The influence of formal institutions on the internationalization of companies in an emerging country.
| Autor | Monticelli, Jefferson Marlon |
| Cargo | Texto en ingles - Ensayo |
1 Introduction
Firms in emerging economies are committed to internationalize processes as a mean of protecting themselves from the turmoil existing in their domestic markets. According to Fleury and Fleury (2011), Brazilian firms have been late to internationalize because of the country's physical size (which provides them with a large domestic market), because of a lack of government incentives, and because of the protectionist measures that isolated the domestic market up to the 1990s. The local government is encouraging Brazilian firms to operate abroad, thereby changing the dynamics of business. In turn, the strength of the domestic market discourages some firms from diversifying their operations, since operating in unfamiliar environments imposes greater costs and risks (Rocha, Silva, & Carneiro, 2007).
Institutional theory has been used to complement the industry-based view and resource-based view--and has come to be known as an institution-based view (Gao, Murray, Kotabe, & Lu, 2010; Peng, 2002; Peng & Khoury, 2008). This perspective has focused on understanding how institutional mechanisms function and what influence they have on the strategy and performance of firms. However, few studies conducted within the internationalization agenda have focused on aspects of the institutional environment in the country of origin. This is particularly true about research investigating emerging economies and the firms based in them. Research interest in institutional environments has tended to concentrate on how host country's factors influence direct foreign investment and entry mode decisions.
In emerging economies, the relationships between firms and institutions normally involve considerable information asymmetries and high transaction costs, and product diversification is encouraged in order to minimize risks. In developed countries, the opposite characteristics prevail, encouraging firms to narrow their product lines, which in turn leads them to base their sources of competitiveness on efficient production or economies of scope (Meyer & Peng, 2005).
From a theoretical perspective, this article seeks to understand the influence that formal institutions exert on the internationalization processes of firms from emerging economies. This study is an attempt to answer the following research question: How do formal institutions influence internationalization of firms from emerging economies? In order to answer it, we draw support from neo- institutionalist theory, the institution-based view, and theories of internationalization. The empirical field of study is the Brazilian wine industry, specifically wineries located in the country's Southern region, which is the largest wine producer and exporter out of Brazil's five administrative regions. This industry is suitable for this study due to its location, because it has many different firms of varying sizes and degrees of experience, and because it enjoys formal institutional support for seeking out foreign markets.
2 Literature review
Neo-institutionalism argues that political and social environments are organized through institutions and attempts to explain the impact of the structures they establish on the behavior and economic performance of organizations (Hoskisson, Eden, Lau, & Wright, 2000; North, 1990). In an economic context, the influence of institutions has the effect of encouraging firms to redefine their strategies. Institutions have evolved as a response to imperfections in the functioning of economic structures in markets (North, 1990).
2.1 Institutionalization and institutions
Organizational institutionalism focuses on institutions and processes, primarily at the organizational level. It inserts organizations into a different context to enable the analysis of their interactions with internal and external environments, striving to ensure their continuity in the midst of contextual pressures and, therefore, situates the analysis within the resulting organizational model (Greenwood, Oliver, Suddaby, & Sahlin, 2008).
Scott (2001) puts greater emphasis on the limitations or demands that the institutional environment imposes on organizations attempting to ensure their own survival, whether imposed through regulatory, normative, or cognitive-cultural elements. He also describes the institutional environment as the set of rules and requirements that organizations must abide by to obtain the expected support and legitimacy from the environment in which they operate.
The more stringent the rule is, the greater its impact on society; the weaker it is, the greater the flexibility and, therefore, the less influence it has to change social structures (Hollingsworth, 2000). Seen from this perspective, the institutionalization process becomes highly dynamic and recursive rather than static (Machado-da-Silva, Fonseca, & Crubellate, 2005). Therefore, in our view institutions are more restrictive than inclusive. They impose control, limits, and rules upon individuals and organizations. Those who do not seek to comply with the dictates of institutions cease to be legitimate and are therefore excluded from the game, since they are not willing to play by the rules of the house.
2.2 Institution-based view
Since institutions are seen as independent variables, the institution-based view focuses on the dynamic interaction between institutions and organizations, taking into account the strategic choices made as a result of this relationship (Peng, Wang, & Jiang, 2009). According to these studies, a firm embedded in a particular institutional environment will seek to optimize its performance according to the context in which it operates (Peng & Luo, 2000).
Emerging economies have been defined in terms of their fast growth and pro-market reforms, as environments in which industries have undergone and are continuing to undergo dramatic structural changes (Luo & Tung, 2007), and as settings in which markets face institutional deficiencies (Roth & Kostova, 2003) or institutional voids (Khanna & Palepu, 2010). Firms from emerging economies use internationalization to gain competitive advantage in foreign and domestic markets through developing and acquiring new capabilities or exploiting their ownership-specific advantages (Gaur, Kumar, & Singh, 2014). However, emerging economies cannot be generalized, because they include a diverse population of countries. The central and local governments of emerging economies are larger and more active than those of developed economies (Gammeltoft, Barnard, & Madhok, 2010; Peng, Sun, Pinkham, & Chen, 2008). Institutions are decisive in the private sector, regarding protection of property rights, capital market transactions, and laws that reduce uncertainty and promote development (Banerjee, Banerji, Duflo, Glennerster, & Khemani, 2006).
In the context of internationalization, institutions are formal structures responsible for guiding or curtailing the choices of agents with regard to the promotion of their international insertion, and these structures can act in a positive, negative or even indifferent manner.
2.3 Internationalization strategies from the perspective of the neo-institutional theory
Neo-institutional theory suggests that an organization's structure and actions are affected by its social environment. This approach has been used in studies about emerging economies, but the term "institutions" has become ubiquitous (Rottig, 2016). The institutional context has three domains--the regulatory (coercive pressures), the normative (normative pressures), and the cognitive (mimetic pressures) (Scott, 2001)--and their impact on firms' entry modes can be detected (Arslan, 2012). However, the regulatory environment stands out from the others due to the legal system, governance, and level of transparency of the institutions in foreign countries targeted for internationalization efforts (Kostova & Zaheer, 1999; Scott, 2001). It is important to point out that there are three types of institutional isomorphism that can shape firm behavior: (i) mimetic isomorphism--based on imitation of structural arrangements and successful procedures; (ii) coercive isomorphism--in response to political impositions, legal rules, and state regulations; and (iii) normative isomorphism--the result of influences from professional elements exerted through cognitive construction and consolidation involving a set of norms and work methods shared by the members of professions (DiMaggio & Powell, 1983; Scott, 2001).
Firms immersed in the internationalization process are constantly involved with institutional systems and subject to the influence of different levels of institutions, but within a dynamic, fragmented, non-linear, and multidimensional environment. Furthermore, given the important role played by firms in the context of internationalization, they rise above the deterministic vision of institutional accommodation, by building, manipulating and negotiating their own institutional environment (Kostova, Roth, & Dalcin, 2008).
The institutional context influences performance due to organizational capabilities and entry modes into foreign markets. Rigid institutional structures may restrict firms' choices of entry mode (Brouthers, 2002). Wang, Hong, Kafouros and Wright (2012) contend that the effect of government action on the internationalization process of firms varies depending on their resources and capabilities, since different firms have different abilities to internalize the benefits arising from institutional forces. From the perspective of organizational competences, Fleury and Fleury (2011) argue that the sociopolitical and cultural dimensions shape management styles along with the country-specific factors. Thus, different firms may operate within very similar institutional structures, but, depending on the management characteristics of each one, the results of the institutional influence may vary (Mudambi & Navarra, 2002).
In summary, formal...
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