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Knowledge will set you free: enhancing the firm’s responsiveness to institutional change

Research paper by Luis Alfonso Dau

Indexed on: 09 May '16Published on: 09 Mar '16Published in: International Journal of Emerging Markets



Abstract

International Journal of Emerging Markets, Volume 11, Issue 2, April 2016. Purpose This empirical paper combines notions from the POST Model of Economic Geography and Learning Theory from International Business to study how firms may enhance their responsiveness to institutional processes and changes through different forms of international learning. Focusing on one form of institutional changes, namely pro-market reforms, the article analyzes how firms may boost the potential benefits from such changes through international strategies that increase their access to knowledge spillovers and absorptive capacity. These strategies include international product diversification, enhancing innovation capabilities, informal institutional exposure, accumulated internationalization knowledge, and overall experiential knowledge. Design/methodology/approach The hypotheses are tested using generalized least squares models with AR(1) panel-specific autocorrelation and heteroskedasticity correction. Based on the preliminary analyses performed in these studies, we also execute a Hausman test, Bartlett’s test, and James/Alexander’s test. The results of these analyses indicate that the use of random effects is appropriate; that moderating effects are present; and that multivariate analyses using these moderators are suitable, respectively. Findings The results indicate that pro-market reforms have a positive and significant effect on the profitability of firms from developing countries. Furthermore, they provide support for the positive moderating effects of international product diversification, innovation capabilities, informal institutional exposure, accumulated internationalization knowledge, and overall experiential knowledge. Together, these findings suggest that through their international strategic decisions, MNEs can enhance their access to knowledge and become more responsive to institutional changes in their home market. Research limitations/implications This article contributes to the Economic Geography literature by linking the POST model with the classification of types of knowledge from Learning Theory. The paper analyzes how characteristics of place, organization, space, and time play a different role for each of the three basic types of knowledge that is relevant for international firms: institutional, business, and internationalization. Furthermore, the paper contributes to the literature on reforms and firm profitability by delving deeper into the moderating effect of strategic decisions on the relationship between reforms and firm performance. This allows us to have a deeper comprehension of how various sources of international learning may enhance the responsiveness of firms to institutional changes. Originality/value The paper provides several important contributions to the international strategy literature. First, it contributes to Learning Theory by combining it with the POST Model of Economic Geography to study how each of the three sources of knowledge (and their subcomponents) can be further broken down into factors of Place, Organization, Space, and Time. Second, it contributes to the literature of institutional change by studying how knowledge acquired through vastly different means can provide firms with sources of competitive advantage over other local competitors when responding to institutional changes in their home market. Third, it contributes to the literature on reforms and profitability by studying five novel moderators of this relationship.