Institution Based Theory: An Evaluation
Introduction: Succeeding in international business is a tough job even for the most experienced multinational enterprise; international business has never come at a small price. There are trade barriers; cultural, political difficulties coupled with resource allocation and management strategy issues. In the mist of all these challenges some MNEs especially those from developing countries enter the international business arena with limited resources and experience and they still succeed.
The fundamental question is what makes developing countries MNEs succeed in international business and what factors influence the firm’s strategy in international business?
Several reasons have been advocated for their success, the works are grouped into resources based theory and the industry based theory. However recent writers have advocated for the inclusion of the institutions based theory as a new theory on firm strategy.
This paper will attempt to evaluate the argument put forward by Peng, Wang & Jiang (2008) for the inclusion of the institution based theory as the third arm of strategy tripod. To do this it is best to start with a review of the leading theories on firm strategy.
Resources Based Theory
According to Peng, Wang & Jiang (2008) the resources based theory states that the differences within organizations are responsible for its strategy and performance.
Gao, Murray, Kotabe & Lu (2010) noted that the resource based view is centered on the nature of the organizations competitive advantage and looks at why organizations in the same industry perform differently over time. Organizations put together both material and intangible resources to gives them the critical competitive advantage. They further argued that because organizations evenly distribute resources throughout the firm, they are able to use its capabilities and assets to coordinate activities successfully. Consequently higher performance will avail organizations with advanced system and constitution.
Xie, Zhao, Xie and Arnold (2011) argued that technology and market attributes as well as market knowledge are essential assets that are not easily copied or substituted this means organizations strategies should be in line with firm-specific characteristic to categorize, shield, and take advantage of their unique skills and proprietary assets.
However, Peng, Wang & Jiang (2008) argued that the organizations performance is not only affected by the possession of unique combination of assets and experiences but also inﬂuenced by industry and institutional environments within which the ﬁrms operate.
Industry based theory
Peng, Wang & Jiang (2008) also opined that industry specific circumstances determine to a large extent organizations strategy and performance.
Gao, Murray, Kotabe & Lu (2010) lead by Porter (1980) argued that industry based theory asserts that the environment represented by the industry in which it operates. External factor that play out within the industry are more important in determining the organizations strategy and its performance. The organization must therefore respond to environmental issues by adapting to survive. This pressure from the external environment constrains organizations to choose certain strategies to be able to compete favorably. Therefore the industry factors are more important in shaping the organizations strategic behavior with industry specific issues such as market concentration naturally affects availability and distribution of resources which affects performance. (Xie, Zhao, Xie & Arnold, 2011)
The Institution Based theory
Peng, Wang & Jiang (2008) argued that institutions are the official and unofficial rules that govern societal transactions. These institutions differ from place to place, and to a large extent affect the performance of the organization. Politics, legal system, culture and the society in general play a crucial role in mapping...
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