Small Firm Internationalization, Innovation, and Growth

Abstract

This paper studies the effect of internationalization on innovation and firm performance (employment growth and sales growth) taking the interdependencies among the variables into account. Given the potential endogeneity, this study uses theory-driven instrumental variables and structural equation modelling to estimate the direct and indirect effects of internationalization. Firm-level data is obtained from a survey of 150 Dutch small firms that took part in an export promotion program. The main results show that internationalization has a positive impact on innovation. Internationalization increases firm performance directly and indirectly through innovation, while the direct impact of innovation on firm performance is insignificant. We contribute to the literature of export promotion programs as our results suggest that they not only increase small firm internationalization but also affect innovation and firm growth.