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Formal institutions and entry modes in developing countries in Eastern Europe

The case of Bulgaria

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Master Thesis


Business Administration>General




Master Thesis: System and Entry Mode This section will discuss the relationship between the system and the choice of entry mode. North (1990, p. 3) defines an institution as “the rules of the game in society, or more formally, the constraints of man-made designs that shape human interaction”. This definition includes formal institutions—laws and regulations, and informal—customs, norms, and culture (Meyer & Peng, 2005). A new research direction believes that the current system is not just a “background condition” (Meyer et al., 2009). Researchers have realized the importance of institutions, and it is no longer possible for strategic research to only focus on industry conditions and company resources (Peng, 2002). Over time, institutional theory has become a powerful and useful tool for analyzing individual and organizational behavior (Dacin et al., 2002). One of the reasons for this growing interest is that it provides a rich theoretical basis for studying a wide range of key issues. In addition, institutional theory provides opportunities to construct theories in different levels of analysis, which is of great significance for multinational corporation (MNC) research (Kostova et al., 2008). Dikova and Witteloostuijn discussed the importance of institutions in terms of the degree of institutional progress in 2007-"The extent to which consistent game rules in a market economy play a role" (page 1015). Formal and informal institutions participate in the interaction between companies and in this way “affect the related transaction and coordination costs of production and innovation” (Meyer et al., 2011, p. 237). In addition, the organization is also responsible for the transfer of corporate social responsibility (CSiR). More specifically, the less developed the host country’s institutional environment, the more likely MNE will transfer its CSiR practices to subsidiaries (in the host country) (Surroca et al., 2013). Institutions play an important role in the market economy. They must maintain the effective operation of market mechanisms. This will enable companies and individuals to participate in market transactions without causing unnecessary costs and risks (Meyer et al., 2009). When markets in developed countries are functioning normally, market support institutions will not be noticed. On the other hand, when the market cannot function normally, such as in emerging economies, the lack of stable formal institutions is obvious (Peng, 2002). In addition, according to the new institutional model, "the survival of an organization depends on the degree of consistency with the institutional environment. 2.3 Institutions and entry modes of emerging economies As already mentioned, the strategies of transition economies (also considered emerging economies, Hoskisson et al., 2000) are very different from those of developed countries. Therefore, in the analysis, they can only be explained by considering the specific institutional environment (Meyer, 2002). In addition, companies that can adapt to the “pressure” of the system are more likely to obtain scarce resources and survive in foreign markets (Newman, 2000). “Emerging economies can be defined as countries that meet two criteria: fast economic development, government policies conducive to economic liberalization and the adoption of a free market system” (Hoskisson et al., 2000, p. 249). The end of the communist era (1989) released a new wave of fast-growing countries in Central and Eastern Europe-transition economies. Their goal is to support their market mechanisms by liberalizing, stabilizing, and encouraging private companies (Hoskisson et al., 2000). This in turn attracted a large amount of foreign direct investment (FDI) and trade (Gelbuda et al., 2008). However, the attention of researchers has only recently been drawn to the impact of institutions on economic performance (Pournarakis, 2004). When the communist system collapsed, institutions were unable to reduce uncertainty and manage stable structures to support interaction, thereby reducing transaction costs (Meyer, 2001). Slowly a formal institution was formed. However, the characteristic of this construction period is that international business faces various difficulties: overlapping and contradictory legislation, vacuum, incomplete legal framework and vague social norms. In addition, Western companies entering emerging markets must deal with high transaction costs, corruption, and low property rights protection (Meyer, 2001). Therefore, this transition process can be very challenging for MN Es (Gelbuda et al., 2008). Brouthers (2002) supports this view, pointing out that weaknesses in the institutional structure, such as legal restrictions on ownership, may be a cause of barriers to entry. The agency also ensures information about business partners and their potential behavior. This in turn reduces unnecessary information asymmetry, which is usually the cause of market failure. As mentioned earlier, many emerging economies have weak institutional environments, which may lead to information asymmetry. Therefore, companies encounter difficulties and risks in partnerships, so they must invest more resources in information search (Meyer et al., 2009). Read Less