Journal of World Business 44 (2009) 1–15

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Journal of World Business

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Strategic choice during economic crisis: Domestic market position,

organizational capabilities and export flexibility
Seung-Hyun Lee a,1, Paul W. Beamish b,*, Ho-Uk Lee c,2, Jong-Hun Park d,3
a
The University of Texas at Dallas, School of Management, Richardson, TX 75088-0688, United States
b
Richard Ivey School of Business, University of Western Ontario, London, Ont. N6A 3K7, Canada
c
Yonsei University, School of Business, 134 Sinchon-dong, Seodaemun-gu, Seoul 120-749, Republic of Korea
d
Sogang University, School of Business, 1 Shinsu-dong, Mapo-gu, Seoul 121-742, Republic of Korea

A R T I C L E I N F O A B S T R A C T

Keywords: This study examines how sudden shrinkage of domestic demand affects firm-level export
Export intensity performance. Using the Asian economic crisis as a natural experiment, we show that while
Domestic market position the industrial organization (IO) economics and resource-based view (RBV) apply well in
Real options
the pre-crisis period, the real options perspective does a better job in explaining firms’
Economic crisis
efforts to increase exports in the post-crisis period. Specifically, using a real options
Emerging economy
perspective, we show how sudden change in domestic demand provides benefits to those
firms that have invested in flexible capabilities while those firms that are locked in with
inflexible resources fail to change. We find that the positive relationship between a firm’s
domestic market position and export intensity becomes stronger in the post-crisis than
the pre-crisis period. Further, we find a positive relationship between non-location-bound
flexible capabilities such as R&D and export intensity and a negative relationship between
location-bound inflexible capabilities such as advertising and export intensity. These
relationships become more pronounced in the post-crisis period.
Crown Copyright ß 2008 Published by Elsevier Inc. All rights reserved.

It is difficult for firms to recognize and adapt to change
when it is drastic, sudden, and externally forced (Carroll,
1984; Hannan & Freeman, 1984; Tripsas & Gavetti, 2000).
At the same time, however, certain firms do sustain
competitive advantage even during such major environ-
mental changes (Abernathy & Clark, 1985; March, 1981;
Tushman & Anderson, 1986). Given that there are wide
variances in firms’ abilities to adapt to environmental
changes (Walker, Madsen, & Carini, 2002), an important
* Corresponding author. Tel.: +1 519 661 3237; fax: +1 519 661 3700.
E-mail addresses: lee.1085@utdallas.edu (S.-H. Lee),
pbeamish@ivey.uwo.ca (P.W. Beamish), houklee@yonsei.ac.kr (H.-U. Lee),
johnpark@sogang.ac.kr (J.-H. Park).
1 tribute to previous research by taking a flexibility approach.
Tel.: +1 972 883 6267; fax: +1 972 883 6521.
2
Tel.: +82 2 2123 5478; fax: +82 2 364 7828.
3
Tel.: +82 2 705 8866; fax: +82 2 705 8519.
issue is why some organizations prosper and others suffer
after a drastic environmental change.
To address this issue, we examine how a drastic change
resulting from the Asian economic crisis affects Korean
firms’ export intensity (defined as export sales divided by
total sales). While previous studies have incorporated
industrial organization (IO) and resource-based view
(RBV) perspectives in explaining the effect of certain firm
capabilities on its export intensity (e.g., Bain, 1956; Barney,
1986, 1991; Miller & Shamsie, 1996; Scherer & Ross, 1990),
the theoretical perspectives and empirical settings have
been static. Accordingly, previous research cannot ade-
quately explain the changes that might occur in the
relationship between firm capabilities and its export
intensity after a drastic environmental change. We con-
Specifically, we incorporate the real options perspective
(Peng, 2003) and examine how the relationship between

1090-9516/$ – see front matter . Crown Copyright ß 2008 Published by Elsevier Inc. All rights reserved.
doi:10.1016/j.jwb.2008.03.015
2 S.-H. Lee et al. / Journal of World Business 44 (2009) 1–15
flexible and inflexible firm capabilities and export intensity
changes as a result of a sudden environmental change.4
We show that a sudden shrinkage in the domestic
market has differential effects on firms’ export intensity
depending on their domestic market position. We argue
that firms with non-location-bound flexible capabilities
quickly adapt to the changed domestic environment by
increasing their export intensity. Firms that possess
location-bound inflexible capabilities find it difficult to
adapt to the changed environment. Our paper contributes
to the literature by examining the relationships among
firms’ domestic market position, organizational capabil-
ities, the degree flexibility of capabilities and export
intensity in a crisis period.
1. Korean economic crisis and strategic response via
export
In Chinese, the term ‘‘crisis (weiji)’’ is expressed with
two characters, the first meaning ‘‘danger’’ and the
second ‘‘opportunity’’ (Kim, 1998b). This means that
while there is downside of crisis, one can also find that
crisis is an opportunity. Some firms view a crisis as an
opportunity to change. Gilbert (2006) finds that compet-
ing frames of threat and opportunities can co-exist. For
example, Kirzner (1973) argued that in a situation of
market disequilibrium, there exists opportunities for
economic rents. Also a high-risk high-return hostile
environment can be the birthplace for entrepreneurial
organizations (Covin & Slevin, 1991). In this kind of
hostile environment, a firm’s flexibility would allow
them to outperform other competitors. A drastic change
of external environment for Asian firms was the Asian
economic crisis in 1997. We specifically examine the
export intensity of Korean firms before and after the
economic crisis and how a huge drop in domestic demand
drives firms to focus on exports.
In the last three decades, Korea has made remarkable
economic progress. Led by an aggressive export-oriented
government policy, Korea’s per capita income increased
10-fold between 1962 and 1997. Korea now ranks 12th in
the global ranking of trading nations with many of its
industries leading the world in shipbuilding, consumer
electronics, and semiconductors. Along with the other
‘‘Asian Tigers’’ (i.e., Taiwan, Singapore, Hong Kong), as an
emerging economy (Hoskisson, Eden, Lau, & Wright, 2000)
Korea has been a model for other countries to emulate
(Cho, Kim, & Rhee, 1998; Kim, 1998b). The era of
tremendous growth and stability of the Korean economy,
however, came to an end in late 1997 with the Asian
4
The macroeconomic indicators show that the crisis effect, while
devastating, was temporary (Lee, Makhija, & Paik, 2008). In addition, right
after the economic crisis, Korean firms were short of financial resources
and thus it was hard for the firms to make foreign investments. According
to the subsidiary data obtained from the Korea Listed Companies
Association (KLCA), additional FDI was not an attractive option for Korean
firms until the year 2000. For example, in 1998, less than 5% of the Korean
firms increased the number of foreign subsidiaries. Instead of FDI working
as a source of new sales generation, it was intra-firm export to FDI
locations that helped Korean firms to mitigate the negative impact of the
Asian economic crisis (Kim, 1998a). For this reason, we focus on exports in
this paper. However, we controlled for the effect of FDI in our analyses.
economic crisis. Singh and Yip (2000) note, ‘‘the crisis that
struck . . . Asia in 1997 was, for most countries in the
region, the most severe of the last 50 years. Coming after
more than two decades of high growth and numerous
claims of impending Asian economic dominance, the crisis
was a major shock to the region and firms operating there
(p. 706).’’ Yet, while this shock adversely affected many
countries in Asia, it was particularly difficult for Korea.
Table 1 compares several economic indicators before
and after the economic crisis. During the pre-crisis period
of 1994–1996, Korea’s annual GDP growth rates were
averaging 8%. Unemployment was relatively low and the
exchange rate was stable and relatively strong. During the
pre-crisis period all signs indicated stability and future
growth for the Korean economy. By contrast, during the
post-crisis period of 1998–2000, the GDP contracted by
37%. The unemployment rate nearly tripled, averaging 6.8%
and there was a twofold increase in the inflation rate in
1998 (International Financial Statistics, 1999). At the same
time, the Korean currency depreciated by 75% in 1998 and
remained depreciated at an average of 45% for the rest of
the post-crisis period.
These statistics suggest that the Korean economic crisis
acted as a ‘‘double-edged sword’’ for Korean firms. On the
one hand, the crisis substantially reduced the size of the
domestic market. This economic turmoil led to massive
competitive pressure on virtually all Korean industries,
and threatened the survival of Korean firms (Chang, 2003).
The loss in the value of the Korean currency after the crisis
allowed Korean firms to capitalize on the price-competi-
tiveness of their products in foreign markets. As presented
in Table 1, exports increased by an average of $18 billion
from the pre-crisis ($148 billion) to the post-crisis period
($166 billion). The favorable exchange rate provided
Korean firms with the means to overcome the crisis by
increasing their export intensity. This was particularly
advantageous for those firms that were export-oriented in
the pre-crisis period.
Gaining access to foreign markets is often a necessary
part of a firm’s strategy to obtain strategic competitive-
ness and long-term success (Bartlett & Ghoshal, 1998).
Among the different ways to access foreign markets, the
predominant internationalization mode for many firms is
exporting. For example, exports of merchandise and
commercial services amounted to US $7.3 trillion in 2003
(WTO press in April 2004). It is especially important to
examine the exports of Korean firms given that Korea’s
growth and development was based on such exports
(Amsden, 1989; Awokuse, 2005). In addition, it is also
interesting that in Korea exporting was led by large firms
rather than smaller firms. Statistics by the Small and
Medium Business Administration Agency in Korea shows
that around 60% of all exports in Korea are done by large
firms. Further, exporting is the dominant mode of foreign
market participation for Korean firms, constituting 40% of
Korea’s gross domestic product (The Bank of Korea,
2004). This is why Guillen (2000) finds that large Korean
firms gain and sustain competitive advantage by focusing
on export. The reason they were able to increase their
exports was thanks to their high level of capabilities
(Guillen, 2000).
 S.-H. Lee et al. / Journal of World Business 44 (2009) 1–15 3

Table 1
Selected economic indicators for Korea, 1994–2000

Pre-crisis period 1997 Post-crisis period

1994 1995 1996 1998 1999 2000

Gross domestic production (billion $) 504 606 621 550 348 449 512
Private consumption (billion $) 290 351 359 314 184 242 276
Government consumption (billion $) 56 77 79 69 48 58 62
Gross capital formation (billion $) 194 233 247 198 93 136 159
Exports of goods and services (billion $) 141 146 157 161 123 167 209
Import of goods and services (billion $) 151 199 218 191 101 153 193

Unemployment rate (%) 2.4 2.0 2.0 2.6 6.8 6.3 4.1

Inflation rate (%) 6.2 4.5 4.9 4.0 7.5 0.8 3.2
a
Exchange rate (Korean won/$) 803.5 771.3 804.5 951.3 1401.4 1188.8 1131.0

Sources: World Bank Group; International Financial Statistics, IMF; Center for Economic Information, Korea Development Institute; Monthly Statistical
Bulletin, various issues, The Bank of Korea.
a
Period average.

2. Theoretical development characterized as flexible non-location-bound capabilities

Among the dominant viewpoints for explaining a firm’s
strategy in the field of strategic management are the IO and
RBV perspectives. The IO perspective emphasizes the
importance of market power in generating monopolistic
rents for firms and the RBV perspective emphasizes
heterogeneous firm capabilities in generating efficiency
rents for firms (Bain, 1956; Barney, 1991; Morgan, Kaleka,
& Katsikeas, 2004). Neither perspective, however, expli-
citly considers how firms flexibly use their capabilities
when the environment suddenly changes. The real options
perspective, on the other hand, suggests that organiza-
tional capabilities that provide flexibility at the time of
changes in the market serve as a foundation for a firm’s
competitive advantage (Bowman & Hurry, 1993; Kogut &
Kulatilaka, 2001; Sanchez, 1993). In other words, after an
economic crisis, it is important to know which capabilities
are more valuable for firms’ export intensity. This is why
proponents of the real options perspective argue that it is
difficult for firms that are not flexible to sustain their
competitive advantage when a drastic market change
occurs (Sanchez, 1993). When small to moderate changes
occur in the market, RBV capabilities (e.g., valuable, rare,
inimitable, nonsubstitutable) can still be a source of
competitive advantage. However, the advocates of the
real options perspective argue that in high-velocity
markets, firms need flexible capabilities to sustain
competitive advantage (Kogut & Kulatilaka, 2001).
The fact that firms with flexible capabilities are better
able to outperform competitors at the time of drastic
change in an environment shows that firms with flexible,
non-location-bound capabilities would outperform their
competitors in high-velocity markets (Bowman & Hurry,
1993). The importance of exports increased after the 1997
Asian economic crisis because of the sudden shrinkage in
domestic demand. For this reason, those firms that build
on existing knowledge would overgeneralize from past
circumstances and thus be at a disadvantage (Argote,
1999). Therefore, it is important to locate flexible
capabilities that are geographically fungible when it is
necessary to increase exports. Specifically, we examine
investments in R&D and advertising since R&D is
that are less bounded in a local market while advertising is
difficult to transfer across borders (Anand & Delios, 1997;
Salomon & Shaver, 2005).
The real options perspective suggests that only those
firms that possess flexibility are able to sustain compe-
titive advantage after an economic crisis (Lee, Makhija, &
Paik, 2008; Sanchez, 1995). Thus, while Korean firms’
export intensity before the economic crisis can be
explained using IO and RBV perspectives, firms’ export
intensity after the economic crisis cannot be satisfactorily
explained with such static theories. Hence, we incorporate
the real options perspective to show how firms with such
capabilities are able to increase their export intensity after
an economic crisis. To test our theoretical framework, we
examine the exporting intensity of Korean firms before and
after the Asian economic crisis. This allows us to ascertain a
point in time in which a major economic crisis occurred,
providing a natural experiment for our study.
3. Hypotheses development
3.1. Domestic market position and export intensity under a
stable environment
According to IO economics, a firm’s domestic market
position is an important determinant of its strategy (Porter,
1985, 1990). Previous research suggests two competing
hypotheses about the effect of a firm’s domestic market
position on its export intensity. The first stream suggests a
negative relationship (Ito & Pucik, 1993). The argument
here is that domestic market leaders would not have such a
strong incentive to expand abroad because of their greater
domestic market position. Greater market power makes
domestic leader firms complacent with the status quo and
consequently locked-in to their domestic market. Accord-
ingly, leader firms may regard exploiting overseas markets
through exporting as less necessary. On the other hand,
there would be powerful incentives for domestic follower
(non-dominant) firms to expand abroad because such
firms cannot successfully engage in head-to-head rivalry
with domestic leader firms and because of the limited
growth potential of the domestic market. For domestic
4 S.-H. Lee et al. / Journal of World Business 44 (2009) 1–15
follower firms, obtaining first mover advantages in inter-
national markets is one way to gain important competitive
advantages over the market leaders (Lieberman & Mon-
tgomery, 1988). Ito and Pucik (1993) found that due to
larger market share, industry leaders have a lower export
intensity compared to non-dominant follower rivals.
Additionally, Mascarenhas (1986) found that the built-in
advantages of incumbent dominant players in an industry
drive non-dominant firms out of their domestic market.
For example, Daewoo Motors, the second largest auto-
mobile producer in Korea after Hyundai Motors before the
Asian economic crisis, was more aggressive in its effort to
penetrate foreign markets (Business Week, 1994). Daewoo
was one of the first Korean automobile manufacturers
in Korea to try and enter the Eastern European market
(Economist, 1996).
Other scholars argue for a positive relationship between
a firm’s domestic market position and its export intensity.
Domestic leader firms enjoy several advantages that derive
from their market power, including cost advantages
through scale economies, leveraging their reputation in
the marketplace, preempting preferred suppliers or
customers, and setting industry standards in their favor
(Scherer & Ross, 1990). Such advantages allow dominant
firms greater superiority over smaller competitors result-
ing in higher returns for dominant firms (Demsetz, 1973;
Peltzman, 1977). Domestic market leaders can and will
leverage such advantages in overseas markets through
exports (Porter, 1990). Additionally, prior research argues
that fierce rivalry in the home market pressures firms to
innovate and upgrade productivity. Domestic rivalry
creates not only positive externalities but also greater
rates of innovation that can lead to greater levels of exports
(Sakakibara & Porter, 2001). Market leaders must con-
stantly upgrade their capabilities to maintain their leader-
ship position. For example, confronting fierce competition
from LG in domestic market, Samsung Electronics was able
to upgrade their capabilities to successfully compete in
global markets (Far Eastern Economic Review, 1996).
Taken together, these arguments suggest that domestic
market leaders will export more because they have the
capabilities to do so. In support of this argument,
Pagoulatos and Sorensen (1976) found a positive relation-
ship between a firm’s domestic market power and its
exports.
Prior research thus suggests both positive and negative
relationships between a firm’s domestic market position
and its export intensity. This discrepancy makes it possible
to ‘‘choose the theory which best holds its own in
competition with other theories; the one which by natural
selection, proves itself the fittest to survive’’ (Popper, 1959,
p. 108). In sum, these arguments suggest two pairs of
competing hypotheses, with the first being:
Hypothesis 1a. A firm’s domestic market position will be
positively associated with its export intensity in the pre-
crisis period.
Hypothesis 1b. A firm’s domestic market position will be
negatively associated with its export intensity in the pre-
crisis period.
3.2. R&D and advertising investments and export intensity
under a stable environment
RBV suggests that investments in firm-specific cap-
abilities, such as R&D and logistics, help firms to gain and
sustain competitive advantage (Barney, 1991; Dhanaraj &
Beamish, 2003). Non-location-bound capabilities, such as
R&D and market research, allow firms to effectively
transfer them abroad at low costs (Sapienza, Autio, George,
& Zahra, 2006). Accordingly, firms tend to target their R&D
investments for the global rather than the local market
(Dhanaraj & Beamish, 2003; Ettlie, 1998). Supportive of our
arguments, prior research found a positive association
between R&D investments and export intensity (Brau-
nerhjelm, 1996; Cavusgil, 1984). In particular, Ito and
Pucik (1993) found that R&D spending had a positive effect
on the export intensity of Japanese firms. They concluded
that firms investing in R&D would ultimately be more
competitive in the international arena because R&D
investments allow firms to ‘‘constantly renew and upgrade
existing technology and thus reinforce today’s competitive
advantage for tomorrow’’ (Ito & Pucik, 1993, p. 72). It was
the strength coming from the R&D investment that led
Samsung and LG Electronics to successfully compete in
global markets (Far Eastern Economic Review, 1996).
These arguments suggest the following hypothesis:
Hypothesis 2a. A firm’s R&D investments will be positively
associated with its export intensity in the pre-crisis period.
The RBV also suggests that firm-specific capabilities are
the source of competitive advantage. However, the value of
capabilities may also depend on geographic transferability
(Anand & Delios, 1997). While location-bound capabilities,
such as advertising and human resources management,
provide firms with important advantages, the location-
bound nature of such capabilities suggests that their value
is limited to the domestic market (Anand & Delios, 1997;
Mascarenhas, 1986; Salomon & Shaver, 2005). Firms with
greater advertising in the domestic market, for example,
can enjoy premiums if their better reputation commands a
higher price relative to domestic competitors’ products.
Consequently, potential domestic competitors may be
discouraged from entering an advertising intensive market
because of the substantial barriers that need to be
overcome due to the established brand loyalty of firms
with greater advertising (Erickson & Jacobson, 1992). The
benefits of advertising that are location-bound encourage
firms to prefer domestic sales to foreign sales. The focus on
domestic sales, in turn, leads to more advertising in
the domestic market, creating a reinforcing pattern
between advertising and sales there (Oster, 1982). This
is consistent with Kravis and Lipsey (1992) who found that
advertising intensity was not significant for exports. In
other words, when advertising focus is on a different
market segment, the effect of the advertising can be
negative on other segments (Kim & Hahn, 2004). We
suggest that Korean firms with greater advertising would
create a higher dependence on the domestic market,
resulting in a negative relationship between advertising
and export intensity. These arguments suggest the
following hypothesis:
 S.-H. Lee et al. / Journal of World Business 44 (2009) 1–15
Hypothesis 2b. A firm’s advertising investments will be
negatively associated with its export intensity in the pre-
crisis period.
3.3. Sudden change in environments and real options
capabilities under an unstable environment
When there is a drastic reduction in the size of the
domestic market, however, the firm’s positional advantage
may provide incentives and capabilities to increase
exports. First, market leaders would be affected the most
because they had the biggest market share. Thus, the
positional advantage can be a disadvantage for the market
leaders at the time of domestic market shrinkage. As
mentioned earlier, the Korean economic crisis resulted in a
drastic shrinkage of the domestic market as well as a
substantial increase in domestic competition (Bae, Kang, &
Lim, 2002; Chang, 2003). Such radical changes in the
external environment would have been a signal or wake-
up call for domestic market leaders to initiate actions to
compensate for the lost domestic sales by increasing their
exports.5 Dominant firms, having market power advan-
tages, may be able to change their focus to export
especially when there is such a strong incentive under
conditions of drastic shrinkage of domestic demand. The
real options perspective suggests that it is the times of
change that capabilities that were not appreciated and
used before the change are valued. This is why Kogut and
Kulatilaka (2001, p. 744) define core competences as ‘‘the
choice of capabilities that permits firms to make the best
response to market opportunities.’’
Prior research has found that fierce rivalry in the home
market pressures firms to innovate and upgrade their
productivity. With such rivalry, market leaders must
constantly upgrade their capabilities to maintain their
leadership position (Sakakibara & Porter, 2001). The
resultant upgraded capabilities demonstrate their value
when there is need to adapt to a changed domestic market
environment and increase the level of export. This is why
Kogut and Kulatilaka (2001), using real options perspec-
tive, argue that it is during the times of huge environ-
mental shift that firms begin to look into the capabilities
rather than resorting to their positional advantages in an
industry. Therefore, those leader firms that had positional
advantage would also fare better during the economic
crisis because they are capable of increasing their exports.
Consistent with Salomon and Shaver (2005), our argu-
ments imply that firms with positional advantage would
increase their level of exports when confronted with a
5
This might be best explained by the boiling frog phenomenon. A frog
is put into a pan of cold water that is slowly heated to the boiling point. If
the change in the temperature is gradual enough, the frog fails to react
and dies. By contrast, a frog put directly into a pan of boiling water would
quickly jump out and survive (Tichy & Devanna, 1986). As this
phenomenon shows, a sudden change in the environment serves as a
catalyst for firms to respond quickly through new export strategies.
Accordingly, we argue that domestic leader firms might have reacted
quickly to the economic crisis by increasing their exports, suggesting that
the positive relationship between domestic market position and export
intensity would be stronger, or the negative relationship weaker, in the
post-crisis than the pre-crisis environment.
5
sudden shrinkage in the domestic market. In sum, we
argue that domestic leader firms might react quickly to an
economic crisis by increasing their exports. This suggests
that the positive relationship between domestic market
position and export intensity (H1a) would be stronger, or
the negative relationship (H1b) weaker, in the post-crisis
than the pre-crisis environment. For example, the compe-
tition between Samsung and LG in developing LCD TVs
after the economic crisis made Samsung a formidable
competitor in global markets relative to the past leaders
such as Sony (Forbes Asia, 2007). These arguments lead to
the second two competing hypotheses:
Hypothesis 3a. The economic crisis will moderate the
relationship between a firm’s domestic market position
and its export intensity such that the positive relationship
will become stronger in the post-crisis period.
Hypothesis 3b. The economic crisis will moderate the
relationship between a firm’s domestic market position
and its export intensity such that the negative relationship
will become weaker in the post-crisis period.
3.4. R&D and advertising investments and export intensity
under an unstable environment
Changes in the macroeconomic environment such as a
fundamental shift in the level of demand are sometimes
unpredictable. An unpredictable market change can force
firms to radically reconfigure their value chains in
response to new threats (Bowman & Hurry, 1993; Lee,
Peng, & Lee, 2008). The difficulty for firms is that the
likelihood these potential threats will occur is unknown.
This makes it difficult to decide on an appropriate level of
investment so that potential future threats can be
addressed. For this reason, successfully competing in
fluctuating markets requires capabilities that are funda-
mentally different from those that previously lead to
success in relatively more stable markets (Bowman &
Hurry, 1993; Kogut, 1991). Thus, a firm possessing the
flexibility to respond advantageously to unknown future
changes in its environment will be able to better cope with
sudden changes in environments than a firm with
inflexible capabilities (Foss, 1998).
The positive association between flexible capabilities,
such as R&D investments, and a firm’s export intensity
should become stronger after an economic crisis. The
currency depreciation following the Asian crisis increased
the importance of exports for Korean firms because it
allowed their products to be more price-competitive in
international markets. In other words, in the face of or a
rapid decline in domestic demand, the firm’s ability to shift
lost domestic sales to foreign markets increases the value
of their exporting related investments (Lee, Makhija, et al.,
2008; Lee, Peng, et al., 2008). Despite the increased
importance of exports in the post-crisis period, however,
not all Korean firms were able to easily increase their
exports.
The real options perspective suggests that firms that
make high investments in R&D can relatively easily transfer
the R&D capabilities to other uses (Kogut & Kulatilaka, 2001;
6 S.-H. Lee et al. / Journal of World Business 44 (2009) 1–15
Scott & Pascoe, 1987). Investments in R&D allow the firm to
change product attributes more rapidly than their compe-
titors (Amram & Kulatilaka, 1998; McGrath, 1997; Pakes,
1986). Mitchell (1989) also finds that firms with high-R&D
capabilities tend to have an easier time entering new
markets. It is important that the capabilities are geogra-
phically fungible and thus can contribute to the increase in
exports. R&D capabilities especially are relatively easily
transferred abroad (Helfat & Lieberman, 2002). Firms with
greater R&D investments might have possessed more
flexible capabilities that were conducive to increasing
exports in the post-crisis period. Because firms target their
R&D investments for the global rather than domestic
market, they can appropriate their R&D investments in
international markets when needed (Dhanaraj & Beamish,
2003; Ettlie, 1998). For example, Henderson and Cockburn
(1994), studying the pharmaceutical industry, show that
competitive advantage in research is the key to survival in an
uncertain environment. Firms can enjoy flexible capabilities
by commercializing the knowledge they created, leveraging
the knowledge in different ways such as licensing it to an
external party, or engaging in joint development and
marketing with partners (McGrath & Nerkar, 2002). Tripsas
(1997) also shows that investment in technological assets
enhances the survival rate of incumbents. Consequently,
R&D investments provide firms with flexible capabilities to
take a ‘wait-and-see’ approach between the domestic and
international markets. For instance, Samsung Electronics’
continuous emphasis on R&D investments kept Samsung on
top of new technologies that enabled them to better
compete in the global market place (R&D Magazine,
2006). R&D investments would lead to more exports in
the post-crisis than in the pre-crisis period. This suggests the
following hypothesis:
Hypothesis 4a. The economic crisis will moderate the
relationship between a firm’s R&D investments and its
export intensity such that the positive relationship will
become stronger in the post-crisis period.6
The negative association between a firm’s advertising
investments and export intensity, however, should
become stronger after an economic crisis. The real options
literature suggests that firms with flexible capabilities are
better able to respond to the change in environments
(Kogut & Kulatilaka, 2001; Sanchez, 1993). When the
domestic market size shrinks due to dampened demand,
firms need to look outside for opportunities. However,
location-bound advertising inhibits firms from doing so. In
Korea, the reduction in the size of the domestic market
together with the myriad of reforms mandated by the IMF
to the Korean government resulted in more domestic
competition (Chang, 2003). This heightened competitive
environment threatened the survival of Korean firms. To
6 Ministry of Information and Communications. The com-
Past research has demonstrated the value of examining more positive
or more negative relationships in different environments. For example,
Haleblian and Finkelstein (1993) looked at industry environments and
tested a hypothesis that CEO dominance would be more negatively
associated with firm performance in a turbulent environment than in a
stable environment. Sundaramurthy et al. (1997) and Bergh (1995)
examined similar kinds of comparisons at the firm level. Hitt et al. (2000)
examined a similar phenomenon.
neutralize this threat, Korean firms could establish a
stronger presence in the domestic market, expand into
foreign markets through exports, or both.
We argue that firms with greater investments in
inflexible capabilities, such as advertising, in the pre-crisis
period were more inclined to focus on their domestic
market rather than engage in more exports in the post-
crisis period. First, firms with greater advertising invest-
ments have difficulty increasing their exports after the
crisis because the location-bound nature of advertising
inhibits firms from taking advantage of flexibility via
effective transfer of advertising benefits abroad (Caves,
1981). Therefore, investing in advertising may provide
negative incentive to look abroad for opportunities due to
its inflexibility and location-bound nature. Second, the
increased competitive environment after the crisis forced
these firms to escalate their commitment to defending
their domestic position. This is because large amounts of
advertising investments in the pre-crisis period together
with the drastic decrease in the size of the domestic market
acted as an exit barrier, further increasing their depen-
dency on the home market following the crisis (Harrigan,
2001; Oster, 1982). In a sense, escalation of commitment
keeps firms from giving up their old and inflexible
capabilities. This is consistent with Hennart and Park
(1994) and Chang (1995) who found that the advertising
intensity of Japanese firms did not positively affect foreign
expansion efforts (Helfat & Lieberman, 2002). Accordingly,
advertising investments would result in even lower
exports in the post-crisis than in the pre-crisis period.
We thus hypothesize:
Hypothesis 4b. The economic crisis will moderate the
relationship between a firm’s advertising intensity and
its export intensity such that the negative relationship will
become stronger in the post-crisis period.
4. Methods
4.1. Data and sample
The sample for this study consists of Korean manu-
facturing firms for the 1994–2000 period. Service firms
were excluded because of their lack of exporting activity
and their inconsistency of accounting practices compared
with manufacturing firms (Chang & Hong, 2000). We
obtained our sample using the following procedure. First,
we relied on the Korean Standard Industry Classification
(KSIC) code at the four-digit level and identified 54
manufacturing industries. Second, for each industry, we
identified all firms that remained as independent entities
for the period from 1994 to 2000 based on the WISEfn’s
QUANTIWISE database. The WISEfn is a financial informa-
tion services company that is supported by the Korean
pany has several databases including the QUANTIWISE
database, which provides detailed financial and invest-
ment information on Korean companies.
While the majority of our data was collected through
WISEfn’s QUANTIWISE database, data on foreign direct
investment and chaebols were obtained from other sources.
 S.-H. Lee et al. / Journal of World Business 44 (2009) 1–15
Specifically, we collected foreign direct investment data
from LEXIS/NEXIS, the Korea Listed Companies Association’s
database, and the Korea Information Service Company’s
database. We obtained chaebol membership information
through the Korea Fair Trade Commission database. Since
the Korean economic crisis occurred in late 1997, we
eliminated the year-1997 data from our sample to clearly
demarcate pre- and post-crisis periods. Additional exclusion
of firms with less than 10% export intensity and firms with
missing data further reduced our sample to 1445 observa-
tions. Following Ito (1997) and Shaked (1986), we restricted
our sample to the firms that have 10% or higher export
intensity to include only those firms with substantial export
activities in the analysis. This 10% criterion has been used as
a cut-off level in prior research. Our final data consists of 701
observations (283 firms) in the pre-crisis period and 744
observations (292 firms) in the post-crisis period.
4.2. Measures
4.2.1. Dependent variable
Following previous research (Shaked, 1986) we mea-
sured a firm’s export intensity as the ratio of a firm’s export
sales over its total sales.
4.2.2. Independent variables
We measured a firm’s domestic market position as the
domestic sales of the firm divided by the leader firm’s
domestic sales in the industry (Ito, 1997). Because some
firms in our sample operate in multiple segments at the
four-digit level, we used the firm’s largest segment as its
representative industry in calculating the firm’s domestic
market position. With this correction, the leader firm in an
industry has a value of 1 and the other firms have values
greater than 0, but smaller than 1. Similarly, we measured
a firm’s R&D investments as its R&D expenses over its total
assets and a firm’s advertising investments as its advertising
expenses over its total assets, respectively.
4.3. Control variables
To control for other exogenous effects on a firm’s export
intensity, we included a large number of control variables.
These include firm size, firm performance, foreign
exchange rate, the number of competitors, chaebol
dummy, capital intensity, absorbed slack, unabsorbed
slack, amount of foreign direct investment, and industry
dummy variables. Firm size and firm performance can
affect firms’ export intensity (Mascarenhas, 1986). Firm
size and firm performance were measured using the
logarithm of total assets and ROA (return on assets),
respectively. Because we argued that a dramatic currency
depreciation following the crisis increased the export
intensity of Korean firms, we controlled for the currency
exchange rate on export intensity. We measured the
foreign exchange rate variable as the average exchange for a
given year.
Previous research suggests that rivalry in the domestic
market can increase firms’ competitiveness in interna-
tional markets (Porter, 1980, 1990). The number of
competitors was measured by counting the number of
firms in each industry. To better capture competition, we
7
counted the number of firms in each industry in both the
Korea Stock Exchange and Korea Securities Dealers
Automated Quotation (KOSDAQ). Membership in Korean
business groups known as ‘‘chaebols’’ can influence firms’
export because of the potential resource sharing among
member firms (Chang & Hong, 2000). The chaebol dummy
variable was measured as 1 for the affiliated firms
belonging to Korean business groups called ‘‘chaebols’’
and 0 otherwise.
Economies of scale as reflected in firms’ capital
intensity can have a positive effect on export because
higher fixed assets may pressure firms to expand inter-
nationally to cover these costs (Ito, 1997). Capital intensity
was measured as a firm’s fixed assets over its total assets.
Slack resources can have positive effects on firms’ export
because greater slack provides firms with more abilities to
expand (Ito, 1997). We included two types of slack:
absorbed slack and unabsorbed slack. Absorbed slack was
measured as the ratio of a firm’s selling, general, and
administrative expenses over its total sales. Unabsorbed
slack was measured as a firm’s quick ratio, defined as
current assets minus inventories over current liabilities.
Since the amount of FDI activity can affect exports, we
controlled for this possibility by including the logarithm of
the total assets from FDI.
We controlled for potential industry effects on a firm’s
export intensity by including industry dummy variables
(Dess, Ireland, & Hitt, 1990). Since results from using
industry dummies classified at the four-digit level of the
KSIC code were basically identical to those from using
industry dummies at the three- and the two-digit levels, we
report the results from the regression analysis including
industry dummies at the four-digit level. Finally, the year
dummy variables cannot be simultaneously included with
the foreign exchange rate variable in our regression model
because we measured the foreign exchange rate variable as
the average exchange for a given year and the average
exchange rate differed from year to year. To verify whether
the effects of yearly foreign exchange rates can be captured
by the year dummy variables, we also ran an additional
regression model by excluding the foreign exchange rate
variable and including the year dummy variables. The
results of the two regression models were almost identical.
4.4. Analytical model and procedures
We developed the following regression model to test
our hypotheses:
Y it ¼ a þ b1 DMPit þ b2 RNDit þ b3 ADVit þ d1 POST
 DMPit þ d2 POST  RNDit þ d3 POST  ADVit
X
þ h j Z i jt þ ni þ eit (1)
where Yit is the export intensity of firm i in year t, DMPit the
firm’s domestic market position, RNDit its R&D invest-
ments, ADVit its advertising investments, POST the post-
crisis period dummy variable (i.e., 0 for the 1994–1996
period and 1 for the 1998–2000 period), Zijt a control
variable, ni the firm-specific residual, and eit is a standard
residual (mean zero, homoskedastic, uncorrelated with
itself, ni and independent variables).
8 S.-H. Lee et al. / Journal of World Business 44 (2009) 1–15
We estimated the regression model (1) by using the
generalized least squares (GLS) procedure (Hitt, Gimeno, &
Hoskisson, 1998). Since our data set is a pooled time-series
cross-sectional database, there exists the possibility of
cross-sectional heteroskedasticity and within-unit serial
correlation. When these problems are present, the tradi-
tional ordinary least squares (OLS) assumptions of con-
stant variance and no-autocorrelation of the error term
will be violated, rendering standard OLS to be inappropri-
ate (Dielman, 1980). By using GLS, we transform the
original variables in such a way that the transformed
variables can satisfy the OLS assumptions. Further, the GLS
procedure partitions error variance into three components
(i.e., random error in space, random error in time, and
random error not unique to space or time) and uses this
information to derive efficient and unbiased parameter
estimates (Sayrs, 1989). Thus, the estimators obtained
from the GLS procedure allow us to investigate the time-
series component of the data while maximizing the
degrees of freedom. Our analysis was performed in STATA
8 using the program’s xt family of commands, which are
specifically designed to handle pooled time-series cross-
sectional database.
Normally, fixed-effects models are preferred in panel
data analyses (Greene, 2003). We could not use the fixed-
effects approach because some of our independent
variables were stable across time for our sample firms.
This is a common problem when there are a relatively
small number of observations per cross-sectional unit
(Greene, 2003). When the fixed-effects approach is
excluded, a random-effects approach is often available,
but only for datasets where the fixed effects are
uncorrelated with the other independent variables. To
test this assumption, we conducted a Hausman test, which
revealed no significant correlations between our indepen-
dent variables and the firm-level fixed effects. Hence, we
report the results from the random-effects model in this
paper.
We eliminated the year-1997 data from our empirical
analysis to clearly distinguish pre- and post-crisis periods.
Past research, however, shows that the Korean economic
crisis took place in late 1997, suggesting that the year 1997
could be classified as the pre-crisis period (Ang & Ma, 2001;
Bae et al., 2002). For this reason, we repeated the same
analysis as model (1), with the year-1997 data included in
the pre-crisis period. Results from the analysis with the
year-1997 data included (N = 1740) were basically iden-
tical to those with the year-1997 data excluded (N = 1445).
Hence, in the following section, we chose to report the
results with the year-1997 data excluded.
5. Results
Table 2 contains the descriptive statistics and the
correlation matrix for all the variables included in this
study. All the variables were checked for normality using
the skewness–kurtosis test and the analysis revealed no
serious departures from uniform variance, suggesting that
the assumption of a normal distribution was maintained
(Hamilton, 1992). To check for multicollinearity, we
calculated the variance inflation factors (VIF) for all the
variables. The average VIFs were less than 2—substantially
lower than the recommended cutoff of 10, suggesting that
multicollinearity is not a problem (Chatterjee, Hadi, &
Price, 2000).
To examine whether the relationships among a firm’s
domestic market position, organizational capabilities and
its export intensity change following the economic crisis,
we first conducted separate regression analyses for each
period. We standardized all the variables except dummy
variables to neutralize the effects of the varying magni-
tudes of independent variables on the dependent variable.
Table 3 shows the results of the separate regression
analyses. Models 1–4 present the results for the pre-crisis
period (N = 701), and Models 5–8 for the post-crisis period
(N = 744). For each period, the coefficients for domestic
market position, R&D investments, and advertising invest-
ments remain stable.
The results in Table 3 show three interesting findings.
First, domestic market position is positive and significant
in the pre-crisis period. For example, the coefficient for
domestic market position is 0.055 ( p < 0.001) in Model 4.
This suggests preliminary evidence in support of H1a.
Second, for both periods, R&D investment is positive and
significant whereas advertising investment is negative and
significant. These results are consistent with our H2a and
H2b. Third, the relationships become even stronger in the
post-crisis than the pre-crisis period providing support for
H3a, H4a, and H4b. For example, the coefficient for
domestic market position is 0.218 ( p < 0.001) in Model
8, which is greater than 0.055 ( p < 0.001) in Model 4. The
coefficient for R&D investments is greater in Model 8 than
in Model 4, implying that the association between a firm’s
R&D investments and its export intensity becomes more
positive in the post-crisis than the pre-crisis period.
Similarly, the coefficient for advertising investments is
more negative in the post-crisis than the pre-crisis period.
These results indicate that the Korean economic crisis
plays an important moderating role for the relationship
between a firm’s domestic market position, organizational
capabilities and its export intensity.
Some of the control variables also warrant explana-
tions. Being part of a chaebol group is negatively associated
with export performance. Foreign direct investment, while
negatively associated with export performance, becomes
positively associated with export performance after the
economic crisis.
To examine whether the relationships shown in Table 3
are statistically significant, we conducted Chow tests based
on our regression model (1). The Chow-test results are
shown in Table 4. Specifically, Model 1 shows the results
assuming no structural changes occurred between the pre
and post-crisis periods. With regard to H1a and H1b,
domestic market position is estimated as 0.091 ( p < 0.001)
in Model 1. This result is consistent throughout Models 2–
5. Our results imply that the association between a firm’s
domestic market position and its export intensity is
positive rather than negative for the entire period of our
study, providing support for H1a. We elaborate on this
finding in the next section. With regard to the results for
H2a and H2b, R&D investments and advertising invest-
ments are estimated as 0.098 ( p < 0.001) and 0.239
Table 2
Descriptive statistics and correlations

Variable Mean S.D. 1 2 3 4 5 6 7 8 9 10 11 12 13

1. Export 0.48 0.25

intensity
2. Domestic 0.15 0.26 0.01 (0.78)
market
position
3. R&D 0.08 0.28 0.12*** (0.00) 0.05* (0.04)
investment

S.-H. Lee et al. / Journal of World Business 44 (2009) 1–15

(%)
4. Advertising 0.42 0.95 0.23*** (0.00) 0.20*** (0.00) 0.01 (0.60)
investment
(%)
5. Post-crisis 0.51 0.49 0.11*** (0.00) 0.14*** (0.00) 0.00 (0.73) 0.17*** (0.00)
dummy
6. Firm size 18.99 1.37 0.03 (0.16) 0.53*** (0.00) 0.00 (0.91) 0.12*** (0.00) 0.05* (0.02)
7. Firm 0.00 0.12 0.00 (0.97) 0.00 (0.92) 0.04 (0.11) 0.03 (0.21) 0.09*** (0.00) 0.02 (0.29)
performance
8. Foreign 1023.54 238.55 0.12*** (0.00) 0.13*** (0.00) 0.00 (0.99) 0.16*** (0.00) 0.93*** (0.00) 0.04y (0.09) 0.11*** (0.00)
exchange
rate
9. Number of 2.58 41.29 0.13*** (0.00) 0.35*** (0.00) 0.19*** (0.00) 0.02 (0.39) 0.00 (0.90) 0.11*** (0.00) 0.02 (0.28) 0.00 (0.78)
competitor
*** ***
10. Chaebol 0.14 0.34 0.03 (0.25) 0.44 (0.00) 0.02 (0.35) y
0.01 (0.00) 0.04 (0.09) 0.61 (0.00) 0.01 (0.47) 0.04y (0.07) 0.09*** (0.00)
***

dummy
11. Capital 0.53 0.14 0.07*** (0.00) 0.09*** (0.00) 0.03 (0.23) 0.13*** (0.00) 0.15*** (0.00) 0.31*** (0.00) 0.06** (0.01) 0.12*** (0.00) 0.06** (0.01) 0.22*** (0.00)
intensity
12. Unabsorbed 1.00 0.70 0.00 (0.99) 0.14*** (0.00) 0.00 (0.91) 0.00 (0.90) 0.07*** (0.00) 0.17*** (0.00) 0.21*** (0.00) 0.07*** (0.00) 0.09*** (0.00) 0.17*** (0.00) 0.31*** (0.00)
slack
13. Absorbed 0.12 0.58 0.03 (0.21) 0.01 (0.54) 0.03 (0.19) 0.06* (0.02) 0.03 (0.21) 0.08*** (0.00) 0.18*** (0.00) 0.02 (0.29) 0.01 (0.46) 0.02 (0.39) 0.00 (0.92) 0.03 (0.17)
slack
* * ** * ** * ***
14. Foreign 16.42 6.40 0.01 (0.52) 0.05 (0.04) 0.05 (0.03) 0.02 (0.43) 0.06 (0.01) 0.05 (0.02) 0.06 (0.01) 0.03 (0.17) 0.05 (0.03) 0.07 (0.00) 0.03 (0.24) 0.05* (0.04) 0.00 (0.92)
direct
investment
y
p < 0.10.
*
p < 0.05.
**
p < 0.01.
***
p < 0.001.

9
 10
Table 3
Results for pre- and post-crisis periods

Independent variables Pre-crisis period sample (N = 701) Post-crisis period sample (N = 744)

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8

Domestic market 0.082*** (0.016) 0.055** (0.017) 0.213*** (0.024) 0.218*** (0.025)
position

S.-H. Lee et al. / Journal of World Business 44 (2009) 1–15

R&D investment 0.046* (0.015) 0.030y (0.016) 0.132*** (0.015) 0.138*** (0.014)
Advertising 0.249*** (0.018) 0.244*** (0.019) 0.476*** (0.033) 0.476*** (0.033)
investment
Firm size 0.176*** (0.016) 0.130*** (0.015) 0.010 (0.018) 0.046* (0.022) 0.042** (0.013) 0.038** (0.013) 0.090*** (0.016) 0.009 (0.019)
Firm performance 0.050y (0.028) 0.047 (0.029) 0.080** (0.024) 0.069* (0.028) 0.014* (0.007) 0.013 (0.007) 0.008 (0.009) 0.009 (0.009)
Foreign 0.215* (0.104) 0.106 (0.106) 0.218** (0.083) 0.126 (0.099) 0.160*** (0.010) 0.127*** (0.015) 0.172*** (0.011) 0.152*** (0.012)
exchange rate
Number of 0.060 (0.041) 0.105* (0.044) 0.264*** (0.049) 0.254*** (0.048) 0.402*** (0.057) 0.343*** (0.055) 0.367*** (0.047) 0.188*** (0.047)
competitors
Chaebol dummy 0.210*** (0.036) 0.175*** (0.036) 0.212*** (0.030) 0.252*** (0.034) 0.226*** (0.059) 0.036 (0.039) 0.129** (0.046) 0.313*** (0.049)
Capital intensity 0.214*** (0.011) 0.209*** (0.013) 0.158*** (0.017) 0.151*** (0.016) 0.013 (0.012) 0.024y (0.014) 0.000 (0.013) 0.014 (0.013)
Unabsorbed slack 0.012 (0.010) 0.004 (0.012) 0.016 (0.018) 0.019 (0.018) 0.011 (0.009) 0.010 (0.013) 0.011 (0.012) 0.009 (0.013)
Absorbed slack 1.105*** (0.130) 1.190*** (0.139) 0.284 (0.204) 0.184 (0.199) 0.061*** (0.014) 0.052*** (0.012) 0.048*** (0.012) 0.051*** (0.011)
Foreign direct 0.038*** (0.009) 0.044*** (0.009) 0.044*** (0.005) 0.041*** (0.006) 0.020** (0.007) 0.035*** (0.009) 0.014 (0.009) 0.033** (0.009)
investment

sm 0.714 0.711 0.685 0.687 0.684 0.666 0.660 0.634

se 0.312 0.312 0.311 0.312 0.336 0.335 0.334 0.332
r 0.839 0.838 0.828 0.828 0.805 0.797 0.796 0.784
Wald x2 285.26 287.99 316.00 316.10 306.49 325.39 342.40 373.20
No. of groups 283 283 283 283 292 292 292 292

Coefficients for industry dummy variables not reported. Numbers are standard regression coefficients. Numbers in parentheses are standard errors.
y
p < 0.10.
*
p < 0.05.
**
p < 0.01.
***
p < 0.001.
 S.-H. Lee et al. / Journal of World Business 44 (2009) 1–15 11

Table 4
Results for hypotheses tests

Independent variables Whole-period sample (N = 1445)

Model 1 Model 2 Model 3 Model 4 Model 5

Domestic market position (A) 0.091*** (0.016) 0.073*** (0.016) 0.089*** (0.016) 0.087*** (0.016) 0.065*** (0.017)
R&D investment (B) 0.098*** (0.012) 0.098*** (0.012) 0.050* (0.018) 0.092*** (0.012) 0.051** (0.018)
Advertising investment (C) 0.239*** (0.016) 0.235*** (0.015) 0.237*** (0.016) 0.239*** (0.015) 0.234*** (0.015)
A  post-crisis dummy 0.054** (0.018) 0.082*** (0.018)
B  post-crisis dummy 0.074** (0.023) 0.068** (0.022)
C  post-crisis dummy 0.172*** (0.023) 0.178*** (0.027)
Firm size 0.022 (0.018) 0.022 (0.018) 0.020 (0.018) 0.016 (0.018) 0.019 (0.018)
Firm performance 0.033** (0.010) 0.035*** (0.010) 0.033** (0.010) 0.030** (0.010) 0.033** (0.010)
Foreign exchange rate 0.092*** (0.008) 0.100*** (0.009) 0.093*** (0.008) 0.086*** (0.008) 0.097*** (0.009)
Number of competitors 0.372*** (0.054) 0.354*** (0.061) 0.365*** (0.054) 0.427*** (0.071) 0.414*** (0.053)
Chaebol dummy 0.217*** (0.038) 0.245*** (0.037) 0.215*** (0.037) 0.223*** (0.038) 0.255*** (0.039)
Capital intensity 0.052*** (0.013) 0.052*** (0.014) 0.053*** (0.013) 0.059*** (0.013) 0.058*** (0.013)
Unabsorbed slack 0.015 (0.010) 0.016 (0.010) 0.013 (0.010) 0.008 (0.010) 0.012 (0.010)
Absorbed slack 0.039*** (0.009) 0.039*** (0.009) 0.039*** (0.009) 0.038*** (0.009) 0.038*** (0.008)
Foreign direct investment 0.012 (0.008) 0.011 (0.008) 0.010 (0.007) 0.017* (0.007) 0.007 (0.008)

Chow-test results (x2) – 8.35*** 10.18*** 54.71*** 54.87***

sm 0.654 0.648 0.646 0.650 0.630
se 0.386 0.386 0.386 0.386 0.385
r 0.741 0.738 0.736 0.739 0.728
Wald x2 562.57 573.78 568.83 571.36 595.66
No. of groups 309 309 309 309 309

Coefficients for industry dummy variables are not reported. Numbers are standard regression coefficients. Numbers in parentheses are standard errors.
*
p < 0.05.
**
p < 0.01.
***
p < 0.001.

( p < 0.001), respectively, in Model 2. These results are
consistently obtained in Models 2–5. Hence, our results
provide support for H2a and H2b.
Models 2–5 assume that a structural change occurred
between the pre and post-crisis periods in terms of our
variables of interest (domestic market position, R&D
investment, and advertising investment). To conduct the
Chow test, we included the multiplicative terms between
the variables of interest and the post-crisis dummy variable.
Our results suggest that a structural change exists between
the pre and post-crisis periods in terms of all the variables of
interest. Specifically, the Chow-test results between Model
1 and Model 2 indicate that a structural change exists with
regard to domestic market position in the pre and post-crisis
periods (x2 = 8.35, p < 0.001). Additionally, the coefficient
for the multiplicative term between domestic market
position and the post-crisis dummy variable was estimated
as 0.054 ( p < 0.01). This suggests that the association
between a firm’s domestic market position and its export
intensity becomes more positive following the economic
crisis. These results provide support for H3a.
Similarly, the Chow-test results between Model 1 and
Model 3 indicates that a structural change exists with
regard to R&D investment between the pre and post-crisis
periods (x2 = 10.18, p < 0.001). Additionally, the coefficient
for the multiplicative term between R&D investment and
the post-crisis dummy variable was estimated as 0.074
( p < 0.01). This suggests that the association between a
firm’s R&D investment and its export intensity becomes
more positive in the post-crisis period. Such evidence
suggests support for H4a.
The Chow-test results between Model 1 and Model 4
suggests that a structural change occurred with regard to
advertising investment in the pre and post-crisis periods
(x2 = 54.71, p < 0.001). Additionally, the coefficient for the
multiplicative term between advertising investment and
the post-crisis dummy variable was estimated as 0.172
( p < 0.001). The association between a firm’s advertising
investment and its export intensity becomes more
negative in the post-crisis period. These results provide
support for H4b.
Finally, the results of the joint Chow test based on
Models 1 and 5 confirm the individual Chow-test results
that a structural change occurred between the pre and
post-crisis periods (x2 = 54.87, p < 0.001). Furthermore,
the three multiplicative terms are all significant in Model 5
providing strong support for H3a, H4a and H4b.
6. Discussion
We find that the tendency of domestic leader firms to
have greater export intensity was more pronounced in the
post-crisis than in the pre-crisis period. The Korean
economic crisis served as a wake-up call for domestic
leader firms to increase their export intensity. Consistent
with the boiling frog phenomenon, our results show that
dominant firms were most affected by the unexpected
decrease in domestic market share and thus had a larger
incentive to look beyond their domestic market (Tichy &
Devanna, 1986). In this sense, the Korean crisis was a type
of ‘constructive destruction’ for the firms (Kim, 1998b;
Suhomlinova, 1999).
Unlike the Japanese firms examined by Ito (1997),
dominant firms were leading exporters before the economic
crisis as well as after the economic crisis. One possible
reason is the size of the domestic market. Compared to
12 S.-H. Lee et al. / Journal of World Business 44 (2009) 1–15
Japanese firms, Korean firms may not be able to act
complacently by being dominant firms in the domestic
market because the size of their domestic market is much
smaller than that of Japan. In a comparatively smaller
domestic market, it is likely that firms have to look beyond
the domestic market. For this reason, the more positional
advantages a firm possesses, the more likely that this
dominant firm would have an advantage in exporting.
The relationship between a firm’s R&D investments and
export intensity was positive and significant for the entire
period of our study. This suggests that the substantial
amount of R&D investment and shortened product life
cycle prompted firms to try and recoup their R&D inves-
tments as early as possible. Such pressure necessitates
firms to target their upstream capabilities such as R&D for
the global rather than the local market (Dhanaraj &
Beamish, 2003). In addition, R&D investments can result in
improvements in existing products, reductions in costs or
increases in quality, and ultimately product innovation
(Capon, Farley, Lehmann, & Hulbert, 1992; Hambrick &
MacMillan, 1985). Consequently, R&D investments allow
firms to gain greater competitiveness in the international
market than they would otherwise be able to accomplish.
This is consistent with Henderson and Cockburn’s (1994)
view that research competence is the enduring capability
in highly competitive environments. Our results suggest
that a firm’s R&D investments play a significant role in
enhancing its export intensity (Salomon & Shaver, 2005).
We find that a positive relationship between a firm’s
R&D investment and its export intensity becomes more
manifest in the post-crisis than the pre-crisis period. Our
results suggest that the intensified domestic competitive
environment following the economic crisis induced Korean
firms with greater R&D investments to exploit their
flexible capabilities by increasing their export intensity.
The dramatic currency depreciation following the crisis
increased the value and volume of exports from Korean
firms since it allowed their products to be more price-
competitive in international markets. Not all Korean firms,
however, were able to capitalize on the opportunity
following the crisis. As real options theory suggests, firms
with greater R&D investments had greater flexibility,
which was advantageous for increasing exports in the
post-crisis period. Greater R&D investments tend to
enlarge a firm’s flexibility, which allows the firm to cope
with numerous contingencies associated with dramatic
environmental changes. As a result, the association
between a firm’s upstream capabilities such as R&D and
its export intensity become more positive in the post-crisis
than the pre-crisis period.
With regard to the relationship between a firm’s
advertising investments and export intensity, we find a
negative and significant association in both the pre- and
post-crisis periods. The results suggest that downstream
capabilities, such as advertising, are more effective in
domestic than foreign markets because of the difficulty of
transferring the benefits of downstream capabilities
beyond the home market due to communication and
language barriers (Salomon & Shaver, 2005). For these
reasons, firms that invest heavily in advertising are more
dependent on their domestic market. We found a negative
association between firms’ advertising investments and
export intensity in both the pre-crisis and the post-crisis
periods. Furthermore, such an association becomes more
negative following an economic crisis. As real options
theory suggests, the reduction in the size of the domestic
market following the economic crisis made firms with
greater investments in location-bound inflexible capabil-
ities, such as advertising, more committed to defend their
domestic market, further increasing their reliance on the
home market. These results suggest that advertising
investments prevented some Korean firms from taking
advantage of opportunities arising from the economic
crisis.
Being part of a chaebol group was actually negatively
associated with export performance. One possibility is that
chaebol firms, having more mutual support functions in
their structure, may have been more satisfied with
domestic demand before the crisis and may have been
better able to cope with huge domestic demand decrease
after the crisis providing less need to increase exports. It is
also interesting that foreign direct investment was
negatively associated with exporting before the economic
crisis, but the relationship became positive after the
economic crisis. We suspect that having profit generating
foreign direct investment locations provided a lower
incentive for the Korean firms to focus on exporting before
the crisis. After the crisis however, having foreign direct
investment locations might have enabled Korean firms to
engage in intra-company trade and export to these
locations from Korea (Kim, 1998a).
6.1. Contributions
This study examined the heterogeneity in firms’ export
intensity in the context of an economic crisis. While
previous studies have provided explanations for firms’
export intensity by using the IO and RBV theories, past
research points out that RBV breaks down when drastic
change in the market place makes it harder for firms to
maintain competitive advantage. Consequently, while we
used IO and RBV theories to explain firms’ export levels
during the pre-crisis period, we used the real options
perspective to explain how firms possessed with flexible
capabilities would benefit more from them when the
domestic market abruptly shrinks (Kogut & Kulatilaka,
2001). Based on the real options theory, we also show that
firms with location-bound capabilities such as advertising
can be locked into the domestic market and be less inclined
to increase their level of exports after an economic crisis.
This line of investigation is thus similar to studies which
have emphasized the importance of examining how
beneficial certain capabilities or assets are under different
environment (Bergh, 1995; Haleblian & Finkelstein, 1993;
Hitt, Dacin, Levitas, Arregle, & Borza, 2000; Sundara-
murthy, Mahoney, & Mahoney, 1997).
We contribute to the knowledge about firms’ export
performance by showing that when abrupt environmental
change takes place, the real options theory can better
explain how the firms with such flexibilities are better able
to increase their level of export. Second, in line with past
research (Ito, 1997; Sakakibara & Porter, 2001; Salomon &
 S.-H. Lee et al. / Journal of World Business 44 (2009) 1–15
Shaver, 2005), we specifically examined how domestic
market shrinkage differentially affects firms’ exports, depe-
nding on how much they are equipped with flexibilities.
Our study has important implications for academics
and business practitioners alike. Prior research has found
both positive and negative relationships between a firm’s
domestic market position and its export intensity. Porter
(1990) argued that firms successful in their domestic
market are more likely to be competitive in international
markets, resulting in an increase in exports. On the other
hand, Ito and Pucik (1993) argued that firms with a greater
domestic market position have a tendency to focus
predominately on their home market, which lessens their
export intensity. Our research suggests that any conclu-
sions regarding such relationships must take into con-
sideration the changes in the environmental context that
condition these relationships. The Korean economic crisis
substantially reduced the size of the domestic market and
made it difficult for the government to protect local
industries, thereby creating a more competitive domestic
market. Accordingly, we found the positive relationship
between domestic market position and export intensity
became stronger after the crisis.
Additionally, our study contributes to the development
of the real options theory by showing that the value of
flexibility for a firm’s export intensity depends on the
environmental context. We find that in the pre-crisis
period, firms with greater location-bound inflexible
capabilities, such as advertising, have much more difficulty
in increasing their exports in the post-crisis period. Similar
to the Icarus Paradox that suggests how exceptional
companies bring about their own downfall (Miller, 1992),
Korean firms’ location-bound inflexible advertising cap-
ability in the pre-crisis period led to their inability to take
advantage of the opportunities to increase exports
following the economic crisis. Accordingly, the results of
this study suggest the importance of giving dedicated
attention to the management of a firm’s capabilities within
the environment in which they must function. While firms
need to protect and develop valuable core capabilities, they
must also be careful to not become too dependent on them.
Otherwise this could lead them to become inflexible when
change is most needed. Indeed, changes in the environ-
ment may alter the importance of resources of the firm
(Sedaitis, 1998).
In terms of managerial implications, it is likely that
dominant firms in Korea achieved such a status because
they were more capable. Their more flexible capabilities
not only provided benefit in the domestic market, but they
also extended to export markets. Especially in a relatively
small domestic market, it is important to consider both the
domestic and international market simultaneously. In
addition, to be more effective in penetrating export
markets and cope with a sudden demand decrease in
the domestic market, it is important to invest in non-
location-bound flexible capabilities.
6.2. Limitations and future research directions
Like all research, this study has left some unanswered
questions which suggest avenues for future research. First,
13
we focused on the impact of the Asian economic crisis on
Korean firms because it provided a ‘‘natural setting’’ to test
our hypotheses. Since many emerging economies have
undergone economic crises during the last decade, future
research can be directed at empirically testing our
hypotheses in other countries. Second, our research
examined certain organizational capabilities that have
been shown to be relevant for firms’ export intensity.
Future research should incorporate additional organiza-
tional capabilities.
We also find that the relationship between a firm’s
domestic market position and export intensity was
positive during the entire period of our study. Consistent
with Porter (1990), a firm’s export intensity increases with
greater domestic market position. Our evidence suggests
that Korean market leaders were not content to solely
focus on their domestic market. These findings are in
contrast to those of Ito and Pucik (1993) who found a
negative association between a firm’s domestic market
position and export intensity in Japan. A possible
explanation for this may be related to the substantial
differences in the size and purchasing power of the two
economies. While the Japanese market provides sufficient
demand for Japanese leader firms to focus on their home
market, the smaller Korean market necessitates Korean-
dominant firms to expand outside their local market.
Additionally, the export-oriented polices of the Korean
government provided a stronger incentive for dominant
firms than non-dominant firms to increase their export
intensity (Kim, 1998b). In this sense, it would be
interesting to see if the size of domestic market may
change the incentives of the firms to export.
In addition, while we only examined the effect of
domestic market shrinkage, an economic crisis may
involve more than just domestic market shrinkage. Many
Asian countries such as Korea have the tradition of a very
strong institutional influence on firm behavior (Amsden,
1989; Amsden & Hikino, 1994; Guillen, 2000). For example,
Chung and Beamish (2005) and Lee, Peng, et al. (2008)
found that the Asian economic crisis led to a change of
institutions in Asia, specifically in Korea. In this sense it
would be interesting to see how such institutional change
may affect firms’ export performance.
7. Conclusion
Salomon and Shaver (2005) argue that exporting is
associated with domestic sales. We specifically examined
how sudden domestic market shrinkage can push firms to
increase their level of export to recoup the loss incurred
during such a period, using as a context Korean firms
before and after the Asian economic crisis. We found that
domestic market leaders have a greater incentive to
increase their level of export, because they lost the most
from the domestic market shrinkage. In addition, we also
find support for real options theory: while firms with non-
location-bound flexible capabilities such as R&D benefit
more during the economic crisis period than pre-crisis
period, firms with location-bound capabilities such as
advertising actually make it harder for the firms to increase
their export level.
14 S.-H. Lee et al. / Journal of World Business 44 (2009) 1–15
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