Market liberalization in emerging-market economies and the entry of multinational firms spur significant changes to the industry/institutional environment faced by domestic firms. Prior studies have described how such changes tend to be disruptive to the relatively backward domestic firms, and negatively affect their performance and survival prospects. In this paper, we study how domestic supplier firms may adapt and continue to perform, as market liberalization progresses, through catch-up strategies aimed at integrating with the industry's global value chain. Drawing on internalization theory and the literatures on upgrading and catch-up processes, learning and relational networks, we hypothesize that, for continued performance, domestic supplier firms need to adapt their strategies from catching up initially through technology licensing/collaborations and joint ventures with multinational enterprises (MNEs) to also developing strong customer relationships with downstream firms (especially MNEs). Further, we propose that successful catch-up through these two strategies lays the foundation for a strategy of knowledge creation during the integration of domestic industry with the global value chain. Our analysis of data from the auto components industry in India during the period 1992–2002, that is, the decade since liberalization began in 1991, offers support for our hypotheses.
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An analysis of data from the CapEx database maintained by CMIE, India, shows that the number of financial collaborations increased by 32% (from 182 to 240) during 1998–2002, when compared with the 1992–1997 period. By contrast, the number of technical collaborations decreased by 16% (from 219 to 189).
As per Hennart's (2009) “bundling” model, when both MNE's FSAs and the complementary CSAs possessed by local firms are difficult to transact in markets, the MNE enters through an equity joint venture with a local firm. When the MNE's FSAs are easy to transact but the complementary CSAs possessed by local firms are difficult to transact, MNEs are better off licensing or selling their FSAs to the local firms. However, when the MNE's FSAs are difficult to transact, but the complementary CSAs are easy to transact, MNEs are better off choosing a wholly owned subsidiary as the entry mode.
For domestic firms, another potential catch-up strategy is learning by exporting. Exporting may allow firms, especially in less developed and technologically backward economies, to benefit from spillovers and become more productive and innovative over time (Aw & Hwang, 1995; Bernard & Jensen, 1999; Golovko & Valentini, 2011; Salomon & Jin, 2008; Salomon & Shaver, 2005a). However, only the more efficient of these firms are likely to export (Clerides, Lach, & Tybout, 1998). Also, firms tend to export only after they gain strength in their domestic markets (Salomon & Shaver, 2005b). Furthermore, firms that do not possess distinct competencies have been found not to benefit from exporting (Cassiman & Golovko, 2011). Therefore we expect domestic firms to focus on exports only after they become productive and established in the domestic market.
Unlike MNEs in developed markets, domestic firms in most emerging economies undergoing liberalization are likely to be small, produce only one product (or a few products) and cater to limited domestic demand. Therefore they may not derive scale/scope benefits from R&D. Competing demands for scarce financial resources may limit their ability to invest much in internal R&D. Even if a domestic firm were to invest in R&D, these efforts could prove risky and detrimental to performance as competitors quickly introduce off-the-shelf designs obtained through technology collaborations (Narayana, Mridul, & Chandan, 1992). Therefore, in the early years of liberalization, internal R&D by domestic firms is likely to be limited to adapting licensed technologies for local use (Narayanan, 1998). Indeed, only those firms that have successfully coped with technology upgrading and changes in the industry environment are likely to invest in internal R&D (see Van den Bosch et al., 1999).
We recognize the limitation of using royalty expenses as a surrogate measure of technology upgrading through licensing and joint ventures. Hence we drew data on technology collaborations between domestic firms and MNEs from CMIE's CapEx database. We created an alternative measure, a dummy variable TechCollab, that took the value 1 if a domestic firm had technical collaborations with a relevant MNE, and 0 otherwise. Using this alternative measure yielded similar results.
We carried out this categorization in two stages. In the first stage, we collected data on the customer base of firms in our sample, and categorized firms that derived 60% or more of their annual revenues directly from auto manufacturers as belonging to Tier 1. We categorized the remaining firms as belonging to lower tiers. We also requested two industry experts (individually), each with at least 15 years’ experience in the Indian auto industry, to categorize our sample of firms into different tiers, based on their knowledge of auto manufacturers’ relationships with suppliers. In the second stage, we compared our categorization with those of the two experts. When differences arose in the categorization of a few firms, we sought the opinion of a third industry expert, and adopted the majority opinion.
As per industry practice, we defined complexity as a composite ranking on three dimensions: (1) complexity of technology; (2) complexity of production process; and (3) criticality to performance of end product. We requested three industry experts to rank each firm's primary products on these three dimensions and then aggregate these rankings to determine whether the firm offered products of high, medium or low complexity. When differences arose among the three experts in the case of a few products, we adopted the majority opinion.
Given our hypotheses that TechLicensing would negatively influence Performance during the 1992–1997 phase and positively during the 1998–2002 phase, we tested for a potential curvilinear relationship between the two variables. The quadratic term (TechLicensing squared) was not statistically significant in either phase.
We emphasize that 93–94% of components firms in our sample were Indian-controlled, that is, firms in which the Indian partner had majority ownership and control. Accordingly, our results on the positive relationship between customer relationships and performance pertain primarily to domestic Tier 1 firms.
In addition, we used logistic regression models to explore how technology licensing and the strength of customer relationships were associated with the probability of survival of domestic firms beyond the 1992–1997 phase. We estimated five models, each exploring the determinants of firm survival (i.e., “did not fail” or “was not acquired”) for one, two, three, four and five years beyond the transition phase (1992–1997). We found that the strength of customer relationships (Tier) increased the probability of survival significantly in all five models, whereas technology upgrading (TechLicensing) ceased to be associated with survival beyond 1998. These results offered additional support for our Hypotheses 1 and 2.
The contrasting experiences of two auto components firms, one in Brazil and the other in India, which forged joint ventures with Lucas Industries, UK, support this conjecture. Freios Varga, the Brazilian joint venture with Lucas (formed in 1971), was bought out by the foreign partner after Lucas merged with the Varity Corporation in 1996 (Humphrey & Memedovic, 2003). In contrast, Lucas TVS, the Indian joint venture between Lucas and the TVS Group, was acquired by the TVS Group in 2001 from Varity, and is now a Indian-owned Tier-1 supplier to both domestic and MNE auto manufacturers (Nagaraj, 2003).
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We benefited immensely from the critical comments and suggestions offered by Ishtiaq Mahmood and three anonymous reviewers. We also acknowledge the suggestions offered on earlier versions by Mike Peng, Anshuman Tripathy, and the participants at the 2008 Academy of Management and the 2009 Academy of International Business annual meetings.
Accepted by Ishtiaq Mahmood, Area Editor, 19 December 2011. This paper has been with the authors for three revisions.
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Kumaraswamy, A., Mudambi, R., Saranga, H. et al. Catch-up strategies in the Indian auto components industry: Domestic firms’ responses to market liberalization. J Int Bus Stud 43, 368–395 (2012). https://doi.org/10.1057/jibs.2012.4
- internalization theory
- auto components industry