Abstract
This study analyses how various internationalization modes affect innovation in ten transition economies. Using propensity score matching to account for selection, we match firms on size, sector, and country. A key contribution is that firms are also matched based on the heterogeneity of institutional legacy systems at the firm level as such burden is commonly associated with firms in transition economies and affects internationalization. The empirical results show that internationalization raises a firm’s tendency to innovate. More specific, outsourcing is connected to product innovation, whereas exporting and FDI are associated with R&D spending and patenting.
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Notes
However, also using data for Slovenia, Damijan and Kostevc (2006) do not find substantial learning effects from exporting.
We also build on insights from Bloom et al. (2012) who show that there is a gap in organizational practices between firms from advanced economies is and transition economies. Firms from transition economies face relatively low levels of domestic competition and make relatively small investments in human capital. An important consequence of the legacy system influence at the firm level is that it reduces the degree of internationalization (Estrin et al. 2009; Gelbuda et al. 2008).
Although in the international business literature there are several case studies that show how internationalization drives innovation and technology adoption (Knight and Cavusgil 2004; Child and Rodrigues 2005; Mathews 2006; Bonaglia et al. 2007; Duysters et al. 2009; Contractor 2012), econometric evidence is still scant and context specific.
This means that our results are less affected by context-specific liberalization trajectories, which are uncontrolled for in individual country studies. Most empirical studies that investigate the effects of internationalization often focus on selected individual countries. The estimation of the effects of internationalization is especially challenging in transition economies. In this context, firm behavior is strongly influenced by the rapid economic and institutional transformation of society from a planned to a market economy in the late 1990s (Meyer and Peng 2005; Berglöf et al. 2010).
Firm owners that foresee international activities may engage in hiring executives with international experience. Although these managers contribute to the internationalization of the firm, when they are hired because of a previous decision to internationalize the firm, their capabilities do not cause internationalization. In a recent working paper, using Brazilian linked employer-employee mobility data, Molina and Muender (2013) show that firms that later become engaged in exporting invest in hiring internationally experienced managers.
To take selection effects into account, apart from matching techniques, another common strategy to circumvent potential selection bias is to cleverly pick trade liberalization events that first generate variance in the internationalization of firms, which in turn influences productivity and innovation over time (Lileeva and Trefler 2010; Bustos 2011). However, qualitative firm-level data collection often involves survey methods for which it is difficult to trace individual firms over time. In our case, the data from transition economies are a cross-section of firms, which means that we cannot observe the firm-level adjustments over time.
A first requirement for matching is to account for these differences in observables by controlling for a set of covariates (conditional independence). This is a set of covariates such that the potential outcomes are independent of the treatment status, which has the effect that the selection into internationalization becomes random; this is essential for the ‘construction’ of a counterfactual. A second requirement is that firms can be sufficiently matched to these counterfactuals such that there is overlapping between the observable characteristics of the treated and the untreated firms (common support). Formally, common support means that for each value (or range) of the covariates, there is a positive probability of being both treated and untreated to ensure substantial overlap in the characteristics of international and not-international firms. As a treatment is binary, to estimate the propensity score a probit or logit model can be used. The set to check conditional independence must include all relevant covariates that relate to both internationalization as well as the outcome (here: innovation), which produces the specification of the selection model. Obviously, after calculating propensity scores for each firm, there are various ways to match international firms to counterfactuals. To interpret the results of the impact, standard errors of propensity score matching estimates are obtained using bootstrapping, although this produces error estimates that are asymptotically unbiased, meaning that in small samples there is no guarantee of unbiased estimates.
Because for treated firms with relatively high propensity scores there are only few untreated firms, it is a challenge to match properly. If a ‘with replacement’ procedure is followed, we will in some cases compare several internationally active firms with the same not-internationally active firm. This could potentially lead to estimation problems, as it is possible that this selected counterfactual has unobserved characteristics that create a bias towards low levels of innovation (Dehejia and Wahba 2002). However, using the ‘without replacement’ method increases the variance and gives rise to problems of finding common support. Therefore, we choose to use the ‘with replacement’ method as default. In addition, we restrict the sample to the common support area by using a caliper of 0.10 to ensure a high quality of the match.
Balancing tests are performed to confirm that legacy system variables make a significant contribution to the matching properties so as to overcome selection on observables (see Rosenbaum and Rubin 1983, 1985). Covariate imbalance tests check if the estimated propensity scores adequately balance the observed characteristics between the treatment and the control group firms by evaluating the difference in covariate means. After matching on these characteristics, there are no differences in these variables so that there is no selection bias on observables. The standardized difference calculated - which is the size of the difference in means of the covariate between the treatment and comparison firms scaled by the square root of the average of the sample variances - is substantially below 20 after matching.
Table 4 presents three exceptions where there are observed differences across treatment and control groups, which potentially creates a selection bias. First, for international outsourcing differences in best practices persist (p < 0.10), where the other firms score higher in term of best practices than firms that outsource internationally. To our interpretation, this selection effect would in theory only create a downward bias, as better practices could translate into more subcontracting. Second, for FDI we find that firms in the treatment group score higher in terms of management practices (p < 0.10). Before matching these differences were more pronounced (p < 0.01) than after matching (p < 0.10). The robustness tests in Table 5 under specification 15 show that if we match firms on management practices, the main results are the same: firms engaged in FDI are more likely to make R&D efforts and obtain patents. Third, for FDI, compared to the control group firms in the treatment still have more organizational levels (p < 0.10) after matching, although after matching these differences again become much smaller. Given that for most variables that fall outside the matching procedure we were able to take away ex ante difference, one may suggest that due to proper matching possible bias from unobservable is also reduced.
The new product dummy (without the requirement of significant contribution to sales) is insignificant for FDI and export, but significant for international outsourcing. We do not use this dummy in the main analysis, because we only want to look at how meaningful these product and service innovations are for the firm. The fact that over two-third of the firms indicate that they launched new products and services suggests that it is difficult to use such an indicator as a measure of distinction between innovators and non-innovators.
Another potential issue is the interplay between the different internationalization forms, that is, firms that are exporting can also be involved with other internationalization forms (see weak correlations in Table 2). We have tested subsamples where we dropped firms that undertake more than one international activity and the main findings remain unchanged.
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Boermans, M.A., Roelfsema, H. The Effects of Internationalization on Innovation: Firm-Level Evidence for Transition Economies. Open Econ Rev 26, 333–350 (2015). https://doi.org/10.1007/s11079-014-9334-8
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DOI: https://doi.org/10.1007/s11079-014-9334-8