FUNDAÇÃO GETULIO VARGAS
ESCOLA BRASILEIRA DE ADMINISTRAÇÃO PÚBLICA E DE EMPRESAS MESTRADO ACADÊMICO EM ADMINISTRAÇÃO
Sequential Relationship: Innovation, Exportation and
Performance, and Effect of Government Subsidy - Evidence from
Emerging economies
Luda Lee
Rio de Janeiro
2017
Luda Lee
Sequential Relationship: Innovation, Exportation and
Performance, and Effect of Government Subsidy - Evidence from
Emerging economies
Thesis presented as a requirement to obtaining the Master’s Degree in Administration
Fundação Getulio Vargas
Supervisor: Ronaldo Couto Parente
Rio de Janeiro
2017
Ficha catalográfica elaborada pela Biblioteca Mario Henrique Simonsen/FGV
Lee, Luda
Sequential relationship: innovation, exportation and performance, and the effect of government subsidy - evidence from emerging economies / Luda
Lee. – 2017. 52 f.
Dissertação (mestrado) - Escola Brasileira de Administração Pública e de Empresas, Centro de Formação Acadêmica e Pesquisa.
Orientador: Ronaldo Couto Parente. Inclui bibliografia.
1.Desenvolvimento organizacional. 2. Eficiência industrial. 3. Exportação. 4. Subsídios governamentais. I. Parente, Ronaldo Couto. II. Escola Brasileira de Administração Pública e de Empresas. Centro de Formação Acadêmica e Pesquisa. III. Título.
CONTENTS
1. INTRODUCTION 5
2. LITERATURE REVIEW 7
2.1. The impact of innovation on export and firm performance --- 7
2.2. Export and firm performance --- 10
2.3. The role of government subsidy --- 10
3. RESEARCH BACKGROUND AND HYPOTHESES 13
3.1. Innovation Activity and Firm Performance --- 14
3.2. Sequential relation: innovation, export and firm performance --- 15
3.2.1. Innovation activity and export intensity --- 17
3.2.2. Export intensity and firm performance --- 17
3.3. Indirect effect: mediating role of export --- 18
3.4. Moderating role of government subsidy --- 19
4. RESEARCH METHOD 20
4.1 Samples and data collection --- 20
4.2 Description and measurement of variables --- 22
4.2.1. Innovation --- 22
4.2.2. Export intensity --- 23
4.2.3. Firm performance --- 23
4.2.4. Government subsidy --- 23
4.2.5. Control variables --- 24
5. DATA ANALYSIS AND RESULT 25
5.1. Model test --- 25
5.2. Results --- 26
5.2.1 Exploratory Factor analysis --- 26
5.2.2. Innovation activity effect --- 27
5.2.3. Export intensity effect --- 27
6. DISCUSSION AND IMPLICATION 29
7. CONCLUSION 32
REFERENCE 42
TABLES Table 1 - Variable Description --- 34
Table 2 - Statistic Summary of the Variables --- 36
Table 3 - Result of Exploratory Factor Analysis --- 38
Table 4 - Correlation of Variables --- 39
Table 5 - Result of Sobel Mediation Test --- 40
Table 6 - Result of Regression Analysis --- 41
4 Abstract
This study examines the sequential relationship between a firm’s innovation activity, export intensity and performance in emerging economies. Hypotheses were generated based on this framework, and they also modeled the roles played by government subsidy as moderator. Our hypotheses were tested on a sample that includes Chinese, Indian and Russian manufacturing firms. Results in a sequential model show that (1) innovation activity positively and indirectly affects firm performance through exporting, (2) government subsidy strengthens the positive relationship between export intensity and firm performance in emerging economies. However, although previous studies have theoretically identified that the government has a significant role on the relation between firm innovation and export performance, no empirical evidence could be found through this study. Our findings uphold previous theories that the effort of firms to develop their innovation leads to a firm’s increase of export and profit, and the moderating role of the government substantially affect export intensity in emerging economies.
Keywords: Innovation; Exportation; Firm performance; Government subsidy; Sequential relationship and Emerging economies
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1. Introduction
There is no single way to improve the growth of a firm. Firms could set their growth strategy based on promoting existing products or exploiting new ones, by serving their current markets or finding new ones (Ghoshal & Bartlett, 1988; Oesterle, 1997; Kyläheiko et al, 2011; Zahra, Ireland, & Hitt, 2000). It seems that exploiting resources, developing new products and expanding markets have a close association to firm strategy. For decades, previous studies on implementing firm strategy have identified that firms’ capabilities are important factors for maximizing firm profit in markets, and have suggested that firms’ activities such as acquiring, absorbing, coordinating, and integrating resources from external organizations can enhance capabilities (Teece, 1993; Pisano, 1990; Brown & Eisenhardt, 1995; Ahuja & Katila, 2001; Lu et al., 2010). In this context, we can understand why firms engage in innovative activities. Literature on innovation claims that innovation is key to firm capability, firm success and sustainable competitive advantage in the market (Lichtenthaler & Lichtenthaler, 2009; Zhou & Wu, 2009; Calantone, Cavusgil, & Zhao, 2002; Akman & Yilmaz, 2008), and competitive advantage is derived from knowledge, technological skills and experience in the creation of new products (Teece, Pisano, & Shuen, 1997; Barney, 2001). The production of new products or processes strengthens a firm’s competitive position in relation to its rivals (Verona, 1999; Allred & Park, 2007).
Firms also dedicate part of their efforts to expand their business in international markets and intensify their research for competitive advantages (Hitt, Hoskisson, &Kim, 1997; Luo & Tung, 2007) to confront the competition and survive in markets. Export activities are regarded as an optimsal base for international expansion of firms to develop their activities incrementally overtime because they allow firms to accumulate institutional, business and
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internationalization knowledge (Sharma &Blostermo, 2003; Majocchi, Bacchiocchi, & Mayrhofer, 2005).
Many emerging economies including Asian countries such as China, India and South Korea continue to rely on exports for venturing into foreign markets (Singh, 2009; Gao et al., 2010; Aw, Chung, & Roberts, 2000). Even though manufacturing firms in emerging economies apparently can only acquire limited resources (Aulakh, Rotate, & Teegen, 2000; Yamakawa, Peng, & Deeds, 2008), they have been successful in the international market (Yi, Wang & Kafouros, 2013). Firm’s internal factors are not enough to explain its performance, so country specific aspects should also be considered (Rugman, 2005). Studies on emerging economies indicate that the institutional framework is the fundamental difference between emerging economies and developed countries. External organizations such as institutions or government directly determine which firms will struggle to formulate and implement their strategy in order to create competitive advantage (Ingram & Silverman, 2002; Peng, Wang & Jiang, 2008).
Most previous studies have merely concentrated on researching developed countries. At this point, we can question whether innovative activity also matters in emerging economies for their international competitiveness as well as for strategies. If so, which determinant most affects emerging economic firm performance? Also, how is it different from the features of firms in developed countries? Government policies can be a main factor to explain the upward movement in emerging economies from captive manufacturing to create high value technological product (Yi, Wang &Kafouros, 2013). Despite strongly formulated theoretical frames, there is some doubt about the empirical studies related to this issue.
The aim of this study is to examine a mechanism of the relationship between innovation activity, export and firm performance, and to reveal the role of the government in
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emerging economies for their international business strategy. The existence of government subsidy will be treated as the most important feature in this study to understand its effect to emerging economies. We will focus on three countries that have emerged as important players in the global economy: China, India and Russia, and test our model through a survey conducted on manufacturing firms in these three countries. Through this study, we expect to narrow the research gap of relevant literature.
The following section presents the theoretical background, and the subsequent sections introduce a development of the model and hypotheses, empirical analysis and results. It also draws conclusions and some implications for managers and policymakers, especially in developing economies, and we expect this study to cover a wide framework for international business research and emerging economic studies.
2. Literature Review
2.1. The impact of innovation on export and firm performance
The argument of a positive relationship between firm innovation activity and performance has already been validated in numerous studies. First of all, there is the traditional explanation to the positive relationship between firm level innovation and firm performance built on Schumpeter’s (1934) work (Atalay, Anafarta &Sarvan, 2013). He argued that innovating allows firms to enjoy relatively high profits when they are first introduced to the market due to limited direct competition. Scholars have continued to confirm that innovative firms also tend to have higher firm performance (Geroski & Machin, 1993; Li & Atuahene-Gima, 2001; Han et al.,1998; Therrien et al.,2011). Artz et al. (2010) studied the impact of
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acquired patents and product innovations on firm performance in different industries in U.S. and Canada, Pla-Barber & Alegre, (2007) assert that the innovation process requires input such as R&D, specialized human resources and technical equipment, and generates a number of outputs, such as new and significantly improved products. The presence of product innovation is also expected to be associated to a deliberate market expansion strategy (Vaona & Pianta, 2008).
In relation to foreign market expansion, Hirsch & Bijaoui (1985) early showed that firms that possess a newly developed product and its proprietary knowledge will start exporting in order to exploit their market power in a foreign market because of the limits of the domestic market. It is found using data from European countries that both process and product innovation have a positive effect on performance (Griffith et al., 2006), and there is a study that analyzed Italian manufacturing firms, which found that firms that introduce product and/or process innovations are more likely to export than non-innovative firms (Basile, 2001). Roper & Love, (2002) demonstrated that product innovation has a strong effect on the propensity to export in the UK and German manufacturing plants, and showed the differences between determinants of export performance comparing these two countries. Cassiman & Golovko (2011) focus on the indirect effect of innovation, explaining that product innovation leads to the productivity enhancement, and ultimately leads firms to decide to export.
Furthermore, there are studies that examine whether this relationship is also significant in emerging economies. Chinese firms are considered a particularly interesting group in terms of the role of innovation capabilities in exporting (Guan & Ma, 2003). Although Chinese firms are often not regarded as technology leaders that are capable of manufacturing differentiated products (Buckley et al., 2007; Wang et al 2012), they have been successful in the global export market (Yi, Wang & Kafouros, 2013) . Özçelik & Taymaz (2004) deal with possible impacts
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of technological capabilities on export performance in emerging economies manipulating Turkish data. In the same way that exploiting an innovative activity affects a firm’s willingness to export, it can be affirmed that a firm’s export intensity might also be one of the major factors that leads to the firm profit performance.
However, there are some studies that affirm there is no effect of innovation on firm performance or export. In their study on a case in India, Kumar & Siddharthan (1994) insist that there is no significant competitive advantage of high-technological activities entering the export market or competing through innovation because most developing countries are more adaptive rather than creative in nature. The authors also explain that product life cycles in high technology industries are short, and therefore it is difficult for developing countries to achieve a significantly competitive advantage on the basis of imitation. Santos et al. (2014) hypothesized the positive relation between innovation and a firm’s financial performance in private and public companies in Brazil, but they empirically found non-significant results. They pointed out that they did not consider the output effort of innovation, such as patents, in their study, and they did not take into account the country business environment in the data. Da Silva et al. (2015) also evaluated firm valuation in Brazil and found that the R&D intensity is not significantly relevant in operating performance and in the average profitability reversion. They point out that this is because R&D/sales reinforces the abnormal risk for innovative companies.
2.2. Export and firm performance
It is clear that export activities positively affect employment, foreign exchange revenues, industrial development and national prosperity while also improving the performance of sales volume, market shares and profitability (Koksal, 2009). Scholars have
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investigated if exporting firms had been over-performing before entry into the export market or the other way around (Wagner 2007; Bernard and Jensen, 2004; López 2009). Learning related to the activity of export, such as technological learning, increase high-quantity production and brings high profit performance (Grazzi, 2012). Firm export activity would be considered such as one degree of internationalization based on a multidimensional approach (Author et al., 2015). Lee, Jooh & Berhe Habte-Giorgis (2004) examine the effects of strategic factors, including R&D activities and product innovation, toward firm economic performance through export activity based on the data from U.S. manufacturing. This sequential model explains the direct and indirect impact of R&D activities on company performance, and this significant result implies a new insight to understanding exporting procedure that leads to international competitiveness and trade performance.
2.3. The role of government subsidy
Literature on institutional theory has tried to explain the role of external institutions on firm-level technological development and innovation activity (Mahmood & Rufin, 2005; Nelson, 1988), and has emphasized that institutional factors have directly affected the behavior and strategic choices of firms, especially in emerging economies (Peng, 2003; Peng et al., 2008; Gao et al, 2010).
Mahmood & Rufin (2005) conceptualized a technological development model that represents an effect of the proper role of the government on economic development. Wang et al. (2012) show the mechanism which governments impact the internationalization of firms in emerging markets and assert that institutional benefits help firms overcome information and resource constraints (Khanna et al., 2005). There are also some studies that affirm that new
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product development and improvement of existing products under a favorable environment enhance firm capability and performance (Peng &Luo, 2000), and that government support for R&D activities increase companies’ export sales (Guan &Ma, 2003; Köksal, 2009).
Through many studies, it can be understood that emerging economy governments have provided favorable policies to encourage R&D investments by domestic and global companies (Cheng and Bolon, 1993; Li and Zhong, 2003; Li and Kozhikode, 2009) and improvement in innovation capacity. It is well known that in China and India, especially, this cannot be achieved without the involvement of governments that set up a favorable environment for the firms (Motohashi and Yun 2007; Fan, 2011). Recently, China is considered the most influential emerging country in the international business landscape, and they overtook the U.S. and E.U. and became the largest exporter of high-tech products (World Bank, 2008; Yi, Wang, & Kafouros, 2013). The government of India has also emphasized promoting the development of indigenous technologies, and focused on creating a strong technological infrastructure with its support (Mani, 2004; Fan, 2011). In addition, it built up an extensive network of science and technology, granted incentives for the R&D efforts of enterprises, and provided funding for resources (Fan, 2011). Chadee and Roxas (2013) researched the link of innovation activity with Russian firms’ performance under their institutional environment, and explained that government support, proactive economic and industrial policies, and other government programs for businesses enable the firms to pursue more promising innovative ventures. However, Russia is known for its corruption, which is intricately woven in the government. Most Russian studies on businesses indicate that inefficient institutional environment obstructs firm profit performance (Aidis & Adachi, 2007; Puffer & McCarthy, 2011). Since research regarding the role of institutions/ the government in the behavior of Russian firms is still lacking, it is important to examine the positive aspects of government in order to understand
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the Russian business environment because Russia has been considered one of the outstanding emerging economies in the global landscape.
Even though former empirical studies on the consequences of institutional and government subsidy are numerous, researchers have only focused on its direct effect on export or firm performance. They did not even consider it as moderator in the context of the sequential relations between innovation activity, export and firm performance. Related issues have received much less attention than factors such as a firm’s demographic aspect or strategic specific features.
3. Research Background and Hypotheses
A resource-based view of the firm is the most influential theoretical framework for understanding the creation and sustainability of competitive advantage, and for explaining why firms perform differently (Hitt et al., 2001). It showed that technologically sophisticated firms participate in the sector of scientific knowledge related to innovation, and their efforts to increase wealth and innovation significantly influence their performance (Clark & Griliches, 1984; Chittoor, Aulakh & Ray, 2015).
Oliver (1997) combines RBV and institutional theory, arguing that institutional and/or external factors have a significant influence on a firm's selection of resources and strategies (Peng, 2003; Yamakawa et al., 2008). A good infrastructure and understanding of technologies make the firms more capable of integrating external research findings of their products and processes (Kesseler, 2003; Kafouros, 2006; (Kafouros et al., 2008).
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In this study, innovation activity is considered firm competence to export to the foreign market, and therefore it relates to firm profitable performance and government subsidy. As described in a research framework of innovation activity, export intensity, and performance (see Fig. 1), the level of a firm’s innovative activity is directly or/and indirectly linked to successful exportation, and in turn leads to a firm’s profitable performance.
[Figure 1. Research Model]
Fig.1. A theoretical model explaining the sequential relationship between innovation activity, export intensity and firm performance with a moderating role of the government subsidy.
3.1. Innovation Activity and Firm Performance
According to Garcia & Calantone (2002), ‘innovation’ is an iterative process initiated by the perception of a new market and/or service opportunity for a new technology which leads to development and production that strives for commercial success of the product. Among
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various types of innovation, technological innovation is most important in this study. Technological innovation consists of two types of innovations: process and product. It is widely recognized that technological innovation is key to profit performance of firms, since innovative firms grow faster in terms of employment and profitability (Baregheh, Rowley, & Sambrook, 2009). Yet, how can this argument be dealt with in relation to emerging economy firms? It can be argued that the theoretical consent of a positive relation between innovation and firm performance, which has been built on developed country firm cases, could be also applied to explaining case of emerging economy firms.
Li & Kozhikode (2009) state that firms in emerging economies have learned from, and caught up with, investing firm in developed countries, but to do so they had to develop their own innovative capabilities and move from a process to a product focus and from imitation to innovation. Scholars have emphasized a view of ‘assimilation’ to explain the contribution of innovation capacity from emerging economies (Dahlman 1994; Hobday 1995; Kim 1998; Fan, 2011). In short, we can infer that if firms from emerging economies focus on developing their own innovation capability, and not merely imitate, they could not only enhance firm profitability, but also emerge as major players in technology intensive sectors (Mathews, 2002; Gassman & Han, 2004; Altenburg, Schmitz & Stamm, 2008).
On the other hand, heterogeneity derived from an internal and/or external factor significantly affects firm activity, which is the difference between emerging economy firms and developed economy ones. This is key to explaining the movement of emerging economies in the innovation landscape (Toivanen, 2014; Fan, 2006; Mathews, 2002). This will be discussed in the following section. From this argument developed by scholars, the following hypothesis was derived.
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Hypothesis 1: In emerging economies, innovation activity is positively related to firm
performance.
3.2. Sequential relation: innovation, export and firm performance 3.2.1. Innovation activity and export intensity
Key resources are good predictors of the export strategy used by firms (López Rodríguez & García Rodríguez, 2005). Among the drivers that impact export performance of manufacturing firms in emerging economies, the ability to produce a good product at a competitive price is considered important for the export market (Basevi, 1970). In this regard, technological innovation is generally represented as firm capability, and this affects a firm’s willingness to expand toward export market, despite certain barriers, cost and risks (Luo & Tung, 2007).
At the macroeconomic level, Fagerberg (1988) and Greenhalgh (1990) found that differences in innovation can influence export behavior. Lefebvre, Lefebvre, & Bourgault, (1998) investigated R&D related capabilities as determinants of export intensity, explaining that these activities make the firm exploit resources, use an intense external source of information, and operate as part of a global market. Lall & Kumar (1981) assert that exporters who have their R&D activity export more over time than traditional firms (Özçelik & Taymaz, 2004), and Hirsch & Bijaoui (1985) show that firms that are engaged in R&D have a higher propensity to export. Moreover, Welch & Wiedersheim-Paul (1980) explained that production capability relies on the absolute and objective competitiveness of the firm, while willingness
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to export is a consequence of self-evaluation of cost and benefit of entering a foreign market. Based on prior studies, it seems logical to construe that successful innovation may serve as a crucial factor for a productivity-enhancing investment, hence increase firm export performance. We propose that innovation activity will associate positively with export intensity because innovation within firms can make them to start their operations abroad in search for a greater demand for a new product, and to spread the research and development (R&D) costs over a larger sales volume (Cassiman & Golovko, 2011). As a consequence, it can be stated that the more firms develop their ability to innovate their products, the more their export intensity will increase.
Hypothesis 2a: In emerging economies, a firm’s innovative activity is positively related to
its export intensity.
3.2.2. Export intensity and firm performance
In general, the success and survival of a firm depends on profitability (Wagner, 1995). Export activity is traditionally seen as one of the critical routes to corporate growth and financial strength (Cooper & Kleinschmidt, 1985). One of the most developed streams of research examining and explaining export is the stage theory of internationalization (Johanson & Vahlne, 1977). From this perspective, internationalization is accomplished by establishing export capability through a developmental and sequential process (Glaum & Oesterle, 2007). In the early stages of internationalization, when firms need to expand to their overseas markets, they try to achieve high growth; but at this stage, when they have not achieved their break-even
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point, profitability will be low. However, as firms gain more experience from playing their role in international markets, and when they reach the break-event point, profitability will start to increase (Kongmanilaa & Takahashib, 2009). In this regard, it seems reasonable to contend that export intensity can be one of the stages for firm growth and profitability, and it can be expected that export intensity positively effects the increase of firm profitability, thereby enhancing firm performance.
In addition, potential benefits of international expansion through exportation include realization of volume economies leading to price competitiveness, gathering of knowledge and information about product improvement, operational flexibility and stability, organizational advantages and tax arbitrage with government support (Voss & Blackmon, 1996; Lee, Jooh & Berhe Habte-Giorgis, 2004). In light of these arguments, a fundamental assumption in this study is that firm performance (firm profitability) improves when a firm expands its vigorous activities across borders.
Hypothesis 2b: In emerging economies, export intensity of a firm positively affects
its performance.
3.3. Indirect effect: mediating role of export
Hypothesis 1 predicts a positive relationship between a firm innovation activity and export intensity, and Hypothesis 2 also predicts a positive relationship between export intensity and firm performance. Together these hypotheses specify a model in which firm innovation activity indirectly improves firm performance by contributing to increased export intensity.
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Essentially, firm innovation activity has a positive effect on firm profit performance and is seen as an influence on export sales in manufacturing firms (Lee, Jooh & Berhe Habte-Giorgis, 2004). Accordingly, it can be expected that export intensity will mediate the firm innovation activity–firm performance relationship.
Hypothesis 3: In emerging economies, export intensity partially mediates the relation
between innovation activity and firm performance.
3.4. Moderating role of government subsidy
One of the main arguments in this study is the positive effect of the government’s direct or indirect subsidy either on the relation between innovation activity and export intensity or between export intensity and firm performance. Institutional support, especially undertaken by governments, has become a key feature in many emerging economies to achieve superior economic growth and international competitiveness (Chadee & Roxas, 2013).
Institutional support can contain a variety of aspects, including government programs. Scholars regard government subsidy as an important factor and as a specific type of external resource, because it may control substantial resources, provide firms with assets, and input information and financial benefits, such as favorable taxation conditions for growth (Li & Zhang, 2007). Government subsidy may also minimize the importance of other drivers that could negatively affect export performance, such as sunk costs (Clerides et al., 1998; Delgado et al., 2002), risk (Ahmed et al, 2002; Leonidou, 1995), financial constraints (Bellone et al, 2010) and uncertainty (Raven, McCullough, & Tansuhaj, 1994). Within this context,
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government subsidy and appropriate policies can reduce the negative effect of the above-mentioned factors, upgrade national technological capabilities, and increase firm competency (Montobbio & Rampa, 2005).
Export assistance also offered by government agencies includes a variety of initiatives in order to deal with different export barriers, and this helps exporting firms overcome certain invisible barriers and develop managers’ positive perception toward international operations (Shamsuddoha et al, 2009). Kafouros et al (2008) explain that technology-management researchers have also argued that a good infrastructure makes high-tech firms more capable of integrating external research findings in their products and processes.
Innovative firms can take advantage of enhancing their competence in export with government subsidy, and they will likely be more successful in profitable performance (Yi, Wang & Kafouros, 2013). This leads to the following hypotheses:
Hypothesis 4a: The relation between innovation and export intensity is moderated by
government subsidy.
Hypothesis 4b: The relation between export intensity and firm performance is moderated by
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4. Research Method
4.1 Samples and data collection
The purpose of the study is to explore the sequential relationship between firm level innovation activity, export and performance, and simultaneously to examine the moderating role of government subsidy on this mechanism in emerging economies. Thus, a survey was conducted by e-mail targeting firms from three emerging countries: China, India and Russia.
For testing the above-mentioned hypotheses, the purpose of the questionnaire used in the survey was to obtain relevant variables that represent each factor in our research model: innovation activity, export intensity, firm profit performance, government subsidy, and other control and dummy variables at firm level. The questionnaire was designed in English, and some questions address the four-year period from 2011 to 2014. As we thought that collecting data from one-year period only might not be sufficient to analyze our argument, we decided to collect data from a four-year period.
The questionnaire was pre-tested in August 2015 in 17 manufacturing firms in South Korea in cooperation with The Korea Chamber of Commerce & Industry, and it was revised according to the feedback from questions for those companies. Next, a questionnaire was sent by e-mail to 1,500 companies in November 2015. We obtained a list of e-mail contacts from those companies in cooperation with the Chamber of Commerce & Industry of each country: the ACFIC in China, ICC in India, and CCI in Russia, and 500 firms from each country were randomly selected from the list. We received 512 responses from all three countries. First, we asked respondents if they had access to management/administrative information. A total of 173 incomplete or unreasonable responses, including negative (‘no’) responses, were discarded for information reliability. Even though the survey was conducted for manufacturing firms, there
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were five responses from the service industry. As a result, a total of 334 responses from firms were collected: 51 Chinese firms, 119 Indian firms, and 164 Russian firms, having on average a valid response rate of 22.26 %.
4.2 Description and measurement of variables 4.2.1. Innovation
Technological innovation can be measured in several ways: R&D expenditures, number of patents (Hagedoorn & Cloodt, 2003), number of new products or patents introduced in the market (Wakelin, 1998; Kleinknecht, Van Montfort & Brouwer, 2002; Zheng Zhou, 2006), amount of investment in innovation and cumulative number of patents (Acs & Audretsch, 1988).
Firm innovative activity was measured using the total number of international patents granted. Granted patents reflect a firm’s technology and innovation opportunities, and they measure the propensity to undertake innovative activities in each industry sector (Montobbio &Rampa, 2005). Counting patents mainly offers two advantages as innovation proxy: (1) a patent legal document is officially registered and is not subject to measurement errors, (2) when patents are granted by an institution, the criteria of quality assessment of innovation will likely be uniform and comparable among firms, even if they are located in different countries (Montobbio &Rampa, 2005).
Moreover, the number of patents issued to firms in emerging economies has increased dramatically over the past decade, and interestingly, a large number of the patents issued to multinational enterprises from developed countries are being generated in emerging economies
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(Gassmann and Han, 2004; Hicks, 2005; Li & Kozhikode, 2009). In this respect, the number of international patents are measured as a proxy of firm innovation in emerging economies.
4.2.2. Export intensity
Export intensity is computed as the annual ratio of a firm’s export sales to total sales, and the values were a four-years from 2011 to 2014. By expanding markets beyond the domestic market, firms should be able to extend product life and enjoy the accompanying returns (Lee, Jooh & Berhe Habte-Giorgis, 2004). The positive effect of productivity growth rate on export ratio provides evidence for the importance of skills in determining export performance (Oulton, 1996).
4.2.3. Firm performance
Researchers investigating firm performance have used a variety of measures of profitability. Since firm performance is a multi-dimensional construct, three different aspects of firm performance were measured in this study: Returns of Asset (ROA), Returns of Equity (ROE) and Rate of Operating Profit (ROP). ROA, in particular, is a widely used profitability measure in innovation research (Roberts & Amit, 2003; Sher & Yang, 2005), and it captures the ability of a firm to develop profits from its asset or investment base (Artz et al., 2010). Since most of these measures tend to be strongly related to one another, all three profitability ratios were used as indicators of a firm’s overall performance (Keats & Hitt, 1988; Cho & Pucik, 2005).
23 4.2.4. Government subsidy
There are many different types of government subsidies, therefore five variables were measured in terms of government support, and an exploratory factor analysis was employed in order to obtain single factor. We proposed two hypotheses of moderator effects of government subsidy: the effect on the relationship between innovation activity and export intensity and the effect on the relationship between export intensity and firm performance. The variables were measured in terms of their various role-related aspects: government financial support,
technological support, efficiency of export promotion policy, efficiency of export credit service, and efficiency of government infrastructure.
4.2.5. Control variables
Firm level variable: firm size, firm year, export experience and foreign shareholder.
Several variables are controlled to address concerns about the potential endogeneity of the innovative capability measure and other firm-level unobserved heterogeneity.
At firm level, firms can enjoy benefits such as cost reduction, economies of scale, exploitation of new markets and potential monopoly rents because large companies are known to possess more financial and human resources (Wagner, 1995). These benefits help firms decide on their commitment of resources to innovation and their innovative strategy (Wagner, 2012; Pla-Barber & Alegre, 2007b). This makes the firm a suitable unit of analysis when considering the role of technology in export behavior. Moreover, it can be said that decisions or policies made by a government might differ depending on firm size, in that the government might prefer to invest in large companies to guarantee its leverage, or provide differential rates of support, depending on firm size.
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Targeted foreign investment brings new technologies and higher levels of technical skills, it enhances international market access and strengthens the competitive position of firms in the long run, especially alongside an ability to absorb part of its knowledge and organizational competences (Ernst, Ganiatsos, & Mytelka, 1998; Lall, 1998; Montobbio & Rampa, 2005). In order to avoid the endogeneity problem of a foreign shareholder possibly being another spurious explanation in our main argument, the ‘foreign shareholder’ variable was employed as one of the control variables.
Finally, some additional dummy variables were introduced to account for idiosyncrasies associated with time, country variations and industries. Year dummies are included to capture time effects associated with exchange rate and other time-varying factors on export performance. In addition, standard country dummies and industry dummies control any remaining unobservable region-specific effects.
“Insert Table 1 here”
5. Data Analysis and Result
5.1. Model test
The data obtained through a survey was analyzed by the STATA statistical package program, and all proposed hypotheses were tested through OLS regression estimation with robust standard error (Atalay et al., 2013). A large number of dummy variables that are consistent with time and regions in our data set was able to capture all time varying and cluster
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Previously, the data set was summarized in order to check whether there were outliers to each variable. Normally, the number of employees in a firm is not more than 100,000, so we deleted the values of the firm size of three observations that had beyond 100,000.
“Insert Table 2, and 4 here”
5.2. Results
In Table 5 and 6 regression estimation results for the relation between innovation and firm performance are presented.
5.2.1 Exploratory Factor analysis
An Exploratory Factor Analysis of the responses was implemented using the principal-component factor method with oblique pro-max rotation. Only items with loading weights of at least .60 on a single factor and no more than .40 on another factor were retained. In an EFA conducted on eight items, three items of firm performance and five items of government subsidy, results showed a strong loading under three different factors: one factor of firm performance and two factors of government subsidy, as seen in Table 3. The loading factor for the items range from 0.80 to 0.94. Accordingly, all the results mentioned for factor analysis are in acceptable range.
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estimate reliability of responses. As shown in table 3, all the factors have adequate reliability, in that Cronbach's alpha results are higher than 0.7.
Consequently, three factors were kept: one factor indicates firm performance and two factors indicate government subsidy, which were labeled ‘government support1’ and ‘government support 2’. A factor ‘Government support 1’ indicates relatively a direct support to firms, and a factor ‘government support 2’ is export-related support from the government, which includes infrastructure and administrative support.
“Insert Table 3 here”
5.2.2. Innovation activity effect
Model 1 in Table 6, shows the regression estimation result of Hypothesis 1, which predicted the positive direct effect of innovation activity on firm performance. As expected, firm innovation activity has a positive significant effect on total firm performance (β = 0.0006, p<.05, r2=0.114). Even though the coefficient is very small, shows that there is a positive trend that increasing the relation between innovation and firm profit performance.
Hypothesis 2a, whose result is shown in Model 2 in Table 6, predicted the positive relationship between innovation activity and firm export intensity. The result showed that the effect of innovation on firm export intensity is also positive significant (β = 0.003, p<.01, r2=0.25).
27 5.2.3. Export intensity effect
Hypothesis 2b indicating the relationship between export intensity and firm performance was supported (β = 0.16, p<.01, r2=0.31) as seen in Model 3 in Table 6. In support of Hypotheses 2a and 2b, we finally tested the mediation effect of export intensity between the relation of innovation activity and firm performance in order to see the sequential relationship, which is one of main arguments in this study. Innovation activity is found to have an indirect effect on firm performance, as we hypothesized (Hypothesis 3); the coefficient of indirect effect is 0.0005, and the coefficient of direct effect is not significant. The formal two-tailed significance test, which assumes a normal distribution demonstrated that the indirect effect is significant (Sobel z = 4.2, p<.01). Bootstrap results confirmed the Sobel test (see Table 5), with a bootstrapped 95% CI around the indirect effect (0.0005, 0.00012). Thus, hypothesis 3 is also supported.
“Insert Table 5 here”
5.2.4. Government subsidy effect
Hypotheses 4 predicted the effect of government support on two positive relations; innovation-export intensity, and export intensity-firm performance. The estimation result of Hypothesis 4a is shown in Model 4 in Table 6. In the above-mentioned result of exploratory analysis, five variables were grouped by two factor variables. To examine the moderating effect of government subsidy on these two relations, interactions of government support with innovation and export intensity were added separately (innovation x support1, export x
28
support1, innovation x support2, and export x support2).
As depicted in model 4, the interactive effect of the first government subsidy factor on export intensity was statistically non-significant (β = 0.00014, p=.819, R2=0.31), and the second interactive effect of government subsidy showed non-significant results (β = 0.0019, p=.27, R2=0.35).
However, consistent with our expectations in Hypothesis 4b, Model 5 in Table 6 represents the interactions between export intensity and both government subsidy factors were significant and positive in relation to firm performance: interaction with first government factor (β = 0.0211, p<.05, R2=0.24); interaction with second government factor (β = 0.0495, p<.01, R2=0.33).
Thus, Hypothesis 4a, which states that the moderating effect of government subsidy on the relation between innovation activity and export intensity was not supported. Hypothesis 4b, which predicts the positive moderating effect of government subsidy and export intensity on firm performance was supported in both cases of governmental support factors.
6. Discussion and Implication
This study might be one of the steps in developing firm capability perspective for manufacturing companies in emerging economies. We developed and tested our conceptual framework of direct/indirect paths of the association between innovation activity, export intensity and firm profit performance. We also modeled with the role of government subsidy, which is considered a specific feature in emerging economies, and tested as moderator in each
29
relation: between innovation activity and export intensity and between export intensity and firm performance.
First of all, the estimation of a direct path from innovation activity to performance in emerging economies is positively supported in this study. Also, the indirect path from innovation to firm performance through export has been verified. Interestingly, different from what was expected in Hypothesis 3, we found the full mediation effect of export intensity on the relation between innovation and firm performance in this study. In order to check the influence of export intensity of the mediation model, we ran model 1 (Hypothesis 1) once again, using the exporting variables as the control variable, and the results showed that it is not significant. Based on this, it can be stated that export intensity strongly influences other factors in this study. These results indicate that exportation is indispensable to understanding the mechanism of firm profitability activity in emerging economies.
In reference to the mediation relation between innovation, exportation and firm performance mentioned above, a study by Lee, Jooh & Berhe Habte-Giorgis (2004) found the mediation effect of export activity between product innovation and economic performance using data from U.S. manufacturing companies. We wanted to research other studies to achieve better results in this study, but we could not find any previous research what deals with the mediation relation in emerging economic businesses. Thus, this study may contribute to studies on emerging economies in order to understand the role of export activity in the economy, and to comprehend innovation and R&D activity in the context of international businesses coming from emerging economies.
Second, the moderator effect of both types of government subsidies are revealed as non-significant in the association between innovation activity and export intensity. It is well
30
known that relevant policies can solve some factors of failures of producers and upgrade national technological capabilities (Montobbio & Rampa, 2005), and also that the successful role of the government during innovation process enhances the effectiveness of internalization of spillovers by improving the overall level of social capital in the country (Mahmood & Rufin, 2005). Contrary to previous studies (Fan, 2011; Li & Kozhikode, 2009; da Silva et al., 2015), which show the positive effect of government subsidy in relation to innovation activities, we found a non-significant relationship. The innovation phenomenon might be interpreted differently depending on the characteristics of industries and economies that the firms have incorporated (Pla-Barber & Alegre, 2007a). Thus, the results suggest that a mere governmental subsidy could be of no use for developing innovation activity and export performance without fully understanding industrial and economic characteristics.
Third, the moderator effect of both type of government subsides is positively significant in the relation between export intensity and firm profit performance. It means that the positive relation between export and firm performance strengthens as the level of government subsidy increase. This result upholds the argument that the competitive advantage of the innovative firms depends not only on a capability of expansion to a foreign market, but also, and more importantly, on its ability to effectively cooperate with external organizations, such as institutions or governments (Luo, 2000).
A fundamental question is whether emerging economy firms can benefit from their own innovation and achieve their success in the market, or whether imitating their competitors from developed economies is a more efficient strategy (Zhou, 2006). It is not easy to explain using previously existing theories that have been made based on firm in developed economies. Despite theoretical discussions, even if emerging economy firms also innovative to a certain level on their own, they would fulfill expectations of both export performance and produce
31
profit, yet they would not enhance firm profitability and surpass their competitors from developed economies (Altenburg, Schmitz & Stamm, 2008; Özçelik & Taymaz, 2004).
7. Conclusion
Theoretical frames have been formulated to show that innovation is key parts to firm capability, firm success and sustainable competitive advantage in the market (Lichtenthaler & Lichtenthaler, 2009; Zhou & Wu, 2009; Calantone, Cavusgil & Zhao, 2002; Akman & Yilmaz, 2008), but there are still doubts about empirical studies. Most of the previous studies on firm innovative activity in the international business have focused separately on each link of innovation to export and to firm performance. Even though studies on emerging economies have revealed that the role of the government is sufficient, they have not fully presented the integrated mechanism of explanation with innovation, export and performance regarding the institutional role.
The main argument of this study was developed based on the following assertion: firms from emerging economies no longer enjoy incentives such as export tax rebates, and it is therefore more important for these firms to enhance export performance and their profit performance by relying on innovation and product differentiation (YI, Wang &Kafouros, 2013). Hence, it is necessary to produce further explanations about firms that aim their strategic competencies toward exporting to sustain their competitive power in the markets (Lee &Habte-Giorgis, 2004).
This study provides additional evidence of the discussion on the relation among innovation, export and profit performances at firm level in emerging economy firms. Through
32
this paper, a more profound knowledge of such discussion was gained. It can be suggested that firm size, age and university graduated-employee ratio might be associated with profit performance. The experience of foreign joint venture and the existence of foreign share also might affect firm export and profit performance.
However, there are still some limitations. Since we check our research model empirically through data set, which gained from the survey of three countries manufacturing firms: China, India and Russia, there might be some doubt as to whether this result can be applied to small economy firms and non-manufacturing firms as well. The findings in this study can contribute to further studies in this field. It may be possible to expand this study to include developed economy firms in terms that estimate government subsidy influence. It is also possible to adopt structural estimation approach to eliminate possible limitations that may occur due to measuring errors, and also to maximize the use of information by reducing possible misleading factors (Blinder, 1973).
Despite these possible limitations, this study makes important contributions to both emerging economy export activity and to literature on innovation and other relevant literature. The paper shows that there is a strong linkage between innovation, export and firm performance, as well as a significant role of government subsidy in emerging economies. Even though the theoretical back ground is clear, there is still some empirical doubt in relation to proof of their link (Brito, Brito, & Morganti, 2009; Yeh-Yun Lin & Yi-Ching Chen, 2007).
Moreover, for future research, it is suggested that as innovative surveys accumulate over time, it will be possible to add a time-series dimension to the analysis, in which case we will eagerly undertake the work of modeling simultaneous causation.
Finally, the results of this study have a few implications for policy-makers and practitioners. By showing that there is strong relationship among innovation, export, firm profit
33
and government subsidy in emerging economy firm, policy makers from emerging economies should add more resources to help their firms to innovate in order to develop the economy, and internationalize.
34 [Table 1. Variable Description]
Variable Definition Style Type Range Coding
Firm performance
ROA Return of Asset, net income/asset Yearly
varying Categorical 1,2,3,…12
-100~-81%=1, -80~-61%=2,…81~100%=12'
ROE Return of Equity, net income/equity Yearly
varying Categorical 1,2,3,…12
'-100~-81%=1, -80~-61%=2,…81~100%=12'
ROP Rate of Operating Profit, total cost/total sale Yearly
varying Categorical 1,2,3,…12
'-100~-81%=1, -80~-61%=2,…81~100%=12'
Innovation activity
International patents Total granted Number of International patents Continuous Unlimited
Export intensity
Export Ratio Export total sale ratio, export sales/total sales Yearly
varying Categorical 0,1,2,…10
0%=0, 1~10%=1, 11~20%=2,…91~100%=10
Government Support
Finanacial support Existence of direct/indirect financial support from government Dummy 0, 1 Yes=1, No=0
Tech_support Existence of technological support from government Dummy 0, 1 Yes=1, No=0
Promotion policy Government Promotion policy efficiency Categorical 1,2,3,4
Export Credit Efficiency of Government Export Credit service Categorical 1,2,3,4
Govern_Infrastructure Government Infrastructure and Administrative service for
35
Variable Definition Style Type Range Coding
Firm level control
Firm size Number of employee Fixed Continuous Unlimited
Firm year The year of foundation Fixed Continuous Unlimited
Export experience Existence of Export experience Fixed Dummy 0, 1 Yes=1, No=0
Foreign
shareholders Existence of Foreign shareholders Fixed Dummy 0, 1 Yes=1, No=0
Country variable
China Chinese firms Fixed Dummy 0, 1 Yes=1, No=0
India Indian firms Fixed Dummy 0, 1 Yes=1, No=0
Russia Russian firms Fixed Dummy 0, 1 Yes=1, No=0
Year variable
Year 2011 Year 2011 Fixed Dummy 0, 1 Yes=1, No=0
Year 2012 Year 2012 Fixed Dummy 0, 1 Yes=1, No=0
Year 2013 Year 2013 Fixed Dummy 0, 1 Yes=1, No=0
Year 2014 Year 2014 Fixed Dummy 0, 1 Yes=1, No=0
Industry variable 19 variables
Accessory, Air, Auto, Beverage, Chemical, Electronic, Food, Furniture, Glass, Iron, Machine, Metal, Oil&Gas, Paper,
Pharmaceutical, Plastic, Steel, Textile, and Etc
Fiexd Dummy 0, 1 Yes=1, No=0
36 [Table 2. Statistic Summary of the Variables]
Variable Obs Mean SD Min Max
Firm performance ROA 1,232 6.89 2.55 1 12 ROE 1,232 6.74 2.70 1 12 ROP 1,232 6.92 2.56 1 12 Innovation activity International patents 1,080 35.56 111.53 0 957 Export intensity Export Ratio 1,232 2.92 2.78 0 10 Government Subsidy Financial support 1,124 0.38 0.49 0 1 Tech_support 1,124 0.29 0.45 0 1 Promotion policy 1,116 2.69 1.08 1 4 Export Credit 612 3.18 0.72 1 4 Govern_Infrastructure 1,116 2.79 0.99 1 4 Firm level control
Firm size 1,192 1425.41 3130.31 1 30000 Firm year 1,208 25.98 23.14 2 158 Export experience 1,216 0.66 0.47 0 1 Foreign shareholders 1,232 0.31 0.46 0 1 Country variable China 1,348 0.15 0.36 0 1 India 1,348 0.35 0.48 0 1 Russia 1,348 0.49 0.50 0 1 Year variable Year 2011 1,348 0.25 0.43 0 1 Year 2012 1,348 0.25 0.43 0 1 Year 2013 1,348 0.25 0.43 0 1 Year 2014 1,348 0.25 0.43 0 1
37
Variable Obs Mean SD Min Max
Industry variable 1,336 Accessory 20 0 1 Air 20 0 1 Auto 88 0 1 Beverage 4 0 1 Chemical 40 0 1 Electronic 104 0 1 Food 68 0 1 Furniture 24 0 1 Glass 16 0 1 Iron 8 0 1 Machine 40 0 1 Metal 52 0 1
Oil & Gas 28 0 1
Paper 4 0 1 Pharmaceutical 12 0 1 Plastic 32 0 1 Steel 8 0 1 Textile 68 0 1 Other Industries 364 0 1
38 [Table 3. Result of Exploratory Factor Analysis]
Factor and items F1 F2 F3
F1. Firm performance
ROE (Return on Equity, net income / equity) for last years 0.89 ROA (Return on Asset, net income / asset) for last years 0.94 ROP (Rate of Operating Profit, total cost / total sales) for last years 0.90
F2. Government support 2
Government runs 'export promotion policy' with efficiency 0.92 Government works 'export credit service' with efficiency (ex: export financing,
export insurance, etc.) 0.91
Government has 'good infrastructure and administrative service for export 0.82
F3. Government support 1
Company has received financial support (any direct and indirect financial
support) from government 0.86
Company has received any technical support from government 0.80
Eigenvalues 2.99 2.26 1.17
Common variance explained by each factor 2.49 2.43 1.50
Cronbach’s alpha 0.92 0.71 0.81
Note: N=612. All the factor loadings are significant at p<.001. Items are sorted by their loadings on each factor. As shown in table, all the factors have adequate reliability (Cronbach's alpha higher than 0.7).
39 [Table 4. Correlation of Variables]
1 2 3 4 5 6 7 8 9 1. Innovation 1 2. Export Ratio 0.2* 1 3. Performance 0.11* 0.41* 1 4. Govern Support 1 0.23* 0.19* 0.1* 1 5. Govern Support 2 0.19* 0.33* 0.12* 0.35* 1 6. Firm size 0.3* 0.17* 0.11* 0.13* 0.08 1 7. Firm year 0.1* 0.15* 0.12* 0.09* 0.06 0.24* 1 8. Export Experience 0.08* 0.03 0 0.1* 0.11* 0.07* 0.07* 1 9. Foreign Share 0.3* 0.36* 0.17* 0.32* 0.23* 0.18* 0.13* 0.04* 1
Note 1: 'Performance', 'Government Support1', and 'Government Support 2' are factor variables. In order to be
clear and simple, we put the factor variable in correlation table. See Table 3.
Note 2: We just consider main variables and firm level control variable here. No dummy variables in this table.
40 [Table 5. Result of Sobel Mediation Test]
Coefficient SE z p a Coefficient 0.0032 0.0007 4.46 8.00E-06 b Coefficient 0.14 0.0112 12.30 0 Indirect effect 0.0005 0.00011 4.20 0 Direct effect 0.0004 0.0003 1.54 0.124 Total effect 0.0009 0.00028 3.07 0.0022 Value SE z p
Indirect effect and significance using normal distribution
Sobel 0.0005 0.00011 4.2 0.00003
M SE LL 95% CI UL 95% CI z p
Bootstrap results for indirect effect
Effect 0.0005 0.00012 2.10E-04 0.00069 3.64 0
Note: N=1,032. Unstandardized regression coefficients are reported. Bootstrap sample size = 1,000. LL=lower limit; CI=confidence interval; UL=upper limit
41 [Table 6. Result of Regression Analysis]
Model 1 Model 2 Model 3 Model 4 Model 5
VARIABLES Performance Export Performance Export Performance
Main variable Innovation 0.000644** 0.00283*** 0.00129 -6.13e-05 Export Intensity 0.160*** 0.144*** 0.155*** Govern Support1 -0.0323 0.246*** -0.0545 0.0589 -0.101** Govern Support2 -0.0440 0.730*** -0.187*** Interaction Inno*Gov support 1 0.000149 Inno*Gov support 2 0.00191 Export*Gov support 1 0.0211** Export*Gov support 2 0.0495*** Control variable
Firm size 1.37e-05
8.49e-05*** 1.44e-05 6.82e-05*** 9.42e-05*** 1.09e-05 1.25e-05 Firm year 0.00493*** 0.0164*** 0.000722 0.0172*** 0.0162** 0.00300** 0.00108 Export experience -0.0502 -0.491*** -0.0497 -0.401** -0.612** 0.0190 -0.017 Foreign share 0.248*** 0.127* 1.691*** 0.869*** 0.0426 0.0706 Constant -0.140 2.181*** -0.547*** 1.096*** 1.181*** -0.448*** -0.630*** Observations 1,032 1,032 600 1,032 592 1,056 600 R-squared 0.114 0.251 0.313 0.314 0.347 0.237 0.333
Note: We ran regressions with country, year, and industry dummy variables in each model. To be shown the table simple, we
did not put the variables.
4
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