Accumulative and Assimilative Learning, Institutional Infrastructure, and Innovation Orientation of Developing Economy Firms

• Published date: 01 May 2015
• Author: Sougata Ray,Preet S. Aulakh,Raveendra Chittoor
• Date: 01 May 2015
• DOI: http://doi.org/10.1002/gsj.1093

ACCUMULATIVE AND ASSIMILATIVE LEARNING,

INSTITUTIONAL INFRASTRUCTURE, AND

INNOVATION ORIENTATION OF DEVELOPING

ECONOMY FIRMS

RAVEENDRA CHITTOOR1, PREET S. AULAKH2*, and SOUGATA RAY3

1Indian School of Business, Hyderabad, India

2Schulich School of Business, York University, Toronto, Canada

3Indian Institute of Management Calcutta, Kolkata, India

We examine the role of internationally acquired knowledge and supra-firm institutional infra-

structure on developing firms’ innovation orientation. Empirical results, based on a panel of

11,048 Indian manufacturing firms during the period 1990 to 2009, show that the macro-

and micro-institutional context in which firms are embedded condition the effect of global

resource and product market participation on indigenous innovation efforts. In particular,

technology imports (accumulative learning) have a stronger effect on inducing investments

in innovation when the macro-institutional development is weak and for firms that are

affiliated to business groups. However, product market internationalization (assimilative

learning) plays a more important role in facilitating innovation efforts as the institutional

environment becomes stronger and for independent firms that do not possess the

network advantages inherent in business groups. Copyright © 2015 Strategic Management

Society.

INTRODUCTION

The global strategy literature recognizes two impor-

tant sources of firm motivations to expand into

international markets: exploiting existing know-how

through a process of transferring a firm’s unique

knowledge, whether it is related to technology, pro-

duction, marketing, or other activities, across

borders(Hitt, Hoskisson, and Kim, 1997; Ghoshal,

1987; Tsang, 1999); and exploration whereby expo-

sure to and learning from diverse institutional con-

texts, competitive conditions, and customer

behavior increase its knowledge base which, in turn,

fosters innovation in different aspects of the value

chain (Barkema and Vermeulen, 1998; Zahra,

Ireland, and Hitt, 2000). Much of the research based

on the former assumes that the internationalizing

firm already possesses the technology and product-

related knowledge it needs to meet the demand of

the foreign markets and that the act of internation-

alization is undertaken in order to exploit this stock

of existing know-how (Hitt et al., 2006). However,

an emerging body of research suggests that interna-

tionalization of firms from developing economies is

guided primarily by learning motivations, with

foreign markets serving as channels through which

firms gain access to diverse ideas and knowledge

that are unavailable domestically, but which are

essential for survival and growth in a changed insti-

tutional context (Chittoor et al., 2009; Doz, Santos,

and Williamson 2001; Luo and Tung, 2007; Nelson,

2005). According to Nelson (2008a: 14–15), ‘for

Keywords: investments in innovation; organizational learning;

developing economies; institutions; business groups; India

*Correspondence to: Preet S. Aulakh, Schulich School of Busi-

ness, York University, 4700 Keele St., Toronto, ON M3J 1P3,

Canada. E-mail: paulakh@schulich.yorku.ca.

Global Strategy Journal

Global Strat. J., 5: 133–153 (2015)

Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/gsj.1093

Copyright © 2015 Strategic Management Society

countries aiming to catch up, the basic challenge is

to learn to master new ways of doing things . . . The

innovation in catching up involves bringing in and

learning to master ways of doing things that may

have been used for some time in the advanced

economies of the world, even though they are new

for the country or region catching up.’

While there is a general consensus that global

markets provide learning opportunities for firms

from developing economies which, in turn, can

provide the impetus for investments in innovation

and facilitate catching up on the knowledge fron-

tier, we are yet to fully understand the mechanisms

by which external learning is internalized and

applied for indigenous innovation (MacGarvie,

2006; Nelson, 2005; Lall, 1992). Placing our article

in the context of the post-liberalization era that

facilitated access to global resources and markets,

we study the effects of learning through resource

and product market internationalization on firm

R&D investments and how the institutional infra-

structure in which firms are embedded conditions

these relationships.

Our base theoretical arguments are anchored in

two distinct perspectives on how external learning

is internalized and applied to indigenous innovation

in developing economies. One view, rooted in neo-

classical economics, considers learning, and the

associated economic growth, coming primarily

through investments in physical and human capital

(e.g., Abramovitz, 1986; Amsden, 1989; Kim and

Lau, 1994). Accordingly, investing in technology

imports and adapting them to local contexts allow

firms to move up the technology frontier. An alter-

native perspective, with roots in evolutionary eco-

nomics (Dosi, 1988; Nelson and Winter, 1982;

Nelson and Pack, 1999; Nelson, 2005; Lall, 1992;

Bell and Pavitt, 1993), identifies ‘learning-by-

doing’ as the primary mechanism that motivates

innovation efforts of developing economy firms. In

order to use the acquired know-how effectively,

new sets of skills and organizing principles are

required, which can be achieved when firms actu-

ally step outside to pursue product market interna-

tionalization in global markets and interact with

advanced market firms and customers (Nelson,

2005).

These two perspectives highlight the learning

potential—and the related motivations for invest-

ments in innovation—from participating in interna-

tional resource and product markets. However,given

the diverse theoretical assumptions of these two per-

spectives and their level of analysis,1it is unclear

theoretically and empirically how and under what

conditions each learning mechanism facilitates inno-

vation efforts. For instance, developing countries’

liberalization efforts to facilitate inward technology

flows have led to unequal absorption of the external

technology to jump start indigenous innovation

efforts (OECD, 2006). Similarly, evidence on the

effect of product market internationalization as a

source of innovation is inconclusive. In a review

of the extensive learning-by-exporting literature,

Wagner (2007) reports that while there is converging

evidence that more productive firms undertake inter-

nationalization because these firms are able to afford

the extra sunk costs of entering new markets (Melitz,

Helpman, and Yeaple, 2004), whether international-

izing firms become more innovation oriented is still

not clear from evidence across a wide range of

industries and countries. Furthermore, although the

literature has highlighted the important role played

by institutions (North, 1990) on firms’ learning and

innovation, we are yet to understand the exact nature

and mechanisms of their influence (Nelson, 2008b).

The question of how firms’ institutional environ-

ments shape their learning from global markets

assumes particular significance given that most

developing economies are undergoing substantial

liberalization and institutional changes (Hoskisson

et al., 2000).

In this article, we advance this stream of research

by developing and empirically testing a model

explaining the driversof investments in innovation by

developingeconomy firms. We first examine the com-

peting accumulation and assimilation arguments by

hypothesizing the effects of the two learning mecha-

nisms (technology imports and product market inter-

nationalization) on investments in innovation. We

then theorize that the institutional context in which a

firm is embedded conditions the relationship between

the two learning mechanisms and innovation efforts.

In particular,we incorporate institutions at two levels.

At the macro level, we analyze the influence of

1The traditional approach to economic growth (accumulation)

focuses on investments at the country level (Nelson, 2005).

‘Countries simply settle on appropriate levels of capital/labor

intensity . . . Firms in a given industry are all on the same

production function and select their techniques with reference

to relative factor price ratio . . .’ (Lall, 1992: 165). The assimi-

lation argument of ‘learning-by-doing’ considers economic

growth by incorporating firm-level heterogeneity in the analy-

ses, as firms within the same country may possess different

internal processes to assimilate external knowledge.

134 R. Chittoor et al.

Copyright © 2015 Strategic Management Society Global Strat. J., 5: 133–153 (2015)

DOI: 10.1002/gsj.1093