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Are large business groups conducive to industry innovation? The moderating role of technological appropriability

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Abstract

This paper examines the impact of the share of business groups in an industry on the industry’s R&D intensity. First, we derive a simple theoretical model of industry R&D intensity in the presence of big business groups. Our model predicts that the effect of business-group share on industry R&D intensity differs across industries depending on the technological appropriability: A positive relationship for industries with low R&D appropriability, while a negative relationship for industries with high R&D appropriability. Based on these predictions, we develop and test our hypothesis using unique data on Korean manufacturing industries. Our results confirm the moderating role of technological appropriability, implying that the inverted-U shape between business-group share and industry R&D intensity frequently observed at the aggregate-sample level reflects the combination of those two opposite relationships.

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Notes

  1. Relying on the traditional entry barrier argument that considers the share of business groups as a proxy for entry barriers, Mahmood and Mitchell (2004) found an inverted-U relationship between business-group share and industry patenting activity. Similarly, some studies (e.g., Feenstra, Yang, & Hamilton, 1999; Lawrence, 1991; Saxonhouse, 1993) considered the presence or extent of business groups as a proxy for market structure or entry barrier based on the likelihood of collusion among business groups.

  2. Firms often prefer secrecy or time-to-market to patents. Firms can also take an innovative step without their own patents; they skillfully take advantage of licensing or imitation.

  3. While non-price factors for customer choice include not only quality but also other detailed attributes as novelty, design, trendiness, advertising, network effect, and so on, it is quite difficult to formalize the latter because their effects depend largely on subjective perception and emotional status of a customer. In addition, such attributes are often considered part of the quality of a product in a broader sense. It has been customary in economics for a long time that consumer sensitivity to product quality relative to product price is used as a good proxy for consumer preference (e.g., Dorfman & Steiner, 1954).

  4. Although not only quality innovation but also cost reduction (usually part of process R&D) involves R&D spending, prior studies show that product R&D accounts on average for about two-thirds of the total R&D spending in an industry (Lee, 2005; Scherer, 1982; Scherer & Ross, 1990).

  5. For the effect of differences in technological opportunity on R&D investment, see Scherer (1965), Phillips (1966), Jaffe (1986), Dosi (1988), and Klevorick et al. (1995). For absorptive capacity for exogenous technological knowledge, see Cohen and Levinthal (1989) who point out that absorptive capacity substantially affects a firm’s ability to create new knowledge and thus the productivity of its R&D by identifying, assimilating, and exploiting outside knowledge.

  6. It is assumed for simplicity that firms operating in the same industry face the same consumer preference. Hence, firm heterogeneity in technological competence causes firm heterogeneity in R&D efforts.

  7. As postulated in Cave and Porter (1977), we can consider the subgroup of firms with business-group-affiliation as a strategic group pursuing similar strategies and having comparable levels of technological competence, which can be distinguished from the subgroup of independent firms by the so-called mobility barrier between the two subgroups of firms.

  8. Closely related to the third and fourth points, Manikandan and Ramachandran (2015) identified two important “value-adding” features of business groups (i.e., multi-business business portfolio and multi-entity structure under the umbrella of group headquarters) underpinning their continuously superior performance in emerging markets.

  9. The 22 industries cover the entire two-digit SIC manufacturing industries. According to the Ministry, the companies covered by the survey are: (1) all companies with employees of 300 or more on the Establishment Census by the National Statistical Office of Korea; (2) some companies with employees of less than 300 drawn by stratified random sampling; (3) companies with attached research institutes or R&D divisions or companies involved in R&D projects funded by the Korean government (regardless of their employment size).

  10. According to the Analysis of R&D Expenditure by Industry by Korea Institute of Science and Technology Evaluation and Planning, manufacturing industries accounted for 92.8% of the country’s R&D expenditure in 2007. The electronics industry took the largest share (44%), followed by the automobile industry (16%).

  11. For example, the amount of total sales of the 30 largest chaebol reached to as high as 46% of the gross national product as of 1995 (Choi, 1996). It has also been quite conventional that the Fair Trade Commission under the Korean government monitors and regulates the 30 largest business groups.

  12. We conducted the same regression analysis using each of the appropriability measures separately, including the Yale survey measure reported in Lee (2005), and found that the choice of appropriability measure does not qualitatively alter our results reported here.

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Correspondence to Ajai S. Gaur.

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Appendix

Table 6 The 30 largest business groups in Korea, 1991–1955

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Lee, CY., Lee, JH. & Gaur, A.S. Are large business groups conducive to industry innovation? The moderating role of technological appropriability. Asia Pac J Manag 34, 313–337 (2017). https://doi.org/10.1007/s10490-016-9481-0

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