Essays on strategic adaptation and firm performance during institutional transition

ESSAYS ON STRATEGIC ADAPTATION AND FIRM PERFORMANCE DURING INSTITUTIONAL TRANSITION AJAI SINGH GAUR (B.Tech. (ISM Dhanabad), MIB (IIFT, New Delhi), PhD (ISM Dhanabad)) A THESIS SUBMITTED FOR THE DEGREE OF DOCTOR OF PHILOSOPHY DEPARTMENT OF BUSINESS POLICY NATIONAL UNIVERSITY OF SINGAPORE 2007 ACKNOWLEDGEMENTS I needed a great deal of encouragement and support to embark on my journey to obtain a second Ph D. As this journey comes to an end, I would like to acknowledge the great support I have received from several people, without which this journey would not have been started, much less completed. First, and foremost, my sincere thanks go to my thesis committee chair Andrew Delios for his encouragement, support, guidance, and training. Andrew has been a wonderful advisor and mentor, who always amazed me with his compassion, enthusiasm, energy, accessibility, promptness, and above all, his patience. been exceptionally generous with his time and effort. He has At any time of the day, I could write to him and expect a response within minutes, if not seconds. To me he is not only a great academic and a model of excellence in scholarship, but also a wonderful person. I feel greatly enriched for every moment I spent with him in the past four years. I also received invaluable guidance and support from my thesis committee members, Kulwant Singh and Chung Chi-Nien during the duration of the Ph D program and at various stages of the development of my thesis. They challenged me and stimulated my intellectual curiosity, which helped me to enrich this thesis. Kulwant has also been very helpful and supportive in my job search process. Without his strong recommendation letters, and guidance in my job search, I would still be searching for a job. Several other professors helped me in many ways. Jane Lu provided me with great training in writing research articles and response documents to the reviewers, while we developed my term paper in her course into a published article. Daniel McAllister, Peter Hwang, Ramadhar Singh and Jayanth Narayanan were always there to listen to my problems and calm me when I had frustrations. I will remain indebted to them, and many other professors, for their guidance and support. Several friends in the Ph D program made the tough life of a Ph D student, a joyful experience. Special mention must go to Sankalp, Shirish, Poornima, Philip, Tanmay, Mayuri, and Andreas. The tea time philosophical and meaningless discussions, the time spent watching movies and in the sports ground, and so many more fun activities we had, each helped to rejuvenate me, and focus on my research. ii I am thankful to each of them for being wonderful friends and colleagues for my lifetime. The Business Policy Department’s staff – Woo Kim, Wendy and Jenny – made it so easy for me to handle administrative issues. I gratefully acknowledge the support received from them. I also acknowledge the Asia Research Institute’s financial support for fieldwork that helped in my data collection efforts. Part of the data I used in this dissertation comes from the Prowess database of the Centre for Monitoring Indian Economy, which I accessed as a visiting faculty at the Indian Institute of Foreign Trade (IIFT), New Delhi. IIFT’s support in giving me access to its computational and library facilities was very helpful in my data collection efforts. Special thanks are due to my brother, Sonjaya, who was always there to listen to my problems, and guide me through tough times. Finally, no words can express my thanks to my lovely and supporting wife, Deeksha. Even with the pressures of her own doctoral studies, she always had time to listen to my ideas, read my works, and provide critical, yet encouraging comments. To her this thesis belongs. iii TABLE OF CONTENTS ACKNOWLEDGEMENTS ii SUMMARY .vi LIST OF TABLES . viii LIST OF FIGURES ix CHAPTER ONE .1 INTRODUCTION OVERVIEW OF THE RESEARCH QUESTIONS Essay 1: Strategic Adaptation During Institutional Transition Essay 2: Strategic Adaptation And Firm Performance EMPIRICAL CONTEXT CONTRIBUTIONS .9 Theoretical Contributions Empirical Contributions .11 STRUCTURE OF THE DISSERTATION 12 CHAPTER TWO 13 KEY CONSTRUCTS AND DEFINITIONS .13 OWNERSHIP STRUCTURE .13 BUSINESS GROUPS 21 Theories of Business Groups .23 INSTITUTIONS AND INSTITUTIONAL TRANSITION 25 Institutional Transition in India .31 STRATEGIC ADAPTATION 39 Strategic Adaptation: An Example (The Tata Group) .46 SUMMARY .49 CHAPTER THREE .51 STRATEGIC ADAPTATION DURING INSTITUTIONAL TRANSITION .51 THEORY AND HYPOTHESES 53 Ownership Concentration and Identity 57 Impact of Institutional Transition 64 Business Group Affiliation 67 METHODS .69 Setting 69 Data Source and Measures .70 Analytic Procedure .74 RESULTS .76 Exit Decision 76 Collaboration Decision 82 Robustness Tests 88 DISCUSSION AND CONCLUSION .89 iv CHAPTER FOUR .94 STRATEGIC ADAPTATION AND FIRM PERFORMANCE .94 THEORY AND HYPOTHESES 96 Background 96 Foreign Collaborations .99 Exits .105 METHODS .110 Data Sources And Measures 110 Analytic Procedure .112 RESULTS .113 Foreign Collaborations and Performance Consequences 116 Exit and Performance Consequences .121 Robustness Tests 126 DISCUSSION AND CONCLUSION .132 CHAPTER FIVE .137 DISCUSSION AND CONCLUSION .137 CONCLUSION .137 CONTRIBUTIONS .139 LIMITATIONS AND FUTURE DIRECTIONS .144 BIBLIOGRAPHY 147 v SUMMARY I link agency theory and an institutional theory perspective to predict the strategic choices firms make and the performance consequences of these choices during a period of institutional transition. The two strategic choices I investigate are the choice to collaborate with foreign firms and the choice to exit the market. I examine the strategic choices and the performance consequences of strategic choices in two essays. In the first essay, I argue that the ownership concentration of domestic private, domestic institutional, foreign private and foreign institutional owners, institutional transition, and business group affiliation, each affects a firm’s choice to collaborate with foreign firms or to exit the market. In the second essay, I argue that strategic choices such as collaboration with foreign firms or exiting the market, in the case of business group affiliated firms, have a positive impact on a firm’s performance. However, the relationship between these two strategic choices and a firm’s performance is contingent on the governance structure of the firm. I test the theoretical arguments presented in this dissertation on a longitudinal sample of 9,926 Indian firms over a 17 year period from 1989 to 2005. The time period from 1991 onwards is a period during which there have been gradual and significant developments in various institutional dimensions related to product markets, labor markets and capital markets in India. This makes India an ideal setting for studying the process of strategic adaptation during institutional transition. The empirical analyses largely support my arguments. With respect to the effect of ownership structure on a firm’s strategic choices, I found that different types of owners influenced a firm’s choice to collaborate with foreign firms or to exit the market, differentially. Institutional transition had a non-linear impact on the choice to collaborate and the choice to exit. During the initial years of institutional vi transition, there was a high incidence of exit as well as collaborative activities; however, as the institutional transition progressed, the exit and collaboration choices were implemented less frequently. Finally, I found group affiliated firms to be more likely to choose the “exit” and the “collaborate” options, as compared to unaffiliated firms. Regarding the performance consequences of strategic choices, I found that a firm’s choice to collaborate and to exit had a positive impact on a firm’s performance. The positive relationship between foreign collaborations and a firm’s performance was, however, contingent on a firm’s ownership structure and its business group affiliation. Likewise, the positive relationship between the number of exits in a business group and a firm’s performance was contingent on the ownership structure of the non-exiting firms of the business group. The theoretical arguments and the findings I present in this dissertation provide new avenues of research on strategic adaptation and change, especially in the dynamic and evolving institutional environments we have been witnessing in many emerging economies in the early 2000s. vii LIST OF TABLES Table 2.1: Institutional Transition in Emerging Economies 26 Table 2.2: Conceptualization and Operationalization of Institutional Transition 30 Table 2.3: Institutional Transition in India (1991-2003) .32 Table 2.4: Changes in Transaction Costs in Stock Exchanges in India .37 Table 2.5: Number of Institutions for Higher Education in India 37 Table 2.6: Time Trend and Institutional Transition in India .38 Table 2.7: Sample of Research on Strategic Adaptation and Change .40 Table 2.8: Entry, Exit Pattern of Tata Group .48 Table 3.1: Descriptive Statistics and Correlations .77 Table 3.2: Exponential Event History Analysis (Event: Exit = 1) .78 Table 3.3: Exponential Event History Analysis (Event: Collaborate = 1) .83 Table 3.4: Panel Data Poisson Estimation (Random Effects) Results (Dependent Variable: Number of Collaborations) 84 Table 4.1: Descriptive Statistics and Correlations (Full Sample) 114 Table 4.2: Descriptive Statistics and Correlations (Group Affiliated Firms) 115 Table 4.3: Effects of Foreign Collaborations (All) on Firm Performance (ROA) .117 Table 4.4: Effect of Exits (all) on Performance (ROA) of Group Affiliated Firms 122 Table 4.5: Effects of Foreign Collaborations (Financial) on Firm Performance (ROA) 128 Table 4.6: Effects of Foreign Collaborations (Technical) on Firm Performance (ROA) 129 Table 4.7: Effect of Exits (by Merger/Sale) on Performance (ROA) of Group Affiliated Firms 130 Table 4.8: Effect of Exits (by closure) on Performance (ROA) of Group Affiliated Firms 131 viii LIST OF FIGURES Figure 1.1: Research Framework .4 Figure 2.1: Different Ownership Categories and Relationship with the Organization .18 Figure 2.2: Changes in Interest Rates 35 Figure 2.3: Foreign Investment Inflows (Million USD) 35 Figure 2.4: Changes in Stock Index (BSE Index) 36 Figure 3.1: Model for Firms’ Strategic Choices 56 Figure 3.2: Annual Distribution of Exits .71 Figure 3.3: Annual Distribution of Foreign Collaborations .72 Figure 3.4: Effect of Domestic Ownership on Firm Exit .79 Figure 3.5: Effect of Foreign Ownership on Firm Exit .80 Figure 3.6: Effect of Institutional Transition on Firm Exit 81 Figure 3.7: Effect of Group Affiliation on Firm Exit 82 Figure 3.8: Effect of Foreign Ownership on Foreign Collaboration .86 Figure 3.9: Effect of Institutional Transition on Foreign Collaboration 87 Figure 3.10: Effect of Group Affiliation on Foreign Collaboration 87 Figure 4.1: Strategic Adaptation and Firm Performance .98 Figure 4.2: Effect of Foreign Collaborations and Domestic Institutional Ownership on firm performance 118 Figure 4.3: Effect of Foreign Collaborations and Foreign Private Ownership on firm performance .119 Figure 4.4: Effect of Foreign Collaborations and foreign Institutional Ownership on firm performance 120 Figure 4.5: Effect of Foreign Collaborations and business group affiliation on firm performance .121 Figure 4.6: Effect of Exits and Domestic Private Ownership on Performance of Group Affiliated Firms 123 Figure 4.7: Effect of Exits and Domestic institutional Ownership on Performance of Group Affiliated Firms .125 Figure 4.8: Effect of Exits and Foreign Private Ownership on Performance of Group Affiliated Firms 125 Figure 4.9: Effect of Exits and Foreign Institutional Ownership on Performance of Group Affiliated Firms 126 ix CHAPTER ONE INTRODUCTION Strategy makers today face a world with diverse and changing institutions of governance. This situation raises fundamental questions for our field, for it is these institutions that determine who sets the goals for the company, who exercises control over strategic decisions, and who bears the consequences. - SMS 2006 Conference Invitation An important question for strategy research is, “How firms respond to fundamental changes in their institutional environments and what are the performance consequences of a firm’s strategic responses?” Even though strategic management scholars recognize that organizations and their environments change over time (Hoskisson, Eden, Lau, & Wright, 2000; Peng, 2003), much of the extant literature fails to incorporate the dynamic aspects of changes in strategy and environment in theoretical and empirical modeling (Rajagopalan & Spreitzer, 1997; Zajac et al., 2000). The studies that look at the issue of strategic adaptation focus on industry specific changes in certain aspects of the environment, such as regulatory changes (Goodstein & Boeker, 1991; Smith & Grimm, 1987; Zajac & Shortell, 1989) but the overall institutional environment in such studies remains quite stable (Peng, 2003). Industry specific changes studied in a cross-section of time might be subordinate to the multi-faceted and broad changes that can occur in national institutional environments. emerging economies. This issue is particularly important in the case of In the early 2000s, many economies in the world went through fundamental changes in their institutions (Newman, 2000). This transition related to changes in such institutions as capital markets, product markets, labor markets, the trade regime, and soft infrastructure such as monitoring mechanisms, BIBLIOGRAPHY Ahluwalia, M. S. 1996. India’s economic reforms. In R. Cassen & V. 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Contemporary Economic Policy, 17(4): 530-539. 162 [...]... Institutional Transition • • Business Group Affiliation Strategic Choices Exit Cooperate o Collaborate with MNCs Performance Consequences 4 Essay 1: Strategic Adaptation during Institutional Transition How firms adapt their strategies to a changing external environment is a question of fundamental interest amongst strategic management scholars During a period of institutional transition, firms are exposed... understand how organizations behave during a period of fundamental institutional transition, scholars should be “examining and comprehending organizations operating in other places” Emerging economies present a natural laboratory for studying strategic adaptation during institutional transition As Peng (2003: 277) points out, “the scale and scope of these (institutional) transitions (in emerging economies)... two strategic choices over time I use agency theory and institutional theory perspectives to set the theoretical framework for examining the strategic choices that firms make during a time of institutional transition in an emerging economy Essay 2: Strategic Adaptation and Firm Performance Firms that develop congruence with the external environment are expected to experience superior performance (Andrews,... affiliation I elaborate on the implication of these aspects of group affiliation for firms’ strategic choices and performance consequences in the next two chapters 24 INSTITUTIONS AND INSTITUTIONAL TRANSITION Organizational research has been concerned with the theme of institutions and institutional transition since the onset of the 2000s My late 2006 search of the word “institutions”, in the abstracts of peer... theory and provide evidence about the impact of the internal and external governance structures of a firm on its strategy and performance during a period of institutional transition Empirically, the dissertation examines how ownership structure and ownership identity, institutional transition and business group affiliation affect a firm s choice to collaborate with foreign firms or to exit a market, and. .. contributes to the conceptual literature in several ways For the strategic adaptation and change literature, this dissertation contributes by looking at 9 the underlying dimensions of strategic adaptation The strategic choices I investigate result in a change in the overall strategic stance of a firm over time A focus on strategic choices helps me take a continuous view on strategic adaptation (Brown & Eisenhardt,... To understand the strategic reaction of firms to broad environmental change, we need to structure the investigation so that it takes into account the overall changes in the institutional environment and the firm level attributes that are affected by such changes This dissertation addresses these issues of strategic adaptation to transitions in institutional environments by using an integration of agency... implications of these two strategic choices that a firm can make In addition to assessing the direct effect of these two strategic choices on firm performance, I propose contingency factors based on ownership concentration and group affiliation, which enhance or diminish the influence of these two strategic choices on a firm s performance 3 OVERVIEW OF THE RESEARCH QUESTIONS This dissertation aims to... the impact of strategic adaptation on firm performance generally conceptualizes adaptation as a static event Moreover, these studies conceptualize the performance consequences of strategic adaptation in an environment which is largely static (Peng, 2003), but for a few industry specific changes in certain regulative aspects When change is the only constant aspect in an environment, any congruence developed... on, firms which are attempting to adapt to a changing external environment during different phases of institutional transition and development Finally, for the business group literature, this dissertation helps to disentangle the implications of group affiliation for firms’ strategic choices and performance during different phases of institutional development The strategic choices to collaborate and . 1: Strategic Adaptation During Institutional Transition 5 Essay 2: Strategic Adaptation And Firm Performance 6 EMPIRICAL CONTEXT 7 C ONTRIBUTIONS 9 Theoretical Contributions 9 Empirical Contributions. Table 2.1: Institutional Transition in Emerging Economies 26 Table 2.2: Conceptualization and Operationalization of Institutional Transition 30 Table 2.3: Institutional Transition in India. Collaborations and Performance Consequences 116 Exit and Performance Consequences 121 Robustness Tests 126 DISCUSSION AND CONCLUSION 132 CHAPTER FIVE 137 DISCUSSION AND CONCLUSION 137 CONCLUSION