Institutional Distances in International Marketing Channels: Governance

¶ … Institutional Distances in International Marketing Channels: Governance Strategies That Engender Legitimacy and Efficiency, the researchers posit that firms doing business in foreign institutional environments face significant pressure to gain social acceptance (which they term as "legitimacy") and to compete in meaningful ways that only result from being well-informed about the host market (which they term "efficiency"). They explain that obtaining legitimacy may incur additional costs of adaptation and market assessment that tends to undercut firm efficiency. Firms must invest to understand the local market and position themselves to work cooperatively with local partners. The managerial dilemma becomes how to gain legitimacy while safeguarding efficiency (Yang et. al, 2012).

The past solution, as the article highlights, was to conform to gain social acceptance for survival -- even if was detrimental to the firm and compromised self-interests. The authors suggest that the more effective method is to minimize institutional distance through regulatory, normative and cultural-cognitive means (Yang et al., 2012). The goal is to significantly decrease market ambiguity and legitimacy pressure. They cite contract customization and relational governance -- combined -- as the best way to achieve this.

The article defines the three pillars of institutional distance as regulatory (laws and sanctions that dictate what an organization can or cannot do), normative (societal beliefs and norms that outline what people should or should not do), and cultural-cognitive (what people typically do). Understanding how all of these play out in the international market is critical because it enables firms to understand the applicable rules, routines, conventions and expectations in the host market -- all of which impact efficiency. Further, potential host partners may be distrustful of foreign partners or view them as less socially fit because of their lack of understanding of customary business practices, standards, values and norms (Lin, 2012). This often means less access to resources, social support and insider knowledge about the market, exerting a legitimacy pressure on the firm.

Contract customization can offset the legitimacy-efficient challenge by enhancing organizational learning and cultural assimilation. It creates a tailored set of obligations, roles and benefits that help prevent misunderstandings. Contracts also help protect against opportunism. It is much harder for host partners to take advantage of unwitting foreign partners when contracts are involved. They help establish standards and clarity for both parties and discourage self-seeking behaviors. Similarly, relational governance helps create a sense of trust that turns foreign firms into "insiders" with access to information that eliminates market ambiguity (Yang et. al, 2012). Cooperative actions, joint planning, information sharing, flexibility, and feelings of solidarity enhance the foreign firm's position in the eyes of local businesses and offer opportunities to learn, understand and adapt to doing business in a new country (Lin, 2012). Firms can mimic their channel partners to gain legitimacy.

To prove their hypothesis, the researchers conducted personal interviews with two senior managers from Chinese firms that manufacture and export goods to various countries through foreign distributors. A total of 436 managers from 218 firms were asked to answer survey questions pertaining to their relationship with the distributor with which they conducted the highest volume of business. The multi-choice survey questions were designed to measure institutional distance at the organizational level, including regulatory, normative, and cross-cultural. Measurements were also taken of perceived legitimacy pressures and market ambiguity. The authors also measured the use of governance strategies to combat legitimacy-effectiveness challenges -- contract customization and relational governance. The research design also included measures of strategic, selling and economic performance within the channel. Firm size, transaction history and frequency with the distributor, asset specificity, environmental volatility, and the effects of state-owned manufacturers, an important institutional factor in China, were set as controls. All measurements were tested to ensure adequate convergent validity, limited bias, and satisfactory reliability.