Drawing on Penrose’s theory of the growth of the firm, the international business literature, the literature on the knowledge-based view, organizational learning, and absorptive capacity, this dissertation addresses four research questions: 1) What are the effects of downstream international activities (sales and marketing completed abroad) and upstream international activities (purchasing, production, and R&D completed abroad) on the acquisition of market knowledge and technological knowledge? 2) What is the role of prior knowledge in these relationships? 3) What are the effects of the newly acquired knowledge on different growth outcomes? 4) What is the role of processes of knowledge transformation and exploitation in these relationships?

Addressing these issues has practical relevance for the development of small and medium-sized enterprises (SMEs). On the one hand, international expansion might provide small and medium-sized firms with additional knowledge, enriching their limited resource base. On the other hand, internationalization might spread the limited resource base of SMEs too thin and create internal coordination problems.

Longitudinal survey data from 885 Swedish international SMEs yielded the following results. First, downstream internationalization and upstream internationalization are important sources of new market and technological knowledge for SMEs. Second, while downstream internationalization directly brings new market and technological knowledge, the acquisition of new knowledge from upstream internationalization is enhanced by the firm’s prior endowment of knowledge. Third, knowledge acquired from internationalization contributes to a firm’s growth advantage in international markets and to its further internationalization, and it provides the basis for entrepreneurial actions such as venturing into new markets and reaching new international customers. However, the new knowledge base has no, or very little, effect on SMEs’ growth in domestic markets. Fourth, the relationships between knowledge acquired from internationalization and different growth outcomes are not accentuated by a firm’s knowledge management processes. These processes have only a direct effect on a firm’s growth advantage in international markets, its continued internationalization, and its entrepreneurial growth through the development and commercialization of new products/services in international markets.

Overall, the study suggests that internationalization promotes the acquisition of new market knowledge and new technological knowledge, which in turn contribute to the growth of SMEs, especially in international markets.