Effects of Firm Innovation and Consumer eWOM on Product Recalls in an Emerging Market: The Moderating Role of Ownership Structure

Abstract

Product recalls are highly disruptive for many firms. Understanding the drivers of such recalls is paramount to helping firms effectively reduce product recall risk. While prior studies have investigated the drivers of product recalls in developed markets , little is known about the factors that drive product recalls in emerging markets. Using data for 2010-2016, this study identifies firm innovation and negative electronic word-of-mouth (eWOM) as drivers that influence the volume of vehicle recalls in the Chinese automobile industry, a sector characterized by increasing R&D investment and consumer quality awareness. Considering the foreign ownership restriction policy of the Chinese automobile industry, we further examine the moderating effect of ownership structure. We find that firm innovation increases the volume of product recalls for Chinese domestic automakers (CDAs) while decreasing the volume of product recalls for international joint ventures (IJVs), negative eWOM leads automakers to recall defective vehicles, and the ownership structure itself (IJV versus CDA) has a significant impact on the volume of product recalls. These results offer insights that can help managers take concrete steps to reduce and counter product recalls. Index Terms-Electronic word-of-mouth (eWOM), firm innovation, ownership structure, product recalls.