Institutional voids

Question 1

What is an institutional void?

Answer 1

An institutional void refers to the absence or underdevelopment of institutions that enable and support market activity (Khanna & Palepu, 1997)

Question 2

What are institutions?

Answer 2

Institutions can refer to a country’s rules & policies, governmental structure, cultural norms & standards .

Question 3

How do institutional voids affect international business?

Answer 3

Institutional voids hamper the ease by which buyers & sellers can interact. This results in higher transaction costs, which in turn reduces the likelihood of efficient outcomes.

Question 4

Voids disturb the functioning of markets. What kind of problems arise from institutional voids?

Answer 4

• opportunism (corruption)
• excessive rents to a few actors (reducing entrepreneurship)
• excessive market power (discouraging competition)

Question 5

Firms can respond to or react to institutional voids. How might firms mitigate the risks of institutional voids?

Answer 5

• Internalise activities to reduce transaction costs.
• substitute firm’s private information to bridge the information void for better investment decisions
• Institutional borrowing to build contract safeguards using another country’s institutions.
• Signalling using CSR to convey credibility, reduce transaction costs, & enhance legitimacy.

Question 6

Institutions serve as “the rules of the game” (North, 1990). Why are formal & informal institutions so important?

Answer 6

Formal institutions & informal institutions influence the transaction costs of business activities. Higher costs for procuring materials, capital, information, skills, new ideas etc. (*countries differ in how institutions affect the economy, society, & businesses - common law vs civil law system).

Question 7

Firms can avoid, compensate, substitute, remedy or take advantage of institutional voids. How might firms use non market exchanges to its benefit?

Answer 7

Firms may rely more on informal institutions, or try to influence the government to change institutions (laws/ regulations). Social & political actions include social entrepreneurship, lobbying of governments. MNE’s may engage in bribery (corruption) of the government (especially when bribery is an accepted business practice in a country). Examples include: Samsung (‘Chaebol’), State-Owned Enterprises).

Question 8

How does corruption weaken institutions?

Answer 8

• Corruption lowers investment & retards economic growth.
• Some firms may obtain excess rents (decreasing competition) & creates monopolies.
• If rent seeking is proven more lucrative than productive work, talent will be mis allocated, which has adverse consequences for the country’s growth rate.