2.3.1. Antecedents of Technological Diversification Through Firm-Environment Interdependence
Since organisation theorists characterised organisations as open systems rather than closed systems [33
], the environment’s role in facilitating or hindering the organisational process, outcomes, structures and strategies are largely fulfilled. The environment of a firm is defined as “the totality of physical and social factors that are taken directly into consideration in the decision-making behaviour of individuals in the organization” (Duncan, 1972: [34
]). In this vein, firms decide their diversification strategy on the basis of environmental factors such as uncertainty and competition, as these factors will shape the interdependence between firm and environment. The environment generates both opportunities and threats, forcing firms to respond [35
]. If resources in the external environment are unstable, firms are more likely to implement a diversification strategy to release tensions and controls from a single source of technological and other resources. By contrast, in a resource-stable environment, the power of the environment is largely reduced to alternative resources which can be secured to mitigate uncertainty. For example, Peng and colleagues [36
] found that firms in countries where institutional infrastructure is underdeveloped are more likely to diversify, due to their need to seek critical resources from other domains to complement the insufficient support of the institution. From the RDT view, this can be explained by a firm’s desires to reduce its dependence on the environment by adding more resource providers and reducing uncertainties by implementing multiple projects [37
The environment is a multifaceted phenomenon. Although many theorists have theorised dimensions of the environment, the most recognised is Dess and Beard’s work. Following Aldrich [38
], Dess and Beard [10
] unpack the environment into three dimensions: dynamism, munificence and complexity. Perhaps an important reason making this paper seminal in the environmental study is that they also provide an explicit means to measure each dimension, with which subsequent papers can test their frameworks. The two dimensions are mostly mentioned in the literature as they are considered to be orthogonal and cover some aspects of complexity, especially in transition economies [39
]. Following this lead, we also focus on the constructs of dynamism and munificence to measure the environment.
Environmental dynamism refers to the unpredictability, uncertainty and rate of change in an organisation’s environment [41
]. This construct captures to “some extent the underlying theme of unpredictable change” [42
]. We argue that in a dynamic environment, firms will have more incentives to achieve a higher level of technological diversification. As noted by RDT, diversification is a strategy to address an interdependent relationship with the environment either within or beyond firms’ boundaries. In a fast-changing and unpredictable environment, firms need to pay more attention to gaining access to resources from the environment. In this volatile situation, securing resources, especially technological resources, from a single source is far from realistic, as uncertainty is the main reason for unpredictability. By contrast, when an environment is stable and less fierce, firms can secure resources from a single source without losing autonomy. In this environment, diversification, although it can mitigate the interdependence of firms and environment, may have higher costs than potential profits, as searching for other alternatives in a stable environment is not necessary, and may even be harmful to existing paradigms [43
]. In conclusion, in a dynamic environment, firms are more likely to diversify in order to mitigate the power imbalance of the environment and manage interdependence by obtaining multiple technological resources [44
]. Following this logic, we propose the hypothesis:
H1: Environmental dynamism positively relates to technological diversification.
Environmental munificence refers to the richness of external resources for future growth [45
]. Although the research on munificence is limited compared with dynamism, its impact on organisational strategies [46
], decision processes [47
], firm structure [48
], and firm output [49
] is well documented. In this paper, we propose that in a munificent environment, firms are less likely to be technological diversifiers.
When the external resources are rich, the interdependence of a firm and the external environment are well organised, and any power imbalance is reduced, as firms can obtain resources from other providers in the environment. In this sense, firms can be specific in limited technological fields without an overemphasis on narrow niches of technology that would constrain the flexibility of the strategy as resources are available in the external environment. By contrast, when resources in the external environment are scarce, diversification is a practical strategy to avoid losing autonomy. In a resource-scarce environment, living on a single technology is potentially dangerous for firms. Because in this environment, firms that are technologically specific would rely on narrowed resource providers thus increasing dependence on the environment. From the perspective of RDT, firms would try to use a diversification strategy to escape from the constraints of single-source input from the environment, especially when the external resources are limited [1
There is fruitful research evidence to support our argument. For example, Wan [50
] found that a country’s resource environment, including factors and institutions, would affect a firm’s diversification patterns. He noted that in developed countries, “firms have efficient access to an abundant supply of environmental resources and competition is fierce… low levels of product diversification allow firms to devote more attention to a single or a few related product markets to sharpen its competitive edge in production efficiency or enjoy economies of scope… managing a diverse business portfolio may also cause significant strain on managerial information processing capacity, negatively affecting overall firm performance in these economies” [50
In conclusion, we argue that in munificent environments, firms have fewer incentives to become diversifiers, as firms can rely on a limited source of technology input without compromising autonomy.
H2: Environmental munificence is negatively related to technological diversification.
2.3.2. Boundary Conditions of Ownership
As we expect that firm-environment interdependence would determine the diversification patterns of firms, we also suggest that this relationship is shaped by state ownership. Scholars believe that state ownership tends to be higher in emerging economies due to market failure and poor protection of property rights [51
]. Most empirical research supports the adverse effect of state involvement, including lack of innovation, poor financial performance and increased corruption [51
We expect the state ownership may exert different moderating effects on the relationship between environmental munificence, dynamism and technological diversification, however. In addition to adverse effects, ownership mechanisms can lead to relational advantages [52
], as ownership-based arrangements can improve inter-organisational learning [53
], and stabilise important supply relationships [24
] and governance hierarchical coordination problems through internal communication and negotiation [26
]. With the powerful actor involved, the power imbalance will be mitigated, as government and firms align as one party against the environment. In this paper, we summarise the effects of state ownership through its two roles: 1) supply resource and 2) supply protection.
We argue that state ownership negatively moderates the relationship between environmental dynamism and firm technological diversification. First, the government provides firms with resources that will become alternative sources to the external environment. This is especially the case in developing countries where institutional and market infrastructure are underdeveloped [55
]. In these countries, due to market inefficiency, acquiring resources from the government is a more direct and easier method [56
]. Coalition with the government thus gives firms more direct and easy access to the vital resources that they need. From the view of RDT, the alternative resources available will compromise the power imbalance between the firm and environment. Governments would buffer firms from the control of the external environment [58
]. Governments will absorb turbulence and uncertainties on behalf of the firm. In this case, firms would maintain autonomy without compromising the power from their interdependence with the external environment. These firms thus have fewer incentives to engage in an escape strategy because they can be less dependent on the environment as either alternative resources available or by shielding the government from bargaining processes with the external stakeholders.
As argued earlier, in a dynamic environment, firms have incentives to become diversifiers in order to reduce the power imbalance from an unstable relationship. This argument, however, would change if we consider state ownership. With a higher level of state ownership, firms can either gain access to vital resources from the government or be protected by the government from the constraints of other resource providers [6
]. We would thus expect that even in a dynamic environment, firms with higher levels of state ownership have less incentive to become diversifiers. In contrast, with a low level of state ownership, the relationship between firm and environment is irreplaceable. Firms are required to negotiate with the environment to gain access to resources, and are thus more constrained to the external environment. Following this logic, we propose:
H3: State ownership negatively moderates the effect of environmental dynamism on technological diversification.
On the other hand, in a munificent environment, as argued earlier, firms are less likely to become diversifiers. We argue that the negative effect between environment munificence and technological diversification will amplify with the buffer effects of government. To be specific, with resources and protection from the government, firms have even less incentive to diversify. The stable and abundant resources in the environment and government enable firms to invest and reconfigure their technology input into relatively narrow inches without compromising autonomy. Studies have confirmed that the concentration of state involvement is higher in emerging economies, than in developed countries [59
], and government involvement would legitimate a firm’s behaviour [60
], thus making the firms’ decisions stable without the intervention of the external constituents [61
H4: State ownership positively moderates the effect of environmental munificence on technological diversification.
We propose a framework for the study as suggested by the model in Figure 1