Strong Institutional Environment Research Articles

Bringing corporate governance into internalization theory: State ownership and foreign entry strategies

We use internalization theory to analyze the establishment and entry mode decisions of state-owned (SOE) and privately owned (POE) enterprises. We enrich internalization theory by building on insights from economic theory of corporate governance and taking into account particular characteristics of SOEs such as non-economic motivations, long-term orientation, and different risk preferences. We examine foreign entries over a 10-year period in the Canadian oil and gas industry. This single-country and single-industry context features foreign SOEs and POEs from a wide range of home countries, allowing a focused study of the combined influence of state ownership and home-country factors. Compared to POEs, SOEs tend to prefer acquiring stand-alone assets rather than firms, and to take lower ownership shares. We also find that differences between SOEs and POEs diminish when home countries are characterized by high government quality and market orientation and identify differences between types of SOEs, with partially owned SOEs exhibiting behaviors more similar to POEs than fully owned SOEs. We demonstrate how our enrichment of internalization theory strengthens its predictive and explanatory capacity. Our results also show that SOEs from strong and market-oriented institutional environments are similar to POEs and can be studied using the traditional internalization theory.

Internal capabilities, national governance and performance in African firms

We explore the relations between firms’ internal capabilities, national governance quality (NGQ) and performance in the African context using a dataset comprised of 11,183 firm-year observations (1490 unique firms from 15 African countries over a 17-year period). Our study offers new insights into how interlinkages between firms’ internal and external environment, shape corporate success. Specifically, we find that (1) firms’ internal capabilities (captured by financial resource-availability and growth prospects) are critical enablers of performance in both weak and strong institutional environments, (2) individual firms perform well in environments where their peers performs well, (3) NGQ directly enhances aggregate firm performance, and in tandem, the performance of individual firms, and (4) NGQ moderates the capability-performance nexus, by enhancing the translation of growth opportunities into profitability. The results highlight the critical role of firm-level financial resource availability and growth prospects in shaping corporate success in this challenging institutional environment.

Foreign Direct Investment - Growth Linkage in Sub-Saharan Africa: Is Governance a Mediating Factor?

In sub – Saharan Africa, weak institutions and the rising concern for improved business environment offer considerable leverage for enhancing the effectiveness of institutional framework, capital inflows, and public investment efficiency. These have put SSA in the global spotlight in recent times. Hence, the study examines the mediating effect of governance on FDI – growth nexus in 35 SSA countries between 2002 and 2017 using panel data techniques (Pooled OLS, Fixed Effects, and Panel-Corrected Standard Error’ (PCSE) estimation) and the Dynamic One – Step Difference and System GMM. Results indicate that control of corruption, political stability and regulatory quality, including governance composite index, have a positive and significant effect on economic growth, suggesting that institutions have a salutary impact on SSA economies. The findings further show that FDI inflows adversely influence growth owing to insufficient absorptive capacity that could enhance FDI effectiveness in the region. More importantly, the pervasiveness of poor governance in SSA is identified as a critical case that undermines the development of the nexus between FDI and economic growth. Thus, the study suggests that FDI – growth linkage would be enhanced by promoting a strong institutional environment that offers a good mechanism for attaining the actual FDI spillover potential through a policy framework that points the path towards cost-effective measures in SSA. Also, there should be core investment policies across African countries that would induce the private sector in consolidating government efforts and resources aimed at improving international competitiveness by diversifying the region’s economies away from a protracted commodity – based.

Does an Inclusive Citizenship Law Promote Economic Development?

This paper analyzes the impact of citizenship laws on economic development. We first document the evolution of citizenship laws around the world, highlighting the main features of jus soli, jus sanguinis as well as mixed regimes, and shedding light on the channels through which they could have differentiated impact on economic development. We then compile a data set of citizenship laws around the world. Using cross-country regressions, panel-data techniques, as well as the synthetic control method and subjecting the results to a battery of tests, we find robust evidence that jus soli laws—being more inclusive—lead to higher income levels than alternative citizenship rules in developing countries, though to a less extent in countries with stronger institutional environment.

Migrant Remittances and Economic Growth: The Role of Financial Development and Institutional Quality

This paper investigates the conditional effects of remittances on economic growth in 14 Middle East and North Africa (MENA) countries. Using unbalanced panel data over the period 1982‑2016, we study the hypothesis that the effect of remittances on economic growth varies depending on the level of financial development and institutional environment in recipient countries. We use Two-Stage Least Squares (2SLS/ IV) instrumental variables method in which we address the endogeneity of remittances. Our results reveal a complementary relationship between financial development and remittances to ensure economic growth. The estimations show that remittances promote growth in countries with a developed financial system and a strong institutional environment.

Does an Inclusive Citizenship Law Promote Economic Development?

This paper analyzes the impact of citizenship laws on economic development. We first document the evolution of citizenship laws around the world, highlighting the main features of jus soli, jus sanguinis as well as mixed regimes, and shedding light on the channels through which they could have differentiated impact on economic development. We then compile a data set of citizenship laws around the world. Using cross-country regressions, panel-data techniques, as well as the synthetic control method and subjecting the results to a battery of tests, we find robust evidence that jus soli laws—being more inclusive—lead to higher income levels than alternative citizenship rules in developing countries, though to a less extent in countries with stronger institutional environment.

Foreign direct investments from emerging markets: The push-pull effects of sovereign credit ratings

This paper analyses the determinants of FDIs from emerging market countries. We investigate the role of sovereign credit ratings of both donor and recipient countries in determining bilateral FDI flows from 17 emerging countries to 71 recipient countries. We find that sovereign credit ratings are important determinants of emerging market FDI. Donor sovereign credit ratings have a positive relationship with FDI outflows, suggesting that emerging market investors are more likely to engage in FDI activities when their own ratings strengthen. We find that emerging market FDI investors invest more in high rating advanced countries and low rating emerging market countries when their own rating improves. In addition, they invest more in high rating advanced countries with rating downgrades and low rating emerging market countries with rating upgrades. Furthermore, we find that donor emerging market countries with better institutional quality are more likely to invest directly abroad. Emerging market recipients with a stronger institutional environment are able to attract more FDI from other emerging markets while the institutional quality of developed market recipients matter less.

Corporate Social Irresponsibility of African Firms Across the Continent: Does Leaving the Path of Africapitalism Hurt Shareholder Value?

Within the context of Africa, the prevalence of poor institutional environments and its prioritisation of economic responsibilities create simultaneously the need for more socially responsible business practices, and the risk of more socially irresponsible episodes to be discovered. Despite there have been documentations of corporate social irresponsibility (CSI) (e.g. tax evasion, human rights abuse and bribery), there appears to be a lack of research quantitatively assessing the impact of CSI on shareholder value across the African continent. From the lens of stakeholder theory, expectancy violations and institutional voids, we argue that the interrelationship between stakeholder expectations, power and interests is of primacy to the firm and can exert influence on firms’ economic role in creating shareholder value in the macro environment. Using a large sample of 865 African companies across the only emerging markets in Africa (Egypt and South Africa) and representative frontier markets (Kenya and Nigeria) during 2009-2016, we find that firms avoiding CSI earn higher returns and the penalty for CSI is higher in countries with stronger institutional environments. The findings imply for investors and managers that even in the context of weak institutions, adherence to basic moral principles (i.e. avoiding bad) appear to be good business practice.

The Moving Missions of Community Colleges: An Examination of Degree-Granting Profiles Over Time

Objective: Despite extensive debate about the curricular mission of community colleges, prior research has not sufficiently analyzed differences in the kinds of degrees (i.e., the field of study and award level) community colleges produce. Therefore, we explore both the fields of study and the levels at which public community colleges grant degrees and analyze how this has changed over time. Method: Multilevel latent class analysis is used here to estimate latent degree-granting profiles, and colleges are allocated into the profiles based on their observed degree-granting behaviors from 1987 to 2012. Results: The analysis shows that public community colleges can be allocated into five distinct degree-granting profiles over the period of study. A small minority of colleges have and continue to engage almost exclusively in a vocational mission. The two degree profiles that increased in prominence over time suggest an overall shift toward the simultaneous pursuit of transfer and vocational missions. However, a majority of colleges (68%) exhibited stable degree-granting behaviors between 1987 and 2012, indicating a relatively high level of stability in degree-granting patterns across community colleges during this period. Contribution: These patterns highlight variation across colleges and both stability and change within institutions over time. This suggests that public community colleges are simultaneously situated in strong institutional and technical environments and, thus, are subject to constraints and incentives that shape not only their stated policies but also their actual degree-granting behaviors.

Regulatory Institutional Distance and MNCs' Subsidiary Performance: Climbing up Vs. Climbing Down the Institutional Ladder

Abstract We investigate the possibility of regulatory institutional distance exerting an asymmetric effect on multinational corporations' (MNCs') subsidiary performance depending on the direction of institutional distance. We use the term ‘institutional ladder’ to differentiate between upward distance, referred to as when the subsidiary is operating in a relatively stronger institutional environment than its parent-firm's home country, and downward distance for vice versa. Combining institutional theory with organisational imprinting and learning perspectives, we argue that the implications of regulatory institutional distance on subsidiary performance are relatively more positive (or less negative) when MNCs are climbing down the institutional ladder as compared to when MNCs are climbing up the institutional ladder. We also argue that subsidiary ownership strategy – i.e. the choice of a wholly owned subsidiary (WOS) versus joint venture (JV) – moderates the above-mentioned implications of institutional distance on subsidiary performance. We test these hypotheses based on a panel data-set of 1936 foreign subsidiaries representing 70 host countries and 66 home countries and spanning the 12-year period: 2002–2013.

Real Earnings Management, Institutional Environment, and Future Operating Performance: An International Study

This paper investigates the association between firms' engagement in real activities manipulation (hereafter REM) on future firm performance in an international setting, and whether the association is conditional upon country-level institutional factor. Our inquiry is motivated by a paucity of research on the consequences of REM in an international setting. Using a large sample over the period of 2001 to 2015, we find that current-period REM is positively associated with future performance: a finding that is consistent with Gunny (2010) in the US. Importantly, we find that the positive performance effect is driven by firms operating in countries with strong institutional environments. Finally, we find that future operating performance improves when REM is undertaken by firms in strong institutional environments only during a non-economic crisis period, but not during an economic crisis period. The paper adds to the existing REM literature by showing a non-monotonic effect of REM on future performance that is conditional on the strength of a country's institution. We also contribute to the accounting information and crisis literature by documenting a time-variant effect of REM on future performance.

The influence of multinational enterprises on subsidiaries: context matters

PurposeThe purpose of this paper is to examine how differences in the institutional environments of a multinational enterprise (MNE) shape the role of management control systems (MCSs) and social capital in the headquarter (HQ)-subsidiary relationship of an emerging economy MNE.Design/methodology/approachA case study design was adopted in this research in order to understand how the differences in the institutional environments of an MNE shape the design and use of MCSs. Data were gathered by means of semi-structured interviews, document analysis and observations. Interviews were conducted at the Nigerian HQ and UK subsidiary of the Nigerian Service Multinational Enterprise (NSMNE).FindingsThe study found that the subsidiary operated autonomously, given its residence in a stronger institutional environment than the HQ. Instead of the HQ depending on MCSs means of coordination and control, it relied on social capital that existed between the HQ and subsidiary to coordinate and integrate the operation of the foreign subsidiary studied.Research limitations/implicationsThe evidence from this research indicates that social capital could be effective in the integration and coordination of multinational operations. However, where social capital becomes the main mechanism of coordination and integration of HQ-subsidiary operations, the focus may have to be, as in this case, on organisational social capital and the need to achieve group goals, rather than specifically designated target goals for the subsidiary. The implication of this is that it may limit the potential of the subsidiary to explore its environment and search for opportunities. These are important insights into the relationship between developed country-based subsidiaries and their less developed countries-based HQs.Practical implicationsA practical implication of this research is in the use of local or expatriate staff to manage the operation of the subsidiary. While previous studies on the MNE, from the conventional perspective of multinational operation, suggest that expatriates may be sent to the subsidiary to head key positions so as to enable the HQ to have control of the subsidiary operation, it is different in this case. The NSMNE has adopted a policy of using locals who have the expertise and understanding of the UK institutional environment to manage the subsidiary’s operation.Social implicationsThis research sheds some light on how development issues associated with a multinational institutional environment may shape the business activities and the relationship between the HQ and subsidiary. It gives some understanding of how policies and practices may have different impacts on employees as businesses attempt to adjust to pressures from their external environment(s).Originality/valueThe reliance on social capital as a means of coordination and control of the foreign subsidiary in this study is significant, given that previous studies have indicated that multinational HQs normally transfer controls and structure to foreign subsidiaries as a means of control. Also, while previous studies have suggested that MNEs HQ have better expertise that enables them to design and transfer MCSs to foreign subsidiaries, this study found that such expertise relates to the institutional environment from which the HQ is operating from. Through the lens of institutional sociology theory, these findings directly contribute to the literature on the transference of practices and control systems in international business discourse.

Gender Equality: Which Policies Have the Biggest Bang for the Buck?

This paper analyzes the relationship between fiscal and structural policies and gender inequality in education and labor force participation for countries at different stages of development. Due to the substantial number of possible factors that link with gender inequality previously highlighted in the literature, we pay particular attention to addressing model uncertainty and using various statistical methods to find the variables with the strongest links to gender gaps. We find that higher public spending on education, better sanitation facilities, low adolescent fertility, and narrower marriage age gaps are significantly related to narrower gender gaps in education. We also find that better infrastructure, a stronger institutional environment, more equal legal rights, and low adolescent fertility rates are strongly associated with higher female labor force participation. When labor market protection is low, an increase in protection is associated with a narrowing of labor force participation gaps between men and women. But when labor market protection levels are high, an increase in protection is associated with a widening in labor force participation gaps.

Gender Equality: Which Policies Have the Biggest Bang for the Buck?

This paper analyzes the relationship between fiscal and structural policies and gender inequality in education and labor force participation for countries at different stages of development. Due to the substantial number of possible factors that link with gender inequality previously highlighted in the literature, we pay particular attention to addressing model uncertainty and using various statistical methods to find the variables with the strongest links to gender gaps. We find that higher public spending on education, better sanitation facilities, low adolescent fertility, and narrower marriage age gaps are significantly related to narrower gender gaps in education. We also find that better infrastructure, a stronger institutional environment, more equal legal rights, and low adolescent fertility rates are strongly associated with higher female labor force participation. When labor market protection is low, an increase in protection is associated with a narrowing of labor force participation gaps between men and women. But when labor market protection levels are high, an increase in protection is associated with a widening in labor force participation gaps.

The Influence of Multinational Enterprises on Subsidiaries: Context Matters

Purpose – This paper examines how differences in the institutional environment of a multinational enterprise (MNE) shape the role of management control systems (MCSs) and social capital in the headquarters-subsidiary relationship of an emerging economy MNE. Design/methodology/approach – A case study design was adopted in this research. Data was gathered by means of semi-structured interviews, document analysis and observations. Interviews were conducted at the Nigerian headquarter (HQ) and United Kingdom (UK) subsidiary of the Nigerian multinational enterprise. Findings – The study found that the subsidiary operated autonomously, given its residence in a stronger institutional environment than the HQ. Instead of the HQ depending on MCSs as a means of coordination and control, it relied on social capital that existed between the HQ and the subsidiary to coordinate and integrate the operation of the foreign subsidiary studied. Originality/value – The reliance on social capital as a means of coordination and control of the foreign subsidiary in this study is significant, given that previous studies have indicated that multinational HQs normally employ MCSs as a means of control of foreign subsidiaries. Also, while previous studies have suggested that MNEs HQs have better expertise which enables them to design and transfer MCSs to foreign subsidiaries, this study found that such expertise relates to the institutional environment from which the HQ is operating from. Through the lens of institutional sociology theory and social capital theory, these findings directly contribute to the literature on the transference of practices and control systems in accounting and international business literatures.

Institutional Environment and Microfinance Performance in Sub‐Saharan Africa

AbstractThis paper explores the impact of the institutional environment on the performance of 291 microfinance institutions in 34 sub‐Saharan Africa countries during the period 2006 to 2014, by analysing the unbalanced panel data using fixed effects and generalized method of moments (GMM) estimation techniques. The panel regression results demonstrate strong evidence that a strong institutional environment has a positive effect on the performance of microfinance institutions in sub‐Saharan Africa. More specifically, the findings reveal a positive and significant relationship between business freedom and microfinance performance in sub‐Saharan Africa. These vital findings not only provide useful information to policy makers and key microfinance industry players, but also highlight the impact that institutional qualities have on microfinance performance.

Community leadership and engagement after the mix: The transformation of Toronto’s Regent Park

The CAD$1 billion transformation of Toronto’s Regent Park neighbourhood from Canada’s largest public housing site to a mixed income community is likely to inform the next several decades of public housing redevelopment policy both nationally and internationally. This paper focuses on the process and impacts of large-scale redevelopment, in the context of attempts to build a physically and socially inclusive neighbourhood incorporating non-market and market housing in downtown Toronto. Drawing from in-depth interviews with 32 Regent Park community leaders and other key decision makers, the paper explores how resident engagement and leadership development opportunities impact redevelopment processes in mixed income initiatives. Results focus on three key emerging areas of both strength and concern: (1) efforts to build community alongside the redevelopment as an integral, evolving and place-specific strategy; (2) the impacts and challenges of both a strong institutional environment in Regent Park and a sense of weak institutional memory; and (3) formal and informal leadership and mentorship opportunities and their contribution towards the development of engagement and cohesion in Regent Park. The opportunity for low-income housing initiatives to support knowledge building and learning, preservation of institutional memory and local leadership development is significant in the context of examining physical and social redevelopment.

Home Country Institutional Effects on the Multinationality–Performance Relationship: A Comparison Between Emerging and Developed Market Multinationals

Abstract The question of how institutional aspects can shape multinational enterprises' (MNEs) operations abroad and overall performance has received increasing attention in the international business literature. We address this issue by meta-analyzing the effects of home country formal institutions on MNEs' multinationality–performance (M–P) relationship using data from 170 independent studies covering over 54,600 firms from 26 countries. By focusing on specific policies such as capital market development, labor market flexibility, regulatory quality, control of corruption, and trade openness, we provide evidence that home country institutions can significantly influence MNEs' M–P relationship. From a multilevel approach, our findings indicate that a stronger institutional environment not always positively affects the M–P relationship. For developed market firms, the M–P relationship gets stronger with an improved institutional environment. However, in emerging markets, we find that the M–P relationship is actually weaker in cases of higher levels of home country labor flexibility and control of corruption. We discuss the implication of these findings showing that home country institutions have a significant and contrasting role in shaping MNEs' capacity to increase performance from their multinational investments.

Earnings management, capital structure, and the role of institutional environments

This paper examines the effect of earnings management on financial leverage and how this relation is influenced by institutional environments by employing a large panel of 25,777 firms across 37 countries spanning the years 1989–2009. We find that firms with high earnings management activities are associated with high financial leverage. More importantly, this positive relation is attenuated by strong institutional environments. Our results lend strong support to the notions that (1) both corporate debt and institutional environments can be served as external control mechanisms to alleviate the agency cost of free cash flow; and (2) it is less costly to rely on institutional environments than debt. After meticulously addressing the possible endogeneity issues and conducting various robustness tests, our main conclusions remain confirmed.

Commonality in News Around the World

Motivated by the pioneering study of Morck, Yeung, and Yu (2000), this paper investigates whether and how news commonality varies according to a country’s institutional environments. Using a unique global news data set across 41 countries for the 2000-2009 period, we document three notable findings. First, firm-level news comoves more in countries with weaker institutional environments than in those with stronger institutional environments. Second, news commonality is positively associated with both stock return comovement and stock liquidity commonality. Third, the effect of news commonality on stock return and liquidity comovement is higher in countries with stronger institutions than in those with weaker institutions. These results suggest that a country’s institutional environments affect firm-specific information production and, more importantly, support the information-efficiency view that lower price synchronicity is caused by greater capitalization of firm-specific information.