The Impact of Institutional Reforms on Characteristics and Survival of Foreign Subsidiaries in Emerging Economies*

Abstract

 This study goes beyond the conventional notion of the institutional environment of emerging economies and investigates their dynamic context. It examines the complex influences of policy reforms on the characteristics and survival of foreign subsidiaries in emerging economies before and after the 1997 Asian Economic Crisis. This study proposes that FDI policy reforms during times of crisis may not only have a positive effect on institutional munificence for foreign firms, but such drastic reforms may also produce a negative effect (e.g. institutional volatility and complexity) on the environment. We consider how foreign firms effectively respond to the unfavourable forces of the post-crisis environments while taking advantage of the munificence of the policy reforms. We find that foreign subsidiaries tend to take the form of wholly-owned subsidiaries (versus joint ventures), majority joint-ventures (versus minority joint-ventures), or trading operations (versus manufacturing operations) in the post-crisis institutional environment. Consistently, foreign subsidiaries with these characteristics are more likely to survive in the postcrisis environment.

Export propensity and intensity of subsidiaries in emerging economies

“…In particular, the resource endowment of the host economy and its institutional framework moderate the characteristics and survival of foreign subsidiaries, especially in emerging economies (Chung & Beamish, 2005;Meyer & Peng, 2005 Davis and Meyer (2004) found that the determinants of whether subsidiaries engage in R&D differ from the determinants of R&D intensity -in particular, that government support impacts subsidiaries' incidence of R&D but not its level, while competitive conditions affect the level but not the incidence. We thus hypothesize that explanatory factors vary in determining whether or not subsidiaries export at all (propensity), and, if they do, how much they export (intensity).…”

“…The institutional perspective of business strategy emphasizes the institutional framework as a key factor influencing the strategies and operations of foreign investors (Luo & Peng, 1999;Peng, 2003;Chung & Beamish 2005;Narayanan & Fahey, 2005;Meyer et al, 2008).…”

Do foreign and domestic firms behave any different during economic slowdowns?

“…Owing to these advantages, MNEs may be in a better position to compete and to face the obstacles in the market. For example, MNEs may have better access to resources, or the ability to use internal capital markets when faced with financial constraints, and be able to access overseas credit through their parent companies, which allows them to expand their economic activity even in turbulent periods (Desai et al, 2004;Blalock et al, 2005;Chung and Beamish, 2005).…”

An institution-based view of international business strategy: a focus on emerging economies

“…This prediction has been refuted by the increasingly voluminous research that draws on the institutionbased view to tackle IB strategy problems in emerging economies. Five years later, in 2005, seven out of eight papers (88%) in the Journal of Management Studies special issue on strategy research in emerging economies, edited by two of the same editors as for the AMJ special issue and two new editors (Wright et al, 2005) (1) business groups (Chang & Hong, 2000;Guillen, 2000;Khanna & Palepu, 2000;Wan, 2005;Yiu, Bruton, & Lu, 2005); (2) privatization (Filatotchev, Buck, & Zhukov, 2000;Uhlenbruck & De Castro, 2000); (3) foreign investment strategies (Child & Tsai, 2005;Chung & Beamish, 2005;Delios & Henisz, 2000;Hitt et al, 2000;Isobe, Makino, & Montgomery, 2000;Meyer & Nguyen, 2005); (4) domestic strategies in emerging economies (Peng & Luo, 2000;White, 2000); and (5) internationalization strategies for firms based in emerging economies expanding abroad (Brouthers, O'Donnell, & Hadjimarcou, 2005).…”