Effects of Internationalization on Innovation in the Service Industry: Evidence from Korea

Abstract

I. IntroductionA body of literature suggests that knowledge creation and innovation via learning has become increasingly critical for the success of a company with the advent of knowledge-based economy (Grant, 1996; Zahra and George, 2002; Vila and Kuster, 2007). A firm's ability to acquire, absorb, assimilate, adapt, create, exploit and use new knowledge is now considered one of the most important sources for sustaining competitive advantage (Wang and Ahmed, 2007). In this regard, a firm's international expansion tends to reinforce its organizational structure and business processes, thereby improving its capability for knowledge creation and extension (Castellani and Zanfei, 2007; Prashantham, 2005). International diversification has been proven to affect technology-based companies' ability to learn and perform in global markets (Hitt et ak, 1997; Zahra et ak, 2000).Empirical studies have investigated how internationalization may affect knowledge acquisition and learning effort, by analyzing the relationship between internationalization (via export mode) and firm innovation. Salomon and Shaver (2005) examined the impact of learning from export experience on firm innovation, measured by patent application counts, using a sample of Spanish manufacturing firms. In subsequent studies, Salomon (2006) investigated the role of export strategies in innovative productivity, and Salomon and Jin (2008) analyzed how learning from export experience might show heterogeneous impacts in different industries. Generally, a positive relationship between internationalization and firm innovation was found in this stream of research (Filipescu et ak, 2009; Castelliani and Zanfei, 2007; Trofimenko, 2008). While these studies were undertaken using a variety of data collected from manufacturing companies, we found little research that focused on the association between these rather widely used variables-intemationalization and innovation-in the context of the service industry. While some studies on the service industry also exit, they mainly concerned the impact of internationalization on overall firm performance (Capar and Kotabe, 2003; Goerzen and Makino, 2007) rather than on more specific variables such as innovation.While manufactured goods have dominated world trade over the years, the importance of trade in services is also growing, particularly for industrialized nations. In Singapore, exports comprise 69% of the total service production, while most European countries export between 10% and 20% of their service products, and the USA exports around 5% (Patterson, 2004). In Korea, whose economy is highly dependent on foreign markets, exports of service products accounted for 11% of national total exports in 2009. Furthermore, the outward foreign direct investment (FDI) flows in the service sector worldwide were $476 billion in 2002-2004, while those in the manufacturing sector remained only one-third ($165 billion) of the service sector FDI outflows (UNCTAD, 2008). In 1987-2005, 52% of all cross-border mergers and acquisitions (MA Miozzo and Miles, 2002; Drejer, 2004; Toivonen and Tuominen, 2009).Given this background, this study aims to contribute to the research of the internationalization-innovation link by examining such relationship in the service industry using a large dataset from South Korea (henceforth, Korea). We think that it would be a meaningful endeavor to apply this research framework to the service industry, given that a number of innovations have also been witnessed in this sector - for example, information technology, banking, and legal advice. While the potential strategic importance of international expansion on innovation can be emphasized in all industries, innovation in the service industry appears to be different from that in the manufacturing industry (Ietto-Gillies, 2002). …