Does business group affiliation encourage R&D activities? Evidence from India

Abstract

The decision to undertake investment in innovative activities is an important strategic choice made by firms. This study investigates the relationship between business group (BG) affiliation and research & development (R&D) activities of Indian firms. Using an empirical approach that accounts for endogeneity and selection bias, we observe that BG affiliation has significant positive influence on the sample firms’ R&D activities. Employing various proxies for institutional development, we show that the effect of BG affiliation on R&D declines with the improvements in institutional and regulatory mechanisms. Further, this study explores the linkages between diversification strategies at the group level and R&D investments by firms affiliated with BGs. Results show that degree of related diversification is positively associated with the affiliates’ innovation efforts.

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Notes

  1. 1.

    For a summary of empirical results, see Fig. 1 of Guzzini and Iacobucci (2014a).

  2. 2.

    See Khanna and Palepu (2000a) for a detailed discussion on the suitability of analyzing performance measures of affiliates to understand the impact of group level diversification.

  3. 3.

    BGs in India are often characterized by majority shareholders with under-diversified portfolio due to their unwillingness to dilute ownership in controlling firms.

  4. 4.

    Bankruptcy of one of the affiliates affects reputation of the BG and may impact its capital market interactions.

  5. 5.

    The basic tenant of stewardship theory is that there is no inherent conflict of interest between managers and owners as hypothesized by Jensen and Meckling (1976). Managers under this theory want to do a good job and like to act as a good steward of corporate assets. Further it argues that organization structure that empowers senior management and provide clarity on expectations from top management will lead to superior performance (see Donaldson & Davis, 1991).

  6. 6.

    For example, the major business houses in India like Tata, Hero group share managerial personnel and distribution network across affiliates (Ramaswamy et al., 2012).

  7. 7.

    Unlike the present study, Chang et al. (2006) measured innovativeness by the number of successful US patent applications. However, we posit that effect of institutions will be the same on R&D and patenting given the strong contemporaneous positive relationship between the two variables (Pakes & Griliches, 1980).

  8. 8.

    Under conglomerate diversification, a single firm operates in different industries whereas Indian business groups are an agglomeration of independent firms operating in different industries with or without cross-holding among them (Ramachandran et al., 2013). However, there is considerable empirical evidence of resource sharing among BG affiliates (Khanna & Rivkin, 2001).

  9. 9.

    This final sample is after deleting 6603 firm-year observations with missing lagged scaling variable and/or information on independent variables.

  10. 10.

    We measure R&D expenditure as the sum of both capital and current expenditure. Prowess database obtains this information from the annexure to the board of director’s report. Information on R&D expenses is normally reported by manufacturing companies as per section 217 of the Indian Companies Act 1956.

  11. 11.

    The data is taken from http://www.worldbank.org/en/publication/gfdr/data/financial-structure-database.

  12. 12.

    See: http://info.worldbank.org/governance/wgi/index.aspx#reports. The two governance measures are available from 1996 onwards. Since data is available for alternate years till 2002, we used linear interpolation to estimate values for the missing years.

  13. 13.

    See Greene (2003) for further details.

  14. 14.

    In our data set, missing values of R&D cannot be treated as zero investment in R&D, since firms need to report R&D expenses only if it is greater than 1% of sales revenue. Therefore, including only sample firms with non-zero R&D values will lead to biased estimates due to sample selection.

  15. 15.

    Quality test: χ 2(1) = 58.18; p = .000.

  16. 16.

    We thank an anonymous referee for suggesting this.

  17. 17.

    As given in Table, only 23.6% of firm-year observations of the dependent variable are non-zeros.

  18. 18.

    Estimated using PROWESS database for the year 2013.

  19. 19.

    We consider a sample firm as public if it is listed on one of the two major exchanges in India viz. Bombay Stock Exchange (BSE) and National Stock Exchange (NSE)

  20. 20.

    In comparison to stand-alone firms, ownership concentration is high in Indian BG firms (Sarkar, 2013).

  21. 21.

    Indian BGs popularly known as business houses are known for strong relational ties (Carney et al., 2011) and centrality in decision making.

  22. 22.

    See Ramachandran et al. (2013) for a detailed account of how three independent companies within Tata group pooled their resources to develop “swach”—a low-cost water purifier.

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Acknowledgements

We are grateful to two anonymous referees, Senior Editor Professor Anil Nair, and Professors T. N. Srinivasan and Satish Krishnan for insightful comments and suggestions. We thank seminar participants at IIM Kozhikode, IFMR Chennai, IISc Bangalore and participants of the annual Conference of Forum for Global Knowledge Sharing, Bangalore, 2014; Conference on Micro Evidence on Innovation and Development, New Delhi, 2015; and Academy of Management, Anaheim, 2016 for valuable comments. We take the complete responsibility for any remaining errors or omissions.

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Komera, S., Jijo Lukose, P.J. & Sasidharan, S. Does business group affiliation encourage R&D activities? Evidence from India. Asia Pac J Manag 35, 887–917 (2018). https://doi.org/10.1007/s10490-017-9530-3

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Keywords

  • R&D investment
  • Business groups
  • Diversification
  • India