Impact of competition from unregistered firms on R&D investment by industrial sectors in emerging economies
Introduction
Emerging economies are low income, rapid-growth countries that primarily use the economic liberalization strategy. They accounted for approximately 34% of the global economy1 (Hoskisson et al., 2000; Hoskisson et al., 2013). Schneider (2002) suggests that 60% of the gross domestic product in emerging economies corresponds to the informal sector. The informal sector (unregistered firms) refers to economic activities in the production and trade of goods and services that are conducted by unregistered firms that operate outside of government regulation and taxation systems. Therefore, unregistered firms avoid the costs associated with regulatory compliance and taxes and thus gain an advantage over formal firms (Darbi et al., 2016; Ketchen et al., 2014). According to the World Bank,2 in all countries around the world, 53.2% of formal firms compete against unregistered firms, and 27.1% identify the practices of their competitors in the informal sector as a major constraint.3 For Latin American and Caribbean countries, 62.0% of formal firms compete against unregistered firms, and 30.6% identify the practices of their competition from unregistered firms as a major constraint. However, the informal sector is an underexplored variable. It has generally become important for the field of strategic management, especially in areas such as dynamic capabilities, absorptive capacity, property rights, innovation, non-market strategies and international management (Darbi et al., 2016; Iriyama et al., 2016; Mccann and Bahl, 2016; McGahan, 2012; Mendi and Costamagna, 2017). Unregistered firms are a new type of competitor that possesses cost advantages and higher flexibility regarding products, processes, and societal acceptance (Williams and Martinez-Perez, 2014). Consequently, unregistered firms will have a substantial effect on the strategic behaviors of formal firms (Darbi et al., 2016; Mendi and Costamagna, 2017).
The preliminary research by Mendi and Costamagna (2017) found that competition from unregistered firms has a negative effect on innovation outcomes (processes and products) in formal manufacturing firms from Latin American and Africa. The authors noted that the presence of competition from unregistered firms affects the innovation strategy of formal firms since they observe a weakening of returns from innovation. Thus, formal firms are discouraged from introducing new products or processes. However, Mccann and Bahl (2016) concluded that competition from unregistered firms has a positive effect on new product development (NPD) in manufacturing firms from Eastern Europe and Central Asia. Therefore, we argue that much of this contradiction results from two contextual factors (industry sectors and institutional effects) that have not been taken into account to analyze the variation of the effect of unregistered firms on the R&D investments of formal firms. First, the previous research did not consider important contextual variables in organizational behavior (Johns, 2006), such as the different industrial sectors where formal firms developed (Bogliacino and Pianta, 2010; Pavitt, 1984). Second, the previous research did not consider the institutional factors such as the Intellectual Property Right Index (IPRI) (Zhao, 2006). If these two variables are considered, the effect of competition from unregistered firms on formal firms may deliver results that differ those previously found. Our study extends well beyond the previous research by considering the existing diversity across the manufacturing sectors. We move away from the idea that the competition from unregistered firms has the same impact across industrial sectors on innovation performance measurement as NPD or R&D.
Against this background, we want to address the following research questions. Do formal manufacturing firms that confront competition from unregistered firms invest differently in R&D than formal firms that do not? If the answer is yes, are formal firms' R&D investments affected by the industrial sector (i.e., science-based, supplier-dominated, scale-intensive, or specialized-suppliers) or the level of property rights? How do formal firms adapt to this competition from unregistered firms?
We examined the variability of the effect of competition from unregistered firms on the R&D investments by formal firms according to the industrial sectors and property rights in a sample of emerging Latin America economies (Hoskisson et al., 2013). We analyzed R&D investments since it is a highly significant input in the innovation process and has positive effects on innovation performance and on the propensity to innovate (Geldes et al., 2017; Helfat, 1997). Additionally, R&D explains a substantial part of productivity growth in emerging economies and the increasing social returns from employment, consumer confidence, and reducing poverty (Bravo-Ortega and García Marín, 2011). We derive our understanding from organizational ambidexterity to explain whether formal firms increase, decrease or do not modify R&D investments to adapt to the competition from unregistered firms (Darbi et al., 2016). Furthermore, this study contributes to the research on R&D investment by identifying the effect of a new variable (i.e., competition from unregistered firms) on formal firms' R&D investments using Pavitt Taxonomy industrial sectors and levels of property rights.
Based on propensity score matching through quasi-experimentation (Lee et al., 2017), we observed that a formal supplier-dominated industry that competes with unregistered firms invests less in R&D. However, other industrial sectors (science-based, scale intensive, and specialized suppliers) do not reduce their R&D investments. Furthermore, we found that the IPRI functions as a barrier for competition from unregistered firms. Formal firms that compete with unregistered firms invest less in R&D in a low-level IPRI environment. However, in a high-level IPRI environment, formal firms that compete with unregistered firms do not change their R&D investment decisions.
The remainder of this paper is organized as follows. In the following section, we present the theoretical framework and hypotheses. Following that, we outline the methodology of the research. Subsequently, we report the results, which are followed by a discussion. This paper ends by presenting the study's conclusions, implications, and ideas for future research.
Section snippets
Competitive dynamics and R&D investment in emerging markets
The effect of unregistered firms is a new variable that alters the competitive dynamics of the industry (Darbi et al., 2016; Vassolo et al., 2011). In this sense, formal firms decide whether to pay attention to the unregistered firms, and this influences the R&D investments of formal firms in emerging markets (Darbi et al., 2016; Garg et al., 2003; Ocasio, 1997; Su et al., 2010). The “parasite view” indicates that formal and unregistered firms compete when the firms have similar products and
Sample
To test the hypotheses, we utilized the 2010 World Bank Enterprise Survey. This survey provides the world's most comprehensive data on firm-level business environments in developing economies using a representative sample of the private sector (Distinguin et al., 2016; Mccann and Bahl, 2016). The data provide the possibility of studying formal strategic innovation behaviors in the presence of unregistered firms. The Enterprise Survey data have been featured in prior published studies regarding
Results
Table 3 shows the summary descriptive statistics and pairwise correlations of the variables used in the probit analysis for the firm's intensity of competition from unregistered firms in which we observe low or non-existent correlations between the independent variables. For each variable, we reported its average, standard deviation and minimum and maximum values. On average, firms in Latin America have smaller R&D investment with a medium capacity. Most firms do not have a quality
Conclusions, implications and future research
We extended the research of the determinants to R&D investment (Howells, 2008) in the context of emerging economies in Latin America, where on average there is a high degree of informality and a low institutional level (Vassolo et al., 2011). We found that competition from the informal sector (unregistered firms) is a new determinant that can influence R&D, depending the context of the firm (Darbi et al., 2016).
The effect of unregistered firms on R&D investments from manufacturing firms depends
Jorge A. Heredia Pérez is Researcher and Professor at Universidad del Pacífico (Peru). He holds a Ph.D. and MSc from Universidad Adolfo Ibañez (Chile). His research of interests includes competitive strategy, international management, innovation, proximity and inter-organizational cooperation, especially in emerging markets and China. He has published in a range of academic journals such Technovation, Journal of Business and Industrial Marketing, among others. Professor Jorge A. Heredia Pérez
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Jorge A. Heredia Pérez is Researcher and Professor at Universidad del Pacífico (Peru). He holds a Ph.D. and MSc from Universidad Adolfo Ibañez (Chile). His research of interests includes competitive strategy, international management, innovation, proximity and inter-organizational cooperation, especially in emerging markets and China. He has published in a range of academic journals such Technovation, Journal of Business and Industrial Marketing, among others. Professor Jorge A. Heredia Pérez is a member of the Academy of Management (AOM) and Strategic Management Society (SMS).
Universidad del Pacífico.
Email: [email protected]
Martin Kunc is Visiting professor for the MBA program of Universidad Santa Maria (USM), Chile. He has obtained a PhD from London Business School and has interests in strategic decision making under the resource-based view of the firm. He has papers in different journals such as Strategic Management Journal, Management Decision, Technovation and other journals in areas such as innovation, performance measurement and managerial cognition. His forthcoming book evaluates the use of strategic management concepts and analytics.
Email: [email protected]
Cristian Geldes is Assistant Professor at Faculty of Economy and Business of Universidad Alberto Hurtado (Chile). He holds a PhD and MSc from Universidad Adolfo Ibañez (Chile). His research of interests include innovation, proximity and inter-organizational cooperation, especially in emerging markets. He has published in a range of academic journals such Technovation, Industrial Marketing Management, Journal of Business Research, among others.
Faculty of Economy and Business.
Universidad Alberto Hurtado.
Erasmo Escala 1835.
Santiago, Chile.
+562 28897366
Alejandro Flores is Principal Professor at Universidad del Pacífico (Perú) and member of the research group of strategy innovation and competitiveness. He also is the Chief of the Academic Department of Business Administration. His interest research areas are Corporate Strategy, Innovation, Merge and Acquisition, Emerging Economy and Informal Competition. Currently, he researches about the corporate strategy of Chinese enterprises in Latam.
Susanne Durst is Associate Professor (Reader) at the School of Business at University of Skövde (Sweden) and Professor of Business Administration at Universidad del Pacífico (Peru). She is also the leader of the research group knowledge and innovation management (KIM) at the School of Business at University of Skövde. Her research interests include small business management, SME business transfers, knowledge management, knowledge risk management and corporate governance. She has been conducting several national and international research projects on company succession, corporate governance, and knowledge management in SMEs and public organizations. Her work has been recognized through different awards, including the Transeo Academic Award in 2012 and has been published in international peer-reviewed journals. Before joining academia, she worked in different positions with private enterprises of different industries and size.