Disentangling the Effects of Business Groups in the Innovation-Export Relationship

Abstract

This paper examines the role of business groups (BGs) in the relationship between innovation and exports. In light of the divergent theoretical predictions on the role of BGs being paragons or parasites and the arguments that characteristics of BGs differ across countries, we develop hypotheses that are explicitly based on China’s institutional context. By analyzing the institutional pressures under which BGs shape their strategy and operations, we formulate hypotheses on the effects of business group affiliation (BGA) on firm exports. Empirical results, based on a large sample of Chinese manufacturing firms during 1998-2007, show that both innovation and BGA have positive effects on exports, but BGA impairs the positive value of innovation to exports. These findings are robust in different specifications. This paper provides support for both the positive and negative narratives surrounding the role of BGs and highlights the complex role played by BGs which needs to be understood in the context of institutions.