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MNE institutional advantage: How subunitsshape, transpose and
evade host countryinstitutions
Patrick Regnér1 andJesper Edman2
1Department of Marketing and Strategy,Stockholm School of
Economics, Stockholm,Sweden; 2Graduate School of
InternationalCorporate Strategy, Hitotsubashi University,Tokyo,
Japan
Correspondence:P Regnér, Department of Marketing andStrategy,
Stockholm School of Economics,Box 6501, Stockholm S-113 83,
Sweden.Tel: +46 (0)87369516;Fax: +46 (0) 31 99 27;email:
[email protected]
Received: 4 May 2011Revised: 8 October 2013Accepted: 22 October
2013Online publication date: 19 December 2013
AbstractScholars increasingly emphasize the impact of
institutions on multinationalenterprises (MNEs), but the opposite
relationship has attracted less research –that is, MNE agency in
relation to institutions. Based on a comparative case studyof six
MNEs from the United States and Sweden, this paper remedies this.
Itexplores and explicates MNE subunits’ strategic responses to host
country institu-tional constraints and opportunities in five
different regions. A new-institutionalapproach is adopted, which
allows for an investigation of MNE subunit agency inrelation to
normative and cognitive institutions, as well as regulative ones.
Thisfine-grained analysis reveals not only what kinds of responses
MNE subunitsinvoke, but why and how they are able to respond. We
identify four strategicresponses by which subunits shape, transpose
and evade institutions in the pursuitof competitive advantage:
Innovation, Arbitrage, Circumvention and Adaptation.These responses
are driven by three key enablers: multinationality, foreignness
andinstitutional ambiguity – that serve to enhance and heighten
three mechanisms:reflexivity, role expectations and resources. By
linking the enablers and the mechan-isms to specific types of
strategic responses in a framework and typology, thepaper not only
contributes to emerging research on the interplay between
MNEs,institutions and strategy, but to strategy practice.Journal of
International Business Studies (2014) 45, 275–302.
doi:10.1057/jibs.2013.66
Keywords: institutional context; competitive advantage;
case-theoretic approaches;multinational corporations (MNCs) and
enterprises (MNEs); neoinstitutional theory;strategy and business
strategy
INTRODUCTIONApplying both economic (North, 1990) and
organizational (Scott,2008) institutional theories, international
management research haswitnessed an increasing interest in the
impact of institutionson multinational enterprise (MNE) activities
and behaviors(Cantwell, Dunning, & Lundan, 2010; Henisz &
Swaminathan,2008; Jackson & Deeg, 2008). Recognizing that MNEs
are uniquein simultaneously operating across multiple institutional
environ-ments, researchers have investigated how country-level
institu-tions and institutional distance affect entry mode behavior
(Davis,Desai, & Francis, 2000; Lu, 2002; Meyer, Estrin,
Bhaumik, & Peng,2009), performance (Chacar, Newburry, &
Vissa, 2010), learning(Ghoshal, 1988; Henisz & Delios, 2002),
legitimacy (Chan & Makino,
Journal of International Business Studies (2014) 45, 275–302©
2014 Academy of International Business All rights reserved
0047-2506www.jibs.net
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2007; Kostova & Zaheer, 1999) and the transfer ofstrategic
practices (Kostova & Roth, 2002).While these works have opened
up an exciting
new area of inquiry, scholars have also lamentedthe absence of
agency in institutional analyses ofthe MNE (Kostova, Roth, &
Dacin, 2008; Phillips &Tracey, 2009; Phillips, Tracey, &
Karra, 2009;Saka-Helmhout & Geppert, 2011). Even as
theyhighlight the important role played by institutionalcontexts,
extant studies say relatively little abouthow MNEs and their
subunits respond strategicallyto host country institutions. Nor do
they identifythe drivers that underlie such response
strategies.Although several studies investigate the impactof
institutional factors on entry mode strategies(Brouthers, 2002; Xu
& Shenkar, 2002), these studiesgenerally maintain a focus on
static structure (e.g.,joint venture vs wholly owned subsidiaries)
and anarrow emphasis on how institutional constraintscan be reduced
and legitimacy increased. Moreover,responses to institutions have
predominantly beenconsidered on the level of the MNE and
corporatemanagement, as opposed to subunit and subsidiarymanager
level (cf. Xu & Shenkar, 2002). As a result,there is a dearth
of studies that investigate howsubsidiaries and subunits respond to
local institu-tional contexts.The limited number of studies that do
address
MNE subsidiary agency in relation to institutionshave focused on
the adaptation of home-countrypractices to local institutional
settings (Gooderham,Nordhaug, & Ringdal, 1998; Kostova &
Roth, 2002)or on processes of translation underlying globaliza-tion
and trans-national institution building (Djelic& Quack, 2003).
There has, however, been little ifany explicit emphasis on how such
agency may linkto the advantages of the MNE in host countries.
Thisis despite recent research suggesting not only thatMNEs may
have advantages in responding to insti-tutions compared with
domestic firms (Kostovaet al., 2008), but that experimental
processes inMNE subsidiaries are where the main drivers of
suchresponses lie (Cantwell et al., 2010). It would thus beof great
interest to understand the unique traits thatprovide MNEs with an
institutional advantage overdomestic firms.Against this background
and various calls for
research on MNE responses in relation to institutions(Cantwell
et al., 2010; Kostova et al., 2008, 2009;Phillips et al., 2009),
this paper identifies specificMNE strategic responses to
institutions, as well as theirunderlying mechanisms and enablers.
The paper spe-cifically addresses the following questions: Do
MNE
subunits employ strategic responses to institutions? Ifso, what
do these look like, that is, what are thedifferent types of
strategic responses? Why are MNEsable to provide these responses,
that is, what are theenablers? How do MNEs respond to institutions,
thatis, what are the primary mechanisms? Finally, arethese
responses, enablers and mechanisms unique toMNEs, composing a
particular advantage over domes-tic actors?We address these
questions by exploring how the
subunits of six different MNEs from the United Statesand Sweden
responded to local institutions in fivedifferent regions. Our study
contributes to interna-tional management by identifying not only in
whatway MNE subunits respond to institutional settings,but also
delineating the underlying enablers andmechanisms of such
responses. We find that whileMNEs are exposed to highly complex
pressure acrossregulative, normative and cognitive institutions,
theyalso respond forcefully. We identify four distinctMNE strategic
responses, implemented using threespecific mechanisms. These
mechanisms are enabledboth by the MNE’s unique social position
across andwithin countries, as well as the degree of ambiguityin
the local organizational field. By identifying theseenablers and
the mechanisms they engender, ourwork breaks new ground in
identifying how MNEsgarner competitive advantage vis-à-vis local
actors, byshaping, transposing and evading institutions.In addition
to contributing to international man-
agement, our study also offers insights for organiza-tion
theorists by extending research on agency inrelation to
institutions in a multinational context. Indoing so we delineate
conditions for enhanced strate-gic responses to institutions and
also illustrate possibleboundary conditions. We contribute to
strategic man-agement by illustrating the importance of
managinginstitutional and social factors for achieving competi-tive
advantage, and by delineating what the under-lying mechanisms of
such management processesmay look like. By building on recent
developments inneoinstitutional theory and integrating these
withinsights on MNE strategic responses, we seek tostrengthen the
linkage between international man-agement studies and institutional
and strategic man-agement theories (cf. Cantwell & Brannen,
2011).
THEORYAND RESEARCH OBJECTIVE
Institutions and MNEsCentral to the recent focus on institutions
amonginternational management scholars is the realizationthat
context has a direct influence on the strategies
MNE institutional advantage Patrick Regnér and Jesper
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Journal of International Business Studies
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of MNEs (Jackson & Deeg, 2008; Mudambi &Navarra, 2002;
Peng, Wang, & Jiang, 2008). Whileregulatory, normative and
cultural-cognitive institu-tions arguably shape the operating
conditions facedby any firm (Scott, 2008), scholars have
suggestedMNEs may be particularly exposed to these effectsbecause
they span multiple contexts and nationalboundaries (Westney, 1993;
Morgan, Kristensen, &Whitley, 2001). Consequently, multiple
studieshave explored how local institutional conditions, aswell as
the institutional distance between home andhost country, affect the
competitive strategies ofMNEs (Boubakri, Mansi, & Saffar, 2013;
Chung &Beamish, 2005; Henisz & Delios, 2001; Kostova,1997;
Kostova & Roth, 2002; Lu, 2002; Meyer &Nguyen, 2005; Xu
& Shenkar, 2002).While these studies make important
contributions
to our understanding of how MNEs relate to localinstitutions,
areas for further inquiry remain. First,many extant studies have
operationalized institutionson the country level, focusing in
particular on thepolitical, legal and societal aspects of
institutions(Brockman, Rui, & Zou, 2013; Meyer, 2001; Penget
al., 2008; Wan, 2005; Jackson & Deeg, 2008). Thismacro level of
analysis, however, fails to take intoaccount the industry-specific
normative and cogni-tive institutional challenges that MNEs often
encoun-ter when entering host countries (Orr & Scott,
2008).Examining institutions on the level of the countrythus risks
excluding important insights that can begained by analyzing the
specific context withinwhich the MNE subunit conducts business
(Phillipset al., 2009; Saka-Helmhout & Geppert, 2011).Second,
drawing on the classic tenets of institu-
tional economics (North, 1990; 2005) and new-institutionalism in
organization theory (DiMaggio &Powell, 1983; Meyer & Rowan,
1977), a majority ofstudies view institutions as constraints that
increaseoperating costs for the MNE (Eden & Miller,
2004;Rosenzweig & Nohria, 1994). Consequently, scholarshave
predominantly focused on how firms reduceinstitutionally driven
transaction costs through theirchoice of country markets, ownership
strategies andentry modes (Brouthers & Brouthers, 2000; Chan
&Makino, 2007; Meyer et al., 2009; Xu & Shenkar,2002).
Viewing institutions as entrenched and lar-gely immobile facets of
the environment, extantresearch has particularly emphasized how
firmseither adapt to or offset pressures for conformitywith
firm-specific advantages (Zaheer, 1995). Therehas been far less
emphasis on howMNEs proactivelyengage with and strategize around
their institutionalenvironment.
In one of the few exceptions to the dominant viewof institutions
as inertial macro-level constraints,Saka-Helmhout and Geppert
(2011) explore varyingforms of active agency employed by local
subsidiarymanagers introducing new products and practicesinto host
country markets. This study is importantboth because it identifies
an MNE advantage inresponding to institutions, and because it
places thelocus of this response at the subunit level,
therebyadding to the growing recognition that local subunitsplay
important roles in MNE activities in general(Rugman & Verbeke,
2001; Andersson, Forsgren, &Holm, 2002, 2007; Almeida &
Phene, 2004) and in thedevelopment of firm-specific advantages in
particular(Birkinshaw & Morrison, 1996; Ghoshal &
Nohria,1989; Gupta & Govindarajan, 1994; Roth
&Morrison,1992). A more precise focus on the subunit level
isparticularly vital, as theMNEs’ response to extraordin-ary
institutions (Kostova & Zaheer, 1999) often lies atthe industry
or business-specific level (Kostova et al.,2008; Phillips et al.,
2009). Building on these initialefforts, this paper seeks to
understand the dynamicsbetween MNEs and host country institutions
byexploring responses on the subunit level.
A New-Institutional Approach to MNE SubunitAgencyTo explore
agency on the subunit level, we explicitlyadopt a new-institutional
framework (Greenwoodet al., 2008; Scott, 2008). Starting with
DiMaggio(1988), new-institutionalists have devoted consider-able
attention to various forms of agency, rangingfrom the muscular and
purposive actions of institu-tional entrepreneurs (Barley &
Tolbert, 1997;Greenwood & Suddaby, 2006; Maguire, Hardy,
&Lawrence, 2004) to the reproduction of instituti-onalized
routines by deeply embedded actors(Lounsbury & Crumley, 2007).
Most recently, theinstitutional work literature has identified how
thepurposiveness of agency varies, ranging from passiveand
routinized iterations on the one hand to highlycalculative
projective agency on the other (Battilana& D’Aunno, 2009). A
primary purpose of this paperis to identify different types of
strategic responses – thatis, the more calculative and projective
forms ofagency (cf. Saka-Helmhout & Geppert, 2011) – thatMNEs
employ vis-à-vis institutional environments.Following Oliver we
define strategic responses as
“the strategic behaviors that organizations employin direct
response to the institutional processes thataffect them” (Oliver,
1991: 145). This definitionexplicitly views conformity and
acquiescence aspossible forms of strategic agency; it hence
departs
MNE institutional advantage Patrick Regnér and Jesper
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Journal of International Business Studies
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from definitions that primarily emphasize actionsthat either
deviate from and challenge prevailinginstitutions (e.g., DiMaggio,
1988; Maguire, Hardy,& Lawrence, 2004), or specifically seek to
maintainthem (Lawrence, 1999; Lawrence & Suddaby, 2006).We use
Oliver’s broader definition because for mostforeign entrants,
conformity with local institutionsis not an example of
taken-for-granted behavior andhabit, but rather an explicit form of
strategic agency(Kostova & Zaheer, 1999; Luo, Shenkar, &
Nyaw,2002; Saka-Helmhout & Geppert, 2011).The new-institutional
approach to agency is parti-
cularly useful for our purposes for several reasons.First,
new-institutionalism explicitly recognizes thatinstitutions are
multifaceted and operate along notonly the regulative, but also
normative and cognitive“pillars” (Scott, 2008); such non-regulatory
institu-tions often constitute the most challenging aspects
offoreign operations (Orr & Scott, 2008). Second, whilea view
of agency linked to new-institutionalismallows for a more
fine-grained analysis, the threepillars also provide a framework
for generalizingfindings, both across our empirical cases and
vis-à-vistheory at large. Finally, as our emphasis is on
subunitagency in response to local institutions we are
lessinterested in how differences in home and hostcountry
institutional environments provide strategicadvantage (as is often
the focus in comparativeinstitutional analysis, e.g., Jackson &
Deeg, 2008),and more concerned with identifying common stra-tegies
that can be employed by all MNE subunits,regardless of home
country, when interacting withhost country institutions.
Enablers and Mechanisms of Agency: Why andHow Organizations are
Able to Respond toInstitutional ConditionsAs scholars recognize the
organizational capacity fortaking purposive action vis-à-vis
institutions, theirfocus has increasingly shifted towards
understandingwhy such responses arise, that is, what their
under-lying enablers are. To date, research has largelyfocused on
two enabling factors of strategic responsesto institutions: the
organization’s social position,and the field-level conditions
(Battilana, Leca, &Boxenbaum, 2009). Boundary-spanning social
positions,that is, those that cross multiple institutional
fields,can enable agency by exposing actors to alternativelogics,
practices and norms, as well as status-specificexpectations from
local actors (Rao, Monin, &Durand, 2003; Sauder, 2008). By
contrast, marginaland fringe social positions within a field can
enableagency by limiting the organization’s embeddedness
in local networks, thereby reducing pressures tomaintain
established norms and practices (D’Aunno,Sutton, & Price, 1991;
Lawrence & Suddaby, 2006;Leblebici, Salancik, Copay, &
King, 1991; Scott,2008: 102).In turn, the broader field conditions
of the institu-
tional environment can enable agency by providingactors with
greater room for maneuverability andaction. Specifically,
institutional fields characterizedby significant ambiguity and
uncertainty (Lawrence,Suddaby, & Leca, 2009; Seo & Creed,
2002) can pro-vide greater opportunities for actors to employ
poli-tical and social skills to engender change (Fligstein,1997).
Similarly, actors may be more prone to iden-tify and leverage
institutional contradictions (Creed,DeJordy, & Lok, 2010) in
fields that operate onmultiple, and competing, logics (Greenwood,
Diaz,Li, & Lorente, 2010). Conversely, more innovativeforms of
agency may also arise in highly stable fields,since these are
easier to interpret and understand(Beckert, 1999).Social positions
and field conditions hence enable
strategic responses because they provide orga-nizations with
opportunities to leverage particularmechanisms of agency. These
include (but are notlimited to) the ability to see beyond current
norma-tive and cognitive constraints (Bourdieu, 1977,1990;
Emirbayer & Mische, 1998; Giddens, 1976;Sewell, 1992),
heterogeneous pressure for confor-mity (Leblebici et al., 1991;
Zuckerman, 1999), andaccess to particular capabilities, assets,
relationshipsand networks (Greenwood & Suddaby, 2006).
Thesemore specific mechanisms provide insight into howorganizations
are able to engage in strategic res-ponses to institutions.In
identifying enabling factors and their under-
lying mechanisms, the vast majority of extantresearch has
focused on purely domestic actors.Notably, such enabling factors
and mechanismshave clear parallels to key traits that set MNE
apartfrom domestic actors. To begin with, MNEs are, bytheir very
definition, boundary-spanning organiza-tions, with significant
exposure to alternative prac-tices, norms and behaviors (Ghoshal
& Bartlett,1990; Meyer, Mudambi, & Narula, 2011;
Molina,2012; Rosenzweig & Singh, 1991; Westney, 1993).Second,
the subunits of MNEs often inhabit mar-ginal or weakly embedded
positions in host countryinstitutions and networks (cf. Mezias,
2002). Whilethis outsider position may result in increased
pres-sures for conformity (Kostova & Zaheer, 1999;Rosenzweig
& Singh, 1991), it may also mitigateexpectations of isomorphism
(Kostova et al., 2008;
MNE institutional advantage Patrick Regnér and Jesper
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Journal of International Business Studies
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Shi & Hoskisson, 2012), allowing MNEs to challengelocal
norms and behaviors (Edman, 2009). Finally,by virtue of their
search for new market opportu-nities, MNEs often enter
institutional environmentscharacterized by significant
heterogeneity, uncer-tainty and ambiguity (Meyer, 2001; Meyer,
Estrin,Bhaumik, & Peng, 2009; Clark & Geppert, 2011;Molina,
2012; Coeurderoy & Gordon, 2008; Jackson& Deeg,
2008).Viewed in light of new-institutional theory, these
studies suggest the MNEs’ unique social positions, aswell as
their exposure to ambiguous field conditions,may strengthen their
ability to undertake strategicresponses to institutions that are
unavailable todomestic players, thereby resulting in a
particularinstitutional advantage (Kostova et al., 2008,
2009;Phillips et al., 2009). This potential for agency vis-à-vis
institutional host country environments andadvantage over domestic
competitors may play animportant part in the overall corporate
strategy ofthe MNE. To date, however, few studies have soughtto
explore how MNEs actively respond to hostcountry institutions.
While there is general recogni-tion that the MNE’s
boundary-spanning may beadvantageous (cf. Grant, 1987), there is
little insightinto exactly how this specific trait contributes to
theMNEs ability to respond to host country environ-ments. This
paper contributes to filling this researchgap. Specifically, our
aim is to explore what kinds ofresponses MNE subunits invoke
vis-à-vis host coun-try institutional environments, why they are
able torespond (i.e., their enabling underpinnings), andhow they
undertake the responses (i.e., the specificmechanisms).
RESEARCH DESIGN AND METHODSGiven both the explorative nature of
our study,and our intention to extend existing theory, wefollow
recent calls for qualitative methods andpluralist approaches in
international businessresearch (Birkinshaw, Brannen, & Tung,
2011;Welch, Piekkari, Plakoyiannaki, & Paavilainen-Mantymaki,
2011) by employing a comparativeretrospective multiple case study
design (Eisenhardt,1989; Langley, 1999). This approach was
suitablebecause it allowed us to explore site-specific contexts,as
well as mechanisms (Stake, 1994; Yin, 1994); bothof these were
crucial, given our focus on culturaland institutional effects which
vary in industriesacross different countries (Marschan-Piekkari
&Welch, 2004).We chose subunits as the level of analysis
because
our interest lies primarily in how responses are
created in specific institutional settings; this is oftenthe
work of subunits dealing with local business-specific regulations,
norms and customs (Regnér,2003; Saka-Helmhout & Geppert, 2011),
as opposedto work at global headquarters (Birkinshaw, 1997;Orr
& Scott, 2008). In particular, it has recently beensuggested
that this level of analysis is most relevantwhen trying to
determine MNE idiosyncrasies inrelation to institutions (Kostova et
al., 2008) andthat MNE subunits may be particularly relevantwhen
managing host country institutions (Cantwellet al., 2010). Our unit
of analysis is thus the MNEsubunits’ diverse responses to
institutional pres-sures. Note that we made observations across
avariety of subunit and subsidiary types and that wecollectively
label them “subunits”. Below we outlinethe case-selection criteria
used to ensure sufficientvariety in responses.
Case SelectionAlthough we ground our study in an
institutionalframework, the explorative nature of the workmeant
that we had few a priori criteria to guide ourinitial case
selection, other than that the casesshould embody situations in
which firms activelyresponded to host country institutions. Given
thetacit and taken-for-granted nature of institutions,Schneiberg
and Clemens (2006) suggest that institu-tional interactions are
most visible during times ofupheaval and change, when prevailing
behaviorsand norms are challenged.We therefore purposely chose to
focus on firms
introducing new products, services and practicesbecause such
actions often provoke institutional con-flict and exceptions,
thereby triggering purposiveresponses on the part of MNEs (Orr
& Scott, 2008);this approach made the strategic responses to
institu-tions more observable. Given the ambiguous andmultifaceted
nature of institutional settings, we delib-erately searched for
cases where MNEs responded toall three of Scott’s (2008)
institutional pillars. Ourcase selection follows previous work on
institutionsand MNE behavior (Kostova & Roth, 2002; Orr
&Scott, 2008; Xu & Shenkar, 2002), and recognizes
thecomplex and multilevel nature of institutions.We explicitly
focused on cases wherein MNEs had
introduced novel and norm-deviant practices. Basedon interviews
within 12 different multinationalsconducted for two earlier
research projects, we wroteup case narratives outlining major
challenges andopportunities faced by MNEs introducing novelproducts
and practices into new environmental con-texts. From these we
identified six cases wherein the
MNE institutional advantage Patrick Regnér and Jesper
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MNEs’ introduction of new products and practicesresulted in
interactions vis-à-vis local regulatory,normative and/or cognitive
institutions. This typeof focused theoretical sample of multiple
casesallows for a replication logic in which cases aretreated as
experiments from which inferences aremade, producing stronger
theoretical generaliza-tions (de Vaus, 2001; Yin, 1994). The six
cases permitvariation in external conditions by representingproduct
and service introductions into various mar-kets – including the
United States, Japan, the EU andSoutheast Asia – and by
representing various indus-tries, products and services, ranging
from pharma-ceuticals to automotive components to
financialservices. Table 1 provides a summary of the six firmsand
their host markets, products/services and insti-tutional
conditions. As responding to institutionssometimes involve rather
sensitive strategies, oneselection requirement was that
interviewees werewilling to share delicate information and that
richarchival data was available. To ensure this require-ment, one
trade-off was that our cases differed intheir timing, including
some from the mid- to late1990s (AGA, Autoliv, Citibank and
Pharmacia) and
some from the late 1990s and early 2000s (Ericsson,The
Hartford).
Data Collection and ValidityThe case studies were primarily
composed of first-hand interviews, augmented by secondary
sourcesincluding company documents, industry associationstudies and
statistics, newspaper clippings andannual reports. We conducted
background inter-views to identify key informants (usually
subsidiarypresidents, heads of local product units or
practiceandmanagers at headquarters with responsibility forcertain
regions and projects), who subsequentlyintroduced us to further
interview subjects. Weinterviewed an average of 13 informants per
com-pany and the interviews lasted 1–2.5 h. To reducepotential bias
and ensure diverse views of institu-tional conditions and
responses, we conductedinterviews with not only subunit managers
but alsoheadquarters staff and external experts (includinganalysts,
industry associations, customers and com-petitors). In total, we
conducted 110 interviews atvarious stages between 1998 and 2008, of
which athird primarily concerned the respondents’ views of
Table 1 Firms, geographical markets, products/services and
institutional conditions
Company Industry Objective Host market(s) Salient institutional
conditions
AGA(Sweden)
Industrial Gas Introduction of Westernsales, distribution
andmarketing formats forindustrial gas
Eastern Europe Lack of or extreme uncertainty regardingproduct
regulations, sales and distributionpractices and norms in emerging
hostmarkets
Autoliv(Sweden/US)
Automotive supplier Introduction of new airbagproduct
Continental Europe Product seen as unnecessary andexpensive by
car manufacturers in hostcountries since mandatory
seatbeltregulations were already in place
Citibank(US)
Banking and Finance Introduction of new lendingproduct
Japan New lending format ran counter to normsand assumptions
dominant in theJapanese banking industry; opposed bylocal
competitors
Ericsson(Sweden)
Telecommunications Introduction of mobiletelephony systems
Southeast Asia Product seen as less appropriate since
itinterfered with existing radio frequencies(often of military use)
and fixed telephony;unclear standards and lack of regulation inhost
markets
The Hartford(US)
Life Insurance andConsumer Finance
Introduction of newdistribution strategy
Japan Existing norms and regulations impededfirm’s ability to
introduce its distributionformat
Pharmacia(Sweden/US)
Pharmaceuticals Introduction of unique andnovel
smoking-cessationproduct
Anglo-Saxonmarkets (Canada,UK & US)
Product ran counter to normative andcognitive foundations in
host markets;seen as illegitimate and questionable. Lackof
regulations and standards
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Edman280
Journal of International Business Studies
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institutional conditions and responses, while theremainder of
the interviews concerned this togetherwith wider MNE strategic
considerations. Our archi-val search employed public media sources
like news-papers and magazines, as well as internal
companydocuments, industry analyses and annual reports, asshown in
Table 2.All interviews were recorded and transcribed,
except in a few instances when this was not possible.Interviews
conducted in non-English languages weretranslated and
double-checked by native speakers.Interview data was coded and
organized inductivelyinto subject categories. Our approach was
qualitativeand interpretative: we did not count words andsentences
but rather sought to draw conclusionsabout meanings, mechanisms and
actions from theavailable data (Langley, 1999). We began by
usingdetailed coding, essentially summarizing individualbits of
data and information; this yielded severalhundred categories per
firm. During multiple codingiterations we extracted and evaluated
diverse units ofcoded data and checked consistencies in the
emer-ging codes; as the analysis progressed, categories were
combined and refined to form higher order themesand constructs.
As data collection was split betweenthe two authors, codes and data
classifications werecritically examined and challenged by the
author notinvolved in a particular data collection.Because the
research was exploratory in nature, we
iterated between data collection, coding and theoriz-ing
throughout the project, revisiting old data andgathering new
information which was subsequentlyadded to existing findings
(Dubois & Gadde, 2002).Emerging concepts were evaluated by
activelysearching for contradictory information through arefutation
strategy (Spiggle, 1994), as well as byassembling data in temporal
order using a process-tracing approach (Gerring, 2004). Building on
thedata collection and sorting, we developed individualcase
analyses for each firm, ranging in length from20 to 40 pages, which
were validated by informants.We subsequently used cross-case
comparative analy-sis, contrasting the firms across multiple
categories(Gerring, 2004; Miles & Huberman, 1994).
Thebetween-case approach increased external validityby both
sharpening findings from the within-case
Table 2 Overview of data sources
Company Annualreports
Other secondary sources(company histories, company
internal documents, industry reports,press releases, etc.)
Number of informantsintervieweda
Informantsinterviewedby type
AGA 17 11 5 Corporateexecutives: 2Business unit/project
managers: 2
Autoliv 18 20 15 CorporateExecutives: 4Business unit/project
managers: 5
Citibank Japan 3 11 19 Corporate executives: 3Business
unit/project managers: 11External experts: 5
LM Ericsson 20 14 22 Corporate executives: 3Business
unit/project managers: 7External experts: 8
The Hartford 1 35 7 Corporate executives: 3External experts:
4
Pharmacia 30 8 16 Corporate executives: 5Business unit/project
managers: 6Business developmentmanagers: 2External experts: 3
aSome informants were interviewed twice.
MNE institutional advantage Patrick Regnér and Jesper
Edman281
Journal of International Business Studies
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studies, and generating new concepts from thesystematic
combination of various case aspects(Adcock & Collier, 2001;
Collier & Mahon, 1993).
Data Coding and AnalysisOur findings emerged in a three-stage
process. In thefirst stage we constructed firm-specific narratives
toidentify the extent and type of institutional condi-tions faced
by each MNE subunit. Separating theinstitutional conditions
according to Scott’s pillars –that is, regulative, normative and
cognitive – weidentified 16 distinct institutional conditions
(6regulatory, 6 normative and 4 cognitive) whereMNEs used strategic
responses. As the first columnin Table 3 shows, these various
institutional condi-tions involved considerable uncertainty and
com-plexity for the MNE.While all firms face some degreeof
complexity and heterogeneity when challenginginstitutional
settings, the findings suggest complex-ity may be particularly
severe for MNEs.In the second stage of the analysis, we sought
to
identify the strategic responses MNEs employed indealing with
each of the 16 institutional conditions,as well as the responses’
enabling factors and theirunderlying mechanisms. Figure 1 outlines
the pro-gression of data coding, categorization and analyti-cal
dimensions, and thus includes the raw datacoding in the first
column. The figure provides abridge between our method, data,
findings andemergent constructs. As Figure 1 indicates, our
dataanalysis in this stage was guided by our three over-arching
research questions: What were the MNEresponses to the institutional
conditions? Why werethey able to undertake these responses? How
didthey implement these responses?We began by sorting data from the
narratives into
descriptive categories based on these three overarch-ing
research questions. Because the three researchquestions address
different levels of abstraction (ran-ging from the broader typology
of strategic responses,down to the more specific underlying
mechanisms),we posed all three questions to each data point. Table
3provides concrete evidence of this analytical process.For example,
as the table indicates, a quote from TheHartford’s experience in
dealing with regulative insti-tutions provided insight not only
into what theMNE’s strategic response was (“Worked to
changeexisting institutions”) but also why the firm was ableto do
this (thanks to its “International status”) andmore specifically
how (by “Leveraged local audienceexpectations”). While these
categories naturally boresome resemblance to each other, they each
sought toanswer one of the specific questions of what, why and
how the MNEs responded to various institutionalconditions.We
subsequently sorted the categories into three
overarching themes, depending on which of thethree research
questions they addressed, as shownin column three of Figure 1. Once
the second-orderthemes reached theoretical saturation we
comparedthe categories across cases to identify similarities
anddifferences. This analysis led to the conceptualiza-tion of our
three overarching dimensions: strategicresponses to institutional
complexity, the multipleenablers of these strategic responses, and
the particu-lar mechanisms underlying the strategic responses.The
answers to our what, why and how questionsthus compose our
principal constructs, as shown inthe fourth column of Figure 1.In
the final stage of the analysis, we continued the
cross-case analysis to identify how particularresponses,
enablers and mechanisms were interre-lated. This analytical process
involved iteratingbetween the codified and sorted data, the
narrativecases and pre-existing studies of agency. Based onthis
iteration, we developed propositions for howthe various enablers
and mechanisms are interre-lated and result in various strategic
responses bysubunits in institutional environments.
FINDINGS: A TYPOLOGY OF MNE STRATEGICRESPONSES TO
INSTITUTIONS
As indicated in Figure 1, our analysis identified fourdistinct
strategic responses types: Innovation responsessought to create
and/or change host country institu-tions. Arbitrage responses
sought to exploit differencesbetween host and home (or
third-country) settings.Circumvention responses involved
sidestepping andeffectively dodging the demands of local
institutions.Finally, theAdaptation responses sought to conform
tothe institutions of a host country.In addition, we also
identified three unique enablers
of these responses. First, we found that responses wereenabled
by the MNEs’ multinationality; through itsboundary-spanning
multinational social positions,the MNE is exposed to alternative
regulations, normsand understandings. Second, we found that
responseswere also enabled by the MNE’s foreignness inhost country
institutions. Foreignness effectivelyamounted to a weakly embedded
outsider social posi-tion in host country institutions and
networks. Thisforeignness trait is also unique for the MNE
anddifferent in kind, like the case of multinationality.Finally,
host country field conditions also enabled thestrategic responses
in the form of the MNE’s extensiveexposure to institutional
uncertainty and ambiguity.
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Table 3 Representative quotes and first-order categorization by
research question
Institutional conditions Representative quotes from case
narratives Representative first-order categorization of narrative
data in response to research questions
What did thesubunit do?
Why was the subunit ableto do this?
How did the subunitdo this?
AGA regulative and normative (A,B):Ambiguity due to collapse
ofindustrial gas regulations andnormative assumptions in
virtuallyall aspects
“…we repeated similar things everywhere …we moved from the first
wave of efforts in theEast [to the second] and then we will
moveinto a third…explicit knowledge transfer iscrucial…and now we
are travelling to Chinaand do the same thing…” (AGA manager)
Introduced institutionsestablished elsewhere
Had experience from otherinstitutional locations;Uncertainty in
local institutionalenvironment
Transferred institutionalknowledge; seeing beyondexisting
institutions
AGA cognitive (C): Littleunderstanding of Western industrialgas
sales and distribution formats
“…we solved it step by step and…we did it ina rather smooth
way…when in Rome youmust do as the Romans…and adapt”
(AGAmanager)
Adapted to localinstitutions
Low acceptance as foreign firm Followed local
audienceexpectations
Autoliv regulative (D): Lack of airbagregulation; uncertainty as
towhether it would develop
“We did not use lobbying or work withlegislators…It is the [US]
legislation…thatpropelled it…” “The US legislation wassignificant
and distinct event influencing this[airbag introduction]”
Introduced institutionsestablished elsewhere
Had experience from otherinstitutional locations
Transferred institutionalknowledge; seeing beyondexisting
institutions
Autoliv normative (E): Airbagsviewed as too large,
unnecessaryand inappropriate
“…we produced airbags for Volvo’s US car…[then we]
developed…airbag[s] for Europe[cars]” (Autoliv manager)
Adapted to fit locallyinstitutionalized norms
Had experience from otherinstitutional locations
Transferred institutionalknowledge; seeing beyondexisting
institutions
Autoliv cognitive (F):Difficult to understand any need
forairbags
“…European consumers started to questionwhy they were not
protected in the same way[w. airbags]”
Introduced institutionsestablished elsewhere
Had experience from otherinstitutional locations;Uncertainty in
local institutionalenvironment
Transferred institutionalknowledge
Citibank regulative (G): Existingregulations unclear;
syndicationpossibly illegal
“It takes effort to explain to the market, toinvestors and
borrowers…but [the products]will be adopted when they make
sense”(Citibank manager)
Worked to change existinginstitutions
Had experience from otherinstitutional locations
Seeing beyond existinginstitutions
Citibank normative (H): Loansyndication unknown,
potentiallyinappropriate
“As a foreign bank you don’t hesitate topropose something or to
do something. TheJapanese banks will get into situations maybethey
shouldn’t because of relationships…wewon’t” (Citibank manager)
Sought to be outside hostcountry institutions
Was outsider, not part of localinstitutions; uncertainty in
thelocal institutional environment
Leveraged local audienceexpectations
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Table 3: (Continued )
Institutional conditions Representative quotes from case
narratives Representative first-order categorization of narrative
data in response to research questions
Citibank cognitive (I): mechanisms ofloan syndication not
understood
“People have different expectations of foreignand Japanese
firms…we don’t really competewith them. We [are] outside the system
butstill respectable…do things [they] couldn’t”(Citibank
manager)
Sought to be outside hostcountry institutions
Was outsider, not part of localinstitutions
Leveraged local audienceexpectations
Ericsson regulative institutions (J):Lack of radio/mobile
telephonyregulations; radio spectrumsprohibited
“[we]…believed in walking the talk…workedin different
directions, influencing standards,influenced authorities,
influencedcorporations…making sure the standardssuited us in some
way” (Ericsson manager)
Worked to change existinginstitutions
Had experience from otherinstitutional locations
Used international status toinfluence local actors; Seeingbeyond
existing institutions
Ericsson normative (K): Negativeattitudes towards telephony
basedon radio
“…we had knowledge few had on the worldmarket…we had people
travelling aroundAsia talking to…powerful people in
themilitary…convincing them...” (Ericssonmanager)
Worked to change existinginstitutions
Had international status; Hadexperience from other
institutionallocations
Used international status toinfluence local actors;recognizing
alternativeinstitutions
Hartford regulative (L): Existingregulations did not
supportdistribution format
“We worked with the FSA…they knew wewere number one in the US,
so that helped usa lot…we got in the door” (Hartfordmanager)
Worked to change existinginstitutions
Had international status Leveraged local
audienceexpectations
Hartford normative (M): Distributionformat seen as
inappropriate
“We happen to have an insurance license, butwe’re in the
business of doing somethingelse…our main competitors are bank
depositsand investment trusts” (The Hartfordmanager)
Ignored local institutionalnorms
Ambiguity about industrymembership
Leveraged local uncertaintyabout firm’s position
Pharmacia regulative (N): Noregulatory framework in place
tosupport nicotine chewing gum
“…what we have done, based on ourknowledge in medication and
registrationfunctions, is rather remarkable…we wrote theFDA
guidelines” (Pharmacia manager)
Created new institutions inthe host country
Had experience from otherinstitutional locations
Transferred institutionalexperience and knowledge
Pharmacia cognitive and normative(O,P): Nicotine as
medicationdifficult to understand and viewedas inappropriate
“…we had a very strong vision for how toboost Nicorette globally
and the wholesmoking cessation market…it is a form ofvisionary
fore-checking…” (Pharmaciamanager)
Created new institutions inthe host country
Had experience from otherinstitutional locations
Transfer of institutionalexperience and knowledge;recognizing
alternativeinstitutions
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In contrast to multinationality and foreignness, theMNE’s
greater exposure to ambiguous institutionalenvironments is a
difference in degree rather thankind, but the elevated exposure to
institutionalambiguity appears to offer the MNEs greater
oppor-tunity for engaging in strategic responses. In sum-mary, we
found that the responses were enabled byboth the MNEs’ unique
social positions – that is,their multinationality and foreignness –
and by
host country field conditions – that is, the level
ofinstitutional ambiguity.Focusing more specifically on how these
enablers
underpinned the strategic responses, we found
thatmultinationality, foreignness and host country insti-tutional
ambiguity enhanced three mechanisms thatunderlie strategic
responses. First, we found thatMNEs leveraged reflexivity, that is,
the ability to seebeyond local norms, cognitions and regulatory
AGA
Autoliv
Citibank
Ericsson
Hartford
Pharmacia
A. Regulative
B. Normative
C. Cognitive
D. Regulative
E. Normative
F. Cognitive
G. Regulative
H. Normative
I. Cognitive
N. Regulative
O. Normative
P. Cognitive
L. Regulative
M. Normative
J. Regulative
K. Normative
What?
Why?
How?
What?
Why?
How?
What?
Why?
How?
Strategic Responses
Innovation
Arbitrage
Circumvention
Adaptation
Mechanisms
Reflexivity
Role-expectations
Resources
Enablers
Multinationality
Foreignness
Institutionalambiguity
Sorting of narrative data into first-order categories
Sorting first-order categories into second-order themes
Conceptualizing dimensions of second-
order themes
Case narrativesraw data
1. Recognizing alternative institutions (K,O,P)
2. Seeing beyond existing institutions (A,B,D,E,G,J)
3. Sought to be outside host country institutions (H,I)
4. Worked to change existing institutions (G,K,I,J)
5. Adapted to local institutions (C)
6. Created new institutions in the host country (N,O,P)
7. Ignored local institutional norms (M)
8. Leveraged local uncertainty about position vis-à-vis local
institution (M)
9. Had experience from other institutional locations
(A,B,D,E,F,G,J,N,O,P)
10.Low acceptance as foreign firm (C)
11.Introduced institutions established elsewhere (A,B,D,F)
12.Leveraged local audience expectations (H,I,L)
13.Ambiguity about industry membership (M)
14.Was outsider, not part of local institutions (H,I)
15.Transferred institutional experience and knowledge
(A,B,D,E,F)
16.Uncertainty in local institutional environment (A,B,F,H)
17.Used international status to influence local actors (J,K)
18.Had international status (K,L)
19.Follow local audience expectations (C)
20.Adapt to fit institutionalized norms (E)
Strategic Responses
3. Sought to be outside institutions 4. Worked to change
existing
institutions 5. Adapted to local institutions 6. Created new
country
institutions 7. Ignored local institutional
norms11. Introduced institutions
established elsewhere20. Adapted to fit local institutions
Mechanisms
1. Recognizing alternative institutions
2. Seeing beyond existing institutions
8. Leveraged local uncertainty about positions vis-à-vis local
institutions
12. Leveraged local audience expectations
15. Transferred institutional experience and knowledge
17. Used international status to influence local actors
19. Followed local audience expectations
Enablers9. Had experience from other
institutional locations10. Low acceptance as foreign firm13.
Ambiguity about industry
membership14. Was outsider, not part of local
institutions16. Faced uncertainty in local
environment18. Had international status
Figure 1 Progression of data coding, categorizations and
analytical themes and dimensions.
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conditions of their surrounding host country envi-ronments.
Reflexivity allowed MNE subunits torecognize institutional
differences and contradictionsto a far greater extent than their
local competitors;this in turn made it possible for the MNE
subunits toidentify opportunities for agency in relation to
insti-tutions, as well as possible deviations from prevailingnorms
and practices.Second, we found that the enablers resulted in
MNE-specific role expectations, that is, different audi-ence
assumptions and beliefs about the MNE subu-nits. These role
expectations resulted in differentregulative, normative and
cognitive conditions, effec-tively allowing the MNEs to engage with
local institu-tions in a different manner, as compared with
localdomestic actors. Finally, multinationality, foreignnessand
exposure to ambiguous institutional environ-ments also provided
MNEs room to transfer resourcesfrom MNE operations in other
organizational fields,including institutional experiences,
knowledge, socialskills and capital. In sum, the MNEs built on
threemechanisms in their strategic responses: (1)
increasedreflexivity (i.e., the ability to see beyond currentnorms
and regulations); (2) differentiated role expec-tations (i.e.,
particular assumptions and beliefs aboutwhat the organizations
could legitimately do); and (3)transfer of institutional resources
(i.e., assets and/orpractices from diverse institutional
settings).Combining these insights, our analysis suggests
MNE subunits crafted different strategic responsesby drawing on
diverse mechanisms that wereenabled by their multinationality and
foreignness,as well as their exposure to institutional ambiguityin
the host country. Table 4 provides an overviewof the strategic
response typology and the linkagebetween the strategic responses,
the enabling factorsincluding social positions and host country
field con-ditions, and the underlying mechanisms employed ineach
response. By linking the enablers and themechanisms to the
strategic responses, we highlighthowMNEs have particular
institutional advantages inshaping, transposing and evading host
country insti-tutions. Below we discuss these findings in
greaterdetail.
Institutional InnovationIn institutional innovation, MNEs
respond to institu-tional complexity by purposely seeking to work
with andcreate new institutions, and/or change prevailing
institu-tions. They are primarily able to do this by relying
onincreased reflexivity, role expectations and resources thataccrue
from their boundary-spanning multinationalitypositions. In this
strategic response, the institutions
of the host country are relatively fixed and clearlydemarcated;
MNEs hence do not actively leverageambiguities in local field
conditions when engagingin institutional innovation, but instead
build onstable extant institutions or the lack of them. In
ourstudy, the institutional innovation approach is mostclearly
exemplified by Ericsson and Pharmacia’sapproaches to the
institutions of their host countrymarkets; in addition, The
Hartford and Citibank usedinstitutional innovation when dealing
with the reg-ulatory pillar of host country institutions.
Ericsson’s introduction of mobile telephony intoSoutheast
AsiaWhen Ericsson entered Southeast Asian telecom mar-kets in the
mid- to late 1990s, after having establishedstrong positions in
Europe, it faced several institutionalchallenges and complexities.
As in the case of Europein the late 1980s, the regulations of most
countries“provided no room for mobile telecommunications”,beyond
that of the military; hence, it was technicallyillegal to introduce
handheld portable phones. Interms of societal norms, clients in
host countries –including both governments and individual
consu-mers – were uncertain as to the value and necessity ofmobile
telecommunications, much as they had beenin Europe initially. To
overcome these challenges,Ericsson worked with different
constituents to changenorms and regulations to support its mobile
telephonybusiness. As two managers observed:
[W]e were very early…we travelled around Asia and triedwith
officials…people with power…traditionally the mili-tary…asked for a
small part in radio for private use…we werevery early in the
markets…we circled our competitors…wewere very proactive.
It was individuals that worked broadly on all frontiers;
fromcomponents to laws and regulations…all of us we traveledthe
world, to standardization organizations, etc.
Ericsson hence overcame challenging regulativeconditions by
actively helping local governmentsdevelop the rules, technical
requirements and legalstandards necessary for mobile telephony.
Ericsson’sability to do this stemmed from its significant expo-sure
to institutions in multiple country contexts. Thecompany had gained
valuable experience workingwith regulatory bodies and authorities
when settingup mobile telephony systems in the Middle
East,Continental Europe and Scandinavia. By absorbinginsights from
these events and building up a stock ofinstitutional knowledge and
capabilities, Ericssonbecame an expert at establishing host country
mobile
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Table 4 MNE strategic responses: Definitions, enabling factors
and primary mechanisms
Strategic responses Innovation Arbitrage Circumvention
Adaptation
Purposely changing or creatinglocal institutions
Leveraging differences in host vshome and
third-countryinstitutions
Leveraging ambiguities andoutsider social position in
hostcountry environments
Conforming to local institutionalpressures
Enabling factors Social position Boundary-spanning
throughMultinationality
Boundary-spanning throughMultinationality
Weak embeddedness due toForeignness
Weak embeddedness due toForeignness
Field conditions Low ambiguity;transparent and
coherentinstitutions
High ambiguity;existence of institutionalcontradictions
High ambiguity;existence of institutionalcontradictions
Low ambiguity;transparent and coherentinstitutions
Mechanisms Reflexivity High:Ability to see
institutionaldifferences key to identifyinginnovation
opportunities
High:Ability to see institutionaldifferences and
contradictionskey to identifying arbitrageopportunities
High:Ability to see institutionalcontradictions key to
identifyingcircumvention opportunities
Low:Ability to see institutionaldifferences and
contradictionsless important in adaptation
Roleexpectations
High:Local expectations on the MNE tointroduce new practices
permitslocal institution-building
Low:Local actors’ assumptions andbeliefs about the MNE
lessimportant in arbitrage
High:Local actors’ assumptions ofoutsidership provide
greaterroom to defy prevailingpractices
High:Local actors’ assumptions andexpectations of
adaptationprecludes active attempts tochange or defy
institutions
Resources High:Transfer of alternative institutionalexperiences
and knowledgesupports institution-building
High:Transfer of alternativeinstitutional experiences
andknowledge makes arbitragepossible
Low:Transfer of institutionalexperiences and knowledge
lessimportant in circumvention
Low:Transfer of institutionalexperiences and knowledge
lessimportant in adaptation
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telephony regulations. As reported by one Ericssonmanager:
We placed people out there, those with home [country]knowledge,
moved them to new locations…it was verychallenging in some
countries.
[T]he Ministries answered they did not have 450 MHz
avail-able…our people became acquainted with them and workedwith
them…located opportunities in their frequency plans.
Pharmacia’s introduction of Nicorette into the UnitedStatesIn
introducing the anti-smoking product Nicoretteinto the United
States, Pharmacia similarly faced alack of regulations. In
particular, there was consider-able confusion as to which
regulatory body hadjurisdiction over the product, since authorities
wereuncertain whether a nicotine chewing gum shouldbe considered a
food or a drug. In addition to theregulatory hurdles, the product
itself was consideredhighly illegitimate by virtually all actors.
Nicotinewas viewed as a poison and an anathema to thepharmaceutical
industry; this was reflected in thenorms of medical practices, the
cognitive mind-setsof doctors, and the regulations of the Food and
DrugAdministration (FDA). Doctors and pharmacists haddifficulty
understanding how nicotine could be con-sidered a medication, as
well as how and if it couldbe used to reduce smoking. This made it
almostimpossible for the company to find a businesspartner since no
one quite understood the product.As one central figure in the
original venture noted:
We had a long-standing relationship
with…[pharmaceuticalcorporation] Warner Lambert, who [also] owned
the world’slargest manufacturer of chewing gum…they lost
interest…they felt that selling a chewing gum containing a
poisonmight have an adverse effect on their ordinary market.(Fernö,
1994: 1224)
Like Ericsson, Pharmacia sought to overcome theseinstitutional
constraints by working intensively toinfluence regulations and
norms and gain supportfor their smoking-cessation product
Nicorette. Thisincluded work both among individual doctors andother
medical practitioners, and on the level of theFDA. Notably, this
was an explicit tactic, as one ofthe architects behind the entry
noted:
[W]e had a very strong vision for how to boost Nicoretteglobally
and the whole smoking cessation market…it is aform of visionary
fore-checking.
[B]uilding a market…and providing product
informationthrough…sales, conferences and advertising in
industrypress. Physicians and pharmacists were the
target…thegoal…[was] to create a market.
Pharmacia not only gained the FDA’s confidencein delineating the
US regulation regarding smokingcessation, it managed to advance
even furthercompared with other markets by registeringthe product
as “Nicotine polacrilex” (from poly-methacritic acid) rather than
“Nicotine chewinggum”, which was considered less legitimate in
theindustry. In informing the FDA and helping itrewrite
regulations, Pharmacia relied on experi-ence from both its
home-country and other host-country institutional environments. A
Pharmaciamanager reported:
[W]hat we have done, based on our knowledge inmedicationand
registration functions, is rather remarkable…we wrotethe FDA
guidelines.
In line with Ericsson, Pharmacia’s efforts thusstemmed from its
boundary-spanning multinationalposition, particularly its efforts
at working withregulators in its home country of Sweden.
TheEricsson and Pharmacia cases illustrate not only towhat extent
they influenced and changed institu-tions, but how they initiated
and created them fromscratch.
The Hartford’s introduction of variable annuities salesthrough
banks in JapanIn the case of The Hartford’s introduction of
variableannuities into Japan, the primary institutional chal-lenge
stemmed from what the company perceived asoverly restrictive
regulations on sales channels. Inparticular, The Hartford’s
strategy relied on selling itsinvestment-oriented insurance
products throughindependent financial advisors, including banksand
securities companies; the extant regulatory fra-mework, however,
prohibited sales of insuranceproducts through financial
institutions. Like Erics-son and Pharmacia, The Hartford was able
to over-come this institutional hurdle by actively workingwith
local regulators, convincing them to reclassifyvariable annuities
as a mutual fund-type product,which could be distributed through
banks and secu-rities companies. The primary reason the firm
wasable to do this was its experience from the USinstitutional
environment, and the regulators’ recog-nition of The Hartford as a
leading firm in its homemarket. As one manager noted:
We worked with regulators…we convinced them that theproduct
should be categorized as a mutual fund…and I think,they recognized
that we were number one in the US…theyrecognized our expertise and
knowledge of regulations andthe market.
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Citibank’s introduction of loan syndication into JapanWhen
Citibank sought to introduce loan syndicationonto the local
Japanese financial services market, oneof its biggest challenges
consisted of convincing localcustomers of the value of the new
product. Loansyndication, a lending format in which multiplebanks
jointly lend to individual borrowers, ran coun-ter to many of the
fundamental characteristics ofJapan’s pre-existing bilateral
lending tradition (Scher,1998). Consequently, customers were
uncertain aboutthe value and merits of the new practice.
Citibankovercame this uncertainty by educating customersabout loan
syndication’s financial benefits. The abilityto do so came from the
company’s experience ofovercoming similar normative constraints in
othercountries, as one manager noted:
Being the first company to try something new is alwaysdifficult,
but we took our knowledge of being first anywhere,in any market,
and we explained to customers, pointed outthe benefits. So, this is
a company that has been doing loansyndication for 20 years, so
introducing it was not a problem.
Mechanisms and enabling factors of institutionalinnovation:
Reflexivity, role expectations and resour-ces through
multinationality and low institutionalambiguityIn each of the above
cases, the focal firms faced veryclear regulatory and normative
constraints from hostcountry institutions. To overcome these
constraints,the firms purposively sought to innovate by
introdu-cing new regulations, norms and values that wouldengender
greater acceptance for their products.Notably, innovation and
change in institutions canoccur through spillovers from foreign
entrants andincremental learning; by defining innovation as
apurposive attempt at change, we exclude such spil-lover
effects.The cases highlight how the active implementa-
tion of new institutions was primarily enabled bythe combination
of the MNE subunit’s boundary-spanning social positions as a
multinationals, andthe low ambiguity of the host country
institutionalenvironment (see Table 4; column 1, rows 1 and
2).Specifically, the subsidiary’s boundary-spanningsocial position
engendered three underlying mech-anisms that were key to
institutional innovation:reflexivity over alternative institutions,
transfer ofinstitutional resources and specific role-expectationson
the part of local audiences.Reflexivity was central to
institutional innovation,
as the MNEs’ boundary-spanning activities in nume-rous
institutional settings not only made them see
beyond immediate constraints, but also made themrecognize the
potential for changing extant insti-tutions (see Table 4; column 1,
row 3). For example,Ericsson could see beyond the normative and
regu-lative resistance to mobile telephone systems andlocate
opportunities in the new markets. Pharma-cia’s advantage was that
it was able to see beyond theclassification of nicotine as a poison
and an illegiti-mate drug and instead envision nicotine as
amedicaltreatment. Likewise, The Hartford and Citibank sawthe
Japanese regulations from the perspective oftheir presence in many
other markets and thusmanaged to influence regulators.The transfer
of institutional resources was in turn
crucial to institutional innovation because it pro-vided MNEs
with a template on which to base theirinstitutional innovation (see
Table 4; column 1,row 5). For example, both Ericsson and
Pharmaciachanged local regulatory institutions by drawing ontheir
institutional experience and practices fromhome and other host
countries. The Hartford simi-larly introduced ideas from its home
market, as didCitibank in drawing on its experience of “being
firstanywhere” to educate and convince local constitu-ents. As
these examples suggest, these resources wereavailable to the firms
because of their boundary-spanning social positions and
multinationality.Only through transfer of institutional resources
frommultiple institutional locations and markets, werethese firms
able to develop the insights and knowl-edge to introduce particular
regulations, norms andcognitive models into the host countries.
Naturally,capital resources relating to institutional change
alsoplayed a role. Pharmacia, for example, faced severalyears of
lobbying and discussion before it was able toconvince local
regulators and doctors of the value ofNicorette; Ericsson similarly
invested significanttime and energy in convincing local regulators
notonly of the merit of its technology, but also of howthe market
should be structured.Finally, role expectations were also critical
for
institutional innovation because they providedMNEs with the
legitimacy and status needed tochallenge prevailing regulations,
norms and mentalmodels (see Table 4, column 1, row 4). For
example,Ericsson gained access to key regulators and was ableto
introduce its mobile system ideas largely thanks toits reputation
as a world leading telecommunica-tions firm. Similarly, The
Hartford’s reputation asbeing the number one seller of variable
annuities inthe United States helped them initiate
regulatorydiscussions with Japanese officials. The expectationsof
local audiences on the MNEs’ thus played a
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central role in their ability to introduce new institu-tions. In
the case of our MNEs, these unique role-expectations were a direct
result of their boundary-spanning positions, and the expectations
andassumptions placed on them as large
multinationalentities.Notably, the innovation response was also
enabled
by the low ambiguity of institutional conditions ineach of the
subunits’ host country markets. Specifi-cally, the lack of
institutional ambiguity meant thatreflexivity around discrepancies
and contradictions inthe institutional settings was not an
importantmechanism underpinning institutional innovation.Instead,
low ambiguity made it easier for the MNEsubunits to engage in
institutional innovation byrelying on reflexivity, resources and
role-expecta-tions directly related to their multinationality.In
the case of Pharmacia, for example the unam-
biguous lack of FDA regulation of nicotine productsmade it easy
for the firm to directly apply its knowl-edge from other markets.
Pharmacia’s success hencedid not depend on any unique or
idiosyncratic partof US regulations, but rather on resources and
role-expectations accruing from its boundary-spanningposition and
that they could build new institutionswithout having to steer and
balance between diver-ging institutional perspectives. Similarly,
the strate-gic responses of Ericsson, Citibank and The Hartforddrew
on their reflexivity over and knowledge aboutalternative
institutions based on their multination-ality, as opposed to
reflexivity around institutionalcontradictions.
Institutional ArbitrageIn the institutional arbitrage response
strategy,MNEs leveraged differences in institutions of homeand host
country contexts. In contrast to theinnovation response,
institutional arbitrage wasenabled by both the MNE’s
boundary-spanningposition and ambiguities in local field
conditions.Our cases suggest reflexivity and resources are
impor-tant mechanisms underlying institutional arbit-rage, while
role expectations are less important.We found particular evidence
of arbitrage res-ponses in the cases of Autoliv’s introduction
ofairbags in Europe with regulative and cognitiveinstitutions, as
well as AGA’s interaction withregulative and normative institutions
surroundingindustrial gas in Eastern Europe.
Autoliv’s introduction of airbags into EuropeOne of the salient
challenges faced by Autoliv in itsattempts to introduce airbags to
the Europeanmarket
was the lack of recognition and acceptance of the newproduct.
Although car safety was a strong normamong European car consumers,
this had alsoresulted in an earlier focus on seatbelts;
consequently,car manufacturers had little understanding for
intro-ducing yet another safety device. For Autoliv, thisproblem
was a repeat of the situation it had faced inthe US market in the
late 1980s and early 1990s a fewyears earlier: US car manufacturers
had broadlyopposed the introduction of airbags, calling them“red
herrings” and “a complete waste of time”; thisopposition was
overcome by relying on the introduc-tion of new safety legislation.
This experience fromthe US market benefitted the firm when dealing
withsimilar opposition from European car manufacturers.In addition,
the company was also able to takeadvantage of growing ambiguities
in European end-consumers’ understandings of safety. As
continentaldrivers became increasingly aware of the use of air-bags
in the United States and in US-made cars, theyactively began to
question why European automo-biles did not have similar features.
Autoliv was able toleverage these increasing contradictions to its
advan-tage. As one senior manager noted:
The established [European car-] manufacturers…did notbelieve in
it…tried to combat it…European consumersstarted to question why
they were not protected in the sameway…[but] we produced airbags
for Volvo’s US cars…theAmerican type.
Building on their experience from the stronglynegative US car
manufacturers and their realizationthat European consumers still
valued safety, Autolivmanaged to introduce airbags, as one
managerechoed:
[W]e were successful with the European airbag concept…[with] a
“face bag”…an add-on safety system…. We createdthe market!
AGA’s introduction of new industrial gas distributionformats
into Eastern EuropeAGA’s entry into Eastern Europe in the years
afterthe fall of communism was characterized by con-siderable
uncertainty and turbulence. While oldinstitutions had been
discredited, new ones hadyet to take their place: this was true in
the regula-tive, normative and cognitive domains. For AGA,the
uncertainty arose in particular from the under-developed nature of
the local distribution system;while there was little ambiguity in
terms of itsunderlying product (industrial gas), there was
con-siderable confusion as to the norms and practices
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of how industrial gas should be stored, transportedand
distributed and what the dominant regulatoryframework was. In AGA’s
case virtually all dimen-sions were complex. As two managers
noted:
How would the state-owned gas monopolies be divided up?…Which
parts were offered to foreigners? How would thegeneral industry
structure, our customers, be re-formed andprivatized?
The other issue was…the continuous problems with
autho-rities…with bottled gases…they were constantly concerned.
In response to these uncertainties, AGA chose tobase its
distribution practices on the regulatory andnormative institutions
governing gas-distributionpractices in Western Europe. While these
regula-tions were not the de facto standards of its EasternEuropean
markets, there was nothing to preventthe firm from following them
in its daily opera-tions (unlike, e.g., in the cases of Ericsson,
Pharma-cia, The Hartford and Citibank, discussed above).In doing
so, the firm not only overcame the uncer-tainties of the local
markets, it also managed togain a competitive edge, thanks to the
more devel-oped nature of the Western distribution practices.AGA’s
arbitrage response thus built on both itsboundary-spanning social
position as a multina-tional, and the opportunities that arose due
to theambiguities and uncertainty of local field condi-tions. As
one manager noted:
Besides the headquarters’ staff support…we had a “godparenting”
sponsorship system…where each new subsidiarywas supported by an
established subsidiary [in the West].
Mechanisms and enabling factors of institutionalarbitrage:
Reflexivity and resources through multi-nationality and high
institutional ambiguityThe cases suggest that AGA and Autoliv’s
institu-tional arbitrage responses were enabled by both theirsocial
positions as boundary-spanning multina-tionals, and the particular
field conditions includinghigh level of ambiguity in the host
country insti-tutional environment (see Table 4; column 2, rows
1and 2). As the above examples demonstrate, aninstitutional
arbitrage strategic response calls forexploiting differences in
institutional environments.Specifically, the boundary-spanning
multinationalposition gave the firms access to important
resourcesin the form of alternative institutional templates
(seeTable 4; column 2, row 5); it was thanks to thesetemplates that
AGA was able to implement its gasdistribution format, and that
Autoliv was able topropose the adoption of airbags. For example,
AGA’s
gas distribution practices were institutionalized andtaken for
granted in Western Europe both legallyand cognitively; at the same
time, however, theyconstituted an institutional novelty to newly
openedmarkets in Eastern Europe. In the case of Autoliv,airbags had
become an established norm in theUnited States, but an emergent –
and contested – ideain the European market. By leveraging
institutionaland building on the transfer of institutional
resou-rces, both of these actors were able to introduce theirnew
products.To engage in arbitrage responses, however, MNEs
must be able to recognize the institutional ambigu-ities and
voids in host countries. As a result, reflex-ivity constitutes an
important mechanism alongsideresources, for MNEs engaging in
institutional arbit-rage (see Table 4; column 2, row 3). In the
specificcase of AGA and Autoliv, the two companies had thereflexive
capability to effectively identify and lever-age the contradictions
and ambiguities of theirspecific host country institutional
environment.This reflexivity mechanism was enabled by the
com-panies’ boundary-spanning multinationality, butalso by the
contradictions and ambiguities of thehost country institutional
environment. Hence,AGA’s and Autoliv’s ability to introduce new
ideasthat challenged the existing institution was alsodependent on
host country field conditions. In bothcases, host country
institutional conditions exhib-ited considerable uncertainty and
ambiguity, withparticular institutional voids: AGA was hence able
tointroduce its new gas distribution format into EasternEurope
precisely because hitherto taken-for-grantedpractices and
regulations had lost their legitimacy.For Autoliv, the combination
of institutional experi-ence from the US airbag market and the
pre-existingexperiences in car safety, in conjunction with
itsdiverse constituents’ inconsistent understandings ofairbags (car
manufacturers opposing and customerssupporting them), opened up a
unique opportunityto introduce airbags in Europe.In contrast to the
case of institutional innovation,
where firms simply introduced new innovations ontop of
pre-existing institutions or lack thereof, insti-tutional arbitrage
relies on introducing practices inresponse to particular
ambiguities and institutionalvoids in local field conditions.
Importantly, the roleof local institutional ambiguities constitutes
themain difference between innovation and arbitragestrategic
responses. In the case of innovation, firmsdraw on their transfer
of institutional resources frommultiple institutional environments
to change extantinstitutions; institutional conditions are hence
the
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object of their acting and do not provide for
responseopportunities as such. In the case of arbitrage, how-ever,
the response opportunity arises from alreadypre-existing
institutional ambiguities; in this case,local institutional
conditions are hence the subject –that is, the source – of their
agency.
Institutional CircumventionWhile institutional arbitrage
connotes a responsewhere an MNE actively leverages differences in
insti-tutional pressures, our third strategic response
–institutional circumvention – constitutes scenarioswhere MNEs
avoid institutional pressures. Whileextant studies in international
management havehighlighted how firms avoid institutional
pressuresby relying on firm-specific capabilities and assets,
ourcase is somewhat different. The circumvention strat-egy
constitutes a response where firms leverage both theambiguities of
host country environments, and their socialposition as a foreign
outsider. These factors enable thecircumvention strategy because
they result in bothparticular role-expectations among domestic
actors,and because they provide the MNEs with reflexivityand the
ability to identify ambiguities in the hostcountry institutional
environment. Among our cases,Citibank and The Hartford’s responses
to host coun-try normative and cognitive institutions are
clearexamples of a circumvention strategy.
Citibank’s introduction of loan syndication into JapanOne of the
constraints Citibank faced when introdu-cing loan syndication onto
the Japanese market wasthat the new practice ran counter to many of
thedeeply institutionalized norms and practices ofJapan’s
pre-existing lending format, known as themain-bank system. For
example, while loan syndica-tion was predicated on joint lending by
multiplebanks, fees for arranging banks and the trading ofloans on
a secondary market, Japan’s main-banksystem was built on the notion
of bilateral lendingwith low interest and no loan trading.
Conse-quently, the new practice faced significant norma-tive and
cognitive constraints among customerssteeped in the ways of the
main-bank system; more-over, an arcane usury law raised the
possibility thatthe new practice might even technically be
illegal.While these institutional constraints prohibited
many of Citibank’s domestic competitors fromintroducing the
practice, they did not prevent Citi-bank from doing so. A major
reason for this wasambiguity in the local institutional
environment.Specifically, while Japanese banks were expected
tomaintain pre-existing practices, Citibank and other
foreign entities were seen as uncertain elements andhence given
greater leeway to challenge local norms,practices and products. As
one manager noted:
[Y]ou could be outside the system, but still viable…you
couldsolve political problems in a way that Japanese
bankscouldn’t…if you think of the domestic [Japanese] banks, ifone
of them upset the apple cart, that would have been ahuge deal.
The difference in customer perceptions and expec-tations on the
banks is also evident in the words of aJapanese bank manager:
[W]hen the foreign financial institutions did loan syndica-tions
in Japan, customers did not expect these banks, theforeign banks,
to take the same share of lending on theirbooks as the Japanese
banks had. In the case of the foreignbanks, the role of arranger
and lender was seen as separate.
Notably, the introduction of loan syndication wasnot the first
time that Citibank had taken advantageof its position as an
outsider firm; in fact, the com-pany had come to recognize that it
played a particularrole or position in the local market, enabling
it tooften introduce new product innovations. In sum,Citibank’s
ability to evade and circumvent the nor-mative opposition to loan
syndication was groundedin both institutional ambiguities in host
countryfield conditions, and its outsider position as a
foreignfirm.
The Hartford’s introduction of variable annuities intoJapanLike
Citibank, The Hartford also faced considerableopposition to its
introduction of variable annuities.While this product already
existed on the Japanesemarket, it was largely characterized by
stable annualreturns; by contrast, The Hartford’s variable
annu-ities were investment-oriented and thus similar tomutual
funds. The company also sought to sell themvia banks and securities
companies. These noveltiesresulted in not only regulative
constraints discussedunder the heading of institutional innovation,
butalso normative opposition, particularly within theJapanese life
insurance. One president of a Japaneselife insurance company even
went as far as to writeto the US life insurance association,
complainingthat The Hartford’s variable annuities were “invest-ment
products and…not fit for a safety-orientedindustry like life
insurance”.Like Citibank, The Hartford nonetheless deviated
from these expectations and norms, actively market-ing its
investment products through banks andsecurities companies. The
reason for this was the
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significant uncertainty and ambiguity that surroundedboth its
identity and stature as a life insurancecompany. As a foreign
entity that had enteredJapan relatively recently, The Hartford was
not anactive member of the Japanese Life InsuranceAssociation; nor
had it adopted the strategy of alarge dedicated sales force
preferred by many localactors. This set the firm apart from many of
itsdomestic competitors. Moreover, with its empha-sis on products
that were very similar to mutualfunds, the company often seemed
less of an insur-ance firm and more of a securities company. As
onemanager noted:
Do you see the word insurance in our name? No, it’s
notthere…that’s because we are not an insurance company…weare an
investment company which happens to have a lifeinsurance license,
but we are not an insurance company,we’re an investment
company.
The outsider position of The Hartford, and thedistance between
its product distribution strategiesand those of the main-stay
Japanese firms, is further-more evidenced in a response from a
manager at aJapanese insurance company, who noted:
Hartford’s products are too risky…that’s their problem, youcan’t
sell…insurance like that.
Another manager of a Japanese insurer explained:
That style of things doesn’t work here in Japan; it’s not
howthis market functions.
Like Citibank, The Hartford managed to circum-vent pressures for
institutional conformity by rely-ing on ambiguities and uncertainty
in the insti-tutional setting. Notably, the firm’s ability to
lever-age this heterogeneity was not based on its
globalinstitutional experience, but rather on the localsubsidiary’s
foreignness and outsider position in theJapanese institutional
environment. Recall that Japa-nese life insurance companies had
significant experi-ence of variable annuities and were also aware
ofalternative sales formats used in the United Statesand other
areas; yet they were deeply embedded inthe prevailing norms and
logics of the Japaneseinsurance market, hence they were largely
unwillingor unable to act on their knowledge. On account ofits
foreignness and uncertain status, The Hartforddid not face the same
isomorphic pressure to con-form to traditional practices of the
Japanese lifeinsurance industry; as a result, the firm wasable to
break from local norms and practices tointroduce the new
practice.
Mechanisms and enabling factors of institutional cir-cumvention:
Reflexivity and role expectations throughforeignness and
reflexivity due to high institutionalambiguityThe circumvention
response relied on leveragingboth high institutional ambiguities in
local fieldconditions, and the outsider social position thatcomes
from foreignness (see Table 4; column 3, rows1 and 2). These
factors enabled twomechanisms thatwere crucial for institutional
circumvention: reflex-ivity and role-expectations.As the preceding
cases show, reflexivity was crucial
because it allowed the MNEs to recognize institu-tional voids
and opportunities available in the hostcountry (see Table 4; column
3, row 3). In the case ofCitibank’s introduction of loan
syndication, mostcustomers remained firmly embedded in the
beha-viors and mind-sets of the pre-existing bilateral lend-ing
system, even after the bank had helped establishnew regulations.
Citibank’s reflexivity enabled it tosee beyond these constraining
norms and mentalmodels, to envision alternative institutions and
lend-ing formats. The Hartford’s introduction of variableannuities
similarly involved identifying blind spotsfor new distribution
norms, beyond the taken-for-granted norms of Japanese life
insurers. Notably,Citibank and The Hartford’s reflexivity were
notprimarily a result of the firms’ boundary-spanningsocial
positions as multinationals. In fact, many oftheir domestic
Japanese competitors were active in theinternational market; hence
they too were aware ofalternative regulations, norms and mental
models.What enhanced Citibank and The Hartford’s reflexiv-ity was
instead their position as outsiders in the localJapanese market. By
being less embedded in localnorms and mental models, the firms were
able to lookbeyond prevailing institutional constraints.
Reflexiv-ity was therefore enabled both by local ambiguitiesand
their foreign and outsider position.Role expectations were also a
particularly impor-
tant mechanism underlying circumvention res-ponses (see Table 4;
column 3, row 4). When Japa-nese banks sought to introduce loan
syndication, forexample, they faced considerable opposition
fromdomestic clients, who viewed the new practice asillegitimate
and falling outside the expectationsapplied to traditional Japanese
banks. As a foreignbank, Citibank did not face these role
expectations;it was therefore able to break from
institutionalizedpractices in ways that Japanese banks could not
(e.g.,by selling loans to third-parties). Similarly, TheHartford’s
lack of embeddedness in the local Japa-nese life insurance industry
made it easier for the
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firm to act on the idea of selling insurance throughbanks; this
idea was, by contrast, an anathema toJapanese insurers, who
complained that “life insur-ance is a safety-oriented product” and
should not besold through investment companies.Notably, transfer of
institutional resources did
not constitute a key mechanism in circumventionresponses.
Citibank and The Hartford’s strategywas to circumnavigate extant
host country normsand cognitions, not change them. As a result,
theydid not actively leverage institutional experience orknowledge
available from their boundary-span-ning multinationality. This
stands in stark contrastwith the institutional innovation responses
theyemployed when dealing with the host countryregulative
institutions, as discussed earlier. In thiscase, resource transfer
of institutional experienceand knowledge was crucial, given that
the under-lying approach was aimed at actively altering
pre-existing laws and regulations.
Institutional AdaptationOur final strategic response corresponds
to the well-established adaptation strategy in previous
interna-tional business literature (Bartlett & Ghoshal,
1989).In this response, MNEs actively conform to hostcountry
institutions. The primary mechanism thatdrives this response is the
role-expectations the MNEfaces from foreign actors and they are in
turnenabled by its social position as a foreign outsider.In our
cases, AGA’s responses to host country cogni-tive institutions are
a clear example of this responsetype and Autoliv’s response to
normative institu-tions is also of this type.
AGA’s introduction of new industrial gas distributionformats
into Eastern EuropeWhile AGA used an institutional arbitrage
responseto introduce distribution formats taken fromWesternEurope,
it also balanced this approach with explicitattempts to adapt its
behaviors and strategies toprevailing local understandings and
interpretations.In particular, the company recognized that not all
ofthe practices used in Western Europe were applicableto its
Eastern European markets; moreover, several ofthe Western European
markets’ institutions servedto constrain the firms’ opportunities
in the localmarket and put it at a disadvantage to other
compe-titors. In response, AGA balanced its reliance onarbitrage
with practical adaptations to local normsand practices. For
example, in each market