Performance of professional service firms from emerging markets: Role of innovative services and firm capabilities

Abstract

Professional service firms (PSF) from emerging markets face a financial dilemma: PSFs tend to utilize high-wage labor, yet their emerging market status makes foreign clients cautious regarding quality and less willing to pay high prices. To allay these concerns, PSFs may be able to develop attractive, highly innovative services, but as the resource-based view (RBV) notes, this requires emerging market firms to possess critical capabilities to support such a competitive advantage. Relying on services theory, we propose that entrepreneurial orientation (EO) of management and expert human capital (HC) are critical capabilities, enabling a PSF to develop and market innovative services profitably. In testing our model on 201 Indian PSFs, we find a mediating role for innovativeness whereby EO and HC drive service innovation which, in turn, accounts for financial performance. Further, we find EO positively moderates the innovative service–performance relationship as proactive, risk-tolerant managers improve foreign marketing. Insights for theory and practice are provided that enable PSFs to overcome the constraints and challenges of their emerging market origin.