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Institutional strategies adopted by developed
country MNCs to fill institutional voids of India
MSc. Business Administration: International Management Track
Csenge Lili Csötönyi
10826432
Supervisor: Francesca Ciulli
Second supervisor: Niccolò Pisani
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Statement of originality
This document is written by Student Csenge Lili Csötönyi who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document are 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.
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Acknowledgements
I would like to express my sincere gratitude to my supervisor, Ms. Francesca Ciulli for her great support, guidance and patience through the process of writing my thesis. I would like to thank the entire international management team for helping me complete my master studies successfully and sparking my interest in the different courses. Lastly, I would like to thank my family and friends and especially for believing in me through this journey.
5 1 ABSTRACT
The inhabitants of the most impoverished emerging countries are not able to participate in the markets because of the absence or inefficient operations of supportive institutions. Based on a multiple case study this thesis examines the strategies of developed country MNCs they implement in order to fill the institutional voids of emerging market and their contribution to the development of emerging countries. The context of emerging markets makes it possible to analyze what type of institutional strategies are applicable to fill institutional voids and introduce new ones taking it also into consideration how the adopted strategies facilitate the development of emerging markets.
6 2 TABLE OF CONTENT 1 ABSTRACT ... 5 2 TABLE OF CONTENT ... 6 3 INTRODUCTION ... 7 4 IMPORTANCE OF INSTITUTIONS ... 8 5 INSTITUTIONAL CHANGE ... 10 6 INSTITUTIONAL ENTREPRENEURSHIP ... 12
7 INSTITUTIONAL ENTREPRENEURSHIP AND MNCS ... 14
8 CHARACTERISTICS OF EMERGING MARKETS ... 17
9 THE CASE OF AN EMERGING MARKET: CHARACTERISTICS INDIA ... 20
10 THE SOLAR ENERGY OPPORTUNITY IN INDIA ... 22
11 MNC STRATEGIES TO FILL IN INSTITUTIONAL VOIDS IN EMERGING MARKETS ... 24
12 METHODOLOGY ... 31
13 RESEARCH DESIGN ... 31
14 CASE STUDY SELECTION ... 32
15 DATA COLLECTION ... 33 16 DATA ANALYSIS ... 35 17 RESULTS ... 37 17.1 D.LIGHT ... 37 17.2 SUNEDISON ... 41 17.3 SUNFUNDER ... 45
18 CROSS CASE ANALYSIS ... 50
19 DISCUSSION ... 54
20 ADAPTATION STRATEGY ... HIBA! A KÖNYVJELZŐ NEM LÉTEZIK. 21 CONCLUSION ... 59
7 3 INTRODUCTION
Institutions play a major role in influencing the operations of actors, and the emergence of New Institutionalism shed light on the fact that actors can, in turn, also exert influence on institutions and even have to ability to initiate changes in them (Williamson, 2000). These actors who initiate changes and contribute to the transformation of institutions are defined as institutional entrepreneurs (DiMaggio, 1988). Institutional entrepreneurship is termed as “activities of actors who have an interest in particular institutional arrangements and who leverage resources to create new institutions or to transform existing ones” (Maguire, Lawrence and Hardy, 2004: 657).
Previously most of the literature focused on the role of domestic organizations in changing institutions (Battilana et al., 2009), however, scholars recently has begun to observe the growing importance of multinational companies (MNCs) acting as change agents (Regnér & Edman, 2014, Kostova et al., 2008). MNCs have more specific resources and international experience than domestic companies, making it possible for them to break with existing institutions and introduce institutional changes (Hardy & Maguire, 2008).
So far the research on institutional entrepreneurship focused on the institutional entrepreneurial process in home environments (Greenwood & Suddaby, 2006) and within host country institutions (Regnér & Edman, 2014) but due to the rapid growth and emergence of developing countries research has started to focus more on the specificities of the institutional environment of emerging markets and has started to identify how these underdeveloped institutions provide opportunities for institutional entrepreneurs to enter the emerging market. In emerging markets the absence or inefficient operation of certain institutions means a concern for the development of these emerging countries and the lack of certain supportive institutions also poses challenges
8 on the operations of developed country MNCs. Institutional voids mean the absent or weak institutions, preventing people from participating in markets due to the extreme poverty they live in (Maír & Marti, 2006). Developed country MNCs are able to take the role of institutional entrepreneurs and with their international power they can address the institutional voids emerging markets struggle with. Due to its scarce resources and lack of supportive institutions emerging markets create an interesting context to study institutional entrepreneurial process in filling institutional voids. Establishing new institutions in the poorest emerging markets offer opportunities for developed country MNCs because by building institutions developed country MNCs can facilitate the development of these emerging markets.
4 IMPORTANCE OF INSTITUTIONS
Institutions structure the different fields of social life and they exist to define and influence the context in which individuals, organizations, companies, labor unions or countries interact with eachother. Institutions are external forces which provide guidance to people how to interpret actions and how to act in the world that surrounds them (Campbell, 2004). More specifically, as defined by North (1991) institutions are humanly devised constraints that structure political, economic and social interaction. Institutions in general are formulated by formal and informal institutions. Formal institutions include rules, regulations, state laws or property rights and they can be enforced by official entities, such as judges, courts or officers. Contrarily, attitudes, norms, behavior and traditions are examples of informal institutions and they are self-enforced mechanisms serving the interests of all the individuals within the society (Jütting et al., 2007). Institutions provide standardized templates of interaction thus decreasing the costs of economic exchange (Jütting et al., 2007).
9 Scott (1995) identified three different types of institutional pressures: regulative (formal and informal rules, regulations or state laws), normative (prescriptive norms and values) and cognitive (symbols and shared meanings). These institutional pillars are important in the institutional literature because they affect and support the emergence, maintenance and change (also known as institutional dynamics)of institutions.
Within the institutional theory two powerful streams of research emerged: old and new institutionalism. Concerns of “influence, coalitions and competing values were central” (Greenwood & Hinings, 1996:1031) in the old institutionalism placing emphasize on the way how formal and rational organizational missions are altered by different group interests. Brint & Karabel (1991:352) noted that old institutionalism “emphasizes the details on an organization’s interactions with its environment over time” (p.352) and focuses on the “beliefs and actions” of the actors who are powerful enough to define the direction of group interests. In the interpretation of old institutionalism “change is one of the dynamics of organizations as they struggle with differences of values and interests” (Greenwood & Hinings, 1996:1032). In contrary, new institutionalism focuses on persistence of institutions (Greenwood & Hinings, 1996) and highlights the way how institutions embody value and power in relationships (Hall & Taylor, 1996). Powell & DiMaggio (1991) built upon the view of institutional persistence and identified that “…once established and in its place, practices and programs are supported and promoted by those organizations that benefit from prevailing conventions” (Powell & DiMaggio 1991:191). This view puts a dilemma on institutional change because it “equate institutions with stability or durability” (Clemens & Cook. 1999:442). It means that institutions are not likely to change until the actors who have interests in the current institutions have enough power to protect them. This issue further emphasizes the path-dependent nature of institutions (Powell & DiMaggio, 1992) which means “the stickiness associated with specific technological trajectories that economic, technical and institutional forces generate” (Garud &
10 Karnoe, 2001:5). North (1994) also mentioned that the “direction of change is determined by path dependance”(North, 1994:7). The emergence of unpredicted external or internal changes can affect the power of existing organizations and make them weaker in defending the existing institutions.
New Institutionalism made it possible to answer questions, like how people or organizations create, change and maintain organizations even though institutions have a path dependent nature and institutiona exert pressure on them towards stasis. Therefore, the scholars of New Institutionalism elaborated concepts that explain how institutions evolve in the different stages of creation, maintenance and change which contributed to the better understanding of institutional change.
5 INSTITUTIONAL CHANGE
Institutional change can be related to every organization which serve different societal actions, explaining how the organizations transform institutions when they formulate responses to a changing world (North, 1990). The cause of institutional change can occur due to exogenous (e.g technological change) or endogenous (depletion in resources) shocks (Ostrom, 2005), which affect the transaction costs of an organization such as the production or operation costs. Transaction cost economics claims that parties who engage in a transaction are characterized by bounded rationality and opportunism which results in higher cost of economic exchange due to the existence of institutions (Williamson O. E., 1989). When existing institutions are no longer efficient then new institutions will emerge and create a new path (Williamson, 2000).
North (1993) claimed that formal constrains (rules, laws, regulations etc.) can change even overnight, however informal institutions (norms, behaviour, religion etc.) change more moderatly. The role of formal and informal rules are different in the institutional literature. Williamson (2000) treats informal rules as a background in which formal rules are “embedded”.
11 In his work, Williamson (2000) identified four institutional levels based on how fast they change. On the first level institutional embededdnes takes place which includes informal institutions such as “customs, tradition, norms and religion” (Williamson, 2000:597). According to Williamson (2000) the institutions on this level change very slowly. Formal rules, such as laws, regulations or property rights, constitute the “institutional environment” which is situated on the second level. At this level institutional change can take decades or even centuries (Kingston & Caballero, 2009). On the third level institutions of governance are placed. The importance of this level lies in the sets of rules which direct everyday interactions and able to minimize transaction costs. In most cases institutional change in this level takes years. Finally, “resource allocation and employment” (Williamson, 2000:597) takes place on the fourth level. On the fourth level “adjustment to prices and output occur more or less continuously” (Williamson, 2000:600). According to Williamson (2000), “the NIE operates at two levels” (Williamson, 2000:610) on the second and third levels (institutional governance and institutional environment), meaning that Williamson only considered formal institutions more important. The author claimed, that informal institutions are “important, but underdeveloped part of the story” (Williamson, 2000:610).
On the contrary, North (1990) puts informal institutions in the center of institutional change. In the interpretation of North (1990) cultural transmission process is responsible for reproducing informal rules which evolve in an evolutionary manner. North (1990) claimed that informal rules “had gradually evolved as extensions of previous formal rules”, meaning that institutional change is an incremental process which derives from many smaller changes rather than one large one.
To sum up, changing institutions is not an easy and fast process, because there will always be actors who want to defend the status quo. There exist different actors who can change or enforce institutions. These actors can be governments who have the power to introduce or outlaw
12 existing norms or rules, they can be civil society groups who spread new behavioral patterns, individual characters, like authoritative leaders or even organizations which are in some cases as powerful as national governments (Jütting, 2007; Giddens, 1990). In the next section the concept of institutional change agents will be introduced.
6 INSTITUTIONAL ENTREPRENEURSHIP
The concept of institutional entrepreneurship plays an important role in understanding how actors shape and transform existing and newly emerging institutions.
The idea of institutional entrepreneurship was first introduced by Eisenstadt (1980) who introduced these actors as catalysts for structural change. Later on DiMaggio (1988) introduced the idea of institutional entrepreneurship as actors who can transit institutions in spite of pressures towards social stability. In the interpretation of DiMaggio (1988:14) “new institutions arise when organized actors with sufficient resources see an opportunity to realize interests that they value highly”. Institutional entrepreneurs can be organizations, groups of organizations or even individuals who have the aim to leverage resources in order to create new or transform existing institutions (Battilana et al., 2009, DiMaggio 1988).
Battilana et al. (2009) built on the definition of DiMaggio and argued that institutional entrepreneurs are change agents, but not all change agents are institutional entrepreneurs. In the interpretation of Battilana et al. (2009), institutional entrepreneurs have to fulfil two criteria: “(1) they have to initiate divergent changes and (2) they actively have to participate in the implementation of these changes” (Battilana et al., 2009:68). By divergent changes they mean processes that break with the existing institutionalized templates within certain institutional contexts. Divergent changes can be initiated either within the borders of an organizations or in a wider institutional context (Battilana et al., 2009). Institutional entrepreneurs always mobilize
13 resources and allies in order to introduce new institutions, but in some cases their efforts are not going to be successful in convincing audiences to implement new routines. Although in this case the introduction or change of a new institution failed, the actors can still be considered as institutional entrepreneurs because they initiated divergent changes (Olsen & Boxenbaum, 2009).
One of the challenges institutional entrepreneurs have to cope with is that, whenever they advocate changes, the existing institutions will be defended by those actors who can benefit from the current situation (Levy & Skully, 2007). What is more, institutional entrepreneurship can be very paradoxical itself as it raises the question of how organizations or individuals are able to break with and change institutions which actually determine their current behavior and actions (Garud, Hardy, & Maguire, 2007).
Institutional entrepreneurship can be empowered by many different factors. For example, Phillips (2000) proposes that composite versatile problems such as environmental issues can enable participants to act as institutional entrepreneurs while Durand & McGuire (2005) suggest that absence of necessary resources can also encourage organizations to migrate and act as institutional entrepreneurs in other fields (Leca et al., 2008). The structure of organizational fields and the degree of institutionalism determines business opportunities for institutional entrepreneurship (Tolbert & Zucker, 1996).
While mature fields represent relatively stable and well defined norms and behavior patterns, emerging fields are characterized by uncertainty and vulnerability providing opportunities for strategic action (Battilana et al., 2009,York & Dean,2010). A lower level of institutionalization provide better opportunities for institutional entrepreneurs in advocating changes because in emerging fields the resistance to change is not that strong, institutional patterns are not complete
14 or even absent which calls for the reorganization of institutions. Therefore immature institutional fields might be more favorable by institutional entrepreneurs (Maguire et al. 2004).
In summary, institutional entrepreneurs are either individuals or organizations who initiate changes that break with the existing institutions and introduce new formal or informal institutions while actively participate in implementing them.
7 INSTITUTIONAL ENTREPRENEURSHIP AND MNCS
After the emergence of the institution based view a growing number of scholars has analyzed multinational corporations (MNCs) through an institutional point of view (Dacin et al., 2002, Kostova et al. 2008). The application of institutional theory makes it possible to analyze MNCs in many different fields, for example how MNCs contribute to institutional change in transition economies (Peng 2003, Roth & Kostova 2003) how institutional distance effects the operations of MNCs in host countries that have different institutions than the home country of MNCs (Ghemawat, 2001), or how MNCs respond strategically to multiple institutional constraints coming from different host countries (Child & Tsai, 2005).
The emergence of the institution based view is really important from the aspect of MNCs because it answers the question why MNCs, coming from different countries, implement different strategies in host countries. The institution based view also realized that institution mean firm specific advantages for MNCs and that industry characteristics or the ownership of specific resources are not the only means to gain advantage when operating in a host country (Peng, 2002). The institutional advantage of an MNC can derive from the internal culture, influences from the state and the society or from interfirm relations among home and host countries. The institution based view highlights the interactions between institutions and organizations and claims that strategies are the result of these interactions (Peng, 2002).
15 The institution based view also raised attention to the fact that MNCs can overcome the liability of foreignness and are able to adapt to local host governments when they pay attention to institutional differences when investing in a foreign country. As MNCs are present in multiple countries they have to cope with several institutional environments. The role of changing institutions is especially important when MNCs are coming from developed countries and invest in developing countries. In this case the institutional environment of the host country is substantially different than the home country institutions of the developed country MNCs. These various developed and developing institutional environments, in which the developed country MNCs operate, can become conflicting and exert too many different kinds of institutional pressures that the MNCs which can become confusing for developed country MNCs.. In order to overcome the difficulties of the multiple institutional environments and facilitate efficient business operations developed country MNCs might break with the existing institutions of the developing markets and introduce new ones to decrease institutional distance (Ghemawat, 2001).
Battilana et al. (2009:72) claimed that organizations can be considered as an institutional entrepreneur when it “…initiates, and actively participates in the implementation of changes that diverge from existing institutions, independent of whether the initial intent was to change the institutional environment and whether the changes were successfully implemented”. Institutional changes can be initiated by a single MNC or through the collaboration of several MNCs who face the same institutional challenges in a field (Wright & Zammuto, 2013)
Institutional entrepreneurship plays an important role in decreasing institutional distance1 between the home and host country of MNCs (Phillips et al., 2009). Institutional distance is
1 “Institutional distance is a measure of the differences in the cognitive, regulative and normative institutions that characterize the relevant organizational fields in the home and host environments and the degree of institutional uncertainty in the host country” (Phillips et al., 2009).
16 remarkably high between developed and developing countries, meaning that developed country MNCs have to cope with many uncertainties in developing markets. In emerging markets one of the reasons of institutional distance is the absence of formal and informal institutions that govern the efficient operations of markets (Khanna & Palepu, 1997). When MNCs meet with multiple combination of institutional distance and uncertainty they can conduct different institutional strategies to overcome the difficulties posed by the incomplete institutional environment (Marquis & Raynard, 2014; Levy & Scully, 2007, Regnér & Edman 2014). For example, in the case of high institutional difference and low uncertainty, developed country MNCs have to transfer institutions from their home country so that their business model is able to operate within the new circumstances. Low institutional difference and high uncertainty requires some adjustments of the host country institutions (Brunetti & Weder, 1998). In highly uncertain environments developed country MNCs need to cooperate with local governments and stakeholders in order to build reliable informal networks as a “substitute for weak market structures” (Peng & Luo, 2000:21). Most of the emerging markets are characterized by high uncertainty, high institutional distance and the absence of institutions is also very common in developing countries. The lack or inefficient operation of institutions can be referred to as institutional voids. Institutional voids are defined as “the lack of market-supporting institutions such as market intermediaries and legal protection of shareholders (Khanna et al., 2005, Peng & Jiang 2010)” (Luo & Chung, 2012:4). Institutional voids also hinders the inhabitants of emerging markets to actively participate in the market due to the weak or absent institutions. Although institutional voids can mean the sources of many obstacles for developed country MNCs to do business in emerging markets, they can also offer business opportunities (e.g. the large pool of unmet needs, lack of developed infrastructure and distribution system, or lack of quality suppliers or reliable transportation the growing number of population) for entrepreneurial MNCs who can fill the voids (Khanna & Palepu 2010).
17 8 CHARACTERISTICS OF EMERGING MARKETS
Nowadays the world is facing the incredible economic growth of some developing countries. Approximately 30 countries are labelled as emerging markets by the World Bank (World Bank). An emerging market can be described as a country which is facing economic development and institutional reforms in order to be able to emerge globally and actively participate and shape global markets as developed countries do (Khanna & Palepu, 2010). Developed country MNCs, operating in an emerging markets often have to deal with cultural distance, different institutional complexities or country specific business practices. Emerging markets involve many factors that can impose considerable impact and challenges on the operations of developed country MNCs. In comparison to developed countries, the factors of emerging markets include different segments of customers, different breadth of governmental authorities, distinct economic policies, uncertain consumer behavior, demanding culture, high rates of emigration to the developed world, fragmented markets, limited income and weak infrastructure. (Luo, 2001; Banga & Mahajan, 2005).
One of the most important characteristic of emerging markets is the chronic shortages of resources in consumption, exchange and production. For instance unskilled labor, insufficient supply of raw material or chronic shortage of electricity make production highly uncertain and unpredictable in developing countries (Sheth, 2011). An other characteristic of emerging markets is the inadequate infrasctructure, which includes the roads in very bad condition, inefficient logistic and distribution systems, the lack of point-of-sales terminals, transaction enablers and banking functions such as credit cards. These absent institutions can cause big difficulties for developed country MNCs when setting up operations in emerging markets as
18 these institutions are mainly taken for granted in developed countries and are missing from emerging ones.
Although developed country MNCs have to cope with multiple difficulties, mentioned above, the economic growth and liberalization of these markets resulted in easier flow of foreign direct investment and decreased restrictions towards foreign companis, creating very good opportunities for developed country MNCs to expand their operations and set up businesses abroad (Li et al, 2007).
Sheth (2011) highlighted several factors that are responsible for the growth of emerging markets. First, the economic reforms of of the BRIC countries (Brazil, Russia, India and China) made markets liberalized that were highly directed by socialism and ideology. It also means that some ex-communist and socialist countries have become well-functioning capitalist markets creating new markets for developed country MNCs. Second, the developed countries are aging, making their domestic markets a bit stagnant with less growth potential. This issue means that the future growth of developed countries might stem from emerging markets. Third, emerging markets, especially with such large populations as China and India made the emergence of a new middle-class possible which creates large-scale first time buyers of many products and services from the developed countries. What is more emerging markets, like China and India provide huge amount of human capital while industrial materials can be reached from Brazil and Central America, providing really good investment opportunities for MNCs.
However part of the “problem” of emerging economies is that their majority of the citizens live in very poor circumstances, creating a base-of-pyramid (BOP) which doesn’t seem appealing or good enough for businesses. However there is a flipside, lying in BOP markets, which is “the more institutional voids there are, the more niches there are for entrepreneurs to fill” (Palepu, Research & Ideas, 21 June 2010). It is important to mention that filling these „niches” mean
19 just as good opportunities for MNCs as for individual entrepreneurs. There are vast amount of opportunities in the bottom of the market but in order to exploit them developed country MNCs have to adopt radically different strategies than they implement in home countries. Developed country MNCs can set up operations such as manufacturing facilities or service centers in emerging markets to address institutional voids while they can benefit from the inexpensive operational costs and labor (Khanna et al., 2005). By filling institutional voids MNCs can “infuse new beliefs, norms and values into social structures” (Rao et al., 2000:240). Another role of developed country MNCs in filling institutional voids of emerging markets is to implement institutions which enable these emerging countries to participate in developed markets (Mair & Martí, 2006). It is beneficial for developed country MNCs to fill institutional voids and help the development of emerging markets because in this way the institutional distance between the developed and developing countries can be mitigated making it easier for developed country MNCs to expand operations in emerging countries (Prahalad & Hammond, 2002).
Institutional voids can emerge in many forms and shape the openness and political fields of the country as well as the political, labor, product markets of developing countries.
It is important to mention that every emerging market is characterized by institutional voids but the nature of these voids are different in every market, suggesting that there is no “one-size-fits-all” solution to fill institutional voids (Rodrigues, 2013:17).
In the next section the thesis discusses the case of an emerging market, namely India, introducing the specific challenges and institutional voids that MNCs have to take into consideration in this particular country.
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9 T
HE CASE OF AN EMERGING MARKET:
CHARACTERISTICSI
NDIAIn terms of population India has become the second largest country in the world following China. The population of the country is around 1.2 billion and still growing (The Worls Bank, 2014). There are vast amount of available opportunities in the country that makes it attractive for business investors, yet India present also challenges for foreign firms. Indeed, the country has a huge market size, a fast developing economy, diversified resources and cheap labor, but on the other hand the infrastructure of India is still very weak and bureaucracy and corruption are still strong in the country.
The very poor, rural areas of India with its 114 million households constitutes a BOP market. In these rural areas many people still does not get sufficient education and due to this issue they suffer from illiteracy (Bairganjan et al., 2010). Last but not least, the country has to face acute scarcity of power, meaning that thousands of villages remain without electricity and blackouts are very common even in bigger cities. (Bose, 2012 ) In most of the rural households in India access to reliable electricity is still missing and inhabitants have to use kerosene for lightning or inexpensive but harmful sources of fuel for cooking which causes health and environmental constraints in the same time (Bairganjan et al. 2010). The limited access to electricity creates huge institutional voids in the rural markets such as the economic underdevelopment of these areas, undereducation because children don’t have light to study after the dark, isolation from other villagers due to the inadequate electric and telecommunication infrastructure, lack of clean water because the water pumping and cleansing systems also require electricity. (Marquis & Raynard, 2015).
Filling in these institutional voids, mentioned above, create great opportunities for developed country MNCs to expand their business in the BOP markets. By investing in the BOP markets and helping the development of poor people, the operation of developed country MNCs might
21 also get enriched with some philanthropic values, because these MNCs can position themselves as “partners in progress” by filling institutional voids (Khanna & Palepu, 2010). The social issues of India mean a large pool of institutional voids, however developed country MNCs who invest in these voids are not only lead by moral reasons but mainly because these institutional voids especially in the social fields create lucrative opportunities for their businesses (Khanna & Palepu, 2010).
The development of institutions is still an ongoing process in developing countries. Therefore developing countries still struggle with institutional voids which prevents the impoverished rural inhabitants of the emerging countries from participating in the market. This thesis aims to enrich the existing literature by identifying how institutional voids provide opportunities for developed country MNCs, who act as institutional entrepreneurs, to build or change institutions and reconnect rural inhabitants with the market.
The goal of this thesis is to develop awareness that institutional voids mean more opportunities than constrains for developed country MNCs and to identify institutional strategies that are adoptable for developed country MNCs to fill these voids and contribute to the development of emerging markets. Following these reasons, the research question of the thesis is:
What type of strategies MNCs from developed countries implement in order to fill institutional voids and conntrobute to the development of India ?
The research question aims to explain that the institutional context of an emerging market, like India, requires very different kind of strategic thinking from developed country MNCs but still these challenges should rather be taken as opportunities and not as threats. What is more there has not been much discussion about developed country MNC strategies that aim at implementing new institutions in base-of-pyramid markets and try to contribute to the development of rural areas. The research attempts to answer this question by combining existing
22 perspectives of institutional strategies, conducted by MNCs, and identify those strategies that are feasible to fill in institutional voids in the BOP markets.
10 T
HE SOLAR ENERGY OPPORTUNITY IN INDIAWith its geographic location India provides great opportunities for solar energy companies. Being a tropical country, the number of sunny days can exceed three hundred days per a year, which could create five thousand kWh of electricity (Becker & Fischer, 2012). With solar energy it is possible to decrease the cost of electricity bills, and also mitigating the peak energy costs would be possible with solar energy as the generation of solar electricity corresponds with the peak demand during the sunny hours. However India has always struggled with huge electricity shortage during the distribution of energy. The theft of electricity makes it even harder to make up for the blackouts and shortages which does not only make the life of rural inhabitants very difficult and insecure but also hinders the economic growth of the country. In rural areas many formal and informal institutions are absent because the unreliable supply of electricity made it impossible to implement certain institutions that could contribute to the economic growth. Therefore, the role of solar energy companies is really important in establishing reliable electricity supplies in rural areas and building necessary formal and informal institutions also have substantial role in order to contribute to a better life of rural inhabitants and keep India on an economically growing path (Energy Alternatives India, 2012).
The following table summarizes the companies who introduced new solar energy technologies in BOP areas in India and helped to fill in institutional voids by the introduction of their technologies or innovations.
23 The first case study that will be explored concerns SunEdison, which is a solar panel manufacturer company from the United States. In 2012 the company realized that the rural India struggled with extreme electricity shortage and blackouts which meant a very good opportunity to exploit for the company. In order to fill up the missing institutional voids and help the local rural communities to increase their living standards the company launched the Eradication of Darkness program in India, which included the the introduction of small scale off-grid solar panels, available for single household usage.
The second case explores the activities of the United States-based Borg Energy in India. In 2013 the company also realized big scale opportunities in filling institutional voids of impoversihed Indian villages by introducing micro solar plants for the households. The company did not only focus on the households but they also introduced solar panel based ATMs
2 SunFunder raised the amount with Khosla Impact which will be used in the markets of Africa, India and Latin-America, not only in India.
Number of countries the MNC operates in (2015) Full year revenue of the MNC (2014) Year of the MNC’s entry in India Technology, the MNC introduced Planned investment in India
SunEdison (US) 35 $ 2.5 billion 2012 Introduction of small scale off-grid solar PVhotovoltaics solutions (Eradication of Darkness) Water pump project $ 15 billion by 2022
d.light (US) 14 unknown 2009 Introduction of
solar powered LED lamps and solar lanterns
$ 2 million by 2017
SunFunder (US) 6 unknown 2014 Introduction of
solar powered LED lamps and solar lanterns
$ 2,5 million2 in 2015
24 for better financial operations in the rural areas. The electrification of some banking procedures also made the financing of the household solar panels more feasible.
The third case consists of a global social enterprise which with its activities addresses the BOP markets of emerging markets of the world. D.light is a United States based company which operates in Africa, South Asia, China and in the United states and has sales activities in 62 countries. The main aim of d.light is to support and accelerate the adoption of renewable energy by poor inhabitants of rural emerging country areas by introducing a financially suitable solution for them.
The case studies are all relevant and appropriate for the thesis as all of the three companies have recently introduced innovations to the Indian market which substantially contributed to the institutional development of these rural Indian areas. Regarding the cases, it is also important that the qualitative data focuses on contemporary events, which are easily accessbile from secondary data, such as newspapers, company annual reports and other websites.
An other reason to select the cases of these three particular MNCs is that they are all from a developed country, namely the United States, and they all have substantial investments in the renewable energy sector of India. By exploring these cases the reader can get a deeper insight how these MNCs form strategies to fill institutional voids in an emerging market by introducing their products and whether and how they contribute to developing new or changing existing institutions, especially in the rural parts of India.
A third reason for the selection of these particular MNCs is that their home country is a developed country with a sunbstantial focus on emerging markets, like India.
25 As discussed earlier emerging markets are characterized by institutional voids which include the absence of effective regulation systems, well developed intermediary institutions, business support services, skilled labor or developed education system. As a consequence many multinational companies, coming from developed countries, find it very difficult to implement successful strategies in emerging markets due to institutional voids. In order to mitigate institutional voids developed country MNCs act as institutional entrepreneurs because they can actively influence the institutional environment by initiating changes in existing institutions or by introducing new institutions which contributes to the development of emerging countries (Khanna & Palepu, 2010).
The concept of institutional strategies is important in the institutional entrepreneurship literature because institutional strategies describe those patterns which are necessary for organizations to direct institutional structures to different ones (Lawrance, 1999).
Institutional strategies of MNCs can be defined as “comprehensive set of plans and actions directed at leveraging and shaping the socio-political and cultural institutions within an organization’s external environment” (Marquis & Raynard, 2015:5). According to this definition organizations have to behave proactively if they aim at diagnosing and shaping their institutional environments. Institutional voids present big challenges for MNCs in the BOP markets so in order to bridge these obstacles MNCs need to implement different strategies to mitigate uncertainty and institutional distance and ensure their smooth operations in emerging markets.
In order to develop propositions the following section will discuss existing theories of MNCs’ institutional strategies combined with the institutional specificities of India to answer what type of strategies MNCs implement to fill up institutional voids and how these actions contribute to the development of rural inhabitants of India.
26 According to Khanna et al. (2005) there are five different institutional contexts that should be evaluated by developed country MNCs when forming their strategies in emerging countries. In some interpretation openness of an emerging country means the level how much the government, the media and people of an emerging country open for foreign direct investments. Openness also refer to the limitation the emerging country’s government put on foreign investors, or the freedom of developed country MNCs to enter the country without entering into a joint venture and the freedom of choosing partners. India is slowly becoming an open country because the country doesn’t posit obstacles in front of the free flow of FDI in the country (Timmons, Kumar, & Raina, 2012). On the other hand there are still a lot of companies who enter the country through joint ventures or licensing and there are still many governmental restrictions meaning that the country is still not totally open for developed country MNCs.
The product market factors of emerging economies also lack substantial institutions. Most developed country MNCs are not able to collect data of their customers because the telecommunication infrastructure is really underdeveloped. Communication with rural customers is almost impossible because they lack electricity to charge their cell phones. Due to the lack of efficient communication customers of rural parts are not able to get information of products and services, what is more illiteracy means a huge cultural barrier for companies as inhabitants of the rural areas are not able to interpret the product/service instructions. Sometimes products can’t be delivered to rural parts of emerging markets because of absent distribution channels and reliable suppliers. However India has a large pool of rural inhabitants whose demands should also be satisfied, however solving this issue still means difficulties for developed country MNCs. By filling the institutional voids of the product markets developed country MNCs could impact the development of product markets of India.
The development of labor markets of emerging countries is really necessary because the strength of the education infrastructure is really difficult to verify for developed country MNCs.
27 In rural areas elementary and secondary schools need substantial development not to speak of providing better circumstances for students to study. Developed country MNCs could also facilitate the English language learning of Indian people by hiring them.
Capital markets of emerging countries pose also a challenge for international companies because they lack sophisticated financial markets, like credit-rating agencies, venture capital firms or investment analysts. Family ties and interpersonal relations have a very strong influence on the investment decisions of people living in emerging countries. The enforcement of corporate governance is also weak in emerging economies which makes it difficult to build a trustworthy relationship when developed country MNCs engage in joint ventures or other partnerships (Khanna et al.,2005).
The institutional voids of capital, product and labor markets offer great entrepreneurial opportunities because in all the three fields there are several institutional voids (e.g. irreliable financial institution, lack of communication and distribution infrastructure, underdeveloped elementary and high schools etc.) that could be solved with the help of developed country MNCs. By doing business in emerging markets developed country MNCs can contribute to fill in the institutional voids of capital, product and labor markets and establish new institutions which both serve the development of the emerging markets and the financial interest of the MNCs (Paddison, 2014). These voids of the product, labor and capital markets call for entrepreneurial action from MNCs who are able to identify opportunities in the absence of some institutions.
Regnér & Edman (2014) introduce four types of strategic responses that MNC subunits implement when they meet institutional constraints or see exploitable opportunities in the host country.
28 When implementing innovation strategies MNCs actively search for opportunities to create new institutions or change existing institutions of the host country. MNCs are able to engage with the innovation strategy when the emerging markets have role expectations towards them or they depend on the resources of the MNCs. When implementing innovation strategies, MNCs are able to change the existing institutions that constitute the product-, capital-, labor markets and fill institutional voids through introducing innovations to the market of India.
Proposition 1: When developed country MNCs fill institutional voids in India the implementation of innovation strategies are appropriate because MNCs actively look for changing institutions in order to develop the institutions of the capital, product, labor markets.
When MNCs leverage from the institutional differences and contradictions between the home and host country they commit arbitrage. Existence of institutional contradictions, high ambiguity and the transferring of existing institutions from home country enables MNCs to implement institutional arbitrage strategies in emerging markets. Institutional arbitragers exploit the inconsistencies among formal and informal rules in a “transition period and advance their business interests” (Li et al., 2006:365). Institutional entrepreneurs are driven by market opportunities who establish market institutions while arbitragers are taking advantage of non-market regulations” (Li et al., 2006:369). Therefore it is not likely that developed country MNCs commit arbitrage when filling institutional voids because that would not promote the establishment of new institutions.
Proposition 2: when developed country MNCs fill in institutional voids in India they are not likely to implement arbitrage strategies because developed country MNCs are not really embedded in the host country and this strategy doesn’t actively advance the development of the institutions of the product, labor and capital markets of India.
29 Circumvention strategies are adopted when developed country MNCs leverage the institutional ambiguities and their outsider position in a host country. Transferring institutional experiences are less important for MNCs when they engage with circumvention strategies. In this case developed country MNCs avoid institutional pressures, which is not in line with the idea of institutional entrepreneurship. For these reasons MNCs, who aim at filling institutional voids of emerging markets are not likely to use circumvention strategies as this strategy is not efficient in bringing institutional changes in the capital-, product, and labor markets.
Proposition 3: developed country MNCs are not likely to implement circumvention strategies when filling institutional voids because owing to their outsider position, developed country MNCs are not actively engage in the institutional development of emerging markets.
Finally, when filling in institutional voids in emerging markets, MNCs have to adapt their business model for a certain level to the new institutional context because of the institutional pressures, exerted by the host country. Developed country MNCs can not completely avoid the institutions of the host countries if they want to gain legitimacy and credibility for their operations. In some cases developed country MNCs have to adjust their strategies to the institutional voids of a developing country, however the costs and benefits of adapting strategies should be measured by MNCs because in some countries adapting strategies is impractical. (Khanna et al., 2005).
Proposition 4: developed country MNCs implement adaptation strategies to a moderate degree when filling institutional voids in emerging markets because adaptation to local circumstances is necessary to become more embedded in the local context.
Marquis & Raynard (2015) found that institutional strategies that focus on emerging markets can be categorized along three dimensions: relational, infrastructure-building, and socio-cultural building strategies. Relational strategies are dedicated to manage relationships with
30 important authorities. These activities include networking or efforts to build a good relations with national governments. When important institutions are missing or are weak MNCs have to deal with several obstacles when investing in an emerging country. As discussed earlier, these obstacles can be the underdeveloped political, product markets, capital markets and labor markets of emerging economies. However, by implementing efficient relational strategies developed country MNCs are able to overcome the liabilities of foreignness and mitigate uncertainty and institutional distance in the country. Through partnerships and good informal relations it is possible to exert influence on the institutions of product, labor and capital markets operating in India.
Proposition 5: developed country MNCs adopt relational strategies in order to fill institutional voids and to mitigate institutional distance and uncertainty between the home and host country.
However, when necessary institutions are absent or inefficient, developed country MNCs have to adopt infrastructure-building strategies in order to fill the social, physical and technological voids in an emerging market. Examples of the infrastructure building strategy includes the engagement in collective action to promote infrastructure advancement, introducing specific services, the promotion of global business model standards and the development of the society.
Proposition 6: In order to fill institutional voids in India, developed country MNCs are likely to adopt infrastructure building strategies to address underdeveloped emerging markets and build more efficient social, physical and technological infrastructures in India.
Sometimes bridging different demographic characteristics among countries can be very challenging for MNCs. If developed country MNCs want to be able to address country specific cultural and social characteristics, firm have to implement socio-cultural building strategies. By establishing partnerships with local firms, training local labor force and building local capacity developed country MNCs gain more local knowledge and experience and also more
31 legitimacy regarding their operations. Implementing socio-cultural building strategies are important for developed country MNCs because with this strategy it is possible to address demographic issues and challenges (under education, illiteracy, lack of hygiene etc.) which formulates substantial institutional gap in emerging markets. By addressing these socio-cultural issues, developed country MNCs are able to contribute to the development of the social sphere and formulate a more competitive environment in India.
When conducting a socio-cultural building strategy, MNCs have to be aware of the fact that prevailing institutions, such as political regimes, are still very strong in shaping the business environment and too much radical changes are not welcome.
Proposition 7: When implementing socio-cultural building strategies developed country MNCs engage in solving demographic issues and challenges which contributes to the social life development of India
12 METHODOLOGY
This section, starting with the research design, explains the research methods adopted to answer the research question of this thesis. Afterwards, the cases and the reasons for the case selection will be introduced. Then in the last section the method of the data collection and analysis will be explained.
13 RESEARCH DESIGN
As the study conducts a qualitative research, the data is gathered from a relatively small number of cases in order to gain a deeper understanding of a particular subject (Taylor, 2005). What is more, qualitative studies have to fulfil two criteria: authenticity and trustworthiness. Authenticity is responsible for the usefulness of the results, whether the results contribute to a better understanding of the research phenomenon (Bryman, 2003).The trustworthiness of the
32 study means that findings are “worth paying attention to” (Lincoln & Guba, 1985:290). To fulfil the criteria of authenticity and trustworthiness the study conducts a large-scale literature survey.
The nature of the research question requires a qualitative analysis which will be conducted through a multiple case study design. As the thesis will answer “how” do developed country MNCs fill institutional voids and “how” they contribute to the development of base-of-pyramid markets markets of emerging countries by introducing institutions applying a case study in this research is relevant (Yin, 2013). As the phenomenon of the study is only investigated through a few cases, the case study method suffers some inability to statstically generalize the findings of the study. However, according to Yin (2013) analytic generalization can neutralize this disadvantage.
For this reason, the thesis analyzes three United States based MNCs, having substantial operations in the renewable energy market of India.
14 CASE STUDY SELECTION
The cases are going to be analyzed in an explorative way and the aim of the research is to refine and investigate the propositions. The theorietical propositions are going to be tested by a deductive approach because this method is specifically designed to test the propositions which were created after analyzing the academic literature (Saunders et al., 2009).
The cases were selected by searching for developed country MNCs who contributed to the development of the institutions of BOP markets of India by filling institutional voids. The shortage of power, mainly electricity, is still among the biggest concerns in India especially in the rural areas. By 2030 India will need to substantially increase its power generation capacity if the country wants to maintain its current economic growth (Kundra & Katz, 2012).This issue provides a great opportunity for renewable energy companies as the usage of alternative energy is inevitable if India wants to decrease its green-house-gas emission.
33 15 DATA COLLECTION
In order to investigate what kind of institutional strategies MNCs adopt in India a qualitative research will be conducted through the use of secondary data. Newspaper articles, online articles, interviews with researchers or annual reports of enterprises can be used as sources of secondary data. Secondary analysis means the utilisation of existing data in order to conduct a research which outcome is distinct from the results of the original work. With secondary data it is possible to answer new research questions or formulate an alternative of the original research question (Hinds et al., 1997).
In order to ensure the quality of the secondary data, the sources are carefully collected by examining the authors educational background, the original purpose of the data collection, the intended audience, whether the data was publicated for a specific or general audience and whether the sources are well referenced (McCaston, 2005).
Secondary data from NGOs and other independent organizations is used in order to understand whether these units agree that developed country renewable energy companies contribute to the institutional development of India by identifying and filling institutional voids.
Annual reports of developed country renewable energy companies are investigated in order to get deeper insights how they evaluate their contribution to fill institutional voids and develop institutions of India. From the CSR and sustainability reports and press releases of companies it is possible to identify the goals, mission and vision of these MNCs regarding the development of rural Indian communities and their institutional strategies.
During the collection of secondary data is wasn’t entirely possible to use the same sources of data because in some cases the available data about the companies’ activites was not sufficient enough to conduct a research and answer the research question. Owing to this issue the sources
34 were selected based on the availability and usefulness of the data they provide about the selected developed country MNCs.
Table 2: Sources of secondary data
MNC United States based
news
Indian news Other sources
SunEdison International Business Times
PR Newswire
Reuters
Hindustan Times The Hindu Business Line
The CSR journal
OMC power blog3 Sierra Club4
SunFunder Huffington Post Forbes
Crowdfund Insider
India Smart Grid Forum
The Lumina Project5
d.light Forbes
Huffington Post Economist
The Hindu Business Line
Outlook Business
The Climate Group6 Kaufman fellows7 Venture beat8 Acumen9
3 Blog, provided by OMC power, an Indian renewable energy company 4 U.S. based environmental organization
5 U.S based organization, providing timely analysis and information on off-grid lighting solutions for the developing world
6 Non-profit organization for a low carbon future 7 Global network of innovative firms and mentors
8 Leading source of news on entrepreneurship and technology innovations 9 U.S. based non-profit organization
35 The timeframe of the collected data will be the sequence of the years the selected MNCs entered the Indian market. It means a timeframe starting at 2009 with the entrance of d.light to the Indian market until present day (2009-2015). This method will guarantee that all the changes of the strategies of the MNCs and institutional developments are included in the research.
The vailidity and reliability of the research will be ensured by using multiple sources of evidence which will ensure that the suggested propositions are accurate. In order to provide data and result reliability all the conducted processes will be documented (Rowley, 2012)
16 DATA ANALYSIS
After the collection of data the next step is the analysis of the secondary data. The NVivo software which is a special program to analyze qualitative data, is going to be used to conduct the analysis. The secondary data of the research will be analyzed through thematic coding. Thematic coding means that themes are assigned to the data to help meaningful patterns to emerge from the analyzis. This method contributes to answer the research question. The themes/codes of this thesis emerged from the existing literature of institutional entrepreneurship regarding MNC strategy formation in multiple country contexts.
The codes were selected in order to identify common patterns of MNCs institutional strategies in emerging markets, which are presented in Table 3. The identified codes help to illustrate a complex set of data in a simpler manner which makes a better understanding of the empirical data.
36
Codes Description
Innovation “purposely seeking to work with and create new institutions, and/or change prevailing institution” (Regnér & Edman, 2014:286) Arbitrage “MNEs leveraged differences in institutions
of home and host country contexts and third-country institutions” (Regnér & Edman, 2014:290)
Circumvention “The MNE actively leverages differences in institutional pressures, our third strategic response – institutional circumvention – constitutes scenarios where MNEs avoid institutional pressure” (Regnér & Edman, 2014:292)
Adaptation “Conforming to local institutional pressures” (Regnér & Edman, 2014:287)
Relation building strategy “The actions and activities taken to interact with and strategically manage important referent audiences, including political bodies and key stakeholder groups”(Marquis & Raynard, 2014:63)
Infrastructure building strategy “The actions and activities taken to address marginally developed markets, and underdeveloped social, technological, and
37
Codes Description
physical infrastructures” ”(Marquis & Raynard, 2014:63)
Socio-cultural building strategy “The actions and activities taken to address the socio-cultural and demographic issues/challenges, which shape the competitive environment.” ”(Marquis & Raynard, 2014:63)
17 RESULTS 17.1 D.LIGHT
D.light produces affordable solar-powered solutions for people who live without reliable access to electricity in developing countries. The company realized that the BOP market of India accounts for more than 400 million people who doesn’t have good access to electricity and took it as an investment chance. The main impact of d.light on rural India is that in 2009 they introduced small household solar lamps as a substitute for kerosene lamps. By the introduction of these solar lamps d.light wanted to break the institutional ties with the usage of kerosene lamps which has been in usage for a very long time. Kerosene lamps are dangerous for the environment and for the healt of the people and they are not able to provide reliable lighting for rural inhabitants. D.light introduced a product, solar lamps, which provided a reliable supply of light after the sunset, making it possible for rural villagers to study or read during the nights, to have more social activities in the villages and to feel safer on the streets.
38 For this reason D.light can be seen as a good example for institutional entrepreneurship as they disrupted the kerosene-based lighting market and introduced small scale solar-powered lamps which contributed to the development of the social infrastructure.
"We seek to make a difference in the lives of people, their productivity, health, education etc. Energy or light is a basic need.”
/The Economic Times, 2012/
“…the company has realized that innovation is not in the lamp. Instead, it’s in how to make it affordable, which is a nuanced task, not just a global slash in prices.”
/Forbes Magazine, 2014/
However d.light entered a very difficult market in India as kerosene was heavily subsidized by the government, changing the mindset of rural inhabitants and make them accept the solar energy-based lamps meant a huge challenge to the company because solar lamps were unknown for the BOP market and rural inhabitants didn’t have the knowledge how to use them. What is more in 2014 the Indian government cut the renewable energy budget by two-thirds (Pearson, 2014). As the support of renewable energy was cut down by the government the situation got even more concerning in the rural areas where payment for the solar lamps was quite uncertain. To handle this issue d.light realized, that in order to keep up its business operations it had to develop the capital markets of rural India. In order to fill an institutional void of the capital market of India -as a part of the infrastructure building strategy- d.light introduced financial products to make payments easier for its rural customers.
“So, the solar company is developing financial products to help get light into the hands of its customers”
39 Rather, in India in 2011, d.light introduced the top-up system. Skierka says that a culture of top-up cards, similar to cellphone scratch cards, which are ubiquitous, available at every mom-and-pop shop, were a hit”
/Forbes Magazine, 2014/
“At the same time, he said, microfinance, leasing and other financing options will help customers afford solar electricity systems and services.”
/The Daily Climate, 2015/
But the payment issues of rural people is not the only thing that concerns the efficient distribution of solar-powered lamps. Setting up an efficient distribution channel meant a challenge for the company. First, d.light employed private retailers to distribute its products, however these companies lacked sufficient knowledge about the products of d.light, making it impossible to educate the rural customers about the benefits and usage of the solar lamps. After this unsuccessful cooperation with private retailers, d.light formed alliance with government cooking-gas distribution companies which had enough capacity to receive training by d.light distributors about the benefits of solar energy-powered lamps and was able to broadcast this knowledge to rural customers making them aware of the advantages of solar energy.
“d.light found a better channel with the government cooking gas distribution companies (HPCL and BPCL), who stocked only 10-15 products and had the time needed to educate the customer while delivering the cooking gas at their doorstep.”
“Many d.light distributors have the same great intent and willingness, but lack essential sales skills. d.light coaches them in these skills which equip them to sell not only d.light solar lanterns, but many other products as well.”
40
“an extraordinary distribution system in the developing world."
/Huffingtonpost, 2014 /
For d.light, well-trained distributors were necessary who understands the product well enough to explain it to the rural customers who are unlikely to spend their little saving on products they don’t really know. Therefore, d.light also had a big responsibility in training and educating the local workforce about the advantages of solar lantern products.
Recently d.light built alliances with local Indian companies such as Bharat Petroleum LPG Division, HPCL, micro-banker FINO, to leverage their existing infrastructure in marketing the d.light products (Mitra, 2012).
“Its business model is based on strategic alliances with likeminded organisations, which have lastmile reach and strong engagement with end consumers.”
/The Economic Times, 2012/
These partnerships provide example of relational building strategies of d.light, because the main purpose through these collaborations was to leverage local expertise and reach a more accepted presence on the market.
As d.light introduced new knowledge and practices in the lives of the rural Indian people it can be seen as an example of building informal institutions. D.light made the usage of solar energy a new norm in rural villages of India, and managed to decrease the dependence on kerosene lamps by raising awareness on the advantages of solar energy. Although using kerosene lamps has a strong tradition in rural villages, d.light managed to break with this tradition and solar energy lamps were accepted really fast by the rural people.
