10.5465/AMBPP.2015.147 RELATIONSHIP BETWEEN INTERNATIONALIZATION AND INNOVATION IN EMERGING ECONOMY FIRMS POOJA THAKUR WERNZ Pamplin College of Business Virginia Tech Blacksburg, VA 24060 SHANTALA SAMANT Virginia Tech ABSTRACT Emerging economy multinationals (EMNEs) are increasingly internationalizing their operations as well as moving away from imitation towards innovation. We study the relationship between internationalization and innovation activity of these EMEs. Data on 64 Indian biopharmaceutical firms from 1997 to 2013 is used to empirically test our hypotheses. INTRODUCTION As emerging economies (EEs) adopted pro-market reforms in the 1980s and 1990s, a new breed of multinationals arose. Despite facing high levels of corruption, weak intellectual property rights regimes, underdeveloped capital markets and institutional voids at home (Cuervo-Cazurra, 2012), these emerging multinational enterprises (EMNEs) grow through increased international expansion and innovation. Outward foreign direct investments (OFDI) from emerging economies increased from less than 1 percent in 1970s to 27.6 percent in 2010 (Aharoni, 2014), underpinning the increasing internationalization of EMNEs. Nearly sixty percent of this OFDI went to other developing countries primarily in the form of greenfield investments (World Bank, 2011). EMNEs are also improving their organizational capabilities and gradually moving towards innovation rather than imitation to drive future growth (Amann & Cantwell, 2012). Internationalization and innovation are two strategies for growth (Lecerf, 2012) that are especially important for new entrants from emerging economies hoping to compete with developed country firms. While there is an extensive body of literature on internationalization of EMNEs (Buckley & Hashai, 2013) and a nascent stream of research on innovation by these firms (Govindarajan & Ramamurti, 2011), no prior research has looked at the impact of international expansion on innovation for EMNEs. The relationship between internationalization and innovation warrants further study as these two strategies are interdependent. In this paper, we propose that the internationalization-innovation relationship is horizontal S-shaped, divided into three stages based on the degree of internationalization. The impact of internationalization on innovation differs in each of these three stages due to the differences in motives and the resulting differences in strategies adopted. We examine the proposed horizontal S-shaped curvilinear relationship in the context of the Indian EMNEs from the biopharmaceutical industry. The timeframe for our data is from 1997 to 2013. Our longitudinal dataset comprises 64 EMNEs with 651 foreign subsidiaries and 786 patents filed with the United States Patent and Trademark Office (USPTO).