MNE microfoundations and routines for building a legitimate and sustainable position in emerging markets

• Date: 01 November 2017
• Author: Pervez N. Ghauri,Ulf Elg,Simon Collinson,John Child
• DOI: http://doi.org/10.1002/job.2214
• Published date: 01 November 2017

SPECIAL ISSUE ARTICLE

MNE microfoundations and routines for building a legitimate

and sustainable position in emerging markets

Ulf Elg

1

|Pervez N. Ghauri

2

|John Child

2,3

|Simon Collinson

2

1

Lund University, Lund, Sweden

2

University of Birmingham, Birmingham, U.K.

3

University of Plymouth, U.K.

Correspondence

Professor Pervez N. Ghauri, University of

Birmingham, Edgbaston Park Road,

Birmingham B15 2TY, U.K.

Email: p.ghauri@bham.ac.uk

Funding information

Ragnar Soderberg's Foundation, Grant/Award

Number: ERN:13/09

Summary

A number of studies have analysed how multinational enterprises (MNEs) develop appropriate

strategies for managing the institutionally different contexts of various markets. However, we still

know rather little about how MNEs manage different institutional pressures when they operate in

emerging markets. These markets have a higher level of uncertainty as their values and structures

undergo change. This paper investigates the microfoundations and routines that can be part of

developing a firm's capability to achieve a legitimate and environmentally sustainable position

in emerging markets. We focus upon the microfoundations and routines for managing regulative,

normative, and cultural–cognitive pressures. The paper utilizes an extensive qualitative case

study approach. It reports a study at corporate and subsidiary levels of 3 Swedish MNEs in the

in 4 markets: Brazil, Russia, India and China. The study identifies a set of routines for managing

each of the 3 institutional forces and supporting microfoundations at individual, interactive, and

structural levels. We are thus able to offer new insights on how the institutional context interacts

with MNE strategies and identify more generic routines and microfoundations behind the capa-

bility for developing a sustainable market position.

KEYWORDS

emerging markets, institutional theory, microfoundations, MNEs, routines

1|INTRODUCTION

The capability to grow and develop a sustainable competitive position

in emerging markets is a key strategic factor for multinational enter-

prises (MNEs; Cavusgil, Ghauri, & Akcal, 2013; Hadjikhani, Elg, &

Ghauri, 2012). At the same time, cultural and contextual forces present

major challenges (Bartlett & Ghoshal, 2000; Elg, Ghauri, &

Tarnovskaya, 2008; Gooderham, Minbaeva, & Pedersen, 2011; Meyer

& Peng, 2016; Zaheer, 1995). These localized factors require unique

capabilities from MNEs, while they often strive to pursue a global

strategy (Morris, Hammond, & Snell, 2014). Given that these consider-

ations are emphasized in the literature, it is remarkable that we still

know rather little about how Western MNEs navigate through differ-

ent institutional environments when they operate in emerging mar-

kets. Most of these markets are still developing with a high degree of

social, political, and economic change. Consequently, values and struc-

tures in the society are also changing. This makes it more likely that

MNEs can proactively influence the institutional environment in these

markets than in more developed markets with more stable institutions.

However, for Western MNEs, there are significant cultural differences

between their home markets and emerging markets. Consequently, the

perspective of local employees and other critical stakeholders can gen-

erally be expected to diverge more from corporate practices than in

the Western markets.

Institutional theory has been used in order to analyse how MNEs

can develop appropriate strategies for managing the different contexts

of foreign markets (Andersen, Christensen, & Damgaard, 2009; Dacin,

Goodstein, & Scott, 2002; Tan & Wang, 2011). It offers an increased

understanding of the structures, norms, and values of the local envi-

ronment and of the pressures that firms have to understand and deal

with (Busenitz, Gomez, & Spencer, 2000; Deligonul, Elg, Cavusgil, &

Ghauri, 2013; Peng, 2012). Traditionally, a key assumption has been

that institutions are inclusive structures that shape the behaviour of

firms and drive them to adapt in similar ways, eventually leading to iso-

morphism (DiMaggio & Powell, 1983; Yeniyurt, Townsend, Cavusgil, &

Ghauri, 2009). At the same time, it is argued that MNEs have to man-

age institutional systems that vary between different markets

(Kostova, 1999) and that it will not be possible to adapt completely

to local variations while applying a global core strategy (Peng, 2012).

Earlier studies also suggest that MNEs are often sufficiently powerful

Received: 12 March 2016 Revised: 29 June 2017 Accepted: 30 June 2017

DOI: 10.1002/job.2214

1320 Copyright © 2017 John Wiley & Sons, Ltd. J Organ Behav. 2017;38:1320–1337.wileyonlinelibrary.com/journal/job

and resourceful to be able to influence institutional structures in

emerging markets (Child & Tsai, 2005; Elg & Ghauri, 2015).

These considerations also connect to a more general discussion

concerning the role of macro structures and forces in relation to

micro‐level behaviour and foundations. For example, Van De Ven

and Lifschitz (2013) argue that although institutions certainly influence

what individuals consider to be legitimate and acceptable, firms and

individuals are also to a varying degree able to achieve institutional

change. Powell and Colyvas (2008) note that institutionalism mainly

considers macro‐level forces and processes, while disregarding ongo-

ing factors and activities at the micro level. They also discuss

microfoundations for institutional theory, but these are on a more gen-

eral level and not linked to individual firms' behaviour. All in all, there is

a shortage of studies that link overall institutional arrangements and

processes to firms' strategic behaviour (Djelic, Nooteboom, & Whitley,

2005), and to the role of individuals as well as interactions and struc-

tures within the firm.

Sustainability and social responsibility are stressed today as an

essential foundation of most businesses, because they can generate

competitive advantages (Perrini & Vurro, 2010; Porter & Kramer,

2006) but also because they are considered to be an important support

for a firm's legitimacy in different markets (Elg, Ghauri, & Schaumann,

2015; Ellen, Webb, & Mohr, 2006). Furthermore, restrictions regarding

how to exploit natural resources may undermine a firm's competitive

advantages if not properly considered, whereas capabilities to operate

in a way that acknowledges environmental sustainability may generate

competitive advantages (Hart, 1995; Hart & Dowell, 2011). This also

means that microfoundations for operating in emerging markets, where

rules and regulations concerning sustainability issues may be vague or

unclear, should incorporate processes and values emphasizing these

issues. However, sustainability is a complex issue that involves stake-

holders on different levels and with different perceptions (Starik &

Kanashiro, 2013). The global aspect adds further complexity due to cul-

tural aspects and local norm systems (Bondy, Moon, & Matten, 2012).

We thus suggest that cross‐fertilizing institutional theory with a

microfoundations approach may aid our understanding of this com-

plexity. We anticipate that the changing effects of microfoundations

on different levels, and their corresponding routines, drive different

sustainability‐related outcomes at the firm level. Central to these

microfoundations, and this overall chain of interactions, is the behav-

iour of individual employees. Recent studies have advanced our under-

standing of the relationships between employee “green behaviour,”

different organizational contexts, and sustainability‐related outcomes

(Bissing‐Olson, Iyer, Fielding, & Zacher, 2013; Carmeli, Brammer,

Gomes, & Tarba, 2017). But many of these are conceptual (Strauss,

Lepoutre, & Wood, 2017) or focus on single‐country studies (Norton,

Zacher, Parker, & Ashkanasy, 2017) None examine these interactions

across different country environments, which is our main contribution

to this field of enquiry.

This paper adopts a multilevel analysis with the aim of examining

how variations in microfoundations influence differences in firms' rou-

tines and capabilities and how these in turn influence the ways in

which firms cope with variations in their environments. It identifies

routines that can be applied in order to manage regulative, normative,

and cognitive environmental pressures and explains their

microfoundations in terms of the individuals, interactions, and struc-

tures behind these routines. Microfoundations refer to the individual

capabilities, intraorganizational processes, and routines that sustain

dynamic capabilities. They may explain a firm's ability to influence

macro structures and to develop routines and capabilities for gaining

a sustainable competitive advantage within a certain macro environ-

ment (Argote & Ren, 2012; Barney & Felin, 2013; Felin & Foss, 2009;

Teece, 2007). This view has, however, scarcely been applied to the

challenges faced by MNE managements in local institutional envi-

ronments and the conditions under which they will be able to

develop a long‐term competitive position (Park & Harris, 2014).

MNEs also face the challenge of gaining legitimacy and recognition

as responsible local citizens. This, in turn, means that their interac-

tions and joint value creation with stakeholders other than business

partners are essential (Bondy et al., 2012; Reimann, Ehrgott,

Kaufmann, & Carter, 2012).

Firms differ in terms of their capacity to cope with different insti-

tutional structures. We contribute by offering an in‐depth under-

standing of how firms ca n approach instituti onal forces through a

combination of proa ctive and reactive responses based upo n certain

routines and microfoundations. Linking individuals to interaction pro-

cesses and structures offers a broader perspective on

microfoundations . Another important aspe ct discussed in the litera-

ture is how far corporate values and practiceshave an impact on sub-

sidiaries in culturally different markets and how they relate to local

values and activities (Kostova & Roth, 2002). We enhance knowledge

about this by investig ating how corporate and local practice s respec-

tively influence the routines and microfoundations developed to

manage institution al forces in emerging mark ets. Our research

explores how firms vary in terms of the kinds of routines they are

able to deploy, in rela tion to both the external context experience d

by colocated firms and the underlying microfoundations that are

unique to each firm.

We will focus on the so‐called BRIC (Brazil, Russia, India and

China) markets. They have been regarded as the strategically most

important emerging markets. As discussed by Hadjikhani et al.

(2012), the BRIC markets have a growth rate up to 5 times larger than

the average for developed markets—at the same time, they belong to

completely different cultures, economic realities, and political systems.

By studying these four markets, we are able to offer new insights on

how the institutional context interacts with MNE strategies and iden-

tify more generic routines and microfoundations behind the capability

for developing a sustainable market position that appears to be rele-

vant regardless of the cultural and institutional contexts.

Our main objective is thus to increase the understanding of how

individuals and micro processes at a lower level cope with higher level

structures and institutions. This will lead to a theoretical approach for

understanding an MNE's capability to build a position in emerging mar-

kets based upon the underlying microfoundations and routines. Earlier

research has discussed the fruitfulness of a microfoundational

approach and what it adds to our understanding of firms (Devinney,

2013; Winter, 2013). It has been argued that this line of research

underestimates the role of macro‐level factors (Vromen, 2010) but also

that microfoundations first and foremost are based upon individuals

and their motivation (Foss & Lindenberg, 2013). However, several

ELG ET AL.1321