Strategic Responses to Institutional Voids (Rationalization, Aggression, and Defensiveness): Institutional Complementarity and Why the Home Country Matters.

Date01 Octubre 2021
AuthorLuiz, John M.

1 Introduction

The global economy has experienced substantial shifts in terms of economic output and trade flows, with the growing importance of emerging markets and the declining share of advanced economies (Liedong et al., 2020). Whilst we have seen a mounting literature on emerging markets, this has been limited in terms of geographical coverage, and Fainshmidt et al. (2018) argue that there are a large group of understudied economies within the developing world that have diverse and unique institutional environments. They lament that with the growth of developing economies, research has not kept pace with understanding institutional contexts for vast parts of the world. We respond to this by focusing here on examining the institutional environment in two understudied countries with fragmented institutional systems and fragile states, to use their terminology, and examine how such contexts affects the strategic responses of firms. This will be of increasing importance to international business studies in the future as more such countries become investment targets.

Emerging and developing markets are often presented as being beset by institutional voids (Gao et al., 2017). It is argued that in the presence of these voids the environment of business may become turbulent, costly, and unpredictable, making it difficult to plan, manage transaction costs, and create stable long-term strategies for profitability (Khanna & Palepu, 2010). Faced with conditions of sustained institutional voids, firms, particularly foreign multinational enterprises (MNEs), may end up fleeing the host country to seek more stable environments (Barnard & Luiz, 2018; Cuervo-Cazurra et al., 2018a, b; Holburn & Zelner, 2010). Those that remain face higher transaction costs associated with these voids and the lack of predictability and security of investment means that they have to develop mitigating strategies and unique capabilities to succeed in these settings. Firms therefore have a range of possible responses to host country institutional voids and we ask whether those responses may be affected by the institutional environment of their home country by building on prior literature on the effects of a firm's home country on internationalization (Cazurra et al., 2018b; Garcia-Canal & Guillen, 2008; Hoskisson et al., 2013).

Gao et al. (2017, p. 2148) argue that 'institutions are more than just background conditions' and that they directly impact the strategic responses available to firms. They state that 'firms can achieve and sustain competitive advantage through strategies that overcome, shape, and capitalize on the nature of the institutional environments'. Extant research in international business explores the relationship between institutional voids and firm outcomes as well as how they affect the motives for, timing of, and selected entry modes (Aguilera & Gr0gaard, 2019; Kostova et al., 2019; Meyer et al., 2009).

Our approach is narrower and focuses on firms that operate in environments of institutional voids and seeks to understand how their strategic responses to these voids are affected by their home countries' institutional contexts. It adopts an exploratory, qualitative methods approach in two African countries which are characterized by such voids (as per Khanna & Palepu, 2010), namely the Democratic Republic of the Congo (DRC) and Zimbabwe.

We provide additional insights into three strands of research. Firstly, the impact of institutional voids on firms' behavior in emerging markets (Khanna & Palepu, 2010; Wang et al., 2020) and we extend this towards less developed markets by demonstrating the diverse responses of firms to such voids and we provide some explanation for why these responses may vary. Secondly, the literature on the effects of a firm's home country on internationalization (Geleilate et al., 2016; Hoskisson et al., 2013; Luo & Wang, 2012). Cuervo-Cazurra et al. (2018b, p. 593) state that surprisingly '[M]any of the current theories and models of the multinational have paid limited attention to the influence of the multinational's home country'. Likewise, Adomako et al. (2020) lament the lack of consideration given to the critical role of home countries' institutional environments in driving international expansion and they focus on how it influences and moderates the relationship between perceived environmental uncertainty and the patterns of internationalization. We highlight how the home country may influence the strategic responses of firms to institutional voids in particular. Lastly, we contribute towards the study of firms in underdeveloped countries, particularly in Africa, which remains underresearched (Boso et al., 2019; Chen et al., 2017; Mol et al, 2017). Not only do we need to have a better sense of how existing research translates into institutionally voided, low income regions which may feature more prominently in the future as they develop further, but also by focusing on more extreme institutional settings we follow the advice of Barnard et al. (2017) about the value of theorizing from extreme conditions.

The paper is structured as follows. We proceed by reviewing the theoretical arguments around the impact of institutional voids on the strategic responses of firms and why the home country institutional context may matter in this regard. This is followed by an overview of the research methodology. The results and discussion follow. We conclude by discussing the theoretical and practical implications of our study, the limitations, and areas for future research.

2 Theoretical Background

2.1 Institutional Voids in Emerging and Developing Markets (1)

Institutions are the collective rules, laws, regulations, norms and conventions or rules of the game that underpin the economic environment (North, 1990). The inherent differences in the nature of institutional arrangements from one country to the other has an influence on the level of economic activity and can present both opportunities and constraints for doing business there (Adomako et al., 2019; Cuervo-Cazurra et al., 2019; Liu & Li, 2019). Within international business research, the role of institutional context is pivotal to understanding firm behavior and success. Furthermore, because of the increasing focus on emerging and developing markets and the prevalence of voids in many such economies it is all the more important to comprehend their impact.

Khanna and Palepu (2010) describe institutional voids as missing or inefficient market-supporting institutions necessary to complete transactions in an economy. They equate emerging markets as 'transactional arenas' where these structural deficiencies dominate and argue that the preponderance of these are located in developing countries. These countries are often beset by weak national governance structures, inefficient judiciaries, a lack of independent checks and balances, ineffective regulatory systems, poor infrastructure, and significant information asymmetries which complicate contracting and exchange (Gao et al., 2017). These voids 'hamper market interactions, increase transaction costs, cause economic inefficiency (Khanna & Palepu, 1997) and subsequently shape firms' resource commitments in foreign markets' (Liedong et al., 2020, p. 1).

Literature on institutional voids has focused on various aspects including the difficulties and the costs that doing business in these environments entails (Garrone et al., 2019; Liedong & Frynas, 2018), on how such voids can be overcome or addressed (Saka-Helmhout, 2020), the impact on resource commitments by MNEs (Liedong et al., 2020), on its impact on risk (Han et al, 2018), and from a strategy perspective the interplay between market and nonmarket strategies (Henisz & Zelner, 2012; Rodgers et al., 2019; White et al., 2018; Yasuda & Mitsuhashi, 2017).

As emerging and developing markets increasingly gain in importance within the international business arena, both as markets and as producers, so it is becoming all the more important to comprehend the effects of institutional voids on firms' behavior. Such institutional environments can still sustain economic activity, depending on the strategies that both local and multinational companies in these contexts adopt, but at a cost. Scholars have suggested that firms operating in institutional voids can find ways to either fill in or abuse existing voids (Doh et al., 2017), or accommodate or circumvent institutional constraints (Cantwell et al., 2010; Dunning & Lundan, 2010).

How firms respond to specific institutional voids may differ in terms of their strategies and such systemic variations may stem from differences in resources or knowledge and such capabilities may not be transferable across geographies (Doh et al., 2017). Under extreme conditions of institutional voids, strategies may become less effective and firms' survival necessitate developing sensitivity to the signals and evolving rapidly, even while attempting to influence the institutional context (Feinberg et al., 2015). This points to the importance of firms actively engaging with local institutional conditions and proactively developing strategic responses to succeed in these contexts. We ask whether systematic variations in these responses to institutional voids are affected by the institutional environment of firms' home countries?

2.2 Strategic Responses of Firms to Institutional Voids: Why the Home Country Matters

Institutional theory has been criticized for its assumptions of organizational passivity and its neglect of the strategic behavior and influence that organizations have on institutional development (Ma et al., 2016). Oliver (1991, p. 173) illustrates that institutional frameworks can readily 'accommodate a variety of strategic responses to the institutional environment when the degree of choice and activeness that organizations exhibit in response to institutional constraints and expectations is not assumed to be...

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