Edited by Hemant Merchant
Chapter 3: Institutional theory and institution building in emerging economies
Emerging economies are characterized by turbulence and uncertainty that may take the form of rapid political, economic, and institutional changes that are often accompanied by relatively underdeveloped factor and product markets (Wright, Filatotchev, Hoskisson, and Peng, 2005). Emerging economies can be distinguished from developed economies by virtue of their strong economic growth, with many emerging economies experiencing gross domestic product (GDP) growth rates that dramatically outpace those in developed countries. Because of their strong growth rates and burgeoning economic development, in 2013 for the first time more than half of the world’s GDP originated from emerging economies (Economist, 2013). Although some of the highest growth rates over the last two decades came from Brazil, Russia, India, and China (i.e., the BRIC countries), their share of global output is no longer rising as fast as it did in the 2000s. Emerging economies can also be distinguished from developed economies on the basis of institutional constraints (Child and Tsai, 2005; Peng, 2000; Wright et al., 2005), institutional distance (Xu and Shenkar, 2002), and institutional voids (Khanna and Palepu, 1997). Institutional constraints refer to government and societal institutions that impose regulatory constraints upon the strategies that firms may pursue and, as such, they are related to the regulatory pillar as outlined by Scott (1995). Xu and Shenkar (2002) argue that institutional distance between the home and the host country must be matched to firm-level attributes in order to establish the organizational legitimacy of the foreign subsidiary in the host country.
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