Learning by outward and inward internationalization and the outward/inward innovativeness of firms in Poland

Grossman and Helpman [1991] state that exporting firms gain knowledge through interaction and competition on foreign markets, which is not accessible to firms whose operations are limited only to the domestic market. Therefore, according to their opinion, exporting, facilitate the accumulation of knowledge that enables innovation. Through exporting, firms gain access to two types of knowledge: market knowledge and technological knowledge [Salomon and Shaver, 2005]. Market knowledge concerns customers, their expectations and preferences as well as local customs, leading to understanding of customers’ behaviors in a given market environment. Technological knowledge refers to operational processes, methods and techniques, related to scientific understanding of the principles of the functioning of material things and physical phenomena. Studies on learning by exporting prove that international diversification of business activity positively influences the acquisition of market knowledge. It may however cause difficulties in transferring technological knowledge, especially when the internationalization of a firm takes place through exporting, which is not conducive to the control of knowledge flows [Yeoh, 2004; Villar et al., 2020].

Firms that export products obtain information which may be used to adapt their products to international differences in needs and expectations of customers [Clerides et al., 1998]. As a result, exported products mostly differ from what the company previously offered on the domestic market, and this means the necessity of introducing product and marketing innovations, and sometimes also processes that are behind those adjustments. This way, in addition to accumulating market knowledge, firms that export also expand their technological knowledge, using the knowledge and experience of their buyers [Clerides et al., 1998]. Learning by exporting is not just about simple modification of products by responding to the needs of foreign customers, but it is also learning about the possibilities of offering better and new products [Salomon and Shaver, 2005; Salomon, 2006]. Foreign buyers often provide exporters feedback on how to improve existing products, and sometimes also offer their technical or operational support for product development [Evenson and Westphal, 1995]. In addition, exporters are confronted in host markets with competitors that they do not meet in the home market and can use them as an operational benchmark to redesign products to meet the technological standards of foreign competition. Empirical research shows that the emergence of the effect of learning by exporting is favored by the direct involvement of a firm in export activities without the participation of intermediaries and exporting to more developed countries [Salomon, 2006]. D’Angelo et al. [2020] prove that the innovativeness of firms depends on the dynamics of exporting and that foreign collaboration agreements moderate the negative effect of rapid changes in exporting on innovativeness. The role of foreign equity is also raised by Zhou et al. [2020] who report that foreign equity positively moderates the effects of exporting on innovativeness of firms when related to local R&D effort.

Some researchers address the type of innovation that results from learning by exporting. Damijan and Kostevc [2006], who conducted research of Slovenian firms, prove that exports have a positive effect on process innovations implemented by medium and large enterprises, but have no impact on product innovations. At the same time, they state that medium and large firms increase their efficiency as a result of starting exporting for the first time. This may indicate an increase in efficiency resulting from process innovations, strengthening the technical efficiency of the firms. They also note that this type of relationship does not appear in small firms which may be due to their small-scale activities and this may inhibit benefiting from implemented process innovations. Very few studies link the exporting with more types of innovations. For example, Shearmur et al. [2015] show that the Canadian exporters significantly more willingly than non-exporters introduce product, process and management innovations, while for marketing innovations the research results are not clear. The strongest relation is observed for large exporters and does not exist for ad-hoc exporters.

Monreal-Pérez et al. [2012] studied Spanish firms and confirm the hypothesis of autoselection, which state that innovative firms are more likely to start exporting. At the same time, they do not notice any effects of learning by exporting in the form of implementations of process and product innovations, even though exporting firms introduce more innovations than non-exporters. Based on the results obtained, they state that firms are not able to take a full advantage of the possibilities of learning by exporting when they export into a limited number of markets, mainly to the European Union countries. These markets seem to be very similar to the Spanish market; therefore they do not provide new knowledge about products or processes, which could be used in the innovation process. As a result, these firms apply similar strategies as they have in the local market, which does not bring satisfactory results. The authors also point out that the ability to learn by exporting requires parallel running of own R&D which increases the ability to absorb knowledge (knowledge absorptive capacity) [Cohen and Levinthal, 1990]. They believe that this is facilitated by the participation in international joint ventures, as it gives access to the distinctive knowledge of foreign partners [Park, 2011]. The low ability of Spanish firms to learn by exporting is also a result of the low intensity of their exports, which have not yet reached the minimum threshold required to strengthen firms’ innovativeness by international activities [Kafouros et al., 2008]. In addition, they note that the difficulty in learning by exporting and other forms of internationalization is related to a low level of knowledge of foreign languages and the lack of international experience of Spanish managers. They indicate finally that another study including more advanced forms of internationalization might show the effects of learning by internationalization apart from exporting.

As Salomon and Jin [2010] write that the main focus of extant research on relations between internationalization and innovativeness of firms is the possibility of using distinctive resources and abilities developed by the parent company to expand and compete successfully on foreign markets. Later studies begin to notice that an alternative motivation for firms’ international involvement is the access to resources and valuable knowledge in the host country. This approach is particularly visible in the case of firms from emerging economies, i.e. late and new entrants (latecomers, newcomers) that consider entering the markets abroad as a springboard giving them access to strategic resources on foreign markets, allowing them to free themselves from constraints on the home market [Mathews, 2006; Luo and Tung, 2007; Lou and Tung, 2017]. Moreover, it has been found that firms internationalize their activities not only to exploit the knowledge already available (knowledge exploitation), but also to acquire it (knowledge exploration) [Martin and Salomon, 2003; Penner-Hahn and Shaver, 2005; Park, 2011; Tang et al., 2020]. Support for the thesis on influence of internationalization on the innovativeness of firms is provided today by empirical research on both newly created, small firms (international new ventures, start-ups) as well as large international firms investing abroad. It is proved that both international new ventures, as well as subsidiaries of transnational corporations allow transferring knowledge not only from the home country to foreign subsidiaries (exploit knowledge), but also transfer it from the host country to the home country (acquire knowledge). The additional issue that is discussed here is the ability to transfer knowledge (knowledge transfer) and the ability to integrate knowledge (knowledge integration) on an international scale, so that the knowledge from different sources can be effectively used to increase innovativeness and competitiveness of a firm [Almeida, 1996; Zahra et al., 2000; Penner-Hahn and Shaver, 2005; Park, 2011; Lou and Tung, 2017; Tang et al., 2020].

As mentioned above, learning by internationalization of a firm adopting more advanced forms than exports is studied in the context of early-internationalized firms, the so-called international new ventures [Zahra et al., 2000]. Zahra et al. have investigated the influence of international business diversification and foreign entry strategies on the ability of technological learning by internationalization. The results of their research show that international diversity and entry strategy have a very strong influence on the extent and depth of acquired knowledge and the speed of technological learning of firms, and hence—also on their performance. Greater diversity of markets means exposure to more diverse knowledge that can be acquired and used in the innovation processes. However, the sooner the firm increases the spatial extent of the activity, the more difficult for it is to assimilate knowledge, unless the psychic distance between the markets is not significant.

The study by Dunning [1996] on the role of mode of entry for the ability to enhance competitive advantage of transnational corporations at country level indicates that the FDI and non-equity cooperation agreements are more favorable than arm's length transactions (e.g. exporting). This finding has greater significance nowadays since the most often used forms of entry into foreign markets are FDI in newly created firms (start-ups) or acquisitions of local firms, which are a way to acquire new knowledge. Research shows that forms of internationalization based on greater control of knowledge flows, i.e. foreign investments, are positively related to technological learning, while forms with a lower degree of control, e.g. exporting have a negative impact on the learning outcomes. The ability to integrate knowledge (knowledge integration) possessed and acquired by a firm in the course of internationalization is a very important factor influencing the learning process of the surveyed firms [Zahra et al., 2000].

The studies on international entry and operation modes as a path to innovativeness of firms are also conducted by Thakur-Wernz et al. [2019] and Villar et al. [2020]. Research of Indian firms by Thakur-Wernz et al. [2019] showed that the mode of entry and location choices influence the type and nature of innovation activity. The green-field FDI foster innovation in core technologies, whereas brown-field FDI (mergers and acquisitions) support non-core technologies. Subsidiaries located in high income countries encourage product innovation, while subsidiaries in low income countries are conducive to process innovations. Villar et al. [2020] studied Spanish firms’ foreign operation modes and link them with technological and organizational innovations. They differentiate resource-exploiting modes (exporting) from resource-augmenting modes (foreign joint venture, subsidiary, or acquisition). They have found that the resource-augmenting modes are favorable to organizational innovation, but the resource-exploiting modes do not support technological innovations as assumed. This leads to the conclusion that the effect of learning by internationalization depends strongly on the foreign operation mode and the choice of activity locations. Not only is it related with the innovativeness per se, but also with the type of innovations.

Very strong support for the thesis about firms’ learning by internationalization is provided by research on international joint ventures and international strategic alliances, which are considered the most effective way of learning or acquiring technology and hidden knowledge embedded in other companies. It is believed that international joint ventures and strategic alliances facilitate transferring critical skills and abilities of firms that vary according to the national origin [Inkpen, 1998; Park, 2011]. In research on the international learning of firms participating in joint ventures and alliances, the attention of researchers is not limited to the transfer of knowledge from the host country to the home country. They analyze bilateral and multilateral flows of knowledge related to the exploitation and exploration of knowledge carried out between various entities that participate in these flows on an international scale. The subject of research is international, inter-organizational learning, including the ability to transfer knowledge, absorb it, and integrate it within an emerging network [e.g. Lane et al., 2001; Tsang, 2002; Tang et al., 2020].

The impact of learning by international joint ventures or strategic alliances on firms’ innovativeness is quite difficult to investigate using quantitative analysis methods because of the fact that its effects are shared by many involved entities and it can be evaluated from different perspectives. It is easier to explore the relationship of innovation with the international involvement of transnational corporations (TNCs), which operate worldwide in various forms, including joint ventures and strategic alliances. The international involvement of multinational enterprises (MNEs) is usually expressed through exports and foreign direct investment (FDI) and by the spatial extent of markets. It is noted that firms differ in terms of forms of international engagement, combining exporting with foreign direct investments related to their subsidiaries and foreign firms [Greenaway and Kneller, 2007]. These studies are part of a wider context regarding the influence of internationalization on the performance of firms [Kotabe et al., 2002; Greenaway & Kneller, 2007; Kafouros et al., 2008].

In the studies of relationships between the internationalization and innovativeness of international firms (TNCs, MNEs), the most frequently used measures are based on formative variables. For example the internationalization is expressed by FDI, number and distance to foreign markets, whereas the innovativeness is described by R&D expenditure, number of patents or number of patents’ citations. Researchers associated with this issue indicate that the strength of the relationship between internationalization and innovativeness of firms depends on the degree of internationalization achieved, i.e. the degree of firm's international involvement determined by various forms of internationalization such as exporting and foreign investments, spatial scope of firm activity, and its international experience [Kotabe et al., 2002; Kafouros et al., 2008; Shearmur et al., 2015; Thakur-Wernz and Samant, 2017]. So, in all these cases, one cannot discuss any more about learning by exporting, but about learning by internationalization.

Kafouros et al. [2008] prove that only the most internationalized firms achieve positive results from their expenditure on innovations, and the size of the firm does not matter significantly. Furthermore, Frenz and Ietto-Gillies [2007] in their research on international firms in the UK confirm that the degree of internationalization affects the innovativeness of firms. Firms that are part of multinational networks, both domestic and foreign, are more innovative. Not only are all these firms characterized by greater innovativeness, but also by constant conduct of innovative activities. Castellani and Zanfei [2007] investigate the influence of the internationalization on innovativeness of firms manufacturing abroad. They indicate that international Italian firms which have manufacturing subsidiaries in foreign countries are more innovative than those that produce in their home country only. This is interpreted as evidence that access to more diversified knowledge related to production activities is a source of innovativeness.

Shearmur et al. [2015] link the product, process, management, and marketing innovations with the degree of internationalization, which is measured by export intensity of Canadian firms, proving that the exporters are more innovative than non-exporters. Thakur-Wernz and Samant [2017] indicate the influence of international experience of Indian firms on innovation performance and observe the moderating role of knowledge distance between the home and host country on this relationship. Xie and Li [2018] link the relationship between exporting and innovativeness with the distance in the institutional development of home and host countries. They state that, for exporters in emerging economies, stronger support for R&D and better-developed market intermediaries at home enhance the positive effect of exporting on firms’ innovation, while market openness in the home region tends to dampen it. At the same time, exporters exporting mainly to other emerging economies tend to be more innovative than those exporting mostly to advanced markets.

The analysis of the literature review on the relationship of outward internationalization with innovativeness of firms is concluded with following hypotheses posited:

H1a: Outward internationalization is positively related with outward innovativeness.

H1b: Outward internationalization is positively related with inward innovativeness.

The theoretical foundations for the existence of relationships between the inward internationalization and innovativeness of firms can be traced both in the literature on outward/inward internationalization as well as in the one that deals with inward forms of internationalization only and their linkages with performance of firms. Because the coexistence and interdependence of outward and inward internationalization in a firm is not widely comprehended [Welch and Luostarinen, 1993; Korhonen, 1999; Fletcher, 2001], the relationships between both the outward and inward internationalization and innovativeness of firms are rarely tested in empirical research. There are few researchers who address the issue of the influence of exporting and importing or outward and inward FDI on the performance or innovativeness of firms [Bernard et al., 2007; Şeker, 2012; Filippetti et al., 2017; Olabisi, 2017]. The conclusion of research by Bernard et al. is the existence of a positive influence of international openness on the performance of firms, both from developed economies and developing ones. Exporting and importing firms have a greater ability to survive and grow, especially when they also trade internationally with foreign firms or as the transnational corporations do—conduct internal transactions with their subsidiaries [Bernard et al., 2007]. Despite the positive influence of international business openness on firms’ performance, research on the influence of both types of international exchange on firms’ innovativeness is rare. Şeker [2012] in his study proves that both exporting and importing firms are not only growing faster, but are also more innovative than any other group. Exporters occupy the second place, and at the end of the list are firms which are not involved in international exchange [Şeker, 2012]. Research on firms from less developed economies, including the Polish one, also shows that firms that simultaneously export and import grow in the fastest pace and are most effective, followed by those who only export, then by only importing firms, and finally firms that do not participate in international exchange [Hagemejer and Kolasa, 2011]. Şeker also indicates that firms with foreign capital are not more innovative than others. However, the international capital cooperation has a positive influence on the development of firms, as firms with foreign capital are developing faster than local firms [Şeker, 2012].

In a comprehensive study on the impact of internationalization on innovativeness of firms at countries’ level, Filippetti et al. [2017] associate the relationship with an absorptive capacity of a country. Internationalization is represented by outward/inward FDI and exports/imports, while innovativeness is described by patent applications. They show that outward FDI is positively related with patenting, but the countries with high absorptive capacity (high-AC) benefit more. There is also a positive relationship between inward FDI and patenting in high-AC countries, but a negative association in low-AC countries, where inward FDI is supposed to replace innovation activity of local firms. They also indicate that only the low-AC countries benefit from both importing and exporting in terms of knowledge and innovation acquisition.

Last but not least, it is important to mention the results of two previous studies conducted by the author that are based on the same data set, research concept, and methodology. In the first study [Szymura-Tyc, 2015] the subject of analysis is the relationship between the overall internationalization (embracing both the outward and inward forms) with the overall innovativeness (including its outward and inward types). The holistic approach to internationalization and innovativeness revealed a positive relationship between the internationalization and innovativeness of firms with some differences existing by sector and size – stronger for industrial than service firms, and for large and small firms. The second study [Szymura-Tyc, 2018] abandons the holistic approach to innovativeness, linking the overall internationalization with most commonly studied types of innovativeness, i.e. product and process innovativeness. The outcomes of the research show that the overall internationalization contributes more to the process innovativeness than the product innovativeness. The context of these studies is the Polish transition and emerging economy, which may have an influence on the results and conclusions.

As it has been mentioned earlier, the smallest group of researchers focuses only on the inward forms of internationalization and performance of firms, finding that forms such as importing or inward foreign direct investments also support the innovativeness of firms [Greenaway et al., 2004; Salomon, 2006; Şeker, 2012; García et al., 2013; Jin et al., 2019]. However, in the research on relationships between inward internationalization and firms’ innovativeness, it is the inward FDI which attracts significantly more attention than importing. These studies are very often conducted in a broader context (e.g. influence of inward FDI on the effectiveness of local firms) [Haskel et al., 2007] and bring diverse conclusions—from those pointing to their positive impact [Greenaway et al., 2004; Haskel et al., 2007]—to others showing the negative influence of inward FDI on innovativeness of local firms, but positive influence on their efficiency [García et al., 2013]. It is assumed that the type of economy, determined by the degree of its economic development is highly relevant to these results [Greenaway and Kneller, 2007; Şeker, 2012].

The outcomes of these studies are also related to the type of inward foreign investments and forms of activity of foreign firms in the host economy. For example, Greenaway et al. [2004] argue that in a developed economy, such as the UK economy, inward FDI supports exporting of local businesses if the multinational firms carry on R&D locally and conduct exporting activities by themselves too. In turn, García et al. [2013] indicate that FDI coming to Spanish firms and industries has a negative influence on the innovativeness of local firms. They suggest that multinational companies do not rely on the innovations of their Spanish subsidiaries, but instead replace them with innovations coming from their own country or transfer the responsibility for innovations to the parent company. A similar negative effect on the innovativeness of local firms may result from FDI at the industry level, pushing out local innovations and forcing local firms to operate in less profitable niches. However, these researchers emphasize that foreign investments, both at firm and industry level, positively influence the effectiveness of local firms. As a result of a certain combination of competition and side effects related to knowledge flows, local firms introduce more effective production methods or—taken over by foreign partners—use their distinctive competences in the field of leading production methods on the local market. García et al. [2013] assume that inward FDI may be beneficial for local firms increasing their efficiency and helping them modernize production. However, the inward FDI have a detrimental effect on their innovative potential, because although foreign firms bring distinctive technological competences, they can reduce the ability of local firms to implement their own innovations.

In a later study on Spanish firms, Jin et al. [2019] consider the moderating role of technological capabilities on the relationship between inward FDI and local firm innovativeness. They assumed that domestic firms with existing technological capabilities are able to learn better from foreign entrants. Surprisingly, they have found that the local technological leaders apply for patents and introduce new products than the technological laggards. These results reveal that technological capabilities do not protect domestic firms from negative consequences of innovativeness of local firms subsequent to increased competition related with inward FDI.

Based on the literature review on the relationship between inward internationalization and innovativeness of firms, the following hypotheses are formulated:

H2a: Inward internationalization is positively related with outward innovativeness.

H2b: Inward internationalization is positively related with inward innovativeness.