3.

INSTITUTIONAL VOIDS
AND TRANSITIONAL
ECONOMIES
Emerging markets
Fall 2023
Jakob Arnoldi

JAKOB ARNOLDI
PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
 AGENDA AND LEARNING GOALS
1. Understand market intermediaries.
2. Make institutional voids more specific.
3. Begin to get a grasp of how firms can strategize around institutional voids.
4. Understand the institutional approach to firm strategy.

JAKOB ARNOLDI
PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
 A DIFFERENT VERSION OF
LEARNING GOALS…
You should be able understand the following:

“An institutional voids lens has thus helped to explain key features of
emerging markets and provided greater clarity in how they differed from
developed markets. Institutional voids can occur in any of a number of
institutional arenas, including political, legal and social systems, foreign
investment and trade-related institutions, and product, labor and capital
markets (Khanna & Palepu, 2010 ; Chacar, Newburry, & Vissa, 2010 ). When
these critical institutions operate poorly, they hinder the mechanisms that
allow buyers and sellers to come together, increasing the transaction costs
of market activity. These costs not only affect the connections between
producers and consumers, they also dampen incentives for innovation and
the leveraging of unique knowledge, talent and skills.”
(Doh, et al., 2017)

JAKOB ARNOLDI
PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
 RECAP: MARKET INSTITUTIONS
​Rules of the games which:
• Coordinate transactions;
• create stability (participants know what to expect);
• reduce information asymmetries;
• reduce transaction costs;
• create trust;
• makes it possible for strangers to transact.

JAKOB ARNOLDI
PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
 RECAP: MARKET
INTERMEDIARIESRECAP:
​Market intermediaries provide information, act as mediators and otherwise
help bring sellers and buyers together.

​If organizations are players and institutions are rules, then market
intermediaries are (other firms) helping/maintaining/implementing and
monitoring the rules and otherwise servicing the players in the games so that
the games run smoothly, for example (but not only) the referees.

JAKOB ARNOLDI
PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
 RECAP: COMBINED, MARKET INSTITUTIONS
AND MARKET INTERMEDIARIES
​Establish, maintain and enforce rules of the games which:
• Coordinate transactions;
• create stability (participants know what to expect);
• reduce information asymmetries;
• reduce transaction costs;
• create trust;
• makes it possible for strangers to transact. Yes, same list as
before

JAKOB ARNOLDI
PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
 RECAP: RELATIONSHIP BETWEEN MARKET
INSTITUTIONS AND MARKET INTERMEDIARIES
Market intermedieries often provide and dissminate
codified information, e.g.:
​Market intermediaries
more tangible than • Certificates
institutions. • Underwritings/attestations (e.g. signed auditing
​Regularized behavior
How is codified information linked to institutions?
reports).
caused by both.
• Codified means standardized information.
• Standardized means de-contextualized, regular, and
regulated.
• Regulation hinges on rules = institutions.

DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
JAKOB ARNOLDI
PROFESSOR
EXAMPLE: Accounting
 RELATIONSHIP BETWEEN MARKET INSTITUTIONS AND MARKET
INTERMEDIARIES

Market intermediaries generally only work if institutionally supported and

embedded. Examples:
​Trustworthyness of banks relying on legislation and enforcement.
​Credit card payment systems, distribution networks, insurance systems, need
legal guarantees.
​Arbitrators operate based on legislation.

JAKOB ARNOLDI
PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
 TAXONOMY OF MARKET
INTERMEDIARIES
1) Credibility enhancers (International Organization for Standardization, AACSB)
2) Information analyzers and advisors (stock analysts, rating agencies or
market analysts consultants.
3) Aggregators and Distributors (retailers, handlers and couriers, venture
capital funds)
4) Transaction Facilitators (Visa or PayPal, financial exchanges,
5) Adjudicators (courts and arbitrators)
6) Regulators and policy makers (consumer protection agencies, financial
authorities)

JAKOB ARNOLDI
PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
 Source:

Khanna and

Palepu (2010)

JAKOB ARNOLDI
PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
 ASSESSING INSTITUTIONAL VOIDS

​Look for the tangible market intermediaries.

​Look for the enforcement of formal rules (i.e. legislations and regulation)
​Look for degree of state involvement.

JAKOB ARNOLDI
PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
 ANALYSING INSTITUTIONAL VOIDS ACROSS
COUNTRIES (MARKETS):
Product markets: allocation
1) Is there a retail infrastructure 8) Financial information
2) Payment and transaction systems
3) Supply networks
Labor markets:
4) Rights of workers
5) Managerial talent pool
6) Educational system
Capital markets
7) Efficiency of banks/capital

JAKOB ARNOLDI
PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
 ANALYSING INSTITUTIONAL VOIDS
ACROSS COUNTRIES (MACRO
CONTEXT):

1) Independence of media, leverage

of NGOs.
2) Political restrictions, barriers for
trade and investment.
3) Bureaucratic/legal efficiency.
Protection of property rights.

JAKOB ARNOLDI
PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
 EXERCISE
WWW.POLLEV.COM/BADM2

JAKOB ARNOLDI
PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY Source: European Chamber of Commerce China –
 SECOND PART: HOW FIRMS CAN STRATEGIZE
AROUND INSTITUTIONAL VOIDS?

JAKOB ARNOLDI
PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
 HOW FIRMS CAN STRATEGIZE AROUND INSTITUTIONAL VOIDS?

1. Substitute
• Use informal instead of formal institutions.
In the case
2. Internalize of MNCs:
• Transact within firms rather than between firms. adapt
through
• Sourcing or value chain integration JVs/alliance
• Greenfield investment rather than acquisition… s

• (Market or hierarchy
• Make or buy)
3. Fill/develop
• Act as market intermediaries.
• Push for reform and regulation.
4. Avoid/wait
JAKOB ARNOLDI
PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
 SUBSTITUTING: TRANSACTIONS CONDUCTED IN EMERGING
MARKETS SUPPORTED BY INFORMAL INSTITUTIONS

- Social
networks/connections
- Family
- Handshake deals

JAKOB ARNOLDI
PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
 WHAT ARE FAMILY AND SOCIAL
CONNECTIONS?
​Institutions! ​As institutions they:
​But informal institutions. ​ reate trust.
C
​Informal rules of the game. ​Reduce information asymmetries.
I​ nformal market intermediaries. ​ reate expected and expectable patterns of behavio
C

JAKOB ARNOLDI
PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
 INTERNALIZATION
​Using hierarchical forms of coordination as opposed to
contractual:

• Less sourcing – more (related) diversication.

• Business groups with internal transactions.

For domestic EM firms the same as

substitution? For foreign firms
defensive management of LOF?

JAKOB ARNOLDI
PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
 FILLING/DEVELOPING
​Filling by becoming market intermediary.
​Lobbying for reforms in order to gain competitive advantage.

JAKOB ARNOLDI
PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
 WAIT…

JAKOB ARNOLDI
PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
 SPECIFIC EXAMPLES
​In emerging markets firms rely more on support obtained from/via informal
institutions.
• Family owned firms
• Transactions through networks
• Business groups (internalization)
• Political support

JAKOB ARNOLDI
PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
 SIDE EFFECTS OF INFORMAL
INSTITUTIONS
​Increase effect of distance.
• Informal institutions are culturally grounded.
• Reduce talent pool.
• Reduce efficiency of markets.
• Increase corruption.
• Increase opportunistic behavior.
• Increase agency costs and transaction costs.

JAKOB ARNOLDI
PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
 THINGS ARE NOT BLACK AND
WHITE
​Emerging markets have informal and developed formal?
​ etworks matter only in emerging markets?
N
​Downsides to informal institutions but also downsides to formal?

JAKOB ARNOLDI
PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
 SUMMATION
​Market intermediaries rely on, and reproduce and stabilize, market institutions.
​ irms can substitute for institutional voids by using informal institutions and/or
F
by internalizing transactions.
​Emerging market firms do both.
​For Western MNCs these options are also viable but so are developing and
waiting strategies.

JAKOB ARNOLDI
PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
 A PRIMER FOR NEXT TIME

Below is a very simple visual representation of a production process of bicycles: (different

kinds of) raw material (left) is going into a factory (middle) that is manufacturing bicycles
(right). That illustration is in fact too simple. Actual production of bicycles entails much
more complex value chains with many more stages of production. Please try to draw up a
more realistic production process, beginning with raw materials and ending with a bicycle
sold in a retail outlet. When you have done that, think about whether you expect the all the
production and value creating processes to be handled by a single firm – why?/why not?
And think about how this relates to the articles by Williamson.

JAKOB ARNOLDI
PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY