Elsevier

Journal of Business Research

Volume 68, Issue 9, September 2015, Pages 1964-1973
Journal of Business Research

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

https://doi.org/10.1016/j.jbusres.2015.01.006Get rights and content

Abstract

This paper proposes a theoretical model to explain the impact of two types of external network (i.e., market network and institutional network) and business group network on product and organizational innovation based on learning theory, which suggests that the knowledge carried by partners, and the scope of appropriability of partners in different networks could be instrumental for different types of innovation. The paper tests the model with two Community Innovation Surveys of Korean manufacturing firms conducted in 2002 and 2005. Largely confirming our theoretical model, our results show that (1) institutional network is more positively related to product innovation than market network, (2) market network is positively related to organizational innovation, but its relationship is not significantly stronger than that of institutional network, and (3) business group affiliation is positively related to both product and organizational innovation after controlling for the effects of institutional and market networks.

Introduction

Since the 1940s when Schumpeter deemed creative destruction to be at the heart of economic progress, innovation has been regarded as one of the most important factors in enhancing business competitiveness (Ahuja et al., 2008, McCraw, 2007). Innovative firms generate rents by taking risks in new resources development and combination (Peteraf, 1993, Peteraf and Barney, 2003). Innovation in business includes both the introduction of new technological products and new organizational processes (Armbruster et al., 2008, Birkinshaw and Mol, 2006, Hamel, 2006).

With the shift from a closed to an open innovation model, firms nowadays increasingly rely on their external business partners for innovation: the source of new ideas often resides outside a firm and the implementation of new ideas crucially depends on coordination among business partners, customers, and suppliers (Boudreau and Lakhani, 2009, Chesbrough, 2003, Dyer and Hatch, 2004, Keil et al., 2008, Powell et al., 1996). Prior research on networks and innovation has examined the effects of both network size (Calighirou et al., 2004, Cassiman and Veugelers, 2006, Faems et al., 2005, Frenz and Ietto-Gillies, 2009, Hoang and Rothaermel, 2010, Takeishi, 2001) and network diversity (Al-Laham et al., 2010, Duysters and Lokshin, 2011, Laursen and Salter, 2006, Leiponen and Helfat, 2010, Un et al., 2010) on innovation. A larger network provides more social capital for timely information, crucial resources, and new knowledge for innovation. A diversified network increases the variety of the information, resources, and knowledge accessed. In general, research finds that the larger and the more diversified the external networks are, the higher the innovation and performance of a firm (Calighirou et al., 2004, Laursen and Salter, 2006).

However, two important areas are under-researched in the literature. The first under-researched area is about the effect of networks on different types of innovation. Most network studies have focused on the effect of network on patent or product innovation (e.g., Al-Laham et al., 2010, Cassiman and Veugelers, 2006, Frenz and Ietto-Gillies, 2009). This focus has limited our understanding of organizational innovation which is referred to as a firm’s introduction of internal management practices, processes, structures, and its external relations that are new and value-adding to the firm (Ganter and Hecker, 2013, Mol and Birkinshaw, 2009). The non-technical and administrative nature of organizational innovation contrasts greatly with product innovation (Battisti and Stoneman, 2010, Damanpour and Aravind, 2011). Understanding the effect of network on organizational innovation is important because organizational innovation contributes to a new source of competitive advantage (Hamel, 2006) and extends theoretical debates on the learning input to non-technical innovation (Camisón and Villar-López, 2014, Ganter and Hecker, 2013).

The second under-researched area is about whether business group contributes additional resources on top of other networks to innovation. A business group is a conglomerate of legally independent firms that are linked to each other by common administrative and financial management (Chang and Hong, 2000, Guillen, 2000, Khanna and Rivkin, 2001). Business groups in emerging economies provide group-level resources that are different from other external network resources but are essential for innovation when market infrastructures are underdeveloped (Chang et al., 2006, Choi et al., 2011). Research findings on the impact of business group on innovation have been ambivalent (Khanna and Yafeh, 2007, Mahmood and Mitchell, 2004). Business group could exert both positive and negative effects on innovation, rendering it difficult to pinpoint its overall impact. Since business group is a prominent network in emerging economies, studying the business group network of an affiliate firm extends theories on networks and innovation to a different institutional setting.

To address these unresolved issues in the literature, this study puts forth a key research question: How do business group and different external networks of a firm affect the extent of product and organizational innovation? This question is significant for furthering our understanding of network and innovation, as the question addresses how the impact of networks is contingent on the types of innovation. This paper draws upon learning theory to explain the impact of business group and external networks on different types of innovation. In the next section, we will first delineate two types of external network and business group network and then compare their learning characteristics.

Section snippets

External networks

External networks provide firms with an ideal platform for learning, as network partners bring diverse information and resources when they work together with a focal firm on specific projects (Doz, 1996, Hamel, 1991, Inkpen, 2002, Inkpen and Tsang, 2005, Lui, 2009). A learning process between a firm and its network partners involves a firm acquiring from its network partners new knowledge that it cannot create on its own, and then turning the acquired knowledge into useful applications (Cohen

Institutional network and innovation

We argue that institutional network is more conducive than market network to product innovation. Product innovation involves improvement in existing products or introduction of new features/products to meet customer needs (Damanpour, Walker, & Avellaneda, 2009). The improvement or addition of new features to products requires technical knowledge that is tangible and discrete (Birkinshaw & Mol, 2006). Moreover, product innovation changes what a firm can offer to its customers and the outside

Sampling and data collection

The study tests the research question using the information on network and innovation obtained from two surveys of Korean manufacturing firms conducted at two instances three years apart. The choice of a Korean sample is critical for testing the influences of business group, market network, and institutional network on innovation simultaneously. Given the importance of business groups in Korea’s industrial development, this study provides a strong case to examine the role of business groups in

Analysis and results

Table 2 reports the descriptive statistics and zero-order correlations of the variables included in this study.

The skewness and kurtosis statistics show that the distributions of the variables are close to normality (c.f., De Jong and Freel, 2010, Janowicz-Panjaitan and Noorderhaven, 2008, Zhang et al., 2003). We use negative binomial regression to test the proposed hypotheses (H1 to H4) since the dependent variables (product and organizational innovation) of this study take on nonnegative

Discussion

Building upon the growing interest in networks and innovation, this paper poses a research question about business group, external networks, and innovation in emerging economies: How do business group and different external networks of a firm affect the extent of product and organizational innovation? We argue that bringing innovation types into the theoretical model advances our understanding of network and innovation.

We develop four hypotheses to test the effect of business group and the two

Conclusions

This study extends our current understanding of networks (business group network and two external networks) and innovation in three important ways. First, there is an urge to study organizational innovation apart from technologically-driven product innovation; both contribute significantly to the competitive advantage of a firm (Birkinshaw and Mol, 2006, Damanpour and Aravind, 2011). This study adds to the literature by differentiating the network antecedents of product and organizational

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  • Cited by (0)

    The authors thank the four anonymous reviewers for their constructive comments and suggestions, and the Associate Editor, Professor Lei-Yu Wu, and Professor Arch Woodside, Editor-in-Chief for the valuable guidance throughout the review process. The authors also thank Stephen Frenkel at UNSW Australia, Simon Restubog at Australian National University, Nanfeng Luo at Renmin University, and Karpsoo Kim at Korea Advanced Institute of Science & Technology for their invaluable feedback on previous drafts. Our appreciation goes out to Science and Technology Policy Institute, Korea for the data. We gratefully acknowledge funding support from the International Business Cluster Research Fund, School of Organisation and Management, UNSW, PS21298.

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