Impact of Internationalization on Innovation in the Service Industry

Abstract

This paper examines the impact of internationalization on the production, process, and organizational innovations of Korean service firms. While the effect of foreign activities on organizational learning has been progressively revealed mostly in the manufacturing sector, the question remains whether such a relationship also holds for service industries whose unique features include the limited separability between production and consumption, which often constrains international trade. However, as globalization and development in supporting information or logistics technologies have enabled service firms to unbundle the production and consumption of service activities, a higher level of internationalization may promote knowledge sourcing and spillover from foreign markets more prominently so as to promote innovations within a service firm. Based on the results of the logistic regressions using the 2006 Korean Innovation Survey data, we found that Korean service firms’ international expansion is significantly and positively associated with their product innovation, as well as with organizational innovation, albeit to a lesser extent. Our results, however, did not support our hypothesis on the relationship between international expansion and process innovation. Lastly, the magnitude of the estimates in our models revealed that internationalization has a greater impact on product innovation than on process or organizational innovation.

Keywords: internationalization, innovation, service industry, overseas sales