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Dealing with institutional voids in emerging markets

Operating a business or working in an emerging or underdeveloped economy as an expat from the developed world is a fascinating and eye-opening experience, exposing a world of opportunities that were considered unimaginable when living the comfort zone of a predictable, humdrum abyss. This may seem inconceivable to a citizen of the developing world confronted by daily economic and social problems which seem unsurmountable, nevertheless never forget that instability leads to creativity and opportunity. 

Many would say that the advent of cultural barriers in distant places is too high a price to pay to make this entrepreneurial experience worth the effort, especially if the adventure involves loved ones and other personal commitments.

 In a previous article, I suggested that my personal experiences have shown me that cultural learning has turned out to be an enriching experience, even one which helps one grow personally. I would say that the highest hurdle that one has to negotiate as an inexperienced subject from the developed world when operating in the developing environment, is learning to deal with institutional voids, as this is a phenomenon new to us which requires flexibility and improvisation.

In business, an institution sounds like something formal or set in stone by an official body, indeed some academics define it as such: “The set of rules and requirements that organizations must abide by to obtain the expected support and legitimacy from the environment in which they operate” (Montcelli et al., 2017). Although this sounds almost governmental, it also relates to any legal, regulatory, intermediary, cultural facilitating, official or cultural norms which a company needs to follow in a business environment to operate in any given business environment. Indeed, Ledyaeva (2017) defines institutions in emerging markets as “…a range of specialized intermediaries which provide the requisite/needed information and contract enforcement needed to consummate/document transactions.”

Institutional voids, on the other hand, refer to “Institutional conditions hampering ease by which buyers and sellers can interact” (Doh et al., 2017), or “the absence of specialized intermediaries, regulatory systems, and contract-enforcing mechanisms in emerging markets” (Khanna et al., 2005). Simply put, where institutions are not formally present in emerging markets, this creates difficulty and added cost for the business to operate. In practical terms, these can include: product markets (market research companies, marketing services, intellectual property law, efficient dissemination of law, mediums of communication, consumer activism, logistical services & infrastructure); capital markets (banking, investment, liquidity, stock & commodities markets); labour markets (education, training, human resource services), government regulation (corruption, norms, regulation, legislation); and legal (contract enforcement, legal advice & services).

One of the biggest frustrations when confronted by these areas of apparent deficiencies, is to sink into the feeling that business just will not function due to an inadequate mindset or insufficient infrastructure in the host country. This negative reaction is often a result of cultural shock and gets better with time, but reality shows that each nation has a different set of unwritten and written rules, and requires a separate learning curve, requiring added planned investment of resources (human, financial and time) to fully integrate and function properly within a new environment.

Being willing to learn and adjust strategy to new institutions and institutional voids is the first step to integration into the new ecosystem. A common mistake is to create a polycentric international marketing strategy from headquarters, only to send an ethnocentric leader to the host country who will try and apply the flexible strategy without fully understanding the need for change. This ethnocentric manager will not want to rise to the challenges of conducting logistics with local intermediaries who do not serve the same functions, working in industrial parks which operate under different legal conditions, setting up contracts with retailers which have a different concept of exclusivity, nor working with the same legal protection in matters of conflict resolution.

Voids serve as an opportunity to be more innovative. The advent of the Asian miracle is an excellent example of how economies can raise themselves from the ruins of war by making up for a lack of infrastructure, raw materials and institutions through the enterprising use of technology and innovation. Countries like Hong Kong, Japan, and then Taiwan, Korea and eventually China would catch up with the Western world without having to develop their institutions so thoroughly, at least in the short term. They would create new concepts, develop infrastructure with existing plans, capitalize on factor limitations by adapting scientific knowledge, and react to global demand by exploiting their form of competitive advantage.

When it comes to involving people, getting around institutional voids requires improvisation more than formal preparation. From the decision-making to the operative levels, more unpredictable and irregular environments require the local touch; hire people based on what they are eager to learn rather than what they already know. One reason why the United States is so famed for being enterprising and entrepreneurial is its historic ability to import flexible people with an instinctive ability to find solutions to barriers (despite today’s negativities about US immigration policy!).

Such places as India and China are full of young entrepreneurs who think in terms of how to turn barriers into opportunities, spotting global business models and creating value before Multinational Companies (MNCs) even complete their market research, let alone start working on the prototype! In Africa, for example, the economy is still fragmented, a result of linking colonies to imperial capitals. This has made it difficult for many businesses, such as grocery retailing or mobile phones, to expand and have a truly continent-wide market presence. Local minds have set up ideas such as creating on-line retailing hubs that replicate “medinas” or typical markets that turn shopping into a social rather than an impersonal experience; people can interact and barter through on-line clusters offering multiple brands, buying and selling various wares in a single hub.

Formal institutions in emerging markets can be a matter of decorum more than properly founded. Democratic systems and agencies are often duplicates of functioning arrangements previously established elsewhere. For example, Mexico’s legal system is a clone of the French statutory structure, as is its republican philosophy. Furthermore, Mexico’s three-branch federal political system is a copy of the USA’s arrangement. These were put together to mask a one-party governmental regime to make it look like a properly-functioning pluralistic democracy with open presidential elections. Business needs to be mindful that much of the corruption, red tape and general inefficiency of government, comes from the fact that it was never really set up to serve the interests of those who need it most. This is not a unique problem, of course, and with time the interests of business are being better attended by formal and informal institutions.

Show an interest in the emerging market, make a presence on the ground and find out for yourself how things work. Immersing oneself in the country in the work context and observing everyday life in person is the best way of learning. Allow yourself to fall into institutional voids voluntarily, and set up your task forces to solve problems. The strategies employed to find solutions due to a lack of amenities found at home requires added specialists, resources and help, of course, but finding the most efficient formula can be optimized by observing first-hand. Take the problem of corruption, for example. Until one discovers the real actions and motivations of individuals, departments, authorities or institutions in affected countries, it is difficult to understand the nature of corruption and how the business needs to deal with it, as the phenomenon changes from nation to nation. Alternatively, the problems of inefficiencies in retailing can be more visual than theoretical. Conducting store checks personally and observing inventories, deliveries and interviewing staff can give a much better insight into possible solutions to gaps in retailing services than an impersonal presentation from a marketing research executive in an isolated meeting room.

Formal institutions in emerging markets are not designed to support business. These nations are characterized by being market economies, however, they are normally ‘emerging’ from command variants, meaning that they still have remnants of big bureaucratic institutions with self-serving interests. Do not expect unions to represent the rights of workers, when they may be working in the interest of politics. Do not expect business to adhere to local laws with so much honor as law does not necessarily act in its favour; at times the law can be flexible to the needs of the interested party. Tax law will often affect business the most; private citizens often receive the most incentives in emerging economies. Try not to depend too much on official statistics when making strategic decisions as they often reflect on the reputation of governors more than focus on reality; get a second opinion and do your research…also trust your own instincts. Also, governmental institutions designed to provide services to businesses often create more obstacles than incentives; export promotion, business incubators, and technological parks set up by public universities or government are often white elephants with little regard for market needs.

International business has recently taken a more cautious view of exploring emerging markets and creating offshore economies there. Globalization has become a bad word to certain heads of state of the developed world, creating apathy and even suspicion among the business community, especially when emerging economy governments behave in an erratic fashion (see article “SMEs and export opportunities,” Bnomics, August 11, 2019.) At the same time, emerging economies have themselves positioned themselves as breeders of international MNCs with a naturally superior understanding of institutional voids and a more flexible approach to this kind of market. They should be taken as an example of how to react to unstable & unique environments with innovative strategies.

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Andrew Lee Davis Blake

Andrew Lee Davis Blake at Expertise en investigación de mercados
Profesor de negocios internacionales con historial en proyectos de investigación privados. Especializado en áreas de negociación internacional, comunicación intercultural y estrategias de internacionalización empresarial. Participa como consultor para PYMES, organiza actividades de promoción internacional.
Andrew Lee Davis Blake

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