Investments in Innovation in Developing Economy Firms: The Role of Internationalization

This study examines drivers of investment in innovation in developing economies in the post-liberalization era characterized by institutional changes and global competition. Drawing from economic growth theories, evolutionary economics, and the international business literature, we develop a model incorporating the role of internationally acquired knowledge and supra-firm institutional infrastructure on innovation orientation of indigenous firms and empirically test the hypothesized relationships on a panel data of firms from the Indian pharmaceutical industry. Our results show that while participation in global resource and product markets independently influence investments in innovation, product market internationalization mediates the relationship between resource accumulation and investment in innovation. In other words, firms use international resources to pursue product market internationalization, and it is a combination of technology acquisition and experiential knowledge from global markets that provides the impetus for investment in innovation. This supports recent articulations in the literature regarding the importance of both external knowledge accumulation and assimilation as drivers of innovation for developing economy firms. We further theorize and find support for the conditioning role of business group affiliation on the relationship between sources of knowledge and innovation orientation. In particular, we find that business groups provide the institutional infrastructure which substitutes for external accumulative learning in the case of affiliate firms.