Building Capabilities in Emerging Markets: How Firms Integrate Relational and Operational Resources

Abstract

As interest rises in the effect of the institutional environment on firms’ strategy in emerging markets, scholars argue that firms cannot develop a leading market position without addressing the institutional ‘voids’ (Khanna and Palepu, 2010) or ‘idiosyncrasies’ (Henisz, 2003) that make emerging markets challenging to operate in. In this study, we investigate how domestic firms in emerging markets build and integrate their operational and relational resources within their capability-building process to become leaders in their industry, while addressing the challenges stemming from their institutional environment. Drawing on a inductive study of the capability-building path of four domestic firms in the cosmetics and banking industries Brazil (1990-2011), we find that firms have followed diverging capability-building paths, with leading firms attaining a high level of capability development in four core areas: national coverage and scale, innovative and multi-segment product offerings, human capital quality and corporate social responsibility (CSR) effectiveness. To build those distinctive capabilities, leading firms have deployed in an integrated manner operational and relational resources, enabling them to address institutional challenges that otherwise would have impeded their capability-building process. We find that integration of operational and relational resources in capability-building process is facilitated by three key mechanisms: the executives’ holistic view of the environment; the formation and governance of a broad and diverse alliance portfolio, and the redeployment of social ties.