Journal of Management Research

Open Access Open Access  Restricted Access Subscription Access
Open Access Open Access Open Access  Restricted Access Restricted Access Subscription Access

R&D, FDI, and Efficiencies of Small and Medium Sized Firms


Affiliations
1 National University of Kaohsiung, Taiwan, Province of China
2 Institute of Business and Management National Chiao Tung University, Taiwan, Province of China
     

   Subscribe/Renew Journal


This study analyzes how small- and medium-sized enterprises’ (SMEs) R&D and foreign direct investment (FDI) affect their technical efficiencies in an environment of globalized production in order to complement previous research studies. When the magnification effect (the network effect of FDI magnifies the marginal cost savings effect of R&D) dominates the replacement effect (for production cost savings there is a substitution between R&D and FDI), FDI and R&D are complements; otherwise, both are substitutive strategies. Our theoretical propositions suggest that unless the replacement effect dominates the magnification effect very much, FDI will indirectly improve technical efficiency through R&D activities. We use 1989-1996 panel data of FDI by Taiwan’s SMEs to test the proposition. Our major empirical findings are: (1) FDI not only directly improves technical efficiencies, but also indirectly enhances technical efficiencies through complementing R&D activities. (2) R&D expenditures significantly improve firms’ technical efficiencies. (3) For those Taiwan’s SMEs investing in mainland China, FDI and R&D are more likely to be a substitutive strategy; however, FDI still indirectly amplifies technical efficiency through R&D activities. (4) Currently, it is more efficient for Taiwan’s SMEs to focus on the globalization of production than on market globalization.

Keywords

R&D, Foreign Direct Investment, Technical Efficiency, Replacement Effect, Magnification Effect
User
Notifications

  • Acs, Z. J. and Audretsch, D. B. (1991), R&D, Firm Size and Innovative Activity, in Acs, Z. J. (Ed), Innovation and Technological Change: An International Comparison, pp. 39–59, University of Michigan Press, Ann Arbor.

  • Acs, Z. J. and Audretsch, D. B. (1988), Innovation in Large and Small Firms: An Empirical Analysis, American Economic Review, 78: 678–690.

  • Acs, Z. J., Morck, R., Shaver, J. M. and Yeung, B. (1997), The Internationalization of Small and Medium-sized Enterprises: A Policy Perspective, Small Business Economics, 9: 7–20.

  • Aigner, D. J., Lovell, C. A. K. and Schmidt, P. (1977), Formulation and Estimation of Stochastic Frontier Production Function Models, Journal of Econometrics, 17: 21–37.

  • Almeida, P. and Kogut, B. (1999), The Exploration of Technological Diversity and Geographical Localization in Innovation, in Acs, Z. J. and Yeung, B. (Eds), Small and Medium-sized Enterprises in the Global Economy, pp. 103–120, University of Michigan Press, Ann Arbor.

  • Atkinson, S. E. and Halvorsen, R. (1986), The Relative Efficiency of Public and Private Firms in a Regulated Environment: The Case of U.S. Electric Utilities, Journal of Public Economics, 25: 281–294.

  • Baldwin, J. R. and Johnson, J. (1999), Entry, Innovation, and Growth, in Acs, Z. J. (Ed), Are Small Firms Important? Their Role and Impact, pp. 51–78, Kluwer Academic Publishers, Boston.

  • Banker, R. D., Charnes, A. and Cooper, W. W. (1984), Some Models for Estimating Technical and Scale Inefficiencies in Data Envelopment Analysis, Management Science, 30: 1078–1092.

  • Battese, G. E. and Coelli, T. J. (1995), A Model for Technical Inefficiency Effects in a Stochastic Frontier Production Function for Panel Data, Empirical Economics, 20: 325–332.

  • Battese, G. E. and Coelli, T. J. (1992), Frontier Production Functions, Technical Efficiency and Panel Data: With Application to Paddy Farmers in India, Journal of Productivity Analysis, 3: 153–169.

  • Berger, A. N. and Mester, L. J. (1997), Inside the Black Box: What Explains Differences in the Efficiencies of Financial Institutions? Journal of Banking and Finance, 21: 895–947.

  • Buckley, P .J. and Casson, M. C. (1998), Models of the Multinational Enterprise, Journal of International Business Studies, 29: 21–44.

  • Charnes, A., Cooper, W. W. and Rhodes, E. L. (1978), Measuring the Efficiency of Decision Making Units, European Journal of Operational Research, 2: 429–444.

  • Chen, T. (1992), Determinants of Taiwan’s Direct Foreign Investment: The Case of a Newly Industrializing Country, Journal of Development Economics, 39: 397–407.

  • Chen, H. and Chen, T. (1998), Network Linkage and Location Choice in Foreign Direct Investment, Journal of International Business Studies, 29: 445–467.

  • Coelli, T. J. and Perelman, S. (2000), Technical Efficiency of European Railways: A Distance Function Approach, Applied Economics, 32: 1967–1976.

  • Cornwell, C., Schmidt, P. and Sickles, R. C. (1990), Production Frontiers with Cross-sectional and Time-series Variation in Efficiency Levels, Journal of Econometrics, 46: 185–200.

  • Dilling-Hansen, M., Madsen, E. S. and Smith, V. (2003). Efficiency, R&D and Ownership - Some Empirical Evidence, International Journal of Production Economics, 83: 85–94.

  • Färe, R., Grosskopf, S., Lovell, C. A. K. and Yaisawarng, S. (1993), Derivation of Shadow Prices for Undesirable Outputs: A Distance Function Approach, Review of Economics and Statistics, 75: 374–380.

  • Farrell, M. J. (1957), The Measurement of Productive Efficiency, Journal of the Royal Statistical Society, Series A, 120: 253–290.

  • Franko, L. G. (1989), Global Corporate Competition: Who’s Winning, Who’s Losing, Strategic Management Journal, 10: 449–474.

  • Fujita, M. (1997), Small and Medium-sized Enterprises in Foreign Direct Investment, in Buckley, P. J., Campos, J. and Mirza, H. (Eds), International Technology Transfer by Small and Medium-sized Enterprises, pp. 9–70, St. Martin’s Press, New York.

  • Fujita, M. (1995a), Small and Medium-sized Transnational Corporations: Trends and Patterns of Foreign Direct Investment, Small Business Economics, 7: 183–204.

  • Fujita, M. (1995b), Small and Medium-sized Transnational Corporations: Salient Features, Small Business Economics, 7: 251–271.

  • Grosskopf, S., Hayes, K., Taylor, L. and Weber, W. (1996), Budget Constrained Frontier Measures of Fiscal Equality and Efficiency in Schooling, Review of Economics and Statistics, 79: 116–124.

  • Hailu, A. and Veeman, T. S. (2000), Environmentally Sensitive Productivity Analysis of the Canadian Pulp and Paper Industry, 1959-1994: An Input Distance Function Approach, Journal of Environmental Economics and Management, 40: 251–274.

  • Hill, C. W. L. (2003), International Business: Competing in the Global Marketplace, Fourth Edition, McGraw-Hill, New York.

  • Hitt, M. A., Hoskisson, R. E. and Kim, H. (1997), International Diversification: Effects on Innovation and Firm Performance in Product-diversified Firms, Academy of Management Journal, 40: 767–798.

  • Horst, T. (1972), Firms and Industry Determinants of Decision to Invest Abroad: An Empirical Study, Review of Economics and Statistics, 54: 258–266.

  • Huang, C. J. and Liu, J. T. (1994), Estimation of a Non-neutral Stochastic Frontier Production Function, Journal of Productivity Analysis, 5: 171–180.

  • Hubert, F. and Pain, N. (2001), Inward Investment and Technical Progress in the United Kingdom Manufacturing Sector, Scottish Journal of Political Economy, 48(2): 134–147.

  • Kamien, M. and Schwartz, N. (1982), Market Structure and Innovation, Cambridge University Press, Cambridge.

  • Kogut, B. and Kulatilaka, N. (1994), Operating Flexibility, Global Manufacturing, and the Option Value of a Multinational Network, Management Science, 40: 123–139.

  • Kohn, T. O. (1997), Small Firms as International Players, Small Business Economics, 9: 45–51.

  • Kotabe, M., Srinivasan, S. S. and Aulakh, P. S. (2002), Multinationality and Firm Performance: The Moderating Role of R&D and Marketing Capabilities, Journal of International Business Studies, 33: 79–97.

  • Kumbhakar, S. C., Ghosh, S. and McGuckin, J. T. (1991), A Generalized Production Frontier Approach for Estimating Determinants of Inefficiency in U.S. Dairy Farms, Journal of Business and Economic Statistics, 9: 279–286.

  • Li, Y. and Hu, J. L. (2002), Technical Efficiency and Location Choice of Small and Medium-sized Enterprises, Small Business Economics, 19: 1–12.

  • Lu, J. W. and Beamish, P. W. (2001), The Internationalization and Performance of SMEs, Strategic Management Journal, 22: 565–586.

  • Lucas, R. E., Jr. (1993), Making a Miracle. Econometrica, 61: 251–272.

  • Mao, W. and Koo, W. (1997), Productivity Growth, Technological Progress, and Efficiency Change in Chinese Agriculture after Rural Economic Reforms: A DEA Approach, China Economic Review, 8: 157–174.

  • Meeusen, W. and Van den Broeck, J. (1977), Efficiency Estimation from Cobb-Douglas Production Functions with Composed Error, International Economic Review, 18: 435–444.

  • Naisbitt, J. and Aburdene, P. (1990), Megatrends 2000: Ten New Directions for the 1990’s, Avon Books, New York.

  • Nelson, F. and Olson, L. (1978), Specification and Estimation of a Simultaneous-Equation Model with Limited Dependent Variables, International Economic Review, 19: 695–709.

  • Norbäck, P. J. (2001), Multinational Firms, Technology and Location, Journal of International Economics. 54: 449–469

  • Oviatt, B. M. and McDougall, P. P. (1999), A Framework for Understanding Accelerated International Entrepreneurship, in Wright, R. (Ed), Research in Global Strategic Management (Vol. 7), pp. 23–40, JAI Press, Stamford.

  • Oviatt, B. M. and McDougall, P. P. (1995), Global Start-ups: Entrepreneurs on a Worldwide Stage, Academy of Management Executive, 9: 30–44.

  • Oviatt, B. M. and McDougall, P. P. (1994), Toward a Theory of International New Ventures, Journal of International Business Studies, 25: 45–61.

  • Pitt, M. M. and Lee, L. F. (1981), The Measurement and Sources of Technical Inefficiency in the Indonesian Weaving Industry, Journal of Development Economics, 9: 43–64.

  • Reynolds, P. D. (1997), New and Small Firms in Expanding Markets, Small Business Economics, 9: 79–84.

  • Ross, S. (1989), A First Course in Probability (3rd Ed), Macmillan Publishing Company, New York.

  • Schmidt, P. and Sickles, R. (1984), Production Frontiers and Panel Data, Journal of Business and Economic Statistics, 2: 367–374.

  • Urata, S. and Kawai, H. (2000), The Determinants of the Location of Foreign Direct Investment by Japanese Small and Mediumsized Enterprises, Small Business Economics, 15: 79–103.

  • Van Hoesel, R. (1996), Taiwan Foreign Investment and the Transformation of the Economy, in Dunning, J. H. and Narula, R. (Eds), Foreign Direct Investment and Government: Catalysts for Economic Restructuring, pp. 280–315, Routledge, London.

  • Vernon, R. (1970), Organization as a Scale Factor in the Growth of Firms, in Markham, J. W. and Papanek, G. F. (Eds), Industrial Organization and Economic Development, pp. 47–66, Houghton Mifflin, Boston.

  • Wu, Y. (2000), Measuring the Performance of Foreign Direct Investment: A Case Study of China, Economics Letters, 66: 143–150.


Abstract Views: 289

PDF Views: 1




  • R&D, FDI, and Efficiencies of Small and Medium Sized Firms

Abstract Views: 289  |  PDF Views: 1

Authors

Yang Li
National University of Kaohsiung, Taiwan, Province of China
Jin-Li Hu
Institute of Business and Management National Chiao Tung University, Taiwan, Province of China

Abstract


This study analyzes how small- and medium-sized enterprises’ (SMEs) R&D and foreign direct investment (FDI) affect their technical efficiencies in an environment of globalized production in order to complement previous research studies. When the magnification effect (the network effect of FDI magnifies the marginal cost savings effect of R&D) dominates the replacement effect (for production cost savings there is a substitution between R&D and FDI), FDI and R&D are complements; otherwise, both are substitutive strategies. Our theoretical propositions suggest that unless the replacement effect dominates the magnification effect very much, FDI will indirectly improve technical efficiency through R&D activities. We use 1989-1996 panel data of FDI by Taiwan’s SMEs to test the proposition. Our major empirical findings are: (1) FDI not only directly improves technical efficiencies, but also indirectly enhances technical efficiencies through complementing R&D activities. (2) R&D expenditures significantly improve firms’ technical efficiencies. (3) For those Taiwan’s SMEs investing in mainland China, FDI and R&D are more likely to be a substitutive strategy; however, FDI still indirectly amplifies technical efficiency through R&D activities. (4) Currently, it is more efficient for Taiwan’s SMEs to focus on the globalization of production than on market globalization.

Keywords


R&D, Foreign Direct Investment, Technical Efficiency, Replacement Effect, Magnification Effect

References