Oragnizational responses to institutional upheaval by Central Eurasian firms and the ability to transform under uncertainty.

AuthorIsmail, Kiran M.

INTRODUCTION

The economies of Post-Soviet countries are undergoing a phase of massive institutional upheaval. Following the breakdown of the Soviet Union in 1991, these countries have emerged from an autocratic and highly centralized regime to build their transition to a market-based economic system. Such a shift obliges that the old institutional system, deeply rooted in Communist Soviet ideology, is gradually replaced by a new ideology requiring the transformation of organizational practices, norms, routines and behaviors. The firms' capabilities and resources needed to function in the new market-driven system and compete in the global market may be very different from the resources and capabilities that were required by the firms to survive and prosper in the centrally-planned system (Holt, Ralston and Terpstra, 1994; Newman, 2000).

In the past, the corporate business environment of the Soviet Union was dominated by a strong-tied highly centralized network of bureaucracies, and large and mature firms with deep ties to the government were able to access resources necessary to maintain some level of performance. However, the post-Soviet transition era requires firms to become more flexible and to adapt to an increasingly market driven operational agenda and to explore and exploit the business opportunities brought forth by a gradual economic liberalization. The progress toward a market-driven economy, however, has been uneven across the countries of the Newly Independent States (NIS), consisting of both Central and Eastern European (CEE) and Central Eurasian countries. All of these countries have been identified by the European Bank for Reconstruction and Development as "countries in transition". While some of the CEE countries have made measured progress toward economic liberalization, Blank (2004) observed that by and large, in the Central Asian countries, the establishment of democratic political systems and market economies has been slow.

In this study we draw insights from institutional theory to better understand the importance of having an effective and developed institutional structure for business enterprise firms to succeed in transition economies. Specifically, we test empirically, in a sample of firms from seven transition economies of Central Eurasia, the effect of institutional development, or its lack thereof, on various firm responses to institutional upheaval. The Central Eurasian countries are in a peculiar position as they have not joined the European Union and have not benefited from an infusion of capital and other resources that some of the new European Union members have benefited from. Therefore, for Central Eurasian firms, transition is far slower and firms cannot count that deeply on foreign aid or assistance. They are, so to say, "left on their own" to build the new system in a context of resource scarcity and "mind boggling" changes.

Thus, the primary research questions of interest for the current study are: (1) what response strategies do firms in the transition economies of Central Eurasia employ in the face of institutional upheaval, and (2) how does the ability to respond strategically (or adapt) relate to possible transformational responses. In this endeavor, we follow the extant research on institutional theory and a wealth of studies examining changes in transition economies (e.g., Peng and Zhou, 2005; Zhou, Peng and Anand, 2005).

This study was motivated by two factors. First, Meyer and Peng (2005) have discussed the great extent to which international business scholars have focused on the organizational and management issues faced by firms in the transition economies of Central and Eastern Europe (CEE). Indeed, the CEE has served as a fruitful region for testing the applicability of existing theories in international business and management studies, and to develop new ones (Meyer and Peng, 2005). These countries are former Soviet republics that are moving toward becoming market economies. Among Post-Soviet countries, what is starkly apparent is the relative lack of researchers' attention of international business and management scholars on the countries of Central Eurasia. Our desire to contribute to a better understanding of business dynamics within the Central Eurasian region is thus our first motivation for the present study. Several studies of transition economies have grouped the countries of Central Eurasia in with those of Central and Eastern Europe (see, e.g., Roth and Kostova, 2003; House, Hanges, Javidan, Dorfman and Gupta, 2004), but we believe the unique cultural and historical significance of the countries of the old Silk Road deserve closer attention in their own right. Indeed, Ford and Ismail (2006), in reviewing the results reported by Dorfman, Hanges and Brodbeck (2004) for the Eastern European cluster of countries in the GLOBE studies, found subtle differences in leadership perceptions between Georgia and Kazakhstan--two Central Eurasian countries included in this cluster--and the rest of the Eastern European cluster countries. This suggests a need to examine Central Eurasian countries in a manner not confounded by including CEE countries. In addition, as mentioned previously, these countries have not joined the European Union and do not benefit from the financial inflows from their wealthier European neighbors.

A second motivating factor for the present study has to do with recent efforts at leadership development in the Central Eurasian region, such as the Central Eurasian Leadership Alliance (CELA) Programs (1), that involve the building of social capital via networks, ties, and contacts (cf. EastWest Institute, 2002; Ford and Ismail, 2004, 2006), and in which the second author of the present paper has played a role since its beginning. As such, it is intuitively appealing to conjecture whether alumni from such a program would be in better position to address the uncertainties associated with institutional upheaval than would managers not having such exposure. However, the CELA is not implemented in all NIS countries and it is only several years old with a small alumni pool. Therefore this issue is not a concern in the present paper. Nonetheless, it seems worthwhile to take a more focused look at the institutional environment in the CELA countries in order to better understand the business challenges and prospects faced by CELA alumni and other business persons in the region. Therefore, the countries for which data were developed for this study only include the NIS countries from which CELA participants are drawn and which are also included in the BEEPS (2) database used in the study.

The remainder of this paper is organized in three main parts. In the next section we briefly review the underlying theory and formulate the hypotheses. Next, we present and describe the data and research methods undertaken to test the proposed hypotheses. Finally, the analyses of the results and a broader discussion and implications conclude this paper.

THEORY DEVELOPMENT AND HYPOTHESES

INSTITUTIONAL THEORY AND INSTITUTIONAL CHANGE

Institutional theory is based on the concept that organizations are influenced by their institutional environment and are required to conform to collective norms and beliefs of this environment. To survive and prosper, organizations are expected to follow, and perhaps imitate, environmental elements in their practices and structures (Haveman, 1992). Organizations must fit into their institutional image in order to gain legitimacy and gain access to physical and social resources. In this view, the survival of organizations depends on their adherence to institutionally defined rules and norms (Meyer and Rowan, 1977; Dimaggio and Powell, 1983; Oliver, 1991; Scott, 2002). Firms' strategic choices are, therefore, influenced by the dynamic interaction between institutions and organizations (Peng, 2002).

According to North (1990) institutions could be formal, such as industry or government regulations, or informal, such as those composed of cultural norms and values that are imposed by societal pressures. North posits that market efficiency is partly determined by the surrounding institutional environment and the extent to which it supports economic activity. Well developed institutions reduce search, negotiation and contracting costs, and the uncertainties involved in inter-firm exchanges, and these institutions, in turn, support a stable structure for legal, regulatory and political infrastructures and agencies that protect firms (e.g., their proprietary assets, the enforceability of contracts) and facilitate exchanges (Meyer, 2001). On the other hand, inefficient institutions increase the costs of transactions and impose limitations on firm behavior and innovation.

Organizational theorists explain that organizations tend to manage complexities present in their environments by adapting to the conditions that are present in the environment, and this conformity ensures the long term survival and growth of firms (Chakravarthy, 1982). Boisot and Child (1999) term this phenomena 'complexity absorption' and suggest that firms can absorb complexity, or, in other words, reduce uncertainty "through the creation of options and risk-hedging strategies. That is, they can hold multiple and sometimes conflicting representations of environmental variety ..." (1999: 238).

Institutional theorists also echo the same argument. Oliver (1991) suggests that in environments that are characterized by high levels of uncertainty and complexity, organizations tend to conform to institutional norms instead of resisting institutional pressures. This conformity tends to buffer organizations from environmental shocks (Meyer and Rowan, 1977), thereby encouraging them to stick to the routines or templates that are taken for granted in their particular institutional context (Greenwood and Hinnings, 1996; Johnson et al., 2000). Johnson et al. (2000) discuss this...

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