Institutional Impacts on Firm Internationalization

S. Marinova

• Publisher: Palgrave Macmillan
• Year: 2014
• Print ISBN:
  9781349495993
  9781137446336
• eBook ISBN:
  9781137446350
• Topic: Business
• Subtopic: Business Strategy
• Index: Business

Institutional Impacts on Firm Internationalization addresses various aspects of the investigated phenomenon, providing an insight in the role of the varieties of capitalism on the globalization of business activities worldwide.

1

Institutions and International Business

Svetla Marinova

Institutional theory (for analysis of the roots of institutional theory, see Bill and Hardgrave, 1981; Hodgson, 1994) is one of the most important perspectives in international business. Hence, it has attracted the attention of scholars in the last few years (Doh et al., 2012; Tihanyi et al., 2012; Wood and Demirbag, 2012). It has become so prevalent that it is sometimes difficult to delineate what is not an institution or what remains non-institutionalized in a home- or host-country context. Rightly so, institutional definitions differ within diverse theoretical streams of literature (Hotho and Pedersen, 2012). There are three quite different theoretical interpretations of institutions that in our view do not compete with each other, but there is quite a high level of congruity, complementarity and compatibility among them in terms of the core of their argument in relation to institutions being rules and belief systems that should be followed or established stable and resilient social structures which define and enforce the guiding principles for social behaviour. While North (1990) classifies institutions into formal (laws, regulations, rules) and informal (norms, practices, values), Scott (1995, 2008) categorizes the institutional pillars into regulative (laws, regulations, rules), normative (norms, practices) and cultural-cognitive (culture, ethics, morality, values), and Whitley (1992, 2010) labels the key institutions as proximate (laws, regulations, state structures, policies, labour system, financial system) and background (norms governing relationships, ethics, values). Although the three theoretical perspectives diverge in the way they define institution, it is obvious that they are congruent in the core of their understanding of institutions. Yet, they have different views on how institutions affect firm behaviour. Consequently, the definition of institutions that authors adopt depends very much on the purpose of their research.

Institutions are interdependent, in other words, the influence of institutions is broader than a single institution particularly from the perspective of firm’s strategy and actions, that is, strategic actions. Institutions are diverse, they are multilevel and they are interdependent. For example, formal institutions, such as economic, regulatory, political and social institutions, are all in some way interdependent. In some way they have their independent influences, but they also have collective influences. Institutions are also multilevel, that is, they include national, regional and local rules and regulations. For example, a Norwegian firm decides to locate in Russia to set up a major facility. That firm clearly has to deal with the formal state level institutions in the country, regulatory, political, legal and economic institutions, but it has also to deal with the informal institutions. However, it also has to choose a location, let’s say a specific region of the country, which means that it has also to abide by and deal with the formal institutions in that region such as regional, political, economic and social offices as well as with the specific regional culture. Even when locating in a particular city, the institutional challenges to the firm are similar. Hence the firm has to deal with multilevel interdependencies of institutions in host countries. However, if the formal state institutions are weaker and less efficient, then authority becomes more dispersed and firms will have to dedicate more resources in order to deal with local and regional institutions as these become even more important to the firm in securing foreign direct investment (FDI) projects. These conditions then create problems of uncertainty and ambiguity and firms have to take actions to allocate additional resources so that they can deal with such situations. In the case of weak institutional systems where the ‘rules of the game’ (North, 1990) are either deficient or poorly enforced, we find evidence in line with Martinsons’ (1998) theory of institutional deficiencies (TIDE) that relationship-based firm behaviour will prevail. So, one of the key actions of firms is that they continue to enlarge and create more diverse social networks that help them navigate among the different and somewhat diverse institutional demands and influences on their actions. That is why this book brings in the importance of social networks and civil society in filling in institutional structural holes.

The structural holes could be related to the lack of specific institutions, that is, institutional void or the different degree to which institutions exist in terms of organizational field and its level of development, or they could be associated with the mechanisms by which institutions enforce existing rules, regulations and norms, or even with the degree to which these are enforced. Following this line of dispute, it can be argued that institutional fields could be at a different stage of development in various countries and this has an effect on the volume, purpose and organization of investment flows as well as on their motivations. Moreover, regularity and continuity can only support the development of institutional fields and institutional entrepreneurship that can enhance the organizational fields (DiMaggio and Powell, 1983) supporting institutional effectiveness and efficiency.

This book draws attention to the importance of institutional entrepreneurship, which is embedded in the country-specific context and could be more government and/or business driven depending on the type of socio-political model adopted by a state. Thus, we acknowledge the existence of both top-down and bottom-up institutional entrepreneurship and recognize that the two forces are in play in building and enhancing the FDI institutional environment in each country. Our argument is that it is not about whether institutional entrepreneurship exists or not, but it is the degree to which government- and business-level institutional entrepreneurship drives the process of institutional formation and enhancement and the intensity of their interaction that shape the concrete institutional setting influencing firms’ strategic actions in international business context.

Multiple national formal level institutions influence the lower level institutions in terms of rules and norms. Therefore, we propose that industry structure and norms in the industry are influenced by formal institutions and by established practices. The relationship is not uni-dimensional and one-directional, but it is executed through regulations, policies and professional practices. For example, formal institutions can restrict providing access to natural resources and money supply, whether in home or host country. Industry attributes affect strategic firm behaviour and strategic actions. However, norms and laws in specific industries also affect the strategic behaviour and actions of firms and their practices. This could be observed, for instance, in the oil, banking, high tech, engineering, building and retailing industries. In this sense, the contributions of the book recognize that institutions have both positive and negative effects, can act as enablers and constrainers of FDI and behaviour of firms in specific industries. Consequently, we argue that there is a need to examine more systematically the institutional environments in their complexity of interaction, confluence and multilevel nature.

Home-country institutions determine the availability and accessibility of location advantages to domestic and foreign firms. In this sense, institutions limit the extent to which location advantages can be used or acquired by firms and thus determine the transaction cost of gaining access to home-country resources (Hennart, 2012). Hence, the argument that internationalizing firms can without obstruction acquire readily and equally available location advantages is not supported in the contributions to the book. Rather, we argue that such access is mediated, controlled and defined by the home-country institutions that are relevant to inward foreign direct investment. While the restrictive nature of institutional impacts has been evident in some emerging economies, we advocate that it is similarly manifested in developed economies. In such cases, it is not institutional void per se or weakness of institutions that act as deterrents, but it is the power of a strong institutional system that has clearly set its national priorities.

This book recognizes the need for a lot more work on understanding institutions and institutional pressures that shape firm behaviour. There are a number of issues that bridge institutions and firm strategic actions and behaviour that we try to touch upon, but this still remains an area to be explored in much greater detail.

Chapter 2, ‘Convergence versus Divergence: Testing Varieties of Capitalism Perspective on the Globalization of Business Practices’ by Andrei Kuznetsov and Marcus Jacob, explores the impact of institutional differences on the organizational behaviour of transnational corporations using quantitative analysis. The chapter has identified elements of firm behaviour that are particularly sensitive to the impact of host-country institutions. The developed analytical framework is a valuable tool for managers when evaluating the firm’s position vis-à-vis host- and home-country practices in order to attain greater congruency with environmental conditions or parent company practices. The authors use variety of capitalism theory, emphasizing the role of national institutions and the power of institutional complementarity, in order to establish whether business practices of multinational firms operating across various types of capitalisms really differ or converge. By comparing the organizational behaviour of German parent firms and their British subsidiaries, the chapter tests the ‘power’ of the national institutional system in which this ‘power’ is confronted with the ‘power’ of intra-organizational quasi-institutional set-ups that exist within international firms. The results show that two competing forces are in play and they have unequal influence on different aspects of firm coordination. First, German affiliates in the UK exhibit significantly different behaviour from their parents across all five explored domains that suggest the existence of distinct systemic institutional forces. Second, the relative alignment of firm behaviour with institutional practices in the host country is mediated by factors internal to the firm, such as age, size and subsidiary function. Corporate governance, employee relations and training and education in subsidiaries are predominantly driven by parent firm routines and less so by host-country institutional set-up. By contrast, industrial and inter-firm relations in subsidiaries are profoundly influenced by determinants inherent in host-country institutions. The micro-level analysis confirms that adaptation to the national institutional set-up is not full and not uniform across the coordination dimensions. These findings question the complementarity argument in its strong form and suggest that a less static and more dynamic alternative of varieties of capitalism theory is needed to address the complexities of micro relations. The chapter posits that it is only through the analysis of the individual elements of institutional environments that scholars can forward an agenda providing managerial guidance in international business environments in which institutional change abounds.

Chapter 3, ‘Institutional Determinants of Outward Foreign Direct Investment from Emerging Economies: A Home-Country Perspective’ by Mohamed Amal and Bruno Thiago Tomio, analyses the controversial impact of institutions on FDI in emerging economies. This chapter examines the importance of home-country governance as a determinant of outward foreign direct investment (OFDI). Using a panel data model for 43 developing countries from Asia, Africa and Latin America over the period from 1996 to 2010, the authors estimate the relationship between OFDI and governance indicators controlling for several economic variables such as the size and openness of the home economy. The model estimation shows that on the one hand, three of the six variables of the World Governance Indicators register negative correlations with OFDI, while the variable Political is the only one that was found statistically significant. This finding points out to the hypothesis of ‘Institutional Escapism’, a particular behaviour of multinational companies (MNCs) where a negative institutional scenario may stimulate OFDI, since companies may feel encouraged to operate across borders to run away from some home market restrictions (e.g. Rule of Law) or uncertainties (related to Political Stability, Voice and Accountability). On the other hand, the results show a positive correlation between OFDI and Control of Corruption and Regulatory Quality in the home country, suggesting that an improved institutional environment may stimulate the competitiveness of firms in foreign markets. The effects of the control variables, including GDP, Trade and inward foreign direct investment (IFDI), have registered a higher coefficient, pointing out to a significant role of economic openness on OFDI. The empirical findings of the panel data model estimation have supported the core concept of the Investment Development Path (IDP) model proposing that the local presence of foreign firms is vital for the development of ownership advantages by emerging MNCs (EMNCs). Consequently, one could argue that a country’s ability to attract IFDI will have a positive impact on enhancing the competitiveness and OFDI performance of local firms. Moreover, the authors demonstrate that countries with high level of trade and market openness are more likely to engage in OFDI projects. Chapter 4, ‘Effects of Government Economic Policy on Outward Foreign Direct Investment: Experience from China and the EU’ by Witold Wilinski and Xiaoxin Li, discusses the policy of China and the European Union (EU) in supporting OFDI and gives examples of recent restrictive policy measures towards IFDI pursued by highly developed countries. There is no doubt that China is more active in supporting its firms investing abroad than the EU. China offers fiscal and financial incentives and special support programmes for OFDI. Due to the fact that the EU has a common market, tax incentives for OFDI cannot be offered within its geographical limits. However, the EU could adopt certain elements of financial support. In the case of China, programmes that support gaining new technologies and natural resources seem to be particularly important. China takes an active part in providing support to its companies abroad which has led to increasingly negative reactions from developed economies. The authors argue that during the last decade, firms from highly advanced countries have successfully developed business ventures in emerging economies using OFDI. If developed economies start to pursue stricter restrictive policies towards the companies from emerging economies willing to invest in their countries, such policies will surely evoke a similar response by emerging economy governments.

Chapter 5, ‘Foreign Direct Investment Growth in China: Implications for Politics, the Economy and Culture’ by Attila Yaprak and Yingtao Xiao, reaffirms that FDI is an essential ingredient in the economic growth of nations and not being an exception. FDI in China has grown rapidly in the past three decades. The authors analyse the political, economic and cultural influences on FDI growth during the four stages of China’s economic growth, that is, Isolation (1949–1978), Initial Growth (1979–1989), Rapid Growth (1990–2001) and Slowing Growth (2002–present) stages. The chapter examines political (key leadership, governing ideology and legislation), economic (policy, general growth, FDI performance and consumer behaviour) and cultural factors (social ideology, corruption and bureaucracy), each of which independently and conjointly has impacted FDI growth in China. The authors propose that FDI growth in China will continue unabated but will increase at a slower rate. However, FDI in the form of wholly foreign-owned enterprises, especially in the service sectors and in the Western inland regions of China, will grow faster. Investment from large MNEs will continue to increase, resulting in more technology- and capital-intensive FDI projects. Overall, a better investment environment, including encouraging policies, increasing political transparency and increasing market capacity, in China will continue to attract foreign investors. However, existing and emerging problems such as wealth disparity, corruption and nationalist consumerism will pose real challenges to future investors.

Chapter 6, ‘Should Governments Support Outward FDI? The Case of Poland’ by Marian Gorynia, Jan Nowak, Piotr Trapczyński and Radosław Wolniak, discusses the positive and negative effects of OFDI on investing firms and home-country economies and firms. The authors argue that broader policies supporting the competitiveness and internationalization of local firms should be incorporated in the discussion on OFDI support. This approach is of particular relevance to the context of emerging economies which are trying to develop their national competitiveness and engage in OFDI. The relationship between these two processes should be an important consideration for policymakers in choosing policies that are favourable to the home country’s sustainable development in the long run. On the level of implementation, a crucial determinant to effectiveness of an OFDI support system is its availability to and awareness of its potential recipients. A typology of various financial and non-financial support measures is proposed and discussed by the authors in the Polish context as Poland has become an emerging source of FDI outflows. A policy framework model is proposed with implications for the overall effectiveness of the OFDI support system.

Chapter 7, ‘Innovation in Emerging Economies: The Spillover Effects of Foreign Direct Investment and Institutions in Russia’ by Natalya Smith and Ekaterina Thomas, examines innovation performance in a transition economy. The chapter is specifically focused on the impact of FDI and institutions on innovation in Russia during the period 1997–2009. The study shows that FDI, conditional on a lower level of investment risk, is a significant predictor of innovation. It confirms a positive association between FDI and innovation and a negative relationship between innovation capability and investment risk. In addition, skilled labour, openness to trade and the level of urbanization (i.e. the presence of large cities, a proxy for population density) are observed to enhance innovation. Interestingly, although we observe a positive association between natural resource abundance and the number of patents filed, this relationship is negative in the case of new technologies created. The study makes important contributions. Firstly, it contributes to a better understanding of the regional innovation system in transition. The second contribution is empirical as the chapter takes the innovation selection process of firms into account when studying FDI, institutional development and innovation outcome by analysing these two decisions simultaneously using Heckman’s estimation technique.

Chapter 8, ‘The Role of Home Governments in Outward Foreign Direct Investment’ by Svetla Marinova, John Child and Marin Marinov, explores OFDI institution building in China and Russia that shows how this process has been heavily influenced by the governments of the respective countries and therefore by the continuity or otherwise of the political and economic system. The authors associate OFDI institution building with the role of home governments and institutional entrepreneurship on the part of individuals and organizations that introduce, establish and develop new institutional rules and norms redefining OFDI firm behaviour. The analysis suggests that institutional structures differ among emerging economies and it can be anticipated that their government policies and institutional specifics impact OFDI activities in different ways, which calls for better understanding by scholars exploring the relationship between OFDI and institutions.

Chapter 9, ‘Structural Model of Institutional Environment Influence on International Entrepreneurship in Emerging Economies’ by Daria Volchek, Sami Saarenketo and Ari Jantunen, analyses the challenges faced by smalland medium-sized enterprises (SMEs) in emerging economies that are seeking growth and internationalization due to underdeveloped regulation, taxation policies, unfavourable societal attitudes towards entrepreneurship, lack of access to financial resources and absence of insti...

Table of contents

• Cover
• Title Page
• Copyright
• Contents
• List of Figures, Tables and Boxes
• Notes on Contributors
• 1. Institutions and International Business
• 2. Convergence versus Divergence: Testing Varieties of Capitalism Perspective on the Globalization of Business Practices
• 3. Institutional Determinants of Outward Foreign Direct Investment from Emerging Economies: A Home-Country Perspective
• 4. Effects of Government Economic Policy on Outward Foreign Direct Investment: Experience from China and the EU
• 5. Foreign Direct Investment Growth in China: Implications for Politics, the Economy and Culture
• 6. Should Governments Support Outward FDI? The Case of Poland
• 7. Innovation in Emerging Economies: The Spillover Effects of Foreign Direct Investment and Institutions in Russia
• 8. The Role of Home Governments in Outward Foreign Direct Investment
• 9. Structural Model of Institutional Environment Influence on International Entrepreneurship in Emerging Economies
• 10. The Effects of Country and Industry Factors on the Competitive Advantage of European Construction Firms Operating in Russia
• 11. Understanding Failure in International Retailing: An Institutional Framework for Future Investigation
• 12. Key Determinants of Retail Internationalization: Do Institutions Matter?
• 13. Firm Internationalization and Institutions: The Case of Pharmaceutical Retailing
• 14. Tri-Space Framework for Understanding MNC Behaviour and Strategies: An Institutionalism and Business System Perspective
• Index