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DOI: 10.1177/1476127009337439
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EDITORIAL ESSAY
340
In other words, high degrees of institutional distance will exist when there
are large differences between the institutional environment in the host and
home countries, and this will make it more likely that a firm will refrain from
entering the host country.
We believe that institutional distance should be broadened to include a
concern with the degree of institutionalization, or what we call institutional
uncertainty, in addition to the degree of difference. As firms internationalize,
they encounter not only institutional contexts where key institutions differ, but also contexts that are composed of institutions that are not well
institutionalized. While the host country, particularly if it is a developing
economy, may be characterized by an absence of a given institution or set
of institutions, it may also be characterized by institutions that while
similar to the home country are only weakly entrenched. The low degree
of institutionalization results in a high degree of ambiguity and therefore a
greater degree of institutional uncertainty. This uncertainty has the effect
of increasing the complexity and risk for international business, thereby
increasing the institutional distance between the home and the host country.
Extending institutional distance to take account of institutional difference
and institutional uncertainty results in a more accurate measure of institutional distance.
But adding this second dimension does more than simply expand our
understanding of institutional distance, it allows us to categorize the different
forms of institutional environments faced by MNCs (see Figure 1). Rather
than just low or high levels of institutional distance, there are four distinct
types of institutional environments that a firm might encounter in a host
country. First, if both institutional uncertainty and difference are low, then
the level of institutional distance is low and the risk faced by firms moving
into this context is also low: firms can simply transfer their existing business
model to the new context. A German food services firm entering Austria
would be an example of this scenario.
The second case is more difficult for MNCs. If we move to the upper
left quadrant, we have a scenario where the differences between the two institutional systems are high while the uncertainty remains low. In this situation,
the institutional distance is moderate and firms must develop strategies for
managing it: firms need to adapt their business model so that it fits with the
new institutional context or else change the new institutional context so that
their current business model becomes viable. An example of this scenario
would include an Indian automotive manufacturer seeking to enter the US
market: the institutional context is quite different but highly institutionalized
and therefore predictable.
Third, moving to the lower right quadrant, we encounter a situation
where the difference between the home and host country institutional
Host country institutional uncertainty
Low
High
High
Adapt
Moderate risk,
complexity, effort
Avoid
High risk, complexity, effort
Low
Transfer
Low risk, complexity, effort
Hedge
Moderate risk,
complexity, effort
Host country
institutional
difference
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game with which they are familiar come into collision and sometimes even
are in contradiction with rules of the game dominant elsewhere (Djelic
and Quack, 2008: 315). Kostova (1997: 180) makes the point even more
forcefully when she argues that the institutional characteristics of a country
reflect that countrys environment in a relatively encompassing way, as they
capture various aspects of the national environment, including cultural norms,
social knowledge, rules, regulations, and others. Therefore, the country level
should be retained when appropriate, but researchers should be open to more
micro or more macro levels of analysis.
Third, the appropriate level of analysis may be more limited in scope than
the country level and vary widely across a particular economy; some parts of a
host countrys economy may be relatively similar to the home context, while
other parts may be very different. This highlights the fact that the nature of
the institutional context faced by MNCs often depends on the kind of business that they are engaged in. For example, an American manufacturing firm
wishing to enter the Dubai market for oil industry equipment will face a very
different degree and form of institutional distance than an American bank
wishing to enter the financial services industry in the same country. While
the oil industry is governed by a relatively generic set of international norms,
banking in the Islamic world operates on a fundamentally different set of
practices than in the US.
The concept of institutional distance would therefore be strengthened if
it was based upon a construct that was not geographically limited, that could
span multiple levels of analysis and that could incorporate important aspects
of these different levels. In institutional theory, this level of analysis has been
conceptualized as the organizational field. DiMaggio and Powell (1983: 148)
define an organizational field as follows:
. . . those organizations that, in the aggregate, constitute a recognized area of
institutional life: key suppliers, resource and product consumers, regulatory
agencies, and other organizations that produce similar services or products.
The virtue of this unit of analysis is that it directs our attention not simply to
competing firms . . . or to the networks of organizations that actually interact . . .
but to the totality of relevant actors.
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a different set of skills than those outlined above. Specifically, MNCs need
to be able build networks and alliances in the host country, to develop lines
of arguments that appeal to a diverse variety of stakeholders and to align
new norms and practices with the values of these stakeholders (Maguire
et al., 2004). This might, for example, involve MNCs offering products or
services that have not previously been available, and which has the effect of
structuring a previously unstructured field.
In the top right hand quadrant, where MNCs are confronted with high
levels of institutional uncertainty and high levels of institutional difference,
they clearly need to engage in both types of institutional entrepreneurship,
which represents a profound challenge to even the most well-resourced and
institutionally skilled MNCs. Success, at least in the short run, is unlikely
although the rewards for successful companies are often large.
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346
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Analysis (SAGE, 2002), with Cynthia Hardy, and Power and Organizations (SAGE, 2006),
with Stewart Clegg and David Courpasson. He is currently editing a volume for the
Research in the Sociology of Organizations series on technology and organizations and
is also co-editor (with Marvin Washington) of the Journal of Management Inquiry. Address:
Imperial College Business School, Tanaka Building, South Kensington Campus, London
SW7 2AZ, UK. [email: n.phillips@imperial.ac.uk]
Paul Tracey is Lecturer in Human Resources and Organizations at the Judge Business
School, University of Cambridge. He was previously Assistant Professor of Entrepreneurship
at Warwick Business School. His research interests include entrepreneurship, regional
innovation and institutional change. He has published in a range of academic journals
including the Academy of Management Review, Organization Studies, Entrepreneurship
Theory and Practice and Strategic Organization. He has recently begun work on a project
on organizational corruption. Address: Judge Business School, University of Cambridge,
Trumpington Street, Cambridge CB2 1AG, UK. [email: p.tracey@jbs.cam.ac.uk]
Neri Karra currently manages the Designing Demand programme at Design London, a
international centre for design-led innovation created by Imperial College Business School
and Royal College of Art. Prior to joining Design London, Neri completed her PhD in
Management Studies at the Judge Business School, University of Cambridge and lectured
at the London College of Fashion. Her research interests include internationalization
of new ventures, family business and creative ventures. She has published a number
of papers in management journals including Entrepreneurship Theory and Practice
and Organizational Research Methods. Her research was nominated for the William
H. Newman Award for best paper from a doctoral thesis and was a finalist for Best
Paper in International Management at the Academy of Management. Her recent book,
Beyond Borders, focuses on international expansion in creative ventures (VDM Verlag
Dr Muller Aktiengesellschaft & Co. KG, 2008). Neri is also a successful entrepreneur
who founded and continues to manage her own fashion firm. Address: Design London,
Imperial College Business School, South Kensington Campus, London SW7 2AZ, UK.
[email: n.karra@imperial.ac.uk]