Does business group affiliation encourage R&D activities? Evidence from India

The decision to undertake investment in innovative activities is an important strategic choice made by firms. This study investigates the relationship between business group (BG) affiliation and research & development (R&D) activities of Indian firms. Using an empirical approach that accounts for endogeneity and selection bias, we observe that BG affiliation has significant positive influence on the sample firms' R&D activities. Employing various proxies for institutional development, we show that the effect of BG affiliation on R&D declines with the improvements in institutional and regulatory mechanisms. Further, this study explores the linkages between diversification strategies at the group level and R&D investments by firms affiliated with BGs. Results show that degree of related diversification is positively associated with the affiliates' innovation efforts.