Institutional change and corporate R&D investments in an emerging economy: The role of financing constraints and group affiliation

Abstract

The institutional voids perspective attributes the success of business groups to the negated institutional conditions in emerging economies. In an alternative view, several recent studies hint that business groups may have a superior capacity to monitor resource allocation decisions at the affiliated firm level. We test these contrasting arguments by investigating how institutional changes aimed at securing a more market-oriented financial environment affect R&D investment decisions in group affiliates and independent firms. Using data drawn from Korean listed companies for the period 1994-2006, our longitudinal results indicate that business groups may be an efficient organizational form, in that affiliates’ R&D decisions are consistent with theoryconferred relationships, even after the Asian financial crisis. That is, business group affiliates made R&D investments consistent with growth opportunities both before and after the financial crisis. In contrast, while independent firms were able to reduce financing constraints after the institutional environment changed, the positive relationship between their R&D investments and growth opportunities vanished. These findings imply that business groups, unlike independent firms, may possess an internal monitoring capacity that restrains managerial agency problems at the affiliated firm level. This study complements the extant research that focuses on the direct performance effect of business group affiliation by examining the difference in resource allocation between these distinct organizational forms in an evolving emerging economy. Our findings inform the literature that acknowledging the inherent advantages of business groups that continue to exist in the face of institutional changes is of significance in understanding the nature of business groups and the conditions in which they are more efficient than independent firms.