Internal embeddedness of business group affiliates and innovation performance: Evidence from China

Existing research on the relationship between internal embeddedness and the innovation performance of business group affiliates reports mixed results. We adopt embeddedness theory to identify two distinct characteristics of internal embeddedness, namely directorate embeddedness and capital embeddedness, and their respective impacts on business group affiliates' innovation performance. Based on a sample of listed affiliates in China from 2009 to 2018, our empirical results show that directorate embeddedness is positively related to the innovation performance of affiliates, whereas capital embeddedness has an inverted U-shaped effect. Furthermore, the pyramidal control layers of business groups attenuate the positive relationship between directorate embeddedness and the innovation performance of affiliates, and similar pyramidal control layers abate the inverted U-shaped relationship between capital embeddedness and innovation performance. Our findings highlight the distinctive characteristics of internal embeddedness and provide new insights into an organizational structure that drives business group affiliates’ innovation performance in a key emerging market.