Overcoming Institutional Voids: A Reputation‐Based View of Long‐Run Survival

Published date01 November 2017
DOIhttp://doi.org/10.1002/smj.2649
Date01 November 2017
Strategic Management Journal
Strat. Mgmt. J.,38: 2147–2167 (2017)
Published online EarlyView 22 March 2017 in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2649
Received 9 March 2016;Final revisionreceived 24 December 2016
Overcoming Institutional Voids: A Reputation-Based
View of Long-Run Survival
Cheng Gao,1Tiona Zuzul,2Geoffrey Jones,3and Tarun Khanna1*
1Strategy Unit, Harvard Business School, Boston, Massachusetts
2Strategy and Entrepreneurship Faculty, London Business School, London, U.K.
3General Management Unit, Harvard Business School, Boston, Massachusetts
Research summary: Emerging markets are characterized by underdeveloped institutions and
frequent environmental shifts. Yet, they also contain many rms that have survived over
generations. How arerms in weak institutional environments able to persist over time? Motivated
by 69 interviews with leaders of emerging market rms with histories spanning generations,
we combine induction and deduction to propose reputation as a meta-resource that allows
rms to activate their conventional resources. We conceptualize reputation as consisting of
prominence, perceived quality, and resilience, and develop a process model that illustrates the
mechanisms that allow reputation to facilitate survival in ways that persist over time. Building
on research in strategy and business history, we thus shed light on an underappreciatedstrategic
construct (reputation) in an undertheorized setting (emerging markets) over an unusual period
(the historical long run).
Managerial summary: Why are some rms able to persistently survive in challenging, uncertain,
and underdeveloped business environments? To explore this question, we analyze in-depth
interviews with leaders of emerging market rms that have survived over decades and even
centuries. We nd that rm reputation is a key strategic driver, and propose new ideas about
the ways through which reputation facilitates survival. We elaborate how a favorable reputation
allows a rm to more fully utilize its existing resourcesby decreasing uncertainty. Wealso propose
that reputation has offensive and defensive properties that make it valuable to rms during
both positive and negative economic cycles. Finally, we discuss why a reputation-based source
of competitive advantage is hard to imitate, and outline three general approaches for building
reputation. Copyright © 2017 John Wiley & Sons, Ltd.
Introduction
Emerging markets are characterized by insti-
tutional voids (Khanna & Palepu, 1997). To
survive and thrive over time, rms operating in
these markets must respond to unpredictable (but
predictably frequent) shocks—political instability,
Keywords: emerging markets; institutional voids; reputa-
tion; business history; intangible resources
*Correspondence to: TarunKhanna, Strategy Unit, Harvard Busi-
ness School, Soldiers Field Road, Boston, MA 02163. E-mail:
tkhanna@hbs.edu
Copyright © 2017 John Wiley & Sons, Ltd.
violence, macroeconomic uctuations, and even
war—without the benet of specialized intermedi-
aries that can analyze market information, facilitate
transactions, and provide signals of credibility
(Khanna & Palepu, 1997; Khanna & Rivkin, 2001).
Doing so can be difcult and failure rates are
high; for instance, emerging market banks had an
estimated failure rate of 25% over a 7-year period
in the 1990s (Brown & Dinc, 2005). Nonethe-
less, emerging markets are rife with examples
of rms and business groups that have survived
over decades, generations, and even centuries.
2148 C. Gao et al.
For example, Grupo Bimbo, founded in Mexico
in the 1940s, endured national and international
turbulence to emerge as one of the world’s largest
bakeries; Tata Group was founded in 1868 and
developed into a leading Indian business group
despite facing colonialism, rebellions, and major
social transformations; and Koç Holding, founded
in 1926, survived numerous national and regional
crises to maintain its foothold as Turkey’s leading
business group. Emerging markets thus present
researchers with a puzzle: How are rms competing
in such weak institutional environments able to
persist across time?
Research in strategy has increasingly focused on
the relationship between institutions and rm out-
comes, proposing that effectivestrategies depend on
and vary across different institutional environments
(e.g., Ahuja & Yayavaram, 2011; García-Canal &
Guillén, 2008; Hiatt & Sine, 2014; Marquis & Ray-
nard, 2015; Peng, Sun, Pinkham, & Chen, 2009;
Zuzul & Edmondson, 2017). Scholars have argued
that institutions are more than just background con-
ditions (Meyer, Estrin, Bhaumik, & Peng, 2009),
and directly inuence the strategic actions available
to an organization (Ingram & Silverman, 2002). In
this view, rms can achieve and sustain competitive
advantage through strategies that overcome, shape,
and capitalize on the nature of their institutional
environments (Henisz, 2000; Marquis & Raynard,
2015).
Strategies that account for institutional environ-
ments might be especially important in emerging
markets (Hiatt & Sine, 2014). Emerging markets
are replete with institutional voids: They lack insti-
tutions that can help facilitate market transactions
(Khanna & Palepu, 2010). Banks cannot always
ensure access to credit; courts cannot guarantee the
enforcement of intellectual property rights; audi-
tors cannot reliably certify a rm’s nancial oper-
ations. As a result, the demands, constraints, and
challenges facing rms in emerging markets are
different than those facing their counterparts in
mature markets. Theories and ndings from devel-
oped market settings are not necessarily applica-
ble in emerging market contexts (Khanna, 2014;
Marquis & Raynard, 2015). Bettis, Gambardella,
Helfat, and Mitchell (2014, p. 3) thus argued that
there are “clear opportunities” to develop new the-
ory for institutionally underdeveloped settings in
order to expand our understanding of “world-wide
strategic management.” This article builds on one
such opportunity.
Motivated by a set of 69 publicly available
interviews with the founders and leaders of rms
with histories spanning generations in emerging
markets across continents, we combine inductive
with deductive reasoning to propose theory on how
rms competing in institutionally weak settings
are able to survive over the long run. Through
an inductive-deductive theory-building process
(cf. Gavetti & Rivkin, 2007), we propose rm
reputation as a key strategic construct in these
settings. Driven by our data, we propose that in
emerging markets, reputation consists of three
elements: prominence, perceived quality, and
resilience. The rst two elements—prominence
and perceived quality—have been established
by research in developed markets (Rindova,
Williamson, Petkova, & Sever, 2005). We extend
this denition by proposing that a previously
untheorized component—resilience (beliefs about
a rm’s ability to withstand shocks)—is essential in
emerging markets. Our emerging markets research
context allowed us to inductively uncover the
importance of resilience as the lack of institutional
intermediaries in such settings sharply illuminated
its signicance. Particularly, in settings where a
rm’s survival cannot be taken for granted, and
where institutional intermediaries cannot guarantee
remediation, the belief that a rm will survive
crises to fulll its obligations is critical in driving
stakeholder actions. Thus, by focusing on the
context of emerging markets, we both build on
and extend existing theory on the meaning of
reputation.
We also propose a process model that illustrates
the mechanisms that allow reputation to facilitate
long-term survival. Because emerging markets fea-
ture institutional voids that hinder potential trans-
action partners from credibly signaling, accessing,
and validating relevant information, a key struc-
tural feature that deters welfare-enhancing trans-
actions between two parties is potential transac-
tion uncertainty. In developed markets, counter-
parties can rely on mature institutions to decrease
uncertainty and hedge against transactional risks,
both by guaranteeing quality ex-ante, and by pro-
viding remediation ex-post. We propose that, when
institutional credibility enhancers and adjudicators
are not present, a rm’s reputation can provide
transactional condence. This, in turn, can increase
the quantity of prot-reaping transactions, allow-
ing the rm to activate its conventional resources.
This suggests that, in emerging markets, a positive
Copyright © 2017 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 2147–2167 (2017)
DOI: 10.1002/smj

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