No full-text available
To read the full-text of this research,
you can request a copy directly from the authors.
Factor markets, institutional quality and firm formalisation: The contingent effect of economic conditions at the founding stage
Abstract
The informal economy makes an important contribution to economic activity but knowledge about the country-level conditions that influence an informal firm’s willingness to formalise is limited. This article integrates insights from institutional theory and the imprinting hypothesis to explain how factor markets and institutional quality affect the likelihood that informal firms formalise over time, as well as how these effects are contingent on economic conditions at the founding stage. Using data from the World Bank Enterprise Surveys comprising of 8005 observations from 2477 firms in 73 countries, the results suggest that better factor markets and institutional quality increase the likelihood of formalisation and these relationships are strengthened by favourable economic conditions at the founding stage. The low correlation between factor markets and institutional quality supports the importance of separating these dimensions, while the moderating effect of economic conditions at the founding stage supports the importance of imprinting.
ResearchGate has not been able to resolve any citations for this publication.
This study examines the internationalization of emerging economy new ventures. We argue that different types of owners provide different benefits (e.g., resources) that help fuel emerging economy new ventures’ internationalization, and further, that these benefits depend on institutional conditions in the new ventures’ home countries. Examining these arguments in a sample of African new ventures, we find that state ownership and foreign ownership relate positively to emerging economy new ventures’ internationalization. Further, we find evidence that, while the effect of state ownership is contingent on the quality of the home countries’ formal institutions, the effect of foreign ownership is contingent on the fractionalization (i.e., variance and divisions) of the home countries’ informal institutions. Therefore, the results shed light on how fractionalization and formal institutions might condition the effects of ownership on new ventures’ internationalization strategies in emerging economies.
Plain English Summary
Internationalization can be critical to the scale-up strategies of new ventures and can contribute to the economic development of emerging markets. Various owners provide different types of resources and other benefits that can support such internationalization, but the legal environment and other societal conditions in the new ventures’ home countries might shape the nature and importance of these benefits. We examine these arguments by studying the internationalization of new ventures located in 34 African countries, using surveys collected from 2006 to 2016. The results reveal that although both state owners and foreign owners can help new ventures internationalize, the benefits of state ownership decline as the country’s legal environment becomes more developed, and the benefits of foreign ownership decline in countries where there is greater ethnic, religious, and linguistic division. Therefore, for scholars, our research suggests that the various factors that shape emerging economy new ventures’ internationalization might be interdependent. Similarly, the results suggest that practitioners and policymakers should consider conditions in the overall environment when considering the potential benefits of different forms of ownership.
DEBATES IESA • Volumen XXV • Número 4 • octubre-diciembre 2020
LA GENERACIÓN DEL MILENIO (también conocida como generación Y o milenial) abarca unos 2.000 millones de personas nacidas entre, aproximadamente, 1980 y 2000. La industria financiera ha estudiado las características de esta generación, que tiene entre 20 y 40 años de edad, y sus diferencias con las generaciones precedentes. A medida que alcancen su edad de mayor ingreso y gasto, los mileniales tendrán un impacto enorme en la economía global. «Los mileniales han alcanzado la mayoría de edad en una época de cambio tecnológico, globalización y trastornos económicos», señalaba en 2014 un informe elaborado por el banco de inversión Goldman Sachs (2014). «Eso les ha dado un conjunto de comportamientos y experiencias diferentes de las de sus padres. Han tardado más en casarse y mudarse por su cuenta, y han mostrado diferentes actitudes hacia la propiedad que han ayudado a crear una "economía compartida"».
Constituyen también la primera generación de nativos digitales y tienen un estilo de vida activo que influye en las tendencias de todos los ámbitos. En 2015 la firma de auditoría Deloitte calculó que para 2020 el patrimonio neto agregado de los mileniales en todo el mundo oscilaría entre 19 billones y 24 billones de dólares.
Si bien muchos mileniales desconocen su potencial de ingresos, en los próximos años ocurrirá un cambio masivo (Deloitte, 2020): Primero, los mileniales están a punto de entrar en sus años de ingresos óptimos, lo que resultará en un aumento significativo de activos. En segundo lugar, ser autónomo como empresario es un modelo clave que acelerará el aumento de activos. Además, los mileniales se beneficiarán de la riqueza de sus padres baby boomers. Un informe de Ernst and Young (2017) prevé que los mileniales recibirán unos treinta billones de dólares en herencias durante los próximos veinte años.
Los mileniales alcanzaron la mayoría de edad en medio de una gran incertidumbre económica y mercados financieros volátiles. Enfrentan un conflicto entre el bajo riesgo que están dispuestos a asumir por sus inversiones y la necesidad de obtener alto retorno para financiar su jubilación.
The current understanding of entrepreneurial action is grounded in time, but the different facets of this time remain to be sufficiently explored. We argue that entrepreneurial action has two temporal dimensions: world time and human time. World time reveals the prior contextual conditions giving rise to entrepreneurial actions that generate subsequent results. Human time reveals how entrepreneurs act on the basis of past experiences, attention to current conditions, and images of the future. Using a narrative framework to integrate world time and human time, we contribute to a deeper understanding of the different facets of time in entrepreneurial action.
The purpose of this article is to address key aspects of Wood, Bakker, and Fisher’s (AMR, in press) time-calibrated theory of entrepreneurial action, through which they take important steps towards identifying temporal calibrations that characterize the business venturing lifecycle. The issue that concerns us with the Woods et al. theorization is the extent to which it unnecessarily constrains itself to reasoned intentionality. While we do not doubt that logical reasoning and judgment often play a role in opportunity exploitation and that such logics can be instrumental to founding and scaling a successful enterprise, we would still assert that unintended and unreasoned elements of entrepreneurial action elude and even weaken the connection between an entrepreneur’s conscious time calibration and the actual timing of events, thereby limiting the descriptive and predictive value Wood et al.’s framework. A growing body of research shows that unreasoned drivers (e.g., disinhibition, impulsivity) are non-ignorable facets of human activity that are equally indispensable to a predictive framework for entrepreneurial action. Thus, the better pathway is to apply the broad-spectrum approach of Lerner, Hunt and Dimov (2018), who argue for the treatment of rational and non-rational drivers as empirically and conceptually coexistent. As Martin Buber wrote, “All journeys have secret destinations of which the traveler is unaware.”
While previous comparative research has identified the formal institutional conditions that differentiate countries on their degree of informal entrepreneurship, this paper examines the characteristics that shape cross-national diversity in its type. Based on a series of fuzzy-set qualitative comparative analyses (fs/QCA) of 138 country cases, we find evidence of causal heterogeneity in the configuration of institutional conditions associated with entrepreneurial outcomes that are informal and growth-oriented and those that are informal and subsistence-oriented. Given our results, we propose that the formal institutional-based conditions that differentiate between types of informal sectors are best identified by the conjoint mixture of strength and weakness of state capabilities across multiple domains, rather than by uniform weakness, or voids, along all state functions. In our discussion, we explore the implication of our configurational-based findings for the comparative analysis of national systems of informal entrepreneurship and for the tailoring of policies to account for the multiple institutional-based pathways by which entrepreneurs come to enter into the informal economy.
We evaluate the impact of corruption on firm births in the formal sector in the 32 Mexican states. In addition to controlling for socioeconomic factors previously linked to entrepreneurship, we also evaluate the impact of corruption and corruption squared in each of the Mexican states with both spatial and non-spatial models. Our results show that corruption is positively correlated with the formation of new formal-sector firms, but corruption squared is negatively correlated with firm formation. We believe this implies that some corruption helps entrepreneurs navigate complex rules and bureaucracy but too much corruption hinders entrepreneurship. We find a strong spatial component to new firm formation.
RESEARCH SUMMARY
Research documents the performance effects of attending to shareholders and treating employees well but underplays national differences in the relative power of labor and capital. We advance a configurational perspective that acknowledges the fit between stakeholder engagement, context, firm attributes and performance. As a cornerstone of this perspective, we develop a typology of stakeholder engagement strategies expressing how firms navigate the tension between conforming with local expectations—by prioritizing shareholders or employees, according to context—and being distinctive—by diverging from their peers. Analyzing a cross‐national sample of firms from 2004 to 2011, we identify combinations of engagement strategies, firm attributes, and contexts linked to high performance. Our findings highlight the multiple context‐dependent paths which link stakeholder engagement to high firm performance.
MANAGERIAL SUMMARY
How do firms navigate pressures from shareholders and employees across different institutional environments? We develop a typology of stakeholder engagement strategies based on how firms in different countries strike a balance between conformity (i.e. prioritizing locally important stakeholders) and differentiation (i.e. prioritizing stakeholders that their local peers might neglect). Our findings show that the engagement strategies associated with high performance vary according to local institutional context and firm characteristics. In particular, by not merely prioritizing stakeholders who are already locally important, firms can use stakeholder engagement to differentiate themselves from their peers, and such engagement strategies are often linked to high performance.
This article is protected by copyright. All rights reserved.
Despite the depiction of decisions to formalize informal firms as rational and ethical, many entrepreneurs in developing countries continue to operate informally regardless of its perceived illicit status. While existing research on why entrepreneurs choose informality emphasizes the economic costs and benefits of such decisions, this often overlooks the realities of the informal economy and the constraints which marginal populations—particularly women—face. In this paper, we use institutional theory and sensemaking to understand the experiences of women in the informal economy and what formalization means to them. We use a qualitative approach to collect data from 90 women entrepreneurs in three different cities in Nepal. In our findings we identify three groups of women with distinctive understandings of formalization—business sustainability, livelihood sufficiency and strategic alignment. Their interpretation of formalization reveals the complex, dynamic, and cyclical nature of formalization decisions. Decisions are also guided by the optimization of social and emotional logics, whereby formalization is conceived differently depending on different life stages, experiences within the informal economy and wider socio-cultural contexts. Our findings highlight the ethical implications of formalization where being a ‘good citizen’, rather than complying with formal rules and regulations, is about attuning to and fitting in with socially prescribed roles. Our research provides a nuanced view of formalization decisions, challenging idealized and ethical notions of formalization as a desired end state.
This article inductively builds theory on how transaction costs may be alleviated, and institutional voids bridged in developing economies, based on the case study of the successful migrants' entrepreneurial involvement in Nigerian agriculture: Shonga Farms. We posit that the iterative process of building conditions of trust that initiates with long-term commitment, involvement of the regional government, appropriate modes of financial contracts, and the gradual transitioning of controlling interests to private actors, are factors of success. We draw additional lessons by contrasting our case study with other similar migrant schemes that failed.
Rather than portray formal and informal sector entrepreneurs as discrete groups, an emergent scholarship has conceptualized a continuum from wholly formal to wholly informal entrepreneurs. The aim of the article is to advance a degree of (in)formality approach by evaluating whether the institutional determinants found to explain whether an enterprise is formal or informal are also valid when explaining the level of (in)formality of enterprises. To do so, a 2017 survey of 500 retail microenterprises in the city of Lahore in Pakistan is reported. The finding is that higher levels of formality are more significantly associated with individual-level characteristics of the entrepreneur and enterprise, such as educational level and sales, than with formal and informal institutional conditions, as proposed by institutional theory. The article thus concludes by offering new theoretical implications and exploring some innovative policy measures to tackle informal entrepreneurship.
In this essay, we critique the usage of the term ‘institutional void’ to characterize non-Western contexts in organizational studies. We explore how ‘conceptual stretching’ of institutional voids – specifically, the theoretical and geographic expansion of the concept – has led not only to poor construct clarity, but also pejorative labelling of non-Western countries. We argue that research using this term perpetuates an ethnocentric bias by deifying market development and overlooking the richness and power of informal and non-market institutions in shaping local economic activity. We call for an ‘epistemological rupture’ to decolonize organizational scholarship in non-Western settings and facilitate contextually grounded research approaches that allow for more indigenous theorization.
Building new space for institutional theory, we propose how the severity of formal and informal institutional voids shapes the productivity of entrepreneurial activities within society. Our theory makes the key assumptions that voids can exist in both formal and informal institutions and that they are capable of hindering entrepreneurial behavior that is favorable to development progress. We extend new theoretical domains by conceptualizing informal institutional voids and proposing how both formal and informal institutional voids and their interaction influence two qualitative outcomes within localities: (1) the unique forms of entrepreneurial activity, and (2) the objectives underlying this entrepreneurial activity.
Entrepreneurs play a key role in introducing innovations into the market. However, the extant literature has found that the degree of innovation within new ventures varies considerably and that these differences can be related to the individual factors of entrepreneurs. In this article, we go one step further and suggest that the influence of individual factors on innovation is contingent on the institutional context. We use a sample of more than 140,000 entrepreneurs from 101 countries that have participated in the Global Entrepreneurship Monitor (GEM) project between 2005 and 2015. Our results show that individual characteristics of the entrepreneur, such as risk tolerance, entrepreneurial alertness, education and previous entrepreneurial experience, influence innovation in new ventures but that their effect is reinforced by an institutional context with high economic freedom.
The informal economy (IE) has attracted the attention of policy makers, practitioners and academics alike, reflected both in the growing number of publications spanning different disciplinary foci and in the recent policy emphasis on the formalisation of IE (ILO 2014, Sepulveda and Syrett 2007, Williams and Nadin 2014). The emphasis on formalisation reflects the move beyond traditional explanations of IE as lacking sustainability and stability associated with being a remnant of economic development (Webb et al. 2009) to appreciate its permanence and significance, and its links with, and interdependencies on, the formal economy (Castells and Portes 1989, Meagher 2013, Chen 2007). The IE, broadly accepted as ‘the diversified set of economic activities, enterprises, jobs, and workers that are not regulated or protected by the state’ (Chen 2012: 8), contributes substantially to national GDPs of countries at different developmental stages, accounting as much as 40-60% of the GDPs of developing countries (Godfrey 2011, Schneider 2002). The IE also attracts a disproportionately high number of women, whose participation in these often vulnerable forms of (self)employment is frequently portrayed as motivated by poverty or ‘involuntary exclusion’ from the formal labour market and concerned with sustaining their family’s livelihood (Franck 2012, Bushell 2008, Williams and Gurtoo 2011). These views often ignore the gendered constraints on women’s entrepreneurial activities and their reproduction through social norms, codes of behaviour and practices in specific socio-cultural contexts and the barriers to women’s sustainable economic activity through formalisation.
This article analyses how financial literacy and role models contribute to explaining the performance of micro-enterprises in the informal economy. Grounded in human capital reasoning and social learning theory, we argue that financial literacy and personal knowledge of role models lead to improved firm performance. We test our hypotheses on a unique dataset of 739 micro-enterprises in Ecuador. We find that financial literacy is an important predictor of financial performance but not growth, and the use of role models predicts return on assets but not other performance metrics. Our results have implications for future work on micro-enterprises and the nature of the human and social capital of their founders.
We show that economic conditions when managers enter the labor market have long-run effects on their career paths and managerial styles. Managers who began their careers during recessions become CEOs more quickly, but at smaller firms. They also have more conservative styles, such as lower investment in capital expenditures and research and development, more cost cutting, and lower leverage and working capital needs. These recession effects appear to be largely driven by the characteristics of the CEO’s first job (recession CEOs tend to start in smaller or private firms), which suggests that the early work environment is important to the formation and selection of managers.
Received June 30, 2015; editorial decision August 5, 2016 by Editor Francesca Cornelli.
Entrepreneurs in many emerging economies start their firms informally, without registering with the state.We examine howinformality at the time of founding affected the performance of 12,146 firms in 18 countries across sub-Saharan Africa. Our findings indicate that entrepreneurs who registered their firms at founding enjoyed greater success in terms of sales and employment. But these benefits varied widely across countries. Consistent with the idea that legitimation processes account for these benefits, countries in which people trust their government more had larger advantages associated with being formal.
This paper addresses questions raised by Storr, Haeffele-Balch and Grube in their book Community Revival in the Wake of Disaster: Lessons in Local Entrepreneurship (2015). I review the reasons why the book is timely, especially the rising number and costs of disasters globally and the shifting norms on the role of government in disaster management. Social capital serves as a critical engine for resilience to crisis, and I move to demonstrate its importance in the mitigation and recovery stages. Then, I raise a research agenda based on their writings, focusing on building quantitative evidence to match the qualitative data already gathered by the authors. Specifically, I focus on testing claims about the definition and density of entrepreneurs, the role of polycentricity, and the public policy pools that would build entrepreneurial talent in vulnerable communities.
While existing research has explained how actors can disrupt even deeply entrenched practices, we focus on the role of the context in fueling these efforts. To do so, we analyze one of the largest anticorruption operations ever launched in Brazil: the “Lava Jato” (Car Wash Operation) and its antecedents, the contextual enablers of change, and the institutional work of agents involved in this operation. We find that the confluence of jolts, gradual changes in the field, and the cumulating work of purposeful actors were essential for anticorruption actions to gain traction across the country and lead to a breakthrough in the fight against corruption. We develop a model to explain how actors seeking institutional change are contextually empowered, and their efforts yield breakthroughs only at particular points in time when the context is “ripe” for change. Our findings contribute both to institutional theory and the corruption literature.
Research Summary: The dynamic development of a host country's institutional and factor market conditions is a critical consideration for multinational enterprises when entering emerging countries. By studying 2,245 foreign direct investments into Africa during the period 2008-2013, we find that MNEs are more likely to enter African countries that have formal institutions that are rapidly improving via greenfield investments. This is especially true for those MNEs with prior investment experience in Africa or with local government connections. We also find that acquisition modes are more likely to be adopted in African countries with rapidly improving factor market conditions, especially by MNEs with local government connections. We promote a dynamic perspective for MNEs for assessing business opportunities and entry modes in Africa. Managerial summary: Foreign direct investment establishment mode literature has focused on the impact of unidimensional measures of institutional status, despite that institutional environments in emerging economies undergo substantial and continuous changes in multiple dimensions. This study integrates the dynamic institution-based view with the theoretical construct of institutional competitive advantages to examine the heterogeneous strategic responses of investing firms to host country institutional dynamics. Empirical results from 2,245 FDIs into Africa during the period 2008-2013 show that multinational enterprises MNEs are more likely to adopt: (1) a greenfield mode in countries with rapid development of formal institutions; and (2) an acquisition mode in countries with rapid development of factor markets. Moreover, the regional experience of MNEs strengthens the first effect, while the institutional ties strengthen both effects.
Research Summary: We investigate the theoretical and empirical implications of longitudinal data in strategy research. Theoretically, longitudinal data allow strategy researchers to distinguish between relationships among constructs within versus between firms. Empirically, longitudinal data contain information about two types of relationships: within-and between-firm. We describe how the hybrid approach, a technique used in other disciplines, disentangles within-and between-firm relationships. We reexamine a study of research and development expenditures to illustrate the advantages of the hybrid approach. Based on our theory and reexamination, we offer a series of recommendations for researchers using longitudinal data to test theoretical perspectives. Managerial Summary: Strategy research examines two important sources of variation over time: what is occurring within the firm (e.g., Do firms perform better over time when investing more in R&D?) and what is occurring between firms (e.g., Do firms investing more in R&D outperform firms investing less in R&D?). These two sources may be similar or different in both direction and magnitude, and when significant differences exist in either direction or magnitude researchers must carefully consider the implication of these differences to their theoretical rationale and statistical testing. Our paper highlights the benefits of theorizing and testing these two sources of variance, providing scholars the ability to broaden both the theoretical and empirical contribution of their research. It is important to understand this distinction when considering how research results might inform managerial decision making.
In recent years, management scholars and practitioners have been advocating a more prominent role for business in economic and social development at the “Base of the Pyramid” (BoP) where more than a billion people subsist on less than two dollars a day. Yet, in both theory and practice, the development of financially sustainable and scalable business solutions for the BoP has been challenging. By integrating insights from the emerging BoP literature with extant research on the replication of organizational routines and templates, this study examines how the distinctive conditions of the BoP affect the development and replication of scalable business solutions for the world’s poor. In particular, we identify key distinctive conditions of the BoP and develop an organizing framework on the mechanisms that facilitate the development and replication of viable and scalable business templates there. Our analysis contributes to BoP research by advancing understanding of the role of templates in economic and social development at the BoP as well as to research on the replication of organizational routines and templates by delineating the distinctive conditions and mechanisms that affect the development and replication of templates at the BoP.
To advance understanding of the entrepreneurship process in developing economies, this paper evaluates whether registered enterprises that initially avoid the cost of registration, and focus their resources on overcoming other liabilities of newness, lay a stronger foundation for subsequent growth. Analyzing World Bank Enterprise Survey data across 127 countries, and controlling for other firm performance determinants, registered enterprises that started-up unregistered and spent longer operating unregistered are revealed to have significantly higher subsequent annual sales, employment and productivity growth rates compared with those that registered from the outset. The theoretical and policy implications are then discussed.
We offer an organizational lineage inheritance theoretical framework for understanding the longevity of imprinting effects of two consecutive eras with distinct environmental conditions, values, and norms. Adopting a genealogical approach, we find that erabased imprinting is contingent on lineage-based transmissions. Era-based initial conditions strongly influence the entrepreneurial proclivity of the first generation of firms but have no influence on subsequent generations, and each generation is influenced by the entrepreneurial proclivity of the former. We show two mediation effects and one moderation effect, supporting our theoretical argument that the longevity of imprinting effects is due to heredity processes. First, the effect of era-based initial conditions on the entrepreneurial proclivity of the second generation is mediated by the entrepreneurial proclivity of the first generation. The effect of the entrepreneurial proclivity of the first generation on the third-generation's entrepreneurial proclivity is mediated by the entrepreneurial proclivity of the second generation. Second, a mismatch between the mental models of the knowledge-transmitting agents (the founders) and the knowledgereceiving agents (organization members - prospective entrepreneurs) moderates the effect of the entrepreneurial proclivity of one generation on the entrepreneurial proclivity of the next.
This paper examines two social enterprises and 25+ informal economy micro-entrepreneurs in Kenya who utilise waste materials to generate income, considered through the conceptual lens of bricolage. Waste materials can all be considered as sources of free or discounted materials that in resource-constrained and poor communities might be leverage to generate income in the absence of employment. This paper explores three key themes that emerge from the research findings, namely the various strategic dimensions of the cases, the networks and social capital they leverage and how these livelihood models relate to various dimensions of bricolage such as improvisation, making do, and the process of ‘fiddling’ or recombining resources. The findings also suggest that differing waste livelihood have different rates of return, or profitability, and differing input requirements of capital, skills and knowledge. The paper also stresses the role of boundary spanning organisations such as NGOs and hybrid/social enterprises.
Abstract: We argue that organizations have deep roots in traumatic societal shocks that long preceded their founding. Drawing on literatures from strategic management and the social sciences, we explain how traumatic shocks such as conflict, disease, and natural disaster can alter the institutional and cultural paths that determine future business environments. Historical shocks can help clarify the origin of cultural and institutional differences and help provide causal inference about why these differences are correlated with organizational structure and strategy. We explain specific cultural and institutional mechanisms through which historical traumatic shocks persist as well as specific organizational factors influenced by these mechanisms. We also provide guidance on key approaches for empirically linking traumatic shocks with modern firms as well as common identification problems in these methods. Our approach clarifies a path for clarifying theory on how culture and institutions shape firms, and how management scholars might anticipate the evolution of market development following emerging traumatic shocks.
Informal firms operate in a shadowy zone where they produce legal goods and services but do not follow legal requirements to register with government authorities. The collective economic activity involving informal firms, their suppliers, and their customers constitutes the informal economy. Although the informal economy accounts for a significant percentage of total commerce in many countries, there has been little management research about it. We outline some key issues and questions involving the informal economy that management researchers could help to answer, forming a potential research agenda in the process.
This study focuses on how founding institutions impact intraorganizational capabili- ties and how such imprints may have different external manifestations in subsequent historical eras. We introduce the concept of exaptation to organizational theory, identifying an important process whereby the historical origin of a capability differs from its current usefulness. Three founding conditions—branching policy, moderniza- tion, and political culture—influenced banks’ development of capabilities for manag- ing dispersed branches, and these capabilities subsequently led to variation in banks’ propensity to engage in acquisitions.
This study investigates the role of managerial and marketing capabilities in moderating the relationship between competitive strategy and firm performance using data from 581 micro and small businesses (MSBs) in Ghana. Using a hierarchical multiple regression analysis the findings indicate that while differentiation strategy is related to performance, cost leadership strategy does not influence performance after controlling for several firm-specific factors. The findings further show that both managerial capability and marketing capability moderate the relationship between competitive strategy (cost leadership and differentiation) and performance for MSBs in Ghana. However, managerial capability strengthens the influence of cost leadership strategy on performance, while it weakens the impact of differentiation on performance. Moreover, marketing capability augments the impact of differentiation on performance, while it diminishes the influence of cost leadership on performance. The findings indicate a contingency approach to the implementation of competitive strategy by MSBs.
In recent decades, emerging economy (EE) firms have taken an aggressive approach to international expansion. Drawing upon option portfolio theory, this study develops the characteristics of the OFDI portfolio based on two attributes of a portfolio and two dimensions of host environments. We examine how the characteristics of the OFDI portfolio dynamically influence the OFDI‒performance linkage. Using a sample of 545 Chinese listed multinational firms during the period 2009–2018, we find EE firms’ OFDI contributes more to short-term performance when the OFDI portfolio features a higher overall quality of host institutions or a higher diversity of strategic factor market developments in the host countries. However, over a relatively long period, EE firms’ OFDI contributes more to long-term performance when the portfolio features a higher overall diversity of strategic factor markets and institutional environments. These findings offer further knowledge on the OFDI‒performance link in emerging economies.
Research summary
We analyze the impact of informal entrepreneurship on innovation in emerging markets. Building on agency and imprinting theories, we introduce the concept of informality costs, that is, the higher agency costs from adverse selection and moral hazard problems caused by a firm’s informal creation. These informality costs become imprinted and affect internal agency relationships among employees and managers and external agency relationships with suppliers and distributors, constraining the firms’ incentives and ability to innovate even after formalization. As a result, informally created firms engage more in imitative and less in innovative new product development. We further propose that changes in ownership and the innovation environment alter the persistence of informality costs. Specifically, foreign firm and business group ownership reduces the persistence of informality costs and results in more innovativeness, while state ownership heightens informality costs and leads to less innovativeness. Moreover, improvements in national innovation systems decrease informality costs, strengthening the innovativeness of informally created firms.
Managerial summary
We study how the informal creation of new ventures in emerging economies affects their innovation after they become formal firms. We propose that informally created new ventures suffer from informality costs established as a result of being informal at the beginning of their lives that reduce their incentives and ability to innovate. As a result, these firms tend to introduce new products that are imitative rather than innovative. We also propose that changes in the firm’s ownership and in the national innovation system alter the persistence of informality costs and their impact on innovation. First, informally created new ventures acquired by foreign firms or private business groups have reduced informality costs and innovate more, while those acquired by the state have enhanced informality costs and imitate more. Second, national innovation system improvements reduce informality costs and support innovativeness.
This study contributes to the existing entrepreneurship literature by demonstrating how formal and informal entrepreneurship in emerging economies are differentially driven by the interplay between financial development and good governance. The following findings are obtained through the two-step system Generalized Method of Moments: (i) there exists an unconditional positive (negative) impact of financial development on formal (informal) entrepreneurship; (ii) the conditional effect of quality of governance increases formal entrepreneurship and decreases informal entrepreneurship; (iii) the net effects on formal entrepreneurship from the interactions of financial development with the indicators of governance quality are mostly positive, indicating that the quality of governance can be employed to enhance the positive weak effect of financial development on formal entrepreneurship; and (iv) the net effects on informal entrepreneurship from the interactions between financial development and the indicators of governance quality are negative for most estimated models, indicating that good governance can be used as a policy variable that improves the potentially weak impact of financial development on reducing informal entrepreneurship. Theoretical and empirical contributions, policy and practical implications are also discussed.
Research summary
We review the relationships between institutions and global strategy and explain several clarifications for future research. First, studies need to clarify the standard used to assess quality in institutional dimensions they research rather than let readers assess them from the measures. Second, analyses need to specify the theoretical approach used, which may be based on the paradigm from a single discipline (economics, sociology, politics, psychology) or the integration of underlying disciplines, as often seen in management. This must form the basis of a consistent set of assumptions rather than a potpourri of arguments from incompatible logics. Third, investigations need to clarify the direction of relationship and mechanisms. On the one hand, studies on the impact of institutions on strategy should clarify the institutional influences used (adapt, appeal, avoid). On the other hand, research on the effect of strategy on institutional change should clarify the institutional strategies (inform, influence, incentivize) and institutional spillovers (compete, command, copy) by which firms change institutions.
Managerial summary
The study of institutions (controls of the behavior of individuals and firms) has become a popular topic analyzed in global strategy. Unfortunately, there is some confusion on how institutions affect the global strategy of firms because of differences in the viewpoints used to explain the relationships. We clarify past arguments by explaining the need to identify the standards used to assess quality in institutions, and the assumptions of approaches based on underlying disciplines (economics, sociology, politics, or psychology) as well as those that integrate these disciplines like in management. We also explain the mechanisms by which institutions affect the global strategy of firms (adapt, appeal, avoid), as well as the mechanisms by which global strategies influence the transformation of institutions via institutional strategies (inform, influence, incentivize) and institutional spillovers (compete, command, copy).
Research Summary
Companies sponsor platform ecosystems as an open innovation strategy to encourage complementors to develop complementary products, services, or technologies that can add value to the platform ecosystem. In this study, we develop and test an information‐based theory of entrepreneurial activity within platform ecosystems. We postulate that ecosystems produce different types of information—a subset of which will foster entrepreneurship in the form of the commercialization of complementary products that were previously released for free. Our results indicate that product‐specific information is associated with commercialization, but we fail to detect a relationship between market information and subsequent commercialization activity.
Managerial Summary
The digital economy has led to a proliferation of platform ecosystems that harness external innovation. These ecosystems rely on complementors who enhance the value of platforms by creating complementary technologies. Hence, complementors’ commercial viability is important. One such type of ecosystem is an app store, which enables complementors to introduce software that improve the platform product. App stores exist for a variety of software platforms, ranging from mobile phone operating systems (iOS and Android) to electronic medical record systems (Epic and Cerner). In this research, we find that complementors who introduce a free version of a mobile app are more likely to commercialize their app in response to specific types of information and platform designers should manage information in their platforms to foster platform viability.
This article is protected by copyright. All rights reserved.
Informal markets encompass economic activity that occurs outside of formal regulations and is rather guided by informal norms, values, and understandings. A growing stream of research explores the transition of entrepreneurs from informal to formal markets. Past research appears to portray the transition to formality as a strategic choice made by entrepreneurs and to center on regulatory concerns, such as acquiring licenses, registering the business, and paying taxes. Such an approach to studying formalization, however, may not adequately account for the influence of informal institutions on such a transition, and ignores the facilitating role often played by institutional intermediaries, a type of institutional entrepreneur. Thus, the purpose of this study is to explore a more comprehensive view of formalization in which an institutional intermediary seeks to help small producers transition from selling their goods in informal markets (where formal regulations and infrastructures do not exist or are severely underdeveloped) to formal markets (where developed formal regulations and infrastructures have engendered stronger competition and heightened quality and efficiency standards). More specifically, we examined the process by which an NGO attempted to transition approximately 1,800 dairy farmers in rural Nicaragua from informal to formal markets. Our results suggest that the success of formalization efforts by institutional intermediaries hinges on a series of inter-related tactics aimed at providing “institutional scaffolding” to encourage and facilitate informal entrepreneurs' participation in formal markets.
In developing countries, weak institutional capacity to observe and regulate the economy discourages foreign capital inflows vital to venture investment. This informality effect may differ for migrant remittances, inflows less reliant on formal arrangements. We use institutional and transaction cost theories to propose that informality shifts migrant remittances toward venture funding. Analyses in 48 developing countries observed from 2001 to 2009 support our proposition. When the informal sector exceeds approximately 46% of GDP, remittances increase venture funding availability. Migrants and their remittances are vital to funding new businesses and entrepreneurially-led economic growth in developing countries where substantial informality deters other foreign investors.
The paper empirically examines the effect of economic freedom on the average prevalence of formal and informal entrepreneurship. Whereas the formal entrepreneurship and economic freedom nexus has been studied, the influence of economic freedom on informal entrepreneurship is less forthcoming. The results, based on cross-country data and after accounting for possible reverse causality, show that economic freedom promotes formal entrepreneurship and inhibits informal entrepreneurship. Furthermore, the return from economic freedom is greatest in countries with a relatively higher prevalence of formal and informal entrepreneurship.
Despite its connotations of non-compliance, illegality, social exploitation and marginality, the informal sector is a substantial contributor to economic life in developing countries and, increasingly, in more technologically advanced activities. Its prevalence in developed economies has also become more widely recognized. In light of its significance, this paper reviews research on the informal sector from a management and organization scholarship perspective, rather than from an entrepreneurship view, as has been the focus until now. It sets out the atypical management practices that are inherent in the sector, explores the under-researched relationship between formal and informal firms, and highlights definitional, conceptual and other limitations in extant research. As a step in resolving these issues, the authors present a conceptual model of formality and informality in a three-dimensional framework that highlights an organizational infrastructure dimension, a view of firms operating along a continuum, and a multi-level analytical context. Building on this, the authors detail opportunities for enhanced appreciation of in situ management and organizational practices in the informal sector and outline tools for pursuing a management and organization scholarship agenda. Overall, the authors argue that management scholarship has great potential to improve understanding of the informal sector, and that the informal sector provides opportunities to advance management theory, research and practice.
Motivated by the growth and internationalization of business groups, this paper reviews the business group literature and presents a future research agenda, highlighting their implications for international strategy. The paper identifies theoretical tensions and empirical ambiguities around three key business group features—corporate governance, internal markets, and corporate strategy—and three key outcome variables—performance, economic impact, and innovation—that have generated significant debate. We conclude with three methodological concerns relevant to these debates: generalizing business group research across countries, endogeneity in business group research, and performance measurement in business groups.
Research summary: Existing research describes a broad range of determinants of new product development (NPD), a fundamental competitive activity of firms. A considerable share of this work has occurred in the context of developed economies, raising a concern that some important determinants may remain unexamined. We suggest that one such determinant is competition from informal (unregistered) firms. Drawing from the attention‐based view, we investigate the effects of informal competition on NPD in a large sample of firms located across Eastern Europe and Central Asia. We examine not only the direct effect but also how this effect is moderated by characteristics of the competitive and institutional context.
Managerial summary: The purpose of this research is to examine the relationship between competition from informal (unregistered) firms and new product development (NPD) by formal firms. We argue that NPD is an effective response to differentiate from informal firms, and our analyses of over 9,000 firms located in emerging economies across Eastern Europe and Central Asia indicate that NPD activities are more likely in formal firms who rate informal competition as a greater obstacle. The strength of this direct relationship depends on aspects of the competitive and institutional environment: it is weakened when levels of competition from other formal firms are higher, when alternative responses such as corruption are more available, and when managers are more optimistic about the regulatory environment. Copyright © 2016 John Wiley & Sons, Ltd.
Research summary: The use of Heckman models by strategy scholars to resolve sample selection bias has increased by more than 700percent over the last decade, yet significant inconsistencies exist in how they have applied and interpreted these models. In view of these differences, we explore the drivers of sample selection bias and review how Heckman models alleviate it. We demonstrate three important findings for scholars seeking to use Heckman models: First, the independent variable of interest must be a significant predictor in the first stage of a model for sample selection bias to exist. Second, the significance of lambda alone does not indicate sample selection bias. Finally, Heckman models account for sample-induced endogeneity, but are not effective when other sources of endogeneity are present. Managerial summary: When nonrandom samples are used to test statistical relationships, sample selection bias can lead researchers to flawed conclusions that can, in turn, negatively impact managerial decision-making. We examine the use of Heckman models, which were designed to resolve sample selection bias, in strategic management research and highlight conditions when sample selection bias is present as well as when it is not. We also distinguish sample selection bias, a form of omitted variable (OV) bias, from more traditional OV bias, emphasizing that it is possible for models to have sample selection bias, traditional OV bias, or both. Accurately identifying the type(s) of OV bias present is essential to effectively correcting it. We close with several recommendations to improve practice surrounding the use of Heckman models.
Institutional theory is employed for examining how and to what extent external pressure leads to changes in the venture idea during the start-up and early life of new, knowledge-intensive ventures. From a population of 321 young, knowledge-intensive firms that underwent a training program at Linkping University, Sweden, structured telephone interview data were obtained from 167 firms. The results confirmed that the venture idea had undergone more change in ventures that had more external owners, a dominant customer, and an incubator location. The results imply that institutional theory is a meaningful tool for understanding why and how venture ideas change over time.