Untangling the Duality of Emerging Market Firms’ Response to Outward Foreign Direct Investment Policies on Their Innovation Performance: A Resource Dependence Perspective

Abstract

Firms’ international expansion, affected by outward foreign direct investment (OFDI) policies of home countries, can greatly shape their innovation performance. Yet, existing literature lacks sufficient investigation toward the nexus between corporate response to policies in OFDI activities and subsequent innovation performance. Thus, the authors designed this study to examine how a firm’s response to OFDI policies affects its innovation performance. Drawing upon the resource dependence theory, the authors theorize corporate response to OFDI policies as firm dependence on home government. By arguing that such dependence differentially affects firm innovation through support and control mechanisms, they elucidate the inverted U-shaped relationship between corporate response to OFDI policies (measured by the percentage of a firm’s OFDI projects in policy-favored markets) and innovation performance (measured as patent counts). Furthermore, this curvilinear relationship, they posit, is moderated and strengthened by home-government subsidies the firm receives (calculated as the ratio of annual subsidies received to yearly sales). With archival data of 2,050 Chinese listed manufacturing firms responding to specific OFDI policies during 2013–2021, their predictions are corroborated. Overall, by illuminating the innovation implications of OFDI as corporate response to policies, this study contributes to the international marketing literature in the context of emerging markets.