Country institutions have become of heightened importance for firms’ international strategies in recent years. Herein, I review the reasons for the growing importance of institutional environments and examine how they influence the international strategies of multinational enterprises (MNEs). There have been significant changes in the global, economic and competitive landscapes in recent years. These changes are examined.
Three critical and interrelated changes in the global competitive landscape are identified. They include (1) more interconnected (interdependent) national economies, (2) a significantly larger number of multinational firms and (3) growing importance of emerging economies (and their MNEs). These changes have increased the importance of countries institutional environments. Country institutions, both formal institutions (codified and explicit rules and standards that shape behavior) and informal institutions (Shared norms that guide cohesive behaviors) are examined. I explain the influences of institutional complexity, institutional distance and geographic regions on firms’ international strategies.
Research has shown that both culture (informal institution) and formal institutions are interrelated and affect firms’ strategies. And, while specific institutions such as intellectual property protection (law and enforcement) are important, the collective influence of institutions has a critical influence on firms’ international strategies. And, institutions are multilevel (national, regional and local-municipal). The institutional complexity (combined effects of multiple institutions and their diversity) is carefully considered in executives’ strategic decisions. When firms consider entering a new foreign market, they also consider the institutional distance between the home and host countries. The differences in culture and in formal institutions compose the institutional distance and affect whether and how firms enter these markets. Greater institutional distance contributes to the liabilities of foreignness the challenges of which must be managed effectively to succeed in the new market. And the effects of institutional distance are asymmetric depending on whether the firm’s home country institutions are stronger/more developed or weaker/less developed than the host country institutions. Finally, many firms follow regional international strategies in which they invest in selected regions of the world. Recent research suggests firms enter regions that have attractive institutional profiles and engage in institutional arbitrage across the countries in those regions.
This essay provides the base for additional research by identifying a number of important research questions on institutions and international strategy.
This essay highlights the importance of institutions for firms’ strategies. Understanding institutions and their influence contributes to more effective executives’ strategic decisions and more effective national and international policies.
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