Summaries of all the articles required for the exam of the course Innovation in Emerging Markets at the Radboud University ():
- Khanna, T. and Palepu, K. G. (2010). ‘The nature of institutional voids in emergingmarkets’, in T. Khanna and K. G. Palepu (eds), Winning in Emerging Markets: A Road...
Summaries Articles Innovation in Emerging Markets 2020
Lecture 1:
What is really different about emerging market multinationals?
R. Ramamurti
Emerging markets firms (EMNE’s) have had to figure out how to take advantage of opportunities and
resources in the rest of the world as growth has picked up in emerging markets and slowed in
advanced economies.
Up until now there are two answers to this question; either a new theory has to be developed, or an
existing theory is sufficient.
1) Why do emerging economies produce MNE’s at all? Given their economic and technological
backwardness, they are ought not to do so. They also seem to lack the necessary ‘ownership
advantages’ needed to become an MNE since they only seem to have ‘ordinary resources’ (not a
source of extraordinary rents).
Unsatisfying explanations:
- ENME’s simply do not possess ownership advantages, but their internalization is because of
home country advantages. This however lacks a foundation of long run success, which
EMNE’s do have.
- ENME’s internalize to obtain the ownership advantages they lack springboard theory of
internalization. This however would lead to OLI not being entirely applicable to EMNE’s,
since ownership advantages would not have to be possessed before internalizing.
Promising explanations:
- EMNE’s do possess ownership advantages, but these are different from the ones we have
been trained and conditioned to see in DNME’s. Dunning also saw ownership advantages as
more then cutting-edge technology or global brands, think about customer needs, ultra-low
costs. It is not obvious why we would consider some advantages as more precious than
other, like brands or marketing being more precious than low costs, often considered as a
weak ownership advantage.
- DMNE’s have more potent ownership advantages because they had more time to
accumulate capabilities, meaning ENME’s and DMNE’s are at a different stage and with time
EMNE’s may augment and enhance their ownership advantages to become more like
DMNE’s. Most research is done for already globalized organizations, they however did not
always have a global brand, for example.
- EMNE’s go abroad to obtain technologies and brands primarily for exploitation in their home
markets, not abroad. After doing this, they may even venture out.
2) Multinationals that internationalize in wrong ways? EMNE’s appear to have violated core tenets of
internalizing, like internalize much faster, or targeted countries in the wrong sequence, or invest
more in developed countries than other emerging economies. They also more often use risk entries,
like M&A’s.
Unsatisfying explanations: contribute anomalous behavior to emerging market origins of EMNE’s
without considering alternative explanations that may be unrelated to nationality.
Promising explanations:
- The speeding up of internalizing may be the result of global economic context in which it is
easier for firms to obtain resources and internalize, and not of the EMNE’s organizational
trait.
, - EMNEs invest in countries that are physically or economically distant because their strategies
are based on exploiting differences rather than similarities across countries. There is no
attention paid to this since MNE theory is overly influenced by DMNE experience.
- Cross-border vertical integration in natural resource industries, either by firms searching for
downstream markets or upstream supplies; this may lead to the choice to go to a developed
country.
- Another reason to go to a developed country is that industries can already be matured in
developed world but may be booming in emerging markets; EMNEs would prefer M&A,
which would only add to the capacity glut.
Conclusion: the notion that firms must have ownership advantage before internationalizing holds up
for EMNE’s, however they can have different ownership advantages, and they have to take three
implications into account: the global context for internationalization, the stage of evolution of the
firm as an MNE and the industry in which it operates. They may choose strategic options not yet
seen with DMNEs.
More refinement and extension of EMNEs is needed, and how can they help develop internalization
theories.
The Nature of Institutional Voids in Emerging Markets
Khanna & Palepu
The landscape of emerging markets remains deeply striated by institutional legacies. To become fully
developed physical infrastructure is needed, but also institutional development that underpins the
functioning of mature markets.
Most important market feature: buyers and sellers can come together to do business, in developed
markets specialized intermediaries provide information and contract enforcement. This lacks in
developing markets. Finding each other and evaluation quality of products and services is difficult.
Institutional voids the lacunae created by the absence of market intermediaries. These missing
intermediaries are a frequent source of market failure.
Three main sources of market failure:
1. Absent or unreliable sources of market information
2. Uncertain regulatory environment
3. Inefficient judicial system
Institutional voids can also bring opportunities for entrepreneurial foreign or domestic companies to
build businesses based on filling these voids.
Transactions costs: measure of how well a market works. Low for well-functioning markets.
■ Information asymmetries and incentive conflicts between buyers and sellers create
significant problems in markets, can lead to loss of confidence for market participants.
■ It is possible to devise institutional arrangements to mitigate these problems and make the
markets work significantly better than they would otherwise.
■ Institutional arrangements will affect those benefiting from institutional voids.
Importance market intermediaries:
- Product markets consumers are able to search for their desired products based on
information provided by companies through different forms of communication and
third-party information providers. Also function for retail chains by analyzing consumer
preferences. Soft and hard (like roads) infrastructure.
, - Capital markets these markets are often strictly regulated, by financial reporting,
accounting standards, information intermediaries and financial intermediaries.
- Labor markets educational institutions, placement agencies and headhunters, employment
contracts and regulations, unions and unemployment insurance.
Lecture 2:
Summary lecture 2 – article 3
Doh, J., Rodrigues, S., Saka-Helmhout, A. and Makhija, M. (2017). ‘International business
responses to institutional voids’, Journal of International Business Studies, 48:293-307.
Institutional void: specific conditions in which institutions were either not working well or were
completely absent, undermining the function and workings of the market. When there is an
institutional void, it means that interaction between buyers and sellers is harder and that there are
therefore high transaction costs within a country. These higher costs, like for information, materials
et cetera, reduce the likelihood of efficient outcomes. A country has a lot of institutions, but a focus
on the institutional voids explains the workings of a country’s market and its ability to function well.
Each potential void is an actionable construct, that can be reacted to or shaped. When looking at
institutional voids, we look at formal (written rules sanctioned and enforced by the state) and
informal (unwritten rules that are not officially sanctioned or enforced) institutions. By drawing
attention to how varying organizational arrangements might substitute for missing institutions, this
perspective highlights the strong connection between context and firm strategy.
Institutions and institutional voids
Institutions serve as “rules of the game” through their influence on the transaction costs of business
activities. Each country differs in how institutions affect its economy, society and businesses and
therefore differs in the type of transaction costs. For example, a highly regulated country that could
lead to more transaction costs is, as formal rules may be less easily internalized.
Institutional voids are especially present in emerging markets. Transaction costs can affect
connections between producers and consumers, and can also dampen incentives for innovation and
leveraging of unique knowledge, talent and skills. However, institutional voids can also offer
competitive advantages to local and foreign firms that have the skills to address them.
Formal institutional voids: absence or underdevelopment of regulatory institutions (laws).
Informal institutional voids: includes standard, commercial conventions and also expected standards
of behavior specific to a culture and learned through social interactions.
Institutional voids in the social system can bring about market failure, for example social norms and
community structure in Bangladesh creates market exclusion for impoverished women.
Firm strategies for addressing institutional voids
Majority of research identifies 3 strategies of firms when facing institutional voids: 1) adapt business
model to local conditions 2) shape or alter these conditions or 3) avoid operating in the environment
altogether. Also some nonmarket strategies, like exercise of political influence to change form and
content of regulation.
Need for further research – (which this research does)
Contexts characterized by underperforming formal institutions may be rich in informal institutional
arrangements that serve as an alternative system of support.
, Institutions can fail in different manners and this can open up new markets for private firms to
perform functions better than the state. However, this could fail because of great transaction costs
or inability to capture value due to spillover effects.
Firms might use nonmarket exchanges to create or influence formal institutions where these are
absent or weak. Corruption can occur here, which threatens the functioning of markets by
generating negative externalities, in which firms obtain excess rents or create monopolies.
Along with a desirable, more comprehensive consideration of voids, it is important to consider the
possibility of a larger variety of responses by firms to institutional voids. Not just look at internalizing
capital, labor and product markets, but also other approaches like reliance on trusted network or
bonding with government and NGOs.
It is important to recognize that responses to voids, whether initiated by private sector actors or the
state, can also potentially have negative consequences. Firms as well may prefer that some
institutional voids remain in place because they deter competitive entry into their industries.
Finally, voids involving different types of exchanges may require different responses from firms.
Contributions to the special issue
Two important insights highlighted: 1) there is a wider variety of strategies used by firms to deal with
different types of institutional voids than previously identified. There are four different strategies for
responding to an institutional void: internalization of activities, substitution of institutional
information with own unique knowledge, borrowing better developed institutions from other
countries and signaling through nonmarket activities.
2) Voids existing in companies’ domestic operating environments might follow these firms to new
environments through their foreign direct investments as a form of liability of origin.
Table 1 in the article shows the types of institutional voids and firm responses examined in each
article included in this article.
Kim & Song: focus on institutional voids related to capital market development and the efficient
allocation of financial resources for investment and economic growth. This study shows that
underdevelopment of capital markets increases the likelihood of costly M&A deal abandonments for
domestic firms – a form of exit strategy – whereas more developed capital markets reduce the
incidence of abandoned deals due to availability of better upfront information. This relationship is
only confirmed for acquiring firms without affiliation with business groups. Business groups control
key information and resources related to such decisions through superior internal markets that can
‘‘mimic’’ developed external institutions. Furthermore, the benefits that business group-affiliated
firms derive from internal capital markets do not disappear as external capital market institutions
become better developed. It appears that internal and external markets are, to some extent,
interchangeable in reducing transaction costs.
This study shows value of internalization strategy in reducing transaction costs.
Kingsley & Graham: specific institutions employed in a given environment influence the nature of
information generated in that environment. Government dissemination of accurate information
about the functioning of the economy is a valuable component of this information. The nature of
such information is such that, for the most part, only governmental agencies will be in a position to
ensure its availability. Thus Kingsley and Graham note that the lack of such information creates
‘‘information voids’’. When faced with these, foreign investors’ own private info can serve as
substitute source of information. However, variation in the private information of different type of
investors influence its value as a substitute. For this reason, foreign investors are not equal in their
ability to manage information voids.
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