Business Group Networks and Group Innovation in Emerging Markets
Business groups, a constellation of legally independent firms operating under common administrative and financial management and connected by various types of ties, have been recognized as an important innovation powerhouse in emerging markets such as Korea and Taiwan(Chang, Chung, & Mahmood, 2006; Mahmood & Mitchell, 2004; Mahmood & Singh, 2003). Given the pervasive networks between business group members (Hamilton, 1996), scholars have assigned an important role to intra-group networks in understanding where the innovativeness of business group arises in emerging markets. Particularly, scholars have focused on three most commonly observed types of ties in business groups, i.e., buyer-supplier ties, equity ties and interlocking director ties (Belenzon & Berkovitz, 2010; Khanna & Rivkin, 2006; Mahmood, Zhu, & Zajac, 2011). Specifically, buyer-supplier ties within business groups connect firms engaged in commercial transactions and enable them to transfer production materials and market information across firm boundaries. Equity ties connect group members who hold equity stakes in each other through cross-shareholdings, providing a channel for the transfer of financial investment and control. Finally, director ties connect group members as they share the same individuals on the boards, and hence enable group members to coordinate strategies and governance (Mahmood et al., 2011).

One explanation on how intra-group networks may facilitate group innovation is that intra-group networks reduce the transaction costs in the innovation process as they create internal capital market, and internal labor market which fill in the institutional voids in the external market (Belenzon & Berkovitz, 2010; Khanna & Rivkin, 2001; Mahmood & Mitchell, 2004). Unlike innovation in advanced economies, innovation in emerging economies often face difficulties in raising external capital, recruiting talent or protecting intellectual property rights to fuel innovation due to the undeveloped institutions. However, such problems are greatly attenuated in business groups as the networks linking group members cultivate trust and reduce opportunism among group members (Chang et al., 2006) and hence incentivize members to extensively involve in exchanging resources such as financial capital and research personnel with each other, sharing innovation risks and protecting innovation returns within the group boundaries. The creation of such internal markets of capital, labor and intellectual property rights compensates the malfunctioning innovation infrastructures in the external market and enables more effective allocation of resources for innovative opportunities within groups (Khanna & Yafeh, 2005). Consequently, innovation is facilitated more within business groups than in independent firms.

In addition to providing institutional infrastructures for innovation, intra-group networks may also generate social capital critical for innovation activities within and beyond group boundaries (Guillen, 2000). For instance, network ties connecting group members may create such social capital as knowledge externalities among group members. Due to the existence of the knowledge spillovers, the aggregated expected payoff of innovation inputs (e.g., knowledge access from international joint venture partners) will be amplified (Mahmood & Zheng, 2009). As a result, motivation of business group members in pursuing innovation is greatly enhanced. Further, business group networks may also create such social capital as business reputation which is an especially valuable resource for innovation in emerging markets. Due to the extensive connections among group members, violation of contracts by a particular member in a business group usually puts the entire group’s reputation at stake. Given this fact, foreign providers of technology in emerging markets usually consider groups more reputable of honoring contracts and hence prefer to partner with group members (Luo & Chung, 2005; Mahmood & Mitchell, 2004). As such, business groups are more capable of tapping into the frontier knowledge than independent firms due to the existence of intra-group networks.

While the majority of studies linking intra-group networks and business group innovation assume homogenous ties in intra-group networks, it is also increasingly recognized that the variety of ties in business group networks is important for understanding the innovativeness of business groups for two reasons (Khanna & Rivkin, 2006; Lincoln & Gerlach, 2004). Specifically, different types of ties characterized by distinct content in business groups may first increase the variety of information and resources which extends the scope of solutions to problems in innovation (Mahmood et al., 2011). Second and more importantly, different types of ties may also interact with each other in complementary or substitutive ways and jointly affect the synergy creation in group innovation. However, under what conditions heterogeneous ties in business groups may complement or substitute each other to affect group innovation remains an open issue (Lincoln & Gerlach, 2004). BIBLIOGRAPHY
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