The influence of competition from informal firms on new product development
| Author | Mona Bahl,Brian T. McCann |
| Published date | 01 July 2017 |
| DOI | http://doi.org/10.1002/smj.2585 |
| Date | 01 July 2017 |
Strategic Management Journal
Strat. Mgmt. J.,38: 1518–1535 (2017)
Published online EarlyView 26 October 2016 in WileyOnline Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2585
Received 29 July 2015;Final revisionreceived 12 August 2016
THE INFLUENCE OF COMPETITION FROM INFORMAL
FIRMS ON NEW PRODUCT DEVELOPMENT
BRIAN T. MCCANN1*and MONA BAHL2
1Owen Graduate School of Management, Vanderbilt University, Nashville,
Tennessee, U.S.A.
2Williamson College of Business Administration, Youngstown State University,
Youngstown, Ohio, U.S.A.
Research summary: Existing research describes a broad range of determinants of new product
development (NPD), a fundamental competitive activity of rms. A considerable share of this
work has occurred in the context of developed economies, raising a concern that some important
determinants may remain unexamined. We suggest that one such determinant is competition from
informal (unregistered)rms. Drawing from the attention-based view, we investigate the effectsof
informal competition on NPD in a largesample of rms located across Eastern Europe and Central
Asia. Weexamine not only the direct effect but also how this effect is moderated by characteristics
of the competitive and institutional context.
Managerial summary: The purpose of this research is to examine the relationship between
competition from informal (unregistered) rms and new product development (NPD) by formal
rms. We argue that NPD is an effective response to differentiate from informal rms, and our
analyses of over 9,000 rms located in emerging economies across Eastern Europe and Central
Asia indicate that NPD activities are more likelyin formal rms who rate informal competition as
a greater obstacle. The strength of this direct relationship depends on aspects of the competitive
and institutional environment: it is weakened when levels of competition from other formal rms
are higher, when alternative responses such as corruption are moreavailable, and when managers
are moreoptimistic about the regulatory environment. Copyright © 2016 John Wiley & Sons, Ltd.
INTRODUCTION
Firm-level competitive actions are a central concern
to competitive strategy (e.g., Gimeno, 1999; Porter,
1980; Smith, Ferrier, and Ndofor, 2001). Although
existing research has generated a wealth of knowl-
edge in this area, prior work generally shares a
commonality of being set in the context of devel-
oped economies. This is concerning given questions
Keywords: informal competition; new product develop-
ment; attention-based view; emerging economies; compet-
itive strategy
*Correspondence to: Brian T. McCann, Owen Graduate School
of Management, Vanderbilt University, 401 21st Avenue
South, Nashville, TN 37203, U.S.A. E-mail: brian.mccann@
owen.vanderbilt.edu
Copyright © 2016 John Wiley & Sons, Ltd.
about the “extent to which theories and method-
ologies used to study strategy in mature, developed
economies are suited to the unique social, political,
and economic contexts as well as rm characteris-
tics of emerging economies” (Wright et al., 2005:
2). More specic to the motivation of our article
is the concern that the emerging economy context
may include relevant factors largely unexamined
due to their lack of prevalence in developed
economy contexts, resulting in signicant gaps in
our understanding of the drivers of competitive
behaviors. Our research is motivated by such a
factor, as we investigate the effects of competi-
tive pressure from informal (unregistered) rms.
Informal rms are dened as rms that produce
and sell legal goods and services, yet they remain
The Inuence of Competition from Informal Firms on NPD 1519
unregistered with government authorities, allowing
them to avoid legal requirements such as taxes and
regulations. Activity in the informal sector makes
up a signicant portion of economic activity in
developing economies, with some studies conclud-
ing that informal activity represents over 50percent
of GDP in emerging economies (Schneider, 2002).
The strategic consequences of competition from
informal rms (“informal competition”) remain rel-
atively underexplored. One recent study (Iriyama,
Kishore, and Talukdar, 2016) that has begun to
address this gap described potential competitive
advantages of informal rms, including the abil-
ity to operate more quickly and at lower costs by
avoiding regulations. The authors argued that one
way formal rms can respond is to engage in cor-
rupt activities such as payoffs to regulatory of-
cials in an attempt to achieve parity on speed and
low cost. Our purpose in this article is to investi-
gate whether other types of competitive responses
may be deployed to combat threats from informal
competitors, an important question given that many
formal rms may be unable or unwilling to engage
in corruption. More specically, we examine how
new product development (NPD) by formal rms is
inuenced by the presence of informal competition
and how this relationship depends on characteristics
of the competitive and institutional context.
We elect to examine NPD for several reasons.
First, NPD offers an alternative viable competitive
response to the issue of informal competition. In
contrast to corruption in an attempt to emulate the
benets enjoyed by informal rms, NPD offers a
way to differentiate from these competitors who
may lack the capabilities to engage in this activity.
Second, it is a particularly signicant competitive
strategy that contributes to rm growth (Penrose,
1959), helps rms adapt to changing market
conditions (Schoonhoven, Eisenhardt, and Lyman,
1990), and enhances rm performance (Chaney,
Devinney, and Winer, 1991). Third, expanding the
scope of NPD research to emerging economies is
important given recent work demonstrating that
the relationship between traditional drivers of NPD
(i.e., institutional development, rm resources, and
competitive pressure) varies across different eco-
nomic contexts, such as transition and nontransition
economies (Shinkle and McCann, 2014).
To build our theoretical model of the relation-
ships between informal competition and NPD, we
draw from the attention-based view (ABV) (Ocasio,
1997), which argues that the cognitive limitations of
decision makers (Simon, 1997) result in a restricted
amount of attention to dedicate to particular issues
(problems or opportunities) and answers (action
alternatives). Wedraw upon two central premises of
the ABV. The rst is the ABV’s premise of focus of
attention, which argues that what decision makers
do depends upon the issues and answers they focus
their attention on. We begin by explaining why the
issue of informal competition is likely to draw atten-
tion and why NPD draws attention as an answer to
that particular issue.
To add richness to our theoretical model and to
highlight the causal mechanisms at play, we also
consider contextual factors that moderate this pri-
mary relationship. Our approach here is consistent
with the ABV’s second premise of situated atten-
tion, which contends that the context of the rm
impacts allocation of attention. As a complement
to prior work that has considered the rm’s internal
context (e.g., Tuggle etal., 2010) and character-
istics of the industry environment (e.g., Cho and
Hambrick, 2006), we focus on the competitive and
institutional context. We rst take into account
the fact that our focal rms face competition from
both formal and informal rms. We argue that
attention is distracted from informal competitors
when formal competition is greater, leading us to
predict that the main effect of informal competition
on NPD weakens as the level of formal competition
increases. Our arguments also anticipate that the
amount of attention paid to the answer of NPD
depends on the availability of other answers, some
of which may depend on the institutional context.
Consistent with the results of Iriyama et al. (2016),
we predict a weakening of the main effect when
alternative actions such as irregular payments to
government ofcials (bribery) are more prevalent.
Finally, given the importance of the regulatory
environment to the issue of informal competition,
as well as prior work indicating the signicant
inuence of optimism on decision making espe-
cially in the context of dynamic environments (e.g.,
Hmieleski and Baron, 2009), we focus on the level
of optimism formal rm managers have about the
regulatory environment. We predict that the link
between informal competition and NPD weakens
as formal rm managers are more optimistic about
the regulatory environment.
This work contributes to the competitive strat-
egy literature by investigating a force that has been
relatively underexplored as a determinant of com-
petitive behavior. Given its prevalence in emerging
Copyright © 2016 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 1518–1535 (2017)
DOI: 10.1002/smj
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