International business scholars have long acknowledged the central role of institutions – ‘the rules of the game in a society’, as Douglas North put it – on firms’ performance, strategies and behaviors. However, IB research has mostly focused on formal institutions, the written rules, laws and regulations, leaving the informal institutions with their usually unwritten but socially shared rules and constraints with much less attention. Yet, informal institutions may have equally strong impact on determining firms’ success on a given market.
Lidl’s entry to Finland 18 years ago in 2002 serves as a good example of this. Maybe you still remember how Lidl’s entry created a big buzz in the media, and astonishment ‒even suspicion‒ among the Finnish public, as the company seemed to be doing it all wrong, or at least in a very strange manner. For instance, it did not accept credit cards as a method of payment, or bottles that were not of its own brands in its reverse vending machines. It filled its shelves with almost only foreign products and brands unknown to most Finns and tried to teach people how to operate at the short checkout counters typical in Germany but completely unfamiliar to Finns, who were not used to scooping their groceries back into their shopping trolleys to pack them elsewhere. The company did not advertise to the public, refused to give interviews to the media and did not even allow reporters to enter its stores. And it soon acquired a negative employer reputation by exercising an authoritarian management style, with excessive use of warnings, a lack of trust and communication, a strict hierarchy and an oppressive working atmosphere. No wonder Lidl Finland operated at a loss for many years.
Hence, while Lidl complied with formal institutional environment in Finland, many stakeholders, like the media, customers, employees, labour unions etc., would not accept its behaviour that so clearly was not according to the shared norms and customs, in other words, the informal institutional environment of the host country and sector.
Indeed, it wasn’t until the company made major changes in its strategy and behavior that its operations In Finland finally turned a profit: Lidl increased the amount of domestic brands and products in its product range, it started to accept credit cards as a payment method and other brands’ bottles in its reverse vending machines. It worked closely together with the Finnish services union (PAM) and corrected its HRM practices; it changed its no comment policy to open communication with the media, and introduced clever and humorous TV advertising campaigns. And it finally gave in and changed those annoying short checkout counters to longer ones, similar to what other Finnish grocery stores had, with plenty of room to pack one’s purchases at the counter.
The example of Lidl in Finland emphasizes the common viewpoint in International business research, according to which firms’ survival and performance are determined by the extent of alignment with the institutional environment. Hence, when operating in foreign markets, multinational enterprises have to comply with external pressures of the host country institutional environment if they wish to succeed. However, this viewpoint does not acknowledge the important agency role of MNEs as they also construct their institutional environments.
Indeed, despite having to adapt its original strategies in Finland, Lidl also introduced some new-to-the-market practices that were welcomed by Finnish stakeholders, and eventually became institutionalized in Finnish grocery retail sector as domestic companies adopted similar practices. For instance, Lidl taught Finns to require good quality with lower prices and introduced consumers to many delicacies and new products, such as prosciutto, duck breast and proper bratwurst, forcing domestic competitors to follow suit.
Hence, the interplay between organizations and their environments is characterized by co-evolutionary development where organizations influence their environments, and environments that consist of other organizations and populations in turn influence those organizations. This dynamic is orchestrated by stakeholder responses but is also linked to how well established the existing institutions in the field are. You can read more about the interplay between MNEs’ entry and the host country informal institutional environment in our forthcoming book chapter in the series ‘Progress in International Business Research (PIBR) ‒The Multiple Dimensions of Institutional Complexity in International Business Research’. (See: https://books.emeraldinsight.com/page/series-detail/Progress-in-International-Business-Research/)
Chapter details: Pelto, Elina & Karhu, Anna (2020) Chapter 13: Stakeholder responses and the interplay between MNE post-entry behaviour and host country informal institutions. In: Progress in International Business Research ‒The Multiple Dimensions of Institutional Complexity in International Business Research, eds. Verbeke, A., van Tulder, R., Rose, E. and Wei, Y. Emerald Insight.
Elina Pelto PhD
University Lecturer
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