Sourcing Technological Knowledge Through Foreign Inward Licensing to Boost the Performance of Indian Firms: The Contingent Effects of Internal R&D and Business Group Affiliation.

Date01 Octubre 2020
AuthorElia, Stefano

1 Introduction

Rapid evolution and rising presence of emerging market firms (EMFs) in an array of global industries have attracted significant attention. Scholars (e.g., Athreye and Cantwell 2007; Awate et al. 2015; Cuervo-Cazurra and Gene 2008; Kumar-aswamy et al. 2012; Lall 2003; Luo and Tung 2007) attribute sourcing of foreign technological knowledge as the key factor behind the EMFs' rapid global success, because it initiates an inevitable process of technological upgrading. Foreign technological knowledge fosters the catching-up of EMFs with their global peers (Awate et al. 2012, 2015; Cui et al. 2016; Liu and Zou 2008; Perri et al. 2016), accelerates the internationalization process (Buckley et al. 2016a, b; Thite et al. 2016), and increases the innovative performance (Cassiman and Veugelers 2006). However, academic understanding of the influence of foreign technological knowledge on the EMFs' financial performance is still limited (Kafouros and Forsans 2012; Tsai and Wang 2008), yet it is fundamental to comprehend the ultimate effect of this widely used technological knowledge sourcing strategies.

Additionally, previous research has mainly analyzed the cross-border technological knowledge sourcing by EMFs through intensive and proactive internationalization strategies, such as foreign direct investments (FDI) (Pavlinek 2018; Scalera et al. 2020). However, little attention has been devoted to alternative forms of technological knowledge sourcing strategies, such as inward licensing, which are also potentially beneficial, but most importantly faster and easier to be implemented, and comparatively less expensive (e.g., Sikimic et al. 2016). Addressing this gap, in this paper we focus on EMFs' strategy to use inward licensing to access foreign technological knowledge, and its impact on their financial performance. Therefore, the core research question of our paper is: How does foreign technological knowledge acquired through inward licenses affect the financial performance of EMFs?

To answer our research question, we rely on the Knowledge-based view (KBV) of the firm (Grant 1991, 1996; Kogut and Zander 1992), which proposes that firm performance is a function of knowledge amassed by the firm, and the Resource Dependence Theory (RDT), which suggests that firms maximize their economic power by controlling critical external resources (Pfeffer and Salancik 1978). Combining these theories, we posit a general positive contribution of technological knowledge acquired through inward licensing on EMFs' performance.

We extend the analysis by distinguishing between the domestic and international origin of the licensed technological knowledge, and we argue that foreign inward licenses may be more beneficial to firm performance than domestic inward licenses. Indeed, the former enables the access to more specialized, diverse and advanced technological knowledge than the latter, thus potentially embodying a higher prospect to the firm's sustainable competitive advantage and its technological catching-up process (McGrath et al. 1996; Winter and Szulanski 2001).

However, we also expect that the impact of the advanced technological knowledge sourced via foreign inward licenses can be inequitable among EMFs. Ceteris paribus, the effect is contingent upon firms' structure and the organization of their internal resources. Indeed, the theoretical underpinning for a plausible answer to our main research question depends upon the fit between the technological knowledge acquired through licenses and the endowment of technological knowledge held by the EMF, either directly developed within the firm or available via the shared control with other firms. More specifically, we suggest that the positive impact of foreign inward licenses is affected by (1) the firm's knowledge base developed internally through R&D activity, and (2) the firm's access to additional resources available within the business group's network.

For developing our first argument, we build upon the literature suggesting that internal R&D enhances the firm's ability to understand, absorb and employ external technological knowledge (Cohen and Levinthal 1990). Given the relatively lower technological knowledge base of EMFs, we argue that the combination of internal R&D with the external technological knowledge sourced through inward licenses from abroad triggers a positive interaction mechanism that boosts the EMFs' financial performance, by making the technological catch-up process more effective and efficient. It offers the possibility to convert the foreign technological knowledge more rapidly and efficiently into commercial products and services (Cohen and Levinthal 1990; Tsai and Wang 2008). Additionally, internal R&D can complement the advanced and specialized knowledge sourced through foreign inward licensing, thus prompting the rise of more effective synergies and, hence, new competitive advantages (Cassiman and Veugelers 2006; Kogut and Zander 1992; Sapienza et al. 2005).

About the second contingent effect, we suggest that EMFs able to leverage the resources held by their broader corporate network, may also benefit from foreign-sourced technological knowledge. However, EMFs affiliated to a business group, i.e., a set of legally independent firms bound together by formal and informal ties for taking coordinated action (Khanna and Rivkin 2001), may draw less benefits from technological knowledge accessed through inward licensing, as group affiliated firms can already pool a set of diversified resources, including proprietary technological knowledge, from their inter-group network (Buckley et al. 2014; Gulati 1998).

Our hypotheses, tested on a firm-level panel data set of Indian firms observed from 2001 to 2013 (source: Prowess), are confirmed by the empirical analysis and a number of additional robustness checks. Indeed, foreign inward license turns out to have a positive impact on performance, being its effect amplified by internal R&D. However, business-group affiliated firms exhibit a less positive performance when sourcing technology through foreign inward licenses.

Finally, our analysis, focused on Indian EMFs, provides significant implications for managerial decision making and theoretical development which can be vouched by testing our propositions in other emerging countries' contexts. First, it sheds light on the strategic role of foreign inward licensing as an alternative channel to source technological knowledge and foster EMFs' knowledge-based competitive advantage. Second, it extends the literature on technology licensing by focusing on its effect on firm performance distinguishing between the domestic and foreign origin of licenses, adding to the existing evidence focusing primarily on the effect of innovative performance (e.g., Wang et al. 2013). Third, it extends the KBV by combining it with the RDT. It reveals how the performance of EMFs is directly affected not only by the firm's own resources, but also by the externally sourced technological knowledge, and how the utility of the latter is contingent upon both the firm internal R&D and the group network resources. Fourth, it suggests that, on the one hand, managers of EMFs (especially the Indian ones) should consider the strategy of acquiring technological knowledge via inward foreign licenses to boost their financial performance, especially when combined with internal R&D. On the other hand, managers of (Indian) EMFs belonging to business groups should explore the availability of alternative technological knowledge within their network of firms first, before looking for external resources through inward foreign technology licenses.

2 Theoretical Framework and Hypotheses

The KBV conceives the firm as an institution that generates, amasses and applies knowledge in order to create value (Eisenhardt and Santos 2002). It suggests that knowledge is a key resource, and heterogeneity in the knowledge base among firms leads to variation in their performance (Decarolis and Deeds 1999; Felin and Hesterly 2007; Grant 1996). In particular, firms adopt different entrepreneurial strategies to boost and sustain differentiation of their knowledge base (Galunic and Eisenhardt 1994), for instance, by developing knowledge-based resources internally through conducting own R&D, or by sourcing knowledge externally.

In this respect, the extant literature recognizes the importance of technological knowledge for the success of EMFs. Technological knowledge (in a wider sense) refers to "both basic scientific knowledge right through to more applied and experimental development, design and prototype work, not just R&D-based knowledge (although it does not cover more general managerial or marketing knowledge)" (Howells et al. 2003, p. 395). Nevertheless, constrained by the resources and time scarcity, the lack of a solid knowledge base and the need to strengthen their core competencies, EMFs often resort to the acquisition of technological knowledge from external sources (Ahuja and Katila 2001; Awate et al. 2015; Cui et al. 2016). This allows the EMF to reduce its R&D costs, gestation time and uncertainties associated with the R&D projects while enhancing the degree of knowledge base of the firm (Chung and Yeaple 2008). This translates into higher economic rent and a better control over the 'new' knowledge generated through the combination of external and internal knowledge (Cassiman and Veugelers 2006; Kessler et al. 2000; Kogut and Zander 1992; Tsai and Wang 2008, 2009).

This view is fully supported by the RDT, which suggests that firms maximize their economic power by controlling critical external resources (Pfeffer and Salancik 1978). In this perspective, the access to external resources is conceived as a strategy to reduce the costs and uncertainty of developing new technological knowledge (Mowery 1988). Scholars suggest that inward licensing--a contractual agreement through which a licensee firm...

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