THE IMPACTS OF THE EMERGING MARKETS INSTITUTIONAL ENVI-RONMENT ON FOREIGN FIRMS - A Study on Finnish Cleantech Firms in China

Abstract

The institutional environment affects the strategy that firms must choose in order to do business in a given market and strategy then affects the firm’s performance. The purpose of this study was to investigate the changing institutional environment of the emerging market of China and gain an understanding of the different formal and informal institutional factors that have an impact on foreign firms operating there.

This study uses a deductive approach and establishes a framework based on a wide literature review that was tested through semi-structured interviews. The interviews were conducted in Finnish cleantech companies that have extensive history operating in China. The data from the interviews was analyzed together with the theoretical framework to understand the main differences and similarities in them. Cleantech was chosen as the empirical focal point as limited academic research has been conducted in this industry.

According to this study, most of the formal institutional forces in China tend to have more negative impacts on foreign firms. These negative impacts include increased protectionism, weak legal environment and poor information transparency regarding local firms. The informal factors have more positive impacts due to the emphasis on relation-ships in the market that help firms overcome difficulties created by the malfunctioning formal institutions. The impacts identified are more versatile than depicted in previous studies. The impacts of both formal and informal institutions need to be considered together to evaluate total impact they have on firms. It is important for foreign firms to understand the differences in the institutional environments between home and host country and adapt their strategies accordingly.

It was shown that China clearly needs to pay attention in developing its institutional environment to ensure market growth. Even with all the challenges caused by the transitioning institutional environment, China has become the main market for many foreign firms and despite difficulties firms will continue operating there.