Innovation and internationalization as growth strategies: The role of technological capabilities and appropriability Kalevi Kyla ¨ heiko, Ari Jantunen, Kaisu Puumalainen, Sami Saarenketo *, Anni Tuppura Lappeenranta University of Technology, School of Business, P.O. Box 20, FI-53851, Lappeenranta, Finland 1. Introduction Entrepreneurship is associated with novelty, the promotion of change, and expansion into new markets. Entrepreneurial firms reach for growth by launching new products or attracting new customers, or effecting a combination of both. From this perspective the firm’s operations related to product and international diversification could be considered an entrepreneurial endeavor based on its ambitions to exploit new opportunities and utilize their resources. Since both forms of diversification (innovation-related new products/services and internationalization-related new markets) are based on existing resources and capabilities it is natural to think that they must be somehow interrelated. An interesting question is whether the firm’s innovation activities are complementary to its international expansion or whether they substitute it. It is well known, for example, that in some high-tech industries for a firm producing innovative products that have only a few (if any) potential domestic clients internationalization is compulsory if it is to stay in business (Saarenketo, 2004). Kafouros, Buckley, Sharp, and Wang (2008, p. 63) go further and claim that, ‘‘...firms need to have a sufficient degree of internationalization, i.e., be active in many markets, to capture successfully the fruits of innovation’’. We are tempted to think, however, that internationalization is not necessary (at least not in the short run) for all firms that launch innovations. On the other hand, not all internationalized firms are necessarily very innovative, at least in terms of new product launches. This study focuses on the potential trade-off between innovation and internationalization strategies, taking the Penrosian theory of the growth of the firm as the starting point. Penrose’s basic message about the importance of (un)used International Business Review 20 (2011) 508–520 ARTICLE INFO Article history: Received 20 December 2009 Received in revised form 31 August 2010 Accepted 2 September 2010 Available online 24 December 2010 Keywords: Appropriability Growth strategy Innovation Internationalization Penrose Performance ABSTRACT Firms grow either by launching new products (innovation) or by attracting new customers (internationalization) or by using a mixed strategy. An interesting question is whether innovation and internationalization activities are complementary or substitutive. The paper discusses the connections between technological capabilities, their appropriability, innovation activities, and internationalization, and derives hypotheses from the knowl- edge-based view of the firm. The hypotheses are empirically analyzed using survey data from 300 Finnish firms clustered as follows: (i) domestic replicators, (ii) domestic innovators, (iii) international replicators, and (iv) international innovators. The performance of the clusters is empirically analyzed, the success criteria being actual growth rate and profitability. We conclude that a profitable firm needs to have unused technological capabilities in order to exploit economies of scope through innovation. A strong appropriability regime strengthens growth. Internationalization and innovation combined is the most advisable option when domestic markets are limited. ß 2010 Elsevier Ltd. All rights reserved. * Corresponding author. Tel.: +358 50 308 6181; fax: +358 56217299. E-mail address: sami.saarenketo@lut.fi (S. Saarenketo). Contents lists available at ScienceDirect International Business Review journal homepage: www.elsevier.com/locate/ibusrev 0969-5931/$ – see front matter ß 2010 Elsevier Ltd. All rights reserved. doi:10.1016/j.ibusrev.2010.09.004