Institutional Leverage Capability: Creating and Using Institutional Advantages for Internationalization

• Published date: 01 February 2016
• Author: Amit Karna,Ansgar Richter,Christian Landau,Klaus Uhlenbruck
• DOI: http://doi.org/10.1002/gsj.1108
• Date: 01 February 2016

INSTITUTIONAL LEVERAGE CAPABILITY:

CREATING AND USING INSTITUTIONAL

ADVANTAGES FOR INTERNATIONALIZATION

CHRISTIAN LANDAU1, AMIT KARNA2*, ANSGAR RICHTER3, and

KLAUS UHLENBRUCK4

1Department of Management and Economics, EBS Business School,

Oestrich-Winkel, Germany

2Business Policy, Indian Institute of Management Ahmedabad, Ahmedabad,

India

3Organisation and Management Group, University of Liverpool Management

School, Liverpool, United Kingdom

4School of Business Administration, Department of Management and

Marketing, University of Montana, Missoula, Montana, U.S.A.

Plain language summary: Home country institutions, for instance chambers of commerce

and

educational systems, can support firmsʼefforts to expand into foreign markets. However,only

some firms utilize this support andbecome successful in international markets.We propose

that

these firms have a particular ability to leverage institutions; they have institutional lever

age

capability. More precisely ,we explain that firms need to be aware of the institutional support,

access it, decide to adopt it, and adapt their resources to fully exploit the institutions available

in their home countries. Werecommend that firmsdesign organizationals tructures and pro-

cesses to leverage institutions for internationalization. We illustrate our suggestions with

the

example of the German ʻhidden champions,ʼmedium-sized firms that are global market leaders,

and how they leverage institutions to internationalize.

Technical summary:We developthe notion of a firmʼsinstitutionalle verag e capability in

order

to explain heterogeneity among firms with respect to their abilityto turn a locationʼs generally

available institutional benefits into firm-specific institutionalcompetitive advantages.Institu-

tional leverage capability represents a higher-orderconstruct formed bythe four components of

awareness, access, adoptionan dadaption of institutional be.nefits. It is of particular

strategic

relevance in institutional contexts that provide high levels of support to firms.Firms can

use

institutional competitive advantages, which they generate by leveraging their homecountry’s

institutions, for the purpose of internationalization.We illustrate our argument using

the

example of several mid-sized German companies that have leveraged home-country

institu-

tional benefits and attained leading positions in international markets. Copyright © 2016

Strategic Management Society.

INTRODUCTION

A basic premise of international business research is

that firms are embedded in the institutional settings of

the locations in which they are based (Kostova,1997).

Whereas earlier research understood institutions as

constraining the economic activity of firms (e.g.,

Keywords: Institutional advantages; home country environ-

ment; location-based advantages; institutional leverage capabil-

ity (ILC) internationalization

*Correspondence to: Amit Karna, Business Policy,Indian Insti-

tute of Management Ahmedabad, IIM Campus, Vastrapur,

Ahmedabad-380015, India. E-mail: karna@iimahd.ernet.in

Global Strategy Journal

Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/gsj.1108

Copyright © 2016 Strategic Management Society

Global Strat. J., 6: (2016)

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50 68

DiMaggio and Powell, 1983; North, 1990), current

work suggests that local institutions support firms and

can be a source of advantage for firm located in the

respective institutional environment. Scholars (e.g.,

Hall and Soskice, 2001) have argued that the institu-

tional structure of the local economy can benefit firms

engaging in particular types of activities.

Such institutional advantages can also be firm spe-

cific in nature. Martin (2014) suggests that institu-

tions may not only provide firms with generic or

comparativeadvantage, but also constitute a source of

competitive advantage and that firms with institu-

tional competitive advantage are capable of creating

idiosyncratic resources via interaction with their

institutional environment. For example, home

country institutions may give firms unique access to

location-based resources such as financial, human,

and social capital required for internationalization

(Dunning and Lundan, 2008; Xu and Meyer, 2013).

Firms can internalize benefits provided by their

domestic environment and turn them into firm-based

ownership advantages (Hymer, 1976; Nachum and

Rolle, 1999a, 1999b). Such benefits, although

location-based, can also result in firm-specific insti-

tutional advantages. Firms can exploit such advan-

tages to overcome the liability of foreignness in

international markets (Dunning, 1980; Hymer, 1976;

Zaheer, 1995).

Martin’s (2014) discussion of institutions as a

source of competitive advantagehas left several ques-

tions unanswered that we seek to address in this

article. Specifically,how and why can some firms turn

local institutional benefits provided to all firms situ-

ated in the respective location into firm-specific com-

petitive advantages, whereas others are unable to do

so? Furthermore, how do firms utilize home country-

based institutional competitive advantages for the

purpose of internationalization, and when is the

exploitation of such advantages of particular

relevance?

To answer these questions, we introduce the

notion of institutional leverage capability (ILC) and

explain its role in the internationalization of firms.

We define a firm’s ILC as its capacity to continu-

ously identify local institutional benefits, establish

and maintain the legitimacy to engage with the insti-

tutions, purposefully interact with them, and config-

ure its existing resources in such a way as to

integrate institutional benefits for achieving its

desired end. Drawing on the dynamic capabilities

literature (Helfat et al., 2007; Teece, 2007), we

identify four components that jointly form the

higher-order construct of a firm’s ILC—awareness,

access,adoption, and adaptation—and discuss their

microfoundations. Our central argument is that dif-

ferences in ILC account for the heterogeneity among

firms in their ability to use location-based institu-

tional factors for strategic purposes, i.e., for creating

institutional competitive advantage and using it, for

example, for internationalization. In this context, we

emphasize the capacity of firms to adjust and

develop their resource base with the help of home

country institutional benefits. We argue that the

success of firms in international operations partially

results from both the existence of a home country

base that provides institutional benefits and the

capacity of firms to integrate them effectively in their

own resource base. We explore the missing link

between country-level institutional benefits and their

use at the firm level as a form of competitive advan-

tage, specifically in the context of internationaliza-

tion strategies.

Drawing on the work of Simon (1992, 1996, 2009,

2012), we illustrate our theoretical argument using

the example of the success at internationalizing of

many German ‘hidden champions’—small- to

medium-sized and relatively unknown companies

that have world-leading marketshares in their lines of

business.1Some characteristics of these firms could

be construed as putting them at a disadvantage in the

pursuit of internationalization strategies as compared

to larger firms whose resources and brands may reso-

nate more easily with suppliers, buyers, investors,and

employees. Despite this condition, many of the

‘hidden champions’ haveleveraged institutional ben-

efits originating from their home country environ-

ment, e.g., a well-developed system of vocational

qualifications, a strong engineering culture, and a

network of contacts and access to trading partners

provided by trade and industry organizations, in

order to overcome barriers to internationalization

(Meyer-Stamer and Wältring, 2000; Simon, 2012).

These examples illustrate that home country institu-

1Simon (2012) puts particular emphasis on the international-

ization of the firms he identifies as ‘hidden champions.’ In his

work, Simon points out that the ‘hidden champion’ story is not

a purely German phenomenon. At the same time, he finds a high

concentration of such relatively unknown market leaders in

Germany and the adjacent countries of Switzerland,Austria and

Luxembourg, and he seeks to identify the drivers underlying

their success. Simon recounts that the ‘hidden champion’ story

originated from discussions with Theodore Levitt about the

global market leadership of relatively unknown companies

in the mid-1980s. Levitt (1993) popularized the notion of

‘globalization.’

Copyright © 2016 Strategic Management Society

DOI: 10.1002/gsj.1108

Global Strat. J., 6:50 68(2016)

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Institutional Leverage Capability and Internationalization 51