Innovation-Performance relationship: the moderating role of the Degree of Internationalization

Abstract

Moderator variables are typically introduced when there is an unexpectedly weak or inconsistent relationship between a predictor and a criterion variable (Baron and Kenny, 1986). Holak, Parry and Song (1991) and Zhang, Li, Hitt, and Cui (2007) found an inconsistent relationship between R&D spending (a measure of innovation) and firm performance and so concluded that this relationship should be studied under different contextual factors. One such factor is the Degree of Internationalization (DOI) of a firm. Therefore, this paper evaluates the innovation-performance link in the presence of a moderator - the Degree of Internationalization (DOI). It proposes that DOI moderates the innovation-performance relationship. In addition, this research tests the hypothesis that DOI can affect either the form or the strength of the innovation-performance relationship. Only one previous study has evaluated the moderating effect of DOI on innovation-performance relationship, but this paper did not investigate the influence on the form of the relationship.

The findings of this study are based on time series cross-sectional data of 102 large U.S. manufacturing firms from seven different industries. Data for each firm was obtained for eight years (2000-2007) from the Compustat database. Hypotheses were tested using the TSCSREG procedure with Fuller-Battese method implemented in SAS. The identification and the differentiation of the moderation effect into form and strength were carried out by using the typology from the work of Sharma, Durand and Gur-Arie (1981). The results show that DOI moderates the innovation-performance relationship positively and significantly. In addition, DOI affects the form (direct) and is a quasi moderator of the innovation-performance relationship. In terms of theory, there are two implications. First, that DOI is an important contingency factor when examining the innovation-performance relationship. Predicting the innovation-performance relationship without including DOI may lead to misleading conclusions. Second, when evaluating the relationship between R&D and firm performance, identifying whether DOI moderates the form or the strength of the relationship is needed in order to use a proper analytical technique. In terms of practice, the results sensitize managers to the need to focus not only on innovation activities, but also on their internationalization in order to appropriate the full benefits of their innovations.