Researchers at the Higher School of Economics (HSE University) have revealed that Russian companies need to invest in the development of intellectual resources in order to maximize the benefits from partners in developed countries. Results of the study have been published in the journal, Knowledge Management Research & Practice .
For the most part, theoretical research in the field of international trade tends to focus on the importance of foreign direct investment, not only as an additional source of financing, but also as an important element in the transformation and improvement of the quality of human capital, the mechanism of knowledge-sharing between companies and the adaptation of new technologies. This should, in the end, lead to an increase in a company's competitiveness. However, empirical evidence is extremely varied and contradictory, especially with regard to companies located in emerging economies. Moreover, recent studies, in particular, Taglioni, Winkler (2016), have shown that the possible advantages of foreign direct investment do not appear automatically. Rather, they are strongly tied to the company's ability to perceive potential benefits.
Two studies by HSE researchers, Anna Bykova, Carlos Hardon and Felix Iturriaga, have analyzed the data of Russian public companies and the impact of foreign investment. 'We found that, in general, the presence of foreign property does not affect the performance of companies. It either has a positive effect in a period of economic recession, or it strengthens the positive effect for export-oriented companies,' says Anna Bykova. 'This surprised us and it seemed rather strange, especially considering the number of companies with foreign ownership in our study. It occurred to us that it is possible that foreign investments are not 'useful' to everyone - that they are only useful for companies with a certain resource endowment. In other words, in order to have a positive effect, there needs to be what we call, 'mediators', or intermediaries, between foreign investments and the company's performance. This hypothesis was tested using the concept of dynamic capabilities developed by D. Teece in 1997. According to our assumptions, the dynamic capabilities play this mediative role.'
'Dynamic capabilities'- the ability of the company to constantly create, expand and modify resources depending on environmental conditions and company strategy (Helfat et al. 2007).
Data from 1096 Russian public companies from 2004 to 2014 were used as a sample for the study. The data were collected by the International Laboratory of Intangible-driven Economy at HSE in Perm from open sources. The method of partial least squares (Partial Least Square-Structural Equation Modeling, PLS-SEM) and software SmartPLS 3.0 were used. The unique feature of this method is that it enables scientists to evaluate the functional relationships between unobservable variables, such as dynamic capabilities, and observable variables, such as foreign investment and company performance. In this case, unobservable variables are represented in the model by observable indicators. This method has certain advantages, including less strict requirements regarding the normality of data distribution and the use of secondary information. PLS-SEM is therefore used increasingly in studies in the field of strategic management.
'Unlike previous studies relying on PLS-SEM, our model used open data, rather than data from surveys, to measure dynamic capabilities,' says Anna Bykova, research associate at the International Laboratory of Intangible-driven Economy at HSE in Perm.
The results show that dynamic capabilities play not a partial intermediary role, as the authors assumed, but a full intermediary role. The results of previous studies which demonstrate the absence of a statistically significant effect of foreign direct investment were therefore confirmed. Furthermore, the results show that the transformation of foreign investment into added economic value occurs either through the transformation of the company's internal resources or through the use of dynamic capabilities.
Researchers identified three types of dynamic capabilities which are most relevant for analyzing the interaction between recipient companies from developing economies and investing companies in developed countries. The first type is absorption capability, or a company's ability to learn, absorb and implement the knowledge and technology they receive from foreign partners. The second type is adaptive capability, or a company's ability to transform internal resources according to the requirements of foreign investors. This is especially important for companies in emerging markets. The third type is communicative capability, or a company's ability to effectively detect and introduce knowledge around higher market standards, technology related to working with buyers and suppliers, and increasing customer loyalty.
In analyzing the impact of different types of dynamic capabilities, the authors found that communicative capability has the greatest potential to create value: 52.2% of the total effect is due to this type. For operational efficiency, measured in terms of the profitability of total assets, the greatest effect is due to adaptive capability, responsible for 50% of the overall effect. The findings enable us to construct various strategies for long-term and short-term company development.
The authors plan to continue their study of the mediating role of dynamic capabilities, taking into account industry specificity, including the mediating effect of the industry, in the model which has been developed and verified.
The research was carried out as part of HSE's Basic Research Programme in 2018.
Knowledge Management Research & Practice