Amsterdam Business School
DRIVING INNOVATION IN DEVELOPING ECONOMIES The Role of Sustainability on Innovations in Emerging Market Multinationals.
Date: 24-01-2018 Joep Arends
Student Number: 11445122 MSc Business Administration:
International Management Master Thesis: Final Version
University of Amsterdam
First supervisor: Dr. Mashiho Mihalache
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STATEMENT OF ORIGINALITY
This document is written by Student Joep Arends who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
2 TABLE OF CONTENTS STATEMENT OF ORIGINALITY 1 TABLE OF CONTENTS 2 ABSTRACT 3 1. INTRODUCTION 4 2. LITERATURE REVIEW 7 2.1 EM-MNEs 7
2.2 Innovation in Emerging Markets 11
2.3 Sustainability 13
2.4 Drivers of Sustainability 16
2.5 Cooperation with Firms from Developed Economies 20
2.6 Research Question 21
3. THEORETICALFRAMEWORK 21
3.1Sustainability and Innovation 22
3.2 Moderation of Cooperation with Firms from Developed Economies 24
4. METHODS 26 4.1 Empirical Setting 26 4.2 Dataset 26 4.3 Measures 28 4.4 Data Analysis 34 5. RESULTS 37 5.1 Current Situation 37 5.2 Models 39
6. DISCUSSION AND CONCLUSION 41
6.1 Limitations and Future Research 45
ACKNOLEDGEMENTS 48
REFERENCE LIST 48
APPENDIX 56
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ABSTRACT
There is a growing interest amongst scholars and practitioners in studying the field of sustainability and in finding the link to improved business outcomes as innovativeness. Research in this field has mainly been conducted in organizations from developed economies, but in recent times companies from emerging market economies are becoming increasingly influential on the global market. Therefore, this study investigates how sustainability influences innovativeness in multinationals from emerging economies (EM-MNEs), where the influence of cooperation with firms from developed economies moderates the relation between sustainability and innovativeness. To account for sustainability in EM-MNEs, this paper identifies several internal and external drivers; in particular, this paper assumes that the reciprocity between these drivers determines the degree of sustainable actions taken. In addition, this thesis studies the influence of the alignment between the internal and external drivers on the innovativeness of the firm; the aim is to investigate the relation between sustainability and innovativeness. This is done through examining the total influence of sustainability drivers as well as the gap between them. The data gathered for this research consist of secondary cross-sectional panel data on the firm level of a hundred large EM-MNEs over a period of four years. Furthermore, to test the relationship, regression analyses are executed in STATA. The results suggest that incorporating and aligning the internal and external drivers of sustainability increases innovativeness and leads to the implication that for EM-MNEs, this influencing of innovativeness occurs in the same way as it does for MNEs from developed economies.
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1. INTRODUCTION
China had once been one of the largest environmental polluters. However, it is now on the way to become a green superpower and has already made the world’s largest solar farm (Philips, 2017). Currently China is the world’s top clean energy investing country, and it has made much progress on creating and innovating in sustainable markets. Furthermore, the Chinese government and businesses recognize that the developing world should not follow the same path as the developed countries took in their economic development. Some critics have stated that this notion predominantly stems from an economical need instead of the drive for sustainability (Philips, 2017). Although China is moving away from their developing country status, there is a general increase in businesses from developing economies operating globally, and such a situation is putting sustainability high on the agenda (Lacy & Hayward, 2011). With such trends in mind, this thesis intends to investigate the influence of sustainability on businesses from emerging market economies.
Overall, sustainability is a growing term in business practice, management, and strategy. Sustainability can be defined as adjustments throughout the whole organization according to environmental, economic, and social, considerations in the long term (Crane & Matten, 2004). Many companies are often under the impression that incorporating sustainability practices drives cost higher and does not create benefits and opportunities for them (Nidumolu, Prahalad & Rangaswami, 2009). On the contrary, focusing on sustainability results in improvements throughout the whole organization, according to recent research (Maletič et al., 2014).
A specific organizational aspect where sustainability could drive improvements is the firm’s innovativeness. According to Seebode, Jeanrenaud, and Bessant (2012), sustainability and innovation are linked to each other in a certain way. Furthermore, Hansen, Grosse-Dunker, and Reichwald (2009) described two possible relations between sustainability and innovation.
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One possibility is that sustainability increases the demand on innovations to become more environmentally and socially aware. The second possibility is that sustainability provides a new source for innovation and competitive advantage. In looking at these two possible relations, this thesis assumes that sustainability drives innovativeness.
However, studies on the relation between sustainability and innovation are mainly focused on practices within the developed countries (Brem & Ivens, 2013). There has been a growing interest amongst scholars and practitioners that arises in the operationalization from emerging market organizations, and the differences with businesses from developed economies as businesses from emerging markets are increasingly globalizing (Ramamurti, 2012). Furthermore, the aspects of innovation and sustainability are highly important factors for organizations from emerging market economies (Narula, 2012). Therefore, this study investigates how sustainability influences innovation in multinationals from emerging economies (EM-MNEs). Moreover, this study addresses how the cooperation with firms from developed economies influences the relation between sustainability and innovation.
To gain an insight into how sustainability influences innovation, this paper identifies different drivers for sustainability. Because by incorporating sustainability, the products, services, and the underlying business models which frame them are affected (Seebode, Jeanrenaud & Bessant, 2012). From this, it can be seen that the motivation to incorporate sustainable practices and initiatives can stem from several factors (Law & Gunasekaran, 2012). These are divided into the internal and external drivers.
The internal drivers considered in this study originate from the mindset and actions throughout a corporation for being socially responsible by focusing on sustainability. These are expressed in the sustainable actions taken alongside the products, processes and management practices (Law & Gunasekaran, 2012). The external drivers originate from the institutional level, such as governmental legislation, and market competitive pressures (Law &
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Gunasekaran, 2012). Here, the pressures from different stakeholders influence the drivers for sustainability (Epstein & Roy, 2001). These internal and external drivers both account for the strategy a corporation addresses related to sustainability; it is the reciprocity between these drivers that determines the degree of sustainable actions and initiatives taken throughout the organization (Walsh & Dodds, 2017). Therefore, this thesis further examines the alignment between the internal and external drivers. This is done by looking at the total influence of sustainability drivers as well as the gap between them on the innovativeness of a firm.
For these items to be supported, substantiated, and investigated, this thesis is constructed as follows. First, the paper identifies the main discussions on emerging market multinationals in the literature review, as they tend to develop differently than traditional multinationals from developed economies (D-MNEs) (Ramamurti, 2012). The concepts of sustainability and innovation are also defined here. Secondly, the proposed relations between sustainability and innovation as well as the moderating effect of cooperation with firms from developed economies are explained in the theoretical framework. This part results in a conceptual model that is extended with the different factors that compose sustainability. Thirdly, the research methods are discussed; in particular, this study analyses data statistically taken from a hundred multinationals from emerging economies over a period of four years. Fourthly, the results and insights from the regression analysis are presented; the outcomes provide reasons to assume a positive relation between sustainability and innovativeness exists amongst EM-MNEs. Lastly, these results are discussed, and a conclusion is drawn. Thereafter, the limitations of the study and future implications are mentioned; this part shows how this paper contributes to the literature, particularly in providing greater insight into the native field of EM-MNEs and the relation between sustainability and innovation.
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2. LITERATURE REVIEW
In this part, the paper firstly reviews the main discussions and gaps in research on EM-MNEs. It then focusses on innovation and the influence of sustainability, particularly by highlighting the different sources of sustainability. Furthermore, the aspect of cooperation between EM-MNEs and firms from developed countries is placed into the context of innovation and sustainability.
2.1 EM-MNEs
Emerging market multinationals are multinationals that originate from developing economies (Ramamurti, 2012). With the rise of globally known EM-MNEs such as Tata Steel from India and Lenovo from China (Brem & Ivens, 2013), the emerging market economies are gaining significant influence in the business world (Ramamurti, 2012). Therefore, the influence of EM-MNEs can no longer be neglected.
Progressively, more extensive research is done on the unique features of EM-MNEs, and several new theories are developed. For instance, the springboard perspective by Luo and Tung (2007) depicts that EM-MNEs acquire the critical resources needed to compete in home and host countries through their rapid expansions. Another theory introduced is the notion of institutional escapism by Peng and Deeds (2008), which proposes that EM-MNEs become global in order to avoid the weak institutional environments of their home country. It is seen that EM-MNEs often have an early global presence; they expand early to similar countries and are likely to rely on acquisitions and alliances to acquire new capabilities (Ramamurti, 2012; Contractor, 2013). Lastly, a study by Contractor (2013) divides the EM-MNEs into six typologies according to their strategic intent.
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Categories of EM-MNEs
The first category of EM-MNES comprises the global competitors. These EM-MNEs rival the global companies in their markets by operating on a large scale, and they gain access to new resources and markets by their global scope (Contractor, 2013). This strategy creates competitive advantages in both their home and host countries. The second category includes the outsource producers that seek to grow rapidly. These are large-scale producers for foreign corporations; they intend to expand rapidly by contracts and aspire to reach the higher profit end in the value chain (Contractor, 2013). The third category are the global knowledge and process consultant companies. They gain their competitiveness by combining the low-cost efficiencies of their home countries with the ability to handle the complex needs of their customers (Contractor, 2013). The fourth category are the EM-MNEs that focus on home-based capability increment; this means that the EM-MNE acquires assets from global businesses through foreign direct investments. This is done with the intention to acquire knowledge, brands, and other proprietary assets for the use in the home and host countries (Contractor, 2013). These first four categories are in occurrence with the Non-stated owned types of niche entrepreneurs and world-stage aspirants as identified by Luo and Tung (2007). The niche entrepreneurs are characterized as having a narrow-focused product coverage globally, while world-stage aspirants as defined as being diversified in their product scope and having dispersed locations globally.
The fifth category are the EM-MNEs that operate through replication of their own business practices in other emerging markets mainly. Their competitive strength stems from the knowledge on the advantages and pitfalls of operating in emerging economies (Contractor, 2013). Lastly, there is the category of natural resource seekers. These are predominantly largely state-owned enterprises that invest abroad with the sole purpose of gaining natural resources (Contractor, 2013). These resemble the identified type of transnational agents noted by Luo
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and Tung (2007) in that these EM-MNEs invest and expand extensively abroad whilst being tied to home government instructions and influences.
The above categories and strategies do not merely seem to be unique to businesses from emerging economies (Contractor, 2013). However, compared with MNEs from advanced economies, EM-MNEs internationalize more on the strengths of their home country in specific aspects. For instance, one aspect is the access to natural resources and cheap labour instead of knowledge-based advantages (Ramamurti, 2012). This depicts that EM-MNEs have certain firm-specific advantages, such as the ability to develop products suited to the emerging market customer (Khanna, Palepu & Sinha, 2006). The second aspect is in increasing production and operational profitability through the ability to optimize production processes; this can be done by using more labour and less capital, by using inputs more efficiently, or by having lower overhead. Lastly, EM-MNEs tend to have privileged access to resources and markets through the support of the home government (Ramamurti, 2012). Furthermore, EM-MNEs have developed new firm specific advantages through operating in the difficult conditions of emerging markets; in particular, EM-MNEs are developing new technologies and strong brands through their innovativeness (Ramamurti, 2012). A specific intake in the organizational peculiarities is the ambidextrous view of the EM-MNE.
The ambidextrous view of the EM-MNE
Ambidexterity is the multidimensional concept of aligning the internal managerial and business demands whilst adapting to changes in the market environment (Birkinshaw & Gibson, 2004). This means that “organizations focus on the simultaneous fulfilment of two disparate (and sometimes competing) ends rather than forcing a selection between two alternatives” (Luo & Rui, 2009 p.51). For example, these two alternatives can include exploitation and exploration, efficiency and flexibility, low cost and customer responsiveness,
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global integration and local responsiveness, stability and adaptability, and short-term profit and long-term growth (Luo & Rui, 2009). Furthermore, the ambidexterity of EM-MNEs can be divided into four dimensions: orientation, competence, competition, and co-evolution. For each dimension, two contrasting elements occur simultaneously.
Co-orientation consists of leveraging short-term gains with long-term growth. To do so, the EM-MNE needs to acquire certain resources—such as new technologies (e.g., patents) or intellectual property rights (e.g., brands)—that foster long-term growth whilst leveraging short term competitiveness (Luo & Rui, 2009). Co-competence means that EM-MNEs operate internationally through their market-based capabilities and network-based competences (Luo & Rui, 2009). Co-competition in this case means that EM-MNEs simultaneously compete and cooperate with their stakeholders. In doing so, they gain collaborative competitive advantages to overcome disadvantages when going global at an early stage (Luo & Rui, 2009). Lastly, co-evolution is the combining done through compliance and the adaption of influences from the external environment in their home and host countries (Luo & Rui, 2009). Furthermore, EM-MNEs tend to be more prone to ambidexterity than D-EM-MNEs as they try to overcome their late-mover disadvantages. This is so because EM-MNEs must face several challenges, namely dealing with the external environment in the home country and abroad, developing the cooperating and competing ties with their stakeholders, and leveraging short-term gains with long-term growth (Luo & Rui, 2009).
In summary, scholars in recent years have given more attention to the topic of EM-MNEs. However, there is still relatively little research done on how these organizations emerge and operate (Ramamurti, 2012). The main discussion on this topic is whether these EM-MNEs originate and operate similarly or differently than D-MNEs (Ramamurti, 2012; Mauro & Garcia-Canal, 2009). This raises the question on whether existing theories about business and management, especially at an international level, are applicable or new theories need to be
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developed. A specific aspect where D-MNEs and EM-MNEs seem to differ is the drive for innovation.
2.2 Innovation in Emerging Markets
Currently the OECD countries continue to dominate as innovative nations. However, the innovative gap between the developed and emerging economies has become narrower on average; this is mainly due to the top performing countries from the emerging economies of China, Brazil and India (Wunsch-Vincent, Lanvin & Dutta, 2015). The businesses from these emerging economies have learned that technology adoption alone is no longer sufficient to foster the catch-up and to maintain the economic growth (Wunsch-Vincent, Lanvin & Dutta, 2015). As in general, innovation is a highly important factor for the development of emerging markets (Narula, 2012).
The main literature on innovation has identified market demand as the main driver for innovation; however, there could be new factors that drive innovation (Mowery & Rosenberg, 1997). Within emerging market economies, different sources for innovation are identified. For instance, innovating is an important factor in addressing societal problems, such as poverty and health issues in emerging economies (Wunsch-Vincent, Lanvin & Dutta, 2015). According to Dahlman (2010), there are three main drivers behind innovation in EM-MNEs, namely (a) the acquisition of technology from abroad, (b) the domestic creation of new knowledge, and (c) the dispersion and effective use of this new knowledge throughout the economy.
Moreover, several internal and external factors also seem to influence innovation. The internal factors are the capabilities and processes within companies for creating and commercializing technology. For instance, this can be the research and development (R&D) department or the market scope. It should be noted that innovation in the emerging economies tends to be more incremental and often may take place in an informal setting outside of the
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formal R&D departments (Wunsch-Vincent, Lanvin & Dutta, 2015). The external factors are the influences from the innovative environment; for instance, this can be the openness to international competition (Radas & Božić, 2009; Porter & Stern, 2001). On the one hand, EM-MNEs create innovative opportunities through cooperation with strategic partners, and on the other hand, they create disruptions in the competitive environment through low-cost innovations (Ramamurti, 2012). This happens because both the weak institutions and the low average income create the motive to direct consumers at the bottom of the pyramid (Khanna, Palepu & Sinha, 2006).
At the country level, these factors can be combined and measured with the national innovative output (NIU) measure (Porter & Stern, 2001). The NIU measure is mostly determined by several factors, such as (a) the number of scientists and technologists in the workforce, (b) the aggregate level of R&D spending, (c) the effectiveness of intellectual property protection, (d) openness to international competition, and (e) the intensity of spending on higher education (Porter & Stern, 2001). At the firm level, these measures are related to different factors, namely (a) the degree of R&D, (b) the degree of patents and other intellectual property protection, (c) equity and acquisition modes, and (d) the degree of higher educated personnel. These last factors are considered as the study focusses on the firm level analysis.
Innovation in EM-MNEs
Innovation is a key element for firms in emerging economies that are catching up to the market. The ability of organizations to introduce innovations in a sustained way globally is a crucial factor for diminishing the divide between the developed and developing economies (Dolfsma, Duysters & Costa, 2009). Overall, there is the consensus that EM-MNEs tend to innovative differently than MNEs from developed countries (Varadarajan, 2017; Nidumolu, Prahalad & Rangaswami, 2009) where new concepts have emerged, such as the concepts of
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reverse innovation and the bottom of the pyramid strategies.
Reverse innovation is defined as the intention to create and develop services and products in and for emerging markets which are meant to be sold worldwide from the beginning. This often happens through globalized innovation teams (Brem & Ivens, 2013). Furthermore, the bottom of the pyramid strategy consists of rethinking products, services and business practices to emerging markets consumers since these markets have a large consumer base with a small amount of money to spend per person (Zedtwitz et al., 2015). Moreover, the ability of EM-MNEs to innovate is highly influenced by the ambidextrous aspects of innovation because EM-MNEs need to align the radical and incremental innovations that are influenced by the internal and external environment (Li, Lin & Chu, 2008).
Overall, the current literature mentions the need to investigate the differences in innovation between D-MNEs and EM-MNEs (Radas & Božić, 2009). This is crucial because the existing literature has not given enough attention to the drivers for innovation in EM-MNEs (Vives, Asakawa & Svejenova, 2010). Therefore, this study delves into the factors that drive innovation in the organizations from emerging market economies, where there has been a growing interest in the influence of sustainability on innovation (Karltorp, Guo & Sanden, 2017; Li & Athuahene-Gima, 2001).
2.3 Sustainability
Sustainability is a continually evolving term in the fields of business practice, management, and strategy. Sustainability is considered to be the long-term maintenance of systems according to environmental, economic, and social considerations (Crane & Matten, 2004). This is often referred to as a “triple bottom line” perspective (Elkington, 1997). In addition, sustainable development is the development that meets the needs of the present without compromising the ability of future generations to meet their own needs (Brem & Ivens,
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2013; Law & Gunasekaran, 2012). Aside from this broad view, sustainability from a business perspective can be defined as the creation of goods and services that meets the needs of the present generation without diminishing the economic, social, or environmental opportunities in the long run (Jansson et al., 2000). Moreover, organizations in general have been adopting a more balanced and socially responsible view in practice (Crane & Matten, 2004). As companies that focus on, and push sustainable practices can improve their overall organizational performance (Maletič et al., 2014).
The aforementioned aspects play a particularly important role in EM-MNEs as their sustainable innovation processes are of significant influence in how they can catch up with D-MNEs (Dolfsma, Duysters & Costa, 2009). At present, large companies such as Tesla, Amazon and Google derive their innovativeness from the need to be sustainable (Fisk, 2010). A major way to address sustainability in organizations are sustainability-orientated innovation practices (SOI) (Maletič et al., 2014). SOI is defined as the integration of environmental and social aspects into products, processes, and organizational structures (Klewitz & Hansen, 2014). These practices drive the improvement of the overall organizational performance because they lead to improvements on products, services, processes, and management (Maletič et al., 2014). However, the drive for sustainability is in practice often neglected as many companies are under the impression that sustainability diminishes their competitiveness. It is often still assumed that integrating sustainability in business practices increases costs and does not create direct financial benefits (Nidumolu, Prahalad & Rangaswami, 2009). There has been evidence against this argument: in certain sustainable innovations, sustainability seems to result in improvements throughout the whole organization (Maletič et al., 2014). Therefore, is it necessary to further outline how organizations incorporate sustainability and what drives them to do so.
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Incorporating sustainability
Incorporating sustainability occurs throughout the whole organization where the sustainability strategy determines the degree to which this is conducted. In general, there is the concept that there are two types of sustainability strategies, namely low-cost sustainability strategies and sustainable differentiation strategies (Walsh & Dodds, 2017). Furthermore, the reciprocity between them determines the degree of sustainable actions and initiatives taken throughout the organization; this can eventually create competitive advantages.
The low-cost sustainability strategies consist of three main elements. Firstly, there are sustainable inputs, which implement sustainability in operating practices and can result in efficiency gains, such as reducing costs for packaging, storage, material, or energy (Epstein & Roy, 2001). Secondly, there are investment gains through the access to pro-sustainable investors and other sources of capital (Walsh, 2014). Because, being sustainable can lead to lower firm costs as less of a risk premium is attached to sustainable sourcing. In addition, it can lead to a reduction in development time, which means lower carrying costs of capital (Walsh, 2014). Lastly, there is the improvement of relations with regulators and local stakeholders that lead to savings in regulatory costs. This happens because continuous positive improvements on sustainability can result in lowered up-front regulatory cost due to eased governmental requirements (Walsh, 2014).
For sustainability differentiation strategies, higher sales and market shares are generally gained through reaching and creating a sustainability-sensitive market (Walsh, 2014). The following three constructs are the main aspects in this area. Firstly, there is the improvement of the brand image, which leads to reputation enhancement and being the brand of choice (Fisk, 2010; Walsh, 2014). Secondly, there is the aspect of sustainable service development. Here, an improved service reputation is created; for example, this can be done by retaining a higher quality personnel that is attracted by and related to the sustainable aspects of the company.
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Lastly, there is the aspect of sustainable product development. This leads to an improved reputation of the product and creates possibilities for premium pricing (Walsh, 2014).
Aside from incorporating strategies, a management and measurement system for sustainability is essential for providing guidance in choosing, designing, and implementing the strategy. It is crucial to have such a system in place because these systems help organizations to systematically identify, measure, and manage their sustainability goals, obligations and risks (Epstein & Roy, 2001). Such systems include the ISO or GRI standards for sustainability as well as the sustainable innovation cube model (Hansen, Grosse-Dunker & Reichwald, 2009). The accounting of these measures are later used in the research section of the paper.
Overall, sustainability can influence and improve the drive for sustainable changes in products, services, processes, marketing approaches, and the underlying business models which frame them (Seebode, Jeanrenaud & Bessant, 2012). The motivation for incorporating sustainable practices and initiatives stems from different sources, where there are several internal and external factors that drive sustainability (Law & Gunasekaran, 2012).
2.4 Drivers of Sustainability
An area of study that is becoming of interest to many researchers is the motivators for sustainable development in organizations. However, there is still no extensive understanding on why certain firms incorporate sustainability to a larger extend than others (Law & Gunasekaran, 2012). In combining various insights, several factors that influence the drive for sustainability are identified. These are divided into the internal and external drivers.
Internal drivers of sustainability
The internal drivers stem from the corporate willingness and the mindset of being socially responsible by focusing on sustainability (Law & Gunasekaran, 2012). Although
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earlier research has shown a positive relationship between corporate social performance and overall profitability, management often needs clear results before embracing sustainable development (Law & Gunasekaran, 2012). Therefore, for the adoption of sustainability, a supportive environment is required to drive the implementation. Such an environment includes relevant resources and processes, a supportive management and evaluation systems within the organization (Law & Gunasekaran, 2012). These can be seen in the sustainable actions taken alongside the company’s product, process, and management practices. Here, the internal drivers are divided in the process, product, and managerial push.
Cost reductive process and product push. Products and processes are usually at the core of the multinational. Incorporating sustainability in the processes lowers production cost and drives innovative improvements on efficiency (Fisk, 2010; Epstein & Roy, 2001). For instance, in the production process, sustainability can drive innovations in resource use reduction, waste disposal, and resource use substitution (Varadarajan, 2017). This can happen through diminishing wastage of energy during the production process, reducing material storage and processing costs, and reducing waste disposal (Epstein & Roy, 2001). These process innovations enable the production with less input through eco-efficiencies that are aimed to reduce the material and energy intensity (Rennings et al., 2006). Furthermore, sustainability can drive a new source of innovations (Hansen, Grosse-Dunker, & Reichwald, 2009). This is possible because the use of sustainability as a source of differentiation for new products and services can lead to innovations and create opportunities for R&D (Fisk, 2010; Nidumolu, Prahalad & Rangaswami, 2009). Moreover, innovations for sustainability-oriented products and services entail the improvement of current goods and services on sustainability or the development of new sustainable products and services. These often relate to innovations as recycled or remanufactured products (Maletič et al., 2014). These innovations can also reduce cost, which for instance can be done with less packaging or material substitution where
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efficiency and innovation do not need to be strategic trade-offs (Epstein & Roy, 2001; O’Reilly & Tushman, 2008).
Managerial push. The management’s viewpoint towards sustainability is a key driver in applying sustainability strategies throughout the corporation (Law & Gunasekaran, 2012). The managerial push occurs in multiple ways. The first is through the aspect of brand innovation. This is defined by Fisk (2010) as making sustainability the driver in the brand, culture, and identity of the business. Secondly, the push is done through organizational innovation where the core of the business and the measures of success are redesigned (Fisk, 2010). This is because sustainability gives management incentives to implement and design new business models and platforms as implementing environmental management systems, for instance (Nidumolu, Prahalad & Rangaswami, 2009; Maletič et al., 2014). Lastly, the push is done through the strategic innovation, in which sustainability is incorporated to change the way of how the business and its competitors work and compete with one another (Fisk, 2010). All these aspects determine the size and impact of the sustainable initiatives because having an alignment of management with a strategic consensus in incorporating sustainability can stimulate innovative activities and prohibit possible pitfalls (Li, Lin & Chu, 2008).
External drivers of sustainability
The external drivers stem mainly from challenges around the market competition and changing needs on sustainability (Law & Gunasekaran, 2012). This is because social and environmental issues are generally the main driving forces for incorporating sustainability; the pressures from different stakeholders can influence how and to which extend an organization does this (Epstein & Roy, 2001). This is because the stakeholders react to the performance on sustainability and the promotion of that performance (Epstein & Roy, 2001). External factors affect sustainability strategies within an organization through different channels, such as laws
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and regulations, market trends, and social pressures (Law & Gunasekaran, 2012). Therefore, these external factors on the sustainability strategy can be divided in institutional and market pressures (Rennings, 2000).
Institutional pressures. Institutional pressures in this context are the pressures from different actors to become more sustainable aware; these actors can include governments and NGOs (Nidumolu, Prahalad & Rangaswami, 2009). The environmental and social laws and regulations can lead to the need for sustainable practices. Furthermore, these actors can push alternative business practices by creating incentives for organizations to innovate in sustainability (Westly et al., 2011; Altenburg & Pegels, 2012).
Market pressures. Pressures from the market on sustainability stem from the competitiveness of the industry and the demand from consumers. An increasing sustainable competitive environment positively influences the pressure to act on sustainability (Nidumolu, Prahalad & Rangaswami, 2009). This occurs as increasing competition drives the need for businesses to differentiate themselves from others and be more cost efficient (Fisk, 2010; Brem & Ivens, 2013). Furthermore, the increase in consumer demand for more sustainable products or services leads to an increase in sustainability throughout the industry (Fisk, 2010). These increasing needs and wants of sustainably aware consumers are met through the market innovations by organizations (Fisk, 2010). For instance, high-tech companies now must develop sustainable products to meet the market needs (Law & Gunasekaran, 2012).
Strategic intent
These internal and external drivers are quite in line with the strategic options for incorporating sustainability as identified by Walsh and Dodds (2017). Within the internal drivers, the push by products, processes, and management is related to the sustainable inputs of low-cost sustainability strategies and the sustainable product and service improvement from
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the differentiation strategy. The reason for this is because lowered cost and increased sales creates an incentive to further incorporate sustainability (Epstein & Roy, 2001). The external drivers relate to the access to investors, the regulatory compliances from the low-cost strategies, and the improved brand image from the differentiation strategies, since these parts of the strategies are influenced by external pressures (Walsh, 2014).
Similar to how the low-cost and differentiation strategies form hybrid types into the total sustainability strategy, the overall drive for sustainability is influenced by the ambidexterity between the internal and external drivers (Walsh & Dodds, 2017).
2.5 Cooperation with Firms from Developed Economies
Within the literature on sustainability and innovation in emerging market economies, foreign direct investments (FDI) is often seen as an influential factor. This is because FDI can influence both the internal and external factors of the drive for innovation and sustainability. This can occur in different positive ways, such as the increase in competition or an increase in spill-over effects and investments (Dahlman, 2010). However, there are also some signs of negative influences of FDI on local innovation and sustainability (Liu et al., 2010). For instance, the innovation environment can be diminished by a crowding-out effect, the capitalization of knowledge, and the loss of autonomy (Cheung & Ping, 2004; Liu, Hodgkinson & Chuang, 2014).
It is therefore possible that the involvement of foreign companies influences the relationship between sustainability and innovation. However, this study is focused at the firm level, and the factor of FDI is of more relevance at the national level. At the firm level, this study aims to determine whether cooperation with firms from developed economies by EM-MNEs influences the relation between sustainability and innovation. Furthermore, the study examines whether a higher level of cooperation leads to more influence of sustainability on
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innovation where EM-MNEs can cooperate with firms from developed countries through different equity and non-equity modes (Pan & Tse, 2000).
2.6 Research Question
In short, there is a great need for more sustainable actions and innovations (Fisk, 2010), especially within the emerging economies as they are becoming increasingly influential globally (Ramamurti, 2012). Also, sustainability is becoming more of an important factor in the drive for innovativeness where progressive companies now treat sustainability as innovation’s new frontier (Varadajan, 2017; Nidumolu, Prahalad & Rangaswami, 2009). The existing literature has generally given little attention to drivers of innovation in emerging market MNEs (Vives, Asakawa & Svejenova, 2010), whilst multinationals are key players in the global innovation and sustainability process (Dolfsma, Duysters & Costa, 2009). Moreover, the current literature highlights the need to study the differences between D-MNEs and EM-MNEs in the field of innovation (Radas & Božić, 2009).
With these points in mind, this study presents the following research question: Does sustainability affect the innovativeness of multinationals from emerging market economies? The focus of the research is on the alignment between the internal and external drivers that influences sustainability and innovativeness. The cooperation with firms from developed economies is considered to be a moderating factor.
3. THEORETICAL FRAMEWORK
This part explains the relationship between sustainability and innovativeness as well as the influence of cooperation with firms from developed economies; it concludes with the conceptual model following the proposed hypotheses.
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3.1 Sustainability and Innovation
Haanaes et al. (2011) found that there is a growing gap between companies that incorporate sustainability driven business practices and companies that do not engage in these practices. As the organizations that embrace sustainability get different and even better competitive results through prioritizing their activities differently (Haanaes et al, 2011). Within the organizations that embrace sustainability, there seems to be a connection between sustainability and the degree of innovativeness (Seebode, Jeanrenaud & Bessant, 2012). On the one hand, incorporating sustainability can increase the demand on innovations to become more environmentally and socially aware (Hansen, Grosse-Dunker, & Reichwald, 2009). On the other hand, sustainability drives new sources of innovation (Hansen, Grosse-Dunker, & Reichwald, 2009). This as resembled in the low-cost strategies and differentiation strategies of sustainability (Walsh & Dodds, 2017). Because in the low-cost strategies the focus lies on reducing cost through implementing sustainable practices in current processes and, in the differentiation strategy the focus lies on reaching and creating new sustainable-sensitive markets through new innovative products and services (Walsh, 2014).
The motivation to incorporate these sustainability strategies stems from the influence of the internal and external drivers of sustainability. The internal drivers include the cost-reductive process, the product push, and the managerial push. Because through implementing sustainability in the product and processes, production cost can be lowered, and this drives furthermore innovative improvements on efficiency (Fisk, 2010; Epstein & Roy, 2001). As for instance in innovations in resource use reduction and waste disposal (Varadarajan, 2017). In addition, innovative opportunities for research and development arise from the use of sustainability as a source of differentiation for new products and services (Fisk, 2010; Nidumolu, Prahalad & Rangaswami, 2009. Lastly, the managerial drive towards sustainability is key in applying sustainability throughout the organization driving organizational changes
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and innovations (Law & Gunasekaran, 2012). The external drivers originate from institutional and market pressures. Because organizations must adapt to the changing needs on sustainability where the pressures from different market and institutional stakeholders influence to which extend an organization does this (Epstein & Roy, 200; Law & Gunasekaran, 2012). These institutional stakeholders do this by creating regulations and incentives for organizations to innovate in sustainability (Westly et al., 2011; Altenburg & Pegels, 2012). Furthermore, through market innovations the needs to adapt to increasing competition and changing consumer wants, are met (Fisk, 2010).
The combination of these internal and external drivers creates the force for implementing sustainable strategies that influences innovation throughout the organization. Because the alignment of the sustainable strategies determines in which extend sustainable actions and initiatives are taken throughout the organization which lead to competitive advantages (Walsh & Dodds, 2017). As according to the contingency theory, an organization can perform better when it aligns its strategy effectively to internal and external factors (Van de Ven & Drazin, 1984).
Just like the low cost and differentiation strategies form hybrid types into the total sustainability strategy, the overall drive for sustainability is influenced by the ambidexterity between the internal and external drivers (Walsh & Dodds, 2017). However, there is still little known about the extent to which the factors of internal and external drivers influence the performance on sustainability and innovation. Therefore, this study explores how the alignment of the internal and external drivers influences the sustainable and innovative performance. Regarding this point, the study assumes that a higher alignment of the drivers entails more innovativeness. To address the research question, this study proposes that a positive relationship exists between the drive for sustainability and innovativeness in EM-MNEs. This is tested by linking the total (sum) and the alignment (gap) of the internal and external drivers
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to the innovative performance. Therefore, this thesis proposes the following two hypotheses: H1: When there is a higher number of internal and external drivers experienced by the firm, the firm’s innovativeness is also higher.
H2: When there is a wider gap between a firm’s internal and external drivers, the firm’s innovativeness is lower.
This thesis assumes that these hypotheses hold in the context of EM-MNEs as they are increasingly incorporating sustainability in their business practices while improving their innovative capacity (Brem & Ivens, 2013). Furthermore, for EM-MNEs to compete in the global market, they need not only operational advantages but also progressive strategic options and learning capabilities from incorporating sustainability (Luo & Rui, 2009).
3.2 Moderation of Cooperation with Firms from Developed Economies.
Sustainability is becoming of increasing concern within the developed economies; a growing number of organizations from developed economies now derive their innovativeness from the need to be sustainable (Hansen, Grosse-Dunker & Reichwald, 2009). Therefore, it is possible that the cooperation between firms from developed economies and EM-MNEs influences the relationship between sustainability and innovation. As identified in the literature review, this can happen through positive spill-over effects or increased pressures for sustainability from the developed economies perspective. However, there is also the possibility that reverse effects occur when there is no concern with sustainability or that the drive for sustainable innovation stems solely from the EM-MNE (Dahlman, 2010). This study explores whether cooperation leads to more influence of sustainability on innovation.
EM-MNEs can cooperate with firms from developed countries through different equity or non-equity modes (Pan & Tse, 2000). The equity modes include wholly owned subsidiaries (WOS) and joint ventures (JV), while the non-equity modes are contractual agreements and
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exports. Within these modes, contractual agreements and JVs are strategic alliances and therefore they are considered for this study as the cooperation modes. Foreign involvement from the EM-MNE through WOS or exports are considered as a non-cooperation mode (Pan & Tse, 2000). For this thesis, the subsidiary ownership types of none, minority share, 50%-50%, majority share and 100% ownership are considered as determents for cooperation modes. To account for the level of cooperation and not the share of ownership, it is assumed that a 50%-50% ownership inclines the highest level of cooperation and that this relation is linear (Contractor, 1990). To test whether cooperation between E-MNEs and organizations from developed economies positively influences the relation between sustainability and innovation, the following hypotheses are composed.
H3A: Increasing the level of cooperation between E-MNEs and organizations from developed economies positively influences the relation between the sum of internal and external drivers of sustainability and the innovativeness of the firm.
H3B: Increasing the level of cooperation between E-MNEs and organizations from developed economies negatively influences the relation between the gap of internal and external drivers of sustainability and the innovativeness of the firm.
From the hypotheses, the following conceptual model is drawn. Figure 1. Conceptual model:
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4. METHODS 4.1 Empirical Setting
The objective of this study is to explain the relationship between sustainability and innovation in EM-MNEs. The study is focused on EM-MNEs because they are gaining significant influence on business globally (Ramamurti, 2012), yet there is relatively little research done on drivers of innovation in emerging economies (Vives, Asakawa & Svejenova, 2010). Furthermore, data on MNEs is more extensive and available than small or medium enterprises from emerging economies, for instance. This study analyses secondary cross-sectional panel data at the firm level.
4.2 Dataset
Data were collected and analysed of hundred large EM-MNEs over a four-year time period. The time frame concerns recent years only, since the academic and managerial interest in sustainability and EM-MNEs is relatively new (Dolfsma, Duysters & Costa, 2009). For the data collection, first a list of hundred EM-MNEs was assembled. Secondly, the data on these EM-MNEs were gathered through different databases where data were found to be predominantly available from the years 2013 to 2016. Finally, the merging of the collected data produced the complete dataset, which consists of data on internal and external sustainability measures, innovation measurements, predominant subsidiary ownership types, and control variables of the EM-MNEs.
The selection of the EM-MNEs is taken from the report “Transparency in corporate reporting: Assessing emerging market multinationals” prepared by Transparency International (2016). Transparency International is an organization that aims to prevent corruption through working with partners in the government, the business world, and the civil society. In this study, they assessed the corporate reporting practices of 100 large multinational companies from
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emerging markets. The selection of these EM-MNEs is based on their identification of rising stars in the global economy (Transparency International, 2016), and their report covers 16 different countries. Based on the report, this paper uses the identified company name, industry, and country. The final dataset is compiled from the following data and accompanied data sources.
The Orbis and Osiris databases were used for a company’s financial data, innovative measurements, ownership data, and information on subsidiaries. From these databases, several kinds of data can be found, namely the ownership type, financial data about operating revenue/turnover, R&D expenses, and R&D/operating revenue. The data on patents and the data on subsidiaries in developed economies are gathered from Orbis only.
The Corporate Social Responsibility Hub (CSRHub) database was used for finding the EM-MNE’s sustainability performance grade, internal measurements, and accompanied country and industry sustainability performance grade. The CSRHub is the world's largest sustainability business intelligence database. Their ratings and tools evaluate and benchmark a company’s sustainability performance. The objective of CSRHub is to provide consistent ratings of CSR performance (CSRHub, 2017). This is done through the following steps. First, a mapping is done to a central scheme as they divide CSR performance into twelve subcategories, which are then placed into four main categories. After this, the performance is converted to a numeric scale, where all the data is rated on a 0 to 100 scale. The possible biases are adjusted through comparing and analysing different data sources. The data on the company are combined into the base ratings at the subcategory level, and these ratings are then aggregated to the category level. Lastly, country and industry data are analysed for the assembling of industry and country averages (CSRHub, 2017). For this thesis, a temporary student account was acquired which granted access to the dashboard data. It was found that there was no sufficient data available for 23 of the 100 EM-MNEs.
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Another database used was the Global Reporting Initiative (GRI) database, which contains annual (sustainability) reports and GRI assessments. The GRI is a global independent institute that assists businesses, governments, and other organizations in tackling critical sustainability issues. They maintain a large sustainability disclosure database with assessments by them and third parties (Rientjes, 2017). The overview of the organizations provides information about the quality of the organization’s reports on sustainability initiatives and adherence to general and assurance guidelines (Global Reporting Initiative, 2016). In total, there were 17 out of the 100 EM-MNEs not included in the GRI database.
Lastly, the World Economic Forum (WEF) database was used, particularly for its Global Competitiveness Index (GCI) dataset on the countries sustainable and environmental governance. The World Economic Forum is an independent institution fostering global development through public-private cooperation (WEF, Schwab, 2014). The GCI dataset measures national competitiveness, which is defined as the set of institutions, policies and factors that determine the level of productivity (WEF, Schwab, 2014). For this study, the sustainability-adjusted GCI dataset of 2014–2015 is used. It measures 144 economies on their sustainable competitiveness, and this includes issues surrounding social and environmental sustainability, which are issues considered in this study. The measurement is built on the economic concept of global competitiveness adjusted to the pillars of social and environmental sustainability (WEF, Schwab, 2014). All the 16 different countries used in this study are accounted for in the GCI dataset.
4.3 Measures
Dependent variable Innovativeness
To measure innovativeness at the firm level, an extensive number of determents can be used as innovations occur throughout the whole organization (Smith et al., 2008). These are predominantly measured from three categories. The measures in the first category are product
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and technology measures, such as through patents or patent applications. The second category consists of financial and market measures, such as through total R&D spending. Lastly, there are subjective measures such as organizational innovation responsiveness (Denti, 2013). This study gathers the data on innovation for each company using the number of patent applications (PATENTS) and the factor of innovative capacity (ICAP). The factor of innovative capacity shows the number of companies that invest in R&D as a percentage of their revenue. This is measured by dividing the yearly R&D expenses using the operating revenue (Corporate Knights, 2017). This study predominantly focuses on patents since this data is more extensively available than the innovative capacity. Also, the amount of ICAP data was solely not enough to test the relations.
The innovative capacity measure was used in the assessment of the Corporate Knights (2017) sustainability index, and it was applied in this study as a measure for innovation in a post-analysis control test. This measure is used because in studying innovation in emerging economies, innovation needs to be defined and measured more broadly than solely by new inventions (Smith et al., 2008: Groboschenko, 2008). Furthermore, there is more certainty over the outcomes of the tests if the outcomes of the statistical tests with ICAP and PATENTS as measure for innovativeness are relatively the same.
Independent variable internal drivers
The internal drivers consist of the cost reductive process and product push, and the managerial push. To measure the internal motivation, the factors relating to the internal infrastructure and resources must be assessed (Law & Gunasekaran, 2012). For this study, the internal drivers are measured by the extent of sustainable efficiency, brand incorporation, and managerial measurements. These measurements are extracted from the CSRHub and GRI listings (Mertens & Maas, 2012).
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Sustainable efficiency is measured using the total score of the CSRHub subcategories scores on product (SPS) and resource management (SPRMS); this total score produces the sustainable efficiency measure (SusEff), where SusEff = SPS + SPRMS. The product score entails the capacity of the organization to reduce environmental costs, create market opportunities through new sustainable technologies and processes, and produce market products and services that benefit consumers in the areas of health and the quality of life (CSRHub, 2017). Furthermore, the resource management scores resemble how efficiently resources are used within the organization and throughout the value chain. This includes the organization’s capacity to reduce the use of materials, energy or water and to develop efficient solutions by improving its supply chain management (CSRHub, 2017).
A score on the extensiveness of reporting is determined by creating the brand incorporation measure (BrInc). This measure assesses sustainability as the driver in the brand, culture, and identity of the business (Fisk, 2012). Having a more extensive reporting of sustainable practices and initiatives is an indicator of the perceived importance of sustainability in the organization. The report type and adherence level as identified by the GRI are used as measurements. This produces a score on a high, medium, and low range, where for the type of report the following ranking is applicable: (a) high is used for GRI-standards or GRI-G4; (b) medium is used for GRI-G3, G3.1, and citing GRI; and (c) low is used for non-GRI. Furthermore, for the adherence/standard level, the following ranking is used: (a) high is used for “In accordance” with Core, A, or A+; (b) medium is used for “In accordance” with Comprehensive, B, or B+; and (c) low is used if it is undeclared, none, C, or C+ (Global Reporting Initiative, 2017).
The extensiveness of managerial measurements (MMS) is assessed on whether the managerial measurement tools of ISO 26000 and AA1000 are applied. This leads to a score of low when none is applied, medium if one of the two is applied, and high if both are applied.
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The ISO 26000 is applicable as it is an international guideline for the implementation of sustainable activities in an organization (Rientjes, 2017). It provides guidance for managers in conducting internal and external assessments on sustainability (Hanh, 2013). Furthermore, the AccountAbility’s AA1000 Series is applicable because it provides principles-based standards and frameworks in guiding companies with sustainable strategies, governance, and operational management (AccountAbility, 2017).
By calculating the total of all these measures, all the items from the assessment of the internal drivers in the theoretical framework are accounted for. The measures of BrInc and MMS are transformed into a scale from 1 to 100 to align with the SusEff measure. Furthermore, all the measures are assumed to be of equal importance to internal drivers and are therefore equally weighted. The final measure of the independent variable internal drivers (IVID) is constructed as the following:
IVID = SusEff + BrInc + MMS
Independent variable external drivers
The external drivers consist of the institutional and market pressures. As seen in the study by Law and Gunasekaran (2012), the construct of motivating effect of the external factors was measured by factors relating to laws and regulation in the operating country and the social pressure effects on the organization.
For this study, the institutional pressures are measured by data on the main operating countries policy on social and environmental law, regulations, and incentives. These specific aspects are represented in the combination of the scores in the GCI sustainability adjusted index. The GCI gives a country score from one to seven on several sustainable competitive aspects (WEF, Schwab, 2014). For this study, several relevant factors are used, namely the social-sustainability adjusted GCI value (SSGCI), the environmental-sustainability adjusted
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GCI value (ESGCI), the stringency of environmental regulations (SERGCI), and the enforcement of environmental regulations (EERGCI). These are taken during the 2014–2015 period. The total of the scores creates the measure for each country on institutional pressures (IPress), and IPress = SSGCI + ESGCI + SERGCI + EERGCI. This study includes only these factors of the GCI because they cover the specific aspects of institutional pressures as identified in the theoretical framework. General country performance grades on sustainability often cover a wide range of variables that do not necessarily affect EM-MNEs. For instance, the CSRHub country grade includes total CO2 emissions related to other countries that is not related to the firm level.
The market pressures are measured by the demand for sustainable products or services and the competitiveness on sustainability in the industry of the organization. The motivating effect due to the need to advance can be measured by items relating to the pressures of market trends, external competition, and reputation (Law & Gunasekaran, 2012). These items are best reflected in the industry sustainability score assessed by CSRHub, which covers the same measures for the sustainability of the organization as weighted over the whole industry. Furthermore, the score is adjusted to the main operating countries and timeframe. The final score of the independent variable internal drivers (IVED) is constructed by combining the IPress and MPress measure. Moreover, these measures are seen to be of equal importance to external drivers and are therefore equally weighted.
IVED = IPress + MPress
Moderator Cooperation with firms from developed economies (MC)
To determine how the cooperation of EM-MNEs with firms from developed economies moderates the relation between sustainability and innovation, this study looks at the difference between equity modes identified by Pan and Tse (2000). This study, firstly considers the initial
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difference between cooperation or not. In the post analysis the difference between the ownership types is measured.
The cooperation between EM-MNEs and organizations from developed economies is measured by the type of subsidiaries in developed economies. Here, several possible scenarios are given for the EM-MNEs subsidiaries: to not be present in developed economies (NONE), have a minority ownership share between 1% and 49% (MINORITY), be equally owned with a share of 50% (50/50), be majority owned by the EM-MNE with a share between 51% and 99% (MAJORITY), or be wholly owned by the EM-MNE with a share of 100% (WOS). For the assignment of the category, the predominant ownership type is taken where the most frequently used form of subsidiary ownership type by the firm is the predominant cooperation mode. For the test on cooperation, the ownership types of NONE and WOS as identified from the literature, are categorized as non-cooperation modes, and the other types are assigned as cooperation modes. In the post-analysis, tests are conducted with moderating variables created for each of the ownership types. This is done to see whether the proposed increase in cooperation within the strategic alliances has a larger influence on the relation between sustainability and innovation.
Control variables
To control for the innovativeness outcome of EM-MNEs, a set of firm specific variables are included. First, the size of the firm, which is measured as operating revenue divided by turnover, is included as a variable since it is found to be positively related with innovation. One reason for this is that larger companies tend to have more resources to innovate and can benefit from economies of scale in R&D (Gorodnichenko, Svejnar & Terrell, 2008). The second variable is the age of the firm measured in operating years from date of incorporation. Here, it is either possible that older firms innovate less because they developed routines that are
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resistant to innovation or that they innovate more because they can accumulate the knowledge necessary to innovate (Gorodnichenko, Svejnar & Terrell, 2008). The third variable is government/state ownership; a dummy variable equal to one is included if the government or state has a majority stake in the firm and zero otherwise. The reason for doing this is because state ownership tends to be negatively related with innovation through bureaucratic obstructions (Gorodnichenko, Svejnar & Terrell, 2008).
Several controls are internally resolved in the use of the other variables and datasets. For instance, the industry competitiveness as a control variable on innovation is weighted in with the GCI measure on institutional and market pressures (Ayyagari et al., 2011).
4.4 Data Analysis
Constructs for hypothesis testing
This study tests seven different models from the hypotheses using multiple regression analysis as the statistical tool in STATA. This is to examine and analyse the relationship between sustainability and innovativeness and the moderating effect of cooperation with firms from developed economies. For all tests, panel regressions with both firm and year fixed are performed whilst controlling for size, age, and state ownership. To strengthen the findings, two post-analysis tests were conducted.
To test the hypotheses, the following constructs for the variables were used. For the dependent variable, DVI denotes the innovativeness of the firm, and PATENT denotes total
amount of patent applications. In the post-analysis, the test was performed with DVI = ICAP: DVI = PATENT
For testing H1, the joint effect of internal and external drivers of sustainability is
operationalized as the sum of the two. Sum of Drivers = IVID + IVED
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For testing hypothesis 2, the alignment between the internal and external drivers is operationalized as the absolute value of the difference between them. For the study, the absolute value is taken to capture the misalignment in both directions (Hawn & Ioannou, 2016). In the database, there was only one instance where the value of external drivers was higher than internal drivers.
Gap of Drivers = IVID – IVED
To test H3, the moderating effect of cooperation with firms from developed economies is operationalized as the cooperative form of subsidiary ownership.
Cooperation = 1 if in none cooperation mode V 2 if in cooperation mode.
The hypothesis was tested by adding the product of the moderator and the independent variable to the regression equation, as described by Baron and Kenny (1986). Both the factors of Sum of Drivers Coop. and Gap of Drivers Coop. are constructed. For the post-analysis, the tests were conducted with each ownership type separately to see whether an increase in cooperation has a larger influence on the proposed relations. Here, cooperation is a categorical variable of the predominant subsidiary ownership type. This was tested by assigning each type of subsidiary ownership a 1 or a 2 when it is the predominant form. Thereby creating four modifying factors where the effect should differ according to the assumptions.
Sorting, reliability and validity of data
A company is removed from the dataset when the data on most of the measurements was not available as without the necessary information, it would not possible to measure any of the constructs over any of the four years. Companies that were removed from the dataset are Chery Automobile, Cotemina, Etisalat, Fung Group, Galanz Group, China Shipping group, LDK Solar, Mabe, Magnesita Refratarios, Tenaris, and the Wanxiang Group. To create panel data, Sinohydro was deleted from the list since the only data found is in 2012. In the STATA
