Business groups’ affiliates have taken advantages in many emerging economies as business groups mitigate incomplete institution and market failures by providing internal infrastructure support to affiliates. Previous studies mostly focused on the influence of business groups on financial performance of affiliates based on the various theoretical perspectives. However, little attention has been devoted to their effects on innovation of affiliates. Although some focused on the innovation aspect, they examine the role of business groups in the context of emerging economies. The market complementary role of business groups cannot fully explain the effect of business groups on the affiliates’ innovation after the markets have begun to function more effectively. In addition to explaining the complementary role of business groups in market institutions, this study suggested an alternative mechanism for determining the effect of business groups on affiliates’ R&D investment decisions even after the markets have begun to function more effectively.
This study used a performance feedback perspective to provide a deeper understanding of business groups’ influence of the search propensity of affiliates. A firm’s responsiveness to performance feedback is an important process of adaptation that initiates search behavior. Search behavior is affected by the manner in which the firm is embedded in an context. We examined how the affiliates perform different search behavior compared to the independent firms by dividing the cases where the achievements not reaching the aspiration levels and the cases where the achievements exceeding the aspiration levels. In addition to highlighting the role of historical and social aspirations from a performance feedback perspective, we also examined business group aspirations as additional reference points for determining affiliates’ search behavior.
Using a sample of Korean manufacturing firms, we compared the innovativeness of affiliated firms and non-affiliated firms. The final data set was composed of 6,698 firm-year observations during the period 2004 to 2012. 888 observations from firms affiliated with business groups and 5,810 from firms that were unaffiliated. This study found that group affiliates invest less in R&D than do non-affiliates when they perform below their aspiration levels. Results also suggested that business group aspirations provide an additional reference point for determining affiliates’ search behaviors.
Affiliates were more likely to exhibit inertia when they have achieved their aspirations.