Business Group affiliation promotes innovative
performance in Emerging Markets:
India’s pharmaceutical industry: a case study.
Master Thesis
Business Group affiliation promotes innovative performance in Emerging Markets: India’s pharmaceutical industry: a case study.
Date: June 19, 2015 Word count: 7935
Student:
Michael Richardson S2071932 Saffierstraat 15, 9743LE, Groningen 0617818599 m.c.richardson@student.rug.nl Supervisor: Dr. S. Gubbi Co-assessor: Dr. A. Van Hoorn
Abstract
Innovation has been considered as a prerequisite for firms’ survival and competitiveness. Emerging-Market countries are usually considered suppliers of raw materials and low-cost labor, dealing with low-knowledge process and products. As these countries grow and transition from developing to more developed economies, they will start to move from high labor-intensive to capital-intensive and knowledge-based economies.
Table of Contents
Abstract ... 3 1. Introduction ... 1 2. Literature Review ... 4 Business groups ... 6 R&D investment ... 8 Internationalization ... 10 3. Theoretical Model ... 13 4. Methods ... 14Research Context: India... 14
Sample and Data ... 16
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1. Introduction
Innovation has been widely named as the dominant factor in maintaining firms’ worldwide
competitiveness (Gaynor, 2002); as the main determinant for not only a firm’s prosperity but also its survival (Cefis and Marsili 2006) and, as the driving force behind international trade (Vernon, 1966; Krugman, 1979). Furthermore, Gaynor (2002) argues that innovation can fuel organizational growth and that it is the engine that allows businesses to maintain their sustainability in a global economy. In support of this, some authors argue that firms’ ability to develop new products and processes that enhance their productivity and increase their competitive advantage is fundamental for their success in modern times (Vernon, 1966; Krugman, 1979).
According to DTI (2003) economics paper 7, innovative activities have a positive impact on firms’
performance granting them an advantage over those that do not innovate. The United Nations Economic Commission for Europe (UNECE, 2009:15) emphasized that “innovation is a basic source of
competitiveness in modern knowledge-based economies. It results in higher living standards and contributes to the solution of environmental and social challenges”.
In the last two decades there seems to be shift in the economic system, moving away from developed economies towards emerging-market economies (EM). For emerging-market economies to catch up with developed economies, it is of utmost importance for EM firms to innovate in order to be competitive and for the development of knowledge-based economy. However, unlike developed economies, emerging- market economies such as India suffer from weak or absent institutions, the so-called institutional voids that are necessary to support business activities (Khanna and Palepu, 1997).
Khanna & Palepu (1997) indicated that these institutional voids can take place in the following institutional dimensions: capital market, labor market, product market, government regulation, and contract enforcement. On the other hand, they found that (highly) diversified business groups could fill this institutional voids by imitating the functions of several institutions that are present only in
developed economies (Khanna and Palepu, 1997:41).
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and whose members are linked through relations of interpersonal trust, based on a similar personal, ethic or communal background”.
Business groups are of paramount importance in the industrial organization and economic activity of many countries, in particular in developing (emerging) countries such as Mexico, Chile, Brazil, Malaysia, India, China and Eastern European countries. Especially diversified business groups dominate private sector activities, arising in response to market failures (Leff 1978, Ghemawat and Khanna 1998,
Toulan2001) and policy inducements (Chang and Choi 1988). Furthermore, these groups often control a significant share of the country’s natural resources, they account for the largest and most visible of the country’s firms (Amsden and Hikino 1994, Granovetter 1995, Khanna and Palepu 1997) and add value and employment (Fulvio, 2012). For example, in Mexico statistics show that just the ten largest groups account for 54 percent of total sales expenditure and 48 percent of formal employment. While in the case of Chile, the top 20 business groups control 84.5 percent of the assets of the largest companies operating in the country. Just the top five business groups control 47.5 percent of the total assets of companies listed on the local stock exchange (Lefort and Walker (2000c). These numbers emphasize the importance of the business groups. While business groups are widespread, their specific characteristics differ from country to country. For this study the focus will be on business groups located in India.
Some empirical evidence supports Khanna and Palepu’s (1997) statement by arguing that business groups prosper in instances of weak national institutions and, congruently, those groups perform better in countries characterized by weaker institutions than in countries with well-established institutions (Khanna and Yafeh, 2007; Carney et al., 2011). Taking this argument even further, Chang et al. (2006) found that business group affiliation has a stronger (positive) effect on innovation in less developed (emerging) markets.
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and foreign spillovers and economies of scale. (Mahmood and Mitchell, 2004; Belenzon and Berkovitz, 2010).
Despite the fact that there is an overwhelming amount of literature on innovation and innovation performance, a significant amount focus on Western or industrialized Asian countries, whereas the available literature on Emerging Markets focuses on, for example, the effects of the Chinese government financial incentives on firms’ innovation performance (Guan and Yam, 2015); linking market orientation and innovative performance ( Şanal, Alpkan, Aren, Sezen, and Ayden 2013); the impact of different channels for international technology spillover on the innovation performance of Chinese high-tech industries (Liu and Buck, 2007); the effects of search scope along the supply chain on the innovation performance of small and medium-sized enterprises (SMEs) in emerging markets (Ren, Eisingerich and Tsai, 2015); reverse innovation unlocking business opportunities in Emerging Markets (Sinha, 2013); the performance effect of business groups in Emerging Markets (Khanna, Rivkin, 2001); or profitability of group affiliation in Emerging Markets (Khanna and Palepu, 2000).
However, there is a lack of empirical studies linking emerging-market firms’ business group affiliation and their innovative performance. In order to fill this gap we will investigate and attempt to answer the following research question: Does business group affiliation promote firm’s innovative performance in Emerging Markets? Additionally, we will address the following questions: Do business group affiliated firms have higher innovative performance than stand-alone firms?
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2. Literature Review
As suggested in the introduction, innovation has been widely cited as a main determinant for not only the firms’ prosperity but also their survival (Cefis and Marsili 2006). However, there is no clear definition for innovation. The United Nations Economic Commission for Europe defines innovation “as the
successful commercial or social exploitation of new ideas where the idea is successfully brought to market (or in a social context reduces social costs or improves social services), by offering a more effective alternative to existing arrangements”, while Drucker (1993), Cho and Pucik (2005) define it as the creation of new effective products and processes through the application of new knowledge; and Cowan and Jonard (2009) explains it as the discovery of knowledge not known by others. Consequently, this lead to the creation of new products, for which firms use patents to protect their R&D investments (Cowan and Jonard, 2009).
Tidd, Bessant, and Pavitt (1997) said “innovation is a process involving the transformation of
opportunities into practical utility”. As Emerging Markets develop economically, their firms’ ability to innovate becomes a vital factor for their international competitiveness. Porter and Scott (2003) argued that competitive advantage comes from “the ability to create and then commercialize new products and processes, shifting the technology frontier as fast as their rivals can catch up” (Porter & Scott, 2003: 1). According to the European Commission, “competition through innovation appears to be as important as price competition as a reaction by enterprises to market pressures. In many business sectors, an
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Freeman and Soete (1997) defined innovative performance as the degree to which firms are able to continuously introduce new inventions in the market, thus the introduction rate of new products, new process systems or new devices (Freeman and Soete, 1997).
Additionally, the existing literature presents factors, such as “cooperation with suppliers’, clients’, and universities, the existence of risk capital investors and business angels, an innovation friendly climate in addition to infrastructures to have certain effects on firms’ innovation activities” (; Roberts and Berry, 1985; Cooper, 1990; Wheelwright and Clark, 1995; Slappendel, 1996; Dussage etal. 1992; Lemon and Sahota, 2004; Koc and Ceylan; 2007; Tidd and Bessant, 2009; Idris, and Tey 2011; Lindic and Marques da Silva, 2011; Bourne, 2011; BarNir, 2012; Garcés-Ayerbe et al. 2012; Mainardes et al. 2011; Fernandes, Ferreira and Raposo, 2013:566).
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Table 1. Key Determinants for Innovative Capability
Business groups
Hall, Lotti, and Mairesse (2009) point out that large firms often implement multiple innovation initiatives. According to a number of authors large firms lead to a positive performance thanks to economies of scale and scope. At the same time, they say that performance might be bound by the high level of costs due to administrative limitations (Irwin, Hoffman, and Geiger 1998; Gopalakrishnan 2000). Consequently, large firms are more likely to pursue innovation than smaller firms. However, there are some empirical indications of the existence of an inverse relationship between productivity of R&D investments and size, therefore supporting the theory that large firms focus on existing products and spend less time developing new ones (Acs and Audretsch 1990; Cohen and Klepper 1996; Plehn-Dujowich 2007).
Previous studies found that firms embedded in a network of partners (Ahuja, 2000b) are able to identify and exploit the partner’s complementary resources and capabilities and may gain a competitive
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new product developments and business models (Durand, Bruyaka, Mangematin, 2008; Leiponen and Helfat, 2010). According to Gulati, 1999; Zhang and Li, 2010, firms participating in inter-firm networks gain significant informational advantages in terms of access, timing and learning. Subsequently, their competitive position and in-house innovation capabilities are improved. Furthermore, present research suggests that inter-organizational and inter-firm relationships (e.g., Freeman, 1991; Pittaway, Robertson, Munir, Denyer, & Neely, 2004; Powell & Grodal, 2005; Wu, 2011) whereby firms work closely with customers and suppliers can make a significant contribution to their innovation performance (Prahalad & Ramaswamy, 2000; Skaggs & Youndt, 2004).
From the above discussion, one can infer that large firms are more likely to pursue innovation, and have a more positive business performance than smaller firms. And firms embedded in a form of network (e.g. network of partners) can benefit from the access to network’s wealth of resources, capabilities (e.g. technical, administrative etc.) and know-how in comparison with firms not part of network. In such case, one can say that business groups encompasses the above-mentioned scenario. As suggested earlier in the introduction, business groups are the primary form of business organization and they are responsible for the majority of business and economic activity in emerging-markets.
Mahmood and Mitchell (2004) introduced the term innovation infrastructure that describe the set of resources such as finances, talent, and technology, that firms need in order to undertake innovative activities(Mahmood and Mitchell 2004:1349). And the authors pointed out that business groups can provide affiliated firms with the needed innovation infrastructure. They divided innovation
infrastructure in four elements. The first element focus on business groups as venture capitalists providing affiliates with an internal markets that allocates financial and human capital, and know-how towards the needs and innovative opportunities within the group. The second element focus on business groups as research centers, the incubators for scientific talent and developing efficient labor markets. With the advantage that groups can spread the incurred fixed costs over the businesses within the group. The third element focus on business group as protectors and enforcers of intellectual properties and contracts. The fourth element focus on business groups as providers of internal intermediation for complementary sectors (Mahmood and Mitchell, 2004). So, Mahmood and Mitchell reinforce the advantages of being affiliated to business groups.
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consistent with the ideas of shared values and shared destiny among business group members” (Kalnins and Chung, 2002:12).In support of this argument Claessens, Djankov and Klapper (2000) found that the establishment of an internal market can lead to economic benefits and greater diversification of firm risks that may not be possible in external financial market due to market imperfection.
However, there are a number of papers that argue that the complex structure of business groups can encourage inefficient investments and lead to greater expropriation (Shleifer and Vishny, 1997; Scharfstein and Stein, 1997; Scharfstein, 1998). The political economy literature on groups has often viewed government-supported business groups as rent -seeking “parasites.” (Khanna, T., and Yafeh, Y., 2005). Furthermore, “groups can hinder innovation by creating barriers to new entrants and thereby limiting opportunities to experiment with new technology” (Mahmood and Mitchell, 2004:1348).
From the above discussion one can say that business groups grant their affiliated firms with various advantages that they would not have if they were on their own. However, there is some risks that can arise due to the complex business groups’ structure and other inefficiencies. In order to investigate if affiliated firms are better off than independent firms the following hypothesis was formulated.
Hypothesis one: Business-group affiliated firms have a higher degree of innovative performance than non-affiliated firms.
R&D investment
In order for emerging markets to catch up with developed countries, they need to gain the knowledge to develop and commercialize new ideas (Reddy and Zhao 1990), the so-called knowledge sourcing element (Mahmood and Mitchell, 2004). However, gaining knowledge is not enough. It is even worthless if the firm does not have the proper infrastructure and capabilities to discern, disseminate and absorb the acquired knowledge and make use of it in an effective and efficient way.
According to a study on 254 Korean IT SME’s, in order for them to increase their internal technological capabilities, they need to acquire external knowledge. Usually, acquiring knowledge in more advanced countries takes place in tacit form. Tacit knowledge is more difficult to capture and it requires a certain level of absorption from the acquirer (Zahra and Gerald, 2002).
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new insights and knowledge. Cohen & Levinthal (1989) and Griffithetal (2004) emphasize the importance of investing in R&D in order to improve the firm’s ability to absorb existing and new information.
According to the OECD, R&D refers to "all creative work undertaken on a systematic basis in order to increase the stock of knowledge and the use of this stock to devise new applications, such as new and improved products and processes" (Oslo, 2005:92). Technology acquisition indicates the purchase of embodied technology - in the form of "advanced machinery and computer hardware" - and disembodied knowledge - in the form of "purchase of rights to use patents and non-patented inventions, licenses, know-how, trademarks, software and other types of knowledge from others for use in the enterprise (Oslo, 2005:94)". Existing literature suggests that complex product innovation relies on formal R&D, while process innovation relies on technological acquisitions (Parisi, Schiantarelli and Sembenelli, 2006).
Research shows that the combination of absorption capabilities with internal R&D investment can effectively help accelerate technological cooperation. Furthermore, it can help magnify the performance-enhancing effects of external know-how and technology, as well as strengthening technological
cooperation (Miotti, Sachwald 2003). Cassiman and Veugelers (2006) found that an increase in internal R&D investment and technological cooperation with external organizations has a positive effect on companies’ internal R&D capabilities.
Schumpeter (1942) was the first to advance the notion that a firm’s size affects innovative activities. Since then, there have been several arguments supporting the notion that larger firms are in a superior position to invest in R&D. The justifications for such assumption were based on the facts that firstly, larger firms had easier access to external finance and larger internal funds to support capital intensive R&D projects; secondly, large companies are considered to have a higher degree of diversification, which helps them deal with the uncertainty of R&D investment; lastly, large corporations are able to have economies of scale and scope when they embark on big R&D projects (Cohen and Klepper, 1996; Mairesse and Mohen, 2002).
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Damanpour (1992) Meta-analysis establishes that firm size has a positive relationship with innovation. According to the author, size has a positive effect, because larger firms are able to employ larger R&D talents that would allow the firm to accumulate more technological knowledge and capabilities. Smaller firms, on the other hand, have to deal with R&D and technological issues and a number of impediments such as lack of financial, managerial and marketing skills and access to external funding sources. However, some argue that smaller firms are more flexible and responsive to accept and affect change (Bommer and Jalajas, 2002). From the above discussion we can infer that R&D investment plays a key role in firms’ ability to innovate, which in turn, increases the firms’ innovative performance. And also that firms’ size can have a direct positive effect on R&D. As mentioned earlier business groups are the main form of business organization in Emerging Markets. With the second hypothesis of the study we will try to investigate if R&D as moderator will have an interaction effect on firms’ innovative
performance.
Hypothesis 2: The positive effect of R&D on innovative performance will be higher for group
affiliated firm than for stand-alone/independent firm.
Internationalization
Continuing building on the knowledge sourcing element (Mahmood and Mitchell, 2004), in which Emerging Markets try to gain knowledge to develop and commercialize new ideas (Reddy and Zhao 1990). The literature shows that internationalization can contribute to both knowledge gain and
commercialization of new ideas and products. Internationalization can be broadly defined as “expanding across country borders into geographic locations that are new to the firm” (Hitt et al., 1994: 298). According to The Trade and Innovation Project, internationalization affects innovation through the following channels: imports, foreign direct investment (FDI) and trade in technology (Kiriyama, 2012). Vernon (1966) argues that firms introduce new products to satisfy domestic demands to increase revenue and market share, to spread risks and costs in the international markets. There are several ways for a firm to be active in international market for example export, import, outsourcing and FDI; these are called modes of internationalization. Furthermore, literature shows that internationalization has
numerous other advantages. In the next section two of these advantages will be presented.
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Through internationalization firms can reduce the cost of innovation (Kotabe, 2002) by accessing multiple markets, where they could acquire materials and R&D inputs at the lowest-priced available resources and outsource their research facilities to the most lucrative regions (Kafouros, 2008). Prior studies found that the income of a scientist in India is one- tenth of the income of a scientist in Sweden, whereas, the cost per square meter for biotech lab in the US is 10 times more costly than one in India (Granstrand, Håkanson & Sjölander, 1993). In addition, Cheng and Bolon (1993) state that
internationalization can help firms to get into contact with the much needed technical expertise and to recruit superior engineers and scientists.
Increase of firms’ innovative capabilities
Through internationalization firms are exposed to a constant flow of information with regards to their clients’ changing preferences and requirements (Kafouros, 2006). This is valuable, because it may help the firms to increase the quality of their products; grant them with higher flexibility to adapt to the local markets need, which in turn leads to better firm responsiveness and enhance scientific collaboration (Kafouros, 2008). Van Biesebroeck (2005) and De Loecker (2007), found some support for the ‘learning by exporting’. In addition, Hitt et al (1997) emphasized that highly internationalized firms not only improve their ability to innovate by having learning opportunities but also by having higher competition. For more information on the main implication of internationalization see figure 2.
However, there are few studies that show that export fosters innovation (Bratti and Felice, 2012). Most existing literature point to the effect of innovation on exports (Cassiman and Golovko, 2011; Becker and Egger, 2013). Nevertheless, there are some that raised the issue of endogeneity between innovation and export (Grossman and Helpman, 1994). They argued that while innovation affects export, the opposite can happen as well. According to Becker and Egger (2013), the link between exports and product and process innovation is the most studied aspect between internationalization and innovation interaction. Furthermore, they claim that product and to some extent process innovation might drive exports at the firm level (Becker and Egger, 2013; Cassiman and Golovko, 2011).
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(1998) argues that small innovating firms are less likely to enter export markets, while large innovative firms are likely to export, and the more innovations they have had, the higher is the probability to enter export markets.
Hypothesis 3: The positive effect of internationalization on innovative performance will be
higher for group affiliated firms than for stand-alone/independent firms.
Figure 1
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3. Theoretical Model
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4. Methods
Research Context: India
As countries grow and mature, they should also move up on the value chain. As is the case with
Emerging-Market countries they are usually considered as suppliers of raw materials, low cost labor and dealing with low- knowledge processes and products. As these countries grow, and transition from developing to more develop economies, they will start to move from a high labor-intensive to a more capital-intensive and knowledge-based economies. Innovation and a country’s ability to develop new technologies will be the key. There are five high-technology manufacturing industries comprising
aerospace, pharmaceuticals, computers and office machinery, communications equipment, and scientific (medical and optical) instruments. This study will focus on the pharmaceutical industry, due to its various economic and social implications. The pharmaceutical industry is one the highest R&D intensive industry, and that requires constant innovations that have major impacts on people’s daily life and well-being.
Within the emerging-market countries, there were various pioneers (Mexico, Brazil) in the
pharmaceutical industry, but none were as interesting as India’s. As one of the fastest growing Emerging-Market countries, India is considered globally as the third largest pharmaceutical industry in terms of volume. The Indian pharmaceutical industry is around 80% dominated by branded generic products and the industry reached a staggering value of $11.9 billion (emerging market standards) (MarketLine, 2014).
Until the 1970s India was highly dependent on pharmaceutical imports and the industry was 80% dominated by foreign multinationals. The 1970 Patent Act Amendment, brought a seismic shift in the industry, by permitting Indian firms to reverse engineer previous patented products and produce them at lower cost but through different process. Due to non-existent R&D and low pricing of medicines, Indian firms were able to grow exponentially domestically and internationally especially in Latin America and Africa, nearly overtaking foreign multinationals market share.
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In 2005 the Indian government made an amendment to the 1970s’ Patent act to comply with TRIPS. Many voiced their fears and assumed that the changes to the Patent Act to introduce product patent would have a negative impact on India. On contrary to everybody’s assumptions, the industry has continued to grow steadily. Studies show that in the post- TRIPS era has changed Indian firms R&D structure and stimulated them to increase their R&D investments in order to fend off stiff global competition. In addition to increase in their R&D investments, they continued to increase their generic product exports in regulated and unregulated markets (Kamiike & Sato, 2011).
In the table below it can be observed that after the introduction of TRIPS, India’s pharmaceutical
Compound Annual Growth Rate (CAGR) exports far surpassed India’s total exports. However, during the period 2009-2013 the Indian pharmaceutical industry had a strong, but decelerating growth (MarketLine, 2014).But according to 2014-2018 prognosis it will reaccelerate to a higher growth level. Mckinsey & Company projections, show that the industry will grow up to 20-$25 billion, due to the rising income level, greater health insurance coverage and launches of patented products (McKinsey & Company).
Table 2 Comparison CAGR Foreign Trade
This backdrop of continuous adaptations provide one of the main reasons why one should study Indian pharmaceutical industry.
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As suggested earlier on in the introduction business groups have been an integral component of the economy, and control the majority of business activities in Emerging Markets. As such is the case of India, according to Sarkar (2010), business groups have control Indian business activities since their inception. According to data provided by Prowess, group-affiliated firms control nearly 80% of the top 50 corporate sectors in the 2006 (Sarkar, 2010).
In addition to the previous reasons, India is quite interesting, because it has several hundred business groups that provides the researcher with extensive sample and statistical analysis material, due to the fact that single lines of business of diversified business groups are organized as separate legal entities, which requires them to publish their financial statements (Khanna and Palepu, 2000). Also, Indian firms are normally members of only one group, making it easier to identify to which group they are affiliated. Additionally, India has well-established accounting systems equivalent to those of advanced economies.
This empirical context is ideal, for investigating and comparing how business group affiliation does affect firms’ innovative performance in comparison to independent firms.
Sample and Data
For this study two dataset were used and the datasets have a timespan from 2000 to 2012. The first dataset provided panel firm-level financial information of the top 50 companies in the Indian
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Measures
Dependent variable
Innovative performance
Freeman and Soete (1997) defined innovative performance as the degree to which firms are able to continuously introduce new inventions in the market, thus the introduction rate of new products, new process systems or new devices (Freeman & Soete, 1997; Hagedoorn & Cloodt, 2002).For this study, innovative performance is measured by the count of new product announcements.In order to gather the data for new product announcement, we perform a content analysis of a dataset with multiple newsletters and official company announcements that were retrieved from Bombay Stock Exchange. From the initial analysis we can group the gather data into four categories: 1) Foreign FDA product approvals; 2) Foreign approval manufacturing sites; 3) new product announcement; 4) launch of generic products in foreign and domestic market. Furthermore we used two selection criteria to evaluate if the announcement is a new product. First, the product has to be new and launch for the first time in the domestic market; or it has to be in the third clinical trial phase, because after successful completion of the Clinical Trial III the product can be launched. After the review, the amount of new product
announcements during the last 10 years was limited. A frequency test was performed, and showed that the period 2006 had to most of the new product announcements counts. During the period 2002-2006 there were 107 new product announcements.
Independent variable
Business group affiliation
The key independent variable is business group. The business group variable will be operationalized as a dummy which equals zero, if the firm is affiliated to a business group and one if the firm is independent.
Moderators
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Control variables
In addition to the main hypotheses testing variables, we have some control variables that may affect the firm’s innovative performance. First, firm size is measured by the average logarithm of the firm’s total assets for the period 2002-2006. Second, firm age is measured by the average number of years since the founding of the firm between 2002-2006 (Wang, Hong, Kafouros, & Wright, 2012).
Model and Estimation
Because new product announcement is count measure, academics suggests the usage of a panel Poisson regression (Greene, 2003; Kennedy, 1998). A key feature of the Poisson distribution is that variance equals the mean, thus
Var(Y) = E(Y) =µ
In the context of count data, one should consider the assumption that the variance is proportional to the mean. Specifically
Var(Y) = ɸE(Y) =ɸµ, so if ɸ=1 then the variance equals the mean and the Poisson mean-variance relationship can be obtained. If ɸ>1 then there is talk about over-dispersion relative to Poisson. Whereas, ɸ < 1 then there is talk about under-dispersion (Rodrigues, 2013).
New product announcement as count variable can have an unlimited number amount. However, it seems that the values in the data sets cluster around 0, 1, 2 and sporadically a few higher values. In order to test the Poisson Regression assumption holds, a Goodness –of- Fit Test was conducted. The result of the test showed that χ2 (40) = 127.34, Value/DF=3.176, so the variance is ɸ>1 so over-dispersion. With such over-dispersed count data, theory recommends the usage of the Negative Binomial Regression.
We test the hypotheses by using the following regression specification:
NPA= β0+ β1 (BGA) + (β1 (BGA)*β2 (R&D)) + (β1 (BGA)* β3 (Int)) + β 4(F_size) + β (F_age)
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5. Results
Table 3 and 4 show the descriptive statistics of the sample. In table 3 one can observe the means, standard deviations and inter-correlations of all the variables.
In table 4 one can observe that business group affiliates NPA mean is 10 time bigger than independent firms NPA mean. While independent firms have a higher internationalization mean in comparison with business group affiliates. On R&D one can observe that business-group affiliates have higher R&D investments than independent firms. However, the difference in firm size is quite small, implying that independent firms are medium to large in size. Whereas on firm ages, business-group affiliates have a higher mean than independent.
Table 3 Overview of Means, Standard Deviation and Correlation of the total sample
Variable Mean S.D. Min Max 1 2 3 4 5 6
NPA 2.326 3.961 0.000 18 1 BG Affiliation 0.37 0.488 0.000 1 -.386** 1 Internationalization 0.318 0.236 0.000 0.891 0.235 0.207 1 R&D investment 0.039 0.036 0.000 0.12 .368* -0.248 .332* 1 Firm Size 4.442 1.013 1.87 6.66 .490** -.386** .310* .548** 1 Firm Age 28.63 19.683 6 97 0.085 -.322* -0.219 -0.182 .355* 1
**. Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed).
Table 4 Comparison of Means and Standard Deviation between business group and independent firm
Business Group Independent Firm
Variable Mean S.D. Min Max Mean S.D. Min Max
1 NPA 3.483 4.572 0 18 0.353 0.996 0 4
2 Internationalization 0.281 0.200 0 0.655 0.381 0.282 0 0.891
3 R&D investment 0.046 0.041 0 0.12 0.028 0.023 0 0.062
4 Firm Size 4.739 1.041 1.87 6.66 3.937 0.750 2.38 4.94
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Table 5 Negative Binomial Regression of New Product Announcements
Model I Model II Model III Model IV Model V
β Sig β Sig β Sig β Sig β Sig
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The Goodness-of-Fit Test for all the five models were close to one. Hence, the assumptions were met, so, Negative Binomial Regression could be used. Table 5 presents the result from the negative binomial regression. Model I presents only the control variable. The results show that firm size is positively associated with innovative performance. Model 2 serves as baseline as it includes the predictor variable (business-group affiliation) and control variables only. The results confirm that being a business group affiliated is positively associated with innovative performance. Moderator 1 and Moderator 2 are added in Models III and IV. The results show that the two variables are not statistically significant. Model V present the results the hypotheses In Model V we introduced the interactions simultaneously.
Hypothesis 1 suggests that Business group’s affiliated firms have higher degree of innovative
performance than non-affiliated firms. In Model II, III, IV there is statistically significant support for
hypothesis 1. But in contrast, business group affiliation in Model V, at significance of 0.054 is slightly above the 0.05, so there is no support for hypothesis one. But at p<0.1 there is significant support for the hypothesis one, but one has to be cautious.
Hypothesis 2 suggests that positive effect of R&D on innovative performance will be higher for group affiliated firm than for independent firm. The interaction term is significant at p<0.1, there is positive
and significant support for hypothesis 2. The result establish that there is some positive interaction between business group affiliated and R&D investment, which in turn is positively associated to innovative performance.
Hypothesis 3 suggests that the positive effect of internationalization on innovative performance will
be higher for group-affiliated firm than for independent firm. The interaction term is statistically
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6. Discussion
The purpose of this research was to investigate if business group affiliation can promote firm’s innovative performance in Emerging Markets and the positive moderator effect of R&D and internationalization. Innovation is important for firms to be able to compete and survive in this competitive and globalized world. From existing literature we can make the three assumptions. First assumption is that business groups could fill in the institutional voids that exist in Emerging Markets. Mahmood and Mitchell (2004), suggested that business groups could facilitate innovation by providing institutional infrastructure. Second assumption is that large firms are more likely to export and able to invest in R&D than small firms.
The aim of the first hypothesis was to investigate if business-group affiliated firms will have higher innovative performance than independent firms. Although high significance was found supporting the hypothesis during Model II, III and IV, but during the full model it the significance was slightly above the p> 0.05. But we can infer that business-group affiliated firms have higher innovative performance than independent firms in the pharmaceutical industry in India, there were some noteworthy challenges and discoveries. One of the challenges was the limited amount of new product announcements, which in turn translates into the low overall innovative performance in India’s pharmaceutical industry. This issue was raised during an interview with an industry representative. This limited amount of new product
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The goal of the second hypothesis was to investigate R&D moderator effect on the relation between business-group affiliation and innovative performance. Even though the statistical evidence was not significant, there is to a certain degree a relationship between business group affiliation and R&D and innovative performance. Nonetheless, overall R&D investment in the Indian pharmaceutical industry is very low, with the exception of a few of the largest business groups. This issue was raised during the interview with an industry representative. The industry representative provided some points that play a role in R&D investment being so low, namely weak intellectual property protection mechanism and other regulatory framework, awareness deficiency and high pressure on prices. The emphasis was on the first point, weak intellectual property protection mechanism and other regulatory framework. He illustrated this problem by referring to the fact that currently there are less than 50 patented products in the pharmaceutical industry. Further, he argues that innovation in the current situation is very difficult, as product investment is not safe and there are a lot of regulations one has to adhere to. However, he points out that there is some innovation happening on a small scale and on molecules. But, even new molecule findings will not be further developed in the domestic markets but out licensed to foreign MNE at an upfront payment. This is quite intriguing and contradictory to the assumption that India’s
compliance with the WTO TRIPS agreement would provide certain degree of protection of intellectual property rights.
The aim of the third hypothesis was to investigate internationalization’s moderator effect on the relation between business-group affiliation and innovative performance. Prior literature suggested that
internationalization may increase organizational learning, scientist diversity benefits and R&D spillovers. There was no significant support for hypothesis three. However, the data showed that business-group and independent firms alike have high export intensity. Independent firm export intensity mean surpasses that of business groups. India’s current business model is not based on innovative products but on generic, low cost products. This business model is driven by price sensitive markets (such as Africa, Latin America and Asia), industrialized countries fiscal deficits and ageing factors. Currently, most industrialized economies are coping with heavy healthcare costs and with the ageing dilemma, especially in Japan. And they looking for ways to sustain and finance their system through low-cost generic
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One last point that will be discussed and proposed for future research is the role of the institutional environment and broader context in which firms need to function. From the previous discussions one can observe that there are some structural institutional implications. As said earlier business group can fill the institutional voids that exist in Emerging Markets, but these firms do not have inexhaustible resources there is certain limit. In the case of Indian pharmaceutical industry, the institutional environment can create domestic and international uncertainty, which in turn affect firms’ strategic decision-making and willingness to innovate. One can argue that the public sector needs to make available and where it is required to strengthen its institutions, in such a way, that it can provide the basic financial and institutional infrastructure. To sum up, the country institutional environment
(political, economic and sociocultural institutions) should be taken into account in future studies on how the institutional environment affects innovative performance of business-group affiliated and
independent firms alike.
All in all, this study contributes to the research field of international business and emerging-markets by examining an important factor for firms’ survival and competitiveness, namely innovation. We can conclude that business- group affiliated firms have higher innovative performance than independent firms. Further we can say that to some extent there is a positive interaction effect between firms that are affiliated with business groups and their R&D investments, whereas in the case of internationalization, there is no significant interaction.
Nevertheless, this study has several limitations. First limitation is the usage of new product
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Appendix A
Table 6 India's business group development overview
Period Description Factor/ Event
Business Group Pre
independence (mid-19th century to 1947)
Prior to this period:
- Most business activities were controlled by European Business House (Sarkar, 2010)
- Indian entrepreneurs could only do business in trade and money lending (Sarkar, 2010)
- Dependent on family and individuals for project financing
India’s consolidation under British rule:
- Institutional changes had unanticipated demonstration effect (Tripathi2004)
- direct and indirect exposure to Western ideas and business development (Tripathi and Mehta 1990)
- Indian ingenuity, entrepreneurial zeal, and family financial backing led to the
establishment of the first domestic industrial venture, the Bombay Spinning and Weaving Company; which in turn pave the way for the development of business group that are now known in India (Sarkar, 2010).
Business Group Post
independence (1947- 1991)
- India’s development foundation was based on the idea of “the ending of poverty and ignorance and disease and inequality of opportunity” (PM Nehru, 1947)
- Path of creating a mixed economy in which both private and public sector can coexist
- ensuring that the economic
- Industry Development and Regulation Act (1951) implemented during first three five- year plans - main aim was to prevent concentration of wealth by giving the
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system does not concentrate wealth
smaller and new firms were exposed to the full rigor of the license regime (GOI, 1969, p. 183)
- Monopoly and Restrictive Trade Practice Act (1969) – main aim was to extend the control to curb the increasing concentration of private assets in large business houses by using both asset and control criteria to classify. This legislation had mixed results it was able to curb the growth of the Top 20 business groups, but led to the growth of other
business groups (Rajakumar and Henley, 2007) Business Group
Post economic liberalization (1991-upwards)
- Mind shift from state intervention towards economic liberalization - State Reform measures-
removal of a large number of regulatory hurdles Paved the way for the increase of competition in the domestic economy (Rajakumar and Henley, 2007).
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Appendix B
Appendix C
Table 7 Negative Binomial Regression for H1 Tests of Model Effects
Source Type III Wald Chi-Square df Sig. (Intercept) 5.581 1 .018 BusinessG_Dummy 12.588 1 .000 Average_Exportintensity 2.281 1 .131 Average_RD_intensity .302 1 .583 Average_Firm_Size 2.907 1 .088 Average_Age .036 1 .850
Dependent Variable: Total_NPA
Model: (Intercept), BusinessG_Dummy, Average_Exportintensity, Average_RD_intensity, Average_Firm_Size, Average_Age
Table 8 Negative Binomial Regression H2
Tests of Model Effects
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BusinessG_Dummy *
Average_RD_intensity 2.365 1 .124
Table 9 Negative Binomial Regression H3
Tests of Model Effects
Source Type III Wald Chi-Square df Sig. (Intercept) 4.785 1 .029 BusinessG_Dummy 2.680 1 .102 Average_Exportintensity 1.514 1 .218 Average_RD_intensity .304 1 .582 Average_Firm_Size 2.870 1 .090 Average_Age .038 1 .845 BusinessG_Dummy * Average_Exportintensity .034 1 .854
Dependent Variable: Total_NPA
Model: (Intercept), BusinessG_Dummy, Average_Exportintensity, Average_RD_intensity, Average_Firm_Size, Average_Age, BusinessG_Dummy * Average_Exportintensity
Table 10 Negative Binomial Regression Full Model Tests of Model Effects
