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Governance Structure, Innovation and Internationalization: Evidence From India
INTMAN-00486; No of Pages 10 Journal of International Management xxx (2013) xxx–xxx
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Journal of International Management
Governance Structure, Innovation and Internationalization: Evidence From India Deeksha A. Singh a, 1, Ajai S. Gaur b,⁎ a b
School of Business, Rutgers University - Camden, Camden, NJ 08102, United States Department of Management and Global Business, Rutgers Business School, Newark and New Brunswick, 1 Washington Park, Newark, NJ 07102, United States
a r t i c l e
i n f o
Article history: Received 2 March 2013 Accepted 2 March 2013 Available online xxxx Keywords: Family ownership Institutional ownership Business groups R&D intensity Internationalization
a b s t r a c t We examine the impact of firm-level governance structure on the innovation and internationalization strategies of emerging market firms. We propose that in the case of emerging market firms, governance is a response to the prevailing institutional environment and affects the innovation and internationalization strategies of firms. Based on a longitudinal sample of 16,337 firm-year observations of Indian listed firms over a year time period from 2002 to 2009, we find a positive effect of family ownership and group affiliation on R&D intensity and new foreign investments. Institutional ownership also positively affects new foreign investments, but has no effect on R&D intensity. Further, we find that R&D intensity interacts with family ownership, institutional ownership and group affiliation in affecting new foreign investments. © 2013 Elsevier Inc. All rights reserved.
1. Introduction It is widely recognized that certain governance arrangements offer competitive advantages to emerging market (EM) firms that adopt them. Several theoretical arguments have been proposed to explain the superiority of certain governance forms over others in emerging markets (Carney, 2005). For example, it has been argued that emerging markets have institutional voids, which are exploited by business groups to achieve competitive advantage as compared to stand alone firms (Khanna and Palepu, 2000). The focus of much of the extant literature on emerging market firms is in identifying the sources of performance differential among firms. However, it is well established in strategy literature that governance affects firm performance by influencing the strategic choices that firms make (Hoskisson et al., 2002). There is limited research examining how governance arrangements in EM firms affect their strategic choices. This study is an attempt to address the above noted oversight. We focus on one important aspect of firm governance in EM firms — ownership structure, and how the same affects competitiveness of EM firms. We argue that innovation capability and international presence are not just strategic choices that firms make, but also important aspects of their overall competitiveness, at least in the case of EM firms. Recent developments in agency theory suggest that different owners have different motivations and preferences with respect to important strategic decisions made by the firms (Brickley et al., 1988). As a result, the decisions to innovate and internationalize are likely to be dependent on the governance structure of the firm in question. Consequently, we examine the linkages between governance structure and innovation capability as well as internationalization of EM firms. Innovation and internationalization are important strategic choices that firms make. The importance of innovation for long-run competitiveness of firms is well established. Yet, EM firms did not focus much on innovation in the past as limited competition in domestic markets meant that firms could survive and prosper by selling copycat products (Gaur and Kumar,
⁎ Corresponding author. Tel.: +1 732 646 5094; fax: +1 973 353 1664. E-mail addresses: [email protected] (D.A. Singh), [email protected] (A.S. Gaur). 1 Tel.: +1 732 253 0490. 1075-4253/$ – see front matter © 2013 Elsevier Inc. All rights reserved. http://dx.doi.org/10.1016/j.intman.2013.03.006
Please cite this article as: Singh, D.A., Gaur, A.S., Governance Structure, Innovation and Internationalization: Evidence From India, Journal of International Management (2013), http://dx.doi.org/10.1016/j.intman.2013.03.006
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2010). A case in point is the pharmaceutical firms in India which benefitted a great deal due to weaker patent regulations in the last decade of the 20th century. Thus, there was neither an incentive, nor significant benefits of investing in research and development (R&D) and developing innovation capacity. In recent years, the level of competition, from domestic as well as foreign firms has substantially increased as a result of globalization in the external front and liberalization of internal markets. Extant literature suggests that increased competition makes it imperative for firms to innovate in order to remain competitive (Aghion and Howitt, 1992). For EM firms, innovation capability has become very important in the changed institutional environment (Awate et al., 2012; Kumaraswamy et al., 2012). It is thus important, both theoretically and practically, to examine how EM firms develop innovation capability. Internationalization, similar to innovation, was also long ignored by EM firms. There were several reasons why EM firms were not very active in the international market place. For example, in some countries, government policies did not encourage integration with the global economy, which limited the extent of international involvement of EM firms. EM firms also did not have the resources and capabilities needed to compete effectively in the global market place (Luo and Tung, 2007). These conditions have drastically changed in the past two decades, resulting in large scale foreign expansion of firms from many EMs (Ramamurti, 2009). While, scholars have investigated the performance consequences of such internationalization by EM firms, we do not have adequate understanding of what drives EM firms to internationalize (Gaur and Kumar, 2010). In this paper, we develop theory to link governance structure to the innovation capability and internationalization of EM firms. We test our model on a longitudinal sample of publically listed firms in India from 2000 to 2009. Our findings suggest a positive effect of family ownership and group affiliation on R&D intensity and new foreign investments. Institutional ownership also positively affects new foreign investments, but has no effect on R&D intensity. Further, we find that R&D intensity positively interacts with family ownership, institutional ownership and group affiliation in affecting new foreign investments.
2. Theory and hypotheses 2.1. Background Strategic decisions, such as investments in new R&D projects or new geographic markets, have long term consequences for organizational survival and success. One of the fundamental issues in the management literature is to have the mechanisms to make sure that managers take these strategic decisions in the best interests of the owners. Governance structure of a firm is an importance mechanism to ensure that managers are working in the best interests of the owners. There are two issues about the role of different governance mechanisms that require a closer scrutiny. First, the performance consequences of internationalization are not consistent across different contexts. Extant literature suggests that developed market firms experience negative performance effect at the low levels of international diversification, which turns positive at the moderate level and again negative at the very high levels of international diversification (Contractor et al., 2003). In the case of emerging market firms, Gaur and Kumar (2009) find that the effect of internationalization on performance remains positive at low as well as high levels of internationalization. Given that the performance consequences of growth strategies such as international expansion are context dependent (Meyer et al., 2011), we need to reassess the role of governance mechanisms in affecting the growth strategies. With respect to R&D strategies, again there is no clear evidence on how these affect profitability of firms in emerging markets, particularly as R&D investments have very long payoffs. Second, much of the extant literature assumes that there is a divergence in the interests of the managers and the owners, and therefore, owners need governance mechanisms to make sure that managers pursue the interests of the owners and not their own interests (Daily et al., 2003). However, in certain contexts and situations, the interests of owners and managers may not be divergent (Carney, 2005; Zahra, 2003). For example, Carney (2005) argues that in firms with high family ownership, there is minimal need to monitor the managers as the owners are themselves engaged in the management of the firm. Such firms have relatively reduced incidence of principal–agent conflict. The present study is an attempt to redress the above noted gaps. Emerging economy firms such as those from India have traditionally not relied much on innovation and internationalization. This has been a consequence of several factors. India has been a highly regulated economy until 1991. There was minimal competition as government allocated licenses about what and how much to produce and sell (Kedia et al., 2006). Consequently, firms had limited incentive to innovate. Regulated environment also made it difficult for firms to internationalize. It is well established that strength in the home country is one of the main sources of competitive advantage in foreign markets. Since Indian firms operated in a closed-regulated environment, they hardly had any home country advantage that they could exploit in foreign countries. In 1991, India faced a severe fiscal crisis that prompted it to undertake major economic reforms which paved the way for deregulation and privatization. The deregulation and privatization lead to increased competition, not only from other domestic players but also foreign firms. In order to remain competitive firms were forced to invest in R&D. The changes in the institutional environments also encouraged firms to undertake international investments for multiple reasons. These include achieving scale economies by expanding markets internationally, resource acquisition, acquiring legitimacy in domestic as well as foreign markets (Deeds et al., 2004), as well as attempting to escape from stifling regulatory constraints at home (Luo and Tung, 2007). Given that the R&D investments and large scale internationalization are relatively recent phenomena for EM firms (Kumaraswamy et al., 2012), it is important to examine the role of governance structure in these strategic choices (Lee and O'Neill, 2003; Zahra, 2003). Please cite this article as: Singh, D.A., Gaur, A.S., Governance Structure, Innovation and Internationalization: Evidence From India, Journal of International Management (2013), http://dx.doi.org/10.1016/j.intman.2013.03.006
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2.2. Ownership structure and innovation Owners perform two main functions — resource allocation and monitoring. Owners make a decision about the investment of the residual income. There are several investment options at any given point in time. Owners need to assess the return potential of different investment strategies and allocate resources accordingly. Owners also need to monitor the agents who implement owners' decisions, to make sure the agents do not pursue their own interests and the investments perform as expected. Investments in innovation projects are inherently risky for several reasons. First, they require huge investments in the form of sunk cost and the outcome of these investments is very uncertain as innovation activities have a high likelihood of failure (Mudambi and Swift, forthcoming). Even when the innovation results in a favorable outcome, the time horizon for returns to materialize is very long (Lee and O'Neill, 2003). As a result of the longer time horizon for returns, the innovation itself may become obsolete from commercial point of view. Given these risks, it is natural for different owners to get involved with the decisions related to innovation investments. We argue that concentrated ownership in the hand of a family results in firms making greater investments in innovation activities. There are several factors that encourage family firms to invest in R&D. Scholars have argued that family firms are associated with a high level of altruism (Kerr et al., 1960). Altruism refers to a trait that links one's personal well-being to the well-being of others (Bergstrom, 1995). Altruistic behavior helps in strengthening family bonds (Simon, 1993). In the case of family firms, the strong bonding between family members fosters loyalty towards the leadership and a commitment to work for the long term survival and growth of the organization (Miller and Le Breton-Miller, 2005; Ward, 1987). Given that R&D investments are essential for developing competitive advantage in the long-run, family firms are more likely to make such investments in spite of the associate risks (Schulze et al., 2001). Family involvement also lends three distinct advantages to family firms — parsimony, personalism, and particularism (Carney, 2005). Parsimony refers to careful resource conservation which family controlled firms pursue in order to preserve family wealth (Durand and Vargas, 2003). Personalism refers to the concentration of organizational authority in one person, the owner-manager. Personalism reduces the bureaucratic controls under which the managers operate, making it possible for them to employ strategies and solutions that reflect the vision of the owner-manager (Chua et al., 1999). Particularism refers to the owner-manager's ability to enforce decision rules that may be driven by non-economic considerations (Carney, 2005). Carney (2005) argues that family-based governance lends distinct competitive advantage due to these three characteristics of family firm, and helps them take decisions that are good in the long-run. As argued earlier, R&D investments have a longer time horizon. As a result, managers, who often face pressure to show profitability in the short-run, are likely to shirk from making investments that generate returns in the long-run, even though such investments may be in the best interests of the firms and owners. This conflict between owners and managers is accentuated in the case of publicly listed firms due to the pressure from stock markets (Gerlach, 1992). However, in the case of family firms in emerging economies, family members also serve as managers and directly control the strategic affairs. This eliminates the traditional agency conflict between owners and managers (Carney, 2005; Zahra, 2003). As the owners get involved in decision making, even professional managers find it easier to take risky investment decisions. Moreover, family members and professional managers working in family firms are more likely to be good stewards of resources than greedy agents, as their future is often linked to the growth and success of their firms (Miller and Le Breton-Miller, 2005). As a result they are likely to do a very thorough and careful analysis of the R&D investment decisions, which enhances the success of, and subsequent investment in R&D activities. There is some evidence about the positive effect of family and clan influence on innovation strategies. Miller and Le Breton-Miller (2005) argued that family firms are more likely to invest in R&D for long-run survival and success. Sirmon and Hitt (2003) argued that family firms with a longer time horizon are more likely to pursue innovation. Minetti et al. (2011) also found that family involvement was positively associated with innovation in the case of Italian firms. Lorenzen and Mudambi (forthcoming) show the positive influence of family-based clans on innovation in the filmed entertainment cluster of Bollywood in India. Consistent with these, we propose a positive effect of family ownership on R&D investment in the case of emerging market firms. H1a. Family ownership is positively related to R&D investments. Institutional owners also affect a firm's innovation strategies (Hoskisson et al., 2002; Kochhar and David, 1996). There are arguments, both in support of and against the positive influence of institutional owners on R&D investments. Scholars arguing for a negative effect of institutional owners suggest that institutional owners are apprehensive about short-term negative earnings (Graves and Waddock, 1990). This creates disincentives for managers to make R&D investments that have high risks and a long payoff period. Scholars arguing for the positive effect of institutional owners suggest that institutional owners keep a diversified portfolio and are more interested in firms in which managers pursue focused strategies rather than diversification (Hoskisson et al., 2002). Perusal of focused strategies in the long-run is possible if firms invest in innovation activities that differentiate them from others. Thus, institutional investors indirectly pressurize firms to pursue innovation strategies. At the same time, not all institutional investors have a short-term horizon (Brickley et al., 1988). Hoskisson et al. (2002) argued that there are several groups of institutional investors, such as pension funds, which have rather long-term horizon, and invest in firms that have potential to remain profitable in the long-run. Gilson and Kraakman (1991) reported that US pension funds remained invested in the same firm for as long as a decade. 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We argue that in the case of emerging economies, the positive effect of institutional investors on R&D investments is likely to be more pronounced. First, managers in emerging economy firms do not face a very high level of pressure to generate positive earnings in the short-run (Singh, 2012). The stock markets in emerging markets are not highly developed and firms rely a great deal on alternate sources of financing, including internal surplus cash, and loans from other firms. At the same time, the market intermediaries to analyze a firm's strategies and the reasons for poor stock market performance are not well developed. Consequently, managers are somewhat protected against criticism if they do not perform well in the short-run. Aghion et al. (2008) argue that institutional investors also help in alleviating managers' concerns about short term performance and thus incentivize them to invest in R&D projects. At the same time, institutional investors in emerging markets have rather long time horizon (Choi et al., 2011). Many of the institutional investors were previously owned by the government, which invested in certain firms for non-economic reasons. Even with privatization, these investors continue to operate under government influence, which makes it difficult for them to exit a firm. The investment options for institutional investors are also quite limited due to a limited number of well managed firms. Thus, if they find a firm making investments for the long-term, they are more likely to remain invested than quit. As a net result, we expect institutional investors to have a positive influence on R&D investments. H1b. Institutional ownership is positively related to R&D investments.
2.3. Business group affiliation and innovation Business group affiliation is an important aspect of firm governance in emerging markets. Khanna and Rivkin (2001) define a business group as a set of legally independent entities, which share several formal and informal linkages and take coordinated actions in multiple product and/or geographic markets. The types of inter-linkages that group affiliated firms share include social ties in the form of family, caste, religion, language, ethnicity and region (Encarnation, 1989; Lorenzen and Mudambi, forthcoming), as well as organizational ties such as presence of common members on the boards, buyer–supplier relationships, and financial relationships (Kedia et al., 2006). In the case of India, business groups present a quasi-governance arrangement, in the sense that even though different affiliated firms are legally separate entities, they are under a common, informal administrative control (Kedia et al., 2006). Often these groups are also under the control of a family, even though not all affiliated firms in a group may have the same level of family ownership. These business groups operate somewhat similar to large, diversified conglomerates, where each division has to strive for the attention of the corporate office. There is significant sharing of resources across group affiliated firms, including sharing of human resources. The managing director of one affiliated company may serve as the board chairman of another affiliated company, and many board members may be common, which makes it easy to take coordinated action. The above characteristics of a business group make it easy for the affiliated firms to derive greater benefits from innovation than their stand-alone counter parts. For example, one of the business groups in India, the Tata group, recently produced the world's cheapest car at about USD 2000. The production of this product needed innovations not only from the automobile firm, but also from the steel firm, the software firm and many other sister firms of the Tata group. Given that the benefits of innovation are shared across the group, there is greater incentive to invest in R&D. Furthermore, the firms of a business group that contribute to innovation, gain in prestige and importance within the business group. This results in a healthy competition within a group to engage in innovative activities. Finally, innovation requires substantial resources. It is not uncommon for business groups to subsidize the long-term investments of certain firms in a group. Business group affiliated firms find it easier to access different types of resources, including the financial resources than stand-alone firms. Thus, group affiliated firms not only have greater incentive to invest in R&D, but also find it easier to do so. Accordingly, we hypothesize: H2. Business group affiliation is positively related to R&D investments.
2.4. Ownership structure and internationalization The ownership structure of a firm significantly influences the international diversification decision that firms make (Zahra, 2003). Internationalization is a risky growth strategy which requires substantial resource commitments during the early stages of foreign expansion (Gaur and Kumar, 2010). Scholars have argued that internationalization depresses firm performance in the early stages, and firms start reaping the benefits from internationalization only after they reach a threshold in their internationalization trajectory (Contractor et al., 2003). Agency theory suggests that managers would want to pursue growth strategies in order to increase their job security, on-job consumption and compensations. The owners, therefore, need to monitor the managers to make sure that managers do not excessively pursue the risky strategies. However, involvement of family members in the case of emerging markets minimizes the traditional agency problems (Carney, 2005; Zahra, 2003). In such firms, managers' identities are often linked to the firms that they serve (Gomez-Mejia et al., 2003). As a result, managers become stewards who work for the long term interests of the firm. Given the risks associated with pursuing internationalization strategies, managers in family firms are not likely to pursue these strategies unless managers have the support of the owners, particularly when owners are involved in the decision making. Please cite this article as: Singh, D.A., Gaur, A.S., Governance Structure, Innovation and Internationalization: Evidence From India, Journal of International Management (2013), http://dx.doi.org/10.1016/j.intman.2013.03.006
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Owners on the other hand, have altruistic motives in deciding which strategies to pursue (Berrone et al., 2010; Schulze et al., 2001). Altruism in the context of a family firm means that if a particular strategy is important and beneficial in the long run and increases the employment potential as well as reputation of the family members, then owners would want to pursue it even though there may be substantial risks involved (Schulze et al., 2001; Zahra, 2003). The support of owners may lengthen the time horizon for payoffs (Miller and Le Breton-Miller, 2005; Zahra, 2003), making it possible for the managers to assume greater risks. In spite of the risks involved, international expansion could be a profitable strategy for emerging market firms. Extant literature on internationalization of emerging market firms suggests that firms often want to expand in foreign markets to avoid the stifling competition in the domestic markets and seek new markets for their tried and tested products (Gaur and Kumar, 2010; Luo and Tung, 2007). When operating in the domestic markets, firms face competition not only from domestic firms but also from foreign firms that have entered emerging market in recent years. With the trade and economic liberalization, it has become a lot easier for foreign multinationals to operate in the emerging markets. While there is debate about the positive and negative spillover effects of foreign firms on local firms, there is evidence of some degree of crowding out of the local firms as a result of competition from the foreign firms. Even without the competition from the foreign firms, domestic competitors are very similar in profile to each other and have somewhat similar resources and capabilities. This makes it very difficult for firms to differentiate with each other in markets where most local firms compete on commodity type of products (Witt and Lewin, 2007). Faced with stiff competition in the local markets, firms enter foreign markets for both exploitation and exploration purposes (Deeds et al., 2004). Since the profile of competitors in foreign markets is quite different, firms can exploit their core competence in producing price sensitive products (Kapur and Ramamurti, 2001). The success of Chinese manufacturing firms and Indian software and pharmaceutical firms in foreign markets underscores this point (Gaur and Kumar, 2010). Foreign markets also provide opportunities for these firms to learn and explore new products and technologies, which they can then use in domestic markets. It is easier for firms with family ownership as well as institutional ownership to make a decision to internationalize than firms without family involvement (Zahra, 2003). An important aspect of altruism in family firms is that preserving the family wealth and increasing it for the next generations becomes the guiding principal in running the business (Schulze et al., 2001). Given that internationalization has benefits in the long run, family firms are more likely to take the risks for long-term benefits. Internationalization also brings short-run benefits such as the reputation effects. In the case of emerging markets such as India, international expansion is viewed as reputation enhancing. There is some evidence to this effect in the extant literature. Zahra (2003), in his analysis of US based family firms found that family ownership was positively related to the degree of internationalization. Similar to family owners, presence of institutional owners also encourages international expansion. Institutional owners generally have a preference for firms which are more visible in the global market place. Additionally, institutional owners, through their presence in company boards, are often actively involved in the decision making, critically analyzing different investment options and keeping a watch over managerial actions. Such involvement of institutional owners also minimizes agency problems as discussed in the case of family owners, and makes it easier for managers to take the decision to internationalize. Based on the empirical findings and the arguments presented above, we propose the following hypotheses: H3a. Family ownership is positively related to new foreign investments. H3b. Institutional ownership is positively related to new foreign investments.
2.5. Group affiliation and internationalization The choice of international diversification is closely related to the firm's ability to compete in the international markets. Group affiliation confers several benefits for the affiliated firms, when they decide to increase their level of international diversification. As discussed earlier, the presence of business groups in many emerging economies can be attributed to the inefficient institutional environment in these economies. In the past, many of these firms were able to generate monopoly rents in their domestic markets by manipulating the inefficiencies of the institutional environment (Kedia et al., 2006). Thus group affiliated firms enjoyed benefits, primarily due to the weak institutional environments in which the groups operated (Khanna and Palepu, 2000). Over time, business groups developed certain capabilities and built resources (Kedia et al., 2006). The preferential access to cheaper capital, local resources, and the internal labor markets help a group affiliated firm in its internationalization efforts. Emerging markets are also characterized with greater level of risk due to uncertain political and economic conditions. Affiliation to a business group helps deal with the environmental uncertainties as group affiliated firms can control different parts of the value chain (Gaur and Kumar, 2009). Even if the unaffiliated firms may have access to similar resources, the positive effects get magnified in case of groups because of the group-wide sharing of resources and capabilities (Khanna and Rivkin, 2001). These factors help group affiliated firms to develop a competitive advantage against the unaffiliated firms. Even when the institutional environment improves, and institutional voids reduce, group affiliated firms may find themselves to be more competitive than the unaffiliated ones due to the positive spillovers of the past and the associated path dependency. The superior Please cite this article as: Singh, D.A., Gaur, A.S., Governance Structure, Innovation and Internationalization: Evidence From India, Journal of International Management (2013), http://dx.doi.org/10.1016/j.intman.2013.03.006
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competitive advantage in the domestic market helps the group affiliated firms in increasing their level of international diversification (Gaur and Kumar, 2010). Accordingly, we hypothesize: H4. Business group affiliation is positively related to new foreign investments.
2.6. The joint effect of innovation and governance structure Innovation helps in internationalization. Extant literature suggests that innovation capabilities help firms sustain competitive advantage in foreign markets (Anand and Kogut, 1997; Singh, 2009). Investments in R&D help translate tangible and intangible resources into innovative products, which in turn lead to sustainable competitive advantage (Buckley and Casson, 1976; Morck and Yeung, 1991). While emerging economy firms are relatively weaker in terms of technological capabilities as compared to developed economy firms, those that do have some technological capabilities find it easier to internationalize (Filatotchev et al., 2009; Kumar et al., 2012). Young et al. (1996) found that Chinese state-owned enterprises which had innovative capabilities, found it easier to internationalize. In fact, some of the innovation that emerging market firms pursue is specifically targeted at improving the international competitiveness of these firms (Kuemmerle, 1999). Given that the baseline effect of innovation on internationalization is well established in literature, we focus on how innovation and governance structure interact with each other in affecting internationalization. We argue that when a firm has a favorable governance structure for international expansion, the positive effect of innovation on internationalization gets augmented. As we argued before, both family owners and institutional owners have a positive effect on firm internationalization. Both these sets of owners will be more inclined to encourage managers to internationalize if they anticipate success from internationalization activities. A high level of R&D intensity will provide assurance to the owners that internationalization is likely to be successful. On the other hand, if managers do not have the support of owners, they may shirk and may be reluctant to pursue internationalization even if their firms have the needed capabilities. Accordingly, we propose: H5a. Family ownership positively moderates the relationship between R&D investment and new foreign investments. H5b. Institutional ownership positively moderates the relationship between R&D investment and new foreign investments. Similar to the ownership structure, business group affiliation also augments the positive effects of R&D investments on internationalization. There are several mechanisms through which the effect of technological resources gets augmented. The R&D done in an individual firm is often complimentary to what is done in another affiliated firm. An individual firm may access the technology residing in the group in order to enhance its own technological capability and compete in technologically advanced foreign markets through FDI. Therefore, we expect that the impact of R&D investments on internationalization will receive an impetus when combined with institutional resources such as being affiliated to a business group. H6. Business group affiliation positively moderates the relationship between R&D investment and new foreign investments.
3. Methods 3.1. Sample The sample of this study comprises all the publicly listed firms that have provided details on their board composition to the Bombay Stock Exchange (BSE), the leading exchange in India from 2000 to 2009. As of April 30, 2011, there were a total of 4946 listed firms in the BSE. We obtained firm specific details including ownership structure and international expansion from the Prowess database of the Center for Monitoring the Indian Economy (CMIE), which has detailed, longitudinal information on about 20,000 Indian firms. After removing the firms that have missing data, and lagging the explanatory variables by one year, and removing the outliers, we are left with an unbalanced panel of 16,337 firm-year observations over eight years from 2002 to 2009. 3.2. Variables 3.2.1. Dependent variables R&D investments and new foreign investments in a given year are two dependent variables in this study. The information on both these variables comes from the Prowess database. Consistent with the extant literature, we measure R&D investments as an intensity measure, by taking a ratio of total R&D expenses over total sales. New foreign investment is a logarithmic transformation on the total value of foreign investments in a given year. 3.2.2. Explanatory variables Family ownership, institutional ownership, and business group affiliation are the key explanatory variables in the regression models predicting R&D intensity. Institutional owners include both domestic and foreign institutional owners and include such entities as pension funds, mutual funds and banks. Both the ownership variables are continuous varying from zero to 100%. We took a natural logarithm of the ownership variables to normalize the distributions. In the regression models predicting new Please cite this article as: Singh, D.A., Gaur, A.S., Governance Structure, Innovation and Internationalization: Evidence From India, Journal of International Management (2013), http://dx.doi.org/10.1016/j.intman.2013.03.006
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international investment, R&D intensity also becomes a predictor variable. We measure business group affiliation by an indicator variable which takes a value of one if a firm belongs to a business group and zero otherwise. In the regression models, we lag the explanatory variables by one year. 3.2.3. Control variables We controlled for firm size, size of the board of directors, financial performance and industry effects. We measure firm size by a natural logarithm of total sales. Financial performance is measured by return on assets (ROA) in the previous year. Board size is a natural logarithm of total number of board members. Finally, we controlled for industry effects using eight indicator variables to represent nine primary industries to which the firms in our sample belong. 3.3. Analytic procedure We used random effects GLS estimation in the models predicting R&D investments as well as new foreign investments. We preferred a GLS regression over pooled OLS regression due to the important assumptions of homoskedasticity and an absence of serial correlation in pooled OLS. Pooled OLS requires the errors in each time period to be uncorrelated with the explanatory variables in the same time period, for the estimator to be consistent and unbiased (Wooldridge, 2002). A GLS regression is more suitable in that it corrects for the omitted variable bias, and presence of autocorrelation and heteroskedasticity in pooled time series data. 4. Results Table 1 presents the descriptive statistics and correlations. As can be seen from Table 1, 43% of the firms belonged to a business group. The highest value of shared variance being 17% between institutional ownership and firm size, none of the correlations are high enough to suggest any problem of multicollinearity. We tested for multicollinearity formally using VIF statistic; all the VIF statistics were well within the range, with the highest value being 4.2. Table 2 presents the results of panel data GLS estimation on R&D investments. H1a predicted a positive relationship between family ownership and R&D intensity. The coefficient on family ownership is positive and significant (Table 2, Model 2: β = 0.030, p b .05), H1a is supported. H1b predicted a positive relationship between institutional ownership and R&D intensity. The coefficient on institutional ownership, although positive, is not significant. H1b is not supported. H2 predicted a positive relationship between business group affiliation and R&D intensity. The coefficient on group affiliation is positive and significant (Table 2, Model 2: β = 0.253, p b .05), giving support to H2. Table 3 presents the results of panel data GLS estimation on new foreign investments. We developed the models in a hierarchical manner. Model 1 has all the control variables, Model 2 has main effects, Models 3, 4 and 5 have the three interaction effects, entered one by one, and Model 6 is the full model. H3a predicted a positive relationship between family ownership and new foreign investments. The coefficient on family ownership is positive and significant (Table 3, Model 2: β = 0.017, p b .001), H3a is supported. H3b predicted a positive relationship between institutional ownership and new foreign investments. The coefficient on institutional ownership is positive and significant (Table 3, Model 2: β = 0.116, p b .001). H3b is supported. H4 predicted a positive relationship between business group affiliation and new foreign investments. The coefficient on group affiliation is positive and significant (Table 3, Model 2: β = 0.167, p b .001), giving support to H4. Next, we examine the joint effect of R&D and governance structure on foreign investments. H5a predicted a positive interaction between family ownership and R&D intensity in affecting foreign investments. The coefficient on the interaction term is positive and significant (Table 3, Model 3: β = .591, p b .001), giving support to H5a. The coefficient on the interaction term between institutional ownership and R&D intensity is also positive and significant (Table 3, Model 4: β = 1.335, p b .001), giving support to H5b. Finally, H6 predicted a positive interaction between group affiliation and R&D intensity. The coefficient on the interaction term is insignificant. In the full model, this coefficient turns negative and significant. H6 is not supported.
Table 1 Descriptive statistics and correlations.
1. 2. 3. 4. 5. 6. 7. 8. 9.
Foreign investmentsa Firm sizea Board sizea Prior performance R&D intensity Advertising intensity Group affiliation Institutional ownershipa Family ownershipa
Mean
S.D.
1.
2.
3.
4.
5.
6.
7.
8.
9.
0.424 3.812 1.959 −0.006 0.003 0.016 0.354 1.038 1.340
1.240 2.315 0.440 0.163 0.027 0.111 0.478 1.563 1.279
– 0.302 0.195 −0.001 0.134 0.032 0.183 −0.021 0.310
– 0.424 0.062 0.037 −0.133 0.340 −0.008 0.478
– 0.021 0.039 0.009 0.191 0.086 0.228
– 0.003 0.005 −0.007 0.000 0.009
– 0.000 0.043 0.005 0.059
–0.000 −0.020 0.081
– −0.191 0.333
– −0.060
–
n = 16,337 firm year observations (2002–2009). Correlation > |.01| significant at p b .05. a Logarithmic transformation.
Please cite this article as: Singh, D.A., Gaur, A.S., Governance Structure, Innovation and Internationalization: Evidence From India, Journal of International Management (2013), http://dx.doi.org/10.1016/j.intman.2013.03.006
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Table 2 Random effects GLS estimation on R&D intensity. Variables
Model 1
Control variables Firm size Prior performance Advertising intensity Hypothesized effects Family ownership Institutional ownership Business group affiliation Wald χ2 Δ χ2
Model 2
B
S.E.
B
S.E.
0.032† −0.001 0.429†
(0.018) (0.107) (0.244)
0.008 0.011 0.395
(0.019) (0.107) (0.244)
0.030⁎ 0.039 0.253⁎ 42.12⁎⁎⁎ 12.70⁎⁎⁎
(0.012) (0.025) (0.123)
29.42⁎⁎⁎
Controls include nine primary industries. n = 16,337 firm-year observations. ⁎⁎⁎p b 0.001; ⁎p b 0.05; †p b 0.10; (all two-tailed tests).
5. Discussion and conclusion This study examines the impact of firm-level governance structure on the innovation and internationalization strategies of emerging market firms. We propose that in the case of emerging market firms, governance is a response to the prevailing institutional environment and affects the innovation and internationalization strategies of firms. More specifically, we argue for a positive effect of family ownership, institutional ownership, and business group affiliation on R&D intensity and new foreign investments. Further, we propose that favorable ownership structure of a firm augments the positive effect of R&D capabilities on internationalization. We test our hypotheses on a sample of 16,337 firm-year observations of Indian listed firms over an eight-year time period from 2002 to 2009. Our findings suggest a positive effect of family ownership and group affiliation on R&D intensity and new foreign investments. Institutional ownership also positively affects new foreign investments, but has no effect on R&D intensity. The insignificant effect of institutional ownership on R&D intensity implies that institutional owners in emerging markets are not interested in investing in firms that engage in innovation activities. Given that innovation has not been the strength of emerging market firms, institutional owners might not be willing to take the risk of long-term investment in highly uncertain R&D activities. Even though we did not hypothesize, we find R&D intensity to be positively related to new foreign expansion, which supports the argument that technological capabilities play an important role in international markets (Singh, 2009). Further, we find that R&D intensity positively interacts with family ownership and institutional ownership in affecting new foreign investments. Before we discuss the contributions of this study, its limitations need to be noted. This study is based on a sample of Indian firms, which raises questions about the generalizability of this study's findings to other emerging market contexts. However, to
Table 3 Random effects GLS estimation on new foreign investments. Variables
Control variables Firm size Board size Prior performance R&D intensity Advertising intensity Main effects Family ownership Institutional ownership Group affiliation Interaction effects Family × R&D Institutional × R&D Group × R&D Wald χ2 Δ χ2
Model 1
Model 2
Model 3
Model 4
B
S.E.
B
S.E.
B
0.176⁎⁎⁎ 0.272⁎⁎⁎ −0.116⁎⁎⁎ 1.322⁎⁎⁎ 0.225⁎⁎
(0.006) (0.018) (0.034) (0.249) (0.080)
0.150⁎⁎⁎ 0.258⁎⁎⁎ −0.102⁎⁎ 1.264⁎⁎⁎ 0.175⁎
(0.007) (0.019) (0.033) (0.247) (0.079)
0.149⁎⁎⁎ (0.007) 0.150⁎⁎⁎ 0.258⁎⁎⁎ (0.019) 0.256⁎⁎⁎ −0.102⁎⁎ (0.033) −0.102⁎⁎ 0.446 (0.317) −1.099⁎ 0.183⁎ (0.079) 0.171⁎
0.017⁎⁎⁎ 0.116⁎⁎⁎ 0.167⁎⁎⁎
(0.004) 0.015⁎⁎⁎ (0.008) 0.116⁎⁎⁎ (0.045) 0.167⁎⁎ 0.591⁎⁎⁎
1847.48⁎⁎⁎
2134.91⁎⁎⁎ 287.43⁎⁎⁎
2171.18⁎⁎⁎ 36.27⁎⁎⁎
S.E.
B
(0.004) 0.017⁎⁎⁎ (0.008) 0.112⁎⁎⁎ (0.045) 0.165⁎⁎⁎ (0.142)
1.335⁎⁎⁎ 2183.03⁎⁎⁎ 48.12⁎⁎⁎
Model 5
Model 6
S.E.
B
S.E.
B
S.E.
(0.007) (0.019) (0.033) (0.447) (0.079)
0.150⁎⁎⁎ 0.258⁎⁎⁎ −0.102⁎⁎ 1.431⁎⁎⁎ 0.174⁎
(0.007) (0.019) (0.033) (0.357) (0.079)
0.150⁎⁎⁎ 0.253⁎⁎⁎ −0.103⁎⁎ −1.602⁎⁎⁎ 0.168⁎
(0.006) (0.019) (0.033) (0.459) (0.079)
(0.004) 0.017⁎⁎⁎ (0.008) 0.116⁎⁎⁎ (0.045) 0.168⁎⁎⁎
(0.210)
(0.004) 0.014⁎⁎⁎ (0.008) 0.107⁎⁎⁎ (0.045) 0.185⁎⁎⁎
(0.004) (0.008) (0.044)
0.549⁎⁎⁎ (0.150) 2.929⁎⁎⁎ (0.306) −0.317 (0.494) −5.878⁎⁎⁎ (0.723) ⁎⁎⁎ ⁎⁎⁎ 2136.80 2296.60 1.89 161.69⁎⁎⁎
Controls include nine primary industries. n = 16,337 firm-year observations. ⁎⁎⁎p b 0.001; ⁎⁎p b 0.01; ⁎p b 0.05; (all two-tailed tests).
Please cite this article as: Singh, D.A., Gaur, A.S., Governance Structure, Innovation and Internationalization: Evidence From India, Journal of International Management (2013), http://dx.doi.org/10.1016/j.intman.2013.03.006
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the extent firms in emerging markets share similar traits, the findings of this study should apply to other similar emerging markets that have experienced institutional transition in recent years. Second, the focus of this study was on two specific aspects of governance structure — ownership structure and business group affiliation. However, there are several other governance mechanisms, such as board of directors, which may also influence both innovation and internationalization strategies. Third, our measure of innovation is R&D intensity, which is an input measure, and not an output measure of innovation. Future research could test our theoretical model using output measures of innovation such as number of patents or new product introductions. Fourth, our data does not allow us to delineate specific objective of R&D investment or finer details about the foreign investments. It is possible that the preference of different owners may vary depending on the objective of the R&D investment and foreign investment. Finally, we do not distinguish between the innovation strategies and leading and laggard firms (Cantwell and Mudambi, 2011). These present fruitful avenues for future research. Despite these limitations, this study makes important theoretical and empirical contributions. In the case of emerging markets, governance arrangements such as business group affiliation and presence of family ownership are the reflections of the broader institutional environment. We show that these governance arrangements affect innovation and internationalization strategies of emerging market firms in significant ways. These findings point to the direct and indirect role of institutional environment in strategic decision making (Kumar et al., 2012). For the family business literature, our findings show that family firms are quite progressive, in spite of the popularly held belief that family firms are less professional. We find that family firms are not only investing in innovation, but also expanding to foreign markets to remain competitive in the changed environments. These findings are consistent with other studies that argue that specific properties of the local context could be a source of competitive advantage for firms expanding abroad (Meyer et al., 2011). For the business group literature, our findings are quite interesting for several reasons. Recent research on business groups suggests that in the changed institutional environment in emerging markets, business groups have a negative relationship with firm performance (Gaur and Delios, 2006). These studies hint that business groups are not able to adapt well to the changed institutional environments in some emerging markets. Our findings suggest that group affiliated firms are making efforts to develop capabilities to remain competitive in the changed institutional environments. Investments in innovation activities and going abroad in search of markets and resources are some of the strategies that firms can pursue to remain competitive, and business groups are doing that (Kumaraswamy et al., 2012). In conclusion, this study confirms the importance of governance and innovation for internationalization of emerging market firms. We hope that our research stimulates scholarly interest in further disentangling the role of different governance mechanisms in the strategic choices that firms make to survive and profit in the changed institutional environment in emerging markets.
Acknowledgment This research was supported by grants from Rutgers University Research Council and the Technology Management Research Center of Rutgers Business School. The article benefited greatly from comments and advice provided by the special issue editors, Sid Grey, Vikas Kumar and Ram Mudambi and three anonymous reviewers.
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Journal of International Management
Governance Structure, Innovation and Internationalization: Evidence From India Deeksha A. Singh a, 1, Ajai S. Gaur b,⁎ a b
School of Business, Rutgers University - Camden, Camden, NJ 08102, United States Department of Management and Global Business, Rutgers Business School, Newark and New Brunswick, 1 Washington Park, Newark, NJ 07102, United States
a r t i c l e
i n f o
Article history: Received 2 March 2013 Accepted 2 March 2013 Available online xxxx Keywords: Family ownership Institutional ownership Business groups R&D intensity Internationalization
a b s t r a c t We examine the impact of firm-level governance structure on the innovation and internationalization strategies of emerging market firms. We propose that in the case of emerging market firms, governance is a response to the prevailing institutional environment and affects the innovation and internationalization strategies of firms. Based on a longitudinal sample of 16,337 firm-year observations of Indian listed firms over a year time period from 2002 to 2009, we find a positive effect of family ownership and group affiliation on R&D intensity and new foreign investments. Institutional ownership also positively affects new foreign investments, but has no effect on R&D intensity. Further, we find that R&D intensity interacts with family ownership, institutional ownership and group affiliation in affecting new foreign investments. © 2013 Elsevier Inc. All rights reserved.
1. Introduction It is widely recognized that certain governance arrangements offer competitive advantages to emerging market (EM) firms that adopt them. Several theoretical arguments have been proposed to explain the superiority of certain governance forms over others in emerging markets (Carney, 2005). For example, it has been argued that emerging markets have institutional voids, which are exploited by business groups to achieve competitive advantage as compared to stand alone firms (Khanna and Palepu, 2000). The focus of much of the extant literature on emerging market firms is in identifying the sources of performance differential among firms. However, it is well established in strategy literature that governance affects firm performance by influencing the strategic choices that firms make (Hoskisson et al., 2002). There is limited research examining how governance arrangements in EM firms affect their strategic choices. This study is an attempt to address the above noted oversight. We focus on one important aspect of firm governance in EM firms — ownership structure, and how the same affects competitiveness of EM firms. We argue that innovation capability and international presence are not just strategic choices that firms make, but also important aspects of their overall competitiveness, at least in the case of EM firms. Recent developments in agency theory suggest that different owners have different motivations and preferences with respect to important strategic decisions made by the firms (Brickley et al., 1988). As a result, the decisions to innovate and internationalize are likely to be dependent on the governance structure of the firm in question. Consequently, we examine the linkages between governance structure and innovation capability as well as internationalization of EM firms. Innovation and internationalization are important strategic choices that firms make. The importance of innovation for long-run competitiveness of firms is well established. Yet, EM firms did not focus much on innovation in the past as limited competition in domestic markets meant that firms could survive and prosper by selling copycat products (Gaur and Kumar,
⁎ Corresponding author. Tel.: +1 732 646 5094; fax: +1 973 353 1664. E-mail addresses: [email protected] (D.A. Singh), [email protected] (A.S. Gaur). 1 Tel.: +1 732 253 0490. 1075-4253/$ – see front matter © 2013 Elsevier Inc. All rights reserved. http://dx.doi.org/10.1016/j.intman.2013.03.006
Please cite this article as: Singh, D.A., Gaur, A.S., Governance Structure, Innovation and Internationalization: Evidence From India, Journal of International Management (2013), http://dx.doi.org/10.1016/j.intman.2013.03.006
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2010). A case in point is the pharmaceutical firms in India which benefitted a great deal due to weaker patent regulations in the last decade of the 20th century. Thus, there was neither an incentive, nor significant benefits of investing in research and development (R&D) and developing innovation capacity. In recent years, the level of competition, from domestic as well as foreign firms has substantially increased as a result of globalization in the external front and liberalization of internal markets. Extant literature suggests that increased competition makes it imperative for firms to innovate in order to remain competitive (Aghion and Howitt, 1992). For EM firms, innovation capability has become very important in the changed institutional environment (Awate et al., 2012; Kumaraswamy et al., 2012). It is thus important, both theoretically and practically, to examine how EM firms develop innovation capability. Internationalization, similar to innovation, was also long ignored by EM firms. There were several reasons why EM firms were not very active in the international market place. For example, in some countries, government policies did not encourage integration with the global economy, which limited the extent of international involvement of EM firms. EM firms also did not have the resources and capabilities needed to compete effectively in the global market place (Luo and Tung, 2007). These conditions have drastically changed in the past two decades, resulting in large scale foreign expansion of firms from many EMs (Ramamurti, 2009). While, scholars have investigated the performance consequences of such internationalization by EM firms, we do not have adequate understanding of what drives EM firms to internationalize (Gaur and Kumar, 2010). In this paper, we develop theory to link governance structure to the innovation capability and internationalization of EM firms. We test our model on a longitudinal sample of publically listed firms in India from 2000 to 2009. Our findings suggest a positive effect of family ownership and group affiliation on R&D intensity and new foreign investments. Institutional ownership also positively affects new foreign investments, but has no effect on R&D intensity. Further, we find that R&D intensity positively interacts with family ownership, institutional ownership and group affiliation in affecting new foreign investments.
2. Theory and hypotheses 2.1. Background Strategic decisions, such as investments in new R&D projects or new geographic markets, have long term consequences for organizational survival and success. One of the fundamental issues in the management literature is to have the mechanisms to make sure that managers take these strategic decisions in the best interests of the owners. Governance structure of a firm is an importance mechanism to ensure that managers are working in the best interests of the owners. There are two issues about the role of different governance mechanisms that require a closer scrutiny. First, the performance consequences of internationalization are not consistent across different contexts. Extant literature suggests that developed market firms experience negative performance effect at the low levels of international diversification, which turns positive at the moderate level and again negative at the very high levels of international diversification (Contractor et al., 2003). In the case of emerging market firms, Gaur and Kumar (2009) find that the effect of internationalization on performance remains positive at low as well as high levels of internationalization. Given that the performance consequences of growth strategies such as international expansion are context dependent (Meyer et al., 2011), we need to reassess the role of governance mechanisms in affecting the growth strategies. With respect to R&D strategies, again there is no clear evidence on how these affect profitability of firms in emerging markets, particularly as R&D investments have very long payoffs. Second, much of the extant literature assumes that there is a divergence in the interests of the managers and the owners, and therefore, owners need governance mechanisms to make sure that managers pursue the interests of the owners and not their own interests (Daily et al., 2003). However, in certain contexts and situations, the interests of owners and managers may not be divergent (Carney, 2005; Zahra, 2003). For example, Carney (2005) argues that in firms with high family ownership, there is minimal need to monitor the managers as the owners are themselves engaged in the management of the firm. Such firms have relatively reduced incidence of principal–agent conflict. The present study is an attempt to redress the above noted gaps. Emerging economy firms such as those from India have traditionally not relied much on innovation and internationalization. This has been a consequence of several factors. India has been a highly regulated economy until 1991. There was minimal competition as government allocated licenses about what and how much to produce and sell (Kedia et al., 2006). Consequently, firms had limited incentive to innovate. Regulated environment also made it difficult for firms to internationalize. It is well established that strength in the home country is one of the main sources of competitive advantage in foreign markets. Since Indian firms operated in a closed-regulated environment, they hardly had any home country advantage that they could exploit in foreign countries. In 1991, India faced a severe fiscal crisis that prompted it to undertake major economic reforms which paved the way for deregulation and privatization. The deregulation and privatization lead to increased competition, not only from other domestic players but also foreign firms. In order to remain competitive firms were forced to invest in R&D. The changes in the institutional environments also encouraged firms to undertake international investments for multiple reasons. These include achieving scale economies by expanding markets internationally, resource acquisition, acquiring legitimacy in domestic as well as foreign markets (Deeds et al., 2004), as well as attempting to escape from stifling regulatory constraints at home (Luo and Tung, 2007). Given that the R&D investments and large scale internationalization are relatively recent phenomena for EM firms (Kumaraswamy et al., 2012), it is important to examine the role of governance structure in these strategic choices (Lee and O'Neill, 2003; Zahra, 2003). Please cite this article as: Singh, D.A., Gaur, A.S., Governance Structure, Innovation and Internationalization: Evidence From India, Journal of International Management (2013), http://dx.doi.org/10.1016/j.intman.2013.03.006
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2.2. Ownership structure and innovation Owners perform two main functions — resource allocation and monitoring. Owners make a decision about the investment of the residual income. There are several investment options at any given point in time. Owners need to assess the return potential of different investment strategies and allocate resources accordingly. Owners also need to monitor the agents who implement owners' decisions, to make sure the agents do not pursue their own interests and the investments perform as expected. Investments in innovation projects are inherently risky for several reasons. First, they require huge investments in the form of sunk cost and the outcome of these investments is very uncertain as innovation activities have a high likelihood of failure (Mudambi and Swift, forthcoming). Even when the innovation results in a favorable outcome, the time horizon for returns to materialize is very long (Lee and O'Neill, 2003). As a result of the longer time horizon for returns, the innovation itself may become obsolete from commercial point of view. Given these risks, it is natural for different owners to get involved with the decisions related to innovation investments. We argue that concentrated ownership in the hand of a family results in firms making greater investments in innovation activities. There are several factors that encourage family firms to invest in R&D. Scholars have argued that family firms are associated with a high level of altruism (Kerr et al., 1960). Altruism refers to a trait that links one's personal well-being to the well-being of others (Bergstrom, 1995). Altruistic behavior helps in strengthening family bonds (Simon, 1993). In the case of family firms, the strong bonding between family members fosters loyalty towards the leadership and a commitment to work for the long term survival and growth of the organization (Miller and Le Breton-Miller, 2005; Ward, 1987). Given that R&D investments are essential for developing competitive advantage in the long-run, family firms are more likely to make such investments in spite of the associate risks (Schulze et al., 2001). Family involvement also lends three distinct advantages to family firms — parsimony, personalism, and particularism (Carney, 2005). Parsimony refers to careful resource conservation which family controlled firms pursue in order to preserve family wealth (Durand and Vargas, 2003). Personalism refers to the concentration of organizational authority in one person, the owner-manager. Personalism reduces the bureaucratic controls under which the managers operate, making it possible for them to employ strategies and solutions that reflect the vision of the owner-manager (Chua et al., 1999). Particularism refers to the owner-manager's ability to enforce decision rules that may be driven by non-economic considerations (Carney, 2005). Carney (2005) argues that family-based governance lends distinct competitive advantage due to these three characteristics of family firm, and helps them take decisions that are good in the long-run. As argued earlier, R&D investments have a longer time horizon. As a result, managers, who often face pressure to show profitability in the short-run, are likely to shirk from making investments that generate returns in the long-run, even though such investments may be in the best interests of the firms and owners. This conflict between owners and managers is accentuated in the case of publicly listed firms due to the pressure from stock markets (Gerlach, 1992). However, in the case of family firms in emerging economies, family members also serve as managers and directly control the strategic affairs. This eliminates the traditional agency conflict between owners and managers (Carney, 2005; Zahra, 2003). As the owners get involved in decision making, even professional managers find it easier to take risky investment decisions. Moreover, family members and professional managers working in family firms are more likely to be good stewards of resources than greedy agents, as their future is often linked to the growth and success of their firms (Miller and Le Breton-Miller, 2005). As a result they are likely to do a very thorough and careful analysis of the R&D investment decisions, which enhances the success of, and subsequent investment in R&D activities. There is some evidence about the positive effect of family and clan influence on innovation strategies. Miller and Le Breton-Miller (2005) argued that family firms are more likely to invest in R&D for long-run survival and success. Sirmon and Hitt (2003) argued that family firms with a longer time horizon are more likely to pursue innovation. Minetti et al. (2011) also found that family involvement was positively associated with innovation in the case of Italian firms. Lorenzen and Mudambi (forthcoming) show the positive influence of family-based clans on innovation in the filmed entertainment cluster of Bollywood in India. Consistent with these, we propose a positive effect of family ownership on R&D investment in the case of emerging market firms. H1a. Family ownership is positively related to R&D investments. Institutional owners also affect a firm's innovation strategies (Hoskisson et al., 2002; Kochhar and David, 1996). There are arguments, both in support of and against the positive influence of institutional owners on R&D investments. Scholars arguing for a negative effect of institutional owners suggest that institutional owners are apprehensive about short-term negative earnings (Graves and Waddock, 1990). This creates disincentives for managers to make R&D investments that have high risks and a long payoff period. Scholars arguing for the positive effect of institutional owners suggest that institutional owners keep a diversified portfolio and are more interested in firms in which managers pursue focused strategies rather than diversification (Hoskisson et al., 2002). Perusal of focused strategies in the long-run is possible if firms invest in innovation activities that differentiate them from others. Thus, institutional investors indirectly pressurize firms to pursue innovation strategies. At the same time, not all institutional investors have a short-term horizon (Brickley et al., 1988). Hoskisson et al. (2002) argued that there are several groups of institutional investors, such as pension funds, which have rather long-term horizon, and invest in firms that have potential to remain profitable in the long-run. Gilson and Kraakman (1991) reported that US pension funds remained invested in the same firm for as long as a decade. Please cite this article as: Singh, D.A., Gaur, A.S., Governance Structure, Innovation and Internationalization: Evidence From India, Journal of International Management (2013), http://dx.doi.org/10.1016/j.intman.2013.03.006
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We argue that in the case of emerging economies, the positive effect of institutional investors on R&D investments is likely to be more pronounced. First, managers in emerging economy firms do not face a very high level of pressure to generate positive earnings in the short-run (Singh, 2012). The stock markets in emerging markets are not highly developed and firms rely a great deal on alternate sources of financing, including internal surplus cash, and loans from other firms. At the same time, the market intermediaries to analyze a firm's strategies and the reasons for poor stock market performance are not well developed. Consequently, managers are somewhat protected against criticism if they do not perform well in the short-run. Aghion et al. (2008) argue that institutional investors also help in alleviating managers' concerns about short term performance and thus incentivize them to invest in R&D projects. At the same time, institutional investors in emerging markets have rather long time horizon (Choi et al., 2011). Many of the institutional investors were previously owned by the government, which invested in certain firms for non-economic reasons. Even with privatization, these investors continue to operate under government influence, which makes it difficult for them to exit a firm. The investment options for institutional investors are also quite limited due to a limited number of well managed firms. Thus, if they find a firm making investments for the long-term, they are more likely to remain invested than quit. As a net result, we expect institutional investors to have a positive influence on R&D investments. H1b. Institutional ownership is positively related to R&D investments.
2.3. Business group affiliation and innovation Business group affiliation is an important aspect of firm governance in emerging markets. Khanna and Rivkin (2001) define a business group as a set of legally independent entities, which share several formal and informal linkages and take coordinated actions in multiple product and/or geographic markets. The types of inter-linkages that group affiliated firms share include social ties in the form of family, caste, religion, language, ethnicity and region (Encarnation, 1989; Lorenzen and Mudambi, forthcoming), as well as organizational ties such as presence of common members on the boards, buyer–supplier relationships, and financial relationships (Kedia et al., 2006). In the case of India, business groups present a quasi-governance arrangement, in the sense that even though different affiliated firms are legally separate entities, they are under a common, informal administrative control (Kedia et al., 2006). Often these groups are also under the control of a family, even though not all affiliated firms in a group may have the same level of family ownership. These business groups operate somewhat similar to large, diversified conglomerates, where each division has to strive for the attention of the corporate office. There is significant sharing of resources across group affiliated firms, including sharing of human resources. The managing director of one affiliated company may serve as the board chairman of another affiliated company, and many board members may be common, which makes it easy to take coordinated action. The above characteristics of a business group make it easy for the affiliated firms to derive greater benefits from innovation than their stand-alone counter parts. For example, one of the business groups in India, the Tata group, recently produced the world's cheapest car at about USD 2000. The production of this product needed innovations not only from the automobile firm, but also from the steel firm, the software firm and many other sister firms of the Tata group. Given that the benefits of innovation are shared across the group, there is greater incentive to invest in R&D. Furthermore, the firms of a business group that contribute to innovation, gain in prestige and importance within the business group. This results in a healthy competition within a group to engage in innovative activities. Finally, innovation requires substantial resources. It is not uncommon for business groups to subsidize the long-term investments of certain firms in a group. Business group affiliated firms find it easier to access different types of resources, including the financial resources than stand-alone firms. Thus, group affiliated firms not only have greater incentive to invest in R&D, but also find it easier to do so. Accordingly, we hypothesize: H2. Business group affiliation is positively related to R&D investments.
2.4. Ownership structure and internationalization The ownership structure of a firm significantly influences the international diversification decision that firms make (Zahra, 2003). Internationalization is a risky growth strategy which requires substantial resource commitments during the early stages of foreign expansion (Gaur and Kumar, 2010). Scholars have argued that internationalization depresses firm performance in the early stages, and firms start reaping the benefits from internationalization only after they reach a threshold in their internationalization trajectory (Contractor et al., 2003). Agency theory suggests that managers would want to pursue growth strategies in order to increase their job security, on-job consumption and compensations. The owners, therefore, need to monitor the managers to make sure that managers do not excessively pursue the risky strategies. However, involvement of family members in the case of emerging markets minimizes the traditional agency problems (Carney, 2005; Zahra, 2003). In such firms, managers' identities are often linked to the firms that they serve (Gomez-Mejia et al., 2003). As a result, managers become stewards who work for the long term interests of the firm. Given the risks associated with pursuing internationalization strategies, managers in family firms are not likely to pursue these strategies unless managers have the support of the owners, particularly when owners are involved in the decision making. Please cite this article as: Singh, D.A., Gaur, A.S., Governance Structure, Innovation and Internationalization: Evidence From India, Journal of International Management (2013), http://dx.doi.org/10.1016/j.intman.2013.03.006
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Owners on the other hand, have altruistic motives in deciding which strategies to pursue (Berrone et al., 2010; Schulze et al., 2001). Altruism in the context of a family firm means that if a particular strategy is important and beneficial in the long run and increases the employment potential as well as reputation of the family members, then owners would want to pursue it even though there may be substantial risks involved (Schulze et al., 2001; Zahra, 2003). The support of owners may lengthen the time horizon for payoffs (Miller and Le Breton-Miller, 2005; Zahra, 2003), making it possible for the managers to assume greater risks. In spite of the risks involved, international expansion could be a profitable strategy for emerging market firms. Extant literature on internationalization of emerging market firms suggests that firms often want to expand in foreign markets to avoid the stifling competition in the domestic markets and seek new markets for their tried and tested products (Gaur and Kumar, 2010; Luo and Tung, 2007). When operating in the domestic markets, firms face competition not only from domestic firms but also from foreign firms that have entered emerging market in recent years. With the trade and economic liberalization, it has become a lot easier for foreign multinationals to operate in the emerging markets. While there is debate about the positive and negative spillover effects of foreign firms on local firms, there is evidence of some degree of crowding out of the local firms as a result of competition from the foreign firms. Even without the competition from the foreign firms, domestic competitors are very similar in profile to each other and have somewhat similar resources and capabilities. This makes it very difficult for firms to differentiate with each other in markets where most local firms compete on commodity type of products (Witt and Lewin, 2007). Faced with stiff competition in the local markets, firms enter foreign markets for both exploitation and exploration purposes (Deeds et al., 2004). Since the profile of competitors in foreign markets is quite different, firms can exploit their core competence in producing price sensitive products (Kapur and Ramamurti, 2001). The success of Chinese manufacturing firms and Indian software and pharmaceutical firms in foreign markets underscores this point (Gaur and Kumar, 2010). Foreign markets also provide opportunities for these firms to learn and explore new products and technologies, which they can then use in domestic markets. It is easier for firms with family ownership as well as institutional ownership to make a decision to internationalize than firms without family involvement (Zahra, 2003). An important aspect of altruism in family firms is that preserving the family wealth and increasing it for the next generations becomes the guiding principal in running the business (Schulze et al., 2001). Given that internationalization has benefits in the long run, family firms are more likely to take the risks for long-term benefits. Internationalization also brings short-run benefits such as the reputation effects. In the case of emerging markets such as India, international expansion is viewed as reputation enhancing. There is some evidence to this effect in the extant literature. Zahra (2003), in his analysis of US based family firms found that family ownership was positively related to the degree of internationalization. Similar to family owners, presence of institutional owners also encourages international expansion. Institutional owners generally have a preference for firms which are more visible in the global market place. Additionally, institutional owners, through their presence in company boards, are often actively involved in the decision making, critically analyzing different investment options and keeping a watch over managerial actions. Such involvement of institutional owners also minimizes agency problems as discussed in the case of family owners, and makes it easier for managers to take the decision to internationalize. Based on the empirical findings and the arguments presented above, we propose the following hypotheses: H3a. Family ownership is positively related to new foreign investments. H3b. Institutional ownership is positively related to new foreign investments.
2.5. Group affiliation and internationalization The choice of international diversification is closely related to the firm's ability to compete in the international markets. Group affiliation confers several benefits for the affiliated firms, when they decide to increase their level of international diversification. As discussed earlier, the presence of business groups in many emerging economies can be attributed to the inefficient institutional environment in these economies. In the past, many of these firms were able to generate monopoly rents in their domestic markets by manipulating the inefficiencies of the institutional environment (Kedia et al., 2006). Thus group affiliated firms enjoyed benefits, primarily due to the weak institutional environments in which the groups operated (Khanna and Palepu, 2000). Over time, business groups developed certain capabilities and built resources (Kedia et al., 2006). The preferential access to cheaper capital, local resources, and the internal labor markets help a group affiliated firm in its internationalization efforts. Emerging markets are also characterized with greater level of risk due to uncertain political and economic conditions. Affiliation to a business group helps deal with the environmental uncertainties as group affiliated firms can control different parts of the value chain (Gaur and Kumar, 2009). Even if the unaffiliated firms may have access to similar resources, the positive effects get magnified in case of groups because of the group-wide sharing of resources and capabilities (Khanna and Rivkin, 2001). These factors help group affiliated firms to develop a competitive advantage against the unaffiliated firms. Even when the institutional environment improves, and institutional voids reduce, group affiliated firms may find themselves to be more competitive than the unaffiliated ones due to the positive spillovers of the past and the associated path dependency. The superior Please cite this article as: Singh, D.A., Gaur, A.S., Governance Structure, Innovation and Internationalization: Evidence From India, Journal of International Management (2013), http://dx.doi.org/10.1016/j.intman.2013.03.006
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competitive advantage in the domestic market helps the group affiliated firms in increasing their level of international diversification (Gaur and Kumar, 2010). Accordingly, we hypothesize: H4. Business group affiliation is positively related to new foreign investments.
2.6. The joint effect of innovation and governance structure Innovation helps in internationalization. Extant literature suggests that innovation capabilities help firms sustain competitive advantage in foreign markets (Anand and Kogut, 1997; Singh, 2009). Investments in R&D help translate tangible and intangible resources into innovative products, which in turn lead to sustainable competitive advantage (Buckley and Casson, 1976; Morck and Yeung, 1991). While emerging economy firms are relatively weaker in terms of technological capabilities as compared to developed economy firms, those that do have some technological capabilities find it easier to internationalize (Filatotchev et al., 2009; Kumar et al., 2012). Young et al. (1996) found that Chinese state-owned enterprises which had innovative capabilities, found it easier to internationalize. In fact, some of the innovation that emerging market firms pursue is specifically targeted at improving the international competitiveness of these firms (Kuemmerle, 1999). Given that the baseline effect of innovation on internationalization is well established in literature, we focus on how innovation and governance structure interact with each other in affecting internationalization. We argue that when a firm has a favorable governance structure for international expansion, the positive effect of innovation on internationalization gets augmented. As we argued before, both family owners and institutional owners have a positive effect on firm internationalization. Both these sets of owners will be more inclined to encourage managers to internationalize if they anticipate success from internationalization activities. A high level of R&D intensity will provide assurance to the owners that internationalization is likely to be successful. On the other hand, if managers do not have the support of owners, they may shirk and may be reluctant to pursue internationalization even if their firms have the needed capabilities. Accordingly, we propose: H5a. Family ownership positively moderates the relationship between R&D investment and new foreign investments. H5b. Institutional ownership positively moderates the relationship between R&D investment and new foreign investments. Similar to the ownership structure, business group affiliation also augments the positive effects of R&D investments on internationalization. There are several mechanisms through which the effect of technological resources gets augmented. The R&D done in an individual firm is often complimentary to what is done in another affiliated firm. An individual firm may access the technology residing in the group in order to enhance its own technological capability and compete in technologically advanced foreign markets through FDI. Therefore, we expect that the impact of R&D investments on internationalization will receive an impetus when combined with institutional resources such as being affiliated to a business group. H6. Business group affiliation positively moderates the relationship between R&D investment and new foreign investments.
3. Methods 3.1. Sample The sample of this study comprises all the publicly listed firms that have provided details on their board composition to the Bombay Stock Exchange (BSE), the leading exchange in India from 2000 to 2009. As of April 30, 2011, there were a total of 4946 listed firms in the BSE. We obtained firm specific details including ownership structure and international expansion from the Prowess database of the Center for Monitoring the Indian Economy (CMIE), which has detailed, longitudinal information on about 20,000 Indian firms. After removing the firms that have missing data, and lagging the explanatory variables by one year, and removing the outliers, we are left with an unbalanced panel of 16,337 firm-year observations over eight years from 2002 to 2009. 3.2. Variables 3.2.1. Dependent variables R&D investments and new foreign investments in a given year are two dependent variables in this study. The information on both these variables comes from the Prowess database. Consistent with the extant literature, we measure R&D investments as an intensity measure, by taking a ratio of total R&D expenses over total sales. New foreign investment is a logarithmic transformation on the total value of foreign investments in a given year. 3.2.2. Explanatory variables Family ownership, institutional ownership, and business group affiliation are the key explanatory variables in the regression models predicting R&D intensity. Institutional owners include both domestic and foreign institutional owners and include such entities as pension funds, mutual funds and banks. Both the ownership variables are continuous varying from zero to 100%. We took a natural logarithm of the ownership variables to normalize the distributions. In the regression models predicting new Please cite this article as: Singh, D.A., Gaur, A.S., Governance Structure, Innovation and Internationalization: Evidence From India, Journal of International Management (2013), http://dx.doi.org/10.1016/j.intman.2013.03.006
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international investment, R&D intensity also becomes a predictor variable. We measure business group affiliation by an indicator variable which takes a value of one if a firm belongs to a business group and zero otherwise. In the regression models, we lag the explanatory variables by one year. 3.2.3. Control variables We controlled for firm size, size of the board of directors, financial performance and industry effects. We measure firm size by a natural logarithm of total sales. Financial performance is measured by return on assets (ROA) in the previous year. Board size is a natural logarithm of total number of board members. Finally, we controlled for industry effects using eight indicator variables to represent nine primary industries to which the firms in our sample belong. 3.3. Analytic procedure We used random effects GLS estimation in the models predicting R&D investments as well as new foreign investments. We preferred a GLS regression over pooled OLS regression due to the important assumptions of homoskedasticity and an absence of serial correlation in pooled OLS. Pooled OLS requires the errors in each time period to be uncorrelated with the explanatory variables in the same time period, for the estimator to be consistent and unbiased (Wooldridge, 2002). A GLS regression is more suitable in that it corrects for the omitted variable bias, and presence of autocorrelation and heteroskedasticity in pooled time series data. 4. Results Table 1 presents the descriptive statistics and correlations. As can be seen from Table 1, 43% of the firms belonged to a business group. The highest value of shared variance being 17% between institutional ownership and firm size, none of the correlations are high enough to suggest any problem of multicollinearity. We tested for multicollinearity formally using VIF statistic; all the VIF statistics were well within the range, with the highest value being 4.2. Table 2 presents the results of panel data GLS estimation on R&D investments. H1a predicted a positive relationship between family ownership and R&D intensity. The coefficient on family ownership is positive and significant (Table 2, Model 2: β = 0.030, p b .05), H1a is supported. H1b predicted a positive relationship between institutional ownership and R&D intensity. The coefficient on institutional ownership, although positive, is not significant. H1b is not supported. H2 predicted a positive relationship between business group affiliation and R&D intensity. The coefficient on group affiliation is positive and significant (Table 2, Model 2: β = 0.253, p b .05), giving support to H2. Table 3 presents the results of panel data GLS estimation on new foreign investments. We developed the models in a hierarchical manner. Model 1 has all the control variables, Model 2 has main effects, Models 3, 4 and 5 have the three interaction effects, entered one by one, and Model 6 is the full model. H3a predicted a positive relationship between family ownership and new foreign investments. The coefficient on family ownership is positive and significant (Table 3, Model 2: β = 0.017, p b .001), H3a is supported. H3b predicted a positive relationship between institutional ownership and new foreign investments. The coefficient on institutional ownership is positive and significant (Table 3, Model 2: β = 0.116, p b .001). H3b is supported. H4 predicted a positive relationship between business group affiliation and new foreign investments. The coefficient on group affiliation is positive and significant (Table 3, Model 2: β = 0.167, p b .001), giving support to H4. Next, we examine the joint effect of R&D and governance structure on foreign investments. H5a predicted a positive interaction between family ownership and R&D intensity in affecting foreign investments. The coefficient on the interaction term is positive and significant (Table 3, Model 3: β = .591, p b .001), giving support to H5a. The coefficient on the interaction term between institutional ownership and R&D intensity is also positive and significant (Table 3, Model 4: β = 1.335, p b .001), giving support to H5b. Finally, H6 predicted a positive interaction between group affiliation and R&D intensity. The coefficient on the interaction term is insignificant. In the full model, this coefficient turns negative and significant. H6 is not supported.
Table 1 Descriptive statistics and correlations.
1. 2. 3. 4. 5. 6. 7. 8. 9.
Foreign investmentsa Firm sizea Board sizea Prior performance R&D intensity Advertising intensity Group affiliation Institutional ownershipa Family ownershipa
Mean
S.D.
1.
2.
3.
4.
5.
6.
7.
8.
9.
0.424 3.812 1.959 −0.006 0.003 0.016 0.354 1.038 1.340
1.240 2.315 0.440 0.163 0.027 0.111 0.478 1.563 1.279
– 0.302 0.195 −0.001 0.134 0.032 0.183 −0.021 0.310
– 0.424 0.062 0.037 −0.133 0.340 −0.008 0.478
– 0.021 0.039 0.009 0.191 0.086 0.228
– 0.003 0.005 −0.007 0.000 0.009
– 0.000 0.043 0.005 0.059
–0.000 −0.020 0.081
– −0.191 0.333
– −0.060
–
n = 16,337 firm year observations (2002–2009). Correlation > |.01| significant at p b .05. a Logarithmic transformation.
Please cite this article as: Singh, D.A., Gaur, A.S., Governance Structure, Innovation and Internationalization: Evidence From India, Journal of International Management (2013), http://dx.doi.org/10.1016/j.intman.2013.03.006
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Table 2 Random effects GLS estimation on R&D intensity. Variables
Model 1
Control variables Firm size Prior performance Advertising intensity Hypothesized effects Family ownership Institutional ownership Business group affiliation Wald χ2 Δ χ2
Model 2
B
S.E.
B
S.E.
0.032† −0.001 0.429†
(0.018) (0.107) (0.244)
0.008 0.011 0.395
(0.019) (0.107) (0.244)
0.030⁎ 0.039 0.253⁎ 42.12⁎⁎⁎ 12.70⁎⁎⁎
(0.012) (0.025) (0.123)
29.42⁎⁎⁎
Controls include nine primary industries. n = 16,337 firm-year observations. ⁎⁎⁎p b 0.001; ⁎p b 0.05; †p b 0.10; (all two-tailed tests).
5. Discussion and conclusion This study examines the impact of firm-level governance structure on the innovation and internationalization strategies of emerging market firms. We propose that in the case of emerging market firms, governance is a response to the prevailing institutional environment and affects the innovation and internationalization strategies of firms. More specifically, we argue for a positive effect of family ownership, institutional ownership, and business group affiliation on R&D intensity and new foreign investments. Further, we propose that favorable ownership structure of a firm augments the positive effect of R&D capabilities on internationalization. We test our hypotheses on a sample of 16,337 firm-year observations of Indian listed firms over an eight-year time period from 2002 to 2009. Our findings suggest a positive effect of family ownership and group affiliation on R&D intensity and new foreign investments. Institutional ownership also positively affects new foreign investments, but has no effect on R&D intensity. The insignificant effect of institutional ownership on R&D intensity implies that institutional owners in emerging markets are not interested in investing in firms that engage in innovation activities. Given that innovation has not been the strength of emerging market firms, institutional owners might not be willing to take the risk of long-term investment in highly uncertain R&D activities. Even though we did not hypothesize, we find R&D intensity to be positively related to new foreign expansion, which supports the argument that technological capabilities play an important role in international markets (Singh, 2009). Further, we find that R&D intensity positively interacts with family ownership and institutional ownership in affecting new foreign investments. Before we discuss the contributions of this study, its limitations need to be noted. This study is based on a sample of Indian firms, which raises questions about the generalizability of this study's findings to other emerging market contexts. However, to
Table 3 Random effects GLS estimation on new foreign investments. Variables
Control variables Firm size Board size Prior performance R&D intensity Advertising intensity Main effects Family ownership Institutional ownership Group affiliation Interaction effects Family × R&D Institutional × R&D Group × R&D Wald χ2 Δ χ2
Model 1
Model 2
Model 3
Model 4
B
S.E.
B
S.E.
B
0.176⁎⁎⁎ 0.272⁎⁎⁎ −0.116⁎⁎⁎ 1.322⁎⁎⁎ 0.225⁎⁎
(0.006) (0.018) (0.034) (0.249) (0.080)
0.150⁎⁎⁎ 0.258⁎⁎⁎ −0.102⁎⁎ 1.264⁎⁎⁎ 0.175⁎
(0.007) (0.019) (0.033) (0.247) (0.079)
0.149⁎⁎⁎ (0.007) 0.150⁎⁎⁎ 0.258⁎⁎⁎ (0.019) 0.256⁎⁎⁎ −0.102⁎⁎ (0.033) −0.102⁎⁎ 0.446 (0.317) −1.099⁎ 0.183⁎ (0.079) 0.171⁎
0.017⁎⁎⁎ 0.116⁎⁎⁎ 0.167⁎⁎⁎
(0.004) 0.015⁎⁎⁎ (0.008) 0.116⁎⁎⁎ (0.045) 0.167⁎⁎ 0.591⁎⁎⁎
1847.48⁎⁎⁎
2134.91⁎⁎⁎ 287.43⁎⁎⁎
2171.18⁎⁎⁎ 36.27⁎⁎⁎
S.E.
B
(0.004) 0.017⁎⁎⁎ (0.008) 0.112⁎⁎⁎ (0.045) 0.165⁎⁎⁎ (0.142)
1.335⁎⁎⁎ 2183.03⁎⁎⁎ 48.12⁎⁎⁎
Model 5
Model 6
S.E.
B
S.E.
B
S.E.
(0.007) (0.019) (0.033) (0.447) (0.079)
0.150⁎⁎⁎ 0.258⁎⁎⁎ −0.102⁎⁎ 1.431⁎⁎⁎ 0.174⁎
(0.007) (0.019) (0.033) (0.357) (0.079)
0.150⁎⁎⁎ 0.253⁎⁎⁎ −0.103⁎⁎ −1.602⁎⁎⁎ 0.168⁎
(0.006) (0.019) (0.033) (0.459) (0.079)
(0.004) 0.017⁎⁎⁎ (0.008) 0.116⁎⁎⁎ (0.045) 0.168⁎⁎⁎
(0.210)
(0.004) 0.014⁎⁎⁎ (0.008) 0.107⁎⁎⁎ (0.045) 0.185⁎⁎⁎
(0.004) (0.008) (0.044)
0.549⁎⁎⁎ (0.150) 2.929⁎⁎⁎ (0.306) −0.317 (0.494) −5.878⁎⁎⁎ (0.723) ⁎⁎⁎ ⁎⁎⁎ 2136.80 2296.60 1.89 161.69⁎⁎⁎
Controls include nine primary industries. n = 16,337 firm-year observations. ⁎⁎⁎p b 0.001; ⁎⁎p b 0.01; ⁎p b 0.05; (all two-tailed tests).
Please cite this article as: Singh, D.A., Gaur, A.S., Governance Structure, Innovation and Internationalization: Evidence From India, Journal of International Management (2013), http://dx.doi.org/10.1016/j.intman.2013.03.006
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the extent firms in emerging markets share similar traits, the findings of this study should apply to other similar emerging markets that have experienced institutional transition in recent years. Second, the focus of this study was on two specific aspects of governance structure — ownership structure and business group affiliation. However, there are several other governance mechanisms, such as board of directors, which may also influence both innovation and internationalization strategies. Third, our measure of innovation is R&D intensity, which is an input measure, and not an output measure of innovation. Future research could test our theoretical model using output measures of innovation such as number of patents or new product introductions. Fourth, our data does not allow us to delineate specific objective of R&D investment or finer details about the foreign investments. It is possible that the preference of different owners may vary depending on the objective of the R&D investment and foreign investment. Finally, we do not distinguish between the innovation strategies and leading and laggard firms (Cantwell and Mudambi, 2011). These present fruitful avenues for future research. Despite these limitations, this study makes important theoretical and empirical contributions. In the case of emerging markets, governance arrangements such as business group affiliation and presence of family ownership are the reflections of the broader institutional environment. We show that these governance arrangements affect innovation and internationalization strategies of emerging market firms in significant ways. These findings point to the direct and indirect role of institutional environment in strategic decision making (Kumar et al., 2012). For the family business literature, our findings show that family firms are quite progressive, in spite of the popularly held belief that family firms are less professional. We find that family firms are not only investing in innovation, but also expanding to foreign markets to remain competitive in the changed environments. These findings are consistent with other studies that argue that specific properties of the local context could be a source of competitive advantage for firms expanding abroad (Meyer et al., 2011). For the business group literature, our findings are quite interesting for several reasons. Recent research on business groups suggests that in the changed institutional environment in emerging markets, business groups have a negative relationship with firm performance (Gaur and Delios, 2006). These studies hint that business groups are not able to adapt well to the changed institutional environments in some emerging markets. Our findings suggest that group affiliated firms are making efforts to develop capabilities to remain competitive in the changed institutional environments. Investments in innovation activities and going abroad in search of markets and resources are some of the strategies that firms can pursue to remain competitive, and business groups are doing that (Kumaraswamy et al., 2012). In conclusion, this study confirms the importance of governance and innovation for internationalization of emerging market firms. We hope that our research stimulates scholarly interest in further disentangling the role of different governance mechanisms in the strategic choices that firms make to survive and profit in the changed institutional environment in emerging markets.
Acknowledgment This research was supported by grants from Rutgers University Research Council and the Technology Management Research Center of Rutgers Business School. The article benefited greatly from comments and advice provided by the special issue editors, Sid Grey, Vikas Kumar and Ram Mudambi and three anonymous reviewers.
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