The Third Leg in the Strategy Tripod – Institutional Based View

The Third Leg in the Strategy Tripod

Institutional Based View Introduction Strategy has come to play a significant role in international business (IB) in recent times. This is predicated on the fact of complexities associated with globalization. The interplay of various factors of production in an environment could have been sufficient for MNEs in taking investment decisions. However, experience has shown otherwise. In this light, strategizing in the international business arena has been dominated by industry and resource based views, somewhat ignoring the magnitude of institutional impact on investment decisions.

Evaluation of ‘the Third Leg in the Strategy “Tripod”’

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According to Peng et al (2008), citing Porter(1980) Barney (1991) the industry-based view is rooted in the assumption that the strategy employed by MNEs is determined by the conditions within the industry of focus. Also, the resource based view tends to narrow performance and international business strategy to resources in specific firms. The aggregated views are functions of research findings carried out in environments whose institutions are seemingly standardized and stable.

Meanwhile these views have not been able to deal with the nagging questions posed by strategy as regards investment locations. Recent research directions have established remarkable differences in the institutional frameworks of emerging economies relative to developed economies. This is largely due to long history of cultural, legal and political platforms that organize their businesses. According to Peng et al (2008), the effect of these formal and informal institutions are quite remarkable in shaping strategies and performance even in developed economies.

This may not have come to the front burner without recent research on the relationship between institutions and organizational strategies in emerging economies. Peng et al (2008) are of the view that earlier approach to international IB strategy did not offer institutions appropriate place in the strategy discourse. In furtherance to this, Peng et al (2008) argue that the institutions should actually be recognized as the third leg in the strategy tripod. The other legs being resource based and industry based views.

Let us explore the institutions and how they impact IB strategies. In understanding an institution, the renowned Economist Searle (2005 pp. 21) defines an institution as ‘any collectively accepted system of rules (procedures, practices) that enable us to create institutional facts’. It follows that the institutions set the rules for doing business in any environment. As such an MNE is only going to be successful where it understands, assimilates and applies the rules of the environment for competitive advantage.

Peng et al’s (2008) argument on the institutional view of strategy focuses on legal, social and political aspects as these have been found to change quite significantly in emerging economies upon both internal and external impacts.

Effectiveness of the Four Cases Offered in Supporting the Central Argument

Peng et al (2008) posit that in transacting business in a developed economy, the supporting institutions operate albeit silently at the background. This is in contrast to the situation in emerging economies where the weight of institutions plays visible roles in consummating transactions.

These visible roles have tendencies to alter the business equation in favor of MNEs who have taken proactive steps in influencing the institutional outcomes. Place this fact side by side the growing importance of emerging economies, it becomes imperative that institutional view of strategy becomes as important as the traditional views. Emerging economies like China and India are great examples where institutions’ actions and inactions play great roles in balancing the IB strategy tripod. Growing The Firm In China

Peng et al (2008) note that it is puzzling to see China growing economically in the midst of underdeveloped institutional framework. This growth could not have taken place on the strength of the industry and resource based views alone. Peering deeply, Peng et al (2008) Wong (2012) recognize the cultural influences that abound in Chinese business climate which border on social and family networks otherwise referred to as guanxi. This may have phenomenally replaced the formal institution, as such affects the success of businesses within the environment.

Peng et al (2008) suggest that in economic environments where institutions are week, norms and cognition take over as game changers. This highlights the import of institution based view in IB strategies. Competing In And Out Of India The meteoric rise of India in the area of IT and Business Process Outsourcing (BPO) was attributed to resource and industry based view of IB strategy (Peng et al 2008). These views are based on the opinion that cheap labor, excellent skills are major factors responsible for their growth.

Nonetheless, institutional considerations are found to be quite relevant in India’s context. Considerations in the areas of education subsidy to top Universities and various economic reforms including liberalization by government institutions played crucial roles in making India a competitive environment for investments (Peng et al 2008). These institutional references can conveniently stand as the third tripod of the IB strategy. Antidumping As Entry Barriers Market-based variables as noted by Peng et al (2008) have been alleged as the basic entry barriers in IB.

Meanwhile non market based institutional variables have been largely ignored in IB strategies.. Trade barriers have come to play important roles in IB strategies. Countries in protecting their local business players against foreign competition usually set up institutional policies aimed at stemming imports by foreign MNEs. These MNEs are alleged to compete unfavorably through the process of dumping. Davis (2009) citing the 1947 GATT agreement defines dumping as a situation where goods originating from a country are imported into another country at less than normal values.

The use of anti-dumping laws by developed countries against MNEs from developing countries is a good example of how an institutional policy could be a tool of trade barrier in IB. Western countries have used this tool of protectionism against competition from Asia quite effectively. The issue here is that when market-based forces fail, antidumping laws could be deployed by local firms to ward off MNEs, thus firming the position of institutional based view as the third leg in the IB strategy tripod. Governing The Corporation In Emerging Economies Corporate governance is highly a determinant in firm performance in developed countries.

This is due to the fact that the agency theory focuses on separation of ownership and control. These are exemplified by principal-manager conflicts (Peng et al 2008) quite unlike a lot of emerging economies where principal-principal conflict is the norm. The ability of an MNE to invest in such an environment would mean understanding the value and complexities of concentrated ownership and strategizing accordingly.

Conclusion

It is evident from the work of Peng et al (2008) and other researchers that institution-based view has come to occupy the third leg of the IB strategy discourse.

It is pertinent to note that the emergence of the institution based view does not in any way diminish the importance of the traditional based views in IB strategy. Instead it complements the traditional views, thus balancing the IB strategy in form of a tripod. It is my opinion that this tripod leverages on industry-based view, resource-based view and institutional-based view for balance. While Peng et al (2008) referenced most of their arguments on developing economies, the institutional effects are found to be applicable in developed countries as well.

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