Academic journal article Management International Review

Diverse Institutional Environments and Product Innovation of Emerging Market Firms

Academic journal article Management International Review

Diverse Institutional Environments and Product Innovation of Emerging Market Firms

Article excerpt

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. …

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