In emerging markets, why do institutional voids occur and what can companies do to operate successfully in the presence of institutional voids?

Question

What will be an ideal response?

Answer 1

Institutional voids stem from the inefficiencies in capital, product and labour markets, due to the absence or inefficiency of institutions. Such institutions enable markets to function smoothly. In developed countries businesses can rely on specialized intermediaries such as distribution agents, arbitrators and information providers to operate efficiently. Companies are able to distribute information to customers via advertising, marketing, the web and retail chains. Logistics companies distribute the product, credit card issuers facilitate the purchasing, information agencies provide information on consumption to firms and information on products to consumers. Information-based institutions can provide independent assessments to certify a firm’s credibility, collect and analyse information and provide consulting services. They can also match customers and suppliers and provide distribution services; provide platforms for buyers and sellers; help resolve disputes; and regulate business transactions

In EMs, intermediaries either do not exist or their operations are less comprehensive when compared to developed markets. Informal institutions exist in order to provide for the gap of missing intermediaries but access to informal intermediaries are limited. Weakness or absence of intermediary institutions which provide services; weaknesses in the governance system; weaknesses in the legal system; poor enforcement of regulations; are some of the factors which create institutional voids.

The absence or the inefficiency of institutions increases the transaction costs of the multinationals. Managers need to consider issues arising from institutional voids and determine whether they can reach the customer efficiently, evaluate creditworthiness of the customer, collaborate with supply chain partners, hire qualified personnel, and find reliable partners or not before entering into an EM (Khanna & Palepu, 2010).

Increasingly foreign investors are utilizing the services of third parties with expertise in the relevant areas to gather information. Some examples of third parties may be consultants, ex-government officers, researchers, political risk services, or market information services. For this purpose, software tools such as information extraction software and data mining tools are also employed. Talking to different sources such as government officials, suppliers, academicians, banks and consultants within the market can also mitigate the information gaps to a significant extent. Another strategy of foreign investors is partnering with local firms who have know-how of the market and are experienced in operating in the presence of institutional voids.