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Journal of Business Venturing 17 (2002) 553 576

Resources of the firm, Russian high-technology startups, and firm growth

Garry D. Brutona,*, Yuri Rubanikb

Department of Management, M.J. Neeley School of Business, Texas Christian University, Fort Worth, TX 76129, USA b Quality Laboratory, Moscow Federal Institute of Electronic Technology, Moscow, Russia

Received 1 November 1998; third revision received 1 February 2001; accepted 1 February 2001

Abstract Russia possessed many world-class technologies prior to the break up of the Soviet Union. Entrepreneurial endeavors resulted from this technological ability as market forces encouraged individuals to leave the large state enterprises that produced those technologies. Founding characteristics of the firm impact the resources that are available to the startup firm. This study investigates the extent to which founding factors in Russia help high-technology firms to prosper. It was found that the team establishing the business mitigated the liability of newness. However, in contrast to the US, the culture of Russia does not produce negative results if the founding team grows very large. Additionally, it was shown that firms that pursued more technological products and enter the market later performed best. D 2002 Elsevier Science Inc. All rights reserved.
Keywords: Russia; High-technology entrepreneurship; Liability of newness; Emerging markets; Resource theory

1. Executive summary Firms can be viewed as composites of various resources. In stable economies, it has been argued that young firms do not do as well as more mature firms. The underlying reason for such a liability of newness is the limited resources available to young firms. This emphasis on
* Corresponding author. Tel.: +1-817-257-7421; fax: +1-817-257-7227. E-mail address: (G.D. Bruton). 0883-9026/02/$ see front matter D 2002 Elsevier Science Inc. All rights reserved. PII: S 0 8 8 3 - 9 0 2 6 ( 0 1 ) 0 0 0 7 9 - 9


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resources is supported in the entrepreneurship literature, which records that a principal cause of high-technology firm failure is a lack of financial resources. However, Eisenhardt and Schoonhoven (1990) argued that liability of newness of young high-technology firms could be mitigated by the nature of the firms founding characteristics. Particularly, the characteristics of the founding team, the innovativeness of the firms product(s), and the firms position as a first mover can mitigate the liability of newness since these characteristics impact the accessibility of resources. Prior to its economic transition, Russia produced many world-class technological products. Many of those individuals who left the technology-based state companies and research laboratories have gone on to found their own high-technology-based new ventures. But, in general, Russias transition to a market economy has been tumultuous. For example, the monetary system of the country reflected an exchange rate for the ruble of 35 per US dollar in April 1991 and this expanded to upwards of 26,000 per US dollar during November 1999 (in nonredenominated terms). Additionally, the industrial output of the country has been continuously falling since economic liberalization began. If Russia is to be a constructive member of the world economy, it is critical that its high-technology entrepreneurs succeed. This research found that the size of the team establishing the business can mitigate the liability of newness in Russia. The larger the team, the greater the financial resources that can be generated and the easier it is to accomplish the myriad administrative tasks associated with starting a high-technology venture since there are more individuals available to do the work. Additionally, it was found that the greater the technological innovativeness, the better the performance of the startup. However, due to the limited resources available to hightechnology startups in a transitional economy such as Russia, later entrants perform better than do earlier entrants. In a transitional economy, many resources that first movers can obtain, such as dominance of distribution channels, can be illusionary and disappear over time. Thus, before moving into a market in such settings, it is important that firms ensure that the role and strength of various resources have been established before entrepreneurial firms seek to control them. The implications for Russian high-technology policymakers and entrepreneurs from these findings are significant. Entrepreneurship in Russia offers a significant means for the economy to reverse its decline. The mean increase in employment among the 45 firms examined was 239%. Thus, the evidence presented here is that entrepreneurial startups have the potential to provide significant employment opportunities for the nation. Additionally, for entrepreneurs, it clearly signals that they can increase their chances of success by ensuring certain characteristics are present as they establish their firm. High-technology entrepreneurs in Russia would be well served by focusing their resources on building large founding teams, seeking to ensure they have an innovative product, and building their competitive resources.

2. Introduction The resource theory of the firm has gained increasing usage in the management literature (Hoskisson et al., 1999). However, there has been only limited investigation of the theory in

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transitional economies (Javenpaa and Leidner, 1998). There is an increasing recognition that research from nations with stable economic environments does not necessarily generalize to those whose economies are transitioning from command to free market orientation (Boyacigiller and Adler, 1991). That nations with transitional economies are characterized by a high degree of change and turbulence can be seen through the frequent legal and regulatory changes, the level of currency-exchange fluctuations, and the uncertain position of private enterprise in the political framework (Ahlstrom and Bruton, 2000). These environmental characteristics may change which resources are valuable to a firm or how such resources are gathered and employed. Additionally, to date, the explicit usage of resource theory of the firm in the entrepreneurship literature has also been limited. Its implicit usage is evident in the recognition of the liability of newness or the fact that young firms have a greater propensity not to prosper (Stinchecombe, 1965). Such young firms have an absence of established relationships, roles, and routines, such external and internal interconnections being critical resources of the firm (Pfeffer and Salancik, 1978). The absence of relationships, roles, and routines increase the financial pressure at a time when new businesses have limited resources available (Eisenhardt and Schoonhoven, 1990). The liability of newness has received support from the examination of a wide variety of organizations in stable economies (i.e., Freeman et al., 1983; Li and Guisinger, 1991). Therefore, there is a need to investigate the resource theory of the firm as it relates to both transitional economies and entrepreneurship. The role of resources in entrepreneurial firm success is expected to be clearest in entrepreneurial ventures, which have high growth potential as compared to small business ventures that require fewer resources. Hightechnology ventures are prime examples of such high growth potential ventures and will be the focus of this research. The Russian economy, prior to economic liberalization, was particularly strong in high-technology domains (Machlis, 1994). Therefore, this research will focus on high-technology firms in Russia. Eisenhardt and Schoonhoven (1990) argued that the success (growth) of young hightechnology firms could be increased by the nature of the founding characteristics of the firm. Thus, this research focuses on high-technology startups in Russia and the ability of founding characteristics to mitigate the liability of newness (encourage firms to prosper or grow). The ability to better understand the role of resources in such settings will not only aid in the development of the theory but also aid in the understanding of how to help high-growth firms prosper in such environments.

3. Conceptual foundations 3.1. Background on startup firms in Russia Since 1990, economic changes in Russia have resulted in the development of a large number of entrepreneurial firms as individuals leave large state enterprises to start their own businesses (Ageev et al., 1995; McCarthy et al., 1993). While there is no estimate of how many of these firms are high-technology firms, it is known that prior to its


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economic transition, Russia was a producer of many world-class technological products (Machlis, 1994; The Economist, 1997). Many of those individuals who left the technology-based state businesses and research labs have gone on to found their own technology-based ventures. Russias transition to a market economy has resulted in a tumultuous environment for business (Snavely et al., 1998; Kuznetsov et al., 2000). For example, the monetary system of the country reflected an exchange rate for the ruble of 35 per US dollar in April 1991 and this expanded to the equivalent of 26,000 per US dollar by 1999.1 During this same time, the industrial output of the country has fallen an estimated 45% (The Economist, 1999). The laws of the country remain in a continual state of flux. Frequent changes in the laws drive many Western firms to limit their exposure in Russia. For example, in 1996, IBM exited one of the only high-technology alliances between a Russian firm and a major international high-technology firm due to unexpected changes in the tax laws of the country (Bruton and Samiee, 1998). Similarly, the protection of technological ideas through patent protection remain of limited practicality for Russian firms (Bruton and Rubanik, 1997a). The environment for a startup business is even more difficult than for an established firm such as IBM. Financial constraints often limit the growth of new firms in mature economies (Eisenhardt and Schoonhoven, 1990). In Russia, such financial constraints, particularly for high-technology firms, are heightened since the funding mechanisms for new firms are at best rudimentary and at worst nonexistent (Bruton and Rubanik, 1997a; Kuznetsov et al., 2000). For example, for practical purposes, the venture capital industry does not exist within Russia at present (Barton and Shaheen, 1995; Kuznetsov et al., 2000). Similarly, the banking segment of Russia remains in great fluctuation and its lending to new startup businesses is very limited (Shleifer, 1997; Kontorovich, 1999). The interest rate for the best (prime) shortterm lending relationships in Russia is 28% (The Economist, 2000) and the rate for high-risk, high-technology startups is even higher when funding is available. The result of these difficulties is that Russian firms often use trade credit as an alternative to bank loans (Cook, 1999). But, even such trade credits, while available to small firms, are very limited for new startup firms. Thus, the environment of a transitional nation, particularly for a young high-technology startup firm, is different from that of a stable environment such as the US. It has been argued that firms in very turbulent environments have different strategic needs from that of firms in stable environments (Ansoff and Sullivan, 1993). It is reasonable to question whether theoretical predictions based on the findings from a stable environment like the US are applicable to this environment. The impact of such environmental differences have been recognized by resource-based theorists who have argued that if opportunities and threats of a firm change in a rapid and unpredictable manner (typical of a transitional economy), firms may not be able to maintain a resource-based competitive advantage (Barney, 1997).
1 The Russian government redenominated money in 1998, removing three 0s from the end of all bills. So, what were 26,000 rubles in 1997 were 26 rubles in 1998.

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3.2. Resource theory and liability of newness In new firms, Penrose (1959) recognized that the absence of given resources could limit the growth of that firm while the presence of given resources could promote growth in such firms. Particular focus has been given to the role of financial resources in the success of the startup firm. For example, Martin and Justis (1993) argued that access to capital was one of the most critical resources for the success of new firms. More specifically, Bruno et al. (1986) argued that the principal cause of high-technology firm failure was the lack of financial resources. Thus, resource theory recognizes that the configuration of a startup firms resources can have a critical impact on the firms ability to prosper with financial resources being particularly important; financial resources reflect the firms tangible resources (Wernerfelt, 1984). Stinchecombe (1965) also recognized that resources for new firms were critical but from a sociological point of view. He argued that young firms have a greater propensity to fail than do more mature organizations principally because they have not established relationships with suppliers and customers or established roles and routines within the firm. The absence of these items places the firms financial resources under pressure (Eisenhardt and Schoonhoven, 1990). This leads to a liability of newness for startup firms. There has been strong support for the liability of newness theory in stable environments (i.e., Freeman et al., 1983; Li and Guisinger, 1991).2 The liability of newness has often been connected with firm failure. However, it should be noted the term today is typically associated with a broader meaning that more accurately implies the inability of a new firm to prosper. For example, Eisenhardt and Schoonhoven (1990) studied the growth of new firms when examining the liability of newness. Thus, both resource theory and the literature on the liability of newness recognize that resources are critical to firm growth. The question that arises naturally from the recognition that resources are critical to the firms ability to prosper is how firms can mitigate the negative effect of their absence. Resource theory of the firm has not examined this issue extensively. However, in the literature on liability of newness, Eisenhardt and Schoonhoven (1990) discovered that the nature of the founding team and the nature of the market in which the firm competed could mitigate the liability of newness. Their findings are built on the rationale that these given founding characteristics help the new firm overcome shortages in resources that might be present. 3.3. Transitional environments The application of resource theory of the firm to settings outside of the US has received only limited investigation (Javenpaa and Leidner, 1998). Such research has focused on how knowledge-based resources are developed through the firms past history and current
There have been some studies that have called into question the efficacy of the liability of newness. For example, Carroll and Huo (1986), Singh et al. (1986), and Staber (1989) did not find support for the liability of newness. But, each of these findings were based on nonprofit activities and did not examine for-profit businesses.


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market position to develop dynamic resources (Teece et al., 1997). However, for startup firms in general and high-technology firms in transitional economies in particular, financial constraints are the most pressing resource concern and prior research has yet to investigate this concern. The literature argues that the pressures associated with the liability of newness are particularly severe in situations where an industry is in a formative period (Aldrich and Fiol, 1994). The transitional nature of the Russian environment results in entrepreneurial firms being a new form of business, which is not widely understood or supported in Russia. This absence of understanding is demonstrated in the punitive registration documentation and taxes required of even the smallest new venture in Russia (Kontorovich, 1999). The registration documentation and taxes are often more severe than those required of large mature businesses in Russia. This lack of understanding and support for new ventures supports the belief that all entrepreneurial firms in Russia are in a formative stage and thus under pressures that will make the liability of newness particularly severe. But, whether such severity can then be mitigated by the nature of the founding team is unclear. Prior efforts to examine the liability of newness outside the US have been limited. But, one of the few studies that did, in an environment only slightly less stable than the US, raised questions about the universal applicability of the theory (Bruderl and Schussler, 1990). However, the results do bring into question, as Hofstede (1993) argues, whether management theories are culturally and situationally bound. 3.4. Founding characteristics Prior research on the liability of newness found that in a stable environment such as the US, the liability of newness can be mitigated by the characteristics of the firm at its founding (Eisenhardt and Schoonhoven, 1990). These resources act to mitigate the impact of the drain on firm financial resources, which come from the firms newness. Specifically, three characteristics at the startup at founding are of concern here: nature of the founding team, the technological innovativeness of the firms product, and timing of entry into market. 3.4.1. Team size There is empirical support for the research founding team idea that is able to mitigate the impact of the liability of newness in the West (i.e., Eisenhardt and Bourgeois, 1988; Eisenhardt and Schoonhoven, 1990). The benefits of larger teams include shared prior work experience or shared common industry background that can overcome part of the costs that arise due to the difficulties in building a new social structure. Larger teams also bring greater resources to the new firm, which can offset the lack of access to financial resources (Roberts, 1991). Larger numbers of people in founding teams also ensure that organizational resources are available to accomplish the numerous necessary activities associated with a hightechnology firm startup (Roberts, 1991). Most studies have discovered that firms founded by larger teams do better due to the extra resources they bring to the founding (Cooper and Gimeno-Gascon, 1992). However, it has also been shown that large founding teams can also increase the complications in communication and decision-making (Kamm et al., 1989).

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In Russia, there are fewer potential negatives associated with making the founding team too large. The founding of almost all high-technology startup firms occurs in Russia when a group of researchers leave an established research facility (Bruton and Rubanik, 1997a). These individuals leave the facility as a team and found the business after working together for a number of years. There is a strong emphasis in the Russian culture on relationships developed when conducting business (Holt et al., 1994; Puffer, 1994). Thus, the founding team, no matter how large, has worked closely with each other for years. This familiarity and heterogeneity of experiences lead to improved communication and understanding among participants. Additionally, the term team often implies group decision-making in the US, but this is not what typically occurs in Russia. Instead, while the nations collectivist culture results in individuals clearly identifying themselves with the group, decision making remains hierarchical (Elenkov, 1997, 1998; McCarthy et al., 1997). The result is that the lead entrepreneur typically makes all of the key decisions (Elenkov, 1997). Similar results have been found in other transitional economies with collectivist cultures (Yates and Lee, 1996). Thus, the potential negatives that might arise from a larger team in the West would not be expected in Russia. However, larger teams do impact the financial resources available to the high-technology startup in a transitional economy. As discussed previously, the ability of a new hightechnology startup business to prosper is closely tied to financial resources (Bruno et al., 1986). In Russia, there are virtually no funds available to a high-technology startup firm except those that are internally generated. The more individuals involved in the founding team, the greater the capital resources that can be gathered. Hypothesis 1: A positive relationship is expected between the number of founding team members and the growth of high-technology startups in Russia. 3.4.2. Product innovativeness Eisenhardt and Schoonhoven (1990) argue that the most relevant characteristic of a startup firm when evaluating the liability of newness is the firms technical innovativeness. Technical innovativeness is important since it impacts the resources of the firm including financial resources (Romanelli, 1989). Innovative products can provide a competitive advantage to a firm, but the greater the innovativeness of the technology, the greater the consumption of resources since it requires high levels of competence in basic science and resources to promote the new technology (Maidique and Patch, 1982). The resources to promote the product are important since they ensure that the products innovativeness is accurately perceived (Link, 1987). Eisenhardt and Schoonhoven (1990) proposed that moderate levels of technological innovativeness would be the most successful in promoting the growth of a high-technology firm. However, they found no initial support for this hypothesis. Rather, they found that less innovative strategies were beneficial in promoting the early growth of high-technology firm. As stressed previously, the critical factor for a high-technology firm in a transitional economy such as Russias is financial resources. Because a strategy that employs a unique


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or differentiated technology is more expensive to develop and promote, this strategy will be less successful for Russian entrepreneurs to pursue. While the startup firm may produce an excellent technological breakthrough product, resources may not be available to fully develop and promote the product. Therefore, in a manner consistent with Eisenhardt and Schoonhovens (1990) findings in a stable environment, it is expected that the most successful means to mitigate the impact of firm newness in Russia is not to emphasize technological innovativeness. Hypothesis 2: A negative relationship is expected between a high-technology startup firms technological innovativeness and its growth in Russia. 3.4.3. Market entry Firms also have the ability to make the strategic choice on whether they wish to enter the market first, follow quickly after those firms first into the market have begun to establish the market and its rules of competition, or enter the market once the market and its rules of competition are clearly established; these respective strategic approaches to the market are commonly referred to as first mover, early followers, and late followers. There are wellrecognized benefits to being a first mover in a new product market for high-technology firms (Li and Guisinger, 1991). For example, the recent evidence from stable economies is that the earlier the market entry, the more positive the impact on firm performance (Manu and Sriram, 1996; Szymanski et al., 1995). First movers have the benefit of preempting the acquisition of resources (Lieberman and Montgomery, 1988). These resources can include geographic resources (locations), technological resources (patents), or customer perceptions (Lieberman and Montgomery, 1998). Firms can use such resources to build market share as they seek to gain economies of scale and gain customer loyalty (Lieberman and Montgomery, 1988; Szymanski et al., 1995). However, first movers may miss the best opportunities and focus on obtaining the wrong resources (Lieberman and Montgomery, 1998). Followers, either early or late, can capitalize on the mistakes of the first mover firm (Golder and Tellis, 1993). Later entrants to the market could perform better since they require fewer resources to educate consumers about the product or to develop the market potential for the product. In general, most research supports the belief that for technology-based firms, the earlier the firm enters the market, the more successful they will be (Li and Guisinger, 1991). However, Eisenhardt and Schoonhoven (1990) found that the number of competitors in the market (indicating in part when the firm entered the market) did not impact firm growth. To date, the impact of the timing of market entry on firm success in international settings has yet to be significantly investigated. However, Lieberman and Montgomery (1998) argued for a greater investigation of the (dis)advantages of first movers in international settings. In such an exploratory domain, there is conflicting rationale on what to expect. For example, the impact of being a first mover may be even more substantial in transitional Russia than in stable environments (Lieberman and Montgomery, 1998). The benefits of capturing resources in a transitional economy like Russias are even greater since resources may be even scarcer than in an economy such as the US (Mascarenhas, 1992a,b). For example, obtaining

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dominance of a resource such as distribution channels may have a greater impact since distribution channels are more limited internationally. Thus, the benefit to early entrants is even more dynamic in international settings. However, firms may not benefit from being early movers in a transitional economy, which is fragmented (such as Russia), because resources that could be obtained by a first mover are not stable (Nakata and Sivakumar, 1997). Thus, obtaining first mover advantage in resources such as distribution channel can be illusionary because the distribution channels are undergoing so much change that those obtained now may be replaced soon. Additionally, if the startup does obtain the wrong resources in its first mover efforts, the effects will be more serious in a resource-limited environment such as Russia. Hypothesis 3: A positive relationship is expected between high-technology startup firms, which enter a market early, and their growth in the Russian market.

4. Research method 4.1. Data collection Data collection in Russia presents many unique and challenging problems. Most prevalent is the desire of business people for secrecy. Several issues feed a concern about releasing data. The tax rate for businesses in Russia can approach 70% (Khartukov, 1996). Tax officials are paid a bonus for finding business people who have not fully paid their tax assessment, whether underpayment occurred intentionally or not. Thus, releasing any data that somehow shows that the business should be reporting more income than it does can place the business person in a difficult situation. Combined with the concerns about taxes are concerns about the Mafia. The Russian Mafia is already active in the general business community (Zimmerman and Cooperman, 1995). It is common for an established business to pay part of its income to the Mafia. However, a startup business may not have come to the attention of the Mafia, and as a result, high-technology Russian business people are hesitant to release any data to outside sources. The gathering of data is further limited by the fact that many traditional means of data collection are unfamiliar to Russian business people. Methods such as mail or telephone surveys are largely unknown in Russia and are not well received. This resulted in the most effective means of data collection for this research being structured interviews (Filafotchev et al., 1996; Issac and Michael, 1984; Buckley et al., 1976). However, this methodology requires that access and cooperation be granted to the interviewer. Thus, in Russia, unless some sort of connection previously exists or an introduction can be made by someone who has such a connection, it is very unlikely that business people in Russia will consent to an interview. For this study, an individual associated with the Moscow Federal Institute of Electronic Technology (MIET) was utilized to gather the survey data through personal interviews with participants. This institute was the leading university in the Soviet Union for microelectronic


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technology. MIET graduates are historically the leaders and researchers at the nations premier semiconductor, computer, and electronics firms. Thus, an interviewer associated with the university brings recognized credibility. In addition, this research occurred in Zelenograd, Russia, the once top-secret center of the Soviet Unions microelectronic effort and home of MIET (Port and Galuszka, 1996). Prior to the breakup of the Soviet Union, the economic focus of the entire city of approximately 200,000 people was high technology.3 There is a significant relationship between the University and most high-technology business activity in the city. The survey was initially formulated jointly in English by the American and Russian authors. This survey was then translated into Russian by an individual not associated with the research. The translation was then reexamined for accuracy by the Russian researcher and then back translated to verify the translation by one other individual not associated with the research. This survey instrument was pretested on a single high-technology startup firm and appropriate changes were made in the instrument by the authors. The individual from MIET who conducted the interviews to gather the survey data was well known in the technological community. This individual was trained to conduct the interviews through both verbal instruction and sample interview training sessions to ensure that valid and reliable information was obtained. 4.2. Sample The definition of what constitutes a high-technology firm has proven difficult for researchers (McCarthy et al., 1987). Some researchers have defined a high-technology firm in a quantitative manner by selecting firms spending some specified level of their budget on research and development (Maidique and Hayes, 1984). Others have utilized a qualitative measure such as the sophistication of the firms product (Riche et al., 1983). The reluctance of Russian business people to provide financial data precludes the first option; therefore, this research utilizes a variation of the latter method. MIET has established an entity referred to as a technological park or technopark. The use of the term park should not be confused with an incubator or research park in the US at which all firms are in a given location. Rather, it is an organization, which provides services to high-technology startup firms throughout Zelenograd. Some of the services are free, but most services are provided for a fee. Items, which can be very hard for a startup firm in Russia to gain access to such as fax machines, photocopying, legal services, strategic planning, and design assistance, are provided. Due to the tremendous resource shortage in Russia, particularly for startup firms, there are numerous applications to join the technopark. However, the management of the technopark (which came from the academic staff of MIET) focuses its efforts solely on high-technology firms; it is estimated that 75% have a microThree of the six electronics firms in Russia chosen as base enterprises by the government on which the national semiconductor industry is to be maintained were in Zelenograd (Andreyev, 1995) The only microelectronics firm in Russia outside of Zelenograd of substantial size is the Svetlana Electronics in St. Petersburg.

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electronic focus (Zelenograd Scientific and Technological Park Report, 1995). Thus, they supervise very closely which firms may join. As a result, it is believed that almost all hightechnology startup firms that are thought to exist in the area have chosen to participate with the technological park in some manner. Additionally, while the chaos of the Russian economy does not allow exact statistics on firms and their products to be available, it is believed by government officials that these firms represent all of the known high-technology entrepreneurial startups with a microelectronic base in the Zelenograd area and a very high percentage of such firms within Russia. The 45 participants in the technopark with a microelectronic basis to their product were utilized for the sample (see Bruton, 1997 for an in-depth review of technopark). The participants had already been identified by the technoparks management as high-technology firms on the basis of their product. The researchers validated this designation by reviewing the technological sophistication of each of the products of the parks participating firms. This review, particularly by the Russian coauthor whose academic training is on semiconductor development and production quality, validated their designation as a high-technology firm in each case. All 45 firms classified as high-technology startups through this process agreed to participate in the research. The principal founder of each firm was interviewed for this research. Such key informants have proven to be accurate sources of data in the US (Brush and VanderWerf, 1992; Dess and Robinson, 1984) and such single respondents have been utilized in prior US research evaluating strategic concerns (Shortell and Zajac, 1990; Snow and Hrebiniak, 1980). The use of such a single respondent would particularly be appropriate in Russia due to the hierarchical nature of the decision-making process in a Russian firm (Elenkov, 1998). In such situations, the principal founder of the firm is responsible for all key decisions, in much the same way as Andrews (1971) described CEOs as the prime strategists in a business who would have the most realistic understanding of their business. The average age of the entrepreneurs interviewed was 41 years old, while the average of the other founders of the firm was estimated by the principal founder to be 40 years old. The principal founder and the other individuals in the founding team were discovered to typically possess graduate technical degrees. The principal founders education level was typically slightly higher than the other members of the team, with a large number of the principal founders possessing the Russian equivalent of a PhD. Prior to starting the firm, as expected, almost all members of the founding teams of the high-technology firms worked together either immediately prior to starting the new firm or in close proximity to founding the firm. In most cases, the lead founder of the hightechnology firm served a similar lead function at the prior employer, supervising the other members of the founding team. The technology being produced by the startup firm was reported as very similar to the prior employers technology. Additionally, as expected, the principal founders almost always had no prior experience in areas such as marketing and finance. Their employment and their experience prior to founding the firm were focused on research and development and working in a large governmentrelated research institute. They estimated the average size of the government research institutes they worked for to be 2600 employees. Prior to economic liberalization, of the


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200,000 individuals living in Zelenograd, approximately one-quarter would have been employed in such research institutions. 4.3. Variable definition 4.3.1. Performance Russian entrepreneurs typically refuse to release accurate direct financial data, as do all business people in Russia (Puffer and McCarthy, 1995). Thus, measures such as profit, value of products shipped, or sales could not accurately be determined for a large sample of firms. Instead, a commonly used measure of new venture performance, growth in firm employment, was used (McDougall and Oviatt, 1996). Growth was also used by Eisenhardt and Schoonhoven (1990) when they examined the liability of newness in high-technology firms in the Silicon Valley. Growth in employment indicates that a new ventures sales are increasing (Brush and VanderWerf, 1992). A similar impact can be assumed in Russia. Once a firm employs an individual in Russia, the individual has certain protection under the law, and dismissal at will is typically not possible even in an economic downturn. Additionally, the firm must begin to contribute to various government funds for certain items including the employees retirement. Thus, firms are unwilling to hire an individual unless they have a strong need for the person and can generate the cash flow to support the persons employment. This is particularly true for the startup new venture, which has very limited resources. Therefore, the growth in employment of the Russian startup firm is an indication that the firms sales are also growing; sales growth has previously been used to determine the impact of mitigating factors of the liability of newness (Eisenhardt and Schoonhoven, 1990). The dependent variable in this study is the annual percentage growth in employment for the firm. All of the firms interviewed were started since 1990 and are at least 1 year old. The annual percentage growth in employment was determined by calculating total percentage growth in firm employment over the life of the new venture divided by the number of years the firm had been in existence. The correlation between the performance measure and the age of the firm was examined and found to be nonsignificant.4 4.3.2. Independent variable: founding team Previous research has defined the founding team in various ways with some researchers not even clearly defining, apparently assuming it is self-evident (Doutriaux, 1992). Others have defined the founding team as individuals who occupied an executive position in the firm when it began (Eisenhardt and Schoonhoven, 1990). Alternatively, some have defined it as

To validate this measure, the researchers met with five of the entrepreneurs who were willing to discuss their financial performance to a greater extent, although they still would not give exact numbers. These individuals were asked initially to answer two qualitative questions based on Dess and Robinson (1984), which previously had been shown to have a high degree of correlation with quantitative measures. The two researchers then discussed with the entrepreneurs indications of their employee growth and financial results. Both the qualitative questions and the verbal interactions supported employee growth as an appropriate indicator of the firms performance.

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those individuals who work to some degree in the firm, invest in the firm, and can expect to obtain the proceeds of any profits from the firm (by the implication from the discussion of Cooper and Bruno, 1977). Our concern in examining startups by Russian high-technology entrepreneurs are the factors that mitigate the liability of newness. Therefore, it is this last definition of the founding team, which will be utilized in this study since it focuses on the input of resources into the firm. 4.3.3. Independent variable: innovativeness To measure the next two independent variables, secondary data would be available in a manner similar to Eisenhardt and Schoonhoven (1990). In their research, they examine a single industry, semiconductors. They were able to obtain secondary data on a single data item, which allowed uniform comparisons on issues such as product sophistication (micron line length) to classify product innovativeness. However, no such secondary information is available in a transitional economy such as Russias.5 Thus, qualitative measures must be utilized. Such measures are not without their drawbacks. However, in this exploratory research within the confines of what information could be obtained, such information could provide the greatest insight from the largest number of respondents. The accurate evaluation of the innovativeness of a product can be difficult to obtain. Therefore, multiple questions were asked of the principal founder to obtain a more accurate perspective on the issue. To date, no widely established multidimensional qualitative measure of product innovativeness has been established. Therefore, in a manner similar to Zahra and Covin (1993), a scale was created based on different dimensions of the innovativeness of the firms product. The questions on these dimensions were based on prior research and writings on innovativeness. The firms score on the innovativeness scale was determined by summing the responses to these three questions. The first question used in the scale employed a Likert type scale (15) and asked the respondents to rate the technological uniqueness of their product in the marketplace (1 = unique and 5 = copy). The second question was a dichotomous question, which asked the respondents whether they choose to principally compete based on (1) better product or (2) better price. Those entrepreneurs with the more innovative product were expected to compete on the basis of better product while those with a less innovative product were expected to compete on the basis of price (Porter, 1980). Finally, innovativeness should be based not only on how the firm compares to other Russian firms but also to how it compares to other worldwide competitors since technology is so mobile across borders. Thus, the founding entrepreneurs were asked if there were international competitors in the Russian market whose products were based on similar technology. If there were no international competitors with similar technology, the firms product should be more technologically innovative, while if there were international competitors with similar technology, they were less technologically innovative. The dichotomous question was
Even if such information was available, it is unlikely that a researcher from the US could obtain it. Security concerns reminiscent of the Cold War are still common in high-technology firms. The fact that an estimated 75% of high-technology funding in the Soviet Union was military-related increases this tendency towards secrecy.


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scaled 1 = no international competitors with similar technology and 2 = international competitors with the same technology. Summing the three questions, a score of 3 was the lowest score possible for an innovative product and 9 the highest score for a less innovative product.6 4.3.4. Independent variable: market entry The expectation is that since most interaction with customers in the Russian market would be conducted by the principal founder, they would be aware of other products against which they were competing. Additionally, the limited size of the Russian market for hightechnology products makes it unlikely that the entrepreneur would be unaware of any similar products. Therefore, the research instrument solicited along a continuum a response regarding the firms market when they entered. A score of 1 on the scale indicated that the firm was first in the market, a pioneer. If the firm entered a market where they were one of the lasts to enter, they would be considered a late follower (5 on the Likert scale). The date was treated as ordinal data since the relationship between each of the variables may be exact, but one response does reflect a greater or lesser response than the other. Hypothesis 3 proposed an inverse relationship: the earlier the entry into the market, the higher the growth. Thus, it would be expected, based on the hypothesis, that the lower the score on the Likert scale, the higher the growth. 4.3.5. Analysis In constructing the regression, the measure of market entry was examined using dummy coding in a manner consistent with Cohen and Cohen (1983); such a tradeoff in this exploratory examination is appropriate. Such an analysis allows the impact of the different responses to market entry to be evaluated while holding the other independent variables constant. The measures of the independent variables were validated by a pretest from an in-depth interview with one of the respondent firms prior to the general survey. In the pretest, responses to these questions were discussed in detail and supported the use of the measures as a means of obtaining information on these aspects of the research. The analysis performed was regression with the dependent variable Growth in Employees. The independent variables included Founding Team Number, which was the number of individuals who invested in the firm with the expectation of obtaining the proceeds of any profits, and Product Innovativeness, which was a composite measure composed of Product Uniqueness (Likert scale measured 1 = unique, 5 = copy), International Competitive Products (international firms with similar products 0 = No, 1 = Yes), and Price or Product Differentiation (0 = Differentiation, 1 = Price). Three categories of the Market Entry were created. The first category of earlier entrants (1 on the Likert scale) was assigned the intercept term. A second dummy variable was for the respondents who indicated that they were one of the first few firms in a market (2 on the Likert scale) and those firms that

The higher the innovativeness score, the lower the innovativeness of the firm, while the lower the innovativeness, the higher the innovativeness of the firm.

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indicated they were neither one of the first nor one of the last, a later follower (3 on the Likert scale). One firm indicated that it was a 4, one of the later firms to enter the market, and was assigned to category 2. The third category of firms, latter entrants (5 on the Likert scale), was assigned to the second dummy variable.

5. Results 5.1. Variable means, standard deviation, and correlation Table 1 provides the means for the variables. The average number of five founders in Russian firms is large by the standards of established economies; prior research showed that in the US, high-technology firms typically had three founders (Eisenhardt and Schoonhoven, 1990), while in Canada, three were two founders (Doutriaux, 1992). However, in examining the standard deviation for the variable, it is quite clear that the range for the size of these teams can be considerable. In fact, in the sample, the number of founders ranged from 1 to 20. Table 1 also presents the correlation of the variables and demonstrates that multicollinearity should not be a concern with this sample. Additionally, the variance inflation factors (VIF) were run to test for multicollinearity. The results for the variables were approximately 1.0. Neter et al. (1989) argue that multicollinearity is not a concern if VIF values are less than 10.0. 5.2. Regression results Table 2 presents the results of the regression. The total regression was significant at 0.002 with a r2 of .36. Thus, the regression model accounted for a meaningful amount of variance in new firm growth. Hypothesis 1 proposed that the larger the founding team, the greater the firm growth. This variable was significant at .05. Thus, Hypothesis 1 was supported. The regression estimate for the Technological Innovativeness variable was 1.7 and significantly different from zero, reflecting that less innovative startups will experience higher growth. The negative sign denotes an inverse relationship; performance improved as technological innovation increased.7 This result indicates that as firms sought to decrease technological innovativeness, performance declined; thus, Hypothesis 2 was rejected. Hypothesis 3 argued that earlier entry would lead to greater performance. Each of the variables was significant. However, the variance explained by the Later Followers was twice the level of First Movers. Thus, Hypothesis 3 was rejected; later followers were more likely to have greater growth in employment. To validate the importance of team size in obtaining resources for the firm, during the interview, participants were questioned about the financial sources of their financing. Most

7 Normally, a hypothesized inverse relationship would yield a negative coefficient. However, since a low value for the firm indicates high innovativeness, our hypothesis translates to an expectation of a positive coefficient.


Table 1 Mean, standard deviation, and correlation for dependent and independent variables ( P values noted in parentheses) Variable Number Mean Standard Founding Product First of firms deviation team innovativeness mover 45 42 45 45 45 45 42 45 2.3 5.2 5.3 0.13 0.51 0.35 2.3 1.6 5.8 4.0 1.5 0.34 0.50 0.48 1.1 0.5 .32 (.04) .36 (.01) .10 (.55) Early follower Late follower Product uniqueness International Price or product competitive differentiation focus products .26 (.08) .01 (.96) .62 (.000) .35 .16 .08 .40 (.01) (.30) (.58) (.01)

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Growth Founding team Product innovativeness First movers Early followers Late followers Product uniqueness International competitive products Price or product differential focus

.201 (.18) .11 (.46) .26 (.08) .31 (.04) .12 (.43) .18 (.25) .21 (.18) .08 (.59) .11 (.50) .05 (.76) .26 (.09) .01 (.94) .17 (.26) .90 (.000) .35 (.02) .29 (.05) .40 (.01) .22 (.15) .76 (.00) .05 (.76) .20 (.18) .07 .03 .02 .04 (.64) (.87) (.88) (.77)

.05 (.74)




Growth: percentage growth in started firms employees. Founding Team Number: number of individuals who invest in the firm and expect to obtain the proceeds of any profits. Product Innovativeness: measure composed of composite of Product Uniqueness, International Competitive Products, and Price Product Differentiation measures; most innovative firm product score 3, least innovative firm score 9. First Mover: ranking of firm on a five-point scale as a first mover = 1, 0 if not. Early Follower: ranking of firm on a five-point scale as a 2 (not first but soon after) = 1, 0 if not. Late Follower: ranking of firm on a five-point scale as either 3, 4 (either neither one of first nor last or as one of later entrants) = 1, 0 if not. Product Uniqueness: rating of technological innovativeness of firms product: 1 = unique, 5 = copy. International Competitive Products: evaluation of whether there are products from international firms with similar technological features: 1 = no, 2 = yes. Price or Product Differentiation Focus: evaluation of whether positioned firm against competitors based on product differentiation or price of product: 1 = differentiation, 2 = price.

G.D. Bruton, Y. Rubanik / Journal of Business Venturing 17 (2002) 553576 Table 2 Regression results (dependent variable: annual percentage growth in employment) Independent variable Founding team number Product innovativeness First mover Early follower Later follower Model r2 Regression F value (df = 4,41) * P =.10. ** P =.05. *** P =.01. Unstandardized regression coefficients; probability > F 0.4** 1.7*** 5.28* 8.26** 11.897*** .36 5.16***


Standard error 0.21 0.58 1.55 1.99 2.83

refused to provide any information, but of those that did, none reported any venture capital, bank, or government financing. Beyond the original founding team, the other source of financing available to these firms were family members of the founding team.

6. Discussion The results presented here are noteworthy in providing the first evidence that hightechnology firms and entrepreneurs in a transitional economy, such as Russias, have similarities and unique differences, with high-technology entrepreneurs in more stable economies. Specifically, this study provides evidence to support the predictions for the size of the founding team (Hypothesis 1). In light of the severe resource shortage facing Russian entrepreneurs, it is perhaps not surprising that the ability to integrate as many individuals as possible into the operation of the firm mitigates the liability of newness (Hypothesis 1). The larger team allowed the startup to generate more financial resources internally. Additionally, the larger team limits the need for financial resources since more individuals are available to do the myriad tasks necessary in a startup firm (Roberts, 1991). This study did not examine the manner in which the team members interact with each other. In the US, it is typically believed that large teams can bring difficulties in management and decision making (Kamm et al., 1989). However, the evidence here is that this is not the principal concern in Russia but rather that resource access is the focus. This difference can, in part, be explained by the nature of how the Russian teams are formed which is different from those of the US. Typically, Russian founding teams involve individuals with a long history of work with each other. This long history of working together can act to mitigate many of the difficulties, which plague founding teams in the US whose members know each other far less well. As the economic transition matures in Russia, it is likely that the situation, with respect to founding teams, will change significantly. Increasingly, founding teams may not have such a long common work history since, ultimately, most research teams leaving large state businesses and research laboratories will have done so during this transitional period. One of


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the longitudinal issues that merits future investigation in Russia is how such founding teams change and impact firm success. Additionally, such longitudinal studies should examine the ideal size for such teams. The larger team may aid in the initial growth of the firm; however, as this large number of individuals must be supported, such large teams may not be ideal for the survival of the firm. Hypothesis 2 was significant but in the opposite direction predicted; thus, the more innovative the product, the more the firm grew. Hypothesis 2 was consistent with evidence from the West that innovativeness did not produce the best initial results in mitigating the liability of newness. However, it was also previously noted that there is evidence from other domains that support the benefit of technological innovativeness to firms in stable environments (Doutriaux, 1992; Sandberg and Hofer, 1987). Thus, while the evidence presented here is counter to that predicted, it is consistent with many findings in the broader domain of entrepreneurship. Many of the established high-technology firms in Russia that grew out of the old state businesses have found a competitive niche by producing low cost, undifferentiated products (Port and Galuszka, 1996). For example, one semiconductor firm located in Zelenograd, Mikron now controls 20% of the world market for microchips used in watches while the other large semiconductor manufacturer in the city, Angstrom, is a dominant provider in the market for microchips used in handheld calculators. The production costs in Russia of many large high-technology firms, like Micron and Angstrom, are such that they can generate significant cash flow by becoming the lowest cost producer in a given market. However, the pursuit of strategies relying on such a low cost strategy provides these large firms with revenue without generating significant profits. Additionally, both of these large high-technology firms have also pursued massive layoffs of workers during this time; for example, Micron eliminated over half of its staff between 1992 and 1995 (Bruton and Rubanik, 1997b). Thus, on neither the measure typically used for established firms profits nor on that used here for entrepreneurial firms employee growth do the established technology firms perform well. The results of the research conducted here indicate that those firms, which can be most technologically innovative or unique, will be the most successful. Therefore, rather than replicate the difficulties of the large state firms (from where many of these entrepreneurs came), they are seeking new strategic approaches. However, the firms expansion efforts are still largely focused on Russia. The interviews disclosed a few firms that have attempted to pursue international business beyond Russia. However, most of the firms that have attempted such activities have quickly abandoned them. The resources to support wide geographically spread entrepreneurial efforts simply are not available. Instead, Russian firms have sought to target their products inside Russia where language barriers and cultural differences are minimal and costs are lower. Future research should expand the understanding of the role of technology in Russian startups. For example, the evidence here is that greater technological innovation leads to greater firm performance as measured by employee growth. But, the interaction may be more complex. The level of capital requirements may interact with the nature of the technology of the product and the economies of scale required for the product. A larger sample of high-

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technology firms drawn from across Russia would allow greater investigation of such issues. The Soviet Union historically established areas of concentration for its high-technology businesses. Thus, under state planning, cities similar to Zelenograd include: Chernolgolovka, which concentrated on laser technology; Rushkino, which concentrated on biology-related areas; Monina, which concentrated on aviation; and Mitechi, which concentrated on spacerelated areas. All these cities were closed cities prior to 1991 but now are open to Western researchers. Therefore, future research should also investigate high-technology startups in these cities to see if similar results are found. The evidence from Hypothesis 3 is that the firms also lower the risk of their focus on innovative products by moving into the market later rather than earlier. It has been recognized that in emerging markets that are fragmented, there may be limits to advantages from being a first mover (Nakata and Sivakumar, 1997). In a resource-limited environment such as Russia, being the first mover has significant risks because choosing the wrong resources on which to focus can be particularly damaging to a startup firm with limited resources. The fact that transitional economies are so turbulent means that the potential for picking the wrong resources is particularly high. Focusing the research on Zelenograd startups resulted in an industry concentrated in microelectronics. Study of a single industry provides better control over confounding industry-related variables. For example, differing industry growth rates and industry structures may impact the research results in a sample from several industries but should not be a factor in this study. However, future research should examine whether similar results concerning technology are found in startups in other industries. Additionally, the addition of other industries will allow bigger sample size, which will allow better testing of the impact of the timing of market entry. Specifically, the sample size of six firms of the first entrants cell in the analysis was relatively small. Therefore, the increase in sample size with firms from other industries will allow greater certainty in the analysis that later entrants into a market perform better.

7. Public policy implications This research has significant implications for Russia. The nations gross domestic product continued on a downward slide until this year when rising oil prices resulted in some relief for the country. However, large-scale unemployment and underemployment remains chronic and the nations industrial infrastructure continues to decline. The nation desperately needs to invigorate itself if it is to become a world citizen whose economic power is comparable with other world leaders. The mean increase in employment among the 45 firms examined was 239%. The evidence presented here is that entrepreneurial startups have the potential to provide significant employment opportunities for the nation. However, the government will need to promote entrepreneurial firms if they are to reach their full potential. To date, the government has not actively sought to encourage small businesses or hightechnology ventures. Almost none of the high-technology startups examined here reported preparing a business plan before beginning their business. Additionally, since the founding


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team members came from the large research facilities where their sole focus was technological issues, they had little preparation on topics such as financing the firm while budgeting and marketing. Thus, helping entrepreneurs develop the necessary skills are relatively simple activities that the government could encourage that could have significant results for the nation.

8. Conclusion This research, for the first time, examined resource theory in transitional economies and high-technology firms. The research provided general support for the use of the theory. Hypothesis 1 was supported: larger teams were likely produce greater resources and in turn lead to greater firm success. Hypothesis 3 was not supported but, as noted in the development of the theoretical rationale for Hypothesis 3, there has been a disagreement about what resource theory would predict about first mover advantage in a transitional economy. The authors rationale was consistent with the dominant Western logic but the evidence presented here is that an alternative view of first mover advantage and resource theory in transitional economic settings is more appropriate. The risk in identifying inappropriate resources to focus plus the risk that resources such as distribution channels may even disappear is too high for financially constrained firms. Three specific founding firm variables were examined in this research. The exploratory nature of this research in a single city where Russias microelectronic industry dominates results in the use of a nonrandom sample. Future research should further our understanding by examining a broader sample of firms with more numerous variables and richer multiple scales. The variables examined here can provide a basis for the investigation of hightechnology firms in transitional economies. There will always likely be significant restraints on the questions that can be asked of entrepreneurs in Russia. For example, due to excessive taxation and a very active Mafia presence, financial data are almost never released nor considered reliable when it is released. Thus, issues such as funding sources and levels of startup capitalization cannot typically be investigated. However, future research in startups should expand the variables examined to include topics such as the relationship between planning and performance, the nature of the firms asset makeup, and the firms international posture. The research, also for the first time, identifies the means by which Russians can encourage high-technology entrepreneurial ventures in their own environment. Russia continues to face tremendous difficulties in its transition to a market economy. However, entrepreneurship offers the potential for the nation to solve many of its economic problems (Hisrich and Gratchev, 1993, 1995). The evidence presented here is that there are similarities between high-technology firms in stable economies like the US and those in transitional economies such as Russia. However, as detailed throughout this manuscript, there are also unique differences, which cannot be overlooked. Future research should continue to expand the investigation of this critical area not only by examining the similarities but also by seeking differences. The findings not only will have a significant impact on the economic success of

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Russia but will also ensure that future efforts between Russia and the world focus on economic cooperation and not military competition. Acknowledgements Appreciation is expressed to Chuck Bamford, Gary Castrogiovanni, Karen Cravens, Vance Fried, Benjamin Oviatt, George Vozikis, Margaret White, and Stuart Youngblood for their comments on earlier versions of this manuscript. References
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