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

Abstract

Outward foreign direct investment (OFDI) of small and medium-sized enterprises (SMEs) from emerging economies has emerged as a significant phenomenon in global markets. However, extant research has not paid sufficient attention to this trend. Particularly, there is a lack of understanding of how SMEs’ internal resources may interact with their domestic institutional environment in driving OFDI. Drawing on the resource-based view and the institutional theory, this study fills this gap and examines how research and development (R&D) intensity influences OFDI frequency of SMEs from China, one of the largest emerging economies, and the moderating effects of coercive pressure, normative support, and mimetic force from SMEs’ domestic, regional institutional environment. Using a sample of 2620 Chinese SMEs publicly-listed on the Chinese Growth Enterprise Market during 2010–2017, we find that R&D intensity can be viewed as a key strategic resource that drives Chinese SMEs’ OFDI frequency and that three factors in their regional institutional environment (regional marketization, ties to industry associations, and peer OFDI frequency in the region) strengthen the relationship between R&D intensity and SMEs’ OFDI. This study contributes to the literature on SMEs’ OFDI by demonstrating the importance of combining the resource-based view and institutional theory to examine the roles played by both SMEs’ internal resources and their domestic institutional environment in driving their OFDI activities in emerging economies.

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Data Availability

All data used in this study are described in the paper.

Notes

  1. 1.

    Wind is a leading company in China’s financial information services industry. Please see the company’s website for a detailed description of the company’s databases: https://www.wind.com.cn/en/edb.html

  2. 2.

    We thank an anonymous review’s suggestion for using this variable to control for heterogeneity in R&D intensity across industries.

  3. 3.

    We thank an anonymous reviewer’s suggestion about possible interactions between normative support (ties to industry associations) and the other two institutional dimensions (mimetic and coercive forces). We performed an additional analysis to test this possibility. Specifically, we first split the samples into two sub-samples, one including firms without ties to industry associations and the other including those with ties to industry associations. We then tested the interactions between R&D intensity and regional marketization and OFDI frequency on these two sub-samples separately. We found that regional marketization and OFDI frequency in the region only interact significantly with R&D intensity in the sub-sample of firms with no ties to industry associations. These results show that there is a substitution effect between normative support and other institutional forces.

  4. 4.

    The implementation of Shenzhen-Hong Kong Stock Connect (SHSC) on 5 December 2016 is another tangible progress on Chinese stock market liberalization (the first one is Shanghai-Hong Kong Stock Connect) post the 2007/08 crisis. Not all firms traded on SHSC and those that are have stronger market ability to obtain external capital and innovation resources.

  5. 5.

    Model for the first stage:

    \(R\& D_{it} = \beta_{1} X_{it} + \beta_{2} {\text{C}}_{it} + \sum {Industry} + \sum {Year} + \varepsilon_{it}\)

    Model for the second stage:

    \(OFDI_{it} = \beta_{1} R\& D_{i(t - 1)} + \beta_{2} M_{i(t - 1)} + \beta_{3} R\& D_{i(t - 1)} *M_{i(t - 1)} + \beta_{4} {\text{C}}_{i(t - 1)} + \sum {Industry} + \sum {year} + \varepsilon_{it}\)

    Note: X represents the instrumental variables that affect R&D intensity; C are the control variables; M are moderator variables. The results of the first stage are available on request from the authors.

  6. 6.

    All supplementary test results are available from the authors upon request.

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Acknowledgments

We acknowledge financial support from the National Natural Science Foundation of China (Grants nos. 71702084 and 71372179) and the Humanity and Social Science Foundation of the Ministry of Education of China (17YJC630112).

Funding

This research was supported by the National Natural Science Foundation of China (Grants nos. 71702084 and 71372179) and the Humanity and Social Science Foundation of the Ministry of Education of China (17YJC630112).

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Correspondence to Yuping Zeng.

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Qiao, P., Lv, M. & Zeng, Y. R&D Intensity, Domestic Institutional Environment, and SMEs’ OFDI in Emerging Markets. Manag Int Rev 60, 939–973 (2020). https://doi.org/10.1007/s11575-020-00432-9

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Keywords

  • R&D intensity
  • Outward foreign direct investment
  • Domestic institutional environment
  • Small and medium-sized enterprises