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Abstract
Emerging economies present attractive opportunities to foreign firms. However, internationalization risk faced by foreign firms can have significant implications for their performance relative to local firms. Information Technology (IT) and IT-enabled capabilities help firms overcome internationalization risk and compete globally. Marketing Capability and Relational Capability also mitigate this risk through access to information related to markets and the business environment. We examine how foreign firms and local firms compare in leveraging synergies between such IT and firm capabilities. We focus on two kinds of IT-enabled capabilities: IT-enabled Flexibility in Customer Services, and IT-enabled Flexibility in Partner Services, and develop hypotheses for their complementary effects with Marketing Capability and Relational Capability respectively, to positively influence firm performance. We then draw on the firm-specific advantages framework to argue that foreign firms face a comparative disadvantage relative to local firms in leveraging the synergy between IT-enabled Flexibility in Customer Services and Marketing Capability. In contrast, foreign firms enjoy a comparative advantage relative to local firms in leveraging the synergy between IT-enabled Flexibility in Partner Services and Relational Capability. Empirical analysis using matched-pair survey and secondary data of 182 foreign and local firms in India supports our hypotheses. Our findings highlight important differences in how foreign and local firms benefit from IT, thus contributing towards a better understanding of how context and contingencies influence IT implications in emerging economies.
Acknowledgments
We thank the review panel for their meticulous and detailed comments that helped improve this paper. We are grateful to participants at the 2014 International Conference on Information Systems for valuable comments on a preliminary version of this paper. We also thank participants at seminars at the University of Colorado Denver, University of Hong Kong, and Washington State University for helpful comments on previous versions of this paper. Any errors that might remain are our own.
Notes
1. The relationship between risk and uncertainty was demonstrated eloquently by Knight [Citation45]. He assumed that risk and uncertainty are two separate concepts: risk assumed to be based on explicit knowledge, uncertainty based on implicit knowledge, and the frontier between risk and uncertainty somehow dynamic. Knight argued that if some part of uncertainty may be expressed in a quantitative probability, then it fades into risk. The remaining part, the uncertainty that cannot be framed quantitatively, is defined as “true uncertainty,” i.e., “occurrences so revolutionary and unexpected by anyone’’ [45, p. 176].
2. India is downstream (having a more uncertain environment) to host countries of most foreign firms [Citation50]. Thus, in general, foreign firms operating in India face higher risks and greater uncertainty as compared to other large developing economies.
3. Challenges of internationalization risk in emerging economies are exemplified by the recent struggles of foreign firms such as Walmart, Unilever, and Kellogg’s in competing against local firms in India. However, at the same time, foreign firms such as Samsung, Nike, and HSBC are prospering in India and other emerging economies.
4. An instance of how foreign and local firms may differ in benefits from IT is that IT benefits local firms by enhancing operational efficiency, whereas IT benefits foreign firms by helping in communication with headquarters [Citation77].
5. A plausible reason for the dearth of nuance regarding whether foreign firms face deficiencies or enjoy comparative advantages relative to local firms when leveraging IT is that much of extant research is conducted in developed economies. In their reflection article commemorating their JIBS Decade Award, Meyer and Peng [Citation60, p.2] state that “in developed economies, theorizing that abstracts from contextual variations can still often lead to meaningful (albeit incomplete) theoretical explanation of business phenomena.” Conversely, integrating context with the theory is particularly suitable for emerging economy contexts and enables scholars to develop nuanced theoretical ideas.
6. OlaCabs, a local competitor of Uber (a foreign firm) in India, offers customers the flexibility to pay for taxi services in three IT-enabled ways: cash, app-based credit card, and pre-paid digital wallet connected to a bank account [Citation86]. Compared to Uber, which only allows app-based credit card payments, OlaCabs gains are due to IT-enabled flexibility.
7. In India, consumers who desire quality and price premiums tend to live in concentrated urban areas, whereas a vast majority of the population with lower purchasing power is dispersed in rural areas. The 69 percent of India’s rural population contributes 50 percent of the country’s gross domestic product, live in 600,000 villages, of which less than 4 percent have a population greater than 5,000.
8. Samsung and Sharp are exemplars of better performing foreign firms. They leveraged superior manufacturing capabilities to reduce prices of flatscreen TVs and grow sales while competing against local Chinese firms producing conventional TVs [Citation29].
9. Emerging economies provide a contextual and institutional environment that is often not experienced by foreign firms earlier. As a result, many foreign firms learn from one another and form a strategic reference group to mimic each other’s behavior, leading to consistent patterns of strategies and actions. Hence, differences in contextual origins and institutional settings provide another basis for the generalizability of strategic behaviors, such as FSAs, across foreign and local firms.
10. An information system is the information processing part of a business or organization and deals with information processing tasks, such a management and servicing process, and actors, such as managers and people. Structurally, an IS consists of related system components, the relationships between them, and behavior that accommodates changes to system states over time.
11. It is possible that location-boundedness arising from lack of context-specific knowledge about local cultures and ways of doing business may be mitigated to some extent through the hiring of senior and middle managers from the foreign country. Nonetheless, path dependencies and time-compression diseconomies will remain. Furthermore, in a large emerging economy like India, there is no “single version” of market knowledge. Distinct differences in cultures, sub-cultures, races, languages, religious practices and state regulations across geographies imply that India consists of multiple markets, with multiple versions of market knowledge. Such diversity would require the hiring of more than a few local leadership and management team members. Finally, the foreign firm would also require not only the means but also the will to incorporate local expertise into its marketing practices.
12. ITCS derived from IT deployed by local food chains in India is an example of localized ITCS. When presented with online customer service channels from foreign food chains (e.g., McDonalds) and competing local food chains (e.g., fast food segment of Haldiram’s in India), customers may be more attracted to the local firm because a local firm’s IT-enabled customer services are more adapted and flexible to their needs and contextual preferences. Specifically, websites and apps of foreign food chains often require customers to verify their purchase through email while local firms accept phone text messages and missed-call based verifications. Customers using low-bandwidth Internet connections or having no email accounts prefer this flexibility.
13. A significant percentage of local firms in India are majority family- or community- owned or influenced. This overlap between family and business systems results in risk aversion and long-term orientation. The alignment of long-term orientation of family and community firms with the cultural ethos of Indian customers leads to enduring relationships. This successful behavior, in turn, shapes the strategic choices of other non-family local firms, which thereby also share a similar long-term orientation.
14. An example that substantiates our arguments for why local firms are better positioned than foreign firms to leverage the synergy of ITCS and Marketing Capability is IndusInd Bank, a local firm based in Mumbai, India (see Table A1 in Online Appendix A for additional examples). The bank uses IT-enabled customer services, such as smartphone-based local language–enabled video chat that caters to local needs, in addition to multichannel facilities such as ATMs, and banking through Internet, mobile and phone channels. IndusInd is the first Indian bank to adopt a real-time gross settlement system (RTGS) that enables specialized real-time funds and securities transfer without a waiting period, and the transaction is settled on a one-to-one basis without bundling with any other transaction. Adoption of RTGS is an innovative step as the Indian banking system faces challenges due to socio-cultural factors and lack of awareness that hamper the spread of e-payments. ITCS helped IndusInd to identify opportunities, respond to customer needs, and synchronize local expertise to fulfill business needs, resulting in it becoming one of the best-performing bank stocks. HSBC exemplifies a foreign firm that has struggled to adapt its global IT platforms to the Indian context. Despite heavy investments in marketing, HSBC has decided to shrink its presence and focus on the higher-end of “globalized” Indian consumers. This is because HSBC has been unable to provide flexible banking services (e.g., missed-call based deposits) that local firms offer through mobile apps and online channels.
15. Honda illustrates our arguments that foreign firms have firm-specific advantages stemming from global scope of international operations and a global network of partners (see Table A1 in Online Appendix A for additional examples). Honda manufactures cars and two-wheelers in India. Honda set up a local base of supply chain firms to replace costly importing of parts and equipment. To achieve a local supply chain base that meets its standards while remaining cost-effective, Honda relies on an IT-enabled marketplace and portal to source, coordinate, and communicate with partners. Thus, Honda, a foreign firm, uses relevant IT to complement its expertise in building local relationships, enabling it to flexibly respond to vagaries in supplier capacity constraints due to information sharing and operational synchronization. The resulting visibility and flexibility provided Honda with a highly efficient “just-in-time” manufacturing process producing increasing volumes of market-leading products.
16. We can also examine counterfactual arguments to this hypothesis [Citation23]. Foreign firms would have a comparative disadvantage relative to local firms in leveraging the synergy of ITPS with Relational Capability if the complementarity is a location-bound FSA. If this were the case, foreign firms in emerging economies would primarily have local, not global partners. These local partners would have a high bargaining power and would enforce non-IT based exchanges on foreign firms. However, this would only result in foreign and local firms having a similar ability to leverage ITPS to complement Relational Capability, contradicting the counterfactual premise.
17. The population for this study consisted of all medium and large sized organizations (annual revenues greater than US$ 20 million) headquartered in the Mumbai–Pune region. The sample frame was constructed by collating one industry and two city directories and removing inactive organizations with no filings to India’s Ministry of Corporate Affairs in the prior two years.
18. Surveys were administered using a dual online-offline mode [Citation43]. In the initial online mode, firms were invited to participate in the survey through emails which explained the study’s purpose, its benefits, and the credentials of the research team. This mode ensured that potential respondents were operational firms with Internet access and a basic level of technology sufficiency. In the offline mode, follow-up telephone calls were made to confirm participation, gather contact details of the respondents, and set up onsite meetings. The surveys were administered in-person during these meetings, thereby ensuring that the firm and respondents were authentic and met eligibility criteria. Participation was incentivized by offering a summary of our findings, a small souvenir, and assuring confidentiality and privacy of responses.
19. Chief marketing officers (or equivalent) responded to questions on marketing capability; senior IT managers responded to questions on ITCS and ITPS, and chief operating officers (or equivalent) responded to questions on relational capability. Designations of equivalent respondents were general manager, director, vice president, and senior manager.
20. The financial year (FY) in India runs from April 1 to March 31. As our survey data were collected in December 2013-February 2014, we use performance data from Prowess for the next year (FY 2015-2016). FY 2014-2015 data provided similar results.
21. Survey instruments were developed through a multi-step process. In Step 1, items were constructed using existing scales where available or else through the development of new multi-item scales. In Step 2, items were pre-tested with academic IS and survey research experts, and senior marketing, operations and IT managers as industry respondents. Pre-test respondents offered comments regarding interpretation of the items, content validity, terminology, and clarity. The questionnaires were adjusted based on the comments. In Step 3, the questionnaires were localized by employing the back-translation method [Citation43], wherein a trilingual research assistant translated questions into the local language, and a second research assistant translated them back to English. The two versions were compared, discussed, and refined. In Step 4, the questionnaires were pilot tested to assess reliability, convergent and discriminant validity, and predictability. Final revisions were made to the questionnaires based upon the results of the pilot test.
22. Though controlling for the effect of Prior Performance on Performance is standard in IT business value studies, it also introduces issues into the empirical model. Since Performance is not independent of Prior Performance, Prior Performance may also account for unobserved variables that do not change over time in a random effects model. This may lead to skepticism in the estimates. However, we also estimated the model without Prior Performance and found consistent results. We also found consistent results in the two-stage model used for analyzing the survey data. Together, this brings confidence in our approach and the benefits of controlling for Prior Performance outweigh the issues raised from doing so.
23. We use the survey-based measure of Marketing Capability “because capabilities are deeply rooted in organizational processes, subjective evaluations of experienced decision makers may better capture their nuances [than objective measures of capabilities]” [47, p. 5] and “may allow researchers to measure firms’ internal capabilities more precisely” [107, p. 178].
24. Although an exclusion restriction is not formally required for identification, we include two additional variables in the first-stage equation (which are not present in the second-stage performance equation) to aid in model identification [Citation34]. These variables were (1) number of multi-firm platforms the firm participates in and (2) size of senior IT management team of the firm. Conceptually, both these variables suggest a high level of IT in the firm and are not likely to by themselves influence firm performance. The statistically significant coefficients of these variables in the first-stage equation (see Table A3 in Online Appendix A) suggest that there is unlikely to be a problem of weak identification [Citation11]. When we also include these two additional variables in the performance equation, neither of them was statistically significant, and the results are unchanged.
25. We conducted several additional tests to assess robustness. First, because the independent variables, main dependent variable (ROA), and control variables are from different sources and the main dependent variable is objective (not perceptual), it mitigates concerns of common method bias [Citation69]. Nevertheless, we performed Harman’s one-factor test [Citation34] and marker-variable test [Citation54]. In Harman’s test, nine factors with eigenvalues exceeding one were extracted, with the first factor explaining only 14.86 percent of the variance. In marker-variable tests, correlations among variables did not change significantly after accounting for common method variance. Thus, our matched-pair data collection protocol and results of both tests suggest that common method bias is not a big concern. Moreover, because our hypotheses pertain to interaction effects, common method bias is even less of a concern because common method variance reduces the likelihood of detecting interaction effects [Citation105]. Second, we checked for multicollinearity by examining variance inflation factors (VIFs). In all equations, maximum and average VIFs were below 2.76, which is well below suggested limits, indicating that multicollinearity is not problematic. Third, although tests did not suggest the presence of heteroscedasticity [Citation108], we use robust standard errors in all our estimations [Citation33]. To further test whether our data suffers from heteroscedasticity, we plotted the squared residuals against predicted values of the dependent variable, the idea being to test whether the estimated mean value of Performance is systematically related to the squared residual. We found no systematic pattern, suggesting no significant heteroscedasticity. We also plotted residuals against independent variables. No systematic pattern emerged, further suggesting a lack of heteroscedasticity. Fourth, we assessed the sensitivity of the alternative survey-based measure of firm performance to individual items. For example, we re-estimated the models after dropping the item related to sales growth. Results remain unchanged. Consistent with prior research, a holistic measure of performance is more appropriate [Citation71]. Fifth, we performed several diagnostic checks including normality of residuals, and influential observations, and found no problems or violations of assumptions [Citation33]. Sixth, as discussed earlier, we triangulated our results using Marketing Intensity collected from Prowess database to proxy for Marketing Capability. The results, shown in Table A5 in Online Appendix A, are unchanged.
26. Our findings are in the context of foreign firms in an emerging economy. We can expect similar contextual and contingent factors to influence the synergy between IT-enabled capabilities and firm capabilities in the context of a developed economy, with foreign firms hailing from emerging economies. However, since the location-bound nature of FSAs would plausibly be reversed in this context (complementarity of ITCS with Marketing Capability a nonlocation-bound FSA and complementarity of ITPS with Relational Capability a location-bound FSA), the findings and theoretical mechanisms would both be different.
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Notes on contributors
Jiban Khuntia
Jiban Khuntia ([email protected]) is the Ph.D. Program Director and Assistant Professor of Information Systems in the Business School at the University of Colorado, Denver. He received his Ph.D. from the Robert H. Smith School of Business, University of Maryland. Dr. Khuntia’s research is in the areas of digital service innovation and health IT. His work has appeared in journals including Journal of Management Information Systems, Production and Operations Management, Decision Support Systems, Communications of the AIS, and others. Earlier, he had a decade of professional and consulting experience in supercomputing, the IT industry, and government organizations.
Abhishek Kathuria
Abhishek Kathuria ([email protected]) is an Assistant Professor of Information Systems at the Indian School of Business. He was previously at The University of Hong Kong, which he joined after receiving a Ph.D. from the Goizueta Business School at Emory University. His research interests include business value of IT and the role of IT in innovation, with a focus on emerging economies. His work has been published in such journals as Journal of Management Information Systems, and Communications of the AIS, among others, and received multiple best paper nominations and awards at various academic conferences. Dr. Kathuria is an advisor to and co-founder of multiple startups, and consults on business transformation, organizational turnarounds, and IT strategy with public and private corporations in Hong Kong, India, and the Middle East.
Terence J.V. Saldanha
Terence J.V. Saldanha ([email protected]) is an Assistant Professor of Management Information Systems at the Terry College of Business at the University of Georgia. He received his Ph.D. in Information Systems from the Stephen Ross School of Business at the University of Michigan. His research interests include the business value of IS and the role of IS in innovation. His research has been published in such journals as MIS Quarterly, Journal of Management Information Systems, Journal of Operations Management, and Production and Operations Management, among others, and in various academic conference proceedings. Prior to his graduate studies, he worked in the software development industry.
Benn R. Konsynski
Benn R. Konsynski ([email protected]; corresponding author) is the George S. Craft Distinguished University Professor of Information Systems and Operations Management at the Goizueta Business School at Emory University. He has held faculty positions at the University of Arizona and Harvard Business School, and served as adviser and board member on public and private corporations. He holds a Ph.D. in Computer Science from Purdue University. Dr. Konsynski was also named Baxter Research Fellow at Harvard, and Hewlett Fellow at The Carter Center. He specializes in issues of digital commerce and information technology in relationships across organizations and has published in such diverse journals as Harvard Business Review, MIS Quarterly, Journal of Management Information Systems, Data Communications, Communications of the ACM, Decision Sciences, Decision Support Systems, Information Systems Research, and IEEE Transactions on Software Engineering.