FIRM FUNCTIONS AND THE NATURE OF COMPETITIVE ADVANTAGE IN INTERNATIONALIZING SMEs

Abstract

Prior literature suggests that dynamic capabilities enable, on the one hand, firms to respond successfully to the changes in the markets, and on the other hand, to embrace firms’ ability to shape their business environments. However, existing studies have not fully considered how some firms within the same industry are able to shape markets, and why others need to adapt to these changes in a Kirznerian manner. We make an attempt, based on contemporary literature on the microfoundations of dynamic capabilities, to explain how resource allocation between marketing and R&D function — as one of the microfoundations and as a central contributor to innovation — influences the sustainability of competitive advantage and, consequently, a firm’s ability to create or respond to exogenous shocks. Findings from our multiple-case study on internationalizing SMEs indicate that investments in marketing and R&D functions per se are a necessary though not sufficient condition for building dynamic capabilities and competitive advantage. Rather, the extent to which companies are able to follow their own strategies is closely tied to the microfoundations of dynamic capabilities.