Knowledge that Transforms

Innovativeness and Problem Solving in the MNC : The Impact of Internal and External Relationships

The original article to which this erratum refers was published in Strategic Management Journal 24 (13): 1249–1263 (2003).

In a recent paper, Powell () studied 20‐year performance in 21 industries, using an ordinal performance measure (‘wins’), and the Gini coefficient as a measure of competitive dominance. The findings suggest that firm performance is statistically indistinguishable from performance in non‐business domains such as politics, games, sports, and pageants. This paper extends these findings, developing the statistical foundations for a general theory of competitive dominance. The paper presents a Gibrat‐based null hypothesis, develops a decomposable index of competitive dominance, and suggests statistical procedures and empirical methods for future research.

This study links the highly distinctive national contexts of the pharmaceutical industry to the evolution of innovative capabilities for Japanese drug firms from 1975 to 1995. During these two decades, the Japanese domestic environment for pharmaceuticals changed radically, encouraging a ‘bubble’ of trivial innovations. Experience by Japanese firms in their domestic market predominantly determined their innovative capabilities, pushing these firms towards trivial innovation. Corporate experience in the socially ‘proximate’ markets of Southern Europe served as a strategic complement for significant innovation by Japanese drug firms, and thus as a partial counterweight to the home market. Unfortunately, corporate diversification was a strategic substitute for significant innovation, and many Japanese drug firms are significantly diversified. The resulting degradation of innovative capability for Japanese drug firms has locked most of them into an increasingly unattractive home market.

In this paper, we hypothesize that acquisitions undertaken during low market cycles will exhibit better performance than other acquisitions for two key reasons: lower likelihood of overpayment due to hubris and ease in implementing restructuring initiatives such as retrenchment. We define performance as the cumulative abnormal returns surrounding the acquisition event and deploy a trend‐based measure for market cycle. Based on an analysis of 115 acquisitions by Singapore firms between 1990 and 1999, we find strong support for the hypothesized relationship.

This paper empirically investigates the forces that shape the post‐entry exit probability of entrepreneurial start‐ups, with an emphasis on the impact of incumbents' strategic behavior in financial markets. We find that entrepreneurial start‐ups in highly competitive industries are more likely to exit and that leverage compounds this exit risk. However, the latter result only holds when potential adverse selection and moral hazard problems in financial markets are large at start‐up. Under these circumstances, competitors can negatively influence creditors' perceptions on entrepreneurial quality or behavior through aggressive strategic actions to impede future financing and induce the start‐up's exit.

How do firms allocate limited search resources among substituting technologies with uncertain prospects? This paper contrasts three different approaches. The first follows evolutionary theorists' portrayals of decision‐making processes under bounded rationality. The second approach—real option reasoning—fosters flexibility by investing in more than one technology and postponing the decision to specialize. Following the third approach—real option pricing—firms base their search investments on forward‐looking calculations of technology option prices. We lay out the contrasting theoretical assumptions behind each of these three approaches and construct a simulation model to compare their implications.

Although the value creating effect of firm restructuring which results in a reduction of internal markets (including spin‐offs, carve‐outs and other divestitures) is generally well accepted for U.S. firms, there is little evidence on the extent to which such arguments can be extended to firms in emerging economies. This study addresses this void in the literature by examining the issue of restructuring in the newly emerging economy of the Czech Republic. Several hypotheses relating to internal and external markets in emerging institutional environments are developed and tested using a large database of original and restructured Czech firms undergoing privatization. After controlling for factors such as size and performance, it is found that restructuring significantly reduced the value of firms, despite the general belief that Czech firms emerging from the communist era were highly overdiversified. This finding, while contradicting a majority of the work on restructured firms in the United States, nonetheless supports the notion that sizeable internal markets play an enhanced role in underdeveloped institutional environments.

Extant theory presents conflicting perspectives on how internetworking might affect the organizational structures of established firms. One prediction is that internetworking could narrow organizational scope and deepen specialization, reduce hierarchy, and increase external partnering. A second contends that internetworking might increase scope, expand hierarchy, and decrease external partnering. Analysis of a multinational sample of 469 firms reveals that deeply internetworked firms are more focused and specialized, less hierarchical, and more engaged in external partnering than less intensively internetworked organizations are. No scope broadening or hierarchy expansion effects are observed.