Resources of the firm, Russian high-technology startups, and firm growth Garry D. Bruton a, * , Yuri Rubanik b a 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 0883-9026/02/$ – see front matter D 2002 Elsevier Science Inc. All rights reserved. PII:S0883-9026(01)00079-9 * Corresponding author. Tel.: +1-817-257-7421; fax: +1-817-257-7227. E-mail address: [email protected] (G.D. Bruton). Journal of Business Venturing 17 (2002) 553–576
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Resources of the firm, Russian high-technology startups,
and firm growth
Garry D. Brutona,*, Yuri Rubanikb
aDepartment of Management, M.J. Neeley School of Business, Texas Christian University,
Fort Worth, TX 76129, USAbQuality 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
0883-9026/02/$ – see front matter D 2002 Elsevier Science Inc. All rights reserved.
Growth: percentage growth in started firm’s 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 firm’s 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
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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 high-
technology firms and entrepreneurs in a transitional economy, such as Russia’s, 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
Table 2
Regression results (dependent variable: annual percentage growth in employment)
Independent variable Unstandardized regression coefficients; probability >F Standard error
Founding team number 0.4** 0.21
Product innovativeness � 1.7*** 0.58
First mover 5.28* 1.55
Early follower 8.26** 1.99
Later follower 11.897*** 2.83
Model r2 .36
Regression F value (df = 4,41) 5.16***
* P=.10.
** P=.05.
*** P=.01.
G.D. Bruton, Y. Rubanik / Journal of Business Venturing 17 (2002) 553–576 569
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 firm’s 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-
G.D. Bruton, Y. Rubanik / Journal of Business Venturing 17 (2002) 553–576570
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 space-
related 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 struc-
tures 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 nation’s 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 nation’s 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 high-
technology ventures. Almost none of the high-technology startups examined here reported
preparing a business plan before beginning their business. Additionally, since the founding
G.D. Bruton, Y. Rubanik / Journal of Business Venturing 17 (2002) 553–576 571
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 Russia’s 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 high-
technology 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 firm’s asset makeup, and
the firm’s 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
G.D. Bruton, Y. Rubanik / Journal of Business Venturing 17 (2002) 553–576572
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.
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