The Effect of Institutional Capabilities on E-Business Firms' International Performance.

VerfasserJean, Ruey-Jer 'Bryan'

1 Introduction

E-business companies operate online and provide products/services/platforms to customers using the Internet (Amit and Zott 2001). (1) Examples of e-business companies include on-line markets/platforms makers, on-line portals, and online product/service providers (Mahadevan 2000). E-business companies create values using business models that differ from those of traditional manufacturing firms, and play an increasingly important role, not only in the developed world but also in emerging markets. According to research from Accenture and Ali-research (2015), China will become the world's largest business-to-consumer (B2C) e-commerce market by 2020. In addition, e-business internationalised rapidly given the cross-border interconnectedness of the Internet. E-commerce giants such as Alibaba started cross-border e-commerce operations in the last decade. Forrester Research forecasts that worldwide B2C cross-border e-commerce will reach $424 billion by 2021, making up 15% of all online commerce. However, cross-border e-commerce is difficult and subject to the liabilities of foreignness and newness. A case in point is Uber, which recently suffered significant losses in China due to fierce local competition and significant institutional challenges (Salomon 2016). Hence, understanding how e-business can succeed in international markets is a critical issue for management scholars and practitioners in the modern economy.

Despite the growing trend of e-business internationalisation, academic research on this area is sparse. Few academic studies examine this phenomenon. For example, Brouthers et al. (2016) investigate the key success factors of German e-business internationalisation. Luo et al. (2005) examine the drivers of the internationalisation speed of US e-business. While this recent line of work improved our understanding of e-business internationalisation, the empirical evidence is based on developed countries such as Europe and the US. Despite the increasingly active internationalisation of emerging market-based e-business firms, few works study their performance. Further, the unique business model of e-business, which quickly connects different ecosystem partners such as customers and suppliers through digital platforms or networks, means that their internationalisation approach may differ significantly from those of traditional manufacturing multinational enterprises (MNEs). Boston Consulting Groups' recent report shows that e-business offers a new business model and services that can break through trade barriers and financial resource constraints. Gabrielsson and Pelkonen (2008) find that internet and media service firms can internationalise rapidly to more distant countries. Brouthers et al. (2016) argues that e-business firms may face a lower liability of foreignness, such as risks in making significant investment in foreign markets than do manufacturing MNEs. However, little is known about the unique capabilities of emerging market e-business firms and how these capabilities can drive their success in international markets. Further, service firms have increasing expanded into international markets (Merchant and Gaur 2008). However, previous work shows that success of service firms' internationalization requires unique capabilities and strategies compared with manufacturing firms (Kundu and Lahiri 2015). However, little work has examined how the effect of unique capabilities of service firms from emerging markets affect international performance.

To address these gaps, this study develops and tests a theoretical framework of the drivers of international performance for emerging market e-business firms. Specifically, we focus on the role of institutional capabilities in shaping emerging market e-business firms' international performance. Institutional capabilities are a firm's knowledge, relationships, and skills that enable the firm to succeed in an environment characterised by the absence or underdevelopment of market-supporting institutions (Khanna and Palepu 1997). The notion of resources and capabilities as a firm's competitive advantage is the focus of the resource-based view (RBV) of the firm (Barney 1991). However, previous work on the RBV in international business largely ignores how firms can develop special institutional capabilities through interactions with their home market institutional environment. The institutional environment is the central notion of institutional theory (Khanna and Palepu 2013; Peng et al. 2008; Scott 1995), which argues that different institutional environments, including the regulatory, normative, and cognitive environment, may shape a firms' strategy and success. However, few studies developed from institutional theory discuss how firms create this type of institutional advantage and why they differ in their ability to do so (Landau et al. 2016).

Integrating the RBV and institutional theory, institutional capabilities are important resources that serve as a firm's source of competitive advantage in emerging economies, given that emerging economies have substantial institutional voids (Barney 1991). Firms develop institutional capabilities in response to the weak institutional frameworks at home and the significance of institutional capabilities to firms' performance at home is well understood; however, it is not clear whether such capabilities also matter for e-commerce firms' performance abroad. A recent case study of a family multinational firm from Indonesia (Carney et al. 2016) reports that the institutional capabilities of political networking, relationship contracts, and business model innovation can be successfully transferred abroad. Borrowing from this insight, the current study investigates the effect of institutional capabilities on e-business's international performance. We develop and test theoretically grounded arguments on whether institutional capabilities improve e-business firms' performance in foreign markets. In addition, like other resources and capabilities, institutional capabilities may lose some value when applied abroad (Cuervo-Cazurra et al. 2007). We examine several boundary conditions, including reputation, domestic institutional hostility, and institutional difference on the effect of institutional capabilities on international performance for Chinese e-business firms. Figure 1 illustrates our proposed conceptual framework.

The empirical context of this study is e-business firms in China. Chinese e-business firms offer an excellent setting for this study for several reasons: (1) China is the world's largest and fastest growing e-commerce market (Wang et al. 2016). Further, cross-border e-commerce is rapidly growing in China. Based on a recent report, China is projected to become the world's largest cross-border e-commerce market by 2020. (2) China is the largest emerging market globally. Its unique institutional environment and consumer readiness for new technologies led to the development of many new e-commerce business models (Wang et al. 2016). In particular, Chinese e-business firms have to develop capabilities to cope with the significant institutional voids in China. For example, Alipay, the largest online credit and payment e-commerce company in China, provides a third-party certification service and serves to enhance credibility, which helps mitigate financial fraud in business transactions. (3) Chinese e-business firms actively internationalised their services and ecosystems abroad. For example, Alipay and WeChat expanded to many international markets, such as the US and Asian countries in recent years. Hence, Chinese e-business firms provide a good opportunity to examine how emerging market firms' institutional capabilities will shape their international performance.

This study offers several contributions. First, we investigate the effect of institutional capabilities on e-business firms' international performance in the Chinese context. Hence, this study provides a theory-grounded framework to investigate the internationalisation of e-business from emerging markets. Specifically, this research contributes to the emerging literature on institutional capabilities and how firms can transfer these capabilities across borders (Carney et al. 2016; Landau et al. 2016). Most studies on institutional capabilities are conceptualised or based on a single case study and lack large-scale empirical evidence (Carney et al. 2016; Landau et al. 2016). In addition, we examine different moderating effects on the relationship between institutional capabilities and international performance. Hence, this study responds to the call for more research on the boundary conditions of how institutional capabilities transfer across national boundaries (Carney et al. 2016). Furthermore, our study advances the research on the internationalisation of service firms by focusing on an emerging industry, e-business. Previous empirical evidence on service internationalisation focus mainly on industries such as banking and retailing (Merchant and Gaur 2008; Pla-Barber and Ghauri 2012). Advanced Internet technology offers abundant opportunities for firms engaging in e-business to create new services. Despite the increasing importance of e-business in service industries, few studies examine the strategy implications using this unique context (Hazarbassanova 2016). Our study addresses this gap by offering theoretically grounded empirical evidence based on Chinese e-business firms.

2 Theory and Hypotheses

2.1 Institutional Capabilities and Their Value in Emerging Markets

International business scholars suggest that institutions are an important variable that explains firm behaviours and performance in emerging markets with weak institutional frameworks (Khanna and Palepu 2013; Meyer et al. 2009). Institutions are "the humanly devised constraints that structure political, economic and social interaction" (North 1991, p. 87). Specifically...

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