Institutions and Foreign Subsidiary Growth in Transition Economies: The Role of Intangible Assets and Capabilities

• Published date: 01 June 2016
• Date: 01 June 2016
• DOI: http://doi.org/10.1111/joms.12169

Institutions and Foreign Subsidiary Growth

in Transition Economies: The Role of Intangible

Assets and Capabilities

Mario Kafouros and Murod Aliyev

University of Leeds

ABSTRACT Although transition economies experience significant institutional transformations

that vary in their degree and pace, scholarly knowledge of what distinguishes more successful

foreign subsidiaries from less successful ones in such environments is limited and inconsistent.

We enhance the understanding of this subject by examining how variations in the institutional

development of transition economies influence the usefulness of a subsidiary’s intangi ble assets

and capabilities and, in turn, their effectiveness in enhancing its growth. Prior research assumes

that foreign subsidiaries that operate in any given environment are always better off when

they possess strong intangible assets and capabilities. Our analysis of more than 33,000

observations in 14 transition economies challenges this view and enables us to explain why

some subsidiaries grow more quickly in less-developed institutional environments, whereas

others more quickly in countries with institutions that are more developed. More specifically,

we show that although a subsidiary’s intangible assets enhance its growth in transition

economies with stronger institutions, these effects are particularly weak or insignificant in

transition countries with less developed institutional environments. Conversely, a completely

different pattern emerges for subsidiary capabilities, with their marginal effects on subsidiary

growth being significantly higher in countries that are institutionally less developed than in

transition countries with more developed institutions.

Keywords: capabilities, institutions, performance, resources, subsidiary growth, transition

economies

INTRODUCTION

The study of the determinants of foreign subsidiary growth and performance is one of

the most fundamental topics in international business and management research.

Although this literature initially focused on developed countries, recent work emphasizes

Address for reprints: Mario Kafouros, Leeds University Business School, University of Leeds, UK (M.

Kafouros@leeds.ac.uk).

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C2015 John Wiley & Sons Ltd and Society for the Advancement of Management Studies

Journal of Management Studies 53:4 June 2016

doi: 10.1111/joms.12169

the theoretical value and managerial importance of examining emerging countries

(Hoskisson et al., 2013; Wright et al., 2005; Xu and Meyer, 2013), particularly transition

economies in Central and Eastern Europe (CEE) (Meyer and Peng, 2005; Shinkle and

Kriauciunas, 2010). Even among emerging countries, transition economies are special

because of their radical switch from a socialist system to a market-based economy

(Hoskisson et al., 2000; Wright et al., 2005). Because this transition is characterized by

the transformation of various institutions and occurs at different rates across countries,

transition economies provide a unique context for examining the predictive power of

existing and new theories (Danis et al., 2010; Peng, 2003).

Prior research on subsidiary growth and performance has examined inter-firm varia-

tions by using two distinct theoretical lenses, namely, the resource-based view and insti-

tutional theory. The first explanation hinges upon the use and internalization of firm-

specific intangible resources (Barney, 1991; Dixon et al., 2010; Peng, 2001; Teece et al.,

1997). The literature broadly defines intangible resources to include both intangible assets

and capabilities (Hall, 1992, 1993). Intangible assets are a firm’s identifiable soft assets,

including intellectual property, technology, licences and other reputational assets (Dene-

kamp, 1995; Hall, 1992, 1993; Roberts and Dowling, 2002). They are part of a firm’s

resource set that in combination with other external assets can lead to a stream of prod-

ucts, services and advantages (Amit and Schoemaker, 1993). Capabilities, however, can-

not be easily identified. They hinge upon the overall efficiency with which a firm

deploys and allocates its assets to achieve certain outcomes (Amit and Schoemaker,

1993; Huesch, 2013). Therefore, capabilities can be conceptualized as the firm’s ability

to convert or transform inputs (assets) into desired outputs (Dutta et al., 2005) –i.e., the

primary function of capabilities is to increase the effects or productivity of other assets

possessed by the firm (Makadok, 2001). Building on these concepts, prior studies suggest

that intangible assets and firm capabilities involve high levels of specificity, enabling the

subsidiaries of multinational enterprises (MNEs) to compensate for their liability of for-

eignness and to compete successfully in host countries. According to this view, therefore,

MNEs enter and expand into new markets because they can transfer, internalize, com-

bine and exploit valuable assets and capabilities in their subsidiaries (Buckley and Cas-

son, 1976; Delios and Beamish, 2001).

The second conceptualization suggests that performance outcomes are primarily

determined by the development of institutions – defined as regulative, normative, and

cognitive structures and processes – in the host country (North, 1990; Scott, 1995). Both

formal and informal constraints and the development of institutional frameworks can

have a profound effect on a firm’s behaviour and expansion (Henisz and Swaminathan,

2008; Meyer and Peng, 2005, p. 613; North, 1990; Peng, 2004; Peng et al., 2008,

p. 923; Williamson, 2000). Foreign subsidiaries must respond to institutional pressures

in the host country given that institutional settings create incentive-constraint structures

within which firms operate. Therefore, because institutional development changes the

rules of the game (North, 1990), it plays an important role in explaining foreign subsidi-

ary growth in the host country (Chan et al., 2008; Chung and Beamish, 2005; Kim

et al., 2010; Makino et al., 2004; Taussig and Delios, 2014).

However, despite these theoretical predictions, empirical evidence concerning the

performance effects of institutional development is conflicting. Whereas some evidence

581Institutions and Foreign Subsidiary Growth in Transition Economies

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C2015 John Wiley & Sons Ltd and Society for the Advancement of Management Studies