Sustainability, Institutions and Emerging Economies Yadong Luo University of Miami AIB Fellows Panel AIB SE Conference Miami, October 24, 2014

Rapid growth, little guidance on sustainability

Sustainability of emerging economies comprises:  Basic needs. Access to safe water, sufficient living space, adequate health care, and education are fundamental priorities for sustainability  Resource efficiency. A nation’s efficiency in such areas as the use of water and energy and the effective recycling of waste directly correlates to the quality of life of its citizens  Environmental cleanliness. Limiting exposure to harmful pollutants is fundamental to livability  Infrastructural environment. Equitable access to green space, public transportation, and dense, efficient buildings makes communities more livable and efficient  Commitment to future sustainability. National and local policies & standards as well as human, financial, technological resources devoted to sustainability  Institutional environment. Sustained economic and social development in emerging economies hinges so much on the improvement of institutional environment 4

Theories on Institutional Environment  Institutional Theory  Institutional theory is a widely accepted theoretical posture that emphasizes isomorphism and legitimacy  It seeks to explain homogeneity not variation – It considers the processes by which structures, including schemas, rules, norms, and routines, become established as authoritative guidelines for social behavior. Scott (1995) indicates that, in order to survive, organizations must conform to the rules and belief systems prevailing in the environment, because institutional isomorphism, both structural and procedural, will earn the organization legitimacy  Institutions are governance structures based on rules, norms, values, and culture  Three major mechanisms: Coercive (political/regulatory/legal), Normative (professionalization) and Mimetic (standard responses to uncertainty)  Institutional theory overlooks the role of active agency and resistance in organization- environment relations 5

Theories on Institutional Environment  New Institutional Economics (NIE)  Institutions are the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction. Institutions provide the structure for exchange that determines the cost of transacting and the cost of transformation. North distinguishes between institutions (rules of the game) and organizations (players in that game). Institutional change is path dependent.  The major role of institutions in a society is to reduce uncertainty by establishing a stable structure to human interaction. When the evolution of institutions creates a hospitable environment for cooperative solutions to complex exchange, it spurs economic growth  How well institutions solve the problem of coordination and production is determined by the motivation of the players, complexity of environment, and the ability of the players to decipher and order the environment.  Informal and formal institutions: Informal institutions, which are often culturally derived, will not change immediately in reaction to changes in the formal rules. Informal institutional changes are incremental  Formal institutions (political rules, economic rules and contact law) can complement, revise or supersede informal constraints  Organizations and entrepreneurs are the agents of, and shape the direction of, institutional change. The interaction of purposive organizations and institutions leads to a dynamic evolution of the economy. Thus, adaptive efficiency, along with allocative efficiency, is required to facilitate the way an economy evolve through time 6

Theories on Institutional Environment  Institution-based view of strategy  Treating institutions as independent variables, the institution-based view of strategy focuses on the dynamic interaction between institutions and organizations and considers strategic choices as the outcome of such an interaction. Strategic choices are not only driven by industry conditions and firm capabilities, but are also a reflection of the formal and informal constraints of a particular institutional framework that managers confront  Institutions reduce uncertainty for different actors by conditioning the ruling norms of behaviors and defining the boundaries of what is legitimate. Actors, in turn, rationally pursue their interests and make choices within a given institutional framework  While formal and informal institutions combine to govern firm behavior, in situations where formal constraints are unclear or fail, informal constraints will play a larger role in reducing uncertainty, providing guidance, and conferring legitimacy and rewards to managers and firms 7

Institutional Complexity Perspective  All the above theories on institutions didn’t explicitly address the following institutional complexities facing emerging economy enterprises (EEEs):  Multi-directionality – At the same t and p, some institutional forces improve but others worsen, which significantly escalates institutional complexity for firms. This goes beyond “constituent multiplicity”  Vertical and horizontal heterogeneity – EEEs in the same country or even same province/state and same industry encounter considerably different institutional parameters, especially formal rules and regulations, caused by:  Different motives and interests between central and local levels (vertical heterogeneity) and among local levels (horizontal heterogeneity)  Weakened authority and power from the central, and deteriorated enforceability and implementation  Lack central coordination, planning, monitoring and disciplines  Instability – (1) Law authorities lack independence, often unduly influenced by the ruling party and executive branch/state cabinet; (2) Government leadership instability leads to institutional environment instability; (3) Weak central planning  Ambiguity – (1) Dealing with formal institutions is both tedious (process) and dubious (rules) (2) Non- transparent rules and personalized interpretations of these rules; (3) Poor enforceability  Undesirability – One mid-level official in one government agency could enact or amend a nationwide policy, with many rules coming out from “close-door blueprinting” ; lacking the feedback system from the business community and impeding Pareto optimality and efficiency 8

Institutional Complexity Perspective  Informal institutions heighten institutional complexity too  Implicit/covert rules and norms  Moral degradation at the society  Ubiquitous corruption  Declined societal trustworthiness  Transformation of social standards and culture 9

Institutional Complexity Perspective 10 Strategic Response Organizational Response Institutional Complexity Co-Evolution Process Varying Resource Dependence Collaborative and Collective Influence

Institutional Complexity Perspective Strategic Responses to Institutional Complexity StrategiesTacticsExamples Compromise Comply Obeying rules and norms Balance Balancing expectations of multiple constituents Select Partially follow a few institutional requirements Negotiate Negotiating with institutional agencies Avoid Conceal Disguising nonconformity Buffer Loosening institutional attachments Evade Changing goals, activities or domains Dismiss Ignoring explicit norms and requirements Influence Challenge Contesting rules and requirements Co-opt Importing influential constituents Shape Influencing rules and regulations Control Dominating institutional constituents and processes 11 Conformity passivity Manipulate proactiveness Individual firm efforts Collective & uniting efforts

Institutional Complexity Perspective Factors behind strategic responses Institutional coerciveness External dependence Corporate strategies Long-term orientation Ability to influence 12 Thanks