Innovation by Business Groups in Taiwan , 1981-2000 : The Impact of Strategic Scope and Market Development on Local Search Arising from IntraGroup Buyer-Supplier Ties

Business groups are important sources of innovation in emerging economies, but there is substantial heterogeneity in the extent of innovative activity by groups, both across groups and over time. Variation in the density of intra-group buyer-supplier ties that are common linkages among group affiliates may help explain the heterogeneity. Buyer-supplier ties create benefits for group innovativeness by offering access to resources, but also may constrain group innovativeness by creating an emphasis on local search. No research has examined how buyer-supplier ties affect group innovativeness, whether directly or conditional on factors that influence when local search will impose particularly strong constraints on group innovativeness and when any constraints will be less critical. We draw on evolutionary economic theory and related research to study how internal group structure and external market context affect the local search constraints of intra-group buyer-supplier ties. First, we argue that greater strategic scope of a group’s senior leadership structure relaxes the local search constraints that arise from closely-linked intra-group operations. Second, we argue that increased market development of the institutional environment increases the opportunity costs of local search. Our empirical contribution lies in demonstrating that strategic scope and market development affect the innovative impact of intragroup buyer-supplier ties through the local search mechanism, thereby increasing our understanding of business group innovativeness in an emerging market, both across groups and over time. Our conceptual contribution applies most centrally to the evolutionary economics literature, by identifying strategic scope as a means of escaping the constraints of local search and in examining how the institutional environment shapes the opportunity costs of local search. Business groups are important sources of innovation in emerging market economies, which in turn contributes to economic and social development of those countries, but we understand little about why group innovativeness differs across groups and over time (Amsden and Hikino 1994; Hobday 1995; Chang, Chung , and Mahmood 2006). Business groups are sets of independent firms, operating in multiple industries, which are connected to each other by linkages such as buyer-supplier ties, director interlocks, and equity cross-shareholdings (Granovetter 1995; La Porta, Lopez-de-Silanes, and Shleifer 1999; Khanna and Rivkin 2001). A few studies have examined how intra-group buyer-supplier ties and other internal linkages affect group strategy and financial performance (Dyer 1996; Lincoln, Gerlach, Ahmadjian 1996; Keister 1998, 2001), but no studies have examined how such ties affect group innovativeness. The technology studies literature offers a starting point for investigating differences in group innovativeness, by highlighting benefits and constraints on innovative activity that arise from operating linkages such as buyer-supplier ties. On the one hand, studies of buyer-supplier relationships among firms in developed economies by von Hippel (1988), Clark and Fujimoto (1991), and others suggest that extensive intra-group buyer-supplier ties might help groups combine disparate resources in novel ways. On the other hand, arguments about local search by Nelson and Winter (1982), Helfat (1994), and others in the evolutionary economics literature suggest that groups with extensive intra-group buyersupplier ties may miss opportunities that arise outside the groups’ boundaries. The challenge, then, is to identify factors that shape the net innovative impact of resource benefits and local search constraints. Evolutionary economic theory suggests two conditions under which internal group structure and external market context will either attenuate or increase the costs of local search. First, research arising from the behavioral theory of the firm (Cyert and March 1963), which underlies the intra-organizational arguments of evolutionary economics, suggests that the innovative benefits of intra-group buyer-supplier ties will be affected by what we refer to as a group’s strategic scope. We define strategic scope as the range of opportunities that the leaders of an organization can identify and assess, which will vary with the leadership structure of the organization (Ocasio 1997; Greve 2008). We predict that greater strategic scope will increase the innovative benefits of intra-group buyer-supplier ties, thereby reducing the costs of local search. Second, ideas from the literature on national innovation systems (Lundvall 1992; Nelson