Siegel and Larson: Labor Market Institutions and Global Strategic Adaptation
Labor Market Institutions and Global Strategic Adaptation:
Evidence from Lincoln Electric
Jordan Siegel and Barbara Zepp Larson
Harvard Business School, Boston, MA 02163,
firstname.lastname@example.org and email@example.com
Although one of the central questions in the global strategy field is how multinational firms successfully navigate multiple and often conflicting institutional environments, we know relatively little about the effect of conflicting labor market institutions on multinational firms’ strategic choice and operating performance. With its decision to invest in manufacturing operations in nearly every one of the world’s largest welding markets, Lincoln Electric offers us a quasiexperiment. We leverage a unique data set covering 1996-2005 that combines data on each host country’s labor market institutions with data on each subsidiary’s strategic choices and historical operating performance. We find that Lincoln Electric performed significantly better in countries with labor laws and regulations supporting manufacturers’ interests and that Lincoln Electric performed significantly better in countries that allowed unconstrained use of incentive-payfor-performance. Furthermore, we find that in countries with labor market institutions unfriendly to manufacturers, the company was still able to enhance its performance significantly by what we term flexible intermediate adaptation.
Key words: global strategy; institutions, labor market; adaptation; complementarity History: This preliminary draft is dated January 25, 2007. Please do note cite, quote, or circulate without the authors’ permission.
One of the most significant questions in the global strategy field is how multinational firms should navigate their way through multiple and often conflicting host-country institutional environments (Ghoshal and Westney 1992). In spite of the fact that most FDI is still conducted by manufacturing companies whose profitability derives in large part from achieving labor productivity, we still know surprisingly little about whether labor market institutions, defined as formal and informal rules governing the labor market, matter for the operating performance of foreign direct investment, and if so which ones matter and how much they matter. Despite earlier calls for research in this area (Rosenzweig and Singh 1991), there has been little work done on the effect of adaptation to labor market institutions on multinational firms’ strategic choice and performance (see one notable exception by Zaheer, 1995).
Siegel and Larson: Labor Market Institutions and Global Strategic Adaptation
The following questions are still largely understudied. Under what conditions should multinational firms simply avoid institutionally incompatible environments when the institutions affect basic rules of work, and what in fact makes an environment institutionally incompatible? How far should multinational firms go in adapting to different institutional environments? When should a multinational firm hold the line and introduce what at first appears to be an incongruent organizational practice into a host country? Whereas some past studies have examined the likelihood of transfer of organizational practices abroad, remarkably few have examined the effect of strategic adaptation on firm performance. Adaptation is one of the important strategies in international business (Prahalad and Doz, 1987; Bartlett and Ghoshal, 1989; Ghemawat 2003), and yet a recent literature review shows that little is known about the optimal level of adaptation by multinational firms to any local market institutions (Dow 2006). To answer these questions, we leverage a unique quasi-natural experiment. Lincoln Electric is one of the most studied companies of all time in MBA programs, and it operates...
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