Journal of World Business xxx (xxxx) xxx

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Journal of World Business

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Institutional fragility and internationalization of Indian firms: Moderating

effects of inward FDI and linkages
Vikrant Shirodkar a, *, Rishika Nayyar a, Sumati Varma b
a
University of Sussex Business School, University of Sussex, Brighton, United Kingdom
b
Department of Commerce, Sri Aurobindo College (Evening), University of Delhi, Delhi, India

A R T I C L E I N F O A B S T R A C T

Keywords: In this paper, using institutional and organizational learning theories, we argue that institutional fragility within
Emerging market multinational enterprises India impacts the internationalization of Indian firms such that firms from more fragile regions are likely to have
Institutional theory lower internationalization levels. We also suggest that this effect is moderated by inward (industry-level) foreign
International business
direct investment (FDI) and inward (firm-level) linkages with foreign firms. We test our hypotheses based on the
India
Subnational institutions
analysis of 707 Indian firms over the period 2008–2018. Our study contributes to the literature examining the
complexity, and the speed and consistency of institutional progress in emerging economies, and its impact on
firms’ internationalization.

1. Introduction
The internationalization of firms from emerging economies has been
widely attributed to the institutional conditions in these countries
(Chen, Li & Shapiro, 2015; Del Sol & Kogan, 2007; Li, Xia, Shapiro & Lin,
2018; Luo & Tung, 2007; Ma, Ding & Yuan, 2016; Sun, Peng, Lee & Tan,
2015; Yang, 2018). The concept of ‘institutional fragility’ (Shi, Sun, Yan
& Zhu, 2017; Wang & Zhou, 2020; Zhang & Deng, 2017) advances prior
research in this context by taking into account both the multidimen­
sionality of institutions (Jackson & Deeg, 2008), as well as the speed at
which each dimension progresses relative to others. The institutional
environment is argued to be more conducive for economic activity when
different dimensions - such as legal efficiency, corruption control, in­
tellectual property (IP) protection, and factor-market development,
among others (Bevan, Estrin & Meyer, 2004; Hoskisson, Wright, Fila­
totchev & Peng, 2013) - are consistently progressed (Amable, 2000;
Fukuyama, 2014; Hall & Gingerich, 2009). However, institutional
fragility occurs when these dimensions progress inconsistently and the
speed of progress (Banalieva, Eddleston & Zellweger, 2015) is faster
along some dimensions than others, creating internal friction and con­
flict in institutional reform (Shi et al., 2017). The impact of institutional
fragility can be examined at both cross-national and subnational levels,
however, within large emerging economies such as China and India, the
scope of institutional fragility at a subnational level is considerably
greater (Roland, 2004).
For firms, institutional fragility has been argued to increase both
relational and cognitive complexity within the institutional information
space (Boisot & Child, 1999). Prior research argues that firms adopt the
following alternative strategic options in response to these complexities
– (1) learning from and adapting to these complexities; (2) attempting to
shape the environment; and (3) avoiding and escaping the environment
(Doh, Rodrigues, Saka-Helmhout & Makhija, 2017). So far, research on
firms’ strategic responses to institutional fragility has focused on option
(3) and in China (B. B. Li et al., 2021; Shi et al., 2017), where arguably
lesser democratic forms of governance substantially increase the costs of
influencing institutions; and political arrangements such as the Belt and
Road initiative (Zhu, Sardana & Tang, 2022) make it costlier for firms to
adapt business models to institutional fragility, as compared to escaping
the environment (Shi et al., 2017). As such, our understanding of how
firms might learn and adapt to institutional fragility (i.e. options 1 and
2), and how this would impact their commitment to internationalization
remains limited. In other emerging market contexts such as India, Brazil
and South Africa, the political context allows a greater scope for firms to
both adapt to as well as mitigate the consequences of institutional
fragility, which alleviates the need to escape to foreign locations (Doh
et al., 2017). Therefore, in our paper, combining institutional and
organizational learning theories (Dodgson, 1993; Fiol & Lyles, 1985;
March & Olsen, 1975), and using the Indian context, we first argue that
institutional fragility affects the learning of Indian firms in ways that
may subsequently influence their internationalization differently.

* Corresponding author.
E-mail address: v.shirodkar@sussex.ac.uk (V. Shirodkar).

https://doi.org/10.1016/j.jwb.2023.101502
Received 23 September 2022; Received in revised form 18 September 2023; Accepted 27 September 2023
1090-9516/© 2023 The Author(s). Published by Elsevier Inc. This is an open access article under the CC BY license (http://creativecommons.org/licenses/by/4.0/).

Please cite this article as: Vikrant Shirodkar et al., Journal of World Business, https://doi.org/10.1016/j.jwb.2023.101502
V. Shirodkar et al.
Accordingly, we ask: (1) To what extent does institutional fragility (at the
subnational level in India) impact the internationalization of Indian firms?
Organizational learning theory (OLT) suggests that when operating
under conditions of institutional fragility, the cognitive and relational
complexities faced by firms can lead them to develop context-specific
learning mechanisms (Boisot & Child, 1999). However,
inter-organizational linkages may widen the scope of firms’ learning
(Kafouros, Love, Ganotakis & Konara, 2020). Drawing on these insights,
we suggest that the boundary conditions of firms’ learning in institu­
tionally fragile contexts can be extended via inter-organizational link­
ages. Specifically, we argue that ‘inward FDI’ within the firms’ industry
and firms’ explicit linkages with foreign firms can mitigate the adverse
learning effects of institutional fragility. With greater inward FDI there is
a greater scope of spillover and agglomeration benefits to local firms
(Yi, Chen, Wang & Kafouros, 2015). Likewise, firms’ explicit inward (yet,
foreign) linkages gained via, but not limited to, collaborations with local
subsidiaries of foreign firms, imports of raw (and/or intermediate)
materials, and foreign technology licensing also constitute an important
source of diversified learning (Lu, Ma, Taksa & Wang, 2017). For firms
based in emerging markets, it has been argued that the process of
learning begins with leveraging such ‘inward’ linkages (i.e. linkages and
exposure to foreign technologies within their home country) and con­
tinues with ‘outward’ linkages (i.e. linkages developed outside the home
country) via exporting or subsidiary development (Mathews, 2002). In
prior research, the ‘linkage leverage learning’ (LLL) (Mathews, 2002;
Thite, Wilkinson, Budhwar & Mathews, 2016) and the ‘inward outward
LLL’ (IOL3) (Lu et al., 2017) models have provided an influential
explanation about the rise of emerging Asian firms. We suggest that
inward (industry) FDI and inward (firm-level) foreign linkages reduce
the adverse learning effect of institutional fragility on the internation­
alization of Indian firms. Accordingly, our second research question is:
(2) How do inward (industry) FDI and firms’ inward (foreign) linkages
moderate the effect of institutional fragility on the internationalization of
Indian firms?
Our study makes important contributions to the existing literature.
First, theoretical discussion on the effect of institutional fragility on the
internationalization of emerging market firms (EMFs) is in its infancy.
We advance this research by examining how EMFs learn to compete in
institutionally fragile contexts, as an alternative to escaping the envi­
ronment (Liu, 2017), and how this learning affects their commitment to
internationalization. Specifically, we argue that institutional fragility
narrows the scope of firms’ learning and causes them to develop
domestically focused competitive advantages that are less transferable
to international settings (Arregle, Miller, Hitt & Beamish, 2016),
reducing their commitment to internationalization. In this context, we
contribute to prior research on the impact of institutional fragility in two
ways – (1) While Shi et al. (2017) focus on the impact of institutional
fragility on the propensity of OFDI, we examine how this impacts the
scale of internationalization by firms. In this context, we suggest that
whereas the propensity of OFDI is viewed as a first-level decision in
foreign investment and may be influenced by institutional escape logics
(Stoian & Mohr, 2016; Witt & Lewin, 2007), the scale of foreign in­
vestment will be influenced by an organization’s ability to leverage their
learning and experience (Elango & Pattnaik, 2011; Vahlne, 2020). (2)
We focus on India whereas prior research on institutional fragility has
largely focused on China (X. Li, Cheng, Wan & Zhao, 2021; Shi et al.,
2017; Sutherland, Anderson, Bailey & Alon, 2020; Zhang & Deng,
2017). India is one of the large emerging economies and Indian firms are
increasingly investing in various foreign markets (Bangara, Freeman &
Schroder, 2012; Chittoor, Aulakh & Ray, 2015). Prior studies have also
argued that Indian and Chinese firms behave differently in terms of their
internationalization strategies, due to various reasons. E.g. Munjal,
Varma and Bhatnagar (2022) argue that Indian and Chinese firms have
different institutional ‘imprints’, which influence their foreign direct
investment (FDI) location decisions. In a similar vein, Zhu et al. (2022)
argue that whilst Indian firms enjoy greater freedom when engaging in
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OFDI and are supported by liberal market policies, Chinese firms are
often ‘forced’ to invest in the BRI (Belt and Road Initiative) signatory
countries.
Second, through our moderators, we contribute to research on the
factors that reduce the adverse learning effects of institutional fragility,
and in consequence, improve emerging market firms’ (EMFs’) interna­
tionalization levels. Prior research on the ‘LLL’ model (Luo & Bu, 2018)
has largely focused on ‘external’ (i.e. overseas) linkages developed by
EMFs as a source of their learning; and has ignored the importance of
learning via ‘inward’ linkages - linkages to global resources in the firm’s
‘home’ country (Lu et al., 2017). Inward linkages created via inward FDI
(in the industry) and firm-specific inward linkages constitute an equally
important source of learning for EMFs (Cuervo-Cazurra, Luo, Ram­
amurti & Ang, 2018). Yet, less is known about how such inward linkages
interact with institutional fragilities in the home country. We contribute
to this important emerging line of research by arguing and finding that
inward linkages reduce the adverse learning effect of institutional
fragility and increase the scope of Indian firms’ internationalization.
In the following sections, we first provide a background to theory,
followed by developing our hypotheses on the relationship between
institutional fragility (at a subnational level within India) and interna­
tionalization of Indian firms and on the moderating effects of inward FDI
and firm-level linkages. This is followed by the description of our
methods. We then present our results from our empirical analysis, which
is finally followed by discussion and conclusions.
2. Theoretical background and hypotheses
Institutions - defined as ‘rules of the game in a society, or more
formally, the humanly devised constraints that shape human in­
teractions’ (North, 1990) are heterogeneous, not only ‘among’ countries
but also ‘within’ countries (Peng & Lebedev, 2017). Institutions change
over time, and this change occurs along various dimensions (Jackson &
Deeg, 2008) at different speeds (Banalieva et al., 2015). In emerging
economies, pro-market liberalization has been argued to drive institu­
tional progress along dimensions such as corruption control, develop­
ment of product and factor markets and IP protection regimes; and this
progress has been argued to be a key driver of the internationalization of
firms from these economies (Cuervo-Cazurra, Gaur & Singh, 2019; Kim,
Kim & Hoskisson, 2010).
In this context, institutional fragility, as previously defined, em­
phasizes a situation where these dimensions of institutions progress at
an inconsistent pace, creating a ‘misaligned’ restructuring process (Shi
et al., 2017). The speed and consistency of institutional progress along
different dimensions have been studied separately in prior research. For
instance, greater speed of institutional progress has been argued to create
a turbulent environment for firms to learn, impacting firm performance
negatively, whereas a gradual progress allows both firms and govern­
ments to adjust to new institutions with lesser stress (Banalieva et al.,
2015; Fuentelsaz, Garrido & Gonzalez, 2022). Likewise, when different
institutional dimensions progress consistently, they complement each
other, and it becomes easier for firms and governments to coordinate
issues related to labor (such as wages, skills, training), financing, inno­
vation, and other aspects of economic activity (Amable, 2000;
Fukuyama, 2014; Hall & Gingerich, 2009). By considering both speed
and consistency of institutional progress simultaneously (under the
concept of institutional fragility), our understanding of institutional
complexities in emerging economies, and how firms respond to frictions
and conflicts in institutional progress can be improved (Shi et al., 2017).
For example, if privatization progresses faster than the factor market
dimensions of institutions (e.g., enforcement of laws), manufacturers are
exposed to a complex situation which entails opportunities to expand in
the home market, but are disincentivized to produce high quality or
innovative products due to the lack of suitable factors of production and
IP protection regimes. In consequence, firms may resort to avoiding
formal regulations, hiring temporary workers and pervasively exploiting
V. Shirodkar et al.
connections to safeguard their investments (Zhang & Deng, 2017). In
sum, institutional fragility has been argued to increase uncertainty and
transaction costs for firms; however prior research has, so far, examined
only the escape effect of institutional fragility (Shi et al., 2017), and paid
lesser attention to how firms may learn and adapt to institutionally
fragile contexts.
Organizational learning theory (OLT) (Dodgson, 1993; Huber, 1991)
posits that firms learn ‘vicariously’ from changes to their external
environment – by observing the actions and results of others in the field
(Casillas, Barbero & Sapienza, 2015). Learning occurs through the
mechanisms of encoding new institutional experiences into organiza­
tional routines, and ‘unlearning’ past behavior (Levitt & March, 1988).
Under conditions of institutional fragility however, as institutions
progress rapidly along some dimensions but not others, uncertainty
about the future causes firms to be mindful about ‘unlearning’ certain
aspects of old institutions imprinted onto their behavior, before learning
and adapting to new institutions (Zhao, Lu & Wang, 2013). Firms also
learn via generic vs. specific learning mechanisms depending on their
societal context (Belderbos, Olffen & Zou, 2011). Under complex insti­
tutional situations as those created by institutional fragility, due to both
time and scope constraints of learning, firms are likely to follow the
‘bandwagon’ (or specific) mechanism of learning where they model
their behavior by imitating a narrow set of peers who focus on imme­
diate decision making, rather than assessing long term feasibilities
(Belderbos et al., 2011). This may result in firms developing business
models and competitive advantages which are suited to a narrow scope
of institutional contexts, and which are less transferable to international
settings (Arregle et al., 2016).
OLT (Dodgson, 1993; Huber, 1991) further emphasizes that inter-­
organizational linkages facilitate wider learning during institutional
complexities. Firms embedded in institutional fragility may be able to
circumvent the development of institution-specific knowledge by link­
ing with other firms that have more diversified knowledge. The
linkage-leverage-learning (LLL) model (Mathews, 2002, 2006), for
instance, while explaining the accelerated process of emerging market
firms’ (EMFs’) internationalization, suggests that these firms first ‘link’
up with Western MNEs to tap into global resources by forming collab­
orative partnerships, followed by ‘leveraging’ these linkages to over­
come their resource barriers; and finally build up ‘learning’ processes
through repeatedly linking and leveraging. Lu et al. (2017) further
suggests that the LLL model, however, assumes that learning from
linkages only happens ‘outside’ the EMFs’ home environment, and ig­
nores the fact that EMFs also learn by collaborating with firms ‘within’
their domestic (home) environment. Hence, they put forth the IOL3
model which argues that EMFs learn through both inward and outward
linkages. The idea of the effect of inward linkages is also drawn from the
burgeoning literature on the association between inward FDI and out­
ward FDI (Li, Li & Shapiro, 2012; Stoian & Mohr, 2016). Whereas in­
ward FDI within a firm’s industry is argued to have spillover effects on
local firms, direct collaborations and linkages with subsidiaries of
foreign firms in the home environment can be a source of learning about
the technologies and business models which have a global reach.
Overall, we suggest that the OLT offers valuable insights to understand
how firms learn and adapt to institutional fragility, how this impacts
their internationalization scale, and how inward (industry) FDI and
firm-level linkages extend the boundaries of firms learning in institu­
tionally fragile conditions.
2.1. Subnational institutional fragility and the internationalization scale
of Indian firms
Based on the aforesaid logics, we first develop our argument on the
association between institutional fragility (at a subnational level within
India) and the internationalization scale of Indian firms. A greater scale
of internationalization is indicative of an increasing commitment to
internationalization, beyond the decision to engage in FDI (Elango &
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Journal of World Business xxx (xxxx) xxx
Pattnaik, 2011; Meyer & Thaijongrak, 2013). Although the literature on
EMFs sometimes uses the terms OFDI and internationalization inter­
changeably, the drivers of EMFs’ decision to undertake OFDI may differ
from their ability to make greater amounts of foreign investments in the
future (Buckley, 2018). Prior research on the internationalization pro­
cess of firms (Johanson & Vahlne, 1990; Vahlne & Johanson, 2017) has
emphasized that increasing commitment to internationalization is
driven by firms’ learning and knowledge. For EMFs, whose interna­
tionalization needs to be accelerated to catch up with their global
counterparts, learning from ’home’ (Pattnaik, Singh & Gaur, 2021) is
argued as a distinctive determinant of their internationalization levels
(Cuervo-Cazurra et al., 2018; Lu et al., 2017). In this context, we first
argue that institutional fragility within India (at a subnational level) will
lead Indian firms to commit lesser to internationalization. This is due to
the following reasons.
As previously noted, institutional fragility depicts a situation where
different dimensions of institutions progress inconsistently and at a high
speed. Rapid progress in some institutional dimensions (e.g., labor and
financial market development) encourages EMFs to focus their learning
efforts on their home markets, which remain as important to them as
international markets (Luo & Tung, 2007). Yet, as other dimensions of
institutions such as legal system efficiency, intellectual property (IP)
protection and control of corruption progress slowly, firms will continue
to rely on connections and other nonmarket forces to protect their
business (X. Li et al., 2021). Thus, as a response to institutional fragility,
embedded firms will attempt to deploy new organizational routines to
respond to the institutional dimensions that are progressing speedily,
however, will be unable to unlearn all aspects of their behavior because
some aspects of old institutions prevail. Given that institutional fragility
creates a considerable level of stress for firms to adapt to new systems,
firms’ learning will occur largely via ‘bandwagon’ mechanisms (Bel­
derbos et al., 2011) – i.e. modeling their learning based on a smaller set
of local firms and focusing on short term advantages over assessing the
long term feasibility of their learning actions. This is also because, by
doing so, firms will be able to cater to the fast-changing demands of
certain stakeholders (e.g. local customers, by producing lower quality,
yet affordable products and solutions), and yet maintain older organi­
zational norms to satisfy other stakeholders (e.g. local regulators or
policymakers via bribery and connections). In sum, institutional fragility
increases the specificity of firms’ learning experiences (Chetty, Eriksson
& Lindbergh, 2006), and in consequence, causes them to develop busi­
ness models and competitive advantages which are likely to be suc­
cessful in the home market but difficult to be re-deployed to
international contexts (Arregle et al., 2016; Hart, Sharma & Halme,
2016). In relative terms, where institutional fragility is lower, the con­
sistency in the pace of institutional progress along multiple dimensions
enable firms embedded in such regions to develop more generic learning
and knowledge (e.g. higher quality products and strong corporate
governance) which can be more easily utilized in internationalization.
Consider the example of AI Champdany Industries Limited (AICIL)
headquartered in West Bengal (one of the most institutionally fragile
provinces in India) .1 Established in 1917, AICIL is a major manufacturer
of specialized jute products with around 8000 employees. AICIL’s
overall investment outside India during 2008 to 2018 is INR 10.6
million, which include the development of subsidiaries in the United
Kingdom (UK). However, in perspective, the average amount of in­
vestment made by an Indian company during this period is INR 25,720
million. AICIL’s local subsidiaries in India are also established in other
institutionally fragile states such as Odisha and Chhattisgarh, and their
1
The illustrative examples of companies provided in our paper are taken
from our sample based on the CMIE Prowess database. We triangulated this
data with that obtained from the companies’ websites and annual reports. The
description of institutionally fragile states is also based on our analysis – please
refer the methodology section (specifically, Fig. 3) for further details.
V. Shirodkar et al.
major revenue also comes from government procurement in these states.
In contrast, Himatsingka Seide Limited, founded in 1985 and head­
quartered in Karnataka (the least fragile state in India), designs, man­
ufactures, and distributes a variety of textile products. The company
made an international commitment of INR 30,293.6 million during 2008
to 2018, which includes the development of a global network of sales
offices and warehousing facilities in North America and Europe,
alongside various parts of India. As such, it could be argued that
specialized learning experiences developed by AICIL in institutionally
fragile contexts deter their commitment towards internationalization,
whereas Himatsingka Seide’s base in an institutionally less fragile
context, despite being in the same industry, enables it develop more
diverse, sophisticated products and to commit more to internationali­
zation. Overall, based on these arguments, we hypothesize:
Hypothesis 1: Subnational institutional fragility has a negative effect on
the internationalization scale of Indian firms headquartered in those
regions.
2.2. The moderating effect of inward FDI
As argued in the previous section, institutional fragility causes firms
embedded in such contexts to apply ‘bandwagon’ mechanisms of
learning (Belderbos et al., 2011) and focus on short term solutions, as
firms cannot fully unlearn the norms and routines influenced by older
prevailing institutions. These boundary conditions to firms’ learning
posed by institutional fragility can be extended by greater inward FDI
within the firms’ industry. Prior studies have recognized that with
greater inward FDI, there is a greater scope for incumbent firms to
vicariously learn from foreign firms and technologies (Huber, 1991; Li
et al., 2012; Stucchi, Pedersen & Kumar, 2015). Greater inward FDI
provides agglomeration benefits for the region (Driffield, 2006; Young &
Lan, 1997). Local incumbent firms can broaden their knowledge base
through these agglomerations, for instance, by hiring managers who
have experience of working in foreign firms, or through informal
networking with managers of foreign firms in trade fairs and via
participation in trade associations (Liu, 2017). These mechanisms pro­
vide local firms embedded in institutionally fragile regions a greater
scope to model their learning behavior from a broader range of firms
who contribute to agglomeration externalities (Belderbos et al., 2011).
In consequence, these firms are likely to move away from a deeply
localized focus, to developing more generic and globally relevant
products, practices and corporate governance structures, instrumental
in overcoming the adverse learning effect of institutional fragilities. A
prominent example in the context of India comes from the pharmaceu­
tical industry, which has not only been a high recipient of inward FDI
but has also led trade and OFDI from India (Bhaumik & Driffield, 2011;
Bhaumik, Driffield & Pal, 2010). In this context, Kwality Pharmaceuti­
cals Limited (incorporated in 1983), headquartered in Punjab, and
having manufacturing facilities in Himachal Pradesh - both relatively
institutionally fragile states - has continually increased its foreign in­
vestment between 2008 and 2018 (INR 141.6 million), and has also
established a foreign subsidiary in Mozambique to export and market its
products. In 2022, the company’s export sales constituted 65% of its
total sales. Arguably, a high level of inward FDI in this industry in India
contributes to the company’s wider learning and knowledge base
enabling it to commit more to internationalization. Overall, based on
these arguments, we hypothesize:
Hypothesis 2: Inward FDI (within the firm’s industry) reduces the effect
of subnational institutional fragility on the internationalization of Indian
firms headquartered in such regions.
2.3. The moderating effect of inward firm-level linkages
Finally, we suggest that EMFs’ bandwagon learning effects caused by
4
Journal of World Business xxx (xxxx) xxx
institutional fragility are also reduced by explicit inward (firm-level)
linkages with foreign firms. As described in the IOL3 model, inward
linkages are defined as the ‘linkages that offer access to global resources
in [dragon] multinationals’ home environment’ (Lu et al., 2017). There
are numerous ways through which EMFs form linkages with foreign
firms within their home environment. Some of the important channels
include, for instance, importing raw (or intermediate) materials and
participating in global supply chains (Blalock & Veloso, 2007), collab­
orating with local subsidiaries of foreign firms (Hsieh, Ganotakis,
Kafouros & Wang, 2018) and foreign technology licensing (Elia, Munjal
& Scalera, 2020). Importing raw materials and participating in global
supply chains has been argued to improve product sophistication among
Indian firms (Banga, 2023). Likewise, collaborations and partnerships
with local subsidiaries of foreign firms extends EMFs’ knowledge
relating to foreign business practices, markets, and institutions, enabling
EMFs to develop generic knowledge that can be deployed in interna­
tional settings (Duysters, Jacob, Lemmens & Jintian, 2009). Prior
research has noted that Indian pharmaceutical companies such as Ran­
baxy have been successful in internationalizing (Ray, Ray & Kumar,
2017) by assimilating technical and management knowledge via coop­
erative relationships with foreign companies within their home envi­
ronment (Fan, 2011; Young, Hood & Peters, 1994). In a similar vein,
foreign licensing – a contractual agreement through which a ‘licensee’
(in our case, an Indian firm) obtains the right to use or leverage pro­
prietary know-how and technological resources (e.g. patents, brands,
and trademarks) owned by a foreign firm (i.e. the ‘licensor’), in return
for a lump-sum upfront amount and periodic royalty payments
(Howells, James & Malik, 2003) - allows EMFs to learn through reverse
engineering and augment technological knowledge efficiently, swiftly,
and legitimately (Kotabe, Sahay & Aulakh, 1996).
Where institutional fragility increases the uncertainty for embedded
firms to invest heavily in research and development (e.g. due to weak
legal protection of IP and bureaucracy, despite strong product markets),
inward linkages with foreign firms in their home environment enable
firms in such regions to differentiate and diversify their product port­
folio and improve product quality (Wang, Roijakkers & Vanhaverbeke,
2014). Via such linkages, EMFs can also shift their institutional learning
from local informal networks to international innovation networks –
extending their learning space (Hassink & Klaerding, 2012), for
example, by gaining access to advanced innovation opportunities and
facilitating collaborations between network participants (Wang et al.,
2014). In particular, foreign inward licensing provides EMFs with access
to the technological knowledge developed in specialized clusters (Elia
et al., 2020), thus increasing EMFs’ learning boundaries beyond local
institutional settings (Liu, 2017). An illustrative example could be the
case of Mayur Uniquoters Limited (established, 1992), a large producer
of synthetic (artificial) leather (turnover $96.9 million and 495 em­
ployees in 2022), and whose manufacturing plants are based in Rajas­
than and Madhya Pradesh, both institutionally fragile states. The
company has exported on average 17% of its total sales (between 2000
and 22) and has recently invested in subsidiaries in countries including
the United States (US) and South Africa. Its export partners include large
foreign companies such as General Motors, Chrysler, Ford, Toyota,
Mercedes Benz and Honda, all of whom have a strong presence in the
Indian market. As such, it could be argued that despite the company’s
foundations in institutionally fragile states, their inward linkages to
foreign firms in India enable it to improve its product standards and
commit more to internationalization. Based on this, we hypothesize -
Hypothesis 3: Inward firm-level linkages reduce the effect of institu­
tional fragility on the internationalization of Indian firms headquartered
in such regions.
Overall, Fig. 1 describes our theoretical framework.
V. Shirodkar et al.
Fig. 1. Conceptual Model.
3. Methodology
3.1. Research context
We focus on India - a diverse and growing emerging market that has
evolved into an important player on the global stage but remains rela­
tively understudied in the institutional context of outward FDI (Zhu
et al., 2022), despite Indian MNEs having emerged as important con­
tributors to the global OFDI flows during the last two decades
(UNCTAD, 2019). The states (or provinces) in India have devolved
power in the areas of law and order, security of property rights, regu­
lation of labor and business (Debroy, Bhandari & Aiyar, 2014).
Furthermore, the economic reforms of the 1990s gave greater autonomy
to the state authorities, as a result of which, even though some formal
rules and reforms are designed at the national level, the pace of imple­
mentation varies drastically at the subnational (state) level (DIPP, 2017;
Ostrom, 1998). This is evident in the performance of states on the
business reforms action plan2- with states such as Andhra Pradesh,
Gujarat and Karnataka consistently outperforming Kerala, Rajasthan
and West Bengal in implementation of business reforms (DIPP, 2017).
The differences are also conspicuous in the level of institutional
fragility across Indian states. For example, in West Bengal, while there
has been a speedy progress towards market liberalization, there is
considerable lack of progress in other areas of reforms relating to pro­
tection of property rights, quality of judiciary and regulation of labor
and business. Likewise, the state of Rajasthan has speedily improved the
quality of judiciary and securing property rights, but has lagged behind
in the regulation of labor and business, resulting in a distorted labor
market, inadequate infrastructure, higher cost, bureaucratic hurdles and
corruption in obtaining business licenses and permits. In contrast, in
Karnataka and Gujarat, the reform process has been relatively more
synchronized (Debroy et al., 2014). This provides evidence of remark­
able heterogeneities in the institutional environment across subnational
regions (i.e. states) in India. Fig. 2 presents the varied performance of
states across the institutional dimensions.
3.2. Sampling
To populate our sample, we first used the CMIE Prowess database to
extract all the 4882 firms listed on the BSE (formerly, Bombay Stock
Exchange) as of January 2023. BSE is the oldest and one of the two major
stock exchanges in India. BSE listed firms have been used in the previous
studies examining internationalization strategies of Indian firms
2
Business Reforms Action Plan (BRAP) are developed since 2015 by the
Department of Industry and Internal Trade (DPIIT), Ministry of Commerce &
Industry, Government of India. The action plan is circulated for implementation
with States and Union Territories with the aim to reduce regulatory compli­
ances for businesses. https://eodb.dpiit.gov.in/Home/About (accessed: 7 July
2022)
5
Journal of World Business xxx (xxxx) xxx
(Chittoor et al., 2015; Mondal & Gadepalli, 2020). Prowess, maintained
by the center of Monitoring Indian Economy (CMIE), is a comprehensive
database which provides detailed financial information of companies in
India, and is frequently used in India-based studies (Elango & Dhanda­
pani, 2020; Ray et al., 2017). Second, we excluded firms from the
financial sector as they are subject to different accounting principles and
OFDI regulations (Kumar, Singh, Purkayastha, Popli & Gaur, 2020). We
also excluded the subsidiaries of foreign firms, as our study focuses on
the internationalization of Indian firms. This left us with 3571 firms. Out
of the 3571 firms, data on ‘overseas investment outside India’ – to
measure internationalization scale (our dependent variable), was
available for 860 firms. Finally, after accounting for missing data on all
other variables of interest (detailed below), our final sample used for
empirical analysis comprised of an unbalanced panel of 4739 firm-year
observations for 707 firms across financial years 2008 to 2018.
The sampled firms represent a mixture of 37 unique industries,
headquartered in 17 Indian states which account for nearly 80% of In­
dia’s GDP.3 Table 1 below shows the state-wise distribution of sampled
firms. The time frame for this study (2008 to 2018) is guided by the
availability of data on all the relevant state-level variables required for
the computation of our key explanatory variable - subnational institu­
tional fragility. The time frame is also justified because: (1) Following
our starting year (2008), the Indian government made several new al­
lowances to liberalize and promote outward investments (Khan, 2012).
(2) The ending year (2018) provides an appropriate cut-off point as the
COVID-19 pandemic greatly affected cross-border investment flows
(Munjal et al., 2022).
3.3. Variables and measures
Our dependent variable is firms’ internationalization scale. Following
prior studies (Panicker, Mitra & Upadhyayula, 2019; Singh & Delios,
2017), this was measured by the amount of foreign investment made by
the sampled firms each year (Hassel, Höpner, Kurdelbusch, Rehder &
Zugehör, 2003). This measure is commonly used in studies focusing on
emerging market multinationals (e.g. Buckley, Munjal, Enderwick &
Forsans, 2016; Tang & Buckley, 2022).
Our independent variable is institutional fragility, which we examine
at the subnational level within India, based on the differences in the pace
of reform along different institutional dimensions at the state (or prov­
ince) level in which the firms in our sample are headquartered. To
measure this, we adopted the entropy formula-based approach (Shi
et al., 2017). The data sources and detailed methodology used in the
construction of institutional index and institutional fragility measure are
3
Authors own calculation based on Gross State Domestic Product Data (Rs.
Lakhs, current prices) obtained from Reserve Bank of India (India’s central
bank) Handbook of Statistics on Indian States, 2021 edition (https://m.rbi.org.
in/scripts/AnnualPublications.aspx?head=Handbook+of+Statistics+on+In
dian+States, Accessed: 21 July 2022).
V. Shirodkar et al. Journal of World Business xxx (xxxx) xxx

Fig. 2. Varied performance of Indian states on institutional dimensions.

Source: Authors description based on data from Economic Freedom of Indian States (Debroy et al., 2014) (Higher score indicates better performance)

subnational environment in India (B. B. Dash & Raja, 2013; Vadla­

Table 1
mannati, 2015). Table 2 below shows the degree of variation in each
State wise distribution of sample firms.
institutional dimension across the states covered in this study. A
State Number of firms Proportion graphical depiction of variations in the levels of institutional fragility
Maharashtra 251 36% across Indian states in our sample is presented in Fig. 3 below. As can be
Telangana 71 10% seen, the most fragile state in our sample is Madhya Pradesh with the
Tamil Nadu 67 9%
average fragility score of 0.52 and least fragile state is Karnataka with
Gujarat 64 9%
New Delhi 62 9%
the average score of 0.18.
West Bengal 52 7% Our first moderating variable is inward FDI. Prior research has pro­
Karnataka 43 6% vided evidence that inward FDI in an industry constitutes an important
Uttar Pradesh 22 3% source of learning via spillover effects (Hertenstein, Sutherland &
Haryana 16 2%
Anderson, 2017; Li et al., 2012; Xia, Ma, Lu & Yiu, 2014). Therefore,
Rajasthan 16 2%
Punjab 13 2% following the extant studies, we measure inward FDI as the ratio of
Madhya Pradesh 9 1% foreign capital (equity) investment to the total capital investment in
Andhra Pradesh 6 1% each 2-digit industry (Xia et al., 2014), as per national industry classi­
Odisha 5 1% fication (NIC-2008). The data on industry-wise annual foreign equity
Himachal Pradesh 4 1%
Kerala 3 0%
capital investment is obtained from the Department of Industry and
Assam 3 0% Internal Trade (DPIIT, formerly DIPP), Ministry of Commerce and In­
Total 707 100% dustry, annual statistics available on open government data (OGD)
platform India. We followed Nayyar and Maity (2021) to synchronize
the industry classification between DPIIT and NIC-2008.
provided in the supplementary file (available online) in Tables S1 and
For our second moderator, firm-level inward linkages with foreign
S2). Shi et al. (2017) used a marketization index to calculate institu­
firms, we construct a composite measure comprising of each sampled
tional fragility within China, however, such an index is not available for
firm’s annual foreign expenditure on import of capital goods (foreign
India. To develop the index for India, we include the following
embodied technology), imports of raw materials, stores and spares
time-varying dimensions based on prior research in India (Nayyar &
(foreign disembodied technology), royalty and technological know-how
Prashantham, 2020): (1) factor-market development (proxied by gross
(foreign licensing), and dividends (foreign capital). This is in line with
enrolment ratio in higher education; credit-deposit ratio of scheduled
studies on internationalization of Indian firms (e.g. Narayanan & Bhat,
commercial banks according to place of sanction); (2) efficiency of legal
2011). The composite measure is scaled to the size of the firms measured
system (proxied by disposal rate of Indian Penal Code, IPC, cases by
by their total assets in each year (Ray et al., 2017). As part of our
lower courts); (3) protection of property rights (number of patent ap­
robustness tests, we also used an alternative measure of firm-level
plications filed per capita); and (4) control of corruption (disposal of
linkages in the form of foreign licensing - measured as foreign expen­
corruption cases under prevention of corruption act, 1988 and related
diture on royalty and technological know-how to total foreign expen­
sections of IPC by lower courts). The four dimensions comprehensively
diture by firms in each year (Elia et al., 2020).
measure the formal regulatory dimension of the institutional environ­
We control for various regional, industry and firm level variables that
ment (Chen et al., 2015) and are used in prior studies examining the

6
V. Shirodkar et al. Journal of World Business xxx (xxxx) xxx

Table 2
State-level variations across each institutional dimension (time period 2008–2018).
Institutional dimension Measure Minimum Maximum Coefficient of standard
value value deviation (%)

Factor market Gross enrolment ratio in higher education (18–23 years) (ratio) 0.08 0.49 41%
development Credit deposit ratio of SCBs according to place of sanction (ratio) 0.30 1.23 33%
Efficiency of legal Disposal rate of Indian Penal Code, IPC, cases by lower courts (ratio) 0.02 0.37 52%
system
Protection of property Number of patent applications filed per capita (ratio) 0.00 0.06 127%
rights
Control of corruption Disposal of corruption cases under prevention of corruption act, 1988 and related 0.00 0.48 78%
sections of IPC by lower courts (ratio)

Fig. 3. Graphical presentation of institutional fragility in select Indian states (Average 2008–2018).
Source: Authors compilation based on data used for the construction of subnational institutional fragility (Higher score indicates higher fragility; Madhya Pradesh being the most
fragile state, Karnataka being the least)

may influence firm’s scale of internationalization, following prior
studies (Buckley et al., 2016; Chittoor et al., 2015; Shirodkar & Shete,
2021). At the firm level, we control for the effect of firm age (natural
logarithm of number of years since establishment), size (natural loga­
rithm of total assets), marketing capabilities (ratio of expenditure on
marketing activities to total sales), technological capabilities (ratio of
expenditure on research & development to total sales), prior interna­
tionalization (natural logarithm of export sales as a ratio of total sales),
financial leverage (debt to equity ratio), business group affiliation (dummy
variable), government ownership dummy, and firm performance (ratio of
net profit before interest and tax to total sales) (Rogers, 2004). We used
log transformation where the series required normalization due to high
variance. The data for all firm specific variables is taken from Prowess
database. We control for industry-specific effects by including 36 in­
dustry dummies as per NIC-2008 classification at 2-digit level. Finally,
we include year dummies to control for time-specific effects.
3.4. Estimation method
We used random effect generalized least squares (GLS) estimation to
test our proposed hypotheses. A GLS regression is preferred over pooled
OLS as it corrects for the omitted variable bias and the presence of
heteroskedasticity and autocorrelation in pooled time series data.
Furthermore, we preferred random-effect over fixed-effect estimation as
some of our variables such as group affiliation and government owner­
ship are time invariant. The use of random-effects also allowed us to
incorporate industry-specific effects. However, an important assumption
for using the random effects estimation is that the unobserved hetero­
geneity should not be correlated with the independent variables
(Cameron & Trivedi, 2005). We tested for this important assumption
using Hausman test, the results of which (Chi-square: 26.30, p: 0.1221)
confirms that random effects estimation is better than fixed effects. All
time-varying independent and control variables are lagged by one year
to avoid possible endogeneity with the dependent variable, and to allow
for the fact that the strategic decision such as internationalization at
time ‘t’ would depend on the conditions at time ‘t-1′ (Buckley & Munjal,
2017).
4. Results
4.1. Main analysis
The descriptive statistics and correlation matrix are presented in
Table 3. All the correlation coefficients are sufficiently low, indicating
that multicollinearity is not a problem. The average of the variance
inflation factors is found to be 2.93, which is sufficiently below the
threshold of 10 (Hair, 2009), reconfirming that multicollinearity is not
an issue.
The results of random effects GLS regression model are presented in
table 4. We analyze our data in hierarchical models. In model 1, we test
the independent effect of institutional fragility on the internationaliza­
tion of Indian firms (hypothesis 1). In model 2, we introduce both the
moderating variables and test for the robustness of our results for hy­
pothesis 1. In models 3 and 4, we introduce the two interaction terms
testing respectively for hypothesis 2 and 3. Model 5 is the full model.
Hypothesis 1 predicted a negative relationship between institutional
fragility and Indian firms’ internationalization scale. As can be seen
from model 1 (Table 3), the coefficient of institutional fragility is
negative and statistically significant (β = − 0.1868, p = 0.049). The
coefficient of institutional fragility remains negative and significant

7
V. Shirodkar et al. Journal of World Business xxx (xxxx) xxx

Table 3
Descriptive statistics and Correlations.
Variables (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14)

(1) 1.000
Internationalization
(log)
(2) Institutional − 0.037 1.000
fragility
(3) Inward FDI − 0.001 − 0.019 1.000
(4) Inward linkages − 0.033 − 0.009 − 0.064 1.000
(5) Firm size (log) 0.546 − 0.016 − 0.031 0.052 1.000
(6) Firm age (log) 0.053 0.032 − 0.008 0.026 0.239 1.000
(7) Export intensity 0.033 − 0.045 − 0.054 0.035 − 0.212 − 0.157 1.000
(log)
(8) Debt-equity ratio − 0.035 0.039 − 0.019 0.023 0.005 0.013 − 0.010 1.000
(9) Government 0.027 − 0.018 0.098 0.112 0.249 0.195 − 0.243 0.010 1.000
owned dummy
(10) Marketing 0.028 − 0.033 0.096 − 0.043 − 0.002 − 0.020 0.006 − 0.008 − 0.034 1.000
intensity
(11) Technological 0.114 − 0.038 0.104 − 0.047 0.041 − 0.083 0.162 − 0.018 − 0.073 0.166 1.000
intensity
(12) Profitability 0.161 − 0.011 0.058 − 0.203 0.131 − 0.025 0.098 − 0.101 0.042 0.079 0.112 1.000
(13) Business group 0.272 0.004 − 0.039 − 0.060 0.269 0.187 − 0.013 0.011 − 0.398 0.008 0.019 0.046 1.000
affiliation dummy
(14) Institutional 0.053 − 0.159 0.049 0.009 − 0.023 − 0.138 0.027 − 0.002 − 0.010 − 0.016 0.075 0.009 − 0.091 1.000
quality index
Mean 4.69 0.287 0.025 0.171 9.255 3.382 2.474 1.546 0.151 0.017 0.011 − 2.085 0.471 1.5
Standard deviation 3.042 0.195 0.034 0.477 1.979 0.614 1.806 11.921 0.358 0.036 0.016 0.977 0.499 0.578
Variance inflation 1.15 1.90 1.22 1.61 1.49 1.44 1.04 2.53 1.16 1.59 1.26 1.60 1.20
factors

Table 4
Main analysis: Results of random-effects GLS regression (Dependent variable: Firm internationalization).
Variables Model 1 Model 2 Model 3 Model 4 Model 5

H1: Institutional fragility − 0.1868** − 0.1922** − 0.2352*** − 0.1901*** − 0.3687***

(0.0950) (0.0969) (0.0814) (0.0674) (0.075)
H2: Institutional Fragility * Inward FDI 8.1295** 8.2543**
(3.9016) (3.7487)
H3: Institutional Fragility * Inward linkages 0.7426** 0.759**
(0.3575) (0.3342)
Inward FDI 0.5493 − 1.3929 1.0642* − 1.5001
(0.5908) (1.4181) (0.5755) (1.3642)
Inward linkages − 0.1223 − 0.0864 − 0.3359* − 0.3454*
(0.1566) (0.1584) (0.1731) (0.1798)
Firm size 1.0272*** 1.0338*** 1.0164*** 1.0173*** 1.0178***
(0.0765) (0.0776) (0.0696) (0.07) (0.0693)
Firm age 0.0817 0.0976 − 0.0168 − 0.0165 − 0.0186
(0.1875) (0.1863) (0.2008) (0.1983) (0.2000)
Export intensity 0.08** 0.0823** 0.0463 0.0475 0.0469
(0.0376) (0.04) (0.0372) (0.0369) (0.0374)
Debt-equity ratio 0.0052 0.0053 0.0056 0.0057 0.0057
(0.0037) (0.0037) (0.0036) (0.0038) (0.0037)
Govt owned − 1.6858 − 1.712 − 1.4082 − 1.3935 − 1.4038
(1.3226) (1.3279) (1.474) (1.4684) (1.4746)
Marketing intensity − 0.6988 − 0.6773 − 1.0953 − 1.2503 − 1.1555
(0.8174) (0.8628) (0.9775) (0.9817) (0.9371)
Technological intensity 6.0749*** 6.4842*** 6.2001** 6.0483** 6.1814**
(2.2742) (2.344) (2.9174) (3.0153) (2.9392)
Profitability 0.0016 − 0.0016 − 0.0078 − 0.0041 − 0.0059
(0.0491) (0.0524) (0.0387) (0.0402) (0.0397)
Business group affiliation 0.2237 0.2132 0.2412 0.241 0.2394
(0.2528) (0.2556) (0.2604) (0.2601) (0.2597)
Constant − 5.7298*** − 5.8875*** − 5.4081*** − 5.4395*** − 5.3715***
(1.3083) (1.3234) (1.496) (1.4777) (1.5003)
Industry Dummies Yes Yes Yes Yes Yes
Time Dummies Yes Yes Yes Yes Yes
R squared 0.44 0.44 0.44 0.44 0.44
Wald Chi2 860.54*** 855.76*** 785.42*** 783.77*** 787.93***

N = 4739 firm-year observations. ***, **, * denotes statistical significance at 1%, 5%, and 10% level of significance respectively. Cluster robust standard errors re­
ported in parentheses.

consistently through models 2 to 5. Hence, hypothesis 1 receives strong inward FDI. Consistent with our theoretical prediction, the coefficient of
support. the interaction term is found to be positive and significant (β = 8.1295,
Model 3 includes an interaction between institutional fragility and p = 0.037). This suggests that inward industry-level FDI weakens the

8
V. Shirodkar et al. Journal of World Business xxx (xxxx) xxx

negative effect of institutional fragility on firm internationalization.

Hence, hypothesis 2 is supported.
Next, we include the interaction term between institutional fragility
and inward linkages in model 4. As expected, the coefficient of the
interaction term is found to be positive and significant (β = 0.7426, p =
0.038). This suggests that inward firm-level linkages weaken the nega­
tive effect of institutional fragility on firm internationalization. Hence,
hypothesis 3 receives strong support.
To further facilitate the interpretation of interaction effects, we plot
the interaction graphs using the predicted values of estimates from
Table 4. The interaction graphs (Fig. 4 and Fig. 5) show the degree of
Indian firms’ internationalization at varying levels of institutional
fragility with different levels of exposure to inward FDI and linkages.
Fig. 4 shows that when institutional fragility is high, firms in in­
dustries with greater inward FDI would have a greater degree of inter­
nationalization as compared to firms in industries with lower inward
FDI. Fig. 5 shows that the negative effect of institutional fragility on
internationalization will be weaker for firms with greater inward (firm-
Fig. 5. Effect of inward (firm-level) linkages on the relationship between
level) linkages with foreign firms, as compared to firms with lesser in­
institutional fragility and Indian firms’ internationalization.
ward linkages. Further details of the simple slope analyses are presented
in Table 5 and Table 6.
Table 5 shows that in the absence of inward FDI in the firms’ in­ Table 5
dustry, a unit increase in the subnational institutional fragility reduces Average Marginal Effects (Effect of Institutional fragility on Indian firms’
internationalization by 21 percent. For firms in industries with low in­ internationalization at different levels of Inward FDI).
ward FDI (first quantile), institutional fragility reduces firms’ interna­ At (values of Inward FDI) dy/dx Std error z p-value
tionalization by 14 percent. The slope turns increasingly positive with
Mean - 1 SD − 0.3124 0.1017 − 3.07 0.002
greater inward FDI. With industry inward FDI at one standard deviation Zero (min value): No linkages − 0.2351 0.0813 − 2.89 0.004
(SD) above the mean, the negative effect of institutional fragility is First Quantile − 0.1539 0.0753 − 2.04 0.041
reversed, such that the scale of internationalization for firms in those Mean − 0.0329 0.0993 − 0.33 0.741
industries is likely to be higher by 28 percent. Mean + 1 SD 0.2466 0.2130 1.16 0.247
Mean + 2 SD 0.5262 0.3419 1.54 0.124
Likewise, Table 6 shows that for a firm without any inward linkages,
Mean + 3 SD 0.8057 0.4737 1.7 0.089
a unit increase in subnational institutional fragility reduces the scale of Max value 3.1792 1.6086 1.98 0.048
internationalization by 17 percent. The slope turns increasingly positive
Note: The values of inward FDI at two and three standard deviations below the
with an increase in firms’ inward linkages. At higher levels (for instance,
mean are negative and hence are not economically meaningful to be reported
at one SD above the mean), a unit increase in the subnational institu­
here. While the value is also negative at one standard deviation below the mean,
tional fragility is likely to have a positive effect on the scale of inter­ it is reported here following the standard practice.
nationalization by 34 percent.
Finally, all the interaction terms are added in Model 5 (Table 4). The
coefficients of institutional fragility as well as the interactions terms Table 6
retain the expected sign and statistical significance. This suggests that all Average Marginal Effects (Effect of Institutional fragility on Indian firms’
our hypotheses are robustly supported. Among the control variables, in internationalization at different levels of Inward Linkages).
line with the theoretical predictions, we find that firm internationali­ At (values of Inward Linkages) dy/dx Std error z p-value
zation is positively associated with firm size and technological intensity
Mean - 1 SD − 0.4167 0.1280 − 3.26 0.001
that represents firm’s traditional ownership advantages. Prior Zero (min value): No linkages − 0.1901 0.0674 − 2.82 0.005
First Quantile − 0.1826 0.0675 − 2.7 0.007
Mean − 0.0629 0.0913 − 0.69 0.491
Mean + 1 SD 0.2910 0.2415 1.2 0.228
Mean + 2 SD 0.6449 0.4079 1.58 0.114
Mean + 3 SD 0.9988 0.5766 1.73 0.083
Max value 19.5399 9.4987 2.06 0.04

Note: The values of inward linkages at two and three standard deviations below
the mean are negative and hence are not economically meaningful to be reported
here. While the value is also negative at one standard deviation below the mean,
it is reported here following the standard practice.

internationalization experience in the form of export sales gains signif­

icance, but only in the first two models.

4.2. Robustness tests

We conducted various tests to check the robustness of our findings.

Fig. 4. Effect of inward (industry) FDI on the relationship between institutional
fragility and Indian firms’ internationalization.
First, we modelled firm internationalization in a two-staged decision
framework, where at the first stage, the firm decides whether to engage
in OFDI or not, and in the second stage, it decides the extent of inter­
nationalization, i.e., how much to invest (volume of foreign investment).
For the purposes of this robustness test, we used an alternative database

9
V. Shirodkar et al.
on OFDI from India, published by the Reserve Bank of India (RBI) - In­
dia’s central bank, and using a smaller (but representative) sample of the
top 500 firms listed on the BSE (Bombay Stock Exchange) .4 RBI data is
also frequently used in Indian OFDI studies (e.g., Munjal et al., 2022;
Nayyar et al., 2021). To model our database, we started by manually
checking the name of each firm in our sample in the RBI’s OFDI data­
base. In the first step, we check if the firm has made an overseas in­
vestment in the given financial year, and in the second step, we calculate
the total amount invested in each year by aggregating the amount of
investment made by the firm in all transactions made during the year.
Our sample for this robustness check is an unbalanced panel of 2363
firm-year observations consisting of 321 firms (after excluding firms
from financial sector and subsidiaries of foreign companies). Between
the sample used for this robustness test (using RBI and BSE-500 data)
and the sample used in our main analysis (using CMIE Prowess data),
there is an overlap of around 26% (i.e., 183 firms), which confirms the
reliability of foreign investment data between the two sources - Prowess
and RBI. For the first stage, we have a dichotomous dependent variable
(OFDIijst) that takes the value 1 if the firm ‘i’ from industry ‘j’ and state
‘s’ engaged in OFDI in year ‘t’, and 0 otherwise. For the second stage, the
dependent variable is the amount of foreign investment. The measures
for institutional fragility, inward FDI and inward linkages are the same
as used in the main analysis. We introduce two additional control var­
iables in this analysis - foreign equity ownership (percentage of equity
capital held by foreign investors) and expenditure on import of capital
goods (ratio of total forex expenditure on imports). We used the Heck­
man two-stage procedure, which involves including inverse-mills ratio
and excluding a variable (linkages represented by foreign expenditure
on import of capital goods) that is more likely to affect the decision to
engage in OFDI (stage-1) than determine the amount of investment,
OFDI, in the second stage. In stage 1, mixed-effect Probit regression is
used since it is considered better than alternative approaches (e.g., logit
model) to compute an inverse Mills ratio for inclusion in the
second-stage analysis (Heckman, 1979). In the second stage, informed
by the results of Hausman test, we used random effects GLS regression
method. The results are found to be consistent and reported in the
Table 7 and Table 8.
Second, to validate that the institutional dimensions that we
included in our institutional fragility measure provide a good repre­
sentation of institutional environment in Indian states, we created an
institutional quality index (at the state level in India) by adapting the
range equalization method by Debroy et al. (2014) .5 The composite
measure achieved the Cronbach’s alpha score of 0.65, indicating an
acceptable level of reliability (Hulin, Netemeyer & Cudeck, 2001;
Ursachi, Horodnic & Zait, 2015). To avoid the possibility that the
method of range equalization and rescaling used to construct the insti­
tutional quality index may affect our main results by magnifying the
state-level variations, we had not controlled for this variable in our main
analyses. However, as a robustness test, we added the institutional quality
index as an additional control variable, since this has been previously
argued to impact the internationalization of emerging market firms
(Chen et al., 2015; Nayyar, 2018). We follow the same hierarchical
approach to testing the hypotheses. The results are presented in Table S3
4
Our rationale for using an alternative dataset for this robustness test was
that in our main analysis (based on the CMIE Prowess database), there were
only 3 firms (out of 707 firms) which did not undertake OFDI at all over our
time-period. As such, there would be very little variability in the OFDI variable
if we used that sample for the robustness test using Heckman two-stage anal­
ysis. Please note, however, that the same sample (based on BSE-500) was used
for both stages of the Heckman analysis.
5
The Economic Freedom in Indian States (EFI) index developed by Debroy et
al (2014) is based on the Fraser Institute’s Economic Freedom of World Index,
and is co-published by the Cato Institute, Friedrich Naumann Foundation and
Indicus Analytics.
10
Journal of World Business xxx (xxxx) xxx
of the Supplementary file (available as an online supplement). We find
support for all our hypotheses.
Third, we tested with an alternate specific measure for firm-level
inward linkages in the form of foreign licensing (Elia et al., 2020).
Given the limited availability of data on foreign expenditure on royalty
and technical know, this robustness analysis had to be carried on
reduced sample size of 847 firm-year observations. The list of control
variables is the same as used in the robustness test 1. Our aim here is to
check for the robustness of findings for hypothesis 3. As can be seen from
models 4 and 5 of the Table S4 of the Supplementary file (available as an
online supplement), the coefficient for the interaction term between
institutional fragility and foreign technology licensing is positive and
significant at 10% level of significance.
4.3. Post-Hoc analyses
We also conducted additional post-hoc tests, the details of which are
included in the Supplementary file (online). First, we tested for the
moderating effect of firm-performance. Strong firm-performance is
argued to increase firms’ risk-taking propensity (Danso, Adomako,
Damoah & Uddin, 2016; Xie, Huang, Stevens & Lebedev, 2019). Spe­
cifically, in the Indian context, greater profitability causes firms to spend
proportionately on corporate social responsibility (CSR), and this may
be argued to increase their internationalization levels (Shirodkar &
Shete, 2021). Our results are presented in Table S5 – Model 1 in the
online supplement, and show that the interaction term Institutional
Fragility*Profitability achieves a positive sign but is not statistically
significant.
Second, we attempted to explore how institutional fragility within
India impacts the internationalization of government-owned firms.
Given that prior research has shown that state-ownership moderates the
relationship between institutional fragility and OFDI (e.g. Shi et al.,
2017), we expected a similar result in the Indian context. To test this
argument, we re-ran the baseline specification on the sample of firms
that are owned by the state or the central government (information
obtained from Prowess, CMIE). We found that in the case the
government-owned firms, the relationship between subnational insti­
tutional fragility and internationalization is insignificant (Table S5 –
Model 2 of the Online supplement), suggesting that Indian SOEs do not
face the same learning challenges caused by institutional fragility as
private firms do. The lack of significance could also be due to the small
sample size (sample of 166 firm year observations). As such, we suggest
that future research can re-test this with a larger sample size.
Finally, we examine the effect of the pace of change in individual
dimensions of institutional reform within India on the internationali­
zation of Indian firms, as well as on the moderating effects of inward
linkages. The results are shown in Tables S6 through S9 of the (online)
supplementary file. The results cannot be compared to the effect of
institutional fragility, as here, we do not account for how the pace of
change in one dimension is related to the pace of change in others. Yet,
the results show some interesting findings and warrant further research.
E.g. only the pace of change in ‘factor market development’ is signifi­
cantly (and negatively) associated with internationalization, whereas
for other dimensions, the effect is insignificant. We then also examine
the effect of the pace of change in institutional reforms on a composite
basis. The results are shown in Table S10 of the (online) supplementary
file. Again, although this is not similar to the effect of institutional
fragility, we find that the effect is consistent with our main findings.
5. Discussion and conclusions
5.1. Theoretical implications
Our findings provide support to all of our hypotheses on the effect of
institutional fragility (Shi et al., 2017) on the internationalization of
Indian firms, and on the moderating effects of inward FDI and inward
V. Shirodkar et al. Journal of World Business xxx (xxxx) xxx

Table 7
Stage 1 results of two-stage Heckman regression (BSE-500 sample).
Stage 1: Decision to engage in OFDI [p(DV=OFDIijst=1)]

Variables Model 1 Model 2 Model 3 Model 4

H1: Institutional fragility − 0.2107** − 0.4050*** − 0.3035*** − 0.4960***

(0.1021) (0.1499) (0.1019) (0.1612)
H2: Institutional Fragility * Inward FDI 9.2176 9.1780
(6.4200) (6.7813)
H3: Institutional Fragility * Inward linkages 0.8540*** 0.8400***
(0.2293) (0.2179)
Inward FDI 0.8812 − 1.9093 0.8807 − 1.892
(0.5698) (1.8822) (0.5736) (1.9593)
Inward linkages − 0.0578 − 0.0590 − 0.4081*** − 0.4077***
(0.0361) (0.0374) (0.1017) (0.1047)
Profitability − 0.1461 − 0.1341 − 0.1521 − 0.1403
(0.2524) (0.2536) (0.2518) (0.2533)
Technological intensity 8.2851*** 8.323*** 8.2739*** 8.3104***
(1.8708) (1.9565) (1.8310) (1.9163)
Foreign equity 1.0462*** 1.0523*** 1.0728*** 1.0793***
(0.2661) (0.2658) (0.2563) (0.2564)
Marketing intensity 1.7189 1.7261 1.6960 1.701
(1.3573) (1.3413) (1.3592) (1.3453)
Business group affiliation − 0.3947** − 0.3953** − 0.3910** − 0.3914**
(0.1546) (0.1535) (0.1543) (0.1533)
Govt owned Dropped

Export intensity 0.3986** 0.3959** 0.3981** 0.3950**

(0.1968) (0.1951) (0.1988) (0.1972)
Debt equity ratio − 0.0141 − 0.0140 − 0.0144 − 0.0143
(0.0092) (0.0092) (0.0093) (0.0093)
Firm size 0.8152*** 0.8175*** 0.8144*** 0.8166***
(0.0901) (0.0901) (0.0903) (0.0903)
Firm age − 0.0013 − 0.0012 − 0.0014 − 0.0013
(0.002) (0.0021) (0.002) (0.0020)
Import share (capital goods) − 0.4578 − 0.4519 − 0.4616 − 0.4557
(0.371) (0.3723) (0.3663) (0.3674)
Industry Dummies Yes Yes Yes Yes
Time Dummies Yes Yes Yes Yes
Constant − 4.2826*** − 4.2359*** − 4.2556*** − 4.2089***
(0.3915) (0.3813) (0.3973) (0.3852)
Observations 2363 2363 2363 2363
Log-pseudolikelihood − 1271.9114 1270.8313 − 1267.9453 − 1266.8845

N = 2363. ***, **, * denotes statistical significance at 1%, 5%, and 10% level of significance respectively. Cluster robust standard errors reported in parentheses. p
(Wald chi-square)***.

firm-level linkages with foreign firms. In relation to our hypothesis 1,
using institutional (North, 1990) and organizational learning theories
(Dodgson, 1993; Huber, 1991), we argued that due to the uncertainties
posed by institutional fragility, firms embedded in these contexts are
forced to learn via bandwagon mechanisms (Belderbos et al., 2011) to
develop more domestically focused business models and competitive
advantages that are less likely to be transferred internationally (Arregle
et al., 2016). This would subsequently reduce their commitment to
internationalization. Our support to this hypothesis extends the findings
of prior studies on the impact of institutional fragility. Shi et al. (2017),
for instance, argued that institutional fragility (in China) causes firms
located in such provinces to ‘escape’ to foreign markets (via OFDI) due
to the uncertainty and complexity caused by institutional fragility. Our
findings from the Indian context suggest that the drivers of emerging
market firms’ decision to undertake ‘OFDI’ may differ from their ability
to make greater amounts of foreign investments, in line with prior
suggestions (Buckley, 2018). Emerging market firms may often
under-anticipate the risks associated with FDI, and may eventually limit
their foreign investment upon realizing the negative performance effects
of OFDI (Haiyue & Manzoor, 2020).
At the same time, in our first robustness test (Table 7), we find that
institutional fragility in India also impacts Indian firms’ OFDI nega­
tively, in contrast to the finding by Shi et al. (2017) based on Chinese
firms. This opens up alternative theoretical possibilities as well the scope
of contextual effects on the effect of institutional fragility on emerging
market firms’ OFDI. As such, we do recognize that although Indian firms
may be inclined to escape institutional fragility, they may be able to do
so within domestic boundaries, rather than overseas. However, this
warrants further research, as our sample size in our robustness test
(Table 7) was considerably smaller than Shi et al. (2017). Yet, it may be
conceivable that whilst Chinese firms are more likely to escape their
fragile home institutions and leverage their external connections to
learn ‘on the job’ (in addition to domestic learning) when engaging in
OFDI (Luo & Tung, 2007; Zhu et al., 2022), Indian firms are more likely
to utilize their learning from their home-based networks prior to
investing overseas. Overall, by taking India as the research context, we
address the call for extending the geographical coverage of subnational
studies which have previously had a strong focus on China (Hutz­
schenreuter, Matt & Kleindienst, 2020; Liu, Lu & Chizema, 2014).
Broadly, we contribute to the vast literature on the OFDI of emerging
market firms (EMFs) that have greatly emphasized the institutional and
learning effects of the home country on their internationalization
(Meyer & Nguyen, 2005; Pattnaik et al., 2021; Ramachandran & Pant,
2010; Xia et al., 2014; Yang, 2018).
Relatedly, our study also emphasizes that the OFDI of firms from
different emerging market countries may be differently motivated (Zhu
et al., 2022). Between China and India for example, previous studies
have noted that state-ownership features as a distinctive factor in Chi­
nese OFDI, but not in the Indian case (Kumar & Chadha, 2009). Among
the BRIC countries, Chinese and Russian OFDI is also argued to be
strongly supported by their home governments, such as via China’s ‘Go
Out’ policy, but Indian and Brazilian OFDI is not (Holtbrügge &

11
V. Shirodkar et al. Journal of World Business xxx (xxxx) xxx

Table 8
Stage 2 results of two-stage Heckman regression (BSE-500 sample).
Stage 2: Amount of OFDI

Model 1 Model 2 Model 3 Model 4

H1: Institutional fragility − 5744.1084** − 8711.3379** − 6724.0772** − 9837.8487*

(2851.9717) (4382.3147) (3426.3927) (5144.9244)
H2: Institutional Fragility * Inward FDI 136,445.41* 140,139.94*
(73,274.282) (79,518.817)
H3: Institutional Fragility * Inward linkages 7699.7285** 8112.7632**
(3635.1282) (3890.55)
Inward FDI − 9136.6816* − 49,891.308** − 8865.8788** − 50,593.684*
(4802.5195) (25,446.603) (4415.9516) (26,750.563)
Inward linkages − 701.7983*** − 740.7413*** − 4348.0728** − 4599.8351**
(254.7559) (276.0442) (1869.4255) (2019.2221)
Profitability − 1340.2559* − 1251.7718 − 1449.1551* − 1374.0383
(803.9917) (817.6026) (840.9004) (847.3341)
Technological intensity 69,877.531*** 72,099.861*** 70,495.32*** 73,136.973***
(14,048.011) (15,451.52) (16,591.56) (18,269.115)
Foreign equity 11,719.858* 12,169.779* 12,299.237* 12,835.433*
(6102.7039) (6369.8037) (6576.9146) (6914.6324)
Marketing intensity 20,145.053** 21,374.891** 20,222.872** 21,568.721**
(9084.9432) (9741.5542) (9780.6198) (10,563.321)
Business group affiliation − 4137.5984*** − 4306.4015*** − 4199.543*** − 4395.5337**
(1447.8153) (1549.9358) (1597.5302) (1723.958)
Govt owned − 13,397.397*** − 13,666.889*** − 12,928.008*** − 13,189.297***
(3630.2055) (3783.9027) (3677.9744) (3849.0554)
Export intensity − 1437.012 − 1306.1379 − 1358.2151 − 1201.2081
(1236.1117) (1192.534) (1112.9) (1070.1144)
Debt equity ratio − 195.5872*** − 201.5545*** − 203.8851*** − 211.2819***
(54.7913) (58.2988) (63.9933) (68.5219)
Firm size 12,972.945*** 13,347.823*** 13,192.693*** 13,631.142***
(4434.04) (4652.3592) (4847.7072) (5120.3982)
Firm age − 34.5536 − 34.4004 − 35.8489 − 35.8597
(30.8703) (30.7567) (31.6658) (31.6407)
Inverse mills ratio 13,074.252*** 13,640.489*** 13,464.009** 14,135.17**
(4699.6253) (5029.3759) (5326.4882) (5746.1798)
Constant − 65,644.515*** − 67,238.269*** − 66,933.183*** − 68,914.511***
(20,319.172) (21,312.457) (22,946.736) (24,245.131)
R squared 0.08 0.09 0.08 0.09

Kreppel, 2012). Furthermore, natural resource seeking is argued as a
primary motive in most Chinese state-owned firms’ OFDI, which often
does not lead to further internationalization of their operations; how­
ever, in the Indian OFDI case, firms are more driven by their strategic
motivations and to scale their operations internationally in subsequent
years (Kumar & Chadha, 2009; Zhu et al., 2022). This also impacts the
location choices of Indian and Chinese firms OFDI differently, with
Chinese firms, for example, internationalizing to geographically closer,
resource rich countries (Duanmu & Guney, 2009), and those which are
signatories of the Belt and Road initiative (Zhu et al., 2022). Finally,
Indian and Chinese firms are also argued to be impacted by different
home-institutional imprints when undertaking OFDI (Munjal et al.,
2022). Indian firms, due to their Commonwealth imprint following the
British colonial rule, are inclined to invest in countries supporting
Commonwealth ideals, whereas this is not the case for Chinese firms.
Thus, our study encourages future research to appreciate the heteroge­
neity of institutional conditions in emerging economies that may influ­
ence the internationalization behavior of firms based in these countries.
In relation to our hypotheses 2 and 3, we contribute to a more ho­
listic understanding of the effect of subnational institutional fragility on
the internationalization levels of EMFs by considering the learning effect
of inward FDI and inward firm-level linkages with foreign firms. Prior
research on learning through linkages by EMFs has largely focused on
their ‘outward’ linkages. E.g. Mathews (2002) suggested that by the
process of forming outward links with foreign firms from advanced
markets and by leveraging these links by overcoming inimitability and
transferability barriers, EMFs can become more engaged in outward
internationalization. Our findings are in line with Lu et al. (2017) who
put forth the inward-outward LLL (IOL3) model as an extended version
of the LLL model (Mathews, 2002), stressing the inclusion of inward
linkages in the home country. Our support to H2 and H3 suggests that
inward FDI and linkages reduce the adverse learning effects caused by
institutional fragility and improves firms’ internationalization levels.
5.2. Managerial and policy implications
The findings of our study present important implications for man­
agers and policymakers. Specifically, for managers of firms located in
institutionally fragile states in emerging markets, our findings empha­
size the importance of learning from foreign firms through industry and
other firm-level collaborations as a way to diversify learning, and to
engage and commit more to international markets. Learning from these
sources would be instrumental in gaining generic and internationally
deployable skills and knowledge, and to develop internationally scalable
products and services. For policymakers in developing countries, our
results establish a clear need for synchronizing the pace of reform across
various institutional dimensions to improve the competitiveness of local
firms. Higher institutional fragility not only impedes the scale of out­
ward internationalization and indigenous R&D activities aimed at
capability upgradation by local firms, but also results in loss of economic
activity, tax revenue and employment opportunities, as firms may shift
their operations to low fragility states. Our findings also imply that
attracting inward FDI through policy instruments reduces the institu­
tional fragility effect. A case in point is India’s “Make in India” campaign
which, since 2014, has been successful in attracting FDI in the
manufacturing sector – an industry largely dominated by China over
previous decades (Saranga, Mudambi & Schotter, 2017). Following this
campaign, Indian states such as Maharashtra and Uttar Pradesh made
various efforts to attract manufacturing FDI competitively in their states,
by reducing government intervention and bureaucracy in various ways

12
V. Shirodkar et al.
(Nagaraj, 2019). This has not only improved the transfer of valuable
technology and skills from foreign to local firms but also improved local
firms’ international competitiveness.
5.3. Limitations and future research
Despite our contributions, we do recognize some limitations of our
study that create avenues for future research. First, we recognize that
our time-varying measures of subnational institutions in India could be
broadened to include more indicators. However, data on such indicators
are either available for one year only or only for few state-years of the
sample period, thereby restricting the use of a broader measure in this
study. Likewise, a firm may have its headquarters in an institutionally
fragile state but may have other domestic subsidiaries in less fragile
states. Although a firm greatly derives its learning from its ‘home’
environment, recent studies on reverse knowledge transfer (Rabbiosi,
2011) suggest that subsidiaries – both domestic and foreign can also be
an important source of learning for headquarters, especially for
emerging market firms (Nair, Demirbag & Mellahi, 2016). Due to our
data limitations, we are unable to capture this, and we suggest that this
could be an important area for future research. Second, we also recog­
nize that emerging markets are heterogeneous (Estrin, Meyer & Pellet­
ier, 2018), and our findings based on examination of firms from India
cannot be generalized to other emerging market contexts without
caution. Future studies may include multiple countries in the analysis
and extend this research – particularly as institutional fragility can be
measured at both cross-national and sub-national levels. Third, and
finally, our dependent variable can be extended beyond internationali­
zation to include the host characteristics where the firms have invested.
This would allow a more nuanced analysis of the learning effects caused
by institutional fragility based on host market characteristics. Yet,
despite these limitations, we believe that we make a worthwhile
contribution to the literature on the internationalization of EMFs, and to
the literature on institutional aspects of foreign investment.
Data availability
Data will be made available on request.
Supplementary materials
Supplementary material associated with this article can be found, in
the online version, at doi:10.1016/j.jwb.2023.101502.
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