The Complementarity Between Imports and R&D for Emerging Market Firms

Abstract

Innovation is vital to firms from emerging markets to compete successfully with more technologically advanced companies from developed economies. The primary focus of recent IB research has been on the unique strategies of emerging markets MNEs used in the final stage of the internationalization process, e.g. buying technological and market capabilities abroad, to overcome the latecomer handicap. We still know little about the early-stage strategies that emerging market firms can utilize to build up initial capabilities to enable internationalization. In this study, we focus on importing as an option for firms to build and accumulate the needed technological competencies. We argue that firms’ importing and internal R&D activities are complementary for innovation performance in the emerging market context and such complementarity is contingent on external competition dynamics. We test our predictions using a large sample of Chinese firms from high-tech industries. We find that firms, which combine importing and in-house R&D efforts, achieve better innovation performance. This complementary effect is more salient for firms in industries with intense competition. The presence of inward FDI in an industry also enhances the synergistic effect of imports and R&D. Lastly, accounting for heterogeneity of local competitors along the technological dimension, we find that technology laggards are more likely to benefit from the complementary effect compared to technological leaders. Our findings highlight the importance of imports as a channel for emerging market firms to enhance innovation performance in their quest for internationalization.