The Nexus between Innovation and Internationalization. Evidence from a micro-level Survey of the Romanian ICT Business Sector

ABSTRACT

The aim of this paper is to explore the nexus between innovation and internationalization (the “self-selection hypothesis”) in the behavior of business organizations operating in the ICT sector. The data was gathered from a survey of national and multinational companies in the Romanian ICT sector. The results show a significant positive influence between innovation and internationalization, although this relationship is more robust for multinational companies, due to the history and strategies of parent companies. The findings have major implications for literature, macroeconomic management, and business practice.

KEYWORDS:

• Business
• innovation
• internationalization
• high-tech
• self-selection

JEL CLASSIFICATION:

• codes: F 23
• O 32

Introduction

Since the 1970s, seminal contributions have shown that innovation is crucial for international expansion of firms and for their sustainability and prosperity (Johanson and Vahlne, 1977). Innovation has also been linked to competitive advantage in foreign markets (Porter 1990, 2008; Genc, Dayan, and Genc 2019; Bagheri et al. 2019). Firms, especially latecomers, incrementally expand their international operations as they gain experience and knowledge (Mathews 2002a,2017).

Innovation and internationalization have become complementary growth strategies that are mutually reinforcing in a virtuous dynamic circle (Golovko and Valentini 2011; Kyläheiko et al. 2011; Filippetti, Frenz, and Ietto-Gillies 2011; Bannò, Morandi, and Varum 2013). However, researchers draw heterogeneous results on the effects of innovation on internationalization, explanations mainly concerning the business environment (Lachenmaier and Wößmann 2006), public policies (Bannò, Morandi, and Varum 2013), the type of innovation (Cassiman, Golovko, and Martínez-Ros 2010; Cassiman and Golovko 2011), firm size (Dunning 1980; Oviatt and McDougall 1997).

Examining the two-way relationship between innovation and internationalization, Vila and Kuster (2007) provide empirical results confirming that internationalization influences innovation at the firm level and, at the same time, the more innovative a firm is, the more likely it is to expand internationally. In the same vein, Filipetti et al. (Filippetti, Frenz, and Ietto-Gillies 2009, 2011) document the existence of an influential relationship between innovation and internationalization in the form of a virtuous circle and conclude that innovative firms enjoy success in foreign markets. This view is also supported by Chiva, Ghauri, and Alegre (2014) who show that innovation and internationalization are two mutually conditioning processes, forming part of a virtuous circle. Organizational learning, innovation and internationalization are interconnected processes that influence firm competitiveness.

Surveys such as that conducted by Altomonte et al. (2013) on 14,759 European firms with more than 10 employees in seven EU Member States report that large firms are highly active in foreign markets and at the same time carry out complex innovative processes. Moreover, they show that there is a relationship between exports and product/process innovation and that high innovation intensity correlates positively with foreign operations. A broader perspective is outlined by Frenz and Ietto-Gillies (2003, 2007, 2009) and Frenz, Girardone, and Ietto-Gillies (2005) who question the relationship between multinationality and firms’ propensity to innovate not only in manufacturing, but also in services, showing that MNCs have an international network that facilitates knowledge transfer, encourages learning, etc. with a positive impact on innovation capacity. In their interesting study, Archibugi and Iammarino (2002) even put forward the idea of globalization of innovation as a connection between two remarkable phenomena, namely the deepening integration of economic activities at the global level and the vital importance of knowledge in these activities, and show that to a large extent, but with obvious heterogeneity between countries, there is a link between R&D and production of MNCs’ foreign affiliates.

Alongside the direct effects that innovation exerts on the decision to expand into foreign markets, the spill over effects into the economy are also noteworthy. The adoption of ICT in firms in other sectors is likely to increase the propensity to exporting/internationalization through several mechanisms (Hagsten and Kotnik 2017). Thus, depending on the size of the firm and the sector in which it operates, recourse to ICT has the potential to facilitate innovation, with effects on the productivity dynamics and competitive position of firms, to reduce transaction costs, to organize production more efficiently, to facilitate communication between seller and buyer, to access knowledge about markets and customers, etc. (Añón Higón and Bonvin 2022).

The mainstream literature examines either of two hypotheses, namely self-selection and learning-by-exporting. The self-selection hypothesis suggests that the most productive or innovative firms self-select in their export markets (Ayob, Freixanet, and Shahiri 2022; Cassiman, Golovko, and Martínez-Ros 2010; Cassiman and Golovko 2011), while the learning-by-exporting hypothesis underlines the empowering role of exporting on performance in innovation and productivity (Altomonte et al. 2013; Freixanet, Monreal, and Sánchez-Marín 2021; Freixanet and Rialp 2022). From this viewpoint, our research is premised on the hypothesis of self-selection, without, however, focusing exclusively on export as a mode of internationalization of the firms surveyed. Within this contextual framework, the aim of this paper is to explore the nexus between innovation and internationalization in the behavior of business organizations operating in the ICT sector.

The research focuses on companies in the ICT sector because this sector has seen significant developments in recent decades in all economies of the world, due to the positive impact of the inclusion of digital technologies in various activities, as well as other such tools that ICT companies offer to individuals/organizations/institutions. At the same time, the pandemic crisis highlights the major role of digitization of some activities and the significant benefits of including various IT means in the technical infrastructure of a business organization or an institution. Moreover, in the context of what we have previously called the knowledge economy and what we call, more recently, the digital economy, successful business organizations are exploiting the advantages of ICT to increase their competitiveness in the global market. Because of intense innovative activity and global presence, the ICT sector has become a “must have” in the world’s economies.

For Romania, as traditional growth engines have slowed, the ICT sector could become one of the main drivers of sustainable growth, which places it in the role of `digital challenger`, with significant prospects of improving its global competitiveness (Novak et al. 2018). Romania’s potential for capitalizing on the opportunities of digitalization and convergence toward the tech-based economy is mainly related to the developed hard and soft infrastructure, highly qualified workforce, favorable political, legal and business environment, and innovation and entrepreneurial culture (Novak et al. 2018). Along with multinational companies, domestic companies are becoming significant players; although they have preferred outsourcing, we are witnessing a reconfiguration of the “pattern” of business in this sector due to increased availability of financial resources, access to new technologies, but also the national and international environment. Empirical evidences point to an increasing presence of Romanian ICT companies in international markets, primarily through exports. The high level of exports and, at the same time, the rate of growth may be, to some extent, a result of Romania’s accession to the EU, which has created favorable conditions for operations outside the national borders, but also a broader market for Romanian companies. The Romanian market has also become a preferred destination for more and more multinational companies because of the access to well-trained human resources in the field and a developed technical infrastructure (Romania is one of the countries with the best internet speed). From this viewpoint, the operations of well-known foreign companies on the Romanian market have, to a large extent, made it easier for Romanian companies to access foreign markets.

This study broadens the area of knowledge in two main directions. First, it explores the relationship between innovation and business internationalization in knowledge intensive sectors such as ICT. Although rather extensive research has been carried out, previously published studies have tended to focus mainly on manufacturing. Second, this study focuses on contextual factors of an emerging economy in Central and Eastern Europe, which during the last decades have undergone radical political, economic and social transformations, while the most studies examine this relationship in companies operating or coming from mature developed economies or dynamic emerging economies (e.g., China). In addition, the comparative perspective provides the opportunity to capture some strategic issues developed by multinational companies, which can become models of good practice for domestic companies.

The results bring managerial implications at the micro and macro level. The synergy between innovation and internationalization might raise the potential interest of business organizations concerned in targeting sources of growth and sustainable competitive advantage. At the same time, it may have potential applications for substantiating macroeconomic policies (Ayob, Freixanet, and Shahiri 2022; Bannò, Morandi, and Varum 2013; Freixanet 2012, 2022; Love and Roper 2015; Munch and Schaur 2018; Wadhwa, McCormick, and Musteen 2017).

The remaining of the paper proceeds as follows. The second part highlights the state of the art in the intellectual foundations of the research field. The third part gives a brief overview on methodological design, while the fourth part depicts and discusses the main findings of this study. The prime conclusions of the research and some future research directions are drawn in the last part of the paper.

State of the Art in Intellectual Background

Research Field

In order to explore the main research directions in the thematic field under study, we performed a frequency analysis of the keywords in the titles/abstracts of the articles and proceedings paper listed in the Web of Science database using VOSviewer. We have searched for topic `innovation” and “internationalization” and title “innovation” and “internationalization” in Web of Science Core Collection; for 1998–2021, the search revealed 119 results (articles). The minimum number of occurrences of a keyword is 5; of the 605 keywords, 45 meet the threshold. For each of the 45 keywords, the total strength of the co-occurrence links with other keywords was calculated. The keywords with the greatest total link strength were selected.

In Figure 1 (a), the size of the circles represents the occurrence of the keywords; thus, the larger the circles, the more keywords were selected in the publications on the given topic. The distance between two keywords demonstrates the relative link and the similarity between topics. Circles in the same cluster suggest similar topics in selected publications. Thus, the Figure 1 (a) shows the existence of 5 clusters correlated with the scientific research on the issue under consideration. Figure 1 (b) reflects the temporal distribution of the occurrence of the keywords in the selected publications during 1998–2021.

Figure 1. Co-occurrence keyword network (1998–2021).

Source: Developed by authors with VOSviewerNote: (a) Co-keyword network visualization (occurrences); (b) co-keyword overlay visualization (occurrences and average publication year scores)

Several components were identified, reflecting the existence of a variety of topics discussed in relation to the influence of innovation on internationalization. As indicated by the clustering of topics in Figure 1, scientific discourses emerge in different directions.

In the broadest cluster (red), discussions are circumscribed around performance, in connection with technological innovation, exports, entrepreneurship, dynamic capabilities, SMEs etc. Suggesting studies concerned with the links between innovation, internationalization, firm size and performance. The next cluster (green) was formed by connections between keywords such as technology, absorptive-capacity, globalization, strategies, industry, location, entry focused on the topic of foreign direct investment, indicating an interest in investigating foreign market entry strategies in relation to industry and technological capability. The third cluster (blue) focuses predominantly on internationalization in relation to knowledge, networks and competitive advantage. The fourth cluster (light-green) focuses on R&D in relation to performance, investment, spillovers. The last cluster (purple) suggests research on innovation in relation to exports and productivity.

As we can see, the literature is still quite scattered in addressing the relationship between innovation and internationalization, and an approach that integrates more topics from organizational theory in relation to decision and modes of entry into foreign markets is needed.

A Brief Review of Important Contributions

The era of deregulation, technological developments, regional economic integration and converging consumer behavior has set new rules for success and formulated new strategic imperatives for becoming a winner in business (Verdin and Van Heck 2001). For companies seeking to participate or triumph in the global economy, international expansion is the name of the game. Internationalization is, by its nature, a sequential process wherein firms may go through several stages of gradual involvement in operations that cross national borders. (Albaum, Duerr, and Josiassen 2016; J. Johanson and J.-E.Vahlne 1977; Vernon 1966; Dunning 1980; Ietto-Gillies 1994; Dunning and Lundan 2008), which implies strategic reconfigurations that allow operations to adapt to the specifics of the international business environment (Calof and Beamish 1995; Leonidou et al. 2018). Thus, internationalization appears as a process with a dynamic/evolutionary nature that includes a behavioral/adaptive dimension and generates organizational effects such as knowledge and learning outcomes (De Clercq et al. 2012), financial performance (Lu and Beamish 2001) and growth (Na, Kim, and Shin 2019). Expanding internationally can enable firms to reconfigure their value chains and improve profitability in ways that would not be available in a domestic context. International businesses can develop global synergies from a variety of sources (Wall, Minocha, and Rees 2015).

In general, firms engage in international operations as they learn and accumulate knowledge and experience (Johanson and Vahlne 1977; Coviello 1994; Mathews 2002a, 2002b, 2006, 2017). It is widely accepted that in order to gain and maintain competitive advantages in the international business environment, firms need to constantly develop their core competencies (Hamel 1998; Prahalad and Krishnan 2008) and create superior products/services regardless of their size or the country in which they operate (Oviatt and McDougall 1997; Rosenbusch, Brinckmann, and Bausch 2011). Especially for latecomer companies, having to compete with established giants in the international market, it has become vital to develop strategies based on linkage-learning-leverage (Mathews 2002a, 2002b; (Falk 2015) and moving from imitation to innovation (Dunning, Kim, and Park 2008).

The literature on innovation management suggests that innovative firms will tend to expand their operations into foreign markets in order to increase turnover and spread the fixed costs of innovation over a larger number of products (Rogers 2004). Also, a growing body of research supports and documents the idea that innovation encourages internationalization, emphasizing the importance of knowledge management, social capital and communication technologies for successful internationalization efforts (Prashantham 2005).

Following the tradition pioneered by the resource-based view (Barney 1991) a large body of literature argues that firms achieve heterogeneous performance because the strategic resources they control not only are heterogeneous, but these resources are also not always perfectly mobile across firms, which is why this heterogeneity can be long-lasting. From this logic, innovation, as a firm-specific activity that exploits internal strategic resources, can be regarded as rare, imperfectly imitable and difficult to substitute.

Although the relationship between innovation and exports is an increasingly debated topic in the literature, there is still a lack of comprehensive grounded theory explaining this dynamic relationship and, moreover, a lack of a systematic discussion of the connection between innovation and more sophisticated forms of business internationalization.

One of the first contributions to address in more depth the relationship between innovation, measured as input by R&D expenditure, and firms’ export behavior is the work of Hirsch and Bijaoui (1985). Observing that exports in certain high-tech industries in Israel experienced a significant dynamic during the period 1975–1981, they explore the underlying drivers of this development and conclude that innovative firms acquire a degree of monopoly that allows them to discriminate between foreign and domestic markets.

More recently, much of the evidence that aims to explain the drivers underpinning this relationship suggests that, especially in developed countries, more productive firms select into export markets in virtue of the sunk cost hypothesis which claims that entry/expansion into foreign markets requires considerable capital; the nature of these costs is a key factor in reaching and sustaining an export decision (Cassiman 2007). These specific costs of entering foreign markets lead to self-selection of more productive firms in export operations (Cassiman and Golovko 2011).

Cassiman (2007), Cassiman and Golovko (2007, 2011) reason that a potential mechanism underlying the selection of more productive firms to export is related to innovation; moreover, they test the hypothesis that product innovation and process innovation exert different effects on export performance. In this respect, they use empirical evidence to suggest that it is possible to distinguish two different mechanisms by which (product) innovation can influence a firm’s decision to engage in export operations. On the one hand, successful innovation can act as an investment in productivity growth, thus indirectly leading to self-selection of firms in export markets. On the other hand, innovation activities can also generate a direct effect on the export decision. Firms may launch operations abroad in search of higher demand for their new products or to spread R&D costs over higher sales volumes.

Following the same vein, Ayob, Freixanet, and Shahiri (2022) point out that firm-specific innovative capabilities, including non-technological and managerial innovation, matter in shaping export propensity. They refine the research and distinguish between product innovation and process innovation as two forms of technological innovation, demonstrating that both can boost a firm’s competitive advantage, although the mechanisms for achieving this objective differ. Product innovation leads to improvements that make a firm’s supply preferable to that of other firms at similar price levels or allows it to raise its prices. Process innovation focuses on improving efficiency, thereby driving down average production costs and allowing prices to fall or generating an economic surplus that translates into a higher profit margin that can be exploited to support the higher transaction costs characteristic of international sales. Overall, the evidence emphasizes the importance of product versus process innovation in the rationale for the export decision (Ayob, Freixanet, and Shahiri 2022; Becker and Egger 2013) and supports the self-selection hypothesis in that firms need to innovate to reach a productivity threshold that allows them to afford the initial costs of entering foreign markets.

In a series of studies exploring the role of firms’ innovative capacity in performance in foreign markets, Lefebvre, Lefebvre, and Bourgault (1998), Lefebvre and Lefebvre (2002) show that the firm’s overall strategy of creating new technologies reflects positively on the firm by improving the “stock” of knowledge, developing new skills, etc. Therefore, performance in foreign markets is the result of intensive R&D activity, and the firm’s internationalization is the consequence of ongoing innovative activity. In the same sense, Rodríguez and Rodríguez (2005) argue that the resources held by a company (knowledge, core competences, technologies) influence its competitive advantage; product/process innovation and patents held by the business organization influence the decision to enter a foreign market. Firms that achieve both product and process innovation are more likely to undertake export operations compared to non-innovating firms (Becker and Egger 2013).

Giovannetti, Ricchiuti, and Velucchi (2011) show that success in foreign markets is conditioned by the conduct of innovative activities, by operating in high-tech sectors and by firm size. Their innovative processes and the business area in which they operate influence the long-term performance of firms. Technologies and innovative activity ensure that firms are able to cope with risks in external markets.

Internationalization, as previously recalled, is an incremental process of adapting a firm’s operations to the international environment, thereby making it sensitive to the action of a confluence of factors. Decisions to enter foreign markets, forms of doing business and scale of operations are also influenced by other firm-specific variables. Thus, for instance, evidence has suggested a non-linear relationship between firm size and export, in the sense that the size is critical up to a certain level (Bernard and Jensen 2004). Larger firms have more resources they can allocate to enter foreign markets, but as they develop, they may be motivated to enter foreign markets through more sophisticated forms of internationalization than through exports (Cassiman 2007). Ownership structure and the nature of capital, i.e. belonging to an international group or a multinational company, due to the increased potential for financial and technological transfers have a positive effect on export propensity and reduce this critical level (Roper and Love 2002). The structure of a group may be an explanatory variable in situations where some firms export substantially but do not carry out significant R&D or innovation (Cassiman 2007).

While there is growing interest and much evidence that innovation (especially technological innovation) positively influences both the likelihood and propensity to export, this relationship may not always be positive. Rosenbusch, Brinckmann, and Bausch (2011), based on a meta-analysis that aggregates empirical evidence on the relationship between innovation and performance in SMEs, find that although innovation is positively related to SMEs’ performance, the intensity of this nexus is influenced by contextual factors such as, among others, firm age, cultural context, strategic focus. Wadhwa, McCormick, and Musteen (2017) further suggest that in the case of countries such as those in Central and South-Eastern Europe, the challenges of the domestic business environment and scarce organizational resources are particularly important for small and medium-sized firms in industrial sectors that are active or intend to enter foreign markets as the scale of the domestic market and increasing competition make them highly dependent on this internationalization path. Prior to this, Roper and Love (2002) concluded that positioning in highly innovative clusters/business networks delineated on the basis of geographical proximity may act to the detriment of export performance; this is because such location is unlikely to generate demand effects and implies a negative agglomeration effect from the supply side.

Bagheri et al. (2019) evidence a relationship described by an inverse U-shaped curve between technological innovation and international performance for small and medium-sized firms. Thus, while certain levels of technological innovation are imperative for the success of small and medium-sized firms in the international arena, too much or too little innovation could actually affect their international performance. Relying on previous literature, they show that for smaller firms, due to constraints related to resources, experience, reputation, etc., internationalization is strongly influenced by the motivations and skill and knowledge endowments of decision-makers; in this context, new innovation-driven strategies can significantly improve their competitive position in foreign markets.

The development of knowledge-intensive sectors in industry and services can be seen as a dominant feature of today’s capitalist economy. In this context, there is a growing recognition that innovative activity in these sectors differs from that in traditional industries in terms of key knowledge sources, the role of codified and tacit knowledge, and the types of networks and local clusters (Tödtling, Lehner, and Trippl 2006). On this basis, a distinction can be drawn between synthetic and analytical knowledge bases. Tödtling, Lehner, and Trippl (2006) and Tödtling and Trippl (2007) depict the main features of sectors profiled by knowledge bases. Thus, in traditional industries (such as engineering, machinery, etc.) synthetic knowledge base dominates; these industries are typical for innovative application or combination of existing knowledge, with low R&D and a strong orientation toward solving specific problems raised by customers. Learning by doing and interaction, practical skills and tacit knowledge are extremely important, resulting in an incremental innovation model. In contrast, in industries with analytical knowledge bases, such as biotechnology and ICT, innovation processes rely heavily on scientific input and codifiable knowledge; knowledge creation is grounded in the application of widely shared and accepted scientific methods and principles, processes are formally organized (e.g., in R&D departments) and results tend to be documented in reports or technical patent descriptions. In these sectors the rate of product and process innovations, usually of a radical nature, is high and research is carried out to a very large extent in companies, although these companies are relatively dependent on external sources of knowledge as well.

These arguments and theoretical insights suggest the following hypotheses concerning the relationship between innovation and internationalization within companies operating in Romanian ICT sectors:

(H1) Within homegrown ICT companies, innovative activity correlates positively with the internationalization of business in the context of their status as newcomers.

(H2) In MNCs affiliates operating in Romania, innovative activity and prior decisions on innovation correlates positively with the parent companies’ top management strategy for business internationalization.

Research Design

The empirical research used micro-level data collected from a panel of firms operating in the ICT sector of the Romanian economy. Given that a large number of multinational companies operate in this sector, we considered it appropriate to apply two questionnaires designed for each type of business organization, namely Romanian-owned firms and multinational companies (affiliates of multinational companies with headquarters in foreign countries).

The survey instrument was developed to capture the relationship between innovation and internationalization focusing only on firms in the ICT sector of the Romanian economy. The structure of the questionnaire was designed to reach the aim of the research and, at the same time, to highlight the main factors that simultaneously influence the innovative activity of a firm and the internationalization of its operations.

The questionnaires were pre-tested during September-November 2019; for this purpose, ICT professionals working in companies in the main ICT hub cities were contacted. After pre-testing, a number of substantive as well as formal changes were made, which included, among other things, several clarifications on some of the concepts used and other similar issues. The questionnaire was administered from December 2019 to June 2020, using the Google Forms platform. Participants in the questionnaire were individuals in a management or executive position within ICT companies in Romania.

Both questionnaires were structured in three parts. In the first part of the questionnaire aimed at Romanian companies, the items (close-ended questions) were focused on gathering information about the field of activity, size of the company, R&D activities, ways of protecting innovations/inventions, modes of entering foreign markets, barriers encountered in accessing foreign markets, share of turnover gained abroad. The second part featured items with a Likert scale with five possible answers (to a very small extent, to a small extent, to some extent, to a large extent, to a very large extent), focusing on the innovative activity of firms on the one hand and on the internationalization of business on the other. In the third part, items providing information on the respondents (position held in the organizational hierarchy and studies completed at the time of completing the questionnaire) were included. As for the questionnaire applied to affiliates of multinational companies operating in the ICT sector in Romania, it was also structured in three parts, with the difference that the first part included items capturing information on the company’s field of activity, country of origin, R&D activities, ways of protecting innovations/inventions and share of turnover achieved abroad. Innovative activity and internationalization of business are also described by items for which a Likert scale with five possible answers (to a very small extent, to a small extent, to some extent, to a large extent, to a very large extent) was employed.

The research panel covered companies operating in areas where innovative activity and foreign market operations are integral to the strategy of business organizations. Because of the considerable development of the ICT sector in recent years, we have undertaken a more detailed documentation of the activities currently carried out in this sector. Thus, we found (according to the national activity nomenclature) that the operations carried out in the ICT sector are included in the Information and Communication division. In order to validate the classification of specific activities in the ICT sector in the Information and Communications category, we consulted the National Statistical Institute (INSSE) and EUROSTAT databases. The criteria for inclusion in the panel were:

i.Geographical criterion. We have selected the counties where there is a university whose educational programme offers training/studies for ICT engineers (we have assumed that regions with higher education institutions in the field of information and communications in the proximity will support the development of the ICT sector in that area by setting up new companies, but also by creating an attractive environment for multinational companies); 20 counties were thus selected.

ii. Criterion related to the activity carried out. The classification of activities in the domestic economy (Romanian version of the Nomenclature of Activities of the European Community – NACE Rev. 2) was reviewed and the specific activities of the ICT sector were identified (including the sub-sector of services and the sub-sector of production of computers/electronics components which is included as hardware in our research) and were found to correspond to the Information and Communication sector, which was followed by selecting the top 10 companies, for each NACE Code, in the selected counties; a number of 2,222 companies resulted.

iii.Criterion related to the size of the company. Initially we chose to screen companies with at least 10 employees, but due to the fact that the national economy is largely composed of companies with less than 9 employees, we decided to extend the sample to include micro-enterprises with at least 2 employees; a total of 1,543 companies resulted. Firms that reported profits in the year prior to the study and with public contact details were selected and a number of around 800 companies were requested to complete the questionnaires.

The administration of the questionnaire yielded 212 responses (103 responses from Romanian companies and 109 responses from multinational companies), with a 25% response rate. As for the questionnaires for Romanian companies in the ICT sector, we note that three of them were not validated due to the failure to meet the criterion regarding the conduct of operations in foreign markets (for example, in the item regarding the penetration of foreign markets, respondents answered that the business organization in which they work does not conduct operations in foreign markets).

As the data show, the overwhelming majority of both the Romanian firms and the foreign affiliates operate in the software and telecommunications sector in Romania (about 90%). Regarding the size, the largest percentage of Romanian firms (about 32%) had between 50 and 250 employees, 22% had between 10 and 50 employees, 17% of responding firms had less than 9 employees, while about 29% of firms had more than 250 employees. In terms of the location of the headquarters of MNCs, it is noteworthy that over 40% of respondents work in affiliates of multinational companies based in the US and Canada, and over 40% in affiliates of multinational companies based in Europe (France, Germany, Italy, UK).

In line with the main theoretical contributions reviewed, we measured innovative activity, as an independent variable, by responses on a Likert scale to items concerning quality of human resources, development of new products and services, introduction of new processes, top management’s vision, design of new organizational structures, acquisition of new knowledge, the firm’s financial capacity, R&D budgets, cultural particularities. At the same time, the propensity to internationalize a firm’s operations manifests itself in proactive or reactive behavior, depending on a number of factors. We measured the dependent variable, i.e., the propensity to internationalize the firm’s operations, by Likert scale responses to items focusing to a number of endogenous factors (e.g., managerial attitudes, core competencies, internal resources) and exogenous factors (e.g., opportunities offered by foreign/European markets).

Table 1 depicts a descriptive statistic of the scores for the two dimensions, i.e., the innovative activity of the firm and the internationalization, in the case of Romanian-owned companies and MNCs affiliates.

Table 1. Descriptive statistical analysis.

	Romanian owned companies		Foreign affiliates
	Innovative activity	Internationalization	Innovative activity	Internationalization
Mean	3.52	3.54	3.65	3.59
Median	3.61	3.56	3.65	3.59
Standard Deviation	0.37	0.24	0.23	0.52
Minimum	2.67	3.07	3.12	2.22
Maximum	3.94	4.05	3.96	4.51
Count (number of questions)	18	11	16	15

As can be observed, the targeted companies scored high on both innovation activity and internationalization. However, both dimensions are more significant for multinational companies.

Given the features of data, to reveal the patterns of respondents’ perception on the interaction between innovation and internationalization we employed the principal component analysis (PCA) with Varimax rotation method, using SPSS 20.

We then used multiple linear regression to estimate the model describing the nature of the interaction between innovation and internationalization, as follows:

(1) $y=x\alpha +\epsilon$(1)

Where:

y – dependent variable;

x–vector of independent variables;

α – vector of the coefficients;

ε – error.

The econometric model computed the scores of the factors resulting from the PCA for innovative activity as explanatory variables, and those for the business internationalization as independent variables.

Empirical Findings

Before exploring the relationship between variables and testing the hypotheses, we examined test validity to ensure that our findings are representing the phenomena under research and that our measurement is correct. To this end, we used Kaiser-Meyer-Olkin (KMO) and Bartlett’s test of Sphericity to demonstrate that the data is appropriate for factor analysis.

Table 2, provides the results of the KMO and Bartlett’s test in the case of Romanian companies. As we can see, both values for KMO of sampling adequacy are above 0.90 which is higher than 0.5, and the significant Bartlett’s test is 0.00 which is less than 0.001. Therefore, it was concluded that the data is appropriate for conducting factor analysis.

Table 2. KMO and Bartlett’s test.

		Innovative activity	Internationalization of business
Kaiser-Meyer-Olkin Measure of Sampling Adequacy.		.917	.913
Bartlett’s Test of Sphericity	Approx. Chi-Square	1134.483	901.480
	df	136	55
	Sig.	.000	.000

With regard to the measurement model, we evaluated individual item reliability which is confirmed by Cronbach’s alphas (Table 3).

Table 3. Reliability statistics.

	Innovative activity	Internationalization of business
Cronbach’s Alpha	.946	.941

Loadings are above the accepted threshold of 0.7, which demonstrated the high reliability of the findings and that the data was suitable for further investigation.

In the case of Romanian companies, the PCA test displayed three factors that explain approximately 67.4% of the total variance concerning the innovative activity. For the internationalization of business, the PCA displayed three factors that explain about 80% of the total variance, respectively 40%, 20% and 20%. Table 4 exhibits the moderate-to-strong correlations between main variables and components.

Table 4. Rotated component matrix for Romanian companies.

Innovative activity	Component			Internationalization	Component
	1 (30%)	2 (20%)	3 (17%)		1 (40%)	2 (20%)	3 (20%)
Knowledge acquisition as a priority	.798			Acquisition of new technologies	.891
Flexible organizational structures	.770			Employees’ motivation	.774
Employees’ motivation to learn	.752			New products/services development	.745
The growth of the company was driven by new products/services development	.666			A sound internationalization strategy	.709
Ongoing training for products/services development	.666			Employees’ qualification/lifelong learning	.630
The acquisition of new technologies as a foundation of the product and process innovation	.657			R&D multicultural project teams		.905
New ways of distribution and relationships with customers	.563			Romania’s accession to the EU			.862
Budgeting training for knowledge acquisition	.530			Romanian employees’ English language skills			.744
The innovation – new products/services development		.814
Innovative activity targets process innovations		.778
Robust managerial vision		.681
Fiscal facilities			.803
R&D networks			.786
R&D budget			.657
R&D project teams			.601

As for innovative activity, the first factor explains circa 30% of the total variance and is related to human resources (new organizational structures, acquisition of new knowledge, training). These relationships show that innovative activity depends largely on the quality of human resources and on the acquisition and processing of knowledge. The second factor explains about 20% of the total variance and is associated with variability concerning the new technologies and the creation of new products/services. It denotes that innovations in production and the acquisition of new technologies, due to a sound managerial vision, are priorities. The third factor captures the orientation of companies toward innovation networks with research institutes and R&D project teams. For the internationalization of business, the PCA displayed three factors that explain about 80% of the total variance. The first factor captures about 40% of the total variance and positively associates with innovation-led internationalization strategy. It denotes that acquisition of new knowledge and ongoing learning, strengthening of innovative capacity, creation of new products/services fuel the internationalization of Romanian companies. The second factor concentrates about 20% of the total variance and relates to variables that describe the organizational culture emphasizing that multicultural R&D project teams and outstanding performance support internationalization. The third factor links to the internationalization-prone environment, Romania’s accession to the EU and fewer language barriers having an important role.

In the case of MNCs affiliates, the PCA test revealed three components that explain about 56% of the total variance for innovative activity.

For business internationalization, the PCA displays three factors explaining about 75% of the total variance. The moderate-to-strong correlations between main variables and components are summarized in Table 5.

Table 5. Rotated component matrix for MNCs affiliates.

Innovative activity	Component			Internationalization	Component
	1 (32%)	2 (20%)	3 (4%)		1 (38%)	2 (20%)	3 (17%)
Budgeting employees’ qualification/training	.816			Innovation encourages the internationalization	.803
Employees’ motivation to improve their skills	.806			R&D activity performed by affiliates	.728
Employees’ motivation to continuous learning	.746			R&D multicultural project teams in affiliates	.718
Budgeting acquisition of new technologies	.565			A sound top management strategy	.715
New products/services development		.755		Multicultural features	.625
Flexible organizational structures		.715		High qualified human resources	.542
New ways of distribution and relationship with customers		.692		Labor-cost advantages		.785
Part of R&D activity is carried out by affiliates		.637		Romania’s accession to the EU		.781
R&D project teams		.562		Fiscal facilities		.746
Process innovation			.816	English language skills		.504
Multicultural features			.563	Acquisition of smaller companies as an entry mode			.645

As for innovative activity, the first factor explains about 32% of the total variance and combines with variables describing the human resources development strategies. It expounds that the employees’ motivation for lifelong learning, acquisition and processing of knowledge, with financial support, is a vector of innovation. The second factor concentrates about 20% of the total variance and targets the organizational innovation strategy; it illustrates that MNCs internationalize part of their R&D activity, stimulate R&D networks and flexible organizational structures and support new products/services development, as the core of their innovative activity. The third factor captures the interest for process innovations and the exploitation of multicultural diversity for acquisition of knowledge.

For internationalization, the PCA displays 3 factors explaining about 75% of the total variance. The first factor captures about 38% of the total variance and is connected with the sound internationalization strategy developed by the top management. As global competition increases, innovation, in all its forms, supports internationalization and becomes a vector of competitive advantage; also, the multicultural project teams significantly support the expansion in foreign markets. The second factor concentrates about 20% of the total variance and links with the internationalization strategy as a way to optimize operating costs, finding locations with labor cost advantages, tax facilities, low language barriers, opportunities for greenfield investments. The third factor explains about 17% of the total variance and captures internationalization as a way to increase market share.

The results of the econometric estimation of the influence of innovation on internationalization, both in Romanian and foreign companies are described in Table 6.

As newcomers, Romanian companies in the sector need to design and implement strategies based on linkage, leverage and learning. Their strategic position still differs from that of the MNCs with which they compete. They evolve innovation-led internationalization strategies. The independent variables linked to the innovation activity, namely the human resources development, the innovation strategy and R&D organization exert a significant influence on business internationalization. It denotes that the acquisition of new knowledge and ongoing learning, flexible organizational structures, the strengthening of innovative capacity, the development of new products/services fuel the internationalization of Romanian companies. In addition, the quality of human resources, multicultural R&D project teams, and networks develop an internationalization – prone organizational culture. These findings support the first hypothesis.

Multinational companies operating in Romania, some of them also players in the global competition, mainly follow the internationalization strategy developed by top management of their parent companies, which confirm the second hypothesis. In this approach, innovation capacity, nurtured by the development of human resources and a sound innovation strategy, plays an important role. This show that the employees’ motivation for lifelong learning, acquisition and processing of knowledge, with financial support, are vectors of innovation. Furthermore, it illustrates that MNCs also internationalize part of their R&D activity, stimulate R&D networks and flexible organizational structures and support new products/services development, as a core of their innovative activity. As global competition increases, innovation, in all its forms, supports internationalization and becomes a vector of competitive advantage; also, the multicultural project teams significantly support the expansion in foreign markets.

Conclusions

The aim of this paper was to explore the relationship between innovation and internationalization in the behavior of business organizations operating in the Romanian ICT sector. This research is grounded in the self-selection hypothesis. The research data were gathered from a survey of domestic and multinational companies operating in Romania, which allowed for a comparative analysis and the identification of some particularities of the two categories of companies.

Taken together, the findings of this study suggest a significant relationship between the innovative activity in the ICT sector in Romania and business internationalization, both in the case of MNCs and in the case of domestic companies. In these companies, the development of human resources combined with flexible organizational structures and R&D networks conducive to innovation stimulates expansion in international markets by improving competitive advantage. Of course, in the case of MNCs, due to the history and strategies developed, this relationship is more intense than in the case of domestic companies, given the context of the Romanian economy in the last 30 years.

Therefore, pro-innovation strategies and policies can make the ICT sector a real driver of economic growth in Romania in the coming decades, placing it among the technologically advanced countries in Europe.

Apart from the fact that this research provides additional evidence with respect to the critical role of innovation in the firm’s international operations, this study might prove to be particularly valuable to managers and policymakers.

Internationalization has the potential to be a driver of growth for both business organizations and the economy as a whole. In the midst of increasing market integration, either globally or in integrated regional spaces such as the EU, and of expanding global value chains, competitiveness emerges as a major imperative. In this context, managers have to consider that innovative activity, in particular through the mediating effect of productivity dynamics, is becoming a predictor of competitiveness not only in the home market but also in external markets. In the case of firms from countries with historical contexts that have imposed major transformations on their economic systems, such as Romania, identifying sources of sustainable competitive advantage is crucial. Constraints related to the resources that can be allocated to innovative activity, especially in the case of small and medium-sized firms, can be overcome through strategic orientation, harnessing the knowledge of employees, focusing on less costly forms of innovation (open innovation, process innovation, organizational innovation) and developing a pro-innovation organizational culture. Romania’s integration into the European Union has also posed challenges for companies in general, due to increased competition, as well as opportunities arising from access to an enlarged market. Moreover, for companies operating in the ICT sector in Romania, the presence of MNCs can be an opportunity to set an example of best practice, especially in terms of innovation-oriented strategies.

The synergy between innovation and internationalization may also be of potential concern to macro-economic decision-makers in their efforts to design public support systems, especially as forecasts show that Romania’s position will remain rather fragile in the regional context. Innovative activity at the firm level, especially if we consider firms in the ICT sector, can generate spillover effects throughout the economy. Beyond the fact that exports driven by innovative activity are sources of growth per se, studies show that high-tech exports have a higher growth potential than other categories of exports. In this situation, support for fostering innovative activity in firms may be more appropriate than simply targeting an increase in the number of exporters or export volumes. This could be pursued by government programmes to stimulate R&D&I, measures to promote access to R&D and innovation funding, a framework for cooperation between research institutes/universities and firms to facilitate knowledge transfer and overcome resource constraints. In addition, specific targeting through export or internationalization promotion programmes could be considered, with a focus on assisting exporters who carry out domestic innovation activities or collaborate with entities specialized or other firms in this respect through consultancy, market analysis, training, financial and fiscal incentives, etc., that may be adjusted according to the stage or priorities of internationalization.

Although it provides valuable findings, empirical research is burdened by a number of limitations. An important limitation of the research is the cross-sectional nature of the data, which does not allow a direct causal relationship to be concluded. Also, the research could not be carried out according to the mode of entry/operate in foreign markets. The questionnaire aimed primarily at collecting information that would provide a picture of management strategy and vision in terms of innovation and internationalization. Both innovative activity in firms and the orientation toward internationalization are captured by subjective instruments which, although popular in research of this type, have limitations especially when it comes to generalizations. Moreover, these dimensions are influenced by a complex of factors, some of them of a conjectural nature, which have not been captured. In this context, future research could also incorporate objective instruments to measure innovative activity and the scale of operations abroad. In addition, the lockdown measures implemented in the first months of 2020 required the questionnaire to be administered exclusively online; this situation, although it may seem to be easier, was not as effective as face-to-face interaction to solve, for example, possible problems arising from the formulation of items or other issues inherent in the administration of questionnaires.

Further research might be focused deeply on triadic determination among innovation-internationalization-performance in an integrative approach that includes several organizational dimensions. Also, cross-country comparative studies of other knowledge-intensive sectors would be of interest.

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Additional information

Funding

The author(s) reported there is no funding associated with the work featured in this article.

Notes on contributors

Aurel Burciu

Aurel Burciu is Professor, PhD, at the “Ștefan cel Mare” University of Suceava, Department of Management, Business Administration and Tourism; he is a PhD supervisor on Business Administration. His main areas of interest are Business Administration, and Comparative Management. He is author and co-author of more than 100 articles published in international/national scientific journals; he is the author or co-author of about 10 books as well as of teaching and learning materials for students. He is a former Fulbrighter at University of Central Florida, USA.

Rozalia Kicsi

Rozalia Kicsi is an Associate Professor, PhD, at the “Ștefan cel Mare” University of Suceava, Department of Management, Business Administration and Tourism. Her main fields of scientific interest are International Business, International Trade and Business Administration. She is author and co-author of more than 30 papers published in international scientific journals; she is also the author and co-author of three books in her main fields of interest, as well as of teaching and learning materials for students. She is a member of the American Economic Association and other national and international professional associations.

Alexandra-Maria Danileț

Alexandra-Maria Danileț is an assistant at the “Ștefan cel Mare” University of Suceava, Department of Management, Business Administration and Tourism. She was awarded a Ph.D. in Business Administration with thesis “Study of the relationship between innovations dynamics and the internationalization of business organizations”. Also, she is attending postdoctoral advanced research studies in the field Business Administration. She is author of one book and over ten papers on topics such as the innovative activity within business organizations, the strategies they follow to access the global market, the impact of information technology on organizational performance, the connection between innovation and the internationalization of firms.

Ionel Bostan

Ionel Bostan is Professor, PhD, at the “Ștefan cel Mare” University of Suceava, Department of Law and Public Administration; he is a PhD supervisor on Economics. His main areas of interest are Financial Law, and International Business. He is author and co-author of more than 60 articles published in international scientific journals indexed in Web of Science Core Collection; he is also the author or co-author of about 12 books as well as of teaching and learning materials for students. He is Corresponding Member of the American Romanian Academy and Doctor Honoris Causa of the Academy of Economic Studies (Republic of Moldova).

Iulian Condratov

Iulian Condratov is an Associate Professor, PhD, at the “Ștefan cel Mare” University of Suceava, Department of Management, Business Administration and Tourism. His main fields of scientific interest are Statistics and Business Administration. He is author and co-author of more than 30 papers published in international scientific journals; he is also the author and co-author of books in his main fields of interest, as well as of teaching and learning materials for students.

Table 6.

Summary of statistical models.

Independent variables (innovative activity)	Dependent variables (internationalization)
Romanian companies
	Innovation – led internationalization	Organizational culture	External environment
Human resources development	0.51***	0.32***	0.23**
Innovation strategy	0.35***	0.05	−0.03
R&D organization	0.22***	0.40***	0.07
Diagnostic statistics
R ^2	0.44	0.27	0.05
F Statistics	25.48***	11.95***	1.99
MNCs
	Top management strategy	Costs optimization	Market share
Human resource development	0.53***	0.15	0.19**
Innovation strategy	0.51***	0.08	−0.05
Process innovations	0.24***	0.12	0.01
Diagnostic statistics
R ^2	0.60	0.04	0.04
F Statistics	54.10***	1.63	1.48

Note: *p <0.1; **p <0.05; ***p <0.01