R&D Driven Innovation in Emerging Markets: The Moderating Role of Institutional Voids

R&D driven innovation in

emerging markets
The moderating role of institutional Voids
Tara Goverts
Student number: 2559281
MSc BA – Specialization Strategy & Organization
VU University Amsterdam
Application date: 01/12/2015
Submission date: 01/05/2016
Thesis supervisor: Dr. R.O Mihalache

Second supervisor: Dr. A.S. Alexiev

Master Thesis -‐ T. Goverts

Table of content
Abstract 3
1. Introduction 4
2. Theoretical Background 7
2.1. Innovation in emerging markets 7
2.2. Research and development 8
2.3. Institutional voids 9
2.4. Hypotheses development 10
3. Methodology 15
3.1. Research design and data collection 15
3.2. Measurement of variables 17
3.3. Data analysis 20
4. Empirical Results 21
5. Discussion 25
5.1. Managerial implications 25
5.2. Limitations and future research 27
6. Conclusion 29
7. References 30
8. Appendix 35
Appendix A: conceptual model 35
Appendix B: country sample 36
Appendix C: operationalization of the model variables 39

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Abstract
As a response to the rising internationalization of R&D operations, this study
attempts to increase understanding of the effectiveness of firm’s R&D in enabling
innovation in emerging markets. It is often observed that the underdeveloped
institutions of foreign markets (i.e., the institutional voids) challenge the operations
of multinationals. Using cross-country panel data, this paper empirically
investigates if and how underdeveloped institutional conditions moderate the
relation between R&D and innovation. By performing the generalized estimating
equations (GEE) technique, we find that different levels of institutional conditions
significantly affect the strength of R&D as a driver for innovation output.
Specifically, it is observed that the lack in training institutions in emerging markets
weaken the relation between R&D and innovation, while the underdevelopment in
financial market and local supplier conditions seem to strengthen the relation.

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1. Introduction
In the past decades, a common understanding has been achieved about the
importance of innovation. Economists have acknowledged that in an era where
global competition and economic prosperity is rising, innovation is key to business
success (Hult, Hurley & Knight, 2004; Back, Parboteeah & Nam, 2014). While
innovation in developed markets has obtained extensive attention in academic
research, considerably less attention has been paid to innovation in emerging
markets (Hult et al., 2004; Ernst, Kahle, Dubiel, Prabhu & Subramaniam, 2015).
This is striking as the need for innovation in emerging markets has increased
significantly in the last few years (Global Innovation Index, 2015).
Ever since the late 20th century, emerging economies have experienced rapid
economic growth. Due to increase in foreign direct investments, the level of gross
domestic product and income grew abundantly (Alfaro, Chanda, Kalemli-Ozcan &
Sayek, 2004; World Bank, 2015). The rising wealth has brought millions of people
out of abject poverty and lifted them into the low-middle income segment1. As this
segment accounts for nearly 4 billion people and is expected to cover half of global
consumption by 2025, it is undeniable that the demand for products and services is
growing in this segment (London & Hart, 2004, Ernst et al., 2015). Consequently,
innovation and new product development is growing in importance in emerging
markets (Atsmon, Child, Dobbs & Narasimhan; 2012; Ernst et al., 2015).
Hence, the locus of innovation is shifting (Govindarajan & Ramamurti, 2011 Li &
Kozhikode 2009). While multinationals primarily rushed into emerging markets for
cheap labor and low-cost production, recent economic growth has encouraged firms
to explore the opportunities presented by the demand side and triggered the
introduction of innovations strategies (Govindarajan, & Ramamurti, 2011; Li &
Kozhikode 2009). By intensifying local research and development (R&D),
multinationals strive to take the lead in new product development in emerging
markets (Zhang, Li, Hitt, & Cui, 2007; Li & Kozhikode 2009) For years, scholars

1 Ernst & Young, Hitting the sweet spot; the growth in the middle class of emerging markets (2013), p. 5.
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have acknowledged R&D as a strong driver of innovation (Wu 2007; Mairesse &
Mohnen 2005). Therefore, it seems valid that multinationals rely on R&D to
provoke overseas product development. Yet statistics show that despite the
intensification of local R&D, multinationals are struggling to augment new product
development in emerging markets (Khanna, Palepu & Sinha, 2005; Dawar &
Chattopadhyay, 2002, Govindarajan, & Ramamurti, 2011).
As of this, prior studies are questioning the role of R&D when striving for
innovation output in foreign markets (Goñi & Maloney, 2014 Schneider 2005). A
reason that is often suggested for the disappointing results is the lack of well-
developed institutional conditions (Khanna et al., 2005; Goñi & Maloney, 2014).
Institutions are argued to be of great importance in R&D processes as they provide
complimentary resources and knowledge that is needed to efficiently transform
R&D input into innovation output (Allen & Cohen, 1969). As emerging markets
lack well-developed political, training or financial institutions, commonly referred
to as institutional voids, it is expected that multinationals face difficulties in
execution business models (Khanna & Palepu 1997, Dawar & Chattopadhyay,
2002; Porter & Stern, 2001). Consequently, literature questions the value of R&D in
shaping innovation when operating in markets that lack well developed institutions
(Porter & Stern, 2001; Khanna et al., 2005).
Given the relatively new and unexplored phenomenon of innovation in emerging

markets, little research has empirically investigated the affect of the lacking
institutions on the productivity of R&D (London & Hart, 2004; Hult et al., 2004;
Brem & Wolfram; 2014). Moreover, the little existing research that has addressed
innovation in emerging markets has mostly been qualitative or single-country based
(Ernst et al., 2015). As innovation in emerging markets is obtaining a more
prominent role for future business growth, it is vital that firms understand how
lacking institutions affect their models in shaping innovation (Khanna et al., 2005;
Mair & Marti, 2009; Porter & Stern, 2001). This paper sets a first step in increasing
this understanding by examining the influence of institutions, or the lack of them,
on the R&D when striving innovation output in emerging markets.
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Drawing on a cross-country data, this study empirically investigates the following
research question:
“How do institutional voids influence the effectiveness of R&D in developing

innovation output?”
By providing insight in the moderating role of institutions on the relation between

R&D and innovation this paper contributes to literature in several ways. Firstly, it
amplifies the little existing literature on innovation in emerging markets by
questioning the often taken-for-granted relationship between R&D and innovation
(Wu 2007; Mairesse & Mohnen 2005). Secondly, it identifies the challenges set by
institutional voids when striving new product development in foreign markets
(Khanna et al., 2005; Khanna, & Palepu, 2013). Thirdly, it provides practical
contributions by empirically mapping the moderating effect of these voids on the
effectiveness of R&D models, hereby increasing managers’ insights in the value of
R&D operations in foreign markets (Khanna et al., 2005; London & Hart, 2004).
The rest of the paper is structured as follows. First, some theoretical background on
the growing importance of innovation in emerging markets is given. Next we
provide deeper insight in the role of institutional conditions on innovation activities
and construct the hypotheses that are used to answer the research question.
Subsequently, we discuss the research methods and present the empirical results.
Lastly, some implications, limitations and suggestions for future research are given.
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2. Theoretical background
In order to build a common understanding of why it is important to increase

understanding of innovation in emerging markets some fundamental observations
are introduced. Firstly, theoretical background on emerging markets and their need
for innovation is given. Thereafter we discuss the essence of R&D and its role in
new product establishment. The conflicting views that arise from current literature
on the importance of R&D for innovation output in emerging markets will form the
basis for our hypotheses development.

2.1 Innovation in emerging markets
When talking about ‘emerging markets’, literature refers to markets in transition
from planned to free-market economies that lack history of foreign investment,
show high growth rates, huge potential and high levels of risk (Mody, 2004;
Burgess & Steenkamp, 2006). In the past decades, scholars paid abundant attention
to the movement of western multinationals to emerging markets (Dawar & Frost,
1999; Khanna, & Palepu 2013). As emerging economies loosened their tariff
barriers and opened up to foreign trade, western multinationals turned to developing
economies to access cheap supplies such as raw materials, labor and logistics
(Garelli, 2008).
As of the start of the 21st century, the world has entered a new wave of globalization
(Garelli, 2008; Hitt, Keats & DeMarie, 1998). While at first multinationals turned to
emerging markets for production reasons, the growing prosperity of emerging
markets has shifted their intention (Li & Kozhikode, 2009; Garelli, 2008). In this
next wave of globalization, the prior aim is to get access to the domestic markets of
emerging economies (London & Hart, 2004, Garelli 2008). Due to the growing
economic wealth, absolute poverty is gradually eradicating and countless people
have been lifted into the world of consumption (Khanna and Palepu, 2004, World
Bank, 2015). This growing demand for products and services from the lower
segment creates tremendous opportunities for western firms longing to growth their
business (London & Hart, 2004).
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However, it is often observed that firms are struggling to compete in the domestic
markets of emerging nations (Khanna and Palepu, 1997; Khanna et al., 2005).
Relevant studies state that multinationals merely target the top market segment of
emerging markets (Khanna & Palepu, 2004). By exporting high-end, western
products to the top market class, firms are neglecting the enormous potential
presented by the lower consumption classes, hereby decreasing their chances of
future business growth (Prahalad & Hart, 2002; London & Hart, 2004). The often-
executed strategy in which firms modify western products to local needs, known as
global localization, restrains them from capitalizing on the opportunities of the
lower and middle income segments (Hart & Christensen, 2002; Govindarajan &
Ramamurti 2011).
Fortunately it is observed that the need to adjust strategies when targeting the lower
segments of foreign markets is slowly becoming apparent to both scholars and
managers (Tiwari and Herstatt, 2014; Agnihotri, 2015) Academics are criticizing
the earlier global localization models and are encouraging new strategies to
establish affordable, customized products that are desired by the lower consumption
class (Govindarajan & Ramamurti 2011). Moreover several multinationals, such as
General Electrics, PepsiCo and Unilever, have acknowledged the need for low-cost
innovation strategies (Govindarajan & Ramamurti 2011; Prahalad, 2012;). Overall it
has become widely apparent that in order to successfully compete in the
consumption class of emerging markets, in-depth market knowledge and innovative,
customized products are required (London & Hart, 2004).
2.2. Research and development

To establish innovation activity and increase new product development in foreign
markets, most firms rely on research and development (R&D) (Mairesse & Mohnen
2005; Zhang et al., 2007). In the last decade, the world has experienced an
enormous rise in international R&D spending’s of multinationals (Li & Kozhikode,
2009; Zhang et al., 2005). By increasing international R&D spending’s,
multinationals aim to develop their technological capabilities, acquire vast
knowledge of local conditions and source innovation activities overseas (Zhang et
al., 2007). Extensive literature that has investigated the relation between R&D and
8


innovation activity argues that high R&D investments correspond with high levels
of new product development, hence it seems rational that firms turn to R&D to
augment their overseas new product development (Mairesse & Mohnen 2005; Paul,
Mytelka, Dunwiddie, Persinger, Munos, Lindborg & Schacht, 2010, Hagedoorn &
Cloodt, 2003). The OECD Frascati Manual provides a universally accepted
definition of R&D. According to this manual “research and development (R&D)
comprises work undertaken on a systematic basis in order to increase the stock of
knowledge, including knowledge of man, culture and society, and the use of this
stock of knowledge to devise new applications and products” (OECD Frascati
Manual). Scholars that have extensively researched the relation between R&D and
innovation suggest that if R&D works productively, it is able to translate R&D
input, such as ideas, knowledge or technology, into scalable innovative output, such
as patents or new products (Paul et al., 2010; Penner‐Hahn & Shaver, 2005).
Although the above arguments demonstrate support for the investment in R&D
when striving new product development, more recent literature is less enthusiastic.
Goñi & Maloney (2014) advocate that R&D expenditure alone is not likely to
generate new products when operating in markets that lack the well-developed
conditions of western economies. Schneider (2005) supports this view by
concluding that even though R&D expenditures are in general relevant for both
developed and developing countries, it seems to play a much bigger role in
explaining innovation in developed countries. The significant level of market
obstacles that are present in emerging markets are assumed to be effecting the
translation of R&D input into innovation output (Allen & Cohen, 1969; Goñi &
Maloney, 2014; Radjou & Prabhu, 2012). As of these arguments, the effectiveness
of R&D in shaping innovation is being questioned when shying away from the
developed frontier (Radjou & Prabhu 2012; Schneider 2005).
2.3. Institutional voids

While emerging markets have been praised for their economic growth, the
development of market institutions has stayed behind (Hoskisson, Eden, Lau &
Wright, 2000; Khanna et al., 2005). This is concerning as well-developed
institutions, such as legal frameworks and training institutions, are key for economic
9


success (Hoskisson et al., 2000; North 1990). Therefore, if these institutions are
either weak or lacking, huge challenges are imposed on the operations of businesses
(Porter & Stern, 2001). Inadequate intermediaries and underdeveloped infrastructure
make it hard to obtain reliable information on customer preferences or contractual
agreements (Khanna & Palepu, 2004; Khanna et al., 2005). Moreover, the lack of
qualified suppliers and trained laborers make it tough to attract or transform
resources into valuable output (Allen & Cohen, 1969). Especially in costly and
resource intensive processes as R&D, it is expected that the lacking institutions
obstruct productivity (Bilbao‐Osorio & Rodríguez‐Pose, 2004; Falk, 2006).
Literature that researched the lacking institutions in foreign markets has christened
them as ‘the institutional voids’ (Khanna and Palepu 1997). The studies emphasize
the need to identify the challenges presented by institutional voids and understand
their affect on firm’s business models when entering emerging markets (Khanna
and Palepu 1997; Khanna and Palepu 2013; Goñi & Maloney 2014).
Thus, literature suggest that to effectively implement business models in emerging

markets, firms need to recognize the influences of the lacking institutions on their
operations (Khanna et al., 2005). As innovation is a rather new phenomenon in
emerging markets, little literature has empirically investigated this influence on the
R&D operation of multinationals (Brem & Wolfram, 2014; Hult et al., 2004; Ernst
et al., 2015). However, the conflicting findings on the importance of R&D for
shaping new product development in emerging markets emphasizes the need to
improve understanding on this topic (Radjou & Prabhu 2012; Schneider 2005;
Mairesse & Mohnen 2005; Zhang et al., 2007).
2.4. Hypotheses development

As mentioned, firms are increasingly internationalizing their R&D activities to
augment new product development in emerging markets. However the productivity
of R&D is being disputed in markets that lack institutions development (Goñi &
Maloney 2014; Schneider 2005). Yet, empirical, cross-country research on this
topic is lacking (Ernst et al., 2015; Brem & Wolfram 2014). As innovation is
emerging markets is getting more important for business growth, this paper aims to
extend prior literature by mapping the affect of institutional conditions on R&D
productivity, hence increasing insights in the effectiveness of R&D overseas.
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In the next section, we identify some key institutional conditions that form the basis
for our hypotheses. Appendix A provides the conceptual model that visualizes the
proposed hypotheses.
The availability of high-quality training institutions

The first institutional condition that is integrated in the model is the availability of
training institutions. While some markets possess extensive training services
capable of educating well-qualified talent, others lack any sort of training
institutions (Khanna et al., 2005). However, as it is often observed that firms are
dependent on the skills of the labor pool to execute their business models, a lack in
training services challenges the operations of firms (Khanna et al., 2005; Khanna &
Palepu, 1999). An unqualified labor pools especially challenges the R&D activities
of firms as those require complex processes for which skilled and technical talent is
required (Howells, 2008).
Prior literature supports the idea of the necessity of trained talent in firm’s R&D
activities (Ballot, FakhFakh & Taymaz 2001; Falk, 2006). A first argument given
for this statement is that the absorptive capacity of R&D activities depends on the
availability and quality of trained employees (Falk, 2006). With absorptive capacity,
we refer to the ability of a firm to recognize the value of new information, process it
and most importantly, apply it to commercial ends (Cohen & Levinthal, 1990).
Within R&D, the absorptive capacity of firms defines the capability of transforming
R&D input into innovation output (Cohen & Levinthal, 1990). As well trained talent
is a key assets of the absorptive capacity of firms, it is thus essential that training
services are available to provide this talent (Cohen & Levinthal, 1990l Falk, 2006).
Secondly, well-trained workers augment R&D processes, as they are capable of

transferring new technologies, information and know-how into the firm (Falk, 2004;
Allen & Cohen, 1969). R&D processes are dependent on the access to technological
and market information as it allows them to produce customized products and
services for local market needs (Hoskisson er al., 2000). Hence the incoming
knowledge flow of trained talent augments the effectiveness of R&D in shaping
innovation output since it enlarges insights in market needs, technological know-
how and local resources (Falk, 2004; Allen & Cohen, 1969).
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Considering the previous studies that expresses the importance of trained talent in
transforming R&D in innovation output, it is assumed that a lack of high-quality
training institutions, as often encountered in emerging markets, can be
disadvantageous to the productivity of R&D processes. To empirically test this
statement, we construct the following hypothesis:
H1: A lack in high-quality training services negatively moderates the relation

between corporate R&D and innovation output
The government efficiency

Secondly, we turn to the public institutions of countries to analyse the affect of
institutional conditions on R&D productivity. We specifically focus on the
efficiency of governmental regulations. Extensive literature has pointed to the
positive influence of efficient regulatory policies, such as legal frameworks,
government spending’s and intellectual property rights, on the level of corporate
R&D (Falk 2004; Lin, Lin & Song, 2010). Effective legal rights allow firms to
protect their technological inventions by contractual agreements hence increasing
the benefits of their R&D efforts (Lin, Lin, & Song,, 2010; Falk, 2004). However,
while the positive influence of legal policies on corporate R&D investment is well
discussed, literature paid less attention to the influence of government efficiency in
further stages of R&D processes; i.e. the productivity of R&D.
The few literature that did researched the governmental influence on R&D
productivity often suggests that governments indirectly affect corporate R&D.
Especially, the role of governmental spending’s has been addressed. Corporate
R&D can profit from efficient governmental spending’s on R&D labs, universities
or research centres as it enhances technological advancements and human capital
(Atkinson & Wial, 2008; Cohen & Levinthal, 1990). Since technology and human
capital are vital for the capability of transforming R&D activity into new inventions,
firms can benefit form the spill-overs derived from efficient R&D spending’s
(Whelan, Collings & Donnellan, 2010; Atkinson & Wial, 2008; Cohen & Levinthal,
1990). This view is in line with the study of Rodríguez-Pose, Tijmstra & Bwire
(2009) who state that firms that are operating in areas with low government
efficiency struggle to fulfil their innovation potential due to the fact that knowledge
12


spill-overs and technological advancements and declined by poor and inadequate
governmental policies.
Thus prior research suggest that the efficient governmental institutions firstly
encourage firms to increase R&D efforts and secondly (indirectly) strengthen R&D
effectiveness in developing innovation. These arguments lead to the following
hypothesis:
H2: The lack of efficient governmental policies negatively moderates the relation
The Financial Market institutions

Another institutional condition that is often perceived to influence business
operations, is the quality of the financial institutions (Mody, 2004; Burgess &
Steenkamp, 2006). When talking about financial institutions of countries we refer to
the banking-system, securities exchanges, local equity market and other financial
agencies that provide capital or financial information to businesses (Global
Competiveness Index, 2015). The sophistication of financial markets varies widely
across countries. Whereas western markets show highly developed financial system,
developing countries are known for their lack of financial market sophistication
(Khanna at el., 2005).
Financial systems are found to be of primary concern to the execution of corporate

R&D processes. The most important argument for this suggestion is the fact that
R&D activities are costly processes and require substantial financial investments
before being capable of transforming knowledge into new product development
(Bilbao‐Osorio & Rodríguez‐Pose, 2004; Becker, 2013). Thus, a vast amount of
capital is needed to support the technological and resource intensive activities of
R&D processes (Becker, 2013, Falk, 2004). Whenever the incoming stream of
external capital is obstructed, it is thus expected to hamper innovation progress
(Becker, 2013). The study of Müller & Zimmermann (2009) confirms this view by
researching the importance of equity finance of R&D activity.
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Their study concludes that companies that focus on R&D need more equity capital
and are therefore more reliant on a functioning market for external capital.
Given the fact that R&D activities require substantial financial investments in order
to effectively augment innovation, it is expected that a lack in financial market
development hinders the relation between R&D input and innovation output. These
arguments lead to the following hypothesis:
H3: The lack of well developed financial markets negatively moderates the relation
The quality of local suppliers

The last institutional condition that is examined in order to map the effect of
institutions, or the lack of them, on the relation between R&D and innovation, is the
local suppliers quality. It is often observed that there is a great variance in
development of product markets across countries (Khanna et al., 2015). While some
countries show highly developed product markets, others lack end-to-end logistic
providers, distribution channels or quality suppliers to efficiently transport resources
from and to businesses (Khanna et al., 2005; Global Competiveness Index, 2015). In
this study, we specifically focus on the variance in local supplier quality as it is
often expressed that suppliers are of high importance for the productivity of R&D
(Chung & Kim 2003, Arranz & Arroyabe, 2008).
Different arguments are provided for the positive influence of local suppliers on
R&D effectiveness (Rosell, Lakemond, Dabhilkar & Bengtsson 2011; Chung &
Kim 2003; Arranz & Arroyabe, 2008). One of the most profound arguments relies
on the fact that firms do not innovate in isolation but interact with external sources,
such as customers or suppliers, to augment their internal processes for innovation
development (Malerba, 2002). Local suppliers are capable of transferring
complementary resources and valuable market knowledge into the firm, hence
expanding the resource base on which R&D processes draw (Arranz & Arroyabe,
2008). Moreover does it allows for better insight in customer needs, hence
increasing the ability to align R&D processes with local market demand (Chung &
14


Kim 2003; Arranz & Arroyabe, 2008).
Next to the provision of market knowledge and external resources, prior research
points to the cost advantages derived from quality suppliers. It is often observed that
the integration of supplier in business processes reduces the production costs and
lead-time of new product development (Arranz & de Arroyabe 2008; Chung & Kim
2003). Moreover, Sobrero & Roberts (2002) revealed that high levels of supplier
involvement are associated with both lower production costs and lower lead-time
(time between the initiation and execution of a process). Consequently, R&D
processes benefit from these cost-efficiencies as it speeds the transformation from
R&D input into output while reducing operation costs (Sobrero & Roberts, 2002).
As the above arguments suggest that local suppliers are of value to R&D processes,
we hypothesize that a lack in local quality supply negatively influences the effect of
R&D in shaping innovation.
H4: The lack of quality suppliers negatively moderates the relation between
corporate R&D and innovation output
3. Methodology
In order to understand if the relation between R&D and innovation is affected by the
above-mentioned institutional conditions, we analyse the constructed hypothesis.
The next section discusses the research setting, data and analyses techniques that are
uses to analyse the hypotheses.
3.1 Research setting and data collection

The aim of this study is to gain insight in how institutional voids moderate the
relation between R&D input and innovation output. In order to empirically examine
this, we conduct longitudinal, cross-county data analysis over a time-span of 7
years. A cross-country analysis allows us to examine the relationship of R&D and
innovation within different institutional context, hereby improving understanding of
the role of institutional voids. Data from 124 countries over the period of 2008 up to
and including 2014 is used in the analysis. The 124 countries represent a wide
15


variety of economies including both advanced and emerging economies. The
diversity in country statuses ensures that different levels of institutional contexs are
included in our research. Appendix B presents an overview of the economies that
are included in the dataset.
The data used to measure the level of institutions, R&D efforts and innovation
output of countries is collected from the World Economic Forum Global
Competiveness Index and the Global Innovation Index. The Global Competiveness
Index is an annually published report provided by the World Economic Forum and
describes the competitive landscape of different countries. It delivers valuable data
on a country’s productivity and its ability to achieve sustained levels of growth
(Global Competiveness Index, 2015). The World Executive Opinion Survey,
capturing opinions of over more than 14,0000 business leaders around the world on
a wide range of topics, provides the data that is depicted in the Global
Competiveness Index.
The second database from which this study extracts data is the Global Innovation
Index. The Global Innovation Index depicts a ranking of the innovation capabilities
and output of a large group of countries and is the result of a collaboration between
the World Intellectual Property Organization (WIPO), Cornell University and
INSEAD. It provides a rich database of detailed metrics regarding innovation input
and output. The GII relies on two sub-indices: the Innovation Input Sub-Index and
the Innovation Output Sub-Index. As this paper is interested in the innovation
output, the latter index is used in our research. Since both indexes cover a large
amount of economies, we are able to collect all necessary data on the 124 countries
from these two indexes. Moreover, as both are published annually, they provide
data on all 7 years that are included in our panel. Consequently, the dataset used for
our analyses included 868 observations, equally distributed over the 124 economies
and years 2008 to 2014.
As mentioned, this paper uses panel data with a time-span of 7 years. Accordingly,
our dataset includes two dimensions; a cross-sectional dimension represented by the
124 economies and a time-series dimension represented by the 7-year time-span
16


(Hsiao, 2007). A panel dataset is used as it offers certain advantages to our study.
Firstly, it provides more extensive numbers of observations, hereby increasing the
reliability of the output (Hsiao, 2007). Secondly, more accurate interpretation of
model parameters can be made when using time-series data (Frees, 2004; Hsiao
2014). As this study is interested in the moderating effect of (the lack of)
institutions, it is vital that the parameters are comprehensible. Longitudinal data
helps to increase the efficiency of the parameters as it lowers colliniearity among
the independent variables used in the model (Hsiao, 2007).
The data used to measure the level of institutions, R&D and innovation output of
the countries is collected from the World Economic Forum Global Competiveness
Index and the Global Innovation Index. The Global Competiveness Index is an
annually published report provided by the World Economic Forum and describes
the competitive landscape of different countries. It delivers valuable data on a
country’s productivity and its ability to achieve sustained levels of growth (Global
Competiveness Index, 2015). The World Executive Opinion Survey gathers the data
that is depicted in the Global Competiveness Index. This survey captures the
opinions of more than 14.000 business leaders around the world on a broad range of
topics.
3.2 Measurements of variables

The hypotheses that are employed in our research are operationalized using existing
measures of the Global Competiveness Index and the Global Innovation Index. The
next section provides an overview of the specific data that is used to depict our
variables. Appendix C provides an overview of the total variables used in our
model.
Dependent variable: Innovation Output

The independent variable in the constructs is innovation output. In academic
research, numerous measures have been used to map innovation output, ranging
from patents, invention disclosers, new products to sales ratio’s (Makri & Scandura,
2010; Back et al., 2014). As of today, a universal measurement of innovation is still
lacking. In this study, innovation output is operationalized by data reported by the
GII’s Innovation Output Sub-Index. This sub-index maps the total innovation output
17


of economies by measuring knowledge, technology and creative outputs of a
country on a scale from 1 to 100 (Global Innovation Index, 2015). Measures that are
included in the index are patents applications, utility model applications, royal and
license fees, trademarks and creative goods.
Independent Variable: Research and Development

The independent variable in our model is R&D input. Literature often refers to
R&D spending’s as a solid indicator of the effort that firms put in establishing R&D
(Hagedoorn & Cloodt, 2003; Falk., 2004). Therefore this paper uses R&D
spending’s to measure the R&D input of companies. We take the existing data of
the Global Competiveness Index that depicts the company’s R&D spending’s per
country to represent R&D input. The Global Competiveness Index has derived this
data from the Executive Opinion Survey which asks its respondents to map the level
of company’s R&D spending’s in their country on a scale from 1 to 7.
Moderating variables: Institutional Conditions

The institutional conditions, represented by government efficiency, availability of
training services, financial market development and local suppliers quality, are the
moderating variables of our model. To operationalize these institutional structures,
we take data from the Global Competiveness Index. All the moderating variables
are depicted on a scale of 1 to 7, with 1 being either weak or low and 7 being high
of strong. The first moderating variable included in the model is the availability of
high quality training services. The Executive Opinion Survey asked business
executives to rank the extent to which specialized training services are available in
their country. The data that has been collected by the survey is used in our study to
operationalize the variable on availability of training services in countries.
Government efficiency, our second moderating variable, is operationalized by data

taken from the 1st pillar of the Global Innovation Index that maps the public
institutions of countries. The Executive Opinion Survey has collected data on the
government’s efficiency by asking respondents to scale the level of legal
frameworks, governmental regulations and efficient governmental spending’s in
18


their country. Consequently, the Global Competiveness Index computed the
arithmetic mean of the individual indicators into a single measurement depicting the
government’s efficiency.
Third, we derive data on the development of financial markets from the 8th pillar of
the Global Competiveness Index. This pillar portrays data on the level and quality
financial regulations, intermediaries and local equity of countries. To construct a
single measurement for the overall financial market development, the Global
Competiveness Index has bundled financial data on these indicators from the World
Economic Forum, World Bank and International Finance Cooperation into one
single measurement. Lastly, we take data from the 11th pillar of the Global
Competiveness Index to measure our fourth moderating variable; the level of local
quality suppliers of economies. By asking business leaders to rank the quality of
local suppliers in their country, the World Economic Forum has constructed a
reliable dataset on the supplier quality for each country. All data on the moderating
variables are accurately copied and integrated in our own dataset.
Control Variables
To increase the reliability of the research, we need to account for exogenous factors
that influence the level of innovation output in countries. In order to do so, this
study adds several control variables to the model. The first factor that is controlled
for is the level of competition. Numerous studies have discussed the influence of
competition on innovation activity. While some studies suggest a positive (linear)
effect between competition and innovation output (Becker; 2013, Blundell, Gri¢th
and van Reenen, 1999; Geroski 1994), other studies refer to an inverted non-linear
U relationship or a negative relation (Aghion, Bloom, Bluncell, Griffith and Howitt,
2002; Becker; 2013). Although the moderating direction is being disputed,
literature agrees that competition is a vast influencer of innovation. As of this, we
control for competition in our model to ensure validity of the results. The level of
competition is measured by data taken from the 6th pillar of the Global
Competiveness Index. This pillar provides computable data on the competition
intensity of countries by merging data on domestic and foreign competition of the
19


World Economic Forum, World Bank and International Finance Cooperation.
Next, we add market size as a control variable in our research. Both theoretical and
empirical studies found that market size positively influences innovation output
(Acemoglu and Linn, 2003, GCI, 2015). Porter and Stern (2001) state that even a
single change in market size can explain a substantial variation in patents among
economies. As the economies in our dataset show a wide variety in market size, it is
essential to control for this variable. The data used to operationalize the market size
of economies has been taken from the Global Competiveness Index that depicts the
market size of countries a scale from 1 to 7.
Lastly, we control for the level of education in our model. Numerous studies have
proven that a good national educational system positively influences the capacity to
create innovative activity (Nelson and Phelps, 1966; Ballot, FakhFakh, & Taymaz
2001). The Executive Opinion Survey gathers data on the level of the education
system per economy and translated this in a measurable data by ranking it on a scale
from 1 to 7. Consequently, we integrate this measurement in our model.
3.3. Data analysis

After having collected data to operationalize the variables, we are able to test our
proposed hypotheses. Our aim is to understand the moderating effect of institutions,
or the lack of them, on the relationship between R&D and innovation output. In
order to do so, we include interaction effects in our model. ‘An interaction is to be
observed when the nature or strength of the relation between two variables (R&D
and innovation) changes as function of the third variable (institutional voids)’
(González & Cox 2007). If the interaction effect shows statistical significance (p-
value <0,05), the moderation is supported and we can conclude that the variables
are significantly influencing the relationship between R&D and innovation output
(Jaccard & Turrisi, 2003; González & Cox 2007). The interaction effects are
constructed by taking the product of the moderating variables and the independent
variable (Jaccard & Turrisi, 2003). To ensure that the regression coefficients of the
interaction effect have meaningful interpretations, we mean-centered the variables
before constructing the interaction effect (Afshartous & Preston, 2011). By doing
20


so, we reduce the potential multicollinearity of the interaction terms hence
increasing interpretability (Aiken and West, 1991).
We empirically analyze the data by performing the statistical technique of

generalized estimating equations (GEE). This technique extends the generalized
linear model (GLM) since it enables the analysis of longitudinal datasets using all
available data (Zeger, Liang & Albert, 1988). The GEE facilitates panel analyses as
it allows for more efficient and unbiased regression estimates when including
repeated measurements over time (Ballinger, 2004; Zeger et al., 1988).
Moreover, the GEE technique is recommended when studying estimation effects as

well as the estimation of the coefficients (Hubbard, Ahern, Fleischer, Van der Laan,
Lippman, Jewell & Satarian 2010). As this study is interested in the interaction
effects of the moderating variables, the GEE is thus a proper technique to analyse
our data. A reason why the GEE is recommended over other regression methods, is
because it violates the independence assumption made in traditional regression
methods (Hubbard et al., 2010; Ballinger, 2004; Zeger et al., 1988). In time-
measurements, it can be expected that the observations are dependent on earlier
observations, such as that we expect that the level of government efficiency of an
economy is dependent on the strength of the efficiency in previous years. The GEE
allows for this correction by assuming a certain ‘working’ correlation structure for
the repeated measurements of the outcome variable (Ballinger, 2004; Zeger et al.,
1988). By controlling for independence, we improve the reliability of the data
analysis. In the next section we depict the output and discuss the results of the GEE
analysis hence allowing us to evaluate the proposed hypotheses.
4. Empirical Results
Table 1 reports the descriptive statistics and the correlations coefficients of the
variables used in the different empirical models of the study. Table 2 presents the
results of the linear regressions performed by the generalized estimating equations
(GEE). The first model, Model 1, includes the three control variables of our study.
Model 2 enlarges the equations by adding the four moderating variables depicting
21


the institutional condition. Model 3 adds the main effects of R&D spending’s and
lastly Model 4 integrates the interaction effects between the main effect and the
moderating variables.
As presented in table 1, we investigated the correlations of our key variables by

means of the Pearson product-moment correlation coefficient technique before
analysing the hypotheses. For all variables we found significant correlation levels
with a P<0.001. Moreover, all correlations are positive (r>0), indicating that high
(low) levels of one variable is associated with high (low) levels of the other. An
additional test conducted before analysing the hypotheses is the reliability test of
Cronbach Alpha. This test allows us to measure the scale reliability of the
independent variables (Pallant & Manual, 2007). As most independent variables are
measured on a Likert scale from 1 to 7, we need to check for internal consistency
among the variables. An alpha (α) of 0,70 or above is considered to be acceptable
(Santos, 1999; Pallant & Manual, 2007). As the alpha coefficient for the variables in
our model is α=.901, we can conclude that there is internal consistency among the
scaled variables used in the model.
Table 1. Descriptive statistics and correlation

Mean s.d. 1 2 3 4 5 6 7 8 9
1. Innovation
23, 938 16,518 -
output
2. R&D Spending’s -0,001 0,877 0,37 -
3. Government
0,002 0,755 0,24 0,63 -
Efficiency
4. Training services 0,000 0,847 0,45 0,65 0,61 -
5. Financial Market
-0,002 0,713 0,20 0,55 0,73 0,68 -
Development
6. Local Suppliers
0,000 0,580 0,23 0,63 0,41 0,73 0,57 -
Quality
7. Competition -0,002 0,565 0,34 0,63 0,79 0,68 0,77 0,53 -
8. Market Size 0,002 1,148 0,25 0,53 0,10 0,56 0,35 0,62 0,22 -
9. Education
0.003 0,917 0,33 0,71 0,74 0,73 0,63 0,48 0,67 0,20 -
System
Notes: N: 868. Pearson product-moment correlation coefficients are reported. All correlations are
significant at the P<0,01 (2-tailed).
22


In order to analyze our hypotheses, we turn to table 2. This table reports the
regression coefficients (b) that are taken from the parameter estimates output of the
GEE. Before analyzing the interaction effects of the institutional conditions, it is
important to stress that there is a significant relation between R&D and innovation.
The significant coefficients of the main effect depicted in Model 3 and 4 reveal that
R&D is positively related to innovation output. However, as the coefficients show
different quantities in Model 3 and 4, it is argued that the relationship changes as of
the integration of the interaction effects in Model 4.
To evaluate our hypotheses and examine the effect of the moderating variables, we
discuss the results of the full model, Model 4. The regression coefficients (b) that
are reported in the table represent the changes in the relationship between the main
effect and dependent variable as of a one-unit change in the moderating variables
(Tabachnick, Fidell & Osterlind, 2001; González & Cox 2007). If the coefficients
are statistically significant, we can conclude that the moderating variable is
significantly influencing the relation (González & Cox 2007). A positive regression
coefficient indicates that an increase in the moderating variable corresponds with a
stronger relation between R&D and innovation. Additionally, a negative significant
coefficient indicates that an increase in the moderating variable negatively effects
the relation between R&D and innovation output.
We find strong support for Hypothesis 1, which describes the moderating role of the
availability of high-quality training services on the relation between R&D and
innovation. The interaction term between the availability of training services and
R&D spending’s’ is statistically significant (P<0,05) and shows a positive
regression coefficients (β = 2,128). This indicates that a high (low) availability of
training services in an economy corresponds with a stronger (weaker) relation
between R&D spending’s and innovation output of countries. This is in line with the
proposed hypotheses. However, the empirical results do not support a moderating
role of government efficiency, hypothesis 2, as the interaction term between R&D
spending’s and government efficiency is not statistically significant. Consequently
we cannot argue about the validity of hypothesis 2 which suggests that lower levels
of government efficiency are associated with lower R&D effectiveness.
23


For both hypothesis 3 and 4, we do find statistical significance. The significance of
the interaction term between R&D spending’s and financial market development
(p< 0.05) provides support for the idea that financial markets moderate the
relationship between R&D spending’s and innovation output. In addition, the
interaction term of R&D spending’s and local quality suppliers shows an even
stronger significance level with a P value of <0,001. However, both hypotheses are
only partially supported as the regression coefficient reports a different direction
than is suggested in the hypotheses. While it was expected that lower levels of
financial market development and lower quality of suppliers would weaken the
effectiveness of R&D in shaping innovation output, the empirical results report a
negative regression coefficient (β = -1, 442 and β -2,293). Meaning that low levels
of the moderating variable positively moderate the relationship. Consequently,
hypotheses 3 and 4 are only partly supported by the empirical results.
Table 2. Results of the regressions by the generalized estimating equations for innovation output
Model 1 Model 2 Model 3 Model 4
Control Variables
Competition 3,025*** 2,806*** 1,502*** 3,527***
Market Size 1,356*** 0,520 0,391 0,427
Education System 2,397*** 1,802*** 2,731*** 1,353***
Moderating Variables
Training Services 3,162* 2,526*** 3,283***
Government Efficiency -1,882** -1,952** -2,448***
Financial Market Development 1,147 1,026 0,412
Local Quality Suppliers -1,246 -1,042 -1,466**
Main effect
R&D Spending’s 1,2177** 1,288*
Interaction Effects
R&D spending’s X Training Services 2,128**
R&D spending’s X Government Efficiency 0,703
R&D spending’s X Financial Market
Development -1,442**
R&D spending’s X Local Quality Suppliers -2,293***
Notes: N: 868. Standardized Coefficients are reported. * p < 0.1, ** p < 0,05, ***p < 0,01 (2-tailed)
24


5. Discussion

While firms are increasingly internationalizing R&D activities to respond to the
rising product demand of emerging markets, modern literature disputes the
effectiveness of R&D in shaping innovation in markets that are overshadowed by
institutional voids. By conducting cross-country analysis this study builds on the
need to clarify the disputed relevance of R&D in enhancing innovation (Goñi &
Maloney 2014; Schneider 2005) and responses to the need to amplify innovation
literature in foreign markets (Hult et al., 2004; Ernst et al., 2015). Drawing on a
sample of 124 economies, we aim to answer the question of how institutional voids
influence the effectiveness of R&D in enhancing innovation.
5.1. Theoretical and managerial implications

This study finds empirical support for the idea that institutions are key influencers
of R&D effectiveness in shaping innovation (Furman, Porter & Stern, 2000, North,
1990). By testing the moderating role of four key institutional conditions, we were
able to identify a change in the relation between R&D and innovation as of a change
in the institutional conditions. Specifically, we found support for the moderating
role of training services, financial markets and supplier quality (hypothesis 1, 3 and
4). Identifying a significant interaction of the institutional conditions allows us to
believe that firms might encounter varying results on their R&D efforts when
expanding R&D activities across borders. This finding is in line with the ideas of
institutional theory stating that institutional conditions are key influencers of firms
operations (North, 1990) and supports the view of Porter & Stern (2001) who state
that the productivity of innovation models is dependent on the location in which it is
situated.
As statistical support for the influence of institutional conditions is found, we

continue our study by interpreting how the conditions affect R&D across countries.
Specifically, we are interested in the affect of the (lacking) institutional conditions
of emerging markets. As firms are increasingly targeting the consumption markets
of emerging countries, it is vital to provide better understanding of firm’s
innovation capacity in those countries (Li & Kozhikode, 2009; Zhang et al., 2007).
25


Firstly, we tested how the lack of training institutions influences the effectiveness of
R&D. Building on prior views that stress the importance of trained talent in R&D
activity (Ballot et al., 2001; Falk, 2006; Cohen & Levinthal, 1990), we hypothesized
that low levels of training institutions in emerging markets negatively moderate the
relation between R&D and innovation. Empirical support for this statement was
found. Consequently, it is argued that the ability of firms to transform R&D efforts
into innovation output in emerging markets is weakened as of the lacking training
institutions. Since firms are steadily expanding their R&D activities to emerging
markets (London & Hart, 2004; Li & Kozhikode, 2009), it is incited that managers
find ways to overcome the challenges presented by the lack in training services.
Next it was argued that inefficient governmental policies hamper the relation
between R&D and innovation (Atkinson & Wial, 2008; Cohen & Levinthal, 1990).
However, when testing this assumption, we did not find significant support
confirming this assumption. As of this, we cannot make a solid suggestion about the
moderating role of the inefficient government in emerging markets on R&D’s
effectiveness. Additionally, we investigated the moderating role of financial
markets conditions on the effectiveness of R&D. As R&D require large capital
investments, it was hypothesized that R&D effectiveness is weakened when
executed in markets that lack financial market sophistication (Burgess &
Steenkamp, 2006; Khanna et al., 2005). Although our study supports the view that
financial institutions influence the effectiveness of R&D in shaping innovation, it
contradicts the thought that underdeveloped financial markets reduce R&D
effectiveness (Becker, 2013). Contradictory results were found, suggesting that
R&D is a stronger influencer of innovation when operating in markets that lack
well-developed financial institutions. This challenges the thoughts of prior research
that argues that the effectiveness of R&D activities is reliant on external capital
provided by financial institutions (Bilbao‐Osorio & Rodríguez‐Pose, 2004; Becker,
2013).
Lastly, we found striking results for the affect of local suppliers on R&D
effectiveness. Drawing on theory that reported the advantages of incoming
knowledge spillovers (Arranz & Arroyabe, 2008; Sobrero & Roberts, 2002), it was
26


argued that a lack of quality suppliers weakens the relation between R&D and
innovation. Yet clashing results were found. Although the moderating role of
suppliers in R&D productivity was supported, the findings report that low levels of
supplier quality correspond with stronger R&D effectiveness. This finding
contradicts prior views stating that supplier quality is vital for effective R&D
activity (Arranz & Arroyabe, 2008).
A plausible argument that might explain why a lack in both financial development
and supplier quality does not seem to weaken the effectiveness in R&D is provided
by Miott & Sachwald (2003). They argue that the lack of institutions can encourage
firms to interact with other external sources that help them execute their operations.
Firms might for example partner with universities or competitors, in the form of
strategic alliances or partnerships, in order to obtain the complementary resources or
capital necessary to effectively execute R&D activity (Miott & Sachwald, 2003;
Arranz & Arroyabe, 2008; Khanna et al., 2005). However, to further support this
thought, a better understanding of the role of external partnerships in R&D
operations is required.
5.2. Limitations and future research

Although this research was carefully prepared, there are still some limitations and
shortcomings to the study. A first limitation of this study is the limited number of
institutional conditions integrated in the model. We measure the affect of
institutions on R&D effectiveness on the basis of four institutional conditions. Yet,
institutional theory reports numerous other conditions that vary in development
across nations, such as commercial and industrial infrastructure (North, 1990;
Global Competiveness Index 2015). Analyzing the moderating roles of other types
of institutional conditions would provide a more complete understanding of how
institutions influence the effectiveness of R&D in shaping innovation.
Moreover, this study uses country level data of the World Economic Forum to map
the effort that firms put into R&D activities. Even though the World Economic
Forum provides reliable and adequate data, it does provide a somewhat broad and
generalized view of the efforts that firms put into R&D. If the study had included
27


firm-level data to depict the R&D input, a more detailed and precise view of the
both R&D effort and results would have been achieved. Lastly, prior research has
indicated that in order to assess a firm’s capability in enhancing innovation, studies
should rely on multiple indicators (Damanpour, 1991). It is adviced that innovation
literature uses a composite measurement consisting all determinants of innovation
input (Damanpour, 1991; Carayannis & Provance 2008). While this study takes a
significant step in mapping a firm’s capability of R&D in determining innovation
output, it neglect all other determinants of innovation. Including other indicators of
firm innovativeness would provide a more complete understanding of a firm’s
capacity to innovate hence augmenting understanding of how to innovate in
emerging markets.
Based on the results of this study, some opportunities for future research arises.
While it was hypothesized that institutional voids would negatively influence R&D
effectiveness, contradictory results were found for the lack in financial market and
local quality suppliers. Consequently, this asks for further investigation. As
mentioned, research argues that whenever institutions are lacking, firms are
encouraged to focus on other informants that are capable of providing the necessary
external resources (Miott & Sachwald, 2003; Khanna et al., 2005). Future research
could explore which external sources substitute for the role of institutions in
providing external resources.
Furthermore, future research could build on the fact that this study provides insights
in the influences of institutional voids on firms operations, hence neglects further
suggestions on how to respond to these influences. Prior studies state that firms
must modify their business models to the unique market conditions of countries in
order to successfully implement their business models (Khanna et al. 2005; Khanna
and Palepu 1997; Khanna and Palepu 2013). While some multinationals have
managed to recognize the influences of institutional voids and successfully adapted
their business models2, it is often observed that firms are struggling to effectively
adjust their models to the underdeveloped institutions of foreign markets. Hence,

2 To illustrate this point: McDonalds is often referred to as a firm that manages to respond successfully to the
differences in institutional conditions. E.g. when they recognized the lack in training institutions in China, it opened a
local Hamburger University. Within 4 years, they trained more than 4000 employees and increased their operations
immensely. (McKinsey & Company, Perspectives on global organizations (2012) p.17)
28


future research could consider providing insight in how firms should adapt their
innovation models in order to capitalize on the unique market conditions of
emerging markets.

6. Conclusion
This study contributes to existing literature by advancing the understanding of how

corporate R&D is influenced by the institutional conditions of emerging countries.
As firms are increasingly internationalizing R&D operations in order to respond to
the growing market demand, it is vital that it is well understood if and how R&D
operations are being affected by the local conditions of foreign markets. While prior
research has addressed the issue of institutional voids, little research has tried to
empirically map the affect of voids on the innovation models of firms. As
innovation has become a primary source of future business growth, this study aims
to increase insights in how R&D operations are affected by the institutional voids
when striving for innovation development overseas.
By investigating the moderating affect of four different types of institution, this

study found that the effectiveness of R&D in shaping innovation changes as of a
change in institutional context. Thus, whenever R&D activities are transferred
across borders, firms can expect to experience a change in the results derived from
their R&D efforts. As emerging markets differ extensively in institutional context
from advanced markets, it is of high importance that firms acknowledge this
finding. However no single answer can be given to the question of how institutional
voids affect R&D effectiveness, as it appears that some voids are positively
affecting the strength of R&D, while others show a negative influence. When
zooming in on the specific institutional voids, we can conclude that the lack of
training institutions hamper the relation between R&D and innovation, while a lack
in financial markets and local suppliers strengthen the relationship. Consequently, it
is suggested that future research extends this study by investigating how firms can
respond to these varying influences in order to maximize results on R&D
operations.
29


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Appendix

Appendix A: Conceptual model

Control Variables
Research &
Innovation Output
Development
Level of Institutional Voids
Training Government Financial Market Local Quality

Services Efficiency Development Suppliers
Figure 1. Conceptual model.
35


Appendix B: Country sample
Table: Country sample (N=124)

Economy Region (IMF, April, 2015)
Albania Emerging and Developing Europe
Algeria Middle East, North Africa, and Pakistan
Argentina Latin America and the Caribbean
Armenia Commonwealth of Independent States
Australia Advanced economies
Austria Advanced economies
Azerbaijan Commonwealth of Independent States
Bahrain Middle East, North Africa, and Pakistan
Bangladesh Emerging and Developing Asia
Barbados Latin America and the Caribbean
Belgium Advanced economies
Benin Sub-Saharan Africa
Bolivia Latin America and the Caribbean
Bosnia and Herzegovina Emerging and Developing Europe
Botswana Sub-Saharan Africa
Brazil Latin America and the Caribbean
Bulgaria Emerging and Developing Europe
Burkina Faso Sub-Saharan Africa
Burundi Sub-Saharan Africa
Cambodia Emerging and Developing Asia
Cameroon Sub-Saharan Africa
Canada Advanced economies
Chile Latin American and the Caribbean
China Emerging and Developing Asia
Colombia Latin American and the Caribbean
Costa Rica Latin American and the Caribbean
Cote d’Ivoire Sub-Saharan Africa
Croatia Emerging and Developing Europe
Cyprus Advanced Economies
Czech Republic Advanced Economies
Denmark Advanced Economies
Dominican Republic Latin American and the Caribbean
Ecuador Latin American and the Caribbean
Egypt Middle East, North Africa, and Pakistan
El Salvador Latin American and the Caribbean
Estonia Advanced Economies
Ethiopia Sub-Saharan Africa
Finland Advanced Economies
France Advanced Economies
Gambia Sub-Saharan Africa
Georgia Commonwealth of Independent States
Germany Advanced Economies
Ghana Sub-Saharan Africa
Greece Advanced Economies
Guatemala Latin America and the Caribbean
Guyana Latin America and the Caribbean
Honduras Latin America and the Caribbean
Hong Kong Advanced Economies
Hungary Emerging and Developing Europe
Iceland Advanced economies
India Emerging and Developing Asia
Indonesia Emerging and Developing Asia
Ireland Advanced economies
Israel Advanced economies
Italy Advanced economies
36


Jamaica Latin America and the Caribbean
Japan Advanced economies
Jordan Middle East, North Africa, and Pakistan
Kazakhstan Commonwealth of Independent States
Kenya Sub-Saharan Africa
Korea Advanced economies
Kuwait Middle East, North Africa, and Pakistan
Kyrgyz Republic Commonwealth of Independent States
Latvia Advanced economies
Lesotho Sub-Saharan Africa
Lithuania Advanced economies
Luxembourg Advanced economies
Macedonia Emerging and Developing Europe
Madagascar Sub-Saharan Africa
Malawi Sub-Saharan Africa
Malaysia Emerging and Developing Asia
Mali Sub-Saharan Africa
Malta Advanced economies
Mauritius Sub-Saharan Africa
Mexico Latin America and the Caribbean
Mongolia Emerging and Developing Asia
Montenegro Emerging and Developing Europe
Morocco Middle East, North Africa, and Pakistan
Mozambique Sub-Saharan Africa
Namibia Sub-Saharan Africa
Nepal Emerging and Developing Asia
Netherlands Advanced economies
New Zealand Advanced economies
Nicaragua Latin America and the Caribbean
Nigeria Sub-Saharan Africa
Norway Advanced economies
Oman Middle East, North Africa, and Pakistan
Pakistan Middle East, North Africa, and Pakistan
Panama Latin America and the Caribbean
Paraguay Latin America and the Caribbean
Peru Latin America and the Caribbean
Philippines Emerging and Developing Asia
Poland Emerging and Developing Europe
Portugal Advanced economies
Qatar Middle East, North Africa, and Pakistan
Romania Emerging and Developing Europe
Russian Federation Commonwealth of Independent States
Saudi Arabia Middle East, North Africa, and Pakistan
Senegal Sub-Saharan Africa
Serbia Emerging and Developing Europe
Singapore Advanced economies
Slovak Republic Advanced economies
Slovenia Advanced economies
South Africa Sub-Saharan Africa
Spain Advanced economies
Sri Lanka Emerging and Developing Asia
Sweden Advanced economies
Switzerland Advanced economies
Tajikistan Commonwealth of Independent States
Tanzania Sub-Saharan Africa
Thailand Emerging and Developing Asia
Trinidad and Tobago Latin America and the Caribbean
Tunisia Middle East, North Africa, and Pakistan
Turkey Emerging and Developing Europe
Uganda Sub-Saharan Africa
37


Ukraine Commonwealth of Independent States
United Arab Emirates Middle East, North Africa, and Pakistan
United Kingdom Advanced economies
United States Advanced economies
Uruguay Latin America and the Caribbean
Venezuela Latin America and the Caribbean
Vietnam Emerging and Developing Asia
Zambia Sub-Saharan Africa
Zimbabwe Sub-Saharan Africa
38


Appendix C: Operationalization of the model variables
Variable Source Operationalization

Dependent Variable Innovation output Global Innovation Index Data taken from the innovation output Sub-Index
Pillar [1 = low output level; 100 = high output level]
Independent Variable R&D Spending’s Global Competiveness Data taken from the Executive Opinion Survey: In
Index* your country, to what extent do companies spend on
research and development (R&D)? [1 = do not spend
on R&D; 7 = spend heavily on R&D]
Moderating Variables Availability of high- Global Competiveness Data taken from the Executive Opinion Survey: In
quality Training Services Index* your country, to what extents are high-quality,
specialized training services available? [1 = not
available at all; 7 = widely available]
Government Efficiency Global Competiveness Data on the efficiency of government spending,

Index* government regulation and legal frameworks
gathered by Executive Opinion Survey is aggregated
in a single measurement World Economic Forum [1
= low efficiency; 7 = high efficiency]
Financial Market Global Competiveness Data on the availability of financial services, local
Development Index** equity markets, regulations, banking systems, venture
capitalist and legal rights gathered by the Executive
Opinion Survey is aggregated in a single
measurement by the World Economic Forum [1 =
weakly developed; 7 = highly developed]
Level of Local Suppliers Global Competiveness Data taken from Executive Opinion Survey: In your
Quality Index* country, how would you assess the quality of local
suppliers? [1 = extremely poor quality; 7 = extremely
high quality]
Control Variables Competition Global Competiveness Data on foreign competition and domestic
Index* competition is aggregated in a single measurement in
the 6th pillar by the World Economic Forum. [1 = low
levels of competition; 7 = high levels]
Market Size Global Competiveness Data on the domestic market size index,
Index** Exports as a percentage of GDP and GDP (PPP$
billions) is aggregated into a single measurement by
the World Economic Forum [1 = small market size; 7
= large market size]
Education System Global Competiveness Data taken from Executive Opinion Survey: How
Index* well does the education system in your country meet
the needs of a competitive economy? [1 = not well at
all; 7 = extremely well]
Notes: * Data in the index is collected from the World Economic Forum. ** Data in the index is collected from
the World Economic Forum, World Bank and International Finance Cooperation.
39

R&D Driven Innovation in Emerging Markets: The Moderating Role of Institutional Voids

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R&D Driven Innovation in Emerging Markets: The Moderating Role of Institutional Voids

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R&D driven innovation in

Thesis supervisor: Dr. R.O Mihalache

Given the relatively new and unexplored phenomenon of innovation in emerging

“How do institutional voids influence the effectiveness of R&D in developing

By providing insight in the moderating role of institutions on the relation between

In order to build a common understanding of why it is important to increase

2.2. Research and development

2.3. Institutional voids

Thus, literature suggest that to effectively implement business models in emerging

2.4. Hypotheses development

The availability of high-quality training institutions

Secondly, well-trained workers augment R&D processes, as they are capable of

H1: A lack in high-quality training services negatively moderates the relation

The government efficiency

The Financial Market institutions

Financial systems are found to be of primary concern to the execution of corporate

The quality of local suppliers

3.1 Research setting and data collection

3.2 Measurements of variables

Dependent variable: Innovation Output

Independent Variable: Research and Development

Moderating variables: Institutional Conditions

Government efficiency, our second moderating variable, is operationalized by data

3.3. Data analysis

We empirically analyze the data by performing the statistical technique of

Moreover, the GEE technique is recommended when studying estimation effects as

As presented in table 1, we investigated the correlations of our key variables by

Table 1. Descriptive statistics and correlation

5.1. Theoretical and managerial implications

As statistical support for the influence of institutional conditions is found, we

5.2. Limitations and future research

This study contributes to existing literature by advancing the understanding of how

By investigating the moderating affect of four different types of institution, this

Agnihotri, A. (2015). Low-cost innovation in emerging markets. Journal of Strategic Marketing,

Damanpour, F. (1991). Organizational innovation: A meta-analysis of effects of determinants and

North, D. C. (1990). Institutions, institutional change and economic performance. Cambridge

Prahalad, C. K. (2012). Bottom of the Pyramid as a Source of Breakthrough Innovations. Journal of

Sobrero, M., & Roberts, E. B. (2002). Strategic management of supplier–manufacturer relations in

Wu, L. Y. (2007). Entrepreneurial resources, dynamic capabilities and start-up performance of

Level of Institutional Voids

Training Government Financial Market Local Quality

Figure 1. Conceptual model.

Table: Country sample (N=124)

Variable Source Operationalization

Government Efficiency Global Competiveness Data on the efficiency of government spending,

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