The complexity of institutional environments and the performance of multinational corporations

Abstract

Institutions, generally defined as the rules of the game in a society, have been widely studied to explain the performance level of foreign affiliates of multinational corporations (MNCs). Drawing on the institution-based view of firms, this thesis examines the effects of an important, but underexplored concept - the complexity of institutional environments - on the performance of foreign affiliates. The complexity of institutional environments highlights the multifaceted, interdependent, and configurable natures of the complex web of the institutional system by further conceptualizing it into three conceptual pillars: institutional multiplicity, institutional substitution, and institution nal harmoniousness. This thesis centers on the main research question: How do three conceptual pillars of the complexity of institutional environments holistically influence the performance of foreign affiliates of MNCs in the host country? More specifically, institutional multiplicity means that institutional environments are fragmented into multiple autonomous institutional constituents (i.e., economic, political, and social institutions) that have overlapping sources of authority and idiosyncratic channels of market transactions and transformation to affect the performance of foreign affiliates in different manners and magnitudes. Institutional substitution, stressing the self-adjusted processes of mitigating institutional hazards, refers to an interactive mechanism through which the underdeveloped institutional constituent promotes the roles of alternative ones in facilitating foreign affiliate performance. Institutional harmoniousness reveals the positive performance implications of the configurable appropriateness of the structural combination in terms of the institutional development and institutional dynamic of regional economic, political, and social institutions. In the empirical setting of foreign affiliates in 31 subnational regions of the mainland of China during 1998-2008, the results, derived from the multilevel mixed-effects linear regression, reveal that (i) while economic, political, and social institutions all have positive impacts on foreign affiliate performance, political institutions have a relatively dominant effect on foreign affiliate performance; (ii) most two-way and three-way institutional substitutions, except for the substitution of economic and social institutions, are critical drivers for mitigating institutional hazards and further improving foreign affiliate performance; (iii) institutional harmoniousness in the development aspect has a positive implication for foreign affiliate performance. This thesis makes theoretical and empirical contributions to the development of the complexity of institutional environments and the literature of firm performance. Theoretically, it conceptualizes the complexity of the institutional environments into three theoretical pillars and examines their holistic influences on foreign affiliate performance. Empirically, it tests the arguments by developing multiple institutional measurements in the 31 subnational regions of the mainland of China, thereby bridging the gaps between institutional complexity and subnational regions. Practically, the findings of this thesis have important managerial and policy-making implications for international executives presently active in the mainland of China as well as future investors there and beyond.