Innovative capacity development : performance link for firms in an emerging market : a two-part study

Abstract

As the role of emerging markets become increasingly important in today‘s global economy, recent research has proliferated in topics such as new marketing perspectives (Sheth, 2011), successful firm entry (Johnson and Tellis, 2008), and innovation in emerging markets (Immelt, Govindarajan, and Trimble, 2009). Innovation in particular has become an important topic. Following this line of research this two-part thesis covers two different perspectives of firm innovation in an emerging market: (1) How domestic Chinese firms globalize and learn through innovation and (2) How foreign firms effectively innovate within China. Through this two-part thesis, I hope to contribute to the growing body of literature on firms’ strategies, particularly in developing innovative capacity for performance, in emerging markets. In the first part, I investigate how domestic Chinese firms learn through innovation and other mechanisms, as they internationalize through exporting activities. As China continues to display its influence on developed markets and the global economy, it is increasingly important to examine issues surrounding the globalization of Chinese firms. Research has documented a “learning-by-exporting” (LBE) effect in which firms (especially from emerging markets) learn through exporting, leading to productivity improvements. Yet prior studies have not discovered the exact learning mechanisms involved. Thus, this study “opens the black box” in examining how and under what conditions firms learn and achieve these productivity gains. I posit that firms leverage their learning through innovativeness, production capability improvements and managerial improvements. I test my hypotheses with panelized data on over 240,000 privately-owned Chinese firms between 2001 and 2007. All three mechanisms show a parallel and significant mediation between firm exporting and firm productivity. Furthermore, I find that the salience of these mechanisms is contingent upon industry characteristics: firms in industries with intensive R&D and moderate exporting demonstrate the most learning through all three conduits. In the second part, I take a reverse perspective and investigate how foreign firms set up their operations in China with the purpose of innovating, and highlight the effective strategies involved in this process. Foreign firms are increasingly moving their research operations to emerging markets, which represents a new technology strategy involving significant investments in R&D resources and local technological talent. Using absorptive capacity as a theoretical framework, I examine the effectiveness of this strategy and its boundary conditions. Specifically, how can establishing a local knowledge base (reflecting path dependency), obtaining local government support (to mitigate appropriability risks), and employing a strongly controlled organizational mode (wholly owned subsidiaries) facilitate foreign firms’ technology strategy in an emerging market? To test these postulates, I consider the innovative and local market performance of 524 foreign firms (216 wholly owned foreign subsidiaries and 308 international joint ventures) in China in 2008. The significant empirical support for my hypotheses contributes to the growing literature on foreign firms’ R&D strategy, emerging market innovations, and organizational entry modes.