Subnational Institutional Environment and Product Diversification of Chinese Trust Companies

Abstract

Does subnational institutional environment influence product diversification strategy of firms?While the diversity in subnational institutional development is observed in many emerging economies, its effect on firm strategic behavior and outcomes has not been sufficiently studied.Utilizing the context of the emergence of Chinese trust industry in imbalanced domestic institutional environment, we test the influence of subnational institutional environment on trust companies' strategy formulation (product diversification) and implementation outcome (firm performance). Based on data of all trust companies in the industry during 2007 to 2010, we find substantial support to our hypotheses. Findings show that the level of government interference negatively moderates the relationship between human capital and product diversification and the relationship between product diversification and firm performance; the level of intermediary development has the opposite effects on the two relationships. These results highlight a subnational institutional perspective on firm strategy formulation and implementation in an emerging economy context.