Geographical location, External Knowledge, and Firm Performance - Essay Sample

Introduction

Geographical location is an aspect of organization governance that can highly impact the performance of a firm. A firm's geographic location determines its access to support services, customers, and production factors, including labor, capital, and raw material (Atalay et al. 2011, p. 210). A firm's location also determines other important aspects, such as competitive strategies, collaborative arrangements, and access to external knowledge. According to Gallego et al. (2013, p. 8), location is critical in innovative governance. Firms are pursuing strategies that would give the firm a competitive advantage. Location is one of the elements that an organization's governance can leverage to achieve innovation and improve firm performance (Smit, 2020, p.13).

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Atalay et al. (2011, p. 233) identified a positive relationship between an organization's strategic location and a firm's performance. The study suggested that organizations should not rely on strategic location as their only competitive advantage but should rather struggle to be innovative. Gallego et al. (2013, p. 10) emphasized the need for product innovation and business processes innovation. Therefore, the governance of any organization has a big role to play in planning for innovation. The management should recognize the impact of technology on innovation and drive organization-wide innovation culture.

One of the most useful models for analyzing the effect of firm location on a business organization's competitiveness is Michael Porter's Diamond Model of competitive advantage. The model is suitable because it is highly specialized in the impact of geographic location on a firm's level of innovation (Boasson and MacPherson, 2001, p. 1430). Therefore, it is easy to understand how a firm’s governance can drive product and business process innovation by focusing on location aspects. Porter's model also explains how the geographic location can affect its access to knowledge, whether internal or external.

Porter Diamond Model identifies four competitive advantages; firm strategy, structure and rivalry, factor conditions, demand conditions, and related and support industries (Fainshmidt, Smith and Judge, 2016, p. 101). The rivalry aspect of the model is important since it pushes firms to adopt strategies that will make the firm competitive and perform better (Boasson and MacPherson, 2001, p. 1432). According to Schumpeter’s theory, increased competition levels fuel innovation as firms try to be more competitive (Schumpeter, 2000, p. 661). Firms become more innovative in their products and processes, and that level of innovation gives them a competitive edge in the international market (Boasson and MacPherson, 2001, p. 1432). According to Porter's model, firms with geographical location advantages have excellent performance compared with their counterparts (Bakan, and Dogan, 2012 p. 444). Geographical location advantages also place the firm in a position to obtain external information.

The availability of related and support industries increases a firm’s access to external knowledge. There is a strong tie between external knowledge and innovation (Ritala, Olander, Michailova, and Husted, 2015, p. 22). Business organizations utilize the information they gather, both internally and externally, to develop a new product that meets customer expectations. Although both sources of knowledge are important to the organization, external knowledge proves more useful in innovation governance (Fainshmidt, Smith, and Judge, 2016, p. 100). High product and process innovation levels translate to improved firm performance and make a firm more competitive (Atalay et al. 2011, p. 233).

Geographical location advantages build a good foundation for strategic alliances and partnerships, which are important sources of external information (Fainshmidt, Smith, and Judge, 2016, p. 98). The absorptive capacity theory agrees with the idea of forming collaborations to take advantage of external knowledge sources, such as customers, clients, suppliers, and scholars (Smit, 2010, p. 14). The geographical location of a firm can influence the way the organization gathers external information. For example, proximity to customers and research institutions make it easy to get customer feedback and benefit from research knowledge. Innovative governance is responsible for the productive utilization of external knowledge to build product and business process innovation (Rosenbusch et al., 20110, p 450).

According to Schumpeter (2000, p. 664), innovation can provide a firm with long term success. Rosenbush et al. (2011 p. 144) stated that non innovators are at the risk of extinction since the business world is an ever-changing, and continuous improvement is inevitable. Atalay et al. (2011, p. 2) studied the relationship between innovation and firm performance, focusing on Turkish automotive supply companies. The study found a positive relationship between the level of innovation and firm performance. According to the research, external knowledge is a significant source of information for innovation. Automotive firms that relied on external knowledge as a benchmark for innovation needs were more successful than those who relied on internal knowledge (Atalay et al. 2011, p. 233). The study concluded that organization governance should prioritize innovation and position the organization to maximize external knowledge to develop innovative products. The findings are in agreement with H6, that geographical location influence access to external knowledge, which in turn affects the firm’s performance through innovation.

The Governance of Geographical Location and External Knowledge

Innovation governance is a multidimensional concept and includes innovation management at the marketing level, business process, organization innovation, and product-level (OECD and Eurostat, 2005, p. 35). The management cannot neglect the values of the firm's geographic location in promoting innovation by providing access to external knowledge. The statement connects the sixth hypothesis (H6) to the seventh hypothesis (H7), indicating that proper innovation governance that focuses on geographical and external knowledge management can improve the performance of an organization (Gallego et al., 2013, p. 8). The biggest challenge to innovation managers, in this case, is to align business location strategy with innovation goals by ensuring that the geographical location of the firm gives it access to external knowledge, which is a source of innovation (Rosenbusch et al., 20110, p 444.

Porter's Diamond Model demonstrates the significance of geographical advantages in a firm's innovativeness and consequently, organizational performance (Fainshmidt, Smith and Judge, 2016, p. 103). The two concepts, therefore, need proper governance to promote innovation and competitive strategies. Innovation governance includes pursuing locational strategies that ensure the right factor conditions, demand conditions, and support industries (Eickelpasch, Lejpras, and Stephan, 2010, p. 89). The business location strategy decision should come at the initial steps of setting up the business and should use information from comprehensive market research (Jiménez-Jiménez and Sanz-Valle, 2011, p. 420).

However, innovation governance may need to revisit the location later due to possible changes in the market conditions.

Since a firm's governance is affected by the firm's size, which affects the firm's innovation, the management should also pay attention to the firm's size on making location decisions (Jiménez-Jiménez and Sanz-Valle, 2011, p. 420). A large organization will possibly have multiple locations, making the decision more complex (Cho and Pucik, 2005, p. 558). However, large firms also have technological innovation capability, which can convert external knowledge into innovative products and processes and improve firm performance (Cho, and Pucik, 2005, p. 556).

Thus, a firm's governance needs to plan its locations and utilize its locational advantages to be innovative. Locational advantages will enable the firm to create strong networks that it can use to be more innovative (Cho, and Pucik, 2005, p. 571). For example, governance can pursue strategic collaborations, which are significant sources of external knowledge. The firm should choose partners who share similar innovation goals to ensure success. Proper external knowledge management will make the firm more innovative and improve the firm’s performance (Rosenbusch et al., 20110, p 444).

References

Atalay, M., Anafarta, N., and Sarvan, F., 2013. The relationship between innovation and firm performance: Empirical evidence from the Turkish automotive supplier industry. Procedia-social and behavioral sciences, 75(3), pp.226-235. Retrieved from https://www.academia.edu/download/31585416/atalay_anafarta_sarvan_2013.pdf.pdf

Bakan, I. and Dogan, I.F., 2012. Competitiveness of the industries based on Porter's diamond model: An empirical study. International Journal of Research and Reviews in Applied Sciences, 11(3), pp.441-455. Accessed from https://www.academia.edu/download/53247065/Bakan_ve_Dogann__2012.pdf

Boasson, V., and MacPherson, A., 2001. The role of geographic location in publicly traded pharmaceutical companies' financial and innovation performance: empirical evidence from the United States. Environment and Planning A, 33(8), pp.1431-1444. Accessed from https://journals.sagepub.com/doi/abs/10.1068/a3431

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Fainshmidt, S., Smith, A., and Judge, W.Q., 2016. National competitiveness and Porter's diamond model: The role of MNE penetration and governance quality. Global Strategy Journal, 6(2), pp.81-104. Retrieved from https://onlinelibrary.wiley.com/doi/abs/10.1002/gsj.1116

Jiménez-Jiménez, D. and Sanz-Valle, R., 2011. Innovation, organizational learning, and performance. Journal of business research, 64(4), pp.408-417. Retrieved from https://www.sciencedirect.com/science/article/pii/S0148296310001906

OECD and Eurostat, 2005. Oslo Manual-Third Edition: Guidelines for Collecting and Interpreting Innovation Data, Paris. Retrieved from https://www.oecd-ilibrary.org/science-and-technology/oslo-manual_9789264013100-en.

Ritala, P., Olander, H., Michailova, S., and Husted, K., 2015. Knowledge sharing, knowledge leaking, and relative innovation performance: An empirical study. Technovation, 35, pp.22-31. Accessed from https://www.sciencedirect.com/science/article/pii/S0166497214001060.

Rosenbusch, N., Brinckmann, J., and Bausch, A., 2011. Is innovation always beneficial? A meta-analysis of the relationship between innovation and performance in SMEs. Journal of Business Venturing, 26(4), pp.441-457. Retrieved from https://www.sciencedirect.com/science/article/pii/S0883902609001232

Smit, A.J., 2010. The competitive advantage of nations: is Porter’s Diamond Framework a new theory that explains the international competitiveness of countries?. Southern African Business Review, 14(1). Retrieved from https://www.ajol.info/index.php/sabr/article/view/76358