Managing institutional environment in emerging economy : longitudinal investigation of foreign firms in China

Abstract

Emerging economies are considered as the business arena providing major growth opportunities for multinational corporations (MNCs). However, the institutional environment characterized by pervasive institutional voids and fundamental market-oriented institutional transitions, has posed great challenges for MNCs entering and operating in emerging economies. Despite the growing research attentions given to the shaping effects of institutional factors on firms’ strategic choices and performance, most of the previous studies take an independent and static view of institutional effects. The independent view assumes away the interactive effects among different institutional factors, while the static view neglects the dynamic complexities raised by promarket reforms undergoing in emerging economy. The goal of this thesis is to narrow these research gaps and thereby gain better understandings of how MNCs can strategically manage the challenging institutional environment in emerging economy. Two studies in this thesis address each research gap respectively. Taking an interactive view, the first study emphasizes the multifaceted nature of institutional environments and examines how multiple institutional dimensions distinctively and interactively shape MNCs’ ownership choices. While previous studies have identified a variety of firm-level strategies that can substitute for absent and inefficient institutions (e.g. business groups, family control, reputation, relational networks), this study adds to the literature by suggesting that, within a multifaceted institution system, voids generated by some dysfunctional institutional aspects can be compensated by other sets of institutions. Empirical analyses corroborate this argument and provide supportive evidence to the interactive institution-based view proposed in this study. Taking a dynamic view, the second study examines how market-oriented institutional transitions undergoing in emerging economy influence the performance of MNCs’ foreign subsidiaries in this context. Despite the growing research interests in institutional transitions in emerging economy, existing studies predominantly focus on the extent and outcome of institutional changes while largely neglect the process heterogeneities. Drawing on the environment variability literature, this study identifies three key dimensions of institutional dynamism (i.e. the speed, unpredictability, and un-synchronization of institutional changes), and examine their performance implications on foreign-invested firms. Empirical analyses based on a large sample of foreign firms across ten years show that foreign firms suffer financially when the market-oriented institutional transition in the focal region has a low speed, high level of unpredictability and high level of un-synchronization. To deter these negative effects, the study further examines the buffering effects of three firm-level contingencies. Specifically, the results reveal that partnering with state-owned enterprises and accumulating local experiences can significantly attenuate the negative effects from the slowness of promarket reforms, while reducing foreign ownership level is the proper strategy to deter the negative effects from the un-synchronization of institutional changes. Overall, this thesis contributes to the current literature by developing an interactive and dynamic institution-based view, and it provides practical guidance for MNCs on strategically managing the institutional environment in emerging economy.