Subnational institutional configurations and international expansion of SMEs in emerging economies

Previous literature has described emerging economies as ‘[…] those countries whose national economies have grown rapidly, in which the economic sectors have carried out and are carrying out relevant and continuous structural changes, and whose markets are promising despite their volatility and weak legal systems’ (Luo and Tung 2007, 483). These economies differ from developed ones regarding the effect of institutions on firms’ international business strategies, which is largely greater in the emerging contexts (Peng et al. 2008). Indeed, in emerging economies, SMEs willing to internationalise face problems that are different from those SMEs located in developed countries (Chandra et al., 2020), and they hardly ever undertake international expansion just to exploit the resources they have, given that they often do not have ownership advantages compared to their foreign counterparts (Cheng and Yu 2008). As an alternative, they will adopt the internationalisation strategy based on the local institutional framework (Yan et al. 2018), while seeking an opportunity to increase their assets as a result of the external expansion (Yiu et al. 2007).

This approach is consistent with institutionalism, which suggests that the adoption of a particular strategy will be influenced by the institutional framework (North 1990, 2005; Scott 1995). In particular, SMEs will adopt those strategies for which they find institutional support (Adomako et al. 2020). Concerning international business decisions, firms must consider both home and host countries’ institutions (Peng et al. 2008), but it is the home institutional framework that managers mostly take into consideration when making decisions (Chan and Makino 2007).

Institutions have been analysed by the literature on entrepreneurship (e.g. Lim et al. 2016; Simón-Moya et al. 2014; Stenholm et al. 2013; Valdez and Richardson 2013) and international business (e.g. Demirbag et al. 2007; Chan and Makino 2007; Ketkar and Acs 2013; Meyer et al. 2009). Consistent with early versions of institutionalism, they have mostly been studied through macro-level proxy variables and considered single factors whose effect is analytically estimated in isolation (Szyliowicz and Galvin 2010). For example, Deng and Zhang (2018) and Wu and Deng (2020) focus on the influence of the regulative institutional dimension on the internationalisation of SMEs from China, Demirbag et al. (2007) analyse the regulative and normative aspects of institutions, and Chan and Makino (2007) study the influence of cognitive and regulative dimensions on the decisions related to the level of ownership of subsidiaries abroad.

In the context of emerging economies, previous studies have found weak institutional conditions (e.g. Gil-Barragan et al. 2020), which hinder economic development (De Clercq et al. 2010); they have also shown several effects of institutions on firms’ international decisions (e.g. Chandra et al. 2020; Doh et al. 2017; Donnelly and Manolova 2020). Firstly, in emerging economies, the regulative dimension is characterised by limited legislation that results in a legal vacuum (Puffer et al. 2010; Yan et al. 2018), bureaucracy (Chandra et al. 2020; Ghalwash et al. 2017), unforeseen, inconsistent and vaguely defined governmental policies and programmes (Demirbag et al. 2007; Ferreira et al. 2011; Puffer et al. 2010), and, in general, institutional voids (Doh et al. 2017; Puffer et al. 2016). This is especially observable at the subnational level, where greater discretion by the local authorities is frequent (Meyer and Nguyen 2005). Other weaknesses include the limited information about the competition in the market (Acs et al. 2008; Fornes et al. 2021; Chandra et al. 2020) provided by statistical agencies and information offices. Likewise, these economies usually lack incentives that stimulate entrepreneurship and business growth (De Clercq et al. 2010; Meyer et al. 2009) or such incentives are unclear or even inappropriate due to the lack of experience in policymaking by governments (Yan et al. 2018). In contrast, when the regulative dimension of institutions provides stable support for business expansion—e.g. effective and stable stimuli to boost and carry out internationalisation—entrepreneurs can trust them and undertake internationalisation because they do not feel that they will waste the resources of their SMEs due to the inconsistencies of the regulations (Volchek et al. 2015). In addition, if managers can find information offices in their territory that provide relevant data and advise on crucial issues for SMEs to internationalise (Hessels and Terjesen 2010)—e.g. required legal procedures (Trevino et al. 2008)—public aid and incentives encouraging international expansion (Luo and Tung 2007; Meyer and Nguyen 2005), and an offer of training that allows the updating of the employees to the needs of the industry in which the firm operates (Domadenik et al. 2008), they will be in a position to undertake international expansion with their SMEs. According to Meyer and Nguyen (2005), although such regulation comes from a central government and is uniform for the whole country, the effectiveness with which it is implemented in each municipality generates differences at the subnational level. Therefore, the perception of entrepreneurs in each locality on the regulative dimension of institutions may depend on the attention and help they receive from an information office, the support and speed with which they can process a request for assistance, or the possibility their employees will receive training offered by the public administration at centres, among other things.

Secondly, in emerging economies, the normative dimension of institutions is usually highly developed because it includes informal values and beliefs that tend to proliferate to compensate for the lack of a stable regulative dimension (Fornes et al. 2021; Puffer et al. 2010; Yan et al. 2018). Such normative aspects of institutions often differ among subnational territories due to the existence of strong local cultures and traditions (Cantwell et al. 2010; Meyer and Nguyen 2005; Rodríguez Pose 2013). These informal normative institutions encompass social values about admissible human behaviour and socially acceptable business objectives—e.g. power, status, as well as adequate ways of seeking their attainment—e.g. licit, regulated businesses, ethical relationships with government, etc. (Huang and Sternquist 2007). Some authors have found in emerging economies a permissive cultural environment towards corruption (Ferreira et al. 2011; Puffer et al. 2010, 2016; Trevino et al. 2008), irregularities in the formalisation of the business start-up and firms’ subsequent activities, or hostility towards those who make their fortunes based on their investments (Busenitz et al. 2000), all of which generate uncertainty (Tracey and Phillips 2011) and harm SMEs’ international expansion—e.g. in terms of internationalisation speed and results (Gil-Barragan et al. 2020). By contrast, entrepreneurs will feel encouraged to undertake international expansion when they perceive that those who are successful in business enjoy respect and status in the locality; that SMEs’ success and international expansion are considered honourable and praised and such success is spread by the media; when successful entrepreneurship is the subject of great joy in private conversations, and that, in general, successful and expansive business practice is valued. In addition, the fact of having been socialised among entrepreneurs with similar objectives will legitimise such decisions (Powel and DiMaggio 1991).

Thirdly, emerging economies typically lack a large number of big companies and internationalised firms, since it is SMEs that proliferate; in addition, some SMEs operate in the informal sector. For this reason, these economies have less quality business knowledge accumulated on the basis of their firms’ experience—e.g. knowledge of host markets, how to deal effectively with foreign customers—which limits the possibilities of other firms to internationalise (Chandra et al. 2020; Luo and Tung 2007). In this respect, in contexts of risk, such as the decision to internationalise, managers try to reduce the uncertainty of decision-making by imitating the successful decisions frequently made by previous firms (Scott 1995). Business habits, under this approach, offer a form of nonreflective, self-sustainable behaviour that arises as a result of actions repeated over time, which are commonly used where conditions of uncertainty exist (Lu 2002). This lack of practical knowledge of firms’ experience of internationalisation is coupled with the lack of education in business in many cases. Specifically, in emerging economies, there often exists a lack of training courses and university studies in business administration (Ghalwash et al. 2017), which generates quite an absence of theoretical guides for actions on how to approach the process of business expansion. In this respect, Trevino et al. (2008) warn that education in an emerging economy is an adequate proxy for the quality of the workforce and the degree of openness of an economy to international business, and Simón-Moya et al. (2014) highlight the role of knowledge in contributing towards the internationalisation of new ventures. On this basis, we can say that in those localities where entrepreneurs perceive the existence of relevant knowledge (practical and/or theoretical) for undertaking international expansion, which can be accessed from other firms or captured through the hiring of available skilled personnel, they will feel they are in a better position to undertake international expansion. This is so because, in the internationalisation process of SMEs, knowledge of other markets plays a key role as it can decrease the levels of uncertainty in those foreign markets (Pino et al. 2021).

Finally, given that these institutional dimensions are interconnected and highly interdependent (Gries and Naude 2011; Szyliowicz and Galvin 2010), Jackson and Deeg (2008) warn that their one-dimensional study is inadequate since such analysis does not allow the examination of the effect that the interaction among institutions can have on business internationalisation. In this regard, Gries and Naude (2011) assert that the institutional dimensions reinforce each other to maintain the institutional status quo. For example, informal institutions can act as a resilient force against legislative change because, in the decision-making processes, individuals take into consideration both enacted laws and social norms and shared cognitions (North 2005). Thus, one would expect formal institutions to fail to achieve their intended effect if informal institutions cease to be congruent with the formal ones (Cantwell et al. 2010). However, their joint effect is increased if these, even with different contents, are oriented in the same direction and so complement each other.

Researchers highlight the existence of institutional differences between territories of the same country (e.g. Chen et al. 2020; Meyer and Nguyen 2005). Indeed, the most recent versions of neo institutionalism highlight local institutional idiosyncrasies (North 1990, 2005), proposing that the institutional peculiarities of a place—e.g. tax rates, the educational level of the local population, cultural norms, etc.—may not only affect the business decisions adopted by the entrepreneurs located in these areas but also the effectiveness of the policies implemented by the governments to encourage a specific business practice or strategy (Cantwell et al. 2010; North 2005; Rodríguez Pose 2013).

In the context of the developed economies, and concerning the regulative dimension of institutions, subnational institutional plurality is common and derives from administrative decentralisation, with governments at different levels that legislate in their areas of administrative competence. In emerging economies, however, administrative centralisation is common, although there is also a space for local singularity in such formal institutions due to the unequal effectiveness with which local authorities implement national regulations (Meyer and Nguyen 2005), or the zeal with which they pursue their fulfilment. Additionally, informal institutions, whether we look at normative or cognitive aspects of institutions (Stephan et al. 2015), also differ between territories since they arise and are consolidated from the shared experience and common learning that takes place between individuals located in a given area, who consequently face similar events and contexts (North 1990). As a result, the expectation is that each territory within a country will have its own institutional configuration, characterised by a combination of formal (regulative) and informal (normative and cognitive) institutions.

As stated by North (1990), and later empirically corroborated by Stephan et al. 2015, formal and informal institutions act together in configurations to shape individuals’ actions. Relatedly, Park (2021) reminds us that historical evidence demonstrates the interactions between formal and informal institutions, either as complements or substitutes. In addition, concerning institutional dimensions and in line with the precepts of the most recent versions of neo institutionalism, Szyliowicz and Galvin (2010) highlight that they are interconnected, and Jackson and Deeg (2008) assert that interactions between dimensions must be considered because a single dimension, individually considered, can have different and even opposite effects on the behaviour of both individuals and businesses. The nature of the effects of an institutional dimension will depend on the interaction with the other institutional dimensions in a particular configuration, as shown by Fuentelsaz et al. (2019) for regulative and normative aspects of institutions at a national level. This may be the reason why regulatory changes enacted by central governments have diffuse effects on firms located in different territories of the same country, or sometimes do not correspond with what was expected (Dunning and Lundan 2008). For example, several authors have pointed out that macro-level regulatory changes are inadequate if they are inconsistent with the local institutional configuration (Cantwell et al. 2010; North 2005). Given the existence of different institutional configurations within a country, the changes undertaken by the central government should be based on the correct combination of formal and informal institutions (Rodríguez Pose 2013).

For example, a territory with an institutional configuration based on regulative, normative, and cognitive aspects of institutions favourable to SME international expansion, which complement each other, could be expected to generate entrepreneurial opportunities perceptible to the entrepreneurs, who, as a result, will feel highly encouraged to undertake international expansion. However, given that emerging economies are characterised by limited and weak regulation and that the cognitive aspects of institutions are often of low qualitative value in terms of business knowledge for internationalisation, as already argued, the normative dimension can acquire greater relevance in providing legitimacy to the business decisions related to international expansion if it drives and legitimises such entrepreneurial action. Therefore, this second institutional configuration could potentially also lead to the international expansion of SMEs. Given the lack of previous literature that identifies the institutional configurations that drive the international expansion of SMEs, we establish, as a proposal, the following:

The population under study includes entrepreneurs who manage businesses located in the six tourist municipalities of Sergipe (Brazil)—specifically, Aracaju, Sâo Cristobâo, Pirambu, Larajeinras, Estancia, and Canindé—who fulfilled the following preconditions: they are founders, owners, and managers of an SME operating in a tourism-related sector—i.e. hospitality, catering, transport, recreational activities, tour operators, retail trade, and consultancy services. The condition of the founder, owner, and manager of the SME represents a relevant requirement in the present study in order to make possible the analysis (on a territorial level) of the potential relationships between “institutions in a specific territory as perceived by entrepreneurs” and “the international expansion of the SMEs that they manage”.

In the absence of a registry of such entrepreneurs in the municipalities under study, we resorted—as an approximation—to the registration of firms. The census provided by the Ministério do Desenvolvimento, Indústria e Comércio Exterior, Governo do Estado de Sergipe (Secretary of State for Economic Development and Science and Technology, Commercial Board of the State of Sergipe) was used and, according to the list provided, there were 1520 firms operating in the tourism industry in the six municipalities analysed. However, this census did not offer a reliable calculation of the firms due to two basic problems: the lack of an up-to-date registry that included business ‘ups and downs’, and the existence of a high level of informal entrepreneurship—that is, of active but not legally constituted businesses. In addition, on the lists consulted, there was no information—or it was unreliable—regarding the size of the firms or the subsector in which they operated (most of these fields were blank in the census). All these circumstances prevented the proper determination of the population size and, consequently, the definition of a sample size following statistical criteria. As an alternative, a fixed quota system was established and it was guaranteed that each municipality had a balanced representation in the sample (between 15 and 20%), thus enabling the subsequent comparative analysis.

We obtained the information through a structured questionnaire written in Portuguese (the official language of Brazil). To carry out the fieldwork, the SEBRAE institution (Serviço Brasileiro de Apolo as Micro e Pequenas Empresas) collaborated, selecting six interviewers and participating in their training (e.g. regarding the terms and the meaning of the items in the questionnaire) and coordination. Because SEBRAE is a well-recognised organisation that provides support to micro and small businesses in Sergipe, the entrepreneurs invited to participate in the study were very favourable towards collaborating in the data collection phase. As a result of this willingness, abstentions, or refusals were rather low, and we reached a satisfactory participation level of entrepreneurs in each municipality (response rate higher than 90%).

Specifically, we obtained a sample of 296 entrepreneurs (sampling error of ± 3.69% with respect to the 1520 tourism firms including the census of the Junta Comercial do Estado de Sergipe) with the following territorial distribution: São Cristovão, 17%; Aracaju, 23%; Pirambu, 14%; Laranjeiras, 14%; Stay, 15%; and Canindé, 19%. On average, the SMEs managed by their founders and participating in the study had 9.89 years of life and had a staff of 3.3 full-time employees. They operated in the following tourism subsectors: accommodation (19.26%); restoration (29.39%); transport (14.53%); recreational activities (12.16%); intermediary agents (3.04%); commercial (20.27%); and others (1.35%). Finally, 89 of the 296 SMEs in the sample were internationalised.

Table 1 shows details of the scales, validity, and reliability assessments. Referring to validity, the assessment included several indicators. Specifically, we first considered the variance explained by the full model (61.536%) and by each factor in the factor analysis. Second, and following Hair et al. (1995), we verified that convergent validity was high through three tests: (1) the factor loadings on all items in the factor analyses are equal and above 0.6; (2) the average variances extracted (AVE) of all the constructs are equal and above 0.5; and (3) the composite reliability (CR) is over 0.7. Third, we assessed discriminant validity through the square roots of the AVE following Fornell and Larcker’s (1981) criterion. Specifically, the square root of AVE for institutional dimensions is superior to the correlations between them, which implies discriminant validity is good (please see correlations in Table 2). Concerning the reliability of the scale, internal consistency was checked through Cronbach’s alpha for all the items (alpha = 0.797) and each institutional dimension (see Table 1). As the scale for each institutional dimension is made up of less than 10 items, alphas equal to and above 0.6 can be considered acceptable (Loewenthal 2015).

Data analysis was carried out in three phases. First, an analysis of correlations was carried out in order to examine the possibility of multicollinearity. Likewise, and given that the research uses a single source of data—the SMEs’ entrepreneur—and is cross-sectional, which could lead to a common method of variance, analyses were carried out in order to inform on this risk. For this purpose, the survey-taker was asked to ensure that the participants understood all the questions and, during the empirical study, the respondents were guaranteed total anonymity. In addition, after the construction of the database, a Harman factor test was carried out following the procedure indicated by other authors (Koropp et al. 2013; Li et al. 2007). The tests performed show that there are four factors in the data with eigenvalues greater than 1, regardless of whether a non-rotated factor analysis of principal components is used (total explained variance = 63.47%), a principal component analysis with varimax rotation (total explained variance = 63.47%), or a factor analysis of main axes with varimax rotation (total explained variance = 53.19%). The first extracted factor explains 26.99%, 19.93%, and 17.42% of the total variance, respectively. Therefore, the Harman test failed to identify a single or main factor underlying all the variables included in the present work, so there is no evidence of the existence of a common method of variance.

Table 3 shows the mean difference test carried out to assess the existence of statistically significant differences among municipalities in terms of the institutional dimensions. Results indicate that the territories compared have significant differences in regulative, normative, and cognitive aspects of institutions.

Firstly, while Aracaju and Estância present the most favourable regulative institutional dimensions for businesses according to the entrepreneurs located in these municipalities, Pirambu and Canindé stand out for having the worst. The existence of these differences is relevant because they affect institutional aspects such as the existence of state aid and regional funds, information offices on issues of relevance to the operation and expansion of the business, or the training offered in professions required for the development of the tourism SME, among others.

Secondly, the results also find differences concerning the normative institutional dimension, which encompasses cultural aspects related to entrepreneurship such as the high level of respect for people who succeed with their own business, the existence of frequent conversations and news in local media concerning successful entrepreneurs, and the acceptance of female entrepreneurs. Looking at the mean comparison, we find that the territories of Laranjeiras and Estância stand out for having the most favourable normative institutional dimension, compared to Aracaju and São Cristovão, which are characterised as having those that provide a lower level of support for the development of successful and productive entrepreneurship.

However, and thirdly, it is precisely these two municipalities—Aracaju and São Cristovão—that have the most suitable cognitive institutional dimension for facilitating the growth and expansion of the SMEs located in them. Cognitive aspects of institutions include the existence in the municipality of people with university degrees, computer skills, managerial experience, and experience in the industry in which the SME operates. Canindé and Pirambu, on the contrary, rank the worst concerning this institutional dimension.

Considering these results globally, we can affirm that each municipality has its own configuration or combination of institutional dimensions, in such a way that aspects of regulative, normative, and cognitive institutions are favourable to firms expanding at different degrees, such differences being perceived by the entrepreneurs who have their tourism SMEs located in them. Thus, results provide support for H1.

Table 4 shows the mean difference test for municipalities of Sergipe with respect to the international expansion of SMEs. The test performed finds statistically significant differences between these territories. This result guarantees the existence of an adequate context in which to carry out the qualitative comparative analysis of institutional configurations and its relationship with the international expansion of SMEs put forward in proposition P1. Specifically, the average values for each municipality, shown in Tables 3 and 4, allow such an analysis to be carried out.

Focusing on the three municipalities where the international expansion of SMEs is higher, Estância, Canindé, and Aracaju, we can observe the different institutional configurations that characterise each territory. In Estância, where the international expansion of SMEs is highest, the regulative and normative institutional dimensions are favourable to firms’ expansive activity, both ranking second in the rankings of the six municipalities analysed, while the cognitive dimension ranks third. Thus, we found coherent formal and informal institutions that complement each other and support internationalisation.

Aracaju, being the third-ranked municipality in terms of the international expansion of SMEs, stands for having the most favourable regulative and cognitive aspects of institutions for expansive business activity, compared to the other municipalities—although its normative dimension ranks it at fifth. In this case, the formal regulative and informal cognitive institutions are the ones that are complementary in supporting internationalisation; such a great and harmonised effect can in some way make up for the lack of a favourable culture (informal normative institutions) and allow Aracaju to be located in third place in the rankings of SME international expansion, albeit with great distance from Estância.

Canindé, however, being the second municipality in terms of the international expansion of SMEs, ranks third regarding the normative dimension of institutions and the fifth/sixth concerning the regulative and cognitive dimensions, respectively; so, complementarity in the suitability of formal and informal institutions to boost expansive business activity was not found, and normative aspects of institutions only moderately support expansive business activity: Canindé is much closer to Aracaju (the third) than to Estância (the first).

On the other extreme, Laranjeiras, São Cristovão, and Pirambu are the municipalities where the international expansion of SMEs is the lowest, and these municipalities are characterised by the absence of complementary formal and informal institutions that favour expansive business activity. São Cristovão and Pirambu have regulative and normative institutional dimensions that rank low in the rankings of the six municipalities, and the cognitive aspects of institutions are especially low in the case of Pirambu (it ranks fifth); in Laranjeiras the normative dimension is the most favourable for expansive business activity, but the regulative and cognitive dimensions are low and occupy the third and fourth position in the rankings.

All considered, the results seem to be in line with proposition P1, but they also offer some findings that invite a deeper discussion. We offer such a discussion below.