Internationalization and Sustainable Operations: A Broad Investigation of Chi...
MT_S2946408_Ercole
1. The effect of innovation on export performance and
the role of home-country business environment in
transition economies
Master Thesis
By
Alessio Ercole
S2946408
a.ercole@student.rug.nl
Rijksuniversiteit Groningen - Faculty of Economics and Business
MSc. International Business and Management
January 23th
, 2017
Supervisor: Dr. O. Lindahl
Co-assessor: Dr. R. de Vries
2. 2
ABSTRACT
Innovation has been extensively demonstrated to be a determinant of export performance in
open market contexts. The purpose of this research is to test the persistence of this relationship
in transition economies, as the radical institutional changes particularly challenge firms’
activities and strategies. Moreover, we make use of the idiosyncratic context to investigate the
potential moderating influence of the business environment on the relationship. Three aspects
are considered: corruption, access to finance and intellectual property right protection. The
analysis is conducted using a Tobit estimation model on data retrieved from the BEEPS
database, which provide information on more than 15,000 firms from 30 former Communist
countries. The findings confirm the positive effect of innovation on export performance within
this context, and the positive moderating role of access to finance. While no support is found
for corruption, intellectual property right protection, in contrast with our expectations,
negatively moderate the relationship.
Keywords: Innovation; Export performance; Transition economies; Business Environment;
Corruption; Access to finance; Intellectual property rights protection
3. 3
ACKNOWLEDGEMENTS
This thesis marks the end of my Master at the University of Groningen. Firstly, I would like to
express my sincere gratitude to my supervisor dr. Olof Lindahl from the Uppsala University,
for his precious guidance and feedbacks during the entire research project. Then, I would like
to thank my parents and my sister for their daily support, motivation and encouragement to
strive to achieve my goals. Finally, I am grateful to all my fellow students and friends, who
have contributed to make my experience in Groningen unforgettable.
5. 5
LIST OF TABLES
LIST OF FIGURES
Table 1 Sample description 26
Table 2 Descriptive statistics 32
Table 3 Results of tobit estimation model 34
Table A1 LR test for heteroscedasticity 57
Table A2 VIF test for multicollinearity 57
Table A3 Correlation matrix 58
Table A4 Firm size robustness test 59
Table A5 EU membership robustness test 60
Table A6 Non-EU membership robustness test 61
Table A7
Robustness test with alternative measures of moderating
variables 62
Table A8 BEEPS 2012-2014 relevant questions 63
Figure 1 Conceptual model 24
6. 6
1. INTRODUCTION
Innovation has been regarded as “the life blood of corporate survival and growth” (Zahra &
Covin, 1994, p.183). Due to constantly evolving technology and international competition, the
value of existing products and services is continuously at risk. Therefore, enterprises have
increased their innovative efforts as a corporate strategy to survive and have success in the
domestic and global market. In addition, innovativeness represents a strategic orientation that
helps firms to gain a competitive advantage over competitors, in terms of both price and quality
(Gunday, Ulusoy, Kilic, & Alpkan, 2011). Moreover, because customer needs are continuously
changing, it is generally accepted that all firms should innovate regardless of their size or sector
in order to compete and survive in the market (Atalay, Anafarta, & Sarvan, 2013).
In business studies, not many issues have had as much agreement as the innovativeness
being a determinant of firm performance (Rubera & Kirca, 2012). Similarly, the positive effect
of innovation on export performance, conceptualized as the “success of a firm’s international
transactions in terms of its overall operations” (White, Griffith, & Ryans, 1998, p.193), has
been thoroughly confirmed. This is grounded on two main rationales. Firstly, export markets
involve higher costs (i.e. entry or transportation costs) than domestic ones. Based on the
resource-based view and the heterogeneity of firms, only the more productive firms self-select
themselves into exporting. In particular, innovativeness is regarded as one of the main sources
of higher productivity (Bernard & Jensen, 1999; Cassiman & Golovko, 2011). The second
explanation is drawn from the “product life cycle” theory. In the early stage of new product,
firms aim to maximize their revenues. However, since in the early innovation stage the domestic
market is restricted, firms expand abroad in order to exploit their market power (Cassiman &
Martinez-Ros, 2007; Hirsch & Bijaoui, 1985).
Thus far, however, the research on the relationship between innovation and export
performance has mainly been tested in developed countries and in high-institutional
development settings. Also, most of the empirical evidence has been drawn in free-market
contexts. However, as Yi, Wang, and Kafouros (2013) contend, the innovation–exports
relationship is not universal but context-specific, due to critical role played by institutions in
influencing firms’ activities. The institution-based view has indeed emphasised the role of home
country characteristics in shaping firms’ decisions to innovate or internationalize. For example,
Murtha & Lenway (1994) have found home country political features to significantly affect
export behaviour of enterprises. Similarly, Teece (2006) has put much emphasis on how
7. 7
institutions affect the degree to which firms can take advantage of their innovative activity. For
instance, the effectiveness of the regulatory system, and especially the enforcement of property
rights, are likely to moderate the returns that firms can capture from innovation (Teece, 1986).
Nevertheless, little attention has been given to whether the “rules of the game” might increase
or decrease the effect on innovation on exporting.
This research would aim to fill several gaps in the literature. Firstly, we want to add
value to the existing theory about the innovation-exports causality by investigating whether this
relationship persists in the context of Central and Eastern European transition economies. These
countries provide an interesting setting where to test established theories, since the transition
process confers them a series of unique characteristics. The radical change from central
planning to market competition has left a profound mark on the behaviour of firms, which are
deeply conditioned by the ongoing and rapid changes of institutions (Meyer & Peng, 2005).
However, effects of this dynamic environment have heterogeneously affected firms. While
some companies have successfully adapted to the new market structure, others have failed to
benefit from the transition to a market-oriented economy. This might be due to the planned
economy heritage that still influences corporate-level activities and strategies (Boermans &
Roelfsema, 2015). According to Meyer and Peng (2005), little light has been shed on which
resources can contribute to establish a competitive advantage in a transition environment. The
necessity to investigate is further highlighted by the fact that context-specific resources, such
as business networks (Peng & Heath, 1996) and strategic flexibility (Uhlenbruck, Meyer, &
Hitt, 2003), have been demonstrated to help prevail over competitors in these countries. Thus,
it would be interesting to investigate whether, within this area, innovation represents a
determinant of export performance, or whether the unstable institutional environment
compromises the appropriability of returns to innovation.
Additionally, innovative strategies that are successful in certain context might turn out
to be less fruitful in other environments (Prajogo, 2016). Thus, our purpose is to integrate the
resource-based view with the institution-based view, analysing whether certain home country
characteristics influence the effect that innovation has on export performance. To analyse the
business environment of a certain country, previous studies have considered a various set of
indicators. Previous researches have mainly used the World Governance Indicators (voice &
accountability, political stability and lack of violence, government effectiveness, regulatory
quality, rule of law, and control of corruption). Drawing on previous studies and considering
the aim of our study, we will focus on three specific characteristics of the institutional
8. 8
environment: corruption, access to finance and protection of intellectual property rights. In fact,
as Batra, Kaufmann, and Stone (2003) and Ayyagari, Demirgüç-Kunt, and Maksimovic (2008)
have verified through firm-level data, these aspects represent the main obstacles to firms’
growth. We argue that these variables play a critical role in the innovation – exports
relationship. Additionally, they adequately reflect the constraints that the idiosyncratic context
of transition economies provides. For example, Teece (1986) shows that property rights
enforcement hinders the possibility for enterprises to take advantage of their innovative
activities. Moreover, Li and Ferreira (2011), examining the institutional quality of transition
economies, take into examination the regulatory, political (corruption) and financial system,
given the underdevelopment of these institutions in these countries. Therefore, our research
question is: “Does innovation increase export performance in transition economies? Is this
relationship moderated by the local business environment?”
Our dataset is based on "EBRD-World Bank Business Environment and Enterprise
Performance Survey (BEEPS), 2012". Although institutions have mostly been examined at the
country-level due to lack of reliable data, this database allows to examine voids actually
perceived by enterprises, increasing the relevancy of our study. In fact, some of previous studies
have suffered from one particular drawback. Cross-country data is based on de jure regulations,
therefore giving insight only into costs that firms would have to deal with if the situation was
homogeneous among all enterprises. However, different firms face different constraints,
making the use of subjective data fundamental (Aterido, Hallward-Driemeier, & Pagés, 2011).
Data on intellectual property protection are retrieved from the Intellectual Property Right Index,
which effectively combines both de facto and de jure measures. The heterogeneity in terms of
institutional development at the country-level, registered within the sample, adds to the
generalizability of our results to other contexts. In fact, our sample includes low-income
economies of Central Asia, characterised by significant institutional voids, as well as rich
Central European countries that, as members of the EU, have a fully developed market system
(De Rosa, Gooroochurn, & Görg, 2010). Since a large portion of firms in our sample shows no
exporting, Tobit estimation is utilised to test the hypotheses. This model has the main advantage
of incorporating zero values in the estimation as the result of the decision about whether or not
to export. Therefore, it is suitable for dual decision making process, that is the choice to whether
to sell abroad and, if so, how much (Gashi, Iraj, & Geoff, 2014).
Theoretical, managerial and policy-maker implications of the paper can be identified.
Firstly, we extend the existing literature by examining whether benefits of innovating on export
9. 9
performance are present in transition economies. Secondly, we integrate the resource-based
view with the institution based-view, examining whether institutional voids can affect the
influence of innovativeness on export performance. Thirdly, while the literature has focused on
how business environments influences innovation, we examine whether home country
environment reduces the appropriability of returns from innovation. From a managerial point
of view, this research helps executives on their decisions about deployment of internal
resources. May, Stewart and Sweo (2000) have shown how practices that are successful in
Western countries, once transferred to transition countries, have not achieved the expected
results, due to environmental turbulence and deep uncertainty. Providing empirical support to
the benefits of innovativeness on exports might encourage local managers increase their R&D
efforts. Also, our research is relevant for policy-makers. Firms’ export performance is indeed
considered as a determinant of economic growth in developing countries. While most policies
aim to expand research and development activities as a mean to stimulate growth, less attention
has been given to how the business environment further helps capture the positive effects of
innovation. Therefore, our research aims to highlight that, in order for innovative firms to
benefit from better export performance, not only they have to be encouraged to invest in
research and development. Also, decision makers’ have to make the effort to create a favourable
business environment, which would allow enterprises to have higher returns on innovation in
terms of exporting.
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2. THEORETICAL BACKGROUND
In this section, the relevant literature for this study is presented. First, the concepts of innovation
and export performance are defined, followed by an overview of the main features of transition
economies. Next, the innovation-export performance relationship is discussed, both in terms of
the main theories underlying it and the potential issues concerning the existence of this
relationship in a transition economy context. Then, the potential influence of the business
environment on the relationship is introduced. The aspects of the environment that are
considered in this study, namely corruption, access to finance and intellectual property rights
protection are hence explained and singularly combined with the main relationship in order to
develop the hypotheses.
2.1 Innovation
Since innovation has been examined in several fields, from technology to business or
economics, being therefore described from different standpoints, several definitions are
provided (Baregheh, Rowley, & Sambrook, 2009). From a general perspective, innovation
concerns the implementation of an idea that is new to the adopting organisation (Damanpour,
1996). Most of existing literature has mainly adopted the technological view on innovation,
thus applying this concept only to the introduction of new products or processes. However, we
argue that it is important to extend innovation even to non-technological modernisations
(Schmidt & Rammer, 2007). These include both organisational, which regards the
implementation of a new managerial technique, process or structure to purse organisational
goals (Azar & Ciabuschi, in press), and marketing innovation, which involves “new product
design or packaging, product placement, product promotion or pricing” (OECD / Eurostat,
2005, p.49). First, the technological perspective is suitable to capture innovativeness only in a
manufacture context, thus being obsolescent in service industries where new processes and
products tend to be an insignificant part of the total innovations. Also, in order for an innovation
to be successful, the marketisation of new products requires the re-organisation of new business
routines or marketing relationships. Our view is in line with Gunday et al. (2011), who stress
the multi-dimensionality of innovation as comprehension of new products, new productive
processes, expansion to new markets or new corporate strategies. Following these
considerations, we will make use of the definition given by the OSLO manual (OECD /
Eurostat, 2005), which labels innovation as “implementation of a new or significantly improved
11. 11
product (good or service), or process, a new marketing method, or a new organisational method
in business practices, workplace organisation or external relations” (p.46).
Several studies have regarded internal research and development (R&D) activities as a
reliable indicator of firm- or industry-level innovation (Raymond & St-Pierre, 2010). However,
we argue that R&D expenditures capture only one dimension of the inputs required by
innovation, but does not necessarily lead to the introduction of the new innovation. For instance,
Parisi, Schiantarelli, and Sembenelli (2006) do not find any significant association between
R&D spending and the introduction of new processes, as this might mainly be correlated with
expenditures on fixed capital. Additionally, firms can choose market mechanisms as a mean to
generate innovations. This is made possible by R&D outsourcing, technological consultancy or
technological collaboration with other companies or public institutions (i.e. universities)
(Santamaría, Nieto, & Barge-Gil, 2009). Finally, investments in innovation are not limited to
R&D spending, but also involve expenditures for introducing a new technology into the market,
new capital equipment or employee coaching (Hall, 2010).
Firm-level innovation is not an objective by itself, but is developed to increase firms’
value and maintain or enhance the competitive position in the market (Cohn, 2013). New
technologies can contribute to the enhancement of market shares and profitability, by replacing
obsolete products or reducing production time. According to the resource-based view of the
firm, innovation is likely to lead to advantage over competitors. This theory makes two main
assumptions. First, due to the different endowments of resources, firms within an industry are
heterogeneous. Secondly, resources are not perfectly mobile across firms, so this divergence
can endure for a long time. Following these considerations, enterprises have a sustained
competitive advantage when they implement a value-creating strategy, such as the introduction
of new products or processes that are not replicable by competitors (Barney, 1991; Barney,
2001). However, as stated by Lengnick-Hall (1992), in order for innovation to lead to a
competitive advantage, four conditions should be satisfied. First, competitors should not be able
to imitate it (Porter, 1985). This might involve both a particular configuration of the innovation
itself, as well as an effective system of property rights. Second, the innovation should be shaped
according to customers and their demands, as opportunities mainly stem from the customer
value chain (Porter, 1985). Third, timing is critical: introducing the new creation at the right
moment and with the right industry conditions, provide the innovator with a first-mover
advantage. Finally, the effective commercialisation of the new technology requires the
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complementary use of other assets (Teece, 1986) . For instance, without a high-quality
manufacturing or marketing department, profiting from R&D would be significantly harder.
2.2 Export performance
An important decision related to the internationalization strategy of a firm is which entry mode
to select for a foreign market (Agarwal & Ramaswami, 1992). The main modes of entry
available to enterprises are exporting, contractual agreements, joint ventures, acquisitions, and
greenfield investments. The choice between these five options has mostly been grounded on
the transaction cost theory. Depending on the costs for finding, negotiating and monitoring a
potential partner, firms tend to rely or on the market or on more hierarchical modes to deliver
their products (Brouthers, 2002). Additionally, when evaluating each entry mode, managers
appear to consider three main variables: risk, return and degree of control (Kumar &
Subramanian, 1997). Exporting comprises the “physical transfer of goods from the firm to the
foreign market with or without an agent in exchange for the value of the goods in monetary
terms” (Kumar & Subramanian, 1997, p.54). It is a low resource commitment and a low risk
entry mode. On the other hand, it is also associated with a low profit return and provides little
control to the firm, which might hinder the possibility to improve its competitive power and to
maximize the returns (Agarwal and Ramaswami, 1992). However, low control can also be
beneficial for firms. These can take advantage of scale economies, while not having to deal
with bureaucratic hinders associated with other modes of entry. Moreover, the enforcement of
contracts can be problematic in the presence of a high external uncertainty or underdeveloped
institutional environment. Finally, when expanding to low potential markets, exporting is found
to reduce the risk of failure (Agarwal & Ramaswami, 1992; Anderson & Weitz, 1986) .
Katsikeas, Leonidou, and Morgan (2000), in a review of the existing literature, find
three different groups of variables that directly influence export performance. Managerial
aspects embody all the characteristics of decision makers involved in the export process.
Organisational characteristics include human and other critical resources, operating elements,
and strategy and objectives of the exporting firm (Leonidou, Katsikeas, & Piercy, 1998).
Finally, environmental factors can be described as those forces that affect either the domestic
and international environment where firms operate. These are beyond the control of the
organisation (Aaby & Slater, 1989). In addition, a study of He, Brouthers, and Filatotchev
(2013) uncovers how both resource- and institutional-based view have to be taken into account
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when analysing determinants of export performance. They demonstrate that export performance
is strongly influenced by market-oriented capabilities of the firms, which consist on learning
from customers, competitors and external environments and using this information to have
success. However, foreign markets entail several obstacles, such as the institutional
environment of the host country, which affects how the exporting firm will do business. Thus,
the institutional distance between home and host county is found to moderate the effect that
internal capabilities has on export performance. Additionally, the local business environment
of the home country can be thought to moderate the relationship analysed, which is something
we will discuss after offering an overview of transition economies.
2.3 Transition economies
The fall of Communism in Central and Eastern European Economies has been the starting point
of a radical change, in terms of social, political and economic perspectives. This event has
influenced 29 countries in Eastern Europe and the former Soviet Union. However, although
showing similar features, the process of evolving from a centrally-planned to a market economy
in Central and Eastern European economies begun under different conditions. While Eastern
Europe countries were struck by waves of mostly peaceful revolutions in 1989, the collapse of
Soviet Union in 1991 was the event that led the countries within the Soviet bloc to gain their
independence (De Melo, Denizer, Gelb, & Tenev, 2001).
Since then, this area, namely the former Communist bloc, has undergone a period of
structural reforms in terms of economic, regulatory, social and institutional changes. Many
countries have opened up their economies to international trade, while most of state-owned
enterprises have been privatised. Despite all restructurings, these countries suffer from
consistent institutional voids. The use of barter, the reduced business to business relationships,
as well as the weak institutional, political, legal and bureaucratic system are significant
obstacles for firms’ activities (Bevan, Estrin, & Meyer, 2004). However, after a dramatic initial
economic slowdown (Svejnar, 2002), former Communist countries have had different trends of
growth. Most countries from Central and Eastern Europe have recovered from the downturn,
while the economies of Russia and some of the former Soviet Union countries are still in
decline. Reasons of this divergence are various. For instance, within the former Soviet Union,
two forms of illegal interactions between state and firms are still common. These are state
capture, whereby firms affect the formation of rules and laws through private payments, and
14. 14
corruption, which instead aims to shape the implementation of these rules (Hellman, Jones, &
Kaufmann, 2000). These two factors are likely to have hampered both firms’ and aggregate
performance. Additionally, the EU membership has led certain countries to implement and
enforce laws that have stimulated the local economy (Roland, 2002).
This weak institutional environment has affected both firms’ innovation activities and
export performance. Although some transition countries have made important progresses in
terms of economic development, innovation capabilities have not been successfully developed.
This results in a notable gap between R&D expenditure of Central and Eastern European
countries that have joined the EU and the rest of EU countries (Leskovar-Spacapan & Bastic,
2007). This distance can be explained by political reforms that have not successfully changed
the managers’ attitude towards innovation. Therefore, the low motivation to enhance quality,
the lack of competences, education or training and the responsibility avoidances are negatively
hampering R&D expenditures in former centrally-planned economies (Leskovar-Spacapan &
Bastic, 2007). The correlation between regulatory environment and under development of
innovative activities is confirmed by Krammer (2009). According to his study, in transition
economies, a more efficient bureaucratic system and a stronger intellectual property rights
would be likely to lead to a substantial growth in R&D activities of firms.
Increasing exports has been a necessity for firms in transition economies (Shinkle &
Kriauciunas, 2010). Firstly, after the collapse of the Communist system, enterprises could start
selling their products abroad directly, as state-owned export agencies ceased to exist. In
addition, the dramatic fall in domestic demand made the expansion to a foreign market a priority
for firms in these countries. However, we should take into consideration the strong variability
among countries. Kaminski, Wang and Winters (1996) claim that different conditions at the
beginning of the reform period, geographical location and diverse market access to OECD
countries have not allowed each country to equally benefit from the switch from a centrally
planned to a market economy, especially in terms of exporting.
Transition economies of Central and Eastern Europe provide a highly idiosyncratic
context. Thus, the discontinuous change from a planned to a market economy, as well as a rapid
industrialisation and market development, permit to test theories that have been established in
mature market economies (Meyer & Peng, 2005). Particular characteristics permit to
differentiate transition economies also from developing countries. In fact, firms in emerging
countries have to deal only with issues associated with economic development from agricultural
to an industrialised economy. In contrast, enterprises in former centrally-planned have also to
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adapt to structural institutional changes (Meyer & Peng, 2005). Consequently, theories that are
established in developed countries have demonstrated that are not fully applicable to this area.
For instance, although privatization has often been linked to better performances, Aussenegg
and Jelic (2007) find that privatised firms in transition economies did not achieve greater
efficiency, profitability, capital investments or output. The reason for this is that an institutional
void is more likely to lead to stagnation and decapitalisation rather than improvements in
performance (Nellis, 1999).
2.4 Innovation and export performance
The critical role of innovation as determinant of export performance has received much
attention in the literature. A significant amount of research has confirmed the validity of this
causality at the firm-, industry- and country-level in both developed (Lages, Silva, & Styles,
2009; Rodríguez & Rodríguez, 2005; Roper & Love, 2002; Wakelin, 1998) and developing
countries (Guan & Ma, 2003; Montobbio & Rampa, 2005). Most of these studies have drawn
their hypotheses from the resource-based view of the firm, which gives emphasis to the
heterogeneousness of enterprises. Due to their different endowments of resources, firms are
able to generate a competitive advantage in the long term (Barney, 2001). Innovation is one of
the resources that more contribute to a competitive advantage. In fact, it is characterised by a
high degree of specificity, which limits its transferability to other firms, and complexity, as it
is difficult to identify the factors associated with its generation (Rodríguez & Rodríguez, 2005).
Grounding on this theory, innovative firms can have higher export performance for two
reasons. Firstly, they can develop more efficient productive processes. Melitz (2003) builds a
model of industry dynamics of firms with diverse endowment of resources, and so different
productivity levels. In this model, only the most productive firms can overcome sunk costs of
entry to export markets. Similarly, Bernard and Jensen (1999) claim that ‘‘good firms become
exporters’’ (p.2). Since operating in foreign markets increases firms’ costs, in terms of
transportation, production or distribution channel establishment, potential exporters would have
to deal with entry barriers that only successful firms can overcome. Bustos (2011) also argues
that the lower costs of production give firms the possibility to provide products at a lower price,
thus being more appealing to foreign customers. Secondly, product and marketing innovations
can confer competitive advantages based on differentiation, allowing the firm to manufacture
higher quality products better tailored to customer requirements (Rodríguez & Rodríguez,
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2005). Cavusgil and Zou (1994), for example, find that the ability of enterprises to introduce
new products increases its relevance when operating in foreign markets, since product
management has to take the variety of demands in international markets into account. To
examine which factor has a more significant influence on export behaviour for Spanish
manufacturing firms, Caldera (2010) discovers that product upgrading has a greater impact than
cost reduction. However, the product life-cycle approach to trade also underpins the causality.
This theory maintains that, since the domestic market is limited in the early stage of the product
cycle, innovative firms have incentives to expand into export markets to exploit their market
power derived from innovation (Hirsch & Bijaoui, 1985). Consequently, their export
performance is higher due to the exploitation of the market power achieved through the new
technology.
Azar and Ciabuschi (In press) also prove the positive effect of organisational innovation
on export performance. They contend that technological innovation does not improve export
performance by itself. In contrast, it necessitates the complementary adaptation of managerial
system to fully benefit from the new product or process. Introducing an organisational
innovation would also enhance the organisational climate, teamwork or information sharing.
Thus, by enhancing organisational climate, which is associated with labour productivity, or
reducing costs of supplies, firms can take advantage of better export performance (Gunday et
al., 2011).
All these explanations have been mainly retrieved from market-based economies and
from relatively stable environments. Therefore, it appears to be necessary to test whether
advantages of engagement in innovative activities exist in transition countries. In fact, these are
struggling to build market-supporting institutions despite the presence of consistent legacies of
a centrally-planned economy. As Yi et al. (2013) argue, the innovation-export causality is
context-dependent. Therefore, it might be that, in this idiosyncratic context, enterprises cannot
make a successful use of their new technologies through a foreign expansion. Teece (1986)
shows that firms not always can take advantage of their innovativeness. For instance, when
property rights are not well-enforced, innovators can lose out their profits to imitators,
especially if the imitators have lower manufacturing costs. This can be applied to transition
economies, where institutional voids cause property rights not to be efficiently protected.
Additionally, the effective exploitation of an innovation often necessitates it to be used in
conjunction with a complementary asset (Teece, 1986). Uhlenbruck et al. (2003) contend that,
in the former Communist bloc, the central government used to provide firms with procurements,
17. 17
distribution contracts and product line. However, this support vanished after the privatisation.
Firms have so been left dealing with strategic decisions, institutional voids and external
competitors on their own, despite the lack of technical and managerial capabilities. In particular,
former state-owned firms found themselves in a context of market-based economy, yet with a
set of resources suitable for satisfying the needs of a socialist economy. For example, the
innovation effectiveness is supported and stimulated by flexible work arrangements. Therefore,
the implementation of a new technology, in transition countries, might be hindered by the
traditional organisational system grounded on the Fordist mass production. This might prevent
firms to fully benefit from their innovative activities (Uhlenbruck et al., 2003).
In addition, firms that were used to operate in a central-planned environment did not
lack technological capabilities but, on the other hand, might have had troubles with adapting to
a market-based economy. Since state-owned enterprises were not allowed to experiment on
their own, as they had to obey to the orders from central plan, they could not gain any experience
with dealing with customer demands (Kogut & Zander, 2000). However, once the Soviet Union
collapsed, enterprises had to start taking responsibility on their own innovative activities. It can
be argued that, since they might have a deficiency in the ability to identify market needs, their
innovations have not been as effective as those implemented by firms in capitalist countries.
Consequently, privatised firms might not have been able to effectively benefit from their
innovative activity. This view is congruent with that of Uhlenbruck et al. (2003), who state that
the separation from the market during the Communist stage, has made former centralised firms
less responsive to market needs. In fact, former-socialist enterprises found themselves to
operate in a completely different context, having to adapt their set of capabilities and resources
to the new institutional and competitive conditions. Although policies have provided the
opportunity to gradually acclimatise with open markets, initial institutions have persisting
effects (Kogut & Zander, 2000). Thus, discontinuous and radical change processes, which entail
the combination of current and new resources, might lead to an unexpected outcome (Meyer &
Peng, 2005). Testing the innovation-export relationship in transition countries can also give
insight into the applicability of this theory in a high-growth context. A study of Masso and
Vahter (2008), in a late-transition country such as Estonia, reveals no significant differences in
productivity between innovative and non-innovative firms. The reason has been associated with
the macroeconomic growth that some countries have undergone, as the increasing market
demand allows to exploit economies of scale regardless of their R&D operations. Therefore,
we consider important to test the following hypothesis:
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Hyp1: In transition economies, innovative firms have better export performance
2.5 Business environment
Although the relation between innovation and export performance has received much attention
in the literature, previous studies have not exhaustively examined the potential moderating
effect of home country characteristics. An exception to this is the research of Yi et al. (2013),
who discover that foreign ownership, government relationship, affiliation to a business group
and regional marketisation shape the effect of innovativeness on export intensity. Additionally,
López-Bazo and Motellón Corral (2013) demonstrate that the increase in the propensity of
exporting due to innovation is larger in regions where the extensive margin of exports is high.
Moreover, Prajogo (2016) find the environmental dynamism and competitiveness to increase
the relationship between product and process innovation and firm performance. Consequently,
there is a significant gap in the literature in relation to whether the business environment
influence the effects of innovation on export performance. However, Meyer and Peng (2005)
explain that, especially within the idiosyncratic context of transition economies, it is necessary
to integrate the institution-based with the resource-based view. In fact, particular conditions
influence which resources sustain a competitive advantage. Analysing the moderating effect of
institutions in transition economies adds value to our research. In fact, this context has been
characterised by an ‘institutional divergence’, or ‘great divide’ (Berglof & Bolton, 2002). While
some countries have adopted modern standards and regulations, others are stuck in the
‘development trap’, where inefficient political institutions, such as high levels of corruption or
bureaucracy inefficiencies, hurdle economic development (Sonin, 2013).
The business environment is made of “the myriad forces which are beyond the control
of management in the short run”. In particular, a critical role in shaping this environment is
played by all those stakeholders that affect the firm activities, such as customers, competitors
or regulatory institutions (Ward, Duray, Leong, & Sum, 1995, p.99). Various aspects of the
business environment have been analysed in the literature, therefore providing a notably broad
range of quality indicators and measurements. Most studies have drawn from Kaufmann, Kraay,
and Zoido (1999), who group all the available indexes into six main dimensions of governance:
voice & accountability, political stability and lack of violence, government effectiveness,
regulatory quality, rule of law, and control of corruption. On the other hand, in the idiosyncratic
context of transition economies, different aspects have been considered. For instance, Grigorian
19. 19
and Martinez (2000) focus on government repudiation of contracts, risk of expropriation,
corruption, rule of law, and bureaucratic quality. Also, Khanna and Palepu (1997) study
product, capital, and labour markets, legal and regulatory system.
Following a literature review based on the nature of this study, we will rely on the
research of Ayyagari et al. (2008). This study finds three particular aspects of the business
environment to principally constrain firms’ growth: corruption, access to finance and property
rights protection. Due to our focus on innovation, we concentrate on intellectual property rights.
This choice is also motivated by our focus on transition economies: corruption, during the
planned regime, used to be contemplated as an acceptable mean when dealing with rigid
bureaucratic system (Iwasaki & Suzuki, 2012). Access to finance was also critical, due to the
absence of any financial market in the former Communist bloc (Coricelli & Masten, 2004).
Finally, the transition stage has led to one of the biggest privatisation of property rights in the
history. Although previous studies have found few examples of countries with poor institutions
but positive business environments (Gillanders & Whelan, 2014), we maintain that our chosen
variables are good proxies of the institutional quality of legal (intellectual property rights),
political (corruption) and financial (access to credit) system (Li & Ferreira, 2011).
2.5.1 Corruption
Corruption can be defined as “an act in which the power of public office is used for
personal gain in a manner that contravenes the rules of the game” (Jain, 2001, p.73). The most
common form of corruption, and the form we focus on in this study, is bribery. This is
represented by payments made by companies to government officials in order to receive a
favour, such as the granting of a licence (Cleveland, Favo, Frecka, & Owens, 2009). We argue
that corruption has a primary role in the effect that innovation has on exports, as innovative
firms are found to be more subject to rent-seeking behaviours. The need for having access to
business permits, tax documents or other government-supplied resources increases the number
of their contacts with officials. Thus, their perceived corruption is expected to be significantly
higher than non-innovative firms (Murphy, Shleifer, & Vishny, 1993).
On one hand, some researches have argued the “efficient grease” function of briberies,
since they can help circumvent one of the major impediment to economic activity: inefficient
bureaucracy (Leys, 1965). However, as Aidt (2009) maintains, corruption can enhance
efficiency as a second-best possibility since, given a set of already existing institutional voids,
20. 20
bribery helps agents circumvent these distortions. In contrast, the first-best option would be to
remove the distortions themselves. On the other hand, a high number of studies have pointed
out that corruption sands the wheels of growth, by significantly obstructing firms’ activities.
The main argument is that the occurrence of bribery may alter resource allocation by increasing
the returns to rent seeking compared to those of productive activities (Baumol, 1996). Dal Bó
and Rossi (2007) discover a strong relationship between bribes and inefficiency at the firm
level, since in more corrupt countries more labour is needed in order to produce a given level
of output.
Given the damaging effect of corruption on firms’ operations, we claim that corruption
might negatively affect the positive influence of innovation on export performance for two
reasons. Firstly, the increase in productivity allowed by process innovations might be absorbed
by the payment of bribes. Innovative firms would lose their competitive advantage in respect
to their competitors. Thus, the level of productivity after the payment of bribe might not be high
enough to overcome sunk costs and entry barriers imposed by foreign markets. Ayyagari,
Demirgüç-Kunt, and Maksimovic (2010) prove that innovative firms, despite paying higher
amount of bribes than non-innovative firms, do not receive better services from officials. As a
result, in a corrupted environment, innovative firms might see their position with respect to
non-innovative ones compromised, so that they do not have enough abilities and productivity
to manage exports. Secondly, an extremely corrupted environment may persuade enterprises to
reduce interactions with government, which is necessary in order to obtain licenses for
operating abroad. Rather, they would prefer to expand more slowly or operate in the informal
sector (De Rosa et al., 2010). Hence, we can expect that innovative firms in high-corrupted
contexts may prefer to exploit their competitive advantage in the domestic market, rather than
being more exposed to bribes by exporting. Following these considerations, we formulate the
following hypothesis:
Hyp2: In transition economies, higher corruption decreases the positive effect of innovation on
export performance
2.5.2 Access to finance
Access to finance “generally refers to the availability of quality financial services at reasonable
costs” (Barr, Kumar, & Litan, 2007, p.11) The dependence of the level of access to finance of
firms on the condition of the financial system of a certain country has been established in the
21. 21
literature (Berman & Héricourt, 2010). Financial institutions are responsible for transferring
funds from savers to investors. In particular, they have to overcome the obstacles of agency
costs, adverse selection and asymmetric information associated with financing contracts and
supervising the pooling of resources from savers to borrowers. However, dimensions of access
to finance comprise both supply and demand of credit. While financial institutes only have a
direct effect on the supply, the request of credit by firms might be affected by absence of
financial knowledge and social trust or a burdensome paperwork requested (Aggarwal &
Goodell, 2014).
Access to credit has a strong effect on economic growth. In fact, it influences the birth
of new enterprises and therefore the competition that, in turn, increases the quality of products,
the employment rate and the standard of living in general (Aggarwal & Goodell, 2014).
Additionally, Ayyagari et al. (2008) reveal that financial constraint is the biggest obstacle to
firm growth, regardless of the countries and firms considered. Previous literature has deeply
shown that access to external finance influence the innovative activity of firms (Ayyagari,
Demirgüç-Kunt, & Maksimovic, 2012; Kortum & Lerner, 2000). However, not much attention
has been paid to whether external financing constraints affect the possibility to take advantage
of innovative activity. It is important to state that innovative firms are subject to financial
constraints to a much larger extent. In fact, financial institutions are less able to evaluate their
activities, because either these are based on intangible assets or firms keep them secret to
prevent other firms to copy ideas. Moreover, returns to innovation might be uncertain, as new
products not always achieve the expected success. Finally, new technologies are mainly
context-specific, therefore cannot be used outside the firm itself (Lee, Sameen, & Cowling,
2015; Magri, 2009).
Analysing the role of access to credit in transition economies increases the relevancy of
our study. Before the fall of Communism, financial institutions did not play any critical role,
since they only had to apply decisions stated by the central plan. For instance, banks did not
have to assess any credit-worthiness, as firms could not go bankrupt. Therefore, transition
countries had to build their financial institutions from scratch (Coricelli & Masten, 2004).
Similarly, privatised firms, which were used to be provided with passive finance regardless of
their conditions, had to start raising external capital on their own. Hence, investments dropped
dramatically, even though most successful firms were able to reorient their sales or use their
retained earnings (Pistor, Raiser, & Gelfer, 2000). After two decades of transition process,
formerly-planned countries show significant variability in their financial development. While
22. 22
some are still suffering from institutional voids, others have been able to develop significantly
their credit market (Coricelli & Masten, 2004). Similarly, Konings, Rizov, and Vandenbussche
(2003) find that there is a significant variance in access to credit in this area, as some firms can
benefit from softer budget constraints, due to tax allowances or “preferential” bank credits.
We argue that good access to finance increases the effect that innovation has on export
performance. In fact, innovators have better opportunities of exporting into foreign markets,
due to their higher productivity and quality products. However, they might have to deal with
the finance gap, that is defined as the lack of capitals to fund a profitable investment chance
(Mina, Lahr, & Hughes, 2013). Therefore, a good access to finance can help innovative firms
to exploit their advantages in a foreign market. Financial loans are indeed necessary for
overcoming costs associated with starting operating abroad, such as international shipping, that
have to be faced before making revenues (Contessi & De Nicola, 2012). Moreover, Melitz
(2003) provides a model where firms with higher productivity self-select into exporting.
However, Manova (2013) integrates this model with the access to finance variable. He
demonstrates that in a context of low access to finance, despite every firm above a certain
productivity level can start selling abroad, only most successful firms can export at their best
without being affected by credit constraints. In contrast, firms with productivity below a certain
level will decide to limit their exports, in order to reduce their need of external capital.
Following these considerations, we can hypothesise:
Hyp3: In transition economies, higher access to finance increases the positive effect of
innovation on export performance
2.5.3. Intellectual property rights
Intellectual property rights can be defined as “government-protected rights granted to
an inventor or creator to exclude others from using the technology or product in question”
(Maskus, 2004, p.22). These can be defended through a set of several different tools: patents,
copyrights, trademarks, industrial designs, geographical indications and trade secrets
(Candelin-Palmqvist, Sandberg, & Mylly, 2012). As Maskus (2004) state, three main reasons
are behind the guarantee of intellectual property rights. Firstly, these promote technology
development by guaranteeing innovators to obtain returns to their investment expenditures.
Firms have been found to reduce their R&D expenditure when they cannot appropriate their
innovative output (Lunn, 1985). Secondly, since some forms of property rights necessitate the
23. 23
public revelation of what is protected, they increase the amount of openly available knowledge.
Finally, they incentivise the development of technology markets, as patents or trade secrets give
the possibility to trade protected knowledge through formal contracts. Some studies argue that
a strong protection hinders growth, due to the restricted diffusion of knowledge, along with
permitting innovators to obtain a monopoly power, thus deterring potential entry into a certain
industry. However, Gould and Gruben (1996), in a cross-country study, demonstrate that
stronger intellectual property protection promotes the economic growth and does not hamper
the entrance in a market. Additionally, although new technology results to be cheaper, a weak
enforcement of property rights makes the acquisition of innovation much more difficult.
Finally, more innovative firms from developed countries limit their investments in countries
with a weak property rights protection, so that these can less benefits from the advantages of
globalisation.
According to the resource-based view, certain resources allow firms to gain a
competitive advantage over the competitors, due to their value, rareness, non-substitutability
and non-imitability (Barney, 1991). Consequently, the subsistence of a market power depends
also on the degree to which a firm can protect its innovations from imitation (González-Álvarez
& Nieto-Antolín, 2007). In order for innovative firms to make profits from their innovative
activity, patents are fundamental. Innovators can keep the control over the new technology, as
well as decide to transfer the control to others, either by selling or leasing it (Lunn, 1985).
Previous studies have found that patents and other types of property rights allow innovators to
appropriate the biggest portion of the technology value, while a weak enforcement limit the
possibility to capture rents (Anton & Yao, 1994).
Within the former Communist regimes, despite some countries still suffering from
consistent institutional weaknesses, several transition countries have toughened the protection
of intellectual property rights after the ratification of the TRIPs Agreement (Della Malva &
Santarelli, 2016). In addition, the implementation of property rights reforms has been
complementary to open market policies. Opening up the economy to FDI aims to increase the
flow of international technology available to domestic firms. Within a context of strong
protection of property rights, multinationals from developed countries are more prone to diffuse
their technology. Thus, we might consider market liberalisation and tighter regime of
intellectual property rights as two complementary reforms (Maskus, 2000).
We propose that a strong protection of intellectual property rights increases the effect
that innovation has on export performance. In fact, weak property rights allow competitors to
24. 24
imitate technology implemented by a certain firm. The competitive advantage that innovators
can take advantage of might therefore be lost, since imitators can still achieve the same levels
of productivity or quality. As Teece (2006) theorised, the limited intellectual property
protection prevents pioneers from obtaining the returns of their technologies, since the first
mover advantage is likely to be lost.
Therefore, innovative firms will benefit more from better export performance with a strict
regime of appropriability. Thus, we can theorise:
Hyp4: In transition economies, higher intellectual property right protection increases the
positive effect of innovation on export performance
2.6 Conceptual model
FIGURE 1 CONCEPTUAL MODEL
25. 25
3. METHODOLOGY
This section offers an insight into the method used to test the hypotheses presented in the
theoretical chapter. A description of data source and the final sample is given. This is followed
by an explanation of how the variables of this research are measured. Finally, the estimation
model used in this research, namely the Tobit model, is illustrated.
3.1 Data source
Our data source is mainly based on the 2012-2014 EBRD-World Bank Business Environment
and Enterprise Performance Survey (BEEPS)”, which has featured several relevant studies in
the literature (S. Lee & Weng, 2013; McCann & Bahl, 2016). Since the aim of this survey was
to analyse the idiosyncratic business environment in transition economies, its usage is
appropriate for answering our research question.
The fifth wave of BEEPS survey is chosen because this is the first one to utilise the
definition of innovation suggested by the Oslo Manual, thus comprising product, process,
marketing and organisational innovation. Moreover, as direct information about innovation are
included, there is no need to rely on indirect proxies (i.e. R&D intensity) for our independent
variable. The usage of subjective data also adds value to our research. In fact, these become
particularly effective when evaluating the influence of the business environment on firms’
processes and performance, as economic agents ground actions and decisions on their
perceptions of external constraints (Kaufmann, Kraay, & Mastruzzi, 2011). In particular,
objective data tend to significantly vary from the de facto situation, especially when related to
external condition. For instance, some aspects of governance, such as corruption or financial
constraints, often do not leave any trail on paper, thus being difficult to be objectively measured.
On the other hand, information collected through questionnaires might be subjected to
perception bias. At the country level, this might originate from different cultural norms and
diverse degrees of political freedom, which influence the choice of specific ratings. However,
Fries, Lysenko, and Polanec (2003) have checked for potential perception bias in the BEEPS
2002, but have not found any impartiality. Since the BEEPS 2009 follows a similar approach,
we expect that the results of our analysis will not be compromised.
The 2012-2014 BEEPS survey contains questions regarding whether firms have applied
for any patents or trademark. However, no information about whether these tools have turned
out to be a successful way of preventing competitors from imitating are provided. Thus, we
integrate our data source with the 2012 International Property Rights Index (IPRI), provided by
26. 26
the Property Rights Alliance, and in particular with the Intellectual Property Rights (IPR)
section, as previous studies have already done (Balsmeier & Delanote, 2015; Della Malva &
Santarelli, 2016). This index draws on several different sources. These are opinions of experts
on actual enforcement on these rights, objective data regarding participation in international
treaties, restriction or length of the protection and the Office of the US Trade Representative
“Special 301” list, which analyses to what extent piracy rates are present in business software.
Therefore, consistent with BEEPS structure, de facto measures are taken into account
(Aggarwal & Goodell, 2014).
3.2 Sample
Country Freq. Percent Cum.
Albania 360 2.58 2.58
Armenia 360 2.58 5.16
Azerbaijan 390 2.8 7.96
Bosnia Herzegovina 360 2.58 10.54
Bulgaria 293 2.1 12.65
Croatia 360 2.58 15.23
Czech Republic 254 1.82 17.05
Estonia 273 1.96 19.01
FYR Macedonia 360 2.58 21.59
Georgia 360 2.58 24.17
Hungary 310 2.22 26.4
Kazakhstan 600 4.3 30.7
Latvia 336 2.41 33.11
Lithuania 270 1.94 35.05
Moldova 360 2.58 37.63
Montenegro 150 1.08 38.7
Poland 542 3.89 42.59
Romania 540 3.87 46.46
Russia 4,220 30.27 76.73
Serbia 360 2.58 79.31
Slovak Republic 268 1.92 81.24
Slovenia 270 1.94 83.17
Turkey 1,344 9.64 92.81
Ukraine 1,002 7.19 100
Total 13,942 100
TABLE 1 COMPOSITION OF OUR SAMPLE
27. 27
BEEPS data has been gathered through surveys conducted by the World Bank and the European
Bank for Reconstruction and Development in 15,883 firms of 30 European and Central Asian
transition countries between 2012 and 2013. The subset of enterprises was selected through a
stratified random sampling, in order to provide a representative sample of the firms in the
region, in terms of age, size or location. Moreover, in each country, the industry composition
of the sample was based on its comparative contribution to GDP. In the BEEPS survey,
interviewers evaluated to what degree respondents were providing trustworthy information:
inferring from McCann and Bahl (2016), we will exclude observations if interviewees were
considered as not truthful (n=107). However, since the IPR index does not cover Belarus,
Georgia, Kirgiz Republic, Mongolia, Tajikistan and Uzbekistan, these countries will therefore
be excluded from our analysis, reducing the final dataset to 13,942 observations. Table A1
illustrates the composition of our sample.
3.3 Measures and variables
3.3.1 Independent variable
Innovation. To measure innovation, we refer to Gorodnichenko and Schnitzer (2013) and
Alsharkas (2014), by using a dummy variable set equal to 1 if the firms have introduced at least
one product, process, organisational or marketing innovation in the last three years. The dummy
takes the value 0 if none of these have occurred. This measure better represents innovation than
two traditional measures: number of patents, which quantify inventions and not innovation, and
R&D expenditures, which capture the innovative process but not its outcome. In addition, the
context in which our hypotheses will be tested has a strong role in addressing our decision. In
fact, patenting and formal R&D might not be observed in the context of a transition economy
due to the institutional underdevelopment. This hampers the trust of firms in mechanisms of
intellectual property right protection, and limited resource endowments of new or newly
privatised firms, thus reducing legal protection of innovation and R&D investments.
Furthermore, the use of a dummy variable consents to circumvent the problems that would be
associated with comparing the number of innovations in intensive and non-intensive technology
sectors. In this case, it would be necessary to consider the degree of newness and innovativeness
of each innovation. In contrast, a dichotomous variable, despite being less precise, overcome
this issue. Additionally, by requiring only binary answers (“yes”/ “no”), the risk of translation
mistakes and cultural biases is significantly reduced. Thus, the use of a binary item increases
28. 28
the reliability of data when gathering information in a large set of countries (Bergmann, Müller,
& Schrettle, 2014).
3.3.2 Dependent variable
Export performance: We will measure this variable by quantifying the percentage of the total
sales that is exported directly. As Katsikeas et al. (2000) argue, this is the most widely
recognised measure of export performance in the literature. In fact, beside ruling out the size
effect, it mirrors the success of the international transactions of the firm in respect of its overall
domestic sales (White et al., 1998). Since we are interested in investigating whether innovation
helps to overcome entry and operating costs of foreign markets, we have decided not to include
indirect exporting. In fact, indirect intermediaries allow firms to reduce costs of
internationalising, such as those correlated with negotiation in distant markets (Hessels &
Terjesen, 2010). Hence, due to the nature of our study, we will quantify export performance on
the basis of the firms’ answer to the question “In fiscal year [insert last complete fiscal year],
what percentage of this establishment’s sales were direct exports?”.
3.3.3 Moderating variables
Corruption is constructed on the basis of the answer to the question about the frequency of
informal payments/gifts to get things done: never (=0), seldom (=1), sometimes (=2), frequently
(=3), very frequently (=4) and always (=5). The reliability of self-reported measures of bribes
might be questionable, as corruption relates to illicit activities. However, as Ayyagari et al.
(2010) maintain, the data collection of the BEEPS aimed to obtain as reliable answers as
possible. For instance, government officials did not participate to the data gathering. Also, since
identities of firms and managers were confidential information, interviewees did not run any
risk of being legally prosecuted. Finally, several papers, such as the one of Hallward-Driemeier
and Aterido (2009), have found a strong correlation between firms’ answers about obstacles in
the business environment in BEEPS survey and objective data from other sources.
Access to finance. This variable is captured by the question: “To what degree is Access
to Finance an obstacle to the current operations of this establishment?”. Higher values
indicated a situation of limited access to finance. In order to match this quantification with our
hypothesis, we rescale the answers by assigning higher values to full access to finance. Hence,
we code answers on a scale from 0 to 4 (0= very severe obstacle, 1=major obstacle, 2=moderate
obstacle, 3=minor obstacles, 4=no obstacles).
29. 29
Intellectual property rights protection is quantified by the Intellectual Property Rights
Index, which ranges from 0, associated with a weak IPR regime, to 10, that represents the
ideally strongest protection context. The final ratio is determined by the average of three sub-
measures, namely (1) an evaluation of the IPR regime made by experts, (2) a measure of patent
protection associated with the Ginarte-Park Index of Patent Rights and (3) a quantification of
the strength of the IPR enforcement on the basis of the volume of copyright piracy.
3.3.4 Control variables
In this study, we control for firm-, industry- and country-level variables. First, we control for
firm size. Larger firms tend to have more resources that can be invested in certain activities,
such as expansion to international markets. Thus, due to the fixed costs associated with
exporting, such as dealing with additional uncertainty or gathering information, large
enterprises might take advantage of economies of production and marketing (Rodríguez &
Rodríguez, 2005; Wakelin, 1998). The lack of related data prevents us from using continuous
variable. Thus, following the approach of Beck, Demirguc-Kunt, & Maksimovic (2005), we
generate a discontinuous variable equal to 1 for small (less than 20 employees), 2 for medium
(between 20 and 100 employees) and 3 for large firms (more than 100 employees). Also, we
include the firm age, since older firms have accumulated experience and knowledge that are
found to allow for higher export performance (Yi et al., 2013). This is quantified by the
difference between the beginning of firms’ operations and the year of each interview. Moreover,
we build a dichotomous indicator for foreign ownership. In fact, the higher experience in
operating in foreign markets is found to stimulate indeed the exporting (Rodríguez &
Rodríguez, 2005). An enterprise is considered as foreign if more than 10% of it is owned by a
private foreign individual, company or organisation.
We also control for the potential industry variability by creating a sector dummy.
Regarding the country-level, we do not use of country dummies as these would also capture the
variability in the country-level intellectual property protection regime. Thus, four country-level
dummies are included. Market size is captured by the natural log of GDP: by operating in a
bigger market, firms develop certain capabilities that can be exploited by internationalizing
(Deng, 2004). Additionally, the degree to which a market is open to export, measured by the
total exports as a percentage of GDP, is expected to have an influence on our dependent
variable. We also generate a dummy variable for EU membership: as a first step for EU
accession, some countries had to sign the Europe Association Agreement, that forced them to
30. 30
implement market liberalisation policies. Hence, firms located in EU countries might be
favoured in terms of less barriers to exports (Awokuse, 2007). Furthermore, Lall (1980) has
demonstrated the level of human competence to be correlated with either internationalisation
propensity and intensity of American firms. Thus, we also control for the percentage of labour
force with tertiary education.
3.4 Empirical approach
3.4.1 Model description
In a review of the previous studies concerning the determinants of export performance,
Sterlacchini (1999) argues that the shortcoming of several researches lies in having used OLS
estimates. In fact, when the export share variable has most of observations in its lower limit,
then OLS regression is biased, since it might predict values of export performance outside its
actual range. Moreover, this distribution compromises the assumption of linearity (Amemiya,
1984). Thus, as the same author suggests, a censored Tobit estimate has to be utilised.
Our data is subject to the same distribution issue, as only 17% of the firms in our sample
are exporters, so that our dependent variable is equal to 0 for most of the observations. Inferring
from this, a tobit model left-censored with zero is used. The main advantage of this model is
that it incorporates zero values into the estimation as the result of the decision to whether or not
to export. This is particularly relevant in our case, because zero values should not be regarded
as only the minimum values that the dependent variable can have but, instead, the choice of the
firm not to export its product or its services. In fact, Tobit can be seen as a single mechanism
that “determines the choice between y=0 versus y > 0 and the amount of y given y > 0”
(Wooldridge, 2002, p.536). This way, Tobit estimate includes both propensity and intensity of
exporting, by applying the same coefficients on explanatory factors for the two decisions
(Bleaney & Wakelin,1999). Therefore, for this model to be applied, it is necessary that the
decision to whether to export and, if so, how much to export have the same determinants.
However, as Gashi et al. (2014) argue, previous studies lead us to assume that there are no
differences in the two factors. Finally, another advantage of the use of Tobit model is that it
allows us to control for the potential endogeneity of the innovation that might be an issue if the
export propensity of firms was ignored in the estimation (Gashi et al., 2014).
31. 31
3.4.2 Preliminary analysis
As Wooldridge (2002) contends, in order for Tobit model to provide consistent results, the
assumptions of normality and homoscedasticity have to be met. First, we maintain that,
according to the central limit theorem, if the sample consists of a significantly high number of
observations, no attention has to be paid to distribution of data (Ghasemi & Zahediasl, 2012).
Considering that our sample consists of more than 13,000 observations, the central limit
theorem is found to apply and issues of normality can therefore be disregarded.
Heteroscedasticity is found when the values that a dependant variable take are inhomogeneous
across the range of values of its predictors. Inferring from Engle (1984), a Likelihood Ratio
(LR) test is performed. Table A1 in the Appendix displays the results. Since Prob>chi2 is
significant, the null hypothesis of homoscedasticity is rejected. Therefore, robust standard
errors will be used.
In addition, multicollinearity involves the dependence of explanatory variables from
one another. This would compromise both the specification and the estimation of the
relationship analysed through the regression (Farrar & Glauber, 1967). Therefore, to check that
multicollinearity does not reduce the consistency of our results, we examine the correlations
among our variables by inspecting the Variance Inflation Factor. According to Graham, 2003,
multicollinearity is detected when VIFs > 10. Thus, we can conclude that our explanatory
variables do not suffer from this issue (see Table A2 in the Appendix).
32. 32
4. RESULTS
The next section presents the empirical results of our analysis. The chapter starts with the
descriptive statistics. After that, the results of our estimation model are provided. Finally,
robustness checks are performed in order to test the consistency of our findings.
4.1 Descriptive statistics
In the table below, main statistics of our variables are presented.
The data suggests that a significant number of total firms have introduced at least one
between product, process, organisational or marketing innovation (5,557). Moreover, a
relatively low average percentage of direct export over total sales is registered (6.53), thus
showing that local markets seem to be the main area of operation for most firms in transition
economies. With regards to moderating variables, corruption seems not to strongly hit firms, as
roughly half of total interviewees have answered that is never common to have to pay some
Variable Obs Frequency Mean Std. Dev. Min Max
Innovation 13,942 0=8,387 1=5,557 0.3985798 .4896235 0 1
Export 13,782 6.530982 19.96037 0 100
Accessfin 13,655 0=817 1=1,660
2=2,443 3=2,338
4=6,347
2.863274 1.284484 0 4
Corruption 12,730 0=6,590 1=2,394
2=2,336 3=955
4=244 5=211
0.93967 1.198097 0 5
IPRindex 13,942 4.651198 1.119898 2.3 6.9
firm_age 13,788 14.46729 11.68866 0 174
firm_size 13,942 1=7,190 2=5,128
3=1,624
1.600775 0.6876362 1 3
foreign_own 13,942 0=13,071 1=871 0.062473 0.2420215 0 1
logGDP 13,942 26.11401 1.953919 22.13125 28.40582
logExpo 13,942 24.19504 5.051317 3.64154 27.11047
TertEdu 13,944 35.00854 15.61164 13.3 55.5
EUmember 13,942 0=10,226 1=3,716 0.266533 0.4421618 0 1
TABLE 2 DESCRIPTIVE STATISTICS
33. 33
“additional gifts” to get things done. Similarly, very few managers consider access to finance
as a major (817) or very severe (1,660) hurdle to their firms’ growth. The statistics of
intellectual property right index illustrate how institutional development vary across single
countries, since the minimum value is significantly lower than highest one (2.3 in comparison
to 6.9, on a scale from 1 to 10). In relation to control variables, firms have an average age of 14
years. Furthermore, most of the dataset regards small and medium enterprises, since only 1,624
of the respondents are managers of large firms, and domestically-owned firms, with only one-
quarter of the total being foreign-owned. Additionally, three-quarter of enterprises are settled
in countries not members of EU. In addition, the table A3 in the Appendix displays the
correlation between our main variables.
4.2 Baseline results
Table 3 shows the results of the Tobit estimation. Since only pseudo-R2
is given, we cannot
evaluate the extent to which the model predicts the variability. AsVeall & Zimmermann (1996)
contend, while pseudo R2
can be used to make comparisons across different estimation models,
no conclusions can be drawn when a singular type of estimation is utilised. Therefore, pseudo-
R2
is not included in the findings.
Model 1 examines the direct effect of innovation on exporting. The most critical result
regards the statistically significant effect (p<0.01) of innovation on export performance, thus
confirming the validity of an established relationship even in a particular context as transition
economies. As expected, firm size (firm_size), firm age (firm_age) and foreign-ownership
(foreign_own) are strong predictors (p<0.01) of export performance, due to their assets or
higher experience with internationalising; A similar significance is registered, at the country-
level, by membership to European Union (EUmember). In contrast, GDP (logGDP) is negative
strongly significantly correlated with export performance. A significant result, but also with a
sign different from our expectations, is registered for the level of human skills in the country
(TertEdu). Given these results, we find support for hypothesis 1.
In model 2, corruption is added as a moderating variable. Innovation and control
variables that were previously significant remain strong predictors. In contrast with previous
studies that have shown how bribes directly hinder exports (Olney, 2016), corruption has not
significant, although negative, direct relationship with export performance (p<0.05). Hence,
bribes seem to reduce the opportunity for enterprises to expand to foreign markets. Once
34. 34
interacted with innovation, corruption has a negative relationship with exporting. However,
since the coefficient is not statistically significant, we have to reject hypothesis 2.
In model 3, the results of the moderating effect of access to finance (accessfin) on
innovation-export performance are displayed. Access to finance is not a direct significant
predictor variable of export performance: this diverges from previous studies that demonstrated
(1) (2) (3) (4)
VARIABLES Export Export Export Export
Innovation 14.34*** 12.61*** 8.380** 27.86***
(1.593) (2.046) (3.832) (6.656)
foreign_own 36.34*** 35.70*** 36.59*** 35.58***
(2.482) (2.582) (2.494) (2.478)
firm_size 18.48*** 17.73*** 18.22*** 19.33***
(1.121) (1.160) (1.124) (1.119)
firm_age 0.212*** 0.225*** 0.218*** 0.156***
(0.0550) (0.0569) (0.0554) (0.0554)
logGDP -1.914*** -1.664** -1.960*** -9.311***
(0.684) (0.704) (0.685) (0.899)
EUmember 22.57*** 22.81*** 22.37*** -12.07***
(1.867) (1.937) (1.871) (3.651)
logExpo 0.144 0.114 0.141 0.380*
(0.217) (0.219) (0.217) (0.227)
TertEdu -1.174*** -1.177*** -1.169*** -0.985***
(0.0739) (0.0759) (0.0741) (0.0722)
Corruption -1.834
(1.153)
Innovation*corruption 1.480
(1.483)
Accessfinance -0.902
(0.916)
Innovation*accessfinance 2.145*
(1.219)
IPRindex 18.65***
(1.594)
Innovation*IPRindex -2.602**
(1.324)
Constant -20.40 -22.51 -15.98 81.43***
(14.40) (14.96) (14.63) (16.52)
Sigma 57.69*** 56.89*** 57.31*** 57.18***
(0.969) (0.997) (0.966) (0.965)
Industry dummies YES YES YES YES
Observations 13,638 12,470 13,367 13,638
Robust standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
TABLE 3 RESULTS OF TOBIT ESTIMATION MODEL
35. 35
how firms without financial constraints can benefit from higher export performance. In
addition, the coefficient of the interacting effect of innovation with access to finance is
marginally significant (p<0.1). Hence, we find support for hypothesis 3.
In model 4, we have considered the moderating effect of intellectual property right
protection (IPRindex). In this case, the moderator is found to be a strong significant predictor
(p<0.01) of export performance. Thus, a strong protection local regime is found to promote the
international expansion of firms. Furthermore, the interaction between the IPR index and
innovation is negative significant at the 90% level. This entails that an interaction of innovation
and consistent protection of property rights hinders exports rather than favouring them.
Consequently, hypothesis 4 has to be rejected.
4.3 Robustness checks
Robustness checks are executed in order to test how regression coefficient behaves when the
original model undergoes some modifications, especially in terms of removal or addition of
regressors or investigation of sub-samples. These sensitivity analyses help detect
misspecification in the original estimation model (Lu & White, 2014).
Firstly, firm size can be argued to have an influence on both internationalisation and
ability to cope with constraining business environment. In fact, firms with limited assets, might
face more obstacles when it comes to expanding abroad or can find institutional constraints as
more binding in comparison to big enterprises (Audretsch & Elston, 2002). Therefore, we
decide to test our regressions only on small and medium businesses, namely those with less
than 100 employees, removing firm size as a control variable. Results are shown in table A4 in
the Appendix. As before, the effect of innovation on exporting is strongly significant (p<0.01).
In model 2, corruption significantly hinders exports (p<0.1), while its interaction with
innovation is insignificant. Moreover, while the interacting effect of access to finance is
statistically significant (p<0.05), the one of intellectual property right protection is strongly
significant (p<0.05), but with a negative coefficient, thus contradicting our original hypothesis.
Since this further test reflects the findings of the original sample, we can contend that our results
are robust to firm size.
Yi et al. (2013) have shown that the moderating effect of certain institutional
characteristics varies across areas with different levels of marketisation, since functioning of
markets stimulate the improvement in institutions. Therefore, applied to our research, it might
be the case that the EU membership, which guarantees the access to the European Single
36. 36
Market, strengthen or weaken the sensibility of the innovation-exports relationship to the
influence of aspects of business environment. The affiliation to the EU has also allowed some
firms to conform their regulatory system with that already established in European developed
market economies. Consequently, institutional constraints might be less binding in European
countries (Manolova, Eunni, & Gyoshev, 2008). Table A5 in the Appending displays the results
of the estimation model with the European countries subsample, while table A6 of the one of
countries outside the EU. While our results for the non-EU members are equal to those
previously originated, within EU countries none of the three interactions between innovation
and the three moderators is significant. Therefore, we might presume that our results are
sensitive to the EU membership.
In addition, to check the robustness of the interacting effects, we replace our measures
with those provided, at the country-level, by the “Control of Corruption Perception Index (CPI)
2012” for corruption and by the “Domestic credit to private sector as a percentage of GDP
2012”, a common measure of financial institutions development (Beck & Demirguc-Kunt,
2006), for access to finance. Since the Control of Corruption Perception Index rank countries
based on their level of the transparency of the public sector, less corrupted countries have higher
scores than more corrupted. Hence, according to our formulation of H2, we expect a positive
interacting effect between this index and innovation. About intellectual property right
protection, we rely on Oxley (1999), who contend that enforcement of property rights depends
on the ability of the court to enforce its decisions. Thus, we generate a variable on the basis of
the question of the BEEPS survey about to what extent court system is able to enforce its
decisions. Table A7 in the Appendix illustrates the results, with model 1 showing the interacting
effect of control of corruption, model 2 the one of credit to private sector (%GDP) and model
3 the subjective measure of court system ability to enforce its decisions. The results show that,
at the country-level, the interaction between control of corruption and export performance is
positive and insignificant. Hence, results related to H2 are robust to country-level measures.
Nevertheless, the moderating effect of the domestic credit to private sector with exports is
negative but insignificant: we can claim that the findings on H3 are non-robust to country-level
measures. Finally, Model 3 show that the ability of court system to enforce its decisions does
not moderate the innovation-exporting relationship. Thus, even in this case, results do not
support H4, proving the robustness of our results to firm-level proxy of intellectual property
rights protection.
37. 37
5. DISCUSSION
The aim of this research is to investigate whether the positive relationship between innovation
and export performance, persists even in an idiosyncratic context such as the one of transition
economies. Moreover, the specificity of this environment has provided the opportunity to
investigate whether this relationship is moderated by three aspects of the business environment,
namely corruption, access to finance and intellectual property rights protection. In the
remainder part of this chapter, we analyse more in depth the results of our analysis.
Hypothesis 1 is confirmed, thus supporting the assumption that, in transition economies,
innovative firms can benefit from better export performance. This result extends the already
consistent literature about the significance of the relationship (Rodríguez & Rodríguez, 2005;
Wakelin, 1998; Yi et al., 2013). Uhlenbruck et al. (2003) argued that the collapse of the Soviet
Union, and the following privatisation of most of the firms, left local managers dealing with
strategic decisions, despite lacking abilities critical to operate in an open market. In the light of
what has been found, we can argue that local firms seem to have managed to overcome the
obstacles that the transition stage involves, at least those hampering the development of a
competitive advantage exploitable in international markets. As expected, we have found foreign
ownership, firm size and firm age to be positively associated with firms’ export performance.
In contrast, two peculiar results need further attention. Both level of human skills, measured by
the percentage of employees with tertiary education, and market size are found negatively
correlated with firms’ export performance. We maintain that the nature of exports plays a
critical role in the first case. In fact, firms in this context, when exporting, are likely to compete
on price rather than quality. Thus, since employees with tertiary education require higher
salaries, and therefore increasing costs, firm in countries with a lower educational level tend to
export more. Additionally, the significant negative effect of market size (logGDP) on exporting
can be explained by the fact that, larger domestic markets allow enterprises to exploit their
competitive advantage in the home country, reducing the need for internationalising.
Furthermore, the results have not supported the hypothesis 2. Consequently, our
research has given no proof to the influence of corruption on the innovation-export performance
relationship. These results appear to be similar to those of Yi et al. (2013), which find that
government relationships do not influence the effect of innovation on export. In that case,
however, government relationships were captured by the percentage of assets owned by the
government. Moreover, the findings are consistent with Everhart, Vazquez, and McNab (2009),
which have found the insignificancy of corruption on economic growth. The insignificancy of
38. 38
our hypothesis might be due to measurement bias. In fact, we have focused on a particular
aspect of corruption, namely informal payments required when dealing with officers’.
Nevertheless, corruption is a much broader concept that cannot be quantified in one single
definition. As Pellegata and Memoli (2016) explain, corruption has to be related to the overall
confidence of citizens in institutions, as only this way it would be possible to effectively
measure the extent to which the rent-seeking behaviour of politicians or officials influence the
firms’ behaviour. Additionally, subjective measures, although capturing those aspects that do
not leave trail on paper, are not exempt from flaws. Firstly, less educated people or those living
in rural parts are demonstrated to be not as sensitive to corruption as other people; secondly,
interviewees are likely to generalise or overestimate based on their own experiences (Pellegata
& Memoli, 2016). Further studies should therefore measure corruption in a broader sense, by
also considering state capture or trustworthiness of legal system, or triangulate experience-
based data with objective ones.
Our findings have also given support to the moderating role of access to finance on the
relationship between innovation and export performance. Consequently, innovative firms that
have access to various sources of finance can benefit more from their competitive advantage by
having better export performance. This result is consistent with the research of Manova (2013),
which has extended the model of self-selection of most productive firms into exporting markets
developed by Melitz (2003). Her theory has demonstrated that productivity at higher levels than
competitors, which in our case is achieved by innovating, provides firms with a wider range of
strategic opportunities, such as the possibility to enter foreign markets. However, since
operating abroad would increase the operating costs (i.e. entry costs, transportation), these firms
are more affected by financial constraints. Therefore, a weak financial system erodes the higher
export performance guaranteed by innovative activity. We contend that this is particularly
relevant in a former centrally-planned context, where firms are more dependent on financial
institutions. In fact, within the Communist regimes, banks tended not to test any credit
trustworthiness of those in needed of external finance (Pistor et al., 2000). Hence, local
businesses had to start facing liquidity constraint only after the collapse of the central
government, with the limited experience in dealing with this problem that might be an
additional explanation of the negative moderating effect on our main relationship. The fact that
this result is not robust to the country-level measure should not undermine our findings. In fact,
the extreme heterogeneousness of firms (in terms of age, size, location) in this context reduces
the reliability of group-level measures.
39. 39
Finally, the results of our last hypothesis have turned out to be unanticipated. A stronger
intellectual property right protection regime seems to negatively affect the innovation-exporting
relationship, which is the outcome opposite to that expected. In other words, the more
intellectual rights are protected, the less innovative firms can take advantage of better export
performance. Though, intellectual property rights should provide firms with the certainty that
they can appropriate their innovative efforts. However, as Meyer and Peng (2005) maintain,
transition economies provide an idiosyncratic context where the ongoing institutional change
affect firms in a way different from that expected in an open market context. In addition,
strengthening patent laws have already been found to have an ambiguous influence on trade
flows in a significant number of studies (Maskus & Penubarti, 1995). One potential explanation
might stem from the fact that governments in developing countries have strengthened IPR in
order to attract FDI from developed countries (Tanaka & Iwaisako, 2014). Since only the most
productive firms self-select themselves into foreign markets, in countries with a tight protection
regime, the larger presence of MNEs might have eroded the competitive position of local firms
that, despite their innovative efforts, still lag behind multinationals in terms of productivity.
Another reason could be associated with the determinants of exporting in countries affected by
significant institutional voids. Witt and Lewin (2007) demonstrate that, the misalignment
between firms’ needs and home country institutional development, increases the likelihood that
firms internationalise, thus considering FDI as an escape response. Therefore, in our case, once
IPRs have been tightened, innovative firms might not have felt the need to escape from a
negative environment, but rather they have preferred to exploit their competitive advantage in
the home-country. However, further research should shed more light on this finding. Our
estimation model showed also the positive significant effect of intellectual property rights on
export performance. This finding adds empirical support to the theoretical model developed by
Yang and Maskus (2009), that contend that stronger IPR protection regime in developing
countries spurs know-how transfer from developed countries. The minor marginal cost raises
the amount transferred, thus making firms from emerging countries more competitive when
operating abroad.
An important point of discussion is set by the insignificance of all the interactions within
the European Union members. Two rationales may underpin this finding. Firstly, this might
stem from a more favourable business environment that, along with promoting exports, allow
firms to capture a higher amount of the returns generated by innovation in terms of export
performance, with respect to non-EU counterparts. Secondly, we have already argued how
managers lack experience in operating in market-based economies. This might result in
40. 40
introducing innovation that are not as effective as those created in Western countries: since they
do not effectively match the institutional conditions, their value is likely to be eroded by a
negative external environment.
41. 41
6. CONCLUSIONS
The environmental uncertainty and the radical institutional changes, which have been affecting
transition economies during the last 20 years, have already challenged and rejected several
theories that were taken for granted in market economies (Meyer & Peng, 2005). Nevertheless,
in this study, we have demonstrated the significance of the innovation-export performance
relationship even in such a particular context. Thus, we can conclude that innovation represents
a critical factor of firms’ survival and success regardless of the type of economy in which a firm
operates. Moreover, we have shed more light on the potential contingency of this relationship
in transition economies. In this case, however, the results have reflected the unpredictability of
behaviours of constructs in an ongoing transition process. While innovative firms with higher
access to finance are more likely to take advantage of better export performance, no support
has been found for the moderating role of corruption. Furthermore, an unanticipated finding is
related to the negative effect of interaction of strong intellectual property right protection with
innovativeness on export performance. However, all these results are found to be strongly
contingent on the level of marketization of the country. In fact, when testing our hypotheses
only on EU members, we have discovered the effect of innovation on export performance to
not be significantly moderated by the business environment. It seems clear that transition
countries that have joined the EU have had the opportunity of both opening up their economies
and promoting and internal institutional development. In the following paragraphs, drawing on
our results, we define theoretical and practical implications of our results, as well as describe
the limitations of our study and provide ideas for future research.
6.1 Theoretical implications
Our study has a number of theoretical implications. Firstly, we have provided support to the
generalisability of the innovation-export performance relationship even in former-centrally
planned context. This particular environment, which has been undergoing radical institutional
changes, represents a fruitful context where to test theories built and developed in market
economies. For instance, in transition economies, the application of resource-based view, the
one which our main relationship is mainly built upon, might have been at risk, as external
conditions affect which type of resources grants a competitive advantage (Meyer & Peng,
2005). Moreover, most previous literature has concentrated on only two forms of innovation,
namely process and product (Arrow, 1972; DiPietro & Anoruo, 2006; Rodríguez & Rodríguez,
2005; Wakelin, 1998). However, this technological perspective is found to be outdated, due to
42. 42
the rising importance of managerial and organisational innovation. Therefore, the availability
of data has allowed us to move beyond the traditional definition by incorporating managerial
and marketing innovation, as the Oslo Manual promotes. This way, we have been able to better
capture innovative behaviour also in service industries (Schmidt & Rammer, 2007).
Furthermore, our study has given insight into the contingency of the resource-based
view. While literature has deeply analysed how firm heterogeneity helps to gain a sustainable
competitive advantage, less attention has been given to how this process might be affected by
external environment. Therefore, some previous studies have raised the need for an examination
of how institutional factors interact with firms’ internal resources (Meyer & Peng, 2005). Our
research fills this the gap by showing that some aspects of a particular business environment,
namely corruption, access to finance and intellectual property rights protection, influence the
influence the effect that firms’ innovation has on their export performance. Finally, a consistent
amount of studies has demonstrated that institutional voids reduce firms’ propensity to
innovate. Our findings, however, have given empirical evidence to the work of Teece (2006),
who mentioned in his theorising the importance of financial institutions and intellectual
property rights in order for firms to fully profiting from their innovations. Despite our
hypotheses having tested in a transition-economy context, we maintain that the results can be
applied to other both developed and developing country. In fact, the number of the observations
(roughly 14,000 firms) and the variability in institutional development within the sample
considered, represent a broad dataset that demonstrate how business environment affect the
innovation-exporting relationship.
6.2 Managerial and policy-maker implications
The results of our study are also of high relevance for managers in transition economies. Within
these countries, local executives have to deal with environmental turbulence, threatening
conditions and deep uncertainty that hurdle the decision-making process. As May, Stewart,
and Sweo (2000) contend, this unstable environment generates a political and ideological
impact on business. In particular, the resulting institutional context is notably different from the
one in more developed countries, where most of existing theories have been tested. Thus,
theories of strategic behaviour cannot be extended to the former Communist bloc, leaving
executives coping with changing conditions with no theoretical guidance. In particular,
managers facing threatening conditions have been found to reduce their strategic flexibility and
solution generation (May, Stewart, & Sweo, 2000), which in turn can reduce innovative
