The influence of economic institutions on strategic choice: Evidence from transition economies

George Allen Shinkle, Purdue University

Abstract

The choice of strategy is generally regarded as a critical determinant of firm survival and performance, but our understanding has focused on factors internal to the firm and external competitor threats. Missing from previous work and thus our understanding is the role of economic institutions in influencing the choice of strategy. To address this gap regarding the firm-level choice of strategy, I examine the influence of the economic institutional environment and internal and external capabilities on a sample of Central and East European firms. I analyze the strategic response after a permanent shift induced by an exogenous shock because such situations require firms to reevaluate, change, or reselect their strategy. The model explains choice in an ordered progression of strategic choices consisting of; (1) cost efficiency, (2) sales growth, and (3) competitive position. This progression is based on the level of innovation and risk-taking required. The primary hypothesized relationships are; (1) the degree of market orientation in the economic institutions relates to higher choices in the strategy progression, (2) the level of organizational capabilities, both internal and external, relates to higher choices in the strategy progression, (3) internal and external capabilities positively interact regarding choices in the strategy progression, and (4) the institutional environment and capabilities exhibit a positive interaction regarding choices in the strategy progression. The internal capabilities evaluated are the technical capabilities of the firm. The external information capabilities considered are from three distinct sources. These three sources of external information capabilities include the market, experts, and the government. My results provide support for the hypothesized relationships across various model configurations. However, some of the relationships are complex and different than expected. In total, I find strong support for the importance of economic institutions regarding the choice of strategy. I also find support for the importance of technical capabilities and external information from expert sources on strategic choice. I find an unexpected negative relationship between technical capabilities and the chosen level in the strategy progression. I find significant complementary relationships between technical capabilities and expert information capabilities; however, contrary to my prediction this complementary relationship does not result in higher level choices in the strategy progression until the institutional environment is considered. I find the predicted positive 3-way interaction relationship for the institutional environment-technical capabilities-expert information capabilities interaction. These results support my arguments that motivation, ability to implement, and knowledge of what to do are simultaneously required to select more innovative and risky strategies. However, the interaction results also suggest that firms with low technical capabilities and low external expert information capabilities also chose innovative and risky strategies when the institutional environment has high market orientation. This unexpected result is explored in more detail. In addition to the primary model of my study regarding the choice of level in the strategy progression, I also provide three additional analyses. I offer an alternative model using the choice of importance rating for competitive position strategy. In this analysis, I find similar relationships to my primary model. I also empirically test six institutional measures which each capture an aspect of the level of market orientation of the environment. These models demonstrate how various measures of institutional freedom reflect on the strategy choice model. Controlling corruption is shown as a significant factor in comparison to market oriented regulations regarding choice. Furthermore, I test a simplified model of performance as a function of the strategy choices. Firms that give high importance to a strategy (high priority to their goals) rate their success as being higher. Additionally, growth and competitive position strategy choices are indicated as leading to higher success than cost efficiency strategies, in my tested context. In sum, the strategic choices of firms are influenced by motivation, ability, and knowledge; both individually and in combination. This research improves our understanding of how the economic institutional environment and organizational capabilities affect the strategic choices of firms and contributes to the continuing development of the institution-based view of business strategy.

Degree

Ph.D.

Advisors

Kraiuciunas, Purdue University.

Subject Area

Management|Economics

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