Several papers and reports highlight the fact that firms do not operate in isolation. In particular, RGFs’ integration into networks of alliances and partnerships with other firms, service providers, and institutions appears to be one of their outstanding characteristics (OECD, 2002). These networks facilitate the distribution of financial and human capital as well as information about markets, products, and technology. Littunen and Virtanen (2009) found that close interplay with external personal networks increases the odds of becoming a growth business.
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Jarillo (1989) followed the Schumpeter tradition of the entrepreneur as the opportunity creator and analyzed RGFs’ use of external resources in their pursuit of growth. External resources are measured as the ratio of sales over assets. The argument is that a high ratio of sales over assets indicates a structure with “less integration” because the firm subcontracts more functions and thereby uses more external resources. His analysis confirms that the fastest growing firms make more use of external resources than the average firm, especially for small firms, and those firms using the most external resources also grow above their industry average.
Zhao and Aram (1995) used sociological network theories when describing their concept of networking, measured by the concepts of “range” (total number of contacts) and
“intensity” (amount of resources exchanged and the frequency of contacts). In their case study on six young Chinese firms, the RGFs had both greater range and more intense networking, regardless of stage of firm development, than low-growth firms. They argued that networking helps young firms gain access to important resources from outside. Access to resources is also used as an argument to form alliances, but in such closer relations firms can also utilize their partners’ employees and share financial burdens when cooperating (Barringer et al., 1998).
3.10.2 Developing important external relations
In a qualitative analysis of three small globally oriented RGFs, Freeman, Edwards, and Schroder (2006) showed that firms face several constraints when internationalizing. These constraints are poor access to economies of scale, lack of financial and knowledge resources, and aversion to risk-taking. They overcome these constraints by engaging in collaborative partnerships. Partnerships with larger foreign firms provide market knowledge and the sharing of the financial burden. These firms’ business networks are derived from personal networks developed over time. Their competitive advantage and strategy include unique technology as a source of competitive advantage and a growth strategy through partnership and alliances.
In analyzing RGFs in the Munich IT cluster and how these firms grow through the use of external relations, Lechner and Dowling (2003) found that for most firms, external relationships are important for growth, and the number of close partnerships increases with the company’s stage of development. Further, the firm’s most important relations are characterized by relationships developed over a long time period and close spatial proximity.
The regional embeddedness of the firms’ network enhances the sharing of resources. These firms use different types of networks (the relational mix) that are important for their development: reputational networks; coopetition networks; marketing networks; and
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knowledge, technology, and innovation networks. Supply networks are not considered the most important. On the contrary, Beekman and Robinson (2004) found that firms tend to maintain or expand their relationships with a core of critical suppliers when they grow rapidly. They argue that firms can save time and opportunity cost through close relationships with their suppliers and that the suppliers can help young firms overcome the liability of newness.
Lechner and Dowling’s (2003) analysis further indicated that knowledge creation is dependent on strong ties, while knowledge acquisition is dependent on weak ties.
Consequently, since knowledge creation is important for product and service development, the authors argued that weak-tie networking and non-redundant ties are important but that the transformation of these ties into strong ties is crucial for value exploitation. Since young firms face the liability of newness, they need to build on their initial social networks and develop them into closer collaboration based on business logic. Freeman et al. (2006) argued that personal networks are developed over time. Furthermore, Feindt et al. (2002) showed that personal contact with customers is important when the firm is young. However, as these firms grow, partnerships with other actors become more important in supporting the expansion of the business. They found that the basis for collaborating with external partners is achieving well-developed internal systems and control of external and internal processes. Social networks can be time-consuming, and there is a trade-off if one should cut old ties and develop new ones (hopefully important for the development of the business), or be stuck in redundant ties. Lechner and Dowling (2003) therefore recommend a mix of both social and business logic when a firm discusses their network strategy.
3.10.3 Organizational learning
In an analysis of machinery manufacturers and business service firms, Sadler-Smith, Spicer, and Chaston (2001) investigated whether organizational learning behaviors distinguish RGFs from their slower-growing counterparts. They distinguished between a passive or active learning orientation. An active learning orientation is positively associated with growth within the manufacturing industry but is not significantly related to business service firms. The active learning related to high growth in manufacturing is characterized by free information flow, challenging existing routines and procedures, and the promotion of risk-taking and experimentation. The authors discussed whether business service firms inherently have a greater capability for flexibility and adaptability, whereas many firms within manufacturing are “locked-in” by technology and processes.
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3.11 Economic resources and performance