Strategic Responses to Institutional Voids (Rationalization, Aggression, and Defensiveness): Institutional Complementarity and Why the Home Country Matters

The global economy has experienced substantial shifts in terms of economic output and trade flows, with the growing importance of emerging markets and the declining share of advanced economies (Liedong et al., 2020). Whilst we have seen a mounting literature on emerging markets, this has been limited in terms of geographical coverage, and Fainshmidt et al. (2018) argue that there are a large group of understudied economies within the developing world that have diverse and unique institutional environments. They lament that with the growth of developing economies, research has not kept pace with understanding institutional contexts for vast parts of the world. We respond to this by focusing here on examining the institutional environment in two understudied countries with fragmented institutional systems and fragile states, to use their terminology, and examine how such contexts affects the strategic responses of firms. This will be of increasing importance to international business studies in the future as more such countries become investment targets.

Emerging and developing markets are often presented as being beset by institutional voids (Gao et al., 2017). It is argued that in the presence of these voids the environment of business may become turbulent, costly, and unpredictable, making it difficult to plan, manage transaction costs, and create stable long-term strategies for profitability (Khanna & Palepu, 2010). Faced with conditions of sustained institutional voids, firms, particularly foreign multinational enterprises (MNEs), may end up fleeing the host country to seek more stable environments (Barnard & Luiz, 2018; Cuervo-Cazurra et al., 2018a, b; Holburn & Zelner, 2010). Those that remain face higher transaction costs associated with these voids and the lack of predictability and security of investment means that they have to develop mitigating strategies and unique capabilities to succeed in these settings. Firms therefore have a range of possible responses to host country institutional voids and we ask whether those responses may be affected by the institutional environment of their home country by building on prior literature on the effects of a firm’s home country on internationalization (Cazurra et al., 2018b; García-Canal & Guillén, 2008; Hoskisson et al., 2013).

Gao et al. (2017, p. 2148) argue that ‘institutions are more than just background conditions’ and that they directly impact the strategic responses available to firms. They state that ‘firms can achieve and sustain competitive advantage through strategies that overcome, shape, and capitalize on the nature of the institutional environments’. Extant research in international business explores the relationship between institutional voids and firm outcomes as well as how they affect the motives for, timing of, and selected entry modes (Aguilera & Grøgaard, 2019; Kostova et al., 2019; Meyer et al., 2009).

Our approach is narrower and focuses on firms that operate in environments of institutional voids and seeks to understand how their strategic responses to these voids are affected by their home countries’ institutional contexts. It adopts an exploratory, qualitative methods approach in two African countries which are characterized by such voids (as per Khanna & Palepu, 2010), namely the Democratic Republic of the Congo (DRC) and Zimbabwe.

We provide additional insights into three strands of research. Firstly, the impact of institutional voids on firms’ behavior in emerging markets (Khanna & Palepu, 2010; Wang et al., 2020) and we extend this towards less developed markets by demonstrating the diverse responses of firms to such voids and we provide some explanation for why these responses may vary. Secondly, the literature on the effects of a firm’s home country on internationalization (Geleilate et al., 2016; Hoskisson et al., 2013; Luo & Wang, 2012). Cuervo-Cazurra et al. (2018b, p. 593) state that surprisingly ‘[M]any of the current theories and models of the multinational have paid limited attention to the influence of the multinational’s home country’. Likewise, Adomako et al. (2020) lament the lack of consideration given to the critical role of home countries’ institutional environments in driving international expansion and they focus on how it influences and moderates the relationship between perceived environmental uncertainty and the patterns of internationalization. We highlight how the home country may influence the strategic responses of firms to institutional voids in particular. Lastly, we contribute towards the study of firms in underdeveloped countries, particularly in Africa, which remains underresearched (Boso et al., 2019; Chen et al., 2017; Mol et al., 2017). Not only do we need to have a better sense of how existing research translates into institutionally voided, low income regions which may feature more prominently in the future as they develop further, but also by focusing on more extreme institutional settings we follow the advice of Barnard et al. (2017) about the value of theorizing from extreme conditions.

The paper is structured as follows. We proceed by reviewing the theoretical arguments around the impact of institutional voids on the strategic responses of firms and why the home country institutional context may matter in this regard. This is followed by an overview of the research methodology. The results and discussion follow. We conclude by discussing the theoretical and practical implications of our study, the limitations, and areas for future research.

Respondents from both countries highlighted the difficulties of doing business in the host environments, in particular as regards the heightened political uncertainty and risk, corruption, lacking social and physical infrastructure, and unreliable regulations, amongst others. The unpredictability of the institutional environment and the ambiguous and dynamic nature of the rules of the game as per Khanna and Palepu’s (2010) institutional voids increased the transaction costs of doing business. This put pressure on firms to adapt and to respond appropriately to the institutional voids. Our thematic analysis of the interviews revealed a number of responses employed by firms as presented in Table 3. Firms utilized different elements to give themselves the ability to at times just survive and at other times to thrive in this environment—moving between states of hibernation and forceful opportunism. Although firms utilized a combination of these strategies, we see home country effects. The institutional environment of their home country appeared to frame both their perception of and their strategic responses to the voids. We explore this below.

In this paper, we theorize that the institutional environment of firms’ home countries affect their strategic responses to institutional voids in host emerging or developing markets. Our company case studies, represented seven countries, with diverse institutional settings as presented in Table 1. We suggest that firms’ familiarity, or lack thereof, with institutional voids in their home country impact upon their perception of such institutional conditions and that it provides a ‘sense-making’ lens which they apply in their responses. Our categories map onto the theoretical dimensions of Oliver’s (1991) strategic responses to institutional pressures but are also distinctive given that our focus is international and is premised on the interplay between the home and the host environment. We identify differences in the strategic responses of AMNEs, EMNEs and domestic firms associated with the impact of this institutional complementarity between their home and host country environments. By bringing in the international context we can account for notions of institutional distance and examine whether similarities and differences affect strategic responses thereby incorporating an additional lens to Oliver’s institutional pressures. We show that the strategic responses of our sampled firms to institutional voids are characterized by rationalization for domestic firms (R), EMNEs by aggressive agility (A), and AMNEs by defensiveness (D) (RAD). Local firms are embedded in the domestic environment and as insiders they are most keenly attuned to the particular institutional voids, whilst AMNEs are the most institutionally distant to the host environment and as outsiders to these institutional voids they are more defensive in their strategic responses, and lastly, EMNEs have some familiarity with similar institutional contexts and recognize certain complementarities between their home and the host settings which affect their strategic responses.

Local firms demonstrated greater levels of what Oliver (1991) refers to as acquiescence with some elements of compromise. They were more likely to follow and accept the taken for granted norms and to comply with the rules although with efforts to make their voices heard through collective strategies by negotiating with institutional stakeholders in a nonthreatening manner. EMNEs revealed more of what Oliver refers to as manipulation whereby they attempted to co-opt influential constituents and shape values and criteria but also elements of compromise as they balanced the expectations of multiple constituents recognizing that they needed to adapt and accommodate local institutional elements. AMNEs came closest to Oliver’s avoidance, not through complete escape but by avoiding certain risks and giving up market share. They exhibited some elements of compromise especially in utilizing their FSAs for tactical bargaining with institutional stakeholders by making themselves indispensable in terms of the resources they could offer. By focusing on what they did well and their resource advantages they also tactically were able to better conceal or disguise nonconformity.

Table 4 unpacks this RAD framework of strategic responses structured around the institutional complementarity between home and host settings. AMNEs’ strategic responses were defensive in nature and associated with their superior FSAs and risk management. But their level of discomfort with institutional voids, given low levels of contextual knowledge, and their search for predictability in the rules of the game imply certain disadvantages linked to their lower level of embeddedness in the host environment. In other words, they have a greater liability of foreignness due to the institutional distance. In terms of our sampled firms, they were more likely to turn away business and lose market share to maintain a desired risk ceiling in such institutionally voided contexts.

On the other hand, EMNEs capitalized on their knowledge of less institutionally stable contexts and adopted aggressively agile strategic responses to what they perceived as the opportunities presented by these settings. Lastly, local companies have less international diversification and opportunity to escape and therefore have to work within these environments and to rationalize and reconcile with and embed their strategic responses within the context. What they lack in resources they make up for with their high contextual knowledge allowing them to leverage their resources effectively.

Our theoretical contribution is as follows. Whilst Oliver (1991) hypothesized antecedents that impact on organizational responses to institutional processes, she did so from a theoretical perspective rather than with empirical research and she did not explicitly account for an international context. Boddewyn and Brewer (1994) extend this to an international setting and study the interactions between firms and institutional settings but their analysis is firmly rooted on one side of the coin, namely the host institutional conditions. Our contribution is to show the dynamics of why the home institutional environment may impact upon the strategic responses of firms to institutional voids in host markets and thereby brings in an additional dimension. Furthermore, our institutional setting is extreme as we highlight understudied economies within the developing world that have diverse and unique institutional environments (Fainshmidt et al., 2018). Given that Oliver’s theorization does not analyze an international setting, possible differences between home and host institutional pressures are not examined and how these might affect the strategic responses of firms. The consequence of this is apparent upon closer examination of her hypotheses which do not account for how institutional pressures might be affected by institutional distance. For example, she hypothesizes that the likelihood of organizational resistance to institutional pressures is greater, the ‘greater the degree of discretionary constraints imposed on the organization by institutional pressures’ (p. 164), and the ‘lower the level of uncertainty in the organization’s environment’ (p. 170). We highlight that such responses are affected by how a firm’s home country environment may help frame their understanding of these institutional pressures. By virtue of similarities and differences between the home and the host context, a firm can be an insider or outsider or something in-between to environments beset by institutional voids, and we argue that this may impact upon those hypothesized responses. We show that AMNEs are most likely to respond in the hypothesized manner as their frame of reference is a home context of well-functioning institutions with predictable rules of the game and this leads to higher levels of resistance in institutionally voided settings. Local firms, on the other hand, as insiders that are deeply embedded in that institutional context and have little room for escape are likely to interpret the rules of the game differently and will seek some form of reconciliation with those rules. Lastly, EMNEs which have some familiarity with difficult institutional environments see certain complementarities between their home and their host contexts which allow them greater agility in recognizing and taking advantage of opportunities. In this way we are able to add additional nuance, evidence and dimensions to Oliver’s theorization.

Secondly, we contribute towards the literature on the effects of a firm’s home country on internationalization (Cuervo-Cazurra et al. 2018a, b; García-Canal & Guillén, 2008; Luo & Wang, 2012). We show how the home context impacts firms’ strategic responses to institutional voids and provide an explanation for why this may be the case. Whilst there are increasing calls to take context more seriously in management research, in our study context is paramount (Doh et al., 2012; Hamann et al., 2020). We see firms’ abilities to operate in these environments and to exploit their inherent FSAs defined by the context. This institutional context is associated with higher transaction costs or what Dorobantu et al. (2017) refer to as ‘institutional costs’ and the lack of predictability and security of investment and operations. The volatility and ambiguity of the rules of the game imply that firms may not be able to rely on their existing models and routines structured around their FSAs as they may not translate effectively in this milieu. Newman (2000) supports this notion stating that in extreme institutional contexts existing resources and capabilities may be rendered less relevant. This does not imply that FSAs are unimportant but rather that firms cannot assume that they can exploit them as per usual because their effectiveness may be neutered by the challenging institutional environment (Barbour & Luiz, 2019).

Whilst prior research points to the importance of FSAs in overcoming the liability of foreignness, the nature of our institutional environments is such that the ability of firms to exploit these FSAs may be compromised as they translate less seamlessly. The institutional voids may provide certain advantages to local firms or EMNEs which have more familiarity with such conditions as they can capitalize upon their knowledge and experience and take advantage of institutional complementarity. Newman (2000) states that the foreignness of more extreme institutional contexts implies that firms (we would argue AMNEs) lack legitimate templates to process and interpret information and activity. The institutional voids create ambiguity in cause–effect relationships which may result in strategic confusion. This confusion is less pronounced for firms that have experiences and capabilities from the past that are relevant to this institutional context. Firms have to make sense of the rules of the game and their ability to process and understand the ambiguity is impacted by their level of embeddedness in this institutional framework and their prior experience of such institutions.

Thirdly, we contribute towards the literature on institutional voids in emerging markets (Khanna & Palepu, 2010; Meyer & Peng, 2016; Wang et al., 2020) and we extend this towards the study of less developed markets—in Africa in our case (Boso et al., 2019; Zoogah et al., 2015). As the continent grows in importance so it becomes all the more imperative for us to understand the challenges of doing business in such settings and how it affects the ability of firms to succeed under these conditions. Furthermore, given the increasing presence of MNEs in Africa (Parente et al., 2019) it is important that we further understand the advantages and disadvantages that investors will face—in particular whether EMNEs or AMNEs are better positioned to exploit these opportunities and to leverage their FSAs most effectively. We provide nuance on the impact of institutional voids and demonstrate that it does not necessarily affect the strategic responses of firms in the same manner. We suggest that the home country institutional context may mitigate the impact of institutional voids in host markets and may affect the ability of firms to leverage their sources of advantage. We illustrate the differences in the strategic responses in institutionally voided environments between AMNEs, EMNEs and domestic firms and thereby contribute to our understanding of differences between these firms in terms of their FSAs and CSAs.

Our research suggests that firms’ strategic responses to institutional voids in emerging or developing markets are affected by the home country’s institutional environment and firms’ experiences and advantages arising from that home context. Firms adopt strategic responses which reflect their respective advantages and this results in diverse approaches based on the interplay between capitalizing upon internal resources and institutional know-how. Strategic responses to institutional voids reflect constrained optimization—effectively utilizing a combination of internal resources adapted to the external environment. For some firms this may result in a defensive posture whilst for others opportunistic and aggressive agility, or rationalization and reconciliation, and the extent of this is influenced by the home country and its institutional conditions.

Our study has implications for practice. Firstly, managers should note the dangers of assuming that FSAs necessarily translate into institutionally voided locations but should rather start with the context and interpret and develop responses that speak to that context. This requires fully integrating both a resource and institution-based analysis of firms’ underlying advantages. Secondly, we demonstrate the scope for firms to adopt solutions-driven approaches that attempt to fill institutional voids (Gao et al., 2017). We show that how they do so is impacted by their home country with local firms more likely to engage in negotiation and reconciliation, whilst AMNEs capitalize upon the bargaining power associated with their extensive international resources. This leads to our third practical implication which is the importance of a partnership-driven approach to institutional voids (Doh et al., 2012, 2017; Dorobantu et al., 2017). We propose that how firms engage in such partnerships is impacted by their home country and their experience of partnerships (hybrid and otherwise). For example, whilst local firms rely extensively on meaningful representation on official business–government forums and bodies to represent, coordinate and negotiate their positions, EMNEs engage in innovative partnerships with a wider range of stakeholders aimed at mitigating some of the institutional risks. Our research also demonstrates the difficulty of such partner-driven approaches where such bodies are often ‘compromised’ by governments—as in the DRC where the chamber of business mining was headed by the CEO of the state-owned mining company creating conflicts of interest.

Several limitations manifest as regards this research which leads to areas for future research. The nature of the sample in terms of countries, firms and sectors selected mean that we cannot generalize but that was not the purpose of this research which was exploratory in nature. Future research could extend this by exploring how it generalizes to other settings and sectors. Even within Africa we selected two countries characterized by more severe institutional voids but, as we highlighted in Table 1, there is a continuum of institutional environments and this requires further nuanced analysis. Additionally, more work of a longitudinal nature will allow us to explore the dynamics of how strategic responses adapt to institutional voids. We know that institutional environments are not static and thus how firms’ strategic responses interact and are affected by institutional changes requires more work. Furthermore, our focus was on the strategic responses and not on the relative success of these responses and this lends itself to future research. Related to this, our research only touches on the connected nature of market and nonmarket strategies although it is not something we actively investigated. Mellahi et al. (2016) argue that more work is needed in this area and particularly how the combination of market and nonmarket strategies can result in unique capabilities. We lack a mid-theory that shows MNE organizational adaptation processes using combinations of nonmarket and market capabilities or development phases and all the more so in particularly trying institutional environments that are subject to continuous change. Our research proposes that such an analysis needs to account for differences in the home country’s institutional context of firms.