Unbalanced Institutions in Market Transition: How Do They Matter for Firm Strategic Choices and Performance in Emerging Economies?

By Liu, Weiping; Li, Jiatao | Management International Review, October 2019 | Go to article overview

Unbalanced Institutions in Market Transition: How Do They Matter for Firm Strategic Choices and Performance in Emerging Economies?


Liu, Weiping, Li, Jiatao, Management International Review


1 Introduction

Institutions are the humanly devised rules and constraints that structure human interactions (North 1990), and they include both formal rules and informal constraints. Institutions, including the economic and legal dimensions, establish norms, rules, and procedures for economic and social activities, and constitute a society's basis for production, exchange, and distribution (North 1990). Following prior literature, we define economic institutions as the structural arrangements through which a society produces, distributes, and consumes goods and services (Khanna and Palepu 2000). Economic institutions generally involve market intermediaries (Khanna and Palepu 1997; North 1990) and supporting infrastructures (Porter 1990). They provide needed infrastructure and systems to allow for business activity and exchange, and influence production and transactions by shaping resource availability and access to opportunities within a region (Khanna and Palepu 1997, 2000; North 1990). We define legal institutions as the existence of laws, regulations, and written rules that define the 'rules of the game' of market competition (Acemoglu and Johnson 2005; Acemoglu et al. 2005). They constitute and define an established order within which businesses operate (North 1990) and set constraints on practices that considered unfair or socially harmful.

The institutional transition process under way in many emerging economies has attracted the attention of scholars in a wide range of disciplines, including economics, sociology, international business, and business strategy (Boisot and Child 1996; Hoskisson et al. 2013; Li 2013; Nee 1992; Wright et al. 2005). Emerging economies are defined here as those undergoing institutional transition towards a market-based system, a process which normally involves building various market-supporting institutions (Hoskisson et al. 2000). The institutional transition normally involves "fundamental and comprehensive changes introduced to the formal and informal rules of the game that affect organizations as players" (Peng 2003, p. 275). Business scholars have developed an institution-based view of firm strategy which emphasizes the dynamic interaction between institutions and firms, and considers strategic choices as a reflection of the prevailing economic, legal, and political systems (Peng 2003). According to the institution-based view, emerging economies often lack the stable institutional structure which facilitates economic exchange, and thus tend to suffer from high costs. Organizations pursue strategies that take advantage of opportunities while accommodating the constraints imposed by the underdeveloped institutions.

Such an institution-based perspective has been widely adopted by scholars in strategic management. Most of them adopt a simple dichotomy that divides the world into emerging and developed economies, and emphasize the underdeveloped nature of institutions in emerging economies, such as deficient capital market structures, poor legal infrastructure, weak property rights protection, or high institutional uncertainty. More recently, Hoskisson et al. (2013) go beyond the simple dichotomy to consider firms in mid-range economies, i.e., economies that are positioned between traditional emerging economies and those considered fully-developed. These economies have more developed market infrastructures, but their development is often unbalanced.

Institutional transition is a dynamic process in which different institutions develop in different ways at different speeds. As a result, institutional transitions in different economies may manifest diverse patterns which may have different impacts on firms (Jackson and Deeg 2008; Lundan and Li 2019). When the multiple dimensions of institutions transit simultaneously, they could interweave, support, and reinforce each other. Better synchrony promotes their reaching some sort of equilibrium, which in turn facilitates development (Hall and Soskice 2001) and economic performance (Yang et al. …

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