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Adaptation, bridging and firm upgrading: How non-market institutions and MNCs facilitate knowledge recombination in emerging markets

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Abstract

How do multinational corporation (MNC) subsidiaries and local institutions help or hinder emerging market suppliers to upgrade their capabilities? Drawing on insights from economic sociology and comparative capitalism, we posit that in these contexts of scarce resources and inferior technologies upgrading depends on the ways in which organizational and institutional networks enable firms to integrate imported advanced knowledge with local applied knowledge. Using a combination of field work and unique survey data of Argentine auto parts suppliers, we show that process upgrading improves significantly when suppliers have ties to seemingly resource-weak non-market institutions that improve access to a variety of experiential knowledge. These institutions act as knowledge bridges, helping local firms tap into diverse applied knowledge embedded in isolated industrial districts and adapt frontier advanced practices to their local conditions. Moreover, suppliers appear to benefit from ties to MNC subsidiaries only when they simultaneously collaborate with certain non-market institutions that help them recombine experiential knowledge with the standards gained from the subsidiaries.

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Notes

  1. This article focuses on the heterogeneity of organizations and institutions in a country. For the sake of simplicity, we refer to a GSI as any institution that receives at least partial government funding, has government actors participating in its governance and program evaluation, and provides firms with specific services. This definition follows research on government support of industries (Knoke, 2001; Powell et al., 2012; Thelen, 2003). Below, we distinguish further between different types of GSIs, schools and associations.

  2. Recent efforts to statistically analyze network variables and upgrading in developing countries include Giuliani and Bell (2005), Kumaraswamy et al. (2012) and McDermott et al. (2009). We also draw on our field interviews with 35 managers and policymakers.

  3. Toyota invested in Argentina in 2003, but would not develop a local supplier system until after 2005.

  4. Following the literature on network analysis about learning and innovation, we consider a tie to be both formal and informal, for example, through a formal alliance, formal participation in a program or informal relations with an organization (Powell et al., 2012; Zuckerman & Sgourev, 2006).

  5. In contrast, this research has also highlighted how local educational institutions often lack both the capacities and industry linkages to engage in firm training, relying instead on rote teaching of students.

  6. As explained above and below, ties to other firms, schools or banks would not provide access to the needed applied knowledge, but we include control variables for these organizations in our models.

  7. Our theorizing about bridging organizations that facilitate knowledge flows does not assume they have strong and sophisticated resources, common to similar work in advanced countries (e.g., Powell et al., 2012). As per the section “MNCs, weak institutions and regional fragmentation in the Argentine automotive industry,” Argentine associations and GSI are weak and poorly endowed, but the long history of the industry justifies assuming that Argentine auto part manufacturers possess learning capabilities to process the diverse experiential knowledge. We will revisit this point in our discussion section.

  8. While the limit of five entities may censor the number of ties, in our case, the median number of ties reported by firms in any question is 1, and the maximum number of mentions was reached for about 10% of the cases (never for the same firm across all questions capturing ties).

  9. To capture the influence of ties to MNCs on supplier upgrading, we followed the literature on manufacturing and automotive supply chain vertical spillovers (Blalock & Simon, 2009; Dyer & Hatch, 2006; Giuliani et al., 2005) to include only the 63 foreign-owned firms within the automotive value chain, as opposed to MNCs in other industries.

  10. To capture the geographic diversity of the alters, we grouped focal firms into seven industrial districts: Buenos Aires-South, Buenos Aires-North, Buenos Aires-West, Rosario, Santa Fe-Rafaela, Cordoba and San Luis. Historical records and interviews indicated that this division is justified because of the relative provincial sizes and patterns of geographic clustering of firms. See also the section “MNCs, weak institutions and regional fragmentation in the Argentine automotive industry.”

  11. Because of the limited degrees of freedom, we could not use individual controls for every assembler. Instead, we first measured the influence of the assembler on the supplier by determining the top two assembler value chains for each supplier. Second, we then regressed Process Upgrading on a model of firm demographics and a dummy for the assemblers. Finally, we grouped them into those who had above and below average effects on upgrading.

  12. Due to the small size of the auto part sector and the relatively high survey response rate, we were unable to increase the number of observations for our quantitative study. As a result, our model estimations have a limited d.f., which leaves our analysis with a relatively small statistical power.

  13. In Model B, we decompose Ties to All into the variables that count the ties to each of the six types of alters described above. In Model C, to study the effect of ties to High GeoDiversity alters, we further decompose Ties to All into ties each MNCs, associations and GSIs into ties to each of those with top-10% and bottom-90% of geographic diversity. We then aggregate together Ties to Not-MNCs, Banks, Schools and Not-High GeoDiversity MNCs. For this reason, and since these decomposed variables account for all the ties in the six different types of alters, we do not include Ties to All and the other ties to the six different alters in Model C. In Model D, we present the baseline for the interaction between ties to MNCs and top geographically diverse associations and GSIs. We decompose Ties to All into Ties to MNCs, Ties to Associations and GSIs in each category with top-10% and bottom-90% geographic diversity reach, and we aggregate the rest of ties to not-MNC with ties to banks and school. Finally, Model E adds to Model D the interaction between ties to MNCs and ties to top geographically diverse associations and institutions.

  14. Our results presented here and in other models available show that ties to alter firms in general and even ones with high geographic diversity have negative or insignificant effects on the process of upgrading.

  15. The Cancilleria is a GSI for promoting exports, created in the late 1990s. But its main benefit for suppliers was similar to that of AFAC – providing industry information and creating forums for firms.

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Acknowledgements

Both authors contributed equally and are listed in alphabetical order. We are very grateful to AFAC and IAE Business School for assistance with interviews, survey design and implementation. We would like to thank our editor, Julian Birkinshaw, and three anonymous referees for their guidance in fundamental improvements in the paper; John Paul MacDuffie, Francesco Zirpoli, Kendall Roth, Vit Henisz, Andy Spicer, Andreas Braun, Antoine Vernet, and participants at the IESE brown bag series; AIB, DRUID, IMVP, INCODE, ISA, PVMI, SASE and SMS conferences for very helpful suggestions on previous iterations. Lucas Cyr, Lizette St. Hilaire and Hye Sun Kang provided excellent research assistance. We also thank the IMVP, URF of the University of Pennsylvania, Mack Institute at Wharton, and the CIBER of the University of South Carolina for supporting our research. All errors and omissions are our own.

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Authors and Affiliations

  1. Robert H. Smith School of Business, University of Maryland, College Park, USA

    Rafael A Corredoira

  2. Moore School of Business, University of South Carolina, Columbia, USA

    Gerald A McDermott

  3. IAE Business School, Universidad Austral, Buenos Aires, Argentina

    Gerald A McDermott

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  1. Rafael A Corredoira
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Accepted by Julian Birkinshaw, Guest Editor, 12 March 2014. This paper has been with the authors for three revisions.

APPENDIX

APPENDIX

Sample of questions from survey

4 5 6 7

Table A1 Questions capturing Process Upgrading (Cronbach’s α=0.78)
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Table A2 Questions capturing Sophistication Intent (Cronbach’s α=0.68)
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Table A3 Questions capturing ties to Firms
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Table A4 Questions capturing Ties to Associations, GSIs, Banks and Schools
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Corredoira, R., McDermott, G. Adaptation, bridging and firm upgrading: How non-market institutions and MNCs facilitate knowledge recombination in emerging markets. J Int Bus Stud 45, 699–722 (2014). https://doi.org/10.1057/jibs.2014.19

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