R&D Intensity, Domestic Institutional Environment, and SMEs' OFDI in Emerging Markets.

Date01 Diciembre 2020
AuthorQiao, Penghua

1 Introduction

In an increasingly competitive global environment, small and medium-sized enterprises (SMEs) from emerging economies (EEs) have been witnessed to rise and rapidly expand in international markets (Buccieri et al. 2020; Buckley et al. 2018), exerting a great impact on their countries' economies (Genc et al. 2019). For example, SMEs accounted for about 51.6% of the total number of international companies in Brazil (Oura et al. 2016; Manotas and Gonzalez-Perez 2020). In China, SMEs are responsible for over half of the total outbound investment and may have the potential to further widen their roles in international markets (Deng and Zhang 2018). This trend has started attracting scholars' attention to study outward foreign direct investments (OFDI) of SMEs from EEs (Buccieri et al. 2020; Deng and Zhang 2018; Genc et al. 2019; Guillen and Garcia-Canal 2009). A key question that scholars have attempted to answer, but not yet fully addressed, is what factors may drive SMEs' OFDI activities in EEs (Cui et al. 2014; Luo and Zhang 2016). This study aims to enrich this stream of literature by examining the impacts of firms' innovation capability, as reflected by their research and development (R&D) intensity, and domestic institutional environment on the OFDI frequency of SMEs in China, the largest EE.

Extant studies have identified a number of factors that may influence firms' engagement in OFDI in EE, including firms' ownership, financial resources (Gaur et al. 2014; Meyer and Thaijongrak 2013), top managers' experience (Fung et al. 2020; Hope et al. 2011), host institutional environment, and home-country political institutions (Hoskisson et al. 2013; Lu et al. 2014). However, scholars have rarely considered firms' innovation capability as a driving force of their OFDI activities in EEs. Innovativeness has commonly been viewed as an outcome, as opposed to an antecedent, of OFDI in EEs because firms in those countries often lack innovation due to resource constraints (Luo and Tung 2007; Terziovski 2010) and they may engage in OFDI to gain strategic assets to enhance their innovation capabilities (Cui et al. 2014; Genc et al. 2019). Nevertheless, innovation capability may be a key driver of OFDI for SMEs in EEs for the following reasons.

On the one hand, SMEs typically have limited resources compared to large companies and therefore often rely on innovation capability to enhance their competitiveness in the global market (Wang et al. 2013; Yi et al. 2013). Studies in more developed economies have shown a positive link between R&D intensity and SMEs' OFDI (Di Cintio et al. 2017; Falk and de Lemos 2019; Hollenstein 2005; Suh and Kim 2014). On the other hand, the government in major EEs such as India, Brazil, China has made significant efforts in fostering indigenous knowledge creation and innovation through providing financial and policy supports, resulting in the rapid development of innovation capabilities of SMEs (Fu et al. 2011; Greeven et al. 2019; Yip and McKern 2016; Zhang and Guo 2019). Further, economic growth and rising consumption levels in EEs are driving SMEs to focus on innovation through R&D investments (Greeven et al. 2019). Consequently, SMEs in EEs may develop firm-specific advantages that they can leverage to foreign markets (Dunning 1980). Therefore, drawing on the resource-based view (RBV) of the firm, we expect that SMEs in EEs with high R&D intensity are more likely to have specific innovation advantages that allow them to engage in more frequent OFDI activities.

Furthermore, this paper investigates how factors in the domestic institutional environment moderate the R&D intensity-SMEs' OFDI relationship. Generally, firms are embedded in the specific institutional context of their home countries (Yi et al. 2013). Institutions influence firms not only by supporting economic transactions but also benefit different types of firms through their resources and capabilities (North 1993). SMEs are generally regarded as more susceptible to the influences of institutional forces as they lack the resources and power to impact or counter institutions (Cardoza et al. 2016; Deng and Zhang 2018; Stoian and Mohr 2016). In EEs, SMEs' strategies are greatly impacted by institutional forces due to significant economic and political reforms (Buckley et al. 2018; Nuruzzaman et al. 2020). In large EEs such as China, uneven paces in economic reforms across regions have led to substantial heterogeneities in firms' regional institutional environments, which may lead to divergent resource endowments and strategic orientations of enterprises (Chan et al. 2010; Fu 2015; Li et al. 2018; Shi et al. 2012; Sun et al. 2015). Therefore, we expect that the extent to which SMEs in EEs may rely on innovation capability as a driver of OFDI is conditioned on the regional institutional environment in which they are embedded. Consequently, drawing on institutional theory (DiMaggio and Powell 1983; Heugens and Lander 2009; Scott 1995), we examine how the relationship between R&D intensity and OFDI frequency of SMEs in EEs is moderated by three institutional forces that firms face in their regional environments, including coercive pressure, normative support, and mimetic force.

We test our hypotheses using a sample of 2620 Chinese SMEs publicly listed on the Chinese Growth Enterprise Market during 2010-2017. China is a suitable context for this study because it is not only the largest EE but also a major contributor of OFDI with the second-largest amount of foreign investments in the world (American Enterprise Institute 2019). Starting in the 1980s, China has been making deliberate efforts such as initiating the national innovation system to foster innovation and entrepreneurship, which has promoted the rapid development of indigenous firms' technological and innovation capabilities (Fu 2011; Yip and McKern 2016). As a result, China became one of the major R&D investors in the world (Fu 2015). Meanwhile, China has witnessed a dramatic rise of SMEs (Deng and Zhang 2018). By the end of 2018, 99.8% of all the registered firms were SMEs, which increased by 115% from the end of 2013 (NBSC 2019). Those SMEs have been actively participating in the 'China goes global' strategy (Deng and Zhang 2018; Zhang et al. 2016a) and are viewed as future hidden champions (Greeven et al. 2019).

Our results show that R&D intensity is positively associated with Chinese SMEs' OFDI frequency and this relationship is strengthened by three institutional factors, including the coercive pressure resulting from regional marketization, normative support gained from ties with industry associations, and mimetic forces exerted by OFDI activities by other firms in the same industry and region. These findings allow us to make several contributions to the literature on OFDI by EE firms.

First, we offer a novel perspective to understand the antecedents of SMEs' OFDI in EEs by combining the RBV and institutional theory. Prior studies have suggested that SMEs suffer from weak resources, and have primarily applied the RBV to examining OFDI by large firms in EEs (Huang et al. 2017; Wang et al. 2012a). Our results show that the RBV combined with the institutional theory can explain R&D intensity as the internal driver of SMEs' OFDI under the influence of their regional institutional environment, supporting the notion that resources and institutional capital jointly contribute to a firm's sustainable competitive advantage (Xiao et al. 2019; Yi et al. 2013). Especially as SMEs in EEs possess a relatively narrow range of advantages, they tend to obtain innovative advantages through R&D investments to enhance their global competitiveness (Lin and Wang 2019). Second, unlike previous studies focusing on the difference between home and host country institutions, our study focuses on variations in firms' domestic institutional environment. By exploring the different moderating effects of coercive pressure, normative support, and mimetic force facing firms in the regional institutional environment, we show that regional institutions may 'foster' OFDI in EEs, which complements the previous view of OFDI as a means to 'escape' the weak domestic institutional environment in EEs (Boisot and Meyer 2008). Our results echo the conjecture that the 'escaping' and 'fostering' roles of home country institutions coexist and are mutually supportive (Deng and Zhang 2018). Third, as the largest emerging economy, China's development status may provide experience for other EEs with an institutional context characterized by state interference, piecemeal economic reforms, and gradual institutional evolution (Chen et al. 2018; Deng 2013; Tsui 2004). By observing the linkages among firm resources and external institutions in the region and industry, we offer an inclusive, comprehensive theoretical framework for studying SMEs' OFDI of EEs. Our findings thus enrich the application of the combination of RBV and institutional theory in EEs and may inform those countries in their efforts to promote OFDI by SMEs.

The paper is organized as follows: the next section provides the theoretical background, conceptual framework, and hypothesis development. We then explain methodological issues and perform our empirical analysis in the third section. The last section is devoted to the discussion of the main results and our concluding remarks.

2 Theory and Hypothesis Development

2.1 The Resource-Based View and Institutional Theory

The RBV suggests that firms are bundles of resources and their strategies as well as competitive advantages are driven by resources that are valuable, rare, and imperfectly imitable or substitutable (Barney 1991; Wernerfelt 1984). The RBV has been one of the major theoretical perspectives that scholars draw on to explain MNEs' motivation and performance in FDI activities. Earlier studies on FDIs by firms from developed countries posit that firm-specific assets such as...

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