Importance of Institutional Theory in International Business
Provide an overview of the development of institutional theory in international business. What insights does the theory provide on how institutions shape an organization’s strategies? Use relevant examples where appropriate.
The essay throws a light on the overview of development of institutional theory in the international business. The importance of the institutional theory has to be identified in order to improve the international business. The actual insights on institutions have to be identified that is provided in shaping the strategies of organization effectively. The usage of relevant examples has to be provided as to understand the importance of the same in an effectual manner. Furthermore, the main aim and purpose of the essay is to analyse and identify the different kind of insights of the respective theory in shaping the organization effectively.
Institutional theory has been utilised increasingly by the international businesses and management researchers in order to explain the strategies and behaviour of the different multinational companies. According to Ang, Benischke, and Doh (2015), internationalisation incorporates various range of decisions in which the modes of entry choice and selection of international market as well. The choice of entry mode includes choosing among joint ventures, franchisee, exporting, foreign direct investment and strategic alliances as the main means of entering into the foreign markets.
However, on the other hand, International Market Selection is the precursor that involves the mean of entering into the market. IMS is one the strategic decisions that plays a central role in the international marketing strategy and this is critical factor in determining the international performance of the organizations. The decisions of the IMS are considered critical for the success of the organizations in abroad. There are different literatures in the past wherein the decisions related to IMS with the other areas of the internationalisation such as go/no go decisions along with inclusion of the different kind of choice of the entry mode of the firms.
The main purpose of the paper is to use the institutional theory as to theorize and empirically examine the different kind of host country environments as this will predict the different international markets produce more successful performance. When one American Food Company Kraft tried to acquire the chocolate company of UK Cadbury in the year 2010 for an amount of $19.5 billion, there was an analysis of institutional framework and this included different kind of tax legislations (Luthans and Doh 2018).
Insight of Institutions in Shaping Strategies of Organization
For instance- Marks & Spencer tried to regulate their presence in different markets all over the world. When the respective company tried to include their presence in the China market, it was seen that they could not include their presence in the respective market as there were different regulations and they could not compete in the market in a positive manner as well. This was a huge failure for Marks & Spencer in the China market, however the company succeeded in the other markets in different countries. Furthermore, it has been seen that Marks & Spencer has started off with the product development approach of Ansoff’s matrix in which it included the different kind of franchisee options while operating in Chinese market as this assisted them in managing the different operations in much more effective manner.
From the instance, it can be identified and analysed that the most essential trends that is supporting the rise of the institutional theory is that there are large number of companies that is headquartered in greater number of countries (Johnson 2016). The instance of Marks & Spencer has helped and assisted in understanding the international businesses studies mainly focused on different multinationals from United States of America along with the developed countries of Western Europe and Japan. In the present scenario, it can be noticed that most of the large multinational companies are from non-Triad countries that included Brazil, Taiwan and Mexico.
These are the different multinational companies that exhibited the behaviours that is different from the established triad multinational companies. The result was such that the researchers who previously focused mainly on the different kind of other aspects such as corporate behaviour along with analysis of the characteristics of the multinational organizations. Moreover, it can be seen that institutional theories have well-developed conceptualisation of the entire environment that includes world polity and societal level.
Furthermore, it has been seen that institutional theory helps the different international companies the different kind of suggestions and helps them in decision-making process for transferring their business to different other companies effectively. The decision-making process plays a large role in managing the decisions of the organizations effectually as these assists in understanding the current business structure of the organization along with understanding the concepts that will help such organizations in settling in different other companies as per the rules and regulations.
It has been seen that the companies need to focus more on the entry modes for the different organizations to enter certain markets. Shenkar, Luo, and Chi (2014) has commented that the version of the institutional theory has suggested that the country needs to create certain kind of structures, rules, norms and schemas that can be acted as the guidelines of the social behaviour. This is the huge responsibility of the companies to understand the different tastes and preferences of the customers in the respective country before entering into the market effectively. This is one most essential concept that has to be adopted by the organizations in gaining more competitive advantage in the business (Keohane and Martin. 2014).
International Market Selection
With the usage of both elements of formal and informal institutional theory, this has suggested that it has provided with a complete picture of the national business environment of the country than simply utilising one or the other as this is in the case of cultural studies. Hence, in this scenario, the usage of informal and formal institutional theory characteristics as the predictive kind of lens for direct selling (Musso and Francioni 2014). Direct selling is known as face to face selling method that is applied by the different companies from fixed location of the retailers. However, as the form of non-store retail, the direct selling concept is different from direct marketing concept as this mainly focuses on the mailed catalogues and this focuses mainly on direct response and other similar approaches.
Institutional theory has helped and assisted the organizations in the entire economy. The basic kind of principles of the Institutional theory includes that the different organizations need to organize themselves in such a manner as this will help them in managing the different kind of changes in the international market. The structure of the organization along with the different strategies of the organizations has to be in accordance with the policies and procedures of the country wherein they will be entering in the future (Kotabe and Helsen. 2014).
Institutional theory has provided the proper insight into the different types of the entry modes for the organizations that will be suitable for the different organizations. For instance- the direct selling mode strategy is suitable for the retail offline markets. However, on the other hand, the different online markets need to include the different kind of strategic alliances or other franchisee business as the offline shops in different parts of the world to gain competitive advantage. The other development that helps in pointing out the strategic significance of the different institutions in the recent era is the increase in the international trade along with multinational operations of the different organizations in the entire market (Laufs and Schwens 2014).
Furthermore, it has been noticed that in order to be fair, international business is one of the area wherein there is long kind of intellectual history that helps in considering the entire impact of the different institutions on the different strategies. For instance- It includes the different type of cultures concerns differences in the national cultures along with risk of expropriation of the entire capital by the host nation that will enter into the different prescriptions for operating in the international market as this will assist them in managing the entire growth of the organizations effectively (Hoenen and Kostova 2015). However, even this area there is rapid growth in the attention to different institutions. The significance of international context that will help in highlighting the role of different kind of institutions is the cross-national kind of comparisons as this helps in highlighting the institutional differences that may be taken for granted within the country in an effectual manner.
Usage of Institutional Theory in Empirical Examinations
With the implementation of the institutional theory, there has been technological advancements in the companies. The interdependence between the different companies and technology has been prominent in the new institutionalism theory. As there is development of the new technologies, the new kind of institutions are required to develop and exploit the other institutions effectively. However, there are different kind of technological advancements, that helps in highlighting the entire significance of the institutions as this exposes the gaps in the entire institutional structures (Kolk 2016).
Institutional theory is an essential element in which the different technological advancements make the institutions salient through setting off the episode of the institutional creation or the change (Grob and Benn 2014). The institutional theory has assisted in analysing the different kind of compromise along with manipulation of the different existing institutions. The attention that is generated by the different type of collapses is not at all the result of the new technology, internationalisation or shift of the different political regimes. Internationalisation will help the companies in the market to adopt with different kind of changes that as to make the operations reliable and stable in nature (Oparaocha, 2015).
There are different advantages and disadvantages of the entry modes that includes the five most common entry mode strategies that is adopted by different companies in the entire market. It has been seen that the exporting entry mode includes the fast entry and there is no such risk involved in it. However, on the other hand, there are different disadvantages included in the same that involves low control and local knowledge along with potential impact of the environment as well. Furthermore, it has been seen that the licencing and franchising entry mode includes fast entry along with low risk and cost. However, there are different disadvantages that include less control and licensee may be the competitor (Johanson and Mattsson. 2015).
For instance- Marks and Spencer did not follow the rules and regulations of the China Market and this was a huge issue for them to compete in the market as well. However, there were different other ventures in the market that were successful as they include the product development strategies in the market and this is competitive.
The new institutionalism theory is treated as the actors that helps in making different choices with interests and this distinguishes itself neo-classical assumptions of the rationality as well. The entire decision-making process is based on the institutionalism theory as this will provide the companies with different options to perform the tasks effectively. The different institutional theorists assert the institutional kind of environment that helps in strongly influencing the development of the formal structures in different organizations.
Different Multinational Companies and Institutional Theories
Hitt, Li, and Xu (2016) has argued that these kinds of institutional myths are accepted merely by the different companies in gaining along with maintaining legitimacy in the institutional environment. The organizations need to adopt the vocabularies of the structure that is prevalent to the job environment as this will assist in reducing the ineffectiveness in the different actions that are taken by the organizations for the survival of the organizations in the different kind of environments. The institutional theory has helped the different companies in managing the different kind of objectives that are required by all the different kinds of entry modes. It has been noticed that the institutional environments help in strongly influencing the development of the different formal structures of the organization that has to be analysed effectively by the different companies that opts for different types of entry modes. However, it can be seen and identified that such formal structures can reduce the efficiency of the organization and hinder their performance in comparison to the other competitors in the market.
Furthermore, Hernández and Nieto (2015) has commented that there are different institutional myths that are accepted by the different organizations to maintain or gain legitimacy in the environment that is institutional in nature. On the other hand, Hennart and Slangen (2015) has stated and hypothesised that the net effect of the different institutional pressures is done in order to overall increase the homogeneity of the organizational structures in the institutional type of environment. Furthermore, Ferreira et al. (2014) has added and stated that the institutional isomorphism rate has been increased when the different firms are highly dependent on institutional environment, when the companies highly rely on the different professionals and exist under high type of uncertainty or the ambiguous goals.
The institutional theory helps the different kind of companies that chooses different kind of entry modes in making them salient with the features of the market wherein they are going to transfer their business activities. It has been seen that the companies have to face different pressures and the formal environment hinders the overall productivity of the organization as well (Cavusgil and Knight 2015). Due to the formal environment that has to be faced by the organizations, the company’s competitive position is hindered and this create negative impact on the organization as well. However, in order to reduce such negative impact from the organization, the companies try to often decouple the technical core from the different kind of legitimising structures.
Institutional Theory and Decision-Making in International Business
From the analysis done by the different researchers, it can be analysed and identified that within the entire institutional environment, the entities gain and exert more influence on their dependents. Furthermore, the organizations who are under coercive pressure, the adoption rate is slower in nature and this increases the entire adoption of the building legitimacy in the entire institutional environment as well. De Villa, Rajwani, and Lawton (2015) has commented that institutional theory and environment helps in ensuring the survival of the organizations in different kinds of environments of different countries. The entry modes adopted by the companies has to be followed by the organizations in such a manner that they should not be highly dependent on the institutional environment as this can cause pressure on them in the future.
Conclusion
Therefore, it can be concluded that the institutional theories play a major role in the international businesses. The international business that adopt different entry modes while shifting their business in different countries, this can assist them in adopting to the different types of the entry mode as they can gain competitive advantage. Furthermore, it has been noticed that the companies should not rely totally on institutional theory as there are different kind of institutional myths that can affect the entire performance of the company and hinder the growth along with productivity as well.
Furthermore, it was noticed that the institutional theory provides different kinds of insights wherein this has provided with institutions that can be gained by them to shape the strategies of the organizations. It has been noticed and identified that there were different examples of different companies such as Marks and Spencer that could not compete in the market as there has been different issues and the style of the market was not understood by the respective company as well
References
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