Institutional Theory in International Business and Management: Volume 25

Laszlo Tihanyi is the B. Marie Oth Professor in Business Administration in the Mays Business School at Texas A&M University, USA. He received a PhD in Strategic Management from Indiana University and a Doctorate in Business Economics from Corvinus University of Budapest in his native Hungary. He is also an honourary Professor at Corvinus University. His main research areas are internationalization, corporate governance in multinational firms and organizational adaptation in emerging economies. His current research interests include the involvement of board of directors in foreign direct investment, the institutional environment of internationalization decisions and the effects of social movements on multinational firms. His papers have been published in the Academy of Management Journal, Academy of Management Review, Strategic Management Journal, Organization Science, Journal of International Business Studies and others. He served as Associate Editor of the Journal of Management Studies. He is currently on the Editorial Boards of the Academy of Management Journal, Journal of International Business Studies, Journal of Management Studies and Business Horizons.

The first part of Volume 25 is dedicated to our annual feature from a leading scholar. The 2011 Recipient of the Booz & Co./Strategy+Business Eminent Scholar in International Management Award was Professor Jagdish N. Bhagwati of Columbia University. Professor Bhagwati was honoured by this Award by the International Management Division of the Academy of Management at its annual conference in San Antonio, TX. His acceptance speech outlines the role of multinational corporations in economic development. The speech is followed by the commentaries of Ted London of the University of Michigan and Tarun Khanna of Harvard University.

The Booz & Co./Strategy+Business Eminent Scholar in International Management is an annual award given by the International Management Division of the Academy of Management and Sponsored by Booz & Co./Strategy+Business.

The earliest arguments as the leaders of the newly independent developing countries began to plan for accelerated growth and resulting reduction of poverty – what I have called the progressive and activist ‘pull up’ strategy for reducing poverty, in contrast to the conservative characterization of it as a passive ‘trickle down strategy’ suggesting that the Earl of Nottingham and his vassals are eating leg of lamb and venison at a high table, with crumbs falling to the dogs and serfs below – involved answering a basic economic-philosophical question: How would integration into the world economy on dimensions such as trade, equity investment (i.e. multinationals), migration and technology (e.g. intellectual property protection) work? Would, as the opponents argued, integration into the world economy on these different dimensions lead to disintegration of the national economy; or would it help instead?

Professor Jagdish Bhagwati is a prolific scholar with an impressive array of awards and multiple publications to his name. By traditional measures of output, Professor Bhagwati has clearly addressed many interesting questions. Yet there is more to a scholar's career than can be captured by these numbers; Professor Bhagwati's work can also be marked by the importance of the questions he asks. Important questions offer insight into how we can reframe our thinking. Beyond contributing to the debate about globalization and free trade, Professor Bhagwati has helped reshape it. In this chapter, I identify several important questions that he has asked regarding the role of globalization in poverty alleviation and explore their importance in helping us think differently about how globalization can work better for the poor.

It is a privilege to discuss Professor Bhagwati's (2012) address on the occasion of his being honoured by the Academy of Management.

One of the most important trends that supporting the rise of institutional theory research is the increasing number of leading multinational enterprises headquartered in a greater number of countries. Although early international business studies focused on multinationals from the United States, the developed countries of Western Europe and Japan, some of the largest multinational enterprises today are from non-Triad countries, including Brazil, China, Korea, India, Mexico, Russia, South Africa and Taiwan. These new multinationals exhibited behaviours different from those of established Triad multinationals and, in many cases, competed with distinctly different strategies. The result was that international business scholars, who traditionally concentrated on studying host country factors as the key to understanding corporate behaviour began to pay much more attention to the characteristics of the multinationals’ home institutional environments as a potential determinant of the multinationals’ internationalization strategy. For example, a growing number of studies have examined the variance in corporate governance systems around the world and their implications for the strategies of multinational enterprises (La Porta, Lopez-de-Silanes, & Shleifer, 1999; Pedersen & Thomsen, 1997). The shift in the population of leading multinationals has also led to the emergence of research on business groups. Although Japanese multinational enterprises had the kereitsu structure and some European firms were parts of conglomerates these structures were considered by most scholars to be inefficient. However, this viewpoint is changing as the body of new multinational enterprises originates from countries where business group membership has been the norm, rather than the exception (Guillén, 2000; Khanna & Palepu, 2000; Khanna & Rivkin, 2001).

In this chapter, we examine and expand institutional theory. While acknowledging that actors and organizations interrelate in an institutional (legal, political and socio-economic) framework and that this interaction between them shapes economic activities (North, 1990; Scott, 1995), we argue that the boundaries of today's institutional environments have significantly evolved. They encompass not only the traditional domains of micro (individual/organization) and macro (nation-state) levels as well as of a co-located physical environment captured by received institutional theory but also an added dimension that transcends physical space. This new dimension includes a dispersed, borderless environment that invisibly cuts across nation-states. We discuss the implications of this extended view of institutional domains for theory and practice.

Institutional economics at the societal level focuses on the examination of interpersonal and impersonal economic, political and social institutions within a given polity and how such institutions might change and evolve over time. Such examination is critical to both international business scholars and practitioners if they are to successfully navigate variations in the rules of the game in international trade and commerce. Whilst institutional economics offers an immense body of literature on institutions, it offers surprisingly few theoretical or conceptual tools for empirical analysis. This chapter discusses five extant frameworks and proposes an ontological theoretical framework developed from interdisciplinary sources to underpin extant frameworks and thereby guide international business researchers in designing more effective research instruments for examining institutional change across and between cultures.

The liability of foreignness has long been acknowledged as a key concept in international business research. Departing from the cost side of foreignness, this chapter explores intangible benefits of foreignness exclusive to multinational enterprises in a host country in addition to tangible benefits such as preferential tax policies. Intangible benefits of foreignness are defined as advantages of foreignness so as to distinguish from assets of foreignness – tangible benefits of foreignness. Drawing on institutional theory and social comparison theory, we propose that advantages of foreignness can lead to important firm-specific performance-related outcomes, which have been generally underestimated in the international business literature.

The international business literature has long acknowledged that firms face disadvantages when engaging in business abroad. This disadvantage is expressed in such constructs as the costs of doing business abroad, the liability of foreignness and the country-of-origin effect; however, none of these constructs fully captures the potential liability associated with the home base of the multinational enterprise. We develop a new construct, liability of home, aimed at filling this gap, providing insights into the theory and practice of international business.

This chapter contributes to the existing literature on institutional theory and international business research by integrating the concepts of polycentrism and institutional learning to examine how MNEs from emerging economies invest in developed countries. We argue that equity-based market entry modes and non-equity-based modes create different needs for learning about economic, regulatory and political institutions; entry modes with or without local partners lead to different levels of institutional embeddedness and institutional learning speeds. Finally, the content of institutional knowledge also determines its transferability and adaptability. We emphasize the importance of recognizing the integrated nature of economic, regulatory and political institutions from a polycentric perspective and discuss their change in different situations.

We view emerging-market multinational corporations (EMNCs) as agents for global isomorphism. EMNCs seek to enter developed markets not only to expand their business operations but also to acquire advanced knowledge to enhance their core competencies. In entering these markets, EMNCs are subject to coercive, normative and cognitive pressures as they seek legitimacy. Once these firms gain legitimacy in advanced markets through the adoption of local business practices, they transfer these approaches to their headquarters in developing markets, establishing best practices in their home markets. Further, EMNCs may engage in efforts aimed at changing the institutional environment in the developing market to facilitate the transfer of learned practices from the developed market. Thus, we propose that these best practices lead to global isomorphism, but also note instances where symbolic adoption of developed market practices may slow the isomorphic process.

This study draws upon the interorganizational imitation theory and endorsement literatures to explain the entry mode decisions of emerging-market firms (EMFs) into developed markets. Specifically, the study argues that EMFs entering developed markets pay differential attention to the prior actions of reference groups – by type of country of origin (whom to follow?) and by entry mode (how to imitate?). We test our hypotheses with a sample of 591 entries by EMFs investing in the United States over a 10-year period. The results support an isomorphism-based framework with different influences across reference groups by country of origin and entry mode. We find a dominant form of isomorphism, even after controlling for transaction costs and resource-based explanations.

The chapter explores the stages of development of an outward foreign direct investment (OFDI) institutional field during periods of major system change in big emerging economies. The state and its agencies appear to be the principal institutional entrepreneurs in developing the OFDI organizational field. Consequently, the development of OFDI institutions depends heavily on the extent to which state policy is consistent in supporting the regulative, normative and cognitive pillars enabling and promoting but also monitoring and controlling OFDI. The chapter concludes by advancing theoretical propositions positing the relationship between continuity, the maturity of the OFDI organizational field and the level of institutional entrepreneurship stemming from governmental and business sources.

This empirical study conceptualizes the institutional environment within which firms function in a transition economy as a number of dimensions, representing the externally set ‘rules of the game’ as perceived by senior managers. It then proposes a mediating model of the links between that environment and the commercial performance of enterprises in which incentive intensity is a key strategic choice, influenced by perceptions of the institutional setting and the influence of that choice is carried on to commercial performance by a set of managerial orientations. The model is tested using survey data from a sample of 959 Chinese enterprises.

We develop a framework that explains the role of knowledge resources in the formation of international strategic alliances by multinational corporations. The focus is on the value and uniqueness of knowledge resources and two types of learning international strategic alliances, exploratory and exploitative. Also, we explain how the institutional environment – a host country's property and contractual rights, rule of law and the institutional distance between the countries of the partnering firms – affects the attractiveness of these two forms of alliances.

Many international management scholars have expressed concern about whether societal culture changes so rapidly that research which attempts to represent it has little utility. We address this fundamental concern of international management by providing three theoretical lenses to examine the forces that produce and maintain a society's culture: functional theory, neo-institutional theory and complexity theory. We consider principles of progressive change and problems of social psychology from functional theory, the three pillars and conflicting institutional logics of neo-institutional theory and the ideas of stable equilibrium, oscillations and chaos of dynamic systems from complexity theory. Although these three theoretical lenses sometimes produce conflicting explanations of culture change, they often complement each other. Together, they provide a more realistic picture of the dynamics of the societal cultural milieu of organizations than do cultural representations that favour stability or those that completely discount the utility of any attempt at representing cultural continuity.

We use insights from resource dependence, institutional theories and social movement theories to examine the indigenization of subsidiary management in the multinational company (MNC). We discuss the effects of interdependence with local organizations, access to critical resources, and MNC legitimacy in the host country on the indigenization of subsidiary management. We consider the impact of local and extra-local social movement activity as well as the local political opportunity structure in the host country. The organizational variables in the framework include international strategy and experience. We suggest implications for further international management research and practice involving the operation of foreign subsidiaries.

The international context provides multinational enterprises (MNEs) with distinct and plural institutional arrangements. The concept of institutional logic, which has received little attention in MNE management research, provides theoretical tools to address the plurality of institutional contexts that characterize MNEs. By focusing on the concept of institutional logic rather than on traditional neo-institutional views of organizational phenomena, this chapter aims to provide a theoretical framework to address the institutional plurality of MNEs and to study the impact of diverse arrangements of institutions on individual and organizational behaviours in the context of MNEs.

The paper focuses on legitimation and legitimation strategies applied by companies. Following the process of systematic review, we analyse empirical studies exploring legitimation and legitimation strategies from different theoretical perspectives. Using the key findings by reconnoitering and comparing the theoretical background, approaches, methodologies and findings of these empirical studies, we outline potential directions for research in the legitimation strategies of firms engaged in international business operations.

Jagdish N. Bhagwati is professor of economics and law at Columbia University and one of the most prolific scholars on globalization. He has a BA in economics from Cambridge and a PhD in economics from the Massachusetts Institute of Technology. He has served as an external advisor to the director general of the World Trade Organization, as a special policy advisor on globalization to the United Nations, and as an economics policy advisor to the director general of the General Agreement on Tariffs and Trade. Before moving to Columbia University he was professor at the Massachusetts Institute of Technology. Professor Bhagwati currently serves on the Academic Advisory Board of Human Rights Watch (Asia) and on the board of scholars of the Centre for Civil Society. He is senior fellow of the Council on Foreign Relations.