Institutional Strategies in Emerging Markets

We review and integrate a wide range of literature that has examined the strategies by which organizations navigate institutionally diverse settings and capture rents outside of the marketplace. We synthesize this body of research under the umbrella term institutional strategies, which we define as the comprehensive set of plans and actions directed at leveraging and shaping sociopolitical and cultural institutions to obtain or retain competitive advantage. Our review of institutional strategies is focused on emerging market contexts, settings that are characterized by weak capital market and regulatory infrastructures and fast-paced turbulent change. Under such challenging conditions, strategies aimed at shaping the institutional environment may be especially critical to an organization’s performance and long-term survival. Our review reveals that organizations engage in three specific and identifiable sets of institutional strategies, which we term relational, infrastructure-building, and socio-cultural bridging. We conclude by highlighting fruitful avenues ∗Corresponding author. Email: [email protected] The Academy of Management Annals, 2015 Vol. 9, No. 1, 291–335, http://dx.doi.org/10.1080/19416520.2015.1014661 # 2015 Academy of Management 291 D ow nl oa de d by [ C hr is to ph er M ar qu is ] at 1 4: 59 2 7 M ar ch 2 01 5 for cross-disciplinary dialogue in the hope of promoting future research on emerging markets and defining the next frontier of institutional theory in organizational analysis. Institutional Strategies in Emerging Markets In an increasingly complex and integrated global economy, a significant challenge for organizations is navigating institutionally diverse contexts—each posing a different set of opportunities and challenges. Scholars over the past decades have articulated the multifaceted influence of institutions on organizations and competition, with some traditions foregrounding formal and legal aspects (Hall, 1986; North, 1990; Williamson, 2000), while others focusing more on informal and socio-cultural aspects (DiMaggio & Powell, 1983; Meyer & Rowan, 1977). North (1991, p. 87) defined institutions as “humanly devised constraints that structure political, economic and social interaction”. For Scott (2014, p. 56), institutions are the “regulative, normative, and cultural-cognitive elements that, together with associated activities and resources, provide stability and meaning to social life”. While extensive research has focused on the effects of institutional variation on organizations (Greenwood, Raynard, Kodeih, Micelotta, & Lounsbury, 2011; Peng, Wang, & Jiang, 2008), less attention has been paid to examining the ways in which organizations purposefully and strategically shape their institutional environment to enhance their competitive advantage. Yet, as recent research has shown, the effective management of socio-political and cultural institutions is no less important to organizational survival than marketplace success (Hillman & Hitt, 1999; Lounsbury & Glynn, 2001; Marquis & Qian, 2014; Seelos & Mair, 2007). In this paper, we review and integrate recent literatures that have documented a variety of strategies by which organizations attend to institutionally diverse settings and capture rents outside of the marketplace, including collective mobilization strategies that seek to influence the public policy arena (Henisz & Zelner, 2003; Hillman, Keim, & Schuler, 2004), to transform institutions (Campbell, 1998; Hillman & Hitt, 1999; Lawrence, 1999), and to engage with key stakeholder groups (Freeman, 1984; Galaskiewicz, 1985; Mitchell, Agle, & Wood, 1997). While these efforts have shed light on the complexity of organizational behaviors, our understanding of the diversity and contextual relevance of different types of institutional strategies remains balkanized and selective. We focus our review of institutional strategies on emerging market economies—countries characterized by rapid industrialization, economic liberalization and increased integration into the global economy. In these contexts, the society and economy are rapidly co-evolving, such that the onus is often on organizations to pursue and promote not only economic, but also social 292 † The Academy of Management Annals D ow nl oa de d by [ C hr is to ph er M ar qu is ] at 1 4: 59 2 7 M ar ch 2 01 5 development (Hoskisson, Eden, Lau, & Wright, 2000; Luo, 2006; Mair, Marti, & Ventresca, 2012). In the last decade, emerging markets have assumed a prominent position in the global economy and they are projected to account for more than half of world GDP on the basis of purchasing power by the end of 2014 (see Figure 1). The rapid rise and development of countries such as China, India, Brazil, and South Africa in the twenty-first century has attracted tremendous interest from managers and investors, yet our theories have not kept pace (Davis & Marquis, 2005). As Wright, Filatotchev, Hoskisson, and Peng (2005, p. 27) convincingly argue, research with a focus on emerging economies is both an opportunity and a necessity—as they are “fertile grounds not only for testing existing theories but also for developing new ones”. Accordingly, we propose that research in emerging economies feature more prominently in organizational studies as we move forward. While the specific context that we examine is emerging economies, our intention is to review and synthesize various streams of research in order to identify and map the complex array of institutional strategies that firms undertake—which can then be generalized to business organizations in other contexts as well. To date, strategies that can be considered part of firms’ institutional strategizing have been variously referred to as non-market or political strategies (Baron, 1995; De Figueiredo & Tiller, 2001; Hillman & Hitt, 1999; Hillman et al., 2004), collective action (King & Pearce, 2010; Schneiberg & Lounsbury, 2008; Walker & Rea, 2014), resource dependence (Mizruchi, 1989; Oliver, 1991; Pfeffer & Salancik, 1978), and stakeholder management (Freeman, 1984; Mitchell et al., 1997). Although these literatures are not traditionally considered under the institutional theory ambit, a common feature is that they address how organizations strategically manage their broader Figure 1 World GDP Trends for Advanced and Emerging Market Economies. Note: GDP based on PPP share of world total. Source: International Monetary Fund, April 2014 World Economic Outlook Database. Institutional Strategies in Emerging Markets † 293 D ow nl oa de d by [ C hr is to ph er M ar qu is ] at 1 4: 59 2 7 M ar ch 2 01 5 external environments; and, as such, provide important insights for theorizing about institutional processes. Conceptualizing strategies as “institutional” provides an opportunity to integrate these rich, yet disparate streams of research— and, thus, offers a more accurate identification of the overarching conceptual domain. Furthermore, while studies have examined emerging market contexts from a variety of different theoretical perspectives, we argue that an institutional lens is particularly useful in these contexts because they are undergoing large-scale economic and social changes that are still little understood (Roland, 2000). We define the term institutional strategy as “the comprehensive set of plans and actions directed at leveraging and shaping socio-political and cultural institutions to maintain or improve an organization’s competitive position”. Our review of the literature reveals that organizations engage in three specific and identifiable sets of institutional strategies, which we term relational, infrastructure-building, and socio-cultural bridging. Relational strategies involve networking efforts to cultivate and manage dependency relationships with the government and key stakeholder groups (Marquis & Qian, 2014; Siegel, 2007). Infrastructure-building strategies address missing or inadequate regulatory, technological, and physical infrastructures that support business activities (Mair &Marti, 2009; Rao, 1998; Schneiberg & Lounsbury, 2008). Socio-cultural bridging strategies tackle socio-cultural and demographic issues that can hinder economic development and trade—for example, political and social unrest, illiteracy, poverty, and ethnic or religious conflicts. In unpacking the concept of institutional strategies in this way, we aim to develop an integrative framework that outlines a more interactive and reciprocal view of institutional processes—one that highlights the agentic and intent-driven nature of organizations’ engagement with institutions, and the importance of institutional perspectives in firms’ strategic action in a globalizing economy. We argue that such a perspective is an important new frontier of institutional research in organizational studies. Accordingly, we focus our review on highlighting fruitful areas for cross-disciplinary dialogue, and on providing a roadmap for future scholarship on navigating the complexities of diverse institutional environments. Institutional Strategies as the New Frontier of Institutional Research in Organizational Studies Beginning in the 1970s, scholars from various disciplines including economics, political science, and sociology began focusing on how institutions—or the formal and informal “rules of the game”—affected organizational and economic activity (North, 1990; Scott, 2001). In organization studies, the research that built on this tradition tended to emphasize the capacity of institutions to control and constrain organizational behavior by “defining legal, moral, 294 † The Academy of Management Annals D ow nl oa de d by [ C hr is to ph er M ar qu is ] at 1 4: 59 2 7 M ar ch 2 01 5 and cultural boundaries and distinguishing between acceptable and unacceptable behavior” (Scott, 2014, p. 58). Significant empirical work in this area, for example, focused on how social and cultural expectations exerted pressures on an organization to conform to “legitimate practice” within a given institutional field (e.g. Davis, 1991; Fligstein, 1985; Galaskiewicz & Wasserman, 1989). This early work in institutional theory was powerful in demonstrating the substantial isomorphic forces in organizational fields—thus, addressing DiMaggio and Powell’s original question of “why do organizations look so similar?” Later streams of research within organization studies shifted the focus from examining continuity and constraint in social structures to exploring how actors exercise agentic behavior and instigate change (cf. Hirsch & Lounsbury, 1997; Thornton, Ocasio, & Lounsbury, 2012). Drawing upon resource dependence arguments, Oliver (1991) argued that organizations do not passively conform to homogenizing institutional pressures. Instead, some organizations actively resist these pressures by challenging them, dismissing them, or coopting the sources of the pressures (Marquis & Lounsbury, 2007). And research on institutional entrepreneurship and institutional work has documented how actors leverage material and symbolic resources to create new institutions or to transform existing ones (Battilana, Leca, & Boxenbaum, 2009; Lawrence, Suddaby, & Leca, 2009; Maguire, Hardy, & Lawrence, 2004). Despite offering considerable insights into how actors engage in proactive agentive behaviors to instigate broad transformational change, existing models have typically assumed a field-level perspective—with less attention being paid to how organizations strategically shape their institutional contexts to further their own individual ends. Scholars in strategy and international business have also increasingly advocated taking an “institution-based” approach. With the changing competitive landscape confronting firms as globalization has progressed, there is increasing recognition that research needs to investigate and understand how contextual factors affect competition, performance, and the development of sustainable competitive advantages (Ahuja & Yayavaram, 2011; Oliver, 1997; Peng, Sun, Pinkham, & Chen, 2009; Peng et al., 2008). For instance, Ingram and Silverman (2002, p. 20) contend that “institutions directly determine what arrows a firm has in its quiver as it struggles to formulate and implement strategy”. While this stream of research has tended to point to legitimacy and reputational pressures for social conformity, there has been growing recognition that organizations act strategically when confronted with institutional constraints— both those related to variation across global contexts generally and the particularities of local contexts. Building on the widespread interest in institutional processes, we review a series of literatures that explore how organizations interact with, navigate, and shape their external environments. While these literatures stem from Institutional Strategies in Emerging Markets † 295 D ow nl oa de d by [ C hr is to ph er M ar qu is ] at 1 4: 59 2 7 M ar ch 2 01 5 different legacies and antecedents, taking stock of this growing body of research is critical to our capacity to think comprehensively about the institutional conditions confronting organizations. We integrate this work under a common heading by adopting a broad definition of institutional strategies—one that includes all plans and actions taken by an organization to strategically manage socio-political and cultural institutions, and/or leverage them to its competitive advantage. The term institutional strategy was first considered by Lawrence (1999, p. 161), who identified two basic types: “(1) membership strategies that involve the definition of rules of membership and their meaning for an institutional community; and (2) standardization strategies that are concerned with the establishment of technical legal or market standards that define the ‘normal’ processes involved in the production of some good or service”. While we agree that these are important, they may only scratch the surface of what is possible and necessary in today’s global environment. Our main point is that organizations need to be proactive about diagnosing and shaping their external environments. Contrasting with earlier perspectives that viewed institutions as top-down pressures that constrain social and organizational behavior, our perspective foregrounds the strategic interaction between organizations and their institutional environments. In doing so, our review aims to showcase institutional theory as a theory of action for the twenty-first century. In the following section, we outline the critical features that differentiate emerging markets from developed and developing markets, and draw attention to the importance of these differences in affecting an organization’s operations, strategic focus, and overall competitive landscape. In the discussion, we offer recommendations for future research that examines how the institutional strategies that we identify may vary across different emerging economies. Why Institutional Strategies are Essential in Emerging Markets As locations of future growth for firms, emerging markets have attracted increasing scholarly attention (Li, 2001; Xu & Meyer, 2013)—with emphasis being placed on examining the role of institutional factors in channeling organizational attention, decision-making, and actions. This growing interest is clearly reflected in two recent special issues on strategic management in emerging markets. In Hoskisson et al.’s (2000) Academy of Management Journal special issue, the editors highlighted institutional theory as one of the key theories used in the special issue papers. Then, five years later, in a special issue of the Journal of Management Studies, Wright et al. (2005) noted that institutional theory “has indeed risen, as predicted by Hoskisson et al. (2000), to become a new dominant theory guiding strategy research on emerging economies”. 296 † The Academy of Management Annals D ow nl oa de d by [ C hr is to ph er M ar qu is ] at 1 4: 59 2 7 M ar ch 2 01 5 As scholarship on emerging markets has developed over recent decades, researchers have pointed to a number of important differences among emerging economies. Most notable is the difference between countries in Asia, Latin America, Africa, and the Middle East that were formerly classified as developing economies and transition economies in the former Soviet Union, Eastern Europe, and East Asia (Hoskisson et al., 2000; Khanna & Palepu, 2010; Wright et al., 2005). This latter group of countries is uniquely characterized by a shift from centrally planned economies to market economies— reflected in increased privatization, the changing role of government, and legal and institutional reforms. Although emerging economies differ in their pace of political and economic change and growth, they share a number of characteristics that not only differentiate them from the more traditionally studied developed markets, but also create a set of general challenges for navigating their business environments. Thus, for the purposes of our review, we focus more on the similarities across emerging markets in terms of economic, market, and institutional conditions. We also highlight key sources of variation between emergingmarkets and developed and developing market contexts. In many ways, emerging markets occupy an intermediate position between developed and developing markets—specifically in terms of the extent of market liberalization, the degree of integration into the global economy, and the level of economic development (Hoskisson, Wright, Fitatotchev, & Peng, 2013). Identifying the similarities and differences between these contexts is an important first step to better understanding how organizations can strategically manage or alter aspects of their institutional environment to obtain or retain competitive advantage. Economic and Market Conditions A defining feature of emerging market economies is that they are “low-income, rapid-growth countries using economic liberalization as their primary engine of growth” (Hoskisson et al., 2000, p. 249; see also Arnold & Quelch, 1998). The importance of such markets to global corporations and investors is demonstrated by the proliferation of emerging market typologies, such as BRICS, CIVITS, and EAGLES, and the development of lists of emerging economies by key market actors including the IMF, FTSE, MSCI, S&P, Dow Jones, and Russell. Table 1 provides a list of countries considered emerging economies across current categorizations—importantly, it shows general convergence on which countries are included. Figure 2 plots the major countries of the world along the dimensions of economic growth rate and per capita GDP—key dimensions by which emerging economies are identified. As the figure shows, countries that are typically considered emerging economies are clustered in the middle of the graph, occupying a prime spot with respect to future growth prospects: relatively high GDP Institutional Strategies in Emerging Markets † 297 D ow nl oa de d by [ C hr is to ph er M ar qu is ] at 1 4: 59 2 7 M ar ch 2 01 5 Table 1 Emerging Markets Identified by Major Investment Classification Sources Country IMF FTSE MSCI S&P Dow Jones Russell