Local firm’s response to inward FDI in emerging markets: are business group affiliates more innovative? Master thesis

(1)

Local firm’s response to inward FDI in emerging markets: are

business group affiliates more innovative?

Master thesis

Emiel Reeringh: s2350610

Date of submission: 13 June, 2016

Word count 12852

First supervisor: Dr. S. R. Gubbi Co-assessor: Dr. A. R. Muller

(2)

2

Local firm’s response to inward FDI in emerging markets: are business group affiliates more innovative?

Emiel Reeringh, Faculty of economics and business, University of Groningen, June 2016

Abstract

This article investigates how business group affiliation affects the relationship between incoming foreign direct investment and innovative response by firms. Using a fixed effects model with both firm- and business group level data from the period of 2005-2011. This study finds evidence that the affiliation to business groups can in fact improve the innovative response of firms. No evidence was found that higher professionalization levels in business groups positively affect the innovative response of firms after the introduction of FDI. However, business groups with higher international attention experience a stronger response than more domestically focused business groups. These findings have implications for both future research and carries recommendations for policy makers in developing business group settings.

(3)

3

1. Introduction

With the opening of world trade and the subsequent increase of foreign direct investment (FDI) into newly developing countries, domestic firms feel the pressure to adjust their strategies. Doing so in order to cope with the increased competition and new business environment (Mathews, 2006). The changes in business environment give rise to both opportunities and threats. Opportunities in the form of knowledge spillovers, potential diversification in new markets, and significant learning opportunities (M. A. Hitt, Dacin, Levitas, Arregle, & Borza, 2000). With on the other hand the threats that come with the opening of markets; increased competition, diminished market share and the overall threat of crowding out are amongst the fears of new foreign competitors (Jacoby, 2010).

The literature on the effects of inward FDI has seen extensive attention in the past. While some have found evidence of positive spillovers (Alfaro, Chanda, Kalemli-Ozcan, & Sayek, 2010; J. Li, Chen, & Shapiro, 2013; Lin & Kwan, 2016; Mao & Yang, 2016). Some researchers have found no significant evidence for spillovers (Fu, Pietrobelli, & Soete, 2011; Perri & Peruffo, 2015) or even negative effects of FDI (Aitken & Harrison, 1999; Waldkirch & Ofosu, 2010). In theory, the existence of positive effects of inward FDI makes sense. By learning from competitors who originate from technologically superior markets, firms could learn best practice methods. This effect can contribute to economic growth (Alfaro, Chanda, Kalemli-Ozcan, & Sayek, 2004), foster innovation (X. Li, 2011), and foster overall technological capabilities (Hansen & Ockwell, 2014).

These effects are often studied in an emerging market context. With the opening of many countries around the world, FDI flows have moved increasingly to emerging markets. This begs the question, what is the realized effect of inward FDI in emerging markets and how do local firms cope with inward FDI? Such a question has remained unanswered despite receiving plenty of attention in research (Cheung & Lin, 2004; Ito, Yashiro, Xu, Chen, & Wakasugi, 2012; H. Xu, Wan, & Sun, 2014). The question remains important for many emerging market governments. For example, a study ordered by the Indian government in 2016 has the objective to assess the impact of inward FDI in the pharmaceutical industry (PTE, 2016). This highlights the need of many emerging market governments to understand how inward FDI affects their economies. Despite longstanding attention, not many studies have been able to truly identify the mechanisms that allow local firms to improve their own competitive position from inward FDI (Y. Tang & Zhang, 2016).

(7)

7

Given the generally lower competitive abilities of developing market firms, the increased presence of developed market firms in emerging markets has made it more difficult to compete with the influx of foreign competitors. However, with the new competition exists the real possibility to learn from business rivals through, amongst others, knowledge spillovers (Oyelaran-Oyeyinka & Sampath, 2007; Pellegrin, 2001; T. Tang & Popp, 2016). And a major area in which firms can increase their overall competiveness is in the field of innovation (Gaynor, 2002). Considering that innovation improves the ability to sustain competitive advantages, innovation is vital to the continued existence of the firm.

By improving their innovative response, developing market firms are better equipped to close the existing technology gap and compete more efficiently and effectively in their respective home markets. Once they have the competitive ability to compete in home markets, the next step would be foreign expansion. This all means that the pressure to innovate is growing. The crux of the matter however, is that learning is both costly and requires time (Park & Harris, 2014; Y. Zhang,

Li, & Li, 2014). Innovation requires significant resources in order to effectively compete against foreign technology (H. Xu et al., 2014).

The ability to improve the company’s knowledge base is especially important for those firms who are reliant on more knowledge intensive resources and processes, where the benefits are stronger if their organizations are responsive to new knowledge flowing into the market. However, the benefits are mostly obtained when strong institutional arrangements are in place (Manikandan & Ramachandran, 2015). But while these institutions benefit both the absorption of FDI and the ability to innovate, emerging markets are characterized by the lack of development of these institutions (Mair, Martí, & Ventresca, 2012), which begs the question of how to innovate in order to compete with the increased competition which characterizes these economies.

(8)

8

barriers to improve organizational capabilities. In addition, a common channel of developing knowledge is through international joint ventures (Park & Harris, 2014). However, if multinationals are worried their intellectual property will be stolen, then they will choose to protect it more closely and enter themselves, thereby preventing knowledge leaks, or choose to abstain from entering the market. Meaning that it becomes even more difficult for the local firm to compete against foreign multinationals, given the technology gap and resource deficiencies that exist. This is especially so for local firms in knowledge intensive industries. Here the importance of innovation and knowledge base becomes increasingly important to compete against multinationals. However, due to institutional voids, not only capital markets, but also areas such as education and the availability of skilled labor are severely limited. Without these input factors, competing and developing as a local firm against foreign multinationals becomes exceedingly difficult.

However, this does not mean that local firms have no ways of improving their innovative ability. One explanation for how emerging market firms are better able to cope with increased competition is through the existence of business groups. These business groups have sensing opportunities that allows them to grasp information, which includes process knowledge, better than non-affiliate firms. This can allow them to reduce the knowledge gap that exists between business group affiliates and developed market firms.

The special mechanisms put in place by business group affiliates, allow them to be better at responding to inward FDI by increasing their innovative output and innovative performance compared to non-affiliate firms. Furthermore, business group affiliates who have higher rates of professionalization, are expected to benefit more from external knowledge. Due to professionalized organizations having stronger identifying abilities and stronger personal networks for the transmission of knowledge. This paper also proposes that those business groups that have higher contacts with international markets, will have higher benefits from FDI, because of their increased competencies gained through contact with multiple markets.

(9)

9

best of my knowledge, there exists no research that investigates how business group affiliation affects how local firms improve their innovative capabilities in response to inward FDI.

By examining 114 listed Indian pharmaceutical firms during the timeframe of 2005-2011, this paper formulates an answer to the question of whether business group affiliation helps in responding to inward FDI by improving innovative output in a high-knowledge intensive industry. The Indian pharmaceutical industry offers an ideal setting given its dichotomous nature of having both business groups and stand-alone firms. Moreover, the need and drive for innovation is strong given the increasing FDI in the pharmaceutical industry, which requires increased attention from local firms, or else they will cease to exist (Chittoor, Sarkar, Ray, & Aulakh, 2009; Jha & Krishnan, 2013).

This paper finds support that business group affiliation shows signs of improving the innovative response of business group affiliates to inward FDI. Furthermore, this study find evidence that business group characteristics do impact FDI transformation. In addition, the degree of internationalization seems to be positively related to the ability to respond to inward FDI by increasing the output of new products. On the other hand no evidence is found for the notion that the degree of professionalization positively affects the local response to incoming FDI.

This paper thereby contributes to the literature of business groups by filling the gap that exists between FDI and innovative response, and how business group affiliation affects this relationship. Further contributions are made to the field regarding organizational structure, by identifying the effect of two distinct organizational forms. Furthermore, insights are provided through which characteristics drive innovative differences between affiliates and non-affiliates, more specifically, how internationalization and professionalization affect innovative response of business group affiliates.

(10)

10

2. Literature review

2.1 The effect of FDI on host economies

Even without conclusive evidence backing its effect, FDI remains an important tool for emerging markets to grow their economies and boost firm capabilities through its positive effects. Therefore, considering the importance of FDI in many emerging countries, it is vital to understand how and when FDI in emerging markets is bringing positive effects. The context of an emerging market is in this case important, since both the learning rate and learning objective differs across settings, meaning that the spillover benefits will differ across these settings as well (M. a Hitt, Li, & Worthington, 2005). And since the objective of many governments is to increase the amount of incoming FDI, it is important to understand the full gravity of the impacts FDI have on host economies. Not in the least to allow governments to make insightful decisions on the structure of their economic policies.

Despite inconsistent results obtained by studies on the effect of FDI, many authors continue to believe that there are positive effects associated with inward FDI. These effects include, but are not limited to, stimulated entrepreneurial skills and more importantly, both upstream and downstream activities are said to benefit from increased FDI (Xu & Sheng, 2012). Because of this, developing countries are very eager to attract foreign investment and foster policies that are aimed at increasing the amount of inward FDI (Liu, 2008). However, due to a difference in the amount of resources available to domestic and foreign firms, performances and benefits are likely to differ significantly between these two players (Aitken & Harrison, 1999). This means that there need to be certain arrangements in place to facilitate adequate transfer of knowledge and competencies. One important aspect that has been found as an enabler of FDI spillovers is the development of proper infrastructure (Roberts & Deichmann, 2011). Therefore, in order to make up for the differences in skills and competencies, proper institutions need to be put in place to fully embrace the positive effects of FDI.

(11)

11

2016). However, in order to gain these benefits it is important for countries to have a sufficient development in order to harness these benefits and transform them into domestic innovative response.

Conversely, the presence of FDI does not only seem to bring positive returns to the economy. Despite the limited research into the negative aspects of FDI, both Lin and Kwan (2016) and Li et al. (2013) have found evidence that there exists a crowding out effect in the market. This is consistent with the findings of Agosin & Machado (2005) who found that the increased competition is a deterrent for domestic investment, which in turn limits the incentive to innovate. This decreased innovation can subsequently result in less robust economies due to reliance on foreign companies. In response to inward FDI, companies need to improve their competitiveness in order to survive in the local market (Luo & Tung, 2007). Increasing the competitiveness can mean upgrading current processes and capabilities. However, it can also mean improving on the absorptive capacity. The concept of absorptive capacity refers to the ability to recognize and internalize new knowledge (Cohen & Levinthal, 1990). So in short, absorptive capacity is the ability of a firm to recognize valuable knowledge outside the firm’s environment and being able to use that knowledge to create value inside the firm. Inward FDI offers the change to learn about the processes and knowledge of multinationals, if local firms have the absorptive capacity needed. Some studies have tried to investigate what is needed for superior absorption of foreign knowledge (Straub & Terada-hagiwara, 2010; B. Xu, 2000). The result of these studies indicate that there needs to be a basic level of absorptive capacity in order to reap some advantages from this incoming FDI (Borensztein, De Gregorio, & Lee, 1998; X. Li, 2011). The absorptive capacity of firms can be improved through matters such as stronger infrastructure (Straub & Terada-hagiwara, 2010), through stronger employment training (Oyelaran-Oyeyinka & Sampath, 2007), and through stronger patent protection (Acemoglu & Akcigit, 2012; Zekos, 2013). However, as outlined earlier, these factors are often missing or lacking in quality in emerging markets.

(12)

12

innovation can help local firms to strengthen their positions both in the local market and the global market (Jha & Krishnan, 2013).

2.2 Business group dynamics.

As mentioned previously, business groups have shown indications of being able to improve the innovative ability of firms. Therefore, it is important to gain an understanding of how business groups work, and how they can alleviate some of the inherent problems emerging market firms are faced with. The existence of business groups is a striking feature of many emerging economies (Pattnaik, Chang, & Shin, 2013). This makes it an important aspect of many economies. While there does not exist a uniform definition of business groups, most researchers define business groups as: ‘’a collection of legally independent firms that are linked by multiple ties, including ownership, economic means (such as inter-firm transactions) and/or social relations (family, kinship, friendship) through which they coordinate to achieve mutual gain’’ (Yiu, Lu, Bruton, & Hoskisson, 2007: p. 1553). However, many emerging economies are currently experiencing a transition to a more liberal market design, this also means that the dynamics of business groups are changing (M. Ayyagari et al., 2015). These disruptions to the status quo again offer both opportunities and threats. Some firms are able to adapt and reap the benefits of the new business environment. Others, however, fail to fully grasp the benefits of the new environment and slowly be replaced by new players (Cuervo-Cazurra & Dau, 2009). Take for example the Indian liberalization period, companies like the Tata group were able to take advantage of the new competitive environment and expand into the international marketplace (Tata, 2016). The response of many business groups was to increase the strength of internal ties (Khanna & Palepu, 1999). By solidifying their ties, business groups hope to improve knowledge transfer and social cohesion (M. Ayyagari et al., 2015).

(13)

13

group, around 66% of the total shares is in possession of the Tata Sons group. Which in turn is endowed by the Tata family (Tata, 2016). Through this they have formal ties throughout the entire Tata group businesses. The same familial relations are present in a lot of Indian business groups (Valk & Rozemeijer, 2009). Starting from a single business, these large enterprises grow to diversify into many different industries (Bennedsen, Nielsen, Kasper, Perez-Gonzalez, & Wolfenzon, 2007). Literature is divided on whether or not this shared ownership is beneficial for the overall firm. Morck and Nakamura (2007) argue that the long-term strategy of business groups are more coherent, leading to higher potential performance. On the other hand, cross-firm ownership can also lead to power struggles by family members (Rajan, Servaes, & Zingales, 2000), which in turn can break down the cohesion and knowledge sharing amongst business group members. Moreover, control by a small group of people can have serious repercussions for firms (Morck, Wolfenzon, & Yeung, 2005). These consequences include, but are not limited to, biased capital allocation and diminished growth potential. Despite the different view on the role of business group ownership, most literature agrees that the role of ownership influences the performance and behavior of firms (Gaur & Kumar, 2009; Kim & Yi, 2006; Zhang, Lu, Zhang, & Jiang, 2015). Which in turn will have a significant impact on how firms respond to the introduction of FDI in the domestic market

(14)

14

determining strategy is lower in case of interlocked boards. This goes against the view that interlocked boards have a broader view of the industry (in case of same industry interlocks) and therefore better able to capitalize on industry wide opportunities (Ruigrok et al., 2006). However, it becomes clear that the board of directors can have a strong influence on knowledge sharing routines across companies. This makes it more likely that business groups with their interlocked boards can gain more benefits from new external knowledge than their non-affiliate counterparts. These interlocked boards often manifest itself through the posting of family members in multiple board positions (Dekker, Lybaert, Steijvers, & Depaire, 2015). This means that there is less room for professional managers on these boards. This could have the consequence that firms are less able to cope with new and changing business environments (Chittoor & Das, 2007). This means that business groups might have an advantage with their interlocked boards in the field of transmitting knowledge, however, they might perform worse in their ability to cope with new information.

2.3 Hypotheses

2.3.1 Business group innovative response

With the entrance of foreign players not only does the competition increase, but it also offers possibilities to close the knowledge gap that exists between local and foreign players (X Liu, Wright, Filatotchev, Buck, & Lu, 2010). If companies can take advantage of these opportunities, they are able to make up for their competitive disadvantages and leverage their own advantages more efficiently (Guillén & García-Canal, 2009). However, emerging markets are often characterized by the existence of poor property rights. If the intellectual property of these foreign firms is not protected well, there is less incentive to enter in joint ventures or strategic alliances. Instead companies become more protective of their intellectual property and attempt to keep everything inside. Meaning that foreign multinationals are more likely to enter the market through Greenfield projects or acquisitions (Kyle & Qian, 2013).

(15)

15

sense and assimilate external knowledge (Cohen & Levinthal, 1990). All of these factors make it hard for local firms to increase their competitiveness and ability to innovate. Subsequently making it harder to compete against foreign firms. This is especially so in high tech industries where the need for these factors is even higher (X Liu et al., 2010). The ability of local firms to leverage their local capabilities is relatively low compared to foreign firms with stronger technological capabilities.

Business group affiliation can help to improve the ability to cope with these adverse circumstances. Through their specialized internal mechanics they can strongly influence the competitiveness of local firms. Business groups are able to diminish the gap between developed and developing countries through four main abilities. For one, they are able to cross-subsidize endeavors and have a wider access to new talent than non-affiliates. Two: they have created extensive higher education facilities. Countries like India lack an extensive network of business schools. Through intensive internal training, business affiliates have access to finely tailored, and skilled personal (Ramachandran et al., 2013). Thirdly, through their common brand, they have significant name recognition. Such a brand stands for something, leading to higher levels of legitimacy and acceptance in their respective markets. Subsequently leading to superior recruitment processes (Khanna & Palepu, 1999). Lastly, and most important, business groups are overall better equipped to innovate. This is done through the ability of these business groups to share technological knowledge and through internal capital markets (Almeida, Kim, & Kim, 2015). This result is supported by Iona, Leonida, and Navarra (2013) who found that business group affiliates have superior organization and managerial processes to handle the acquisition and assimilation of knowledge. Furthermore, business groups have been shown to have higher innovative capabilities than their non-affiliate counterparts (Castellacci, 2015). All of this indicates that business groups are better equipped to handle the transition from a more sheltered economy to one with both increased innovative needs and increased competition.

H1: In high-tech industries in emerging markets the business group affiliation promotes the local response to FDI in the form of higher innovative output.

(16)

16 2.3.2 Professionalization

Most business groups are owned by specific families (Colli & Colpan, 2016). However, there are differences in the extent to which they employ professional managers (i.e. non family members). There has been done much research in the field of professionalization of family-owned businesses.

On the one hand there are the proponents of having a CEO from the family. This would give them the benefit of special firm specific knowledge, as well as a higher degree of trust (Donnelley, 1964). Moreover they are said to have a more long-term oriented focus. Outsiders are attributed with a more short-term orientation and higher degrees of self-interest (Bennedsen et al., 2007). All of this indicate that there could be advantages to having lower degrees of professionalization in an organization.

However, there has been much literature published which argues against having family members in higher positions in the organization. Chittoor and Das (2007) argue in their paper that those firms who are better at introducing outside competences are more likely to have superior performance. In this increasingly dynamic, global business environment it is virtually impossible to find all the right competencies in the family and therefore outside assistance is vital for long-term sustainable success. Moreover, research has found evidence that those firms who appoint relatives in senior positions have significantly lower risk taking behavior and lower standardization of routines than those firms who appoint from ‘’outside’’ the family (Bennedsen et al., 2007; Perez-Gonzalez, 2006). More importantly, in the context of knowledge recognition and assimilation, professional managers are more likely to possess external connections, and are subsequently better at identifying business opportunities (Chittoor & Das, 2007). Another advantage of professional managers lies in their ability to restructure organizations (Dekker et al., 2015). Moreover, professionalized business groups have been shown to have higher acquisition performance (Sraer & Thesmar, 2007). With the benefits of these characteristics, firms with higher professionalization rates are likely to be better equipped to handle the rapid changes that are happening in many emerging markets. By delegating decision-making to lower level managers firms are more flexible when faced with uncertainty (Dekker et al., 2015) and therefore, able to adapt to the rapidly changing environment that often characterizes emerging markets.

(17)

17

actively identify (to learn from or acquire directly), assimilate and adapt outside knowledge flows to fit their organization. By assimilating these outside knowledge flows, professionalized business groups build up their knowledge base faster than less professionalized business groups, and have subsequently a stronger innovative response to inward FDI.

H2: Within business groups the relationship between inward FDI and innovative response is positively moderated by the degree of professionalization of the business group.

2.3.3 Internationalization

During the last few decades, internationalization has played an increasing role in the global economy. Due to resource and market constraints at home, companies have to move beyond domestic borders (Luo & Tung, 2007). Through the internationalization process, firms subsequently come into contact with more knowledge and resources. Through this could potentially gain more competencies which can be transferred through organization (M. A. Hitt et al., 2000). Park and Harris (2014) argue that through interaction with international players, better and more efficient learning processes can be adopted. Moreover, through internationalization companies can increase their capacity to innovate by having access to complementary resources that facilitate the innovation process (Kafouros, Buckley, Sharp, & Wang, 2008). Accessing foreign knowledge bypasses the market constraints that inhibit the company in the domestic market.

Similarly, being more internationalized can solve the resource constraints that emerging markets suffer from. Being able to access foreign institutions and resources, companies can leverage their foreign experience and knowledge into their innovative processes and apply them to compete against the intensifying competition in the domestic market.

(18)

18

2015). This would allow affiliates to respond more timely to inward FDI by increasing their knowledge base and improving their innovative output and process. Non-business group members, do not have the benefit of having access to such networks and therefore, have more difficulty to respond to inward FDI.

H3: The relationship between inward FDI and innovative response is positively moderated by the degree of internationalization of the business group

3. Conceptual model

The hypotheses proposed in this paper are illustrated in figures 1 and 2. Hypothesis 1 investigates the effect of business group affiliation, whereas hypotheses 2 and 3 investigate how internal characteristics of business group companies, affect the innovative response of business group affiliates.

4. Research design

4.1 Research setting: India

This study investigates how business groups deal with the absorption and assimilation knowledge spillovers in their innovative process. This requires three factors that must be taken into account when choosing the setting. The presence of sufficient FDI in the country, the existence of strong business group presence, and a focus on innovation. For these reasons investigating the Indian pharmaceutical industry offers an excellent opportunity to investigate business group response. India has a long history of business group presence. Staring in the nineteenth century, where families started to invest in diversified investment portfolios. Ever since, India’s business environment has been characterized by the existence of business groups (Pattnaik et al., 2013). Even after the liberalization in 1991, business groups still continue to play an important role in the Indian economy.

(19)

19

pharmaceutical industry receives has been rising, and their share of the total FDI received in India has seen a steady rise (Government, 2016).

Figure 1: The influence of business group affiliation on the relationship between inward FDI and innovative response

Figure 2: The influence of BG characteristics on the relationship between inward FDI and innovative response

The Indian pharmaceutical is a fast growing industry. In 2014 the Indian pharmaceutical market experienced a growth of 33%. Over the period of 2005-2011, the market grew an annual 16% on average. Moreover, the market forecast for the period 2014-2019 expect the market value to reach $33.4 Billion, compared to a $16 Billion valuation in 2014 and a valuation of $6 Billion

Inward FDI Innovative

response

Inward FDI Innovative

(20)

20

in 2005 (Marketline, 2015). At the moment, the Indian pharmaceutical industry is one of the leading players in the global pharmaceutical market. More importantly for this research, the Indian pharmaceutical market has attracted a lot of investment meaning a strong inflow of FDI into the pharmaceutical market (Das & Das, 2015). This provides an excellent stage for this research, as all the necessary ingredients are present to properly invest the hypothesized linkages. This study takes a timeframe of the years 2005 through 2011. This is an interesting period for the Indian pharmaceutical industry given the adoption of the trade related aspect of intellectual property rights (TRIPS) agreement and its first initial enforcement in 2005 (Gubbi, Ray, & Aulakh, 2015). The TRIPS stipulates the rules that companies have to follow regarding intellectual property rights. This entails that companies can no longer use reverse engineering or sell knockoff drugs (Gubbi et al., 2015; Kyle & Qian, 2013). However, the TRIPS can bring benefits as well. There has been an extensive strand of literature that investigates the link between patent protection and innovation (Allred & Park, 2007; Czarnitzki & Toole, 2011). Although some have argued that the introduction of the TRIPS agreement inhibits innovation (Kyle & Qian, 2013), most agree that the stronger patent protection results in more effort put forth into innovative processes (Abrams, 2009; Czarnitzki & Toole, 2011). This would mean that the implementation of the TRIPS agreement can help to increase the innovative pace of all the companies. Even though some companies have had a difficult time adjusting to the new institutional environment, most have come out stronger than before (Gubbi et al., 2015).

(21)

21

study excludes foreign-owned companies, subsidiaries and state-owned firms. Since this study is interested in the ability of emerging market firms to react to incoming FDI. By taking foreign-owned companies this would skew the results as their familiarity with foreign knowledge is most likely higher compared to native firms. All of the above makes India a good case setting to investigate the effect of business group affiliation, since the effect of business group affiliation can be easily and accurately estimated, combined with the strong focus on innovation.

4.2 Data source and sample

(22)

22

companies who are affiliated with a business group. The information on new product announcements was compiled using the news releases of the Bombay stock exchange (BSE). Every news release involving each of the sample companies was scanned for classifications that indicated a new product launch announcement. This process resulted in 328 new product announcements to be launched both in the domestic and foreign market.

(23)

23

4.3 Sample variables

4.3.1 Dependent variable

The main variable of interest for this study is the innovative response. Innovative response generally is a tricky concept to measure given its intangible nature. Most studies however, use the numbers of patents granted or patents filed as a proxy for innovation (Cheung & Lin, 2004; J. Li et al., 2013; Rodriguez-Pose & Di Cataldo, 2014; Wu, Wang, Hong, Piperopoulos, & Zhuo, 2016). However, this is a highly imperfect proxy (Griliches, 1990). Not all new innovations go through the patenting process. Most inventions are not radical in nature, but have more of an incremental nature (Rodriguez-Pose & Di Cataldo, 2014). This lowers the patentability of these innovation. Therefore, using patent applications or patents granted has the high possibility of undervaluing the total innovations.

Innovative response will be measured by counting the new product announcements made by companies in the sample. This measure comes closer to the real commercial value of the new products (Xiaohui Liu & Buck, 2007). Moreover, this measure bypasses the previously mentioned problem of lowered patentability. Since, these new products can be either completely new, or improvements of older products, all are counted towards innovation performance. Furthermore, considering the international nature of business, two categories of product announcements will be counted. One will count the products announced for the domestic market, while the second will count the products announced for foreign markets. Both will be added since the products for foreign use are developed in India. This way all innovative activity is taken into consideration in determining the actual performance of the specific companies. This is similar to Ayyagari, Demirgüç-Kunt, and Maksimovic (2011) who include new products introduced as a proxy for the total innovation by firms.

4.3.2 Independent variable

(24)

24 4.3.3 Interaction effects

The prowess database offers data on the ownership structure of companies in India. Through this, ownership can be determined as public Indian, or Indian business group (which is a mentioned category). Using this classification systems, companies that fall under the first category are coded as taking a value of 0. The dummy takes a value of 1 in case it falls under the category of Indian business group. Measuring business group affiliation as a dummy reflects the customary method to operationalize business group affiliation (Belenzon & Berkovitz, 2010; Chittoor et al., 2015; Gubbi et al., 2015).

The degree of professionalization will be operationalized following a similar method used by Ayyagari et al. (2015), who operationalize the professionalization as the ratio of board positions held by family members of promoters to the total positions available. This means that those firms with a high degree of professionalization have little to no family members in the executive positions of their business group and employ professional managers. This also means that there are little to none business group promoters present in influential positions such as the board of directors, the audit committee or shareholder committee. The professionalization will therefore be measured by the ratio of members who share the same last name as any promoter of the business group compared to the total members. This measure will be standardized to measure the effect of the interaction term in model 2.

The degree of internationalization is operationalized by the export intensity of the overall business group. This is a common indicator for the degree of international involvement of companies (Kwok, Reeb, & Kwok, 2000). Although it could potentially miss certain degrees of foreign subsidiary sales, the availability of data makes this a very common and often used variable. For this reason this study will use the export intensity as a proxy for the degree of internationalization (or international involvement). This measure will likewise be standardized to measure the effect of the interaction term in model 2.

4.3.4 Control variables

(25)

25

the conception of the firm. Furthermore, similar to many other studies, the level of debt was controlled for by using the financial leverage ratio (total debt/total assets). These control variables are all used in the first estimation of business group versus non-business group (on the firm level).

The following control variables are used in the second specification which compares business groups with each other. The first control variable here is the Business group diversification. Therefore, to account for the degree of diversification, the number of industries that the business group is involved in are measured. This study also controls for Business group size since bigger business groups might have a stronger influence on the relationship between FDI and innovative response. Bigger business groups can be expected to have access to other resources than smaller ones. Therefore controlling for this is imperative. This is done through the number of companies in the group. Moreover, same as with the individual companies, business group age might very well influence the results. For this reason Business group age is controlled for, by measuring the time of incorporation until the focal year. Lastly, I control for the business group sales by adding the total sales of the entire business group in the regression analysis. The inflow of FDI on the national level is controlled for in both models, again through the logarithmic function of national level FDI.

4.4 Method of analysis

(26)

26

4.5 Model estimation

The effect of business group affiliation on the relationship between inward FDI and innovative response is estimated by running the following fixed effects model:

(1) 𝑌𝑖, 𝑡 = 𝑎 + 𝐵1𝑋𝑖, 𝑡 + 𝐵2 (𝑋𝑖𝑡 ∗ 𝐷𝑖) + +𝑍𝑖, 𝑡 + 𝑣𝑖 + 𝑒𝑖𝑡

where Yi,t is the innovative response of company i at year t, Xi,t is the incoming FDI for company

i at year t (note: this is equal for all firms, regardless of BG affiliation), Xi,t*Di is the interaction

effect of business group affiliation on innovative response, with Di being the business group dummy if company i is affiliated with a business group. Vi represents the unobservable time

invariant effects and ei,t represents the error term. Zi,t represents a vector of firm level control

variables for company i at year t.

Reworking model (1) to include the necessary interactions of business group professionalization and internationalization gives the following estimation:

(2) 𝑌𝑖, 𝑡 = 𝑎 + 𝐵1𝑋𝑖, 𝑡 + 𝐵2 (𝑋𝑖𝑡 ∗ 𝑃𝑖, 𝑡) + 𝐵3(𝑋𝑖, 𝑡 ∗ 𝐼𝑖, 𝑡) + 𝑍 + 𝑣𝑖 + 𝑒𝑖𝑡

where Yi,t still stands for the innovative response for firm i in year t, Pi,t represents the

professionalization ratio of company i in year t and Ii,t represents the internationalization of

business group i (measured in export intensity) in year t. Variable Z represents a vector of business group control variables (see conceptual model 2) for business group i at year t. Vi represents the

unobservable time invariant effects and ei,t represents the error term It must be reiterated that this

estimation looks at the relationship of FDI and innovative response only between business groups. This means non-affiliate firms are left out of this model.

5. Results

(27)

27

As stated earlier, this study focuses on two distinct areas. The relationship of FDI and innovative response depending on whether you are a business affiliate or not, and the relationship depending on business group characteristics (professionalization and internationalization respectively). This means that the first model estimates the relationship including both business group affiliate firms and non-affiliate firms (all listed). The second model on the other hand only looks between business groups and how their characteristics influence this relationship. Because of this, this study presents the reader with two distinct analyses of the study. To determine the individual impact of the individual predictors, this study uses a stepwise method of adding the variables of interest. This means that for both models several estimation steps will be utilized in order to create the model with the highest explanatory power. Tables 3 and 4 present the outcome of the fixed effect estimation. And as can be seen, the Adjusted R2 hovers around between 7 and 8% for the first model and between 15-20% for the second model (see tables 3 and 4).

5.1 Business groups versus non-business groups

As mentioned before, the first model has 797 observations dispersed over 114 firms (32 business group and 72 non-business group affiliates). And again, it is important to note that this analysis compares business group affiliates with non-business group affiliates, without taking into consideration some of the more complex factors that might influence the estimations (think geopolitical context, or distribution of FDI in certain areas). This should be captured by the fixed effects of the model.

(28)

28 5.1.2 Individual variables

Estimation 2 adds the variable for FDI (IndustryFDIt-1 in table 3) and seems to slightly increase the explanatory power of the model (from R2 of .0725 to 0.731). This is just a slight increase which is reflected in the fact that the effect is positive but non-significant (β= .0278, p=.512). So as expected the variable has a positive impact on the number of innovations, however, this effect is non-significant for both business group and non-business group affiliates.

5.1.3 Interaction effects

The purpose of this study was twofold and the first reason was to investigate whether business groups have a different relationship between FDI and innovative response. Hypothesis 1 argued that those firms that are members of business groups are better able to leverage new incoming knowledge and convert it into their own knowledge base. To see this it would mean that the interaction between FDI and business group affiliation is positive and significant. This is supported by looking at table 3. It would appear that the result shows a positive coefficient for the interaction between business groups and FDI (β=.05253, p=.0.094) therefore being significant at the 10% significance level. However the direct effect of FDI is still insignificant. This means that over the sample, the business group affiliates were more responsive to FDI and were able to convert that knowledge more than compared to their non-business group affiliates. Although this is an inconclusive result given the 10% significance level of the interaction and the insignificant result of the direct FDI effect. What can be seen across the model is the direct effect of the moderator, which shows a significant and positive result for the business group affiliation (β=.8497, p=.000). The results presented here show initial evidence that business group affiliates are more responsive than non-business group affiliates when it comes to reacting to inward FDI. 5.2 Business group effects model

(29)

Table 1: Descriptive statistics and correlation matrix model 1

N= 729, a= Figures in million $

Table 2: Descriptive statistics and correlation matrix model 2

N= 220, a= Figures in million $

Mean

Std. Deviation

Innovative

response BG dummy Firm age Firm sales Firm assets Firm ROTA Firm debt/equity

National FDI Industry FDI Innovative response .41 1.64 1.00 BG dummy .28 .45 .26 1.00 Firm age 25.26 16.16 .07 .23 1.00 Firm salesa _92.46 _181.01 _.66 _.34 _.12 _1.00 Firm assetsa _152.02 _341.50 _.68 _.28 _.07 _.94 _1.00 Firm ROTA 5.92 9.39 .06 .14 .11 .14 .09 1.00 Firm debt/equity .87 1.02 -.02 .06 -.07 .02 .03 -.23 1.00 National FDI 9.22 .87 .03 -.01 .08 .08 .08 -.06 -.01 1.00 Industry FDI 9.02 .54 .03 -.01 .06 .06 .06 -.06 .01 -.02 1.00 Mean Std. Deviation Innovative response Professionalization BG export intensity BG diversification BG company

count BG sales a BG assets a BG age

(30)

However, all of these control variables are showing non-significant results. It is interesting to see that the business group sales has an opposite sign compared to business group assets. This could perhaps be a result from the multicollinearity where one absorbs the negative effects and the other the positive. Therefore, it must be noted that due to these previously explained problems, no real conclusions can be drawn from this fact.

5.2.2 Individual variables

Looking again at the impact of the addition of FDI in estimation 2 of the second model and again we can see that it has a positive but still non-significant effect (β=.0.03894, p=.729) indicating that there appears to be no real effect that results from the introduction of FDI in the innovative patterns of these pharmaceutical companies. Knowing that this result is achieved within the group of business group affiliates also mean that there does not appear to be a within group difference with model 1, although it does appear that the p-value has declined somewhat.

5.3.3 Interaction effects

(31)

31

that the results are similar to the previous estimation (β=.2418, p=.039). This shows that the estimation shows stable results across both estimation 6 and 7. Looking at the adjusted R2 shows increasing values across the estimations, showing that the results are adding explanatory value to the model. The one exception is the addition of the interaction term of professionalization, which decreases the explanatory power. This can be explained by the fact that the extra explanatory power of professionalization is so low that it decreases the power of the model (due to higher degrees of predictors in the model). This also means that the addition of internationalization adds explanatory power to the model, further indicating that the existence of international ties are important for the absorption of FDI.

6. Robustness tests

Business group boards often have interlocked boards (Khanna & Rivkin, 2006). Meaning that board members have other functions besides the one tested in the sample. To test if

professionalized business group affiliates (more dedicated board members) perform better than their less professionalized counter parts, the same test is run, but now with the number of other functions performed by board members (as opposed to professionalization ratio). The different measure indicates how much dedicated time a single board member can spend on their respective jobs. The more other functions a board has, the less professionalized it is. The result shows that the more dedicated business group members (i.e. those with less board interlock) have a higher innovative response to inward FDI. While the result is insignificant, it counters the result

(32)

32

acquisition (Luo & Tung, 2007), allowing them to have a stronger innovative response compared to those who do not. This result confirm that the result for internationalization is robust using alternative methods.

Table 3: Firm fixed effects model of FDI absorption and innovative response; business group versus non-business group affiliates

(1) (2) (3) Variables Innovative response Innovative response Innovative response Firm age -0.00346 -0.0162 -0.0137 (0.0219) (0.0292) (0.0292) Firm sales 0.00110 0.00112 0.00103 (0.000948) (0.000949) (0.000949) Firm assets 0.00150*** 0.00150*** 0.00147*** (0.000545) (0.000545) (0.000544) Firm Rota 0.00442 0.00440 0.00413 (0.00466) (0.00466) (0.00466) Firm Debt/equity ratio -0.113* -0.112* -0.102

(0.0625) (0.0625) (0.0627) NationalFDIt-1 0.0157 0.0324 0.0308 (0.0407) (0.0480) (0.0480) BG affiliation dummy 0.847*** 0.851*** 0.850*** (0.236) (0.236) (0.236) IndustryFDIt-1 0.0278 0.0260 (0.0424) (0.0424) IndustryFDIt-1*BGaffiliation 0.0525* (0.0313) Observations 797 797 797 (Within) R-squared 0.0725 0.0731 0. 0770 Number of companies 114 114 114

(33)

33

Table 4 Firm fixed effects model of FDI absorption and innovative response; business groups only

(1) (2) (3) (4) (5) (6) (7)

Variables Innovative

response Innovative response Innovative response Innovative response Innovative response Innovative response Innovative response

BG industry count -0.605** -0.599** -0.602** -0.683*** -0.602** -0.665*** -0.663*** (0.238) (0.239) (0.239) (0.242) (0.240) (0.240) (0.241) BG company count 0.210* 0.208* 0.207* 0.239** 0.207* 0.204* 0.201* (0.114) (0.115) (0.114) (0.115) (0.115) (0.115) (0.115) BG sales -0.000871 -0.000930 -0.00105 -0.000802 -0.00108 -0.00106 -0.00117 (0.00140) (0.00141) (0.00141) (0.00141) (0.00142) (0.00140) (0.00140) BG assets 0.00184** 0.00184** 0.00184** 0.00165** 0.00186** 0.00174** 0.00174** (0.000796) (0.000798) (0.000796) (0.000800) (0.000802) (0.000794) (0.000797) BG age 0.0439 0.0398 0.0376 0.0173 0.0359 0.0127 0.0123 (0.0430) (0.0447) (0.0446) (0.0461) (0.0450) (0.0457) (0.0460) NationalFDIt-1 0.00645 0.00363 0.0186 0.0186 0.0166 0.0363 0.0532 (0.108) (0.108) (0.109) (0.108) (0.109) (0.107) (0.108) IndustryFDI t-1 0.0389 0.0553 0.0208 0.0565 0.0559 0.0745 (0.112) (0.113) (0.112) (0.113) (0.112) (0.113) Professionalization -0.414 -0.437 -0.399 (0.312) (0.319) (0.315) Internationalization 0.542* (0.295) 0.479 (0.295) 0.452 (0.295) IndustryFDI × professionalization -0.0340 (0.0986) 0.0240 (0.101) IndustryFDI × internationalization 0.227** (0.112) 0.242** (0.116) Observations 220 220 220 220 220 220 220 (Within) R-squared 0.155 0.155 0.163 0.171 0.164 0.190 0.198

Number of business groups 32 32 32 32 32 32 32

(34)

34

7. Discussion

This study provides support that being part of a business group helps companies to improve innovation reacting and assimilating inward FDI. As previously argued, this could be because of a more responsive nature of business group affiliates. By having stronger networks, business group affiliates are more likely to react to new incoming knowledge and are comparatively better at adapting to this new situation (Morck & Nakamura, 2007). Business group affiliates indeed show stronger performance when it comes to the innovativeness. This direct effect has also been found in other studies and by other literature and seems to be a more accepted piece of evidence in the literature on business groups (Belenzon & Berkovitz, 2010; Chang, Chung, & Mahmood, 2006).

On the other hand, the theorized effect of professionalization having higher innovation levels does not appear to be verified. This result is contradictory to the result obtained by Ayyagari et al. (2015) who found evidence that professionalization has a significant on the responsiveness to FDI. The results obtained offer a contrasting view to the previous results on professionalization. Where more professionalized firms look differently to foreign knowledge than less professionalized firms. Although this result is insignificant, one reason for the reversal of the direction could be that those firms with highly professionalized senior staff try to improve internal processes and competencies more than that they improve their output. Moreover, the argument for positive effects of professionalization was structured around the fact that professional managers are capable of generating superior innovative response through, for instance, better outside networks. However, it might very well be the case that this argument does not fit well with the nature of business groups and only really applies in more companies from developed countries.

The last claim made by this study was that those firms with more international attention would be more responsive to inward FDI. This study provides support that those business group with more revenue coming from outside the domestic market, performed better when it came to reacting to inward FDI by foreign players.

(35)

35

institutional voids in India are slowly shrinking and that this means that the more focused and specialized firms are gaining an advantage compared to those more diversified companies.

An important belief, when it comes to FDI, is the direct spillover effect of FDI domestic firms. However, this study found no significant results for the direct effects of FDI. A reason for this could be that the implementation of the TRIPS agreement, caused Indian firms to be less able to respond to this new incoming FDI data, by limiting copying routines of domestic firms. Because of the TRIPS agreement, they might have been less able to copy drugs of other companies, which might have represented a lot of innovation before the enforcement of the TRIPS agreement. 7.1 Theoretical implications and recommendations

This study provides some relevant insights into the field of business studies and through that provides recommendations for people in practice. Most of the literature that focuses on FDI either looks at the response of business group affiliates to inward FDI (M. Ayyagari et al., 2015) or at the FDI taking patterns of business groups (Jean, Tan, & Sinkovics, 2011; Tan & Meyer, 2010). This study however extends the literature of business group by investigating the link between business groups, FDI and innovation, thereby contributing to the strand of literature of business groups and innovation. Thereby showing that business groups are stronger in reacting to the increased competition that follows inward FDI. Moreover, this study increases the understanding of how business group characteristics influence the strategic responses of local firms to inward FDI. Doing so, this paper increases the understanding of how these business group characteristics drive firm innovative response. In addition, this study finds no direct impact of inward FDI on the innovation of firms. This offers some insights in the field of FDI spillovers, that perhaps FDI research needs to move away from direct spillover effects and look more at the effect of FDI in strengthening institutions, infrastructure to facilitate their development. Thereby taking a longer perspective, instead of looking at short term FDI effects. Lastly, contributions are made by linking the two fields which focus on innovation and business groups. This study provides further insights in how business groups are handling competitive pressures by improving their innovative output.

(36)

36

on the development of capabilities to become competitive. Increasing the institutional framework can help companies leverage their local markets better and can allow stronger technology and capacity building. Moreover, business group should look outside domestic borders in order to increase their competitiveness in the domestic market. Not only can it help them increase access to knowledge, it could also potentially increase competences, which can be applied at home for more effective competition in the domestic market (Luo & Tung, 2007). Lastly, the effect of professionalization proved to be insignificant, both in the original test as well as in the robustness test. The results imply that for initial capacity building, it might not be desirable to have higher levels of professionalization. The mechanics of family ownerships and interlocked boards, seem to help business groups to compete and respond better against inward FDI and its effects.

7.2 Limitations and future research

While this study has revealed several points about the nature of business groups. The setting was for a high tech industry. Future research should take a more comprehensive view of business group response to inward FDI across a range of industries to validate the results found. Similarly, the results may be driven by institutional factors that facilitate a certain approach to business (Hall & Soskice, 2001). The results obtained cannot be confirmed till other studies replicate the methodology proposed and utilized here. Further research must therefore take a closer look in how institutional arrangements affect the findings and behavioral patterns of business groups. Moreover, while the measure of professionalization is more used in research (e.g. Dekker, Lybaert, Steijvers, & Depaire, 2015). No specific characteristics where identified or used as measures of board development. Especially considering that matters such as board diversity and the inclusion of women in board positions has shown to have an impact on performance and innovation (Low, Roberts, & Whiting, 2015). A case study can help to understand the specific mechanics of how professionalization characteristics in business groups affect innovation and strategic response to inward FDI. Another limitation present in this study is the limited sample size. Both model 1 and model 2 have had limited observations (729 and 220 respectively). This can be considered to be a small sample. This could bias the results as an underlying assumption may in fact be grouping these observations together. A bigger sample has to be taken in order to confirm or reject these possibilities.

(37)

37

firms have a more internal focus when it comes to reacting to inward FDI. Where they focus on improving internal competencies and the quality, not so much the output they produce.

Furthermore, future studies should consider how more regionalized FDI affects the results presented in this study. Considering high intra-national diversity in many emerging economies. Localized factors may be more able to complement the competitive reactions of business group affiliates presented in this paper. Moreover, inter-industry linkages are another potential subject for investigation to see how business groups react to inward FDI. While they may not put more effort in pharmaceuticals. Domestic firms may strengthen their core competencies in other industries and transfer these competencies to other affiliate firms. Another aspect which would help understand the business group dynamic is to look at the speed of reacting to incoming FDI. With the knowledge that business group and big firms respond in a different way to changes in the environment (M. Ayyagari et al., 2015; Chen & Hambrick, 1995) and that business group respond more effectively to inward FDI, more insights need to be gained in the process of innovation, as this study only discusses the outcomes.

8. Conclusion

(38)

38

(39)

39

9. Acknowledgments

(40)

40

10. References

Abrams, D. S. (2009). Did TRIPS Spur Innovation? An Analysis of Patent Duration and Incentives to Innovate. University of Pennsylvania Law Review, 157, 1613–1647. Acemoglu, D., & Akcigit, U. (2012). Intellectual property rights policy, competition and

innovation. Journal of the European Economic Association, 10(1), 1–42.

Agosin, M. R., & Machado, R. (2005). Foreign Investment in Developing Countries: Does it Crowd in Domestic Investment? Oxford Development Studies, 33(2), 149–162.

Aitken, B. J., & Harrison, A. E. (1999). Do Domestic Firms Benefit from Direct Foreign

Investment ? Evidence from Venezuela. The American Economic Review, 89(3), 605–618. Alfaro, L., Chanda, A., Kalemli-Ozcan, S., & Sayek, S. (2004). FDI and economic growth: The

role of local financial markets. Journal of International Economics, 64(1), 89–112. Alfaro, L., Chanda, A., Kalemli-Ozcan, S., & Sayek, S. (2010). Does foreign direct investment

promote growth? Exploring the role of financial markets on linkages. Journal of

Development Economics, 91(2), 242–256.

Allred, B. B., & Park, W. G. (2007). The influence of patent protection on firm innovation investment in manufacturing industries. Journal of International Management, 13(2), 91– 109.

Almeida, H., Kim, C.-S., & Kim, H. B. (2015). Internal Capital Markets in Business Groups: Evidence from the Asian Financial Crisis. The Journal of Finance, LXX(6), 2539–2586. Ayyagari, M., Dau, L. A., & Spencer, J. (2015). Strategic responses to FDI in emergin markets:

are core members more responsive than peripheral members of business groups. Academy

of Management Journal, 58(6), 1869–1894.

Ayyagari, M., Demirgüç-Kunt, A., & Maksimovic, V. (2011). Firm Innovation in Emerging Markets: The Role of Finance, Governance, and Competition. Journal of Financial and

Quantitative Analysis, 46(06), 1545–1580.

Belenzon, S., & Berkovitz, T. (2010). Innovation in Business Groups. Management Science,

(41)

41

Bennedsen, M., Nielsen, Kasper, M., Perez-Gonzalez, F., & Wolfenzon, D. (2007). Inside the family firm: the role of families in succession decisions and performance. The Quarterly

Journal of Economics, (May), 647–691.

Borensztein, E., De Gregorio, J., & Lee, J.-W. (1998). How does foreign direct investment affect economic growth? Journal of International Economics, 45(1), 115–135.

Castellacci, F. (2015). Institutional Voids or Organizational Resilience? Business Groups, Innovation, and Market Development in Latin America. World Development, 70, 43–58. Chang, S.-J., Chung, C.-N., & Mahmood, I. P. (2006). When and How Does Business Group

Affiliation Promote Firm Innovation? A Tale of Two Emerging Economies. Organization

Science, 17(5), 637–656.

Chari, M. D. R. (2013). Business groups and foreign direct investments by developing country firms: An empirical test in India. Journal of World Business, 48(3), 349–359.

Chen, M.-J., & Hambrick, D. C. (1995). Speed, Stealth, and Selective Attack: How Small Firms Differ From Large Firms in Competitive Behavior. Academy of Management Journal,

38(2), 453–482.

Cheung, K. Y., & Lin, P. (2004). Spillover effects of FDI on innovation in China: Evidence from the provincial data. China Economic Review, 15(1), 25–44.

Chittoor, R., & Das, R. (2007). Professionalization of Management and Succession Performance--A Vital Linkage.pdf. Family Business Review, 20(1), 65–79.

Chittoor, R., Kale, P., & Puranam, P. (2015). Business groups in developing capital markets: Towards a complementarity perspective. Strategic Management Journal, 36(4), 1277–1296. Chittoor, R., Sarkar, M., Ray, S., & Aulakh, P. S. (2009). Third-World Copycats to Emerging

Multinationals: Institutional Changes and Organizational Transformation in the Indian Pharmaceutical Industry. Organization Science, 20(1), 187–205.

Cleeve, E. A., Debrah, Y., & Yiheyis, Z. (2015). Human Capital and FDI Inflow: An Assessment of the African Case. World Development, 74, 1–14.

(42)

42

Innovation Wesley M . Cohen ; Daniel A . Levinthal Absorptive Capacity : A New Perspective on Learning and Innovation. Science, 35(1), 128–152.

Colli, A., & Colpan, A. M. (2016). Business Groups and Corporate Governance: Review, Synthesis, and Extension. Corporate Governance (Oxford), 24(3), 274–302.

Criscuolo, P., & Narula, R. (2008). A novel approach to national technological accumulation and absorptive capacity: aggregating Cohen and Levinthal. European Journal of Development

Research, 20(1), 56–73.

Cuervo-Cazurra, A., & Dau, L. A. (2009). Promarket Reforms and Firm Profitability in Developing Countries. Academy of Management Journal, 52(6), 1348–1368. Czarnitzki, D., & Toole, A. A. (2011). Patent protection, market uncertainty, and R&D

investment. Review of Economics and Statistics, 93(1), 147–159.

Das, P., & Das, S. (2015). Competitiveness and its impact on research and development in Indian pharmaceutical industry. Decision, 42(3), 325–334.

Dekker, J., Lybaert, N., Steijvers, T., & Depaire, B. (2015). The Effect of Family Business Professionalization as a Multidimensional Construct on Firm Performance. Journal of Small

Business Management, 53(2), 516–538.

Devos, E., Prevost, A., & Puthenpurackal, J. (2009). Are interlocked directors effective monitors ? Financial Management, 38(4), 861–887.

Donnelley, R. G. (1964). The Family Business. Harvard Business Review, 93–105.

Driffield, N., Love, J. H., & Yang, Y. (2016). Reverse international knowledge transfer in the MNE: (Where) does affiliate performance boost parent performance? Research Policy,

45(2), 491–506.

Faroogue, O. A. L., & Yarram, S. R. (2013). Evidence on two-way relationships between foreign direct investment inflows and country-level individual governance indicators, Singapore

Economic Review, 58(2), 1350013–1350026.

(43)

43 Development, 39(7), 1204–1212.

Gaur, A. S., & Kumar, V. (2009). International diversification, business group affiliation and firm performance: Empirical evidence from India. British Journal of Management, 20(2), 172–186.

Gaynor, G. H. (2002). Innovation by design: what it takes to keep your company on the cutting

edge. Amacom.

Gorodnichenko, Y., Svejnar, J., & Terrell, K. (2014). When does FDI have positive spillovers? Evidence from 17 transition market economies. Journal of Comparative Economics, 42(4), 954–969.

Government of India. (2016). FDI statistics. Department of industrial policy and promotion. Retrieved from http://dipp.nic.in/English/Publications/FDI_Statistics/FDI_Statistics.aspx Granovetter, M. (1985). Economic Action and Social Structure: The Problem of Embeddedness

Mark Granovetter. American Journal of Sociology, 91(3), 481–510.

Griliches, Z. (1990). Patent Statistics as Economic Indicators: A Survey. Journal of Economic

Literature (Vol. 28).

Groningen, U. of. (2010). Statistics II for IB&M (First). Harlow: Pearson Education Limited. Gubbi, S. R., Ray, S., & Aulakh, P. S. (2015). International Search Behavior of Business Group

Affiliated Firms : Scope of Institutional Changes and Intragroup Heterogeneity.

Organization Science, 26(5), 1485–1501.

Guillen, M. F. (2000). Business Groups in Emerging Economies: a Resource-Based View.

Academy of Management Journal, 43(3), 362–380.

Guillén, M. F., & García-Canal, E. (2009). The American Model of the Multinational Firm and the “New” Multinationals From Emerging Economies. Academy of Management

Perspectives, 23(2), 23–35.

Hall, P. A., & Soskice, D. (2001). Varieties of Capitalism: the institutional foundations of

comparative advantage (First edit). Oxford: Oxford university press.

Local firm’s response to inward FDI in emerging markets: are business group affiliates more innovative? Master thesis