Performance effects of stakeholder interaction in emerging economies: evidence from Brazil.

AutorBandeira-de-Mello, Rodrigo
CargoReport

Introduction

Mainstream research in Strategy has focused primarily on industry and firm effects as determinants of firm performance (e.g. McGahan & Porter, 1997; McGahan & Victer, 2010; Rumelt, 1991, e.g. for Brazil, Bandeira-de-Mello & Marcon, 2006; Brito & Vasconcelos, 2004, 2005), disregarding institutional differences (Peng, 2002). Nonetheless, some studies in this line of research have reported the importance of national institutional differences. For example, Carvalho, Bandeirade-Mello, Vianna and Marcon (2009) found relevant stable and transient country effects in a Latin American sample of firms. Goldszmidt, Brito and Vasconcelos (2007) found that country, industry and country-industry interaction effects had approximately the same relative importance in performance variance decomposition; and altogether, these effects were nearly as important as the firm effect. These country differences arise from differences in national formal and informal institutional arrangements, which affect the way business is done, as well as the resulting performance distribution (Griffiths & Zammuto, 2005).

Indeed, emerging economies' idiosyncrasies have urged mainstream strategy theories to better specification and towards the consideration of multiple theoretical perspectives (Hoskisson, Eden, Lau, & Wright, 2000; Wright, Filatotchev, Hoskisson, & Peng, 2005). While emerging market economies are characterized by the rapid pace of their economic development, by policies towards economic liberalization, and by the adoption of a free-market system (Hoskisson et al, 2000), they also show remarkable differences from the taken-for-granted assumptions of mainstream research in Strategy. Weak formal institutions, economic and political instability, corruption and bribery, high degrees of environmental uncertainty, underdeveloped financial markets, and strong emphasis on informal organizations defy theorizing within the context of emerging economies (Farashahi & Molz, 2004).

Firm organization and strategy in emerging economies seem to rely heavily on distinctive relationships with external actors. One may cite the studies on diversified business groups as a response to cope with market failures in high transaction cost environments (Guillen, 2000; Khanna & Palepu, 2000), and the role of non-market capabilities to grant access to scarce, valuable country resources in support of unrelated diversification (Wan, 2005). The pervasive influence of the government in business and the necessity to establish connections with the powerful shape-organizing activities in China and transition economies (Pearce, 2001), help to improve overall firm performance (Peng & Luo, 2000), can serve as first mover advantages for companies entering emerging markets (Rahman & Bhattacharyya, 2003), and are part of the multinational companies' lives (Holtbrugge, Berg, & Puck, 2007).

Despite the fact that external actors are important in emerging market contexts, the literature on strategy is relatively silent in analyzing how these actors interact and to what extent this interaction affects firm performance (Luk, Yau, Tse, Sin, & Chow, 2005). Theoretical propositions about firm relationships with multiple stakeholders (Neville & Menguc, 2006; Pajumen, 2006) and methodologies for helping managers make decisions involving multiple conflicting stakeholder claims (Winn & Keller, 2001) have been proposed. Only recently, stakeholder theory has begun to reemerge in the strategy and performance discussion (Choi & Wang, 2009; Harrison, Bosse, & Phillips, 2010; Luque, Washburn, Waldman, & House, 2008). However, which firm-stakeholder interactions managers should decide to nurture in order to positively affect firm performance in emerging markets remains a question to be better investigated.

The present research fills this gap. The purpose of this paper is to advance the research on domestic firms competing within emerging economies (Wright et al., 2005) by offering a new approach to understand and measure the performance effects of firm relationships with external actors. Our approach uses a contractual metaphor to understand firm-stakeholder relationships (Cornell & Shapiro, 1987; Jones, 1995; Williamson, 1985) in weak environments. We suggest that superior firms' performance is associated with efficiently 'contracting' multiple interacting stakeholders. Efficiency would come not only through reducing costs in a single stakeholder relationship, but from economies of scope among contracts with interacting stakeholders. Interaction makes it possible to economize on stakeholder relationships and curb opportunism even in the weak environments of emerging economies.

We explore the performance effects of stakeholder contracting for the case of Brazil, an important emerging economy (Hoskisson et al., 2000). While Brazilian firms may benefit from an increasing level of available economic factors, they face a high transaction cost environment due to political instability and bureaucratic inefficiency (Wan, 2005). We believe that by developing relationships with key stakeholders, transaction and resource costs are reduced to the extent to which stakeholders in the firm contractual set interact with each other. We verify our stakeholder interaction argument in the Brazilian context. Contracting patterns are identified and described. Performance effects of each contracting pattern are measured and a fine-grained analysis of the best contract combination is provided and checked, allowing for further theory development.

This paper extends existing literature in three ways. First, we took on the suggestion of Wright, Filatotchev, Hoskisson and Peng (2005) of using multiple theoretical streams--Stakeholder Theory and Transaction Cost Economics--to give conceptual support and to guide our exploratory intent. Second, our stakeholder-based approach does not constrain the filling of institutional voids to business group or network memberships (Khanna & Palepu, 2000). We suggest that independent firms may also develop their own mechanisms to reduce transaction costs, and access key resources in weak institutional markets. Third, we offer a novel way to model, theoretically and empirically, the stakeholder effects on firm performance, overcoming methodological difficulties of data collection and reliability, common to research in these settings (Hoskisson et al., 2000). We believe that this exploratory investigation in the Brazilian context offers fresh insights into strategy research and the practice of domestic firms in emerging economies.

A Contract Metaphor for Managing Stakeholder Interactions

The use of contracts to understand social and economic relations has received influences from different theories in Sociology, Economics, Law, and Organization Theory (Heugens, Oosterhout, & Vromen, 2004; Williamson, 1985). In the field of Business and Society, contracts are also used to explain firms' relationships with their stakeholders (Donaldson & Dunfee, 1999; Freeman & Evan, 1990; Friedman & Miles, 2002; Hill & Jones, 1992; Jones, 1995; Key, 1999; Pajumen, 2006).

In this paper, we share the instrumental view of the Stakeholder Theory (Donaldson & Preston, 1995), in which efficient contracting with stakeholders would maximize conventional firm performance measures (Berman, Wicks, Kotha, & Jones, 1999; Bosse, Phillips, & Harrison, 2009; Harrison et al, 2010; Jones, 1995). We also assume the following definitions: (a) stakeholders are 'any group or individual who can affect or is affected by the achievement of a corporation's objectives' (Freeman, 1984, p. 46), such as stockholders, employees, customers, suppliers, local communities, government, and financiers; and (b) stakeholder contracts are "relationships entered into with some degree of freedom and in accord with at least some of the interests of the parties" (Friedman & Miles, 2002, p. 7). The firm is then seen as a nexus of contracts (Jensen & Meckling, 1976; Williamson & Winter, 1991), a focal point of separate bilateral contracts with stakeholders (Hill & Jones, 1992).

This proposed contractual metaphor is analyzed under the umbrella of the Transaction Cost Economy (TCE) (Williamson, 1985). According to this approach, bounded-rational individuals seek their own interest with guile, giving rise to opportunistic behavior when two parties enter a relationship in which there is asset specificity (Nooteboom, 1993; Williamson, 1975, 1985). The asset specificity is the source of potentially quasi-rents (Klein, Crawford, & Alchian, 1978; Williamson, 1985). The quasi-rent value of the asset is the excess of its value over its salvage value; as the asset become more specific, that is, valuable only in the context of a given relationship, quasi rents are created and therefore the possible gains from opportunistic behavior increases (Klein et al., 1978). The main argument of TCE is that contracts are assigned to appropriate governance structures that curb opportunism, reduce the transaction costs, and make it possible for the parties involved in the relationship to live out the agreement efficiently (Williamson, 1985). Precisely, we argue that reasonable governance costs can be achieved, even in the weak institutional environments of emerging economies, if the firm can succeed in finding the best combination in its stakeholder contractual set. We propose that interacting stakeholders may reduce the costs of curbing opportunism under bounded rationality and uncertainty.

While firm-stakeholder contract types may vary in degree of formality, extent of specificity, frequency, and regularity (Jones, 1995), we focus on relational contracts (Macaulay, 1963; MacNeil, 1978) and we assume the existence of opportunism, bounded rationality, and idiosyncratic investments, in which bilateral governances are found to reduce transaction costs and to promote contract efficiency (Williamson, 1985). For example, firms engaging in philanthropic...

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