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& 2006 Academy of International Business All rights reserved 0047-2506 $30.00 www.jibs.net

The effect of specificity of experience on a firm’s perceived importance of institutional knowledge in an ongoing business Sylvie Chetty1, Kent Eriksson2 and Jessica Lindbergh2 1 Department of Commerce, Massey University, Auckland, New Zealand; 2Centre for Banking and Finance, KTH – The Royal Institute of Technology, Stockholm, Sweden

Correspondence: Sylvie Chetty, Department of Commerce, Massey University, Private Bag 102 904, North Shore Mail Centre, Auckland, New Zealand. Tel: þ 64 9 414 0800; Fax: þ 64 9 441 8177; E-mail: [email protected]

Abstract We study how three types of firm experience, ranging from the specific to the general, influence the perceived importance of institutional knowledge in the ongoing business of internationalising firms based on a sample of 101 small-tomedium-sized firms. The three types of firm experiences are international, country and ongoing business. The results show that firm experience within the ongoing business, and the experience from multiple past business deals in various countries, develop institutional knowledge, whereas experience from multiple past business deals in a specific country does not. The theoretical contribution of this paper is that it establishes a link between different kinds of experience and managerial cognition in terms of institutional knowledge. In addition, it emphasises that firms develop institutional knowledge from multiple diverse country experiences, and experience in the specific ongoing business rather than experiences at the level of the country. Journal of International Business Studies (2006) 37, 699–712. doi:10.1057/palgrave.jibs.8400214 Keywords: internationalization; institutional knowledge; experiential knowledge; learning; small-to-medium-sized firms; international experience

Received: 13 August 2003 Revised: 1 July 2005 Accepted: 20 December 2005 Online publication date: 6 July 2006

Introduction International economic growth has been linked to differences in institutional conditions among countries because these differences primarily represent obstacles to firms as they internationalise (Globerman and Shapiro, 1999). Several groups, including governments, the North American Free Trade Agreement, the European Union and the World Trade Organization, are trying to reduce institutional differences among countries in an effort to promote growth. The argument is that if a manager knows more about the importance of institutions, then that manager also perceives less uncertainty about the problems and opportunities in a foreign market (Johanson and Wiedersheim-Paul, 1975; Johanson and Vahlne, 1977). Reduced uncertainty concerning institutions in international business drives firm growth because it makes the perception of opportunities more accurate and realistic (Penrose, 1959). Institutional conditions are a complex matter that incorporate not only laws and regulations but also cognitive factors, such as culture and business practice (North, 199