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Increasingly, multinational corporations (MNCs) nolonger simply view emerging countries as manufactur-ing bases; instead, they recognize their market poten-

tial and have begun to develop firm strategies that suitthese unfamiliar and turbulent host country environ-ments (Luo and Park 2001; Tan and Litschert 1994).

This conjecture is consistent with the traditionalenvironmentstrategyperformance framework, which

suggests that a firm must be able to scan and make senseof its external environments and then identify strategyto 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 toovercome a wide range of external pressures arisingfrom host country markets (Cui, Griffith, and Cavusgil2005; Cui et al. 2006).

Despite the significant contributions of prior researchwith regard to the environmentstrategyperformance

framework (e.g., Luo and Park 2001), studies examin-ing marketing strategy that foreign firms can deploy intheir 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. 5873

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

Extending the EnvironmentStrategyPerformance Framework: The Roles

of Multinational Corporation NetworkStrength, Market Responsiveness, andProduct Innovation

Ruby P. Lee

ABSTRACT

The purpose of this study is to extend the traditional environmentstrategyperformance 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 ofBusiness, The Florida State University (e-mail [email protected]).

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EnvironmentStrategyPerformance Framework 59

ture suggests that market responsiveness and productinnovation are two particularly critical strategic pos-tures in international marketing, research has not exam-ined these simultaneously in one study. A foreign firmthat reacts in a timely manner to local customer needs

and develops new markets faster than its competitors ina host country (defined as market responsiveness) has avital marketing strategy for survival (Lee, Chen, and Lu2009; Luo 2001). Furthermore, because emerging mar-kets such as China are likely the central battlefields ofMNCs across the globe, the foreign firm must adopt amore 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 staycompetitive in its host country (Li and Atuahene-Gima2001; 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 turbulencesin their local markets.

In addition, although an MNC network provides criti-cal resources to support the strategic initiatives of anMNCs headquarters and subsidiaries (Kogut and Zan-der 1993; Lee et al. 2008), little empirical evidenceexists regarding the strength of such a network and itsrole in the relationship between strategy and firm per-formance. An MNC network comprises the MNCs

headquarters, its subsidiaries, and the extent of rela-tional ties formed among these various business unitswithin the MNC network, referred to as MNC networkstrength. It is also instrumental in gaining access tosocial 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 connectionswith other MNC units to overcome their liabilities offoreignness (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 networkstrength, an MNCs foreign subsidiary can understandthe benefits of relying on its MNC network strength.Although this study views knowledge in a general senserather than a specific kind made available in an MNCnetwork, it maintains that network strength serves as an

important source for a foreign firm to tap into a diverseset of knowledge and information embedded in itsMNC network.

Together, this research addresses the following unan-swered questions: (1) Which marketing strategic pos-tures can better deal with environmental turbulence in ahost country? (2) When should foreign firms use theirMNC 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 theimpact of marketing strategic postures on firm perform-ance? In answering these questions, this study extendsthe traditional environmentstrategyperformanceframework (Child 1972; Porter 1991; Tan and Litschert1994) by applying the complementary insights of theinternational marketing strategy and network literature.

The synthesis of the environmentstrategyperformanceframework and network theory enables researchers toexpand the boundary conditions for which potentialresources derived through MNC network strength can

be used to handle environmental turbulence and supporta foreign firms marketing strategy and performance inits host country.

The following sections discuss a conceptual frameworkthat links together environmental forces, marketingstrategic postures, MNC network strength, and firmperformance. Then, a set of hypotheses is developed andtested 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 implicationsand directions for further research.

CONCEPTUAL FRAMEWORK AND

HYPOTHESES

The traditional environmentstrategyperformanceframework suggests that changes in environmental tur-bulence cause a firm to adopt different strategies for thepurpose 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 arisingfrom external environments, which then lead to strate-gic decisions (Daft and Weick 1984; Weick 1979).Because of its criticality, the strategic choice of a firmremains one of the central focuses in organizationalresearch (e.g., DeSarbo et al. 2005).

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

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strategic postures for MNCs survival and organicgrowth 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 tolocal 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 firms long-term commit-ment to the creation of new products that suit currentand future needs (Li and Atuahene-Gima 2001). Suchstrategy that emphasizes offering new and distinguish-able products from those of major competitors is a moreproactive one for a foreign firm to pursue organicgrowth (Zhang, Di Benedetto, and Hoenig 2009).

Building on the environmentstrategyperformanceframework, Figure 1 shows that a foreign firms market-ing strategic postures (i.e., market responsiveness andproduct innovation) and MNC network strength are

means to deal with two types of environmental turbu-lence; therefore, they influence the firms performance inits host country. Because MNC network strength mayprovide additional resources to support the foreign

firms host country marketing strategic postures, MNCnetwork strength likely reinforces the positive influencesof market responsiveness and product innovation onforeign firm performance.

Environmental Turbulence and MarketingStrategic Postures

Strategic choice theorists have long suggested that firmsactively manage and control their strategy such that theycan 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 firms abi-lity to cope with the direct challenges of competitiveforces (Porter 1991). In particular, the literature suggeststhat 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 determineshow foreign firms interpret local market informationand knowledge generated from their major competitorsand customers and then act on and exploit any oppor-

tunities presented in such unpredictable environmentalchanges. 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 thanits rival firms in response to different and subtle changesin its local market (Grein, Craig, and Takada 2001; Luo2001). Longer delays in responding to host market con-

Figure 1. Conceptual Model

Marketturbulence

H1a

H2a

H2b

H3b

H3a

H5b

H5a

H5c

H4b

H4a

H1b

Marketresponsiveness

MNCnetworkstrength

Productinnovation

Technologicalturbulence

Firmperformance

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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 itrequires the foreign firm to apply its existing knowledgeto 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 tomarket responsiveness.

Similar to market turbulence, technological turbulencemay 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 Anderson1986). When the foreign firm faces a high level of

volatility, change, and unpredictability related to thetechnology of its host country, market responsivenessthat emphasizes timely response to local competitorsand customers through the use of existing knowledge

could be an attractive marketing strategy (Lee, Chen,and Lu 2009). Frequent changes in technology can makea firms product obsolete faster. However, by exploitingalternative markets for its existing products faster thanits counterparts, the foreign firm can extend its productlife cycle to the untapped markets in its host country.Despite being more reactive, this strategy provides amore 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 relatedto market responsiveness.

Apart from local market responsiveness, the foreignfirm may focus on product innovation as an alternativemarketing strategic posture to counteract environmentalpressures proactively. Product innovation reflects the

extent to which a foreign firm can introduce more noveland distinctive products than its competitors in its host

country (Li and Atuahene-Gima 2001; Zhang, DiBenedetto, 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 knowledgeapplication, as in the case of market responsiveness

(Nonaka 1994). Researchers have demonstrated thatfirms that adopt product innovation strategy can reducethe undesirable effects from uncertain environments (Liand Atuahene-Gima 2001). In other words, this strate-gic posture should be useful to manage both market andtechnological turbulence. When rapid changes of cus-

tomer preferences and competition exist, focusing onproduct innovation enables the foreign firm to offernovel products that not only cater to the needs of localcustomers but are distinguishable from its competitors,making its product offerings more attractive in the hostmarket (Li and Atuahene-Gima 2001). Product innova-tion strategy also enables the foreign firm to redefine theneeds of customers, change the rules of competition, andexpand its market for growth (Wind and Mahajan

1997), providing a more proactive strategy to cope withmarket turbulence.

H2a: Market turbulence is positively related to

product innovation.

Similarly, frequent updates and changes in technologybecome a norm in a volatile technological environment.

A foreign firm needs to recognize that it operates in ahost country where sudden and unpredictable changesin technological environment can make its current prod-ucts obsolete quickly. As such, to stay abreast of therecurrent changes in technology, continuous commit-ments to product innovation may help the foreign firmbreak through industry norms and perhaps redefinetechnological standards in its host market (e.g., Eisen-

hardt and Tabrizi 1995), providing a more aggressiveapproach to offset technological turbulence. Thus:

H2b: Technological turbulence is positively relatedto product innovation.

Environmental Turbulence and MNC NetworkStrength

Within an MNC, the connections between foreign unitsconstitute a strategic network (Inkpen and Tsang 2005).

This so-called MNC network, which spans across orga-nizational boundaries, enables the network units tointeract with one another to exchange ideas and shareresources that can facilitate their individual strategicplanning 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 researchargues that a network provides idiosyncratic and inimi-

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table resources to network members (Andersson, Fors-gren, and Holm 2007; Nohria and Ghoshal 1997).When network strength (i.e., the extent of relational tiesformed between MNC units) increases, a focal foreignfirm can increase the likelihood that it will obtain awider 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 ofcohesive connections between firms, fosters cooperationand learning, which is essential to organizational success(Burt 1997; Tsai 2001). A high level of network strengthimplies more closely tied relationships between networkmembers, 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 capitalis readily available between network members and the

development of individual social capital will helpknowledge transfer or sharing. Consistently, priorresearch has shown that additional resources (e.g.,market information, technical know-how) may be made

available to different foreign units belonging to the samenetwork (Nohria and Ghoshal 1997). Thus, althoughan MNC likely comprises a group of geographicallydispersed subsidiaries, strong MNC network strengththat promotes more communication and interactionsamong subsidiaries can overcome the geographicdistance between them (Hansen and Lvs 2004).When stronger relational ties and continuous inter-

actions with other overseas units of the same MNCnetwork are maintained, the foreign firm is more likelyto obtain resources it lacks from the network to dealwith its host environmental challenges (e.g., Andersson,Forsgren, and Holm 2002; Gulati, Nohria, and Zaheer2000).

Specifically, an MNCs foreign units that are locatedacross the globe may provide a significant source ofmultiple market knowledge (Inkpen and Tsang 2005).

Maintaining closer relationships with other foreignunits enables the foreign firm to obtain diverse informa-

tion from other MNC units that can guide the foreignfirm to evaluate its particular market condition moreeffectively (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 MNCunits to help identify and solve its own local marketproblems (Argote and Ingram 2000).

H3a: Market turbulence is positively related toMNC network strength.

Different from market turbulence, technological turbu-lence is characterized by the frequent and volatilechanges of technologies and emphasizes the change in

the form of know-how and degree of innovation (Tush-man and Anderson 1986). Extant research suggests thatunpredictable changes in technological environmentscan make the foreign firms existing technology obsoletefaster (Hansen and Lvs 2004). Therefore, the foreignfirm must have a wider scope of knowledge, such astechnical know-how, to understand and handle frequenttechnological 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 Lvs2004). As a result, similar to market turbulence, thepresence of high technological turbulence encourages

the foreign firm to increase its relational ties with otherMNC units for the purpose of obtaining a wider rangeof knowledge to help identify unique product attributesand new product concepts appropriate to its local mar-

ket (Hansen and Lvs 2004; Hansen, Mors, and Lvs2005).

H3b: Technological turbulence is positively relatedto MNC network strength.

Performance Implications of MarketingStrategic Postures

In the context of international marketing, the successof an MNCs foreign operations lies in its marketresponsiveness to host environments (Prahalad andDoz 1987). Consistent with extant research showingthat timely responses to environmental challenges andopportunities are often associated with positiveperformance outcomes, being responsive to localmarkets should also increase a foreign firms perform-

ance (e.g., Luo 2001). Specifically, a foreign firmsability to respond to its local market is partly subject

to its exploitation competence. Exploitation is therefinement and extension of existing competencies,technologies, and paradigms (March 1991, p. 85). Theforeign firm that can exploit its existing resources torespond to its customer needs and competitor actionsmore effectively, and extend its current technology to

appeal to its new host market faster than rivals, shouldhave more positive performance (Grein, Craig, andTakada 2001).


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H4a: Market responsiveness is positively related tofirm performance.

In addition to market responsiveness, previous researchhas suggested that product innovation is an alternativemarketing strategy that promotes firm performance

(e.g., Li and Atuahene-Gima 2001). A literature reviewshows that product innovation strategy comes withmultiple benefits. For example, product innovationsignals a firms commitment to continuous developmentof novel ideas and products, enabling the firm to profitfrom higher market returns (Lee and Chen 2009).In addition, product innovation enables the foreign firmto preempt the market, occupy strategic resources, andcreate entry barriers (Lieberman and Montgomery

1998). Offering new products that can differentiatethemselves from their major competitors and potentiallyincrease market demands should lead to positivefirm performance.

H4b: Product innovation is positively related tofirm performance.

Performance Implications of MNC NetworkStrength

Previous research has suggested that knowledge fromdifferent foreign units within the MNC network isricher than what an individual foreign firm alone canderive (Inkpen and Tsang 2005). Broader knowledgegives 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 foreignunits (Luo and Shenkar 2006), as previous research hasindicated, when entities are closely connected, businessunits or firms are motivated to exchange ideas and shareresources (Tsai 2001; Uzzi 1999). Stronger networkstrength enables different foreign units to overcome pos-sible communication barriers, making synergistic bene-fits such as complementary or new knowledge likely tobe developed (Nohria and Ghoshal 1997). Thus, when

MNC network strength promotes more knowledgepooling, which could increase the foreign firms compe-

tencies, positive performance outcomes should result(e.g., Lee et al. 2008; Luo et al. 2004).

H5a: MNC network strength is positively relatedto firm performance.

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

positive effects of marketing strategic postures on firmperformance. Increases in MNC network strength helpthe foreign firm obtain more resources from other for-eign subsidiaries and its headquarters to reinforce itsresponsiveness to local environments (Hansen andNohria 2004). In particular, firms with stronger ties are

associated with higher levels of trust, which facilitatemarket 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 moreideas to identify its local market trends and opportuni-ties and determine which current product attributes arefavorable 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 ofmarket trends. Thus, MNC network strength shouldreinforce the positive impact of market responsivenesson firm performance.

H5b: MNC network strength positively moderatesthe impact of market responsiveness on firmperformance.

Similarly, MNC network strength should make theeffect of product innovation strategy on firm perform-ance stronger. Product innovation involves substantialtechnical 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 tocoordinate and communicate with each other moreeffectively and accurately, thereby facilitating knowl-edge assimilation and transfer (Inkpen and Tsang 2005).Because knowledge about product developments can bemore technical and difficult to assimilate, strong ties canincrease mutual sharing and interactions during theprocess of knowledge assimilation and application(Eisenhardt and Tabrizi 1995; Hansen and Lvs 2004),thus strengthening the impact of product innovation on

firm performance.

H5c: MNC network strength positively moderatesthe impact of product innovation on firmperformance.

METHOD

Sample and Data Collection

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

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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 fromdeveloped 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 issignificantly different from Western economies, foreignfirms are likely to develop their own strategies andresources to cope with various local environmentalforces in their host country. Thus, China provides adynamic, yet appropriate setting to test the proposedtheory.

The sampling frame of this study was based on a list

provided by a leading university in Shanghai. The listcomprised MBA alumni who had extensive workexperience and were employed currently by either for-eign wholly owned subsidiaries or joint ventures in high-

technology industries. This study uses the term foreignfirms to reflect both types of ownerships. Similar torecent organizational research conducted in China, datawere collected on-site (e.g., Li and Atuahene-Gima

2001). Interviewers contacted each foreign firm on thelist by telephone to identify a key informant who wasknowledgeable about his or her local operations fromeach firm, verify the address, and set up appointments todrop 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 thisstudy. Of 300 firms contacted, 140 completed the

survey.

Among the respondent firms, 23.6% were partiallyowned ventures and 76.4% were wholly owned sub-sidiaries; their headquarters were located in the UnitedStates (53%), Europe (34%), Asia (10%), and others(3%), comparable to the foreign direct investment trendthe Peoples Republic of China Ministry of Commercereported in 2006, a year before data collection. Theseforeign firms represent a wide range of high-technology

industries, including telecommunications, softwaredevelopment, 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 businessdirectories and other sources were used to acquire nec-

essary secondary data, including firm age, sales, and thenumber of employees, so that nonrespondent firmscould be compared with respondent firms. There were

no significant differences between these two groups onthe previously mentioned demographic variables, sug-gesting that nonresponse bias unlikely existed. Next, thequalification of key informants was checked. The surveydirected respondents to report on their positions andyears employed with their firm. Approximately 90% of

the respondents had worked for their company for anaverage of five years and were senior executives familiarwith their local operations.

Questionnaire Design and Development

Each of the individual construct operationalizations wasdrawn from the appropriate prior research. Because theinitial questionnaire was constructed in English, two

bilingual graduate students fluent in both English andChinese translated the questionnaire in Chinese andback-translate it in English. Two bilingual academicresearchers then compared the back-translated question-

naire with the original English version and found nomajor differences. As a pretest, five senior executiveswho were familiar with their firms operations in Chinaevaluated 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 thebasis of their comments. Finally, the survey was admin-istered to the preidentified respondents, who were askedto evaluate their host country environments and theiroperations in China.

Measures

Market turbulence was conceptualized as the extent ofinstability in a host country marketplace. In line withprevious studies (Lee et al. 2008), a four-item, seven-point Likert scale was used to measure the level of hostcountry market turbulence. The four items were as fol-lows: (1) New customers tend to have product-relatedneeds 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 thembefore, (3) Our competitors are consistently changing

their product features, and (4) Our competitors areconsistently changing their sales strategies.

The survey defined technological turbulence as the paceof 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 industryis changing rapidly, (2) Rapid technology change inour industry necessitates frequent product modifica-

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tions, (3) Technological developments in our industryare frequent, and (4) Technological changes in ourindustry provide major opportunities.

Market responsiveness was conceptualized as the degreeto which a foreign firm can respond to the opportunities

of its host country in a timely manner (Lee, Chen, andLu 2009; Luo 2001). The scale consisted of four itemsadapted 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) Weare always one of pioneers to new markets, and (4)When we find that our customers would like us tomodify a product or service, we are all involved to make

concerted efforts to do so.

Product innovation was conceptualized as the extent towhich a foreign firm produced and launched products

that were more creative and differentiated than its com-petitors (Li and Atuahene-Gima 2001). Two itemsadapted from Atuahene-Gima (2005) and anchored ona seven-point semantic differential scale were included:

In comparison to major industrial competitors (1) ourproducts are not at all creativevery creative and (2) thedegree of product differentiation is relatively lowrelatively high.

The survey referred to MNC network strength as theextent of relational ties between the focal foreign firmand other units in the MNC network. Drawing from thework of Lee and colleagues (2008), five items wereincluded: (1) There is very little interaction among ourunits (reverse coded), (2) Relations among our for-

eign units are very close, (3) Our foreign units sharefrequent communications, (4) Our foreign units dis-cuss common problems frequently, and (5) Our for-eign units share close ties among themselves. All itemswere anchored on a seven-point Likert scale.

In line with Li and Atuahene-Gima (2001), the surveymeasured firm performance by prompting the respon-dents to compare their own operations with the major

competitors in their host country in the past three yearson the following six items: market share, sales growth,return on assets, overall product or service quality, over-all profitability, and customer satisfaction. Finally, a

firms age or years of operation likely influence its abi-lity to learn and acquire resources and eventually affectits performance. To control for such possible nuisanceeffects, firm age, measured by the years of operations in

China, was included. The Appendix provides the detailsof the measures, and Table 1 summarizes the basicdescriptive statistics and correlation coefficients of theconstructs.

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 separatingthe key constructs into several subsections and using dif-ferent formats to reduce informants use of simplestraight-line responses. Second, the Harmans single

factor test was conducted to assess whether a commonmethod bias exists in the data. Using exploratory factoranalysis, 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 matrixshowed that all the measurement items loaded ontotheir 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 ofpartial correlation analyses indicate no hidden correla-tions between paired variables that are masked by the

effect of other variables, again suggesting that commonmethod variance is unlikely a concern.

LISREL8.7 was used to conduct a confirmatory factor

analysis to evaluate all items. The Appendix summarizesthe 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, anda standardized root mean square residual of .05. Themodel 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 reliabilitiesranged from .69 to .95 (Nunnally and Bernstein 1994).With regard to evidence of discriminant validity, asTable 1 shows, in all cases the AVE of each factorexceeded the squared correlation between the factorpair (Fornell and Larcker 1981). In short, these resultssupport the construct validity of the measurementmodel. 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-stageleast squares (3SLS) along with seemingly unrelatedregression (SURE) to test the hypotheses because the

conceptual model contained multiple linear equations.Furthermore, because the errors arising from the linearequations of marketing strategic postures and MNC

network strength (see Models 13 in Table 2) are likelycorrelated, the 3SLS method combined with SUREcan control for contemporaneous correlation of errorsacross the equations and thus produce more efficientestimates (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 andWest 1996).

Table 2 summarizes the hypothesis testing results. Withregard to H1a and H1b, which postulate the positiveinfluences of market and technological turbulence onmarket responsiveness, the hypotheses are supported.As Model 1 shows, market responsiveness is influenced

positively by market turbulence (b = .16, p < .05) andtechnological turbulence (b = .17,p < .01), in support ofH1a and H1b, respectively. H2a, which predicts a positiverelationship between market turbulence and product

innovation (b = .04, p > .05), is not supported (seeModel 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 findingsshown 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 withH3b, 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 expecteddirection that market responsiveness (b = .28, p < .01)and product innovation (b = .16, p < .01) positivelyinfluence firm performance, in support of H4a and H4b,respectively. With regard to the performance implicationof MNC network strength, the results show that MNCnetwork strength (b = .25,p < .001) is positively relatedto firm performance, in support of H5a.

To examine the interaction effects, Model 5 was con-

structed by adding the interactions of network strengthwith market responsiveness and product innovation toModel 4. The results show that MNC network strengthfurther serves as a moderator to reinforce the positiveimpact of market responsiveness on firm performance(b = .15,p < .05), confirming H5b. However, in contrast

with H5c, MNC network strength reduces the positiveeffect of product innovation on performance (b = .11,

p < .05).

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In addition, in line with Cohens (1988) procedure, theR-square between Models 4 and 5 were compared toexamine the effect size of the interaction terms, whichwas .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, a3SLS without the option of SURE was conducted, andthe results stayed substantially the same as thosereported in Table 2, indicating the robustness of thefindings.

DISCUSSION

This study examines the roles of marketing strategic

postures and MNC network strength in mitigating envi-ronmental turbulence to affect firm performance amongforeign firms in China. Building on the environmentstrategyperformance framework (Child 1972; Tan and

Litschert 1994), this research proposes that marketresponsiveness 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 foreignfirm should use its MNC network strength to deal withturbulent environments and facilitate firm performance(e.g., Andersson, Forsgren, and Holm 2007; Inkpen andTsang 2005).

Theoretical Implications

This research provides several insights to academia.First, the findings confirm and extend the traditionalenvironmentstrategyperformance framework byshowing that market responsiveness and product inno-vation are two critical marketing strategic postures todeal with turbulent environments and create superior

firm performance in a foreign market (Porter 1991). Inparticular, both market and technological environmentsshape the strategic posture of market responsiveness,which in turn produces positive performance outcomes.

However, the results indicate that only technologicalturbulence influences foreign firms to focus on productinnovation 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 FirmResponsiveness 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*

2 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.

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the importance of evaluating multiple environmentalsegments and examining how each of them shapes dif-ferent marketing strategic postures rather than viewingenvironmental factors as creating identical impacts onstrategic initiatives.

Second, this study expands the scope of the traditionalenvironmentstrategyperformance framework byincluding MNC network strength. In particular, theresults show that MNC network strength can be abuffer alternative to marketing strategic postures indealing with market turbulence and generating positiveperformance outcomes. When a foreign firm is situatedin a turbulent market environment, it should increaseMNC network strength because doing so underscores

the likelihood of obtaining more valuable resources andbroader knowledge from other network members tohelp solve its local market problems (Inkpen and Tsang2005).

Third, MNC network strength can act as a moderatorto influence the impact of strategy on firm performance.However, MNC network strength entails a characteris-

tic that can produce mixed effects (Uzzi 1997). On theone hand, strong social ties can be detrimental toknowledge creation (Ahuja 2000; Uzzi 1999); on theother 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 itsMNC network for resources? This question can beresolved by simultaneously considering the types of

marketing strategic postures the foreign firm adopts.The results indicate that MNC network strength is anasset to reinforce the impact of market responsivenesson firm performance, and at the same time, it acts as aliability to reduce the positive effect of product innova-tion on firm performance. Such findings are consistentwith Buckley and Martin (2004, p. 381), who observethat complementarity of different kind arises whenthere are interactions between the operations of a firmin different geographical or product areas. These inter-

actions may be positive (complementary) or negative intheir 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 everyforeign firm, because the knowledge and informationacquired from other network members may not neces-sarily help the focal foreign firm in strategizing.

Importantly, the benefits of using network strength toincrease the focal foreign firms performance depend onwhich marketing strategic postures it pursues. It may be

that product innovation strategy requires more technicalknowledge, and such knowledge is typically more tacitand stickier to assimilate and transfer. Alternatively,product innovation demands more creative thoughtsand ideas. However, stronger social ties may sometimesencourage network firms to reach consensus, which may

impede, rather than facilitate, the foreign firm in formu-lating new products, undermining the impact ofproduct innovation on performance (Granovetter 1973;Uzzi 1997). Amid the conflicting role of networkstrength, this study not only provides a clearer bound-ary for foreign firms in using their MNC networkstrength but also widens the application of the tradi-tional environmentstrategyperformance framework.

Managerial Implications

This research offers further insights to practitioners. Inparticular, the results of this study show that market

responsiveness and product innovation are two market-ing strategic postures a foreign firm should pursuesimultaneously to navigate technological turbulence inits host country. Responding in a timely manner to fre-

quent technology updates in a host country is impor-tant. Yet unprecedented changes in technology mayrequire the foreign firm to be more proactive. Productinnovation strategy helps the foreign firm stay afloat intechnological races to deal with such a volatile techno-logical environment as in the case of China (Li andAtuahene-Gima 2001).

With respect to local market turbulence, the resultsdemonstrate that market responsiveness is an effectivestrategy to overcome rapid changes in local marketdemands and competitor actions. Therefore, it would bewise for managers of foreign firms to monitor andincrease their responsiveness to host market environ-ments (Lee, Chen, and Lu 2009). However, this studyfinds no support for the use of product innovationstrategy to deal with market turbulence. A possibleexplanation is that when the trend of local customer

preferences and needs is so unpredictable, combinedwith a random pattern of competitor actions, foreign

firms may find it difficult to create new products thatsuit the local market. Particularly in China, where awide range of customers and intense competition exists,launching new products is never an easy task (Penhirin2004).

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

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Note that the primary function of MNC networkstrength is to help a focal foreign firm access resourcesembedded in its MNC network (Inkpen and Tsang2005). By strengthening its social ties with other foreignsubsidiaries, the focal foreign firm can obtain resourcesneeded for dealing with its own local environment

(Andersson, Forsgren, and Holm 2002). Perhaps fre-quent changes in technology from a host country makeit difficult for the foreign firm to evaluate whichresources are needed from its network. In addition, theforeign firm may not rely on the collective wisdom pro-vided by its network members because doing so couldcreate inertia to change and prevent the foreign firmfrom 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 ofbuilding 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 arelikely to be more observable than those in technology

across host countries, the information and knowledgeshared within the MNC network provide tremendousinputs for the foreign firm to manage the unpredictablemarket demands and capricious competitor challenges.Broader market knowledge and diverse market informa-tion shared in the MNC network give the foreign firmmore support to identify its local market trends quickly.In addition, compared with technical knowledge, mar-

ket knowledge may be less sticky to assimilate andtransfer. Therefore, increases in market turbulence mayencourage the foreign firm to strengthen its relationalties with other MNC units to obtain resources for solv-ing its local marketing problems.

Regarding the performance implications of strategicpostures and MNC network strength, market respon-siveness and product innovation as two marketingstrategic 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. Inaddition, MNC network strength as a means to obtaininformation and facilitate knowledge transfer betweenforeign units boosts the foreign firms local performance(Andersson, Forsgren, and Holm 2002; Hansen, Mors,and Lvs 2005). Managers of foreign firms should

take advantage of the possible resources derived fromtheir MNC network strength to garner positive firmperformance.

Finally, regarding whether MNC network strength rein-forces the impacts of marketing strategic postures onfirm performance, the results are mixed. Foreign firmsthat operate in China should be cautious and under-stand when the configuration of MNC network strengthand strategic initiatives provides the best performance

outcomes. On the one hand, MNC network strength isimportant because it enables the foreign firm toexchange ideas with other firms within the MNC net-work and quickly access needed resources, thusstrengthening the firms impact of market responsive-ness on firm performance. On the other hand, MNCnetwork strength may be harmful to firm performancewhen it is used with product innovation strategy (Hameland Prahalad 1994). Although strong ties encourage

more communications and idea exchange, someresearch cautions that (1) because of redundancies in theinformation 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 firmsto strive for consensus, and such collective thinking mayhinder, rather than facilitate, the foreign firms formula-tion of new products (Granovetter 1973, 1985); as a

result, MNC network strength may reduce the effect ofproduct innovation on performance. Importantly, Chinais a unique market largely different from Westernsocieties, demanding foreign firms to develop morealternative solutions, fresh insights, and novel ideas.Thus, foreign firms should not use their MNC networkstrength 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 informationsharing structure between its business units. Foreignunits may take more initiatives to help each other if theirheadquarters 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 ofknowledge and information being transferred andassimilated between MNC network members. It is pos-

sible that certain knowledge required by a foreign firmis too new, tacit, sticky, or complicated to be shared byother MNC units. Further studies should take into

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account how different types of knowledge may affectthe use of network strength. Along the same line, furtherstudies 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 encourageresponses. 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 commonmethod variance (Lindell and Whitney 2001). There-fore, further research is encouraged to perform marker-

variable analysis in addition to other approaches (e.g.,Harmans one-factor analysis) to ensure that commonmethod 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 economicgrowth and country risk, it is widely known that differ-ences in culture (e.g., uncertainty avoidance among cus-tomers) constitute a critical component influencing howmanagers of different countries perceive environmentalforces 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 otheremerging economies.


Appendix. CFA Results and Measures

Standardized ConstructMeasures 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 creativevery creative.

The degree of product differentiation is relatively lowrelatively high.

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THE AUTHOR

Ruby P. Lee is Associate Professor of Marketing in theCollege of Business at The Florida State University. Sheholds a doctoral degree from Washington State Univer-

sity. Her current research interests include marketingstrategy and metrics, product innovation, knowledgemanagement, and interfirm relationships. In addition to

Journal of International Marketing, she has published inJournal of Marketing, International Journal of Researchin Marketing, Decision Sciences, Journal of the

Academy of Marketing Science, andJournal of ProductInnovation Management, among others.

ACKNOWLEDGMENTS

The author thanks the three anonymousJIM reviewersand the seminar participants at the Department ofMarketing and Management, Faculty of Business, HongKong Polytechnic University, for their constructivecomments.

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