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Contents lists available at ScienceDirect
International Business Review
journal homepage: www.elsevier.com/locate/ibusrev
Industry globalization and the performance of emerging market firms:
Evidence from China
Nitin Pangarkar a,*, Jie Wu b,1
a
b
NUS Business School, National University of Singapore, 1 Business Link, Singapore 117592, Singapore
Faculty of Business Administration, University of Macau, Av. Padre Tomas Pereira, Taipa, Macau, China
A R T I C L E I N F O
A B S T R A C T
Article history:
Received 25 August 2009
Received in revised form 31 January 2011
Accepted 31 January 2011
In this study, we explore the extent to which industry globalization affects the
performance of firms in China, an emerging market. We focus on the period between
1996 and 2001 and track the globalization levels for six different Chinese industries as well
as the performance of 166 public listed firms in these industries. The results validate our
major premise: high levels of industry globalization positively impact the performance of
Chinese firms. We also find that when their industries globalize, firms with slack resources
experience greater performance improvement than other firms without these resources.
ß 2011 Elsevier Ltd. All rights reserved.
Keywords:
Emerging market firms
Export intensity
Industry globalization
Import intensity
Organizational slack
Performance
1. Introduction
How does industry globalization in an emerging economy impact the performance of emerging market firms? Are
emerging market firms which possess greater slack resources in a better position to address the challenges and leverage the
opportunities from industry globalization? We study these questions within the context of China, one of the most important
emerging markets in the world. We conceptualize industry globalization as the extent to which an industry in an emerging
market shares linkages, in the form of imports and/or exports, with the rest of the world and operationalizes it by using
industry-specific trade flows (e.g., import and export intensities). We argue that higher industry globalization will imply
greater competitive pressure and/or higher incentives to learn. Drawing from the Resource Advantage (Hunt, 1997) and the
Competitiveness theories (Porter, 1990), we further argue that greater or novel competition will spur emerging market firms
to improve their competitiveness, in turn, leading to better performance. Drawing from organizational theory, we further
predict that emerging market firms possessing greater slack resources will experience a greater boost in performance from
industry globalization than firms with lesser slack resources. We believe that our paper extends the prior literature on this
topic, conceptually as well as empirically. Below we identify three specific and key aspects in which our study extends the
prior work on the topic of industry globalization.
Our first point relates to the geographic focus of prior literature and consequent inapplicability of their results to
emerging markets which are playing an increasingly important role in the global economy. Although several prior studies
have examined industry globalization (e.g., Kobrin, 1991; Makhija, Kim, & Willimason, 1997), there are two issues with the
* Corresponding author. Tel.: +65 6516 5299; fax: +65 6779 5059.
E-mail addresses: [email protected] (N. Pangarkar), [email protected] (J. Wu).
1
Tel.: +853 8397 4720; fax: +853 2883 8320.
0969-5931/$ – see front matter ß 2011 Elsevier Ltd. All rights reserved.
doi:10.1016/j.ibusrev.2011.01.009
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literature. First, many prior studies have examined the patterns of industry globalization for developed markets, and, in fact,
mostly for the US. The findings about the levels of industry globalization in the US may not be applicable to other markets—in
fact, Makhija et al. (1997) found significant differences in industry globalization across different developed markets (US
versus Germany, Japan, etc.). Industry globalization patterns are likely to differ even more sharply for emerging markets
(identified as the next battleground for IB competition by Peng, 2001) versus the US because of the salient differences in the
institutional contexts across these countries (Khanna & Palepu, 1997, 2000). As Makhija et al. (1997: 686) point out: ‘‘There
appears to be an implicit, if not explicit assumption that the structure of the US business serves as an adequate approximation of
that in other countries. There is, however, little basis for this assumption; on the contrary, US industries have been described to be in
great contrast to those in other parts of the world.’’ They also note (on p. 686) that globalization of industries may be best
studied at the national industry level since ‘‘specific national industries are likely to vary in the extent and the manner in which
they are linked to other national industries.’’ Their finding of differing levels of industry globalization across countries also
supports our argument about the inapplicability of results from developed markets to emerging markets.
Secondly, prior literature has also focused on measuring the extent of globalization and categorizing firms and industries,
but not addressed the issue of how industry globalization impacts performance of firms in that industry (e.g., Kobrin, 1991;
Malnight, 1995; Mascarenhas, 1984). We argue that higher globalization of an industry will help the performance of firms in
that industry—mainly due to competitiveness pressures since firms must become more efficient to survive against global
rivals. In this regard, an OECD report (2002: 155) notes that: Increased competition can lead to both one-time and ongoing gains
in multi factor productivity (or MFP), i.e., the combined productivity of labor and capital. We expect the performance-enhancing
effect of competition to be particularly salient for firms in emerging markets since many of them may be young, these
countries often lag behind the technological frontier and also lack well-functioning product markets. The OECD (2002) report
goes on to estimate that the gains in MFP were twice as large for countries such as Portugal or Greece versus more developed
(and pro-competitive) markets such as Canada and the US. Specifically, among the criteria identified by Porter (1990) for
well-functioning product markets, though many industries in emerging markets have numerous players, they might lack the
discerning customers, or the capable competitors, that would induce firms to upgrade their capabilities and value
propositions (Porter, 1990). We further suggest that global rivals (e.g., import competition) may be more effective in exerting
competitive pressure on the emerging market firms than domestic rivals, especially if the domestic rivals are young or less
competitive—as in the case of China.
Another weakness in the existing literature concerns an inattention to the boundary conditions of the effects of
globalization on firm behaviors and outcomes. Despite the general consensus that globalization has a significant impact on
firm performance, there is paucity of literature on how firm characteristics shape the relationship between industry
globalization and firm performance. This omission is surprising, because, although firms are constrained by their
environments (e.g., globalization), some of them might possess a higher level of slack resources and are able to proactively
pursue and exploit potential opportunities of environments by mobilizing their internal resources (Bourgeois, 1981; Voss,
Sirdeshmukh, & Voss, 2008). We seek to address this by exploring whether emerging market firms possessing greater slack
resources are in a better position to address the challenges and leverage the opportunities from industry globalization.
This paper is organized into four sections. In Section 2, we summarize the key conceptual arguments linking the degree of
industry globalization, as well as its two constituent variable export and import intensities, with the performance of firms in
that industry. We discuss the methodological aspects of the study in Section 3, followed by a discussion about the results of
hypotheses testing in Section 4. The concluding section of the paper includes discussion of results, contributions, limitations,
and directions for future research.
2. Theory and hypotheses
Industrial Organization (IO) theory argues that industry structure is the primary determinant of firm profitability (Porter,
1980). Resource based theory, on the other hand, argues that inter-firm differences in resources should be a stronger
predictor of the performance of individual firms (Barney, 1986; Wernerfelt, 1984). The debate about the relative importance
of firm and industry effects has spawned a large body of empirical literature examining the variance in firm profitability
attributable to these two sets of factors, with most of the studies observing that industry effects are indeed important—a
result we will build on later in the paper (Brush & Bromiley, 1997; Brush, Bromiley, & Hendrickx, 1999; Rumelt, 1991).
International Business (IB) researchers have extended the IO perspective to the international context by adding the country
(either home or host) effect to firm and industry effects (Beccera & Santalo, 2003; Makino, Isobe, & Chan, 2004). IB theorists
argue that the culture, institutions, economic and legal structures of a home country may importantly affect firms’ behavior
and strategies, and, consequently, their performance (Hawawini, Subramanian, & Verdin, 2003; Makino et al., 2004; Porter,
1990). Another strand of literature in IB has argued that host country factors may influence the relative competitive positions
(and, consequently, the performance) of both multinational and local firms. Although the empirical results about the home
country effect are inconclusive (e.g., Yip, 1991 versus Hawawini et al., 2003), many studies have observed that host country
environment has a significant impact on the performance of firms (e.g., Christman, Day, & Yip, 1999).
Our focus in this study, the relationship between industry globalization and performance of emerging market firms, is
slightly different from prior studies that have either measured industry globalization without examining performance
implications, or examined this phenomenon from the perspective of functional areas (e.g., marketing or R&D) within firms
(Malnight, 1995; Mascarenhas, 1984). Industry globalization is a combination of country-level (e.g., host government
Please cite this article in press as: Pangarkar, N., & Wu, J. Industry globalization and the performance of emerging market
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Fig. 1. Graphical depiction of hypotheses.
policies about trade and investment) and industry-level (e.g., the underlying industry economics or the ‘globalization
drivers’ of the industry; Kobrin, 1991; Makhija et al., 1997; Porter, 1986; Yip, 1989) factors. We believe that it is appropriate
to examine the combined effects of host country2 and industry since prior literature has argued that these effects are
intertwined (Cantwell, 1989; Krugman & Obstfeld, 1991). Prior empirical analyses also suggest that the interaction between
country and industry effects is a stronger predictor of variation in firm performance than either the country or the industry
effect (Hawawini et al., 2003; Makino et al., 2004).
It may also be useful at this stage to note that we are not discounting the importance of strategic choices made by firms
which might have important implications for their performance (Henderson & Mitchell, 1997; Schendel, 1997). Our key
argument is that the extent of globalization of an industry will have a significant impact on the performance of emerging
market firms and this impact will be separate, and in addition to, the impact of firm strategies.
Several prior studies have observed that industry globalization can impact firm performance (e.g., innovation output)
through spillover (Buckley, Clegg, & Wang, 2002; Coe & Helpman, 1995; Salmon & Shaver, 2005; Wei & Liu, 2006). We extend
this argument to performance outcomes such as ROA and ROE. To draw a linkage between industry globalization and these
aspects of firm performance, we first disaggregate industry globalization into two separate, yet related, dimensions—import
intensity (the extent to which a particular industry is exposed to import competition) and export intensity (the degree to
which a particular industry participates outside its home country through exports). Below, we will develop the conceptual
arguments about the impact of each of the dimensions on the performance of emerging market firms. Fig. 1 depicts our
model and summarizes the conceptual arguments supporting the hypothesized relationships.
2.1. Performance implications of import intensity
The Resource Advantage (Hunt, 1997) and the Competitiveness theories (e.g., Porter, 1990) form the conceptual
foundation of our arguments. The Competitiveness theory argues that competitive advantage of firms may be a function of
the unique environment they are embedded in—the configuration of Porter’s diamond (Porter, 1990) in their home country,
for instance. Often-cited examples in this regard include the Swiss watch industry and the Japanese automobile industry
which emerged as globally competitive industries. When firms from these globally competitive national environments start
competing in emerging markets where the configuration of Porter’s diamond is not as favorable, they are expected to enjoy a
competitive advantage (Hunt, 1997) over the emerging market firms in the form of either lower costs or better customer
value. In order to meet the competitive threat, emerging market firms might ‘‘attempt to neutralize and/or ‘‘leapfrog’’ the
advantaged firm by better managing their existing resources and/or by acquisition, imitation, substitution or major
innovation (Beccalli, Casu, & Girardone, 2006; Holm, Holmstrom, & Sharma, 2005; Hunt, 1997). In other words, emerging
market firms may try to address their competitive disadvantage by lowering their costs (or reducing their X-efficiency,
Leibenstein, 1966; Primeaux, 1977) or improving their value propositions (Krugman & Obstfeld, 1991; Porter, 1990).
Empirically, prior studies have often found strong positive effects of import competition on emerging market firms. Blalock
2
It is noteworthy that though we focus only on China, Chinese policies (e.g., openness to trade) differ systematically across industries and hence there is a
country effect which is in addition to the industry economics effect (e.g., the presence or absence of scale economies) which would influence the industry
globalization level.
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and Veloso (2007) found that firms in industries supplying increasingly import-intensive sectors have higher productivity
growth than other firms. We extend the above arguments to predict that the competitiveness-enhancing measures
undertaken by emerging market firms in face of import competition will be reflected in improved performance.
Despite its efficiency-enhancing impact, higher import intensity of an industry also poses several challenges to emerging
market firms. It might lead to higher competitive intensity and thus reduced prices and margins (Porter, 1980). Larger number
of competitors might also imply erosion in the sales volume of the emerging market firms, possibly diluting the available
economies of scale with the extent of dilution inversely related to the competitiveness of emerging market firms. IB theories,
such as the OLI paradigm proposed by Dunning (1981), argue that many MNCs possess strong monopolistic advantages (e.g.,
superior technology, brand and management systems). The extent, as well the transferability, of ownership advantages varies
across industries and IB research argues that the competitive advantages to MNCs may be particularly salient in industries that
are technology- or scale-intensive, and against particular types of rivals such as Small and Medium-sized Enterprises (or SMEs),
or firms in emerging markets (Chng & Pangarkar, 2000; Johansson & Yip, 1994; Wu & Pangarkar, 2006; Yip, 1989). Lavie and
Fiegenbaum (2000), for instance, concluded that the entry of MNCs induced consolidation in several sectors in Israel through
the exit of many marginal players. They also concluded that when a market is opened up, MNCs are able to push aside emerging
market firms within a very short time. Similarly, Ger (1999) argued that emerging market firms might do well by sidestepping
the MNCs through one of the following means: by focusing on services or information technology rather than the staple of
manufactured goods (where the advantages to MNCs are more salient), or by designing low-cost technological alternatives
appropriate to local conditions. Although both Lavie and Fiegenbaum’s (2000) and Ger’s (1999) studies focus on MNCs’ entry
through FDI, their arguments are equally applicable to entry via imports into a country—since such entry, similar to FDI, brings
the MNCs into direct competition with emerging market firms.
The adverse effects of higher import intensity, however, may be less salient in growing and large-sized markets (e.g., China
rather than Israel in Lavie & Fiegenbaum’s, 2000 study) which can accommodate more players. Strong market growth in these
markets will also enable competitive firms to make up lost volume over time (Economist Intelligence Unit, 2005, Chapter 1).
The lower volume due to a greater number of players implied by higher levels of import intensity may also be offset partially
by the exit of weaker players whose volume becomes available to the surviving firms. Larger firms in emerging markets, such as
publicly listed firms, may also be more capable of handling the challenges posed by higher import intensity because they might
possess deeper managerial skills as well as location-specific resources (e.g., stronger distribution channels or government
relationships) that have enabled them to achieve market prominence (Dawar & Frost, 1999; Wu & Pangarkar, 2006).
In summary, we believe that the positive competitiveness- and efficiency-improving aspects of higher import intensity
(better cost efficiency due to learning and competitive pressure and enhanced capabilities to offer higher value-added
products) will offset the negative impact (loss of scale economies and erosion of margins) leading to an overall positive
impact on the performance of firms in an emerging market (Birkinshaw, Morrison, & Hulland, 1995). Hence,
Hypothesis 1. Higher import intensity of an industry in an emerging market will be associated with better performance of
firms in that industry.
2.2. Performance implications of export intensity
To examine the impact of export intensity on performance, we again refer to the Resource Advantage and
Competitiveness theories. Exporting firms often need to compete with sophisticated global players who might enjoy scaleand value-based advantages. If the exporting firms are from an emerging market while the destinations of products include
developed countries, they may be forced to upgrade the value of their products by offering superior designs, technology or
customer service/responsiveness (Love & Mansury, 2009). The fact that these competitive interactions take place outside
their home markets poses further challenges to emerging market firms and provides stronger incentives to improve. As Hunt
(1997) argues, the necessity to compete will be the mother of invention or the ‘birth of new resources.’ Many prior studies
have observed that exporting improves a firm’s competitiveness such as the ability to sell higher value added products in
domestic or export markets, as well as its financial performance (Alvarez & Lopez, 2005; Falvey, Foster, & Greenaway, 2004;
Porter, 1990; Wei & Liu, 2006). Liu and Buck (2007) reported that learning by exporting (and importing) promoted
innovation in Chinese firms. A report by the Economist Intelligence Unit (2005: 17) noted that: (Exporting companies can)
benefit from their participation in a supply or manufacturing chain for export production, learning valuable lessons in marketing
trends, price differentials, and streamlined logistics. The beneficial impact of higher export intensity has been demonstrated for
Korean firms by Rhee et al. (1984), for Taiwanese firms by Westphal (2002), for US service firms by Love and Mansury (2009)
and for Indonesian firms by Blalock and Gertler (2004). Hence, we propose that
Hypothesis 2. Higher export intensity of an industry in an emerging market will be associated with better performance of
firms in that industry.
2.3. Industry globalization and the performance of member firms
Although we considered the standalone impact of export and import intensities in the above discussion, the two concepts
may be interlinked. Global rivals who are importing goods in the emerging markets might also help emerging market firms
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become more competitive in export markets (Anwar & Nguyen, 2010). Emerging market firms may also be able to connect
better with the rest of the world through sales leads/relationships—thus helping their exports. Greater imports and exports,
in turn, can lead to further improvements in competitiveness because of greater scale economies, among other factors
(Blomstrom & Lipsey, 1996).
Cognizant of the interdependence between export and import intensities, we model industry globalization as an
interactive effect of export and import intensities. At high levels of industry globalization (high levels of export and import
intensities, Makhija et al., 1997), the combined effects of competitiveness pressures (greater efficiency), learning effects
(from foreign competitors in both import and export markets) and scale effects (due to exports) will lead to superior
performance of the emerging market firms. At low levels of industry globalization (low levels of both export and import
intensities), not only will the competitiveness and scale effects be absent, but there could also be complacency (because of
lack of sophisticated competitors) which will result in the loss of efficiency, leading to lower performance. Hence, we
hypothesize that
Hypothesis 3. Higher globalization of an industry in an emerging market will be associated with better performance of firms
in that industry.
As noted above, higher industry globalization creates challenges as well as opportunities for emerging market firms—e.g.,
high import intensity implied by the advent of international competitors poses challenges to all firms in an emerging market
and provides them incentives to become cost efficient (Caves, 2007; Scherer & Huh, 1992; Wiersema & Bowen, 2008).
Similarly higher export intensity creates opportunities to acquire additional scale and improve cost position. To exploit these
opportunities, however, emerging market firms must possess resources—e.g., the additional volume through exports can
only be leveraged through significant investments in the form of foreign market and/or customer development.
We submit that the ability to capitalize on the opportunities provided by higher industry globalization varies across firms
and that the presence of organizational slack is a facilitator in this regard. Cyert and March (1992: 42) defined slack resources as
‘‘the difference between a firm’s total resources and its total necessary payments’’. Bourgeois (1981) further defined slack as a
resource cushion which can be mobilized in a discretionary manner to absorb environmental threats and to exploit potential
opportunities. Empirically, many studies have found that the presence of slack facilitates strategic behavior—such as various
explorative activities that involve risk-taking (Martinez & Artz, 2006), innovation (Nohria & Gulati, 1997) and environmental
adaptation (Herold, Jayaraman, & Narayanaswamy, 2006; Voss et al., 2008). Voss et al. (2008) suggest that firms with abundant
slack resources are likely to prefer explorative strategies over exploitative strategies, especially when the level of external threat
(such as the arrival of foreign competition) is high. The above arguments suggest that slack will generally lead to positive
performance. We do not hypothesize this relationship in view of the fact that it has been investigated by prior literature. Instead,
we hypothesize that the interaction between industry globalization and slack resources will have a positive impact on
performance. In other words, firms in the possession of greater slack resources will be better able to respond to industry
globalization (Tsai, Huang, & Ma, 2009) and enjoy a performance boost over and above the one enjoyed by other firms (with
lesser slack resources) in the same industry because of industry globalization. Hence we hypothesize that,
Hypothesis 4. The interaction between slack resources and industry globalization will have a positive and significant impact
on performance of emerging market firms.
3. Methods
3.1. Sample
To be included in our sample, a firm had to be in operation in the 1996–2001 period, and its stock had to be traded in
either Shanghai Stock Exchange Market or Shenzhen Stock Exchange. Data about the sampled firms and the industries (to
which they belonged) was drawn from four main sources. Sampled companies’ annual reports in the period of 1996–2001
provided by China Genius Security Information System formed the first data source. For the industry level variables such as
export and import intensities and industry globalization, we relied on the China Statistical Yearbooks. We manually
collected data about 144 export commodities and 96 import commodities across six years listed in the yearbook. Based on a
mapping of these commodities to each of the industries, we calculated the export and import intensities for each industry. To
determine business group affiliation we consulted the list of Chinese business groups provided by WangFang data.3 To cross
check the representativeness of our sample, for each of the six industries, we collected additional data about the number of
firms and their distribution from the China Economic Net Database.4 We will check the characteristics of this population
with our sample. Our final sample included 166 firms and 963 total (firm-year) observations.
At this point, it may be appropriate to identify some of the distinguishing features of our sample. Similar to our study, key
prior studies on industry globalization have often used multi-industry samples, which improves the generalizability of the
results. For example, Kobrin (1991) examined the patterns of global integration (a similar concept to industry globalization
used in this study) based on secondary data spanning 56 manufacturing industries. Birkinshaw et al. (1995) examined the
3
4
http://hk.wanfangdata.com/.
http://en.ce.
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structural and competitive determinants of global integration strategy by gathering and analyzing a sample of 24 businesses
from 10 industries. Our study follows this tradition by collecting data on publicly listed Chinese firms in six different
industries.
Although samples in prior industries have often spanned multiple industries, they tend to be cross-sectional in nature.
Kobrin (1991), for example, compared data for 1982 and 1986. In his study he faced the constraint that the next benchmark
survey (the source of his data) was not available. While recognizing the value of longitudinal analyses, he settled on ‘some
rough intertemporal comparisons’ (p. 23). Birkinshaw et al. (1995), similarly, wished for detailed time series level data at the
business-unit level. Hence, we believe that it is appropriate to conclude that time-series data on key relevant variables in this
study, especially the extent of industry globalization, are difficult to obtain. We aimed to address this issue by constructing a
panel dataset on 166 Chinese firms operating in six different industries between 1996 and 2001. This period is an interesting
and appropriate phase especially for Asian firms since it includes economic crests (e.g., 1996 and first half of 1997) as well as
troughs (1997 East Asian economic crisis followed a couple of years later by the stock market crash in the US and the
September 11th terrorist attacks). We submit that the variation in the economic environment over the time period covered
by the study will be a good test of the robustness of the underlying relationships.
3.2. Dependent variable
We employed Return on Assets (ROAs) as a measure of firm performance. ROA is an accounting ratio which includes the
impact of a firm’s capital structure (e.g., debt versus equity) as well as its operations efficiency (Kim, Hoskisson, & Wan,
2004).
3.3. Independent variables
We proxied key constructs such as export and import intensities and industry globalization (an additive/interactive effect
between the two intensities) by trade flow levels which have often been used as objective indicators of the extent of industry
globalization (Arndt, 1999; Cvar, 1984; Kobrin, 1991; Makhija et al., 1997; Porter, 1986). Trade flow levels offer several
advantages. First, they are replicable because of their objective nature. Second, they are a direct measure of the extent of
linkages of a national industry with the outside world. They also share common antecedents with globalization—e.g., high
economies of scale, a frequently mentioned antecedent of high industry globalization, will lead to centralization of value
addition activities such as manufacturing (high globalization), in turn increasing the trade flow levels (Kotabe & Glenn, 1989;
Morrison & Roth, 1992; Roth & Ricks, 1994). Trade flow levels do not include factors such as sharing/flow of intangible assets
which are another characteristic of highly globalized industries. Despite this fact, Makhija et al. (1997) argue that the flow of
tangible assets such as raw materials and components proxy (or include) the application of intangible assets. They further
note on p. 688 that: Their movement across borders in the form of exports and imports suggests that distinct value adding activities
are taking place at separate international locations; this, in turn, reflects the extent of international integration within the industry.
Several authors (e.g., Cvar, 1984; Porter, 1986; Prescott, 1983) have argued that high trade ratios are a necessary condition
for a global industry. In Cvar’s (1984) and Prescott’s (1983) studies, specific values of ratios were identified to determine
industry ‘globalness’. In summary, we believe that trade flow levels are reasonable proxies for industry globalization.
To calculate the export and import intensities, we divided industry level exports and imports by domestic sales. A key
motivation for adjusting for domestic consumption (i.e., dividing by domestic sales) was to allow the comparison of firms
from different industries (Makhija et al., 1997). Higher magnitude of each of these ratios indicates the presence of greater
linkages, in terms of international trade, of that industry with other countries.
To proxy the industry globalization variable, which would include the cumulative impact of both export and import
intensities, we calculated an additive interaction of export and import intensities. We chose additive interaction because we
believe that lower value of one variable can be compensated by higher value of another variable, especially towards
explaining firm performance. For instance, high import intensity can cause firms to improve their competitiveness thus
positively impacting firm performance even if the export intensity is low. High export intensity, can similarly improve
competitiveness, in general, and scale economies, product quality and customer value, in particular. We will, however, test
the sensitivity of our results to the traditional operationalization of an interactive effect—multiplication of the two main
effect variables. We believe that our measure satisfies one of the key criteria identified by Makhija et al. (1997: 861) for
industry globalization measures: it should be able to distinguish between industries with significant trade linkages to other
countries and others that do not have these linkages.
Consistent with prior research, we measured organizational slack by the equity-to-debt ratio (Sharfman, Wolf, Chase, &
Tansik, 1988). The higher the value of the debt/equity ratio, the greater will be the resources at the particular firm’s disposal
to respond to the forces of, and capitalize on the opportunities provided by, industry globalization. In Table 1 we identify the
operational measures for the key variables used in our analysis as well as the data sources used.
3.4. Control variables
To control for alternative explanations for the key relationship being examined, we included several control variables in
our regression estimations. First, we included several measures of firm size including initial registered capital (time
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Table 1
Operational measures for variables and data sources.
Variable
Operationalization
Data sources
Performance
Export intensity
Import intensity
Organizational slack
Total sales
Initial firm size
Competitive intensity
Business group membership
Return on Assets (ROAs) and Return on Equity (ROE)
Industry exports/industry sales
Industry imports/industry sales
Equity/debt
Total sales (log)
Registered capital (log)
Number of industrial rivals
A binary variable indicating whether a firm is
linked to a business group or not
Industry exports/industry sales industry
imports/industry sales
China Genius Security Information System
National Bureau of Statistics
National Bureau of Statistics
China Stock Market & Accounting Research (CSMAR) Data
China Stock Market & Accounting Research (CSMAR) Data
China Genius Security Information System
National Bureau of Statistics
WangFang Data
Industry globalization
invariant) and total sales (time variant). We used the logarithmic transformations to normalize these variables. Larger firms
might exhibit better performance because of factors such as economies of scale and higher market power. In addition, we
included a control for business group membership, which was operationalized as a binary variable based on whether the
focal firm listed one of the top 500 companies in China as one of its ten largest shareholders (Kim et al., 2004). Prior research
suggests that firms belonging to business groups perform better than other firms, probably because of direct or indirect
government support as well as superior access to capital (Carney, Shapiro, & Tang, 2009; Keister, 1998). We also controlled
for the competitive intensity of the industry (number of firms within the industry) and included binary variables for industry
membership which might account for industry-specific variation, such as structural characteristics determining an
industry’s attractiveness (Porter, 1980). Finally, we included binary variables for each year to account for broader (economywide) time-based trends (excluded or base year = 1996).
3.5. Estimation methods
Our data is pooled time series where observations represent firm-years. One potential issue with this data structure is the
unobserved heterogeneity since each firm accounts for six (1996–2001) observations. The issue can be solved by introducing
firm-specific error terms. We used the random effects model which introduces error terms that vary randomly over time for
each firm (Sayrs, 1989; Wooldridge, 2002). Jensen and Zajac (2004) argue that random effect models are more appropriate
than fixed effect models when the time period covered is short (as in our study). Wooldridge (2002) suggested that
researchers estimate both random and fixed effect models and if the coefficients are close, random effect model would be
preferred. The random effect model may be specified as follows:
yit ¼ b0 þ b1 xit1 þ þ bk xitk þ ai þ uit
(1)
where ai captures all unobserved, time-constant factors that affect yit and is called unobserved effect.
A key assumption for random effect models is that the unobserved effect ai is uncorrelated with explanatory variables. We
believe that it is reasonable to assume that industry level factors such as export and import intensities and industry
globalization are uncorrelated with firm characteristics.
4. Results
As shown in Fig. 2, the export and import intensities vary over time and across industries. The export intensity was uniformly
low for Papermaking and paper products and was uniformly high for Garments and fiber products and Electrical equipment and
machinery. The import intensity was uniformly low for Garments and other fiber products and Food processing and
manufacturing. For Chemical fibers, Smelting and pressing of non-ferrous metals, both the ratios witnessed a decline, followed
by an increase. For Papermaking and paper products and Garments, the ratios remained rather stable over the time period. For
Food products, the ratios remained stable for the first few years followed by an increase towards the end of the time period. The
observed variation in industry globalization scores across industries and over time implies that our multi-industry and multiyear sample might yield more generalizable conclusions than single-industry and cross-sectional samples.
We highlight two findings from the above analysis. First, the Electrical equipment and machinery and Chemical fibers
industries in China are highly globalized since they exhibit high export and import intensities. Second, the Smelting and
processing of non-ferrous metals industry is lowly globalized since it exhibits low export and import intensities. The
remaining three industries could be termed as moderately globalized since they exhibit low values of one ratio but moderate
values of the other ratio. Comparing our classification to Kobrin’s (1991) classification based on Transnational Integration
(intra-firm trade flows), we can find some similarities. In his study, Electronic equipment and Chemical fiber emerged as a
highly globally integrated industry and Food emerged as a less globally integrated industry. The similarity in the
classification of these industries across our and Kobrin’s (1991) studies strengthens our confidence in the usage of trade
flows as indices of industry globalization.
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Fig. 2. Variation in export and import intensities over time.
Electronics and telecommunications accounted for the largest proportion of firms (at 36.3%), and the other industries
were roughly equally represented in our sample (12.4% of firms in Chemicals; 16% in Food processing; 10.9% in Garments;
13.2% in Paper and 11.2% in Smelting and pressing of non ferrous metals). The average firm in our sample had total assets
RMB 140.2 millions. Firms in the Electronic and telecommunications, Chemicals, and Smelting and pressing of non ferrous
metals tended to be bigger than the firms in the other three industry groups. With the aim of verifying whether our sample
was representative of the respective industry categories within China, we examined the whole populations of firms in these
industries in terms of their average size as well as their distribution (25th percentile, 75th percentile, etc.; table not included
in the interest of parsimony). The similarity between the whole population and the sample in terms of size distribution
suggests that our sample is representative of the population. In terms of profitability, our sample firms exhibited excellent
levels of profitability though the average values were influenced by a few outliers, as suggested by the high standard
deviations.
In Table 2, we present the correlation matrix for all the variables included in the regression analysis. It is clear that, barring
a few exceptions (the correlations between industry membership, which are control variables, and export/import
intensities) the bivariate correlation coefficients between the independent variables are generally low. The negative
correlations between industry membership variables are unavoidable and, being control variables, they should not impact
our conclusions significantly. To address any potential concerns about collinearity between export and import intensities
which are key independent variables, we will estimate models by introducing only one of these variables but not the other.
The results of our regression analyses are reported in Table 3. In general, our models performed quite well with high
values of Chi-squared statistic. To examine the support for Hypotheses 1 and 2, we look at models 2–6. The import intensity
variable had significant coefficients in all the regressions where it is included—thus lending strong support to Hypothesis 1.
The results for the export intensity variable were mixed with insignificant coefficients in some models and negative and
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Table 2
Correlation matrix.
Variables
Mean S.D.
1
ROA (1)
Export intensity (2)
Import intensity (3)
Industry globalization (4)
Organizational slack (5)
Firm age (6)
Initial firm size (7)
Total sales (8)
Competitive intensity (9)
Business group membership (10)
18.050
0.585
0.364
0.949
1.506
14.701
0.005
4.662
8.426
0.451
1.000
1.000
0.179*
0.292* 0.428*
*
0.100
0.550*
0.258* 0.132*
0.138*
0.02
0.051
0.082*
0.081*
0.113*
0.168*
0.175*
0.071*
0.200*
*
(12.021)
(.493)
(.482)
(.522)
(1.575)
(3.405)
(1.002)
(.516)
(.741)
(.498)
2
3
4
1.000
0.518*
1.000
0.065*
0.064*
0.001
0.023
0.010
0.068*
0.0805*
0.033
0.486*
0.283*
*
0.117
0.080*
5
6
7
8
9
10
1.000
0.056
1.000
0.015 0.006
1.000
0.130* 0.094*
0.493*
1.000
0.145* 0.031 0.066* 0.098*
1.000
*
*
0.061
0.119
0.319
0.247* 0.019 1.000
p < 0.05.
significant coefficients in other models (i.e., models 5 and 6). The sign was contrary to our prediction and hence Hypothesis 2
was not supported. We will discuss possible reasons for the negative influence of export intensity which is contrary to our
prediction. The industry globalization variable had a positive and significant coefficient as predicted (as shown in models 5
and 6), thus lending support to Hypothesis 3. Organizational slack had a positive impact on performance which is consistent
with the findings of prior literature. The interactive effect of organizational slack and industry globalization also had positive
coefficients in models 5 and 6, thus lending support to Hypothesis 4.
Among the two size variables, the initial capitalization variable had no impact whereas the current sales variable had
positive and significant coefficients in all the models, suggesting that larger firms get the benefit of economies of scale and/or
greater market power. It is noteworthy that our sample includes only listed firms and the larger among these firms may
enjoy significant scale advantages over smaller, unlisted firms. The business group membership variable did not have
Table 3
Results of random-effect regression analyses.
Dependent variables
Initial firm size
Firm age
Total sales
Business group membership
Competitive intensity
Chemical fibers
Electronics and telecommunication
Food processing
Garments
Paper making
Organizational slack
ROA
Model 1
Model 2
Model 3
Model 4
Model 5
Model 6
0.388
(0.650)
0.645***
(0.180)
2.722**
(0.873)
1.792
(0.944)
4.348*
(1.881)
9.188**
(2.935)
8.358***
(2.044)
7.399**
(2.605)
14.020***
(3.062)
5.551*
(2.546)
0.949***
(0.202)
0.391
(0.651)
0.647***
(0.180)
2.702**
(0.871)
1.676
(0.945)
4.428*
(1.875)
6.854*
(3.221)
8.289***
(2.043)
9.627***
(2.906)
14.029***
(3.056)
7.905**
(2.880)
0.945***
(0.201)
3.357
(1.931)
0.367
(0.646)
0.635***
(0.179)
2.869***
(0.868)
1.555
(0.942)
4.055*
(1.871)
8.642**
(2.921)
3.944
(2.594)
2.905
(3.065)
9.194**
(3.517)
4.986*
(2.537)
0.984***
(0.201)
0.369
(0.646)
0.636***
(0.179)
2.843**
(0.869)
1.527
(0.942)
4.127*
(1.871)
7.588*
(3.218)
4.419
(2.664)
4.498
(3.686)
9.745**
(3.584)
6.178*
(2.963)
0.978***
(0.201)
1.610
(2.068)
4.890*
(2.180)
0.369
(0.646)
0.636***
(0.179)
2.843**
(0.869)
1.527
(0.942)
4.127*
(1.871)
7.588*
(3.218)
4.419
(2.664)
4.498
(3.686)
9.745**
(3.584)
6.178*
(2.963)
0.978***
(0.201)
6.500**
(2.378)
0.360
(0.646)
0.649***
(0.179)
2.821**
(0.867)
1.539
(0.941)
3.963*
(1.869)
7.055*
(3.221)
4.533
(2.661)
4.913
(3.686)
9.808**
(3.579)
6.285*
(2.959)
1.052***
(0.203)
6.561**
(2.375)
4.890*
(2.180)
4.632*
(2.180)
0.759*
14.970
(16.616)
203.118***
Export intensity
5.526**
(2.023)
Import intensity
Industry globalization
Industry globalization slack
Constant
2
x statistics
15.193
(16.615)
185.898***
12.993
(16.601)
189.767***
18.516
(16.540)
196.013***
17.099
(16.623)
196.848***
17.099
(16.623)
196.848***
N = 963, no. of firms = 165. Year dummies are included, but are not reported due to space consideration.
*
p < 0.05.
**
p < 0.01.
***
p < 0.001.
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significant coefficients in either set of regressions—probably because some aspects of the benefits of group membership
were captured by other variables such as size. Firm age variable had a negative and significant coefficient in all the
regressions implying that older firms find it more difficult to cope with the globalization of their industries. This finding is
consistent with the arguments of the structural inertia perspective.
We performed a variety of robustness checks. Our first check relates to the deployment of an alternative performance
measures—ROE. We were encouraged since the results were almost identical, in terms of the coefficients of key variables and
their significance (results not reported in the interests of parsimony). Wooldridge (2002) suggests that scholars should use
both fixed and random effect models to check for robustness. Following his suggestion, we ran fixed effect estimations and
found a high level of consistency across the two sets of estimations (random versus fixed effects; fixed effect results are not
included in the interests of parsimony). In some industries such as Electronics, MNCs account for a large proportion of
Chinese exports, which might bias results about the relationship between export intensity and performance. To account for
this possibility, we excluded the Electronics industry from our analysis and re-estimated the regressions. The results
remained the same, however! Finally, we also re-estimated the results with the multiplicative interaction variable for
operationalizing the industry globalization construct. Here, again, the results remained the same. We believe that these
robustness checks should inspire a high level of confidence in our results.
5. Conclusion
We will first discuss the results about import and export intensities with the aim of highlighting the contrasting results in
terms of significance of impact/coefficients for the two variables. We will then discuss the result about the impact of industry
globalization.
5.1. Explaining the contrasting results for import versus export intensity
As expected, we found that import intensity had a positive and significant impact on firm performance. As argued in
Section 2, higher import intensity leads to higher competitive pressure and has a competitiveness-enhancing effect on the
emerging market firms, which then improves their performance. In contrast, we found that higher export intensity does not
lead to improved performance emerging market firms—in fact, it might even have a negative impact. While the literature
relating export strategies to firm performance has argued that exporting firms exhibit superior productivity (Alvarez &
Lopez, 2005), other studies have observed that the impact of exports, especially with regard to achieving additional
economies of scale, may be more modest (Ruiz-Nápoles, 2001). Exports can also enhance firms’ capabilities by serving new
customers or competing with a different set of rivals in less familiar, or less protective, environments. We submit that the
positive effects of exporting, especially as they relate to outcomes such as ROA, may be outweighed by several factors in the
case of Chinese firms. In the time period covered by the study, many Chinese firms were at an early stage of development and
hence their key skills lay in taking a given technology and producing low-cost products using that technology. Exports by
these firms, though they yielded additional volumes, were likely to be of low-end products often sold under another brand
name (OEM arrangements). For instance, TCL, a large volume producer of TVs based on the Cathode Ray Tube (or CRT)
technology within China, was virtually unknown to customers outside China since its TVs were supplied to foreign TV firms
under OEM arrangements. In these cases, the lion’s share of the profits might go to firms that control the non-replicable
valuable assets such as the brand and/or the distribution network in the foreign market (Dierickx & Cool, 1989). Feenstra
(1998) points out that the value added (and consequently profits accounted for) by the Philippines- and China-based
assemblers of Barbie dolls is a fraction of the final selling price of the doll. Dependence on OEM exports might also limit the
learning opportunities since the exporting Chinese firm typically focuses on manufacturing to exploit the comparative
advantage, but is distant from marketing and business development.
The Economist (November 10th, 2007: 4–7) cited a study by Branstetter and Lardy (2006) which decomposed the value
addition in the manufacture of the Apple iPod, which is made in China by contract manufacturers. The largest component of
value ($80 out of the $224 wholesale price) is accounted for by Apple’s gross profit. Branstetter and Lardy (2006) estimate the
value of assembly and testing activities performed in China to be $3.70. They further estimate that only 15% of the value of
China’s electronics and IT exports is added in China. The above statistics would support our arguments about the
insignificant or negative impact of exports on Chinese firms’ profitability.
Similar to imports, exports can also serve as a disciplining force for Chinese firms—forcing them to become efficient. We
submit, however, that the disciplining force is much weaker in this case since exports are ‘voluntary’ whereas competition
from imports must be dealt with.
5.2. Performance enhancing effects of industry globalization and generalizability to other emerging markets
We found that industry globalization, an interaction effect between export and import intensities, has a significant
positive impact on performance. An interesting conclusion arising out of this result is that, although export intensity has a
significant or negative standalone impact on performance, this effect is more than compensated by import intensity. In other
words, when both export and import intensities are high the strong efficiency-improving impact of import competition
dominates, which might lead to greater competitiveness in export markets.
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While our empirical analysis was focused on China, we believe that our conclusions should be broadly applicable to other
emerging markets because of the similar context (London & Hart, 2004; Merchant, 2007). First, while China is unique in some
respects such as its huge market size and excellent physical infrastructure, it is also similar to other emerging economies
with respect to its recent growth rates, its relatively short history as a market economy and the visible hand of the
government (including the presence of state-owned enterprises). In fact, the smaller market size of other emerging markets
such as Vietnam would imply that the performance-enhancing effects of industry globalization discussed in this paper
should be even more important in those countries. We also believe that, like China, the domestic competition in many other
emerging markets is not sufficiently strong or effective and hence industry globalization might enhance performance of
firms even in these countries.
6. Contributions
Our study has contributed to the literature by addressing the under-researched issue of how industry globalization
impacts the performance of firms in an emerging economy. In their paper, Makhija et al. (1997) had noted several key points
about the prior literature: the paucity of literature focusing on empirical measurement of industry globalization, the lack of
objective and systematic measures which hinders our understanding about industries, especially in terms of the extent of
their globalization and comparisons of globalizations across different national contexts. While addressing the first two issues
identified above, our analysis of 166 listed firms in China over the 1996–2001 period validated our major premise that higher
industry globalization positively impacts firm performance. Extending the research on industry globalization to the context
of emerging market firms is important as well as fruitful. As an increasingly critical force shaping the world economy,
emerging markets are characterized by tremendous opportunities in the form of great market potential as well as
environmental uncertainty, mainly because of governmental interference and immature institutions (Khanna & Palepu,
1997, 2000). This study suggests that higher integration of industries into the global economy through openness to imports
may actually help the performance of merging market firms while governmental interference (e.g., protectionism) might
hinder, rather than help, their performance.
More importantly, our results suggest that the optimal response of emerging market firms to greater globalization of their
industry may be contingent. Firms that have the benefit of large domestic markets (allowing them to gain the benefit of
economies of scale without exports, Stoian, Rialp, & Rialp, 2010) and lack sophisticated capabilities may find it fruitful to
focus on domestic markets and forego exports (Aggarwal, Jenny, Hutson, & Kearney, 2010; Lavie & Fiegenbaum, 2000; Wu &
Pangarkar, 2006). In fact, these firms may be better off responding directly to the threat posed by import competition within
the confines of domestic market by improving their efficiency, for instance (Dawar & Frost, 1999). Also, in such a situation,
these firms might find it useful to refrain from lobbying for government protection since the competition from imports might
boost their efficiency and performance. Our analysis also suggests that firms with some slack resources benefit even more
from industry globalization and hence should have even lower incentives for lobbying or seeking protection. If firms in
emerging economies are able to anticipate the opening up of their market to competition, they might proactively try to build
slack resources which will enhance their performance when the market eventually opens up. On the other hand, even if
exporting might appear to be an attractive strategy, the emerging market firms must pay careful attention to the
implications for their performance, especially if they are exporting low value added or low end products. Since the reduced
volume resulting from high import intensity may be a significant concern in markets with limited demand, exporting
strategies may be more fruitful in these markets, however! In this paper, we did not explicitly account for firm capabilities,
but we might surmise that the range of options available to more capable firms may be broad and might include exporting—
as exemplified by the success of Chinese telecom equipment firms such as Huawei and ZTE in international markets.
Our analysis does not account for creativity in strategies, either. Gabrielsson, Kirpalani, Dimitratos, Solberg, and Zucchella
(2004), for instance, argue that ‘born global’ firms must increase their cash flows rapidly by leveraging on the channels provided
by MNCs, networks and/or the Internet. In other words, they must find creative ways for overcoming the constraints posed by
their resources to achieve rapid growth. Given China’s short history as a market economy, many of the Chinese firms in our
analysis may be classified as born globals (or at least share many characteristics with born globals) and creative strategies may
be important for them. There might, however, be a ‘country effect’ with regard to the feasibility of these strategies. If firms in
other parts of the world consider Chinese firms to be bigger future threats than other firms such as the Finnish or Israeli firms in
Gabrielsson et al.’s (2004) sample, the feasibility of leveraging networks may be negatively affected.
The results of our study should be replicable as well as generalizable because of two key reasons. First, we used objective
measures to assess the degree of globalization. As Birkinshaw et al. (1995) point out, many prior studies (Cvar, 1984; Doz,
1987; Flaherty, 1986; Hout, Porter, & Rudden, 1982; Yoshino, 1986) have extrapolated the conclusions based on a small
number of cases (firms) in particular industries to the whole industry. The objective measures used in the present study
would enable its replication in other (geographic or industry) contexts. We also believe that the multi-industry sample
deployed in the study would further enhance the generalizability of our findings.
7. Limitations
We acknowledge three limitations of our analysis, which may be addressed in future research. First, we did not account
for other types of resource flows besides tangible products—such as people, technology and ideas/knowledge (Bartlett &
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Ghoshal, 1989), which might have a separate and additional impact than the industry-level trade flows we examined in this
paper. Secondly, our conclusion about the impact of industry globalization on performance may be less applicable to some
firms (e.g., smaller, unlisted firms or even listed firms that lack competitiveness) who may not have the ability to respond to
globalization of their industry in general, and import competition in particular. Thirdly, our conclusion about the impact of
exports on firm performance must be viewed with some caution in other emerging markets. Since the Chinese market is
large in size, firms may be able to achieve efficient cost structures without exporting. However, this may not be true of firms
in other emerging economies. Our analysis also focuses on specific outcomes such as ROA but does not account for several
benefits of the exporting strategy including improved product quality or greater innovation which might have an indirect
and long-term impact on profitability.
8. Future research
Our study suggests three key avenues for further research on this topic. First, future research may want to include
additional variables proxying firm capabilities—such as technological or marketing capabilities that help firms defend their
positions or expand internationally. In an emerging market context, links to the government in the form of government
shareholding and/or relationships may also be valuable. Since we lacked data about this specific aspect, we could not include
it in our empirical analysis. We might speculate, however, that business group membership, which is included in our models,
may be significantly correlated with government linkages and hence accounted for, at least partially, in our analysis.
Nevertheless, future research might find it useful to include more firm-specific variables in the analysis. Secondly, our result
for the export intensity variable also needs further validation within the Chinese as well as other emerging market contexts.
If the variable has a significant positive influence in other contexts, it would suggest a country to be an important contingent
variable for the relationship between industry globalization and performance since a large and growing domestic market
might enable Chinese firms to put off exports without adversely impacting their cost structure. Finally, future research might
also examine whether our conclusion about the positive impact of import intensity is valid for smaller and unlisted firms
which might lack the management and other skills to compete with global rivals.
In conclusion, our study addressed the important issue of how industry globalization impacts the performance of
emerging market firms, and how organizational slack moderates the relationship between industry globalization and firm
performance of emerging market firms. We found empirical support for the argument that higher industry globalization
leads to better performance. While extensive prior literature in the economics discipline has shown that international
trade is beneficial for countries (e.g., Baldwin, 1995; Freeman, 2004), our research goes a step further and argues that
industry globalization enhances the performance of emerging market firms. We also find that firms having slack resources
are in an even better position to benefit from industry globalization. Although our empirical analysis focused on 166
Chinese firms from six different industries, we believe that there are many commonalties between China and other
emerging markets. These commonalties would imply that that our results are broadly generalizable to other emerging
market contexts.
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