Business group effects on the R&D intensity-internationalization relationship: Empirical evidence from India☆
Introduction
Emerging market firms, particularly those affiliated with business groups, are increasingly using research and development (R&D) as a platform for international expansion. Consider the case of Dr. Reddy’s Laboratories Ltd., a major Indian pharmaceutical company. The firm increased its R&D expenditure over 30-fold in less than a decade and has developed formulations which are now being licensed out to partners from developed countries (Bedi, Bedi, & Sooch, 2013).
R&D-driven internationalization is attractive, because it allows firms to generate rents on a global scale. It is also fraught with challenges, because emerging market firms are latecomers to global competition (Gaur and Delios, 2015, Mathews, 2006) and the output from their research effort is often not of a caliber high enough to provide them with a source of sustainable advantage against capable competitors from developed economies (Guillén and García-Canal, 2009, Li and Kozhikode, 2009, Singh and Gaur, 2013; Yi, Wang, & Kafouros, 2013). Thus, a richer understanding of the mechanisms that help translate emerging market firms’ R&D effort into international expansion is of both theoretical and practitioner interest.
Although the internationalization of emerging market firms has excited a great deal of attention in the past decade (Chittoor, Sarkar, Ray, & Aulakh, 2009; Cuervo-Cazurra, 2012, Gaur and Kumar, 2010, Guillén and García-Canal, 2009, Mathews, 2006, Ramamurti, 2012), there is still paucity of research on the phenomenon of R&D-driven internationalization. This is the gap that our study hopes to fill. By doing so, we respond to calls by Doh (2015) and Hambrick (2007) for phenomenon-based research in international business, where the “principal focus [is on] the ability to accurately and insightfully inform a real-world phenomenon or phenomena” (Doh, 2015, p. 1). More specifically, we turn our attention to the role of business groups in the R&D- driven internationalization of their affiliates.
Business group membership offers a number of advantages. Affiliated firms enjoy the benefits of economies of scale and scope, have access to the resources of the entire network, get preferential treatment from government agencies and domestic financial institutions (Guillén, 2000; Kumar, Gaur, & Pattnaik, 2012; Purkayastha, Manolova, & Edelman, 2012) and thus are able to undertake risky strategic commitments, such as internationalization based on R&D capabilities. However, business group membership does not confer equal benefits to all affiliates. Business groups exhibit substantial heterogeneity in ownership and governance structures (Bertrand, Mehta, & Mullainathan, 2002; George and Kabir, 2012, Singh and Gaur, 2013) and affiliates’ strategic initiatives are shaped to a large degree by their position as a core or a peripheral member of the business group (Ayyagari, Dau, & Spencer, 2015). Hence, the core thesis of our paper is to investigate the heterogeneity within business groups with respect to ownership and governance structures and its effect on the R&D intensity-internationalization relationship for business group affiliates.
To unpack the effects of within-group heterogeneity, we pair the resource-based view of the firm (Penrose, 1956, Penrose, 1959) with agency theory (Fama & Jensen, 1983). Integrative theoretical frameworks are particularly appropriate for the study of business group affiliates, because business groups exhibit complex linkages among resources, institutions, and industries (Gaur, Kumar, & Singh, 2014). In the context of the phenomenon of interest to our study, R&D-driven internationalization, the actions of firm principals (owners) and their first-order agents (boards of directors) have a significant effect on the process of resource deployment for international expansion (Mahoney & Pandian, 1992; Sirmon, Hitt, Ireland, & Gilbert, 2011). This effect is manifested through several interconnected mechanisms. First, ownership structures instigate principal–principal and principal-agent conflicts which affect the efficiency with which resources generated from R&D investment (such as new products or technologies) are deployed for expansion into foreign markets (Duran, Kammerlander, van Essen, & Zellweger, 2016). Second, boards of directors play an important resource-provisioning role, and their ability to provide complementary resources in the form of expertise, experience, and social contacts can support the translation of R&D investment into internationalization (Sirmon and Hitt, 2003, Sirmon et al., 2011). Relatedly, boards of directors fulfill important monitoring functions which can mitigate the threat of resource diversion by controlling (family) owners and opportunistic managers, and thus increase the efficiency of using R&D activity as a platform for internationalization (Chen, Li, Shapiro, & Zhang, 2014).
Our study makes three contributions. First, following previous studies that use a multi-theoretic approach to study business group affiliated firms (Douma, George, & Kabir, 2006; Gaur et al., 2014, Gaur and Delios, 2015), we combine agency theory with the resource-based view of the firm to explain the effects of ownership and governance structures within business groups on the link between research intensity and internationalization. We argue and find that ownership by the family and affiliated firms has a positive moderating impact, while family participation in governance has a negative moderating effect. Second, we extend the “capability development” strand of internationalization research, which rationalizes that emerging market firms internationalize with an asset-augmentation motive (Bonaglia, Goldstein, & Mathews, 2007; Mathews, 2006, Luo and Tung, 2007). We argue and find that when emerging market firms invest in R&D activities, they develop assets that are internationally exploitable. Thus, both asset augmentation and asset exploitation need to be taken into consideration for a proper understanding of their internationalization (Dunning, 2006). Finally, we contribute to the growing literature that examines the effect of business group heterogeneity on affiliates’ strategic conduct and performance (Carney, Gedajlovic, Heugens, Van Essen, & Van Oosterhout, 2011; Gaur and Kumar, 2009, George and Kabir, 2012, Kumar et al., 2012, Lamin, 2013, Lien and Li, 2013, Singh and Gaur, 2013). We extend this literature by unpacking the within-business-group heterogeneity, in our case the heterogeneity in ownership and governance structures.
The next section describes the theoretical underpinnings of the study, followed by a discussion of the empirical approach, results and conclusions.
Section snippets
The R&D intensity—internationalization relationship
The nascent stream of literature that looks at the R&D-driven internationalization of emerging market firms has adopted two principal lenses, an institutional lens, and a capability-development lens. Studies in the institutional tradition suggest that poor institutional safeguards of intellectual property rights make investments in R&D a high risk proposition. As a result, emerging market firms may attempt to leverage R&D benefits quickly by accessing a larger market through
Sample selection
Our sample is drawn from the Prowess database, which is maintained by CMIE (Centre for Monitoring the Indian Economy). We initially extracted data of all firms, both affiliated and unaffiliated, that is provided in Prowess database for the period 2006–2012. Considering firms that were only listed (BSE listing A&B) and dropping firms that have sales of less than Rs 60 million (Berger & Ofek, 1995), and those that do not have founding family’s equity, reduced this number to 2455 firms. We then
Results
Table 1 provides the means, standard deviations, and correlations for all variables.
Table 2 presents the results of the second stage of the 2SLS regressions.8 We used GLS estimations for examining our hypotheses. GLS estimations provide corrections for the presence of autocorrelation and heteroscedasticity in cross-sectional time series data and so are suitable for our analysis (Singh & Gaur, 2013).
To test Hypothesis 1, we
Discussion
Emerging market firms are fast becoming a sizeable and rising feature of global competition (Chittoor et al., 2009). A report by the McKinsey Global Institute suggests that firms based in emerging markets will account for more than 45% of the Fortune Global 500 ranking by 2025, up from 26% in 2013 (McKinsey Global Institute, 2013).12 However, our understanding of these emerging giants, particularly the phenomenon
Limitations and directions for future research
Our study is not without limitations, which need to be borne in mind when interpreting its results. Although the theoretical framework of the study can be applied beyond the Indian context, future researchers may look into other emerging markets dominated by business groups to test the validity of our empirical results. Second, our measure of R&D capabilities as R&D expenditure is somewhat rudimentary. Future studies may incorporate other aspects of R&D capability such as new patents filed or
Conclusions
Limitations notwithstanding, our study contributes to the ongoing conversation on the R&D intensity-internationalization dynamics in emerging markets, using panel data which allows us to track the mechanisms of change over time. Emerging economies represent a potentially rich area for phenomenon-based research wherein a contemporary, real-world phenomenon can be identified, tested and the robustness of theories that were primarily conceptualized for a developed market can be checked in a
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2022, International Business ReviewCitation Excerpt :For example, Yiu et al. (2005, p. 185) argue that “the value-creating potential of a business group is largely dependent on how business groups are able to acquire resources and generate capabilities necessary to prosper.” This is supported by previous studies that have failed to identify a consistent relationship between BG affiliation and firm internationalization, with studies suggesting a positive (Purkayastha, Manolova, & Edelman, 2018; Tajeddin & Carney, 2019), negative (Chakrabarti & Mondal, 2017; Gaur & Delios, 2015) and non-significant relationship (Nam et al., 2018). Building upon the notion that BG network characteristics influence SMEs’ international sales, we suggest that the impact of BG affiliation on SMEs’ international sales may differ depending on whether the SMEs are part of domestic or international BG.
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A previous version of the paper was presented at the 2014 Academy of International Business annual meeting in Vancouver, Canada.