Hilma Hakala From Institutional Voids to Entry Mode Strategy: Managing Political Risk in Emerging Markets Vaasa 2025 School of Marketing and Communication Bachelor’s thesis in International Business 2 VAASAN YLIOPISTO Markkinoinnin ja viestinnän akateeminen yksikkö Tekijä: Hilma Hakala Tutkielman nimi: From Institutional Voids to Entry Mode Strategy: Managing Po- litical Risk in Emerging Markets Tutkinto: Kauppatieteiden kandidaatti Oppiaine: Kansainvälinen liiketoiminta Työn ohjaaja: Sniazhana Diduc Valmistumisvuosi: 2025 Sivumäärä: 36 TIIVISTELMÄ: Kansainvälisen liiketoiminnan toimintaympäristö on viime vuosina muuttunut yhä epävakaammaksi poliittisten jännitteiden, geopoliittisten konfliktien ja institutionaalisten heikkouksien seurauksena. Erityisesti kehittyvät markkinat tarjoavat yrityksille merkittäviä kasvumahdollisuuksia, mutta altistavat ne samalla monenlaisille poliittisille ja institutionaalisille riskeille. Tässä kandidaatintyössä tarkastellaan, miten institutionaaliset puutteet ja poliittinen epävakaus vaikuttavat yritysten valitsemiin markkinoilletulostrategioihin kehittyvillä markkinoilla. Kehittyvien markkinoiden merkitys globaalissa taloudessa on kasvanut erityisesti viime vuosikymmeninä, kun monikansalliset yritykset ovat pyrkineet hyödyntämään näiden markkinoiden nopeaa talouskasvua, laajenevia kuluttajamarkkinoita sekä luonnonvaroja. Samanaikaisesti viimeaikaiset globaalit kriisit, kuten COVID-19-pandemia, geopoliittiset jännitteet ja alueelliset konfliktit, ovat lisänneet epävarmuutta ja korostaneet institutionaalisten ja poliittisten riskien vaikutusta yritysten kansainvälisiin strategioihin. Tutkielman tavoitteena on syventää ymmärrystä kehittyville markkinoille tyypillisistä institutionaalisista ja poliittisista riskeistä sekä siitä, miten nämä riskit ohjaavat yritysten markkinoiletulostrategioiden valintaa. Lisäksi tutkielmassa pyritään selvittämään, miten yrityskohtaiset tekijät, kuten resurssit, kansainvälinen kokemus ja riskinsietokyky, vaikuttavat näihin valintoihin. Tutkielma on toteutettu teoreettisena kirjallisuuskatsauksena ja perustuu sekä klassisiin että ajankohtaisempiin kansainvälisen liiketoiminnan tutkimuksiin. Tulokset osoittavat, että kehittyville markkinoille on ominaista heikot sääntely- ja oikeusjärjestelmät, epävarmat sopimusten täytäntöönpanomekanismit ja poliittinen arvaamattomuus, jotka yhdessä lisäävät yritysten kohtaamaa epävarmuutta. Tutkimus korostaa, että markkinoilletulostrategioiden valinta ei perustu pelkästään perinteisen kontrollin ja riskin väliseen kompromissiin, vaan siihen vaikuttaa yhä enemmän yritysten kyky rakentaa paikallista legitimiteettiä ja hallita sidosryhmäsuhteita. Yrityskohtaiset tekijät toimivat keskeisinä moderaattoreina näiden riskien ja strategisten valintojen välillä. Tutkielma tarjoaa teoreettisen katsauksen institutionaalisten puutteiden ja poliittisen epävakauden yhteisvaikutuksista markkinoilletulostrategian valintaan ja tarjoaa hyödyllisiä näkemyksiä strategiseen päätöksentekoon kansainvälisessä liiketoiminnassa, erityisesti epävarmoissa toimintaympäristöissä. Tutkielman johtopäätökset korostavat tarvetta tarkastella markkinoilletulostrategioita dynaamisina ja kontekstisidonnaisina päätöksinä, joissa yrityksen sisäiset valmiudet ja ulkoiset institutionaaliset olosuhteet ovat jatkuvassa vuorovaikutuksessa. Tutkielma luo pohjaa jatkotutkimukselle, jossa voidaan syventää ymmärrystä eri toimialojen ja maantieteellisten alueiden välisistä eroista. AVAINSANAT: emerging markets, institutional voids, political instability, entry mode choice, foreign market entry, risk management, control–risk trade-off 3 UNIVERSITY OF VAASA School of Marketing and Communication Author: Hilma Hakala Title of the Thesis: From Institutional Voids to Entry Mode Strategy: Managing po- litical Risk in Emerging Markets Degree: Bachelor of Economics and Business Administration Programme: International Business Supervisor: Sniazhana Diduc Year: 2025 Pages: 36 ABSTRACT: The operating environment for international business has become increasingly unstable in recent years as a result of political tensions, geopolitical conflicts, and institutional weaknesses. Emerging markets in particular offer companies significant growth opportunities, but at the same time expose them to a variety of political and institutional risks. This bachelor's thesis examines how institutional voids and political instability affect the market entry strategies chosen by companies in emerging markets. The importance of emerging markets in the global economy has grown particularly in recent decades, as multinational companies have sought to take advantage of these markets' rapid economic growth, expanding consumer markets, and natural resources. At the same time, recent global crises, such as the COVID-19 pandemic, geopolitical tensions, and regional conflicts, have increased uncertainty and highlighted the impact of institutional and political risks on companies' international strategies. The aim of the thesis is to deepen the understanding of the institutional and political risks typically associated with emerging markets and how these risks guide companies' entry mode choices. In addition, the thesis aims to clarify how company-specific factors, such as resources, international experience, and risk tolerance, influence these choices. The study is a theoretical literature review based on both classic and more recent research on international business. The results show that emerging markets are characterized by weak regulatory and legal systems, uncertain contract enforcement mechanisms, and political unpredictability, which together increase the uncertainty faced by companies. The study emphasises that the choice of market entry strategies is not based solely on the traditional trade-off between control and risk but is increasingly influenced by companies' ability to build local legitimacy and manage stakeholder relationships. Company-specific factors act as key moderators between these risks and strategic choices. The study provides a theoretical review of the combined effects of institutional deficiencies and political instability on the choice of market entry strategy and offers useful insights for strategic decision-making in international business, especially in uncertain operating environments. The conclusions of the study emphasise the need to view market entry strategies as dynamic and context-specific decisions in which the company's internal capabilities and external institutional conditions are in constant interaction. The study lays the groundwork for further research to deepen our understanding of the differences between various industries and geographical areas. KEY WORDS: emerging markets, institutional voids, political instability, entry mode choice, foreign market entry, risk management, control–risk trade-off 4 Contents 1 Introduction 6 1.1 Background and Motivation 6 1.2 Problem Statement and Research Aim 7 1.3 Research Questions, Scope and Structure of the Thesis 8 2 Emerging Markets, Institutional Voids and Political Instability 9 2.1 Emerging Markets 9 2.2 Institutional Voids 10 2.3 Political Instability & Risk 11 3 Market Entry Mode Strategies in International Business 13 3.1 Overview of Entry Modes 13 3.2 Control–Risk Trade-off 15 3.3 Firm-Specific Factors 16 3.4 Risk Mitigation Through Entry Modes 18 4 Linking Context and Strategy: Effects of Institutional Voids and Political Instability on Entry Mode Choice 19 4.1 Institutional Voids and Political Risk as a Combined Effect 19 4.2 Mechanisms influencing entry mode choices 20 4.3 Company-specific factors as mediators 22 4.4 Conceptual Framework and Summary 23 5 Conclusions 26 5.1 Summary of the Findings 26 5.1.1 What Types of Institutional Voids and Political Risks Characterize Emerging Markets Today? 26 5.1.2 How Do These Voids and Risks Influence the Choice of Entry Mode for International Firms? 27 5.1.3 How Do Firm-Specific Factors (e.g., Size, Experience, Resources) Moderate These Relationships? 28 5.2 Managerial Implications 29 5 5.3 Limitations and future research 29 References 31 Appendices 36 6 1 Introduction 1.1 Background and Motivation Recent geopolitical disruptions, post-COVID fragmentation, and rising economic nationalism have substantially reshaped the global business environment (Contractor, 2021; Fan et al., 2022). Multinational enterprises (MNEs) that once viewed emerging markets as promising opportunities for expansion are now facing growing uncertainty due to political instability, sanctions, and weak institutional infrastructures (Yan & Piao, 2025). Despite these challenges, emerging markets continue to attract significant foreign direct investment (FDI), driven by their rapid growth potential, expanding consumer bases, and resource availability (UNCTAD, 2025, pp.7-8). Moreover, recent reviews of the FDI literature further confirm that researchers focus on emerging markets in international business research, particularly in relation to entry mode choices, institutional conditions and political risk (Nazzal et al., 2022). Current literature highlights that the global business environment post-COVID-19 is increasingly fragmented, which increases the importance of both political risks and institutional weaknesses in emerging markets (Contractor, 2021; Shu et al., 2025). For example, Contractor (2021) emphasises that global supply chains have become more vulnerable to disruptions after the crisis, requiring firms to assess the institutional capacity of markets more carefully than before. Similarly, Fan et al. (2022) note that escalating geopolitical tensions and trade disputes between major powers are shaping companies’ decisions on market entry and risk management strategies. Together, these developments underline the need to examine entry mode decisions from new perspectives, particularly regarding firms’ ability to build local stakeholder relationships and secure legitimacy in uncertain circumstances. 7 However, operating in such contexts requires more than financial capital, it demands the ability to navigate environments where formal market-supporting institutions are absent, underdeveloped, or unreliable. These so-called institutional voids affect how markets function and how firms structure their international operations (Khanna & Palepu, 1997; Doh et al., 2017). When combined with political instability, they create complex risk landscapes that influence how foreign firms choose between different market entry modes, such as exporting, licensing, joint-ventures, or wholly owned subsidiaries. Understanding how institutional voids and political instability shape these strategic decisions is crucial, especially in today’s world where geopolitical tensions, such as the Russia–Ukraine conflict, trade decoupling between the U.S. and China, and shifts in global governance, redefine the meaning of “emerging market.” For both managers and policymakers, insights into these dynamics can help build more resilient strategies for internationalization. 1.2 Problem Statement and Research Aim Existing international business research has extensively analysed entry mode choices (Brouthers, 2002; Meyer et al.2009), yet the interaction between institutional voids, political instability, and firm-level entry strategies remains underexplored. Many studies treat institutional risk and political risk separately, without considering how their combination alters transaction costs, legitimacy pressures, and control preferences in emerging markets. Although entry mode research is extensive, the literature examining geopolitical risks and institutional fragilities in the post-COVID era remains fragmented. There is a lack of research examining how political instability and institutional deficiencies together shape companies’ need for control and risk tolerance when entering markets. The contribution of this study lies in combining these two phenomena and examining entry mode choices from the perspective of both institutional and political risks simultaneously. 8 This thesis aims to bridge that gap by examining how institutional voids and political instability jointly influence firms’ entry mode decisions in emerging markets. It seeks to synthesise existing literature and highlight how firms adapt their governance structures to manage uncertainty and risk while pursuing strategic opportunities. 1.3 Research Questions, Scope and Structure of the Thesis The guiding purpose of this research is to understand how context-specific risks in emerging markets influence strategic entry decisions. Accordingly, the supporting research questions are: 1. What types of institutional voids and political risks characterize emerging markets today? 2. How do these voids and risks influence the choice of entry mode for international firms? 3. How do firm-specific factors (e.g., size, experience, resources) moderate these relationships? The thesis focuses on emerging markets as host countries for foreign entrants, drawing primarily on academic research and recent empirical evidence. When examining different entry mode strategies, the focus is on firm-level decision-making rather than on the perspectives of individual managers or leaders. This approach aligns with the objective of analysing market entry as an organizational strategic choice rather than as an outcome of managerial cognition or psychology. The study adopts a theoretical methodology without empirical case studies, which is suitable for synthesising existing research across institutional environments. By relying on established literature rather than a single-case analysis, the thesis offers a broad basis for understanding how institutional voids and political instability jointly influence firms’ entry strategies in emerging markets. Its structure follows the research questions by defining the context, reviewing entry mode strategies, and integrating these perspectives into an analytical framework. 9 2 Emerging Markets, Institutional Voids and Political Instability 2.1 Emerging Markets Emerging markets (EMs) are economies that combine growth potential with structural and institutional weaknesses. They are typically characterized by expanding consumer markets, rising income levels, and industrial transformation, but also by incomplete regulatory systems, corruption, and limited transparency (Meyer & Peng, 2016). Unlike developed markets, EMs often lack stable institutions that enforce contracts, protect investors, or ensure consistent rule of law. These conditions both attract and challenge multinational enterprises. As Contractor (2021) notes, the global economy is undergoing a phase of “re- regionalization,” where firms must balance opportunity and vulnerability. While EMs promise high returns, they expose firms to context-specific risks that require adaptation, learning, and flexible governance. Examples of such markets include the BRICS countries meaning Brazil, Russia, India, China and South Africa. These countries have represented the core of global economic emergence since their economies demonstrate how growth and instability can coexist. For example, the BRICS countries struggle with corruption, political volatility, bureaucratic inefficiencies and geopolitical tensions. At the same time, they can uphold strong innovation capacity, state-led growth and quick adaptability to changing situations (Becha et al., 2025). The classification of emerging economies is still under debate, and some scholars argue that China, for example, no longer fully meets the criteria for an “emerging market” due to its institutional development and economic size (Li et al., 2022). However, for the purposes of this work, China is considered an emerging market because its regulatory environment and institutional structures still create significant market uncertainties for foreign companies. 10 Beyond the BRICS, a newer group of countries, sometimes called the Next Eleven, has gained attention for their rapid industrialization and demographic potential. This group includes, among others, Vietnam, Turkey, Indonesia, Mexico and Nigeria. These economies share similar institutional challenges, such as regulatory uncertainty and governance gaps, yet remain attractive for foreign investors seeking diversification and access to fast-growing consumer bases (Tariq & Ahmed, 2022). 2.2 Institutional Voids The term institutional voids was popularized by Khanna and Palepu (1997), referring to the absence or underdevelopment of market-supporting institutions such as legal systems, financial intermediaries, and regulatory frameworks. These voids increase transaction costs by making it difficult for buyers and sellers to find each other, evaluate quality, and enforce agreements (Khanna & Palepu, 2010). In practice, institutional voids may manifest as weak property rights, corruption, limited financial market depth and unpredictable enforcement. Firms entering such environments must decide whether to internalize certain activities, partner with local actors, or rely on informal mechanisms such as networks and trust. Doh et al. (2017) emphasise that firms can respond to institutional voids through four main strategies: internalization, substitution, institutional borrowing, and signaling. These responses influence the governance mode and degree of control a firm seeks in its foreign operations. Institutional voids are particularly evident in emerging markets, where the formal infrastructure that underpins market efficiency, such as transparent accounting standards, effective judiciary systems, and capital markets, is often incomplete or unevenly distributed (Meyer & Peng, 2016). As a result, firms frequently depend on relational ties and informal networks to mitigate uncertainty and secure legitimacy. For example, in countries such as India or Nigeria, multinational enterprises often engage in 11 alliances with local partners to navigate regulatory gaps or overcome bureaucratic inefficiencies. Moreover, recent research suggests that institutional voids are not static but evolve with economic and political change. Developing digital infrastructure, regulatory reforms, and foreign investment can gradually reduce these voids, while political instability or corruption can widen them (Rodrigues & Child, 2023). The ability of firms to adapt their entry strategies and governance structures to these shifting institutional conditions is a key determinant of long-term performance in emerging markets. Furthermore, crises such as the COVID-19 pandemic have demonstrated how institutional weaknesses can intensify during periods of disruption. Many emerging economies faced challenges related to healthcare capacity, digital infrastructure limitations and unpredictable regulatory responses, forcing firms to rely more heavily on local networks, informal practices and cooperation with public actors (Rodrigues & Child, 2023). Additionally, recent meta-analysis evidence suggests that stakeholder relations and legitimacy have become increasingly central in managing institutional voids (Wan et al., 2023). This implies that entry mode choices today more strongly reflect a firm’s ability to build acceptance among local institutions, market actors and communities. Such legitimacy-oriented considerations are particularly relevant in settings where formal institutions are weak, and firms must secure support from local stakeholders to operate effectively. (Liedong et al., 2020). 2.3 Political Instability & Risk Political instability refers to volatility in a country’s political environment that threatens the predictability of policies or the safety of operations. It includes government turnover, civil unrest, corruption, sanctions, or regulatory unpredictability (Henisz & Zelner, 2010). In emerging markets, political risk and institutional weakness often reinforce one 12 another: poor governance increases uncertainty, while instability undermines institutional reforms. Recent research confirms that such political instability can intensify existing institutional voids by weakening regulatory predictability and limiting firms’ ability to rely on formal governance mechanisms (Fan et al., 2022). For foreign investors, political instability translates into higher non-market risk, including policy reversals, expropriation, or constraints on profit repatriation. As Stevens et al. (2015) note, firms facing such conditions must not only assess financial risks but also legitimacy risks: how local stakeholders perceive their right to operate. Consequently, political risk management becomes central to entry strategy design. Recent global developments, such as the Russia–Ukraine conflict and rising geopolitical tensions between major economies, have further underscored the importance of political risk assessment in international business. These events highlight that even previously stable markets can become politically volatile, compelling multinational enterprises to adapt their governance and risk management practices accordingly (Contractor, 2021). A recent example of the impact of political instability on business is Ethiopia, where crises related to ethnic tensions, regional conflicts and governance weaknesses have weakened the operating conditions for businesses. According to research, political instability and governance deficiencies significantly affect the success of businesses in the Amhara region, demonstrating how political and institutional risk are intertwined in emerging markets (Gebersilassie, 2024). 13 3 Market Entry Mode Strategies in International Business 3.1 Overview of Entry Modes Market entry modes determine how firms engage with foreign markets. The most common options include exporting, licensing or franchising, joint-ventures, and wholly owned subsidiaries (Hill et al., 1990). These modes differ in terms of control, resource commitment, and exposure to risk. In stable institutional environments, firms may prefer equity-based modes such as wholly owned subsidiaries. In contrast, in uncertain or politically unstable contexts, firms may opt for contractual or shared-ownership arrangements that limit exposure. Meyer et al. (2009) argue that entry mode choice is essentially a trade-off between control and risk, a balance shaped by institutional quality. More recent research also supports this view, showing that institutional uncertainty and geopolitical risk guide companies to choose forms of market entry with lower commitment, especially in emerging economies where risk predictability is low (Fan et al., 2022). However, contemporary research suggests that institutional quality alone is no longer considered sufficient to explain firms’ entry mode choices. In the post-COVID era, firms simultaneously assess both the institutional constraints of the market and their own ability to build local stakeholder relationships and manage legitimacy risks (Wan et al., 2023). Considering these findings, the traditional control-risk trade-off gains an additional dimension, in which the institutional environment and the firms’ own resources interact dynamically. Moreover, recent study highlights that entry mode choices are shaped not only by cost considerations but also by stakeholder influence, business group affiliation, and host-country network structures (Bretas et al., 2024). These factors can lead firms toward lower-control modes even when higher control might offer better protection of assets. 14 To illustrate the theoretical discussion presented above, it is useful to summarise the main market entry modes in a comparative format. Table 1 clarifies how the different entry modes differ from each other in terms of the level of control, resource commitment, risk exposure and speed of market entry. These factors are central in terms of companies’ strategic decision-making, especially in emerging markets. The table below synthesises key insights from established international business literature. Table 1. Summary of main entry modes (Hill et al., 1990; Meyer et al., 2009; Wan et al. 2023; & Bretas et al., 2024) ENTRY MODE CONTROL LEVEL RESOURCE COMMITMENT RISK EXPOSURE SPEED OF ENTRY TYPICAL USE CONDITIONS EXPORTING Low Low Low market risk, higher trade/policy risk Fast Early market testing, limited local adaptation needs LICENSING / FRANCHISING Low / Moderate Low Risk of IP leakage, contract enforcement risk Fast When local adaptation is needed but firm avoids heavy investment JOIN VENTURE (JV) Shared Moderate Partner risk, political risk partly shared Moderate When institutional voids require local partner knowledge MINORITY EQUITY INVESTMENT Low / Moderate Moderate Moderate exposure Moderate Entering unstable markets with some control but limited liability WHOLLY OWNED SUBSIDIARY (WOS) High High High political & operational risk Slow Large, stable markets, when protecting technology is critical In the table above, the entry modes are compared to highlight how different combinations of control, commitment and risk influence firms’ strategic choices in emerging markets. Hill et al. (1990) emphasise that exporting and licensing are low- control governance structures that primarily expose firms to contractual and policy- 15 related risks rather than operational uncertainty. Equity-based modes, on the other hand, such as joint ventures and wholly owned subsidiaries, provide a lot more control, but also require higher resource commitments and expose firms more directly to host- country institutional and political risks (Meyer et al., 2009). Recent studies have further refined this perspective by showing that, in contexts marked by institutional voids, firms increasingly rely on collaborative arrangements, particularly joint ventures, to compensate for missing market-supporting institutions (Wan et al., 2023). Additionally, stakeholder pressures and network structures may push firms towards lower-control modes, even when high-control modes would traditionally be favoured (Bretas et al., 2024). Together, these insights demonstrate that entry mode choices are not solely determined by efficiency considerations but are also influenced by institutional constraints and non-market dynamics. 3.2 Control–Risk Trade-off Traditionally, the choice of market entry has been viewed as a trade-off between control and risk: the higher the level of ownership and control a company chooses, the greater both the potential return and the exposure to political and institutional risks (Hill et al., 1990; Meyer et al., 2009). More recent research continues to confirm this basic logic, but refines it, particularly in high-risk operating environments. A meta-analysis by Tang and Buckley (2020) shows that political and institutional risk in the target country is systematically associated with a lower degree of foreign ownership: for example, companies favour partial ownership or contractual arrangements over full subsidiaries when the risk level is high. The control–risk trade-off is particularly important in emerging markets, where institutional gaps and political instability often occur simultaneously. Liedong et al. (2020) emphasise in their review that institutional gaps increase uncertainty about resource commitment: the weaker the regulatory and enforcement environment, the more difficult it is for companies to assess how well their investments can be protected and repatriated. In this situation, high-control entry forms, such as wholly owned subsidiaries, 16 not only mean higher expected returns but also significantly higher downside risk if institutional structures fail. The pandemic has fundamentally changed the way firms manage risk, forcing companies to prioritise resilience and strike a balance between short-term operational risks and long-term strategic objectives when managing global supply chains (Canwat, 2024). Similar findings are presented by Rodrigues and Child (2023), who argue that the pandemic and geopolitical tensions have increased the number of situations in which companies in high-political-risk markets may favour lower-commitment models, such as joint ventures, to limit their exposure (Aib, 2024). However, as the environment becomes clearer or the company’s resources and local knowledge strengthen, the degree of ownership can also be increased, for example by converting joint ventures into wholly owned subsidiaries to ensure control over critical operations (Petersen & Benito, 2024). In summary, the control–risk trade-off in emerging markets is not a static decision, but a dynamic process in which companies adjust their level of ownership according to institutional risk, political uncertainty and long-term strategic goals. More recent literature also emphasises that the trade-off is closely linked to a company’s ability to build local legitimacy and stakeholder relationships: if these are strong, the company can bear a higher level of control risk the institutional environment alone would explain (Liedong et al., 2020; Wan et al., 2023). 3.3 Firm-Specific Factors Internal characteristics of a company have a significant impact on what kind of entry strategies the company considers realistic and strategically appropriate. Previous research emphasises the role of resources, international experience, network relationships and risk tolerance in entry mode choices (Brouthers & Hennart, 2007). 17 According to more recent literature, these factors have become even more important as operating environments have become increasingly unstable (Li et al., 2021). A company’s resource base essentially determines whether a higher degree of ownership, such as WOS, is a realistic option. Extensive capital, technology, and organizational capacity support higher control structures, while resource-constrained companies are more likely to resort to cooperative or contractual models (Li et al., 2021). In addition, a firm’s market knowledge and experience of operating in the institutional environments of developing countries strengthen its ability to manage uncertainty and make higher control options more attractive. On the other hand, smaller and less experienced players, especially emerging market companies that are internationalizing, typically favour lighter entry modes, as economic uncertainty and limited resources increase investment risks (Kyriakopoulos et al., 2025). This suggests that the size of a company and its level of organizational readiness determine not only the choice of entry mode, but also how flexibly the company can adapt its strategy when institutional or political risks change. Market-specific knowledge capital also influences the entry mode strategy. Amankwah- Amoah et al. (2022) shows that companies with a stronger knowledge of foreign markets can utilize higher forms of control more effectively and achieve better performance in international markets. Conversely, companies that lack local knowledge favour lighter and more flexible market entry solutions to manage risks. Thus, firm’s internal characteristics are decisive in determining how institutional and political risks can be managed. These factors directly influence company’s preferences in the balance between control and risk and therefore understanding them is essential in analysing entry mode choices in emerging markets. 18 3.4 Risk Mitigation Through Entry Modes Market entry strategies serve as key risk management tools when companies operate in politically uncertain and institutionally deficient environments. Recent research highlights that companies often choose their entry mode primarily based on risk mitigation rather than simply growth or control (Li et al., 2021). One key risk management mechanism is equity control. Companies can reduce their exposure to political and institutional risks by choosing modes of lower control, such as joint ventures or licensing (Aib, 2024). These enable risk sharing with a local partner, which is particularly valuable in operating environments where regulatory and administrative systems are weak. Aib’s (2024) research shows that in high-political-risk environments, joint ventures are often more stable than wholly owned solutions because partners can navigate uncertainties and leverage experience together. On the other hand, companies can also strengthen control if the operating environment or strategic situation requires it. Petersen & Benito (2024) shows that companies often transform their JV arrangements into WOS structures when institutional or political uncertainty decreases or when the firm’s own expertise and resources grow. This suggests that companies view entry modes dynamically: the logic of risk management can lead to both increased and reduced control. In addition, companies utilize networks and local stakeholders to support risk management. Amankwah-Amoah et al. (2022) underlines that strong local relationships and market knowledge help companies adapt to institutional deficiencies and reduce the risks caused by political uncertainty. Thus, the choice of entry mode is not only a choice of ownership level, but also a strategic tool that guides how companies build and utilize their networks in target countries. Overall, entry mode strategies form a diverse and dynamic risk management framework in which companies balance investment control, partnerships and stakeholder relationships. 19 4 Linking Context and Strategy: Effects of Institutional Voids and Political Instability on Entry Mode Choice 4.1 Institutional Voids and Political Risk as a Combined Effect In previous chapters, institutional voids and political instability have been examined as separate phenomena. However, they often occur in the same operating environments and reinforce each other’s effects. Institutional voids, such as weak contract enforcement, inadequate regulation, corruption and underdeveloped financial markets, complicate the functioning of market mechanisms and increase transaction costs (Khanna & Palepu, 1997, 2010; Doh et al., 2017). Political instability, in turn, manifests itself in the form of changes in government, unpredictable regulation, conflicts and sanctions, which increase non-market risk for investments (Stevens et al., 2015). Recent research shows that institutional fragility and political instability often form a “risk link”, in which an increase in one uncertainty reinforces the effects of the other (Sun et al., 2021). In emerging markets, political instability can slow down institutional development or even collapse existing structures. For example, the COVID-19 pandemic weakened the administrative capacity of some countries, increased regulatory inconsistency and exposed infrastructure deficiencies, deepening existing institutional voids (Rodrigues & Child, 2023). Similarly, geopolitical tensions and regional conflicts can create situations where political risk rises sharply, and institutions lose their legitimacy or capacity to function (Liedong et al., 2020). Both institutional voids and political instability affect firm’s transaction costs, particularly through contract risks, monitoring costs, and the likelihood of opportunistic behaviour. According to recent studies, these factors influence the level of control chosen by a company and thus its entry mode decision: the weaker the institutions and the higher 20 the political risk, the more cautious companies are about committing to large capital investments (Wan et al., 2023; Liedong et al., 2020). At the same time, institutional uncertainty increases the need for companies to rely on local partners, networks, and non-market strategies, which steers companies toward collaborative or lower-control market entry modes. On the other hand, if political instability specifically targets joint ventures or restricts local ownership in certain industries, companies may choose higher control models to protect their intellectual property rights and reduce their dependence on unreliable institutions (Petersen & Benito, 2024). This shows that the combined effect of institutional voids and political risk does not always lead to similar strategic choices. Firms’ reactions depend on industry regulation, market risk profile, and the company’s own resources and risk tolerance. Overall, the combination of institutional voids and political instability creates a multi- layered risk field in which companies’ entry mode choices are shaped by the combined effects of external circumstances and internal capabilities. This highlights the need to view market entry strategy as a dynamic process in which changes in the institutional environment can rapidly alter the optimal operating model. 4.2 Mechanisms influencing entry mode choices The impact of institutional voids and political risk on market entry choices can be analysed through several theoretical mechanisms. Traditionally, entry mode literature has emphasised transaction costs: the weaker the institutional environment, the more profitable it is to internalize critical functions and choose an entry mode with a high degree of control, such as a wholly owned subsidiary (Meyer et al., 2009). Institutional voids increase asymmetric information, the risk of opportunism and uncertainty in contract enforcement, which contribute to the costs associated with outsourced arrangements (Khanna & Palepu, 2010). From this perspective, joint 21 ventures or cooperation models based on local partners can act as “intermediaries” for institutional voids if the partner brings local knowledge and relationships with authorities, but at the same time they add partner risk and potential conflicts of interest (Jaworek et al., 2021). However, research in recent years has broadened this perspective. The literature on institutional voids has pointed out that voids should not be seen only as obstacles but can also enable new forms of institutional entrepreneurship and innovation in business models (Dieleman et al., 2022). For example, multinational companies can respond to institutional voids by developing their own standards, training programs, or distribution channels, in which case the choice of entry mode is directly linked to the firm’s desire and ability to shape local operating conditions (Doh et al., 2017; Dieleman et al., 2022). Another key mechanism relates to legitimacy and stakeholder relations. Stevens et al. (2015) argue that political risk should be viewed as a legitimacy-based phenomenon: the weaker the institutions and the more polarized the political environment, the more important it is how the company’s activities are perceived from the perspective of local stakeholders, authorities, customers and communities. Wan et al. (2023) show in their meta-analysis that companies’ ability to build stakeholder relationships and social acceptability is an increasingly important factor in managing institutional voids. This is also reflected in entry mode choices: lower control modes, such as licensing or franchising, can be used in situations where a company wants to leverage the legitimacy and networks of local partners, even if it means giving up some direct control (Bretas et al., 2024). High-control modes, such as WOS: s, may be justified if the company seeks to protect critical technology or brand in an environment where institutions cannot be trusted, but at the same time, this increases exposure to political and institutional risks (Jaworek et al., 2021). 22 A third mechanism can be seen in firms’ non-market and geopolitical strategies. Contractor (2021) and Shu et al. (2025) emphasise that in the post-COVID environment, companies will have to pay more attention to geopolitical diversification, supply chain resilience and the “clustering” of political risk in certain areas. This may lead, for example, to companies distributing their production capacity across several countries and choosing different entry modes in these countries depending on their risk profile. In some economies, low commitment and quick exit options are emphasised, while in others, more long-term, high-control structures are built (Contractor, 2021; Shu et al., 2025). To conclude, institutional voids and political instability affect entry mode choices through at least three main mechanisms: transaction costs, legitimacy and non-market strategies. Companies must balance these perspectives according to the level of control, flexibility and local acceptability they consider most strategically important. 4.3 Company-specific factors as mediators Although the institutional and political context provides the framework for entry mode decisions, companies do not respond to it in the same way. Company-specific factors such as resources, international experience, risk tolerance, network relationships and corporate responsibility act as important mediating and transforming factors (Brouthers & Hennart, 2007; Meyer et al., 2009). The resource-based perspective emphasises that large and experienced multinational companies often have greater financial and organizational capacity to bear political and institutional risk than small companies. Such firms, for example, establish WOS: s even in institutionally unstable environments because they have the ability to build their own governance systems and risk management mechanisms (Meyer et al., 2009; Jaworek et al., 2021). Smaller operators, on the other hand, may resort to lower control modes, such as contract-based cooperation or JV: s, to share risk with local partners. 23 International experience and learning influence how companies interpret institutional and political risk. Rodrigues and Child (2023) show that global crises, such as the COVID- 19 pandemic, can serve as learning experiences that shape firms’ perceptions of risk and governance structures. Experienced multinational companies can leverage their previous crisis experiences to adapt their ownership and governance models, for example, by diversifying investments across multiple countries or converting JV: s into WOS: s or vice versa, depending on the situation. Stakeholder relations and corporate responsibility constitute the third key company- specific dimension. Wan et al. (2023) emphasise that a company’s ability to build trust with local stakeholders reduces the harmful effects of institutional voids and can also open opportunities for higher control entry modes. Similarly, Liedong et al. (2020) show that in environments characterized by politics and corruption, companies can strengthen their legitimacy through responsibility and community strategies, which reduces the risk of political backlash. Thus, the impact of the institutional and political environment on entry mode choices is not mechanical but depend on the company’s resources, learning ability and how well it is able to build and leverage its stakeholder relationships. The same risk profile can lead to very different strategic choices in different companies. 4.4 Conceptual Framework and Summary The aim of this chapter I to combine institutional voids, political instability, company- specific factors and market entry strategies into a single entity. Previous studies show that the institutional operating environment and political stability form a key external framework within which companies assess risks and the need for control (Rodrigues & Child, 2023; Shu et al., 2025). At the same time, companies’ own resources, expertise and risk tolerance determine what options they can realistically consider strategically appropriate (Brouthers & Hennart, 2007). 24 The conceptual framework summarizes these relationships in a mind map (Figure 1), in which institutional voids and political instability constitute key external pressures on structural choices for market entry. Institutional voids are related to, among other thing, uncertainty in the enforcement of contracts, underdeveloped financial markets and corruption, while political instability arises from changes in government, conflicts and regulatory changes. Firm-specific factors, such as resources, international experience, networks and risk tolerance, regulate how a company interprets these external stimuli and how much control it is willing to take. The figure 1 illustrates how these three elements guide the choice of entry mode. For example, significant institutional voids and political instability may guide companies towards lower ownership models, such as JV: s or contractual arrangements (Aib, 2024). Conversely, if a company has strong resources and local knowledge, it may choose models with higher control, such as subsidiary, even if the operating environment is unstable (Petersen & Benito, 2024). Thus, the entry mode decision is shaped by the combined effect of external risks and internal capabilities. Entry mode choice - Ownership level and control - Capital commitment - Risk exposure and speed Institutional voids - Uncertainty surrounding the implementation of agreements - Weakness of financial markets - Corruption and administartive inefficiency Political instability - Changes in government - Conflicts and unrest - Changes in regulatory and trade policies Firm-specific factors - Resources and expertise - International experience - Risk tolerance and networks 25 Figure 1. The impact of the institutional environment, political instability and company-specific factors on the choice of entry mode (Adapting Khanna & Palepu, 1997; Shu et al., 2025; Wan et al., 2023; Fan et al., 2022; Aib, 2024; Petersen & Benito, 2024) 26 5 Conclusions The purpose of this chapter is to present the key conclusions of the study and to respond to the research problem and research questions based on the literature review in the previous chapters. The chapter begins by summarizing the central findings of the study regarding the effects of institutional gaps and political instability on strategic choices in market entry. This is followed by a presentation of practical management implications for internationalizing companies based on the conclusions. The chapter concludes with a discussion of the limitations of the study and suggestions for further research, which open opportunities for future academic debate. 5.1 Summary of the Findings The aim of this study was to examine how institutional voids and political instability together shape the entry mode choices of international companies in emerging markets. Based on the literature review, three key conclusions can be drawn the correspond to the research questions. 5.1.1 What Types of Institutional Voids and Political Risks Characterize Emerging Markets Today? According to this study, developing markets continue to be characterized by diverse institutional voids and political risks, which have a significant impact on companies’ decisions to internationalize. Institutional voids are particularly evident in the form of deficiencies or weaknesses in market-supporting structures, such as uncertainty in contract enforcement, underdeveloped financial markets, unpredictable regulation and administrative inefficiency and corruption. These factors increase transaction costs and impair market efficiency, forcing firms to develop alternative control and adaptation mechanisms (Khanna & Palepu, 2010; Doh et al., 2017). 27 Political risks, on the other hand, are related to the instability and unpredictability of the political environment. These include, among other things, changes in government, political conflicts, social unrest, international sanctions and sudden changes in trade and investment policies. Recent global crisis, such as the COVID-19 pandemic, geopolitical tensions and regional conflicts, have highlighted that political risk is not limited to traditionally unstable economies but can also occur in operating environments that were previously considered relatively stable (Contractor, 2021; Fan et al., 2022; Shu et al., 2025). The key conclusion is that institutional voids and political instability are not separate phenomena but often reinforce each other. Weak institutions increase the impact of political risk, as they limit the ability of stated to respond to crisis and provide businesses with a predictable operating environment. At the same time, political instability can deepen institutional deficiencies, for example by undermining the legitimacy and enforcement of regulation. Due to this interaction, the risk profile of emerging markets is dynamic and context-dependent in nature, which emphasises the need for companies to assess markets holistically rather than through individual risk factors (Wan et al., 2023; Contractor, 2021). 5.1.2 How Do These Voids and Risks Influence the Choice of Entry Mode for International Firms? Based on the literature review, institutional voids and political instability directly affect companies’ choice of market entry strategies by increasing uncertainty and transaction costs. In line with traditional control-risk thinking, companies seek to limit their exposure by choosing lower-control entry modes, such as exports, licensing or JV: s, especially when the institutional environment is weak or political risk is high (Meyer et al., 2009; Brouthers, 2002). However, recent literature shows that entry mode choices can no longer be explained solely by institutional quality. In the post-COVID environment, companies 28 simultaneously assess both market constraints and their own ability to manage stakeholder relationships and achieve local legitimacy (Wan et al., 2023). As a result, companies may also opt for higher control solutions in institutionally challenging environments if strategic objectives, such as securing supply chains or protecting technology, require it (Bretas et al., 2024). Institutional voids and political risk do not therefore automatically lead to lighter entry modes; rather, their impact depend on the firm’s overall strategy and risk management capabilities. 5.1.3 How Do Firm-Specific Factors (e.g., Size, Experience, Resources) Moderate These Relationships? Company-specific factors prove to be the key determinants of how institutional voids and political risks are reflected in entry mode choices. Previous research emphasises the importance of the quantity and quality of resources, international experience and organizational capabilities in market entry strategies (Brouthers & Hennart, 2007). Experienced and well-resourced firms are better able to absorb political and institutional uncertainty and can therefore choose higher control operating models even in challenging operating environments. Moreover, relationship networks and stakeholder capital are becoming increasingly important in emerging markets. Companies with strong local partnerships or previous experience of similar institutional environments can mitigate the effects of institutional voids and achieve legitimacy more effectively (Liedong et al., 2020; Wan et al., 2023). Thus, the choice of entry mode is not merely a reaction to external risk environment, but the result of the interaction between external risks and the company’s internal capabilities. In summary, it can be said that institutional voids and political instability affect entry mode choices both directly and indirectly. They shape transaction costs, the assessment of licensing and ownership risks, stakeholder pressures and companies’ strategic 29 priorities. Firms’ own resources and capabilities, in turn, act as mediating mechanisms that determine how strongly these risks influence choices. 5.2 Managerial Implications The results of the study offer several practical conclusions for companies planning to internationalize. First, companies should evaluate emerging markets as holistic risk entities, where institutional voids and political instability often reinforce each other. It is not enough to consider economic potential alone; companies must also pay attention to the functioning of regulatory and administrative structures and the stability of the political environment (Fan et al., 2022; Shu et al., 2025). Secondly, firms should choose an entry mode that matches the institutional profile of the target market as well as the company’s own resources and risk tolerance. In less developed markets, sharing risks with a local partner may be justified, while companies with significant technology or assets to protect may benefit from greater control (Meyer et al., 2009; Bretas et al., 2024). Third, companies should invest in building stakeholder relationships, as legitimacy and trust can reduce institutional risks and enable more strategically attractive entry mode choices (Liedong et al., 2020; Wan et al., 2023). Lastly, it is important for firms to maintain flexible governance structures that allow for changes in ownership or partnership models as market conditions change, as demonstrated by pandemics and geopolitical crises (Rodrigues & Child, 2023; Petersen & Benito, 2024). 5.3 Limitations and future research This study is based on a literature review, which means that the conclusions are based on evidence provided by previous studies and their theoretical starting points. Empirical 30 data, especially company-specific data, could provide more accurate insights into the actual dynamics of entry mode decisions. Second, measuring institutional voids and political instability remains a research challenge. Future studies could develop more precise indicators or empirical models that consider the dynamic and regionally varying nature of risks. Moreover, the study focused on emerging markets at a general level. 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The use of AI The free version of the AI-powered DeepL Translator was used in this thesis as a linguistic support tool for translating selected sections of the author’s original ideas from Finnish to English, as well as for enhancing lexical choice, grammatical accuracy, and sentence formulation. The translator tool did not generate original ideas or independently produce content; all concepts and textual input originated solely from the author. 1 Introduction 1.1 Background and Motivation 1.2 Problem Statement and Research Aim 1.3 Research Questions, Scope and Structure of the Thesis 2 Emerging Markets, Institutional Voids and Political Instability 2.1 Emerging Markets 2.2 Institutional Voids 2.3 Political Instability & Risk 3 Market Entry Mode Strategies in International Business 3.1 Overview of Entry Modes 3.2 Control–Risk Trade-off 3.3 Firm-Specific Factors 3.4 Risk Mitigation Through Entry Modes 4 Linking Context and Strategy: Effects of Institutional Voids and Political Instability on Entry Mode Choice 4.1 Institutional Voids and Political Risk as a Combined Effect 4.2 Mechanisms influencing entry mode choices 4.3 Company-specific factors as mediators 4.4 Conceptual Framework and Summary 5 Conclusions 5.1 Summary of the Findings 5.1.1 What Types of Institutional Voids and Political Risks Characterize Emerging Markets Today? 5.1.2 How Do These Voids and Risks Influence the Choice of Entry Mode for International Firms? 5.1.3 How Do Firm-Specific Factors (e.g., Size, Experience, Resources) Moderate These Relationships? 5.2 Managerial Implications 5.3 Limitations and future research References Appendices