Ownership Network and R&D Investment in Pyramidal Business Groups

This study investigates how a firm's R&D investment is determined in the context of pyramidal business groups. Bringing to the forefront ownership network that serves as a governance backbone of pyramidal business groups, we offer an explanation of how the group burden is derived and distributed across affiliate firms with close attention to position in the ownership network. Then, we develop and articulate a causal linkage between the group burden and R&D investment behavior. Specifically, we argue that affiliate firms occupying central position in the ownership network reduce R&D investment to spare financial, operational, and managerial resource for the group burden. In addition, drawing on a behavioral theory of the firm, we propose that this negative effect of central position on R&D investment becomes stronger when the firms possess a greater amount of organizational slack. We empirically test these hypotheses in the context of large family business groups in Korea or Chaebols that control their affiliates through pyramidal ownership network. Consistent with our expectation, we found a negative relation between centrality in the ownership network and R&D investment for a sample of Chaebol affiliate firms and that this relation is negatively moderated by the amount of organizational slack.