Institutional constraints for outsourcing services in Russia

Abstract

PurposeThe purpose of this paper is to show how the institutional context in an emerging economy, Russia, moderates the “do or buy” decision of international firms operating in the country. This is examined through the influence of institutional voids on transaction costs and definition of core competencies.Design/methodology/approachThe paper adopts a qualitative research approach, where the empirical data are based on interviews with executives of eight Finnish companies, which have invested in Russia's second largest city, St Petersburg.FindingsThe key findings include first, that the formal and informal constraints in the Russian business environment influence outsourcing decisions in terms of increased transaction costs, and in terms of resources needed to be competitive. Second, the authors show that, due to these constraints, a firm in Russia may need to insource functions that it would otherwise outsource as non‐core activities and invest in building of competencies specific to the Russian business environment.Research limitations/implicationsThe limitation of the study is its focus on two countries. However, the analytical framework proposed for examining influence of institutions on outsourcing strategies is applicable to other country contexts.Practical implicationsThis paper shows how the institutional constraints of the host country, reflecting in this case as underdeveloped market for business services and complex state regulation, can result in a significant need for adaptation of a foreign firm's business processes. This must be taken into account in business planning and allocation of resources to the Russian operations.Originality/valueThe paper provides researchers and practitioners with new information about a little‐studied topic by showing concrete ways of how institutions influence outsourcing strategies in Russia.

Subsidiary’s Network Competence: Finnish Multinational Companies in Russia

“…Third, a business adaptation of Finnish companies in Russia is highly affected by the relationships with the Russian authorities (Karhunen and Kosonen 2013a). These relationships are often needed in order to overcome the institutional barriers that are prevalent in the Russian business environment: legislation instability that affects e.g.…”

Cross-border remittance between emerging economies: an institutional perspective

“…Institutional theory emerged from sociology to explain organizational behavior (Scott, 1987). The theory has been considered at multiple levels from macro inter-organizational structures such as collective actions in industrial networks (Brito, 2001), intra-organizational firm performance (Li et al , 2014) and individual decision-making processes (Karhunen and Kosonen, 2013). Though research often takes a multi-level analytical approach (Dabas et al , 2012; Jansson et al , 2007; Matthyssens et al , 2013), institutional theory is particularly useful as a foundation for the analysis of business markets due to the complex, diverse environments in which they interact (Yang and Su, 2014) or, in the case of this research, when considering marketing channels (Grewal and Dharwadkar, 2002).…”

“…Institutional constraints arise when companies face institutional differences between different countries that limit MNC operations (Khanna and Palepu, 2006). For example, organizations entering the Russian market are limited in their ability to outsource legal services due to numerous formal and informal constraints (Karhunen and Kosonen, 2013) or when western companies face difficulties in emerging economies due to the lack of specialized intermediaries, differences in regulatory systems or contract enforcement mechanisms to highlight a few (Khanna and Palepu, 2006; Khanna et al , 2005).…”

Understanding the Present by Examining the Past: Imprinting Effects On Supply Chain Outsourcing in a Transition Economy

“…The uncertainties and upheaval in the post‐transition period exasperated imprinted practices founded in the Soviet era (Tilcsik, ). Both the Soviet period and early postmarket reform institutional environment left a persistent fear of uncertainty, with the resulting imprint of self‐reliance reflected in the Russian management culture (Karhunen & Kosonen, ). Even recently, firms are often still managed by individuals socialized in the Soviet era context (McCarthy, Puffer, May, Ledgerwood & Stewart, ).…”