Academic journal article Management International Review

The Product Cycle Revisited: Knowledge Intensity and Firm Internationalization

Academic journal article Management International Review

The Product Cycle Revisited: Knowledge Intensity and Firm Internationalization

Article excerpt

Abstract and Key Results

* This paper presents an expanded version of the product cycle framework, which illustrates how the role of R&D, production and marketing activities, as a salient determinant of competitive advantage, evolves along the product cycle. The framework considers the implications of these changes for the internationalization of firms marketing products belonging to the different phases of the cycle.

* The paper shows how changes in "knowledge-intensity" of products along the product cycle are interrelated with changes in "service-intensity" and "distance premium" and thus enable to predict the sequence in which low knowledge intensive and high knowledge intensive firms internationalize R&D, production and marketing activities.

Key Words

Internationalization, Product cycle, Knowledge, Services, Distance premium

Introduction

Firm-specific knowledge has been traditionally regarded as the single most important determinant of competitive advantage in the international market place. To compete internationally, firms must possess idiosyncratic assets, which compensate for the "liability of foreignness" (Hymer 1976) that penalizes firms engaging in cross-border transactions, relative to their indigenous competitors. Firm specific knowledge has two important characteristics, it can be withheld from competitors, and its transfer across national borders entails significant costs (Teece 1977). A large body of literature exists that examines the relationship between firm specific knowledge and the preferred foreign market servicing mode (e.g., Kogut/Zander 1993, Martin/Salomon 2003). In addition, extensive literature can be found on the internationalization of knowledge creation activities (e.g. Cantwell 1995, Niosi 1997, Patel/Pavitt 1991, Patel/Vega 1999, Papanastassiou/Pearce 1996, 1999), usually referred to as the internationalization of Research & Development (R&D) activities. The present paper adopts a different approach: it examines the relationship between the level of firm specific knowledge (hereinafter: knowledge-intensity) and the internationalization process of firms. More specifically, we pose the following research question: How do changes in the knowledge-intensity of firms affect the sequence and configuration of the internationalization process of their research & development, production and marketing activities?

This research question was motivated by our observations regarding the internationalization modes adopted by a sample of 75 Israeli firms, all heavily engaged in international transactions (1) . Our empirical data showed a relationship between the knowledge-intensity of firms and their internationalization modes, as detailed in Table 1. Table 1 presents data relating to foreign subsidiaries, categorized by the major function these subsidiaries performed: R&D (representing knowledge creation activities), production or marketing. The sample was divided into two groups -47 firms characterized by high knowledge intensity ([H.sub.K] firms) and the remaining 28 firms, characterized by low knowledge intensity ([L.sub.K] firms) (2) .

Analysis of the two groups by the functions of their subsidiaries reveals significant differences: overall, [H.sub.K] firms have a much higher propensity than [L.sub.K] firms to engage in cross-border investment. Moreover, [L.sub.K] firms hardly engage in cross-border investments in R&D, and the share of [L.sub.K] firms with marketing subsidiaries is lower than that of [H.sub.K] firms. The propensity of the two groups to invest in production is about the same.

These internationalization patterns of knowledge creation, production and marketing activities of [L.sub.K] and [H.sub.K] firms seem to make intuitive sense, and it is quite probable, that when a similar analysis is performed on firms from other countries, the distribution of their cross-border activities will not be too different from that shown in Table 1. …

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