Institutional constraints for outsourcing services in Russia

Abstract

PurposeThe purpose of this paper is to show how the institutional context in an emerging economy, Russia, moderates the “do or buy” decision of international firms operating in the country. This is examined through the influence of institutional voids on transaction costs and definition of core competencies.Design/methodology/approachThe paper adopts a qualitative research approach, where the empirical data are based on interviews with executives of eight Finnish companies, which have invested in Russia's second largest city, St Petersburg.FindingsThe key findings include first, that the formal and informal constraints in the Russian business environment influence outsourcing decisions in terms of increased transaction costs, and in terms of resources needed to be competitive. Second, the authors show that, due to these constraints, a firm in Russia may need to insource functions that it would otherwise outsource as non‐core activities and invest in building of competencies specific to the Russian business environment.Research limitations/implicationsThe limitation of the study is its focus on two countries. However, the analytical framework proposed for examining influence of institutions on outsourcing strategies is applicable to other country contexts.Practical implicationsThis paper shows how the institutional constraints of the host country, reflecting in this case as underdeveloped market for business services and complex state regulation, can result in a significant need for adaptation of a foreign firm's business processes. This must be taken into account in business planning and allocation of resources to the Russian operations.Originality/valueThe paper provides researchers and practitioners with new information about a little‐studied topic by showing concrete ways of how institutions influence outsourcing strategies in Russia.