Employment and Market Innovation in Chinese Business Group Affiliated Firms: The Role of Group Control Systems

Abstract

Prior research has suggested a number of potential benefits to firm membership in business groups. These benefits include availability of capital and other resources not readily accessible in an open market, the facilitation of entrepreneurship, plus information and risk sharing advantages. We suggest that another important benefit is the assistance of group control systems in helping the firm to manage conflicting pressures in the institutional environment and facilitate coevolution of these conflicting pressures. To empirically demonstrate the relevance of this viewpoint, we examine the case of China where business groups facilitate institutional transition, actively balancing market pressures to increase levels of innovativeness in firms with institutional pressures emanating from the government to maintain high employment levels. Using data from a broad sample of more than 1,000 Chinese affiliate firms in more than 200 business groups, we find that government policy, ownership and managerial mindset influence the political goal of maintaining high employment levels, while interdependence among group affiliate firms is related to lower employment levels. However, while government ownership and the government managerial mindset were negatively related to market innovation activities, group financial and cultural control systems positively affected the tendency of affiliate firms to focus on market innovation.

The impacts of external network and business group on innovation: Do the types of innovation matter?

“…Since market partners operate in the same industry, they usually possess more similar knowledge to that of a focal firm than institutional partners (Al-Laham et al, 2010). With reference to business group network, knowledge possessed by business group partners who work in the same industry has additional relatedness due to a shared culture and control system within the same group (White, Hoskisson, Yiu, & Bruton, 2008).…”

“…In sum, we expect a firm to be more open and willing to share knowledge with institutional partners than with market partners. Compared with market and institutional partners, a business group network has an overarching control system and a common culture (White et al, 2008). The appropriability of business group partners is likely to be low.…”

“…Frenz and Ietto-Gillies (2009) argue that a firm's business group provides an important channel for knowledge acquisition. Finally, the concern about expropriation of product innovation by other business group members is low as group members are under an overarching group-wide control system (White et al, 2008). Low expropriation possibilities encourage knowledge sharing among business group members.…”

Business group attributes and internationalization strategy in China

“…Parent firms have control over strategic decisions and resources within the group (Yiu et al, 2007b). The groups are also characterized by high industrial and regional (provincial) diversification, as well as by close relationship with local governments (White et al, 2008). Many business groups are state-designed, whereas others come from collectives, 1 family businesses or private owners, as well as joint-venture partners and foreign firms (Lu and Ma, 2008).…”

A tale of two levels: the diversification of business groups

“…In this chapter, interdependence captures how actively member firms of a business group transact with one another (Jones & Hill, 1988;White, Hoskisson, Yiu, & Bruton, 2008). When member firms of a business group do not transact very much with one another, they may be less dependent on the business group.…”