THE 5TH COPENHAGEN CONFERENCE ON:
'EMERGING MULTINATIONALS': OUTWARD INVESTMENT FROM
EMERGING ECONOMIES
27-28 October 2016
Copenhagen Business School, Copenhagen, Denmark
HOME COUNTRY INSTITUTIONS AND EXPORTS OF FIRMS
FROM DEVELOPING COUNTRIES: DOES INNOVATION
MATTER?
Virginia HERNÁNDEZ
University Carlos III of Madrid, Business Management Division,
C/ Madrid, 126. 28903 Getafe (Madrid), Spain
Phone: +34 916245817, Fax: +34 916245707, [email protected]
María Jesús NIETO
University Carlos III of Madrid, Business Management Division,
C/ Madrid, 126. 28903 Getafe (Madrid), Spain
Phone: +34 916245826, Fax: +34 916245707, [email protected]
Alicia RODRÍGUEZ1
University Carlos III of Madrid, Business Management Division,
C/ Madrid, 126. 28903 Getafe (Madrid), Spain
Phone: +34 916245822, Fax: +34 916245707, [email protected]
August 26, 2016
*
Authors appear in alphabetical order. This project was funded by the Ministry of Economy and
Competitiveness (ECO2012-36160 and ECO2015-67296-R) and the Community of Madrid and the
European Social Fund (S2015/HUM-3417, INNCOMCON-CM). Rodríguez thanks Ramón Areces
Foundation for financial support.
1
Corresponding author
1
HOME COUNTRY INSTITUTIONS AND EXPORTS OF FIRMS
FROM DEVELOPING COUNTRIES: DOES INNOVATION
MATTER?
Abstract:
We study the impact of home country institutions on the internationalization of
developing countries’ firms and the role of innovation. Specifically, we analyze the
relation between governance imperfections and the export intensity of firms, as well as
considering the moderating role of product innovation in this relation. Theoretically, we
propose that greater governance imperfections result in lower export intensity and that
product innovation is particularly important for internationalization because it mitigates
the constraints of operating with weak home country institutions. Data from a sample of
1,895 firms from 23 eastern European and central Asian countries provide strong
support for the negative relation between a weak regulatory environment and exports. In
addition, we find that product innovation mitigates the negative effect. These findings
allow us to conclude that although firms from developing countries face difficulties to
export due to the regulatory constraints of their home countries, a strategy based on
product innovation represents a viable way of overcoming these limitations.
Keywords: Internationalization, Home country institutions, Innovation, Exports, Developing
Countries
2
INTRODUCTION
Firms from emerging countries have undeniably moved center stage in the international
arena over recent years (Young et al, 2014). The fact that these firms operate in
countries with underdeveloped institutions may exert a different impact on the drivers
and outcomes of international expansion compared to firms operating in more
developed environments (Chen et al., 2015; Cui & Jiang, 2010; Luo & Tung, 2007).
The relevance of the potential influence of home country institutions has caught the
attention of scholars in the last years, with studies examining how these institutions
affect the strategies of firms from emerging economies (Young et al., 2014), particularly
their outward internationalization (Stoian & Mohr, 2016; Sun et al., 2015).
Despite the best efforts of the literature to explore home country institutions and their
effects on internationalization performance, many questions remain unanswered. One
underresearched hot topic focuses on determining under what conditions home country
institutions affect outward internationalization strategies. Studies in this research stream
exist that examine weak institutions, along with others that analyze how effectively
institutions promote the internationalization of firms. The former explain how
corruption, protectionism and coercive pressures may produce an escape effect on firms
from developing countries (Cuervo-Cazurra, 2016; Cuervo-Cazurra et al., 2015: Stoian
& Mohr, 2016). In contrast, the latter examine how higher quality institutions provide
greater resources and reduce transaction costs and uncertainty, thereby strengthening
firms’ foreign operations (Sun et al., 2015; He & Lin, 2012; Wu & Chen, 2014). Our
paper adds to this stream of research on firms that operate in contexts where institutions
are weaker than in developed countries and that consequently take internationalization
decisions in a different manner (Gaffney et al, 2014; Hoskisson et al., 2013; Wright et
3
al., 2005). Specifically, our primary research objective is to analyze the direct effect of
governance imperfections on the export intensity of firms in developing markets.
As a second objective, we examine whether firms’ resources and capabilities may
explain heterogeneity in export behavior in the face of home country constraints. Given
the extensive literature on the relation between innovation and internationalization (PláBarber & Alegre, 2007; Basile, 2001; Castellani & Zanfei, 2007; Tomiura, 2007;
Rodríguez & Nieto, 2010; Vila & Kuster, 2007; among many others), we postulate that
in contexts with governance imperfections the innovation capacity of firms may affect
the impact of home country institutions on the internationalization of firms from
developing countries. In particular, we take into account the impacts of different types
of innovation – product and process – on firms’ international behavior (Becker &
Egger, 2013; Cassiman et al., 2010; Lo Turco & Maggioni, 2015) and propose that
product innovation moderates the relation between governance imperfections and export
intensity.
In line with Agnihotri and Bhattacharya (2015), we focus on export intensity because
the Uppsala model suggests that firms lacking experience expand via exports since they
require the lowest resource commitment (Johansson & Valhne, 1977, 2011). As recently
opened markets in developing countries suffer from resource constraints and
institutional voids, firms have little experience with internationalization strategies
(Ramamurti, 2012) and tend to opt for less risky modes of internationalization (i.e.,
export intensity).
To perform our empirical analysis, we use the database generated by The Enterprise
Surveys (The World Bank, 2013). This database contains information from 2012 on
1,895 firms from 23 eastern European and central Asian countries. The availability of
4
data from a wide range of developing countries enables us to reach conclusions that may
be generalizable.
With this study we contribute to two streams of research. First, we contribute to the
discussion
on
the
relations
between
home
country
institutions
and
the
internationalization of firms in emerging countries (Agnihotri & Bhattacharya, 2015;
Cuervo-Cazurra, 2016; He & Lin, 2012; Stoian, 2013). Specifically, we advance on
studies that look to explain how different home country regulatory institutions may
promote the internationalization of firms in emerging economies (Cuervo-Cazurra,
2016; Stoian & Mohr, 2016; Sun et al., 2015). In this paper, we provide a more in-depth
analysis of home country institutions by focusing on the effects of governance
imperfections on export intensity. To do this, we use a measure of governance
imperfections that captures the regulatory development of the country of origin. In
addition, our database contains firms from 23 emerging economies, which enriches our
results and conclusions by making it possible to consider different levels of
development. We also extend recent analyses that propose potential moderating effects
that alter outward internationalization from emerging countries (Stoian & Mohr, 2016;
Sun et al., 2015; Wu and Chen, 2014). In contrast to these studies, we focus on how the
relation between governance imperfections and export intensity may be modified by the
innovation results of the firm. In this way, we incorporate in the analyses firm level
factors that may influence this relation. Up to now, few studies of emerging countries
have examined the interactions between variables related to the origin country and to
the firm (Estrin et al., 2016; Wu & Chen, 2014; Yi et al., 2013). In particular, we
highlight the important role of resource endowments (e.g., innovation) in overcoming
the obstacles to internationalization caused by existing institutional limitations in the
countries of origin of these firms.
5
Second, we contribute to the extensive literature that analyzes the relation between
innovation and internationalization strategies (Castellani & Zanfei, 2007; Cerrato, 2009;
Dhanaraj & Beamish, 2003; Basile et al., 2003). Scholars have traditionally linked these
concepts through linear causality by considering one of them as the cause of the other.
Thus, most studies examine the direct effects of innovation on internationalization
(Basile, 2001; Rodríguez & Nieto, 2010; Wakelin, 1998), and vice versa (Frenz & IettoGillies, 2007; Vila & Kuster, 2007), and some even postulate bi-directional relations
between innovation and internationalization (Golovko & Valentini, 2011; Jeong, 2003;
Monreal-Pérez et al., 2012). We change the focus and postulate that innovation
moderates a previous relation (in our case, between governance imperfections and
export intensity). Therefore, in this work we offer a new perspective for the potential
relations between innovation and internationalization that goes beyond the explanation
of linear causality that most studies present. Lastly, this study acts a bridge across
different research streams, connecting topics such as innovation, institutions,
internationalization and geography in its analyses of emerging markets.
The paper is organized as follows. First, we address the relevant theoretical aspects and
research hypotheses. Second, we go on to describe the sample, variables, and
methodology. Third, we discuss the results and their implications. And lastly, we state
our conclusions and outline the paper’s limitations and some future lines of research.
THEORY AND HYPOTHESES
The Institutional-based view suggests that institutional factors are what lie behind a
country’s set of ‘rules of the game’ and standards. In other words, these are factors that
may limit or reinforce certain behaviors of the firm (North, 1990). Specifically,
6
institutional factors can be divided into regulatory, normative and cognitive-cultural
factors (Scott, 2001). Although all three factors are relevant and influence firms in the
different contexts in which they operate, regulatory factors are particularly interesting
because governments are capable of defining levels of development and generating
positive conditions for investment and economic growth (Cuervo-Cazurra & Genc,
2008; Globerman & Shapiro, 2003; Meyer et al., 2009).
In line with this, the literature typically focuses on analyzing regulatory factors in the
destination country. Different studies examine how governance infrastructure affects
decisions on entry mode (Dikova & Witteloostuijn, 2007; Slangen & van Tulder, 2009),
location (Coeurderoy & Murray, 2008), investment (Globerman & Shaphiro, 2003), as
well as consequent performance (Chan et al., 2008). Institutional differences between
origin and destination countries are also relevant, as they exert an effect on the
perception of psychic distance (Håkanson & Ambos, 2010) and of the risk inherent in
international decisions (Kraus et al., 2015). These distances, then, affect the choice of
entry mode (Gaur & Lu, 2007; Hernández & Nieto, 2015; Xu & Shenkar, 2002), time of
entry (Pogrebnyakov & Maitland, 2011), and international expansion (Berry et al.,
2010). In most of these studies, the firms in international markets come from developed
countries where strong regulatory institutions that guarantee a stable set of market rules
are taken for granted (Peng et al., 2008). However, firms from developing countries –
where institutional voids exist – have gained importance in international markets.
Consequently, the international business literature has begun to recognize the important
role that a country’s regulatory institutions play (Chen et al., 2015; He & Lin, 2012;
Stoian & Mohr, 2016; Sun et al., 2015).
Regulatory institutions in emerging countries do not a priori offer the same guarantees
as in developed countries (Luo & Tung, 2007; Gelbuda et al., 2008; Peng et al., 2008).
7
Indeed, institutions in emerging countries not only do not reduce uncertainty, but may
actually act as a source of uncertainty (Xu & Meyer, 2013). Specifically, in these
countries formal institutions tend to be relatively undeveloped, with weak legal systems,
poorly protected property rights, and constantly changing policies that fail to provide
legal security (Chen et al., 2015; Dikova & van Witteloostuijn, 2007; Hong et al., 2015;
Xu & Meyer, 2013). The institutional conditions in these countries increase information
asymmetries and transaction costs for foreign firms (Meyer, 2001; Meyer et al., 2009),
but also for local firms (Wright et al., 2005). In fact, these national institutional
weaknesses put firms from developing countries at a competitive disadvantage
compared to firms from developed countries (Young et al., 2014). Thus, firms from
developing countries may display behaviors and strategies that differ from those of
firms from developed ones, particularly when it comes to internationalization strategies
(Cuervo-Cazurra & Genc, 2008; Makino et al., 2002). Institutions in the country of
origin, then, are an important factor to bear in mind when analyzing internationalization.
Home country institutions and the internationalization of firms in developing countries
Most studies in this field argue that high-quality home country regulatory institutions
promote internationalization (Wan & Hoskisson, 2003; He & Lin, 2012). Good
governance infrastructure, then, protects contracts and intellectual property, reduces
risks of expropriation (La Porta et al., 2000; Wan & Hoskisson, 2003), produces
stronger economies with more resources (Kirca et al., 2012), and drives economic
growth (Globerman & Shapiro, 2003). In particular, local policies designed to improve
the legal system have been found to contribute to the internationalization of firms in
emerging countries (Sun et al., 2015). Likewise, reforms that promote stronger
institutions help firms gain advantages in efficiency and productivity that are important
for their international growth (Stoian, 2013; Gaffney et al., 2014). In addition, policies
8
introduced by some of these emerging countries to boost international initiatives can be
crucial to mitigate the risks involved and encourage local firms to move into foreign
markets (Hoskisson et al., 2013; Gammeltoft et al., 2012).
Some scholars also suggest that the absence of an advanced regulatory framework
fosters internationalization by generating an escape effect from the limitations of the
origin country. Specifically, these studies argue that the existence of corruption,
protectionism, and other coercive pressures could push firms to internationalize as a
means of escaping their origin countries (Cuervo-Cazurra et al., 2015; Cheng & Yu,
2008; Stoian & Mohr, 2016). Even though firms from emerging economies may
internationalize to escape the institutional constraints and competitive disadvantages
that exist in their origin countries, at the same time these limitations generate extra costs
that hinder their foreign expansion (He & Lin, 2012). Consequently, we argue that this
escape effect can only occur when the firm has sufficient resources to overcome these
constraints and bear the costs of internationalization. Overall, then, governance
imperfections (understood as less developed regulatory institutions in the home country,
political instability, weak governmental control, corruption, etc.) limit opportunities to
internationalize or compete in foreign markets. These arguments lead us to posit the
following hypothesis:
Hypothesis 1. The existence of governance imperfections in the home country is
negatively related to export intensity, with higher levels of governance
imperfections resulting in lower levels of export intensity.
The role of innovation in less institutionally-developed markets
The institutional characteristics of origin countries affect the collective knowledge that
firms can exchange with one another to develop new ideas and opportunities (Teixeira,
9
2013; Watkins et al., 2015), promote technological entrepreneurship (Judge et al.,
2015), and generate innovation competences and capabilities (Mudambi & Navarra,
2002). Emerging market institutions generally hinder business (Newburry et al., 2016),
while more advanced institutions provide an opportunity to produce technology,
knowledge and innovation (Makino et al., 2002; Luo & Tung, 2007; Wu, 2013). Thus,
although innovation can be difficult in these contexts, firms from countries with weaker
institutional frameworks can produce successful innovation results (Fleury et al., 2013¸
Govindarajan & Ramamurti, 2011). The question to be answered is whether the benefits
of the innovation outcome generated in these contexts outweigh the difficulties posed
by greater institutional constraints and the limitations to move into international
markets.
The relation between innovation and internationalization has been widely analyzed
(Castellani & Zanfei, 2007; Dhanaraj & Beamish, 2003; Golovko & Valentini, 2014;
Tomiura, 2007; among others). Numerous studies find a positive relation, thereby
revealing innovation as a source of competitive advantage that allows firms to be more
active in international markets (Basile, 2001; Monreal-Pérez et al., 2012; Plá-Barber &
Alegre, 2007; Rodríguez & Nieto, 2010).
The literature typically distinguishes between product and process innovations and
relates both types of innovation with the development of competitive advantages (Van
Auken et al., 2008). The characteristics and strategic implications of each type of
innovation, however, may be highly different (Gopalakrishnan et al., 1999). New
products and product improvements allow firms to increase the customer base in their
current markets or reach new markets, indicating that product innovation is positively
related to growth (Wolff & Pett, 2006). Process innovations can also generate different
competitive advantages for firms, as they allow them to improve their long-term
10
efficiency (Gopalakrishnan, et al.,1999) and enhance internal capabilities, making them
more adaptable to pressures in competitive markets (Van Auken et al., 2008).
The roles of product and process innovations in creating competitive advantages have
led authors to analyze their individual impacts on internationalization – and these
impacts seem to be different. Product innovation captures most of the attention, because
process innovation does not directly influence internationalization (Cassiman et al.,
2010), or does so only when accompanied by product innovation (Becker & Egger,
2013). The fact that product innovation makes it possible for firms to satisfy client
needs better or open new markets (i.e., firms can become more market-oriented) could
explain why this type of innovation boosts the search for new international markets in
which to sell products. Although operational process improvements enable firms to
improve productive efficiency and achieve subsequent cost savings, these gains may not
necessarily allow firms to sell abroad. It is for this reason that we focus on product
innovation. This focus, however, does not set out to examine its potential direct effect
on internationalization, but analyzes the moderating role on the relation between home
country institutions and internationalization in emerging economies.
The competitive advantage delivered by product innovation is likely to be especially
important in contexts in which institutions are underdeveloped and firms face
governance imperfections. Given that these are environments in which product
innovations are more difficult to achieve, innovative firms will be more competitive on
the national scene. Product innovations will have a beneficial effect on the relation
between governance imperfections and export intensity, because firms’ innovation
capabilities allow them to overcome institutional constraints and because they are better
prepared to compete in international markets. Firms operating in these environments
that are able to generate more innovative products, then, will display certain advantages
11
that allow them to escape from the limitations of their local institutions and sell their
products and/or services in other countries. In line with this, we put forward the
following hypothesis:
Hypothesis 2. Product innovation will positively moderate the negative relation
between governance imperfections in the home country and export intensity.
EMPIRICAL ANALYSIS
Sample
To perform the empirical analysis, we have used The Enterprise Surveys database
(produced by the World Bank in 2013). These surveys have been used in studies by
other scholars (Hope et al., 2011; Ramdani & van Witteloostuijn, 2012) and adopt a
standard methodology that covers different environmental aspects such as access to
finance and levels of corruption, infrastructure and crime, as well as data on the firm
and on the degree of competition. The surveys were completed by managing directors,
accountants, human resource managers, etc.; they collect data via standardized
instruments and a uniform sampling methodology to minimize measurement errors and
yield data that are comparable across different economies. Moreover, the surveys study
registered businesses and follow a stratified random sampling methodology. This
practice ensures sufficiently large and representative samples of different countries.
Specifically, in this study we use the Business Environment and Enterprise Performance
Survey of eastern European and central Asian countries. This survey provides data from
2012 on 1,895 firms from 23 eastern European and central Asian countries. To define
the variables related to institutional context, we also rely on the World Bank
12
Governance Matters dataset, which contains the World Development Indicators (WDI)
for our sample firms’ countries of origin.
Variables
Dependent variable. Export intensity is the proportion of sales generated from
international markets (calculated as the percentage of total sales) in 2012 (Agnihotri &
Bhattacharya, 2015; Capar & Kotabe, 2003; Fernández & Nieto, 2006; Plá-Barber &
Alegre, 2007; Wakelin, 1998).
Independent variables. We use four independent variables: Governance imperfections;
Only product innovation; Only process innovation; and Product and Process
innovation.
Governance imperfections measures the regulatory development of the country of
origin. To calculate this variable, we use the World Bank’s Governance Matters
database. Different editions of this database have been widely used in the literature to
analyze empirically the impact of regulatory or formal institutions (Cuervo-Cazurra &
Genc, 2008; Dikova & van Witteloostuijn, 2007; Garrido et al., 2015; among others).
Specifically, this database measures six dimensions of government, including: Voice
and accountability; Political stability and absence of violence/terrorism; Government
effectiveness; Regulatory quality; Rule of law; and Control of Corruption. These
indicators capture how governments are chosen, controlled and replaced; their capacity
to formulate and implement policies; and the level of respect of the citizens and the state
for the institutions that govern economic and social interactions. We perform a factorial
analysis of these indicators and identify a single factor that defines the degree of
regulatory development of the country of origin. To construct this in negative terms and
define a continuous variable that captures the degree of ‘imperfection’ of each country
13
of origin, we reverse the scores so that higher values indicate higher levels of
governance imperfections (Slangen & Beugelsdijk, 2010).
We include different variables for innovation to gauge the effects of innovation
strategies that may be developed by firms. In line with previous studies that find that
innovation results have different implications, depending on whether they are based on
product innovation and /or process innovations (Becker & Egger, 2013; Cassiman et al.,
2010; Lo Turco & Maggioni, 2015), in this paper we differentiate the three options:
Only product innovation is a dichotomous variable that takes value 1 when in the last
three years the firm has introduced products or services into the market that are new or
that offer a significant upgrade on its goods or services, but has not introduced process
innovations.
Only process innovation is a dichotomous variable that takes value 1 when in the last
three years the firm has developed new or significantly improved production processes,
distribution methods or support activities for its goods and services, but has not
developed product innovations.
Product and process innovation is a dichotomous variable that takes value 1 when in
the last three years the firm has achieved both product and process innovations.
These are all dichotomous variables, in accordance with the previous literature
(Bertrand & Mol, 2013; Ma et al., 2015; Nieto & Rodríguez, 2011; among many
others).
Control variables. We include controls for firm characteristics, ownership structure and
industrial activity in all the models. Thus, we control for firm age to capture the level of
experience or learning, as this is a factor that can have an impact on international
14
operations (Elango & Pattnaik, 2007). We measure Firm Age via the number of years
the firm has been in existence (He & Lin, 2012).
We also include the effect of ownership by a larger firm. Scholars have identified that
being part of a business group may help firms to internationalize (Rodríguez & Nieto,
2012). Moreover, business groups are especially important in emerging economies,
because they may exist as substitutes for well-functioning markets (Yi et al., 2013).
Consequently, we measure Part larger firm via a dummy variable that takes value 1
when the firm is owned by a larger organization, and value 0 otherwise (Garg & Delios,
2007; Chen et al., 2015).
In addition, we include a dummy variable that measures if the firm has an
internationally-recognized quality certification, a measure used by other scholars to
study exports (Boehe, 2013). Certification is a dichotomous variable that takes value 1
when the firm has this certification, and value 0 otherwise (Wu & Voss, 2015).
We also control for firm size to gauge its effect on internationalization (Estrin et al.,
2016; Sun et al., 2015). Firm size has been used frequently as a control variable,
because it is useful to measure the impact of scale economies and diseconomies (Hitt et
al., 1997). To control for size, we use four dummy variables that are defined by the
number of employees: Micro (<5 employees); Small (5-19 employees); Medium (20-99
employees); and Large (>=100 employees). To avoid problems of multicollinearity,
Large is excluded from the models and is only used as the baseline category.
Additional controls take into account the ownership structure of the firm, as different
structures will have specific characteristics that may affect international behavior
(Fernández & Nieto, 2006; Majumdar et al., 2012). Specifically, we identify whether
the firm is a public or private shareholding company (Shareholding); a sole
15
proprietorship (Sole); a partnership (Partnership); or has some other structure (Other).
As before, to avoid problems of multicollinearity, Shareholding is excluded from the
models and is only used as the baseline category.
Beyond controls at firm level, we include control variables for industrial activity. We
differentiate between service firms and manufacturing firms via the dichotomous
variable Manufacture. This variable takes value 1 for firms operating in a
manufacturing sector and value 0 for firms in a service sector.
Lastly, the models include control variables at country of origin level. Specifically, in
accordance with the classification of the World Bank, we sort countries by income
level. We use three dummy variables: High economy; Upper middle economy; and
Lower middle economy. These variables take value 1 when the country is classified at
the corresponding level, and value 0 otherwise. These country level dummies control
for potential country-related biases. To avoid problems of multicollinearity, this study
excludes Lower middle economy, which is used as the baseline category. In the
appendix, we include the list of countries classified under these criteria.
Table 1 displays the descriptive statistics included in the models, and table 2 contains
the correlations of the variables used in the study.
[Insert table 1 and table 2 about here]
For its part, table 3 displays the descriptive statistics for the sample, organized by size
and sector categories. Interesting differences related to innovation strategy and export
intensity exist for the different sizes of firms. The micro-firms category innovates less
than does any other group. As expected, resource constraints in micro-enterprises cause
them to hardly possess developed innovation strategies. In contrast (but for the same
reason), large firms display the highest innovation percentages. These firms also display
16
the highest values for product and process innovations. For their part, small and
medium-sized firms display similar percentages for the different types of innovation.
Concerning export intensity, the propensity to export grows in step with the increasing
size of firms. Thus, only 13 percent of micro-firms export, while 50 percent of large
firms do so. Additionally, innovation strategies seem to be preferred by manufacturing
firms, with the combination of product and process innovations proving the most
popular strategy for them. Manufacturing firms also have a higher percentage of export
intensity than do service firms.
[Insert table 3 about here]
Methodology
Because our dependent variable Export intensity is left-censored (with an accumulation
point of 0), a Tobit model is specified. These models are commonly used in studies that
measure export intensity or the degree of internationalization (Agnihotri &
Bhattacharya, 2015; Estrin et al, 2016; Fernández & Nieto, 2006). Specifically, a Tobit
model is used when the response variable can only be observed when one or more
conditions are met. For export intensity, we find one accumulation point with value 0
(which indicates that the firm does not export), thus revealing that the use of the Tobit
model is appropriate in our analyses. Tobit models are a hybrid between probit and
multiple regression models that make it possible to calculate consistent estimations –
something that would be impossible when working only with ordinary least square
(OLS) models. In statistical terms, the model can be expressed as follows:
Yi = Xi + ui
=0
if Yi > 0
for other instances.
17
Additionally, to identify potential problems of multicollinearity, we performed an
analysis of the variance inflation factor (VIF). Individual VIF values greater than 10.0,
combined with average VIF values greater than 6.0 indicate a problem of
multicollinearity (Neter et al., 1989). The highest VIF individual value and the mean
value in the model are lower than the threshold points, suggesting the absence of
multicollinearity (see table 2).
RESULTS
Table 4 shows the Tobit regression analyses on export intensity for the six models used
in this study. Model 1 focuses exclusively on the control variables; model 2
incorporates the direct effects of the independent variables; models 3 - 5 include the
interaction between Governance imperfections and each innovation strategy,
respectively; and model 6 is the full model with all the interactions. We use the results
from model 6 to test the hypotheses.
First, we find support for Hypothesis 1, as the coefficient for Governance imperfections
is negative and statistically significant. This result indicates that weak regulatory
controls in the country of origin negatively affect export intensity. Second, we find
support for Hypothesis 2, as the coefficient for the interaction between Only product
innovation and Governance imperfections is positive and significant. This result
indicates that Product innovation has a positive and significant moderating effect on the
negative relation between Governance imperfections and Export intensity. Moreover,
we do not find a significant effect for the interaction of Only process innovation and
Governance imperfections or for the interaction of Product and process innovation and
Governance imperfections. Thus, as levels of governance imperfections in the country
18
of origin rise, only the achievement of product innovations helps to increase export
intensity.
[Insert table 4 about here]
Turning to the results of the innovation variables on export intensity, the coefficient for
Only product innovation is positive and statistically significant; the coefficient for Only
process innovation is positive and not significant; and the coefficient for Product and
process innovation is positive and significant. These findings indicate the predominant
effect of product innovation on internationalization, which is in line with the results of
previous studies (Becker & Egger, 2013; Cassiman, et al., 2010).
Concerning the control variables, the coefficient for Firm Age is negative and
significant. This may be because older firms in emerging markets are more reluctant to
enter international markets (Elango & Pattnaik, 2007). The coefficient for Part larger
firm is positive and significant, which suggests that firms belonging to a group are more
likely to export. Similarly, the coefficient for Certification is positive and significant,
implying that quality certifications ease entry to international markets. The coefficients
for Micro, Small and Medium are all significant and negative in explaining export
intensity. This result suggests that small firms and medium-sized firms export less than
do large firms. This finding is due to the fact that smaller firms have fewer resources
and capabilities to perform international operations. And of the controls for ownership
structure, the coefficient for Sole and Other are negative and significant, indicating that
firms whose ownership is divided into shares (regardless of whether they are traded on
the stock market) export more. Concerning industrial sector, the coefficient for
Manufacture is positive and significant, suggesting that manufacturing firms display
greater export intensity than do service firms. Lastly, at a country level, we find that
19
only the coefficient for Upper middle economy is positive and significant. This indicates
that firms from these economies export more than do those from lower middle
economies, while no difference exists between firms from lower and higher economies.
DISCUSSION AND CONCLUSIONS
The motivation behind this paper lies in the increasingly significant role developing
countries play in the international arena. Despite the growing importance of firms from
these
countries
in
international
markets,
many questions
related
to
their
internationalization remain underresearched. The institutional conditions in these
countries differ markedly from those in more developed countries, with the latter
enjoying markets and a regulatory framework that provide a more favorable
environment for international growth. These institutional factors in the country of origin
have not been much analyzed, although some recent studies reveal their importance for
internationalization, especially for firms in emerging countries (Chen et al., 2015;
Stoian & Mohr, 2016; Sun et al., 2015).
Our work follows this recent trend and has two objectives. First, we aim to delve more
deeply into the relation between governance imperfections and the export intensity of
firms in developing markets. And second, we set out to understand how innovation may
modify this relation.
In our first hypothesis we postulate that governance imperfections exert a negative
effect on export intensity. Specifically, we argue that firms operating in contexts with a
low quality regulatory framework, with less developed policies and regulations, and
poor levels of government effectiveness and control over corruption, will encounter
20
more difficulties than will firms from countries with more developed institutional
contexts. Thus, these national institutional weaknesses will burden firms with added
difficulties and put them at a competitive disadvantage for international growth. Our
empirical results provide support for this relation. In other words, we find that higher
levels of governance imperfections result in lower levels of export intensity for firms.
In our second hypothesis we postulate that product innovation has a moderating effect
on the negative relation between governance imperfections and export intensity.
Specifically, we argue that firms which develop innovations will see the negative effects
of these imperfections on international growth reduced. Although institutions in
emerging markets generally hinder business activities (Newburry et al., 2016),
numerous successful and innovative firms exist (Fleury et al., 2013; Govindarajan &
Ramamurti, 2011). Resources and capabilities for innovation, then, are what can make
the difference, as all firms in emerging markets operate in the same context with its
unfavorable institutional factors. For this reason, we argue that innovation capability is
a differentiating factor that can moderate the negative relation between environmental
conditions and international expansion. Bearing in mind the findings of previous work
on the impact of different innovation results on international performance (Becker &
Egger, 2013; Cassiman et al., 2010), we focus on product innovation as the most likely
candidate to affect this relation. The empirical results provide support for our second
hypothesis. The negative impact governance imperfections exert on export intensity is
positively moderated when firms achieve product innovations. These findings confirm
the importance of innovation resources in contexts in which local institutions are
obstacles to internationalization.
This study contributes to the literature in several ways. First, we deepen the analysis of
the relation between governance imperfections and the internationalization of firms
21
from developing countries. Our work, then, adds to those that argue in favor of giving
greater prominence to the role of institutions in the origin country, especially in
countries where these institutions are underdeveloped (Stoian & Mohr, 2016; Sun et al.,
2015). Second, our findings highlight the effective moderation exerted by firm-specific
characteristics on the relation between governance imperfections and export intensity.
Specifically, we show how innovation can be a crucial factor to mitigate the
institutional deficiencies that may be faced by internationalizing firms. Thus, we
analyze innovation as a moderating variable instead of adopting a linear causality
approach, as is the case in most of the previous literature (Basile, 2001; Rodríguez &
Nieto, 2010; Monreal-Pérez et al., 2012). Likewise, we add to those studies that take
into account that internationalization processes are affected by multi-level factors – in
this case, country and firm levels (Estrin et al., 2016; Wu & Chen, 2014; Yi et al.,
2013). Lastly, our results reveal the importance of inter-connecting innovationinstitution-geography-internationalization relations, as suggested by some authors
(Newburry et al., 2016). Empirically, our analyses are performed on a wide sample of
firms of different sizes and sectors from numerous developing countries. And the great
diversity of firms from countries with varying degrees of institutional development
makes it possible to reach conclusions that are generalizable to similar contexts.
The results and conclusions reached in this paper have implications for policy makers
and managers in developing markets seeking to improve the internationalization of their
firms. Government policy makers and other regulatory institutions can promote
internationalization by creating more favorable institutional conditions for firms.
Greater controls to prevent corruption, stronger protection of ownership rights, and
higher quality regulations and laws are all actions that will improve the image and
credibility of public policies and help boost the international competitiveness of local
22
firms. Similarly, governments should introduce policies that support product innovation,
a step that would aid firms in overcoming the negative impact of regulatory
imperfections. In addition, managers in these environments possess tools to counteract
their position of relative disadvantage in international markets. Specifically, product
innovations strengthen the presence of firms in international markets and are an
important tool to reduce the consequences of institutional limitations.
This study is not free of limitations. Indeed, many of these limitations suggest
interesting new directions for future research. The international experience of managers
is often a key factor behind the initial decision and subsequent success or failure of
internationalization. Future research could consider managerial knowledge and
experience as potential resources that may also lessen the external difficulties presented
by institutions in underdeveloped markets (Agnihotri & Bhattacharya, 2015). Likewise,
future studies could also examine other international operations such as international
alliances to determine whether innovation may have a different moderating effect.
Researchers might also explore how firms perform these innovations (e.g., by
themselves or in conjunction with other agents) to reveal possible differences in
mitigating governance imperfections.
23
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29
Table 1. Descriptive statistics
Variable
Export intensity
Governance imperfections
Only product innovation
Only process innovation
Product and process innovation
Age
Part of a larger firm
Certification
Micro
Small
Medium
Sole
Partnership
Other
Manufacture
Lower economy
Upper economy
High economy
Std.
Obs Mean
Dev.
1869 12,173
27
1884 -0,023 0,984
1881 0,129 0,335
1881 0,067 0,250
1888 0,156 0,363
1884 18,186 13,838
1895 0,071 0,256
1861 0,301 0,459
1895 0,104 0,306
1895 0,429 0,495
1895 0,329 0,470
1894 0,045 0,208
1894 0,014 0,116
1894 0,012 0,110
1645 0,407 0,491
1895 0,283 0,451
1895 0,478 0,500
1895 0,239 0,426
30
Min Max
0
100
-2,197 1,664
0
1
0
1
0
1
1
153
0
1
0
1
0
1
0
1
0
1
0
1
0
1
0
1
0
1
0
1
0
1
0
1
Table 2. Correlation matrix
1
1 Gorvernance imperfections
2 Only product innov
2
3
-0.09
-0.10
-0.16*** -0.1***
***
-0.20
-0.04
-0.09
8 Micro
0.06*
0.02
0.10
12 Partnership
0.03
14 Manufacture
0.07
0.01
**
-0.04
10
11
12
13
14
15
16
17 VIFS
-0.06
*
-0.09
***
***
0.39
16 Upper middle income
0.40***
-0.88
***
1.04
1
1.10
0.06
*
1
0.06
*
0.02
***
0.04
0.1
0.04
-0.05
-0.01
0.04
***
15 Lower middle income
17 High income
9
1
0.01
-0.03
-0.002
11 Sole
0.05
*
0.02
***
7 Certif
13 Other
8
1.08
***
-0.04
10 Medium
7
1
-0.02
9 Small
6
5.09
***
4 Product and process innov
6 Part of larger firm
5
1
3 Only process innov
5 Age
4
-0.01
-0.02
0.00
0.14
1.16
1
***
-0.05*
-0.16
***
0.03
0.15
1.05
***
-0.07
1
1.17
-0.12*** 1
-0.05
**
0.02
-0.16
0.08
**
-0.02
-0.01
0.00
-0.03
-0.04
-0.12
-0.01
-0.03
-0.02
0.02
-0.01
0.02
0.01
0.06
-0.01
*
0.03
-0.07
**
0.01
0.06
*
-0.03
0.14
***
0.16
***
0.11
***
-0.02
0.02
-0.15
0.00
-0.03
-0.01
0.02
0.02
0.18
***
***
-0.01
0.01
-0.06
0.15
***
***
*
***
***
0.00
-0.17
-0.07**
0.09***
0.08
***
0.08
**
1.73
-0.29
***
-0.24
***
1
-0.6
2.63
***
0.04
0.08
-0.02
0.04
-0.04
-0.07
0.14
-0.02
**
***
-0.06*
-0.08
***
**
-0.06
*
1
-0.06
2.36
*
1
-0.03
-0.02
0.03
-0.03
0.03
-0.06
1.06
1
*
1.01
-0.01
1
-0.02
-0.02
1.04
1
1.08
-0.01
0.02
0.01
-0.05
-0.01
-0.13
0.03
0.00
0.02
0.07**
-0.02
0.04
-0.02
-0.03
-0.03
-0.04
0.04
0.09
***
1
6.71
-0.6***
***
-0.36
***
1
-0.53
6.7
***
1
Mean
* p<0.05; ** p<0.01; *** p<0.001
31
2.5
Table 3. Innovation and Export propensity by firm size and sector categories
Full
Sample
Only product
innov
Only process
innov
Product &
process innov
Export
propensity
Micro
Small
Medium
Large
10,47%
43,12%
32,91%
13,50%
10,15%
11,40%
14,70%
15,35%
10,15%
6,30%
6,14%
6,60%
9,60%
15%
15,70%
20,70%
13,20%
20,75%
34,84%
51,17%
Manufact
Service
40,70%
59,30%
14,88%
10,90%
7,80%
5,80%
22,00%
11,40%
47,70%
15,54%
32
Table 4. Results
(1)
Export
intensity
Governance Imperfections
Only product innovation
Only process innovation
Product and Process innovation
(2)
Export
intensity
(3)
Export
intensity
(4)
Export
intensity
(5)
Export
intensity
(6)
Export
intensity
-29.95***
(5.007)
16.80***
(6.022)
2.762
(8.966)
20.27***
(5.399)
-31.30***
(5.106)
21.23***
(6.262)
2.599
(9.012)
20.21***
(5.419)
13.30***
(4.983)
-29.66***
(5.025)
16.86***
(6.015)
1.078
(10.49)
20.29***
(5.394)
-29.87***
(5.073)
16.82***
(6.032)
2.778
(8.971)
20.13***
(5.561)
-31.46***
(5.265)
21.28***
(6.271)
1.753
(10.50)
20.63***
(5.581)
13.54***
(5.244)
-2.294
(8.503)
1.831
(5.046)
-0.229*
(0.127)
28.64***
(8.120)
11.04**
(4.700)
-45.59***
(10.61)
-42.93***
(6.524)
-12.34**
(6.052)
-25.17*
(13.29)
-7.037
(32.45)
-58.48**
(25.13)
52.86***
(4.718)
11.15*
(6.136)
-14.86
(12.55)
-48.21***
(9.301)
63.15***
(2.643)
1574
19
-2700.8
Only product innovation X Governance Imperfections
Only process innovation X Governance Imperfections
-4.925
(8.311)
Product and Process innovation X Governance Imperfections
Age
Part larger firm
Certification
Micro
Small
Medium
Sole
Partnership
Other
Manufacture
Upper middle economy
High economy
Constant
Sigma cons
N
df_m
Log Likelihood
-0.152
(0.125)
29.03***
(7.845)
13.24***
(4.631)
-44.42***
(10.813)
-38.46***
(6.374)
-8.72
(5.98)
-21.08*
(11.714)
-11.63
(30.42)
-58.34**
(23.89)
55.08***
(4.654)
17.45***
(5.91)
47.17***
(6.182)
-64.48***
(8.273)
-0.222*
(0.129)
30.46***
(7.950)
11.12**
(4.700)
-44.49***
(10.63)
-42.16***
(6.530)
-11.78*
(6.086)
-23.22*
(13.27)
-7.377
(32.15)
-61.49**
(25.39)
52.66***
(4.726)
11.50*
(6.104)
-16.33
(12.41)
-48.55***
(9.323)
-0.230*
(0.127)
28.86***
(8.075)
10.97**
(4.693)
-45.70***
(10.64)
-43.02***
(6.509)
-12.37**
(6.050)
-24.97*
(13.33)
-7.333
(32.58)
-58.71**
(25.14)
52.88***
(4.721)
11.03*
(6.117)
-15.10
(12.50)
-47.98***
(9.285)
-0.223*
(0.129)
30.27***
(7.971)
11.20**
(4.705)
-44.22***
(10.59)
-41.95***
(6.536)
-11.69*
(6.080)
-23.61*
(13.30)
-7.472
(32.08)
-61.22**
(25.36)
52.62***
(4.722)
11.58*
(6.110)
-16.36
(12.43)
-48.60***
(9.326)
-0.605
(4.805)
-0.222*
(0.129)
30.49***
(7.955)
11.11**
(4.702)
-44.49***
(10.63)
-42.17***
(6.530)
-11.78*
(6.085)
-23.23*
(13.29)
-7.488
(32.21)
-61.51**
(25.37)
52.67***
(4.726)
11.47*
(6.103)
-16.41
(12.42)
-48.48***
(9.324)
64.23***
(2.628)
1591
12
-2789.2
63.31***
(2.646)
1574
16
-2703.4
63.14***
(2.643)
1574
17
-2700.9
63.29***
(2.648)
1574
17
-2703.3
63.30***
(2.643)
1574
17
-2703.4
Standard errors in parentheses. * p < 0.10, ** p < 0.05, *** p < 0.01
33
Appendix. Distribution of firms by country of origin
Export
propensity
Lower middle income
Upper middle income
High income
Armenia
Kosovo
Kyrgyzstan
Moldova
Mongolia
Albania
Azerbaijan
Bosnia & Herzegovina
Bulgaria
Kazakhstan
Macedonia
Montenegro
Romania
Serbia
Croatia
Czech Rep
Estonia
Hungary
Latvia
Lithuania
Poland
Slovakia
Slovenia
1,44%
0,37%
0,27%
1,61%
0,59%
1,02%
0,43%
2,30%
1,18%
0,05%
3,80%
0,48%
1,02%
2,68%
0,86%
0,59%
1,61%
1,28%
1,98%
1,07%
0,43%
0,16%
3,58%
28,79%
Total
34
Nº firms
167
11
44
181
130
113
69
115
70
83
176
52
95
120
36
18
70
62
90
44
16
12
95
1869