Academic journal article Development and Society

Foreign Entry Strategies: Strategic Adaptation to Various Facets of the Institutional Environments

Academic journal article Development and Society

Foreign Entry Strategies: Strategic Adaptation to Various Facets of the Institutional Environments

Article excerpt

A comprehensive model of foreign entry strategies by multinational enterprises (MNEs) is developed in this paper, and a theory is proposed on how the entry strategy is likely to be determined in the interface between internal and external pressures for both conformity and legitimacy. In contrast to a selection rationale, an adaptation argument is developed, through which we enhance our understanding of the various facets of the institutional environment and the constraints MNEs encounter in their internationalization strategies.

Keywords: Foreign Entry Strategies, Adaptation, Multinational Firms, Institutional Environments.

Introduction

Despite abundant research on entry strategies in International Business (IB) studies, scholars have paid scant attention to the social context within which entry strategies into foreign markets are embedded (Granovetter, 1985). In fact, few studies have contrasted economic and social explanations for choices on entry mode strategy. It is unclear, for example, how different entry mode strategies reflect internal, inter-firm and external environment pressures. It is accepted, however, that the models of interaction between firms and their institutional environments determine the firms' adjustment to external constraints and may promote the firms' survival, even if the external environments are unknown and cannot be accurately predicted. In the case of multinational enterprises (MNEs), the difficulties are heightened because MNEs are exposed to multiple and distinctly complex foreign business environments (Guisinger, 2001). Guisinger (2000), for example, suggests that the essence of International Business (IB) is the adaptations that firms must undertake when they face unfamiliar, unstable and complex surroundings in foreign countries. But how do MNEs adapt? To adapt, survive and grow, MNEs need to respond effectively to internal institutional pressures as well as to the demands imposed by external environments (DiMaggio and Powell, 1983; Kostova and Roth, 2002; Scott, 2003). Hence, each subsidiary must strategically adapt to the various dimensions of the host country's institutional environments (e.g., regulatory, legal, economic, technological and cultural environments), to the patterns of inter-firm interaction (e.g., industry associations and networks, industry regulations, laws, standards and norms) as well as to MNEs' internal norms. Oliver notes as follows (1997: 697).

Firm's institutional environment includes its internal culture as well as broader influences from the state, society and inter-firm relations that define socially acceptable economic behavior.

An assessment is made of the impact of the internal and external facets of the institutional environments of MNEs on the selection of foreign entry strategies (see also Davis, Desai, and Francis, 2000). Recent research suggesting that firms make choices influenced by their environments will be followed (see also D'Aunno, Sutton, and Price, 1991), including other firms operating in the same industry or in the same host market; firms then formulate a strategic response to their environmental conditions (Oliver, 1991). When analyzing external institutional pressures, two contexts - i.e., home and host countries, and inter-firm interfaces - are distinguished. External institutional pressures include regulatory structures, governmental agencies, laws, courts, professions, interest groups, public opinion, culture and economy (Scott, 2003). Each new subsidiary's set of rules, procedures, practices, norms, values and structures require legitimacy in light of the host country's institutional environment. Interfirm interfaces represent practices of rivalry and imitation whereby firms choose to follow strategies implemented by other firms.

Internal institutional pressures applied to the analysis of MNEs' subsidiaries refer to conformity pressures from headquarters and other subsidiaries. For example, the structure and internal processes of a new subsidiary need to adapt, or already be similar, to those of other subsidiaries of the same parent MNE in order for the new subsidiary to be considered a complete member of the corporation. …

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