Ownership, innovation, and variable institutional quality

• Published date: 01 March 2023
• Author: Hien Thu Tran,Mark Freel
• Date: 01 March 2023
• DOI: http://doi.org/10.1111/corg.12477

ORIGINAL ARTICLE

Ownership, innovation, and variable institutional quality

Hien Thu Tran

1

| Mark Freel

1,2

1

Telfer School of Management, University of

Ottawa, Ottawa, Ontario, Canada

2

Lancaster University Management School,

Lancaster, UK

Correspondence

Hien Thu Tran, Telfer School of Management,

University of Ottawa, 55 Laurier Ave E,

Ottawa, ON K1N 6N5, Canada.

Email: hien.tran@telfer.uottawa.ca

Abstract

Research question/issue: Innovation has been a constant feature of the tales of tran-

sition and transformation. State ownership as the engine of innovation and techno-

logical change may be juxtaposed with the “liability of stateness”and the notion that

“privatization works.”This study seeks to investigate the relationship between legal

ownership and innovation inputs and outputs, while accounting for the moderating

effect of institutional quality on this relationship.

Research findings/insights: We exploit unique data from a very large-scale panel sur-

vey of enterprises (65,750 firms between 2006 and 2014) in Vietnam, a fast-growing

but understudied transition country, and apply advanced methodologies that control

for the endogeneity of institutions. Our findings point to the continued dominance of

state-owned enterprises (SOEs) in innovation activities in Vietnam. However, the

returns to innovation in SOEs accrue only up to a point and improving institutional

quality serves to diminish their advantage over privately-owned enterprises (POEs)

and to level the playing field.

Theoretical/academic implications: We employ an integrated framework that

develops predictions from resource dependence, agency, and institutional theories to

explore the direct and contingent influences of ownership and institutional quality on

firm-level innovation activities. Our study contributes to the growing literature on

state ownership and innovation in transition and emerging economies and the recent

calls for greater attention to local institutional context and revising the existing theo-

ries on “state underperformance.”

Practitioner/policy implications: This study offers insights to policy makers in

enhancing the quality of local institutions. Higher-quality institutions moderate the

advantages state ownership confers and ameliorate the disadvantages associated

with private ownership.

KEYWORDS

agency theory, corporate governance, innovation, institutional theory, resource dependence

theory

1|INTRODUCTION

Transition economies continue to be characterized by “high context,”

in the sense that all aspects of the ideological, political, economic, and

social environments exist not merely as a “context”but, rather, as an

extension of state capitalism. Not only does state ownership reflect

certain institutional realities, but it also confers advantages in a con-

text in which other ownership types coexist (Lazzarini &

Musacchio, 2018). For instance, state-led strategies of technological

innovation and development have frequently been associated with

national economic growth and technological catch-up (Lee

et al., 2015, p. 16). State ownership and government connections,

Received: 22 June 2020 Revised: 5 June 2022 Accepted: 11 June 2022

DOI: 10.1111/corg.12477

Corp Govern Int Rev. 2023;31:285–306. wileyonlinelibrary.com/journal/corg © 2022 John Wiley & Sons Ltd. 285

more generally, have been shown to associate directly with higher

levels of innovation performance (Choi et al., 2011), producing more

(diversified) patents (Xu & Zhang, 2008) and building stronger inven-

tive (Lazzarini et al., 2021) and innovative capabilities (Munari

et al., 2010). It has also been shown to positively moderate the effect

of research and development (R&D) intensity and technological capa-

bilities on innovation performance (Wang et al., 2015; Yi et al., 2017).

This, however, stands in contrast with Musacchio et al.'s (2015)

notion of “liability of stateness,”which holds that inefficiencies in

state-owned enterprises (SOEs) inevitably entail underperformance in

innovation and that “privatization works”(Megginson &

Netter, 2001). State ownership has been shown to associate with

fewer new product introductions, product improvements, and new

technology adoptions (e.g., Ayyagari et al., 2011; Zhou et al., 2017)

and with lower new product sales and revenues from innovation

(e.g., Guan et al., 2009; Jefferson et al., 2003). Given this mixed pic-

ture of the effect of state ownership (Lan & Galaskiewicz, 2012; Zhou

et al., 2017), it is perhaps unsurprising that still further studies have

found no relationship between state ownership and innovation (see

Wang & Kafouros, 2009 in China; and Choi et al., 2012 in Korea).

While this apparent inconsistency may be a cause for frustration,

we use it as our point of departure. Unremarkably, we believe that

these inconclusive results are due, in part, (i) to variations in the mea-

sures of innovation input, output, and the methodologies used to esti-

mate the input–output transformation process; (ii) to essential

differences in the manner in which different types of legal ownership

provide innovation resources to the firm (Chen et al., 2014) and

encourage utilization of these resources with different levels of effi-

ciency (Baysinger et al., 1991); and (iii) to the endogenous nature of

“ownership”within a system that is directed by both political and per-

formance goals (Megginson & Netter, 2001). However, more remark-

ably, we believe the inconclusiveness is likely to rest in the general

neglect of variety in the quality of local and/or national institutional

contingencies that endogenously moderate the relationship between

ownership structure and innovation inputs/outputs (e.g., Lazzarini

et al., 2021; Wang et al., 2015).

In addressing these limitations, we make four contributions. First,

we contribute to corporate governance research that aims to under-

stand why different governance mechanisms (such as prevailing own-

ership types) appear to have different effects on the innovation

production process; and how these effects are moderated by the vari-

ety and dynamics of local public governance, a core component of

institutional quality. In particular, we leverage elements of resource

dependence theory (RDT), agency theory (AT), and institutional theory

(IT) to elaborate a theoretical framework that outlines the relation-

ships among legal ownership, institutional quality, and innovation. We

believe that this approach allows us to resolve some of the tensions

that persist in the empirical literature.

Second, most influential studies on the relative merits of state-

and private-ownership were written in the 1990s (for a review, see

Megginson & Netter, 2001 and Estrin et al., 2009), during which gov-

ernments divested SOEs in developed economies to enhance eco-

nomic efficiency, decrease government intervention, and introduce

competition in monopolized sectors (Estrin & Pelletier, 2018). Only

recently has attention turned to the role of innovation in processes of

transition and transformation (for a review, see Belloc, 2012). Follow-

ing this growing literature (e.g., Ahlstrom & Bruton, 2010; Chen

et al., 2014; Lee et al., 2015; Santarelli & Tran, 2017), we extend our

research to Vietnam. Vietnam, characterized by immature and weak

market institutions (Tran, 2019), is an attractive research setting that

allows us to explore how transitional institutions

1

and their ongoing

restructuring processes impact firm-level innovation (Chen

et al., 2014; Xu et al., 2014). We test our theoretical framework using

extensive longitudinal census data collected from 65,750 Vietnamese

firms from 2007 to 2014 and apply advanced methodologies to con-

trol for the potential selection bias and the endogeneity of legal own-

ership. Of course, the tension between generalizability and specificity

is ever present in transition economy research (Meyer & Peng, 2016).

However, lack of attention to contextual (and institutional) variety is

likely to result in misinterpretations of data and misapplications of

findings obtained from different locations. Large scale empirical stud-

ies in less studied locations, such as Vietnam (de Jong et al., 2015),

contribute to a literature that, inevitably, continues to be dominated

by studies of transition in China (e.g., Lei, 2017; Phan et al., 2010).

Third, although an increasing number of studies in the manage-

ment literature have linked a firm's innovation capacity with its own-

ership structure (Aghion et al., 2013; Musacchio & Lazzarini, 2014)

and the institutional context in which it operates (McDermott

et al., 2009), the treatment is often static with limited consideration of

subnational (regional) institutional variation. Such regional institutional

variation, resulting from uneven economic development and cultural

diversity across regions, is evident in every nation (Chan et al., 2010;

Teng & Yi, 2017). Indeed, it may be more significant in transition

economies (Meyer & Peng, 2016) since “the process of economic

transition …is often spatially and structurally uneven”within coun-

tries (Chan et al., 2010, p. 1230; Yi et al., 2017). Our findings suggest

that as local institutional quality improves, SOEs' innovation perfor-

mance tails off as the benefits of privilege are withdrawn. In contrast,

higher institutional quality fosters higher innovation performance in

private-owned enterprises (POEs) by easing their access to critical

innovation resources. In other words, institutional quality moderates

the countervailing processes of resource allocation and resource utili-

zation and reduces the innovation performance gap that may arise

between state ownership and private ownership.

2|THEORY AND HYPOTHESES

Corporate ownership structure fundamentally shapes corporate gov-

ernance by determining how ownership rights, particularly control

rights and residual profit rights, are distributed within the corporation

(Belloc, 2012). Transition economies frequently follow a state capital-

ism model wherein the state plays a direct and critical role in promot-

ing and influencing economic development through reform policies

(Zhang & Greve, 2018). SOEs, acting as agents of the government,

provide an important channel for the State to regulate the economy

286 TRAN AND FREEL