Antecedents to government relationship building and the institutional contingencies in a transition economy.
| Verfasser | Mondejar, Reuben |
| Posten | RESEARCH ARTICLE - Report |
Abstract:
* This study argues that the government-relationship building efforts by foreign invested enterprises (FIEs) depend on the perceived level of regulatory uncertainties, which, in turn, is conditioned by the institutional distances between their home and host countries.
* The regulatory antecedents (regulatory complexity and enforcement uncertainty) to government-relationship building by foreign-invested enterprises and the moderating effects of institutional distance (regulative and cultural distances) in the context of the large transition economy of China are examined using a sample of 424 foreign-invested enterprises.
* The results show that they tend to actively engage in government-relationship building when regulatory uncertainties (complexity and enforcement uncertainties) are high. The moderating analyses reveal the strengthening effects of regulative distances on the relationship between regulatory uncertainties and government-relationship building and the mixed effects of cultural distance.
Keywords: Regulatory complexity * Institutional distance * Government relationship-building * Transition economy
Introduction
Why do foreign invested enterprises (F1Es) (1) engage in government relation-building activities? What roles does institution play? To address these questions, we draw on the perspectives of institution-based views of international business (Peng et al. 2008) and corporate political strategy (Hillman and Hitt 1999) to empirically examine (a) the regulatory uncertainties as antecedents to the engagement in government-relationship building in the context of a transition economy of China and the moderating effects of national institutional distance on such a relationship.
Government-relationship building represents the extent to which a foreign subsidiary engages itself in allocating its time and efforts to cultivate and develop relationships with various local governments and regulatory agencies (Peng 2000a). The emergent institution-based firm literature in transition economies (Child 1994; Luo and Tan 1999; Peng 1997; Peng 2000b; Peng et al. 2008) has increasingly recognized the government-relationship building as an essential strategic capability of firms in transition economies (Peng and Heath 1996) to improve organizational innovativeness (Luk et al. 2008) and firm performance (Peng and Luo 2000). However, the link between the specific institutional environment and the firm-level political endeavor remains underexplored (Rodriguez et al. 2006). A number of empirical studies have examined the determinants of the government-business relationship (Blumentritt and Nigh 2002; Hillman 2003; Hillman and Wan 2005; Meznar and Nigh 1995). (2) While these studies enriched our knowledge of the important role of government connections in firms' political strategy, they provided little explanation why FIEs in the first place develop government relationships in the context of emerging economy and whether such non-market endeavors equally benefit FIEs. With the exception of Luo's study (2001), a majority of the studies primarily confined their analyses to either U.S. firms in the American market (Meznar and Nigh 1995) or U.S. MNCs (Blumentritt 2003; Blumentritt and Nigh 2002; Hillman 2003; Hillman and Wan 2005). Moreover, the existing studies in the context of emerging markets "have barely scratched the surface of the impact of both formal and informal institutions on the strategies of foreign entrants" (Wright et al. 2005, p. 6). There is a lack of research on the institutional antecedents of post-entry political strategies (Rodriguez et al. 2006; Hillman and Wan 2005) and more research is needed to examine the antecedents and consequences of the corporate political strategy (Hillman et al. 2004).
To address the deficiencies, we integrate the emergent perspectives of the institution-based view of the IB strategy (Peng 2003; Peng et al. 2008; Peng and Heath 1996) and corporate political strategy (Hillman and Hitt 1999) to develop and test a set of hypotheses on the regulative-distance moderated relationship between regulatory uncertainty and government-relationship building and the differential performance implications of cultural origin. Acknowledging the multidimensional nature of institutions (Jackson and Deeg 2008), in this study we focus on two regulatory uncertainties--regulatory complexity and enforcement uncertainty--because these prominent attributes represent unpredictable turbulences (Peng 2001) and regulatory interferences (Luo 2002) that lead to poor investment protection and governance (La Porta et al. 2000) and determine the business success and failure in a transition economy (Roland and Verdier 2003). Hypotheses addressing regulatory uncertainties and institutional distance factors suggested by institutional arguments are tested using a data set that combines archival reports for the national institutional environment with primary data obtained through the survey of 424 FIEs in China. The theoretical perspectives and empirical analyses help augment the existing knowledge by answering recent calls for incorporating various institutional settings towards a better understanding of political strategies of MNCs (Eden and Lenway 2001; Blumentritt and Nigh 2002; Hillman 2005; Rodriguez et al. 2006) and for more attention to institutional contingency in investigating multinational enterprises in emerging economies (Meyer 2004).
China is the empirical setting for three reasons. First, after more than three decades of reform, the fundamental institutional changes and experiments have altered the competitive environment for firm operating in China (Keister 2002; Naughton 2007). However, the uncertain institutional environment still remains a key challenge to foreign-invested firms. For instance, based on a recent survey of 434 member firms, The American Chamber of Commerce in China identified enforcing contracts, unclear laws and regulations, and inconsistent regulatory interpretation among the top-five challenges (Business Climate Survey, American Chamber of Commerce 2011). Thus, examining how FIEs respond and cope with these dynamic and uncertain regulatory variations in a transition economy like China increases our knowledge in strategic research (Child 2000). Second, like other emerging economies with direct government interventions in various aspects of business operations (Hoskisson et al. 2000; Peng 2000a), governments still continue exercising extensively the distributive power over resources through tax policies, land exploitation laws, and labor market regulations (Li et al. 2008). Because the Chinese laws ban political lobbying, FIEs are deprived of this venue to directly participate and influence the government regulators by legal means. Thus, this unique institutional landscape offers a challenging opportunity to scrutinize, refine, and test the existing management theories (Peng et al. 2001) and necessitates the need to examine why and whether FIEs use government-relationship-building as a political strategy. Finally, given that overall governments in emerging economies remain a key resource provider that firms rely on (Schipke 2001) and the institutions are less developed (Khanna and Palepu 1997, 2006), our study setting is particularly germane to future research beyond China to include other emerging economies. Theoretically, research findings in China can be corroborated in the context of other emerging economies to increase the validity of the propositions of this study and to add important new insights.
Theoretical Background and Hypotheses
We propose that a firm's post-entry political strategy is vital, because regulatory hazards can consequentially undermine the value of already invested assets that are costly to be redeployed. As a regulatory environment constitutes the primacy of exogenous forces shaping corporate strategies (Shaffer 1995), FIEs in a transition economy engage in government-relationship building as a strategic action to mitigate the potential negative impacts of the institutional environment in order to achieve better performance. As a relationship-based strategy, government-relationship building offers firms benefits such as navigating bureaucracy, accessing government-controlled critical resources, and enjoying tax reductions (Thun 2006). However, the extent to which a FIE engages in developing the relationship with host government depends on the regulatory conditions.
Foreign subsidiaries are embedded in an institutional environment that presents a reality consisting of the totality of physical, social characteristics and artifacts (Milliken 1987). As Rugman and Verbeke (1998) proposed that institutional reality drives the interactions between government and business, decision-makers' perceptual differences in regulatory uncertainties can result in distinct managerial actions (Weick 1979) by FIEs to formulate post-entry non-market strategies (Baron 1995) to actively influence the policymaking of the host government. This proposition is underpinned by the logics of institutional and corporate political strategy perspectives. According to the institution-based view of IB, institutions provide a context that adds to the explanations of the competitions among industries and firms (Peng 2004; Peng et al. 2008). In a transition economy, the "fundamental and comprehensive changes introduced to the formal and informal rules of the game affect organizations as players" (Peng 2003, p. 275) and "state-building" of market reform inevitably results in inextricably intertwined interactions between markets and state (Fligstein 1996) that defines the rules of the game that promote certain types of behavior and restricts others through "explicit regulative processes: Rule-setting, monitoring, and sanctioning activities" (Scott 2001, p. 35). The various levels of government, as key providers of resources and rules/regulations in the social and...
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