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Product diversification and international expansion of business groups: evidence from India.

Abstract:

* Does product diversification constrain or boost international expansion of business groups from emerging markets? What is the role of international orientation and group resources in moderating this relationship? Given the dominance of business groups as an organizational form in emerging markets and their recent international expansion, these research questions are pertinent and timely.

* We use GLS fixed-effects models to test our arguments using longitudinal data on foreign direct investment of 482 business groups, incorporating 4,038 firms from India over a period of 8 years from 2001-2008.

* We find that a high product diversification has an adverse effect on the international expansion of emerging market business groups, and that international orientation and group resources positively moderate this relationship.

* Our findings suggest the inherent trade-off that exists between strategies of product diversification and international expansion for emerging market business groups. Those business groups that can effectively employ their learning from prior international exposure and their technical competences are better placed to simultaneously pursue a strategy of product diversification and international expansion.

Keywords: Business groups * International expansion * Product diversification * India

Introduction

Business groups are 'collections of legally independent businesses, often extensively diversified and interconnected by a medley of economic and social ties' (Jones and Khanna 2006, p. 455). While business groups are present in developed markets, their presence in emerging markets is ubiquitous, where they typically operate across diverse, often unrelated industries (Khanna and Yafeh 2007). There is general consensus that a diversified product scope is an effective strategy for business groups in emerging markets, as it enhances overall performance (Chang and Hong 2002; Khanna and Palepu 2000a, b). However, it is unclear whether existing product diversification (PD) constrains or boosts the international expansion of business groups. More specifically, we do not know much about the effect of PD on the extent of international expansion by emerging market business groups or the potential moderating factors of this relationship. We address the above research issue by drawing on insights from the literature on business groups, diversification and the internationalization of emerging market firms.

Does a presence in multiple industry-product streams deter or aid international expansion of emerging market business groups? This question is of critical importance for at least two reasons. First, business groups from emerging markets have only recently embarked on a strategy of international expansion and are classified as 'latecomers' to the international marketplace (Luo and Tung 2007). Consequently, understanding the antecedents of international expansion becomes critical for the survival and future growth of emerging market business groups. Second, business groups are 'networked' organizations with multiple ties among individual affiliate members (Khanna and Rivkin 2001). Coordinated strategic actions and the internal sharing of resources such as personnel, capital, and knowledge among affiliate members interlocked by a variety of equity-based ties such as cross-shareholdings, as well as non-equity-based ties such as social ties, is a common practice (Bertrand et al. 2002; Douma et al. 2006). Decisions regarding major strategic endeavors such as international expansion are, as a result, likely to be taken at the group level rather than at the firm level. Subsequently, studying the international expansion of business groups, rather than of firms affiliated to business groups, will provide for more compelling arguments and in the process build on extant research on business group-affiliated firm internationalization (Guillen 2000; Meyer 2006).

We contend that business groups that are highly product-diversified will have a lower propensity to expand internationally through foreign direct investment (FDI), and thus will engage less in outward FDI compared to their counterparts that are not as highly product-diversified. Furthermore, the relationship between PD and international expansion will be moderated by the international orientation and resources of the business groups. The bases of our theoretical arguments lie in the resource-based view, transaction cost economics and institutional theory. The use of such a multi-theoretic approach is appropriate and necessary when conducting research on emerging-market entities (Wright et al. 2005). We tested our hypotheses using longitudinal data on FDI of 482 business groups, incorporating 4,038 firms from India over a period of 8 years from 2001- 2008. We used Generalized Least Square (GLS) Fixed-Effects models to test the hypotheses using 3,777 group-year observations that formed the final sample.

Our study explores the inherent trade-off between PD and international expansion by business groups from emerging markets and makes the following two contributions to extant research. First, by analyzing the impact of PD strategies on the international expansion of business groups, we not only respond to the call for investigating product and geographic scope simultaneously (Peng and Delios 2006), but also extend this research, which primarily investigates the combined effects of product and international diversification on firm performance (Delios and Beamish 1999; Hitt et al. 1997).

Second, prior studies on business groups have mostly focused on the performance implications for their affiliates in the domestic context (e.g., Chacar and Vissa 2005; Zattoni et al. 2009), with a small minority focusing on internationalization implications for their affiliates (e.g., Elango and Pattnaik 2007; Gaur and Kumar 2009). This is somewhat surprising, given the accepted view of business groups as a coordinated networked organization (Khanna and Rivkin 2001), with abundant evidence of resource sharing among affiliate members (Douma et al. 2006) and centralized decision making on strategic issues. By looking at the inter-relationship between PD and international expansion at the business-group level, we aim to overcome some of the limitations associated with analyzing performance and internationalization implications at the firm level. In the next sections, we present our theory and hypotheses followed by our empirical analyses and discussions of the results.

Theory and Hypotheses

Business Groups

Business groups are a common organizational form in many emerging economies (Ghemawat and Khanna 1998; Khanna and Rivkin 2001). The extant literature proposes multiple theoretical explanations for the presence of business groups. The economics perspective conceptualizes business groups as a set of firms operating in different product markets under common bureaucratic and financial control, in response to missing factor markets and consequently high transaction costs in emerging economies (Left 1978). Extending this view, Khanna and Palepu (1997, 2000a, b) argue that business groups arise as an alternative mechanism to conduct transactions in environments that have misguided regulations and erratic contract-enforcement regimes, and lack intermediaries in the product, capital and labor markets. Emphasizing the role of government in the development of business groups, the political economics literature conceives business groups as a 'device of the state to achieve political and economic objectives' by providing resources and incentives to certain politically connected entrepreneurs (Ghemawat and Khanna 1998).

Other prominent explanations include resource-based and sociological perspectives. From the resource-based perspective, Guillen (2000) views business groups as a collection of firms which develop capabilities for entering into a myriad of industries in a cost-effective manner when foreign trade and investment policies allow only these firms to have access to foreign and domestic resources like capital and technology. The sociological perspective emphasizes the formal and informal ties that transform business groups into social entities that have legitimacy in the surrounding social structure (Granovetter 1994).

There are at least three common themes in explanations of business groups proposed using different theoretical perspectives (Gaur and Delios 2006). First, group- affiliated firms are legally separate entities, while the group itself is not (Chang and Hong 2002). Second, business groups are highly diversified, with affiliate firms often operating in unrelated industries (Ghemawat and Khanna 1998). Third, group-affiliated firms are related through different types of overlapping ties, such as cross ownership, interlocking directorates, or social relationships (Keister 1998; LaPorta et al. 1999). Among these characteristics of business groups, the one that is of key interest for this study is their highly diversified (product diversification) nature. We examine the interplay between PD and the international expansion of business groups and the role of potential moderating influences.

Product Diversification and Group Internationalization

As noted above, business groups tend to be highly diversified. The reasons for this high level of PD emanate primarily from transaction costs and institutional theory considerations. Emerging markets, such as India, lack the institutions necessary for conducting efficient market-based transactions. These institutional voids are related to a number of factors, such as underdeveloped capital, labor and product markets, an ineffective property-rights regime, weak law enforcement and inefficient judiciary (Khanna and Palepu 1997). The absence of these institutions, which we often take for granted in developed markets, hampers firms" ability to conduct business efficiently.

For example, if law-enforcement and intellectual-property protection is weak, firms do not have an incentive to invest in research and development (Teece 1986; Allred and Park 2007). Not possessing innovative technology puts a firm at a competitive disadvantage in the long run, in comparison to foreign players with a much stronger technological capability. Likewise, a lack of financial disclosure regulations and information intermediaries such as equity analysts leads to information asymmetries between firms and investors, making it more expensive to raise capital and obtain loans at competitive rates (Hoskisson et al. 2000; Khanna and Palepu 2000a; Wright et al. 2005). Institutional voids in labor markets make it more difficult for firms to hire talent, due to rigid labor regulations and labor immobility (Khanna and Rivkin 2001; Wan and Hoskisson 2005). Further, the weak contract-enforcement regimes create voids in the product market by increasing opportunism and uncertainty, leading to high costs in any transaction (Khanna and Rivkin 2001).

These institutional voids induce business groups to create internal capital, labor and product markets through vertical and horizontal diversification and resource sharing amongst member firms (Left 1978; Chang and Choi 1988). Group-affiliated firms can bypass the inefficient external market by conducting various transactions amongst themselves. Consequently, group-affiliated firms tend to outperform the unaffiliated ones, which do not have recourse to internally created markets in the face of inefficient external markets (Khanna and Palepu 2000b; Khanna and Rivkin 2001).

The above strategies to circumvent institutional voids and reduce transaction costs work well for reducing inefficiency in the domestic market operations of business groups. However, these strategies may not be equally effective in international expansion activities (Gaur and Kumar 2009). PD and international expansion strategies require different types of skills and are inherently risky, since under both strategies organizations spread their resource base in terms of product proliferation or market proliferation (Sambharya 1995; Singh et al. 2010). The limited research on the direct effect of PD on international expansion suggests an inverse relationship. For example, Grant et al. (1988), in a study of 262 British manufacturing firms, reported that multinational diversity was strongly negatively associated with product diversity.

The above trade-off between PD and international expansion becomes stronger when analyzed in the specific context of business groups in emerging markets such as India. Business groups have close linkages with other actors such as institutions, government and other businesses. As a result, they are highly embedded in the economic, social and political fabric of emerging markets (Granovetter 1994). Due to their association with key institutions such as the government, business groups are able to secure industrial licenses to enter new industries in the domestic market at a high frequency (Encarnation 1989; Khanna and Yafeh 2007; Guillen 2000), secure finance from government-owned financial institutions and effectively lobby the government to prevent competitors from entering into their industries (Encarnation 1989). As a result, business groups are shielded from competition in the domestic market. A negative consequence of such preferential treatment is that business groups find it difficult to innovate and undergo strategic adaptation when operating in environments that have well-developed institutions for efficient, market-based exchanges (Gaur 2007).

The structural inertia, as explicated in the organizational ecology perspective (Hannan and Freeman 1984), for business groups is likely to be high, preventing them from making any significant changes in their routines and processes that have provided sustainable competitive advantages and dominant market positions. The legacy of successful domestic operations with existing product and market strategies in domestic markets makes it more challenging to make adaptations in their product and market strategies in international markets. Thus, the very factors that have led to the success of business groups in emerging markets may have a dampening effect when these groups pursue international expansion.

In addition, as we pointed out before, business groups operate with a high level of PD, as a result of repeated entry into new industries. A simultaneous presence in several industries will overstretch managerial resources and lead firms to make suboptimal and inefficient decisions. There is evidence regarding such overstretching of managerial resources in the case of SMEs when operating in multiple industries (Singh et al. 2010). There are several other disadvantages associated with a high level of PD. For example, a high level of PD is associated with higher internal governance costs (Jones and Hill 1988). A high level of PD may also lead to increased bureaucracy and inefficiencies in internal capital allocation. Given that international diversification also entails risk and uncertainty, firms with a high level of PD are less likely to add an additional layer of risk through overseas investments.

Furthermore, diversification, both in terms of product markets and geographic markets, is expected to reduce non-systematic risk. The highly diversified structure of business groups allows for risk reduction through transfer of resources across the network of affiliates within the group. This further reduces the incentives for business groups to internationalize for risk-reduction purposes, which is an important driver of investment in foreign markets. Based on the above logic and theoretical arguments, we propose:

Hypothesis 1: Product diversification of a business group is negatively related to its level of internationalization as measured by FDI.

Moderating Role of International Orientation

Although business group-affiliated firms from emerging markets such as India have only recently started to engage in FDI in any significant manner (Delios et al. 2009), they have operated in international markets for a much longer period, albeit mainly through exporting (Yiu et al. 2007). Given the high gains associated with FDI, it is clear that in the long run, FDI is potentially a more competitive method than exporting for operating in international markets (Lu and Beamish 2001). Nevertheless, the importance of international orientation through exports cannot be undermined. While it may be more beneficial to have FDI-specific experience for the success of future FDI, the general knowledge of operating in foreign markets that firms gain while exporting is also beneficial if firms do not have FDI-specific experience (Barkema et al. 1996). There are at least three ways in which international orientation can aid in FDI and thereby moderate the negative relationship between PD and international expansion.

First, international orientation makes firms aware of different opportunities available in foreign markets. Market research and opportunity identification are key challenges that firms face while deciding whether to invest in foreign countries. To some extent, prior exports in a country can help firms overcome the liability of foreignness. Second, exporting helps firms understand the success factors relevant to operating in foreign markets. A related consequence of success in exports is quality improvement in different business operations, including manufacturing, logistics, and marketing. The learning gains associated with quality improvement in different business operations helps firms when they decide to participate in foreign markets more actively by way of FDI. Finally, exporting activities often provide the initial impetus required for firms to commit to FDI. In fact, FDI sometimes serves as a means to further promote exports. Buckley et al. (2007), in their analysis of Chinese firms, found that firms view FDI as a means to further promote their exports. Through FDI, firms gain better access to input materials, distribution channels and clients, which eventually help in future exporting activities (Vermeulen and Barkema 2001).

The above-mentioned benefits of international orientation can help overcome some of the costs that business groups with a high level of PD face when investing abroad. Thus, while prior export experience helps in making successful FDI, prior stock of exporting acts as a trigger to initiate new FDI activity and/or build on existing foreign investment activities. We expect this positive effect of international orientation on FDI to be applicable for business groups from emerging markets, consequently moderating their PD--international expansion relationship.

Hypothesis 2a: The international focus (as measured by exports to sales ratio) of a business group positively moderates the relationship between PD and outward FDI such that internationally focused business groups have a higher level of outward FDI in spite of a high level of PD.

Hypothesis 2b: The international experience (years since first FDI) of a business group positively moderates the relationship between PD and outward FDI such that business groups that initiated FDI earlier have a higher level of outward FDI in spite of a high level of PD.

Moderating Role of Group Resources

The resource-based view suggests that firm-specific resources are the basis of performance differential amongst firms (Barney 1991). The firm-specific heterogeneity arising due to differential resource configurations leads firms to assume different strategic positions. Resources become particularly important in the case of firms' international business strategies, as firms need to overcome the liability of foreignness while operating abroad (Gaur et al. 2011). While emerging market firms possess fewer traditional resources and capabilities, they do have some unique resources that help in the international expansion (Gaur and Kumar 2010; Mathews 2006). In fact, some emerging-market firms are rapidly building on their resource base through greater investments in R&D and marketing-related activities and internationalize based on their ownership-specific advantages (Ramamurti 2009).

Technological and marketing capabilities comprise two basic resources that determine success in domestic as well as foreign markets (Kotabe et al. 2002). There are two factors that make technological capabilities an important determinant in the success of internationalization efforts of emerging-market firms. First, a majority of internationalization activities of emerging-market firms are targeted at developed markets, which have a very sophisticated consumer base. The consumers in developed markets demand high quality and technologically advanced products. In order to satisfy this market segment, firms need to have technological capabilities. Second, the level of technological sophistication amongst emerging-market firms is relatively low, making it easy to differentiate between firms based on technological capabilities. Thus, emerging-market firms that have technological capabilities find it easier to internationalize successfully. Young et al. (1996) found technological capabilities to be important drivers of the internationalization of Chinese state-owned enterprises. In line with this, we expect emerging-market business groups that possess certain unique technological resources to engage relatively more in FDI-related activities, negating the negative effect of PD on international expansion.

Similar to technological resources, the marketing ability of a firm is also an important determinant of its international-expansion activities. Greater resources devoted towards marketing allow firms to more thoroughly scan various international markets and be able to make better choices in terms of location, entry mode and foreign partners. There is limited evidence in the extant literature regarding the direct impact of the marketing resources on the international expansion of emerging market firms. However, there are several illustrations of how many emerging market firms use the 'diaspora effect' to market their product, and eventually build a larger market presence in foreign markets (Kapur and Ramamurti 2001). We posit that emerging-market business groups that have greater resources to invest in international market research to build a strong market reputation are more likely to engage in FDI and minimize the negative effect of PD on international expansion. Accordingly, we hypothesize:

Hypothesis 3a: Group-level technological resources positively moderate the relationship between PD and outward FDI such that groups with high technological resources have a higher level of outward FDI in spite of a high level of PD.

Hypothesis 3b: Group-level marketing resources positively moderate the relationship between PD and outward FDI such that groups with high marketing resources have a higher level of outward FDI in spite of a high level of PD.

Methods

Data Source and Sample

We test our hypotheses on a sample of Indian business groups. There are several reasons that the study of Indian business groups is ideal to test our arguments. First, Indian firms have become active at the international stage relatively late compared to firms from other emerging economies. At the same time, a high level of PD is a historical phenomenon for Indian business groups. This eliminates the possibility of endogeneity in our models, as we predict internationalization to be based on product diversification.

Second, business groups are a dominant feature of the Indian economy, providing us with a large enough sample to study internationalization at the group level. At the same time, there is no active government participation in any of the business groups in India. As a result, the actions that business groups undertake are a consequence of their own strategic choices, and are not driven by the interests of outside players such as government. Finally, it is relatively easy to identify a firm as group-affiliated in the Indian context, as almost all firms have a single group membership. Because of these features, several scholars have relied on Indian business groups in studies on group-level issues (Chacar and Vissa 2005; Khanna and Palepu 2000a).

We derive our sample from the 2009 version of the Prowess database of the Center for Monitoring the Indian Economy. The Prowess database includes all the companies traded on India's major stock exchanges and several others, including central public-sector enterprises and foreign enterprises. There were a total of 4,038 firms belonging to 487 business groups. Given that there was not much FDI by Indian firms prior to 2000 (Delios et al. 2009), we collected data from 2001 onwards. The unit of analysis is a business group's international investment decision. After deleting cases with missing values, we were left with a sample of 3,777 group-year observations of 482 groups for the 2001-2008 time period.

Variables

Dependent variable. We measured the level of internationalization by the amount of group-level FDI in a given year. Much of the extant literature on the internationalization of emerging-market firms relies on the ratio of foreign sales to total sales, where foreign sales are often measured as total exports. Given the relatively high reliance of emerging-market firms on exports (Gaur and Kumar 2010), the ratio of exports to total sales captures only one aspect of internationalization and does not truly reflect internationalization per se. By using actual international investment as a measure of internationalization, we can overcome some of the limitations of the extant literature. We use a natural logarithm of the group-level FDI in our regression models.

Explanatory variables. The level of group-level PD is the key explanatory variable. Khanna and Palepu (2000a, p. 872), in their study of diversified Indian business groups, find that 'virtually all entry into new lines of business by existing firms in India is carried out through floating a new firm', and that 'individual firms within a group appear to be remarkably undiversified'. Consequently, Khanna and Palepu (2000a) use the number of unique industries (at two-digit SIC level) represented by individual firms in a group as a measure of group-level product diversification. We follow a similar approach, but use multiple conceptualizations to measure group-level product diversification. We use a count of the unique industries at four-digit, three-digit, two-digit and one- digit levels, represented by individual firms belonging to a group. To check the robustness of our results, we also use a count of the total number of firms in a group. Given our results are consistent across these five conceptualizations, we report the results based on a count of four-digit level industries in which a group operates.

Other explanatory variables include group-level international focus, international experience and technological and marketing resources. We measure the group-level international focus using the ratio of foreign sales (exports) to total sales. Group-level international experience is a count of the number of years since FDI was first made by any group-affiliated firm. We measure group-level technological and marketing resources by taking a ratio of group-level technological and advertising expenses to total group-level sales.

Control variables. We control for group size, group age, and the availability of cash at the group level. We measure group size by the total assets of a group. We measure group age by the total number of years since the inception of the oldest firm affiliated to a business group. Finally, we measure the availability of cash by taking an aggregate of cash available with each firm of a business group. We transformed all these variables by taking a natural logarithm.

Results

We examined the relationship between PD and international diversification using a group-year unit of analysis over the eight-year period from 2001-2008. With firm-year records, we used GLS Fixed-Effects models to test the hypotheses. Table 1 presents the correlation matrix and descriptive statistics for all variables in our models. Group-level cash is highly correlated with group size, raising concerns about multicollinearity. Given that group size and group cash are only control variables, we conducted separate analysis with only one of these at a time. The sign and significance of our key explanatory variables remains the same. Therefore, we decided to retain both the controls in our final models. None of the other correlations are high enough to warrant any concerns about multicollinearity.

Table 2 presents the results of our Fixed-Effects estimation models. Hypothesis 1 suggests a negative relationship between PD and the internationalization of a business group. The coefficient of PD is negative and significant (Model 1: [beta] = -0.232, t< 0.001), giving support to H1.

Hypothesis 2 suggests that a group's international orientation as measured by the ratio of foreign sales to total sales and FDI experience positively moderates the relationship between PD and internationalization such that the negative effect of PD on internationalization is smaller if groups have a higher level of international orientation. The coefficient of interaction between PD and the ratio of foreign sales to total sales is positive and significant (Model 2: [beta]=0.037, t<0.05). H2a is supported. The coefficient of interaction between PD and FDI experience is positive and significant (Model 3: [beta]=0.157, t<0.001). H2b is supported. Figure 1 and 2 present these interaction effects, in Fig. 1, the relative gradients of the lines for low and high foreign sales to total sales suggest that as the level of product diversity increases, groups with a higher level of export intensity find it easier to internationalize compared to groups with a lower level of export intensity. Likewise in Fig. 2, the relative gradients of the lines for low and high FDI experience suggest that as the level of product diversity increases, groups with a higher level of FDI experience find it easier to internationalize compared to groups with a lower level of FDI experience.

[FIGURE 1 OMITTED]

[FIGURE 2 OMITTED]

[FIGURE 3 OMITTED]

Hypothesis 3 suggests that resources positively moderate the relationship between PD and internationalization such that the negative effect of PD on internationalization is smaller if groups have more resources. The coefficient of interaction between PD and R&D intensity is positive and significant (Model 4: [beta]=5.868, t < 0.001). H3a is supported. Figure 3 presents this interaction effect. The coefficient of interaction between PD and advertising intensity is not significant. H3b is not supported. We discuss the potential reasons for this insignificant effect in the next section. When we include all the interaction in one model (Model 6), all these effects remain qualitatively the same in terms of sign and significance, giving us confidence about the stability of our results.

Discussion and Conclusion

We examined the impact of PD on the international expansion of business groups based in India by integrating institutional theory, resource-based view and transaction-cost economics (Hoskisson et al. 2000; Wright et al. 2005). While prior studies have examined the impact of product and international diversification on firm performance, we provided empirical validation of the direct relationship between PD and international expansion of business groups.

One of the major findings of this study is the negative impact of PD on the international expansion of business groups. Several business groups from India have treaded the path of international expansion in order to increase their market coverage and enhance competitive advantage (Ramamurti and Singh 2009). While expansion to international markets provides several benefits to these groups, empirical finding from our study show that a high level of unrelated PD in their domestic market constrains their international expansion. This is due to the fact that diversified business groups derive several benefits in an institutional context where external markets lack efficient mechanisms to support market-based exchange. Business groups fill institutional voids and replace the external markets through their internal capital, product and labor markets (Khanna and Rivkin 2001). However, as the markets develop, the advantages of internal capital, product and labor markets diminish (Chang 2003). In the particular instance of internationalization, reliance on group-specific internal resources in the domestic market context may not be transferable to developed foreign markets.

While it is possible for highly diversified business groups to internationalize their operations, success in this strategy requires the ability to develop competencies through learning from previous internationalization activities. In the early stage of internationalization, business groups may not have the required knowledge of foreign markets (Parkhe 1991). However, where business groups are able to employ their prior knowledge gained through exporting and previous FDI activities, they will be able to internationalize their operations, despite their high level of PD. Our empirical findings suggest that instead of relying only on domestic markets to increase growth and competitiveness, business groups with international orientation are able to successfully expand into international markets (Kim et al. 1989).

Finally, our finding on the moderating role of business group resources on the relationship between PD and international expansion shows that business groups with a higher level of technological resources are able to exploit their resources to internationalize their operations. The extant literature on emerging-market firm internationalization suggests that the lack of ownership-specific advantages motivates these firms to acquire strategic assets in overseas markets (Luo and Tung 2007). Our study suggests that emerging-market firms may be able to make use of the collective technological capabilities of the groups to which they belong.

Theoretically, our study contributes by providing alternate explanations for internationalization of emerging market based business groups. We used institutional theory and transaction-cost economics to demonstrate that while the fit between underdeveloped institutions and PD adds value in a domestic market, it limits the adoption of an international investment strategy. In order to enrich the explanatory role of institutions in explaining firm strategy in emerging markets, future studies may need to focus on the facilitating and constraining role of institutions on strategic choices adopted by emerging-market firms.

One way to extend this research is to focus on trade-offs between different strategic choices adopted by emerging-market firms. For example, future studies may benefit from examining the role of an export strategy on FDI. Another avenue by which to enrich institutional theory, together with the resource-based view in explaining the internationalization of emerging market firms, is to focus on the role of governmental policies. Finally, comparing the internationalization of business groups and standalone or independent firms will shed some light on the interplay of the roles of the institutional context and the resource-based view in explaining international strategy.

This study's findings offer some implications for owner-managers of business groups and practicing managers of firms affiliated with business groups in emerging markets. Many business-group affiliated firms have initiated several projects in foreign markets in recent years. However, the findings of the study show that the benefits enjoyed by highly diversified business groups in the domestic market may not accrue for international expansion. Highly diversified business groups find it difficult to internationalize their operations through foreign investments. Careful consideration of international experience, resources and capabilities is required for international expansion. Firms affiliated with diversified business groups should learn from the knowledge of international markets acquired by member firms through exports and FDI to successfully internationalize their operations. Business groups need to pay special attention in building efficient knowledge-sharing systems within their network to facilitate the internationalization of member affiliates. Enhancing technological capabilities to a greater extent than marketing capabilities is also critical for the international expansion of affiliated firms.

The findings of our study should be interpreted in view of its limitations. The empirical context of our study, India, has some distinguishing features that lend uniqueness to its firms and thereby impose limitations on the generalizability of our findings to other emerging-market firms. An important feature of Indian firms is the relatively short internationalization history, particularly with respect to FDI. Another attribute is the relatively recent initiation of institutional transformation in India. Emerging markets such as China, which started to open up to the world economy as well as develop market-based institutions much earlier, may demonstrate that business groups have been able to break-free from their embeddedness in the institutional context and are able to effectively internationalize despite being highly diversified.

Future researchers can test the validity of our findings with alternate measures of internationalization as well as incorporate additional resources in the empirical analysis. An avenue for advancing this line of research is to bring in new theoretical lenses, such as cluster theory, to view the hypothesized relationships. In the case of clusters, the ties amongst firms are mostly informal, with several of them being strong competitors. Competition between firms within a cluster allows for high level of innovation. On the other hand, business group affiliated firms are tied to each other, not only through informal ties, but also through formal ties such as cross ownership, which ensure that there is cooperation between firms. These firms are not co-located as in the case of clusters and do not compete with each other. Micro-level data on business groups in different contexts may enable researchers to identify the specific commonalities with clusters and explore the extent to which these characteristics are associated with innovation, competitiveness and a higher propensity to commit FDI.

In conclusion, our research suggests that the success of internationalization efforts of business groups in emerging markets depends on their level of product diversification and this relationship is further contingent on business group-level resources and international orientation. Business groups that are able to recognize the interdependencies between different strategic choice and resource configurations are more likely to be successful in their international forays.

Acknowledgements: This research was supported with the Rutgers University Research Council Grant (2010). The article benefited greatly from comments and advice provided by the two anonymous reviewers. We also thank the participants at the 2010 Asia Academy of Management conference for their comments on an earlier version of this paper.

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Table 1: Descriptive statistics and correlations (a,b,c)

 Variables Mean S. D. 1 2

1. Internationalization 44.19 351.97 --
 (FDI)
2. Size (assets) 2859.40 15145.42 0.52 --
3. Age (years) 42.41 27.16 0.08 0.29
4. Cash 168.18 1174.10 0.53 0.85
5. R&D intensity 0.01 0.08 0.05 0.00
6. Advertising intensity 0.15 4.39 0.03 0.08
7. Foreign sales total sales 0.31 2.73 0.03 0.07
8. FDI experience (years) 1.39 2.14 0.57 0.43
9. Product diversification 3.60 3.44 0.29 0.60

 Variables 3 4 5 6 7

1. Internationalization
 (FDI)
2. Size (assets)
3. Age (years) --
4. Cash 0.26 --
5. R&D intensity -0.02 0.00 --
6. Advertising intensity -0.02 0.10 0.00 --
7. Foreign sales total sales -0.04 0.10 0.00 0.53 --
8. FDI experience (years) 0.09 0.43 0.06 0.05 0.07
9. Product diversification 0.47 0.52 -0.01 0.01 -0.03

 Variables 8 9

1. Internationalization
 (FDI)
2. Size (assets)
3. Age (years)
4. Cash
5. R&D intensity
6. Advertising intensity
7. Foreign sales total sales
8. FDI experience (years) --
9. Product diversification 0.25 --

(a) Based on a sample of 3,777 group-year observations during
2001-2008

(b) Mean and S.D. based on actual fig. (in 100 million Indian
rupees), correlations based on transformed values as described in
the variables section

(c) Correlation greater than [absolute value of 0.03] significant
at p=0.05

Table 2: GLS fixed-effects regression (DV: log of group level FDI)

 Model 1 Model 2

 B S.E. B S.E.

Group size 0.312 *** 0.031 0.314 *** 0.031
Group age -0.002 0.002 -0.002 0.002
Group cash 0.075 *** 0.021 0.074 *** 0.021
R&D intensity (R&D) 0.027 0.162 0.027 0.162
Advertising intensity -0.002 0.004 -0.014 0.007
 (Adv)
FSTS 0.002 0.007 -0.006 0.008
FDI experience 0.468 *** 0.029 0.466 *** 0.029
Product diversification -0.232 *** 0.046 -0.241 *** 0.046
(P.D.)
P.D. * FSTS 0.037 * 0.019
P.D. * FDI experience
P.D. * R&D
P.D. * adv
[R.sup.2] 0.40 0.40
F 100.71 90.02

 Model 3 Model 4

 B S.E. B S.E.

Group size 0.320 *** 0.031 0.316 *** 0.031
Group age -0.002 0.002 -0.002 0.002
Group cash 0.071 *** 0.021 0.073 *** 0.021
R&D intensity (R&D) 0.027 0.162 -4.053 *** 1.225
Advertising intensity -0.002 0.004 -0.002 0.004
 (Adv)
FSTS 0.003 0.007 0.002 0.007
FDI experience 0.286 *** 0.045 0.461 *** 0.029
Product diversification -0.323 *** 0.049 -0.260 *** 0.046
(P.D.)
P.D. * FSTS
P.D. * FDI experience 0.157 *** 0.030
P.D. * R&D 5.868 *** 1.747
P.D. * adv
[R.sup.2] 0.41 0.41
F 93.19 91.05

 Model 5 Model 6

 B S.E. B S.E.

Group size 0.312 *** 0.031 0.326 *** 0.031
Group age -0.002 0.002 -0.001 0.002
Group cash 0.074 *** 0.021 0.068 *** 0.021
R&D intensity (R&D) 0.027 0.162 -3.616 ** 1.224
Advertising intensity 0.015 0.017 0.000 0.020
 (Adv)
FSTS -0.002 0.008 -0.006 0.008
FDI experience 0.468 *** 0.029 0.289 *** 0.045
Product diversification -0.232 *** 0.046 -0.350 *** 0.049
(P.D.)
P.D. * FSTS 0.029 * 0.015
P.D. * FDI experience 0.149 *** 0.030
P.D. * R&D 5.239 ** 1.745
P.D. * adv -0.010 0.010 -0.007 0.010
[R.sup.2] 0.40 0.41
F 89.63 71.14

n (group-year) =3,777

* p<0.05; ** p<0.01; *** p<0.001 (all two-tailed tests)


DOI 10.1007/s11575-012-0133-4

Received: 30.03.2010 / Revised: 14.05.2011 / Accepted: 07.06.2011 / Published online: 16.03.2012 [C] Gabler-Verlag 2012

Assist. Prof. A. S. Gaur ([mail])

Department of Management and Global Business, Rutgers Business School, Newark,

USA

e-mail: ajai@business.rutgers.edu

Assoc. Prof. V. Kumar * Dr. C. Pattnaik

Department of International Business, University of Sydney of Business School,

Sydney, Australia
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Title Annotation:RESEARCH ARTICLE
Author:Kumar, Vikas; Gaur, Ajai S.; Pattnaik, Chinmay
Publication:Management International Review
Date:Mar 1, 2012
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