Weak Institutional Environment Research Articles

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.

From connection to collusion: How college admissions bow to powerful alumni in China

AbstractAccess to college is critical for social mobility in China. Using a detailed college admission database that includes essentially all four‐year public universities from 2005 to 2013, we demonstrate that Chinese universities preallocate more admission seats to provinces that happen to fall under the leadership of their alumni. Moreover, we demonstrate that the identified admission favoritism constitutes a political exchange between public universities and their powerful alumni in the sense that (a) universities and the connected provinces tend to sign formal partnership agreements; and (b) university leaders who sign formal partnership agreements receive indirect personal gains in terms of career advancement in the party‐state bureaucracy. Our article provides causal evidence that social connections facilitate powerful government insiders' collusion and capture of public resources in a weak institutional environment.

The Effect of Product Diversification on Corporate Social Performance in the Non-Renewable Energy Industry: Exploring the moderating effects of host country development and the Sustainable Development Goals

Aim: Building upon stakeholder and institutional theory, this paper investigates the relationship between product diversification and corporate social performance (CSP), thereby attempting to make essential contributions to the current literature. Based on an extensive literature review, it was expected that related, unrelated and total product diversification are positively related to CSP. Moreover, it was hypothesized that the exposure to weak institutional host country environments negatively affects the relationship between diversification and CSP, and that the Sustainable Development Goals (SDGs) have a positive effect on the relationship.
 Design / Research methods: The sample selected for this research is the non-renewable energy industry, since the industry shows great divergence in terms of corporate social responsibility (CSR) performance. In addition, the industry is highly susceptible to regulatory changes, while the Sustainable Development Goals have an enormous focus on the reliability and sustainability of energy, making it a highly relevant industry to study. This study analyzed 40 a 40 non-renewable energy firms over a time frame of seven years, by using OLS regression.
 Conclusions / findings: The results reveal that unrelated diversification is positively related to CSP, while the other forms of diversification show insignificant results. Contrary to expectations, the Sustainable Development Goals negatively affect the relationship between product diversification and CSP, while the moderating effect of exposure to weak institutional environments is insignificant.
 Originality / value of the article: Research on the relationship between product diversification on corporate financial performance is well-established, but the way in which product diversification influences a firm’s behavior towards stakeholder demands and social concerns remains largely unexplored. Accordingly, the results of this study challenge existing theories while adding more context to the existing relationship, and in turn provide promising avenues for future research.

Does institutional theory explain integrated reporting adoption of Fortune 500 companies?

PurposeThe objective of this study is to investigate whether the institutional environment is associated with the adoption of integrated reporting.Design/methodology/approachThe sample of the study is based on the firms included in the list of Fortune Global 500. The logistic regression analysis was run to test the proposed hypotheses.FindingsThe findings indicated that the code-law orientation and strength of the institutional quality are significantly associated (i.e. positively and negatively, respectively) with the integrated reporting of Fortune 500 companies. Firms are motivated for more transparency in stakeholder-oriented and weakly regulated contexts. Thus, stakeholder pressure is more influential than shareholder interest in motivating or forcing firms to issue integrated reports. Besides, there appears to be a trade-off between the public sector and the private sector in terms of ensuring an accountable and transparent business environment. If the public sector does not undertake its role in ensuring a transparent business environment, the private sector fills the gap. The results are robust to alternative sampling and methodologies.Research limitations/implicationsThis study implied that the stakeholder orientation of countries fosters the transparency and accountability of firms. Corporate behavior is impacted by the institutional strength or weakness of nations. The institutional theory provides an appropriate ground to understand drivers of corporate reporting practices of firms beyond firm-level characteristics.Practical implicationsThe adoption of integrated reporting framework by Fortune 500 companies can be leveraged to alleviate concerns about their social and environmental impacts. Policy-makers in the countries which have a weak institutional environment force or encourage their firms to increasingly meet the transparency and accountability demands of society.Social implicationsThe research findings might play an encouraging role in that various stakeholders (i.e. customers, public, civil organizations and press) should undertake active roles and responsibilities to encourage firms to behave in socially and environmentally responsible ways.Originality/valueThis study adds to the literature by examining the influence of the institutional environment on the adoption of integrated reporting, using recent international data, and focusing on the largest companies according to the Fortune's annual Global 500 list. This study is one of the first to examine the association between a set of governance characteristics (i.e. board size, board independence and board diversity) and integrated reporting adoption.

Corporate governance and cash holdings: Evidence from worldwide board reforms

Using staggered board reforms as a quasi-natural experiment and a difference-in-differences approach, this study examines the impact of corporate governance on cash holdings in 41 countries. We find that board reforms are followed by significant reductions in cash holdings. This effect is more pronounced for firms with weaker pre-reform corporate governance and for firms from countries with weaker institutional environments. Analysis of cash spending suggests that, following board reforms, firms are more likely to use cash to increase R&D expenditures, dividend payouts, and share repurchases, but not to increase capital or acquisition expenditures. Finally, the results indicate that enhanced corporate governance following board reforms leads to higher (lower) cash (dividend payouts) values, consistent with the view that board reforms strengthen corporate governance.

Further attempt to explain the oil curse mechanism using a debt overhang concept

PurposeThis study aims at increasing the authors’ understanding how and why the oil curse takes place.Design/methodology/approachThe study uses a structural equation model (SEM) and stochastic frontier analysis (SFA) in order to underline the mechanism under which the oil curse operates.FindingsThe study shows that oil abundance could lead to inefficient resource allocation. This inefficiency is strongly correlated with a weak institutional setting which would lead to accumulated external debt and ultimately to poor economic performance.Research limitations/implicationsThe quality of institutions and governance plays a major role in defining government success in allocating public resources efficiently. In a weak institutional setting, characterized with lack of accountability oil rents can promote rent-seeking behavior of public agents; a type of behavior that promotes misallocation and waste of resources. This in turn undermines public finances and leads to external debt accumulation. Debt per se is not necessarily a bad thing, but it has a turning point beyond which it can be a source of economy for countries (particularly countries with limited diversified source of revenue and inefficient public sector). It is to note that the authors work does not refute the positive impact that the increase in oil value has on economic growth (e.g. Nusair, 2016). However, it reminds policy makers that in order to sustain this impact over long term, it is necessary to build a strong institutional framework that prevents inefficient use of resource allocation as it could result in rapid accumulation of debt over short period of time. The adoption of sovereign wealth funds (SWFs) by a number of oil rich countries has helped them to manage adverse oil shocks. Nonetheless, the effectiveness of these funds could be limited in a country whose institutions are not very strong. Characterized by a mediocre institutional setting, Algeria's sovereign fund, for example, has lost 67% of its reserves over just two years (2014–2015) before reaching the level zero by February 2017 following the drop of oil prices in 2015 (see Central Bank of Algeria, 2017). Also, the foreign exchange reserves of the country experienced a drop of more than 72% over a short period of time (2014–2020), leading to the resurgence of the idea of contracting external debt. Similarly, following the sharp drop in oil prices in 2015, the Saudi Arabia's external debt (% of GDP) has jumped by more than 150% over three years only, reaching a level of 28.85% in 2020 compared to a 10.62% in 2015 (https://Fred.stlouisfed.org/series/SAUDGDPGDPPT). The positive correlation of weak institutions with inefficiency can lead to fiscal policy procyclicality. Inefficient public spending tends to be procyclical compared to productive public spending (Makin, 2014). This procyclicality is apparent in developing countries, particularly those characterized by corrupted and weak institutional environment (Alesina et al., 2008; Frankel et al., 2013). This is conducive to output fluctuations where booms and busts are exacerbated (Frankel et al., 2013).Originality/valueOriginality of the study resides in the idea that external debt is an important element that could help to explain why oil curse could take place. The transmission mechanism that underpins the oil curse hypothesis is yet to be fully understood. In doing so, the paper, with the use of two sophisticated statistical techniques, reconciles between the concept of debt overhang and oil curse hypothesis. Similar research efforts are scant.

Political uncertainty and the choice of external audit: international evidence from private firms

PurposeThis paper documents the impact of political uncertainty on the decision of private firms to use external auditors to verify their financial statements.Design/methodology/approachThe authors use the data from 141 countries and the pooled logistic regression to test our arguments. The data is provided by the World Bank's Enterprise Surveys and is collected during the period between 2006 and 2019.FindingsThe results show that firms with high exposure to political uncertainty are more likely to use external auditors to verify their financial statements. The results are robust across various sub-samples and hold when we use alternate proxy for political uncertainty. The results are also robust after controlling for potential endogeneity concerns. The authors also find that the effect of political uncertainty on the choice of external audit is more pronounced for firms that are headquartered in countries with weak institutional environment. The authors document significant role of democracy, rule of law and accountability in determining the relationship between political uncertainty and the choice of external audit.Originality/valueThe authors believe that theirs is one of the initial attempts (if not the first) to investigate the effect of political uncertainty on the choice of external audit among the private firms in developing countries.

Nature and evolution of trust in business-to-business settings: Insights from VC-entrepreneur relationships

While the importance of trust in B2B relationships has been well established, research is yet to investigate its processual nature. This study investigates the VC-Entrepreneur relationship – a special B2B relationship to outline the nature and evolution of trust across a venture's life cycle. Results suggest that early-stage relationships are characterized by asymmetric trust, which declines with time and impacts cooperation between both sides, access to funding and business networks, contract enforcement, feedback, mentorship, and knowledge sharing. Late-stage VC- Entrepreneur relationships suffer from symmetric distrust, which increases with time, resulting in an overt emphasis on contracts, syndicated investments, disagreements during decision making, and pressure to exit. This study extends B2B trust literature by offering a relationship-phase-contingent view of trust across a venture's life cycle, outlining specific contexts that question the reciprocal and symmetric assumption of trust in dyadic relationships. It highlights how the interplay among power, opportunism, and weak institutional environment dictate dyadic trust. And finally, the paper outlines three testable propositions on trust in VC- Entrepreneur relationships that can be extended to other emerging economies.

Quality of life as an indicator of public management performance in the Republic of Kazakhstan

We examine quality of life issues in the Republic of Kazakhstan. Based on systematization of theoretical approaches to the definition of a concept and structure of living standards found in scientific literature and their critical analysis, we have identified and justified the fundamental structural blocks of the quality of life as a complex aggregate indicator reflecting the level of development of many areas of a modern person’s life together affecting the degree of his or her life activity’s efficiency. Using an extensive range of statistical data and tools of economic and mathematical modeling, we aim to identify the degree of influence of macroeconomic indicators that characterize certain areas of human life (healthcare, education, living conditions, security, income level, etc.) on living standards. Given the above, the central hypothesis of this study is that public management of the quality of life in the Republic of Kazakhstan can be more effective if it provides a scientifically grounded system of tools based on the assessment of the quality of life which takes into account both regional and industry specifics, feedback from the population as a recipient of public services, and is based on the principle of integration and consistency of state body management decisions. Results we have obtained imply the existence of a correlation between such quantitative indicators as natural growth, a number of pension recipients, the Gini coefficient and the quality of life index determined by qualitative indicators: general life satisfaction of the population and the level of perception of happiness. Results of the study confirm current trends in the socio-economic development of Kazakhstan, characterized by income inequality issues in both intersectoral and interregional sections, aggravated against the background of the global pandemic threat, the recession of a prolonged nature, and other external shocks and challenges. Based on the results obtained, the authors conclude that the key causes of socio-economic differentiation in Kazakhstan are associated with a weak institutional environment and weak performance of formal institutions. The quality of institutions impacts the process of socio-economic development in a creative way, including through the formation of an appropriate institutional environment regulating the entire set of socio-economic relations. This circumstance emphasizes the priority of challenges state management bodies face in the context of improving the existing institutional environment, which allows determination of rational behavior boundaries for people and economic entities to optimize and stabilize the socio-economic development of the state as a whole. We have developed and proposed a number of suggestions and recommendations for improving the existing institutional environment and the system of state management, practical implementation of which should reduce the existing large gap in income levels as the main factor of living standards in Kazakhstan.

Broadening our Sight on Family Firms and Employment Changes: The Role of Institutional Risks

Job security is increasingly valued by employees worldwide. This paper examines the effect of family involvement on employment changes over time in different institutional environments. Using an unbalanced panel of 3,322 listed firms from 40 countries over the 10- year period, we find that family firms on average are less likely to reduce employment compared to their non-family counterparts. Moreover, the superior ability of family firms to protect labor continues to hold even in weak institutional environments, characterized by high political, socioeconomic and investment risks. We also find that the negative effect of family influence on employment reduction varies significantly across different types of family firms in different institutional environment. These findings have important implications for theory and practice.

Strategic Choice Under Institutional Uncertainties: How Do MNCs Interact with Weak Institutions?

Although the role of the institutions is to reduce uncertainty, a weak institutional environment can have the opposite effect, increasing uncertainty for a multinational company (MNC). Therefore, MNCs adapt their strategies in a weak institutional environment. However, according to co-evolutionary theory, they also can influence those institutions. Our research focuses on how MNCs adapt their strategy to uncertainty caused by weak institutions and how they can build influence them. We conducted an inductive multiple case study of seven companies, leaders in their global and national markets, in four industries in Brazil: automotive, beverage, cosmetics, and tobacco. Our findings suggest that high levels of institutional uncertainty not only affects MNCs directly, but that it also serves as a source of relational uncertainty by affecting their suppliers and markets. They also reveal how greater uncertainty can result in internal resource improvement through an exploitation strategy, causing an MNC to have a major influence over its partners and their institutional environments. Finally, they show how market composition can determine channels of influence over institutions, directly by an MNC or indirectly by industry associations. Our study contributes to understanding the role of weak institutions as a source of uncertainty that influences operational strategy definition.

Corporate Social Performance in Emerging Economies: The Moderating Role of Internationalization

Institutional voids in emerging economies has been well known as an important factor that lowers the inclination of MNEs to devote their resources in the social domain. We however submit that internationalization encourages the deployment of resources for corporate social performance, even in a weak institutional environment. Integrating the concept of slack and legitimacy spillovers, we argue that the willingness to invest corporate resources into socially responsible activities is contingent on the company’s level of control, the expansion direction of business group to which the company belongs, and the degree of global competition. Using longitudinal dataset of 553 publicly listed companies in Asian emerging economies, we find that vertical expansion orientation and presence of foreign competition positively modify the relationship between available slack resources and corporate social performance. While we do not find statistical support for structural control, we observe that the ability to exercise control within the business group potentially creates a negative impact on resource commitment for corporate social performance. We highlight the implications of our findings for policy makers and future research on emerging economies and emerging market multinationals.

Foreign residency rights and corporate cash holdings

Based on the privately owned enterprises in China's A-share stock market from 2007 to 2017, we investigate the relation between foreign residency rights and corporate cash holdings. The empirical results show that privately owned enterprises whose controlling persons have foreign residency rights may hold more cash. Our conclusions are robust when considering the endogeneity concerns, alternative measures of cash holdings and foreign residency rights, additional control variables, the effect of financial crisis. In further analyses part, we discuss the effect of extradition agreements, residency countries' institutional environment, law enforcement efficiency in China, political connections, verifying that the positive relation remains when: (a) controlling persons obtain foreign residency rights from countries that have no extradition agreements with China, (b) residency countries have weak institutional environment, (c) privately owned enterprises are in regions with better law enforcement efficiency, (d) privately owned enterprises have no political connections. Moreover, we explain the reason that why privately owned enterprises with foreign residency rights hold more cash from the perspective of precautionary motive, transaction motive, speculative motive, corporate governance. At last, we find that foreign residency rights are negatively associated with the market value of cash holdings.

Deployment of whistleblowing as an accountability mechanism to curb corruption and fraud in a developing democracy

PurposeThis paper investigates the challenges and opportunities for the deployment of whistleblowing as an accountability mechanism to curb corruption and fraud in a developing country. Nigeria is the institutional setting for the study.Design/methodology/approachAdopting an institutional theory perspective and a survey protocol of urban residents in the country, the study presents evidence on the whistleblowing program introduced in 2016. Nigeria’s whistleblowing initiative targets all types of corruption, including corporate fraud.FindingsThis study finds that, even in the context of a developing country, whistleblowing is supported as an accountability mechanism, but the intervention lacks awareness, presents a high risk to whistleblowers and regulators, including the risk of physical elimination, and is fraught with institutional and operational challenges. In effect, awareness of whistleblowing laws, operational challenges and an institutional environment conducive to venality undermine the efficacy of whistleblowing in Nigeria.Originality/valueThe study presents a model of challenges and opportunities for whistleblowing in a developing democracy. The authors argue that the existence of a weak and complex institutional environment and the failure of program institutionalization explain those challenges and opportunities. The authors also argue that a culturally anchored and institutionalized whistleblowing program encourages positive civic behavior by incentivizing citizens to act as custodians of their resources, and it gives voice to the voiceless who have endured decades of severe hardship and loss of dignity due to corruption.

Family control and cost of debt: Evidence from Thailand

This paper analyzes the incentives behind controlling families' financing decisions which help sustain their firms' long-term survivorship. Using a sample of hand-collected ownership of Thai listed companies for the period 2009–2015, we show that family firms in Thailand have lower debt financing cost compared to non-family firms. The lower cost of external debt financing predominates in highly profitable family firms insofar that these firms are reputable and concerned with their long-term survivorship. Further, family firms benefit from the strong and trustworthy relationships they established with creditors, which help to alleviate information asymmetry in Thailand's weak institutional environment. Our results are robust to possible confounding effect of bank-connected lending, possible endogeneity issues, different proxies for family control and control variables, and the use of matched samples.

EVALUATING THE IMPLICATIONS OF STARTING-UP UNREGISTERED ON FUTURE FIRM PERFORMANCE: EVIDENCE A 2019 SURVEY IN ALBANIA

This paper evaluates critically the relationship between starting-up unregistered and firm performance. The widespread belief across all the dominant theories of informal entrepreneurship is that unregistered start-ups experience poorer future firm performance than those registered from the outset of their operations. To evaluate this poorer performance thesis, this paper reports World Bank Enterprise Survey (WBES) data on 377 enterprises in Albania collected in 2019. After controlling for other determinants of firm performance, the finding is that formal enterprises that started-up unregistered have significantly higher annual sales growth than enterprises that registered from the outset. To explain this, the argument is that in weak institutional environments, such as Albania, the advantages of operating unregistered at the outset outweigh the benefits of registration. The result is a call to re-theorize firm performance in the informal sector and for policy to shift toward a more facilitating approach that enhances benefits of registration.

Liquidity and speed of leverage adjustment

This article investigates the effect of liquidity on the speed of adjustment (SOA) of corporate leverage at the individual company level. Using panel analysis of data from 35 countries between 1996 and 2016, we find that high-liquidity firms have a significantly faster SOA than less liquid firms. This result survives a series of robustness checks and holds after addressing the endogeneity concern using exogenous shocks and additional control variables. We find that the positive effect of liquidity on the SOA exists only for over-levered firms, and this impact is moderated in countries with bankruptcy codes. We further find that the positive liquidity-SOA relationship is less (more) pronounced for firms in strong (weak) institutional environments. The results provide new insights into the role of liquidity in firms’ capital structure decisions and the determinants of capital structure dynamics. JEL Classification: G12, G32

Responsible Firm Behaviour in Political Markets: Judging the Ethicality of Corporate Political Activity in Weak Institutional Environments

While support for corporate political activity (CPA) is well echoed in the literature, little has been done to empirically examine its ethicality. Moreover, existing ethical CPA frameworks assume normative and rational leanings that are insufficient to provide a comprehensive account of CPA ethicality. Utilizing the Ghanaian context, adopting a multiple case study design involving 28 Directors from 22 firms, and employing a grounded theory approach, I explore how the ethicality of CPA is determined in weak institutional environments. The findings reveal that business executives evaluate ethics at three levels (i.e. context, organizational and strategy) using three principles (i.e. utilitarianism, justice and institutions). Leveraging this knowledge, I present an eclectic framework that bridges the long-standing gap between normative ethical prescriptions and lived ethical realities. In doing so, I move away from abstraction to give “voice” to the actors involved in CPA. I also present a model that shows how the ethical judgement process is influenced by managerial intuition and interactive personal and organizational experiences. This article has important theoretical and practical implications for ethical business-government relations in developing countries.

Multiple directorships in emerging countries: Fiduciary duties at stake?

AbstractThis study investigates the effect of multiple directorships on firm performance, using a database of non‐financial firms listed on the Pakistan stock exchange. Prior literature provides inconsistent evidence on the relationship between multiple directorships and firm performance in an emerging country context, which may be the result of overlooking both the large differences in institutional environments among emerging countries and the dynamic endogenous relationships between board variables and firm performance. We aim to contribute to this academic debate by focusing on directorship appointments to multiple boards in a weak institutional context. Corporate governance practices, such as boards with outside directors exercising their fiduciary duties, are crucial for effective governance in weak institutional environments. However, serving in multiple directorships is expected to compromise the execution of director duties. Using a dynamic system Generalized Method of Moments model, our findings show, indeed, a negative effect of multiple directorships on firm performance in a weak institutional environment. Building on the premise that corporate governance is conditional in nature, we also tested the moderating influence of firm size on this relationship, but we did not find supporting evidence in a dynamic model setting. Our results have important practical implications for policy makers as well as firms.