Role of Home Country Institutional Environment in International Strategy

Literature Review, 2013

19 Pages, Grade: 0.933


Table of Contents

1 Introduction

2 Definition of the Home Country Institutional Environment

3 Influence of Institutions on Firm Strategies

4 Differences of Instiutional Environment between Developed and Emerging Economies
4.1 Differences of Institutional Environment between Developed and Emerging Economies - Formal Institutions
4.1.1 Institutional Change
4.1.2 Collaboration
4.2 Differences of Institutional Environment between Developed and Emerging Economies – Informal Institutions

5 Influence of Institutions on the Entry Mode Choice in International Strategy

6 Conclusion

Reference List

1 Introduction

For firms it is crucial to analyze its strategy in order to improve and reflect the forthcoming strategy. The literature has dealt with many factors in the market in order to establish the best way to analyze a firms’ strategy. Nevertheless, a new field of study has become more important in the last years: the impact of home country institutions on firms’ strategies.

In order to define the role of home country institutional environment in international strategy, it is important to specify why firms start to internationalize. Hitt, Uhlenbruck, and Shimizu (2006, p. 1137) justify that a multinational enterprise (MNE) or multinational corporation (MNC) interacts in two or more countries want to enhance its economic of scale and scope, market power, knowledge enhancements, capabilities and innovations, and entrepreneurial opportunities.

To the purpose of a successful international performance, a firm needs to build up an international business. International Business Studies define this term as the “Business that crosses national borders, (and this includes the) interactions of business with the international environment” (Eden et al., 2011, p. 58). Overall, Eden et al. (2011) specify that international business incorporates the quests of resources, government structure, and interactions between all actors of the economic, sociocultural and political dimension. Therefore, this definition implicitly underscores that a MNE interacts with its whole environment in the home and host country, hence also with its institutional environment (p.58).

Moreover, in international business studies international strategy is the newest field of research besides the definitions of international business and international management. It is derived by Global Strategic Journals as the “assembly protection and application of unique resources and capabilities to gain sustained competitive advantage in the marketplace” (Eden et al., 2011, p. 60). This definition accentuates that the aim of a firm is to establish and defend a competitive advantage with the acquisition of useful resources. Consequently, resources are part of the internal environment of a firm and therefore, they are influenced by institutions, too.

However, Peng, Wang, and Jiang (2008) focus on the influence of institutions in the Journal of International Business Studies. They emphasized the importance of an “institution-based view”. Therefore, they argue that this point of view is a new field in International Business Studies besides the known studies of industry-based view and resource-based view. Prior to that, institutions were seen as “background conditions” because many researches were concerned with developed economies, for instance the United States, where the market-based institutional framework is relatively stable (Peng et. Al., 2008). But the development of emerging economies illustrates the enormous difference between institutional environments. Therefore, the institution-based view declines because researchers focuses more on emerging economies have an obvious different institutional environment. Consequently, this literature review contains the institutional environment of emerging economies.

Hence, this paper focuses on three parts of influence of institutions: First, it surveys the fields in which firms’ are influenced by its home country institutional environment.

Second, it illustrates the differences of institutional environment between emerging and developed economies.

Third, it prospects the impact of the home country institutional environment on international strategy, especially on the entry mode choice.

2 Definition of the Home Country Institutional Environment

All the literature that is concerned with institutions defines them as “the rules of the game” (Li & Yue, 2007, p.672) and “the humanly devised constraints that structure human interaction” (Chan, Isobe & Makino, 2008, p. 1181). Thus, institutions influence the overall action of individuals. With respect to a firms strategy, Meyer, Estrin, Bhaumik and Peng (2009) constitute that “institutions directly determine what arrows firm has in its quiver as it struggles to formulate and implement strategy and to create competitive advantage” (p.3). Hence, this definition emphasizes that the overall goal of a firm’s strategy is to establish and defend a competitive advantage. Consequently, it is obvious that the influence of institutions works in a chain of causation beginning with their impact on individuals who influence a firm’s organization and management that again influences the strategy of a firm.

Moreover, Researchers divide institutions in different aspect with regard to the political system, the cultural system and the value system. Overall, a common definition by Li and Yue (2007) is that “… institutions might be political (bureaucratic infrastructure), legal (formal rules) or societal (general norms) …” (p.670). In particular, they are established in “regulatory, cognitive, and normative dimensions”.

First, the regulatory dimension deals with government policies in a country for instance, laws and regulations that can support markets and industries but they can also exert uncertainty in the market of a country.

Second, the normative dimension is an overall value system of the country for instance, the good belief in new businesses and innovations (Busenitz, Gómez & Spencer, 2000, p. 995). Consequently, “values guide the selection and justification of actions, the evaluation of people and events, and the social construction of reality.” (Harzing & Noorderhaven, 2003, p. 10).

Third, cognitive dimension includes educational and social knowledge that is developed in institutions for instance schools and religious organizations.

Researches define the first dimension as formal institutions and the last two as informal institutions.It is crucial due to Hofstedes’ cultural dimension (…) to integrate culture as “a substream of institutional arrangements that underpins the informal institutions” (Peng, Wang & Jiang, 2007, p. 922). These five dimension of national culture are a possible analyziz in order to measure a national culture. This paper focuses on two out of four dimension of Hofstedes’ definition of culture: “Uncertainty avoidance” and “power distance”. Besides these two dimensions, there exist two more dimensions: “Individualism vs. collectivism” and “masculinity vs. femininity”. Our two chosen dimensions are a common use in the literature in order to measure the influence of institutions on firms. Hence, Business Studies include the cultural dimension of power distance that influences the “preferences regarding the distribution of authority” and uncertainty avoidance that determines the “importance of rules and procedures” (Harzing et al., 2003, p. 9).

3 Influence of Institutions on Firm Strategies

However, it is evident that institutions influence a firm’s strategy but it is important to analyze in which parts of the strategy they direct the firm.

First, the regulative dimension of institutions “set, monitor and enforce rules (Ionascu, Meyer & Erstin, 2004, p. 4), for instance, legal regulations. Thus, this dimension influences the political and legal part of the PESTEL framework in the external environment of a firm and increases or decreases uncertainty in the market. Therefore, Henisz and Delios (2002) define the differences in the regulatory distance as the “laws and regulations, licensing of new business, […], payment of taxes, government licenses and fees, and the means and feasibility of exit, etc.” (p.7).

As a market-supporting example, government regulations can facilitate companies to acquire resources and therefore support local firms in internal quests. Moreover, government policies can provide support for new businesses and reduce the risk to fail for entrepreneurs.

Otherwise, a non market-supporting regulative dimension creates uncertainty for firms and exacerbates the acquisition of resources. This complication of the access to resources can be a problem in order to establish a competitive advantage. The literature observes that firms in these non-market supporting economies tend to create an “extensive collaboration” (Vasudeva, 2008, p. 1249) with other firms, parties of the government, and competitors in order to exchange resources. This networking process can be interpreted, that formal institutions from the regulative dimension act as a basis for firms and if they are unstable, informal institutions substitute them.

However, the regulative dimension includes also the legal system of a country that influences the “…level of investor protection and ownership concentration.” (Li & Yue, 2007, p. 681). Thus, legal systems can provide protection for firms, for instance the English common law system. Such a system provides a “better access to external capital” (Li & Yue, 2007, p.673). Li and Yue (2007) describe that in countries with a civil law system that has limited protection for firms, for example Germany or France “… the capital markets are likely to be less developed making it costly to obtain external capital.” However, these firms establish “internal capital markets to allocate capital within a firm.” (Li & Yue, 2007, p.673). To conclude, uncertainty in the regulative dimension and less governmental support lead to collaborations within the markets between local firms in order substitute unstable formal institutional by informal ones.


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Role of Home Country Institutional Environment in International Strategy
EBS European Business School gGmbH
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role, home, country, institutional, environment, international, strategy
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Laura Weil (Author), 2013, Role of Home Country Institutional Environment in International Strategy, Munich, GRIN Verlag,


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