Business Group Affiliation, Innovation, Internationalization, and Performance: A SemiParametric Analysis

• Author: Alfonsina Iona,Pietro Navarra,Leone Leonida
• DOI: http://doi.org/10.1111/j.2042-5805.2013.01060.x
• Date: 01 August 2013
• Published date: 01 August 2013

BUSINESS GROUP AFFILIATION, INNOVATION,

INTERNATIONALIZATION, AND PERFORMANCE:

A SEMIPARAMETRIC ANALYSIS

ALFONSINA IONA,1,2 LEONE LEONIDA,1,2 and PIETRO NAVARRA2,3*

1School of Economics and Finance, Queen Mary University of London,

London, United Kingdom

2Dipartimento di Economia SEAM, Università di Messina, Messina, ltaly

3London School of Economics and Political Science, London, United Kingdom

We use firm-level data provided by the fourth U.K. Community Innovation Survey (CIS4) to

investigate the relationship between business group affiliation, innovation, internationaliza-

tion, and firm performance. We carry out a semiparametric estimation procedure and find that:

(1) firm performance is higher for those firms that join business groups rather than for

stand-alone firms; (2) the introduction of innovation throughorganizational and/or managerial

practices provides higher performance in business groups affiliated than in unaffiliated firms;

(3) the joint adoption of innovations is more beneficial than the individual adoption; (4) the

interplay between business group affiliation and innovation leads to better performance in

those firms that face competition in international markets rather than in those whose product

market is domestic only. Copyright © 2013 Strategic Management Society.

INTRODUCTION

The problem of implementing and managing the

number of activities or practices that make up a

complex system is a central issue in the management

literature. In one of his pioneering studies, Herbert

Simon analyzes the properties of a complex system

and argues that they tend to evolve faster and toward

stable and self-generating configurations (Simon,

1962). The complexity arises from the unknown

nature of the interactions between different

parts and from how they affect the overall system

performance. A number of studies examined the

relationship between the organizational structure of

a complex system and its performance, suggesting

that the characteristics, as well as the dynamics of

the system’s structure, can have considerable impact

on the evolution of organizations and on their overall

performance (Baldwin and Clark, 2000; Schilling

and Steensma, 2001; Galunic and Eisenhardt, 2001;

Hoetker, 2006; Sanchez and Mahoney, 2012). In this

line of research, the term ‘architecture’ refers to the

overall design of a system and describes the general

form of and the particular interrelationships between

the whole and its parts. In this framework, the system

architecture’s problem is to make a given organiza-

tion’s structure as flexible and manageable as pos-

sible to meet the challenges arising from highly

dynamic and competitive business environments.

The organizational form we consider in this article

is the business group. We define a business group

as a set of firms that operate in multiple market

sectors and that, although legally independent, are

Keywords: firm performance; business group affiliation;

innovation

*Correspondence to: Pietro Navarra, Dipartimento di Economia

SEAM, Università degli studi di Messina, Piazza Pugliatti 1,

98100, Messina, Italy. E-mail: navarrap@unime.it or

navarrap@lse.ac.uk

Global Strategy Journal

Global Strat. J., 3: 244–261 (2013)

Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1111/j.2042-5805.2013.01060.x

Copyright © 2013 Strategic Management Society

connected to each other through a constellation

of enduring formal as well as informal ties

(Granovetter, 1995; Khanna and Rivkin, 2001). Our

research objective is to analyze the relationship

between business group affiliation and performance

as well as the extent to which this relationship is

affected by the adoption of innovations. We focus on

two different sets of innovations—managerial and

organizational practices—and investigate whether

the relationship between business group affiliation

and performance is either corroborated or weakened

by their implementation. Unlike the majority of

existing studies that tend to focus on the effect of the

adoption of one set of practices only (Battisti and

Stoneman, 2010) we focus on both the single and the

joint adoption of the two sets of innovation practices

considered in this study.

The effect of the interplay between business group

affiliation and innovation on performance is also

examined according to the internationality of a firm.

We identify the internationality of a firm on the basis

of whether it operates in the U.K. market only or if it

also extends its market operations to foreign coun-

tries (Gomes and Ramaswamy, 1999). Examining

the effect of business group affiliation on the rela-

tionship between internationality and performance

will shed light on an important aspect that charac-

terizes business organizations as complex systems

exploiting internationalization by tapping in to local

competencies (Wernerfelt, 1984). Such competen-

cies can become the basis for new managerial and

organizational practices (Baldwin and Clark, 1997).

Therefore, the greater exposure to multiple national

contexts makes it more likely that independent firms

enter into business groups and leverage new prac-

tices that improve their flexibility to cope with

demand shocks and other market uncertainties

(Kogut, 1989).

Therefore, there are three research questions in

our study. First, we investigate whether the perfor-

mance of a firm is stronger for those affiliated with

business groups versus stand-alone firms. Second,

we examine whether the introduction of innovation

through organizational and/or managerial practices

is associated with stronger performance in firms

affiliated with business groups as opposed to those

standing alone. Third, we analyze whether the

interplay between business group affiliation and

innovation grants different effects on a firm’s per-

formance according to whether its operations are

carried out in markets that are international or only

domestic.

The empirical investigation is conducted by

using a large dataset of U.K. firms collected by the

Community Innovation Survey (U.K. CIS4). This

dataset contains information for 16,383 firms on

whether, over the period 2002 to 2004, they have

introduced managerial and organizational innova-

tions along with information on technological inno-

vations and on a set of firm-specific and market

characteristics. We use a semiparametric procedure,

based on kernel density methods applied to appro-

priately weighted samples, to estimate both the

direct effect of business group affiliation on firm

performance distribution and its indirect effect

through the adoption of managerial and organiza-

tional innovations. Those effects are estimated both

for domestic and international firms. The semipara-

metric procedure provides a visually clear represen-

tation of the effect of business group affiliation on

firm performance, of whether the joint adoption of

innovations boosts the effect of business group

affiliation on performance, and finally, of whether

those effects differ between firms that operate in

international markets and those whose product

market is only domestic.

The results of our empirical investigation provide

support for a positive effect of business group

affiliation on firm performance. Such an effect is

corroborated when a firm carries organizational and

managerial innovation. The impact of the interplay

between business group affiliation and innovation

on performance is even stronger if organizational

and managerial innovative practices are imple-

mented jointly. This suggests complementarity

between the two sets of innovations. Finally, the

relationship between business group affiliation and

innovations on performance is more pronounced

and grants higher benefits for those firms that

face competition in international markets as com-

pared with those whose product market is only

domestic.

The layout of the article is as follows: we next

formulate our theoretical hypotheses. Then we

describe the data and the empirical methodology

used in the estimation. We then present and discuss

the empirical results before providing some conclud-

ing remarks.

MOTIVATION AND HYPOTHESES

A number of studies use exchange theory and

transaction cost analysis to demonstrate that firms’

Business Group Affiliation, Innovation, Internationalization, and Performance 245

Copyright © 2013 Strategic Management Society Global Strat. J., 3: 244–261 (2013)

DOI: 10.1111/j.2042-5805.2013.01060.x