Dynamic Capabilities and Firm Performance: An Empirical Study of Chinese New Ventures

Baoshan GE School of Management

Jilin University Changchun, P. R. China

Gebs@jlu.edu.cn

Baobao DONG School of Management

Jilin University Changchun, P. R. China markruby@sina.com

Abstract—Capability-based Theory believes dynamic capabilities as the senior stage of corporate capabilities is very crucial to firm’s growth and development. Based the analysis on 877 samples of high-tech new ventures, this paper explored the relationship between dynamic capability and firm performance. The empirical result shows that the three dimensions of dynamic capability which include dynamic mechanism, learning mechanism and matching mechanism are all positively associated with firm performance with a descending degree of their influence. Finally we analyzed the empirical results and offered an outlook for the future research.

Keywords- dynamic capability, firm performance, high-tech firm, new venture

I. INTRODUCTION Economic globalization and technological

transformation have offered more possibilities and opportunities for competition, and the deconstruction of former market frame has resulted changes on competition rules in most of the industries. This accelerated competitive environment means that the competitors can no longer continue to use the old competition mode which is to decide how to response after the counterparts take initiatives. Meanwhile, all the competitive advantages become temporary and dynamic and the competition mode among firms change to be dynamic competition. In the rapid changing competitive environment, how to master the rules of firm capability formation and evolution, how to construct and develop dynamic capability to foster sustainable and healthy development of the firm, become the important topics to be resolved in today’s strategic management. Any firm that ignores dynamics of environment , or can not respond effectively to environmental dynamics , can not possibly get long-term income higher than the average level, not to say realize sustainable competitive advantage and long-term survival and growth[1].

If firms can not continually realize capability reconstruction and thus get dynamic capability, then it is hard for them to survive in turbulent environment .Dynamic capability has been considered to be the source for the firm to acquire sustainable competitive advantage. How to start from the firm itself and continually develop and cultivate dynamic capabilities which can match environmental changes is not only one of the key factors for the firm to acquire short-term high performance, but more importantly determines the firm’s long-term growth.

So, this paper begins with dynamic environment and researches on the relationship between dynamic capability and firm performance.

II. LITERATURE AND HYPOTHESES

A. Dynamic Capability In 1997 Teece, Pisano and Schuen brought forward

dynamic capability and believed that it is the ability used by the firms to integrate, build and reconfigure internal resources and capabilities to address rapidly changing environments. This view regards capability as a kind of resource [2]. Furthermore, Eisenhardt and Martin define dynamic capabilities as ‘the firm’s processes that use resources – specifically the processes to integrate, reconfigure, gain and release resources – to match and even create market change’ and ‘the organizational and strategic routines by which firms achieve new resources and configurations as markets emerge, collide, split, evolve, and die’. This suggests that dynamic capabilities are simply processes, and therefore this does not lend further understanding of the distinction between dynamic capabilities and processes [3]. While Wang and Ahmed defined dynamic capabilities as a firm’s behavioral orientation constantly to integrate, reconfigure, renew and recreate its resources and capabilities and, most importantly, upgrade and reconstruct its core capabilities in response to the changing environment to attain and sustain competitive advantage [4]. By this definition, they first argued that dynamic capabilities are not simply processes, but embedded in processes. Processes are often explicit or codifiable structuring and combination of resources and thus can be transferred more easily within the firm or across firms. Capabilities refer to a firm’s capacity to deploy resources, usually in combination, and encapsulate both explicit processes and those tacit elements (such as know-how and leadership) embedded in the processes. Hence, capabilities are often firm-specific and are developed over time through complex interactions between the firm’s resource development [5]. According to the above analysis, we believe that dynamic capability is the ability of a firm to sustain and change the capabilities which are regarded as the base of competitive advantages. It is the ability to change firms’ capabilities and its focus is on the innovation and learning via resources to address the changing market. Wang and Ahmed argued, after analyzing the previous empirical studies, that dynamic capability has three dimensions and they are adaptive capability, absorptive capability and innovative capability [4]. Adaptive capability is defined as a firm’s ability to

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identify and capitalize on emerging market opportunities [6,7], absorptive capacity is the ability of a firm to recognize the value of new, external information, assimilate it, and apply it to commercial ends and the ability to evaluate and utilize outside knowledge is largely a function of the level of prior knowledge. Innovative capability refers to a firm’s ability to develop new products and/or markets, through aligning strategic innovative orientation with innovative behaviours and processes. While Wu divided dynamic capability into resource integration capability, resource reconfiguration capability, learning capability and ability to respond to market changes [4]. Above all, dynamic capabilities are represented in detail within firms by a series of complicated operational process. This paper divides it into three dimensions which are dynamic mechanism, learning mechanism and matching mechanism according to the internal dynamic mechanisms.

B. Hypotheses Verona and Ravasi considered dynamic capabilities

to be a series of normal procedures which guide corporate resource construction, and dynamic capabilities are daily organizational procedures which are penetrated into the routines guiding corporate resource reconstruction and operations. These capabilities have significant influence on firm performance [8].Deeds et. al, after studying 94 biology pharmaceutical firms, suggested that the strong dynamic capabilities formed by the firm to some extent were hard to be copied and imitated by other firms and the firms which based their operations on these dynamic capabilities would have high performance [9]. Newbert, through researching on 817 nascent entrepreneurs , found that these entrepreneurs developed the needed resources by utilizing their own resources to identify external resources, acquiring resources and integrating and utilizing these resources at the early stages of their life, and through resource development process as well as the market responses, the firms primarily formed relatively strong learning capability and a series of other dynamic capabilities, and finally these firms got success and survived in the market [10].

On the basis of summarizing and recognizing the internal factors and structures of firm intellectual capital under Chinese context, Hong and Wu, built a dynamic model of firm competitive advantage in competitive environment, and suggested that dynamic capabilities driven by intellectual capital are key factors to explain sustainable excess profit and competitive advantages through empirically analyzing the mutual reactive mechanisms among firm intellectual capital , dynamic capability and strategy and competitive advantage [11]. Based on the above analyses, this paper put forward the following hypothesis:

H1: Dynamic mechanism is positively associated with firm performance;

H2: Learning mechanism is positively associated with firm performance;

H3: Matching mechanism is positively associated with firm performance.

III. SAMPLES AND MEASURES

A. Samples and data collection The samples of this paper are mainly new ventures

and GEM Report of China (2002) defined new venture to be established within 42 months[12], so this paper selected firms established within 42 months and carried out random sampling on this basis. The samples are high-tech ventures which are mainly in six industries of integrated circuit, communications, optic electronics, exactitude instruments and biotic technologies. The respondents are mainly general managers or core members of entrepreneurial team or people who are assigned by the general manager and who understand well about the firms.

This investigation was carried out in Northeastern China (Changchun and Dalian), North China (Tianjin and Beijing), and Eastern China (Shanghai and Kunshan) to ensure the reasonability and representation of questionnaire distribution. 1200 questionnaires were sent out, with 400 questionnaires for each region, and 877 questionnaires were returned with a recovery rate of 73.08%. In the returned questionnaires, 79 questionnaires were with incomplete basic information, and 81 questionnaires were not responded on relevant items. These questionnaires were eliminated in analysis and finally 717 valid questionnaires were collected with a valid recovery rate of 59.75%. The general sample features are shown in Table I.

B. Measures Dynamic capabilities. Based on the work of Newbert,

Teece et. Al and Eisenhardt and Martin，we use the items in Table II to measure three dimensions of dynamic capabilities [2,3,10].

Firm performance. At the early stage, new venture mainly pays attention to survival and growth，Jovanovic and Delmar et. al suggested that net sales profit and sales growth increase can reflect firm growth and bring gradually increasing profit for firms, meanwhile, income increase rate can evaluate growth performance [13,14]. Palepu et. al suggested that firm’s investment input should be paid to meet the needs of daily operation and shareholders. And this is the basis of firm growth, otherwise firms will hardly survive. So ROI can also demonstrate the possibility of firm growth [15]. This paper referred to the above analysis, using net sales profit, sales growth, income increase and ROI to measure firm performance of new venture. The above items are all measured in a Likert-5 scale to facilitate respondents to answer the importance degree, satisfaction degree or agreement degree on these criteria.

Control Variables. Although this paper selected firms established within 42 months to be research objects, but firm age is intensively associated with firm capability, and firms at different stages have different capability development level, and performance of high-tech firms may have large differences. So, this paper selected firm age as a control variable. This paper introduced dummy variable as a control variable to represent firm age, with 0

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representing “within 1 year” and 1 representing “1- 2”years.

TABLE I. THE PROFILE OF THE SAMPLES

Items Samples Percentage Items Samples Percentage

Firm region

Northeastern China 183 25.5%

Staff number

1-10 persons 216 30.1%

North China 243 33.9% 10-50 384 53.6% Eastern China 291 40.6% Above 50

persons 117 16.3%

Total 717 100% Total 717 100%

Firm age

below 1 year 211 29.4% Sales (￥

10,000)

1-10 109 15.2% 1-2 years 207 28.9% 10-50 347 48.4%

2-3.5 years 299 41.7% Above 50 261 36.4% Total 717 100% Total 717 100%

TABLE II. MEASUREMENT ITEMS OF DYNAMIC CAPABILITIES AND EXPLORATORY FACTOR ANALYSIS

Variables Items Factor loading Cronbach’α

Dynamic mechanism

Perfect leading system and organizational institutions 0.613

0.769

Scientific decision systems 0.772 Good system and environment for talents competition 0.837

Reasonable internal incentive system and profit distribution institutions 0.815

Firm culture encouraging innovation , establishing innovation failure forgiveness system 0.669

Actively cultivating staff’s innovative techniques 0.881 Business cooperation and information sharing among divisions 0.732

Discussing solutions with supplier and clients 0.651

Learning mechanism

Offering adequate resources to support learning activities 0.774

0.747

Building corresponding learning organizations 0.667 Encouraging staff to learn by themselves 0.785 Offering frequent training opportunities 0.813

Learning from other firms through alliances and collaborations. 0.721 Sharing work experiences among staff 0.694

Matching mechanism

Allowing every division to break normal work procedures to ensure work agility 0.873

0.731 Internal work modes are changing with individuals and time 0.813

Responding in time to internal and external environment 0.732 The speed to realize strategic transformation is always faster than

competitors 0.655

Fast adjustment to unexpected changes 0.673 KMO sample adequacy test：0.837；Chi-Square：621.710，d.f.:459; Sig.:0.000

TABLE III. CONFIRMATORY FACTOR ANALYSIS OF RESOURCE DEVELOPMENT PROCESS

ariables Criteria

Dynamic mechanism Learning mechanism Matching mechanism

2χ 117.220 98.790 102.663

df 65 43 58 2χ /d.f

1.80 2.29 1.77

GFI 0.912 0.977 0.906 RMSEA 0.061 0.130 0.071

NFI 0.902 0.891 0.907 CFI 0.899 0.914 0.943

IV. HYPOTHESES TESTING AND RESULTS

A. Factor analysis and reliability Statistical software SPSS15.0 and Structural Equation

Model software AMOS6.0 were utilized to analyze the variable statistically. The development process of the firm resources has been analyzed using principal component analysis (maximizing deviations rotation) and reliability test (Cronbach’α coefficient)and finally get the results of factor analysis in Table II .Table II shows that after exploratory factor analysis and reliability test of the items, the KMO sample adequacy test is 0.837 which is fit for

factor analysis with an accumulated explanation amount of variables of 52.91% and subsequently get three factors: dynamic mechanism, learning mechanism and matching mechanism. So these three processes are not co-varied. And then first step confirmatory factor analysis was done for three dimensions of dynamic capabilities and firm performance, results see Table III and Table IV. The fitting degree of every criterion in the model basically reached the general requirements for analysis except only RMSEA (0.130) of learning mechanism wasn’t satisfactory; however, the general fit is accepted. Table V shows the Descriptive statistics among variables and Pearson coefficient.

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TABLE IV. FACTOR ANALYSIS RESULTS OF FIRM PERFORMANCE

Variables Items Factor loading Cronbach’α Firm performance (GFI=0.943;NFI=0.908; CFI=0.979; RMSEA=0.057 )

Net sales profit 0.697

0.817 Sales growth 0.873 Income growth 0.806

ROI 0.844 KMO sample adequacy test：0.822; Chi-Square：369.510，d.f.:183; Sig.:0.000

TABLE V. DESCRIPTIVE STATISTICS AMONG VARIABLES AND PEARSON COEFFICIENT

Variables Mean SD 1 2 3 4 1.Dynamic mechanism 3.17 0.994 1 2.Learning mechanism 2.19 1.121 0.420** 1 3.Matching mechanism 3.26 0.952 0.403* 0.322** 1 4.Firm performance 3.37 0.677 0.279*** -0.118 0.301 1

*p<0.1; **p<0.05; ***p<0.01.

TABLE VI. RESULTS OF HIERARCHICAL REGRESSION

Variables Firm performance Model1 Model2

Control variablesFirm age 0.147** 0.096* Dependent variables Dynamic mechanism 0.472* Learning mechanism 0.236*** Matching mechanism 0.173** R2 0.109 0.158 Adjusted R2 0.094 0.143 F-value 24.325*** 20.571*** R2 Change --- 0.049 *p<0.05; **p<0.01; ***p<0.001.

B. Results This paper utilizes SPSS15.0 to carry out regression

test on hypothesis. The results are in Table VI. In Table 6, Model 1 only includes control variables and

the results show that firm age is positively associated with firm performance and to some extent, the older high-tech firms, the higher their performance might gradually be. From Model 1 to Model 2, R2 increases by 0.049（p<0.001 ） , so in this model the increase of R2 is significant，showing the entire model improved. In Model 2, dynamic mechanism, learning mechanism and matching mechanism are all respectively positively associated with firm performance（β=0.472，p<0.05; β=0.236，p<0.001；β=0.173，p<0.01），so H1, H2,H3 are all supported. From the above regression coefficients, the three dimensions which are involved in regression equation are all significantly and positively associated with firm performance with the most influence from dynamic mechanism reaching 0.472, and subsequently learning mechanism reaching 0.236 and matching mechanism reaching 0.173. Thus firm dynamic mechanism is the most important factor which leads to firm operational performance.

V. DISCUSSIONS AND CONCLUSION

A. Discussions The building of dynamic mechanism is the prerequisite of the formation of dynamic capabilities, and former empirical researches also showed that dynamic

mechanism was most intensively associated with operational performance. Dynamic mechanism is built under the joint actions of external environmental pressure and internal dynamics. From things’ running rules, internal factors are the fundamental reasons for things to develop, so in order to cultivate dynamic capabilities , the first priority is to construct the internal dynamic mechanism, and then on this basis, to build firm’ s external dynamic mechanism. Inwards, through innovative firm culture, the execution of innovative institutions, innovative firms are established while through building effective incentive systems, incentive factors are cultivated. Outwards, through strengthening of the ties between suppliers and clients, external dynamic factors are absorbed. And by combination of internal and external dynamic factors, firm performance is possibly promoted which is crucial for the survival of high-tech firms.

Meanwhile, firms should build learning mechanism to promote learning capability. In times when information and knowledge are main source for competitive advantage, learning is the basis for firm survival and growth and is source for sustainable competitive advantage. Firms which are competitive in Chinese and global markets consider learning capability to be core resources, and by continually learning, they become organizations which can construct, integrate and redistribute internal and external capabilities. Whether firms can transform learning capability and knowledge management capability to sustainable competitive

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advantage becomes the vital factor for firm success. The empirical results of this paper shows that the mean of learning mechanism is lowest with a value of only 2.19 and this shows that Chinese firm’ learning capabilities are relatively weak and also shows that firms’ learning mechanism has a large space to be improved which should get attention from firms.

Through matching mechanism, firms solve the problem of in-time marching of firm capability and resource system and internal and external environmental changes to form continually new competitive advantage and to ensure sustainable vitality of the firm. The construction of matching mechanism of firm needs to build information system to screen the environment and recognize opportunities and also needs to strengthen flexibility management to build strategic matching mechanism. Meanwhile, firms need to build crisis prevention system. The prerequisite of building matching mechanism for the firm is to collect and deal with external environmental information in time and respond rapidly to the changes of outer situations. Meanwhile, to ensure that firms respond fast and in time to competitors’ behaviors and changing customers’ demands in changing environment, firms have to strengthen flexibility management to reach consistent goal with the external environment dynamics.

B. Conclusion Based on 877 valid questionnaires, this paper studied

the relationship between the three dimensions of dynamic capabilities and firm operational performance. The results show that dynamic capabilities make important impacts on firm operational performance through the mutual collaboration and operation of dynamic mechanism, learning mechanism and matching mechanism. And the three dimensions of dynamic capabilities are all positively associated with firm operational performance to different extents. Besides, among every dimension of dynamic capabilities, dynamic mechanism makes the greatest impact on firm operational performance, with learning mechanism and matching mechanism making the descending impacts.

Surely, this paper has some limitations. For the scale of dynamic capabilities, this paper only adopts the relevant important items and takes simplicity instead of accuracy. Future research should focus on the design and development of scales to further test the relationships among every criterion of dynamic capabilities as well as the relevant relationships and causal relationships between those criterion and performance. Similarly, this paper only studies the relationship between dynamic capabilities and new venture, and future research should focus on the relationship between dynamic capabilities and mature firms as well as this mechanism’s impacts on new

ventures and this is especially significant for new ventures. And the comparison of different mechanisms of dynamic capabilities between new venture performance and mature performance is also one of the topics in future research.

ACKNOWLEDGMENT The authors would like to thank the National Natural

Science Foundation of China for financially supporting this research. The paper is supported by two important programs of China (Grants No: NSFC-70672025 and NSFC-70732005).

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