The Rules of The Game: South Africa: A Case Study on Institutional Voids and its Effect on Multinationals' Entry Strategies in South Africa

Abstract

Institutions in emerging markets play an essential role in determining success or failure of specific strategies of companies because of their capability to enforce rules, structures, or constraints on the company. Tarun Khanna and Krishna Palepu (2010) coined the term “institutional voids” to help explain the institutional environment that multinationals are dependent on, and the fact that the institutions that make up this environment are either missing or not functioning as expected in emerging markets. Understanding the relationship between a company’s institutional environment and its strategic choices is, therefore, paramount to the field. The institutional voids have much potential to shed needed light on this relationship, by helping to direct focus on the institutions that matter most to how firms function. This study attempts to address how institutional voids in South Africa affect multinationals’ entry strategies. This is done through a conceptual framework with particular focus on Khanna and Palepu’s (2010) five context framework which examines a country’s political and social systems, its degree of openness, its product markets, its labor markets, and its capital markets. The framework is subsequently applied, through a case study based on six interviews including market intermediaries and an industry expert, all based in South Africa. The findings revealed that the labor market was the most critical void in SA, due to a shortage of educated workers and restrictive labor regulations. Additionally, business synergies with public sector can also be appointed as an institutional void, as it encompasses several constraints that prevents desired business operations for foreign MNCs. Drawing on these, I develop new insights on the implications of the navigated voids for multinationals’ strategies. I conclude with suggestions for future research.