowledge acquisition constructs by developing and testing these in the context of internationalizing Finnish software firms. Our chapter is structured as follows. First, we review received theories on the internationalization process of small- and medium-sized firms, focusing particularly on the roles assigned to knowledge and to the acquisition of knowledge in these theories. Second, we develop a theoretical model that explicates relationships between international social capital, technological knowledge sharing, and the acquisition of technological and foreign organizing knowledge in international collaborative relationships. Third, we test the model empirically in a sample of 92 Finnish software firms. Finally, we discuss our findings and the implications of these for theory development in international entrepreneurship.