Strategic responses of subsidiaries of multinational firms in emerging markets to institutional Pressures : shedding light on the liability of foreignness

Abstract

Institutional theory has been used to explain the duality of multinational companies and the need to establish legitimacy both internally- within the organisation and externally- with the external operating environment. The concept of liability of foreignness explains the legitimacy pressures posed by the duality of environments that MNCs are exposed to and the strategic responses taken in this context. However it remains unclear how MNCs respond appropriately to the conundrum, more so in the emerging market context. Using deductive qualitative research grounded on institutional theory, the research study sought to establish which liability of foreignness issues posed the greatest challenge for MNC executives in emerging markets, their response to emergent issues and additionally how they deal with conflicting outcomes, if any from the strategic responses taken. The findings support institutional theory precepts that external institutional pressures pose the greatest challenge for MNCs but conversely the firm’s response to the challenges puts the overall efficiency of the firm at risk. Executives of MNCs focused on emerging markets will find the outcome of the research useful as it identifies key LOF issues and the appropriate strategic response. More importantly it also addresses albeit to a limited extent how to mitigate the conflicting outcomes of such actions. An attempt is also made at establishing an optimal mix of strategic actions.