Exploring the Role of a Country's Institutional Environment in Internationalization: Strategic Responses of SMEs in Russia

Abstract

Based on the suggested five-pillar institutional framework, the study empirically investigates the impact of the institutional environment on internationalization aspirations of small and medium enterprises (SMEs) in emerging economies and maps their strategic responses against imposed institutional pressures. The data collected across five forest cluster SMEs in Saint Petersburg and Moscow are analyzed. Political instability, corruption, bounded cognition, over-patriotism, and high power distance act as the main constraints, while demands for new knowledge and funding are identified as the main drivers for internationalization. The classified institutional challenges are mapped against the possible strategic responses of the SMEs, such as acquiescence, compromise, avoidance, defiance, and manipulation.

KEYWORDS:

• entrepreneurship
• institutional environment
• international entrepreneurship
• Russia

Notes

Institutional environment is defined as a higher-level conceptual construct that consists of the effects of regulatory, normative, cognitive, cultural, and conductive nature and acts as one of the constituting elements of the external business environment.

Internationalization is defined as involvement of a firm in both outward and inward international operations. Outward internationalization refers to all ranges of equity-based (foreign direct investment), non-equity-based (export, licensing, franchising, etc.), and shared equity-based (equity alliances, joint ventures, and consortiums) foreign entry modes. Inward internationalization refers to foreign resource, skills, and technologies acquisition as well as incoming foreign investments.

Approximation is based on the exchange rate of the Central Bank of Russia on August 15, 2013 (1 U.S. dollar = 33.1583 rubles).

Criteria 2 and 3 follow the definition of SMEs provided by the Government of Russian Federation (Federal act 18.10.2007#N 230-Φ3 and Ammendum to the Federal act 02.07.2013#N 144-Φ3).

Snowball sampling method refers to formation of a random sample of individuals, where each previous respondent is asked to name next k respondents in the population that is defined according to sampling criteria chosen by a researcher (Goodman 1961).

The template analysis refers to a method of data analysis when a researcher creates “a list of codes representing themes identified in the textual data. [ … ] The template is organized in a way which represents the relationships between themes, as defined by the researcher, most commonly involving a hierarchical structure” (King 2004, 256).

The Lake Wobegon effect refers to a behavioral phenomenon of overestimating one's capabilities in relation to others. The scholars proved existence of the phenomenon among firm managers, who tend to estimate their skills and knowledge as above average in a certain domain (e.g., Malmendier and Tate 2005; Cooper, Woo, and Dunkelberg 1988). Merkle and Weber (2011) proved that the effect is associated with a mismatch of one's beliefs about own abilities and a rational information processing. Thus, Lake Wobegon effect acts as a form of a psychological bias that causes overconfidence.