Weak Institutional Environment Research Articles

Frontier Markets and Sustainable Entrepreneurial Competences: An Exploratory Study of the Impact of a New Industry in Guatemala

There is growing interest among scholars and policy makers to develop sustainable entrepreneurial competences in pre-emerging, frontier markets characterized by limited access to advanced capital, high protectionism, and weak formal institutional environments. To become internationally competitive, these markets need to radically rethink their long-standing, embedded practices, which have often been linked to socioeconomic inequality. Our study, grounded in corporate entrepreneurship, is an exploratory analysis of why and how well-established firms, operating in the financial service industry, created more equity-based businesses practices to enter the new industry of mobile banking. The firms in our study needed a combination of both economic incentives and social pressures to do so but, in the process, developed new entrepreneurial competencies. Successful firms were those that significantly altered their embedded practices and engaged in fostering new informal relationships with previously overlooked stakeholders, particularly customers from indigenous backgrounds. Our multi-case, inductive research design offers theoretical and practical insights regarding how incorporating internal and external corporate entrepreneurial factors in an underserved market setting, such as the frontier market of Guatemala, not only fosters socioeconomic equality but also creates international attractiveness and competitiveness.

Exploring the link between institutional pressures and the timeliness of corporate internet reporting: the case of an emerging economy

PurposeThe purpose of this study is to examine the role played by coercive, normative and mimetic pressures in stimulating timeliness of corporate internet reporting (TCIR).Design/methodology/approachThis study uses content analysis technique to track the TCIR practices of top 100 non-financial companies listed on the Dhaka Stock Exchange. A disclosure index of 14 items is developed to capture the extent of TCIR. The authors collected the relevant data from multiple sources, such as corporate websites, monthly review reports and corporate annual reports for the year-end 2019. This study uses Poisson regression models to explore the association between institutional pressures and TCIR.FindingsConsistent with the predictions of institutional isomorphism theory, the authors find that coercive isomorphic pressures through ownership by foreign investors, government, general public and connection with parent multinational corporations have positive associations with TCIR. The authors also find that normative pressures resulting from cross-directorships have positive influence on TCIR. The authors provide evidence of mimetic pressures through industry memberships (i.e. companies operating in technology-based industry) positively impacting TCIR. The additional analysis suggests that institutional pressures are rather associated with the extent of voluntary TICR and to a lesser extent to regulatory TICR.Originality/valueTo the best of the authors’ knowledge, this study is the first to show the positive impacts of coercive, normative and mimetic isomorphic pressures on TCIR in an emerging economy characterized by weak institutional environment and mixed prospects for TCIR.

Controlling shareholder share pledging and the cost of equity capital: Evidence from China

We propose and test the incentive view—that the margin call pressure and ownership-control discrepancy associated with insider share pledging increase investors’ perceived risk, and thus also the cost of equity capital, in an emerging market. Using a controlling shareholder share pledging sample for Chinese listed firms, we find that firms with share pledging have a cost of equity capital that is 23.7 basis points higher than firms without share pledging. Further, share pledging increases the cost of equity capital through the information risks and agency conflicts channels. Cross-sectional analyses show that share pledging has a stronger effect on the cost of equity capital in non-state-owned enterprises, firms without monitoring of multiple large shareholders, firms with controlling shareholders assuming the position of chairperson, and firms with a weak institutional environment. In addition, using the global financial crisis and the outbreak of the coronavirus (COVID-19) as quasi-natural experiments, we disentangle the potential confounding effect of firm fundamentals and show that share pledging is positively associated with the cost of equity capital. Overall, the results are consistent with our incentive view that share pledging increases the cost of equity capital in an emerging market.

Returnee managers as an asset for emerging market multinational enterprises: Chinese cross-border acquisitions (2008–2017)

Returnee managers, a scarce human resource for emerging market multinational enterprises in the past, are becoming increasingly abundant, and their value is at risk of diminishing. The analysis of Chinese cross-border acquisitions (2008–2017) reveals that only returnee managers from the same country in which an acquisition is targeted facilitate the acquisition, whereas the others fail to make a difference. The impacts are stronger when the acquiring company has less international experience and when the target country has a weak institutional environment. Thus, returnee managers as an asset should be deployed where they are most needed and least substitutable.

Remittances, institutions and human development in Sub-Saharan Africa

PurposeThe purpose of this paper is to examine the relationship between remittances, institutions and human development (HD) in Sub-Saharan African (SSA) countries using data from 2004 to 2018. The study attempts to answer two critical questions: Do the increasing remittances inflow to the region have any effect on human capital development? and does the effect of remittances on human development vary depending on the level of institutional quality?Design/methodology/approachThe analysis uses a dynamic model; system Generalized Method of Moments (Sys-GMM) as this approach controls for the endogeneity of the lagged dependent variable; thus, when there is a correlation between the explanatory variable and the error term, which is normally associated with remittances, it also controls for omitted variable bias, unobserved panel heterogeneity and measurement errors in the estimation.FindingsThe findings indicate a positive and significant impact of remittances on HD in SSA. The results further reveal a substitutional relationship between institutions and remittances in stimulating HD. The estimations mean that remittances promote HD in countries with a weak institutional environment. The findings also establish that the marginal significance of remittances as a source of capital for HD falls in countries with well-developed institutions.Practical implicationsTo increase the flow of remittances, policymakers should implement policies that increase the likelihood of both skilled and unskilled migrants sending remittances.Originality/valueMost empirical research on the impact of remittances on HD does not tackle the problem of endogeneity associated with remittances. This study, however, provides empirical evidence by using Sys-GMM that solves the problem. The current study also is the first work to examine the relationship between remittances, institutions and HD in SSA and provides a new guide for future research on the remittance and HD nexus.

Environmental regulation and real earnings management—Evidence from the SO2 emissions trading system in China

This study investigates the effect of environmental regulations on the real earnings management and accrual earnings management of firms. Based on China's sulfur dioxide(SO2) emissions trading program, we adopt a difference-in-difference approach and find that the emissions trading program is negatively associated with real earnings management. The negative relation is stronger for firms with high information asymmetry and firms with poor corporate governance. Our findings suggest that market-based environmental regulations such as the cap-and-trade program can indeed incentivize firms to provide better earnings quality even in a weak institutional environment.

An Exploration of the Viability of Forensic Accounting Techniques in Combating Financial Statement Fraud in Nigerian Organizations

Abstract: Purpose: This study explored the viability of forensic accounting techniques in combating financial statement fraud in Nigerian organizations. The study specifically examined the relationship between forensic accounting techniques and fraud deterrence; and, the viability of forensic accounting techniques to enforce corporate policies and procedures. Research methodology: The study adopts the survey research design. The sampling frame comprised accounting lecturers and chartered accountants in two geographical locations of Anambra State. The study utilized non-probability sampling to mitigate non-response bias and to select knowledgeable respondents. The final retrieved questionnaires were fifty. The primary data were analyzed using Pearson correlation analysis. Results: The Pearson correlation results showed a positive association between forensic accounting techniques (FAT) and fraud deterrence. Secondly, there is a positive association between forensic accounting techniques and the enforcement of corporate policies. Limitations: The main limitation was the small sample size from the retrieved questionnaires future studies can therefore widen the sampling frame and explore other sectors. The study also spanned one of the South-eastern States limiting generalizability. Contribution: The study contributes to the literature in the context of developing countries, on the continuing viability of forensic accounting techniques (FAT) in detecting financial statement fraud in its various multifarious forms in such countries with weak institutional environments compared to developed countries. The study also adds to the literature on the viability of forensic accountants in enforcing corporate policies and procedures which is useful in an organizational research context. Keywords: 1. Fraud 2. Forensic Accounting Techniques 3. Fraud Detection 4. Fraud Prevention 5. Forensic Accounting

Development of corporate social responsibility framework for developing countries: the case of Kazakhstan

Purpose of research.The aim of this systematic review is to develop a general framework which is applicable for analysis of corporate social responsibility (CSR) in developing economies. This framework is further applied to transitional economy such as Kazakhstan.Methodology.This study presents a systematic review of existing CSR literature on developing economies. The study used the content analysis approach and identified the relevant studies by searching the keywords. Based on existing literature, the study developed a general framework which summarizes mostly noted motives and limitations relevant for CSR discussion in the context of developing countries.Originality / value.The most of existing studies aimed on developed countries and limited research is conducted in the context of developing countries that are characterised by weak institutional environment and have different socio-economic factors, compared to their counterparts. The study adds value to existing CSR literature by developing the framework which summarizes motives and limitations of CSR for developing countries.Findings.We identified that most ofexisting studies have reported the barriers of undertaking CSR research and documented the factors such as corruption, weak stakeholder activism and lack of government controls as main constraints. On the other hand, existing studies reported that religious traditions, historical background, globalization, and government institutional voids are the main drivers of CSR studies. Subsequent application of the framework to Kazakhstan shows that these constraints and motives are also true for the country.

Влияние качества институциональной среды на развитие реального и финансового секторов экономики Китая

The article examines the impact of the quality of the institutional environment on the development of the real and financial sectors of the economy. To assess the formation of the institutional environment, a set of qualitative and quantitative indicators was used. As indicators for assessing the development of the financial sector, it is proposed to use indicators of financial depth. Based on the use of correlation analysis tools, correlations between indicators of financial depth and indicators for assessing the formation of the institutional environment were identified. Based on the identified most significant correlations, taking into account institutional factors, diagnostic models were constructed, the use of which allowed us to build three forecast scenarios for changes in the financial depth of the Chinese financial system for the period up to 2030: optimistic, optimistic and basic. Arguments are presented that prove the weakness of the institutional environment of the Chinese economy, not only in comparison with the most developed economies, but also in emerging markets due to the preservation of certain characteristics of the transition economy, which hinders the development of the financial sector and market mechanisms. It is revealed that in the short term, further expansion of state participation in the Chinese financial market in a weak institutional environment may have a positive effect, but in the long term, an increase in state presence may become an obstacle to institutional development. Testing of the proposed tools of correlation analysis on the materials of the United States showed that indicators of the financial depth of the financial systems of developed countries with a high level of development of institutions have much weaker correlations with indicators of the formation of the institutional environment than in countries with emerging markets characterized by low quality of institutions.

Family Female Directors versus Non‐family Female Directors: Effects on Firm Value and Dividend Payouts in an Extreme Institutional Environment

AbstractBy differentiating between family and non‐family female directors, this study aims to reconcile the prior mixed evidence on the effect of board gender diversity, especially when a company operates in a weak institutional environment. We argue that female directors are not homogenous. Drawing upon the socioemotional wealth perspective, this study proposes that family and non‐family female directors would display different behaviour when fulfilling their duty as monitoring managers. By analysing boards of directors in Indonesia from 2012 to 2018, we show that only non‐family female directors significantly enhance firm value and advocate dividend payouts. Our results indicate that non‐family female directors are more effective than family female directors at monitoring the management and protecting the interests of minority shareholders. This study echoes the call of integrating institutional contexts and differentiating different types of female directors when analysing the effects of gender diversity.

The Influence of Institutional Differences on Control Mechanisms in Alliances

ABSTRACTCross-border alliances expose firms to heightened risks, posing different governance and control challenges than domestic alliances. We examine the impact of differences in alliance partner countries' institutional environments. Analysis of survey data supports our contention that cross-border alliances involve a greater reliance on formal controls, particularly when firms collaborate with partners in countries with a weaker institutional environment. These relations exist regardless of governance structure (i.e., equity or non-equity alliance) that prior research considers a critical choice for addressing cross-border alliance risks. Additional analyses show that four subdimensions of institutional characteristics (voice and accountability, regulatory quality, rule of law, and control of corruption) and one subdimension of formal controls (behavior controls) are the main drivers in the association between institutional distance and reliance on formal controls. These findings demonstrate the distinct impact of institutional environment as a country-level determinant of alliance control choices.Data Availability: Due to confidentiality agreements with respondents, the data cannot be released publicly.JEL Classifications: D23; D82; L22; M4.

Generalized trust, personalized trust, and dynamics of capital structure: Evidence from China

This paper investigates the impact of social trust on a firm's adjustment speed toward an optimal capital structure. Leveraging the availability of generalized trust and personalized trust metrics in China, we find that, as expected, when a firm is located in a high social trust region (with either generalized or personalized trust), it adjusts more quickly toward its target capital structure. Moreover, we document that the impact of generalized trust (personalized trust) on the adjustment speed is magnified if the firm already had stringent financial constraints (less-severe agency problems) but it is not related to the severity of a firm's agency problems (financial constraints). Additional analysis suggests that the impact of social trust on capital structure dynamics is primarily through debt rather than equity. Furthermore, we find that when a firm is located in a weak formal institutional environment, the impact of generalized trust on the adjustment speed strengthens, suggesting that formal institutions and generalized trust are partial substitutes. Interestingly, the substitution effect of formal institutions and personalized trust is weak. Hence, the impact of generalized trust and personalized trust on capital structure adjustment share some similarities but differ in other respects.

How Business Models Evolve in Weak Institutional Environments: The Case of Jumia, the Amazon.Com of Africa

We advance research on the antecedents of business model design by integrating institutional and imitation theories to explore how the business model of new ventures evolves in a weak institutional environment. Based on a case study of Jumia—an online retailing company in Africa established with the aim to emulate the success of Amazon.com—we propose a process model entitled “imitate-but-modify” that explains how business models evolve through four distinct phases (i.e., clarification, legitimacy, localization, and consolidation). In essence, this model explains how new ventures surrounded by considerable uncertainty deliberately seek to learn vicariously by imitating the business model template of successful firms. However, because of significant institutional voids, the ventures’ intentional imitation is progressively replaced by experiential learning that blends business model imitation with innovation.

The Nature of Global Green Finance Standards—Evolution, Differences, and Three Models

(1) Background: Green finance standards have proliferated with much need for harmonization to accelerate global green financial flows. However, little is known on the nature of green finance standards that accelerates differentiation, rather than harmonization. Therefore, we embark to answer the question what the nature of green finance standards is and specifically how green finance standards have evolved in major economic systems driven by different actors and leading to differences and commonalities over time and environmental focus area. (2) Methods: To analyze the question, we build a model based on institutional and standards theory and apply text analysis and statistical methods to analyze 84 green finance standards issued from 1998 to 2020. (3) Results: we find clear evidence that green finance standards evolve depending on economic governance types (e.g., market-based, government-based and in weak institutional environments), environmental focus areas (e.g., pollution, climate, biodiversity) and depend on actors in government, intermediaries and developing financial institutions. We also show that this development has been dynamic over the last few decades. We further test and confirm three models of green finance standards: output-based, input-based and process standards that have evolved. With the findings, we aim to provide a better foundation for both research and policy in future green finance standard research, development and harmonization.

Dark Banking? Banks and Illicit Deposit Flows

Do banks enable organized crime? Does bank regulation insulate financial intermediation from criminal activity? I address these questions using evidence from the drug trade in Mexico, finding that local drug cartel activity causes an increase in bank deposits. Branch networks grow in affected areas; this growth is not driven by increased lending opportunities. Post-election of a law-and-order government, effects attenuate, with liquidity flowing into branches of U.S. banks along the border. I interpret this as evidence that finance follows crime in weak institutional environments, and that, absent transnational policy coordination, regulatory arbitrage via cross-border liquidity flows undermines banking regulation.

Location Choice and the Firm Performance in Developing Countries: The Exploration-Exploitation Perspective

Location choice has been one of the key elements to affect the performance of firms. While existing literature highlights the strategic value of agglomeration, we question whether the value also applies in the context of developing economies, considering the weak institutional environment would hamper the overall benefit of clusters. Based on the exploitation-exploration framework proposed by March (1991), this study posits that the exploration-oriented locations provide more opportunities for firms operating in developing countries. Reflecting the characteristics of developing countries that state intervention is common and strong, we hypothesize that the state ownership, opposite to the venturing spirit, flexibility, and agility on the private businesses, weakens the strategic fit with the exploration-oriented location choices. Using a dataset of Vietnamese firms listed in the Ho Chi Minh Stock Exchange, our statistical findings show that firms’ level of exploration orientation would have a positive effect on firm performance. Additionally, the level of state ownership would weaken the effect of exploration-oriented location choice on the performance. Overall, this study suggests that exploration-oriented locations may be the optimal choice for firms who would seek profitability and achieve competitive advantage in developing countries. At the same time, state ownership may prevent firms from efficiently utilizing the accessible resource in those locations.

Does bribery sand or grease the wheels of firm level innovation: evidence from Latin American countries

This paper examines the effects of bribery on product and process innovation at the firm level in Latin American countries. We provide insights into the heterogeneous effects of bribery on the types of innovations across firms. Using the locality-sector average of bribe payments as a percentage of firm annual sales, we control for endogeneity bias, which is a recurring econometric problem in corruption-innovation studies. Overall, we find evidence to support the ‘sand the wheels’ hypothesis and argue that this negative effect is slightly higher in process innovation compared to product innovation. Using interaction terms to see the effects of bribery on different firm sizes and institutional structures, we find that bribery hurts firm innovation for micro and small firms, but not for large firms. The results also suggest that the negative effect of corruption on firm level innovation is stronger for firms in weak institutional environments than for firms in strong institutional settings. Practical interventions to promote strong institutional governance are not easy to arrange when corruption is endemic. Greater awareness of the extortionist environment of companies in these countries in the international community may bring pressures to bear for reform.

A Framework for a Capabilities-Based Approach to Copyright

Abstract This article highlights the importance of an analysis of copyright law from a human development perspective. Drawing on Amartya Sen and Martha Nussbaum’s Capabilities Approach, it outlines why copyright scholarship and policymaking should address human capabilities. It also explores several vital questions that a human development approach to copyright raises, including questions about the distributional effects of copyright law. It examines Mary Sue fan fiction through the lens of the Capabilities Approach to illustrate how the approach differs from the standard utilitarian approach to copyright. Furthermore, it argues that several factors associated with a country’s level of development, particularly its social, economic, and institutional contexts, affect the relationship between copyright and human capabilities. Therefore, rather than making broad generalizations about whether or not copyright law is good or bad for human development, it concludes that aspects of copyright law can enhance human development in the presence of certain other factors (such as strong indigenous industries and institutions). Conversely, aspects of copyright law can have a significant negative impact on human capabilities in certain environments, such as a weak institutional environment, or a socio-economic environment that is fraught with inequality. To illustrate this point, the article examines the issue of piracy through the lens of the Capabilities Approach.

The Dark Side of Samsung’s Value Chain: The Human Costs of Cobalt Mining “BLOOD, SWEAT AND COBALT”

Samsung has been implicitly linked to human rights abuses and wider social downgrading propagated within the Democratic Republic of Congo (DRC). Reports by different studies have shown artisanal cobalt mines (ASM) to exploit child labour and subject workers to perilous conditions. The IT multinational is dependent upon Congolese cobalt as a key element in lithiumion batteries used to produce their array of electronics. However, irresponsible cobalt sourcing practices undertaken by Tier 1 suppliers, Glencore and Huayou, have resulted in ASM operations being incorporated into Samsung’s global value chain, as Tier 2 suppliers. Analysis of the relationships underpinning Samsung’s cobalt value chain theoretical framework, highlights the presence of a relational governance structure, with captive elements among upstream Tier 1 and Tier 2 suppliers. Samsung is thereby reliant upon both Glencore and Huayou to transmit and enforce private codes of conduct down the value chain to expel human rights abuses. In conjunction, the DRC’s weak and unstable institutional environment has facilitated corruption and the improper enforcement of laws across the ASM industry. It is thereby imperative that Samsung takes ownership of the issues present within its value chain, as both Tier 1 suppliers and the Congolese government have failed to ensure responsible cobalt sourcing practices to date. This report recommends that Samsung adopt a holistic action plan, not only utilising their own resources and capabilities, but also those of critical stakeholders including Tier 1 suppliers, NGOs and the DRC and South Korean governments. Most prominently, this report suggests that supply chain transparency can be improved using certificates of origin and blockchain technology. Furthermore, it is recommended that poverty alleviation is targeted as a key measure through “Cobalt for Development”, an action plan designed to instigate both social and economic upgrading within ASM operations and the wider community. By employing a multi-scalar approach and addressing the issues inherent across multiple governance levels, Samsung can ensure a responsible source of cobalt be sustained.

Institutional arrangements in the commercialization of electric energy from sugarcane biomass in the Brazilian midwest

abstract: Reducing the use of fossil fuels and mitigating environmental impacts justifies the generation of electricity from renewable sources. In Brazil, sugarcane is the biomass that most generates electricity, and Mato Grosso do Sul state accounts for 10% of this electricity. Production can be traded in the spot market, long-term contracts regulated by the Federal Government, or free contracts between companies. Despite these options, only half of the sugarcane industries in Mato Grosso do Sul commercialize electricity. Based on Transaction cost economics, the objective of this work is to identify the most suitable governance structures used in the commercialization of electricity produced by the sugarcane plants in the state of Mato Grosso do Sul and to evaluate the institutional environment impact on these structures. A questionnaire was applied to all sugarcane companies in the state, and interviews were conducted with specialists and regulatory agencies. The results indicate that the widespread use of plural forms of governance for the commercialization of energy reduces the risks linked to a weak institutional environment and judicialization of the spot market. The preference for free contracts and a large number of short-term transactions indicate a lack of trust in the existing institutions, with the need to strengthen independent regulatory agencies.