Filling Market Institutional Underdevelopment: Institutional Substitution and Strategic Fit on Foreign Firm Performance

Abstract

How do foreign firms facilitate performance by filling market institutional underdevelopment in emerging markets? While extant studies have examined the roles of strategic responses in over-coming market deficiencies, our study, drawing on institution-based view of firms, examine the roles of nonmarket institutions—political and social institutions, and firm’s strategic fit between ownership portfolios and such nonmarket institutions in substituting for the negative impacts of market institutional underdevelopment on foreign firm performance. Our study find that the negative effect of underdeveloped market institutions on foreign firm performance becomes weaker when the development level of political and social institutions is higher; such substitu-tive effects will become respectively larger for foreign firms with higher ownership diversity, government ownership, and central government ownership.