The Effects of the Institutional Environment on the Internationalization of Chinese Firms - Part 7

The early studies on adopting an institutional perspective in IB research mainly focused on the influence of the institutional environment on the foreign market entry modes of MNCs. They suggested that the choice of entry mode is a result of the organization's responses to isomorphic pressures arising from both a firm's external environment and its internal organizational practices and routines (e.g., Davis, Desai, & Francis, 2000; Dikova & van Witteloostuijin, 2007; Yiu & Makino, 2002). Chan and Makino (2007) examined the legitimacy rationale behind the choice of the subsidiary ownership structure among MNCs from an institutional perspective. They argued that MNCs are likely to accept a lower ownership stake in exchange for external legitimacy when they are under strong pressure to conform in the host country. MNCs are likely to take a higher ownership stake in response to strong internal pressure from parent companies to sustain their internal legitimacy. In these studies, the institutional distance between the home and host country has been an important research concept (Dunning & Lundan, 2008). The three types of institutions, namely the normative, regulative, and cognitive institutions, identified by DiMaggio and Powell (1983) and Scott (2001) have been frequently used to analyze institutional differences.

In their discussion of new theoretical perspectives on MNCs, Dunning and Lundan (2008) emphasized that to explain the growth of the MNCs, it is necessary to bring together different theoretical viewpoints, for instance, institutional theory, resource-based theory, transaction cost theory and knowledge-based theory.

Oliver (1991) applied the convergent perspectives of institutional and resource-dependence theories to their prediction of firms' strategic responses to the institutional environment. In response to pressures to conform to the institutional environment, organizations may behave differently. As such, Oliver (1991) identified five strategic responses ranging from passive action to active resistance, including acquiescence, compromise, avoidance, defiance, and manipulation. Based on Oliver's strategic responses (1991), Witt and Lewin (2007) argued that a firm's response to avoiding the perceived misalignment between its needs and the home country's institutional conditions is another explanation for outward FDI.

Dunning (2006) pointed out that the eclectic OLI paradigm lacks institutional content, and it is important to incorporate institutional factors in the future extension of the model.

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