THE INFLUENCE OF INSTITUTIONAL QUALITY INVESTIGATED ONCE AGAIN: THE MEDIATING ROLE OF MANAGEMENT PRACTICES

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THE INFLUENCE OF INSTITUTIONAL QUALITY INVESTIGATED ONCE AGAIN: THE MEDIATING ROLE OF MANAGEMENT PRACTICES

Master thesis,

Msc. Human Resource Management &

Msc. International Economics and Business

University of Groningen Faculty of Economics and Business

July 8, 2016

Martine van der Veen Studentnumber: 2207567

E-mail: m.b.van.der.veen.1@student.rug.nl

Supervisor Msc. HRM: dr. T. Vriend

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ABSTRACT

Contemporary work presented by Bloom and Van Reenen (e. g., 2006; 2007; 2010) illustrates that a lot of variation on management practices exists across firms and countries. This study opens the black box by identifying a role for institutional quality. By drawing on institutional theory and organization theory this study provides a theoretical framework that argues that the relationship between institutional quality and organizational performance is mediated by management practices. Additionally, this adoption process was expected to occur faster due to competitive pressures. Mixed modeling was applied to the sample that includes data on 6135 firm-year observations from the World Management Survey, Orbis, and the World Bank across 18 countries. The mediation hypothesis was supported by the findings, however, the moderating role of competition was not. This study provided important contributions by showing that institutional quality is a significant determinant of the adoption of management practices, and thereby clarifies the variation of management practices across countries.

Key words: institutional quality, management practices, organizational performance,

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It has been increasingly recognized that management practices are important to organizations (van Hoorn, 2014). Management practices are said to be an important contributor to high levels of productivity, profitability, and sales growth (Bloom & Van Reenen, 2007; Huselid, 1995; Syverson, 2011). Moreover, they ensure the vitality of organizations by increasing the survival rates (Bloom & van Reenen, 2007). Due to its importance, one would expect that organizations devote their efforts to the optimization of their management practices. Surprisingly, the opposite is true. Contemporary work presented by Bloom and Van Reenen (e. g., 2006; 2007; 2010) illustrates that a lot of variation on management practices exists across firms and countries. This study opens the black box by identifying a role for institutional quality.

Institutional quality has received a great deal of attention in existing academic literature, especially in the economical and organizational field. The importance of institutions is well studied and widely acknowledged. This is not surprising, since cultural and political institutions grant organizations a “license to operate” and form a critical source of organizational support by shaping the conditions (Heugens & Lander, 2009). Institutions determine founding rates of organizations, their organizational forms, and even survival (Palmer & Biggart, 2005). However, there is still little evidence on the impact of institutional quality on management practices of individual firms.

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By drawing on institutional theory and organization theory this study attempts to fill this gap. The past decades, institutional theory began to form one of the prominent standpoints in organizational analyses (Heugens & Lander, 2009; Palmer & Biggart, 2008). According to Heugens and Lander (2009) a proportion of the institutional theorists perceive exogenous factors to be the source of organizational action. Furthermore, organizations are constrained by (social) rules and have to comply with the conventions from institutions. Eventually, this shapes organizational form and practice (Ingram & Simons, 1995). Many contributors to this research topic analyzed the perspective that organizations who share similar institutional contexts start to employ similar practices causing them to become isomorphic (DiMaggio & Powell, 1983; Kostova & Roth, 2002). Many elements of the institutional contexts are country specific (Rosenzweig & Singh, 1991), consequently, this implies that organizations adopt diverse management practices across different countries (Kostova & Roth, 2002; Gooderham, Nordhaug, & Ringdal, 1999). I hypothesize that institutional quality leads to the adoption of better management practices of firms and ultimately, increases their organizational performance. That is, organizations respond to the quality of institutions in the country they are located in, which forms an incentive to adapt management practices according to the institutional environment and consequently improve their performance.

To further explore this notion I investigate the accelerating process from competitive pressures. I hypothesize that the adoption of high quality management practices as a response to institutional quality accelerates when competitive pressures are present. Competition puts pressure on the vitality of organizations (Helpman, 2011). The basic assumption in economic literature is that when an organization is not able to remain competitive, it will not survive and has to exit the market (Helpman, 2011). Therefore, when competitive pressures are present, firms feel an even stronger need to respond to its institutional environment and leads them to enhance operations by improving management practices. The hypotheses are tested by using data from the World Management Survey which provides data on 18 management practices as adopted by various manufacturing firms in 18 countries.

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create conflicts (Greenwood, Raynard, Kodeih, Micelotta, & Lounsbury, 2011). This makes it even more challenging for firms to respond to them. It means adopting the right set of local management practices in order to remain legitimate in all environments important to the vitality of the firm (Kostova & Roth, 2002). When organizations do successfully respond to institutional differences, firms gain competitive advantages since the different institutional environments provide access to the unique and potentially valuable capabilities that are embedded in them (Stahl & Voight, 2008).

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2. THEORY

This section provides the review of relevant literature in order to provide the theoretical argumentation that is underlying the proposed hypotheses. Firstly, the direct relationship between institutional quality and management practices is presented. Secondly, the direct relationship between management practices and organizational performance is addressed. Thirdly, the mediation hypothesis is provided that assumes a mediating effect of management practices on the relationship between institutional quality and organizational performance. The theory section ends with a moderation hypothesis that predicts a moderating role for competition on the relationship between institutional quality and management practices.

2.1 Institutional quality and management practices

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shown us the outcome by giving us the examples of the divergent paths of East- and West-Germany, and North- and South-Korea. Here, one side prospered while the other stagnated, mainly caused by the variety of institutional quality (Acemoglu et al., 2001). Therefore, institutional quality is not simply a matter of institutionalization. It is a matter of functionality where dysfunctional institutions damage effective (collective) actions (Wu et al., 2015).

Palmer and Biggart (2008) reviewed the usage of institutionalism as a framework and concluded that institutionalism can be used to explain behaviors of (complex) organizations of all types in nearly all times and places. Firstly, a consequence of institutional environments is that it can shape the relationship between headquarters and subsidiaries (Li, Jiang, & Sheng, 2016). The difference in institutional quality explains the inter-organizational relationship, where a larger institutional distance between the home-market of the headquarters and the host-market of the subsidiary creates uncertainty and increases the liability of foreignness. Secondly, Le, Kim, and Lee (2016) investigated institutional quality in the context of the financial sector. They admit that institutional quality plays a significant role in exporting a firm’s innovation performance. Expanding abroad to a country with high institutional quality, such as one with strong enforcement of intellectual property rights, boosts innovation and helps with transforming resource inputs into knowledge. Furthermore, institutional theory proclaims that institutional knowledge creates pro-active managerial behaviour via pressures or constraints (DiMaggio & Powell, 1983; Palmer & Biggart, 2005). Organizations are subject to institutional pressures and are forced to comply with these elements. This legitimacy process operates through a mechanism where the (social) rules from institutions become widely accepted, creating greater pressure for organizations to adopt them in order to maintain legitimacy (Ingram & Simons, 1995). Ultimately, institutional pressures influence decision-making, and the organizational strategies and structures that they design. Furthermore, the institutional forces may exert direct pressures on organizations to adopt certain practices which will lead to isomorphism by conforming to accepted ways of doing business and adapting widespread practices (Griffith, Hammersley, & Kodous, 2015; Kostova & Roth, 2002). This could lead to the modification of a firm’s goals and managerial practices (Ingram & Simons, 1995; Palmer & Biggart, 2005).

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rely on when managing their operations (Bloom & Van Reenen, 2007; van Hoorn, 2014). Management practices are aspects of daily operations that directly involve the behavior of middle-managers (van Hoorn, 2014). They are more than simply being the attributes of top-management since they are part of the organizational structure and behavior. Furthermore, they evolve at a slower pace than top-management, where CEOs come and go frequently (Bloom & Van Reenen, 2007). Top-management only influences management practices to a small extent since the foundation is founded in an organization’s actions, experiences, interests, history and its people (Kostova & Roth, 2002). Therefore, management practices construct the shared knowledge, and the routines involved with using this knowledge, in order to function daily (Kostova & Roth, 2002).

Although the pace of evolvement is slow, management practices are still expected to be subject to changes. Indeed, Bloom, Genakos, Sadun, and Van Reenen (2012) found considerable differences in management practices across firms and countries, which implies that they are not static. Multiple antecedents have been identified that cause this heterogeneity in management practices. Firstly, ownership structure is said to influence the adoption of management practices. Particularly family-ownership in combination with family-management causes worse management practices in comparison to organizations with private-equity ownership (Bloom & Van Reenen, 2007; Bloom et al., 2012; Bloom, Lemos, Sadun, Scur, and Van Reenen, 2014). Low management quality was also found at organizations owned by governments (Bloom & Van Reenen, 2007; Bloom et al., 2012; Bloom et al., 2014). Secondly, product-market competition seems to affect management practices through a selection-mechanism. Tougher product-market competition drives inefficient organizations out of the market and allocates more resources to the efficient ones (Bloom & Van Reenen, 2007). Thirdly, culture explains parts of the variety in management practices across firms and countries. Specifically, individualist cultures improve management practices because they formalize labor relations for organizations (van Hoorn, 2014).

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This originates from the underlying notion that organizations’ maintenance is dependent upon a process of exchange with external parties (Campbell & Lindberg, 1990; Child, 1972). Organizations themselves are not able to generate all resources or functions internally and, therefore, must enter into relations and transactions with the external environment (Aldrich & Pfeffer, 1976). As a result, they interact with external parties and develop practices to acquire the desired resources and services that make operations possible.

The notion that institutional quality leads to the adoption of management practices is based on two underlying mechanisms. That is, the combination of legitimacy issues and the importance of the external environment causes organizations to adopt management practices according to the institutional quality. Namely, organizations are bound by the constraints that institutions put on them. Next to market forces, cultural, political, and regulatory forces form important exogenous factors of organizations (Palmer & Biggart, 2005; Scott 2001). Institutions are thus part of the external environment that organizations have to deal with, and the internal practices are then the result of an interaction with the demands of institutions (Aldrich & Pfeffer, 1976). Managers actively scan their environments for institutional elements, which results in an response to these elements in the form of adapting management practices (DiMaggio & Powell, 1983; Palmer & Biggart, 2005).

For that reason, I propose that concerns over legitimacy, and on top of that, the importance of the interaction with the external environment, forces firms to adapt management practices that match with the institutional pressures that the organization is subject to. Therefore, low-quality institutions damage the efficient adoption process of management practices, while high-quality institutions stimulate them.

Hence, the following hypothesis is proposed:

Hypothesis 1: Institutional quality is positively related to management practices.

2.2 Management practices and organizational performance

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has shown otherwise. Often, better work-life balances are found in organizations that score high on management practices which suggests that the workforce starts to work smarter instead of longer when management practices are adapted (Bloom and Van Reenen, 2006; Bloom, Kretschmer, & Van Reenen, 2010). Secondly, higher managerial quality leads to energy intensity of organizations. Well managed organizations are significantly more energy-efficient because they economize on energy use (Bloom, Genakos, Martin, & Sadun, 2010). However, most importantly, management practices seem to influence elements related to organizational performance. For example, basing workers’ promotion solely on tenure or seniority is unlikely to be beneficial for performance in an organization. Furthermore, failing to identify and solve problems that limit process development, is another danger to performance improvement.

Defining organizational performance is not nearly as straightforward as most literature implies (Richard, Devinney, Yip & Johnson, 2009). Various performance-related definitions exist, however, only few studies use consistent definitions and measures. (Organizational) performance is so common that a definition is rarely explicitly stated which makes it quite complex to provide a single all-encompassing definition. Generally, organizational performance allows for evaluation and comparison of organizations over time and is one of the most important criterion to assess environments, actions, and outcomes of organizations (Richard et al., 2009). Richard et al. (2009) propose that organizational performance consists of three elements of organizational outcome: financial performance, market performance, and shareholder return.

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performance has received attention already. In various studies by Bloom and Van Reenen the relationship between management practices and organizational performance is empirically investigated. They found strong evidence that better management practices are positively and significantly associated to firm size, market value, productivity, profitability, sales growth, and survival rates (Bloom & Van Reenen, 2007; Bloom, Sadun, & Van Reenen, 2009; Bloom & Van Reenen, 2010; Bloom et al., 2014).

Therefore, the following hypothesis is derived:

Hypothesis 2: Management practices are positively related to organizational performance.

2.3 The mediation hypothesis

The theoretical review above predicts that institutional quality is expected to influence management practices and that management practices are expected to influence organizational performance. In addition, I hypothesize that there is a mediating relationship between the three variables where management practices mediate the relationship between institutional quality and organizational performance.

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organizations by allocating key resources (Campbell & Lindberg, 1990). This is in line with Hall and Jones (1999), who mention that institutional quality leads to a favorable social infrastructure, which provides an environment that encourages productive activities.

Therefore, managers are actively engaged with exogenous forces that result from the institutional environment. They not only take into account competitive factors, but balance these against institutional demands (Chen & Hambrick, 1995; Deephouse, 1999) in order to improve performance and to increase survival rates (Rosenzweig & Singh, 1990). Thus, institutional quality affects managers and the practices they implement, and this is turn influences organizational performance.

Hence, management practices determine the relationship between institutional quality and organizational performance. They are expected to form a channel through which institutional quality affects organizational performance.

Therefore, the third hypothesis is as follows:

Hypothesis 3: The positive indirect relationship between institutional quality and organizational performance is mediated by management practices.

2.4 The moderating role of competition

The first hypothesis states that institutional quality is expected to be positively related to management practices. Moreover, I hypothesize that this is conditional upon competition.

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Kolasky (2004) defines competition as “a process by which market forces operate freely to assure that society’s scarce resources are employed as efficiently as possible to maximize total economic welfare”. Consequently, when organizations are competing with each other, for instance for customers, the least productive organizations face an exit of the market, while the most productive organizations remain to exist (Baumol, 2002).

The result of competition is a survival of the fittest mechanism. Organizations are able to survive when they attain a superior status by being able to beat competition (Alchian, 1950). This provokes a feeling of threat for organizations and its managers, as they face an environment where fellow competitors are also striving for a superior status. Threats are associated with difficulties, high stakes, and moreover, urgency (Chattopadhyay et al., 2001). Therefore, it becomes important to respond quick. If the organization fails to respond or to take action in time, it could face negative outcomes such as reduced revenues or profits. Or in the worst scenario even bankruptcy.

When facing sources of adversity, organizations try to cope by adjusting their position in the environment (Staw et al., 1981). Activities to cope with adversity are commonly viewed as appropriate in order to increase the survival of organizations (Staw et al., 1981). Managers become increasingly aware of the external environment and its institutional issues, that is more demanding now when challenges to survival are at place. Especially, when organizations are new to the institutional surroundings, becoming legitimate with the institutional pressures is increasingly challenging. Getting familiar with a new external environment requires time and resources. Competition results into the fact that time and resources are scarce, which makes it increasingly important to respond quick to local legitimacy pressures (Rangan, 2000).

Therefore, it becomes necessary for organizations to focus on improving rather than stagnating operations, since standing still increases the chance of failing to attain or maintain a superior status (Baumol, 2002). As a result of standing still, the organization could be forced to exit the market. Hence, the pressures from competition create an incentive to adopt practices that are verified or legitimated by the institutional context in order to ensure an organizational fit (Griffith et al., 2015). Following from this, organizations in the same institutional environment enter in a head-to-head competition pushing themselves to respond and upgrade management practices according to what the institutional environment dictates (Wu et al., 2015).

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This leads to the following hypothesis:

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3. METHOD

This section presents the sample, measurement instruments, and method that was used to perform the analyzes.

3.1 Sample

The data to construct the variables included in this research comes from different databases as is identified below. The final sample contained an unbalanced panel which means that the number of time series observations is different across organizations (Hill, Griffiths, & Lim, 2011). The years included range from 2000 till 2011, with occasional gaps. The sample consists of manufacturing firms only. The final sample consisted of 50,853 firm-year observations from over 18 countries. Firms with missing data were dropped from the estimation models.

3.2 Measurement instruments

The variables included in this study were institutional quality, management practices, organizational performance, and competition.

3.2.1 Independent variable

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dimensions: voice and accountability, political stability and absence of violence, government effectiveness, regulatory quality, rule of law, and control of corruption (World Bank, 2016). The six dimensions were averaged into one single index measuring the level of institutional quality per country. Pursuing this measure I followed the example by many other scholars. (e. g., Easterly & Levine, 2003; Le et al., 2016; Muštra & Škrabić, 2014; Rodrik, Subramanian, & Trebbi, 2004). An example of the calculation and the countries included can be found in the appendix. The scores range from -2.50 indicating institutions with the lowest quality, to +2.50 indicating institutions with the highest quality. Criticism on using these indicators does exist. Many of its composing sources are subjective of nature, therefore, comparing and ranking countries across the globe might seem less appropriate. However, van de Walle (2005) mitigates the criticism by pointing to the large amount of sources which makes the data more reliable. Langbein and Knack (2010) investigated the validity and reliability of the WGI and found high inter-correlations, which confirms the idea that the indicators are reliable and that they measure the same broad construct.

3.2.2 Mediating variable

Management practices. In order to test the hypotheses, data from the World Management Survey (WMS) was used. The WMS is an evaluation tool developed by an international consulting firm that investigated the different management practices used by different organizations across countries (Bloom & van Reenen, 2010). The complete database includes interviews with middle managers from over 20,000 manufacturing firms across 35 countries. The response rate is approximately 50%, which is uncorrelated with the performance of organizations. Therefore, the database does not include disproportionally successful or unsuccessful firms (Bloom et al., 2012).

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whether targets cover a sufficiently broad set of metrics: What types of targets are set for the company?, What are the goals for the plant?, and Tell me about the non-financial goals? To avoid interviewer bias, the survey aimed at medium-sized organizations, increasing the chance that the interviewers were not likely to have heard of the organization before. Furthermore, only limited information was provided to them such as name, telephone number and industry. The interviewers were MBA students who were trained and had some business experience to perform the interviews. Around three quarters of the interviews included a second interviewer that was monitoring the interview silently and independently scored the management practices. A validity correlation of .88 was found for these double-scored interviews (Bloom et al., 2012).

In total, eighteen different management practices were evaluated. The described management practices by middle managers were given scores that ranged from 1 (worst practice) to 5 (best practice). These eighteen practices constitute four broad areas: operations, monitoring, targets, and incentives. Operations (two practices) tests how well modern management techniques have been introduced and what the motivation is behind changes to operations. Monitoring (five practices) informs what is going on in the organization and how information is used for continuous improvement. Targets (five practices) assesses whether organizations set the right targets and, take appropriate action if the preferred outcomes are not achieved. Incentives (six practices) informs whether organizations are rewarding and promoting workers, based on their performance, whether they prioritize careful hiring, and whether they are trying to retain the best employees. Finally, the eighteen individual practice-scores were averaged into a single indicator that represented how good or how bad the management practices of the organization are. The higher the assigned score on management practices, the better management practices the organization has.

3.2.3 Dependent variable

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measure performance. The Orbis database provides information on firm-level accounts allowing for such a variety of indicators as measured by them. This research only used (labor) productivity as measured by the logarithm of sales per employee (Bloom et al. 2012). Huselid (1995) states that this is a simple indicator that is widely used.

3.2.4 Moderating variable

Competition. This study measures competition by looking at trade openness. According to David (2007), trade openness is a relevant indicator of competition. A country that opens up to trade lowers the trade barriers, which results into an inflow of trade and foreign competitors. Although more complex methods of measuring trade openness exist, I used the logarithm of sum of exports and imports to real GDP (Harrison, 1996). This is a common indicator which demonstrates whether a country participates in foreign trade (Easterly & Levine, 2003). The World Bank provides World Development Indicators on 214 countries which includes data on trade (as a percentage of GDP). Sources for trade are the World Bank national accounts data, and the OECD national accounts data files.

3.2.5 Control variables

Two control variables were included to investigate the relationships in this study. The first control variable was workforce, as measured by the number of people employed by the firm. The second control variable was capital. In other words, both control variables were used to control for firm size. Firm size was expected to influence the relationships, since larger firms tend to have more (financial) resources to employ better management practices and to increase performance compared to smaller firms (Bloom et al., 2012). Data to construct the control variables was also taken from the Orbis database.

3.3 Method

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simultaneous estimations with firm-level and country-level variables. Furthermore, mixed models includes both fixed, as well as random effects. Not only random intercepts but random slopes are incorporated, and multiple layers of group effects can be captured. However, an additional concern was the issue of endogeneity, since it seems likely that organizational performance could also drive management practices. To solve this, I used lag explanatory variables. Hence, all explanatory variables were lagged one year so that institutional quality in year 1 explains management practices in year 2, and in turn, management practices explain labor productivity in year 3.

In order to test the mediation hypothesis, a Sobel test was performed. Sobel (1982) designed an approach which allowed for testing the significance of the mediation effect. It analyzes whether the direct relationship between the independent variable and dependent variable reduces once the mediator variable is added to the regression. An advantage from the Sobel test is that it does not generate new coefficients, but bases the mediation effect on the previous regression results. However, this study includes data on multiple levels: the country-level, industry-level, and firm-level. Unfortunately, a Sobel test is not appropriate for regressions with multi-level data. As a consequence, the results could be misleading. Krull and MacKinnon (2001) do present mediation models that appropriately tests mediation effects in clustered data. They present three types of mediation models. The 2  1  1 mediation model from Krull and MacKinnon (2001) comes closest to the mediation model in this study. This multi-level model infers that data on the independent variable (institutional quality) is on level 2, and data on the mediating variable (management practices) and the dependent variable (labor productivity) is on level 1. Still, this model is not fully sufficient, since it only incorporates two levels instead of three. Yet, the 2  1  1 model does preserve the original data structure because the firm-level data of management practices and labor productivity does not need to be aggregated to the country-level data of institutional quality. Although not a perfect solution, I used both the Sobel test and multilevel mediation approach to assess whether the mediation hypothesis finds support. In line with what is explained earlier, I included the lag explanatory variables in the regressions.

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4. RESULTS

This section provides the descriptive statistics and correlation matrix of all variables included in the regressions. Furthermore, the results of the hypothesis testing is presented.

4.1 Descriptive statistics and correlation matrix

The descriptive statistics of the variables included in this study are provided in table 1. The data on institutional quality and trade openness is measured on the country-level, whereas data on management practices and labor productivity is ascribed to the firm-level. The lowest value for institutional quality is for China (-0.6) and the highest value for New Zealand (1.87).

Table 1. Descriptive statistics

Variable Source Obs. Mean SD Min. Max.

Institutional quality World Bank 41,607 .778 .792 -.6 1.87

Competition World Bank 46,230 1.653 .170 1.306 1.970

Management practices WMS 6,196 2.973 .683 1 4.888

Labor productivity Orbis 5,092 5.318 1.009 -4.295 8.812

Capital Orbis 5,604 27,575 11,7342 -3911 3362661

Workforce Orbis 5,168 691.397 2052.078 1 50524

Notes. Obs. = number of observations, SD = standard deviation, Min = minimum, Max = maximum, WMS = World Management Survey.

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Table 2. Correlation matrix.

Variable CO IQ MP LP Workforce Capital

CO 1.000 IQ .013 1.0000 MP -.170*** .294*** 1.000 LP -.304*** .285*** .300*** 1.000 Workforce -.038** -.015 .126*** -.003 1.000 Capital -.083*** .071*** .054* .139*** .323*** 1.000 Notes. * p<0.05, ** p<0.01, *** p<0.001. 4.2 Regression results

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Table 3. Results of hypothesis testing. (1) (2) (3) (4) Dependent variable MP MP LP LP LP LP MP MP Institutional quality .130** .245** .606** .532** .129* .066 (.047) (.092) (.180) (.191) (.062) (.245) Management practices .227*** .308*** .230*** .305*** (.038) (.040) (.038) (.040) Competition -.111* -.189 (.043) (.173)

Institutional quality x competition .090** .255

(.033) (.269)

Control variables NO YES NO YES NO YES NO YES Observations 6135 1399 1226 863 1226 863 6188 1399

Countries 18 11 12 12 12 12 18 11 Industries 1212 425 404 372 404 372 1213 425

Firms 4598 992 927 834 927 927 4616 992

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Table 4. Mediation results.

Dependent variable: labor productivity (1) (2)

Mediator Management practices Management practices

Independent variable Institutional quality Institutional quality

Indirect effect .092*** .078

(.021)

Direct effect .573*** .501*

(.070) (.209)

Proportion of total effect

that is mediated .139 .135

Notes. Standard errors are in parentheses. The first model is a Sobel test. The second model is a multi-level mediation. This model does not provide standard errors and a p-value for the indirect effect. However, it did show a significant a-path (p < 0.05), b-path (p < 0.001), and c’-path (p < 0. 05). * p<0.05, ** p<0.01, *** p<0.001.

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5. DISCUSSION

This section starts with the interpretation of the results. Subsequently, the theoretical and practical implications are provided. Finally, the limitations and suggestions for future research are presented.

5.1 Interpretations of the results

This study examined the relationship between institutional quality and organizational performance as mediated by management practices. Furthermore, the moderating role of competition on the relationship between institutional quality and management practices received attention.

The first hypothesis indicated that institutional quality is positively related to management practices. This was supported by the results. In addition, the results confirmed the second hypothesis. Therefore, management practices are positively related to organizational performance. The third hypothesis states that the positive indirect relationship between institutional quality and organizational performance is mediated by management practices. Although an optimal method was not available, the approaches used in this study supported the mediation hypothesis. The final hypothesis predicted that the positive direct relationship between institutional quality and management practices is weaker when competitive pressures are low, and stronger when competitive pressures are high. Unfortunately, this was not supported by the results.

5.2 Theoretical implications

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culture (van Hoorn, 2014). However to my knowledge, institutional quality was not yet mentioned.

This study confirms that institutional quality is indeed an antecedent to the adoption of management practices. This was in line with the literature review presented in the theory section. Institutional theorists suggest that organizations enhance their legitimacy within the environment by developing and adapting existing management practices according to the pressures and constraints from institutions (DiMaggio & Powell, 1983; Griffith et al., 2015). Organizations are said to act in a way that produces and reproduces the external environment (DiMaggio & Powell, 1983). It leads to a process of convergence where the legitimated practices become embedded in the perspectives of managers as appropriate best practices (Griffith et al., 2015). Moreover, this explains the variations of management practices across countries. Since high institutional quality stimulates social activities, ensures information transparency, and reduces transaction costs, this will lead to better management practices compared to environments where organizations face low institutional quality and thus adopt worse management practices (Alonso & Garcimartín, 2009; Wu et al., 2015). Additionally, this study confirmed that better management practices lead to higher organizational performance. Previously, this was investigated by Bloom and Van Reenen (2007) who measured organizational performance along a variety of indicators. I replicated this investigation and used labor productivity as an indicator of organizational performance. Once more the relationship was confirmed. Another theoretical implication form the findings presented here is the presentation of a new explanatory framework that recognizes the mediation role of management practices in the relationship between institutional quality and organizational performance. Furthermore, empirical evidence is presented to support the justification of this framework. This not only explains variation of management practices, but additionally presents a clarification for the large differences in performance and productivity across organizations (Bloom & Van Reenen, 2007).

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differently in situations with increased uncertainty and risk (Chattopadhyay, Sitkin, Barden, 2006). Due to competition, managers have to cope with loss of control and a loss of resources (Chattopadhyay et al., 2006). As a result of threat, managers tend to rigidly pursue activities that are routine, and rely on what has worked for them in the past. This implies that managers do not start to adopt new management practices under pressures of competition, but, that they rely on familiar or well-established management practices. By doing this, managers try to regain control (Chattopadhyay et al., 2006). The threat-rigidity theory could thus explain why competition did not have the accelerating effect on the relationship between institutional quality and management practices. That is, managers do not want to engage in modifying processes relative to what the institutional environment dictates, because, there is an external pressure from competition which forms a potential source of adversity that increases uncertainty and reduces control.

5.3 Practical implications

This study provides some important practical implications for managers and organizations. Firstly, this study illustrates the importance of the institutional environment to organizations. The results presented here provide evidence that the management practices of organizations are influenced by the institutional quality of the country they are operating in. Responding to the institutional environment, instead of ignoring it, can significantly improve management practices and moreover organizational performance. Secondly, this study stresses that when organizations struggle to improve organizational performance, they should consider their management practices. Even though organizations often tend to rely on short-term changes instead of long-term reforms, they should evaluate the potentials of managerial quality. Organizations can gain a competitive advantage when they optimize their management practices, especially when they balance these against the unique and potentially valuable capabilities that institutions can provide access to (Stahl & Voight).

5.4 Limitations and future research

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6. CONCLUSION

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APPENDIX

Table A.1 Example calculation of Institutional quality by country (in 2010).

Country V&A PS GE RQ RoL CoC IQ

Australia 1,44 0,87 1,77 1,69 1,76 2,04 1,60 China -1,63 -0,66 0,1 -0,22 -0,33 -0,6 -0,56 Germany 1,31 0,78 1,57 1,58 1,62 1,74 1,43 Greece 0,88 -0,13 0,55 0,63 0,61 -0,16 0,40 Italy 0,95 0,47 0,45 0,89 0,38 0,00 0,52 Japan 1,04 0,85 1,52 1,03 1,33 1,57 1,22 Poland 1,03 0,99 0,64 0,98 0,66 0,41 0,79 Portugal 1,10 0,7 1,02 0,73 1,04 1,03 0,94 Sweden 1,58 1,09 2,01 1,67 1,96 2,32 1,77 United Kingdom 1,29 0,4 1,56 1,74 1,76 1,56 1,39 United States 1,12 0,44 1,55 1,44 1,63 1,26 1,24

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THE INFLUENCE OF INSTITUTIONAL QUALITY INVESTIGATED ONCE AGAIN: THE MEDIATING ROLE OF MANAGEMENT PRACTICES

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