Innovation incremental for business group firms: IIM-A working paper

A firm affiliated to a business group tends see more incremental innovation due to internal network of knowledge transfer, says a working paper at the Indian Institute of Management, Ahmedabad (IIM-A).  The paper shows that firms affiliated to business groups not only seem to benefit from availability of internal capital, but also in the process of innovation.

Further, the study argues that network diversity impacts nature of innovation by firms affiliated to a business group.  Titled 'Innovation in Business Group Firms: Influence of Network Diversity', the paper has been co-authored by Anita Kerai and Sunil Sharma of IIM-A.

"Network diversity does influence the type of innovation by business group firms. Given that internal network may be more cost efficient, business group firms may have a tendency to over rely on knowledge transfer within the groups. However innovation in such cases will be incremental. In an open era innovation, when technology is changing at very fast pace, even larger firms are outsourcing the R&D activities or becoming part of alliances," the paper concluded.

As per the paper, for firms competing in global market or in industries where other players have capabilities for radical innovation, it is imperative for business group firms to leverage external network. "It will help managers to form innovation strategies and acquire required resources," the paper opined.

The trend seems to be more visible in emerging markets like India, China, Mexico, Brazil and Russia, going by the number of patents.

"Firms from India, China, Mexico, Brazil and Russia commonly referred as emerging markets are replacing firms from developed countries in Fortune 500 lists. Emerging market firms are constantly transforming themselves to become innovators and global challengers. In 2013, emerging market firms have been granted three times more patents by US patents and Trademark office (USPTO) as compared to companies from developed markets," it stated.

The paper alluded to the fact that business groups in emerging markets and top patent granted firms share the common characteristic of presence in multiple locations and multiple product domains.

"As more and more emerging market firms entered in the global market, they realized the need to go beyond the low-cost advantage. Innovation has become crucial for firm’s survival and growth especially in fast changing highly competitive market. Emerging market firms affiliated to business groups have responded well to this challenge and have come up with interesting innovations," the paper further stated.