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I ncreasingly, multinational corporations (MNCs) no longer simply view emerging countries as manufactur- ing bases; instead, they recognize their market poten-

tial and have begun to develop firm strategies that suit these unfamiliar and turbulent host country environ- ments (Luo and Park 2001; Tan and Litschert 1994). This conjecture is consistent with the traditional environment–strategy–performance framework, which suggests that a firm must be able to scan and make sense of its external environments and then identify strategy to align with such external conditions for success (e.g., Child 1972; Miller and Friesen 1983). Previous research

has demonstrated that different strategies (e.g., tech- nology transfer) are required for MNC subsidiaries to overcome a wide range of external pressures arising from host country markets (Cui, Griffith, and Cavusgil 2005; Cui et al. 2006).

Despite the significant contributions of prior research with regard to the environment–strategy–performance framework (e.g., Luo and Park 2001), studies examin- ing marketing strategy that foreign firms can deploy in their host countries are inadequate. Although the litera-

58 Journal of International Marketing

Journal of International Marketing

©2010, American Marketing Association

Vol. 18, No. 4, 2010, pp. 58–73

ISSN 1069-0031X (print) 1547-7215 (electronic)

Extending the Environment–Strategy– Performance Framework: The Roles of Multinational Corporation Network Strength, Market Responsiveness, and Product Innovation Ruby P. Lee

ABSTRACT The purpose of this study is to extend the traditional environment–strategy–performance framework by including net- work theory to examine when a foreign firm can use its multinational corporation (MNC) network strength to buffer market turbulence and technological turbulence and when the foreign firm can deploy it to support the influences of marketing strategic postures (i.e., market responsiveness and product innovation) on firm performance. The author tests the hypotheses on data collected from 140 foreign firms in China. Although prior research has demonstrated that firms often use multiple strategies and resources to cope with environmental forces, the findings illustrate that different environmental segments have unequal bearings on market responsiveness, product innovation, and MNC network strength. In addition, despite the direct positive influences of individual marketing strategic postures and MNC network strength on firm performance, their combined effects are mixed. The author concludes with a discussion of the implica- tions of these results for research and practice.

Keywords: network strength, market responsiveness, product innovation, environmental forces, China

Ruby P. Lee is Associate Professor of Marketing, College of Business, The Florida State University (e-mail [email protected]).

Environment–Strategy–Performance Framework 59

ture suggests that market responsiveness and product innovation are two particularly critical strategic pos- tures in international marketing, research has not exam- ined these simultaneously in one study. A foreign firm that reacts in a timely manner to local customer needs and develops new markets faster than its competitors in a host country (defined as market responsiveness) has a vital marketing strategy for survival (Lee, Chen, and Lu 2009; Luo 2001). Furthermore, because emerging mar- kets such as China are likely the central battlefields of MNCs across the globe, the foreign firm must adopt a more proactive marketing strategic posture (i.e., prod- uct innovation). By introducing more novel and distin- guishable products than its rivals, through product innovation strategy, the foreign firm should stay competitive in its host country (Li and Atuahene-Gima 2001; Zhang, Di Benedetto, and Hoenig 2009). Thus, foreign firms should concurrently examine these two marketing strategic postures along with their perform- ance implications and further investigate the effective- ness of each in coping with environmental turbulences in their local markets.

In addition, although an MNC network provides criti- cal resources to support the strategic initiatives of an MNC’s headquarters and subsidiaries (Kogut and Zan- der 1993; Lee et al. 2008), little empirical evidence exists regarding the strength of such a network and its role in the relationship between strategy and firm per- formance. An MNC network comprises the MNC’s headquarters, its subsidiaries, and the extent of rela- tional ties formed among these various business units within the MNC network, referred to as MNC network strength. It is also instrumental in gaining access to social capital and knowledge, among other resources (Lee et al. 2008). With the growing importance for for- eign firms to manage overseas markets independently, their success requires support from their connections with other MNC units to overcome their liabilities of foreignness (Andersson, Forsgren, and Holm 2002; Bartlett and Ghoshal 1989; Ghoshal and Bartlett 1990). The current study proposes that by taking into account the direct and indirect influences of MNC network strength, an MNC’s foreign subsidiary can understand the benefits of relying on its MNC network strength. Although this study views knowledge in a general sense rather than a specific kind made available in an MNC network, it maintains that network strength serves as an important source for a foreign firm to tap into a diverse set of knowledge and information embedded in its MNC network.

Together, this research addresses the following unan- swered questions: (1) Which marketing strategic pos- tures can better deal with environmental turbulence in a host country? (2) When should foreign firms use their MNC network strength to obtain resources from their MNC networks to deal with host country environmen- tal turbulence? and (3) To what extent could these for- eign firms use MNC network strength to reinforce the impact of marketing strategic postures on firm perform- ance? In answering these questions, this study extends the traditional environment–strategy–performance framework (Child 1972; Porter 1991; Tan and Litschert 1994) by applying the complementary insights of the international marketing strategy and network literature. The synthesis of the environment–strategy–performance framework and network theory enables researchers to expand the boundary conditions for which potential resources derived through MNC network strength can be used to handle environmental turbulence and support a foreign firm’s marketing strategy and performance in its host country.

The following sections discuss a conceptual framework that links together environmental forces, marketing strategic postures, MNC network strength, and firm performance. Then, a set of hypotheses is developed and tested on the survey data collected from senior execu- tives of 140 foreign firms in China. The results are pre- sented, followed by a discussion of their implications and directions for further research.

CONCEPTUAL FRAMEWORK AND HYPOTHESES

The traditional environment–strategy–performance framework suggests that changes in environmental tur- bulence cause a firm to adopt different strategies for the purpose of defending its competitive advantage and, ultimately, firm performance (Child 1972; Porter 1991; Tan and Litschert 1994). The firm is viewed as an infor- mation processor that has strong cognitive abilities to scan and interpret threats and opportunities arising from external environments, which then lead to strate- gic decisions (Daft and Weick 1984; Weick 1979). Because of its criticality, the strategic choice of a firm remains one of the central focuses in organizational research (e.g., DeSarbo et al. 2005).

In the literature, market responsiveness and product innovation have been suggested as important marketing

60 Journal of International Marketing

strategic postures for MNCs’ survival and organic growth in their host countries (Doz and Prahalad 1991; Porter 1991; Prahalad and Doz 1987). To survive, a for- eign firm must at least be able to respond quickly to local customer needs and competitor actions, emphasiz- ing the importance of market responsiveness (Lee, Chen, and Lu 2009; Luo 2001). Conversely, product innova- tion strategy demonstrates a firm’s long-term commit- ment to the creation of new products that suit current and future needs (Li and Atuahene-Gima 2001). Such strategy that emphasizes offering new and distinguish- able products from those of major competitors is a more proactive one for a foreign firm to pursue organic growth (Zhang, Di Benedetto, and Hoenig 2009).

Building on the environment–strategy–performance framework, Figure 1 shows that a foreign firm’s market- ing strategic postures (i.e., market responsiveness and product innovation) and MNC network strength are means to deal with two types of environmental turbu- lence; therefore, they influence the firm’s performance in its host country. Because MNC network strength may provide additional resources to support the foreign firm’s host country marketing strategic postures, MNC network strength likely reinforces the positive influences of market responsiveness and product innovation on foreign firm performance.

Environmental Turbulence and Marketing Strategic Postures

Strategic choice theorists have long suggested that firms actively manage and control their strategy such that they can adapt to environmental forces and remain competi- tive in the market (Child 1972; Miller and Friesen 1983). This stream of research places emphasis on a firm’s abi- lity to cope with the direct challenges of competitive forces (Porter 1991). In particular, the literature suggests that market and technological environments are two pro- found forces influencing MNCs (e.g., Lee et al. 2008).

Market turbulence refers to the rate of change in cus- tomer preferences and competitive actions in a host country (Cui et al. 2006; Lee et al. 2008). It determines how foreign firms interpret local market information and knowledge generated from their major competitors and customers and then act on and exploit any oppor- tunities presented in such unpredictable environmental changes. In the presence of a turbulent market environ- ment, such as more intensive competition and more fluc- tuated demand, it is important that the foreign firm can sense its own host market and take actions faster than its rival firms in response to different and subtle changes in its local market (Grein, Craig, and Takada 2001; Luo 2001). Longer delays in responding to host market con-

Figure 1. Conceptual Model

Market turbulence

H1a

H2a

H2b

H3b

H3a

H5b

H5a

H5c H4b

H4a

H1b

Market responsiveness

MNC network strength

Product innovation

Technological turbulence

Firm performance

Environment–Strategy–Performance Framework 61

ditions may cause the foreign firm to lose its local mar- ket position (Grein, Craig, and Takada 2001). As such, market responsiveness is a desirable strategy because it requires the foreign firm to apply its existing knowledge to react to changing local market conditions (Lee, Chen, and Lu 2009). When market turbulence increases, the foreign firm is more likely to increase its market respon- siveness accordingly.

H1a: Market turbulence is positively related to market responsiveness.

Similar to market turbulence, technological turbulence may call for equal attention to foreign firms (Lee et al. 2008). Technological turbulence refers to the rate of change in new products and processes as a result of pro- liferating technology in a given host country market (Jaworski and Kohli 1993; Tushman and Anderson 1986). When the foreign firm faces a high level of volatility, change, and unpredictability related to the technology of its host country, market responsiveness that emphasizes timely response to local competitors and customers through the use of existing knowledge could be an attractive marketing strategy (Lee, Chen, and Lu 2009). Frequent changes in technology can make a firm’s product obsolete faster. However, by exploiting alternative markets for its existing products faster than its counterparts, the foreign firm can extend its product life cycle to the untapped markets in its host country. Despite being more reactive, this strategy provides a more cost-effective and speedy means for the foreign firm to overcome the challenges associated with fre- quent updates of new technology in its local market.

H1b: Technological turbulence is positively related to market responsiveness.

Apart from local market responsiveness, the foreign firm may focus on product innovation as an alternative marketing strategic posture to counteract environmental pressures proactively. Product innovation reflects the extent to which a foreign firm can introduce more novel and distinctive products than its competitors in its host country (Li and Atuahene-Gima 2001; Zhang, Di Benedetto, and Hoenig 2009) and is considered a criti- cal strategy to support international market entry (e.g., Lages, Silva, and Styles 2009) and organic growth (Porter 1991).

In the literature, product innovation is a strategy associ- ated with knowledge creation rather than knowledge application, as in the case of market responsiveness

(Nonaka 1994). Researchers have demonstrated that firms that adopt product innovation strategy can reduce the undesirable effects from uncertain environments (Li and Atuahene-Gima 2001). In other words, this strate- gic posture should be useful to manage both market and technological turbulence. When rapid changes of cus- tomer preferences and competition exist, focusing on product innovation enables the foreign firm to offer novel products that not only cater to the needs of local customers but are distinguishable from its competitors, making its product offerings more attractive in the host market (Li and Atuahene-Gima 2001). Product innova- tion strategy also enables the foreign firm to redefine the needs of customers, change the rules of competition, and expand its market for growth (Wind and Mahajan 1997), providing a more proactive strategy to cope with market turbulence.

H2a: Market turbulence is positively related to product innovation.

Similarly, frequent updates and changes in technology become a norm in a volatile technological environment. A foreign firm needs to recognize that it operates in a host country where sudden and unpredictable changes in technological environment can make its current prod- ucts obsolete quickly. As such, to stay abreast of the recurrent changes in technology, continuous commit- ments to product innovation may help the foreign firm break through industry norms and perhaps redefine technological standards in its host market (e.g., Eisen- hardt and Tabrizi 1995), providing a more aggressive approach to offset technological turbulence. Thus:

H2b: Technological turbulence is positively related to product innovation.

Environmental Turbulence and MNC Network Strength

Within an MNC, the connections between foreign units constitute a strategic network (Inkpen and Tsang 2005). This so-called MNC network, which spans across orga- nizational boundaries, enables the network units to interact with one another to exchange ideas and share resources that can facilitate their individual strategic planning and implementation (Andersson, Forsgren, and Holm 2007; Bartlett and Ghoshal 1989). Although an established MNC network does not guarantee net- work or knowledge diversity, a large body of research argues that a network provides idiosyncratic and inimi-

table resources to network members (Andersson, Fors- gren, and Holm 2007; Nohria and Ghoshal 1997). When network strength (i.e., the extent of relational ties formed between MNC units) increases, a focal foreign firm can increase the likelihood that it will obtain a wider range of knowledge from other MNC units (Lee et al. 2008).

Some researchers have shown that social capital, includ- ing trust and information sharing arising from a set of cohesive connections between firms, fosters cooperation and learning, which is essential to organizational success (Burt 1997; Tsai 2001). A high level of network strength implies more closely tied relationships between network members, and social capital likely results from such con- nected social structure (Nahapiet and Ghoshal 1998). In line with this, Inkpen and Tsang (2005, p. 160) observe that in an MNC, “organizational social capital is readily available between network members and the development of individual social capital will help knowledge transfer or sharing.” Consistently, prior research has shown that additional resources (e.g., market information, technical know-how) may be made available to different foreign units belonging to the same network (Nohria and Ghoshal 1997). Thus, although an MNC likely comprises a group of geographically dispersed subsidiaries, strong MNC network strength that promotes more communication and interactions among subsidiaries can overcome the geographic distance between them (Hansen and Løvås 2004). When stronger relational ties and continuous inter- actions with other overseas units of the same MNC network are maintained, the foreign firm is more likely to obtain resources it lacks from the network to deal with its host environmental challenges (e.g., Andersson, Forsgren, and Holm 2002; Gulati, Nohria, and Zaheer 2000).

Specifically, an MNC’s foreign units that are located across the globe may provide a significant source of multiple market knowledge (Inkpen and Tsang 2005). Maintaining closer relationships with other foreign units enables the foreign firm to obtain diverse informa- tion from other MNC units that can guide the foreign firm to evaluate its particular market condition more effectively (Garcia-Pont, Canales, and Noboa 2009). Thus, when the local market is more turbulent, it moti- vates the foreign firm to increase its network strength, which may help the firm obtain a wider range of infor- mation about different marketplaces from other MNC units to help identify and solve its own local market problems (Argote and Ingram 2000).

H3a: Market turbulence is positively related to MNC network strength.

Different from market turbulence, technological turbu- lence is characterized by the frequent and volatile changes of technologies and emphasizes the change in the form of know-how and degree of innovation (Tush- man and Anderson 1986). Extant research suggests that unpredictable changes in technological environments can make the foreign firm’s existing technology obsolete faster (Hansen and Løvås 2004). Therefore, the foreign firm must have a wider scope of knowledge, such as technical know-how, to understand and handle frequent technological changes. In other words, a highly turbu- lent technological environment creates more obstacles for the foreign firm to rely on itself to encounter techno- logical challenges in its host market (Hansen and Løvås 2004). As a result, similar to market turbulence, the presence of high technological turbulence encourages the foreign firm to increase its relational ties with other MNC units for the purpose of obtaining a wider range of knowledge to help identify unique product attributes and new product concepts appropriate to its local mar- ket (Hansen and Løvås 2004; Hansen, Mors, and Løvås 2005).

H3b: Technological turbulence is positively related to MNC network strength.

Performance Implications of Marketing Strategic Postures

In the context of international marketing, the success of an MNC’s foreign operations lies in its market responsiveness to host environments (Prahalad and Doz 1987). Consistent with extant research showing that timely responses to environmental challenges and opportunities are often associated with positive performance outcomes, being responsive to local markets should also increase a foreign firm’s perform- ance (e.g., Luo 2001). Specifically, a foreign firm’s ability to respond to its local market is partly subject to its exploitation competence. Exploitation is “the refinement and extension of existing competencies, technologies, and paradigms” (March 1991, p. 85). The foreign firm that can exploit its existing resources to respond to its customer needs and competitor actions more effectively, and extend its current technology to appeal to its new host market faster than rivals, should have more positive performance (Grein, Craig, and Takada 2001).

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Environment–Strategy–Performance Framework 63

H4a: Market responsiveness is positively related to firm performance.

In addition to market responsiveness, previous research has suggested that product innovation is an alternative marketing strategy that promotes firm performance (e.g., Li and Atuahene-Gima 2001). A literature review shows that product innovation strategy comes with multiple benefits. For example, product innovation signals a firm’s commitment to continuous development of novel ideas and products, enabling the firm to profit from higher market returns (Lee and Chen 2009). In addition, product innovation enables the foreign firm to preempt the market, occupy strategic resources, and create entry barriers (Lieberman and Montgomery 1998). Offering new products that can differentiate themselves from their major competitors and potentially increase market demands should lead to positive firm performance.

H4b: Product innovation is positively related to firm performance.

Performance Implications of MNC Network Strength

Previous research has suggested that knowledge from different foreign units within the MNC network is richer than what an individual foreign firm alone can derive (Inkpen and Tsang 2005). Broader knowledge gives the focal firm greater flexibility and more ideas to respond to local challenges. Despite the cultural and lan- guage barriers that may arise between MNC foreign units (Luo and Shenkar 2006), as previous research has indicated, when entities are closely connected, business units or firms are motivated to exchange ideas and share resources (Tsai 2001; Uzzi 1999). Stronger network strength enables different foreign units to overcome pos- sible communication barriers, making synergistic bene- fits such as complementary or new knowledge likely to be developed (Nohria and Ghoshal 1997). Thus, when MNC network strength promotes more knowledge pooling, which could increase the foreign firm’s compe- tencies, positive performance outcomes should result (e.g., Lee et al. 2008; Luo et al. 2004).

H5a: MNC network strength is positively related to firm performance.

Furthermore, access to more knowledge and informa- tion through MNC network strength not only induces a direct effect on firm performance but also bolsters the

positive effects of marketing strategic postures on firm performance. Increases in MNC network strength help the foreign firm obtain more resources from other for- eign subsidiaries and its headquarters to reinforce its responsiveness to local environments (Hansen and Nohria 2004). In particular, firms with stronger ties are associated with higher levels of trust, which facilitate market information exchange (Tsai and Ghoshal 1998). Because more diverse information and broader knowl- edge contained in the MNC network may become avail- able to the focal foreign firm, it gives the firm more ideas to identify its local market trends and opportuni- ties and determine which current product attributes are favorable in its local market (Roth et al. 2009). Informa- tion sharing enables the foreign firm to be more respon- sive to its local market, improving its understanding of market trends. Thus, MNC network strength should reinforce the positive impact of market responsiveness on firm performance.

H5b: MNC network strength positively moderates the impact of market responsiveness on firm performance.

Similarly, MNC network strength should make the effect of product innovation strategy on firm perform- ance stronger. Product innovation involves substantial technical know-how to make products new and creative (Eisenhardt and Tabrizi 1995). Thus, it requires a for- eign firm to have access to a wide range of updated tech- nology. When the foreign firm and other units within the MNC network are closely tied, they are likely to coordinate and communicate with each other more effectively and accurately, thereby facilitating knowl- edge assimilation and transfer (Inkpen and Tsang 2005). Because knowledge about product developments can be more technical and difficult to assimilate, strong ties can increase mutual sharing and interactions during the process of knowledge assimilation and application (Eisenhardt and Tabrizi 1995; Hansen and Løvås 2004), thus strengthening the impact of product innovation on firm performance.

H5c: MNC network strength positively moderates the impact of product innovation on firm performance.

METHOD Sample and Data Collection

This research investigates MNCs’ foreign operations in China, one of the fast-growing emerging economies that

64 Journal of International Marketing

demand foreign firms to have different marketing strate- gic postures to cope with turbulent host country envi- ronments (Luo and Park 2001; Tan and Litschert 1994). As a result of domestic market saturation, MNCs from developed countries continue to expand to foreign mar- kets, such as China, by setting up wholly owned sub- sidiaries or joint ventures. Because the Chinese market is significantly different from Western economies, foreign firms are likely to develop their own strategies and resources to cope with various local environmental forces in their host country. Thus, China provides a dynamic, yet appropriate setting to test the proposed theory.

The sampling frame of this study was based on a list provided by a leading university in Shanghai. The list comprised MBA alumni who had extensive work experience and were employed currently by either for- eign wholly owned subsidiaries or joint ventures in high- technology industries. This study uses the term “foreign firms” to reflect both types of ownerships. Similar to recent organizational research conducted in China, data were collected on-site (e.g., Li and Atuahene-Gima 2001). Interviewers contacted each foreign firm on the list by telephone to identify a key informant who was knowledgeable about his or her local operations from each firm, verify the address, and set up appointments to drop off and pick up the survey. All respondents pro- vided their responses within prescheduled pickup dates; thus, no early or late responses are reported in this study. Of 300 firms contacted, 140 completed the survey.

Among the respondent firms, 23.6% were partially owned ventures and 76.4% were wholly owned sub- sidiaries; their headquarters were located in the United States (53%), Europe (34%), Asia (10%), and others (3%), comparable to the foreign direct investment trend the People’s Republic of China Ministry of Commerce reported in 2006, a year before data collection. These foreign firms represent a wide range of high-technology industries, including telecommunications, software development, and information technology, and had operated for an average of 14 years in China.

Response Bias and Validity Checks

To verify the validity of the data, multiple business directories and other sources were used to acquire nec- essary secondary data, including firm age, sales, and the number of employees, so that nonrespondent firms could be compared with respondent firms. There were

no significant differences between these two groups on the previously mentioned demographic variables, sug- gesting that nonresponse bias unlikely existed. Next, the qualification of key informants was checked. The survey directed respondents to report on their positions and years employed with their firm. Approximately 90% of the respondents had worked for their company for an average of five years and were senior executives familiar with their local operations.

Questionnaire Design and Development

Each of the individual construct operationalizations was drawn from the appropriate prior research. Because the initial questionnaire was constructed in English, two bilingual graduate students fluent in both English and Chinese translated the questionnaire in Chinese and back-translate it in English. Two bilingual academic researchers then compared the back-translated question- naire with the original English version and found no major differences. As a pretest, five senior executives who were familiar with their firms’ operations in China evaluated the Chinese instrument to ensure that the model was appropriately bounded. The pretest respon- dents were extensively debriefed following survey com- pletion. Then, the survey instrument was refined on the basis of their comments. Finally, the survey was admin- istered to the preidentified respondents, who were asked to evaluate their host country environments and their operations in China.

Measures

Market turbulence was conceptualized as the extent of instability in a host country marketplace. In line with previous studies (Lee et al. 2008), a four-item, seven- point Likert scale was used to measure the level of host country market turbulence. The four items were as fol- lows: (1) “New customers tend to have product-related needs that are different from those of our existing cus- tomers,” (2) “We are witnessing demand for our prod- ucts from customers who have never bought them before,” (3) “Our competitors are consistently changing their product features,” and (4) “Our competitors are consistently changing their sales strategies.”

The survey defined technological turbulence as the pace of changes in technology and measured it on a seven- point Likert scale with four items derived from Jaworski and Kohli (1993): (1) “The technology in our industry is changing rapidly,” (2) “Rapid technology change in our industry necessitates frequent product modifica-

Environment–Strategy–Performance Framework 65

tions,” (3) “Technological developments in our industry are frequent,” and (4) “Technological changes in our industry provide major opportunities.”

Market responsiveness was conceptualized as the degree to which a foreign firm can respond to the opportunities of its host country in a timely manner (Lee, Chen, and Lu 2009; Luo 2001). The scale consisted of four items adapted from Jaworski and Kohli (1993) and Luo (2001) and was anchored on a seven-point Likert scale: (1) “We respond to our customer needs in a speedy man- ner,” (2) “Our entry to new markets is timely,” (3) “We are always one of pioneers to new markets,” and (4) “When we find that our customers would like us to modify a product or service, we are all involved to make concerted efforts to do so.”

Product innovation was conceptualized as the extent to which a foreign firm produced and launched products that were more creative and differentiated than its com- petitors (Li and Atuahene-Gima 2001). Two items adapted from Atuahene-Gima (2005) and anchored on a seven-point semantic differential scale were included: “In comparison to major industrial competitors (1) our products are not at all creative–very creative and (2) the degree of product differentiation is relatively low– relatively high.”

The survey referred to MNC network strength as the extent of relational ties between the focal foreign firm and other units in the MNC network. Drawing from the work of Lee and colleagues (2008), five items were included: (1) “There is very little interaction among our units” (reverse coded), (2) “Relations among our for- eign units are very close,” (3) “Our foreign units share frequent communications,” (4) “Our foreign units dis- cuss common problems frequently,” and (5) “Our for- eign units share close ties among themselves.” All items were anchored on a seven-point Likert scale.

In line with Li and Atuahene-Gima (2001), the survey measured firm performance by prompting the respon- dents to compare their own operations with the major competitors in their host country in the past three years on the following six items: market share, sales growth, return on assets, overall product or service quality, over- all profitability, and customer satisfaction. Finally, a firm’s age or years of operation likely influence its abi- lity to learn and acquire resources and eventually affect its performance. To control for such possible nuisance effects, firm age, measured by the years of operations in China, was included. The Appendix provides the details of the measures, and Table 1 summarizes the basic descriptive statistics and correlation coefficients of the constructs.

Table 1. Descriptive Statistics and Correlation Matrix

1 2 3 4 5 6 7

1. Market turbulence .61

2. Technological turbulence .46** .77

3. Market responsiveness .26** .30** .60

4. Product innovation .15* .41** .33** .53

5. MNC network strength .22** .04 .18** .11 .82

6. Firm performance .27** .14 .28** .26** .30** .78

7. Firm age .08 .03 –.13 –.10 .05 .15 —

M 4.55 4.73 4.83 4.79 4.91 4.91 14.00

SD 1.13 1.46 1.07 1.33 1.30 1.30 14.52

*p < .10 (two-tailed test). **p < .05 (two-tailed test). Notes: The average variance extracted of each construct is on the diagonal.

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To reduce concern about common method variance, sev- eral approaches were used (Podsakoff et al. 2003). First, the questionnaire was designed carefully by separating the key constructs into several subsections and using dif- ferent formats to reduce informants’ use of simple “straight-line” responses. Second, the Harman’s single factor test was conducted to assess whether a common method bias exists in the data. Using exploratory factor analysis, a model that had items for all the latent con- structs was estimated. Five eigenvalues exceed 1, rang- ing from 1.07 to 6.64. The rotated component matrix showed that all the measurement items loaded onto their respective factors, indicating no substantial com- mon method bias in this study. Third, in line with mul- tiple guidelines, partial correlation analysis was con- ducted to assess any potential common method bias (Lindell and Whitney 2001). The results from a series of partial correlation analyses indicate no hidden correla- tions between paired variables that are masked by the effect of other variables, again suggesting that common method variance is unlikely a concern.

LISREL8.7 was used to conduct a confirmatory factor analysis to evaluate all items. The Appendix summarizes the confirmatory factor analysis model results. Overall, there was a satisfactory fit, as indicated by a model com- parative fit index of .96, a nonnormed fit index of .95, a root mean square error of approximation of .07, and a standardized root mean square residual of .05. The model chi-square is 262.64 with 155 degrees of freedom (p < .01). In addition, all factor loading estimates of the measurement items, ranging from .69 and .93, are sig- nificant at the 1% level. Average variance extracted (AVE) ranged from .53 to .82, and construct reliabilities ranged from .69 to .95 (Nunnally and Bernstein 1994). With regard to evidence of discriminant validity, as Table 1 shows, in all cases the AVE of each factor exceeded the squared correlation between the factor pair (Fornell and Larcker 1981). In short, these results support the construct validity of the measurement model. Table 1 presents the descriptive statistics along with the correlations and AVEs of the variables.

RESULTS

STATA 9.0 was used to conduct the three-stage least squares (3SLS) along with seemingly unrelated regression (SURE) to test the hypotheses because the conceptual model contained multiple linear equations. Furthermore, because the errors arising from the linear equations of marketing strategic postures and MNC

network strength (see Models 1–3 in Table 2) are likely correlated, the 3SLS method combined with SURE can control for contemporaneous correlation of errors across the equations and thus produce more efficient estimates (Greene 2005). To address multicollinearity, in line with established procedures, related variables were mean centered before creating proposed inter- action terms to test the hypotheses (Aiken and West 1996).

Table 2 summarizes the hypothesis testing results. With regard to H1a and H1b, which postulate the positive influences of market and technological turbulence on market responsiveness, the hypotheses are supported. As Model 1 shows, market responsiveness is influenced positively by market turbulence (b = .16, p < .05) and technological turbulence (b = .17, p < .01), in support of H1a and H1b, respectively. H2a, which predicts a positive relationship between market turbulence and product innovation (b = –.04, p > .05), is not supported (see Model 2). However, the results support H2b, that tech- nological turbulence positively influences product inno- vation (b = .39, p < .001). H3a and H3b postulate that market turbulence and technological turbulence influ- ence MNC network strength, respectively. The findings shown in Model 3 indicate a positive influence of mar- ket turbulence on MNC network strength (b = .32, p < .01), in support of H3a. However, in contrast with H3b, technological turbulence does not affect MNC net- work strength (b = –.08, p > .05).

In terms of the direct effects of marketing strategic pos- tures and MNC network strength on firm performance, the findings shown in Model 4 point to the expected direction that market responsiveness (b = .28, p < .01) and product innovation (b = .16, p < .01) positively influence firm performance, in support of H4a and H4b, respectively. With regard to the performance implication of MNC network strength, the results show that MNC network strength (b = .25, p < .001) is positively related to firm performance, in support of H5a.

To examine the interaction effects, Model 5 was con- structed by adding the interactions of network strength with market responsiveness and product innovation to Model 4. The results show that MNC network strength further serves as a moderator to reinforce the positive impact of market responsiveness on firm performance (b = .15, p < .05), confirming H5b. However, in contrast with H5c, MNC network strength reduces the positive effect of product innovation on performance (b = –.11, p < .05).

Environment–Strategy–Performance Framework 67

In addition, in line with Cohen’s (1988) procedure, the R-square between Models 4 and 5 were compared to examine the effect size of the interaction terms, which was .05. Although the effect size is considered small, it is statistically different from zero at the 5% level (F-incremental value = 2.64), suggesting the significant impact of the proposed interaction terms. Finally, a 3SLS without the option of SURE was conducted, and the results stayed substantially the same as those reported in Table 2, indicating the robustness of the findings.

DISCUSSION

This study examines the roles of marketing strategic postures and MNC network strength in mitigating envi- ronmental turbulence to affect firm performance among foreign firms in China. Building on the environment– strategy–performance framework (Child 1972; Tan and Litschert 1994), this research proposes that market responsiveness and product innovation are two market- ing strategic postures that help foreign firms navigate

market and technological turbulence in China. In addi- tion, network theory offers insights into when a foreign firm should use its MNC network strength to deal with turbulent environments and facilitate firm performance (e.g., Andersson, Forsgren, and Holm 2007; Inkpen and Tsang 2005).

Theoretical Implications

This research provides several insights to academia. First, the findings confirm and extend the traditional environment–strategy–performance framework by showing that market responsiveness and product inno- vation are two critical marketing strategic postures to deal with turbulent environments and create superior firm performance in a foreign market (Porter 1991). In particular, both market and technological environments shape the strategic posture of market responsiveness, which in turn produces positive performance outcomes. However, the results indicate that only technological turbulence influences foreign firms to focus on product innovation strategy. The current findings demonstrate

Table 2. 3SLS Regression Results (N = 140)

Model 1 Model 2 Model 3 Model 4 Model 5

Market Product MNC Network Firm Firm Responsiveness Innovation Strength Performance Performance

Constant –1.38*** –1.43*** –1.13* 4.69*** 4.68***

Firm age –.01* –.01 .01 .02* .02*

Market turbulence .16* –.04 .32**

Technological turbulence .17** .39*** –.08

Market responsiveness .28** .29**

Product innovation .16** .11

MNC network strength .25*** .26***

Market responsiveness × MNC

network strength .15*

Product innovation ×

MNC network strength –.11*

χ2 21.47*** 30.42*** 8.47** 39.20*** 46.27***

R2 .13 .18 .05 .20 .24

*p < .05 (one-tailed test). **p < .01 (one-tailed test). ***p < .001 (one-tailed test). Notes: The results reported here are estimated simultaneously by the 3SLS and SURE. When the option of SURE is removed, the results remain largely the same.

68 Journal of International Marketing

the importance of evaluating multiple environmental segments and examining how each of them shapes dif- ferent marketing strategic postures rather than viewing environmental factors as creating identical impacts on strategic initiatives.

Second, this study expands the scope of the traditional environment–strategy–performance framework by including MNC network strength. In particular, the results show that MNC network strength can be a buffer alternative to marketing strategic postures in dealing with market turbulence and generating positive performance outcomes. When a foreign firm is situated in a turbulent market environment, it should increase MNC network strength because doing so underscores the likelihood of obtaining more valuable resources and broader knowledge from other network members to help solve its local market problems (Inkpen and Tsang 2005).

Third, MNC network strength can act as a moderator to influence the impact of strategy on firm performance. However, MNC network strength entails a characteris- tic that can produce mixed effects (Uzzi 1997). On the one hand, strong social ties can be detrimental to knowledge creation (Ahuja 2000; Uzzi 1999); on the other hand, strong ties can be useful to facilitate inter- actions and sharing (Tsai and Ghoshal 1998). There- fore, should a foreign firm turn to or away from its MNC network for resources? This question can be resolved by simultaneously considering the types of marketing strategic postures the foreign firm adopts. The results indicate that MNC network strength is an asset to reinforce the impact of market responsiveness on firm performance, and at the same time, it acts as a liability to reduce the positive effect of product innova- tion on firm performance. Such findings are consistent with Buckley and Martin (2004, p. 381), who observe that “complementarity of different kind arises when there are interactions between the operations of a firm in different geographical or product areas. These inter- actions may be positive (complementary) or negative in their impact on the outcome for the firm.” In line with their observation, this research also finds that MNC net- work strength is not universally advantageous to every foreign firm, because the knowledge and information acquired from other network members may not neces- sarily help the focal foreign firm in strategizing.

Importantly, the benefits of using network strength to increase the focal foreign firm’s performance depend on which marketing strategic postures it pursues. It may be

that product innovation strategy requires more technical knowledge, and such knowledge is typically more tacit and stickier to assimilate and transfer. Alternatively, product innovation demands more creative thoughts and ideas. However, stronger social ties may sometimes encourage network firms to reach consensus, which may impede, rather than facilitate, the foreign firm in formu- lating new products, undermining the impact of product innovation on performance (Granovetter 1973; Uzzi 1997). Amid the conflicting role of network strength, this study not only provides a clearer bound- ary for foreign firms in using their MNC network strength but also widens the application of the tradi- tional environment–strategy–performance framework.

Managerial Implications

This research offers further insights to practitioners. In particular, the results of this study show that market responsiveness and product innovation are two market- ing strategic postures a foreign firm should pursue simultaneously to navigate technological turbulence in its host country. Responding in a timely manner to fre- quent technology updates in a host country is impor- tant. Yet unprecedented changes in technology may require the foreign firm to be more proactive. Product innovation strategy helps the foreign firm stay afloat in technological races to deal with such a volatile techno- logical environment as in the case of China (Li and Atuahene-Gima 2001).

With respect to local market turbulence, the results demonstrate that market responsiveness is an effective strategy to overcome rapid changes in local market demands and competitor actions. Therefore, it would be wise for managers of foreign firms to monitor and increase their responsiveness to host market environ- ments (Lee, Chen, and Lu 2009). However, this study finds no support for the use of product innovation strategy to deal with market turbulence. A possible explanation is that when the trend of local customer preferences and needs is so unpredictable, combined with a random pattern of competitor actions, foreign firms may find it difficult to create new products that suit the local market. Particularly in China, where a wide range of customers and intense competition exists, launching new products is never an easy task (Penhirin 2004).

The findings further indicate that only market turbu- lence influences MNC network strength; technological turbulence has no impact on MNC network strength.

Environment–Strategy–Performance Framework 69

Note that the primary function of MNC network strength is to help a focal foreign firm access resources embedded in its MNC network (Inkpen and Tsang 2005). By strengthening its social ties with other foreign subsidiaries, the focal foreign firm can obtain resources needed for dealing with its own local environment (Andersson, Forsgren, and Holm 2002). Perhaps fre- quent changes in technology from a host country make it difficult for the foreign firm to evaluate which resources are needed from its network. In addition, the foreign firm may not rely on the collective wisdom pro- vided by its network members because doing so could create inertia to change and prevent the foreign firm from identifying breakthrough technologies and realiz- ing opportunities (Hamel and Prahalad 1994). Because the cost of networking outweighs its benefits in the pres- ence of technological turbulence, the consideration of building MNC network strength could become irrele- vant for the foreign firms that attempt to deal with fre- quent technological changes in China.

In contrast, because changes in market conditions are likely to be more observable than those in technology across host countries, the information and knowledge shared within the MNC network provide tremendous inputs for the foreign firm to manage the unpredictable market demands and capricious competitor challenges. Broader market knowledge and diverse market informa- tion shared in the MNC network give the foreign firm more support to identify its local market trends quickly. In addition, compared with technical knowledge, mar- ket knowledge may be less sticky to assimilate and transfer. Therefore, increases in market turbulence may encourage the foreign firm to strengthen its relational ties with other MNC units to obtain resources for solv- ing its local marketing problems.

Regarding the performance implications of strategic postures and MNC network strength, market respon- siveness and product innovation as two marketing strategic postures and MNC network as a resource fac- tor determine firm performance in positive ways. For- eign firms are encouraged to develop these important strategic postures because they increase performance. In addition, MNC network strength as a means to obtain information and facilitate knowledge transfer between foreign units boosts the foreign firm’s local performance (Andersson, Forsgren, and Holm 2002; Hansen, Mors, and Løvås 2005). Managers of foreign firms should take advantage of the possible resources derived from their MNC network strength to garner positive firm performance.

Finally, regarding whether MNC network strength rein- forces the impacts of marketing strategic postures on firm performance, the results are mixed. Foreign firms that operate in China should be cautious and under- stand when the configuration of MNC network strength and strategic initiatives provides the best performance outcomes. On the one hand, MNC network strength is important because it enables the foreign firm to exchange ideas with other firms within the MNC net- work and quickly access needed resources, thus strengthening the firm’s impact of market responsive- ness on firm performance. On the other hand, MNC network strength may be harmful to firm performance when it is used with product innovation strategy (Hamel and Prahalad 1994). Although strong ties encourage more communications and idea exchange, some research cautions that (1) because of redundancies in the information and knowledge being shared inside a net- work, it may not provide any new insights (Granovetter 1973) and (2) strong social ties may force network firms to strive for consensus, and such collective thinking may hinder, rather than facilitate, the foreign firm’s formula- tion of new products (Granovetter 1973, 1985); as a result, MNC network strength may reduce the effect of product innovation on performance. Importantly, China is a unique market largely different from Western societies, demanding foreign firms to develop more alternative solutions, fresh insights, and novel ideas. Thus, foreign firms should not use their MNC network strength blindly.

Limitations and Further Research

Despite the important findings presented in this study, some limitations and issues warrant further discussion. First, the current study considers neither the organiza- tional structure nor the reward system of an MNC, which may affect the communications and information sharing structure between its business units. Foreign units may take more initiatives to help each other if their headquarters promote and reward them for doing so. Comparable studies of different organizational struc- tures and reward systems may provide additional insights (e.g., Andersson, Forsgren, and Holm 2007; Garcia-Pont, Canales, and Noboa 2009).

Second, this study does not consider the nature of knowledge and information being transferred and assimilated between MNC network members. It is pos- sible that certain knowledge required by a foreign firm is too new, tacit, sticky, or complicated to be shared by other MNC units. Further studies should take into

account how different types of knowledge may affect the use of network strength. Along the same line, further studies could examine the diversity of an MNC net- work, the geographic proximity of network members, and cultural distance between network members, because these factors may be related to the range and types of knowledge available to network members.

Third, because the respondents were high-profile execu- tives, a relatively short survey was used to encourage responses. The survey did not include at least one theo- retically unrelated variable as a marker variable, a tech- nique suggested in the literature to assess common method variance (Lindell and Whitney 2001). There- fore, further research is encouraged to perform marker-

variable analysis in addition to other approaches (e.g., Harman’s one-factor analysis) to ensure that common method variance is not a concern (Chang, Van Wit- teloostuijn, and Eden 2010).

Fourth, although China and other emerging economies share many aspects in common, such as economic growth and country risk, it is widely known that differ- ences in culture (e.g., uncertainty avoidance among cus- tomers) constitute a critical component influencing how managers of different countries perceive environmental forces and process information (e.g., Song, Calantone, and Di Benedetto 2002). Further research could exam- ine whether the findings of this study hold true in other emerging economies.

70 Journal of International Marketing

Appendix. CFA Results and Measures

Standardized Construct Measures Factor Loadings AVE Reliability

Market Turbulence (anchored on a seven-point Likert scale) .69–.89 .61 .83

New customers tend to have product-related needs that are different from those of our existing customers.

We are witnessing demand for our products from customers who never bought them before.*

Our competitors are consistently changing their product features.

Our competitors are consistently changing their sales strategies.

Technological Turbulence (anchored on a seven-point Likert scale) .80–.92 .77 .91

The technology in our industry is changing rapidly.

Rapid technology changed in our industry necessitates frequent product modifications.

Technological developments in our industry are frequent.

Technological changes in our industry provide major opportunities.*

Market Responsiveness (anchored on a seven-point Likert scale) .78–.81 .60 .82

We respond to our customer needs in a speedy manner.

Our entry to new markets is timely.

We are always one of pioneers to new markets.

When we find that our customers would like us to modify a product or service, we are all involved to make concerted efforts to do so.*

Product Innovation (anchored on a seven-point semantic differential scale) .69–.77 .53 .76

Compared to our major industrial competitors …

Our products are … not at all creative–very creative.

The degree of product differentiation is … relatively low–relatively high.

Environment–Strategy–Performance Framework 71

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THE AUTHOR

Ruby P. Lee is Associate Professor of Marketing in the College of Business at The Florida State University. She holds a doctoral degree from Washington State Univer- sity. Her current research interests include marketing strategy and metrics, product innovation, knowledge management, and interfirm relationships. In addition to Journal of International Marketing, she has published in Journal of Marketing, International Journal of Research in Marketing, Decision Sciences, Journal of the Academy of Marketing Science, and Journal of Product Innovation Management, among others.

ACKNOWLEDGMENTS

The author thanks the three anonymous JIM reviewers and the seminar participants at the Department of Marketing and Management, Faculty of Business, Hong Kong Polytechnic University, for their constructive comments.

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