What impact does country of origin have on the strategies followed by multinationals to address institutional voids in non-home markets? A case study of developed market multinationals and emerging market MNEs in the technology sector in Malaysia
Ayoub Chengachi 10002334
Amsterdam, June 24th, 2016
Faculty Economics and Business – Business Administration Track: International Management
Master Thesis Ayoub Chengachi Student number: 10002334 Supervisor: Francesca Ciulli Academic year: 2015 – 2016 Word count: 21.807
Statement of Originality
This document is written by student Ayoub Chengachi who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.
The faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
Acknowledgements
I would like to thank my supervisor, professor Francesca Ciulli, for her guidance, feedback and support during the entire process of writing my research. Her feedback was of great help and therefore I want to express my gratitude towards her. I also want to thank the University of Amsterdam for the excellent guidance during this entire master thesis process.
ABSTRACT
IB scholars have showed the importance of the impact institutions may have on businesses by the increasing literature concerning this topic. However, there has been limited attention to the different activities MNEs undertake in host countries and the impact the country of origin of the MNE has on these activities. Therefore study investigated the responses of MNEs from developed countries and MNEs from emerging countries and examines whether and how these strategies differ. This is especially interesting because of the different backgrounds and international expansion motivations of emerging market multinationals and developed market multinationals. This research is done by a multiple case study of multinationals in the technology industry, who entered Malaysia between 2004 and 2010. Multiple strategies are identified by extensively studying existing literature. The propositions are largely supported and show that there is a clear influence of country of origin on the strategies undertaken by MNEs to deal with institutional voids in a host country.
TABLE OF CONTENT
1. INTRODUCTION……….………..6
2. LITERATURE REVIEW………...……….8
2.1 Institutional Theory and International Business………....9
2.2 Institutional Voids………...………..…...12
2.3 Multinationals’ responses to Institutional Voids……...………..…....15
2.3.1 Institutional Avoidance……….16
2.3.2 Operational Internalization Strategies………...17
2.3.3 Institutional Adaptation………....18
2.3.4 Institutional Co-Evolution………18
2.4 Multinationals and country of origin……...………..……...22
2.4.1 Developed Countries……...……….……….…22
2.4.2 Emerging Countries ……...………..24
2.5 Research Question and Propositions………..…...25
3.METHODOLOGY…...………...…...………...……….31
3.1 Research Design……….………..31
3.2 Case Selection……….……….34
3.2.1 Developed Market Multinationals………34
3.2.2 Emerging Market Multinationals………..35
3.2.3 Overview of the Cases………..36
3.3 Data Collection……….………...37
3.4 Data Analysis……….………..38
3.5 Quality of the Research Design………...40
4. RESULTS……….……….41
4.1 Within-Case Analysis……….……….41
4.1.1. Within-Case Analysis: Facebook……….………42
4.1.2. Within-Case Analysis: Google……….………...46
4.1.3. Within-Case Analysis: Huawei……….………...50
4.1.4. Within- Case Analysis: ZTE Corporation………54
5. DISCUSSION……….………...……59
5.1 Propositions. ………...………59
5.2 Contributions and Managerial Implications……….………64
5.3 Limitations and Suggestions for Future Research………...65
6. CONCLUSION……….……….66
1. INTRODUCTION
Firms that engage in foreign direct investment (FDI) have to deal with the institutional
environment in the host country. This environment provides a basic framework for companies concerning what behaviour are acceptable in a specific context (Peng, 2002). In many cases multinationals have to deal with institutional environments that are not beneficial for their operations. In particular, the presence in a country of institutional voids has a major impact on the strategies that companies follow. Institutional voids are defined as situations in a country where institutional settlements supporting markets are non-existent, failing, and/or fragile (Mair & Marti, 2009; Rodrigues, 2013), such as the lack of constitutional laws regarding property rights, inefficient implementation of existing rules, weak markets, underdeveloped infrastructure, and corruption (Stal & Cuervo-Cazurra, 2011, p. 215). Dealing with institutional voids correctly is crucial to succeed in non-home markets. Khanna and Palepu (2013) emphasized the
importance of dealing with institutional voids by stating that multinational enterprises (MNEs) should not pursue FDI by any means if they are not interested in facing and dealing with institutional voids in emerging countries. Weak, or non-existent institutions are primarily
associated with challenges that developed market multinationals (D-MNEs) face when operating in emerging countries, because the latter have much less developed institutions than D-MNEs home countries (Doh, Rodrigues, Saka-Helmhout, Makhija, & Khanna, 2016). However, according to the OECD an increasing number of companies from emerging markets have expanded their businesses internationally; from an extremely low FDI amount in 1980 to USD 351.2 billion in 2008 (Sauvant, Maschek, & McAllister, 2010; Hennart, 2012). Thus addressing institutional voids is something that both D-MNEs and emerging market multinationals (E-MNEs) have to deal with. Understanding the possible different approaches to address
institutional voids is crucial for a multinational’s success, both from developed and emerging countries.
Generally, governments aim to attract inward FDI due to the existence of (natural) factor endowments, the so-called location specific advantages (LSAs), and improve the local
institutional environment (Cantwell, 2015; Dunning, 2000). E-MNEs and D-MNEs that are already established in a host country also benefit from FDI pursued by other MNEs in that particular country, since it has a positive impact on the economic growth of the country. To increase inward FDI, institutional voids should be diminished. The main difference between
E-MNEs and D-E-MNEs regarding their FDI motives is that when expanding abroad the former is usually focused on leveraging and exploiting ownership advantages while the latter is more focused on acquiring the resources that it lacks (Luo & Tung 2007). Hence, the motives for expanding internationally differ for these MNEs, which impacts their foreign strategies. D-MNEs originate from countries characterized by a strong institutional framework, which generally aids them in the process of engaging in FDI while E-MNEs come from countries characterized by a weak institutional framework, which makes it in contrast more difficult for them to engage in FDI.
Current research on institutional voids mainly focuses on entry strategies and on how multinationals can adjust their entry mode to deal with institutional voids (Gaur, Kumar, & Singh, 2014). A multinational for example could chose to engage in a low equity entry mode if a host country is characterized by relatively many institutional voids (Dunning, 2000; Rugman & Verbeke, 2004). Existing literature instead overlooks what behaviour MNEs engage in,
concerning institutional voids, once established in a host country. Furthermore current research focuses mainly on how D-MNEs deal with institutional constraints in host countries (Gaur, Kumar, & Singh, 2014; Khanna & Palepu, 2006). Limited attention has instead been given to how E-MNEs deal with institutional voids in a host country, which is especially interesting due to the significant growth of E-MNEs. It is interesting to compare D-MNEs’ responses to
institutional voids with those adopted by E-MNEs, since their motives for going abroad and their experiences in their country of origin differ (Gaur, Kumar, & Singh, 2014). The importance of exploring this topic has also been emphasized in a 2014 call for papers in the Journal of
International Business Studies (JIBS), which stated the need to understand the strategies adopted by D-MNEs and E-MNEs to deal with institutional voids, and if these strategies differ (Doh, Rodrigues, Saka-Helmhout, Makhija, & Khanna, 2016). In keeping with the research gap in extant literature and with the JIBS’ call for papers, this study aims at studying the approaches adopted by MNEs, from different types of countries of origin, to cope with institutional voids in a shared host country. More specifically, this study aims to answer the following research question: “What impact does country of origin have on the strategies followed by multinationals to address institutional voids in non-home markets?”. By comparing the responses of E-MNEs and D-MNEs to institutional voids in the same host country this research will examine the presence of differences and/or similarities.
This research question will be answered through a multiple case study design, having as units of analysis E-MNEs and D-MNEs operating in Malaysia. According to Rodrigues (2013) especially countries that face rapid growth of FDI inflow are characterized by institutional voids. For this reason, this study selected Malaysia as a research setting, as it has experienced rapid growth of FDI inflows in the past years. Indeed, data from the United Nations Conference on Trade and Development (UNCTAD, 2015) shows that Malaysia has experienced an increase in FDI flows from USD 6240 million in 2006 to USD 10799 million in 2014, indicating a growth rate of 73.06 per cent in a period of eight years. This study will analyze the strategies that MNEs from emerging and developed countries have adopted to deal with the institutional voids of Malaysia. Data will be collected from company reports, newspaper articles, press releases and governmental statements.
This study aims to make contributions to the field of international business literature by deepening our theoretical understanding of what strategies companies follow to address
institutional voids when they expand abroad. More specifically the study aims to contribute to the literature on institutional voids both by comparing the behaviour of D-MNEs and E-MNEs and by analysing how MNEs address institutional voids when they are already established in a host country and not at the time of entry.
In the next part of the paper I will discuss the institutional theory, go more in depth on institutional voids, the strategies that firms may use to address these voids, and discuss
differences between D-MNEs and E-MNEs. At the end of this sections propositions will be made regarding the research question. The third section will explain the methodology of this research. In the following section the results will be illustrated. Next, the discussion of the results will be presented, and finally the implications for future research and the conclusion will be discussed.
2. LITERATURE REVIEW
In this section several important topics for this research will be discussed, starting with the role of institutions in international business, institutional voids, the strategies that may be followed to deal with these voids, including institutional avoidance, operational strategies, institutional adaptation, and institutional co-evolution. Furthermore the institutional environment that characterizes emerging markets and developed markets will be examined, and also specific
characteristics of E-MNEs and D-MNEs when they decide to expand to a non-home market. The limitations of current literature will be discussed and based on the identification of a research gap the research question will be presented. Finally propositions will be created based on the
literature that is applicable to answer the research question of this study. 2.1 Institutional Theory and International Business
Douglass North (1990: p.5) defined institutions as “the rules of the game” and the institutional framework in a country provides a basis for firms regarding what behaviour is acceptable in a specific context (Peng, 2002). This framework consists of formal and informal constraints. Meyer and Peng (2005: p. 610) define formal institutions as political regulations regarding doing and starting a new business, economic/social/political incentives and constraints. They include laws, and regulations regarding, among other things, property rights, rivalry, and contractual agreements that provides a foundation for production, import/export, and distribution (Seyoum, 2009). Formal institutions encourage for example transparency, less trade barriers, and
regulations such as property rights Many emerging countries suffer from the lack of these formal institutions which eventually results in a less attractive marketplace for MNEs, creating a barrier for FDI (Kumssa & Mbeche, 2004). The Organization for Economic Co-Operation and
Development (OECD), UNCTAD, and a high degree of both governmental and supranational bodies adopt the definition of a MNE as “an enterprise that engages in foreign direct investment (FDI) and owns or, in some way, controls value-added activities in more than one country” (Dunning & Lundan, 2008, p.3). Formal institutions are important tools for governments to attract FDI from these MNEs, especially when countries have very different informal institutions (Mayer & Bénassy, 2007). Large differences in informal institutions create a higher risk for MNEs because they are not experienced in operating in these informal institutional environments (North, 1990). Helmke and Levitsky (2004, p.726) define informal institutions as “informal rules which are created, communicated, and enforced outside of officially sanctioned channels”. Informal rules are composed of norms of behaviour, which are incorporated in the countries’ specific culture (North, 1990). Institutions are highly important for MNEs as it is clearly showed by the increasing interests of IB scholars.
The literature concerning the relationship between companies and a country’s institutions has been changing over the past years. It is important to stress these changes because it shows
different ways of how companies could deal with local institutions. Institutional theory in its early years mainly focused on institutional reforms and that companies should be actively involved in changing institutions (Selznick, 1949; Greenwood & Hinings, 1996). This old institutionalism favoured high power distance and informal structures (Clark, 1972; Selznick, 1949, 1957). Companies put emphases on improving local institutions, and change was highly valued. On the other hand new institutionalism, also described as the new institutional school by Perrow (1986), changed its course and emphasized that companies should not be actively
engaged in changing institutions (Selznick, 1996; Kraatz & Zajac, 1996). Hence adjustment to the context in which the company operates became the main focus of companies. New
institutionalism acknowledged the importance of legitimacy significantly and isomorphism became a central point of discussion (DiMaggio & Powell, 1983). Isomorphism entails that companies show similar behaviour to other companies, and adapt their practices to fit within the institutions in the country (Boxenbaum & Jonsson, 2008). Legitimacy is described as the societal approval of corporate behaviour and operations (Baumann-Pauly, Scherer, & Palazzo, 2015; Ashforth & Gibbs, 1990; Suchman, 1995). Thus companies that focus on gaining legitimacy engage in activities to please the society that the company serves and decide not to engage in activities that might create disapproval within the society. Thus the new institutionalism raised importance for creating a stable environment rather than the importance of reforms (Meyer & Rowan, 1977; DiMaggio & Powell, 1983). Many scholars, however, acknowledged the importance of old institutionalism, and hence emphasize the impact institutional change may have on businesses (Mair & Marti, 2009).
Especially for MNEs institutions play a crucial role as it showed by the increasing interests of IB scholars. Many IB scholars have mainly discussed the institutional theory as part of larger frameworks. The highly recognized eclectic (OLI) paradigm by John Dunning (2000) for example is a three-legged model that provides guidance for firms to decide whether it is profitable to pursue FDI. According to Dunning (2000) an organization should pursue FDI in a host country when there are Ownership Specific Advantages, which include both tangible and intangible assets of the firm and the company’s strength to harmonize its entire business network; Location Specific Advantages, which indicates Country specific Advantages (CSAs), including institutions; and finally Internalization Advantages, meaning the advantages of managing firm specific advantages (FSAs) internally instead of working with other external
organizations (Rugman, Verbeke & Nguyen, 2011). Dunning stresses the importance of host country institutions by stating that the local institutional environment is a critical element, and that MNEs should pursue FDI if the local institutions are favourable (Dunning, 1988; Dunning, 2000; Dunning, 2001).
The classical framework for International Business Theory, namely the CSA/FSA matrix of Rugman (1981), takes into account both location- and firm-specific advantages and shows their importance. In figure 1 below the third cell is the most optimal cell, because here companies can combine both strong FSAs with strong CSAs, which will lead to optimal outcomes (Rugman et al., 2011). The optimal location choice for a company is therefore a country characterized by strong CSAs. Hence by this model Rugman et al., show that strong CSAs, including institutions have a major impact on a businesses’ operations.
Figure 1: CSA/FSA Matrix (Rugman, 1981)
Peng, Sun, Pinkham, and Chen (2009) stressed the importance of these CSAs by focusing on the institutional environment of a host country; they viewed the Institution Based View (IBV) as the third leg of a strategy tripod, composed also by the Industry Based View and the Resource Based View (RBV). The Industry-Based View presents the importance of several industry factors that will determine a company’s success, such as the threats of new entrants and supplier power (Porter, 1991). The RBV puts an emphasis on the resources that a company has that could create competitive advantages, thus focusses on FSAs (Barney, 1991). Peng et al. (2009), believed that this third leg was crucial to the tripod and included the IBV to stress the importance of the
influence the institutional environment may have on a company’s success. The OLI framework, CSA/FSA matrix, and the three-legged strategy tripod all highlight the importance of institutions for companies operating internationally.
2.2 Institutional voids
When MNEs decide to engage in outward FDI in a host country they might face institutional voids in that specific country (Mair & Marti, 2009). Institutional voids are situations where specific rules or norms and values in the host country that support businesses in their operations are not existent, are failing to do what they are supposed to do and are weak (Mair & Marti, 2009; Rodrigues, 2013; Tracey & Phillips, 2011; Khanna & Palepu, 2006). Institutional voids have been defined by Stal and Cuervo-Cazurra (2011, p. 215) as “domestic institutional
constraints such as lack of legal protection for property rights, poor enforcement of commercial laws, non-transparent judicial and litigation systems, inefficient market intermediaries, political instability, unpredictable regulatory changes, government interference, bureaucracy, weak infrastructure, and corruption in public service and government sectors”.
An example of a country in which institutions are very poorly managed (bureaucracy, taxes, working structures), which is critical to achieve economic growth, is Greece. According to McKinsey & Company (2012) the Greek government fails to gather approximately 15- 20 billion in annual tax revenue, due to the fact that both a complicated administrative system and tax system create legal, bureaucratic and procedural disadvantages for entrepreneurial activity and growing businesses. This is an example of an institutional void creating barriers for FDI, and shows the importance of weak and/or non-existent institutions for MNEs. This complies with Dunning’s (2000) statement that companies are less likely to engage in FDI to locations with weak institutions, and therefore view weak institutions as a negative. Khanna and Palepu (2013) state that when a company is not interested in facing and dealing with institutional voids in a host country, it should not expand to that respective country. Additionally, they view institutional voids as a positive thing; despite the increasing challenges in a weak institutional environment, there are many opportunities for companies as well to improve those weak institutions (Khanna and Palepu, 2013). Hence, when countries are characterized by non-attractive location specific advantages, including the country’s institutions, companies have to be actively involved in
turning those institutional voids into strong CSAs, or they should decide to not expand at all (Rugman & Collinson, 2009, p.238).
IB scholars have focused on the notion of institutional voids and emphasized that weak institutions can hinder or encourage markets to work (Mair & Marti, 2009). Economists focused in depth on how these institutional voids countered businesses to efficiently operate and viewed the increasing transaction costs as the major negative result of these voids (Khanna & Palepu, 2000). According to many scholars, such as North (1991), McDermott (2007), Stark (1996), Fligstein and Mara-Drita (1996) and Fligstein and Calder (2015), it is mostly the government’s responsibility to fill these voids by the means of formal institutions, such as establishing strong grounds for property rights, agreements, and business control policies, while businesses might intercede when governments are weak by the means of improving local conditions and
confidence in markets themselves (Mair & Marti, 2009; Khanna & Palepu, 1997). La Porta, Lopez-de-Silanes, Shleifer, and Vishny (2000) argued that multinationals should use corporate governance systems and that this is essential to increase efficiency and the quality of control of businesses. This will provide guidelines for the entire MNE network, no matter which location, on how to behave and which activities are acceptable or not. Thus it would provide a specific set of rules that business should use to conduct business within the appropriate boundaries. This is especially useful when multinationals operate in a host country characterized by institutional voids, because it provides specific guidelines on how to deal with specific issues that the MNE might face in a host country (Picou & Rubach, 2006). Mair, Marti, and Ventresca (2012) took a different approach and looked into the notion of social exclusion and the role of an intermediary organization to create inclusion in Bangladesh and empower the poor. They concluded that institutional voids are the reason for the poorer population not being able to participate in the market. Changing the institutional architecture and legitimizing new actors, regardless of
economic background of the actors, is a crucial point in an emerging country to improve the life of the poor (Mair, Marti, and Ventresca, 2012). Hence they made the distinction between the wealthy and the non-wealthy population and studied the impact institutional voids has on the rich and the poor population within a particular country. Scholars focusing on development and the political field have also stressed the importance of institutions to improve the life of the
underprivileged, and showed that social, cultural, and political institutions are highly significant factors regarding market access and market participation (Narayan, Chambers, Shah, & Petesch,
2000; Yunus, 2007, p.232; Mair & Marti, 2009). Puffer, McCarthy, and Boisot (2010) looked into less developed markets as well, but focused on entrepreneurship within transitioning markets, which are characterized by formal institutional voids such as the lack of constitutional laws regarding property rights (Helmke & Levitsky, 2004; Stal & Cuervo-Cazurra, 2011, p. 215). According to Puffer et al. (2010) entrepreneurs in Russia and China and other
transition/emerging economies rely much more on informal institutions in contrast to
entrepreneurs in developed markets, because the formal institutional voids create a high degree of uncertainty for entrepreneurs. Chakrabarty (2009) found similar results when it comes to national culture and institutional voids, and stated that the power of the national culture on society, which is an informal institution, is stronger when formal institutions are weak. This indicates that informal institutions become more important when formal institutions are weak. Additionally, Puffer et al. (2010) found that there is a clear deviation between entrepreneurship within less developed markets and developed countries, since the latter operate in countries with strong formal institutions that reduce risk and uncertainty. They clearly state that entrepreneurs from less developed countries should be analysed differently than entrepreneurs from developed markets due to their different contexts (Puffer, McCarthy, and Boisot (2010). DiMaggio (1988) took a different lens when it comes to local institutions and introduced the notion of institutional entrepreneurship to illustrate that actors actually can engage in changing local institutions in a country. According to DiMaggio (1988) companies should be actively involved in institutional entrepreneurship when they find opportunities for development within a country (Maguire, Hardy, & Lawrence, 2004); a firm could for example improve local infrastructure, or initiate programs for educational development. Cantwell, Dunning, and Lundan (2010) also
acknowledge the impact that firms can have on institutions and studied different types of company institutional engagement, and the impact their activities might have on local institutions. Finally, the eclectic paradigm by Dunning (2000) and the CSA/FSA matrix by Rugman (1981), one the most acknowledged works in IB literature, focuses on the entry strategies of companies that are interested in expanding abroad and how multinationals can adjust their entry mode to deal with institutional voids. The behavioural nature of multinationals once established is only considered in a limited extent in existing literature (Gaur, Kumar, & Singh, 2014). Due to the fact that the main focus was on entry mode strategies and not on actual behaviour of MNEs, most studies on institutional voids were not longitudinal in nature. Previous
literature mainly focused on the government’s role in changing institutions, and also made the distinction between the wealthy and non-wealthy population within a particular country and the impact institutional voids has on both parties (North, 1991; McDermott, 2007; Stark, 1996; Fligstein & Mara-Drita, 1996; Fligstein & Calder 2015; Mair & Marti, 2009; Khanna & Palepu, 1997; Mair, Marti, & Ventresca; 2012; Narayan, Chambers, Shah, & Petesch, 2000; Yunus, 2007, p.232). Additionally literature focused on changing local institutions in general by any company, and on entry mode strategies as a way to deal with institutional voids (DiMaggio, 1988; Maguire, Hardy, & Lawrence, 2004; Cantwell, Dunning, and Lundan, 2010; Dunning, 2000; Rugman, 1981). However literature did not focus on the differences between D-MNEs and E-MNEs in their responses to institutional voids in a non-home market. This is especially
interesting because as Puffer et al. (2010) clearly mention, D-MNEs and E-MNEs should be analysed differently because of their different backgrounds.
2.3 Multinationals’ responses to institutions
Previous literature has explored the responses of MNEs to institutions in general in host
countries. As mentioned in section 2.1, institutional theory in its early years highly emphasized that companies should be actively involved in changing local institutions (Selznick, 1949; Clark, 1972; Greenwood & Hinings, 1996; Selznick, 1949, 1957), while the new institutionalism put emphasis on local adaptation and highly valued isomorphic behaviour and legitimacy building (Selznick, 1996; Kraatz & Zajac, 1996; Perrow; 1986; DiMaggio & Powell, 1983). In order to identify a comprehensive set of strategies MNEs could adopt to address institutional voids, it is important to incorporate this literature on MNEs’ responses to institutions and institutional differences across countries with extant research on MNEs’ responses to institutional voids, in order to identify a categorization of all the possible responses to institutional voids. Extant literature signals that MNEs can follow different strategies to deal with institutions and, more specifically, with institutional voids in a host country (Tracey & Phillips, 2011; Frynas, Mellahi, & Pigman, 2006; Feinberg & Gupta, 2009; Cantwell, Dunning, & Lundan, 2010). The different possible responses to institutional voids, which will be discussed in the next subsections, include: institutional avoidance, operational internalization, institutional adaptation, and institutional co-evolution.
2.3.1 Institutional Avoidance
MNEs might follow an institutional avoidance strategy to address weak institutions in (potential) host countries (Cantwell et al., 2010). This entails that multinationals that want to invest in a foreign country base their location choices to open a foreign subsidiary on the institutional environment in the potential host countries. Hence if weak institutions characterize a specific country, firms will most likely avoid that country, while in case of strong institutions the firm is most likely to start a subsidiary in that specific country. These business units usually try to remain within the operating boundaries of the multinational, rather than deviating from the existing practices (Tempel, Edwards, Ferner, Muller-Camen, & Wächter, 2006). Therefore these companies prefer to pursue outward FDI in countries with similar characteristics as their home country. Concerning the institutional avoidance strategy, the institutional environment is seen as exogenous, deeming that institutions cannot be influenced and changed. A technology company for example, pursuing an institutional avoidance strategy will not directly enter a country if there is a lack of intellectual property rights in that particular country (Meyer & Peng, 2005). Hence firms engaging in these strategies are very focused on a fit between the company’s activities and the host country institutions. Based on the degree of fit with the institutional environment
companies make a decision to engage in an avoidance strategy or a high equity entry strategy in the host country (Globerman & Shapiro, 2002; Jensen, 2000, pp. 80-86; Meyer & Peng, 2005; Hirschman, 1970, p.17). Hence a company is for example less likely to expand by a high equity entry mode to a foreign country with highly different culture and laws. These companies make a distinction between institutional environments and base their strategies upon that. Next to exit or avoidance, when it comes to countries with a weak institutional environment, adopting an institutional avoidance strategy may also involve a change in firms’ regular entry strategy (Cantwell, Dunning, & Lundan, 2010). Firms could for example enter a foreign country by the means of exporting rather than pursuing a Greenfield operation, if the institutional environment is different from their home country. However, in case of large differences, firms are more likely to avoid operating in the country. Institutional avoidance is thus a strategy that helps
multinationals to minimize the amount of risk when expanding, and is suitable when companies are not prepared to drastically change their own activities, norms and behaviour to address institutional voids (Jaehrling & Méhaut, 2013). Cuervo-Cazurra (2006) also stressed the fact that
even when the institutional environment in a potential host country provides interesting
opportunities for multinationals, these firms may prefer to engage in isomorphic behaviour by focusing on countries with similar institutions as in their home country. Thus even if a particular foreign market would be interesting for a company, firms might choose less interesting markets which share more characteristics with their home market. This is also in line with the Uppsala internationalization process model, or the 1977 model, which explains that firms expanding abroad often start expanding to countries that are similar to the home country, mostly to reduce the risk associated with outward FDI (Johanson & Vahlne, 2009). Hence, the Uppsala model indicates that firms prefer to start their internationalization to countries with similar
characteristics and avoid countries that are dissimilar from their home country. 2.3.2 Operational Internalization Strategies
Another way to deal with institutional voids in a host country is known as following an ‘operational internalization strategy’(Feinberg & Gupta, 2009). MNEs adopting this strategy enter a new country with different/weaker institutions but make their subsidiaries operationally dependent on the parent company when it comes to managerial skills, intermediate goods, technology, production, and trade (Feinberg & Gupta, 2009; Delios & Henisz, 2000). By doing so the subsidiaries will be less influenced by and exposed to the host country institutional environment, especially political hazards. Another advantage of this strategy is that when a company integrates the subsidiary within the parent company and the entire MNE subsidiary network, the economic worth of the assets in a host country will diminish notably when those assets are separated from the parent company, owing to the fact that the subsidiary relies on the global network of the multinational, regarding market knowledge, distributors, and brand names (Teece,1986; Feinberg & Gupta, 2009). Thus the foreign subsidiary will be highly dependent on the parent company and the entire subsidiary network of the multinational. This will reduce the likelihood of expropriation by the host country government, which occurs especially in emerging markets, since the subsidiary alone will be of negligible value without the overall MNE network (Fagre & Welles, 1982; LeCraw, 1984). Hence this approach reduces local policy risks in the host country. Another advantage is that the higher the degree of intra-firm integration of the subsidiary into the multinational’s global trading network, the less risk it will face concerning deviating demand rates for the subsidiary’s products and services (Feinberg & Gupta, 2009).
This would make the subsidiary less dependent on the local distribution channel, local marketing partners and suppliers of complementary products. It will also diminish the risk associated with non-payments from local buyers in case of weak economic conditions and it optimizes the overall MNE performance, as a result of becoming much more flexible due to the close collaboration of the entire MNE network (Song, 2015; Lall, 1978).
2.3.3 Institutional Adaptation
This strategy to cope with institutional voids entails accepting the weaknesses of the host country’s institutions (Cantwell et al., 2010). Similar to the institutional avoidance strategy, the institutional environment is seen as exogenous. Companies following this strategy adapt their own behaviour, systems, practices, and protocols to match with the host country’s institutions (Selznick, 1996; Kraatz & Zajac, 1996) in contrast to an institutional avoidance strategy. Hence they follow the new institutionalism approach and focus on local adaptation, and try to remain within the institutional boundaries of the host country (DiMaggio & Powell, 1983; Boxenbaum & Jonsson, 2008). When there is an opportunity to impact institutions in the host country firms pursuing this strategy may seize the opportunity, but they will do so only within limited
boundaries (Cantwell et al., 2010). They are more focused on gaining legitimacy by adopting desirable and similar practices as local companies (Kostova & Roth, 2002). The key driver for firms engaging in this type of strategy is to learn from the local institutional environment, whether weak or strong, and change their strategies according to the host context’s institutional environment (Chang & Rosenzweig, 2001; Davis, Desai, & Francis, 2000; Guillén, 2003). Radical implementations of institutional adaptation strategies are when companies in a host country try to become embedded in that particularly institutional environment by means of becoming “local” as much as possible, deemphasizing their true country of origin (Cantwell et al., 2010). This strategy therefore requires companies to be very flexible in their practices and behaviours, in order to adapt their own behavior to local conditions. According to Mason (1992) companies operating in a host country should put their efforts into becoming a market insider, understanding the institutional environment and being locally responsive, however he also
emphasized the importance of the host country government to create an attractive market place. 2.3.4 Institutional Co-Evolution
According to Cantwell et al. (2010) companies can also be involved in institutional engagement by means of institutional co-evolution. This entails that multinationals are actively involved in changing the local institutional environment in the host country. In regards to the institutional co-evolution strategy, the environment is seen as somewhat endogenous (Feinberg & Gupta, 2009), which entails that firms view the institutional environment not as given but something that they could influence and change. Companies can achieve co-evolution for example by focusing on corporate political strategies (Doh, Teegen, & Mudambi, 2004; Ramamurti & Doh, 2004). By following this strategy MNEs use political resources to impact the decisions made by specific influential political actors (Feinberg & Gupta, 2009; Holburn & Zelner, (2010). Frynas, Mellahi, and Pigman (2006; p.324) define corporate political resources as “any firm attributes, assets, human resources, or any other resources that allow the firm to use the political process to improve its efficiency and profitability”. Examples of political strategy activties are “lobbying, advocacy advertising, PAC contribution, legal action and grassroots mobilization” (Hillman, Zardkoohi, & Bierman, 1999). A disadvantage of using political resources might be that it could make the company dependent on specific political actors, hence when the political environment changes it might have significant effects on the multinationals (Leuz & Oberholzer-Gee, 2006). Political resources have already proven to be very successful in the past. An example of a
company that has used political resources is Lockheed Martin. The company entered Russia at an early stage and established a joint venture with a state owned company. This close collaboration with the government gave Lockheed Martin the opportunity to secure a number of limited launching rights in Russia per year, and in exchange the company transferred their hardware, knowledge and technology with to a local joint venture partner (Frynas et al., 2000). A MNE in a host country could also join forces with local companies in lobbying the government to adapt specific institutions, usually formal institutions in this case, to support their needs (Georgiou, 2004; Feinberg & Gupta, 2009).
According to Cantwell et al. (2010) institutional entrepreneurship is also part of the co-evolution strategy. As mentioned in section 2.2, institutional entrepreneurship was introduced by DiMaggio (1988) and is defined by Garud, Jain, & Kumaraswamy (2002, p. 196) as: “initiatives to shape institutions as they emerge, that create a whole new system of meaning that ties the functioning of disparate sets of institutions together. They define, legitimize, combat, or co-opt rivals to succeed in their institutional projects”. This goes beyond merely the introduction of new
institutions but the institutional entrepreneur should also be actively involved in implementing the new institution, and thus control if the new institution is used as it should be in the host country (Amis, Slack, & Hinings, 2004; Battilana, 2006; D’Aunno, Succi, & Alexander, 2000; Greenwood & Hinings, 1996). MNEs operate in different countries with different institutional environments, which should be a large incentive for those firms to practice institutional entrepreneurship. Tracey and Phillips (2011) distinguish between the three actual forms of institutional entrepreneurship. First, they identify the institutional brokering strategy, which entails that one can introduce new institutions that will reduce the risks for other companies that entered or are planning to enter the host country. According to Peng (2001) actors engaged in this form of institutional change are true entrepreneurs since they act as brokers in the market. The second strategy is the ‘institutional voids spanning’ strategy, which involves creating new institutions that become commonly accepted in the country as the norm (Tracey & Phillips, 2011). These new institutions can be institutionalized, if key actors use these new institutions extensively (Lawrence, Hardy, & Phillips, 2002). An example of a successful new institution created by institutional spanning is the micro credit program of the Grameen Bank in
Bangladesh, which became the widely acknowledged solution to give poor people, especially women, in Bangladesh and other countries worldwide, financial support to set up a business (Kumar, Hossain, & Gope, 2015). The third institutional entrepreneurship strategy is the ‘bridging institutional distance’ strategy, which entails that a MNE’s subsidiaries can transfer best practices from the MNE’s home country to the host country (Tracey & Phillips, 2011). The next tables gives an overview of the MNE responses to institutional voids, their respective definitions, and the context in which the literature studied these specific responses.
MNE
responses to IV
Definition References Context
1. Institutional
Avoidance “The institutional environment is seen as exogenous to firms, they choose between different institutional environments, and they react to poor institutional quality by adjusting their entry mode”
Cantwell, Dunning, & Lundan, p.576 (2010), Tempel, Edwards, Ferner, Muller-Camen, & Wächter (2006), Globerman & Shapiro (2002), Jensen (2000), Meyer
This type of response has mainly been studied in the field of
internationalization and entry mode decisions. This literature focuses on how multinationals choose foreign
international expansion. 2. Operational
Internalization Strategy
“Following an operational internalization strategy means that MNEs make their
subsidiaries operationally dependent on the parent company when it comes to managerial skills, intermediate goods, technology, production, and trade. By doing so the subsidiaries will be less influenced by and exposed to the host country institutional environment, especially political hazards”
Feinberg & Gupta (2009), Delios & Henisz (2000), Fagre & Wells (1982), LeCraw (1984), Song (2015), Lall (1978)
This literature studied how multinationals can benefit from
internalizing activities within the MNE which will reduce transaction costs. They mainly focused on improving the firm’s efficiency and cost reduction, by reducing unnecessary transaction costs 3. Institutional
Adaptation “The institutional environment is exogenous, but firms adapt their own behaviour to achieve a better fit, and they may try to influence local institutions but only to a limited extent. Firms seek legitimacy by adapting local isomorphic pressures, focus on local learning and adaptation, and they become embedded into the institutional context”
Cantwell, Dunning, & Lundan, p.576 (2010), Kostova & Roth (2002), Chang & Rosenzweig (2001), Davis, Desai, & Francis (2000),
Guillén (2003), Mason (1992)
These studies focused on isomorphic behavior of multinationals and the benefits local adaptation has on the multinational.
4. Institutional
Co-Evolution “Institutional environment is partly endogenous, and firms adjust to different institutional environments by a process of co-evolution. They introduce new institutions that are adapted to the local context, by for example involving in political strategies.
Institutional entrepreneurship is also part of this strategy, and these are initiatives to shape institutions as they emerge, that create a whole new system of meaning that ties the functioning of disparate sets of institutions together. They define, legitimize, combat, or co-opt rivals to succeed in their institutional projects”
Cantwell, Dunning, & Lundan, p.576 (2010), Feinberg & Gupta, (2009), Doh, Teegen, & Mudambi (2004), Ramamurti & Doh (2004), Frynas, Mellahi, & Pigman (2006); Tracey & Phillips (2011), Peng (2001), Holburn & Zelner (2010).
The literature that has focused on this type of response mainly
focused on the notion of institutional
entrepreneurship and political strategies. They looked at how multinationals can play a role in institutional change for their own benefit.
Table 1: MNEs’ responses to Institutional Voids and related literature
2.4 Multinationals and Country of Origin
Previous studies showed that the country of origin of an MNE has an influence on the behaviour/activities of MNEs in a foreign country and the entry strategies it engages in when pursuing outward FDI (Kolstad & Wiig, 2012; Luo & Tung, 2007). In order to understand MNEs’ behaviour in a host country more in depth, it is important to take into account the existing literature on the influence that the country of origin may have on a multinational when expanding abroad. Therefore this subsection will explain the institutional environments of D-MNEs and E-D-MNEs’ home countries, and discuss their standard entry strategies when they decide to internationalize. It is important to illustrate the literature on MNE entry modes, because this can signal how companies address institutional voids and if they take these voids into
account in their decision-making when they internationalize. 2.4.1 Developed Countries
The International Monetary Fund (IMF) defines developed countries as “countries with negligible poverty at such a poverty line” (Nielsen, 2011). A developed market, such as the United States, countries in Western Europe, and Japan, is a country in which the economy is highly developed and is characterized by a strong institutional framework, and ranks high in factors such as gross domestic product, gross national product, per capita income, degree of industrialization, and development of infrastructure (Hitt, Dacin, Levitas, Arregle, & Borza, 2000). The economic advancement and harmony within the society in developed markets positively influences the improvement and acknowledgement of rules of exchange, which increases the ease of doing business in the country (North, 1990; Pedersen & Thomsen, 1997). Developed countries are characterized by relatively few institutional voids because the
institutions are much more advanced than in emerging markets, thus D-MNEs are more experienced in operating in countries with a strong institutional framework (Hitt et al., 2000). This entails that these companies have less experience with dealing with institutional voids in contrast to E-MNEs. D-MNEs operate in countries with high economic, educational, and
finances (Kolstad & Wiig, 2012). Thus D-MNEs will not primarily base their location choices to expand abroad on the acquirement of resources. According to Ioana-Cristina and Gheorghe (2014, p.41) developed markets are recognizable by “the large size of the economy, gross national product that is much higher than emerging nations, high attractability for foreign investors, and a low volatility of exchange rate which implies lower risks for trading”. This makes it very interesting for MNEs to establish subsidiaries in those countries. However
developed nations are also mature markets with many large competitors (Pedersen & Thomsen, 1997). Another important benefit of D-MNEs because of their country of origin is the
associations people have regarding the firm because of their home country. Brands from
developed markets are usually associated with good quality of their offerings and this positively influences their brand image (Lai & Zaichkowsky, 1999). IB research has examined the different pathways often followed by D-MNEs regarding international expansion (Santos, Barandas, & Martins, 2015; Andersen & Buvik, 2002). A classical model for the internationalization approach followed by D-MNEs according to Johanson and Vahlne (1977) is the Uppsala approach, or the process/stages of internationalization model, in which companies expand internationally in a gradual course by first learning from a country similar to the home country, and then
incrementally expand to less similar countries. These companies also often start expanding with low risk entry mode strategies, such as exporting, joint ventures or contractual agreements, rather than high-risk entry modes, being Greenfield investments and acquisitions (Forsgren, 2002; Johanson & Vahlne, 1977). This indicates that D-MNEs have a preference to operate in other developed countries and slightly less developed nations rather than countries with much weaker institutional environments, because the latter are usually characterized by relatively many institutional voids (Barkema, Bell, & Pennings, 1996; Holburn & Zelner, 2010). In case of D-MNEs expanding to emerging markets, the company will choose for low risk entry strategies (Forsgren, 2002; Johanson & Vahlne, 1977). Thus current entry strategy literature suggests that D-MNEs prefer low risk entry modes when the host country is characterized by a non-familiar market, a different institutional framework, and by many institutional voids (Kolstad & Wiig, 2012; Ramamurti, 2012; Luo & Tung, 2007).
2.4.2 Emerging Countries
Emerging market economies represent “growing markets, which are transformed from a pre-market economy stage, either a non-pecuniary traditional or centrally planned economy, to the market stage of the mature Western capitalistic economy, by way of integrated and successful structural reforms of companies, markets, and society. And show economical traits of growth, complexity, and turbulence” (Jansson, 2008, p.16). An emerging country is a country, such as India, China, Saudi Arabia, and Brazil, which has not developed its economy and local environment as much as developed markets (Ramamurti, 2012). These countries are
characterized by “high volatility, low correlations with developed markets and within emerging markets, corruption, high likelihood to experience shocks induced by regulatory changes, exchange rate devaluations, and political crises” (Bekaert, Harvey, &Viskanta, 1998, p.102). A factor that has a negative influence on a company because of its home country is the association that people have regarding the firm because of their home country; brands from emerging markets are usually associated with poor quality of their offerings and this negatively influences their brand image (Lai & Zaichkowsky, 1999). Emerging countries are also characterized by relatively many institutional voids because the institutions are much less advanced in contrast to developed markets. As a consequence E-MNEs are more experienced in operating in countries with a weak institutional framework. An E-MNE for example might have acquired much more capabilities in acquiring and sustaining political resources and bargaining power. E-MNEs operate in their home countries with low economic, educational, and technological development, which has a negative impact on their resource availability (Kolstad & Wiig, 2012). For example they make less profits in comparison to D-MNEs. Therefore, E-MNEs tend to have fewer resources than D-MNEs, and focus on acquiring resources in a foreign country such as human capital and technology, to be able to compete with large competitors. According to Yves Simon (1997, p.913) emerging markets are recognizable by “the small size of the economy, a gross national product that is significantly lower than developed nations, reduced opening for
accepting foreign investors, and a high volatility of the exchange rate which implies greater risk in trading”. This all creates much more challenges for MNEs to operate in such countries. For financial investments the most important risk in emerging markets is the price volatility, which make these markets less attractive for investors (Simon, 1997). IB literature has examined extensively the different approaches followed by E-MNEs regarding their international
expansion strategies (Santos, Barandas, & Martins, 2015; Hitt, Dacin, Levitas, Arregle, & Borza, 2000; Ramamurti, 2012; Andersen & Buvik, 2002; Aybar & Ficici, 2009). According to the Uppsala model firms should internationalize to similar countries as the home country, however research showed that E-MNEs do not follow the stages model and actually follow the opposite strategy by expanding to dissimilar countries first and later to more similar countries (Mathews, 2002; Guillen & Garcia-Canal, 2009; Madhok & Keyhani, 2012; Ramamurti, 2012). This can be explained by the fact that E-MNEs are usually characterized by limited strategic resources, which leads these firms to engage in medium/high risk entry modes in the host country, such as mergers and acquisitions and alliances, to acquire those highly needed lacking resources (Hitt et al., 2000. This is in line with the Springboard perspective introduced by Luo and Tung (2007), which explains internationalization behaviour of E-MNEs by stating that these companies expand abroad aggressively with high risk entry modes to acquire important strategic resource endowments from mature multinationals in the host country, thus driven by pull factors rather than push factors. This could provide the E-MNE with a solution for their latecomer liability in the new market (Deng, 2009; Gubbi, Aulakh, Ray, Sarkar, & Chittoor, 2010). They use
springboard activities to gain benefits such as highly developed technology, brand image, production capabilities, knowledge, and make it less dependent on the home market (Luo & Tung, 2007). Another reason for E-MNEs to expand to dissimilar countries is because these firms are particularly interested in exploiting disparities rather than analogies (Ghemawat, 2007); they aim to acquire resources that they can not acquire in their home country or countries similar to their home country.
2.5 Research question and propositions
As shown in the previous sections extant literature on institutional voids mainly focused on the different entry strategies pursued by D-MNEs in host countries as a way to deal with institutional voids. Furthermore, literature has focused on institutional change of institutions that don’t
directly affect the MNEs operations, which is more Corporate Social Responsibility (CSR) related such as improving diversity values in a country, rather than looking at the responses of MNEs when they actually face institutional voids that really hinder their operations in a host country. More specifically, previous literature mainly focuses on when and how a company
should enter a potential host country, which has specific institutional features, and in particular institutional voids, but it has not examined, to the authors’ knowledge, how these MNEs address institutional voids once they are established in the host country. Concerning institutional voids, limited research looked into the actual differences between E-MNEs’ and D-MNEs’ responses to institutional voids, which are very likely to be divergent due to the different institutional
background of these MNEs and their motivations to internationalize. Hence, very little is known to date regarding how D-MNEs and E-MNEs engage in addressing institutional voids in a host country, their differences and similarities. Therefore this research aims at answering the
following research question “What impact does country of origin have on the strategies followed by multinationals to address institutional voids in non-home markets?”. By answering this question, this study aims to contribute to the IB field by deepening our theoretical understanding of what strategies companies actually follow to address institutional voids when they
internationalize and how country of origin impacts these responses to institutional voids.
According to Tempel et al. (2006), MNEs following an institutional avoidance strategy to cope with institutional voids in a host country prefer to pursue similar behaviour and practices as the parent company rather than deviating from them. These companies emphasize the importance of a fit between the company and the institutional environment, and if the potential host country is very different from the home country, these companies are more likely to maintain a low equity entry strategy (Globerman & Shapiro, 2002; Jensen, 200, pp. 80-86; Meyer & Peng, 2005; Hirschman, 1970, p.17). D-MNEs have more experience in operating in strong institutional environments and have abundant resources, such as their financial balance and human capital. Therefore they aren’t required to acquire critical resources in comparison to E-MNEs. The low volatility in their home country will make emerging countries with many institutional voids more risky for D-MNEs, while E-MNEs are used to taking risks (North, 1990; Pedersen & Thomsen, 1997). These D-MNEs could choose to maintain a low risk entry mode, such as exporting or other contractual agreements, or they could establish a high equity entry mode in a neighbouring country characterized by stronger institutions to learn more about the area and only then increase their equity investment (Cantwell et al., 2010; Santos et al., 2015; Andersen & Buvik, 2002). According to Cuervo-Cazurra (2006) companies may prefer similar countries as an expansion option even if the distant country offers more opportunities. This behaviour relates to the process model, or Uppsala model, of internationalization, in which multinationals prefer to expand to
similar countries, and learn before expanding to more distant countries (Johanson & Vahlne, 1977). Hence, existing literature indicates that there is a higher probability of D-MNEs to pursue an institutional avoidance strategy to cope with institutional voids, because they prefer to expand to countries similar to the home country that involves low risk and learn about the market before increasing their equity investment, while E-MNEs use a springboard approach when
internationalizing involving high risk and distant host countries.
Proposition 1 → D-MNEs are more likely to engage in an institutional avoidance strategy to face institutional voids in a host country than E-MNEs.
Subsidiaries could also choose to become operationally dependent on the parent company when it comes to managerial skills, intermediate goods, technology, production, and trade (Feinberg & Gupta, 2009; Delios & Henisz, 2000). This operational strategy to deal with institutional voids diminishes the influence of the host country institutional environment on the company (Teece, 1986). According to Feinberg and Gupta (2009) firms choose this strategy in order to reduce risks, such as the risk of deviating demand rates or non-payments from local buyers. D-MNEs come from countries with strong institutions that are beneficial for the firm; hence this strategy aims at benefitting from the strong institutions in their home country and the market and low cost in the host country, which reduces the overall volatility in the host country to some extent (Delios & Henisz, 2000). The internationalization of E-MNEs is usually
characterized by aggressive high-risk expansion to highly economic, institutional and physical distant countries, mainly to compensate for their latecomer disadvantage (Luo & Tung, 2007; Deng, 2009; Gubbi, Aulakh, Ray, Sarkar, & Chittoor, 2010). In contrast, D-MNEs follow a step-by-step approach starting with low risk and similar countries (Santos, Barandas, & Martins, 2015; Andersen & Buvik, 2002). E-MNEs mostly expand abroad to acquire critical resources, while a critical reason for D-MNEs to expand is to gain access to lower production costs (Luo & Tung, 2007). Thus it would be a legitimate choice for a D-MNE to expand to a country with lower costs while trying to remain disconnected from the host country’s weak institutional environment. By doing so D-MNEs can benefit from the low costs in the host country while not being completely exposed to the weak host country institutions. As existing literature indicates that D-MNEs prefer low risk strategies when expanding abroad while E-MNEs prefer high-risk
strategies, I argue that it is more likely for D-MNEs to engage in an operational strategy to deal with institutional flaws in a host country than E-MNEs.
Proposition 2 → D-MNEs are more likely to engage in an operational strategy to face institutional voids in a host country than E-MNEs.
According to Cantwell et al. (2010) MNEs could choose to adapt their own structure, practices, protocols, and behavior to fit the institutional environment in the host country to a greater extent. This strategy is thus based on the notions of local isomorphism and legitimacy building (Boxenbaum & Jonsson, 2008; Selznick, 1996; Kraatz & Zajac, 1996; DiMaggio & Powell, 1983). A key requisite to successfully follow this strategy is learning from the local institutional framework and incorporating the acquired knowledge in the firm’s structure and strategies (Chang & Rosenzweig, 2001; Davis, Desai, & Francis, 2000; Guillén, 2003). An extreme form of institutional adaptation is when a firm aims at becoming as “local” as possible, eliminating any associations with their true country of origin (Cantwell, Dunning, & Lundan, 2010). E-MNEs have a disadvantage over D-MNEs because of specific associations related to their home country, such as the association of weak quality of products made in China (Ha-Brookshire & Yoon, 2012). This puts E-MNEs already one step behind on their competitors in the host country, hence E-MNEs are very likely to engage in institutional adaptation in order to eliminate the unfavourable association with their home country to build a status of a legitimate actor. It could be more beneficial for the E-MNE to look like a local actor rather than a
multinational from another emerging country (Noorderhaven & Harzing, 2003; Roth,
Diamantopoulos, & Montesinos, 2008; Lipsey, 2004; Ahmed et al., 2004). In contrast, D-MNEs are linked to favourable home country associations, which make it less likely for these
companies to engage in institutional adaptation. Additionally, it would be an illogical decision for D-MNEs to adapt their practices to probably less efficient practices and behaviours. Proposition 3 → E-MNEs are more likely to engage in an institutional adaptation strategy to face institutional voids in a host country than D-MNEs.
According to Feinberg and Gupta (2009) firms may choose to follow a proactive
approach to deal with institutional flaws by actually changing the local institutional environment in the host country, which is also conceptualized as the institutional co-evolution strategy
(Cantwell, Dunning, & Lundan, 2010). Firms could do so by engaging in political strategies, which will aid to influence the decision making process of influential political actors (Doh, Teegen, & Mudambi, 2004; Ramamurti & Doh, 2004). Another political strategy is to collaborate with local firms for lobbying the government to change particular institutions (Georgiou, 2004; Feinberg & Gupta, 2009). Both political strategies and institutional
entrepreneurship are ways to influence institutions but take different lenses to do so. D-MNEs prefer entry modes such as joint ventures and contractual agreements when expanding to dissimilar countries, in order to reduce the risks in a host country with a weak institutional environment. This additionally enables the D-MNE to focus on learning to operate in such countries. E-MNEs on the other side prefer high-risk equity based entry modes such as mergers and acquisitions (Forsgren, 2002; Johanson & Vahlne, 1977; Hitt et al., 2000). E-MNEs are characterized by resource constraints and therefore are required to acquire critical resources, such as human capital and technological knowledge/capabilities, while D-MNEs are much more focused on learning about the market. Their motivations and reasons for expansion are therefore divergent. D-MNEs often already collaborate with local companies, which makes lobbying with local companies, to request institutional change from the government, more logical for D-MNEs in contrast to E-MNEs. Since D-MNEs are more engaged in local learning, prefer low risks, and have abundant resources, they are more likely to improve local institutions, while E-MNEs have less resources to do so and are much more focused on acquiring new resources. E-MNEs are also experienced in operating in a weak institutional environment, hence it would be less logical for them to aim to change weak institutions in a host country.
Proposition 4a → D-MNEs are more likely to engage in an institutional co-evolution strategy to face institutional voids in a host country than E-MNEs.
Institutional entrepreneurship concerns both introducing and implementing a new institution in a host country (Amis, Slack, & Hinings, 2004; Battilana, 2006; D’Aunno, Succi, & Alexander, 2000; Greenwood & Hinings, 1996). Institutional brokering entrepreneurship entails that a
multinational introduces new institutions reducing the risks for other companies to operate in that particular host country (Tracey & Phillips, 2011). Since D-MNEs are generally more focused on reducing risk and more experienced with strong favourable institutions (Forsgren, 2002;
Johanson & Vahlne, 1977) it is more likely that these companies will implement new institutions improving business activity in the host country by reducing risk. Institutional void spanning entrepreneurship strategy entails that new institutions are built in a host country, are widely acknowledged as the norm, and used by key actors in the country (Tracey & Phillips, 2011; Lawrence, Hardy, & Phillips, 2002). Since E-MNEs are characterized by a weak institutional environment, these firms are more aware of the problems faced in a weak institutional
environment and more likely engaged in looking for a solution. An example is the first micro credit banking system that was set up by a company originated in Bangladesh, a country
characterized by a relatively underprivileged population (Kumar, Hossain, & Gope, 2015). Even with all the technological capabilities and resources, D-MNEs did not provide a proper solution for the insolvency problem of the poor. Hence the familiarity of companies in emerging nations make them more experienced in dealing with institutional voids. Furthermore, bridging
institutional distance strategy involves subsidiaries transferring best practices from their home country and parent company to the host country (Tracey & Phillips, 2011). This requires strong institutions in the home country, since it would be illogical to transfer weak institutions from the home country to the host country. D-MNEs originate in countries characterized by strong
institutions, while E-MNEs originate in countries characterized by a weak institutional framework (Hitt, Dacin, Levitas, Arregle, & Borza, 2000; Jansson, 2008; Ramamurti, 2012). Therefore literature suggests that D-MNEs are more likely to transfer the strong institutions from their home country to the host country, and E-MNEs have less strong institutions to transfer from their country of origin.
Proposition 4b → D-MNEs are more likely to engage in an institutional brokering
entrepreneurship strategy due to their experience with reducing risk and their familiarity with strong favorable institutions
Proposition 4c → E-MNEs are more likely to engage in an institutional void spanning entrepreneurship strategy due to their awareness of the problems faced in a market characterized by institutional voids.
Proposition 4d → D-MNEs are more likely to engage in a bridging institutional distance entrepreneurship strategy due to their strong home institutional background.
3. METHODOLOGY
This section will start with a discussion of the research design of this study and the chosen context for this research. Secondly the cases and their respective home country’s institutional framework will be briefly discussed. This section will then continue with illustrating the data collection process and data analysis strategy. Finally concluding remarks regarding this methodology will be made.
3.1 Research Design
This particular study requires a qualitative research approach, because this study requires an in-depth analysis of multinationals and their behaviour in a particular context, and is narrowly focused on multinationals and their unique strategy to deal with institutional voids. This research will answer how multinational companies address institutional voids in non-home markets and whether country of origin influences their strategies. This type of research question, which entails a lack of control by the researcher on the phenomenon, is a “what” question and should be answered, according to Yin (2013), through a qualitative research design. A case study approach is the correct method to analyse MNE behaviour in a specific context, because it focuses on understanding behaviours in a particular environment (Eisenhardt, 1989). To gain in depth understanding of particular phenomenon, data have to be collected from a relative small number of cases (Taylor, 2005; Eisenhardt and Graebner, 2007; Saunders & Lewis, 2012). This research question therefore will be answered by the means of a multiple case study approach. A multiple case study design is necessary when one aims to answer research questions concerning specific subjects when the existing literature is lacking sufficient information regarding the topic, and it also increases the external validity (Eisenhardt, 1989). Since only a few cases are analyzed, it is
