Strengthening Institutions to Legitimise Business Continuity in Weak Institutional Environments

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This paper investigates how weak institutional environments influence MNE decision making to be involved in creating public good facilities with the aim of reducing community risk, and to what
extend these can be traced back to the MNE choose of a Head Quarter (HQ) or local embeddedness driven strategies. Institutions are important in relation to risk management as they reduce uncertainty about transactions costs. From norms, which guide the interaction and dealing between individuals, to societies legal systems where disputes can be settled by an objective court. However,
in regions where formal institutions are either weak, by that unable to enforce its own rules, MNEs can encounter severe difficulties as they lack knowledge, especially about informal institutions, that
determine ‘the rules of the game’ in the business environment. MNEs can apply two distinct generic risk management strategies in their dealings with local communities. One strategy is based on rules
provide by the HQ, which focuses on providing guidelines in compliance with normative global institutions, while another strategy focuses on embedding the subsidiary in the local institutional
environment. Both of these strategies aim at reducing or mitigating community risk by engaging in renovating institutions or by constructing them in local communities were the MNE is active. Three
distinct categories of local institution building were investigated related to Education, Infrastructure as well as cultural or social institutions. The findings show that by prescribing to either an
Embeddedness or HQ driven strategy the MNEs either gained or lost legitimacy with the local communities. Companies that gained legitimacy were following an Embeddedness strategy and that
investments in institution building were made in close corporation with local community. Findings also show that local dependence on these intuitions grew stronger and community members became
increasingly reliant on the benefits that came with these continuous investments. The alternative HQ driven strategy findings showed that these companies lost local legitimacy and thereby
increased the community risk they were exposed to. These companies did not invest especially in institution building and the ones that did focus on more general types of activities such as
sponsorships or scholarships that were targeting a much wider stakeholder audience. It was found that engagement in institution building, not only had a direct operational impact, as in the case of
infrastructure (gaining access to quality road, electricity, etc.) and educational (access to qualified labour, research, etc.), but also served a purpose as part of a risk mitigation strategy towards NGOs
and the media. By gaining legitimacy and dependence from local communities the MNE reduced the risk that the community would contact and engage with these outside and possible powerful
stakeholders. Institution building hence serves a dual purpose, firstly, making communities reliant on the MNE by providing public good facilities in the absence or at best weak institutional
environment. Secondly, serving as an effective risk mitigation tool that keeps aggressive actors from partnering with local communities against the company thereby presenting a risk to its
continued operations.


KonferenceThe Private Sector in Development
LokationCopenhagen Business School