Level Of Institutional Development Research Articles

Commercial diplomacy's role in entering foreign markets in the age of global value chains

We examine the role played by commercial diplomacy in firms' outward internationalisation. Based on interviews with economic counsellors and a comparative case-study analysis of firms entering foreign markets, we explore the antecedents and consequences of commercial diplomacy for foreign market entry. The moderating effects of commercial diplomacy vary with regard to the foreign market's level of institutional development as well as the entry mode. The greatest potential effect is identified in less developed, institutionally and politically less stable countries and while engaging in internalisation-related entry modes. The results also depend on firms' perceptions, the timing of the relationship that is established between firms and counsellors as well as the economic counsellors' capabilities. Commercial diplomacy is important for both recognising and exploiting opportunities in international markets. We discuss the managerial and policy implications and develop propositions for testing in later entry mode research and commercial diplomacy research.

Commercial diplomacy's role in entering foreign markets in the age of global value chains

We examine the role played by commercial diplomacy in firms' outward internationalisation. Based on interviews with economic counsellors and a comparative case-study analysis of firms entering foreign markets, we explore the antecedents and consequences of commercial diplomacy for foreign market entry. The moderating effects of commercial diplomacy vary with regard to the foreign market's level of institutional development as well as the entry mode. The greatest potential effect is identified in less developed, institutionally and politically less stable countries and while engaging in internalisation-related entry modes. The results also depend on firms' perceptions, the timing of the relationship that is established between firms and counsellors as well as the economic counsellors' capabilities. Commercial diplomacy is important for both recognising and exploiting opportunities in international markets. We discuss the managerial and policy implications and develop propositions for testing in later entry mode research and commercial diplomacy research.

Government subsidies, state ownership, regulatory infrastructure, and the import of strategic resources

PurposeAlthough there has been much research on government support for export in China and other emerging economies, considerably less attention has been given to government subsidy-related importing activity in China. This study aims to propose that the government subsidies as the source of financial resources produce a significant increase of imports, as the firms are more likely to engage actively in importing technology-related products which are conducive for China’s future innovation. However, state ownership in firms negatively moderates this relationship and holds back technology imports. Improved formal regulatory institutions do not help to improve but rather weaken this relationship.Design/methodology/approachTo investigate how government policy affects imports of strategic resources in China, all of the listed firms on Chinese stock markets (from 2008 to 2014) have been selected, the firms that are engaged in exporting and importing activities. The data from the China Stock Market & Accounting Research database have been selected and merged with those of the General Administration Customs in China. A panel analysis has been done with several robustiness tests.FindingsFirst, the study indicates that government subsidies are a driving force for the development of importing activities. Second, it finds conflicts of interests between government subsidies and state ownership of a firm, as increased ownership will weaken and even negate the positive effect of a government policy, thus negatively affecting the national competitiveness in the long run. Third, it is important to take into account the issue on different levels of institutional development, even allowing for the fact that a nationwide government policy is applied to the firms located in all corners of the country.Research limitations/implicationsThe authors suggested a regional difference in regulatory development but did not find the proposed direction. In their future study, the authors will validate and generalize this intriguing substitutional effect. They expect the results will help the government to ensure that it can fulfill a policy (e.g. regulation) down to every gross-roots organization so the development of regulatory infrastructure will help the firm to obtain and accumulate strategic resources through increased imports of them. Another direction of their future study will explore how government policy will prompt the firms to increase their spending so that they can possess plenty of “stamina” for their future development.Practical implicationsDifferent levels of institutional development exist in China even allowing for the fact that a nationwide government policy should be applied to all firms within the territory. This certainly has impacts on technology imports and thus creates difficulties for firms located in the western parts of China about which the government is particularly concerned. The government needs to ensure that its policies (laws and regulations) can be fulfilled down to every gross-roots organization so that the development of regulatory infrastructure can be inclusive and pervasive, given its influence on technology importation and indigenization.Originality/valueBoth of the theoretical and empirical work centered on policy initiatives and particularly government subsidies in emerging economies that significantly influence imports of strategic resources, a means with which the firm is better able to maintain and develop its competitive advantages, particularly in an economy with institutional void. Relatedly, the results on a causal relationship help envision a transcending trajectory of China’s economy, suggesting that businesspeople should capitalize on the policy advantage so that they are better able to sustain their long-term development. The results also present implications for policymakers to encourage and support strategic move toward such import endeavors.

FINANCIAL LIBERALIZATION AND STOCK MARKET EFFICIENCY: MEASURING THE THRESHOLD EFFECTS OF GOVERNANCE

This study takes the initiative to make a link between empirical aspect of an economy and theoretical part of it. Investigating econometric findings, the current study has taken advantages of profound analytical discussions to justify which school of thought describe liberalization phenomena and its relevant side effects. This paper presents an investigation into the effects of financial openness on stock market efficiency in emerging markets after controlling for certain level of institutional development. The results demonstrate that there is a threshold effect in the liberalization–efficiency relationship. Specifically, we found that the impact of financial liberalization on informational efficiency of the stock market was positive and significant only after a certain threshold level of institutional development had been attained. Below this level, the effect of financial liberalization on stock market efficiency was negative. This finding suggests that the positive effects of financial liberalization on informational efficiency are contingent on the level of institutional development, thus supporting the idea that financial liberalization embedded within a sound institutional framework has the capacity to enhance stock market efficiency. The conclusion that the governance concept, emphasized in econometric findings, is implicit in the definition of neoliberalism can be considered as one of the contributions of the study.

Government policies and firms' entrepreneurial orientation: Strategic choice and institutional perspectives

The relationship between government policies and firms' entrepreneurial orientation has been a controversial topic in entrepreneurship research. This paper examines how economic policies promulgated by the central government can attempt to shape the entrepreneurial orientation of privately owned firms in China. Instead of adopting the environmental deterministic view, this paper builds on strategic choice theory together with institutional theory to propose that the entrepreneurs' perception of new policies and the surrounding institutional environment interact to shape firms' behaviors, such as their entrepreneurial activities. Specifically, the greater the entrepreneurs perceive the effectiveness of new policies to be, the more likely their firms will capitalize on such policies by engaging in entrepreneurial activities. Private firms based in institutionally developed regions, however, will not be motivated to engage in as many entrepreneurial activities as those in regions with lower levels of institutional development. Additionally, the relationship between the perceived effectiveness of new policies and entrepreneurial orientation is mitigated for firms with political connections.

INSTITUTIONS MATTER DIFFERENTLY DEPENDING ON THE OWNERSHIP TYPES OF FIRMS: INTERACTING EFFECTS ON FIRM PRODUCTIVITY IN CHINA

Ownership and institutions are regarded as key determinants of firm performance. Using data of Chinese firms from 1998 to 2009, this study tests the separate and interacting effects of ownership and institutions. The divergent performance of firms can be explained from the heterogeneous ownership context, as confirmed by the literature, and through variations in the way that firms of different ownership types use and exploit institutions. Privately owned firms tend to exploit considerably larger benefits from the same institutions in comparison with foreign-owned enterprises (FEs) or state-owned enterprises (SOEs). FEs or SOEs also obtain some benefits; however, these benefits are significantly smaller than those obtained by private enterprises (PEs). Results can be attributed to the differences in the aims and incentives of firms with diverse ownership types. While the initial productivity of PEs may be lower than that of FEs at the low levels of institutional development, PEs are shown to eventually catch up with FEs because institutions develop further over time to be better exploited by PEs than FEs. Hence, any policy design should consider this coevolving nature of institutions and firm ownership; whereas private firms cannot prosper without sound institutions, institutional development may be useless unless there are private firms that can benefit from this institutional development.

An Empirical Study on Green Innovation Efficiency in the Green Institutional Environment

Previous studies have found that reverse technology spillover effects can promote industrial technology modernization in developing countries. However, it is still unknown whether reverse technology spillover effects can improve green innovation efficiency in developing countries. In particular, institutional uncertainties characteristic of transition economies have a significant impact on industrial modernization. Therefore, researching the impact of the institutional environment on the relationship between reverse technology spillover effects and green innovation efficiency is of great significance. In this paper, we use data from G20 countries as well as China’s foreign direct investment (FDI) data to measure the effects of reverse technology spillovers and adopt the threshold effect model to explore the relationship between reverse technology spillover effects and green innovation efficiency as well as the influence of the institutional environment on this relationship, based on China’s provincial panel data from 2003 to 2015. The empirical results show that the reverse technology spillover effects can effectively improve green innovation efficiency. There is a threshold for the influence of the institutional environment on the relationship between reverse technology spillover effects and green innovation efficiency. When the institutional development level surpasses the threshold value, an acceleration effect is generated. In addition, we find that the legal system is the key bottleneck in terms of improving green innovation efficiency. How to improve and perfect the path of institutional construction in China and how to enable institutions to gain threshold speed-up effects have become the major problems the Chinese government faces in institutional construction. The research results of this paper offer a reference to developing countries in regard to improving their institutions and enhancing their green innovation efficiency.

An alternative benchmark for the validity of China’s GDP growth statistics

The veracity of China’s official statistics on GDP growth rates is a matter of debate in both the popular media and academic literature. Given the level of institutional development, its size, complexity and fast pace of change as an emerging economy, there are good reasons to expect that producing reliable and consistent estimates for GDP is difficult. An alternative benchmark would therefore be useful. We propose a benchmark index for the nominal GDP growth constructed bottom-up from publically available and audited total Revenue numbers of 150 major Chinese listed companies covering 19 industry sectors. This benchmark index closely tracks the official statistics, but with some interesting deviations. Validation by using Gross Margin numbers for our Chinese sample and US data produced similar results. The methodology also allowed us to produce estimates of growth at the industry level, which highlights some important changes underway in the structure growth patterns of the Chinese economy.

The asymmetric effect of institutional distance on international location: Family versus nonfamily firms

Research Summary: This study examines international location choice by considering the potential effects of institutional distance on the decision comparing family and nonfamily firms. We argue that the magnitude and direction of institutional distance matter and that institutional distance has an asymmetric effect on location choice. However, we argue that family involvement has a moderating effect on this relationship because family firms manage institutional distance differently than nonfamily counterparts. Our results, using a sample of Italian firms (2000–2013), reveal that firms are more likely to choose locations for which the positive institutional distance is greater. Additionally, when compared to nonfamily firms, family firms are more likely to choose locations with greater negative institutional distance and less likely to enter countries with greater positive institutional distance.Managerial Summary: Institutional distance between countries is an important dimension firms take into account when deciding the location of their foreign investments. We show the importance of the magnitude and direction of this distance in choosing the destination country and the different impact that distance has for family firms. Institutional distance has an asymmetric effect on the international location choice. Specifically, greater positive institutional distance makes firms more likely to choose a location; on the contrary, greater negative institutional distance makes the location less attractive. Family firms, however, present some peculiarities that fine‐tune the effect of institutional distance on the location decision. Thus, family firms are more (less) likely to choose locations involving lower (higher) levels of institutional development than their home country compared to nonfamily counterparts.

Nexus between privatization and marketization during transition process: an experimental analysis based on China’s provincial panel data

ABSTRACTThis paper explores the nexus between privatization and marketization in pursuit of insightful implications about effective privatization/marketization policies, particularly in institutionally underdeveloped countries like China. Our hypothesis is that, given a certain level of institutional development, we can identify causal and dynamic relationships between privatization and marketization. If market expansion facilitates private ownership more easily and rapidly than privatization promotes marketization, transition policy should emphasize market expansion even if the ultimate objective is to privatize the entire economy as extensively as possible. We test this hypothesis with panel data from Chinese provinces to draw implications about a dynamic nexus between privatization and marketization vis-à-vis institutional background. We then develop an illustrative analysis comparing privatization-first versus marketization-first policies to examine their cumulative effects on development of private enterprises and markets in subsequent periods.

Global trade and trade protection in a globalised world

While the World Trade Organisation and Regional Trade Agreements work for boosting the global trade, trade protection remains prevalent. This contradiction took a new turn during the 2007/2008 global financial and economic crisis. There has been an argument that trade protectionist activities are influenced by diverse factors, including social, economic and institutional factors. This study examines what determines trade protectionist actions, taking into consideration some macro-economic variables. The data were sourced from the Global Trade Alert and World Development Indicators. The authors find that a country's level of economic growth is not a crucial factor for engaging in trade protection. It is also interesting that as a country's institutional quality improves, there might be the less protectionist tendencies. This implies that a country's magnitude of protection is determined by its level of institutional development. The other finding includes that the more a country trades, the higher its tendency to protect.

State Leaders’ Onsite Visit

Political visit is an under-researched way in which governments influence firms and markets. Chinese state leaders (i.e. Politburo Standing Committee Members) often visit firms during their domestic inspection tours. This study shows that representativeness, political connections and alignment with government goals are the three important criteria for choosing firms to visit. We document positive market reactions contingent on the political power of different administrations and government officials. Moreover, the results show that visits are associated with higher operating performance. These positive impacts are also contingent on certain firm characteristics and the levels of institutional development. Finally, we find that political visit can be substituted as a source of legitimacy for CSR activities and increases the social attention for the firms, which reduces firms’ incentives to donate while motivates firms’ unethical behaviors in order to meet social expectations.

Back to BITs and Bites: Do Trade and Investment Agreements Promote Foreign Direct Investment within Latin America?

In this paper we investigate the impact of regional trade agreements (RTAs) and bilateral investment treaties (BITs) on intra-regional foreign direct investment (FDI) across Latin American countries from 1995 to 2012. We use an augmented gravity model in which we control for cross-country heterogeneity, multilateral resistances and endogeneity of RTAs/BITs. This study empirically reveals that belonging to a well-established RTAs, such as MERCOSUR, is significantly more effective than the enforcement of BITs in fostering intra-regional FDI. We observe heterogeneous impacts within the bloc: BITs exert a positive but small effect, with an estimated increase in FDI stocks between 4-7.25%, for middle income countries such as Argentina, Brazil, Chile, Costa Rica, Mexico and Uruguay. However, we observe a non-significant effect on middle-low income countries as Bolivia, Colombia, Ecuador, Peru and Paraguay. Our results suggest that political risk and the level of institutional development in the host country act as strong determinants of BITs effectiveness. Furthermore, we find that the main determinants affecting intra-bloc FDI are factor endowments and market potential. These findings shed clarity into the current debate on the effectiveness of BITs versus RTAs as an adequate mechanism to attract foreign investment.

How do industry and country impact firm performance? A national and supranational analysis

We contribute to the literature of the country, industry and firm effects on performance by developing an autoregressive cross-classified mixed-effect linear model that examines heterogeneity in the profitability of corporations in emerging and developed economies, as well as corporations located in different supranational regions. To this purpose, we simultaneously decompose abnormal returns into permanent and transitory components at the firm, industry, country and industry–country levels. We find that firms in emerging countries have significantly higher rates of performance persistence and different sources of persistence compared to firms located in developed countries. These differences are also evident between different supranational regions and countries at different levels of institutional development.

Exporting and innovating among emerging market firms: The moderating role of institutional development

Building on the recombinatory view of innovation and an institutional perspective, this study investigated how the level of institutional development in a firm’s home region and the institutional distance between the home and export markets might influence the effectiveness of learning through exporting. For exporters in emerging economies, more support for R&D and better-developed market intermediaries at home were found to enhance the positive effect of exporting on firms’ innovation, while market openness in the home region tends to dampen it. Exporters exporting more to other emerging economies tend to be more innovative than those exporting more to advanced markets. These findings arise from an empirical study of exporting and innovation among Chinese manufacturers.

The Impact of Transactional and Relational Corporate Political Strategies on Charitable Donations

This paper examines the impact of transactional and relational corporate political strategies on corporate social responsibility. Using a nationwide longitudinal survey dataset of Chinese entrepreneurs, I differentiate transactional from relational political strategies and show how they affect corporate charitable donations differently: transactional political strategy, including entrepreneurs political appointment and firms political liaison, have positive effects; whereas the relational ones, including entrepreneurs political ideology and political adherence, have a negative influence. Meanwhile, the positive effects are weaker and the negative ones are stronger as the level of institutional development increases. This study contributes to a better understanding of the complex effects of corporate political strategy and how it varies depending on levels of institutional development. In addition, it sheds light on private businesses in China, and deepens our understanding of Corporate Social Responsibility (CSR) research and practices.

Стратегии развития туризма в российских регионах

The article analyzes the tourism industry development in Russian regions, taking into account the different approaches to the existing strategies of territorial planning in tourist and hotel spheres. The internal tourist market is dynamically growing and embraces new recreational destinations, however, the economic efficiency and investment activity of these territories still depends on the level of institutional development of the socio-economic system and inter-branch communications. Institutional regulation of the tourist territory, on the one hand, develops and promotes the investment attractiveness of tourist and recreational resources, and on the other hand, stimulates and regulates tourist flows. The subjects-participants of the interaction not only enhance competitiveness and brand recognition, but contribute to the effective promotion of territorial initiatives in the state and investment structures. The article also discusses various approaches to centralized strategy of the tourism industry within the framework of the unified Tourism Development Program in the Russian Federation. The author believes that the problem of forming tourism destinations and clusters, which are necessary for the integrated involvement of the territory in tourism, is multilevel in nature. It covers a wide range of issues starting with the stage of the forming and assessing the register of tourist and recreational resources and ending with the overall coordination of spatial planning. There is no uniform methodology for assessing territorial tourist resources and unambiguous approaches to observing the results of the social and economic activities of the tourist industry in destinations. Nevertheless, many regions have already formed conditions for increasing the mass tourist flow and the development of domestic and inbound tourism products. At the moment, there are some very vivid examples of the intensive attraction of tourist flows in destinations in a fairly short period of time; the article considers exactly such results

Family Ownership and Earnings Quality: Evidence from Different Institutional Environments

This study combines insights from the socioemotional wealth perspective and institutional and resource-based theories to examine the earning quality of family and nonfamily firms operating in countries characterized by different levels of institutional development. Results based on a cross-sectional sample of firms from 12 European countries show that family status and a country’s level of institutional development are positively related to earnings quality. They also show that institutional development moderates the relationship between family status and earnings quality. Comparing insider-oriented countries that are characterized by lower regulatory and financial development with outsider-oriented countries that are characterized by higher regulatory and financial development, we found that family firms have a higher earnings quality in insider-oriented countries than in outsider-oriented ones. Thus, our study finds support for a substitution effect, whereby family status compensates for the limited capacity of less developed regulations and markets to induce virtuous financial reporting behaviors. Forthcoming in Journal of Management and Governance

Balance sheet effects on monetary and financial spillovers: The East Asian crisis plus 20

We study how the financial conditions in the Center Economies [the U.S., Japan, and the Euro area] impact other countries over the period 1986 through 2015. Our methodology relies upon a two-step approach. We focus on five possible linkages between the center economies (CEs) and the non-Center economics, or peripheral economies (PHs), and investigate the strength of these linkages. For each of the five linkages, we first regress a financial variable of the PHs on financial variables of the CEs while controlling for global factors. Next, we examine the determinants of sensitivity to the CEs as a function of country-specific macroeconomic conditions and policies, including the exchange rate regime, currency weights, monetary, trade and financial linkages with the CEs, the levels of institutional development, and international reserves. Extending our previous work (Aizenman et al., 2016), we devote special attention to the impact of currency weights in the implicit currency basket, balance sheet exposure, and currency composition of external debt. We find that for both policy interest rates and the real exchange rate (REER), the link with the CEs has been pervasive for developing and emerging market economies in the last two decades, although the movements of policy interest rates are found to be more sensitive to global financial shocks around the time of the emerging markets’ crises in the late 1990s and early 2000s, and since 2008. When we estimate the determinants of the extent of connectivity, we find evidence that the weights of major currencies, external debt, and currency compositions of debt are significant factors. More specifically, having a higher weight on the dollar (or the euro) makes the response of a financial variable such as the REER and exchange market pressure in the PHs more sensitive to a change in key variables in the U.S. (or the euro area) such as policy interest rates and the REER. While having more exposure to external debt would have similar impacts on the financial linkages between the CEs and the PHs, the currency composition of international debt securities does matter. Economies more reliant on dollar-denominated debt issuance tend to be more vulnerable to shocks emanating from the U.S.

Foreignness as both a global asset and a local liability: How host country idiosyncrasies and business activities matter

While international business research traditionally portrays foreignness as a liability for dealing with local market idiosyncrasies, this paper argues that it can regularly shift back and forth between being an asset and a liability. Key to this argument is the fact that the performance of a firm in a particular host country can be importantly shaped not only by activities aimed at accessing key external resources in local markets, but also by those targeting resources in global markets. When the focus is tapping into local resource markets, foreignness can be a liability that grows in size with the idiosyncrasies of those markets. But when the same firm in the same host country turns to global markets for external resources, foreignness can become an asset that also increases in value with the significance of local idiosyncrasies. I test this argument by looking at the performance effect of being foreign for private equity (PE) firms when investing in, and when subsequently exiting from, portfolio companies in emerging economies. The analysis capitalizes on a novel dataset tracking 546 PE deals, managed by 45 foreign and local PE firms, and across 49 emerging economies at varying levels of institutional development.