Based on Research By Haiyang Li and Yan “Anthea” Zhang

To Innovate Overseas, Learn From Foreign Businesses At Home

  • Internationalization often results in decreased product innovation, particularly in emerging market firms.
  • As manufacturing firms expand internationally, divided resources and attention lead to less ingenuity.
  • Markets with high import penetration suffer less from innovation loss as they expand globally, because they become accustomed to international business practices at home.

For centuries, raw materials and technology flowed along the Silk Road between China and the West. Ideas, including Islam and Buddhism, math and medicine, traveled as well. And as global trade spread, innovation did too.

The same trends continue today. Or at least they do most of the time. According to Haiyang Li and Yan Anthea Zhang, management professors at the business school, international expansion in some cases actually dampens product innovation. It’s not globalization that’s the problem, Li and Zhang say, but the splitting of a company’s resources between domestic and overseas markets, especially in emerging market firms.

Previous scholars, they argue, assumed that when such a company split resources, its share in the domestic market remained constant. But they found to the contrary: as a firm increases its international market share, its domestic market share decreases. And when the company’s domestic market dwindles, so too do the opportunities to search for novel ideas for that market.

To test their ideas, Li, Zhang and coauthor Jie Wu of the University of Macau looked at China, an emerging market whose firms tend to pursue aggressive internationalization to gain world-class technology and capability. Because China’s domestic market is growing rapidly at the same time, however, these companies can’t disregard it.

Li, Zhang and Wu studied 883 manufacturing firms in China. Analyzing data from the World Bank and Chinese National Bureau of Statistics, the scholars examined manufacturing firms from Beijing, Chengdu, Guangzhou, Shanghai and Tianjin. What they found is that firms that divided resources between domestic and international markets often were less innovative.

Because these companies serve both domestic and overseas markets, managers often ran short on time or resources to create novel ideas, and ended up imitating their peers. It’s a particularly thorny problem for emerging market firms, whose leaders are less likely to have global management experience. Aesop aside, necessity seems to squelch invention.

The more widely the Chinese firms expanded geographically, in fact, the less they innovated. There was just one scenario in which the Chinese firms’ innovation boomed along with global expansion: when businesses faced high import penetration on their home turf.

Companies that had to deal with such penetration, the researchers discovered, had seen diverse paths to doing business already in their own market. So they were better prepared to go international than companies in more provincial marketplaces. In other words, the Silk Road had already come to them.

Throughout history, world travel has been a path to new ideas—and prompted new ideas in the travelers themselves. Zhang, Li and Wu offer a provocative insight about the limits of this kind of movement. If a company doesn’t have the capacity to take advantage of its new horizons, its power to invent actually shrinks.

The best way for companies to build that capacity? Paradoxically, embrace the foreign presence at home.

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Haiyang Li is a professor of strategic management and innovation and Yan Anthea Zhang is the Fayez Sarofim Vanguard Professor of Management at the Jones Graduate School of Business at Rice University.

To learn more, please see: Li, H., Zhang, Y. A., and Wu, J. (2012). The role of internationalization in the product innovation of emerging market firms. Academy of Management Annual Meeting Proceedings. (2012) p.1.