Performance Impact of Temporal Strategic Fit: Entrainment of Internationalization with Pro‐Market Reforms

• Published date: 01 November 2017
• Author: Vikas Kumar,Manish Popli,Mohammad Akbar,Ajai Gaur
• Date: 01 November 2017
• DOI: http://doi.org/10.1002/gsj.1160

Performance Impact of Temporal Strategic Fit:

Entrainment of Internationalization with Pro-Market

Reforms

Manish Popli,

1

Mohammad Akbar,

2

Vikas Kumar,

3

and Ajai Gaur

4

*

1

Strategic Management Area, Indian Institute of Management, Indore,

India

2

Strategic Management Area, Indian Institute of Management, Lucknow,

India

3

Discipline of International Business, University of Sydney, Sydney,

Australia

4

Department of Management and Global Business, Rutgers Business

School - Newark and New Brunswick, Newark, New Jersey

Research summary: Pro-market reforms in emerging markets evolve in a temporal pat-

tern, however extant studies examining the impact of pro-market reforms have eschewed

temporality. We propose that the net impact of reforms on firm performance is contingent

on the temporal s trategic fitofthefirm’s strategic choice with the external environment.

Using internationalization as the strategic choice, we posit that a positive impact of inter-

nationalization is contingent on whether or not firms entrain (synchronize) the temporal

parameters of their internationalization activities with those of pro-market reforms.

Robust empirical support for these arguments comes from longitudinal panel data related

to Indian automotive firms from 2001 to 2010, contributing to our understanding of the

role of the temporal strategic fitoffirms’strategic choicesduring institutional transitions.

Managerial summary: Managers of emerging market (EM) firms have faced pro-market

reforms in their home markets, leading to a high degree of competition. Hence, it is per-

tinent for EM firms to know the intricacies of their response during such changes. We

suggest that managers should frame their strategic responses by considering not only

the role of “what”and “how,”but also the impact of “when”and “at what rate.”We

find firms that shape their responses in synchronization with the changes in the external

environment are in the best position to mitigate the erosion of their profitability. As

such, this study focuses on the impact of temporal fit of internationalization activities

with pro-market reforms by EM firms and has implication for managers of economies in

transition. Copyright © 2017 Strategic Management Society.

Introduction

In recent years, many emerging markets (EMs)

have aggressively pursued pro-market reforms,

leading to large-scale institutional changes

(Hoskisson, Eden, Lau, & Wright, 2000). Institu-

tional changes in EMs entail complexity

(Banalieva, 2014; Hermelo & Vassolo, 2010). How

Keywords: entrainment; India; internationalization; pro-market

reforms; temporal strategic fit

*Correspondence to: Ajai Gaur, Department of Management

and Global Business, Rutgers Business School - Newark and

New Brunswick, 1 Washington Park, Newark, NJ 07102.

E-mail: ajai@business.rutgers.edu

Copyright © 2017 Strategic Management Society

Global Strategy Journal

Global Strategy Journal, 7: 354–374 (2017)

Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/gsj.1160

well a firm is able to cope with this complexity

depends on its strategic choices, which ultimately

impact its performance (Peng & Heath, 1996). Prior

research into the impact of pro-market reforms on

firm performance suggests both positive and nega-

tive effects (Chari & David, 2012; Cuervo-

Cazurra & Dau, 2009; Dau, 2013). To extend this

literature, and in line with Dau (2012), we propose

that it is important to shift the focus toward a sys-

tematic investigation of firm strategic responses

that produce benefits under reform. It is puzzling

that despite the evolutionary characteristics of pro-

market reforms, much extant literature takes a

rather static view (Hoskisson et al., 2000; Peng,

2003). We address this by examining how the

response of EM firms to patterns of pro-market

reforms affects their performance. We focus on the

trajectory of pro-market reforms and propose that

the net impact of reforms is contingent on the tem-

poral strategic fitofafirm’s strategic choice of

internationalization with the external cycle of

reforms. We call this fitoffirm strategy with the

external cycle of reforms “entrainment,”which is

key to the theoretical arguments in this study.

Over the past two decades, EMs have experi-

enced significant changes in their institutional

environments and factor markets (Hoskisson,

Wright, Filatotchev, & Peng, 2013). Scholars have

argued that the nature of institutional changes and

their significant impact on EM firm strategies

(Kim, Kim, & Hoskisson, 2010) make it imperative

to examine firms’strategic choices that link pro-

market reforms to firm performance (Hoskisson

et al., 2000; Newman, 2000; Peng, 2003). In this

study, we regard internationalization as a strategic

choice and focus on its entrainment with reforms as

a determinant of firm performance. Chittoor, Sar-

kar, Ray, and Aulakh (2009) note that in the con-

text of pro-market reform, internationalization is a

popular and effective strategic choice for EM firms;

it facilitates their access to new markets and strate-

gic resources. However, the temporal aspects of

internationalization in relation to reforms have

largely evaded scholarly attention.

The concept of entrainment provides a starting

point for our theorizing about the temporal fitofa

firm’s strategic choice with the external environ-

ment. The concept has its genesis in physics, but

also has spanned many disciplines, such as biology,

economics, and psychology. In organizational stud-

ies, the entrainment framework builds on contin-

gency theory and introduces an additional

dimension of time to the strategic fit literature

(Pérez-Nordtvedt, Payne, Short, & Kedia, 2008).

Thus, it suggests that the temporal synchronization

of organizational activity with the external environ-

ment has a positive effect on organizational perfor-

mance, whereas a reduced fit or misfit has a

negative effect and could even lead to organiza-

tional failure. Pro-market reforms characterize the

external environment of EMs and are often

dynamic in nature; they continue to affect firms for

many years (Banalieva, 2014). Pro-market reforms

can also be classified into narrow- and broad-scope

reforms (Gubbi, Aulakh, & Ray, 2015). The former

have an impact on one or few industries, whereas

the latter—including product market, capital mar-

ket, and labor market reforms—have economy-

wide impacts (Chari & David, 2012). For example,

in India, broad-scope reforms subsume intermittent

shocks or triggers and lead to progressive changes

thereafter (Ramamurti, 2000). For the purpose of

our study, such broad-scope reforms are the rele-

vant type of pro-market reforms.

We follow Dau (2013) to argue for the baseline

effect that degree of internationalization moderates

the effect of reforms on firm performance. In continu-

ation with this theorization, we argue that in addition

to the strategic choice of internationalization, it is the

degree of temporal fit of internationalizatio n with

pro-market reforms that leads to performance varia-

tion at the firm level. We identify two subgroups of

firms (Boyd, Haynes, Hitt, Bergh, & Ketchen, 2012)

with different levels of entrainment with the external

environment (Ancona & Chong, 1996; Aschoff,

1979; McGrath & Rotchford, 1983; Pérez-Nordtvedt

et al., 2008). The first subgroup consists of ag gres-

sive firms that are early movers in response to regula-

tory shocks in the external environment. They

conform to phase synchronization or phase entrain-

ment and perform better than others. We integrate the

theoretical argument of first-mover advantage with

internationalization motives of EM firms and suggest

that firms moving early in their internationalization

activities experience superior performance as the

market-based economy strengthens.

The second subgroup is derived from the first

subgroup and consists of firms that internationalize

at a pace that is congruent with the pace of broad-

scope institutional reforms. They conform to pace

synchronization or pace entrainment and are likely

to have performance superior to other firms, includ-

ing those that are phase synchronized. For pace-

synchronized firms, the rate of increase of

Temporal Strategic Fit through Entrainment 355

Copyright © 2017 Strategic Management Society Global Strategy Journal, 7: 354–374 (2017)

DOI: 10.1002/gsj