Managing socio-political risk at the subnational level: Lessons from MNE subsidiaries in Indonesia

Within emerging markets, institutional conditions vary significantly at both the country and subnational levels. Although the extant literature recognises the types of risk faced by multinational enterprises (MNEs) in emerging markets, it has hitherto paid scarce attention to explaining how MNEs manage such risk at the subnational level. Reporting on four case studies from Indonesia, we outline how MNEs ensure their success by maintaining active relationships with a variety of non-market actors—including opinion leaders, government officials, and communities at the subnational level. In our study, we developed a conceptual framework, showcasing how MNEs can manage socio-political risk within heterogeneous institutional settings.     

Is there an advantage of emergingness? A politico-regulatory perspective

The source(s) of competitive advantage of emerging-economy multinational enterprises (MNEs) remains a puzzle in international strategy scholarship, with some arguing that such firms are at a disadvantage compared to developed-economy rivals. Drawing on the concept of institutional advantage and using a sample of 233 foreign subsidiaries operating in 25 emerging economies over the period of 2000–2017, we find that foreign subsidiaries of emerging-economy MNEs are more adept than foreign subsidiaries of developed-economy MNEs at deploying their fixed asset management capabilities in emerging-economy host countries, especially when host-country politico-regulatory institutions are underdeveloped. Likewise, we find that subsidiaries of emerging-economy MNEs are more adept at deploying their tax planning capabilities when host-country politico-regulatory institutions become increasingly volatile. We discuss how these findings contribute to scholarly thought regarding the performance of emerging-economy MNEs.     

Macro‐institutional conditions in Ghana and the challenges to HRM program development and implementation

Multinational enterprises (MNEs) originating from advanced economies with operations in less developed host countries need to have a good understanding of the macro‐institutional conditions of the host country. Given HRM practices are context‐specific and embedded within the institutional and cultural settings of the host country, an exploratory qualitative study approach was employed to ascertain the host country's institutional dimensions (drivers) likely to undermine HRM program implementation in large local companies and in MNEs. Data were drawn from key stakeholder participants, including HR managers from MNE subsidiaries, domestic firms, and officials from key stakeholder institutions. The evidence points to six (6) dimensions of a less‐developed host country's macro institutions that undermine firms' HRM advancement. These include the regulatory system, education and training arrangement, labor market conditions, cultural barriers, political actors' intrusion, and economic uncertainty. The implications thereof are discussed.     

International strategy: From local to global and beyond

To survive and thrive, multinational enterprises (MNEs) have had to adapt to dramatic changes and increasing complexity in the global competitive landscape over the past 50 years. MNEs’ international strategies and the academic research on the various attributes and outcomes of these strategies have evolved accordingly. This work reviews the evolution of international strategy research over the past five decades. In particular, the research on international diversification and the timing and speed of entering international markets is closely examined. In recent years, the influence of formal and informal institutions on international strategy has become a central research topic. Furthermore, MNEs’ strategies often seek to explore and exploit critical capabilities to build advantages in international markets. Finally, emerging research themes, such as institutional complexity, business sustainability, emerging economy firms and international new ventures are highlighted.     

Subnational institutions,political capital,and the internationalization of entrepreneurial firms in emerging economies

This study advances the institution-based view of strategy by integrating it with firm-specific capability considerations. In particular, we investigate the integrative influence of subnational-level home country institutional environments and firm-level political capital, as an important way to seek resources, on emerging economy entrepreneurial firms’ internationalization. With data from Chinese entrepreneurial firms, we find that the development of subnational institutional environments in the home country is related to firms’ degree of internationalization. Furthermore, while political capital with low-level governments enhances the effect of subnational institutions on internationalization, political capital with high levels of government has no such moderation effect. Theoretical and empirical contributions and implications are discussed.     

Effects of Informal Institutions on the Performance of Microenterprises in the Philippines: The Mediating Role of Entrepreneurial Orientation

The study investigates the effects of informal institutions and entrepreneurial orientation on the performance of microenterprises at the subnational level within a developing country context. Using structural equation modeling based on a large-scale survey of 735 microenterprises in the Philippines, it is found that informal institutional factors and entrepreneurial orientation are associated with firm performance. However, further analysis reveals a strong mediating role of entrepreneurial orientation on the informal institutions-firm performance relationships. This finding is novel and adds to our understanding of the mechanism through which informal institutions affect firm performance, particularly for microenterprises in developing countries.     

When social movements close institutional voids: Triggers,processes, and consequences for multinational enterprises

Our research builds on existing literature examining institutional voids in emerging economies. Using data from two cases of mining FDI in Argentina, we conceptualize the triggers, processes and consequences of informal institution-building by a social movement. We found the cases to exhibit different ‘community sustainability orientations’, enabling two contrasting strategies, ‘bargaining’ and ‘gatekeeping’, to address the existing institutional void. This led to the development of new formal institutions – regulated CSR for the former and legal ban on mining operations for the latter case. Our study thus offers insights into the processes through which institutional entrepreneurship by social movements influences MNEs.     

The three faces of China: Strategic alliance partner selection in three ethnic Chinese economies

It is generally understood that firm strategy is linked to both internal firm resources and external, competitive industry forces. More recently, studies have suggested that firm strategy is also influenced by the formal and informal institutions of the institutional environment. Culture and commercial conventions represent important informal institutions – the norms and values shared by a group of individuals – whereas more formal institutions include the regulatory, economic, and political forces in the environment. We explore the effects of formal and informal institutions on strategic alliance partner preferences in Mainland China, Taiwan, and Hong Kong. Although the three share a broad lineage, their institutional development differs in some respects. Utilizing a policy capturing study, we explore alliance preferences of senior managers from each of the three economies to demonstrate how similarities and differences in the institutional environment can produce variation in alliance partner preferences. This paper contributes empirically by comparing alliance partner preferences in three different ethnic Chinese communities in East Asia. We add to the nascent but growing literature on institutions and strategy, with practical implications for understanding alliance partner preferences of managers in China, Taiwan, and Hong Kong, which represent major centers of strategic alliance activity.     

MNEs and policy networks: Institutional embeddedness and strategic choice

Political strategies are a crucial matter for MNEs in the context of globalization. We argue that MNEs’ influence on political decision-making depends on their insertion into policy networks, which define the institutional framework and the interaction patterns of business/government relations in different issue-areas. Then, we propose a stylized taxonomy regarding the differentiation of MNEs’ political leverage in various domains, at a home country level. Finally, we explore the influence of political power at home on MNEs’ strategic approaches to the host countries, taking into account the bargaining power of local actors in the concerned issue-areas.     

The impact of formal and informal institutional distances on MNE corporate social performance

Can host country selection affect the corporate social performance (CSP) of multinational enterprises (MNEs)? Using institutional distance as our theoretical lens, we propose and empirically examine the notion that greater institutional diversity can have disparate influences on the social performance of different types of MNEs. We conceptualize each MNE as a unique portfolio of locations and use that “footprint” to examine the impact of formal and informal institutional distances on CSP. We hypothesize and find (1) a moderating influence of greater formal institutional distance in the MNE portfolio that slows the rate of increased benefits associated with greater international scope; and (2) a direct influence of greater informal institutional distance that lowers the overall levels of CSP independent of the international scope of the MNE. Managerial implications for international location selection are discussed.     

Institutional environment and firms' sources of financial capital in Central and Eastern Europe

The external business environment is a major determinant of which sources firms select to obtain financial capital. We examine how the regulatory, political, and financial dimensions of the institutional environment influence the extent to which firms rely on informal sources of financial capital. The analyses of data from 2869 firms in twenty-six transition economies in Central and Eastern Europe (CEE) indicate that ineffective regulatory system, underdeveloped financial system, and government corruption are strong determinants of firms' reliance on informal channels for financial capital. We also find that smaller firms are more vulnerable when the local financial system is underdeveloped and the regulatory institutions are less effective in these transition economies. A subgroup analysis of firms' forms of establishment shows that private firms are sensitive to the level of development of the local financial system and state-owned enterprises are particularly sensitive to the degree of corruption.     

Cultural distance,political risk,or governance quality? Towards a more accurate conceptualization and measurement of external uncertainty in foreign entry mode research

It is well accepted that multinational enterprises (MNEs) prefer equity joint ventures (JVs) over wholly owned subsidiaries (WOSs) in foreign countries where the formal and informal external environment is highly uncertain. Many entry mode studies have modeled the external uncertainty faced by MNEs in foreign countries as the cultural distance to these countries (thus focusing on the informal environment), or as their political risk level (thus focusing on the formal environment). We argue that both approaches are suboptimal because (1) cultural distance not only reflects the external uncertainty associated with WOSs but also the internal uncertainty associated with JVs, and (2) political risk covers only one aspect of the formal external environment. We contend that the governance quality of foreign countries is a better proxy for external uncertainty. The lower this quality, we hypothesize, the higher the likelihood that MNEs will choose JVs over WOSs. An analysis of 231 entries by Dutch MNEs into 48 countries offers support for this hypothesis. We also find that cultural distance has no impact on entry mode choice and that political risk has the weakest impact of all aspects of governance quality.     

A South-South perspective on emerging economy companies and institutional coevolution: An empirical study of Chinese multinationals in Africa

In this paper, we show how international tenders act as defining moments in building asymmetric coevolution-based mechanisms between Chinese multinational enterprises and local institutions in developing African countries. We used a case study methodology to explore how three Chinese multinationals – Citic, Sinopec, and Chinalco – developed non-market relations with the institutions of three African countries, namely, Algeria, Gabon and the Republic of Guinea, both during and after the submission of international tenders, to win strategic contracts and securely embed the company in question within the target host country. We found that Chinese companies not only submit tenders, but also develop multiple kinds of alliances in order to influence local institutions over the long term, transplant new business practices and standards, and expand in an unparalleled way, with host-country institutions and Chinese MNEs acting as partners in the new ecosystem. Based on our findings, we propose a model which highlights the specific mechanisms through which successful coevolution processes emerge and prosper between Chinese multinationals and developing country institutions. This study contributes to the international management literature by extending the field of institutional theory to co-evolutionism in international business.     

Greenfield Investments or Acquisitions: Impacts of Institutional Distance on Establishment Mode Choice of Multinational Enterprises in Emerging Economies

ABSTRACT

The authors analyze the impacts of formal and informal institutional distance on establishment mode choice of multinational enterprises (MNEs) using a sample of 343 foreign direct investments (FDIs) made in selected emerging economies of Central and Eastern Europe, Asia, and Latin America by the Finnish MNEs. This study contributes to conceptualization and operationalization of institutional distance as well as its application in international business studies. The empirical analysis revealed that high informal institutional distance results in preference of greenfield investments by the Finnish MNEs as the authors hypothesized. However, the authors also found that high formal institutional distance results in preference of acquisitions, which is opposite the study hypothesis as well as the findings of previous studies addressing similar issues.     

Legitimizing the apprenticeship practice in a distant environment: Institutional entrepreneurship through inter-organizational networks

This paper asks how Multinational Enterprises (MNEs) engage in institutional entrepreneurship to successfully transfer the organizational practice of apprenticeship-based training from Continental Europe to the distant host environment of the United States. In our case study, we highlight the important role of inter-organizational networks to coordinate engagement with the cognitive, normative, and regulative pillars of host country institutions. This networked form of institutional entrepreneurship involves the formation of inter-organizational networks for the purpose of bringing about institutional change collaboratively. In the process of transferring apprenticeship, a particular vision of workforce training was created, support gathered, and institutional change was sustained locally around the issue of training. We argue further that networked institutional entrepreneurship is a useful strategic tool to overcome the particular kind of institutional distance between the institutional settings of more coordinated market economies (CMEs) and more liberal market-oriented economies (LMEs). We contribute to existing knowledge by showing how practice transfer is shaped by particular kinds of institutional distance, and highlighting the role of inter-organizational networks as a way of governing collective agency associated with institutional entrepreneurship and the emergence of new local proto-institutions.     

Corruption,South African Multinational Enterprises and Institutions in Africa

We examine the responses of South African multinational enterprises (MNEs) to corruption in African markets in the context of institutional voids. Corruption is a source of uncertainty and additional transactional costs for MNEs and it necessitates a strategic response. The research employs a qualitative study of a sample of MNEs with experience in internationalising into Africa. The results indicate that corruption in African markets is pervasive and closely associated with the institutional voids in these countries. MNEs see themselves as ‘institution takers’ responding to countries’ institutional makeup at the organisational and individual level but fail to fully appreciate their impact on institutions both positively and negatively. Rather MNEs focus on strategic responses at the organisational level to address corruption operationally in the host country. We add to the existing literature by providing a dynamic framework of the complex webs of association between institutions, MNEs and corruption in conditions of economic underdevelopment. The research suggests that MNEs do not need to get caught in a vicious cycle whereby they perpetuate corruption in conditions of underdevelopment and institutional voids but instead can contribute towards a virtuous cycle through which they institutionalise ethical foundations.     

The international market selection of Chinese SMEs: How institutional influence overrides psychic distance

The purpose of this research is to contribute to the ongoing debate about whether psychic distance still plays a vital role in the internationalisation of SMEs from emerging markets. Drawing on the prior research which suggests the salient impact of institutional factors on internationalisation, we investigate the role of home country institutions in international market selection. Adopting a multi-case methodology, we collected semi-structured interview data from six small and medium-sized manufacturing firms in China. Our findings suggest that while psychic distance is still important in some circumstances, both formal institutions, such as government support, and informal institutions, such as business and political guanxi, enable Chinese SMEs to choose psychically distant markets. Our findings also indicate that informal institutions interact with formal institutions to further influence SMEs’ international market selection. This research contributes to SME internationalisation studies by revealing how formal and informal institutional factors override psychic distance in influencing international market selection.     

Institutional distance and the quality of the headquarters–subsidiary relationship: The moderating role of the institutionalization of headquarters’ practices in subsidiaries

Through the lens of the institutional theory, we developed and empirically tested a contingency theoretical framework that examines the effects of formal and informal institutional distances on the quality of the headquarters–subsidiary relationship, and how such effects are contextualized by internal institutionalization of headquarters’ practices in subsidiaries of Chinese multinational enterprises (MNEs). Data were collected from both the headquarters of 297 Chinese MNEs and their respective subsidiaries. The results show that regulative and cultural distances are positively associated with the quality of the headquarters–subsidiary relationship, and that these positive relationships are stronger when subsidiaries institutionalize headquarters’ practices to a higher degree. Theoretical and practical implications are highlighted in the paper.     

CSR and stakeholder salience in MNE subsidiaries in emerging markets

The purpose of this study is to identify the key stakeholder groups pressuring multinational enterprises (MNEs) in emerging markets (EMs), also if the pressure is global or local, to develop corporate social responsibility (CSR) strategies. Drawing on stakeholder salience and institutional theories, all the stakeholder groups acknowledged and analysed in the literature were identified and examined to understand if they were perceived by MNEs in China as effective in pressuring them to engage in CSR strategies and activities. Results demonstrate that only stakeholder groups with power – government power or voting power – are perceived as having enough pressure to make MNEs’ Chinese subsidiaries engage in CSR, which is contrary to current theories. Our results allow us to theorise on an extension of the concept of utilitarian power and political power when analysing stakeholder salience in EMs. This research has important implications for managers as balancing and working with limited resources and correctly identifying and prioritising key stakeholders are vital to successfully improving performance.     

The Performance Impact of Informal and Formal Institutional Differences in Cross-Border Alliances

This study addresses the simultaneous and diverse effects of differences in informal and formal institutions on cross-border alliances’ financial performance. We utilize data from 405 microfinance institutions (MFIs), based in 74 developing countries, that have alliances with partners from developed countries. We find that the impact of informal institutional differences between MFIs and their cross-border partners is sigmoid-shaped, with performance first increasing, then declining, before improving again as informal institutional differences grow large. By contrast, formal institutional differences appear to be detrimental to MFIs’ performance. Consistent with our prediction, we find that MFIs’ cross-border experience moderates both formal and informal institutional effects.