Diverse institutional environments and product innovation of emerging market firms.
| Verfasser | Wu, Jie |
| Posten | RESEARCH ARTICLE |
Abstract
* This study unbundled institutional environment into two distinct aspects: institutional distance (the degree of dissimilarity between the institutional environment of a firm's home country and an economy into which it expands) and institutional diversity (the variety of all the institutional environments to which a firm is exposed), and related them to product innovation performance of emerging market firms.
* Data on 917 Chinese manufacturing firms in multiple industries over 3 years was analyzed.
* The results show a positive relationship between institutional distance and product innovation success. An inverted U-shaped relationship was found between the institutional diversity of a firm's foreign markets and its product innovation success.
Keywords: Institutional environments * Institutional distance * Institutional diversity * Product innovation * Emerging markets * China
Introduction
In an increasingly knowledge-based economy, understanding the factors that determine an organization's ability to produce new ideas and continually innovate is a fundamental issue for strategic management and international business scholars (Sorensen and Stuart 2000). Innovation occupies a central position among all organizational outputs, not only because it is a primary way in which firms compete and grow, but also because it profoundly influences social and economic evolution (Eisenhardt and Tabrizi 1995; Sorensen and Stuart 2000). This study focused on two key aspects of the institutional environment in which firms innovate--institutional distance and institutional diversity--and examined their different impacts on innovation. In so doing it addressed an important unresolved issue in international business and strategic management--the nature of the relationship between the institutional environment and a firm's innovation performance.
International business and strategy scholars have devoted sustained attention to the consequences of the institutional environment but have failed to reach consensus as to whether the institutional environment has negative or positive effects on organizational performance (Tsang and Yip 2007; Yang et al. 2012). Recent research on the international expansion of firms from emerging markets has led to the important insight that expansion into more developed countries presents an opportunity to access advanced technology and know-how and enables a firm to take advantage of a foreign country's institutions to promote organizational learning and innovation (Makino et al. 2002; Luo and Tung 2007). However, expanding into a foreign country that is institutionally distinct from the home country may also trigger "the conflicting demands of external legitimacy in the host country" (Xu and Shenkar 2002, p. 610). Thus it appears that the value of international expansion is conditioned by the level of institutional development in the foreign country relative to the home country (Makino et al. 2002). The higher the level of institutional development, the greater the probability that a foreign firm will gain access to advanced technologies and valuable resources. But the diversity of the new institutional environment may limit the benefits an entrant can harvest from international expansion (Kostova 1999). Moreover, the existing studies of foreign expansion have focused mainly on firms from developed markets. These studies have primarily examined how firms from a developed market expand to another developed market or to less developed markets, but no enough attention has been paid to how firms from emerging markets expand to more or less developed markets and their implications for organizational survival and outcomes (Luo and Tung 2007; Tsang and Yip 2007). In fact, almost no studies have explicitly examined how complex institutional environments affect innovation performance of emerging market firms.
This study is designed to fill these gaps by contributing to the literature in three areas. First, most previous studies have examined the effect of the institutional environment on the probability of organizational survival and on financial performance (e.g., Xu and Shenkar 2002; Gaur and Lu 2007), but this study instead examined the effect of the institutional environment on innovation performance. Second, differing from prior studies on this topic, this study conceptualized institutional environments as having two distinct aspects: institutional distance (the degree of dissimilarity of institutional environments between two countries) and institutional diversity (the variety of institutional environments in multiple foreign countries), and examined their different impacts on innovation performance. Such a distinction can help elucidate the roles of different elements of the institutional environment in promoting innovation and provide an empirical indicator of the effectiveness of knowledge flows using the different elements. Then, the study integrated the literature on new institutional economics, international diversification and international expansion of emerging market firms to derive testable propositions about the relationships between institutional distance, institutional diversity and innovation performance of emerging market firms. Evidence clarifying the relationship between the institutional environment and innovation performance of emerging market firms would be relevant for designing effective and efficient international expansion strategies by emerging market firms.
The empirical analyses were designed to test the impacts of institutional distance and diversity on innovation using a large sample of 917 Chinese manufacturing firms in various industries over a period of 3 years (1998-2000). It is likely that the impact of institutional distance and diversity on product innovation will differ from that on process innovation. This study was restricted to product innovation.
The next section will review prior academic work on diverse institutional environments, analyze it in terms of the two distinct elements, and discuss the differences between them. Building on this review and the theoretical framework being proposed, hypotheses relating institutional distance and institutional diversity to the product innovation success of emerging market firms will be developed separately. An empirical study designed to test the hypothesized relationships and its findings will then be described. The final section will discuss the implications of these findings for theory and practice and the limitations of this study will be used to outline an agenda for further research.
Background
Although international business scholars have long studied the relationship between the institutional environment and firm performance, most research in this tradition has focused on the institutional environment of a firm's home country (e.g., Kim et al. 2010; Porter 1990; Wan and Hoskisson 2003) or a host country (e.g., Berry 2006; Pantzalis 2001). However, a few pioneering studies have explored the institutional environment from the perspective of the institutional distance between a firm's home and the host country into which it has expanded (Kostova 1999; Xu and Shenkar 2002; Gaur and Lu 2007). Kostova (1999) explored country-, organization- and individual-level factors that affect transnational transfer of organizational practices and suggested that institutional distance between the home and host countries affects transfer success. Xu and Shenkar (2002) suggested that institutional distance is associated with firms' host country selections. They related institutional distance to entry mode and ownership mode and proposed that institutional distance may predict foreign market entry strategies. But they did not explore the possibility that institutional distance might influence innovation output. Gaur and Lu (2007) showed that institutional distance has an inverted U-shaped relationship with the survival rate of foreign subsidiaries, and ownership strategies positively moderate the relationship between institutional distance and the survival rate, but they too did not directly examine the impact of institutional distance on innovation.
Other studies have examined the complexity of the institutional environments in which firms are embedded and its strategic implications. Kostova and Zaheer (1999) have suggested that the complexity of the institutional environment is reflected in the institutional distance between the home and host countries and the variety of institutional environments encountered in multiple foreign countries. They posited that variety and inconsistency in the institutional environments a firm faces raises challenges when it needs to develop competence in dealing with them. While they did not directly examine the role of variety as a predictor of organizational outcomes, their work has important implications for modeling the relationship between institutional environments and firm performance. Recognizing the institutional distance between the home and host countries and the diversity of institutional environments across multiple foreign countries highlights the importance of decomposing the institutional environment into distinct elements and identifying their very different underlying causal mechanisms leading to innovation performance.
This study thus analyzed institutional environments in terms of two distinct elements: (1) the degree of dissimilarity in the institutional development between a foreign market and the home market (Kostova 1999) and (2) the variety in the institutional environments of multiple foreign markets to which a firm has expanded (Kostova and Zaheer 1999). The first is referred to here as institutional distance; the second is referred to as institutional diversity. The two concepts differ in several important ways. First of all, institutional distance focuses on the dyadic relationship between the home market and a particular foreign market to which the...
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